Aegea Saneamento e Participações S.A.

Financial statements December 31, 2014 and 2013

KPDS 110271

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Contents Management report 2014

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Relationship with auditors

36

Independent auditors' report on the financial statements

38

Balance sheets

40

Statements of income

41

Statements of comprehensive income

42

Statements of changes in shareholders' equity

43

Statements of cash flows

44

Statements of value added

45

Notes to the financial statements

46

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Management Report 2014 Dear Shareholders The Management of Aegea Saneamento e Participações S.A., in compliance with the statutory and legal provisions, submits to the examination of its shareholders the Management Report and the corresponding individual and consolidated financial statements for the fiscal years ended December 31, 2014 and 2013, accompanied by the Independent Auditors’ Report on the Financial Statements. Message from the Board After a period for adaptation of the Company’s capital structure, in 2014, Aegea celebrated the consolidation of its partnership with foreign investors. Within a challenging macroeconomic scene, in a year dotted with major events such as the FIFA World Cup and the Presidential Elections in Brazil, the company ended the year with positive financial results and with capital aiming at the universalization of sewage and water services in the country. During the year, Aegea, Prolagos and Águas Guariroba were registered at the Securities Commission (CVM) and went public in Category B – which allows the negotiation of debt on the market – and due to this, gained access to new sources of capital. It is worth emphasizing that such action was only possible thanks to the high level of corporate governance practiced by the company, complying with all the market requirements. On the operational side, we have had important initiatives in one of the most critical points for our business: labour. In 2014, we established Academia Aegea, a structure for the development of human capital which, through the Aegea Administrative Center (CAA), offers trainings focused on knowledge of our business. In relation to new concessions, during the year the company has conquered another 8 concessions, thus bringing an additional 8 municipalities into the company’s project portfolio. At the end of the year, Aegea was responsible for water and sewage services in 29 cities, for water supply in 5 municipalities, and for sewage collection and treatment in 1 municipality. In 2014, water made the news because of the variation of the rainfall distribution over the last few years has emptied the reservoirs in the Southeast and the Northeast of the country, thereby creating an unprecedented situation. Of course, Aegea has followed this issue which has a high impact on its business, but has informed that none of the municipalities where the company manages the water supply has suffered or had any kind of impact as a result of the water crisis of the country. On the other hand, the attention to this issue, generated by discussion of the issue on national media, has provided several new opportunities which could become new business in years to come. From the financial point of view, the company ended the year with growth in income and in EBITDA, maintaining its rating before the main world agencies and also aimed at expanding investor and foreign bank through participation in events of this business segment. 3

With everyone’s support and effort, we have further consolidated our corporate governance which has had national acknowledgement: Aegea was in second place in Época magazine ranking, the Anuário Negócios 360º. The company was awarded for its capacity of innovation and HR practices, as one of the articles in this issue shows. We have obtained indicators of which we are proud, such as those presented in the research study carried out by the Ministry of Health, hospitalization rate for diarrhea-related diseases in the municipality of Campo Grande, which in 2003 stood at 157.3 for every 100,000 people, and then fell to 22.2 for every 100,000 people, representing a decrease of 86%. The favorable counterpart was the decrease in total expenses with hospitalization caused by diarrhea-related diseases in São Paulo, which was R$48,336 per 100,000 people and R$ 10,618 in 2013 per 100,000 people, a drop of 78%, as a result of the investments in sanitation made by Águas Guariroba (MS). The concessionaire received the Melhores do Middle Market award, of the IstoÉ Dinheiro magazine for the investments and technology adopted. In Piracicaba, the 100% of treated sewage is reason of the pride for Águas do Mirante and for all of us. In Mato Grosso, the work of Nascentes do Xingu and the conquest of Sinop made Aegea the largest private sanitation company in the State. Aside from strengthening our activities in Mato Grosso, we have arrived in Pará and Santa Catarina. More than just making us proud, all this strengthens us to forge ahead in our quest to continue taking health and quality of living to the population of the cities served by Aegea, always in a sustainable manner. Thank you and a good year to all!

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FUNCTIONAL ORGANIZATIONAL CHART

Concessions Services

5 municipalities

23 municipalities

Águas de São Francisco do Sul and Águas de Buritis will start the activities in 2015.

COMPANY'S PROFILE Aegea Saneamento e Participações S.A. is a private operator of basic sanitation services, with active present in the communities served and close collaboration with the granting power, managing the service agreement through the relationship with its stakeholders as well. Headquartered in the city and state of São Paulo, and with expertise to operate in all the processes of the full sanitation cycle – from supply and collection through to sewage treatment. Aegea closes 2014 with public sanitation concessions in 35 municipalities divided into six Brazilian states, and is responsible for responding to the needs of more than 2.5 million people in more than 840,000 households. Structure The operations of the Group’s business units are supported by Engepav Serviços, a subsidiary structured by Aegea in 2011. The company coordinates the development of solutions and projects demanded by the units and acts as a center of shared engineering and maintenance services. Aegea optimizes resources and gains scale and efficiency through Engepav Serviços, ensuring liquidity

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and providing support in operational and strategic matters for the concessionaires and for the new businesses. Aegea also has the Aegea Administrative Center (CAA), in Santa Bárbara d’Oeste, State of São Paulo, in charge of the trial balances, data consolidation, balance sheet and audit closing, human resource policies, financial statements and other processes related to HR and to management. The CAA aims to assure the business uniformity, allowing greater synergy between the current companies and the new acquisitions. The Company has a service branch, Sanitation Systems Management (GSS). Using the technical knowledge obtained and applied to its concessionaires, the scope of services involves: performance and loss reduction, commercial management and distribution management agreements. Supplementing the services, the GSS also provides software for commercial management, registration, reading and simultaneous printing and telemeasurement. The country’s future has the basic sanitation sector as one of its cornerstones According to the study by Instituto Trata Brasil1, in 2011, 396,048 people were hospitalized with diarrhea in Brazil; of these, 138,447 were children under the age of 5 years (35% of the total). In the 100 largest cities, 54,339 people were hospitalized (14% of the total) and 28,594 of these were children aged between 0 and 5 years. This means that children under the age of 5 represented 53% of hospitalizations for diarrhea in the largest cities and 21% of these hospitalizations in Brazil. Children from this age bracket constitute the group most vulnerable to diarrhea, and consequently, its greatest victims, in comparison with the population as a whole. Recent2 studies suggest an association between the incidence of diarrhea during the first 2 years of life and a downslide in cognitive performance later on in childhood. This reinforces the fact that diseases associated with a lack of appropriate sanitation affect not only the current population, but also have repercussions for the future of our society. If the leap to become a developed country must involve improvement in the quality of education, then basic sanitation is a key assumption to ensure that the cognitive capacity of the population will not be impaired. Basic Sanitation Market in Brazil Taking treated water and a sewage collection network to all Brazilian households is a subject that has been gaining increasing space in discussions held by society, on the agenda of entrepreneurs, executives and in all spheres of government. In June 2013, the Ministry of Cities, through the National Department for Environmental Sanitation, regulated the National Plan for Basic Sanitation (Plansab), with guidelines of investments for the sector with the intention of achieving

1

Study: Impacts on Health and on the Unified Health System Resulting from Exacerbations Related to an Inadequate Sanitary Sewage System of the 100 Largest Municipalities between 2008 and 2011. 2 Study: Association of early childhood diarrhea and cryptosporidiosis with impaired physical fitness and cognitive function four-seven years later in a poor urban community in northeast Brazil. Guerrant DI, Moore SR, Lima AA, Patrick PD, Schorling JB, Guerrant RL.

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the universalization of sanitation by 2033, ensuring better living conditions, more health for the population and greater environmental preservation. The challenges are enormous and range from deficient structures to a shortage of specialized labor to work in the sector. Since 2004, private companies have helped the Government to fill these gaps, acting in the sector by means of concessions – either full or partial - or Public-Private Partnerships (PPPs). According to the diagnosis of water and sewage services conducted by the National Sanitation Information System (SNIS) in 2013, the national average percentage of the population supplied with water is 82.5%.

Water coverage — % of Population Average: < 40% 40–60% 60–80% 80–90% > 90% Source: SNIS 2013

The study also reveals that 48.6% of the Brazilian population is provided with sewage collection services, but only 39%of the generated sewage is treated. It is important to emphasize that the study considers the volume of sewage generated equivalent to the volume of water consumed.

Sewage coverage - % Population Average: < 10% 10–20% 20–40% 40–70% > 70% Source: SNIS 2013

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Sewage Treatment - % of Generated sewage(1) Average: < 10% 10–20% 20–40% 40–70% > 70% (1) Considering that the total sewage corresponds to the water consumption Source: SNIS 2013 (National Sanitation Information System)

The fight against chronic deficit In Brazil, the rate of water losses in distribution is among the most critical, a far call from the reality of more developed countries such as Australia, USA and Canada. According to SNIS 2013, the average volume of loss of water is 36.9%. The enormous volume of losses in water distribution and inadequate sewage treatment recorded in the public service delivery system are among the more negative consequences of loss efficiency of the service. rate of losses in distribution — % Volume Available

Average: < 20% 20.0–30.0% 30.1–40.0% > 40.0%

Source: SNIS2013

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rate of losses in water distribution

Source: Trata Brasil Institute; SNIS 2013

The Company presented a decrease in the consolidated rate of losses in distribution, even after the consolidation of the concessionaires acquired by Aegea, where the indicator was above the average of the existing concessionaires; the rate closed at 32.9% in 2013 compared with 32% in 2014. The concessionaires Águas de Matão, Águas de São Francisco, Águas de Confresa, Águas de Diamantino, Águas de Novo Progresso, Águas de Guarantã, Águas de Matupá and Águas de Sinop were incorporated in the period, and the rate was higher than 50% in all events. The loss rate of entrant companies is generally higher than in mature companies. Initially, when the rate has a trend and as the Company adopts its management standard according to the activities, the rate of each concessionaire is timely reduced.

Entrants Aegea Saneamento - Consolidated

The low coverage, on the other hand, demonstrates that there is an enormous base to be served and a demand for high investments to achieve the universalization of services. As it is a municipalized market, the power of the concession belongs to the municipality, a situation that transforms the dispersed market into a huge universe of opportunities. On a greater or smaller scale, the municipalities will seek resources to face this challenge. It is a set of circumstances that demands a leap in development in the sanitation sector through the model practiced by private companies.

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According to Plansab, investments of around R$508.5 billion will be required in structural and structuring measures in the sector until 2033, so as to achieve the following targets for sanitation in the country: 

Rate of Water Coverage: 99%



Rate of losses in water distribution: 31%



Rate of treatment of collected sewage: 93%

It is believed that investments in structural measures correspond to the total sums invested in actions relating to the expansion of water production and distribution; from sanitary landfills and sorting and composting plants and also to a portion of 30% of investments in replacement in these components. For urban drainage the structural measures correspond to 30% of the investments in expansion and to 70% of the investments in replacement, in which the greatest liabilities are to be found, depending on the methodology used. The estimate for investments in actions composed of structural measures, until 2033, is about R$283.8 billion, representing 55.8% of the necessary total. The supplementation of the estimated total values is considered for the structural measures related to the four components of basic sanitation, subtracted from the values for the structural measures. Estimated investments of R$224.7 billion will be required until 2033 in measures of a structuring nature (corresponding to 44.2%of the total investments necessary. With regard to the origin of investments, the study estimates that 59% of the resources (R$299.9 billion) originate from the federal agents and R$208.6 billion are contributed by international agencies, service providers, state and municipal budgets and the private sector, in the form of direct investments or of compensation.

Strong presence of Public Companies

State Companies 3,891 municipalities Municipal Companies - 890 municipalities Private Companies 297 municipalities

Source: Associação Brasileira das Concessionárias Privadas dos Serviços Públicos de Água e Esgoto (ABCOH)

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ECONOMIC AND FINANCIAL PERFORMANCE DRE (´000)

2014

2013

A%

Net operating income

599,511

491,674

21.9%

Income from construction

370,489

209,081

77.2%

Operating costs and expenses

(360,733)

(306,816)

17.6%

Construction cost

(370,489)

(209,081)

77.2%

EBIT - Operating income

238,778

184,858

29.2%

Financial income (loss)

(65,793)

(46,196)

42.4°%

Taxes on profits

(60,747)

(58,090)

4.6°%

112,238

80,572

39.3%

Net income

Net income Net operating income

Fiscal year ended December 31,

Consolidated (R$ million) Water supply services

2014 480,327

2013 420,410

∆% 14%

41,889

35,650

8%

164,835

99,147

66%

6,867

9,846

-30%

477

-

100%

370,489

209,081

77%

1,064,884

774,134

38%

Deductions from gross income

(94,884)

(73,379)

29%

Net operating income

970,000

700,755

38%

Other indirect water services Sewage services Other indirect sewage services Income from services Income from construction Total gross income

The Company’s income are preponderantly composed of the collection of tariffs from users, due to the rendering of public water and sewage services in the sphere of concession agreements. Moreover, within the sphere of the Public-Private Partnership (Águas de Mirante S.A.), the Company receives the transfer of tariffs paid to the public authority that is its partner. Owing to the characteristics of the market in which it operates, the Company’s revenues are highly predictable, and have a low rate of default, which enables it to obtain constant growth indices in its operating income.

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The Company also measures construction income related to the construction or improvement services under the service concession agreement. As established by IFRIC 12 and in Technical Interpretation ICPC01 – Concession Agreements and correlated to IAS 11 and in CPC 17 – Construction agreements, the construction income is recognized with a basis on the stage of conclusion of the works executed. The right of use of infrastructure derives from expenditures made during the improvement work in exchange for the right to charge the users for the use of the infrastructure. This right is comprised by construction cost plus profit margin and loan costs attributable to this asset. The subsidiaries estimated that a possible margin is irrelevant, considering it zero. The Company’s net operating income, excluding construction income, went from R$491.7 million in the period ended December 31, 2013 to R$599.5 million in the period ended December 31, 2014, representing an increase of 21.9%. The main reasons for the variations in the Company’s net operating income were: (i) Enhancement of the revenue generation capacity through conquest/acquisition: Águas de Matão (Matão-SP), Águas de São Francisco (Barcarena-PA), Águas de Confresa (Confresa-MT), Águas de Diamantino (Diamantino-MT), Águas de Novo Progresso (Novo Progresso-PA), Águas de Guarantã (Guarantã do Norte-MT) , Águas de Matupá (Matupá-MT) and Águas de Sinop (Sinop-MT). The new concessions were responsible for 16.0% of this increase, or R$ 17.3 million; (ii) Increase in water treatment and distribution revenue, and in revenue from sewage collection and treatment in existing contracts due to the maturation of operations, efficiency gains and contractual adjustments referring to contractual milestones and/or annual adjustments based on inflation indices were responsible for 67.1% of the increase or R$ 72.3 million. (iii) Here we individually highlight Águas do Mirante, responsible for 16.8%, or R$ 18.2 million of this increase. This was due mainly to the completion of the work on contractual benchmarks of the concessionaire, which in 2014 reached 100% of sewage treatment collected in the city of Piracicaba (SP).

OPERATING PERFORMANCE Economy Economy

2014

2013

∆%

Water

698,890

554,990

25.9%

Sewage

547,955

476,409

15.0%

1,246,845

1,031,399

20.9%

Total

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The number of households supplied with Water rose 25.9% between 2014 and 2013. The arrival of concessionaires Águas de Matão and Águas de Sinop explains 22.0% and 29.5% respectively of such increase. During the period we emphasize the evolution of the concessionaire Prolagos, with significant individual growth of 9.8% resulting from the conclusion of works on the distribution network and effective performance of the commercial area. The number of households receiving Sewage services rose 15.0%. The new concessionaire Águas de Matão explains 43.9% of the increase. We emphasize the individual growth of 10.3% exhibited in the period by the concessionaire Prolagos and 10.1% in Águas Guarrioba, due to the execution of expansion works on the sanitary sewer system, the obtainment of new connections.

Invoiced Volume The increase in the client base (economies) consequently entailed a rise in the invoiced volume of water in 2014, which grew 16.3% over the prior year, and the volume of sewage, which grew 11.1%.

Water (‘000)

2014

Total invoiced volume (m³)

2013

Δ%

108,204

93,046

16.3%

Residential

95,193

82,646

15.2%

Commercial

8,580

6,624

29.5%

215

106

102.8%

4,216

3,670

14.9%

Industrial Public Sewage (´000)

2014 71,904

Total invoiced volume (m³)

2013 64,713

Δ% 11.1%

The new concessionaires account for 70.4% of the increase in water volume and 71.2% of the volume of sewage. Default The 180-day default rate increased 1.48 percentage points from 3.87% in 2013 to 5.35% in 2014 to 5.35% in 2014, and the Company is now working on special campaigns to encourage negotiations and participation in direct debit arrangements, focusing on groups of major debtors based on the segmentation of the debtor portfolio. We also emphasize the default generated by some public clients, of relevant representativity. In general, the efficiency of the commercial policies used by the company has shown in the gradual decrease of this indicator.

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—Default - 180 days

OPERATING COSTS Operating costs

Fiscal year ended December 31,

(Amounts expressed in thousands of reais) Cost of services rendered

2014

2013

(208,706)

(179,063)

16.6%

Construction costs

(370,489)

(209,081)

77.2%

Cost of services rendered

(579,195)

(388,144)

49.2%

∆%

The cost of services account recorded an increase of R$190.7 million, or 49.2%, rising to R$388.1 million in 2013, from R$579.2 million in 2014. As a percentage of net operating income from sales and services, the cost of sales and of services rose to 55.4% in 2013 from 59.7% in 2014. This increase in the cost of services was mainly due to the following factors: (i)

(ii)

An increase in construction costs of R$161.4 million, or 77.2%, over the prior year. Such increase is directly related to the increase in investments in water and sewage works in 2014; In 2014, 8 new concessionaires started the activities, and they were responsible for R$ 23.1 million out of such increase

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OPERATING EXPENSES Operating expenses

Fiscal year ended December 31,

(Amounts expressed in thousands of reais) Administrative and general expenses

2014 (134,360)

2013 (110,486)

∆% 21.6%

Research and development expenses

(17,924)

(16,829)

6.5%

Equity in net income of subsidiaries

1,228

1,195

2.8%

Other operating income (expenses)

(971)

Operating expenses

(152,027)

(1,633) -40.6% (127,753)

19.0%

The balance of the operating expenses account increased 19.0%, or R$24.6 million, climbing from R$127.8 million in 2013, to R$152.0 in 2014. The entrant companies were responsible for R$ 9.4 million, or 38.5%. The development research account has an increase of R$ 1.1 million, or 6.5%, and is the part of the Company responsible for nurturing infrastructure projects in Private-Public Partnerships and also in concessions, and also helps to strengthen the structure of management and control. The administrative expenses of the Holding suffered a decrease of R$ 4.3 million, or 7.1%, from R$ 25.1 million in 2013 to R$ 20.8 million in 2014. Net equity in the earnings of subsidiaries in the year ended December 31, 2014 amounted to R$1.2 million and R$1.2 million in the year ended December 31, 2013. The income determined in the year 2013 resulted from the activities of Nacional Águas, a subsidiary of the Company that provides sanitation systems management services.

EBITDA and EBITDA MARGIN The table below presents the reconciliation between EBITDA and net income/loss disclosed in the Company’s financial statements for the years ended December 31, 2014 and 2013. Breakdown of consolidated EBITDA (Amounts expressed in thousands of reais) (=) Net income for the year

Fiscal year ended December 31, 2014 2013 112,238 80,572

(+) Income and social contribution taxes

60,747

58,090

(+) Financial expenses, net

65,793

46,196

(+) Amortization and depreciation

56,158

39,329

294,936

224,187

(=) EBITDA

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On consolidated bases, the Company’s net leverage, measured by the net debt/EBITDA ratio, was only 2.77 times in 2014 against 1.95 times in 2013. In December 2014, the Company had in its cash holding a total of 2.25 times its total short-term allocated debt. The EBITDA margin in 2014 was 49.2%, against 45.6% in 2013. FINANCIAL INCOME (LOSS) Consolidated net financial income (Amounts expressed in thousands of reais) Financial income Interest on interest earning bank deposits

2014

2013

69,488 53,708

38,389 23,385

14,699

14,680

1,081

324

(135,281) (116,605)

(84,585) (69,738)

(1,562)

(3,833)

(562)

(554)

Banking expenses and commissions

(6,002)

(5,345)

Expense with grant obligations

(5,108)

(4,410)

Other

(5,442)

(705)

(65,793)

(46,196)

Interest and fines on late payment of invoices Other Financial expenses Interest on loans, financing and debentures Interest on late payments Expenses with IOF

Net financial expenses

Financial income The financial income account exhibited an increase R$31.1 million, or 81.0%, rising to R$38.4 million in 2013, from R$69.5 million in 2014. The Company’s financial income consists of results obtained mainly in the management of its cash, funds available, money market investments and from interest received on the late payment of water supply and sewage income. The main factor that contributed for this increase was the investment of the loans and financing obtained in the period, as well as cash surpluses. Financial expenses The financial expenses account exhibited an increase of R$50.7 million, or 59.9%, rising to R$84.6 million in 2013, from R$135.3 million in 2014. This variation reflects the increase in loans and financing in the period. The costs of loans attributable to the acquisition, construction or production of an asset were qualified as part of the cost of assets, and recorded in the intangible assets account as acquisition

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instead of financial expenses. The capitalized costs of loans totaled the sum of R$15.9 million in the year ended December 31, 2014, and R$16.8 million in the year ended December 31, 2013. Income and social contribution taxes In the fiscal year ended December 31, 2013, the Company had total expenses with income taxes in the amount of R$58.1 million, compared with expenses in the amount of R$60.7 million in the fiscal year ended December 31, 2014, representing an increase of R$2.6 million, or 4.6%, due to earnings before income tax of the respective periods.

INVESTMENTS In 2014, conducted by an exclusive team, new business prospecting received investments of R$17.9 million, an increase of 6.5% against 2013, R$16.8 million. The area now works with a portfolio comprising 82 projects, representing total of 3.6 million in savings from 12 Brazilian states. The partnerships with local players contribute to bring down costs associated to the process for origination and maintenance of the portfolio. Prospecting and projects occur through the development of EIPs – Expression of Interest Procedures. The EIP is the instrument currently used by the Company to promote infrastructure projects in public-private partnerships and also in concessions. The system compensates the lack of time, resources and know-how of the public sector to carry out feasibility studies that are usually highly complex. Consists of the public offer of studies by private companies interested in having the municipalities structure themselves to prepare future service concession agreements in the sanitation sector. After the study approval process, the municipal government is able to create the specific legislation, prepare the notices with invitation to bid and organize the public bid, open to all companies. The firm that draws up the study competes for the concession on an equal footing. The period of dedication up to the conclusion of the bid may be as long as two years. On December 31, 2014, the Company had 37 subsidiaries (direct and indirect) and 1 jointlycontrolled subsidiary, with 9 of these subsidiaries having been established or acquired during this year. The total amount of investments of the Company in subsidiaries and jointly-controlled subsidiary and associated companies is R$ 593.2 million as of December 31, 2013 and as of December 31, 2014 such amount corresponded to R$ 743.5 million. For further details, please see the table below:

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% Interest Subsidiary

12/31/2014

12/31/2013

Direct Indirect

Direct Indirect

99.99%

-

99.99%

-

99.99% 99.99% 99.99% 51.00%

-

99.99% 99.99% 99.99% 51.00%

-

60.00%

-

60.00%

-

99.99% 99.99% 99.99%

0.01% 0.01% -

99.99% 99.99% 99.99%

-

99.99%

0.01%

-

-

99.99% 70.00% 99.99% 99.99%

0.01% 0.01% 0.01%

-

-

99.99%

0.01%

-

-

51.00% 99.99% -

51.00% 51.00% 100.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00%

99.99% 0.01% -

99.99% 100.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00%

Subsidiaries Prolagos S.A. - Concessionária de Serviços Públicos de Água e Esgoto Águas Guariroba S.A. Engepav Engenharia e Comércio Ltda. Águas do Mirante S.A. Concessionária Águas de Meriti Ltda. Águas de Porto Esperidião Saneamento e Distribuição Ltda. Águas de Matão S.A. GSS - Gestão de Sistemas de Saneamento Ltda. LVE - Locadora de Veículos e Equipamentos Ltda. Águas de São Francisco Concessionária de Saneamento S.A. Águas de Sinop S.A. Águas de São Francisco do Sul Ltda. Águas de Guarantã Ltda. Águas de Matupá Ltda. Águas de Novo Progresso - Tratamento e Distribuição Ltda. Nascentes do Xingú Investments S.A. Águas de Diamantino S.A. Águas de Confresa S.A. Nascentes do Xingú Participações e Administração S.A. Silvegli Participações Ltda. Águas de Barra do Garças Ltda. Águas de Sorriso S.A. Águas de Poconé S.A. Águas de Primavera S.A. Águas de Campo Verde S.A. Águas de Marcelândia S.A. Águas de Vera S.A. Águas de União do Sul S.A. Águas de São José S.A. Águas de Santa Carmem S.A. Águas de Nortelândia S.A. Saneamento Básico de Pedra Preta S.A. Saneamento Básico de Jangada S.A.

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APA - Água de Peixoto de Azevedo S.A. Águas de Carlinda S.A. Águas de Cláudia S.A. Águas de Jauru Abastecimento e Distribuição S.A.

-

51.00% 51.00% 51.00% 51.00%

-

51.00% 51.00% 51.00% 51.00%

-

50.00%

-

50.00%

Jointly-controlled subsidiary Nacional Águas e Saneamento Ltda.

CONSOLIDATED INDEBTEDNESS Aegea ended December 2014 with a balance of cash and cash equivalents and securities (the latter money market investments linked to the settlement of the debentures) in the total amount of R$527.7 million. Aegea’s gross debt on the same date reached the amount of R$1.3 billion. The composition of the gross debt and net debt is presented below. Consolidated indebtedness

Fiscal year ended December 31,

(Amounts expressed in millions of reais) Cash, cash equivalents and investments

2014

2013 528

551

1,344

987

Short-term Gross Debt

234

199

Long-term Gross Debt

1,110

788

Net debt

816

436

Net debt/Ebitda

2.77

1.95

Gross debt

Debt Distribution Profile

Short term Long term

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RELEVANT EVENTS Teleconference of Quarterly Results In 2014, the Company held three teleconferences of results, to announce and to comment on operational and financial performance for the respective period, in:  May 21, 2014: Income in the First Quarter of 2014 (1Q14)  August 20, 2014: Income in the Second Quarter of 2014 (2Q14)  November 26, 2014: Income in the Third Quarter of 2014 (3Q14) Rating In August 2014, the risk rating agency Fitch Ratings has affirmed the rating 'A + (bra)' with a stable outlook for Aegea. According to the note, the agency informs that the affirmation of Aegea’s rating reflects the low risk of business in the basic sanitation area, characterized by high predictability of operational cash flow management. Also according to the note, “The company has expanded its activities without any pressure on the financial profile and benefits from the ever-greater diversification of assets in the industry”. Company Aegea Saneamento e Participações S.A.

Type Long-term National

2010

2011

-

-

2012

2013

2014

A (bra) A+(bra) A+(bra)

Prospect Stable

PERSONNEL MANAGEMENT On December 31, 2014, Aegea had 2,258 employees. Training Aegea executes the management of its training at the Aegea Administrative Center (CAA), which brings together specialists from different areas, and has its operational base in the city of Santa Bárbara d’Oeste, in São Paulo state. Being active in the private sanitation segment – since it is a relatively recent formation – Aegea opted to proceed with the internal qualification of its employees. For such, the Company structured a customized vocational training program, created to cater both to current operations and new concessions. The main tool used by Aegea to train its employees is Academia Aegea, which offers trainings focused on knowledge of the main processes regarding water supply and sanitation. For the training of managers, Aegea focuses on processes related to the management of the sanitation business following the model designed by the actual Company. Apart from the Academy, Aegea also has the following training programs: Graduate/MBA – intended for the qualification of managers, focused on the development of leadership skills and on adopting the operational model.

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Graduation degree – Aegea has structured its own undergraduate level course, in partnership with the Technological Institute of Aeronautics (ITA), with the Federal University of Mato Grosso do Sul (UFMS) and the Estácio University in Campo Grande – in order to update and train the employees with a good leadership profile in knowledge of the main sanitation processes. Trainee Program – the trainee program is focused on young people coming out of Engineering courses, who shall have the opportunity of getting to know different areas within the company and, if taken into the workforce, can acquire extra skills to become technical managers. Training – dedicated to the qualification of employees who take to the field, this training program is offered to those who have completed high school and are already able to work at a water station. For those wishing to join but who do not meet the basic requirements, Aegea offers – at the facilities of the subsidiaries – elementary and high school education. Behavioural Training – organized for teams that are directly related to the user, this training offers lectures that address motivational techniques, quality of service, and leadership. The managers are also advised about how to deal with the Press, and how to represent the Company before the community. In 2014, the Company invested over 26 thousand hours of training, as shown in the table below: Total hours of training

Company Aegea Saneamento

5,542

Aguas de Barra do Garças

1,038

Águas de São Francisco

896

Águas do Mirante

336

Engepav Engenharia

154

GSS - Gestão de sistemas de saneamento

1

Prolagos

890

Nascentes do Xingu

659

Águas Guariroba

16,621

OVERALL TOTAL

26,137

CORPORATE GOVERNANCE Linking the company to the highest standards of corporate governance is part of the assumptions of the restructuring that produced Aegea, and that have been followed very strictly over these years of activity to guarantee sustained growth and the perpetuation of its ventures. Consequently, the governance model in place is being constantly improved, always seeking alignment between the interests of the shareholders and the Company’s long-term objectives, incorporating best practices observed in the market.

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To control, with efficiency and discipline, the operations of the business units, Aegea has an experienced executive team and also a board consisting of professional managers with vast knowledge of the business, always seeking alignment between the interests of the shareholders and the best market practices. In addition, among the distinctive factors of the governance policies followed by Aegea, there is participative management, which ensures that the interests of all stakeholders of the company are incorporated into the general strategic plan of the company, which is prepared every five years and reviewed annually.

Board of Directors The Board of Directors establishes corporate policies, supervises management activities, approves strategic operations, and orders the Executive Board in execution of their decisions and also in strategic planning. Responsible for taking strategic decisions for the Company and its associated companies, the Board is the higher governance body and also has its performance model set out in the Internal Regulation of the Aegea’s Board of Directors – RICA. On December 31, 2014 the Aegea’s Board of Directors is comprised by the following members: Name

Position

Hamilton Amadeo

Chairman of the Board of Directors

Anastácio Ubaldino Fernandes Filho

Member

André Mastrobuono

Member

Antônio Kandir

Member Independent Member

Eduardo José Bernini Luiz Serafim Spinola Santos

Member

Thomas Daniel Brull

Member

Hamilton Amadeo – Civil engineer, has worked successfully since 1995 with several regulatory agencies, responsible for the concept and coordination of the implementation of performance models aimed at concessionaires of public services, with significant results in expanding the profitability of the companies. Has solid experience in acquisition of controlling stakes in concessionaire companies on the secondary market and participation in public biddings of concessionaires. Before joining the Equipav Group in 2004, he had the title of Director in important infrastructure companies. Graduated in Civil Engineering at the Engineering School of Lins, in Lins, State of São Paulo.

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Anastácio Ubaldino Fernandes Filho – Graduated in Electrical Engineering at the Pontifical Catholic University of Minas Gerais (PUC/MG), then pursued graduate studies in Economical Engineering at the Fundação Dom Cabral. Since 2006, he has been the CEO at Kepler Weber S/A. He was the Finance Administrative Director and Chief Operating Officer at the Companhia AIX Participações, CEO of Braspérola Indústria e Comércio S/A and Companhia Vale do Rio Doce. He has been on the Board of Directors of the following companies: Rio Doce Limited, Vale do Rio Doce Alumínio, Rio Doce Geologia, Aço Minas Gerais, Bahia Sul Celulose, Salobo Metas, Bolsa de Valores do Rio de Janeiro - Câmara de Liquidação e Custódia, Instituto Brasileiro de Relações com Investidores (IBRI) and Associação Brasileira das Companhias Abertas (ABRASCA). André Mastrobuono – He has a Bachelor’s Degree in Engineering from the University of São Paulo (USP), Mr. Mastrobuono is a Master in Business Administration (MBA) from the University of Chicago, Graduate School of Business. Between 1996 and 2002 he worked for McKynsey Co. as an Associate Principal, and then, between 2002 and 2006 he was the Vivo’s General Director. He also worked as the CEO at TELEMIG CELULARES & AMAZONIA CELULAR, PARMALAT DO BRASIL S.A., SANTA ELISA VALE BIO ENERGIA S.A., and SAN ANTONIO INTERNACIONAL, and is a member of the Board of Directors of the companies: ACEL Associação das Operadoras de Celular - President of the Board (2007/2008), and L. Dreyfus C. - SEV BIO ENERGY S.A (2009/2010). He is currently the CEO at URBPLAN S.A. Antonio Kandir – Mr. Kandir has a Bachelor’s degree in Mechanical Engineering from the Polytechnic School of São Paulo University (POLI-USP), as well as being a Master in Economics from the University of Campinas (UNICAMP) and Doctor in Economics, also from UNICAMP. Mr. Kandir was the State Minister of Planning and Budget, a Federal Deputy, President of the National Council of Privatization, Brazilian Governor at the Interamerican Development Bank – IDB, Special Secretary for Economic Policy, President of the Institute of Applied Economic Research (IPEA), a Director of Kandir e Associados S/C Ltda and study coordinator at Itaú Planejamento e Engenharia. He also worked as a professor at the University of Campinas (UNICAMP), at the Pontifical Catholic University of São Paulo (PUC/SP) and also an Assistant Faculty Fellow at Notre Dame University. Over the last ten years, he has participated in Boards of Directors and also managed several investment funds. Between 2005 and 2008, he was a member of the Board of Directors of Datasul S.A., a software development company specialized in business management. He was also a member of the Board of Directors at Medial Saúde S.A., a company of the health sector, between 2006 and 2008, and CSU Cardsystem S.A., specialized in outsourcing the processing of electronic means of payment, in the period from 2011 to 2012. He is currently the Partner and Director of GG Capital Investimentos Ltda, a company that provides financial advisory services at Governança & Gestão Investimentos, a company that provides asset management services. He also participates in the Board of Directors of GOL Linhas Aéreas Inteligentes S.A., a Brazilian airline, and Companhia Providência Ind. Com, specialized in the production and commercialization of plastic products. At the Company, he is a member of the Personnel Management Committee.

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Eduardo José Bernini – Mr. Bernini is an economist, graduated from the Economics and Business School of the University of São Paulo (FEA/USP), and has pursued further courses at the University of Virginia, at the University of California at Berkeley, at the Brazilian Institute of Corporate Governance (IBGC) and also at FIPECAFI. Member of the Editorial Board and columnist at ‘Smart E-nergy’ magazine, and a guest professor at the courses of Corporate Governance for Regulated Business and also Regulation and Business in Energy, at the Getúlio Vargas Foundation in Company, at IBP-Pós, at ABDIBEduCorp and also at the IBGC. He is a Board member of a board certified through Experience, by the Brazilian Institute of Corporate Governance (IBGC, 2009) and also has an MBA in Corporate Governance from FIPECAFI (2013). He was the CEO of the AES Group in Brazil, of EDP-Brasil, VBC Energia and Eletropaulo, as well as Deputy Secretary in the Ministry of Mines and Energy (1994) and in the Government of the State of São Paulo (1995/1996). He is currently a member of the Administration Board at DESA – Dobrevê Energia S.A. and the Abrinq Foundation for the Children and Adolescents’ Rights, and the Committee of Management and Governance of Instituto Fernand Braudel for World Economics, also having been a Board member of the Board of Directors of InPar S.A., Usina Moema Participações and also several companies of the energy sector (Eletropaulo, CPFL, CESP, Comgás, CERJ, Bandeirante Energia, companies where he worked as a Vice-President and as the President of the Board of Directors). In the period from September 1, 2010 and April 30, 2011 he was the Associação Brasileira da Indústria Química (ABIQUIM). Luiz Serafim Spinola Santos – Mr. Santos has a Bachelor’s degree of Federal University of Rio de Janeiro (UFRJ), became a Master in Production Engineering at COPPE/UFRJ, and went to graduate-level courses in business management at INSEAD (France), as well as further courses focused on finance and investments, at London Business School. He is currently an independent member of the Board of Directors of Metalúrgica Gerdau, Cremer and João Fortes Engenharia. He is also vice-president of the Brazilian Association of Listed Companies (ABRASCA), presiding over the Self-Regulation Council for Open Companies, of this institution, and also represents this institution on the Regulation Board for Capital Markets, of ANBIMA. He is a member of the Brazilian Institute of Corporate Governance (IBGC). In 2014 he was sworn in as one of the members of the recently established Mergers and Acquisitions Committee (CAF). He was a partner at UBS Capital Americas (1998/2002) and Brasilpar (1981/97), and also participated in the management board of Fitch do Brasil, between 1994 and 2002. Between 1977 and 1981, he was the superintendent of the Securities Commission (CVM), being head of Market Relations and Relations with Intermediaries. Between 1974 and 1977 he worked at the National Economic and Social Development Bank (BNDES), as Operations Supervisor, and from 1972 to 1974 he worked at the Bank of Boston, as International Operations Manager. He has been on the Boards of the following companies: Líder Taxi Aéreo, Varig, Springer, Medidata Informática, FPI-Food Processing International and the Sudameris Bank. He is a partner of Flex Parque SPE Ltda and Cullen Development Inc. (BVI). Thomas Daniel Brull – He was the Restructuring Director at Sharp S.A.; Director for Planning, Control and RI at TecToy S.A. where he led the corporate restructuring of the companies and going public (IPO); VP for Finance, Planning and Business Management at the Grupo

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Banderantes de Comunicação (BAND), creating the activity of investor relations; VP for Finance at ALONET S.A., responsible for the valuation of the company; CFO and IR at EDP-Energias do Brasil and also CFO and DRI at Tecnisa, where the main results obtained can be considered as being the follow on (subsequent raising of shares), issue of debentures and CCBs, sale of equity, and implementation of a new model for cash management. Mr. Brull has a Bachelor’s degree in Business Management at the Getúlio Vargas Foundation (FGV) and is a master in financial management from the Economics and Business School from São Paulo University (FEA/USP) and Master in Business Administration at Indiana University in Bloomington. He is a head professor in finance and accountancy for MBA courses at Business School São Paulo.

Executive Board Apart from implementing the Board decisions, the Executive Board is also responsible for management, planning and operational performance of the Company. As of December 31, 2014, the Executive Board consisted of the following directors: Name

Position

Hamilton Amadeo

CEO

Felipe Bueno Marcondes Ferraz

Director

Flávio Martins Tarchi Crivellari

CEO and Investor Relations Officer Director

Radamés Andrade Casseb

Hamilton Amadeo – Civil engineer, has worked successfully since 1995 with several regulatory agencies, responsible for the concept and coordination of the implementation of performance models aimed at concessionaires of public services, with significant results in expanding the profitability of the companies. Has solid experience in acquisition of controlling stakes in concessionaire companies on the secondary market and participation in public biddings of concessionaires. Before joining the Equipav Group in 2004, he had the title of Director in important infrastructure companies. Graduated in Civil Engineering at the Engineering School of Lins, in Lins, State of São Paulo. Felipe Bueno Marcondes Ferraz – Mr Ferraz has a Bachelor’s degree in Mechanical Engineering from the State University of Campinas (UNICAMP), and started the activities by developing optimization processes at the production lines at Rigesa MeadWestvaco (Valinhos, State of São Paulo), leading decisions about investments, divestments and productive capacity of the production plant of MeadWestvaco Healthcare Packaging at Mebane (North Carolina, United States) and Manaus (State of Amazonas). He has been at Aegea since 2007, and was responsible for the process of operational turnaround at Prolagos – raising cash generation and relationships with all interested parties in this business, extension of the contract of concession, extension of the water and sewage networks, with the consequent expansion of the client base. He led the New

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Business area of the Company, and is now in charge of the Aegea Administrative Center (CAA), which includes departments such as Human Resources, Personnel Management, Operational Treasury, Information Technology, Income Security, and Financial Management. The CAA will be responsible for business uniformity, allowing greater synergy between the current companies and the new acquisitions. Flávio Martins Tarchi Crivellari – Mr Crivellari is an economist, who developed his professional career in concessionaires of public services and Government institutions before he was taken on by the Equipav Group. In the organization, he is responsible for operations involving mergers and acquisitions, harnessing of resources, financial management, corporate governance, planning and treasury management. Member of the Financial Committee of ABDIB, ABCON and the Sanitation Work Group of the BNDES. Graduate Studies in Economic Theory from the Getúlio Vargas Foundation (RJ) and also from the Federal University of Rio de Janeiro (UFRJ). Radamés Andrade Casseb – Mr. Casseb is a technology professional who has held positions of leadership in infrastructure companies and has also obtained significant experience with activities concerning regulated services. He took over as Operation Director at Aegea after a period at the helm of the operational area at the Equipav Group. Has a Bachelor’s degree in Information Technology, he has an academic background in Infrastructure from the Getúlio Vargas Foundation of São Paulo (FGV/SP).

Committees To discuss the most relevant issues and obtain greater firmness in establishment of targets, creation of policies, and decision-making, the Management of Aegea has set up four committees. These are: Auditing, Risks and Finance Committee Objective: Support the Administration Board to monitor issues concerning financial reports, including financial statements. Members: Luiz Serafim Spinola Santos, Ronald Schaffer and Thomas Daniell Brul.

Personnel Management Committee Objective: Support the Board of Directors in relation to jobs and salary policies. Members: Antonio Kandir, Flávio Martins Tarchi Crivellari, Mário Roberto Amorim Baltar and Santiago Crespo.

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Project Assessment Committee Objective: Support the Board of Directors in assessment of assumptions and risks of projects and investments for the Company. Members: Felipe Bueno Marcondes Ferraz, Jorge Carlos Amim and Yaroslav Memrava Neto.

Regulation Committee Objective: Support the Administration Board in regulatory issues, as according to the Internal Regulation. Members: Ana Cândida Tocheton Cristofoletti, Eduardo José Bernini and Guillermo Deluca. SOCIAL RESPONSIBILITY Aegea’s social responsibility is one of the pillars of its performance strategy. Besides the programs and actions developed for this purpose, which are becoming stronger every year, social management is completely inserted in its operating model. A fundamental point in this model is that the relationship with society is treated as an asset: To Aegea, both the client that engages the company’s services – the municipal government, in the case of concessions – and the user of its services, are part of the community impacted by its activity. The Company strives to act through: Respect to client: Concessions have contracts for defined periods and the rendering of quality services is one of the guarantees of the continuity and renewal of agreements signed by the parties; Respect to user: From the Company’s perspective, as sanitation is an essential public service, users should receive the best service; Respect for the community: With each new acquisition, the concessionaire of Aegea becomes part of local life and gets involved in the expectations and demands of residents, who become users of the company. As it positions itself as an essential service provider, the Company has the commitment of ensuring more health and quality of life for users, providing treated water and treating all the sewage that it collects. Respecting all the links that form this important network of relations is, therefore, an essential condition for the success of Aegea’s operations. See below some examples of projects supported by Aegea and their contributions to the development of human, environmental and social capital:

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Itinerant Service – The aim here is to serve the needy population, beyond the same services offered in conventional shops. This scheme offers special conditions for settlement of debts, recouping clients and giving them the benefit of Social Fees. This Project started in 2010 and by December 2014 a total of 17,634 people had been served and 26,098 services had been provided. Afluentes Program – The aim here is to establish an open channel for communication with community leadership. We now have direct contact with 435 community leaders. Between 2009 and 2014, over 12,000 requests of community leaders were catered to. Winter Clothing Campaign – The aim here is to encourage employees, their families and partners, to get involved in social work for the needy community. Between 2006 and 2014, a total of 296,125 thousand units of clothing, footwear and blankets were collected and handed over to financially challenged families. Social Fees – The benefit of Social Fees, according to Municipal Law No. 3,928, of December 2001, means that low-income families can receive treated water with a discount of 50%. This company helps 5,890 clients with this scheme for Social Fees. The Concession Notice sets a limit of 3% of the total of all connections. Saúde Nota 10 – the aim here is to make the student community aware of the benefits and importance of sanitation, using special teaching materials, puppet shows, launch of a special competition, and the awarding of prizes to the best placed entrants. This Program served 140 state and private schools, benefiting more than 127,726 thousand students between 2006 and 2014. De olho no óleo – The aim is to help people become more aware through the students, as also to offer more options for the appropriate disposal and recycling of used oil. Between 2011 and 2014, a total of 40,820 students participated in the program, collecting over 8,000 liters of oil.

Sanear é Viver – The main aim here is to encourage teachers to work upon sanitation issues in the classroom, thereby helping to build awareness of the importance of treated water and sewage for health. In the period between 2009 and 2014, 741 teachers have visited the company and have been trained by this program.

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Água Solidária – This Sociological Project was introduced in August 2011, seeking to serve areas with extreme social vulnerability, such as shantytowns (favelas) and other areas of poverty. Most of the families who reside in these locations do not have access to water supply or sewage collection services. Through this project, some 1,950 clients were benefited with social fees between 2011 and 2014. Food parcels were also given to 863 families who kept up to date with their water bills over three months, which helped about 1,720 people.

Curso das Águas – The company opens its gates to establish closer relationships with entities. The aim is to inform about the history and the values of the concessionaire, and also to show the structure and quality of their technical operations. It started in May 2012 and 2014, and more than 4,200 visits were recorded. Environmental Journalism Award – The aim is to encourage news reports about the positive impact of sanitation in Campo Grande, broadening the general population’s and journalists’ knowledge and awareness of the issue. It was set th up in 2010, and in 2014 the 5 edition of this event was held with the participation of 44 entries in the following categories: Printed newspapers, radio, television, Internet, photographs, journalism, and University students. Corrida das Águas – The Water Race is already part of the calendar of sporting events in Mato Grosso do Sul. The event is held in the month of March and is part of the weekly schedule of activities in commemoration of World Water Day. The aim is to draw attention to the importance of the preservation of water resources while, at the same time, encouraging healthy living habits. The athletes participate in the street race in four different categories: Female 5km; Male 5km; 10 km for women; 10 km for men; and a 5 km walk. The event had some 800 participants in 2014. Bom de Bola, bom na Escola – The ‘Bom de Bola, bom na Escola’ project was developed by the Military Police, with Águas Guariroba as a partner. Between 2011 and 2014, this Project served some 100 students from schools close to the Effluent Treatment Station (ETS). Apart from football, this project plans to transmit basic concepts such as citizenship, hierarchy, discipline, and the Statute of the Child and the Teenager, as well as rights and duties. Football training is held at the football field in the ETE Los Angeles Park

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Projeto Coral das Águas - Music is another means of transmitting good vibes, good energy, and also has the power to make the environment more harmonic, dissolving tensions, bringing relief to the soul and bringing people closer together. Choir singing has already proved to be a powerful tool for development and promotion of social integration, improving concentration and tackling stress. Singing in a group is good for cooperation and cordiality and can also be used internally as an example of organization and teamwork. · Through singing, it provides social integration between employees, discipline, creativity, concentration, and also tackles stress; · It raises the self-esteem of collaborators, through musical presentations; · Prepares the group for internal and external presentations, to disclose the name of the company; It started in 2014, with 10 internal and external presentations. ENVIRONMENTAL RESPONSIBILITY Measures for water preservation Prolagos has two main projects aimed at reuse of water. Always thinking of sustainability and today, even more, in management of water resources, we have the New Waters Project which is carried out at ETA Juturnaíba, which is our main water treatment station, in the district of São Vicente, in the city of Araruama, and which consists of reusing water through retrowashing of the filters. This water is reintegrated into the system, passing through the whole treatment process, and becomes ideal to be used by the population. This brings a saving of some 30 million liters of water per month. This, in addition to the disposal of some 216 tons of silt that was formerly sent to the water catchment areas. The second project is the Treatment Station for Reuse Water (ETAR), which consists of a system of membranes, and is in the city of Armação dos Búzios, one of Brazil’s most important tourist destinations, with the capacity to produce 2 million liters of water per month. Part of the water produced by this station already serves the Búzios Golf Club on a daily basis. There are some 40 thousand liters of water per day, used for irrigation of the distinctive grass. This means less impact on the capture of water from Juturnaíba Lake and also helps with the recovery of the environment as a whole. In addition to these actions, seeking to spread awareness of the need to reuse water, Prolagos has donated a tank for reuse water to the municipality of Município de Iguaba Grande and also the Municipality of São Pedro da Aldeia, while maintaining support to the Municipality of Cabo Frio, to use the treated effluents from the Effluent Treatment Stations (ETSs) for the cleaning of public areas, tackling forest fires and also the use of the Intermunicipal Forest in Iguaba Grande.

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Carbon Footprint Well aware of its commitment to the environment, Prolagos has carried out the Inventory of Greenhouse Gases, to quantify the emissions of pollutants and the carbon footprint. This inventory was made based on the indicators of the GHG Protocol and confirmed by an independent certifying body. Management of waste Prolagos has a program in place for the management of waste thus generated, and in 2014 over 700 tons of silt from sewage treatment stations were sent to the duly licensed landfill, while the water treatment station supplied another 880 tons of waste which were also sent for appropriate disposal, no longer polluting the Juturnaíba Lake. Here we also mention the scraps of iron, totaling 70 tons, which were sent to be reused in the metalworking industry. Participative Management Participative Management for better governance of water resources is concept which is part of our business, and in the light of this fact Prolagos participates in several spaces for debates seeking to make a contribution for the preparation of Government policies and preservation of the environment and of water resources, through the company’s own knowledge. Prolagos is active in 5 municipalities within the Lake District of the State of Rio de Janeiro, these municipalities being included in the 6th Hydrographical Region of the State of Rio de Janeiro, known as Lagos São João. Prolagos understands that it is very important to have the participation of all stakeholders in the decision-making process, and for this reason the company participates in several discussions within the basins committee, through technical commissions, especially that of Environmental Education, Monitoring and Sanitation. At these meetings, there is also participation of members of the granting power, civil society, a regulatory body, organizations aimed at the environment; there is discussion of the needs to anticipate investments, execution of work projects, among others, seeking improvements to the environment and to the quality of life of the community. In addition to these, Prolagos participates in the Municipal Committees for the Environment and Water Resources, the State Council for Water Resources, and Debating Forums, seeking the preservation of water resources and the improvement of the environment. Participation in events: Municipal Plans for Basic Sanitation In the years of 2013 and 2014, the Lake District had the drawing up of Municipal Plans for Basic Sanitation, and Prolagos sought to interact throughout the process, from the transfer of information through to the monitoring of public hearings.

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Circuit of Environmental Education Prolagos has participated in the Regional Circuit of Environmental Education in the municipality of Silva Jardim, talking about the activities carried out at the Juturnaíba Lake, and also the views of the Concessionaire about this issue. This event was an initiative of the Basins Committee and brought together educators, environmentalists, fisherpeople and the community at large, with the theme: “Juturnaíba: our water comes from here”, Debate on Water Governance Prolagos participated in a political dialogue about water governance, promoted by the National Waters Agency (ANA) and the Organization for Cooperation and Economic Development, and intends to give an independent assessment based on evidence and political recommendations, based on a solid economic analysis and also on best international practices. The aim is to improve Brazil’s ability to deal with a complex and varied institutional and territorial environment, in relation to water demand and water safety. It intends to provide those who take political decisions with specific guidance about two important enhancements currently under way at ANA, like the National Pact for Water Management, which intends to improve the articulation between federal and state policies for better integration of the national management of water resources. The dialogue started in October 2013, after the signing of an agreement between the OECD and ANA. This dialogue is based on an extensive process of involvement of the interested parties, for whom the delegation of the OECD embarked on two detailed missions in Brazil (collection of information, between 10 and 14 March 2014, and case studies, 18 to 24 May 2014), in order to have a meeting with over 80 representatives from a wide range of institutions, organizations and other parties interested in basin levels, from states and also federal institutions. The project shall be completed with the launch of an OECD report, in April 2015.

Plans for Recovery and Preservation of the Atlantic Rainforest In the year when the Program for Environmental Education of the Concessionaire seeks to work on the concepts of water and forest, the region receives an important instrument in working towards the recovery of degraded areas. This meets the need for recovery and preservation of the Juturnaíba Reservoir, seeking better water quality, and Prolagos took part in the debates. Licensing Forum promoted by the Municipality of São Pedro da Aldeia The concessionaire participated in the Licensing Forum promoted by the Secretariat for the Environment of the city of São Pedro da Aldeia, and the proposal was that of having a debate about changes to environmental licensing throughout the state. 32

State Meeting of Basin Committees Prolagos participated in the State Meeting of the Basin Committees (ECOB) in the Municipality of São Pedro da Aldeia, which this year had the main issue of: The Basin Committee as a Political Articulator of the Waters. At that time, the Environment Coordinator, Keila Ferreira, was asked to coordinate the proposals of the users’ sector, having the opportunity to present the work of the Concessionaire and its role in the development of the Lake District. In addition, the company has been given a round of applause, proposed by the Rio de Janeiro State Forum of Committees, for its activities in participative management to improve the quality of the environment. At the end, some representatives of committees paid a technical visit to the Effluent Treatment Station (ETS) of São Pedro and the Operational Control Unit.

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Environmental programs: Prolagos Cultivates – Every year, Prolagos generates some 10,000 jars from its program for monitoring water and waterways. Since January 2014 these jars have started to have a more prestigious form of disposal. Together with the Intermunicipal Forest in Iguaba Grande, these jars are now used for the production of seedlings that shall be donated to the participants in the Saúde Nota 10 and Saber Faz Bem projects.

Agente das Águas - Program initiated in 2012 of Participatory Monitoring and Integrated Evaluation of Water Quality across the River Basins in Araruama and Saquarema lakes and São João and Una rivers. It has as general purpose to evaluate the water quality across the Lakes and São João River Basin, based on previous experiences of LAPSA (Laboratory of Evaluation and Promotion of Environmental Health of the Department of Biology - IOC - Fiocruz), to develop educational and community mobilization strategies for training and transfer of scientific information and instrumentality of the population with modern tools to evaluate the rivers. The target audience for this program is the surrounding community of Juturnaíba Lake. The project trained about 60 volunteers from 7 surrounding communities of the Reservoir. Ambiente-se With the purpose of intervening in the reality around us and promote well-being and environmental quality, the Environment Department, together with the HR Department and Administrative Department launched a corporate environmental education program called “Ambiente-se com o lema ‘Use Menos, Faça Mais’.” [Acclimate yourself with the motto ‘Use Less, Do More’.” Each employee received a mug and a reusable bottle, through which we will avoid the use of about 40 thousand plastic cups per month. In addition, educational signs were spread across the headquarters, seeking to change personal attitudes and practices by means of using the environmental knowledge. Also, a newsletter is sent to employees with articles about environmental conservation and reuse of recyclable materials.

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Newsletters Revivendo Águas Claras Raise awareness and mobilize the population for forest restoration in the São João River Basin is the main purpose of the Program “Revivendo Águas Claras” prepared by Prolagos (subsidiary) together with River Basin Committee, São João River Consortium and Juturnaíba Lake Concessionaires.

An integral part of the Environmental Education Program approved by the 2014/2016 Agenersa biennium, the “Revivendo Águas Claras” project aims to make a social mobilization for the area owners to enroll their lands in the bank of areas and, next, begin to plant up to 10 hectares around Juturnaíba Reservoir.

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Relationship with auditors In compliance with CVM Instruction no. 381/2003, we inform you that, in the year ended December 31, 2014, KPMG Auditores Independentes provided the following services: Audit services on individual and consolidated financial statements for the year ended December 31, 2014 and limited review on respective quarters; tax services including summary review on completion of cards that comprise Corporate Income Tax Return (DIPJ) for calendar year 2012 of AEGEA Saneamento e Participações S.A. and its subsidiaries; and other services including limited assurance for the purpose of issuing a positive conclusion on recalculation of covenants segregated in the contract entered into by AEGEA Saneamento e Participações S.A. and the International Finance Corporation – IFC. The Company’s policy for contracting services other than external audit from independent auditors follows principles that preserve these professionals’ independence. These principles comprise, in accordance with internationally accepted standards: (a) the auditor should not audit his own work; (b) the auditor should not exercise management roles for the client, and (c) the auditor should not promote the interests of his clients. Total value of services provided by KPMG Auditores Independentes referring to tax services was R$74.5 thousand, which is equivalent to 5% of fees related to external audit services, And other services including limited assurance for the purpose of issuing a positive conclusion on recalculation of covenants segregated in the contract entered into by AEGEA Saneamento e Participações S.A. and the International Finance Corporation – IFC was R$37.1 thousand, which corresponds to 2% of fees related to external audit services. KPMG Auditores Independentes declared that provision of other services, as described above, does not affect independence and objectivity necessary to perform external audit services provided to the Company. ******* The information in the performance report about the invoiced volume of water and sewage, Water and Sewage Savings Number, 180-day Default Ratio, Physical Loss Ratio, EBITDA Margin, Capex and quantitative aspects about EBIT and EBITDA were not subject to review by the independent auditors. Statement of the Executive Board In compliance with article 25 of CVM Instruction No. 480/09, of December 07, 2009, the Executive Board declares that discussed, reviewed and agreed with the opinions expressed in the KPMG Auditores Independentes’, issued on that date and with the financial statements for the year ended December 31, 2014.

36

Acknowledgment Finally, we wish to thank our users and shareholders for the trust, our fund providers and service providers for the support, and our employees for their effort and dedication.

37

KPMG Auditores Independentes R. Dr. Renato Paes de Barros, 33 04530-904 - São Paulo, SP - Brasil Caixa Postal 2467 01060-970 - São Paulo, SP - Brasil

Central Tel Fax Nacional Internacional Internet

55 (11) 2183-3000 55 (11) 2183-3001 55 (11) 2183-3034 www.kpmg.com.br

Independent auditors' report on the financial statements To The Management and Shareholders of Aegea Saneamento e Participações S.A. São Paulo – SP We have audited the accompanying individual and consolidated financial statements of Aegea Saneamento e Participações S.A. ("Company"), identified as Parent Company and Consolidated, respectively, which comprise the balance sheet as of December 31, 2014 and the related statements of income, comprehensive income, changes in shareholders' equity and cash flows, for the year then ended, as well as the summary of the significant accounting practices and other explanatory notes. Management’s responsibility for the financial statements The Company's management is responsible for the preparation and fair presentation of the individual financial statements in accordance with the accounting practices adopted in Brazil and of the consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board - IASB, and in accordance with the accounting practices adopted in Brazil and for such the internal controls as management determines is necessary to enable the preparation of these financial statements that are free from material misstatement, whether due to fraud or error. Independent auditors’ responsability Our responsibility is to express an opinion on these financial statements based on our audit, which was conducted in accordance with Brazilian and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement. An audit involves performing procedures selected to obtain evidence about the amounts and disclosures presented in the financial statements. The procedures selected depend on the auditor's judgment, including an assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal controls relevant to the preparation and fair presentation of the Company‘s financial statements in order to design audit procedures that are appropriate in the circumstances, but not for purposes of expressing an opinion on the effectiveness of these Company’s internal controls. An audit also includes the evaluating the appropriateness of accounting practices used and the reasonableness of accounting estimates made by management, as well as evaluating the presentation of financial statements taken as a whole. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

38 KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça.

KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

Opinion on the individual financial statements In our opinion, the individual financial statements aforementioned present fairly, in all material respects, the financial position of Aegea Saneamento e Participações S.A. as of December 31, 2014, its the financial performance and its cash flows for the year then ended, in accordance with the accounting practices adopted in Brazil. Opinion on the consolidated financial statements In our opinion, the consolidated financial statements aforementioned present fairly, in all material respects, the consolidated financial position of Aegea Saneamento e Participações S.A. as of December 31, 2014, its consolidated financial performance and its consolidated cash flows for the year then ended, in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and accounting practices adopted in Brazil. Other issues Statements of added value We have also audited the individual and consolidated statements of added value (DVA) for the year ended December 31, 2014, prepared under Company's management responsibility, whose presentation is required by Brazilian Corporate Law for publicly-held companies and as supplementary information under IFRS as these standards do not require the presentation of the DVA. These statements were submitted to the same audit procedures previously described and, in our opinion, are fairly presented, in all material respects, in relation to the financial statements taken as a whole. São Paulo, February 24, 2015 KPMG Auditores Independentes CRC 2SP014428/O-6 (The accompanying financial statements have been translated into English for the convenience of readers outside Brazil) Wagner Petelin Accountant CRC 1SP142133/O-7

39

Aegea Saneamento e Participações S.A. Balance sheets at December 31, 2014 and 2013 (In thousands of reais)

Parent company Assets Cash and cash equivalents Interest earnings bank deposits Trade accounts receivable Inventories Current tax assets Advances to suppliers Dividends and interest on own capital receivable Other receivables

Note 6 7 8

9

12/31/2014

Consolidated

12/31/2013

12/31/2014

Parent company 12/31/2013

Liabilities Suppliers and contractors Loans, financing and debentures Labor and social security obligations Tax liabilities Income and social contribution taxes Installment payment of taxes Other accounts payable

131 60,736 13,483 12,536 162,223 5,898

4,025 306,152 1,626 6,828 123,367 5,294

8,533 443,394 156,671 8,640 28,576 6,621 16,170

37,020 447,894 115,224 9,574 12,015 1,892 19,868

255,007

447,292

668,605

643,487

62,493 20,821 109,217 2,946

56,643 59,123 -

75,780 39,187 9,727 46,735 43,085 10,982

66,288 26,928 9,051 43,969 34,516 6,280

195,477

115,766

225,496

187,032

743,494 11,696 1,592

593,212 8,314 122

13,248 19,123 1,758,548

6,646 14,066 1,377,064

Shareholders' equity Capital Funding costs Profit reserve Additional dividend proposed

952,259

717,414

2,016,415

1,584,808

Shareholders' equity attributable to controlling shareholders

Note 13 14

Interest earnings bank deposits Private debentures - related parties Trade accounts receivable Non-current tax assets Checking accounts receivable from related parties Deferred tax assets Other receivables

7 10 8 10 24

Total non-current assets Investments Property, plant and equipment Intangible assets Total non-current assets

11 12

1,207,266

1,164,706

2,685,020

17,538 199,445 15,160 11,144 221 2,895 24,009

26,574

10,039

357,769

270,412

247,639 1,376 1,116 597 1,033

248,478 671 2,310

1,109,866 1,587 3,353 21,438 129,437 90,375

788,050 1,587 4,530 20,665 116,318 83,384

251,761

251,459

1,356,056

1,014,534

882,607 (20,278) 17,948 48,654

882,607 (20,278) 40,879 -

882,607 (20,278) 17,948 48,654

882,607 (20,278) 40,879 -

928,931

903,208

928,931

903,208

-

-

42,264

40,141

Total shareholders' equity

928,931

903,208

971,195

943,349

Total liabilities

278,335

261,498

1,713,825

1,284,946

1,207,266

1,164,706

2,685,020

2,228,295

-

-

-

-

15

16

14 10 17 24 16

Total non-current liabilities

Total liabilities and shareholders’ equity

See the accompanying notes to the financial statements

40

12/31/2013

48,939 233,597 24,423 19,368 8,067 685 22,690

Loans, financing and debentures Current accounts payable to related parties Installment payment of taxes Provision for contingencies Deferred tax liabilities Other accounts payable

2,228,295

12/31/2014

242 4,928 2,592 1,854 423

Non-controlling interest

Total assets

12/31/2013

2,576 13,973 6,804 1,535 1,686

Total current liabilities Total current assets

12/31/2014

Consolidated

18

Aegea Saneamento e Participações S.A. Statements of income Years ended December 31, 2014 and 2013 (In thousands of reais)

Parent company Note

Net operating income Cost of services rendered

19 20

Gross income Administrative and general expenses Research and development expenses Other operating income Other operating expenses Equity in net income of subsidiaries

21 22

11

Income (loss) before net financial expenses and taxes Financial income Financial expenses

23 23

Net financial expenses Income (loss) before taxes Income and social contribution taxes

12/31/2014

12/31/2013

12/31/2014

12/31/2013

73,168 (42,524)

15,784 (10,344)

970,000 (579,195)

700,755 (388,144)

30,644

5,440

390,805

312,611

(20,467) (17,924) 334 (1,964) 130,626

(25,138) (16,829) 1,149 (3,501) 132,339

(134,360) (17,924) 1,134 (2,105) 1,228

(110,486) (16,829) 1,917 (3,550) 1,195

121,249

93,460

238,778

184,858

24,352 (32,659)

15,048 (29,159)

69,488 (135,281)

38,389 (84,585)

(8,307)

(14,111)

(65,793)

(46,196)

79,349

172,985

138,662

(60,747)

(58,090)

112,942 24

Consolidated

(1,219)

403

Net income (loss) for the year

111,723

79,752

112,238

80,572

Income (loss) attributed to: Controlling shareholders Non-controlling shareholders

111,723 -

79,752 -

111,723 515

79,752 820

Net income (loss) for the year

111,723

79,752

112,238

80,572

Earnings per share Basic earnings per share (in R$)

27

0.17

0.13

0.17

0.14

Diluted earnings per share (in R$)

27

0.17

0.13

0.17

0.14

673,076,048

670,217,706

673,076,048

670,217,706

Average number of shares

See the accompanying notes to the financial statements

41

Aegea Saneamento e Participações S.A. Statements of comprehensive income Years ended December 31, 2014 and 2013 (In thousands of reais)

Parent company 12/31/2014 Net income (loss) for the year

Consolidated

12/31/2013

12/31/2014

12/31/2013

111,723

79,752

112,238

80,572

-

-

-

-

Total comprehensive income

111,723

79,752

112,238

80,572

Comprehensive income attributable to: Controlling shareholders Non-controlling shareholders

111,723 -

79,752 -

111,723 515

79,752 820

Total comprehensive income

111,723

79,752

112,238

80,572

Other comprehensive income

See the accompanying notes to the financial statements

42

Aegea Saneamento e Participações S.A. Statements of changes in shareholders' equity Years ended December 31, 2014 and 2013 (In thousands of reais) Attributable to controlling shareholders Profit reserve

Capital

Funding costs

Legal

Profit retention

Retained earnings

Additional dividend proposed

Total

Interest of noncontrolling shareholders

Total shareholders' equity

Balances at January 1, 2013

574,554

-

8,374

38,753

-

-

621,681

39,321

661,002

Capital increase in cash at September 30, 2013

300,000

-

-

-

-

-

300,000

-

300,000

-

-

-

-

(20,278)

-

(20,278)

-

-

-

-

-

8,053

-

8,053

-

-

79,752

820

80,572

-

(86,000) -

Cost with issuance of new shares Capital increase in cash as of December 19, 2013

(20,278) 8,053

Net income (loss) for the year

-

-

Allocations: Legal reserve Dividends and interest on own capital Profit reserve

-

-

Balances at December 31, 2013

882,607

(20,278)

79,752

-

3,988 -

(49,634) 39,398

(3,988) (36,366) (39,398)

-

(86,000) -

12,362

28,517

-

-

903,208

40,141

943,349

1,608

1,608

Capital transfer

-

-

-

-

-

-

-

Net income (loss) for the year

-

-

-

-

111,723

-

111,723

515

112,238

Allocations: Legal reserve Dividends paid Additional dividends proposed

-

-

5586 -

(5,586) (57,483) (48,654)

48,654

(86,000) -

-

(86,000) -

48,654

928,931

Balances at December 31, 2014

882,607

(20,278)

(28,517) -

17,948

-

See the accompanying notes to the financial statements

-

-

43

42,264 -

971,195 -

Aegea Saneamento e Participações S.A. Statements of cash flows Years ended December 31, 2014 and 2013 (In thousands of reais)

Parent company 12/31/2014 Cash flows from operating activities Income (loss) before taxes

Consolidated

12/31/2013

12/31/2014

12/31/2013

112,942

79,349

172,985

138,662

2,132 32,384 (23,537) (130,626) -

47 27,900 (15,009) (132,339) -

56,157 116,605 (53,708) (1,228) 157 6,405

39,329 1,064 69,738 (23,385) (1,195) (1,490) 6,356

(6,705)

(40,052)

297,373

229,079

(11,857) (7,001) (3,550)

(1,626) (4,550) (860)

(58,659) 934 (17,130) (4,729) (843)

(26,216) (2,622) 12,166 (10,284)

2,334 4,212 2,596 (14)

(69) 119 1,027 2,248

31,287 8,912 8,080 (1,661) (500) 1,963

(5,806) 2,571 (2,857) (3,148) (129) (70,547)

Interest paid Income and social contribution taxes paid

(30,828) -

(25,252) -

(98,487) (43,842)

(76,822) (48,179)

Net cash generated by (used in) derived from operating activities

(50,813)

(69,015)

122,698

(2,794)

Cash flow from investment activities Interest earnings bank deposits Advances for future capital increase Dividends and interest on own capital received Losses with investments Sales of investments Acquisition of subsidiaries Acquisition of other investments Capital transfer in subsidiaries Cash from sale of fixed assets Acquisition of property, plant and equipment Acquisition of intangible assets

242,282 (3,500) 3,241 173 276 (3) (46,105) (5,399) (1,585)

(221,626) 136,207 (10,545) (3,337) (13,400) (8,278) (84)

48,716 1,000 173 (3) (8,566) (386,822)

(273,352) (4,831) 40 (14,030) (175,848)

Advance for business acquisition Acquisition of subsidiaries Acquisition of the subsidiary Águas de Barra do Garças, net of cash obtained in the acquisition Acquisition of the subsidiary Agência Ambiental, net of cash obtained in the acquisition

(12,500) (10,451) -

(12,500) (29,788)

(15,520) -

Cash flow from (used in) investment activities

166,429

(121,063)

(387,790)

(483,541)

Cash flow from financing activities Loans, financing and debentures obtained Loans, financing and debentures paid Checking accounts receivable from related parties Current account payable to related parties Dividends paid Capital transfer from subsidiaries’ minority shareholders

7,000 (350) (41,536) 1,376 (86,000) -

185,067 (185,585) (26,087) (86,000) 287,775

724,082 (402,201) (884) (86,000) 1,608

451,306 (238,626) 2,160 (1,172) (86,000) 287,775

(119,510)

175,170

236,605

415,443

(3,894)

(14,908)

(28,487)

(70,892)

4,025 131

18,933 4,025

37,020 8,533

107,912 37,020

(3,894)

(14,908)

(28,487)

(70,892)

-

-

-

Adjustments for: Amortization and depreciation Income (loss) in the write-off of intangible assets Interest on loans, financing and debentures Interest on interest earning bank deposits Equity in net income of subsidiaries Formation / (reversal) of contingencies Formation of allowance for doubtful accounts

Changes in assets and liabilities (Increase) / Decrease in assets Trade accounts receivable Inventories Current and non-current tax assets Advances to suppliers Other receivables Increase / (Decrease) in liabilities Suppliers and contractors Labor and social security obligations Tax liabilities Installment payment of taxes Payment of contingencies Other accounts payable

Cash flow (used in) from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 Net decrease in cash and cash equivalents

See the accompanying notes to the financial statements

44

-

-

-

Aegea Saneamento e Participações S.A. Statements of value added Years ended December 31, 2014 and 2013 (In thousands of reais) Parent company 12/31/2014

Consolidated

12/31/2013

12/31/2014

12/31/2013

1,037,543

754,321

Income

82,777

19,556

Sales of services Income from construction Other income Allowance for doubtful accounts

82,443 334 -

18,407 1,149 -

672,325 370,489 1,134 (6,405)

549,679 209,081 1,917 (6,356)

(42,583)

(36,510)

(543,086)

(377,683)

(13,361) (29,222)

(3,760) (32,750)

(370,489) (91,797) (80,800)

(209,081) (81,230) (87,372)

40,194

(16,954)

494,457

376,638

56,157

39,329

Inputs acquired from third parties (Include the tax amounts - ICMS, IPI, PIS and COFINS) Construction cost Cost of services sold Materials, energy, outsourced services and other

Co

Gross added value Depreciation and amortization

2,132

Net value added produced by the Company

47

38,062

(17,001)

438,300

337,309

Added value received as transfer

154,978

147,387

70,716

39,584

Equity in net income of subsidiaries Financial income

130,626 24,352

132,339 15,048

1,228 69,488

1,195 38,389

Total added value payable

193,040

130,386

509,016

376,893

Distribution of added value

(193,040)

(130,386)

(509,016)

(376,893)

Personnel

(29,109)

(12,365)

(118,010)

(75,592)

Direct remuneration Benefits Severance pay fund (FGTS)

(22,766) (5,019) (1,324)

(9,909) (1,576) (880)

(90,066) (22,147) (5,797)

(54,871) (15,576) (5,145)

Taxes, rates and contributions

(16,866)

(4,388)

(152,780)

(128,807)

Federal taxes State taxes Municipal taxes

(14,499) (2,367)

(3,461) (927)

(133,417) (6,801) (12,562)

(120,997) (5,822) (1,988)

Third-party capital remuneration

(35,342)

(33,179)

(125,988)

(91,220)

Interest Rents Other

(32,509) (2,833) -

(29,159) (519) (3,501)

(118,167) (7,821) -

(84,585) (3,085) (3,550)

(111,723)

(80,454)

(112,238)

(81,274)

(57,483) (54,240) -

(36,366) (44,088) -

(57,483) (54,240) (515)

(36,366) (44,088) (820)

-

-

Remuneration of own capital Dividends and interest on own capital Retained earnings Interest of non-controlling shareholders in retained earnings

See the accompanying notes to the financial statements

45

-

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Notes to the financial statements (In thousands of reais)

1

Operations Aegea Saneamento e Participações S.A. (the “Company”) is a holding established as a privatelyheld Corporation located in the city of São Paulo, São Paulo State (SP) on March 26, 2007 that started its operations on December 17, 2010. The Company is engaged in holding interest in other companies, as partner or shareholder, as well as in providing advisory, technical assistance, maintenance and management services to companies related to businesses in which the Company takes part, directly or indirectly, especially regarding sanitation concession in the municipal, state and/or federal spheres, inside and outside the Federative Republic of Brazil. Aegea also has the Aegea Administrative Center (CAA), in Santa Bárbara d’Oeste, State of São Paulo, in charge of the trial balances, data consolidation, balance sheet closing, external audit service, human resource policies, financial statements and other processes related to HR and to management. The CAA aims to assure the business uniformity, allowing greater synergy between the current companies and the new acquisitions. On May 21, 2014, the Company was listed in the Securities Commission ("CVM"), in category B, authorizing the trade of the Company’s securities on regulated markets of securities, except for the following: a) shares and share certificates of deposits; or b) securities that give the holder the right to acquire the securities mentioned in item (a), as a result of their conversion or exercise of rights attached thereto, provided that issued by the very issuer of the securities referred to in item (a) or by a company belonging to the said issuing group.

46

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

2

Group entities The Company’s interests as well as its activities are as follows: % Interest 12/31/2014 Subsidiary Subsidiaries Prolagos S.A. - Concessionária de Serviços Públicos de Água e Esgoto Águas Guariroba S.A. Engepav Engenharia e Comércio Ltda. Águas do Mirante S.A. Concessionária Águas de Meriti Ltda. Águas de Porto Esperidião Saneamento e Distribuição Ltda. Águas de Matão S.A. GSS - Gestão de Sistemas de Saneamento Ltda. LVE - Locadora de Veículos e Equipamentos Ltda. Águas de São Francisco Concessionária de Saneamento S.A. Águas de Sinop S.A. Águas de São Francisco do Sul Ltda. Águas de Guarantã Ltda. Águas de Matupá Ltda. Águas de Novo Progresso - Tratamento e Distribuição Ltda. Nascentes do Xingú Investments S.A. Águas de Diamantino S.A. Águas de Confresa S.A. Nascentes do Xingú Participações e Administração S.A. Silvegli Participações Ltda. Águas de Barra do Garças Ltda. Águas de Sorriso S.A. Águas de Poconé S.A. Águas de Primavera S.A. Águas de Campo Verde S.A. Águas de Marcelândia S.A. Águas de Vera S.A. Águas de União do Sul S.A. Águas de São José S.A. Águas de Santa Carmem S.A. Águas de Nortelândia S.A. Saneamento Básico de Pedra Preta S.A. Saneamento Básico de Jangada S.A. APA - Água de Peixoto de Azevedo S.A. Águas de Carlinda S.A. Águas de Cláudia S.A. Águas de Jauru Abastecimento e Distribuição S.A. Jointly-controlled subsidiary Nacional Águas e Saneamento Ltda.

•

12/31/2013

Direct

Indirect

Direct

Indirect

99.99% 99.99% 99.99% 99.99% 51.00% 60.00% 99.99% 99.99% 99.99% 99.99% 99.99% 70.00% 99.99% 99.99% 99.99% 51.00% 99.99% -

0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 51.00% 51.00% 100.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00%

99.99% 99.99% 99.99% 99.99% 51.00% 60.00% 99.99% 99.99% 99.99% 99.99% 0.01% -

99.99% 100.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00% 51.00%

-

50.00%

-

50.00%

Prolagos S.A. – Concessionária de Serviços Públicos de Água e Esgoto, was established on February 2, 1998 to be engaged in exploring public utilities including basic sanitation, water production and supply and sewage treatment in municipalities of Cabo Frio, Búzios, São Pedro da Aldeia and Iguaba Grande and water supply in municipality of Arraial do Cabo, all of them located in Rio de Janeiro State. Object of said Contract is the exploration of public utilities including basic sanitation, water production and supply and sewage treatment in municipalities of Cabo Frio, Búzios, São Pedro da Aldeia and Iguaba Grande and water supply in the municipality of Arraial do Cabo, all of them located in Rio de Janeiro State, over the period of 25 years, renewable for an equal period. In 2010, based on the new concession investment plan, the State, together with municipalities offering concession and the Company, decided to extend concession period until 2041, and prevailing concession agreement will now be valid until May 13, 2041.

47

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

•

Águas Guariroba S.A. – established on September 29, 2000, effectively started its operation on October 18, 2000, in accordance with Concession Agreement no. 104 entered into with municipality of Campo Grande, Mato Grosso do Sul State (MS). Object of said Agreement is the exploration of public utilities for water supply and sanitary depletion granted for the entire territory of municipality of Campo Grande, MS, under concession regime, exclusive, over the initial period of 30 years, renewable for an equal period. On April 26, 2012, the Company and municipality of Campo Grande, MS, entered into an addendum to the Concession Agreement no. 104 that determines extension of concession period for exploration and provision of services until August 23, 2060.

•

Engepav Engenharia e Comércio Ltda., formed on November 29, 2010, under the Company’s name of Roldan Consultoria e Assessoria Empresarial Ltda. On February 1, 2012 its name was changed when Aegea Saneamento e Participações S.A. parent company, was admitted through the assignment and transfer of 99.99% of its quotas. The Company effectively started its operation in March 2012 and, since then, is providing engineering services solely to Prolagos S.A. – Concessionária de Serviços Públicos de Água e Esgoto, Águas Guariroba S.A. and Águas do Mirante S.A.

•

Águas do Mirante S.A., established on March 1, 2012, effectively started its operations on June 11, 2012, in accordance with Concession Agreement no. 48/2012 entered into with SEMAE – Serviço Municipal de Água e Esgoto of municipality of Piracicaba, São Paulo State (SP), through concession obtained from participation in bid process no. 1,687/2011. Object of said concession agreement is the exploration of public utilities for sanitary depletion granted for the entire territory of the municipality of Piracicaba, São Paulo State, SP, under the concession regime with public-private partnership, administrative type, exclusive, over the period of 30 years, renewable for an equal period.

•

Concessionária Águas de Meriti Ltda. On March 18, 2013, the Company acquired control of Concessionária Águas de Meriti Ltda., a non-operational company that held the concession to operate in sanitation and sewage treatment in the municipality of São João do Meriti, Rio de Janeiro State, for the amount of R$4,080.

•

Águas de Porto Esperidião Saneamento e Distribuição Ltda., was established on January 15, 2013 to operate in accordance with concession agreement no. 48/2012 obtained with the criterion of best tariff price entered into with the municipality of Porto Esperidião, valid until December 21, 2042, and is engaged in providing water supply and sanitary depletion public services in the municipality of Porto Esperidião, pursuant to the terms of public bid process no. 001/2012

•

Águas de Matão S.A. was established on December 13, 2013, headquartered in the municipality of Matão, São Paulo State, at Av. Siqueira, 1221, and is engaged in providing, under the concession regime, potable water collection, treatment, conduction and distribution and sanitary sewage collection and treatment, pursuant to the terms of public bid offer no. 02/2013, concession obtained with the criterion of best offered tariff price,with minimum validity period of 30 years.

•

GSS – Gestão de Sistemas de Saneamento Ltda. was established on August 6, 2013. The Company and its direct subsidiary Engepav Engenharia e Comércio Ltda. decided to establish company GSS – Gestão de Sistemas de Saneamento Ltda., engaged in: (a) management of

48

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

sanitation systems; (b) measurement of electric power, gas and water consumption; (c) system (software) planning, preparation, implementation and supply; (d) water collection, conduction, treatment and distribution; (e) sewage collection and treatment; (f) maintenance of water and sewage treatment systems; (g) investments in other companies; and (h) import and export transactions related to its activities. •

LVE – Locadora de Veículos e Equipamentos Ltda. was established on June 18, 2013 and is engaged in renting automotive vehicles and machinery and equipment.

•

Águas de São Francisco Concessionária de Saneamento S.A.established on October 18, 2013, entered into the Concession Agreement no. 02.117/2014 on February 5, 2014, with the municipality of Barcarena, Pará State, for the purpose of exploring basic sanitation, water production and supply and sewage treatment public utilities in the municipality of Barcarena, Pará State, for a period of 30 years.

•

Águas de Sinop S.A. formed on August 28, 2014, headquartered in the city of Sinop, state of Mato Grosso, aims to operate under concession regime, pursuant to Public Bid Notice No. 002/2014 with the municipality of Sinop/MT, the provision of public services of drinking water supply and sanitation, including the development of projects to serve the urban area of the municipality of Sinop/MT, for a period of thirty (30) years.

•

Águas de São Francisco do Sul Ltda. formed on September 10, 2014, under the concession regime, entered into an agreement on December 2, 2014, pursuant to Public Bid Notice No. 056/2014, providing municipal services of drinking water supply and sanitation, as well as the provision of complementary services in São Francisco do Sul, state of Santa Catarina, for a period of thirty five (35) years.

•

Águas de Guarantã Ltda., the Company acquired its control in July 2014, the Concessionaire started up in May 2001 under the concession regime with the purpose of providing public services of water supply and sanitation in the municipality of Guarantã do Norte, State of Mato Grosso in accordance with the concession agreement No. 45/2001, in force until December 2030.

•

Águas de Novo Progresso - Tratamento e Distribuição Ltda., the Company acquired its control in July 2014, the Concessionaire started up in June 2004 under the concession regime with the purpose of providing public services of water supply and sanitation in the municipality of Novo Progresso, state of Pará, in accordance with the concession agreement, under the public bid notice No. 001/2003, in force until July 2034.

•

Águas de Matupá Ltda. the Company acquired its control in August 2014, the Concessionaire started up in October 2001 under the concession regime with the purpose of providing public services of water supply and sanitation in the municipality of Matupá, state of Mato Grosso, in accordance with the concession agreement No. 001/2001, in force until January 2032.

•

Nascentes do Xingú Investimentos S.A. formed on October 18, 2013, the company aims at having corporate interest and managing investments in other companies as partner or shareholder. On June 30, 2014, the equity value of the corporate interest held by AEGEA Saneamento e Participações S.A. in companies Águas de Confresa S.A. and Águas de Diamantino S.A., become part of the capital of the Nascentes do Xingu Investimentos S.A.

•

Águas de Diamantino S.A. organized on May 6, 2014, with headquarters in the city of Diamantino, Mato Grosso, aims at operating under concession regime pursuant to Public Bid Notice No. 002/2013 with the city of Diamantino/MT, the provision of public services of

49

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

drinking water supply and sanitation, including the development of projects to serve the urban area of the city of Diamantino/MT, for a period of thirty (30) years. •

Águas de Confresa S.A. formed on October 24, 2013, whose purpose is to explore public sanitation services, production and supply of water and sewage treatment in the city of Confresa, state of Mato Grosso, under the public bid notice No. 03/2013, executed on January 18, 2014 for a period of thirty (30) years.

•

Nascentes do Xingú Participações e Administração S.A. was established on December 1, 2012, headquartered at Av. Miguel Sutil, nº 12.727, in the city of Cuiabá, Mato Grosso State, and is engaged in administrating own chattels and properties and holding interest in other companies. The Company operates as the holding of Xingú complex, which has 17 companies that provide water supply and sewage treatment services in the municipalities of Sorriso, Poconé, Primavera do Leste, Campo Verde, Marcelândia, Vera, União do Sul, São José do Rio Claro, Santa Carmem, Nortelândia, Pedra Preta, Jangada, Peixoto de Azevedo, Carlinda, Claudia, Barra do Garças and Jauru, all of them located in Mato Grosso State.

•

Nacional Águas e Saneamento Ltda., company acquired on October 10, 2012, engaged in water collection, treatment and distribution, sewage collection and treatment, maintenance of treated water supply networks, maintenance of collection networks and of sewage treatment systems, activities started on November 15, 2011 and its duration is 6 years and 6 months, according to the contract entered into with the municipality of Penha in Santa Catarina.

3

Acquisition of subsidiaries On February 7, 2014, the subsidiary GSS - Gestão de Sistemas de Saneamento Ltda. ("GSS") exercise the Call Option of the company Agência Ambiental - Gestão de Tecnologia Ltda. ("Agência Ambiental"), established in the city of São Paulo – state of Sao Paulo, which held the Call Option of concessionaires Águas de Matupá Ltda., Águas de Guarantã Ltda., Águas de Novo Progresso Ltda. and management software. GSS acquired all quotas of Agência Ambiental for R$27,301, and the amount of R$12,950 was effectively paid, and the remaining balance of R$14,351 by means of assuming Agência Ambiental’s debts. On the same date, Agência Ambiental was merged by GSS.

50

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

On March 31, 2014, the rights related to the Call Option of concessionaires Águas de Matupá Ltda., Águas de Guarantã Ltda., Águas de Novo Progresso Ltda. and management software were split from GSS and transferred to the Company. The Company also had loans receivable from these concessionaires in the amount of R$2,640. Subsequently, the Company exercised the call option of these concessionaires. The summary of the types of the payments transferred and the recognized amounts of assets acquired and liabilities assumed on the acquisition date is presented as follows:

Consideration transferred R$ Cash

29,941

Identifiable assets acquired and liabilities assumed R$ Cash and cash equivalents Accounts receivable Current tax assets Other receivables Investments Deferred tax assets Intangible assets (i) Loans and financing Accounts payable Labor and social security obligations Current and non-current tax liabilities Provision for contingencies Deferred tax liabilities Other accounts payable (ii)

153 1,452 107 161 8 2,027 31,627 (332) (114) (351) (3,287) (1,116) (2,027) (3,367)

Total amount of identifiable assets

24,941

Goodwill R$ Consideration transferred Fair value of identifiable assets

29,941 (24,941) 5,000

Goodwill (ii) (i)

It refers to the concession agreement in the amount of R$17,864, right of management software use in the amount of R$5,598 and intangible assets resulting from acquired companies, in the amount of R$8,165.

(ii)

It refers to goodwill on the software acquisition. Goodwill is attributed mainly to the skills and technical talents of the GSS’ workforce and to the synergies which are expected to be achieved in the integration of the entity to the Group’s existing business of basic sanitation operation. No part of the goodwill recognized is expected to be deductible for income tax and social contribution purposes.

51

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

On December 31, 2014, the Company performed the impairment test of the goodwill and no impairment was identified, therefore, no loss was recognized in the profit & loss for 2014. The Company incurred acquisition-related costs of R$138 on attorney’s fees and due diligence costs. These expenditures were included in the Company’s administrative expenses in the statement of income for the period ended June 30, 2014. (a)

On July 2, 2013, indirect subsidiary Silvegli Participações Ltda. acquired total shares of EMASA – Empresa Matogrossense de Água e Saneamento Ltda. (“EMASA”), basic sanitation concessionaire company established in the municipality of Barra do Garças, Mato Grosso State (MT), whose concession agreement will end only in September 2033, for the amount of R$15,855. On October 21, 2013, indirect subsidiary Silvegli Participações Ltda. granted a single share of its interest in EMASA – Empresa Matogrossense de Água e Saneamento Ltda. to indirect subsidiary Nascentes do Xingú Participações e Administração S.A. On the same date, the corporate name of EMASA was changed to Águas de Barra do Garças Ltda. Summarized below are the types of the payments transferred and the recognized amounts of assets acquired and liabilities assumed on the acquisition date:

Consideration transferred R$ Cash

15,855

Identifiable assets acquired and liabilities assumed R$ Cash and cash equivalents Trade accounts receivable Other receivables Concession contract Intangible assets Suppliers and contractors Loans and financing Labor and social security obligations Provision for contingencies Other accounts payable Deferred tax liabilities

335 784 111 33,177 828 (122) (2,615) (402) (4,836) (2,106) (9,299)

Total assumed liabilities, net

15,855

The Company incurred acquisition-related costs of R$202 on attorney’s fees and due diligence costs. These expenditures were included in the Company’s administrative expenses in the statement of income for the year ended December 31, 2013.

52

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

4

Preparation basis

a.

Statement of conformity The consolidated financial statements were prepared in accordance with the International Financial Reporting System (IFRS) issued by the International Accounting Standards Board (IASB) and also in accordance with the accounting practices adopted in Brazil (BR GAAP). The individual financial statements of the parent company were prepared according to the BR GAAP. The review of Technical Pronouncements No. 07 (approved in December 2014) amended CPC 35, CPC 37 and CPC 18 and authorized the use of the equity income in the separate financial statements according to IFRS, eliminating the difference between BR GAAP and IFRS; The issue of individual and consolidated financial statements was authorized by the Board of Directors on February 20, 2015.

b.

Measuring basis The individual and consolidated financial statements were prepared based on the historical cost, except for those items measured at fair value through profit or loss.

c.

Functional currency and presentation currency These individual and consolidated financial statements are being presented in Brazilian Real, functional currency of the Company and its subsidiaries. All financial information presented in Brazilian Reais has been rounded to the nearest value, except otherwise indicated.

d.

Use of estimates and judgments The preparation of individual and consolidated financial statements according to IFRS and CPC standards requires Management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported values of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and assumptions are reviewed in a continuous manner. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future periods or years affected. Information regarding critical judgments referring to the accounting policies adopted which significantly impact the amounts recognized in the individual and consolidated financial statements are included in the following notes:

•

Note 8 – recognition and measurement of allowances for doubtful accounts;

•

Note 12 – definition of intangible assets’ useful lives;

•

Note 17 - recognition and measurement of provisions for contingencies: main assumptions about the probability and magnitude of outflow of funds; and

•

Note 24 - recognition of deferred tax assets, availability of future taxable income against which tax losses may be used.

53

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

5

Significant accounting policies The accounting policies described below have been consistently applied to all the years presented in these individual and consolidated financial statements.

a.

Basis of consolidation

(i)

Business combinations Business combinations are recorded using the acquisition method on acquisition date, that is, when control is transferred to the Company. Control is defined as the ability to rule the entity's financial and operating policies in order to benefit from its activities. When determining that its control is in place, the Company takes into account the currently exercisable potential voting rights. The Company calculates goodwill in the date of acquisition as:

•

Fair value of transferred consideration; plus

•

The recognized amount of any non-controlling interest in the acquiree; less

•

The net amount (generally at fair value) of identifiable assets acquired and liabilities assumed. When the value is negative, the gain from an advantageous purchase is recorded directly in income for the year. The transferred payment does not include amounts related to payment of prior relationships. Those amounts are usually recognized to income for the year. Transaction costs, except costs for issuing debt or equity instruments, incurred by the Company in connection with business combinations, are recorded in income as incurred. Any contingent payments to be made are stated at their fair value on the acquisition date. If the payment is classified as an equity instrument, it is not remeasured and the liquidation is recorded in shareholders' equity. For other payments, subsequent changes in the fair value of the contingent consideration are recorded in income for the year.

(ii) • •

Interest of non-controlling shareholders For each business combination, the Company chooses to measure any minority interest in the acquired company using one of the following criteria: At fair value; or By proportional interest of identifiable net assets of the acquiree, which are generally at fair value. Changes to the Company’s interest in a subsidiary that do not result in loss of control are accounted for as transactions with shareholders, in the capacity of shareholders. Adjustments to minority interest are based on a proportional amount of the subsidiary’s net assets. No adjustment is made to goodwill based on future profitability and no gain or loss is recognized in income for the year.

54

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

(iii)

Subsidiaries The financial information of the subsidiaries is included in the consolidated financial statements as from the date it starts to be controlled by the Company until the date such control ceases. The accounting policies of the subsidiaries are aligned with the policies adopted by the Company. The individual financial information of the parent company, financial information of subsidiaries are recognized under the equity method. The financial statements of the subsidiaries on the same base date of submittal of the financial information are used to calculate equity in the earnings and consolidation.

(iv)

Investments in entities are accounted for at the equity method The Company’s investments in entities accounted for at the equity method include interests in subsidiaries and jointly-owned subsidiaries. A jointly-owned subsidiary is established through a contract according to which the Company has shared control and is entitled to the contract’s net assets, and not to specific assets and liabilities resulting from the agreement. Investment in joint venture is accounted for by using the equity method. Such investment is initially recognized at cost, which includes with transaction expenses. After initial recognition, consolidated financial statements include the Company’s interest in investees’ income or losses for the year and other comprehensive income up to the date in which significant influence or joint control no longer exists.

(v)

Investment in Joint Venture - Consortia Consortia have no legal responsibility of their own and should be considered as an agreement through which the parties cooperate with each other to provide services. Consortium assets, liabilities, and results are recorded, line by line, by the subsidiaries in proportion to their interest in them.

(vi)

Transactions eliminated in the consolidation Group’s balances and transactions, and any unrealized income or expenses derived from transactions among these companies, are eliminated in the preparation of the consolidated financial statements. Unrealized gains originating from transactions with investees recorded using the equity method are eliminated against the investment in the proportion of the Company's interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only up to the point where there is no evidence of loss due to impairment.

b.

Financial instruments

(i)

Non-derivative financial assets – recognition and derecognition The Company and its subsidiaries recognize the loans and receivables on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are initially recognized on the date of the negotiation under which the Company and its subsidiaries become a party to the contractual provisions of the instrument.

55

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

The Company and its subsidiaries fail to recognize a financial asset when the contractual rights to the cash flows of the asset expire, or when the Company and its subsidiaries transfer the rights to reception of the contractual cash flows on a financial asset in a transaction in which substantially all the risks and benefits of ownership of the financial asset are transferred. Any interest created or held by the Company and its subsidiaries in such transferred financial assets is recognized as a separate asset or liability. Financial assets and liabilities are offset and the net amount reported in the balance sheet only when the Company and its subsidiaries have legally enforceable right to set off and there is intention to settle on a net basis, or to realize the asset and settle the liability simultaneously.

(ii)

Non-derivative financial assets - measurement Financial assets measured at fair value through profit or loss A financial asset is classified as measured at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial assets are stated at fair value through profit or loss if and its subsidiaries manage these investments and makes decisions on investment and redemption based on fair value according to the risk management and strategy of investment documented by the Company and its subsidiaries. The transaction costs are recognized in income (loss) as incurred. Financial assets measured at fair value through profit or loss are measured at fair value and changes in the fair value of such assets, which consider any gain with dividends, are recognized in profit or loss for the year. Financial assets classified as held for trading include sovereign debt short-term securities actively managed by the treasury department of the Company and its subsidiaries to meet shortterm liquidity needs. Financial assets designated at fair value through profit or loss comprise equity instruments that would otherwise be classified as available for sale.

Financial assets held to maturity If the Company and its subsidiaries have the intent and capacity of holding to maturity the debt securities, these financial assets are classified as held to maturity. The investments held up to maturity are initially recognized at fair value plus any transaction costs directly assignable. After their initial recognition, the investments held to maturity are measured at amortized cost using the effective interest rate method, reduced by any impairment losses. Financial assets held to maturity include financial investments, mainly long-term investments.

Loans and receivables Loans and receivables are financial assets with fixed or determinable payments, but not quoted on any active market. Such assets are initially recognized at fair value plus any transaction costs directly assignable. After their initial recognition, loans and receivables are measured at amortized cost using the effective interest rate method, reduced by any impairment losses. Loans and receivables comprise trade accounts receivable, checking account receivable, related parties and other receivables.

56

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Cash and cash equivalents Cash and cash equivalents comprise balances of cash and cash equivalents, banks checking account and interest earning bank deposits with original maturities of three months or less as of the contracting date, which are subject to an insignificant risk of change in fair value and are used by the Company and its subsidiaries to manage short-term obligations. Interest income on interest earning bank deposits is recognized in the statement of cash flows, as operating activities.

(iii)

Non-derivative financial liabilities – Recognition, write-off and measuring The Company and its subsidiaries initially recognize the debt securities issued on the date that they are originated. All other financial liabilities (including those liabilities designated at fair value through profit or loss) are recognized initially on the negotiation date on which the Company and its subsidiaries become a party to the contractual provisions of the instrument. The Company and its subsidiaries derecognizes a financial liability when its contractual obligations are discharged or canceled or expired. The Company and its subsidiaries have the following non-derivative financial liabilities: Loans, financing and debentures, suppliers and contractors, current account payable related parties and other accounts payable. Such financial liabilities are initially recognized at fair value plus any transaction costs directly assignable. After their initial recognition, these financial liabilities are measured at amortized cost using the effective interest rate method.

(iv)

Capital - Common shares Common shares are classified as shareholders' equity. Additional costs directly attributable to the issue of shares are recognized as reduction in the shareholders’ equity. The compulsory minimum dividends, as established in the By-laws, are recognized as liabilities.

c.

Inventories Inventories of materials and consumption are recognized at average acquisition cost and include expenses incurred in the acquisition of inventories and other expenses incurred to bring them to their location and existing conditions.

d.

Intangible assets The Company and its subsidiaries have the following intangible assets:

•

Computerized systems’ right of use right and development costs Are state at acquisition cost less amortization, which is calculated in accordance with their estimated useful lives.

•

Infrastructure exploration right – see item n.

Constructions in progress They are expenses directly attributable to the construction of an infrastructure, which include costs with material, direct workforce and capitalized interests on loans.

57

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

e.

Impairment

(i)

Non-derivative financial assets Financial assets not measured at fair value through profit or loss, including investments calculated under the equity method of accounting are assessed at each reporting date for objective evidence of impairment loss. Objective evidences of financial assets’ impairment include:

•

debtor’s default or delays;

•

restructuring of an amount owed to the Group in conditions that the Group would not consider under normal conditions;

•

indications that the debtor or issuer will face bankruptcy;

•

negative changes in payment situation of debtors or issuers;

•

the disappearance of an active market for an instrument; the

•

observable data indicating that expected cash flow measurement of a group of financial assets decreased.

Financial assets measured at amortized cost The Company and its subsidiaries consider as evidence of impairment of assets measured by amortized cost both individually and on an aggregate basis. All individually significant receivables are assessed for impairment. Those identified as non-impaired on an individual basis are collectively assessed for any impairment loss not yet identified. Assets that are not individually significant are assessed on an aggregate basis in relation to impairment by grouping the assets with similar risk characteristics. When assessing impairment on an aggregate basis the Company and its subsidiaries make use of historical trends of the recovery term and the amounts of losses incurred, adjusted to reflect the management's judgment if the current economic and credit conditions are such that the actual losses will probably be higher or lower than those suggested by historical trends. An impairment is calculated as the difference between the asset's book value and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate. The losses are recognized in income and reflected in an account for allowance for losses. When the Company and its subsidiaries consider that it is not possible to reasonably expect recovery, amounts are written-off. When a subsequent event causes the amount of the impairment loss to decrease, the impairment loss is reversed through profit or loss.

Investees recorded under the equity method of accounting A loss by a reduction to recoverable value referring to an investee recognized under the equity method is measured by comparing the investment’s recoverable value to its book value. An impairment loss is recognized in the statement of income and is reversed if there has been a favorable change in the estimates used to determine the recoverable value.

58

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

(ii)

Non-financial assets The carrying amounts of the non-financial assets of the Company and its subsidiaries, except for inventories and deferred income and social contribution tax assets are reviewed at each reporting date for indication of impairment. If such indication exists, the asset's recoverable amount is determined. For goodwill and intangible assets with an undefined useful life, the recoverable value is estimated on an annual basis. An impairment loss is recognized when the carrying amount or its CGU (cash generating unit) exceeds its recoverable value. The recoverable value of an asset or cash-generating unit is the greater of its value in use and its fair value less selling expenses. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment as to the recoverability period of capital and specific risks of the asset or cash generating unit. As to other assets, impairment losses recognized in prior years are valued on each presentation date for any indications that the loss has increased, decreased or no longer exists. A loss of value is reversed if there has been a change in estimates used to determine the recoverable value. An impairment loss is reversed only with the condition that the book value of the asset does not exceed the book value that would have been calculated, net of depreciation or amortization, if the value loss had not been recognized.

f.

Other current and non-current assets Stated at their cost or realization value, including, when applicable, income earned up to the balance sheet date.

g.

Provisions A provision is formed if the Company and its subsidiaries have a legal or constructive obligation as a result of a past event, which can be reliably estimated, and it is probable that an outflow of funds will be required to settle the obligation.

h.

Provision for maintenance – concession contracts Contract obligations to maintain granted infrastructure at specific level of operation or to recover infrastructure at specified condition before returning it to the concession grantor at the end of the concession contract are recorded and evaluated at best estimate of expenditures necessary to settle this obligation on balance sheet date. The policy of the Company and its subsidiaries defines that periodic physical interventions, clearly identified and intended to recompose granted infrastructure to technical and operating conditions required in contract, are in the scope of the provision for maintenance during entire concession period. There are no physical interventions provided for in contract and/or estimated by the Company and its subsidiaries’ up to the end of current concession period; therefore, no provision was recorded as of December 31, 2014 regarding this matter.

59

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

i.

Other current and non-current liabilities Stated at the known amounts or estimated, plus, when applicable, the corresponding charges and monetary and exchange variations incurred up to the balance sheet date.

j. (i)

Employee benefits Short-term employee benefits Obligations for short-term employee benefits are measured on a non-discounted basis and incurred as expenses as the related service is rendered. The liability is recognized at the amount expected to be paid under the cash bonus plans or short-term profit sharing if the Company and its subsidiaries have a legal or constructive obligation to pay this amount as a result of prior service rendered by the employee, and the obligation can be reliably estimated.

(ii)

Post-employment benefit – health care plans The Company and its subsidiaries offer to its employees health plans compatible with the market, where the Company is co-sponsor of the plan and its employees contribute with fixed monthly payments, and the plans may be extended to their spouses and dependents. The monthly costs of contributions made by the Company and its subsidiaries are recorded monthly in income statement on an accrual basis. Costs, contributions and actuarial liabilities related to such plans are determined annually, with a basis on an appraisal carried out by independent actuaries.

k.

Operating income

(i)

Service concession agreements Income related to construction or improvement services pursuant to service concession agreement is recognized based on work completion stage, in conformity with accounting policy for recognition of income from administration service concession agreement, which is based on IFRIC 12 and on Technical Interpretation no. 1 (R1) of the Accounting Pronouncements Committee – Concession Agreements and related to IAS 11, and on Technical Pronouncement no. 17 (R1) of the Accounting Pronouncements Committee – Construction contracts. Income from operations or service is recognized in the period in which the subsidiaries provided services. When the subsidiaries provide more than one service under a service concession agreement, the compensation received is allocated in accordance with the market values of the services delivered.

(ii)

Water supply and sewage services Income related to water supply and sanitary depletion services are recognized upon measurement of water consumption.

(iii)

Other water and sewage indirect services Income from other water and sewage indirect services refers to provision of hydrometer installation and water connection and re-connection, and is recognized in the period in which services are provided by subsidiaries.

60

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

(iv)

Service income Income from services provided by subsidiary refer to accounting, financial and legal advisory services, and are recognized in the period. Income from services rendered is recognized in the income (loss) in proportion to the stage of completion of the service. Income is not recognized if there are significant uncertainties as to its realization. Income and expenses are recognized on the accruals basis.

l.

Financial income and expenses Financial income basically includes interest income from interest earning bank deposits and discounts obtained. Interest income is recognized in profit or loss using the effective interest method. Financial expenses include interest expenses and charges on loans, financing, debentures and taxes in installments. Borrowing costs which are not directly attributable to the acquisition, construction, or production of a qualifying asset are accounted for in profit or loss using the effective interest rate method.

m.

Income and social contribution taxes The direct subsidiaries Engepav Engenharia e Comércio Ltda. and the following subsidiaries of Nascentes do Xingú Participações e Administração S.A., namely Águas de Carlinda S.A., Águas de Nortelândia S.A., Águas de Vera S.A., Águas de Claudia S.A., Águas de Jauru Abastecimento e Distribuição S.A., Águas de Santa Carmem S.A., Águas de União do Sul S.A., Saneamento Básico de Jangada S.A., Águas de Barra do Garças Ltda., Águas de Sinop S.A., Águas de Guarantã Ltda., Águas de Matupá Ltda. e Águas de Novo Progresso - Tratamento e Distribuição Ltda. and the following subsidiaries of the Nascentes do Xingu Investimentos S.A., Águas de Confresa S.A., Águas de Diamantino S.A. have calculated their Income Tax and Social Contribution for the year using the presumed income which, based on gross sales, the rate of 32% is applied to calculate taxable base, applying the percentage of 15% plus a surcharge of 10% on the exceeding taxable income of R$240 (annual basis) for income tax and 9% on taxable income for social contribution on net income. Other subsidiaries have the income and social contribution taxes, both current and deferred, are calculated based on the rates of 15% plus a surcharge of 10% on taxable income in excess of R$ 240 (annual base for the year) for income tax and 9% on taxable income for social contribution on net income, and consider the offsetting of tax loss carryforward and negative basis of social contribution limited to 30% of the annual taxable income. Income tax and social contribution expenses comprise the current and deferred income tax and social contribution are recognized in profit & loss unless they are related to the business combination, or to items recognized directly in equity or in other comprehensive income.

(i)

Current tax Current tax is the tax payable on the taxable income for the year, at tax rates enacted or substantively enacted on the date of presentation of the individual and consolidated financial statements, and any adjustments to taxes payable in relation to prior years.

61

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

(ii)

Deferred tax Deferred taxes are recognized in relation to the temporary differences between the book values of assets and liabilities for accounting purposes and the related amounts used for taxation purposes. Deferred taxes are not recognized for the following temporary differences: initial recognition of assets and liabilities in a transaction that is not business combination, and not affecting the accounts nor taxable profit or loss, and differences related to investments in subsidiaries and subsidiary entities when likely not to be reversed within a foreseeable future. Besides, deferred taxes are not recognized for taxable temporary differences arising from the initial recognition of goodwill. Deferred taxes are measured at tax rates expected to be applied to temporary differences when they are reversed, based on laws enacted or substantively decreed up to the reporting date of individual and consolidated financial statements.

(iii)

Tax exposures To determine current and deferred income tax, the Company and its subsidiaries take into consideration the impact of uncertainties on positions taken on taxes and if the additional income tax and interest payment has to be made. The Company and its subsidiaries believe that the provision for income tax recorded in liabilities is adequate for all outstanding years, based on its evaluation of several factors, including interpretations of tax laws and past experience. This evaluation is based on estimates and assumptions that may involve several judgments on future events. New information may be made available, leading the Company and its subsidiaries to change its judgment on the adequacy of existing provision. These changes will impact income tax expenses in the year in which they occur. Deferred tax assets and liabilities are offset when there is a legal enforceable right to set off current tax assets and liabilities, and the latter relate to income taxes levied by the same tax authority on the same taxable entity. A deferred income tax and social contribution asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable income will be available against which the unused tax losses and credits can be utilized, limiting to the use of 30% of annual taxable income.

n.

Contracts for concession of services – Infrastructure exploration rights – ICPC 01 (R1) / IFRIC 12 The infrastructure within the reach of the technical interpretation ICPC 01 (R1) – Concession Agreements (corresponding to IFRIC 12 in the international accounting standards - IFRS), is not recorded as fixed asset of the concessionaire since the concession agreement does not transfer to the concessionaire the right of control over use of the infrastructure of public services. Only the assignment of such assets' ownership is provided for in order to provide the public services, and they will revert to the concession grantor on expiry of the respective agreement. The Concessionaire has access to operating public service provision infrastructure on behalf of the concession grantor, at conditions provided for in the arrangement. Under the terms of the concession contracts in the scope of this Interpretation, the Concessionaire is a service renderer, building or improving the infrastructure (construction or improvement services) used to provide a public service and operates and maintains this infrastructure (operation services) during a determined period.

62

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

If the Concessionaire provides construction or improvement services, received or receivable remuneration is recorded at fair value. This remuneration may correspond to right on intangible asset or financial asset. The concessionaire recognizes an intangible asset to the extent it receives the right (authorization) of charging public utility users. In case of subsidiaries, concession agreement does not provide for any remuneration at the end of infrastructure exploration period; for this reason, no financial asset was recognized in consolidated financial statements. The right of use of infrastructure derives from expenditures made during the improvement work in exchange for the right to charge the users for the use of the infrastructure. This right is comprised by construction cost plus profit margin and loan costs attributable to this asset. The subsidiaries have estimated that the eventual margin is close to zero. Amortization of infrastructure exploration right is recognized in income for the year on the straight-line basis over concession period.

o.

Concession right In conformity with guideline included in items 12 and 13 of OCPC 05 – Concession agreements, the Company and its subsidiaries adopt the accounting practice of recognizing total price for public utility delegation (grant) under intangible assets as a contra-entry to future amounts payable to the Concession Grantor, that is, concession agreement is considered as unenforceable.

p.

Segment information An operating segment is a component of the Company which engages in business activities from which it may earn income and incur expenses. Financial statements do not include information per segment, considering that Management did not identify other operating segment in addition to concession for exploration of water supply and sewage (sanitation) public utilities in the transactions of the Company and its subsidiaries.

q.

Capitalization of borrowing costs Loan costs attributable to concession agreement are capitalized during the construction stage in accordance with Technical Pronouncement CPC 20(R1) – Loan Costs, issued by the Accounting Pronouncements Committee (equivalent to IAS 23 in international accounting standards IFRS).

r.

Statements of added value The purpose of this statement is to evidence wealth created by the Company and its subsidiaries and its distribution during a certain period and is presented by the Company and its subsidiaries pursuant to the terms of technical pronouncement CPC 09 – Statement of Value Added, issued by the Accounting Pronouncements Committee, which is presented as an integral part of Financial Statements in accordance with accounting practices adopted in Brazil applicable to publicly-held companies, while for IFRS they represent an additional financial information.

s.

Basic and diluted profit per share The basic earnings per share are calculated by dividing the result for the year attributed to the Company’s shareholders by the weighted average quantity of shares of capital stock paid up in the respective year.

63

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

The diluted earnings per share are calculated by dividing the result for the year attributable to the Company's shareholders by the weighted average of outstanding common shares in the respective year taking into account the conversion of all potential shares with dilution effect. The Company and its subsidiaries do not have instruments that might dilute basic income per share.

t.

New standards and interpretations not yet adopted IFRS 9 Financial Instruments IFRS 9, published in July 2014, replaced the existing guidance in IAS 39 - Financial Instruments: Recognition and Measurement (Financial Instruments): Recognition and Measuring). IFRS 9 includes the revised guidance about the classification and measurement of financial instruments, including a new model of expected credit loss for the calculation of the impairment of financial assets, and new requirements about the hedge accounting. The standard maintains the existing guidance about the recognition and derecognition of financial instruments in IAS 39. IFRS 9 is effective for periods beginning on or after January 1, 2018 with early adoption allowed. IFRS 15 - Income from Contracts with Clients IFRS 15 requires an entity to recognize the amount of income reflecting the consideration that it expects to receive in exchange for control of these goods or services. The new standard will replace most of the detailed guidance on income recognition that currently exists in IFRS and GAAP when the new standard is adopted. The new standard is applicable beginning on or after January 1, 2017, with early adoption permitted by the IFRS. The standard may be adopted retrospectively, adopting a cumulative effects approach. The Company is evaluating the effects IFRS 15 will have on its financial statements and disclosures. The Company has not yet chosen the transition method to the new standard or determined the effects of the new standard in today's financial reports.

u.

Determination of the fair value A number of the Company's accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes. When applicable, additional information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

6

Cash and cash equivalents Parent company

Cash and banks Interest earnings bank deposits

Consolidated

12/31/2014

12/31/2013

12/31/2014

12/31/2013

131 -

73 3,952

8,533 -

27,147 9,873

131

4,025

8,533

37,020

64

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Cash and bank deposit balances include basically cash available and bank deposits available, respectively.

7

Interest earnings bank deposits Parent company Description

Average interest rate p.a. %

Fundo de Investimento Safira Post-fixed CDB Post-fixed CDB

Appreciation of the unit price 75–98% of CDI 98,1% to 103% of CDI

Current Non-current

Consolidated

12/31/2014

12/31/2013

12/31/2014

12/31/2013

123,229

36,396 326,399

77,510 397 441,267

56,094 458,088

123,229

362,795

519,174

514,182

60,736 62,493

306,152 56,643

443,394 75,780

447,894 66,288

Investments in CDB's, although having long-term maturities, may be redeemed at any time without prejudice to the remuneration already recognized and are part of the Company's daily cash management and, accordingly, stated in current assets. The acquired quotas of Fundo de Investimento Safira, managed by Banco BTG, correspond to a multimarket investment fund, redeemable at any time, as per the Company's liquidity needs. The portfolio of the funds consists of bank certificates of deposit with investment-grade financial institutions under low-risk credit conditions denoting proper guarantees and reduced vulnerability to external disturbing factors to an issuance or a set of issuer’s obligations. The financial assets presented in non-current assets are related to the loans that the Company raised during the previous years. The clause provided in the agreement sets forth that the Company must maintain a reserve account for its obligations related to three subsequent months, from the calculation base date, pursuant to the agreement between the parties. The Group's exposure to interest rate risks and a sensitivity analysis of financial assets and liabilities are disclosed in Note 25.

8

Trade accounts receivable Parent company Services receivable - Related-party transactions (Note 10) Water and sewage services (-) Allowance for doubtful accounts

Current Non-current

Consolidated

12/31/2014

12/31/2013

12/31/2014

12/31/2013

13,483 -

1,626 -

225,523 (29,665)

241,412 (99,260)

13,483

1,626

195,858

142,152

13,483 -

1,626 -

156,671 39,187

115,224 26,928

65

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

The maturity of accounts receivable on the date of financial statements at December 31, 2014 and 2013 was as follows: Consolidated Balance falling due

Up to 180 days

Balances overdue > 180 days

Total

Total 12/31/2014

Residential Commercial Industrial Public sector Mixed (commercial and home)

51,100 9,455 653 9,199 -

36,000 7,280 714 14,028 -

5,017 4,047 237 2,312 -

41,017 11,327 951 16,340 -

92,117 20,782 1,604 25,539 -

Subtotal - consumers Renegotiations

70,407

58,022

11,613

69,635

140,042 85,481

Consumer class

225,523 Consolidated Balance falling due

Up to 180 days

Balances overdue > 180 days

Total

Total 12/31/2013

Residential Commercial Industrial Public sector Mixed (commercial and home)

34,311 6,039 167 6,793 1,414

25,677 3,452 267 5,106 1,286

56,223 13,617 640 4,700 6,212

81,900 17,069 907 9,806 7,498

116,211 23,108 1,074 16,599 8,912

Subtotal - consumers Renegotiations

48,724

35,788

81,392

117,180

165,904 75,508

Consumer class

241,412

Allowance for doubtful accounts was recognized based on the analysis of overdue amounts and at amounts considered sufficient by Management to cover possible losses on realization of trade accounts receivable. Detailed allowance for doubtful accounts per consumer class is as follows: Consolidated

Residential Commercial Public sector Mixed (commercial and home) Industrial Installments

66

12/31/2014

12/31/2013

(5,017) (4,047) (2,312) (237) (18,052)

(62,118) (14,604) (4,897) (6,529) (737) (10,375)

(29,665)

(99,260)

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Changes to allowance for doubtful accounts in the year ended December 31, 2013 and in the year ended December 31, 2014 are as follows: Consolidated

Nature Current Renegotiations

Balance at 12/31/2013

(+) Additions

(-) Reversals

(-) Writeoffs

(-) Write-off of securities pursuant to Law 9,430/96

(94,003) (5,257)

(6,308) (5,500)

5,403 -

4,370 -

61,376 10,254

(29,162) (503)

(99,260)

(11,808)

5,403

4,370

71,630

(29,665)

Balance at 12/31/2014

Consolidated Nature Current Renegotiations

Balance at 12/31/2012

(+) Additions

(-) Reversals

(-) Write-offs

Balance at 12/31/2013

(86,958) (7,942)

(20,924) -

11,883 2,685

1,996 -

(94,003) (5,257)

(94,900)

(20,924)

14,568

1,996

(99,260)

Management of subsidiaries have adopted several measures intended to identify default causes and is implementing several actions intended to reduce it. These measures include review of hydrometers, payment of debts in installments, maintenance of a program for permanent cut, and systematic combat to frauds and clandestine connections. As of December 31, 2014, Management, based on its evaluation of credit risk and history of receipts from clients, understands that it is necessary to recognize an allowance for doubtful accounts on balance of current accounts receivable overdue for more than 180 days, which indicate that clients shall not pay their outstanding balances. Management also recognizes a supplementary provision for current accounts receivable and payment in installments falling due and overdue for less than 180 days from clients that have invoices included in the allowance for doubtful accounts. On December 31, 2014, the Company now recognizes accounts receivable from individual amounts below R$5 in the accounting records as effective loss for subsidiaries Prolagos and Águas Guariroba, using the same criteria of tax treatment pursuant to Law 9,430/96, without prejudice to the maintenance of the collection thereof. The amounts recovered will be accounted for as loss recovery.

9

Dividends and interest on own capital receivable Parent company

Prolagos S.A. Concessionária de Serviços Públicos de Água e Esgoto Águas Guariroba S.A.

67

12/31/2014

12/31/2013

23,124 139,099

14,919 108,448

162,223

123,367

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

10

Related party transactions Remuneration of key management staff On December 31, 2014, remuneration of Management key personnel, which refers to the Executive Board and the Board of Directors, totaled R$6,660 (R$4,469 on December 31, 2013) in parent company, and R$17,174 (R$10,088 on December 31, 2013) in consolidated, is recorded in the group of administrative expenses and includes salaries, fees, variable compensation, and direct and indirect benefits. The Company and its subsidiaries do not have other types of compensation, such as postemployment benefits (except for health care plan mentioned in note 5j (ii), other long-term benefits or benefits of labor contract termination.

Parent company The Company’s final parent company is Greq Participações e Administração Ltda. and its direct subsidiary is Aegea Investimentos S.A., which holds 65.97% of shares representing its capital.

Other related party transactions The main balances of assets and liabilities as of December 31, 2014 and 2013 as well as transactions that influenced income (loss) for the years then ended, related to operations with related parties, result mainly from transactions with shareholders and associated companies of the same economic group. The main operations performed during the year are shown in the table below: Parent company Current assets Accounts receivable - (a) (Note 8) Águas de Matão S.A. Águas de São Francisco Concessionária de Saneamento S.A. Águas do Mirante S.A. Prolagos S.A. – Concessionária de Serviços Públicos de Águas e Esgoto Águas Guariroba S.A.

Advance to supplier – (b) Equipav S.A. - Pavimentação, Engenharia e Comércio Equipav Engenharia Ltda.

Other receivables - (b) Águas de Campo Verde S.A. Águas Guariroba S.A. Águas do Mirante S.A. Águas de Matão S.A. Águas de Barra do Garças Ltda. GSS - Gestão de Sistemas de Saneamento Ltda. Águas de São Francisco Concessionária de Saneamento S.A. LVE - Locadora de Veículos e Equipamentos Ltda. Equipav Engenharia Ltda. GTE - Gestão e Tecnologia em Eng. Ltda. Engepav Engenharia e Comércio Ltda. Sarpav Mineradora Ltda.

68

Consolidated

12/31/2014

12/31/2013

12/31/2014

12/31/2013

1,173 915 3,117

-

-

-

4,917 3,361

368 1,258

-

-

13,483

1,626

-

-

-

-

-

1,885 7

-

-

-

1,892

44 38 30 66 38 86 75 10 576 -

559 159 58 79 19

128 201 -

19

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Parent company

Consolidated

12/31/2014

12/31/2013

12/31/2014

12/31/2013

963

874

329

19

Non-current assets Checking accounts receivable - related parties (c) Mobit Mobilidade e Participações S.A. Equipav S.A. - Pavimentação, Engenharia e Comércio Empate Engenharia e Comércio Ltda. Equipav Engenharia Ltda. Greq Participações e Administração Ltda. Águas de Matão S.A. Águas do Mirante S.A. GSS - Gestão de Sistemas de Saneamento Ltda. Concessionária Águas de Meriti Ltda. LVE - Locadora de Veículos e Equipamentos Ltda. Águas de Porto Esperidião Saneamento e Distribuição Ltda. Águas de São Francisco Concessionária de Saneamento S.A. Nascentes do Xingú Participações e Administração S.A. Águas de Campo Verde S.A. Águas de Sorriso S.A. Águas de Primavera S.A. Águas de Vera S.A. Águas de Cláudia S.A. Águas de Poconé S.A. APA - Água de Peixoto de Azevedo S.A. Saneamento Básico de Pedra Preta S.A. Águas de Carlinda S.A.

606 25,130 2,069 2,180 75 4,100 23,003 2,000 2,100 980 170 140 170 100 50 45

176 16,695 6,799 9,158 17,593 2,533 2,069 100 75 1,000 1,300 850 170 140 100 100 50 45

606 -

176 26,698 6,797 9,158 -

Águas de São José S.A. Saneamento Básico de Jangada S.A. Águas de Jauru Abastecimento e Distribuição S.A. Águas de Marcelândia S.A. Águas de Nortelândia S.A. Águas de Santa Carmem S.A. Águas de União do Sul S.A. Brasil Central Eng. Ltda. Eletricidade Paraense S.A. Aegea Investimentos S.A.

35 30 30 25 20 20 10 46,129

35 30 30 25 20 20 10 -

46,129

655 485 -

109,217

59,123

46,735

43,969

739 -

-

-

14,690 17,545 13,374 247 26,495

739

-

-

72,351

2,803 18,018

-

-

-

20,821

-

-

-

145,223

61,623

47,064

118,231

Acquisitions of intangible assets in the year – (d) Empate Engenharia e Comércio Ltda. Equipav Engenharia Ltda. GSS - Gestão de Sistema de Saneamento Ltda. Equipav S.A. - Pavimentação, Engenharia e Comércio Minerpav Mineradora Ltda. Equipav Tecnologia e Engenharia Ltda.

Private Debentures (e) Águas de Matão S.A. Águas de São Francisco Concessionária de Saneamento S.A.

69

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Current liabilities Suppliers – related parties (b) (Note 13) Engepav Engenharia e Comércio Ltda. Brasil Central Eng. Ltda. Equipav Engenharia Ltda. Equipav Tecnologia e Engenharia Ltda. Greq Participações e Administração Ltda. LVE - Locadora de Veículos e Equipamentos Ltda. Kullinan (Ibura Consortium) Eletricidade Paraense S.A. Minerpav Mineradora Ltda. Non-current liabilities Checking account payable - related parties (c) NAG – Nucleous of Support to Management Brasil Central Eng. Ltda. Filadelfo dos Reis Dias Águas de Campo Verde S.A. Saneamento Básico de Jangada S.A. Águas de Pedra Preta S.A. Água de Peixoto de Azevedo S.A. Águas de Primavera S.A. Aguas de São José S.A. Águas de Sorriso S.A. Águas de Vera S.A. Other

Parent company

Consolidated

12/31/2014 12/31/2013

12/31/2014 12/31/2013

50 -

48 -

145 1,049 4,980 1 8 3 1

2,437 14

50

48

6,187

2,451

40 9 337 99 750 1 114 26 -

-

212 268 1,017 90

212 268 1,017 90

1,376

-

1,587

1,587

1,426

48

7,774

4,038

Parent company 12/31/2014 12/31/2013 Income (loss) Gross income from services (note 19) - (c) Prolagos S.A. - Concessionária de Serviços Públicos de Água e Esgoto Águas de São Francisco Concessionária de Saneamento Ltda. Águas do Mirante S.A. Águas de Matão S.A. Águas Guariroba S.A.

(a)

Consolidated 12/31/2014 12/31/2013

31,434 1,089 5,694 1,250 42,976

4,433 13,974

-

-

82,443

18,407

-

-

The nature of the balances in trade receivables and income from services rendered is related to the Company's service provision to its subsidiaries through the administrative service center ("CAA" - AEGEA Administrative Center), located in Santa Barbara d'Oeste in the State of São Paulo. The relevant services are summarized in: tax accounting/tax audit, finances, human resources, personnel management, revenue security center and information technology, which are determined by the calculation of hours served and billed on a monthly basis, with payment term of 30 days.

70

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

(b)

Balances held with related parties and classified in the group of advances to suppliers, other credits and related-party suppliers have operating nature due to contracting of services for the execution of expansion and maintenance work on water and sanitary depletion networks, which will be offset against invoices for provision of services. Provisions of service are governed by cost contracts and payments are made according to measurements.

(c)

Amounts referring to these transactions are recognized in non-current assets and non-current liabilities, and refer to financial movements for cash supply, without maturity and adjustment.

(d)

On September 30, 2014, the Company and its direct subsidiaries have entered into credit assignment and debt assumption agreements. Accordingly, the Company has accounted a total assets of R$46,129 with its direct parent company AEGEA Investimentos S.A.

(e)

Amounts held with related parties and classified in intangible assets group have operating nature deriving from the contracting of services to execute construction work and expansion of water networks and sanitary depletion. Contracts for the provision of engineering services related to contracting of construction work and expansion of water and sanitary depletion network services are as follows: changes in 2014

Equipav Tecnologia e Engenharia Ltda. Engepav Engª e comº Ltda.

Total Contracted

Balance at 12/31/2013

new agreements

Realized

Balance at 12/31/2014

206,838 745,383

132,360 99,889

406,781

(110,371) (19,613)

21,989 487,057

952,221

232,249

406,781

(129,984)

509,046

The contracted amount of R$206,838 refers to the construction works of the sewage systems in the city of Piracicaba, state of Sao Paulo, contracted by direct subsidiary of Águas do Mirante S.A., started in June 2012. Above presented values represent global value of contracts for the provision of engineering services related to the contracting of construction work and expansion of water and sanitary depletion network, and are recognized in accounting books through physical and financial measurement, with services being provided by third parties and related parties. (a)

The amounts refer to the issuance of non-convertible, simple debentures, for private distribution, with no intermediation of institutions included in the securities distribution system, issued by the subsidiaries Águas de Matão S.A. and Águas de São Francisco Concessionária de Saneamento S.A., with the purpose of investing in infrastructure and working capital. There are other non-convertible, private debentures, in the amount of R$100,819, which are traded in the subsidiaries that have been eliminated in the consolidation process.

11 a.

Investments Breakdown of balances Parent company 12/31/2014

12/31/2013

Investments in subsidiaries and jointly-controlled subsidiaries Advance for investments acquisition (g) Other investments

730,991 12,500 3

593,212 -

Total investments

743,494

593,212

71

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

b.

Breakdown of investments in subsidiaries

Capital Quantity of shares: Common shares Interest Total assets of the subsidiaries Total liabilities of the subsidiaries Income of subsidiaries Shareholders’ equity of investees on December 31, 2014 Equity in income of subsidiaries (-) Unearned income between subsidiaries Goodwill in the acquisition of subsidiaries Amount of the investment on December 31, 2014

Investment amount at January 1 2013 Equity in net income of subsidiaries Unearned income between the companies Dividends and interest on own capital Paid-in capital (c) Capital transfer (c) Acquisition of interest (d) Income in interest acquisition/other Amount of the investment on December 31, 2013 Equity in net income of subsidiaries Unrealized profit among companies Dividends and interest on own capital Capital increase (c) Advances for future capital increase Acquisition of interest (d) Losses with investments Spin-off (e) Sale of corporate interest (f) Transfer of investments between subsidiaries Amount of the investment on December 31, 2014

Águas de Sinop S.A.

LVE Locadora de Veículos e Equipamentos Ltda.

Águas de Matupá Ltda.

Águas de Guarantã Ltda.

Águas de Novo Progresso Ltda.

Águas de São Francisco do Sul Ltda.

Total

Prolagos S.A.

Águas Guariroba S.A.

Engepav Engenharia e Com. Ltda.

Águas do Mirante S.A.

Nascentes do Xingú Participações e Administração S.A.

Águas de Porto Esperidião Saneamento e Distribuição Ltda.

255,041

124,427

8,000

28,326

52,002

1

1,129

15,500

7,000

1,080

901

7,373

450

1,165

4,179

663

2,019

-

221,673,074 99.99%

111,800,014 99.99%

99.99%

33,263,000 99.99%

52,000,500 100.00%

60.00%

51%

100.00%

7,000,000 100.00%

1,080,000 51.00%

901,000 100.00%

7,373,000 100.00%

99.99%

100.00%

100.00%

100.00%

70.00%

-

636,690

1,121,017

23,944

247,280

306,870

3,378

3,198

21,875

44,450

17,595

20,625

10,355

7,615

2,660

6,019

2,242

2,028

2,477,841

(292,166) 44,862

(856,551) 98,308

(11,698) 4,381

(221,746) (3,780)

(220,197) (2,157)

(3,200) 217

(2,069)

(6,837) (3,277)

(42,121) (4,671)

(17,204) (689)

(24,789) (5,065)

(2,705) 277

(7,532) 201

(1,128) (25)

(2,398) (292)

(986) (29)

(6) 3

(1,713,332) 128,264

344,525

264,467

12,246

25,534

45,896

178

1,129

15,038

2,329

391

(4,164)

7,650

83

1,532

3,621

1,256

2,022

723,732

44,858

98,298

4,381

(3,780)

(2,157)

130

(3,277)

(4,671)

(473)

(5,065)

277

201

(25)

(292)

(29)

2

128,378

-

-

(54,657)

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

45,385

-

-

3,504

-

-

-

-

-

-

5,877

4,456

4,182

-

63,404

344,490

264,440

(42,412)

70,916

45,896

107

4,080

15,038

2,329

199

(4,164)

7,650

83

7,409

8,077

5,438

1,415

730,991

Conces. Águas de Meriti Ltda.

GSS - Gestão de Sistemas de Saneamento Ltda.

Meriti Ltda.

GSS Gestão de Sistemas de Saneamento Ltda.

Águas de Matão S.A.

Nascentes do Xingú Investimento S.A.

Águas de São Francisco S.A.

Águas de Sinop S.A.

LVE Locadora de Veículos e Equipamentos Ltda.

Águas de Matupá Ltda.

Águas de Guarantã Ltda.

(54,657)

Progresso Ltda.

Águas de São Francisco do Sul Ltda.

Confresa Saneamento e Distr. Ltda.

Águas de Diamantino S.A.

Nacional Águas e Saneamento Ltda.

Total

-

-

-

-

-

-

488,016

-

-

-

-

-

-

1,195

153,503

-

-

-

-

-

-

-

-

(21,166)

-

450 -

-

-

-

-

-

-

(450) 550

(55,009) 10,546 13,400 4,630

-

-

-

-

-

-

-

-

-

(707)

(705)

-

-

-

(118)

-

-

-

-

-

-

588

593,212

(4,671)

(473)

(5,065)

277

201

(25)

(292)

(29)

2

(92)

157

774

129,217

-

-

-

-

-

-

-

-

-

-

-

-

-

1,409

-

17,063

7,000

4

901

7,373

-

765

2,078

563

1,413

399

480

(800) -

(54,470) 46,105

-

-

3,500 (6,297) -

-

(276)

-

-

-

6,669 -

6,291 -

4,904 -

-

-

-

(173) -

4,400 17,864 (173) (6,297) (276)

-

-

-

389

-

944

-

-

-

-

-

-

-

(307)

(637)

(389)

45,896

107

4,080

15,038

2,329

199

(4,164)

7,650

83

7,409

8,077

5,438

1,415

-

-

-

Prolagos S.A.

Águas Guariroba S.A.

Engepav Engenharia e Com. Ltda.

Águas do Mirante S.A.

Nascentes do Xingú Participações e Administração S.A.

Águas de Porto Esperidião Saneamento e Distribuição Ltda.

Águas de Matão S.A.

Nascentes do Xingú Investimento S.A.

Águas de São Francisco S.A.

271,008

124,374

(13,610)

55,708

50,536

-

-

-

-

-

-

-

-

-

52,544

86,810

19,189

(1,009)

(3,949)

(24)

-

(685)

-

-

-

-

(568)

-

-

(21,166)

-

-

-

-

-

-

-

-

-

(12,118) -

(5,614) -

(36,827) 5,750 -

13,400 -

-

1 -

4,080

4,345 -

-

-

-

-

-

2

-

-

-

-

-

-

311,434

205,570

(46,662)

68,096

46,587

(23)

4,080

3,660

-

44,858

98,298

4,381

(3,780)

(2,157)

130

-

(3,277)

-

-

1,409

-

-

-

-

(11,802) -

(39,428 -

(2,440) -

6,600

1,466

-

-

-

900 -

-

-

-

-

-

-

344,490

264,440

(42,412)

70,916

72

730,991

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

c.

Capital increase in subsidiaries

(i)

Year 2013 On January 15, 2013, the Company, together with Equipav Engenharia Ltda., in the proportion of 60% and 40%, respectively, established Águas de Porto Esperidião Saneamento e Distribuição Ltda., through payment of capital in the amount of R$1 divided into 1,000 shares, to operate in accordance with concession agreement no. 48/2012 entered into with the municipality of Porto Esperidião and valid up to December 21, 2042, to be engaged in the concession for provision of public utility services of water supply and sanitary depletion in the municipality of Porto Espiridião, pursuant to the terms of public bid no. 001/2012. On June 3 and November 11, 2013, the Company’s shareholders approved payment of capital in subsidiary Águas do Mirante Ltda., in the amounts of R$8,400 and R$5,000, respectively. On July 18, 2013, the Company decided to establish company LVE – Locadora de Veículos e Equipamentos S.A. through capital payment of R$45 plus the promise of capital payment of R$405 within 12 months. On December 20, 2013, the Company paid-in remaining capital of R$405, totaling R$450. On August 6, 2013, the Company and its subsidiary Engepav Engenharia e Comércio Ltda. decided to establish company GSS – Gestão de Sistemas de Saneamento Ltda. through capital payment of R$50 plus the promise of capital payment of R$450 within 24 months. During the year, the Company approved capital payment in its direct parent company of R$3,845. On October 21, 2013, subsidiary GSS – Gestão de Sistemas de Saneamento Ltda. entered into a contract for purchase option of Agência Ambiental – Gestão de Tecnologia Ltda., and made an advance payment of R$5,978. On February 7, 2014, a call option was exercised, with payment of the second installment, in the amount of R$6,972, totaling R$12,950. As of December 31, 2013, shareholders approved capital increase of direct subsidiary Engepav Engenharia e Comércio Ltda. in the amount of R$7,999, being R$5,750 through capitalization of advance for future capital increase balance and R$2,249 through capitalization of income for current year.

(ii)

Year 2014 On January 9, 2014, the Company approved the capital increase of the subsidiary Águas de São Francisco S.A., in the amount of R$901. On January 14, September 30 and December 19, 2014, the Company paid in the capital stock in its subsidiary Águas de Matão S.A., amounting to R$200, R$4,303 and R$2,497, respectively, which now has the capital stock of R$7,000. On January 22, 2014, the capital stock of the subsidiary Águas de Confresa S.A. was increased by R$569, of which the Company contributed R$399 corresponding to its interest in such subsidiary. On January 27 and March 31, 2014, the Company approved the capital stock to be paid in its subsidiary Águas do Mirante S.A., in the amount of R$3,500 and R$3,100, respectively, which now has a capital stock of R$28,326.

73

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

On May 6, 2014, the Company subscribed and paid in the capital stock of the subsidiary Águas de Diamantino S.A. in the amount of R$480, divided into 480,000 common shares with no par value. On March 31, 2014, the Company approved the capital increase of its subsidiary GSS - Gestão de Sistemas de Saneamento Ltda., in the amount of R$6,300. On the same date, there was partial spin-off related to the investment in Agência Ambiental, in the amount of R$6,297 (see note (e.) below). On July 24, 2014, the Company approved the contribution of investments of Nacional Águas Ltda., in the amount of R$389. On November 11 and December 30, 2014, the Company subscribed and paid in thecapital stock, in the amounts of R$9,744 and R$1,019. On December 30, 2014, the Company will contribute within up to one hundred and eighty (180) days, by means of an AFAC, the amount of up to R$3,500, thus the subsidiary’s capital stock will be R$15,500. On July 31, 2014, the Company subscribed and paid in 947,238 new quotas, in the amount of R$947, issued by the direct subsidiary ENAE Participações Ltda. through the contribution of its investments in the subsidiaries Águas de Confresa S.A. and Águas de Diamantino S.A., which correspond 307,447 and 637,224 shares, respectively, in addition to the contribution in local currency, which corresponds 2,567 new quotas. Subsequently, the Company has its corporate name changed and the corporate type to the Nascentes do Xingu Investimentos S.A. On August 28, 2014, the Company acquired 99.99% of the quotas in the capital stock of Águas de Sinop S.A., which operates drinking water supply and sanitation services, in the city of Sinop, state of Mato Grosso, for R$7,373. This concession refers to the agreement No. 96/14, executed and effective for the period of 30 years. On October 15, 2014, the Company paid in the capital stock of its subsidiary Nascentes do Xingú Participações e Administração S.A., in the amount of R$1,466. On December 30, 2014, the Company approved the capital increase of its subsidiary Águas de São Francisco do Sul Ltda., in the amount of R$1,413. On December 30, 2014, the Company subscribed and paid in the capital stock of its subsidiaries Águas de Matupá Ltda., Águas de Guarantã Ltda. and Águas de Novo Progresso - Tratamento e Distribuição Ltda., in the respective amounts of R$765, R$2,078 and R$563, being paid up in cash. On December 31, 2014, the Company approved an increase in the capital of its direct subsidiary Engepav Engenharia e Comércio Ltda., by means of an FACA, in the amount of R$ 900, to be paid in up to 120 days from the closure of the reference period, or on the occasion of the first amendment to the articles of association, increasing the capital stock to R$8,900.

74

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

d.

Acquisition of interest

(i)

Year 2013 On March 18, 2013, the Company acquired for R$4,080, 51% of shares of Concessionária Águas de Meriti Ltda., a non-operational company that held the concession to operate in sanitation and sewage treatment in the municipality of São João de Meriti, Rio de Janeiro State. This concession refers to contract no. 86/98, valid until June 25, 2028.

(ii)

Year 2014 As mentioned in note 3, on February 7, 2014, the subsidiary GSS acquired the quotas of the capital stock of Agência Ambiental for R$27,301 the amount of R$12,950 was actually paid, and the remaining amount of R$14,351 corresponded to the assumption of Agência Ambiental’s debts. The company Agência Ambiental holds the right to purchase three public sanitation concessionaires, namely: Águas de Guarantã Ltda., Águas de Novo Progresso - Tratamento e Distribuição Ltda. and Águas de Matupá Ltda.

e.

Spin-off On March 31, 2014, GSS was split and net assets were spun off in the amount of R$6,297, consisting of assets, rights and liabilities briefly described in GSS's statement of financial position as of February 28, 2014, especially the rights and liabilities related to the acquisition of the three concessionaires originated in the acquisition of Agência Ambiental.

f.

Sale of ownership interest On September 30, 2014, the Company sold 397,438 registered, with no par value, common shares of the subsidiary Nascentes do Xingú Investimentos S.A., having remained with 550,800 shares representing 51% of the capital of the subsidiary. The shares were sold to NX SAneamento Ltda. for R$348, obtaining in this operation a gain of R$72.

g.

Advance for acquisition of investments On September 10, 2014, the Company entered into a Stock Option Instrument (“Instrument”) for the acquisition of Empresa T-Broip Tecnologias e Participações Ltda. (“T-Broip”) for R$19,800, having made an advance payment of R$8,500 on September 15, 2014 and R$4,000 on October 20, 2014, the remaining balance to be paid upon the completion of the purchase. T-Broip has the call option of the 51% interest in two Special Purpose Companies (“SPEs”), namely, Águas de Santa Inês Ltda. and Águas de Barra do Corda Ltda., for the exploration of public sanitation concessions, both full water and sewage concessions in the state of Maranhão. The Company shall exercise, at its sole discretion, the call option as soon as T-Broip formally acquires the 51% interest in the SPEs, once the SPEs have obtained the authorization of the concession authorities to start up and permit for the mobilization of personnel to provide services, and such option will be limited until March 10, 2015. If the Company does not exercise the call option, the amount of R$4,000 will not be refunded and R$8,500 will be restated at CDI rates.

12

Intangible assets Amounts recorded as intangible assets refer to the concession for exploration of infrastructure and are comprised as follows:

75

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

a.

Breakdown of balances Consolidated 12/31/2014

Assets Goodwill Agência Ambiental Concession right (i) Nascentes do Xingú Infrastructure right of exploration (ii) Grant/Concession contract Technical facilities for sanitation Buildings of treatment plants Machinery and equipment Other components

Useful life (in years)

Remaining term (in years)

Average annual interest

Cost

30

20

5.7%

5,000

19

19

16–48 03–30 05–69 03–60 01–30

5.6%

10–46 02–30 05–48 02–47 02–30

2.1% 3.9% 3.0% 4.2% 5.1%

Constructions in progress Constructions in progress Advances to suppliers Software Software license

b.

12/31/2013

5

03–10

23.2%

(-) Amortization

Net

Net

5,000

5,000

-

5,000

-

26,621

(2,532)

24,089

25,582

26,621

(2,532)

24,089

25,582

459,518 822,728 524,627 49,249 25,959

(68,574) (173,123) (38,987) (13,841) (5,912)

390,944 649,605 485,640 35,408 20,047

347,150 331,467 340,841 18,444 13,293

1,882,081

(300,437)

1,581,644

1,051,195

125,008 11,775

-

125,008 11,775

297,127 1,885

136,783

-

136,783

299,012

11,406

(374)

11,032

1,275

11,406 2,061,891

(374) (303,343)

11,032 1,758,548

1,275 1,377,064

Changes in cost Consolidated 12/31/2013 Assets Goodwill Agência Ambiental Concession right (i) Nascentes do Xingú Infrastructure right of exploration (ii) Grant/Concession contract Technical facilities for sanitation Buildings of treatment plants Machinery and equipment Other components Constructions in progress Constructions in progress (iv) Advances to suppliers Software Software license

Cost

12/31/2014 Additions

Acquisitions of subsidiaries (iii)

Write-offs

5,000

Transfers

Cost

-

5,000

-

-

5,000

-

-

5,000

26,621

-

-

-

-

26,621

26,621

-

-

-

-

26,621

403,255 483,119 371,071 25,255 18,103

858 1,762 1,119 10,733 6,801

17,922 7,333 451 198 125

(9,080) (283) -

46,563 330,797 151,986 13,063 930

459,518 822,728 524,627 49,249 25,959

1,300,803

21,273

26,029

(9,363)

543,339

1,882,081

297,127 1,885

370,489 11,775

-

(1,885)

(542,608) -

125,008 11,775

299,012

382,264

-

(1,885)

(542,608)

136,783

1,323

5,216

5,598

-

(731)

11,406

1,323

5,216

5,598

-

(731)

11,406

1,627,759

408,753

36,627

(11,248)

-

2,061,891

76

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

c.

Changes in amortization Consolidated

Assets Concession right (i) Nascentes do Xingú

12/31/2013 Accumulated amortization

Additions

12/31/2014 Accumulated amortization

(1,039)

(1,493)

(2,532)

(1,039)

(1,493)

(2,532)

(56,105) (151,652) (30,230) (6,811) (4,810)

(12,469) (21,471) (8,757) (7,030) (1,102)

(68,574) (173,123) (38,987) (13,841) (5,912)

(249,608)

(50,829)

(300,437)

(48)

(326)

(374)

(48) (250,695)

(326) (52,648)

(374) (303,343)

Infrastructure right of exploration (ii) Grant/Concession contract Technical facilities for sanitation Buildings of treatment plants Machinery and equipment Other components Software Software license

Consolidated

Goodwill

Right to exploration of infrastructure

Constructions in progress

Software

Total

Balances at December 31, 2012

26,621

874,362

217,413

1,223

1,119,619

Additions Transfers Write-offs Amortizations

(1,039)

88,476 127,683 (1,064) (38,262)

209,081 (127,482) -

281 (201) (28)

297,838 (1,064) (39,329)

Balances at December 31, 2013

25,582

1,051,195

299,012

1,275

1,377,064

(i)

Intangible assets recorded under caption concession right refer to goodwill determined upon acquisition of control over Nascentes do Xingú. These intangible assets are based on expected future earnings, and are amortized on a straight-line basis over concession period of subsidiary.

(ii)

The intangible assets recorded under caption Infrastructure exploration right refers solely to expenditures on infrastructure construction and improvement. Amortization is carried out at the straight-line basis, considering smaller period between the asset’s useful life and concession period.

(iii)

Above disclosed intangible assets have defined useful lives that vary from 1 to 60 years, except for balance of “Intangible assets in progress”, as these assets refer to items that have not yet become operational.

(iv)

Note no. 3.

(v)

Interest on loans capitalized in the Intangible Assets in progress, for the year ended December 31, 2014, was R$15,968 and an average rate of 6.45% p.a. (R$16,832 and 9.48% p.a. as of December 31, 2013). The amounts recorded as Intangible Assets in progress refer to engineering services for the improvement or expansion of the sanitation infrastructure.

77

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Intangible assets with defined useful lives are subject to annual impairment test in case there are indication of loss in value. No impairment indicators were identified in accordance with Technical Pronouncement CPC 01 – Impairment of Assets for any of intangible assets presented above. Indirect subsidiaries Águas de Sorriso S.A., Águas de Poconé S.A. and Águas de Barra do Garças Ltda. and its direct subsidiary Águas de Guariroba S.A. are parties to lawsuits in progress that are classified by Management and its external legal advisors as remote losses that may cause loss of respective concessions, representing a total net value as of December 31, 2014 of R$804,803 (R$709,738 as of December 31, 2013). In the hypothesis that cancellation of any of the Concessions related to above-mentioned lawsuits is decided, the Grantor, pursuant to the terms of Law no. 8,987, of February 13, 1995, should indemnify investment installments related to reversible assets that have not yet been amortized or depreciated and that were realized for the purpose of guaranteeing granted services’ continuity and adequacy to current events, as well as indemnify all damages and loss of profit, as the Concessionaire entered into a concession agreement based on its legitimacy and validity.

13

Suppliers and contractors Consolidated

Parent company 12/31/2014

12/31/2013

12/31/2014

12/31/2013

2,526 50

194 48

42,752 6,187

15,087 2,451

2,576

242

48,939

17,538

Rendering of services and contractors payable Suppliers - Related parties (Note 10)

14

Loans, financing and debentures Description

Working capital Working capital (Bridge) CEF Project Debentures

BNDES project

Charges DI + interests of 2.2–2.3% p.a. TR + 12% p.a. UPR + interests 5–12% p.a. DI + interests of 2.3–3.25% p.a. Long term interest rate (TJLP) + interest 3.00–4.40 p.a.

Investment

TJPL + interests 3.5–6% Fixed - 3.5% p.a. CDI + interest 0.5–3.0% p.a.

Working capital (Bridge) Other

DI + interests of 1.9–1.94% p.a. Leases

Finame Finisa

Maturities

Original value

Parent company

Consolidated

12/31/2014

12/31/2013

12/31/2014

12/31/2013

May 15–Oct 15

19,328

-

-

14,917

95,683

Jun 14–Jul 15 Dec 14–Apr 37 Jul 14–Dec 19

20,000 351,268 705,000

-

-

-

-

153,389

152,730

21,099 290,498 743,113

266,430 412,875

Jun 17–Jul 28

145,508

-

-

120,917

110,997

Jan 19

2,526

-

-

2,434

835

Nov 23

8,460

-

-

4,059

-

Oct 22

100,000

101,441

100,676

101,441

100,675

37,568 7,697

6,782

-

37,710 7,275

-

261,612

253,406

1,343,463

987,495

13,973 247,639

4,928 248,478

233,597 1,109,866

199,445 788,050

Feb 14–May 15 July/17

Current Non-current

78

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Schedule of debt amortization The installments classified in non-current liabilities as of December 31, 2014 are according to the following schedule: Schedule of debt amortization – Loans and financing Parent company

Consolidated

12/31/2014

12/31/2013

12/31/2014

12/31/2013

2015 2016 2017 2018 2019 onwards

14,573 14,573 14,573 53,920

6,392 13,134 13,135 13,135 52,682

93,230 45,843 48,090 370,240

54,589 54,358 61,271 63,154 341,353

Total

97,639

98,478

557,403

574,725

Schedule of debt amortization - Debentures Parent company

Consolidated

12/31/2014

12/31/2013

12/31/2014

12/31/2013

64,286 85,714 -

64,286 85,714 -

174,004 185,686 99,972 90,801

38,325 80,952 94,048 -

150,000

150,000

552,463

213,325

2015 2016 2017 2018 2019 onwards Total

As of December 31, 2014, the Company and its subsidiaries incurred raising costs amounting to R$5,817 (R$1,419 as of December 31, 2013), which were recognized in accordance with IAS 32 and Technical Pronouncement CPC 08 (R1) – Transaction Costs and Premium on Issuance of Securities issued by the Accounting Pronouncements Committee. The Company and its subsidiaries have usual market guarantees, restrictions and covenants related to their loans. All restrictive clauses referring to loans, financing and debentures are being fully complied with by the Company and its subsidiaries as of December 31, 2014.

Aegea Saneamento e Participações S.A.

On October 28, 2013, on the occasion of 2nd issuance, the Company issued 150,000 registered, book-entry, non-convertible, simple debentures, in a single series, with real collateral and additional personal guarantees, at a total nominal amount of R$150,000. These debentures have a maturity date on October 25, 2017 with amortization upon maturity (bullet). The Company undertakes to observe a number of restrictions related to such debentures, among which the most important are: •

Personal guarantee assumed by the guarantor Engepav Engenharia e Comércio Ltda.;

•

Guarantee of fiduciary assignment provided for in the agreement, in the amount equivalent to 50% of the receivables from the dividends to be distributed by Prolagos S.A. - Concessionária de Serviços Públicos de Água e Esgoto, Águas Guariroba S.A. and Engepav Engenharia e Comércio Ltda.; and 79

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

•

Pledge of 54.39% of the shares of AEGEA Saneamento e Participações S.A. held by Aegea Investimentos e Saneamento, 100% of Fundo de Participações (FIP), to be shared between the International Finance Corporation (IFC) and the Debenture Holders. On September 12, 2012, the Company entered into an agreement with International Finance Corporation (IFC), financing the total nominal amount of R$100,000. This financing has a maturity date on October 15, 2022. The Company undertakes to observe a number of restrictions related to such financing, among which the most important are:

•

Personal guarantee assumed by the guarantor Engepav Engenharia e Comércio Ltda.;

•

Guarantee of fiduciary assignment provided for in the agreement, in the amount equivalent to 50% of the receivables from the dividends to be distributed by Prolagos S.A. - Concessionária de Serviços Públicos de Água e Esgoto, Águas Guariroba S.A. and Engepav Engenharia e Comércio Ltda.; and

•

Pledge of 54.39% of the shares of AEGEA Saneamento e Participações S.A. held by Aegea Investimentos e Saneamento, 100% of Fundo de Participações (FIP), to be shared between the International Finance Corporation (IFC) and the Debenture Holders.

Águas Guariroba S.A. Between November 30, 1991 and April 11, 2013, the Company entered into an agreement with the Federal Savings Bank (Caixa Economica Federal - CEF), financing subsidized for the investments in sanitation at the nominal value of R$352,539. Such financing expires on the period from December 6, 2014 and April 14, 2037. The Company undertakes to observe a number of restrictions related to such financing, among which the most important are: •

Personal guarantee assumed by the guarantors Aegea Saneamento e Participações S.A. and Equipav S.A. Pavimentação, Engenharia e Comércio;

•

Guarantee of fiduciary assignment provided for in the agreement, limited to the first business day of each year, to the amount equivalent to 60% of the credit rights of the borrower, and said percentage may be gradually reduced according to future requests; and

•

Pledge of 60% of the shares of Águas Guariroba S.A. held by Aegea Saneamento e Participações S.A.. On December 17, 2012, upon the 1st issuance, the Company issued 130 non-convertible, registered, book-entry, simple debentures, in a single series, with real collateral and additional personal guarantee, at a total nominal amount of R$ 130,000. These debentures were fully amortized on September 17, 2014. On August 15, 2014, upon the 2nd issuance, Águas Guariroba issued 20,000 non-convertible, registered, book-entry, simple debentures, in a single series, with real collateral and additional personal guarantee (in replacement for the 1st issuance that was settled), at a total nominal amount of R$200,000. These debentures have maturity date on August 15, 2019, with principal amount being repaid in three installments, with a 3-year grace period. (1st installment to be paid in 36 months).

80

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

The Company undertakes to observe a number of restrictions related to such debentures, among which the most important are: •

Personal guarantee assumed by the guarantor AEGEA Saneamento e Participações S.A.;

•

Guarantee of fiduciary assignment provided for in the agreement, limited to the first business day of each year, at the amount equivalent to 25% of the credit rights of the borrower; and

•

Pledge of 25% of the shares of Águas Guariroba S.A. held by Aegea Saneamento e Participações S.A.. As of December 31, 2014, Águas Guariroba S.A incurred raising costs amounting to R$1,598 (R$48 as of December 31, 2013) which were recognized in accordance with IAS 32 and Technical Pronouncement CPC 08 (R1) – Transaction Costs and Premium on Issuance of Securities issued by the Accounting Pronouncements Committee.

Prolagos S.A. - Concessionária de Serviços Públicos de Água e Esgoto Between January 10, 2012 and June 28, 2013, the subsidiary Prolagos S.A. - Concessionária de Serviços Públicos de Água e Esgoto entered into an agreement with the National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social BNDES), a financing subsidized for investments in sanitation at a nominal amount of R$145,508. This financing has maturity date between January 17, 2022 and July 15, 2028. The Company undertakes to observe a number of restrictions related to such financing, among which the most important are: •

Personal guarantee assumed by the guarantors AEGEA Saneamento e Participações S.A.;

•

Guarantee of fiduciary assignment provided for in the agreement, limited to the first business day of each year, at the amount equivalent to 50% of the credit rights of the borrower; and

•

Pledge of 49% of the shares of Prolagos S.A. - Conncessionária de Serviços Públicos de Água e Esgoto held by Aegea Saneamento e Participações S.A.. On May 19, 2011, upon the 1st issuance, the Company issued 75 non-convertible, registered, book-entry, simple debentures, in a single series, with real collateral and additional personal guarantee, at a total nominal value of R$75,000. These debentures were settled in three equal semiannual installments of R$8,333 in May 2013, November 2013 and May 2014, and the remaining balance fully settled on September 17, 2014, being the total amount paid of R$77,099. On August 15, 2014, upon the 2nd issuance, the Company issued 10,000 non-convertible, registered, book-entry simple debentures, in a single series, with real collateral and additional personal guarantee (in replacement of the 1st issuance that was settled), at a total nominal amount of R$10. These debentures will be paid in three annual installments on August 15, 2017, 2018 and 2019. The interest is semiannually paid on maturity dates based on the closing date of the transaction.

81

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

The Company undertakes to observe a number of restrictions related to such debentures, among which the most important are: •

Personal guarantee assumed by the guarantor AEGEA Saneamento e Participações S.A.;

•

Guarantee of fiduciary assignment provided for in the agreement, limited to the first business day of each year, at the amount equivalent to 25% of the credit rights of the borrower; and

•

Pledge of 25% of the shares of Prolagos S.A. - Concessionária de Serviços Públicos de Água e Esgoto held by Aegea Saneamento e Participações S.A.. As of December 31, 2014, Prolagos S.A. incurred raising costs amounting to R$1,298 (as of December 31, 2013 no funding costs were incurred), which were recognized in accordance with IAS 32 and Technical Pronouncement CPC 08 (R1) – Transaction Costs and Premium on Issuance of Securities issued by the Accounting Pronouncements Committee.

Águas do Mirante S.A.

On December 19, 2012, by 1stissuance, Águas do Mirante issued 660 debentures, and 400 debêntures of the 1st series and 260 debentures of the 2nd series, non-convertible, registered and book-entry, in a single series, with real collateral and additional personal guarantee, at a total nominal value of R$66,000. These debentures were fully repaid on June 4, 2014. On May 15, 2014, on the occasion of the 2nd issue, Águas do Mirante issued in 1550 nonconvertible, registered, book-entry, simple debentures, in a single series, with real collateral and additional personal guarantees (in replacement of the 1st issue that is settled), at a total nominal value of R$155,000. This debenture has maturity date on May 15, 2015 with amortization of the principal amount in bullet. The Company undertakes to observe a number of restrictions related to such debentures, among which the most important are: •

Personal guarantee assumed by the guarantor AEGEA Saneamento e Participações S.A.;

•

Guarantee of the fiduciary assignment provided for in the agreement, from the first business day of each year, the amount equivalent to 99.99% of the credit rights of the borrower. As of December 31, 2014, Águas do Mirante incurred raising costs amounting to R$1,257 (R$385 as of December 31, 2013) which were recognized in accordance with IAS 32 and Technical Pronouncement CPC 08 (R1) – Transaction Costs and Premium on Issuance of Securities issued by the Accounting Pronouncements Committee.

Nascentes do Xingú Participações e Administração S.A.

On February 7, 2014, on the occasion of the 1st issue, Nascentes do Xingu Participações e Administração S.A. issued 100 non-convertible, registered, book-entry, simple debentures, in a single series, with real collateral and additional personal guarantee, at a total nominal value of R$ 1,000. These debentures have maturity dates on August 7, 2016 with the principal amount amortized in a lump sum on said maturity date, except in the case of early maturity, voluntary early redemption, mandatory early redemption, voluntary early amortization and mandatory early amortization pursuant to the issuance deed.

82

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

The Company undertakes to observe a number of restrictions related to such debentures, among which the most important are: •

Personal guarantee assumed by the guarantor AEGEA Saneamento e Participações S.A.;

•

Guarantee of the fiduciary assignment provided for in the agreement, the amount equivalent to 100% of credit rights of Águas de Primavera S.A., Águas de Sorriso S.A. e Águas de Campo Verde S.A. As of December 31, 2014, Nascentes do Xingu Participações e Administração S.A. incurred raising costs amounting to R$849 (R$822 as of December 31, 2013), which were recognized in accordance with IAS 32 and Technical Pronouncement CPC 08 (R1) – Transaction Costs and Premium on Issuance of Securities issued by the Accounting Pronouncements Committee.

15

Tax liabilities Parent company PIS/COFINS/CSLL payable on provision of services PIS/COFINS payable INSS on provision of services ICMS - Value-added Tax ISS - Services tax Withholding tax on interest on own capital IOF on loan payable IRRF/INSS/ISS payable on provision of services Fee payable to the Concession Grantor ISS payable on third party’s services Other

16

Consolidated

12/31/2014 161 485 1 138 682 68 -

12/31/2013 129 423 583 682 37

12/31/2014 1,849 10,865 79 955 506 2,954 1,616 544 -

12/31/2013 669 3,115 247 114 973 663 4,007 677 466 90 123

1,535

1,854

19,368

11,144

Other accounts payable Parent company

Concession rights payable – Águas de Barra do Garças Ltda. (iii) Concession rights payable - Águas de Diamantino S.A. (iii) Installment payable referring to acquisition of Águas do Meriti Ltda. (i) Outsourced services payable Concession rights payable - Águas de Matão Provision for net assets payable (v) Accounts payable from purchase of assets Concession Grantor fees Assumption of debt through the acquisition of the company Agência Ambiental - Gestão de Tecnologia Ltda. (iv) Concession rights payable – Águas Guariroba S.A. (ii) Proposed dividends Advances from clients Other accounts payable

Current Non-current

(i)

Consolidated

12/31/2014

12/31/2013

12/31/2014

12/31/2013

-

-

2,946 1,169

3,506 -

2,060 -

2,310 -

2,060 34 3,439 81

2,310 5,964 6,575 2,048 525 702

659

423

2,160 86,008 19 6,780 8,369

83,436 2,327

2,719

2,733

113,065

107,393

1,686 1,033

423 2,310

22,690 90,375

24,009 83,384

Balance refers to installments payable regarding acquisition of company Concessionária Águas de Meriti Ltda., as mentioned in note 11. Part of amounts agreed-on upon purchase of the company will mature within one and two years, counted as of contract signature date.

83

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

(ii)

This balance refers to future payments to be made to the concession grantor in relation to infrastructure exploration rights, entered into on October 18, 2000 and amendment on April 26, 2012, between the Company and Campo Grande Municipal Government, an addendum to Concession Agreement no. 104 that determines extension of exploration and provision of services concession period until August 23, 2060. The sum paid on December 31, 2014 was R$ 2,535 (R$ 4,598 on December 31, 2013).

(iii) On March 6, 2014, the Company, through the letter 219/22014, proposed to the Concession Authority to suspend the monthly payments of the granting price in the amount of R$319 owed by the Concessionaire to the Municipality for financial support purposes, enabling to meet the request until the measurement of the outstanding amount and the completion of the economic and financial recovery process related to this concession agreement. In an Official Letter issued on July 21, 2014, the Municipality of Campo Grande – state of Mato Grosso do Sul agreed to the suspension proposed. It remains unchanged the monthly payment in the amount of R$85 due to the State Government of Mato Grosso do Sul. (iv)

This balance refers to liabilities assumed by direct subsidiary Águas de Barra do Garças Ltda. and Águas de Diamantino S.A. at the time concession was won according to bid notice.

(v)

The balance refers to the debts of the company Agência Ambiental - Gestão de Tecnologia Ltda. (“Agência Ambiental”), which were assumed by the subsidiary GSS when the call option was exercised on February 7, 2014. Following the acquisition, Agência Ambiental was merged by GSS and, subsequently, the balances related to the acquisition of the three concessionaires originated in the acquisition of Agência Ambiental were split and merged by the Company. As a result of this split, part of the Agência Ambiental’s debts was assumed by the direct subsidiary GSS (R$3,900) and by the Company (R$10,451), which will only be settled after the authorization of the Concession Authority of the respective concessionaires and execution of the quota transfer agreements.

(vi)

The social fund is intended for social works, and may be only used after agreement with the city government. The value is recognized on a monthly basis, at a rate of 0.5% of the sales of the subsidiary Águas Guariroba S.A., as provided for in the concession agreement.

17

Provision for contingencies Subsidiaries are parties to lawsuits and administrative proceedings deriving from the normal course of operations, involving civil, labor and tax issues and are currently defending themselves in all tax assessments, administrative proceedings, labor notifications and claims in which they are involved. Management, based on evaluations from its internal legal advisors and subsidiaries’ external legal advisors, recognized a provision at an amount considered sufficient to cover probable losses from claims in progress, or the amount required by applicable accounting rules, as follows: Parent company Nature Civil liability contingencies Labor contingencies Tax contingencies

Nature Civil Labor Tax

Consolidated

12/31/2014

12/31/2013

12/31/2014

12/31/2013

1,116

-

4,819 1,272 15,347

5,375 1,061 14,229

1,116

-

21,438

20,665

12/31/2013

Acquisition of subsidiaries

Additions

Payments

Write-offs

12/31/2014

5,375 1,061 14,229

1,116

2,921 704 2

(381) (119) -

(2,946) (524) -

4,969 1,122 15,347

20,665

1,116

3,627

(500)

(3,470)

21,438

84

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Nature Civil Labor Tax

12/31/2012

Acquisition of subsidiaries

Additions

Payments

Write-offs

12/31/2013

5,901 2,154 -

14,229

2,485 1,316 -

(129) -

(3,011) (2,280) -

5,375 1,061 14,229

8,055

14,229

3,801

(129)

(5,291)

20,665

Contingent liabilities for which a provision has not been recorded and evaluated as possible loss Contingent liabilities not recognized in consolidated financial statements referring to proceedings evaluated by legal advisors as possible risk totaled R$56,819 as of December 31, 2014 (R$84,214 as of December 31, 2013). No provision has been recorded for these lawsuits, in view of the fact that the accounting practices adopted in Brazil do not require that they be recorded. The main suits are: •

The Federal Revenue Service (IRS), in the city of Campo Grande, filed against the subsidiary Águas Guariroba S.A., two tax assessment notices for (I) requirement of Tax on Credit, Exchange and Insurance Transactions or related to Securities – IOF, Regular Fine and Default Interest, proceedings 10140.722.323/2013-30, as of December 30, 2013, supposedly due to the realization of financial loans to other entities of its corporate group, referring to the period between January 2010 and December 2010 and (II) requirement of Corporate Income Tax IRPJ and Social Contribution on Net Income - CSLL, ex-officio fine and Default Interest, proceedings 10140.722.322/2013-95, as of December 30, 2013, due to disallowance of operating expenses, and requirement of Special Fine, for the calendar year of 2010. Águas Guariroba filed administrative defenses and, in relation to item (II), the defense was partial. Both have been awaiting judgment in the first court by the IRS Office. The estimates of the filed defenses are classified as possible, due to recent previous favorable decisions of the Administrative Council of Tax Appeals (CARF) related to the matters that were the subject of the defenses. These proceedings totaled R$4,670 on December 31, 2014 (R$4,553 in December 2013);

•

Águas Guariroba S.A. also has labor proceedings that correspond mainly to claims for compensations for material and moral damages, and claims for overtime work and previous notice. On December 31, 2014, there are also proceedings of the same type totaling R$1,375 (R$260 on December 31, 2013);

•

The subsidiary Prolagos S.A. - Concessionária de Serviços Públicos de Água e Esgoto (“Prolagos”) has a lawsuit filed by fishers of São Pedro da Aldeia and Cabo Frio, RJ, region against subsidiary Prolagos and other sanitation concessionaires are accused of polluting a lake with sewage flow. Prolagos instructed proceedings with decisions by the regulatory agency, finally judging that the company did not hold any responsibility for the event, a judgment that was ratified by Ambiental, by the mayors and state environmental agency. The estimated amount of the contingency on December 31, 2014 is of R$5,200 (R$5,200 on December 31, 2013). Along with its legal counsel, the Company's Management has assessed the proceedings’ loss risk as possible.

85

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

•

Prolagos has civil proceedings, which mainly correspond to lawsuits involving claims made by clients with bills reassessments, indemnification for accidents and material damage, arising from the relationship of services provided by the Company. As of December 31, 2014, the Company has other civil contingencies amounting to R$ 13,272 (R$ 11,072 on December 31, 2013), classified as possible losses by the legal advisors and Management, thus not requiring the recording of any reserves to cover potential losses in accordance with the accounting practices adopted in Brazil.

•

Proceedings related to labor claims in the subsidiary Prolagos S.A. - Concessionária de Serviços Públicos de Água e Esgoto, associated with the payment of overtime work and previous notice to former employees, thus there being no proceedings of significant individual amount. On December 31, 2014, there are also proceedings of the same type totaling R$123 (R$21 on December 31, 2013). As mentioned in note 12, in addition to lawsuits above, indirect subsidiaries Águas de Sorriso S.A., Águas de Poconé S.A. and Águas de Barra do Garças Ltda. are parties to lawsuits in progress related to respective Concessions whose values may not be estimated.

18 a.

Shareholders' equity Capital At December 31, 2014, the paid-up capital is R$ 882,607 (R$ 882,607 as of December 31, 2013) and is represented by 673.076.048 common nominative shares with no par value presented as follow:

Aegea Investimentos S.A. Remedy 100% Equity Investment Fund IFC - International Finance Corporation GIC - Government of Singapore GIF - Global Infrastructure Fund

b.

12/31/2014

12/31/2013

65.97% 15.68% 3.21% 12.82% 2.32%

65.97% 15.68% 3.21% 12.82% 2.32%

100.00%

100.00%

Legal reserve Is formed at the rate of 5% of the net income determined in each financial year, pursuant to article 193 of Corporations Law (Law 6404/76) up to the limit of 20% of the capital.

c.

Profit retention reserve The Company's Management, pursuant to article 196 of the Brazilian Corporation Law (Law 6,404/76), on December 31, 2013 proposed to retain, according to the capital budget, the portion of exceeding profit in order to a legal reserve and to distribute dividends, which were approved at the Annual Shareholders’ Meeting of April 16, 2014.

d.

Dividends Shareholders will be entitled to receive, each year, minimum mandatory dividends equivalent to 25% of net income for the year, after recognition of legal reserve.

86

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Requirements related to minimum mandatory dividends related to 2014 were complied with according to the chart below: Net income (loss) for the year (-) Formation of legal reserve

111,723 (5,586)

Adjusted net income

106,137

Mandatory minimum dividend - 25% on adjusted net income

26,534

Dividends distributed in 2014 Dividends paid for the income (loss) for the year 2014 Dividends distributed referring to income in the previous years

57,483 28,517 86,000

Additional dividends proposed referring to the year of 2014 submitted to approval at the Annual Shareholders’ Meeting Additional dividends proposed

48,654

The Company's Management will submit at the Annual General Meeting, together with the approval of the accounts for the year, a proposal for distribution of supplementary dividends referring to 2014, which corresponds to R$48,654. The total dividends proposed referring to income for 2014 amounts to R$106,137. The balance of the proposed additional dividend is maintained in a specific equity account, under the name “Proposed additional dividends” until its effective approval and payment.

19

Net operating income Parent company

Consolidated

12/31/2014

12/31/2013

12/31/2014

12/31/2013

Water supply services Other indirect water services Sewage services Other indirect sewage services Income from services Income from construction

82,443 -

18,407 -

480,327 41,889 164,835 6,867 477 370,489

420,410 35,650 99,147 9,846 209,081

Total gross income

82,443

18,407

1,064,884

774,134

(-) Cancellations (-) Service tax

(9,275)

(2,623)

(22,070) (72,814)

(15,374) (58,005)

Total net operating income

73,168

15,784

970,000

700,755

87

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

20

Cost of services rendered Parent company

Personnel Conservation and maintenance Third party services Materials, equipment and vehicles Amortization and depreciation PIS and COFINS credits on amortization Concession costs Construction cost Electric power Chemicals Rental Other costs

21

12/31/2014

12/31/2013

12/31/2014

12/31/2013

(25,331) (912) (9,030) (873) (2,085) (36) (1,747) (2,510)

(6,584) (1,502) (1,601) (558) (99)

(62,371) (4,869) (16,413) (13,111) (49,998) 8,151 (5,626) (370,489) (46,099) (4,296) (4,540) (9,534)

(61,640) (5,690) (29,320) (8,292) (36,193) 6,519 (7,457) (209,081) (30,621) (2,856) (622) (2,891)

(42,524)

(10,344)

(579,195)

(388,144)

Administrative and general expenses Parent company

Consolidated

12/31/2014

12/31/2013

12/31/2014

12/31/2013

(4,437) (34) (8,845) (623) (47) (93) (2,047) (414) (1,086) (2,743) (98)

(4,245) (51) (12,039) (285) (47) (699) (6,688) (1,084)

(52,040) (2,172) (34,347) (5,149) (6,405) (157) (6,159) (530) (2,083) (5,224) (1,426) (3,281) (8,174) (7,213)

(22,952) (3,861) (38,045) (9,675) (6,356) 1,490 (3,136) (537) (1,457) (1,300) (1,971) (2,463) (11,170) (9,053)

(20,467)

(25,138)

(134,360)

(110,486)

Personnel Conservation and maintenance Third party services Materials, equipment and vehicles Allowance for doubtful accounts Provision (reversal) for contingencies Amortization and depreciation Electric power Insurance Travel and accommodation Taxes, rates and contributions Rental Advertising and publicity Other expenses

22

Consolidated

Research and development expenses Parent company

Consolidated

12/31/2014

12/31/2013

12/31/2014

12/31/2013

(3,599) (11,190) (1,865) (1,270)

(3,698) (11,339) (936) (856)

(3,599) (11,190) (1,865) (1,270)

(3,698) (11,339) (936) (856)

(17,924)

(16,829)

(17,924)

(16,829)

Personnel Third party services Traveling Other expenses

88

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

23

Net financial expenses Parent company 12/31/2014

12/31/2013

12/31/2014

12/31/2013

23,537 815

15,009 24 15

53,708 14,699 1,081

23,385 14,680 324

24,352

15,048

69,488

38,389

(32,384) (125) (27) (123) -

(27,900) (588) (218) (453) -

(116,605) (1,562) (562) (6,002) (5,108) (5,442)

(69,738) (3,833) (554) (5,345) (4,410) (705)

(32,659)

(29,159)

(135,281)

(84,585)

(8,307)

(14,111)

(65,793)

(46,196)

Financial income Interest on financial investments Late-payment interest and fine upon invoice payment Other Financial expenses Interest on loans, financing and debentures Interest on late payments Expenses with IOF Banking expenses and commissions Expenditures on grant obligations Other

Net financial expenses

24 a.

Consolidated

Income and social contribution taxes Current income and social contribution taxes Reconciliation of IRPJ and CSLL at the rates provided under the tax legislation, with the respective sums in the income statement for the December 31, 2014 and 2013 fiscal years, is shown below: Parent company 12/31/2014

12/31/2013

112,942

79,349

(130,953)

(132,339)

(18,011)

(52,990)

34%

34%

Income and social contribution taxes: at combined statutory rate

6,124

18,016

Non-deductible expenses

(304)

(288)

(6,603)

(6,029)

Deferred income and social contribution taxes on temporary differences, tax loss carryforwards and negative basis of social contribution unrecognized in previous years

591

-

Deferred income and social contribution taxes on temporary differences, tax loss carryforwards and negative basis of social contribution unrecognized (i)

(1,090)

(11,296)

63

-

Income and social contribution taxes: Current Deferred assets

(1,293) 74

403

Income tax and social contribution in income for the year

(1,219)

403

7%

1%

Accounting profit before income and social contribution taxes contribution taxes Equity in income of subsidiaries Adjusted net income (loss) Combined statutory rate

Interest on own capital received

Workers' Meal Program (PAT) and other tax incentives

Effective rate

89

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Consolidated 12/31/2014

12/31/2013

172,985

138,662

Subsidiaries’ income determined at deemed income

(6,946)

(1,854)

Equity in income of subsidiaries

(1,228)

(1,195)

164,811

135,613

34%

34%

(56,036)

(46,108)

(1,334)

318

Deferred income and social contribution taxes on temporary differences, tax loss carryforwards and negative basis of social contribution unrecognized in previous years

1,107

-

Deferred income and social contribution taxes on temporary differences, tax loss carryforwards and negative basis of social contribution unrecognized (i)

(1,877)

(11,296)

Trade receivables unpaid, deductible in the current year

-

6,037

Workers' Meal Program (PAT) and other tax incentives

3,703

1,561

215

720

(6,525)

(9,322)

Income and social contribution taxes: Current Deferred assets

(48,882) (11,865)

(41,748) (16,342)

Income tax and social contribution in income for the year

(60,747)

(58,090)

31%

35%

Accounting profit before income and social contribution taxes contribution taxes

Adjusted accounting profit Combined statutory rate Income and social contribution taxes: at combined statutory rate Non-deductible expenses

Other permanent differences Subsidiaries’ taxes determined at deemed income

Effective rate

(i)

Deferred tax assets that were not recognized because it is not probable that future taxable income will be available to offset unused tax losses.

b.

Tax credits - Refis The Company’s Board of Directors approved the adhesion to Article 33 of Law 13,043/14, which allows the early settlement of the installments by its subsidiary Prolagos S.A. Concessionária de Serviços Públicos de Água e Esgoto e Águas Guariroba S.A.. The option requires the payment in cash, corresponding to at least 30% of the balance of the total installment payment. Out of the total adhesion amount, R$884 was paid in cash and the remaining R$2,063 was settled with credits of tax losses of Prolagos S.A. Concessionária de Serviços Públicos de Água e Esgoto.

90

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

For the early settlement of such installments, the tax debts were settled according to the following table, which also presents the residual balance of the debts as of December 31, 2014: Consolidated

c.

Amount of debts early settled

Cash payment

Used tax losses

Balance at 12/31/2014

Income and social contribution taxes

2,947

(884)

(2,063)

-

Total

2,947

(884)

(2,063)

-

Composition of deferred taxes Deferred income and social contribution taxes are recorded in order to reflect future tax effects attributable: (i) at temporary differences between tax basis of income accounts and respective accounting records on the accrual basis, and (ii) to the effects generated by the adoption of the Transition Tax Regime (RTT). Consolidated Assets

Allowance for doubtful accounts Provision for profit sharing Provision for contingencies Other provisions Gain with unrealized exchange variation Fair value of assets acquired in business combination Tax loss and negative basis for social contribution Funding costs for loans and financing Interest capitalized in intangible assets Fair value of assets acquired in business combination Revenue to be billed to government agencies Adjustments of the Transitory Tax Regime - RTT - depreciation charges Adjustments of the Transitory Tax Regime - RTT - financial charges from debenture operation Amount subject to offset Deferred tax assets (liabilities)

Liabilities

12/31/201 4

12/31/201 3

12/31/201 4

12/31/201 3

9,293 1,689 1,838 197 2,377 26,407 54,465 -

8,249 1,073 1,941 2,528 51,919 -

(1,950) (15,944) (33,863) (293) (115,075)

(1,403) (10,562) (33,977) (101,570)

(37,836)

(31,194)

(148) 37,836

31,194

58,430

34,516

(129,437)

(116,318)

For the purpose of evaluating recognition of deferred tax assets on tax losses for the year, subsidiaries prepared studies on future earnings. The book value of tax assets is reviewed periodically and projections are reviewed annually. If there are relevant factors that modify the projections, these are reviewed during the year by the subsidiaries. (a)

The expenses recorded in the accounts as a result of the amortization of intangible assets were calculated considering the shorter term between the useful life of the assets and the concession period, totaling R$38,414 for the year ended December 31, 2014 (R$29,525 December 31, 2013). For purposes of calculating the income tax and social contribution for the same year, the expense recorded was calculated based on rates established by current tax legislation, totaling R$78,222 (R$84,388 on December 31, 2013).

91

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Unrecognized deferred tax assets Deferred tax assets are not recognized in relation to the following items:

Timing differences Other provisions Accumulated tax losses and the negative social contribution base

12/31/2014

12/31/2013

1,442 203 27,577

56,404

29,222

56,404

Deductible timing differences and accumulated taxes losses do not lapse pursuant to the tax legislation in force. Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profits will be available so that the Group can utilize the benefits of these.

25

Financial instruments Overview The Company and its subsidiaries are exposed to the following risks:

•

Credit risk;

•

Liquidity risk, and

•

Operational risk. This note presents information on the exposure of the Company and its subsidiaries to each of the risks abovementioned and measurement and risk and capital management proceedings. Risk management structure The Management is responsible for the follow-up of the risk management policies of the Company and its subsidiaries and managers of each area regularly report the Management on their activities. The risk management policies of the Company and its subsidiaries are established to identify and analyze risks which the Company and its subsidiaries are exposed, to define proper risk limits and controls, and to monitor risks and compliance with limits. Risk policies and systems are reviewed regularly to reflect changes in the market conditions and in the activities of the Company and its subsidiaries. The Company and its subsidiaries seek to develop, upon its training and management standards and procedures, a discipline and control environment in which all employees are aware of their assignments and obligations. Credit risk Management seeks to minimize the credit risks tied to financial institutions, by diversifying its operations with top line institutions.

92

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Financial assets’ book values represent maximum exposure to credit risk, as follows: Parent company Assets Cash and cash equivalents Interest earnings bank deposits Private debentures Checking accounts receivable - related parties Dividends and interest on own capital receivable Other receivables

12/31/2014

12/31/2013

131 123,229 20,821 109,217 162,223 8,844

4,025 362,795 59,123 123,367 5,294

424,465

554,604

Consolidated Assets Cash and cash equivalents Interest earnings bank deposits Trade accounts receivable Checking accounts receivable - related parties Other receivables

12/31/2014

12/31/2013

8,533 519,174 195,858 46,735 27,152

37,020 514,182 142,152 43,969 26,148

797,452

763,471

Guarantees The policy of the Company and its subsidiaries is to provide financial guarantees only for the Aegea Group’s companies.

Liquidity risk Liquidity risk is the risk of the Company and its subsidiaries encountering difficulties in performing the obligations associated with its financial liabilities that are settled with cash payments or with another financial asset. The approach of the Company and its subsidiaries in liquidity management is to guarantee, as much as possible, sufficient liquidity to perform their obligations upon maturity, under normal and stress conditions, without causing unacceptable losses or with a risk of sullying the reputation of the Company and its subsidiaries. Additionally, the mechanisms are periodically analyzed aiming to raise funds to reverse positions that could affect the liquidity of the Company and its subsidiaries.

93

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

The table below shows the risks of liquidity by maturity and reflects the financial flow of the Company and its subsidiaries on December 31, 2014: Parent company Assets Cash and cash equivalents Interest earnings bank deposits Private debentures Checking accounts receivable - related parties Dividends and interest on own capital receivable Other receivables

Liabilities Loans, financing and debentures Suppliers and contractors Checking account payable - related parties Other accounts payable

Up to 1 year

> 1 year

131 123,229 20,821 109,217 162,223 8,844

131 60,736 162,223 5,898

62,493 20,821 109,217 2,946

424,645

228,988

195,477

367,178 2,576 1,376 2,719

42,032 2,576 1,686

325,146 1,376 1,033

373,849

46,294

327,555

Consolidated Assets Cash and cash equivalents Interest earnings bank deposits Trade accounts receivable Checking accounts receivable - related parties Other receivables

Liabilities Loans, financing and debentures Suppliers and contractors Current accounts payable to related parties Other accounts payable

8,533 519,174 195,858 46,735 27,152

Up to 1 year 8,533 443,394 156,671 16,170

> 1 year 75,780 39,187 46,735 10,982

797,452

624,768

172,684

1,998,426 48,939 1,587 113,065

333,705 48,939 22,690

1,664,721 1,587 90,375

2,162,017

405,334

1,756,683

Interest rate risk The Company and its subsidiaries are exposed to interest rate risks and fluctuations in its investments, loans, financing and debentures. On the date of the individual and consolidated financial statements, the profile of financial instruments remunerated through interest was:

94

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Parent company Book value 12/31/2014

12/31/2013

Variable rate instruments Financial assets Interest earnings bank deposits Private debentures

123,229 20,821

362,795 -

Financial liabilities Loans, financing and debentures

261,612

253,406

Consolidated Book value 12/31/2014

12/31/2013

519,174

514,182

1,343,463

987,495

Variable rate instruments Financial assets Interest earnings bank deposits Financial liabilities Loans, financing and debentures

The Company and its subsidiaries make sensitivity analysis of main risks to which its financial instruments are exposed. For the sensitivity analysis of interest rate variations, Management adopted, for the probable scenario, the same rates used on balance sheet date. Scenarios II and III were estimated with additional valuation of rates of 25% and 50% respectively, while scenarios IV and V have estimated additional devaluation of 25% and 50%, respectively, for the probable scenario. The table below shows possible impacts on results for each of the scenarios: Parent company Scenarios

Asset Exposure

Exposure

Risk

Effective interest rate at I - Probable II – 25% 12/31/2014

III – 50% IV - 25%

V -50%

1 – Financial assets Financial investments and private debentures 2 – Financial liabilities Loans, Financing - Debentures 1+2

144,050

Variance of CDI

10.81%

15,572

19,465

23,358

(261,612)

Variance of CDI

10.81%

(28,280)

(35,350)

(42,420)

(12,708)

(15,885)

(19,062)

Effect

95

11,679

7,786

(21,210) (14,140) (9,531)

(6,354)

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Consolidated Scenarios

Asset Exposure

Exposure

Risk

Effective interest rate at 12/31/2014

I - Probable

II – 25%

III – 50%

IV -25%

V -50%

10.81%

56,123

70,153

84,184

42,092

28,061

(100,491) (125,614)

(150,737)

(75,368)

(50,246)

1 – Financial assets Interest earnings bank deposits 2 – Financial liabilities Loans and financing Loans and other financing Loans and financing BNDES 1+2

519,174

(929,614) (290,498) (123,351)

Variance of CDI

Variance of CDI UPR Variance of TJLP

10.81%

Effect

0.86%

(2,498)

(3,123)

(3,747)

(1,874)

(1,249)

5.00%

(6,168)

(7,709)

(9,251)

(4,626)

(3,084)

(53,034)

(66,293)

(79,551)

(39,776)

(26,518)

Market risk Market risk is the risk that alterations in market prices, such as exchange rates and interest rates, have in the earnings of the Company and its subsidiaries, or in the value of their holdings of financial instruments. The objective of market risk management is to manage and control exposures to market risks, within acceptable parameters, and at the same time to optimize the return.

Operational risk Operating risk is the risk of direct or indirect losses arising from different causes related to the processes, personnel, technology and infrastructure of the Company and its subsidiaries, and external factors, except credit, market and liquidity risks, as those arising from legal and regulatory requirements and from generally accepted corporate behavior standards. Operating risks are associated to all operations of the Company and its subsidiaries. The goal of the Company and its subsidiaries is to manage the operational risk to avoid the occurrence of financial losses and damage to its reputation, and to pursue cost effectiveness and avoid control procedures that restrict initiative and creativeness. Top management of each business unit is responsible for developing and implementing controls to address operating risks. Existence of integrated and accurate information systems support Management on mitigation of operating risks with the implementation of standardized and automated processes.

Capital management The capital management of the Company and its subsidiaries is conducted so as to balance own and third parties' fund sources, balancing the return to quotaholders and the risk to quotaholders and creditors.

96

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Classification of financial instruments The classification of financial instruments is presented in the table below, and there are no financial instruments classified in other categories besides those informed: Parent company

NE Assets Cash and cash equivalents Interest earnings bank deposits Private debentures Dividends and interest on own capital receivable Checking accounts receivable from related parties Other receivables Total Liabilities Suppliers and contractors Loans, financing and debentures Checking account payable - related parties Other accounts payable

Liabilities at amortized cost

Total at December 31, 2014

131 20,821 162,223 109,217 8,844

-

131 123,229 20,821 162,223 109,217 8,844

62,493

301,236

-

424,465

-

-

-

2,576 261,612 1,376 2,719

2,576 261,612 1,376 2,719

-

-

-

268,283

268,283

Fair value through profit or loss

6 7 10 9 10

Loans and receivables

60,736 -

Held to maturity 62,493 -

60,736 13 14 10 16

Total

-

Parent company

NE Assets Cash and cash equivalents Interest earnings bank deposits Dividends and interest on own capital receivable Checking accounts receivable from related parties Other receivables Total Liabilities Suppliers and contractors Loans, financing and debentures Other accounts payable

Fair value through profit or loss

6 7 9 10

13 14 16

Total

Liabilities at amortized cost

Total at December 31, 2013

4,025 123,367 59,123 5,294

-

4,025 362,795 123,367 59,123 5,294

56,643

191,809

-

554,604

-

-

-

242 253,406 2,733

242 253,406 2,733

-

-

-

256,381

256,381

Loans and Liabilities at receivables amortized cost

Total at December 31, 2014

Loans and receivables

306,152 -

Held to maturity 56,643 -

306,152

Consolidated

NE Assets Cash and cash equivalents Interest earnings bank deposits Trade accounts receivable Checking accounts receivable from related parties Other receivables Total Liabilities Current accounts payable from related parties Suppliers and contractors Loans, financing and debentures Other accounts payable

Fair value through profit or loss

6 7 8 10

10 13 14 16

Total

97

443,394 -

Held to maturity 75,780 -

443,394

8,533 195,858 46,735 27,152

-

8,533 519,174 195,858 46,735 27,152

75,780

278,278

-

797,452

-

-

-

1,587 48,939 1,343,463 113,065

1,587 48,939 1,343,463 113,065

-

-

-

1,507,054

1,507,054

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Consolidated

NE Assets Cash and cash equivalents Interest earnings bank deposits Trade accounts receivable Checking accounts receivable from related parties Other receivables Total Liabilities Current accounts payable from related parties Suppliers and contractors Loans, financing and debentures Other accounts payable

Fair value through profit or loss

6 7 10

10 13 14 16

Total

447,894 -

Held to maturity 66,288 -

447,894

Total at December 31, 2013

Loans and Liabilities at receivables amortized cost 37,020 142,152 43,969 26,148

-

37,020 514,182 142,152 43,969 26,148

66,288

249,289

-

763,471

-

-

-

1,587 17,538 987,495 107,393

1,587 17,538 987,495 107,393

-

-

-

1,114,013

1,114,013

Fair value a.

Derivative financial instruments The Company and its subsidiaries do not perform operations with derivative financial instruments in order to mitigate or eliminate risks to its operation.

b.

“Non-derivative” financial instruments Management considers that fair value equals book value for all operations, as for this operations the book value reflects the settlement value on that date, since these transactions mature in the short term. Thus, the carrying amounts recorded in the balance sheet relating to the balances of interest earning bank deposits, as well as accounts payable and other debts do not differ from their fair values at December 31, 2014 and 2013. Comparison between book values and fair values of loans, financing and debentures as of December 31, 2014 is as follows: Parent company Liabilities Loans, financing and debentures

Book value

Fair value

261,612

274,211

Consolidated Liabilities Loans, financing and debentures

Book value

Fair value

1,343,463

1,386,764

Fair values of loans, financing and debentures were calculated by projecting cash flows up to transactions’ maturities using future rates obtained from public sources (ex: BM&FBovespa and Bloomberg) plus spread defined in contract and brought to present value at risk-free rate (pre DI).

98

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Fair value hierarchy The different levels were defined as follows: •

Level 1 – Prices quoted (not adjusted) in active markets for identical assets and liabilities

•

Level 2 - Inputs, except for quoted prices, included in Level 1 which are observable for assets or liabilities, directly (prices) or indirectly (derived from prices).

•

Level 3 – Assumptions, for assets or liabilities, which are not based on observable market data (non-observable inputs).

Determination of fair value The investments classified as fair value through profit or loss are classified in the level 2 category. The disclosure of the fair value of financing and debentures is classified as level 2 of the fair value hierarchy. For level 1 and level 3, the Company did not have transactions to be classified in base dates.

26

Insurance coverage The Company and its subsidiaries adopt the policy of contracting insurance coverage for properties subject to risks in amounts considered sufficient to cover any casualties, considering the nature of their activity. At December 31, 2014, operating risk insurance coverage was comprised of R$ 20,000 for material damage, R$ 64,376 for civil liability, R$ 2,859 for equipment, R$ 12,000 for income loss and R$ 282,089 to the concessionaire performance bond for the Company and its subsidiaries.

27 a.

Net earnings per share Basic earnings per share Basic earnings per share is calculated by dividing profit attributable to company shareholders by the weighted average number of common shares, as follows: Parent company

Basic earnings per share

Company’s Net Income Weighted average of shares outstanding (in thousands) Basic earnings per share - R$

12/31/2014

12/31/2013

12/31/2014

12/31/2013

111,723

79,752

112,238

80,572

673,076 0.17

591,458 0.13

673,076 0.17

591,459 0.14

Parent company

Diluted earning per share

Company’s Net Income Weighted average of shares outstanding (in thousands) Basic earnings per share - R$

99

Consolidated

Consolidated

12/31/2014

12/31/2013

12/31/2014

12/31/2013

111,723

79,752

112,238

80,572

673,076 0.17

591,458 0.13

673,076 0.17

591,459 0.14

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

28

Commitments subject to concession contracts Subsidiaries assumed investment commitments in accordance with its concession agreements to be complied with by the end of concession period, and foreseen investments and investments in progress for the following years are stated below.

Águas Guariroba S.A. The Company assumed investment commitments, as per Concession Agreement No. 104, of October 18, 2000 and Amendments, entered into with the Local Government of the City of Campo Grande, to be complied with by the end of the concession period. As follows, the expected and ongoing investments for the next years: (i) Reference value for compliance with executive plan points - R$560,000; (ii) Up to December 2015, sanitary depletion system must serve at least 75% of urban population; (iii) Up to December 2017, sanitary depletion system must serve at least 80% of urban population; (iv) Up to December 2019, sanitary depletion system must serve at least 85% of urban population; (v) Up to December 2021, sanitary depletion system must serve at least 90% of urban population; (vi) Up to December 2023, sanitary depletion system must serve at least 95% of urban population; (vii) Up to December 2025, sanitary depletion system must serve at least 98% of urban population and this rate must be maintained constant during concession period. The Company received from the Local Government of the City of Campo Grande and from the Regulatory Agency of Public Services of Campo Grande, the official letters No. 144/GAB/PMCG and 484/GAB/AGEREG respectively, communicating about the schedule of the works of pavement and implementation of rainwater drainage networks, and also of the water supply systems, sewage collection and treatment, due to the goals set out in the program “pavimentação e qualificação de vias urbanas” [“Paving and qualification of urban roads”] by the National Department of Transportation and Mobility of the Ministry of Cities (PAC2). Said works of implementation of rainwater drainage networks and pavement, require, for technical reasons, the prior implementation of the water supply and sewage networks. Due to the abovementioned, the Company was requested to anticipate the global schedule of the water supply and sewage collection, provided for in the concession agreement, more specifically in the region called Imbirussu/Segredo. On March 6, 2014, the Company notified the Local Government of the City of Campo Grande and the Regulatory Agency that, in order to comply with the request, is necessary to readjust the water supply networks and anticipate the schedule of the expansions in sewers networks for that region. Such measures referring to the anticipation of investments not originally assumed by the Company alter the economic and financial balance of the concession agreement. The Company estimates the amount of R$97,000 in investments necessary to meet the requests of the Local Government of the City of Campo Grande and the Regulatory Agency.

100

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

On July 21, 2014, the Concession Authority agreed with the Company's request to suspend the monthly payments of the granting price of R$319 owed by the Concessionaire to the Local Government, for financial support purposes, enabling the compliance with the request until the measurement of the outstanding balance and completion of economic and financial recovery procedures of the concession agreement. Monthly payments still remain payable to the State of Mato Grosso do Sul in the amount of R$85.

Prolagos S.A. - Concessionária de Serviços Públicos de Águas e Esgoto. The Company has a commitment arising from variable granting right that refers to the public service provision price, represented by a variable amount, corresponding to 0.5% on the water supply services invoiced monthly, plus 0.1397% of onlending to clients for the use of water resources in the year ended December 31, 2014. The Company assumed investment commitment in accordance with its concession agreement to be complied with by the end of concession period, and foreseen investments and investments in progress for the following years are stated below. Assumed commitments are presented on a chronological order according to addenda to concession agreement for services of implementation, expansion, maintenance and operation of water supply, sanitary sewage collection and treatment systems in urban areas of Armação dos Búzios, Cabo Frio, Iguaba Grande and São Pedro da Aldeia, and distribution of potable water to the municipality of Arraial do Cabo, entered into with these municipalities and Rio de Janeiro State, and current Addendum is dated February 8, 2011: I) 2015 - (a) Investment in Water Supply - (i) Enhancement of the Water System – Collection and Treatment: R$8,014; (ii) Watermains R$10,350; (iii) Distribution Network R$1,547; (b) Others investments R$ 2,000; II) 2016 - (a) Investment in Water Supply - (i) Enhancement of the Water System – Collection and Treatment: R$10,978; (ii) Watermains R$15,525; (b) Investment in Sewage – (i) Transposition of River Una Effluents R$1,177; c) Other investments R$ 2,000; III) 2017 – (a) Investment in Water – (i) Distribution Network R$2,390; (ii) Reservoirs R$1,139; (b) Investment in Sewage – (i) Networks/Booster stations and foundation lines R$1,189; (ii) Transposition of River Una Effluents R$10,591; (c) Others investments R$ 4,466; IV) 2018 to 2041 – (a) Investment in Water – (i) Distribution Network R$4,914; (ii) Reservoirs R$3,456; (b) Investment in Sewage – (i) Sewage Treatment Plants (ETE) R$1,550; (c) Other investments to be defined R$72,540.

Águas do Mirante S.A. The company acquired through its participation in the bid process No. 1687/2011 and pursuant to the Concession Agreement No. 48/2012 has as corporate purpose to operate and manage the business purpose of this concession, designed for purposes of collection, treatment, disposal or elimination of sewage and/or solid waste, as well as recycling, design and construction of such systems, manufacturing, installation, supervision and assembly of equipment related to its core business, purchase and sale and production of materials related to its main activity, imports and exports related to the corporate purposes, service provision and technical assistance in the areas where the company operates and shareholding in other companies dedicated to its area of operation, commercial or civil, domestic and/or foreign, as a shareholder or partner. Águas do Mirante must ensure the global collection and sewage treatment services to the inhabitants of the city of Piracicaba/ state of Sao Paulo, and the investment rates in the sewage collection and treatment system must meet the following schedule: (i) As of June 2014, compliance with contractual milestone 3; (ii) Up to July 2014, compliance with contractual milestone 4; (iii) Up to November 2015, compliance with contractual milestone 5. Up to December 31, 2014, the milestones have been complied with.

101

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Águas de Matão S.A. The Company has a concession acquired through a bidding process with the Local Government of the City of Matão, state of Sao Paulo. This concession agreement is in force for a period of 30 years, from the execution date of the agreement in 2013. By means of participation in the bidding process No. 002/2013 and in accordance with the Concession Agreement No. 077/2013, the Company has as purpose to provide public services of collection, treatment, supply and distribution of drinking water, of collection, transportation, removal, interception, treatment and final disposal of sewage, in the city of Matão, state of Sao Paulo, and its Districts, including the construction, installation and operation of ETE-São Lourenço do Turvo, construction of interceptors in order to serve the neighborhoods that are in the sub-basin of Cascavel, Silvânia, Linha Velha rivers and part of Nova Matão river, on an exclusive basis, complying with the current legislation, ensuring the global sewage service in the city of Matão.

Nascentes do Xingú Participações e Administração S.A. Summary of main commitments assumed between June 2000 and February 2012 by companies consolidated in Nascentes do Xingú, in accordance with Concession Agreements, is as follows: Specific Goals: (i) Maintain service levels in water supply services provided to 100% of population. (ii) Achieve service levels in sanitary depletion services provided to an interval from 50% to 100% of population, from 2014 to 2033, according to each municipality.

Águas de Porto Esperidião Saneamento e Distribuição Ltda. As follows, the summary of the main commitments assumed under the Concession Agreement entered into in December 2012: Specific Goals: (i) To maintain the levels of water supply services provided to 100% for the population.

Águas de São Francisco Concessionária de Saneamento S.A. On February 5, 2014, the Company entered into the Concession Agreement No. 02,117/2014, referring to the exclusive provision of public water supply and sanitation services in the city of Barcarena – state of Para, for a period of 30 years, renewable for the same period. In its expansion plan, by end of year 5, it will serve 80% of urban population with clean water and 45% with sewage services, within the standards required by law. By the end of the year 7, it will make the water supply services global, and reach 55% of the population with sanitation services. As the global water supply service is reached, it should be maintained throughout the concession. For sanitation services, the goals of the agreements are 70% in the year 10.80% in the year 14,90% in the year 19, and global supply must be obtained in the year 23 and maintained until the end of the concession.

Águas de Sinop S.A. As follows, the commitments undertaken in the concession agreement No. 96 as of September 19, 2014, entered into with the Local Government of the city of Sinop. Specific goals: (i) To maintain the levels of water supply services provided to 100% of the population (ii) to keep the levels of loss reduction in year 2 by 50%, in year 6 by 45%, in the year 11 by 40%, in the year 16 by 35%, in the year 21 by 30%, and from year 26 by 25% (iii) to achieve the sanitation system coverage goals in year 2 by 55%, in year 3 by 85%, in the year 4 by 87%, in year 5 by 97%, and from year 6 by 98%.

102

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

Águas de Guarantã Ltda. The main commitments undertaken pursuant to the Concession Agreement entered into in May 2001, and First Amendment to the Concession Agreement entered into in July 2003: Specific Goals: (i) in 2 years, to serve 100% of urban population with clean water and keep this ratio in subsequent years (ii) to serve 70% and 100% of urban population with sanitation services in 10 years and 15 years respectively.

Águas de Novo Progresso Ltda. According to the Concession Agreement executed in August 2003: Specific Goals: (i) in 2 years, to serve 50% and in 5 years, 100% of urban population with clean water (ii) in 5 years, to serve 50% and in 20 years, to serve 80% of urban population with sanitation.

Águas de Matupá Ltda. The Concession Agreement entered into in October 2001 provides for the main specific goals: (i) in 2 years, to serve 100% of population with clean water, keeping this ratio in the subsequent years and reducing the loss ratio to 20% (ii) in 10 years, to serve 50% and in 25 years, to serve 70% of urban population with sanitation.

Nascentes do Xingú Investments S.A. As follows, the summary of the main commitments undertaken by companies Águas de Confresa in January 2014 and Águas de Diamantino in May 2014, consolidated in the Nascentes do Xingú Investimentos in accordance with the Concession Agreement: Specific Goals: (i) To maintain the levels of the water supply services provided to 100% of the population (ii) to keep the levels of loss reduction in year 1 by 40% in year 4 by 33%, in year 1 by 27% and in year 16 to 30 by 25% (iii) to achieve the sanitation system coverage goals in year 1 by 20%, year 4 by 50%, year 10 to 30 years by 100%. The goals and obligations referring to the concession agreements are audited by the regulatory authority in order to verify the compliance with the obligations by the Concessionaire. In the case of any delays or differences in the execution of works or provision of services, the Concessionaire must communicate, justify and provide proper measures to correct these facts. On December 31, 2014, the main goals have been complied with.

29

Subsequent events On January 12, 2015, the Company announced that the concession was obtained to provide local public services of water supply and sanitation in the city of Timon, state of Maranhão, for an operation period of 30 years.

103

Aegea Saneamento e Participações S.A. Financial statements December 31, 2014 and 2013

On February 3, 2015, the Federal Supreme Court (STF) rendered a decision in favor of the Águas Guariroba S.A., referring to the proceedings 001.05.028326-0 and Civil Appeal No. 2007.024187-2 as of July 11, 2005, of the popular lawsuit for the annulment of act related to the concession agreement between Águas Guariroba, the city of Campo Grande, state of Mato Grosso do Sul and company Sanesul, as described in note 12, item IV. On February 13, 2015, the lawsuit was judged final and unappealable. *

*

*

Board of Directors Hamilton Amadeo Anastácio Ubaldino Fernandes Filho André Machado Mastrobuono Antônio Kandir Eduardo José Bernini Luiz Serafim Spinola Santos Thomas Daniel Brull

Executive Board Hamilton Amadeo Flávio Martins Tarchi Crivellari Radamés Andrade Casseb Felipe Bueno Marcondes Ferraz

Accountant Leandro Kato Accountant CRC SP 223439/O-7 104