Annual Report Of

Annual Report of

2013

Sustainability Report 2013 | COPASA MG

50 Years Of Copasa

Numbers, reports, statements, relevant information, achieve- have worked and work in building our 50-year history. We who know ments and expectations, here we’ll have everything one expects from our rivers and river basins, we know a little spring alone can grow a document like this. Once again, Copasa is shown and placed with when it joins to another, believe in its fate, jumps and runs through transparency. But this year we have a different report for a reason the mountains of Minas Gerais till it reaches our valleys and then directly linked to numbers: we are reporting the results of the year seek other lands where they serve. These are the rivers of Minas, we achieved our first 50 years. ready, like us the people in Minas, to integrate, unify and serve. We This report shows a bit of what we did to mark such a relevant are thus in Copasa. We look back with pride and learning in search date - the Povo D’Água workshop. A group of 71 employees, each of how best to build on the next 50 years, serving the Minas and its with experiences and practical contact related to the rivers of our people. state that makes up our nine major river basins, they dedicated In our Sustainability Report it stands out, as you can see, themselves to a work of which the vast majority had no previous some numbers: nine large basins that are actually the union of experience: embroider and turn this very act in a meaningful artistic thousands and thousands of springs, small streams and large rivers; performance, with beauty and sharing - the final work is the sum of 71 employees who symbolize all that worked here, work and still will everything that was made collectively. We share this masterpiece come to work, and 50 who are part of our history. The brief texts that with you, who will have the opportunity to enjoy it through the graph- introduce the chapters were taken from the memorial of employees, ics in this report. texts that recount their experiences in the nine basins of Minas As we can tell from here, when one gives himself to the group Gerais. The Matizes Dumont Group, internationally recognized for and share his beliefs and dreams, he enables personal and col- the quality of their work in art education, was asked to coordinate lective transformation. It was in this way that thousands of people the work.

Sustainability Report 2013 | COPASA MG 3 Abstract

Copasa 06 Vision, Mission, Values and Strategic Positioning 07 Message from Management 08 Key Indicators 12 Copasa History 17 Organizational Structure Copasa 19 Subsidiaries 20 Copasa in 2013 23

Corporate Governance 32 Governance Structure 33 Ethical Conduct 41 Relationship With Stakeholders 43

Economic Dimension 46 Economic Conditions 47 Financial Performance of Parent 48 Investments 57 Capital Market 59 Operational and Commercial Performance 61 Key Risks, Opportunities and Strategies 67

Sustainability Report 2013 | COPASA MG Environmental Dimension 71 Environmental Policy 72 Environmental Regulation 74 Collection and Sewage Treatment 79 Environmental Conservation 84 Energy Efficiency 87 Climate Change 89 Environmental Education 93

Social Dimension 96 Copasa and its Employees 97 Copasa and its Customers 118 Copasa and its Suppliers 123 Copasa and Community 125

Annual Social Report 134

About The Report 138 Parameters of the report 139 GRI ContentIndex 142 Acknowledgement 153 Technical Sheet 154

Financial Statements 155

Sustainability Report 2013 | COPASA MG Therefore, I feel proud and accomplished to be part of this company, that not only provides me brilliant achievements, but also helps the rivers of my story to follow their courses.

Sustainability Report 2013 | COPASA MG Copasa

VISION 2017 VALUES Be a reference in business management at ► Ethics and transparency in relations. the national sanitation market with the highest ► Social and environmental responsibility. number of assistance in the operating area. ► Valuing employees. VISION 2030 ► Quality of services provided. Being a global company and a landmark in ► Proud to be Copasa. the sanitation sector. ► Innovation and entrepreneurship. MISSION ► Focus on customer satisfaction. Providing solutions in water supply, sanitation ► Acting safely. and solid waste, creating value for customers, ► Dissemination of knowledge. shareholders, employees and society in a sustain- ► Sustainable growth. able manner.

STRATEGIC POSITIONING Maintain the standard of quality at the lowest possible cost, focusing on the pursuit of productive efficiency, expansion of production volume and minimizing expenses.

Sustainability Report 2013 | COPASA MG 7 Message from Management

Message from the Chairman of the Board João Antônio (GRI 1.1) Fleury Teixeira Copasa, mixed economy Company, was incorporated in 1963 as a Minas Company for Water and Sewage (Comag) and had its name changed to Sanitation Company of Minas Gerais (Copasa MG), by State Law No. 6.475 of November 14th, 1974. Since 2003, became a public company and in 2006, its shares were traded on the New Market segment of the São Paulo Stock Exchange (BM & FBOVESPA) and the Minas Gerais state as its majority shareholder.

In 2013, the state government, through Copasa launched the Água da Gente program, the largest sanitation program in the history of Minas Gerais, which provides funds of approximately R$ 4.55 billion in improvement projects, expansion and implementation of water supply and sewage systems, to be invested by 2016.

In its first 50 years, the Company has consolidated its performance, contributing to improve the health and quality of life of the population in the state of Minas Gerais. The technical competence of our workforce is recognized by the market and our management practices based on the principles of social responsibility and

Sustainability Report 2013 | COPASA MG 8 sustainability have been awarded as a business excellence model. besides the economic performance dimensions -financial, social, The recognition of the management model implemented in the and environmental and climate change. Company as evidenced by the awards received in 2013, gives a Other important achievements relate to the expansion of cover- winning sequence to this half century of life. age area and increased population served with the services provided The Metropolitan Operation Board received the top recognition by the company. We closed the year 2013 supplying treated water to award in the latest edition of the National Quality Award in Sanitation a population of approximately 14.6 million people, which represents (PNQS 2013), the Diamond Chiron Trophy, and the most important an increase of 3.4% compared to 2012, while the number of people sanitation award in Latin America. PNQS is dedicated as a reference served with sanitation services was approximately 9.3 million tool in the evaluation and continuous improvement of environmental customers, 6.2% more than the number registered in 2012. sanitation services in the country. The Época Business Magazine The year 2013 was very special to Copasa. When congratulating Yearbook 360º awarded Copasa for the second year in a row as the our employees for their achievements this year, we began to think Best Company in the Water and Sanitation Sector. The Value Award about the challenges we must overcome to continue our sustainable 1000 elected for the second time, as best Sanitation Company in growth, so that we can achieve our vision of future to be a reference Brazil and received an unprecedented award from Você S/A maga- in business management at the national sanitation market with zine because of our policies and practices in Human Resources. the highest level of service in our area, contributing to the socio- In addition, for the fourth consecutive year, Copasa takes part in economic and environmental development of society. the portfolio of the BM & FBOVESPA Corporate Sustainability Index (ISE). This index aims to reflect the return on a portfolio composed of We began 2014 with estimated investments of R$ 983 million, stocks of companies committed to sustainability and environmental for the expansion of water and collection and treatment of sewage responsibility, differentiating them in terms of quality, commitment services. We will speed up the implementation of our strategy, to sustainable development, equity, transparency, nature of product, strengthen partnerships, continue to invest in people and create value for our stakeholders.

Sustainability Report 2013 | COPASA MG 9 Message from the CEO Ricardo Augusto (GRI 1.1) Simões Campos In 2013, the year we completed 50 years, we continue to consolidate our benchmark for business excellence for a sustainable manner in order that we could overcome steps, perform undertak- ings and achieve results. We concluded the review cycle from strategic planning to articulate and set goals for the coming years, in a process involving all managers, welcoming and encouraging the participation of professionals from several areas of knowledge. We also reviewed our vision and mission and reinforced the values and principles that guide our actions in everyday life. It is a commitment of the Company with the way we deliver results, reaffirming our quest for efficiency and profitability.

Copasa ended the year 2013 with a net revenue from water and sewage at R$ 3.01 billion (not including construction revenue) and Adjusted Ebitda of R$ 1.14 billion. During the year, investments totaled up R$ 909.2 million, applied mainly in the collection and treatment of sewage (R$ 566.4 million) systems and water supply

Sustainability Report 2013 | COPASA MG 10 systems (R$ 321.5 million), which resulted in significant expansion (WWTP) in various cities in the state of Minas Gerais, among them: of capacity of helping users with the services provided by the com- Conceição do Mato Dentro, Mirabela, Montalvânia, Salinas, Santa pany. Still, three new concession contracts for the provision of health Luzia and Santa Rita do Sapucaí. The company ended the year 2013 and renewed sewage services were signed in 12 municipal towns for with 148 stations in operation and 78 more under construction, water supply services. Also we started operating 14 new systems, scheduled for completion by 2016. three with water supply and 11 sewage services, especially in the To meet the specific needs of smaller localities Human city of Sabara, located in the Metropolitan Region of Belo Horizonte. Development Index (HDI), Copasa expanded its operations in the In relation to water supply, compared to 2012, the population northeastern region of the state of Minas Gerais, through its subsidi- served increased by almost half a million people (484,000), an ary Copasa Services Integrated Sanitation North and Northeast of increase of 3.4%, representing an audience of approximately 14.6 Minas Gerais S/A (Copanor). The company ended the year 2013 million people connected to the network distribution of treated providing water services in 198 systems, benefiting 283,000 people, water. Regarding sewage systems, significant developments, with and sewage systems in 61, benefiting 118,000 people. an increase of over half a million people (543,000) who might have We thank the employees and partners of Copasa who contrib- public sewage services, an increase of 6.2% and totaling approxi- uted in their daily activities, with involvement and commitment to the mately 9, 3 million people to benefit from this service. achievement of results, based on the management model adopted Advances in issues related to sewage treatment is an important and supported by the awards and recognitions earned in 2013 and milestone for the company and resulted in significant increase in the comprising this report. We hope to achieve our mission together with volume of treated sewage, reaching 237.3 billion liters, an increase the foundation in the principles of sustainability, to build an even of 12% compared to the year 2012. Among the main actions, there stronger company, contributing to the universalisation of sanitation is the beginning of operation of 19 new Sewage Treatment stations and improving the quality of life for people in our field services.

Sustainability Report 2013 | COPASA MG 11 Key Indicators (Controller Data)

(GRI EC1)

Economic and financial data (R$ thousands) 2013 2012 2011 Sewage Net Operating Income (NOI) of water and sewage 3007736 2768365 2509610 Cost of services plus office and administrative expenses 2286482 2,012,471 ¹ 1754302 Cost of services plus selling and administrative expenses (excluding 1858448 1635129 1449805 depreciation / amortization) Ebitda 1156899 1,143,033 ¹ 1,051,524 ³ Ebitda Adjusted ² 1140390 1,127,953 ¹ 1,037,569 ³ Net profit 419 795 ¹ 481 723 470,437 Total assets 9.454.301 9,143,663 ¹ 8274201 Gross debt 3272425 3182320 2956752 Net debt 3011944 2685895 2715216 Net Worth 5.337.359 4,934,888 ¹ 4,501,677

Sustainability Report 2013 | COPASA MG 12 Profitability indicators 2013 2012 2011 Return on investment (NI / TA) 4.4 5.3 ¹ 5.7 Return on equity (LL / PL) 7.9 9.8 10.5

Economic and Financial Indicators 2013 2012 2011 Current Liquidity 1.18 1.45 0.84 Debt capital / equity 0.77 0.85 ¹ 0.84 EBITDA margin (%) 30.0 32.0 ¹ 31.8 Adjusted EBITDA margin (%) 36.3 38.7 39.8 Net debt / Ebitda 2.6 2.4 2.6

Share 2013 2012 2011 Book value per share (R$) 44,60 41.23 ¹ 39.17 Profit or loss per share (R$) 3,51 4,02¹ 4.09

Sustainability Report 2013 | COPASA MG 13 Market 2013 2012 2011 Number of water connections (un) 3915098 3779192 3634689 Number of sewage connections (un) 2404141 2258604 2111360 Number of water savings (un) 4731449 4571955 4402057 Number of sewage units (un) 3065071 2893771 2708870 Billed water volume (1,000 m³) 684 359 667 325 649 706 Billed sewage volume (1,000 m³) 446 754 428 220 402 552 Extension of water mains (km) 46,620 44,864 43,906 Expansion of the sewage network (km) 22,138 20,093 18,105 Municipalities with water concession (un) 626 625 620 Municipalities with sewage concession (un) 283 2774 225 Municipalities operated - water (un) 617 612 606 Municipalities operated - sewage (un) 223 200 176 Population served - water (thousand) 14,550 14,066 13,614 Population served - sewage (thousand) 9,328 8,785 8,270

(GRI EN8)

Sustainability Report 2013 | COPASA MG 14 Workforce 2013 2012 2011 Employees 11,864 11,611 11,535 Number of admissions 767 378 479 Outsourced5 1,340 725 686

Environmental Indicators (R$ thousands) 2013 2012 2011 Investments in external programs and projects 7,335 9,642 6,336 Investments in production and operation 363 947 356 345 171 735

Sustainability Report 2013 | COPASA MG 15 Social Indicators (R$ thousands) 2013 2012 2011 Training and development of employees 1,912 1,805 1,097 Profit sharing 32,670 27,613 28,317 Sponsoring cultural, artistic and sports activity6 3,375 3,555 3,750 Fund for Children and Adolescence. 6 0 671 750 Total domestic social investment 493 858 431 542 401 090 Total external social investment 664 958 595 853 495 482

Notes: 1 These values differ from those published in 2012 due to accounting adjustments, as described in Explanatory Note 3.23 of the financial statements of 2013. 2 EBITDA is not an accounting measure prepared by the Company, calculated by observing the CVM Instruction Nº 527/2012, consisting of net income plus income taxes, net interest income, depreciation, amortization and non-operating income of the Subsidiaries. The EBITDA margin is calculated on total revenue (net revenue from water and sewage revenues and construction, plus other operating income and revenue of Subsidiaries). Now the Adjusted EBITDA is calculated excluding revenues / costs of construction. Revenues from construction, although they have no effect immediate cash, generate implications in the year they are recognized, given that its outcome is part of the calculation basis for the payment of interest on capital / dividends and participation of employee profit sharing.3 The values differ from those disclosed in the Annual Report 2011, due to change in calculation methodology. 4 In the Subsidiary Copanor number, 30 sewage concessions that had not been disclosed were included in release operating in December 2012 and which have a combined population of 97 000 inhabitants. Moreover, the number referring to the parent, were included four new sewage concessions signed in December 2012 that were not disclosed in release operating that month. 5 The number of outsourced employees is estimated considering the manpower allocated in service contracts, for Copasa does not hire third parties directly. 6 Values referring to resources released by the company by Tax Incentive Laws.

(GRI 3.10)

Sustainability Report 2013 | COPASA MG 16 The History of Copasa

In order to define and implement a comprehensive policy for Currently, Copasa is a public traded company, regulated by the the basic sanitation in the state of Minas Gerais, on July 5, 1963, Corporations Act, a mixed economy, linked to State Department of sanitation was established by State Law No. 2,842, the Comag. In Regional Development and Urban Policy of Minas Gerais (SEDRU). 1971, another important step was taken in this story. The Federal Acts as a concessionaire of the sanitation sector, developing activi- Government established the National Sanitation Plan (Planasa), ties that comprise the public services of water supply and sewage, establishing the goals to be achieved by the country in the sanitation including activities ranging from planning and preparation of projects sector. From there, the Municipal Department of Water and Sewage to their implementation, expansion, remodeling and operation of Belo Horizonte (Demae), responsible for the provision of such sanitation services. services in the city of Belo Horizonte, was incorporated into Comag. (GRI 2.1/GRI 2.2/GRI 2.5) This merge and the changes introduced by Planasa, especially the increase of technical and financial support to the work of the state In 2006, the Company made its initial public offering (Initial sanitation companies, brought significant impetus to the growth Public Offering - IPO), joining the Novo Mercado of BM & FBovespa. of the Company. With this, Comag began to undergo a series of In April 2008, it was made a second offering of shares in its entirety modifications to fit the needs of the sanitation of the state of Minas by the Municipality of Belo Horizonte and partly by the state of Minas Gerais policy, among them, changing their name to Copasa MG, by Gerais, which retained the controlling interest. Law Nº. 6.475/1974.

Sustainability Report 2013 | COPASA MG 17 In 2007, aiming to strengthen its presence in the market and take advantage of business opportunities, three subsidiaries were created: Copasa Mineral Waters of Minas Gerais, Copasa Services Irrigation and Copanor. (GRI 2.2/GRI 2.3)

On July 5, 2013, the Company completed 50 years of existence, being recognized as a benchmark in business excellence in its industry, fulfilling its role of contributing to the development of the state of Minas Gerais and the quality of life of its people. In the year of the fiftieth anniversary of Copasa, to further leverage the sanitation sector, the government of Minas Gerais has launched the largest program of improvements in the state's history, the Água da Gente, ensuring investments in works of improvement and expansion of water supply and water and sanitation systems, including sewage treatment. The program will directly impact the quality of life and improve the urban infrastructure of the cities served by Copasa, as well as help restore and protect the major rivers of Minas Gerais, with the expansion of sewage collection and treatment programs.

Sustainability Report 2013 | COPASA MG 18 Organizational Structure Copasa

(GRI 2.3) General Assembly Shareholders Advice Fiscal

Council Administration Auditing Internal

Presidency

PRE Vice - Presidency VPR

Financial Corporate Directorate of Technical Metropolitan Operation Operation Department of Directorate and Investor Management Planning and Director and Board of Board Board Central Environment of Operation Relations Office Management New Business Operation Southwest East (DMA) North (DNT) (DFI) (DGC) (DPG) (DTN) (DMT) (DSO) (DCL)

Sustainability Report 2013 | COPASA MG 19 Subsidiaries

Copanor Copanor is the concessionaire for the provision of water supply and sewage collection and treatment, with reduced tax in locations with low HDI and population between 200 and five thousand inhabitants in the region of the basins of Jequitinhonha, Mucuri, São Mateus, Buranhém, Itanhém and Jucuruçu, all of which are located in the north and northeast of the state of Minas Gerais, responsible for the execution of the Structuring Project of the Government of the State of Minas Gerais - Life in the Valley. (GRI SO5)

With resources from the State of Minas Gerais, the Subsidiary maintains technological and organizational structures that allow for increasing the efficiency and reducing operating costs in the provision of sanitation services, enabling to maintain a tariff model compatible with a socio-economic reality of the region without com- promising the quality of services. According to the report Studies and Models for Rural Sanitation, Prepared by the World Bank, Copanor’s experience was chosen as one the models of the deployment and management of sanitation services in isolated communities in Brazil.

Sustainability Report 2013 | COPASA MG 20 In December 2013, there were a total of 198 localities served Copasa Mineral Water from Minas Gerais with implanted water systems, benefiting 283,000 people and 61 The Subsidiary Copasa Mineral Waters of Minas Gerais was cities with sewage systems, benefiting 118,000 people. In addition, created by the government of Minas Gerais to promote the return 886 families were benefited from the implementation of sanitary of production, distribution and marketing of mineral water sources modules with toilet tank, shower and sink in their homes. Until of cities of Caxambu, Cambuquira and Lambari, in the circuit of the December 2013 out of the 92 counties that are part of the coverage waters of Minas Gerais, and also the sources in Araxá. area of Copanor, 88 already had the acquiring law passed and the program contracts signed by the mayors, allowing transfer of the The Caxambu was the first bottled water to return to the municipal government services to Copanor. market through the Subsidiary Copasa in 2008. The mineral water Cambuquira returned to the market in 2011. Araxá returned to In its first implementation stage, which corresponds to the the market in 2012. After completing the adaptation process for region of valleys Jequitinhonha, Mucuri, Mateus Buranhém Itanhém compliance with the requirements of regulators, as reported in the and Jucuruçu, will be met by 2016, 463 cities with population Sustainability Report 2012, the Lambari returned to the shelves in between 200 and five thousand inhabitants, benefiting 400,000 2013, with the completion of the reform of the factory and suitability people. The works of implementation or adaptation of infrastructure determinations to the National Health Surveillance Agency (ANVISA ) in more than 150 locations are in progress and are already com- and the National Department of Mineral Production. pleted or in final stages of approval, more than 110 projects of water and / or sewage, whose works are planned to be hired in the next Since its inception, the subsidiary invested R$ 29.7 million, years. generating approximately 850 direct and indirect jobs. In 2013, it grew to its area of operation with the inclusion of new distributors, From 2007 until December 2013, was invested by the state government through Copanor, with funds from the State Treasury, the amount of R$ 423 million in sanitation, equipment, materials and services.

Sustainability Report 2013 | COPASA MG 21 being present, besides Minas Gerais, São Paulo, Rio de Janeiro, Copasa Irrigation Services Distrito Federal, Goiás, Bahia, Ceará, Paraná and Santa Catarina, Copasa Irrigation Services began its operations in March 2008 and packaged these units 3.1 million liters of mineral water. and since then, were performed investments in the amount of 7.5 The Cambuquira and Caxambu brands are the official water million with funds from the State Treasury. These investments were for the 11th edition of Madrid Fusion, an important event in world directed towards improving the operational infrastructure and procure- gastronomy held annually since 2002. The 11th edition was held in ment of vehicles and equipment for Phase II of the Irrigation Project January 2013 in the Spanish capital, having as theme the cuisine of Jaíba. Minas Gerais. In early 2013, the state government decided to transfer management of Irrigation System Phase II of Jaíba the Association of Irrigators Jaíba II (DIJ II), based on State Decree No. 46.080 of 12 / November 2012. As a result of this change, the subsidiary is in liquidation process.

Sustainability Report 2013 | COPASA MG 22 Copasa in 2013

(GRI 2.8 /GRI 2.9)

Copasa finished the year with the supply of treated water Below are some deliberation published by ARSAE-MG in 2013: to 14.6 million people in the state of Minas Gerais, having been ► Technical Note No. 02: determine the cost of the free telephone made 136 000 new water connections and deployed 1756 km of service of the Company; new distribution networks, totaling 46,620 km. Also expanded the ► Technical Note No 04: Details calculation of the tariff adjustment service with sewage services, and now serves 223 municipalities of Copasa index and determines an adjustment of 5.25%; Minas Gerais, benefiting 9.3 million people. The volume of treated ► Resolution No. 38: provides for the obligation of prior notification sewage was 237.3 million cubic meters, which represents more than to the user in rate of change of tariff category or commencement 12% higher than in 2012. This increase is due to the start-up of 19 of the provision of services; new ETEs. ► Resolution No. 40: defines the general conditions for the provi- Regulation of the sector sion of public services of water and sanitation regulated; ► Consultation Paper No. 05: Objective contributions spoon to lay The regulation of public services in basic sanitation has an down the general conditions for the activities to be performed by objective to guarantee the balance between the needs of users (for laboratories of service providers. low tariffs, quality services and in proper amount), service providers (for economic and financial sustainability) and investors (for In 2013, ARSAE-MG made 56 economic inspections, technical adequate remuneration of investments). In compliance with Federal and commercial inspections to verify and assess the quality of services provided by Copasa. Law 11.445/2007, the State Law No. 18,309, which establishes standards for water and sewage services, created the Regulatory Agency Services Supply Sewage and Water of the State of Minas General (ARSAE-MG), special autarchy linked to SEDRU.

Sustainability Report 2013 | COPASA MG 23 Copasa participation in the state of Minas Gerais 1

The market value of the Company on December 31, 2013, totaled R$ 4.2 billion. The company ended the year with net revenue from water and sewage at $ 3.01 billion (not including construction revenue) and Adjusted EBITDA of R$ 1.14 billion. Investments totaled R$ 909.2 million, applied mainly in water supply systems (R$ 321.5 million) in business development, general purpose goods and other programs (R$ 21.3 million) and sewage (R$ 566.4 million), which resulted in significant expansion of service capacity with users of public services sanitation systems served by the Company.

Municipalities with water concession Municipalities with water and sewage concession Municipalities without a license

Note: ¹ Position on 31/12/2013.

Sustainability Report 2013 | COPASA MG 24 Concessions for water and sewage services

Fulfilling its institutional mission of being an agent of social and Resende and Santa Juliana: concessions for the provision of water economic development of the state of Minas Gerais in 2013, Copasa supply services in 12 municipal headquarters were renewed. Also expanded and ensured compliance in areas where it already oper- during the year 2013, the Subsidiary Copanor assumed new conces- ated and also expanded its market by signing new concessions for sions for the provision of water and sewage in municipal centers and the provision of sewage services health in various municipal offices. several towns and villages supply services. A consolidated basis, Copasa arrived in late 2013 as a concessionaire for provision of Astolfo Dutra, Camacho, Divisa Alegre, Florestal, Itamonte, water services in 626 municipalities and sewage in 283 municipali- Itapeva, Lagoa Grande, Marilac, Moeda, Nova Módica, Nova ties, as shown below:

Sustainability Report 2013 | COPASA MG 25 Concessions and operations of water and sewage Item Total Copasa Copanor Number of municipalities with water concession 626 580 46 Number of municipalities with sewage concession 283 237 46 Number of municipalities with operation of water 617 572 45 ¹ Number of municipalities with sewage operation 223 194 29 ¹

Note: 1The municipalities that are not yet in operation are in works and/or end-stage investment

Sustainability Report 2013 | COPASA MG 26 Technical Cooperation

Aiming to expand its market, Copasa develops technical coopera- entrepreneurs an institutional vision of the company, its investment tion activities with municipalities, sanitation companies and entities plan and the stage of technological development. This visit ended in the public and private sectors in Brazil and abroad. These activities with the expectation of stimulating technological exchange between are performed in the form of technical visits, technical assistance, both parties. consulting, getting an appropriate response to business modeling. Ethiopian Delegation: stimulated by the World Bank, the In 2013, in addition to receiving teams from various institutions director of the Department of Water and Sewage company Morrison and delegations from countries like England, Ethiopia, Mozambique Hershfield L'International Inc. (Canada), Mr. George Douglas McRae, and Morocco with the aim of benchmarking, in-service training organized the visit to Copasa a committee formed by technicians or identifying prospective partners, Copasa met the demands of and politicians, all involved in a pilot project of sewage system in businesses such as: Basic Sanitation Company of the State of São that country. The Ethiopian delegation was formed by the mayor of Paulo (Sabesp), Sanitation Company of Pará (Cosanpa), Espírito Addis Ababa, capital of Ethiopia, and the crew of the Addis Ababa Santo Sanitation Company (Cesan ), Companhia Vale do Rio Doce Water and Sanitation Development and Rehabilitation Project Office (Vale SA), Goiás Sanitation (Saneago), Autonomous Water & Sewage (Ethiopia), totaling seven people. During the visit, to the Ethiopian Service from Volta Redonda (AMSA Volta Redonda) and Municipal institutional and physical structures of the company, focusing on Water and Sewage Service of Ouro Preto (Semae Ouro Preto). Here sewage infrastructure in the city of Belo Horizonte, with technical are some details of these activities: visits to STPs Arrudas (CHP) and Onça were presented.

British mission: UK Trade & Investment (UKTI), the com- Delegation of the Government of Mozambique: mercial department of the British government, organized a visit of a the state government, through the Secretariat of State for Planning British mission technology for water management and solid waste, and Management of Minas Gerais (SEPLAG), formalized a technical between September 30 and October 4, 2013. This delegation led cooperation agreement with the government of Mozambique, aimed by Minister Richard Benyon, the UK government responsible for at technical training and training of the teams involved in the speci- Environment, Water and Rural Affairs, chose two Brazilian sanitation fication, acquisition activities and implementing routines control companies to be visited, one is Copasa, which presented to British inputs. With respect to materials for sanitation, Copasa was chosen

Sustainability Report 2013 | COPASA MG 27 to receive the teams and carry out the training on site. This training aimed at learning about macroflux shopping, specification, catalo- ging materials and governance catalog, involved the procurement team Copasa and was conducted in three stages during the month of November 2013.

Ministry of Finance: aiming at contributing to the modernization program of the management of the Ministry of Finance, the corporative management coordinator of the Economic Policy Secretariat requested visit benchmarking the Copasa, motivated by the awards received by the company, considered one of the best companies to work for in the country, the Guia Você S/A. The agenda of technical cooperation was focused on people management policy, detailing the issues highlighted by the Ministry of Finance team as of great importance to the improvement of its management process.

State Department of Social Defense (SEDS): aware of the need to change the process of managing people within the state agencies, generating returns as improving the organizational climate, improved productivity, reduced absenteeism and removal by disease, SEDS requested technical visit to Copasa to ascertain what programs were adopted by the company. It was up to the Company, which has far-reaching practices among employees programs, making the transfer of methodologies adopted to the team responsible for human resources SEDS.

Sustainability Report 2013 | COPASA MG 28 Modeling of Business Opportunities

Copasa is developing prospecting and modeling opportunities infrastructure. The winner of the bidding process was the Norberto for business activities since 2011, seeking to expand the market Odebrecht contractor. performance and strengthening the company's image. In 2013, Public-private partnership - the city sewage of the partnerships were structured as follows: municipality of Divinópolis: public-private partnership in the Foz do Brazil: Copasa is a partner of Foz do Brazil, with a form of an administrative concession for the deployment and partial minority share of 15.5% of the shares to take on a patterned design, operation of the sewage of the city of Divinópolis system in order to construction and operation (which will be transferred after 17 years) assist the program signed with the municipal government contract. of treatment of water and sewage systems, business electricity The total term of the concession will be 27 years, involving invest- distribution and collection and disposal of solid waste from Steel ments in civil works, equipment and projects, totaling approximately Vallourec & Sumitomo Tubos do Brazil, in the city of Jeceaba. The R$ 202.5 million required for the provision of transport infrastruc- return on this investment has surpassed anticipated in the work ture and sewage treatment in the basins of rivers Itapecerica, Para plan, thus proving the correctness of Copasa to innovate their way of and Ermida. The partnership aims to meet the expansion of the acting and start a new business in the industrial field. collection and treatment of sewage to a percentage close to 95% Public-private partnership - water system producer of the population by the year 2022. The expected publication of the from the Tame River: public-private partnership in the form of invitation to bid is to occur in the first half of 2014. an administrative concession for the expansion, maintenance and operation of the producer shared water system of Manso River, one For 2014, are provided for new partnerships with the private responsible for the integrated water system in the Metropolitan sector, seeking to diversify the market performance of the company, Region of Belo Horizonte supply, expanding its production capacity which intends to operate in segments such as sewage reuse sewage in more 1.8 m3 /s. The total term of the concession will be 15 years, treatment plants for industrial purposes, industrial sewage treat- involving investments in civil works, equipment and projects, totaling ment, as well as obtaining strategic concessions in Minas Gerais approximately R$ 500.6 million needed for the provision of all and out of state.

Sustainability Report 2013 | COPASA MG 29 Awards and Recognitions

(GRI 2.10) Brazilian Association of Sanitary and Environmental Engineering, the tenth Seminar on Innovation Management Sanitation, held in Brazil-Germany Chamber: the cogeneration system of Curitiba in November 2013. This objective referred practice achiev- power and biogas exploitation of ETE Arrudas was recognized with ing results through strategic operation of working groups, promoting the von Martius Sustainability Award 2013 granted by the Brazil- the dissemination and improvement of best management practices. Germany Chamber. This system aims to prevent polluting gases to be disposed in the environment as well as providing the use of the Common Market: Copasa was ranked among the top 50 gas that is released during the process of sewage treatment. largest and best companies in the state of Minas Gerais, in the category Expression, and ninth place in the category Excellence in Época Business 360º: after a thorough and unprecedented XV Minas Award Business Performance 2012/2013, sponsored by survey on the key dimensions of corporate governance in Brazil, the the magazine Mercado Comum. Related to financial performance Época Business Yearbook 360º Copasa awarded for the second were evaluated criteria such as growth in operating income, earn- consecutive year as the Best Company in the Water and Sanitation ings before interest, taxes, depreciation and amortization, industry Sector. Prepared in partnership with Fundação Dom Cabral and Boa leadership, number of employees, equity, among others. Vista Services, the yearbook included six items: financial perfor- Business Communication: in an election organized by mance, corporate governance, innovation, forward thinking, human magazine Negócios da Comunicação, Copasa was recognized for the resource practices, and environmental responsibility. third consecutive year as one of the companies best communicate Innovation in sanitation management: Copasa had the with journalists, in the sanitation category. The award is based on a practice of shared management, developed in the North Operations survey of 25,000 journalists from around the country, which elect Department, headquartered in Montes Claros, recognized by the three companies by market sector.

Sustainability Report 2013 | COPASA MG 30 PNQs: the Board of Metropolitan Operations received the S/A: Copasa was contemplated because of its human maximum recognition in the edition of PNQs 2013 - Chiron Diamond resources policies and is among the "Best Companies to Work Trophy - Level IV - 1,000 points. The DMT was the largest unit to be For." The prize, awarded by the magazine Você S/A, in 17th edition recognized in the most important awards in the sanitation sector in brings the 150 companies that invest the most satisfaction and Latin America. This award encourages businesses to invest in the employee motivation. Copasa joined the list in the category of Public sector managerial practices aimed at sustainability and competitive- Institutions. The award is one of the most respected in the country ness. Its main objective is to increase the performance of public or and selects companies for excellence in the workplace, based on the private, municipal or state, responsible for the provision of water, evaluation of the employees themselves, whose opinion on various sewage, urban draining and solid waste services. issues related to performance in human resource impacts, differ- ently, in the result. Corporate Sustainability: for the fourth consecutive year, Copasa composes the ISE portfolio of BM & FBOVESPA. This index aims to reflect the return on a portfolio composed of stocks of companies committed to sustainability, differentiating them in terms of quality, commitment to sustainable development, equity, transparency, product nature, beyond performance on economic and financial dimensions, social, environmental and climate change.

Economic Value: The Valor 1000 Award elected Copasa as the best sanitation company in Brazil. Promoted by the newspaper Valor Econômico, in the 13th edition of the yearbook, the results obtained in terms of net revenue, sustainable growth and value creation were evaluated, in addition to efficient and transparent management, corporate governance, social involvement and respect for the consumer and the environment.

Sustainability Report 2013 | COPASA MG 31 [...] Waters of Minas Gerais, true wealth Following mild to dewater. Nurturing, swimming, sailing [...]. Governance Structure

(GRI 4.1) ► free float (Shares outstanding) of at least 25%, and the Company

Copasa is a mixed economy company, publicly traded; whose held on December 31, 2013, 48.6% of the outstanding shares; controlling shareholder is the state of Minas Gerais, with 51.1% of ► conducting at least one public meeting per year with analysts and the shares. Since its IPO, held in February 2006 in order to ensure a balance of interests between shareholders and expand their rights investors, aiming to submit its economic-financial, projects and in relation to law, adhered to the highest standards of corporate prospects situation, having been held in 2013, seven meetings governance of BM & FBOVESPA’s Novo Mercado. with the Association of Investment Analysts and Professionals Between good governance practices, with which the company is of the Capital Market (Apimec), which took place in the following committed, are: cities: Belo Horizonte, Brasília, Juiz de Fora, Porto Alegre, Rio de ► action with a board of at least 20% independent directors, and Janeiro, Sao Paulo and Uberlândia; Copasa has five independent members (62.5%), a total of eight

members of the Board; ► resolution of any dispute or controversy that may arise between

► granted to minority shareholders tag along 100% (conditions the Company, its shareholders, officers and members of the identical to those offered to majority shareholders in case of sale Supervisory Board, through the Chamber of Arbitration of the BM of control); & FBOVESPA Market as arbitration clause of the Bylaws; ► dissemination of financial statements are translated into English;

► preparation and dissemination of the Code of Ethical Conduct ► sealing the accumulation of positions of chairman of the Board and disclosure and securities trading policy; and Chief Executive Officer or Chief Executive of the Company,

► issuance of common shares, with all voting shareholders; from 2014, with Copasa adopts this practice since 2007.

Sustainability Report 2013 | COPASA MG 33 Representation of the governance structure of Copasa

General Meeting of Shareholders

Supervisory Board

Board of Directors Independent Audit

Internal Audit Executive Board }

Sustainability Report 2013 | COPASA MG 34 General Meeting of Shareholders Supervisory Board Highest level of decision competence of the shareholders Copasa has a permanent Supervisory Board, which can be from has under its exclusive competence, among other things: take the three to five members and an equal number of alternates, share- management accounts, examine, discuss and vote on the financial holders or not, elected at the Annual General Meeting. Their fees are statements, determine the allocation of net income and dividend fixed by the Assembly, under the law, and term of office is one year. distribution; elect administrators and members of the Fiscal Council; resolve on reform of the Bylaws, and decide on the remuneration of directors. Additionally, the Company's Bylaws states that are the responsibility of the General Assembly the following resolutions involving amounts exceeding R$ 150 million: approval of any Composition of the Supervisory Board on December 31, 20131 investment or expenditure not provided for in the annual budget, Name Post establishment of administrative tender proceedings, exemption Paulo Nunes Elisiário President and unenforceability of bidding and the additive terms of their Jair Siqueira Vice-president contracts and approvals of administrative bidding process, signing Alvimar Silveira de Paiva Board member agreements and contracts involving loans, financing and legal Carlos Eduardo Carvalho de Andrade Board member transactions to be executed by the Company. Rafael Rodrigues Alves da Rocha ² Board member Leticia Pedercini Issa Maia ² Alternate director Sérgio Person Paula Castro Alternate director

Note: ¹ The biographies of the members of the Supervisory Board may be accessed at website www.copasa.com.br / go to, Corporate Governance section. ² Members elected as representatives of the minority.

Sustainability Report 2013 | COPASA MG 35 Board of Directors Regarding the frequency of meetings, the Board conducts a monthly meeting, and special meetings may be held whenever neces- The Board of Directors, a deliberative body, is the highest court sary. According to the Bylaws of the Board, its members must declare, of Copasa Administration. Its responsibilities include: convening the prior to determination, where the matter has been referred for General Meeting; approve the strategic planning, approving business individual or conflicting interest with the Company and shall abstain plans, annual budgets and multi-year, and operating the Company's from participating in the discussion and vote. investment plans; elect and remove directors and determine their responsibilities; approve new leases with a net present value is (GRI 4.6) negative, as the study of economic feasibility conducted by the Company; adopt positions and salaries and investment plan or unanticipated expenses in the annual budget of values between R$ 9 and R$ 150 million; choose and dismiss independent auditors.

The Council will be composed of at least five and at most nine members elected by the General Meeting of Shareholders. Its members meet unified term of one year, except impeachment, considering the annual exercise period each Annual General Meeting, and may be reelected.

The remuneration of each director represents 20% of the compensation paid to members of the Executive Board, and 50% of the value equals a fixed monthly payment and 50% average are paid in accordance with the participation of counsel in the monthly meetings. In addition, the directors receive 20% of the profit sharing to the directors. (GRI 4.5)

Sustainability Report 2013 | COPASA MG 36 director of the Company, the controlling shareholder or controlled by the Company, (IV) is not a supplier or buyer, direct or indirect, of the Company’s Composition of the Board of Directors on December 31, 20131 products or services in magnitude involving loss of independence, (V) is Name Post not an employee or officer of a company or entity offering or demanding services and / or products to the Company, (VI) is not a spouse or close João Antônio Fleury Teixeira President relative of any director of the Company, (VII) receive no compensation Ricardo Augusto Simões Campos ² Vice-president from the Company other than as director (excluding from this restriction amounts in cash from any equity interest), or (VIII) the elected councilor by Alencar Santos Viana Counselor the mechanism provided by Article 141, § § 4 and 5 and Article 239 Law Alexandre Pedercini Issa ³ Counselor 6.404/76). Alfredo Vicente Faria Salgado ³ Counselor (GRI 4.3) Enio Ratton Lombardi ³ Counselor Euclides Garcia de Lima Filho ³ Counselor José Carlos Carvalho ³ Counselor Tadeu Barreto Guimarães Counselor

Notes: ¹ The biographies of the members of the Board of Directors may be accessed at website www.copasa.com.br / go to, Corporate Governance section. ² In the present composition, only the vice chairman of the Board of Executive Officers is part of Copasa. (GRI 4.2) ³ independent Directors (art. 14, § 2, of the Bylaws: “It is considered independent adviser that (I) has no relationship with the Company, except for equity capital, (II) is not a controlling shareholder, spouse or second degree relative of a controlling shareholder, is not and has not in the last three (3) years related to a company or entity related to the controlling shareholder (excluding from this restriction people to public education and / or research); (III) has not been in the last three (3) years an employee or

Sustainability Report 2013 | COPASA MG 37 Executive Board The Executive Board consists of up to 11 members, shareholders or not, resident in the country, elected by the Board of Directors The Executive Board is responsible for managing the overall for a term of three years and may be reappointed, and shall remain business. Ordinarily meets at least once a week and, extraordinar- in office until the election and investiture of their successors. It ily, whenever required by the corporate business. is composed of the President, Vice President and nine Directors, To strengthen the alignment of strategies and guidelines four operating (Operation Center-East, Metropolitan, Northern, and of the Company as well as providing tracking relevant to the Southwest) and five corporate (Financial and Investor Relations, company’s performance issues, regular meetings of the Executive Corporate Governance, Environment, Planning and Management, Board with the management team are held. Additionally, itinerant and Technical and New Business). Board meetings occur with some executives who have strategic responsibilities for the management of investment and market expansion plan of the Company program.

Sustainability Report 2013 | COPASA MG 38 cosition of the Board on December 31, 2013 ¹ Name Post Ricardo Augusto Simões Campos CEO Technical Director and Carlos Gonçalves de Oliveira Sobrinho New Business Director of Corporate Gelton Palmieri Abud Management Juarez Amorim Chief Metropolitan Operation Director of Northern Márcio Luiz Murta Kangussu Operations Director of Planning Marcos Antônio Teixeira and Management Paula Vasques Bittencourt CFO and Investor Relations Director of Paulo Fernando Rodrigues Lopes Operations Southwest Joseph Tilden Santiago Director of Environment Director of Operations Valerius Maximus Gambogi Parreira East Central

Note: ¹ The curriculum of the Executive Board may be accessed at website www.copasa.com.br/ go to, Corporate Governance section.

Sustainability Report 2013 | COPASA MG 39 Internal Audit Measures taken in corruption cases are set forth in Standard Procedure of the Disciplinary System, the Rules of Administrative The role of Internal Audit is guided by the Annual Audit Plan Procedure for Termination of Employee and current legislation. approved by the Board of Directors, which is directly linked. This link gives independence and impartiality to the Audit to perform their (GRI SO4) functions, such as planning and execution of audit work on control systems, identification of gaps and/or deficiencies; proposal and Independent Audit accompanying improvements in internal controls. It is also respon- The company providing the audit of the financial statements sible for generating, as a product of the above functions, useful and of Copasa the year ended December 31, 2013 services were reliable to guide and support decisions of the Executive Board and PricewaterhouseCoopers Independent Auditors. During the contract the Board of Directors information. period, which began in March 2013, there was no provision of other The Internal Audit aims at strengthening internal controls so services unrelated to the audit of the financial statements. that they can generate reliable information for financial statements (GRI 3.13) and create an environment that inhibits the practice of acts contrary to that enjoyed by the Code of Ethical Conduct and Disciplinary System of the Company.

In 2013, 21 audit works, which involved 61 organizational units, representing approximately 32.6% of the units of the Company were made. In these studies, we assessed the risks of the process, including the identification of possible corruption. The main controls of the Company are included in the system Enterprise Resource Planning (ERP), with integrated operations, allowing the units responsible for monitoring the processes and identify irregularities. (GRI SO2)

Sustainability Report 2013 | COPASA MG 40 Ethical Conduct

(GRI 4.8/GRI 4.9) The Ethics Committee held weekly meetings. In 2013, talks with the aim of disseminating the guidelines of the Code of Ethical The Code of Ethics establishes Copasa corporate ethical values Conduct were given to approximately 300 employees. and guiding the Company's relationship with its stakeholders. (GRI SO3) The Ethics Committee composed of six members, the obser- vance of the established guidelines. For both, mentor and advise employees on issues relating to the interpretation and application of the Code of Ethics, conducts periodic lectures, receive complaints, evaluates and decides on possible breaches of the Code

Ethical processes 2013 ¹ 2012 2011 Open ethical processes 15 16 16 Application of ethical strictures 3 3 6 Formal recommendations to managers and employees 5 7 6 involved

Note: ¹ As of December 31, 2013.

Sustainability Report 2013 | COPASA MG 41 Also in 2013, was made the review of the Code of Conduct and Procedures Manual for the Investigation of Complaints and Irregularities, through a working group constituted by the Ethics Committee, plus representatives of the Legal Department, Audit and Ombudsman. The new versions of the Code and Manual were approved by the Executive Board and the Board of Directors. Internal Rules of the Ethics Commission was also established.

As stated in previous Sustainability Report, the following initiatives were undertaken to promote employee engagement with the theme:

► presentation on the role of the Ethics Committee of Copasa the 8th Meeting of the Council for Public Ethics with the Ethics Committees of the State of Minas Gerais;

► in partnership with the Association of Employees of Copasa, its Subsidiaries and Sponsored (Aeco) was held the Third Essay Contest and Drawing for the children and dependents of employees of Copasa, with the theme The ethics nowadays. 527 papers were presented, to prizes, of which 12 were classified as 1st, 2nd and 3rd places in four age categories, all awarded at a ceremony in November 2013;

► in partnership with the Group Theatre Copasa, an educational skit on ethics and ethical behavior in everyday life, designed for employees of the Company has been prepared.

Sustainability Report 2013 | COPASA MG 42 Relationship With Stakeholders

(GRI 4.14/GRI 4.16) Customers

Copasa relates to its stakeholders according to their values, Copasa relates to the users of its services by the grounded beliefs and principles, guided by the provisions of the Code of quality guidelines, with a focus on continuous improvement of the Ethical Conduct, aimed at aligning interests and identifying the instruments used in the relationship with customers, who have expectations of the parties involved. In this sense, uses forms of service requests for services, clarification of doubts and record interaction and relationship management with aligned channels to claims (complaints and praises). For questions that have not been communicate decisions, mobilize the workforce and consolidate resolved in instances or directly responsible units, the company partnerships for sustainable development of its business and offers the services of the Ombudsman (for more information: Copasa society. and its customers). To provide the proper relationship to society, the Company uses different communication channels and conducts the State of Minas Gerais dialogue, especially through print and digital media, according to The state of Minas Gerais, with 51.1% of Copasa shares, is the the reality of each stakeholder, such as posters, brochures, mail- Company's parent. Transactions with related parties are conducted ers, TV Copasa, intranet, Gota D’água Magazine, Health and Life at prices and conditions considered by Management consistent with newsletter, Interviews and communication with customers through those on the market, except for the form of financial settlement, mobile devices (SMS), website (Contact Us), Facebook, Twitter and which could happen through a special deal (settlement of accounts). Customer Service (115). SEDRU is the body to which Copasa is linked institutionally to the The company implemented the communication network State of Minas Gerais. formed by employees in order to enhance the dialogue with stakeholders, especially employees and society, aiming at the integration of information provided by all organizational units.

Sustainability Report 2013 | COPASA MG 43 Providers after the release of results, with simultaneous translation to English. These conference calls can also be made on demand. Copasa’s relationship with suppliers is ruled by law, with an emphasis in Law No. 8.666/1993, which guides the selection proce- (GRI 4.4) dures, hiring and management of suppliers and service providers by This and other information can be obtained at website public bodies and entities. In addition, the company's relationships www.copasa.com.br/ir. The Investor Relations team can also with suppliers of goods and services are guided by technical and be contacted at e-mail [email protected] and telephone professional criteria, compliance with laws and regulations, aimed at +55 31 3250.2015. meeting the strict needs of the organization (for more information: Copasa and its suppliers). Regulatory and inspection bodies Copasa following determinations of government agencies Investors responsible for issues related to their area of expertise, such as: Copasa adopts as investor relations policy transparency, ARSAE-MG, CVM and environmental agencies, under the supervision timeliness and quality of information provided, thereby potentially of the State of Minas Gerais Corporate Governance Committee. providing subsidies that are sufficient for making decision to invest in shares of the Company. Municipalities. The main communication tools used are: meetings with ana- As municipalities are holders of responsibility for the provision lysts and investors (Copasa Day,Non Deal Road Shows national and of sanitation services, relations with Copasa they represent the international meetings with the Association of Investment Analysts grantor. The relationship between the parties is established from and Professionals of the Capital Market and scheduled visits); the granting and program, which, in turn, are formalized in line with website investor relations, with content in Portuguese and English, current legislation, in particular the Federal Law 11.445/2007 available through the Securities Commission (CVM) and website contracts. In the regions where it operates, Copasa maintains direct investor relations, of reports as IBASE Social Annual Report, the full contact and participates in meetings with representatives of local annual financial statements, the form of reference, the financial legislative and grantor in order to ensure the quality of services, statements, annual and sustainability report, monthly operating establishing partnerships and renew and get new awards. release and quarterly results release , conference calls, quarterly,

Sustainability Report 2013 | COPASA MG 44 Internal public Copasa maintains relationship with its employees, oriented respect and compliance labor, of contracts, collective bargaining agreements and internal rules (For more information: Copasa and employees).

Society In addition to strive for excellence in providing a basic service, Copasa bases its relationship with the good practices of social and environmental responsibility, with transparency and respect for cultural values, aiming at the sustainable development of the Company's business and society. The Company conducts and supports various projects of social and cultural nature, aiming at strengthening the society and communities in which it operates (For more information: Copasa and community).

Sustainability Report 2013 | COPASA MG 45 We know that the challenges in the future will be much larger, but the will to work can help to overcome adversity, because when you love what you do, things become much easier. Economic Conditions

In order to stimulate economic activity in a strong downturn, the Product (GDP) must not exceed 2.5%. Already the dollar, driven by Federal Government, in early 2013, has kept the interest rate at 7.25% global uncertainty, ended the year at R$ 2.34, representing an annual per year, the lowest level in history, as well as deepened exemptions depreciation of 15%. from taxes and increased exponentially loans at subsidized interest For 2014, there are more questions than consensus, whether by rates of the National Bank for Economic and Social Development difficulties to discern the effects of the reduction of monetary stimulus (BNDES). By mid-year, external factors - in particular, the monetary by the U.S. Federal Reserve Bank, whether by internal uncertainties of policy decisions of the United States - have caused upheaval in the the presidential elections. Anyway, modest fall in inflation, equal to or macroeconomic scenario: the dollar rose against the real, increasing lower than the previous fiscal policy and still no target year growth are pressure on inflation. The combined risk of food prices and the official the synthesis of the best predictors for the period. inflation rates dropped to a level above the official target ceiling, leading the central bank to respond with monetary tightening during the remainder of the year.

Frustrated trying to speed up the activity level, the federal government abandoned old political dogmas and assembled a package of concessions of public services to the private sector, to clear the obsta- cles of infrastructure to growth and increase the rate of investment. However, inflation, as measured by the National Consumer Price Index (IPCA), was maintained throughout the year above the central target and ended the period accumulating a high of 5.91%, the prime rate closed the year at 10% per year and the growth rate of Gross Domestic

Sustainability Report 2013 | COPASA MG 47 Financial Performance of Parent

revenue Net operating revenue from water and sewage Parent reached R$ ► average rate increase of 5.25%, which came into force from 3.01 billion in 2013, representing an increase of 8.6% over the value May 13, 2013; recorded in 2012, which was R$ 2.77 billion. This increase was due to: ► change in the percentage of charging the sewage, depending ► 3.5% increase in the number of water savings and 5.9% in the on the start-up of STPs. number of sewage units, Copasa result of efforts to increase the Following comparative table of net revenue from water and coverage of services in the state of Minas Gerais; sewage in 2013 and 2012:

Revenues from water and sewage (R$ thousand) 2013 2012 Variation (%) Net revenue - water 1980672 1858366 6.6 Net Revenues - Sewage 1027064 909 999 12.9 Net revenue from water and sewage 3007736 2768365 8.6

Sustainability Report 2013 | COPASA MG 48 Have construction revenues increased by 7% compared to the year 2012, as the following table:

Income (expense) construction (R$ thousand) 2013 2012 Variation (%) Revenue from construction 707 082 660,725 7.0 Construction cost (690 573) (645 645) 7.0 Revenue net construction 16,509 15,080 9.5

Costs and expenses In fiscal 2013, cost of services, administrative expenses and selling expenses totaled R$ 2.29 billion, 13.6% higher value than recorded in 2012, which was R$ 2.01 billion. The following table shows, in detail, the evolution of the Company's costs in the comparative periods:

Sustainability Report 2013 | COPASA MG 49 R$ thousand 2013 2012 Variation (%)

Cost of services plus office and administrative expenses 2286482 2012471 13.6 Staff 1011363 904 002 11.9 Depreciation and amortization 428 034 377 342 13.4 Electric power 220 560 241 057 -8.5 Third party services 394 460 295 892 33.3 Material 118,939 105 436 12.8 Other Operating Costs 51,565 43,284 19.1 Tariff pass to municipalities 71,933 68,120 5.6 Allowance for doubtful accounts 73,672 67,019 9.9 Tax credits (84,044) (89,681) -6.3 + Cost of services selling and administrative expenses 1858448 1635129 13.7 (excluding depreciation / amortization)

Sustainability Report 2013 | COPASA MG 50 The items that most impacted Copasa costs in 2013 compared ► Third-party services: to 2012 were: increase of 33.3%, mainly due to rising expenditures for repair ► Staff: and maintenance of goods and service systems, resulting from increase of 11.9%, mainly due to the collective bargaining agree- new contracts with higher unit prices, considering that the heating ment, whose base date is May, to 2.2% increase in the number demand in the construction sector has impacted the prices of labor of employees of the Company, and to spending on the program Voluntary Retired Employee and / or conditions Retire, which totaled services. These expenses were also influenced by new contracts R$ 26.8 million in 2013 from R$ 8.7 million in 2012. In 2013, to provide services arising from the Company’s expansion and the spending on this program accounted for 2.6% of total payroll costs increase in spending on advertising, aiming to disseminate the Água (1.0% in 2012); da Gente Program; ► Depreciation and amortization: ► Materials: rise of 13.4%, due to the start of depreciation / amortization of assets due to the incorporation of assets and works closed during increase of 12.8%, primarily due to increased spending on treatment the comparative period; materials, fuels / lubricants and conservation and maintenance of

► Electricity: systems, due to the increase in consumption due to the expansion of energy expenditure in 2013 decreased by 8.5% (R$ 20.5 million), the Company’s materials, and increased price of these products; due especially to the drop in electricity tariff from January 2013, ► Tax credits: around 20%, depending on the measure Act No. 579/2012. This decrease was partially offset by the annual rate adjustment of the decrease of 6.3% due to the reduction of energy expenses, which is electric utility, which occurred in April 2013; one of the items that contribute most to the recovery of the credits.

Sustainability Report 2013 | COPASA MG 51 Other income (expenses) In 2013, other operating revenues decreased by 11.1%, mainly social contribution on net income, offset in 2012, amounting to due to the fact that in 2012 there were accounting in other income R$ 7.5 million tax; and additional compensation costs Food Program arising from tax incentive program to clean Watershed in the amount Worker previous years, amounting to R$ 12 million. of R$ 72 million, which did not occur in 2013. Another factor that Now other operating expenses fell 9.9% due to reduction of the weighed in reducing that item was the non-recurrence in 2013 of amounts accrued for litigation. The table below shows the values in recovery of tax credits related to the indexation of income tax and the comparative periods:

Other income (expenses) (R$ thousand) 2013 2012 Change (%)

Other operating income Technical services revenue 1,673 5,289 -68.4 Reversal of provision not deductible 33,057 57,677 -42.7 Recovery of written-off accounts 66,193 35,732 85.2 Other revenue 7,804 23,632 -67.0 Total other operating income 108 727 122 330 -11.1 Other operating expenses Non-Recurring Losses (53,653) (70,400) -23.8 Other expenses (28,063) (20,273) 38.4 Total other operating expenses (81,716) (90,673) -9.9 Total other income (expense), net 27,011 31,657 -14.7

Sustainability Report 2013 | COPASA MG 52 Ebitda The 2013 EBITDA was calculated according to CVM Resolution Excluding the revenues and expenses of construction, the value of No. 527/2012, that is covering the revenue and construction adjusted EBITDA in 2013 was R$ 1.14 billion, with an EBITDA margin costs, which were at $ 1.16 billion, against R$ 1.14 billion in 2012. of 36.3%, according to the following table:

Calculation of EBITDA ¹ 2013 2012 Change (%) Profit for the year 419 795 481 723 -12.9 (+) Taxes on income 146 363 157 424 -7.0 (+) Net interest income 158 769 122 551 29.6 (+) Depreciation and Amortization 428 034 377 342 13.4 (+) Non-operating income of subsidiaries 3,938 3,993 -1.4 (=) EBITDA 1156899 1143033 1.2 (=) EBITDA Margin 30.0% 32.0%

Adjusted EBITDA (excluding the result of construction) 1140390 1127953 1.1 Adjusted EBITDA margin 36.3% 38.7%

Note: ¹ EBITDA is not an accounting measure prepared by the Company, calculated by observing the CVM Instruction No. 527/2012, consisting of net income plus income taxes, net interest income, depreciation, amortization and non-operating income of the Subsidiaries. The EBITDA margin is calculated on the total revenue (net revenue from water and sewage revenues and construction, plus the other operating income and revenue of the Subsidiaries). Already Adjusted EBITDA is calculated excluding revenues / costs of construction. Revenues from construction, although they have no effect immediate cash, generate implications in the year they are recognized, given that its outcome is part of the calculation basis for the payment of interest on capital / dividends and participation of employee profit sharing.

Sustainability Report 2013 | COPASA MG 53 Income (expense)

Regarding financial revenue, we highlight the reduction in R$ thousand 2013 2012 Change(%) interest rates and real gain items in financial applications, due to Financial income lower cash amount available for investment in short-term securities. Monetary and exchange 14,200 51,645 -72.5 The variation of the item monetary and exchange variation is mainly variation explained by the recognition in 2012 of £ 23.1 million relating Interest 9,907 21,696 -54.3 to the restatement of proceeds from the issuance of debentures Gain real investments 37,601 58,710 -36.0 contracted with BNDES 4th. Capitalization of 24,126 2,768 N. M. The financial costs, it is noted that, due to the reduced partici- financial/other assets pation of foreign currency debt in total debt Copasa, the appreciation Total financial income 85 834 134,819 -36.3 of the euro against the dollar and was real small. It is noteworthy Financial expenses that, in 2012, was recorded in item interest on financing the same Monetary and exchange amount of R $ 23.1 million related to resources from BNDES (4th (58,036) (55,603) 4.4 variation issue of debentures) mentioned above. Thus, there was a net loss Interest on Debt (181 481) (194,447) -6.7 29.6% higher in 2013 compared to 2012, from R$ 122.6 million to Several (5,086) (7,320) -30.5 £ 158.8 million. Total financial expenses (244 603) (257 370) -5.0 Net financial income (158 769) (122 551) 29.6

Sustainability Report 2013 | COPASA MG 54 Net Income and Profitability Remuneration to shareholders The net profit of the Company determined in 2013 was R$ In respect to the dividend approved by the Annual and 419.8 million, representing a return on equity of 7.9%. The increase Extraordinary General Meeting held on April 28, 2009 policy, the in revenues from water and sewage at 8.6% was neutralized by Board of Directors of the Company decided, for the year 2013, the increase in costs and expenses at 13.6%, the reduction in we distributed dividends in the form of interest on capital at the other operating income by 14.7%, as well as by the increase in net rate of 35% of net income, adjusted for any decrease or increase financial expenses 29.6%. in the amounts specified in items I, II and III of art. 202 of Law Nº 6.404/1976. Such distributions have been carried out in the form of interest on capital, ad referendum the Annual General Meeting, as provided in the Bylaws. At the General Meeting of Shareholders, R$ thousand 2013 2012 Change (%) were ratified distributions for the year. In the following table, we Net profit 419 795 481 723 -12.9 present the declarations of interest on shareholders' equity for the Earnings (loss) per share 3.52 4.04 -12.9 year 2013.

Sustainability Report 2013 | COPASA MG 55 Reference Date of RCA Date of credit Gross Value Gross value Date of payment (R$ million) per share (R$) 1Q13 03/18/2013 03/21/2013 38.1 0.3189 05/17/2013 2Q13 06/24/2013 06/25/2013 36.4 0.3049 08/23/2013 3T13 09/20/2013 09/24/2013 31.1 0.2603 11/19/2013 4Q13 01/29/2014 02/03/2014 34.1 0.2855 04/03/2014 YTD 2013 139.7 1.1696

For the coming years, as defined in dividend policy, the Board of Directors to define the percentage to be distributed as interest on capital, within the limit of 50% of net income. The distribution will occur quarterly, giving up the payment within 60 days after each distribution.

Sustainability Report 2013 | COPASA MG 56 •

Investments

The investments made in 2013 totaled R$ 909.2 million. Of INVESTMENTS in 2013 this total, R$ 321.5 million was invested in water supply systems, R$ 909,2 MILLIONS R$ 566.4 million was allocated to the collection and treatment of sewage and R$ 21.3 million was invested in systems other business 2,34% development programs and operational. OTHERS R$ 21,3 millions In addition to using their own resources, the investments have been equated by loans from the Federal Savings Bank, the BNDES and German bank Kreditanstalt fur Wiederanufbau (KfW).

Regarding investments in water supply systems, stand out from those intended to complement interconnecting pipeline in northwest metropolitan area of Belo Horizonte and the expansion of production capacity of the Rio das Velhas system in the Metropolitan Region of Belo Horizonte and others for the deployment of water supply of de Passabem, Fama and Santana do Desertoand and the expansion of service capacity of the water supply in many cities, such as : Belo Horizonte, Campos Gerais, Cássia, Cruzília, Contagem, Coromandel, Divinópolis, Esmeraldas, Felixlândia, Itamarandiba, Nova Lima, Prata, Raposos, Ribeirão das Neves, Rio Manso, Santa Vitória, São 62,30% Gotardo, Taiobeiras e Ubá. 35,36% SEWAGE WATER R$ 566,4 millions R$ 321,5 millions

Sustainability Report 2013 | COPASA MG 57 In relation to sewage systems, we highlight the investments for the expansion of sewage from Belo Horizonte / Contagem (Meta 2014), Cataguases, Pedro Leopoldo and Pouso Alegre, Vespasian and ETE Arrudas systems; works for the construction of STPs in Almenara, Barbacena, Betim (ETE Central,) Caratinga, Conceição do Mato Dentro, Divinópolis, Extrema, Ibirité, Jequitinhonha, Justinópolis, Ribeirão das Neves, Martinho Campos, Monte Azul, Nova Serrana, Raposos, Santa Luzia, Santo Antonio do Monte, Santos Dumont, São Gotardo, São Sebastião do Paraíso, Teófilo Otoni e Três Corações, and the implementation of sewage systems in Camanducaia, Carmo do Paranaíba, Capitão Enéas, Carbonita, Coronel Fabriciano, Francisco Dumont, Itacarambi, Lontra, Manga, Serra dos Aimorés, São João da Ponte, Varzelândia e Verdelândia.

Sustainability Report 2013 | COPASA MG 58 Capital Market

Copasa’s shares are traded on the BM & FBOVESPA under the CSMG3 code, and is listed on the Novo Mercado Special Corporate Governance since the IPO, held in 2006.

The share capital of the Company as of December 31, 2013 was R$ 2.77 billion, represented by 119,684,430 common shares. Of this total, 51.1% belonged to the State of Minas Gerais, 48.6% were in circulation (free float) and the remainder (0.3%) was in cash.

In 2013, the share price, adjusted for interest on capital, a decrease of 12.3%, whereas in the same period, the Bovespa index, which serves as an indicator of the average performance of the stock prices of most marketable and representativeness of the Brazilian capital market, decreased by 15.5%. On December 31, 2013, the market value of the Company amounted to R$ 4.2 billion.

Sustainability Report 2013 | COPASA MG 59 Stock performance

120%

110%

100%

90%

80%

70%

CSMG3 60% IBOVESPA

01/01/201301/28/201302/28/201303/31/201304/30/201305/31/20306/30/201307/31/201308/31/201309/30/201310/31/201311/30/201312/31/2013

In 2013, shares of Copasa were present in 100% of the ses- (IGC), the Corporate Governance Index Novo Mercado (IGNM), the sions, with an average daily trading volume of R$ 11.7 million and index Small Caps (SMLL) and the Corporate Governance Index Trade an average of 1,600 trades per day. Its shares are part of important (IGCT). Moreover, Copasa was again selected to integrate, in 2014, index of the BM & FBOVESPA, being the highlight IBrX-Brazil Index the theoretical portfolio of ISE BM & FBOVESPA, which aggregates (which lists the 100 most liquid stocks on the stock exchange), companies that have differentiated commitment to sustainability the Stock Index Tag Along (ITAG), the Corporate Governance Index and environmental responsibility.

Sustainability Report 2013 | COPASA MG 60 Operational and Commercial Performance

(GRI 2.8)

The population served with water supply increased by 484 thousand people, a percentage increase of 3.4%, reaching approximately 14.6 million inhabitants at the end of 2013. This performance reflects the expansion of Copasa and Copanor, evidenced by the addition of 136,000 new water connections throughout the period.

Consolidated1 - assistance with water supply

Item Unit 2013 2012 Municipalities with concession2 Unit 626 625

Municipalities with operation3 Unit 617 612 Population served Thousand 14,550 14,066 Billed links Thousand units 3,915 3,779 Network extension km 46,620 44,864 Volume of water billed 1,000 m3 / year 684.359 667.325

Notes: 1 Includes locations served by Copasa and the Copanor. 2 Total municipalities in which the company holds any concessions (seats, villages, settlements or other). 3 Total municipalities in which the company operates any concessions (seats, villages, settlements or other).

Sustainability Report 2013 | COPASA MG 61 In sewage services, the total number of cities increased from an increase of 6.5%, that is, 146 thousand new connections, of 200 in 2012 to 223 in 2013, benefiting a population of 9.3 million, which approximately 43,000 are due to start operations in new an increase of 543 thousand people attended. This service is carried locations. The collection network was expanded in 2045 km, totaling by 2.4 million sewage building connections, which in 2013 showed more than 22,100 km.

Consolidated1 - compliance with sanitation

Item Unit 2013 2012 Municipalities with concession2 Unit 283 277

Municipalities with operationo3 Unit 223 200 Billed links Thousand units 2,404 2,258 Population served Thousand 9,328 8,785 Network extension km 22,138 20,093 Sewage volume billed 1,000 m³ / year 446 754 428 220 Volume of sewage treated 1,000 m³ / year 237 291 211 092

Sustainability Report 2013 | COPASA MG 62 The volume of sewage treated by the Company amounted to 237.3 billion liters, with a percentage increase of 12% over the previous year, the operation of 19 new STPs have been initiated in several cities in the state of Minas Gerais, among which Conceição do Mato Dentro, Mirabela, Montacute, Salinas, Santa Luzia (ETE headquarters) In 2013, the expansion of the Company increased the volume and Santa Rita do Sapucai. of water billed at 17.0 billion liters and 18.5 billion liters of sewage volume billed. The expansion of water and sanitation in villages that 3 volume of sewage treated (million m ) were already operated supply and start billing for water and sewage services in new locations, such as municipal headquarters Buenópolis, White Grass, Centralina, Mughal, Mirabela, Montacute and Sabara, 250,0 237,3 contributed to this growth. 211,1 200,0 182,2 3 157,1 Billed volume (million m ) 150,0 127,5 800,0 100,0 700,0 667,3 684,4 50,0 600,0

500,0 446,7 2009 2010 2011 2012 2013 428,2 400,0

300,0

200,0

100,0 ─ water sewer water sewer 2012 2013

Sustainability Report 2013 | COPASA MG 63 Also emphasize the results achieved in terms of staff productivity, as measured by total employees/1.000 connections (water and sewage), which increased from 1.96 employees/1.000 bonds in 2012 to 1.93 in 2013.

The following table sets forth, for the indicated period, the performance of certain operational / business indicators:

Consolidated - commercial performance indicators / operational Item Unit 2013 2012 Employees Unit 12.177 11,827 Productivity (A + E) Emp. / Thousand connections 1.93 1.96 Billed water volume 1,000 m³ / year 684 359 667 325 Billed volume of sewage 1,000 m³ / year 446 754 428 220 Volume of water produced 1,000 m³ / year 973 885 948 816 Index of metering % 99.9 99.89 Loss rate billing 1 2 % 29.7 29.6 Water Not Converted into Revenue (ANCR)2 l / connection / day 236.4 234.1

Notes: ¹ Average annual. ² Data Controller.

Sustainability Report 2013 | COPASA MG 64 Commercial Management The Company works with different billing cycles, depending on the period of time between the water meter reading and the maturity Rates of the account, which impacts the agility of storage. In 2013Two types The provision of water and collection and treatment of sewage of cycle was applied: in 94.5% Billing, corresponding to locations with are paid in the form of tariffs. The tariff policy applied by Copasa is better access infrastructure, we applied the lower cycle consists of 15 regulated by ARSAE-MG. working days, the larger cycle of 20 days, was applied in locations with Rates are differentiated according to categories - social, resi- poor infrastructure access, representing 5.5% billing. dential, commercial, industrial and public - and consumer groups. His determination takes into account the economic and financial balance of the concession and the preservation of the social aspects of public sanitation services operated by Copasa. Furthermore, are progressive in relation to billable volume, that is, those who consume more pay more per liter than those who consume less. This tariff policy benefits the population, raising awareness for proper water consumption. The rate of sewage collection and treatment equivalent to 90% of the water rate and sewage collection with and without treatment rate is 50% of the water tariff. Rate adjustments are annual and previously approved and authorized by ARSAE-MG. In 2013, an average rate increase of 5.25%, approved by Normative Resolution ARSAE-MG No 35/2013 of 12 April 2013 was applied. Billing The customer base of Copasa is diverse and sprayed, especially the portion from the residential consumption, equivalent to 69.7% of revenue, which reduces dependence or company’s exposure to a particular customer or group of customers. The ten largest customers account for only 5.7% of revenue and the top 50 by only 7.7%.

Sustainability Report 2013 | COPASA MG 65 Delinquency

The delinquency ratio, which corresponds to the ratio between the balance of accounts receivable and the total amount billed considering cumulative data since January 1998, reached 1.39% in 2013 and is considered one of the best in the country and reference to other companies operating in the sector.

Delinquency rates have been declining steadily in recent years as a result of a consistent trade policy, which has among its pillars development firm collection actions and debt negotiation policy with large customers and public administration.

Sustainability Report 2013 | COPASA MG 66 Key Risks, Opportunities and Strategies (GRI 1.2/GRI 4.11/GRI EC2)

In developing a strategic planning process are identified and analyzed business risks that may affect the proper functioning of the Company and its sustainable development. This identification enables proactive performance of the company, aiming to address these risks.

Sustainability Report 2013 | COPASA MG 67 Key business risks

Unilateral termination of the concession contracts. Business Risks Non-renewal of concession contracts. Expiration of the useful life of the water and sewage systems. Operational risks Significant increase water loss. Climate change (drought and flood related impacts). Reduction in revenue. Increased costs. Financial risks Restriction of financial resources for realization of investments. Lifting the default rate by public bodies. Reduction of water availability of water sources. Environmental risks Pollution of production. Shares of the Public Ministry and environmental agencies due to environmental liabilities. Increased costs arising from legal and / or regulatory constraints. Legal, economic and financial risks Uncertainty as to the methodology for tariff review by the regulator. Expenditures for renewal and acquisition of new concessions.

Sustainability Report 2013 | COPASA MG 68 Copasa established in June 2012, a working group with the From the evaluation of the relevance of risks, risk matrix, which objective to identify and pursue the best methodology in the market will be prioritized as to its criticality, considering the aspects of impact for corporate management, risks whose members conducted research and probability will be defined. The risk map will display the most and technical visits benchmarking and participated in forums and relevant risks. trainings related to the topic. Also hired a specialized company to provide consulting services to the group in developing the corporate Strategic planning review risk management process, based on standards set by Committee of The strategic planning review occurred in 2013, comprehensive Sponsoring Organizations of the Tread way Commission (COSO) in your and structured process, with the participation of the entire manage- document COSO II - ERM, aiming identify, assess, measure, assemble ment team, taking into account the analysis of the macro environment matrix, proposed treatment, establishing action plans, communicate and market performance, the characteristics of the industry and the and monitor corporate risks that may impact the company and influ- organization's internal environment. Alternatives resulting from these ence the achievement of strategic objectives. According to the general analyzes were evaluated for redefinition of business fundamentals, plan of work and its schedule, the project will be completed in May setting the strategic positioning of the organization and consolidation 2014. This process is an initiative of the strategic objective of increas- of its strategic objectives in order to maximize strengths, correct ing the efficiency and effectiveness of processes. weaknesses, seize opportunities and mitigate threats. Corporate risks have been identified as having grants: risk library In this case, entry alternatives were evaluated in new markets, public service sector presented by the consultant, consultation with de- both in and outside of Minas Gerais state, and ways of acting in partment heads and superintendents, and individual interviews with all accordance with established goals, defining initiatives, indicators and directors. Subsequently, the Internal Audit team and the working group targets, as well as their action plans needed the success of strategies. reviewed the identified risks, classifying them in strategic, financial, According to the methodology established strategic management, operational, regulatory, legal and compliance. Then in workshop risk analysis of organizational performance is monitored systematically by management, department heads, superintendents, counselors, master the Executive Board and the leaders of strategic objectives, control- analysts and strategic project coordinators assessed the inherent ling the implementation of the initiatives and their action plans and impact criteria and probability risk and forms of treatment adopted achievement of goals, using a system of hierarchical meetings, which by the company for its mitigation, resulting in the assessment of the occur according to pre-established agenda and calendar. residual risks same criteria.

Sustainability Report 2013 | COPASA MG 69 In this strategy management model, the leaders of the goals are responsible for ensuring the implementation of initiatives as planned, respecting deadlines, priorities and costs; ride, guide and motivate those responsible for such initiatives and their working groups in the implementation of action plans, and present the results to the strategic planning manager, with emphasis on the difficulties encountered and possible solutions for consideration and decision of the Board in order to fulfill the institutional mission and achieve the future vision of the organization.

Sustainability Report 2013 | COPASA MG 70 I still remember that on Sundays and holidays, my father liked to fish, and I went along to know the richness of the waters of that region. There, in contact with the exuberance of the waters, aroused my interest to preserve and care for others who are the waters. Environmental Policy

Copasa is committed to promoting the improvement of quality ► promote communication between the company, shareholders, of life in communities through the provision of water and sanita- suppliers, customers, government agencies and the community, tion services, aligning its activities with the preservation of the to motivate and disseminate responsible conservation actions environment, within the concepts of sustainable development and and environmental protection; supported on the following principles also available at: ► promote and maintain steadily, educational programs aimed at www.copasa.com.br/middleenvironment: the appropriate behavior with regard to the environment; ► comply with legislation and environmental standards for the ► document and implement its environmental policy, disseminating preservation of the environment and the continued work for their it to all sectors of society, evaluating, reviewing and periodically improvement; updating its objectives and goals. ► develop procedures for assessing the environmental performance In the strategic planning review, conducted in 2013, the process of their production systems, seeking continuous improvement of has identified the need to review the policy for environmental its processes; performance of the Company. The company complies with the current ► reduce environmental impacts and prevent pollution in all its legislation, seeking environmental regulation of their enterprises and processes, products and services; the gradual reduction of the environmental impacts of its operations through compliance with all mitigation measures determined by the ► promote and support the implementation of a system of environ- responsible environmental agencies when issuing conditions for the mental management in companies; Company’s projects. Depend on prior environmental licensing the ► work together with the community and federal, state and munici- construction, installation, expansion and operation of sewage works pal institutions, in the basins of interest of the company, seeking that use environmental resources and considered to be actually or recovery and preservation of water sources; potentially polluting or likely to cause environmental degradation. The

Sustainability Report 2013 | COPASA MG 72 legal basis for environmental licensing is the State Law Nº 772/1980, regulated by State Decree 39.424/1998.

The scheme of grant of rights to use water resources objectively carry out quantitative and qualitative control of water use and the effective exercise of rights of access to water. The Law 9.433/1997 recognizes water as an economic good and aims to create the conditions of equilibrium between supply and demand and set the charge for its use. For recovery to occur, you must: be installed and functioning in each river basin, a Committee of the Basin; being created and installed an Agency Basin, a study of the economic viability be done, and be developed by the Committee a Basin Plan, aiming to motivate and guide the implementation of programs and projects.

The State Law 13.199/1999 have on state politics water resources of Minas Gerais and establishes the right of access to water resources, with priority for public supply, the maintenance of ecosystems and the involvement of public authorities, users and communities in water resources management.

Sustainable growth is the foundation of strategic planning, which develops actions for the preservation and restoration of ecosystems, such as the maintenance of approximately 25 000 hectares of watershed protection and participation in Watershed Management Committees river in collegiate regional units and environmental education.

Sustainability Report 2013 | COPASA MG 73 Environmental Regularization (GRI EN14)

In Minas Gerais, the assignments for environmental regulation are agencies regarding actions planned and implemented that attest to the exercised by the State Environmental Policy Council (Copam), through reduction of risks to biodiversity. the Regional Units Collegiate (URCs) of the Regional Offices of the Regarding sewage systems, 274 environmental adjustments Environment and Sustainable Development (Suprams). between interim operating permits, environmental operating permits, Since 2011, any new project to be submitted for approval by advance licenses, installation and operation, licensing exemption the Executive Board must be previously validated by the Office of certificates, consents, authorizations, authorizing document envi- Environment and Water Resources, in order to enable the process ronmental intervention and were obtained waiver of environmental of environmental regulation, aligned to the strategic goals of the intervention. In 2013, we invested approximately R$ 621 thousand company. The environmental regulation enables the implementation of in the process of obtaining environmental regularization of the the expansion, improvement and implementation of water and sewage developments. systems, generating new revenue and investment to Copasa.

In 2013, the company was obtained for systems of water supply Payment for use of water resources 394 environmental settlements between environmental and operating The charge for the use of water resources is an economic tool permits for drilling, preliminary and installation licenses, certificates of for water management under national water policy and in state water exemption from licensing and environmental intervention and author- policy of Minas Gerais. The charge relates to the use of water resources izing document environmental intervention. When interventions have that are subject to licenses and aims to encourage the rational use of effects on biodiversity, studies of local environmental impact, with the water and generate financial resources for investments to restore and establishment of protection goals and monitoring processes are carried preserve the watershed basins. out, when is the case, reports are produced, shipped to environmental

Sustainability Report 2013 | COPASA MG 74 In 2013, the total amount paid was R$ 11.6 million, R$ 10.8 The creation of Basin Committees in the state of Minas Gerais million at the state level (basin of rivers Piracicaba, Jaguari, Araguari, must be made in accordance with Law No. 13.199/1999 and be Velhas, Piracicaba, Caratinga, Piranga, Suaçuí Grande, Santo Antonio based on the units of planning and management of water resources, e Manhuaçu) and R$ 800 thousand in federal (basins of rivers Doce, as defined by the State Water Resources Board. Paraíba do Sul, São Francisco, PCJ/Piracicaba, Capivari and Jundiaí) .

The amount paid for each operating system is fully passed to the client of the locations where billing is done through specific item on the invoice of water supply and sanitation services.

Committees Watershed Management (GRI SO5/GRI 4.13)

TThe Watershed Committees are deliberative and legislative entities in the territorial areas, which are intended to promote, under the management of water resources, the technical and economic viability of the investment program and consolidation of urban and regional restructuring policies, aiming at the sustainable development of its basin.

The duties of these Committees, among others: to approve the master plan of water resources and their respective budget, to integrate the state water plan and its updates; approve plans for implementation of the funds raised by charging for the use of water resources (including transfer resources in grants), as well as the default values for the recovery, establishing the criteria and standards for such, and approve the granting of rights to use water resources for large projects and pollution potential.

Sustainability Report 2013 | COPASA MG 75 Watersheds of the state of Minas Gerais Copasa has representatives in 34 of the 36 existing State Committees in Minas Gerais and in four Federal Watershed Committees. In addition to the Committees two agencies basins were installed in the state of Minas Gerais: the Live Fish Agency and Multisectoral Association of Users of Water Resources in River Basin Araguari (ABHA), which are decentralized executive units in support of its Committees Watershed designed to provide administrative, technical and economic support. The ABHA is responsible for supporting the Araguari Committee and Live Fish Agency, for supporting watershed of the Rio das Velhas, surrounding the Três Marias Dam, the Pará River, tributary of the Upper São Francisco and Jequitaí Pacuí and rivers. His performance is based on the goal of ensuring actions to promote the recovery and preservation of water resources of the state, ensuring the Company the necessary conditions which guarantee the population of its concession areas access to good quality water at affordable prices.

Doce River Basin Pardo River Basin

Grande River Basin Piracicaba/Jaguari River Basin

Jequitinhonha River Basin São Francisco River Basin

Paraíba do Sul River Basin Eastern basins smaller: Buranhém River, Jucuruçu River, Itanhaém River, Peruíbe Paranaíba River Basin River, Itaúnas River, Mucuri River, São Mateus River, and Itapoana River

Sustainability Report 2013 | COPASA MG 76 Water catchment On their core activities of water harvesting, Copasa has granted to use surface or groundwater sources granted by the Minas Water Management Institute or the National Water Agency of as the domain of wealth is state or federal. The availability of water resources in the state of Minas Gerais, combined with the policy of environmental preservation and encouraging conscious consumption - supported in the Company's tariff policy - has enabled the Copasa avoid implementing rationing policies throughout its history .

Copasa owns or has rights to use the land of the catchment areas of their systems for water production. Follows the situation in relation to the right to use the waters in December 2013:

State and federal grants Amount Discounts granted for use (m³/s)

Surface abstractions 628 49.4 Groundwater abstraction 1,339 12.04 Total awarded 1,967 61.44

Sustainability Report 2013 | COPASA MG 77 Monitoring of water resources Copasa monitors its 1,551 surface and underground water sources in towns serviced by the company throughout the state of Minas Gerais. The collected data are stored in specific databases and made available for inspection to determine the geo-hydrologi- cal and hydro-climatic characteristics of diversified Minas regions.

The monitoring program includes:

Station Collection points Measurement Type

Fluviometric 401 Flow of surface water sources Rainfall 534 Rainfall Surface: 609 Quality of raw water Subways: 893 Quality of water abstracted Watershed / dams: 87 Self-Monitoring of STPs 827

Sustainability Report 2013 | COPASA MG 78 Collection and Sewage Treatment (GRI EN26)

The company has developed a significant effort to expand the collected. Seeking tailor misstatements sewage and pollution of services of collection and treatment of sewage, seeking to expand rivers, Copasa invests in the following actions: coverage to the collection, interception of sewage generated and Hunting-Sewage Program: it is one of Copasa environ- deployment of new STPs. In this sense, Investments of R$ 341.2 mental actions, which aim to identify and eliminate all improper million in 2013, with an increase in the volume of treated sewage, sewage dumping into pluvial networks and streamlets, directing which reached 237.3 billion liters, of the order of 12% compared them to the STPs. Thus, the program contributes to the elimination to the year 2012 were performed. A consolidated basis, Copasa, of pollution of water bodies and improving the quality of life. This in 2013, he served as a concessionaire for provision of sewage program was conceived and designed in 1997 and started its services in 283 municipalities. interconnection works from the year 2000. Since then, several To contribute to the growth strategy of the company with regard dumps were eliminated in undue storm sewage networks and water to the expansion in concessions sanitary sewage services and to courses in the cities of Belo Horizonte, Contagem, Ribeirão das promote the training of employees, the adequacy of systems and Neves and Santa Luzia, part of the Velhas River basin, and in Betim standardizing procedures of sewage services, we developed the municipality belonging to the basin Paraopeba. In 2013, the program Training Program and Standardization of Operational Procedures coverage was increased, including the city of Teófilo Otoni. in Sanitary Sewage Systems (Proceg), aiming to flatten and spread knowledge and best practices inherent to these services, their In other places, where there is a structured program, diverse interfaces and related topics. In 2013, 126 employees were trained. actions are performed aiming to curb the improper dumping, for example, participation in municipalities where there are connections To monitor the results, among other initiatives, the Company with high values of feasible sewage. maintains strategic indicators related to the achievement of market expansion plan and the pollutant load removed from the sewage

Sustainability Report 2013 | COPASA MG 79 Receiving Program and Control of Domestic Sewage treatment plants for industrial reuse (water reuse ); enable compliance not (Precend): created in 2003, after the inauguration of ETE with legal standards regarding the characteristics of the effluent and Arrudas the Precend started to work together to Minas companies final sludge produced in sewage treatment plants; ensure longer life of seeking a suitable destination for industrial sewage in these organiza- the sewage treatment plants from Copasa. tions. Initially deployed in the Metropolitan Region of Belo Horizonte, To verify compliance with effluent discharge into the public sew- the program has expanded to the interior of the state of Minas Gerais. age system standard, currently, about 40% of registered companies Started with 32 companies registered in 2003, currently has more have a contractual obligation to submit to Copasa self-monitoring of than 2,770 companies. their effluent. The frequency of the self-monitoring report is set accord- The program, through its control mechanisms, enables Copasa ing to the size of the business, its pollution potential risk in the receipt receive in its sewage system non-domestic sewage and have them of their effluent. sent to treatment plants safely. His goals are: to ensure the integrity Monitoring Program Receiving Bodies: has the objec- of pipelines that receive many dumps, prevent the occurrence of tive of knowledge of water quality of several existing streams and explosions and flammability, prevent the introduction of pollutants that creeks in the state of Minas Gerais, in order to support the deployment pass through the WWTP and continue to pollute waterways, protect the of new sewage treatment plants and sewage pumping stations; checks collector system against corrosion, fouling, obstruction and toxic fumes, the operation and effectiveness of the process of STPs, and measures reducing the risks related to the health of workers who deal with the the effectiveness of actions environmental carried by Copasa under the public sewage system, enable the use of the final effluent from sewage Hunting-Sewage Program and Precend.

Sustainability Report 2013 | COPASA MG 80 Strategic Revitalization Project Velhas River Basin - Goal 2014 (GRI SO5)

The Velhas River is the largest tributary of the São Francisco River Belo Horizonte, and revitalization of the Pampulha Lagoon in order to basin, with a length of 801 km, along which are included 51 municipali- ensure the return of the fish and swim in the Metropolitan Region of ties crossed by the river and its tributaries. Considering the economic Belo Horizonte in 2014. importance of the region and the level of degradation of the basin, In the period 2004-2013, Copasa hired more than 200 works, became a fundamental institution of actions for the conservation, estimated around R$ 1.8 billion, with emphasis on the modernization preservation and restoration of water quality standards by 2014 goal, of ETE Arrudas and implementation of secondary treatment at ETE Oz, one of the structural designs of the Government of the State of Minas located in the Metropolitan Region of Belo Horizonte. Also noteworthy General whose main actions are: selective collection and treatment are the works for the removal of sewage Pampulha Lagoon in Belo of solid waste collection, interception and treatment of domestic and Horizonte municipality. industrial sewage in all municipalities of the Metropolitan Region of

Sustainability Report 2013 | COPASA MG 81 Percent of sewage treated in relation to that collected in the Rio das Velhas basin

VELHAS river basin - RMBH

Sustainability Report 2013 | COPASA MG 82 Program to clean Paraopeba River Basin Revitalization of the São Francisco The Federal Republic of Germany through KfW supports Brazil in Aiming to ensure the sanitation of Minas municipalities in its efforts to protect the climate and the environment. With the program the São Francisco basin, Copasa signed an agreement with the to clean up the Paraopeba River Basin , the German government Development Company of the Valley of the São Francisco and supports Copasa and the Government of the State of Minas Gerais in Parnaíba (Codevasf), whereby hired works for the complete systems achieving their goals in relation to improvements in the environmental for sewage (collection networks, interceptors, pumping and TEE) situation and the living conditions of the local population. The for the following cities: Bom Despacho, Capitão Enéas, Francisco program involves funds of R$ 450 million, of which Copasa invested Dumont, Itacarambi, Juvenilia, Lontra, Manga, Pedras de Maria da approximately 30% by December 2013, amounting to € 100 million Cruz, Presidente Juscelino, Prudente de Morais, São João da Ponte, the amount contracted with the German bank. The project schedule Taquaraçú de Minas, Varzelândia and Verdelândia (completion provides for shares to be held by 2016. planned for 2014) and Brasilândia of Minas Gerais, Espinosa and São Gonçalo do Abaeté (completion planned for 2015). This program is directly linked to the strategic actions of the Government of the State of Minas Gerais, aiming to revitalize the river basin and universal access to basic sanitation by means of the following components: construction and expansion from eight sewage systems and use of biogas; construction of two units of waste treatment; mobilization, sensitization and health and environmental education, especially to promote adhesion property to the sewage system, aiming at the sustainability of socio-economic and environmental benefits, protection of the most important sources for the supply of drinking water.

Sustainability Report 2013 | COPASA MG 83 Environmental Conservation

(GRI EN13) Among the activities developed in the reserves, include: limiting the spread of fires; avoidance of fishing and poaching and protection of By preserving several green areas, Copasa ensures protection of natural heritage, identification, study and reintegration of endangered various species of flora and fauna native ecosystems present in the state species, maintenance of roads that cut through the reserves to expedite of Minas Gerais. Since orchids that occur in areas of vegetation in the the movement of teams, monitoring of surface and groundwater sources, areas of ferruginous yoke of iron quadrangle of the state until the maned execution and maintenance of manual and mechanized firebreaks, wolves in the Minas camps of the semiarid region of Montes Claros conducting campaigns on deforestation and burning, and environmental region there are a large number of protected species, components education for the local population. biodiversity. Some protected species are only found in restricted areas of environmental reserves, called endemic species. Besides maintaining partnerships with institutions that also care for the preservation of biodiversity, such as universities, Copasa compose Copasa maintains 15 environmental reserves within the state of the Advisory Councils of the Rola Moca State Park, Green Mountains Minas Gerais, totaling 24,297 hectares of preserved areas under perma- State Park, Lapa Grande State Park, Environmental Preservation Area nent surveillance asset, in order to avoid the presence of intruders, fire and South Area of Environmental Conservation Lagoa Santa Karst. hazards and degradation of native flora and fauna, and risks of existing water sources there. The fire brigades of the Company are specially (GRI 4.13) trained to act in prevention and firefighting principles, acting also in surrounding areas, preventing the fire from spreading and step inside your reservations. The implementation and maintenance of manual and mechanized firebreaks in the areas of water producing systems provide fast access firefighters and firefighters in containing the spread of fires.

Sustainability Report 2013 | COPASA MG 84 Environmental reserves The following table presents the environmental reserves and their respective areas:

Designation Municipality Area (ha)

Balm Ibirité 391 Barreiro Belo Horizonte 880 Catherine Brumadinho 387 Playpen Belo Horizonte 151 Latches Nova Lima 1,074 Oath Oath 3,180 Medina Medina 569 Horsefly Nova Lima 1,250 Pau Fruit Diamantina 1,700 Blue Stone Blue Stone 1,156 Rio Manso Rio Manso, Bonfim, Brumadinho, Crucilândia, Itatiaiuçu 9,000 Rola Moca Ibirité 112 Serra Azul Mateus Leme, Igarapé, Itauna, Juatuba 3,200 Taboões Ibirité, Sarzedo 247 All Saints Teofilo Otoni 1,000 Total 24,297

(GRI EN11)

Sustainability Report 2013 | COPASA MG 85 Water Source Protection Program Introduced 24 years ago, it is a program focused on recovery, protection and preservation of the sub-basins of water sources used by Copasa, to ensure its life and continuity of water abstraction for public water supply and environmental protection. Landowners are engaged in the program, so as to form environmental awareness necessary to the continuity of the activities essential to achieve the desired results. Aiming to expand the action, environmental education workshops and other educational and awareness-raising activities are conducted, further solidifying the executed actions. In 2013, approximately R$ 2 million was invested by planting over 86,000 seedlings of riparian forests, farms benefiting 43 municipalities. The program also caters to what determine Gerais the State Law 12.503/1997 that created the State Water Conservation Program.

Sustainability Report 2013 | COPASA MG 86 Energy Efficiency

(GRI EN26) Copasa performs monitoring and control of electric energy for Water, the International Water Association, and the resolutions of the acquisition in captive and free markets, self-production and energy National Electric Energy Agency and the National Program for Energy efficiency measures, including control and combating real and apparent Conservation in Sanitation Sector. The EEP aims to establish guidelines water losses, the main opportunity to reduce the specific energy con- and procedures that help the company achieve and maintain high levels sumption. With this work, has gotten gains in standardization of actions of efficiency in operational and administrative processes, with lower to reduce energy costs and water losses as well as to take advantage energy costs. of opportunities for self-production from the energy available in sewage In the context of the Strategic Plan 2013-2017, was endorsed treatment processes and the accumulation of dams water. improve the program as one of the initiatives to achieve the strategic The energy efficiency projects aimed at achieving the lowest power goal of increasing the efficiency and effectiveness of processes. This consumption, with lower costs, notwithstanding the excellence in quality enhancement pierces the review and update of the ESSP, including the of service to society through integrated actions with evaluative and shares of own-energy generation, focusing on the pursuit of productive participative action, in line with the guidelines industry and international efficiency, optimization of production volume and minimize operating policies, in the quest for preservation of natural resources and improved expenses while maintaining the standard of quality at the lowest possible quality of life and environmental conditions. cost. Copasa maintains, better known as the Energy Efficiency Program (EEP) Integrated Program for Reducing Water Losses and Costs The indicator Energy Not Converted into Result (JAM) expresses Energy, which instituted actions to rationalize the use of electricity in the amount of energy the aggregate volume of water not converted their operational and administrative processes, basing himself the into revenue, as indicated by the EEP, and depicts the result of energy concepts and guidelines of the National Program to Combat Waste efficiency measures in reducing water losses.

Sustainability Report 2013 | COPASA MG 87 Evolution of the use of electricity in Copasa (GRI EN3)

Year kWh self- JAM2 kWh/ ANCR2 acquired produced kWh1 lig./day l/lig./day

2013 864 755 531 8586790 0.20 236.48

2012 831 820 818 - 0.20 234.12 2011 802 778 591 - 0.19 230.57

Notes: 1 In 2013, the Company began regular operation of thermal power plant of ETE Arrudas, reaching 60.6% of energy consumption of ETE with the generation of the plant. The thermoelectric power of this unit is 2.4 mega- watts. The heat resulting from the production of electricity in turbines also heats the sludge used in the anaerobic reaction and increases the efficiency of the digesters, which speeds up the work and increases the current treatment capacity at the station. Moreover, Copasa was approved by the Clean Development Mechanism (CDM) project, concerning the reduction of emissions resulting from the implementation of this fuel greenhouse gases, which was expected a reduction of 26,237 tons of carbon dioxide equivalent for the duration of accreditation. ² The figures given refer to the mean of the last 12 months calculated in December of each respective year.

Sustainability Report 2013 | COPASA MG 88 Climate Change

Copasa since 2010 comes from the 2009 data, voluntarily ► Blue Fleet Program: developed in Operating Department North, participating in the Volunteer Program Record of Annual Emissions of headquartered in Montes Claros, aims to improve the manage- Greenhouse Gases of Projects in the State of Minas Gerais, with the ment of its fleet of vehicles, incorporating practices that prioritize Carbon Disclosure Project (CDP). The annual preparation of inventories the reduction of operating costs, the sequestration of emissions of greenhouse gases is an important environmental management tool of pollutants and waste management; and Copasa have used to identify and quantify the major sources of ► energy efficiency projects: cogeneration of electricity in thermal greenhouse gas emissions generated by its activities. power plant ETE Arrudas, preventing greenhouse gases are Changes in the hydrologic regime resulting from climate variability released into the environment; studies of energetic use of biogas and change pose a risk to the activities of Copasa, particularly for the and sludge STPs in other midsize company’s concession. public supply. The company has been implementing and participating in other initiatives that seek to examine the subject, mitigate the genera- (GRI EN18) tion of greenhouse gases and / or dealing with the impacts of climate In order to establish a climate change policy, the Board approved change, such as: the establishment of the Climate Committee, a management committee ► participation in the Climate Forum Ethos Institute in Minas of prevention policy against the effects caused by the changes and Forum Sustainable Production and Consumption and the climate variability. In this report, are considered the data for 2012, which Municipal Committee on Climate Change and Eco-efficiency of the showed that 87.1% of these emissions come from sewage. The transport Municipality of Belo Horizonte; of products, goods, materials and workers appeared to be responsible for 2.4% of emissions, the consumption of electricity by 10.4%, and 0.1% ► actions for preservation, maintenance and expansion of green from other sources. areas for the protection of watersheds, which contribute to the sequestration of greenhouse gases; (GRI EN29)

Sustainability Report 2013 | COPASA MG 89 Some indicators presented in this inventory show that the increase in the fraction of treated sewage in relation to total sewage collected and increase the fraction of treated sewage in mixed and aerobic stations contribute to reducing emissions of greenhouse gases. There is a tendency that these emissions show a gradual decrease in the coming years, considering that the Company has increased the volume of treated sewage.

volume of sewage treated (million m3)

250,0 237,3 211,1 200,0 182,2 157,1 150,0 127,5

100,0

50,0

2009 2010 2011 2012 2013

Sustainability Report 2013 | COPASA MG 90 Emissions in tons of CO2e in 2012

Reductions in tons of CO2e Emission Activity Indicator 2012 Indicator Emission Sewage collected (untreated) Total volume of sewage collected l / year 114,971,192,000.00 254,047.89 Treated sewage Total volume of sewage treated l / year 178,263,990,345.60 205,959.28 Scope 1 Diesel 2,234,011.51 5600.96 Direct emissions Total fuel Gasoline 3,305,221.00 5904.24 Fuel consumption consumption in liters Natural Gas Vehicles (NGV) 0.00 0.00 Scope 2 Indirect emissions Electric power Total energy consumption 831,820.82 55033.98 Total inventory Total volume of sewage collected (m3) 324,279,599.00 526,546.34 Bus transportation 764,441.00 21.94 Scope 3 Sum of the distances traveled in all sections other emissions Airlift 2,616,212.00 384.69 Total Scope 3 406.63

Total biofuel con- Biodiesel 0.00 0.00 sumption in liters Ethanol 1852.85 2.73 Emissions from biomass Fuel consumption Biofuel contained in Biodiesel 111,700.58 272,39 fuels Ethanol 661,044.20 972,32 Total biomass 774,597.63 1247.44

Sustainability Report 2013 | COPASA MG 91 Total emissions in 2012 - fuel

Fuel Volume (l) * Energy (kcal) Energy (MWh) Emissions (tCO2eq)

Common Diesel 2.234.011,51 18.005.685,97 20.936,84 5600,96 Regular gasoline 3.305.221,00 20.349.584,65 23.662,31 5904,24 Ethanol consumed 1852,85 9.443,42 10,98 2,73 Biodiesel contained in diesel 111.700,58 884.668,56 1028,68 272,39 Contained ethanol in gasoline 661.044,20 3.369.143,97 3917,61 972,32 Total Scope 1 38.355.270,62 44.599,15 11505,19 Total biomass 4.263.255,95 4957,27 1247,44 Total 42.618.526,57 49556,43 12752,63

Total emissions in 2012 - electricity

Year Total Emission factors Emissions tCO2eq Total kWh Total MWh Total 2012 831.820.818,09 831.820,82 0.0653 55033,98

(GRI EN16/GRI EN17)

Sustainability Report 2013 | COPASA MG 92 Environmental Education

In 2013, we implemented the Environmental Education environmentally friendly attitudes regarding employees with benefits Program Broadening Horizons, whose goal is to strengthen and sup- in reduced waste and waste generation , among others. port the practice of environmental education in setting guidelines focused on the alignment of related programs, projects and actions Program Chuá Sanitary and Environmental in building a new culture in relation to environment, taking as the Education central theme water, considering it essential for life, health, sustain- The study of water, the treatment process, the basics of hygiene able development and social inclusion. and cleanliness and waterborne diseases is a matter directly or indi- After participatory drafting process, the program was adopted rectly connected to sanitation and is part of the curriculum of primary and institutionalized by the direction of Copasa and institutionalized education institutions. Chuá The program was developed with the Intersectoral Steering Committee for Environmental Education, com- support of the Regional Offices of Education to serve students and the posed of representatives of operational and corporate boards. With community by providing educational materials for teachers, students monthly meetings, the Committee has worked to fulfill its mission, and representatives of other segments of the community, visits to the promoting some activities, among which are: the quarterly meetings environmental reserves Copasa, water treatment stations, STPs and of environmental education, which cover the process of house environmental education centers. In addition to the tours, lectures, in training of employees on the subject, and the coordination with the which the Company’s technicians teach notions about the treatment of Foundation State of the Environment (FEAM) to establish partner- water and sewage, conscious consumption, care for the environment, ship for implementation of Copasa Atmosphere Program, which processes for monitoring water treated by the company in its labs, care aims to raise awareness of behavior change and internalization of areas are given preservation, among others.

Sustainability Report 2013 | COPASA MG 93 With 27 years of experience, the Chuá is destined for other education initiatives have also been developed directly in schools segments of society, seeking the formation of citizens committed to (seminars, lectures, other activities), focused on the theme of sanita- ecological values, personal attitudes and practices that reflect position to approximately 1,430 students. tively on the quality of life and the environment. Performed in hundreds Ceam Curvelo of municipalities in Minas Gerais, the program has served more than two million children and adolescents. In 2013, about 250 thousand In 2012, we implemented the CEAM in Curvelo, in partnership people participated in the program. with the Federal Center of Technological Education of Minas Gerais. Located in the area of water treatment station of the city, the space Environmental Education Centers (Ceam) is used for development of environmental education for the entire community. (GRI EN12) Ceam ETE Arrudas e ETE Betim Ceam Barreiro The Arrudas ETE has a CEAM created with the objective of carry- Situated in an area of special protection for environmental ing out activities related to the environment and promote awareness preservation (State Decree Nº 22,091, of June 8, 1982), has 880 of environmental preservation. Among other activities, it is a place of acres, Where is also located a source responsible for strengthening the visitation open to the public. The CEAM Arrudas ETE is to highlight the supply for the local population. biomonitoring system, consisting of an aquarium of about ten thou- The structure of the CEAM Barreiro enables the community to sand liters, which is powered exclusively by liquid resulting from sewage use as a source of information and awareness about the importance treatment ETE, allowing you to control the quality of the final effluent of environmental preservation, especially for the guaranteed sources of the treatment plant before to be released in Ribeirão Arrudas. One of supply. Environmental initiatives developed awareness of visitors of the peculiarities of that biomonitoring is the use of fish in the São seeking to preserve the area through participation in environmental Francisco basin itself as an indicator of efficiency. Among the various workshops and fun activities with the use of an interpretive trail that species found there: matrinxã, mandi-yellow, curimatã piau and white. runs along part of the river bed and part of the forest that surrounds The CEAM ETE Betim been in operation since November 2013 and is the area. similar to the ETE Arrudas. In 2013, about 3,700 people, including students and teachers from 78 educational institutions, businesses, employees and other representatives of the company visited the center. Other environmental

Sustainability Report 2013 | COPASA MG 94 Education water consumption Integrated environmental action Copasa Minister lectures in industries, schools, hospitals, Through playful actions, lectures and public hearings, the condominiums, public bodies and businesses, addressing issues Company holds meetings which aim to engage participants on related to the overall performance of the Company in relation to issues related to environmental education. In 2013, we highlight the water supply, sewage collection and treatment systems and envi- achievement of educational games, contests phrases, drawings and ronmental education supplies. Information aimed at raising public essays relating to sanitation, benefiting more than two thousand awareness of the need for environmental preservation and combat- people. ing waste water, as well as tips for leak detection and cleaning of water tank are presented. In 2013, 163 lectures were held, given an approximate audience of 12,290 people, while 63% were taught in educational institutions.

Monitored visits Aiming to educate the community about the importance of conservation of water sources and rational use of water resources, by demonstrating the various stages of the production process, such as collection, treatment and distribution of water, Copasa keeps monitored visits in their systems basic sanitation services.

Sustainability Report 2013 | COPASA MG 95 So, it is through art that we will display the importance of the sewage treatment plant and the importance of a clean river, cleaner each day. Copasa and its Employees

The policy of human resource management Copasa calls for and by the Institute of Directors (FIA). The result, published in Guide the promotion of fair, ethical, and democratic isonomic treatment 2013 S/A, Pointed Copasa as one of five public institutions manage- to employees, seeking to reconcile the expectations and interests ment models of people across Brazil. between them and the Company. The company seeks to meet the In 2014, the company held again with all employees, internal expectations and needs of employees, primarily through perfor- climate survey and continue participating in external surveys, in ming, every two years, the organizational climate survey, using the order to compare with the market, make improvements and raise Organizational Climate Indicator (CLOG) as reference management. their productivity levels. The result analysis subsidizes planning aimed to maintain the quality and harmony in the workplace and improve the quality of life and Workforce performance of employees. A survey conducted in 2012 showed (GRI LA1) an index of favorability of 75.7% and showed a sense of importance and pride to work in the Company. The result was higher than the average 66.4% market share, calculated on research conducted in Year 2013 2012 2011 the same period of 20 Minas companies of medium and large. In Number of employees 11.864 11.611 11.535 2013, based on research conducted in the previous year, all business units develop actions aimed at improving opportunities identi- Number of admissions 767 378 479 fied. The needs identified were also addressed in the revision of the Number of employees reinstated 1 3 5 strategic planning process, which included initiatives regarding the Amount of layoffs 490¹ 278 355 appropriateness of some human resource policies. Amount of disability retirees 23 27 30

Also in 2013, seeking external references regarding the policies and practices of personnel management, Copasa participated Note: ¹ This number includes 335 retired employees off through the Search Best Companies to Work For, conducted by the magazine S/A Voluntary Retirement Program (PDV).

Sustainability Report 2013 | COPASA MG 97 Employees by category 2013 2012 2011

Category Amount % Amount % Amount % Upper 1.017 8,6 1.034 8,9 1.002 8,7 Technical (operational or administrative) 2.399 20,2 2.334 20,1 2.207 19,1 Operational 7.524 63,4 7.282 62,7 7.369 63,9 Administrative support 924 7,8 961 8,3 957 8,3 Total 11.864 100,0 11.611 100,0 11.535 100,0

Employees by region of the state of Minas Gerais

Area / gender Male Female Total % Central region 858 61 919 7,75 North-central region 679 50 729 6,14 Metropolitan Region of Belo Horizonte 4.084 757 4,841 40,80 Northeast 699 36 735 6,20 Northern Region 549 33 582 4,91 Southeast 934 45 979 8,25 Southwest Region 731 57 788 6,64 Southern Region 1.517 97 1.614 13,60 Steel Valley Region 636 41 677 5,71 Total 10.687 1.177 11.864 100,00

Sustainability Report 2013 | COPASA MG 98 2013 2012 2011

Unity Amount % Amount % Amount % Operational Directors 10.152 85,6 9.824 84,6 9.754 84,6 Units management and administration 1.712 14,4 1.787 15,4 1.781 15,4 Total 11.864 100,0 11.611 100,0 11.535 100,0

Age 2013 2012 2011 Employee turnover (total by gender, age and region) 18 to 35 2,922 2,678 2,799 Year 2013 From 36 to 45 3,680 3,674 3,683 Men (%) Women (%) Total (%) Gender 46 to 60 years 4,853 4,822 4,694 5,50 4,80 5,43 Age Above 60 409 437 359 Under 30 2,24 1,60 3,85 Total 11,864 11,611 11,535 30 to 50 1,67 1,31 2,98 Above 50 1,58 1,90 3,48 Region Metropolitan Region of 1,93 0,34 2,27 Belo Horizonte The state of Minas Gerais 3,57 0,20 3,77

(GRI LA2)

Sustainability Report 2013 | COPASA MG 99 Valuing Diversity In Copasa, people are recruited, selected and contracted in accordance with criteria established by law. To ensure equality of opportunity, fairness and justice, the Company encourages inclusive practices, as in the internal selection process for positions of trust and effective positions, which provide, in the event of a tie in the final score, preference for female candidates and by (the) candidates (the) black (the), in that order. The invitations to tender predict 10% of the vacancies for each position for admission of persons with special needs jobs and the company has sought to adapt their dependencies with special lifts, ramps and own bathrooms. The Company promotes respect for religious diversity, enabling the realization of Masses, services and events in its internal spaces. The celebration of International Women's Day is an event of signifi- cance in the timing of Copasa, offering diverse cultural and artistic programs to employed, promoted with the support of Aeco. Since 2003, the homosexual employees may include his companions of the same sex as dependent on the Association of Health Care Employees Copasa (Copass Health), and the Company anticipated the deployment of Precedent Ruling No. 12/2010 National Health Agency.

Sustainability Report 2013 | COPASA MG 100 Employees by education and gender Education Female Male Total 4th incomplete series 1 269 270 Full 4th grade 5 515 520 5th to 8th incomplete series 4 268 272 Full 5th to 8th grade 7 960 967 Incomplete secondary education 5 176 181 High school 453 6,681 7,134 Incomplete higher education 32 166 198 University degree / postgraduate 670 1,652 2,322 Total 1,177 10,687 11,864

Remuneration by gender Female Male Salary range Amount % Amount % From 1 to 4 SMs * 353 29.9 7,880 73.7 5-9 of SMs * 455 38.6 1,690 15.8 10 to 14 SMs * 189 16.0 519 4.9 15 to 19 SMs * 73 6.2 167 1.6 20 to 24 SMs * 55 4.6 175 1.6 SMs 25 or more * 52 4.4 256 2.4 Total 1,177 100.0 10,687 100.00

Note: * Minimum Wage effective in December 2013. (GRI LA14)

Sustainability Report 2013 | COPASA MG 101 Management positions by gender Board / Council Post Female Male Total Post Female Male Total Advisor 2 20 22 Executive Board 1 9 10 Auditor General 0 1 1 Board of Directors 0 9 9 Head of technical advice Supervisory Board 0 5 5 1 0 1 Presidency Head of department 0 11 11 (GRI LA13) Chief of staff 0 1 1 Coordinator 2 7 9 Manager Operational District 1 39 40 Division Manager 33 72 105 Admissions by gender Of fundraising manager 0 1 1 2013 2012 2011 Of large projects manager 0 2 2 Number % Number % Number % Legal Attorney 0 1 1 Gender Superintendent 6 16 22 Female 57 7.4 44 11.6 40 8.4 Subtotal 45 171 216 Male 710 92.6 334 88.4 439 91.6 Director 1 9 10 Total 767 100.0 378 100.0 479 100.0 Total 46 180 226

Sustainability Report 2013 | COPASA MG 102 Number of employees by race ¹ Race 2013 2012 2011 Women Men. Total Women Men. Total Women Men. Total

White 820 5,959 6,779 833 5,907 6,740 852 5,944 6,796 Yellow 5 44 49 5 38 43 4 35 39 Mixed Meters 305 3,698 4,003 294 3,561 3,855 285 3,476 3,761 Black 47 981 1,028 47 924 971 43 896 939 Indigenous 0 5 5 0 2 2 0 0 0 Total 1,177 10,687 11,864 1,179 10,432 11,611 1,184 10,351 11,535

Nota: 1 The classification of employees by race is accomplished by self-declaration. ² According to Brazilian Institute of Geography and Statistics (IBGE), the browns constitute one of the five groups of “color or race” that make up the Brazilian population, Together with whites,black,yellow and indigenous. The term ‘brown’ is most commonly used to refer to mixed race Brazilians, that is individuals with varied racial ancestries.

Sustainability Report 2013 | COPASA MG 103 Compensation by class Negros Browns Other breeds

Salary range Number % Number % Number % Total employees 1 to 4 SMs * 832 7,0 3.025 25,5 4.376 36,9 8.233 5 to 9 SMs * 141 1,2 677 5,7 1.327 11,2 2.145 10-14 SMs * 36 0,3 181 1,5 491 4,1 708 15-19 SMs * 9 0,1 41 0,3 190 1,6 240 20-24 SMs * 6 0,1 44 0,4 180 1,5 230 SMs 25 or more * 4 0,0 35 0,3 269 2,3 308 All 1,028 8,7 4.003 33,7 6.833 57,6 11.864

Notas: * Minimum Wage effective in December 2013.

In 2013, the salary of the lowest Copasa reached from the date of the category (May), an 62% greater than the national minimum wage. Only 6.8% of the Company’s employees receive lower wages. (GRI EC5)

Sustainability Report 2013 | COPASA MG 104 Opportunities for all absorption must occur within six months after the start of operation. In 2013, 22 employees were absorbed from city halls. The human resource management is supported by practices that ensure non-discrimination and equal opportunities for all, enable (GRI EC7 ) the professional growth of employees and encourage the inclusion of Internship Program: designed with the objective of minorities. contributing to the training of students at the university and technical level, in 2013 offered opportunities for 232 students, who underwent Being a state-owned enterprise, mixed economy, whose main training in various business units. The program also offers internship shareholder is the Government of the State of Minas Gerais, selection opportunity to students employed. In 2013, 135 employees were and hiring of employees to fill vacant positions of sitting are performed interns in the Company. obligatorily through public tenders, given the Federal Constitution, whose edicts are widely publicized in the press and on the internet. Hiring apprentices: the Copasa admits apprentices, giving The company can also absorb assumed operating systems personnel, them a financial contribution of half the minimum wage, plus charges and provide internships and hire apprentices, as described below: (Guarantee Fund for Time of Service - FGTS and National Social Security Institute - INSS) and transportation. In 2013, through a part- tender: selection process whereby the Company recruits nership with the National Industrial Apprenticeship Service (SENAI), selects and hires people, having as main objectives meet the needs the Copasa hired 226 apprentices aged between 16 and 24 years. of manpower and generate joined booking to fill vacancies. Through Apprenticeships are offered in administrative proceedings. Learners specific edict, published widely, vacancies are offered to all regions after completing the theoretical part in Senai, develop practices in of operation Copasa in the state of Minas Gerais, with the forecast, business activities, allowing their professional development. During including quotas for hiring people with disabilities, in compliance this period, young people receive from their tutors and monitoring of with the specific law. human resources unit.

Absorption of staff: the assumption of operating systems, Internally, employees can participate in the selection process via the program signed contract with the municipal governments, for permanent staff positions and positions of trust, provided they the absorption of staff from these institutions may occur, provided meet the requirements requested in the submission widely dis- that the employees are working in the activity of sanitation, to be seminated throughout the company, including intranet and bulletin approved by exam and meet the requirements of the Company. The boards, as follows:

Sustainability Report 2013 | COPASA MG 105 Internal selection process for positions of trust: Internal selection for effective positions: process held twice a year, is the process by which the company identifies whereby Copasa recruits and selects, among all employees who employees with leadership potential to fill vacancies in positions of meet the criteria and requirements of Regulation Plan Careers, Jobs trust. The new managers of the Company, at all hierarchical levels and Salaries (PCCS) and meet the qualifying rounds of curriculum - except president, directors and certain other strategic positions analysis and selection interview, those who gather the most ap- - are selected by technical and behavioral evaluations, according propriate skills profiles. to rules laid down in specific regulations, available to employees. In addition to the recruitment and selection of personnel, Aiming to renew its management framework and maintain domestic Copasa enables the professional growth of employees through the competitiveness, managers who complete six years in function also policies described below participate in the selection process if they have interest in staying in Professional growth: made possible based on individual office. performance evaluations applied from the time the employee In 2013, 113 employees were enrolled in this selection process. joins a specialty that requires a learning period to reach maturity, As a result, 36 managers were selected. Of this total, 15 new experience and individual and functional expertise. As the result, the managers took over the management of a unit for the first time, employee may have their growth to a level and / or group immedi- getting the support of the Program Monitoring and Development of ately above, to reach the fullness of their salary range in the same New Managers, which promotes the adaptation and development of specialty. In 2013, 9,984 reviews for career growth and 131 for employees selected to fill management positions. To do so, provides: occupants of positions of trust were performed. It has also created guidance on performance in the selection process, meetings a group of internal work with the aim of developing an integrated Feedback with superior construction of personal development plan, performance management system in order to measure the evolution development groups, and lecture series on the internal processes of performance of each employee and the effectiveness of train- of interest to new managers, the follow-up interview one semester, ing, and promote recovery and improve the capabilities of these orientation meetings and feedback to superiors. In 2013, 5 new employees. managers participated in the program and in 2014, 13 new manag- (GRI LA12 ) ers begin their participation.

(GRI EC7 )

Sustainability Report 2013 | COPASA MG 106 Functional Progression: increase functional activity of the employee to a higher valuation in order to fill vacant job, since it meets the requirements and criteria set forth in the Regulations of PCCS.

Master analyst and expert technician: to sediment organizational learning, Copasa maintains this specialty skilled professionals with benchmarks for technical excellence, renowned and recognized expertise to propose solutions regarding the policies and guidelines of corporate and operational management. In 2013, the company had six analysts and master a technical assistant specialist.

Training and development (GRI LA11 )

The precepts of corporate education in Copasa seek to foster the development of individual skills necessary to strengthen the culture of business excellence and sustaining competitive advantage of the Company. In 2013, £ 1.9 million was invested in shares training and development of employees, with the offer of 40,071 training opportunities and 433,864 hours of activities.

Sustainability Report 2013 | COPASA MG 107 Year Investment in Number of Number of hours of Average hours per professional participants (unit) professional employee (h) development (R$) development (H) 2013 1,912,468.39 40,071 433 864 37.40 2012 1,804,750.01 41,865 453 095 40.75 2011 1,096,808.09 44,984 418 144 36.20 2010 1,439,644.00 41,507 434 281 34.90

(GRI LA10)

The needs for training and development of employees are iden- Program for New Employees and continuously at other times, are tified through the needs assessment of training process conducted addressed the rights and duties of employers and meaning of work annually, covering all organizational units, contributing to the devel- and disseminated the Code of Ethics. In 2013, 15,857 training opment of corporate education program, whose goal is to ensure opportunities on these topics were offered, for a total workload of the continuity of the generation, possession and multiplication of 124,530 hours / man. Also noteworthy are the actions of environ- knowledge in Copasa. Another initiative to encourage professional mental education, which seek to raise awareness and awakening, in growth is to expand the skills of employees and their participation domestic and foreign audiences, the core elements of a culture of in vocational technical courses for agents sanitation, with financial sustainability. subsidies of 90%. In 2013, 178 employees used this allowance. (GRI HR3) Copasa includes in its policies and procedures aligned to the actions set out in the Declaration of Human Rights, especially in training and development, such as the right to education, security, equality, equality, freedom, among others. From the Integration

Sustainability Report 2013 | COPASA MG 108 Compensation for results Health and Safety The variable compensation mechanisms seek to promote, Actions related to occupational health and safety in Copasa develop and enhance the capabilities of employees, motivating are regulated by legislation and by a specific provision of health, them to achieve better results. In this sense, Copasa uses variable safety and occupational health in the present collective bargaining pay models that reward the collective effort to meet the goals set in agreement between the Company and the Union of Workers in strategic planning: the Purification and Distribution of Water and Sewage Services in the State of Minas General (MG Sindagua), the Trade Union of the Gratuity charge of system performance: granted to Directors in the State of Minas Gerais (Saemg) and the Union of the occupant of the employee in charge of the art system, depending Engineers in the State of Minas Gerais (Senge). All employees are on the calculation of the operating performance of the localities represented on committees, commissions or groups of formal health under their responsibility. and safety committees as Dengue Prevention, Internal Commission Bonus managerial performance: Monthly assessment for Accident Prevention and Health Mediators, linked to the Health that rewards employees occupying positions of trust, depending on Promotion Program, which covers the Program of Attention to Health the calculation of the performance of your drive towards achieving and Prevention of AIDS (APA), the Program for Prevention and Care the goals established system. Subject in Relation to Alcohol and Drugs (PASA) and other occupa- Gratification of institutional performance: quarterly tional health actions, described below. evaluation system with direct relation to the strategic objectives of (GRI LA6; GRI LA9) the company, monthly rewards employees according to the results The Program for Environmental Risk Prevention Program and obtained by their work unit. In 2013, the percentage of the bonus the Medical Control of Occupational Health form the basis of the increased from 15.28 to 16.5% of the base salary of the employee. shares in occupational health and safety of employees. The first Profit sharing: consists of distributing part of the annual net income to allows you to identify and propose solutions to work situations that employees in accordance with labor legislation. It is calculated linearly may result in injury to the health of the employee. The second allows with the amount equal to all employees, regardless of pay level. the monitoring of the health of employees through employment, periodic, dismissal and other tests.

Sustainability Report 2013 | COPASA MG 109 Other actions complement the strategy of maintaining occupa- lectures, distribution of educational material and condoms in an- tional health and safety in Copasa: nual campaigns, among other activities. The auxiliary works aim to Internal Commission for Accident Prevention (CIPA): provide treatment for those living with HIV, which includes laboratory tests, psychosocial, medical and dental care and supply of specific the 76 existing Company Cipas in providing support to practitioners drugs, as well as guidance and assistance to the family. of medicine and safety at work regarding the identification and treatment of risks related to occupational health, safety and ergonomics, PASA: aims to reduce disease related to chemical dependency, in compliance with the Norm # 9 of Ordinance No. 3.214/1978 absenteeism and workplace accidents. The program includes: Ministry of Labor and Employment. lectures for internal and external audiences on the prevention of (GRI LA8 ) alcoholism, smoking and other addictions, and monitoring of the treatment process - diagnostic, therapeutic individual project meet- Program to Combat Dengue: in 2013, the Copasa contin- ings of therapeutic groups, guidance and support to the families of ued the activities of the 52 Standing Committees Fighting Mosquito participants program and emergency room visits. It also includes the Outbreaks of Dengue Transmitter, formed by 503 trained agents. The treatment of smoking, with subsidized supply of medication, referral committees are responsible for maintaining constant surveillance, for consultation and specific medical examinations and psychologi- aiming to eliminate outbreaks of mosquito that transmits dengue cal assistance during the period of one year. establishments Copasa, besides supporting the actions promoted by municipal and state governments. Monthly meetings and issued Professional Rehabilitation Program: in partnership reports of the activities, which are transferred to the State of Minas with the INSS, enables the functional movement of the employee Gerais are performed. Several events were held in communities, who has incapacity to exercise its original function due to a health involving presentations by costumed actors mosquitoes and provi- problem or work accident. On December 31, 2013, 26 rehabilitation sion of informational material. In 2013, the campaign had slogan processes were underway. The employed in the rehabilitation pro- “Dengue Prevention wins.” For 2014 it is planned to strengthen cess are accompanied by doctors and social workers and relocated surveillance activities, including a performance of mobilization of in new functions, which are possible in the use and appreciation of service providers. their working potential.

APA: acts in a preventive, educational and assistance to HIV Working Group on Ergonomics: provides the specialized virus and AIDS patient character. The preventive actions involve organizational units concerned with the prevention of occupational

Sustainability Report 2013 | COPASA MG 110 diseases and accidents at work and to identify factors that affect these actions include: Training and Program Development in Health health care, performance, and hence the productivity of employees. and Safety at Work, which requires specific training in basic knowl- Thus, it seeks to ensure ideal working conditions, and to develop edge of security for each function; Program for Promotion of Health projects in ergonomics and support units into demands for legal and Welfare, with the capacity of 265 agents multipliers and a expertise. workload of 2839 hours; training in compliance with the Regulatory Standards of the Ministry of Labor, focused on the legal require- Program Gymnastics: established to motivate employees to ments for carrying out certain activities, training of building and develop effectively the practice of specific exercises and implement forest firefighters employed, the latter responsible for the protection other elements of ergonomics that produce beneficial health effects of areas of environmental preservation company. of workers. Three daily sessions are held at company headquarters, conducted by a professional physical therapy, occurring in different (GRI HR8 ) times and places to enable the participation of the largest possible Some figures depict the results of occupational health and number of employees. Apart from Belo Horizonte, the program is safety Copasa in 2013: developed in the cities of Corinth, Montes and Salinas. Expanding the scope of the program to other organizational units is scheduled ►recovery rate of employees for the treatment of alcoholism and for 2014, according to the initiative to improve the quality of life, other drug: 73.07%; constantly in strategic planning. ►recovery rate of employees for the treatment of smoking: 82.10%;

Special Assistance Program: intended for employees and ►19.55% reduction in the number of accidents compared to 2012; their dependents with special needs, provides reimbursement of ►reduction in the percentage of accidents with temporary and specific health treatments and differential school attendance. The permanent removal rate and frequency of accidents in relation to maximum grant amount is set at the collective bargaining agree- 2012. ment, reviewed annually. In 2013, 307 beneficiaries were assisted with 92 employees and 248 dependents.

In 2013, 10,074 training opportunities focusing on health and safety programs, totaling 74,619 hours were offered. This value corresponds to 25% of total training opportunities that year. Among

Sustainability Report 2013 | COPASA MG 111 Indicator 2013 2012 2011

Metropolitan The state of Metropolitan The state of Metropolitan The state of Region of Belo Minas Gerais Region of Belo Minas Gerais Region of Belo Minas Gerais Horizonte Horizonte Horizonte Percentage of accidents with temporary 0.89 1.32 0.95 1.69 0.77 1.68 removal

Percentage of accidents with 0.18 0.30 0.34 0.52 0.36 0.40 permanent removal

Percentage of accidents resulting in 0.00 0.01 0.00 0.00 0.00 0.03 death

Frequency rate of accidents at work 14.69 17.56 20.63 21.40 21.29 21.99

Severity rate of workplace accidents ¹ 36.27 617.84² 59.02 82.93 43.62 1388.44

Notas: 1 This indicator measures the severity of accidents based on days off (lost). ²The variation of this value is due to the occurrence of car accidents with casualties.

(GRI LA7)

Sustainability Report 2013 | COPASA MG 112 Benefits with responsibility and quality of life training. Continuing the monitoring of the action plan, were also The Program Benefits Copasa achieved a rate of 84% favorabil- performed further research with employees and units, which have ity in the last organizational climate survey conducted in 2012. proven positive outcomes of implemented actions.

The Company promotes improved quality of life of its employ- Aeco: provides benefits to members by means of merchants, ees, seeking to meet the factors related to health, leisure, social like optical, pharmacies, bookstores etc. network. Performs promo- and financial support. To do so, one of the initiatives corresponding tions like the annual distribution of free Kits school for students, to the benefits offered to its employees, regardless of employment children of employees. Maintains four social clubs, which promotes status (fixed or indefinite period) or workload: medical and dental championships in football field, truco tournaments, bridesmaid and care, specialty care, life insurance group; education aid, education other games. Sponsors cycling team and athletes kung fu, judo, aid Special; funeral assistance; vouchers; and food vouchers; food taekwondo and jiu jitsu. Supports the Coral Copasa track team and assistance, Christmas gift basket, standard snack, childcare as- the company. sistance, payroll loan, and housing assistance. Corporate citizen: is provided to employees the possibility (GRI LA3) of extending some legal faults (marriage and bereavement of immediate family, for example) and payments that exceed the legal Psychosocial follow up: with the aim of contributing to provision, such as birthday and assistance to sick relative. The the improvement of personal well-being and job performance of Company grants the addition of 60 days on maternity leave, pursu- employees, the company maintains a team of psychologists and ant to Law No. 11.770/2008. social workers who accompany and guide employees and their families who are experiencing difficult situations. In 2012, a specific Party 25 years: Copasa honors annually the employees who plan of action to improve the working conditions of employees who complete 25 years of service to the company. In 2013, 617 were work in isolated locations where uptake occurred during 2013 was included professionals, who contributed with effort and dedication to developed. Among the actions taken, we highlight the availability improving the quality of life of millions of people. of mobile, improvements in the physical structure of jobs specific Family Support Program and Adolescents: aims to to employees, increased frequency of contacts and visits of senior promote adolescent health, giving parents a forum for discussion

Sustainability Report 2013 | COPASA MG 113 to better understand the process experienced by their children, Another factor that ensures peace of mind for the employee improving family and professional relationships. In partnership with is the Foundation of Security of the State of Minas Gerais (Libertas the Federal University of Minas Gerais School of Health and Minas Foundation), closed pension fund which provides supplemental Gerais, performs service to youth within the context of the family, retirement benefits provided by Social Security. including discussion about health issues and own adolescence. The (GRI EC3) work is done through medical care and promotion of educational activities such as workshops, lectures and meetings between Copasa maintains the Voluntary Retirement Program for parents and children. In 2013, 233 events were held, including Employees Retirees and / or conditions Retire, which guarantees the medical assessments, clinical care and monitoring, given lectures to termination of the employment contract by dismissal without cause, groups of parents and adolescents and group meetings. with all rights under this modality, besides offering the employee the prerogative of lifetime use health plan and group life insurance at Family Financial Planning Program: aims to contribute no cost to the company. In 2013, 335 employee terminations were to the reduction of the debt ratio and encourage savings, through performed. the guidance for family financial planning, aimed at improving the quality of life of employees. In 2013, the program included 342 Union relations people, including employees, dependents and external audiences, through lectures and individual consultations. Employees are represented primarily by three entities: Sindagua MG, Saemg and Senge. Recognizing their representativeness, the Program Preparation for Retirement: aims to prepare Company maintains a harmonious working relationship with the the employee for retirement, helping to establish a project of produc- unions, permanently ensuring compliance with collective bargaining tive life out of the company environment, personnel, physical well- agreements concluded. All employees enjoy the benefits provided being and emotional fulfillment and quality of life, encouraging him to for in those agreements, even those who are not members of trade face this new phase of life as a stage of growth and learning. In 2013, unions. six workshops were held with participation of 88 employees and 65 (GRI LA4 ) companions, is planned for 2014 the same number of seminars. (GRI LA11) Each year, at the date of the Copasa (month of May) is constituted a committee with representatives from all directorates to

Sustainability Report 2013 | COPASA MG 114 conduct with the unions, the process of discussion and negotiation involvement, participation and commitment of the employees in the of claims submitted Tariff. The last collective bargaining agreement search for greater efficiency and productivity. The project is based was signed on July 10, 2013, in effect retroactively from 1st May on technological innovation and improvement of all methods and 2013 April 30, 2014. work processes, helping to reach better results and better service to customers and investors. The interest on the part of employees To deal with routine matters presented by the unions, the to participate in the project has surpassed initial expectations when Company maintains an ongoing dialogue with union representatives, launching this award. In 2013, numerous proposals, which were ensuring effective communication with the representative bodies of evaluated from the point of view of technical experts in the field, the employees. During the year 2013, no cases were found in which were presented. The result will be announced in February 2014. The this right of freedom of association and bargaining has undergone top three operational category will be awarded and also the support risk. category. (GRI HR5) Program Trainee: selects annually, according to the rules laid down in specific regulations, professionals with greater potential Knowledge management for recovery and learning. In 2013, 14 employees approved in the selection process had the opportunity to extend systemic view of The knowledge and experience of the staff are competitive organizational processes Copasa and their management model, advantages of the Company, which encourages actions to preserve and develop the skills and guidance to the business expansion of the information and technical and operational knowledge of its corporate focus. employees, such as: Supporting the development of business manage- Enterprise Library: comprehensive collection, consisting of ment system: allows the management of managerial practices about 38,810 records, allows employees the opportunity to broaden in accordance with the criteria that evaluate the adoption of the their knowledge, stimulating self-development. The library Copasa foundations of excellence established in the methodology of the has established itself as municipal and state reference for research, National Quality Award in Sanitation, and enables the predictability of especially those related to sanitary engineering, environmental management practices in order to ensure the stability of the results. science and related subjects. Copasa has an Internal Standardization Technical Committee, Copasa Award for Technology & Innovation: seeks to which coordinates corporate participation in committees of the consolidate the strategic objectives of the organization through the Brazilian Association of Technical Standards (ABNT). In 2013, it

Sustainability Report 2013 | COPASA MG 115 showed the company’s participation in discussions related to ductile Sanitation and Environment, with the presentation of the work Lifting iron pipes and standards of basic sanitation projects, coordinating the energy behavior. the review of technical standards for concrete structures for sanitation, trench shoring, project supply water and sanitation and housing Research and technological development allotment, in reviewing the technical specification of the concrete In the performance of Copasa regarding the research and tech- cover (DN 600) and multiple patterns of individual metering, and nological development, we highlight the exploration and technological internal working group to evaluate the use of networks and sewage innovation, aimed, primarily, by entering into technical cooperation interceptors materials. agreements, conducting tests aimed at demonstrating the quality and Copasa also had representatives in working groups of the operability of products that may be used by the company, focusing Commission to Study the ABNT and the National Institute of on streamlining processes, methods and resources used, seeking Metrology, Quality and Technology (INMETRO) in reviewing and / or constant improvement of services. drafting of technical standards and ordinances. For example: Among the prospected technologies and implemented in 2013, CE-02: 111.02 - Commission study of pipeline systems and water are: the amphibious pump, used to capture the raw water in the distribution - PVC pipes and connections - NBR 5647-1-5, EC-02: municipality of Cataguases, and flexible tubing for deep wells, tested 143.25 - Commission study of cast iron pipes and connections in the city of Patos de Minas and deployed in various operational Ductile - NBR 7675, CE-177: 002.02 - Commission study of polyolefin systems of the regions west and north of the state of Minas Gerais. pipes - NBR 15551. It is also good to highlight: the Fertigation project, developed in Also there was the presentation of technical papers, by partnership with the State University of Montes Claros, which refers representatives of the Company, at an event held in Goiânia in to the reuse of treated effluent from the WWTP city of Janaúba for 2013, such as: Agricultural reuse of sewage from WWTP Janaúba fertilization of crops, including banana silver and cotton, down 30 % / MG;The sample size of a sampling plan for the control of water water consumption and 80% of spending on fertilizer, and Reduction quality in the distribution network; A statistical look at the current Project Water Hardness, with the application of carbon dioxide, reality in Brazil; Ordinance Nº 2914 - case study: Belo Horizonte. Also conducted in partnership with the Federal University of Minas Gerais, noteworthy is the participation in the 24th Technical Meeting of the through the Center of Agricultural Sciences Campus Hills clear. Association of Engineers Sabesp (AESabesp) - National Congress of In radio communication projects, over £ 650,000 was invested,

Sustainability Report 2013 | COPASA MG 116 with the implementation of control units operating radio, among has 18 patents (between patents and utility models), 40 marks eight which are the systems deployed in Além Paraíba, Alfenas, Divinópolis, software and several inventions in process analysis at the National Inhapim, Mount Zion, Pará de Minas, Patos de Minas, and Varginha Institute of Industrial Property. Flush systems, and the update of the solution control of operational teams North District, located in the municipality of Belo Horizonte.

Also with respect to operational development, emphasizes the acquisition of equipment and vehicles, including adaptation to some specific operations, for the activities of the Integrated Service System (Sati) operating units, aiming to meet the demands of water connections and sewage and maintenance in general on their networks. In 2013, approximately R$ 5.7 million was invested in tooling, equipment and vehicles for new operating systems and other parts that were already in operation. The Sati of the municipality of Araxá operating unit has ISO 9001:2008, audited by BSI certification that certifies that products and services meet strict quality standards and precise specifications accreditation.

Proper rigging of the units provides fast response to operational demands, impacting on cost reduction, customer satisfaction and the ratification of the quality of services provided. The performance of this operational service in Copasa is accompanied, among other tools, through the monthly assessment of the process indicator Customer Service Request After the Deadline.

In the development of trademarks and patents, a significant event occurred activities in 2013, which was the granting of rights of industrialization of patented articles by bidding processes. Copasa

Sustainability Report 2013 | COPASA MG 117 Copasa and its Customers

A good relationship with its customers is a priority for Copasa, Liability for products and services which is based on the guarantee of a quality service, coupled with (GRI PR1) the permanent opening for dialogue The design of products and services Copasa aims to ensure Service agencies: 737 local Customer Service (care agency, that they are suitable for the intended use and present danger to the local office and operating unit) available in the state of Minas Gerais health and safety of society. Customer Service Customer: customer service by phone and virtual environment, providing information and directing their Control of water quality service demands for operational and commercial sectors of the In order to guarantee the quality of products and services, Company. The Center Customer Relations offers some channels for Copasa maintains a strategic indicator that assesses the compliance recording customer demands: phone 115, Chat, Contact Us, as well standards of potability of water determined by the Ministry of Health as social networks, blog, SMS and Email Marketing, Which are also on aspects of sampling frequency, water quality and continuity of used to provide information about intermittency of supply, works and supply. The laboratory network Copasa has been restructured since maintenance in networks. 2009, with the renovation of laboratories and the construction Virtual Agency enables customers to make inquiries and of new units, such as the Eastern Regional Laboratory, located in obtain services such as a change of name and address, analysis Ipatinga. This network is divided into central, regional and district and simulation calculation accounts associated network of banks laboratories, totaling 29 laboratories, and hundreds of local and other authorized agents receivables, issuing debt clearance laboratories, which are strategically located in the state of Minas certificate, query historical consumption, bills paid, payment online Gerais, covering water treatment plants operated by the company. accounts, change the due date of the bill, execution times of service, Laboratories are modern and equipped with the latest generation reconnection of water, issuance of duplicate accounts and request that are fully functioning equipment, performing more than one correction of leaking water and sewage. million monthly analyzes. The analyzes show that the water provided

Sustainability Report 2013 | COPASA MG 118 by Copasa meets the requirements of the internal quality control and The details of the account is also available for those with visual Ordinance Nº 2.914/2011 of the Ministry of Health impairments clients, provided it is in your best interest. The Quality Management System of Central Laboratory, located in Belo Horizonte, has ISO 9001:2008, audited by SGS Certification Quality control of sewage Inc. certification. This certification has been renewed every six The laboratory network Copasa is structured to make the control months since 2000. The Central Laboratory is also accredited by the of sewage treatment units, which have increased significantly in International Standard ISO / IEC 17025:2005 certificate and CRL recent years. All constructed STPs are equipped with laboratories for 0474, granted by INMETRO. This certificate is the formal expression control of the daily routine analysis. The analysis that require more of the recognition of the technical competence of Copasa to perform complex procedures are performed in regional laboratories. tests on water samples and sewage. To assess the quality of sewage, analyzes aimed at the control On water bills, are reported the main parameters: chlorine, of treatment processes and verification of efficiency of treatment color, fluoride, total coliform, turbidity and Escherichia coli, As estab- facilities in compliance with environmental legislation (CONAMA lished by Ordinance No. 2914 of the Ministry of Health In website Resolutions Nº 357, March 17, 2005 are carried out, and 430, of May www.copasa.com.br Copasa, . Are disclosed information on basic 13, 2011, beyond the Normative Resolution Joint Copam / CERH-MG parameters of quality control of each of the locations operated with No. 1 of May 5, 2008). For legal compliance, program monitoring public service water supply water. Also available is the Water Quality of sewage, surface water and groundwater associated with ETE is Report, published annually, containing more information about the established according to the criteria of the Technical Note 002/2005 water quality situations on protection of water sources, description of - DIMOG / DISAN, FEAM, allowing the verification of environmental the types of employees treatment and general information about the impacts and the effectiveness of control actions taken. location. (GRI PR3) Technical and operational responsibility At this quality, adds to the direct action of water Copasa in Copasa has a metrological laboratory tests concerning hydro- preventing tooth decay, with the addition of fluoride in the treatment metric, coordinated by a different staff, responsible for technology process on all systems supply company, always meeting the stand- development and management of micro and Macro measurement ards required by Brazilian law. company. These processes are of paramount importance for the

Sustainability Report 2013 | COPASA MG 119 control and management of the meters installed in the park Copasa, increasing reliability results issued, as well as confirming and as well as for the control of water losses. recognizing the technical competence of the laboratory. It has also been accredited by INMETRO, as CRL Nº 0563, of August 17, 2012 This laboratory has specific INMETRO certification as an certificate. In December 2013, the laboratory was again subjected to authorized testing station under the PMG-68 number in accordance audit by the INMETRO for revalidation of accreditation granted, the with the requirements established by INMETRO Nº 066/2000. result of which will be released in 2014. This certification, issued by INMETRO Nº 072/2009, confirms and ensures recognition of ability and competence to perform the met- We highlight some actions taken to enhance the technical and rological activities prescribed for recovery, assembly and inspection operational efficiency of the Company: of water meters. The laboratory is equipped with modern structure, Program Quality Improvement of micro-measure- with the latest equipment and processes for controlling the activities ment: established in 2004, it is a set of actions for the manage- and results of computerized traceability, ensuring the quality and reliability of services according to the required quality standards. ment of its water meters Copasa. This program includes preventive maintenance of this park, with the replacement of water meters Aiming to expand the activities of the laboratory, ensuring that have low performance measurement of the amount consumed continuous search for improvement of the metrological quality of by customers, plus the following segments: replacement of water water meters used by Copasa, is underway with Inmetro, since 2012, another accreditation to new working methods to be applied in meters by age; downsizing and modernization of meters; meet the hydrometric laboratory ensuring compliance with the requirements demands of the Program Reducing Water Losses, large consumers defined by the technical regulations in force metrology. Moreover, the (clients considered special, with higher consumption 600 m³ / system is being implemented quality management in the manner month), special gauges to surveys, squares and gardens. established by the strictest technical and managerial requirements Statistics Management System of Park Water me- in order to enhance their competence in performing the activities ters: placed in the context of the Quality Improvement Program of and results in the generation of technically valid and recognized by micro-measurement. Together, these tools enable greater efficiency INMETRO. in the micro-measurement system, allowing financial gain and In December 2011, on audit, the laboratory hydrometric was contributing to the reduction of apparent losses and, consequently, recommended for the INMETRO accreditation by ABNT NBR ISO/ the improvement of the internal indicator ANCR, besides allowing IEC 17025:2005, demonstrating thereby the standardization and the rational use of water, contributing to the preservation of harmonization of services performed at the international level,

Sustainability Report 2013 | COPASA MG 120 environment. Since 2008, the system keeps a record 60 months of Customer satisfaction data to the meter, which allows obtaining performance indicators (GRI PR5) related to the age of the park, need to resize, results and impacts resulting from the replacement of water meters, and allows infer- Dissatisfactions and complaints identified are treated by teams of operations, from the generation of a new order of service at the ences about the performance of the meters and possible fraud and time of the survey; a deadline for compliance is established. The violations. results of the post-sale survey are consolidated and made available Am + program Copasa: aims to encourage good practice in the computerized trading system, intranet and e-mail, to opera- and promote improvements in the categories of Safety, Organization tional units. Control is achieved by operating districts, through the and Urbanization (AM) of the operating units, focusing on the welfare analysis of specific report, with the possibility to compare the results of employees and enhance the image of the company. Annually, the of the last 13 months by operating unit. units that have excelled in their zeal for conservation, as assessed Monitoring of recent transactions with new customers happens by the abovementioned criteria and the result of performance through the aftermarket, applied by operational districts of the indicators that make up the strategic map are rewarded. interior and the Customer Service Customer in Greater Metropolitan Belo Horizonte after the implementation of the new water and sew- Copasa SOS program: methodology for reporting relevant to age connections. The purpose of the survey is to obtain information the Executive Board for managing crises occurrences, which enables as to the quality service and the relationship with the employee / proactive actions to solve occurrences which may affect the image of service provider, addressing the cleaning aspects of the site, meet- Copasa. ing deadlines, use of uniforms by employees, on-site signage, and implementation of restoration and overall evaluation of services. In addition, the Company maintains continuous improvement of the mechanisms used to meet the standards of vigilance in order to The satisfaction survey, which occurs at the end of the phone ensure safety in their facilities. To treat the relevant and / or emer- call, in which the client responds to two questions to assess the gency matters, has a contingency plan that addresses technical, compliance of their demand and telemarketer, is also performed. operational, environmental, human resources, financial, logistical In 2013, there was no lawsuit against Copasa for unfair compe- and social. Any occurrences are analyzed to determine the scope of tition, anti-trust and monopoly. preventive actions to prevent recurrence. (GRI SO7)

Sustainability Report 2013 | COPASA MG 121 Ombudsman When asked to assess the deadline for resolution of the dispute after trigger the Ombudsman and the quality of the The Ombudsman acts as a differential communication channel Copasa with society, receiving complaints and complaints that have response sent, 55% of respondents considered excellent / good not been addressed or resolved satisfactorily by conventional service and 81% said they would trigger again Ombudsman for solution of channels (Contact Us, virtual office, phone and 115 service points). their demand. The outlook for 2014 is that 60% of respondents Aiming to identify factors that affect the quality of customer service, consider the performance of excellent / good Ombudsman. your staff visit the operational units responsible for the majority of The Ombudsman is also responsible for receiving requests sent requests received, and from information collected at these visits, through the Transparency Portal, available at www.copasa.com.br, and interact with other organizational units to try to resolve the problems meet the legal deadline to reply to the applicant in accordance with noted, acting on the continuous improvement of services. the Access to Information Act (Act No. 12.527/2011). Also accom- As provided in the Sustainability Report 2012, a survey of panies the processes involving Copasa opened by the Ombudsman satisfaction with the care provided by the Ombudsman, which ARSAE-MG and the State Ombudsman. has been applied on a monthly basis since April 2013, has been developed. Search results, the criticisms and suggestions made In 2013, no complaints regarding breaches of customer by the applicants contribute to the improvement of the work of the privacy and losses of customer data were recorded. Ombudsman. The questionnaire of this survey has three questions: (GRI PR8) how do you evaluate the time for resolution of the dispute after trigger the Ombudsman, it evaluates the clarity and objectivity of the information contained in the response of the Ombudsman, and the Ombudsman trigger again for solution of your problem. In 2013, the survey was administered to 45% of plaintiffs who sued the Ombudsman to file complaints in the period from March to November. The rate of respondents was 27% of respondents. (GRI PR5)

Sustainability Report 2013 | COPASA MG 122 Copasa and its Suppliers

Copasa seeks to contribute to the development of their supply They are provided in the Bidding and Purchasing icon website chain in order to ensure quality services and materials purchased, www.copasa.com.br, the information required for the registration of in addition to observing the practices of socioeconomic and environ- suppliers, being able to track registration status in order to partici- mental responsibility. pate in bidding. The selection of suppliers is conducted through bidding pro- The most widely used form of bidding for procurement of cesses conducted by the Standing Committees of Bid, in accordance materials and services is the electronic trading, which adds greater with applicable law and with the conditions and criteria under public transparency; better negotiate with suppliers, lower cost and greater bidding documents. To ensure the quality of materials purchased from suppliers, the company performs inspections for quality control flexibility in the conduct of the proceedings. Moreover, Copasa in order to meet the set of bidding and technical specifications. enables monitoring of trading in real time via the Internet, providing Through the approval of material suppliers, production processes are access to all information and process steps, a practice that brings verified, the technical capacity and quality systems and environmental transparency, publicity and reliability to the event. protection suppliers. The performance of suppliers of materials and Copasa requires all providers attesting to compliance with labor equipment is evaluated by the following criteria: timeliness of delivery obligations and submission of statement that does not employ under and fulfillment of the requirements of the technical specifications. 18 at night, dangerous or unhealthy, that employs no less than 16 Copasa does not adopt policy or practice preference to local years unless under the apprentices work and in this case, that is suppliers, since their signings follow the precepts laid down in Law from 14 years, and yet, that does not submit its degrading labor No. 8.666/1993. However, the company notes in its bidding process and forced labor. These and other documents are checked during compliance of Complementary Law No. 123/2006, which estab- the bidding process and the qualification phase of the Commissions lishes the right of preference to micro and small businesses Bids and Auctioneers. (GRI EC6) (GRI HR1/ GRI HR2)

Sustainability Report 2013 | COPASA MG 123 The Company includes in the bidding documents for procurement of tires a requirement that the provider remove, the same quantity to be supplied, used tires, so they are given the proper disposal and hire specialized companies to collect various materials, uniforms and personal protective equipment and cooperatives to collect recyclables such as paper, plastic pipes, metal pipes, stacks, reactors, materials, and develop contracts for collection of lamps and collecting ambulatory waste, giving them proper disposal. (GRI EN26 )

Copasa not directly hires the 3rd, but performs actions to engage manpower allocated in service contracts in organizational values and principles. In this sense, integration activities are carried out in order to disseminate such matters as: mission and vision of Copasa; PNQs, preventing and combating dengue; Code of Ethics.

Sustainability Report 2013 | COPASA MG 124 Copasa and Community

In the review of the strategic planning process, we identified the regarding operational actions to minimize / eliminate bad smells are need for the Company to review its policy of social action; need this performed. treatment will occur in 2014.

In 2013, several actions were taken in order to minimize and Sanitation and social development address the impacts of interventions arising from the infrastructure In celebration of special events such as the World Water Day inherent to the Company's services and seeking to promote the and Environment Week, Copasa, through information campaigns engagement of communities in understanding and valuation of and public awareness, intensifies their actions aimed at mobilizing these services, such as: society in favor of the rational use of water and environmental pres- Socio Technical Working (TTS): actions aimed at improving ervation. In 2013, the campaign was created Water. He who loves it the quality of community life and the sustainability of your business cares for it, and this counted with the membership of professional are developed. In 2013, the highlights were the actions taken in the associations, educational institutions, sports clubs, supermarkets municipalities of Belo Horizonte and Counting, for the TTS program and malls in order to strengthen and broaden the dissemination of to clean Pampulha Lagoon Basin, developed to minimize impacts, these actions. encouraging participative management that promotes the sustain- Still in 2013, Copasa supported the World Day of the bathroom, ability of the enterprise. on November 19, the date set by the United Nations (UN) to invite (GRI SO1) the public to reflect on the importance of sanitation. At that time, an artistic installation gathering 60 toilets for information on the Network of odor perception: exclusive communica- current status of sanitation in Brazil and in the world was presented tion channel is available to the community surrounding the at Seven Square in the center of the city of Belo Horizonte. The WWTP Arrudas inform the perception of odor to the operators unusual, Copasa seeks to arouse critical consciousness of citizens, of the station. In addition, community meetings for clarifications

Sustainability Report 2013 | COPASA MG 125 calling attention to the importance of sanitation for public health and Rural Sanitation: Copasa participates in the actions of environmental protection. the Government of the State of Minas Gerais in meeting the small disadvantaged localities of health infrastructure, implementing vari- To promote citizen access to basic sanitation and the improve- ous social programs in municipal towns, rural communities and state ment of the health of the state of Minas Gerais population services, schools conducted through agreements and/or contracts. These the Company maintains the following initiatives: programs aim to improve the quality of life and health of populations (GRI EC8) where Copasa not holds the concession for the provision of services Sponsorship: philanthropic entities registered in action through the implementation of water supply, sewage and solid waste Account with us can benefit from the service of collecting monthly treatment systems simplified. contributions from individuals and corporations through the ac- National Program for Water Resources counts of water/sewage Copasa people. The amounts collected are Development (National Proágua): developed in partnership for the payment of services rendered by the Company to the entities. with the Minas Institute of Water Management, with the technical If there is surplus collected is credited to the current accounts of support of Copasa, with investment from the federal and state institutions. In December 2013, the program contained 476 regis- governments in the amount of R$ 29.4 million, aims to ensure the tered institutions. improvement and implementation of the supply of good quality water Water in Schools: conducted in partnership with the State to the northern region of the state of Minas Gerais, promoting their Department of Education and SEDRU, with funds from the state gov- rational use. In 2013, met at the stage of completion of the water ernment in the amount of R$ 16.9 million, aims at the construction, supply systems of municipal seats Januaria, Frangipani, Mato Verde expansion and improvement of water supply systems in 414 state and Rio Pardo de Minas and 62 municipal centers linked to these schools, and analysis and monitoring the quality of water provided by locations. public water supply systems in 3,555 state schools. Over two million Acceleration Program (PAC) Sanitation and Solid and 500 thousand students have benefited from the initiative. In Waste I II – Sedru/Ministry of Cities/ CEF/Copasa: the purpose 2013, 105 works by deploying simplified water supply systems and of the covenants, with a value of £ 7 million, is the development 102 social technical visits to schools with works in progress, to pass of design studies, field services, basic designs, executive projects, on information about water treatment issues and health education environmental licensing and institutional support for integrated were conducted.

Sustainability Report 2013 | COPASA MG 126 units consortium locations. Eight poles (Good Order, Divinópolis, volume of waste released into the environment. In 2013, received Ant, Fruity, Itajubá Januária, Montes Claros and Teófilo Otoni) - 128 4290 kg of aluminum cans and 51,810 kg of PET bottles. municipalities. In 2013, the reprogramming of such covenants was Subsidy to charities: Copasa can allocate up to 0.6% performed, as well as the study design bidding consortium Januaria. of their monthly income to the grant award program, which was National Program for Universal Access and Use of adequate to action Count on us held in conjunction with the State Water (Water for All): worth approximately £ 84 million, this is Department of Social Services and the Voluntary Social Services. In an agreement signed between the government, through the Ministry 2013, 795 charities have benefited from discounted rates for water of National Integration, and the Secretary of State for Development and sewage up to the limit of the contracted demand. For entities of the Jequitinhonha and Mucuri and northern Minas Gerais registered in action Count on us the grant is a 25% discount on room (Sedvan), with intervention of the state of Minas Gerais, represented rates. For charitable hospitals linked to Solidariedágua Program, the by the State Government (SEGOV) and Copasa as executing actor. discount is 50%. Said agreement has aimed to deployment, retrieval and/or extension Social tariff: as Normative Resolution No. 020/2012 of of collective systems of water supply in the state of Minas Gerais, un- ARSAE-MG, which established the criteria for entitlement to social der the Water for All Program. The area covered by the program shall tariff, the client must belong to a family enrolled in the Single Registry consist of the 85 municipalities that make up the Minas semiarid. for Social Programs of the Federal Government, with income per In 2013, nine lots were bid for work, one for monitoring and one for capita monthly or less half the national minimum wage. In 2013, social work. Work orders were issued from September 2013 and the 630,188 households (average/month) benefited from the social tariff drilling of deep wells was initiated. to water and 316,215 households (average/month), with sewage. Solidariedágua program: collects voluntary contributions (GRI EC9) from customers Copasa directly in water/sewage bills for settlement of overdue debts of charity hospitals with the Company. To support victims of tragedies were sent in December 2013, 114,000 glasses of bottled water for the State Secretariat of Civil Valley Water Program: encourages residents of clusters Defense of Minas Gerais. This year, this support has met the major- of Belo Horizonte to exchange aluminum cans and PET bottles for ity of the population of the city of Governador Valadares, in the state discounts on the water bill, having as objectives: benefit low-income of Minas Gerais, which suffered from heavy rains. clients; create environmental awareness of recycling, and reduce the

Sustainability Report 2013 | COPASA MG 127 In partnership with Specialized Police in Locating Missing Persons, DONATED VALUE R$ 755.543 Copasa discloses, on the back of water bills and sewage, distributed 730.230 throughout the state of Minas Gerais, photos of missing persons.

592.110 Promoting citizenship Program TRUST IN 6%: enables employees Copasa allocate part of your income tax due to the Fund for Children and Adolescents, which is one of the fundamental means for the viability of care policies for infant juvenile population recommended by the Child and Adolescent. In the campaign of 2013, 913 employees joined the program and donations totaled R$ 755.543, for the following counties: Alfenas, Almenara, Alvinópolis, Andradas, Araçuaí,

Belo Horizonte, Betim, Bom Despacho, Cambuquira, Caratinga, 2011 2012 2013 Contagem, Corinto, Coronel Fabriciano, Cristais, Crucilândia, Curvelo, Diamantina, Divinópolis, Frutal, Ipatinga, Itajubá, Jaboticatubas, number of donors Janaúba, Januária, Jordânia, Lavras, Leopoldina, Liberdade, 942 Matozinhos, Montes Claros, Palma, Patos de Minas, Resende Costa,

Ribeirão das Neves, Sabará, Salinas, Santa Luzia, Santos Dumont, 913 São Domingos do Prata, São Francisco, São Sebastião do Paraíso,

Teófilo Otoni, Três Corações, Ubá and Varginha. 841 The performance of the program in the last three years is shown below:

2011 2012 2013

Sustainability Report 2013 | COPASA MG 128 Program Integration and Social Contribution Beyond the Walls: developed to integrate Copasa communities, contributing to improving the quality of life of the surrounding unit Copasa population located near the villages Pedreira Prado Lopes and Lord of the Steps in the municipality of Belo Horizonte. Among the main activities, the highlight is the Coral Infant Drops Song Contest, singing group composed of about 50 children, ages 6 to 11 years.

Fica vivo Program!: created by the Government of the State of Minas Gerais, aims to intervene in social reality before the crime happens, decreasing homicide rates and improving the quality of life. Therefore, it is done monitoring and specialized cultural, sporting, leisure and vocational workshops for youth 12-24 years are offered at social risk and residents in areas that concentrate high indicators of homicide. Copasa is a partner in this initiative, through an agreement signed with the State Department of Social Protection and the Senai, having, in 2013, hired 19 young people as apprentices, who were nominated by the secretariat.

Volunteering: Copasa employees, with the support of the company, organize and perform various volunteer activities such as collection of various products and collecting recyclable materials for donation to needy families and charitable institutions campaigns, celebrations of Children's Day, Christmas etc.

Sustainability Report 2013 | COPASA MG 129 Relating to art and educating Copasa Art Gallery: installed in the lobby of the headquarters of Copasa, it is a space designed to promote visual and plastic Concert at the Foot of Hose: again, Copasa opened the arts, with a regular program of exhibitions, which are defined by doors of its headquarters to the surrounding community, offer- public competition. In 2013, six exhibitions, visited by some four ing a Christmas conwcert, which also featured the presence of thousand people were held. their employees. Gallery Homeland Copasa: installed at headquarters, Storytellers: objective transmitting ethical values of promotes artistic expression employees. In 2013, a collective of citizenship and encourage discussion of positive attitudes towards artwork developed by the Program Development and Enhancement environmental preservation through moments of entertainment, Team, whose goal is to mobilize human potential for the identifica- approximation and integration, promoting the art of telling “tales tion and resolution of problems through the development and and stories.” In 2013, seven presentations were made highlighting enhancement of the teams involved and the stimulus was presented the awards ceremony Chuá Program and Nature Day celebration, and supported the initiative and innovation. benefiting an approximate audience of six thousand people. Theatre Group Copasa: ccomposed of employees, objective Coral Copasa: created 32 years ago, consists of 34 value internal talent and use playful language of theater to dissemi- employees and their families. In 2013, the choir performed 15 nate strategic issues for the company and its stakeholders, enabling performances, benefiting an approximate audience of ten thousand the understanding and assimilation on all levels of employees. The people, highlighting the Concert Party 50 Copasa and presentation group developed 25 pieces and various sketches, and, in 2013, at the International Choir Festival. In the Christmas festivities, completed 20 years of existence. This year, the highlights were the performed their traditional presentations: 5th Concert on the Feet following presentations: The trap, which deals with family financial of Hose and Christmas Cantata Copasa held at Freedom Square, planning and Start again, which is part of the Preparation for tourist spot in Belo Horizonte. Retirement Program. Meet Joe Black: with the purpose of stimulating the integration among employees, musicians and singers gives employees the opportunity to show their talents colleagues. In 2013, eight meetings, sanctioned by approximately 100 people in each of the edits were made.

Sustainability Report 2013 | COPASA MG 130 Encouraging actions for social development

Funds released by the Company by means of incentive laws

Year Rouanet’s law (R$) Sports Incentive Law (R$) Donations to the FIA (R$) Total

(R$) 2.700.000,00 675.000,00 ─ 3.375.000,00

2013 2,700,000.00 675,000.00 - 3,375,000.00 2012 2,884,000.00 671,000.00 671,000.00 4,226,000.00 2011 3,000,000.00 750,000.00 750,000.00 4,500,000.00

Copasa sponsors, by Laws Incentive Culture and Sports, 2013, the show presented Tailrank, Redeeming themes in the his- projects that promote culture and entertainment and encourages tory of Minas in the state of Minas Gerais, as vissungos, an African the practice of sports such as: language sung, the Bantu culture;

Popularization Campaign of Theatre and Dance: event Palace of Arts - 2013 Season Operas: one of the largest that happens every year in January and February. The campaign centers of artistic and cultural activities in the state of Minas Gerais, aims to present and promote the artists and to facilitate access to the Palace of Arts is host to grand spectacles, configuring itself as an the arts, with reduced ticket prices. In 2013, it had 154 parts, Minas important cultural complex. The Clovis Salgado Foundation, which municipalities of Belo Horizonte, Ipatinga and Araxá, with a total administers under management, has four major artistic bodies of audience of approximately 350 thousand people; recognized speech: the Symphony Orchestra of Minas Gerais, the Dance Company of the Palace of Arts, Coral Lyric of Minas Gerais Entertainment Multidisciplinary values of Minas and the Children’s Choir. In 2013, integrating Season Operas three Gerais: the project was part of the Values Program of Minas Gerais, world titles were produced operatic repertoire: Madame Butterfly, in the 9th and for the termination of its activities, presented a Trovatori II of Tristan and Isolde and Verdi; spectacle that brought together 500 young people on the scene. In

Sustainability Report 2013 | COPASA MG 131 Count Youth Orchestra: founded 14 years ago, is aimed years old, with physical qualities and technical skills appropriate to at promoting human development through access to art, culture and the development of high performance sport, in terms of basketball education project, in order to enable the promotion of citizenship and football Male hall, artistic gymnastics, trampoline, judo, tennis, and social inclusion of children, adolescents and young people in swimming and men’s and women’s volleyball; vulnerable situations in Municipality of Belo Horizonte and Count Core Training for Athletes Basketball: Mackenzie (Pedreira Prado Lopes and Taquaril). The work involves conducting Sports Club aims to provide children and teens, mostly from public courses and workshops on musical education in which students schools, excellent conditions for developing their sports skills with have the opportunity to learn and develop artistic skills and, at proven yield for sport expertise. the same time, prepare for a more structured and secure social relationship; Support events Departure Point - Where in Theaters: group theater with Concerts in the Park: initiative of Clovis Salgado 31 years of activity, founded in the city of Batley, with 20 profes- Foundation - Palace of Arts, where concerts are held in public Renné sionals on permanent basis. Created and systematized methods Gianetti Municipal Park, with performances of Symphony Orchestra and production processes in the Brazilian drama that sustain its 31 and the Choir Lyricist of Minas Gerais, having become a cultural mounted spectacles. In 2013, 24 presentations were made; tradition in the city of Belo Horizonte. Each concert has an approximate audience of four thousand people. Participation Copasa is with Performing Arts Award of Minas Gerais (Minas the distribution of treated water to the audience. Scene): developed by the Ministry of Culture of Minas Gerais, in partnership with Sergio Magnani Cultural Institute, aims to encour- Cooperatives and Art in the Parks: promoted by the age and strengthen the scenic productions in the state. In its latest Syndicate System and Organization of Cooperatives of the State edition, the prize included 45 projects, divided into three categories: of Minas Gerais, this project seeks to integrate and enhance the cooperative philosophy through culture and leisure, with artistic maintenance of scenic areas, scenic spectacles and movement of performances in parks. The estimated audience was two thousand equipment and materials; people per event, for which Copasa treated water supplied through Athletes Training and Development Through the packaged cups and Pipinha. Integration of Sports Sciences: aims to promote the Natura Music Festival: it is a meeting with Brazilian improvement of young athletes and adults from Minas Tennis Club popular music, presenting 21 artists of different styles and rhythms and the state and national sports community, between 6 and 35

Sustainability Report 2013 | COPASA MG 132 in two simultaneous stages. Copasa distribute treated water to an estimated audience of 50,000 people. Copasa does not perform any financial or in-kind contributions to political parties, politicians and related institutions. (GRI SO6)

Sustainability Report 2013 | COPASA MG 133 Annual Social Report (GRI EN30)

Company: Sanitation Company of Minas Gerais - COPASA 1 - Calculation Basis 2013 Value (thousand reais) 2012 Value (thousand reais) Net revenue from water and sewer (RL) ¹ 3.007.736 2.768.365 Total net revenue ² 3.714.818 3.429.090 Operating profit (RO) ³ 566.158 639.147 Gross payroll (FPB) 1.011.363 904.002

2 - Internal Social Indicators Value Value (thousands) % Of GP % Of NR (thousands) % Of GP % Of NR Feed 116.746 11,54% 3,88% 103.702 11,47% 3,75% Compulsory social charges 235.379 23,27% 7,83% 202.586 22,41% 7,32% Private pension 37.282 3,69% 1,24% 33.683 3,73% 1,22% Health 47.425 4,69% 1,58% 42.408 4,69% 1,53% Safety and health at work 6.928 0,69% 0,23% 5.839 0,65% 0,21% Education 2.829 0,28% 0,09% 2.538 0,28% 0,09% Culture 191 0,02% 0,01% 124 0,01% 0,00% Training and professional development 1.912 0,19% 0,06% 1.805 0,20% 0,07% Nurseries or childcare assistance 846 0,08% 0,03% 787 0,09% 0,03% Participation in profits or results 32.670 3,23% 1,09% 27.613 3,05% 1,00% Others4 11.649 1,15% 0,39% 10.457 1,16% 0,38% Total - Internal social indicators 493.857 48,83% 16,42% 431.542 47,74% 15,59%

Sustainability Report 2013 | COPASA MG 134 3 - External Social Indicators Value Value (thousands) % Of RO % Of NR (thousands) % Of RO % Of NR Education 1.084 0,19% 0,04% 1.120 0,18% 0,04% Culture 3.355 0,59% 0,11% 3.314 0,52% 0,12% Health and sanitation5 277.249 48,97% 9,22% 214.789 33,61% 7,76% Sport 874 0,15% 0,03% 883 0,14% 0,03% Fighting hunger and food safety6 29 0,01% 0,00% 433 0,07% 0,02% Others7 535 0,09% 0,02% 773 0,12% 0,03% Total contributions to society 283.126 50,01% 9,41% 221.312 34,63% 7,99% Taxes (excluding social security 381.832 67,44% 12,69% 374.541 58,60% 13,53% contributions) Total - External social indicators 664.958 117,45% 22,11% 595.853 93,23% 21,52% 4 - Environmental Indicators Value Value (thousands) % Of RO % Of NR (thousands) % Of RO % Of NR Investments related to production / 363.947 64,28% 12,10% 356.345 55,75% 12,87% operation Investments in programs and / or 7.335 1,30% 0,24% 9.642 1,51% 0,35% projects Total investments in the environment 371.282 65,58% 12,34% 365.987 57,26% 13,22% Regarding the establishment of annual targets to minimize waste, consumption in general in ( X ) h a s n o t a r g e t s ( ) m e e t s 5 1 - 7 5 % production / operations and increase efficiency in the use of natural resources: ( ) complies 0-50% ( ) complies 76-100% 5 - Workforce Indicators 2013 2012 Number of employees at end of period 11.864 11.611 Number of admissions during the period 767 378 Number of outsourced employees8 1.340 725 Number of trainees 103 101 Number of employees over 45 years 5.262 5.259 Number of women working at the company 1.177 1.179

Sustainability Report 2013 | COPASA MG 135 % of management positions held by women 20,98% 20,54% Number of blacks working in the company 5.031 4.826 % of management positions occupied by blacks 14,28% 13,40% Number of people with disabilities or special needs 469 459 6 - Relevant information regarding corporate citizenship 2013 Goals in 2014 Relationship between the highest and 23,79 ND lowest salary Total number of accidents 284 276 Social and environmental projects ( ) Directors (X) directors and ( ) All employees ( ) Toward (X) directors and ( ) All employees developed by the company were managers managers defined by: Standards of health and safety in the ( ) Directors and ( ) All employees (X) all + Cipa ( ) Directors and ( ) All employees (X) all + Cipa workplace were defined by: managers managers Concerning freedom of association, ( ) Do not get (X) follows ILO ( ) Encourages ( ) Will not get (X) will follow ILO ( ) Will follow and right to collective bargaining and involved standards and follows ILO standards encourage the worker representation, the company: ILO The private pension plan includes: ( ) Directors ( ) Directors and (X) all employees ( ) Toward ( ) Directors and (X) all employees managers managers The participation in profits or results ( ) Directors ( ) Directors and (X) all employees ( ) Toward ( ) Directors and (X) all employees include: managers managers When selecting suppliers, the same ( ) Are not ( ) Are suggested (X) are required ( ) Will not be ( ) Will be (X) will be ethical standards and social and considered considered suggested required environmental responsibility adopted by the Company: Regarding the participation of ( ) Do not get (X) supports ( ) Organizes and ( ) Will not get (X) support ( ) Will organize employees in voluntary work involved encourages and encourage programs, the Company: Total number of complaints and the company: Procon: 344 in Court: 2,502 the company: "Procon:176" in Court:2,452 criticism from consumers: 1111911 1089312

Sustainability Report 2013 | COPASA MG 136 % of complaints and criticisms the company: "Procon:100%" in court: 42.61% the company: "Procon:100%" in court:60% addressed or resolved: 100% 100% Total value added to distribute 2013: 2,094,570 In 2012: 2,045,417 (in thousand R$): Distribution of Value Added (DVA): 26,60% government 41,71% coworkers 26,08% government 37,84% coworkers 6,66% shareholders 11,65% third parties 7,76% shareholders 12,36% third parties 13,38% retained" 15,95% retained" 7 - Other Information CNPJ 17.281.106/0001-03, industry: sanitation. Clarification on the information declared Division of Social Responsibility, phone 55 31 3250.1560, email [email protected]. This company does not use child labor or slave labor and has no involvement with prostitution or sexual exploitation of children or adolescents and is not involved in corruption. Our company values and respects diversity both internally and externally. 1 - The Social Report 2013, being considered the value of Net Revenue from major activities of the Company, namely, water and sanitation for the calculation of indicators supply services and not did not consider the value of Construction Revenues arising from conversion to IFRS. 2 - Net revenue from water and sewer + construction revenue. The 2012 differs from the value reported in 2012, due to accounting adjustments, as described in Note 23.3 to the Financial Statements 2013. 3 - The 2012 differs from the value reported in 2012, due to accounting adjustments, as described in Note 23.3 to the Financial Statements 2013. 4 - Spending on employee benefits such as funeral assistance, institutional gatherings, Family Financial Planning Program, Program Preparation for Retirement, insurance, solemnity for employees who have completed 25 years of service to the Copasa and transportation for employees. 5 - Expansion of families benefiting from the social tariff in accordance with Normative Resolution 020/2012 of the Regulatory Agency Services Water Supply and Sanitation of the State of Minas Gerais (MG ARSAE). 6 - The difference in value is due to the allocation of resources held in 2012 through tax incentives, a program that distributed food supplement for social assistance entities. 7 - Sponsoring events and various projects such as: Employee Donation Program Copasa Fund for Children and Adolescents, Staying Alive Program and International Seminar on Social Responsibility. 8 - The number of employees (the) Outsourced (as) is estimated considering the labor allocated in service contracts, for Copasa does not hire third parties directly.

Sustainability Report 2013 | COPASA MG 137 The riverpassed through the village and at various points, so anywhere that I went I could face it. Parameters of the report

(GRI 4.17) Inclusion of stakeholders: were identified as key stakeholders Copasa customers, employees, the state of Minas Gerais Copasa published annually since 2005, their economic, social (majority shareholder), suppliers, investors (minority shareholders), and environmental outcomes integrated into a single document. This regulators, the granting authorities (municipalities) and society. report covers the year 2013, in whose elaboration were adopted for the fourth consecutive year, the Global Reporting Initiative (GRI), and (GRI 4.15) the Company achieved the application level B. The financial state- Scope: were analyzed and reported the issues, information ments have been audited by PricewaterhouseCoopers and indicators considered important for evaluating the performance (GRI 3.1; GRI 3.2; GRI 3.3; GRI 3.13) and strategies of Copasa as unitary enterprise, the economic, environmental and social dimensions. Additional information about the The Company has been perfecting the process of drafting their Subsidiaries were assimilated and indicated in the text. Considering reports, have been defined that, from 2012, the preparation of the the relevance of the subject to the location or the public engaged in content would be carried out by own staff, seeking to strengthen the some places are detailed examples and specific situations of differ- engagement of internal stakeholders in this process, which includes ent organizational units. the involvement of senior management. (GRI 3.6; GRI 3.7; GRI 3.8) In this issue, once again, we sought to extend service of GRI indicators, to cover all aspects of sustainability. To guide their Materiality: materiality directs communication to the topics development process, the following principles, among others, were of greatest relevance to the public to which the company relates. In observed: 2013, Copasa conducted a materiality analysis to identify sustainability issues most relevant to your business and its stakeholders, (GRI 3.11)

Sustainability Report 2013 | COPASA MG 139 especially through mapping of stakeholder expectations, realized on the strategic planning review, which identified as major issues in internal and external perspectives:

Stakeholders Sources of information HIGH A Reference form Legal and regulatory charges Customers Ethos Indicators of Social Employees Responsibility State of Minas Gerais ISE Providers Mapping stakeholder expectations MEDIUM B Investors Perception study Regulators Organizational climate survey Grantor Minas Integrated Development Plan Society Annual Report of the Internal elevance to the company to elevance

Ombudsman R

Management Report LOW

LOW MEDIUM HIGH Relevance to the stakeholders

The analysis results show the following material issues to Topics of high relevance for the company and for more Copasa: A than one stakeholder group. Mid topics relevant to the company or to more than one B group of stakeholders.

Sustainability Report 2013 | COPASA MG 140 A - Topics of high relevance for A - Mid topics relevant to the Company the Company and for over a or to more than one group of group of stakeholders stakeholders

Expansion projects and socio- Modernization of existing water and environmental responsibility. sewage systems.

Enhancement of environmental Relationship with suppliers. education. Appreciation of diversity. Meet the requirements of government agencies and regulation.

Availability and quality of products and services.

Fostering appreciation of sewage services.

Optimization of operating and financial results.

Conservation of natural resources.

Review of human resource policies.

Tariff revision.

Universalization of basic sanitation services.

Sustainability Report 2013 | COPASA MG 141 GRI content index (GRI 3.12)

Indicator Page Remarks Indicator Page Remarks Strategy and analysis Copasa is a mixed capital Statement from the most company for shares in the senior decision maker of 2.6 Type and legal nature. authorized capital under the organization about the the ownership control of 1.1 8; 10 relevance of sustainability the state of Minas Gerais. to the organization and its The performance of Copasa strategy. focuses on municipalities in the state of Minas Gerais, 2.7 Markets served. Description of key impacts, in sanitation management, 1.2 67 risks and opportunities. maintaining technical cooperation agreement. Organizational Profile 2.8 Size of organization. 23; 61 2.1 Name of the organization. 17 Significant changes during 2.9 23 Primary brands, products the reporting period. 2.2 17; 18 and / or services. Awards received in the 2.10 30 2.3 Operating structure. 18; 19 period. The headquarters is Report parameters located at Rua Copasa Report Profile Location of organization's Mar in Spain, 525 in Santo 2.4 Period covered by the The report refers to the headquarters. Antonio neighborhood in 3.1 139 report. year 2013 the city of Belo Horizonte, Minas Gerais. The annual and sustainability report was Number of countries where 2.5 17 3.2 Date of previous report. 139 published earlier in 2012 the organization operates. (Available in: www.copasa.com.br)

Sustainability Report 2013 | COPASA MG 142 Indicator Page Remarks Indicator Page Remarks Reporting cycle (annual, Summary of Content of the GRI 3.3 139 biennial, etc.). 3.12 Table identifying the 142 ‘Is Contact point for location of information in 3.4 questions regarding the 154 the report. report or its contents. Verification Scope and boundary of report 3.13 Policy and current practice 40; 139 Process for defining report with regard to seeking 3.5 content. external assurance for the 3.6 Boundary of the report. 139 report. State any specific Governance, commitment and engagement 3.7 limitations on the scope or 139 Governance boundary of the report. 4.1 Governance structure of 33 Basis for preparing the the organization. report referred to joint 4.2 Indicate whether the 37 ventures, Subsidiaries, 3.8 139 Chair of the highest level leased facilities, of governance is also an outsourced operations, and executive officer. other organizations 4.3 State the number of 37 Can be found throughout Data measurement independent or non- the report, close the 3.9 techniques and bases of executive highest presentation of values, calculation. governance body members. where applicable. 4.4 Mechanism for 44 Explanation of the effect shareholders and of any restatements of employees to provide 3.10 information provided in 16 recommendations or earlier reports and the direction to the highest reasons for such re. governance body. Significant changes from previous reporting regarding 3.11 the scope, boundary or 139 measurement methods applied in the report year

Sustainability Report 2013 | COPASA MG 143 Indicator Page Remarks 4.5 Linkage between 36 compensation for members of the highest governance body, senior managers, and executives (including departure arrangements) and the organization's performance (including social and environmental performance). 4.6 Processes in place for the 36 highest governance body to ensure conflicts of interest are avoided. 4.8 Statements of mission or 41 values, codes of conduct, and principles relevant to economic, environmental and social performance and the status of its implementation. 4.9 Procedures of the highest 41 governance body for overseeing the identification and management of the organization's economic, environmental and social performance, including relevant risks and opportunities, and adherence or compliance with internationally agreed standards, codes of conduct and principles.

Sustainability Report 2013 | COPASA MG 144 Indicator Page Remarks Commitments to external initiatives 4.11 Report on how the company 67 considers the precautionary approach to their management. 4.12 Charters, principles or other Copasa is not a signatory to any such commitment. initiatives Externally developed economic, environmental and social nature which the organization subscribes or endorses.

4.13 Memberships in associations 75; 84 Besides having active participation in committees in the environmental area, Copasa participates (such as industry associations) in the following associations and organizations: Brazilian Groundwater Association (Abas), Brazilian and / or national / international Association of Sanitary and Environmental Engineering (ABES), ABNT, Brazilian Association of advocacy organizations in Ombudsmen (ABO) Brazilian Association of Human Resources (ABRH), Brazilian Association of Training which the organization has and Development (ABTD), Commercial Association of Ontario (ACM), Association of Sanitation State positions in governance bodies; (AESBE), Inter-American Association of Sanitary and Environmental Engineering (Aidis) American integrate projects or committees; Chamber of Commerce (AmCham), the National Quality Foundation (FNQ), Brazilian Institute of contribute resources beyond Corporate Governance (IBGC), Brazilian Concrete Institute (Ibracon) and Quality Institute Minas Gerais the basic membership dues; (IQM). consider its strategic role as member.

Sustainability Report 2013 | COPASA MG 145 Indicator Page Remarks Indicator Page Remarks Engagement stakeholders Market Presence 4.14 Ratio groups stakeholders 43 EC5 Range of ratios of standard entry 104 engaged in the organization. level wage compared to local 4.15 Basis for identification and 139 minimum wage at significant selection of stakeholders with locations of operation. whom to engage. EC6 Policies, practices and 123 4.16 Approaches to engaging 43 proportion of spending on locally stakeholders Including frequency based suppliers at significant of engagement by type and by locations of operation. group. EC7 Procedures for local hiring 105; 106 4.17 Key topics and concerns raised 139 and proportion of senior through the engagement of management hired from the stakeholders and measures local community at significant adopted by the organization to locations of operation. treat them. Indirect economic impacts Performance indicators EC8 Development and impact of 126 Economic performance infrastructure investments and services provided primarily EC1 Direct economic value generated 12 for public benefit through and distributed. commercial, in-kind, or pro bono. EC2 Financial implications and other 67 EC9 Understanding and describing 127 risks and opportunities for the significant indirect economic organization's activities due to impacts, including the extent. climate change. Environmental performance EC3 Coverage of obligations of 114 defined benefit pension plan Energy offered by the organization. EN3 Direct energy consumption 88 The electricity used in EC4 Significant financial assistance Copasa does not broken down by primary energy Copasa, acquired from received from government. receive direct financial source. Energetic Company assistance from the from Minas Gerais government. (Cemig), is essentially hydroelectric origin.

Sustainability Report 2013 | COPASA MG 146 Indicator Page Remarks Indicator Page Remarks EN4 Indirect energy consumption by The indirect energy Products and services primary source. consumption EN26 Initiatives to mitigate 79; 87; Copasa is irrelevant environmental impacts of 124 when compared to products and services and extent the direct energy of impact mitigation. consumption. Transport EN8 Total water withdrawal by source. 14 EN29 Significant environmental 89 Biodiversity impacts of transporting products EN11 Location and size of land owned, 85 and other goods and materials leased or managed in protected, used for the organization's or adjacent to areas and areas operations, and transporting of high biodiversity value outside workers. protected areas. EN12 Description of significant 94 biodiversity of activities, products and services in protected areas and areas of high biodiversity value outside protected areas impacts. EN13 Habitats protected or restored. 84 Emissions, effluents and waste EN16 Total direct and indirect 92 emissions of gases causing the greenhouse effect, by weight. EN17 Other relevant indirect emissions 92 of greenhouse gas emissions by weight. EN18 Initiatives to reduce emissions 89 of greenhouse gases and reductions achieved.

Sustainability Report 2013 | COPASA MG 147 Indicator Page Remarks Indicator Page Remarks EN30 Total investments and 134 Health and safety at work expenditures on environmental LA6 Percentage of total workforce 109 protection by type. represented in formal health and Social performance safety committees, composed Labor practices and decent work of managers and workers, that help monitor and advise on Employment occupational health and safety LA1 Total workforce by employment 97 programs. type, employment contract and LA7 Rates of injury, occupational 112 region. diseases, lost days, absenteeism LA2 Total number and rate of 99 and work-related fatalities by employee turnover by age group, region. gender and region LA8 Education, training, counseling, 110 LA3 Benefits provided to full-time 113 prevention and risk-control employees that are not provided programs in place to assist to temporary or part-time workforce members, their employees, by major operations. families or community members Relations between workers and governance regarding serious diseases. LA4 Percentage of employees 114 LA9 Issues relating to health 109 covered by collective bargaining and safety covered in formal agreements. agreements with trade unions. LA5 Minimum notice in advance In collective Training and education regarding operational changes, agreements, is not LA10 Average hours of training per 108 including whether it is specified stipulated time limit year per employee broken down in collective bargaining for notification of by employee category. agreements. operational changes. LA11 Programs for competency 107; 114 Any changes are management and lifelong communicated in learning that support the advance, and that continued employability of the period varies employees and management to according to the end of row. situation.

Sustainability Report 2013 | COPASA MG 148 Indicator Page Remarks Indicator Page Remarks LA12 Percentage of employees 106 Non-discrimination receiving regular performance HR4 Total number of incidents of No cases of and career development. discrimination and actions taken. discrimination were Diversity and equal opportunities recorded at Copasa in LA13 Composition of governance 102 2013. bodies and breakdown of Freedom of association and collective bargaining employees per category HR5 Operations identified in which 115 No operation according to gender, age group, the right to exercise freedom was identified as minority and other diversity of association and collective having significant indicators. bargaining may be at significant risk to the right to LA14 Ratio of basic salary of men to 101 risk, and actions taken to exercise freedom women by employee category. support these rights. of association and Human rights collective bargaining. Investment practices and procurement processes Child labor HR1 Percentage and total number 123 HR6 Operations identified as having No operation was of significant investment significant risk for incidents of identified as having agreements that include human child labor, and measures taken significant risk for rights clauses or that have to contribute to the elimination incidents of child undergone screening on human of child labor. labor. rights. HR2 Percentage of significant 123 suppliers and contractors that have undergone screening on human rights and actions taken. HR3 Total hours of employee training 108 on policies and procedures concerning aspects of human rights relevant to operations, including the percentage of employees trained.

Sustainability Report 2013 | COPASA MG 149 Indicator Page Remarks Indicator Page Remarks Forced or compulsory labor SO3 Percentage of employees trained 41 HR7 Operations identified as having No operation was in anti-corruption policies and significant risk for incidents identified as having procedures of the organization. of forced or slave labor, and significant risk for SO4 Actions taken in response to 40 measures taken to contribute incidents of forced or incidents of corruption. to the elimination of forced or compulsory labor. Public policies compulsory labor. SO5 Public policy positions and 20; 75; Safety Practices participation in public policy 81 HR8 Percentage of security personnel 111 development and lobbies. trained in the organization’s SO6 Total value of financial and in- 133 Copasa is forbidden policies or procedures kind contributions to political to undertake any concerning aspects of human parties, politicians and related financial and in- rights relevant to operations. institutions by country. kind contributions Indigenous Rights to political parties, HR9 Total number of incidents of No cases of violation politicians and related violations involving rights of of rights of indigenous institutions. indigenous people and actions peoples by Copasa in taken. 2013 were recorded. Society Community SO1 Nature, scope and effectiveness 125 of any programs and practices that assess and manage the impacts of operations on communities, including entering, operating and exiting. Corruption SO2 Percentage and total number of 40 business units analyzed for risks related to corruption.

Sustainability Report 2013 | COPASA MG 150 Indicator Page Remarks Indicator Page Remarks Unfair competition PR4 Total number of incidents of The services provided SO7 Total number of legal actions for 121 There was no lawsuit non-compliance with regulations by Copasa and their anticompetitive behavior, anti- against Copasa and voluntary codes related products do not trust and monopoly practices in 2013 for unfair to information and labeling of involve filling and and their outcomes. competition, anti-trust products and services, by type of labeling procedures, and monopoly. outcomes. and therefore the Company does not Product Liability adopt procedures Customer health and safety for minimization of PR1 Stages of the life cycle of 118 specific labeling of products and services in which products and services health and safety impacts are risks. The Subsidiary assessed for improvement Copasa Mineral Water and percentage of significant Minas Gerais uses products and services categories labels authorized by subject to such procedures. the competent bodies. PR2 Total number of incidents of non- There is no case PR5 Related to customer satisfaction, 121; 122 compliance with regulations and of non-compliance including results of surveys voluntary codes related to the related to the theme. measuring customer satisfaction impacts of products and services practices. on health and safety during the life cycle, by type of outcomes. Labelling of products and services PR3 Type of information on products 119 and services required by procedures and percentage of significant products and services subject to such information requirements.

Sustainability Report 2013 | COPASA MG 151 Indicator Page Remarks Communications marketing PR6 Programs for adherence to laws, Copasa seeks to standards and voluntary codes represent the diversity related to communications in advertisements, marketing Including advertising, in addition to not promotion and sponsorship. associate their image with religious elements, football teams etc. PR7 Total number of incidents of They were not, in non-compliance with regulations 2013 cases of non- and voluntary codes concerning compliance relating marketing communication to codes and laws including advertising, promotion related to marketing and sponsorship by type of advertising, promotion outcomes. and sponsorship. Accordance PR8 Total number of substantiated 122 complaints regarding breaches of customer privacy and losses of customer data.

Sustainability Report 2013 | COPASA MG 152 Acknowledgment

In 2013, among many moments of celebration of 50 years of Copasa, 71 employees lived a unique experience: the creation of the illustrations in the book Povo d´água. In embroideries, the materialization of their stories and the commitment of all employees Copasa with the waters of Minas Gerais. To each colleague, partner of dreams, challenges and feelings, our sincere appreciation for the beauty that lent themselves to our account and your daily participation in building a better company every and each day.

Sustainability Report 2013 | COPASA MG 153 Technical Record

Independent auditors - financial Overall coordination statements Advising the Presidency PricewaterhouseCoopers Office of the President

Investor Relations Disclaimer Paula Vasques Bittencourt This document may contain CFO and Investor Relations statements relating to the prospects Phone: +55 31 3250.2015 of the business Copasa, which Fax: + 55 31 3250.1409 are projections and are based on Email: [email protected] expectations about the future of the business. These estimates are Questions regarding the report subject to risks, uncertainties and assumptions, including, among (GRI 3.4) others, economic, political, financial and business conditions in the Social Responsibility Division markets in which the Company Phone: +55 31 3250.1560 operates. Prospective investors are Fax: +55 31 3250.1476 cautioned that any such statements Email: [email protected] are not guarantees of future performance and involve risks and Creation and digital development uncertainties. Ideorama comunicação LTDA.

Publication Press Division Phone: +55 31 3250-1069 Fax: +55 31 3250-1666 Email: [email protected]

Sustainability Report 2013 | COPASA MG 154 Illustrative financial statements, in accordance with accounting practices adopted in Brazil and IFRS, on December 31, 2013 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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

Sustainability Report 2013 | COPASA MG 156 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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

Note Parent company Consolidated 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

Sustainability Report 2013 | COPASA MG 157 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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

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

Sustainability Report 2013 | COPASA MG 158 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Statement of Income

Note Parent company Consolidated 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)

Sustainability Report 2013 | COPASA MG 159 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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

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

Statement of Comprehensive Income

Parent company Consolidated NotE 2013 2012 2013 2012 (Restated) (Restated)

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

Sustainability Report 2013 | COPASA MG 160 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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

Parent company statement of changes in equity

Capital reserves Revenue reserves Carrying Total value equity Share Convertible Treasury Legal Tax Profit Retained adjustments capital debentures shares incentives retention 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 3,279 Amortization of Monetary adjustments on fixed assets - 96/97 ------48,284 48,284 Deferred income tax and social contribution adjustments on fixed assets - 96/97 ------(16,095) (16,095)

Sustainability Report 2013 | COPASA MG 161 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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 - 481,723 Actuarial loss on post-employment benefit obligations (Note 17) ------(74,268) (74,268) Fair value of available-for-sale financial assets ------2,489 2,489 Total comprehensive income for the year ------481,723 (71,779) 409,944

Conversion of debentures - 133,704 ------133,704 Increase 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 agreements (Note 3.23) - - - - - 16,912 - - 16,912 Amortization of monetary adjustments on fixed assets - 96/97 ------7,887 (7,887) - Deferred income tax and social contribution 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

Sustainability Report 2013 | COPASA MG 162 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Consolidated Statement of Changes in Equity

Attributable to the owners of the Parent

Capital reserves Revenue reserves

Share Convertible Treasury Legal Tax Profit Retained Carrying Total Non- Total equity capital debentures shares incentives retention earnings value controlling adjustments interests

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 adjustments 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 financial assets ------2,489 2,489 - 2,489 Total comprehensive income for the year ------481,723 (71,779) 409,944 - 409,944

Sustainability Report 2013 | COPASA MG 163 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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 adjustments 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

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

Sustainability Report 2013 | COPASA MG 164 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Parent Company and Consolidated Statement of Changes in Equity

Attributable to the owners of the Parent Capital reserves Revenue reserves

Non- Share Treasury Tax Profit Retained Carrying value controlling capital shares Legal incentives retention earnings adjustments Total 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 - - -

Sustainability Report 2013 | COPASA MG 165 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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

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

Statement of cash flows

Statement of cash flows Consolidated 2013 2012 2013 2012 (Restated) (Restated) 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)

Sustainability Report 2013 | COPASA MG 166 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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

Sustainability Report 2013 | COPASA MG 167 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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

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

Sustainability Report 2013 | COPASA MG 168 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Statement of Value Added

Parent company Consolidated 2013 2012 2013 2012 (restated) (restated) 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

Sustainability Report 2013 | COPASA MG 169 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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

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

Sustainability Report 2013 | COPASA MG 170 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

01. Operations Gerais and the water basins of the Jequitinhonha, Mucuri, São Mateus, Companhia de Saneamento de Minas Gerais (“COPASA MG”, Buranhém, Itanhém and Jucuruçu rivers. “Parent company” or “Company”) is a publicly-traded, mixed-capital Copasa Serviços de Irrigação S.A. (“Serviços de Irrigação”) - es- (public/private) company, controlled by the Government of the State of tablished by State Law 16,698, of April 17, 2007, is engaged in manag- Minas Gerais, having its registered office in the city of Belo Horizonte at ing, executing and exploring the irrigation systems of the Jaíba Project, Rua Mar de Espanha 525, Santo Antônio. The Company is engaged in as well as its maintenance, using both its own and outsourced personnel planning, designing, performing, expanding, remodeling, managing and and resources. This subsidiary may contract, whenever economically vi- providing public services comprising water supply and sewage services, able, through regular bidding processes, services and construction work and is permitted to operate in Brazil and abroad. The Company is subject necessary to the operation of the system, and may purchase products, to the arbitration of São Paulo Stock Exchange’s Market Arbitration equipment and materials required for the performance of its activities. Chamber, as set forth in an arbitration clause included in its bylaws. In compliance with Minas Gerais State Government Decree At December 31, 2013, COPASA MG had the following wholly-owned 46,080, dated November 12, 2012, the Executive Board of COPASA subsidiaries: Serviços de Irrigação considered that the responsibilities imposed by Copasa Águas Minerais de Minas S.A. (“Águas Minerais”) - State Law 16,698, dated April 17, 2007, had been met. Therefore, the esta-blished by State Law 16,693, of January 11, 2007, is engaged in necessary measures for the transfer of management of the Jaíba II the production, bottling, distribution and sale of mineral water from the Project to Distrito de Irrigação do Jaíba - DIJ were concluded on March springs it owns or has license to explore, and managing and exploring 2, 2013, upon termination of service agreement 460/12 entered into the water and spring resources of Caxambu, Araxá, Cambuquira and with RURALMINAS on September 3, 2012. Complete termination of the Lambari. activities is pending because of labor lawsuits and judicial claims against Copasa Serviços de Saneamento Integrado do Norte e Nordeste customers, in which this subsidiary is the defendant and the plaintiff, de Minas Gerais S.A. (“COPANOR”) - established by State Law 16,698, respectively. of April 17, 2007, is engaged in planning, designing, executing, expand- At December 31, 2013, the Company operates in 888 locations ing, remodeling, exploring and providing public services including water in the State of Minas Gerais (882 in December 2012) providing water supply and sewage treatment, collection, recycling, treatment and supply or sewage services, totaling approximately 4,647,083 connec- final disposal of urban, domestic and industrial waste, draining and tions (4,499,455 in December 2012). The twenty main water supply and management of rain water in urban areas in cities of the North of Minas sewage service concessions that the Company holds are as follows:

Sustainability Report 2013 | COPASA MG 171 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Water concessions Sewage concessions Number of Number of Location Expiry Location Expiry connections connections

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.

Sustainability Report 2013 | COPASA MG 172 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

At December 31, 2013, 55 concessions have expired, which a) Parent company financial statements represented 6.19% of the Company’s total funds and whose The parent company financial statements have been prepared renewal procedures are currently under negotiation with the related in accordance with accounting practices adopted in Brazil issued by municipalities. Management estimates that new concession agree- the Brazilian Accounting Pronouncements Committee (CPC) and are ments will be entered into for all expired concessions that are yet to disclosed together with the consolidated financial statements. be renewed. Therefore, there is no risk of discontinuation of water supply and sewage services rendered in these municipalities. In the parent company financial statements, subsidiaries are recorded based on the equity accounting method. The same The Executive Board of the Company authorized on January 28, adjustments are made in the parent company and consolidated 2014 the issue of the parent company and consolidated financial financial statements to reach the same profit or loss and equity statements at December 31, 2013. attributable to the owners of the parent entity. In the case of COPASA MG, the accounting practices adopted in Brazil applicable to the 02. Basis of preparation and presentation of parent company financial statements differ from the International the financial statements Financial Reporting Standards (IFRS) applicable to separate financial statements only in relation to the measurement of investments in The Company is presenting its parent company and consoli- subsidiaries based on the equity accounting method, instead of at dated financial statements. cost or fair value in accordance with IFRS.

2.1. Basis of preparation b) Consolidated financial statements The financial statements have been prepared under the histori- The consolidated financial statements have been prepared and are being presented in accordance with accounting practices cal cost convention, as modified by available-for-sale financial assets adopted in Brazil, including the pronouncements issued by the and financial assets and financial liabilities measured at fair value. Brazilian Accounting Pronouncements Committee (CPC), as well The preparation of financial statements requires the use of as according to the IFRS issued by the International Accounting certain critical accounting estimates. It also requires management Standards Board (IASB). to exercise its judgment in the process of applying the Company’s The presentation of the statement of value added is required by accounting policies. The areas involving a higher degree of judgment the Brazilian corporate legislation and by the accounting practices or complexity, or areas where assumptions and estimates are adopted in Brazil for listed companies, but is considered supple- significant to the financial statements, are disclosed in Note 4.

Sustainability Report 2013 | COPASA MG 173 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated mentary information for IFRS. For IFRS, this statement is presented same disclosure period as those of the parent company and use as supplementary information, and not part of the required set of consistent accounting practices. All balances, income and expenses financial statements. and unrealized gains and losses arising from transactions between group companies are fully eliminated. 2.2. Consolidation A change in the relative participation in a subsidiary that does The consolidated financial statements include the operations of not result in loss of control is recorded as a capital transaction. the Company and the following subsidiaries, the Company’s ownership interests in which at the end of the reporting period are summarized 03. Summary of significant accounting below: policies Interest in capital - % The main accounting policies applied in the preparation of Total Voting Subsidiaries these financial statements are set out below. These policies have Copasa Águas Minerais de Minas S.A. 100 100 been consistently applied to the years presented, unless otherwise Copasa Serviços de Saneamento Integrado do Norte e stated. Nordeste de Minas Gerais S.A. - COPANOR 100 100 Copasa Serviços de Irrigação S.A. 100 100 3.1. Segment reporting Operating segments are reported in a manner consistent with Subsidiaries are all entities over which the Company has the the internal reporting provided to the chief operating decision-maker. power to determine the financial and operating policies, generally The chief operating decision-maker, responsible for allocating accompanying an interest of more than one half of the voting rights. resources and assessing performance of the operating segments, The existence and effect of potential voting rights that are currently is the Executive Board, which also contributes to making the Com- exercisable or convertible are considered when assessing whether pany’s strategic decisions together with the Board of Directors. The the Company controls another entity. Subsidiaries are fully consoli- Group is present in two different segments: (i) the water supply and dated from the date on which control is transferred to the Company. sewage services in public concessions, which are rendered by the They are deconsolidated from the date that control ceases. Parent company and its subsidiary Copasa Serviços de Saneamento The subsidiaries’ financial statements are prepared for the Integrado do Norte e Nordeste de Minas Gerais S.A.; and (ii) the sale

Sustainability Report 2013 | COPASA MG 174 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated of products by the subsidiary Copasa Águas Minerais de Minas S.A. maturities of three months or less, and with immaterial risk of Segment information is presented in Note 19. change in value. They are all used by the Company in the management of its short-term commitments. 3.2. Foreign currency translation 3.4. Financial assets a) Functional and presentation currency 3.4.1. Classification Items included in the financial statements of each subsidiary included in the Company’s consolidation are measured using the Financial assets are classified at initial recognition as loans and currency of the primary economic environment in which the entity receivables and available for sale. The classification depends on the operates (the “functional currency”). The parent company and consoli- purpose for which the financial assets were acquired. dated financial statements are presented in Brazilian reais (R$), which is the Company’s functional and presentation currency. a) Loans and receivables Loans and receivables are non-derivative financial assets with b) Transactions and balances fixed or determinable payments that are not quoted in an active Foreign currency transactions are translated into the functional market. They are included in current assets, except for maturities currency using the exchange rates prevailing at the dates of the greater than 12 months after the end of the reporting period, which transactions or the dates of valuation when items are remeasured. are classified as non-current assets. The Company’s loans and Foreign exchange gains and losses resulting from the settlement receivables comprise cash and cash equivalents, marketable securi- of such transactions and from the translation at year-end exchange ties, collateral deposits, receivables from customers, banks and rates of monetary assets and liabilities in foreign currencies are investments relating to agreements, restricted investments, financial recognized in the statement of income. assets of concessions, equity securities, receivables from subsidiar- Foreign exchange gains and losses related to assets and ies and other receivables. liabilities are recorded in the statement of income under finance b) Available-for-sale financial assets result. Available for sale financial assets are non-derivative financial 3.3. Cash and cash equivalents assets which are designated in this category or are not classified in other categories. They are included in non-current assets unless Cash and cash equivalents includes cash on hand, bank deposits and other short-term highly liquid investments with original management intends to dispose of them within twelve months of

Sustainability Report 2013 | COPASA MG 175 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated the balance sheet date. The investments made by the Company and group of financial assets is impaired. A financial asset or a group classified as available for sale, subsequent to initial recognition, are of financial assets is impaired and impairment losses are incurred stated at fair value and any changes, that are not impairment losses, only if there is objective evidence of impairment as a result of one or are recognized in other comprehensive income and presented within more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on equity. When an investment is written-off, the balance accumulated the estimated future cash flows of the financial asset or group of in other comprehensive income is transferred to the statement of financial assets that can be reliably estimated. income. The criteria that the Company and its subsidiaries utilize to 3.4.2. Recognition and measurement determine whether there is objective evidence of an impairment loss Normal purchases and sales of financial assets are recognized include: on the trade date - the date on which the Company commits to (i) significant financial difficulty of the issuer or debtor; purchase or sell the asset. Investments are initially recognized at fair (ii) a breach of contract, such as a default or delinquency in value plus transaction costs for all financial assets not measured at interest or principal payments; fair value through profit or loss. Financial assets are derecognized (iii) the Company and its subsidiaries, for economic or legal when the rights to receive cash flows from the investments have reasons relating to the borrower’s financial difficulty, granting to the expired or have been transferred and the Company has transferred borrower a concession that a lender would not otherwise consider; substantially all the risks and rewards of ownership. Available-for- (iv) sale financial assets are carried at fair value. Loans and receivables it becomes probable that the borrower will enter bankruptcy or other financial reorganization; are carried at amortized cost using the effective interest method. (v) the disappearance of an active market for that financial asset Changes in the fair value of monetary and non-monetary securi- because of financial difficulties; or ties classified as available for sale are recognized in equity. (vi) observable data indicating that there is a measurable decrease 3.4.3. Impairment of financial assets in the estimated future cash flows from a portfolio of financial assets a) Assets carried at amortized cost since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, The Company and its subsidiaries assess at each balance sheet including: date whether there is objective evidence that a financial asset or

Sustainability Report 2013 | COPASA MG 176 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

► adverse changes in the payment status of borrowers in the or group of financial assets is impaired. In the case of investments portfolio; and in equity securities classified as available for sale, a significant or ► national or local economic conditions that correlate with prolonged decline in the fair value of the security below its cost defaults on the assets in the portfolio. is also evidence that the asset is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - The amount of any impairment loss is measured as the differ- measured as the difference between the acquisition cost and the ence between the asset’s carrying amount and the present value current fair value, less any impairment loss on that financial asset of estimated future cash flows (excluding future credit losses that previously recognized in profit or loss - is removed from equity and have not been incurred) discounted at the financial asset’s original recognized in the statement of income. Impairment losses on equity effective interest rate. The carrying amount of the asset is reduced instruments recognized in the statement of income are not reversed and the amount of the loss is recognized in the statement of income. through 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 3.5. Accounts receivable effective interest rate determined under the contract. As a practical Trade receivables are amounts due from customers for expedient, the Company and its subsidiaries may measure impair- sales made and services rendered in the ordinary course of the ment on the basis of an instrument’s fair value using an observable Company’s business. They are included in current assets, except for market price. those with maturities greater than 12 months after the end of the If, in a subsequent period, the amount of the impairment loss reporting period. In these cases, they are classified as non-current. decreases and the decrease can be related objectively to an event Accounts receivable from customers are recognized initially occurring after the impairment was recognized (such as an improve- at fair value and subsequently measured at amortized cost less a ment in the debtor’s credit rating), the reversal of the previously provision for impaired receivables. recorded loss is recognized in the statement of income. A provision for impairment of trade receivables is established b) Assets classified as available for sale when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of The Company and its subsidiaries assess at each balance the receivable. Significant financial difficulties of the debtor, the sheet date whether there is objective evidence that a financial asset

Sustainability Report 2013 | COPASA MG 177 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated probability that the debtor will enter bankruptcy or other financial 360 days, the related provision is reversed and they are written off reorganization and default or delinquency in making payments against the statement of income under selling expenses, provided (overdue for more than 180 days) are considered indicators that the that the court-ordered collection process had already started. receivable is impaired. Otherwise, these amounts are maintained under the provision for impairment losses at the expected recoverable value. A provision for impairment of trade receivables is calculated based on an analysis of receivables and recorded in an amount ► Other receivables from the Municipal and considered by management sufficient to cover expected losses on Federal Governments receivables, according to the following criteria: Receivables from the Federal and Municipal Governments ► Receivables up to R$ 5, overdue for more than 180 days under agreements, contracts and other operations, which are overdue for more than 360 days, are fully provisioned. These receivables, except those related to the Minas Gerais State Government and the Belo Horizonte Municipal Government, ► Receivables from the Government of Minas Gerais and the are considered uncollectible when they are overdue for more than Municipality of Belo Horizonte (PBH) 180 days, and are directly written off against income, under selling The Company does not constitute a provision for impairment of expenses. the receivables from the Minas Gerais State Government since there ► Receivables above R$ 5, overdue for more than 180 days is no history of default. Receivables from the Municipal Authority of Belo Horizonte not paid until the date of the tariff transfer to the A provision for impairment of receivables is recognized for Municipal Water and Sewerage Fund are fully deducted from the all receivables, except those related to the Minas Gerais State amount to be transferred and, therefore, no provision for losses is Government and the Belo Horizonte Municipal Government, which required. 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. ► Supplementary provision For receivables of up to R$ 30, which are overdue for more than Management also recognizes a supplementary provision for 360 days, the related provision is reversed and they are written off other receivables not yet due and for receivables overdue for less against the statement of income under selling expenses. than 180 days with respect to specific customers included in the provision for impairment of receivables. For receivables over R$ 30, which are overdue for more than

Sustainability Report 2013 | COPASA MG 178 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

3.6. Inventories 3.8. Investments Inventories are stated at the lower of cost and net realizable In the parent company financial statements, investments in value. Cost is determined using the Weighted Average Cost method. subsidiaries are recorded using the equity method. The net realizable value is the estimated sales price in the normal course of business less applicable variable selling expenses. Provi- 3.9. Intangible assets sions for slow-moving or obsolete inventories are recorded whenever considered necessary by management. Materials are for consump- a) Service concession arrangements tion and maintenance of the water supply and sewage treatment The Company recognizes as an intangible asset its right to systems. charge the users of water supply and sewage services provided under the service concession arrangements in accordance with 3.7. Financial assets - concession agreements Interpretation ICPC 01 Service Concession Arrangements.

The Company recognizes a receivable from concession Intangible assets are determined as the residual value of the authorities (municipal governments) when it has an unconditional construction revenue earned for the construction or acquisition of right to receive cash at the end of the concession term as part of infrastructure by the Company, and are recognized as described in the consideration receivable from such authorities for investments Note 3.2. The amount of the financial asset related to the uncondi- made but not recovered through provision of the concession-related tional right to receive cash at the end of the concession term as part services. These financial assets are recognized at the present value of the consideration receivable is recognized as described in Note of such right and calculated on the net amount of the constructed 3.7. Depending on the type of asset and the period of its acquisi- assets that constitute the infrastructure that will be the subject of tion, the cost of acquisition includes the hyperinflation effects, in the consideration payable by the concession authority, discounted accordance with IAS 29, in the period the Brazilian economy was based on the weighted average capital cost of the Company. considered as hyper-inflationary. Under the IFRS, Brazil had a hyper- These accounts receivable are classified as non-current assets inflationary economy up to 1997. considering the expected receipt of such amounts, based on the end Intangible assets are amortized as from the date they are date of the service concession arrangements. available for use, in the location and condition necessary for their use in operations as intended by the Company.

Sustainability Report 2013 | COPASA MG 179 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

The amortization of intangible assets reflects the pattern in c) software licenses which the future economic benefits embodied in the asset are Computer software licenses acquired are recorded on the expected to be consumed by the Company, or the end of the ar- basis of the costs incurred to acquire the software and bring it to rangement, whichever comes first. The pattern of consumption of use. These costs are amortized on a straight-line basis over their the assets relates to their useful life in that the assets constructed estimated useful life of five years. by the Company are included in the tariff calculation base for provision of the concession services. 3.10. Property, plant and equipment Property, plant and equipment are stated at historical cost, less Amortization of an intangible asset ceases when the asset has depreciation and impairment loss, if applicable. Depending on the been fully consumed or written off, no longer being part of the tariff type of asset and the period of its acquisition, the cost refers to the calculation base for provision of the concession services, whichever acquisition cost and the historical cost adjusted by the hyperinflation occurs first. effects, under IAS 29, in the period the Brazilian economy was b) Right of use considered as hyper-inflationary. Under the IFRS, Brazil had a hyper- Use rights refer to costs incurred with renewal of public inflationary economy up to 1997. concession arrangements, with respect to the amount refundable Historical cost includes costs directly attributable to the by COPASA MG for the infrastructure investments made by the acquisition of such items, as well as interest expense on financing municipal governments, plus monetary adjustment, when applicable incurred in connection with their acquisition until the assets become according to the International Accounting Standard (IAS) 29. The operational. Capitalized financial charges are depreciated according amounts recorded in intangible assets refer to refunds already paid to the same criteria and the useful life established for the item of by the Company to the municipal governments as part of the renewal property, plant and equipment in which they were included. agreement for water supply and sewage service concession arrangements. These investments are not part of the tariff calculation base, Subsequent costs are included in the book value of the asset, but they represent the investment made by the Company for renewal or recognized as a separate asset, as appropriate, only when future of the concession arrangements. economic benefits embodied in the item are likely to flow to the Company, when the cost of the item can be reliably measured and These use rights are amortized on a straight-line basis over the its economic useful life exceeds 12 months. The carrying amount term of the directly related concession arrangements.

Sustainability Report 2013 | COPASA MG 180 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated of the replaced items or parts is derecognized. All other repairs and are recognized within “other operating income (expenses), net” in maintenance are charged to the statement of income during the the statement of income. financial period in which they are incurred. 3.11. Impairment of non-financial assets Land is not depreciated. The depreciation of other property, plant and equipment is recorded considering the estimated useful Assets that are subject to amortization are reviewed for impair- lives of the assets using the following depreciation rates: 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- Years able amount. The recoverable amount is the higher of an asset’s Buildings 25 - 40 Machinery 10 - 15 fair value less costs to sell and its value in use. For the purposes of Vehicles 3 - 5 assessing impairment, assets are grouped at the lowest levels for Furniture, fittings and equipment 3 - 8 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 Residual values and the useful life of assets are reviewed and of the impairment at the balance sheet date. adjusted, if necessary, at the beginning of each year, on a prospective basis. 3.12. Financial liabilities The assets recognized in property, plant and equipment are not related to public service concession arrangements and are Financial liabilities are only recognized when the Company as- represented substantially by general use items and buildings of the sumes a contractual obligation under a financial instrument. When Company. recognized, they are initially measured at fair value, plus transaction costs directly attributable to their acquisition or issuance. The The net book value of an asset or a cash generating unit is immediately written down to its recoverable amount when the book Company’s financial liabilities are then measured at amortized cost. value of the asset or group of assets to which it refers exceeds its The principal financial liabilities recognized by the Company are: estimated recoverable amount (Note 3.11). trade accounts payable, borrowings and debentures. Gains and losses on disposals are determined by comparing a) Trade payables the selling prices with the carrying amount, net of depreciation, and

Sustainability Report 2013 | COPASA MG 181 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Trade payables are obligations to pay for goods or services that carrying amount of the conversion option is not remeasured in have been acquired in the ordinary course of business. Accounts subsequent years. payable are classified as current liabilities if payment is due in one Borrowings are classified as current liabilities unless the Com- year or less. If not, they are presented as non-current liabilities. pany has an unconditional right to defer settlement of the liability for Trade payables are recognized initially at fair value and sub- at least twelve months after the balance sheet date. sequently measured at amortized cost using the effective interest Borrowing costs directly related to the acquisition, construction method. or production of a qualifying asset that requires a substantial period b) Borrowings and debentures 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 Borrowings are recognized initially at fair value, net of transac- economic benefits associated with the item will flow to the Company tion costs incurred, and are subsequently carried at amortized cost. and costs can be measured reliably. The other borrowing costs are Any difference between the proceeds (net of transaction costs) and recognized as finance costs in the period in which they are incurred. the total amount payable is recognized in the statement of income over the period of the borrowings using the effective interest rate As permitted by ICPC 01, the Company capitalizes the borrowing method. costs referring to the intangible assets related to the construction services connected to the public service concession agreements. Fees paid on the establishment of loan facilities are recognized as transaction costs of the loan to the extent that it is probable that c) Net presentation some or all of the facility will be drawn down. Financial assets and liabilities are shown net in the balance The fair value of the installment payable under a convertible sheet only if there is a direct current and enforceable right to offset debt instrument is determined using the market interest rate for the amounts recognized, and if there is an intention to offset them, the same debt instrument had it been a non-convertible one, as or to realize the asset and settle the liability simultaneously. informed by the financial institution that issued it. This value is recorded as a liability on an amortized cost basis until such obliga- 3.13. Provisions tion is extinguished by conversion or at the maturity of the respective Provisions for tax and legal claims are recognized when: (i) debt instruments. This is recognized and included in equity, net the Company has a present legal or constructive obligation as a of the effects of both income and social contribution taxes. The

Sustainability Report 2013 | COPASA MG 182 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated result of past events; (ii) it is likely that disbursement of funds will payable” because it is considered as a legal obligation established be necessary to settle the obligation; and (iii) the amount can be by the Company’s bylaws. Dividends exceeding the mandatory estimated with reasonable reliability. minimum amount, which are declared by management after the Where there are a number of similar obligations, the likeli- date of the financial statements but prior to the date of authorization hood that an outflow will be required in settlement is determined for issue, are recorded under proposed additional dividends in by considering the class of obligations as a whole. A provision is equity. recognized even if the likelihood of an outflow with respect to any Interest on capital payable to stockholders is treated in the one item included in the same class of obligations may be small. same way as dividends and debited to retained earnings. Provisions are measured at the present value of the expen- As provided for by relevant tax legislation, such interest payable ditures expected to be required to settle the obligation using to stockholders is calculated under the terms of Law 9,249/95 a pre-tax rate that reflects current market assessments of the and recorded as financial expenses in the statement of income. time value of money and the risks specific to the obligation. The For financial statement publication purposes, interest on capital increase in the provision due to the time elapsed is recognized as is reversed against financial expenses and disclosed as a debit to other interest expenses. retained earnings. 3.14. Distribution of dividends and interest on 3.15. Taxation capital Taxes on profits comprise both income tax and social contribu- Distributions of dividends and interest on capital to the tion, current and deferred. Taxes on profits are recognized in the Company’s stockholders are recognized as a liability in the financial statement of income, except to the extent that they are related to statements at year-end based on the Brazilian Corporate Law and items recognized directly in equity or in comprehensive income. In on the Company’s bylaws. Any amount that exceeds the minimum such cases, the taxes are also recognized in comprehensive income required is only recognized on the date it is approved at a General or directly in equity. Meeting of Stockholders or at its payment date, whichever occurs first. a) Current income tax and social contribution

The amount equivalent to the mandatory minimum dividend The current income tax and social contribution are calculated is recorded in liabilities under “dividends and interest on capital on the basis of the tax laws enacted or substantively enacted at

Sustainability Report 2013 | COPASA MG 183 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated the balance sheet date in the countries where the Company and its differences and unused tax credits and losses, to the extent that subsidiaries operate and generate taxable income. Management taxable profit will likely be available so that the deductible temporary periodically assesses the positions taken by the Company in calcu- differences can be realized, and unused tax credits and losses can lating tax in situations where the applicable tax regulations are open be used, except: to interpretation, and makes provisions, when appropriate, based on ► when the deferred tax asset related to the deductible the estimated amounts payable to the tax authorities. temporary difference is generated upon initial recognition of the asset or liability in a transaction other than a business The current income tax and social contribution are presented combination, and does not affect book profit or taxable net, separated by taxpaying entity, in liabilities when there are income or loss on the transaction date; and amounts payable, or in assets when the amounts prepaid exceed the total amount due on the reporting date. ► on deductible temporary differences with investments in subsidiaries, deferred tax assets are only recognized to the b) Deferred income tax and social contribution extent that temporary differences are reversed in the near Deferred taxes arise from temporary differences at the balance future and taxable profit is available for temporary differ- sheet date between the tax bases of assets and liabilities and their ences to be used. carrying amount. The carrying amount of deferred tax assets is reviewed at each Deferred tax liabilities are recognized on all temporary tax balance sheet date and written off to the extent that taxable profits differences, except: will not likely be available so that deferred tax assets can be used in ► when a deferred tax liability arises upon initial recognition of total or in part. Deferred tax assets adjusted are reviewed at each goodwill or of an asset or liability in a transaction other than balance sheet date and recognized to the extent that future taxable a business combination and, at the transaction date, has profits will likely allow recovery of deferred tax assets. no impact on book profit or taxable income (loss); Deferred tax assets and liabilities are measured at the tax rate ► on temporary tax differences related to investments in likely to be applicable in the year in which the asset or liability will be subsidiaries, when the period for reversal of the temporary realized or settled, based on the enacted tax rates (and tax law) at differences can be controlled and the temporary differences the balance sheet date. are not likely to be reversed in the near future. Deferred tax assets and liabilities are presented net in the Deferred tax assets are recognized on all deductible temporary balance sheet when there is a legally enforceable right and the

Sustainability Report 2013 | COPASA MG 184 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated intention to offset them upon the calculation of current taxes, gener- settled fund benefit and defined contribution. The plans are generally when related to the same legal entity and the same tax authority. ally funded through payments to trustee-administered funds, deter- Accordingly, deferred tax assets and liabilities in different entities or mined by periodic actuarial calculations. A defined contribution plan in different countries are generally presented separately, and not on is a pension plan under which the Group pays fixed contributions a net basis. into a separate entity. The Group has no legal or constructive obliga- c) Taxes on sales and services tions to pay further contributions if the fund does not hold sufficient

Sales and services revenues are subject to certain taxes and assets to pay all employees the benefits relating to employee service contributions, at the following basic rates: 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 Income tax and social contribution Rate - % age, years of service and compensation.

Social Integration Program (PIS)/Public Services Employee Savings 1.65 On October 29, 2010, the Company implemented a new pen- Program (PASEP) sion plan strategy, determining that the Defined Benefit Plan would Social Contribution on Revenues (COFINS) 7.60 Value-added Tax on Sales and Services (ICMS) (*) 7.00 to 18.00 be closed to new members as from that date, and creating a Settled (*) Not levied on water supply and sewage collection services. 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. These charges are presented as revenue deductions in the The Settled Benefit Plan was established based on the statement of income. The credits arising from the non-cumulative cumulative right of each member calculated at the new strategy PIS/COFINS are presented as a deduction of cost of services implementation date. This plan will only receive contributions to rendered in the statement of income. meet administrative expenses and, although the studies performed 3.16. Employee benefits do not identify the possibility of financial insufficiency, thanks to surpluses generated in the plan assets, arising from the difference a) Pension obligations between the restated amount of benefits calculated by reference to The Company operates three pension plans: defined benefit, the National Consumer Price Index (INPC) variation and the yields

Sustainability Report 2013 | COPASA MG 185 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated on plan assets calculated at market rates, any insufficiencies will be equity in other comprehensive income in the period in which they covered by additional matching contributions made by the sponsor- arise. ing entity and plan members. Past-service costs are recognized immediately in profit or loss, The Defined Contribution Plan operates as an individual retire- unless the changes to the pension plan are conditional on the ment savings account, receiving contributions made by members employees remaining in service for a specified period of time (the and the sponsoring entity that are deposited in each member’s vesting period). In this case, the past-service costs are amortized on individual account and applied as described in Note 17. Further- a straight-line basis over the vesting period. more, while with the Company, the member may schedule how b) Profit sharing this savings account will be built up according to his/her financial ability. The contribution made by the sponsoring entity will match the The Company recognizes a liability and an expense for em- member’s contribution, which, in its turn, corresponds to a percent- ployee profit sharing according to operational and financial targets age of the member’s actual salary, varying between 3% and 10%, at disclosed to its employees. A provision is recorded when the Com- the member’s option. pany has a legal contractual obligation or a constructive obligation arising from past events. 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 3.17. Government grants and assistance assets, adjusted by unrecognized past service costs. These liabilities Government grants and assistance are recognized when there are calculated on an annual basis by independent actuaries, using is reasonable assurance that the conditions established by the the projected unit credit method. The present value of the obligation government were fulfilled and that such grants will be received. They is determined by discounting the estimated future cash outflows are recognized as income over the period necessary to match them using interest rates compatible with market remuneration, that is with the related expenses which the government grant or assistance denominated in the currency in which the benefits will be paid, and which have terms to maturity approximating the terms of the related is intended to compensate. pension obligation. The plan assets are measured at fair value. When the Company receives non-monetary assets for donation, Actuarial gains and losses arising from experience adjustments since such donation is necessary to concession and not to the and changes in actuarial assumptions are charged or credited to Company, the assets received are recorded at a nominal amount

Sustainability Report 2013 | COPASA MG 186 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated and offset by a contra account, with the purpose to record mater consumption or when the service is rendered. Unbilled revenue control of assets while avoid improper recognition of benefits in the is represented by revenue, whose related services were rendered statement of income and in the water and sewage tariffs established but not yet billed up to the end of each period. These revenues are by the Regulatory Agency. accounted for at the date the related service is rendered under unbilled trade receivables, based on monthly estimates which take 3.18. Share capital into account the type of the customer, the type of the transaction When the Company repurchases its shares (treasury shares), and the specifications of each sale, so that revenue is matched with the consideration paid, including any directly attributable incremen- costs on the proper accrual basis. tal costs (net of income taxes) is deducted from equity attributable to b) Construction contracts the Company’s stockholders until the shares are canceled or reis- Construction contracts are treated as a single construction sued. Where such shares are subsequently reissued, any considera- contract when: i) the group of contracts was negotiated as a single tion received, net of any directly attributable incremental transaction package; ii) the contracts are so closely interrelated that they are, costs and the related income tax and social contribution effects, is in effect, part of a single project with an overall profit margin, and included in equity attributable to the Company’s stockholders. iii) the contracts are performed concurrently or in a continuous 3.19. Revenue recognition sequence. Construction revenue is comprised of cost plus margin con- Revenue comprises the fair value of the consideration received tracts, whereby revenue is recognized by reference to costs incurred or receivable mainly for the sale of products and services in the on the contracts, plus margin. Such additional margin refers to the ordinary course of the Company’s activities. Revenue is shown net of work carried out by the Company under construction contracts, value-added tax, returns, rebates and discounts, and after eliminat- which is added to the construction costs incurred, thus generating ing intercompany sales. the total amount that is recognized as construction revenue, in a) Rendering of services accordance with CPC 17 and IAS 11 - Construction Contracts.

Revenues and expenses from operations are recognized on the Contract costs are recognized in the statement of income, as accrual basis. Revenue from the rendering of water supply and sew- cost of services rendered, when incurred. All costs directly attribut- age services as well as irrigation services is recognized after water able to the contracts are taken into consideration when measuring

Sustainability Report 2013 | COPASA MG 187 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated revenue, using the cost-plus-margin method. This revenue is al- sibility related to the ownership of the goods and costs incurred or to located based on the weighted average rate of cost of capital - WACC be incurred in respect of the transaction can be measured reliably, it nominal, in full, to the costs incurred in administering contracts is probable that the economic benefits associated with the transac- for works, and the result of investment return margin and margin tion will flow to the Company, and the Company has transferred to transferred to providers of services and material. the buyer all the risks and rewards of ownership of the goods.

When completion of a construction contract cannot be esti- e) Dividend income mated reliably, revenue is recorded only to the extent of the costs Dividend income is recognized when the right to receive pay- recognized that are recoverable. ment is established. c) Interest income

Interest income is recognized on the accrual basis of account- 3.20. Concession contracts ing, using the effective interest rate method. When a financial instru- The Company is the holder of public utility concessions for ment or receivable is impaired, the Company reduces the carrying water supply and sewage services. These concession agreements amount to its recoverable amount, being the estimated future cash are entered into with municipalities, with the State of Minas Gerais flow discounted at the original effective interest rate of the instru- as intervenor and have been recognized in accordance with ICPC 01 ment. Subsequently, as time elapses, interest is incorporated into requirements. assets against interest income. This interest income is calculated at the same effective interest rate used to calculate the recoverable The concession agreements represent a contractual right to amount, i.e., the original rate of the instrument. charge users of the public services, using tariffs regulated by the Regulatory Water and Sewage Agency of the State of Minas Gerais d) Sales of products (ARSAE-MG), over the period of time established by the concession Sales revenue is presented net of taxes and discounts. Taxes agreements. The Company recognizes its contractual right to on sales are recognized when sales are billed and discounts are charge users of the public services over the term of the concession recognized when they become known. Revenue from sales of goods arrangement as an intangible asset, and the amount is amortized as is recognized when the sales amount can be measured reliably, the disclosed in Note 3.9. Company no longer controls the goods sold or has any other respon- Moreover, in all its concession agreements, except for those

Sustainability Report 2013 | COPASA MG 188 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated with the municipality of Ipatinga, the Company has an unconditional created by the Company, represented by revenues (gross sales, right to receive cash as a consideration for returning the assets including the taxes on them, the other revenues and the effects to the concession authority at the end of the concession. In these of the provision for impairment of trade receivables), by the inputs cases, the Company recognized a financial asset, discounted to acquired from third parties (cost of sales and acquisition of materi- present value, considering the best estimate of the cash to be als, energy and third-party services, including the taxes levied at the time of acquisition, the effects of the losses and recovery of asset received at the end of the concession term, as disclosed in Note 3.5. amounts, and depreciation and amortization) and the added value 3.21. Related parties received from third parties (equity in the results of subsidiaries, finance income and other income). The second part of the statement In addition to business transactions carried out with its wholly- of value added presents the distribution of wealth among personnel, owned subsidiaries, the Company recognizes as related parties the taxes and contributions, remuneration of third-party capital and financial transactions maintained with key management personnel, remuneration of own capital. with its controlling stockholder and with enterprises and/or bodies connected with such stockholder, either directly or indirectly, 3.23. Restatement of comparative figures provided that there are formal contractual relations with these The financial statements as at January 1 and December 31, enterprises or bodies which generate financial transactions. 2012 have been adjusted and are being restated in accordance with 3.22. Statement of value added CPC 23: The purpose of this statement is to disclose the wealth created 3.23.1. Changes in accounting practices by the Company and its distribution during a certain reporting pe- (a) The Company recognized retrospectively the changes in riod, and is presented by the Company, as required by the Brazilian accounting practice arising from the revision of IAS 19 - Employee Corporate Law, as an integral part of the parent company financial Benefits, correlated to CPC 33 (RI), which eliminated the recognition statements, and as additional disclosure in the consolidated finan- of the deferral of actuarial gains (losses) (corridor method) and cial statements, since this statement is not required by the IFRS. generated a liability recorded against other comprehensive income The statement of value added was prepared based on informa- in equity. tion obtained from the same accounting records used to prepare 3.23.2. Other restated items the financial statements and pursuant to the provisions of CPC 09, “Statement of value added”. In its first part, it presents the wealth (b) Supplementary monetary adjustment related to the years

Sustainability Report 2013 | COPASA MG 189 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

1996 and 1997, as required by IFRS for the recognition of the at January 1 and December 31, 2012, presented for comparison residual inflationary effects on equity, generating an increase in purposes, have been adjusted and restated as detailed below. intangible assets, property, plant and equipment and financial assets, against carrying value adjustments in equity. Items (b) and (e) above apply only to the parent company’s

(c) Immaterial investment in Foz de Jeceaba initially classified financial statements. at cost and reclassified to available-for-sale financial assets. Meas- The effects of this restatement are as follows: 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 decrease 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

Sustainability Report 2013 | COPASA MG 190 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Balance sheet at 1/1/2012 Parent company Consolidated Balances Balances originally Restatements Restated balances originally Restatements Restated balances reported reported 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

Sustainability Report 2013 | COPASA MG 191 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Balance sheet at 12/31/2012 Parent company Consolidated Balances Balances originally Restatements Restated balances originally Restatements Restated balances reported reported 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

Sustainability Report 2013 | COPASA MG 192 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Statement of income - 12/31/2012 Parent company Balances originally Restatements Restated balances reported

(b) (f)

CONTINUING OPERATIONS 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 1 0 2 134,819 Finance costs (257,370) - (257,370) FINANCE RESULT, NET (122,653) 1 0 2 (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

Sustainability Report 2013 | COPASA MG 193 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Statement of income - 12/31/2012 CONSOLIDAted Balances originally reported Restatements Restated balances

(f) CONTINUING OPERATIONS 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

Sustainability Report 2013 | COPASA MG 194 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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 - 12/31/2012

Parent company Consolidated Balances Balances originally Restatements Restated balances originally Restatements Restated balances reported reported 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 plant and equipment” to “other financial assets”, of which R$ 614 not previously considered affecting “interest income and expenses” referred to the addition to intangible assets with treasury shares and by R$ 19,572, which is offset by the transfer of R$ 241,804 from R$ 945 to IFRS adjustments (not applicable for Consolidated), thus “interest from borrowings and debentures”, of R$ 21,730 from generating a change of R$ 292,691 in this group (R$ 291,746 in “payments of actuarial liabilities” and R$ 32,090 from “taxes paid Consolidated). in installments” within “financing activities”, of R$ 15,080 from “additions to intangible assets and purchase of property, plant and (b) Refers to the transfer of R$ 15,080 from “additions to equipment” to “net margin of construction revenue”, and of R$ intangible assets and purchase of property, plant and equipment” 1,559 from “additions to intangible assets and purchase of property, to “net margin of construction revenue”, and of R$ 1,559 from

Sustainability Report 2013 | COPASA MG 195 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

“additions to intangible assets and purchase of property, plant and Statement of value added - 12/31/2012 equipment” to “other financial assets”, of which R$ 614 referred to Parent company the addition to intangible assets with treasury shares and R$ 945 to Balances IFRS adjustments (not applicable for Consolidated), thus generating originally Restatements Restated balances reported a change of R$ 16,639 in this group (R$ 15,694 in Consolidated). Statement of value added (a) (b) (c) Refers to the transfer of “interest on borrowings and deben- Revenue 3,851,625 (70,851) 3,780,774 tures” amounting to R$ 241,804, Inputs acquired from third parties (1,547,400) 67,886 (1,479,514) R$ 21,730 from “payments of actuarial liabilities” and R$ Retentions (372,318) (5,024) (377,342) 32,090 from taxes paid in installments to the “operating activities” Value added received through transfer 121,397 102 121,499 group and offset by the transfer of R$ 19,572 due to the amortiza- Distribution of value tion of finance charges on borrowings not previously considered, added: Personnel 777,036 - 777,036 thus increasing “repayment of borrowings and debentures” (R$ Taxes and contributions 535,574 (2,682) 532,892 103), “interest of borrowings and debentures” (R$ 18,530), “pay- Remuneration of third ment of actuarial liability and CEMIG” (R$ 407) and “payment of parties' capital 253,766 - 253,766 Remuneration of concession principal and interest” R$ 532), which generated a stockholders 486,928 (5,205) 481,723 change of R$ 222,232 in this group.

Sustainability Report 2013 | COPASA MG 196 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

3.24. New standards, amendments and interpreta- Statement of value added - 12/31/2012 tions to existing standards that are not yet effective Consolidated Balances The following new standards, amendments and interpretations originally Restatements Restated balances reported to existing standards were issued by IASB but are not effective for Statement of value 2013. The early adoption of these standards, even though encour- added (a) aged by IASB, has not been implemented in Brazil by the CPC. Revenue 3,877,048 (70,851) 3,806,197 Inputs acquired from third (a) IFRS 9, “Financial instruments”, addresses the classifica- parties (1,574,928) 70,851 (1,504,077) tion, measurement and recognition of financial assets and financial Retentions (379,930) - (379,930) liabilities. IFRS 9 was issued in November 2009 and October 2010. Value added received through transfer 133,756 - 133,756 It replaces the parts of IAS 39 that relate to the classification and Distribution of value measurement of financial instruments. IFRS 9 requires financial added: assets to be classified into two measurement categories: those Personnel 783,593 - 783,593 measured at fair value and those measured at amortized cost. The Taxes and contributions 536,565 - 536,565 determination is made at initial recognition. The basis of classifica- Remuneration of third parties' capital 254,065 - 254,065 tion depends on the entity’s business model and the contractual Remuneration of cash flow characteristics of the financial instruments. For financial stockholders 481,723 - 481,723 liabilities, the standard retains most of the IAS 39 requirements. The (a) Exclusion of additions from construction in progress related main change is that, in cases where the fair value option is taken for to the property, plant and equipment of the calculation basis for the financial liabilities, the part of a fair value change due to an entity’s construction revenue and costs. own credit risk is recorded in other comprehensive income rather than the statement of income, unless this creates an accounting (b) Supplementary monetary adjustment related to the years mismatch. The Group is yet to assess IFRS 9’s full impact. The 1996 and 1997, as required by IFRS for the recognition of residual standard is applicable as from January 1, 2015. inflationary effects on equity, generating adjustments of R$ 2,965 to net derecognition of financial assets, R$ 5,024 to amortization, R$ (b) IFRIC 21, “Levies”, provides guidance on when to recognize 102 to revenue from financial assets, R$ 2,682 to deferred income a liability for a levy imposed by legislation. The obligation should tax and social contribution and R$ 5,205 to retained earnings in the be recognized only when the related generating event occurs. The parent company financial statements. interpretation is applicable as from January 1, 2014.

Sustainability Report 2013 | COPASA MG 197 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

(c) IAS 32, “Offsetting of financial assets and liabilities”, estimates and assumptions that have a significant risk of causing a changes in IAS 32 clarify the requirements related to the offsetting material adjustment to the carrying amounts of assets and liabilities of financial assets and liabilities. These amendments specifically within the next financial year are addressed below: clarify the meaning of “has the current legal right to offset” and (a) Recognition of construction revenue “simultaneous realization and settlement”. Management does not believe that the adoption of the amendments to the IAS 32 will have Construction revenue is comprised of cost plus margin con- a significant impact on the Company’s financial statements. tracts, whereby revenue is recognized by reference to costs incurred The aforementioned amendments to the IFRS are yet to be is- on the contracts, plus margin. Such additional margin refers to the sued by the CPC. Due to the commitment of the CPC and the CVM to work carried out by the Company under construction contracts, maintain their technical pronouncements updated with those issued which is added to the construction costs incurred, thus generating by the IASB, it is expected that these statements and changes will be the total amount that is recognized as construction revenue, in issued by the CPC and approved by the CVM up to the date of their accordance with CPC 17 and IAS 11 - Construction Contracts. If the mandatory adoption. proportion of the services rendered against total services contracted There are no other IFRSs or IFRIC interpretations that are not were to be 10% more in relation to management’s estimates, the yet effective that would be expected to have a material impact on the revenue recognized for the year would increase by R$ 282,918. If Group. such difference were to be inferior in 10%, the revenue for the year would decrease by R$ 102,918. 04. Critical accounting estimates and judgments (b) Pension benefits Estimates and judgments are continually evaluated and are The present value of the pension obligations depends on a based on historical experience and other factors, including expecta- number of factors that are determined on an actuarial basis utilizing tions of future events that are believed to be reasonable under the a number of assumptions. The assumptions utilized in determining circumstances. the net cost (income) for pensions include the discount interest rate. Based on assumptions, the Company and its subsidiaries make Any changes in these assumptions may impact the carrying amount estimates concerning the future. The resulting accounting estimates of pension obligations. will, by definition, seldom equal the related actual results. The The Company determines the appropriate discount interest rate

Sustainability Report 2013 | COPASA MG 198 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated at the end of each year. This is the interest rate that should be used prevailing circumstances. to determine the present value of estimated future cash outflows Deferred tax assets are recognized for all temporary differences expected to be required to settle the pension obligations. When to the extent that taxable profit will likely be available to such tempo- determining the appropriate discount rate, the Company considers rary differences can be utilized. that the discount rate in Brazil, for complying with accounting standards, should be obtained from the returns on government securities The realization of deferred tax credits are conditioned upon (NTN-B) at the date of the actuarial valuation, without any adjust- future events, which will make the provisions that gave rise deduct- ments for Brazilian risk factors or expectations of future fluctuations ible under current tax legislation. in the profitability of these securities. (d) Impairment of non-financial assets

Other key assumptions for pension obligations Impairment loss exists when the carrying amount of an asset or (c) Taxes 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- There are uncertainties regarding the interpretation of complex tion of fair value less cost to sell is based on information available tax regulations and the amount and timing of future taxable income. on transactions involving the sale of similar assets or market prices Given the wide range of international business relationships less additional costs to dispose of the asset. The value-in-use and the long-term nature and complexity of existing contractual calculation is based on the discounted cash flow model. Cash flows agreements, differences arising between the actual results and the are determined from the budget for the next five years and do not assumptions made, or future changes to such assumptions, could include reorganization activities to which the Company has not yet require future adjustments to tax income and expenses already committed or significant future investments that will improve the recorded. The Company sets up provisions, based on reliable asset base of the cash-generating unit under test. The recoverable estimates, for expected consequences of audits by tax authorities of amount is sensitive to the discount rate used in the discounted cash the respective jurisdictions in which it operates. The amount of these flow model, as well as expected future cash receipts and growth rate provisions is based on various factors, such as past tax audit experi- used for extrapolation purposes. ence and different interpretations of tax regulations by the taxable entity and the pertinent tax authority. These different interpretations (e) Provisions for tax, civil and labor risks may arise in relation to a wide variety of issues depending on the These are recognized when the Company and its subsidiaries

Sustainability Report 2013 | COPASA MG 199 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

have a present legal or constructive obligation as a result of past multiplied by the authorized tariff. events; it is probable that a transfer of economic benefits will be The main concession terms and major changes in concession required to settle the obligation; and the amount can be reliably agreements for the period ended December 31, 2013 are described estimated. The provisions are quantified at present value of the in Note 1. expected disbursement to settle the obligation, applying the appropriate discount rate according to the liability-related risks. At December 31, 2013, the Company had accounts receivable from concession authorities (the municipalities) totaling R$ Provisions are restated up to the balance sheet date in the esti- 494,836, which correspond to the amounts expected to be received mated amount of probable losses, observing their nature and based at the end of the concession period (2012 - R$ 390,757; January 1, on the opinion of the Company’s legal counsel. The principles and 2012 - R$ 325,493) for assets which were not depreciated over the nature of the provisions for tax, civil and labor risks are described in concession period. These amounts were discounted to their present Note 13. value upon initial recognition using the weighted average cost of capital (WACC) rates linked to the respective accounts receivable. 05. Public service concession agreements Intangible assets were accounted for based on the difference At December 31, 2013, the Company holds public utility conces- between the fair value of the assets constructed or acquired for the sions for water supply and sewage services in 888 locations in the State purpose of the concession services and the carrying value of the of Minas Gerais. The concession agreements and/or program agree- financial assets recognized. ments are executed with each municipality for periods ranging from 30 to Below are the results of the construction services performed by 99 years, and all are fairly similar in terms of the rights and obligations of the Company during the periods: 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 Parent company/Consolidated financial and economic balance, pursuant to Federal Law 11,445/07. 12/31/2013 12/31/2012 Therefore, ARSAE-MG is responsible for periodically reviewing these Construction revenue 707,082 660,725 tariffs and for annually determining any required readjustments, in order Construction cost (690,573) (645,645) to realign tariff prices with inflation. Services are charged directly to users, based on the volume of water consumed and sewage collected

Sustainability Report 2013 | COPASA MG 200 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

06. Cash and cash equivalents In 2013 and 2012, the Company classified its marketable securities as cash and cash equivalents since these are considered (a) Cash and cash equivalents financial assets with immediate redemption and original maturity within 90 days, subject to insignificant risk of change in value. Parent company (b) Changes in financial investments 12/31/2013 12/31/2012 1/1/2012

Cash and banks 40,125 47,202 34,632 Parent company Short-term bank deposit 220,356 449,223 206,904 certificates 12/31/2013 12/31/2012 Total 260,481 496,425 241,536 At January 1 449,223 206,904 New investments 1,724,259 3,053,398 Consolidated Income 28,237 40,522 12/31/2013 12/31/2012 1/1/2012 Redemptions (1,981,363) (2,851,601) At December 31 220,356 449,223 Cash and banks 41,582 48,478 35,174 Short-term bank deposit 220,356 449,223 207,197 certificates Consolidated Total 261,938 497,701 242,371 12/31/2013 12/31/2012

At January 1 449,223 207,197 The Company maintains its own funds arising from its business New investments 1,724,980 3,053,398 Income 28,282 40,529 activity invested in Bank Deposit Certificates (CDBs), which consist Redemptions (1,982,129) (2,851,901) of fixed-income securities substantially remunerated by reference At December 31 220,356 449,223 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 Financial assets include only amounts in reais. There are no 2013 totaled R$ 28,237 (2012 - R$ 40,657). investments in foreign currency. None of these financial assets is overdue and no impairment loss was identified.

Sustainability Report 2013 | COPASA MG 201 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

07. Trade and other receivables (a) Trade receivables

The aging of trade receivables is as follows:

Parent company 12/31/2013 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 From 61 to 90 days past due 22,598 15,279 12,307 From 91 to 180 days past due 32,919 24,185 19,481 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

Sustainability Report 2013 | COPASA MG 202 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Consolidated 12/31/2013 12/31/2012 1/1/2012

Not yet due 256,176 197,560 159,547 Up to 30 days past due 51,627 56,564 45,680 From 31 to 60 days past due 33,135 26,395 21,317 From 61 to 90 days past due 22,844 15,301 12,357 From 91 to 180 days past due 33,278 24,220 19,560 Over 180 days past due 16,362 15,340 12,388 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 At December 31, 2013, trade receivables of the parent company there are no accounts receivable in foreign currencies. totaling R$ 176,440 (2012 - R$ - 150,145; January 1, 2012 - R$ 123,875) and the consolidated accounts receivable totaling R$ At December 31, 2013, the trade receivables of the parent 178,414 (2012 - R$ 151,869; January 1, 2012 - R$ 125,295) were company of R$ 777,469 (2012 - R$ 680,747; January 1, 2012 - R$ past due, but not provisioned. These include a number of independent 607,148) and the consolidated trade receivables of R$ 781,543 customers for whom there is no recent history of default. The aging (2012 - R$ 685,603; January 1, 2012 - R$ 612,144) were fully analysis of these trade receivables is as follows: performing.

Sustainability Report 2013 | COPASA MG 203 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Parent company The aging of these receivables is as follows: 12/31/2013 12/31/2012 1/1/2012 Parent company Up to 3 months 141,266 125,667 105,263 12/31/2013 12/31/2012 1/1/2012 3 to 6 months 34,614 24,070 18,221 Over 6 months 560 408 391 Not yet due 1,650 874 728 Total 176,440 150,145 123,875 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 Consolidated Overdue from 91 to 180 days 4,432 2,916 3,053 12/31/2013 12/31/2012 1/1/2012 Overdue from 181 to 360 8,431 5,533 5,219 days Over 360 days past due 4,649 7,276 14,336 Up to 3 months 142,721 126,961 106,347 Total 23,336 19,517 26,146 3 to 6 months 35,129 24,428 18,492 Over 6 months 564 411 394 Total 178,414 151,800 125,233

Consolidated 12/31/2013 12/31/2012 1/1/2012

At December 31, 2013, the trade receivables of the parent Not yet due 1,697 930 944 company totaling R$ 23,336 (2012 - R$ 19,517; January 1, 2012 Up to 30 days past due 1,463 1,004 1,121 - R$ 26,146) and the consolidated trade receivables of R$ 24,004 Overdue from 31 to 60 days 1,458 1,093 1,146 (2012 - R$ 19,910; January 1, 2012 - R$ 27,660) were considered Overdue from 61 to 90 days 1,373 989 1,191 as unrecoverable. The individually impaired receivables mainly relate Overdue from 91 to 180 days 4,559 2,972 3,269 Overdue from 181 to 360 8,671 5,589 5,435 to customers who are healthcare providers and for whom COPASA, days in accordance with current legislation, cannot interrupt water supply Over 360 days past due 4,783 7,333 14,554 and sewage services. Based on management’s assessment, a Total 24,004 19,910 27,660 portion of these accounts receivable may be recovered.

Sustainability Report 2013 | COPASA MG 204 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

The following table summarizes the changes in the provision for impair- (b) Other receivables ment of trade receivables: The other classes of trade and other receivables have no impaired assets. Parent company The maximum exposure to credit risk at the balance sheet date 12/31/2013 12/31/2012 is the carrying value of each class of receivable mentioned above. The Company has pledged tariff revenues as a guarantee for financ- At January 1 19,517 26,146 ing (Note 20). Provision for impairment of trade receivables 73,672 57,420 Receivables written off during the year as (69,853) (64,049) uncollectible At December 31 23,336 19,517

Consolidated 12/31/2013 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 (71,554) (66,464) uncollectible 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.

Sustainability Report 2013 | COPASA MG 205 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Parent company 12/31/2013 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 -

Consolidated 12/31/2013 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 -

Sustainability Report 2013 | COPASA MG 206 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

(i) This refers to financial investments redeemable in more than the original contract and redefining the load and discharge amounts 90 days. of the current status of the project. Accordingly, ANA redeemed at June 28, 2013 the adjusted amount of R$ 14,439, which was (ii) Collaterals for borrowings and debentures are detailed in related to a portion of the amount transferred in December 2007. item “b” of Note 12. The preparation of the addendum and this redemption were made (iii) This refers to advance for future capital increase, loan because only the first phase of the sewage treatment project was agreements and payroll expenses (salary and social charges) relat- completed, but the original contract encompassed the final construc- ing to employees assigned by COPASA MG to its subsidiaries and tion phase. which are being reimbursed as contractually provided for, of which On January 29, 2013 the Company received a transfer of R$ R$ 96,178 refers to Águas Minerais, R$ 12,733 to COPANOR and R$ 8,114 from the National Water Agency (ANA) as payment for the 879 to Copasa Serviços de Irrigação (2012 - R$ 86,637, R$ 19,121 sewage treatment services rendered to the Sewage Treatment and R$ 1,076; January 1, 2012 - R$ 57,541, R$ 17,139 and R$ Plant (ETE) of the municipality of Patos de Minas. As set forth in 1,368, respectively). Clause 6 of Contract 099/2012, the payment for the treated sewage (iv) This refers to funds of the Brazilian National Water Agency will be released to the Company in twelve quarterly, consecutive (ANA) held by COPASA MG under the Water Basin Depollution Pro- installments after obtaining a pollution reduction target certificate to gram (PRODES), to be transferred as payment for the treated sewage be issued by the ANA. The Contract is effective until December 31, from the Ribeirão do Onça sewage treatment plant, in the Municipal- 2018. ity of Belo Horizonte, and from the Betim Central sewage treatment (v) Funds from the payment of the 5th issue of debentures plant (ETE), in the Municipality of Betim, and ETE in the Municipality (Note 12 (b)) were deposited in favor of COPASA MG in a settlement of Ibirité, through the attainment of treated sewage and abatement account maintained by Caixa Econômica Federal. Funds from the of polluting emissions goals. Because these goals were only partially “settlement account” to the “demand account” will be released met, the Company also records these funds in non-current liabilities, according to the work plan for each project, upon an express request under deposits for construction work (Note 11). filed by COPASA MG, and will depend on previous confirmation from The amount of the contract, which was originally R$ 18,720, the fiduciary agent of the release conditions contained in this agree- was adjusted to R$ 10,160 under the addendum prepared in De- ment. The amounts from the settlement account which are awaiting cember 2012 and signed in May 2013, with reference to the date of

Sustainability Report 2013 | COPASA MG 207 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

to be allocated to project development are invested in the “fundo Transfer of Equity 1/1/2012 12/31/2012 de investimento caixa corporativo II referenciado DI longo prazo” AFAC(*) accounting investment fund, which is managed by Caixa Econômica Federal and Águas Minerais (31,046) (20,245) (11,762) (63,053) whose income in 2013 amounted to R$ 9,364 (2012 - R$ 18,053). COPANOR (13,665) - (2,266) (15,931) Serviços de Irrigação (893) - 708 (185) 08. Investments Total (45,604) (20,245) (13,320) (79,169) At December 31, 2013, the subsidiaries had a capital deficiency (*) AFAC - Advances for future capital increase 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 subsidiary Águas Minerais, which started its activities in The changes in the provisions for investment losses are as September 2008, has been recording losses due to the high volume of investments in industrial projects, the upgrade of bottling equip- follows: ment, adjustment of the mix of products to the market requirements, besides refurbishment in the four plants to comply with regulators’

12/31/2012 Equity accounting 12/31/2013 requirements. The losses will be fully recovered as from the increase in (63,053) (10,646) (73,699) capacity approved for the exploration of mineral water sources of Águas Minerais (15,931) 4,047 (11,884) Caxambu, Cambuquira, Lambari and Araxá, in 42% and 58.65% COPANOR (185) (578) (763) Serviços de Irrigação (79,169) (7,177) (86,346) from 2015 and 2016, respectively. Total (79.169) (7.177) (86.346) Accounting information of the subsidiary Águas Minerais, which was used as a basis for the Company’s equity in results and consolidation, 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.

Sustainability Report 2013 | COPASA MG 208 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

On December 20, 2012, a Debt Renegotiation Term was sufficient funds for repayment of these debts. The failure to transfer entered into between COPASA MG and COPANOR. This term was part of the new concessions, associated with problems in the physi- originated in COPANOR, through the Board of Directors Resolution cal and financial schedule of the construction works, delayed the Notice 029/12 and Executive Board Resolution Notice 099/12, both beginning of operation of certain concessions and, consequently, the of December 10, 2012, and in COPASA MG, through Executive Board generation of COPANOR’s cash flow, resulting in the formalization of Resolution Notice 1,011/12, dated December 18, 2012. the debt renegotiation. The reduction in interest rate was based on remunerations on the individual amounts referring to intercompany As such the terms of the intercompany loan agreements with loan agreements, which COPASA MG would obtain in the financial subsidiary COPANOR are now as follows: market. The grace period for the beginning of the debt repayment (a) Reduction in interest rate from 101% to 90% of CDI. is in accordance with the period adopted by financial agents for (b) Repayment over 324 months, with the following conditions: COPASA MG. The debt was reduced by R$ 7,106 in December 2013 because of the overcharge related to employee salaries assigned by (i) The grace period will be 12 months and interest remu- COPASA MG to the subsidiary COPANOR. neration shall be paid in a single installment, at the end of the grace period. In compliance with Minas Gerais State Government Decree 46,080, dated November 12, 2012, the Executive Board of COPASA (ii) The repayment period will be 312 months, in 52 bian- Serviços de Irrigação considered that the responsibilities imposed by nual installments. The first installment will mature on June State Law 16,698, dated April 17, 2007, had been met. Therefore, 20, 2014 and the last one on December 20, 2039. the necessary measures for the transfer of management of the (c) Constitution of a reserve account in the name of COPANOR Jaíba II Project to Distrito de Irrigação do Jaíba - DIJ were concluded (6210-3, at branch 3308 of Banco do Brasil S.A.), which cannot be on March 2, 2013, upon termination of service agreement 460/12 operated by the subsidiary, in order to guarantee the debt service entered into with RURALMINAS on September 3, 2012. Complete payment. termination of the activities is pending because of labor lawsuits The intercompany loan agreements between COPASA MG and and judicial claims against customers, in which this subsidiary is the subsidiary COPANOR were agreed taking into consideration assump- defendant and the plaintiff, respectively. tions of new public utility concessions for water supply and sewage services by the subsidiary, which would allow the generation of

Sustainability Report 2013 | COPASA MG 209 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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 Cost Accumulated amortization Intangible assets, net

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 Common use systems 622,067 (465,059) 157,008 Other 67,848 (7,444) 60,404 Total in operation 8,591,169 (3,925,563) 4,665,606

Under construction

Sustainability Report 2013 | COPASA MG 210 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Construction in progress 1,797,754 - 1,797,754 Total under construction 1,797,754 - 1,797,754 Total intangible assets 10,388,923 (3,925,563) 6,463,360

12/1/2012 Cost Accumulated amortization Intangible assets, net 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) Total in operation 7,737,416 (3,604,432) 4,132,984

Under construction Construction in progress 1,927,472 - 1,927,472 Total under construction 1,927,472 - 1,927,472 Total intangible assets 9,664,888 (3,604,432) 6,060,456

The changes in intangible assets were as follows:

Sustainability Report 2013 | COPASA MG 211 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Balances on Additions Disposals Amortization Capitalized Transfer to Balances on January 1, interest property, plant December 31, 2012 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 203,517 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

Transfer to Balances on Capitalized Transfers to Additions Disposals Amortization property, plant Other December 31, interest financial assets and equipment 2013

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

Sustainability Report 2013 | COPASA MG 212 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

(b) Consolidated

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 337,927 (116,605) 221,322 Common use systems 700,883 (517,595) 183,288 Other 78,459 (8,341) 70,118 Total in operation 9,435,670 (4,306,781) 5,128,889

Under construction Construction in progress 1,771,866 - 1,771,866 Total under construction 1,771,866 - 1,771,866 Total intangible assets 11,207,536 (4,306,781) 6,900,755

12/31/2013 Cost Accumulated amortization Intangible assets, net 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) Total in operation 7,737,433 (3,604,444) 4,132,989

Under construction Construction in progress 1,927,472 - 1,927,472

Sustainability Report 2013 | COPASA MG 213 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Total under construction 1,927,472 - 1,927,472 Total intangible assets 9,664,905 (3,604,444) 6,060,461

The changes in intangible assets were as follows:

Balances on Transfer to Balances on Capitalized January 1, Additions Disposals Amortization property, plant December 31, interest 2012 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 Transfer to Balances on Capitalized Additions Disposals Amortization to financial property, plant Other December 31, interest assets and equipment 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,

Sustainability Report 2013 | COPASA MG 214 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

R$ 211 (2012 - R$ 3,729) as selling expenses and R$ 1,150 (2012 12/31/2013 Accumulated Property, plant and - R$ 19,199) as administrative expenses. Cost depreciation equipment, net At December 31, 2013, the additions to intangible assets In operation amounting to R$ 749,367 substantially referred to (i) the construc- Machinery and equipment 252,734 (165,305) 87,429 tion works for the expansion of the sewage treatment plant of Vehicles 141,973 (106,758) 35,215 Ribeirão Arrudas; (ii) the implementation of the sewage treatment Other 191 (172) 19 394,898 (272,235) 122,663 system of Ibirité, and (iii) improvements in the sewage system of Land and buildings 158,559 (75,744) 82,815 Caratinga, Contagem and Betim.

(i) Considering that common use systems have specific eco- Total in operation 553,457 (347,979) 205,478 nomic useful lives, these assets are controlled in a separate group Total property, plant and 553,457 (347,979) 205,478 named “common use systems”, as from 2012. equipment

10. Property, plant and equipment (a) Parent company 12/31/2012 Cost Accumulated Property, plant and depreciation equipment, net In operation Machinery and equipment 259,841 (155,394) 104,447 Vehicles 111,799 (101,141) 10,658 Other 191 (175) 16 371,831 (256,710) 115,121

Land and buildings 131,946 (71,573) 60,373

Total in operation 503,777 (328,283) 175,494

Total property, plant and equipment 503,777 (328,283) 175,494

Sustainability Report 2013 | COPASA MG 215 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

12/1/2012 Property, plant and Cost Accumulated depreciation equipment, net In operation Machinery and equipment 240,088 (136,254) 103,834 Vehicles 104,770 (97,793) 6,977 Other 155 (125) 30 345,013 (234,172) 110,841 Land and buildings 117,886 (67,856) 50,030 Total in operation 462,899 (302,028) 160,871 Total property, plant and equipment 462,899 (302,028) 160,871

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

Land and Machinery and Construction Vehicles Other Total buildings equipment in progress 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 Balances on December 31, 2013 82,815 87,429 35,215 19 - 205,478

Sustainability Report 2013 | COPASA MG 216 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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 Property, plant and Cost Accumulated depreciation equipment, net

In operation Machinery and equipment 275,717 (172,063) 103,654 Vehicles 142,712 (107,480) 35,232 Other 348 (295) 53 418,777 (279,838) 138,939 Land and buildings 164,348 (76,493) 87,855

Total in operation 583,125 (356,331) 226,794

Under construction

Construction in progress - - -

Total under construction - - -

Total property, plant and equipment 583,125 (356,331) 226,794

Sustainability Report 2013 | COPASA MG 217 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

12/31/2012 Property, plant and Cost Accumulated depreciation equipment, net

In operation Machinery and equipment 281,998 (159,951) 122,047 Vehicles 112,637 (101,755) 10,882 Other 327 (266) 61 394,962 (261,972) 132,990 Land and buildings 135,417 (72,075) 63,342

Total in operation 530,379 (334,047) 196,332

Under construction Construction in progress 2,291 - 2,291

Total under construction 2,291 - 2,291

Total property, plant and equipment 532,670 (334,047) 198,623

12/1/2012 Property, plant and Cost Accumulated depreciation equipment, net

In operation Machinery and equipment 260,944 (138,436) 122,508 Vehicles 106,172 (98,327) 7,845 Other 912 (494) 418 368,028 (237,257) 130,771 Land and buildings 121,372 (68,166) 53,206

Sustainability Report 2013 | COPASA MG 218 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Total in operation 489,400 (305,423) 183,977

Under construction Construction in progress 1,722 - 1,722

Total under construction 1,722 - 1,722 Total property, plant and equipment 491,122 (305,423) 185,699

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

Land and Machinery and Construction Vehicles Other Total buildings equipment in progress 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

Balances on December 31, 2013 87,855 103,654 35,232 53 - 226,794

Sustainability Report 2013 | COPASA MG 219 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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 company 12/31/2013 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

Sustainability Report 2013 | COPASA MG 220 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Consolidated 12/31/2013 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 (b) This refers to the installment payment (concluded in Sep- in installments. 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 (a) This refers to the Offset Agreement which establishes that 4, 2004, whereby the Company has acknowledged a debt of R$ tax and nontax debts payable by COPASA MG shall be offset against 78,495, which was agreed to be divided into 96 monthly consecu- its credits arising from water supply and sewage service invoices tive installments, restated based on the General Market Price Index payable by the Belo Horizonte Municipal Government. The reciprocal (IGP-M), plus interest of 0.5% per month. At December 31, 2013, the debts shall be paid in 120 monthly and consecutive installments, current portion includes only monthly invoices, in the amount of R$ bearing 1% interest and annual monetary restatement based on the 10,832 (2012 - R$ 6,618; January 1, 2012 - R$ 5,442). Special Extended Consumer Price Index (IPCA-E). At December 31, 2013, 74 installments remain payable and the final maturity of the (c) This refers to funds of the Brazilian National Water Agency arrangement will be in February 2020. (ANA) held by COPASA MG under the Water Basin Depollution Pro-

Sustainability Report 2013 | COPASA MG 221 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

gram (PRODES), to be transferred as payment for the treated sewage amount of R$ 14,439. This amount refers to part of the amount from the Ribeirão do Onça sewage treatment plant, in the Municipal- provided by ANA in December 2007. This redemption was made ity of Belo Horizonte, and from the Betim Central sewage treatment because only the first phase of the sewage treatment project was plant (ETE), in the Municipality of Betim, and ETE in the Municipality completed, but the original contract encompassed the final phase. of Ibirité, through the attainment of treated sewage and abatement On January 29, 2013 the Company received a transfer of of polluting emissions goals. Because these goals were only partially R$ 8,114 from the National Water Agency (ANA) as consideration met, the Company also records these funds in non-current liabilities, for the Federal Government’s participation in the construction of the under deposits for construction work (Note 8). Pato de Minas sewage treatment plant. As set forth in Clause 6 of The amount of the contract, which was originally R$ 18,720, Contract 099/2012, the payment for the treated sewage will be re- was adjusted to R$10,160 under the Addendum signed in May leased to the Company in twelve quarterly, consecutive installments 2013, with reference to the date of the original contract, changing after obtaining a pollution reduction target certificate to be issued by the load and discharge amounts in light of the current status of the ANA. The Contract is effective until December 31, 2018. the project. Thus, on June 28, 2013, ANA redeemed the adjusted

Sustainability Report 2013 | COPASA MG 222 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

12. Borrowings and debentures

Parent company 12/31/2013 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 State government/BDMG 1,032 3,726 7,756 Federal Savings and Loan Bank (CEF) 508,499 554,152 613,804 National Treasury - 3,311 41,806 BNDES - BNE 485,572 532,976 533,973 Federal government - bonus 59,654 52,506 51,031 Finame 72,042 - -

Sustainability Report 2013 | COPASA MG 223 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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

Consolidated 12/31/2013 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 BNDES - BNE 59,269 59,255 54,074 Promissory Notes - Citibank - - 155,924 Federal government - bonus 2,004 3,656 4,719 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

Sustainability Report 2013 | COPASA MG 224 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Debentures 275,267 134,024 172,457

Total current 471,930 363,005 543,682

Non-current State government/BDMG 1,032 3,726 7,756 Federal Savings and Loan Bank (CEF) 509,061 554,152 613,804 National Treasury - 3,311 41,806 BNDES - BNE 485,572 532,976 533,973 Federal government - bonus 59,654 52,506 51,031 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

Sustainability Report 2013 | COPASA MG 225 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

(a) Borrowings Consolidated At December 31, 2013, the book values of the Company’s loans Maturity year 12/31/2013 12/31/2012 1/1/2012 in foreign currency totaled R$ 127,332 (2012 - R$ 62,387 - January 2013 - - 212,188 1, 2012 - R$ 55,750), of which R$ 61,658 are in U.S. dollars and 2014 - 188,477 175,683 R$ 65,674 in Euros (2012 - R$ 56,162 in U.S. dollars and R$ 6,255 2015 174,399 153,067 141,171 in Euros; January 1, 2012 - only in U.S. dollars) 2016 137,483 117,590 106,814 2017 100,593 81,494 72,858 Amounts recorded under non-current liabilities fall due as 2018 101,778 82,500 73,766 follows: 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

Parent company Changes in borrowings were as follows: Maturity year 12/31/2013 12/31/2012 1/1/2012 Parent company 2013 - - 212,188 12/31/2013 12/31/2012 2014 - 188,477 175,683 Opening balance 1,381,873 1,619,595 2015 173,935 153,067 141,171 Proceeds from borrowings 216,072 126,382 2016 137,345 117,590 106,814 Provision for interest and financial charges 105,241 125,879 2017 100,523 81,494 72,858 Monetary and exchange variations 19,663 8,382 2018 101,708 82,500 73,766 Repayment of principal (227,873) (363,601) 2019 103,395 83,989 75,145 Payment of charges (106,248) (134,764) 2020 to 2036 575,563 445,775 390,745 Closing balance 1,388,728 1,381,873 Total 1,192,469 1,152,892 1,248,370

Current liabilities (196,259) (228,981) Non-current liabilities 1,192,469 1,152,892

Sustainability Report 2013 | COPASA MG 226 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Consolidated Bank borrowings and debentures mature through 2036 and 12/31/2013 12/31/2012 bear average coupons of 7.66% p.a. (2012 - 8.04% p.a.; January Opening balance 1,381,873 1,619,595 1, 2012 - 8.84%). In addition, the balances of financing lines are Proceeds from borrowings 217,634 126,382 subject to specific rates, as follows: Provision for interest and financial charges 105,353 125,879 Monetary and exchange variations 19,663 8,382 Repayment of principal (228,039) (363,601) Parent company/Consolidated Payment of charges (106,323) (134,764) Financing lines Rates Closing balance 1,390,161 1,381,873

State government/BDMG IGP-M Current liabilities (196,663) (228,981) Federal Savings and Loan Bank (CEF) TR Non-current liabilities 1.193.498 1.152.892 National Treasury TR Exceeding 6% of Long-Term BNDES - BNE Interest Rate (TJLP) On June 7, 2013, the subsidiary COPANOR entered into a loan Government Agency for Machinery and Equipment Financing (FINAME) - agreement of R$ 1,000,000.00 with Banco do Brasil. This agree- Federal government - bonus Dollar ment is subject to an interest rate of 112.5% p.a. of the average rate KfW Euro for the Interbank Deposit Certificate (CDI), to be paid on each base FINAME -Águas Minerais - date starting on July 15, 2013, upon maturity and settlement of the Banco do Brasil - COPANOR CDI debt. Debentures (*) (*) See Note 12(c). 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 (b) Guarantees for bank borrowings and financing between September 15, 2013 and February 15, 2016, the final maturity date. As collateral for financing, the Company has pledged the follo- Proceeds from this borrowing will be used exclusively to guaran- wing: tee the provision of funds in a deposit current account and will not be otherwise invested or used outside of the Banco do Brasil.

Sustainability Report 2013 | COPASA MG 227 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

(i) Foreign currency agreements (ii) Local currency agreements

Federal government - bonds Fiduciary transfer of receivables and restricted account agreements: These are guaranteed up to the contract balance by surety of the Minas Gerais State Government and by the Company’s tariff ► In order to improve and expand the systems in opera- revenue, up to the limits sufficient for the payment of the install- tion, the Company raised funds, between 1995 and ments and other charges due on the maturity dates. As additional 2011, from various financing agencies, and on October guarantees for Discount Bond and Par Bond, the Company maintains 29, 2002, these agreements were consolidated under a reserve account at Banco do Brasil amounting to R$ 42,518, the Restricted Account Agreement made between the restated through December 31, 2013 (2012 - R$ 40,527; at January Company, the Federal Savings and Loan Bank (CEF), 1, 2012 - R$ 35,192), by applying the average price of the Zero designated as administrator, and Unibanco, as the Coupon Bond of the US Treasury, recorded in the account “Collateral financial agent, whereby new funds were released for financing”. from the Government Severance Indemnity Fund For Employees (FGTS). New agreements for the fiduciary Kreditanstalt Fur Wiederaufbau - KfW: transfer of receivables and restricted accounts for the These are guaranteed up to the contract balance by surety of release of new FGTS funds were entered into on July 4, the Minas Gerais State Government and by the Company’s tariff 2006, under the Sanitation for All Program (“Programa revenue, up to the limit sufficient for the payment of the install- Saneamento para Todos”), which superseded all ments and other charges due on the maturity dates, as well as by the separate collateral agreement executed between KfW and the existing programs. Bradesco and Itaú also acted as the Federative Republic of Brazil, and the credit of payment guaranteed financial agents of the funds. The Company pledged by the Federal Republic of Germany. As an additional guarantee, the following as security for these agreements: the Company will maintain a reserve account at the Federal Savings ► Fiduciary collateral transfer of part of COPASA MG’s and Loan Bank (CEF), the minimum balance of which shall be the receivables from the water supply and sewage collec- amount corresponding to one monthly debt service payment falling tion services provided to its private sector consumers, due. The balance of this account recorded as “Collateral for financing” is R$ 891 at December 31, 2013 (2012 - R$ 349; at January 1, at the non-cumulative minimum amounts of R$17,000 2012 - not applicable). and R$15,300 per month, adjusted based on the

Sustainability Report 2013 | COPASA MG 228 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

variations of the IPCA (Amplified Consumer Price index) the expansion of the water supply and sewage treatment disclosed by the Institute of Economic Research (FIPE). systems in the concession areas, are collateralized by concession receivables relating to tariff revenue earned in ► Fiduciary transfer to the assignors of part of the funds the municipalities where the construction projects will be receivable from CEF, related to the temporary cash invest- performed, at three times the value of the monthly charge, ment funds, which are comprised of funds deposited in credited to a centralized account, and by reserve account the restricted account and reserve account, which shall deposits whose minimum balance corresponds to the correspond to three times the amounts of the installments amounts of the installments falling due. The balance of this falling due and whose balance as at December 31, 2013 account recorded as “Collateral for financing” is R$ 1,605 is recorded as “Collateral for financing” amounting to at December 31, 2013 (2012 - R$ 1,186; at January 1, R$ 25,448 (2012 - R$ 25,448; at January 1, 2012 - R$ 2012 - R$ 555). 25,862). (iii) Other borrowings ► Loan and financing agreements with the BNDES for the optimization and expansion of the water supply and sewage ► Loan and financing agreements entered into with the CEF treatment systems in the concession areas are collateral- for construction projects and the expansion of the systems ized by a portion of the receivables for the provision of and connections are collateralized by deposits in collateral public utility services - water supply and sewage services, at accounts whose minimum balance corresponds to the a minimum of R$3,000 and R$23,000 per month, adjusted value of the monthly charge for the agreement executed annually by the IPCA / IBGE, and by reserve account depos- on December 9, 2003, and three times the value of the its whose minimum balance corresponds to three times the monthly charge for the agreement executed on June 30, amount of the installments falling due. The balance of this 2004, calculated on the most recent charge available under account recorded as “Collateral for financing” is R$ 23,546 these agreements. The balance of this account recorded at December 31, 2013 (2012 - R$ 24,171; at January 1, as “Collateral for financing” is R$ 10,247 at December 31, 2012 - R$ 26,527). 2013 (2012 - R$ 10,107; at January 1, 2012 - R$ 9,918).

► Loan and financing agreements entered into with the ► Other financing transactions related to both the State CEF under the CAIXA PAC - 2009 and 2010 programs, for Government/BDMG and the National Treasury are gua-

Sustainability Report 2013 | COPASA MG 229 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

ranteed by the Minas Gerais State Government and by the Company’s tariff revenue. (c) Debentures

Parent company/Consolidated 12/31/2013 12/31/2012 1/1/2012 Subscriptions/ Subscription date Current Non-current Current Non-current Current Non-current series

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

Sustainability Report 2013 | COPASA MG 230 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Changes in debentures were as follows: Issue date June 15, 2004 Term 10 years Grace period of the principal 36 months 12/31/2013 12/31/2012 Repayment 84 months At December 31 1,677,505 1,190,364 Final maturity July 15, 2014 Interest TJLP + 3.58% p.a. Proceeds from debentures 175,734 659,171 Guarantee 20% of the revenue collected, plus reserve account Provision for interest and financial charges 124,978 127,777 Monetary variation 26,803 38,677 Repayment of principal (109,950) (93,958) This 1st issue is guaranteed by 20% of the Company’s revenue Conversion of debentures into shares - (137,486) Payment of charges (127,531) (107,040) from tariffs and a reserve account, the minimum balance of which At December 31 1,767,539 1,677,505 corresponds to three monthly installments falling due, related to all debentures of all series issued and subscribed for, deposited in an Current liabilities (275,267) (134,024) investment fund, recorded as “Collateral for financing”. At December Non-current liabilities 1,492,272 1,543,481 31, 2013, the amount pledged as collateral totaled R$ 12,149 (2012 - R$ 13,154; January 1, 2012 - R$ 14,205).

(i) Non-convertible debentures The funds from this issue were allocated to the financing of projects for expansion and modernization of water supply and ► Subscription - 1st issue: sewage treatment systems in the concession areas of COPASA MG. In June 2004, the Company placed 300 non-convertible simple ► Subscription - 3rd issue debentures of R$1,000 each, in a private issue, through exclusive subscription by the BNDES. These debentures were issued in twelve In December 2007, the Company placed 450 non-convertible series of R$ 25,000 each. The subscription price of each series was simple debentures of R$ 1,000 each, in a private issue, through equivalent to the nominal value plus the interest mentioned below, exclusive subscription by the BNDES. These debentures are issued calculated on a pro rata basis from the issue date to the effective in eighteen series of R$ 25,000 each, under the following contrac- subscription date, under the following contractual terms and condi- tual terms and conditions: tions:

Sustainability Report 2013 | COPASA MG 231 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Issue date June 1, 2007 third series of 4,000 debentures, totaling 10,000 debentures of Term 12 years R$ 74.07 each, under the following contractual terms and condi- Grace period of the 30 months tions: principal Repayment 114 months Final maturity December 15, 2019 Issue date July 15, 2010 Interest TJLP + 2.3% p.a. Term 144 months for the 1st and 3rd series and 145 months for the Floating, with assignment and restriction of funds receivable, plus 2nd series Guarantee reserve account Grace period of the 36 months for the 1st and 3rd series and 37 months for the 2nd principal series Repayment 108 months for the 1st and 3rd series and 9 annual for the 2nd series This 3rd issue is guaranteed by monthly minimum deposits of Final maturity December 15, 2022 R$ 18,000, related to tariff revenues of the Company, updated annu- Interest TJLP + 1.55% p.a. for the 1st and 3rd series, and IPCA + ally based on the IPCA, and by a reserve account, whose minimum 9.046555% p.a. for the 2nd series Guarantee Fiduciary transfer balance must be equal to 3 (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”. This 4th issue is guaranteed by the Company’s revenues from At December 31, 2013, the amount pledged as collateral totaled R$ tariffs corresponding to the monthly installment of R$ 32,000, 16,992 (2012 - R$ 18,019; January 1, 2012 - R$ 19,519). updated annually by the IPCA, and by the Company’s receivables ► Subscription - 4th issue: from the depository bank, related to the deposits to be made and funds existing in the “restricted account” earmarked for fiduciary In July 2010, the Company placed nonconvertible simple transfer of receivables. 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, ► Subscription - 5th issue: respectively, through exclusive subscription by the BNDES, and the In August 2011, the Company placed non-convertible simple second series, in the amount of R$ 222,210, through exclusive debentures, in a private issue, through exclusive subscription by subscription by BNDES Participações S.A - BNDESPAR. The first and Planner Truste DTVM Ltda., consisting of a single series of 288,000 the second series are comprised of 3,000 debentures each, and the debentures of R$ 1 each, in the amount of R$ 288,000, under the

Sustainability Report 2013 | COPASA MG 232 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

following contractual terms and conditions: placement, through exclusive subscription by Pentágono Distribui- dora de Títulos e Valores Mobiliários. These debentures were issued Funds from the “settlement account” to the “demand account” in two series of R$ 200,000 each, totaling R$ 400,000, under the will be released according to the work plan for each project, upon following contractual terms and conditions: express request of the Company, and will depend on previous confirmation from the fiduciary agent of the conditions contained in this agreement: Issue date February 15, 2012 Term 60 months for the 1st series and 84 months for the 2nd series Grace period of the principal 24 months Issue date September 20, 2011 Repayment 7 equal and consecutive semi-annual installments for the 1st Term 240 months series, and 06 equal and consecutive annual installments for the 2nd series Grace period of the principal 42 months Final maturity February 15, 2017 for the 1st series and February 15, 2019 for Repayment 198 months the 2nd series Final maturity September 30, 2031 Interest 100% of the over extra-group Interbank Deposit rate plus a Interest TR + 9% p.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 Guarantee Assignment and restriction of funds receivable (NTN) - series B for the 2nd series Guarantee Unsecured

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% The funds from this issue are used in the 2012-2014 Invest- on the outstanding balance of the debentures at December 31 of ment Program to be conducted in partnership with the municipalities each year, by the accounts transferred and by all shares held by the to which the Company will provide water supply and sewage services Company in investments allowed. under concession agreements, and in the debt rescheduling The funds from this issue are allocated to the development of process. basic sanitation projects of the Company. (ii) Convertible debentures

► Subscription - 6th issue ► Subscription - 2nd issue:

On February 15, 2012, the Company placed 400 unsecured On July 16, 2007, the Company executed a Convertible Deben- non-convertible simple debentures of R$ 1,000 each, in a public tures Deed in the amount of R$ 141,024 under the following terms

Sustainability Report 2013 | COPASA MG 233 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

and conditions: June 1, 2012 and May 31, 2013, when each debenture could be Issue date June 1, 2007 converted into two common shares of the Company, at the price of Number of debentures 1,130,000 R$ 31.20 per share, as restated under the terms of the deed. Unit par value in reais R$ 124,80 Grace period of the principal 59 months 1,129,881 debentures were converted into 4,519,482 shares, Repayment June 1, 2012 and June 1, 2013 and the remaining 119 were paid on June 14, 2013, as follows: Interest TJLP + 2.3% p.a. Guarantee Floating Number Date Converted debentures Common shares The fair value of the financial component recorded in liabilities was calculated using the market interest rate applicable to a similar 8/4/2008 188 752 non-convertible debt bond. The residual book value, corresponding 3/6/2009 5,396 21,584 3/12/2009 973 3,892 to the equity conversion option, is included in equity in revenue 4/1/2009 20,595 82,380 reserves (Note 18). 6/18/2009 2,039 8,156 The stockholders of the Company were granted the preemptive 7/2/2009 4,208 16,832 7/21/2009 240 960 right to subscribe for debentures in the same proportion to the 11/29/2011 314 1,256 number of COPASA MG shares they held on July 30, 2007, so that 5/31/2012 1,095,907 4,383,628 in order to subscribe for one (1) debenture, a stockholder would 9/28/2012 9 18 have to be the holder of 102 shares of COPASA MG. The deadline to 10/30/2012 12 24 Total 1,129,881 4,519,482 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 convertible debentures recognized in the balance sheet is the debentures subscription as from July 31, 2007. calculated as follows: 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

Sustainability Report 2013 | COPASA MG 234 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

12/31/2013 12/31/2012 (i) Covenants in syndicated loans:

Liability component at the beginning of the year 7 135,035 Ratios Limits Finance costs - 8,848 Total debt/equity Equal or less than 1.0 Interest paid - (6,389) EBITDA/debt service Equal or greater than 1.55 Repayments (7) - Water and sewerage connections/number Equal or greater than 350 of employees Debt conversion - (137,487) Liability component at the end of the year - 7

(ii) Covenants in agreements with CEF - the agreements The funds from the 2nd issue were used in the Company’s originally signed with Unibanco, involving FGTS funds, were subse- 2007-2010 Investment Program to modernize, expand and imple- quently transferred and are being managed by CEF, as described ment water and sewage treatment plants, optimize operations with above in item 2 “Fiduciary transfer of receivables and restricted improvements in the control of losses and for water supply and account agreement”: sewage services studies and projects, as well as in investments in new concessions and institutional development Ratios Limits Total debt/equity Equal or less than 1.0 (d) Fair value EBITDA/debt service Equal or greater than 1.7 Current liquidity Above 0.9 The carrying values and fair values of borrowings and deben- Water and sewerage connections/number of tures are disclosed in Note 20. employees Above 365 (e) Restrictive covenants

The Company has loan and financing agreements that contain (iii) Covenants in agreements with BNDES-BNA/BND/BNE: restrictive covenants requiring it to maintain certain financial ratios, as specified below: Ratios Limits Net debt/EBITDA Equal or less than 3.0 EBITDA/Net operating revenue Equal or greater than 36% EBITDA/debt service Equal or greater than 1.5

Sustainability Report 2013 | COPASA MG 235 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

(iv) Covenants in agreements with BNDES/debentures:

Ratios Limits

EBITDA/debt service Equal or greater than 1.5 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 EBITDA/debt service Equal or greater than 1.5 Total 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.

Sustainability Report 2013 | COPASA MG 236 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

13. Provisions for contingencies

(a) Probable contingent liabilities

Provisions are as follows:

Parent company 12/31/2013 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 company 1/1/2012

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

Sustainability Report 2013 | COPASA MG 237 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Consolidated 12/31/2013 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

Consolidated 1/1/2012

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:

Sustainability Report 2013 | COPASA MG 238 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Parent Consolidated sufficient by management to cover probable losses on administrative company and judicial proceedings involving tax, labor and civil matters, taking into account the advice of its legal advisors. At December 31, 2012 before offsetting of judicial deposits 82,642 84,549 The Company is party to judicial claims arising from the normal Additions 31,009 32,300 course of its business of a civil, labor and tax nature. The number of Use (3,579) (4,144) Reversals (31,207) (31,946) lawsuits and the amounts involved are numerous and, accordingly, only the most significant cases are described below (-) Offsetting of judicial deposits (2,391) (3,006) (i) Provisions for civil contingencies

At December 31, 2013 76,474 77,753 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 Parent Consolidated estimates the provisions based on the billed amounts subject to company questioning and also on recent court decisions.

At January 1, 2012 before offsetting of In 2003, the Public Prosecution Office of the State of Minas judicial deposits 90,789 93,792 Gerais filed a public civil action questioning the tariff increase for Additions 44,252 46,163 Use (4,756) (4,756) the municipalities where the Company operated in that year. The Reversals (47,643) (50,650) action questions the fact that the adjustment had been applied to the first bills issued after the increase date, rather than billing the (-) Offsetting of judicial deposits (2,254) (3,775) consumption subsequent to the increase date. Thus, the Public Prosecution Office proposed the cancellation of the tariff increase. At December 31, 2012 80,388 80,774 The final decision found the original claim partially valid and required Use refers to provisions utilized or cases which were lost by the the Company to return to customers the portion of the tariff increase corresponding to the consumption period preceding the increase Company and classified as accounts payable. date. The court-appointed expert informed the amounts but the The provisions for contingencies recorded are considered case is being examined by the Prosecution Office. At December 31,

Sustainability Report 2013 | COPASA MG 239 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

2013, settlement of the amount involved in the final judgment was On October 18, 2011, Vivina Alves de Oliveira Sales et al. filed estimated at R$ 359 (2012 - R$ 341; January 1, 2012 - R$ 324). a claim for pain and suffering and tangible damages, with the Court of Finance-Related Proceedings of the Judicial District of Varginha, Environmental Protection Association Verde Gaia has been filing State of Minas Gerais, resulting from damages to property suppos- public civil actions against COPASA MG questioning the breach of edly caused by water leakage in the public water supply system, in Article 2 of State Law No. 12503/97, whereby water supply utilities the city of Varginha. As from September 2012, the claim entered the are required to invest 0.5% of their operating revenue in environ- expert report review stage. On October 29, 2013 the trial was held, mental protection and conservation of the water basin explored. which is to be followed by the sentence of the court. The provision During the various procedural stages within the Judiciary Branch, amounted to R$ 1,537 at December 31, 2013 (2012 - R$ 1,463; courts of first and second instances handed down favorable deci- January 1, 2012 - R$ 1,386). 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 (ii) Provisions for labor contingencies result of the probable loss in these actions will correspond to 0.5% Most of the claims for which the Company is directly liable of its operating revenue from water supply services to the respective relate to pain and suffering and tangible damages due to occupa- municipality involved in each action, and not the value of the matter tional illnesses or accidents, overtime, commuting time, risk and in dispute, the provision for the 51 actions amounts to R$ 7,331 at health exposure premiums, prior notice payments, salary differences December 31, 2013 (2012 - R$ 6,120; January 1, 2012 - R$ 5,777). deriving from alleged job equality, and challenge of instances of Luciene Ricardo da Silva, et al. filed a claim for tangible dam- termination for cause. The Company records provisions for all labor ages and pain and suffering caused by a landslide that eventually contingencies where the outcome is considered a probable loss, buried the plaintiffs’ property. This landslide was caused by a which represents approximately 48.24% of the potential liabilities ruptured clandestine supply pipeline connected to an old water estimated for all labor contingencies. reservoir. This process is currently waiting decision. In December The Company also appears as a co-liable joint defendant, with 2013 the court requested the plaintiffs and the contractor to present the principal liability lying with outsourced contractors that provide their final arguments, and COPASA MG will subsequently be given maintenance and construction services. In these cases, if the such right, after which the court will hand down its decision. The claims are upheld, these contractors are usually liable for paying the related provision for the matter at December 31, 2013 amounted to award. However, if the contractors are financially unable to make R$ 2,720 (2012 - R$ 2,590; January 1, 2012 - R$ 2,454).

Sustainability Report 2013 | COPASA MG 240 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated payment and consequently could potentially default, the Company Nevertheless, likelihood of loss in this case is assessed as probable, may be legally compelled to settle the labor liability. Accordingly, the and therefore a related provision in the amount of R$ 1,564 was prospects for loss in these cases were considered probable, and at recorded at December 31, 2013 (2012 - R$ 1,456; January 1, 2012 December 31, 2013 the Company recorded a related provision for - R$ 1,342). contingencies in the amount of R$ 1,992 (2012 - R$ 2,054; January A public civil lawsuit was filed by the Public Prosecution Office, 1, 2012 - R$ 2,594). questioning the hiring of an employee for a specified period of time In addition, the Company is currently a party to twenty-seven by the Company, which is still in the initial procedural phase, with the administrative proceedings initiated after an inspection by officials 5th Labor Court of Belo Horizonte/MG. Nevertheless, the likelihood representing the Regional Labor Office, which resulted in infringe- of loss in this case was assessed as probable, and therefore a provi- ment notices on the allegation that the Company failed to compute sion in the amount of R$ 577 was recorded at December 31, 2013 the effects of overtime worked on the employees’ weekly time-off (2012 - R$ 520; January 1, 2012 - there was no provision recorded). pay, and that this would represent undue salary reduction, leading Finally, there is a labor claim filed by SINDÁGUA for the payment to the notices and a fine for each employee found to be in the same of a profit sharing difference of the Company to the employees for situation. This fine, in turn, affected the Company’s contributions to 2010. Such claim, filed with the 2nd Labor Court of Belo Horizonte/ the FGTS, leading to another fine per employee. Legal counselors MG, was reviewed at the courts of first and second instances, and assess the likelihood of loss in these cases as probable, and there- considered valid. A decision will be handed down by the Superior fore a related provision in the amount of R$ 5,066 was recorded at Labor Court due to the interlocutory appeal to higher courts filed by December 31, 2013 (2012 - R$ 4,731; January 1, 2012 - R$ 4,408). COPASA MG. The likelihood of loss in this case is assessed as prob- There is also a labor claim related to a public civil lawsuit in able, and therefore a related provision in the amount of R$ 15,515 course at the 24th labor court of Belo Horizonte, whereby SINDÁGUA was recorded at December 31, 2013 (2012 - R$ 10,508; January 1, and the Public Prosecution Office claim that the dismissal policy and 2012 - R$ 53). motivational program adopted by the Company are discriminatory. In (iii) Provisions for tax contingencies this case, COPASA MG was successful at the court of first instance, but the decision was reversed at the court of second instance. A In December 2013, following the decision of the Company’s new decision will be handed down by the Superior Labor Court. management and the studies carried out by the Accounting Depart- ment, the provision amounting to R$ 16,456, recorded in December

Sustainability Report 2013 | COPASA MG 241 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

2010, was reversed. This provision referred to the tax effect of the ► Individual lawsuits exclusion of the installments paid related to the payment in install- The Company and its subsidiaries are parties to a significant ments program of the IPI premium credit from the calculation basis number of individual lawsuits claiming damages for the disconnection of the income tax and social contribution for 2010. of water service and damages caused by construction works. These (b) Possible contingent liabilities lawsuits were filed in the normal course of the Company’s businesses, COPASA MG is a party to other litigation for which the likelihood and involve pain and suffering and tangible damages, such as for of loss is estimated as possible. No provision for losses on these damages to property (real estate or cars) and accidents caused during matters was recognized, as the Company believes it has a well- activities, among other matters. Management does not believe that founded, legitimate defense. an unfavorable outcome in these legal actions, either individually or Ongoing proceedings at various administrative and judicial in the aggregate, would have a material adverse effect on results of levels in which the Company is a defendant are as follows: operations, financial condition or business prospects of the Company and its subsidiaries. Parent company/Consolidated ► Public Civil Actions and Class Actions Nature 12/31/2013 12/31/2012 1/1/2012 The Company is party to public civil actions and class actions that challenge, and seek to annul, declare void or suspend 19 Civil 376,057 477,222 402,021 of its concession agreements, namely those executed with the Tax 34,239 37,957 55,623 municipalities of Almenara, Barbacena, Campina Verde, Caratinga, Total 410,296 515,179 457,644 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 (i) Civil for Caratinga and São Gotardo, all other actions were classified This refers to lawsuits filed by customers, State and Federal as possible or remote losses and, accordingly, no provisions were prosecutors, municipalities, associations, etc., that seek jurisdic- recognized. It is important to note that a precedent of the Court of tional protection with respect to different issues, except for tax- and Appeals of the State of Minas Gerais concerning a similar case and labor-related claims, which are at various court levels, judicial courts the opinions of renowned jurists are in favor of the Company that the and small claims courts, and are summarized as follows: concession agreements are lawful instruments.

Sustainability Report 2013 | COPASA MG 242 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

► Environmental actions In most cases, these TACs require the Company to implement or improve local sanitary sewage systems or sewage treatment plants The Company is a party to a number of public civil actions and in order to prevent disposal of untreated effluents into bodies of class actions concerning environmental matters, which were filed water. The investments required for compliance with these TACs are against it in the normal course of its business. For the most part, included in the Company’s Investment Program. these proceedings involve remediation of alleged environmental damages, construction of sewage treatment plants and investments (ii) Tax in environmental conservation. Though these claims generally do not This refers to several tax claims, the most significant of involve significant amounts, the Company may be required to make which are two disputes on a tax delinquency notice filed by the substantial investments in the construction of sewage treatment Brazilian Federal Revenue Secretariat in April 2004 because of the plants or to abstain from certain business practices. Company’s failure to include, upon determination of the bases for In one of these environmental class actions, the matter in assessment of PIS/PASEP and COFINS, the financial income from dispute refers to remediation of environmental damages caused foreign exchange gains on liabilities, attributed to the decrease in by effluents discharged in the São Francisco River. Up to date no the US$/R$ exchange rate. The Company filed an administrative decision has been issued for this case, which totaled R$ 76,167 appeal, in both cases, for rejection and challenging of the tax de- at December 31, 2013 (2012 - R$ 72,529; January 1, 2012 - R$ linquency notice and related tax assessment. These administrative 68,317) and whose likelihood of loss has been assessed as possible appeals, however, were denied by the Board of Tax Appeals. according to management. ► Formal Commitments to Action (TACs) 14. Employee profit sharing

In the past, several TACs were executed between the Company and As resolved by the Company’s Board of Directors in a meeting the Prosecution Office of the State of Minas Gerais concerning environ- held on March 1, 2011 and in accordance with prevailing legisla- mental issues arising out of administrative and civil investigations. Also, tion, the amount to be distributed as Employee Profit Sharing is a public civil action was settled by means of a TAC entered into with the equivalent to 25% of the mandatory minimum dividends paid to Prosecution Office, which provides for completion of the sanitary sewage stockholders, after deduction of the legal reserve, and will have system in the municipality of Paracatu in addition to payment of a civil as computation basis for measurement of goals achievement, the indemnity, provision in the amount of R$ 2,240. percentage of completion of the Investment Program approved by

Sustainability Report 2013 | COPASA MG 243 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

the Company for the year, the number of connections per employee Parent company and its operating income. 12/31/2013 12/31/2012 The 2008/2010 Collective Agreement, formally approved at the meeting held on July 25, 2008 and ratified by the 2013 Collective Profit for the year before income tax and social contribution 566,158 639,147 Agreement, signed on July 10, 2013, determines that the computed Statutory rate 34% 34% amount of profit sharing shall be distributed among all employees, in Estimated expenses at statutory rate (192,494) (217,310) two equal installments (50% each), the first payable in April and the second in October. Income tax and social contribution on:

At December 31, 2013, the Company recognized R$ 32,670 (Additions)/exclusions Equity accounting (2,440) (4,830) as a provision for the employee profit sharing for the year Realization of special monetary restatement (475) (1,038) (2012 - R$ 27,613). Donations and subsidies - 2,451 Other (additions)/exclusions (4,359) 1,694 15. Income tax and social contribution Other reconciling items Interest on capital 47,458 54,189 (a) Current income tax and social contribution Tax incentives 5,947 7,420 In Brazil, income taxes include both federal income tax and Income tax and social contribution (146,363) (157,424) 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 Current income tax and social contribution (138,681) (155,999) Deferred income tax and social contribution (7,682) (1,425) reported as income tax expenses in the income statements of the (146,363) (157,424) Company are reconciled with the statutory tax rates as follows: Effective rate 25.9% 24.6%

Sustainability Report 2013 | COPASA MG 244 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Consolidated for income tax and 9% for social contribution are used to calculate 12/31/2013 12/31/2012 deferred taxes. Deferred tax assets are recognized to the extent that it is Profit for the year before income tax and social probable that future taxable profits will be available to utilize contribution 566,221 639,400 Statutory rate 34% 34% temporary differences and/or tax losses, considering projections of Estimated expenses at statutory rate (192,515) (217,396) future results based on internal assumptions and future economic scenarios, which are, therefore, subject to change. Income tax and social contribution on: The deferred tax amounts are as follows: (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%

Sustainability Report 2013 | COPASA MG 245 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Parent company/Consolidated 12/31/2012 Comprehensive Recognized in 12/31/2013 income (loss) profit (loss)

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

Income tax and social contribution: 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

Sustainability Report 2013 | COPASA MG 246 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Parent company/Consolidated 1/1/2012 Comprehensive income Recognized in profit 12/31/2012 (loss) (loss)

In assets

Income tax and social contribution:

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

Income tax and social contribution: 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 Relations Director was approved, which referred to the projection tor’s meeting held on February 21, 2013 and February 22, 2013, of the adjusted future profitability at present value, evidencing the respectively, the technical study prepared by the Strategic Planning possibility of realization of the deferred tax asset. and Corporate Performance Department and the Finance and Inves-

Sustainability Report 2013 | COPASA MG 247 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

According to this technical study, the future taxable event will The amounts received are used in specified construction allow the realization of the deferred tax asset existing at December works under the terms of said agreements, and their amounts, 31, 2013, according to the following estimate: when received, are recognized as technical cooperation agreement accounts in current liabilities, and when used, in current assets pending matching of accounts. Expected realization of deferred tax asset Parent company/Consolidated According to the Normative Instruction (IN) 1, dated January 15, In 2014 10.858 1997, the funds from the technical cooperation agreement will be In 2015 18.803 maintained in a specific bank account and withdrawals will only be In 2016 10.515 allowed for the payment of expenses according to the Work Program. In 2017 10.515 In addition, when not being applied according to their purpose, the In 2018 10.515 After 2018 162.122 funds must be applied in a savings account with an official financial

223.328 institution. Funds available from the technical cooperation agreement are recorded in “Banks and agreement investments”.

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.

Sustainability Report 2013 | COPASA MG 248 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Parent company Receivables (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

Consolidated Receivables (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

Sustainability Report 2013 | COPASA MG 249 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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/Consolidated 12/31/2013 12/31/2012 1/1/2012

(Restated) (Restated)

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

Sustainability Report 2013 | COPASA MG 250 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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 100.485 (74.268) the year 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 its employees, which up to November 2008 total approximately and became sponsor of Fundação de Seguridade Social de Minas 127%, according to the actuarial valuation statements (DRAAs). Gerais - FUNDASEMG, whose rights and obligations were later With the resolution of the Company’s Board of Directors assumed by Fundação Libertas (previously Previminas), which aimed at resolving the Company’s plan deficit, and the approval, was created with the purpose of supplementing the retirement on June 23, 2010, by the National Superintendency of Pension income of participating employees, ensuring the maintenance of Funds (PREVIC), of the new pension plan strategy of the Company, their benefit plan in said Foundation. The Company’s contribution in the period between August 2 and October 29, 2010, all active matches that made by participating employees, pursuant to Sup- employees, employees on leave from work and retirees had the plementary Laws 108 and 109, of May 29, 2001 and its amount is opportunity to access a simulator to get to know the alternatives determined based on actuarial reports previously prepared. of the proposed Pension Plan and choose one of them. As from Since 2002, the supplemental Defined Benefit - DB pension November 1, 2010, the Company started to have three different plan sponsored by the Company has had an actuarial deficit, plans: a) the current DB plan, which was closed to new members, requiring increases in contributions made by the sponsoring entity but remained in effect, receiving contributions from those who

Sustainability Report 2013 | COPASA MG 251 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated elected not to migrate to the other plans, b) the closed-end settled deferred proportional benefits, disability retirement, death benefit, DB plan, created solely to administer employee benefits from prisoner dependent benefit and annual bonus. settlement; and c) the DC plan, created to receive all members and The Company’s actuarial assumptions are reviewed periodi- retirees migrating from the former DB plan as well as new employ- cally and may differ significantly from actual results due to changes ees and directors. Once the migration process was completed, in in market and economic conditions, regulatory events, court December 2011, the DB plan had 150 active participants and 183 decisions, increase or decrease in termination rates and in partici- retirees, the settled benefit plan had 2,018 active participants and pants’ life expectancy. 1,364 retirees, and the DC plan had 10,621 active participants and 476 retirees.

The benefits offered in the defined benefit plan currently (a) Consolidated amounts closed to new adhesions are: supplementary retirement benefits The consolidated amounts recognized by the Company in the (due either to disability, age or years of contribution and special balance sheet are as follows: retirement), as well as sickness benefits, pension, prisoner dependent benefit and death benefit. 12/31/2013 12/31/2012 1/1/2012 The benefits offered in the settled benefit plan are: a) active participants, self-sponsored and retirees - settled scheduled Present value of funded obligations (772.621) (1.009.615) (780.417) retirement benefit payments; b) beneficiaries of active participants Fair value of plan assets 703.355 737.288 619.059 Minimum requirements (additional migrated from the defined benefit plan: settled death benefit and liability) (51.086) - - settled death annuity; and c) nonpaying members or their benefi- Plan asset (liability), net (120.352) (272.327) (161.357) ciaries: settled benefit arising from the option for the proportional deferred benefits. The change in the defined benefit obligation is as follows: 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

Sustainability Report 2013 | COPASA MG 252 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

12/31/2013 12/31/2012 12/31/2013 12/31/2012

At January 1 1.009.615 780.417 Current service cost 447 (875) Current service cost 447 (875) Interest cost 91.615 82.083 Interest cost 91.615 82.083 Expected return on plan assets (67.718) (66.560)

Contributions by plan participants 1.894 2.000 24.344 14.648 Actuarial remeasurements (295.992) 179.130 Benefits paid by the plan (34.958) (33.140) Present amount of obligation In 2013, the reversal on actuarial liabilities in the amount of R$ at December 31 772.621 1.009.615 176,133 was recognized in equity. This is due mainly to changes in the interest rate discount that benefit plans RP1 and COPASA Settled The change in the fair value of the benefit plan assets are as Plan increased from 9.25% pa to 11.79% p.a between 2012 and follows: 2013 and 8.25% p.a for 11 94% p.a in the New Copasa Plan.

12/31/2013 12/31/2012 (b) Analysis of amounts per benefit plan

1) Benefit plan RP1 -DB At January 1 737.830 619.060 Actual return on plan assets (24.939) 133.878 Employer contributions 23.528 16.033 12/31/2013 12/31/2012 1/1/2012 Employee contributions 1.894 2.000 Benefits paid (34.958) (33.141) Fair value at December 31 703.355 737.830 Present value of funded obligations (38.914) (47.774) (36.398) Fair value of plan assets 9.309 4.492 8.518 Plan asset (liability), net (29.605) (43.282) (27.880) The amounts recognized in the statement of income are as follows: The change in the defined benefit obligation is as follows:

Sustainability Report 2013 | COPASA MG 253 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

12/31/2013 12/31/2012 12/31/2013 12/31/2012

At January 1 47.774 36.398 Current service cost 45 34 Interest cost 4.316 3.817 Current service cost 45 34 Expected return on plan assets (694) (1.164) Interest cost 4.316 3.817 3.667 2.687 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 Pension plan expenses totaling R$ 3,667 (2012 - R$ 2,687) were recognized in the statement of income under “administrative expenses”. The change in the fair value of plan assets is as follows: The actual loss on plan assets in 2013 was R$ 1,202 (2012 - R$ 4,278). 12/31/2013 12/31/2012 Investment strategies:

At January 1 4.492 8.518 ► The Board of Trustees of Fundação Libertas defines the invest- Actual return on plan assets (1.202) (4.278) ment guidelines; Employer contributions 7.957 3.775 ► Investment objectives: achieve the minimum actuarial yield Employee contributions 283 371 Benefits paid (2.221) (3.894) (INPC plus technical interest), in the short and long term. Fair value at December 31 9.309 4.492 ► 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 Estimated contributions to the defined benefit pension plan for assets, foreign currency and others according to the Brazilian legisla- the next financial year total R$ 8,354. tion. The amounts recognized in the statement of income are as ► Use of derivatives: for hedging purposes. follows:

Sustainability Report 2013 | COPASA MG 254 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Benchmarks for the investment plan assets: The expected return on plan assets was determined by the plan ► Debt instruments: INPC + 5.22% p.a. manager, based on the estimated expected return for each type of investment, as well as plan asset allocation target, defined based on ► Equity securities: Average IBOVESPA the investment policy for 2013. ► Real estate: INPC ► Loans to plan members: INPC + 8% p.a. Categories of assets for the RP1 plan - DB The main actuarial assumptions used were as follows:

12/31/2013 12/31/2012 Projected unit credit 12/31/2013 12/31/2012 1/1/2012 Available 0.01% - Realizable (pension and administrative) 23.97% 27.69% Equity instruments 0.01% 3.62% Annual discount rate 11.79% p.a. 9.25% p.a. 10.81% p.a. Investment funds 75.25% 64.37% Expected annual return on plan 11.79% p.a. 9.25% p.a. 10.81% p.a. assets Real estate investments 0.47% 3.92% Annual salary increase 6.95% p.a. 7.88% p.a. 7.00% p.a. Borrowings 0.30% 0.40% Annual increase in benefits 5.00% p.a. 5.20% p.a. 5.00% p.a. Total plan assets (%) 100.00% 100.00% Inflation rate 5.00% p.a. 5.20% p.a. 5.00% p.a. AT - 2000 rated Mortality table AT - 2000 Basic AT - 2000 Basic down by 10% Disability table Light Média Light Média Light Média GAMA – COPASA GAMA – Libertas GAMA - Libertas Morbidity table experience experience experience AT - 1949 rated AT - 1949 rated AT - 1949 rated Mortality of invalids up by 100% up by 100% up by 100% 4.5% / (service Turnover 0.858% 0.697% time + 1)

Sustainability Report 2013 | COPASA MG 255 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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

Present value of funded obligations (720.020) (945.651) (728.963)

Fair value of plan assets 684.408 726.249 605.548 (35.612) (219.402) (123.415) Minimum requirements (additional liability) (51.085) - -

Plan asset (liability), net (86.697) (219.402) (123.415)

Sustainability Report 2013 | COPASA MG 256 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

The changes in the defined benefit obligation during the year

were as follows: 12/31/2013 12/31/2012 12/31/2013 12/31/2012

Interest cost 85.990 76.821 At January 1 945,651 728,963 Expected return on plan assets (66.261) (64.948) Interest cost 85,990 76,821 Provision for benefit plan 19.729 11.873 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 Pension plan expenses totaling R$ 19,729 (2012 - R$ 11,873) were recognized in the statement of income under administrative The change in the fair value of plan assets is as follows: expenses. The actual loss on plan assets in 2013 was R$ 21,979 (2012 -

12/31/2013 12/31/2012 gain of R$ 138,885). Investment strategies: At January 1 726.249 605.548 ► The Board of Trustees of Fundação Libertas defines the invest- Actual return on plan assets (21.979) 138.885 Employer contributions 12.230 10.644 ment guidelines. Benefits paid (32.092) (28.828) ► Investment objectives: achieve the minimum actuarial yield Fair value at December 31 684.408 726.249 (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. Estimated contributions to the defined benefit pension plan for the next financial year total R$ 14,489. ► Types of investments not allowed: medium and high-risk credit assets, foreign currency and others according to the Brazilian legisla- The amounts recognized in the statement of income are as tion. follows: ► Use of derivatives: for hedging purposes.

Sustainability Report 2013 | COPASA MG 257 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

► Loans to plan members: INPC + 8% p.a. Asset categories for the settled plan

The main actuarial assumptions used were as follows 12/31/2013 12/31/2012

Projected unit credit Available 0,01% 0,01% Government securities 11,74% 0,00% 12/31/2013 12/31/2012 1/1/2012 Realizable (pension and administrative) 11,64% 12,36% Equity instruments 0,01% 5,13% Annual discount rate 11.79% p.a. 9.25% p.a. 10.80% p.a. Investment funds 68,88% 75,77% Expected annual return on plan assets 11.79% p.a. 9.25% p.a. 10.80% p.a. Real estate investments 6,95% 5,88% Annual increase in benefits 5.00% p.a. 5.20% p.a. 5.00% p.a. Borrowings 0,76% 0,85% Inflation rate 5.00% p.a. 5.20% p.a. 5.00% p.a. Total plan assets (%) 100,00% 100,00% AT - 2000 AT - 2000 AT - 2000 Mortality table rated down by Basic Basic 10% AT - 1949 AT - 1949 AT - 49 rated Mortality of invalids rated up by rated up by up by 100% 100% 100% Disability table Light média Light média - GAMA – GAMA - Morbidity table COPASA - experience experience

Sustainability Report 2013 | COPASA MG 258 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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 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 12/31/2013 12/31/2012

At January 1 16.190 15.056 Present value of funded obligations (13.687) (16.190) (15.056) Current service cost 402 (909) Fair value of plan assets 9.638 7.089 4.994 Interest cost 1.309 1.445 Plan asset (liability), net (4.049) (9.101) (10.062) Employee contributions 1.611 1.629 Actuarial (gains) losses (5.180) (613) Benefits paid by the plan (645) (418) Present amount of obligation at December 31 13.687 16.190 The changes in the defined contribution obligation for the year were as follows:

Sustainability Report 2013 | COPASA MG 259 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Estimated contributions to the defined benefit pension plan for The actual loss on plan assets was R$ 1,758 (2012 - R$ 729). the next financial year total R$ 4,590. Investment strategies: The change in the fair value of plan assets is as follows: ► The Board of Trustees of Fundação Libertas defines the investment guidelines. 12/31/2013 12/31/2012 ► Investment objectives: achieve the minimum actuarial yield (INPC plus technical interest), in the short and long term. At January 1 7.089 4.993 Actual return on plan assets (1.758) (729) ► Types of allowed investments: fixed income - low-risk credit Employer contributions 3.341 1.614 assets, shares, real estate and loans to plan members. Employee contributions 1.611 1.629 Benefits paid (645) (418) ► Types of investments not allowed: medium and high-risk Fair value at December 31 9.638 7.089 credit assets, foreign currency and others according to the Brazilian legislation.

► Use of derivatives: for hedging purposes. The amounts recognized in the statement of income are as follows: Benchmarks for the investment plan assets:

31/12/2013 31/12/2012 ► Debt instruments: CDI

Current service cost 402 (909) ► Equity securities: Average IBOVESPA Interest cost 1.309 1.445 ► Real estate: IGP-M + 6% p.a. Expected return on plan assets (763) (624)

948 88 ► Loans to plan members: IPCA + 6% p.a. The actual return rate on the plan assets in 2013 was 11.94% p.a.

Pension plan expenses totaling R$ 948 (2012 - R$ 88) were The main actuarial assumptions were as follows: recognized in the statement of income under administrative expenses.

Sustainability Report 2013 | COPASA MG 260 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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. Expected annual return on plan assets 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

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.

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%

Sustainability Report 2013 | COPASA MG 261 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Sensitivity analyses of main hypotheses

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 over the authorized capital are subject to approval at General Meetings of Stockholders with capital increase proposals submitted (a) Capital by the Board of Directors. This procedure is adopted when payment The Company is authorized to increase its capital up to is made with assets. the limit of R$ 3 billion after approval of the Board of Directors. Concerning the Company’s capital increases, the stockholders The Company’s subscribed and paid-up capital amounts to R$ may exclude at the General Meetings the preferential rights or 2,773,985,614.66, divided into 119,684,430 registered common reduce the period for them to be exercised in the issue of shares, shares with no par value. debentures convertible into shares and subscription bonus, whose The Company is allowed to issue common shares, debentures allocation is made through trading in stock markets or public convertible into common shares and subscription bonus within the subscription, according to the related legislation, and within the capital limit authorized by the Board of Directors. Capital increases authorized capital limit.

Sustainability Report 2013 | COPASA MG 262 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Stockholders have preference for the subscription of capital Stockholders Number of shares Percentage of increase according to the number of shares they hold, pursuant to interest articles 171 and 172 of Law 6,404/76. State of Minas Gerais 61.189 51,13 In addition, in accordance with the Constitution of the State Directors and officers 2 - of Minas Gerais, if the Company’s controlling stockholder - that is, Other stockholders 58.136 48,57 the State of Minas Gerais - includes COPASA MG in a privatization Treasury shares 357 0,30 Total 119.684 100,00 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 (b) Revenue reserves enact a law authorizing the transfer of ownership control by the (i) Legal reserve State, according to the pertinent state legislation. The legal reserve is credited annually with 5% of the profit for The Company is controlled by the Government of Minas Gerais, the year and cannot exceed 20% of the capital. The purpose of the which holds 51.13% of the Company’s shares. The Company holds legal reserve is to protect the Company’s capital, and it can only be 357 thousand common shares of its own stock in treasury, amount- used to offset losses and increase capital. ing to R$8,576, mostly acquired from the State of Minas Gerais through transactions related to the settlement of debts originating (ii) Tax incentive reserve from the provision of water supply and sewage services and techni- The reserve represents the allocation of tax incentives deriving cal cooperation agreements. The Company has the right to reissue from government grants and donations appropriated to the state- these shares on a subsequent date. ment of income as from January 1, 2008.

The remaining 48.6% of the shares, which represents the In 2013, no amount was recorded in profit (loss) relating to the Company’s free float, is held by various stockholders. incentive for fulfillment of the stages of the pollutant load reduction At December 31, 2013, the capital is held as follows: goals at Company’s sewage treatment plants (Note 11), issued by the ANA, using PRODES funds (R$ 7,208 in 2012).

Sustainability Report 2013 | COPASA MG 263 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

(iii) Profit retention (d) Dividends and interest on capital to stockholders

Management proposes retaining profits of R$ 263,582 (2012 - Under the bylaws, stockholders of any class are entitled to R$ 295,933; January 1, 2012 - R$ 284,379) for future investments a mandatory minimum dividend of 25% of the profit for the year, by the Company, in line with the “action plan” approved by the Board adjusted for the deduction or addition of the amounts specified of Directors, to be carried out in the long term. 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 (c) Carrying value adjustments stockholders become time-barred in favor of the Company.

Carrying value adjustments refer to: Minimum mandatory dividends at December 31, 2013 and (i) Actuarial gains and losses: calculated in conformity with CPC 2012 and January 1, 2012 were as follows: 33 (R1) and IAS 19 (R1) (Note 17). At December 31, 2013, this balance represented receivables of R$ 23,543 (payable in 2012 - R$ 12/31/2013 12/31/2012 1/1/2012 76,942 and January 1, 2012 - R$ 2,673).

(ii) Monetary restatement of assets: application of IAS 29 for Profit for the year (restated) 419.795 481.723 470.437 Legal reserve - (5%) (20.990) (24.346) (23.522) the period during which it was considered that Brazil had a hyper- Tax incentive reserve - (7.208) (9.409) inflationary economy. This restatement is amortized based on the Profit for the period 398.805 450.169 437.506 useful lives of property, plant and equipment items and intangible Mandatory minimum dividend - 25% 99.701 112.542 109.377 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). As resolved at the Extraordinary General Meeting of Stockhold- ers held on April 28, 2009, the Company’s Board of Directors has (iii) Fair value of available-for-sale financial assets: fair value the power to define the annual percentage to be paid as interest on of the investments without significant influence over Foz Jeceaba. capital. Accordingly, the Company’s Board of Directors approved on At December 31, 2013, this balance represented receivables of R$ March 18, 2013 the dividend distribution for 2013 as interest on 17,713 (2012 - R$ 4,653; January 1, 2012 - R$ 2,164). capital equivalent to 35% of the profit for the year adjusted by the

Sustainability Report 2013 | COPASA MG 264 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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 (e) Retained earnings (R$ 1.17 per share), net of withholding income tax amounting to R$ 9,831. In 2012, the payment of interest on capital amounted At January 1, 2013 to R$ 159,381 (R$ 1.34 per share), net of withholding income tax Profit for the year 419,795 amounting to R$ 9,678. In 2011, the payment of interest on capital Minimum mandatory dividend and interest on capital paid amounted to R$ 153,127 (R$ 1.33 per share), net of withholding relating to 2013 (139,582) income tax amounting to R$ 11,224. Transfer to legal reserve (20,990) Allocation to profit retention reserve (263,582) As provided for in Article 9 of Law 9,249/95, and based on Tax incentive reserve - the Long-Term Interest Rate (TJLP), interest on capital was recorded Monetary adjustments on fixed assets 4,359 as finance costs deductible for income tax and social contribution purposes, thereby generating a tax benefit of R$ 47,458. Under At December 31, 2013 - Brazilian corporation law, interest on capital is disclosed as a debit to retained earnings in equity. At January 1, 2012 Changes in the balance of interest on capital payable are as Profit for the year (restated) 481.723 follows: Minimum mandatory dividend and interest on capital paid relating to 2012 (159.381) Transfer to legal reserve (24.346) 12/31/2013 12/31/2012 1/1/2012 Allocation to profit retention reserve (restated) (295.993) Interest on capital payable at the Tax incentive reserve (7.208) beginning of the year 46.469 26.921 66.859 Monetary adjustments on fixed assets 5.205 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) At December 31, 2012 - 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

Sustainability Report 2013 | COPASA MG 265 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

(f) Earnings per share 19. Segment information Basic The Company’s management defined the operating segments Basic earnings per share are calculated by dividing the profit used for the strategic decision-making as water supply and sewage attributable to the stockholders of the Company by the weighted treatment and sale of products. 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). Consolidated 2013 Water and Sale of Financial sewage products statement Parent company/Consolidated balance 12/31/2013 12/31/2012 Gross sales and services revenue 4.039.456 3.500 4.042.956

Profit attributable to stockholders of the Company 419.795 481.723 Deductions from gross revenue (309.042) (517) (309.559)

Weighted average number of outstanding common shares (thousands) 119.327 119.327 Net sales and services revenue 3.730.414 2.983 3.733.397

Basic earnings per share - R$ 3,52 4,04 Costs and selling and administrative expenses (2.995.402) (11.594) (3.006.996)

Operating profit before other net operating Diluted expenses 735.012 (8.611) 726.401

Diluted earnings per share at December 31, 2013 and 2012 Other operating expenses, net (120) were equal to basic earnings per share, because at December 31, 2012 there were only 119 debentures left which are Finance result, net (160.060) potentially convertible, whose impact on diluted earnings is

immaterial. Profit before taxes 566.221

Sustainability Report 2013 | COPASA MG 266 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Consolidated 20. Financial risk management 2012 The Company uses short-, medium- and long-term planning Water and Sale of Financial sewage products statement tools in order to evaluate the management of its financial risks balances and thus guide the decision-making process, so that actions, when Gross sales and services revenue 3.743.705 3.684 3.747.389 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. Deductions from gross revenue (297.990) (1.223) (299.213) In the medium term (360 days), the corporate budget is used, which reflects its action plan, both for operational and investment Net sales and services revenue 3.445.715 2.461 3.448.176 purposes. In the long term, the “Statement of Income” is used, which reflects its strategic objectives for a period of 10 years and Costs and selling and administrative expenses (2.675.193) (13.749) (2.688.942) comprises an economic and a financial statement.

Operating profit before other net 20.1. Financial risk management operating expenses 770.522 (11.288) 759.234 The Corporate Risk Management is aligned with both Cor-

Other operating expenses, net 3.869 porate Governance and the Business Plan, which establishes the Company’s Strategic Objectives. The Finance Department monitors Finance result, net (123.703) financial risks in order to assess credit risks that may impair the liquidity and profitability of the Company, recommending strategies Profit before taxes 639.400 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:

Sustainability Report 2013 | COPASA MG 267 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

(a) Market risk related to the Federal Government - Bonus). However, foreign funds are not very significant to the Company’s capital structure. 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 The Company is exposed to the risk of increase in domestic prices. Market prices are subject to the following risks: interest rate, interest rates due to its net liabilities indexed to TJLP, IPCA and CDI foreign exchange, commodities price and other price risks, such variations. as share price risk. Financial instruments affected by market risk Various scenarios are simulated taking into consideration include loans payable, deposits and available-for-sale instruments. refinancing, renewal of existing positions and borrowings. Based The sensitivity analyses in the following sections refer to the on those scenarios, the Company determines a reasonable change position at December 31, 2013 and 2012. in the interest rate and calculates its impact on the results. These scenarios consider only the main financial assets and liabilities. The sensitivity analyses considered the net debt amount, fixed to floating interest rate ratio, and the percentage of financial instru- (i) Interest rate sensitivity ments in foreign currency, all of which are constant values. The Company analyzed the sensitivity to the effects of possible These analyses did not include changes from the impact of changes in interest rates to which borrowings payables are subject. market variables on the book value of pension and post-employment With all other variables held constant, the Company’s profit before plan liabilities, provisions and non-financial assets and liabilities tax is affected by the impact on loans payable subject to floating from foreign transactions. rates, as shown below:

The sensitivity analysis of the corresponding item in the statement 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 interest rates, with impact on borrowings in foreign currency at floating interest rates (mainly the basket of interest rates on agreements

Sustainability Report 2013 | COPASA MG 268 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Parent company Increase/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 Consolidated Increase/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- Financing in foreign currency is intended for specific works to ity to interest rates is based on current interest rates prevailing in improve and expand water supply and sewage collection and treat- the market, indicating volatility significantly higher than in previous ment systems. The Company does not hedge against currency risks, years. since foreign currency debt is small in relation to total debt. (c) Foreign exchange risk The Company’s exposure in foreign currency, represented by The Company is exposed to the risk of increase in exchange its US dollar- and euro-denominated debt, amounted to R$ 127,332 rates, mainly US dollar and euro exchange rates against the Brazilian at December 31, 2013 (2012 - R$ 62,387; January 1, 2012 - R$ real, directly impacting debt, income and cash flow. 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

Sustainability Report 2013 | COPASA MG 269 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

R$ 42,518 (2012 - R$ 40,527; January 1, 2012 - R$ 35,192) for a will not fulfill an obligation established in a financial instrument or portion of foreign-currency borrowings (Note 12). contract with a customer, leading to a financial loss. The Company (i) Foreign exchange sensitivity is exposed to credit risk in its operating and financial activities, including deposits in banks and other financial institutions, foreign The Company analyzed the sensitivity to the effects of fluctua- exchange transactions and other financial instruments. tions in the US Dollar and Euro exchange rates on the Company’s income and equity. With all other variables held constant, the (i) Accounts receivable Company’s profit before taxes is affected by the impact on borro- The credit risk of customers is subject to the procedures, wings payable subject to foreign exchange variations, as shown controls and policies established by the Company with regard to this below: risk. Credit limits are established for all customers based on internal classification criteria. The majority of the sales is spread among Change in US Effect on profit before taxes (in reais) Dollar rate a large number of customers. For these customers, credit risk is minimal as a result of the portfolio spread and its control procedures 12/31/2013 + 20% (25.363) over such risk. Impairment of trade receivables is adequately - 20% 25.363 covered by a related provision. +10% (12.682) -10% 12.682 (ii) Financial instruments and demand deposits For credit risk, due to the possibility that the Company may 12/31/2012 + 20% (12.363) - 20% 12.363 incur losses on its deposits with financial institutions, in October +10% (6.181) 2012, the Financial Investment Committee was created, which -10% 6.181 analyzes, in accordance with the Company’s Financial Investment Policy, each institution with which the Company will do business, Changes in income and equity derive from changes in US Dollar according to pre-established criteria. Surplus funds are invested only borrowings. in approved counterparties and within the limit set for each. The credit limit of counterparties is reviewed annually, or when there is (d) Credit risk any change in macroeconomic scenarios of the Brazilian economy. Credit risk is the risk that the counterparty to a transaction

Sustainability Report 2013 | COPASA MG 270 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

The credit quality of financial assets that are neither past due (e) Liquidity risk nor impaired can be assessed by reference to external credit ratings The Company monitors the risk of cash shortage using a rolling or to historical information about counterparty default rates: liquidity planning tool. Prudent liquidity risk management implies maintaining cash Parent company and marketable securities sufficient to meet short-term require- 12/31/2013 12/31/2012 01/01/2012 Current accounts, bank deposits and ments and to ensure the Company’s investment program. short-term financial investments (*) Management monitors the Company’s liquidity level by AAA 223.264 469.309 94.559 considering its expected cash flows as well as its cash and cash AA 20.766 26.933 63.469 A 16.290 65 26.520 equivalents (Note 6). Generally, this is performed by the Company’s B (BAA, BA e BBB) 161 118 56.988 operating units, in accordance with the pre-established practice Total 260.481 496.425 241.536 and budget limits. These limits vary by location as they consider the liquidity of the market in which the entity operates. Also, the Liquidity Note: (*) According to risk rating agency Moody’s classification. 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 Consolidado maintenance of debt financing plans. 12/31/2013 12/31/2012 01/12/2012 Current accounts, bank deposits and The following table analyzes financial liabilities settled at net short-term financial investments (*) value, by maturity, corresponding to the remaining period in the bal- AAA 224.721 470.585 95.394 ance sheet in relation to the contractual maturity date. The amounts AA 20.766 26.933 63.469 A 16.290 65 26.520 disclosed in the table are the contractual undiscounted cash flows. 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.

Sustainability Report 2013 | COPASA MG 271 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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 Trade and other payables 170.653 27.108 29.638 52.939

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 Trade and other payables 139.415 24.489 44.366 64.261

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.

The Company does not engage in any operations with derivative instruments.

The following table sets out collaterals pledged by the Company for financing agreements.

Sustainability Report 2013 | COPASA MG 272 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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 (g) Risk of non-renewal of concessions

The Company has borrowing agreements with covenants, The Company has concessions for water supply and sanitary usually applicable to these types of transactions, related to compli- sewage services, and management expects that they will be ance with economic and financial ratios, cash generation and other renewed by the Concession Authority (Municipalities). If the conces- indicators. In order to minimize such risk and monitor the level of sions are not renewed, current levels of profitability and activity may indebtedness, the Company has, included in its bylaws, an Indebted- be impacted. ness Policy with conditions more restrictive than the covenants The Company has not been significantly affected by occur- applicable to its loan and financing agreements (Note 12). rences related to these risks.

Sustainability Report 2013 | COPASA MG 273 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

20.2. Capital management Parent company The primary objective of the Company’s capital management is 12/31/2013 12/31/2012 01/01/2012 to ensure that it maintains a strong credit rating and a sound capital Total borrowings and debentures 3.156.267 3.059.378 2.809.959 base in order to support its business and maximize stockholder Less: cash and cash equivalents (260.481) (496.425) (241.536) value. Net debt 2.895.786 2.562.953 2.568.423 Total equity 5.337.359 4.934.888 4.533.095 The Company manages its capital structure in accordance with Total capital 8.233.145 7.497.841 7.101.518 its Indebtedness Policy, which establishes in its bylaws, that total liabilities of the Company shall be equal to or less than equity. Gearing ratio - % 35 34 36

No changes were made in the objectives, policies or processes Third-party capital index - % 54 52 57 in the years ended December 31, 2013 and December 31, 2012.

Similar to other companies in the sector, the Company monitors its capital based on gearing and debt ratios. The gearing ratio Consolidated corresponds to the net debt expressed as a percentage of total 12/31/2013 12/31/2012 12/31/2012 capital. Net debt, in turn, corresponds to total loans (including short- Total borrowings and debentures 3.157.700 3.059.378 2.809.959 and long-term loans, debentures and other current and non-current Less: cash and cash equivalents (261.938) (497.701) (242.371) debts, as disclosed in the consolidated balance sheet), less cash Net debt 2.895.762 2.561.677 2.567.588 and cash equivalents. Total capital is calculated as equity, as shown Total equity 5.337.359 4.934.888 4.533.095 in the consolidated balance sheet, plus net debt. Total capital 8.233.121 7.496.565 7.100.683

In 2013, the Company’s strategy, which remained unaltered in Gearing ratio - % 35 34 36 relation to 2012, was that of maintaining the financial leverage and debt ratios below 100%. Total liabilities to equity ratio at December Third-party capital index - % 54 52 57 31, 2013 and December 31, 2012 and January 1, 2012 can be summarized as follows:

Sustainability Report 2013 | COPASA MG 274 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

20.3. Fair value estimation Parent company/Consolidated The carrying values of trade receivables and payables, less an 12/31/2013 impairment provision in the case of trade receivables, are assumed Assets Available-for-sale financial to approximate their fair values. The fair value of financial liabilities assets Total assets for disclosure purposes is estimated by discounting the future Prices quoted in active markets (Level 1) - - contractual cash flow at the current market interest rate that is Other significant observable data available to the Company for similar financial instruments. (Level 2) - - Significant data not observable (a) Financial instruments measured in the balance sheet at (Level 3) 48.638 48.638 fair value Total balance 48.638 48.638 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: Parent company/Consolidated 12/31/2012 ► Quoted prices (unadjusted) in active markets for identical assets Assets or liabilities (Level 1). Available-for-sale financial assets Total assets ► Inputs other than quoted prices included within level 1 that are Prices quoted in active markets observable for the asset or liability, either directly (that is, as prices) (Level 1) - - Other significant observable data or indirectly (that is, derived from prices) (Level 2). (Level 2) - - Significant data not observable ► Inputs for the asset or liability that are not based on observable (Level 3) 28.850 28.850 market data (that is, unobservable inputs) (Level 3). Total balance 28.850 28.850 The following table presents the parent company and consolidated assets and liabilities measured at fair value at December 31, 2013 and 2012 and January 1, 2012:

Sustainability Report 2013 | COPASA MG 275 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Controladora/Consolidado mined by using valuation techniques. These valuation techniques 01/01/2012 maximize the use of observable market data when available, and Assets rely as little as possible on Company-specific estimates. If all signifi- Available-for-sale cant inputs required to fair value an instrument are observable, the financial assets Total assets Prices quoted in active markets instrument is included in Level 2. At December 31, 2013 and 2012 (Level 1) - - and January 1, 2012, the Company and its subsidiaries did not have Other significant observable data (Level 2) - - financial instruments whose fair value had been measured at Level 1. Significant data not observable (Level 3) 25.079 25.079 If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3. Total balance 25.079 25.079 Specific valuation techniques used to value financial instruments include:

The fair value of financial instruments traded in active markets ► Quoted market prices or dealer quotes for similar instruments. (such as trading and available-for-sale securities) is based on quoted ► Other techniques, such as discounted cash flow analysis, are market prices at the balance sheet date. A market is regarded as used to determine the fair values of the remaining financial instru- active if quoted prices are readily and regularly available from an ments. 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, (b) Fair value of borrowings 2013 and 2012 and January 1, 2012, the Company and its subsidi- The carrying amounts compared to the respective fair values aries did not have financial instruments whose fair value had been are as follows: 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-

Sustainability Report 2013 | COPASA MG 276 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Parent company Consolidated Amounts Carrying Fair value Carrying Fair value amount amount 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 Fair value Carrying Fair value amount amount 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 remaining months before payment. These values are adjusted to present value using the following market rates:

Sustainability Report 2013 | COPASA MG 277 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Parent company/Consolidated Financing 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

Sustainability Report 2013 | COPASA MG 278 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

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

Sustainability Report 2013 | COPASA MG 279 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

12/31/2012 Loans and receivables Assets available for sale Total Assets Cash and cash equivalents 496.425 - 496.425 Marketable securities 20.135 - 20.135 Trade receivables 798.853 - 798.853 Bank account - agreements 47.480 - 47.480 Restricted investments 188.661 - 188.661 Financial assets - concession agreements 390.757 - 390.757 Equity securities - 28.850 28.850 Receivables from subsidiaries 106.831 - 106.831 Other receivables (excluding prepayments) 155.952 - 155.952

Total 2.205.094 28.850 2.233.944

12/31/2012 Other financial liabilities Total Liabilities Borrowings and debentures 3.059.378 3.059.378 Trade payables 157.397 157.397

Total 3.216.775 3.216.775

Sustainability Report 2013 | COPASA MG 280 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

1/1/2012 Loans and receivables Assets available for sale Total Assets Cash and cash equivalents 241.536 - 241.536 Trade receivables 691.857 - 691.857 Bank account - agreements 9.161 - 9.161 Restricted investments 328.891 - 328.891 Financial assets - concession agreements 325.493 - 325.493 Equity securities - 25.079 25.079 Receivables from subsidiaries 76.048 - 76.048 Other receivables (excluding prepayments) 153.519 - 153.519

Total 1.826.505 25.079 1.851.584

1/1/2012 Other financial liabilities Total Liabilities Borrowings and debentures 2.809.959 2.809.959 Trade payables 108.068 108.068

Total 2.918.027 2.918.027

Sustainability Report 2013 | COPASA MG 281 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

(b) Consolidated

12/31/2013 Loans and receivables Assets available for sale Total Assets Cash and cash equivalents 261.938 - 261.938 Trade receivables 914.785 - 914.785 Bank account - agreements 36.794 - 36.794 Restricted investments 97.380 - 97.380 Financial assets - concession agreements 494.836 - 494.836 Equity securities - 48.638 48.638 Other receivables (excluding prepayments) 158.611 - 158.611

Total 1.964.344 48.638 2.012.982

12/31/2013 Other financial liabilities Total Liabilities Borrowings and debentures 3.157.700 3.157.700 Trade payables 156.104 156.104 Financial leasing 7.769 7.769

Total 3.321.573 3.321.573

Sustainability Report 2013 | COPASA MG 282 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

12/31/2012 Loans and receivables Assets available for sale Total Assets Cash and cash equivalents 497.701 - 497.701 Marketable securities 20.135 - 20.135 Trade receivables 803.513 - 803.513 Bank account - agreements 67.715 - 67.715 Restricted investments 188.661 - 188.661 Financial assets - concession agreements 390.757 - 390.757 Equity securities - 28.850 28.850 Other receivables (excluding prepayments) 156.027 - 156.027

Total 2.124.509 28.850 2.153.359

12/31/2012 Other financial liabilities Total Liabilities Borrowings and debentures 3.059.378 3.059.378 Trade payables 172.440 172.440

Total 3.231.818 3.231.818

Sustainability Report 2013 | COPASA MG 283 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

1/1/2012 Loans and receivables Assets available For sale Total Assets Cash and cash equivalents 242.371 - 242.371 Trade receivables 695.786 - 695.786 Bank account - agreements 11.671 - 11.671 Restricted investments 328.891 - 328.891 Financial assets - concession agreements 325.493 - 325.493 Equity securities - 25.079 25.079 Other receivables (excluding prepayments) 153.540 - 153.540

Total 1.757.752 25.079 1.782.831

1/1/2012 Other financial liabilities Total Liabilities Borrowings and debentures 2.809.959 2.809.959 Trade payables 111.494 111.494

Total 2.921.453 2.921.453

Sustainability Report 2013 | COPASA MG 284 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

22. Revenue Parent company The reconciliation between gross and net revenue is as follows: 2013 2012

Reversal of non-deductible provision 33.058 57.678 Parent company Recovery of accounts written-off 66.193 35.732 2013 2012 Other income 9.476 28.920 Total other operating income 108.727 122.330

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) Consolidated 2013 2012 Net revenue 3.714.818 3.429.090

Reversal of non-deductible provision 33.796 60.728 Recovery of accounts written-off 66.582 36.340 Consolidated Other income 11.355 30.453 2013 2012 Total other operating income 111.733 127.521

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:

Sustainability Report 2013 | COPASA MG 285 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

23 Expenses by nature

Parent company Consolidated 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.

Sustainability Report 2013 | COPASA MG 286 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Parent company/Consolidated Consolidated 2013 2012 2013 2012

Salaries and social charges 28.756 26.083 Salaries 564.698 510.926 Materials 61.212 94.932 Social security costs 171.927 155.641 Equipment 48.924 69.963 FGTS (Government Severance Indemnity Outsourced services 487.650 393.901 Fund for Employees) 65.434 48.340 Financing costs 56.149 60.275 Pension plan contributions 37.282 33.683 Other 7.882 491 Workers' meal program 117.854 103.883 Healthcare plan 46.908 41.544

Total construction costs 690.573 645.645 Other benefits 18.229 17.599

Total 1.022.332 911.616

24. Employee benefit expenses Number of employees (unaudited) 12.241 11.912

Parent company 2013 2012 25. Finance income and costs Salaries 557.100 505.129 Social security costs 170.379 154.578 Finance income (costs) can be summarized as follows: 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

Sustainability Report 2013 | COPASA MG 287 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Parent company 26. Related-party transactions 2013 2012 The Company is controlled by the State of Minas Gerais, which

Interest income 9.907 21.696 holds 51.13% of the Company’s shares (Note 18). Income from financial investments 37.601 58.710 Monetary and foreign exchange gains 14.200 51.645 (a) Assets, liabilities, income and expenses Capitalization of financial assets/other 24.126 2.768 Total income 85.834 134.819 In addition to the agreements described in Note 15, other transactions with related parties substantially represent those Interest on financing (181.481) (194.447) carried out with the State of Minas Gerais, CEMIG, Foz de Jeceaba Monetary and foreign exchange costs (58.036) (55.603) and subsidiaries. Significant balances and transactions with related Other expenses (5.086) (7.320) total costs (244.603) (257.370) parties are set out below: finance result (158.769) (122.551)

Consolidated 2013 2012

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)

Sustainability Report 2013 | COPASA MG 288 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Controladora 12/31/2013 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

Sustainability Report 2013 | COPASA MG 289 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Parent company 12/31/2012 Subsidiaries Other Águas Minerais COPANOR Serviços de Irrigação Total State of MG CEMIG Foz de Jeceaba

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 - - Interest on capital - - - - 24.197 - - Electric power - - - - - 6.618 - Non-current liabilities Provision for investment losses 63.053 15.931 185 79.169 - - - Total liabilities 63.053 15.931 185 79.169 53.984 6.618 -

Statement of income Revenue from water supply and sewage services - - - - 102.077 - - Gains on monetary variations - 1.187 99 1.286 - - - Dividends received ------6.288

Sustainability Report 2013 | COPASA MG 290 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Parent company 1/1/2012 Subsidiaries Other Águas Minerais COPANOR Serviços de Irrigação Total State of MG CEMIG Foz de Jeceaba

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 Interest on capital - - - - 15.870 - - Electric power - - - - - 24.670 - Non-current liabilities Provision for investment losses 31.046 13.665 893 45.604 - - - Total liabilities 31.046 13.665 893 45.604 15.870 24.670 -

Statement of income Revenue from water supply and sewage services - - - - 89.806 - - Gains on monetary variations 5.561 1.542 178 7.281 - - - Dividends received ------1.160

Sustainability Report 2013 | COPASA MG 291 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Balances and transactions with related parties are conducted ► Copanor at prices and under conditions considered by management to be Loan agreement, with interest of 90% of CDI, according to the similar to those prevailing in the market, except for the financial renegotiation described in Note 8. settlement, which may occur through special negotiations (matching of accounts). ► Serviços de Irrigação b) Key management compensation Loan agreement, with interest of 101% of CDI. ► Electricity supply The Company is a major consumer of electric power in the 2013 2012 State of Minas Gerais, where electricity is supplied primarily by the

Salaries 4.637 4.538 Minas Gerais electric power utility company CEMIG, controlled by the Employee benefits 697 701 Company’s controlling stockholder, the State of Minas Gerais. More Total 5.334 5.239 than 300 electric power supply agreements were signed, each one for a specific consumer unit. ► Financing agreements with BDMG 26.1. Related-party transactions The Company entered into various financing agreements with The Company’s main transactions with related parties can be BDMG in the normal course of its business. summarized as follows: ► Agreements with CODEMIG ► Águas Minerais On March 22, 2006, the Company signed with CODEMIG an Since January 2012, monetary restatement on intercompany intention protocol for technical cooperation and, on June 30, 2006, loan agreements has not been calculated and accounted for, be- a lease agreement was made to take over the rights related to cause the balance of these agreements was converted into advance mineral waters of Araxá, Cambuquira, Caxambu and Lambari, as for future capital increase, recorded in equity, whose effectiveness mentioned in Note 1. depends on the approval of the General Meeting to be held in the first quarter of 2014.

Sustainability Report 2013 | COPASA MG 292 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

► Guarantee of the State of Minas Gerais in Company’s (iii) Restricted Account and Assignment and Transfer of Credit agreements with the Federal Government Given in Counter Guarantee Agreement dated November 29, 2011 - in case of default, the Federal Government was The agreements listed below describe the guarantee provided authorized by the State of Minas Gerais to: (i) offset any by the State of Minas Gerais in the agreements of Copasa and the amounts with revenues from constitutional tax income, in Federal Government: amounts sufficient to settle any past due installments; and (ii) request the transfer of funds existing in the State’s rev- (i) Debt Acknowledgement and Settlement Agreement with enue centralizing accounts maintained in a certain financial the Federal Government on January 20, 1994 - in case of institution, in amounts sufficient to settle any installment in default. At December 31, 2013, the outstanding balance of default, the Federal Government was authorized by the this agreement totaled R$ 65,674, as mentioned in Note 12. State of Minas Gerais to: (i) offset any amounts with own revenues and portions of certain taxes, in amounts sufficient to settle any past due installments; and (ii) request 27. Water supply and sewage services in Belo the transfer of funds existing in the State’s revenue central- Horizonte izing accounts maintained in a certain financial institution, The Minas Gerais State Government and the Belo Horizonte in amounts sufficient to settle any installment in default. Municipal Government entered into a cooperation agreement on At December 31, 2013, the outstanding balance of these November 13, 2002, whereby the Company was ensured the right agreements totaled R$ 3,327, as mentioned in Note 12. to continue rendering water supply and sewage services in Belo Horizonte for another 30 years. (ii) Debt Acknowledgement and Consolidation Agreement The first amendment to this agreement was made on April 30, with the Federal Government of August 5, 1998 - the 2004. The main items of the amended cooperation agreement are State of Minas Gerais assigned and transferred to the as follows: Federal Government credits from certain taxes collected, in amounts sufficient to pay installments and charges due on (1) The municipality declared and recognized the debt for each maturity date. At December 31, 2013, the outstand- which it is responsible, in the total amount of R$ 70,662 on November 30, 2002, corresponding to water supply ing balance of these agreements totaled R$ 61,658, as and sewage service bills issued until November 2002 still mentioned in Note 12. pending payment. This debt was being paid in 335 monthly

Sustainability Report 2013 | COPASA MG 293 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

and consecutive installments equivalent to 202,838,77 m³ the Municipal Government, there shall be a refund of 240 of water each, since January 2005. The amount of each remaining installments, the value of each limited to R$ 855, installment in cash was obtained by multiplying the volume restated at the IPCA rate, and to the restated balance. to be settled by the value of the average tariff billed per m³ in Belo Horizonte, plus simple compensatory interest 28. Commitments of 0.5% per month, as from November 2002. However, as from February 24, 2010, with the signing of a Mutual The Company entered into new construction contracts, under Debts Compensation Agreement, the debt has been paid which obligations are recorded as the services are rendered. The in 120 consecutive monthly installments, with interest of main outstanding contracts with contractors and suppliers at 1% and annual IPCA-E inflation adjustment (Notes 7 and December 31, 2013 are listed below: 11). At December 31, 2013, the balance receivable totaled R$ 253,724, of which R$ 41,144 under current assets Term in and R$ 212,580 under non-current assets (R$ 255,676 at Contractors Amount Signed on days (1) December 31, 2012 with R$ 35,676 under current assets

and R$ 220,000 under non-current assets). Odebrecht Ambiental 693,731 12/20/2013 5,475 (2) The Company assumed part of the costs of the Program Construtora Andrade Gutierrez S.A. 186,404 8/25/2011 1,080 Consórcio Orteng/Sonel 71,075 2/21/2013 990 for Environmental Recovery and Sanitation of River Valleys Mendes Junior Trading e Engenharia S.A. 60,339 11/30/2012 810 and Streams in Belo Horizonte (DRENURBS), on behalf of Prefisan Ltda. 28,797 5/23/2013 720 the municipality under the Belo Horizonte Concession Right Infracon Engenharia e Comércio Ltda. 26,353 8/8/2012 630 at the initial amount of R$ 170,000 and restated at the Prefisan Engenharia S.A. 21,624 3/14/2012 1,080 IPCA rate. In December 2011 the Belo Horizonte Municipal Infracon Engenharia e Comércio Ltda. 21,170 8/28/2013 540 Government presented data on spending made on the Comim Construtora Ltda. 19,541 8/9/2013 720 program up to December 2009. Considering its commit- Construtora Penchel Ltda. 19,239 4/19/2013 720 ment to refund part of the amount of these measurements Consirel Constr. Silveira e Resende Ltda. 12,368 8/29/2013 600 as from January 2008, the amount was restated to the referred date and, less the total amount of refunds made Note: (1) Counted from the date set in the first service order. in the period, resulted in a balance of R$ 214,933. On presentation of new spending measurements made by

Sustainability Report 2013 | COPASA MG 294 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Upon renewal or revision of some concession agreements, awards made by courts, final court decisions, including attorneys’ the Company assumed commitments to participate financially in fees and court costs, in the course of proceedings based on civil sewage network construction and river valley treatment works, to be liability for acts of management committed by these individuals carried out by the municipal governments. Among the works to be while carrying out their duties. carried out, those in public sites (stream channeling, open sewage The Company does not have insurance to cover damages channels) are treated as intangible assets - ‘concession rights’, and caused to its buildings and/or facilities on the closing date of the amortized over the remaining concession term. Sewage interceptors financial statements for the year ended December 31, 2013. are incorporated in the Company’s intangible assets.

The main committed amounts refer to the following municipali- 30. Value-added Tax on Sales and Services ties: (ICMS) According to State Law 9,944 of September 20, 1989, and Amounts State Decree 38,104/96, the Company started paying ICMS under Municipalities Committed Realized % realization 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 Belo Horizonte 261,140 73,030 27.97 Betim 80,286 73,521 91.57 1991, the Company suspended the tax payment as a result of a Contagem 83,707 83,707 100.00 preliminary decision in Direct Unconstitutionality Proceeding (ADIN) Montes Claros 121,941 61,417 50.37 567-7, which established that this taxation required a specific law Ribeirão das Neves 86,411 70,977 82.14 to regulate it. The ADIN was declared ineffective, and this issue has Teófilo Otoni 54,360 - - 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 29. Insurance supply of treated water to end consumers is an essential public The Company and its subsidiaries contracted services of third service, by express constitutional determination. However, as the party liability insurance for directors, officers and managers of merits of the action have not yet been judged, and although there commercial companies in order to ensure them the right to compen- are pronouncements from the Federal Supreme Court (STF) and the sation in the event of judicial and extrajudicial settlements, arbitral

Sustainability Report 2013 | COPASA MG 295 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

Higher Court of Justice (STJ), and repeated understanding of the 31. Transactions not involving cash and cash Minas Gerais state law that there would be no ICMS levy on the sup- equivalents ply of drinking water by concession operators that provide this public During 2013 and 2012, the Company and its subsidiaries service, so far there is no definitive Judicial Branch position. Due to carried out the following non-cash investing and financing activities the suspension of the tax payment, the amount of the referred to tax which are not reflected in the statement of cash flow: 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 Parent company/Consolidated from the state tax authorities that would render the establishment of 2013 2012 a provision for this tax justifiable. 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

Sustainability Report 2013 | COPASA MG 296 Sanitation Company of Minas Gerais (MG, Copasa) Year ended December 31 | All amounts in thousands of reais, except when otherwise indicated

32. Evaluation of the impacts of Provisional The Company’s conclusions consider our best interpretation Measure (MP) 627 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 Provisional Measure (MP) 627 was issued on November 11, possible that the final text of the permanent law will differ from the 2013. This MP repeals the Transitional Tax System (RTT) and (i) original wording of the MP. Management may need to reconsider its amends Decree-law 1,598/77, which deals with the corporate conclusions in the light of that final text. income tax, as well as the legislation related to the social contribution 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 amendments to the MP before deciding whether to elect early adoption of the MP.

Sustainability Report 2013 | COPASA MG 297 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

Sustainability Report 2013 | COPASA MG 298 Capital Budget

Given the business growth projections for 2014, the Company will invest in expansion of water services, with production capacity INVESTMENT PROGRAM FOR 2014 expansion projects, expansion of service capacity, implementation WATER 353,2 of systems and well drilling and installation. Moreover, funds will be SEWAGE 610,5 invested in sewage collection systems, in works aimed at expanding OTHER 19,3 the service capacity, implementation of systems, sewage treatment TOTAL 983,0 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 investments 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:

Sustainability Report 2013 | COPASA MG 299 Report of The Statutory Audit Board

In a meeting held on January 29, 2014, the Statutory Audit the Profit Retention Reserve, as per the capital budget contained in Board of Companhia de Saneamento de Minas Gerais – COPASA the investment program (Law 6,404/76). MG, in exercising its legal and statutory duties, examined the Based on tests performed and in view of the opinion issued by Management Annual Report and the Financial Statements, which PricewaterhouseCoopers Auditores Independentes, dated January comprise: the Balance Sheet, the Statements of Income, Changes 27, 2014, the Statutory Audit Board hereby expresses a favorable in Equity and Cash Flows and the Statement of Value Added, in opinion on the approval of these proposals to be submitted for addition to the Notes to Financial Statements and the Independent discussion and vote in the Ordinary General Meeting of Stockholders Auditor’s Report on the Financial Statements, for the year ended of Copasa. December 31, 2013. The following proposals were studied, which are being submitted by Copasa Management for approval of the Ordinary General Belo Horizonte, January 29, 2014 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 allocation of profit of Copasa, totaling R$ 419,795 thousand: R$ 20,990 thousand to constitute the Legal Reserve; R$ 139,582 thousand Paulo Elisiário Nunes Carlos Eduardo Carvalho de Andrade corresponding to the gross amount of R$ 1.17 per share, will be Chairman Member used to pay Interest on Capital imputed on the minimum dividend as follows: R$ 105,502 thousand were approved in meetings of Jair Siqueira Alvimar Silveira de Paiva the Board of Directors held on March 18, 2013, June 24, 2013 and Vice-Chairman Member September 20, 2013 and allocated to stockholders; R$ 54,100 thousand will be distributed proportionally to holders of common Rafael Rodrigues Alves da Rocha shares entitled to remuneration; R$ 263,582 thousand to constitute Member

Sustainability Report 2013 | COPASA MG 300 Declaration of Review of ohe Financial Statements ond Independent Auditor’s Report by Officers

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

Belo Horizonte, January 28, 2014

Sustainability Report 2013 | COPASA MG 301 Independent auditor’s report

To the Board of Directors and Stockholders Management’s responsibility for the financial statements Companhia de Saneamento de Minas Gerais – COPASA MG Management is responsible for the preparation and fair presentation of the parent company financial statements in accordance with accounting practices adopted in Brazil, and of the consolidated We have audited the accompanying parent company financial financial statements in accordance with the International Financial statements of Companhia de Saneamento de Minas Gerais – CO- Reporting Standards (IFRS), issued by the International Accounting PASA MG (“Company” or “Parent company”) as at December 31, Standards Board (IASB), and accounting practices adopted in Brazil, 2013, which comprise the balance sheet as at that date and the and for such internal control as management determines is neces- statements of income, comprehensive income, changes in equity sary to enable the preparation of financial statements that are free and cash flows for the year then ended, and a summary of significant from material misstatement, whether due to fraud or error. accounting policies and other explanatory information. Auditor’s responsibility We have also audited the accompanying consolidated financial statements of Companhia de Saneamento de Minas Gerais – COPA- Our responsibility is to express an opinion on these financial state- SA MG (“Consolidated”) as at December 31, 2013, which comprise ments based on our audit. We conducted our audit in accordance with the consolidated balance sheet as at that date and the consolidated Brazilian and International Standards on Auditing. Those standards statements of income, comprehensive income, changes in equity require that we comply with ethical requirements and plan and perform and cash flows for the year then ended, and a summary of significant the audit to obtain reasonable assurance about whether the financial accounting policies and other explanatory information. statements are free from material misstatement.

Sustainability Report 2013 | COPASA MG 302 An audit involves performing procedures to obtain audit of Companhia de Saneamento de Minas Gerais – COPASA MG and evidence about the amounts and disclosures in the financial state- its subsidiaries as at December 31, 2013, and their financial perfor- ments. The procedures selected depend on the auditor’s judgment, mance and cash flows for the year then ended, in accordance with including the assessment of the risks of material misstatement of the International Financial Reporting Standards (IFRS) issued by the the financial statements, whether due to fraud or error. International Accounting Standards Board (IASB) and the accounting In making those risk assessments, the auditor considers practices adopted in Brazil. internal control relevant to the entity’s preparation and fair presenta- Emphasis of matter tion of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose As discussed in Note 2 to these financial statements, the parent of expressing an opinion on the effectiveness of the entity’s internal company financial statements have been prepared in accordance control. An audit also includes evaluating the appropriateness of with accounting practices adopted in Brazil. In the case of Compan- accounting policies used and the reasonableness of accounting hia de Saneamento de Minas Gerais – COPASA MG, these practices estimates made by management, as well as evaluating the overall differ from IFRS applicable to separate financial statements only in presentation of the financial statements. relation to the measurement of investments in subsidiaries based on We believe that the audit evidence we have obtained is suf- equity accounting, while IFRS requires measurement based on cost ficient and appropriate to provide a basis for our audit opinion. or fair value. Our opinion is not qualified in respect of this matter. Opinion on the parent company financial statements Other matters

In our opinion, the parent company financial statements Supplementary information - statement of value added referred to above present fairly, in all material respects, the financial We also have audited the parent company and consolidated state- position of Companhia de Saneamento de Minas Gerais – COPASA ments of value added for the year ended December 31, 2013, which MG as at December 31, 2013, and its financial performance and are the responsibility of the Company’s management. The presentation cash flows for the year then ended, in accordance with accounting of these statements is required by the Brazilian corporate legislation for practices adopted in Brazil. listed companies, but is considered supplementary information for IFRS. Opinion on the consolidated financial statements These statements were subject to the same audit procedures described In our opinion, the consolidated financial statements referred above and, in our opinion, are fairly presented, in all material respects, in to above present fairly, in all material respects, the financial position relation to the financial statements taken as a whole.

Sustainability Report 2013 | COPASA MG 303 Audit of prior-year information Up to this date, there is no resolution by the State Executive Branch regarding the calculation criteria or enforcement The original financial statements of the Company for the year of payment of said tax; in addition, the aforementioned tax ended December 31, 2012, prepared before the consideration of has not been included in the Company’s tariffs. Accordingly, the adjustments described in Note 3, were audited by another firm such tax is not being charged to consumers, has not been of independent auditors whose report, dated February 20, 2013, accounted for by the Company and is not transferred to the expressed an unmodified opinion on those statements and included State Government. emphasis paragraphs related to the following subjects: As part of our audit of the financial statements for the year ended December 31, 2013, we also audited the adjustments (i) The parent company financial statements have been pre- described in Note 3, which were made to alter the 2012 financial pared in accordance with accounting practices adopted in statements. In our opinion, these adjustments are appropriate and Brazil. In the case of Companhia de Saneamento de Minas were correctly recorded. We were not engaged to audit, review or ap- Gerais – COPASA MG, these practices differ from IFRS apply any other procedures to the Company’s financial statements for plicable to separate financial statements only in relation to December 31, 2012 and, therefore, we do not express any opinion the measurement of investments in subsidiaries based on or any form of assurance on the financial statements for 2012 taken equity accounting, while IFRS requires measurement based as a whole. 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 Belo Horizonte, January 30, 2014 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 PricewaterhouseCoopers Carlos Augusto da Silva special regime, related to treated water supply. According to Auditores Independentes Contador CRC 1SP197007/O-2 "S" MG its legal advisor, specific normative acts regulating this mat- CRC 2SP000160/O-5 "F" MG ter would be necessary in order for this tax to be charged.

Sustainability Report 2013 | COPASA MG 304