Illustrative financial statements, in accordance ... - Copasa · Sanitation company of minas gerais...

Illustrative financial statements, in accordance with accounting practices

adopted in Brazil and IF RS, on December 31, 2013

Sustainability Report 2013 | COPASA MG

Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

2

Balance Sheet

Note PareNt comPaNy coNsolidated

assets 12/31/2013 12/31/2012 1/1/2012 12/31/2013 12/31/2012 1/1/2012

cUrreNt assets

cash and cash equivalents 6 260.481 496.425 241.536 261.938 497.701 242.371

trade receivables 7 697.105 578.853 471.797 702.205 583.513 475.726

marketable securities 7 - 20.135 - - 20.135 -

inventories 34.486 33.121 29.074 37.166 35.187 31.965

taxes to be offset 23.283 21.171 36.236 24.436 21.913 37.009

technical cooperation agreements 16 - - 5.085 12.298 - 5.817

Bank account - agreements 16 36.688 47.480 9.161 36.794 67.715 11.671

other receivables 27.665 22.991 21.741 25.201 23.066 21.762

total cUrreNt assets 1.079.708 1.220.176 814.630 1.100.038 1.249.230 826.321

NoN-cUrreNt assets

long-term receivables:

trade receivables 7 212.580 220.000 220.060 212.580 220.000 220.060

Collateral for financing 7 133.410 132.961 131.778 133.410 132.961 131.778

deferred income tax and social contribution 15 118.944 176.406 149.566 118.944 176.406 149.566

receivables from subsidiaries 7/26 109.790 106.831 76.048 - - -

restricted investments 7 97.380 188.661 328.891 97.380 188.661 328.891

Financial assets available for sale 21 48.638 28.850 25.079 48.638 28.850 25.079

Financial assets - concession agreements 5 494.836 390.757 325.493 494.836 390.757 325.493

other receivables 7 54.524 39.907 16.534 54.835 40.218 17.241

1.270.102 1.284.373 1.273.449 1.160.623 1.177.853 1.198.108



3

investments 08 260 260 260 260 260 260

intangible assets 9 6.900.753 6.463.360 6.060.456 6.900.755 6.463.373 6.060.461

Property, plant and equipment 10 205.478 175.494 160.871 226.794 198.623 185.699

total NoN-cUrreNt assets 8.376.593 7.923.487 7.495.036 8.288.432 7.840.109 7.444.528

total assets 9.456.301 9.143.663 8.309.666 9.388.470 9.089.339 8.270.849

The accompanying notes are an integral part of these financial statements.

Balance Sheet


liaBilities aNd eQUity 12/31/2013 12/31/2012 1/1/2012 12/31/2013 12/31/2012 1/1/2012

cUrreNt liaBilities

Borrowings 12 196.259 228.981 371.225 196.663 228.981 371.225

debentures 12 275.267 134.024 172.457 275.267 134.024 172.457

trade payables 135.338 157.397 108.068 156.104 172.440 111.494

taxes payable and contributions 53.385 47.293 42.427 53.914 47.774 42.748

income tax and social contribution payable 379 - 7.374 379 - 7.374

taxes in installments 11 41.144 35.676 41.239 41.144 35.676 41.239

Provision for vacation pay 11 92.023 84.653 76.587 92.679 85.172 76.949

Employee profit sharing 14 33.087 27.968 28.317 33.087 27.968 28.317

technical cooperation agreements 16 6.547 31.851 - - 39.734 -

Retirement benefit obligations 17 26.409 24.602 12.119 26.409 24.602 12.119

interest on capital 18 31.646 46.469 26.921 31.646 46.469 26.921



4

electric power 11 10.832 6.618 24.670 11.202 6.932 24.670

sundry obligations 11 12.317 13.652 56.558 12.343 13.868 56.742

total cUrreNt liaBilities 914.633 839.184 967.962 930.837 863.640 972.255

NoN-cUrreNt liaBilities

Borrowings 12 1.192.469 1.152.892 1.248.370 1.193.498 1.152.892 1.248.370

debentures 12 1.492.272 1.543.481 1.017.907 1.492.272 1.543.481 1.017.907

taxes payable in installments 11 212.580 220.000 220.060 212.580 220.000 220.060

tax provision 13 - 16.456 44.619 - 16.456 44.619

Provision for legal claims 13 76.474 63.932 43.956 77.753 64.318 46.447

Retirement benefit obligations 17 106.010 259.071 149.285 106.010 259.071 149.285

Provision for investment losses 8/26 86.346 79.169 45.604 - - -

sundry obligations 11 38.158 34.590 38.808 38.161 34.593 38.811

total NoN-cUrreNt liaBilities 3.204.309 3.369.591 2.808.609 3.120.274 3.290.811 2.765.499

eQUity

capital 18 2.773.985 2.773.985 2.636.499 2.773.985 2.773.985 2.636.499

capital reserves 18 - - 3.782 - - 3.782

revenue reserves 18 2.508.330 2.198.133 1.870.586 2.508.330 2.198.133 1.870.586

treasury shares 18 (8.576) (8.576) (9.190) (8.576) (8.576) (9.190)

carrying value adjustments 18 63.620 (28.654) 31.418 63.620 (28.654) 31.418

total eQUity 5.337.359 4.934.888 4.533.095 5.337.359 4.934.888 4.533.095

tOtal lIaBIlItIeS anD eQUItY 9.456.301 9.143.663 8.309.666 9.388.470 9.089.339 8.270.849




5

Statement Of IncOme


2013 2012 2013 2012

(restated) (restated)

coNtiNUiNG oPeratioNs

Net sales and services revenue 22 3.714.818 3.429.090 3.733.397 3.448.176

cost of sales and services rendered 23 (2.322.956) (2.077.253) (2.341.918) (2.097.045)

Gross ProFit 1.391.862 1.351.837 1.391.479 1.351.131

selling expenses 23 (230.568) (211.860) (234.983) (215.308)

administrative expenses 23 (423.531) (369.003) (430.095) (376.589)

other operating income 22 108.727 122.330 111.733 127.521

other operating expenses 23 (81.716) (90.673) (79.183) (96.039)

Employee profit sharing 23 (32.670) (27.613) (32.670) (27.613)

share of results of subsidiaries 08/23 (7.177) (13.320) - -

(666.935) (590.139) (665.198) (588.028)

oPeratiNG ProFit 724.927 761.698 726.281 763.103

Finance income 25 85.834 134.819 84.687 133.756

Finance costs 25 (244.603) (257.370) (244.747) (257.459)

FiNaNce resUlt, Net (158.769) (122.551) (160.060) (123.703)

ProFit BeFore taXatioN 566.158 639.147 566.221 639.400

current income tax and social contribution 15 (138.681) (155.999) (138.744) (156.252)

deferred income tax and social contribution 15 (7.682) (1.425) (7.682) (1.425)

(146.363) (157.424) (146.426) (157.677)



6

ProFit For tHe year 419.795 481.723 419.795 481.723

outstanding shares at the end of the year 119.327.217 119.327.193 119.327.217 119.327.193

Basic and diluted earnings per share for the year attributable to holders of common shares of the parent entity (Note 18) – r$ 3,52 4,04 3,52 4,04


Statement Of cOmprehenSIve IncOme

PareNt comPaNy coNsolidated

Note 2013 2012 2013 2012


prOfIt fOr the Year 419.795 481.723 419.795 481.723

Other cOmprehenSIve IncOme

Items not to be reclassified to profit (loss)

Actuarial gain (loss) on retirement benefits 17 100.485 (74.268) 100.485 (74.268)

Items that may be later reclassified to profit (loss)

Available-for-sale financial assets 13.060 2.489 13.060 2.489

Other cOmprehenSIve IncOme fOr the Year 113.545 (71.779) 113.545 (71.779)

tOtal cOmprehenSIve IncOme fOr the Year 533.340 409.944 533.340 409.944



7

attrIBUtaBle tO:

Stockholders of Parent company 533.340 409.944

non-controlling interests - -

533.340 409.944

Items in the statement of comprehensive income are disclosed net of tax. The income tax relating to each component of other comprehensive income is disclosed in Note 15.


parent cOmpanY Statement Of changeS In eQUItY

caPital reserves reveNUe reserves

carryiNG valUe

adjUstmeNts

total eQUitysHare

caPitalcoNvertiBle deBeNtUres

treasUry sHares

leGal taX iNceNtives

ProFit reteNtioN

retaiNed earNiNGs

at JanUarY 1, 2012 2,636,499 3,782 (9,190) 170,109 20,277 1,680,200 - - 4,501,677

prIOr-Year aDJUStmentS anD aDJUStmentS frOm changeS In AccouNTINg PolIcIeS (NoTe 3.23)

actuarial loss on post-employment benefit obligations (Note 17) - - - - - - - (4,050) (4,050)Fair value of available-for-sale financial assets - - - - - - - 3,279 3,279Amortization of Monetary adjustments on fixed assets - 96/97 - - - - - - - 48,284 48,284Deferred income tax and social contribu-tion adjustments on fixed assets - 96/97 - - - - - - - (16,095) (16,095)



8

tOtal aDJUStmentS frOm prIOr YearS - - - - - - - 31,418 31,418

aDJUSteD OpenIng Balance 2,636,499 3,782 (9,190) 170,109 20,277 1,680,200 - 31,418 4,533,095

cOmprehenSIve IncOme fOr the Year

Profit for the year (restated) - - - - - - 481,723 - 481,723actuarial loss on post-employment ben-efit obligations (Note 17) - - - - - - - (74,268) (74,268)Fair value of available-for-sale financial assets - - - - - - - 2,489 2,489tOtal cOmprehenSIve IncOme fOr the Year - - - - - - 481,723 (71,779) 409,944

conversion of debentures - 133,704 - - - - - - 133,704Increase in capital from convertible debentures 137,486 (137,486) - - - - - - - Additions to intangible assets - - 614 - - - - - 614

Proposed distribution:

─ legal reserve - - - 24,346 - - (24,346) - -

─ Tax incentive reserve - - - - 7,208 - (7,208) - -

─ Profit retention - - - - - 295,993 (295,993) - -

─ Interest on capital (Note 18) - - - - - - (159,381) - (159,381)early recognition of concession agree-ments (Note 3.23) - - - - - 16,912 - - 16,912Amortization of monetary adjustments on fixed assets - 96/97 - - - - - - 7,887 (7,887) -Deferred income tax and social contribu-tion on monetary adjustments on fixed assets - 96/97 - - - - - - (2,682) 2,682 -

AT DeceMBeR 31, 2012 (ReSTATeD) 2,773,985 - (8,576) 194,455 27,485 1,993,105 - (45,566) 4,934,888



9

cOnSOlIDateD Statement Of changeS In eQUItY

attriBUtaBle to tHe owNers oF tHe PareNt


sHare caPital

coNvertiBle deBeNtUres

treasUry sHares

leGal taX iNceNtives

ProFit reteNtioN

retaiNed earNiNGs

carryiNG valUe

adjUstmeNts

total NoN- coNtrolliNG

iNterests

total eQUity

at JanUarY 1, 2012 2,636,499 3,782 (9,190) 170,109 20,277 1,680,200 - 31,927 4,533,604 - 4,533,604

Prior-year adjustments and adjust-ments from changes in accounting policies (Note 3.23)

actuarial loss on retirement benefits (Note 17) - - - - - - - (4,050) (4,050) - (4,050)

fair value of available-for-sale financial assets - - - - - - - 3,279 3,279 - 3,279

Deferred income tax and social contribution on adjustments - - - - - - - 262 262 - 262

Total adjustments from prior years - - - - - - - (509) (509) - (509)

aDJUSteD OpenIng Balance 2,636,499 3,782 (9,190) 170,109 20,277 1,680,200 - 31,418 4,533,095 - 4,533,095

comprehensive income for the year

Profit for the year (restated) - - - - - - 481,723 - 481,723 - 481,723

Actuarial loss on retirement benefits (Note 17) - - - - - - - (74,268) (74,268) - (74,268)

Fair value of available-for-sale finan-cial assets - - - - - - - 2,489 2,489 - 2,489

tOtal cOmprehenSIve IncOme fOr the Year - - - - - - 481,723 (71,779) 409,944 - 409,944



10

conversion of debentures - 133,704 - - - - - - 133,704 - 133,704

Increase in capital from convertible debentures 137,486 (137,486) - - - - - - - - -

Additions to intangible assets - - 614 - - - - - 614 - 614

Proposed distribution: -

─ legal reserve - - - 24,346 - - (24,346) - - - -

─ Tax incentive reserve - - - - 7,208 - (7,208) - - - -

─ Profit retention - - - - - 295,993 (295,993) - - - -

─ Interest on capital (Note 18) - - - - - - (159,381) - (159,381) - (159,381)

early recognition of concession agreements (Note 3.23) - - - - - 16,912 - - 16,912 - 16,912

Amortization of monetary adjust-ments on fixed assets - 96/97 - - - - - - 7,887 (7,887) - - -

Deferred income tax and social contribution monetary adjustments on fixed assets - 96/97 - - - - - - (2,682) 2,682 - - -

AT DeceMBeR 31, 2012 (ReSTATeD) 2,773,985 - (8,576) 194,455 27,485 1,993,105 - (45,566) 4,934,888 - 4,934,888




11

parent cOmpanY anD cOnSOlIDateD Statement Of changeS In eQUItY

attriBUtaBle to tHe owNers oF tHe PareNt


sHare caPital

treasUry sHares leGal

taX iNceNtives

ProFit reteNtioN

retaiNed earNiNGs

carryiNG valUe adjUstmeNts total

NoN-coNtrolliNG

iNterests total eQUity

BalaNce at decemBer 31, 2012 (restated) 2,773,985 (8,576) 194,455 27,485 1,993,105 - (45,566) 4,934,888 - 4,934,888

comPreHeNsive iNcome For tHe year

Profit for the year - - - - - 419,795 - 419,795 - 419,795

actuarial gain on retirement benefits (Note 17) - - - - - - 100,485 100,485 - 100,485

Fair value of available-for-sale financial assets - - - - - - 13,060 13,060 - 13,060

total comPreHeNsive iNcome For tHe year - - - - - 419,795 113,545 533,340 - 533,340

Proposed distribution: -

─ legal reserve - - 20,990 - - (20,990) - - - -

─ Profit retention - - - - 263,582 (263,582) - - - -

─ interest on capital(Note 18) - - - - - (139,582) - (139,582) - (139,582)

other changes in equity - - - - 8,713 - - 8,713 - 8,713

amortization of monetary adjustments on fixed assets - 96/97 - - - - - 6,604 (6,604) - - -

deferred income tax and social contribution on monetary adjustments on fixed assets - 96/97 - - - - - (2,245) 2,245 - - -



12

at decemBer 31, 2013 2,773,985 (8,576) 215,445 27,485 2,265,400 - 63,620 5,337,359 - 5,337,359


Statement Of caSh flOwS

statemeNt oF casH Flows coNsolidated

2013 2012 2013 2012


Cash flow from operating activities:

ProFit For tHe year 419.795 481.723 419.795 481.723

Adjustments to reconcile profit to net cash provided

Provision for impairment of trade receivables 73.672 57.421 75.649 58.715

recovery of accounts written-off (66.193) (35.732) (66.582) (36.340)

charges and monetary/foreign exchange variations, net 16.096 (122) 17.521 1.164

interest income and expenses 175.754 189.762 175.866 189.762

deferred income tax and social contribution 7.682 1.425 7.682 1.425

equity accounting result 7.177 13.320 - -

Net disposal of intangible assets and property, plant and equipment 28.902 11.019 31.193 14.809

depreciation and amortization 428.034 377.342 430.618 379.930

constitution (reversal) of provisions (209) (3.392) 344 (4.477)

Provision for retirement benefits 61.366 53.854 61.366 53.854

Financial assets (12) - (12) -

subsidy revenue - (7.208) - (7.208)

Net margin of construction revenue (16.509) (15.080) (16.509) (15.080)



13

adjUsted ProFit 1.135.555 1.124.332 1.136.931 1.118.277

decrease (increase) in operating assets

trade receivables (95.988) (76.712) (98.016) (78.129)

inventories (1.365) (4.047) (1.979) (3.221)

recoverable taxes (2.112) 16.173 (2.525) 16.204

Bank account - agreements 10.792 (38.319) 30.922 (56.044)

Collateral for financing 8.171 11.527 8.171 11.527

receivables from subsidiaries (3.856) (1.073) - -

Other financial assets (15.031) (65.264) (15.031) (65.264)

other (24.867) (24.623) (24.748) (24.282)

increase (decrease) in operating liabilities

trade payables (22.059) 49.329 (16.337) 60.948

taxes and contributions 6.471 (2.508) 6.518 (2.350)

Provisions for vacation pay 7.370 8.066 7.509 8.222

Employee profit sharing 5.119 (349) 5.119 (349)

technical cooperation agreements (25.304) 36.936 (52.032) 45.551

contingencies (3.705) (4.795) (3.365) (5.815)

Retirement benefit obligations (36.559) (22.383) (36.559) (22.383)

electric power 4.214 1.176 4.270 1.490

other 10.596 (39.383) 10.606 (39.350)

interest paid (233.779) (241.804) (233.854) (241.804)

Payments of actuarial liabilities (23.811) (21.730) (23.811) (21.730)

taxes paid in installments (37.140) (32.090) (37.140) (32.090)

Net casH Provided By oPeratiNG activities 662.712 672.459 664.649 669.408

Cash flows from investing activities:

Financial assets invested and restricted investment - (80.000) - (80.000)

Redemption of financial assets and restricted investment 118.083 229.307 118.083 229.307



14

acquisition of investments - (8.179) - -

addition to intangible assets and purchase of property, plant and equipment (911.759) (706.033) (914.911) (710.720)

Net casH Used iN iNvestiNG activities (793.676) (564.905) (796.828) (561.413)

Cash flows from financing activities:

New borrowings and debentures 391.806 785.553 393.368 785.553

repayments of borrowings and debentures (337.823) (457.559) (337.989) (457.559)

interest on capital paid (154.405) (140.941) (154.405) (140.941)

Payment of principal and interest - cemig - (20.112) - (20.112)

Payment of principal and concession debt interest (4.558) (9.073) (4.558) (9.073)

Payment of tax provision - (10.533) - (10.533)

Net casH Provided By (Used iN) iNvestiNG activities (104.980) 147.335 (103.584) 147.335

(235.944) 254.889 (235.763) 255.330

iNcrease iN casH aNd casH eQUivaleNts

496.425 241.536 497.701 242.371

cash and cash equivalents at the beginning of the year

260.481 496.425 261.938 497.701

casH aNd casH eQUivaleNts at tHe eNd oF tHe year

(235.944) 254.889 (235.763) 255.330

Increase in cash and cash equivalents




15

Statement Of valUe aDDeD


2013 2012 2013 2012


1 Gross reveNUe 4,057,281 3,780,774 4,079,040 3,806,197

1.1 water supply and sewage services rendered 3,315,144 3,064,739 3,335,874 3,086,664

1.2 other income 42,534 76,999 45,151 81,183

1.3 revenues related to the construction of assets 707,082 660,725 707,082 660,725

1.4 Provision for impairment of trade receivables (7,479) (21,689) (9,067) (22,375)

2 iNPUts acQUired From tHird Parties (1,613,334) (1,479,514) (1,625,487) (1,504,077)

2.1 cost of services (1,380,184) (1,263,440) (1,390,021) (1,277,378)

2.2 material, energy, outsourced services and other (163,387) (130,137) (168,206) (136,062)

2.3 other operating expenses (69,763) (85,937) (67,260) (90,637)

3 Gross valUe added 2,443,947 2,301,260 2,453,553 2,302,120

4 dePreciatioN aNd amortiZatioN (428,034) (377,342) (430,618) (379,930)

5 Net valUe added GeNerated 2,015,913 1,923,918 2,022,935 1,922,190

6 valUe added received tHroUGH traNsFer 78,657 121,499 84,687 133,756

6.1 equity in the results of investees (7,177) (13,320) - -

6.2 Finance income 85,834 134,819 84,687 133,756

7 total valUe added For distriBUtioN 2,094,570 2,045,417 2,107,622 2,055,946

8 distriBUtioN oF valUe added 2,094,570 2,045,417 2,107,622 2,055,946



16

8.1 PersoNNel 873,654 777,036 883,076 783,593

8.1.1 direct compensation 557,100 505,129 564,698 510,926

8.1.2 Benefits 218,885 196,286 220,274 196,714

8.1.3 FGts (Government severance indemnity Fund for employees) 64,999 48,008 65,434 48,340

8.1.4 Employee profit sharing 32,670 27,613 32,670 27,613

8.2 taXes aNd coNtriBUtioNs 557,146 532,892 560,590 536,565

8.2.1 Federal 541,627 526,111 544,284 528,950

8.2.2 state 8,375 5,993 9,087 6,790

8.2.3 municipal 7,144 788 7,219 825

8.3 remUNeratioN oF tHird Parties' caPital 243,975 253,766 244,161 254,065

8.3.1 interest and monetary adjustment 239,516 250,050 239,591 250,052

8.3.2 rentals 4,459 3,716 4,570 4,013

8.4 remUNeratioN oF stockHolders 419,795 481,723 419,795 481,723

8.4.1 interest on capital 139,582 159,381 139,582 159,381

8.4.2 earnings reinvested 280,213 322,342 280,213 322,342




17

01. OperatiOnscompanhia de saneamento de minas Gerais (“coPasa mG”,

“Parent company” or “company”) is a publicly-traded, mixed-capital (public/private) company, controlled by the Government of the state of Minas Gerais, having its registered office in the city of Belo Horizonte at rua mar de espanha 525, santo antônio. the company is engaged in planning, designing, performing, expanding, remodeling, managing and providing public services comprising water supply and sewage services, and is permitted to operate in Brazil and abroad. the company is subject to the arbitration of são Paulo stock exchange’s market arbitration chamber, as set forth in an arbitration clause included in its bylaws. at december 31, 2013, coPasa mG had the following wholly-owned subsidiaries:

Copasa Águas Minerais de Minas s.a. (“Águas Minerais”) - esta-blished by state law 16,693, of january 11, 2007, is engaged in the production, bottling, distribution and sale of mineral water from the springs it owns or has license to explore, and managing and exploring the water and spring resources of caxambu, araxá, cambuquira and lambari.

Copasa serviços de saneamento integrado do norte e nordeste de Minas Gerais s.a. (“COpanOr”) - established by state law 16,698, of april 17, 2007, is engaged in planning, designing, executing, expand-ing, remodeling, exploring and providing public services including water supply and sewage treatment, collection, recycling, treatment and final disposal of urban, domestic and industrial waste, draining and management of rain water in urban areas in cities of the North of minas

Gerais and the water basins of the jequitinhonha, mucuri, são mateus, Buranhém, itanhém and jucuruçu rivers.

Copasa serviços de irrigação s.a. (“serviços de irrigação”) - es-tablished by state law 16,698, of april 17, 2007, is engaged in manag-ing, executing and exploring the irrigation systems of the jaíba Project, as well as its maintenance, using both its own and outsourced personnel and resources. this subsidiary may contract, whenever economically vi-able, through regular bidding processes, services and construction work necessary to the operation of the system, and may purchase products, equipment and materials required for the performance of its activities.

in compliance with minas Gerais state Government decree 46,080, dated November 12, 2012, the executive Board of coPasa serviços de irrigação considered that the responsibilities imposed by state law 16,698, dated april 17, 2007, had been met. therefore, the necessary measures for the transfer of management of the jaíba ii Project to distrito de irrigação do jaíba - dij were concluded on march 2, 2013, upon termination of service agreement 460/12 entered into with rUralmiNas on september 3, 2012. complete termination of the activities is pending because of labor lawsuits and judicial claims against customers, in which this subsidiary is the defendant and the plaintiff, respectively.

at december 31, 2013, the company operates in 888 locations in the state of minas Gerais (882 in december 2012) providing water supply or sewage services, totaling approximately 4,647,083 connec-tions (4,499,455 in december 2012). the twenty main water supply and sewage service concessions that the company holds are as follows:



18

water cOnceSSIOnS Sewage cOnceSSIOnSlocatioN NUmBer oF

coNNectioNs eXPiry locatioN NUmBer oFcoNNectioNs eXPiry

Belo Horizonte 976,304 2034 Belo Horizonte 938,773 2034

contagem 231,399 2073 contagem 201,682 2073

Betim 137,171 2042 montes claros 129,836 2028

montes claros 130,098 2028 Betim 111,215 2042

ribeirão das Neves 97,429 2034 ipatinga 88,872 2022

divinópolis 89,943 2041 divinópolis 80,489 2041

ipatinga 82,716 2022 ribeirão das Neves 73,137 2034

santa luzia (1) 69,275 2013 Patos de minas 54,475 2038

Patos de minas 54,930 2038 santa luzia 54,127 2013

ibirité 52,283 2034 Pouso alegre 49,967 2046

Pouso alegre 50,436 2046 varginha (1) 48,875 2013

varginha (1) 49,937 2013 conselheiro lafaiete (1) 42,529 2010

conselheiro lafaiete (1) 49,195 2010 ibirité 39,976 2034

Teófilo Otoni 41,989 2034 lavras 38,134 2034

sabará 41,773 2042 araxá 37,775 2032

lavras 40,136 2034 Teófilo Otoni 36,080 2034

araxá 38,619 2032 sabará 33,257 2042

Ubá 35,453 2014 itajubá 32,909 2034

itajubá 35,190 2034 alfenas 31,568 2033

Nova lima 34,960 2028 Pará de minas (1) 30,254 2009

note: (1) the concession agreement with the cities of conselheiro lafaiete and Pará de minas expired on july 23, 2010, and october 11, 2009, respectively. the water supply and sewage service revenue in 2013 was r$ 30,566 for conselheiro lafaiete and r$ 29,930 for Pará de minas (r$ 28,076 and r$ 30,374 in 2012), or 0.87% and 0.85 % (0.88% and 0.95% in 2012) of the company’s total revenue, respectively. the concession agreements entered into with the municipalities of varginha and santa luzia were terminated on december 1, 2013 and september 1, 2013, respectively, and the company is currently negotiating the renewal of these agreements with the related municipalities.



19

at december 31, 2013, 55 concessions have expired, which represented 6.19% of the company’s total funds and whose renewal procedures are currently under negotiation with the related municipalities. management estimates that new concession agree-ments will be entered into for all expired concessions that are yet to be renewed. therefore, there is no risk of discontinuation of water supply and sewage services rendered in these municipalities.

the executive Board of the company authorized on january 28, 2014 the issue of the parent company and consolidated financial statements at december 31, 2013.

02. Basis Of preparatiOn and presentatiOn Of the finanCial stateMents

the company is presenting its parent company and consoli-dated financial statements.

2.1. Basis of preparation

The financial statements have been prepared under the histori-cal cost convention, as modified by available-for-sale financial assets and financial assets and financial liabilities measured at fair value.

The preparation of financial statements requires the use of certain critical accounting estimates. it also requires management to exercise its judgment in the process of applying the company’s accounting policies. the areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 4.

a) Parent company financial statements

The parent company financial statements have been prepared in accordance with accounting practices adopted in Brazil issued by the Brazilian accounting Pronouncements committee (cPc) and are disclosed together with the consolidated financial statements.

In the parent company financial statements, subsidiaries are recorded based on the equity accounting method. the same adjustments are made in the parent company and consolidated financial statements to reach the same profit or loss and equity attributable to the owners of the parent entity. in the case of coPasa mG, the accounting practices adopted in Brazil applicable to the parent company financial statements differ from the International Financial Reporting Standards (IFRS) applicable to separate financial statements only in relation to the measurement of investments in subsidiaries based on the equity accounting method, instead of at cost or fair value in accordance with iFrs.

b) Consolidated financial statements

The consolidated financial statements have been prepared and are being presented in accordance with accounting practices adopted in Brazil, including the pronouncements issued by the Brazilian accounting Pronouncements committee (cPc), as well as according to the iFrs issued by the international accounting standards Board (iasB).

the presentation of the statement of value added is required by the Brazilian corporate legislation and by the accounting practices adopted in Brazil for listed companies, but is considered supple-



20

mentary information for iFrs. For iFrs, this statement is presented as supplementary information, and not part of the required set of financial statements.

2.2. Consolidation

The consolidated financial statements include the operations of the company and the following subsidiaries, the company’s ownership interests in which at the end of the reporting period are summarized below:

iNterest iN caPital - %

total votiNG

sUBsidiaries

copasa Águas minerais de minas s.a. 100 100

copasa serviços de saneamento integrado do Norte e Nordeste de minas Gerais s.a. - coPaNor 100 100

copasa serviços de irrigação s.a. 100 100

subsidiaries are all entities over which the company has the power to determine the financial and operating policies, generally accompanying an interest of more than one half of the voting rights. the existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the company controls another entity. subsidiaries are fully consoli-dated from the date on which control is transferred to the company. they are deconsolidated from the date that control ceases.

The subsidiaries’ financial statements are prepared for the

same disclosure period as those of the parent company and use consistent accounting practices. all balances, income and expenses and unrealized gains and losses arising from transactions between group companies are fully eliminated.

a change in the relative participation in a subsidiary that does not result in loss of control is recorded as a capital transaction.

03. suMMary Of siGnifiCant aCCOuntinG pOliCies

the main accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to the years presented, unless otherwise stated.

3.1. segment reporting

operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. the chief operating decision-maker, responsible for allocating resources and assessing performance of the operating segments, is the executive Board, which also contributes to making the com-pany’s strategic decisions together with the Board of directors. the Group is present in two different segments: (i) the water supply and sewage services in public concessions, which are rendered by the Parent company and its subsidiary copasa serviços de saneamento integrado do Norte e Nordeste de minas Gerais s.a.; and (ii) the sale



21

of products by the subsidiary copasa Águas minerais de minas s.a. segment information is presented in Note 19.

3.2. Foreign currency translation

a) Functional and presentation currency

Items included in the financial statements of each subsidiary included in the company’s consolidation are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). the parent company and consoli-dated financial statements are presented in Brazilian reais (R$), which is the company’s functional and presentation currency.

b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or the dates of valuation when items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities in foreign currencies are recognized in the statement of income.

Foreign exchange gains and losses related to assets and liabilities are recorded in the statement of income under finance result.

3.3. Cash and cash equivalents

cash and cash equivalents includes cash on hand, bank deposits and other short-term highly liquid investments with original

maturities of three months or less, and with immaterial risk of change in value. they are all used by the company in the manage-ment of its short-term commitments.

3.4. Financial assets

3.4.1. Classification

Financial assets are classified at initial recognition as loans and receivables and available for sale. The classification depends on the purpose for which the financial assets were acquired.

a) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. they are included in current assets, except for maturities greater than 12 months after the end of the reporting period, which are classified as non-current assets. The Company’s loans and receivables comprise cash and cash equivalents, marketable securi-ties, collateral deposits, receivables from customers, banks and investments relating to agreements, restricted investments, financial assets of concessions, equity securities, receivables from subsidiar-ies and other receivables.

b) Available-for-sale financial assets

Available for sale financial assets are non-derivative financial assets which are designated in this category or are not classified in other categories. they are included in non-current assets unless management intends to dispose of them within twelve months of



22

the balance sheet date. the investments made by the company and classified as available for sale, subsequent to initial recognition, are stated at fair value and any changes, that are not impairment losses, are recognized in other comprehensive income and presented within equity. when an investment is written-off, the balance accumulated in other comprehensive income is transferred to the statement of income.

3.4.2. recognition and measurement

Normal purchases and sales of financial assets are recognized on the trade date - the date on which the company commits to purchase or sell the asset. investments are initially recognized at fair value plus transaction costs for all financial assets not measured at fair value through profit or loss. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the company has transferred substantially all the risks and rewards of ownership. available-for-sale financial assets are carried at fair value. Loans and receivables are carried at amortized cost using the effective interest method.

changes in the fair value of monetary and non-monetary securi-ties classified as available for sale are recognized in equity.

3.4.3. Impairment of financial assets

a) assets carried at amortized cost

the company and its subsidiaries assess at each balance sheet date whether there is objective evidence that a financial asset or

group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

the criteria that the company and its subsidiaries utilize to determine whether there is objective evidence of an impairment loss include:

(i) significant financial difficulty of the issuer or debtor;

(ii) a breach of contract, such as a default or delinquency in interest or principal payments;

(iii) the company and its subsidiaries, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that a lender would not otherwise consider;

(iv) it becomes probable that the borrower will enter bankruptcy or other financial reorganization;

(v) the disappearance of an active market for that financial asset because of financial difficulties; or

(vi) observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease can-not yet be identified with the individual financial assets in the portfolio, including:



23

► adverse changes in the payment status of borrowers in the portfolio; and

► national or local economic conditions that correlate with defaults on the assets in the portfolio.

the amount of any impairment loss is measured as the differ-ence between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. the carrying amount of the asset is reduced and the amount of the loss is recognized in the statement of income. if a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. as a practical expedient, the company and its subsidiaries may measure impair-ment on the basis of an instrument’s fair value using an observable market price.

if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improve-ment in the debtor’s credit rating), the reversal of the previously recorded loss is recognized in the statement of income.

b) Assets classified as available for sale

the company and its subsidiaries assess at each balance sheet date whether there is objective evidence that a financial asset

or group of financial assets is impaired. In the case of investments in equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the asset is impaired. if any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss - is removed from equity and recognized in the statement of income. impairment losses on equity instruments recognized in the statement of income are not reversed through the statement of income.

3.5. Accounts receivable

trade receivables are amounts due from customers for sales made and services rendered in the ordinary course of the company’s business. they are included in current assets, except for those with maturities greater than 12 months after the end of the reporting period. In these cases, they are classified as non-current.

accounts receivable from customers are recognized initially at fair value and subsequently measured at amortized cost less a provision for impaired receivables.

a provision for impairment of trade receivables is established when there is objective evidence that the company will not be able to collect all amounts due according to the original terms of the receivable. Significant financial difficulties of the debtor, the



24

probability that the debtor will enter bankruptcy or other financial reorganization and default or delinquency in making payments (overdue for more than 180 days) are considered indicators that the receivable is impaired.

a provision for impairment of trade receivables is calculated based on an analysis of receivables and recorded in an amount considered by management sufficient to cover expected losses on receivables, according to the following criteria:

► Receivables up to R$ 5, overdue for more than 180 days

these receivables, except those related to the minas Gerais state Government and the Belo Horizonte municipal Government, are considered uncollectible when they are overdue for more than 180 days, and are directly written off against income, under selling expenses.

► Receivables above R$ 5, overdue for more than 180 days

a provision for impairment of receivables is recognized for all receivables, except those related to the minas Gerais state Government and the Belo Horizonte municipal Government, which are overdue for more than 180 days, as a credit to the allowance for impaired receivables and as a charge to the statement of income. For receivables of up to r$ 30, which are overdue for more than 360 days, the related provision is reversed and they are written off against the statement of income under selling expenses.

For receivables over r$ 30, which are overdue for more than

360 days, the related provision is reversed and they are written off against the statement of income under selling expenses, provided that the court-ordered collection process had already started. otherwise, these amounts are maintained under the provision for impairment losses at the expected recoverable value.

► Other receivables from the Municipal and Federal Governments

receivables from the Federal and municipal Governments under agreements, contracts and other operations, which are overdue for more than 360 days, are fully provisioned.

► Receivables from the Government of Minas Gerais and the Municipality of Belo Horizonte (PBH)

the company does not constitute a provision for impairment of the receivables from the minas Gerais state Government since there is no history of default. receivables from the municipal authority of Belo Horizonte not paid until the date of the tariff transfer to the municipal water and sewerage Fund are fully deducted from the amount to be transferred and, therefore, no provision for losses is required.

► Supplementary provision

management also recognizes a supplementary provision for other receivables not yet due and for receivables overdue for less than 180 days with respect to specific customers included in the provision for impairment of receivables.



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3.6. inventories

inventories are stated at the lower of cost and net realizable value. cost is determined using the weighted average cost method. the net realizable value is the estimated sales price in the normal course of business less applicable variable selling expenses. Provi-sions for slow-moving or obsolete inventories are recorded whenever considered necessary by management. materials are for consump-tion and maintenance of the water supply and sewage treatment systems.

3.7. Financial assets - concession agreements

the company recognizes a receivable from concession authorities (municipal governments) when it has an unconditional right to receive cash at the end of the concession term as part of the consideration receivable from such authorities for investments made but not recovered through provision of the concession-related services. These financial assets are recognized at the present value of such right and calculated on the net amount of the constructed assets that constitute the infrastructure that will be the subject of the consideration payable by the concession authority, discounted based on the weighted average capital cost of the company.

These accounts receivable are classified as non-current assets considering the expected receipt of such amounts, based on the end date of the service concession arrangements.

3.8. investments

In the parent company financial statements, investments in subsidiaries are recorded using the equity method.

3.9. Intangible assets

a) service concession arrangements

the company recognizes as an intangible asset its right to charge the users of water supply and sewage services provided under the service concession arrangements in accordance with interpretation icPc 01 service concession arrangements.

intangible assets are determined as the residual value of the construction revenue earned for the construction or acquisition of infrastructure by the company, and are recognized as described in Note 3.2. The amount of the financial asset related to the uncondi-tional right to receive cash at the end of the concession term as part of the consideration receivable is recognized as described in Note 3.7. depending on the type of asset and the period of its acquisi-tion, the cost of acquisition includes the hyperinflation effects, in accordance with ias 29, in the period the Brazilian economy was considered as hyper-inflationary. Under the IFRS, Brazil had a hyper-inflationary economy up to 1997.

intangible assets are amortized as from the date they are available for use, in the location and condition necessary for their use in operations as intended by the company.



26

The amortization of intangible assets reflects the pattern in which the future economic benefits embodied in the asset are expected to be consumed by the company, or the end of the ar-rangement, whichever comes first. The pattern of consumption of the assets relates to their useful life in that the assets constructed by the company are included in the tariff calculation base for provi-sion of the concession services.

amortization of an intangible asset ceases when the asset has been fully consumed or written off, no longer being part of the tariff calculation base for provision of the concession services, whichever occurs first.

b) right of use

Use rights refer to costs incurred with renewal of public concession arrangements, with respect to the amount refundable by coPasa mG for the infrastructure investments made by the municipal governments, plus monetary adjustment, when applicable according to the international accounting standard (ias) 29. the amounts recorded in intangible assets refer to refunds already paid by the company to the municipal governments as part of the renewal agreement for water supply and sewage service concession arrange-ments. these investments are not part of the tariff calculation base, but they represent the investment made by the company for renewal of the concession arrangements.

these use rights are amortized on a straight-line basis over the term of the directly related concession arrangements.

c) software licenses

computer software licenses acquired are recorded on the basis of the costs incurred to acquire the software and bring it to use. these costs are amortized on a straight-line basis over their estimated useful life of five years.

3.10. Property, plant and equipment

Property, plant and equipment are stated at historical cost, less depreciation and impairment loss, if applicable. depending on the type of asset and the period of its acquisition, the cost refers to the acquisition cost and the historical cost adjusted by the hyperinflation effects, under ias 29, in the period the Brazilian economy was considered as hyper-inflationary. Under the IFRS, Brazil had a hyper-inflationary economy up to 1997.

Historical cost includes costs directly attributable to the acquisition of such items, as well as interest expense on financing incurred in connection with their acquisition until the assets become operational. Capitalized financial charges are depreciated according to the same criteria and the useful life established for the item of property, plant and equipment in which they were included.

subsequent costs are included in the book value of the asset, or recognized as a separate asset, as appropriate, only when future economic benefits embodied in the item are likely to flow to the company, when the cost of the item can be reliably measured and its economic useful life exceeds 12 months. the carrying amount



27

of the replaced items or parts is derecognized. all other repairs and maintenance are charged to the statement of income during the financial period in which they are incurred.

land is not depreciated. the depreciation of other property, plant and equipment is recorded considering the estimated useful lives of the assets using the following depreciation rates:

years

Buildings 25 - 40

machinery 10 - 15

vehicles 3 - 5

Furniture, fittings and equipment 3 - 8

residual values and the useful life of assets are reviewed and adjusted, if necessary, at the beginning of each year, on a prospec-tive basis.

the assets recognized in property, plant and equipment are not related to public service concession arrangements and are represented substantially by general use items and buildings of the company.

the net book value of an asset or a cash generating unit is immediately written down to its recoverable amount when the book value of the asset or group of assets to which it refers exceeds its estimated recoverable amount (Note 3.11).

Gains and losses on disposals are determined by comparing the selling prices with the carrying amount, net of depreciation, and

are recognized within “other operating income (expenses), net” in the statement of income.

3.11. Impairment of non-financial assets

assets that are subject to amortization are reviewed for impair-ment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. an impairment loss is recognized when the asset’s carrying amount exceeds its recover-able amount. the recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that were adjusted due to impairment are subsequently reviewed for possible reversal of the impairment at the balance sheet date.

3.12. Financial liabilities

Financial liabilities are only recognized when the company as-sumes a contractual obligation under a financial instrument. When recognized, they are initially measured at fair value, plus transaction costs directly attributable to their acquisition or issuance. the Company’s financial liabilities are then measured at amortized cost.

The principal financial liabilities recognized by the Company are: trade accounts payable, borrowings and debentures.

a) Trade payables



28

trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business. accounts payable are classified as current liabilities if payment is due in one year or less. if not, they are presented as non-current liabilities.

trade payables are recognized initially at fair value and sub-sequently measured at amortized cost using the effective interest method.

b) Borrowings and debentures

Borrowings are recognized initially at fair value, net of transac-tion costs incurred, and are subsequently carried at amortized cost. any difference between the proceeds (net of transaction costs) and the total amount payable is recognized in the statement of income over the period of the borrowings using the effective interest rate method.

Fees paid on the establishment of loan facilities are recognized as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down.

the fair value of the installment payable under a convertible debt instrument is determined using the market interest rate for the same debt instrument had it been a non-convertible one, as informed by the financial institution that issued it. This value is recorded as a liability on an amortized cost basis until such obliga-tion is extinguished by conversion or at the maturity of the respective debt instruments. this is recognized and included in equity, net of the effects of both income and social contribution taxes. the

carrying amount of the conversion option is not remeasured in subsequent years.

Borrowings are classified as current liabilities unless the Com-pany has an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date.

Borrowing costs directly related to the acquisition, construction or production of a qualifying asset that requires a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of that asset when it is probable that future economic benefits associated with the item will flow to the Company and costs can be measured reliably. the other borrowing costs are recognized as finance costs in the period in which they are incurred.

as permitted by icPc 01, the company capitalizes the borrowing costs referring to the intangible assets related to the construction services connected to the public service concession agreements.

c) net presentation

Financial assets and liabilities are shown net in the balance sheet only if there is a direct current and enforceable right to offset the amounts recognized, and if there is an intention to offset them, or to realize the asset and settle the liability simultaneously.

3.13. provisions

Provisions for tax and legal claims are recognized when: (i) the company has a present legal or constructive obligation as a



29

result of past events; (ii) it is likely that disbursement of funds will be necessary to settle the obligation; and (iii) the amount can be estimated with reasonable reliability.

where there are a number of similar obligations, the likeli-hood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. a provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expen-ditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the time elapsed is recognized as other interest expenses.

3.14. distribution of dividends and interest on capital

distributions of dividends and interest on capital to the Company’s stockholders are recognized as a liability in the financial statements at year-end based on the Brazilian corporate law and on the company’s bylaws. any amount that exceeds the minimum required is only recognized on the date it is approved at a General meeting of stockholders or at its payment date, whichever occurs first.

the amount equivalent to the mandatory minimum dividend is recorded in liabilities under “dividends and interest on capital

payable” because it is considered as a legal obligation established by the company’s bylaws. dividends exceeding the mandatory minimum amount, which are declared by management after the date of the financial statements but prior to the date of authorization for issue, are recorded under proposed additional dividends in equity.

interest on capital payable to stockholders is treated in the same way as dividends and debited to retained earnings.

as provided for by relevant tax legislation, such interest payable to stockholders is calculated under the terms of law 9,249/95 and recorded as financial expenses in the statement of income. For financial statement publication purposes, interest on capital is reversed against financial expenses and disclosed as a debit to retained earnings.

3.15. taxation

Taxes on profits comprise both income tax and social contribu-tion, current and deferred. Taxes on profits are recognized in the statement of income, except to the extent that they are related to items recognized directly in equity or in comprehensive income. in such cases, the taxes are also recognized in comprehensive income or directly in equity.

a) Current income tax and social contribution

the current income tax and social contribution are calculated on the basis of the tax laws enacted or substantively enacted at



30

the balance sheet date in the countries where the company and its subsidiaries operate and generate taxable income. management periodically assesses the positions taken by the company in calcu-lating tax in situations where the applicable tax regulations are open to interpretation, and makes provisions, when appropriate, based on the estimated amounts payable to the tax authorities.

the current income tax and social contribution are presented net, separated by taxpaying entity, in liabilities when there are amounts payable, or in assets when the amounts prepaid exceed the total amount due on the reporting date.

b) Deferred income tax and social contribution

deferred taxes arise from temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amount.

deferred tax liabilities are recognized on all temporary tax differences, except:

► when a deferred tax liability arises upon initial recognition of goodwill or of an asset or liability in a transaction other than a business combination and, at the transaction date, has no impact on book profit or taxable income (loss);

► on temporary tax differences related to investments in subsidiaries, when the period for reversal of the temporary differences can be controlled and the temporary differences are not likely to be reversed in the near future.

deferred tax assets are recognized on all deductible temporary

differences and unused tax credits and losses, to the extent that taxable profit will likely be available so that the deductible temporary differences can be realized, and unused tax credits and losses can be used, except:

► when the deferred tax asset related to the deductible temporary difference is generated upon initial recognition of the asset or liability in a transaction other than a business combination, and does not affect book profit or taxable income or loss on the transaction date; and

► on deductible temporary differences with investments in subsidiaries, deferred tax assets are only recognized to the extent that temporary differences are reversed in the near future and taxable profit is available for temporary differ-ences to be used.

the carrying amount of deferred tax assets is reviewed at each balance sheet date and written off to the extent that taxable profits will not likely be available so that deferred tax assets can be used in total or in part. deferred tax assets adjusted are reviewed at each balance sheet date and recognized to the extent that future taxable profits will likely allow recovery of deferred tax assets.

deferred tax assets and liabilities are measured at the tax rate likely to be applicable in the year in which the asset or liability will be realized or settled, based on the enacted tax rates (and tax law) at the balance sheet date.

deferred tax assets and liabilities are presented net in the balance sheet when there is a legally enforceable right and the



31

intention to offset them upon the calculation of current taxes, gener-ally when related to the same legal entity and the same tax authority. accordingly, deferred tax assets and liabilities in different entities or in different countries are generally presented separately, and not on a net basis.

c) Taxes on sales and services

sales and services revenues are subject to certain taxes and contributions, at the following basic rates:

IncOme tax anD SOcIal cOntrIBUtIOn rate - %

social integration Program (Pis)/Public services employee savings Program (PaseP)

1.65

social contribution on revenues (coFiNs) 7.60

value-added tax on sales and services (icms) (*) 7.00 to 18.00

(*) Not levied on water supply and sewage collection services.

these charges are presented as revenue deductions in the statement of income. the credits arising from the non-cumulative Pis/coFiNs are presented as a deduction of cost of services rendered in the statement of income.

3.16. Employee benefits

a) Pension obligations

The Company operates three pension plans: defined benefit,

settled fund benefit and defined contribution. The plans are gener-ally funded through payments to trustee-administered funds, deter-mined by periodic actuarial calculations. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. the Group has no legal or constructive obliga-tions to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

on october 29, 2010, the company implemented a new pen-sion plan strategy, determining that the Defined Benefit Plan would be closed to new members as from that date, and creating a settled Benefit Plan and a New Defined Contribution Plan. The result of this strategy was a reduction of risks for the company and its employees, due to migration among plans.

The Settled Benefit Plan was established based on the cumulative right of each member calculated at the new strategy implementation date. this plan will only receive contributions to meet administrative expenses and, although the studies performed do not identify the possibility of financial insufficiency, thanks to surpluses generated in the plan assets, arising from the difference between the restated amount of benefits calculated by reference to the National consumer Price index (iNPc) variation and the yields



32

on plan assets calculated at market rates, any insufficiencies will be covered by additional matching contributions made by the sponsor-ing entity and plan members.

The Defined Contribution Plan operates as an individual retire-ment savings account, receiving contributions made by members and the sponsoring entity that are deposited in each member’s individual account and applied as described in Note 17. Further-more, while with the company, the member may schedule how this savings account will be built up according to his/her financial ability. the contribution made by the sponsoring entity will match the member’s contribution, which, in its turn, corresponds to a percent-age of the member’s actual salary, varying between 3% and 10%, at the member’s option.

actuarial liabilities recognized in the balance sheet for the aforementioned plans correspond to the present value of such liabilities at the balance sheet date, less the fair value of the plan assets, adjusted by unrecognized past service costs. these liabilities are calculated on an annual basis by independent actuaries, using the projected unit credit method. the present value of the obligation is determined by discounting the estimated future cash outflows using interest rates compatible with market remuneration, that is denominated in the currency in which the benefits will be paid, and which have terms to maturity approximating the terms of the related pension obligation. the plan assets are measured at fair value.

actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to

equity in other comprehensive income in the period in which they arise.

Past-service costs are recognized immediately in profit or loss, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). in this case, the past-service costs are amortized on a straight-line basis over the vesting period.

b) Profit sharing

the company recognizes a liability and an expense for em-ployee profit sharing according to operational and financial targets disclosed to its employees. a provision is recorded when the com-pany has a legal contractual obligation or a constructive obligation arising from past events.

3.17. Government grants and assistance

Government grants and assistance are recognized when there is reasonable assurance that the conditions established by the government were fulfilled and that such grants will be received. They are recognized as income over the period necessary to match them with the related expenses which the government grant or assistance is intended to compensate.

when the company receives non-monetary assets for donation, since such donation is necessary to concession and not to the company, the assets received are recorded at a nominal amount



33

and offset by a contra account, with the purpose to record mater control of assets while avoid improper recognition of benefits in the statement of income and in the water and sewage tariffs established by the regulatory agency.

3.18. Share capital

when the company repurchases its shares (treasury shares), the consideration paid, including any directly attributable incremen-tal costs (net of income taxes) is deducted from equity attributable to the company’s stockholders until the shares are canceled or reis-sued. where such shares are subsequently reissued, any considera-tion received, net of any directly attributable incremental transaction costs and the related income tax and social contribution effects, is included in equity attributable to the company’s stockholders.

3.19. revenue recognition

revenue comprises the fair value of the consideration received or receivable mainly for the sale of products and services in the ordinary course of the company’s activities. revenue is shown net of value-added tax, returns, rebates and discounts, and after eliminat-ing intercompany sales.

a) rendering of services

revenues and expenses from operations are recognized on the accrual basis. revenue from the rendering of water supply and sew-age services as well as irrigation services is recognized after water

consumption or when the service is rendered. Unbilled revenue is represented by revenue, whose related services were rendered but not yet billed up to the end of each period. these revenues are accounted for at the date the related service is rendered under unbilled trade receivables, based on monthly estimates which take into account the type of the customer, the type of the transaction and the specifications of each sale, so that revenue is matched with costs on the proper accrual basis.

b) Construction contracts

construction contracts are treated as a single construction contract when: i) the group of contracts was negotiated as a single package; ii) the contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit margin, and iii) the contracts are performed concurrently or in a continuous sequence.

construction revenue is comprised of cost plus margin con-tracts, whereby revenue is recognized by reference to costs incurred on the contracts, plus margin. such additional margin refers to the work carried out by the company under construction contracts, which is added to the construction costs incurred, thus generating the total amount that is recognized as construction revenue, in accordance with cPc 17 and ias 11 - construction contracts.

contract costs are recognized in the statement of income, as cost of services rendered, when incurred. all costs directly attribut-able to the contracts are taken into consideration when measuring



34

revenue, using the cost-plus-margin method. this revenue is al-located based on the weighted average rate of cost of capital - wacc nominal, in full, to the costs incurred in administering contracts for works, and the result of investment return margin and margin transferred to providers of services and material.

when completion of a construction contract cannot be esti-mated reliably, revenue is recorded only to the extent of the costs recognized that are recoverable.

c) interest income

interest income is recognized on the accrual basis of account-ing, using the effective interest rate method. When a financial instru-ment or receivable is impaired, the company reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instru-ment. subsequently, as time elapses, interest is incorporated into assets against interest income. this interest income is calculated at the same effective interest rate used to calculate the recoverable amount, i.e., the original rate of the instrument.

d) Sales of products

sales revenue is presented net of taxes and discounts. taxes on sales are recognized when sales are billed and discounts are recognized when they become known. revenue from sales of goods is recognized when the sales amount can be measured reliably, the company no longer controls the goods sold or has any other respon-

sibility related to the ownership of the goods and costs incurred or to be incurred in respect of the transaction can be measured reliably, it is probable that the economic benefits associated with the transac-tion will flow to the Company, and the Company has transferred to the buyer all the risks and rewards of ownership of the goods.

e) dividend income

dividend income is recognized when the right to receive pay-ment is established.

3.20. Concession contracts

the company is the holder of public utility concessions for water supply and sewage services. these concession agreements are entered into with municipalities, with the state of minas Gerais as intervenor and have been recognized in accordance with icPc 01 requirements.

the concession agreements represent a contractual right to charge users of the public services, using tariffs regulated by the regulatory water and sewage agency of the state of minas Gerais (arsae-mG), over the period of time established by the concession agreements. the company recognizes its contractual right to charge users of the public services over the term of the concession arrangement as an intangible asset, and the amount is amortized as disclosed in Note 3.9.

moreover, in all its concession agreements, except for those



35

with the municipality of ipatinga, the company has an unconditional right to receive cash as a consideration for returning the assets to the concession authority at the end of the concession. in these cases, the Company recognized a financial asset, discounted to present value, considering the best estimate of the cash to be received at the end of the concession term, as disclosed in Note 3.5.

3.21. Related parties

in addition to business transactions carried out with its wholly-owned subsidiaries, the company recognizes as related parties the financial transactions maintained with key management personnel, with its controlling stockholder and with enterprises and/or bodies connected with such stockholder, either directly or indirectly, provided that there are formal contractual relations with these enterprises or bodies which generate financial transactions.

3.22. Statement of value added

the purpose of this statement is to disclose the wealth created by the company and its distribution during a certain reporting pe-riod, and is presented by the company, as required by the Brazilian Corporate Law, as an integral part of the parent company financial statements, and as additional disclosure in the consolidated finan-cial statements, since this statement is not required by the iFrs.

the statement of value added was prepared based on informa-tion obtained from the same accounting records used to prepare the financial statements and pursuant to the provisions of CPC 09, “Statement of value added”. In its first part, it presents the wealth

created by the company, represented by revenues (gross sales, including the taxes on them, the other revenues and the effects of the provision for impairment of trade receivables), by the inputs acquired from third parties (cost of sales and acquisition of materi-als, energy and third-party services, including the taxes levied at the time of acquisition, the effects of the losses and recovery of asset amounts, and depreciation and amortization) and the added value received from third parties (equity in the results of subsidiaries, finance income and other income). The second part of the statement of value added presents the distribution of wealth among personnel, taxes and contributions, remuneration of third-party capital and remuneration of own capital.

3.23. Restatement of comparative figures

The financial statements as at January 1 and December 31, 2012 have been adjusted and are being restated in accordance with cPc 23:

3.23.1. Changes in accounting practices

(a) the company recognized retrospectively the changes in accounting practice arising from the revision of ias 19 - employee Benefits, correlated to CPC 33 (RI), which eliminated the recognition of the deferral of actuarial gains (losses) (corridor method) and generated a liability recorded against other comprehensive income in equity.

3.23.2. Other restated items

(b) supplementary monetary adjustment related to the years



36

1996 and 1997, as required by iFrs for the recognition of the residual inflationary effects on equity, generating an increase in intangible assets, property, plant and equipment and financial assets, against carrying value adjustments in equity.

(c) Immaterial investment in Foz de Jeceaba initially classified at cost and reclassified to available-for-sale financial assets. Meas-urement of this asset at fair value generated an increase in other comprehensive income in equity.

(d) there were early renewals of concession agreements without any revision of the amortization periods. thus intangible assets increased by r$ 25,625, with an offsetting entry to equity as adjustments to the “profit retention reserve” account.

(e) Reclassification of the amount of advances for future capital increases made to the subsidiary Águas minerais from the line item “investments” to “receivables from subsidiaries”, and the amounts of investment losses, which were reported as a reduction in the investment accounts to “losses on investments”, generating an increase of r$ 86,634 in “receivables from subsidiaries”, a de-crease of r$ 23,583 in “investments” and an increase of r$ 63,051 in “losses on investments”.

(f) exclusion of additions from construction in progress related to the property, plant and equipment of the calculation basis for the construction revenue and costs.

The parent company and consolidated financial statements

at january 1 and december 31, 2012, presented for comparison

purposes, have been adjusted and restated as detailed below.

items (b) and (e) above apply only to the parent company’s

financial statements.

the effects of this restatement are as follows:



37

Balance Sheet at 1/1/2012PareNt comPaNy coNsolidated

BalaNces oriGiNally rePorted

restatemeNts restated BalaNcesBalaNces oriGiNally rePorted

restatemeNts restated BalaNces

assets

current 814,630 - 814,630 826,321 - 826,321

Non-current

deferred income tax and social contribution 165.661 (16.095) 149.566 149.304 262 149.566

(a) (b) (c) 165,661 (16,095) 149,566 149,304 262 149,566

assets available for sale (c) - 25,079 25,079 - 25,079 25,079

Financial assets - concession agreements (b) 321,179 4,314 325,493 325,493 - 325,493

investments (c) 22,063 (21,803) 260 22,060 (21,800) 260

intangible assets (b) 6,015,805 44,651 6,060,456 6,060,461 - 6,060,461

Property, plant and equipment (b) 161,552 (681) 160,871 185,699 - 185,699

other non-current assets 773,311 - 773,311 697,970 - 697,970

total assets 8,274,201 35,465 8,309,666 8,267,308 3,541 8,270,849

liabilities and equity

current 967,962 - 967,962 972,255 - 972,255

Non-current

Retirement benefit obligations (a) 145,235 4,050 149,285 145,235 4,050 149,285

other non-current liabilities 2,659,327 (3) 2,659,324 2,616,214 - 2,616,214

equity (a) (b) (c) 4,501,677 31,418 4,533,095 4,533,604 (509) 4,533,095

total liaBilities aNd eQUity 8,274,201 35,465 8,309,666 8,267,308 3,541 8,270,849



38

Balance Sheet at 12/31/2012PareNt comPaNy coNsolidated




assets

current 1,220,176 - 1,220,176 1,249,230 - 1,249,230

Non-current

deferred income tax and social contribution 161.554 14.852 176.406 147.879 28.527 176.406

(a) (b) (c) (d) 161,554 14,852 176,406 147,879 28,527 176,406

receivables from subsidiaries (e) 20,197 86,634 106,831

assets available for sale (c) - 28,850 28,850 - 28,850 28,850

Financial assets - concession agreements (b) 388,031 2,726 390,757 390,757 - 390,757

investments (c) (e) 45,643 (45,383) 260 22,060 (21,800) 260

intangible assets (b) (d) 6,400,225 63,135 6,463,360 6,437,748 25,625 6,463,373

Property, plant and equipment (b) 175,333 161 175,494 198,623 - 198,623

otHer NoN-cUrreNt assets 581,529 - 581,529 581,840 - 581,840

total assets 8,992,688 150,975 9,143,663 9,028,137 61,202 9,089,339

liabilities and equity

current 839,184 - 839,184 863,640 - 863,640

Non-current

Retirement benefit obligations (a) 142,493 116,578 259,071 142,493 116,578 259,071

sundry obligations (e) 50,708 63,051 113,759

other non-current liabilities 2,996,761 - 2,996,761 3,031,740 - 3,031,740

eQUity (a) (B) (c) (d) 4,963,542 (28,654) 4,934,888 4,990,264 (55,376) 4,934,888

total liaBilities aNd eQUity 8,992,688 150,975 9,143,663 9,028,137 61,202 9,089,339



39

Statement Of IncOme - 12/31/2012PareNt comPaNy

BalaNces oriGiNally rePorted restatemeNts restated BalaNces

(b) (f)


Net sales and services revenue 3,499,941 (70,851) 3,429,090

cost of sales and services rendered (2,141,160) 63,907 (2,077,253)

Gross ProFit 1,358,781 (6,944) 1,351,837

Net operating expenses (589,094) (1,045) (590,139)

oPeratiNG ProFit 769,687 (7,989) 761,698

Finance income 134,717 102 134,819

FiNaNce costs (257,370) - (257,370)

FiNaNce resUlt, Net (122,653) 102 (122,551)

ProFit BeFore iNcome taX aNd social coNtriBUtioN 647,034 (7,887) 639,147

current income tax and social contribution (155,999) - (155,999)

deferred income tax and social contribution (4,107) 2,682 (1,425)

ProFit For tHe year 486,928 (5,205) 481,723



40

Statement Of IncOme - 12/31/2012coNsolidated

BalaNces oriGiNally rePorted restatemeNts restated BalaNces

(f)


Net sales and services revenue 3,519,027 (70,851) 3,448,176

cost of sales and services rendered (2,167,896) 70,851 (2,097,045)

Gross ProFit 1,351,131 - 1,351,131

Net operating expenses (588,028) - (588,028)

oPeratiNG ProFit 763,103 - 763,103

Finance income 133,756 - 133,756

FiNaNce costs (257,459) - (257,459)

FiNaNce resUlt, Net (123,703) - (123,703)

ProFit BeFore iNcome taX aNd social coNtriBUtioN 639,400 - 639,400

current income tax and social contribution (156,252) - (156,252)

deferred income tax and social contribution (1,425) - (1,425)

ProFit For tHe year 481,723 - 481,723



41

the following adjustments were made to the statement of cash flows in accordance with CPC 03 (R2) - “Statement of Cash Flows”, and to the statement of value added in accordance with cPc 09 - “statement of value added”:

Statement Of caSh flOwS - 12/31/2012PareNt comPaNy coNsolidated




statemeNt oF casH Flows

Net cash provided by operating activities (a) 965.150 (292.691) 672.459 961.154 (291.746) 669.408

Net cash used in investing activities (b) (581.544) 16.639 (564.905) (577.107) 15.694 (561.413)

Net cash provided by (used in) financing activities (c) (128.717) 276.052 147.335 (128.717) 276.052 147.335

(a) Refers to the provision for finance charges on borrowings not previously considered affecting “interest income and expenses” by r$ 19,572, which is offset by the transfer of r$ 241,804 from “interest from borrowings and debentures”, of r$ 21,730 from “payments of actuarial liabilities” and r$ 32,090 from “taxes paid in installments” within “financing activities”, of R$ 15,080 from “additions to intangible assets and purchase of property, plant and equipment” to “net margin of construction revenue”, and of r$ 1,559 from “additions to intangible assets and purchase of property,

plant and equipment” to “other financial assets”, of which R$ 614

referred to the addition to intangible assets with treasury shares and

r$ 945 to iFrs adjustments (not applicable for consolidated), thus

generating a change of r$ 292,691 in this group (r$ 291,746 in

consolidated).

(b) refers to the transfer of r$ 15,080 from “additions to

intangible assets and purchase of property, plant and equipment”

to “net margin of construction revenue”, and of r$ 1,559 from



42

“additions to intangible assets and purchase of property, plant and equipment” to “other financial assets”, of which R$ 614 referred to the addition to intangible assets with treasury shares and r$ 945 to iFrs adjustments (not applicable for consolidated), thus generating a change of r$ 16,639 in this group (r$ 15,694 in consolidated).

(c) refers to the transfer of “interest on borrowings and deben-tures” amounting to r$ 241,804,

r$ 21,730 from “payments of actuarial liabilities” and r$ 32,090 from taxes paid in installments to the “operating activities” group and offset by the transfer of r$ 19,572 due to the amortiza-tion of finance charges on borrowings not previously considered, thus increasing “repayment of borrowings and debentures” (r$ 103), “interest of borrowings and debentures” (r$ 18,530), “pay-ment of actuarial liability and cemiG” (r$ 407) and “payment of concession principal and interest” r$ 532), which generated a change of r$ 222,232 in this group.

Statement Of valUe aDDeD - 12/31/2012PareNt comPaNy



statemeNt oF valUe added (a) (B)

revenue 3,851,625 (70,851) 3,780,774inputs acquired from third parties (1,547,400) 67,886 (1,479,514)retentions (372,318) (5,024) (377,342)value added received through transfer 121,397 102 121,499distribution of value added:

Personnel 777,036 - 777,036taxes and contributions 535,574 (2,682) 532,892remuneration of third parties' capital 253,766 - 253,766remuneration of stockholders 486,928 (5,205) 481,723



43

Statement Of valUe aDDeD - 12/31/2012coNsolidated



statemeNt oF valUe added (a)

revenue 3,877,048 (70,851) 3,806,197

inputs acquired from third parties (1,574,928) 70,851 (1,504,077)

retentions (379,930) - (379,930)

value added received through transfer 133,756 - 133,756

distribution of value added:

Personnel 783,593 - 783,593

taxes and contributions 536,565 - 536,565

remuneration of third parties' capital 254,065 - 254,065

remuneration of stockholders 481,723 - 481,723

(a) exclusion of additions from construction in progress related to the property, plant and equipment of the calculation basis for the construction revenue and costs.

(b) supplementary monetary adjustment related to the years 1996 and 1997, as required by iFrs for the recognition of residual inflationary effects on equity, generating adjustments of R$ 2,965 to net derecognition of financial assets, R$ 5,024 to amortization, R$ 102 to revenue from financial assets, R$ 2,682 to deferred income tax and social contribution and r$ 5,205 to retained earnings in the parent company financial statements.

3.24. new standards, amendments and interpreta-tions to existing standards that are not yet effective

the following new standards, amendments and interpretations to existing standards were issued by iasB but are not effective for 2013. the early adoption of these standards, even though encour-aged by iasB, has not been implemented in Brazil by the cPc.

(a) IFRS 9, “Financial instruments”, addresses the classifica-tion, measurement and recognition of financial assets and financial liabilities. iFrs 9 was issued in November 2009 and october 2010. It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value and those measured at amortized cost. the determination is made at initial recognition. The basis of classifica-tion depends on the entity’s business model and the contractual cash flow characteristics of the financial instruments. For financial liabilities, the standard retains most of the ias 39 requirements. the main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than the statement of income, unless this creates an accounting mismatch. the Group is yet to assess iFrs 9’s full impact. the standard is applicable as from january 1, 2015.

(b) iFric 21, “levies”, provides guidance on when to recognize a liability for a levy imposed by legislation. the obligation should be recognized only when the related generating event occurs. the interpretation is applicable as from january 1, 2014.



44

estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below:

(a) recognition of construction revenue

construction revenue is comprised of cost plus margin con-tracts, whereby revenue is recognized by reference to costs incurred on the contracts, plus margin. such additional margin refers to the work carried out by the company under construction contracts, which is added to the construction costs incurred, thus generating the total amount that is recognized as construction revenue, in accordance with cPc 17 and ias 11 - construction contracts. if the proportion of the services rendered against total services contracted were to be 10% more in relation to management’s estimates, the revenue recognized for the year would increase by r$ 282,918. if such difference were to be inferior in 10%, the revenue for the year would decrease by r$ 102,918.

(b) Pension benefits

the present value of the pension obligations depends on a number of factors that are determined on an actuarial basis utilizing a number of assumptions. the assumptions utilized in determining the net cost (income) for pensions include the discount interest rate. any changes in these assumptions may impact the carrying amount of pension obligations.

the company determines the appropriate discount interest rate

(c) IAS 32, “Offsetting of financial assets and liabilities”, changes in ias 32 clarify the requirements related to the offsetting of financial assets and liabilities. These amendments specifically clarify the meaning of “has the current legal right to offset” and “simultaneous realization and settlement”. management does not believe that the adoption of the amendments to the ias 32 will have a significant impact on the Company’s financial statements.

the aforementioned amendments to the iFrs are yet to be is-sued by the cPc. due to the commitment of the cPc and the cvm to maintain their technical pronouncements updated with those issued by the iasB, it is expected that these statements and changes will be issued by the cPc and approved by the cvm up to the date of their mandatory adoption.

there are no other iFrss or iFric interpretations that are not yet effective that would be expected to have a material impact on the Group.

04. CritiCal aCCOuntinG estiMates and judGMents

estimates and judgments are continually evaluated and are based on historical experience and other factors, including expecta-tions of future events that are believed to be reasonable under the circumstances.

Based on assumptions, the company and its subsidiaries make estimates concerning the future. the resulting accounting estimates will, by definition, seldom equal the related actual results. The



45

at the end of each year. this is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. when determining the appropriate discount rate, the company considers that the discount rate in Brazil, for complying with accounting stand-ards, should be obtained from the returns on government securities (NtN-B) at the date of the actuarial valuation, without any adjust-ments for Brazilian risk factors or expectations of future fluctuations in the profitability of these securities.

other key assumptions for pension obligations

(c) taxes

there are uncertainties regarding the interpretation of complex tax regulations and the amount and timing of future taxable income.

Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could require future adjustments to tax income and expenses already recorded. the company sets up provisions, based on reliable estimates, for expected consequences of audits by tax authorities of the respective jurisdictions in which it operates. the amount of these provisions is based on various factors, such as past tax audit experi-ence and different interpretations of tax regulations by the taxable entity and the pertinent tax authority. these different interpretations may arise in relation to a wide variety of issues depending on the

prevailing circumstances.

deferred tax assets are recognized for all temporary differences to the extent that taxable profit will likely be available to such tempo-rary differences can be utilized.

the realization of deferred tax credits are conditioned upon future events, which will make the provisions that gave rise deduct-ible under current tax legislation.

(d) Impairment of non-financial assets

impairment loss exists when the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, which is the higher of fair value less cost to sell and its value in use. the calcula-tion of fair value less cost to sell is based on information available on transactions involving the sale of similar assets or market prices less additional costs to dispose of the asset. the value-in-use calculation is based on the discounted cash flow model. Cash flows are determined from the budget for the next five years and do not include reorganization activities to which the company has not yet committed or significant future investments that will improve the asset base of the cash-generating unit under test. the recoverable amount is sensitive to the discount rate used in the discounted cash flow model, as well as expected future cash receipts and growth rate used for extrapolation purposes.

(e) Provisions for tax, civil and labor risks

these are recognized when the company and its subsidiaries



46

have a present legal or constructive obligation as a result of past events; it is probable that a transfer of economic benefits will be required to settle the obligation; and the amount can be reliably estimated. The provisions are quantified at present value of the expected disbursement to settle the obligation, applying the appro-priate discount rate according to the liability-related risks.

Provisions are restated up to the balance sheet date in the esti-mated amount of probable losses, observing their nature and based on the opinion of the company’s legal counsel. the principles and nature of the provisions for tax, civil and labor risks are described in Note 13.

05. puBliC serviCe COnCessiOn aGreeMentsat december 31, 2013, the company holds public utility conces-

sions for water supply and sewage services in 888 locations in the state of minas Gerais. the concession agreements and/or program agree-ments are executed with each municipality for periods ranging from 30 to 99 years, and all are fairly similar in terms of the rights and obligations of the holder and concession authority.

the tariff system for water supply and sewage services is controlled by the minas Gerais state regulatory water and wastewater agency (arsae-mG). these tariffs are intended to maintain the company’s financial and economic balance, pursuant to Federal Law 11,445/07. therefore, arsae-mG is responsible for periodically reviewing these tariffs and for annually determining any required readjustments, in order to realign tariff prices with inflation. Services are charged directly to users, based on the volume of water consumed and sewage collected

multiplied by the authorized tariff.

the main concession terms and major changes in concession agreements for the period ended december 31, 2013 are described in Note 1.

at december 31, 2013, the company had accounts receiv-able from concession authorities (the municipalities) totaling r$ 494,836, which correspond to the amounts expected to be received at the end of the concession period (2012 - r$ 390,757; january 1, 2012 - r$ 325,493) for assets which were not depreciated over the concession period. these amounts were discounted to their present value upon initial recognition using the weighted average cost of capital (wacc) rates linked to the respective accounts receivable. intangible assets were accounted for based on the difference between the fair value of the assets constructed or acquired for the purpose of the concession services and the carrying value of the financial assets recognized.

Below are the results of the construction services performed by the company during the periods:

parent cOmpanY/cOnSOlIDateD12/31/2013 12/31/2012

construction revenue 707,082 660,725construction cost (690,573) (645,645)



47

06. Cash and Cash equivalents

(a) Cash and cash equivalents

parent cOmpanY12/31/2013 12/31/2012 1/1/2012

cash and banks 40,125 47,202 34,632

short-term bank deposit certificates

220,356 449,223 206,904

total 260,481 496,425 241,536

cOnSOlIDateD12/31/2013 12/31/2012 1/1/2012

cash and banks 41,582 48,478 35,174

short-term bank deposit certificates

220,356 449,223 207,197

total 261,938 497,701 242,371

the company maintains its own funds arising from its business activity invested in Bank Deposit Certificates (CDBs), which consist of fixed-income securities substantially remunerated by reference to the variation in the Interbank Deposit Certificate (CDI), ranging from 100.0% to 110.5% in 2013 (2012 - 75% to 110.5%; january 1, 2012 - 75% to 113%). Financial income from these investments in 2013 totaled r$ 28,237 (2012 - r$ 40,657).

In 2013 and 2012, the Company classified its marketable securities as cash and cash equivalents since these are considered financial assets with immediate redemption and original maturity within 90 days, subject to insignificant risk of change in value.

(b) Changes in financial investments

parent cOmpanY12/31/2013 12/31/2012

at jaNUary 1 449,223 206,904

New investments 1,724,259 3,053,398

income 28,237 40,522

redemptions (1,981,363) (2,851,601)

at decemBer 31 220,356 449,223

cOnSOlIDateD12/31/2013 12/31/2012

at jaNUary 1 449,223 207,197

New investments 1,724,980 3,053,398

income 28,282 40,529

redemptions (1,982,129) (2,851,901)

at decemBer 31 220,356 449,223

Financial assets include only amounts in reais. there are no investments in foreign currency. None of these financial assets is overdue and no impairment loss was identified.



48

07. trade and Other reCeivaBles

(a) Trade receivables

the aging of trade receivables is as follows:

parent cOmpanY12/31/2013 12/31/2012 1/1/2012

Not yet due 253,415 193,483 155,850

Up to 30 days past due 51,071 56,483 45,497

From 31 to 60 days past due 32,778 26,358 21,231



over 180 days past due 16,186 15,318 12,339

Billed amounts 408,967 331,106 266,705

Unbilled amounts 311,474 267,264 231,238

trade receivables 720,441 598,370 497,943

(-) Provision for impairment of trade receivables (23,336) (19,517) (26,146)

697,105 578,853 471,797

accounts receivable - non-current 212,580 220,000 220,060

trade receivaBles, Net 909,685 798,853 691,857



49

cOnSOlIDateD12/31/2013 12/31/2012 1/1/2012

Not yet dUe 256,176 197,560 159,547






Billed amounts 413,422 335,380 270,849

Unbilled amounts 312,787 268,043 232,537

trade receivables 726,209 603,423 503,386

(-) Provision for impairment of trade receivables (24,004) (19,910) (27,660)

702,205 583,513 475,726

accounts receivable - non-current 212,580 220,000 220,060

trade receivaBles, Net 914,785 803,513 695,786

trade and other receivables are denominated only in reais and there are no accounts receivable in foreign currencies.

at december 31, 2013, the trade receivables of the parent company of r$ 777,469 (2012 - r$ 680,747; january 1, 2012 - r$ 607,148) and the consolidated trade receivables of r$ 781,543 (2012 - r$ 685,603; january 1, 2012 - r$ 612,144) were fully performing.

at december 31, 2013, trade receivables of the parent company totaling r$ 176,440 (2012 - r$ - 150,145; january 1, 2012 - r$ 123,875) and the consolidated accounts receivable totaling r$ 178,414 (2012 - r$ 151,869; january 1, 2012 - r$ 125,295) were past due, but not provisioned. these include a number of independent customers for whom there is no recent history of default. the aging analysis of these trade receivables is as follows:



50

parent cOmpanY12/31/2013 12/31/2012 1/1/2012

Up to 3 months 141,266 125,667 105,263

3 to 6 months 34,614 24,070 18,221

over 6 months 560 408 391

total 176,440 150,145 123,875

cOnSOlIDateD12/31/2013 12/31/2012 1/1/2012

Up to 3 months 142,721 126,961 106,347

3 to 6 months 35,129 24,428 18,492

over 6 months 564 411 394

total 178,414 151,800 125,233

at december 31, 2013, the trade receivables of the parent company totaling r$ 23,336 (2012 - r$ 19,517; january 1, 2012 - r$ 26,146) and the consolidated trade receivables of r$ 24,004 (2012 - r$ 19,910; january 1, 2012 - r$ 27,660) were considered as unrecoverable. the individually impaired receivables mainly relate to customers who are healthcare providers and for whom coPasa, in accordance with current legislation, cannot interrupt water supply and sewage services. Based on management’s assessment, a portion of these accounts receivable may be recovered.

the aging of these receivables is as follows:

parent cOmpanY12/31/2013 12/31/2012 1/1/2012

Not yet dUe 1,650 874 728

Up to 30 days past due 1,423 948 905

overdue from 31 to 60 days 1,418 1,037 930

overdue from 61 to 90 days 1,333 933 975

overdue from 91 to 180 days 4,432 2,916 3,053



total 23,336 19,517 26,146

cOnSOlIDateD12/31/2013 12/31/2012 1/1/2012

Not yet dUe 1,697 930 944



overdue from 61 to 90 days 1,373 989 1,191




total 24,004 19,910 27,660



51

the following table summarizes the changes in the provision for impair-ment of trade receivables:

parent cOmpanY12/31/2013 12/31/2012

at jaNUary 1 19,517 26,146

Provision for impairment of trade receivables 73,672 57,420

receivables written off during the year as uncollectible

(69,853) (64,049)

at decemBer 31 23,336 19,517

cOnSOlIDateD12/31/2013 12/31/2012

at jaNUary 1 19,910 27,660

Provision for impairment of trade receivables 75,648 58,714

receivables written off during the year as uncollectible

(71,554) (66,464)

at decemBer 31 24,004 19,910

the provision for impairment of receivables was recognized in the statement of income for the year as selling expenses. amounts charged to the provision account are generally written off when there is no expectation of recovering additional cash.

(b) Other receivables

the other classes of trade and other receivables have no impaired assets.

the maximum exposure to credit risk at the balance sheet date is the carrying value of each class of receivable mentioned above. The Company has pledged tariff revenues as a guarantee for financ-ing (Note 20).



52

parent cOmpanY12/31/2013 12/31/2012 1/1/2012

marketable securities (i) - 20,135 -

collateral for borrowings and debentures (ii) 133,410 132,961 131,778

receivables from subsidiaries (iii) 109,790 106,831 76,048

restricted investments (iv) 28,936 33,137 35,973

restricted investments (v) 68,444 155,524 292,918

Available-for-sale financial assets 48,638 28,850 25,079

other 54,524 39,907 16,534

total 443,742 517,345 578,330

NoN-cUrreNt assets (443,742) (497,210) (578,330)

cUrreNt assets - 20,135 -

cOnSOlIDateD12/31/2013 12/31/2012 1/1/2012

marketable securities (i) - 20,135 -

collaterals for borrowings and debentures (ii) 133,410 132,961 131,778

restricted investments (iv) 28,936 33,137 35,973

restricted investments (v) 68,444 155,524 292,918

assets available for sale 48,638 28,850 25,079

other 54,835 40,218 17,241

total 334,263 410,825 502,989

NoN-cUrreNt assets (334,263) (390,690) (502,989)

cUrreNt assets - 20,135 -



53

(i) This refers to financial investments redeemable in more than 90 days.

(ii) collaterals for borrowings and debentures are detailed in item “b” of Note 12.

(iii) this refers to advance for future capital increase, loan agreements and payroll expenses (salary and social charges) relat-ing to employees assigned by coPasa mG to its subsidiaries and which are being reimbursed as contractually provided for, of which r$ 96,178 refers to Águas minerais, r$ 12,733 to coPaNor and r$ 879 to copasa serviços de irrigação (2012 - r$ 86,637, r$ 19,121 and r$ 1,076; january 1, 2012 - r$ 57,541, r$ 17,139 and r$ 1,368, respectively).

(iv) this refers to funds of the Brazilian National water agency (aNa) held by coPasa mG under the water Basin depollution Pro-gram (Prodes), to be transferred as payment for the treated sewage from the ribeirão do onça sewage treatment plant, in the municipal-ity of Belo Horizonte, and from the Betim central sewage treatment plant (ete), in the municipality of Betim, and ete in the municipality of ibirité, through the attainment of treated sewage and abatement of polluting emissions goals. Because these goals were only partially met, the company also records these funds in non-current liabilities, under deposits for construction work (Note 11).

the amount of the contract, which was originally r$ 18,720, was adjusted to r$ 10,160 under the addendum prepared in de-cember 2012 and signed in may 2013, with reference to the date of

the original contract and redefining the load and discharge amounts of the current status of the project. accordingly, aNa redeemed at june 28, 2013 the adjusted amount of r$ 14,439, which was related to a portion of the amount transferred in december 2007. the preparation of the addendum and this redemption were made because only the first phase of the sewage treatment project was completed, but the original contract encompassed the final construc-tion phase.

on january 29, 2013 the company received a transfer of r$ 8,114 from the National water agency (aNa) as payment for the sewage treatment services rendered to the sewage treatment Plant (ete) of the municipality of Patos de minas. as set forth in clause 6 of contract 099/2012, the payment for the treated sewage will be released to the company in twelve quarterly, consecutive installments after obtaining a pollution reduction target certificate to be issued by the aNa. the contract is effective until december 31, 2018.

(v) Funds from the payment of the 5th issue of debentures (Note 12 (b)) were deposited in favor of coPasa mG in a settlement account maintained by caixa econômica Federal. Funds from the “settlement account” to the “demand account” will be released according to the work plan for each project, upon an express request filed by COPASA MG, and will depend on previous confirmation from the fiduciary agent of the release conditions contained in this agree-ment. the amounts from the settlement account which are awaiting



54

to be allocated to project development are invested in the “fundo de investimento caixa corporativo ii referenciado di longo prazo” investment fund, which is managed by caixa econômica Federal and whose income in 2013 amounted to r$ 9,364 (2012 - r$ 18,053).

08. investMents

At December 31, 2013, the subsidiaries had a capital deficiency of r$ 86,346 (2012 - r$ 79,169; january 1, 2012 - r$ 45,604), for which the company recorded a provision for losses in non-current liabilities within “Provision for investment losses”.

the changes in the provisions for investment losses are as follows:

12/31/2012 eQUity accoUNtiNG 12/31/2013

(63,053) (10,646) (73,699)

Águas minerais (15,931) 4,047 (11,884)

coPaNor (185) (578) (763)

serviços de irrigação (79,169) (7,177) (86,346)

total (79.169) (7.177) (86.346)

1/1/2012 traNsFer oF aFac(*)

eQUity accoUNtiNG 12/31/2012

Águas minerais (31,046) (20,245) (11,762) (63,053)

coPaNor (13,665) - (2,266) (15,931)

serviços de irrigação (893) - 708 (185)

total (45,604) (20,245) (13,320) (79,169)

(*) aFac - advances for future capital increase

the subsidiary Águas minerais, which started its activities in september 2008, has been recording losses due to the high volume of investments in industrial projects, the upgrade of bottling equip-ment, adjustment of the mix of products to the market requirements, besides refurbishment in the four plants to comply with regulators’ requirements.

the losses will be fully recovered as from the increase in capacity approved for the exploration of mineral water sources of caxambu, cambuquira, lambari and araxá, in 42% and 58.65% from 2015 and 2016, respectively.

accounting information of the subsidiary Águas minerais, which was used as a basis for the company’s equity in results and consoli-dation, was prepared considering that Águas minerais will continue as a going concern, and does not include the adjustments related to the realization and classification of its assets or the valuation of its liabilities, which could be required if Águas minerais was not able to continue as a going concern.



55

on december 20, 2012, a debt renegotiation term was entered into between coPasa mG and coPaNor. this term was originated in coPaNor, through the Board of directors resolution Notice 029/12 and executive Board resolution Notice 099/12, both of december 10, 2012, and in coPasa mG, through executive Board resolution Notice 1,011/12, dated december 18, 2012.

as such the terms of the intercompany loan agreements with subsidiary coPaNor are now as follows:

(a) reduction in interest rate from 101% to 90% of cdi.

(b) repayment over 324 months, with the following conditions:

(i) the grace period will be 12 months and interest remu-neration shall be paid in a single installment, at the end of the grace period.

(ii) the repayment period will be 312 months, in 52 bian-nual installments. The first installment will mature on June 20, 2014 and the last one on december 20, 2039.

(c) constitution of a reserve account in the name of coPaNor (6210-3, at branch 3308 of Banco do Brasil s.a.), which cannot be operated by the subsidiary, in order to guarantee the debt service payment.

the intercompany loan agreements between coPasa mG and subsidiary coPaNor were agreed taking into consideration assump-tions of new public utility concessions for water supply and sewage services by the subsidiary, which would allow the generation of

sufficient funds for repayment of these debts. The failure to transfer part of the new concessions, associated with problems in the physi-cal and financial schedule of the construction works, delayed the beginning of operation of certain concessions and, consequently, the generation of COPANOR’s cash flow, resulting in the formalization of the debt renegotiation. the reduction in interest rate was based on remunerations on the individual amounts referring to intercompany loan agreements, which COPASA MG would obtain in the financial market. the grace period for the beginning of the debt repayment is in accordance with the period adopted by financial agents for coPasa mG. the debt was reduced by r$ 7,106 in december 2013 because of the overcharge related to employee salaries assigned by coPasa mG to the subsidiary coPaNor.

in compliance with minas Gerais state Government decree 46,080, dated November 12, 2012, the executive Board of coPasa serviços de irrigação considered that the responsibilities imposed by state law 16,698, dated april 17, 2007, had been met. therefore, the necessary measures for the transfer of management of the jaíba ii Project to distrito de irrigação do jaíba - dij were concluded on march 2, 2013, upon termination of service agreement 460/12 entered into with rUralmiNas on september 3, 2012. complete termination of the activities is pending because of labor lawsuits and judicial claims against customers, in which this subsidiary is the defendant and the plaintiff, respectively.



56

09. intanGiBle assets

(a) parent company

12/31/2013

cost accUmUlated amortiZatioN iNtaNGiBle assets, Net

in operation

water systems 4,691,263 (2,612,522) 2,078,741

sewage 3,627,138 (1,051,718) 2,575,420

Use rights 337,867 (116,547) 221,320

common use systems 700,883 (517,595) 183,288

other 78,459 (8,341) 70,118

total iN oPeratioN 9,435,610 (4,306,723) 5,128,887

Under construction

construction in progress 1,771,866 - 1,771,866

total UNder coNstrUctioN 1,771,866 - 1,771,866

total iNtaNGiBle assets 11,207,476 (4,306,723) 6,900,753

12/31/2012


in operation

water systems 4,461,733 (2,453,245) 2,008,488

sewage 3,128,549 (894,520) 2,234,029

Use rights 310,972 (105,295) 205,677


other 67,848 (7,444) 60,404


Under construction



57




12/1/2012


in operation

water systems 4,717,936 (2,749,619) 1,968,317

sewage 2,905,585 (799,631) 2,105,954

Use rights 293,178 (89,661) 203,517

common use systems - - -

other (179,283) 34,479 (144,804)


UNder coNstrUctioN




the changes in intangible assets were as follows:



58

BalaNces oN jaNUary 1,

2012

additioNs disPosals amortiZatioN caPitaliZed iNterest

traNsFer to ProPerty, PlaNt

aNd eQUiPmeNt

BalaNces oN decemBer 31,

2012water systems 1,968,317 66,488 (45,271) (181,411) - 200,365 2,008,488 sewage 2,105,954 41,687 (48,929) (148,890) - 284,207 2,234,029 Use rights 203,517 14,341 (2) (15,421) - 3,242 205,677 common usem systems (i) - 4,414 (1,266) (13,127) - 166,987 157,008 other (144,804) (7,555) 87,335 12,425 - 113,003 60,404 in development 1,927,472 626,706 (2,220) - 58,536 (812,740) 1,797,754 total 6,060,456 746,081 (10,353) (346,424) 58,536 (44,936) 6,463,360


traNsFers to FiNaNcial assets

traNsFer to ProPerty, PlaNt

aNd eQUiPmeNtotHer


2013

water systems 66,678 (5,203) (165,552) - (27,721) 197,298 4,753 2,078,741

sewage 58,763 (5,181) (158,981) - (52,812) 498,302 1,300 2,575,420

Use rights 25,640 (9) (11,393) - 115 1,121 169 221,320

common use systems (i) 38,255 (173) (54,380) - (4,934) 47,452 60 183,288

other 18,812 (1,441) (2,745) - (3,684) (2,734) 1,506 70,118

in development 713,904 (16,414) - 58,656 - (782,034) - 1,771,866

total 922,052 (28,421) (393,051) 58,656 (89,036) (40,595) 7,788 6,900,753

the amortization for the year, allocated to the statement of income, amounted to r$ 391,699 (2012 - r$ 323,704) as cost of services, r$ 211 (2012 - r$ 3,666) as selling expenses and r$ 1,141 (2012 - r$ 19,054) as administrative expenses.



59

(b) Consolidated

12/31/2013


iN oPeratioN

water systems 4,691,263 (2,612,522) 2,078,741

sewage 3,627,138 (1,051,718) 2,575,420

Use rights 337,927 (116,605) 221,322


other 78,459 (8,341) 70,118


UNder coNstrUctioN




12/31/2013


iN oPeratioN

water systems 4,717,936 (2,749,619) 1,968,317

sewage 2,905,585 (799,631) 2,105,954

Use rights 293,195 (89,673) 203,522

common use systems - - -

other (179,283) 34,479 (144,804)


UNder coNstrUctioN




60



the changes in intangible assets were as follows:

BalaNces oN jaNUary 1,

2012additioNs disPosals amortiZatioN caPitaliZed

iNterest

traNsFer to ProPerty, PlaNt aNd eQUiPmeNt


2012

water systems 1,968,317 66,488 (45,271) (181,411) - 200,365 2,008,488

sewage 2,105,954 41,687 (48,929) (148,890) - 284,207 2,234,029

Use rights 203,522 14,341 (2) (15,433) - 3,262 205,690

common use - 4.414 (1.266) (13.127) - 166.987 157.008

systems - 4,414 (1,266) (13,127) - 166,987 157,008

other (144,804) (7,555) 87,335 12,425 - 113,003 60,404

in development 1,927,472 629,992 (5,506) - 58,536 (812,740) 1,797,754

total 6,060,461 749,367 (13,639) (346,436) 58,536 (44,916) 6,463,373


traNsFers to FiNaNcial

assets

traNsFer to ProPerty, PlaNt aNd eQUiPmeNt

otHerBalaNces oN decemBer 31,

2013

water systems 66,678 (5,203) (165,552) - (27,721) 197,298 4,753 2,078,741

sewage 58,763 (5,181) (158,981) - (52,812) 498,302 1,300 2,575,420

Use rights 25,640 (9) (11,403) - 115 1,121 168 221,322

common use 38.255 (173) (54.380) - (4.934) 47.452 60 183.288

systems 38,255 (173) (54,380) - (4,934) 47,452 60 183,288

other 18,812 (1,441) (2,745) - (3,684) (2,734) 1,506 70,118

in development 713,904 (16,414) - 58,656 - (782,034) - 1,771,866

total 922,052 (28,421) (393,061) 58,656 (89,036) (40,595) 7,787 6,900,755

the amortization for the year, allocated to the statement of income, amounted to r$ 391,700 (2012 - r$ 323,508) as cost of services,



61

r$ 211 (2012 - r$ 3,729) as selling expenses and r$ 1,150 (2012 - r$ 19,199) as administrative expenses.

at december 31, 2013, the additions to intangible assets amounting to r$ 749,367 substantially referred to (i) the construc-tion works for the expansion of the sewage treatment plant of ribeirão arrudas; (ii) the implementation of the sewage treatment system of ibirité, and (iii) improvements in the sewage system of caratinga, contagem and Betim.

(i) Considering that common use systems have specific eco-nomic useful lives, these assets are controlled in a separate group named “common use systems”, as from 2012.

10. prOperty, plant and equipMent

(a) parent company

12/31/2013

cost accUmUlated dePreciatioN

ProPerty, PlaNt aNd eQUiPmeNt, Net

iN oPeratioN

machinery and equipment 252,734 (165,305) 87,429

vehicles 141,973 (106,758) 35,215

other 191 (172) 19

394,898 (272,235) 122,663

land and buildings 158,559 (75,744) 82,815

total in operation 553,457 (347,979) 205,478

total ProPerty, PlaNt aNd eQUiPmeNt

553,457 (347,979) 205,478

12/31/2012

cost accUmUlated dePreciatioN

ProPerty, PlaNt aNd eQUiPmeNt, Net

iN oPeratioN


vehicles 111,799 (101,141) 10,658

other 191 (175) 16

371,831 (256,710) 115,121


total iN oPeratioN 503,777 (328,283) 175,494

total ProPerty, PlaNt aNd eQUiPmeNt 503,777 (328,283) 175,494



62

12/1/2012

cost accUmUlated dePreciatioN ProPerty, PlaNt aNd eQUiPmeNt, Net

iN oPeratioN


vehicles 104,770 (97,793) 6,977

other 155 (125) 30

345,013 (234,172) 110,841




the changes in property, plant and equipment were as follows:

laNd aNd BUildiNGs

macHiNery aNd eQUiPmeNt veHicles otHer coNstrUctioN

iN ProGress total

BalaNces oN jaNUary 1, 2012 50,030 103,834 6,977 30 - 160,871

additions 684 (178) 536 55 174 1,271

disposals (222) (148) (160) 38 (174) (666)

depreciation (3,272) (24,232) (3,340) (74) - (30,918)

transfers from intangible assets 13,153 25,171 6,645 (33) - 44,936

BalaNces oN decemBer 31, 2012 60,373 104,447 10,658 16 - 175,494

additions 18,541 5,867 335 - - 24,743

disposals (7) (373) (101) - - (481)

depreciation (3,633) (23,818) (7,524) (8) - (34,983)

transfers from intangible assets 7,541 1,306 31,748 - - 40,595

other - - 99 11 - 110




63

the amortization for the year, allocated to the statement

of income, amounted to r$ 21,095 (2012 - r$ 29,021) as cost

of services, r$ 4,588 (2012 - r$ 306) as selling expenses and

r$ 9,300 (2012 - r$ 1,591) as administrative expenses.

(b) Consolidated

12/31/2013


iN oPeratioN


vehicles 142,712 (107,480) 35,232

other 348 (295) 53

418,777 (279,838) 138,939



UNder coNstrUctioN

coNstrUctioN iN ProGress - - -

total UNder coNstrUctioN - - -




64

12/31/2012


iN oPeratioN


vehicles 112,637 (101,755) 10,882

other 327 (266) 61

394,962 (261,972) 132,990



UNder coNstrUctioN

construction in progress 2,291 - 2,291

total UNder coNstrUctioN 2,291 - 2,291


12/1/2012


iN oPeratioN


vehicles 106,172 (98,327) 7,845

other 912 (494) 418

368,028 (237,257) 130,771




65


UNder coNstrUctioN

construction in progress 1,722 - 1,722

total UNder coNstrUctioN 1,722 - 1,722


the changes in property, plant and equipment were as follows:

laNd aNd BUildiNGs

macHiNery aNd eQUiPmeNt veHicles otHer coNstrUctioN

iN ProGress total

BalaNces oN jaNUary 1, 2012 53,206 122,508 7,845 418 1,722 185,699

additions 708 603 536 82 743 2,672

disposals (198) (234) (569) 5 (174) (1,170)

depreciation (3,475) (26,243) (3,575) (201) - (33,494)

transfers from intangible assets 13,101 25,413 6,645 (243) - 44,916

BalaNces oN decemBer 31, 2012 63,342 122,047 10,882 61 2,291 198,623

additions 20,859 6,693 335 8 - 27,895

disposals (7) (373) (101) - (2,291) (2,772)

depreciation (3,880) (26,019) (7,632) (26) - (37,557)

transfers from intangible assets 7,541 1,306 31,748 - - 40,595

other - - - 10 - 10




66

the depreciation for the year, allocated to the statement of income, amounted to r$ 23,523 (2012 - r$ 31,510) as cost of services, r$ 4,588 (2012 - r$ 322) as selling expenses and r$ 9,466 (2012 - r$ 1,662) as administrative expenses.

11. Other OBliGatiOns

parent cOmpanY12/31/2013 12/31/2012 1/1/2012

taxes paid in installments (a) 253,724 255,676 261,299

Provision for vacation pay 92,023 84,653 76,587

electrical energy (b) 10,832 6,618 24,670

deposit for construction (c) 30,389 34,590 27,875

investment losses (Note 8) 86,346 79,169 45,604

sundry obligations 20,086 13,652 67,491

total 493,400 474,358 503,526

NoN-cUrreNt liaBilities (337,084) (333,759) (304,472)

cUrreNt liaBilities 156,316 140,599 199,054



67

cOnSOlIDateD12/31/2013 12/31/2012 1/1/2012

taxes paid in installments (a) 253,724 255,676 261,299

Provision for vacation pay 92,679 85,172 76,949

electrical energy (b) 11,202 6,932 24,670

deposit for construction (c) 30,392 34,593 27,878

sundry obligations 20,112 13,868 67,675

total 408,109 396,241 458,471

NoN-cUrreNt liaBilities (250,741) (254,593) (258,871)

cUrreNt liaBilities 157,368 141,648 199,600

Passivo circUlaNte 156.316 140.599 199.054

the non-current portion is mainly comprised of taxes to be paid in installments.

(a) this refers to the offset agreement which establishes that tax and nontax debts payable by coPasa mG shall be offset against its credits arising from water supply and sewage service invoices payable by the Belo Horizonte municipal Government. the reciprocal debts shall be paid in 120 monthly and consecutive installments, bearing 1% interest and annual monetary restatement based on the special extended consumer Price index (iPca-e). at december 31, 2013, 74 installments remain payable and the final maturity of the arrangement will be in February 2020.

(b) this refers to the installment payment (concluded in sep-tember 2012) of the debt arising from past-due bills, in conformity with the debt agreement and acknowledgement formally entered into with companhia energética de minas Gerais - cemiG on october 4, 2004, whereby the company has acknowledged a debt of r$ 78,495, which was agreed to be divided into 96 monthly consecu-tive installments, restated based on the General market Price index (iGP-m), plus interest of 0.5% per month. at december 31, 2013, the current portion includes only monthly invoices, in the amount of r$ 10,832 (2012 - r$ 6,618; january 1, 2012 - r$ 5,442).

(c) this refers to funds of the Brazilian National water agency (aNa) held by coPasa mG under the water Basin depollution Pro-



68

gram (Prodes), to be transferred as payment for the treated sewage from the ribeirão do onça sewage treatment plant, in the municipal-ity of Belo Horizonte, and from the Betim central sewage treatment plant (ete), in the municipality of Betim, and ete in the municipality of ibirité, through the attainment of treated sewage and abatement of polluting emissions goals. Because these goals were only partially met, the company also records these funds in non-current liabilities, under deposits for construction work (Note 8).

the amount of the contract, which was originally r$ 18,720, was adjusted to r$10,160 under the addendum signed in may 2013, with reference to the date of the original contract, changing the load and discharge amounts in light of the current status of the project. thus, on june 28, 2013, aNa redeemed the adjusted

amount of r$ 14,439. this amount refers to part of the amount provided by aNa in december 2007. this redemption was made because only the first phase of the sewage treatment project was completed, but the original contract encompassed the final phase.

on january 29, 2013 the company received a transfer of r$ 8,114 from the National water agency (aNa) as consideration for the Federal Government’s participation in the construction of the Pato de minas sewage treatment plant. as set forth in clause 6 of contract 099/2012, the payment for the treated sewage will be re-leased to the company in twelve quarterly, consecutive installments after obtaining a pollution reduction target certificate to be issued by the aNa. the contract is effective until december 31, 2018.



69

12. BOrrOwinGs and deBentures

parent cOmpanY12/31/2013 12/31/2012 1/1/2012

current

state government/BdmG 3,047 4,929 4,717

Federal savings and loan Bank (ceF) 123,627 122,336 114,916

National treasury 3,327 38,801 36,875

National Bank for economic and social development (BNdes) - BNe 59,269 59,255 54,074

Promissory Notes - citibank - - 155,924

Federal government - bonus 2,004 3,656 4,719

Finame 4,981 - -

kfw 4 4 -

BaNk BorrowiNGs aNd FiNaNciNG 196,259 228,981 371,225

simple debentures 275,267 134,017 102,715

convertible debentures 7 69,742

deBeNtUres 275,267 134,024 172,457

total cUrreNt 471,526 363,005 543,682

Non-current



National treasury - 3,311 41,806

BNdes - BNe 485,572 532,976 533,973


Finame 72,042 - -



70

kfw 65,670 6,221 -

BaNk BorrowiNGs aNd FiNaNciNG 1,192,469 1,152,892 1,248,370

simple debentures 1,492,272 1,543,481 952,614

convertible debentures - - 65,293

deBeNtUres 1,492,272 1,543,481 1,017,907

total NoN-cUrreNt 2,684,741 2,696,373 2,266,277

total cUrreNt aNd NoN-cUrreNt 3,156,267 3,059,378 2,809,959

cOnSOlIDateD12/31/2013 12/31/2012 1/1/2012

current



National treasury 3,327 38,801 36,875

BNdes - BNe 59,269 59,255 54,074

Promissory Notes - citibank - - 155,924


Finame 4,984 - -

Banco do Brasil 401 - -

kfw 4 4 -

BaNk BorrowiNGs aNd FiNaNciNG 196,663 228,981 371,225

simple debentures 275,267 134,017 102,715

convertible debentures - 7 69,742



71

deBeNtUres 275,267 134,024 172,457

total cUrreNt 471,930 363,005 543,682

Non-current



National treasury - 3,311 41,806

BNdes - BNe 485,572 532,976 533,973


Finame 72,042 - -

Banco do Brasil 467 - -

kfw 65,670 6,221 -

BaNk BorrowiNGs aNd FiNaNciNG 1,193,498 1,152,892 1,248,370

simple debentures 1,492,272 1,543,481 952,614

convertible debentures - - 65,293

deBeNtUres 1,492,272 1,543,481 1,017,907

total NoN-cUrreNt 2,685,770 2,696,373 2,266,277

total cUrreNt aNd NoN-cUrreNt 3,157,700 3,059,378 2,809,959



72

(a) Borrowings

at december 31, 2013, the book values of the company’s loans in foreign currency totaled r$ 127,332 (2012 - r$ 62,387 - january 1, 2012 - r$ 55,750), of which r$ 61,658 are in U.s. dollars and r$ 65,674 in euros (2012 - r$ 56,162 in U.s. dollars and r$ 6,255 in euros; january 1, 2012 - only in U.s. dollars)

amounts recorded under non-current liabilities fall due as follows:

parent cOmpanYmatUrity year 12/31/2013 12/31/2012 1/1/2012

2013 - - 212,188

2014 - 188,477 175,683

2015 173,935 153,067 141,171

2016 137,345 117,590 106,814

2017 100,523 81,494 72,858

2018 101,708 82,500 73,766

2019 103,395 83,989 75,145

2020 to 2036 575,563 445,775 390,745

total 1,192,469 1,152,892 1,248,370

cOnSOlIDateDmatUrity year 12/31/2013 12/31/2012 1/1/2012

2013 - - 212,188

2014 - 188,477 175,683

2015 174,399 153,067 141,171

2016 137,483 117,590 106,814

2017 100,593 81,494 72,858

2018 101,778 82,500 73,766

2019 103,465 83,989 75,145

2020 to 2036 575,780 445,775 390,745

total 1,193,498 1,152,892 1,248,370

changes in borrowings were as follows:

parent cOmpanY12/31/2013 12/31/2012

oPeNiNG BalaNce 1,381,873 1,619,595

Proceeds from borrowings 216,072 126,382

Provision for interest and financial charges 105,241 125,879

monetary and exchange variations 19,663 8,382

repayment of principal (227,873) (363,601)

Payment of charges (106,248) (134,764)

closiNG BalaNce 1,388,728 1,381,873

cUrreNt liaBilities (196,259) (228,981)

NoN-cUrreNt liaBilities 1,192,469 1,152,892



73

cOnSOlIDateD12/31/2013 12/31/2012

oPeNiNG BalaNce 1,381,873 1,619,595

Proceeds from borrowings 217,634 126,382


monetary and exchange variations 19,663 8,382



closiNG BalaNce 1,390,161 1,381,873


NoN-cUrreNt liaBilities 1.193.498 1.152.892

on june 7, 2013, the subsidiary coPaNor entered into a loan agreement of r$ 1,000,000.00 with Banco do Brasil. this agree-ment is subject to an interest rate of 112.5% p.a. of the average rate for the Interbank Deposit Certificate (CDI), to be paid on each base date starting on july 15, 2013, upon maturity and settlement of the debt.

the grace period for principal payments is three months and repayments will be in 30 monthly, equal, consecutive installments of r$ 33,333.33 due on the 15th day of each month during the period between September 15, 2013 and February 15, 2016, the final maturity date.

Proceeds from this borrowing will be used exclusively to guaran-tee the provision of funds in a deposit current account and will not be otherwise invested or used outside of the Banco do Brasil.

Bank borrowings and debentures mature through 2036 and bear average coupons of 7.66% p.a. (2012 - 8.04% p.a.; january 1, 2012 - 8.84%). In addition, the balances of financing lines are subject to specific rates, as follows:

parent cOmpanY/cOnSOlIDateDFiNaNciNG liNes rates

state government/BdmG iGP-m

Federal savings and loan Bank (ceF) tr

National treasury tr

BNdes - BNeexceeding 6% of long-term

interest rate (tjlP)

Government agency for machinery and equipment Financing (FiName) -

Federal government - bonus dollar

kfw euro

FiName -Águas minerais -

Banco do Brasil - coPaNor cdi

debentures (*)

(*) see Note 12(c).

(b) Guarantees for bank borrowings and financing

As collateral for financing, the Company has pledged the follo-wing:



74

(i) foreign currency agreements

Federal government - bonds

these are guaranteed up to the contract balance by surety of the minas Gerais state Government and by the company’s tariff revenue, up to the limits sufficient for the payment of the install-ments and other charges due on the maturity dates. as additional guarantees for discount Bond and Par Bond, the company maintains a reserve account at Banco do Brasil amounting to r$ 42,518, restated through december 31, 2013 (2012 - r$ 40,527; at january 1, 2012 - r$ 35,192), by applying the average price of the Zero coupon Bond of the Us treasury, recorded in the account “collateral for financing”.

kreditanstalt Fur wiederaufbau - kfw:

these are guaranteed up to the contract balance by surety of the minas Gerais state Government and by the company’s tariff revenue, up to the limit sufficient for the payment of the install-ments and other charges due on the maturity dates, as well as by the separate collateral agreement executed between kfw and the Federative republic of Brazil, and the credit of payment guaranteed by the Federal republic of Germany. as an additional guarantee, the company will maintain a reserve account at the Federal savings and loan Bank (ceF), the minimum balance of which shall be the amount corresponding to one monthly debt service payment falling due. The balance of this account recorded as “Collateral for financ-ing” is r$ 891 at december 31, 2013 (2012 - r$ 349; at january 1, 2012 - not applicable).

(ii) Local currency agreements

Fiduciary transfer of receivables and restricted account agree-ments:

► in order to improve and expand the systems in opera-tion, the company raised funds, between 1995 and 2011, from various financing agencies, and on October 29, 2002, these agreements were consolidated under the restricted account agreement made between the company, the Federal savings and loan Bank (ceF), designated as administrator, and Unibanco, as the financial agent, whereby new funds were released from the Government severance indemnity Fund For Employees (FGTS). New agreements for the fiduciary transfer of receivables and restricted accounts for the release of new FGts funds were entered into on july 4, 2006, under the sanitation for all Program (“Programa saneamento para todos”), which superseded all existing programs. Bradesco and itaú also acted as the financial agents of the funds. The Company pledged the following as security for these agreements:

► Fiduciary collateral transfer of part of coPasa mG’s receivables from the water supply and sewage collec-tion services provided to its private sector consumers, at the non-cumulative minimum amounts of r$17,000 and r$15,300 per month, adjusted based on the



75

variations of the IPCA (Amplified Consumer Price index) disclosed by the institute of economic research (FiPe).

► Fiduciary transfer to the assignors of part of the funds receivable from ceF, related to the temporary cash invest-ment funds, which are comprised of funds deposited in the restricted account and reserve account, which shall correspond to three times the amounts of the installments falling due and whose balance as at december 31, 2013 is recorded as “Collateral for financing” amounting to r$ 25,448 (2012 - r$ 25,448; at january 1, 2012 - r$ 25,862).

► Loan and financing agreements with the BNDES for the optimization and expansion of the water supply and sewage treatment systems in the concession areas are collateral-ized by a portion of the receivables for the provision of public utility services - water supply and sewage services, at a minimum of r$3,000 and r$23,000 per month, adjusted annually by the iPca / iBGe, and by reserve account depos-its whose minimum balance corresponds to three times the amount of the installments falling due. the balance of this account recorded as “Collateral for financing” is R$ 23,546 at december 31, 2013 (2012 - r$ 24,171; at january 1, 2012 - r$ 26,527).

► Loan and financing agreements entered into with the ceF under the caiXa Pac - 2009 and 2010 programs, for

the expansion of the water supply and sewage treatment systems in the concession areas, are collateralized by concession receivables relating to tariff revenue earned in the municipalities where the construction projects will be performed, at three times the value of the monthly charge, credited to a centralized account, and by reserve account deposits whose minimum balance corresponds to the amounts of the installments falling due. the balance of this account recorded as “Collateral for financing” is R$ 1,605 at december 31, 2013 (2012 - r$ 1,186; at january 1, 2012 - r$ 555).

(iii) Other borrowings

► Loan and financing agreements entered into with the CEF for construction projects and the expansion of the systems and connections are collateralized by deposits in collateral accounts whose minimum balance corresponds to the value of the monthly charge for the agreement executed on december 9, 2003, and three times the value of the monthly charge for the agreement executed on june 30, 2004, calculated on the most recent charge available under these agreements. the balance of this account recorded as “Collateral for financing” is R$ 10,247 at December 31, 2013 (2012 - r$ 10,107; at january 1, 2012 - r$ 9,918).

► Other financing transactions related to both the State Government/BdmG and the National treasury are gua-



76

ranteed by the minas Gerais state Government and by the company’s tariff revenue.

(c) debentures

parent cOmpanY/cOnSOlIDateD12/31/2013 12/31/2012 1/1/2012

sUBscriPtioNs/series

sUBscriPtioN date cUrreNt NoN-cUrreNt cUrreNt NoN-cUrreNt cUrreNt NoN-cUrreNt

NoN-coNvertiBle deBeNtUres

subscription - 1st issue

1st and 2nd 6/30/2004 4,515 - 7,775 4,511 7,815 12,245

3rd and 4th 11/9/2004 4,515 - 7,775 4,511 7,815 12,245

5th and 6th 7/29/2004 4,515 - 7,775 4,511 7,815 12,245

7th 12/19/2005 2,258 - 3,887 2,256 3,907 6,122

8th and 9th 4/24/2006 4,515 - 7,775 4,511 7,815 12,244

10th 12/19/2006 2,258 - 3,887 2,256 3,907 6,122

11th and 12th 3/23/2007 4,516 - 7,775 4,511 7,815 12,244

total - 1st issUe 27,092 - 46,649 27,067 46,889 73,467

subscription - 3rd issue

1st to 6th 12/6/2007 15,923 79,246 16,174 95,096 16,299 110,945

7th 9/25/2008 2,654 13,208 2,696 15,849 2,717 18,491

8th 12/6/2008 7,962 39,623 8,087 47,548 8,149 55,472

9th to 11th 3/30/2009 7,962 39,623 8,087 47,548 8,149 55,472

12th to 14th 11/27/2009 2,654 13,208 2,696 15,849 2,717 18,491

15th to 17th 5/26/2010 7,962 39,623 8,087 47,548 8,150 55,473



77

changes in debentures were as follows:

12/31/2013 12/31/2012

at decemBer 31 1,677,505 1,190,364

Proceeds from debentures 175,734 659,171


monetary variation 26,803 38,677


conversion of debentures into shares - (137,486)


at december 31 1,767,539 1,677,505


NoN-cUrreNt liaBilities 1,492,272 1,543,481

(i) Non-convertible debentures

► subscription - 1st issue:

in june 2004, the company placed 300 non-convertible simple debentures of r$1,000 each, in a private issue, through exclusive subscription by the BNdes. these debentures were issued in twelve series of r$ 25,000 each. the subscription price of each series was equivalent to the nominal value plus the interest mentioned below, calculated on a pro rata basis from the issue date to the effective subscription date, under the following contractual terms and condi-tions:

issue date june 15, 2004

term 10 years

Grace period of the principal 36 months

repayment 84 months

Final maturity july 15, 2014

interest tjlP + 3.58% p.a.

Guarantee 20% of the revenue collected, plus reserve account

this 1st issue is guaranteed by 20% of the company’s revenue from tariffs and a reserve account, the minimum balance of which corresponds to three monthly installments falling due, related to all debentures of all series issued and subscribed for, deposited in an investment fund, recorded as “Collateral for financing”. At December 31, 2013, the amount pledged as collateral totaled r$ 12,149 (2012 - r$ 13,154; january 1, 2012 - r$ 14,205).

The funds from this issue were allocated to the financing of projects for expansion and modernization of water supply and sewage treatment systems in the concession areas of coPasa mG.

► subscription - 3rd issue

in december 2007, the company placed 450 non-convertible simple debentures of r$ 1,000 each, in a private issue, through exclusive subscription by the BNdes. these debentures are issued in eighteen series of r$ 25,000 each, under the following contrac-tual terms and conditions:



78

issue date june 1, 2007

term 12 years

Grace period of the principal

30 months

repayment 114 months

Final maturity december 15, 2019


GuaranteeFloating, with assignment and restriction of funds receivable, plus reserve account

this 3rd issue is guaranteed by monthly minimum deposits of r$ 18,000, related to tariff revenues of the company, updated annu-ally based on the iPca, and by a reserve account, whose minimum balance must be equal to 3 (three) monthly installments falling due, related to all debentures of all series issued and subscribed for, de-posited in an investment fund, recorded as “Collateral for financing”. at december 31, 2013, the amount pledged as collateral totaled r$ 16,992 (2012 - r$ 18,019; january 1, 2012 - r$ 19,519).

► subscription - 4th issue:

in july 2010, the company placed nonconvertible simple debentures, in a private issue divided into 3 (three) series, the first and the third series, in the amount of r$ 222,210 and r$ 296,280, respectively, through exclusive subscription by the BNdes, and the second series, in the amount of r$ 222,210, through exclusive subscription by BNDES Participações S.A - BNDESPAR. The first and the second series are comprised of 3,000 debentures each, and the

third series of 4,000 debentures, totaling 10,000 debentures of r$ 74.07 each, under the following contractual terms and condi-tions:

issue date july 15, 2010

term 144 months for the 1st and 3rd series and 145 months for the 2nd series

Grace period of the principal

36 months for the 1st and 3rd series and 37 months for the 2nd series

repayment 108 months for the 1st and 3rd series and 9 annual for the 2nd series

Final maturity december 15, 2022

interest tjlP + 1.55% p.a. for the 1st and 3rd series, and iPca + 9.046555% p.a. for the 2nd series

Guarantee Fiduciary transfer

this 4th issue is guaranteed by the company’s revenues from tariffs corresponding to the monthly installment of r$ 32,000, updated annually by the iPca, and by the company’s receivables from the depository bank, related to the deposits to be made and funds existing in the “restricted account” earmarked for fiduciary transfer of receivables.

► subscription - 5th issue:

in august 2011, the company placed non-convertible simple debentures, in a private issue, through exclusive subscription by Planner truste dtvm ltda., consisting of a single series of 288,000 debentures of r$ 1 each, in the amount of r$ 288,000, under the



79

following contractual terms and conditions:

Funds from the “settlement account” to the “demand account” will be released according to the work plan for each project, upon express request of the company, and will depend on previous confirmation from the fiduciary agent of the conditions contained in this agreement:

issue date september 20, 2011

term 240 months


repayment 198 months

Final maturity september 30, 2031

interest tr + 9% p.a.

Guarantee assignment and restriction of funds receivable

this 5th issue is guaranteed by part of the company’s revenue from tariffs equivalent to the monthly amount of no less than 4.5% on the outstanding balance of the debentures at december 31 of each year, by the accounts transferred and by all shares held by the company in investments allowed.

the funds from this issue are allocated to the development of basic sanitation projects of the company.

► subscription - 6th issue

on February 15, 2012, the company placed 400 unsecured non-convertible simple debentures of r$ 1,000 each, in a public

placement, through exclusive subscription by Pentágono distribui-dora de títulos e valores mobiliários. these debentures were issued in two series of r$ 200,000 each, totaling r$ 400,000, under the following contractual terms and conditions:

issue date February 15, 2012

term 60 months for the 1st series and 84 months for the 2nd series


repayment 7 equal and consecutive semi-annual installments for the 1st series, and 06 equal and consecutive annual installments for the 2nd series

Final maturity February 15, 2017 for the 1st series and February 15, 2019 for the 2nd series

interest 100% of the over extra-group interbank deposit rate plus a spread of a 0.94% p.a. for the 1st series and iPca plus interest corresponding to 100% of the yield on National treasury Notes (NtN) - series B for the 2nd series

Guarantee Unsecured

the funds from this issue are used in the 2012-2014 invest-ment Program to be conducted in partnership with the municipalities to which the company will provide water supply and sewage services under concession agreements, and in the debt rescheduling process.

(ii) Convertible debentures

► subscription - 2nd issue:

on july 16, 2007, the company executed a convertible deben-tures deed in the amount of r$ 141,024 under the following terms



80

and conditions:issue date june 1, 2007

Number of debentures 1,130,000

Unit par value in reais r$ 124,80


repayment june 1, 2012 and june 1, 2013


Guarantee Floating

The fair value of the financial component recorded in liabilities was calculated using the market interest rate applicable to a similar non-convertible debt bond. the residual book value, corresponding to the equity conversion option, is included in equity in revenue reserves (Note 18).

the stockholders of the company were granted the preemptive right to subscribe for debentures in the same proportion to the number of coPasa mG shares they held on july 30, 2007, so that in order to subscribe for one (1) debenture, a stockholder would have to be the holder of 102 shares of coPasa mG. the deadline to exercise the preemptive right was 30 days after july 30, 2007 (day of publication of the Notice to stockholders), hence, up to august 28, 2007. coPasa mG’s shares (csmG3) were traded ex-rights of the debentures subscription as from july 31, 2007.

the conversion option was available for the period between june 2, 2008 and may 31, 2012, when each debenture could be converted into four common shares of the company, and between

june 1, 2012 and may 31, 2013, when each debenture could be converted into two common shares of the company, at the price of r$ 31.20 per share, as restated under the terms of the deed.

1,129,881 debentures were converted into 4,519,482 shares, and the remaining 119 were paid on june 14, 2013, as follows:

nUmBerdate coNverted deBeNtUres commoN sHares

8/4/2008 188 752

3/6/2009 5,396 21,584

3/12/2009 973 3,892

4/1/2009 20,595 82,380

6/18/2009 2,039 8,156

7/2/2009 4,208 16,832

7/21/2009 240 960

11/29/2011 314 1,256

5/31/2012 1,095,907 4,383,628

9/28/2012 9 18

10/30/2012 12 24

total 1,129,881 4,519,482

the convertible debentures recognized in the balance sheet is calculated as follows:



81

12/31/2013 12/31/2012

liability component at the beginning of the year 7 135,035

Finance costs - 8,848

interest paid - (6,389)

repayments (7) -

debt conversion - (137,487)

liaBility comPoNeNt at tHe eNd oF tHe year - 7

the funds from the 2nd issue were used in the company’s 2007-2010 investment Program to modernize, expand and imple-ment water and sewage treatment plants, optimize operations with improvements in the control of losses and for water supply and sewage services studies and projects, as well as in investments in new concessions and institutional development

(d) Fair value

the carrying values and fair values of borrowings and deben-tures are disclosed in Note 20.

(e) restrictive covenants

The Company has loan and financing agreements that contain restrictive covenants requiring it to maintain certain financial ratios, as specified below:

(i) Covenants in syndicated loans:

ratios limits

total debt/equity equal or less than 1.0

eBitda/debt service equal or greater than 1.55

water and sewerage connections/number of employees

equal or greater than 350

(ii) Covenants in agreements with Cef - the agreements originally signed with Unibanco, involving FGts funds, were subse-quently transferred and are being managed by ceF, as described above in item 2 “Fiduciary transfer of receivables and restricted account agreement”:

ratios limits



current liquidity above 0.9

water and sewerage connections/number of employees above 365

(iii) Covenants in agreements with Bndes-Bna/Bnd/Bne:

ratios limits

Net debt/eBitda equal or less than 3.0

eBitda/Net operating revenue equal or greater than 36%




82

(iv) Covenants in agreements with Bndes/debentures:

ratios limits


eBitda margin equal or greater than 33%

indebtedness equal or less than 70%

(v) Covenants in agreements with Kfw:

ratios limits

total liabilities/equity equal or less than 1.0

eBitda/debt repayment equal or greater than 1.5

(vi) Covenants in agreements with Cef/BB/hsBC, 5th and 6th issues of

ratios limits

Net debt/equity equal or less than 1.0



Net debt/ eBitda equal or less than 3.0

eBitda/Net operating revenue equal or greater than 36%

None of the covenants above had been breached through december 31, 2013.



83

13. prOvisiOns fOr COntinGenCies

(a) Probable contingent liabilities

Provisions are as follows:

parent cOmpanY12/31/2013 12/31/2012

coNtiNGeNcies coUrt dePosits Net BalaNce coNtiNGeNcies coUrt dePosits Net BalaNce

civil 37,164 (1,153) 36,011 30,575 (1,054) 29,521

labor 33,542 (824) 32,718 27,282 (1,104) 26,178

tax 828 (414) 414 2,209 (96) 2,113

environmental 7,331 7,331 6,120 6,120

iPi PremiUm credit - - - 16,456 - 16,456

total 78,865 (2,391) 76,474 82,642 (2,254) 80,388

parent cOmpanY1/1/2012

coNtiNGeNcies coUrt dePosits Net BalaNce

civil 24,296 (989) 23,307

labor 14,616 (1,135) 13,481

tax 2,081 (90) 1,991

environmental 5,177 5,177

Presumed credit - Pis/coFiNs 28,163 - 28,163

iPi PremiUm credit 16,456 - 16,456

total 90,789 (2,214) 88,575



84

cOnSOlIDateD12/31/2013 12/31/2012

coNtiNGeNcies coUrt dePosits Net BalaNce coNtiNGeNcies coUrt dePosits Net BalaNce

civil 37,194 (1,153) 36,041 30,575 (1,054) 29,521

labor 35,406 (1,439) 33,967 29,189 (2,625) 26,564

tax 828 (414) 414 2,209 (96) 2,113

environmental 7,331 7,331 6,120 6,120

iPi premium credit - - - 16,456 - 16,456

total 80,759 (3,006) 77,753 84,549 (3,775) 80,774

cOnSOlIDateD1/1/2012

coNtiNGeNcies coUrt dePosits Net BalaNce

civil 24,296 (989) 23,307

labor 17,619 (1,647) 15,972

tax 2,081 (90) 1,991

environmental 5,177 5,177

Presumed credit - Pis/coFiNs 28,163 - 28,163

iPi premium credit 16,456 - 16,456

total 93,792 (2,726) 91,066

the changes in provisions for contingencies were as follows:



85

PareNt comPaNy

coNsolidated

at decemBer 31, 2012 BeFore oFFsettiNG oF jUdicial dePosits 82,642 84,549

additions 31,009 32,300

Use (3,579) (4,144)

reversals (31,207) (31,946)

(-) offsetting of judicial deposits (2,391) (3,006)

at decemBer 31, 2013 76,474 77,753

PareNt comPaNy

coNsolidated

at jaNUary 1, 2012 BeFore oFFsettiNG oF jUdicial dePosits 90,789 93,792

additions 44,252 46,163

Use (4,756) (4,756)

reversals (47,643) (50,650)

(-) offsetting of judicial deposits (2,254) (3,775)

at decemBer 31, 2012 80,388 80,774

Use refers to provisions utilized or cases which were lost by the

Company and classified as accounts payable.

the provisions for contingencies recorded are considered

sufficient by management to cover probable losses on administrative and judicial proceedings involving tax, labor and civil matters, taking into account the advice of its legal advisors.

the company is party to judicial claims arising from the normal course of its business of a civil, labor and tax nature. the number of lawsuits and the amounts involved are numerous and, accordingly, only the most significant cases are described below

(i) Provisions for civil contingencies

these are related to claims for tangible damages or pain and suffering or claims for reimbursement of amounts paid to the company due to overpayment or duplicate payment. the company estimates the provisions based on the billed amounts subject to questioning and also on recent court decisions.

In 2003, the Public Prosecution Office of the State of Minas Gerais filed a public civil action questioning the tariff increase for the municipalities where the company operated in that year. the action questions the fact that the adjustment had been applied to the first bills issued after the increase date, rather than billing the consumption subsequent to the increase date. thus, the Public Prosecution Office proposed the cancellation of the tariff increase. The final decision found the original claim partially valid and required the company to return to customers the portion of the tariff increase corresponding to the consumption period preceding the increase date. the court-appointed expert informed the amounts but the case is being examined by the Prosecution Office. At December 31,



86

2013, settlement of the amount involved in the final judgment was estimated at r$ 359 (2012 - r$ 341; january 1, 2012 - r$ 324).

Environmental Protection Association Verde Gaia has been filing public civil actions against coPasa mG questioning the breach of article 2 of state law No. 12503/97, whereby water supply utilities are required to invest 0.5% of their operating revenue in environ-mental protection and conservation of the water basin explored. during the various procedural stages within the judiciary Branch, courts of first and second instances handed down favorable deci-sions to the plaintiff, and most of the cases had to be reassessed as probable losses. since the amount to be paid by the company as a result of the probable loss in these actions will correspond to 0.5% of its operating revenue from water supply services to the respective municipality involved in each action, and not the value of the matter in dispute, the provision for the 51 actions amounts to r$ 7,331 at december 31, 2013 (2012 - r$ 6,120; january 1, 2012 - r$ 5,777).

Luciene Ricardo da Silva, et al. filed a claim for tangible dam-ages and pain and suffering caused by a landslide that eventually buried the plaintiffs’ property. this landslide was caused by a ruptured clandestine supply pipeline connected to an old water reservoir. this process is currently waiting decision. in december 2013 the court requested the plaintiffs and the contractor to present their final arguments, and COPASA MG will subsequently be given such right, after which the court will hand down its decision. the related provision for the matter at december 31, 2013 amounted to r$ 2,720 (2012 - r$ 2,590; january 1, 2012 - r$ 2,454).

On October 18, 2011, Vivina Alves de Oliveira Sales et al. filed a claim for pain and suffering and tangible damages, with the court of Finance-related Proceedings of the judicial district of varginha, state of minas Gerais, resulting from damages to property suppos-edly caused by water leakage in the public water supply system, in the city of varginha. as from september 2012, the claim entered the expert report review stage. on october 29, 2013 the trial was held, which is to be followed by the sentence of the court. the provision amounted to r$ 1,537 at december 31, 2013 (2012 - r$ 1,463; january 1, 2012 - r$ 1,386).

(ii) Provisions for labor contingencies

most of the claims for which the company is directly liable relate to pain and suffering and tangible damages due to occupa-tional illnesses or accidents, overtime, commuting time, risk and health exposure premiums, prior notice payments, salary differences deriving from alleged job equality, and challenge of instances of termination for cause. the company records provisions for all labor contingencies where the outcome is considered a probable loss, which represents approximately 48.24% of the potential liabilities estimated for all labor contingencies.

the company also appears as a co-liable joint defendant, with the principal liability lying with outsourced contractors that provide maintenance and construction services. in these cases, if the claims are upheld, these contractors are usually liable for paying the award. However, if the contractors are financially unable to make



87

payment and consequently could potentially default, the company may be legally compelled to settle the labor liability. accordingly, the prospects for loss in these cases were considered probable, and at december 31, 2013 the company recorded a related provision for contingencies in the amount of r$ 1,992 (2012 - r$ 2,054; january 1, 2012 - r$ 2,594).

in addition, the company is currently a party to twenty-seven administrative proceedings initiated after an inspection by officials representing the Regional Labor Office, which resulted in infringe-ment notices on the allegation that the company failed to compute the effects of overtime worked on the employees’ weekly time-off pay, and that this would represent undue salary reduction, leading to the notices and a fine for each employee found to be in the same situation. This fine, in turn, affected the Company’s contributions to the FGTS, leading to another fine per employee. Legal counselors assess the likelihood of loss in these cases as probable, and there-fore a related provision in the amount of r$ 5,066 was recorded at december 31, 2013 (2012 - r$ 4,731; january 1, 2012 - r$ 4,408).

there is also a labor claim related to a public civil lawsuit in course at the 24th labor court of Belo Horizonte, whereby siNdÁGUa and the Public Prosecution Office claim that the dismissal policy and motivational program adopted by the company are discriminatory. in this case, COPASA MG was successful at the court of first instance, but the decision was reversed at the court of second instance. a new decision will be handed down by the superior labor court.

Nevertheless, likelihood of loss in this case is assessed as probable, and therefore a related provision in the amount of r$ 1,564 was recorded at december 31, 2013 (2012 - r$ 1,456; january 1, 2012 - r$ 1,342).

A public civil lawsuit was filed by the Public Prosecution Office, questioning the hiring of an employee for a specified period of time by the company, which is still in the initial procedural phase, with the 5th labor court of Belo Horizonte/mG. Nevertheless, the likelihood of loss in this case was assessed as probable, and therefore a provi-sion in the amount of r$ 577 was recorded at december 31, 2013 (2012 - r$ 520; january 1, 2012 - there was no provision recorded).

Finally, there is a labor claim filed by SINDÁGUA for the payment of a profit sharing difference of the Company to the employees for 2010. Such claim, filed with the 2nd Labor Court of Belo Horizonte/MG, was reviewed at the courts of first and second instances, and considered valid. a decision will be handed down by the superior Labor Court due to the interlocutory appeal to higher courts filed by coPasa mG. the likelihood of loss in this case is assessed as prob-able, and therefore a related provision in the amount of r$ 15,515 was recorded at december 31, 2013 (2012 - r$ 10,508; january 1, 2012 - r$ 53).

(iii) provisions for tax contingencies

in december 2013, following the decision of the company’s management and the studies carried out by the accounting depart-ment, the provision amounting to r$ 16,456, recorded in december



88

2010, was reversed. this provision referred to the tax effect of the exclusion of the installments paid related to the payment in install-ments program of the iPi premium credit from the calculation basis of the income tax and social contribution for 2010.

(b) Possible contingent liabilities

coPasa mG is a party to other litigation for which the likelihood of loss is estimated as possible. No provision for losses on these matters was recognized, as the company believes it has a well-founded, legitimate defense.

ongoing proceedings at various administrative and judicial levels in which the company is a defendant are as follows:

parent cOmpanY/cOnSOlIDateDNatUre 12/31/2013 12/31/2012 1/1/2012

civil 376,057 477,222 402,021

tax 34,239 37,957 55,623

total 410,296 515,179 457,644

(i) Civil

This refers to lawsuits filed by customers, State and Federal prosecutors, municipalities, associations, etc., that seek jurisdic-tional protection with respect to different issues, except for tax- and labor-related claims, which are at various court levels, judicial courts and small claims courts, and are summarized as follows:

► Individual lawsuits

The Company and its subsidiaries are parties to a significant number of individual lawsuits claiming damages for the disconnection of water service and damages caused by construction works. these lawsuits were filed in the normal course of the Company’s businesses, and involve pain and suffering and tangible damages, such as for damages to property (real estate or cars) and accidents caused during activities, among other matters. management does not believe that an unfavorable outcome in these legal actions, either individually or in the aggregate, would have a material adverse effect on results of operations, financial condition or business prospects of the Company and its subsidiaries.

► Public Civil Actions and Class Actions

the company is party to public civil actions and class actions that challenge, and seek to annul, declare void or suspend 19 of its concession agreements, namely those executed with the municipalities of almenara, Barbacena, campina verde, caratinga, cataguases, divinópolis, Frutal, Guidoval, itajubá, lavras, leopol-dina, luz, mateus leme, Nanuque, Patos de minas, ribeirão das Neves, são Gotardo, serra da saudade and três corações. except for Caratinga and São Gotardo, all other actions were classified as possible or remote losses and, accordingly, no provisions were recognized. it is important to note that a precedent of the court of appeals of the state of minas Gerais concerning a similar case and the opinions of renowned jurists are in favor of the company that the concession agreements are lawful instruments.



89

► Environmental actions

the company is a party to a number of public civil actions and class actions concerning environmental matters, which were filed against it in the normal course of its business. For the most part, these proceedings involve remediation of alleged environmental damages, construction of sewage treatment plants and investments in environmental conservation. though these claims generally do not involve significant amounts, the Company may be required to make substantial investments in the construction of sewage treatment plants or to abstain from certain business practices.

in one of these environmental class actions, the matter in dispute refers to remediation of environmental damages caused by effluents discharged in the São Francisco River. Up to date no decision has been issued for this case, which totaled r$ 76,167 at december 31, 2013 (2012 - r$ 72,529; january 1, 2012 - r$ 68,317) and whose likelihood of loss has been assessed as possible according to management.

► Formal Commitments to Action (TACs)

in the past, several tacs were executed between the company and the Prosecution Office of the State of Minas Gerais concerning environ-mental issues arising out of administrative and civil investigations. also, a public civil action was settled by means of a tac entered into with the Prosecution Office, which provides for completion of the sanitary sewage system in the municipality of Paracatu in addition to payment of a civil indemnity, provision in the amount of r$ 2,240.

in most cases, these tacs require the company to implement or improve local sanitary sewage systems or sewage treatment plants in order to prevent disposal of untreated effluents into bodies of water. the investments required for compliance with these tacs are included in the company’s investment Program.

(ii) tax

This refers to several tax claims, the most significant of which are two disputes on a tax delinquency notice filed by the Brazilian Federal revenue secretariat in april 2004 because of the company’s failure to include, upon determination of the bases for assessment of PIS/PASEP and COFINS, the financial income from foreign exchange gains on liabilities, attributed to the decrease in the US$/R$ exchange rate. The Company filed an administrative appeal, in both cases, for rejection and challenging of the tax de-linquency notice and related tax assessment. these administrative appeals, however, were denied by the Board of tax appeals.

14. eMplOyee prOfit sharinG

as resolved by the company’s Board of directors in a meeting held on march 1, 2011 and in accordance with prevailing legisla-tion, the amount to be distributed as Employee Profit Sharing is equivalent to 25% of the mandatory minimum dividends paid to stockholders, after deduction of the legal reserve, and will have as computation basis for measurement of goals achievement, the percentage of completion of the investment Program approved by



90

the company for the year, the number of connections per employee and its operating income.

the 2008/2010 collective agreement, formally approved at the meeting held on July 25, 2008 and ratified by the 2013 Collective agreement, signed on july 10, 2013, determines that the computed amount of profit sharing shall be distributed among all employees, in two equal installments (50% each), the first payable in April and the second in october.

at december 31, 2013, the company recognized r$ 32,670 as a provision for the employee profit sharing for the year (2012 - r$ 27,613).

15. inCOMe tax and sOCial COntriButiOn

(a) Current income tax and social contribution

in Brazil, income taxes include both federal income tax and social contribution. the statutory tax rates applicable to income tax and social contribution are 25% and 9%, respectively, resulting in a combined 34% rate for december 2013 and 2012. the amounts reported as income tax expenses in the income statements of the company are reconciled with the statutory tax rates as follows:

parent cOmpanY12/31/2013 12/31/2012

Profit for the year before income tax and social contribution 566,158 639,147

statutory rate 34% 34%

estimated eXPeNses at statUtory rate (192,494) (217,310)

income tax and social contribution on:

(additions)/exclusions

equity accounting (2,440) (4,830)

realization of special monetary restatement (475) (1,038)

donations and subsidies - 2,451

other (additions)/exclusions (4,359) 1,694

other reconciling items

interest on capital 47,458 54,189

tax incentives 5,947 7,420

iNcome taX aNd social coNtriBUtioN (146,363) (157,424)

current income tax and social contribution (138,681) (155,999)

deferred income tax and social contribution (7,682) (1,425)

(146,363) (157,424)

effective rate 25.9% 24.6%



91

cOnSOlIDateD12/31/2013 12/31/2012

Profit for the year before income tax and social contribution 566,221 639,400

statutory rate 34% 34%

estimated eXPeNses at statUtory rate (192,515) (217,396)

income tax and social contribution on:

(additions)/exclusions

realization of special monetary restatement (475) (1,038)

donations and subsidies - 2,451

other (additions)/exclusions (6,841) (3,303)

other reconciling items

interest on capital 47,458 54,189

tax incentives 5,947 7,420

iNcome taX aNd social coNtriBUtioN (146,426) (157,677)

current income tax and social contribution (138,744) (156,252)

deferred income tax and social contribution (7,682) (1,425)

(146,426) (157,677)

effective rate 25.9% 24.7%

(b) Deferred income tax and social contribution

deferred taxes are calculated on income tax (irPj) and social contribution (csll) losses and the temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The currently enacted tax rates of 25%

for income tax and 9% for social contribution are used to calculate deferred taxes.

deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available to utilize temporary differences and/or tax losses, considering projections of future results based on internal assumptions and future economic scenarios, which are, therefore, subject to change.

the deferred tax amounts are as follows:



92

parent cOmpanY/cOnSOlIDateD12/31/2012 comPreHeNsive

iNcome (loss)recoGNiZed iN

ProFit (loss)12/31/2013

iN assets

income tax and social contribution:

temporary differences

Provision for impairment of trade receivables and litigation provision 29,139 - 5,609 34,748

Provisions for actuarial liabilities 50,792 (39,637) (11,155) -

Provisions for cPc-related adjustments 126,118 - 10,950 137,068

Provision for tax contingencies 49,675 - (6,931) 42,744

other temporary provisions - sundry 2,526 - 6,242 8,768

total assets 258,250 (39,637) 4,715 223,328

iN liaBilities


deferred exchange variation - - - -

Provisions for cPc-related adjustments 81,844 (1,985) 12,397 92,256

Provisions for actuarial liabilities - 12,128 - 12,128

total liaBilities 81,844 10,143 12,397 104,384

total - Net 176,406 (49,780) (7,682) 118,944



93

parent cOmpanY/cOnSOlIDateD1/1/2012 comPreHeNsive iNcome

(loss)recoGNiZed iN ProFit

(loss)12/31/2012

iN assets


temporary differences

Provision for impairment of trade receivables and litigation provision 24.587 - 4.552 29.139

Provisions for actuarial liabilities 11.490 38.260 1.042 50.792

Provisions for cPc-related adjustments 112.507 - 13.611 126.118

Provision for tax contingencies 68.047 - (18.372) 49.675

other temporary provisions - sundry 2.600 - (74) 2.526

total assets 219.231 38.260 759 258.250

iN liaBilities


deferred exchange variation 1.724 - (1.724) -

Provisions for cPc-related adjustments 67.941 9.995 3.908 81.844

total liaBilities 69.665 9.995 2.184 81.844

total - Net 149.566 28.265 (1.425) 176.406

at the statutory audit Board meeting and the Board of direc-tor’s meeting held on February 21, 2013 and February 22, 2013, respectively, the technical study prepared by the strategic Planning and corporate Performance department and the Finance and inves-

tor relations director was approved, which referred to the projection of the adjusted future profitability at present value, evidencing the possibility of realization of the deferred tax asset.



94

according to this technical study, the future taxable event will allow the realization of the deferred tax asset existing at december 31, 2013, according to the following estimate:

eXPected realiZatioN oF deFerred taX asset PareNt comPaNy/coNsolidated

in 2014 10.858

in 2015 18.803

in 2016 10.515

in 2017 10.515

in 2018 10.515

after 2018 162.122

223.328

Possible significant factors that could modify the projections will be reviewed during the coming years.

16. teChniCal COOperatiOn aGreeMents

these refer mainly to funds received, after july 2006, under agreements entered into by the company with the state regional development and Urban Policy department (sedrU), the main purpose of which being the technical and financial cooperation for the expansion of the public sanitation system in the regions of vale do jequitinhonha, estrada real (in ouro Preto) and other regions in the countryside of the state of minas Gerais.

The amounts received are used in specified construction works under the terms of said agreements, and their amounts, when received, are recognized as technical cooperation agreement accounts in current liabilities, and when used, in current assets pending matching of accounts.

according to the Normative instruction (iN) 1, dated january 15, 1997, the funds from the technical cooperation agreement will be maintained in a specific bank account and withdrawals will only be allowed for the payment of expenses according to the work Program. in addition, when not being applied according to their purpose, the funds must be applied in a savings account with an official financial institution. Funds available from the technical cooperation agree-ment are recorded in “Banks and agreement investments”.



95

parent cOmpanYreceivaBles (assets) advaNces (liaBilities) Net

december 31, 2013

state 229.229 (217.981) 11.248

other 68.823 (86.618) (17.795)

total 298.052 (304.599) (6.547)

december 31, 2012

state 232.475 (262.262) (29.787)

other 10.340 (12.404) (2.064)

total 242.815 (274.666) (31.851)

january 1, 2012

state 211.111 (206.370) 4.741

other 12.446 (12.102) 344

total 223.557 (218.472) 5.085

cOnSOlIDateDreceivaBles (assets) advaNces (liaBilities) Net

december 31, 2013

state 674.359 (644.266) 30.093

other 68.823 (86.618) (17.795)

total 743.182 (730.884) 12.298



96

december 31, 2012

state 583.913 (621.583) (37.670)

other 10.340 (12.404) (2.064)

total 594.253 (633.987) (39.734)

january 1, 2012

state 484.400 (478.927) 5.473

other 12.446 (12.102) 344

total 496.846 (491.029) 5.817

17. pensiOn plan OBliGatiOns

The related amounts and information on retirement benefit obligations are as follows:

parent cOmpanY/cOnSOlIDateD12/31/2013 12/31/2012 1/1/2012


Non-current liabilities 106.010 259.071 149.285

obligations - short term 14.342 13.256 12.072

272.327 161.357

Normal contributions 12.067 11.346 47



97

eXPeNses (iNcome) recoGNiZed iN tHe statemeNt oF iNcome witH PeNsioN PlaN BeNeFits:

132.419 283.673 161.404

Benefit Plan RP1 -DB

copasa settled Plan 3.667 2.687

New copasa Plan - dc 19.729 11.873

Novo Plano copasa - cd 948 88

24.344 14.648

actuarial remeasurements recognized in the statement of comprehensive income in the year 100.485 (74.268)

accumulated actuarial gains (losses) recognized in the statement of comprehensive income for the period 23.543 (76.942)

on december 7, 1982, the company signed an agreement and became sponsor of Fundação de seguridade social de minas Gerais - FUNdasemG, whose rights and obligations were later assumed by Fundação libertas (previously Previminas), which was created with the purpose of supplementing the retirement income of participating employees, ensuring the maintenance of their benefit plan in said Foundation. The Company’s contribution matches that made by participating employees, pursuant to sup-plementary laws 108 and 109, of may 29, 2001 and its amount is determined based on actuarial reports previously prepared.

Since 2002, the supplemental Defined Benefit - DB pension plan sponsored by the Company has had an actuarial deficit, requiring increases in contributions made by the sponsoring entity

and its employees, which up to November 2008 total approximately 127%, according to the actuarial valuation statements (draas).

with the resolution of the company’s Board of directors aimed at resolving the Company’s plan deficit, and the approval, on june 23, 2010, by the National superintendency of Pension Funds (Previc), of the new pension plan strategy of the company, in the period between august 2 and october 29, 2010, all active employees, employees on leave from work and retirees had the opportunity to access a simulator to get to know the alternatives of the proposed Pension Plan and choose one of them. as from November 1, 2010, the company started to have three different plans: a) the current dB plan, which was closed to new members, but remained in effect, receiving contributions from those who



98

elected not to migrate to the other plans, b) the closed-end settled DB plan, created solely to administer employee benefits from settlement; and c) the dc plan, created to receive all members and retirees migrating from the former dB plan as well as new employ-ees and directors. once the migration process was completed, in december 2011, the dB plan had 150 active participants and 183 retirees, the settled benefit plan had 2,018 active participants and 1,364 retirees, and the dc plan had 10,621 active participants and 476 retirees.

The benefits offered in the defined benefit plan currently closed to new adhesions are: supplementary retirement benefits (due either to disability, age or years of contribution and special retirement), as well as sickness benefits, pension, prisoner dependent benefit and death benefit.

The benefits offered in the settled benefit plan are: a) active participants, self-sponsored and retirees - settled scheduled retirement benefit payments; b) beneficiaries of active participants migrated from the defined benefit plan: settled death benefit and settled death annuity; and c) nonpaying members or their benefi-ciaries: settled benefit arising from the option for the proportional deferred benefits.

The benefits offered in the defined contribution plan are: a) for members who migrated from the dB plan to this dc plan, the time in the previous plan will be computed in the vesting requirements of the new plan; and b) for new members, guaranteed benefits are

deferred proportional benefits, disability retirement, death benefit, prisoner dependent benefit and annual bonus.

the company’s actuarial assumptions are reviewed periodi-cally and may differ significantly from actual results due to changes in market and economic conditions, regulatory events, court decisions, increase or decrease in termination rates and in partici-pants’ life expectancy.

(a) Consolidated amounts

the consolidated amounts recognized by the company in the balance sheet are as follows:

12/31/2013 12/31/2012 1/1/2012

Present value of funded obligations (772.621) (1.009.615) (780.417)

Fair value of plan assets 703.355 737.288 619.059

minimum requirements (additional liability) (51.086) - -

PlaN asset (liaBility), Net (120.352) (272.327) (161.357)

The change in the defined benefit obligation is as follows:



99

12/31/2013 12/31/2012

at jaNUary 1 1.009.615 780.417

current service cost 447 (875)

interest cost 91.615 82.083

contributions by plan participants 1.894 2.000

actuarial remeasurements (295.992) 179.130

Benefits paid by the plan (34.958) (33.140)

PreseNt amoUNt oF oBliGatioN at decemBer 31 772.621 1.009.615

The change in the fair value of the benefit plan assets are as follows:

12/31/2013 12/31/2012

at jaNUary 1 737.830 619.060

actual return on plan assets (24.939) 133.878

employer contributions 23.528 16.033

employee contributions 1.894 2.000

Benefits paid (34.958) (33.141)

Fair valUe at decemBer 31 703.355 737.830

the amounts recognized in the statement of income are as follows:

12/31/2013 12/31/2012



expected return on plan assets (67.718) (66.560)

24.344 14.648

in 2013, the reversal on actuarial liabilities in the amount of r$ 176,133 was recognized in equity. this is due mainly to changes in the interest rate discount that benefit plans RP1 and COPASA Settled Plan increased from 9.25% pa to 11.79% p.a between 2012 and 2013 and 8.25% p.a for 11 94% p.a in the New copasa Plan.

(b) Analysis of amounts per benefit plan

1) Benefit plan RP1 -DB

12/31/2013 12/31/2012 1/1/2012

Present value of funded obligations (38.914) (47.774) (36.398)



The change in the defined benefit obligation is as follows:



100

12/31/2013 12/31/2012

at jaNUary 1 47.774 36.398

current service cost 45 34


contributions by plan participants 283 371

actuarial remeasurements (11.283) 11.048

Benefits paid by the plan (2.221) (3.894)

PreseNt amoUNt oF oBliGatioN at decemBer 31 38.914 47.774

the change in the fair value of plan assets is as follows:

12/31/2013 12/31/2012

at jaNUary 1 4.492 8.518

actual return on plan assets (1.202) (4.278)


employee contributions 283 371

Benefits paid (2.221) (3.894)


Estimated contributions to the defined benefit pension plan for the next financial year total R$ 8,354.


12/31/2013 12/31/2012

current service cost 45 34


expected return on plan assets (694) (1.164)

3.667 2.687

Pension plan expenses totaling r$ 3,667 (2012 - r$ 2,687) were recognized in the statement of income under “administrative expenses”.

the actual loss on plan assets in 2013 was r$ 1,202 (2012 - r$ 4,278).

investment strategies:

► the Board of trustees of Fundação libertas defines the invest-ment guidelines;

► investment objectives: achieve the minimum actuarial yield (iNPc plus technical interest), in the short and long term.

► types of allowed investments: fixed income - low-risk credit assets, shares, real estate and loans to plan members.

► types of investments not allowed: medium and high-risk credit assets, foreign currency and others according to the Brazilian legisla-tion.

► Use of derivatives: for hedging purposes.



101

Benchmarks for the investment plan assets:

► debt instruments: iNPc + 5.22% p.a.

► equity securities: average iBovesPa

► real estate: iNPc

► loans to plan members: iNPc + 8% p.a.

the main actuarial assumptions used were as follows:

prOJecteD UnIt creDIt12/31/2013 12/31/2012 1/1/2012

annual discount rate 11.79% p.a. 9.25% p.a. 10.81% p.a.

expected annual return on plan assets 11.79% p.a. 9.25% p.a. 10.81% p.a.

annual salary increase 6.95% p.a. 7.88% p.a. 7.00% p.a.

Annual increase in benefits 5.00% p.a. 5.20% p.a. 5.00% p.a.

Inflation rate 5.00% p.a. 5.20% p.a. 5.00% p.a.

mortality table at - 2000 rated down by 10% at - 2000 Basic at - 2000 Basic

disability table light média light média light média

morbidity table Gama – coPasa experience

Gama – libertas experience

Gama - libertas experience

mortality of invalids at - 1949 rated up by 100%

at - 1949 rated up by 100%

at - 1949 rated up by 100%

turnover 0.858% 0.697% 4.5% / (service time + 1)

the expected return on plan assets was determined by the plan manager, based on the estimated expected return for each type of investment, as well as plan asset allocation target, defined based on the investment policy for 2013.

Categories of assets for the RP1 plan - DB

12/31/2013 12/31/2012

available 0.01% -

realizable (pension and administrative) 23.97% 27.69%

equity instruments 0.01% 3.62%

investment funds 75.25% 64.37%

real estate investments 0.47% 3.92%

Borrowings 0.30% 0.40%

total PlaN assets (%) 100.00% 100.00%



102

Sensitivity analyses of main hypotheses

Biometric taBle iNterest rate PositioN iN

+1 oF aGe -1 oF aGe + 0.25% -0.25% 12/31/2013

amoUNt oF:

Present value of the plan actuarial obligation 38,476,124 39,338,262 37,812,661 40,072,822 38,914,413

Fair value of plan assets 9,309,173 9,309,173 9,309,173 9,309,173 9,309,173

tecHNical sUrPlUs (deFicit) oF tHe PlaN (29,166,951) (30,029,089) (28,503,488) (30,763,649) (29,605,240)

cHaNGes:

increase/decrease in actuarial obligation -1,1% 1,1% -2,8% 3,0% -

increase/decrease in plan assets - - - - -

Increase/decrease of the technical surplus (deficit) of the plan -1,5% 1,4% -3,7% 3,9% -

2) COPASA Settled Plan

12/31/2013 12/31/2012 1/1/2012



(35.612) (219.402) (123.415)

minimum requirements (additional liability) (51.085) - -




103

The changes in the defined benefit obligation during the year were as follows:

12/31/2013 12/31/2012

at jaNUary 1 945,651 728,963

interest cost 85,990 76,821

actuarial remeasurements (279,529) 168,695

Benefits paid by the plan (32,092) (28,828)

PreseNt amoUNt oF oBliGatioN at decemBer 31 720,020 945,651


12/31/2013 12/31/2012

at jaNUary 1 726.249 605.548

actual return on plan assets (21.979) 138.885


Benefits paid (32.092) (28.828)




12/31/2013 12/31/2012


expected return on plan assets (66.261) (64.948)

ProvisioN For BeNeFit PlaN 19.729 11.873

Pension plan expenses totaling r$ 19,729 (2012 - r$ 11,873) were recognized in the statement of income under administrative expenses.

the actual loss on plan assets in 2013 was r$ 21,979 (2012 - gain of r$ 138,885).


► the Board of trustees of Fundação libertas defines the invest-ment guidelines.


► types of allowed investments: fixed income - low-risk credit assets, shares, real estate and loans to plan members.

► types of investments not allowed: medium and high-risk credit assets, foreign currency and others according to the Brazilian legisla-tion.




104


► debt instruments: iNPc + 5.22% p.a.


► real estate: iNPc

► loans to plan members: iNPc + 8% p.a.

the main actuarial assumptions used were as follows

prOJecteD UnIt creDIt12/31/2013 12/31/2012 1/1/2012

annual discount rate 11.79% p.a. 9.25% p.a. 10.80% p.a.


Annual increase in benefits 5.00% p.a. 5.20% p.a. 5.00% p.a.

Inflation rate 5.00% p.a. 5.20% p.a. 5.00% p.a.

mortality table at - 2000

rated down by 10%

at - 2000 Basic

at - 2000 Basic

mortality of invalids at - 49 rated up by 100%

at - 1949 rated up by

100%

at - 1949 rated up by

100%

disability table light média light média -

morbidity tableGama – coPasa

experience

Gama - experience -


Asset categories for the settled plan

12/31/2013 12/31/2012

available 0,01% 0,01%

Government securities 11,74% 0,00%

realizable (pension and administrative) 11,64% 12,36%

equity instruments 0,01% 5,13%

investment funds 68,88% 75,77%

real estate investments 6,95% 5,88%

Borrowings 0,76% 0,85%

total PlaN assets (%) 100,00% 100,00%



105


Biometric taBle iNterest rate PositioN iN

+1 oF aGe -1 oF aGe + 0.25% -0.25% 12/31/2013

amoUNt oF:

Present value of the plan actuarial obligation 708,956,538 730,704,728 702,237,293 738,583,413 720,020,288

Fair value of plan assets 684,408,343 684,408,343 684,408,343 684,408,343 684,408,343

tecHNical sUrPlUs (deFicit) oF tHe PlaN (24,548,195) (46,296,385) (17,828,950) (54,175,070) (35,611,945)

cHaNGes:

increase/decrease in actuarial obligation -1,5% 1,5% -2,5% 2,6% -

increase/decrease in plan assets - - - - -

Increase/decrease of the technical surplus (deficit) of the plan -31,1% 30,0% -49,9% 52,1% -

3) New COPASA plan - DC

12/31/2013 12/31/2012 1/1/2012




The changes in the defined contribution obligation for the year were as follows:

12/31/2013 12/31/2012

at jaNUary 1 16.190 15.056




actuarial (gains) losses (5.180) (613)

Benefits paid by the plan (645) (418)

PreseNt amoUNt oF oBliGatioN at decemBer 31 13.687 16.190



106



12/31/2013 12/31/2012

at jaNUary 1 7.089 4.993

actual return on plan assets (1.758) (729)



Benefits paid (645) (418)



31/12/2013 31/12/2012



expected return on plan assets (763) (624)

948 88

Pension plan expenses totaling r$ 948 (2012 - r$ 88) were recognized in the statement of income under administrative expenses.

the actual loss on plan assets was r$ 1,758 (2012 - r$ 729).


► The Board of Trustees of Fundação Libertas defines the investment guidelines.


► Types of allowed investments: fixed income - low-risk credit assets, shares, real estate and loans to plan members.

► types of investments not allowed: medium and high-risk credit assets, foreign currency and others according to the Brazilian legislation.



► debt instruments: cdi


► real estate: iGP-m + 6% p.a.

► loans to plan members: iPca + 6% p.a.

the actual return rate on the plan assets in 2013 was 11.94% p.a.

the main actuarial assumptions were as follows:



107

prOJecteD UnIt creDIt

12/31/2013 12/31/2012 1/1/2012

annual discount rate 11.94% p.a. 8,25% p.a. 10,59% p.a.


annual salary increase 5.00% p.a. 7,88% p.a. 7,00% p.a.

Annual increase in benefits 5.00% p.a. 5,20% p.a. 5,00% p.a.

Inflation rate 5.00% p.a. 5,20% p.a. 5,00% p.a.

mortality table at-2000 Basic at-2000 Basic at-2000 Basic

disability table light média light média light média


Asset categories for the new plan

12/31/2013 12/31/2012

available 0.01% 0.01%

realizable (pension and administrative) 1.46% 2.4%

equity instruments 0.01% 5.00%

investment funds 88.01% 83.94%

real estate investments 7.17% 5.50%

Borrowings 3.34% 3.15%

total PlaN assets (%) 100.00% 100.00%



108


Biometric taBle salary GrowtH iNterest rate PositioN iN

+1 oF aGe -1 oF aGe + 0.25% -0.25% + 0.25% -0.25% 12/31/2013

amoUNt oF:

Present value of the plan actuarial obligation 14.044.716 13.354.474 13.842.422 13.535.168 13.522.895 13.855.680 13.687.217

Fair value of plan assets 9.638.482 9.638.482 9.638.482 9.638.482 9.638.482 9.638.482 9.638.482

tecHNical sUrPlUs (deFicit) oF tHe PlaN (4.406.234) (3.715.992) (4.203.940) (3.896.686) (3.884.413) (4.217.198) (4.048.735)

cHaNGes:

increase/decrease in actuarial obligation 2,6% -2,4% 1,1% -1,1% -1,2% 1,2% -

increase/decrease in plan assets - - - - - - -

Increase/decrease in technical surplus (deficit) of the plan 8,8% -8,2% 3,8% -3,8% -4,1% 4,2% -

18. equity and dividends

(a) Capital

the company is authorized to increase its capital up to the limit of r$ 3 billion after approval of the Board of directors. the company’s subscribed and paid-up capital amounts to r$ 2,773,985,614.66, divided into 119,684,430 registered common shares with no par value.

the company is allowed to issue common shares, debentures convertible into common shares and subscription bonus within the capital limit authorized by the Board of directors. capital increases

over the authorized capital are subject to approval at General meetings of stockholders with capital increase proposals submitted by the Board of directors. this procedure is adopted when payment is made with assets.

concerning the company’s capital increases, the stockholders may exclude at the General meetings the preferential rights or reduce the period for them to be exercised in the issue of shares, debentures convertible into shares and subscription bonus, whose allocation is made through trading in stock markets or public subscription, according to the related legislation, and within the authorized capital limit.



109

stockholders have preference for the subscription of capital increase according to the number of shares they hold, pursuant to articles 171 and 172 of law 6,404/76.

in addition, in accordance with the constitution of the state of minas Gerais, if the company’s controlling stockholder - that is, the state of minas Gerais - includes coPasa mG in a privatization process, such process will only occur after a public referendum approves it. after the privatization is approved through this public referendum, the state legislature of the state of minas Gerais will enact a law authorizing the transfer of ownership control by the state, according to the pertinent state legislation.

the company is controlled by the Government of minas Gerais, which holds 51.13% of the company’s shares. the company holds 357 thousand common shares of its own stock in treasury, amount-ing to r$8,576, mostly acquired from the state of minas Gerais through transactions related to the settlement of debts originating from the provision of water supply and sewage services and techni-cal cooperation agreements. the company has the right to reissue these shares on a subsequent date.

the remaining 48.6% of the shares, which represents the Company’s free float, is held by various stockholders.

at december 31, 2013, the capital is held as follows:

stockHolders NUmBer oF sHares PerceNtaGe oF iNterest

state of minas Gerais 61.189 51,13

Directors and officers 2 -

other stockholders 58.136 48,57

treasury shares 357 0,30

total 119.684 100,00

(b) revenue reserves

(i) Legal reserve

The legal reserve is credited annually with 5% of the profit for the year and cannot exceed 20% of the capital. the purpose of the legal reserve is to protect the company’s capital, and it can only be used to offset losses and increase capital.

(ii) tax incentive reserve

the reserve represents the allocation of tax incentives deriving from government grants and donations appropriated to the state-ment of income as from january 1, 2008.

In 2013, no amount was recorded in profit (loss) relating to the incentive for fulfillment of the stages of the pollutant load reduction goals at company’s sewage treatment plants (Note 11), issued by the aNa, using Prodes funds (r$ 7,208 in 2012).



110

(iii) Profit retention

Management proposes retaining profits of R$ 263,582 (2012 - r$ 295,933; january 1, 2012 - r$ 284,379) for future investments by the company, in line with the “action plan” approved by the Board of directors, to be carried out in the long term.

(c) Carrying value adjustments

carrying value adjustments refer to:

(i) actuarial gains and losses: calculated in conformity with cPc 33 (r1) and ias 19 (r1) (Note 17). at december 31, 2013, this bal-ance represented receivables of r$ 23,543 (payable in 2012 - r$ 76,942 and january 1, 2012 - r$ 2,673).

(ii) monetary restatement of assets: application of ias 29 for the period during which it was considered that Brazil had a hyper-inflationary economy. This restatement is amortized based on the useful lives of property, plant and equipment items and intangible assets against retained earnings. at december 31, 2013, this balance represented receivables of r$ 22,364 (2012 - r$ 26,723; january 1, 2012 - r$ 31,927).

(iii) Fair value of available-for-sale financial assets: fair value of the investments without significant influence over Foz Jeceaba. at december 31, 2013, this balance represented receivables of r$ 17,713 (2012 - r$ 4,653; january 1, 2012 - r$ 2,164).

(d) Dividends and interest on capital to stockholders

Under the bylaws, stockholders of any class are entitled to a mandatory minimum dividend of 25% of the profit for the year, adjusted for the deduction or addition of the amounts specified in items i, ii and iii of article 202 of law 6,404/76. the approved dividend amounts bear no interest and any dividends not claimed within three years after the date when they are made available to the stockholders become time-barred in favor of the company.

minimum mandatory dividends at december 31, 2013 and 2012 and january 1, 2012 were as follows:

12/31/2013 12/31/2012 1/1/2012

Profit for the year (restated) 419.795 481.723 470.437

legal reserve - (5%) (20.990) (24.346) (23.522)

tax incentive reserve - (7.208) (9.409)

Profit for the period 398.805 450.169 437.506

maNdatory miNimUm divideNd - 25% 99.701 112.542 109.377

as resolved at the extraordinary General meeting of stockhold-ers held on april 28, 2009, the company’s Board of directors has the power to define the annual percentage to be paid as interest on capital. accordingly, the company’s Board of directors approved on march 18, 2013 the dividend distribution for 2013 as interest on capital equivalent to 35% of the profit for the year adjusted by the



111

deduction or addition of the amounts specified in Items I, II and III of article 202 of law 6,404/76, which amounted to r$ 139,582 (r$ 1.17 per share), net of withholding income tax amounting to r$ 9,831. in 2012, the payment of interest on capital amounted to r$ 159,381 (r$ 1.34 per share), net of withholding income tax amounting to r$ 9,678. in 2011, the payment of interest on capital amounted to r$ 153,127 (r$ 1.33 per share), net of withholding income tax amounting to r$ 11,224.

as provided for in article 9 of law 9,249/95, and based on the long-term interest rate (tjlP), interest on capital was recorded as finance costs deductible for income tax and social contribution purposes, thereby generating a tax benefit of R$ 47,458. Under Brazilian corporation law, interest on capital is disclosed as a debit to retained earnings in equity.

changes in the balance of interest on capital payable are as follows:

12/31/2013 12/31/2012 1/1/2012

iNterest oN caPital PayaBle at tHe BeGiNNiNG oF tHe year 46.469 26.921 66.859

Proposed interest on capital 139.582 159.381 153.127

withholding income tax (irrF) levied on interest on capital (12.971) (7.229) (15.627)

interest on capital paid in the year (141.434) (133.712) (177.438)

transfer to recoverable taxes - 1.108 -

BalaNce oF iNterest oN caPital iN cUrreNt liaBilities 31.646 46.469 26.921

(e) retained earnings

at jaNUary 1, 2013

Profit for the year 419,795

minimum mandatory dividend and interest on capital paid relating to 2013 (139,582)

transfer to legal reserve (20,990)

Allocation to profit retention reserve (263,582)

tax incentive reserve -

Monetary adjustments on fixed assets 4,359

at decemBer 31, 2013 -

at jaNUary 1, 2012

Profit for the year (restated) 481.723

minimum mandatory dividend and interest on capital paid relating to 2012 (159.381)

transfer to legal reserve (24.346)

Allocation to profit retention reserve (restated) (295.993)

tax incentive reserve (7.208)

Monetary adjustments on fixed assets 5.205

at decemBer 31, 2012 -



112

(f) earnings per share

Basic

Basic earnings per share are calculated by dividing the profit attributable to the stockholders of the company by the weighted average number of common shares outstanding during the year, excluding common shares purchased by the company and held as treasury shares (item “a” of this Note).

parent cOmpanY/cOnSOlIDateD12/31/2013 12/31/2012

Profit attributable to stockholders of the Company 419.795 481.723

weighted average number of outstanding common shares (thousands) 119.327 119.327

Basic earNiNGs Per sHare - r$ 3,52 4,04

Diluted

diluted earnings per share at december 31, 2013 and 2012 were equal to basic earnings per share, because at december 31, 2012 there were only 119 debentures left which are potentially convertible, whose impact on diluted earnings is immaterial.

19. seGMent infOrMatiOn

The Company’s management defined the operating segments used for the strategic decision-making as water supply and sewage treatment and sale of products.

cOnSOlIDateD

2013

water aNd sewaGe

sale oF ProdUcts

FiNaNcial statemeNt

BalaNce

Gross sales and services revenue 4.039.456 3.500 4.042.956

deductions from gross revenue (309.042) (517) (309.559)

Net sales and services revenue 3.730.414 2.983 3.733.397

costs and selling and administrative expenses (2.995.402) (11.594) (3.006.996)

Operating profit before other net operating expenses 735.012 (8.611) 726.401

other operating expenses, net (120)

Finance result, net (160.060)

Profit before taxes 566.221



113

cOnSOlIDateD2012

water aNd sewaGe

sale oF ProdUcts

FiNaNcial statemeNt BalaNces

Gross sales and services revenue 3.743.705 3.684 3.747.389

deductions from gross revenue (297.990) (1.223) (299.213)

Net sales and services revenue 3.445.715 2.461 3.448.176

costs and selling and administrative expenses (2.675.193) (13.749) (2.688.942)

Operating profit before other net operating expenses 770.522 (11.288) 759.234

other operating expenses, net 3.869

Finance result, net (123.703)

Profit before taxes 639.400

20. finanCial risK ManaGeMent

the company uses short-, medium- and long-term planning tools in order to evaluate the management of its financial risks and thus guide the decision-making process, so that actions, when needed, can be taken in a timely manner. in the short term, the “daily schedule of cash flow” is used, which covers up to 90 days. in the medium term (360 days), the corporate budget is used, which reflects its action plan, both for operational and investment purposes. in the long term, the “statement of income” is used, which reflects its strategic objectives for a period of 10 years and comprises an economic and a financial statement.

20.1. Financial risk management

the corporate risk management is aligned with both cor-porate Governance and the Business Plan, which establishes the company’s strategic objectives. the Finance department monitors financial risks in order to assess credit risks that may impair the liquidity and profitability of the Company, recommending strategies to mitigate such risks. the Finance department seeks to predict the Company’s cash flow for 12 months, considering the economic scenario disclosed by the financial institutions with which it works.

the main risks to which the company is exposed are the following:



114

(a) Market risk

Market risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate due to changes in market prices. market prices are subject to the following risks: interest rate, foreign exchange, commodities price and other price risks, such as share price risk. Financial instruments affected by market risk include loans payable, deposits and available-for-sale instruments.

the sensitivity analyses in the following sections refer to the position at december 31, 2013 and 2012.

The sensitivity analyses considered the net debt amount, fixed to floating interest rate ratio, and the percentage of financial instru-ments in foreign currency, all of which are constant values.

these analyses did not include changes from the impact of market variables on the book value of pension and post-employment plan liabilities, provisions and non-financial assets and liabilities from foreign transactions.

the sensitivity analysis of the corresponding item in the state-ment of income is the effect of assumed changes in the underlying market risks. This is based on the financial assets and liabilities held at december 31, 2013 and 2012.

(b) Interest rate risk

the company is exposed to the risk of increase in foreign inter-est rates, with impact on borrowings in foreign currency at floating interest rates (mainly the basket of interest rates on agreements

related to the Federal Government - Bonus). However, foreign funds are not very significant to the Company’s capital structure.

the company is exposed to the risk of increase in domestic interest rates due to its net liabilities indexed to tjlP, iPca and cdi variations.

various scenarios are simulated taking into consideration refinancing, renewal of existing positions and borrowings. Based on those scenarios, the company determines a reasonable change in the interest rate and calculates its impact on the results. these scenarios consider only the main financial assets and liabilities.

(i) interest rate sensitivity

the company analyzed the sensitivity to the effects of possible changes in interest rates to which borrowings payables are subject. With all other variables held constant, the Company’s profit before tax is affected by the impact on loans payable subject to floating rates, as shown below:



115

parent cOmpanYiNcrease/decrease iN Basis PoiNts eFFect oN ProFit BeFore taXes (r$)

31/12/2013

+ 0.5% (12,329)

- 0.5% 12,329

31/12/2012

+ 0.5% (12,252)

- 0.5% 12,252

cOnSOlIDateDiNcrease/decrease iN Basis PoiNts eFFect oN ProFit BeFore taXes (r$)

12/31/2013

+ 0,5% (12.333)

- 0,5% 12.333

12/31/2012

+ 0,5% (12.252)

- 0,5% 12.252

the change in base points assumed in the analysis of sensitiv-ity to interest rates is based on current interest rates prevailing in the market, indicating volatility significantly higher than in previous years.

(c) Foreign exchange risk

the company is exposed to the risk of increase in exchange rates, mainly Us dollar and euro exchange rates against the Brazilian real, directly impacting debt, income and cash flow.

Financing in foreign currency is intended for specific works to improve and expand water supply and sewage collection and treat-ment systems. the company does not hedge against currency risks, since foreign currency debt is small in relation to total debt.

the company’s exposure in foreign currency, represented by its Us dollar- and euro-denominated debt, amounted to r$ 127,332 at december 31, 2013 (2012 - r$ 62,387; january 1, 2012 - r$ 55,750), i.e., 4.0% of its total debt (2012 and january 1, 2012 - 2.0%). at december 31, 2013, the company had guarantees of



116

r$ 42,518 (2012 - r$ 40,527; january 1, 2012 - r$ 35,192) for a portion of foreign-currency borrowings (Note 12).

(i) foreign exchange sensitivity

The Company analyzed the sensitivity to the effects of fluctua-tions in the Us dollar and euro exchange rates on the company’s income and equity. with all other variables held constant, the Company’s profit before taxes is affected by the impact on borro-wings payable subject to foreign exchange variations, as shown below:

cHaNGe iN Us dollar rate

eFFect oN ProFit BeFore taXes (iN reais)

12/31/2013 + 20% (25.363)

- 20% 25.363

+10% (12.682)

-10% 12.682

12/31/2012 + 20% (12.363)

- 20% 12.363

+10% (6.181)

-10% 6.181

changes in income and equity derive from changes in Us dollar borrowings.

(d) Credit risk

credit risk is the risk that the counterparty to a transaction

will not fulfill an obligation established in a financial instrument or contract with a customer, leading to a financial loss. The Company is exposed to credit risk in its operating and financial activities, including deposits in banks and other financial institutions, foreign exchange transactions and other financial instruments.

(i) Accounts receivable

the credit risk of customers is subject to the procedures, controls and policies established by the company with regard to this risk. credit limits are established for all customers based on internal classification criteria. The majority of the sales is spread among a large number of customers. For these customers, credit risk is minimal as a result of the portfolio spread and its control procedures over such risk. impairment of trade receivables is adequately covered by a related provision.

(ii) Financial instruments and demand deposits

For credit risk, due to the possibility that the company may incur losses on its deposits with financial institutions, in October 2012, the Financial investment committee was created, which analyzes, in accordance with the company’s Financial investment Policy, each institution with which the company will do business, according to pre-established criteria. surplus funds are invested only in approved counterparties and within the limit set for each. the credit limit of counterparties is reviewed annually, or when there is any change in macroeconomic scenarios of the Brazilian economy.



117

The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings or to historical information about counterparty default rates:

parent cOmpanY12/31/2013 12/31/2012 01/01/2012

current accounts, bank deposits and short-term financial investments (*)

aaa 223.264 469.309 94.559

aa 20.766 26.933 63.469

a 16.290 65 26.520

B (Baa, Ba e BBB) 161 118 56.988

total 260.481 496.425 241.536

note: (*) According to risk rating agency Moody’s classification.

cOnSOlIDaDO12/31/2013 12/31/2012 01/12/2012

current accounts, bank deposits and short-term financial investments (*)

aaa 224.721 470.585 95.394

aa 20.766 26.933 63.469

a 16.290 65 26.520

B (Baa, Ba e BBB) 161 118 56.988

total 261.938 497.701 242.371

note: (*) According to risk rating agency Moody’s classification.

(e) Liquidity risk

the company monitors the risk of cash shortage using a rolling liquidity planning tool.

Prudent liquidity risk management implies maintaining cash and marketable securities sufficient to meet short-term require-ments and to ensure the company’s investment program.

management monitors the company’s liquidity level by considering its expected cash flows as well as its cash and cash equivalents (Note 6). Generally, this is performed by the company’s operating units, in accordance with the pre-established practice and budget limits. these limits vary by location as they consider the liquidity of the market in which the entity operates. also, the liquidity management Policy adopted by the company requires projection of cash flows and analysis of the level of net assets required to meet these projections, monitoring of liquidity ratios in the balance sheet in relation to internal and external regulatory requirements, and maintenance of debt financing plans.

The following table analyzes financial liabilities settled at net value, by maturity, corresponding to the remaining period in the bal-ance sheet in relation to the contractual maturity date. the amounts disclosed in the table are the contractual undiscounted cash flows.



118

MATuRITIeS (I)UP to 1 year BetweeN 1 aNd 3 years BetweeN 3 aNd 5 years over 5 years

at december 31, 2013

Principal 443.577 789.875 599.376 1.295.489

interest 27.949 - - -

BorrowiNGs 471.526 789.875 599.376 1.295.489

trade aNd otHer PayaBles 149.680 29.918 32.751 39.148

at december 31, 2012

Principal 331.820 782.484 606.133 1.307.756

interest 31.185 - - -

BorrowiNGs 363.005 782.484 606.133 1.307.756


at january 1, 2012

Principal 521.288 660.715 431.026 1.174.536

interest 22.394 - - -

BorrowiNGs 543.682 660.715 431.026 1.174.536


the company does not engage in any operations with derivative instruments.

the following table sets out collaterals pledged by the company for financing agreements.

note: (i) The maturity analysis applies solely to financial instruments and, therefore, legal and statutory obligations, such as taxes, dividends, interest on equity, supplemental pension plan, provisions, etc., are not included.



119

iNstitUtioN collateral (committed reveNUe) 12/31/2012 12/31/2012 01/01/2012

ceF until 1998 and National treasury 10% receivables 24,920 24,792 22,459

ceF 2003, 2004, 2007, 2008 and 2009 committed revenue equal to 3 times the monthly debt service 11,234 11,234 11,234

Unibanco 2002 and syndicated agreements 2004 r$ 17 mm annually restated by iPca, since july 4, 2006 24,546 23,097 21,956

syndicated agreements ii - 2006 r$ 15.3 mm monthly restated by iPca, since july 4, 2006 22,091 20,787 19,760

BNdes 2004 (i issue of debentures) 300 mm r$ 18 mm annually restated by iPca, since january 2, 2009 22,511 21,291 20,115

BNdes 2007 (iii issue of debentures) 450 mm r$ 18 mm annually restated by iPca, since october 12, 2007 23,738 22,595 21,215

BNdes Pac 2007/2008 r$ 26 mm annually restated by iPca, since may 20, 2008 34,289 32,449 30,907

BNdes 181 mm r$ 7 mm annually restated by iPca, since april 22, 2010 8,345 7,881 7,498

BNdes simple debentures 740 mm r$ 32 mm annually restated by iPca, since october 1, 2010 38,233 36,367 34,487

BNdes 288 mm committed revenue equal to 4.5% of the debit balance of debentures 12,960 12,960 13,070

kfw committed revenue equal to 1 time the monthly debt service 6,000 6,000 -

ceF - Financing 2011- 2012 committed revenue equal to 3 times the monthly debt service 6,189 6,189 -

(f) Risk of early maturity of debts

the company has borrowing agreements with covenants, usually applicable to these types of transactions, related to compli-ance with economic and financial ratios, cash generation and other indicators. in order to minimize such risk and monitor the level of indebtedness, the company has, included in its bylaws, an indebted-ness Policy with conditions more restrictive than the covenants applicable to its loan and financing agreements (Note 12).

(g) Risk of non-renewal of concessions

the company has concessions for water supply and sanitary sewage services, and management expects that they will be renewed by the concession authority (municipalities). if the conces-sions are not renewed, current levels of profitability and activity may be impacted.

The Company has not been significantly affected by occur-rences related to these risks.



120

20.2. Capital management

the primary objective of the company’s capital management is to ensure that it maintains a strong credit rating and a sound capital base in order to support its business and maximize stockholder value.

the company manages its capital structure in accordance with its indebtedness Policy, which establishes in its bylaws, that total liabilities of the company shall be equal to or less than equity.

No changes were made in the objectives, policies or processes in the years ended december 31, 2013 and december 31, 2012.

similar to other companies in the sector, the company moni-tors its capital based on gearing and debt ratios. the gearing ratio corresponds to the net debt expressed as a percentage of total capital. Net debt, in turn, corresponds to total loans (including short- and long-term loans, debentures and other current and non-current debts, as disclosed in the consolidated balance sheet), less cash and cash equivalents. total capital is calculated as equity, as shown in the consolidated balance sheet, plus net debt.

in 2013, the company’s strategy, which remained unaltered in relation to 2012, was that of maintaining the financial leverage and debt ratios below 100%. total liabilities to equity ratio at december 31, 2013 and december 31, 2012 and january 1, 2012 can be summarized as follows:

parent cOmpanY12/31/2013 12/31/2012 01/01/2012

total borrowings and debentures 3.156.267 3.059.378 2.809.959

less: cash and cash equivalents (260.481) (496.425) (241.536)

Net deBt 2.895.786 2.562.953 2.568.423

total equity 5.337.359 4.934.888 4.533.095

total caPital 8.233.145 7.497.841 7.101.518

Gearing ratio - % 35 34 36

third-party capital index - % 54 52 57

cOnSOlIDateD12/31/2013 12/31/2012 12/31/2012

total borrowings and debentures 3.157.700 3.059.378 2.809.959

less: cash and cash equivalents (261.938) (497.701) (242.371)

Net deBt 2.895.762 2.561.677 2.567.588

total equity 5.337.359 4.934.888 4.533.095

total caPital 8.233.121 7.496.565 7.100.683

Gearing ratio - % 35 34 36

third-party capital index - % 54 52 57



121

20.3. Fair value estimation

the carrying values of trade receivables and payables, less an impairment provision in the case of trade receivables, are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flow at the current market interest rate that is available to the Company for similar financial instruments.

(a) Financial instruments measured in the balance sheet at fair value

the company and its subsidiaries adopted cPc 40/iFrs 7 for financial instruments that are measured in the balance sheet at fair value. this requires the disclosure of fair value measurements according to their level of the following hierarchy:

► Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).

► inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).

► inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

the following table presents the parent company and consoli-dated assets and liabilities measured at fair value at december 31, 2013 and 2012 and january 1, 2012:

parent cOmpanY/cOnSOlIDateD12/31/2013

assets

availaBle-For-sale FiNaNcial assets total assets

Prices quoted in active markets (level 1) - -

Other significant observable data (level 2) - -

Significant data not observable (level 3) 48.638 48.638

total BalaNce 48.638 48.638

parent cOmpanY/cOnSOlIDateD12/31/2012

assets








122

cOntrOlaDOra/cOnSOlIDaDO01/01/2012

assets






The fair value of financial instruments traded in active markets (such as trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. a market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. at december 31, 2013 and 2012 and january 1, 2012, the company and its subsidi-aries did not have financial instruments whose fair value had been measured at level 1.

The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is deter-

mined by using valuation techniques. these valuation techniques maximize the use of observable market data when available, and rely as little as possible on Company-specific estimates. If all signifi-cant inputs required to fair value an instrument are observable, the instrument is included in level 2. at december 31, 2013 and 2012 and january 1, 2012, the company and its subsidiaries did not have financial instruments whose fair value had been measured at Level 1.

If one or more of the significant inputs is not based on observ-able market data, the instrument is included in level 3.

Specific valuation techniques used to value financial instru-ments include:

► Quoted market prices or dealer quotes for similar instruments.

► Other techniques, such as discounted cash flow analysis, are used to determine the fair values of the remaining financial instru-ments.

(b) Fair value of borrowings

the carrying amounts compared to the respective fair values are as follows:



123


amoUNts

carryiNG amoUNt

Fair valUe carryiNG amoUNt

Fair valUe

12/31/2013 12/31/2013 12/31/2013 12/31/2013

Bank borrowings and financing 1.388.728 1.430.504 1.390.161 1.431.932

simple debentures 1.767.539 1.727.836 1.767.539 1.727.836

total 3.156.267 3.158.340 3.157.700 3.159.768

PareNt comPaNy/coNsolidated

amoUNts

carryiNG amoUNt

Fair valUe carryiNG amoUNt

Fair valUe

12/31/2012 12/31/2012 1/1/2012 1/1/2012

Bank borrowings and financing 1.381.873 1.454.429 1.619.595 1.719.016

simple debentures 1.677.498 1.650.652 1.055.329 1.012.141

convertible debentures 7 7 135.035 134.532

total 3.059.378 3.105.088 2.809.959 2.865.689

the market values of liabilities are calculated on the projected debit balances, restated at their contractual rates over the remain-ing months before payment. these values are adjusted to present value using the following market rates:



124

parent cOmpanY/cOnSOlIDateDFiNaNciNG liNes coNtractUal rate Period (moNtHs) market rate commeNts

state government/BdmG 9.03% 15 7.33% ceF rate, since there is no similar one

ceF/FGts 9.24% 132 7.33% Quoted ceF rate in december 2013

National treasury 5.38% 1 7.33% ceF rate, since there is no similar one

BNdes/BNe 6.57% 97 6.55% Quoted BNdes/BNe rate in december 2013

FiName 3.51% 91 3.00% Quoted FiName rate in december 2013

Federal government 4.37% 124 7.33% ceF rate, since there is no similar one

simple debentures 7.94% 88 8.75% Quoted BNdes/BNd rate in december 2013

kfw 2.07% 121 2.07% Quoted kfw rate in december 2013

FiName - aGmm 2.50% 109 3.00% Quoted FiName rate in december 2013

Banco do Brasil - copanor 8.69% 26 7.33% ceF rate, since there is no similar one



125

21. finanCial instruMents By CateGOry

(a) parent company

12/31/2013

loaNs aNd receivaBles assets availaBle For sale total

assets

cash and cash equivalents 260.481 - 260.481

trade receivables 909.685 - 909.685

Bank account - agreements 36.688 - 36.688

restricted investments 97.380 - 97.380

Financial assets - concession agreements 494.836 - 494.836

equity securities - 48.638 48.638

receivables from subsidiaries 109.790 - 109.790

other receivables (excluding prepayments) 161.075 - 161.075

total 2.069.935 48.638 2.118.573

12/31/2013

otHer FiNaNcial liaBilities total

liabilities

Borrowings and debentures 3.156.267 3.156.267

trade payables 135.338 135.338

Financial leasing 7.769 7.769

total 3.299.374 3.299.374



126

12/31/2012


assets


marketable securities 20.135 - 20.135








total 2.205.094 28.850 2.233.944

12/31/2012


liaBilities



total 3.216.775 3.216.775



127

1/1/2012


assets









total 1.826.505 25.079 1.851.584

1/1/2012


liaBilities



total 2.918.027 2.918.027



128

(b) Consolidated

12/31/2013


assets








total 1.964.344 48.638 2.012.982

12/31/2013


liaBilities



Financial leasing 7.769 7.769

total 3.321.573 3.321.573



129

12/31/2012


assets


marketable securities 20.135 - 20.135







total 2.124.509 28.850 2.153.359

12/31/2012


liaBilities



total 3.231.818 3.231.818



130

1/1/2012


assets








total 1.757.752 25.079 1.782.831

1/1/2012


liabilities



total 2.921.453 2.921.453



131

22. revenue

the reconciliation between gross and net revenue is as follows:

parent cOmpanY2013 2012

Gross revenue from water supply and sewage services 3.315.144 3.064.739

construction revenue 707.082 660.725

total Gross reveNUe 4.022.226 3.725.464

taxes on sales and unconditional discounts granted (307.408) (296.374)

Net reveNUe 3.714.818 3.429.090

cOnSOlIDateD2013 2012

Gross revenue from water supply and sewage services 3.332.374 3.082.980

Gross sales revenue 3.500 3.684

construction revenue 707.082 660.725

total Gross reveNUe 4.042.956 3.747.389

taxes on sales and unconditional discounts granted (309.559) (299.213)

Net reveNUe 3.733.397 3.448.176

the company’s other operating income for the years ended december 31, 2013 and 2012 is set out below:


reversal of non-deductible provision 33.058 57.678

recovery of accounts written-off 66.193 35.732

other income 9.476 28.920

total otHer oPeratiNG iNcome 108.727 122.330


reversal of non-deductible provision 33.796 60.728

recovery of accounts written-off 66.582 36.340

other income 11.355 30.453

total otHer oPeratiNG iNcome 111.733 127.521



132

23 expenses By nature


2013 2012 2013 2012

salaries and social charges 1.011.363 904.002 1.022.332 911.616

materials 118.939 105.436 121.270 107.664

outsourced services 615.020 536.949 624.842 547.803

General expenses 123.498 109.263 125.256 113.186

depreciation and amortization 428.034 377.342 430.618 379.930

impairment of trade receivables 73.672 67.019 75.649 68.313

Provision for obsolescence - 221 353 221

construction costs (*) 690.573 645.645 690.573 645.645

cost of sales - - 857 3.160

litigation provision 31.009 44.252 32.300 47.049

equity accounting 7.177 13.320 - -

Employee profit sharing 32.670 27.613 32.670 27.613

other 50.707 48.341 46.883 50.910

oPeratiNG eXPeNses 3.182.662 2.879.403 3.203.603 2.903.110

(-) taX credits (84.044) (89.681) (84.754) (90.516)

Net oPeratiNG eXPeNses 3.098.618 2.789.722 3.118.849 2.812.594

costs 2.322.956 2.077.253 2.341.918 2.097.045

eXPeNses 775.662 712.469 776.931 715.549

note: (*) Breakdown of construction costs.



133

parent cOmpanY/cOnSOlIDateD2013 2012

salaries and social charges 28.756 26.083

materials 61.212 94.932

equipment 48.924 69.963

outsourced services 487.650 393.901

Financing costs 56.149 60.275

other 7.882 491

total coNstrUctioN costs 690.573 645.645

24. eMplOyee Benefit expenses


salaries 557.100 505.129

social security costs 170.379 154.578

FGts (Government severance indemnity Fund for employees) 64.999 48.008

Pension plan contributions 37.282 33.683

workers' meal program 116.632 103.646

Healthcare plan 46.785 41.446

Other benefits 18.186 17.512

total 1.011.363 904.002

Number of employees (unaudited) 11.864 11.611


salaries 564.698 510.926

social security costs 171.927 155.641

FGts (Government severance indemnity Fund for employees) 65.434 48.340

Pension plan contributions 37.282 33.683

workers' meal program 117.854 103.883

Healthcare plan 46.908 41.544

Other benefits 18.229 17.599

total 1.022.332 911.616

Number of employees (unaudited) 12.241 11.912

25. finanCe inCOMe and COsts

Finance income (costs) can be summarized as follows:



134


interest income 9.907 21.696

Income from financial investments 37.601 58.710

monetary and foreign exchange gains 14.200 51.645

Capitalization of financial assets/other 24.126 2.768

total iNcome 85.834 134.819

Interest on financing (181.481) (194.447)

monetary and foreign exchange costs (58.036) (55.603)

other expenses (5.086) (7.320)

total costs (244.603) (257.370)

FiNaNce resUlt (158.769) (122.551)


interest income 8.780 21.903

Income from financial investments 37.646 58.717

monetary and foreign exchange gains 14.136 50.362

Capitalization of financial assets/other 24.125 2.774

total iNcome 84.687 133.756

Interest on financing (181.544) (194.447)

monetary and foreign exchange costs (58.047) (55.605)

other expenses (5.156) (7.407)

total costs (244.747) (257.459)

FiNaNce resUlt (160.060) (123.703)

26. related-party transaCtiOns

the company is controlled by the state of minas Gerais, which holds 51.13% of the company’s shares (Note 18).

(a) Assets, liabilities, income and expenses

in addition to the agreements described in Note 15, other transactions with related parties substantially represent those carried out with the state of minas Gerais, cemiG, Foz de jeceaba and subsidiaries. Significant balances and transactions with related parties are set out below:



135

cOntrOlaDOra12/31/2013

sUBsidiaries otHer

ÁGUas miNerais coPaNor serviços de irriGação total state oF mG cemiG FoZ de jeceaBa

assets

current assets

trade receivables

Billed amounts - - - - 47.072 - -

other receivables

receivables from subsidiaries 398 2.125 - 2.523 - - -

Non-current assets

Borrowings - 12.734 878 13.612 - - -

advances for future capital increases 96.178 - - 96.178 - - -

assets available for sale - - - - - - 48.638

total assets 96.576 14.859 878 112.313 47.072 - 48.638

liabilities

current liabilities

agreements - - - - 11.248 - -

interest on capital - - - - 17.476 - -

electric power - - - - - 10.832 -

Non-current liabilities

Provision for investment losses 73.699 11.884 763 86.346 - - -

total liaBilities 73.699 11.884 763 86.346 28.724 10.832 -

statemeNt oF iNcome

revenue from water supply and sewage services - - - - 107.828 - -

Gains on monetary variations - 1.373 75 1.448 - - -

dividends received - - - - - - 8.913



136


sUBsidiaries otHer


assets

current assets

trade receivables

Billed amounts - - - - 17.996 - -

other receivables

dividends receivable - - - - - - 1.163

Non-current assets

Borrowings - 19.121 1.076 20.197 - - -

advances for future capital increases 86.634 - - 86.634 - - -

assets available for sale 28.850

total assets 86.634 19.121 1.076 106.831 17.996 - 30.013

liabilities

current liabilities

agreements - - - - 29.787 - -


electric power - - - - - 6.618 -




statemeNt oF iNcome


Gains on monetary variations - 1.187 99 1.286 - - -




137


sUBsidiaries otHer


assets

current assets

trade receivables

Billed amounts - - - - 8.905 - -

agreements - - - - 4.741 - -

other receivables

dividends receivable - - - - - - 986

Non-current assets

Borrowings 57.541 17.139 1.368 76.048 - - -

assets available for sale 25.079

total assets 57.541 17.139 1.368 76.048 13.646 - 26.065

liabilities

current liabilities


electric power - - - - - 24.670 -




statemeNt oF iNcome


Gains on monetary variations 5.561 1.542 178 7.281 - - -




138

Balances and transactions with related parties are conducted at prices and under conditions considered by management to be similar to those prevailing in the market, except for the financial settlement, which may occur through special negotiations (matching of accounts).

b) Key management compensation

2013 2012

salaries 4.637 4.538

Employee benefits 697 701

total 5.334 5.239

26.1. Related-party transactions

the company’s main transactions with related parties can be summarized as follows:

► Águas Minerais

since january 2012, monetary restatement on intercompany loan agreements has not been calculated and accounted for, be-cause the balance of these agreements was converted into advance for future capital increase, recorded in equity, whose effectiveness depends on the approval of the General meeting to be held in the first quarter of 2014.

► Copanor

loan agreement, with interest of 90% of cdi, according to the renegotiation described in Note 8.

► serviços de irrigação

loan agreement, with interest of 101% of cdi.

► Electricity supply

the company is a major consumer of electric power in the state of minas Gerais, where electricity is supplied primarily by the minas Gerais electric power utility company cemiG, controlled by the company’s controlling stockholder, the state of minas Gerais. more than 300 electric power supply agreements were signed, each one for a specific consumer unit.

► financing agreements with BdMG

The Company entered into various financing agreements with BdmG in the normal course of its business.

► agreements with COdeMiG

on march 22, 2006, the company signed with codemiG an intention protocol for technical cooperation and, on june 30, 2006, a lease agreement was made to take over the rights related to mineral waters of araxá, cambuquira, caxambu and lambari, as mentioned in Note 1.



139

► Guarantee of the state of Minas Gerais in Company’s agreements with the Federal Government

the agreements listed below describe the guarantee provided by the state of minas Gerais in the agreements of copasa and the Federal Government:

(i) debt acknowledgement and settlement agreement with the Federal Government on january 20, 1994 - in case of default, the Federal Government was authorized by the state of minas Gerais to: (i) offset any amounts with own revenues and portions of certain taxes, in amounts suf-ficient to settle any past due installments; and (ii) request the transfer of funds existing in the state’s revenue central-izing accounts maintained in a certain financial institution, in amounts sufficient to settle any installment in default. at december 31, 2013, the outstanding balance of these agreements totaled r$ 3,327, as mentioned in Note 12.

(ii) debt acknowledgement and consolidation agreement with the Federal Government of august 5, 1998 - the state of minas Gerais assigned and transferred to the Federal Government credits from certain taxes collected, in amounts sufficient to pay installments and charges due on each maturity date. at december 31, 2013, the outstand-ing balance of these agreements totaled r$ 61,658, as mentioned in Note 12.

(iii) restricted account and assignment and transfer of credit Given in counter Guarantee agreement dated November 29, 2011 - in case of default, the Federal Government was authorized by the state of minas Gerais to: (i) offset any amounts with revenues from constitutional tax income, in amounts sufficient to settle any past due installments; and (ii) request the transfer of funds existing in the state’s rev-enue centralizing accounts maintained in a certain financial institution, in amounts sufficient to settle any installment in default. at december 31, 2013, the outstanding balance of this agreement totaled r$ 65,674, as mentioned in Note 12.

27. water supply and sewaGe serviCes in BelO hOrizOnte

the minas Gerais state Government and the Belo Horizonte municipal Government entered into a cooperation agreement on November 13, 2002, whereby the company was ensured the right to continue rendering water supply and sewage services in Belo Horizonte for another 30 years.

The first amendment to this agreement was made on April 30, 2004. the main items of the amended cooperation agreement are as follows:

(1) the municipality declared and recognized the debt for which it is responsible, in the total amount of r$ 70,662 on November 30, 2002, corresponding to water supply and sewage service bills issued until November 2002 still pending payment. this debt was being paid in 335 monthly



140

and consecutive installments equivalent to 202,838,77 m³ of water each, since january 2005. the amount of each installment in cash was obtained by multiplying the volume to be settled by the value of the average tariff billed per m³ in Belo Horizonte, plus simple compensatory interest of 0.5% per month, as from November 2002. However, as from February 24, 2010, with the signing of a mutual debts compensation agreement, the debt has been paid in 120 consecutive monthly installments, with interest of 1% and annual IPCA-E inflation adjustment (Notes 7 and 11). at december 31, 2013, the balance receivable totaled r$ 253,724, of which r$ 41,144 under current assets and r$ 212,580 under non-current assets (r$ 255,676 at december 31, 2012 with r$ 35,676 under current assets and r$ 220,000 under non-current assets).

(2) the company assumed part of the costs of the Program for environmental recovery and sanitation of river valleys and streams in Belo Horizonte (dreNUrBs), on behalf of the municipality under the Belo Horizonte concession right at the initial amount of r$ 170,000 and restated at the iPca rate. in december 2011 the Belo Horizonte municipal Government presented data on spending made on the program up to december 2009. considering its commit-ment to refund part of the amount of these measurements as from january 2008, the amount was restated to the referred date and, less the total amount of refunds made in the period, resulted in a balance of r$ 214,933. on presentation of new spending measurements made by

the municipal Government, there shall be a refund of 240 remaining installments, the value of each limited to r$ 855, restated at the iPca rate, and to the restated balance.

28. COMMitMents

the company entered into new construction contracts, under which obligations are recorded as the services are rendered. the main outstanding contracts with contractors and suppliers at december 31, 2013 are listed below:

coNtractors amoUNt siGNed oN term iN days (1)

odebrecht ambiental 693,731 12/20/2013 5,475

construtora andrade Gutierrez s.a. 186,404 8/25/2011 1,080

consórcio orteng/sonel 71,075 2/21/2013 990

mendes junior trading e engenharia s.a. 60,339 11/30/2012 810

Prefisan Ltda. 28,797 5/23/2013 720

infracon engenharia e comércio ltda. 26,353 8/8/2012 630

Prefisan Engenharia S.A. 21,624 3/14/2012 1,080

infracon engenharia e comércio ltda. 21,170 8/28/2013 540

comim construtora ltda. 19,541 8/9/2013 720

construtora Penchel ltda. 19,239 4/19/2013 720

consirel constr. silveira e resende ltda. 12,368 8/29/2013 600

note: (1) Counted from the date set in the first service order.



141

Upon renewal or revision of some concession agreements, the Company assumed commitments to participate financially in sewage network construction and river valley treatment works, to be carried out by the municipal governments. among the works to be carried out, those in public sites (stream channeling, open sewage channels) are treated as intangible assets - ‘concession rights’, and amortized over the remaining concession term. sewage interceptors are incorporated in the company’s intangible assets.

the main committed amounts refer to the following municipali-ties:

amoUNts

mUNiciPalities committed realiZed % realiZatioN

Belo Horizonte 261,140 73,030 27.97

Betim 80,286 73,521 91.57

contagem 83,707 83,707 100.00

montes claros 121,941 61,417 50.37

ribeirão das Neves 86,411 70,977 82.14

Teófilo Otoni 54,360 - -

29. insuranCe

the company and its subsidiaries contracted services of third party liability insurance for directors, officers and managers of commercial companies in order to ensure them the right to compen-sation in the event of judicial and extrajudicial settlements, arbitral

awards made by courts, final court decisions, including attorneys’ fees and court costs, in the course of proceedings based on civil liability for acts of management committed by these individuals while carrying out their duties.

the company does not have insurance to cover damages caused to its buildings and/or facilities on the closing date of the financial statements for the year ended December 31, 2013.

30. value-added tax On sales and serviCes (iCMs)

according to state law 9,944 of september 20, 1989, and state decree 38,104/96, the company started paying icms under a special tax regime, whereby this tax was levied and paid on the supply of piped water for the period between 1989 and 1991. in 1991, the company suspended the tax payment as a result of a preliminary decision in direct Unconstitutionality Proceeding (adiN) 567-7, which established that this taxation required a specific law to regulate it. the adiN was declared ineffective, and this issue has been the subject of uncontested understanding by the supreme Court in a definitive decision awarded in Direct Unconstitutionality Proceeding 2,224, published on march 21, 2007, whereby the supply of treated water to end consumers is an essential public service, by express constitutional determination. However, as the merits of the action have not yet been judged, and although there are pronouncements from the Federal supreme court (stF) and the



142

Higher court of justice (stj), and repeated understanding of the minas Gerais state law that there would be no icms levy on the sup-ply of drinking water by concession operators that provide this public service, so far there is no definitive Judicial Branch position. Due to the suspension of the tax payment, the amount of the referred to tax is not currently included in the calculation of tariffs of the company, and it is not being charged either to customers or passed on to the State Government. Furthermore, there is no tax deficiency notice from the state tax authorities that would render the establishment of a provision for this tax justifiable.

31. transaCtiOns nOt invOlvinG Cash and Cash equivalents

during 2013 and 2012, the company and its subsidiaries carried out the following non-cash investing and financing activities which are not reflected in the statement of cash flow:

PareNt comPaNy/coNsolidated

2013 2012

debentures converted into shares (Notes 12 and 18) - 137.486

Proposed dividends (Note 18) 31.646 46.469

customer renegotiation with payment via acquisition of land in Teófilo Otoni (Note 9) 18.527 -

acquisition of networks in the municipality of carneirinho with payment via treasury shares (Note 9) - 614

transfer of Prodes/aNa agreement (Notes 7 and 11) 4.201 7.576



143

32. evaluatiOn Of the iMpaCts Of prOvisiOnal Measure (Mp) 627

Provisional measure (mP) 627 was issued on November 11, 2013. this mP repeals the transitional tax system (rtt) and (i) amends decree-law 1,598/77, which deals with the corporate income tax, as well as the legislation related to the social contribu-tion on net income; (ii) provides that future changes in or adoption of accounting methods and criteria will have no effects on the calculation of federal taxes unless and until the tax law addresses those changes; (iii) establishes a specific approach for the potential taxation of profits or dividends; (iv) addresses certain aspects of the calculation of interest on capital; and (v) provides considerations about investments evaluated under the equity accounting method.

the mP becomes effective as from 2015. voluntary early adoption of this mP in 2014 may eliminate certain possible tax effects, especially those related to dividends and interest on capital effectively paid prior to the issuance date of this mP, as well as those related to investments under the equity accounting method. the company prepared a study of the possible effects that could arise from the early or normal adoption of this new mP and concluded that the effects on the financial statements would be immaterial in either case, especially with respect to interest on capital. management is monitoring current discussions and negotiations of possible amend-ments to the mP before deciding whether to elect early adoption of the mP.

the company’s conclusions consider our best interpretation of the current wording of mP 627. a large number of amendments to this mP have already been proposed in the congress, and it is possible that the final text of the permanent law will differ from the original wording of the mP. management may need to reconsider its conclusions in the light of that final text.

Sustainability Report 2013 | COPASA MG 144

execUtIve BOarD

ricardo aUGUsto simÕes camPos Chief Executive Officer

PaUla vasQUes BitteNcoUrt Chief Financial and Investor Relations Officer

carlos GoNçalves de oliveira soBriNHo Chief Technical and New Business Officer

GeltoN Palmieri aBUd Chief Corporate Management Officer

marcos aNtÔNio teiXeira Chief Venture Planning and Management Officer

jUareZ amorim Chief Metropolitan Operating Officer

mÁrcio lUiZ mUrta kaNGUssU Chief North Operating Officer

valÉrio mÁXimo GamBoGi Parreira Chief East Central Operating Officer

tildeN saNtiaGo Chief Environmental Officer

PaUlo FerNaNdo rodriGUes loPes Chief Southwest Operating Officer

accOUntantS

Geraldo maGela moreira calçado BrÍGida BUeNo maioliNi

contador - crcmG - 36.109 accounting, cost and equity superintendent

BOarD Of DIrectOrS

joão aNtÔNio FleUry teiXeira chairman

ricardo aUGUsto simÕes camPos vice-chairman

aleNcar saNtos viaNa FilHo director

alFredo viceNte salGado Faria director

aleXaNdre PederciNi issa director

ÊNio rattoN lomBardi director

eUclides Garcia de lima FilHo director

josÉ carlos carvalHo director


Capital Budget

Given the business growth projections for 2014, the company will invest in expansion of water services, with production capacity expansion projects, expansion of service capacity, implementation of systems and well drilling and installation. moreover, funds will be invested in sewage collection systems, in works aimed at expanding the service capacity, implementation of systems, sewage treatment and proper disposal of sewage under a specific program (“Programa caça-esgoto”), among others.

For these investments, the company will use its own funds in the amount of r$ 335,000, which must be applied in direct invest-ments and third-party funds, which amounted to r$ 648,000. the investment schedule for 2014 totals r$ 983,000.

the following table summarizes the allocation of the company’s investments for 2014:

iNvestmeNt ProGram For 2014

water 353,2

sewaGe 610,5

otHer 19,3

total 983,0


Report of The Statutory Audit Board

the Profit Retention Reserve, as per the capital budget contained in the investment program (law 6,404/76).

Based on tests performed and in view of the opinion issued by Pricewaterhousecoopers auditores independentes, dated january 27, 2014, the statutory audit Board hereby expresses a favorable opinion on the approval of these proposals to be submitted for discussion and vote in the ordinary General meeting of stockholders of copasa.

Belo Horizonte, January 29, 2014

PaUlo elisiÁrio NUNes carlos edUardo carvalHo de aNdrade

chairman member

jair siQUeira alvimar silveira de Paiva

vice-chairman member

raFael rodriGUes alves da rocHa

member

in a meeting held on january 29, 2014, the statutory audit Board of companhia de saneamento de minas Gerais – coPasa mG, in exercising its legal and statutory duties, examined the management annual report and the Financial statements, which comprise: the Balance sheet, the statements of income, changes in equity and cash Flows and the statement of value added, in addition to the Notes to Financial statements and the independent auditor’s report on the Financial statements, for the year ended december 31, 2013.

the following proposals were studied, which are being submit-ted by copasa management for approval of the ordinary General meeting of stockholders: 1) to approve the Financial statements of copasa (parent company and consolidated under iFrs) for the year ended december 31, 2013; and 2) to approve the following alloca-tion of profit of Copasa, totaling R$ 419,795 thousand: R$ 20,990 thousand to constitute the legal reserve; r$ 139,582 thousand corresponding to the gross amount of r$ 1.17 per share, will be used to pay interest on capital imputed on the minimum dividend as follows: r$ 105,502 thousand were approved in meetings of the Board of directors held on march 18, 2013, june 24, 2013 and september 20, 2013 and allocated to stockholders; r$ 54,100 thousand will be distributed proportionally to holders of common shares entitled to remuneration; r$ 263,582 thousand to constitute


in accordance with article 25, sections v and vi, of Brazilian securities commission (cvm) rule 480, dated december 7, 2009, the CEO and other Officers of Companhia de Saneamento de Minas Gerais – coPasa mG, a publicly-held mixed capital corporation headquartered at rua mar de espanha, 525, Belo Horizonte – mG, enrolled under the National corporate taxpayers registry (cNPj) No. 17.281.106/0001 - 03, hereby declare that:

(2) they have reviewed, discussed and agreed with the opinions expressed in the independent auditor’s report issued by Pricewaterhousecoopers auditores independentes on the parent company and consolidated financial statements under iFrs for the year ended december 31, 2013; and

(2) they have reviewed, discussed and agreed with the parent company and consolidated financial statements under IFRS for the year ended december 31, 2013


Declaration of Review of ohe Financial Statements ond Independent Auditor’s Report by Officers


To the Board of Directors and Stockholders Companhia de saneamento de Minas Gerais – COpasa MG

We have audited the accompanying parent company financial statements of companhia de saneamento de minas Gerais – co-Pasa mG (“company” or “Parent company”) as at december 31, 2013, which comprise the balance sheet as at that date and the statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

We have also audited the accompanying consolidated financial statements of companhia de saneamento de minas Gerais – coPa-sa mG (“consolidated”) as at december 31, 2013, which comprise the consolidated balance sheet as at that date and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s responsibility for the financial statements

management is responsible for the preparation and fair pres-entation of the parent company financial statements in accordance with accounting practices adopted in Brazil, and of the consolidated financial statements in accordance with the International Financial reporting standards (iFrs), issued by the international accounting standards Board (iasB), and accounting practices adopted in Brazil, and for such internal control as management determines is neces-sary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these financial state-ments based on our audit. we conducted our audit in accordance with Brazilian and international standards on auditing. those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

Independent auditor’s report


an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial state-ments. the procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.

in making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presenta-tion of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. an audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

we believe that the audit evidence we have obtained is suf-ficient and appropriate to provide a basis for our audit opinion.

Opinion on the parent company financial statements

In our opinion, the parent company financial statements referred to above present fairly, in all material respects, the financial position of companhia de saneamento de minas Gerais – coPasa MG as at December 31, 2013, and its financial performance and cash flows for the year then ended, in accordance with accounting practices adopted in Brazil.

Opinion on the consolidated financial statements

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position

of companhia de saneamento de minas Gerais – coPasa mG and its subsidiaries as at December 31, 2013, and their financial perfor-mance and cash flows for the year then ended, in accordance with the international Financial reporting standards (iFrs) issued by the international accounting standards Board (iasB) and the accounting practices adopted in Brazil.

emphasis of matter

As discussed in Note 2 to these financial statements, the parent company financial statements have been prepared in accordance with accounting practices adopted in Brazil. in the case of compan-hia de saneamento de minas Gerais – coPasa mG, these practices differ from IFRS applicable to separate financial statements only in relation to the measurement of investments in subsidiaries based on equity accounting, while iFrs requires measurement based on cost or fair value. Our opinion is not qualified in respect of this matter.

Other matters

Supplementary information - statement of value added

we also have audited the parent company and consolidated state-ments of value added for the year ended december 31, 2013, which are the responsibility of the company’s management. the presentation of these statements is required by the Brazilian corporate legislation for listed companies, but is considered supplementary information for iFrs. these statements were subject to the same audit procedures described above and, in our opinion, are fairly presented, in all material respects, in relation to the financial statements taken as a whole.


audit of prior-year information

The original financial statements of the Company for the year ended december 31, 2012, prepared before the consideration of the adjustments described in Note 3, were audited by another firm of independent auditors whose report, dated February 20, 2013, expressed an unmodified opinion on those statements and included emphasis paragraphs related to the following subjects:

(i) The parent company financial statements have been pre-pared in accordance with accounting practices adopted in Brazil. in the case of companhia de saneamento de minas Gerais – coPasa mG, these practices differ from iFrs ap-plicable to separate financial statements only in relation to the measurement of investments in subsidiaries based on equity accounting, while iFrs requires measurement based on cost or fair value, and for the monetary restatement of intangible assets and property, plant and equipment items up to december 31, 1997, not recorded in accordance with accounting practices adopted in Brazil and recorded for iFrs purposes.

(ii) the company became a value-added tax on sales and services (icms) taxpayer at september 20, 1989, under a special regime, related to treated water supply. according to its legal advisor, specific normative acts regulating this mat-ter would be necessary in order for this tax to be charged.

Up to this date, there is no resolution by the state executive Branch regarding the calculation criteria or enforcement of payment of said tax; in addition, the aforementioned tax has not been included in the company’s tariffs. accordingly, such tax is not being charged to consumers, has not been accounted for by the company and is not transferred to the state Government.

As part of our audit of the financial statements for the year ended december 31, 2013, we also audited the adjustments described in Note 3, which were made to alter the 2012 financial statements. in our opinion, these adjustments are appropriate and were correctly recorded. we were not engaged to audit, review or ap-ply any other procedures to the Company’s financial statements for december 31, 2012 and, therefore, we do not express any opinion or any form of assurance on the financial statements for 2012 taken as a whole.


PricewaterHoUsecooPers carlos aUGUsto da silva

auditores independentes contador crc 1sP197007/o-2 "s" mG

crc 2sP000160/o-5 "F" mG

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