Financial Statements (Individual and Consolidated) Porto Sudeste do Brasil S.A.

Transcription

1 Financial Statements (Individual and Consolidated) Porto Sudeste do Brasil S.A. with Independent Auditor Report on Financial Statements

2 Individual and consolidated financial statements Contents Management report... 1 Independent auditor report on the financial statements... 6 Financial statements Balance sheet Statement of operations Statement of comprehensive income (loss) Statement of changes in equity Cash flow statement

3 Management Report 1. Message from Management Management of Porto Sudeste do Brasil S.A. - Porto Sudeste or Company, in compliance with the legal requirements and in accordance with the prevailing corporate legislation, hereby submits for your appreciation the Financial Statements accompanied by the respective explanatory notes and the independent auditor s report for the year ended. Should you need any further clarifications, please do not hesitate to contact us. In closing 2017, Management expresses their acknowledgement to suppliers, employees and all other co-workers for their dedication and commitment. 2. Relationship with independent auditors Pursuant to CVM Rule No. 381/2003, we hereby inform that Ernst & Young Auditores Independentes S/S ( EY ) renders external audit services relating to the audit of the Company s financial statements. When contracting services not related to independent audit, the Company adopts procedures that are based on applicable law and on principles internationally accepted that preserve the auditor s independence and objectivity. These principles are as follows: (i) the auditor must not review its own work, and (ii) the auditor must not act as a manager for his/her client neither promote this client s interest. EY represented to the Company that there is no relationship or factual situation that represents conflict of interests, preventing the exercise of their activity on an independent basis. 3. Management's explanations with respect to variable-yield securities Variable-yield securities By virtue of the conclusion of the Company s parent Porto Sudeste do Brasil S.A. acquisition in February 2014, as described in Note 1, the Company assumed the obligations related to the variableyield securities, issued in March 3, 2015 in connection with Porto Sudeste s acquisition by MMX. In order to make the transfer of such obligation feasible, the Corporation issued variable-yield securities (mirror securities of MMXM11) in similar terms to MMXM11, by means of two vehicles: FIP-IE Porto Sudeste Royalties: An infrastructure equity investment fund to hold in its portfolio exclusively Port11 Securities - and for each Port11 Security held by FIP-IE would be entitled to a Unit. FIP-IE s units were offered to the holders of MMXM11 Securities that would fit as qualified investors pursuant to CVM regulation, and would not have restrictions to hold FIP-IE units. 1

4 Porto Sudeste V.M S.A.: A stock corporation registered with CVM under category B. Said corporation issued a new royalty-based variable-yield security, mirror of MMXM11 Security ( PSVM11 Securities ), and such security listed for trading on BM&FBOVESPA (contrary to Port11 Securities which are not accepted for trading on the stock exchange). The PSVM11 Securities were offered to holders of MMXM11 Securities that (i) would not fit as qualified investors, or (ii) would have regulatory restrictions to hold units of a FIP-IE. Such security exchange operation did not generate impacts on the Corporation s financial statements, once the obligation of payment had already been recognized based on contractual clauses with the final holders of the original securities (MMXM11). Through conclusion of security exchange, the Company has an obligation of payment to the carriers above, which in turn have an obligation of payment to the holders of units/securities exchanged. The holders of securities mentioned are entitled to quarterly variable-yield determined since January 1st, 2013, calculated based on metric ton of iron ore (defined below) or the value per ton of other loads (defined below), as the case may be, as follows: R = [(TMMF x VpTMF) + (TMOC x VpTDC)]*FP where: R = royalties payable in relation to each quarter of the fiscal year TMMF = Ton of Iron Ore shipped on Port for the respective quarter TMOC = Ton of Other Loads shipped on Port for the respective quarter VpTMF = Value per Ton of Iron Ore (as defined below) VpTDC = Value per Ton of Other Loads (as defined below) For iron ore loads: the royalties related to iron ore loads shipped on Port in a certain calendar quarter shall be calculated, taking into account the amount of USD 5.00 per ton of iron ore ( value per ton of iron ore ). This value will be (i) adjusted annually at the variation in US PPI calculated from September 2010; and (ii) converted into reais, based on the exchange rate at the ending of the business day immediately prior to the actual payment date. For other loads: the royalties related to other loads, other than iron ores (excluding non-dry loads, such as supply activities) conducted at the Port Terminal will be calculated based on the load margin (as defined below) ( value per ton for other loads ). Load margin (a) means the difference between the average cost per ton (excluding all non-cash items) incurred in relation to the services rendered by Porto Sudeste relating to the applicable load and the average value per ton effectively charged by Porto Sudeste for the services rendered in relation to such load; and (b) must be limited under any circumstance to USD 5.00 per shipped ton. The adjusted limit value of USD 5.00 per ton for load margin will be (i) adjusted annually at the variation in US PPI calculated from September 2010; and (ii) converted into reais, based on the exchange rate at the ending of the business day immediately prior to the actual payment date. 2

5 Annually, in the fourth quarter of each fiscal year, the amount of the metric tons effectively shipped on Port during the respective year ( measured tons ) will be compared to: (a) the years between 2013 and 2016, the take-or-pay volumes indicated in chart below; and (b) the years subsequent, the quantity of metric tons to be shipped on Port in the respective year under all take-or-pay contracts entered into between Porto Sudeste or its subsidiaries in force in the respective fiscal year ( takeor-pay ton ): Metric tons 13,6 31,9 36,8 36,8 If the take-or-pay ton value, less the measured ton value is a positive figure, the values of royalties payable in relation to the fourth quarter of each fiscal year will be added to the amount corresponding to the multiplication of such number by the value per ton for iron ore, or the value per ton for other loads, as the case may be. In the chart below, it is possible to verify the tons measured and to compare with take or pay tons for purpose of calculation described above, considering the year of 2016 as the beginning of the company s commercial operations after the commissioning held in 2015: Tm ,1 9,5 All volumes operated in the year of 2017 are related to iron ore, and there are no other quantities shipped. If, in a certain calendar quarter by the payment of current royalties the cash of issuer and Porto Sudeste is jointly higher than (a) USD 25,000 for the fiscal years between 2013 and 2017, or (b) USD 10,000 for the fiscal years subsequent, in both cases converted into reais at the exchange rate ( minimum cash reserve ), the issuer will use the values that exceed the minimum cash reserve ( available cash ) to pay the effectively accumulated royalties to the holders of securities until the last day of said calendar quarter. It is agreed and understood that issuer is not required to pay such additional values established herein, unless an available cash is held by issuer in the last day of such calendar quarter and until the available cash limit, available cash means the value corresponding to (i) the addition of (a) all available cash values of Porto Sudeste and (b) the positive balances on all bank accounts of issuer and Porto Sudeste (with any financial institution), less (ii) the addition of (a) any values contributed by stockholders of Porto Sudeste through capital increase or stockholder loan, to the extent that such values remain as available cash of Porto Sudeste, (b) BNDES senior debt service reserve account and CESCE senior debt service reserve account, and (c) the values of cash allocated jointly by Porto Sudeste to the IRPJ - Corporate Income Tax, CSLL - Social Contribution on Net Income, and other obligations for which Porto Sudeste s independent auditors require a joint allocation by Porto Sudeste. The royalties shall be cumulative, i.e., if in a certain calendar quarter the available cash for royalties computed by issuer is not sufficient for the total or partial payment of royalties until then computed, said royalties unpaid shall be added to the amount of royalties for the next calendar quarter. The royalties shall only be deemed due and payable when Porto Sudeste has determined that there is sufficient Cash Available for the payment of royalties. 3

6 On, the Company s parent carried out the financial calculations to identify the existence of available net cash and concluded that there is no Cash Available for the payment of royalties on this date. Cash available for payment of royalties 1st quarter st quarter st quarter st quarter 2017 Revenues 68,301 64,659 56,456 52,156 Dividends Applicable Taxes (9,733) (9,214) (8,045) (7,432) Operating Costs (15,452) (25,593) (21,400) (16,654) Maintenance Investment (3,623) (6,839) (4,544) (4,326) Operating Expenses (15,463) (14,196) (20,058) (19,756) Interests and Repayment of the Senior Debt (25,145) (68,289) (14,746) (12,889) Senior Debt Service Reserve Account Interests and Repayment of the Working Capital Senior Debt (371) (42,169) (254) (1,651) New Provisions for Existing Cash Total Cash Available for Payment of Royalties (1,486) (101,641) (12,592) (10,553) Cash available for payment of accumulated royalties 1st quarter st quarter st quarter st quarter 2017 Net Cash or Bank Accounts 43,931 49,758 21,107 30,409 Contributions by the stockholders (43,931) (49,758) (21,107) (30,409) Senior debt service reserve account Allocated cash values Total Cash Available for Payment of Accumulated Royalties

7 Reconciliation between quantity shipped and amounts paid as royalties Shipped Take-orpay/Shipped 2017 Accumulated Volume (M/TONs) 9, ,628 Price per Ton 5,00 5,00 PPI, accumulated 0,47 0,47 Price per TON (USD) 5,47 5,47 Royalty (Porto Sudeste) USD 52, ,595 PSVM11 securities issued by Porto Sudeste V.M. S.A. as a percentage of Port11 securities 0.43% 0.43% Royalties (Porto VM) calculated (KUSD) Cash available for payment of Royalties - - Royalties payable - - Securities are measured in accordance with IAS 37 - Provisions, Contingent Assets and Contingent Liabilities based on projected cash flows from future security related payments discounted at an annual rate of 12.50%. On, the present value of discounted future cash flow amounted to US$ 2,242,111, which converted into Brazilian reais totaled R$ 7,416,903 (US$ 2,354,198, which converted into Brazilian reais totaled R$ 7,672,567 at December 31, 2016). Transaction costs Debt issue costs of variable-yield securities totaling R$8,922 at (R$8.791 em 31 at December 31, 2016), referring to outside legal counsel fees and commissions of guarantee were recorded as reduction of liabilities. Itaguai, March 13, The Management. 5

8 Centro Empresarial PB 370 Praia de Botafogo, 370 6º ao 10º andar - Botafogo Rio de Janeiro - RJ - Brasil Tel: ey.com.br A free translation from Portuguese into English of Independent Auditor Report on Individual and Consolidated Financial Statements prepared in Brazilian currency in accordance with accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS), issued by International Accounting Standards Board (IASB) Independent auditor report on individual and consolidated financial statements The Shareholders, Board of Directors and Officers Porto Sudeste do Brasil S.A. Itaguaí, RJ Opinion We have audited the accompanying individual and consolidated financial statements of Porto Sudeste do Brasil S.A. ( Company ), identified as Parent Company and Consolidated, respectively, which comprise the balance sheets as at, and the related statements of operations, of comprehensive income (loss), of changes in equity and of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the individual and consolidated financial statements referred to above present fairly, in all material respects, the individual and consolidated financial position of Porto Sudeste do Brasil S.A. as at, its individual and consolidated financial performance and its respective cash flows for the year then ended, in accordance with accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS) issued by the 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 the Auditor s Responsibilities for the audit of the individual and consolidated financial statements section of our report. We are independent of the Company and its subsidiaries and comply with the relevant ethical principles set forth in the Code of Professional Ethics for Accountants, the professional standards issued by Brazil s National Association of State Boards of Accountancy ( CFC ) 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 audit opinion.

9 Emphasis - significant uncertainty as to the Company s ability to continue as a going concern Without qualifying our opinion, we draw attention to Note 1 to the financial statements, which shows that as at, the Company s consolidated current liabilities exceeded the consolidated current assets by R$265,388 thousand, it incurred consolidated accumulated losses of R$2,061,370 thousand. This note also states that the Company and its subsidiaries started up in January 2016, but they may still depend on the financial support from their shareholders and/ or third-party funds until their operations generate sufficient cash to continue operating as a going concern. These individual and consolidated financial statements were prepared on the assumption of going concern and do not include any adjustments that would be required in case Management s plans do not achieve the expected results. Other information accompanying the individual and consolidated financial statements and the auditor report Company management is responsible for such other information that is included in the Management Report. Our opinion on the individual and consolidated financial statements does not cover the Management Report and we do not express any form of audit conclusion thereon. In connection with the audit of the individual and consolidated financial statements, our responsibility is to read the Management Report and, in doing so, consider whether this report is materially inconsistent with the financial statements or with our knowledge obtained in the audit or, otherwise, whether this report appears to be materially misstated. If, based on our work we conclude that there is material misstatement in the Management Report, we are required to report this fact. We have nothing to report on this matter. Responsibilities of management and those charged with governance for the individual and consolidated financial statements Management is responsible for the preparation and fair presentation of the individual and consolidated financial statements in accordance with the accounting practices adopted in Brazil and in accordance with 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. 7

10 In preparing the individual and consolidated 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 and its subsidiaries or to cease operations, or has no other realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company s and its subsidiaries financial reporting process. Auditor responsibilities for the audit of individual and consolidated financial statements Our objectives are to obtain reasonable assurance about whether the individual and consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s 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 material misstatements when they exist. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they can influence, within a reasonable perspective, the economic decisions of users made on the basis of these financial statements. As part of the audit conducted 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 risks of material misstatements of the individual and consolidated 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 one resulting from error, as fraud may involve override of internal controls, collusion, forgery, intentional omissions or misrepresentations. 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 and its subsidiaries internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management. 8

11 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 substantial doubt as to the Company s and its subsidiaries ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the individual and consolidated 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 auditor s report. However, future events or conditions may cause the Company and its subsidiaries 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 individual and consolidated financial statements represent the corresponding transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. 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. Rio de Janeiro, March 13, ERNST & YOUNG Auditores independentes S.S. CRC-2SP015199/O-6 Daniel de Araujo Peixoto Accountant CRC-1BA025348/O-9 9

12 A free translation from Portuguese into English of Individual and Consolidated Financial Statements prepared in Brazilian currency in accordance with accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS), issued by International Accounting Standards Board (IASB) Porto Sudeste do Brasil S.A. Balance Sheet and 2016 In thousands of reais Parent Company Consolidated Note Assets Current assets Cash and cash equivalents 4 24,345 4,622 30,409 18,496 Marketable securities 4-34,060-34,060 Trade accounts receivable 5 13, , Accounts receivable from related parties 14-19, Inventories 6 22,611 17,456 65,472 94,299 Taxes recoverable 4,235 8,907 5,613 9,082 Advances 1,268-1,269 16,308 Other 8,620 9,363 8,630 9,282 74,338 93, , ,713 Noncurrent assets Restricted deposits 7 10,107 13,532 10,107 13,532 Taxes recoverable 2, Deferred income and social contribution taxes Investments 8 33,837 28, Property and equipment 9 4,952,597 4,976,444 4,970,369 4,994,144 Intangible assets 10 7,554,461 7,475,391 7,554,461 7,475,391 Other 6,825 1,232 6,891 1,310 Total noncurrent assets 12,560,437 12,495,933 12,542,194 12,484,742 Total assets 12,634,775 12,589,680 12,666,846 12,666,455 10

13 Parent Company Consolidated Note Liabilities and equity Current liabilities Trade accounts payable 18,466 27,966 55,338 89,633 Loans and financing , , , ,538 Taxes and contributions payable 13 6,824 8,239 6,944 8,048 Related parties 14 10,478 13,098 1,107 3,090 Contractual obligations ,717 Provision for investments considering capital deficiency , ,735 Other 6,630 4,984 6,624 32,925 Total current liabilities 356, , ,040 1,052,969 Noncurrent liabilities Loans and financing 11 4,370,737 4,049,044 4,370,737 4,049,044 Variable income securities 12 7,407,981 7,663,777 7,407,981 7,663,777 Provision for contingencies 1,774 1,639 1,927 1,870 Total noncurrent liabilities 11,780,492 11,714,460 11,780,645 11,714,691 Equity 17 Capital 2,424,170 2,254,296 2,424,170 2,254,296 Future capital contribution 325, , , ,874 Cumulative translation adjustments (CTA) (189,467) (127,354) (191,880) (129,714) Accumulated losses (2,062,360) (2,395,156) (2,061,370) (2,395,661) Total equity 497,584 (98,340) 496,161 (101,205) Total liabilities and equity 12,634,775 12,589,680 12,666,846 12,666,455 See accompanying notes. 11

14 Statement of operations Years ended and 2016 In thousands of reais Parent Company Consolidated Note Revenue, net of sale of assets , ,387 1,004, ,211 Costs of sales and services 19 (95,006) (72,521) (883,432) (602,474) Gross profit 112,777 70, ,933 84,737 Operating income (expenses) Administrative expenses 20 (28,513) (29,377) (32,333) (32,877) Depreciation and amortization (192,490) (161,900) (192,717) (162,128) Equity pickup 8 1, Other operating income (expenses) ,483 (2,933) 446,078 (3,017) 227,182 (193,982) 221,028 (198,022) Income before financial income (expense) and taxes 339,959 (123,116) 341,961 (113,285) Financial income (expenses) 21 Financial income 384,955 8, ,529 9,176 Financial expenses (392,119) (488,707) (393,095) (495,145) (7,164) (480,421) (7,566) (485,969) Income before income taxes 332,795 (603,537) 334,935 (599,254) Income and social contribution taxes 16 - (581,721) (104) (586,488) Income (loss) for the year 332,795 (1,185,258) 334,291 (1,185,742) See accompanying notes. 12

15 Statement of comprehensive income (loss) Years ended and 2016 (In thousands of reais) Parent Company Consolidated Profit (Loss) for the year 332,795 (1,185,258) 334,291 (1,185,742) Exchange differences related to conversion into reporting currency (189,467) (127,354) (191,880) (129,714) Total comprehensive income (loss) 143,328 (1,312,612) 142,411 (1,315,456) See accompanying notes. 13

16 Statement of changes in equity Years ended and 2016 In thousands of reais Capital Company Future capital contribution Cumulative translation adjustment Accumulated losses Total Balances at December 31, ,254, (1,209,898) 1,044,398 Capital increase through capitalization of future capital contribution - 169, ,874 Cumulative translation adjustments (CTA) - - (127,354) - (127,354) Loss for the year (1,185,258) (1,185,742) Balances at December 31, ,254, ,874 (127,354) (2,395,156) (98,340) Capital payment 169, ,874 Advance for future capital increase - 155, ,367 Cumulative translation adjustments (CTA) - - (62,113) - (62,113) Income for the year , ,795 Balances at 2,424, ,241 (189,467) (2,062,361) 497,583 14

17 Statements of changes in equity Years ended and 2016 In thousands of reais Capital Consolidated Future capital contribution Cumulative translation adjustment Accumulate d losses Total Balances at December 31, ,254, (1,209,919) 1,044,377 Capital increase through capitalization of future capital contribution - 169, ,874 Cumulative translation adjustments (CTA) - - (129,714) - (129,714) Loss for the year (1,185,742) (1,185,742) Balances at December 31, ,254, ,874 (129,714) (2,395,661) (101,205) Capital payment 169, ,874 Advance for future capital increase , ,367 Cumulative translation adjustments (CTA) - - (62,166) - (62,166) Income for the year , ,291 Balances at 2,424, ,241 (191,880) (2,061,370) 496,161 See accompanying notes. 15

18 Cash flow statement Years ended and 2016 In thousands of reais Parent Company Consolidated Cash flows from operating activities Income (loss) before income taxes 332,795 (603,537) 334,395 (599,254) Non-cash P&L items Depreciation and amortization 192, , , ,474 Transaction cost 52,088-52,088 - Other amortization 4,488-4,488 - Equity pickup (1,702) (228) - - Monetary variation and interest 119, , , ,193 Other provisions/reversals (509,241) 13,740 (509,321) 13,689 Changes in assets and liabilities Accounts receivable 6,056 (15,837) (8,943) 3,319 Sundry advances (27,953) (1,245) (11,645) (17,555) Inventories (4,955) 13,648 (24,719) (55,387) Restricted deposits 4,191 3,092 4,192 3,092 Judicial deposits (5,153) (396) (5,135) (431) Taxes recoverable (17,420) (7,554) (17,652) (13,219) Accounts receivable with related parties (2,244) Advances from customers ,737 Trade accounts payable (11,140) (22,336) (13,902) 26,223 Taxes and contributions payable 14,375 7,342 13,656 8,018 Obligation to third parties 38 (7,305) 38 (7,305) Transactions with related parties (2,639) (10,513) (2,000) (8,797) Other assets (2,977) (1) (2,978) - Salaries and compensations 267 (1,276) 268 (1,276) Interest paid (61,308) (117,106) (61,308) (117,106) Net cash used in operating activities 79,336 (410,073) 70,693 (393,585) Cash flow from investing activities Acquisition of property and equipment (30,708) (91,719) (30,708) (91,766) Marketable securities 34,060 16,914 34,060 16,914 Advance for future capital increase (730) (785) - - Net cash used in investing activities 2,622 (75,590) 3,352 (74,852) Cash flows from financing activities Advance for future capital increase 325, , , ,874 Transaction cost (50,591) (33,368) (50,591) (33,368) Borrowings settled (50,311) (89,730) (50,311) (89,730) Net cash provided by financing activities 224,339 46, ,339 46,776 Exchange differences, net - - Foreign exchange differences (286,574) 306,382 (286,472) 301,844 Decrease in cash and cash equivalents 19,723 (132,505) 11,912 (119,817) Statement of increase (decrease) in cash and cash equivalents At beginning of year 4, ,127 18, ,313 At end of year 24,345 4,622 30,408 18,496 Increase (decrease) in cash and cash equivalents 19,723 (132,505) 11,912 (119,817) See accompanying notes. 16

19 1. Operations Porto Sudeste do Brasil S.A. ( Porto Sudeste or the Company ) was established on November 7, 2007, to develop the logistics and integrated operations in the port sector, notably the implementation and operation of a Port Terminal named Porto Sudeste ( Terminal or Porto Sudeste ). The Company is composed of its parent company and its subsidiaries Pedreira Sepetiba Ltda. ( Pedreira ), Terminal de Conteineres Sepetiba Ltda. ( TCS ), Porto Sudeste VM S.A. ( Porto VM ) and Porto Sudeste Exportação e Comércio Ltda. Porto Sudeste Exportação e Comércio Ltda. was transformed into a society organized by stocks and now will be called Porto Sudeste Exportação e Comércios S.A.. The transformation occurred on October 2, Restructuring and change of controlling shareholder In February 2014 a transaction was completed between the Company s former parent company, MMX Mineração e Metálicos ( MMX ), and Trafigura Pte. Ltd. ( Trafigura ) and Mubadala Development Company PJSC ( Mubadala ), through investees in Brazil, by which Trafigura and Mubadala acquired shared control over the Company. On the transaction completion date, Trafigura and Mubadala made a capital contribution to the Company amounting to US$400 million. In addition, as part of the agreement Porto Sudeste assumed: (i) all bank debt of MMX Sudeste Mineração S.A. (an MMX subsidiary), amounting to R$1.3 billion; and (ii) the obligations stemming from royalty-based floating rate securities under the terms described in Note 12. As a result of this restructuring and assumption of debt by the Company, the port operation license that had been recorded to MMX was also transferred to Porto Sudeste. Upon completion of these transactions, Trafigura and Mubadala became joint holders of 65% ownership interest in the Company, through PSA Fundo de Investimento e Participações. In February 2014, the controlling shareholders Trafigura and Mubadala executed the Shareholders Agreement which provides for the rights and obligations of each controlling shareholder, and MMX right to appoint a member to the Company s Board of Directors while it holds at least 10% of the capital. 17

20 1. Operations (Continued) Additional acquisition of interest by controlling shareholders On August 13, 2015, by means of a capital increase, which entailed the issue of 11,241,101,754 new common registered no-par-value shares, fully subscribed by the investment fund PSA Fundo de Investimento em Participações (a Trafigura and Mubadala investment vehicle in Brazil). Accordingly, MMX was diluted and the controlling shareholders hold 94.58% interest. In March 2017, the amount of US$ 50,000 equivalent to R$ 169,874 received as an advance for future capital increase in May and July of 2016, through the PSA Fundo de Investimento e Participações. After this capital increase, MMX was diluted to a 1.54% interest in the Company and the controllers now hold 98.24%. Company s financial position At December, 2017, the Company records a consolidated working capital deficit of R$ 265,388 thousand including the forecasted debt interest and principal amortization under the Cash Sweep concept of R$ 213,705. Without considering the cash sweep, which is only a payment obligation in 2018 in the event that cash is available the working capital deficit would be R $ 51,683. See also Footnote 11 for a description of the debt refinancing. The Company also has a consolidated accumulated loss of R$ 2,061,370 and a consolidated shareholder s equity of R$ 496,161 for the year then ended. The Company closed the year of 2017 with a cash position consolidated of R$ 30,409. The Company started operations on a technical commission basis in August 2015 and commercially in January It will still depend on financial support from its shareholders and/or third-party funds, until the operations generate sufficient cash to continue operating as a going concern. Based on its business model, the Company has an additional need for cash in order to fund working capital of its operations over 2018, to meet future commitments, including debt service (payment of loans and interest in the short term). Licenses 18 On July 15, 2010, the Company obtained from the Brazil s Water Transportation Regulatory Agency (ANTAQ) authorization for construction and implementation of the Maritime Terminal with capacity for shipping 50mt/a, located in Ilha da Madeira, Itaguaí, Rio de Janeiro. This concession is valid for 25 years, renewable for another 25 years. In 2014, after completing the first phase of the implementation works of the Terminal and obtaining the respective environmental operation license, the Company received from ANTAQ the Operating Release Term (TLO) and the Qualification for International Maritime Traffic (HTMI), whereupon the Company has been fully authorized by this regulatory agency to operate the first phase of the

21 1. Operations (Continued) Licenses (Continued) Terminal. In addition to the release from the regulatory agency, the first phase of the terminal is properly bonded and able to receive goods intended for export. Regarding the offshore access, the dredging and submerged rocks blasting of the access channel to the Terminal and the mooring basin were completed in early As to the second phase of the terminal (50mt/a), the Company completed the assembly of equipment in the mid of 2015 and on November 12, 2015 was granted by ANTAQ TLO Nº11/2015, authorizing the Company to move on with the partial operation of the Private Use Terminal, in accordance with ANTAQ standards and regulations, considering the adjustments of the New Ports Law. As regards the Brazilian IRS, the areas of yard 06, tunnel, pier and yard 32 are within a customs area. This is an important milestone in the technical commissioning and completion process and enables the Company to achieve its full capacity of 50MT/year. The Company obtained approval regarding extension of the Customs of yard 32 on April 22, This is an important milestone in the technical commissioning and completion process and enables the Company to achieve its full capacity of 50MT/year. 19 Arbitration process of Mineração Usiminas S.A. ( MUSA ) On June 6, 2017 the Company entered with Mineração Usiminas S.A. ( MUSA ) into a Transaction Instrument agreeing on conditions to end the subject matter of the arbitration initiated at the Arbitration and Mediation Center of Brazil-Canada Chamber of Commerce, discussing the extension of the obligations taken on by the parties to the Port Service Agreement and Other Provisions entered into on February 11, 2011 ( Agreement ), subject matter of the Material News released by the Company on June 19, The Transaction Instrument establishes, among other provisions, that: (i) the approval of the agreement by the Arbitration Court and the compliance with the obligations taken on will result in the dissolution of the Agreement and in the Parties waiving the rights that might keep in relation to the Agreement; (ii) Porto Sudeste will pay MUSA after the approval by the Arbitration Court, the equivalent in Brazilian reais of US$62,500, (sixty-two million, five hundred thousand U.S. dollars). Additionally, the Parties also then agreed to enter into a new Port Operations Service Agreement ( New Agreement ), which will govern the port service provision by Porto Sudeste to MUSA, after complying with the obligations of the Transaction Instrument. The New Agreement establishes that MUSA will be entitled, but not required, to operate in the upcoming

22 1. Operations (Continued) 20 Arbitration process of Mineração Usiminas S.A. ( MUSA ) (Continued) years a total volume of up to 17.5 million tons of iron ore by Terminal Portuário da Porto Sudeste, located in the municipality Itaguaí - RJ. On June 23, 2017, the Arbitral Tribunal issued an order (i) determining that Porto Sudeste complied with the payment agreed in the transaction agreement entered into with MUSA; and (ii) clarifying that after such payment it would issue a decision approving the agreement between the parties, Porto Sudeste and MUSA. In a joint petition, they reported the payment to the Tribunal on July 12, On September 12, 2017, the Chamber of Arbitration sent the parties the final decision that approved the agreement entered into between MUSA and Porto Sudeste, extinguishing the arbitration, with finalizing the resolution of the matter. 2. Basis of preparation and presentation of financial statements a) Individual and consolidated financial statements The consolidated financial statements were prepared under various measurement bases used in accounting estimates. Accounting estimates involved in the preparation of the financial statements were based on objective and subjective factors, and in line with management s judgment for determining the adequate amounts to be recorded in the financial statements. The settlement of transactions involving these estimates may result in amounts materially different from those recorded in the financial statements due to uncertainties inherent in the estimation process. The Company reviews its estimates at least on an annual basis. The individual and consolidated financial statements were prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), and interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) implemented in Brazil by means of the Brazilian Financial Accounting Standards Board - FASB ( CPC ), and its accounting interpretations ( ICPC ) and guidance ( OCPC ), approved by the Brazilian Securities and Exchange Commission ( CVM ). In addition, the Company considered the guidance provided for in Accounting Guidance OCPC 07, issued by the Brazilian FASB ( CPC ) in November 2014, in preparing its financial statements. Accordingly, significant information of the financial statements themselves is being disclosed and corresponds to that used by management over its

23 administration. On March , Company management authorized the completion and disclosure of the individual and consolidated financial statements for the year ended December 31, b) Basis of preparation and measurement The individual and consolidated financial statements were prepared considering the historical cost, except for financial instruments measured at fair value. c) Functional currency With its startup on January 1, 2016, the Company and its subsidiaries began to earn revenues denominated in US dollars. Therefore, the functional currency was changed from Brazilian real to US dollar. Pursuant to Brazilian legislation and Accounting Pronouncement CPC 2 - Effects of changes in exchange rates and translation of financial statements, these financial statements are presented in Brazilian reais (R$), converting the functional currency (US dollars) to the reporting currency (Brazilian reais). Assets and liabilities are translated to the closing exchange rate in the period; P&L accounts are stated at the exchange rate on the date of the event; and equity at historical buildup cost. The effect of conversion into reporting currency is stated in equity under Cumulative translation adjustments. d) Consolidation The consolidated financial statements include the Company and the following subsidiaries: Interest - % Capital Voting capital Location of head office 2015 da sede Main activity Direct subsidiaries Pedreira 99.98% 99.98% 99.98% 99.98% Brazil Extraction and crushing of stones TCS 99.98% 99.98% 99.98% 99.98% Brazil Logistics Porto VM 100% 100% 100% 100% Brazil Currently inoperative Porto Sudeste Exportação 100% 100% 100% 100% Brazil Purchase and sale of ore Significant consolidation procedures are : 21 (i) Elimination of asset and liability balances between consolidated companies; (ii) Elimination of balances of investment accounts and corresponding interests in capital and retained earnings (accumulated losses) of subsidiaries; (iii) Elimination of balances of revenues and expenses as well as unrealized profits arising from intercompany transactions. Unrealized losses are also eliminated, but only to the extent that there is no evidence of impairment of the related assets; (iv) Balances of intercompany transactions of shared control are eliminated and interests

24 2. Basis of preparation and presentation of financial statements (Continued) d) Consolidation (v) of other shareholders are disclosed in the statement of financial position and P&L; (vi) Changes in the percentage interest in subsidiaries that do not result in loss and/or gain of control are recorded in equity. 3. Summary of significant accounting practices and estimates 3.1. Financial instruments a) Financial assets Loans and receivables are non-derivative financial assets with fixed or determinable payments not quoted in an active market. After initial measurement, these financial assets are stated at amortized cost, using effective interest rate method, less impairment loss. Amortized cost is calculated taking into consideration any discount or premium upon acquisition and charges or costs incurred. Amortization under the effective interest rate method is included as Financial income, in the statement of operations. Impairment losses are recognized as financial expenses in P&L. The Company did not record financial assets held to maturity, held for trading or held for sale in the years ended and The Company and its subsidiaries initially tests whether there is clear evidence of impairment for each financial asset individually. When there is clear evidence of impairment loss, the loss amount is measured as the difference between the carrying amount of the asset and the present value of estimated future cash flows (less estimated future credit losses not yet incurred). The present value of estimated future cash flows is discounted at the original effective interest rate for the financial asset. When applicable, the asset carrying amount is decreased by a provision and the loss amount is recognized in the statement of operations. If in a subsequent year the estimated impairment loss increase or decrease due to an event occurred after the impairment loss recognition, the loss previously recognized is increased or decreased, by means of an adjustment to the provision. A financial asset is written off when the rights to receive cash flows from the asset expire and/or when the Company transfers its rights to receive cash flows of the asset or assumes an obligation to fully pay cash flows received, without significant delay, to a third party under a pass-through arrangement, and has transferred substantially all the risks and rewards related to the asset. 22

25 3. Summary of significant accounting practices and estimates (Continued) 3.1. Financial instruments (Continued) b) Financial liabilities Financial liabilities are classified as financial liabilities measured at fair value through profit or loss, loans and financing or derivatives classified as hedging instruments, as the case may be. The Company determines classification of its financial liabilities upon their initial recognition. Financial liabilities are initially recognized at fair value plus, in the case of loans and financing, transaction cost directly attributable thereto. In 2017 and 2016, the Company only states financial liabilities classified as Loans and Financing, which after initial recognition are measured at amortized cost, using the effective interest rate method. Gains or losses are recognized in the statement of operations. c) Offsetting (net presentation) of financial instruments Financial assets and liabilities are presented net in the statement of financial position if, and only if, there is a current enforceable legal right of offsetting the amounts recognized and if there is the intention to offset or realize the asset and settle the liability simultaneously Cash and cash equivalents Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes. The Company considers that cash equivalents correspond to a financial investment readily convertible into a known cash amount and subject to insignificant risk of change in value. Accordingly, an investment normally qualifies as cash equivalent when it is redeemable in the short term, e.g. three months or less from the investment date Inventories Inventories are valued at the average acquisition or production cost, reduced by a provision for loss of market value, when applicable. The cost of these items includes expenses incurred on acquisition, transportation and storage of related assets. In the case of finished inventories, the cost includes overall manufacturing expenses based on normal operating capacity. 23

26 3. Summary of significant accounting practices and estimates (Continued) Investments The Company s investments in its subsidiaries are accounted for using the equity method in its individual financial statements. Therefore, these investments are recorded in the Parent Company s statement of financial position at cost, increased by changes after acquisition of ownership interest in the subsidiary or affiliate. Goodwill, if any, is included in the investment s book value, and is not amortized. Goodwill is reclassified in the consolidated financial statements as an intangible asset. The statement of operations reflects the portion of P&L from operations of the subsidiaries, and changes directly recognized in equity are reflected, when applicable, in the Parent Company s statement of changes in equity. The Company decides whether it is necessary to recognize any additional impairment losses in investment in its investees. If applicable, the Company calculates the amount of impairment loss as the difference between the investment s recoverable amount and the carrying amount and recognizes this sum in P&L Property and equipment Property and equipment items are recorded at acquisition, buildup or construction cost, including interest, foreign exchange gains (losses) and other financial charges incurred over project construction or development, less accumulated depreciation and/or accumulated impairment losses, if any. An item of property and equipment is derecognized on disposal or when no future economic benefits are expected from its use or disposal. Gains or losses, if any, arising from derecognition are classified in the statement of operations for the year in which the asset is derecognized. Property and equipment includes prepayments for the rendering of services or the acquisition of property and equipment items carried out based on contracts in force and are reclassified for the respective group of accounts when the services or installed equipment are ready to be used and provide cash. Repair and maintenance expenses are recorded directly in the statement of operations when incurred. Depreciation is calculated over the depreciable value, which is the cost of an asset, or another substitute for the cost, deducted from the residual value. Depreciation of property and equipment items is calculated by the straight-line method for civil construction, facilities and administrative equipment, and by a method for operated unit

27 3. Summary of significant accounting practices and estimates (Continued) Property and equipment (Continued) for operational equipment, taking into consideration the economic useful lives of these assets. Borrowing costs attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to be completed for its intended use or sale are capitalized as part of the cost of the respective asset, until the limit allowed by the standard. The excess amount, if any, will be recognized in the statements of operations Impairment of nonfinancial assets The carrying amounts of the Company s nonfinancial assets are reviewed every reporting date in order to determine whether there is any indication of impairment loss. If such indication exists, the asset recoverable amount is determined. In the case of goodwill and intangible assets with indefinite useful life or intangible assets under development that are not yet available for use, the recoverable amount is estimated every year. The recoverable amount of an asset or a Cash-Generating Unit (CGU) is defined as the higher of value in use and fair value less costs to sell. In evaluating value in use, the estimated future cash flows are discounted to present value through the discount rate before taxes that reflects the conditions prevailing in the market in relation to the capital recoverability period and specific risks of the asset. Impairment loss is recognized in P&L for the year if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses related to CGUs are initially allocated to reduce the carrying amount of any goodwill allocated to the CGUs and then, if there is any remaining loss, to reduce the carrying amount of the other assets. Impairment loss related to goodwill is not reversed. In relation to other assets, impairment losses recognized in prior years are evaluated every reporting date in relation to any indication that the loss has increased, decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount, with the reversal being limited to the carrying amount, net of depreciation or amortization, if the loss of value had not been recognized Other current and noncurrent assets and liabilities An asset is recognized in the statement of financial position when its future economic benefits are likely to flow to the Company, and its cost or value can be reliably measured.