NOTES TO FINANCIAL STATEMENTS

December 31, 2017 and 2016

(In thousands of reais - R$, unless otherwise stated)

 

1.                             Operations

 

Eletropaulo Metropolitana Eletricidade de São Paulo S.A. (“Company”) is a public company, whose shares have been registered since November 27, 2017 in the highest listing segment of B3 S.A. - Brasil, Bolsa, Balcão (B3), called Novo Mercado . The Company does not have a controlling shareholder and its capital comprises common shares only.

 

The Company is authorized to operate as an electric power utility concessionaire, primarily in the distribution and sale of electric power in 24 cities in the metropolitan region of Greater São Paulo. Its activities are regulated and inspected by the Brazilian Power Regulatory Agency (ANEEL), which is associated with the Ministry of Mines and Energy (MME).

 

The Company’s headquarters are located at Avenida Dr. Marcos Penteado de Ulhôa Rodrigues, nº 939, stores 1 and 2 (ground floor) and 1 st  to 7 th  floors, Sitio Tamboré, Tower II of Condomínio Castelo Branco Office Park, Barueri, State of São Paulo, Brazil.

 

The Company, as mentioned in Note 23, billed for electric energy distribution services 32,776 and 34,464 GWh for the years ended December 31, 2017 and 2016, serving approximately 7.2 million and 7.0 million consumers for the years ended December 31, 2017 and 2016, respectively.

 

The Concession Agreement for Electric Power Distribution No. 162/1998, executed on June 15, 1998 (ANEEL Resolution No. 72, of March 25, 1998), is effective for 30 years.

 

According to the Concession Agreement, the Company undergoes Tariff Reset processes every four years since July 4, 2003, and Tariff Adjustment on an annual basis. The last Tariff Reset took place on July 4, 2015.

 

1.1                      Migration to Novo Mercado

 

On September 12, 2017, the Special General Meeting approved the conversion of all preferred shares into common shares and the migration of the Company to the special segment of B3, known as Novo Mercado . The resolution that approved the conversion of the shares was ratified by 60.36% of the preferred shareholders of the Company at the Special Preferred Shareholders´ Meeting held on the same date.

 

Preferred shareholders who did not attend the meeting, abstained from voting, or voted against conversion of the shares were entitled to exercise the right of withdrawal. The right of withdrawal could be exercised from September 29, 2017 to October 30, 2017. During this period, 359 shareholders holding 3,058,154 preferred shares issued by the Company, corresponding to 2.7 % of the preferred shares, exercised their right of withdrawal. The amount paid to these shareholders on November 9, 2017 for the right of withdrawal was calculated based on the Company’s equity as of December 31, 2016 (R$16.10 per share), totaling R$49,236.

 

On November 27, 2017, all preferred shares were converted into common shares in the proportion of one preferred share to one common share, which will be traded as of this date in the Novo Mercado of B3 under ticker code ELPL3.

 

The main objectives of the Company’s migration to Novo Mercado were: (i) to strengthen corporate governance; (ii) increase investment capacity through greater access to the capital market and potential reduction in the cost of capital; and (iii) enhancing the liquidity of publicly traded shares

 

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NOTES TO FINANCIAL STATEMENTS

December 31, 2017 and 2016

(In thousands of reais - R$, unless otherwise stated)

 

by consolidating the trading of securities exclusively in common shares, also increasing the attractiveness of new investors.

 

As a result of the migration to Novo Mercado , the Company is no longer controlled by The AES Corporation and the Shareholders Agreement entered into on December 30, 2016 between The AES Corporation, AES Holdings Brasil Ltda. and BNDES Participações S.A. - BNDESPAR, was terminated.

 

1.2                      Settlement Agreement with Eletrobras

 

The Company management, committed and dedicated to the primary purpose of creating value for the Company, and, consequently, to all its shareholders, approved on March 9, 2018, the terms and conditions for, as well as the execution of a settlement agreement with Centrais Elétricas S.A. (“Eletrobras”) aiming to end the judicial proceeding involving Eletrobras, Companhia de Transmissão de Energia Elétrica Paulista (“CTEEP”) and the Company, regarding the payment of the balance of financial expenses related to a loan granted in 1986 by Eletrobras to the then state-owned Company that was then separated to create four companies, including the present Eletropaulo and CTEEP. More details are included in Note 18.1 (b.4).

 

2.                             Basis of preparation and presentation of financial statements

 

The Company’s Management authorized the conclusion of the preparation of these financial statements on May 27, 2019.

 

2.1                      Statement of compliance

 

The Company´s financial statements were prepared and are presented for the year ended December 31, 2017 in accordance with International Financial Reporting Standards — IFRS as adopted by the International Accounting Standards Board — IASB and, where applicable, the Power Regulatory Agency´s (ANEEL) regulations.

 

The Company considered the guidelines contained in Accounting Guidance OCPC 07/IAS 20 for preparation of its financial statements. As such, significant financial statements information is being disclosed in the explanatory notes, and corresponds to the information used by management.

 

The financial statements were prepared using historical cost as value base, except for revaluation of intangible assets recorded in years prior to the transition date to International Financial Reporting Standards (IFRS), for stock options granted, and for valuation of certain financial instruments, which were measured at fair value.

 

2.2                      Basis of preparation and presentation

 

All amounts presented in these financial statements are stated in thousands of reais, unless otherwise stated. Due to rounding, these figures in these financial statements may not accurately add up to the totals stated.

 

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NOTES TO FINANCIAL STATEMENTS

December 31, 2017 and 2016

(In thousands of reais - R$, unless otherwise stated)

 

Going concern

 

At December 31, 2017, based on facts and circumstances existing then, management assessed the Company’s capacity to continue as a going concern and is convinced that its operations are capable of generating resources for continuity of operations in the future. Additionally, management is not aware of any material uncertainty that could give rise to significant doubts as to its ability to continue as a going concern. Accordingly, these financial statements were prepared on a going concern basis.

 

This statement is based on management’s expectations with respect to the Company’s future, consistent with the business plan. At the beginning of each year, the Company prepares annual and five-yearly business plans, which comprise the annual and multiannual budgets, all the capital investment plans, strategic plans and maintenance plans of the Company’s facilities. The plans are monitored during the year by the Company´s governance bodies, and may undergo changes.

 

Business segment

 

The Company´s revenue results substantially from sale of electric energy and distribution through the distribution infrastructure. Consequently, the Company concluded that only the distribution segment is subject to reporting.

 

Sistema Empresas.Net

 

In the table “Statement of Changes in Equity” of the “Empresas.Net” System, used for preparation and submission of documents to the CVM and B3, the depreciation transfer for revalued assets, although not corresponding to “Other Comprehensive Income”, is presented in the column with this indication, since this is the most appropriate option for its presentation.

 

2.3                      Functional currency and translation of balances in foreign currency

 

(a)                        Functional and reporting currency

 

The financial statements were prepared and are presented in Reais (R$), which is the Company´s functional and reporting currency. The functional currency was determined based on the primary economic environment of the Company’s operations.

 

(b)                        Transactions and balances

 

Foreign currency transactions (i.e., all transactions not conducted in the entity’s functional currency) were translated at the exchange rate in force on the transaction date. Monetary assets and liabilities in foreign currency are translated into the functional currency at the exchange rate in force on the financial statements position date.

 

3.                             Accounting policies and estimates

 

Significant accounting policies and estimates are presented in the respective notes.

 

When preparing the financial statements, the Company makes judgments and estimates based on available information, and adopts assumptions that affect the reported amounts of revenues, expenses, assets, liabilities, and disclosures of contingent liabilities. Where necessary, judgments

 

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NOTES TO FINANCIAL STATEMENTS

December 31, 2017 and 2016

(In thousands of reais - R$, unless otherwise stated)

 

and estimates are supported by expert opinions. The Company adopts assumptions based on its experience and other factors deemed reasonable and relevant in the circumstances. The assumptions adopted by the Company are reviewed periodically in the ordinary course of business. However, there are uncertainties inherent in the determination of these assumptions and estimates, which could lead to results that require a significant adjustment to the book value of the related asset or liability in future periods as new information becomes available.

 

3.1                      New accounting pronouncements, interpretations and guidance

 

3.1.1           Amendments to standards and interpretations effective as of January 1, 2017

 

Amendment to Accounting Pronouncement 10/2016 — Approved on August 4, 2016 and disclosed on December 22, 2016. Represents changes in the following pronouncements: CPC 03 (R2)/IAS 7 Statement of cash flows (Disclosure initiative) and CPC 32/IAS 12 Income taxes (Recognition of deferred tax assets for unrealized losses). In general, these amendments introduce improvements in the texts for a better application of the pronouncements, in line with international accounting practices. With respect to CPC 03,(R2)/IAS 7 the amendment resulted in further disclosure, as described in Note 15.6.1. The changes in CPC 32/IAS 12 clarify that an entity needs to consider whether tax legislation restricts the sources of taxable profit against which it may make deductions on the reversal of the deductible temporary difference referring to unrealized losses. Furthermore, the amendments provide guidance on how an entity should determine future taxable profit and explain the circumstances in which taxable profit may include the recovery of certain assets for amounts greater than their carrying amount. The amendment to CPC 32/IAS 12 had no effect on the Company’s financial statements since the current practice is in line with the required changes.

 

3.1.2           Standards, amendments and interpretations issued but not yet effective at December 31, 2017:

 

The following pronouncements became effective for periods after the date of these financial statements, and were not early adopted by the Company.

 

Effective for years beginning on or after January 1, 2018:

 

Revision to Accounting Pronouncement 12/2017 — Approved on December 1, 2017 and disclosed on December 21, 2017: the amendments result from edition of CPC 47/IFRS 15, CPC 48/IFRS 09, permission for insurers not to apply CPC 48/IFRS 09 until 2021, annual changes of Cycle 2014-2016 and of CPCs 28/IAS 40 and 10, as analyzed below:

 

CPC 28/IAS 40 - Investment Property: The amendments clarify when an entity should transfer properties, including construction in progress or real estate projects, to investment property, and when to remove them. The amendments states that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of change in its use. A mere change in management’s intentions for the use of a property does not evidence a change in use. The amendment to CPC 28/IAS 40 has no effect on the Company’s financial statements, since the current practice is in line with the required changes.

 

CPC 10 (R1)/IFRS 02 — Classification and measurement of share-based payment transactions, which address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms

 

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