Strategy and Competitive Advantages

COMPETITIVE ADVANTAGES

Equatorial Energia’s competitive strengths include:

Efficient Capital Allocator

Equatorial intends to expand its current operations through the acquisition of total or joint controlling stake of companies within the electric sector, being distribution, transmission or generation segments. The Company’s target comprises the entire country.

Sound Financial Position

At December 31, 2017, the Company’s total consolidated net debt was R$ 3,164 million (proportional to Equatorial’s stake in its subsidiaries), consisting primarily of medium-term debt with an average maturity of 6 years. Equatorial Energia’s ratio of net debt to EBITDA was 1.8x at that date, which the Company believes is another indicator of its financial strength and an important factor for the successful implementation of its investment process and growth strategy.

Management Principles and Business Model Aimed at Maximizing Results

The Company has sought to implement a corporate culture designed to maximize operating results with a clear vision, solid values and specific goals. Its business model is oriented to achieve operating efficiency and strong financial performance based on strict cost controls, financial discipline, development and retention of qualified professionals, setting up of individual goals, technological development and innovation, and management compensation based on performance.

Operational Excellence

Equatorial is focused on improving the operational quality of its subsidiaries, from the energy supply standpoint, as well as the commercial standpoint. Cemar is top of Aneel’s quality ranking (considering distribution companies above 500 thousand consumers) in the recent years, and Celpa has improved from the last positions to the 8th place in 2017.

Commitment to the Best Corporate Governance Practices

Equatorial Energia adopts the differentiated corporate governance practices demanded by the B3’s Novo Mercado trading segment, which guarantee shareholders’ rights over and above those envisaged by Brazilian Corporate Law and other regulations governing publicly-held companies and the stock market.

 

STRATEGY

The following are key elements of Equatorial Energia’s strategy

To Consolidate Electricity Distributors in Brazil and Latin America

The Company’s principal strategy consists of expanding its electricity distribution and generation operations in Brazil through the acquisition of sole or joint ownership of companies in the electric power industry. The group has a very extreme financial disciplined, aiming at rate of returns that are consistent with the risks pertaining the targeted business.

 To Increase Operating Efficiency and Reduce Energy Losses in Equatorial Energia’s Operations

Over the recent years, Equatorial Energia has achieved significant operating efficiencies at CEMAR. The efficiency ratio, measured by the number of consumers per employee, improved from 748 in 2003 to 1,818 in 2013. At the same time, frequency of interruptions, measured by the number of interruptions per consumer per year, which is referred to as the "FEC" index, and the average duration of interruptions, measured by hours per consumer per year, which is referred to as the "DEC" index, decreased by 72.3% and 70.2% respectively, since 2003. The level of CEMAR’s losses was reduced from 28.7% at end-2007 to 19.2% at the end of 2013. In CELPA, acquired in 2012, similar results can be observed. DEC and FEC indices have been reduced by 73% and 65%, respectively from 2012 to 2017. CELPA has reduced its total losses from 35.5% in 2013 to 27.5% by the end of 2017.

 Selective Assessment of Investments in Energy Transmission

By late 2016 and early 2017, Equatorial has won 8 transmission lots, with total capex estimated at R$ 4.6 billion (as of 2016). It was a very opportunistic acquisition and has proven very attractive due to the increased conditions for the auctions (allowed return increase, possibility to earlier start-up, increase in the allowed construction period, among others).

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