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)

(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.

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

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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.

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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, surrounding communities and society at large for their support for and trust in COPASA MG during 2014, and remain positive about the expectation that 2015 will be a better year, with better results for us all.

The Management

ATTACHMENT TO THE MANAGEMENT REPORT

1. Business expansion

1.1 Water and sewage service concessions

In fulfilling its institutional mission of being an agent of economic and social development in the State of Minas Gerais, COPASA MG has not only expanded and secured the provision of services in areas where it already operated, but has also expanded its market by signing new concessions for water supply in a number of municipalities, such as Datas, Descoberto, Guimarânia, Itamarati de Minas, Santana de Pirapama and Turvolândia. In addition, new sewage treatment concessions were signed in the municipalities of Datas and Guimarânia.

Water supply concession agreements were also renewed in nine municipalities: Mathias Lobato, Conselheiro Lafaiete, Cedro do Abaeté, Conceição dos Ouros, Abadia dos Dourados, Naque, Teófilo Otoni, Confins and Três Corações. The sewage concessions in Conselheiro Lafaiete, Teófilo Otoni, Confins and Três Corações were also renewed.

Nine new concession agreements for the rendering of water supply services and four agreements for sewage services were entered into, while concessions for the rendering of water supply services were renewed in nine municipalities. Operations commenced on 11 new systems, one of which was for water supply services and ten for sewage services, for the most significant of which was the system in the municipality of Timóteo, in the Vale do Aço region.

In 2014, the subsidiary COPANOR acquired new concessions to provide water supply and sewage services in the municipalities of Couto de Magalhães de Minas, Felício dos Santos and Olhos D'Água.

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Overall, COPASA MG ended 2014 as a concessionaire for the provision of water services in 635 municipalities, and as a sanitary sewage service concession operator in 288 municipalities, as follow:

WATER AND SEWAGE SERVICE CONCESSIONS ITEM TOTAL COPASA MG COPANOR Number of municipalities - water concession 635 586 49 Number of municipalities - sewage concession 288 239 49 Number of municipalities - water operation 618 573 45 Number of municipalities - sewage operation 233 204 29

1.2 Investments - COPASA MG

Investments made directly by COPASA MG in 2014 totaled R$ 865.1 million. Of this total, R$ 279.8 million was invested in water supply systems, R$ 555.9 million was allocated to sewage collection and treatment systems, and the remaining R$ 29.4 million was invested in business development and operational development programs.

Consolidated investments are as follow:

Investments - (R$ million) Forecast Carried out - COPASA MG Water 353.2 279.8 Sewage 610.5 555.9 Other 19.3 29.4 INVESTMENT - 2014 983.0 865.1

In addition to the Company's own funds, investments were made using financing from CEF, BNDES, and KfW. Investments in this PPP come from the private partner sources. COPANOR obtained funds, via transfers, directly from the State Finance Department.

1.3 Major programs and actions in 2014

COPASA MG developed and implemented several water supply programs and actions, with the highlights being the following:

 Work to improve the connection from the Northwest water main in the metropolitan region of Belo Horizonte

 Expansion of the production capacity of the Rio das Velhas System in the metropolitan region of Belo Horizonte

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 Implementation of the water supply system in Martinho Campos, and

 Expansion of the water supply system capacity in several locations, mainly: Alpinópolis, Arceburgo, Belo Horizonte, Caetanópolis, Caputira, Carmo Paranaíba, Cataguases, Cássia, Contagem, Coromandel, Itamarandiba, Juatuba, Mateus Leme, Monte Sião, Nova Serrana, Perdigão, Prata, Ribeirão das Neves, Santa Juliana, Santa Vitória, São Francisco de Paula, Varginha and Taiobeiras

With respect to sewage treatment systems, the following are the highlights of the works carried out during 2014:

 Expansion of the sewage treatment systems of Belo Horizonte/Contagem, Cataguases, Montes Claros, Pedro Leopoldo, Pedro Leopoldo and Vespasiano, and the sewage treatment plant of Ribeirão Arrudas (ETE Arrudas)

 Construction of Sewage Treatment Plants in Barbacena, Caratinga, Camanducaia, Capelinha, Cataguases, Carmo do Rio Claro, Conceição do Mato Dentro, Congonhas, Conselheiro Lafaiete, Extrema, Ibirité, Itamarandiba, Jequitinhonha, Martinho Campos, Mateus Leme, Minas Novas, Monte Azul, Nova Serrana, Pedro Leopoldo, Prados, Raposos, Resende Costa, Santa Luzia, Santa Rita do Sapucaí, Santana da Vargem, Santo Antônio do Monte, Santos Dumont, São Gotardo, São Joaquim de Bicas, São Sebastião do Paraíso, Três Corações and Vazante.

 Implementation of the Sewage Treatment Systems of Alfenas, Cabo Verde, Camanducaia, Carmo do Paranaíba, Capitão Enéas, Centralina, Espinosa, Estrela do Indaiá, Fama, Francisco Dumont, Itacarambi, Juvenília, Limeira do Oeste, Lontra, Manga, Pedras de Maria da Cruz, Prudente de Morais, São João da Ponte, Serra dos Aimorés and Várzea da Palma.

1.4 Technical cooperation

COPASA MG carries out various technical activities in cooperation with municipalities, other sanitation companies and the private sector in Brazil and abroad. Such activities, in the form of technical visits and the provision of assistance or advice, involve all segments and leverage the expertise acquired by the Company over 51 years of services provided to the population of the State of Minas Gerais. During 2014, the Company emphasized technical visits by stakeholders to COPASA MG, as it believes that this is a great opportunity to create a conducive environment for technical cooperation by building relationships between the parties involved.

1.5 Subsidiaries

1.5.1 COPASA Serviços de Irrigação SA

COPASA Serviços de Irrigação SA commenced operations in March 2008 and has since made investments of R$ 7.5 million using State Treasury funds. These investments are intended to adjust the operating infrastructure and acquire vehicles and equipment under Stage II of the Jaíba Project Irrigated Perimeter.

In early 2013, the State Government decided that the management of the Irrigation System under Stage II of the Jaíba Project would be transferred from Jaíba to the JAÍBA II Irrigators Association (DIJ II), based on State Decree 46,080 of November 12, 2012.

As a result of this change, the subsidiary COPASA Serviços de Irrigação SA is now being wound up.

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1.5.2 COPASA Águas Minerais de Minas SA

On June 30, 2006, COPASA MG entered into a lease agreement with Companhia de Desenvolvimento Econômico de Minas Gerais (CODEMIG) involving the mining rights, equipment and packaging facilities of mineral waters of Caxambu, Cambuquira, Lambari and Araxá. In June 2007, this contract was amended and the assets and rights related to the lease of the mining rights were transferred to the subsidiary COPASA Águas Minerais de Minas Gerais (AGMM), which made huge investments in the modernization of four plants in order to comply with all requirements of the National Health Surveillance Agency (ANVISA) and the National Department of Mineral Production (DNPM).

In 2014, the Company started to look for alternatives in order to obtain a better economic and financial balance that would be in accordance with the investments.

1.5.3 COPASA Serviços de Saneamento Integrado do Norte e Nordeste de Minas Gerais SA - COPANOR

COPASA Serviços de Saneamento Integrado do Norte e Nordeste de Minas Gerais SA (COPANOR) is the concessionaire that provides water supply and sewage collection and treatment services in locations with a low HDI and a population of between 200 and 5,000 inhabitants in the North and Northeast areas of the State. In the first stage of implementation, through the State Government's "Vida no Vale" Structuring Project, works are being carried out in the Northeast region, in the water basins of the Jequitinhonha, Mucuri, São Mateus, Buranhém, Itanhaém and Jucuruçu rivers, expected to benefit over 430 thousand people in 488 locations in 88 municipalities, when all systems are implemented.

In December 2014, COPANOR was operating water supply systems in 228 locations, benefiting more than 301 thousand people, in addition to sewage systems in 68 locations, which benefited more than 124, people.

With ongoing construction works and projects, the estimate for the next two years is that, at least, 47 new locations will benefit from water supply, and 76 from sewage systems, with investment of more than R$ 161 million.

Between 2007 and December 2014, funds amounting to R$ 492 million from the Minas Gerais State Finance Department were applied to sanitation works and purchases of equipment, materials and services.

Investments made by COPANOR in 2014 totaled R$ 49,441,000, divided as follows: R$ 21,633,952 in SAA and R$ 27,807,048 in SES.

In 2014, the State of Minas Gerais transferred investments of R$ 29 million related to the PPAG 2014 (R$ 95 million expected) and R$ 20,441 million related to the remaining balance payable for 2013 and used for construction works in 2014, thus totaling R$ 49,441 million.

These amounts include construction work measurement, project preparation, inspection, land acquisition, materials under COPANOR's responsibility, structuring, etc.

This amount was proportionally divided among the measurements of construction works carried out in the following municipalities:

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Almenara, Angelândia, Araçuaí, Aricanduva, Bandeira, Berilo, Botumirim, Cachoeira de Pajeú, Capelinha, Caraí, Carbonita, Carlos Chagas, Catuji, Chapada do Norte, Comercinho, Coronel Murta, Couto de Magalhães de Minas, Diamantina, Felisburgo, Francisco Badaró, Frei Gaspar, Grão Mogol, Itacambira, Itaipé, Itamarandiba, Itaobim, Itinga, Jacinto, Jenipapo de Minas, Jordânia, Medina, Mendes Pimentel, Minas Novas, Nova Belém, Novo Cruzeiro, Novo Oriente de Minas, Novorizonte, Olhos D'água, Ouro Verde de Minas, Padre Carvalho, Pavão, Ponto dos Volantes, Rio do Prado, Rubelita, Rubim, Salinas, Santa Cruz de Salinas, Santa Maria do Salto, Santo Antônio do Jacinto, São Félix de Minas, São Gonçalo do Rio Preto, São João do Manteninha, São José do Divino, Serra dos Aimorés, Serro, Taiobeiras, Teófilo Otoni, Turmalina, Veredinha, and Virgem da Lapa.

1.6 New business models

COPASA MG has carried out prospection and business opportunity modeling activities since 2011, aimed at expanding its market and strengthening the company through strategic partnerships and alliances.

The administrative concession PPP for the Rio Manso System was structured in 2014. According to this partnership, the Special Purpose Entity (SPE) thus established is solely responsible for obtaining funds for the expansion, maintenance and joint operation of the Rio Manso Water Production System, which is partially responsible for the integrated water supply system of the Belo Horizonte Metropolitan Region. The system's production capacity was increased by over 1.8 m³/s, that is, from 4.0 m³/s to 5.8 m³/s. The concession has a 15-year term and involves investments in civil works, equipment and projects required to make the entire infrastructure ready for use. Investments in 2014 totaled R$ 256.3 million, of a total of R$ 500.6 million up to 2015. At the end of the contract, the assets generated will be transferred to the Concessionaire. The winner of this tender was Odebrecht Ambiental Manso.

New businesses are under development.

2. Operating performance

2.1 Service data

In the consolidated, the population being supplied with water increased by 460 thousand inhabitants, representing growth of 3.2%, to reach about 15.0 million inhabitants at the end of 2014. This increase was a result of the increased number of connections of the parent company and COPANOR, which increased by 127 thousand new water connections.

CONSOLIDATED - WATER SUPPLY SERVICES ITEM UNITS 2014 2013 Population served thousand people 15,010 14,550 Connections 1,000 units 4,042 3,915 Network extension km 48,531 46,620 Volume of water produced 1,000 m³/year 973,764 973,885 Billed water volume 1,000 m³/year 689,736 684,359

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With respect to sanitary sewage services, the total number of municipalities, also considering the consolidated, increased from 223 in 2013 to 233 in 2014, benefiting a total population of 9.8 million, an increase in the number of people served by 458 thousand.

The service is provided through 2.5 million billed sewage connections, an increase of 125 thousand connections (5.2%) compared to 2013. Of these new connections, approximately 33 thousand relate to the start of operations in new locations. The collection network has been expanded by 1,237 km, totaling more than 23.0 thousand km.

CONSOLIDATED - SANITARY SEWAGE SERVICE ITEM UNITS 2014 2013 Connections 1,000 units 2,529 2,404 Population served thousand people 9,786 9,328 Network extension km 23,375 22,138 Billed sewage volume 1,000 m³/year 453,448 446,754 Treated sewage volume 1,000 m³/year 252,009 237,291

The volume of sewage treated by the Company reached 252.0 billion liters in 2014, an increase of more than 6% on the prior year, due to the start-up of operations in 26 Sewage Treatment Plants (ETEs) in different municipalities of the state, among which we highlight Brasília de Minas, Divinópolis, Ribeirão das Neves, Bom Despacho, Nova Serrana, Pouso Alegre and Monte Sião.

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In 2014, as a result of the Company's expansion, the volumes of billed water and billed sewage grew by 5.4 and 14.6 billion liters, respectively. The expansion of water supply and sewage services in locations that were already operational, and the commencement of billed water and sewage services in new locations, such as the municipalities of Capitão Enéas, Ibiaí, Itapeva, Lontra, Pirapetinga, São João da Ponte and Timóteo, contributed to this growth.

The following table shows the performance of some operational/commercial indicators for the period specified:

CONSOLIDATED - COMMERCIAL/OPERATIONAL PERFORMANCE INDICATORS ITEM UNITS 2014 2013 Employees/connections (A+E) Employees/1,000 connections 1.96 1.93 Water metering rate % 99.89 99.90 Unbilled water (¹) (²) % 29.29 29.70 (¹): Annual average (²): Parent company data

Non-Revenue Water (ANCR), which indicates the difference between the amounts distributed and the volume billed to consumers, reached 230.84 l/connection/day in 2014 (236.48 l/connection/day in 2013). This indicator, which basically measures actual water losses resulting from disrupted water pipelines, thefts, leaks in operating units and differences between macro and micro measurements, is still considered one of the lowest in the sector compared to the Brazilian average of 366.86l/connection/day (SNIS 2013).

The total default rate, which corresponds to accounts receivable divided by the total amount billed, based on data accumulated since January 1998, reached 1.43% in 2014 (2013 - 1.39%), and is considered one of the best in Brazil.

2.2 Water quality control

The COPASA MG laboratory network has been entirely restructured in recent years. The network is comprised of central, regional and district laboratories, with a total of 29 units, and hundreds of local laboratories located close to the water treatment plants, which are strategically distributed throughout the state of Minas Gerais. The laboratories are modern and equipped with state-of-the-art equipment, which are fully operational, conducting more than one million monthly analyses. The Central Labs and the Regional Lab of Montes Claros are certified by the National Institute of Metrology, Standardization and Industrial Quality (INMETRO) through the Standard ABNT ISO/IEC 17025:2005. Other regional labs are in the process of obtaining the same certification.

Based on the analyses performed, the quality of COPASA MG's water is recognized across Brazil and meets internal control requirements regarding quality and the legislation in force, notably Administrative Ruling 2914 from the Ministry of Health, dated December 12, 2011.

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2.3 Sewage quality control

As in the water quality control, the laboratory network of COPASA MG is structured to carry out the monitoring of sewage treatment units, which has increased significantly in recent years. All plants are equipped with laboratories for the control of daily routine analyses. Analyses that require more complex procedures are performed in regional laboratories.

In order to analyze the sewage quality, tests are conducted to monitor the treatment processes and also to check the efficiency of the units, in compliance with current environmental legislation.

2.4 Generation of cash from operations

The adjusted EBITDA for 2014, that is, the Company's operating result less construction revenue and costs, amounted to R$ 1.09 billion (2013 - R$ 1.14 billion). While water- and sewage-related income increased by 4.1%, costs and expenses excluding depreciation/amortization also increased by 5.7%. In addition, other net operating revenue dropped from R$ 27.0 million in 2013 to negative R$ 49.4 million in 2014. The detailed financial performance is disclosed in Section 4 below.

EBITDA calculation* 2014 2013 Var. (%) Profit for the year 318,141 419,795 -24.2% (+) Taxes on income 114,499 146,363 -21.8% (+) Net finance income 186,810 158,769 17.7% (+) Depreciation and amortization 485,605 428,034 13.5% (+) Non-operating results of subsidiaries 2,872 3,938 -27.1% (=) EBITDA 1,107,927 1,156,899 -4.2% (-) Net construction revenue 16,596 16,509 (=) Adjusted EBITDA 1,091,331 1,140,390 -4.3%

EBITDA margin 26.1% 30.0% Adjusted EBITDA Margin 33.4% 36.3%

* The EBITDA is a non-accounting measurement adopted by the Company, calculated in accordance with CVM Instruction 527/2012, and consisting of the profit plus before income tax and social contribution, net finance result, depreciation and amortization expenses and the non-operating results of the subsidiaries. The EBITDA margin is calculated based on total income (net income related to water and sewage, construction income, plus other operating income and income from subsidiaries). The calculation of adjusted EBITDA, in its turn, does not consider construction income/costs. While there is no immediate cash effect, construction revenue generates effects for the year in which it is recognized, given that it forms part of the basis for the calculation of interest on capital/dividends and employee profit sharing.

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3. Parent company financial performance

3.1 Revenue

Net operating revenue from the water supply and sewage services of the parent company reached R$ 3.13 billion in 2014, representing a 4.1%% growth on the R$ 3.01 billion recorded in 2013.

Net revenue (R$ thousand)

Net revenue - water Net revenue - sewage

This increase is attributable to:

 3.1% growth in water and 4.8% in sewage savings

 An average tariff adjustment of 6.18%, effective from May 2014, and

 Change in the percentage of the sewage tariff, as a result of the beginning of operations of a number of Sewage Treatment Plants (ETEs) in 12 locations.

However, the revenue from water and sewage in 2014 compared to 2013 was negatively affected by the following factors:

 Decrease in billed volume per connection, which has been impacted by the change in the consumption behavior of the population and aggravated by the water crisis in 2014. This resulted in the transfer of a number of the customers to lower consumption levels, whose tariffs are lower.

 Decrease in industrial billed volume due to the performance of the economy. Even though this category accounts for less than 1.0% of the total connections, the impact on the Company's total billing was felt because the average rates of this group are higher than those of the other categories.

 Decrease in the sewage tariff in Coronel Fabriciano and Betim and suspension of the sewage tariff collection in Três Corações due to a court decision on the matter.

 Elimination, from January 2014, due to the enactment of Resolution ARSAE 40/2013, in the systematic used to send the second notification of default to customers, with receipt notification, which is now included directly in the customer's invoice. As a result, the indirect revenue and the offsetting entry to the expenses accounted for in outsourced services will no longer be recorded, that is, the effect on the results is null.

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Net construction revenue remained in line with the comparative figures, as shown in the table below:

Construction revenue (expenses) (R$ thousand) 2014 2013 Var. (%) Construction revenue 978,301 707,082 38.4% Construction cost (961,705) (690,573) 39.3% Net construction revenue 16,596 16,509 0.5%

3.2 Costs and expenses

In 2014, the cost of services rendered and administrative and selling expenses totaled R$ 2.45 billion, up 7.2% from 2013, as follow:

R$ thousand 2014 2013 Var. (%) Cost of services rendered + selling and administrative expenses 2,450,655 2,286,481 7.2% Personnel 1,085,758 1,011,363 7.4% Depreciation and amortization 485,605 428,033 13.5% Electrical energy 258,755 220,560 17.3% Outsourced services 371,391 394,459 -5.8% Materials 129,885 118,939 9.2% Sundry operating costs 54,457 51,565 5.6% Tariffs transferred to municipalities 73,117 71,933 1.6% Provision for impairment of trade receivables 92,358 73,672 25.4% Tax credits (100,671) (84,044) 19.8% Cost of services rendered + selling and administrative expenses (excluding depreciation/amortization) 1,965,049 1,858,447 5.7%

The items that most impacted COPASA MG's costs in 2014, compared to 2013, were:

 Personnel: increase of 7.4%, mainly due to the collective bargaining agreement signed, with a base date of May 1, considering that the salaries and benefits have been adjusted by the National Consumer Price Index (INPC), which changed by R$ 5.82%, while the meal ticket has been adjusted by 10%; an increase of 5.7% in the Company’s headcount, and expenses for the Voluntary Retired Employees and/or Retirees Program (PDV), which totaled R$ 28.2 million in 2014, compared to R$ 26.8 million in 2013.

 Depreciation and amortization: increase of 13.5% resulting from the onset of depreciation/amortization of assets, with the addition of equity items and works concluded during the comparative period.

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 Electrical power: increase of 17.3% in 2014, mainly as a result of the adjustment of the electrical energy tariff by approximately 14.6% in April 2014, the increase in consumption due to the long drought period and the Company's growth.

 Outsourced services: decreased by 5.8%, mainly due to the elimination of the second default notice, as mentioned in Item 4.1 - Revenue. If this item had not been considered, expenditure would have been in line with the comparative periods. The increase in expenses for cleaning, vigilance and reception was offset by the decrease in expenditure on transportation services contracted and on data transmission.

 Materials: increase of 9.2% basically due to higher expenses for treatment materials following price adjustments, and increased consumption of chemicals due to the worsening water quality in certain regions due to the period of drought. Expenditure on "vehicle fuel, lubricants and parts" also increased due to the increase in the prices of fuel and also in the consumption.

 Tax credits: increase of 19.8% due to the change in the criteria for appropriation of such credits from September 2013. Until then, the credits were appropriated upon the effective consumption of the products, and from September 2013, they started to be considered upon the acquisition of the products, thus affecting comparability. The increase is also related to the elevation of the expenditure on electrical power, inputs and depreciation, which are the main items that generate these credits.

3.3 Other operating income (expenses)

In 2014, other operating income increased by 1.5%, mainly due to the increase in the reversal of judicial proceedings following the reclassification and derecognition of proceedings, and also because of the donations and subsidies for investments in sewage treatment plants, related to funds from tax incentives from the Water Basin Depollution Program (PRODES).

Other operating expenses increased by 95.5% because of the increase in other expenses, due to the increase in the net actuarial liability of the healthcare plan, which included the retirement due to disability plan, and the increase in eventual or extraordinary losses, due to the increase in the provisions for new judicial proceedings, as well as the monetary adjustment and reclassification of existing processes; in addition to losses with construction in progress related to the construction of a retaining basis for the Ferrugem stream. The related amounts in the comparative periods were as follow:

Other operating income (expenses) - R$ thousand 2014 2013 Var. (%) Other operating income 110,347 108,727 1.5% Revenue from technical services 2,424 1,673 Reversal of non-deductible provisions 26,525 33,057 Recovery of accounts written off 53,296 66,193 Other income 28,102 7,804

Other operating expenses (159,749) (81,716) 95.5% Non-recurring or unusual losses (102,764) (53,653) Other expenses (56,985) (28,063)

Other operating income, net (49,402) 27,011 -282.9%

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3.4 Finance income and costs

Regarding finance income, the decrease in "interest" and in "financial investment actual gains" was mainly due to the lower level of cash available to be invested in short term securities.

The increase in finance costs reflects the increase in the Company's indebtedness and the foreign exchange variations of the debt in US Dollars and in Euros.

R$ thousand 2014 2013 Var. (%) Finance income 77,675 85,834 -9.5% Monetary and foreign exchange variations 21,765 14,201 Interest 9,894 9,908 Actual gains on financial investments 28,481 37,601 Capitalization of financial assets/other 17,534 24,125

Finance costs (264,486) (244,603) 8.1% Monetary and foreign exchange variations (52,301) (58,036) Interest expenses (210,297) (181,481) Sundry (1,888) (5,086)

Finance result, net (186,811) (158,769) 17.7%

3.5 Results

The parent company's profit in 2014 totaled R$ 318.1 million, which represents a return on equity of 5.8%. This decrease occurred because costs and expenses grew more than income, which was negatively impacted by factors such as the decrease in the billed volume per connection and extraordinary expenses incurred, as detailed in "other operating expenses".

Profit (R$ million)

Earnings per share (R$)

3.6 Stockholders' compensation

In compliance with the Dividend Policy approved at the Annual and Extraordinary General Meeting held on April 28, 2009, the Company's Board of Directors decided, for 2013, to pay dividends in the form of interest on equity at a percentage of 35% of profit, as adjusted by the decrease or increase in the amounts specified in items I, II and III of Article 202 of Law 6,404/76.

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The payouts took place in the form of interest on equity, subject to approval by the General Meeting of Stockholders, as set out in the bylaws. At the General Meeting of Stockholders, the payouts for the year are confirmed. The table below shows the declared interest on equity for 2014.

Board meeting Gross amount Gross value per Reference Credit date Payout date date (R$ million) share (R$) 1Q14 3/21/2014 3/24/2014 34.8 0.2913 5/20/2014 2Q14 6/23/2014 6/24/2014 33.4 0.2797 8/22/2014 3Q14 9/19/2014 9/22/2014 32.7 0.2745 11/18/2014 4Q14 3/18/2015 3/24/2015 2.45 0.02055 * Accumulated 103.34 0.8660 2014 *The payment date shall be set up at the General Meeting of Stockholders that will discuss the financial statements for 2014.

For 2015 and subsequent years, as defined in the Dividends Policy, the decision on the percentage to be paid out to stockholders will be made by the Board of Directors, after the Company's results, investment perspectives and tariff review expectations, as well as Brazil's macroeconomic conditions, have been analyzed. This decision is taken prior to the closing of the first quarter of each year.

4. Shareholding structure and share performance

COPASA MG shares are traded on BM&FBOVESPA under the ticker symbol CSMG3, and the Company has been listed on the New Market segment since its Initial Public Offering (IPO) was carried out in 2006.

The Company's capital amounted to R$ 2.77 billion, comprising 119,684,430 common shares. Of this total, 51.1% belong to the Minas Gerais State Government, 48.6% are outstanding (free float), and the remaining 0.3% remain in treasury.

In 2014 the share price, adjusted for interest on equity, decreased by 30.0%, while in the same period Ibovespa (BM&FBOVESPA's index), which is an indicator of the average performance of those shares which best represent the Brazilian capital market, declined by 2.9%. At December 31, 2014, the Company's market value approximated R$ 3 billion.

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In 2014, COPASA MG's shares were present in 100% of trading sessions, with average daily trading volume of R$ 8.9 million, an average of 1,410 trades and around 280,000 shares negotiated per day.

COPASA MG’s shares are included in leading indices at the BM&FBOVESPA, such as the Differentiated Tag-Along Stock Index (ITAG), Differentiated Corporate Governance Index (IGC), Corporate Governance New Market Index (IGNM), Small Caps Index (SMLL), and Corporate Governance Trade Index (IGCT).

5. Corporate governance and Investor relations

When it entered into BM&FBovespa's New Market segment, COPASA MG voluntarily committed to adopting stricter corporate governance practices than those required by legislation.

Among the rights of the Company's stockholders, as guaranteed because of the Company's participation in the New Market, the following are highlighted:  Right to vote, for COPASA MG has only common shares

 Free float (outstanding shares) of at least 25%, while, at December 31, 2014, the Company held 48.6% of the outstanding shares

 Granting to minority stockholders of 100% tag along rights - that is, minority stockholders are granted the same conditions offered to the controlling stockholders in the event of an offer to acquire the controlling stake in the Company

 A Board of Directors made up of at least 20% of independent directors, and COPASA MG had 55.5% of independent directors at December 31, 2014

 Resolution of any dispute or controversy that may arise between the Company, its stockholders, officers and members of the supervisory Board, through the Arbitration Chamber of BM&FBOVESPA, as per the arbitration clause contained in the Company's bylaws.

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As regards the Investor Relations policy, the Company seeks to provide sufficient information for decision- making in relation to investments in COPASA MG’s shares, through the disclosure of transparent, timely and quality information and, as such, reduces any diverging information.

Accordingly, the Company discloses on its Investor Relations website information about the financial statements, operations and the respective analyses, as well as corporate and business information, among other items, systematically laid out and updated, in Portuguese and English. Investors, analysts and the market in general have an email address, [email protected], at their disposal, through which they can send their suggestions, questions and doubts, which are answered as soon as possible.

Reports on the performance of COPASA MG are also prepared and made available to the market in general. The most important reports include the Operational Release, which contains information on operational performance and is disclosed monthly, and the Earnings Release, which presents detailed quarterly results. The Company also holds quarterly conferences for the disclosure of results and clarification of doubts, with the participation of the Company's senior management.

COPASA MG participated in capital market events in 2014, including the meetings of the Association of Capital Markets Investment Analysts (APIMEC) for the presentation and open discussion of COPASA MG's results, held in Belo Horizonte, Rio de Janeiro and São Paulo.

During the year, the Company also received an expressive number of visits by investors and market analysts of both the domestic and foreign markets. It also participated in conferences, seminars and meetings. As a result of this proactive communication with the market, there were, in December 2014, 13 institutions preparing reports containing recommendations about the Company.

6. Technological prospection and innovation

Technological prospection and innovation at COPASA MG are based on studies and tests to provide evidence of the applicability, quality, functionality and cost-benefit relationships of new products and/or processes in the Company, aiming at the optimization and better rendering of services to its customers. In order to do this, the Company has entered into technical cooperation agreements with universities, research centers and suppliers of the sanitation sector in general.

In 2014, among other projects, the Company carried out studies involving the use of a ventilator for the effluent pond, with a horizontal axle and tubular fans which intensify the water flow, thus generating more oxygenation and better elimination of odors, which in turn means more energy efficiency.

Other highlights include the good results obtained from the removal of the excess natural fluor in the production sources, using powdered bone activated coal. Scale-in demonstration studies are being carried out for the purpose of assessing not only the ideal dosage (removal only of the fluor amount exceeding that established by the Health Ministry Ordinance 2914), but also the need for other chemical inputs as well as the impact on the treatment costs.

Among the technologies tested and implemented by the Company is the polycarbonate box, which is installed in the frontal wall and allows access to the consumption meter for measurement and operating service purposes, even if the gate of the real estate where the meter is located is closed, without compromising the safety of the equipment.

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Regarding Trademarks and Patents, COPASA MG currently has 18 letters patent (inventions and utility models), 64 trademarks and nine computer software packages, which are the subject of registrations and registration requests with the National Institute of Industrial Property (INPI).

There is also the Cidades do Futuro (Cities of the Future) R&D strategic project, carried out by CEMIG Distribuição, which involves a number of areas of knowledge, implementing the management of consumption units through the automated reading of measurement data, creating a new concept for customer relationships. COPASA MG and CEMIG are partners in a technical cooperation agreement for integrated water and energy consumption measurement.

Also, in 2014 the reference term was concluded for the contracting of the Company's Automation and Industrial IT Masterplan (PDAI). This masterplan will guide all of the Company's actions regarding the automation of the Company's processes, by defining guidelines and priorities to guarantee that future automation projects are adequate, establishing mechanisms which will allow the automation processes to bring efficiency to the Company.

7. Social responsibility

COPASA MG is a social-minded company which aims at the EXEMPLAR ethical behavior and transparency, among many other values. It makes a number of investments in cultural, sports and social projects, including fostering the education and development of the communities involved, for instance a Children's Choir (Coral Infantil Gotas da Canção) and COPASA's Youth Orchestra. Major institutional projects include: Grupo Contadores de Histórias, Encontro Marcado, COPASA's choir, and COPASA's Art Gallery.

The Programa Chuá is to be highlighted. This program was created in 1986 for the purpose of expanding sanitation and environmental education throughout the State of Minas Gerais and, especially, in all units operated by the Company. In addition to approaching the subject of water on our planet, this program also brings notions about basic sanitation and water-transmitted diseases, in addition to important information on water basins and sustainability. More than 2.5 million students have participated in this Program since its creation, receiving information from the company through lectures and monitored visits.

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7.1. Human resources

COPASA MG (parent company) ended 2014 with 12,540 employees, as set out in the following table:

Employees per professional category 9448 10000 8785 8000 6000 4000 3079 3092 2000 0 2013 2014

Operating Administrative

Because of employees leaving the companies, the need for replacements, the creation of organization units and new systems becoming operational, more than 900 professionals from a number of fields have been hired through a public selection process, and this was one of the factors which contributed, in 2014, to the Company fulfilling its strategy of maintaining and, more importantly, increasing its actuation in the market.

The Company, being aware of how important it is to value its employees in order to encourage the constant organizational performance, COPASA MG applies a meritocracy in terms of career development, referring to the Management Excellence Model (MEG). The highlights among these are the labor force functional movements for ascendant placements, internal recruitment and selection for management and effective positions, and performance evaluations based on competence, which, in 2014, benefited 2,736 employees.

In 2014, the Company offered 35,826 training opportunities, amounting to 401,273 training hours. It also sponsors 216 technical courses by reimbursing employees for 90% of the amounts paid in registrations and monthly tuition.

For retired employees or employees who have met the conditions to retire who spontaneously indicate their intention to retire, COPASA MG has the Voluntary Redundancy Program for Retirees and/or Employees Eligible for Retirement (PDV), which allowed the redundancy of 896 employees, of which 174 retired in 2014.

7.2 Social programs

Among the many social projects carried out by COPASA MG, we highlight:

Rural sanitation: COPASA MG takes part in State Government actions intended to serve small locations which lack sanitation infrastructure, by implementing a number of social programs in municipalities, rural communities and public state schools, under agreements and/or contracts. The programs are designed to improve the quality of life and health of populations residing in locations where COPASA MG does not hold a service provision concession. To this end, COPASA MG has implemented simplified water supply, sewage and solid waste disposal systems.

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Underage Apprentice Program: in partnership with the National Service for Industrial Training (SENAI), 238 young people aged 16 to 24 were hired in 2014, contributing to their qualification and development and therefore increasing their chances of entering the labor market.

Confia em 6%: the COPASA MG Program for Employee Donations to the Children’s and Adolescents' Fund - CONFIA EM 6%, gives Company's employees the opportunity to donate part of their income tax payable to charities assisting impoverished children and teenagers. In 2014, the Company collected R$ 800 thousand, which represented an increase of 6% on 2013, with the adhesion of 994 employees, a 9% increase compared to the previous edition. A total of 44 Children’s and Teenagers’ Rights Councils benefited, as well as 73 units of a number of municipalities.

Other programs and actions

Maintenance of health and quality of life for employees and their family members

In addition to a broad Benefit Program, COPASA MG has specific programs for the health and well-being of its employees and their families.

Support, sponsorship and relevant events

COPASA MG encourages the production, creation and transmission of a number of cultural events, investing in the quality and reach of performing and plastic arts, and strengthening its role as a transformation agent for the economic and social development of the areas where it operates. When supporting and sponsoring events, the Company promotes the spreading of the arts throughout the State of Minas Gerais, offering leisure, culture and entertainment for its people.

8. Environmental responsibility

Environmental policy

COPASA MG's Environmental Management Policy is part of the Company's Strategic Planning, effective from 2013 to 2017. Its strategic goal is to "strengthen social-environmental actions", by taking measures in connection with social and environmental matters relating to the Company's processes and services.

To ensure the quality and amount of water from sources used for public supply, COPASA MG currently has 15 environmental reserves throughout the state, totaling more than 24 thousand hectares of preserved areas. Furthermore, it promotes environmental education actions to enhance public awareness, by investing in projects and actions which are focused on the preservation of the water resources of the State of Minas Gerais and the practice of environmental sustainability.

Environmental permits

The Company's projects have been analyzed by the environmental area, which also arranges the required environmental permits. In 2014, the Company obtained 1,978 permits for water capture, 168 environmental licenses for water and sewage works and permits for obtainable flows totaling 60,43m³/s. Also, the Company made requests to drill 329 deep wells and obtained permits to drill 346 new wells.

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Water harvesting

COPASA MG owns or has rights to use land for harvesting water for its water production systems (position at December 31, 2014):

Federal and state authorization Number Volume authorized for use

Surface harvesting 648 48.53m³/s

Underground harvesting 1,330 11.90m³/s

Total authorized 1,978 60.43m³/s

Payment for use of water resources: The charge for the use of water resources is an economic tool for water management provided for in the National Policy of Water Resources and the Minas Gerais State Water Resources Policy.

In 2014, the Company paid a total of R$ 12.66 million on these charges, including R$ 11.48 million at the state level (for the Piracicaba, Jaguari, Araguari, Velhas, Piracicaba, Caratinga, Piranga, Suaçuí Grande, Santo Antonio and Manhuaçu river basins), and R$ 1.17 million at the federal level (Doce, Paraíba do Sul, São Francisco, PCJ/Piracicaba, Capivari and Jundiaí river basins).

River basin management committees

COPASA MG has representatives on the 36 State Committees (CBHs) in Minas Gerais and on four Federal River Basin Committees, having development projects to be represented on all of them. Its activities are intended to ensure actions that promote the recovery and preservation of the state's water resources.

Environmental education actions

 Environmental Education Center (CEAM): the CEAM Barreiro is located in a Special Protection area in Belo Horizonte for environmental preservation purposes.

 Environmental education in schools: it promotes seminars, lectures and activities focusing on sanitation matters for approximately 1,430 students.

 Basin Protection Program: this program is intended to recover, protect and preserve sub-basins of those water sources used by COPASA MG, so as to ensure their useful lives and the ongoing harvesting of water for public supply, as well as to protect the environment. The program is carried out in partnership with farmers who support the program success. In 2014, this program benefited rural communities in 61 municipalities.

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Environmental reserves

COPASA MG currently has 15 environmental reserves across the state, totaling 24,297 hectares of preserved area. These areas have 24 hour surveillance in order to mitigate risks to the water sources located in the area, the presence of trespassers (fishermen, hunters), fire and the degradation of native flora and fauna.

Monitoring of water sources

COPASA MG monitors its 1,588 surface and underground water sources in the cities operated by the Company across the State of Minas Gerais. It also: (i) monitors the quality of its water sources in 400 river- measuring stations, (ii) controls a network of pluviometers in 540 locations, and (iii) performs the self- monitoring of 912 sampling points in 189 ETEs. All collected data are stored in specific databases and made available for consultation, thus helping to establish the geo-hydrological and hydroclimatic characteristics of the regions of the State of Minas Gerais.

Manuelzão Project

COPASA MG has conducted studies to monitor the Rio das Velhas basin, which benefited from environmental interventions carried out by the company in the Belo Horizonte metropolitan region, as well as social movements focused on the sub-basins and micro-basins. In 2014, a new agreement was entered into with the Research Development Foundation (FUNDEP) to develop mobilization, monitoring and education actions consistent with the ecosystem approach for Rio das Velhas, to use the Manuelzão Project and COPASA MG’s actions to meet the targets involving the improvements in water quality and the recovery of the fauna throughout the river extension. Fishermen and local residents declare that the river is now under revitalization. The most symbolic positive result may be that fish can again be found in the river, and some species have already been caught in a region close to Lagoa Santa.

9. Awards and Recognition

In 2014, COPASA MG was recognized for its excellent work, corporate governance practices, environmental preservation actions, human resources policies, and for efficient communications with the media. These awards were granted by some of the most relevant Brazilian institutions and testify to the Company's keen interest in operating with transparency, emphasizing quality, and serving the Minas Gerais state municipalities with efficiency and swiftness.

Sanitation Quality National Award (PNQS) - 2014 - COPASA MG was the only company ever to receive the highest award of the Sanitation Quality National Award (PNQS), in the IV level, with the Diamond Trophy, because of its management excellence model.

National Quality Award (PNQ) - COPASA MG was recognized as a "Finalist" by the Quality National Foundation (FNQ), based on its compliance with most of the excellence foundations established by FNQ.

XVI Prêmio Minas - Desempenho Empresarial - Mercado Comum - 2013/2014 (XVI Minas Award - Corporate Performance - Common Market - 2013/2014) - COPASA MG was recognized as one of the Top and Largest Companies of the State of Minas Gerais, in the "Corporate Excellence" category.

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"The companies with the best communication with journalists" - This was the fourth year in a row that COPASA MG received this award, which is granted by the Negócios da Comunicação (Communication Business) magazine.

Época 360 Award - COPASA MG received the Época Negócios 360o. Award for the third year in a row, in the Water and Sanitation category.

10. Relationship with the independent auditors

In compliance with Brazilian Securities Commission (CVM) Instruction 381 of January 14, 2003, COPASA MG and its subsidiaries state that the independent firm that performed the external audit of the Company's financial statements for the year ended December 31, 2014 was PricewaterhouseCoopers Auditores Independentes. During 2014, the external auditors only rendered services related to the audit of the financial statements.

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Annual social report - 2014 Company: Companhia de Saneamento de Minas Gerais - COPASA MG 1 - Basis of calculation 2014 amount (R$ thousand) 2013 amount (R$ thousand) Net revenue - water and sewage (NR)¹ 3,132,154 3,007,736 Total net revenue² 4,110,455 3,714,818 Operating Income (OI)³ 432,640 566,158 Gross payroll (GP) 1,085,758 1,011,363 Amount Amount 2 - Internal social indicators % on GP % on NI % on GP % on NI (thousand) (thousand) Food 134,548 12.39% 4.30% 116,746 11.54% 3.88% Compulsory social charges 239,846 22.09% 7.66% 235,379 23.27% 7.83% Private pension plan 38,008 3.50% 1.21% 37,282 3.69% 1.24% Health 50,342 4.64% 1.61% 47,425 4.69% 1.58% Safety and health at work 7,813 0.72% 0.25% 6,928 0.69% 0.23% Education 3,125 0.29% 0.10% 2,829 0.28% 0.09% Culture 223 0.02% 0.01% 191 0.02% 0.01% Training and professional development 1,623 0.15% 0.05% 1,912 0.19% 0.06% Day-care or day-care allowance 850 0.08% 0.03% 846 0.08% 0.03% Profit sharing 19,868 1.83% 0.63% 32,670 3.23% 1.09% Other 12,414 1.14% 0.40% 11,649 1.15% 0.39% Total - Internal social indicators 508,660 46.85% 16.24% 493,857 48.83% 16.42% Amount Amount 3 - External social indicators % on OI % on NI % on OI % on NI (thousand) (thousand) Education 1,754 0.41% 0.06% 1,084 0.19% 0.04% Culture 3,759 0.87% 0.12% 3,355 0.59% 0.11% Health and sanitation³ 358,849 82.94% 11.46% 277,249 48.97% 9.22% Sports 841 0.19% 0.03% 874 0.15% 0.03% Fight against hunger and food security 0 0.00% 0.00% 29 0.01% 0.00% Other 440 0.10% 0.01% 535 0.09% 0.02% Total contributions to society 365,643 84.51% 11.67% 283,126 50.01% 9.41% Taxes (excluding social charges) 366,529 84.72% 11.70% 381,832 67.44% 12.69% Total - External social indicators 732,172 169.23% 23.38% 664,958 117.45% 22.11% Amount Amount 4 - Environmental indicators % on OI % on NI % on OI % on NI (thousand) (thousand) Investments related to the Company's production/operation 423,444 97.87% 13.52% 363,947 64.28% 12.10% Investments in external programs and/or projects 13,267 3.07% 0.42% 7,335 1.30% 0.24% Total environmental investments 436,711 100.94% 13.94% 371,282 65.58% 12.34% In relation to annual goals set to minimize waste, consumption in general in (X) does not have goals ( ) meets from 51 to 75% production/operations and increase efficiency in the use of natural resources: ( ) meets from 0 to 50% ( ) meets from 76 to 100% 5 - Workforce indicators 2014 2013 Number of employees at the end of the year 12,540 11,864 Number of employees hired in the year 1,048 767 Number of outsourced employees4 1,150 1,340 Number of interns 109 103 Number of employees over 45 years of age 5,469 5,262 Number of women working in the Company 1,213 1,177 % of leadership positions held by women 20.70% 20.98% Number of black people working in the Company 5,503 5,031 % of leadership positions held by black people 15.42% 14.28% Number of people with disabilities or special needs 547 469 6 - Significant information on corporate citizenship 2014 Goals for 2015 Ratio between the highest and lowest compensation in the Company 23.82 ND Total number of work accidents 297 282 (X) Senior (X) Senior The social and environmental projects developed by the Company were ( ) Senior management ( ) All ( ) Senior management ( ) All employees defined by: management and employees management and Management Management ( ) Senior (X) All + ( ) Senior (X) All + management ( ) All Occupational management ( ) All Occupational Workplace safety and health levels were defined by: and employees Health and and employees Health and Management Safety Management Safety

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Commission Commission (Cipa) (Cipa) ( ) encourages ( ) will In relation to freedom of association of unions, collective bargaining rights and ( ) is not (X) follows ILO ( ) will not (X) will follows and follows encourage and internal representation of workers, the Company: involved rules get involved ILO rules ILO rules follows ILO rules ( ) Senior ( ) Senior ( ) Senior management (X) All ( ) Senior management (X) All The private pension plan includes: management and employees management and employees Management Management ( ) Senior ( ) Senior ( ) Senior management (X) All ( ) Senior management (X) All Profit sharing arrangements benefit: management and employees management and employees Management Management In selecting suppliers, the same ethical and social responsibility and ( ) are not ( ) are (X) are ()willnotbe ( ) will be (X) will be environmental standards adopted by the Company: considered suggested required considered suggested required ( ) organizes ( ) is not (X ) is ( ) will not (X ) will be ( ) will organize In relation to employee participation in voluntary programs, the Company: and involved supportive get involved supportive and encourage encourages with the with the Consumer Consumer with the with the with the with the Protection Protection Total number of consumer complaints and criticisms filed: Company: Judiciary: Company: Judiciary: Agency Agency 1,135,513 2,391 1,108,341 2,343 (Procon): (Procon): 98 88 with the with the Consumer Consumer with the with the with the with the Protection Protection % of complaints and criticisms addressed or resolved: Company: Judiciary: Company: Judiciary: Agency Agency 100% 39.52% 100% 60% (Procon): (Procon): 100% 100% Total value added to distribute (R$ thousand) In 2014: 2,058,949 In 2013: 2,094,570

26.69% government 44.82% employees 26.60% government 41.71% employees Distribution of value added: 5.02% stockholders 13.04% third-parties 6.66% stockholders 11.65% third-parties 10.43% withheld 13.38% withheld 7 - Other information

CNPJ 17.281.106/0001-03, sector: sanitation. Clarifications about the information reported: Social Responsibility Division, telephone +55 31 3250.1560, email: [email protected]. The Company does not use child or forced 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 Responsibility Report for 2013 considers the amount of Net Revenue from the Company's core activities, that is, water supply and sanitary sewage services for calculation of the indicators, not considering Construction Revenue arising from conversion to IFRS. 2 - Net revenue from water and sewage + construction revenue. 3 - Increase in the number of families benefiting from the Social Tariff, in conformity with Regulatory Decision 020/2012 of the Minas Gerais State Regulatory Water and Wastewater Agency (ARSAE MG). 4 - The number of outsourced employees is estimated considering the labor required to perform service agreements, because Copasa does not hire third parties directly.

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Balance sheet

Note Parent company Consolidated ASSETS 12/31/2014 12/31/2013 12/31/2014 12/31/2013

CURRENT ASSETS

Cash and cash equivalents 06 329,068 260,481 331,039 261,938 Trade receivables 07 686,085 697,105 690,726 702,205 Inventory 41,251 34,486 43,907 37,166 Taxes recoverable 19,829 23,283 21,405 24,436 Technical cooperation agreements 16 37,394 - 49,863 12,298 Bank accounts - agreements 16 24,493 36,688 25,151 36,794 Sundry receivables 31,789 27,665 27,310 25,201

Total current assets 1,169,909 1,079,708 1,189,401 1,100,038

NON-CURRENT ASSETS

Long term receivables: Trade receivables 07 197,511 212,580 197,511 212,580 Collateral for financing 07 137,208 133,410 137,208 133,410 Deferred income tax and social contribution 15 134,585 118,944 134,585 118,944 Receivables from subsidiaries 07/26 16,432 109,790 - - Restricted investments 07 81,774 97,380 81,774 97,380 Available-for-sale financial assets 21 40,748 48,638 40,748 48,638 Financial assets - concession agreements 05 558,964 494,836 558,964 494,836 Sundry receivables 07 49,333 54,524 49,603 54,835 1,216,555 1,270,102 1,200,393 1,160,623 Investments 08 13,838 260 260 260 Intangible assets 09 7,558,877 6,900,753 7,558,877 6,900,755 Property, plant and equipment 10 195,462 205,478 213,044 226,794

Total non-current assets 8,984,732 8,376,593 8,972,574 8,288,432

TOTAL ASSETS 10,154,641 9,456,301 10,161,975 9,388,470

26 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG

Years ended December 31 All amounts in thousands of Reais (continued)

Balance sheet

Note Parent company Consolidated LIABILITIES AND EQUITY 12/31/2014 12/31/2013 12/31/2014 12/31/2013

CURRENT LIABILITIES

Borrowing 12 326,153 196,259 327,014 196,663 Debentures 12 281,779 275,267 281,779 275,267 Trade payables 114,433 135,338 128,471 156,104 Taxes, contributions and social charges 11 50,289 53,385 50,836 53,914 Income tax and social contributions payable - 379 - 379 Taxes payable in installments 11 47,403 41,144 47,403 41,144 Provision for vacation pay 98,436 92,023 99,145 92,679 Employee profit sharing 14 19,868 33,087 19,868 33,087 Technical cooperation agreements 16 - 6,547 - - Retirement benefit obligations 17 28,730 26,409 28,730 26,409 Interest on capital 18 2,516 31,646 2,516 31,646 Electrical power 6,930 10,832 7,433 11,202 Other obligations 11 29,444 12,317 29,625 12,343

Total current liabilities 1,005,981 914,633 1,022,820 930,837

NON-CURRENT LIABILITIES

Borrowing 12 1,263,636 1,192,469 1,265,276 1,193,498 Debentures 12 1,563,261 1,492,272 1,563,261 1,492,272 Public-private partnership 09 279,885 - 279,885 - Taxes payable in installments 11 197,511 212,580 197,511 212,580 Provision for legal claims 13 113,758 76,474 115,782 77,753 Retirement benefit obligations 17 121,582 106,010 121,582 106,010 Provision for investment losses 8 13,171 86,346 - - Other obligations 11 59,292 38,158 59,294 38,161

Total non-current liabilities 3,612,096 3,204,309 3,602,591 3,120,274

EQUITY

Capital 18 2,773,985 2,773,985 2,773,985 2,773,985 Revenue reserves 18 2,726,965 2,508,330 2,726,965 2,508,330 Treasury shares 18 (8,576) (8,576) (8,576) (8,576) Carrying value adjustments 18 44,190 63,620 44,190 63,620

Total equity 5,536,564 5,337,359 5,536,564 5,337,359

TOTAL LIABILITIES AND EQUITY 10,154,641 9,456,301 10,161,975 9,388,470

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

27 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG

Years ended December 31 All amounts in thousands of Reais unless otherwise stated (A free translation of the original in Portuguese)

Statement of income

Note Parent company Consolidated 2014 2013 2014 2013

Net sales and services revenue 22 4,110,455 3,714,818 4,131,432 3,733,397 Cost of sales and services 23 (2,703,759) (2,322,956) (2,723,280) (2,341,918)

GROSS PROFIT 1,406,696 1,391,862 1,408,152 1,391,479

Selling expenses 23 (263,311) (230,568) (266,888) (234,983) Administrative expenses 23 (445,290) (423,531) (450,812) (430,095) Other operating income 22 110,347 108,727 113,765 111,733 Other operating expenses 23 (159,749) (81,716) (164,602) (79,183) Employee profit sharing 23 (19,818) (32,670) (19,818) (32,670) Share of results of subsidiaries 08/23 (9,425) (7,177) - - (787,246) (666,935) (788,355) (665,198)

OPERATING PROFIT 619,450 724,927 619,797 726,281

Finance income 25 77,675 85,834 76,465 84,687 Finance costs 25 (264,485) (244,603) (263,622) (244,747) FINANCE RESULT, NET (186,810) (158,769) (187,157) (160,060)

PROFIT BEFORE TAXATION 432,640 566,158 432,640 566,221

Current income tax and social contribution 15 (122,106) (138,681) (122,106) (138,744) Deferred income tax and social contribution 15 47,607 (7,682) 47,607 (7,682) (114,499) (146,363) (114,499) (146,426)

PROFIT FOR THE YEAR 318,141 419,795 318,141 419,795

Outstanding shares at the end of the year 119,327,217 119,327,217 119,327,217 119,327,217

Basic and diluted earnings per share for the year attributable to holders of common shares of the parent company (Note 18) - R$ 2.67 3.52 2.67 3.52

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

28 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG

Years ended December 31 All amounts in thousands of Reais (A free translation of the original in Portuguese)

Statement of comprehensive income

Parent company Consolidated Note 2014 2013 2014 2013

PROFIT FOR THE YEAR 318,141 419,795 318,141 419,795

Other comprehensive income Items that will not be reclassified to profit or loss Actuarial gain (loss) on retirement benefits 17 (10,389) 100,485 (10,389) 100,485

Items that may be later reclassified to profit (loss) Available-for-sale financial assets (5,207) 13,060 (5,207) 13,060

OTHER COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX EFFECTS (15,596) 113,545 (15,596) 113,545

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 302,545 533,340 302,545 533,340

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

29 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG Years ended December 31 All amounts in thousands of Reais (A free translation of the original in Portuguese)

Statement of changes in equity - Parent company and Consolidated

Attributable to the owners of the Parent Capital reserves Revenue reserves Carrying Share Treasury Tax Profit Retained value capital shares Legal incentives retention earnings adjustments Total AT DECEMBER 31, 2012 (RESTATED) 2,773,985 (8,576) 194,455 27,485 1,993,105 - (45,566) 4,934,888

Comprehensive income for the year Profit for the year - - - - - 419,795 - 419,795 Actuarial gain on retirement benefits (Note 17) ------100,485 100,485 Fair value of available-for-sale financial assets ------13,060 13,060 Total comprehensive income for the year - - - - - 419,795 113,545 533,340

Proposed distribution: . Legal reserve - - 20,990 - - (20,990) -- . Profit retention - -- - 263,582 (263,582) -- . Interest on capital (Note 18) - - - - - (139,582) - (139,582) Other changes in equity - - - - 8,713 - - 8,713 Amortization of monetary adjustments to adjusted assets - 96/97 - - - - - 6,604 (6,604) - Deferred income tax and social contribution on adjusted assets - 96/97 - - - - - (2,245) 2,245 -

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

30 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG Years ended December 31 All amounts in thousands of Reais (continued)

Statement of changes in equity - Parent company and Consolidated

Attributable to the owners of the Parent Capital reserves Revenue reserves Carrying Share Treasury Tax Profit Retained value capital shares Legal incentives retention earnings adjustments Total AT DECEMBER 31, 2013 2,773,985 (8,576) 215,445 27,485 2,265,400 - 63,620 5,337,359

Comprehensive income for the year Profit for the year - - - - - 318,141 - 318,141 Actuarial loss on post-employment benefit obligations (Note 17) ------(10,389) (10,389) Fair value of available-for-sale financial assets ------(5,207) (5,207) Total comprehensive income for the year - - - - - 318,141 (15,596) 302,545

Proposed distribution: . Legal reserve - - 15,907 - - (15,907) -- . Tax incentive retention - -- 6,975 - (6,975) -- . Profit retention - -- - 195,753 (195,753) -- . Interest on capital (Note 18) - - - - - (103,340) - (103,340) Amortization of monetary adjustments to adjusted assets - 96/97 - - - - - 5,810 (5,810) - Deferred income tax and social contribution on adjusted assets - 96/97 - - - - - (1,976) 1,976 -

AT DECEMBER 31, 2014 2,773,985 (8,576) 231,352 34,460 2,461,153 - 44,190 5,536,564

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

31 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG Years ended December 31 All amounts in thousands of Reais (A free translation of the original in Portuguese)

Statement of cash flow

Parent company Consolidated 2014 2013 2014 2013 Cash flow from operating activities: Profit for the year 318,141 419,795 318,141 419,795

Adjustments to reconcile profit with net cash

Provision for impairment of trade receivables 92,358 73,672 95,376 75,649 Recovery of accounts written off (53,296) (66,193) (53,612) (66,582)

Charges and monetary/foreign exchange variations, net 17,143 16,096 18,556 17,521 Interest income and expenses 194,881 175,754 194,974 175,866 Deferred income tax and social contribution (7,607) 7,682 (7,607) 7,682 Equity accounting result 9,425 7,177 - - Net disposal of intangible assets and property, plant and equipment 23,130 28,902 24,465 31,193 Depreciation and amortization 485,605 428,034 488,130 430,618 Constitution (reversal) of provisions 42,501 (209) 43,471 344 Provision for retirement benefits 60,733 61,366 60,733 61,366 Financial assets - (12) - (12) Subsidy revenue (6,976) - (6,976) - Net margin of construction revenue (16,596) (16,509) (16,596) (16,509) Adjusted profit 1,159,442 1,135,555 1,159,055 1,136,931

Decrease (increase) in operating assets Trade receivables 25,629 (95,988) 23,384 (98,016) Inventory (6,765) (1,365) (6,741) (1,979) Taxes recoverable 3,454 (2,112) 3,033 (2,525) Banks and investments in connection with agreements 12,195 10,792 11,643 30,922 Collateral for financing 15,839 8,171 15,839 8,171 Redemption of marketable securities/restricted investments 46,710 - 46,710 - Receivables from subsidiaries (3,431) (3,856) -- Other financial assets (12,972) (15,031) (12,972) (15,031) Other (1,369) (24,867) (1,261) (24,748)

Increase (decrease) in operating liabilities Trade payables (20,905) (22,059) (27,633) (16,337) Taxes, contributions and social obligations (3,475) 6,471 (3,456) 6,518 Provisions for vacation pay 6,413 7,370 6,465 7,509 Employee profit sharing (13,219) 5,119 (13,219) 5,119 Technical cooperation agreements (43,941) (25,304) (37,565) (52,032) Contingencies (5,217) (3,705) (5,445) (3,365) Retirement benefit obligations (37,396) (36,559) (37,396) (36,559) Electrical energy/other 16,779 14,810 17,068 14,876 Interest paid (231,626) (233,779) (231,718) (233,854) Payments of actuarial liabilities (21,184) (23,811) (21,184) (23,811) Taxes paid in installments (42,694) (37,140) (42,694) (37,140)

Net cash provided by operating activities 842,267 662,712 841,913 664,649

32 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG Years ended December 31 All amounts in thousands of Reais (continued)

Parent company Consolidated 2014 2013 2014 2013 Cash flow from investment activities: Redemption of financial assets and restricted investments - 118,083 - 118,083 Additions to intangible assets and purchases of property, plant and equipment (863,448) (911,759) (863,646) (914,911)

Net cash used in investment activities (863,448) (793,676) (863,646) (796,828)

Cash flow from financing activities: New borrowing and debentures 782,680 391,806 784,146 393,368 Repayment of borrowing and debentures (560,442) (337,823) (560,842) (337,989) Interest on capital paid (132,470) (154,405) (132,470) (154,405) Payment of principal and concession debt interest - (4,558) - (4,558)

Net cash (used in) provided by financing activities 89,768 (104,980) 90,834 (103,584)

Increase (decrease) in cash and cash equivalents 68,587 (235,944) 69,101 (235,763)

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 329,068 260,481 331,039 261,938

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

33 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG Years ended December 31 All amounts in thousands of Reais (A free translation of the original in Portuguese)

Statement of value added

Parent company Consolidated 2014 2013 2014 2013 1 GROSS REVENUE 4,449,746 4,057,281 4,476,769 4,079,040 1.1 Water supply and sewage services rendered 3,453,456 3,315,144 3,476,906 3,335,874 1.2 Other income 57,051 42,534 63,326 45,151 1.3 Revenue related to the construction of assets 978,301 707,082 978,301 707,082 1.4 Provision for impairment of trade receivables (39,062) (7,479) (41,764) (9,067)

2 INPUTS ACQUIRED FROM THIRD PARTIES (1,973,442) (1,613,334) (1,991,607) (1,625,487) 2.1 Cost of services (1,674,982) (1,380,184) (1,685,292) (1,390,021) 2.2 Material, energy, outsourced services and other (168,315) (163,387) (171,199) (168,206) 2.3 Other operating expenses (130,145) (69,763) (135,116) (67,260)

3 GROSS VALUE ADDED 2,476,304 2,443,947 2,485,162 2,453,553

4 DEPRECIATION AND AMORTIZATION (485,605) (428,034) (488,130) (430,618)

5 NET VALUE ADDED GENERATED 1,990,699 2,015,913 1,997,032 2,022,935

6 VALUE ADDED RECEIVED THROUGH TRANSFERS 68,250 78,657 76,465 84,687 6.1 Equity in the results of subsidiaries (9,425) (7,177) -- 6.2 Finance income 77,675 85,834 76,465 84,687

TOTAL VALUE ADDED FOR 7 DISTRIBUTION 2,058,949 2,094,570 2,073,497 2,107,622

8 DISTRIBUTION OF VALUE ADDED 2,058,949 2,094,570 2,073,497 2,107,622

8.1 Personnel 922,892 873,654 931,843 883,076 8.1.1 Direct compensation 589,792 557,100 596,892 564,698 8.1.2 Benefits 256,120 218,885 257,494 220,274 8.1.3 FGTS 57,162 64,999 57,639 65,434 8.1.4 Employee profit sharing 19,818 32,670 19,818 32,670

8.2 Taxes and contributions 549,518 557,146 554,886 560,590 8.2.1 Federal 519,576 541,627 523,871 544,284 8.2.2 State 28,862 8,375 29,902 9,087 8.2.3 Municipal 1,080 7,144 1,113 7,219

8.3 Remuneration of third parties' capital 268,398 243,975 268,627 244,161 8.3.1 Interest and monetary adjustment 262,596 239,516 262,717 239,591 8.3.2 Rentals 5,802 4,459 5,910 4,570

8.4 Remuneration of stockholders 318,141 419,795 318,141 419,795 8.4.1 Interest on capital 103,340 139,582 103,340 139,582 8.4.2 Earnings reinvested 214,801 280,213 214,801 280,213

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

34 of 137 (A free translation of the original in Portuguese)

Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

01. Operations

Companhia de Saneamento de Minas Gerais ("COPASA MG", the "Parent Company" or "Company") is a publicly-traded corporation with state and private capital, controlled by the Government of the State of Minas Gerais, headquartered in the city of Belo Horizonte at Rua Mar de Espanha 525, Bairro Santo Antônio. The Company is engaged in planning, designing, performing, expanding, remodeling, managing and providing public services including water supply and sewage services, and is authorized to operate in Brazil and abroad. The Company is subject to the arbitration of the São Paulo Stock Exchange's Market Arbitration Chamber, as set forth in an arbitration clause included in its bylaws.

At December 31, 2014, COPASA MG had the following wholly-owned subsidiaries:

Copasa Águas Minerais de Minas S/A ("Águas Minerais") - established by State Law 16,693, of January 11, 2007, engaged in the production, bottling, distribution and sale of mineral water from the springs it owns or has licenses to explore, and managing and exploring the water and spring parks of Caxambu, Araxá, Cambuquira and Lambari.

Copasa Serviços de Saneamento Integrado do Norte e Nordeste de Minas Gerais S/A ("COPANOR") - established by State Law 16,698, of April 17, 2007, engaged in planning, designing, executing, expanding, remodeling, exploring and providing public services including water supply and sewage treatment, collection, recycling, treatment and final disposal of urban, domestic and industrial waste, draining and management of rainwater in urban areas in cities of the North of Minas Gerais and the water basins of the Jequitinhonha, Mucuri, São Mateus, Buranhém, Itanhém and Jucuruçu rivers.

Copasa Serviços de Irrigação S/A ("Serviços de Irrigação") - established by State Law 16,698, of April 17, 2007, engaged in managing, executing and exploring the irrigation systems of the Jaíba Project, and conducting maintenance, using both its own and outsourced personnel and resources. This subsidiary may contract, whenever economically viable, through regular bidding processes, services and construction work necessary to the operation of the system, and may purchase products, equipment and materials required for the performance of its activities.

In compliance with Minas Gerais State Government Decree 46,080, dated November 12, 2012, the Executive Board of Copasa Serviços de Irrigação SA considered that the responsibilities imposed by State Law 16,698, dated April 17, 2007, had been met. Therefore, the necessary measures for the transfer of management of the Jaíba II Project to Distrito de Irrigação do Jaíba (DIJ) were concluded on March 2, 2013, upon termination of service agreement 460/12 entered into with RURALMINAS on September 3, 2012. Management is working to close the operations of Copasa Serviços de Irrigação SA with the mercantile company registration agencies.

35 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

At December 31, 2014, the Company operates in 894 places in the State of Minas Gerais (888 in December 2013) providing water supply or sewage services, totaling approximately 4,789,035 connections (4,647,083 in December 2013). The twenty main water supply and sewage service concessions that the Company holds are as follow:

Water concessions Sewage concessions Number of Number of Location Maturity Location Maturity connections connections

Belo Horizonte 995,299 2034 Belo Horizonte 960,142 2034 Contagem 235,807 2073 Contagem 209,799 2073 Betim 143,397 2042 Montes Claros 136,492 2028 Montes Claros 135,186 2028 Betim 116,647 2042 Ribeirão das Neves 101,459 2034 Ipatinga 90,394 2022 Divinópolis 92,221 2041 Divinópolis 82,206 2041 Ipatinga 83,907 2022 Ribeirão das Neves 77,227 2034 Santa Luzia (i) 70,914 2013 Patos de Minas 56,764 2038 Patos de Minas 57,053 2038 Santa Luzia (i) 55,566 2013 Ibirité 53,601 2034 Pouso Alegre 51,957 2046 Pouso Alegre 52,308 2046 Varginha (i) 50,333 2013 Varginha (i) 51,397 2013 Conselheiro Lafaiete 44,386 2044 Conselheiro Lafaiete 51,201 2044 Ibirité 42,099 2034 Teófilo Otoni 43,659 2034 Araxá 39,817 2032 Sabará 43,035 2042 Lavras 39,144 2034 Lavras 41,248 2034 Teófilo Otoni 38,174 2034 Araxá 40,970 2032 Itajubá 34,111 2034 Nova Lima 37,614 2028 Sabará 33,031 2042 Ubá (i) 36,497 2014 Alfenas 32,433 2033 Itajubá 36,321 2034 Coronel Fabriciano 31,562 2033

(i) The concession agreements entered into with some of the aforementioned municipalities have expired, and the Company is currently negotiating the renewal of these agreements with the related municipalities. The data related to the water and sewage billing from January to December in these municipalities is as follows:

Municipality Maturity Water and sewage billing (R$) % on billing 12/31/2014 12/31/2013 12/31/2014 12/31/2013 Varginha 9/1/2013 49,110 46,913 1.34 1.33 Santa Luzia 12/1/2013 50,895 48,227 1.39 1.37 Ubá 2/1/2014 17,140 16,418 0.47 0.46

36 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

At December 31, 2014, 79 concessions have expired (55, in December 2013) representing around 8.84% of the Company's total connections (6.19%, in December 2013) and whose renewal procedures are currently under negotiation with the related municipalities. Management expects that new concession agreements will be entered into for all expired concessions that are yet to be renewed. Therefore, there is no risk of discontinuation of water supply and sewage services rendered in these municipalities.

The Executive Board of the Company authorized on March 18, 2015 the issue of the parent company and consolidated financial statements at December 31, 2014.

02. Basis of preparation and presentation of the financial statements

The Company is presenting its parent company and consolidated financial statements.

2.1 Basis of preparation

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

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

(a) Parent company financial statements

The parent company financial statements were prepared and are being presented in accordance with accounting practices adopted in Brazil, based on the technical accounting pronouncements issued by the Brazilian Accounting Pronouncements Committee (CPC).

Because the accounting practices adopted in Brazil applicable to individual financial statements from 2014 do not differ from the International Financial Reporting Standards (IFRS) applicable to separate financial statements, which now allow entities to use the equity method to account for investments in subsidiaries in the separate financial statements, they are also in compliance with the IFRS issued by the International Accounting Standards Board (IASB). These financial statements are disclosed together with the consolidated financial statements.

(b) Consolidated financial statements

The consolidated financial statements have been prepared and are being presented in accordance with the accounting practices adopted in Brazil, including the pronouncements issued by the CPC, as well as according to the IFRS issued by the International Accounting Standards Board (IASB).

37 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

The presentation of parent company and consolidated statements of value added is required by the Brazilian corporate legislation and the accounting practices adopted in Brazil for listed companies, while it is not required by IFRS. Therefore, under IFRS, the presentation of such statements is considered supplementary information, and not part of the set of financial statements.

2.2 Consolidation

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

Interest in capital - % Total Voting Subsidiaries Copasa Águas Minerais de Minas S/A 100 100 Copasa Serviços de Saneamento Integrado do Norte e Nordeste de Minas Gerais S/A - COPANOR 100 100 Copasa Serviços de Irrigação S/A 100 100

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

The subsidiaries' financial statements are prepared for the same disclosure period as those of the parent company and use consistent accounting practices. All balances, income and expenses and unrealized gains and losses arising from transactions between group companies are fully eliminated.

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

03. Summary of significant accounting policies

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

3.1 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, responsible for allocating resources and assessing performance of the operating segments, is the Executive Board, which also contributes to making the Company's strategic decisions together with the Board of Directors. The Group is present in two different segments: (i) the water supply and sewage services in public concessions, which are rendered by the Parent company and its subsidiary Copasa Serviços de Saneamento Integrado do Norte e Nordeste de Minas Gerais SA, and (ii) the sale of products by the subsidiary Copasa Águas Minerais de Minas SA. Segment information is presented in Note 19.

38 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

3.2 Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements of each subsidiary included in the Company's consolidation are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). The parent company and consolidated financial statements are presented in Brazilian Reais (R$), which is the Company's functional and presentation currency.

(b) Transactions and balances

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

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

3.3 Cash and cash equivalents

Cash and cash equivalents includes cash on hand, bank deposits and other short term highly liquid investments with original maturities of three months or less, and with an immaterial risk of changes in value. They are all used by the Company in the management of its short term commitments.

3.4 Financial assets

3.4.1 Classification

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

They are included in current assets, except for those with maturities greater than 12 months after the end of the reporting period.

3.4.2 Recognition and measurement

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

39 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Changes in the fair value of monetary and non-monetary securities classified as available for sale are recognized in equity.

3.4.3 Impairment of financial assets

(a) Assets carried at amortized cost

The Company and its subsidiaries assess at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a "loss event") and that loss event (or events) has an impact on the estimated future cash flow of the financial asset or group of financial assets that can be reliably estimated.

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

(i) Significant financial difficulty of the issuer or debtor

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

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

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

(v) The disappearance of an active market for that financial asset because of financial difficulties, or

(vi) Observable data indicating a measurable decrease in the estimated future cash flow from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including:

 Adverse changes in the payment status of borrowers in the portfolio, and

 National or local economic conditions that correlate with defaults on the assets in the portfolio.

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

40 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

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

(b) Assets classified as available for sale

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

3.5 Trade receivables

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

Accounts receivable from customers are recognized initially at fair value and subsequently measured at amortized cost less a provision for the impairment of trade receivables.

A provision for the impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, the probability that the debtor will enter bankruptcy or other financial reorganization and default or delinquency in making payments (overdue for more than 180 days) are considered indicators that the receivable is impaired.

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

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

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

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

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

For receivables over R$ 30, which are overdue for more than 360 days, the related provision is reversed and they are written off against the statement of income under selling expenses, provided that the court-ordered collection process had already started. Otherwise, these amounts are maintained under the provision for impairment losses at the expected recoverable value.

 Other receivables from the Municipal and Federal Governments

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

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

The Company does not constitute a provision for the impairment of receivables from the Minas Gerais State Government since there is no history of default. Receivables from the Municipal Authority of Belo Horizonte not paid until the date of the tariff transfer to the Municipal Water and Sewerage Fund are fully deducted from the amount to be transferred and, therefore, no provision for losses is required.

 Supplementary provision

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

3.6 Inventory

Inventory is stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost method. The net realizable value is the estimated sales price in the normal course of business less applicable variable selling expenses. Provisions for slow-moving or obsolete inventory are recorded whenever considered necessary. Materials are used for consumption and for the maintenance of the water supply and sewage treatment systems.

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3.7 Financial assets - concession agreements

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

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

3.8 Investments

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

3.9 Intangible assets

(a) Service concession arrangements

The Company recognizes as an intangible asset its right to charge the water supply recipients and sewage services provided under the service concession arrangements in accordance with Interpretation ICPC 01 - Service Concession Arrangements.

Intangible assets are determined as the residual value of the construction revenue earned for the construction or acquisition of infrastructure by the Company, and are recognized as described in Note 3.20. The amount of the financial asset related to the unconditional right to receive cash at the end of the concession term as part of the consideration receivable is recognized as described in Note 3.7. Depending on the type of asset and the period of its acquisition, the cost of acquisition includes hyperinflationary effects, in accordance with IAS 29, for the period during which the Brazilian economy was considered as hyperinflationary. According to the criteria set out under IFRS, Brazil had a hyperinflationary economy up to 1997.

Intangible assets are amortized from the date when they are available in the location and condition necessary for their use in operations as intended by the Company.

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

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

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(b) Rights to use

Use rights refer to costs incurred with renewal of public concession arrangements, with respect to the amount refundable by COPASA MG for the infrastructure investments made by the municipal governments, plus monetary adjustments, when applicable according to International Accounting Standard (IAS) 29. The amounts recorded in intangible assets refer to refunds already paid by the Company to the municipal governments as part of the renewal agreement for water supply and sewage service concession arrangements. These investments are not part of the tariff calculation base, but represent the investment made by the Company for the renewal of the concession arrangements.

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

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

3.10 Property, plant and equipment

Property, plant and equipment are stated at historical cost, less depreciation and impairment losses, if applicable. Depending on the type of asset and the period of its acquisition, the cost reflects the acquisition cost and the historical cost adjusted by the hyperinflation effects, under IAS 29, in the period in which the Brazilian economy was considered as hyperinflationary. Under IFRS, Brazil had a hyperinflationary economy up to 1997.

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

Subsequent costs are included in the book value of the asset, or recognized as a separate asset, as appropriate, only when future economic benefits embodied in the item are likely to flow to the Company, when the cost of the item can be reliably measured and its economically useful life exceeds 12 months. The carrying amount of the replaced items or parts is derecognized. All other repairs and maintenance are charged to the statement of income during the financial period in which they are incurred.

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

Years

Buildings 25 - 40 Machinery 10 - 15 Vehicles 3-5 Furniture, fittings and equipment 3 - 8

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The residual values and the useful lives of assets are reviewed and adjusted, if necessary, at the beginning of each year, on a prospective basis.

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

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

Gains and losses on disposals are determined by comparing the selling prices with the carrying amount, net of depreciation, and are recognized within "other operating income (expenses), net" in the statement of income.

3.11 Impairment of non-financial assets

Assets that are subject to depreciation or amortization are reviewed for impairment 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 recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest level for which there is separately identifiable cash flow (CGU). Non-financial assets are subsequently reviewed for possible reversal of the impairment at the balance sheet date.

3.12 Financial liabilities

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

The principal financial liabilities recognized by the Company are trade payables, borrowing and debentures.

(a) Trade payables

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

Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest rate method.

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(b) Borrowing and debentures

Borrowing is recognized initially at fair value, net of transaction costs incurred, and subsequently carried at amortized cost. Any difference between the proceeds (net of transaction costs) and the total amount payable is recognized in the statement of income over the period of the borrowing using the effective interest rate method.

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

The fair value of the installments payable under a convertible debt instrument is determined using the market interest rate for the same debt instrument had it been a non-convertible one, as informed by the financial institution that issued it. This value is recorded as a liability on an amortized cost basis until the obligation is extinguished, either through conversion or at the maturity of the respective debt instruments. This is recognized and included in equity, net of the effects of both income and social contribution taxes. The carrying amount of the conversion option is not remeasured in subsequent years.

Borrowing is classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date.

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

As permitted by ICPC 01, the Company capitalizes the borrowing costs related to the intangible assets used for construction services connected to the public service concession agreements.

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

3.13 Provisions

Provisions for tax and legal claims are recognized when: (i) the Company has a present legal or constructive obligation as a result of past events, (ii) it is likely that a disbursement of funds will be necessary to settle the obligation, and (iii) the amount can be estimated with reasonable reliability.

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

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

3.14 Distribution of dividends and interest on capital

Distributions of dividends and interest on capital to the Company's stockholders are recognized as a liability in the financial statements at the year end based on the Brazilian Corporate Law and on the Company's bylaws. Any amount that exceeds the minimum required is only recognized on the date when it is approved at a General Meeting of Stockholders or at its payment date, whichever occurs first.

The amount equivalent to the mandatory minimum dividend is recorded in liabilities under "dividends and interest on capital payable" because it is considered to be a legal obligation established by the Company's bylaws. Dividends exceeding the mandatory minimum amount, which are declared by management after the date of the financial statements but prior to the date of authorization for issue, are recorded under proposed additional dividends in equity.

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

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

3.15 Taxation

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

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(a) Current income tax and social contribution

The current income tax and social contribution are calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Management periodically assesses the positions taken by the Company in calculating tax in situations where the applicable tax regulations are open to interpretation, and makes provisions, when appropriate, based on the estimated amounts payable to the tax authorities.

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

(b) Deferred income tax and social contribution

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

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

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

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

Deferred tax assets are recognized on all deductible temporary differences and unused tax credits and losses, to the extent that taxable profits will likely be available so that the deductible temporary differences can be realized, and unused tax credits and losses can be used, except:

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

 On deductible temporary differences in investments in subsidiaries, when deferred tax assets are only recognized to the extent that temporary differences are reversed in the near future and taxable profits are available against which the temporary differences can be used.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and written off to the extent that taxable profits will likely not be available to enable deferred tax assets to be wholly or partially used. Deferred tax assets adjusted are reviewed at each balance sheet date and recognized to the extent that future taxable profits will likely allow the recovery of deferred tax assets.

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

Deferred tax assets and liabilities are presented net in the balance sheet when there is a legally enforceable right and the intention to offset them against the calculation of current taxes, generally when related to the same legal entity and the same tax authority. Accordingly, deferred tax assets and liabilities in different entities or in different countries are generally presented separately, and not on a net basis.

Sales and services revenue is subject to certain taxes and contributions, at the following basic rates:

Taxes Rate - %

Social Integration Program (PIS)/Public Service Employees 1.65 Savings Program (PASEP) Social Contribution on Revenue (COFINS) 7.60 Value-added Tax on Sales and Services (ICMS) (*) 7.00 to 18.00 (*) Not levied on water supply and sewage collection services.

These charges are presented as revenue deductions in the statement of income. The credits arising from the non-cumulative PIS/COFINS are presented as a deduction of cost of services rendered in the statement of income.

3.16 Employee benefits

(a) Pension obligations

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

On October 29, 2010, the Company implemented a new pension plan strategy, determining that the Defined Benefit Plan would be closed to new members from that date, and creating a Settled Benefit Plan and a New Defined Contribution Plan. The result of this strategy was a reduction of risks for the Company and its employees, due to migration between plans.

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The Settled Benefit Plan was established based on the cumulative rights of each member, calculated at the new strategy implementation date. This plan will only receive contributions to meet administrative expenses and, although the studies performed do not identify any possibility of financial insufficiency, thanks to surpluses generated in the plan assets, arising from the difference between the restated amount of benefits calculated with reference to the National Consumer Price Index (INPC) variation and the yields on plan assets calculated at market rates, any insufficiencies will be covered by additional matching contributions made by the sponsoring entity and plan members.

The Defined Contribution Plan operates as an individual retirement savings account, receiving contributions made by members and the sponsoring entity that are deposited in each member's individual account and applied as described in Note 17. Furthermore, while in service with the Company, the member may schedule how this savings account will be built up according to his/her financial ability. The contribution made by the sponsoring entity will match the member's contributions which, in its turn, correspond to a percentage of the member's actual salary, varying between 3% and 10%, at the member's option.

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

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income for the period in which they arise.

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

(b) Profit sharing

The Company recognizes a liability and an expense for employee profit sharing based on the operational and financial targets disclosed to its employees. A provision is recorded when the Company has a legal contractual obligation or a constructive obligation arising from past events.

3.17 Government grants and assistance

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

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When the Company receives non-monetary government grants as donations, and because these donations are necessary for the concession, not for the Company, the assets received are recorded at a nominal amount and offset by an offsetting account, with the purpose of keeping a record for asset control while avoiding improper recognition of benefits in the statement of income and in the water and sewage tariffs established by the Regulatory Agency.

3.18 Share capital

When the Company repurchases its shares (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from the equity attributable to the Company's stockholders until the shares are canceled or reissued. Where such shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax and social contribution effects, is included in the equity attributable to the Company's stockholders.

3.19 Revenue recognition

Revenue represents the fair value of the consideration received or receivable mainly for the sale of products and services in the ordinary course of the Company's activities. Revenue is shown net of value- added tax, returns, rebates and discounts, and after eliminating intercompany sales.

(a) Rendering of services

Revenue and expenses from operations are recognized on an accruals basis. Revenue from the rendering of water supply and sewage services as well as irrigation services is recognized after water consumption, or when the services are rendered. Unbilled revenue is revenue for which the related services were rendered but which was not yet billed up to the end of each period. This revenue is accounted for at the date when the related services are rendered under unbilled trade receivables, based on monthly estimates which take into account the type of customer, the type of transaction and the specifics of each sale, so that revenue is matched with costs on the proper accruals basis.

(b) Construction contracts

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

Construction revenue is comprised of cost plus margin contracts, whereby revenue is recognized with reference to costs incurred on the contracts, plus margin. This additional margin refers to the work carried out by the Company under construction contracts, which is added to the construction costs incurred, thus generating the total amount that is recognized as construction revenue, in accordance with CPC 17 and IAS 11, "Construction Contracts".

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Contract costs are recognized in the statement of income, as part of the cost of services rendered, when incurred. All costs directly attributable to the contracts are taken into consideration when measuring revenue, using the cost-plus-margin method. This revenue is allocated based on the nominal weighted average rate of cost of capital (WACC), in full, to the costs incurred in administering contracts for works, and the result of investment return margin and margin transferred to the providers of services and materials.

When completion of a construction contract cannot be estimated reliably, revenue is recorded only to the extent of the costs recognized that are recoverable.

Interest income is recognized on the accruals basis of accounting, using the effective interest rate method. When a financial instrument or receivable is impaired, the Company reduces the carrying amount to its recoverable amount, which is the estimated future cash flow discounted at the original effective interest rate of the instrument. Subsequently, as time elapses, interest is incorporated into assets against interest income. This interest income is calculated at the same effective interest rate used to calculate the recoverable amount, i.e. the original rate of the instrument.

(d) Sales of goods

Sales revenue is presented net of taxes and discounts. Taxes on sales are recognized when sales are billed and discounts are recognized when they become known. Revenue from sales of goods is recognized when the sales amount can be measured reliably, the Company no longer controls the goods sold, or has any other responsibility related to the ownership of the goods and costs incurred or to be incurred in respect of the transaction can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Company, and the Company has transferred to the buyer all the risks and rewards of ownership of the goods.

(e) Dividend income

Dividend income is recognized when the right to receive payment is established.

3.20 Concession contracts

The Company is the holder of public utility concessions for water supply and sewage services. These concession agreements are entered into with municipalities, with the State of Minas Gerais as intervenor, and have been recognized in accordance with ICPC 01 requirements.

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The concession agreements represent a contractual right to charge the users of public services, using tariffs regulated by the Regulatory Water and Sewage Agency of the State of Minas Gerais (ARSAE- MG), over the period of time established by the concession agreements. The Company recognizes its contractual right to charge users of public services over the term of the concession arrangement as an intangible asset, and the amount is amortized as disclosed in Note 3.9.

Moreover, in all its concession agreements, except for those with the municipality of Ipatinga, the Company has an unconditional right to receive cash as consideration for returning the assets to the concession authority at the end of the concession. In these cases, the Company recognized a financial asset, discounted to present value, considering the best estimate of the cash to be received at the end of the concession term, as disclosed in Note 3.7.

3.21 Related parties

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

3.22 Statement of value added

The purpose of this statement is to disclose the wealth created by the Company and its distribution during a certain reporting period, and is presented by the Company, as required by the Brazilian Corporate Law, as an integral part of the parent company financial statements, and as additional disclosure in the consolidated financial statements, since this statement is not required under IFRS.

The statement of value added was prepared based on information obtained from the same accounting records used to prepare the financial statements and pursuant to the provisions of CPC 09, "Statement of value added". In its first part, it presents the wealth created by the Company, represented by revenue (gross sales, including the taxes on them, the other revenue and the effects of the provision for the impairment of trade receivables), by the inputs acquired from third parties (cost of sales and acquisition of materials, energy and third party services, including the taxes levied at the time of acquisition, the effects of the losses and recovery of asset amounts, and depreciation and amortization) and the added value received from third parties (equity in the results of subsidiaries, finance income and other income). The second part of the statement of value added presents the distribution of wealth among personnel, taxes and contributions, remuneration of third party capital and remuneration of own capital.

3.23 New standards, amendments to and interpretations of existing standards that are not yet effective

The following new standards were issued by the IASB but are not effective for 2014. The early adoption of standards, even though encouraged by the IASB, has not been implemented in Brazil by the Brazilian Accounting Pronouncements Committee (CPC).

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(a) IFRS 15, "Revenue from Contracts with Customers", replaces IAS 11, "Construction Contracts", IAS 18, "Revenue" and related interpretations and introduces the principles to be applied by an entity to determine the measurement and recognition of revenue. Effective date is January 1, 2017. Management is yet to assess IFRS 15's full impact.

(b) IFRS 9, "Financial instruments" addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014 and is effective from January 1, 2018. It replaces the orientation included in IAS 39 related to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortized cost, at fair value through other comprehensive income and fair value through profit or loss. There is now a new expected credit losses model that replaces the current incurred loss impairment model. IFRS 9 relaxes the requirements for hedge effectiveness. It also requires an economic relationship between the hedged item and hedging instrument and for the "hedged ratio" to be the same as the one management actually uses for risk management purposes. The Company has yet to assess IFRS 9's full impact.

There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Company and its subsidiaries.

04. Critical accounting estimates and judgments

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

Based on assumptions, the Company and its subsidiaries make estimates concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year are addressed below:

(a) Recognition of construction revenue

Construction revenue includes cost plus margin contracts, whereby revenue is recognized with reference to costs incurred on the contracts, plus margin. Such additional margin refers to the work carried out by the Company under construction contracts, which is added to the construction costs incurred, thus generating the total amount recognized as construction revenue, in accordance with CPC 17 and IAS 11, "Construction Contracts". If the proportion of the services rendered against total services contracted were to be 10% more in relation to management's estimates, the revenue margin recognized for the year would increase by R$ 18,256. If this difference were to be less than 10%, the revenue margin for the year would decrease by R$ 14,936.

(b) Pension benefits

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

54 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

The Company determines the appropriate discount interest rate at the end of each year. This is the interest rate that should be used to determine the present value of the estimated future cash outflows expected to be required to settle the pension obligations. When determining the appropriate discount rate, the Company considers that the discount rate in Brazil, for complying with accounting standards, should be obtained from the returns on government securities (NTN-B) at the date of the actuarial valuation, without any adjustments for Brazilian risk factors or expectations of future fluctuations in the profitability of these securities.

Other key assumptions for pension obligations are based in part on current market conditions. Additional information is disclosed in Note 17.

There is some uncertainty regarding the interpretation of complex tax regulations and the amount and timing of future taxable income.

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

Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilized. The realization of deferred tax assets is contingent upon future events that will make the underlying provisions deductible, pursuant to the prevailing tax legislation.

(d) Impairment of non-financial assets

Impairment losses exist when the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell or its value in use. The calculation of fair value less costs to sell is based on information available on transactions involving the sale of similar assets or market prices less any additional costs to dispose of the asset. The value-in-use calculation is based on the discounted cash flow model. Cash flow is determined from the budget for the next five years and does not include reorganization activities to which the Company has not yet committed or significant future investments that will improve the asset base of the cash-generating unit being tested. The recoverable amount is sensitive to the discount rate used in the discounted cash flow model, as well as expected future cash receipts and growth rates used for extrapolation purposes.

(e) Provisions for tax, civil and labor risks

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

55 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

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

(f) Borrowing contracts

The Company has borrowing whose contracts include covenants establishing compliance with certain financial ratios and other conditions (Note 12). Some of these contracts provide that, if it fails to meet these ratios, the Company shall present to the creditor additional real guarantees, or that it must promptly recovers the contractually established financial ratios, lest it trigger the accelerated maturity of the debt. The Company's understanding is that, even in the case of non-compliance with these financial ratios, and when the Company is able to present additional guarantees in a timely manner and therefore avoid the accelerated maturity of the debt, this situation is under the Company's control until the end of this custody period.

For the purpose of mitigating the risk of non-compliance with such covenants, the Company's management checks (i) for compliance on a quarterly basis, considering the ratio calculation formulae as specified in each contract, (ii) the established periods for communication with the financial institutions, and (iii) for cross-default, that is, the effects of non-compliance of a contract on other contracts.

05. Public service concession agreements

At December 31, 2014, the Company holds public utility concessions for water supply and sewage services in 894 locations in the State of Minas Gerais. The concession agreements and/or program agreements are executed with each municipality for periods ranging from 30 to 99 years, and all are fairly similar in terms of the rights and obligations of the holder and grantor.

The tariff system for water supply and sewage services is controlled by the Minas Gerais State Regulatory Water and Wastewater Agency (ARSAE-MG). These tariffs are intended to maintain the Company's financial and economic balance, pursuant to Federal Law 11,445/07. Therefore, ARSAE-MG is responsible for periodically reviewing these tariffs and for annually determining any required readjustments, in order to realign tariff prices with inflation. Services are charged directly to users, based on the volume of water consumed and sewage collected, multiplied by the authorized tariff.

The main concession terms and major changes in concession agreements for the period ended December 31, 2014 are described in Note 1.

At December 31, 2014, the Company had accounts receivable from grantors (the municipalities) totaling R$ 558,964, which correspond to the amounts expected to be received at the end of the concession period (R$ 494,836 In December 2013) for assets which were not depreciated over the concession period. These amounts were discounted to their present value upon initial recognition using the weighted average cost of capital (WACC) rates linked to the respective accounts receivable. Intangible assets were accounted for based on the difference between the fair value of the assets constructed or acquired for the purpose of the concession services and the carrying value of the financial assets recognized.

56 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

The results of the construction services performed by the Company during the year are as follow:

Parent company/Consolidated 12/31/2014 12/31/2013

Construction revenue 978,301 707,082 Construction costs (961,705) (690,573)

06. Cash and cash equivalents

(a) Cash and cash equivalents

Parent company Consolidated 12/31/2014 12/31/2013 12/31/2014 12/31/2013

Cash and banks 49,509 40,125 51,480 41,582 Short term bank deposit certificates 279,559 220,356 279,559 220,356 Total 329,068 260,481 331,039 261,938

The Company maintains its own funds arising from its business activity invested in Bank Deposit Certificates (CDBs), which consist of fixed-income securities substantially remunerated by reference to the variation in the Interbank Deposit Certificate (CDI), ranging from 100.0% to 110.5% in 2014 (2013 - - 100.0% to 110.5%). Financial income from these investments in 2014 totaled R$ 21,933 (2013 - R$ 28,237).

In 2014 and 2013, the Company classified its marketable securities as cash and cash equivalents since these are considered financial assets with immediate redemption and original maturity within 90 days, subject to an insignificant risk of changes in value.

(b) Changes in financial investments

Parent company Consolidated 12/31/2014 12/31/2013 12/31/2014 12/31/2013

At January 1 220,356 449,223 220,356 449,223 New investments 2,612,585 1,724,259 2,612,585 1,724,980 Income 21,933 28,237 21,934 28,282 Redemptions (2,575,315) (1,981,363) (2,575,316) (1,982,129) At December 31 279,559 220,356 279,559 220,356

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

57 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

07. Trade and other receivables

(a) Trade receivables

The aging of trade receivables is as follows:

Parent company Consolidated 12/31/2014 12/31/2013 12/31/2014 12/31/2013

Not yet due 196,575 253,415 199,674 256,176 Overdue up to 30 days 71,479 51,071 72,209 51,627 Overdue from 31 to 60 days 38,286 32,778 38,766 33,135 Overdue from 61 to 90 days 20,011 22,598 20,348 22,844 Overdue from 91 to 180 days 30,117 32,919 30,844 33,278 Overdue for more than 180 days 21,864 16,186 22,029 16,362 Billed amounts 378,332 408,967 383,870 413,422 Unbilled amounts 338,021 311,474 338,702 312,787

Trade receivables 716,353 720,441 722,572 726,209 (-) Provision for the impairment of trade receivables (30,268) (23,336) (31,846) (24,004) 686,085 697,105 690,726 702,205 Accounts receivable - non-current (i) 197,511 212,580 197,511 212,580

Trade receivables, net 883,596 909,685 888,237 914,785

(i) Refers to a compensation agreement entered into with the Belo Horizonte Municipal Government, as described in Note 11.

Trade and other receivables are denominated only in Brazilian Reais, and there are no accounts receivable in foreign currencies.

At December 31, 2014, the trade receivables of the parent company of R$ 732,107 (R$ 777,469 in December 2013) and the consolidated trade receivables of R$ 735,887 (R$ 781,543 in December 2013) were fully performing.

At December 31, 2014, the trade receivables of the parent company totaling R$ 151,489 (R$ - 132,216 in December 2013) and consolidated trade receivables totaling R$ 152,350 (R$ 133,242 in December 2013) were past due, but not provisioned. These include a number of independent customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows:

Parent company Consolidated 12/31/2014 12/31/2013 12/31/2014 12/31/2013

Up to 3 months 114,047 100,298 114,410 101,014 3 to 6 months 28,330 24,575 28,795 24,863 Over 6 months 9,112 7,343 9,145 7,365 Total 151,489 132,216 152,350 133,242

58 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

At December 31, 2014, parent company trade receivables, which totaled R$ 30,268 (R$ 23,336 in December 2013), and consolidated trade receivables of R$ 31,846 (R$ 24,004 in December 2013) were impaired. The individually impaired receivables mainly relate to customers who are healthcare providers and for whom COPASA, in accordance with the current legislation, cannot interrupt the water supply and sewage services. Based on management's assessment, a portion of these accounts receivable may be recovered.

The ageing of these receivables is as follows:

Parent company Consolidated 12/31/2014 12/31/2013 12/31/2014 12/31/2013

Not yet due 1,553 1,650 1,634 1,697 Overdue up to 30 days 1,797 1,423 1,891 1,463 Overdue from 31 to 60 days 1,741 1,418 1,831 1,458 Overdue from 61 to 90 days 1,714 1,333 1,804 1,373 Overdue from 91 to 180 days 5,108 4,432 5,375 4,559 Overdue from 181 to 360 days 10,510 8,431 11,057 8,671 Overdue for more than 360 days 7,845 4,649 8,254 4,783 Total 30,268 23,336 31,846 24,004

The following table summarizes the changes in the provision for impairment of trade receivables:

Parent company Consolidated 12/31/2014 12/31/2013 12/31/2014 12/31/2013

At January 1 23,336 19,517 24,004 19,910 Provision for the impairment of trade receivables 92,358 73,672 95,377 75,648 Receivables written off during the year as uncollectible (85,426) (69,853) (87,535) (71,554) At December 31 30,268 23,336 31,846 24,004

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

(b) Other receivables

The other classes of receivables have no impaired assets.

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

59 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Parent company Consolidated 12/31/2014 12/31/2013 12/31/2014 12/31/2013

Collateral for borrowing and debentures (i) 137,208 133,410 137,208 133,410 Receivables from subsidiaries (ii) 16,432 109,790 - - Restricted investments (iii) 48,945 28,936 48,945 28,936 Restricted investments (iv) 32,829 68,444 32,829 68,444 Available-for-sale financial assets (v) 40,748 48,638 40,748 48,638 Other 49,333 54,524 49,603 54,835 Total 325,495 443,742 309,333 334,263

Non-current assets (325,495) (443,742) (309,333) (334,263) Current assets - - - -

(i) Collaterals for borrowing and debentures are detailed in item "b" and "c" of Note 12 and item "c" of Note 9.

(ii) This refers to advances on future capital increases, loan agreements and payroll expenses (salary and social charges) relating to employees assigned by COPASA MG to its subsidiaries and which are being reimbursed as contractually provided for, of which R$ 4,651 refers to Águas Minerais, R$ 11,706 to COPANOR and R$ 75 to Copasa Serviços de Irrigação (R$ 96,178, R$ 12,733 and R$ 879 in December 2013, respectively). In accordance with the General Meeting of Stockholders of the subsidiary Águas Minerais held on April 14, 2014, the amount of the "Receivables from subsidiaries" account decreased by R$ 96,178 as a result of the payment of capital in this subsidiary through the balance of advances on capital increases existing at December 31, 2013.

(iii) This refers to funds of the Brazilian National Water Agency (ANA) held by COPASA MG under the Water Basin Depollution Program (PRODES), to be transferred as payment for the treated sewage, through the attainment of treated sewage and abatement of polluting emissions goals. Because these goals were only partially met, the Company also records these funds in non-current liabilities, as deposits for construction work (Note 11, item (c)).

(iv) Funds from the payment of the 5th issue of debentures (Note 12 (b)) were deposited in favor of COPASA MG in a settlement account maintained by Caixa Econômica Federal. Funds from the "settlement account" to the "demand account" will be released according to the work plan for each project, upon an express request filed by COPASA MG, and will depend on previous confirmation from the fiduciary agent of the release conditions contained in this agreement. The amounts from the settlement account which are waiting to be allocated to project development are invested in the "Fundo de investimento caixa corporativo II referenciado DI longo prazo" investment fund, which is managed by Caixa Econômica Federal, and whose income in 2014 amounted to R$ 6,548 (2013 - R$ 9,364).

(v) Refers to investments without significant influence in Foz Jeceaba.

60 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

08. Investments

At December 31, 2014, the equity of the subsidiary Águas Minerais amounted to R$ 13,578 and was recorded in "investments" (at December 31, 2013 - net capital deficiency of R$ 73,699 recorded in the "provision for losses on investments" account within non-current liabilities). The subsidiaries COPANOR and Serviços de Irrigação had a net capital deficiency of R$ 13,171 (R$ 12,647 at December 31, 2013), for which the parent company recorded a provision for losses in non-current related party liabilities as "Provision for investment losses".

The changes in the provision for investment losses are as follow:

Transfer of Equity in the 12/31/2013 advances for results of 12/31/2014 capital increase subsidiaries

Águas Minerais (73,699) 96,178 (8,901) 13,578 COPANOR (11,884) - (1,109) (12,993) Serviços de Irrigação (763) - 585 (178) Total (86,346) 96,178 (9,425) 407

In accordance with the General Meeting of Stockholders of the subsidiary Águas Minerais held on April 14, 2014, the capital of this subsidiary was increased with the balance of advances on capital increases existing at December 31, 2013, amounting to R$ 96,178.

The subsidiary Águas Minerais, which started its activities in September 2008, has been recording losses due to the high volume of investments in industrial projects, the upgrading of bottling equipment, adjustments to the mix of products based on market requirements, as well as refurbishment of the four plants to comply with regulators' requirements.

The losses will be fully recovered from the increase in the capacity approved for the exploration of mineral water sources of Caxambu, Cambuquira, Lambari and Araxá, in 42% and 58.65% from 2015 and 2016, respectively.

The financial statements of the subsidiary Águas Minerais, which were used as a basis for the Company's equity in results and consolidation, were prepared considering that Águas Minerais will remain a going concern, and do 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.

In compliance with Minas Gerais State Government Decree 46,080, dated November 12, 2012, the Executive Board of COPASA Serviços de Irrigação considered that the responsibilities imposed by State Law 16,698, dated April 17, 2007, had been met. Therefore, the necessary measures for the transfer of management of the Jaíba II Project to Distrito de Irrigação do Jaíba (DIJ) were concluded on March 2, 2013, upon the termination of service agreement 460/12 entered into with RURALMINAS on September 3, 2012. Management is awaiting the authorization of the Minas Gerais State Legislature for the write-off procedures of Copasa Serviços de Irrigação SA with the commercial company registration agencies.

61 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

09. Intangible assets

(a) Parent company

12/31/2014 Accumulated Intangible assets, Cost amortization net In operation Water systems 4,847,554 (2,778,301) 2,069,253 Sewage 4,410,064 (1,237,415) 3,172,649 Shared use systems 846,006 (588,397) 257,609 Rights of use 372,205 (131,531) 240,674 Other 90,320 (10,597) 79,723 Total in operation 10,566,149 (4,746,241) 5,819,908

Under construction Construction in progress 1,738,969 - 1,738,969 Total under construction 1,738,969 - 1,738,969

Total intangible assets 12,305,118 (4,746,241) 7,558,877

12/31/2013 Accumulated Intangible assets, Cost amortization net In operation Water systems 4,691,263 (2,612,522) 2,078,741 Sewage 3,627,138 (1,051,718) 2,575,420 Shared use systems 700,883 (517,595) 183,288 Rights of use 337,867 (116,547) 221,320 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

62 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

The changes in intangible assets were as follow:

Systems of Common Rights of In Water Sewage Other Total use (i) use progress

At December 31, 2013 2,078,741 2,575,420 183,288 221,320 70,118 1,771,866 6,900,753

Additions 68,767 72,603 33,000 14,726 21,031 655,849 865,976

Disposals (56) (85) (306) - (1,582) (20,615) (22,644)

Amortization (168,257) (187,494) (72,476) (14,911) (2,976) - (446,114) Public-Private Partnership (PPP) - - - - - 279,885 279,885 - Rio Manso

Capitalized interest - - - - - 43,610 43,610

Transfers to financial assets (1,684) (44,719) (3,649) 217 (1,321) - (51,156)

Transfers 89,826 754,862 117,628 19,286 (5,881) (991,627) (15,906)

Other 1,916 2,062 124 36 334 1 4,473

At December 31, 2014 2,069,253 3,172,649 257,609 240,674 79,723 1,738,969 7,558,877

The amortization for the year, as allocated to profit (loss), amounted to R$ 441,637 as cost of services rendered, R$ 253 as selling expenses, and R$ 4,224 as administrative expenses (R$ 391,699, R$ 211 and R$ 1,141, respectively, in 2013).

63 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

(b) Consolidated

12/31/2014 Accumulated Intangible assets, Cost amortization net In operation Water systems 4,847,554 (2,778,301) 2,069,253 Sewage 4,410,064 (1,237,415) 3,172,649 Shared use systems 846,006 (588,397) 257,609 Rights of use 372,265 (131,591) 240,674 Other 90,320 (10,597) 79,723 Total in operation 10,566,209 (4,746,301) 5,819,908

Under construction Construction in progress 1,738,969 - 1,738,969 Total under construction 1,738,969 - 1,738,969

Total intangible assets 12,305,178 (4,746,301) 7,558,877

12/31/2013 Accumulated Intangible assets, Cost amortization net In operation Water systems 4,691,263 (2,612,522) 2,078,741 Sewage 3,627,138 (1,051,718) 2,575,420 Shared use systems 700,883 (517,595) 183,288 Rights of use 337,927 (116,605) 221,322 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

64 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

The changes in intangible assets were as follow:

Systems of Common Rights of In Water Sewage Other Total use (i) use progress

At December 31, 2013 2,078,741 2,575,420 183,288 221,322 70,118 1,771,866 6,900,755

Additions 68,767 72,603 33,000 14,726 21,031 655,849 865,976

Disposals (56) (85) (306) - (1,582) (20,615) (22,644)

Amortization (168,257) (187,494) (72,476) (14,913) (2,976) - (446,116) Public-Private Partnership (PPP) - - - - - 279,885 279,885 - Rio Manso

Capitalized interest - - - - - 43,610 43,610

Transfer to financial assets (1,684) (44,719) (3,649) 217 (1,321) - (51,156)

Transfers 89,826 754,862 117,628 19,286 (5,881) (981,627) (15,906)

Other 1,916 2,062 124 36 334 1 4,473

At December 31, 2014 2,069,253 3,172,649 257,609 240,674 79,723 1,738,969 7,558,877

The amortization for the year, as allocated to the profit (loss), amounted to R$ 441,637 in cost of services rendered, R$ 253 in selling expenses, and R$ 4,226 in administrative expenses (R$ 391,700, R$ 211 and R$ 1,150, respectively, in 2013).

At December 31, 2014, the additions to intangible assets amounting to R$ 865,976 mainly referred to (i) the construction work for the expansion of the sewage treatment plant of Ribeirão Arrudas; (ii) the implementation of the sewage treatment system of Ibirité, and (iii) improvements in the sewage system of Caratinga, Contagem and Betim.

(i) Considering that shared use systems have specific economic useful lives, these assets are controlled in a separate group from 2012.

65 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Rio Manso Production System

COPASA MG and Odebrecht Ambiental - Manso SA, a special-purpose corporation, signed a Public- Private Partnership agreement of the administrative concession type to expand the capacity of the Rio Manso Water Production System, in the metropolitan region of Belo Horizonte, and the provision of services through this system.

This contract is effective for 15 years, from the signature date, that is December 20, 2013.

The contract effectiveness includes: (i) the period for completion of works of, at most, 24 months, and (ii) the subsequent period for the provision of services, which corresponds to 13 years. The established term may be extended under the terms of the law, exclusively for the adjustment of the financial and economic balance of the agreement.

The consideration to which the Special purpose entity (SPE) is entitled will be paid from the date of issuance of the authorization for the beginning of the operation.

The progress assessments of the works carried out in 2014 were recorded as a debit in intangible assets amounting to R$ 279,885 and as a credit in non-current liabilities, within the Public-Private Partnership (PPP) - Rio Manso.

This PPP contract is backed by the fiduciary lien of a portion of the revenue accrued from the rendering of public water supply and sewage services, in an amount corresponding, monthly, to 1/12 of the annual amount expected for each effective year of this contract, and also by deposits in a reserve account whose minimum balance corresponds to 1/6 of the annual amount expected for each effective year of this contract. The balance of this account, recorded as "Collateral for financing", was R$ 10,573 at December 31, 2014 (in December 2013 there was no such collateral).

66 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

10. Property, plant and equipment

(a) Parent company

12/31/2014 Accumulated Property, plant and Cost depreciation equipment, net In operation Machinery and equipment 267,588 (183,987) 83,601 Vehicles 137,261 (108,343) 28,918 Other 191 (176) 15 405,040 (292,506) 112,534 Land and buildings 161,896 (78,968) 82,928

Total in operation 566,936 (371,474) 195,462

Total property, plant and equipment 566,936 (371,474) 195,462

12/31/2013 Accumulated Property, plant and Cost depreciation equipment, net In operation Machinery and equipment 252,734 (165,305) 87,429 Vehicles 141,973 (106,758) 35,215 Other 191 (172) 19 394,898 (272,235) 122,663 Land and buildings 158,559 (75,744) 82,815

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

Total property, plant and equipment 553,457 (347,979) 205,478

67 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

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

Machinery Land and and Vehicles Other Total buildings equipment At December 31, 2013 87,429 35,215 19 82,815 205,478

Additions 12,663 - - 1,405 14,068 Disposals (405) (63) - (18) (486) Depreciation (25,511) (10,472) (4) (3,504) (39,491) Transfers 9,438 4,238 - 2,230 15,906 Other (13) - - - (13)

At December 31, 2014 83,601 28,918 15 82,928 195,462

The depreciation for the year, as allocated to profit (loss), amounted to R$ 22,415 as cost of services rendered, R$ 6,125 as selling expenses, and R$ 10,951 as administrative expenses (R$ 21,095, R$ 4,588 and R$ 9,300, respectively, in 2013).

(b) Consolidated

12/31/2014 Accumulated Property, plant and Cost depreciation equipment, net In operation Machinery and equipment 288,629 (192,317) 96,312 Vehicles 137,886 (108,959) 28,927 Other 348 (301) 47 426,863 (301,577) 125,286 Land and buildings 167,865 (80,107) 87,758

Total in operation 594,728 (381,684) 213,044

Total property, plant and equipment 594,728 (381,684) 213,044

68 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

12/31/2013 Accumulated Property, plant and Cost 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

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

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

Machinery Land and and Vehicles Other Total buildings equipment At December 31, 2013 103,654 35,232 53 87,855 226,794

Additions 12,681 - - 1,585 14,266 Disposals (1,740) (63) - (18) (1,821) Depreciation (27,655) (10,480) (8) (3,871) (42,014) Transfers 9,438 4,238 - 2,230 15,906 Other (66) - 2 (23) (87)

At December 31, 2014 96,312 28,927 47 87,758 213,044

The depreciation for the year, as allocated to profit (loss), amounting to R$ 24,867 in cost of services rendered, R$ 6,125 in selling expenses, and R$ 11,022 in administrative expenses (R$ 23,523, R$ 4,588 and R$ 9,446, respectively, in 2013).

69 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

11. Other obligations

Parent company Consolidated 12/31/2014 12/31/2013 12/31/2014 12/31/2013

Taxes, contributions and social charges (i) 50,289 53,764 50,836 54,293 Taxes payable in installments (ii) 244,914 253,724 244,914 253,724 Deposit for construction (iii) 47,557 30,389 47,560 30,392 Other obligations 41,179 20,086 41,359 20,112 Total 383,939 357,963 384,669 358,521

Non-current liabilities (256,803) (250,738) (256,805) (250,741)

Current liabilities 127,136 107,225 127,864 107,780

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

(i) Taxes, contributions and social charges are as follow:

Parent company Consolidated 12/31/2014 12/31/2013 12/31/2014 12/31/2013

National Institute of Social Security (INSS) 20,336 19,169 20,518 19,378 Social Contribution on Revenue (COFINS) 12,381 15,733 12,482 15,824 Social Integration Program (PIS) 2,688 3,416 2,710 3,436 Withholding Income Tax (IRRF) 7,196 6,788 7,229 6,817 Government Severance Indemnity Fund 3,580 for Employees (FGTS) 4,814 3,626 4,869 Other 4,108 3,465 4,271 3,590

Current liabilities 50,289 53,385 50,836 53,914

(ii) This refers to the Offsetting Agreement which establishes that tax and non-tax debts payable by COPASA MG shall be offset against its credits arising from water supply and sewage service invoices, payable by the Belo Horizonte Municipal Government. The reciprocal debts shall be paid in 120 monthly and consecutive installments, bearing 1% interest and annual monetary restatement based on the Special Extended Consumer Price Index (IPCA-E). At December 31, 2014, 62 installments remain payable and the final maturity of the arrangement will be in February 2020.

(iii) This refers to funds of the Brazilian National Water Agency (ANA) held by COPASA MG under the Water Basin Depollution Program (PRODES), to be transferred as payment for the treated sewage, through the attainment of treated sewage and abatement of polluting emissions goals. The payment for the treated sewage will be released to the Company in twelve quarterly, consecutive installments after obtaining a pollution reduction target certificate to be issued by the ANA.

70 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

The contracts entered into by COPASA MG and ANA at December 31, 2014 were as follow:

ETE Date Contract Current balance Signature Maturity Number Amount Note 7 (b)

Betim Central 12/11/2007 12/31/2017 039/2007 10,160 12,233 Ibirité 12/21/2011 12/31/2018 099/2011 4,612 5,709 Patos de Minas 12/18/2012 12/31/2018 099/2012 8,114 9,394 Cataguases 12/19/2013 10/1/2018 101/2013 3,538 3,849 Carmo do Paranaíba 12/19/2013 6/30/2018 104/2013 2,342 2,548 Mateus Leme 12/19/2013 6/30/2020 105/2013 2,442 2,652 São Gotardo 12/19/2013 11/30/2018 106/2013 3,235 3,520 Igarapé 12/31/2013 8/31/2020 111/2013 4,324 4,662 Ribeirão das Neves/Veneza 12/31/2013 7/31/2018 112/2013 4,061 4,378 Timóteo e Coronel Fabriciano 12/12/2014 12/31/2021 084/2014 2,809 - Caratinga 12/12/2014 1/31/2020 086/2014 6,437 - Ribeirão das Neves/Sede 12/12/2014 11/30/2021 087/2014 5,358 - Total 57,432 48,945

At December 31, 2014, the funds related to Timóteo and Coronel Fabriciano, Caratinga and Ribeirão das Neves/Sede ETEs have not yet been provided.

In January 2014, the right to receive the amount transferred by the National Water Agency (ANA) was recognized, with a credit of R$ 6,542 in deferred income, of which R$ 1,367 was related to the remaining amount of the ETE Onça, and R$ 5,175 upon compliance of the 1st phase established in the agreement referring to ETE Betim Central.

71 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

12. Borrowing and debentures

Parent company Consolidated 12/31/2014 12/31/2013 12/31/2014 12/31/2013

Current State government/BDMG 541 3,047 541 3,047 Caixa Econômica Federal 78,228 123,627 78,228 123,627 National Treasury - 3,327 - 3,327 National Bank for Economic and Social 68,600 59,269 68,600 59,269 Development (BNDES) - BNE Promissory Notes - Bradesco 140,585 - 140,585 - FINAME 13,053 4,981 13,121 4,984 Banco do Brasil - - 793 401 Federal government - bonus 611 2,004 611 2,004 KfW Bank 24,535 4 24,535 4 Bank borrowing 326,153 196,259 327,014 196,663

Simple debentures 281,779 275,267 281,779 275,267 Debentures 281,779 275,267 281,779 275,267

Total current 607,932 471,526 608,793 471,930

Non-current State government/BDMG - 1,032 - 1,032 Caixa Econômica Federal 414,603 508,499 414,603 509,061 National Bank for Economic and Social 490,745 485,572 490,745 485,572 Development (BNDES) - BNE FINAME 96,515 72,042 97,013 72,042 Banco do Brasil - - 1,142 467 Federal government - bonus 66,583 59,654 66,583 59,654 KfW Bank 195,190 65,670 195,190 65,670 Bank borrowing 1,263,636 1,192,469 1,265,276 1,193,498

Simple debentures 1,563,261 1,492,272 1,563,261 1,492,272 Debentures 1,563,261 1,492,272 1,563,261 1,492,272

Total non-current 2,826,897 2,684,741 2,828,537 2,685,770

Total current and non-current 3,434,829 3,156,267 3,437,330 3,157,700

72 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

(a) Borrowing

At December 31, 2014, the book values of the Company's borrowing in foreign currency total R$ 286,919 (R$ 127,332 in December 2013), of which R$ 67,194 is in US Dollars and R$ 219,725 in Euros (R$ 61,658 in US Dollars and R$ 65,674 in euros in December 2013).

Amounts recorded under non-current liabilities fall due as follow:

Parent company Consolidated Maturity year 12/31/2014 12/31/2013 12/31/2014 12/31/2013

2015 - 173,935 - 174,399 2016 155,941 137,345 156,664 137,483 2017 124,594 100,523 125,153 100,593 2018 125,012 101,708 125,083 101,778 2019 123,423 103,395 123,494 103,465 2020 117,403 97,934 117,473 98,004 2021 113,175 88,984 113,245 89,054 2022 to 2037 504,088 388,645 504,164 388,722 Total 1,263,636 1,192,469 1,265,276 1,193,498

Changes in borrowing are as follow:

Parent company Consolidated 12/31/2014 12/31/2013 12/31/2014 12/31/2013

At January1 1,388,728 1,381,873 1,390,161 1,381,873 New borrowing 496,639 216,072 498,105 217,634 Accrued charges 92,446 105,241 92,540 105,353 Monetary and foreign exchange variations 10,536 19,663 10,536 19,663 Repayment of principal (306,723) (227,873) (307,127) (228,039) Payment of charges (91,837) (106,248) (91,925) (106,323) At December 31 1,589,789 1,388,728 1,592,290 1,390,161

Current liabilities (326,153) (196,259) (327,014) (196,663) Non-current liabilities 1,263,636 1,192,469 1,265,276 1,193,498

73 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

On December 8, 2014, the Company and Bradesco BBI SASA entered into an agreement for the coordination, placement and public distribution of Commercial Trade Notes, under a firm guarantee regime, of the 2nd issue of COPASA MG. It amounts to R$ 140,000 and is divided into 140 Promissory Notes in single series of R$ 1,000 each, with a maturity of 360 days, and will bear interest, at the maturity date, on the unit par value amount, corresponding to the accumulated variation of 107% of the Interbank Deposit (DI) daily average rate for one day ("over extra grupo").

The funds raised through this will be used by the issuer as an addition to its Investment Program.

On November 12, 2014, the subsidiary COPANOR entered into a loan agreement of R$ 1,466 with Banco do Brasil. This agreement is subject to an interest rate of 113% p.a. of the average rate for the Interbank Deposit Certificate (CDI), to be paid on each base date starting on December 21, 2014, upon the maturity and settlement of the debt.

The grace period for principal payments is four months and repayments will be in 30 monthly, equal, consecutive installments of R$ 49 due on the 21st day of each month during the period between May 21, 2015 and October 21, 2017, that is, the final maturity date.

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

Bank borrowing and debentures mature through 2037 and bear average coupons of 7.63% p.a. (7.66% in December 2013). The balances of financing facilities are subject to specific rates, as follow:

Parent company/Consolidated Financing lines Rates

State government/BDMG General Market Price Index (IGP-M) Caixa Econômica Federal Referential Rate (TR) National Treasury Referential Rate (TR) BNDES - BNE Exceeding 6% of Long term Interest Rate TJLP) Promissory Notes Interbank Deposit (ID) Federal government - bonus US Dollar KfW Bank Euro Banco do Brasil - COPANOR Interbank Deposit Certificate (CDI) Debentures (i) (i) See letter "c" of Note 12.

74 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

(b) Guarantees for bank borrowing and financing

As collateral for financing, the Company has pledged the following:

(i) Foreign currency agreements

Federal government - bonds

These are guaranteed up to the contract balance by a surety of the Minas Gerais State Government and by the Company's tariff revenue, up to the limit sufficient for the payment of the installments and other charges due on the maturity dates. As additional guarantees for the Discount Bond and Par Bond, the Company maintains a reserve account at Banco do Brasil amounting to R$ 53,375, restated through December 31, 2014 (R$ 42,518 in December 2013), by applying the average price of the Zero Coupon Bond of the US Treasury, recorded in the account "Collateral for financing".

Kreditanstalt Fur Wiederaufbau - KfW:

These are guaranteed up to the contract balance by a surety of the Minas Gerais State Government and by the Company's tariff revenue, up to the limit sufficient for the payment of the installments and other charges due on the maturity dates, as well as by the separate collateral agreement executed between KfW and the Federal Republic of Brazil, and the credit of payment guaranteed by the Federal Republic of Germany. As an additional guarantee, the Company will maintain a reserve account at the Federal Savings and Loan Bank (CEF), the minimum balance of which shall be the amount corresponding to one monthly debt service payment falling due. The balance of this account recorded as "Collateral for financing" is R$ 1,588 at December 31, 2014 (R$ 891 in December 2013).

(ii) Local currency agreements

Fiduciary transfer of receivables and restricted account agreements:

 In order to improve and expand the systems in operation, the Company raised funds, between 1995 and 2011, from various financing agencies, and on October 29, 2002, these agreements were consolidated under the Restricted Account Agreement made between the Company, Caixa Econômica Federal (CEF), designated as administrator, and Unibanco, as the financial agent, whereby new funds were released from the Government Severance Indemnity Fund For Employees (FGTS). New agreements for the fiduciary transfer of receivables and restricted accounts for the release of new FGTS funds were entered into on July 4, 2006, under the Sanitation for All Program ("Programa Saneamento para Todos"), which superseded all existing programs. Bradesco and Itaú also acted as the financial agents of the funds. The Company pledged the following as security for these agreements:

• Fiduciary collateral transfer of part of COPASA MG's receivables from the water supply and sewage collection services provided to its private sector consumers, at the non-cumulative minimum amounts of R$ 17,000 and R$ 15,300 per month, adjusted based on the variations of the IPCA (Amplified Consumer Price index) disclosed by the Institute of Economic Research (FIPE).

75 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

• Fiduciary transfer to the assignors of part of the funds receivable from CEF, related to the temporary cash investment funds, which are comprised of funds deposited in the restricted account and reserve account, which shall correspond to three times the amounts of the installments falling due and whose balance as at December 31, 2014 is recorded as "Collateral for financing" amounting to R$ 19,276 (R$ 25,462 in December 2013).

 Borrowing agreements with the BNDES for the optimization and expansion of the water supply and sewage treatment systems in the concession areas are collateralized by a portion of the receivables for the provision of public utility services (water supply and sewage services) at a minimum of R$ 3,000 and R$ 23,000 per month, adjusted annually by the IPCA/IBGE, and by reserve account deposits whose minimum balance corresponds to three times the amount of the installments falling due. The balance of this account recorded as "Collateral for financing" is R$ 25,880 at December 31, 2014 (R$ 23,546 in December 2013).

 Borrowing agreements entered into with the CEF under the CAIXA PAC - 2009 and 2010 programs, for the expansion of the water supply and sewage treatment systems in the concession areas, are collateralized by concession receivables relating to tariff revenue earned in the municipalities where the construction projects will be performed, at three times the value of the monthly charge, credited to a centralized account, and by reserve account deposits whose minimum balance corresponds to the amounts of the installments falling due. The balance of this account recorded as "Collateral for financing" is R$ 2,689 at December 31, 2014 (R$ 1,605 in December 2013).

(iii) Other borrowing

 Borrowing agreements entered into with the CEF for construction projects and the expansion of the systems and connections are collateralized by deposits in collateral accounts whose minimum balance corresponds to the value of the monthly charges for the agreement executed on December 9, 2003, and three times the value of the monthly charges for the agreement executed on June 30, 2004, calculated based on the most recent charges available under these agreements. The balance of this account recorded as "Collateral for financing" is R$ 7,304 at December 31, 2014 (R$ 10,247 in December 2013).

 Other financing transactions related to both the State Government/BDMG and the National Treasury are guaranteed by the Minas Gerais State Government and by the Company's tariff revenue.

76 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Parent company/Consolidated 12/31/2014 12/31/2013 Subscriptions Subscription date /series Current Non-current Current Non-current Non-convertible debentures Subscription - 1st issue 1st and 2nd 6/30/2004 - - 4,515 - 3rd and 4th 11/9/2004 - - 4,515 - 5th and 6th 7/29/2004 - - 4,515 - 7th 12/19/2005 - - 2,258 - 8th and 9th 4/24/2006 - - 4,515 - 10th 12/19/2006 - - 2,258 - 11th and 12th 3/23/2007 - - 4,516 - Total - 1st issue - - 27,092 - Subscription - 3rd issue 1st to 6th 12/6/2007 16,098 63,397 15,923 79,246 7th 9/25/2008 2,683 10,566 2,654 13,208 8th 12/6/2008 8,049 31,699 7,962 39,623 9th to 11th 3/30/2009 8,049 31,699 7,962 39,623 12th to 14th 11/27/2009 2,683 10,566 2,654 13,208 15th to 17th 5/26/2010 8,049 31,699 7,962 39,623 18th 7/2/2010 2,683 10,566 2,654 13,208 Total - 3rd issue 48,294 190,192 47,771 237,739 Subscription - 4th issue 1st 12/27/2010 40,838 223,817 38,586 240,054 2nd 11/24/2011 25,219 162,543 24,840 187,232 3rd 12/27/2012 33,389 215,206 28,166 212,324 Total - 4th issue 99,446 601,566 91,592 639,610 Subscription - 5th issue Single 10/27/2011 15,457 274,910 1,477 288,000 Total - 5th issue 15,457 274,910 1,477 288,000 Subscription - 6th issue 1st 2/23/2012 59,232 85,680 59,096 142,840 2nd 2/23/2012 49,565 156,910 48,239 184,083 Total - 6th issue 108,797 242,590 107,335 326,923 Subscription - 7th issue 1st 4/24/2014 3,232 130,000 - - 2nd 4/24/2014 6,553 124,003 - - Total - 7th issue 9,785 254,003 - -

Total debentures 281,779 1,563,261 275,267 1,492,272

77 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Changes in debentures are as follow:

Parent company/Consolidated 12/31/2014 12/31/2013

At January 1 1,767,539 1,677,505 New debentures 286,041 175,734 Accrued charges 151,204 124,978 Monetary variation 33,764 26,803 Repayment of principal (253,719) (109,950) Payment of charges (139,789) (127,531) At December 31 1,845,040 1,767,539

Current liabilities (281,779) (275,267) Non-current liabilities 1,563,261 1,492,272

Non-convertible debentures

 Subscription - 1st issue:

In June 2004, the Company placed 300 non-convertible simple debentures of R$ 1,000 each, in a private issue, through exclusive subscription by BNDES. These debentures were issued in twelve series of R$ 25,000 each. The subscription price of each series was equivalent to the nominal value plus the interest mentioned below, calculated on a pro rata basis from the issue date to the effective subscription date, under the following contractual terms and conditions:

Date of issue June 15, 2004 Term 10 years Grace period of the principal 36 months Amortization 84 months Final maturity July 15, 2014 Compensation TJLP + 3.58% p.a. Guarantee 20% of the revenue collected, plus reserve account

This 1st issue was guaranteed by 20% of the Company's revenue from tariffs and a reserve account, the minimum balance of which corresponded to three monthly installments falling due, related to all debentures of all series issued and subscribed, deposited in an investment fund, recorded as "Collateral for financing". There was no pledged amount at December 31, 2014 because the final amortization of this issue was made on July 15, 2014 (R$ 12,149 in December 2013).

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

78 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

 Subscription - 3rd issue

In December 2007, the Company placed 450 non-convertible simple debentures of R$ 1,000 each, in a private issue, through exclusive subscription by BNDES. These debentures are issued in eighteen series of R$ 25,000 each, under the following contractual terms and conditions:

Date of issue June 1, 2007 Term 12 years Grace period of the 30 months principal Amortization 114 months Final maturity December 15, 2019 Compensation TJLP + 2.3% p.a. Guarantee Floating, with assignment and restriction of funds receivable, plus reserve account

This 3rd issue is guaranteed by monthly minimum deposits of R$ 18,000, related to the tariff revenue of the Company, updated annually based on the IPCA, and by a reserve account, whose minimum balance must be equal to three monthly installments falling due, related to all debentures of all series issued and subscribed for, deposited in an investment fund, recorded as "Collateral for financing". At December 31, 2014, the amount pledged as collateral totaled R$ 16,523 (R$ 16,992 in December 2013).

 Subscription - 4th issue:

In July 2010, the Company placed nonconvertible simple debentures, in a private issue divided into three series, the first and the third series, amounting to R$ 222,210 and R$ 296,280, respectively, through exclusive subscription by the BNDES, and the second series, amounting to R$ 222,210, through exclusive subscription by BNDES Participações SA - BNDESPAR. The first and the second series are comprised of 3,000 debentures each, and the third series of 4,000 debentures, totaling 10,000 debentures of R$ 74.07 each, under the following contractual terms and conditions:

Date of issue July 15, 2010 Term 144 months for the 1st and 3rd series and 145 months for the 2nd series Grace period of the 36 months for the 1st and 3rd series and 37 months for the 2nd series principal Amortization 108 months for the 1st and 3rd series and 9 annual for the 2nd series Final maturity December 15, 2022 Compensation TJLP + 1.55% p.a. for the 1st and 3rd series, and IPCA + 9.046555% p.a. for the 2nd series Guarantee Fiduciary transfer

This 4th issue is guaranteed by the Company's revenue from tariffs corresponding to the monthly installment of R$ 32,000, updated annually by the IPCA, and by the Company's receivables from the depository bank, related to the deposits to be made and funds existing in the "restricted account" earmarked for fiduciary transfer of receivables.

79 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

 Subscription - 5th issue:

In August 2011, the Company placed non-convertible simple debentures, in a private issue, through an exclusive subscription by Planner Truste DTVM Ltda., consisting of a single series of 288,000 debentures of R$ 1 each, amounting to R$ 288,000, under the following contractual terms and conditions:

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

Date of issue September 20, 2011 Term 240 months Grace period of the principal 42 months Amortization 198 months Final maturity September 30, 2031 Compensation TR + 9% p.a. Guarantee Assignment and restriction of funds receivable

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

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

 Subscription - 6th issue:

On February 15, 2012, the Company placed 400 unsecured non-convertible simple debentures of R$ 1,000 each, in a public placement, through exclusive subscription by Pentágono Distribuidora de Títulos e Valores Mobiliários. These debentures were issued in two series of R$ 200,000 each, totaling R$ 400,000, under the following contractual terms and conditions:

Date of issue February 15, 2012 Term 60 months for the 1st series and 84 months for the 2nd series Grace period of the 24 months principal Amortization 7 equal and consecutive semi-annual installments for the 1st series, and 06 equal and consecutive annual installments for the 2nd series Final maturity February 15, 2017 for the 1st series and February 15, 2019 for the 2nd series Compensation 100% of the over extra-group Interbank Deposit rate plus a spread of a 0.94% p.a. for the 1st series and IPCA plus interest corresponding to 100% of the yield on National Treasury Notes (NTN) - series B for the 2nd series. Guarantee Unsecured

80 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

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

 Subscription - 7th issue:

On April 15, 2014, the Company issued 25,000 unsecured non-convertible simple debentures of R$ 10,000 each, in a public placement, through exclusive subscription by Pentágono Distribuidora de Títulos e Valores Mobiliários. These debentures were issued in a series of 13,000 (1st series) and another series of 12,000 (2nd series), totaling R$ 250,000, under the following contractual terms and conditions:

Date of issue April 15, 2014 Term 60 months for the 1st series and 84 months for the 2nd series Grace period of the 36 months principal Amortization Single installment at the maturity date for the 1st series, and 5 equal and consecutive annual installments for the 2nd series Final maturity April 15, 2019 for the 1st series and April 15, 2021 for the 2nd series Compensation Interest of 108.50% of the Interbank Deposit (ID) rate for the 1st series, and Consumer Price Index (IPCA) plus fixed interest of 7.39% p.a., with a basis of 252 business days, for the 2nd series. Guarantee Unsecured

The funds from this issue are being used in the Company's investment program, and are allocated to non- financed investments, such as the acquisition of land, indemnities of assets from new concessions and the debt rescheduling process.

(d) Fair value

The carrying values and fair values of borrowing and debentures are disclosed in Note 20.

(e) Restrictive contractual clauses - Covenants

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

(i) Covenants on syndicated loans:

Index Limits

Total debt/equity Equal to or less than 1.0 EBITDA/debt service Equal to or greater than 1.55 Water and sewerage connections/number of Equal to or greater than 350 employees

81 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

(ii) Covenants in agreements with CEF - the agreements originally signed with Unibanco, involving FGTS funds, were subsequently transferred and are being managed by CEF, as described above in Item 2 "Fiduciary transfers of receivables and restricted account agreements":

Index Limits

Total debt/equity Equal to or less than 1.0 EBITDA/debt service Equal to or greater than 1.7 Current liquidity Above 0.9 Water and sewerage connections/number of Above 365 employees

(iii) Covenants in agreements with BNDES-BNA/BND/BNE:

Annual calculation - 1st issue of debentures (450 million)/borrowing contracts (48 million and 578 million):

Index Limits

Net debt/EBITDA Equal to or less than 3.0 EBITDA/Net operating revenue Equal to or greater than 36% EBITDA/debt service Equal to or greater than 1.5

(iv) Covenants in agreements with BNDES-BNA/BND/BNE:

Quarterly calculation - 7th issue of debentures (740 million)/borrowing contracts (181 million):

Index Limits

Net debt/EBITDA Equal to or less than 3.0 EBITDA/Net operating revenue Equal to or greater than 36% EBITDA/debt service Equal to or greater than 1.5

(v) Covenants in agreements with BNDES/debentures:

Index Limits

EBITDA/debt service Equal to or greater than 1.5 EBITDA margin Equal to or greater than 33% Indebtedness Equal to or less than 70%

(vi) Covenants in agreements with KfW:

Index Limits

Total liabilities/equity Equal to or less than 1.0 EBITDA/debt repayment Equal to or greater than 1.5

82 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

(vii)Covenants in agreements with CEF/BB/HSBC, 5th and 6th issues of debentures:

Index Limits

Net debt/equity Equal to or less than 1.0 EBITDA/debt service Equal to or greater than 1.5 Total debt/equity Equal to or less than 1.0 Net debt/EBITDA Equal to or less than 3.0 EBITDA/Net operating revenue Equal to or greater than 36%

At December 31, 2014, the EBITDA margin (EBITDA on net operating revenue) was 33.41%, which is not sufficient to comply with the minimum established by the credit instruments held with BNDES, as mentioned in item (iii), letter (a) above, according to the specific criteria defined for the calculation of such liabilities.

Even before using the custody period provided for in the related contract, in order to present additional guarantees to the creditor, which, on average, is 90 days after the base date of the financial statements, the Company's management concluded negotiations with BNDES, based on a proposal of the latter, regarding contractual management improvements and the water crisis faced by the Southeast region of Brazil, which is affecting the sanitation companies, with the purpose of reestablishing the covenants effective since December 31, 2014, except those related to the EBITDA margin indicator, adjustment of other ratios, standardization of the criteria and period for calculation and definition of rules for guarantee-related efforts, thus reestablishing compliance with all contractual conditions.

For all other contracts, taking into accounting the specific calculation criteria for such obligations, the aforementioned facts are not applicable.

13. Provision for contingencies

(a) Probable loss contingencies

Provisions are as follow:

Parent company 12/31/2014 12/31/2013 Contingencies Judicial Net Contingencies Judicial Net deposits balance deposits balance

Civil 48,951 (1,227) 47,724 37,164 (1,153) 36,011 Labor 59,099 (1,237) 57,862 33,542 (824) 32,718 Tax 890 (435) 455 828 (414) 414 Environmental 7,717 - 7,717 7,331 - 7,331

Total 116,657 (2,899) 113,758 78,865 (2,391) 76,474

83 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Consolidated 12/31/2014 12/31/2013 Contingen Judicial Net Contingen Judicial Net cies deposits balance cies deposits balance

Civil 48,981 (1,227) 47,754 37,194 (1,153) 36,041 Labor 61,788 (1,932) 59,856 35,406 (1,439) 33,967 Tax 890 (435) 455 828 (414) 414 Environmental 7,717 - 7,717 7,331 - 7,331

Total 119,376 (3,594) 115,782 80,759 (3,006) 77,753

The changes in provisions are as follows:

Parent Consolidated company

Balance at December 31, 2013, net of judicial deposits 78,865 80,759 Additions 60,679 62,282 Uses (4,709) (4,854) Reversals (18,178) (18,811)

(-) Offset of judicial deposits (2,899) (3,594)

At December 31, 2014 113,758 115,782

Uses refer to provisions settled or litigation lost by the Company and classified as accounts payable.

The provisions for contingencies recorded are considered sufficient by management to cover probable losses on administrative and judicial proceedings involving tax, labor and civil matters, taking into account the advice of the legal advisors.

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

(i) Provisions for civil contingencies

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

84 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

In 2003, the Public Prosecution Office of the State of Minas Gerais filed a public civil action questioning the tariff increases for the municipalities where the Company operated in that year. The action questions the fact that the adjustment had been applied to the first bills issued after the increase date, rather than only billing for consumption subsequent to the increase date. Thus, the Public Prosecution Office proposed the cancellation of the tariff increase. The final decision found the original claim partially valid and required the Company to return to customers the portion of the tariff increase corresponding to the consumption period preceding the increase date. The court-appointed expert determined the amounts, but the case is being examined by the Prosecution Office. At December 31, 2014, the settlement of the amount involved in the final judgment was estimated at R$ 384 (R$ 359 in December 2013).

Environmental Protection Association Verde Gaia has been filing public civil actions against COPASA MG alleging the breach of Article 2 of State Law No. 12503/97, whereby water supply utilities are required to invest 0.5% of their operating revenue in environmental protection and conservation of the water basins explored. During the various procedural stages within the Judicial Branch, courts of first and second instances handed down favorable decisions to the plaintiff, and most of the cases had to be reassessed as probable losses. Since the amount to be paid by the Company as a result of the probable loss in these cases will correspond to 0.5% of its operating revenue from water supply services to the respective municipality involved in each case, and not the value of the matter in dispute, the provision for the 52 cases amounts to R$ 7,717 at December 31, 2014 (R$ 7,331 in December 2013).

Luciene Ricardo da Silva, et al. filed a claim for tangible damages and pain and suffering caused by a landslide that buried the plaintiffs' property. This landslide was caused by a ruptured clandestine supply pipeline connected to an old water reservoir. This process is currently awaiting decision. In December 2013 the court requested the plaintiffs and the contractor to present their final arguments, and COPASA MG will subsequently be given such right, after which the court will hand down its decision. The memorials of COPASA MG were presented in January 2014 and stated that the Company never operated the Santa Cruz reservoir system. This proceeding is being held by the judge under advisement since October 2014, and we expect that the decision will be issued by the end of April 2015 and may be subject to appeal. The related provision for this matter at December 31, 2014 amounted to R$ 2,913 (R$ 2,720 in December 2013).

On October 18, 2011, Vivina Alves de Oliveira Sales et al. filed a claim for pain and suffering and tangible damages with the Court of Finance-Related Proceedings of the Judicial District of Varginha, State of Minas Gerais, resulting from damages to property supposedly caused by water leakage in the public water supply system, in the city of Varginha. From September 2012, the claim was in the expert report review stage. On October 29, 2013 the trial was held, which is to be followed by the sentence of the court. The related provision for the matter at December 31, 2014 amounted to R$ 1,646 (R$ 1,537 in December 2013).

(ii) Provisions for labor contingencies

Most of the claims for which the Company is directly liable relate to pain and suffering and tangible damages due to occupational illnesses or accidents, overtime, commuting time, risk and health exposure premiums, prior notice payments, salary differences deriving from alleged job equality, and challenges against instances of termination for cause. The Company records provisions for all labor contingencies where the outcome is considered a probable loss, which represents approximately 53.93% of the potential liabilities estimated for all labor contingencies.

85 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

The Company also appears as a co-liable joint defendant, with the principal liability lying with outsourced contractors that provide maintenance and construction services. In these cases, if the claims are upheld, these contractors are usually liable for paying the award. However, if the contractors are financially unable to make payment and consequently could potentially default, the Company may be legally compelled to settle the labor liability. Accordingly, the prospects for loss in these cases were considered probable, and at December 31, 2014 the Company recorded a related provision for contingencies amounting to R$ 2,894 (R$ 1,992 in December 2013).

In addition, the Company is currently a party to twenty-seven administrative proceedings initiated after an inspection by officials representing the Regional Labor Office, which resulted in infringement notices alleging that the Company failed to compute the effects of overtime worked on the employees' weekly time-off pay, and that this would represent an undue salary reduction, leading to the notices and a fine for each employee found to be in the same situation. This fine, in turn, affected the Company's contributions to the FGTS, leading to another fine per employee. Legal counselors assessed the likelihood of loss in these cases as probable, and therefore a related provision amounting to R$ 5,446 was recorded at December 31, 2014 (R$ 5,066 in December 2013).

This is a collective labor litigation, in course at the 24th labor court of Belo Horizonte, linked to a public civil lawsuit, whereby SINDÁGUA and the Public Prosecution Office challenge the extinct dismissal policy and motivational program adopted by the Company, pleading for the reintegration of the dismissed employees under this policy, with the payment of salaries not yet due and already due. In this case, COPASA MG was successful in the court of first instance, but the decision was reversed at the court of second instance. A new decision will be handed down by the Superior Labor Court. The likelihood of loss in this case was assessed as probable, and its amount was determined based on calculations made based on legal guidelines and reasons stated by the lawyers responsible for the case. The related provision at December 31, 2014 was adjusted to R$ 22,861 (R$ 1,564 in December 2013).

A public civil lawsuit was filed by the Public Prosecution Office, questioning the hiring of an employee for a specified period of time by the Company, which is still in the initial procedural phase, with the 5th Labor Court of Belo Horizonte/MG. Nevertheless, the likelihood of loss in this case was assessed as probable, and therefore a provision amounting to R$ 647 was recorded at December 31, 2014 (R$ 577 in December 2013).

Finally, there is a labor claim filed by SINDÁGUA for the payment of a profit sharing difference of the Company to the employees for 2010. This claim, filed with the 2nd Labor Court of Belo Horizonte/MG, was reviewed at the courts of first and second instances, and considered valid. A decision will be handed down by the Superior Labor Court due to the interlocutory appeal to higher courts filed by COPASA MG. The likelihood of loss in this case is assessed as probable, and therefore a related provision of R$ 17,187 was recorded at December 31, 2014 (R$ 15,515 at December 31, 2013).

(b) Possible contingent liabilities

COPASA MG is a party to other lawsuits for which the likelihood of loss is estimated as possible. No provision for losses on these lawsuits was recognized, as the Company believes it has a solid, legitimate defense.

86 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Ongoing proceedings at various administrative and judicial levels in which the Company is a defendant are as follow:

Nature 12/31/2014 12/31/2013

Civil 436,983 376,057 Tax 36,748 34,239 Environmental 3,336 - Total 477,067 410,296

(i) Civil

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

Individual lawsuits

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

Public Civil Actions and Class Actions

The Company is party to public civil actions and class actions that challenge, and seek to annul, declare void or suspend 19 of its concession agreements, namely those executed with the municipalities of Almenara, Barbacena, Campina Verde, Caratinga, Cataguases, Divinópolis, Frutal, Guidoval, Itajubá, Lavras, Leopoldina, Luz, Mateus Leme, Nanuque, Patos de Minas, Ribeirão das Neves, São Gotardo, Serra da Saudade and Três Corações. Except for Caratinga and São Gotardo, all other actions were classified as possible or remote losses and, accordingly, no provisions were recognized. It is important to note that a precedent from the Court of Appeals of the State of Minas Gerais in a similar case and the opinions of renowned jurists are in favor of the Company’s position that the concession agreements are lawful instruments.

Environmental actions

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

87 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

In one of these environmental class actions, the matter in dispute refers to the remediation of environmental damages caused by effluents discharged in the São Francisco River. To date no decision has been issued in this case, which totaled R$ 81,575 at December 31, 2014 (R$ 76,167 in December 2013) and whose likelihood of loss has been assessed as possible according to management.

Formal Commitments to Action (TACs)

In the past, several TACs were executed between the Company and the Prosecution Office of the State of Minas Gerais concerning environmental issues arising out of administrative and civil investigations. In most cases, these TACs require the Company to implement or improve local sanitary sewage systems or sewage treatment plants in order to prevent the disposal of untreated effluents into bodies of water. The investments required for compliance with these TACs are included in the Company's Investment Program.

(ii) Tax

This refers to several tax claims, the most significant of which are two disputes on a tax delinquency notice filed by the Brazilian Federal Revenue Secretariat in April 2004 because of the Company's failure to include, upon determination of the bases for assessment of PIS/PASEP and COFINS, the financial income from foreign exchange gains on liabilities, attributed to the decrease in the USD/R$ foreign exchange rate. The Company filed an administrative appeal, in both cases, for the rejection and challenging of the tax delinquency notice and the related tax assessment. These administrative appeals, however, were denied by the Board of Tax Appeals.

Accordingly, COPASA MG lodged a civil action, in the three cases, with the Federal Justice, challenging the validity of the tax notice and requesting a declaration of the non-existence of such tax liability, given that the Federal Supreme Court (STF) had declared the unconstitutionality of Law 9718/98 in respect of the broadening of the basis for the calculation of PIS/PASEP and COFINS. The cases have moved to the appellate level, and the Company had a favorable outcome on the COFINS case at trial court, although a final and unappealable decision on the matter has not yet been issued, while the PIS/PASEP case is still awaiting judgment on the appeal lodged by the Federal Government. The tax liability, adjusted through December 31, 2014, amounts to R$ 40,026 (R$ 35,949 in December 2013) and was classified as a possible contingent loss.

14. Profit sharing

As resolved by the Company's Board of Directors in a meeting held on March 1, 2011 and in accordance with the prevailing legislation, the amount to be distributed through Employee Profit Sharing is equivalent to 25% of the mandatory minimum dividends paid to stockholders, after the deduction of the legal reserve, and will have as computation basis for measurement of goals achievement, the percentage of completion of the Investment Program approved by the Company for the year, the number of connections per employee and its operating income.

88 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

The 2008/2010 Collective Agreement, signed at the meeting held on July 25, 2008 and ratified by the 2014 Collective Agreement, signed on September 10, 2014, determines that the computed amount of profit sharing shall be distributed among all employees, in a single installment payable in April.

At December 31, 2014, the Company recognized R$ 19,818 as a provision for the employee profit sharing (R$ 32,670 in December 2013).

15. Income tax and social contribution

(a) Current income tax and social contribution

In Brazil, income taxes include both federal income tax and social contribution. The statutory tax rates applicable to income tax and social contribution are 25% and 9%, respectively, resulting in a combined 34% rate as at December 2014 and 2013. The amounts reported as income tax expenses in the statements of income of the Company are reconciled with the statutory tax rates as follow:

Parent company 12/31/2014 12/31/2013

Profit before income tax and social contribution 432,640 566,158 Statutory rate 34% 34% Estimated expenses at statutory rate (147,098) (192,494)

Income tax and social contribution on: (Additions)/exclusions Equity in the results of subsidiaries (3,205) (2,440) Realization of special monetary restatement reserve (430) (475) Donations and incentives 2,372 - Other (additions)/exclusions (7,770) (4,359) Other reconciling items Interest on capital 35,136 47,458 Tax incentives 6,496 5,947 Income tax and social contribution (114,499) (146,363)

Current income tax and social contribution (122,106) (138,681) Deferred income tax and social contribution 7,607 (7,682) (114,499) (146,363) Effective rate 26.5% 25.9%

89 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Consolidated 12/31/2014 12/31/2013

Profit before income tax and social contribution 432,640 566,221 Statutory rate 34% 34% Estimated expenses at statutory rate (147,098) (192,515)

Income tax and social contribution on: (Additions)/exclusions Realization of special monetary restatement reserve (430) (475) Donations and incentives 2,372 - Other (additions)/exclusions (10,975) (6,841) Other reconciling items Interest on capital 35,136 47,458 Tax incentives 6,496 5,947 Income tax and social contribution (114,499) (146,426)

Current income tax and social contribution (122,106) (138,744) Deferred income tax and social contribution 7,607 (7,682) (114,499) (146,426) Effective rate 26.5% 25.9%

(b) Deferred income tax and social contribution

Deferred taxes are calculated on income tax (IRPJ) and social contribution (CSLL) losses and the temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The currently enacted tax rates of 25% for income tax and 9% for social contribution are used to calculate deferred taxes.

Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available to utilize temporary differences and/or tax losses, considering projections of future results based on internal assumptions and future economic scenarios, which are, therefore, subject to change.

90 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

The amounts of temporary differences and related deferred taxes are as follow:

Parent company/Consolidated Comprehen Recognized 12/31/2013 sive income in profit 12/31/2014 (loss) (loss) In assets Income tax and social contribution Temporary differences Provisions for impairment of trade receivables and litigation provision 34,748 - 15,206 49,954 Provisions for actuarial liabilities - 5,351 5,351 Provisions for CPC-related adjustments 137,068 - 11,716 148,784 Provision for tax contingencies 42,744 - (6,931) 35,813 Other temporary provisions - sundry 8,768 - 837 9,605 Total assets 223,328 5,351 20,828 249,507

In liabilities Income tax and social contribution Deferred exchange variations - - 6,957 6,957 Provisions for CPC-related adjustments 92,256 64 3,517 95,837 Provisions for actuarial liabilities 12,128 - - 12,128 Total liabilities 104,384 64 10,474 114,922

Total - net 118,944 5,287 10,354 134,585

At the Statutory Audit Board meeting and the Board of Directors’ meeting held on March 19, 2015, respectively, the technical study prepared by the Strategic Planning and Corporate Performance Department and the Finance and Investor Relations Director was approved, which contained projections of the adjusted future profitability at present value, evidencing the possibility of realization of the deferred tax asset.

According to this technical study, the future taxable events will allow the realization of the deferred tax asset existing at December 31, 2014, according to the following estimates:

Expected realization of deferred tax assets Parent company/Consolidated

In 2015 13,208 In 2016 23,499 In 2017 10,586 In 2018 11,050 In 2019 10,586 2019 onwards 180,578 249,507

Possible significant factors that could modify the projections will be reviewed during the coming years.

91 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Provisional Measure (MP) 627 was converted into Law 12,973/14 on May 13, 2014, and confirmed the revoking of the Transitional Tax System (RTT) from 2015. Early adoption in 2014 is allowed.

The Company analyzed the impacts of this Law on its financial statements and internal control structure and, after finding that no material tax effects were expected, decided not to anticipate the adoption of the rules and provisions of this new Law in 2014.

16. Technical cooperation agreements

These refer mainly to funds received, after July 2006, under agreements entered into by the Company with the State Regional Development and Urban Policy Department (SEDRU), the main purpose of which being the technical and financial cooperation for the expansion of the public sanitation system in the regions of Vale do Jequitinhonha, Estrada Real (in Ouro Preto) and other regions in the countryside of the state of Minas Gerais.

The amounts received are used in specified construction works under the terms of said agreements, and their amounts, when received, are recognized as technical cooperation agreement accounts in current liabilities, and when used, in current assets pending the matching of accounts.

According to the Normative Instruction (IN) 1, dated January 15, 1997, the funds from the technical cooperation agreement will be maintained in a specific bank account, and withdrawals will only be allowed for the payment of expenses according to the Work Program. In addition, when not applied according to their purpose, the funds must be applied to a savings account with an official financial institution. Funds available from the technical cooperation agreement are recorded in "Banks and agreement investments".

The net balance of these agreements is as follows:

Parent company Receivables (assets) Advances (liabilities) Net

December 31, 2014 State 73,042 (57,303) 15,739 Other 131,288 (109,633) 21,655 Total 204,330 (166,936) 37,394

December 31, 2013 State 229,229 (217,981) 11,248 Other 68,823 (86,618) (17,795) Total 298,052 (304,599) (6,547)

92 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Consolidated Receivables (assets) Advances (liabilities) Net

December 31, 2014 State 588,709 (560,501) 28,208 Other 131,288 (109,633) 21,655 Total 719,997 (670,134) 49,863

December 31, 2013 State 674,359 (644,266) 30,093 Other 68,823 (86,618) (17,795) Total 743,182 (730,884) 12,298

17. Pension plan

The related amounts and information on retirement benefit obligations are as follow:

Parent company/Consolidated 12/31/2014 12/31/2013

Non-current liabilities 121,582 106,010 Current liabilities 16,050 14,342 137,632 120,352

Normal contributions 12,680 12,067

Total obligations recorded in the balance sheet 150,312 132,419

Expenses (income) recognized in the statement of income with pension plan benefits: Benefit Plan RP1 -DB 2,958 3,667 Copasa Settled Plan 3,442 19,729 New Copasa Plan - DC (441) 948 Copass Saúde Plan ("Plano Copass Saúde") 16,766 - 22,725 24,344 Actuarial remeasurements recognized in the statement of comprehensive income in the year (10,389) 100,485 Accumulated actuarial gains recognized in the statement of comprehensive income for the year 13,155 23,543

93 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

On December 7, 1982, the Company signed an agreement and became sponsor of Fundação de Seguridade Social de Minas Gerais (FUNDASEMG), whose rights and obligations were later assumed by Fundação Libertas (previously PREVIMINAS), which was created for the purpose of supplementing the retirement income of participating employees, ensuring the maintenance of their benefit plan in the said Foundation. The Company's contributions match the contributions made by participating employees, pursuant to Supplementary Laws 108 and 109, of May 29, 2001, and its amount is determined based on the actuarial reports previously prepared.

Since 2002, the supplemental Defined Benefit (DB) pension plan sponsored by the Company has had an actuarial deficit, requiring increases in contributions made by the sponsoring entity and its employees, which up to November 2008 total approximately 127%, according to the actuarial valuation statements (DRAAs).

With the resolution of the Company's Board of Directors aimed at resolving the Company's plan deficit, and the approval, on June 23, 2010, by the National Superintendency of Pension Funds (PREVIC), of the new pension plan strategy of the Company, in the period between August 2 and October 29, 2010, all active employees, employees on leave from work and retirees had the opportunity to access a simulator to get to know the alternatives to the proposed Pension Plan and choose one of them. From November 1, 2010, the Company started to offer three different plans: a) the current DB plan, which was closed to new members, but remained in effect, receiving contributions from those who elected not to migrate to the other plans, b) the closed-end settled DB plan, created solely to administer employee benefits from settlement, and c) the DC plan, created to receive all members and retirees migrating from the former DB plan, as well as new employees and directors. Once the migration process was completed, in December 2011, the DB plan had 150 active participants and 183 retirees, the settled benefit plan had 2,018 active participants and 1,364 retirees, and the DC plan had 10,621 active participants and 476 retirees.

The benefits offered in the defined benefit plan currently closed to new adhesions are: supplementary retirement benefits (due either to disability, age or years of contribution and special retirement), as well as sickness benefits, pensions, prisoner dependent benefit and death benefit.

The benefits offered in the settled benefit plan are: a) active participants, self-sponsored and retirees - settled scheduled retirement benefit payments, b) beneficiaries of active participants migrated from the defined benefit plan: settled death benefit and settled death annuity, and c) nonpaying members or their beneficiaries: settled benefit arising from the option for the proportional deferred benefits.

The benefits offered in the defined contribution plan are: a) for members who migrated from the DB plan to this DC plan, the time spent under the previous plan will be computed in the vesting requirements of the new plan, and b) for new members, guaranteed benefits are deferred proportional benefits, disability retirement, death benefit, prisoner dependent benefit and annual bonus.

The Company's actuarial assumptions are reviewed periodically and may differ significantly from actual results due to changes in market and economic conditions, regulatory events, court decisions, increase or decrease in termination rates and in participants' life expectancy.

94 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated a) Consolidated amounts The amounts related to the three benefit plans recognized in the balance sheet are as follow:

12/31/2014 12/31/2013

Present value of funded obligations (887,163) (772,621) (-) Impact of the restriction on the actuarial obligation 3,944 - Present value of obligation, net (883,219) (772,621) Fair value of plan assets 755,495 703,355 Restriction of contracted deficit (9,908) - Minimum requirements (additional liability) - (51,086) Plan liability, net (137,632) (120,352)

The change in the defined benefit obligation is as follows:

12/31/2014 12/31/2013

At January 1 772,621 1,009,615 Current service cost (636) 447 Interest cost 88,949 91,615 Contributions by plan participants 1,990 1,894 Actuarial remeasurements 45,747 (295,992) Benefits paid by the plan (38,274) (34,958) Cost of the service transferred to benefits not acquired (new) 14,088 - Cost of the service transferred to benefits already acquired (new) 2,678 - Present amount of obligation at December 31 887,163 772,621

Changes in the fair value of the benefit plan assets are as follows:

12/31/2014 12/31/2013

At January 1 703,355 737,830 Actual return on plan assets 67,240 (24,939) Employer contributions 21,184 23,528 Employee contributions 1,990 1,894 Benefits paid (38,274) (34,958) Fair value at December 31 755,495 703,355

The amounts recognized in the statement of income are as follow:

12/31/2014 12/31/2013

Current service costs (636) 447 Interest costs 88,949 91,615 Expected return on plan assets (82,354) (67,718) Past service costs 16,766 22,725 24,344

95 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated b) Amounts segregated by benefit plan

1) Benefit plan RP1 -DB

12/31/2014 12/31/2013

Present value of funded obligations (40,437) (38,914) (-) Impact of the restriction on the actuarial obligation 3,944 - Present value of obligation, net (36,493) (38,914) Fair value of plan assets 19,758 9,309 Restriction of contracted deficit (9,908) - Plan liability, net (26,643) (29,605)

The change in the defined benefit obligation is as follows:

12/31/2014 12/31/2013

At January 1 38,914 47,774 Current service cost 22 45 Interest cost 4,451 4,316 Contributions by plan participants 298 283 Actuarial remeasurements 727 (11,283) Benefits paid by the plan 2,477 (2,221) Present amount of obligation at December 31 40,437 38,914

The change in the fair value of plan assets is as follows:

12/31/2014 12/31/2013

At January 1 9,309 4,492 Actual return on plan assets 7,431 (1,202) Employer contributions 5,197 7,957 Employee contributions 298 283 Benefits paid (2,477) (2,221) Fair value at December 31 19,758 9,309

Estimated contributions to the defined benefit pension plan for the next financial year total R$ 5,458.

The amounts recognized in the statement of income are as follow:

12/31/2014 12/31/2013

Current service costs (22) 45 Interest costs 4,451 4,316 Expected return on plan assets (1,471) (694) 2,958 3,667

96 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Pension plan income (expenses) totaling R$ 2,958 (R$ 3,667 in December 2013) were recognized in the statement of income under "administrative expenses".

The actual return on plan assets in 2014 was R$ 7,431 (loss of R$ 1,202 in December 2013).

Investment strategies:

 The Board of Trustees of Fundação Libertas defines the investment guidelines  Investment objectives: achieve the minimum actuarial yield (INPC plus technical interest), in the short and long term  Types of allowed investments: fixed income - low-risk credit assets, shares, real estate and loans to plan members  Types of investments not allowed: medium and high-risk credit assets, foreign currency and others according to the Brazilian legislation  Use of derivatives: for hedging purposes.

Benchmarks for the investment plan assets:

 Fixed income: INPC + 5.45% p.a.  Variable income: IBOVESPA  Structured investments: INPC + 11.81% p.a.  Investments abroad: MSCI  Real estate: INPC  Operations with participants: INPC + 8% p.a.

The principal actuarial assumptions used were as follow:

Projected unit credit 12/31/2014 12/31/2013

Annual discount rate 11.01% p.a. 11.79% p.a. Expected annual return on plan assets 11.01% p.a. 11.79% p.a. Annual salary increase 7.95% p.a. 6.95% p.a. Annual increase in benefits 5.03% p.a. 5.00% p.a. Inflation rate 5.03% p.a. 5.00% p.a. AT - 2000 (rated down by AT - 2000 (rated down by Mortality table 10%) 10%) Disability table Light Média Light Média GAMA - Experiência GAMA - Experiência Morbidity table Libertas 2014 COPASA AT - 1949 rated up by Mortality of invalids AT - 1949 rated up by 100% 100% Turnover 1.026% p.a. 0.858% p.a.

97 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

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 2015.

Categories of assets for the RP1 plan - DB

12/31/2014 12/31/2013

Available 0.01% 0.01% Realizable (pensions and administrative) 25.57% 23.97% Fixed income 68.50% - Shares 4.31% 0.01% Investment funds - 75.25% Emerging companies 0.04% - Interests 1.08% - Real estate investments 0.49% 0.47% Borrowing - 0.30% Total plan assets (%) 100.00% 100.00%

Sensitivity analyses of main hypotheses

Biometric table Interest rate Position in +1 of age - 1 of age + 0.25% -0.25% 12/31/2014 Amount of: Present value of the plan actuarial obligation 39,952,477 40,908,322 39,552,801 41,648,043 40,437,298 Fair value of plan assets 19,758,255 19,758,255 19,758,255 19,758,255 19,758,255 Technical surplus (deficit) of the plan (20,194,222) (21,150,067) (19,794,546) (21,889,788) (20,679,043) Changes: Increase/decrease in actuarial -1.2% 1.2% -2.2% 3.0% - obligation Increase/decrease in plan assets - - - - - Increase/decrease of the technical -2.3% 2.3% -4.3% 5.9% - surplus (deficit) of the plan

2) COPASA Settled Plan

12/31/2014 12/31/2013

Present value of funded obligations (816,374) (720,020) Fair value of plan assets 722,502 684,408 Minimum requirements (additional liability) - (51,086) Plan liability, net (93,872) (86,698)

98 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

The changes in the defined benefit obligation during the year were as follow:

12/31/2014 12/31/2013

At January 1 720,020 945,651 Interest cost 82,904 85,990 Actuarial remeasurements 48,250 (279,529) Benefits paid by the plan (34,800) (32,092) Present amount of obligation at December 31 816,374 720,020

The change in the fair value of plan assets is as follows:

12/31/2014 12/31/2013

At January 1 684,408 726,249 Actual return on plan assets 57,021 (21,979) Employer contributions 15,873 12,230 Benefits paid (34,800) (32,092) Fair value at December 31 722,502 684,408

Estimated contributions to the defined benefit pension plan for the next financial year total R$ 16,671.

The amounts recognized in the statement of income are as follow:

12/31/2014 12/31/2013

Interest costs 82,904 85,990 Expected return on plan assets (79,462) (66,261) Provision for benefit plan 3,442 19,729

Pension plan expenses totaling R$ 3,442 (R$ 19,729 in December 2013) were recognized in the statement of income under administrative expenses.

The actual return on plan assets in 2014 was R$ 57,021 (loss of R$ 21,979 in December 2013).

Investment strategies:

 The Board of Trustees of Fundação Libertas defines the investment guidelines  Investment objectives: achieve the minimum actuarial yield (INPC plus technical interest), in the short and long term  Types of allowed investments: fixed income - low-risk credit assets, shares, real estate and loans to plan members  Types of investments not allowed: medium and high-risk credit assets, foreign currency and other according to the Brazilian legislation  Use of derivatives: for hedging purposes

99 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Benchmarks for the investment plan assets:

The principal actuarial assumptions used were as follow:

Projected unit credit 12/31/2014 12/31/2013

Annual discount rate 10.97% p.a. 11.79% p.a. Expected annual return on plan assets 10.97% p.a. 11.79% p.a. Annual increase in benefits 5.03% p.a. 5.00% p.a. Inflation rate 5.03% p.a. 5.00% p.a. AT - 2000 (rated down by AT - 2000 (rated down by Mortality table 10%) 10%) AT - 49, rated down by Mortality of invalids AT - 49 rated up by 100% 10% Disability table Light Média Light Média GAMA - experiência GAMA - experiência Morbidity table COPASA COPASA

Asset categories for the settled plan

12/31/2014 12/31/2013

Available 0.02% 0.01% Government securities 64.96% 11.74% Private deposit credit 12.14% - Realizable (pension and administrative) 10.62% 11.64% Shares 0.88% 0.01% Investment funds 0.73% 68.88% Derivatives 3.66% - Real estate investments 6.38% 6.95% Borrowing 0.61% 0.76% Total plan assets (%) 100.00% 100.00%

100 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Sensitivity analyses of main hypotheses

Biometric table Interest rate Position in +1 of age - 1 of age + 0.25% -0.25% 12/31/2014 Amount of: Present value of the plan actuarial obligation 804,238,443 828,149,699 794,843,072 838,921,054 816,374,265 Fair value of plan assets 722,502,472 722,502,472 722,502,472 722,502,472 722,502,472 Technical deficit of the plan (81,735,971) (105,647,227) (72,340,600) (116,418,582) (93,871,793) Changes: Increase/decrease in actuarial -1.5% 1.4% -2.6% 2.8% - obligation Increase/decrease in plan assets - - - - - Increase/decrease of the technical surplus (deficit) of the -12.9% 12.5% -22.9% 24.0% - plan

3) New COPASA plan - DC

12/31/2014 12/31/2013

Present value of funded obligations (13,586) (13,687) Fair value of plan assets 13,235 9,638 Plan liability, net (351) (4,049)

The changes in the defined contribution obligation for the year were as follow:

12/31/2014 12/31/2013

At January 1 13,687 16,190 Current service costs (614) 402 Interest costs 1,594 1,309 Employee contributions 1,692 1,611 Actuarial losses (1,776) (5,180) Benefits paid under the plan (997) (645) Present amount of obligation at December 31 13,586 13,687

Estimated contributions to the defined benefit pension plan for the next financial year total R$ 1,893.

101 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

The change in the fair value of plan assets is as follows:

12/31/2014 12/31/2013

At January 1 9,638 7,089 Actual return on plan assets 2,788 (1,758) Employer contributions 114 3,341 Employee contributions 1,692 1,611 Benefits paid (997) (645) Fair value at December 31 13,235 9,638

The amounts recognized in the statement of income are as follow:

12/31/2014 12/31/2013

Current service costs (614) 402 Interest costs 1,594 1,309 Expected return on plan assets (1,421) (763) (441) 948

Pension plan expenses totaling negative R$ 441 (R$ 948 in December 2013) were recognized in the statement of income under administrative expenses.

The actual return on plan assets in 2014 was R$ 2,788 (loss of R$ 1,758 in December 2013).

Investment strategies:

Benchmarks for the investment plan assets:

The actual return rate on the plan assets in 2014 was 11.05% p.a.

102 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

The main actuarial assumptions were as follow:

Projected unit credit 12/31/2014 12/31/2013

Annual discount rate 11.05% p.a. 11.94% p.a. Expected annual return on plan assets 11.05% p.a. 11.94% p.a. Annual salary increase 7.95% p.a. 5.00% p.a. Annual increase in benefits 5.03% p.a. 5.00% p.a. Inflation rate 5.03% p.a. 5.00% p.a. AT-2000 (rated AT-2000 (rated Mortality table down by 10%) down by 10%) Disability table 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 the plan asset allocation target, defined based on the investment policy for 2015.

Asset categories for the new plan

12/31/2014 12/31/2013

Available 0.01% 0.01% Realizable (pension and administrative) 1.42% 1.46% Government securities 70.51% - Private deposit credit 12.68% - Shares 0.94% 0.01% Investment funds 0.73% 88.01% Derivatives 3.83% - Real estate investments 6.34% 7.17% Borrowing 3.54% 3.34% Total plan assets (%) 100.00% 100.00%

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% 12/31/2014 Amount of: Present value of the plan actuarial obligation ------13,585,701 Fair value of plan assets 13,234,817 13,234,817 13,234,817 13,234,817 13,234,817 13,234,817 13,234,817 Technical surplus (deficit) of the plan 13,234,817 13,234,817 13,234,817 13,234,817 13,234,817 13,234,817 (350,884) Changes: Increase/decrease in actuarial obligation -100.0% -100.0% -100.0% 100.0% 100.0% 100.0% - Increase/decrease in plan assets ------Increase/decrease of the technical surplus (deficit) of the plan -3,871.8% -3,871.8% 3,871.8% 3,871.8% 3,871.8% 3,871.8% -

103 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

4) Copass Saúde Plan ("Plano Copass Saúde")

12/31/2014

Present value of funded obligations (16,766) Fair value of plan assets - Plan liability, net (16,766)

The changes in the defined contribution obligation for the year were as follow:

12/31/2014

At January 1 Cost of services transferred to benefits not acquired (new) 14,088 Cost of services transferred to benefits already acquired (new) 2,678 Present amount of obligation at December 31 16,766

The main actuarial assumptions were as follow:

Projected unit credit 12/31/2014

Annual discount rate 10.99% p.a. Expected annual return on plan assets 10.99% p.a. Annual salary increase 5.00% p.a. Annual increase in benefits 5.00% p.a. Inflation rate 5.00% p.a. HCCTR 4.80% Mortality table AT-2000 (rated down by 10%) Disability table 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 the plan’s asset allocation target, defined based on the investment policy for 2015.

104 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Sensitivity analyses of main hypotheses

Biometric table Interest rate Position in + 1 of age - 1 of age + 0.25% -0.25% 12/31/2014 Amount of: Present value of the plan actuarial obligation - - - - 16,766,325 Fairvalueofplanassets - - - - - Technical deficit of the plan - - - (16,766,325) Changes: Increase/decrease in actuarial obligation -100.0% -100.0% -100.0% -100.0% - Increase/decrease in plan assets - - - - - Increase/decrease of the technical surplus (deficit) of the plan -100.0% -100.0% -100.0% -100.0% -

18. Equity and dividends

(a) Capital

The Company is authorized to increase its capital up to the limit of R$ 3 billion after the approval of the Board of Directors. The Company's subscribed and paid-up capital amounts to R$ 2,773,985,614.66, represented by 119,684,430 registered common shares with no par value.

The Company is allowed to issue common shares, debentures convertible into common shares and subscription warrants within the authorized capital limit. Capital increases above the authorized capital are subject to approval at General Meetings of Stockholders based on capital increase proposals submitted by the Board of Directors. This procedure is also adopted when payment is made in the form of assets.

Concerning the Company's capital increases, the stockholders may exclude at the General Meetings the preferential rights or reduce the period for them to be exercised for the issue of shares, debentures convertible into shares and subscription warrants, placed through sale on stock markets or by public subscription, according to the pertinent legislation, and within the authorized capital limit.

Stockholders have preference for the subscription of capital increases according to the number of shares they hold, pursuant to Articles 171 and 172 of Law 6,404/76.

105 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

In addition, in accordance with the Constitution of the State of Minas Gerais, if the Company's controlling stockholder - that is, the State of Minas Gerais - includes COPASA MG in a privatization process, this process will only occur after a public referendum approves it. After the privatization is approved through this public referendum, the State Legislature of the State of Minas Gerais will enact a law authorizing the transfer of ownership control by the State, according to the applicable state legislation.

The Company is controlled by the Government of Minas Gerais, which holds 51.1% of the Company's shares. The Company also holds 357 thousand common shares of its own shares in treasury, amounting to R$ 8,576, mostly acquired from the State of Minas Gerais through transactions related to the settlement of debts originating from the provision of water supply and sewage services and technical cooperation agreements. The Company has the right to reissue these shares on a subsequent date.

The remaining 48.6% of the shares, which represent the Company's free float, are held by various stockholders.

At December 31, 2014, the breakdown of capital is as follows:

Number of shares Percentage of Stockholders (thousands) interest

State of Minas Gerais 61,189 51.13 Management 2 - Other stockholders 58,136 48.57 Treasury shares 357 0.30 Total 119,684 100.00

(b) Revenue reserves

(i) Legal reserve

The legal reserve is credited annually with 5% of the profit for the year and cannot exceed 20% of the capital. The purpose of the legal reserve is to protect the Company's capital, and it can only be used to offset losses and increase capital.

(ii) Tax incentive reserve

The reserve represents the allocation of tax incentives deriving from government grants and donations appropriated to the statement of income from January 1, 2008.

In 2014, R$ 6,975 was recorded in the statement of income relating to the incentive for the fulfillment of the stages of the pollutant load reduction goals at Company's sewage treatment plants (Note 11), issued by the ANA, using PRODES funds (no amount was recognized in 2013).

106 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

(iii) Profit retention

Management proposes retaining profits of R$ 195,753 (R$ 263,582 in December 2013) for future investments by the Company, in line with the "action plan" approved by the Board of Directors, to be carried out in the long term.

Carrying value adjustments are related to:

(i) Actuarial gains and losses: calculated in conformity with CPC 33 (R1) and IAS 19 (R1) (Note 17). At December 31, 2014, the credit balance on this account totaled R$ 13,155 (R$ 23,543 at December 31, 2013).

(ii) Monetary restatement of assets: application of IAS 29 for the period during which it was considered that Brazil had a hyperinflationary economy. This restatement is amortized based on the useful lives of property, plant and equipment items and intangible assets against retained earnings. At December 31, 2014, the credit balance on this account totaled R$ 18,529 (R$ 22,364 In December 2013).

(iii) Fair value of available for sale financial assets: fair value of the investments without significant influence relating to Foz de Jeceaba. At December 31, 2014, the credit balance on this account totaled R$ 12,506 (R$ 17,713 at December 31, 2013).

(d) Dividends and interest on capital to stockholders

Under the bylaws, stockholders of any class are entitled to a mandatory minimum dividend of 25% of the profit for the year, adjusted for the deduction or addition of the amounts specified in items I, II and III of Article 202 of Law 6,404/76. The approved dividend amounts bear no interest and any dividends not claimed within three years after the date when they are made available to the stockholders become time- barred in favor of the Company.

Minimum mandatory dividends at December 31, 2014 and 2013 were as follow:

12/31/2014 12/31/2013

Profit for the year 318,141 419,795 Legal reserve - (5%) (15,907) (20,990) Tax incentive reserve (6,975) - Net income 295,259 398,805 Mandatory minimum dividend - 25% 73,815 99,701

107 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

As resolved at the Extraordinary General Meeting of Stockholders held on April 28, 2009, the Company's Board of Directors has the power to define the annual percentage to be paid as interest on capital. Accordingly, the Company's Board of Directors approved on March 21, 2014 the dividend distribution for 2014 in the form of interest on capital equivalent to 35% of the profit for the year adjusted by the deduction or addition of the amounts specified in Items I, II and III of Article 202 of Law 6,404/76. The payment of interest on capital amounted to R$ 103,340 (R$ 0.87 per share), net of withholding income tax amounting to R$ 6,961. In 2013, the payment of interest on capital amounted to R$ 139,582 (R$ 1.17 per share), net of withholding income tax amounting to R$ 9,831.

As provided for in Article 9 of Law 9,249/95, and based on the Long Term Interest Rate (TJLP), interest on capital was recorded as finance costs deductible for income tax and social contribution purposes, thereby generating a tax benefit of R$ 35,136. Under Brazilian corporation law, interest on capital is reclassified as a charge to retained earnings, in equity, for financial statement purposes.

Changes in the balance of interest on capital payable are as follow:

12/31/2014 12/31/2013

Interest on capital payable at the beginning of the year 31,646 46,469 Proposed interest on capital 103,340 139,582 Withholding Income Tax (IRRF) on interest on capital (6,961) (12,971) Interest on capital paid in the year (125,509) (141,434) Balance of interest on capital in current liabilities 2,516 31,646

(e) Retained earnings

At January 1, 2014

Profit for the year 318,141 Minimum mandatory dividend and interest on capital paid relating to 2014 (103,340) Transfer to legal reserve (15,907) Allocation to profit retention reserve (195,753) Tax incentive reserve (6,975) Monetary restatement of assets 3,834

At December 31, 2014 -

108 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

At January 1, 2013

Profit for the year 419,795 Minimum mandatory dividend and interest on capital paid relating to 2013 (139,582) Transfer to legal reserve (20,990) Allocation to profit retention reserve (263,582) Monetary restatement of assets 4,359

At December 31, 2013 -

(f) Earnings per share

 Basic

Basic earnings per share are calculated by dividing the profit attributable to the stockholders of the Company by the weighted average number of outstanding common shares during the year, excluding common shares purchased by the Company and held as treasury shares (item "a" of this Note).

Parent company/Consolidated 12/31/2014 12/31/2013

Profit attributable to stockholders of the Company 318,141 419,795

Weighted average number of outstanding common shares (thousands) 119,327 119,327

Basic earnings per share 2.67 3.52

 Diluted

At December 31, 2014 and 2013, diluted earnings per share were equivalent to the basic earnings per share, as in September 2012 the convertible debentures were converted into shares, eliminating the potential dilutive common shares.

109 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

19. Segment information

The Company's management defined the operating segments used for strategic decision-making as water supply and sewage treatment and sales of products.

Consolidated 2014 Sales of Water and Financial statement products sewage balance

Gross sales and services revenue 4,451,687 3,521 4,455,208

Deductions from gross revenue (323,235) (541) (323,776)

Net sales and services revenue 4,128,452 2,980 4,131,432

Costs and selling and administrative expenses (3,432,039) (8,941) (3,440,980)

Operating profit (loss) before other net operating expenses 696,413 (5,961) 690,452

Other operating expenses, net (70,655)

Finance result, net (187,157)

Operating profit before taxes 432,640

110 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Consolidated 2013 Sales of Water and Financial statement products sewage balance

Gross sales and services revenue 4,039,456 3,500 4,042,956

Deductions from gross revenue (309,042) (517) (309,559)

Net sales and services revenue 3,730,414 2,983 3,733,397

Costs and selling and administrative expenses (2,995,402) (11,594) (3,006,996)

Operating profit (loss) before other net operating expenses 735,012 (8,611) 726,401

Other operating expenses, net (120)

Finance result, net (160,060)

Operating profit before taxes 566,221

20. Financial risk management

The Company uses short, medium and long term planning tools in order to evaluate the management of its financial risks and thus guide the decision-making process, so that actions, when required, can be taken in a timely manner. In the short term, the "daily schedule of cash flow" is used, which covers up to 90 days. In the medium term (360 days), the corporate budget is used, which reflects its action plan, both for operational and investment purposes. In the long term, the "Statement of Income" is used, which reflects the Company's strategic objectives for a period of ten years and is both an economic and a financial statement.

20.1 Financial risk management

The Corporate Risk Management is aligned with both Corporate Governance and the Business Plan, which establishes the Company's Strategic Objectives.

The Finance Department monitors financial risks in order to assess credit risks that may impair the liquidity and profitability of the Company, recommending strategies to mitigate such risks.

111 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

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 as follow:

(a) Market risk

Market risk is the risk that the fair value of the future cash flow of a financial instrument will fluctuate due to changes in market prices. Market prices are subject to the following risks: interest rate, foreign exchange, commodities price and other price risks, such as share price risk. Financial instruments affected by market risk include loans payable, deposits and available for sale instruments.

The sensitivity analyses in the following sections refer to the position at December 31, 2014 and 2013.

The sensitivity analyses considered the net debt amount, fixed to floating interest rate ratio, and the percentage of financial instruments in foreign currency, all of which are constant values.

These analyses did not include changes from the impact of market variables on the book value of pension and post-employment plan liabilities, provisions and non-financial assets and liabilities from foreign transactions.

The sensitivity analysis of the corresponding item in the 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, 2014 and 2013.

(b) Interest rate risk

The Company is exposed to the risk of increase in foreign interest rates, with impact on borrowing in foreign currency at floating interest rates (mainly the basket of interest rates on agreements related to the Federal Government - Bonus). However, foreign funds are not very significant to the Company's capital structure.

The Company is exposed to the risk of increase in domestic interest rates due to its net liabilities indexed to TJLP, IPCA and CDI variations.

Various scenarios are simulated, taking into consideration refinancing, the renewal of existing positions and borrowing. Based on those scenarios, the Company determines a reasonable change in the interest rate and calculates its impact on the results. These scenarios consider only the main financial assets and liabilities.

112 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

(i) Interest rate sensitivity

The Company analyzed the sensitivity to the effects of possible changes in interest rates to which borrowing payable is subject. With all other variables held constant, the Company's profit before tax is affected by the impact on borrowing payable subject to floating rates, as shown below:

Parent company Increase/decrease in basis Effect on profit before taxes points (R$) 12/31/2014 + 0.5% (1,327) - 0.5% 1,327

12/31/2013 + 0.5% (1,233) - 0.5% 1,233

Consolidated Increase/decrease in basis Effect on profit before taxes points (R$) 12/31/2014 + 0.5% (1,329) - 0.5% 1,329

12/31/2013 + 0.5% (1,233) - 0.5% 1,233

The change in basis points assumed in the analysis of sensitivity to interest rates is based on the current interest rates prevailing in the market, indicating volatility significantly higher than in previous years.

The Company is exposed to the risk of increase in foreign exchange rates, mainly US Dollar and Euro exchange rates against the Brazilian Real, directly impacting debt, income and cash flow.

Financing in foreign currency is intended for specific works to improve and expand water supply and sewage collection and treatment systems. The Company does not hedge against currency risks, since foreign currency debt is small in relation to total debt.

113 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

The Company's exposure in foreign currency, represented by its US Dollar- and Euro-denominated debt, amounted to R$ 286,919 at December 31, 2014 (R$ 127,332 at December 31, 2013), i.e., 8.4% of its total debt (4.0% at December 31, 2013). At December 31, 2014, the Company had guarantees of R$ 53,375 (R$ 42,518 at December 31, 2013) for a portion of foreign-currency borrowing (Note 12).

(i) Foreign exchange sensitivity

The Company analyzed the sensitivity to the effects of fluctuations in the US Dollar and Euro exchange rates on the Company's income and equity. With all other variables held constant, the Company's profit before taxes is affected by the impact on borrowing payable subject to foreign exchange rate variations, as shown below:

Change in US Dollar rate Effect on profit before taxes (R$)

12/31/2014 + 20% (28,918) - 20% 28,918 +10% (14,459) -10% 14,459

12/31/2013 + 20% (25,363) - 20% 25,363 +10% (12,682) -10% 12,682

Changes in income and equity derive from changes in US Dollar borrowing.

(d) Credit risk

Credit risk is the risk that the counterparty to a transaction will not fulfill an obligation established in a financial instrument or contract with a customer, leading to a financial loss. The Company is exposed to credit risk in its operating and financial activities, including deposits in banks and other financial institutions, foreign exchange transactions and other financial instruments.

(i) Trade receivables

The credit risk of customers is subject to the procedures, controls and policies established by the Company with regard to this risk. Credit limits are established for all customers based on internal classification criteria. The majority of the sales are spread among a large number of customers. For these customers, credit risk is minimal as a result of the portfolio spread and its control procedures over such risk. Impairment of trade receivables is adequately covered by a related provision.

114 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

(ii) Financial instruments and demand deposits

For credit risk, due to the possibility that the Company may incur losses on its deposits with financial institutions, in October 2012, the Financial Investment Committee was created, which analyzes, in accordance with the Company's Financial Investment Policy, each institution with which the Company does business, according to pre-established criteria. Surplus funds are invested only in approved counterparties and within the limits set for each. The credit limits of counterparties are reviewed annually, or when there is any change in the macroeconomic scenario of the Brazilian economy.

The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings or to historical information about counterparty default rates:

Parent company Consolidated 12/31/2014 12/31/2013 12/31/2014 12/31/2013 Current accounts, bank deposits and short term financial investments (*) AAA 328,896 223,264 330,867 224,721 AA - 20,766 - 20,766 A 154 16,290 154 16,290 B (BAA, BA and BBB) 18 161 18 161 Total 329,068 260,481 331,039 261,938 (*) According to risk rating agency Moody's classification.

(e) Liquidity risk

The Company monitors the risk of cash shortagse using a rolling liquidity planning tool.

Prudent liquidity risk management implies maintaining cash and marketable securities sufficient to meet short term requirements and to ensure the Company's investment program.

Management monitors the Company's liquidity level by considering its expected cash flow as well as its cash and cash equivalents (Note 6). Generally, this is performed by the Company's operating units, in accordance with the pre-established practices and budget limits. These limits vary by location as they reflect the liquidity of the market in which the entity operates. Also, the Liquidity Management Policy adopted by the Company requires the projection of cash flow and an analysis of the level of net assets required to meet these projections, the monitoring of liquidity ratios in the balance sheet in relation to internal and external regulatory requirements, and the maintenance of debt financing plans.

The following table analyzes financial liabilities settled at net value, by maturity, corresponding to the remaining period in the balance sheet in relation to the contractual maturity date. The amounts disclosed in the table represent the contractual undiscounted cash flow.

115 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Maturities (i) Up to 1 Between 1 Between 3 Over 5 year and 3 years and 5 years years

At December 31, 2014 Amortization 567,958 778,217 815,177 1,233,503 Interest 39,974 - - - Borrowing 607,932 778,217 815,177 1,233,503 Trade and other payables 130,483 33,276 36,469 22,968

At December 31, 2013 Amortization 443,577 789,875 599,376 1,295,489 Interest 27,949 - - - Borrowing 471,526 789,875 599,376 1,295,489 Trade and other payables 149,680 29,918 32,751 39,148 (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 involving derivative instruments.

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

Guarantee Institution (committed revenue) 12/31/2014 12/31/2013 CEF until 1998 and National Treasury 10% receivables 28,435 24,920 CEF 2003,2004,2007,2008 and 2009 Committed revenue equal to 3 times the monthly debt service 11,234 11,234 Unibanco 2002 and syndicated R$ 17 MM annually restated by IPCA, agreements 2004 since July 4, 2006 26,141 24,546 Syndicated agreements II - 2006 R$ 15.3 MM monthly restated by IPCA, since July 4, 2006 23,527 22,091 BNDES 2004 (I issue of debentures) R$ 18 MM annually restated by IPCA, 300 MM since 2/1/2009 - 22,511 BNDES 2007 (III issue of debentures) R$ 18 MM annually restated by IPCA, 450 MM since 12/12/2007 25,142 23,738 BNDES PAC 2007/2008 R$ 26 MM annually restated by IPCA, since 5/20/2008 36,475 34,289 BNDES 181 MM R$ 7 MM annually restated by IPCA, since 4/22/2010 8,869 8,345 BNDES simple debentures 740 MM R$ 32 MM annually restated by IPCA, since 10/1/2010 40,719 38,233 BNDES 288 MM Committed revenue equal to 4.5% of the debit balance of debentures 12,960 12,960 KfW Committed revenue equal to 1 time the monthly debt service 6,000 6,000 CEF - Borrowing 2011-2012-2013-2014 Committed revenue equal to 3 times the monthly debt service 17,111 6,189

116 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

(f) Risk of early maturity of debts

The Company has borrowing agreements with covenants, usually applicable to these types of transactions, requiring compliance with economic and financial ratios, cash generation and other indicators. In order to minimize such rissk and monitor the level of indebtedness, the Company has included in its bylaws an Indebtedness Policy with conditions more restrictive than the covenants applicable to its loan and financing agreements (Note 12).

(g) Risk of non-renewal of concessions

The Company has concessions for water supply and sanitary sewage services, and management expects that they will be renewed by the Concession Authority (Municipalities). If the concessions are not renewed, the current levels of profitability and activity may be impacted.

The Company has not been significantly affected by occurrences related to these risks.

20.2 Capital risk management

The primary objective of the Company's capital management is to ensure that it maintains a strong credit rating and a sound capital base in order to support its business and maximize stockholder value.

The Company manages its capital structure in accordance with its Indebtedness Policy, which establishes in its bylaws that the total liabilities of the Company shall be equal to or less than its equity.

No changes were made to the objectives, policies or processes in the years ended December 31, 2014 and December 31, 2013.

Similarly to other companies in the sector, the Company monitors its capital based on gearing and debt ratios. The gearing ratio corresponds to the net debt expressed as a percentage of total capital. Net debt, in turn, corresponds to total loans (including short- and long term loans, debentures and other current and non-current debts, as disclosed in the consolidated balance sheet), less cash and cash equivalents. Total capital is calculated as equity as shown in the consolidated balance sheet plus net debt.

In 2014, the Company's strategy, which remained unaltered in relation to 2013, was to maintain financial leverage and debt ratios below 100%. The total liabilities to equity ratio at December 31, 2014 and 2013 can be summarized as follows:

117 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Parent company Consolidated 12/31/2014 12/31/2013 12/31/2014 12/31/2013

Total borrowing and debentures 3,434,829 3,156,267 3,437,330 3,157,700 Less: cash and cash equivalents (329,068) (260,481) (331,039) (261,938) Net debt 3,105,761 2,895,786 3,106,291 2,895,762 Total equity 5,536,564 5,337,359 5,536,564 5,337,359 Total capital 8,642,325 8,233,145 8,642,855 8,233,121

Gearing ratio - % 36 35 36 35

Third party capital index - % 56 54 56 54

20.3 Fair value estimation

The carrying values of trade receivables and payables, less an impairment provision in the case of trade receivables, are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flow at the current market interest rate that is available to the Company for similar financial instruments.

(a) Financial instruments measured in the balance sheet at fair value

The Company and its subsidiaries adopted CPC 40/IFRS 7 for financial instruments measured in the balance sheet at fair value. This requires the disclosure of fair value measurements according to their level of the following hierarchy:

 Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1)

 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2)

 Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

118 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

The following table presents the Company's and its subsidiaries' assets and liabilities measured at fair value at December 31, 2014 and 2013:

Parent company/Consolidated Assets Available-for-sale financial assets Total assets 12/31/2014 12/31/2013 12/31/2014 12/31/2013

Prices quoted in active markets (Level 1) - - - - Other significant observable data (Level 2) - - - - Significant unobservable data (Level 3) 40,748 48,638 40,748 48,638

Total balance 40,748 48,638 40,748 48,638

The fair value of financial instruments traded in active markets (such as trading and available-for-sale securities) is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. At December 31, 2014 and 2013, the Company and its subsidiaries did not have financial instruments whose fair value had been measured at Level 1.

The fair value of financial instruments that are not traded in an active market (for example, over-the- counter derivatives) is determined using valuation techniques. These valuation techniques maximize the use of observable market data when available, and rely as little as possible on Company-specific estimates. If all significant inputs required to determine the fair value of an instrument are observable, the instrument is included in Level 2. At December 31, 2014 and 2013, the Company and its subsidiaries did not have financial instruments whose fair value had been measured at Level 1.

If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3.

Specific valuation techniques used to value financial instruments include:

 Quoted market prices or dealer quotes for similar instruments.

 Other techniques, such as discounted cash flow analysis, are used to determine the fair values of the remaining financial instruments.

119 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

(b) Fair value of borrowing

The carrying amounts compared to the respective fair values are as follow:

Parent company Consolidated Amounts Carrying Carrying amount Fair value amount Fair value 12/31/2014 12/31/2014 12/31/2014 12/31/2014

Bank borrowing 1,589,789 1,586,768 1,592,290 1,589,203 Simple debentures 1,845,040 1,800,856 1,845,040 1,800,856 Total 3,434,829 3,387,624 3,437,330 3,390,059

Parent company Consolidated Amounts Carrying Carrying amount Fair value amount Fair value 12/31/2013 12/31/2013 12/31/2013 12/31/2013

Bank borrowing 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

The market values of liabilities are calculated on a projected debit balance, restated at their contractual rates over the remaining months to maturity. The amount obtained is adjusted to the present value, using the following market rates:

Parent company/Consolidated Contractual Period Market Lines rates (months) rate Comments

State government/BDMG 9.03% 3 7.70% CEF rate, since there is no similar rate CEF/FGTS 8.39% 164 7.70% Quoted CEF rate in December 2014 BNDES/BNE 6.57% 89 6.55% Quoted BNDES/BNE rate in Dec. 2014 FINAME 3.27% 110 6.00% Quoted FINAME rate in December 2014 Federal government 4.27% 113 7.70% CEF rate since there is no similar one Simple debentures 8.44% 83 9.36% Quoted BNDES/BND rate in Dec. 2014 KfW Bank 2.07% 109 2.07% Quoted KfW rate in December 2014 NP Bradesco 12.38% 12 12.73% Market rate quotation for working capital in December 2014 FINAME - AGMM 2.50% 98 6.00% Quoted FINAME rate in December 2014 Banco do Brasil - Copanor 13.07% 24 13.31% CEF rate, since there is no similar rate

120 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

21. Financial instruments by category

(a) Parent company

12/31/2014 Loans and Available-for-sale receivables assets Total Assets Cash and cash equivalents 329,068 - 329,068 Trade receivables 883,596 - 883,596 Banks and investments in connection 24,493 - 24,493 with agreements Restricted investments 81,774 - 81,774 Financial assets - concession agreements 558,964 - 558,964 Equity securities - 40,748 40,748 Receivables from subsidiaries 16,432 - 16,432 Other receivables (excluding prepayments) 168,997 - 168,997

Total 2,063,324 40,748 2,104,072

12/31/2014 Other financial liabilities Total Liabilities Borrowing and debentures 3,434,829 3,434,829 Trade payables 114,433 114,433 PPP - Rio Manso 279,885 279,885 Contract with IBM 3,441 3,441

Total 3,832,588 3,832,588

121 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

12/31/2013 Loans and Available-for-sale receivables assets Total Assets Cash and cash equivalents 260,481 - 260,481 Trade receivables 909,685 - 909,685 Banks and investments in connection 36,688 - with agreements 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 Borrowing and debentures 3,156,267 3,156,267 Trade payables 135,338 135,338 Finance leases 7,769 7,769

Total 3,299,374 3,299,374

(b) Consolidated

12/31/2014 Loans and Available-for-sale receivables assets Total Assets Cash and cash equivalents 331,039 - 331,039 Trade receivables 888,237 - 888,237 Banks and investments in connection 25,151 - 25,151 with agreements Restricted investments 81,774 - 81,774 Financial assets - concession agreements 558,964 - 558,964 Equity securities - 40,748 40,748 Other receivables (excluding prepayments) 164,518 - 164,518

Total 2,049,683 40,748 2,090,431

122 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

12/31/2014 Other financial liabilities Total Liabilities Borrowing and debentures 3,437,330 3,437,330 Trade payables 128,471 128,471 PPP - Rio Manso 279,885 279,885 Contract with IBM 3,441 3,441

Total 3,849,127 3,849,127

12/31/2013 Loans and Available-for-sale receivables assets Total Assets Cash and cash equivalents 261,938 - 261,938 Trade receivables 914,785 - 914,785 Banks and investments in connection 36,794 - with agreements 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 Borrowing and debentures 3,157,700 3,157,700 Trade payables 156,104 156,104 Finance leases 7,769 7,769

Total 3,321,573 3,321,573

123 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

22. Revenue

The reconciliation between gross and net revenue is as follows:

Parent company Consolidated 2014 2013 2014 2013

Gross revenue from water supply and sewage services 3,453,455 3,315,144 3,473,385 3,332,374 Gross revenue from the sale of products 3,521 3,500 Construction revenue 978,302 707,082 978,302 707,082 Total gross revenue 4,431,757 4,022,226 4,455,208 4,042,956 Taxes on sales and unconditional discounts granted (321,302) (307,408) (323,776) (309,559)

Net revenue 4,110,455 3,714,818 4,131,432 3,733,397

The Company's other operating income for the periods ended December 31, 2014 and 2013 is set out below:

Parent company Consolidated 2014 2013 2014 2013

Reversal of non-deductible provisions 26,525 33,058 27,578 33,796 Recovery of accounts written off 53,296 66,193 53,612 66,582 Other income 30,526 9,476 32,575 11,355 Total other operating income 110,347 108,727 113,765 111,733

124 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

23. Expenses by nature

Parent company Consolidated 2014 2013 2014 2013

Salaries and social charges 1,085,758 1,011,363 1,096,494 1,022,332 Materials 129,885 118,939 132,531 121,270 Outsourced services 630,146 615,020 638,743 624,842 General expenses 127,362 123,498 128,210 125,256 Depreciation and amortization 485,605 428,034 488,130 430,618 Provision for the impairment of trade receivables 92,358 73,672 95,376 75,649 Provision for obsolescence 212 - 216 353 Construction costs (*) 961,705 690,573 961,705 690,573 Cost of products sold - - 1,213 857 Litigation provisions 60,679 31,009 62,283 32,300 Equity in the results of subsidiaries 9,425 7,177 - - Employee profit sharing 19,818 32,670 19,818 32,670 Other 99,070 50,707 102,319 46,883 Operating expenses 3,702,023 3,182,662 3,727,038 3,203,603 (-) Tax credits (100,671) (84,044) (101,638) (84,754) Operating expenses, net 3,601,352 3,098,618 3,625,400 3,118,849 Costs 2,703,759 2,322,956 2,723,280 2,341,918 Expenses 897,593 775,662 902,120 776,931

(*) Breakdown of construction costs:

Parent company/Consolidated 2014 2013

Salaries and social charges 28,592 28,756 Materials 74,227 61,212 Equipment 63,755 48,924 Outsourced services 745,416 487,650 Financing costs 45,049 56,149 Other 4,666 7,882

Total construction costs 961,705 690,573

125 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

24. Employee benefit expenses

Parent company Consolidated 2014 2013 2014 2013

Salaries 589,792 557,100 596,892 564,698 Social security costs 182,684 170,379 184,469 171,927 FGTS 57,162 64,999 57,639 65,434 Pension plan contributions 38,008 37,282 38,009 37,282 Workers' meal program 134,566 116,632 135,765 117,854 Healthcare plan 51,346 46,785 51,487 46,908 Other benefits 32,200 18,186 32,233 18,229

Total 1,085,758 1,011,363 1,096,494 1,022,332

Number of employees (unaudited) 12,540 11,864 12,939 12,241

25. Finance income and costs

Finance income and costs can be summarized as follow:

Parent company Consolidated 2014 2013 2014 2013

Interest income 9,894 9,907 8,718 8,780 Income from financial investments 28,481 37,601 28,482 37,646 Monetary and foreign exchange gains 21,765 14,200 21,730 14,136 Income from financial assets/other 17,535 24,126 17,535 24,125 Total income 77,675 85,834 76,465 84,687

Interest expenses (210,297) (181,481) (210,418) (181,544) Monetary and foreign exchange losses (52,299) (58,036) (52,299) (58,047) Other expenses (1,889) (5,086) (905) (5,156) Total costs (264,485) (244,603) (263,622) (244,747) Finance result (186,810) (158,769) (187,157) (160,060)

126 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

26. Related party transactions

The Company is controlled by the State of Minas Gerais, which holds 51.13% of its shares (Note 18).

(a) Assets, liabilities, income and expenses

In addition to the agreements described in Note 15, other transactions with related parties mainly represent those carried out with the State of Minas Gerais, CEMIG, Foz de Jeceaba and subsidiaries. Significant balances and transactions with related parties are set out below:

Parent company 12/31/2014 Subsidiaries Other Serviços State of Águas Foz de COPANOR de Total Minas CEMIG Minerais Jeceaba Irrigação Gerais

Assets Current assets Trade receivables Billed amounts - - - - 23,842 - - Agreements - - - - 15,739 - - Sundry receivables Receivables from subsidiaries 141 4,406 - 4,547 - - - Non-current assets Borrowing - 11,706 75 11,781 - - - Advances on capital increases 4,651 - - 4,651 - - - Available-for-sale assets ------40,748 Investments 13,578 - - 13,578 - - - Total assets 18,370 16,112 75 34,557 39,581 - 40,748

Liabilities Current liabilities Interest on capital - - - - 1,257 - - Electrical power - - - - - 6,930 - Non-current Provision for investment losses - 12,993 178 13,171 - - - Total liabilities - 12,993 178 13,171 1,257 6,930 -

Results Revenue from water supply and sewage services - - - - 114,188 - - Interest and income from monetary variations - 1,315 98 1,413 - - - Dividends received ------6,028 Expenses for electrical energy - - - - - 247,421 -

127 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Parent company 12/31/2013 Subsidiaries Other Serviços State of Águas Foz de COPANOR de Total Minas CEMIG Minerais Jeceaba Irrigação Gerais

Assets Current assets Trade receivables Billed amounts - - - - 47,072 - - Sundry receivables Receivables from subsidiaries 398 2,125 - 2,523 - - - Non-current assets Borrowing - 12,734 878 13,612 - - - Advances on capital increases 96,178 - - 96,178 - - - Available for sale assets ------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 Provisions for investment losses 73,699 11,884 763 86,346 - - - Total liabilities 73,699 11,884 763 86,346 28,724 10,832 -

Results Revenue from water supply and sewage services - - - - 107,828 - - Interest and income from monetary variations - 1,373 75 1,448 - - - Dividends received ------8,913 Expenses for electrical energy - - - - - 209,941 -

Balances and transactions with related parties are conducted at prices and under conditions considered by management to be similar to those prevailing in the market, except for financial settlement, which may occur through special negotiations (offsetting of accounts). (b) Key management compensation 2014 2013

Compensation 5,253 4,637 Employee benefits 773 697 Total 6,026 5,334

128 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

26.1 Related party transactions

The Company's main transactions with related parties can be summarized as follow:

 Águas Minerais

Since January 2012, monetary restatements of intercompany loan agreements has not been calculated and accounted for, because the balance of these agreements was converted into advances on future capital increases. In accordance with the General Meeting of Stockholders of the subsidiary Águas Minerais held on April 14, 2014, the capital of this subsidiary was increased by the balance of advances on capital increases existing at December 31, 2013, amounting to R$ 96,178.

 COPANOR

Loan agreement, with interest of 90% of CDI.

 Irrigation services

The balance at December 31, 2014 related to the loan agreement, which amounted to R$ 970,997.38, was written off as a loss of COPASA MG.

 Electricity supply

The Company is a major consumer of electrical power in the State of Minas Gerais, where electricity is supplied primarily by the Minas Gerais electric power utility company CEMIG, controlled by the Company's controlling stockholder, the State of Minas Gerais. More than 300 electric power supply agreements were signed, each for a specific consumer unit.

 Financing agreements with BDMG

The Company entered into various financing agreements with BDMG in the normal course of its business.

 Agreements with CODEMIG

On March 22, 2006, the Company signed with CODEMIG an intention protocol for technical cooperation and, on June 30, 2006, a lease agreement was signed to take over the rights related to the mineral waters of Araxá, Cambuquira, Caxambu and Lambari, as mentioned in Note 1.

 Guarantees of the State of Minas Gerais for Company's agreements with the Federal Government

The agreements listed below describe the guarantees provided by the State of Minas Gerais in the agreements of Copasa and the Federal Government:

129 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

Debt Acknowledgment and Consolidation Agreement with the Federal Government of August 5, 1998 - the State of Minas Gerais assigned and transferred to the Federal Government credits from certain taxes collected, at amounts sufficient to pay installments and charges due on each maturity date. At December 31, 2014, the outstanding balance of these agreements totaled R$ 67,194, as mentioned in Note 12.

Restricted Account and Assignment and Transfer of Credit Given in a Counter Guarantee Agreement dated November 29, 2011 - in case of default, the Federal Government was authorized by the State of Minas Gerais to: (i) offset any amounts with revenue from constitutional tax income, at amounts sufficient to settle any past due installments, and (ii) request the transfer of funds existing in the State's revenue centralizing accounts maintained in a certain financial institution, in amounts sufficient to settle any installment in default. At December 31, 2014, the outstanding balance of this agreement totaled R$ 219,725, as mentioned in Note 12.

27. Water supply and sewage services in Belo Horizonte

The Minas Gerais State Government and the Belo Horizonte Municipal Government entered into a cooperation agreement on November 13, 2002, whereby the Company was ensured the right to continue rendering water supply and sewage services in Belo Horizonte for another 30 years.

The first amendment to this agreement was made on April 30, 2004. The main items of the amended cooperation agreement are as follow:

1) The municipality declared and recognized the debt for which it is responsible, in the total amount of R$ 70,662 on November 30, 2002, relating to water supply and sewage service bills issued until November 2002 still pending payment. This debt was being paid in 335 monthly and consecutive installments equivalent to 202,838,77 m³ of water each, from January 2005. The amount of each installment in cash was obtained by multiplying the volume to be settled by the value of the average tariff billed per m³ in Belo Horizonte, plus simple compensatory interest of 0.5% per month, from November 2002. However, from February 24, 2010, with the signing of a Mutual Debts Compensation Agreement, the debt has been paid in 120 consecutive monthly installments, with interest of 1% and annual IPCA-E inflation adjustments (Notes 7 and 11). At December 31, 2014, the balance receivable totaled R$ 244,914, of which R$ 47,403 was recorded in current assets and R$ 197,511 in non-current assets (R$ 253,724 at December 31, 2013 with R$ 41,144 in current assets and R$ 212,580 in non-current assets).

2o.)The Company assumed part of the costs of the Program for Environmental Recovery and Sanitation of River Valleys and Streams in Belo Horizonte (DRENURBS), on behalf of the municipality under the Belo Horizonte Concession Rights, at an initial amount of R$ 170,000, restated at the IPCA rate. In December 2011, the Belo Horizonte Municipal Government presented data on spending under the program up to December 2009. Considering its commitment to refund part of these measurements from January 2008, the amount was restated on this date and, less the total amount of refunds made in the period, resulted in a balance of R$ 214,933. Upon the presentation of new spending measurements made by the Municipal Government, there shall be a refund of the 240 remaining installments, the value of each limited to R$ 855, restated at the IPCA rate, and to the restated balance.

130 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

28. Commitments

The Company has entered into contracts for new construction works, under which obligations are recorded as the services are rendered. The main outstanding contracts with contractors and suppliers at December 31, 2014 are listed below:

Date of Term in Contractors Amount signature days (1)

Odebrecht Ambiental 693,731 12/20/2013 5,475 Orteng/Sonel Consortium 71,075 2/21/2013 990 Prefisan Ltda 68,299 11/18/2014 690 Mendes Junior Trading e Engenharia S/A 60,339 11/30/2012 810 Perfil Engenharia S/A 33,385 11/11/2014 720 Prefisan Ltda 28,797 5/23/2013 720 Sonel Engenharia S/A 27,824 12/22/2014 1,080 Prefisan Engenharia S/A 21,624 3/14/2012 1,080 Infracon Engenharia e Comércio Ltda 21,170 8/28/2013 540 Prefisan Ltda 20,118 12/11/2014 540 Comim Construtora Ltda 19,541 8/9/2013 720 Construtora Penchel Ltda 19,239 4/19/2013 720 Infracon Engenharia e Comércio Ltda 13,092 11/5/2014 540 1) From the date set in the first service order.

Upon renewal or revision of some concession agreements, the Company assumed commitments to participate financially in sewage network construction and river valley treatment works, to be carried out by the municipal governments. Among the works to be carried out, those at public sites (stream channeling, open sewage channels) are treated as intangible assets - "concession rights", and amortized over the remaining concession term. Sewage interceptors are recorded in the Company's intangible assets.

The main committed amounts refer to the following municipalities:

Amounts Municipalities Committed Realized % realization

Belo Horizonte 261,140 87,155 33.37 Betim 80,286 73,521 91.57 Contagem 83,707 83,707 100.00 Montes Claros 121,941 61,417 50.37 Ribeirão das Neves 86,411 70,977 82.14 Teófilo Otoni 54,360 - -

131 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

29. Insurance

The Company and its subsidiaries contracted the services of third party liability insurance for the directors, officers and managers of commercial companies in order to ensure them the right to compensation in the event of judicial and extrajudicial settlements, arbitral awards made by courts, final court decisions, including attorneys' fees and court costs, in the course of proceedings based on civil liability for acts of management committed by these individuals while carrying out their duties.

The Company does not have insurance to cover damages caused to its buildings and/or facilities on the closing date of the financial statements for the year ended December 31, 2014.

30. Transactions not involving cash and cash equivalents

During 2014 and 2013, the Company and its subsidiaries carried out the following non-cash investing and financing activities which are not reflected in the statement of cash flow:

Parent company/Consolidated 2014 2013

Customer renegotiation with payment via acquisition of land in Teófilo Otoni (Note 9) - 18,527 Transfer of PRODES/ANA agreement (Notes 7 and 11) 4,614 4,201

31. Asset impairment testing

The Company prepared a technical study of impairment testing to make sure that the carrying amount of its assets does not exceed the recoverable amount, in accordance with CPC 01, based on the 2014 data, taking into account all production variables, billing, the serviced population and the cost of capital up to the remaining period of the effective concession contracts or contracts under renewal process.

The final result of this study showed generation of positive net book value, with a return rate of 10.71% p.a., as follows:

BASE YEAR 2014

WATER SEWAGE TOTAL COPASA

Net intangible assets - adjusted 5,586,895 3,903,486 9,490,381 Net book value of the benefit 6,916,674 5,485,798 12,402,472 Internal rate of return 10.35 11.60 10.71

132 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

32. Events after the reporting period

Because of the water crisis faced by the Southeast region of Brazil, the Company started a campaign in January 2014 encouraging the reduction of the water consumption in the metropolitan region of Belo Horizonte.

The Company estimates a reduction in consumption of approximately 15% in the region, which will impact the Company's revenue. COPASA MG is developing both structuring and non-structuring measures to minimize the impacts of the extended drought season and its effects on water supply, mainly in the metropolitan region of Belo Horizonte.

133 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of Reais unless otherwise stated

EXECUTIVE BOARD

SINARA INÁCIO MEIRELES CHENNA Chief Executive Officer ANTÔNIO CESAR PIRES DE MIRANDA JUNIOR Vice-Chairman EDSON MACHADO MONTEIRO Financial and Investor Relations Officer REMULO BORGES DE AZEVEDO LEMOS Chief Technical and New Business Officer FRANCISCO EDUARDO QUEIROZ CANÇADO Chief Corporate Management Officer RONALDO MATIAS DE SOUSA Chief Venture Planning and Management Officer RÔMULO THOMAZ PERILLI Chief Metropolitan Operating Officer GILSON DE CARVALHO QUEIROZ FILHO Chief North Operating Officer FREDERICO LOURENÇO FERREIRA DELFINO Chief East Central Operating Officer BRUNNO DO CARMO SILVA Chief Environmental Officer JOÃO BOSCO SENRA Chief Southwest Operating Officer

ACCOUNTANTS

GERALDO MAGELA MOREIRA CALÇADO BRÍGIDA BUENO MAIOLINI Accountant - CRCMG - 36.109 Accounting, Cost and Equity Superintendent

BOARD OF DIRECTORS

MARCO ANTÔNIO DE REZENDE TEIXEIRA Chairman SINARA INÁCIO MEIRELES CHENNA Vice-Chairman ALEXANDRE PEDERCINI ISSA Director HUGO VOCURCA TEIXEIRA Director JOÃO BOSCO CALAIS FILHO Director JORGE RAIMUNDO NAHAS Director MURILO DE CAMPOS VALADARES Director PAULO DE SOUZA DUARTE Director RUBENS COELHO DE MELLO Director

134 of 137 Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of reais unless otherwise stated

CAPITAL BUDGET

Given the business growth projections for 2015, the Company will invest in the expansion of water services, with production capacity expansion projects, expansion of service capacity, implementation of systems and well drilling and installation. Moreover, funds will be invested in sewage collection systems, in works aimed at expanding the service capacity, the implementation of systems, sewage treatment and the proper disposal of effluents.

For these investments, the Company will use its own funds amounting to R$ 330,000, which must be applied to direct investments, as well as third party funds amounting to R$ 600,000. The scheduled investment for 2015 totals R$ 900,000.

These estimated amounts may change upon approval of the Capital Budget by the General Meeting of Stockholders.

The following table summarizes the allocation of the Company's investments for 2015:

INVESTMENT PROGRAM FOR 2015 - R$ MILLION

WATER 300.0 SEWAGE 600.0 TOTAL 900.0

135 of 137 (A free translation of the original in Portuguese)

Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of reais unless otherwise stated

REPORT OF THE STATUTORY AUDIT BOARD

In a meeting held on March 18, 2015, the Statutory Audit Board of Companhia de Saneamento de Minas Gerais - COPASA MG, in exercising its legal and statutory duties, examined the Management Annual Report and the Financial Statements, which comprise: the Balance Sheet, the Statements of Income, Changes in Equity and Cash Flow and the Statement of Value Added, in addition to the Notes to Financial Statements and the Independent Auditor's Report on the Financial Statements, for the year ended December 31, 2014.

The following proposals were studied, which are being submitted by Copasa Management for approval of the Ordinary General Meeting of Stockholders: 1) to approve the Financial Statements of Copasa (parent company and consolidated under IFRS) for the year ended December 31, 2014; and 2) to approve the following allocation of profit of Copasa, totaling R$ 318,141 thousand: R$ 15,907 thousand to constitute the Legal Reserve; R$ 103,340 thousand corresponding to the gross amount of R$ 0.87 per share, will be used to pay Interest on Capital imputed on the minimum dividend as follows: R$ 100,888 thousand were approved in meetings of the Board of Directors held on 3/21/2014, 6/23/2014 and 9/19/2014 and allocated to stockholders; R$ 2,452 thousand will be distributed proportionally to holders of common shares entitled to remuneration; R$ 195,753 thousand to constitute the Profit Retention Reserve, as per the capital budget contained in the investment program (Law 6,404/76); R$ 3,141 thousand, corresponding to R $ 6.975 million of tax incentives reserve coming from passed subsidy by the Federal Government as an incentive to watershed pollution (PRODES), less the amount of R $ 3.834 million of the portion transferred to retained earnings in due to the net effect of the amortization of adjustments on assets in 1996 and 1997 period.

Based on tests performed and in view of the opinion issued by PricewaterhouseCoopers Auditores Independentes, dated March 19, 2015, the Statutory Audit Board hereby expresses a favorable opinion on the approval of these proposals to be submitted for discussion and vote in the Ordinary General Meeting of Stockholders of Copasa.

Belo Horizonte, March 18, 2015.

Paulo Elisiário Nunes Alvimar Silveira de Paiva Chairman Member Director

Letícia Pedercini Issa Vice-Chairman

Jair Siqueira Director

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Companhia de Saneamento de Minas Gerais - COPASA - MG at December 31, 2014 All amounts in thousands of reais unless otherwise stated

DECLARATION OF REVIEW OF THE FINANCIAL STATEMENTS AND 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:

1. 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, 2014, and

2. They have reviewed, discussed and agreed with the parent company and consolidated financial statements under IFRS for the year ended December 31, 2014.

Belo Horizonte, March 18, 2015.

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