Before deciding to invest, prospective investors should carefully consider all of the information available on this website and in the Company‘s Reference Form, available on the website of Brazilian Securities and Exchange Commission (CVM). Alupar’s businesses, financial condition, and operating results may be materially and adversely affected by any of the risks referenced below and, therefore, negatively impact the securities issued by the Company. The risks described below are those of which Alupar is aware and which may materially affect the Company. Additional risks not presently known to Alupar may also affect its business.
1) Risks Relating to Regulatory Factors
- The electricity generation and transmission segments are subject to specific government regulations which may be modified from time to time. Alupar’s concessions are exposed to regulatory changes, and such changes may alter original investment rates of return. However, the Brazilian government has not made any retroactive changes to previously granted concessions. Moreover, Provisional Measure 579, which has become the Law 12,783/2013, establishes clear regulatory rules for the energy generation and transmission segments.
- Regulatory agencies may terminate the Company’s concession contracts and authorizations prior to the expiration of their terms and in such cases any indemnity may not be sufficient to recovery the full amounts originally invested.
- The Granting Authority has discretionary authority to determine the terms and conditions applicable to Alupar’s current and future concessions. Thus, it is possible that the Company may be subject to conditions not taken into account when figuring its operating costs and revenues, which could adversely affect the Company.
- Opportunities for the Company’s growth depend substantially on bidding processes.
- Alupar has received federal and state tax breaks, and if these are suspended or canceled its businesses could be adversely affected.
- Alupar may have to incur significant costs in order to comply with environmental laws and regulations which may be unexpectedly altered.
2) Risks Relating to Construction and Operations
- The investment projects of Alupar are currently at different stages of the construction phase and are thus subject to construction risks which may result in delays to their operational timelines and increase anticipated CAPEX. Such risks may also affect the projects’ rate of return. In the past few years, the Company has demonstrated the ability to bring its investment projects online within the time frame established by ANEEL, the federal electric energy regulator. Alupar utilizes its technical expertise to identify and mitigate risks relating to the construction of energy generation and transmission facilities.
- The full receipt of the Annual Allowable Revenue (AAR) for the transmission system is subject to the operational availability of the system. The concessionaire is responsible for any event that disrupts the availability of the system and is also responsible for restoring functionality. If the system unavailability index exceeds the level established by ANEEL, AAR will be deducted from the system. In recent years, Alupar has demonstrated operating excellence in its systems, posting an unavailability below the national average.
- Unexpected changes in rainfall patterns may lead to water supply scarcity, resulting in energy generation at levels lower than the guaranteed capacity of the Company’s hydroelectric generators. Currently, all of Alupar’s hydroelectric generation assets pertain to the Energy Reallocation Mechanism (ERM) and thus are covered under the collaborative compensation mechanism established among Brazilian hydropower producers. The ERM significantly reduces the financial risk associated with the production of electricity at levels below guaranteed output.
- Hydroelectric generation assets are subject to systemic hydropower rationing risk. If the production of all ERM hydroelectric participants is insufficient for mutual compensation, the result could be a material adverse effect on the operating results of the Company‘s generation segment.
3) Risks Relating to Related Parties
- Among other suppliers, the Alupar uses engineering and construction services provided by related parties. This relationship between related parties could suggest a conflict of interest; however, the Company has in place appropriate corporate governance mechanisms for mitigating this risk.
- Alupar’s Bylaws require that any contract with a related party valued in excess of R$ 300 thousand be subject to approval by the Board of Directors, with the stipulation that an independent members must vote in favor.
- Alupar has established a Finances, Auditing, and Related Parties Engagement Committee. The committee advises the board of directors with on issues relating to the engagement of related parties and provides input on any and all contracts between the Company and its subsidiaries or affiliates, executives, and controlling shareholders and any other companies where any of these persons belong, by right or in practice, to the same group, whether a single contract or a series of successive contracts.
- The Company’s Shareholder Agreement establishes that the FI-FGTS holds veto power over any contract with a related party in excess of R$ 253 thousand (as adjusted by the IGP-M index).
- Moreover, any member of the board of directors may request an independent evaluation to review the terms and conditions of a proposal involving a related party that has been presented and to assess its suitability to market conditions.