Companhia de Gás de São Paulo - COMGÁS

Transcription

1 Financial statements as (A free translation of the original report in Portuguese containing financial statements prepared in accordance with accounting practices adopted in Brazil) 1

2 Financial statements as Contents Independent auditor s report on the financial statements... 3 Statement of financial position... 8 Statement of profit or loss Statement of comprehensive income Statement of changes in shareholder s equity Statement of cash flows Statement of value added Notes to the financial statements

3 Independent Auditor s Report on the Financial Statements To the Board of Directors and Shareholders of Companhia de Gás de São Paulo COMGÁS São Paulo SP Opinion We have audited the financial statements of Companhia de Gás de São Paulo COMGÁS ( the Company ), which comprise the statement of financial position as at, the statements of profit or loss, comprehensive income, changes in equity and cash flows for the year then ended, as well as the corresponding notes, comprising the significant accounting policies and other explanatory information. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of Companhia de Gás de São Paulo COMGÁS as at, and its financial performance and its cash flows for the year then ended, in accordance with Accounting Practices Adopted in Brazil and with International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board (IASB). Basis for Opinion We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in section Auditors Responsibilities for the Audit of the Financial Statements of our report. We are independent of the Company in accordance with the relevant ethical requirements included in the Accountant Professional Code of Ethics ( Código de Ética Profissional do Contador ) and in the professional standards issued by the Brazilian Federal Accounting Council ( Conselho Federal de Contabilidade ), and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the individual and consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Measurement of financial instruments (Notes 3.2 and 23) To finance its operations and investments in the gas distribution infrastructure, the Company raises funds from third parties whose conditions expose them to risks related to fluctuations in foreign currency and interest rates. In order to reduce such exposure, the Company enters into derivative financial instruments, mainly interest rate and foreign exchange swaps, and forward contracts. Derivative financial instruments, including instruments designated for risk protection (fair value hedge) and certain debt instruments designated at fair value through profit or loss, are valued using valuation 3

4 techniques that generally involve the exercise of judgment, use of assumptions and estimates. Due to the relevance, this matter was considered significant for our audit. How our audit addressed this matter Our audit procedures included tests of internal controls on the process of identification, measurement, management, recognition and classification of these financial instruments. We obtained the list of financial institutions with which the Company holds financial instrument contracts and obtained a confirmation letter on outstanding balances at. With the assistance of our specialists in financial instruments, we performed an independent recalculation of the fair value of derivative financial instruments and debt instruments designated at fair value through profit or loss using observable data such as quoted prices in active markets or discounted cash flows based on market curves. We also evaluated the adequacy of the disclosures made in the financial statements, especially in relation to sensitivity analysis, interest rate and foreign exchange risks and the classification of the instruments. Based on the evidence obtained from the procedures described above, we considered that the measurement of derivative financial instruments and debt instruments designated at fair value through profit or loss is acceptable in the context of the financial statements taken as a whole, for the year ended. Designation and effectiveness of derivative financial instruments for hedge accounting - fair value hedges (Notes 3.2 and 23) The Company contracts derivative financial instruments to manage its exposure to exchange rate and interest rate risks arising during the normal course of its business. When appropriate, certain derivative financial instrument contracts (swaps) are designated for hedge accounting (fair value hedge) in order to offset the Company exposures to interest rate changes. Due to the relevance of the hedged financial instruments, the high degree of judgment and estimates used and the possible impacts on the financial statements, this matter was considered significant for our audit. How our audit addressed this matter Our audit procedures included tests of internal controls on the process of identification, designation, measurement and management of these financial instruments. With the assistance of our specialists in financial instruments, we evaluated the adequacy of the documentation prepared by the Company to demonstrate the reconciliation between the hedged item versus the instrument designated for hedge accounting and we performed the recalculation of the prospective and retrospective coverage effectiveness test prepared by Company. We also considered the adequacy and sufficiency of the disclosures made in the financial statements. Based on the evidence obtained from the summarized procedures above, we considered that the assumptions and methodologies used to prove the designation and effectiveness of derivative financial instruments for hedge accounting - fair value hedge, are acceptable in the context of the financial statements taken as a whole, for the year ended. 4

5 Other matters Statements of value added The financial information related to the statements of value added (DVA) as at, prepared under the responsibility of the Company s management, presented herein as supplementary information for IAS 34 purposes, have been subject to audit procedures jointly performed with the Company s financial information. In order to form our conclusion, we assessed whether those statements are reconciled with the financial information and accounting records, as applicable, and whether their format and contents are in accordance with criteria determined in the Technical Pronouncement CPC 09 - Demonstração do Valor Adicionado. In our opinion, these statement of value added have been adequately prepared, in all material respects, in accordance with the criteria defined in that Technical Pronouncement and are consistent with the financial statements taken as a whole. Other information accompanying the financial statements and the auditor's report Management is responsible for the other information comprising the management report. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with Accounting Practices Adopted in Brazil and with 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. In preparing the financial statements, management is responsible for assessing the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company s financial reporting process. 5

6 Auditors Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian and international standards on auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Brazilian and international standards on auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit 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 Company s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. 6

7 From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. February 22, 2018 KPMG Auditores Independentes CRC 2SP014428/O-6 Original report in Portuguese signed by Rogério Hernandez Garcia Accountant CRC 1SP213431/O-5 7

8 Statement of financial position and 2016 Assets Note December 31, 2016 Cash and cash equivalents 6 1,727,521 2,108,336 Marketable securities 7 509, ,485 Trade receivables 8 611, ,751 Inventories 76, ,745 Income tax and social contribution 61,393 8,882 Other recoverable taxes 9 77,109 50,424 Derivative financial instruments ,088 17,771 Receivables from related parties 10 1,039 1,049 Other 25,264 29,393 Current 3,301,482 3,012,836 Long-term assets Trade receivables 8 28,706 33,671 Transportation not used , ,006 Other recoverable taxes 9 11,098 12,624 Derivative financial instruments , ,366 Deferred tax assets 16 91, ,757 Judicial deposits 17 53,580 49,255 Other 994 1,421 Intangible assets 12 4,640,875 4,598,856 Non-current 5,365,083 5,655,956 Total assets 8,666,565 8,668,792 The accompanying notes are an integral part of these financial statements. 8

9 Statement of financial position and 2016 Liabilities and equity Note December 31, 2016 Loans, financing and debentures 13 1,264, ,709 Trade payables 15 1,444,835 1,226,634 Other financial liabilities 51,403 1,943 Payable to related parties 10 8,370 7,528 Employee benefits payable 59,059 58,100 Income tax and social contribution - 73,482 Other payable tax 146,169 60,348 Dividends and interest on capital payable 147,235 70,781 Other payable 5,252 3,620 Current 3,126,675 1,985,145 Loans, financing and debentures 13 2,948,152 3,587,366 Advances from customers and other 26,191 19,502 Provision for judicial demands ,637 88,114 Post-employment benefits , ,916 Non-current liabilities 3,522,807 4,092,898 Total liabilities 6,649,482 6,078,043 Share capital 1,481,204 1,312,376 Capital reserve 227, ,133 Revaluation reserve 5,838 6,052 Profit reserve 432, ,900 Carrying value adjustments (129,297) (113,712) Shareholder s equity 18 2,017,083 2,590,749 Total liabilities and shareholder s equity 8,666,565 8,668,792 The accompanying notes are an integral part of these financial statements. 9

10 Statement of profit or loss and 2016 Note December 31, 2016 Net sales 20 5,537,857 5,657,246 Cost of gas and services 21 (3,492,375) (3,174,134) Gross profit 2,045,482 2,483,112 Selling expenses 21 (153,611) (158,136) General and administrative expenses 21 (722,363) (722,853) Other operating expenses (26,423) (26,437) Operational expenses (902,397) (907,426) Gross expenses 1,143,085 1,575,686 Financial costs (623,923) (746,876) Financial income 398, ,100 Exchange rate variation (11,501) 223,943 Derivative financial instruments 11,126 (223,336) Financial result, net 22 (225,540) (263,169) Profit before income tax and social contribution 917,545 1,312,517 Current (63,791) (85,878) Deferred (213,633) (325,540) Income tax and social contribution 16 (277,424) (411,418) Profit for the year 640, ,099 Earnings per share attributable to the owners of the Company - R$ per share attributed to the owners of the Company 19 Basic per share: Common shares 4, ,78281 Preferred shares 5, ,46109 Diluted per share: Common shares 4, ,78281 Preferred shares 5, ,46109 The accompanying notes are an integral part of these financial statements. 10

11 Statement of value added and 2016 December 31, 2016 Profit for the year 640, ,099 Other comprehensive income Items that will not be reclassified to the result: Actuarial loss on defined benefit plan (23,613) (84,866) Taxes on actuarial loss on defined benefit plan 8,028 28,854 Total other comprehensive income for the year (15,585) (56,012) Total comprehensive income for the year 624, ,087 The accompanying notes are an integral part of these financial statements. 11

12 Statement of changes in shareholder s equity and 2016 Share capital Tax Incentives For future capitalization Capital reserves Special goodwill reserve Granted options recognized Revaluation reserves Revenue reserves Legal reserve Profit retention Retained earnings Carrying value adjustments Total equity At January 01, ,312,376 1, , ,104-6, , ,874 - (113,712) 2,590,749 Profit for the year , ,121 Comprehensive income Actuarial gains and losses (23,613) (23,613) Taxes on actuarial gains and losses ,028 8,028 Realization of revaluation reserve (214) Total comprehensive income for the year (214) ,335 (15,585) 624,536 Dividends proposed (593,873) (435,988) - (1,029,861) Interest on capital (169,197) - (169,197) Legal reserve ,017 - (32,017) - - Special goodwill reserve ,828 (168,828) Stock grants Profit retention ,133 (3,133) - - Capital increase 168,828 - (168,828) Total contributions by and distributions to owners 168, (168,828) ,017 (590,740) (640,335) - (1,198,202) At 1,481,204 1, ,828 56, , , ,134 - (129,297) 2,017,083 12

13 Statement of changes in shareholder s equity and 2016 Share capital Tax Incentives Capital reserves For future capitalization Special goodwill reserve Revaluation reserves Revenue reserves Legal reserve Profit retention Retained earnings Carrying value adjustments Total equity At January 01, ,143,548 1, , ,932 6, ,955 1,335,275 - (57,700) 3,181,402 Profit for the year , ,099 Comprehensive income Actuarial gains and losses (84,866) (84,866) Taxes on actuarial gains and losses ,854 28,854 Realization of revaluation reserve (311) Total comprehensive income for the year (311) ,410 (56,012) 845,087 Dividends proposed (1,200,000) (70,139) - (1,270,139) Interest on capital (165,601) - (165,601) Legal reserve ,071 - (45,071) - - Special goodwill reserve ,828 (168,828) Stock grants ,599 (620,599) - - Profit retention 168,828 - (168,828) Total contributions by and distributions to owners 168, (168,828) - 45,071 (579,401) (901,410) - (1,435,740) At December 31, ,312,376 1, , ,104 6, , ,874 - (113,712) 2,590,749 The accompanying notes are an integral part of these financial statements. 13

14 Statement of cash flows and 2016 Note December 31, 2016 Cash flows from operating activities Profit before taxes 917,545 1,312,517 Adjustments for: Amortization , ,597 Loss on the disposal of intangible assets 12 42,432 12,763 Provision for profit sharing 33,905 42,869 Interest and monetary variations 397, ,575 Provision for judicial demands 35,948 8,188 Impairment of trade receivables 8 18,154 24,081 Granted options recognized Other ,583 1,822,578 2,245,173 Variations in: Trade and other receivables (122,309) 19,527 Inventories 22,662 3,582 Trade payables 114,705 (167,240) Recoverable taxes (56,769) 148,075 Taxes payables (29,334) (67,558) Employee benefits payable (38,750) (41,167) Transport not used 11 (47,284) (39,281) Other (28,396) (13,387) (185,475) (157,449) Net cash provided by operating activities 1,637,103 2,087,724 Cash flows from investing activities Additions to intangible assets (352,958) (438,366) Marketable securities (282,915) (198,647) Cash received in the sale of other permanent assets 1,097 - Cash used in investing activities (634,776) (637,013) Cash flows from financing activities Proceeds from new loans, financing and debentures , ,717 Payments of principal on loans, financing and debentures (496,764) (506,503) Payments of interest on loans, financing and debentures (226,324) (213,898) Derivative financial instruments 8,754 1,122 Dividends and interest on capital paid (1,121,407) (1,369,456) Net cash used in financing activities (1,383,142) (1,310,018) (Decrease)/increase in cash and cash equivalents (380,815) 140,693 Cash and cash equivalents at the beginning of the year 2,108,336 1,967,643 Cash and cash equivalents at the end of the year 1,727,521 2,108,336 Additional information: Income tax and social contribution paid 64,680 70,774 The accompanying notes are an integral part of these financial statements. 14

15 Statement of value added and 2016 Note December 31, 2016 Revenue Sale of gas 6,693,939 6,650,195 Other operating income 77,352 52,316 Provision for impairment of trade receivables 8 (18,154) (24,081) Construction revenue - ICPC , ,025 Other income ( expenses ) (26,423) (26,437) 7,077,907 6,991,018 Cost and expenses Cost of gas and transportation (4,070,663) (3,545,606) Cost of sales and services (24,234) (20,325) Construction costs - ICPC 01 (351,193) (339,025) Materials, services and other expenses (223,131) (197,041) (4,669,221) (4,101,997) Gross value added 2,408,686 2,889, Retention Amortization 12 (375,396) (389,597) (375,396) (389,597) Net value added generated by the Company 2,033,290 2,499,424 Value added received through transfer Financial income 263, , , ,408 Total value added to distribute 2,296,330 2,791,832 Distribution of value added Personnel and social charges 165, ,768 Remuneration 106, ,632 Benefits 35,871 36,623 FGTS 13,656 14,668 Other 10,177 7,845 Taxes and contributions 986,764 1,141,872 Federal 548, ,766 State 415, ,285 Municipalities 22,660 17,821 Finance costs and rentals 503, ,093 Interest 400, ,163 Rents 16,270 17,824 Other 86, ,106 Remuneration of shareholder s equity 640, ,099 Proposed dividends 435,988 70,139 Interest on capital 169, ,601 Profit retention 34, ,359 2,296,330 2,791,832 The accompanying notes are an integral part of these financial statements 15

16 1 General information The main activity of Companhia de Gás de São Paulo - COMGÁS (the "Company") is the distribution of piped natural gas in part of the State of São Paulo (in approximately 180 municipalities, including the region referred to as Greater São Paulo) to industrial, residential, commercial, automotive, thermal-power generation and co-generation consumers. COMGÁS is a public company headquartered in São Paulo, State of São Paulo, Brazil, and is listed on the São Paulo Stock Exchange (B3). The Company is a direct subsidiary of Cosan S.A. Indústria e Comércio, which holds 79.87% of the Company's share capital. The Concession Contract for the Exploration of Public Piped Gas Distribution Services was signed on May 31, 1999 with the conceding authority - represented by the Agência Reguladora de Saneamento e Energia do Estado de São Paulo (ARSESP), formerly Comissão de Serviços Públicos de Energia (CSPE)). The Contract grants and regulates the concession for the exploration of public piped gas distribution services for a period of 30 years, which may be extended for a further period of 20 years at the concessionaire's request. ARSESP is responsible for the enforcement of the agreement and for regulating, controlling and overseeing the operations of energy operators in the State of São Paulo. The aforementioned concession agreement describes the Company's obligations, the rules for the five-year tariff review procedures and the quality and safety indicators that the Company must comply with. ARSESP Portaria 160/01, which regulates the general conditions for the supply of piped gas, was recently perfected through a Public Hearing process, AP 03/2016, resulting in Deliberation ARSESP 732/2017, seeking to modernize the relationship of the concessionaire with its market in several aspects of the provision of services. In addition, the concession agreement establishes that the tariffs practiced by the Company must be readjusted once a year in the month of May, with the objective of realigning its price to the cost of gas and adjusting the distribution margin for inflation. Exceptionally, the regulation allows to adjust the cost of gas in a period of less than one year, provided that certain criteria are met, depending on the difference between the cost of gas contained in the tariff and that paid by the concessionaire to its supplier (Resolution ARSESP 308/2012 ). In addition, on a five-year basis, through the Tariff Review process, the tariff margins are realigned to the ticket application, authorized by the regulator, in function of projections of costs and volumes for the next five-year period. 16

17 2 Basis of preparation 2.1 Conformity declaration The financial statements are presented in thousands of Brazilian reais, unless otherwise indicated, including the notes to the financial statements and have been prepared in accordance with accounting practices adopted in Brazil, based on the provisions of the Brazilian Corporation Law, by the Brazilian Securities and Exchange Commission (CVM) - in the Pronouncements and Guidance issued by the Accounting Pronouncements Committee (CPC) - in the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB) and supplemented by the Plan of Accounts of the Public Service of Piped Gas Distribution, instituted by Administrative Order ARSESP nº 22 of November 19, The relevant information specific to the financial statements are being evidenced and correspond to those used by the administration in its management. Certain amounts of the comparative balances were reclassified to improve the disclosures in the financial statements for the year, with an impact on the income statement between the lines of the financial result and statements of cash flows without changes in total per activity. The issuance of these financial statements was approved by the Fiscal Council on February 16, 2018 and by the Board of Directors on February 19, Functional currency and presentation currency The financial statements are presented in Reais (R $). The Real is the functional currency of the Company since it is the currency of the main economic environment in which it operates, generates and consumes cash. 2.3 Use of estimates and judgments The preparation of the financial statements in accordance with accounting practices adopted in Brazil and international standards requires that Management make judgments, estimates and adopt assumptions that affect the application of accounting policies and the reported values of assets, liabilities, revenues and expenses. Actual results may differ from these estimates. Estimates and assumptions are reviewed continuously. Revisions to accounting estimates are recognized prospectively. The information on critical judgments and uncertainties regarding the accounting policies adopted that have effects on the amounts recognized in the financial statements are included in the following explanatory notes: Notes 12 - Intangible assets 17

18 The Company annually performs an evaluation of impairment indicators of intangible and immobilized assets. Impairment exists when the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, which is the higher of fair value less costs to sell and its value in use. The Company has a public concession agreement for a gas distribution service, in which the granting authority controls which services are to be provided and at what price, as well as holds, a significant participation in the infrastructure at the end of the concession. This concession agreement represents the right to charge users for gas supply during the term of the agreement. Accordingly, the Company recognizes this right as an intangible asset. Accordingly, the construction of the necessary infrastructure for the distribution of gas is considered a service provided to the Granting Authority and the corresponding revenue is recognized at fair value. Financing costs directly related to construction are also capitalized. The Company does not recognize the margin in the construction of infrastructure. Subject to the approval of the Granting Authority, the Company has the option to request a one-time extension of the distribution services for another 20 years. Once the concession is terminated, the assets linked to the gas distribution service will be reverted to the Granting Authority, and the Company will be entitled to the indemnity to be determined based on the surveys and evaluations to be determined at that time. Currently, the amounts referring to indemnification are not pre-established or determinable, which is why the Company did not apply the bifurcated model for the accounting of the financial asset. The amortization of the intangible asset reflects the pattern in which the future economic benefits of the asset are expected to be consumed by the Company during the term of the concession agreement, considering the extension, which correspond to the useful life of the assets on-line infrastructure components with the provisions of the São Paulo State Sanitation and Energy Regulatory Agency ("ARSESP"), as disclosed in note 12. The amortization of the components of the intangible asset is discontinued when the respective asset has been fully consumed or written off, and is no longer included in the basis for calculating the concession service fee, whichever occurs first. Note 14 - Operating lease commitments The Company contracted commercial leases and evaluated the terms and conditions of the contracts, the risks and the benefits assumed, and, therefore, accounted for the contracts as operating leases. Note 23 - Fair value of derivatives and other financial instruments 18

19 When the fair value of the financial assets and liabilities presented in the balance sheet cannot be obtained from active markets, it is determined using valuation techniques, including the discounted cash flow model. Data for these methods are based on those practiced in the market where possible; however, where this is not feasible, a certain level of judgment is required to establish fair value. The judgment includes considerations on the data used, such as liquidity risk, credit risk and volatility. Changes in the assumptions about these factors could affect the fair value of financial instruments. Note 24 - Measurement of defined benefit obligations - Actuarial liabilities The cost of defined benefit retirement plans and other post-employment benefits and the present value of the retirement obligation are determined using actuarial valuation methods. Actuarial valuation involves the use of assumptions about discount rates, expected asset return rates, future salary increases, mortality rates, and future increases in pension and pension benefits. The defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each balance sheet date. Note 25 - Share-based Payment The Company measures the cost of transactions settled with employee shares based on the fair value of the equity instruments on the grant date. The estimation of the fair value of stock-based payments requires the determination of the most appropriate valuation model for the granting of equity instruments, which depends on the terms and conditions of the concession. This also requires determining the most appropriate data for the valuation model, including the expected life of the option, volatility and dividend yield and corresponding assumptions. The assumptions and models used to estimate the fair value of share-based payments are disclosed in note 25. Note 17 - Provision for lawsuits Provisions for lawsuits are recognized in profit or loss in other operating expenses, when: the Company has a legal or constitutional obligation as a result of past events; an outflow of resources is likely to be required to settle the obligation; and the amount was estimated safely. The assessment of the likelihood of loss includes assessing the available evidence, the hierarchy of laws, available case law, the most recent court decisions and their relevance in the legal system, as well as the evaluation of external lawyers. Provisions are reviewed and adjusted to take into account changes in circumstances, such as applicable limitation period, findings of tax inspections or additional exposures identified based on new matters or court decisions. Note 11 - Unused transport 19

20 Management, based on its projections of volumes to be consumed and the current rules of the Gas Supply contracts, understands that currently the Company will now be able to fully use the balances recorded under the item "Unused transportation". Measurement of fair value A series of policies and accounting disclosures of the Company require the measurement of fair value for financial and non-financial assets and liabilities. Management regularly reviews significant unobservable data and valuation adjustments. If information from third parties, such as brokerage quotes or price services, is used to measure fair value, Management analyzes the evidence obtained to support the conclusion that such assessments meet the requirements of accounting practices adopted in Brazil and international standards IFRS, including the hierarchy level of the fair value at which such valuations are to be classified. When measuring the fair value of an asset or a liability, the Company uses observable market data as much as possible. The fair values are classified at different levels in a hierarchy based on the inputs used in the valuation techniques as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities; Level 2: inputs, except quoted prices included in Level 1, which are observable for the asset or liability, directly (prices) or indirectly (derived from prices); and Level 3: inputs, for the asset or liability, which are not based on observable market data (unobservable inputs). The Company recognizes transfers between levels of the fair value hierarchy at the end of the financial statements in which the changes occurred. 2.4 Basis of measurement The financial statements were prepared based on historical cost, except for the following material items recognized in the balance sheets: derivative financial instruments measured at fair value; financial instruments measured at fair value through profit or loss; loans measured at fair value through profit or loss; and Employee defined benefit obligations are stated at the present value of the actuarial obligation net of the fair value of the plan assets, according to note Main accounting policies 20

21 The accounting policies described below have been applied consistently by the Company for all years presented in these financial statements. 3.1 Foreign currency Transactions in foreign currency Transactions in foreign currency are translated using the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the exchange rate calculated on that date. Foreign exchange gains and losses resulting from the settlement of these transactions and the translation at the year-end exchange rates referring to monetary assets and liabilities in foreign currencies are recognized in the income statement. Exchange gains and losses related to loans, cash and cash equivalents are presented in the statement of income as financial income or expense. 3.2 Financial instruments Non-derivative financial assets The Company recognizes the loans and receivables and deposits initially as of the date of origination. All other financial assets (including assets designated at fair value through profit or loss) are initially recognized on the trade date on which the Company becomes a party to the contractual provisions of the instrument. The Company classifies the non-derivative financial assets into the following categories: financial assets recorded at fair value through profit or loss, held-tomaturity investments, loans and receivables and available-for-sale financial assets. (a) Financial assets measured at fair value through profit or loss A financial asset is classified at fair value through profit or loss if it is classified as held for trading, that is, designated as such at the time of initial recognition. Financial assets are designated at fair value through profit or loss if the Company manages such investments and makes purchase and sale decisions based on their fair values in accordance with the documented risk management and the Company's investment strategy. Transaction costs are recognized in profit or loss as incurred. Financial assets recorded at fair value through profit or loss are measured at fair value, and changes in the fair value of these assets, which take into account any dividend gains, are recognized in income for the year. (b) Loans and receivables 21

22 Loans and receivables are financial assets with fixed or calculable payments that are not listed in the active market. These assets are initially recognized at fair value plus any attributable transaction costs. After initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment loss. Loans and receivables include cash and cash equivalents, trade accounts receivable and receivables from related parties. Cash and cash equivalents Cash and cash equivalents comprise cash balances and financial investments redeemable in three months or less from the date of hiring. Which are subject to an insignificant risk of change in value, and are used in the management of short-term obligations. Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is written off when: (i) Rights to receive cash flows from the asset expire; (ii) The Company transferred its rights to receive cash flows from the asset or assumed an obligation to pay the cash flows received without delay to a third party pursuant to a "transfer" agreement; and (a) the Company transferred substantially all the risks and rewards relative to the asset, or (b) the Company did not transfer or substantially retain all risks and rewards relative to the asset but transferred the control over the asset. When the Company has transferred its rights to receive cash flows from an asset or has executed a repurchase agreement and has not transferred or retained substantially all the risks and rewards relative to the asset, an asset is recognized to the extent of the Company's ongoing involvement with the asset. In this case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company maintained. Non-derivative financial liabilities The Company recognizes debt securities issued and subordinated liabilities initially on the date they are originated. All other financial liabilities (including liabilities designated at fair value recognized in profit or loss) are initially recognized on the trade date on which the Company becomes a party to the contractual provisions of the instrument. The Company classifies non-derivative financial liabilities in the liability category at amortized cost. These financial liabilities are initially recognized at fair value plus any 22

23 attributable transaction costs. After initial recognition, these financial liabilities are measured at amortized cost using the effective interest method. Financial liabilities comprise loans and financing, debt securities issued (including certain preferred shares), bank overdraft limit, suppliers, dividends and interest on shareholders' equity. When an existing financial liability is replaced by another of the same lender with substantially different terms, or the terms of an existing liability are significantly changed, such replacement or change is treated as write-off of the original liability and recognition of a new liability, the difference being accounting values recognized in the statement of income. Share capital Ordinary shares Additional costs directly attributable to the issuance of shares and stock options are recognized as a reduction of shareholders' equity. Tax effects related to the costs of these transactions are accounted for under CPC 32 / IAS 12. Preferential shares Non-redeemable preferred shares are classified in shareholders' equity, since dividend payments are discretionary, and they do not generate any obligation to deliver cash or other financial assets of the Company and do not require liquidation in a variable number of equity instruments. Discretionary dividends are recognized as distributions in shareholders' equity on the date of their approval by the shareholders. Mandatory minimum dividends as defined in the bylaws are recognized as liabilities. Derivative financial instruments, including hedge accounting The Company maintains financial hedge derivative instruments to hedge its exposure to foreign currency and interest rate risk. Embedded derivatives are separated from their contracts and individually recorded if: the economic characteristics and risks of the main contract and the embedded derivative are not intrinsically related; an individual instrument with the same conditions as the embedded derivative satisfies the definition of a derivative; and the combined instrument is not measured at fair value through profit or loss. At the time of the initial designation of the hedge, the Company formally documents the relationship between the hedging instruments and the hedged items, including the 23

24 risk management objectives and the strategy for conducting the hedge transaction, together with the methods that will be used to evaluate the effectiveness of the hedge relationship. The Company makes an assessment, both at the beginning of the hedge relationship, and continuously, if there is an expectation that hedge instruments will be "highly effective" in offsetting changes in the fair value or cash flows of the respective hedged items during the year for which the hedge is designated, and whether the actual results of each hedge are within the range of 80% - 125%. For a hedge of cash flows of a forecasted transaction, the transaction should have its occurrence as highly probable and should present an exposure to changes in the cash flows that could ultimately affect the reported net income. Derivatives are initially recognized at fair value; attributable transaction costs are recognized in profit or loss when incurred. After initial recognition, derivatives are measured at fair value, and changes in fair value are recorded as described below: (i) Fair value hedges Changes in the fair value of derivatives designated and qualified as fair value hedges are recorded in the statement of income with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The Company only applies fair value hedge accounting to hedge against the risk of fixed interest and foreign exchange variation of loans. Gains or losses related to the effective portion of interest rate swaps for protection against fixed rate loans are recognized in the statement of income as "Financial expenses". The gain or loss related to the non-effective portion is recognized in the statement of income as "Other operating income (expenses), net". Changes in fair value of hedged fixed rate loans attributable to interest rate risk are recognized in the statement of income as "Financial expenses". If the hedge no longer meets the hedge accounting criteria, the adjustment in the carrying amount of a hedged item for which the effective interest rate method is used is amortized over the period to maturity. (ii) Other derivative financial instruments When a derivative financial instrument is not designated in a relationship and does not qualify as hedge accounting, all changes in its fair value are recognized immediately in profit or loss. 3.3 Inventories Inventories are recorded at average acquisition cost and at net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Provisions for low turnover or obsolete inventories are recognized when deemed necessary by Management. 3.4 Intangible assets 24

25 (a) Intangible assets related to the concession agreement The Company has a public concession agreement for the gas distribution service, as described in Note 1, in which the Concession Authority controls which services are to be provided and at what price, as well as, it has a significant participation in the infrastructure at the end of the concession. This concession agreement represents the right to charge users for gas supply during the term of the agreement. Accordingly, the Company recognizes this right as an intangible asset. Intangible assets consist of assets acquired or constructed from the concession, which comprise the necessary infrastructure for the distribution of natural gas, and are amortized and depreciated reflecting the pattern in which the future economic benefits of the asset are expected to be consumed by the Company, the which correspond to the useful life of the active infrastructure components in line with the ARSESP provisions. The Concession Agreement was signed on May 31, 1999, with a term of 30 years. Subject to the evaluation of the Granting Authority, the Company has the option to request the extension of the distribution services for another 20 years. Once the concession is terminated, the assets linked to the gas distribution service will be reverted to the Granting Authority, and the Company will be entitled to the indemnity to be determined based on the withdrawals and evaluations observing the book values to be determined at that time. In addition, the concession agreement establishes that the tariffs practiced by the Company must be reviewed once a year in May, in order to realign its price at the cost of gas and adjust the distribution margin for inflation. Once the concession is terminated, the Company has the right to request the reversion to the Granting Authority of the assets and facilities linked to the gas distribution service. Currently the amounts related to indemnification are not pre-established or determinable, which is why the Company did not apply the bifurcated model for the accounting of the financial asset. (b) Contracts with customers Expenses with the implementation of a gas system (including piping, valves and equipment in general) for new customers are recorded as intangible and amortized over the period of the contract with the customer, up to the limit of the concession agreement. (c) Other intangible assets Other intangible assets that are acquired by the Company and have finite useful lives are measured at cost, less accumulated amortization and accumulated impairment losses. (d) Subsequent expenditure Subsequent expenses are capitalized only when they increase the future economic benefits embodied in the specific asset to which they relate. All other expenses are 25

26 recognized in the income statement as incurred. (e) Amortization Amortization is recognized in the statement of income by the straight-line method based on the estimated useful lives of intangible assets, as of the date these are available for use. Amortization methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate. 3.5 Impairment (a) Non-derivative financial assets A financial asset not measured at fair value through profit or loss is valued at each reporting date to determine whether there is objective evidence that there has been a loss in its recoverable amount. An asset has a loss in its recoverable value if objective evidence indicates that a loss event occurred after the initial recognition of the asset and that loss event had a negative effect on projected future cash flows that can be estimated reliably. Financial assets measured at amortized cost A reduction of the recoverable amount with respect to a financial asset measured at amortized cost is calculated as the difference between the book value and the present value of estimated future cash flows discounted at the effective interest rate of the asset. Losses are recognized in profit or loss and reflected in an allowance account against receivables or assets held to maturity. When a subsequent event indicates reversal, decrease in loss of value is reversed and recorded in profit or loss. (b) Impairment of non-financial assets Assets that are subject to amortization are reviewed for impairment whenever events or material changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized at the amount at which the carrying amount of the asset exceeds its recoverable amount. The latter is the higher of an asset's fair value less costs to sell and its value in use. Non-financial assets, which have been impaired, are subsequently reviewed for the analysis of a possible reversal of the impairment at the reporting date. 3.6 Provisions A provision is recognized, based on a past event, whether the Company has a legal or constructive obligation that can be reliably estimated, and it is probable that an 26