COPASA MG Parent Company and Consolidated Financial Statements at December 31,2014 and Independent Auditor's Report (A Free Translation of the Original in Portuguese)
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(A free translation of the original in Portuguese) Companhia de Saneamento de Minas Gerais - COPASA MG Parent company and consolidated financial statements at December 31,2014 and independent auditor's report (A free translation of the original in Portuguese) Independent auditor's report To the Board of Directors and Stockholders Companhia de Saneamento de Minas Gerais - COPASA MG We have audited the accompanying financial statements of Companhia de Saneamento de Minas Gerais - COPASA MG ("Parent company" or "Company"), which comprise the balance sheet as at December 31, 2014 and the statements of income, comprehensive income, changes in equity and cash flow for the year then ended, as well as the accompanying consolidated financial statements of Companhia de Saneamento de Minas Gerais - COPASA MG and its subsidiaries ("Consolidated"), which comprise the consolidated balance sheet as at December 31, 2014 and the consolidated statements of income, comprehensive income, changes in equity and cash flow for the year then ended, and a summary of significant accounting policies and other explanatory information. Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting practices adopted in Brazil and the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Brazilian and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. 2 PricewaterhouseCoopers, Rua dos Inconfidentes 911, 17º e 18º, Belo Horizonte, MG, Brasil 30140-120, Caixa Postal 289 T: (31) 3269-1500, F: (31) 3261-6950, www.pwc.com/br Companhia de Saneamento de Minas Gerais - COPASA MG In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Companhia de Saneamento de Minas Gerais - COPASA MG and of Companhia de Saneamento de Minas Gerais - COPASA MG and its subsidiaries as at December 31, 2014, and the parent company financial performance and cash flow, as well as the consolidated financial performance and cash flow, for the year then ended, in accordance with accounting practices adopted in Brazil and the IFRS issued by IASB. Other matters Supplementary information - statement of value added We have also audited the parent company and consolidated statements of value added for the year ended December 31, 2014, which are the responsibility of the Company's management. The presentation of these statements is required by the Brazilian corporate legislation for listed companies, but is considered supplementary information for IFRS. The statements were subject to the same audit procedures described above and, in our opinion, are fairly presented, in all material respects, in relation to the financial statements taken as a whole. Belo Horizonte, March 19, 2015 3 (A free translation of the original in Portuguese) Companhia de Saneamento de Minas Gerais - COPASA - MG Years ended December 31 All amounts in thousands of reais unless otherwise stated Contents Item Page Management report 2 Social responsibility report 24 Audited financial statements: Balance sheet 26 Statement of income 28 Statement of comprehensive income 29 Statement of changes in equity 30 Statement of cash flow 32 Statement of value added 34 Notes to the financial statements 35 Proposal for capital budget 135 Report of the Statutory Audit Board 136 Declaration of review of the financial statements and independent auditor's report by officers 137 1 of 137 (A free translation of the original in Portuguese) Companhia de Saneamento de Minas Gerais - COPASA - MG Years ended December 31 All amounts in thousands of reais unless otherwise stated Management report Message from Management In 2014 the rainfall in Brazil was rather low, leading to less water resources and, consequently having significant negative impact on the water capture systems in the Southeast region of Brazil. In the State of Minas Gerais, COPASA MG has been focused on good governance practices and on the experience of its employees, working to guarantee the water supply throughout its operating areas, while ensuring both quality and environment preservation. The major challenge faced by the Brazilian sanitation industry, since Law 11,445/2007 established national basic sanitation guidelines, has been the universalization of the services, as established therein. In this connection, Interministerial Ordinance 571/2013, which approved the National Basic Sanitation Plan (PNSB), established a set of guidelines, targets and actions to provide universal services in Brazilian territory. In Minas Gerais, in compliance with national sanitation guidelines, State Law 18,309/2009 laid down rules on water supply and sewage services in the state, and created the Minas Gerais State Regulatory Water and Sanitary Sewage Agency (ARSAE MG), providing increased stability and safety for all related parties (concessionaires, concession-granting municipalities, serviced population and stockholders) as a result of the transparency of the tariff review criteria and of the service rendering inspection. On a general basis, the funds for investment in the sanitation industry has been raised in the last few years from traditional sources, such as Caixa Econômica Federal (CEF), funds from the Government Severance Indemnity Fund for Employees (FGTS), or the National Bank for Economic and Social Development (BNDES), funds from the Workers' Support Fund (FAT) or Federal government programs, such as the Growth Acceleration Program (PAC). COPASA MG has also raised funds in the capital markets through the issuance of debentures and promissory notes, as well as in foreign markets, from the German Development Bank Kreditanstalt fur Wiederaufbau (KfW), for the development of its business. The Company also introduced a new borrowing model, through a Public-Private Partnership (PPP), to expand the Rio Manso Production System, part of the drinking water production system of the Belo Horizonte metropolitan region. Investments made by COPASA MG in 2014 totaled R$ 865.1 million and were mainly relted to the implementation of new water supply systems and sewage collection and treatment systems. On a aggregated basis, the population being supplied with water exceeded 15.0 million inhabitants, that is, an increase of 3.2% compared to the previous year. In the same period, approximately 9.8 million people benefited from sewage treatment, an increase of 5.0%. Despite the increase in the population reached by the Company's services, the billed volume per connection has been decreasing over the last few years, mainly as a result of the campaigns for awareness and environmental education for the preservation of natural resources and, more recently, because of the need for a reduction in water consumption because of the drought season. In spite of this, net revenue increased by 4.1% to R$ 3.1 billion. Generation of operating cash (Adjusted EBITDA) totaled R$ 1.1 billion, and net income reached R$ 318 million. 2 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG Years ended December 31 All amounts in thousands of Reais unless otherwise stated We are convinced that, in spite of the current difficulties faced by the sanitation industry, COMPASA MG will, through innovation and improvements to its business models, and by seeking strategic partnerships and alliances, increase its competitiveness and guarantee that there will be a source of funds to finance its investments in the coming years, all with the purpose of meeting and overcoming the challenges imposed by the water crisis (including occasional emergency initiatives) and ensure the water supply to the population, the sustainable growth of its business and the maintenance of healthy profitability levels, without compromising our high social and environmental standards. We would like to thank our stockholders, customers, employees, suppliers, concession-granting municipalities,