1Q14 São Paulo, May 15, 2014: CESP - Companhia Energética de São Paulo (BM&FBOVESPA: CESP3, CESP5 and CESP6), the largest hydroelectric power generator in the State of São Paulo and one of the largest in the country, discloses the release for the results regarding first quarter of 2014 (1Q14 ). The quarterly information has been developed according to the International Financial Reporting Standards (IFRS) and accounting practices adopted in Brazil and have been compared to the same periods in 2013, except where otherwise indicated. Conference Call 1Q14 with Simultaneous Translation Date: 05/20/2014 Portuguese 11h00 (Brasília Time) 10h00 (New York Time) Tel.: +55 11 2188-0155 Code: CESP Replay: +55 11 2188-0155 Password: CESP Translation to English 11h00 (Brasília Time) 10h00 (New York Time) EUA: (1 646) 843 6054 Other countries: (1 866) 890 2584 Code: CESP Replay: +55 11 2188-0155 Password: CESP IR Contact: Tel.: +55 11 5613-3626 Fax: +55 11 5613-3657 ricesp@cesp.com.br www.cesp.com.br 1Q14 Highlights Net Operating Revenue of R$1.7 billion in 1T14, 48.9% higher than 1Q13 Operating Revenue of R$393 million, 6.3% lower than 1Q13 Service Income of R$1.3 billion, 80.9% higher than the amount recorded in 1Q13 EBITDA of R$1.5 billion, with a margin of 85.8% Net Income of R$845 million, 149.2% higher than the same period of l2013. Financial and Operating Highlights (R$ thousand) 1Q14 1Q13 Chg % Net Operating Revenue 1,704,205 1,144,537 48.9% Operating Expenses (393,127) (419,760) -6.3% EBIT 1,311,078 724,777 80.9% EBITDA 1,462,500 841,103 73.9% EBITDA Margin 85.8% 73.5% 12.3 p.p. Financial Result (33,028) (80,331) -58.9% Net Income (Loss) 844,831 339,011 149.2% 1
GENERATION FACILITIES CESP Companhia Energética de São Paulo has five hydroelectric power plants operating in price system and a power plant, Três Irmãos, which from April 18, 2013 is being operated temporally in the quota system. Both operations totaled 57 generating units, add up 7,457.3 MW of installed capacity and 3.916 MW average of physically guaranteed energy, representing 6% and 5%, respectively, of Brazil s installed capacity and physically guaranteed energy supply. The hydroelectric plants are distributed between two hydrographic basins, that of the Rio Paraná in the West of the state of São Paulo and the basin of the Rio Paraíba do Sul, in the Eastern region of the state. Below the main data for the Generation Facilities plants are presented: Power Plants Date of Conclusion Generating Units Installed Capacity (MW) Physical Guarantee (Average MW) End of Concessions llha Solteira 1973 20 3,444.0 1,731.5 7/7/2015 Jupiá 1969 14 1,551.2 886.0 7/7/2015 Porto Primavera 1999 14 1,540.0 1,017.0 5/21/2028 Paraibuna 1978 2 87.0 50.0 3/9/2021 Jaguari 1972 2 27.6 14.0 5/20/2020 Total 52 6,649.8 3,698.5 Trës Irmãos* 1993 5 807.5 217.5 11/18/2011 Total 57 7,457.3 3,916.0 * The Company believes that since CESP has not accepted the conditons proposed by Provisional Measure no. 579 (subsequently passed into Law no. 12.783, of 1/14/2013), the Licensing Power took measures to revert the concession back to the Union. Thus, since April 18, 2013, CESP no longer detains the plant under the price exploration regime, now operating it on a temporary and provisional basis in a quota regime. As per the terms of the CESP Concession Contract, upon extinction of the concession, the Company has the right to compensation for those assets still not amortized. According to its records, the Company claims compensation for R$ 3,529.1 million, which refers to the Três Irmãos Hydroelectric Plant. For the Licensing Power, this compensation is worth R$ 1,717.4 million and CESP should seek its rights in court, if necessary. PRODUCTION OF ELECTRIC ENERGY In the first quarter of 2014, electricity production from CESP Generating Park (disconsidering Três Irmãos Power Plant) reached 9,121 GWh, 4.6% above the same period in 2013. 2
Power Plants 1Q14 1Q13 Ilha Solteira 4,116,337 3,846,874 Jupiá 2,281,266 2,191,580 Porto Primavera 2,573,096 2,610,094 Paraibuna 123,881 62,982 Jaguari 26,572 10,838 Subtotal 9,121,152 8,722,368 Três Irmãos 505,252 566,581 Total 9,626,404 9,288,949 Physical Guarantee = 3,698,5 MW average X 24 hours X 90 days = 7,988,760 MWh/1T14 (without Três Irmãos) The production of CESP was 14.2% higher than the physical guarantee, not considering Três Irmãos. SALES? CESP s clients are: (i) the electrical energy distributors in the country which purchase their energy through long term agreements, in auctions in the regulated market; (ii) the traders and free consumers who acquire their energy through public offers in short, medium and long term bilateral agreements. CESP sells its net physically guaranteed energy supply in the following environments: Free Contracting Market ACL: by way of Agreements for Purchase and Sale of Energy (CCVEs) for short, medium and long terms, with volumes, prices and conditions negotiated with selling companies and with free consumers. Regulated Contracting Market ACR: through power purchase auctions organized by ANEEL Electric Energy National Agency, conducted through the CCEE to serve the distributors. Electric Energy Trading Board CCEE: in which the differences between energy produced, physically guaranteed and contracted are booked and liquidated, in which the differences between energy produced, physically guaranteed and contracted are booked and liquidated, partly to meet the ERM Energy Reallocation Mechanism to regulated tariffs that only cover the variable costs of power generation, and partly as waste products and secondary energy, the prices for Settlement of Differences PLD, cleared in CCEE. Furthermore, CESP is operating, on a temporary basis, the Três Irmãos plant, which has provided its energy in a Quota Regime since 4/18/2013. 3
REVENUE Energy Sales Revenue in 1T14 increased by 43.2%, reaching R$1.8 billion, the main highlight being the Short-Term Market (PLD), with a variation of 108.8%. The increase was primarily due to the higher volume of non-contracted energy, settled at PLD prices, which were slightly higher this quarter, compared to 1Q13. Energy Sales Breakdown MWh R$ thousand 1Q14 1Q13 Chg. 1Q14 1Q13 Chg. Free Market - ACL 4,606,065 3,641,714 26.5% 583,802 457,805 27.5% Regulated Market - ACR 2,291,040 3,641,251-37.1% 382,550 409,905-6.7% Spot Market - PLD 1,522,571 1,238,036 23.0% 871,429 417,397 108.8% Spot Market - MRE 410,475 403,265 1.8% 4,144 1,381 200.1% Total 8,830,151 8,924,266-1.1% 1,841,925 1,286,488 43.2% Note 2014 data do not include the energy and revenue of the quota regime from HPP Três Irmãos. REVENUE BREAKDOWN In the first quarter of 2014, the revenues resulting from electric energy sales in the Regulated Contracting Environment (ACR) corresponded to 20.8%, in the Free Contracting Environment (ACL) to 31.7% and in the Electric Energy Commercialization Chamber (CCEE) was 47.5%. 1Q14 1Q13 47.5% 20.8% 32.5% 31.9% 31.7% 35.6% Regulated Market - ACR Free Market - ACL Spot Energy - CCEE The change in the profile of revenue distribution is a reflection of the best prices in the Short-Term Market (PLD) and the greater amount of energy traded in this segment compared to 1Q13. 4
Free Contracting Market ACL The share of Free Contracting Market ACL in the quarter was 31.7% and totaled R$ 583.8 million. The volume of energy intended for the ACL amounted to 4,606 GWh, representing a share of 52.2% in the amount of electricity sold in the quarter. Regulated Contracting Market ACR The share of revenues in this environment was 20.8% in this quarter, reaching R$ 382.6 million. The volume of energy sent to the ACR totaled 2,291 GWh, which represents a share of 25.9 % of the total sold in contracts for the quarter. Spot Market In this quarter, the revenues obtained by the company in CCEE, including the Energy Reallocation Mechanism (MRE) and the Spot Market (PLD) was R$ 875.6 million, a share of 47.5% in total revenues. The volume traded in this environment in the 1Q14 was 1,933 GWh or 21.9% of the total volume sold. In the 1Q14, the PLD price average in the CCEE was R$ 669.76, compared to R$ 326.30 in the 1Q13. DEDUCTIONS TO REVENUE In the 1Q14 Deductions from Revenues represented 8.7% of Gross Operating Revenues and totaled R$161.6 million. In the 1Q13, Deductions from Revenues amounted to R$142.9 million, 11.1% of Gross Operating Revenue. Deductions from Operating Revenues - R$ '000 1Q14 1Q13 Chg. Global Reserve for Reversion Quota - RGR (21,077) (35,361) -40.4% Research and Development (17,036) (11,790) 44.5% Services tax - ISS (20) (32) -37.5% COFINS tax on Operating Revenues (101,419) (78,642) 29.0% PIS tax on Operating Revenues (22,007) (17,068) 28.9% Total (161,559) (142,893) 13.1% % Gross Revenues 8.7% 11.1% -2.4 p.p. The proportional reduction in the Deductions to the Revenue of 2.4 p.p. in gross revenue in 1Q14 over 1Q13 is explained by RGR, which was collected in 1Q13 based on an estimative, given that ANEEL only set the amount to be collected in September 2013, and also due to increased revenues from CCEE, which have PIS/COFINS at a lower rate. OPERATING EXPENSES Operating Expenses in the first quarter of 2014 totaled R$ 393.1 million, 6.3% lower than the same period of 2013, representing 23.1% of Net Revenues, a decrease of 13.6 p.p. Factors that contributed to this reduction: (i) a decrease in depreciation revenue following the end of the economic exploitation of HPP Três Irmãos by the price regime; (ii) Outsourced Services expenditure reduction by 11.1% and Personnel expenditure at 8.1%. On the other hand, there was the constitution 5
of a provision of R$6.3 million for the Retirement Incentive Program (PIA), with the adhesion of 54 employees. On the other hand, expenditures have increased due to: (i) Compensation for the use of water resources, as a consequence of increased electricity production, and (ii) charges for the use of the transmission system, with higher tariff. Operating Expenses - R$ thousand 1Q14 1Q13 Chg. Personnel (43,169) (46,995) -8.1% Retirement incentive program (6,294) - - Social Security Entity - Contribution to plan (2,107) (2,178) -3.3% Social Security Entity - CPC 33 / IAS 19 1,255 (3,989) - Materials (2,872) (2,821) 1.8% Outsourced Services (18,263) (20,540) -11.1% Compensations for Use of Water Resources (51,898) (47,307) 9.7% System Service Charges - transmission (91,606) (85,785) 6.8% System Services Fee (4,611) (4,353) 5.9% COFINS/PIS credits on services charges 4,514 5,299-14.8% Depreciation (159,268) (191,293) -16.7% Provision for Estimated Credit Losses (2,716) - - Operating Provision (12,170) (16,980) -28.3% Other Expenses (3,922) (2,818) 39.2% Total (393,127) (419,760) -6.3% % Net Revenue 23.1% 36.7% -13.6 p.p. EBITDA EBITDA reached R$ 1,462.5 million in the first quarter of 2014, 73.9% higher than 1Q13. EBITDA Margin was 85.8% in the 1Q14. EBITDA R$ milhões 1,462.5 73.9% 85.8% 841.1 68,2% 62,2% 73.5% 1Q14 1Q13 6
Breakdown: EBIT / EBITDA - R$ thousand 1Q14 1Q13 Chg. Net Income (Loss) 844,831 339,011 149.2% Tax and Social Contribution (Net) 425,045 230,139 84.7% Financial Result 33,028 80,331-58.9% EBIT 1,302,904 649,481 100.6% Depreciation 159,596 191,622-16.7% EBITDA 1,462,500 841,103 73.9% EBITDA Margin 85.8% 73.5% 12.3 p.p. FINANCIAL RESULT Financial Revenues totaled R$ 29.1 million in the first quarter of 2014, 125.6% higher than 1Q13 (RS 12.9 million), e and mainly reflect an increase in the cash and, consequently, the return on investments. The Total of Financial Expenses, including Debt Charges and Other Financial Expenses was R$ 46.7 million in the 1Q14, 37.8% below than the same period previous year, due to the indebtedness reduction In the quarter, Net Monetary Variations resulted in R$ R$ 37.0 million negative and reflect indicators tied to inflation. Net Exchange Variations reached R$ 21.5 million positive in 1Q14, reflecting the valuation of the Real against the U.S. Dollar(+3.4%). Thus, the Financial Result in 1Q14 was minus R$33.0 million, 58.9% below the R$80.3 million reported in the first quarter of 2013. 7
Breakdown of Financial Results - R$ thousand 1Q14 1Q13 Chg. REVENUES 29,124 12,911 125.6% Revenues from Investments 26,698 10,049 165.7% FIDC - update 1,752 2,068-15.3% Update of Credit and Receivables - 707 - Update escrow and tax for offset 671 - - Other 3 87-96.6% EXPENSES DEBT CHARGES (38,301) (53,882) -28.9% Foreign Currency (12,658) (24,059) -47.4% Local Currency (25,643) (29,823) -14.0% OTHER (8,381) (21,123) -60.3% Charges and update on taxes and social contributions (107) (324) -67.0% Interest and update of the ELETROBRÁS Agreement - (3,252) - Restatement of assignement of energy bill credits - (4,219) - Income tax on financial operations (56) (44) 27.3% Income tax on remittances abroad (*) (3,450) (6,467) -46.7% Financial Adjustment - TAC (214) (839) -74.5% Financial Operation Expenses - FIDC (212) (1,133) -81.3% Updating R&D - projects (1,870) (1,114) 67.9% Discount on customer contracts (689) (1,980) -65.2% Other charges (1,783) (1,751) 1.8% TOTAL FINANCIAL EXPENSES (46,682) (75,005) -37.8% GROSS INCOME (17,558) (62,094) -71.7% MONETARY AND EXCHANGE VARIATIONS, NET (15,470) (18,237) -15.2% Local Currency (37,007) (38,899) -4.9% Foreign Currency 21,537 20,662 4.2% FINANCIAL RESULT (33,028) (80,331) -58.9% NET INCOME In the 1Q14, Profit before Taxes reached R$ 1.3 billion and expenses from Income Tax and Social Contributions totaled R$ 425.0 million. Thus, the Company presented Profit of R$ 844.8 million, 149.2% higher than the same period of 2013. 8
INDICATORS In the table below are listed the main indicators that affect the result of CESP. Financial and Economic Indexes 1Q14 1Q13 Chg. Average Price Contract - R$ per MWh* 208.59 144.16 44.7% Operating Margin 76.9% 63.3% 13.6 p.p. Foreign Exchange Variation (USD/BRL) -3.40% -1.45% -1.9 p.p. IGP-M (General Market Price Index) 2.54% 0.84% 1.7 p.p. IPC-A (Extended Consumer Price Index) 2.17% 1.94% 0.2 p.p. Current Ratio 1.14 0.93 * Does not consider revenue and energy from Três Irmãos(Quota Regime) FINANCIAL DEBT A Dívida Financeira em 31/03/2014 era de R$ 2.883,1 milhões, 3,9% inferior a 31/12/2013. Considering the cash available of R$ 1,434.9 million, Net Debt at the end of March, 2014 was R$.1,448.2 million, 33.0% lower than 12/31/2012. Financial Debt R$ million -3.9% (US$ 322.1 mm) 2,883.1 3,000,5 25.3% 25.4% (US$ 325.8 mm) 74.7% 74.6% 3/31/2014 12/31/2013 Local Currency Foreign Currency The foreign currency debt was US$ 322.1 million on 03/31/2014, including charges incurred up to the date (US$ 325.8 million on 12/31/2013). 9
Financial Debt Position in 3/31/2014 12/31/2013 (In R$ thousand) Charges Current Long Term Total Total Chg. Foreign Currency 6,787 131,470 590,611 728,868 762,923-4.5% Financial Institutions 1,178 31,307-32,485 32,963-1.5% BNDES 5,508 100,041 589,305 694,854 728,433-4.6% Other 101 122 1,306 1,529 1,527 0.1% Local Currency 17,213 929,506 36,983 983,702 999,870-1.6% Financial Institutions 713 25,819 12,909 39,441 52,493-24.9% Medium Term Notes 16,491 898,515-915,006 916,819-0.2% ELETROBRÁS 9 5,172 24,074 29,255 30,558-4.3% Other Debts 4,081 407,520 758,963 1,170,564 1,237,690-5.4% FIDC 4,081 287,318 441,552 732,951 784,444-6.6% Social Security Entity (a) - 120,202 317,411 437,613 453,246-3.4% Total of Financial Debt (1) 28,081 1,468,496 1,386,557 2,883,134 3,000,483-3.9% Resources (2) - 1,434,928-1,434,928 839,649 70.9% Cash and Cash Equivalents - 1,434,928-1,434,928 839,649 70.9% NET DEBT (1) - (2) 28,081 33,568 1,386,557 1,448,206 2,160,834-33.0% (a) Debt agreements with CESP Foundation that, less R$ 390.3 million for the 33 CPC adjustment present balance of R$47.3 million in Non-Current Liabilities on 3.31.2014 CREDIT RATING On May 13, 2014, the credit-rating agency Standard & Poor's raised its rating of CESP to BBB- (previously rated BB+), placing it in investment grade. On a national scale, the rating was raised to AAA. CAPITAL MARKETS CESP s most negotiated stock, Class B Preferred (CESP6), which represents 64% of the Company s total capital had an appreciation of 18.9% in the first quarter of 2014. In the same period, Class A Preferred (CESP5), which represents 3% of the capital, appreciated 13.1% and the Common shares (CESP3), which represents 33% of the capital, appreciated 2.2%. During the 1Q14, IBOVESPA and the IEE Electric Energy Index saw a negative variation of 2.1% and 5.4% respectively. The table below shows the closing prices and the market value for CESP on the last day of March, 2014 and December, 2013, as well as the total points for the IBOVESPA and IEE indexes on those same dates. Share / Index Closing March 2014 Closing December 2013 Chg. % Number of Shares (thousand) Market Value (R$ thousand) March 2014 CESP3 20.33 19.90 2.2% 109,168 2,219,385 CESP5 25.08 22.18 13.1% 7,703 193,191 CESP6 26.65 22.42 18.9% 210,632 5,613,343 TOTAL CESP 327,503 8,025,919 IBOV 50,414 51,507-2.1% IEE 24,838 26,250-5.4% 10
Base 100 Volume - R$ thousand Base 100 Volume - R$ thousand STOCK PERFOMANCE CESP3 - ON (Share price on 3/31/2014 R$ 20.33) 110 600000 550000 100 500000 450000 90 400000 350000 80 300000 250000 70 200000 150000 60 100000 50000 50 0 Volume CESP3 CESP3 IBOV IEE CESP5 PNA (Share price on 3/31/2014 R$ 25.08) 120 200000 110 180000 160000 100 140000 90 80 120000 100000 80000 70 60000 60 40000 20000 50 0 Volume CESP5 CESP5 IBOV IEE 11
Base 100 Volume - R$ thousand CESP6 PNB (Share price on 3/31/2014 R$ 26.65) 130 110,000,000 120 110 100 100,000,000 90,000,000 80,000,000 70,000,000 90 60,000,000 80 50,000,000 70 60 50 40,000,000 30,000,000 20,000,000 10,000,000 40 0 Volume CESP6 CESP6 IBOV IEE LEGAL DISCLAIMER The statements contained in this document relating to the business outlook, estimates of operating and financial results and growth prospects of CESP are merely projections, and as such based exclusively on Management s expectations regarding the future of the business. These forward looking statements depend substantially on changes in market conditions, the performance of the Brazilian economy, the industry and international markets, and therefore are subject to change without prior notice. 12
Income Statement - R$ thousand 1Q14 1Q13 Chg. OPERATING REVENUES 1,865,764 1,287,430 44.9% Electricity sales to final customers 290,714 238,826 21.7% Electricity sales to distributors - Contracts 293,088 218,979 33.8% Auction Energy 382,550 409,905-6.7% Spot Market Energy 875,573 418,778 109.1% Quota system - Três Irmãos 23,197 - - Other Revenues 642 942-31.8% DEDUCTIONS FROM OPERATING REVENUES (161,559) (142,893) 13.1% Global Reserve for Reversion Quota - RGR (21,077) (35,361) -40.4% Development and research (17,036) (11,790) 44.5% Services tax - ISS (20) (32) -37.5% COFINS Tax on Operating Revenues (101,419) (78,642) 29.0% PIS Tax on Operating Taxes (22,007) (17,068) 28.9% NET OPERATING REVENUES 1,704,205 1,144,537 48.9% OPERATING EXPENSES (393,127) (419,760) -6.3% Personnel (43,169) (46,995) -8.1% Retirement incentive program (6,294) - - Social Security Entity - Contribution plan (2,107) (2,178) -3.3% Social Security Entity - CPC 33 / IAS 19 1,255 (3,989) - Materials (2,872) (2,821) 1.8% Outsourced Services (18,263) (20,540) -11.1% Compensation for Use of Water Sources (51,898) (47,307) 9.7% System Services Charges - transmission (91,606) (85,785) 6.8% System Services Fee (4,611) (4,353) 5.9% COFINS/PIS credits on services charges 4,514 5,299-14.8% Depreciation (159,268) (191,293) -16.7% Provision for Estimated Credit Losses (2,716) - - Operating Provision (12,170) (16,980) -28.3% Other Expenses (3,922) (2,818) 39.2% INCOME FROM OPERATIONS 1,311,078 724,777 80.9% Other Net Revenues (expenses) (8,174) (75,296) -89.1% OPERATING INCOME FINANCIAL RESULTS 1,302,904 649,481 100.6% FINANCIAL RESULT (33,028) (80,331) -58.9% INCOME (LOSS) BEFORE TAXES 1,269,876 569,150 123.1% Current Income Tax (227,560) (128,891) 76.6% Current Social Contribution (82,656) (47,251) 74.9% Deferred Income Tax and Social Contribution (114,829) (53,997) 112.7% Income Tax and Social Contribution TOTAL (425,045) (230,139) 84.7% NET INCOME (LOSS) 844,831 339,011 149.2% NET INCOME (LOSS) per share - R$ 2.58 1.04 149.2% 13
ASSETS 3/31/2014 12/31/2013 CURRENT ASSETS 2,580,358 1,471,399 Cash and Cash Equivalents 1,434,928 839,649 Accounts Receivable 1,066,711 530,195 Allowances for Doubtful Losses (61,632) (58,916) Recoverable Taxes 2,746 39,491 Stockroom 34,361 34,964 Other Receivables 97,544 79,027 Prepaid Expenses 5,700 6,989 LONG TERM ASSETS 13,442,364 13,703,454 Pledges and Restricted Deposits 599,805 601,141 Deferred Taxes and Social Contribution 182,744 297,573 Other Receivables 5,962 6,426 Prepaid expenses 3,310 4,213 Assets available for reversal 1,717,362 1,717,362 Property 10,933,181 11,076,739 TOTAL ASSETS 16,022,722 15,174,853 14
LIABILITIES AND SHAREHOLDERS' EQUITY 3/31/2014 12/31/2013 CURRENT LIABILITIES 2,270,981 1,251,127 Suppliers 7,893 21,907 Loans and Financing 1,084,976 193,781 FIDC 291,399 287,708 Taxes and Social Contributions 191,569 51,649 Regulatory Tariffs 125,740 133,807 Interest on equity and Dividends 402,162 402,162 Estimated obligations and payroll 35,120 32,294 Environmental obligations 5,072 12,418 Other obligations 127,050 115,401 LONG TERM RECEIVABLES 3,607,057 4,606,340 Loans and Financing 627,594 1,569,012 FIDC 441,552 496,736 Employee Pension Entity 47,282 62,915 System Service Charges - transmission 33,600 33,600 Provision for Contigencies 2,329,753 2,316,985 Environmental obligations 109,800 109,800 Other obligations 17,476 17,292 SHAREHOLDERS' EQUITY 10,144,684 9,317,386 Capital Stock 5,975,433 5,975,433 Capital Reserve 1,929,098 1,929,098 Adjustment to net assets 487,119 531,519 Other comprehensive income 49,046 66,579 Income Reserve 368,223 368,223 Additional Proposed Dividends 446,534 446,534 Accumulated Income 889,231 - TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 16,022,722 15,174,853 15
ANNEX I Electricity Sector Glossary ACL Free Contracting Market The segment of the market in which energy is purchased and sold through freely negotiated bilateral contracts, among generators, sellers and free consumers in accordance with specific selling rules and procedures. Distribution agents (distributors) are not allowed to purchase energy in this environment. ACR Regulated Contracting Market The segment of the market in which energy is purchased and sold among generators and distributors, preceded by auctions except in cases envisaged by the Law, in accordance with specific selling rules and procedures. Agent Agent of the Electric Energy Trading Board (CCEE) Concessionaires, authorized companies or permit holders of energy services and facilities, sellers and free consumers, members of the CCEE and subject to the obligations and rights in the Trading Agreement, Rules and Procedures. ANEEL Brazilian Electricity Regulatory Agency Regulatory body of the Brazilian energy industry. A special regime governmental agency, linked to the Ministry of Mines and Energy MME, created by Law 9,427, of December 26, 1996. The Agency has the following responsibilities: regulating and monitoring the generation, transmission, distribution and commercialization of energy, responding to complaints of agents and consumers with fairness to the benefit of society; mediating conflicts of interest between energy sector agents and between energy sector agents and consumers; granting, permitting and authorizing energy facilities and services; ensuring fair tariffs; doing everything to ensure the best possible service quality; requiring investments; encouraging competition among operators; and ensuring service universalization. Assured Energy See Physical Guarantee. Basic Network Transmission facilities of the National Interconnected System SIN, owned by public service transmission concessionaires with voltage equal to or higher than 230 kv, established pursuant to criteria set forth by Regulatory Resolution 67, of June 8, 2004. Bilateral Contract A legal document that formalizes the purchase and sale of electric energy among CCEE agents in the Free Contracting Market in order to establish prices, deadlines and supply volumes in specific time intervals. Captive Consumers Consumers that are only allowed to purchase energy from the distributor to whose network it is connected. CAR Risk Aversion Curve Mechanism that establishes the minimum water storage level in reservoirs of hydroelectric power plants needed to produce energy with a safe interconnected system. CAR was introduced in January 2002 by Resolution 109, which established criteria and rules for the energy operation policy and thermal generation dispatch executed by the ONS, as well as pricing in the energy market. CCE Energy Purchase Agreement Contract with regulated tariff that establishes the general terms and conditions regulating the sale of energy among current generators and distributors with a market lower than 500 GWh/year, to serve its market. CCEAR Energy Trading Agreement in the Regulated Market A contracted between each generator and all distributors that participate in the auction for the sale of energy from existing or future projects. 16
CCEE Electric Energy Trading Chamber Private non profit legal entity that operates under the authorization of the Granting Authority, regulated and monitored by the ANEEL, to facilitate energy purchase and sale transactions between CCEE agents, restricted to the National Interconnected System (SIN). It is in the CCEE that all agents account for their energy rights and book energy transactions on a monthly basis. CCVEE Energy Purchase and Sale Agreement Also called Bilateral Contract. It is an agreement that formalizes the sale of energy (volume, prices, conditions, etc) resulting from the free negotiation among generators, sellers, free consumers and importers in the Free Contracting Market. CNPE - National Energy Policy Council CNPE is a committee created in August 1997 that advises the President of Brazil on the development of national energy policy. The CNPE was created to optimize the use of Brazil s energy resources and to guarantee national energy supply. Concession Contract Legal document signed between the Granting Power and the concessionaire formalizing the concession, which must have the essential clauses relating to the objective, area and period, as well as the main conditions for the provision of the public service. CVM - Brazilian Securities Commission Distributors Agent holding the federal concession to provide energy distribution public services under the terms of applicable legislation, serving captive consumers in its concession area. EBIT and EBITDA Defined by the rules established by the CVM Instruction No. 527/2012. Adjusted EBITDA EBITDA is defined by CESP as Net Income (or Loss) plus Financial Results, Depreciation, Impairment, Operational Provisions, Other Net (Expenses) Revenue, Employees Pension Plan CPC 33/IAS 19, Income Tax and Social Contribution. Electric Sector General Agreement Agreement signed between generators and distributors defining the rules for compensation for the financial losses due to energy rationing in 2001/2002. The agreement, signed in December 2001, envisaged a loan provided by the Brazilian Development Bank (BNDES) to companies and the extraordinary tariff adjustment for consumers, except low income consumers, to recoup losses. Energy Auctions Bidding process for the purchase of electric energy, governed by their invitations to bid and related documents, where distributors may buy energy to serve their market. Energy from Existing Projects Energy produced by projects that were already operating by December 31, 1999, also called Old Energy. Energy from New Projects Electric energy from new plants, new projects in the bidding process and projects granted or authorized until March 16, 2004, which began commercial operations as of January 1, 2000 and whose energy was not contracted until March 16, 2004. It is also called New Energy. Energy Provision Sale of energy to large consumers. Energy Supply Sale of energy to distributors and sellers who resell it to their clients. FIDC Credit Rights Investment fund, as established by the rules of the Brazilian Securities and Exchange Commission (CVM). Receivables securitization. 17
Free Consumers Consumers with contracted demand equal to or higher than 3.0 MW, who have opted to freely negotiate their contract conditions with the energy provider of their choice, (regulated by Articles 15 and 16 of Law 9,074, of July 7, 1995). Free Market See ACL. Generator A company that produces energy. Installed Capacity (Installed Power Capacity) Maximum amount of electricity that may be delivered by a generating unit, a hydroelectric power plant or a generating park. Installed Power Capacity See Installed Capacity. MCSD Mechanism for Compensating Surpluses and Deficits Reallocation process between Distribution Agents who participate in the Electric Energy Trading Board CCEE, of surpluses and deficits in sums of energy contracted in the Regulated Contracting Market ACR. Through this process, distributors can transfer up to 3% of those sums they maintain under purchase agreement with generators to other distributors per year. 16 MME Ministry of Mines and Energy The MME is the Brazilian government s primary authority the power industry. Its main duties are drafting guidelines for the granting of concessions and issuing directives governing the bidding process for concessions that relate to public services and public assets. MRE Energy Reallocation Mechanism A mechanism for sharing the water source risks associated to the electric energy optimization of the National Interconnected System (SIN) relating to the centralized dispatch of the electric energy generation units. This means that eventual generation shortages by a plant under the ONS may be covered by another plant in the system, with a view to optimize the system. These compensations are remunerated by the Optimization Energy Tariff TEO. MW- Megawatt Measurement unit of mechanical or electrical energy, thermal flow and energetic radiation flow, equivalent to one million watts. MW average - Megawatt average Measurement unit related to energy in MegaWatt-hour (MWh) divided by number of hours of the period. MWh - Megawatt-hour Measurement unit equivalent to one megawatt of power supplied or demanded for one hour or a million Watts-hour. ONS National Electrical System Operator An agent instituted by Law 9,648, of 1998, based on the text contained in Law 10,848, of 2004, which is responsible for coordinating and controlling the generation and transmission of electric energy in the National Interconnected System (SIN). Physical Guarantee the amount of energy that an agent is authorized to trade under contracts, as energy supply, measured in average megawatts (average MW). It is established by ANEEL as the average amount of energy that a plant can generate and trade, on a sustainable basis, 365 days per year, with a 5% risk factor. (this replaces the concept of assured energy). PLD Spot price The price disclosed by CCEE, calculated a maximum of one week in advance based on the Marginal Cost of Operations, limited by minimum and maximum prices, in effect for each calculation period and each submarket, based on which the energy sold in the spot market is priced. 18
Quotas See quota system. Quota system The mechanism used for proration of physically guaranteed energy and power from the Hydroelectric Plants, renewed in accordance with Law 12.783 (MP 579) and allocated to the National Interconnected System electric energy distribution concessionaires, as per specific ANEEL regulation, aiming to tariff moderateness Regulated Market See ACR. RGR Global Reversal Reserve a charge paid on a monthly basis (quota) by energy companies with the purpose of providing funds for the reversal and/or nationalization of energy public services. There is also the legal reserve to finance the expansion and improvement of these services, as well as alternative energy sources for inventory and feasibility studies to use new hydraulic potentials, and to develop and implement programs and projects focused on preventing waste and promoting the efficient use of energy. The annual charge to be collected is equivalent to 2.5% of the fixed assets related to the provision of energy services, limited to 3.0% of its annual revenue. RTE Extraordinary Tariff Recomposition Temporary tariff increase authorized for distributors of regions where energy was rationed in 2001 and 2002, in compliance with Law 10,438, of 2002. Part of the proceeds from this compensation was transferred to generators as a refund for the energy purchased. Seller A company that operates in the intermediation of energy purchase and sale transactions. SIN National Interconnected System Electrically interconnected installations, comprising plants and transmission facilities, responsible for providing electric energy to all regions of the country, covering 97% of the Brazilian consumption. Spot Market Segment of the Electric Energy Trading Board (CCEE) where the differences among the electric energy amounts contracted and recorded by CCEE agents and the amounts actually generated or consumed and attributed to the respective agents are traded. Spot Market Power The energy accounted for by the CCEE resulting from differences between production or consumption and the contracted amount. Positive or negative differences are settled in the spot market and calculated at the PLD (spot price). TAC Conduct Adjustment Agreement A legal instrument entered into between those responsible for certain actions or measures (CESP, in this case) and the federal, state or municipal Prosecution Office to defend the public or collective interest. It generally refers to environment preservation, mitigation or recovery initiatives through the establishment of technical obligations and conditions. 19