3Q16 Earnings Release

Transcription

1 São Paulo, October 28, Companhia de Gás de São Paulo - Comgás (Bovespa: CGAS3 and CGAS5, Reuters: CGAS3.SA and CGAS5.SA and Bloomberg: CGAS3:BZ and CGAS5:BZ), announces its results for the third quarter of 2016 (3Q16). The following financial and operating figures are presented in accordance with International Financial Reporting Standards (IFRS) and all comparisons are made with the third quarter of 2015 (3Q15), as indicated. Investor Relations 3Q16 Highlights Nelson Gomes Chief Executive Officer Rafael Bergman Chief Financial and Investor Relations Officer André Salgueiro Treasury and Investor Relations Manager Telephone: investidores@comgas.com.br Conference call in Portuguese Date: 11/01/2016 Time: 11:00 a.m. (BRT) Dial-in: Dial-in: Code: Comgas During the quarter, 13 industries, 185 commercial establishments and 31k households were connected, bringing the number of new customers connected in the last 12 months to more than 115,000; Residential volume grew 18.8%, reflecting the addition of 114k new customers in the last 12 months, the lower average temperature and the end of the water crisis; CNG increased by 3.4% in volume, first quarterly growth in recent years, reflecting the increased competitiveness of gas and growth in the number of conversions in recent quarters; The macroeconomic scenario continues to affect industrial volume, which decreased by 3.7% from 3Q15; Normalized EBITDA was R$ 448 million, increasing 17.9% from 3Q15 Summary of Financial Information 3Q16 3Q15 3Q16/3Q15 Y TD16 Y TD15 Y TD16/Y TD15 1,665,798 1,550, % Total Customers 1,665,798 1,550, % 1,078,091 1,307, % Total Volume* 3,187,528 3,968, % 1,065,599 1,084, % Volume excluding Thermal Generation* 3,072,106 3,265, % 494, , % EBITDA 1,656,704 1,116, % 215, , % Net Income 767, , % The conference call will include a presentation available for download at: ri.comgas.com.br 448, , % Normalized EBITDA 1,105,935 1,063, % 179, , % Normalized Net Income 395, , % 102, , % CAPEX 305, , % 1,388,386 1,174, % Net Debt 1,388,386 1,174, % % Net Debt / EBITDA - Normalized %

2 Executive Summary Gas sales volume in the residential and commercial segments ended the quarter up 18.8% and 6.1%, respectively, from 3Q15. The lower average temperature combined with the end of the water crisis and the connection of 114,000 new customers in the last 12 months, drove residential volume growth. In the commercial market, the strong pace of new customer additions continued, with 1,036 customers connected in the last 12 months and volume growing despite the challenging economic scenario. The industrial segment continues to be impacted by the economic downturn. The decline in volume was 3.7% from 3Q15, reflecting the country's macroeconomic scenario. The accumulated decrease this year is 7.6%. In the cogeneration segment, consumption at industrial plants is being impacted by more competitive electricity tariffs. CNG volume ended the quarter with growth of 3.4% from 3Q15, the first quarterly growth in recent years, mainly driven by the increase in vehicle conversion to CNG. Comgás net revenue reached R$ 1.4 billion in the period, 20.9% lower than in 3Q15, mainly impacted by the reduction in tariffs due to the lower cost of gas and lower volumes. On the other hand, sales mix improved, reflecting the sales growth in the residential and commercial segments. Gas and transportation costs decreased 38.5%, reflecting the lower volume and reduction in the average unit cost of gas. Cost of gas acquired in the quarter decreased from 3Q15, mainly due to the decline in the price of oil and the U.S. dollar in the period. Operating expenses totaled R$ 120 million in 3Q16, increasing 5.1% from 3Q15. This increase was lower than cumulative inflation in the period. During the year, expenses increased 3.0% compared to Normalized EBITDA was R$ million in 3Q16, up 17.9% from 3Q15, due to the better sales mix combined with tariff adjustments carried out in May. IFRS EBITDA grew 27.9% to R$ million in the quarter, reflecting the sharp decline in the cost of gas. Investments in 3Q16 totaled R$ million. Mainly due to the revision of the operating strategy on a few expansion fronts. 2

3 Markets Volume 3Q16 3Q15 3Q16/3Q15 YTD16 YTD15 YTD16/YTD15 73,247 61, % Residential 181, , % 35,729 33, % Commercial 99,977 94, % 838, , % Industrial 2,448,277 2,649, % 68,336 70, % Cogeneration 199, , % 49,859 48, % Automotive 143, , % 1,065,599 1,084, % Tot al 3,072,106 3,265, % % mm³/day % 12, , % Thermal Generation 115, , % 1,078,091 1,307, % Tot al 3,187,528 3,968, % Residential: The change in volume is due to the addition of 114,000 new customers in the last 12 months and the recovery of average volume consumed, as a result of the rise in water levels at reservoirs and the end of the water crisis. Another factor that leveraged part of this volume was temperature, which was 8% (1.6º) colder than in the same period last year. Commercial: Despite the challenging economic scenario, volume increased, mainly due to the addition of 1,036 customers in the last 12 months, for a growth of 7.1%, Of these additions, 185 were made in 3Q16. Industrial: The decrease in volume reflects the decline in industrial production in the concession area. The steepest decreases were registered in the following industries: i) Ceramics, due to the shutdown of furnaces on account of high inventories and the slowdown in the domestic construction market; ii) Steel, impacted by the lower production of steel for the construction, major appliance and automotive industries; and iii) Chemicals/petrochemicals, due to the decline in demand across the sector and the consumption of other alternatives such as refinery gas and aromatic residue. Cogeneration: The decline in volume is mainly due to industrial cogeneration, which was impacted by greater competitiveness of electricity in the spot market (PLD). Automotive (CNG): With the higher competitiveness of gas compared to other liquid fuels (gasoline and ethanol) and initiatives to encourage the use of CNG, there was an increase of 3.4% in volume this quarter, the first quarterly growth in recent years, driven mainly by the increase in conversions. Thermal Generation: Lower thermoelectric dispatch determined by the national power grid operator (ONS). 3

4 Financial Performance Net Revenue Net revenue in the quarter was R$ 1,379 million, down 20.9% from 3Q15, mainly affected by the reduction in tariffs due to the reduction in the cost of gas, pursuant to ARSESP resolution 648, in effect from May 31, 2016 and the 17.5% drop in total sales volume compared to the previous quarter. 3Q16 3Q15 3Q16/3Q15 YTD16 YTD15 YTD16/YTD15 1,632,417 2,017, % Gas Sales 5,119,816 5,736, % 77, , % Construction Revenues 231, , % 9,989 11, % Other Revenues 38,639 29, % 1,719,988 2,139, % Gross Revenue 5,390,324 6,070, % -340, , % Sales Taxes and Contributions -1,057,161-1,122, % 1,379,128 1,743, % Net Sales 4,333,163 4,948, % Cost of Goods and Services The total cost of goods and services sold, which is formed mainly by the cost of gas (commodity), transportation and cost of construction (ICPC 1), totaled R$ million in 3Q16, decreasing by 38.5% from 3Q15. Gas and transportation costs, excluding construction and other costs, totaled R$ thousand in the quarter, down 39.5% from the previous year. This decrease is explained by the lower unit cost of gas and the lower volume distributed in the quarter. Cost of gas decreased from 3Q15, mainly due to the reduction in oil price, which is the index for gas supply agreements, and the depreciation of the U.S. dollar between the periods. 3Q16 3Q15 3Q16/3Q15 YTD16 YTD15 YTD16/YTD15-681,863-1,127, % Cost of Gas -2,077,066-3,169, % -77, , % Construction - ICPC , , % -4,254-4, % Others cost -12,779-14, % -763,699-1,241, % Cost of Gas and / or Services -2,321,714-3,487, % Note that the differences between the actual cost incurred and the cost of gas included in the tariff and billed to customers (according to the tariff structure set by ARSESP) are accumulated in the Regulatory Current Account and passed through/billed as determined by the regulatory agency in the periodic price adjustments or tariff revisions. This balance is restated on a monthly basis by the basic interest (Selic) rate. During the quarter the Company totaled R$ 59.8 million to return to customers in the regulatory current account. At the end of the quarter, the liability balance in the regulatory current account totaled R$ million. In accordance with IFRS, this balance is not booked in the Company's records and is disclosed in Note 21. The decline in the Construction ICPC 1 line is related to lower investments made during the third quarter of 2016 and the consequent postponement of some projects. Operating Income and Expenses In 3Q16, selling, general and administrative expenses, excluding amortization, totaled R$ million, increasing by 5.1% from 3Q15. This variation is justified mainly due to the adjustment of operating expenses for inflation. For the year, expenses grew 3.0% compared to 2015, reflecting the Company's efforts to control expenses. 3Q16 3Q15 3Q16/3Q15 YTD16 YTD15 YTD16/YTD15-36,206-35, % Expenses w ith Sales -108, , % -84,993-79, % General and Administrative Expenses -243, , % % Other Operational Expenses/Revenues -1,930-2, % -120, , % Expenses wit h Sales, General and Administ rat ive -354, , % -103,586-90, % Depretiation and Amortization -283, , % -224, , % Operat ional Expenses/Revenues -638, , % 4

5 EBITDA EBITDA, normalized by the regulatory current account, was R$ million in 3Q16, up 17.9% from 3Q15, reflecting the better sales mix and tariff adjustment made as from May 31 that reflect mainly the reduction in the cost of gas and the inflationary pass-through in distribution margins. The EBITDA impact of the regulatory current account during 3Q16 was R$ million. IFRS EBITDA grew 27.9% to R$ million in the quarter, mainly impacted by the reduction in the cost of gas. 3Q16 3Q15 3Q16/3Q15 YTD16 YTD15 YTD16/YTD15 1,379,128 1,743, % Net Sales 4,333,163 4,948, % -763,699-1,241, % Cost of Assets and / or Services Rendered -2,321,714-3,487, % 615, , % Gross Revenue 2,011,449 1,461, % -120, , % Expenditures w ith Sales, General, and Adm. -354, , % 494, , % EBITDA 1,656,704 1,116, % 35.9% 22.2% 13.7 p.p. Margin EBITDA 38.2% 22.6% 15.7 p.p. 448, , % EBITDA Normalized 1,105,935 1,063, % 32.5% 21.8% 10.7 p.p. Margin EBITDA Normalized 25.5% 21.5% 4.0 p.p. Financial Result Net financial result in 3Q15 was an expense of R$ million, compared to an income of R$ 0.9 million in the same period in This variation is mainly due higher level of net debt and higher interest rates recorded over 3Q16, combined with a non-recurrent interest on income tax and social contribution credits resulting from the change in the calculation of depreciation in 2009 and 2010, as disclosed in 3Q15. Net Income Net income normalized by the regulatory current account amounted to R$ million in 3Q16 (R$ million under IFRS), decreasing by 6.8% from 3Q15, as a result of all the financial impacts described above. 5

6 Investments In 3Q16, Comgás invested R$ million, this variation can be explained by the revision of the strategy on some expansion fronts. Of the total investments made in the quarter, approximately 70% went to expanding the gas distribution network. Notable among the projects are: Guarulhos, Campinas, Osasco, Jundiaí and Campos do Jordão. Cash Flow Reconciliation Cash Flow R$ MM 3Q16 EBITDA Noncash impacts on EBITDA 15.2 Changes in assets and liabilities -6.1 Operating financial result 51.3 Operat ing Cash Flow CAPEX Cash Flow from Invest ing Act ivit ies Funding 48.2 Amortization of principal Amortization of interest Derivatives Others 0.0 Cash Flow from Financing Act ivit ies Free Cash Flow t o t he Equit y Dividends Paid 0.0 Cash Generat ion (Burn) in t he Period Indebtedness Net debt was 16.6% higher than in December 2015, mainly due to the payment of R$1.2 billion as dividends in February Of the total debt, 82% matures in the long term. Local currency debt, including debentures, totaled R$2,423 million, corresponding to 79% of total debt. For debt denominated in foreign currency, the Company's policy is to hedge 100% of its currency exchange exposure. The Net Debt to normalized EBITDA ratio increased from 0.78 in December 2015 to 1.30 in September Sep 16 Dec 15 Sep 16 / Dec 15 2,261,848 2,624,877 Loans and Financing -13.8% 1,304,254 1,198,190 Debentures 8.9% -486, ,032 Derivatives -26.9% 3,079,985 3,158,035 Total Debt -2.5% 1,691,599 1,967,643 (-) Cash, Cash Equivalents -14.0% 1,388,386 1,190,393 Net Debt 16.6% 2,070,424 1,529,918 EBITDA (last 12 months) 35.3% Net Debt/EBITDA -13.8% Net Debt Nomalized / EBITDA Normalized 66.3% Short Term Debt/Total Debt 6.0% 6

7 The debt amortization schedule, including debentures and derivatives, is as follows: Debentures Debent ure 09/30/2016 Emission Series Quant it y Current Long Term Remunerat ion 3rd 1th 128,197 43,520 85,469 CDI + 0.9% p.y. 3rd 2nd 269,338 16, ,799 IPCA+ 5.1% p.y. 3rd 3rd 142,465 9, ,069 IPCA+ 5.6% p.y. 4th 1th 269,620 15, ,482 IPCA+ 7.1% p.y. 4th 2nd 242,374 14, ,532 IPCA+ 7.5% p.y. 4th 3rd 79,900 4,761 84,745 IPCA+ 7.4% p.y. Guidance This section presents guidance ranges for selected operating and financial parameters of Comgás for fiscal year 2016, as well as comparisons to the actual results delivered in In addition, other parts of this release may contain projections. These projections and guidance are merely estimates and indicative, and do not represent any guarantee of future results Guidance 1st Revision 2016 Actual Min Max Mín Máx Total customers (thousand) 1,574 1,650 1,700 1,650 1,700 Volume ex-thermal (thousand m³) 4,287 4,000 4,300 4,000 4,300 EBITDA Normalized (R$mm) 1,378 1,350 1,450 1,350 1,450 EBITDA IFRS (R$mm) 1,530 1,400 1,600 1,900 2,000 CAPEX (R$mm) Disclaimer This document contains forward-looking statements and estimates. These forward-looking statements and estimates are solely forecasts and do not represent any guarantee of prospective results. All stakeholders are cautioned that these forward-looking statements and estimates are and will be, depending on the case, subject to risks, uncertainties and factors related to the operations and business environment of Comgás, and therefore actual results may differ significantly from the estimated or implied prospective results contained in such forward-looking statements and estimates. 7

8 Income Statement 3Q16 3Q15 3Q16/3Q15 R$ t housand YTD16 YTD15 YTD16/YTD15 1,719,988 2,139, % Gross Revenue from Sales/Services 5,390,324 6,070, % -340, , % Gross Revenue Deductions -1,057,161-1,122, % 1,379,128 1,743, % Net Revenue 4,333,163 4,948, % 1,292,954 1,622, % Gas Sales 4,066,819 4,618, % 77, , % Construction Revenues - ICPC , , % 8,592 10, % Other Revenues 34,475 25, % -763,699-1,241, % Cost of Asset s and/or Services Rendered -2,321,714-3,487, % -557, , % Gas Sales -1,618,124-2,707, % -128, , % Transportation and Other Gas Services -471, , % -77, , % Construction Revenues - ICPC , , % 615, , % Gross Profit 2,011,449 1,461, % -224, , % Ot her Operat ional Result s -638, , % -36,206-35, % Selling Expenses -108, , % -188, , % General and Administrative Expenses -527, , % 7, % Other Operational Revenues 9,610 1, % -6, % Other Operational Expenses -11,540-3, % 391, , % Operat ing Income 1,373, , % -55, % Net Financial Expenses -197, , % 81, , % Financial Income 228, , % -137,413-99, % Financial Expenses -426, , % 335, , % Earnings Before Income Tax and Social Cont ribut ion 1,175, , % -119, , % Income Tax and Social Contribution -408, , % 215, , % Net Income for t he Period 767, , % 0 Net Earnings Per Share (R$) % Common % % Preferred % 8

9 Cash Flow Statement 3Q16 3Q15 3Q16/3Q15 R$ t housand YTD16 YTD15 YTD16/YTD ,8% Profit Before Income Tax and Social Cont ribut ion ,1% ,6% Amortization ,5% ,6% Permanent Assets Write-off, Net ,6% ,4% Interest and Monetary Variation on Loans and Debentures ,6% ,9% Provision for Contingencies ,2% ,2% Post-Employment Benefits - CVM Rule ,2% ,3% Allow ance for Doubtful Accounts ,0% ,4% Others ,3% ,9% Cash Generat ed from Operat ions ,4% ,9% Variat ions in Asset s and Liabilit ies ,0% ,7% Accounts Receivable ,0% ,1% Inventories ,8% ,0% Suppliers ,1% ,8% Taxes and Contributions ,2% ,2% Provisions and employee benefits ,1% ,3% Ship or pay and other ,0% ,1% Ot hers ,8% ,0% Taxes on profit ,6% ,3% Interest paid ,8% ,7% Net Cash Generat ed from Operat ions ,6% ,7% Net Cash from Invest ment Act ivit ies ,5% ,7% Additions to Intangible Assets ,5% ,8% Net Cash from Financing Act ivit ies ,9% ,0% Funding ,2% ,1% Amortization from Principal, Loans and Financing ,2% 0 0 0,0% Dividends Paid ,1% ,4% Increase (Decrease) of Cash and Cash Equivalent s ,9% ,4% Variat ions of Cash and Cash Equivalent s ,1% ,6% Closing Balance of Cash and Cash Equivalent s ,6% 9

10 Balance Sheet R$ t housand Sep 2016 December 2015 Sep16 X Dec15 TOTAL ASSETS 8,168,578 8,868, % Current Asset s 2,505,217 2,789, % Cash and Cash Equivalents 1,691,599 1,967, % Accounts Recievable - Clients 538, , % Inventories 138, , % Taxes Recoverable 84, , % Derivative Financial Instruments 21,278 26, % Receivables from Related Parties 1,198 1, % Other Current Assets 28,971 28, % Non Current Asset s 5,663,361 6,078, % Accounts Recievable 32,450 37, % Deffered Taxes 303, , % ICMS Recoverable 11,922 13, % Judicial Deposits 47,103 43, % Derivative Financial Instruments 464, , % Ship or Pay 245, , % Others 1,715 1, % Intangible Assets 4,556,437 4,546, % TOTAL LIABILITIES 8,168,578 8,868, % Current Liabilit ies 2,029,599 2,047, % Payable and Related Parties 3,648 3, % Salaries and Social Deductions 51,465 60, % Suppliers 1,172,843 1,302, % Taxes and Contributions Payable 199,443 96, % Loans, Financing and Debenture 589, , % Advances from Clients and Others 1,006 1, % Dividends and Interest on Capital Payable 611 3, % Other Payables 10,749 4, % Non Current Liabilit ies 3,390,191 3,638, % Loans, Financing and Debenture 2,976,268 3,246, % Advances from Clients and Others 20,780 21, % Obligations w ith retirement benefits 309, , % Provisions for Contingencies 83,881 74, % Shareholders Equit y 2,748,788 3,181, % Payed in Capital 1,312,376 1,143, % Capital Reserves 395, , % Reevaluation Reservas 6,134 6, % Profit Reserve 325,459 1,525, % Accumulated Profits 767, % Adjustments of Equity Evaluation -57,700-57, % 10

11 Upcoming Events 3Q16 Earnings Conference Call November 01, 2016 at 11:00 a.m. (BRT) Dial-in: +55 (11) (11) Senha de acesso: Comgas Palestrante: Nelson Gomes CEO Rafael Bergman CEF and IRO The conference call audio will be available for download in the Results Center section of Comgás' Investor Relations website. To download the presentation, please go to ri.comgas.com.br 11

12 Appendix I Markets 3Q16 3Q15 Resident ial 3Q16/3Q15 1,123,563 1,070,412 Met ers 5.0% 1, 648, 707 1, 534, 357 Number of UDA's* 7. 5% 73, , 663 Volume (mm m³) 18. 8% 237, ,372 Net Revenue 17.3% -47,023-58,177 Cost -19.2% -1, Regulatory Current Account 183.4% 188, , 611 Normalized Margin 31. 4% R$/m³ Normalized 10. 6% *UDA's (householders) 3Q16 3Q15 Commercial 3Q16/3Q15 15, , 615 Met ers 7. 1% 35, , 686 Volume (mm m³) 6. 1% 78,325 77,707 Net Revenue 0.8% -22,935-31,822 Cost -27.9% Regulatory Current Account % 54, , 870 Normalized Margin 18. 9% R$/m³ Normalized 12. 1% 3Q16 3Q15 Indust rial 3Q16/3Q15 1,143 1,085 Met ers 5.3% 838, , 439 Volume (mm m³) -3. 7% 865,824 1,098,456 Net Revenue -21.2% -536, ,202 Cost -34.7% -20,246-4,259 Regulatory Current Account 375.4% 309, , 995 Normalized Margin 13. 3% R$/m³ Normalized 17. 6% 3Q16 3Q15 Cogenerat ion 3Q16/3Q Met ers 3. 8% 68, , 834 Volume (mm m³) -3. 5% 51,505 64,982 Net Revenue -20.7% -37,433-55,163 Cost -32.1% ,319 Regulatory Current Account % 13, , 138 Normalized Margin 8. 1% R$/m³ Normalized 12. 1% 3Q16 3Q15 Aut omot ive 3Q16/3Q Met ers -4. 6% 49, , 226 Volume (mm m³) 3. 4% 53,130 50,262 Net Revenue 5.7% -32,002-40,757 Cost -21.5% -11, Regulatory Current Account % 9, 797 9, 374 Normalized Margin 4. 5% R$/m³ Normalized 1. 1% 3Q16 3Q15 Thermal Generat ion 3Q16/3Q Met ers 0. 0% 12, , 179 Volume (mm m³) % 6, ,043 Net Revenue -94.8% -6, ,063 Cost -94.9% - - Regulatory Current Account 0.0% 564 8, 980 Normalized Margin % R$/m³ Normalized 11. 7% 12

13 Appendix II Tariffs and Adjustments As a utility providing a public service, Comgás activities are regulated by São Paulo State Sanitation and Energy Regulatory Agency (ARSESP), an agency of the São Paulo state government. The distribution of piped natural gas commercially operated by the Company is regulated by a concession contract that establishes five-year tariff cycles and the conditions for calculating and applying the tariffs during these cycles. The goal is to ensure a fair margin both for the Concessionaire and for Users. The funds to cover the Company s operating costs, investments and shareholder returns come from this margin. On May 31, 2009, the second tariff revision was carried out, which set the Company s Maximum Margin (P0) at R$0.3052/m³, with an efficiency factor (X Factor) of 0.82%. The rate paid by consumers is formed by the cost of gas and product transportation plus the Company s margin and taxes. The tariff resulting from the five-year revision is adjusted annually on the anniversary of the signing of the concession contract (May 31). The adjustment is determined by ARSESP and consists of updating the distribution margins by the IGP-M and the cost of gas and of its transportation, considering the actual cumulative variations in the prices of the natural gas acquired by Comgás. In the case of extreme cost variations, the regulatory body may determine the need for an extraordinary adjustment. Postponement of the Tariff Revision ARSESP, through Resolution 494, decided to postpone the tariff revision process of Comgás, which initially was scheduled to occur by May 2014, to 01/30/2015. According to the resolution, only in February 2014 was ARSESP able to conclude the process of hiring an expert consultancy to assist it with said tariff revision process, which started in March Consequently, until the date scheduled for concluding the tariff revision process, there was insufficient time to conduct the methodological definitions, analyze the Concessionaire s data and propose the maximum distribution margins for the new tariff cycle, including the holding of public consultations and hearings to enable the necessary transparency and publicity of the procedure. On the same day on which it announced the postponement of the tariff revision, ARSESP published Resolution 496, which provides for the temporary adjustment of the distribution margins of Comgás, which will be in force from May 2014 until the end of the tariff revision process, scheduled for January This adjustment considered the IGP-M inflation of 5.27% in the period and an X factor of 0.55%, both proportional to 8/12 of the indexes in the last 12 months, given that the tariff revision was postponed for eight months, resulting in a net adjustment of 4.72%. Considering the margins adjusted for inflation less the X factor, the restated gas cost and pass-through of the current account, the adjustments in rates in May 2014 averaged 2.6% in the residential, 1.2% in the commercial, -0.6% in the industrial and 4.3% in the CNG. Resolution 533, published by ARSESP on 12/10/2014, extended the deadline for the tariff revision to 05/31/2015. Due to the new deadline, the agency decided to complement the inflation adjustment with the 4/12 that were not considered in the adjustment authorized by Resolution 496, and the Company s margins were increased by an additional 2.33%, net. On the same date, ARSESP published Resolution 534, which restated the cost of gas and the current account pass-through. These two factors, combined with the margin adjustment based on inflation described above, resulted in the following adjustments in gas sale rates: average adjustments of 2.2% in the residential and commercial, 2.0% in the industrial and 3.8% in the CNG segment. On 03/25/2015 the summary of the minutes of 301st Meeting of the Executive Board of ARSESP held on 03/11/2015, was published in the state register DOESP informing that the Executive Board of ARSESP had voted to implement procedures to: (i) invalidate Article 2 of Resolution 494 of 05/27/2014, which described the criteria for monetary restatement applicable to the tariffs of the Company for the period from May to December 2014, to instead apply the contractual criteria, which means an adjustment based on the IGP-M index in the last 12 months, pursuant to the rapporteur's vote; and (ii) invalidate Resolution 517/2014 and Technical Note 02/2014, which discussed the definition of the WACC. 13

14 On 05/09/2015, ARSESP published Resolution 575, which restated the cost of gas and the current account pass-through. These two factors, combined with the margin adjustment based on inflation of 4.16%, resulted in the following adjustments in gas sale rates: average increase of 6.25% in the residential, 7.7% in the commercial, 9.6% in the industrial segment and 9.2% for CNG stations. On 05/23/2016, ARSESP published Resolution 648, which restated the cost of gas and the current account pass-through. These two factors, combined with the margin adjustment based on inflation of 9.81%, resulted in the following adjustments in gas sale rate: average decrease of 3% in the residential, 11% in the commercial, 21% in the industrial segment and an increase of 2% for CNG stations. On 09/29/2016, ARSESP published Resolution 670 updating the cost of gas and the transfer of the current account, which resulted in the following adjustments to the gas sales tariffs: average decrease of 3.16% in the residential segment, 5.70% in the commercial segment, 9.78% in the industrial sector and 0.07% for CNG stations. This adjustment is valid from 10/03/2016, so did not impact the figures of the third quarter. The Company is awaiting further information from the agency regarding the next steps of the tariff revision process. 14

15 Appendix III Natural Gas Supply Agreements The Company maintains natural gas supply agreements with Petrobras under the following conditions: Firm agreement with Petrobras, in effect through July 2019, for the daily supply of 8.1 million m³ of Bolivian gas; Firm agreement with Petrobras, in effect through December 2019, for the daily supply of 5.22 million m³ of gas; Two back-to-back natural gas supply agreements under the Thermal Power Priority Program (PPT) for the daily supply of 3.06 million m³, of which 2.76 million m³ per day is supplied to the Fernando Gasparian Thermal Power Plant (UTE), in effect through december 2016, and 0.3 million m³ per day is supplied to Corn Products, in effect through March 2023; The prices under the agreements are composed of two portions: one pegged to a basket of fuel oils in the international market and adjusted on a quarterly basis; and the other adjusted on an annual basis in accordance with domestic and/or U.S. inflation. The cost of gas is denominated in R$/m³, and Bolivian gas is calculated in US$/MMBTU. The following table provides a summary of the natural gas supply agreements: Cont ract TCQ Firme UTE - Fernando Gasparian Model Firme Firme Back t o Back Gas Source Bolivian National Petrobras system DQC 8,10 MMm³/day 5,22 MMm3/day 2,76 MMm3/day End of Cont ract jul/19 dez/19 dec/16 Commodity + Transportation Fixed Charge + Variable Charge Price Transportation: annual readjustment according to american inflation: CPI Commodity: quarterly correction based on Oil Basket + Exchange Rate Fixed Charge: annual readjustment by IGP-M Variable Charge: quarterly correction based on Oil Basket (Brent) PPI + IGPM and exchange rat e according t o t he American dollar 15