Risk Factors

The construction, expansion and operation of the electricity transmission facilities and other equipment of the Company, its controlled companies, jointly owned companies and affiliates involve many risks, namely:

• Inability to obtain or renew government permits, licenses and authorizations;
• Unforeseen environmental and engineering issues;
• Unforeseen delays in expropriation procedures and the granting of administrative easements;
• Unavailability of labor and equipment;
• Supply disruptions;
• Work stoppages (strikes and grievances);
• Contractual and labor disputes;
• Socio-political instability;
• Natural disasters or pandemics;
• Climate interference;
• Changes in environmental legislation which impose new obligations and costs for projects;
• Delays in construction and operation or unforeseen cost increases;
• Manufacturing problems or defects in equipment purchased from suppliers for the construction of transmission lines;
• Unavailability of proper funding;
• Explosions and fires;
• Insolvency of contractors or service providers;
• Delays in the supply of raw materials and equipment;
• Vandalism, sabotage and theft;
• Issues involving suppliers;
• Extended unplanned system or operational shutdowns;
• Workplace accidents resulting in permanent disability or fatality;
• Changes in tax legislation;
• Limited availability of suppliers in the market;
• Delays in obtaining permits;
• Legal and regulatory instability caused by political factors; and
• Loss of critical and key personnel.

If any of these or other risks materialize, the Company, its controlled companies, jointly owned companies and affiliates could incur additional operating and/or financial costs, which could adversely affect its business, financial strength and operating results, in addition to negatively affecting the progress of the works. In addition, ANEEL may impose penalties including significant fines and restrictions on operations, as well as the early termination of concession contracts, in the event of non-compliance with any of the obligations established therein.

In case of significant increases in interest rates, the Company’s obligations (loans and financing, debentures and derivative financial instruments – current and non-current liabilities) will lead to an increase in future expenses due to debt charges, which could, in turn, reduce the Company’s liquidity and its ability to meet its obligations. In addition, the Company may incur additional debt to fund future acquisitions, investments or other projects, and to conduct its operations, subject to the restrictions applicable to existing debt. If the Company incurs additional debt, the risks associated with its leverage may increase and, in the event of non-compliance with certain obligations to maintain financial ratios, there may be an early maturity of debts previously contracted, which may have a material impact on the Company’s ability to meet its obligations. In the event of early maturity of debts, the Company’s assets and cash flow may be insufficient to pay off the outstanding balance of its financing agreements. In addition, the impossibility of incurring additional debt may affect the Company’s ability to make the necessary investments in its activities, which could, thus, affect its financial strength and the results of its operations.

The Company, its controlled companies and jointly owned companies, are subject to the fulfillment of contractual obligations provided for in agreements with third parties that restrict their autonomy (including, among others, restrictions on changes in the direct or indirect corporate control of the Company and its controlled companies). In the event of non-compliance with any provision of these agreements, the outstanding amounts (principal, interest and fine) under the respective agreements will become due. The early maturity of the obligations of the Company, its controlled companies or jointly owned companies could have a negative impact on the Company’s financial situation, including the provision for cross-maturity of other obligations assumed by the Company, its controlled companies and jointly owned companies, in accordance with clauses in various loan, financing and debenture agreements entered into with by and between the Company and any third parties. In the event of early maturity of debts, the Company’s assets and cash flow may be insufficient to repay the outstanding balances of its loan, financing, and debenture agreements.

A major part of the company business is conducted by its affiliates.

Any reduction in the ability of its affiliates to produce positive results and generate cash flow could lead to a drop in the dividends and interest on capital paid to the Company, which could adversely affect its business, results and financial strength. In addition, some of its affiliates may require new investments that were not originally planned, as well as enter into loan agreements that prohibit or limit the transfer of capital to the Company. Thus, there is no guarantee that funds from affiliates will be transferred to the Company, which could have an adverse effect on its results.

The Company, its controlled companies and jointly owned companies are subject to certain clauses in existing debt instruments that restrict their autonomy and ability to secure new loans. In addition, the existence of limitations on the indebtedness of the Company, its controlled companies or jointly owned companies may affect the Company’s ability to raise new funds needed for its activities, its maturing obligations and its growth strategy, which may negatively influence its ability to meet financial commitments.

Electricity transmission concessionaires get paid for the availability of their facilities, according to the amount approved by the National Electric Energy Agency (“ANEEL”), when the concession contract is granted or through specific authorizing acts, as is the case of reinforcements and improvements. Thus, these concessionaires get paid for the availability of their assets, instead of according to the amount and load of electricity transmitted. The Company, its controlled companies and jointly owned companies are entitled to receive the Permitted Annual Revenue (“RAP”), which is adjusted annually according to the variation of the IGP-M or IPCA indexes, depending on the specifics of each concession contract, for providing transmission lines for commercial operations. Under the terms of the so-called “Category II” concession contracts (for more information, see item 1.3 hereof), the RAP will drop 50% as of the 16th year, counting from the start of commercial operation of the projects, and remaining stable until the end of the concession term.

This being the case, the Company’s cash flow has dropped, given that in 2019, 2020 and 2021, 2022, twenty-one concessions were affected due to the aforementioned provisions of the concession contracts. The Company cannot guarantee that it will be able to (i) win new bidding processes; or (ii) acquire existing companies holding concessions (whether through the acquisition of equity stakes or otherwise), in virtue of the time frames and amounts needed to re-establish its cash flow. If the Company does not succeed in restoring its cash flow, its growth, investment capacity and payment capacity may be adversely affected.

Due to the above, the Company experienced a decrease in its cash flow, considering that in the years 2019, 2020, 2021 and 2022, 21 concessions were affected due to said provisions of the concession contracts. The Company cannot guarantee that it will be able to (i) win new bids; or (ii) carry out the acquisition of existing concessionaires (whether through the acquisition of equity interest or others) within the terms and amounts necessary to reestablish its cash flow. If it is not successful in recomposing its cash flow, the Company may have its growth, investment capacity and payment capacity adversely affected.

The Company is a party to judicial and administrative proceedings involving various legal and regulatory issues including, but not limited to, civil, environmental, labor, tax proceedings and public interest civil actions. One or more decisions unfavorable to the Company in any judicial or administrative proceeding could have a considerable negative effect on its performance. Furthermore, in addition to the financial provisions and the costs of legal fees on these cases, the Company may be obliged to offer guarantees in court in connection with these proceedings, which may adversely affect its financial capacity. There is no guarantee that the provisions will be sufficient to cover the total cost arising from adverse decisions in judicial and administrative proceedings. Lastly, unfavorable decisions in any of the aforementioned judicial and administrative proceedings may cause damage to the Company’s image and negatively affect the market’s perception of the Company – which may amplify the negative effects on the Company’s financial strength and operating condition. For additional information on the main judicial, arbitration or administrative proceedings, see items 4.4 to 4.6 hereof.

The company and its controlled companies, jointly controlled companies and affiliates, directly or indirectly, conduct their electricity transmission activities, on the basis of concession contracts signed with the Federal Government, with a term of 30 years, starting on the contracts signing date, and currently expiring between the years 2030 and 2052. The Federal Constitution requires that any and all public service concessions be granted through a bidding process. In 1995, Law No. 8.987/95, of February 13, 1995 (“Concessions Law”) was sanctioned to govern any public bidding procedures. According to the Concessions Law, amended by Law no. 10. 848/04, of March 15, 2004 (“New Electricity Industry Model Law”), and following the terms of the concession contracts, the concessions held by the Company may, at the sole discretion of the Granting Authority, be extended for a maximum of an equal period, upon request made by the concessionaire, regardless of being subject to a bidding process, provided that (i) the concessionaire has met the minimum performance standards, (ii) accepts any revisions to the conditions stipulated in the contracts, and (iii) that the extension is in the public interest.

However, even though there is a contractual provision that allows for a possible extension of the contracts due to the issuance of Presidential Decree No. 11.314, of December 28, 2022, which regulates the bidding process and the extension of public electricity transmission service concessions at the end of their term, the Government has defined the re-bidding of contracts as the rule, to the detriment of extensions. Thus, any extension may take place when there is no viability for rebidding, as provided for in the aforementioned Decree, and the extension process must follow art. 4 of Law no. 9.074, of July 7, 1995, and art. 6 of Law no. 12.783, of January 11, 2013.

The plans to expand the transmission capacity of the Company, its controlled companies, jointly controlled companies and affiliates are also subject to the bidding system provided for in the Concessions Law. Due to the Granting Authority’s discretion to extend and/or re-bid the concessions, the Company, its controlled companies, jointly owned companies and affiliates may not accept the terms and conditions proposed for any extension of the contracts, in which case the Company may face competition from third parties in the process of re-bidding these concessions.

In short, there is no guarantee that the current concessions will be extended, and even if they are, there is no guarantee that they will follow the same and/or more favorable terms than those currently in force. Therefore, if the Company, its controlled companies, jointly controlled entities or affiliates do not obtain new concessions or lose some of them, this could have a material adverse effect on the Company’s business, financial strength or results of operations.

Although the policies contracted by the Company include coverage compatible with the major risks of its business, there may be specific situations in which coverage is limited, such as maximum amounts for damages or exclusion clauses. The Company continuously monitors these conditions to ensure the effectiveness of the contracted protections.

In addition, factors such as changes in insurance market conditions, regulatory developments, or asset revaluations may affect policy renewal terms or premium costs. The Company has an agreement with a specialized consulting firm that actively interacts with the insurance market and conducts periodic reviews of its coverage to ensure alignment with its operational and regulatory needs.

The Company undertakes capital market operations, among other financial instruments, to fund capital expenditure for its projects and to refinance existing debt. Thus, the Company may face difficulties in raising these funds, such as (i) fluctuations in interest rates on loans, financing or debentures; (ii) liquidity restrictions, including early maturity clauses and financial covenant requirements; (iii) expansion or contraction of the global or Brazilian economy, and (iv) economic crises caused by calamities, natural disasters and pandemics, influencing the credit assessment of counterparties, among other market risks, as described in item 4.3 hereof. This being the case, if the Company is unable to raise funds through capital market operations, its financial strength and its ability to meet all its contractual obligations may be adversely affected.

The Company may need to raise funds in the future through public or private issuance of units, shares and/or securities convertible into or exchangeable for shares issued by the Company. Any fund raising through the distribution of units, shares and/or securities convertible into or exchangeable for shares issued by the Company may affect the trading price of the Company’s common and preferred shares (including units representing such shares) and result in the dilution of the investor’s ownership interest in the Company’s share capital.

Investing in the securities of companies in emerging markets, such as Brazil, involves greater risk than investing in the securities of companies in more developed countries. The nature of these investments is generally considered speculative. Investments in Brazil, such as investments in the securities issued by the Company, are subject to economic, political and corporate risks, which include, among others: (i) changes in the regulatory, tax, economic and political situations that may affect investors’ ability to receive payments, in whole or in part, relating to their investments; (ii) restrictions on foreign investments and on the repatriation of invested capital; and (iii) changes in the Company’s controlling interest. The Brazilian market is smaller, less liquid and potentially more volatile than stock markets in the United States and other developed countries. These market characteristics may significantly limit the ability of holders of the Company’s securities to sell them at the desired price and on the desired date, which may significantly affect the market price of the Company’s securities. If an active and liquid trading market is not developed or maintained, the trading price of the securities issued by the Company may be negatively impacted.

In addition, the price of securities sold in a public offering is often subject to volatility immediately after the offering. The market price of securities issued by the Company may vary significantly as a result of various factors, some of which are beyond the Company’s control. These factors may negatively influence the trading value of the securities issued by the Company.

In accordance with its articles of incorporation, the Company must pay its shareholders a mandatory annual dividend of no less than 50% of its annual adjusted net income, calculated and adjusted according to the terms of the Brazilian Law of Corporations. The Company’s ability to pay dividends depends on its ability to generate profit. In certain circumstances, the Company may not be able to distribute dividends or may distribute them in an amount lower than the minimum mandatory dividend. These include (i) if net income is capitalized, used to offset losses or retained under the terms of the Brazilian Law of Corporations; (ii) if the Company’s board of directors informs the Annual Shareholders’ Meeting that the distribution is incompatible with the Company’s financial situation, suspending the mandatory distribution of dividends in a given fiscal year; (iii) if the Company’s cash flow and net income, as well as the distribution of such income as dividends or interest on equity, do not materialize, resulting in the mandatory minimum dividend exceeding the realized portion of the net income for the year; and/or (iv) in the event that there are restrictions in financing agreements entered into by the Company on the distribution of dividends. Accordingly, the Company’s shareholders may not receive dividends or interest on equity in such circumstances or may receive dividends lower than the mandatory minimum dividend.

The Company’s growth strategy depends on the obtaining of new transmission concessions that may be through bidding processes conducted by ANEEL, receiving authorizations for the implementation of reinforcements and improvements with associated revenue and the acquisition of existing concessionaires or relevant stakes in them, including through participation in any privatization processes of state-owned companies operating in the electricity transmission industry. The acquisition of companies, relevant stakes or assets involves other operational and financial risks, which include difficulties in integrating administrative and operational management between existing assets and those that may be acquired, liability for possible contingencies and hidden liabilities and the allocation of administrative and financial efforts to the integration process. In addition, any acquisition of electricity transmission concessionaires, or of a relevant equity stake in a company operating in this industry by the Company is subject to approval by ANEEL and the Administrative Council for Economic Defense – “CADE”, and may also be subject to approval by third parties, such as creditors and partners. The Company depends on other factors to implement its business strategies, such as establishing advantageous purchase and sale positions, and growing with financial discipline and maintaining operational efficiency.

It is possible that the Company will not obtain the expected benefits from the acquisition of stakes in transmission concessionaires. In addition, the Company may be unable to efficiently integrate an acquired business into its organization and successfully manage that business or the company that results from these acquisitions. The process of integrating any acquired business may subject the Company to certain risks, such as unforeseen expenses and potential delays related to the integration of the companies’ operations, detour of management’s attention from ongoing business and exposure to unanticipated contingencies and legal claims made against the acquired business prior to its acquisition. The Company may not be successful in dealing with these or other risks or problems related to past or future acquisitions. The Company’s eventual inability to successfully integrate its operations, or any significant delay in achieving this integration, may have a negative impact on its performance.

Thus, there can be no assurance that the Company will achieve growth opportunities, that it will be successful in the bidding processes conducted by ANEEL, or that these acquisitions will be approved by ANEEL, CADE or by creditors, partners or other third parties, or that they will have a positive outcome for the Company in the future. The inability of the Company to implement its growth strategy or to consummate intended acquisitions, the realization of significant contingencies arising from these acquisitions or the realization of acquisitions that do not bring positive results in the future, are factors that could have a material adverse effect on its operating results and financial strength.

The Company conducts its electricity transmission activities, directly or indirectly, based on concession contracts entered into by and between the Company and the Federal Government. Its plans for expanding transmission capacity are therefore subject, in part, to the Company’s success in the bidding processes. There is no guarantee that the company will win all the bidding processes in which it participates, which could significantly affect its expansion strategy and expected financial performance. In addition, to continue and expand its activities, the Company depends on the opening of new bidding processes by the Federal Government. The nonexistence of these processes could have an impact on its financial results.

The winners of public sales for electricity transmission concessions are responsible for building the transmission line and substation facilities subject to these processes. In addition, ANEEL authorizes concessionaires to implement reinforcements and improvements, i.e. to install, replace or renovate equipment in existing transmission facilities, or to adapt these facilities, with a view to increasing transmission capacity, increasing the reliability of the National Interconnected System (“SIN”) or connecting users, after a planning process with the participation of the National Electric System Operator (“ONS”), the Energy Research Company (“EPE”) and the Ministry of Mines and Energy (“MME”).

Non-completion or possible delay in the construction of new transmission lines or projects to expand the electricity transmission capacity of the Company, its controlled companies and jointly-controlled companies due to the risks associated with the construction of electricity transmission systems, such as the increase in the cost of labor, goods and services, risks of project errors, losses and damages caused to third parties, delays in the processes of expropriation and constitution of administrative easements and in obtaining or renewing the necessary licenses, environmental restrictions and delays in completing the construction of the works, in addition to other factors such as calamities and pandemics, may entail additional operating and/or financial costs, and adversely affect the Company’s planning, operating and financial performance.

Any delays in the implementation and construction of new energy projects and non-compliance with any of the obligations established in the concession contracts may also result in the imposition of regulatory penalties by ANEEL, which, in accordance with Normative Resolution No. 846/2019, of June 11, 2019 (“REN No. 846/2019”) and the terms of the concession agreements, may consist of anything from notifications and fines to, ultimately, the early expiration of such concessions through administrative proceedings for the forfeiture of the agreements, which may have a material adverse impact on the Company’s business.

In addition, any delays in the implementation and entry into operation of the transmission networks may result in the application of the Variable Portion for Delay in Entry into Commercial Operation – “PVA” in the RAP, which corresponds to the deduction of a portion of the base payment of a facility due to the delay in its commercial entry.

The Company is controlled by ISA Investimentos e Participações do Brasil S.A. (“ISA Brasil”) and Companhia Energética de Minas Gerais – CEMIG (“CEMIG”), signatories to the Company’s shareholders’ agreement, with powers to, among other things, elect the majority of the members of the Company’s Board of Directors, determine the outcome of any resolution requiring shareholder approval, including transactions with related parties, corporate reorganizations, divestitures, partnerships and the timing of payment of any future dividends. The Company’s controlling shareholders may have an interest in making acquisitions, disposals, partnerships, seeking financing or similar operations that may conflict with the interests of the other shareholders, and even in such cases, the interests of the controlling shareholders may prevail, which may result in decisions being taken that are less favorable to the Company than to the controlling shareholders, harming the Company’s business. CEMIG and ISA Brasil, shareholders that form part of the Company’s controlling block, which, as controlling shareholders of TAESA, exercise influence over the strategic orientation of the Company’s business and may have interests that conflict with those of the Company, which may adversely affect the conduct of business. For additional information on the Company’s shareholder structure and shareholders’ agreement, see Sections 1 and 7 hereof.

As informed by the Company’s Material Facts released on March 26 and May 6, 2021, CEMIG is organizing a competitive process for fully divesting in the Company.

In addition, as informed by the shareholder, through Material Facts disclosed on July 8, 2021, and July 30, 2021, CEMIG received notification from the Minas Gerais State Auditing Court (“TCE-MG”) to submit all documentation related to the procedure for the sale of its stake held in TAESA. TCE-MG rejected the request for an injunction seeking the suspension of CEMIG’s divestment process in TAESA, and the revoking of the previous recommendation that the shareholder refrain from carrying out any act concerning the sale of TAESA’s shares. The agency has requested that additional documents be made available to continue the technical analysis.

If this divestment is carried out, following the terms of the company’s shareholders’ agreement, ISA Brasil will have:

• a pre-emptive right to acquire the stake now held by CEMIG, with the possibility of consolidating its controlling power and becoming the sole controlling shareholder of TAESA; and
• the right to sell its stake jointly with CEMIG, under the same conditions, in which case the acquiring third party(ies) will be obliged to launch a public offer for the acquisition of shares designated for all the Company’s minority shareholders – which could, in turn, reduce the liquidity of the shares issued by the Company.

In addition, if a new controlling block is formed, the Company may undergo sudden and unexpected changes in its corporate policies and strategies, including the replacement of its directors or executive officers.

On March 29, 2023, CEMIG as a shareholder clarified to the market the questions presented by the CVM through Official Letter No. 93/2023/CVM/SEP/GEA-1 of March 28, 2023, in relation to the news published in the press about the mobilization statements of the Minas Gerais state government about its privatization. In this regard, CEMIG clarified that the subject of the news involves the interest publicly expressed on several occasions by the Governor of the State of Minas Gerais and that, however, there is no new information which, in the light of CVM Resolution 44/2021, justifies the disclosure of a Material Act or Fact on the matter.

Thus, the divestment of the shareholding stakes held by CEMIG and/or ISA Brasil in the Company may eventually lead to the discontinuation of the Company’s current management. In this case, the Company cannot guarantee that it will be successful in maintaining the current management or attracting qualified members to join its management. The departure of any key member of the Company’s management, or the inability to attract and retain qualified personnel to join it, could have a material adverse effect on the Company’s business, financial strength, results of operations and image.

Any sudden or unexpected change in the management team, business policy or strategic orientation, or any dispute involving shareholders regarding their respective rights could also adversely affect the Company’s business and operating performance.

Under the terms of the shareholders’ agreements of certain companies controlled by the Company or affiliated to it, if CEMIG ceases to participate, directly or indirectly, in the controlling block of the Company or its legal successors, the other signatories of these shareholders’ agreements will have the right to acquire the shares issued by those entities currently held by the Company. The divestment of the Company’s equity interest in these controlled companies or affiliates may result in a decrease in the Company’s revenues and could have an adverse impact.

Due to the great pulverization and outsourcing of the production chain of the suppliers of the Company’s controlled companies, jointly controlled companies and affiliates, there is no way to fully control supplier irregularities. It is possible that some of the suppliers of its controlled companies, jointly controlled companies and affiliates may present labor issues or issues related to sustainability, outsourcing of the production chain and improper safety conditions, or even that they may use these irregularities to lower the cost of their products. If a significant number of these suppliers do so, the company may suffer losses to its image, net revenue and operating income, in addition to a drop in the value of the securities it issues.

The shares issued by some of the Company’s controlled companies, jointly owned companies and affiliates aim at guaranteeing obligations assumed by them and by the Company due to securities issuance and/or financial contracts. If these controlled companies, jointly owned companies and affiliates or the Company fail to fulfill their obligations under these documents, their creditors may enforce the respective collateral and, as a result, there may be a drop in the Company’s shareholdings in these controlled companies, jointly owned companies and affiliates or even a change in their controlling interest.

A drop in the Company’s shareholding in its controlled companies, jointly owned companies and affiliates will result in an immediate drop in its revenues. In addition, any direct or indirect change of control of its controlled companies, jointly owned companies and affiliates may result in the discontinuation of their current management and this may affect the conduct of business, adversely impacting the Company.

The Company’s success partially depends on the knowledge, skills and efforts of its current management and key employees. If the Company’s management or key employees choose to no longer participate of the Company’s business, the Company may not be able to find in the market equally skilled candidates to replace them. The loss of any member of the Company’s management and the difficulty of hiring professionals with the same skills and expertise could have an effect on the Company’s business, which would have a negative impact on its operating and financial performance and its overall credibility.

Due to the specificity of the equipment and services used in its facilities, the Company, its controlled companies and its jointly owned companies have few suppliers available for certain equipment and, in certain cases, a single supplier. If any supplier discontinues production or stops selling any of the equipment purchased by the Company, its controlled companies and jointly controlled companies, or significantly increases the value of the equipment, they may not be able to purchase this equipment from other suppliers. In this case, the provision of electricity transmission services may be materially affected, and the Company, its controlled companies and jointly-controlled entities may be forced to make unforeseen investments to develop or pay for the development of new technology to replace the unavailable equipment or acquire higher costs than those currently practiced, which may negatively impact the financial condition and operating results of the Company, its controlled companies and jointly-controlled entities.

Some of the Company’s controlled companies, jointly owned companies and affiliates have contracts with service providers to provide operation and maintenance services related to their transmission lines and substations.

The inability or unwillingness of these third parties to provide the contracted services within the appropriate time frames, in accordance with the contractual specifications, could cause these controlled companies, jointly-controlled companies and affiliates to be on default under the terms of the respective concession contracts and cause material adverse effects on the operating results and financial strength of these controlled companies, jointly-controlled companies and affiliates and, consequently, of the Company. Any failures, delays or defects in the provision of services by the contracted suppliers could have a negative effect on the Company’s image and its relationship with its customers and could have a negative impact on its business and operations.

In addition, the termination of these operation and maintenance service contracts, or the inability to renew them or negotiate new contracts with other equally qualified service providers, in a timely manner and at similar prices, could have a material adverse effect on the controlled companies, jointly owned companies and affiliates, and consequently on the Company.

The Company, its controlled companies and jointly owned companies depend on third parties to supply the equipment used in their facilities and are therefore subject to price increases and failures on the part of these suppliers, such as delays in the delivery of equipment or the delivery of faulty equipment. Any failures could harm activities and have a material adverse effect on the Company’s overall performance.

Outsourcing the work carried out may have an impact on the timely identification of any delays and faults and, consequently, on their fixing. Any failures, delays or defects in the provision of services by the construction companies contracted by the Company, in addition to the supply of the machinery or equipment purchased, may have a negative effect on its image and its relationship with its clients, and can negatively impact on the Company’s business and operations. This becomes more critical as a large part of the expansion, emergency, maintenance and field operations are carried out by third parties.

In addition, the termination of any equipment supplies and/or assembly, installation and construction agreements, or the inability to renew them or negotiate new agreements with other equally qualified suppliers or service providers, in a timely manner and at similar prices, could also have a material adverse effect on controlled companies, jointly owned companies and affiliates, and consequently on the Company.

The Company, its controlled companies and jointly owned companies have various contracts with service providers to carry out certain activities. If one or more service companies fail to comply with any of their labor, social security and/or tax obligations, the Company and/or its controlled companies and jointly controlled entities may be held subsidiary or directly liable for compliance with these obligations.

Additionally, termination of these agreements of equipment supply and/or assembly, installation and construction, or failure to renew them or negotiate new agreements with other suppliers or service providers equally qualified service providers, timely and with similar prices, may also cause a material adverse effect on the subsidiaries, joint ventures and affiliates and, consequently, the Company.

In accordance with Brazilian legislation, according to ANEEL Normative Resolution 905/2022, Module V, item 2.16, which replaced ANEEL Normative Resolution 561/2013, the agency has settled the understanding of losses and damages, exempting transmission concessionaires and users with a Transmission System Use Agreement (“CUST”) from indemnifying distribution concessionaires and permissionaires for the amounts paid as compensation for electrical damage to consumer units resulting from the unavailability of assets.

However, in other situations of loss and damage caused by the Company to third parties, resulting from the inadequate provision of electricity transmission services, the evidence of which is duly incontestable and proven, TAESA may be held liable. Consequently, in any of these cases the Company’s business and operating performance may be adversely affected.

The monthly payments made by agents accessing the transmission system are generally guaranteed by Guarantee Contracts (“CCG”) and/or Bank Guarantee Letters (“CFB”). The guaranteed mechanism provided for in the CCGs requires system users to grant the National System Operator (“ONS”), which has powers granted by the transmission companies to act on their behalf, access to bank accounts held with banks indicated in the respective CCG. These accounts must keep a balance of deposits (from invoices paid by users’ end consumers) equivalent to at least 110% of the average amount of the last three-monthly invoices owed to the transmission concessionaires. If any debts have not been paid in full by any user by the 2^nd working day immediately following the due date, after the user has been informed and charged by the transmission company, the transmission concessionaire must notify ONS of the fact so that it may apply measures to reimburse these debts. If the financial guarantee mechanism has already been used three times in a row or five times in a row within a 12-month period, it is up to ONS to require the user to submit a CFB, as established in the Transmission System Use Agreement (“CUST”).

However, for any reason, if ONS does not require or the users do not present these guarantees, which could feature non-compliance with contractual obligations and result in the termination of the CUST related to this guarantee. In this case, there would be no reimbursement of these revenue or termination charges, which would mean in losses for the Company.

The outbreak of any communicable diseases, such as the COVID-19 outbreak on a global scale, may affect investment decisions and cause sporadic volatility in the international and/or Brazilian markets. These outbreaks can result and have resulted, to different degrees, in the adoption of government and private measures that include restrictions, as a whole or in part, on the movement and transportation of people, goods and services (public and private, including jurisdictional, with limitation of forensic activity and suspension of procedural deadlines, and services related to notaries, titles and documents and real estate registration). This being the case, they could cause the closure of private establishments and public offices, interruptions in the supply chain, reduction in consumption in general by the population, in addition to volatility in the price of raw materials and other inputs.

Global economic crisis due to pandemics may cause Brazil, like most countries in the world, to suffer an increase in the unemployment rate and negatively affect society’s ability to keep up with its financial obligations. This could have a direct impact on electricity distributors, which could feel the impact of losses with a significant drop in demand for energy and an increase in defaults. Since they play an key role in paying charges to the rest of the National Interconnected System (“SIN”) chain, they could have difficulties in honoring their contractual commitments regarding transmission charges, negatively affecting the company’s revenues and cash flow.

The Federal Government often exerts influence on the Brazilian economy and occasionally makes significant changes to its policies and regulations. Some of the measures taken by the Federal Government to control inflation, in addition to other policies and regulations, have caused changes in interest rates, tax policies, price controls, currency devaluation, capital controls and import restrictions, among others.

The Company’s activities, financial strength, operational performance, future business opportunities and the market value of its securities may be materially affected by changes in policies or rules involving or affecting certain factors, such as:

•  foreign exchange controls and restrictions on remittances abroad;
• relevant exchange rate fluctuations;
• changes in the fiscal and tax regime;
• liquidity of domestic financial and capital markets;
• interest rates;
• inflation;
• monetary policy;
• developments in the energy sector; and
• other political, legal, diplomatic, social, health and economic events that may occur in or affect Brazil.

Uncertainties as to the implementation of changes by the Brazilian government in policies or regulations that may affect these or other factors in the future may contribute to economic instability in Brazil and increase the volatility of the Brazilian securities market and securities issued abroad by Brazilian companies.

Brazil has a long history of extremely high inflation rates. Inflation and some of the measures taken by the Brazilian government to control it, combined with speculation about the adoption of eventual government measures, have had a significant negative effect on the Brazilian economy. This had contributed to the economic uncertainty that prevails in Brazil and to the increase in volatility in the Brazilian securities market. Successive increases in inflation may increase the Company’s costs and expenses and consequently adversely affect its financial performance as a whole.

Any future measures taken by the Federal Government, including the reduction/increase of interest rates, intervention in the foreign exchange market and measures to adjust or fix the value of the real, may increase inflation, adversely affecting the general performance of the Brazilian economy. If Brazil experiences high inflation in the future, the mechanism for annually adjusting the revenues of the Company, its controlled companies, jointly owned companies and affiliates based on inflation, provided for in their respective concession contracts, may not be sufficient to fully protect them against the effects of rising inflation, which could adversely affect our operating margins.

In addition, in the event of an increase in inflation, the Federal Government may choose to significantly raise the local benchmark interest rates. Any increase in interest rates could have an impact on the cost of raising new loans by the Company, in addition to the cost of its current indebtedness and its financial expenses. This increase, in turn, could adversely affect the Company’s ability to pay its obligations, since it would reduce its cash assets. In addition, any fluctuations in the national interest rates and inflation, which could adversely affect the Company due to the existence of assets and liabilities indexed to the variation in the SELIC and CDI rates and the IPCA and IGP-M indexes. On the other hand, a significant drop in CDI or inflation could negatively affect the income generated from the company’s financial investments and the adjustment of the balance of the concession’s financial assets.

The Federal Government may take over the electricity transmission service in cases of public interest, by means of a specific law authorizing an eventual takeover and payment of prior compensation. These include natural disasters, war, significant public disturbances, threats to internal peace or for economic reasons and for other homeland security issues. The Company cannot guarantee that any compensation to be received will be adequate considering the investments made or received in a timely manner, and any expropriation may have a material adverse impact on the Company.

In addition, the Federal Government, as the granting authority, through ANEEL, can also intervene in the concession to ensure the proper provision of the public service, in addition to ensuring faithful compliance with the relevant contractual, regulatory and legal rules through the administrative intervention procedure. Once an intervention has been declared, the granting authority must initiate an administrative procedure to ascertain the causes of the measure and attribute responsibility. If it is proven that the legal preconditions for the intervention process have not been complied with, the service will be immediately returned to the concessionaire. The intervention process or the declaration of extinction of any concessions could have a significant adverse effect on their financial and operational performance.

The Federal Government may resume the electric power transmission service in cases of public interest, by means of a specific law that authorizes such resumption and payment of prior indemnity. Such reasons include natural disasters, war, significant public disturbance, threats against internal peace or for economic reasons and other reasons related to national security. The Company cannot guarantee that any indemnity to be received will be sufficient considering the investments made, or received in a timely manner, and any expropriation could have a material adverse impact on the Company.

Furthermore, the Federal Government, as the concession grantor, through ANEEL, may also intervene in the concession to ensure adequate provision of the public service, and to ensure faithful compliance with the relevant contractual, regulatory and legal rules through the administrative intervention procedure. Once the intervention has been declared, the concession grantor must initiate an administrative procedure to prove the determining causes of the measure and determine responsibilities. If the non-compliance with the legal assumptions of the intervention process is proven, the service will be immediately returned to the concessionaire. The intervention process or the declaration of termination of any concessions could have a material adverse effect on the Company’s financial situation and results of operations.

Credit ratings affect the perceived risk of investments and, thus, the yields required on future debt issues in the capital markets. Rating agencies regularly assess Brazil and its sovereign ratings based on a number of factors, including macroeconomic trends, physical and budgetary situations, debt metrics and the prospect of changes in any of these factors.

Any downgrade of Brazil’s credit rating could increase the perceived risk of investments and, thus, increase the cost of future debt issues and adversely affect the trading price of the Company’s securities.

The market value of securities issued by Brazilian companies is influenced to varying degrees by the economic and market conditions in Brazil and other countries, including the United States, member countries of the European Union and emerging economies. The reaction of investors to events in these countries may have an adverse effect on the market value of the securities of Brazilian companies, including the securities issued by the Company. Any potential crises in Brazil, the United States, the European Union or emerging economies may reduce investor interest in the securities of Brazilian companies, including those of the Company.

The Brazilian economy is affected by market conditions and international economic conditions, especially those in the United States. For example, share prices on B3 S.A. – Brasil, Bolsa, Balcão, are highly affected by fluctuations in US interest rates and the behavior of the major US stock exchanges. Any increase in interest rates in other countries, especially the United States, could reduce global liquidity and investor interest in making investments in the Brazilian capital market.

In the past, adverse economic conditions in other emerging market countries have generally resulted in an outflow of funds from Brazil and, consequently, a reduction in foreign funds invested in Brazil. The financial crisis that originated in the United States in the third quarter of 2008 resulted in a global recession, with various effects that, directly or indirectly, damaged the financial markets and the Brazilian economy.

In addition, factors related to international geopolitics can adversely affect the Brazilian economy and, consequently, the Brazilian capital market. This being the case, the conflict involving the Russian Federation and Ukraine, for example, poses the risk of a new rise in oil and natural gas prices, while simultaneously causing a possible appreciation of the dollar. As a result, this would cause even more inflationary pressure and could hinder Brazil’s economic recovery.

In addition, the conflict has an impact on the global supply of agricultural commodities. In this sense, any upward adjustment in the price of grains due to high demand may cause the demand for Brazilian production to increase, given the high production capacity and the consequent possibility of negotiating more competitive prices. As a result, export taxes increase and domestic prices may also rise, increasing inflationary pressure. Lastly, it is worth mentioning that a significant portion of Brazilian agribusiness is highly dependent on fertilizers, whose main inputs are imported mainly from the Russian Federation and from two of its allies (the Republic of Belarus and the People’s Republic of China). That being the case, any changes in the export policy for these products could have a negative impact on the Brazilian economy and, consequently, on the Brazilian capital market. It should be noted that, in the face of the invasion perpetrated on February 24, 2022, animosities have arisen not only between the countries directly involved in the dispute, but also other nations indirectly interested in the issue, giving rise to extremely high uncertainty in the global economy.

There can be no assurance that the Brazilian capital market will be open to Brazilian companies and that financing costs in the market will be favorable to Brazilian companies. Any political or economic crises in Brazil and in emerging markets may reduce investor interest in the securities of Brazilian companies, including the securities issued by the Company. This could affect the liquidity and market price of the securities issued by the Company, its future access to the Brazilian capital markets and the financing terms it is subject to, which could adversely affect the market price of the securities issued by the Company.

The operation of electricity transmission networks and systems involves various risks, such as operational difficulties and unforeseen interruptions. These events include any accidents, breakdown or failure of equipment or processes, performance below expected levels of availability and efficiency of transmission assets and catastrophes such as explosions, fires, natural phenomena, landslides, sabotage or other similar events. In addition, government actions regarding the electricity grid, the environment, and operations in addition to other issues can also affect transmission lines.

In addition, other calamities and pandemics may affect the Company’s operations due to the decrees issued by municipalities and states related to the restriction of movement of people, which may hinder the provision of operation and maintenance services in scheduled activities and/or emergency occurrences. This can jeopardize the operation of transmission lines and substations, causing the facilities to become unavailable and, consequently, the application of Variable Portion (“PVs”) by ONS and/or the application of a fine in the concessionaires’ RAP by ANEEL.

The net operating revenue earned by the Company, its controlled companies, jointly owned companies and affiliates as a result of the implementation, operation and maintenance of its facilities is related to the availability and continuity of services. Following the respective concession contracts and current regulations, the Company, its controlled companies, jointly controlled companies and affiliates, are subject to a drop in their respective RAPs due to the application of Variable Portion by ONS and the application by ANEEL of certain penalties depending on the level and duration of the unavailability of services, as determined by ONS and registered with the Transmission Calculation System – SATRA. Thus, any interruptions in its lines and substations could have a material adverse effect on the company’s business, financial strength and operational performance.

The concessions of the Company, its controlled companies, jointly owned companies and affiliates are subject to unilateral early termination in certain circumstances established by legislation and the respective concession contracts. If the concession is terminated, the assets subject to the concession will revert to the Granting Authority. We cannot guarantee that, in the event of an early termination, any compensation for the value of assets that have not been fully amortized or depreciated will compensate for the loss of future profit. If the Granting Authority terminates the concession contract in the event of default, the amount that would be received by the Company may be reduced to zero by the imposition of fines or other penalties, which may have an adverse effect on the Company, its controlled companies, jointly controlled companies and affiliates, and their business and financial performance.

A significant part of the assets of the Company, its controlled companies, jointly owned companies and affiliates, is linked to the provision of public services or public utility services. These assets will not be available for liquidation in the event of bankruptcy or levy to guarantee the execution of court decisions (these assets are referred to as “reversible assets”), since they must be reverted to the Granting Authority, in accordance with the terms of the concessions and the applicable legislation, to guarantee the non-interruption of the public service. These limitations may sizably reduce the cash available to the Company’s shareholders and creditors in the event of liquidation and may also have a negative effect on the ability of the Company, its controlled companies, jointly controlled companies and affiliates to obtain financing. Ultimately, this may have an adverse effect on the Company, its controlled companies, jointly controlled companies and affiliates, their business and financial performance.

Electricity transmission concessions are subject to termination by ANEEL, prior to the expiry of their respective terms, through an administrative procedure. Some of the circumstances that could lead to termination are: (i) the failure of the concessionaire to provide services for more than 30 (thirty) consecutive days, having failed to present an alternate plan acceptable to ANEEL, after hearing ONS; (ii) the decree of bankruptcy or dissolution of the concessionaires; (iii) if ANEEL determines, through an encampment process, that the termination of any of its concessions would be motivated by public interest, as defined in a specific authorizing law; or (iv) the declaration of forfeiture of concession, if it is determined in an administrative proceeding that the concessionaire has failed to perform the contract, in the cases provided for in article 38 of the Concessions Law (such as stoppage of services, loss of the qualification necessary to provide the services and tax evasion).

In the event that the concession contracts of the Company or any of its controlled companies, jointly controlled entities and affiliates are terminated by ANEEL before their respective terms expire, there is no guarantee that the Company, its controlled companies, jointly controlled entities and affiliates will receive damages to fully compensate the investments made. The early termination by ANEEL of the concession contracts of the Company or any of its controlled companies, jointly controlled companies and affiliates, or insufficient damages vs the investments made, could have a negative impact on the Company’s operating results and payment capacity.

The Company, its controlled companies, jointly owned companies and affiliates are part of the Electricity Industry in an environment highly regulated and supervised by the Federal Government through ANEEL, which is also subject to compliance with the determinations of other bodies and other regulatory and environmental authorities. That being the case, the company, its controlled companies, jointly owned companies and affiliates are subject to various regulations including laws, regulations, standards, environmental licensing, health and safety at work. Any significant changes in the understanding of these bodies which could be reflected in applicable laws, rules and agreements or changes in regulatory execution or interpretation, legal requirements or in the terms of existing permits, licenses and contracts applicable to the Company, this could have a negative impact on its business, operational results and financial strength.

Failure to comply with any of the provisions of the aforementioned environmental and occupational health and safety laws, regulations, standards and licenses could subject the Company to severe penalties, significant fines and damages, the revocation of environmental licenses or the suspension of activities, which could have a material adverse effect on its business. There are also requirements in the contracts that set forth the allocation of a certain percentage of the concessionaires’ revenue to research and development in the Brazilian electricity industry, under the terms of Law No. 9.991/00, of July 24, 2000, and specific regulations. In this sense, the agents will be responsible for recovering (in full or in part) what was invested in projects, in the event of disallowances in the final evaluations carried out by the Regulator.

The Company’s financial strength and operational performance may be adversely affected if (i) it has to make additional investments due to new measures not provided for in applicable laws, regulations or contracts; or (ii) unilateral measures imposed by these authorities.

Virtually all of the sources of revenues of the company, its controlled companies, jointly controlled companies and affiliates derive from the RAP received in exchange for the implementation, operation and maintenance of its electricity transmission facilities. Certain extraordinary events, such as investments in transmission lines and facilities, duly approved by ANEEL, such as reinforcements and improvements, if their revenues fall short, may generate additional costs not initially foreseen by the Company. If the Company’s costs increase or its revenues decrease significantly or if it has to make additional investments due to measures not provided for in the applicable legislation, regulations or contracts, or unilateral measures by these authorities, the Company’s financial and operating performance may be adversely affected. The creation of new taxes and/or charges linked to the RAPs will result in the adjustment of revenues upwards or downwards in accordance with the concession contracts.

In addition, the Federal Government may, in the future, adopt stricter rules applicable to the industry’s activities. These may include, for example, the installation of new equipment and/or the adoption of new procedures, leading the Company to incur additional costs and/or investments to fully comply with new rules. Accordingly, these events may adversely affect the Company’s financial strength and operating results.

The provision of electricity transmission services by concessionaires is carried out in accordance with the respective concession contracts and applicable regulations. In the event of non-compliance with any provision of the respective concession contracts or provisions of current regulations, ANEEL may impose penalties on the Company, its controlled companies, jointly owned companies and affiliates. Depending on the seriousness of the breach, applicable penalties may be: (i) a warning; (ii) fines for non-compliance which, depending on the infraction, range from 0.01% to 2% of the concessionaire’s Net Operating Revenue (“NOR”), corresponding to the last 12 months prior to the infraction notice being issued; (iii) embargoes on the construction of new facilities or equipment; (iv) restrictions on the operation of existing facilities and equipment; (v) temporary suspension of participation in bidding processes for new concessions for up to two years; (vi) intervention by ANEEL in the concessions or authorizations granted; and (vii) termination and forfeiture of the concession.

In addition, the Granting Authority has the prerogative to terminate the concessions of concessionaires in the electricity industry before the end of the term, in the event of bankruptcy or dissolution, or through government takeover and forfeiture due to administrative procedure. ANEEL can apply penalties for non-compliance with concession contracts by electricity sector concessionaires or to terminate concessions early, if the concessionaire has given cause or for the good of the Union. In addition, any delays in the implementation and construction of new facilities in relation to the schedule can also trigger the imposition of regulatory sanctions by ANEEL, which, according to REN 846/2019, can range from warnings to early termination of concessions.

In addition, the sector agent that fails to submit a request for ANEEL’s prior approval to put up as collateral the emerging rights, in whatever capacity, or assets linked to the concession, permission or authorization, in accordance with item “c”, item VII of Article 12 of REN 846/2019, is subject to the imposition of a fine of up to 1% of the value of the ROL, corresponding to the last 12 months prior to the drawing up of the infraction notice, in the case of concessionaires, permissionaires and authorized electric energy facilities and services.

In addition, the compensation to which the electricity industry concessionaires will be entitled upon termination of their respective concessions for unamortized investments may not be sufficient to settle their liabilities in full, and payment may be delayed for many years (for more information, see the risk factor “ANEEL may terminate the concession contracts of the Company, its controlled companies, jointly controlled companies and affiliates before the expiration of their terms through an administrative procedure”). If the concession contracts are terminated or extinguished due to the fault of the electricity industry concessionaires, the payment due could be significantly reduced due to the imposition of fines or other penalties.

In this way, the imposition of fines or penalties or the early termination of the concessions of the Company, its controlled companies, jointly owned companies and affiliates could have significant adverse effects on the financial strength and operational performance of the Company, its controlled companies, jointly owned companies and affiliates.

The Federal, State and Municipal Governments regularly implement changes to the tax regime that affect the Company, its controlled companies, jointly owned companies and affiliates. These changes include changes to current tax rates, the end of tax incentives and/or the creation of temporary or permanent taxes, the collection of which is associated with certain specific governmental purposes. Some of these measures may result in an increase in the tax burden of the Company, its controlled companies, jointly owned companies and affiliates, which may in turn influence the profitability and the financial performance of the Company, its controlled companies, jointly owned companies and affiliates. The Company cannot guarantee that it will be able to maintain its projected cash flow and profitability after any increases in Brazilian taxes applicable to the Company and its operations. There can be no assurance that the Company, its controlled companies, jointly controlled entities and affiliates will be able to obtain a timely and full adjustment of their RAP, which could have a material adverse effect on the Company, its controlled companies, jointly controlled entities and affiliates.  In addition, tax authorities may interpret certain tax laws differently from the interpretation adopted by the Company. If such events occur, the Company and its results may be adversely affected.

The activities of the Company, its controlled companies, jointly owned companies and affiliates are highly regulated and supervised by the Federal Government, through the Ministry of Mines and Energy – “MME”, ANEEL, ONS and other regulatory authorities. These authorities have historically exercised a high degree of influence over the activities of the Company, its controlled companies, jointly owned companies and affiliates. The MME, ANEEL and ONS have discretionary powers to implement and amend policies, interpretations and rules applicable to various aspects of the activities of the Company, its controlled companies, jointly controlled companies and affiliates, especially operational, maintenance and safety aspects, in addition to aspects related to remuneration and supervision of the activities of the Company, its controlled companies, jointly controlled companies and affiliates. Any significant regulatory measure by the competent authorities could impose a material burden on the activities of the Company, its controlled companies, jointly controlled companies and affiliates and cause a material adverse effect. The Company’s core business activities, the implementation of its growth strategy and the conduct of its activities may be adversely affected by government actions, including: (a) changes in the legislation applicable to the business of the Company, its controlled companies, jointly owned companies and affiliates, including, but not limited to, tax, labor and environmental legislation; (b) discontinuation and/or changes in concession programs; (c) imposition of stricter criteria for qualification in future bidding processes; (d) discretion of the granting authority in the process of re-establishing the economic-financial balance of the concession agreement;

In addition, the Company, its controlled companies, jointly owned companies and affiliates cannot assure that the future actions taken by the federal and/or state governments toward the development of the Brazilian electricity system will not negatively impact the activities of the Company, its controlled companies, jointly owned companies and affiliates, nor to what extent these impacts may be.

If the Company, its controlled companies, jointly owned companies and affiliates are obliged to proceed in a manner substantially different from that established in its business plan, its financial and operating results could be adversely affected.

The Company’s activities may result in accidents or incidents for workers and/or the communities living near the operation sites. These events can be caused by natural occurrences, human errors, technical failures and other factors and can result in reputational and/or financial damage, penalties for the Company, Executive Officers and members of the Board of Directors, and negatively affect the obtaining or maintaining of concession agreements and installation or operating licenses.

Any accidents at the Company’s facilities could eventually cause damage to neighboring properties, environmental damage and accidents to the population. In these cases, the Company may be sued for damages and may be required to repair any damage caused to the environment, including through public civil actions, which could adversely affect its financial, operational and reputational situation. In the administrative sphere, penalties may be imposed on the Company by the environmental agency responsible, in addition to technical requirements and penalties which may involve the embargo and stoppage of its activities. In addition, the Company, its managers and employees could be held criminally liable in the event of certain environmental damage, which could negatively affect the Company’s image and reputation.

Lastly, due to the extensive length of its assets, the Company is exposed to the risk of physical damage resulting from acts of sabotage, which may negatively impact asset availability and affect its revenue-generating capacity.

The Company, its controlled companies, jointly controlled companies and affiliates are subject to extensive environmental legislation and regulation relating, among other aspects, to atmospheric emissions, waste management, the use of water resources and the suppression of vegetation and interventions in special protection areas. The Company must have licenses and authorizations from government agencies to carry out its activities. During the environmental licensing process, the licensing body may delay the analysis of requests for the issuance or renewal of licenses and authorizations needed for the Company’s business. In addition it can even reject these requests and/or require compliance with complex and costly conditions, which may delay the implementation of the Company’s projects, negatively affect the project schedule and increase implementation costs.

The Company’s inability to comply with the technical requirements (conditions) established by these environmental agencies during the environmental licensing process may hinder or even prevent, as the case may be, the installation and operation of the projects, and the undertaking of the Company’s activities, and may adversely affect its operating results. In case of any violation or non-compliance with these laws, regulations, licenses and authorizations, and/or obligations assumed in terms of adjustment of conduct or environmental commitment terms or in judicial agreements, the Company may suffer administrative sanctions, such as fines, interdiction of activities, cancellation of licenses and revocation of authorizations, in addition to criminal sanctions (including to its managers), which may materially and adversely affect our reputation, image, revenue and operating results. The Public Prosecutor’s Office may initiate a civil investigation and/or, from the outset, bring a public civil action seeking compensation for any damage caused to the environment and to third parties. In addition, in the civil sphere, any environmental damage caused directly or indirectly by the company, its controlled companies, jointly owned companies and affiliates may imply joint and several liability, which means that the obligation to repair the damage caused may affect all those directly or indirectly involved, regardless of whether the agents are at fault or not. This being the case, environmental damage, even if it is caused by activities carried out by third-party contractors, may make the company liable for reparation. If the Company’s financial strength is the great, it may have to remediate or held accountable for damages.

The Company could subsequent recourse against the other companies involved. The Brazilian legislation does not provide for a ceiling or limit on the amount to be set as compensation for environmental damage, which will be proportional to the damage caused. Doctrine and case law also have a majority opinion that compensation for environmental damage is not subject to a statute of limitations, since it involves diffuse and collective interests, which deserve to be widely protected.

Any violations of environmental legislation can also result in administrative penalties, such as the fines provided for in Federal Decree 6.514/2008, totaling up to R$50 million in the most serious cases, when environmental damage of major proportions is found and/or there is a risk to human health. These fines are doubled or tripled in the event of repeat offenses. Among other things, administrative penalties may also involve a warning, an embargo of work or activity, the demolition of work or partial or total suspension of its activities, especially when there is an imminent danger to public health, a serious risk of environmental damage or in cases of recalcitrance, where previously imposed fines have not been enough to correct the offender’s conduct. It should be noted that administrative and criminal sanctions will be applied regardless of the obligation to repair the damage caused to the environment and to third parties affected. The local environmental legislation also provides for the possibility of disregarding the legal personality, whenever this represents an obstacle to recovering the damage caused to the quality of the environment and may lead to the liability of the company’s partners and managers. Government bodies or other authorities may also issue new, stricter rules or seek more restrictive interpretations of existing laws and regulations, forcing the Company to additionally invest in environmental compliance and/or licensing of areas that will be used to implement new projects.

The Company’s controlled companies need several licenses and permits from different national agencies and public bodies, including government agencies and authorities with jurisdiction over the environment. In addition, many agreements signed by the controlled companies for future operations also require them to obtain some licenses and authorizations. The Company’s controlled companies may not be able to obtain all the licenses and authorizations required for the implementation and operation of their project pipeline. An eventual absence of the licenses, authorizations or concessions required for the operations of the controlled companies, or which have been obtained and subsequently contested, could substantially and adversely affect their respective businesses, financial and operational performance, and, consequently, the Company.

Companies in the energy industry are subject to environmental regulations at the federal, state and municipal levels. To properly comply with these regulations, companies may have to, directly or indirectly, bear considerable costs. Any failure to comply with the provisions of the currently applicable laws and regulations or with the requirements and conditions of environmental licenses and/or authorizations that may be applicable to the activities of the Company, its  controlled companies, jointly controlled companies and affiliates, may subject them to the imposition of administrative penalties. These penalties can be warnings, fines, cancellation or revocation of environmental licenses and/or total or partial suspension of their business activities or the payment of sizable compensation in cases of environmental damage or damage to third parties, which may have a material adverse effect on the Company’s activities, business and financial performance. In addition, the federal government and the governments of the states and municipalities where the Company and its controlled companies, jointly controlled companies and affiliates operate may impose stricter rules or control compliance toward current rules. This could lead them to incur significant costs to fully comply with the legislation in force, which could have a material adverse effect on the Company.

Fires, damage caused by natural or man-made disasters, environmental damage and other unforeseen or unpredictable conditions may cause significant damage to the Company’s undertakings, damage or destroy its facilities and properties, cause delays in its projects and/or increasing costs. In addition, the properties where the Company wishes or intends to develop projects may also be affected by unforeseen planning, engineering, environmental or geological issues or conditions, including any issues that arise on third-party properties adjacent to or in the vicinity close to where the Company projects are planned. This may result in unfavorable impacts on these properties by reducing the availability of land. These eventualities could have a material adverse effect on the Company’s business, financial strength, operational performance and reputation.

The proximity of some sites of the company, its controlled companies, jointly controlled companies and affiliates to regions of quilombola and/or indigenous communities may result in the imposition of mitigation and compensation measures for any potential impacts.

Any activities carried out in areas close to quilombola communities must take into account the specific characteristics of the local communities, and the environmental agency may prevent the implementation of projects that represent a high socio-environmental risk for the local population. In addition, potentially polluting projects located in these areas depend on specific authorization from the National Institute for Colonization and Agrarian Reform (“INCRA”) or the National Indigenous Foundation (FUNAI).

Licensing processes in regions close to quilombola communities tend to be lengthy and costly since they require more steps and procedures. In these cases, for example, holding public hearings and drawing up a Communication Plan to keep local communities informed of the activities carried out by the company is a must.

In addition, although the company’s activities are considered to be in the public interest, any expansion or implementation projects are at the risk of being modified or blocked in regions close to quilombola and indigenous communities.

Regarding the energy transmission industry, the major risks associated with climate change are related to the occurrence of extreme weather events such as droughts, heatwaves, wildfires, lightning strikes, wind gusts, storms, floods, and landslides. These events can cause physical damage to transmission structures, reduce system efficiency, and increase the frequency of incidents that impact system availability. For the Company, this translates into high costs for re-establishing the infrastructure and loss of revenue. In addition, quality indicators are negatively impacted, which may increase the likelihood of regulatory fines for failure to meet the indicators, in addition to having a negative impact on the company’s image in the eyes of its stakeholders.

Regulations may become more stringent, resulting in additional costs associated with the control and reduction of greenhouse gas (“GHG”) emissions, whether through requirements established by environmental or regulatory agencies or through legislation. Due to growing concerns over climate change risks, several countries, including Brazil, have adopted or are considering the adoption of regulatory frameworks that, among other measures, aim to increase oversight and reduce GHG emissions. Current regulations on GHG, or any regulations that may eventually be approved, may increase the Company’s costs to comply with environmental legislation. Therefore, climate change could adversely affect the Company’s results.

Similarly, the country has been suffering from the impacts of the water shortage that began in 2021. The low volume of rainfall and the decrease in reservoir levels have caused energy costs to rise, directly affecting generators, distributors, and end consumers.

In carrying out its activities, the Company is subject to the collection, storage, processing and transmission of sensitive or personal data of customers, suppliers and/or employees. The information technology systems used for these purposes may suffer breaches. In addition, computer programmers and hackers may develop and deploy viruses, worms and other malicious software programs that attack its products or exploit any security vulnerabilities in its products. In addition, the hardware and operating system software and applications that the Company uses may contain design or manufacturing defects, including bugs and other problems that may unexpectedly interfere with the operation of the system.

The techniques used to obtain unauthorized, improper or illegal access to the Company’s systems and data or its customers’ data, to disable or disqualify services or sabotage systems, are constantly evolving and can be difficult to detect. They are often not recognized before they go for a target. Unauthorized parties may attempt to access your systems or facilities in different ways, including, but not limited to, by hacking into your systems or the systems of your customers, partners or service providers, or fraudulent attempts to induce your employees, customers, partners, service providers or other users of your systems to provide names, passwords or other sensitive information, information that can be used to access your IT systems. Some of these techniques can be backed by significant technological and financial resources, making them even more sophisticated and difficult to detect.

The Company’s information technology and infrastructure may be vulnerable to cyber-attacks or security breaches and third parties may be able to access personal or private information of their customers, suppliers and employees that is stored or can be accessed through its systems. The Company’s security measures may be breached due to human error, malfeasance, systems failures or vulnerabilities, or other irregularities. Any actual or perceived breach of security could disrupt its operations, render its systems or services unavailable, result in improper disclosure of data, materially damage its reputation and brand, result in material financial and legal exposure, and cause customers to lose confidence in its products and services; thus, adversely affects its business, financial strength or operational results. In addition, any breaches of the network or data security of its suppliers, including data center and cloud service providers, could have similar negative effects. Any vulnerability or perceived vulnerability or data breaches may result in the filing of lawsuits against the Company. There can be no guarantee that the current protection mechanisms of its operating technology and IT systems will be sufficient to prevent cyber-attacks and breaches of security and privacy.

In 2018, the General Data Protection Law (Law No. 13,709/2018 – locally named “LGPD”) was sanctioned, regulating practices related to the processing of personal data in a general manner and no longer sparse and sectoral since which was how privacy and data protection was regulated in Brazil. On September 18, 2020, LGPD came into force, except for articles 52, 53 and 54 of LGPD, which cover administrative sanctions and have been in force since August 1, 2021, in the form of Law No. 14,010/2020. LGPD established a new legal framework to be observed in personal data processing operations and provides. Among other things, it covers the rights of personal data subjects, the legal bases applicable to the protection of personal data, the requirements for obtaining consent, the obligations and requirements relating to security incidents and leaks and data transfers, in addition to the authorization for the creation of the National Data Protection Authority in charge of drawing up guidelines and applying administrative sanctions in the event of non-compliance with LGPD. On August 26, 2020, the federal executive issued Decree No. 10,474/2020 approving the regimental structure and the flowchart of commissioned positions and roles of trust of the National Data Protection Authority (“ANPD”).

The Company collects, uses, processes, stores and manages personal data in the normal course of its business. This personal data may be processed in breach of legislation and is subject to security incidents, in particular hacking, breach, blocking, hijacking or leaks. The Company must also provide a secure environment for the processing of data holders’ data. Investment to sustain the technical and administrative conditions for information security and personal data protection at the Company will also be required, including to support its corporate governance structure for personal data protection. Furthermore, according to LGPD, the Company has a legal duty to maintain a communication channel with the holders of the personal data it processes.

LGPD also establishes that the following information must be provided to data subjects, including through privacy notices: (i) specific purpose(s) of the processing; (ii) means and duration of the processing; (iii) identification of the data controller; (iv) contact information of the data controller; (v) information regarding the sharing of personal data with third parties and the purpose; and (vi) responsibility of the processing agents involved.

Since August 2021, with the entry into force of the sanctions of LGPD, the Company and its  controlled companies may be, gradually, individually or cumulative, subject to the sanctions of (i) warning, with indication of a deadline for the adoption of corrective measures, (ii) obligation to disclose the incident, (iii) partial suspension of the operation of the database to which the infraction refers for a maximum period of 6 (six) months, extendable for an equal period, (iv) suspension of the exercise of the activity of processing the personal data to which the infringement refers for a maximum period of 6 (six) months, extendable for the same period, (v) temporary blocking and/or deletion of personal data, and (vii) a fine of up to 2% (two percent) of the turnover of the company, group or conglomerate in Brazil in its last financial year, excluding taxes, up to the global amount of R$50.000,000.00 (fifty million reals) per infraction.

Regardless of the applicability of administrative sanctions, non-compliance with any of the provisions of LGPD has the following risks: (i) the filing of individual or collective lawsuits claiming compensation for damages arising from violations, based not only on LGPD, but also on the sparse and sectoral legislation on data protection still in force; and (ii) the application of the penalties provided for in the Brazilian Civil Rights Framework for the Internet, in case of a violation of its provisions, notably the security rules for the online storage of information.

In addition, the Company may be held liable for material, moral, individual or collective damages caused and be held jointly and severally liable for material, moral, individual or collective damages caused by the Company and its  controlled companies, due to non-compliance with the obligations established by LGPD. Thus, any failures to protect personal data processed by the Company and/or to comply with the applicable legislation may result in high fines, disclosure of the incident to the market, deletion of personal data from the database, and even suspension of its processing activities, which may negatively affect the Company’s reputation, image and overall performance.