ISA Capital do Brasil S.A.

Transcription

1 Interim Financial Statements Individual and Prepared in accordance with accounting practices adopted in Brazil and consolidated interim financial statements prepared in accordance with International Financial Reporting Standards (IFRS) and accounting practices adopted in Brazil at September 30, 2012 ISA Capital do Brasil S.A.

2 Isa Capital do Brasil Interim Financial Statements Contents Independent auditor s review report on interim financial statements... 1 Interim financial statements (unaudited) Balance sheets... 4 Income statements... 6 Statements of changes in equity... 8 Cash flow statements... 9 Notes to interim financial statements... 11

3 A free translation from Portuguese into English of independent auditor s review report on quarterly information of individual interim financial statements in accordance with accounting practices adopted in Brazil and of consolidated interim financial statements in accordance with International Financial Reporting Standards (IFRS), issued by International Accounting Standards Board IASB and accounting practices adopted in Brazil Independent auditor s review report on quarterly information The Shareholders, Management Board and Board of Directors and Officers of ISA Capital do Brasil S.A. São Paulo - SP Introduction We were engaged to review the accompanying individual and consolidated interim balance sheet of ISA Capital do Brasil S.A ( ISA or Company ) as of, and the related income statements for the three- and nine- month periods ended on, the statements of changes in equity and cash flow statement for the nine-month period then ended, including a summary of significant accounting policies and other explanatory notes. Management s responsibility for the interim financial statements Management is responsible for the preparation and fair presentation of the individual and consolidated interim financial statements in accordance with the Accounting Pronouncement CPC 21 Interim financial statements and of the consolidated interim financial statements in accordance with CPC 21 and IAS 34 Interim Financial Reporting, issued by the International Accounting Standards Board (IASB). Bases for Disclaimer of Conclusion (i) Effect of Provisional Executive Order No. 579 As mentioned in Note 37 (e), on September 11, 2012, Provisional Executive Order No.579 (MP 579) was approved and it regulates the extension of concessions for generation, transmission and distribution of electric power, granted prior to the publication of Law No. 8987, of 1995, and covered by Law No of On September 14, 2012, the Decree No regulating the MP 579 was published. According to MP 579/12, companies with concession agreements for the generation, transmission and distribution of electric power, maturing between 2015 and 2017, may extend these concessions terms, at the discretion of the granting authority and only once for a period of up to 30 years. The company will decide to accept or not the maturity of their current agreements advanced as of December The aforesaid extension is subject to the acceptance of certain conditions set by the Granting Authority, such as: i) revenue set according to the established criteria; ii) observance of quality standards set by Brazilian Electricity Regulatory Agency (ANEEL); and, iii) compliance with values established as damages for concession assets. On October 8, 2012, the subsidiary CTEEP expressed its favorable preliminarily intention to accept the extension of its concession agreement No. 059/2001, which matures on July 7, On November 1, 2012, through Administrative Ruling 579 and 580, the Ministry of Mines and Energy stated that the amounts of the new Allowed Annual Revenue (RAP) regarding CTEEP, applicable as from January 1, 2013, is R$515,621 thousand and damages for assets amount to R$2,891,290 thousand. At, CTEEP had an asset to be indemnified classified under current and noncurrent Accounts Receivable (Concession Assets) amounting to R$4,497,865 thousand and an Allowed Annual Revenue for the 2012/2013 cycle of R$2,113,952 thousand. 1

4 The Company's management is analyzing the conditions established for the extension of the concession term as well as evaluating the potential economic, financial and tax effects on indemnification and RAP amounts, as well as conducting studies and internal projections in order to reach a conclusion to whether or not perform the extension of the concession terms, which the final decision which is due at December 4, The analysis is also necessary to establish accounting effects and the disclosures required. Due to the significant uncertainty as to the realization of a significant portion of the financial asset, of other assets and liabilities related to this agreement and those which may depend on the outcome of future operations, as well as, limited availability of information, of studies and a decision from the Company's management on the execution of the amendment extending the concession agreement, and also on the limitation of disclosures relating to this matter, included in Note 37 (e), we were unable to conclude on the realization of assets, liabilities and other accounting impacts related to the acceptance or rejection of the terms established by the Ministry of Mines and Energy and ANEEL for the renewal of concession agreement 059/2001. (ii) Recording of Equity Instrument As a result of debt restructuring carried out in 2010, mentioned in Note 16.a, ISA recognized the issue of redeemable preferred shares, mentioned in Note 25.a, as equity instruments, which in our opinion, should be recognized as losses on financial instruments, in accordance with accounting practices adopted in Brazil, specifically CPC 39, and IAS 32. In addition, the Company recognized the remuneration of the aforesaid instrument as fixed cumulative dividends, according to its Articles of Incorporation and Shareholders Agreement, and not as financial expenses for purposes of interest, as we understand it should have been done. Had the Company recognized the aforesaid issuance of shares as financial instruments and the abovementioned remuneration as financial expenses rather than dividends, Equity at would have decreased by R$1,225,917 thousand, from R$2,258,927 thousand to R$1,033,010 thousand (individual), and from R$5,203,074 thousand to R$3,977,157 thousand (consolidated). Additionally, total liabilities would have increased from R$467,886 thousand to R$1,693,803 thousand (individual), and from R$5,051,166 thousand to R$6,277,083 thousand (consolidated). Net income for the nine-month period ended would have decreased by R$86,343 thousand, from R$191,533 thousand to R$105,190 thousand (individual), and from R$593,832 thousand to R$507,489 thousand (consolidated), calculated before non-controlling shareholders. Disclaimer of conclusion on individual interim financial statements Due to the significance of matters described in paragraph "Basis for disclaimer of conclusion", we were unable to adopt sufficient review procedures to become aware that the individual interim financial statements referred to above were prepared, in all material respects, in accordance with CPC 21 applicable to the preparation of interim financial statements. 2

5 Disclaimer of conclusion on consolidated interim financial statements Due to the relevance of matters described in paragraph "Basis for disclaimer of conclusion", we were unable to adopt sufficient review procedures to acknowledge that the consolidated interim financial statements referred to above were prepared, in all material respects, in accordance with CPC 21 and IAS 34, applicable to the preparation of interim financial statements. Emphasis of matter As described in Note 36, Law No. 4819/58 granted to employees of companies under the São Paulo State control the advantages to which other public service employees were already entitled, particularly supplementary retirement and pension benefits, also establishing that resulting expenses are the full responsibility of the São Paulo State Government. The operation of the payments involves Fundação CESP, charged with preparing the payroll, and the São Paulo State Government, which transfers the amount to CTEEP (which, in turn, transfers to Fundação CESP for payment to the end beneficiary.) This has been the procedure adopted since the spin-off of CESP, which created CTEEP, and has been fully observed by all parties until December As from 2004, the São Paulo State Government claimed the right to process the payroll and make the payment directly to beneficiaries. However, the São Paulo State Finance Office, in light of the opinion issued by São Paulo State Attorney General s Office, started to disallow a portion of the benefits paid to retirees, which, since then, has been generating accounts receivable from the São Paulo State Government, as mentioned in Note 8.c) and 8.d), given that the Company pays the disallowed portion to complete the benefits, as required by the decision of 49 th Labor Court. The Company s management, in addition to being widely and strongly supported by the opinion of its legal counsel and also based on the fact that the São Paulo State Finance Office is not challenging the Company s full responsibility to provide financial resources for payment of the benefits under Law No. 4819/58 enacted thereby, understands that no obligation or provision for losses in relation to the accounts receivable should be recorded in the Company s financial statements. São Paulo, November 27, ERNST & YOUNG TERCO Auditores Independentes S.S. CRC-2SP015199/O-6 Luiz Carlos Passetti Accountant CRC-1SP144343/O-3 Marcos Alexandre S. Pupo Accountant CRC-1SP221749/O-0 3

6 A free translation from Portuguese into English of individual interim financial statements in accordance with accounting practices adopted in Brazil and of consolidated interim financial statements in accordance with International Financial Reporting Standards (IFRS), issued by International Accounting Standards Board IASB and accounting practices adopted in Brazil Isa Capital do Brasil Balance sheets and December 31, 2011 (In thousands of reais) Company Note (Unaudited) (Unaudited) Assets Current assets Cash and cash equivalents 6 455, , , ,862 Accounts receivable (concession assets) ,432,417 1,474,794 Inventories ,829 50,052 Loans receivable 11 9,364 9,393 9,364 9,393 Interest on equity and dividends receivable 31-84, Receivables State Finance Office ,906 Taxes and contributions to offset 9 36,911 44,950 52,241 56,276 Pledges and restricted deposits 12-2,612-2,612 Prepaid expenses - - 9,098 3,190 Derivative financial instruments 32.a ,946 1,673 Other ,684 74, , ,352 2,616,888 2,246,246 Noncurrent Accounts receivable (concession assets) ,018,704 5,335,027 Receivables State Finance Office , ,750 Tax benefit merged goodwill , ,079 Deferred income and social contribution taxes 30.b 39,372 45,058 39,372 45,058 Pledges and restricted deposits ,839 61,886 Taxes and contributions to offset 9 10,179-10,179 - Derivative financial instruments 32.a ,203 54,195 Loans receivable 11 48,790 44,653 48,790 44,653 Inventories , ,395 Other ,013 27,617 98,341 89,711 7,427,148 6,643,660 Investments 13.b 2,126,702 2,039, Property, plant and equipment ,686 8,836 Intangible assets , ,152 2,126,743 2,039, , ,988 Total assets 2,726,813 2,622,435 10,254,240 9,138,894 4

7 Company Note (Unaudited) (Unaudited) Liabilities Current liabilities Trade accounts payable ,373 83,338 Loans and financing ,177 1,514,901 1,009,850 Debentures , ,825 Taxes and social charges payable 18 13,449 8, ,102 88,351 Tax installment payments - Law No ,965 12,273 Tax installment payments State VAT (ICMS) ,003 - Regulatory charges payable ,670 28,824 Fixed cumulative dividends payable 25.c - 36,004-36,004 Derivative financial instruments 32.a - - 7,108 27,226 Interest on equity and dividends payable - - 6, ,328 Provisions ,945 23,290 Payables Law No. 4819/58 - State Finance Office 5.a 7,194 6,335 7,194 6,335 Payables Law No. 4819/58 OPA 5.b 4,185 3,715 4,185 3,715 Payables CESP Foundation ,989 6,244 Other 1-21,342 30,185 25,881 56,647 2,021,014 1,892,788 Noncurrent liabilities Loans and financing 16 64,269 59, ,312 1,043,635 Debentures ,106, ,636 Tax installment payments - Law No , ,236 Tax installment payments ICMS ,512 - Deferred PIS and COFINS , ,519 Deferred income and social contribution taxes 30.b ,128 42,176 Regulatory charges payable ,127 32,334 Provisions , ,832 Payables Law No. 4819/58 - State Finance Office 5.a 231, , , ,549 Payables Law No. 4819/58 OPA 5.b 145, , , ,068 Special liabilities ,053 24, , ,988 3,030,152 2,387,038 Equity Capital 25.a 840, , , ,378 Capital reserves 25.e 1,199,400 1,199,400 1,199,400 1,199,400 Goodwill on capital transaction 25.f (7,468) (7,488) (7,468) (7,488) Income reserves 25.g 95,510 95,510 95,510 95,510 Retained earnings 131, ,107-2,258,927 2,127,800 2,258,927 2,127,800 Noncontrolling shareholders - - 2,944,147 2,731,268 Total equity 2,258,927 2,127,800 5,203,074 4,859,068 Total liabilities and equity 2,726,813 2,622,435 10,254,240 9,138,894 See accompanying notes. 5

8 Isa Capital do Brasil Income statements (Unaudited) Three- and nine-month period ended and 2011 (In thousands of reais, except when otherwise indicated). Company Quarter Quarter Nine-month period Nine-month period Note Operating income/(expenses) General and administrative 27 (828) (725) (2,454) (2,566) Other expenses, net 29 (13,977) (13,992) (41,961) (41,976) Equity pickup 13.c 91, , , ,099 Income before financial income and expenses and income taxes 76, , , ,557 Financial expenses 28 (5,859) (23,901) (36,857) (54,291) Financial income 28 11,639 17,404 46,446 38,669 Financial income (loss) 5,780 (6,497) 9,589 (15,622) Income before income and social contribution taxes 82, , , ,935 Income and social contribution taxes Current 30 (1,218) (3,782) (13,261) (12,805) Deferred 30 (522) (1,623) (5,687) 47,505 (1,740) (5,405) (18,948) 34,700 Net income for the period 80, , , ,635 Earnings per share - base and diluted 25.h 0,0562 0,0720 0,1335 0,1796 Average number of shares for the period 25.h 1,434,469,504 1,434,469,504 1,434,469,504 1,434,469,504 See accompanying notes. 6

9 Isa Capital do Brasil Income statements (Unaudited) (Continued) Three- and nine-month period ended and 2011 (In thousands of reais, except when otherwise indicated). Quarter Quarter Nine-month period Nine-month period Note Net operating revenue , ,533 2,115,697 2,194,319 Cost of operating services 27 (314,806) (357,914) (848,133) (933,512) Gross profit 491, ,619 1,267,564 1,260,807 Operating income (expenses) General and administrative 27 (33,636) (31,492) (116,357) (108,078) Other expenses, net 29 (20,536) 7,151 (65,935) (61,390) (54,172) (24,341) (182,292) (169,468) Income before financial income and expenses and income taxes 437, ,278 1,085,272 1,091,339 Financial expenses 28 (89,646) (108,069) (333,780) (245,007) Financial income 28 32,547 61, ,287 97,843 Financial income (loss) (57,099) (47,019) (192,493) (147,164) Income before income and social contribution taxes 380, , , ,175 Income and social contribution taxes Current 30 (90,640) (77,581) (230,313) (204,827) Deferred 30 (58,812) (71,433) (68,634) (13,588) (149,452) (149,014) (298,947) (218,415) Net income for the period 230, , , ,760 Net income for the period allocated to: Noncontrolling shareholders 149, , , ,125 Controlling shareholders 80, , , ,635 See accompanying notes. 7

10 Isa Capital do Brasil Statements of changes in equity (Unaudited) Nine-month period ended and 2011 (In thousands of reais) Goodwill on capital transaction Income reserve Total consolidated equity Capital Capital reserve Legal reserve Retained profits Retained earnings Total equity Noncontrolling shareholders Balances at December 31, ,378 1,199,400-5,881 48,230-2,093,889 2,737,364 4,831,253 Income for the period , , , ,760 Fixed cumulative dividends paid for the six-month period (48,230) (132,041) (180,271) - (180,271) Distribution of dividends (subsidiaries) (207,252) (207,252) Additional dividends proposed in subsidiary (123,557) (123,557) Interest on equity in subsidiary (118,492) (118,492) Other in subsidiary Balances at September 30, ,378 1,199,400-5, ,594 2,171,253 2,756,797 4,928,050 - Balances at December 31, ,378 1,199,400 (7,488) 5,881 89,629-2,127,800 2,731,268 4,859,068 Income for the period , , , ,832 Goodwill on capital transaction (Note 25f) Fixed cumulative dividends paid for period (Note 25) (60,426) (60,426) - (60,426) Distribution of dividends in subsidiary (91,663) (91,663) Reversal of prescribed dividends in subsidiary Additional dividends proposed in subsidiary (19,497) (19,497) Interest on equity in subsidiary (79,546) (79,546) Prescribed interest on equity in subsidiary Other Balances at 840,378 1,199,400 (7,468) 5,881 89, ,107 2,258,927 2,944,147 5,203,074 See accompanying notes. 8

11 ISA Capital do Brasil Cash flow statements (Unaudited) Nine-month period ended and 2011 (In thousands of reais) Subsidiary Cash flow from operating activities Net income for the period 191, , , ,760 Adjustment to reconcile net income with cash generated by (used in) operating activities Depreciation and amortization (Note 14, 15 and 27) 9 9 3,526 4,742 Loss on acquisition of subsidiary (Note 29) - - (1,829) 28,490 Reversed valuation allowance in jointly-controlled subsidiary (1,835) Deferred income and social contribution taxes (Note 30) 5,687 (47,505) 68,634 13,588 Deferred PIS and COFINS ,614 82,300 Provision for contingencies (Note 22) - - (8,563) 2,295 Net book value of permanent assets written off (Note 14) Net book value of investments written off (35) - (35) - Equity pickup (Note 13.c) (245,307) (283,099) - - Amortization of goodwill (Note 29) 41,976 41,976 63,600 63,600 Interest and monetary and exchange variation on assets and liabilities 13,204 22, , ,979 7,072 (8,236) 975,170 1,096,935 (Increase) decrease in assets Trade accounts receivable (concession assets) - - (639,350) (918,394) Inventories - - (5,183) (11,275) Trade accounts receivable 1, (107,602) (87,202) Taxes and contributions to be offset 242 (11,390) (4,247) (13,376) Pledges and restricted deposits 2,612 2,304 (3,341) (10,306) Prepaid expenses - - (5,907) (4,183) Other - 57 (18,546) 11,529 3,904 (8,382) (784,176) (1,033,207) Increase (decrease) in liabilities Trade accounts payable (236) (44) (16,009) 14,964 Taxes and social charges payable 5,370 12,805 46,751 23,299 Tax installment payments - Law No (9,508) (6,545) Tax installment payments ICMS - IEMadeira - - 9,516 - Regulatory charges payable - - 6,639 5,453 Payable (11,379) 12 (11,634) (4,311) Other 11 (3,549) (8,209) (19,715) (6,234) 9,224 17,546 13,145 Net cash generated by (used in) operating activities 4,742 (7,394) 208,540 76,873 See accompanying notes. 9

12 ISA Capital do Brasil Cash flow statements (Unaudited) (Continued) Nine-month period ended and 2011 (In thousands of reais) Subsidiary Cash flow from investing activities Property, plant and equipment (Note 14) (3) (28) (4,389) (1,935) Intangible assets (Note 15) - - (2,980) (2,138) Investment (13c) (13,109) Interest on equity and dividends received (*) (25.d) 200, , Net cash generated by (used in) investing activities 200, ,212 (7,307) (17,182) Cash flow from financing activities Funding through loan (Note 16 and 17) - - 1,618,583 1,209,562 Loan payments (including interest) (Note 16 and 17) (5,236) (4,498) (1,016,335) (335,240) Derivative financial instruments payment - - (798) - Dividends and interest on equity paid (Note 25.c) (96,430) (180,270) (426,236) (604,479) Net cash generated by (used in) financing activities (101,666) (184,768) 175, ,843 Net increase (decrease) in cash and cash equivalents 103,887 57, , ,534 Cash and cash equivalents at the end of the period 455, , , ,778 Cash and cash equivalents at the beginning of the period 351, , , ,244 Changes in cash and cash equivalents 103,887 57, , ,534 (*) In the none-month period of 2012, the Company received from CTEEP R$96,680 (R$65,845 in 2011) relating to dividends and interest on equity approved at the end of the previous fiscal year, and R$104,073 (R$183,395 in 2011) relating to dividends and interest on equity approved in 2012 (Note 13.c) See accompanying notes. 10

13 1. Operations 1.1. Corporate purpose The Corporate purpose of ISA Capital do Brasil S.A. ( ISA Capital or Company ) includes equity interest in other companies or ventures, as a partner or shareholder, partnership in joint ventures, membership in consortiums, or any type of business cooperation In a privatization auction held on June 28, 2006, the São Paulo Stock Exchange (BOVESPA), under Bid Notice SF/001/2006, the São Paulo State Government, until then majority shareholder, sold 31,341,890,064 of its common shares, corresponding to 50.10% of the common shares issued by CTEEP. The winner of the auction was Interconexión Eléctrica S.A. E.S.P. ( ISA ). The financial settlement of the transaction took place on July 26, 2006 with the resulting transfer of the ownership of the aforementioned shares to ISA Capital, a Brazilian company controlled by Interconexión Eléctrica S.A. E.S.P., established to operate in Brazil, thus becoming CTEEP s parent company. This transaction was approved by the Brazilian Electricity Regulatory Agency (ANEEL) on July 25, 2006, pursuant to Authorizing Resolution No. 642/06, published in the Official Gazette on July 26, On September 12, 2006, the Company purchased other 10,021,687 common shares issued by CTEEP, held by the São Paulo State Government, and became the holder of 31,351,911,751 common shares. On January 9, 2007, the Company acquired, through a public offering auction (POA) for the acquisition of shares held on BOVESPA, 24,572,554,070 common shares issued by CTEEP, corresponding to 39.28% of the total of this type of shares, pursuant to the public offering notice published on December 4, 2006 As a result of this acquisition, the Company became the holder of 89.40% of the voting capital and 37.46% of the total capital of CTEEP. Thus, after the CTEEP s reverse stock split on July 12, 2007, the Company became the holder of 55,924,465 common shares. 11

14 1. Operations (Continued) 1.1. Corporate purpose (Continued) Later, the Company paid in CTEEP capital 1,727,517 common shares 574,927 shares on August 24, 2009, 594,477 shares on April 23, 2010, and 558,113 shares on December 21, Such capitalizations arise from CTEEP s tax benefit resulting from the partial amortization of the special goodwill reserve for fiscal years 2009, 2010, and By means of a remaining share auction held by CTEEP, ISA Capital acquired 63,146 common shares On June 29, 2012 and July 5, 2012, ISA Capital sold 920 shares. Accordingly, at, the Company held 57,715,128 common shares, corresponding to 37.81% of CTEEP total capital and 89.50% of its voting capital On March 9 and 19, 2010, in order to restructure its foreign currency denominated debt contracts (Bond), the Company increased capital twice by issuing preferred shares at the price of R$ per share, fully subscribed by HSBC Finance (Brasil) S.A. Banco Múltiplo, as follows: (i) In the Special General Meeting held on March 9, 2010, under Board of Directors Proposal terms dated March 8, 2010, Company s capital increase by R$ 840,000 was approved, R$ 420 of which was allocated to capital and R$ 839,580 allocated to capital reserve, by creating and issuing 415,691,162 redeemable preferred shares distributed into 13 classes, entitled to fixed cumulative dividends, which were subscribed and paid in on the same date. Accordingly, Company s capital increased from R$ 839,778 to R$ 840,198, comprising 1,256,316,162 shares. In the same meeting, mandatory dividend reduction, from 25% to 1%, and amendment to the Company s Articles of Incorporation were approved; and (ii) In the Board of Directors meeting held on March 19, 2010, a new capital increase of the Company was approved within authorized capital limit, with issuance of 178,153,342 redeemable preferred shares, distributed into 13 classes, entitled to fixed cumulative dividends, amounting to R$ 360,000, which was fully subscribed and paid in on the same date, R$180 of which was allocated to the Company s capital and R$ 359,820 to capital reserve. 12

15 1. Operations (Continued) 1.1. Corporate purpose (Continued) Accordingly, at, the Company s subscribed and paid-in capital amounted to R$840,378 (R$840,378 at December 31, 2011) and comprises 840,625,000 common shares and 593,844,504 preferred shares (Note 25.a) On May 27, 2010, as resolved by the shareholders, the Company unlisted from Brazilian Securities and Exchange Commission (CVM). CTEEP shares are traded on BOVESPA. In addition, CTEEP adopts the American Depositary Receipts (ADRs) program, Rule 144 A, in the United States. The depositary bank for the ADRs is The Bank of New York, and the custodian bank is Banco Itaú S.A. CTEE s preferred shares are included in the Bovespa Index (IBOVESPA), in the Corporate Governance Index (IGC) and the Electric Power Index (IEE) Concessions CTEEP is entitled to explore, directly or indirectly, the following Public Utility Concession Agreements for Electric Power Transmission: Periodic tariff review Annual revenue allowed (ARA) Concessionair e Agreement Interest (%) Term (years) Maturity Term Next ARA in degree Restatement index R$ thousands Base month CTEEP 059/2001(*) years 2013 No IGPM 2,113,952 12/06 CTEEP 143/ n/a n/a Yes IGPM 15,934 12/06 IEMG 004/ years 2017 Yes IPCA 13,567 12/06 Pinheiros 012/ years 2014 No IPCA 8,173 12/06 Pinheiros 015/ years 2014 No IPCA 19,096 12/06 Pinheiros 018/ years 2014 No IPCA 3,332 12/06 Pinheiros 021/ years 2017 No IPCA 4,400 11/09 (**) Serra do Japi 026/ years 2015 No IPCA 25,102 12/06 IENNE 001/ years 2013 No IPCA 41,893 12/06 IESul 013/ years 2014 No IPCA 2,375 12/06 IESul 016/ years 2014 No IPCA 8,406 12/06 IEMadeira 013/ years 2014 No IPCA 218,933 12/06 IEMadeira 015/ years 2014 No IPCA 184,866 12/06 IEGaranhuns 022/ years 2017 No IPCA 68,900 11/09 (**) (*) Concession agreement No. 059 of CTEEP is subdivided into: SE (Existing Service) referring to the energized installations until May 31, 2000; and NI (New Investments) referring to energized installations as from June 1, Information related to periodic tariff review refers only to concession agreement No. 059 NI (**) According to the concession agreement, ARA will be readjusted on an annual basis, after the venture starts up. The CTEEP IEMadeira is expected to start operating by 1Q13 ( Batch D) and second quarter of 2013 ( Batch F). In addition it began included in the ARA base 06/12, according to Approval Resolution Nº 1313 (Note 26.4). 13

16 1. Operations (Continued) 1.2. Concessions (Continued) Due to acquisition of the shareholding control of CTEEP by ISA Capital on June 28, 2006, an amendment to concession agreement 059/ ANEEL of CTEEP was signed on January 29, 2007, in order to reflect the new controlling shareholder reality. In this amendment, the conditions initially negotiated were maintained and a clause was added defining that the goodwill paid in the auction, as well as the special liabilities and the amounts arising from State Law No. 4819/58, provided for by Sales Notice SF/001/2006, will not be considered by ANEEL for purposes of evaluation of the financial and economic balance of the concession. Further as a result of this amendment, ISA Capital and ISA agreed to make capital contributions to CTEEP. All concession agreements above provide for the right to damages on concession assets upon their termination. Participation in assets (i) Auction No. 001/2011 On June 10, 2011, through ANEEL Auction No. 001/2011, on a public session held at BM&FBovespa, CTEEP established, together with Companhia Hidro Elétrica do São Francisco - Chesf, consortium Extremoz, which won Batch A, comprised of Transmission Line (LT) Ceará-Mirim - João Câmara II, in 500 kv with 64 km; LT Ceará-Mirim - Campina Grande III, in 500 kv with 201 km; LT Ceará-Mirim - Extremoz II, in 230 kv with 26 km; LT Campina Grande III - Campina Grande II, with 8.5 km; Substation (SE) João Câmara II 500 kv, SE Campina Grande III 500/230 kv and SE Ceará-Mirim 500/230 kv. The estimate investment in this project is R$622.0 million and RAP is R$31.9 million in June 2011.CTEEP s equity interest is 51%.. Operations are estimated to start in August 2013, and CTEEP has been considering the project feasibility. 14

17 2. Presentation of the interim financial statement 2.1. Basis of preparation and presentation The individual interim financial statements, identified as Company, were prepared and are presented in accordance with accounting practices adopted in Brazil, which comprise the provisions contained in the Brazilian Corporation Law, pronouncements, interpretations and guidelines issued by the Brazilian FASB ( CPC ) and approved by the Brazilian Securities and Exchange Commission ( CVM ). In accordance with ruling Brazilian laws, these individual interim financial statements present investments in subsidiaries and joint ventures measured by the equity method. Therefore, these individual interim financial statements are not considered to conform to the International Financial Reporting Standards (IFRS), which require investments to be measured at fair value or cost. The consolidated interim financial statements, identified as, were prepared and are presented in accordance with accounting practices adopted in Brazil, which comprise the provisions contained in the Brazilian Corporation Law, pronouncements, interpretations and guidelines issued by CPC and approved by CVM, which conform to IFRS issued by the International Accounting Standards Board IASB. Except for the P&L for the year, the Company does not have any other comprehensive income. According to CVM/SNC/SEP Circular No. 03/2011, the Company represents that significant accounting judgments, estimates and assumptions, as well as significant accounting practices are the same as those disclosed in the financial statements for the year Accordingly, the corresponding information will be read in Notes 2.3 and 3 thereto, except for Note 3.3 on Interligação Elétrica de Minas Gerais S.A. ( IEMG ), subsidiary which elected to use taxable profit as a percentage of gross revenue to calculate income and social contribution taxes for 2012, and Interligação Elétrica Serra do Japi S.A. ( Serra do Japi ), another subsidiary which in 2011 was considered a pre-operating business for tax purposes, started operations in 2012 and also elected to compute taxable profit as a percentage of gross revenue. 15

18 2. Presentation of the interim financial information (Continued) 2.1. Basis of preparation and presentation (Continued) The individual and consolidated interim financial statements were prepared based on historical cost, unless otherwise stated, as described in the accounting practices. The historical cost is usually based on the fair value of considerations paid for assets. All amounts herein presented are in thousands of reais, unless otherwise stated. Non-financial data included in the accompanying interim financial statements, such as volume of electricity, estimates, insurance etc, were not reviewed by the independent auditor. The preparation and disclosure of this quarterly information were approved by the Board of Directors and Supervisory Board on November 27, Functional and presentation currency The Company s and its subsidiaries interim financial statements, included in the consolidated interim financial statements, is reported in Brazilian reais, which is also the currency of the economic environment in which these entities operate (i.e. their functional currency) Significant accounting judgments, estimates and assumptions The Company represents that the information on significant accounting judgments, estimates and assumptions described in Note 2.3 to the financial statements for the year 2011 remain in force for these interim financial information Consolidation procedures The consolidated interim financial information includes the interim financial statements of CTEEP, its subsidiaries and its joint ventures. 16

19 2. Presentation of the interim financial information (Continued) 2.4. Consolidation procedures (Continued) Control is obtained when the Company has the power to control financial and operating policies of an entity to obtain benefits from its activities. The subsidiaries and joint ventures are fully and proportionally consolidated, respectively, from the date on which control or shared control begins up to the date on which control or shared control ceases to exist. At and December 31, 2011, the ownership interests in subsidiaries were as follows: Financial Interest % statements base date Direct CTEEP , ,8059 Indirect Interligação Elétrica Pinheiros S.A. (Pinheiros) , ,8059 Interligação Elétrica Serra do Japi S.A. (Serra do Japi) , ,8059 Interligação Elétrica de Minas Gerais S.A. (IEMG) , ,8059 Indirect Joint ventures Interligação Elétrica Norte e Nordeste S.A. (IENNE) ,4513 9,4515 Interligação Elétrica do Sul S.A. (IESUL) , ,9030 Interligação Elétrica do Madeira S.A. (IEMADEIRA) , ,2810 Interligação Elétrica Garanhuns S.A. (IEGARANHUNS) , ,2810 The following procedures were adopted in the preparation of the consolidated quarterly information: elimination of the subsidiaries equity; elimination of equity investment in subsidiaries; and elimination of the balances of assets and liabilities, revenue and expenses among the consolidated companies. Accounting practices were applied uniformly in all consolidated companies and the financial year of these companies coincide with the Company s. 17

20 3. Summary of significant accounting practices The Company represents that the information on significant accounting practices remain valid for this interim financial statements, and the content of such information can be found in Note 3 to the financial statements for the year For 2012, subsidiaries IEMG and Serra do Japi elected to use the taxable profit as a percentage of gross revenue to calculate the income and social contribution taxes, no longer calculating taxable profit on their accounting records, as computed and disclosed in New and revised standards and interpretations not yet adopted As mentioned in Note 4 to the financial statements for the year 2011, new pronouncements, amendments in existing pronouncements and new interpretations listed below have been published and are mandatory for annual periods beginning on or after January 1, CPC has not yet issued the respective pronouncements and amendments related to new and reviewed IFRS presented in this Note. Due to the commitment of CPC and CVM of keeping updated the set of standards issued based on the updates made by IASB, there is expectation that these pronouncements and amendments will be issued by CPC and approved by CVM through the date of their mandatory application. CVM approved the following CPC pronouncements in addition to those disclosed in the financial statements for the year 2011: CPC 18 R1 Investments in Subsidiaries and Affiliates - CVM Resolution No. 688 of October 4, 2012; CPC 40 R1 Financial Instruments: Disclosures CVM Resolution No. 684 of August 30, 2012; ICPC 08 R1 Accounting for Proposed Dividend Distribution CVM Resolution No. 683 of August 30, 2012; ICPC 09 R1 Individual, and Separate Financial Statements and Adoption of the Equity Method CVM Resolution No. 687 of October 4, CPC 17 R1 Construction Contracts CVM Resolution No. 691 of November 8, CPC 30 R1 Revenue CVM Resolution No. 692 of November 8, CPC 35 R2 Separate Financial Statements - CVM Resolution No. 693 of November 8,

21 4. New and revised standards and interpretations not yet adopted (Continued) The Company and its subsidiaries did not adopt in advance such amendments to its consolidated financial statements as of and did not have the opportunity to evaluate any impacts from their adoption. 5. Obligations assumed upon acquisition of CTEEP Under the share purchase and sale agreement, subject matter of the privatization auction described in Note 1, the Company undertakes to supplement payment of purchase price of CTEEP shares, in the event that CTEEP is released from the burden related to supplementary payments to the private pension plan provided for by Law No. 4819/58, currently being disputed in court. At, the amount of purchase price supplementation is composed of two different transactions, as follows: a) The amount of R$239,159 (December 31, R$238,884), determined upon acquisition of the first equity interest through the privatization auction held on June 28, 2006, recorded in the Payables Law 4819/58 - State Finance Office account, R$7,194 (December 31, 2011 R$6,335) of which in current liabilities and R$188,895 ( R$232,549) in noncurrent liabilities, were matched against R$188,895 in the Investments goodwill on acquisition of interest in Subsidiary account, and the difference of R$50,264, was recognized in the income statement as monetary restatement of the obligation, in accordance with the Consumer Price Index- Amplified (IPC-A) as from December 31, In the nine-month period of 2012, R$7,468 was recognized in income statement. b) The amount of R$149,956 (December 31, R$149,783), determined upon acquisition of the third equity interest through a public offering auction (POA) for the acquisition of shares, held on January 9, 2007, recorded in the Payables Law 4819/58 - POA account, R$4,185 (December 31, 2011 R$3,715) of which in current liabilities and R$ (December 31, 2012 R$146,068) in noncurrent liabilities, were matched against R$120,306 in the Investments goodwill on acquisition of interest in Subsidiary account, and the difference of R$29,650 was recognized in the income statement as monetary restatement of the obligation, in accordance with the Consumer Price Index- Amplified (IPC-A) as from December 31, In the first half of 2012, R$4,357 was recognized in income statement. 19

22 6. Cash and cash equivalents Company Cash and banks ,081 Short-term investments (i) 455, , , , , , , ,862 (i) Breakdown of short-term investments is as follows: Company % of CDI Bank Deposit Certificate (CDB) 95.0% to 106.0% 398, , , ,174 Repurchase agreement (*) 95.0% to 103.0% 62,367 61, , ,562 Provision for IRRF (6,028) (3,955) (6,028) (3,955) 455, , , ,781 (*) Repurchase agreements are securities issued by banks whereby the banks undertake to repurchase a security and the customer undertakes to resell it, with defined rates and predetermined deadlines, backed by private or public securities depending on the availability of the bank, and which are registered with CETIP.. The s hort-term investments are measured at fair value through profit or loss and have daily liquidity. Company management s analysis of the exposure of these assets to interest rate risks, among others, is disclosed in Note 32(c). 7. Accounts receivable (concession assets) Breakdown of accounts receivable is as follows: Accounts receivable from construction services (a) 7,190,251 6,565,661 Accounts receivable from O&M services (b) 260, ,160 7,451,121 6,809,821 Current 1,432,417 1,474,794 Noncurrent 6,018,704 5,335,027 (a) (b) It refers to receivables from construction, expansion, and reinforcement services of electric power transmission facilities, and includes the estimated investments made and not amortized until the end of the concession and for which CTEEP will be entitled to receive cash or other financial assets, when concession agreement is no longer effective. They bear interest at the effective interest rate calculated for each concession agreement. O&M - Operation and Maintenance refers to the portion of monthly sales reported by ONS allocated to compensation for operation and maintenance services, receivable not more than 60 days, on average. 20

23 7. Accounts receivable (concession assets) (Continued) These financial assets are classified as loans and receivables. ANEEL Resolution No. 474 of February 7, 2012 established new annual depreciation rates for assets in services granted in the electricity segment, effective as from January 1, With ANEEL Resolution No. 474, the annual average depreciation rate of the CTEEP s assets will increase from 2.72% to 2.86%. Considering the new periodic depreciation rates and in light of IFRIC 12 and OCPC 5, CTEEP made the calculations to estimate the new value of damages for reversible assets on termination of the concession agreement and the amount attributable to the financial assets, with no significant impacts. Accounts receivable by maturity are set out as follows: Falling due 7,421,680 6,784,301 Overdue Up to 30 days 551 1,353 From 31 to 60 days Over 61 days (i) 28,671 23,569 29,441 25,520 7,451,121 6,809,821 (i) Certain participants of the system have judicially challenged the balances billed referring to the Base Network. Due to this discussion, judicial deposits have been made for the amounts considered to be due by these participants. CTEEP believes that the amounts billed are in accordance with the authorizations from regulatory bodies and therefore, no provision for losses related to them has been set up. CTEEP has no history of losses in accounts receivable, which are secured by guarantee structures and/or access to current accounts operated by the ONS, or directly by the Company, and therefore no allowance for doubtful accounts has been set up. Changes in accounts receivable are as follows: Balances at ,809,821 Revenue from construction (Note 26.1) 689,104 Financial income (Note 26.1) 1,232,402 Revenue from operation and maintenance (Note 26.1) 447,730 Settlement (1,727,936) Balances at

24 8. Receivables State Finance Office Noncurrent Total Total Agreement for acknowledgement and consolidation of debt (a) ,341 Sale of property (b) - - 2,565 Payroll processing Law No. 4819/58 (c) 746, , ,764 Labor claims Law No. 4819/58 (d) 188, , ,986 Family allowance Law No. 4819/58 (e) 2,218 2,218 2,218 Allowance for doubtful accounts (e) (2,218) (2,218) (2,218) 934, , ,656 (a) (b) (c) (d) (e) On May 2, 2002, an Agreement for Acknowledgement and Consolidation of Debt was entered into with the São Paulo State Finance Office, whereby the State Government acknowledges and admits that it owes to the Company the amounts corresponding to the disbursements originally made by CESP - Companhia Energética de São Paulo, from 1990 to 1999, for paying supplementary retirement and pension payroll amounts, arising from benefits under State Law 4819/58. The debt amount then acknowledged was monetarily adjusted up to January 2002, according to the variation of the Fiscal Unit of the São Paulo State Government (UFESP), and from February 2002 onwards, according to the monthly variation of the General Market Price Index (IGP-M), plus 6% per annum (p.a.). The reimbursement would be made in 120 monthly installments, starting on August 1, 2002 and with final settlement on July 1, The installments were settled as expected in July On July 31, 2002, a Private Sale Agreement, providing for the intended sale of a property, recognition of liabilities and commitment to pay, was signed with the State Finance Office, in which the State Government acknowledges and admits that it owes to CTEEP an amount corresponding to the market value of the total area of the property occupied by the State Government, partly used for the construction of prison units. Therefore, the State Government committed to reimbursing CTEEP of said amount in 120 monthly installments, starting on August 1, 2002 and with final settlement on July 1, The installments were settled as expected in July This refers to amounts receivable for settlement of a portion of the payroll for the supplementary pension plan governed by State Law No. 4819/58, from January 2005 to September 2012 (Note 36). This balance is not monetarily adjusted and no income will be accrued thereon until such amounts are paid by the State Government The increase on prior year reflects the execution of a decision whereby CTEEP is required to make monthly transfers of funds to Fundação CESP for such retirees to be paid. These refer to certain labor claims settled by CTEEP, relating to employees retired under the protection of State Law No. 4819/58, which are the responsibility of the State Government. This balance is not monetarily adjusted and no income will be accrued thereon until such amounts are paid by the State Government. CESP made advances for payment of monthly expenses with family allowance, as provided for by State Law No. 4819/58, transferred to CTEEP upon CESP spin-off. Based on the loss expectation, the Company s management set up an allowance for doubtful accounts in noncurrent assets, amounting to R$2,218. The status of the aforementioned proceedings has not changed significantly since December 31,

25 9. Taxes recoverable Company COFINS - - 1,204 1,016 PIS Income tax 43,606 44,950 54,235 53,467 Social contribution 3,484-4, Other - - 1, ,090 44,950 62,420 56,276 Current 36,911 44,950 52,241 56,276 Noncurrent 10,179-10, Tax benefit merged goodwill The goodwill paid by ISA Capital on the acquisition of CTEEP shareholding control is economically based on the expected profitability during the concession term, originating from the acquisition of the concession right granted by the Government, under paragraph 2 b of article 14 of CVM Ruling No. 247, of March 27, 1996, as amended by CVM Ruling No. 285 of July 31, In order for the amortization of goodwill not to adversely impact the dividend flow to shareholders, a provision for maintaining equity integrity (PMIPL) relating to the acquirer and a special reserve for goodwill on merger (Note 23 (c) of CTEEP s ITR) were made in accordance with CVM Ruling No. 349, of March 6, Amortization of goodwill, net of reversal of the provision and corresponding tax effect, has a nil effect on P&L for the year and accordingly, on the mandatory minimum dividend calculation basis. Goodwill totaled R$689,435 at December 31, 2007 has been amortized over the remaining concession period, in monthly installments according to the projected annual future profitability and as authorized by ANEEL Resolution No of December 18, 2007, as follows: Amortization - % p.a. Concession agreements Year 059/ /2001 Total 2008 to to to

26 10. Tax benefit merged goodwill (Continued) For a better presentation of the Company s financial position in the interim financial statements, the net amount of R$97,455 (R$119,079 at December 31, 2011), which, in essence, represents the merged tax credit, was classified in the balance sheet under assets, based on its expected realization, separated from the remaining goodwill, which is classified under intangible assets. Changes for the nine-month period ended are as follows: Intangible assets Total (Notes 13.b and 15) goodwill Tax benefit Balances at ,234 (231,155) 119,079 Realization for the period (Note 29) (63,600) 41,976 (21,624) Balances at ,634 (189,179) 97,455 Amortization is recognized in P&L, under the heading Other expenses, net (Note 29). 11. Loans receivable The loan granted by ISA CAPITAL to its parent company, Interconexión Eléctrica S.A. ESP ( ISA ), refers to the full on-lending of the loan raised by the Company in 2006 denominated in US dollars, originally amounting to US$23,800 thousand, whose maturity in a lump sum was on July 19, 2007 with interest calculated based on LIBOR plus 3.00% p.a. The Company maintained the same assumptions for adjusting such operation, bearing semiannual interest thereon; however, principal is to be repaid within eight years in a lump sum payable on January 30, On December 15, 2011, ISA Capital entered into a loan agreement with Internexa Brasil amounting to R$9,364, maturing on December 28, 2012 and with interest calculated based on CDI variation, plus 0.72% p.a. paid on a quarterly basis. 24