Business Model - Engie - Relatório Anual 2016

ENGIE Brasil Energia’s business model focuses on sustainability, its intention being to respond dynamically to the challenges and opportunities in the energy sector on both global and domestic levels. Starting from an understanding that the current transformations which the sector is undergoing are natural and necessary to the evolution of society, the Company shares the same objective as that proposed by ENGIE, its parent company to all its business units: to be in the vanguard of the energy transition worldwide.

Consequently, ENGIE Brasil Energia’s business model is aligned with the tendencies of decarbonization, decentralization and digitization, which are characterizing the future of the sector. This transition requires a broadening of the vision of the business in order to ensure the creation of value over the medium and long terms. Thus, the key operational areas of ENGIE Brasil Energia continue to be centralized generation, prioritizing renewable sources, and the commercialization of energy although at the same time, seeking increasingly to offer integrated and innovative solutions. In 2016, an important step in this direction was the Company’s debut into the distributed solar energy generation segment through the ENGIE Geração Solar Distribuída subsidiary. GRI G4-8; G4-EC2

The key operational areas of ENGIE Brasil Energia continue to be centralized generation, prioritizing renewable sources, and the commercialization of energy although at the same time, seeking increasingly to offer integrated and innovative solutions.

Strategy

ENGIE Brasil Energia’s businesses are based on two key strategies related to energy commercialization and the responsible expansion of the generating complex.

Energy commercialization

ENGIE Brasil Energia commercializes energy through the Regulated Contracting Environment (ACR) and the Free Contracting Environment (ACL). In the regulated market, sales take place through the intermediary of auctions, participation assuming that the price ceiling proposed by the National Electric Energy Agency (Aneel) is economically adequate for the viable operation of projects under development by the Company.

In the free consumer market through its trading company, ENGIE Brasil Energia seeks to gradually sell available energy at attractive prices, at the same time minimizing the risk of exposure to short-term prices (spot or Price for the Settlement of Differences — PLD). In addition, the Company endeavors to enhance client loyalty as well as diversifying the portfolio, whether by individual sector or between industrial sectors. This counterbalances eventual negative market effects in given sectors or adverse situations with specific clients, thus reducing the risks of revenue shortfalls.

In 2016, the Company intensified its commercialization initiatives with small and medium clients – in a consumption band equal or higher than 0.5 MW –, particularly those in the retailing segment. As a result, the Company successfully added 83 new agreements to the free consumer portfolio, a year-on-year increase of 36.4%.

Commercialization activities are executed as and when opportunities arise, more especially when the markets show a greater buying propensity. However, due to the increase in the spot price and its greater volatility – in recent years a reflection of the hydrological crisis –, ENGIE Brasil Energia may choose to leave a larger volume of its commercial capacity uncontracted in the short-term market. Whenever necessary or opportune, operations for the acquisition of energy for resale are also undertaken.

In 2016, free consumers accounted for 47.9% of physical sales and 45.1% of net revenue from sales, decreases of 0.9 p.p. and 2.2 p.p., respectively compared with 2015.

83
new agreements to the free consumer portfolio, an increase of
36.4%
in comparison with 2015.

Breakdown of clients by physical sales (%)

Breakdown of clients by contracted sales comprising Net revenue from Sales (%)

* In 2016, exports accounted for 0.2% of the physical sales and 0.3% of Net Revenue from Sales.

The 2016 increase in the share of trading companies in physical sales and net revenue from sales compared with the preceding year reflected the sales of conventional energy concomitantly with the purchase of incentivized energy from trading companies, the later being destined for resale to free consumers.

Energy Balance(Average MW)

Diversification of the client portfolio (as at 12.31.2016)

Responsible expansion of the generation complex

Since the outset of its operations in Brazil in 1998, ENGIE Brasil Energia has expanded the installed capacity of its generator complex by 88%, an increase from 3,719 MW to 6,999 MW over 18 years. In 2016, the Company reported a slight drop (0.63%) in installed capacity in relation to the preceding year, a reflection of the decommissioning of Charqueadas TPP (72 MW).

Conversely, 27 MW was added to the Company’s generator complex in the period. Of this total, 18.9 MW represent capacity from the first of the four wind farms making up the Santa Mônica Complex in Trairi in the state of Ceará and unveiled in September 2016. The remaining 8.1 MW is output from the Cacimbas I Wind Plant, which went into partial operations – with three of its seven wind turbines.

Evolution in own installed capacity in operation (in em MW) GRI G4-EU10

The Company has been diversifying its energy matrix and the regional markets in which it operates, prioritizing renewable energy sources. Thus, it remains alert to opportunities for expansion in different regions of the country, conditional on such opportunities being compatible with the requisites of sustainability in economic, social and environmental dimensions.

As the Company expands the portfolio of energy available for commercialization, growth in the generator complex contributes to the longevity of the business and the increase in revenues. This expansion also creates value for Brazilian society as a whole by providing greater security to the national electricity grid and contributing to local sustainable development by creating employment and incomes, among other positive impacts in the regions where the Company’s operations are installed.

In line with the strategic plan, the expansion in the Company’s installed capacity is expected to continue over the next few years as work on construction of new plants is concluded. The following table shows the operations with work in progress.

Growth in the generator complex contributes to the longevity of the business and the increase in revenues. This expansion also creates value for Brazilian society as a whole.

Projects with work in progress (as at 12.31.2016) GRI G4-EU10

Project	Total installed capacity (MW)	Total physical guarantee (MWm)	Ownership	Own installed capacity (MW)	Own physical guarantee (MWm)	Expiration of concession/authorization
Santa Mônica Complex (Wind)¹	70.2	33.0	100%	70.2	33.0	01.25.2045
Jirau (Hydro)²	3,750.0	2,184.6	40%	1,500.0	882.0	08.13.2043
Pampa Sul (Thermical)	340.0	323.5	100%	340.0	323.5	03.30.2050
Campo Largo Complex - Phase I (Wind)	326.7	157.8	100%	326.7	157.8	08.03.2050
Assú V (Solar)	36.7	9.2	100%	36.7	9.2	-
Total	4,523.6	2,708.1		2,273.6	1,405.5

1 - The Complex was already partially operational as at 12.31.2016 while the remainder (70.2 MW) continues under construction.
2 - The Company’s controlling company, ENGIE Brasil Participações Ltda holds a 40% stake in Jirau HPP. The outlook is for the transfer of this stake to ENGIE Brasil Energia will take place in 2017.

Santa Mônica Wind Complex

Located in the municipal district of Trairi (CE), it comprises four plants, which when fully operational, will add a total of 97.2 MW to the Company’s generator complex. The Santa Mônica and Cacimbas wind farms began commercial operations in 2016 and the outlook is that the entire Complex will be operational before the end of the first half of 2017.

Jirau Hydroelectric Power Plant

Operating from a site on the Madeira River, it has its head offices in Porto Velho (RO) and was unveiled on December 16, 2016. With 50 turbines in operation, the project has a total installed capacity of 3,750 MW. ENGIE Brasil Participações, the controlling company of ENGIE Brasil Energia, holds a 40% stake in the project. It is mooted that the transfer of this stake to the Company will be examined in 2017, an event which will have the involvement of the Special Independent Committee for Related Party Transactions.

Pampa Sul Thermoelectric Power Plant

Located in the municipal district of Candiota (RS), the plant will be fired from mineral coal extracted from a seam in the region. At the end of 2016, the project was 47% complete with the year notable for significant progress on the installation of the transmission line towers, work on 44 of the 53 units planned having been concluded. A company for erecting the metallic structure was also engaged during the period.

Campo Largo Complex - (Phase I)

Made up of a series of wind generation projects located in the state of Bahia with the harnessing of potential capacity of 326.7 MW. In September 2016, the decree declaring the external access area to the Campo Largo Wind Complex site one of public utility for the purposes of expropriation was sanctioned and work on services in the accommodation area was begun. In November, the state of Bahia environmental protection agency, Instituto do Meio Ambiente e Recursos Hídricos (Inema), issued the Installation License for the final wind farm in the Complex. Partial commercial operations are scheduled to begin in 2018.

Assú V Photovoltaic Plant

With an installed capacity of 36.7 MW, this plant is a component of the Assú Photovoltaic Complex to be installed in Assú (RN). The project is at the environmental licensing stage. Work is to begin in 2017 with startup in operations programmed for December of the same year.

ENGIE Geração Solar Distribuída

In 2016, the Company debuted the distributed generation market by acquiring a 50% stake in the capital of GD Brasil Energia Solar S/A. This investment will enable ENGIE Brasil Energia to capture opportunities in a market with major growth potential in Brazil, responding to the challenges of a dynamic energy matrix and a segment close to the final consumer. In November 2016, an agreement was signed with the Santa Catarina energy distributor for the installation of photovoltaic systems in a thousand residences in the state. Feasibility of the project is assured through a program whereby the distributor subsidizes 60% of the final consumer’s total investment.

In addition to these operations, ENGIE Brasil Energia has other projects at an advanced stage of development as shown in the following table.

The investment in distributed solar generation will enable ENGIE Brasil Energia to capture opportunities in a market with major growth potential in Brazil, responding to the challenges of a dynamic energy matrix and a segment close to the final consumer.

Projects under development (as at 12.31.2016) GRI G4-EU10

Projects under development	Total capacity (MW)	Type	Ownership	Location
Santo Agostinho Complex	600.0	Wind	100%	Lajes and Pedro Avelino (RN)
Norte Catarinense	600.0	Thermical	100%	Garuva (SC)
Campo Largo Complex - Phase II	330.0	Wind	100%	Umburanas and Sento Sé (BA)
Alvorada	90.0	Solar	100%	Bom Jesus da Lapa (BA)
Assú Complex - Units I, II, III and IV	146.8	Solar	100%	Assú (RN)
Total	1,766.8

600 MW
is the potential output of Santo Agostinho Wind Complex, located in the state of Rio Grande do Norte.

Santo Agostinho Wind Complex

Located in the municipal districts of Lajes and Pedro Avelino in the state of Rio Grande do Norte, this project has a potential output of 600 MW. In June 2016, the state environmental protection agency, Instituto de Desenvolvimento Sustentável e Meio Ambiente (Idema), issued a Preliminary License. The entire project’s documentation necessary to take part in the energy auctions has been prepared.

Norte Catarinense TPP

Located at a site in the municipal district of Garuva (SC), this is a natural gas combined cycle plant with an installed capacity of about 600 MW. In 2016, a Preliminary License was issued allowing the project to bid in future new energy auctions.

Campo Largo Wind Complex - (Phase II)

Will add a further approximately 330 MW of installed capacity to the Campo Largo Wind Complex. Just as in the case of the Santo Agostinho Wind Complex, this operation has already prepared full documentation necessary to take part in energy auctions.

Alvorada Photovoltaic Complex

Located in the state of Bahia, this operation will be made up of four projects with a total estimated installed capacity of up to 90 MWp. The projects are currently at the solar radiation measurement phase. In all cases, the relevant Preliminary License was issued in August 2016, which permits bidding at the new energy auctions as from 2017.

Assú Photovoltaic Complex

ENGIE Brasil Energia acquired a further two projects under the umbrella of the Assú Photovoltaic Complex. This will now be made up of five projects – with a total estimated capacity standing at 183 MWp – to be developed at the Assú (RN) site. All Assú I, II, III and IV Photovoltaic Plants are at the solar radiation measurement stage. They have all received a Preliminary License, which qualifies them to take part in new energy auctions.

The Company is also examining the potential for parallel photovoltaic solar energy generation in the areas where it is installing its wind farms as well as the establishment of partnerships for accelerating the harnessing of this source of energy.

Competitive advantages

In tandem with the strategy for the business, ENGIE Brasil Energia creates value based on the aspects, policies and practices, which differentiate it from other market entities. Among the Company’s principal competitive advantages, of particular importance are:

Operations in a strategic sector

The energy sector is considered strategic to the development of Brazil given that energy constitutes a basic input for production and a large part of society’s everyday activities.

Sector Leadership

The Company ranks among the leaders of independent energy production in Brazil. Its parent company is the largest independent producer in the world, thus reinforcing ENGIE Brasil Energia’s own potential for capturing business opportunities.

Clear commercial strategy

ENGIE Brasil Energia maintains high levels of long-term contracting, thus reducing exposure to short-term market oscillations. In addition, its sales portfolio is a balanced mix of free consumers, different sectors and clients in the regulated market (distributors).

Predictability of cash flow

In addition to the above-mentioned long-term contracting, energy sales agreements are indexed to inflation. Another factor, which contributes to greater predictability, is the diversified generation portfolio – encompassing hydroelectric, thermoelectric and complementary power plants. This diversity serves to reduce the impacts related to climatic events such as low rainfall or less sunlight and wind in certain regions.

High degree of operational performance

The power generating units, which the Company operates, show a high level of uptime and reliability. Contributing to this result are NBR ISO 9001 (management of quality), NBR ISO 14001 (management of the environment) and OSHAS 18001 (occupational health and safety management) certification, which the majority of plants hold.

Stable financial performance

The association of strong cash generation, high average EBITDA margin, consistent net income and the absence of currency exposure all contribute to the financial stability of the Company and its consequent resilience under inclement macroeconomic scenarios. Additionally, as a solid organization with a market value of R$ 22.8 billion at the end of 2016, ENGIE Brasil Energia has access to attractive lines of credit, thus enhancing its competitive edge.

Differentiated risk classification

Fitch Ratings has assigned a Long-Term National Company Rating of ‘AAA (bra)’ and on the global scale, ‘BB+(bra)’, one notch above the sovereign rating.

Best practices of governance and sustainability

Just as with the Management Board, the Board of Directors is made up of experienced professionals with a broad-based knowledge of the sector and duly prepared to take decisions covering the interests of the shareholders and other stakeholders that may be involved. Thus, economic, social and environmental aspects are indissolubly part of the decision-making process.

Contributes to greater predictability the diversified generation portfolio – encompassing hydroelectric, thermoelectric and complementary power plants. This diversity serves to reduce the impacts related to climatic events such as low rainfall or decreased sunlight and winds in certain regions.

Intangible assets

ENGIE Brasil Energia’s principal intangible assets are human and intellectual capital, research, development and innovation activities and the corporate image as well as those considered in the Accounting Statements.

Human and intellectual capital

ENGIE Brasil Energia’s work force is characterized by diversity of age group with a mix of young talent and experienced professionals. The Company fosters the continuing evolution of its employees, investing in actions directed towards career development and also focused on wellbeing and occupational health and safety.

The Company invests in actions directed towards career development and also focused on wellbeing and occupational health and safety.

Image

ENGIE Brasil Energia’s reputation is based on integrity, a hallmark of its relationship with different stakeholders. In this context, transparency and dialog constitute essential elements in the construction and maintenance of an image, which adheres to the values of the Company, as well as the commitments that it assumes.

ENGIE Brasil Energia maintains channels for permanent communication with stakeholders as a means of providing information on its initiatives and projects. The Company website is a particularly important medium in this respect for publishing policies, reports, news items and market announcements, among other information.

In 2016, ENGIE adopted a single corporate logotype for all its companies as a way of increasing Group visibility both in Brazil and worldwide. In the light of the change in the Company’s corporate denomination and logo, several communication initiatives were run to consolidate the new corporate identity both internally and externally.

Research, development and innovation GRI G4 - DMA Setorial

Research, development and innovation (RD&I) activities are becoming increasingly strategic to the Company’s business model. In 2016, this trend gained traction with the creation of the Operating Unit for Strategy and Innovation, an area under the Strategy and Regulation Department. The Unit’s objective is to create innovative solutions to meet the demands of society in the context of the energy transition. To assist this process, the Company intends to strengthen further the existing partnerships with Brazilian universities and research centers in order to consolidate the culture of open innovation, integral to its development strategy.

The Research and Development Program regulated under Law 9991/2010 is an important instrument for conducting these activities. The relevant legislation mandates that generation, transmission and distribution companies should apply 1% of their net annual revenues in R&D projects. It is the responsibility of the companies to establish the objectives of the projects to be developed and to submit them for Aneel’s assessment.

ENGIE Brasil Energia’s total investments in its 2016 R&D Program were R$ 32 million and allocated as follows:

R$ 12.3 million

to the National Scientific and Technological Development Fund (FNDCT);

R$ 6.1 million

to the Ministry of Mines and Energy (MME), as the Company’s contribution to the funding of the Energy Research Company (EPE); and

R$ 13.6 million

for projects with work in progress involving aspects listed in the following table.

Areas of R&D projects - 2016

Area	Amount invested (R$)
Energy efficiency	490,850.51
Alternative sources of electric energy generation	8,581,132.64
Electric energy generation	11,405.33
Thermoelectric generation	404,957.87
Management of the R&D Program	756,659.08
Environment	1,374,318.43
Operation of electric energy systems	362,192.55
Planning of the electric energy system	671.886,34
Supervision, control and protection of electric energy systems	986,880.36

The search for sustainable solutions for energy generation is among the main goals of R&D projects, which are focused on reducing environmental impacts and guaranteeing the reliability of the electricity system. In 2016, an example of these efforts was recognized with the triple award made to the Cidade Azul Solar Energy Plant project. This plant is the result of a research project initiated by the Company in 2011 in cooperation with the Universidade Federal de Santa Catarina (UFSC) and another 11 companies in the electric energy sector.

The project consists of the installation, operation and monitoring of eight trial modules, each one employing seven diferent photovoltaic technologies and solar monitoring stations at eight locations with different climates. The project also involves the installation and maintenance of the Cidade Azul Photovoltaic Plant - in operation since 2014. The plant has a 3.0 MWp power output and was installed in Tubarão (SC), adjacent to the Company’s Jorge Lacerda Thermoelectric Complex (CTJL). The trial modules are recording preliminary results and have proved to be an important source of information for the analysis of how different technologies work in distinct regions.

In the light of these results, the project won the Rio de Janeiro American Chamber of Commerce’s Brazil Environmental Award and the Expressão Ecology Award presented by Editora Expressão, both awards in the Innovation category. The project was also a finalist in the Von Martius Award for Sustainability, Technology Category, sponsored by the Brazil-Germany Chamber of Industry and Commerce.

The Company also fosters a culture of innovation both with its own employees as well as with external stakeholders. It runs the in-house Inove Program, which awards innovative ideas and projects in five categories: Operation and Maintenance, Research and Development (R&D), Commercial and Business, Socio-environmental and Management. All employees are eligible to enter, except managers of the organizational units and members of the Innovation Committee.

The second ENGIE Brasil Award for Innovation was held in 2016. Sponsored by ENGIE Brazil Energia’s controlling company, the initiative recognizes companies, startups and entrepreneurs that devise innovative solutions, either of a technological or commercial nature, for areas of Group interest. Among such areas, we would highlight decentralized energy, green mobility and smart city, energy storage, smart grids or social inclusion through energy efficiency and access to energy.

3.0 MWp
is the capacity of Cidade Azul Photovoltaic Plant, installed in Tubarão.

The innovation culture is fostered by the Company through actions directed at both employees and the external public.

Value Creation

ENGIE Brasil Energia’s business model covers the capital essential to the activities of the Company and its capacity to create value — in the short, medium and long terms — both for the organization and also for its principal stakeholders. In this way, an integrated vision is developed of the connection between the inputs required for managing the Company’s activities and the value created and shared with all stakeholders as shown as follows.