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*Summary of the main points of attention (1/2)*


The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does
not include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in
order to provide a comprehensive understanding of the matters identified.

1 Financial position	2 Lawsuit against all distribution

The Company has been ascertaining recurring losses (R$ 506.7 million	companies
in 2016 and R$ 562.9 million in 2015), reaching an accumulated loss of
R$ 2,473.2 million as of Dec-16 and a net shareholders' equity of R$	A public civil action has been filed by the National Consumers
1,221.7 million.	Association – ANDECO against all Electric Energy Concessionaires in the
In addition, we identify an adjusted net indebtedness (after our	country with respect to prevention and remediation of collective damages
adjustments and reclassifications) as of Dec-16 of R$ 2.2 billion and	against consumers, with a request for preliminary injunction in order for
negative adjusted EBITDA for 2016 of R$ 323.1 million. According to	the companies to refrain from charging the claimed losses from the
the management, the main reasons for the Company’s current financial	consumers in the electricity bills, including pro rata, as well as the losses
situation are:	sustained due to billing or measurement errors, theft, and fraud in the
	period from 2010 to 2014. ANDECO also pursues the annulment of all
- Significant value of assets in service not yet included in the “armored”	ANEEL Resolutions that allow the collection and inclusion in the bills of
basis [base blindada] resulting in a tariff below the one necessary to	sums related to non-technical and technical losses. The value of the
cover the operating costs;	matter is R$ 27 billion, but the amount charged from Companhia
- Delay in the receipt of subsidies (CDE, CVA, among others);	Energética do Piauí is R$ 3.6 billion.
- High level of client default and technical and operating losses;	The plaintiff maintains that, notwithstanding ANEEL’s authorization, the
	prorated billing of non-technical losses (fraud, theft, measurement and
- Late payment to suppliers and other liabilities (as a consequence of	billing errors, and supply without measurement) is groundless and,
the items above), generating cash unbalance and increase in expenses	therefore, the distribution companies must indemnify the regular
with financial charges and arrears penalties.	consumers in twice as much (double indemnification provided for in the
We should stress that the Company’s current financial position,	law) the amounts charged in the period from 2010 to 2014, according to
associated with the tariff gap (e.g., significant volume of assets in	their respective balance sheets. It also pursues the annulment of all
service not yet included in the “armored” basis), with the investment	ANEEL Resolutions that allow the collection and inclusion in the bills of
level during the period of provision of the services, among other factors,	sums related to non-technical and technical losses.
may result in additional risks for the Company, mainly in the last fiscal	This lawsuit was classified by the Company’s lawyers as with risk of
years. We understand that those factors may impair the obtainment of	possible loss. Due to the relevance of the case, we recommend that you
an EBITDA on a recurring and normalized basis, making it more	further develop the discussions with the legal area about the potential
difficult, therefore, to compare the historical periods.	risks that this matter involves.

Privatization of the Eletrobras System Distribution Companies	10 agosto 2017
PwC	3


*Summary of the main points of attention (2/2)*


The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does
not include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in
order to provide a comprehensive understanding of the matters identified.

3 Tax and labor exposure

It is important to stress that, during our works, we identified several
procedures adopted by the Company that may result in questioning and
assessments by the labor and social security and the federal, state, and
municipal tax authorities. In what respects such procedures, the
respective value of the contingencies that may potentially emerge if
they are identified and questioned corresponds to R$ 308.4 million.
Please note that there are other non-quantified adjustments.




Privatization of the Eletrobras System Distribution Companies	10 agosto 2017
PwC	4


*Exhibit I* – *Adjusted EBITDA (1/5)*

The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.

Quality of earnings - CEPISA				The table on the left displays the Company’s quality of earnings
				(EBITDA) analysis for the fiscal years ended on December 31, 2015
		FY15	FY16	(FY15) and December 31, 2016 (FY16).
In R$ thousand		(Audited)	(Audited)
				The adjustments suggested were calculated based on the information
Net revenue		1,295,388	1,350,046
				provided by the Company's management. Those adjustments were
Net profit (loss)		(562,987)	(506,761)	made as a result of our analyses, according to financial and
Add-backs (reversions)		179,096	260,195	management information prepared by the Company’s management.
Financial results		144,644	222,828
Depreciation/amortization		34,452	37,367	The EBITDA corresponds to the net profit subtracted of certain
IR and CSLL		-	-	reclassification items, such as net financial results, taxes and social
Reported EBITDA		(383,890)	(246,566)	contributions on the earned income (Income Tax (IRPJ) and Social
% on net revenue		(30%)	(18%)	Contribution no Net Profit (CSLL)), depreciation and amortization.
Reclassifications		72,195	(34,686)	We should stress that the Company’s current financial position,
1	Reclassification of impairment provisions	57,805	(51,018)
2	Regulatory penalties due to quality of energy	7,150	9,902	associated with the tariff gap (e.g., significant volume of assets in
3	Reclassification of losses from disposal of assets	7,241	6,430	service not yet included in the “armored” basis), with the investment
Normalization adjustments		(19,525)	(41,255)	level during the period of provision of the services, among other factors,
4	Potential normalization of provision for contingencies	(23,099)	49,769	may result in additional risks for the Company, mainly in the last fiscal
5	Normalization of expenses with PCLD	3,574	(91,024)	years. We understand that those factors may impair the obtainment of
Tax and labor adjustments		(536)	(612)	an EBITDA on a recurring and normalized basis, making it more
6	Tax, labor, and social security impacts	(536)	(612)	difficult, therefore, to compare the historical periods.
Adjusted EBITDA		(331,756)	(323,119)	Comments on the adjustments identified are detailed below and in the
% on net revenue		(26%)	(24%)
				next pages of this summary.
Non-quantified adjustments		NQ	NQ
7	Employee insourcing	NQ	NQ	Reclassification adjustments
	Normalization of the revenue from excess demand and			1. Reclassification of impairment provisions: We suggest the
8		NQ	NQ
	excess of reactive power			reversion of the impacts from the recognition and/or reversion of
Other considerations		NQ	NQ	the provision for recoverability of the intangible assets
9	Costs with new structure/Companies integration	NQ	NQ	(impairment), considering that those values are purely accounting
10	Potential risk of change in the CVA values	NQ	NQ	entries which do not directly impact the Company’s cash flow
11	Undue charges – Angra 3	-	NQ
12	Other potential adjustments	NQ	NQ	generation.
Source: Audited financial statements and Pw C analysis

Privatization of the Eletrobras System Distribution Companies				10 agosto 2017
PwC				5


*Exhibit I* – *Adjusted EBITDA (2/5)*


The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.

Quality of earnings - CEPISA				2. Regulatory penalties due to quality of energy: It refers to
		FY15	FY16	fines incurred by the Company on account of quality problems
In R$ thousand		(Audited)	(Audited)	faced in the supply of power. We understand that those values
Net revenue		1,295,388	1,350,046	are not operating expenses and must be reclassified for
Net profit (loss)		(562,987)	(506,761)	purposes of analysis of normalized EBITDA. We recommend
Add-backs (reversions)		179,096	260,195	that this issue be discussed with the “Economic and Legal
Financial results		144,644	222,828	Assessment” area.
Depreciation/amortization		34,452	37,367
IR and CSLL		-	-	3. Reclassification of losses from disposal of assets: It
Reported EBITDA		(383,890)	(246,566)	refers to losses from the disposal of fixed assets classified as
% on net revenue		(30%)	(18%)	operating expenses in the periods. We understand that those
Reclassifications		72,195	(34,686)	values are not operating expenses and must be reclassified for
1	Reclassification of impairment provisions	57,805	(51,018)	purposes of analysis of normalized EBITDA.
2	Regulatory penalties due to quality of energy	7,150	9,902
3	Reclassification of losses from disposal of assets	7,241	6,430	4.Reclassification of provision for contingencies: It refers
				to the reversion of the provisions for contingencies due to their
Normalization adjustments		(19,525)	(41,255)
4	Potential normalization of provision for contingencies	(23,099)	49,769	non-financial nature. Accordingly, we understand that, for
5	Normalization of expenses with PCLD	3,574	(91,024)	purposes of the Company’s normalized and recurring EBITDA,
Tax and labor adjustments		(536)	(612)	the effect from payment of indemnifications materialized in the
6	Tax, labor, and social security impacts	(536)	(612)	fiscal years under analysis. We recommend that the nature and
Adjusted EBITDA		(331,756)	(323,119)	respective projections of non-materialized losses in the fiscal
% on net revenue		(26%)	(24%)	years be discussed with your legal advisors .
Non-quantified adjustments		NQ	NQ
7	Employee insourcing	NQ	NQ	In R$ thousand	FY15	FY16
	Normalization of the revenue from excess demand and			Net revenue	1,295,388	1,350,046
8	excess of reactive power	NQ	NQ	Income with contingency	(23,077)	(73,029)
Other considerations		NQ	NQ	Indemnifications paid	(46,176)	(23,260)
9	Costs with new structure/Companies integration	NQ	NQ	Proposed adjustment	(23,099)	49,769
10	Potential risk of change in the CVA values	NQ	NQ	% payments on net revenue	(3.6%)	(1.7%)
11	Undue charges – Angra 3	-	NQ	Source: Pw C analysis and audited financial statements
12	Other potential adjustments	NQ	NQ
Source: Audited financial statements and Pw C analysis

Privatization of the Eletrobras System Distribution Companies						10 agosto 2017
PwC						6


*Exhibit I* – *Adjusted EBITDA (3/5)*

The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.

Quality of earnings - CEPISA				Normalization adjustments
		FY15	^FY16	5. Normalization of expenses with Allowance for Doubtful
In R$ thousand		(Audited)	(Audited)	Accounts (PCLD): We note that the PCLD is automatically and
Net revenue		1,295,388	1,350,046	systemically calculated, following the criteria established by
Net profit (loss)		(562,987)	(506,761)	Eletrobras, and that such criteria tends to be more conservative
Add-backs (reversions)		179,096	260,195	than those established by ANEEL. Since those provisions are not of
Financial results		144,644	222,828	a financial nature and their variations are not historically constant,
Depreciation/amortization		34,452	37,367	we understand that, for purposes of normalized EBITDA, it must
IR and CSLL		-	-	be considered only the impacts from losses resulting from
Reported EBITDA		(383,890)	(246,566)
% on net revenue		(30%)	(18%)	payments from clients that effectively materialized in the period;
				accordingly, we suggest the reversion of the PCLD in the period.
Reclassifications		72,195	(34,686)
1	Reclassification of impairment provisions	57,805	(51,018)	In R$ thousand		FY15	FY16
2	Regulatory penalties due to quality of energy	7,150	9,902	Net revenue	1,295,388		1,350,046
3	Reclassification of losses from disposal of assets	7,241	6,430	PCLD/Losses income		(95,883)	(68,942)
Normalization adjustments		(19,525)	(41,255)	Proposed adjustment		3,574	(91,024)
4	Potential normalization of provision for contingencies	(23,099)	49,769	Losses in the period		(92,310)	(159,965)
5	Normalization of expenses with PCLD	3,574	(91,024)	% losses on net revenue		7%	12%
Tax and labor adjustments		(536)	(612)
6	Tax, labor, and social security impacts	(536)	₍₆₁₂₎	Tax and labor adjustments
Adjusted EBITDA		(331,756)	(323,119)	6. Tax, labor, and social security impacts: They refer to
% on net revenue		(26%)	(24%)	potential additional impacts resulting from the issues described in
Non-quantified adjustments		NQ	NQ	this summary, both quantified and non-quantified, classified as
7	Employee insourcing	NQ	NQ	probable loss by the Company’s legal advisors.
	Normalization of the revenue from excess demand and
8		NQ	NQ	# Description		31-Dec-15 31-Dec-16
	excess of reactive power
Other considerations		NQ	NQ	4 ISS on shared infrastructure and		268	344
9	Costs with new structure/Companies integration	NQ	NQ	Total tax exposures		268	344
10	Potential risk of change in the CVA values	NQ	NQ	4 Irregularities related to work days		268	268
11	Undue charges – Angra 3	-	NQ	Total labor exposures		268	268
12	Other potential adjustments	NQ	NQ	Total tax and labor exposures + NQ		536	612
Source: Audited financial statements and Pw C analysis

Privatization of the Eletrobras System Distribution Companies							10 agosto 2017
PwC							7


*Exhibit I* – *Adjusted EBITDA (4/5)*

The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.

Quality of earnings - CEPISA				*Non-quantified adjustments*
		FY15	FY16	7. Employee insourcing: The management understands that, as
In R$ thousand		(Audited)	(Audited)	determined by law, the Company needs to insource employees of its
Net revenue		1,295,388	1,350,046	operations (consumption measurement and like professionals), which
Net profit (loss)		(562,987)	(506,761)	will increase the costs, due to issues of inefficiency and equivalence of
Add-backs (reversions)		179,096	260,195	labor benefits. We understand that those impacts may influence the
Financial results		144,644	222,828	Company’s future results.
Depreciation/amortization		34,452	37,367
IR and CSLL		-	-	8. Normalization of the revenue from excess demand and
Reported EBITDA		(383,890)	(246,566)	excess of reactive power: The revenues earned with excess
% on net revenue		(30%)	(18%)	demand and excess of reactive power must be accounted for as
Reclassifications		72,195	(34,686)	“Obligations Related to the Electric Power Utility Service,” which will
1	Reclassification of impairment provisions	57,805	(51,018)	be amortized starting on the next cycle of tariff review. However, the
2	Regulatory penalties due to quality of energy	7,150	9,902	Company recognized those sums as revenues in the fiscal years of
3	Reclassification of losses from disposal of assets	7,241	6,430	2013-2016 and later, in FY16, reversed 100% of the sums recognized
Normalization adjustments		(19,525)	(41,255)	as liabilities until the next cycle of tariff review. Due to the
4	Potential normalization of provision for contingencies	(23,099)	49,769
5	Normalization of expenses with PCLD	3,574	(91,024)	unavailability of information related to the period of those sums, it
Tax and labor adjustments		(536)	(612)	was not possible to quantify the impacts for normalization of
6	Tax, labor, and social security impacts	(536)	(612)	Company’s recurring EBITDA.
Adjusted EBITDA		(331,756)	(323,119)	*Other considerations*
% on net revenue		(26%)	(24%)
Non-quantified adjustments		NQ	NQ	9. Costs with new structure/Companies integration: We note
7	Employee insourcing	NQ	NQ	that, depending on the changes in the Company’s current structure
	Normalization of the revenue from excess demand and			that are made after the conclusion of the privatization process, as well
8		NQ	NQ
	excess of reactive power			as on the measures required for the potential integration with an
Other considerations		NQ	NQ	investor, the Company’s EBITDA may change significantly. In
9	Costs with new structure/Companies integration	NQ	NQ	addition, possible changes in the compensation of the new
10	Potential risk of change in the CVA values	NQ	NQ
11	Undue charges – Angra 3	-	NQ	management must be considered in the Company’s result. We
12	Other potential adjustments	NQ	NQ	recommend that this issue be discussed with the “Economic and Legal
Source: Audited financial statements and Pw C analysis				Assessment” area.
Privatization of the Eletrobras System Distribution Companies				10 agosto 2017
PwC				8


*Exhibit I* – *Adjusted EBITDA (5/5)*

The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.

Quality of earnings - CEPISA				10. Potential risk of change in the CVA values: The Account for
				Compensation of “Portion A” Variations (CVA) records the difference
		FY15	FY16	between the costs estimated in the tariff (Portion A) and the costs
In R$ thousand		(Audited)	(Audited)	effectively incurred, creating a payable or receivable balance (and,
Net revenue		1,295,388	1,350,046	consequently, an expense or a revenue) for the Company. Such amounts
Net profit (loss)		(562,987)	(506,761)	to be paid/received are ratified each year by ANEEL. We found that,
Add-backs (reversions)		179,096	260,195	historically, the amounts ascertained by the Company may significantly
Financial results		144,644	222,828	differ from those ratified by ANEEL, mainly with respect to the financial
Depreciation/amortization		34,452	37,367	items, which are not controlled by the Company. Considering that the
IR and CSLL		-	-	ratification process happens close to the end of the fiscal year (between
Reported EBITDA		(383,890)	(246,566)
% on net revenue		(30%)	(18%)	September and October), we understand that there are no material
				discrepancies for the balances accounted for in Dec-15 and Dec-16. On
Reclassifications		72,195	(34,686)	the other hand, those differences may become significant over the
1	Reclassification of impairment provisions	57,805	(51,018)
2	Regulatory penalties due to quality of energy	7,150	9,902	months.
3	Reclassification of losses from disposal of assets	7,241	6,430	11. Undue charges – Angra 3: According to ANEEL’s information, the
Normalization adjustments		(19,525)	(41,255)	power distribution companies that belong to the interconnected system
4	Potential normalization of provision for contingencies	(23,099)	49,769	unduly charged from their consumers in 2016 certain amounts related to
5	Normalization of expenses with PCLD	3,574	(91,024)	the estimated costs of the nuclear power plant Angra 3. We have not had
Tax and labor adjustments		(536)	(612)	access to the sums to be reimbursed to the Company’s consumers, but
6	Tax, labor, and social security impacts	(536)	(612)
				we were informed that such reimbursement would be made by means of
Adjusted EBITDA		(331,756)	(323,119)	discount (of approximately 7.66%) in the April 2017 bill.
% on net revenue		(26%)	(24%)
Non-quantified adjustments		NQ	NQ	12. Other potential adjustments: Considering the defined scope of our
7	Employee insourcing	NQ	NQ	works; the limitations in the information provided; the tax, labor, and
	Normalization of the revenue from excess demand and			social security exposures that could not be quantified; and possible non-
8		NQ	NQ
	excess of reactive power			recoverable assets adjustments (e.g., inventory with low recoverability
Other considerations		NQ	NQ	expectation); other potential adjustments may be necessary, in order to
9	Costs with new structure/Companies integration	NQ	NQ	better reflect the Company’s normalized and recurring EBITDA. In
10	Potential risk of change in the CVA values	NQ	NQ
11	Undue charges – Angra 3	-	NQ	addition, we recommend that this summary be read jointly with the
12	Other potential adjustments	NQ	NQ	reports of the other due diligence areas (operational, legal, HR,
Source: Audited financial statements and Pw C analysis				insurance, and environmental).
Privatization of the Eletrobras System Distribution Companies				10 agosto 2017
PwC				9


*Exhibit II* – *Net indebtedness (1/6)*

The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.

Net indebtedness				The table on the left displays the Company’s net indebtedness, based
In R$ thousand		Dec-15	Dec-16	on the audited financial statements for the years ended on December
Cash and cash equivalents		9,209	5,200	31, 2015 (Dec-15) and December 31, 2016 (Dec-16).
Securities - TVM		139	8
Loans – short term		(566,227)	(302,796)	We note that the concept of Net Indebtedness is not contemplated in
Loans – long term		(715,220)	(1,378,432)	the accounting practices adopted in Brazil, being it rather a
Net financial indebtedness		(1,272,099)	(1,676,020)	contractual definition. For the purpose of our analysis, we
Collaterals and deposits in court - long term		14,557	16,272	considered, in addition to the net financial indebtedness, other items
Post-employment benefit – short term		(42,327)	(27,609)	and transactions with financing features.
Research and development – short term		(13,605)	(11,128)
Payable taxes		(58,178)	(187,972)	The adjustments suggested and reported were prepared based on
Research and development – long term		(41,560)	(54,080)	management information and reports, audited accounting trial
Post-employment benefit – long term		(13,919)	(3,273)	balances, and enquiries made to the Company’s management. We
Provisions for lawsuits		(78,475)	(128,244)	note that, due to limited information and scope, there may be
Other liabilities – long term		(499)	(503)	adjustments that could not be quantified/identified during our
Other debt items		(234,006)	(396,537)	analysis.
Reported net indebtedness		(1,506,105)	(2,072,557)
Reclassification between working capital and net				Reclassifications between working capital and net
indebtedness		(168,761)	(166,699)	indebtedness
1	Rights to unpaid indemnification from previous periods	-	NQ
2	Suppliers with past due credits	(67,990)	(118,213)	1.	Rights to unpaid indemnification from previous
3	Contractual retentions – Suppliers	(1,799)	(1,799)		periods: We suggest the reclassification from net working
4	Lawsuit related to energy transfers	(13,628)	(15,506)		capital to indebtedness of the Energy Development Account
5	Reclassification of related parties	1,938	2,155		(CDE) receivable balances (recorded in the Indemnification
6	Other liabilities – short term	(87,282)	(33,336)		Right account – short term) generated more 12 months ago.
Subtotal		(168,761)	(166,699)		Accordingly, the proposed adjustment considers the CDE
Adjustments proposed by the due diligence		NQ	(416)		amounts related to fiscal year 2015.
7	Restricted cash balance	NQ	(416)
Subtotal		NQ	(416)	2.	Suppliers with past due credits: We suggest the
Adjusted net indebtedness		(1,674,866)	(2,239,672)		reclassification as net indebtedness of 100% of the suppliers’
Other considerations		937,098	1,113,204		past due payable balances, due to their nature of financing.
Source: Audited trial balances and Pw C analysis

Privatization of the Eletrobras System Distribution Companies					10 agosto 2017
PwC					10


*Exhibit II* – *Net indebtedness (2/6)*


The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.

Net indebtedness				3.	Contractual retentions – Suppliers: We identified a
In R$ thousand		Dec-15	Dec-16		provision for amounts retained under contracts with suppliers,
Cash and cash equivalents		9,209	5,200		which are not classified as working capital due to their non-
Securities - TVM		139	8		operating nature.
Loans – short term		(566,227)	(302,796)
Loans – long term		(715,220)	(1,378,432)	4.	Lawsuits related to energy transfers: We identified
Net financial indebtedness		(1,272,099)	(1,676,020)		records, in the short term suppliers balance, of amounts related
Collaterals and deposits in court - long term		14,557	16,272		to lawsuits involving power transfer contracts. Considering that
Post-employment benefit – short term		(42,327)	(27,609)		those sums are not classified as working capital, we suggest their
Research and development – short term		(13,605)	(11,128)		reclassification as net indebtedness. Note that we have not had
Payable taxes		(58,178)	(187,972)		access to most information related to those lawsuits.
Research and development – long term		(41,560)	(54,080)
Post-employment benefit – long term		(13,919)	(3,273)		Accordingly, we recommend that this matter be discussed with
Provisions for lawsuits		(78,475)	(128,244)		the legal area.
Other liabilities – long term		(499)	(503)	5.	Reclassification of related parties: It refers to balances
Other debt items		(234,006)	(396,537)		receivable from related parties for employee loans (assigned)
Reported net indebtedness		(1,506,105)	(2,072,557)
					paid by the Company. In view of their nature, we suggest their
Reclassification between working capital and net					reclassification as Company’s indebtedness.
indebtedness		(168,761)	(166,699)
1	Rights to unpaid indemnification from previous periods	-	NQ
2	Suppliers with past due credits	(67,990)	(118,213)
3	Contractual retentions – Suppliers	(1,799)	(1,799)
4	Lawsuit related to energy transfers	(13,628)	(15,506)
5	Reclassification of related parties	1,938	2,155
6	Other liabilities – short term	(87,282)	(33,336)
Subtotal		(168,761)	(166,699)
Adjustments proposed by the due diligence		NQ	(416)
7	Restricted cash balance	NQ	(416)
Subtotal		NQ	(416)
Adjusted net indebtedness		(1,674,866)	(2,239,672)
Other considerations		937,098	1,113,204
Source: Audited trial balances and Pw C analysis

Privatization of the Eletrobras System Distribution Companies					10 agosto 2017
PwC					11


*Exhibit II* – *Net indebtedness (3/6)*

The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.

Net indebtedness				6. Other liabilities – short term: We identified certain
In R$ thousand		Dec-15	Dec-16	liabilities classified in the Company’s current liabilities, which, in
Cash and cash equivalents		9,209	5,200	our view, are not characterized as operating working capital, as
Securities - TVM		139	8	detailed below:
Loans – short term		(566,227)	(302,796)
Loans – long term		(715,220)	(1,378,432)	In R$ thousand	Dec-15	Dec-16
Net financial indebtedness		(1,272,099)	(1,676,020)	ANEEL penalty (regulatory)	(21,569)	(29,610)
Collaterals and deposits in court - long term		14,557	16,272	Re. differences after ratifications in 2008, 2009 and	(1,802)	(1,931)
Post-employment benefit – short term		(42,327)	(27,609)	2010. The company filed appeal as to these amounts
Research and development – short term		(13,605)	(11,128)	owed.
Payable taxes		(58,178)	(187,972)	Materials lent to CERON (related parties)	-	(1,448)
Research and development – long term		(41,560)	(54,080)	Contractual retentions payable in the end of the contracts	(212)	(347)
Post-employment benefit – long term		(13,919)	(3,273)	(no [omissis]
Provisions for lawsuits		(78,475)	(128,244)	Re. contingency w/ the company Engeser, not
Other liabilities – long term		(499)	(503)	characterized as CG	(56,550)	-
Other debt items		(234,006)	(396,537)	Penalties payable do the National System Operator	(7,150)	-
Reported net indebtedness		(1,506,105)	(2,072,557)	Adjustment for reclassification to debt	(87,282)	(33,336)
Reclassification between working capital and net				Source: Pw C analysis and discussions w / management
indebtedness		(168,761)	(166,699)
1	Rights to unpaid indemnification from previous periods	-	NQ
2	Suppliers with past due credits	(67,990)	(118,213)	Adjustments proposed by the due diligence
3	Contractual retentions – Suppliers	(1,799)	(1,799)	7. Restricted cash balance: We were informed that certain
4	Lawsuit related to energy transfers	(13,628)	(15,506)	sums maintained in the cash and cash equivalents account
5	Reclassification of related parties	1,938	2,155
6	Other liabilities – short term	(87,282)	(33,336)	(deposits in cash, financial investments, etc.) are not
Subtotal		(168,761)	(166,699)	immediately available. Accordingly, we are excluding those sums
Adjustments proposed by the due diligence		NQ	(416)	from the position as Company net indebtedness.
7	Restricted cash balance	NQ	(416)
Subtotal		NQ	(416)
Adjusted net indebtedness		(1,674,866)	(2,239,672)
Other considerations		937,098	1,113,204
Source: Audited trial balances and Pw C analysis

Privatization of the Eletrobras System Distribution Companies					10 agosto 2017
PwC						12


*Exhibit II* – *Net indebtedness (4/6)*


The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.

Net indebtedness				Other considerations:

In R$ thousand		Dec-15	Dec-16		i.Tax, labor, and social security impacts: We are
Cash and cash equivalents		9,209	5,200		considering, for purposes of analysis of the Company’s net
Securities - TVM		139	8		indebtedness, the tax, labor, and social security exposures
Loans – short term		(566,227)	(302,796)		classified as with risk of probable loss (see specific exhibit in
Loans – long term		(715,220)	(1,378,432)		this summary). We note that the amount presented here already
Net financial indebtedness		(1,272,099)	(1,676,020)
					considers possible fines and interest to accrue upon an
Collaterals and deposits in court - long term		14,557	16,272
Post-employment benefit – short term		(42,327)	(27,609)		assessment by the tax authorities.
Research and development – short term		(13,605)	(11,128)		#	Description	31-Dec-15	31-Dec-16
Payable taxes		(58,178)	(187,972)		3	CVA	5,068	10,878
Research and development – long term		(41,560)	(54,080)		4	ISS on billable services	1,092	1,436
Post-employment benefit – long term		(13,919)	(3,273)
Provisions for lawsuits		(78,475)	(128,244)		Total tax exposures		6,160	12,314
Other liabilities – long term		(499)	(503)		2	Outsourcing of core activities	30,462	37,746
Other debt items		(234,006)	(396,537)		4	Irregularities related to work days	2,960	3,241
Reported net indebtedness		(1,506,105)	(2,072,557)		Total labor exposures		33,422	40,987
Reclassification between working capital and net					Total tax and labor exposures + NQ		39,582	53,301
indebtedness		(168,761)	(166,699)		Fonte: Análise PwC
Adjustments proposed by the due diligence		NQ	(416)		(*) avaliação de risco para as exposições reportadas de acordo com Loese
Adjusted net indebtedness		(1,674,866)	(2,239,672)
					ii.Financial asset – public utility concessions: It refers to
Other considerations		937,098	1,113,204
i	Tax, labor, and social security impacts	(39,582)	(53,301)		the financial asset indemnifiable in the end of the
ii	Financial asset – public utility concessions	682,902	865,133		concession/service period. Depending on how the Company’s
iii	Clients with past due and installment payments	293,778	301,372		sale is structured, the indemnifiable balance may be converted
iv	Collaterals and deposits in court - long term	NQ	NQ		into cash, thus reducing the level of net indebtedness.
v	Provision for contingencies	NQ	NQ
vi	CAPEX investments	NQ	NQ
vii	Undue charges – Angra 3	-	NQ
viii Other potential adjustments		NQ	NQ
Source: Audited trial balances and Pw C analysis


Privatization of the Eletrobras System Distribution Companies								10 agosto 2017
PwC								13


*Exhibit II* – *Net indebtedness (5/6)*


The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.

Net indebtedness				iii. Clients with past due and installment payments: We identified
In R$ thousand		Dec-15	Dec-16	outstanding balances of clients’ past due and installment payments,
Cash and cash equivalents		9,209	5,200	classified in the current and non-current assets. Although they do not
Securities - TVM		139	8	represent a cash item with immediate liquidity, we understand that
Loans – short term		(566,227)	(302,796)	they are a receivable of the Company, which, therefore, must be
Loans – long term		(715,220)	(1,378,432)	included in possible cash flow projections.
Net financial indebtedness		(1,272,099)	(1,676,020)
Collaterals and deposits in court - long term		14,557	16,272	In R$ thousand	Dec-15	Dec-16
Post-employment benefit – short term		(42,327)	(27,609)	Clients – current assets	77,815	91,981
Research and development – short term		(13,605)	(11,128)	Clients – non-current assets	215,963	209,391
Payable taxes		(58,178)	(187,972)	Total	293,778	301,372
Research and development – long term		(41,560)	(54,080)
Post-employment benefit – long term		(13,919)	(3,273)	iv.Long term collaterals and deposits in court: We note that the
Provisions for lawsuits		(78,475)	(128,244)	deposits in court directly related to a provision for contingency must
Other liabilities – long term		(499)	(503)	impact the indebtedness balances in the period. However, since the
Other debt items		(234,006)	(396,537)	Company did not provide the ancillary controls, it was not possible to
Reported net indebtedness		(1,506,105)	(2,072,557)	determine if the full amount of the reported balances must be
Reclassification between working capital and net				included in the analysis of the Company’s net indebtedness.
indebtedness		(168,761)	(166,699)	v.Provision for contingencies: We note that this summary does not
Adjustments proposed by the due diligence		NQ	(416)	consider possible changes in the projection of loss of the Company’s
Adjusted net indebtedness		(1,674,866)	(2,239,672)	lawsuits, resulting from the legal due diligence works.
Other considerations		937,098	1,113,204	vi.CAPEX investments: As mentioned before, the Company has been
i	Tax, labor, and social security impacts	(39,582)	(53,301)	operating as a public utility Company, which has resulted in a
ii	Financial asset – public utility concessions	682,902	865,133
iii	Clients with past due and installment payments	293,778	301,372	reduction in CAPEX investments, maintaining only those that are
iv	Collaterals and deposits in court - long term	NQ	NQ	essentially necessary to continue with the operational activities and
v	Provision for contingencies	NQ	NQ	the levels of quality required by the regulatory agencies. We
vi	CAPEX investments	NQ	NQ	recommend that the impacts estimated by the result of the technical
vii	Undue charges – Angra 3	-	NQ	and operational due diligence be considered.
viii Other potential adjustments		NQ	NQ
Source: Audited trial balances and Pw C analysis


Privatization of the Eletrobras System Distribution Companies						10 agosto 2017
PwC						14


*Exhibit II* – *Net indebtedness (6/6)*


The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.

Net indebtedness				vii. Undue charges – Angra 3: According to ANEEL’s information,
In R$ thousand		Dec-15	Dec-16	the power distribution companies that belong to the
Cash and cash equivalents		9,209	5,200	interconnected system unduly charged from their consumers in
Securities - TVM		139	8	2016 certain amounts related to the estimated costs of the nuclear
Loans – short term		(566,227)	(302,796)	power plant Angra 3. We have not had access to the sums to be
Loans – long term		(715,220)	(1,378,432)	reimbursed to the Company’s consumers, but we were informed
Net financial indebtedness		(1,272,099)	(1,676,020)	that such reimbursement would be made by means of discount (of
Collaterals and deposits in court - long term		14,557	16,272	approximately 7.66%) in the April 2017 bill.
Post-employment benefit – short term		(42,327)	(27,609)	viii. Other potential adjustments: Considering the defined scope of
Research and development – short term		(13,605)	(11,128)
Payable taxes		(58,178)	(187,972)	our works; the limitations in the information provided; the tax,
Research and development – long term		(41,560)	(54,080)	labor, and social security exposures that could not be quantified;
Post-employment benefit – long term		(13,919)	(3,273)	and possible non-recoverable assets adjustments (e.g., inventory
Provisions for lawsuits		(78,475)	(128,244)	with low recoverability expectation); other potential adjustments
Other liabilities – long term		(499)	(503)	may be necessary, in order to better reflect the Company’s
Other debt items		(234,006)	(396,537)	normalized and recurring EBITDA. In addition, we recommend
Reported net indebtedness		(1,506,105)	(2,072,557)	that this summary be read jointly with the reports of the other due
Reclassification between working capital and net				diligence areas (operational, legal, HR, insurance, and
indebtedness		(168,761)	(166,699)	environmental).
Adjustments proposed by the due diligence		NQ	(416)
Adjusted net indebtedness		(1,674,866)	(2,239,672)
Other considerations		937,098	1,113,204
i	Tax, labor, and social security impacts	(39,582)	(53,301)
ii	Financial asset – public utility concessions	682,902	865,133
iii	Clients with past due and installment payments	293,778	301,372
iv	Collaterals and deposits in court - long term	NQ	NQ
v	Provision for contingencies	NQ	NQ
vi	CAPEX investments	NQ	NQ
vii	Undue charges – Angra 3	-	NQ
viii Other potential adjustments		NQ	NQ
Source: Audited trial balances and Pw C analysis


Privatization of the Eletrobras System Distribution Companies				10 agosto 2017
PwC				15


*Exhibit III* – *Net working capital (1/3)*


The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.
Net working capital
Em R$ mil	Dec-15	Dec-16	We present in the table on the left the Company’s net working capital
Clients – short term	387,143	379,675	as of December 31, 2015 (Dec-15) and 2016 (Dec-16), prepared based
Taxes and social contributions – short term	16,469	17,440	on the audited financial statements.
Indemnification right – short term	45,777	124,431
Inventory	15,508	12,884	The adjustments suggested and reported were prepared based on
Financial assets	78,873	132,800	management information and reports, accounting trial balances, and
Other assets – short term	38,965	60,636	enquiries made to the Company’s management. We note that, due to
Suppliers - short term	(243,603)	(246,111)	limited information and scope, there may be adjustments that could
Taxes and contributions	(270,527)	(215,861)	not be quantified/identified during our analysis.
Labor obligations	(45,051)	(30,711)
Industry charges - short term	(7,599)	(10,315)	Reclassifications between working capital and net
Financial liabilities	(47,194)	(88,192)	indebtedness
Other liabilities – short term	(113,668)	(118,133)
Reported net working capital	(144,907)	18,543	•	For further details, see the preceding exhibit of this summary,
Reclassification between working capital and net indebtedness	168,761	166,699		“net indebtedness.”
Rights to unpaid indemnification from previous periods	-	NQ	Adjustments proposed by the due diligence
Suppliers with past due credits	67,990	118,213
Contractual retentions – Suppliers	1,799	1,799	1.	Inventory with low recoverability expectation: Items
Lawsuit related to energy transfers	13,628	15,506		destined to sale (scraps) and lent materials, which are not
Reclassification of related parties	(1,938)	(2,155)		classified as operating working capital.
Other liabilities – short term	87,282	33,336
Subtotal	168,761	166,699	2.	Clients with past due and installment payments: We
Adjustments proposed by the due diligence				identified outstanding balances of clients’ past due and
1 Inventory with low recoverability expectation	(4,868)	(3,980)		installment payments, classified in the current assets, which we
2 Clients with past due and installment payments	(77,815)	(91,981)		suggest be excluded for purposes of analysis of the Company’s
3 Other assets – short term	(24,327)	(44,116)
				working capital. As mentioned before, although they do not
Subtotal	(107,010)	(140,077)
				represent a cash item with immediate liquidity, we understand
Adjusted net working capital	(83,157)	45,166
				that they are a receivable of the Company, which, therefore, must
Other considerations				be included in possible cash flow projections.
i Potential risk of change in the CVA values	NQ	NQ
ii Tax, labor, and social security exposures	NQ	NQ
iii Other potential adjustments	NQ	NQ
Source: Audited trial balances and Pw C analysis

Privatization of the Eletrobras System Distribution Companies				10 agosto 2017
PwC				16


*Exhibit III* – *Net working capital (2/3)*


The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.
Net working capital
Em R$ mil	Dec-15	Dec-16	3. Other assets – short term: We identified certain assets
Clients – short term	387,143	379,675	classified in the Company’s current assets which, in our view, are
Taxes and social contributions – short term	16,469	17,440	not characterized as operating working capital, as detailed
Indemnification right – short term	45,777	124,431	below:
Inventory	15,508	12,884
			In R$ thousand	Dec-15	Dec-16
Financial assets	78,873	132,800	Scraps available for sale	3,585	(1,404)
Other assets – short term	38,965	60,636	Re. structure loan by the company Oi. In view of the
Suppliers - short term	(243,603)	(246,111)	client’s financial difficulties, we suggest writing-off this	(1,431)	(2,071)
Taxes and contributions	(270,527)	(215,861)	CG balance
Labor obligations	(45,051)	(30,711)	Re. longstanding insurance premium, for which the	(915)	(915)
Industry charges - short term	(7,599)	(10,315)	Company did not have further details
Financial liabilities	(47,194)	(88,192)	Re. R&D and EEP balances, which must be	(25,585)	(39,725)
Other liabilities – short term	(113,668)	(118,133)	reclassified in the future as fixes assets or expenses
			Adjustment CG write-off	(24,327)	(44,116)
Reported net working capital	(144,907)	18,543	Source: Pw C analysis and discussions w / management
Reclassification between working capital and net indebtedness	168,761	166,699
Rights to unpaid indemnification from previous periods	-	NQ	Other considerations
Suppliers with past due credits	67,990	118,213	i. Potential risk of change in the CVA values: The Account
Contractual retentions – Suppliers	1,799	1,799	for Compensation of “Portion A” Variations (CVA) records the
Lawsuit related to energy transfers	13,628	15,506
Reclassification of related parties	(1,938)	(2,155)	difference between the costs estimated in the tariff (Portion A)
Other liabilities – short term	87,282	33,336	and the costs effectively incurred, creating a payable or
Subtotal	168,761	166,699	receivable balance (and, consequently, an expense or a revenue)
Adjustments proposed by the due diligence			for the Company. Such amounts to be paid/received are ratified
1 Inventory with low recoverability expectation	(4,868)	(3,980)	each year by ANEEL. We found that, historically, the amounts
2 Clients with past due and installment payments	(77,815)	(91,981)	ascertained by the Company may significantly differ from those
3 Other assets – short term	(24,327)	(44,116)	ratified by ANEEL, mainly with respect to the financial items,
Subtotal	(107,010)	(140,077)
			which are not controlled by the Company. Considering that the
Adjusted net working capital	(83,157)	45,166	ratification process happens close to the end of the fiscal year
Other considerations			(between September and October), we understand that there
i Potential risk of change in the CVA values	NQ	NQ
ii Tax, labor, and social security exposures	NQ	NQ	are no material discrepancies for the balances accounted for in
iii Other potential adjustments	NQ	NQ	Dec-15 and Dec-16. On the other hand, those differences may
Source: Audited trial balances and Pw C analysis			become significant over the months.

Privatization of the Eletrobras System Distribution Companies					10 agosto 2017
PwC					17


*Exhibit III* – *Net working capital (3/3)*


The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.
Net working capital
Em R$ mil	Dec-15	Dec-16	ii.	Tax, labor, and social security exposures: It refers to the
Clients – short term	387,143	379,675		impact on the net working capital of adjustment #6 presented
Taxes and social contributions – short term	16,469	17,440		in the quality of the results. We understand that any changes in
Indemnification right – short term	45,777	124,431		the tax, labor, and social security procedures may also impact
Inventory	15,508	12,884		the Company’s net working capital.
Financial assets	78,873	132,800
Other assets – short term	38,965	60,636	iii.	Other potential adjustments: See adjustment viii of the
Suppliers - short term	(243,603)	(246,111)		preceding exhibit.
Taxes and contributions	(270,527)	(215,861)
Labor obligations	(45,051)	(30,711)
Industry charges - short term	(7,599)	(10,315)
Financial liabilities	(47,194)	(88,192)
Other liabilities – short term	(113,668)	(118,133)
Reported net working capital	(144,907)	18,543
Reclassification between working capital and net indebtedness	168,761	166,699
Rights to unpaid indemnification from previous periods	-	NQ
Suppliers with past due credits	67,990	118,213
Contractual retentions – Suppliers	1,799	1,799
Lawsuit related to energy transfers	13,628	15,506
Reclassification of related parties	(1,938)	(2,155)
Other liabilities – short term	87,282	33,336
Subtotal	168,761	166,699
Adjustments proposed by the due diligence
1 Inventory with low recoverability expectation	(4,868)	(3,980)
2 Clients with past due and installment payments	(77,815)	(91,981)
3 Other assets – short term	(24,327)	(44,116)
Subtotal	(107,010)	(140,077)
Adjusted net working capital	(83,157)	45,166
Other considerations
i Potential risk of change in the CVA values	NQ	NQ
ii Tax, labor, and social security exposures	NQ	NQ
iii Other potential adjustments	NQ	NQ
Source: Audited trial balances and Pw C analysis

Privatization of the Eletrobras System Distribution Companies				10 agosto 2017
PwC				18


*Exhibit IV* – *Balance Sheet*




Assets			Liabilities

	Dec-15	Dec-16		Dec-15	Dec-16
In R$ thousand	(Audited)	(Audited)	In R$ thousand	(Audited)	(Audited)
Cash and cash equivalents	9,209	5,200	Suppliers - short term	243,603	246,111
Securities - TVM	139	8	Loans – short term	566,227	302,796
Clients – short term	387,143	379,675	Taxes and contributions	270,527	215,861
Taxes and social contributions – short term	16,469	17,440	Post-employment benefit – short term	42,327	27,609
Deferred Tax Credit - IRPJ	2,783	-	Research and development – short term	13,605	11,128
Indemnification right – short term	45,777	124,431	Labor obligations	45,051	30,711
Inventory	15,508	12,884	Industry charges - short term	7,599	10,315
Financial assets	78,873	132,800	Financial liabilities	47,194	88,192
Other assets – short term	38,965	60,636	Other liabilities – short term	113,668	118,133
Current assets	594,866	733,074	Current liabilities	1,349,801	1,050,856
Clients – long term	215,963	209,391	Loans – long term	715,220	1,378,432
Taxes and social contributions – long term	5,580	7,668	Payable taxes	58,178	187,972
Collaterals and deposits in court - long term	14,557	16,272	Research and development – long term	41,560	54,080
Financial asset – public utility concessions	682,902	865,133	Advance for future capital increase (AFAC)	-	295,402
Other assets – long term	1,305	1,437	Post-employment benefit – long term	13,919	3,273
Investments	146	146	Provisions for lawsuits	78,475	128,244
Intangible assets	11,712	10,279	Other liabilities – long term	499	503
Fixed assets	29,471	33,624	Non-current liabilities	907,851	2,047,906
Non-current assets	961,636	1,143,950	Capital stock	1,272,747	1,272,747
Total assets	1,556,502	1,877,024	Adjustment for equity assessment	(7,366)	(21,193)
Source: Audited trial balances			Accumulated losses	(1,966,531)	(2,473,292)
			Net equity	(701,150)	(1,221,738)
			Total liabilities	1,556,502	1,877,024
Source: Audited trial balances



Privatization of the Eletrobras System Distribution Companies					10 agosto 2017
PwC					19


*Exhibit V* – *Income Statement*




Income Statement

In R$ thousand	FY15	FY16
Net Revenue	1,295,388	1,350,046
Operating Cost	(1,442,623)	(1,424,293)
Cost of Electricity	(941,285)	(969,254)
Electricity bought for resale	(870,089)	(878,431)
Charges for use of transmission grid	(77,498)	(90,823)
Transfer of ACR/CDE accounts	6,302
Operation Cost	(329,677)	(303,263)
Labor, materials, and third parties services	(212,974)	(244,993)
Depreciation and amortization	(34,452)	(37,367)
Other	(82,251)	(20,903)
Construction Cost	(171,661)	(151,776)
Gross Profit	(147,235)	(74,247)
Operating Expenses/Revenues	(271,108)	(209,686)
Income from Electricity Service	(418,343)	(283,933)
Financial revenue	97,750	96,294
Financial expenses	(242,395)	(319,122)
Financial results	(144,644)	(222,828)
Income before equity stakes	(562,987)	(506,761)
Net profit (loss)	(562,987)	(506,761)
Source: Audited trial balances and audited financial statements




Privatization of the Eletrobras System Distribution Companies			10 agosto 2017
PwC			20


*Exhibit VI* – *Quantified tax, labor, and social security exposures*

The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.


Tax Exposure

Item	Description	Exposure	*Risk assessment ()**
1	Non-technical energy losses	106,866	Possible
2	Writing-off of PIS and COFINS credits on charges	82,937	Possible/Remote
3	CVA	10,878	Probable
4	ISS on shared infrastructure and billable services	3,434	Probable/Possible
Total quantified tax exposure		204,115
Source: Pw C analysis
(*) Risk assessment for reported exposures according w ith Loeser e Portela Advogados




Labor and Social Security Exposure

Item	Description	Exposure	*Risk assessment ()**
1	PLR disqualification	54,800	Possible
2	Outsourcing of core activities	37,746	Probable
3	Medical and dental care	8,530	Possible
4	Irregularities related to work days	3,241	Probable
Total quantified labor and social security exposure		104,317
Source: Pw C analysis
(*) Risk assessment for reported exposures according w ith Loeser e Portela Advogados




Privatization of the Eletrobras System Distribution Companies			10 agosto 2017
PwC			21


*Exhibit VII* – *Tax credit on tax loss, CSL negative basis, and temporary adjustments*


The content below presents the main points of attention identified during the accounting due diligence procedures. Accordingly, it does not
include all matters identified and discussed in the due diligence report, and, therefore, must be read jointly with the whole report in order to
provide a comprehensive understanding of the matters identified.
•	The Company has not recognized in its accounting records the
	IRPJ and CSL deferred credit on the tax losses and on the social
	contribution negative basis, or on the temporary adjustments.
•	It is important to note that the tax losses and CSL negative basis
	balances may be offset with future profits up to the limit of 30% of
	the taxable profit of each year (without limitation in time). We
	should stress that the Company cannot use the tax losses and CSL
	negative basis balances if (i) between the date of determination
	and offsetting there has been both a change in its corporate
	control and (ii) of its field of activity.
•	It is important to note that the tax losses and CSL negative basis
	balances are not reduced by the contingencies presented in this
	summary.

	(R$ thousand)	IRPJ	CSL
	Tax Loss/CSL Negative Basis	2,129,804	1,965,753
	IRPJ 25%	532,451	-
	CSL 9%	-	176,918
	Total	532,451	176,918
	Source: ECF and calculation record




Privatization of the Eletrobras System Distribution Companies			10 agosto 2017
PwC			22

Belo Horizonte, November 1, 2017.

Gentlemen,

In furtherance of the service provision agreement, this paper is part of the services retained for Eletrobras Distribuição Piauí privatization, ITEM 3 – “SERVICE A” (Financial & Economic Evaluation), under the BNDES Agreement.

This Report encompasses the purpose, scope, procedures and methodology used, as well as the market and operating assumptions for Valuation of Distributor and the execution of the new Concession Contract¹.

Discounted Cash Flow was the methodology used. Assumptions were adhered to, based on information delivered by the Distributors and BNDES, and on general market conditions.

The signed copies of this agreement are kept by the Contracting party.

Best regards,

_______________________________

Alexandre Moreira Galvão
Legal Representative & Stockholding Director

¹Statutory Law 12.783 dated January 11, 2013, Article 8, Paragraph 1 A: “When the service provider is a legal entity directly or indirectly controlled by the government, the Union will be entitled to hold such bidding procedure as described in the head section of this article, combined with the service-providing legal entity control transfer, and granting the utility contract to the new controlling shareholder for a 30-year period.” t Ceres )nteligência Financeira

Introduction

Purpose

The purpose of this paper is to issue a Financial & Economic Evaluation Report on Eletrobras Dis-tribuição Piauí and on the execution of a new Concession Contract, in order to shore up the accurate dimensioning and provide technical support in the business deals of the Company.

The purpose of the financial evaluation, besides the main point of determining the business Valuation, is to present scenarios, existing synergies for the business, and value possibilities that may be perceived by the market, as well as associated liabilities. From the company’s viewpoint, the discounted cash flow method reckons in numbers and at present value the whole dimension of the business, on a realistic basis, and taking into account potential points of exploitation of the concession contract, in view of the current structure.

Added hereto are the sensitivity analysis and the risk analysis, in addition to other valuable methods, such as comparative evaluation by multiples or similar transactions, aiming at reaching the clearest perception of the business value interval and possible structures that could make the transaction more efficient, both for the buyer and the seller.

Disclaimers

The job described in this paper was developed according to information obtained from sources appointed by Eletrobras Distribuição Piauí and data delivered by ANEEL.

This evaluation does not take into account the penalties for electricity over-contract by the enterprise at issue, because it was assumed that the new utility company could afford settling its positions at market prices. Ceres hereby highlights that sudden changes in macroeconomic indicators and electricity prices may have some bearing on the values pointed out herein.

Please note that this paper does not contain a Compensation Basis added by the enterprise’s current PP&E positions. The accounting entries covering the current PP&E positions may be found in section “Comments on Current Assets” for invertors’ information.

Methodology

Evaluating a distributor is based on the set of regulations making up the tariff review base applicable to inter-cycle tariffs and tariff readjustments, as well as on the economic pillar of effective forecasts, especially about costs incurred and capital invested. The set of regulations gives direction to the Required Revenue, which is the criterion to set the tariffs used by the distributors. Such tariffs arise from tariff reviews, decomposed from Installment A (non-manageable costs) and Installment B (manageable costs).

Tariff reviews are based on “tariff moderateness” and “continued award to efficiency” principles, with the different complexity/size areas being taken into consideration.

Costs and expenses, taxes, working capital, provision for indemnities and contingencies, and actual disbursements complement the economic flow, to be dimensioned in forecast and at present value, for business analysis.

Please find below some directives forming the tariff review base, dimensioned at the Tariff Level and specified in PRORET (Portuguese acronym standing for “Tariff Regulation Procedures”). The cash flow and the capital cost definition methods used in this evaluation are detailed below. As a final point, find our comments on this paper’s directives for specific approaches and risk analysis.

Operating Costs Abstract

At this stage, we calculated items related to the tariff level cost elements. The operating costs calculated for the distributor take into account the own costs and the other distributors’ costs. The other distributors are included in the calculation to form the efficient cost goal of the distributor under evaluation. The Statutory Operating Costs are forecasted from two angles:

1. Statutory Cost from Nov-2017 to Nov-2023 equivalent to such value as specified in Technical Note 149/2017 SRM/SGT/SRD/SFF/ANEEL;

2. Statutory Cost calculation from Nov-2023 through such methodologies as described in Submodules 2.2 and 2.2-A of PRORET, considering the information obtained from RT 2013, SAMP, BDGD and Financial Statements as the reference values.

Accordingly, the operating costs calculation as of 2013 adhered to the following brief plan of work:

1. Collect data from ANEEL documents; a. PRORET sub-module 2.2 b. PRORET sub-module 2.2-A c. APPROVAL RESOLUTION # 1.858 DATED FEBRUARY 27, 2015; d. Technical Note 409/2013-SRE/ANEEL;

2. Market Data Collection from SAMP (Economic Regulation Market Information Monitoring System);

3. Data Collection of distributor’s structure from BDGD (Distributor’s Geographic Database);

4. Data Collection from the two most-recent annual Financial Statements available;

5. Updating Factor Calculation based on the methodology of Module 2.2, V2.0, PRORET;

6. Efficient Costs Interval Calculation;

7. Operating Costs Goal Definition;

8. Operating Costs Revenue Calculation;

9. Report containing all the calculations made and results obtained upon the application of the proposed methodology;

Please find below a detailed description of such stages.

General Rules

Revenues deemed a reference to reach tariff moderateness shall correspond to the average revenue invoiced plus taxes, in the 36 months preceding the 6^thmonth before the review date, updated at IGP-M³thru the review date, multiplied by 12, as defined in Chapter 3 “Other Revenue Methodology” of Sub-module 2.7 in PRORET.

· In the event the activity was started within a period shorter than 36 months, then we considered the average revenue invoiced thru the 6^thmonth before the review date, updated at IGP-M, multiplied by 12.

³Value updating calculation: A * updating at IGP-M thru review date * 12. Wherein, for updating in:

2015 and 2016: A = average revenue invoiced in the last 12 months, as of the 2^ndmonth before the tariff review date;
2017: A = average revenue invoiced in the last 24 months, as of the 6^thmonth before the tariff review date;
2018 on: A = average revenue invoiced in the last 36 months, as of the 6^thmonth before the tariff review date.

Discounted Cash Flow Introduction

The technique used for evaluation is based on the Discounted Cash Flow methodology, which is supported on the hypothesis that the value of a project depends on its capacity to generate wealth in the future. Revenues, costs, expenses, investments and other working capital requirements are estimated, in addition to all the items that affect the enterprise’s cash fluctuation, for a given period of time.

Seeing as the generated cash flow values occur in different time spans, these must be summed and compared in a current equivalence. Thus, the net balances reckoned per period are taken to present value at a discount rate reflecting the risks inherent to the business, added by the risk-averse investors opportunity cost, i.e., an attractiveness rate reflecting the business capital providers opportunity cost.

Such rate is given by value parameters generally offered by government bonds, incorporates the specific risk of the business, and is calculated based on CAPM (Capital Asset Pricing Model). By that model, the project owners’ equity (Ke) cost is calculated.

To calculate the project values, the owners’ equity cost (Ke) is weighted with the third-parties’ equity cost (Kd), in proportion to the capital structure used in the project, resulting in the enterprise’s WACC (Weighted Average Cost of Capital).

There are different versions of the Discounted Cash Flow methodology, and this paper adheres to the Free Cash Flow to Firm (FCFF) approach.

Capital Asset Pricing Model – CAPM Introduction

The owners’ equity cost (Ke) calculation is primarily based on the business risk analysis, added by the economy’s risk-free yield rate, generally given by the yield offered by government bonds.

At first, companies of the industry serve as the basis, measuring the price fluctuation of their shares in the money market, against the economy oscillations, mirrored on some market index, for instance.

One of such measures is by Beta, which represents a multiplier in relation to the return fluctuations of companies in a given segment in relation to the market and is equivalent to the risk of the segment analyzed. Primarily, we take a weighted average of such measure for the industry, excluding the indebtedness weight. That indicator represents an average and time relation between the returns on the shares selected in relation to the economy, which was highlighted here by the S&P500 returns fluctuation, an index that captures a good deal of transactions in the US market. Therefore, compared are the fluctuations of the prices in dollars of the shares in the public companies that operate in the same industry as the enterprise analyzed, with the S&P500 index fluctuations.

The purpose of this process is to obtain the additional risks of the business at issue in relation to the economy. Therefore, the result of the return expected and required on the business would be a risk free yield rate, in line with the rates offered by the government, added by the economy rate in general, plus the profits or minus the losses of the business, in comparison with the economy as a whole. Hence, a single rate synthesizes the yield required by a business, contemplating all the risks inherent in their fluctuations of income and cash, and adds the gains on zero risk investments, given in traditional short-term investments offered by the government.

Whereas we used indexes present in the US and global economy, calculated in dollars, considering the purpose of accuracy of inter-industry risk levels, therefore, utilization and supplementation in calculating the risks present in Brazilian interest rates in relation to the global market are necessary.

For risk-free and government rates, we used the 10-year US treasury bonds, marked to market continuously (Constant Maturity Bond). Thus, the risk elements present in the Brazilian interest rate, as the country risk premium, regarding the credit risk in the Brazilian Economy against the global market, and the exchange risk, showing the uncertainties about the BRL fluctuation against the USD, must be included. Both of them are already included in SELIC interest rate or government bonds with future maturities, the reason for such inclusions, for they represent the risk-free opportunity cost in Brazil.

For the country risk premiums, we used the difference between Exchange FRC, contracts traded in BM&F-BOVESPA, and the Risk Free Rate calculated through the Treasury Bonds.

each company by adjusting their Debt to Equity (D/E) ratios. Finally, the unleveraged betas of each company are weighted by their Enterprise Value, thus achieving the unleveraged Beta for the resulting Beta, unleveraged, for the industry, which is then re-leveraged in order to consider the fraction of systemic risk corresponding to the relevant company indebtedness effect.

Market Risk Premium

The Market Risk Premium represents the yield expected by the market, taking into account the additional risk in relation to the risk-free rate that practiced therein. The Market Risk Premium is calculated based on the difference between the returns on the S&P500 Index and the perpetual 10-year US Treasury Bonds (Constant Coupon Bond), marked to market annually, considering a long-term window of time. That is, to estimate the Market Risk Premium, the difference between the return on the S&P500, adjusted for dividends and the return on Treasury Bonds, was taken into account.

For the calculation of the return on T-Bonds, the constant maturity bonds, i.e. 10-year-maturity marked-to-market perpetual bonds, are taken into account, assuming the repurchase of the bond at the end of each year. Thus, this return is composed of two components: the yield hired for the year in which the bond was held by the investor and the paper price fluctuation to market due to the changes in the interest rate offered at the end of the year.

Country Risk

As previously mentioned, the CAPM model structuring based on the rates practiced in foreign markets, especially those found in the US market, is more advisable due to the diversity of business segments found in their stock market indices, which explain more comprehensively the relative risks between segments and companies in an economy. However, for application in the countries of origin, it is necessary to adjust the country-specific credit risks, since the US risk-free rate is used, based on T-Bonds, debt securities issued by the United States. The measurement of this risk spread, which applies to developing economies, including Brazil, is denominated country risk. The option recommended in this paper, for a better adjustment, is obtaining the spread between interpolated FRC and T-Bonds, which more directly reflect the country risk present in the interest curve.

Exchange Risk

To estimate the foreign exchange risk premium, the forward premium was obtained by the breakdown of domestic interest rates and the FRC, which already includes the country risk. The foreign exchange coupon and FRC contracts indicate the expected interest rates in US dollars, measuring the DI-1 day

Third-party capital cost (Kd)

The third party capital cost is obtained through the weighted average of the gross debt (2011-2016) of the companies used to calculate Beta, weighted at the Debt/Net Debt ratio, of the same companies, on their respective reference dates. Next, the Cost of Debt / Net Debt ratio is multiplied by the IDC forecast of the target year. As a final point, inflation and taxes are discounted to reach the tax-free real Kd.

Weighted Average Cost of Capital – WACC

The WACC rate is obtained by weighting the owners’ equity cost and the third-party equity cost and their respective sharing in the company’s capital structure, considering the tax benefit of the debt for third-party equity. The capital structure used was the same as used by ANEEL in PRORET, Submodule 2.4.

Special Treatments and Specific Risks

The distributors being analyzed are within the electric power distribution service provision norm as Designated Distributors, pursuant to the terms and conditions of Article 9, Statutory Law 12.783, dated January 11, 2013, and Ordinance 338 dated July 26, 2016, issued by the Department of Mines & Energies (MME).

Accordingly, several terms and conditions were agreed to for operation under supervision of the regulatory agency.

“ReA No. 748/2016 imposes on such distributors the pre-privatization Temporary Distribution Service Provision Plan for 2017, entailing loan transfer to meet the goals set and accommodate the operating costs, inter alia, according to Annex IV – Commitment, attached to said ReA, as follows: ‘The Designated Distributor Officers, regarding the distribution utility service provision (hereinafter referred to as the ‘Officers’), who are signatories to this agreement, in order to be entitled to the transfers of funds set forth in Paragraph 4, Article 9, Statutory Law 12.783 dated January 11, 2013, commit to abide by the provisions of Ordinance MME-388/2016 and see to continuity and suitability of the service delivered, particularly regarding the following parameters, which have been followed up by ANEEL as a priority:

I – industry compliance;

II – the assignment’s electric power loss threshold;

III – the assignment’s Operating Costs threshold;

IV – the assignment’s threshold of discontinuity equivalent duration per consumer unit (DEC); V – the assignment’s threshold of discontinuity equivalent frequency per consumer unit (FEC); VI – quality of information provided to ANEEL; VII – meeting the inspection requirements issued by ANEEL.

The signatories hereto, on behalf of the Officers, hereby commit to send to ANEEL the Temporary Distribution Service Provision Plan, duly executed by the same signatories hereto, detailing the actions to be taken by the management, with a view to abide by the terms and conditions set forth by ANEEL during the assignment period granted by the Contract-Letting Branch of Government.”

the reality and the complexity of the service provision in those regions. More to the point, we considered the terms and conditions contained in the draft template for the Electric Power Distribution Concession Contract, as per resolution issued by the Board of ANEEL during the 15^thOrdinary Public Meeting held on May 2, 2017.

Likewise, the tariff review expected for those distributors was suspended. The new draft contract allows the possibility of accelerated tariff review in the new agreement⁶, a premise taken into account for the Base Scenario 2019.

Those distributors’ compensation bases appear to be outdated, and the unitizing process is underway, in many of them, it may valorize their compensation bases. As a final point, different compensation bases were simulated, given the expected results that may be obtained by Eletrobras, supported by such reports.

Related Parties

The distributors have debt agreements with Eletrobras. Those agreements were priced separately, so as to allow possible debt restructuring with the shareholder.

Outstanding CCC Values and other Industry-Related Charges

There are debt balances for industry-related default. Normative Resolution No. 748/2016 resets post-assignment commitments and provides for loans with RGR funds for cash closing. CCC/other debt flows were treated separately, and the amounts of receivables and payables were reconciled.

Forecast of ‘Light to Everyone’ and RGR Flow earmarked to expiration

We forecasted the amounts payable and receivable by means of CDE funds for Program ‘Light to Everyone’ (PLPT) thru expiration scheduled for December 2018⁷. We did not make PLPT forecasts for subsequent years at scheduled expiration because such forecasts would depend on determinations foreign to the distributors.

As a final point, the total investment in replenishment will be distributed over the years 2018 to 2022 based on the Technical & Operating Due Diligence outcome; for the other years, the necessary replenishments, consistent with the private market⁸within their area of operation.

⁷Presidency of the Republic, Chief of Staff, Legal Team, Decree No. 8.387 dated December 30, 2014.

⁸CEMAR, COELCE,COELBA,CELPE.

Economic & Financial Evaluation

General Assumptions for the Financial Model

For the financial model, it was necessary to adopt some assumptions to analyze the distributors. The model was developed with monthly periodicity; the following general assumptions were defined: Base Date used for the evaluation as of March 1, 2018, with analysis period from March 1, 2018 to February 28, 2048 (30 years of concession contract). However, the tables, charts, and results shown in the Report start in January 2017 and end in December 2047, because, by considering only two months in 2048, the analyses would not be comparable with the other years.

The discount rate used is based on the dynamic rate methodology, consisting in the monthly calculation of the WACC – Weighted Average Cost of Capital, to be applied. The reporting currency is the official currency, i.e., the values are impacted by inflation over the analysis period. Deflator used to bring the forecasted cash flow to present value is IPCA.

For regulatory assumptions, we assumed that Ordinary Tariff Reviews have a 5-year periodicity, being considered in the month of September and as of the year 2023 as reference (5 years after the contract is signed with the new utility company, which is to take place in 2018). Besides, this evaluation considers an Extraordinary Tariff Review in 2019, basically encompassing the BRR reevaluation.

Finally, the results obtained in the evaluation are based on Nominal Cash Flow to Firm.

Summary of Business and Existing Structures

Features of the Business

Authorized by State Law No.4.868, on December 19, 1996,the Executive Power started the process of transfer of shares owned by the State, which were part of the capital stock of Cepisa. In the first phase, ELETROBRASexpands its share participation in the company to 48.86% of the ordinary shares and on January 13, 1997, they assume theadministration of CEPISA together with the State Government. In the same year, on October 20, ELETROBRAS acquires the share control of CEPISAand undertakes the commitment to prepare the company for privatization.

In 2000, Substation Tabuleiros Litorâneos in Parnaíba starts operation – the first 138/69 KV with 120 MVA power and the 138KV transmission line– Piripiri /Tabuleiros is energized.

Since 2005, the 69 kV Satellite system is energized; it includes 10 km Transmission Lines andthe 69/13.8 kV – 25 MVA substation. The power of this substation was expanded to 45 MVA in 2007.

In 2006, an extensive program of works on the reinforcement of the transmission system starts, including construction and refurbishment of substations, 69 kV transmission lines for expansion of the power offer in the entire Stateand implementation of the Light for All Program.

In June 2008, the new management model was implemented for the distribution companies of ELETROBRAS, setting a single and integrated direction, aiming to unify procedures, put employees of different cultures closer, and reinforce confidence of customers served in the different territories of operation. As a holding company, ELETROBRAS controls great part of electric power generation and transmission systems in Brazil, and operates in the distribution segment by means of companies Eletrobras Amazonas Energia, Eletrobras Distribuição Acre, Eletrobras Distribuição Roraima, Eletrobras Distribuição Rondônia, Eletrobras Distribuição Piauí, and Eletrobras Distribuição Alagoas.

Demand Forecasting

Demand Forecasting per Class

The consumption of electric power in Brazil may be divided into eight different classes, which are: Residential, Commercial, Industrial, Rural, Government, Public Lighting, Public Service, and Own Consumption. In order to understand the possible heterogeneities among the groups, the Residential, Commercial, Industrial, and Rural sectors were analyzed in separate. Government, Public Lighting, Public Service, and Own Consumption were all grouped in a single class entitled ‘Other’. This decision was based on the similar consumption behavior between them and to reduce the effect of volatility incurred in low-consumption classes.

Distributor’s History

To project the demand for power of the next thirty years, ending in February/2048, it is necessary to carry out a historical analysis that demonstrates the evolution of power consumption and its distribution between the classes. As observed in Table 10 – Geometric Mean of 2007-2016 Consumptions, all sectors present an evolution in power consumption¹⁹. The Residential, Commercialand Rural sectors present robust average growth, 9.66% p.a., 8.71% p.a. and 7.80% respectively. The others class presented average growth at 5.54% p.a., while the Industrial sector showed low growth, 0.17% p.a. It is also worthwhile noting the composition of power consumption, i.e., how the total power consumption is distributed between the classes. Analyzing Figure 3 – Power Consumption Comparison, it possible to note that no substantial changes occurred in terms of power consumption distribution. In 2007, the residential sector was responsible for 41.34% of the total consumption, against 48.74% in 2016, industrial 12.07% in 2007 against 6.30% in 2016, in commercial 20.42% in 2007 and 22.52% in 2016, rural 4.85% in 2007 and 4.90% in 2016 and others, which started from 21.32% in 2007 and ended 2016 with 17.81%.

¹⁹Source: Distributor’s statement of invoicing

Network Extension (Km)

Common Analyses to Distributors

The network extension project was based on the history of extension of low, medium, and high voltage networks between years 2001 and 2016³⁰. The network extension set forth by the Decennial Plans and PDDs of distributors was added to such history, of which the forecasted network extension was extracted for years 2017 to 2021 for low and medium voltages, 2017 and 2018 for the “Programa Luz para Todos” (Light for All) and high voltage for years 2017 to 2026.

Its history of expansion after the Decennial Plans and PDDs takes into account both the historical and projected investments to each distributor.

Three groups have been segregated: (i) low and medium voltage, (ii) high voltage, and (iii) “Programa Luz Para Todos”. This division was necessary to determine the fundamental differences existing in each group.

The forecasting of group (i) Low and Medium Voltage is set to begin in 2022. A proxy (average of investment/average of growth) of dependency was created between the degree of investment and the network expansion. With the degree of investment projected by Ceres, it was possible to estimate from 2022 the network mileage values.

The same methodology applied to the Low and Medium Voltages was applied to the High Voltage segment. The Decennial Plan already projects the expansion of the network mileage for years 2017-2026. For years 2027-2048, a causal relation was applied between the investment and the network expansion. The investments projected for the high voltage Market served as an input to obtain the network expansion of that class.

Regarding “Programa Luz Para Todos” (PLPT), the data used refer to the Decennial Plans and, therefore, based on the current condition of the legislation that determines the end of the program in 2018, no forecast was made for the coming years.

³⁰The extension of the network built under Programa Luz para Todos in included in the 2001-2006 history, in low and medium voltage

Investment Forecasting

Deployment and Renewal

The CEPISA 2017 Distribution Development Plan (PDD 2017), the 2017 Decennial Plan, the 2017 Plan on the Provisional Electric Power Distribution Services (Provisional Plan), the information of the Due Diligence of service B, in its “Product 7 – Technical-Operational Report of CEPISA”, annex II, in addition to indications of CEPISA’s technical team, obtained in the meetings organized by CERES, were used to define CEPISA’s investment needs.

Investments were subdivided into High Voltage Expansion, Medium Voltage/Low Voltage Expansion, Improvement, Renewal (Maintenance), Luz para Todos, and Infrastructure and Support. From 2017 to 2022, the values obtained in the Due Diligence of service B, in its “Product 7 – Technical-Operational Report of CEPISA”, annex II, were considered as a whole and added to the expenses with Renewal (Maintenance) in 2017 of the Provisional Plan.

Only 30% of the expenses with program Luz para Todos were considered for year 2017, since the other 70% were subsidized with CDE resources and have been allocated as Special Obligations. There was no sub-rogation of investments for CEPISA.

As of 2023, investments with High Voltage Expansion, Medium Voltage/Low Voltage Expansion, and Renewal (Maintenance) continued being forecasted according to the premises described below.

High Voltage Expansion: The values informed in the 2017 PDD were corrected for the base date De-cember 2016 and fully considered until 2026. For the other years in the forecast, the estimated investment is equivalent to the average expenses between 2022 and 2026.

Medium Voltage/Low Voltage Expansion: As of 2023, the value is equivalent to the minimum value between 2018 and 2022, December 2016 taken as a base, and it was considered constant until the end of the forecast, once the information from the CEPISA technical team show that there is a trend of stabilization at levels under the average of the years 2018 and 2022.

Improvement: Based on information supplied by CEPISA’s technical team, it has been defined that, in 2023, the amount corresponds to the average of the amounts spent between 2018 and 2022 with De-cember 2016 as a base, without variations due to the continuous structure of this account.

Renewal (Maintenance): As of 2023, expenses with maintenance will be equivalent to the asset depreciation value. The reference of depreciation of ANEEL’s Normative Resolution no. 674/2015 for the current assets was used to define this value, in addition to the depreciation of new investments of the company, calculated based on the average depreciation of the assets of the Equity Control Report.

PMSO Estimate

Common Analyses to Distributors PMSO Forecasting Method

The analysis of Personnel, Material, Third-party Services, and Other Expenses (PMSO, of the Portu-guese “Pessoal, Material, Serviços de terceiros e Outras despesas”) may be divided into two parts: characterization of the analytical bases and the effective forecasting of such bases according to the types of expenses observed in such accounts.

The First Part, known as the Characterization of Analytical Accounts, underwent 5 Phases: Phase 1 – Grouping of analytical accounts; Phase 2 – Analysis of the account nature as fixed and variable; Phase 3 – Identification of atypical values³³; Phase 4 – Evaluation of the best correlation to variable accounts;

Phase 5 – Identification of regulatory accounts (considered as recurring by ANEEL and compensated thereby).

Phase 1 begins with the monetary adjustment of the analytical accounts evaluated. These accounts are included in the sampling period between January 2012 and December 2016, and were adjusted for the base date of December 2016 for it is the most current of the period.

After such first monetary adjustment, the accounts of expenses were grouped in each PMSO group, in accordance with the similarity of type of expense and respective taxable events.

Phase 2 consists of the analysis of the fixed and variable accounts. The PMSO groups were evaluated considering as fixed account the account whose participation in the expenditure in the past 3 periods³⁴was within the lower and upper limits of the expense grouping sample, where:

³³Values with behavior different from the usual of the account, either too high or too low in relation to the average, values at non-recurring levels ³⁴To accounts completely fixed in value, each 1 out of 5 years of the period would represent 20% of the total expenditure. Thus, the last 3 years would represent 60% of the value in the 5 years evaluated

Upper limit fix/var = 60%*(1-((standard sample deviation)/(sample minimum)) and

Lower limit fix/var = 60%*(1-(standard sample deviation)/(sample maximum)).

Initially, accounts above or below such limits are considered variable. Then, an evaluation is carried out in relation to the nature of the expense (if having characteristics of fixed or variable) and the degree of variation in the recent period³⁵.

Fixed accounts, when projected, are calculated as the average of expenses in the sampling period, excepting outliers.

Variable accounts, when projected, are transformed into indicators and range according to the forecasts³⁶of Consumption Units and Consumed MWh, also excluding atypical values.

Phase 3 evaluates which periods in a sample may consist of atypical values and, therefore, unlikely to occur in the projected scenario. A period entry is considered as an outlier when its value is beyond the established limits of normality of the sample, where:

Upper limit out = (sample average) + (standard sample deviation);

Lower limit out = (sample average) - (standard sample deviation).

After such initial characterization, the nature of the expense and the levels verified in the past 3 years are evaluated in order to identity structural breaches to the expense level to define if the prior samples must be kept or eliminated in the evaluation.

Phase 4 evaluates what are the most correlated variables with the PMSO account groups. More correlated groups are used as an indicator to estimate the account value. The two variables with the greatest correlation with the PMSO accounts were Network Extension (Km)³⁷and Consumption in MWh.

The formation of the indicator in the PMSO group expenses considered as variable occur as shown below:

³⁵Expenses with low variation would tend to be fixed

³⁶More detail on the forecasting of Consumption Units and Consumption in MWh are provided in the chapter of Demand and Consumption Forecasting ³⁷Includes the extension of low, medium, and high voltage network ³⁸Excluding those atypical ³⁹The parameters considered are consumption units and consumption in MWh for the same period of time of the expense, excluding periods considered as atypical by the company

Finally, Phase 5 consists of the classification of the accounts composing the groups of each PMSO block, pursuant to the characterization defined by ANEEL for regulatory PMSO. Thus, each account composing the analytical PMSO has a classification as Effective PMSO (total), Regulatory PMSO and PMSO Other (effective PMSO – regulatory PMSO).

The Second Part includes the Forecasting of the Effective and Regulatory PMSO Groups, and may be divided into four Phases:

Phase 1 – Expense Forecasting for 2017;

Phase 2 – Operating Costs Variation Rate;

Phase 3 – Identification and Treatment of Accounts with Behavior Linked to Improvements of the Distributor;

Phase 4 – Concession Period Forecasting – 2018 to 2047.

Phase 1, Expense Forecasting for 2017, will consider a variation of the expense based on the history of the company, observing the fixed and variable natures of the expenses composing the PMSO.

Fixed and variable expenses are calculated as detailed in the First Part, Phase 2, in accordance with the provisions of this chapter. Variable expenses are transformed into indicators having as denominator the parameter of best correlation that has been analyzed, based on BRL/Parameter, multiplied by the forecasting⁴⁰of Network Extension (Km) or MWh Extension.

Phase 2, Operating Costs Variation Rate and Goal, is subdivided into three steps: 1 – Definition of the Operating Cost Benchmarks; 2 – Definition of Variation Rate and Goal between 2018 and 2022; 3 – Definition of Variation Rate and Goal between 2023 and 2027.

Step 1 of definition of Operating Cost Benchmarks initially took into account the groups determined by ANEEL, which have been adjusted per region. For the distributors of the Northern region, the benchmarks that have been considered consisted of the following private distributors: Celpa and Celtins. These were grouped with Ceron, Eletrobrás Roraima, Eletroacre and Amazonas Energia.

⁴⁰Detailed in the chapter on Consumption and Demand Forecasting

For the Northeastern region, the following were considered: Celpe, Cemar, Coelce, Energisa Paraíba and Energisa Sergipe, Coelba and Cosern; these were grouped with Cepisa and Ceal.

In Step 2 of Definition of the Variation Rate between 2018 and 2022, ANEEL’s DEA data base of calculation of efficient costs was used for the 4CRTP. The PMSO expense of each company with the extension of the network is parameterized.

Based on these indicators, it is possible to calculate the average of the group of each distributor according to the region. Distributors whose initial indicator is greater than that verified by the group average shall have their cost adjusted in terms of indicator in the next rate adjustment, in 2023.

Distributors whose initial indicator is below that verified in the group average shall have as their goal the indicator level between 2023 and 2027 lower than the group average.

Step 3 of Definition of the Variation Rate between 2023 and 2027 consists of the calculation of the average indicator of the private benchmarks of the groups. For the Northeastern region, the private distributors considered were: Celpe, Cemar, Coelce, Energisa Paraíba, and Energisa Sergipe. For the Northern region, the private distributors were: Celpa and Celtins.

When achieving the BRL/Consumption unit indicator of the cycle goal, distributors stabilize the operating cost indicators parameterized by consumption unit.

Phase 3 of Identification and Treatment of Accounts with Behavior Linked to Improvements of the Distributor consists of the identification of considered accounts that influence the effective PMSO cost, but that range in accordance with the operating improvements of the distributor⁴¹. Each company had a set of adjustments treated in their specific section.

Phase 4 consists of the estimate of the PMSO expense levels of distributors during the period of concession. With the goals between 2018 and 2022 and from 2023 to 2027, distributors will achieve the operating cost benchmarks by the end of 2027. From that year, the indicator of BRL PMSO/Consumption Unit is stabilized, and the absolute PMSO value ranges in effective terms by means of the variation of consumption units.

⁴¹Examples: ANEEL fines are reduced according to the curve of improvement of indicators of quality

Efficient Costs Interval

The upper and lower limits of the efficiency interval⁴²calculated to each distributor were estimated. The values considered to these forecasts were based on those found in “Annex I – Efficiency Intervals” of submodule 2.2 V2 of PRORET. These limits have the trend of being aligned with their respective benchmarks in two occasions during the concession; the first ending in 2022 and the second ending in 2027.

The first occasion calculates the simple average of each one of these limits to distributors according to their regional groups, consisting of:

Nordeste: Ceal, Cepisa, Celpe, Cemar, Coelba, Coelce, Cosern, Energisa Paraíba e Energisa Sergi-pe;

North: Amazonas Energia, Eletrobras Roraima, Ceron, Eletroacre, Celpa, and Celtins.

Distributors with upper or lower limit at level worse than that of the group average achieve the group average by 2022.

At the second occasion, the average of private distributors of these regional groups is calculated, consisting of:

Northeast Private Benchmark: Celpe, Cemar, Coelce, Energisa Paraíba, and Energisa Sergipe;

North Private Benchmark: Celpa, Celtins.

It should be noted that since Technical Note 149/2017-SRM/SGT/SRD/SFF/ANEEL defines the operating costs in force from 2017 to 2023, the efficient costs intervals defined in this section will only have an impact to the rate after the Rate Review of 2023.


⁴²Greater detail on the PRORET methodology about this subject may be found in chapter “Methodology”, Item PRORET (Rate Level), Sub-item “Operating Costs”, Topic “Efficient Cost Interval”, or PRORET submodule 2.2 V2

Voluntary Dismissal Plan (“PDV”)

Common Analyses to Distributors

The adjustment of personnel involves the decision between terminating the labor agreement with the collaborator versus offering him/her a voluntary dismissal against financial compensation. The values of each option are evaluated by the employee and by the company, and each will choose what is best when making the decision.

The evaluation begins with the definition of the public eligible to the PDV, considering only collaborators with at least 20 years⁴⁴of effective labor link with the company. This public represents approximately one-third⁴⁵of the total personnel of the evaluated distributors.

Labor link with the company means employees in the following categories⁴⁶:· Employees in full-time positions;· Assigned employees⁴⁷;· Employees under license or with labor agreement suspended;· Officer⁴⁸.

In this sense, the following employees are not included in the base containing employees eligible to the PDV:· Employees requested from other agencies and branches⁴⁹;· Employees without link with the government;· Board members;· Young apprentice;· Interns.

⁴⁴PID – Eletrobras Companies Dismissal Stimulation Plan – Commission of Mines and Energy – Chamber of Deputies –07/02/2013 ⁴⁵PID Eletrobras calculated 36.4% of total eligible personnel ⁴⁶The categories are those presented in the due diligence of Human Resources performed by Service B, in “Product 8: Report on Distributor’s Human Resources Evaluation” of each distributor ⁴⁷According to Decree no. 4.050, dated April 12, 2001, which governs Article 93 of Act no. 8.112, dated 12/11/1990, these employees are part of the personnel of the conceding agency (the evaluated distributor is the conceding institution in such case) ⁴⁸Applicable only to officers with more than 20 years of career in the distributor and part of the effective personnel, not including officers required by other government agencies and branches or without link to the government, among others ⁴⁹According to Decree no. 4.050, dated April 12, 2001, which governs Article 93 of Act no. 8.112, dated 12/11/1990, these employees are part of the personnel of the conceding agency (the evaluated distributor is the receiving institution in such case) {s

The payroll independent of enrollment on December 31, 2016, was evaluated to each distributor. Such evaluation resulted a termination value that is compared to the value if the employee applies to the PDV.

The PDV expense is entered as a nonrecurring item that occurs in two occasions, in its phase 1 on June 1, 2018, and in its phase 2 on June 2, 2019. Employees who leave the company reduce the PMSO personnel account. Such reduction may occur in two ways, either by means of reduction of the work position without the addition of a new employee and/or replacement with a new employee with a more competitive cost, which will return to the PMSO Personnel account.

The termination value is calculated based on the sum of the following accounts: base salary, additions⁵⁰, overtime, prior notice, FGTS fine, vacation, and 13^thsalary, in which:· 13^thsalary has the same value of the Dec/2016 base salary;· Additions and overtime refer to values received by the employees in December 2016;· Prior notice is the sum of the monthly base salary, extraordinary compensation for length of work⁵¹;· FGTS is calculated with the multiplication of the monthly salary by 8%, by the number of months that the individual worked at the company until the base date of December 31, 2016.

The fine of FGTS represent 50% of this value;

· Vacation has total value per employee of half plus 1+(1/3) of a base salary related to Decem-ber 2016. This value is divided by half because at this point of the period, half of the individuals have already used their vacation benefit.

The PDV is calculated as approximately 18 times the sum of the Base Salary, Additions, and Overtime of the collaborators in December 2016. This choice represents the value with which approximately one-third⁵²of individuals eligible to the PDV see it as financially interesting when compared to the involuntary dismissal.

Considering such eligible collaborators, those in two specific situations join the Plan:

1 – Individuals whose PDV is equal to or higher than the involuntary contractual termination value;

2 – Individuals whose PDV is greater than twice the sum of the base salary, additions, and overtime is greater than or equal to the termination value.

⁵⁰Premium for hazardous, dangerous and hardship

⁵¹At every one year, 3 days of bonus are received as compensation, up to a maximum of 60 days or two months of compensation. Added to the prior notice compensated with maximum of 30 days, the total of receipts may totalize 90 days ⁵²PID – Eletrobras Dismissal Benefit Plan – Commission of Mines and Energy – Chamber of Deputies – 07/02/2013. Eletrobras estimated that the number of dismissals would represent 47% of the public eligible to its 2013 PID {t

1 – Normative Resolution no. 748, dated November 29, 2016⁵⁸, which establishes the terms and conditions for the provision of the public service of electric power by Designated Distributor;

2 – Official Letter no. 113/2017-DR/ANEEL, Brasília, dated May 3, 2017, procedure: 48510.000502/2017-00, which determines the submittal of a draft of the new model of Agreement for the Concession of Public Service of Electric Power Distribution⁵⁹.

The treatment given in relation to Document 1, in its Chapter I (Revenue), in its Article 5 established that: “The Designated Distributor will be authorized to assign the resources from offsetting for violation of the limits of quality related to the continuity of the service and the voltage level in permanent regimen as per items 2.13 of section 8.1 and 5.11 of section 8.2 of PRODIST’ Module 8 for investments in the area of concession. ”

These offset values are included in entry Obligations Linked to the Electric Power Service (Special Obligations), during the period of designation for the provision of the electric power public service, i.e., between 01/01/17 and 02/28/18.

In relation to Document 2, in its Clause Nineteen (Transitory Provisions), Subclause One, we have: “DISTRIBUTOR may allocate the resources from offsetting for violation of the limits of quality, related to the continuity of the services and the sampling measurements of the voltage level in permanent regime, for the investments in the area of concession, until the end of the fifth calendar year after the date of execution of the concession agreement. ”

I.e., between 03/01/2018 and 02/28/2023, the distributor may allocate such offsetting to make investments, according to the criteria below:· Paragraph One: “DISTRIBUTOR must continue calculating the offset values from the date of execution of the agreement, according to the regulation, for the purposes of follow-up and inspection by ANEEL”;· Paragraph Two: From the second calendar year following the execution of the agreement, in case the calculated values of the offsets are below the values of the calculated offsetting for the previous calendar year, such difference will be considered as a remunerable investment by DISTRIBUTOR upon the rate review, with the remaining value being included in entry Obligations Linked to the Electric Power Public Service (Special Obligations) ”;· Paragraph Three: “From the second calendar year after the execution of the agreement, in case the calculated values of the offsetting is greater than the values of calculated offsetting for the previous calendar year, such difference shall be invested doubled in the concession

⁵⁸ANEEL

⁵⁹As resolved by ANEEL Management in the 15^thOrdinary Public Meeting, held on May 2, 2017

· Financing linked to the investment budge, beginning in Jan/18, equivalent to 60% of the financeable CapEx (80% of CapEx is financeable). The amortization occurs according to the SAC table, with 12 months of grace period, interest rate of 115% of the CDI and monthly payments (each release occurs in conjunction with the investment schedule).

· Credit releases in 2017 from the RGR fund, as per Directive 388/2016-MME. These releases occur, in a monthly basis, in 2017, with estimated value of BRL 379 million, with amortization by the Price table, with interest rate of 111%, SELIC, in 36 installments. The credit releases of the RGR fund also follow the premises of the table below. It is worthwhile noting that the conditions of the RGR fund financings will be reviewed, so that the new premises will be adopted from the grant of the new concession, as indicated in NT 149/2017-SRM/SGT/SRD/SFF/ANEEL.

Agreements for the Purchase and Sale of Power

Summary of Agreements for the Purchase and Sale of Power

The data contained in the contracts were collected to define the characteristics of the agreements of purchase and sale of power in the Regulated Contracting Environment (ACR). Such data were validated with spreadsheets of internal control assigned by the distributor and with the spreadsheet updated in March 2017, of Consolidated Result of Electric Power Auctions per Contract, obtained on the website of the Electric Power Trading Chamber.

After gathering information on the contracts, the SPARTA system, 2016 readjustment, calculated if the power purchase volume was the same found in the contracts and spreadsheets of internal control. From the validation, the necessary volumes were added in order to obtain values and volumes compatible with the SPARTA.

With the data on quantity of power, price, beginning of effectiveness, end of effectiveness, base date of price, month of readjustment, and index rate of the readjustment of each contract, it was possible to group them based on the beginning and end of the contractual effectiveness, and to readjust the prices in order to update them. Thus, the contracts have been synthesized as shown in the table below. Such data were used as the basis for the demand of power to compose Installment A.

Regulatory Remuneration Base Flow

Regulatory Remuneration Base Calculation

To estimate the Regulatory Remuneration Base to be validated in 4CRTP by ANEEL, the additions, write-off, and adjustments of the regulatory agencies have been evaluated for the following lines:

(1) Fixed Assets in Use (New Replacement Value); (2) Maximum Usage Index; (3) Gross Special Operations; (4) Fully Depreciated Assets; (5) Gross Remuneration Base = (1)-(2)-(3)-(4); (6) Accumulated Depreciation; (7) Net AIS (Market Value in Use); (8) Depreciated Usage Index; (9) Remuneration Base Value (VBR); (10) Stockroom in Operation; (11) Deferred Charges; (12) Net Special Obligations; (13) Real Property and Easements;

(14) Total Net Remuneration Base = (1)-(6)-(8)+(10)+(11)-(12)+(13); (15) RGR PLPT Balance; (16) RGR Balance Other Investments; (17) Depreciation Rate; (18) Regulatory Reintegration Quota = (5)*(17); (19) Effective WACC before Taxes;

(20) RGR PLPT Rate;

(21) RGR Rate Other Investments;

(22) Remuneration of Capital (RC) = (15)*(20)+(16)*(21)+[(14)-(15)-(16)]*(19).

Common Analyses to Distributors

Composition of the 4CRTP Regulatory Remuneration Base

The composition of the Regulatory Remuneration Base considered in the evaluation may be divided into two parts: Initial Base and ANEEL Adjustments⁶¹.

The Initial Base refers to the values that will compose the Regulatory Remuneration Base in the 4^thCycle of Periodical Rate Review (4CRTP). These values were determined by independent companies that conduct the Investment Evaluation (Incremental Base Review) and Armored Base of distributors between 3CRTP and 4CRTP, achieving a composition of part of the lines composing the Regulatory Remuneration Base of the 4CRTP to each distributor. This Initial Base takes into account the Complete Evaluation Report of Distributors.

Thus, the Complete Evaluation Reports, which include the Incremental Base Review and the Armored Base Review and that were considered in the evaluation of each distributor are:

Eletrobras Distribuição Acre: SETAPE – Report: “EDAC Executive Summary – Complete Base –Evaluation of the Electricity Assets of Acre – Eletrobras Distribuição Acre”, reference February 28, 2017;

Eletrobras Distribuição Alagoas: Levin – Complete Evaluation Report “Companhia Energética de Ala-goas – CEAL Project no. 2715-17745”, reference February 28, 2017;

Eletrobras Distribuição Amazonas: Levin – Complete Evaluation Report “Eletrobras Amazonas Ener-gia – Project Levin no. 3174-17752”, reference February 28, 2017;

Eletrobras Distribuição Piauí: Levin - Complete Evaluation Report “Cepisa Eletrobras Distribuição Piauí Project Levin no. 3082-18367”, reference February 28, 2017;

Eletrobras Distribuição Rondônia: Deloitte – Equity Evaluation Report “Centrais Elétricas de Rondônia – Ceron”, reference February 28, 2017;

⁶¹Performed by ANEEL ^inspection

Eletrobras Distribuição Roraima: Levin – Complete Evaluation Report: “Eletrobras Distribuição Rorai-ma Project no. 3012-17862” reference February 28, 2017.

Complete Evaluation of distributions shall hereinafter mean the aforementioned reports, related to the respective distributors.

During the evaluation procedure, the Distributors had two review reports of the Regulatory Remuneration Base. One to be presented to ANEEL, except atypical situations, with the Asset Evaluation Report, which reviews the Incremental Base of a CRTP to the other, considering money adjustments, additions, and write-off.

The second, the Complete Evaluation Report, considers this same Asset Evaluation Base and also reviews the Armored Base of 3CRTP, adjusted to the 4CRTP. This report was made and used in this work due to the important value of the assets of the distributors with potential to make part of their Armored Bases. However, it should be noted that the reviews on the Armored Base may have a smaller expectation of being accepted for they regard to specific cases when compared to the evaluations of the Incremental Base between CRTPs⁶².

The position of the Complete Evaluation Report, which has been considered in this work, includes the money adjustments of the 3CRTP Base, the additions and write-off between the 3CRTP and 4CRTP, and the review of the 3CRTP Armored Base, adjusted to the 4CRTP. The additions, write-off, and review of the Armored Base were included in its pertinent items by the evaluator of the Complete Report.

The evaluation of the Complete Report includes⁶³from item (1) Fixed Assets in Use (New Replacement Value) to (14) Total Net Remuneration Base = (1)-(6)-(8)+(10)+(11)-(12)+(13) and all were used in the composition of the initial Regulatory Remuneration Base of 4CRTP⁶⁴.

Items (15) RGR PLPT Balance and (16) RGR Balance Other Investments were subject to money adjustment by the IPCA between the values obtained in 3CRTP and 4CRTP.

Finally, the other percentage items: (17) and (19) to (21) were maintained constant in relation to what has been verified in 3CRTP and subtotals (5), (7), (9), (14), (18) and (22) had their calculation logics.

⁶²To balance such smaller change of acceptance by the regulatory agency, the difference of the Reviewed Armored Base and the “Common” Armored Base (Armored Base of the Asset Evaluation Report) is set aside, which is greater than that applied to the Incremental Base, as detailed in the topics below ⁶³These same lines are also included for the Asset Evaluation Report that reviews the Incremental Base ⁶⁴Item 1 was adjusted by ANEEL’s disallowance rate, which implied the variation of the original values used in the Regulatory Remuneration Base of the economic-financial evaluation. The disallowance was applied in separate over the Incremental Base and the Armored Base

ANEEL Adjustment on the Incremental and Armored Bases

ANEEL inspects the Incremental Base of assets and the Reviewed Armored Base⁶⁵between periodical rate cycles. This advent implies that the assets presented and/or reviewed may be considered as inapplicable and thus discarded by the regulatory agency. Thus, the incremental Base between the 3CRTP and 4CRTP and the Armored Base Review of this same period were applied percentages of Incremental Base Adjustments and Armored Base Adjustments, respectively.

The average adjustment (disallowance) of the group of distributors evaluated in the 3CRTP per region was applied over the Incremental Base that forms the Initial Base of 4CRTP⁶⁶, or for cases in which the average adjustment is worse than that verified by the company, the adjustment of the distributor was maintained

The average adjustments (disallowance) of the group of distributors evaluated in the 3CRT per region were applied over the Reviewed Armored that forms the Initial Base of the 4CRTP. Such adjustment is applied once to each distributor in its Initial Base, i.e., it is not applied in the following years, differently to the Incremental Base. For the Reviewed Armored Base⁶⁷, Northern companies were attributed a disallowance of 5.73% and Northeastern companies had disallowance of 5.01%.

From 2018 to 2048⁶⁸, the average adjustment of the benchmark private distributors⁶⁹is applied per region, obtained from the 3CRTP Incremental Base. A disallowance of 2.09% was considered to Northeastern, and of 2.83% to Northern companies.

Disallowances are considered as effective, i.e., they are not presented again in the future and considered as assets by ANEEL. This occurs due to two main reasons:

- Difficulty to present the proof of the investment at the degree demanded by the regulatory agency;

- Management faults that could generate investments in assets not acknowledged in the Regulatory Remuneration Base, which makes part of the invested assets to be set aside.

The evaluated distributors, with the entry of a new concession holder, will seek and gradually achieve the adjustment level by ANEEL of the benchmark private distributors of their regions, which will cause

⁶⁵In the specific cases in which they are reviewed and presented again, as occurring to the Evaluated Distributors ⁶⁶Provided by the investment evaluators between 3CRTP and 4CRTP

⁶⁷Armored Base of the Complete Report less Armored Base of the Incremental Report ⁶⁸From the period of a new concession

⁶⁹Benchmark distributors compared to those evaluated in the Northern region: Celpa and Cemar; Northeastern region: Celpe, Energisa Paraíba and Energisa Sergipe. Energisa Tocantins (Celtins) was discarded due to the atypical value (above 1.5 of standard deviation over the average of indicators) of ANEEL adjustment for the period considered when compared to the other private distributors

in the average that their asset disallowances are reduced when compared to the period prior to the private concession holder.

Finally, the application of the disallowance of the Remuneration Base presented by the distributors is levied upon item (1) Fixed Assets in Use (New Replacement Value) and consequently affects the items connected thereto. This will make the values considered in the evaluation to be different of the asset evaluation report in the magnitude of the disallowance applied to each distributor.

Regulatory Remuneration Base Components Forecasting

Inflation adjustments, additions, and write-off of assets shall occur for the years after the Initial Base of 4CRTP, which are considered in the evaluation until the final period of the concession.

Money Adjustments

The money adjustments of the Regulatory Remuneration Base may be subdivided into four detailed subgroups, as follows:

Items Monetarily Adjusted Directly; Items Consisting of Formulas; Percentage Items; Other Items.

It should also be noted that the values of the rates to which such adjustments occur may be found in section “Economic-Financial Evaluation”, in chapter “Macroeconomic Forecasting”.

The items of the Regulatory Remuneration Base are monetarily adjusted⁷⁰by the IPCA⁷¹: (1) Fixed Assets in Use (New Replacement Value); (3) Special Gross Obligations; (10) Stockroom in Operation; (11) Deferred Asset;

⁷⁰The IPCA is applied directly to the value observed from the Initial Base, also considering their increments and write-off throughout the evaluation period ⁷¹National Price Index to the Broad Consumer Amplo – IBGE, according to PRORET Submodule 2.3 V5, review 2.0, with date of effectiveness on 11/23/2015 and after, according to Normative Review no. 686/2015, dated 11/23/2015

(13) Real Properties and Easements; (15) RGR PLPT Balance; (16) RGR Balance Other Investments.

(5) Gross Remuneration Base = (1)-(2)-(3)-(4); (7) Net AIS (Market Value in Use); (9) Remuneration Base Value (VBR);

(14) Total Net Remuneration Base = (1)-(6)-(8)+(10)+(11)-(12)+(13);

(18) Regulatory Reintegration Quota = (5)*(17);

(22) Remuneration of Capital (RC) = (15)*(20)+(16)*(21)+[(14)-(15)-(16)]*(19). The percentage items are not monetarily adjusted by any index. These items are: (17) Depreciation Rate; (19) Effective WACC before Taxes; (20) RGR PLPT Rate; (21) RGR Rate Other Investments.

Finally, items net of their depreciations, depreciations, and complete usage rates are treated specifically and have their money adjustments obtained indirectly.

Item (2) Complete Usage Rate is obtained by multiplying item (1) Fixed Assets in Use (New Replacement Value)⁷²by the ratio of the values of the Initial Base between item (2) over item (1).

Item (4) Fully Depreciated Assets is obtained by multiplying item (1) Fixed Assets in Use (New Replacement Value)⁷³by the ratio between the Accumulated Fully Depreciated Assets over the Accumulated VNR, both items of the ratio are in the same monetary date.

⁷²Monetarily adjusted by the IPCA as highlighted above

On its turn, the (6) Accumulated Depreciation is found by multiplying item (1) Fixed Assets in Use (New Replacement Value) by the ratio between the accumulated depreciation and the Accumulated VNR, with both last items being in the same monetary date.

Item (8) Depreciated Usage Rate is also monetarily adjusted indirectly, multiplying item (2) Complete Usage Rate⁷⁴by the subtraction of one by the ratio between the Depreciation of the Accumulated Usage Rate over the Accumulated Gross Usage Rate, with both items of the ratio being in the same monetary date.

Finally, item (12) Net Special Obligations⁷⁵is obtained by multiplying item (3) Special Gross Obligations by one less the ratio between the Depreciation of the Accumulated Special Obligation over the Accumulated Gross Special Obligation, with both items of the ratio being in the same monetary date.

Increments and Composition of the Regulatory Remuneration Base Lines

The assets will have increments throughout the period of concession, which are net of write-off, and that are contemplated in the economic-financial evaluation of distributors.

The items of the Regulatory Remuneration Base are affected differently by these increments and may be divided into five groups:

Items with Direct Increments; Items Consisting of Formulas; Percentage Items; Items without Increments; Other Items.

Part of the items of the Regulatory Remuneration Base are incremented directly, as detailed below: (1) Fixed Assets in Use (New Replacement Value); (3) Special Gross Obligations; (10) Stockroom in Operation; (13) Real Properties and Easements;

⁷³Monetarily adjusted by the IPCA as highlighted above ⁷⁴Monetarily adjusted by the IPCA as highlighted above ⁷⁵Monetarily adjusted by the IPCA as highlighted above

Items (1), (10) and (13) have their increment values of the Regulatory Remuneration Base detailed in section “Economic-Financial Evaluation” of this document, in section “Investment Forecasting” and, on its turn item (3), is detailed in chapter “Special Obligations”.

Items consisting of formulas, i.e., using the lines of the Regulatory Remuneration Base to be calculated, are monetarily updated indirectly, using the calculations over the items over which the accounts are realized, already with their respective increments. The composition of the formulas of these items is the same according to the provisions established by the regulatory agency⁷⁶, these items being:

(5) Gross Remuneration Base = (1)-(2)-(3)-(4); (7) Net AIS (Market Value in Use); (9) Remuneration Base Value (VBR);

(14) Total Net Remuneration Base = (1)-(6)-(8)+(10)+(11)-(12)+(13);

(18) Regulatory Reintegration Quota = (5)*(17);

(22) Remuneration of Capital (RC) = (15)*(20)+(16)*(21)+[(14)-(15)-(16)]*(19).

Percentage items are not affected by increments. Their percentages are established by regulation and the values verified in the 3CRTP of each evaluated distributor are kept constant. These items are:

(17) Depreciation Rate;

(19) Effective WACC before Taxes; (20) RGR PLPT Rate; (21) RGR Rate Other Investments.

These percentages are maintained unaltered throughout the entire valuation period.

Part of the items of the Regulatory Remuneration Base do not have increments, being only adjusted monetarily by the IPCA, considering the 3CRTP values allocated to each distributor.

(11) Deferred Asset;

(15) RGR PLPT Balance;

(16) RGR Balance Other Investments.

At last, the other items of the Regulatory Remuneration Base have particularities related to their composition and their increments, which are not related to the groups above.

Item (2) Complete Usage Rate is obtained by multiplying item (1) Fixed Assets in Use (New Replacement Value)⁷⁷of the period for the ratio of the values of the Initial Base between item (2) over item (1).

Item (4) Fully Depreciated Assets is detailed in the topic below “Fully Depreciated Assets”, of this same Chapter “Regulatory Remuneration Base Flow”.

Item (6) Accumulated Depreciation is calculated from the sum of the depreciation of the Initial Base, summed to the depreciation of the Incremental Base throughout the period of concession. Greater detail of the depreciation may be found in Chapter “Investment Forecasting” of this same section.

Item (8) Depreciated Usage Rate is calculated from the multiplication of item (2) Complete Usage Rate by one less the ratio between the Depreciation of the Accumulated Usage Rate over the Accumulated Gross Usage Rate, considering the components of the ratio in the same monetary date.

Finally, item (12) Net Special Obligations is obtained with the multiplication of item (3) Special Gross Obligations, by one less the ratio between the Depreciation of the Accumulated Special Obligation and the Special Gross Obligation, considering the components of the ratio in the same monetary date.

Considerations on Assets in Course

It should be noted that this work does not incorporate the Fixed Assets positions in course of the enterprise to the Remuneration Base.

The evaluation reports of the Remuneration Base did not perform any treatment regarding the items of Fixed Assets in Course, due to the fact that this type of asset is not part of the scope of contract. In addition, the accounting position from the audited Financial Statements of the evaluated Distributor does not allow the acknowledgement of relevant particularities for the amounts in course to be considered.

Thus, based on the reports of the evaluators of the Remuneration Base and the audited Financial Statements, the following information cannot be extracted:· what are the assets in operation not unitized;· which amounts represent works in progress;· which values refer to improvements or expansions interrupted;· the New Replacement Value (VNR) of Fixed Assets in course;· the depreciation rate to be applied and the moment in which its application begun;· the usage rate of the assets for the cases in which the asset is already in use, and· the source of financing of these assets in course.

These restrictions impede the estimate of the effective impact that the Fixed Assets in Course may generated to the Initial Remuneration Base and, consequently, to the respective tax impact.

Since the minimum set of premises to include these assets in course in the Remuneration Base was not met, it is not possible to obtain reasonable consistency regarding to· eligibility for provision;· physical-accounting conciliation;·· sources of financing, and other parameters of the reevaluation procedure (such as the VNR calculation, depreciation, usage rate, and write-off evaluations).

Thus, the effects of Fixed Assets in Course to the Remuneration Base were not included in this economic-financial evaluation document. The investor shall then analyze the criterion of adoption of the parameters to be considered.

Finally, for Eletrobras Distribuição Piauí, the Complete Assessment Report “Cepisa Eletrobras Dis-tribuição Piauí project Levin No. 3082-18367” made by Levin is highlighted, which brings the balance for this Fixed Asset in Progress, as observed in the table below.

Special Obligations

Common Analyses to Distributors

The Special Obligations consist of resources related to: financial participation of the consumer, budget appropriation of the Government, federal, state, and municipal charges, and charges of special credits related to the investments applied to the enterprises linked to the concession.

The Special Obligations were calculated in two periods: The first for Dec/16, which used the position of Dec/16 made available by the evaluated distributors. The second from 2017, which excluded from the analytical bases of Special Obligations all nonrecurring items.

Bases with different levels of detail were provided, some distributors had specific treatments to define the recurring items. Program “Luz para Todos” (PLPT)⁸⁴is considered as a recurring item during its period of effectiveness for which distributors have expense forecasting (until 2019).

For the other Special Obligations, recurring items have been considered as those that in the past 5 years presented at least three variations of value, or that in the past three years had at least two years with variation of value.

Indicators of Quality

Analysis of Indicators of Quality

The levels of the indicators of quality achieved by the evaluated distributors throughout the concession period (03/01/2018 to 02/28/2048) were estimated, the goals established by ANEEL in the same period were forecasted.

Seven indicators were evaluated:

DEC (Equivalent Duration of Interruption per Consumption Unit); FEC (Equivalent Frequency of Interruption per Consumption Unit); FER (Equivalent Frequency of Complaint); IASC (ANEEL Rating of Consumer Satisfaction); IAb (Telephone Support Abandonment Rate); ICO (Indicator of Busy Calls of Telephone Support).

These indicators affect the Component of Quality of Service Q of Factor X and may influence the values of Installment B of distributors, in accordance with the coverage or not of the regulatory goals established by ANEEL. The levels of coverage or not of each distributor are compared with the results obtained by the distributors of a same group⁸⁵. A distributor may be between the 25% best or worst companies to whether achieve or not the goal, or between the other 75% that whether achieve or not the levels established by ANEEL.

Summing all indicators, the addition or reduction value of Installment B may be of 2%, depending on the level of coverage of ANEEL goals by the distributor in each indicator, also compared to the other distributors of its group.

The equations and parameters for the classes of each indicator were used in accordance with ANEEL’s PRORET 2.5 V2.0.

The weights equivalent to each indicator are presented below:

“Paragraph Three – From the second calendar year after the execution of the agreement, in case the calculated values of the offsetting is greater than the values of calculated offsetting for the previous calendar year, such difference shall be invested doubled in the concession and included in entry Obligations Linked to the Electric Power Public Service (Special Obligations).”

DEC and FEC

Common Analyses to Distributors

Forecasting of Indicators Performed by the Companies

The indicator of DEC (Equivalent Duration of Interruption per Consumption Unit) consists of the time in which a Consumption Unit (UC) remained without electric power for a certain period and the indicator of FEC (Equivalent Frequency of Interruption per Consumption Unit) consists of the number of times that an UV had no electricity for a given period.

The analyses⁸⁹may be divided into three parts: Starting Point, Indicator Variation Rate and ANEEL Limit.

The starting point consists of the DEC and FEC estimates for 2017 and is the result of data obtained for 2016⁹⁰and adjusted according to ANEEL’s goal of reduction for 2017⁹¹of DECi and FECi⁹². Based on the history of variation of distributors, the assumption is that distributors seek and achieve the DECi reduction percentage for the DEC as a whole, and, similarly, achieve the FECi percentage for the FEC as a whole.

The rate of variation of the indicator is based on the rate of variation realized by the private benchmark⁹³. The DEC and FEC levels of the evaluated company in 2015 are evaluated and compared with the history of the private company, identifying 1993 and 2015 the most recent period in which the company had a rate near that of the evaluated company.

With the evaluation of this period of similarity of indicators, the extension of the period from this point to 2015 is evaluated, followed by the calculation of the annual geometric mean of variation of the indicator of the private company. Such indicator is initially applied in the distributors evaluated between 2018 and 2022, including both.

⁸⁹DEC and FEC Analyses are carried out in separate but have common constructive logical structure ⁹⁰Annual DEC and FEC of the ase of collective indicators of continuity of ANEEL

⁹¹Procedure 48500.004245/2016-77, Vote, Table 1 – Limit for the end of 2017 for operational management. Variation % between the Determined DECi and its Limit for 2017 and the Determined FECi and its Limit for 2017 ⁹²Internal DEC and Internal FEC, indicators that accompany the interruptions occurred in the distribution system of internal origin ⁹³Companies with geographic proximity to the evaluated distributors

The assumed premise is that the privatization will cause the evaluated company to present internal changes that will impact the improvement of the indicator, aligned with the improvement verified by other distributors, also private.

Between 2023 and 2027, the speed in which distributors adjust⁹⁴to achieve the limits established by ANEEL⁹⁵for 2027. This is possible due to the maturity that the new concession holder gains throughout the period in the management of the company, which enables a degree of improvement that is faster than that verified in the recent period by the benchmark private distributors. Subsequently, the speeds adjust to the speed verified by the private distributors.

The evolution of the indicators occurs until the distributor achieves the DEC and FEC levels of the benchmark distributors for 2015 and remain constant until the end of the concession, on February 28, 2048.

At last, it should be noted that although achieving the global regulatory DEC and FEC levels, the distributor may offset consumer in case of violation of the individual limits. Such offsetting is treated in section “Offsetting for the Transgression of the Continuity Limits”.

Forecasting of Limits Established by ANEEL

The definitions of the limits established by ANEEL are based on those established between 2014 and 2016 by ANEEL to each distributor. To 2017, the limit used was that established by no. 88/2017-SRM/SGT/SRD/ ANEEL, dated May 24, 2017, procedure: 48500.002667/2017-99, until November to Eletroacre, Amazonas Energia, Ceron and Eletrobras Roraima, and until September to Cepisa and Ceal, for it consists of the limit established to distributors for the year.

The subsequent months used the limits established in Technical Note no. 149/2017-SEM/SGT/SRD/SFF/ANEEL, dated September 8, 2017, procedure 48500.002667/2017-99, thus achieving a weighted limit for 2017 between both technical notes.

Years from 2018 to 2023⁹⁶considered the provisions of Technical Note no. 149/2017-SEM/SGT/SRD/SFF/ANEEL, dated September 8, 2017, procedure 48500.002667/2017-99, related to

⁹⁴Approximate speed of that verified by the private companies, to be presented in the specific analysis to each distributor ⁹⁵Estimate by Ceres as exposed below ⁹⁶Until the month of the ordinary rate review. To facilitate the view, the values are presented with annual references where 2022 will represent the indicator until the month of review

FER

Common Analyses to Distributors

The FER indicator (Equivalent Frequency of Complaint) consists of the equivalent frequency of complaints per each thousand of consumption units.

Its analysis may be divided into three main parts: Starting Point, Indicator Variation Rate, and Goal.

The starting point consists of the FER estimates for 2017 and is the result of data of the indicator of each distributor obtained between 2010 and 2016¹⁰¹. The geometric mean of annual variation of the distributor to each distributor between 2010 e 2016 is calculated and the variation is applied over the FER realized in 2016. (Realized FER Evaluated Distributor 2016)*(1+Geometric Mean FER 2010-2016 Evaluated Distributor)

The rate of variation of the indicator as of 2018 results from the rate of variation realized by the benchmark private groups¹⁰². The indicators from 2010 to 2016 of each benchmark are used to calculate the simple average of the indicator of each established group¹⁰³. The joint geometric mean per group is applied between years 2012 and 2016¹⁰⁴, having (2017 Indicator)*(1+Rate of Variation of 2013-2016 Benchmark Group) and so successively until the indicator achieves the FER goals defined by ANEEL of the evaluated distributions to the years starting in 2017.

The FER goal used is the limit to year 2017 and after that, defined¹⁰⁵by ANEEL to each distributor. When achieving the goals in the period, distributors stabilize their efforts to improve the indicator. In the long term, companies tend to have indicators equal to the goals estimated to ANEEL. This makes companies tend to achieve the other 75% of the distributors that achieve the FER goals.

¹⁰¹FER base of ANEEL Distribution Indicators

¹⁰²Companies with geographic proximity to the evaluated distributors

¹⁰³Benchmark distributors of the Northern region: Celpa and Celtins (Energisa TO) and benchmark distributors of Northeastern region: Celpe, Cemar, Energisa Paraíba and Energisa Sergipe ¹⁰⁴2012 is the year in which the FER indicators of the groups of private companies are more similar to te average of the indicators of the evaluated distributors. From such common point, we evaluate how the indicator of non-state owned is developed and apply its variation rate to the FER of the evaluated companies ¹⁰⁵Normative Resolution no. 574, dated August 20, 2013

IASC

Common Analyses to Distributors

The IASC (ANEEL Rating of Consumer Satisfaction) indicator consists of the result of the research of evaluation of the degree of satisfaction of the residential consumer with the provided services.

Its analysis may be divided into three main parts: Starting Point, Indicator Variation Rate, and Meta.

The starting point consists of the IASC estimates for 2017 and also provide data of the indicator of each distributor obtained between 2010 and 2016¹⁰⁶. The geometric mean of annual variation of the indicator to each distributor between 2010 and 2016 and applies to the variation over the IASC during 2016. (IASC realized Evaluated Distributor 2016)*(1+Geometric Mean IASC 2010-2016 Evaluated Distributor)

The rate of variation of the indicator as of 2018 will be originated by the realized variation rate of the benchmark private groups¹⁰⁷. The 2010 to 2016 indicators of each benchmark allows for the calculation of the simple average of the indicator of each group established¹⁰⁸. The joint geometric mean is applied per group¹⁰⁹between years 2015 and 2016, with (2017 Indicator)*(1+Variation Rate of the 2015-2016 Benchmark Group) and so successively until the indicator achieves the IASC goals defined by ANEEL for the distributors evaluated for the years as of 2017.

The IASC goal used is the minimum value of 70¹¹⁰from 2017 and sustained until the end of the concession. When achieving the goals of the period, the distributors stabilize their efforts of improvement of the indicator. In the long term, companies tend to have indicators equal to the goals estimated to ANEEL. This makes companies tend to achieve the other 75% of the distributors that achieve the IASC goals.

¹⁰⁶IASC base of ANEEL Distribution Indicators

¹⁰⁷Companies with geographical proximity to the evaluated distributors

¹⁰⁸Benchmark distributors of the Northern region: Celpa and Celtins (Energisa TO) and benchmark distributors of Northeastern region: Celpe, Cemar, Energisa Paraíba and Energisa Sergipe ¹⁰⁹The variation between 2015 and 2016 is the only one with expressive variation of the IASC indicator between 2010 and 2016. Since as of April 2017 it will count on the composition of the X Factor, we understand that the most recent improvement represents the effort of private companies to meet ANEEL goals ¹¹⁰PRORET ANEEL Submodule 2.5A

ICO

Analyses Common to the Distributors

The ICO (Busy Call Indicator of Telephone Service) refers to the list of busy calls over offered.

Its analysis can be divided into three main parts: Starting Point, Indicator Variation Rate and Target.

The starting point consists of the ICO estimates for 2017, which derives from indicator data of each distributor obtained from 2010 to 2016¹¹³. The average is calculated by excluding the missing data¹¹⁴from 2010 to 2016.

The indicator variation rate from 2018 to 2022 is calculated based on the variation of indicators obtained by the groups of benchmark of the outsourced distributors¹¹⁵. By using the indicators from 2010 to 2016 of each benchmark, the simple indicator average is calculated for each group established. The joint geometric average is applied per group from 2012 to 2016¹¹⁶, in which we have (Indicator 2017)*(1+Variation Rate of the Group of Benchmarks 2012-2016) and so on until the indicator reaches the targets defined by ANEEL of the distributors evaluated for the years starting in 2017 of ICO.

Between 2023 and 2027 the distributor speed is adjusted¹¹⁷to reach the target established by ANEEL¹¹⁸for 2027. This is possible thanks to the maturity that the new concessionaire acquires during the period in the company management, which allows them an improvement rate faster than that verified in the recent period by the benchmark of the outsourced distributors. Subsequently, the speeds are adjusted to the speed verified by the outsourced distributors.

The ICO target used is the maximum amount of 2%¹¹⁹from 2015, which is kept to the concession end. While reaching the targets of the period, the distributors stabilized their improvement efforts of the indicator. In the long run, the companies tend to show indicators equal to the targets estimated for ANEEL. This leads the companies to reach the remaining 75% of distributors that reach the ICO targets.

¹¹³ICO base of Distribution Indicators of ANEEL

¹¹⁴The year of 2016 and other points along the historical series present missing data, reason which the average reference checked in the period was used ¹¹⁵Companies geographically located near the distributors evaluated ¹¹⁶The interval with longer historic period was used, without missing data among the benchmark outsourced ¹¹⁷Speed near that checked by the outsourced companies will be presente din the specific analysis for each distributor ¹¹⁸Estimated by Ceres as it will be addressed below ¹¹⁹PRORET ANEEL Submodule 2.5A

Irrecoverable Revenues

Analyses Common to the Distributors

The irrecoverable revenues evaluated are the value invoiced that had not been received up to certain set date. Irrecoverable revenue is that deemed the indicator average: (value invoiced not received in the period t)/(total value invoiced in the period t), from the 49th to the 60th month prior to the base date.

The analysis can be divided into three main parts: an estimate for 2017, a variation rate of the indicators along the concession period and the target established.

To assess the indicator level in 2017, the medium value of the indicator was calculated for the base date of Dec/16. For each consumption class, the total value invoiced in the 60 prior months¹²⁵was assessed as well as the total value not received of such respective months in relation to the base date of Dec/16¹²⁶.

The medium value was calculated between the value invoiced not received over the total value invoiced between the months of Dec/11 and Nov/12 inclusive, reaching the value of irrecoverable revenues on the base date of Dec/16.

The percentage of annual variation proposed by ANEEL in the indicator between 3CRTP and 2CRTP was applied to the value of Dec/16, reaching the value estimated for Dec/17. Thus, it was concluded that the company reached the variation forecast by the regulating body.

In relation to the variation rate after 2017, between 2017 and 2020, it was concluded that the variation rate proposed by ANEEL between 3CRTP and 2CRTP carries on being reached, completing a period of four years in this variation rate, according to initial forecast of ANEEL.

From 2021, the variation rate considered is that proposed in the variation from 4CRTP to 3CRTP. Such order of variations is chosen based on the difference of the rates initially proposed by the regulating body. The variation from 3CRTP to 2CRTP in average is softer than that proposed from 4CRTP to 3CRTP. It is agreed that the default levels need time to be deeply changed and, therefore, a less accelerated rate was used in the 3 first years of concession and a more accelerated rate was applied in the subsequent years.

¹²⁵Data obtained from the distributors also made available for ANEEL. Period prior to the base date considered from Dec/11 to Nov/16 ¹²⁶Considering Dec/16, when what was invoiced, e.g.; in Jan/15, has not yet been received by the distributor

Loss Forecast

The electrical distribution system losses are divided into two categories: Basic Network losses and Distribution Network losses. It its turn, the Distribution Network losses are divided into Technical Losses and Non-Technical Losses.

The Basic Network loss consists of the energy loss in the physical processes occurring between generation to the distribution system. Such loss costs are divided equally between the generator and distributor, with each company assuming 50% of the Basic Network loss. The Technical Loss consists of the energy loss inherent to the electric power transport, voltage transformation and energy measurement. They can be deemed as the consumption of equipment employed in the energy distribution. The Non-Technical Losses correspond to the difference between total losses and technical losses. The remaining losses are associated to the distribution system (e.g; energy robbery, measurement error, invoicing error, etc.). These are losses related to the commercial management of the distributors.

The model is forecast in loss percentage in the energy invoiced (deemed equivalent to the energy injected in the projections of this work) for the Technical Losses and in the Basic Network and loss percentage in the low voltage market for the Non-Technical Losses, as established by the submodule 2.6 of PRORET.

Final Considerations

The fair value of the business for the Enterprise Value indicates R$ 2,476,185,262.79 to Eletrobras Distribuição Piauí and granting of new Concession Agreement. However, the debts, liabilities with suppliers and contingencies cause the company’s Valuation to be negative at R$ 91,400,895.59.

Such affirmation suggests that the sale of the company and the granting of the new concession would be possible only at reduced amounts, which could be mitigated if more adequate conditions were structured for this investor, for example, transfer of existing liabilitiesto the current shareholder.

The impacts of the Losses and more strongly, the Irrecoverable Revenues forEletrobras Piauí generate current amounts, which reduce the business value. However, the possibility to reduce the effective Operational Costs shows to be an opportunity for gains for the new concession holder. Thus, in case there is broad condition to reduce the cost of these companies, the business governance and management will evolve, whether in productivity, quality, continuity, or other indicators, considering the forecasted trajectory, these movements will be sufficient to neutralize the total liabilities existing at Eletrobras Piauí.

Analysis by multiples showed that the appraised company has an indicated amount greater than that suggested by the multiples of the compared private companies. In spite of the regional specificities, the increased indebtedness level, the companies’ status and specific risk premiums, regulatory adjustments and proposals added value to the company. In addition, taxes to be recovered of about R$ 709,368,770.00, arising out of aggregate losses throughout the years, are being considered.


	Summary
1.	Introduction			9
1.1		Context		9
1.2		Purpose		9
1.3		Summary of assumptions		9
1.4		Valuation		11
2.	History and Characteristics of the Concession Area			12
2.1.		Brief History		12
2.2.		Description of the Operating Area		13
2.3.		Socioeconomics		14
2.4.		Transportation Infrastructure		15
2.5.		Climate		17
2.6.		Geoeletric Characteristics		20
3.	Market and Consumption Unit Forecasts			24
3.1.		Market and Consumption Units (CU) History		24
3.2.		Market Forecast Methodology		26
3.3.		Market Forecast Results		33
3.4.		Consumption Unit Forecast Methodology		40
3.5.		CU Forecast Results		42
4.	Methodologies, Premises, and Results of Readjustment and Reviews			43
4.1.		Overview		43
4.1.1.		Regulation by incentives		43
4.1.2.		Recent changes to the contractual and tariff rules of the electric power distribution.		47
4.2.		Methodologies, Premises and Results for the Definition of Installment A		64
4.2.1.		Purchase of Power and Tariff Flags		64
4.2.2.		Charges		65
4.2.3.		Transport Costs		67
4.2.4.		Financial		67
4.2.5.		Technical Losses (“PT”)		68
4.2.6.		Non-Technical Losses (“PNT”)		74
4.2.7.		Default		89
4.3.		Methodology for definition of Portion B		91
4.3.1.		Regulatory WACC		92
4.3.2.		Operational costs and Factor Xt		95
4.3.3.		Factor Xpd and Xq		107
4.3.4.		Demand Surplus, Reactive Excess and Other Revenues		113
4.3.5.		DEC and FEC Indicators		115
4.3.6.		Compensations		124
4.3.7.		Long-Term Investment		128
4.3.8.		Remuneration Base		133

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4.3.9. Tariff Transactions			147
5.	Analysis of the distributor		150
5.1.	Historical Financial Statements		150
6.	Valuation		157
6.1.	Methodology		157
6.2.	Discount Rate		157
6.3.	Assumptions		159
6.4.	Valuation by Multiples		167
6.5.	Conclusion		171
6.6.	Sensitivity		178
7.	References		180
ANNEX I – Extent of Responsibility			181
APPENDIX A – Socioeconomic Characterization of the Concession Area of Cepisa			182
APPENDIX B – Methodologies of Market Projection			185
APPENDIX C - Selection of Models for Market Projections			188
APPENDIX D – Non Selected Alternative Models			190
APPENDIX E – Models of the Assessed DEC and FEC Indicators			194
APPENDIX F – Concepts and Methods of BRR Valuation			195
APPENDIX G – Company’s Debt Overview			198



	Figures

Figure 1 – Macroeconomic Assumptions			10
Figure 2 – Piauí State (capital in highlight)			13
Figure 3 – Federal and State Highways of Piauí			17
Figure 4 – Total precipitation accumulated for the Brazilian states			19
Figure 5 – Average temperatures observed in the Brazilian states			19
Figure 6 – National Interconnected System			20
Figure 7 – Basic network of Piauí: current configuration and expansions.			21
Figure 8 – Map of the state of Piauí with transmission and distribution networks.			22
Figure 9 – GDP real growth projections (% p.a.) of external sources			31
Figure 10 – Schematic drawing for the total forecast of Consumption Unit			40
Figure 11 – Price cap functioning			44
Figure 12 – Yardstick Competition Functioning			45
Figure 13– Example of Periodicity of Periodical Tariff Reviews and Tariff Readjustments			45
Figure 14 – Timeline with changes to the PRORET.			49
Figure 15– Timeline with recent rulings related to the renewal of the concessions.			52
Figure 16 - Trajectory of reduction			79
Figure 17 - Periodicity of Forecast of Regulatory Non-Technical Losses Goals			83
Figure 18 - Dynamics of forecast of Goals of Regulatory Non-Technical Losses			85
Figure 19 – Example of a model for calculation of components X Factor quality indicator			111
Figure 20 – Historical Financial Indicators			151
Figure 21 – Summarized Income Statements			152
Figure 22 – Summarized Balance Sheet			152
Figure 23 – Balance Sheet			152
Figure 24 – Income Statements			153
Figure 25 – Quality of Results			154
Figure 26 – Due Diligence Working Capital			155


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Figure 27 – Due Diligence Net Debt		155
Figure 28 – Due Diligence Financial Indicators		156
Figure 29 - Rolling WACC		159
Figure 30 - Working Capital		166
Figure 31 - EV / Net Revenues Multiples		168
Figure 32 - EV / EBITDA Multiples		169
Figure 33 - EV / BRR Multiples		169
Figure 34 - EV / Consumer Units Multiples (R$ thousand/ Number of clients)		170
Figure 35 - EV / Distributed energy Multiples (R$ thousands / MWh)		170



Graphs

Graph 1 – Density of Total Roads (km/km²)		15
Graph 2 – Percentage of Existing and Planned Roads in 2015		16
Graph 3 – Voltage level share in the total market (%) - Boa Vista (Capital) Forecasts		29
Graph 4 – State GDP in Brazil’s GDP (%) - Cepisa Forecasts		33
Graph 5 – Forecasted Market of Cepisa in each Decade per Class of Consumption		39
Graph 6 – Forecasted Market of Cepisa until 2046 per Class of Consumption		40
Graph 7 – Forecasts of CU’s of Cepisa		42
Graph 8 – Average of Losses per Segment of Cepisa and Comparable		71
Graph 9 – Forecast of technical losses of Cepisa		74
Graph 10 – Comparison between Real and Regulatory Non-Technical Losses over the Low Voltage Market		75
Graph 11 – Forecast of Real and Regulatory Non-Technical Losses Cepisa		86
Graph 12 – Example of heterogeneity curve		100
Graph 13 – Efficiency curve of Cepisa		103
Graph 14 - Projection of Regulatory Other Revenues – Cepisa (BRL Million)		114
Graph 15 - Forecast of Annual Demand Surplus and Reactive Excess Revenues – Cepisa (BRL Million)		114
Graph 16 – Calculated Indicator and Limits of DEC for Cepisa		116
Graph 17 – Calculated Indicator and Limits of FEC for Cepisa		116
Graph 18 – History of Compensations for Violation of the Individual Indicators of Cepisa		117
Graph 19 – Forecast of Cepisa’s DEC		122
Graph20 – Forecast of Cepisa’s FEC		123
Graph 21 – Forecasted Compensation of Cepisa		127
Graph 22 - Projection for electric and non-electric investments of Cepisa		132
Graph 23 - Long-Term Investments Plan for Cepisa per Type of Works/Systems		133
Graph 24 – Tariff Transactions (%)		149
Graph 25 – Cepisa Commercial Class: growth rate accumulated in 12 months		192
Graph 26 – Cepisa Public Entity Class: growth rate accumulated in 12 months		193



Tables

Table 1 – Valuation Results		11
Table 2 – Highway Indicators for Piauí		16
Table 3 – Climate Characteristics of the state of Piauí		18
Table 4 – Evolution of the Number of Consumers per Voltage Level		24
Table 5 – Market Evolution per Voltage Level		25
Table 6 – Mid-Market Evolution per Voltage Level		25
Table 7 – Evolution of the Average Consumption per Tariff Class		26
Table 8 – Variables used in the market forecasts per class - Cepisa		30
Table 9 – State GDP share in Brazil’s GDP (%)		32
Table 10 – GDP average growth rates (%)		33
Table 11 – Forecasted Market of Cepisa in each decade per Class of Consumption		39
Table 12 – Summary of the Forecast of CU’s of Cepisa		42
Table13- Values Factor T and Xpd		58


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Table14 - Values of Regulatory Losses		58
Table 15 - DEC and FEC Global Limits		59
Table 16 - Variation of the amounts destined to PMSO per Distributor		62
Table 17 - Variation of the DEC limits per Distributor		63
Table 18 - Variation of the FEC limits per Distributor		63
Table 19 - Amount of Losses in the Distribution System of Boa Vista		69
Table 20 - Amount of Technical Losses per Segment of Transformation and Network		69
Table 21 - Technical Losses, Goal per Voltage Segment		72
Table 22 - Forecast of total technical losses and technical losses per segment of transformation and network		73
Table 23 – Socio-Economic Variables for the Composition of the Complexity Factor to Combat Non-Technical
Losses		76
Table 24 - Models Selected for the Composition of the Complexity Factor to Combat Non-Technical Losses		76
Table 25 - Result of the Complexity Factors of each Econometric Model to Companies of the Eletrobras Group		77
Table 26 - Average Complexity Factors of the Companies of the Eletrobras Group		77
Table 27 - Summary of Definition of the Starting Point		81
Table 28 - Example of Forecast of the Regulatory Non-Technical Losses		82
Table 29 - Comparison of Real Loss Invoiced with Regulatory Loss Invoiced		84
Table 30 - Complexity Factor of Combat to Non-Technical Losses of the most Complex Companies of Group 1		84
Table 31 - Forecast Regulatory Non-Technical Losses 2023 to 2027		87
Table 32 - Forecast Regulatory Non-Technical Losses 2028 to 2032		87
Table 33 - Forecast Regulatory Non-Technical Losses 2033 to 2037		88
Table 34 - Forecast Regulatory Non-Technical Losses 2038 to 2042		88
Table 35 - Forecast Regulatory Non-Technical Losses 2043 to 2047		89
Table 36 – Operational Costs Efficiency Parameters in 4CRTP		96
Table 37 – Confidence intervals of the efficiency estimations		97
Table 38 – Cluster Composition		101
Table 39 – Composition of the clusters and efficiencies – Cepisa		103
Table 40 – Forecast of regulatory PMSO Cepisa		104
Table 41 – Grid projection modeling results		106
Table 42 – Operational Costs and Component T Cepisa		107
Table 43 – Technical and commercial indicators of component Q of Factor X		110
Table 44 – Commercial indicators in 2016 – Cepisa		112
Table 45 – Results for Factor X and its components Cepisa		112
Table 46 - Calculated/ Projected Calculated and Approved/ Projected Limit of DEC for Cepisa		123
Table 47 - Calculated/ Projected Calculated and Approved/ Projected Limit of FEC for Cepisa		124
Table 48 – Compensation Regression Table		126
Table 49- Forecast of Quinquennial Investments 2018-2022		129
Table 50 - Investments in HV Expansion works 2018-2022		130
Table 51 - Mean, Standard Deviation and Limits for HV Expansion works		130
Table 52 - Investments in HV Expansion work (outliers excluded)		130
Table 53 - Investments in HV Expansion works 2023-2027		130
Table 54 - Forecast of Investments for the Quinquenniums of Cepisa		132
Table 55 – Proportions of the Groups of Assets in BAR		137
Table 56 - Calculation of the AIS Considered in the BRR Model in Feb/17		139
Table 57 –Difference between the Initial and the Final Additional AIS (VOC) of the 3rd RTP		139
Table 58 – Values of BRR Considered Starting Point in the Closed BRR (Capital) in Feb/17		140
Table 59 – Investments between 2018 and December 2022 per Registration Unit: Impact on the Average
Depreciation Rate of the Assets		144
Table 60 – Assumptions for Index and Rate Projection		145
Table 61 – TJLP Projection		145
Table 62 – Projection of Regulatory Reintegration Quota in RTPs		146
Table 63 – Projection for Equity Remuneration without Special obligations in RTPs		146
Table 64 – Projection for Equity Remuneration of the Special obligations in RTPs		146
Table 65 – Projection of the Annual Fixed or Portable Facilities Cost in RTPs		147
Table 66 – Estimations for Required Revenues, VPA and VPB for Cepisa (rated BRL million)		148
Table 67 - Unlevered Beta of comparable companies		158
Table 68 – Transaction Multiples		167
Table 69 – Distributed energy projections		171


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Table 70 – Net Revenues Projections		171
Table 71 – Operating Costs Projections		172
Table 72 – Gross profit Projections		173
Table 73 – Operating Expenses Projections		174
Table 74 – EBITDA Projections		175
Table 75 – Net income projections		176
Table 76 – Cash Flow Projections		176
Table 77 – Terminal Value		177
Table 78 – Valuation Results		177
Table 79 – Financial Covenants		178
Table 80 – Sensitivity Analysis		178
Table 81 – Demographic Information, Level of Education and Unemployment Rates		182
Table 82 – Service Access Information		183
Table 83 – Information on Income		183
Table 84 – Information on Violence		184
Table 85 – Family of Exponential Models		187
Table 86 – Statistical Indicators		189
Table 87 – Residential Class: Cepisa		190
Table 88 – Industrial Class: Cepisa		191
Table 89 – Commercial Class: Cepisa		191
Table 90 – Rural Class: Cepisa		192
Table 91 – Public Entity Class: Cepisa		193
Table 92 – Public Services Class: Cepisa		193



Charts

Chart 1– Socioeconomic characterization of the state of Piauí		14
Chart 2 – Summary with the forecast model for Residential Consumption of Cepisa		34
Chart 3 – Summary with the forecast model for Industrial Consumption of Cepisa		34
Chart 4 – Summary with the forecast model for Commercial Consumption of Cepisa		35
Chart 5 – Summary with the forecast model for Rural Consumption of Cepisa		35
Chart 6 – Summary of the forecast model for the Consumption of Public Service of Cepisa		36
Chart 7 – Summary of the forecast model for the Consumption of Public Lighting of Cepisa		37
Chart 8 – Summary of the forecast model for the Consumption of Public Service of Cepisa		38
Chart 9 – Summary with the forecast model for Own Consumption of Cepisa		38
Chart 10 – Example of the need of investments in HV Expansion for the period between 2023-2027		130


Equations

Equation 1 - Box Cox Transformation		27
Equation 2 - Domiciliary Density Calculation		41
Equation 3 – Kt Coverage		41
Equation 4 – Residential CU’s Forecast		41
Equation 5 – Average Consumption Series		41
Equation 6 – CU’s Forecast		42
Equation 7 – Formula for the Maximum Cap Price and Periodical Readjustment		43
Equation 8 – Formulation for Tariff Readjustment Rate		46
Equation 9 - Formulation for the Complexity Factor of Combat to Non-Technical Loss of Company A		77
Equation 10 - Calculation of Goals of Non-Technical Losses		78
Equation 11 - Global Goal		78
Equation 12 – Value of Non-Recoverable Revenues for companies, which have not undergone 4CRTP		90
Equation 13 – Value of Non-recoverable revenues for companies that have undergone 4CRTP		90
Equation 14 – Calculation of Portion B in adjustment processes		92
Equation 15 – Calculation of Portion B in review processes		92



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Equation 16 – Operational Cost Tariff Coverage		98
Equation 17 – Value of the Efficient operational costs		98
Equation 18 – Annual Variation of the Regulatory Operational Costs		98
Equation 19 – Target of Efficient operational costs		99
Equation 20 – Target of shared Efficient operational costs		99
Equation 21 – Standardization of variables		99
Equation 22 – Euclidian Distance		100
Equation 23 –Efficiency Indicator		102
Equation 24 – Value of the Efficient operational costs		104
Equation 25 – Update Factor		105
Equation 26 – Operational Cost in Tariff review		106
Equation 27 – Component T of Factor X		107
Equation 28 – Component Pd of Factor X		108
Equation 29 – Component Q of Factor X		110
Equation 30 – Determination of Heterogeneity		118
Equation 31 - Limit Equation		119
Equation 32 – Simplified Limit Equation		119
Equation 33 – Linear Regression Equations for DEC		121
Equation 34 – Linear Regression Equations for FEC		121
Equation 35 - Calculation of the average EUSD		125
Equation 36 - Calculation of the Compensation in Force		125
Equation 37 – Projected Compensation		126
Equation 38 – Regulatory Reintegration Quota		134
Equation 39 – Gross BRR		134
Equation 40 – Capital Remuneration		135
Equation 41 – Net Regulatory Remuneration Base		135
Equation 42 – Special Obligations Capital Remuneration		136
Equation 43 – Regulatory Annuity Base (BAR)		137
Equation 44 – Annual Rental Cost (CAL)		137
Equation 45 – Annual vehicle Cost (CAV)		138
Equation 46 – Annual Cost of Information Systems (CAI)		138
Equation 47 - Stationary Series		185
Equation 48 - Seasonal Series		185
Equation 49 - Box & Jenkins Methodology Models		186
Equation 50 – ETS Model		186
Equation 51 – Dynamic Model		187




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1. Introduction 1.1 Context

Companhia Energética do Piauí (Eletrobras Distribuição Piauí or “Company”), a joint-stock corporation controlled by Centrais Elétricas Brasileiras S/A - Eletrobras which owns 100% of its share capital, is a public electricity distributor company in the State of Piauí, with headquarters at Av. Maranhão, 759/Sul - Teresina-PI.

According to Article 2 of Decree 8.893, the Brazilian Development Bank (BNDES) is responsible for the supervision and execution of the privatization process of the electric distributorship concession holders.

In this context, the Consortium has prepared the financial valuation of the Company’s shares with a base date of December 31, 2016, using a Discounted Cash Flow (“DCF”) methodology. The finanicial valuation assumes the scenario of renewal of the concession for electric power distribution. Therefore, the result of this work represents the Company’s value in the event of concession renewal.

1.2 Purpose

The purpose of this report is to provide BNDES, the leader of the project, with information regarding the company’s Fair Value, making clear all assumptions used for calculations of portions A and B, as well as the methodologies used in the financial model.

With this purpose, the following analyses were carried out:· Research and analysis or market information;

· Projections for the energy market, energy demand and regulatory elements;· Analysis of the historical financial statements;· Meetings, conference calls, and discussions with the directors and technical teams of the Company;· Field visits;· financial statements projections (Income Statements and Cash Flow Statements) based on information provided by the Company, market analyses, and due diligence studies;· Financial valuation based on Discounted Cash Flow methodology;· Calculation and projection of the discount rate based on the Weighted Average Cost of Capital (WACC) methodology, used for calculating the present value of projected cash flows;· Calculation and projection of regulatory WACC.

1.3 Summary of assumptions

Methodology

The valuation of the Company was performed using the Discounted Cash Flow method, based on the projected profits, utilizing Free Cash Flow to the Firm (FCFF).


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2. History and Characteristics of the Concession Area

This chapter will detail relevant characteristics of Cepisa, providing information regarding its background, socioeconomics, transportation infrastructure, climate, level of connectedness to the SIN and standards of the electric power distribution grids.

2.1.Brief History

From the construction of the first plant (1914) until the 1960s, Piauí had only isolated nuclei of generation and distribution of electricity through thermoelectric power plants using firewood or diesel oil, supplied to urban areas for a few hours at night. In the capital, Teresina, the supply was made by the Institute of Water and Electric Energy - IAEE and in the rest of the state was the responsibility of the Municipalities. Distribution networks, with wooden poles, experienced large voltage drops and frequent disconnections [1].

In August 1962, Cepisa was incorporated as a joint-stock company under the name of Centrais Elétricas do Piauí S.A. It started the development of an integrated energy generation, transmission and distribution system at the end of the 1960s.

In 1970, the Boa Esperança Hydroelectric Power Plant was built by COHEBE - Companhia Hidrelétrica de Boa Esperança and the state began to have enough energy to implement large-scale economic activities. In the same year, Cepisa incorporated the holdings of Companhia de Eletrificação do Nordeste - CERNE and Companhia Luz e Força da Parnaíba - CLFP and became the sole electrical distribution company in Piauí.

In 1973, the distributor began to gain strength in the electricity market: it developed an Electricity Plan for the state - linking the system with the generation of Boa Esperança - and built two large substations of 69 / 13.8 kV in Teresina and a 69 kV transmission loop connected to the CHESF substation.

In 1987, State Law No. 4.126 changed Cepisa's corporate name to Companhia Energética do Piauí and expanded its scope of action within the energy market. After 10 years, authorized by State Law No. 4.868, the Executive Branch began, on December 19, 1996, the process of disposing of state-owned shares that were part of Cepisa's capital stock. In a first phase, Eletrobras increased its shares in the company to 48.86% of the common shares and assumed, on January 13, 1997, the management of Cepisa in a shared form with the State Government. In the same year, on

October 20, Eletrobras acquired 98.8% of Cepisa’s shares, in preparation for privatization.

Finally, in July 2016, the Eletrobras group decided not to renew the contracts of electric power distributors in the North and Northeast regions, including Cepisa. On August 3, 2016, the Ministry of Mines and Energy (MME), through Ordinance No. 423/2016, designated Cepisa as responsible for providing the public electricity distribution service in the state of Piauí with the intention to ensure continuity of service until December 31, 2017 or until the assumption of a new concessionaire, whichever occurred first.


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distributing irregularly, reaching 600 mm per year. Due to the low rainfall, the dry season is long (about eight months) being more drastic in the center of the Ibiapaba Mountain range. The temperatures range from 2 4 to 40° C, with dry winters. Table 3 contains basic information for the climatic characterization of the state Piauí.


Table 3 – Climate Characteristics of the state of Piauí


		Climatic Characteristics for Roraima and Regions
	Pluvial Index i	Rainfall	Keraunic	Maximum	Maximum Win
Region		Intensity ii	Index iii	Temperature iv	Speed v
	(mm)	(mm/day)	(lightning/ km ²)	(°C)	(mps)
Piauí	52.37	5.04	4.88	33.81	5.10
North	176.60	11.64	5.93	31.76	4.09
Northeast	54.66	5.18	2.48	30.60	5.35
Brazil	109.44	8.82	5.55	29.45	4.69

Source: Raw data obtained on the website of INMET and INPE. Information processing by state based on P&D of ABRADEE, 2012^7.i = Annual Average of water precipitation (rain, snow, hail) in a certain place during a certain period of time. ii = Ration between the Rainfall Index and the number of days with precipitation in a certain region. iii = Quantity of rays in a certain region. iv = Maximum average temperature recorded. v = Maximum average speed recorded.

Due to the predominance of semi-arid climate throughout the year, Piauí presents a monthly average rainfall and rainfall intensity well below the averages of the North and of Brazil overall. Piauí has a maximum average temperature very close to the regional averages, and a little over the national average.

The velocity of the Piaui winds is characteristic of the states of the Northeast Region, with average above the North Region and the nation. The State presents a Keraunic index close to the averages for the nation and for the North Region.Figure 4 shows the cumulative total volume of precipitation (in millimeters) for all Brazilian states in the years 2015 and 2016.

⁷The information available to such analysis is related to the year of 2012 and removed from the P&D project of ABRADEE with the title Methodologies of Periodical Tariff Revision of the Electric Power distributors carried out in 2013, since there is no average or accumulated data of the variables in study publicly available.


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18,400 km networks are in rural areas, totaling more than 27,600 km of LT networks. The system has more than 64,000 distribution transformers and 86 substations [7].

In the metropolitan region of Teresina, the medium voltage networks are characterized by high loads. This fact makes difficult the transfer of loads between distributors. In other regions, the same power supply that serves urban loads, also serves rural loads, causing a high number of interruptions In the other municipalities of the state, the main characteristic of medium and low voltage networks are the long distances traveled. Due to the extensive area of the state (more than 250 thousand km²), several circuits in 13.8 kV can travel distances over 80 km and, in some cases, exceed 100 km in length.

Another characteristic fact of MT and BT system is the existence of conductors operating for a long time with high load that end up supplying energy of poor quality or breaking. This adversely affects the quality indicators (DEC and FEC) of the system and on compensation payments made by Cepisa.


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In this regard, the objective was that of finding forecast models that were suitable for the conduction of long term forecasts, conciliating the observance of presuppositions and using good rates in the information criteria. Since it regards to markets with very specific particularities, in some cases it was necessary to use auxiliary variables that presented association with the historical series from a degree of reliability of 75%, being selected as significant those obtaining p-value below 25% of significance. In most part of the approved models, the p-values were around 5 or 10%. Only in specific cases the p-value of 25% was used. The p-value is not the only criterion adopted for the approval of the models, considering that other tests (residue analyses and information criteria) were applied to each model. Not necessary a value of significance greater than 0.05 or 0.1 is a factor of elimination of the estimated model. There is not a consensus in the specialized literature of the p-value threshold value, the most important being understanding the problem in screen and the theoretical justification [13].

For the case of autoregressive components, moving averages, and trend averages, the models with the best information criteria and that resulted in models with proper residues were selected. The choice of a more appropriate methodology was performed in the following order: Box & Jenkins, ETS and Dynamic Models. The models in which the coefficient signals of the auxiliary variables followed the economic logics were also selected. Therefore, the approach used allows for choosing the best model among a wide range of options and the selection of relevant auxiliary variables. For the 6 companies designated, this approach was applied to each one of the eight consumption classes, which facilities the treatment of specificities of each one of the series to be forecasted. Appendix C shows the consistency tests performed to each selected model. Appendix D presents models that have also been tested and not selected for they violate modeling criteria.

The market forecast per voltage level took into account the evolution of the participation in the voltage levels of the overall market since 2012, according to information provided by the concessionaires. From the analysis of the behavior of these participations, it was possible to build an evolution curve, based on linear extrapolation, generating the market forecasts for each level of voltage (High, Medium, and Low). The evolution of the participation of each voltage level is presented in Graph 3.


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at any time, whenever an event causes substantial economic-financial instability. The RTE may be requested in cases of creation, change or extinction of taxes or charges, after the execution of the concession agreements, and whenever the impact over the activities of the companies is relevant, and duly proven, to the economic-financial equilibrium.

e) Manageable and non-manageable installment

Non-manageable costs correspond to expenses that do not depend on the control of the concessionaire, being directly transferred to the consumer. These items form a relevant part of Installment A, component of the revenue of the concessionaire of distribution that includes costs and sectorial charges, in addition to costs of inputs and upstream segments of the activities of the regulated company, such as costs of power generated or transmitted to the electric power distribution companies. On their turn, manageable costs represent the installment related to the effective activity of the electric power distribution concessionaire, in which the company may establish strategies of management. The so-called Installment B is composed, for instance, by the operational costs, capital and depreciation costs, and non-recoverable revenues.

There are also costs that present a relative degree of management by the concessionaire. This is the case, for instance, of non-technical losses (“PNT”), whose amount depends on both the efficiency of the commercial activities and routines of the concessionaire and on the socioeconomic, institutional, and cultural environment of the geographic area in which the company acts.

Although they affect the purchase of power, allocated in Installment A, technical and nontechnical losses receive regulatory treatment aiming at allowing gains of efficiency in the procedures. The purchase of power may also receive regulatory treatment and respect restriction in order to foment an efficient acquisition and modicity to the end consumer (captive).

An example of this regulatory treatment are the controls related to the purchase of power by related party and the obligations of acquisition of power in auctions in the regulated environment. Therefore, the separation of the manageable and non-manageable costs, in the so-called Installments A and B, is a conceptual simplification that may be changed in accordance with the evolution of the regulation.

4.1.2. Recent changes to the contractual and tariff rules of the electric power distribution.

The implementation of the regime of regulation by incentives in the activity of electric power distribution has been done throughout almost two decades, conditioned by changes to the concession/permit agreements and by public policies. Its evolution and transformation were also marked by the processes of discussions, in inquiries and public hearings, of the regulations that treat the different tariff and contractual aspects. Currently, these rules are described in Technical Notes elaborated by ANEEL, which describe in detail the methods, premises, and results applicable to the different components of the tariffs and the tariff operation procedures.

These regulatory rules are consolidated in the Tariff Regulation Procedures (“PRORET”), which have normative character and consolidate the regulation of tariff processes. The PRORET


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structure was approved by Normative Resolution no. 435/2011, organized in 12 modules, which on their turn are subdivided into submodules.

Regarding the distribution of electric power, there is a set of tariff procedures that include specificities to each contractual situations, as detailed below: I. To Distributors that renew their concession agreements under the terms of Decree no. 8.461/2015, signed contractual amendments with new economic clauses, or signed contractual amendments for the complete adhesion to the new concession model¹², the new tariff rules presented in Normative Resolution no. 761/2017 and in the PRORET list indicated with the letter A in its original number shall be valid¹³.

II. To companies holders of permits and concessionaires of distribution that have not renewed their concession agreement or signed amendments still have valid the PRORET without the indication of letter A.

III. For the set of Distributors owned by the Government, responsible for the provision of distribution services in concessions that have not been extended (so-called Designated Distributors), specific rules shall be applied as per Normative Resolution no. 748/2016 and Homologation Resolution no.

2.184/2016¹⁴.

Figure 14 presents a timeline with the indications of all Normative Resolutions (REN), Homologation Resolutions (REH), Technical Notes (NT), and Public Hearings (AP) that changed or proposed changes to the PRORET as of April 2015.

¹²Under the terms of the Vote of the Rapporteur in the 30th Ordinary Public Meeting of 2016. ¹³Submodules 2.1A, 2.2A, 2.5A, 2.7A, 3.1A, 3.2A, 3.3A, 3.4A, 4.2A and 4.4A.

¹⁴Both resolutions substitute Technical Note no. 331/2016, establishing, on a conclusive basis, the additional conditions to be applied to the Designated Distributors (agency or entity of the government, by decision of the Granting Power, for the provision of the public service of electric power distribution due to the non-extension of a given concession as per Act no. 12.783/2013), with the purpose of assuring the continuity of the provision of the public service of electric power distribution until the empowerment of a new concessionaire to be granted by bidding procedure.


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b. To companies that will undergo their first review after the 3rd RTP, the revenues registered as UD and ER in special obligations until the date of contractual amendment will be subtracted from Installment B. c. To all companies, the invoiced values of UD and ER between the date of contractual change and the date of the tariff procedure will be used as reducers of Installment B. d. The invoiced values will be updated according to the IPCA.

iii. The RI’s are no longer calculated in two installments and now consider exclusively the regulatory percentages of default. In addition, the financial revenues now compose the basis of calculation of the RI’s. iv. In the first tariff review after the execution of the contractual change, the calculation of the Factor X will no longer consider the average growth of the market and consumers of the tariff cycle, being determined on an annually basis. v. The values of other revenues (OR) to be subtracted from Installment B will be calculated in the twelve months prior to the month of reference for the review, and will be updated by the IPCA.

The rules of tariff readjustment presented in Module 3 had the following changes: i. If the first tariff process after the execution of contractual change is a tariff readjustment, known as DR1 in the A version of the PRORET, there will be the need to remove the RI components from Installment B and to transfer them to Installment A, in addition to isolating OR, UD, and ER, which will be determined according to what has been effectively realized. The ONS values shall be transferred from Installment A to Installment B. ii. In the tariff readjustments, Installment B shall be effectively calculated and not only obtained as a residue of the calculation of Required Revenue. iii. The value of Installment B considering the conditions in force and the Reference Market (VPB0DR1) will be obtained from the multiplication of this market for the economic value in force (homologated in the last procedure), equivalent to the tariff component of Thread B (TUSD Thread B) in force. This value will be updated by the difference between IPCA and Factor X and multiplied by a correction factor (Factor DR1), necessary for the application of the adjustments indicated in (i). Finally, the values of OR, UD, and ER will be expurgated, and added the values with ONS. iv. In the subsequent tariff processes, the procedure will be quite similar in practical terms, with the calculation of Factor Pbi-1, which reintroduces the values of OR, UD, and ER in Installment B, which will be adjusted by the inflation (IPCA) and Factor X. Following that, the observed values of these components in the period of reference are excluded from Installment B.


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In Module 4, the neutralities are calculated to all components of Installment A (including other financial components, financial components of neutrality, and financial component of CVA balance to compensate), not only to sectorial charges, as it is the case of the rules in force. The concept of neutrality remains unchanged, such as the difference between the invoiced values and the values included in the tariff processes, neutralizing the differences derived from market changes¹⁵. The proposed methodologies of calculation differentiate items with tariff coverage of fixed nature, when the expense is not changed with the market variation (sectorial charges, connection charges, and Itaipu), and variably, in the opposite case (costs with power, charges with the use of transmission/distribution, and non-recoverable revenues).

The specific case of the neutrality of non-recoverable revenues will be calculated only from the second tariff procedure after the execution of the contractual amendment, since until then there is not a component of tariff coverage for this item. All new items to which there is no calculation of neutrality shall take into account the date of execution of the agreement or contractual amendment. Therefore, for the first tariff procedure after the execution of the agreement or publication of the PRORET, whatever occurs last, the neutrality of Installment A will be calculated only from the next month of signature of the contractual amendment or renewal of the concession agreement, limited to the period of reference, i.e., the last 12 months.

Finally, the installment of non-recoverable revenues was inserted in submodules 7.1 and 7.2, in the function of TUSD Losses cost. The update of submodule 3.2 impacts directly Module 7, due to the calculation of losses in the other facilities of transmission of shared use (DITc), which is in the tariff component of losses in the basic network.

b) Additional Conditions for the Designated Distributors

In its 165th Special Meeting, the shareholders of Eletrobras decided not to approve the extension of the concessions of Ceal, Cepisa, Eletroacre, Ceron, Boa Vista Energia, and Amazonas Energia. In addition, Companhia de Eletricidade do Amapá (CEA) did not have its concession extended for it did not gather the requirements of compliance and Companhia Elétrica de Roraima (CEE) by recommendation of ANEEL. By means of several directives, the Ministry of Mines and Energy designated Amazonas Energia, Eletroacre, Ceron, Cepisa, Ceal, Boa Vista Energia and CEA as responsible for the provision of the public service of distribution of electric power until the end of 2017 or until the assumption of a new concessionaire, whatever occurs first.

Figure 15 illustrates the timeline with recent rulings related to the renewal of the concessions of the distributors of the Eletrobras Group.

¹⁵In this section we are describing the changed made to the PRORETs from Normative Resolution no. 276/2017, including changes to the treatment of the neutralities of charges. The modeling of the items composing Installment A in the financial model is detailed in section 3.2.


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quarter, and annual values of 2016; (iv) flexibilization of the references of regulatory losses to Amazonas Energia, Boa Vista Energia, CEA, and CERR.

Such resolution also establishes that the resources of RGR will be used to assure the minimum conditions of sustainability of the service, as per Directive no. 388/2016-MME, with deadlines, grace periods and fees as indicated in REN no. 748/2016, and the contracted obligations will be assumed by the new concessionaire.

In addition, REN asserts that there are major investments to be made, which will reduce expenses of CCC and, therefore, classified as subrogation of the fund’s resources. ANEEL shall homologate prudent investments considered in the elaboration of the basic project, calculate the amount to be subrogated, and inspect the application. The agency or entity of the federal public administration shall assign to the contracted company for the implementation of the distribution lines, on an irrevocable basis, the credits of reimbursement of CCC.

Finally, the resolution establishes an exceptional regime of regulatory sanctions, prioritizing the character exclusively orientational and/or determinant, without the imposition of penalties.

c) Public Hearing no. 094/2016

In May 2017, ANEEL published, after receiving contributions in Public Hearing no. 094/2016: (i) Technical Note no. 182/2017, with guidelines for the elaboration of a new agreement for the concession of the public service of electric power, as per §1-A of Article 8 of Act no. 12.783/2013; and (ii) a new Contractual Draft.

According to Technical Note no. 182/2017, dated May 2, 2017, ANEEL received Official Letter no. 242/2016-SE, of the Ministry of Mines and Energy (MME) requesting the elaboration of a draft of a concession agreement, observing a few guidelines that aim at expediting the realization and to increase competitiveness of bidding procedures of transfer of corporate control, associated with grants of new concessions. MME emphasized four guidelines: I. Adoption of clauses that allow the conversion of pecuniary compensations into investment obligations to the first five years of new concessions, aiming at allowing the recovery of the concessions; II. Adoption of trajectories of regulatory parameters of efficiency, providing the new controller with term to readjust the values adopted by the companies; III. Adoption of a tariff calendar with interstice of five years at every tariff review, but that allows the performance of two tariff reviews in the first five years of the agreement, allowing exceptionally, the acknowledgment in shorter investment terms; IV. The possibility of the calendar set forth in the item above being chosen by the winner of the bidding, with the first review occurring prior to the third tariff process after the execution of the agreement and the second review shall be carried out in the fifth tariff procedure after such signature.


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According to the result of public hearing no. 094/2016 – presented in Technical Note no. 182/2017 -, transitory provisions were considered about the use of compensations due to violations of the limits of quality related to the continuity of the service and the voltage level to investment, as reproduced below.

“CLAUSE NINETEEN – TRANSITORY PROVISIONS

Subclause One - DISTRIBUTOR may use the resources of compensations due to violation of the limits of quality, related to the continuity of the service and sampling measurements of the voltage level in a permanent regime, for the realization of investments in the area of concession, until the end of the fifth calendar year after the date of execution of the concession agreement.

Paragraph One – From the date of execution of the agreement, the compensation values shall remain being calculated by DISTRIBUTOR, as per the regulation, for the purposes of follow-up and inspection by ANEEL.

Paragraph Two – From the second calendar year following the execution of the agreement, in case the calculated values of the compensations are below the values of the compensations calculated for the previous calendar year, such difference shall be considered as a demineralizers investment by DISTRIBUTOR upon its tariff review, with the remaining value being accounted in entry Obligations Linked to the Public Service of Electric Power (Special Obligations).

Paragraph Three – From the second calendar year following the execution of the agreement, in case the calculated values of compensations are higher than the compensations calculated for the previous calendar year, such different will be invested twice in the concession and accounted in entry Obligations Linked to the Public Service of Electric Power (Special Obligations). ”

According to the Draft, as of 2020, the inobservance of the global, annual limits of the indicators of continuity per determined period will cause economic-financial limitations, as established in Subclause Eight.

“Subclause Eight – As of 2020, the inobservance of the annual limits of collective indicators of continuity for two years in a row or three times in five years may, as per the ANEEL regulation, imply limitation of dividends or payments of interest over its own capital, until the regulatory parameters are restored, observing the provisions of Item I of Subclause One of Clause Seven. ”

From the sixth calendar year, the inobservance of the regulatory goals may imply the filing of a caducity proceeding of the concession as indicated in Subclause Thirteen, as reproduced below, applicable to the criteria related to the continuity of supply.


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It has been observed in Technical Note no. 182/2017 that the designated companies needed high investments in the first years of the concession in order to restore the levels of quality of the service. According to ANEEL, this context consists of an atypical situation, incompatible with the type of application to which the methodology of the Factor X has been designed. Due to this reason, an adequateness of its calculation is seen as possible.

In addition, the new Draft considered that the inspection performed by ANEEL will not apply penalties in the first two years of the new contracts, as a form of mitigating the effects of the technical or commercial problems inherited from the prior situation, as set forth in Subclause Five.

“Subclause Five – Until the twenty-fifth month following the month of execution of the concession agreement, the inspection of ANEEL will have an orientative and/or determinative character, without the application of penalties, except in case of inobservance of determinations by Aneel Management. ”

To meet the request by the MME regarding a tariff calendar that allows an additional tariff review in the first five years of the agreement, aiming acknowledgment in shorter term of investments, the Draft presents the transitory provisions in its Clause Nineteen.

“Subclause Two – In the period between the date of execution of the agreement and the first subsequent ordinary tariff review, a tariff review may occur upon request of the Concessionaire, observing the following criteria: I – The tariff review in lieu of an annual tariff readjustment, to which the same date of processing shall be maintained.

II – The request for review shall be formally presented to ANEEL within at least one (1) years prior to its conduction.

III – The tariff review will occur based on the rules set forth in this agreement and in the regulations in force, except those items set forth in Subclause Three.

IV – In the period of review, the Concessionaire may request the complete evaluation of the Regulatory Remuneration Base.

V – The review shall occur until the third tariff procedure after the execution of the agreement. ”

The Draft also defines the values and specific formulas of calculation for the period between the date of execution of the agreement and the first subsequent tariff review, as set forth in Subclause Three.

“Subclause Three – In the period between the date of execution of the agreement and the first subsequent ordinary tariff review, the values and formula of calculation for the


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Factor X will be used, as well as Operational Costs and Regulatory Losses, different from those set forth by Clause Six, observing the following criteria: I – The value of component Pd of Factor X will be defined as zero (0).

II – The regulatory Operational Costs will be defined considered a degree of efficiency of []% over the average of effective costs observed in the last three (3) years prior to the tariff processing.

III – Regulatory, non-technical losses will be defined in the percentage of []% over the average of the real percentages observed in the last three (3) years prior to the tariff processing.

Sole Paragraph – The tariff effects resulting from the treatment described in this Subclause will be perceived from the first tariff calculation following the execution of the agreement, always with prospective effects. ”

Subclause Four establishes the rules on the debt related to the loan existing with the RGR fund, occurred in the period of designation.

“Subclause Four – DISTRIBUIDORA undertakes to settle the debt related to the loan existing with the RGR Fund occurred in the period of designation, in the following conditions: I – The interest rate to be used for the loan will be of 111% of the SELIC rate; II – The amortization of principal and the payment of interest will have a grace period of 12 months from the assumption of the concession by the new concessionaire, considering that, once the grace period expires, the amortization of the loan will occur in 36 monthly, equal installments. ”

d) Public Hearing no. 032 /2017

On May 4, 2017, ANEEL placed in public hearing Technical Note no. 088/2017, aiming at gathering subsidies to improve the calculation of the regulatory parameters and indicators of quality of services that will serve as the basis for the next tariff review procedures of the Distributors controlled by Eletrobras. The Technical Note establishes the regulatory parameters for the tariff procedures of the Designated Distributors, defined under the terms of Normative Resolution no. 748/2016 and limits to the DEC and FEC collective indicators of continuity.

The proposal is that the value of the T component of Factor X is equal zero (0)to all tariff processes homologated until the first tariff review process after the execution of the Concession Agreement, while to the value of the Xpd component the recommendation is to maintain the Pd component in force until the first tariff process after the execution of the Concession Agreement, when it will assume zero value (see ).


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modicity and with the quality of the service, the tariff impact was simulated considered interest of 5% p.a. and a deadline of 30 years for payment. The monthly values of RGR are defined by REH 2199/2017-ANEEL and the values are reviewed by ANEEL on a quarterly basis based on the quarterly results of distributors. According to ANEEL, the payment of the loan would begin in the sixth year of contractual effectiveness and would extend until its expiration (25 years to pay). Considering that the loan will now be acknowledged in the tariff, there will be neutrality for the new concessionaire in terms of payment of the amounts involved.

f) Technical Note no. 247/2017

In view of Technical Note no. 351/2017, the Ministry of Mines and Energy proposed changes to the draft of the Agreement for the Concession of Public Service of Electric Power Distribution by means of Technical Note no. 247/2017. The main proposed changes related to (i) the acknowledgment in Installment A of the revenue necessary for the payment of RGR loans; (ii) definition, as an extraordinary review, of the tariff procedure that the new controller may request in the interstice of five years of the new concession, basically to consider the volume of investments in the base of assets; and (iii) clarifications on the systematic of flexibilization of the regulatory parameters of operational costs and non-technical losses until the first periodical tariff review.

The proposed changes to the Draft of Agreement mentioned in Technical Note no. 247/2017 are presented below, whose contributions were received until 09/06/2017.

“CLAUSE SIX – TARIFFS APPLICABLE IN THE PROVISION OF THE SERVICE

Installment A – Sectorial Charges: installment of the revenue of the DISTRIBUTOR, destined to the observance of the obligations associated with the Electric Power Services Inspection Fee – “TFSEE”; with the Financial Compensation for the Use of Water Resources – “CFURH” for the purposes of generation of electric power, when applicable; with the System Services Fee – “ESS”; with the Energetic Development Account – “CDE”; with Research and Development – R&D; with the Energetic Efficiency Program – “PEE”; with the Reserve Power Fee – “EER”; payments of loans of the Global Reversion Reserve

– “RGR”, made in accordance with Article 4, § 4, item VI, of Act no. 5.655, dated May 20,

1971, and the other public policies for the electric sector, defined in the supervening legislation;

CLAUSE NINETEEN – TRANSITORY PROVISIONS

Subclause Two – In the period between the date of execution of the agreement and the first subsequent ordinary tariff review, an extraordinary tariff review may occur upon request of the Concessionaire, observing the following criteria: Subclause Three – In the period between the date of execution of the agreement and the first subsequent ordinary tariff review, values and formula of calculation for the


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Factor X will be used, as well as to Operational Costs and Regulatory Losses other than those set forth in Clause Six, observing the following criteria: I – The value of component Pd of Factor X will be defined as zero (0).

II – The regulatory Operational Costs in the first tariff procedure after the execution of the concession agreement will be defined as a percentage of []% over the value of the operational costs of the previous tariff procedure, updated according to the rule of readjustment of Installment B. Between the second tariff procedure and the tariff procedure immediately before the first ordinary tariff, the operational costs will be defined by applying the rule of readjustment of Installment B.

III – Regulatory, non-technical losses will be defined in the percentage of []% over the low voltage invoiced market.

Paragraph One – The tariff effects resulting from the treatment described in this Subclause will be perceived from the first tariff calculation following the execution of the agreement, always with prospective effects.

Paragraph Two – The transitory percentages of items II and III are those resulting from the bidding procedure of the concession of electric power distribution associated with the transfer of control of the legal entity providing the service, under the terms of Art. 8 of Act no. 12.783/2013 and its regulations.

Paragraph Three – The rules set forth in Clause Six shall be applied in the first ordinary tariff review, not considering any effects resulting from the transitory percentages of items II and III.

Subclause Four – DISTRIBUTOR shall settle the loans with the RGR Fund as per Directive MME no. 388, dated July 26, 2016, adjusted as per Art. 4, § 5, of Act no. 5.655, dated May 20, 1971.

Paragraph One – The payments shall be made between the first ordinary tariff review and the final deadline of this agreement.

Paragraph Two – DISTRIBUIDORA will be entitled to tariff acknowledgment of []% of loans paid, according to the definition of the bidding procedure of the concession of electric power distribution, associated with the transfer of control of the legal entity providing the service, under the terms of Art. 8 of Act no. 12.783/2013 and its regulations.

”

g) Technical Note no. 149/2017

On September 8, 2017, ANEEL reopened Public Hearing no. 032/2017, by means of Technical Note no. 149/2017. In it, the Regulator exposed its proposal of flexibilization of a few regulatory parameters – non-technical losses, operational costs and Factor X – and the limits to the DEC and FEC collective continuity indicators until the first ordinary tariff review of the new controller of the designated companies, to be contracted by means of bidding procedure. The proposal of the Agency generated substantial changes in a few parameters that have been


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adjustment (IRT), as per Technical Note no. 351/2017;

· The new agreements will be signed in 2018, whose date was estimated to 03/01/2018. An adjustment (IRT) will occur in this year, on the date of anniversary of the old agreements;· An extraordinary review¹⁶will occur in 2019, on the date of anniversary of the old agreements. In such review, the tariff coverage related to the Annual Cost of Assets

(“CAA”), composed by the Remuneration of Capital, Regulatory Reintegration

Quota, and Annual Cost of Movable and Immovable Facilities will be reevaluated.

No review shall be performed to metrics of PNT, OPEX, Default, Factor X etc.;

· There will be usual IRT’s between 2020 and 2022;

· In 2023, there will be a complete RTP corresponding to the 5-year period after the execution of agreement, in which the regulatory parameters will be once again established (such as PNT, OPEX, Default, Factor X, etc.).

· After 2023, there will be both IRT and RTP in the interstice of 5 years until 2048. The new agreement will be adapted to the tariff rules of REN no. 761/2017.

4.2. Methodologies, Premises and Results for the Definition of Installment A

Installment A is the tariff revenue component through which consumers compensate the Distributor for the costs considered as non-manageable, such as: purchase of power, sectorial charges, power transport costs, financial charges, technical losses, non-technical losses, and default.

Since these costs are considered as non-manageable, they are directly transferred to the tariffs (pass-through) according to the rules established by the Regulator, as detailed below.

The pass-through condition above is true for the cases in which the Distributor is within a regulatory interval of limits of losses and supercontracting.

4.2.1. Purchase of Power and Tariff Flags

For the definition of the amount of required power, for the purposes of regulatory purchase of power, the volumes of energy were calculated for the provision and supply. The power for provision includes the total forecasted market, excluding volumes to free market, distribution, and supply.

The Methodologies and results obtained for the total and free market forecast were presented above. The forecasts of the volumes for distribution and provision followed the estimated behavior for the total market of the concessionaire.

Using the forecasts of regulatory losses, the total losses were estimated – technical, nontechnical, and basic network. In relation to the losses of the basic network, the percentages

¹⁶Such extraordinary review will reopen the armored base.


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presented in the SPARTA spreadsheet of 2016 were maintained. The required power is obtained from the sum of supply, provision, and regulatory losses.

The system of flags, applied by the concessionaires connected to the National Interconnected System – SIN, has three tariff flags (green, yellow and red) which indicate if the power costs more or loss, based on the conditions of generation of electricity. For the economic-financial evaluation, the same favorable scenario of generation was considered by ANEEL in the tariff procedures, i.e., a green flag scenario.

4.2.2.Charges

The sectorial charges are all created by laws approved by the National Congress to allow the implementation of public policies in the Brazilian energetic sector. Its values are included in resolutions or decisions by the National Agency for Electric Power (ANEEL) and are paid by distributors through the electricity bill. Each one of the charges has pre-defined objectives. The charges described below are applicable to the electric sector.

Energetic Development Account (CDE)

The CDE was created by Act no. 10.438/2002 with the objective of, among other purposes, promoting the universalization of the electric power sector in the entire national territory, funding discounts to the tariffs granted to the low income rural and residential classes, assuring the competitiveness of the energy produced from wind source, small hydroelectric power plants, biomass, natural gas, and mineral coal.

The National Treasury may provide contributions of resources to the CDE accounts, aiming the modicity of tariffs. The CDE cost is prorated by all consumers served by the National Interconnected System (SIN). The quota value is calculated by ANEEL.

Electric Power Services Inspection Fee (TFSEE)

The TFSEE was created with the purpose of funding the operation of ANEEL in the exercises of both activities of inspection and economic regulation.

The Fee is paid by all consumers of electric power, levied upon the activity of the agents of distribution, generation, and transmission of electric power.

Program of Incentive to Alternative Sources of Electric Power – “PROINFA”

PROINFA was created by Act no. 10.438/2002 and regulated by Decree no. 5.025/2004 with the objective of Funding the operation of ANEEL in the exercises of both activities of inspection and economic regulation.

Prorating of costs and of electric power contracted by the program, taking into account the Annual Plan elaborated by Centrais Elétricas Brasileiras S/A (ELETROBRAS) and the electric power market verified, both captive and free. The Act conceded exempted to consumptions of the Low Income residential subclass.


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Financial Compensation for the Use of Water Resources (“CFURH”)

The CFURH is set forth in the Federal Constitution of 1988, with the objective of providing financial compensation to the Government, state and municipalities, for the use of water and productive lands necessary for the installation of plants for the generation of power.

System Services Charges (“ESS”)

The ESS was created with the objective of increasing the reliability and safety of the offer of power in the country. The cost is calculated on a monthly basis by the Chamber of Commercialization of Electric Power and is paid by all consumers, captive and free, to the generation agents. It considers the dispatch of thermoelectric plants by order of merit, by energetic safety, operational restrictions, and ancillary services.

National System Operator (“ONS”)

The contribution to the ONS was created with the objective of financing the operation of the National Electric System Operator, which coordinates and controls the operation of generators and transmitters of electric power in the National Interconnected System (SIN). The value is defined on an annually basis by the ONS and approved by ANEEL.

Research and Development and Energetic Efficiency (“P&D/EE”)

The P&D/EE was created with the purpose of stimulating scientific and technological researches related to electric power and the sustainable use of the resources necessary to create it.

Reserve Power Charge (“EER”)

The ERR was crated with the purpose of covering costs resulting from the contracting of reserve power, including administrative, financial, and tax costs.

The prorating among the end users of electric power of the National Interconnected System (SIN), including free consumers and self-producers only in the part of the energy resulting from the interconnection to the SIN, is defined on a monthly basis by the Chamber of Commercialization of Electric Power (CCEE), according to the formula set forth by ANEEL resolution.

As mentioned above, the effect of Installment A is that of pass-through, i.e., costs with sectorial charges, one of the components of Installment A, will be transferred to the consumer by the tariff, thus neutral from the point of view of the economic-financial evaluation, presenting only a temporal effect, since the adjustment caused by the difference between markets of reference is subject to inflation adjustment and adjusted in the next readjustment, however, for the effects of this evaluation, such temporal effect caused by the difference between the inflation adjustment rate (SELIC) and the discount rate (WACC), was not considered by virtue of its low representativeness.


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4.2.3.Transport Costs

Costs with the transport of power are those related to the transport of power from the generation units to the distribution systems, regulated by Resolutions 1917 and 1918, dated 06/03/2015 and Submodule 3.3 of the PRORET, being composed by the following items: a) Use of the transmission facilities classified as Basic Network, Basic Network at Borders, or Other Transmission Facilities (DIT) of shared use; b) Use of the distribution facilities; c) Connection to DIT of exclusive use; d) Connections to the distribution networks; e) Transport of power from Itaipu to the point of connection to the Basic Network; f) Use of Basic Network by the Itaipu plant; and g) Use of the transmission system by the generation centers connected at the voltage level of 88kV or 138kV.

Both the use of the transmission systems and distribution system for the purposes of tariff procedures are calculated considering the amount of contracted demand for the period of reference, valued by the respective economic tariffs in force on the date of the tariff procedure.

4.2.4.Financial

Installment A includes costs that are transferred to the tariffs of the regulated market, but the calculation of the tariff occurs from a forecast for these costs, and the effective costs then do be different in relation to the forecast.

The invoicing of the distributor, as a recovery of Installment A, may be higher or lower than the effective costs of Installment A, and the differences verified will be accounted in entry CVA

(“Compensation of Variation of Values of Items of Installment A”) to a posterior encounter of accounts.

It also occurs with the cost of the thermoelectric generation contracted, which may be higher or lower than that estimated in accordance with the intensity of use of the thermal plants, which on its turn depend on the volume of rainfall, a situations especially difficult to forecast. If, at the time of the calculation of the annual readjustment, CVA has a surplus, that means that the distributor has collected, via tariff, more money has been collected that what has been effectively applied in non-manageable costs. The balance will be corrected by the SELIC rate and the financial component corresponding to CVA will be negative in the calculation of the tariff of the


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next year to compensate the surplus, thus charging against the consumer less than the economic tariff.

As mentioned above, once the components of Installment A were considered neutral, i.e., values related to financial charges for the purposes of this economic-financial evaluation were not considered.

4.2.5. Technical Losses (“PT”)

The electric system is divided into generation, transmission, and distribution of electric power. Distributors receive the power from the supplying agents (transmitters, generators, or other distributors), delivering it to the end consumers, either residential, commercial, rural, industrial, or pertaining to the other classes. The power measured by the Distributors in the consumption units will always be smaller than the power received from the supplying agents. This different is known as loss of power and is segregated according to its origin.

The National Agency for Electric Power - ANEEL – shall refine, at every tariff review, a regulatory referential of losses that takes into account the performance of the concessionaire. Losses may be segmented by losses in the Basic Network, external to the distribution system of the concessionaire and with origin specifically technical, and losses in the distribution, which may have either technical or non-technical nature.

a) Concept and Characterization of the Historical Technical Losses of the Distributor

Technical Losses (PT) are those inherent to the transport of electric power in the network, related to the transformation of electric power into thermal power in the conductors (joule effect), losses in the transformer cores, dielectric losses, etc. They may be understood as the consumption of the equipment responsible for the distribution of power. It is worthwhile noting that the degrees of Technical Losses are defined by ANEEL upon the RTP, and kept constant by a tariff cycle.

The most recent calculation of technical losses of the company, segmented by the components of transformation and network, was performed by ANEEL through Technical Note no. 0192/2013-SRD/ANEEL, dated August 9, 2013, proceeding no.: 48500.000545/2013-34 “Analysis of the contributions of Public Hearing no. 052/2013, related to the evaluation of losses in the distribution system, related to the 3rd Periodical Tariff Review Cycle, of Eletrobras Distribuição Piauí – EDPI (Cepisa) ”. The results of the calculation are shown in


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Review Cycle, of Eletrobras Distribuição Piauí – EDPI (Cepisa) ”. With this Technical Note, ANEEL provides the losses per voltage segment, with unequivocal application and best representation of the historical information verified. ii. The losses obtained in each voltage segment of the distributor were object of comparison with the companies having greater similarity to the concession are in evaluation, considering their specific characteristics. To Cepisa, the selected comparable companies were:· Espírito Santo Centrais Elétricas – ESCELSA;· DME Distribuição S.A. – DMED;· Eletrobras Distribuição Acre - Eletroacre;· Companhia Energética do Rio Grande do Norte – COSERN;· Companhia Sul Sergipana de Eletricidade - Sulgipe;· Empresa Elétrica Bragantina S.A. – EEB;· Companhia Paranaense de Energia – COPEL;· Companhia Sul Paulista de Energia – CSPE. iii. From the comparison with the similar companies, the average IPTS’s obtained considered the weighted losses of each Distributor in relation to the inject power in each voltage segment. The forecasted goal for 2047 consider, by segment, the maintenance of the rates of the company when below the weighted average; or the values observed in the weighed average of comparable companies when the results demonstrate level below that currently achieved by the company. iv. Based on the obtained results of losses per segment, forecasted for 2047, a simple interpolation was used to define the intermediate values. v. With the annual IPTS values obtained, such values were applied over the volumes of injected power per supply voltage segment, resulting the technical losses per segment, estimated to the entire period of Concession. For the consolidation of the total value of losses of the company, the same proportion of injected power adopted by Technical Note no. 0229/2013-SRD/ANEEL has been used.

It is worthwhile stressing that ANEEL, through Technical Note no. 88/2017, dated May 24, 2017, defined the Technical Losses of Cepisa as of 12.17% of the injected power until the first full tariff review after the execution of the Concession Agreements resulting from the bidding procedure. That is, the methodology described in this section is applicable from the first RTP simulated, which will occur in 2023.

c) Results

Graph 8 presents the averages of losses per voltage segment of the comparable companies and Cepisa.


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The trajectory of reduction will be the result of the comparison between the goal and the starting point, both considering the non-technical losses of the measured market. As a general rule, the definition of the trajectory will observe the limits of annual reduction defined in equations (I) and (II). In case the trajectory calculated for the concessionaire surpasses the maximum annual rate of reduction defined by the equation, the limit of the reduction shall prevail.

iii. Definition of the Starting Point

The starting point of non-technical losses is a referential value for the tariff year immediately before the year of the tariff review. In the definition of the starting point of nontechnical losses, the percentage of non-technical losses of the measured market is used. The definition of the starting point will be given by:· Group 1: Maximum 7.50%; Minimum (Goal 3, Measured CRTP, Average of the last 4 years);· Group 2: Maximum 2.50%; Minimum (Goal 3, Measured CRTP, Average of the last 4 years).

The exceptions of the general rule are applied in the following cases:

1. When the company has already been adopting low levels of non-technical losses, below 7.50% to companies of Group 1 and below 2.50% to companies of Group 2, then the average of non-technical losses adopted over the measured market in the last four (4) calendar years shall be considered;

2. Companies with low probability of comparison shall be subject to a complementary analysis and a diagnostics analysis that take into account the degree of effort of the Distributor to combat losses;

3. Concessionaires whose goals to be established by the methodology are greater than the starting point established by the goal of 3CRTP and not included in the item above. Then: a. In case the goal obtained with the non-technical losses of the company of 3CRTP is greater than the goal established with the most recent loss, the goal obtained with the most recent loss will be used as the starting point, without trajectory of reduction; b. In case the goal obtained with the non-technical losses of the company of 3CRTP is greater than the starting point, but smaller than the goal established with the most recent loss, the goal obtained with the non-technical losses of 3CRTP shall be used as the starting point, without trajectory of reduction; c. In case the goal obtained with the non-technical losses of the company of 3CRTP is smaller than the starting point, the starting point shall be defined according to the equations of items (iii.a) and (iii.b), however without trajectory of reduction.

In case the goal obtained with the non-technical losses of the company of 3CRTP is greater than the goal established with the most recent loss, the goal obtained with the most recent loss will be used as the starting point, without trajectory of reduction;


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Ác: participation of consumption class C in the total revenues verified in the test year; RIc: percentage of regulatory non-recoverable revenues, related to class C, according to the tables in PRORET Sub-module 2.2A (tables 2 and 3).

Most components of the equations above will be presented in sections, where Portion B and the results from the tariff transactions are discussed. For ICMS and PIS/Cofins rates, the values used in the tariff adjustment process from 2016 are adopted. For Celpisa, the values are 22.78% for ICMS and 6.64% for PIS/Cofins. These rates are kept constant over the period of analysis.

The percentage of regulatory non-recoverable revenues is obtained using the methodology in TN No. 107/2015 and presented in sub-module 2.2A of PRORET, and are also kept constant over the period of analysis: 1.29% for residential; 0.94% for industrial; 0.55% for commercial; 1.18% for rural; 0.22% for public authority; 0.05% for public lighting; 0.05% for public services.

In addition to the regulatory calculation, the values of the observed default to be used in the calculation of the cash flow have also been estimated. The average revenues not invoiced in the period from 49 to 60 months until the end of 2016 were adopted as starting point, as informed by the distributor. The values obtained and applied in the calculation for 2017 were: 2.95% for residential; 5.88% for industrial; 2.92% for commercial; 6.21% for rural; 2.,95% for public authority; 1.74% for public lighting; 0.78% for public services. It was assumed that these values will be converted into the regulatory percentage within 10 years.

4.3. Methodology for definition of Portion B

The definitions used for the calculation of Portion B are presented in Official Letter no. 113/2017-DR/ANEEL with the draft of the concession agreement - as well as definitions for the Portion A and tariff operations. Except for certain particularities, the definitions follow the methodologies presented in versions “A” of PRORET, as presented below. Note that the elements analyzed below are of regulatory nature and refer to the concession of the public service.

The calculation of the value of Portion B is different between the processes of tariff review and adjustment. In the tariff adjustment procedure, the methodology from sub-module 3.1A of PRORET is followed.

First, the Value of Portion B in the test year (12 months prior to the tariff adjustment) –also called VPB0 component -, is calculated as the quotient of the division of the Value of Portion B from the reference market (both from the previous tariff process) multiplied by the value from the reference market of the current process.

Then, VPB0 is adjusted to recompose the elements, which are excluded from the previous process: Other Revenues, Demand Surplus and Reactive Excess. In the first tariff adjustment of the analyzed concessionaires (2017), an adjustment factor calculated by ANEEL according to Public Hearing No. 58/2016 (DR1 Factor) is used. For the other years, the so-called Pbi-1 Factor is estimated annually based on the data from the previous tariff process (t-1).


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4.3.2. Operational costs and Factor Xt

The Efficient Operational Costs are one of the main components to estimate the Value of Portion B in the Tariff Review processes (CAOM component in the formula for VPB calculation). The methodology used to calculate the efficient operating costs is presented in Official Letter no. 113/2017-DR/ANEEL, clause six, and follows in general lines the provisions of submodule 2.2A of PRORET. A few particularities of the Official Letter will be described throughout the methodology.

Under regulatory point of view, such costs refer to the figures for Personnel, Material, Outsourced Services, Other Operational costs, Taxes and Insurance related to the Electric Power Distribution and Sale activity (PMSO). According to specifications in TN No. 66/2015, PMSO shall be adjusted in some points, particularly for Personnel and Other costs. In the Personnel data, the values of actuarial deficits and surpluses and the retirement and/or voluntary dismissal programs are excluded, while in Others, only the following are considered: indemnities for loss and damage, proper power consumption, expenses for trainees and job initiation program, expenses for consumer advising, expenses for internal communication and reprography, collection fee, bank fees and judicial labor sentences. Such adjustments are applied by ANEEL for tariff reviews and were considered to compose the PMSO data to be projected within this analysis.

The approach used by ANEEL for the calculation of the efficient operational costs in the periodic tariff review seeks defining the efficient cost level for the performance of the processes, according to the conditions provided in the concession contracts and the regulation, assuring adequate service provision and that the assets will keep their service capacity unchanged throughout their service life. In the definition of the efficient operational costs, the costs of the distributors, the efficient cost level and the characteristics of the concession area will be observed.

ANEEL uses the non-parametric model called DEA (Data Envelopment Analysis), whose purpose is to define a production/variable cost boarder as a way to identify the level of efficiency of the companies. The model considers PMSO, with the adjustments mentioned above, as production input. The values are also adjusted by salary indexes, for companies, which work in regions where labor cost is cheaper, not to have competitive advantage, and thus, masking their efficiency score.

The products considered in 4CRTP were: Grid (underground grid, air-borne distribution grid and high voltage grid), consumers, average market (weighted by voltage level), NonTechnical Losses and quality (interrupted consumer hour). Using a sample of 61 companies for the period from 2011 to 2013, ANEEL obtained the efficiency scores in the DEA model as presented in Table 36.


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variation of the consumption units and average growth of the consumption units. The values that appear in Equation 28 are the results for the parameters obtained by means of the regression.

The update of these parameters, considering that there is no methodological change, requires construction of a market and total cost database, including the Capital cost, which requires estimation of a base of assets for each distribution concessionaire in the country. According to PRORET 2.5A, the productivity calculation parameters will be updated in 2019, to be applied in 2020. As there is no updated database, it was considered relevant to keep the format and the parameters of the formula approved for 4CRTP along the whole analyzed period.

For evaluation of the annual variation of the invoiced market – average MWh -, the growth values of the low, medium and high voltage markets are weighted by the share of each voltage range in the formation of Portion B. The weights for each voltage level are fixed and presented in sub-module 2.5A of PRORET. The market and the consumption units used for projection were presented in a specific section in this Report.

Between 2018 and 2022, component Pd will be kept equal to zero, following the proposal of sub-clause three of the Transitory Provisions of the draft concession contract (Document No. 113/2017). The same will be done for component T, once there is also provision to use verified values observed for operational costs, not justifying the adoption of efficiency trajectory.

Technical Note No. 88/2017-SRM/SGT/SRD/ANEEL, which accompanies Public Inquiry ANEEL No. 32/2017, presents values to be adopted for the designated concessionaires for components Pd and T of Factor X in the adjustment process in 2017.

Component Q of Factor X seeks quantifying not only the technical quality, but the commercial performance of the concessionaire as well. The technical aspects are measured by DEC and FEC, which will be discussed hereunder. The commercial aspects are measured by means of five indicators, presented in the following Table.


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4.3.4.Demand Surplus, Reactive Excess and Other Revenues

Sub-module 2.7A of PRORET classified Other revenues in three categories: (i) activities inherent to the electric power distribution service; (ii) complementary activities; and (iii) atypical activities.

The revenues inherent to the electric power distribution service are additional to the power supply, but are still part of the essence of the electric power distribution concession, for which the expenses incurred while providing the services are already contemplated in the revenues of the regulated service. In this category, the revenues obtained from connection charges and chargeable services as included; as well as the revenues determined for Demand Surplus and Reactive Excess; the purpose of their collection is to incentive optimized use of the grid and efficient consumption of power, without effective service compensation by the concessionaire.

The complementary activities are those, whose expenses are not clearly identified and are already covered by the revenues coming from the regulated activity. In this sub-group, the revenues from share of infrastructure and communication systems (PLC) are allocated.

The atypical activities are those, on which administration and management criteria are imposed, which enable full distinction of the cost and income accounting. They are composed of revenues coming from provision of services to third parties (operation and maintenance, consulting, communication and engineering) and charge for the agreement collection in the energy bills.

From the most recent information about Other revenues supplied by the concessionaire, it was adopted as assumption that it will evolve according to the growth of IGP-M, as it is about the price index used by ANEEL for financial update of the regulatory values of Other Revenues. This indicates maintenance of the current levels of other revenues, without additional efforts for their expansion. Such case reflects a reduction of the incentives for generation of other revenues, once there was reduction of the period, in which it is possible gain benefits from this source of revenues. Upon the last update, PRORET, the other revenues are excluded from Portion B annually, and not only in the tariff review processes.

For the set of analyzed concessionaires, it should be noted that the readjustments of 2017 and 2019 used the model of shared revenues of 3CRTP. The application of the current shared methodology will only occur in the first tariff review procedure (2020). The obtained results are presented in Graph 14.


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4.3.5. DEC and FEC Indicators

The regulation of the continuity in the Brazilian Electric Sector – started in the 70s by means of DNAEE Ordinance No. 046/1978 – has underwent successive amendments and improvements until nowadays. After the creation of ANEEL, Aneel Resolution No. 024/2000 (REN No. 024/00) was approved, in which the regulation of the continuity with the new tariff regimen was accounted: the price cap. In this regimen, the regulator seeks to stimulate the distribution concessionaires to provide their services more efficiently, i.e., lower costs and prudent investments. However, for the seek for maximization of the return from the business not lead to worsening of the service quality, ANEEL developed a complementary regulatory mechanism, which sets standards (limits or targets) to be met by the concessionaires under penalties of sanctions and compensations for non-fulfillment.

a) Concepts and History of Calculation of the Indicators

The Distributor determines the continuity of the service provided to the consumers by means of individual indicators regarding the time and the number of times a consumption unit has remained without electric power in given period. Such indicators are submitted to ANEEL periodically, and ANEEL is entitled to inspect the calculation process and assess them from the regulatory point of view. The individual indicators are: DIC - Individual Interruption Duration per Consumption unit or Point of Connection; FIC – Frequency of Individual Interruption per Consumption unit or Point of Connection; DMIC – Maximum duration of continuous interruption per consumption unit or point of connection; and DICRI - Individual duration of the interruption on a critical day per consumption unit or point of connection.

The follow-up of the individual indicators is done by means of limits, also individual, which are defined for monthly, quarterly and annual periods in relation to the DIC and FIC indicators. The limit of the DMIC indicator is defined for a monthly period, while the limit of the DICRI indicator is defined for each interruption on a critical day.

When the limits of the individual continuity indicators are violated, the Distributor shall compensate the consumer financially by means of direct discount in the bill within two months

after the calculation of the violation. As it will be approached in section 4.3.6, the formula defined by the Regulator for the calculation of the compensation considers the percentage of excess valued by a financial charge.

From the values calculated for the individual DIC and FIC indicators, group indicators (DEC and FEC) are obtained, which reflect he average of the continuity of the provided service for given conglomerate of consumers. Normally, the group indicators are calculated both at level of groups of consumption units (subdivisions of the concession area) and at company level (the entire concession area).

The graphs below demonstrate, to the distributor, the evolution of the calculated DEC and FEC indicators and the regulatory limits homologated for the period from 2013 to 2016. In addition, for year 2017, it demonstrates the limit of internal collective indicators ²⁶DECi e FECi

²⁶Internal limits were defined for the manageable part of the indicators by the Distributor according to Normative Resolution No. 748/16, which set forth the terms and conditions for provision of public service of electric power


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Finally, ANEEL defines criteria to handle specific situations of target calculation, such as: (i) the heterogeneous groups; (ii) the groups with very high part of the indicator related to the supply; and (iii) the groups with targets, which imposes high annual reduction rates.

For the handling of the heterogeneous groups, an index – Score ANI – is calculated, which determines whether the heterogeneous group has, average, attributes with higher complexity (when positive) or lower complexity (when negative), when compared to the other groups from its cluster. Score ANI may change the percentile used to define the regulatory target of the heterogeneous group and consequently, change the trajectory of the limits for the analyzed tariff cycle.

For handling of the groups with high share of supply in the indicators (in case, the limit defined at 9% for DEC and 15% for FEC is exceeded), the trajectory of the limits of the group is attenuated diluting the difference between the calculated value of the external indicator and the average of the grouped values of the external indicator of the similar groups in 4 years.

The last treatment given is in relation to the groups with very intensive limit-reduction trajectory, defining maximum annual reduction values of 8 hours for DEC and 5 interruptions for FEC. Thus, the trajectory of reduction is restricted in case it has differences greater than these limits in successive years.

c) Premises to Forecasting the Verified DEC and FEC Indicators (or real)

The projections for the calculated (or verified) service quality indicators – DEC and FEC –follow three particular moments of the new concession. The first moment is characterized with the adoption of Temporary Provision regimen in force in 2017 and possibly, in the beginning of 2018, assuming that the calculated indicators remain equal to the values verified in 2016. The second moment of the projections is comprehended between 2019 and 2025, where it is expected not only the new administration to set off, but also the beginning of the results collected by means of the investment and operational efficiency measurements taken as of 2018.

For projection of the indicator performance in this new phase, benchmarking approach was adopted for identification of comparable companies (the same methodology presented in section 4.3.2 - operational costs). Therefore, the same eight companies comparable to Cepisa have been used: CSPE, Eletroacre, Cosern, Bragantina, DMPE-PC, Copel, Escelsa, and Sulgipe.

From the calculated global values of DEC and FEC of these 8 companies for the history from 2003 to 2016, a database was created containing the annual indicator and the reduction value of this indicator in relation to the value in the following year, provided that there is reduction in the following year, considering it null when the indicator increases from one year to the other. This, linear regressions were used in this database (excluding their critical outliers²⁹and the null values), trying to find the equation, which enables relating the annual indicators to the annual reduction capacity, reflecting the decreasing yield of the service quality improvement efforts. In context of high service discontinuity, it is possible to verify considerable decreases in a few years,


²⁹Value that exceeds the average plus three times the standard deviation of the observations.
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the quinquennium – close to the subsequent tariff review of the Distributor³⁸- considering that in general, there is certain flexibility to perform these works, and 30% have been allocated in each year. The other 40% are allocated in the first three years of the quinquennium, at 10% rate for the first two years and 20% for the third year.

The projections of the third (2028-2032), fourth (2033-2037), fifth (2038-2042) and sixth (2043-2047) quinquennial periods for Expansion and Improvement works were based on the previous quinquennium.

It is worthwhile noting that the investments in works of HV and MV Expansion of the second quinquennium (2023-2027) were forecasted differently, since Cepisa already had investments of expansion forecasted for the period from 2023 to 2026. Thus, the need for 2027 was estimated from the average of investments in the past 4 years, i.e., average of investments between 2023 and 2026. For the other quinquenniums, these works had their metrics of forecast similar to the foregoing, where the HV Expansion works had their separations per years equivalent to the HV Improvement works.

It shall be highlighted that for HV expansion works, we considered oscillating factors between quinquennial periods: at every 10 years, the need of investments doubles in relation to the previous quinquennium. The idea is that expansion at high voltage levels tends to withstand short and medium term load increase. For MV and LV works MT, the amounts of investments present a stable trajectory along the five-year cycles, reflecting the more continuous and capillary fulfillment of the load in these voltage levels.

Regarding the investments in Renewal, the projection metrics was different, in two steps: (i) first, the share of the amount destined to Renewal within the investments in PIQ 2018-2022 was calculated; (ii) taking this percentage as a reference, we applied it to the other 25 years of the contract, from 2023 to 2047.

It shall be pointed out that no resources have been projected for PLpT because the program will be closed by the end of 2017.

b) Assumptions for Projection of Non-Electric Investments

In addition to the projections of investments for Expansion, Improvement, and Renewal works at the different voltage levels of the Distributor, it is also necessary to project the amounts related to the investments in Systems. For this purpose, the adopted the assumption that at every five years, it is required to invest 50% of the provision in the first quinquennium (2018-2022).

c) Results

Table 54 presents the results for the projections for each investment segment of the Distributor by quinquennium. To make comparison easy, we present the projected values in real


³⁸The objective is that the capital disbursement of the concessionaire is close to the tariff recognition of the
investments made.


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which entered in operation by Feb/17. The projection of the Closed BRR account was made as described below:· AIS: evolved upon deduction of write-off of assets and update by IPCA.

· Write-off of assets: the average rate of Write-offs/AIS verified from the information in the Evaluation report prepared by Deloitte in the period between the 3rd RTP and Feb/17 was applied to AIS every month.

· Full Use Index (R$): evolves with IPCA.

· Gross Special obligations: evolved upon deduction of write-off of special obligations (OEs) and update by IPCA. Write-off of special obligations was projected by applying, to the gross special obligations of each month, the average rate of write-offs verified in the Evaluation report prepared by Deloitte on AIS in the period between the 3rd RTP and Feb/17.

· 100% Depreciated assets: application of an average growth rate determined from the evolution of the monthly accounting balance of the assets, which have been 100% depreciated, considering the average depreciation rate of each asset and the residual value in the database in Feb/17 informed by the concessionaire.

· Accrued Depreciation: updates the previous accrued depreciation by IPCA, adds the monthly depreciation and takes the write-off depreciation out. o Monthly Depreciation: gross BRR multiplied by the average depreciation rate. o Write-off Depreciation: application of the average write-off depreciation percentage verified in the Evaluation report prepared by Deloitte on the value of write-offs in the projected month.

· Average Depreciation Rate: the depreciation rate drops from the average level determined in Feb/17, considering the increase of the average service life of the assets. o In Feb/17 the weighted average between the depreciation rate of each asset and its weight in the residual AIS (AIS deducting 100% depreciated assets) verified in the Evaluation report prepared by Levin (delivered on 7/27/2017)

was considered, resulting in 3.13%.

o After Feb/17, the rate drops from the average level of 3.13%, because the assets are becoming 100% depreciated (or are written off). The difficulty is to estimate which the expected level at the end of the projection is (2048). For this purpose, we used accounting data made available by the concessionaire in Nov/16 again, projecting the residual AIS year by year. Then, we calculated the average depreciation rates of the assets, weighting the depreciation rates of each asset by its weight in the residual AIS. Once the rate expected in 2048, 2.60%, was obtained, we interpolated the values between Feb/17 and Dec/2048.


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· Operation Warehouse: proportion of the Operation warehouse account in relation to the gross BRR of the Evaluation report prepared by Levin (delivered on 06/30/2017) applied to the gross BRR of the projected month.

· Depreciated Use Index (BRL): segregation of the percentage of assets, which are not land, in the amount of Full IA, using the proportion of the amount of assets in IA of BRR of the 3rd RTP, which are not land. o In the proportion of the land use index, the annual depreciation rate is not applied. o The annual depreciation rate is applied to the proportion of the use index of the other assets.

· Net special obligations: update of the net special obligation accumulated by the previous month by IPCA, deduction of the Special obligations write-offs from the current month and depreciation of the result.

· Deferred Asset: if existing, it will evolve with the IPCA.· Land and Easement: evolves with IPCA.

· RGR Balance (PLpT): Initially the RGR Balance (PLpT) was subject to inflation adjustment by the IPCA and discounted the depreciation of the period between the 3rd RTP and Feb/17. In the subsequent months, the forecast was made with the update of the balance until the previous month, by the IPCA and depreciation of the result.

· RGR Balance (Other Investments): Initially the RGR Balance (PLpT) was subject to inflation adjustment by the IPCA and discounted the depreciation of the period between the 3rd RTP and Feb/17. In the subsequent months, the forecast was made with the update of the balance until the previous month, by the IPCA and depreciation of the result.

The transaction of the Additional BRR (new investments) was made by means of addition of assets projections for the period after Feb/17, deducted from the write-offs related to these assets. The projection of the Additional BRR account was made as described below:· New Assets (Investments): addition of assets from the current month added to the update (IPCA) of the amount accumulated until the previous month, deducting the asset write-offs that entered into operation after Feb/17. The projection was made using the investments presented in section 4.3.7, deducted at 5%. Lower percentage of deductions was considered in the projection period considering that the additional efforts for asset management and modernization of the asset and unification controls will increase the consistency of the information and reduce the differences, which generated these regulatory deductions.

· Asset Write-offs: o By Feb/27: null, considering the reduced probability of the assets to be written off in the first 10 years.


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	o	Between Mar/27 and Feb/32: 1/3 multiplied by the Write-off/AIS ratio of the Closed BRR.
	o	Between Mar/32 and Feb/42: 2/3 multiplied by the Write-off/AIS ratio of the Closed BRR.
	o	From Mar/42 on: full ratio of Write-off/AIS of the Closed BRR.
	Gross special obligations: additions of special obligations and update by IPCA. The compensation amounts for indicator violation, projected between 2019 and 2023,
	were	added to this account following the provisions in Sub-Clause One of Clause
	Nineteen, which stipulates Transitory Provisions in Technical Note No. 182/2017.
	100% Depreciated assets: it was considered null by Feb/32, given the insignificant proportion of assets, which become 100% depreciated in the period. After this date, scaling was done as follows:
	o	Between Mar/32 and Feb/37: 1/3 multiplied by the average proportion of the 100% Depreciated Assets/AIS ratio of companies of the North and the North- East Regions in the 3rd CRTP. The following were companies considered: Celtins, Energisa Borborema, Celpe and Cemar.
	o	Between Mar/37 and Feb/42: 2/3 multiplied by the average proportion of the 100% Depreciated Assets/AIS ratio of companies of the North and the North- East Regions in the 3rd CRTP.
	o	From Mar/42 on: average proportion of the 100% Depreciated Assets/AIS ratio of companies of the North and the North-East Regions in the 3rd CRTP.
		It was considered that in 25 years, the companies from the Eletrobras Group will be with level of 100% depreciated assets similar to that of the compared
	Full Use companies Index (BRL): in the multiplication North and the of North-East AIS (new Regions. assets) from each month by the Use Index/AIS ratio verified in BRR in the Evaluation report prepared by Levin.
	Accrued depreciation: update of the accrued depreciation prior to IPCA and addition of the monthly depreciation.
	Average depreciation rate: the weight of the investments made available in the Quinquennium Investment Plan (PIQ) from 2018 to 2022, presented in Front 5 Report was considered per group of assets and their respective depreciation rates.
	The segregation of each investment per registration unit of the asset base was done according to the big items (ex: substation busbars, power transformers, reclosers, conductors, etc.), when possible. Thus, the average depreciation rate coming from the investments provided in PIQ was obtained, which resulted in 3.13% of the AIS, as it can be observed in Table 59. This rate was kept constant along the 30 years of concession.


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5. Analysis of the distributor

The Company’s purpose is the provision of electric power services, defined in the concession contract as performing studies; developing projects; and construction and operation of production plants, substations, transmission lines, and electric power distribution networks; as well as development activities in the different energy fields, where all activities are regulated by the Brazilian Electricity Regulatory Agency – ANEEL, a department of the Ministry of Mines and Energy – MME.

Pursuant to Concession Agreement No. 04/2001, entered into with the Brazilian Electricity Regulatory Agency (ANEEL) on 02/12/2001, the Company holds the concession for provision of electric energy throughout the territory of the State of Piauí, which expired on 07/07/2015 but may be extended for up to 30 years.

On October 15, 2012, the distributors whose concessions expired in 2015 were offered the right to express interest in extending the concession for an additional period of 30 years, which they did within the deadline.

On July 22, 2016, at the 165th Extraordinary Stockholders’ General Meeting of Centrais

Elétricas Brasileiras S.A - Eletrobras, it was decided not to extend the concession of the Energy Distributors of Eletrobras Group, including Companhia de Centrais Elétricas do Piauí S.A. The ordinance of the Ministry of Mines and Energy no. 422, of August 3, 2016, aimed at guaranteeing the continuity of service in the concession area of the State of Piauí, designated the Company as responsible for the provision of electricity distribution until the assumption by anew concession holder, or until December 31, 2017, whichever occurs first.

The evaluation of the Distributor assumes that a new concession agreement will be signed with the granting authority on 03/01/2018. As of the fiscal year ending December 2016, the Company recorded a loss of R$ 506,761 in its operations, totaling an accumulated loss amount of R$ 2,473,292, with an excess of current liabilities over current assets in the amount of R$ 317,782 and liabilities shortfall of R$ 1,221,738, thus requiring long-term resources to cover short-term debt and improve cash flow.

5.1.Historical Financial Statements

The period considered in the historical analyses of the Company’s financial statements corresponds to the interval between 2014 and 2016. The following indicators were based on the historical audited financial statements of the Company.


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28, 2018, when a new concession contract would be signed, as contemplated under the terms of the Contract Draft made public by Aneel that establishes a concession period of 30 years (from March 1,2018 to February 29, 2048).

The Cash Flows projections therefore considerd the period from January 1, 2017 to February 29, 2048. However, the business value is based only on the Cash Flows projected for the period from March 1, 2018 to February 29, 2048, as decided by BNDES and the Consortium. This period corresponds to the best assumption for the entry of new investors and the start of a new concession contract. The cash flows were projected in current-day Reais (BRL) (taking into account inflation effects) and discounted at a variable WACC rate according to the calculations previously presented. From the valuation base date (Dec. 31, 2016) to the estimated date for the start of the new concession contract (Mar. 1, 2018), only the Brazilian inflation rate (IPCA) was included in the discount factor. This approach was used in order to assure the business risk would not affect the period prior to the entry of the potential investor.

Operating Assumptions

Market demand

The operational assumptions are based on projected energy consumption as it relates to:· Regulated Market: the amount of energy consumed by the clients of the Residential, Commercial, Industrial, Rural and Other Classes, who pay the distributor both for the consumed energy and the distribution service.

· Free Consumers: the amount of energy consumed by the clients of Commercial and Industrial classes that pay the Distributor only for the distribution service, negotiating the price of the consumed energy directly with other market participants.

· Supplied Distributors: the amount of energy delivered to another energy distribution company that serves consumers outside the concession area of the Distributor.

· Regulatory Allowance for Energy Losses: the amount of energy the Distributor would have as a write-off due to Technical Losses, Non-Technical Losses, and Losses in the High Voltage Network, according to the efficiency limits established by Aneel.

· Regulatory Allowance for Contracted Energy: the amount of energy the Distributor needs to generate or buy to supply the consumers (Regulatory Market, Free Consumers, and Supply), considering its Regulatory Allowance for Energy Losses.

· Verified Energy Losses: the amount of energy equivalent to the difference between the sum of purchased and self-generated energy and the billed energy (Regulatory Market, Free Consumers, and Supply), considering Technical Losses, Non-Technical Losses, and Losses in the High Voltage Network. This amount can be different from the Regulatory Allowance for Energy Loss. When the difference between the Verified Losses and the Regulatory Allowance for Energy Losses (in terms of amount of energy), is over the tolerance limit established by ANEEL, a


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portion of the losses is not passed on by the Distributor as tariff, which negatively impacts the value of the Company.

· Required Energy Supply: the amount of energy the Distributor needs to generate or buy to supply the consumers (Regulated Market, Free Consumers, and Supply), considering its index of Verified Energy Losses.

· Excess Contracted Energy: the excess amount of energy the Distributor generates or buys in relation to the Required Energy Supply. This variable was projected according to the contracted amounts informed by the Company’s

Distribution Board. Aditionally, the perspectives of adequacy of the Energy Balance with the achievement of an optimum level of 3% of Excess Contracted Energy were considered. Such optimum level is established in order to guarantee a safety margin to the supply of the demand for energy. Considering a scenario where the Regulatory Allowance for Energy Losses and the Verified Energy Losses were equivalent, the Distributor would be paid by the generation and purchase of energy exceeding the demand up to the upper limit of 5% of Excess Contracted Energy calculated on the Regulatory Allowance for Contracted Energy.

· Self-Generation: the amount of energy the Distributor itself generates through power stations and generators. As explained in this report, because Portion A was considered neutral, we did not explicitly consider the volume of self-generated energy in the projections, although its effects are implicit in the Working Capital projections.

· Energy Purchase: the amount of energy bought by the Distributor to supply its consuming market, equivalent to the Required Energy Supply added to the Excess Contracted Energy.

· VPA Volume: the amount of energy distributed to the Regulated Market consumers and the Supplied Distributors, who pay for the cost of the energy they consume.

· VPB Volume: the amount of energy distributed to the Regulated Market consumers, Free Consumers, and Supplied Distributors, who only pay for the cost of the energy distribution services.

Electricity Rate

The Electricity Rate, the sale price of the electric power to the consumers in R$/MWh, is composed of Portions A and B. The former relates to the cost of energy production and other non-management costs, and the latter relates to returns to investment and the operational margin inherent in the electric power distribution service. The Electricity Rate is adjusted or revised on an annual basis by Aneel.

Our analyses considered the net value of the Electricity Rate meaning the taxes are not projected separately.

· Portion A

Portion A considers five factors in its calculation: Energy Costs, Transportation Costs, Sector Charges, Finance Charges, and Bad Debt.


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The calculation method applied for Portion A considers that its components should not have an impact on the business value (neutrality), since eventual gains or losses related to estimates made during the rate adjustment are neutralized in the adjustment the following year.

However, there are two cases where the principle of neutrality of Portion A is not applicable: i - When the Cost of Capital of the Distributor is different from the Adjustment Rate applied on the Finance Charges. In such case, the impact will be the difference between the net present values calculated using the different rates. Considering that the difference between the rates is not relevant, the Finance Charges were not projected. Thus, we consider the costs related to Energy Purchase, Transportation, and Sector Charges (R$/MWh) as they are used in the Electricity Rate calculatione. ii - When the amount (MWh) of Required Energy Supply is over the limit of 105% of the Regulatory Allowance for Contracted Energy. In such case, the impact is considered in a portion of the costs related to Energy Purchase and Transportation that is not considered in the Electricty Rate calculation. Such an impact is considered in the valuation, as detailed in this report. a) Energy Cost The energy cost is calculated from the Weighted Average Cost of the Energy, in R$/MWh, considering the Energy Purchase Contracts.

Some Energy Purchase Contracts, as is the case for Self-Generation, have a different approach from the Portion A calculation methodology, using costs from the last energy auctions in the regulated market in order to balance the energy costs to consumers from different distributors operating in the Brazilian market.

In these cases, the differences between the effective cost of energy to the Distributor and the cost considered in Portion A is repaid to the Distributor through CCC. Since the projections assume the neutrality of Portion A, such differences were not considered. However, the financial impact related to the period between the payments of Energy Purchase Costs and the CCC repayments is considered in the projections of the Distributor’s Working Capital needs.

The Consortium observed recent cases in the electric power distribution sector where this difference is directly paid to the party responsible for the power generation, and does not impact the distributor’s Working Capital needs and, therefore, does not present a financial impact for the company. This observed trend supports the assumption of neutrality of Portion A considered in the projections, as well as the assumption of normalization of Working Capital levels based on the average financial indicators for the electricity distribution sector, as discussed in next sections.

The costs informed in the last Distributor’s rate adjustment were used to define the

Weighted Average Cost of Energy as of the base date. The referred average cost was projected considering inflation rate assumptions. Since the monetary adjustments are carried out in the following year through the Finance Charges, which were not considered in the valuation, we considered the costs used in the calculation of Portion A to be equivalent to the effective Energy Purchase Costs.


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Thus, the fraction of Portion A related to the Energy Purchase Cost has a negative financial impact in the cases where the considered Energy Purchase is more than 5% higher than the Regulatory Allowance for Contracted Energy. b) Transportation Costs The transportation costs refer to the SIN transmission system. The Transportation Costs are paid by the Distributor in order to receive the purchased energy.

Transportation Costs were projected based on the relation between the Transportation

Cost and the Energy Cost (in R$/MWh) observed in the last Distributor’s rate adjustment. The calculations consider the schedule of interconnections estimated for the Distributor.

Thus, the fraction of Portion A related to the Transportation Cost has a negative financial impact in the cases where the Required Energy Supply is more than 5% higher than the Regulatory Allowance for Contracted Energy. c) Sector Charges The energy distributors collect the applicable Sector Charges from their consumers and transfer the values to the sector funds.

The Sector Charges were projected based on the values considered in the last available rate adjustment. The base values were adjusted considering the projections for the inflation rate.

Due the the assumption of neutrality of Portion A, the Sector Charges do not present financial impact in the valuation. However, the financial impact related to the period between the payment of Sector Charges and the receipt from the consumers is considered in the projections of the Distributor’s Working Capital needs.

d) Financial Charges

As mentioned before, the Finance Charges were not considered in the valuation. e) Bad Debts

Since the projections consider impact of Bad Debts on the cash flows net of the regulatory allowance considered in Portion A, values related to Bad Debts in the calculation of Portion A were not considered.

· Portion B

Portion B compensates the distributor for capital expenditures and operating margin of the electric power distribution service. It is calculated according to the methodology previously explained in this report and divided by the size of the market considered in the rate adjustments/revision to obtain a value expressed in R$/MWh.

Revenues

The projected Net Operating Revenues are composed of four types of revenues:

· Portion A

Product of the Energy Tariff (R$/MWh) related to Portion A and VPA Volume (MWh).


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· Portion B

Product of the Energy Tariff (R$/MWh) related to Portion B and VPB Volume (MWh).

· Sale of the Excess Contracted Energy

The sale of Excess Contracted Energy is considered for the amounts over the regulatory allowance limit (5.0%) in relation to the Required Energy Supply. The energy price considered for the sale of the Excess Contracted Energy is the Difference Liquidation Price (PLD).

The PLD projection considers the average values observed over the last 5 years for the maximum and minimum limits fof PLD as well as the average PLD in the region. The observed values were adjusted considering the inflation rate projections. The projections also considered the historical seasonality of PLD, since the averages were calculated for each month of the year. The value considered in the sale of Excess Contracted Energy is the projected average value between the minimum limit and observed mean of PLD in the region.

· Other Revenues

The other revenues include Chargeable Services and Sharing of Infrastructure, for example. No real growth was projected for those revenues.

All the projections were estimated net of sales tax, such as PIS, COFINS, and ICMS.

Costs

· Energy Purchase

Product of the Energy Purchase (MWh) and the respective cost (R$/MWh) as projected in Portion A.

· Cost of Self-Generation, Fuel and CCC Repayments

As explained before, because of the assumption of neutrality of Portion A, the values related to such items are not considered in this valuation.

· Transportation

Considering the assumption of neutrality of Portion A, the same value in R$/MWh considered in Portion A was considered as transportation costs. The impact on the Company’s valuation refers only to the amount of energy transported that exceeds the Regulatory Allowance for Contracted Energy.

Operating Expenses

In addition to the costs of Energy and Transportation, distributors also presents operational expenses, as described below:

· PMSO

Expenses of Personnel, Materials, Third Parties’ Services, and Other, projected according to the regulatory methodology of Portion B previously explained. The projected PMSO separated into the four components mentioned above is based on the historical average for each type of expense, as observed in the Distributor’s financial statements.


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An additional cost is considered in relation to the eligible PMSO for Portion B, since some distributors’ expenses are not covered by regulatory allowance. This Aditional Cost is projected from historical information made available by the Distribution Board and follows an accelerated path of efficiency gain in relation to PMSO. This assumption is adopted because it is expected that the Distributor will concentrate efforts to reduce costs that do not have a regulatory allowance.

· Bad debts

The bad debt levels were projected as a decreasing percentage of the net revenues. The calculations were made according to the regulatory methodology of Portion B previously explained. As mentioned before, the percentage was calculated net of the regulatory allowance provided as part of Portion A.

Depreciation and Amortization

The projections for depreciation of existing assets (financial, tangible, and fixed) were based on the historical relation between the Depreciation and Amortization Expenses and the the book value of the assets, calculated using the audited Financial Statements of the Distributor.

The average depreciation considered in the calculations of Regulatory Remuneration Base (BRR) was the same used for the new investments.

Financial Results

Since the valuation method used was the Free Cash Flow for the Firm approach, the financial revenues or expenses were not projected.

Income Taxes

The Income Tax (IR) and the Social Contribution on Net Profit (CSLL) were projected, considering 15% with additional 10% tax rate for the IR and 9% rate for the CSLL.

The deferred tax assets were also considered in the projections. The values reported in the financial due diligence were used as of the base date, and the applicable updates for the projection period were considered.

Investiments (Capex)

The projections consider investments in electric and non-electric assets to meet the operational needs of the Distributor, projected as described in item 5.3.7 Long-Term Investment of this report.

Working Capital and Other Adjustments

The Working Capital needs are projected using the value reported in the financial due diligence as of the Base Date, and contains, among other things, the accounts receivable or payable


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7.	References
[1]	E. D. Piauí, “Projeto Kickoff CEPISA,” 2016.
[2]	Eletrobrás, “Eletrobrás Distribuição Piauí,” [Online]. Available: http://www.eletrobraspiaui.com/historico.php. [Acesso em 05 04 2017].
[3]	Eletrobrás, “Eletrobrás Distribuição Piauí,” Eletrobrás, [Online]. Available: http://www.eletrobraspiaui.com/historico.php. [Acesso em 06 04 2017].
[4]	E. D. Piauí, “Desestatização das Distribuidoras Eletrobrás,” 2016.
[5]	“Wikipédia,” [Online]. Available: https://pt.wikipedia.org/wiki/Piau%C3%AD. [Acesso em 06 04 2017].
[6]	E. D. Piauí, “Relatório da Administração Exercício 2015,” 2015.
[7]	B. Mundial, “The Regulatory Challange of Asset VAluation: A Case Study from the Brazilian Electricity Distribution Sector. Energy Working Notes. Energy and Mining Sector Board.,” 2004.
[8]	PricewaterhouseCoopers, “Electricity Lines Business – ODV Valuation. Study for Unison Networks Limited,”
	New Zealand, 2005.
[9]	E. D. Piauí, “Plano Decenal 2017-2026,” 2016.
[10]	K. F. O. &. R. G. Israel, “Why Does Everyone Use the .05 Level of Significance?, Research Quarterly for Exercise and Sport,” 1987.
[11]	J. M. WOOLDRIDGE, “Econometric analysis of cross section and panel data. MIT Press.,” 2010.


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ANNEX I – Extent of Responsibility

This report (the “Report”) was jointly prepared by PricewaterhouseCoopers Corporate Finane & Recovery Ltda. ("PwC CFR") and Siglasul Consultoria Ltda. (“SSU”) for the use of the Brazilian

Development Bank ("BNDES") with the purpose of supporting the privatization process of the Distributors of Eletrobras System (the “Privatization”), in accordance with contract OCS 028/2017 of February 14, 2017 (the “Contract”).

The Report was prepared based on the information and documents provided by the administration of Companhia Energética do Piauí (the “Administration”). The works carried out do not constitute an exam performed according to the audit standards for financial statements; the works of financial valuation are not regulated and do not have specific determined standards and, for this reason, the procedures applied by us were determined in the Official Notice or aligned with BNDES where indicated in this Report.

This analysis considers only one of several methods that may be used to calculate the valuation of a company, with nothing preventing the potential stakeholders from using their own valuation of the projects. Our analysis did not consider eventual synergies, strategic reasons, scale economies, or other benefits or drawbacks that eventual investors could experience in the event of a change of shareholding interests of the Company.

Upon preparing the analysis, we used information and historical and projected data, not audited by the Consortium and provided in writing or orally by the Administration or obtained from the mentioned sources. Additionally, as every prediction is subjective and depends on individual judgment, being subject to uncertainties, we did not present predictions as specific results to be achieved.

Our work considered the contingencies considered in the other reports of diligences prepared by

Consórcio Mais Energia B (the “Consortium”) under the terms of the Contract, that contain more detailed information.

Our work was developed with the the purposes described above, therefore, it should not be used for other purposes.

In the event we become aware, at any time, of facts or information that had not been provided to us, we reserve the right to revise the calculations and the numerical results.

We do not take responsibility for the update of our reports outside the terms provided in the Contract with BNDES.

We do not take any responsibility, outside the legal hypotheses or hypotheses provided in the Contract executed with BNDES, for losses caused to BNDES, to Companhia Energética do Piauí, companies connected thereto, their shareholders, officers, or other parties, as a consequence of use of the data and information provided by Companhia Energética do Piauí, or obtained from other sources, or for the improper use of our reports that does not observe the disclaimers of the previous paragraphs.

Finally, the provisions of Contract OCS no. 28/2017 (and its annexes) and the effective legislation were followed in the preparation of this Report, whose copyrights are granted to BNDES under the terms of art. 8 of Law no. 13.303/2016. All information transmitted in this document may be used and disclosed by BNDES, without any restriction.


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APPENDIX C - Selection of Models for Market Projections

The selection of models to perform market projections was made from the selection of models that would present greater strength among the set of models estimated in each distributor and market. It should be noted that the historical series of consumption per class (MWh) presented very strange characteristics, especially due to the economic crisis experienced by Brazil, resulting in greater variability of the sets of data, structural and momentary breaks, modifying the standard and level of the series, diverging from historical standards previously experienced, and increasing the difficult of finding an ideal regression model to perform forecasts.

The models were selected within the set of adjusted models considering: the most adequate methodology to be deployed; the use of transformations in the historical series; the need of use of auxiliary variables; the analysis of the information criteria; the analysis of the residuals; and the value of the need of change in the period of the observed historical series, in order to obtain more robust models.

Statistical tests were used in the analysis of the residuals to check assumptions of non-correlation of errors, heteroskedasticity, and normality, namely: Ljung-Box, Durbin-Watson, Arch, and Jarque Bera tests. Additionally, the residuals of the models were analyzed, through serial autocorrelation graphs and histograms. In the cases of the statistical tests, the greater the p-value, the greater the evidence of non-violated assumptions. To fix a base value, the significance level of 1% was used (0.01).

Considering all aspects presented, the purpose was to find the most robust forecast models within each market and class. Below are the p-value of the statistical tests carried out in each distributor and class of the final models used in the projections, which were elected as most adequate among the possibilities and specificities of each historical series.


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APPENDIX F – Concepts and Methods of BRR Valuation

In relation to the methods of BRR valuation, there are four main approaches used by the regulators in Brazil and in other countries: (i) the economic or market value; (ii) the replacement cost; (iii) the combination between the economic and replacement methods, resulting in a hybrid approach; and (iv) valuation based on comparison of BRR with similar companies.

Methods Based on the Economic or Market Value

The methods based on the economic value, also called market value, aim at determining the price the investors would be willing to pay for the company or, in other words, the capacity of the company’s assets to generate wealth.

The economic value of the assets may be estimated from three methodologies: i. Auction Bid: corresponds to the minimum bid value of the sale auction or to the winning bid. Only applicable in the cases where there is a bidding process of sale of the assets, as in the case of privatizations. Its value shall coincide with the net present value of the expected cash flow from the point of view of the winner of the auction or the minimum bidder. This method was used by ARSESP (Regulatory Agency of Sanitation and Energy of the State of São Paulo) in the definition of the value of BRR of COMGÁS (Companhia de Gás de São Paulo) [10] ii. Net Present Value (VPL): defined as the sum of the present values of the estimated flows of expenses, taxes, investments, and revenues of the company, calculated with a discount rate (Weighted Average Cost of Capital - WACC). Its preparation requires several assumptions to the projections of the different components of costs and expenses of the regulated company. iii. Share Value: it consists of the value estimated by the quotation of the company’s shares negotiated on a stock exchange. Although it is a simple parameter, it only represents part of the company’s value: the business value under the point of view of the shareholder. Therefore, it excludes the debt value, which is added in separately. This method was used by the electric power and channeled gas and sanitation Regulators of the United Kingdom, OFGEM (Office of Gas and Electricity Markets) and OFWAT (Water Services Regulation Authority), respectively.

Methods Based on the Replacement Cost

The replacement cost method is focused on the physical, taking into account the valuation of existing assets or the design of the optimum configuration of the infrastructure. Therefore, these methods are different from the economic value, which focuses on the value itself.

There are four main methodologies to estimate the replacement cost: i. Historical Corrected Costs (Current Cost Valuation – CCV): it involves the adoption of the original acquisition price (from the accounting records), depreciated based on the service life and updated by monetary indicator (sector or general). The updating of the book value is required when, as occurs in Brazil, the accounting


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standards do not allow the indexation of the acquisition value of fixed assets. This method is adopted in the regulation of sanitation in Colombia and of Melbourne Water in Australia. It is also used in the regulation of the services of electric power distribution and transmission in Norway and The Netherlands. In the Netherlands, this method is also applied to the regulation of natural gas. ii. Depreciated Replacement Cost (DRC): consists of the cost of replacing each asset with a new one that performs the same services and that has the same capacity as the existing asset, replacing it in identical conditions—that is, without considering technological innovations. Additionally, the depreciation is discounted, representing a deduction for the physical deterioration of the asset and its obsolescence. This method is used in the regulation of some sanitation companies of Australia such as the South East Queensland Water and Hobart Water. iii. Depreciated Optimized Replacement Cost (DORC): this measures the current cost of replacing each asset, taking into account the remaining service life and the best technological and economical options existing. It involves the adaptation of the assets to the demand (such as, for example, using use indexes), the revaluation of the assets to the price of new and the consideration of their accumulated depreciation according to the service life elapsed. Such method is used by ARSESP in the regulation of sanitation to SABESP (Companhia de Saneamento Básico do Estado de São Paulo) and by ANEEL in the electric power distribution [10]. iv. New Replacement Cost – VNR (Gross Optimized Replacement Cost –GORC): this is the result of an optimization process of bottom-up engineering and economic parameters. It does not take into consideration the age of the assets, but simulates the assets that would be operated by a new hypothetical and efficient provider, with current costs and technologies. This method, also called Reference Company, is applied in Chile, either in the regulation of electric power distribution or sanitation. It was also applied by ADASA (Agência Reguladora de Águas, Energia e Saneamento do Distrito Federal - Regulatory Agency of Water, Energy, and Sanitation of Distrito Federal) in the regulation of the sanitation services provided by CAESB (Companhia de Saneamento Ambiental do Distrito Federal). In the case of CAESB, the Regulator aimed at respecting the technological history of the investments made [10].

Hybrid Methods

The hybrid methods correspond to combinations between the methods of economic value and replacement cost. Their use has combined pros and cons of both methods. There are two main approaches: i. Optimised Deprival Value (ODV): this consists of the lowest value between the economic value and the replacement cost. Such method is used by the Commerce Commission in regulation of the services of electric power distribution and transmission in New Zealand [11].


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ii. Rolling Forward: this represents the shielding of the initial base, defined from any of the methods previously detailed, and subsequent update of the shielded values until the date of each tariff revision, taking into consideration the monetary indexing, the deduction of the write-offs, the depreciation, and the additions (whose methods may be different from those used for the initial base). This method converts the initial asset into a kind of financial asset. Once incorporated to the BRR, the price of the asset is not reassessed again nor is technological change incorporated.

This method is used by ANEEL in the valuation of the BRR of the electric power distributors in Brazil.

Comparison Value Method

This method is determined from the values associated to the BRR of similar companies with a sample of comparable assets. To its calculation, it is required the establishment of a benchmarking and the gathering of the values defined to the BRR of other companies.


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National Bank for Economic and Social Development ("BNDES") Av. República do Chile, 100 Rio de Janeiro - RJ

C/O: Ms. Lidiane Delesderrier Gonçalves - OCS 028/2017 Agreement Manager June 2017 Dear Sirs,

According to our service agreement OCS 028/2017 ("Agreement") executed between BNDES and the Mais Energia B Consortium ("Consortium") on 2/14/2017, we present the result of our work carried out in the context of Privatization of Eletrobrás System Distributors.

The result of our work is detailed in this document "Product 07: CEPISA Technical-Operational Evaluation Report ("Report"), dated June 2017.

Our work was developed solely for the purpose of advising the BNDES, as those responsible for executing and monitoring the process of privatization of utility companies by Decree 8,893, in CEPISA's evaluation, in accordance with the Agreement, and was based on information provided by CEPISA's management and on the premise that this information is true and complete. This information was not subject to testing or verification, except where expressly stated within the scope of our work.

In case the Report is to be accessed by third parties, it must be made available in full, so that the applicable safeguards and limitations are known.

Regards,

Siglasul Consultoria Ltda., as member of the Consortium

___________________________

__________________________ Luis Fernando Alvarez Leonardo Campos Filho


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This document is a true copy of the original signed version delivered to BNDES and in the possession of Eletrobras.


Summary
1.		Executive summary		5
2.	Company operational characterization and diagnosis			7
	2.1.	Characterization of the company's area of activity		7
	2.2.	Geoelectric Characterization of the Concession		16
	2.3.	Utility's Consumer Market Analysis		19
	2.4.	Operating Indicators		25
	2.5.	Energy Purchase and Sale Indicators		33
	2.6.	Asset Conditions		37
	2.7.	Critical points observed during the field visit and challenges for new utilities		38
3.	Five-Year Investment Plan ("PIQ")			40
4.	References			44
APPENDIX A - Socioeconomic Characterization of the Concession Area				45
APPENDIX B - Consumer Market				48
APPENDIX C - Attendance to Emergency Occurrences				49



Figures
Figure 1 - State of Piauí (capital highlighted)				9
Figure 2 - Federal and State Highways of Piauí				12
Figure 3 - Cumulative total precipitation for the Brazilian states				15
Figure 4 - Average temperatures observed for the Brazilian states				15
Figure 5 - National Interconnected System				16
Figure 6 - Basic grid of Piauí: current configuration and expansions				17
Figure 7 - Map of the state of Piauí with transmission and distribution lines (May 2015)				18
Figure 8 - Rate Groups and Categories				48


Graphs
Graph 1 - Total Road Density (km/km²)				11
Graph 2 - Percentage of Existing and Planned Roads in 2015				12
Graph 3 - DEC Determined Indicator and Limits				26
Graph 4 - FEC Determined Indicator and Limits				26
Graph 5 - Number of Sets that violated their 2016 limits and UC Representation				27
Graph 6 - Histogram of the Cepisa sets: 2016 DEC				28
Graph 7 - Histogram of the Cepisa NUC: 2016 DEC				28
Graph 8 - Histogram of the Cepisa sets: 2016 FEC				28
Graph 9 - Histogram of the Cepisa NUC: 2016 FEC				29
G
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raph 10 - Evolution of the product quality indicator (DRCE)		30
Graph 11 - Evolution of the product quality indicator (DRPE)		30
Graph 12 - Regulatory Technical Losses for Injected Energy		31
Graph 13 - Comparison between Real Non-Technical and Regulatory Losses for the BT Market		33
Graph 14 - Evolution of Base Energy, Bilateral and CCEAR and the percentage of Required Energy recognized by the Energy
Rate.		36
Graph 15 - Mean Times of Service of Emergency Occurrences		49
Graph 16 - Evolution of the Number of Emergency Occurrences with Electric Power Outage Versus the Total		50


Tables
Table 1 - Five-year investment plan - Base Scenario		7
Table 2 - Five-year investment plan - Alternative Scenario		7
Table 3 - Piauí Road Indicators		13
Table 4 - Climatic Characteristics of the state of Piauí		14
Table 5 - Evolution of the Number of Consumers by Voltage Level		19
Table 6 - Market Evolution by Voltage Level		20
Table 7 - Evolution of Revenue by Voltage Level		21
Table 8 – NUC Evolution by Rate Class		21
Table 9 – Market Evolution by Rate Class		22
Table 10 - Evolution of the Medium Market by Rate Class		22
Table 11 - Revenue Evolution by Rate Class		23
Table 12 - Number of Consumers, Market and Revenue by Voltage Level		23
Table 13 - Number of Consumers and Revenue per Rate Class		24
Table 14 - Compensations for Breach of Quality of Service Indicators		25
Table 15 - Compensations for Breach of Product Quality Indicators		30
Table 16 - Results of Regulated Required Energy (MWh) from 2012 to 2016.		35
Table 17 - Results of Contracted Energy (MWh) from 2012 to 2016		35
Table 18 - Investments in progress in the year 2017 by Type of Project		41
Table 19 - Base Scenario: Projection of Five-Year Investments (Detailed Resources by Type of Project)		42
Table 20 - SEs and LD with anticipated investments for 2022 in the drafting of the Five-Year Plan		43
Table 21 - Alternative Scenario: Projection of Five-Year Investment (Resources by Type of Project)		43
Table 22 - Demographic Information, Level of Education and Unemployment Rates		45
Table 23 - Service Access Information		46
Table 24 - Income Information		46
Table 25 - Information on Violence		47




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1. Executive summary

This report aims to fulfill item "4.2.5 - Technical-Operational Evaluation of Eletrobras Group Companies", of the "Invitation to Bid" regarding the "AARH Electronic Bidding #51/2016 - of the National Bank for Economic and Social Development (BNDES)" for Centrais Elétricas do Piauí S.A. (hereinafter referred to as Cepisa for the purposes of this report).

In this document - and in its Appendices - all aspects related to the Invitation to Bid are presented, as described below: (i) operational characterization and diagnosis of the company, identifying the operational challenges in the distributor's concession area, including the current operational indicators; (ii) conditions of assets, services and investments in progress, based on field visits, assessing the most critical points in the concession; and, (iii) investment plan for the next 5 years, with scenarios that envisage the proper operation of the distributor.

Cepisa's concession area, with a range of over 250,000 km², is located in the state of Piauí, in the Northeastern region of Brazil. The state borders the states of Ceará and Pernambuco to the east; Bahia to the south and southeast; Tocantins to the southwest, and Maranhão to the west. With a population of 3.2 million, the state is the second most populous in the Northeast. In its capital only (Teresina), more than 250 thousand people are concentrated [1]. Piauí is a state characterized by having a high percentage of people living in rural areas (33%), and has an illiteracy rate about 2 times higher than the national average. In addition, the state still lacks infrastructure services: according to data from the 2015 PNAD, the state had the highest rate of households without garbage collection in Brazil (31%). With respect to income, according to IPEA/IBGE data for 2014, the state had the lowest GDP per capita in Brazil (BRL 9,811.00) and average household income below the national average (BRL 705.31 for the state of Piauí, versus BRL 782.76 for the North Region and BRL 730.24 for the Northeast Region). These facts influence the high percentage of families having per capita income below the poverty line (24%).

With a moderately high annual average temperature which varies between 25 °C and 40 °C, the state of Piauí is characterized by a low rainfall index and rainfall intensity, despite presenting a considerable keraunic level. The winds are higher than the Brazilian average, but below the average in the Northeast of Brazil.

By analyzing the road infrastructure, we conclude that the state of Piauí has a low road density, and its highways are in a poor situation (only 13% of the total state roads are paved, the majority of which are state roads). Almost all municipal roads are not paved. These facts make commuting difficult within municipal boundaries and between cities.

Regarding the consumer market, Cepisa has its market represented by consumers allocated at the High, Medium and Low Voltage levels ("AT", "MT" and "BT", respectively), the latter being more expressive with respect to the number of consumers (99.8%), market (72.1%) and revenue (79.9%), according to 2016 data. Captive MT users are responsible for about 20% of the market and 17% of revenue. AT's four (4) customers account for 3.2% of the market and only 2.0% of the company's revenue. Noteworthy is the growth of the BT segment in the period between 2012 and 2016 (6% p.a..), which mainly includes the Residential class, with participation of 87.9% of consumers and 53% of Cepisa's revenue.


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By evaluating operational indicators of service delivery, we identified that the company presented a violation of the regulatory limits for the collective indicators of continuity ("DEC" and "FEC") in the period between 2012 and 2016. Despite the violation, the values are close to the target (15% higher with respect to DEC and 17% with respect to FEC, on average) and show improvement over the years. However, the average total time of fulfillment of emergencies is high, around 7.2 hours.

It should be noted that the level of energy losses in the Cepisa system is high, especially with respect to the commercial aspect (Non-Technical Losses, "PNT"). In 2016, this level was equivalent to 37% of the Company's low voltage market, while the regulatory goal for the year was equivalent to 14%.

Regarding the distributor's electrical system, AT lines and towers were observed to be in a good state of preservation and in good construction and use conditions, where the easement strips under the Transmission Lines ("LTs") are maintained clean and without large-sized afforestation. The operating conditions of LTs are generally preserved. However, the same cannot be said of inspected substations ("SEs"), since even in newer SEs there are assets lacking preventive/predictive maintenance. In addition, of the total of 86 SEs of the company, only 24 are controlled remotely. Such facts lead to operating difficulties, greatly increasing the duration of stoppages.

The MT distribution grid, despite differing according to each region of the state, is reasonably well cared for. Poles are level and new construction standards use protected grids, thus increasing system reliability and reducing losses. Unlike the metropolitan region of Teresina, the MT/BT transformers in rural areas do not have adequate protection (circuit breakers and surge arresters installed), and require improvements. Although this is an OPEX action, we emphasize that the plan for tree pruning and land clearing in the easement strips need improvement actions.

For correcting Cepisa's operating conditions, while observing both commercial and technical aspects, a Five-Year Investment Plan ("PIQ") is an integral part of this report, which prioritizes, for the first five years, investments related to the expansion and strengthening of the company's distribution system, as well as resources needed to fight losses and renew assets.

The main sources of information for the PIQ are the "Electricity System Expansion Plan (2017-2026 horizon)", the "Distribution Development Plan ("PDD") for the year 2017" (although provisional¹), the "2015 Results Plan for Improvement of the Distribution Services" and the "2017 Plan for Temporary Rendering of the Electricity Distribution Service", all of which were prepared by Cepisa, among other bibliographic references listed in Chapter 3 - Five-Year Investment Plan ("PIQ").


¹At the time of drafting this report, the 2017 PDD had not yet been delivered to ANEEL.
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user. Subsequently, we will cover the main operating indicators regarding: (i) quality of service; (ii) product quality; (iii) attendance to emergencies; and (iv) power losses, in addition to evaluating energy purchase and sale indicators.

Also in this chapter we will analyze the conditions of the assets observed in the visits made in the field, highlighting critical points and main challenges for a new utility.

2.1.1. Brief History

From the construction of the first plant (1914) until the 1960s, Piauí provided only precarious and isolated power generation and distribution centers through thermoelectric power plants using firewood or diesel oil, with energy supply limited to urban areas and for a few hours at night. In the capital (Teresina), supply was made by the Instituto de Águas e Energia Elétrica (IAEE), while the municipalities were responsible for rural areas within the state. Distribution grids, which used wooden poles, showed large voltage drops and frequent disconnections [2].

In August 1962, Cepisa was incorporated as a joint-stock company under the corporate name of Centrais Elétricas do Piauí S.A., which began the development of an integrated electricity generation, transmission and distribution system in the late 60's [3].

In 1970, the Boa Esperança Hydroelectric Power Plant, built by COHEBE (Companhia Hidrelétrica de Boa Esperança), started operating and the state began to have enough energy to create conditions for the implementation of energy-intensive economic activities. In the same year, Cepisa incorporated the holdings of Companhia de Eletrificação do Nordeste (CERNE) and Companhia Luz e Força da Parnaíba (CLFP), and became the only electricity distribution utility in Piauí.

Starting in 1973, the Distributor began to gain strength in the electric power market, and developed an Electrification Plan for the state of Piauí, connecting the system with Boa Esperança's generation, in addition to constructing two large 69/13,8 kV substations in Teresina, and the 69-kV transmission ring connected to the CHESF substation.

In 1987, State Law #4,126 changed Cepisa's corporate name to Companhia Energética do Piauí and expanded its scope of action within the energy market. After 10 years, when it was authorized by State Law #4,868, the Executive Branch began, on December 19, 1996, the process of disposing state-owned shares that were part of Cepisa's capital stock. In a first phase, Eletrobras increased its shareholding in the company to 48.86% of the common stock and assumed, on January 13, 1997, the management of Cepisa in a manner shared with the State Government. In the same year, on October 20, Eletrobras acquired Cepisa's shareholding control, that is, 98.8% of the shares, assuming the commitment to prepare the company for the privatization process.


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Contracted Energy is the volume of electric energy (MWh) acquired by Base contracts, Bilateral contracts and Energy Trading in the Regulated Environment Contracts ("CCEAR"), which shall be briefly explained below.

Base Energy encompasses:

• Own Generation: energy generated by the distributor to serve its market, according to Law 9,074 of July 7, 1995, with the wording given by Law 10,848 of 2004, which provides that distributors of the National Interconnected System ("SIN") with a market below 500 GWh/year and those that serve Isolated Systems can carry out electric power generation activities, provided that they are fully intended to serve their own markets.

• Angra 1 and 2 Quota: energy marketed by the Angra 1 and Angra 2 generating plants and compulsorily acquired by utilities operating in the SIN, as provided in article 11 of Law #12,111 of 2009.

• Renewed Concession Quota: amount resulting from the apportionment of the physical energy and power guarantee of plants whose concessions were extended pursuant to Law #12,783 of 2013. Allocation of quotas to distributors is established according to ANEEL regulations.

• Itaipu Binacional Quota: Energy sold by Itaipu Binacional with the electricity distribution utilities acquiring shares of the production that were made available to Brazil, according to specific ANEEL regulation. Holders of quotas of the plant's energy are only distributors located in the South and Southeast/Center-West subsystems, which compulsorily acquire the electricity generated by Itaipu. That is, they do not include distributors located in the North and Northeast subsystems.

Bilateral Contracts are freely negotiated between the agents, signed before the enactment of Law #10,848 of 2004, to serve the Interconnected System. Contracts signed to serve the Isolated System before Provisional Measure #466 of July 29, 2009, and those signed by means of a bidding held in the form of a competition or auction, as set forth by Decree #7,246 of July 28, 2010, also correspond to Bilateral Contracts.

Also classified as Bilateral Contracts are the contracting of Distributed Generation energy resulting from vertical divestiture, as provided by Law #10,848 of 2004. In addition, also classified as such are contracts arising from public bidding carried out by distribution agents with own market lower than 500 GWh/year and contracts signed between a utility with market under 500 GWh/year and its current supply agent.


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2.6. Asset Conditions

Between 4/3/2017 and 4/7/2017, a field visit was carried out at Cepisa's premises, aiming at the diagnosis and evaluation of the technical and physical conditions of the utility's assets, in particular the main electrical energy distribution equipment and infrastructure, identifying the state of preservation, critical points, by voltage level, in the distribution grids, as well as the description and evaluation of the operation and maintenance services, when applicable.

The selection of the critical sets on which the team wanted to carry out the inspection was based on the performance of the continuity of service indicators, i.e., sets with the worst performances and with relevant numbers of consumer units were selected. Based on these criteria, the resulting substations were Nazaré, Marambáia, Jockey, Redenção do Gurguéia, Gilbués, Simplício Mendes, Oeiras, Buriti Grande, Novo Oriente, Parnaíba II and Teresina.

However, some of the critical sets are geographically located in regions of difficult logistics, with distances between 350 and 900 km from the capital (Teresina), which would reduce the expected productivity. Thus, some of these sets were replaced by others having attributes similar to that of the previous ones, but easier to access. Thus, the inspected substations were Nazaré, São Pedro, Regeneração, Jockey, Campo Maior, Alto Longá, Castelo, Satélite, Poty, Marambáia and Teresina.

The visit script was validated during the face-to-face meetings with the company's planning and operation departments.

Briefly, it can be said that the 230 kV substations and transmission lines belonging to the main supply systems of the Basic Grid are in good conditions of construction, use and operation, creating evidence that efficient and predictive maintenance is carried out efficiently, in compliance with the maintenance plans reported in the face-to-face interviews.

The distributor's AT electricity distribution system has two (2) 138 kV transmission lines, totaling 141 km; sixty-seven (67) 69 kV distribution lines, totaling 2,650 km; eighty-six (86) substations, totaling 1,353 MVA installed power and a further forty (40) 34.5 kV lines/feeders (which are actually MT, but their lines/circuits often function as sub transmission).


PwC \| Loeser e Portela Advogados \| Siglasul	Prepared for BNDES	37

The distributor's AT stretches that have been inspected are in a good state of repair and in good conditions of construction and use, and it is possible to guarantee that the predictive and preventive maintenance plans are executed, keeping the easement strips under the LTs clean and without large afforestation. The operating conditions of LTs are generally preserved. However, this is not directly reflected in the assets of the visited and inspected substations, because even in the newest SEs, inspection activities and basic services are apparently neglected. This may indicate that your major assets only undergo corrective (or emergency) maintenance.

It should be noted that over the years there were no resources to guarantee the necessary investments - provided for in the Ten-Year Plan and in the PDDs - in Cepisa transmission lines and substations. This fact resulted in the commitment of supply of electric power with quality for the entire state of Piauí. In addition, as identified and reported in the interviews, load levels of the SEs in almost all high voltage distribution systems are above 60%.

The MT distribution grid of Piauí has characteristics that change according to each region of the state. In general, the MT distribution system is reasonably well cared for. Poles are level, even with infrastructure sharing with other telecommunication utilities, and new standards use protected grids, increasing system reliability and reducing losses.

In the capital and metropolitan region, the MT/BT transformers have adequate protection, with circuit breakers and with surge arresters installed in the electric regions. This reality is different in rural areas of the state, where there are problems of protection and voltage regulation. We emphasize that the plan for tree pruning and land clearing in the easement strips need improvement actions.

In BT the new construction standard features multiplexed conductors. The operating conditions of the grids are partially preserved, but in those older and longer circuits there are several asset maintenance problems.

The following are the problems observed during the operating visits.

2.7. Critical points observed during the field visit and challenges for new utilities

The following is a summary of the main critical points observed during the field visit conducted between 4/3/2017 and 4/7/2017 and the resulting challenges for new utilities from the point of view of the need for specific investments in the Company's distribution system, which should be included in the Five-Year Investment Plan ("PIQ"), which will be summarized in Chapter 3.

2.7.1. High-voltage distribution system and substations

As mentioned previously, the stretches of the transmission lines of the visited AT distribution systems are in a good state of preservation and in good conditions of construction and use, and it is possible to guarantee that the plans for predictive and preventive maintenance are carried out, keeping the easement strips under the LTs clean and without large afforestation. The operating conditions of LTs are generally preserved.

However, in substations the situation is more critical: it was identified and reported in the interviews that the load levels of SEs are above 60% in almost all AT distribution systems. Loadability


PwC \| Loeser e Portela Advogados \| Siglasul	Prepared for BNDES	38

problems exist in 52 SEs out of a total of 86 (and this is largely due to a lack of investment in recent years). To get an idea, of the total of SE's only 24 are controlled remotely. Such facts lead to operating difficulties, greatly increasing the duration of stoppages. We also identified that there is a shortage of short-circuit studies in the company.

As identified in the PIQ, there are ongoing investments in SEs and LTs in 2017. However, these become more intensive in the projection for the next 5 years, especially in 2018, 2020 and 2021. In addition, the amounts intended for this voltage level represent approximately 40% of the investments projected for the utility, and SE automations were placed among the priority investments.

2.7.2. Medium and low voltage distribution system

In the metropolitan region of Teresina, the MT distribution grids are characterized by the high levels of feeder loads, with direct losses to the operation and maneuvering due to a lack of flexibility of relocation or load transfer between them. In emergency and short-term conditions, the interconnection between feeders happens in stretches where the drivers are inadequate and exceed their nominal capacities, increasing the risks to the system.

The structures used in the coastal region of the state are not adequate, due to the high pollution index and saline aggressiveness; thus, poles and hardware in general, insulators, crossings etc. have a life expectancy always below what can be expected in any other regions. Wear and deterioration are premature, and the volume of inspection and maintenance services are ever increasing. In this region, breaking of conductors with phase-ground short-circuits is common, which depending on the area and distances, these high impedance faults are not able to sensitize the protection, making the event very dangerous, and may cause accidents.

The long 13.8 kV feeders are critical. Installed in more distant regions that do not support entry of new customers into MT, it creates evidence of the lack of basic investments to meet market demands in regions with high growth potential. We add the fact of long rural stretches related to PLPT.

The PIQ incorporates, especially in the years 2018 to 2020, large amounts of investments in expansion and improvement of medium voltage grid and that can greatly contribute to correcting the problems in this voltage level.

Regarding the distribution transformers, it is noteworthy that in 2015, 2,333 units were broken down, representing an average annual failure rate of 3.7%. Load balancing is not performed in most circuits (new connections are commonly performed at the phases of easiest handling). Another great offender as the cause of the burnings of these assets are the clandestine connections, which, without control, end up causing excessive overloads and even short-circuits in the transformers' BT.


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Large amounts of investment in expansion and improvement of the low-voltage grid are incorporated into the PIQ, especially in the years 2019 to 2021, which in addition to contributing to the reduction of commercial losses, will produce technical benefits such as reduction of voltage unbalance problems and burning of transformers. However, not related to investments, it is recommended to carry out a plan for correcting and controlling the connection of loads (phasing).

3. Five-Year Investment Plan ("PIQ")

The objective of the PIQ is to present, based on technical and economic evaluations, a five-year investment plan - 2018 to 2022 horizon - for Cepisa's electric energy distribution concession area, with reference to the projects planned as necessary to meet the demand for new connections in the scope of the vegetative growth of the market¹⁷, improvement of the performance indicators of service continuity, reduction of electrical losses, as well as adjustments and implementations of computerized systems for support in commercial management and distribution.

The following summarizes the main points of the adopted methodology, the contracted investments in progress and the summary of the consolidated amounts of projected annual investments.

In order to verify the investment needs, the information provided in the Data Room by Cepisa was used, namely: "Electrical System Expansion Plan (2017-2026 horizon)", "Distribution Development Plan ("PDD") for the year 2017" (although provisional ¹⁸), "Results Plan for the Improvement of Distribution Services, 2015" and "Plan for Temporary Rendering of Electricity Distribution Service, 2017". In addition, we used information obtained by the company's planning area, obtained through face-to-face meetings and conference call.

Initially, we present in Table 18 a summary, by type of project and voltage level, of the investments in progress reported by Cepisa. In total, BRL 123.23 million are intended for projects/investments planned for the year 2017¹⁹.

¹⁷Cepisa does not present projections of new connections between 2018 and 2022 under the Programa Luz Para Todos ("PLPT") program. The expectation is to finalize the universalization of supply throughout the year 2017.

¹⁸At the time of drafting this report, the 2017 PDD had not yet been delivered to ANEEL.

¹⁹The amounts set forth in this section relate to projects in progress or which are in the process of signing a contract. The figures shown are estimated: therefore, they may change during the year.


PwC \| Loeser e Portela Advogados \| Siglasul	Prepared for BNDES	40

National Bank for Economic and Social Development ("BNDES")

Av. República do Chile, 100 Rio de Janeiro/RJ

September 18, 2017 Dear Sirs,

As requested by BNDES and in compliance the with terms and conditions of Electronic Tender AARH No. 51/2016, of OCS Contract No.

28/2017 (the “Contract”) dated February 14, 2017, and the provisions of section 80 of Law No. 13,303/2016, we have prepared this summary containing a presentation of key issues identified by us during the environmental assessment work carried out in Companhia Energética do

Piauí (“CEPISA”).

The scope of our services was limited to the procedures described in item 4.2.7 of Annex I to the Contract. This summary does not include all the issues identified and presented in the Environmental Assessment Report dated May 5, 2017, and should thus be reviewed together with the remainder of the report for a comprehensive understanding of the issues identified.

Our work involved review of documents made available in databases, interviews with managers in charge of the environmental activities of the company and on-site visits to six substation facilities.

The information used in our work was provided by the company's management and reviewed on the premise that it is true and complete. Except as expressly stated in the scope of our work, this information was not subject to testing or verification.

The work carried out does not constitute an examination performed in accordance with financial statement auditing standards. Due diligence works are unregulated and not subject to specific standards; for this reason, the procedures applied in our work were those determined in the Final Tender Protocol, and PwC is not responsible for any inadequacies of such procedures in achieving the goals determined by BNDES. Other matters could have been detected and reported if PwC had been asked to perform additional procedures.

Yours faithfully,

PricewaterhouseCoopers Corporate Finance & Recovery Ltda. acting as consortium leader

/s./ Rogério Roberto Gollo /s./ Luciano Jorge Moreira Sampaio Junior

This document is a true copy of the original signed version delivered to BNDES and in the possession of Eletrobras.


*Summary of key issues identified*

Below is a summary of key issues identified during the environmental assessment work. This summary does not include all issues identified and
presented in the Environmental Assessment Report. Accordingly, it should be reviewed together with the remainder of the report for a
comprehensive understanding of the issues identified.

1 Purpose and limitations of the work	2 Summary of key issues identified:

The work was carried out based on review of documents made available in	•	Facilities operate without the required environmental operation license and
databases, interviews with managers in charge of the environmental activities		other licenses such as the Fire Brigade Inspection Service Certificate
of the company and on-site visits to three substation and two maintenance and		(FBISC) and the IBAMA Federal Technical Registration (IFTR)
storage facilities.	•	Noncompliance with the terms and conditions of operating licenses
The purpose of the work was to evaluate key environmental and social issues of	•	Substation noise levels not monitored
CEPISA in light of the applicable laws and regulations, review how such issues
are managed from environmental and social standpoints, and identify potential	•	Lack of documents such as Solid Waste Management Plans (SWMPs) and
deficiencies and situations that may result in significant risks and costs to the		Solid Waste Inventories (SWIs)
company.	•	Incorrect storage and disposal of hazardous solid wastes
The following topics were reviewed: solid wastes, PCB/ascarel, noise,	•	Unlicensed use of artesian wells (drinkability not monitored also)
atmospheric emissions, wastewaters, water resources, permanent preservation
areas, plant suppression, service providers, environmental accidents,	•	Transformer explosion incidents
environmental liabilities, easement trespassing, conflicts with indigenous	•	Oil stains found on non-impervious soils
populations, engagement practices and interaction with surrounding
populations, as well as assessments, fines and consent agreements.	•	Painting activities carried out without environmental controls
	•	Substations and maintenance activities lack appropriate containment
The scope of the work did not include generation of additional data through		systems and oil-water separator boxes
collection and analysis of soil and water, atmospheric emission and wastewater
samples, nor was any evaluation performed for the purpose of checking	•	Old, pre-1980 transformers in use and untested for PCB/ascarel
compliance with laws related to workers' health and safety.


Eletrobras System Distributor
Privatization PwC	3

Summary of key issues identified

Below is a summary of key issues identified during the environmental assessment work. This summary does not include all issues identified and presented in the Environmental Assessment Report. Accordingly, it should be reviewed together with the remainder of the report for a comprehensive understanding of the issues identified.

3 Estimate of costs to remedy issues identified

An estimated amount between R$ 15.2 million and R$ 67.2 million, approximately, is required in order to remedy and mitigate some of the previously highlighted issues and their respective potential impacts, as shown in the chart below.

Cost estimates do not include the expense with fines incurred by the company due to noncompliance with any applicable laws and regulations. Fines and assessments provided for in the applicable environmental laws and regulations vary substantially in amount; for this reason, the exact amounts of fines are contingent, among other considerations, upon evaluation by the competent environmental authorities. Furthermore, amounts reported do not include the cost of mitigating issues that depend on non-measurable variables at the time of writing, such as disposal of hazardous wastes and disposal of any equipment containing PCBs.

At present, it is not the intention of PwC to state that these figures are accurate and that they reflect the amounts effectively required to implement each of the proposed actions. In any case, the figures presented in this summary serve as a reference in connection with the privatization process.

In addition to the estimated expenditures, resolution alternatives for each identified issue as well as the potential violation or infringement, if any, that the company is subject to under the applicable environmental laws and regulations, were presented. This information is included in the Environmental Assessment Report dated May 5, 2017.


Eletrobras System Distributor Privatization PwC	4


To
Banco Nacional de Desenvolvimento Econômico e Social National Bank for Economic and Social
Development (“BNDES”)
Av. República de Chile nº 100
Rio de Janeiro - RJ

F.A.O.: Ms. Lidiane Delesderrier Gonçalves - Manager of Contract OCS 028/2017

May 2017

Dear Sirs,

In accordance with our service agreement OCS 028/2017 (“Agreement”), signed between the BNDES and
Consórcio Mais Energia B (“Consortium”) on February 14, 2017, we present the result of the work that we
undertook in relation to Privatization of the Eletrobrás System’s Distribution Companies.

The result of our work is set out in the document “Product 08: Assessment Report of CEPISA’s Human
Resources (“Report”), dated May 2017.

Our work was carried out solely for the purpose of advising the BNDES, in its capacity as the party
responsible for executing and monitoring the privatization process of the concessionaires in accordance
with Decree 8893 of (sic) in CEPISA’s assessment, in accordance with the Agreement and was based on
information provided by CEPISA’s management and under the assumption that this information is true
and complete. This information was not subject to testing or verification, except as expressly stated in the
scope of our work.

In the case of access to the Report by third parties, it should be made available in full, so that the
applicable safeguards and limitations be known.

Truly yours,

PricewaterhouseCoopers Corporate Finance & Recovery Ltda., in its capacity as leader of the Consortium




Rogério Roberto Gollo	Marcio José Soares Lutterbach


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This document is a true copy of the original signed version delivered to BNDES and in the possession of Eletrobras.


*Summary*
1.	Executive Summary		5
2.	Organizational structure		8
	2.1.	Organizational chart	8
	2.2.	Nature and duties of the bodies:	8
	2.3.	Profile of positions and roles	10
	2.4.	Profile of positions entitled to a bonus (funções gratificadas) and commissioned positions (cargos em
	comissão)		11
	2.5.	Relevant changes to the Organizational Structure	12
3.	Profile of the workforce		13
	3.1.	General information	13
	3.2.	Demographic profile	13
	3.3.	Productive profile of the workforce	15
	3.4.	Development of the workforce	21
	3.5.	Leadership profile	23
	3.6.	Leadership by position	24
	3.7.	Education level of the leadership	25
	3.8.	Length of service of the leadership	26
4.	Staff costs		27
	4.1.	Compensation structure	27
	4.2.	Cost with active employees	29
	4.3.	Interns and apprentices	30
	4.4.	Cost of inactive employees	31
5.	Collective Bargaining Agreements		31
	5.1.	Salary adjustment:	31
	5.2.	Benefits:	32
	5.3.	Payment of other additional amounts:	32
6.	Outsourcing		33
7.	Aspects related to Health and Safety		34
	7.1.	Verification of the existence of health and safety policies and procedures	34
	7.2.	Analysis of the PCMSO	34
	7.3.	Analysis of the PPRA	34
	7.4.	Verification of occupational medical tests	35
	7.5.	Internal Commission for Accident Prevention (CIPA)	35
	7.6.	Survey of work accidents (with/without lost time) and submission of CAT (Communication of accident at
	work)	35
	7.7.	Verification of Delivery of PPE	36
	7.8.	Activity of Occupational Safety Technician	36
	7.9.	Compulsory training courses	37
1.	Staffing and Compensation Plan (PCR)		39
	1.1.	Remuneration structure	40


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1. Executive Summary

This report consists of the first part of the Assessment of the Human Resources of the distribution company Cepisa, as part of the scope of the project “Assessment of the Privatization Process of the Eletrobras System’s Distribution Companies” contracted by BNDES, by means of the Invitation to Bid “Electronic Auction AARH No. 51/2016” with the consortium Consórcio Mais Energia B made up of PwC (leader of the consortium), Siglasul and the law firm Loeser e Portela Advogados.

For the preparation of the analyzes and indicators shown below, the documents provided by Cepisa between February and April 2016 were used.

In this report, we present information in relation to Cepisa’s workforce, taking into account the cut-off date of December 31, 2016. The following assumptions were adopted for the generation and analysis of indicators in relation to personnel:


Takes into account:	Does not take into account:
Employees	Interns
Members of the councils	Young apprentices
Commissioned employees	Pensioners
Employees requisitioned	Retired due to disability
Chief Executive Officer	Employees who left the company as a result of
	the voluntary termination incentive program
	Employees who left the company in
	December/2016
	Employees Assigned

In order to compare the indicators, PwC’s Benchmarking 2016 was used. The indicators were compared with the figures from the Electricity Sector Panel, which is made up of 18 companies in the sector. In case the figures from the Panel were not available, the indicators were compared with the General Market.

· When assessing the indicators generated, we observed:

Taking into account the base date of December 31, 2016, the distribution company’s workforce has 1,934 active employees. This group is made up for the most part of men (86%), with an average age of 44.

· On average, the employees have been with the company for 14 years, and roughly 35% of them have been with the company for more than 20 years.

· The employees are distributed in four broad job positions: fundamental level professional (44%), mid-level operational professional (10%), mid-level support professional (38%) and higher level professional (7%). There are professionals with an education level below and above the level demanded by the public exam. The prevailing education level refers to those who completed high school education (62%), followed by 26% of those who completed higher education.

· Regarding the leaderships, 41% of the leaders are allocated to undergraduate degree positions and 62% of the positions are held by professionals who have been with the company for no more than 10 years. Such characteristics may designate a group that is


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more inclined to changes and innovation, however with a solid knowledge of the

company processes. We have observed that the command range in the Distribution

Company (number of employees per leader) is 19, higher than that of other companies in

the electric energy sector.

The average churn rate for the last 5 years was approximately 10%. Such indicator was affected by terminations resulting from the voluntary termination programs in years 2013 and 2014 (294 employees) and by the engagements resulting from the activity in- sourcing process in 2015 and 2016. 6. In 2016, 81.4 hours/year per capita of absenteeism was registered. The percentage of hours not worked due to absenteeism of Cepisa is 4.39%, which is moderately high if compared to the average of the sector (2.51%). In 2016, 72.26 of overtime/year per capita was registered. The analysis of such indicators shows an opportunity of increase of the team’s productivity, with direct impact on costs.
In terms of professional qualification, an investment was made of approximately 39h/year and R$265.58 (average) per employee to be dedicated to training.
On average, 7.5% of the staff were on leave in the last 5 years, considering all categories of leave.
Despite Cepisa presenting consistent Health and Safety policies, the analysis of the number of accidents in the last 5 years shows the opportunity to adopt more effective practices. The accident rate was 6.85 accident in average, aligned to the electric energy market, which is 6.13.
In relation to personnel management practices, the distribution company operates in an integrated way with the other companies in the Eletrobras System. There are consistent performance evaluation, training and remuneration practices and policies.
The benefits offered by Cepisa are, in their entirety, established in a collective agreement. It should be noted that the package offered is superior to that usually found in the private sector and that there is no differentiation between the benefits offered to managers and employees of the administrative and operating divisions.


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Board of Directors: the Company’s management’s highest joint decision-making body,

whose purpose is to set the general direction of the Company’s business by means of

fundamental management guidelines, as well as the superior control of the Company, by

inspection of compliance with the guidelines established by it, monitoring the implementation

of the approved programs and verification of the results obtained.

Fiscal Council: Joint decision-making body which is responsible for overseeing the actions

of the company’s managers and verifying compliance with the Company’s legal and statutory

duties, examining its financial statements, as well as other powers set forth in specific

legislation.

Internal audit department: To verify compliance with the guidelines and internal and

external normative acts, by means of examining the procedures, records, files, documents and

figures of the functions and activities carried out by the Company.

Executive Board: To ensure the smooth operation of the Company, and to this end, is

endowed with the powers to administer and manage the business, being able to decide on issues

regarding the corporate purpose, except those which by their nature or by the company’s by-

laws are the responsibility of the General Shareholders’ Meeting or of the Board of Directors. It

is overseen by the Chairman of the BD and is made up 6 (six) members, with a term of office of 3

(three) years, with re-election being permitted. It consists of the local Chief Executive Officer

and 5 (five) corporate officers. Regular meetings are held on a weekly basis, and extraordinary

meetings are held whenever necessary. The members of the Executive Board are elected by the

Company’s Board of Directors.

Higher management bodies: presidency and offices

The bodies responsible for the planning, coordination and control of its specific activities,

defined in the Bylaws and in the Company’s Organization Manual.

Presidency: The company’s political-administrative direction and representation are the responsibility of the Presidency, by means of the actions of the Chief Executive Officer.

Commercial Office: It is the responsibility of the Commercial Office to plan, direct, supervise, coordinate and control the activities related to the Company’s commercial relationship with its consumers, in accordance with what is laid down in the concession agreement and the current legislation, as well as those activities related to market projections and energy purchases.

Financial Office: It is the responsibility of the Financial Office to plan, direct, oversee, coordinate and control the activities related to general and cost accounting, accounts payable and receivable, budget, treasury, tax and fiscal management, asset control, insurance, fundraising and investments.

Management Office: It is the responsibility of the Management Office to plan, direct, supervise, coordinate and control those activities related to personnel management, training and development, occupational health and safety, labor and union relations, supplies and management of materials, transport, information technology, organization and methods, documentation and filing and general services.


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Expansion Office: The Expansion Office is responsible for planning, directing, supervising, coordinating and controlling the activities related to the planning and implementation of the expansion of the distribution and sub-transmission electrical systems, in such a way as to guarantee meeting the demand from the consumer market for energy in the concession area, as well as activities related to the environmental management and monitoring of the Company’s activities.

Regulation and Special Projects Office: The Regulation and Special Projects Office is responsible for planning, directing, supervising, coordinating and controlling activities related to technical, commercial and economic-financial regulation, as well as those related to research projects and development, energy efficiency, the ombudsman department and special projects, in accordance with what is laid down by the concession agreement and the current legislation.


	On December 31, 2016, Cepisa’s workforce was made up as shown in the table below.
	Category	Number
a.	Employees in permanent positions*	1,919
b.	Employees required by other bodies and spheres	6
c.	Employees with no employment relationship with the public	2
	authorities (commissioned employees)
d.	Members of the board	6
e.	Chief Executive Officer	1
Total (a+b+c+d-e)		1,934
	*3 employees with suspended contract were disregarded.

In addition to the professionals above, trainees and young apprentices are also a part of Cepisa’s workforce:


	Category	Number
a.	Young apprentice	33
b.	Interns	31
Total (a+b)		64

2.3. Profile of positions and roles

In line with the provisions of the Eletrobras System’s Staffing and Compensation Plan (PCR), Cepisa’s employees are distributed across four broad job positions:



Broad Job Positions	Levels of complexity	Function

Fundamental Level Professional		§	Assistant Electrician
(PF)	I, II	§	Meter reader
		§	Electrician-Driver
Mid-Level Support Professional	I, II, III and IV	§	Administrative Support
(PMS)		§	Accounting Technician


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		§	Electrical Technician,
Mid-Level Operational		§	Telecommunications Technician
Professional (PMO)	I, II, III and IV	§	Safety Technician
		§	Electronics Technician

		§	Lawyer Administrator
		§	Social Communication Analyst
		§	Information and Technology

		§	Archivist Communications Analyst
		§	Social Assistant
Higher Level Professional (PS)	I, II, III and IV	§	Accountant
		§	Economist
		§	Civil Engineer
		§	Electrical Engineer
		§	Occupational Safety Engineer
		§	Occupational Physician
		§	Organizational Psychologist

Note: The PCR also defines the position of Researcher Professional, but this was not adopted by the Distribution Companies.

2.4. Profile of positions entitled to a bonus (funções gratificadas) and commissioned positions (cargos em comissão)

Positions entitled to a bonus are performed by permanent employees, who hold the leadership and advisory positions:


Category	Number
Assistant	9
Manager	80
Location Leader	15
COI Leader	1
President of the CPL	1
Auctioneer	2
Superintendent	1
LIES Supervisor	4
	113

In addition to the positions entitled to a bonus, Cepisa has employees who have no employment relationship with the public administration, who hold commissioned positions (this model of contracting is provided for in Article 37, sub-item II of the Constitution).


Category	Number
Executive Officer Assistant	2
Total	2

In total, Cepisa’s staff includes 115 employees in positions entitled to a bonus and commissioned positions.


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2.5. Relevant changes to the Organizational Structure 2.5.1. Voluntary Termination Incentive Program (PID)

In 2013 and 2014 all the Eletrobras System’s distribution companies implemented the Voluntary Termination Incentive Plan (PID). The following were considered as eligible: employees that had a permanent employment relationship with the distribution company for at least 20 years, taking into account the month of termination, or that retired under the INSS, regardless of the length of their employment relationship with the distribution company. Signing up for the plan was on a voluntary basis and required the employees to make a request for voluntary termination.

294 employees left the company, distributed in two stages:

The· terminations were carried out in two stages:

· Stage 1 (July 2013 to December 2013) – 18 terminated employees Stage 2 (January 2014 to November 2014) – 276 terminated employees

Those terminated under the PID continued to receive medical assistance benefits, for a determined· period, in accordance with the stage during which they were terminated:· Stage 1 - 60 months of continued medical assistance and Stage 2 - 12 months of continued medical assistance.

2.5.2. Approval of the new organizational structure 2017

On January 10, 2017, Cepisa’s Executive Board approved changes in the organizational structure. Among the organizational changes, highlight goes to the fact that two management departments subordinated to the Presidency Office underwent a change in name:


Former Name (2016)	New Name (2017)
Planning and Monitoring Department	Planning, Sustainability and Monitoring
	Department
	Risk, Insurance, Control and Integrity
Sustainability and Conformity Department	Department

In addition, there were also employees who held positions entitled to a bonus who were removed with other people being appointed to these positions.


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Between 21 and 30 years More than 30 years

4. Staff costs

The analysis of Cepisa’s staff costs was based on the payroll reports for December 2016. The costs presented do not include payment of the 13th salary.

In the documents and reports provided by the Distribution company, the following types of employment relationships included on the payroll (receiving some kind of compensation) were identified:


	Category	Number
	EMPLOYEE	1,919
ACTIVE	COMMISSIONED POSITION	2
	DIRECTOR	6
	CHIEF EXECUTIVE OFFICER	1
	REQUISITIONED	6
	RETIRED DUE TO DISABILITY	7
INACTIVE
	PENSIONER	31
	YOUNG APPRENTICES	33
OTHERS	INTERNS	31
	Total	2,036

The figures and analyses shown below only take into account the 1,934 employees deemed to be active.

4.1. Compensation structure

Cepisa’s compensation structure is made up of the following items:

Fixed compensation:

· Salary - established in accordance with the Staffing and Functions Plan, according to positions and complexity. The current salary table can be found in item 1.1, Part II;· Compensation received for vacations, maternity wages and sick pay;· Fees - paid to employees who exercise the function of Executive Officers or members of the Board of Directors and who do not receive a salary;

· Incorporated bonus - bonuses that were incorporated into the salary and which the employee does not stop receiving;· Additional amounts for length of service – additional amounts incorporated to the salary, paid according to the specific term contained in the Distribution company’s collective agreement.


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Variable compensation:

This takes into account the payment of Profit Sharing. The rules for this payment are described in item 2, Part II.

Benefits:


Benefits paid in December 2016 include the following items:
Support for Health and	Support for Education	Family Support
Well-being
Reimbursement for	Educational allowance	Reimbursement for
medications used on a		babysitters
continuous basis
Reimbursement for	Reimbursement for	Day Care Center allowance
medications	undergraduate degree studies
Gym reimbursement	Reimbursement for graduate
	degree studies
Medical-hospital treatment
Meal ticket
Life insurance
Transport allowance

The rules established for payment of the above benefits are specified in section 6 of this report.

Additional Pay:

· Allowance for health hazard;· Risk premium;· Allowance for hardship;· Allowance for night work;

· Allowance for position entitled to a bonus;

· Special bonus for the executive board/board of directors;

Other items (representing one-off payments):

· Overtime;· On call;

· Allowance for relocation;· Travel allowance.


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Employment Relationship	Number	Cost
Employment Relationship	Number	Cost
Apprentices	33	R$33,736.34
Interns	31	R$12,042.31

The internship program includes higher education and senior high school students. The value of the scholarship for senior high-school interns is R$250.00, and R$360.00 for higher education interns.

Trainees are entitled to a R$7.33 transport allowance and a R$8.68 meal ticket per day of internship, as well as collective life insurance.

For apprentices, the normal payment is R$528.00. Like the interns, the apprentices receive meal tickets, a transport allowance and personal accident insurance.

4.4. Cost of inactive employees

In addition to the cost of employees, the payroll also includes payments to inactive employees:

Pensioners, by judicial determination, receive a pension that total a cost of R$28,406.05. This payment is granted to people who are not part of the workforce and who have suffered accidents related to the electricity network.

5. Collective Bargaining Agreements

The Collective Bargaining Agreement is valid nationwide and covers 100% of the employees, and its clauses cover all six Distribution companies analyzed. In addition to this instrument, the company also has a Specific Profit Sharing Agreement.

Over the years the definitions established in previous years have been maintained.


Document	Coverage
Collective bargaining agreement 2016 - 2018	Its clauses cover all the Distribution companies.
Nationwide undertaking
Specific collective bargaining agreement 2016 -2018
Specific undertaking
Specific clauses in the Collective Bargaining	Specific clauses for Cepisa.
Agreement by distribution company
Specific undertaking

5.1.Salary adjustment:


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With regard to the salary increase, under the current agreement the adjustment was 9.28%.

It is usual to establish a 5% advance on the category’s base date (May), with the difference between the advance and the percentage increase granted under the agreement being paid retroactively.


Collective Bargaining	Salary readjustment percentages
Agreement (in percentage)
2012-2013	6.60%
2013-2015	7.90%
2015-2016	8.18%
2016-2018	9.28%

5.2. Benefits:

The collective bargaining agreement establishes the benefits that the Distribution companies’ employees are entitled to. The full list can be found in Part II, item 3. The face value of benefits is generally adjusted by percentages aligned with the percentage defined for the salary increase.

5.3. Payment of other additional amounts:

In addition to the benefits, the collective bargaining agreement and its specific terms provide for the payment of additional amounts. The main elements are shown below:


Clause	Description of the agreement
Allowance for hardship	Payment of 7.5% on top of base salary, plus Additional Pay for length of service, for employees who work on continuous rotating shifts.

Allowance for health hazard	Calculation basis will be the lowest salary in Eletrobras’ salary matrix. It is restricted to percentages of 40%, 20% and 10%, according to the level of unhealthiness classified as maximum, average and minimum levels.


Allowance for night work	Payment of additional amounts for the employees’ extended hours, provided that the working hours occur entirely during the nighttime period.


Risk premium	Indicates adoption of the payment criteria established under Law 12740/2012 for employees who joined the company prior to 12/08/2012.


Overtime	Calculated in accordance with applications of the percentages established in the applicable legislation.

Remuneration for substitution	Amount granted non-cumulatively to the bonus payment for the formal substitute of the holder of a remunerated leadership function for any period greater than 10 days, of the sum in force in the month of payment.



13th salary	Advance of 50% may be requested at the time that the employee takes an annual vacation and should be received jointly with the payment of vacation pay.


Additional pay for length of service (ATS)	An additional amount will be paid to employees for each year of uninterrupted service with the company.


Electrician / driver remuneration	Remunerations as driver for those electricians who habitually perform the functions of Electrician/Driver.


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(GEM)
	1/3 of the normal hourly rate for employees when they are on call as
On call	established under the applicable legislation.
Vacation pay	Payment of vacation remuneration of 75%.

6. Outsourcing

Historically, the Distribution companies have been in the practice of making use of outsourced labor to perform certain functions. This outsourcing is contracted and managed by the contracting area, by the contract manager. In this way, there is no creation of any employment relationship with the outsourced professionals.

In 2013, there were judicial decisions to replace the outsourced labor force (judicial decisions and judgments 2132/2010 - Federal Court of Accounts - Plenary Session and 2303/2012 -Federal Court of Accounts - Plenary) by own staff. Cepisa has created a project to in-source this workforce.

At present, Cepisa has 1,138 outsourced employees, and the in-sourcing proposal will only refer to the functions of meter reader and electrician, totaling 1,130 employees. .

Cepisa contracted 884 professionals to meet in-sourcing needs, as described below:


		Hirings from 2015 to January 2017
Position		Base salary	Compensation and
	Number	for the	benefit costs in the
		position	period
Electrician assistant	149	1,414.61	6,333,708.74
Electrician driver	426	2,480.27	20,193,222.90
Meter reader	298	1,414.61	8,081,967.15
Electrical Technician	11	2,710.23	62,295.20
Total	884		38,281,362.09

It is important to stress that Law 13249/2017 which regulates outsourcing in companies is being discussed and has not yet been ratified, as a result of which the performance of core activities by outsourced professionals may represent a labor exposure and the need for in-sourcing should be considered.


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§ Integrated Management

§ Investment Management and federal programs

The PCR defines five broad job positions that are spread across the I, II, III and IV complexity levels. These complexity levels differ in terms of autonomy, scope of action/responsibility, problem solving and the application of knowledge:


Broad job position	Levels of complexity
Fundamental Level Professional (PF)	I, II
Mid-Level Support Professional (PMS)	I, II, III and IV
Mid-Level Operational Professional (PMO)	I, II, III and IV
Higher Level Professional (PS)	I, II, III and IV
Professional Researcher (PP)	I, II, III and IV

The broad job positions will be separated into different occupations with the aim of providing professionals with the flexibility to assume different roles in the Organization and, in this way, to enable greater alignment between the professional’s activity and the expectations and needs of each person and the Organization, respecting the specific requirements of each education level.

Each position defines specific duties, skills and educational requirements, taking into account the characteristics of the organizational processes and the professional regulations.

1.1. Remuneration structure

Each of the five broad job positions defined in the Eletrobras System’s Career and Compensation Plan has its own pay scale. The pay scale consists of “bands” that are divided into steps:

Bands: Reflect each of the levels of complexity defined for the positions.

Steps: The number of steps per band varies due to the wage spread defined - guided by internal and external market information - and compliance with the methodology governing requirements for accessing the complexity levels of each job position.


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2. Variable compensation

The Eletrobras system includes a profit sharing (PLR) policy for the company’s employees. The maximum amount to be distributed is up to two months’ salary of the year in question, by each company that uses the system.


This profit sharing payment is carried out in accordance with the fulfillment of two steps.
Step	Targets	Impact on the sum to be distributed


STEP 1	Holding company’s net profit target	25%
PROFITABILITY	EBITDA target by company	25%
STEP 2 OPERATIONAL TARGETS	Corporate Performance Targets Contract: -Availability and Generation; -Availability of transmission lines; -Variable Portion Discounted in transmission; -Points achieved on the Bovespa ISE.	50%

Achievement of the targets can be proportional, and there are specific criteria for each one.

Once all the targets linked to the payment of the PLR payment have been achieved, this will be paid 50% in a linear way and 50% in proportion to each employee’s compensation.

As long as they have been with the company since January 1 of the year related to the PLR, permanent employees will be entitled to it, as will those employees transferred from or to other companies, provided they do not receive PLR from their original/assignee companies. If any of the above mentioned employees have interrupted their employment agreement, during the course of the reference year, they will not receive PLR. If they work only part of the time, over the course of the year, due to the date of joining, retirement, dismissal without due cause, termination or leave, they will receive PLR proportionally.

In order for an employee to be entitled to receive PLR, the hours worked by the employee vis-à-vis the total hours required for their position, discounting vacations, maternity leave and leave on account of occupational illness or accidents at work should be equal to or greater than 95%.

Note 1: The tables with the fulfillment levels of the holding company’s net profit targets,

EBITDA by company and operational targets are listed in the PLR normative documents.

Note 2: There are points in relation to which there are still differences between the companies and the unions, to be settled at a later date.

3. Benefits

As reported in section 4, Part I, Personnel Costs, Cepisa provides its employees with a series of benefits, part of which are established in the collective bargaining agreement and part of which are offered at the company’s discretion.


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No practices which are widely adopted by the market were identified, such as differentiated benefits for management positions.

The benefits defined in the collective bargaining agreement, whether in the nationwide agreement, in the nationwide deed of undertaking, in the Distribution companies’ specific deed of undertaking or in the distributor’s specific deed of undertaking are shown in the table below:


Benefit	Present value
	Between 13 and 16 voucher booklets/year each
Food Allowance/Meal Voucher	containing 29 vouchers with a face value of R$37.82.
	Reimbursement of up to R$449.29/month per
	dependent, for dependents up to 17 years of age, not
	cumulative with day-care center allowance, depending on
	the school term (basic education, high school and/or
Educational Allowance	technical college).
	Reimbursement of expenses for uniforms and school
	supplies for recipients of full scholarships (limited to two
	monthly payments).
Day-care	Reimbursement of R$599.05/month per dependent, for
center/kindergarten/babysitter	dependents aged between 6 months and 6 years (limited
allowance	to two monthly payments).
Health treatment outside the	The company will provide assistance and treatment
State	outside· Lack the State of specialists of Piauí in for the medical following treatment conditions: in the
	The place employee where the is employee travelling is on located; business;
	In case of urgent assistance to employees and
	dependents outside their jurisdiction.
	Costs must be previously authorized by Cepisa,
	except for urgent situations.
	In the event that employees or dependents must be
	removed using the following means: air UTI, aircraft
Removal of patient	rent, among other emergency purposes, the expenses
	arising thereof must be authorized by the company.
Sick pay/work accident	A compensation supplement, which includes the
assistance	thirteenth salary, of the amount corresponding to the
	difference between the monthly compensation and the
	benefit received from social security by way of sick
	pay/accident assistance.

Allowance for those with a PCD	Reimbursement of proven expenses for PCD dependents
dependent (who has a	up to a limit of R$843.65.
disability)
	Reimbursement of funeral expenses up to a limit of
Funeral Allowance	R$4,921.28, or R$9,842.57 as a result of death due to an
	accident at work.
Reimbursement of school	The Distributor will reimburse up to a limit of two
materials	monthly payments of the educational allowance or of the


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	day-care center allowance.
Time off for victims of	Paid leave for the employee for a period of between 3 and
domestic violence	5 days.
Time off for medical	Medical observation of family members or dependents of
observation	the health plan: for a period of between 1 and 30 days on
	production of a doctor’s certificate or a medical report.
Time off for death of stepfather	Leave granted for a period of up to 5 days.
or stepmother
	The company will keep this payment only for employees
Allowance - Law 1971	who have not adhered to the Career and Compensation
	Plan – PCR of the Eletrobras system.
	Additional amount awarded on a yearly basis and
Bonus for length of service	calculated based on the base salary, considering only the
(ATS)	length of service effectively provided to the company.
	Cepisa currently has an agreement with Medplan to cover
	the health assistance of its employees under the
	Accredited Network and Free Choice modalities, for the
	beneficiaries and their dependents.
	The following are regarded as legal dependents: children,
	stepchildren, spouse, companion and parents, under the
Medical and hospital assistance	conditions set out in the specific rule.
	The Distributor has a table with the values of each
	procedure. The payment is made by the company, which
	discounts the employee’s co-participation.
	The cost of medical expenses for Cepisa in 2016 was
	R$5,504,846.56. In December 2016 alone, the cost was
	R$418,017.04 .
	The company will provide medical, nursing,
	psychological and social assistance for employees if the
Service accident	medical service provided by the Unified Health System
	and the Health Plan of the company are not sufficient for
	the full recovery of the employee.
	Group life insurance for permanent employees,
	apprentices, interns, board members and executive
	officer, with specified values. Coverage for death for
Life insurance	natural reasons, accidental death, total or partial
	permanent disability due to accident, permanent total
	occupational disability due to illness.
School tests	Paid leave on the days of university admission tests.


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	Partial reimbursement of expenses for higher education
	for those employees who do not yet have a degree or for
Cost allowance for university	courses whose areas of knowledge are considered to be of
students	interest to the company. The company refunds 90% of
	the monthly tuition limited to R$605.85.
	Granted to employees, apprentices and interns, with a
	discount corresponding to 3% of base salary, limited to
Transport allowance	50% of the amount of transport allowance given on a
	monthly basis.

	Cepisa contracts a specialized service to transport
Personal transport	employees working on a shifts system.

	The company reimburses to the employees expenses with
Reimbursement of medications	medications used continuously due to chronic
used continuously	pathologies, such as diabetes and heart diseases, as well
	as medications for mentally impaired children.
	Reimbursement of expenses with physical activity up to
Incentive for physical activity	the limit of R$94,58.
	The Distribution company will pay any medical and
	hospital treatment expenses which are not covered by the
Medical-hospital treatment	health plan for victims of accidents at work and work-
	related illness.
Medication for those who have	The Distribution company pays 100% of the value of
suffered accidents	medicines for victims of accidents at work.

Other incentives offered:

Private Pension Plan - Cepisa uses the “Fundação Cepisa de Seguridade Social” (FACEPI) to offer its employees a Defined Contribution (CD) Supplementary Pension Plan. The employees’ monthly contributions, together with the company’s participation, will create a savings fund, enabling employees, when they retire, to supplement their pension. In 2016, the amount of the normal contributions paid to the private pension plan’s arithmetical reserves was

R$55,383,410.58.

Employee Profit Sharing (PLR) – Eletrobras pays PLR to its permanent employees, after the end of each financial year, provided that the targets established in the Term of Agreement have been achieved. The guidelines for the distribution of the share of the profits are negotiated with the employees’ representative entity, and comply with the provisions of the State Enterprises’ Coordination and Control Council’s (CCE) Resolution No. 10/1995 and Law

10101/2000.

Quality of Life Program - In order to improve and ensure the quality of life of its employees, the company signs an agreement on an annual basis with SESI/AC, the purpose of which is to offer an active quality of life and leisure program, with the creation of groups interested in dance, sport, culture and other fields of entertainment, where employees can exchange experiences and perform at festive events.


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5. Training and development

The educational model of Eletrobras’ distribution companies for the planning and execution of educational action is formally described in its regulations (Corporate Education - Planning and Execution and Development and Training of People), and in UNISE’s (the Eletrobras companies’ University) Corporate Education Plan.

The management of educational action has a hierarchical structure defined both in

Eletrobras’ corporate sphere and in the distribution companies’ local development structures. The educational model’s general guidelines are defined at corporate level and implemented locally, maintaining the strategic alignment between the different companies, while the distribution companies’ specific demands are met by the local corporate education unit.

The structure of Eletrobras’ educational model is based on management by skills. In the process of drawing up the educational plan, the skills that are a priority for the organization are defined based on the business strategy. The educational model is also integrated with the other people management practices such as performance management, the job position and salary plan, and leadership development, promoting a strategic alignment between the various human resources initiatives.

The Eletrobras companies’ corporate education is organized in two organizational structures that are complementary:

· UNISE - the Eletrobras companies’ University: undertakes the role of providing education that is common to the group’s companies. The planning of UNISE’s educational action is described in the Corporate Education Plan, along with the guidelines for execution.

· Each member company’s Corporate Education Unit: this is responsible for meeting the demands for development of each company’s specific skills, in alignment with its strategy and UNISE’s guidelines. This service is achieved by means of drawing up a Local Corporate Education Plan, which is constructed from each employee’s individual development plans and in accordance with the guidelines of each company’s Business and Management Plan.

Education can be categorized as internal when performed on the company’s premises and with internal instructors; as external when performed by an external supplier in which case it may be within Eletrobras facilities or outside; an introductory course that is designed to integrate the new employee into the organization; and contractual training resulting from contracts with equipment or software suppliers who require that the employees receive training. The distribution companies also have short duration distance learning courses offered by TV Corporativa (LUME).

In order to monitor the quality of the training courses and help ensure continuous improvement, feedback and impact assessments are applied to each training course. And at managerial level, educational action is accompanied by monthly and quarterly reports submitted to the Executive Board.

The criteria for participation and certification of employees are clearly defined in the regulations and the procedures in standard forms. The justifications accepted in the case of dropping out are also listed in the regulations, along with the penalties in the case of withdrawal, failure to pass or dismissal from the company. The formalization of the process


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ensures greater transparency and fairness to the employees, with a view to guaranteeing them equal opportunity for participation and development.

An analysis of the documentation provided by the Distribution companies for training and development shows that Eletrobras’ Corporate University offers consistent programs for developing leadership skills, as well as for management, strategy and various aspects related to operations, along with other topics.

Due to budget constraints, the training courses offered by the Distribution companies are more focused on operational aspects and compliance with compulsory training. For these courses the Distribution companies sometimes use the agreement with System S institutions.


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6. Organizational climate

The organizational climate survey aims to monitor the employees’ satisfaction and commitment to the company, as well as to identify training needs and personal/managerial development needs and to align the culture with the actions carried out by the company.

All of the Eletrobras System’s Distribution companies carry out a survey every two years, evaluating the following aspects:


Motivation	People Management	Management’s Philosophy	Work Environment


	Corporate Education	Organizational
Identity		Clarity
	Career and		Working Conditions
Leadership	Compensation	Communication
			Occupational Safety
Interpersonal	Benefits	Institutional Image	and Health
Relationship
	Recognition	Sustainability

The result of the survey is expressed by means of the Favorability Index, which is the result of the average obtained in the four dimensions evaluated.

In the last edition of the survey, which was carried out in 2015, Cepisa’s favorability index was 65.58%.

During the interview with the Human Resources leadership, it was reported that, at present, the points for attention in relation to the climate are the lack of motivation regarding the company’s sales prospects and the excessive burden on the workforce (due to the decrease in the number of employees) vs. the high demand that has been causing lost time due to occupational illnesses.


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National Bank for Economic and Social Development ("BNDES") Av. República do Chile, 100 Rio de Janeiro - RJ

C/O: Ms. Lidiane Delesderrier Gonçalves — Manager of Agreement OCS 028/2017 May 2017

Dear Sirs,

The summary of the outcome of our work "Product 04: Legal Due Diligence Report" for CEPISA ("Report"), dated May 2017, is detailed in this document.

In case this Report is to be accessed by third parties, it must be made available in full, so that the applicable safeguards and limitations are known.

Regards,

Loeser e Portela Advogados, as member of the Consortium

[Signed] [Signed]

Fernando Loeser José Augusto Sollero Figueira

This document is a true copy of the original signed version delivered to BNDES and in the possession of Eletrobras.


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Introduction	Page 4/15

INTRODUCTION

1. This Executive Report ("Report") was carried out as part of the structuring of the privatization operation for Companhia de Energia do Piauí ("CEPISA" or "Company" or "enterprise"), in accordance with the Invitation to Bid corresponding to AARH ELECTRONIC TRADING FLOOR #51/2016 - BNDES - ITEM 1 - "SERVICE B" (economic and financial assessment and legal, accounting, technical-operational and other specialized professional services).

2. In this context, the NATIONAL BANK FOR ECONOMIC AND SOCIAL

DEVELOPMENT (BNDES), through its Bidding Department, pursuant to the provisions of Law #10,520 of 7/17/2002; Decree #5,450 of 5/31/2005; Supplementary Law #123 of 12/14/2006; Decree #8,538 of 10/6/2015; Law #13,303 of 7/1/2016; and DIR Resolution #3.063/2016 (BNDES System Bidding Regulation) provided for the hiring of a company to provide the specialized services described above.

3. Loeser and Portela Advogados, an integral part of Mais Energia Consortium, together with PricewaterhouseCoopers Corporate Finance & Recovery Ltda., PricewaterhouseCoopers Serviços Profissionais Ltda. and Siglasul Consultoria Ltda., pursuant to OCS Agreement #028/2017, executed on February 14, 2017, was contracted to advise BNDES on the structuring of CEPISA privatization operation ("Operation"), specifically with respect to (i) legal aspects related to the structuring and implementation of the Operation; as well as (ii) carrying out limited legal due diligence work through sampling with respect to the Company, which is contemplated in this Executive Report.

4. This Legal Due Diligence resulted in the preparation of this Report, and includes the analysis and assessment of information and documents to identify any issues that may significantly alter the accounting position and/or market value of CEPISA with respect to the following aspects:

(i) corporate, civil and regulatory matters. Tax, labor, social security and environmental aspects (compliance) were carried out by the advisors responsible for the analysis in these departments, and are reflected in their respective reports;

(ii) existing litigation within the administrative and/or legal spheres that affects or may affect, or is in any way related to CEPISA, and the description must contain the details on the litigation, its probable outcome and the amounts involved;


Legal Auditing Executive Report	CEPISA
Introduction	Page 5/15

(iii) status of the assignment and ownership of real estate and equipment registered or likely to be registered in CEPISA's property, plant and equipment, and the regularity of the respective documentation, including before public records, pointing out any existing liens or encumbrances; and

(iv) gathering public information needed to carry out this service.

5. Lastly, this Report was prepared at the request of BNDES and is addressed only to our client (BNDES), and no other person or entity other than BNDES should rely on it; reference to this Report is also prohibited in any other document, as well as its registration or submission to third parties without our prior and explicit authorization and consent. Notwithstanding the foregoing, and provided that the client-attorney relationship (and related rights and obligations) is limited exclusively to BNDES and our firm, (a) BNDES and its advisors may use this Report for analyzing the legal feasibility of the Operation, for its economic and financial structuring and related purposes; and (b) this Report may be sent or disclosed to third parties, at BNDES' sole discretion and liability, which logically includes full disclosure to potential stakeholders in the Operation and their respective advisors.

6. The legal audit, carried out in the period from March 6 to May 12, 2017, was based on documents and information provided by CEPISA related to the Company.

7. The date of 12.31.2016 was set as the base date for issuance of the respective report of the legal audit performed ("Base Date"). It should be noted, however, that some of the information contained in this Report, as expressly indicated therein, may refer to events occurring after the Base Date.

8. The content of this Report is limited to information obtained through the procedures described below, subject to the restrictions listed.

9. The legal audit was conducted according to the following methodology:

(a) submission of initial request for documents and information to representatives of CEPISA designated to attend the audit process;

(b) submission of requests for additional documents and information, based on information obtained during the investigation process;

(c) interviews, meetings and contacts with CEPISA employees working in the various sectors and units of the company, especially those related to the legal and accounting departments;


Legal Auditing Executive Report	CEPISA
Introduction	Page 6/15

(d) obtaining data extracted from CEPISA's process control system;

(e) analysis of the documents and information made available.

10. It is assumed that (i) all copies made available by CEPISA match the originals; (ii) such documents, except when explicitly stated in this report, are complete and authentic; and (iii) the signatures therein belong to persons empowered to represent the respective parties.

11. In some cases, as usual in all legal proceedings, the level of detail in this Report was compromised by the (partial or total) absence of CEPISA's information and documents, especially related to Civil, Tax and Labor Litigation.

12. This Report is not intended to cover all legal aspects related to CEPISA, but mainly those that have a significant impact on the economic-financial analysis for the purpose of recommending the minimum sale price of the Company's shares.

* *


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Introduction	Page 7/15

EXECUTIVE REPORT

A. REGULATORY ASPECTS

1. CEPISA is a designated distributor responsible for providing public electricity distribution services in the areas of municipalities of the state of Piauí listed in ANEEL

Resolution #295/1999, in order to ensure the continuity of service, pursuant to paragraph 1 of article 9 of Law #12,783/2013, and subject to provide such services in accordance with the terms and conditions established in MME Ordinance 388/2016, until assumption by a new utility or until 12.31.2017, whichever occurs first.

2. Centrais Elétricas Brasileiras S.A. ("ELETROBRAS"), the controlling shareholder of CEPISA, agreed to designate its subsidiaries, including CEPISA, as providers of energy distribution services on a temporary basis, provided that, among other conditions: (i) ELETROBRAS does not undertake to guarantee any new obligations that may be assumed by the distributors, in any way, including obligations arising from the provision of temporary services; and (ii) measures be taken to ensure that the transfer of shareholding controls of the distributors occurs by 12.31.2017, in order to avoid liquidation of the distributors and the return of the respective concessions.

3. CEPISA held the concession for operation of public electricity distribution services under the terms of Concession Agreement #04/2001, signed on 2.12.2001, effective until 7.7.2015, and requested extension of its validity within deadline and under the conditions laid down in that agreement. Nevertheless, ELETROBRAS, at its 165^thExtraordinary General Meeting, resolved for: (i) reject the extension of CEPISA's concession; and (ii) approve the assignment of ownership control of the Distributor by 12.31.2017, provided that, until the assignment of the Distributor to a new controller, the Distributor receives directly from the federal government or through a rate all resources and income necessary to operate, maintain and make investments that are related to the public services of the respective distributor. Considering the interest of the Ministry of Mines and Energy ("MME") in promoting the bidding associated with the assignment of control of the legal entity providing energy distribution services with the corresponding granting of a contract to the new controller for a term of 30 (thirty) years, the National Electric Energy Agency ("ANEEL"), at the MME's request, prepared and submitted to public hearing (Public Hearing #094/2016) the draft of the concession agreement prepared in accordance with guidelines established by the MME with the purpose of increasing competitiveness of bidding processes for assignment of corporate control related with new concession grants.


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3. Article 253 of Law #6,404/76⁴("Corporation Law" or "LSA") provides for the right of first refusal of minority shareholders in the event of admission of shareholders to a wholly-owned subsidiary.

4. This legal provision would not be applicable in the event of the sale of CEPISA's shares to the extent that this Company became a wholly-owned subsidiary of ELETROBRAS through the acquisition of shares, pursuant to article 251 paragraph 2 (1^stpart) of the LSA⁵. Based on the most recent decisions of the Brazilian Securities and Exchange Commission ("CVM")⁶, and based on the specific response of this body in a consultation formulated by ELETROBRAS, the right of first refusal provided for in this legal provision is only applicable to wholly-owned subsidiaries thus converted through mergers of shares.

C. FINANCIAL AGREEMENTS

1. Related Party Agreements. Financing agreements entered into with ELETROBRAS do not contain provisions regarding the possibility and procedures for assignment and/or transfer of the respective rights and obligations, nor do they expressly establish restrictions on the conveyance of control and/or the corporate restructuring of CEPISA.

2. Loans and Financing. The Financing Agreement executed between Caixa Econômica Federal and CEPISA provide for anticipated maturity of the debt as a result of the change of control of CEPISA.

3. Loans and Financing. The consolidated debt with the CEPISA Social Security Foundation ("FACEPI") through an Agreement executed between FACEPI and CEPISA provides for early maturity in the event of non-compliance with the payment of the agreed monthly installments.

D. OPERATING AGREEMENTS AND OBLIGATIONS

1. Based on the analysis of the documents provided regarding agreements and operational obligations, no information was identified indicating risks or recommendations in the privatization process.

⁴Article 253. In proportion to the shares held in the company's capital stock, shareholders shall have the right of first refusal to: I - acquire shares in the capital of the wholly-owned subsidiary, if the company decides to convey them in whole or in part; and II - subscribe a capital increase of the wholly-owned subsidiary, if the company decides to admit other shareholders.

⁵Article 251. The company can be established by means of a public deed, having a Brazilian company as sole shareholder. Paragraph 2. The company may be converted into a wholly-owned subsidiary upon acquisition, by a Brazilian company, of all its shares, or as per article 252.

⁶Such understanding may be observed in CVM Administrative Proceeding #RJ2010/13425, in which it alleges that for companies converted into a wholly-owned subsidiary upon acquisition by a Brazilian company of all its shares, pursuant to article 251 paragraph 2 (1^stpart), the provisions of article 253 do not apply.


Legal Auditing Executive Report	CEPISA
Introduction	Page 10/15

E. INTELLECTUAL PROPERTY

1. Intellectual Property. According to information provided in the data room, and by consulting the website of the National Intellectual Property Institute ("INPI"), no trademark related to the name of, or distinctive sign related to "CEPISA" was identified as of the completion of this Report. However, it should be noted that the term and symbols may be protected under business name protection.

F. INSURANCE

1. Absence of information on payment of contracted insurance premiums. No documents proving payment of premiums on insurance contracted by CEPISA were submitted, so that we cannot say whether the policies are in force. Failure to pay one of the insurance premium installments would result in suspension of such insurance.

2. Failure to submit compulsory insurance policies may result in penalties in accordance with applicable sectoral Regulations. This item is detailed in Section xxx of this Report.

3. Insurance on assets with expired validity. The insurance contract for assets was effective until February 10, 2017 and as of the completion of this Report, no amendment was executed in order to extend said date.

G. LABOR ASPECTS

1. From the analysis about labor aspects, the following points stand out: (i) Insourcing -Public Civil Action, the subject of which is to prohibit outsourcing of CEPISA’s activities, determining the hiring of persons admitted through public competition. One of the points that the Public Prosecutor's Office inserted in the insourcing agreement was that there could be no cost increase with insourced employees. As the total cost of these employees is higher than that of outsourced workers, there was a reduction in the number of employees performing the same activities; (i) Integration of food aid - Among the public civil actions filed against the Distributor, the one having the greatest contingency seeks to integrate the food aid into the salary, considering that the DISTRIBUTOR provided the benefit without observing legal parameters such as enrollment in the Workers' Food Program ("PAT").

2. The following table summarizes CEPISA's estimates of contingent liabilities related to labor litigation according to the legal audit performed.


Legal Auditing Executive Report	CEPISA
Introduction	Page 14/15

(g)	In the Financial Statements, there is an indication of a court deposit of the Distributor made to the approximate amount of BRL 113,000.00, related to proceedings under the materiality threshold.
(h)	Lastly, through a statement of the Tax Checking Account, there are 3 administrative proceedings being processed in the RFB that were not mentioned in the ongoing legal action report

J. REAL ESTATE ASPECTS

1. Absence of Regularization. According to information received from representatives of CEPISA, of the total 97 own properties, ownership of 24 of them is not properly registered in the name of CEPISA. Also according to information provided by representatives of CEPISA, undocumented properties are Federal Properties Under Administration, having quite old occupations, and the Company does not have documentation regarding the assignment of such properties to CEPISA.

2. Goods offered as Collateral. According to the information analyzed in the data room, and also in consultation with representatives of CEPISA, some properties were offered as legal attachment, including properties linked to the concession. In this context, it is worth noting that the existence of certain liens and encumbrances may result in the foreclosure of the property and its subsequent public sale to third parties, thus causing the loss of ownership from the owner. In addition, according to information from representatives of CEPISA, ANEEL's authorization to offer properties linked to the concession as collateral was not obtained. It is important to note that, according to ANEEL Normative Resolution #63 of 5.12.2004, pledging of assets tied to the concession as collateral without prior and explicit authorization by ANEEL constitutes an infraction subject to the imposition of a fine of up to 1% on the amount of the Company's revenues corresponding to the last twelve months prior to the writing of the Infraction Notice.

3. Real Estate Permitting. According to the analysis of the documentation provided and information received from representatives from CEPISA, no Operating Permits or Inspection Permits were issued from the Fire Department for the Company's properties. The lack of real estate licensing may result in the imposition of administrative sanctions and penalties (warnings, fines, etc.), the amount of which may vary as the case may be, and may even result in suspension of activities and the facility's closure.


Legal Auditing Executive Report	CEPISA
Introduction	Page 15/15

4. Built-up Area. According to documentation provided for analysis, as well as information received from representatives of CEPISA, no occupancy permits were issued for CEPISA's properties. Possible irregularities in the built-up area of real estate may prevent (i) issuance of certain permits, such as the Operating Permit and Inspection Permit from the Fire Department; (ii) registration/endorsement of any lease agreements; as well as generating (iii) imposition of administrative sanctions and penalties (warnings, fines, closure of the establishment, etc.).

5. Acquisition/Lease Restrictions (Foreign Nationals). Considering that, according to information provided by representatives of CEPISA, some of CEPISA's own properties are located in a rural area, it is worth mentioning that currently there are restrictions applicable to the acquisition or lease of land by foreign nationals or Brazilian companies controlled by foreign nationals, which include the need for prior authorization from the National Colonization and Agrarian Reform Institute ("INCRA") or the National Congress, as applicable. In addition, it is worth noting that said restrictions also apply to corporate transactions resulting in the assignment of rural properties to foreign legal entities, such as mergers, acquisitions, consolidations and changes in control. Acquisition and/or lease of rural property by foreign nationals or by Brazilian companies controlled by foreign nationals in violation of applicable legislation (Laws #5,709/71 and 8,629/93) may be considered null for all legal purposes.


To the
National Bank for Economic and Social Development ("BNDES")
Av. República do Chile n° 100 Rio de Janeiro - RJ
C/o: Mrs. Lidiane Delesderrier Gonçalves - Manager of OCS Contract No. 028/2017
May 2017

Dear Madam,
Pursuant to our OCS Service Contract No. 028/2017 (“Contract”) signed February 14, 2017, between
BNDES and the Mais Energia B Consortium (“Consortium"), please find enclosed our deliverable for the
work performed in connection with the Eletrobrás System Distributor Privatization Program.
Our findings are detailed in this document, which is entitled Deliverable # 6: Status Report on the
Employee Complementary Pension Fund and Health Care Plan (“Report”) for CEPISA, dated May 2017.
The work carried out does not constitute an examination performed in accordance with financial
statement auditing standards. In performing our review, we used unaudited historical information and
data provided by the Consortium’s management either orally or in writing, or obtained from mentioned
sources.
Our work was developed solely for the purpose of advising BNDES in connection with the evaluation of
CEPISA as required by the Contract. As established by Decree 8.893, BNDES is the entity tasked with
implementing and monitoring the utility privatization process.
In case disclosed to third parties, the Report should be made available in full so that any applicable
waivers and qualifications can be acknowledged by all recipient parties.
Yours faithfully,
PricewaterhouseCoopers Corporate Finance & Recovery Ltda. acting as consortium leader
/s./	/s./
Rogério Roberto Gollo	Carlos Eduardo Silva Teixeira

This document is a true copy of the original signed version delivered to BNDES and in the possession of Eletrobras.

1. Executive summary

This report contains our analysis and findings regarding the review of actuarial assumptions and calculations of mathematical provisions recorded in the balance sheet of Companhia Energética do

Piauí (“CEPISA”) for the fiscal year ended 12/31/2016.

Our analysis aims to provide a better understanding of the risks and opportunities associated with the business in view of commitments related to the post-employment benefits payable by the company.

The post-employment benefits referred to above include two retirement plan and two health care plans, one of which is temporary. Key features of these post-employment benefits will be described below.

Actuarial commitments were measured by an independent actuarial firm, Mercer Gama Consultoria, based on the CPC 33 rules established by the Accounting Standards Board, whereas our analyses were based on actuarial reports, registration databases, regulations and other technical documents made available by the actuary and CEPISA.

2. Plan types

DB Settled Plan: This is a structured, defined-benefit capitalization-based plan for planned benefits. The plan is being phased out since 2/1/2000 and is now closed to new registrations.

Variable Contribution Plan (VCP): This is a structured, variable-contribution retirement plan allowing defined contributions for planned benefits, and defined risk benefits.

Severance Incentive Plan (SIP): This includes a temporary 5-year health care plan introduced in 2013 for employees who at that time had over 20 years of employment with CEPISA and were retired under the INSS. This plan is fully funded by the company.

3. Plan statistics

Below are participant statistics for the plans as measured for fiscal year 2016.


	DB Settled Plan:
Active participants		609
Average age		59.07
Average salary		1,037.78
Retired participants		647
Average age		68.69
Average benefit		2,063.82
Pensioners		282
Average benefit		771.95
Aggregate monthly benefit amount		1,552,978.62


Variable Contribution Plan (VCP)

Active	333
Average age	50.91
Average salary	9,943.89
Retired	33
Average age	64.33
Average benefit	533.12
Pensioners	4
Average benefit	2,163.33
Aggregate monthly benefit amount	26,246.28

SIP
	-
Active
Beneficiaries	263
Average age	64.05
Average cost	566.54

4. Analysis of assumptions and recommendations

4.1. Discount rate

The discount rate must be determined based on high-performing corporate securities or bonds.

Where the foregoing are unavailable, market returns on National Treasury bonds should be used instead. The currency and term of these financial instruments must be consistent with the expected currency and term of post-employment benefit obligations.

We point out that, for purposes of calculating the present value of actuarial liabilities, the rate adopted is net of inflation. The effect of inflation impacts exclusively on the projected expense for the subsequent fiscal year.

The rates used by CEPISA are as follows:

DB Settled Plan - 11.08% p.a. (considering an actual rate of 5.82% and inflation of 4.97% p.a.) VCP Plan - -10.96% p.a. (considering an actual rate of 5.70% and inflation of 4.97% p.a.) SIP Plan - 11.41% p.a. (considering an actual rate of 6.13% and inflation of 4.97% p.a.)

We understand that the rates applied are adequate to the calculations since they are consistent with the average rate of public bonds (NTN-B), which as of 12/30/2016 varied between 5.7% and 5.9% p.a. above inflation, as obtained from ANBIMA. The rates applied are therefore adequate to discount the long-term liability. We believe that a positive or negative 0.25 p.p. variation in the range is acceptable.

4.2. Wage growth projection

This assumption should reflect the expectation of the company regarding the projection of wage growth throughout the participants' career. In general, wages are adjusted for inflation, merit, and promotion.

We noted that actual market rates range from 0.5% p.a. to 3% p.a., according to data developed by the post-employment benefits committee of the Brazilian Actuarial Institute (BAI).

The rate of wage growth adopted in the calculations of liabilities of the plans maintained by CEPISA is 4.97% p.a. (considering an actual real rate of 0% and inflation of 4.97% p.a.).

We noted that the rate used is consistent with market practices and we understand that it was adopted based on the expectation of the company regarding the projection of wage growth throughout the participants' career.

It should be noted that this premise does not apply to SIP.

4.3. Biometric tables

Biometric tables are statistical studies that rely on the occurrence of events observed in a population in order to estimate the incidence of such occurrences in the future.

Such events can be classified as mortality, disability onset, turnover, among others categories and have a direct impact on post-employment benefits.

4.3.1. General mortality

According to CNPC Resolution No. 9 dated November 29, 2012, which amends CGPC Resolution No. 18, the suitability of a biometric table used for longevity projections should be determined by means of a specific study, the results of which confirm adherence, in the last three fiscal years, between the demographic behavior of the mass of participants and beneficiaries within the plan and the respective biometric table used.

The general mortality table adopted for the benefit plans was a sex-segregated AT-2000 adjusted in 10%. According to the independent actuary's report, the table was adopted based on technical studies that confirmed its adherence to the profile of the population in the plans and therefore its suitability to discount the actuarial liability.

4.3.2. Disability onset

The Álvaro Vindas table used for the DB Settled Plan, and the Medium Light table was used for the VCP Plan. According to the study report prepared by the independent actuary, the table used for the Settled Plan was consistent with the participant cohort, whereas for the VCP Plan the cohort was not enough to allow for a study confirming that the table was suitable to match the plan population (the Medium Light table was thus maintained). Since these tables are customarily employed in the market and their adoption does not represent a significant risk to the plan, we believe that they are adequate for the calculations.

It should be noted that this premise does not apply to SIP.

4.3.3. Disabled mortality

The disabled mortality table employed for the pension plans is the MI-85 M&F. According to the study report prepared by the independent actuary, the table proved to be consistent with the cohort in the DB Settled Plan, however the participant cohort in the CV Plan was not enough to allow for a study confirming that the table was suitable to match the plan population. Since this table is customarily employed in the market and its adoption does not represent a significant risk to the plans, we believe that it is adequate for the calculations.

It should be noted that this premise does not apply to SIP.

4.4. Turnover

The turnover assumed for the pension plans was nil, meaning that future participant terminations in the coming years are not expected to bear a significant impact on plan liability.

Considering the plans’ features, we understand that the assumption adopted is adequate for liability calculation purposes.

It should be noted that this premise does not apply to SIP.

4.5. Time of retirement

The time of retirement assumed for the pension plans was the moment in which the benefit vests in full.

This assumption does not apply to SIP.

The study report provided by Gama provides no information on this assumption. Notwithstanding, this assumption is in line with market benchmarks, and we recommend carrying out a specific study on this matter.

4.6. Family composition

The family composition assumption adopted for the pension plans was 95% of married participants and age variance equal to 4 years.

With regard to active participants, although in line with usual market practices, there is no information in the actuary's report on the source of this assumption. Notwithstanding and considering the features of the plans as well as the small impact that may result from its adoption, we understand that the assumption is adequate.

With regard to SIP, one dependent was considered with the same age as that of the participant.

For the beneficiaries, we understand that it is not the best practice because the impact of the premise for the benefits granted can be expressive. We recommend the use of the royal family.

4.7. Health care cost growth rate (HCCTR)

A rate of 3.00% above inflation was assumed to reflect the growth of health care costs due to sector-specific inflation. We understand that this rate is in line with general practices of the market, where rates fluctuate in the range between 1% and 4.5%, according to data developed by the post-employment benefits committee of the Brazilian Actuarial Institute (BAI).

5. Independent actuarial calculations

DB Settled Plan


Reconciliation (in R$)	12/31/2016
Present value of actuarial liabilities (PVL)	(328,842,847.00)
Fair value of plan assets	302,256,834.54
Surplus/(Deficit)	(26,586,012.46)
Non-recoverable surplus (effect of asset limit)	-
Total (liabilities)/net assets to be recognized	(26,586,012.46)
Total (liabilities)/net assets to be recognized (% of PVL)	(8.08%)

VCP Plan

Reconciliation (in R$)	12/31/2016
Present value of actuarial liabilities (PVL)	(797,421.00)
Fair value of plan assets	9,104,236.68
Surplus/(Deficit)	8,306,815.68
Non-recoverable surplus (effect of asset limit)	8,306,815.68
Total (liabilities)/net assets to be recognized	-

SIP

Reconciliation (in R$)	12/31/2016
Present value of actuarial liabilities (PVL)	(4,296,144.80)
Fair value of plan assets
Surplus/(Deficit)	(4,296,144.80)
Non-recoverable surplus (effect of asset limit)
Total (liabilities)/net assets to be recognized	(4,296,144.80)

Actuarial obligations were determined according to the principles and standards established by the regulatory bodies, namely the the National Health Agency (NHA) regarding benefits related to health care, and the National Private Pension Bureau (NPPB) regarding retirement and pension benefits, and are accounted for in accordance with the rules laid out by the Accounting Standards Board. (CPC-33 of the Brazilian Securities and Exchange Commission - CVM 695.)

6. Independent review of actuarial commitment

The actuarial commitment was calculated by an independent actuary, Mercer Gama. We recalculated the installments of Vested Benefits and Implemented Benefits as shown below, and believe that the calculation methodology and process are adequate.

DB Settled Plan


Present Value of Obligations (in R$)	Actuary	PwC
Implemented	232,140,505.00	229,269,511.65
Vested	96,702,342.00	95,689,546.09
Total	328,842,847.00	324,959,057.74
Difference (R$)	(3,883,789.26)
Difference (%)	-1.18%

VCP Plan

Present Value of Obligations (in R$)	Actuary	PwC
Implemented	-	-
Vested	797,421.00	804,284.26
Total	6,863.26
Difference (%)	0.86%


SIP

Present Value of Obligations (in R$)	Actuary	PwC
Implemented	4,296,144.80	4,504,127.38
Vested	-
Total	207,982.58
Difference (%)	4.84%

Considering the inherent subjectivity of actuarial calculations of mathematical provisions related to benefit plans, we understand that the differences identified in the provisions for Vested Benefits and Implemented Benefits indicate the reasonableness of the calculations.

Such subjectivity results, for instance, from the manner by which ages are considered for the purpose of finding the probability of death (whether full or fractional or rounded); the method of rounding flow figures (number of decimal places considered – taking into account that the probability of death considered in our calculations has 6 decimal places, for example); whether income payments are accelerated or in arrears (i.e. made at the beginning or end of the period); asset family composition assumptions in retirement, among other instances where small choices can produce relatively small effects however with potential large absolute values.

Therefore, we understand that the differences presented are acceptable from an actuarial technical point of view, and we understand that the liabilities recorded are properly calculated.

7. Conclusion

Our examinations were based on information provided by both the actuaries responsible for managing the plans and the company, and we considered this information to be appropriate for the preparation of this report.

Our numbers were calculated according to practices that we deem most appropriate when applicable, and should be taken into account together with the considerations below.

With regard to the family composition assumption, we understand that the best practice involves the use of the royal family for the beneficiaries. The impact of using an average family can be significant depending on the population of the plan.

The post-employment benefit obligations recorded in the balance sheet, even where figures are presented with incidental differences which in our opinion relate to the methodology or assumptions adopted, would not, if altered, pose any insolvency risk to the plans.

The defined benefit settled plan has an insufficiency of R$26,586,012.46 that was accounted for as deficit but that do not necessarily represents a financial imbalance, as such insufficiency relates to the volume of future normal and extraordinary contributions expected to be carried into the plans and that will be accounted for in the assets at the time these assets are used to support future plan commitments, thus defeating potential insolvency or liquidity risks.

Still in regard to the defined benefit settled plan, it is important to emphasize that the union is pleading on behalf of employees for the payment of an amount corresponding to contributions in the period between the date the DB plan was settled, established by NPPB as being November 2000, and the date the defined contribution plan was implemented, which is June 2010.

According to the documentation provided to us, the workers’ union argues that during the aforementioned period the participants were not given the right to make and receive contributions that should compound their actuarial reserves and that would afford them higher benefit amounts.

As stated in the minutes of Work Meeting PR-002/2017 held 5/22/2017, in January 2012 FACEFI calculated the amount claimed by the workers’ union to be R$ 70 million. This figure was restated for inflation as of April 2017 to be R$ 100 million.

The variable contribution plan has a technical surplus in the amount of R$ 8,306,815.68 from excess contributions carried into the plan resulting from the financial performance and actuarial gains accrued over the years. However, such surplus can not be considered an economic benefit for the company, given that the limits enforced by local regulators call for up to 25% of the mathematical provisions to establish a reserve to hedge against plan fluctuations of plan risks. We understand that the plan is not exposed to any insolvency or liquidity risk, since all risks associated with it are supported by the portion of the assets intended as plan coverage.

The Severance Incentive Plan (SIP), which affords only health care for a fixed term of 5 years, has a liability of R$ 4,296,144.80 as of 2013. The source of this liability is the difference between the present value of future contributions and the plan cost. This liability is expected to decrease in view that this is a fixed-term plan with only two years remaining and new registrations are not allowed. The plan has an inherent deficit resulting from the fact that it does not have an asset to cover benefits and is funded by the flow of contributions.

We understand that employing a capacity factor to measure health care liabilities is not the best practice in the situation. Medical costs increase according to specific sector rules. For this reason, we understand that there is no loss of benefit value over time due to inflation and therefore the use of a capacity factor is not appropriate.

From a legal perspective, our understanding is that plan benefits have been supported by regular and extraordinary contributions established on the basis of actuarial evaluations prepared by an independent actuary and reviewed by the regulatory body (NPPB) in the case of the pension plans.

With regard to SIP, legal compliance is secured in that contributions are made according to the general rules of the plan.

Product 11 –Privatization Modeling Proposal


To the
Banco Nacional de Desenvolvimento Econômico e Social (“BNDES” - Brazilian National Bank for
Economic and Social Development)
Av. República do Chile nº 100
Rio de Janeiro - RJ

Attention: Ms. Lidiane Delesderrier Gonçalves - Contract Manager OCS 028/2017

October 2017

Dear All,

In accordance with our service contract OCS 028/2017 (“Contract”), executed between the BNDES
and the Consórcio Mais Energia B (“Consortium”) on 02/14/2017, we present the result of our work
made in the context of Privatization of the Distributors of the Eletrobras System.

The result of our work is detailed in this document “Product 11: Privatization Modeling Proposal”
(“Report”) of Cepisa, dated October 2017.

Our work was developed aiming solely at the objective to assist the BNDES, in the quality as
responsible for the performance and follow-up of the privatization of concessionaire companies as per
Decree 8.893, in the evaluation of Cepisa, in accordance with the Contract and it was carried out on the
basis of information provided by the administration of Cepisa and on the premises that this information
is true and complete. This information has not been subject to tests or verifications, except when
expressly defined in the scope of our works.

In the case of access to the Report by third parties, it must be made available in full, provided that the
applicable safeguard and limitations are known.

Sincerely,

PricewaterhouseCoopers Corporate Finance & Recovery Ltda., as leader of the Consortium.




Rogério Roberto Gollo	Marcio Jose Soares Lutterbach


** This document is a true copy of the original signed version delivered to BNDES and in
the possession of Eletrobras.

Product 11 –Privatization Modeling Proposal


*Summary*

Introduction				6
Section I - Privatization context				7
1.	Approach			7
2.	Context			9
2.1		Overview		9
2.2		Institutional and Management Model of the Brazilian Electric Industry		10
2.3		Financial assessment and sales modeling conjuncture		12
3.	Relevant aspects of the Privatization Process			14
3.1		Critical points, necessary adjustments and recommendations		14
3.2		Consent need in Financing Contracts		14
3.3		Deposit of Shares Owned by Eletrobras at FND		15
3.4		Remaining aspects to be considered		15
3.5		Payment methods		15
4.	Purpose of the Auction			17
4.1		Purpose of sale		17
4.2		Assessment of sale feasibility		17
5.	Relevant Aspects of Valuation			18
5.1		Relaxation of regulatory parameters		18
5.2		Debts		18
5.3		Total liabilities		20
5.4		Risks and Contingencies		20
5.4.1			Types of contingencies	20
5.4.2			Current status of contingencies	21
5.4.3			Negotiations to deal with contingencies	22
6.	Assessment of Synergies			23
7.	Adjustments on the Privatization model			28
7.1		Context		28
7.2		Base amount of valuation – Average between valuations of Services A & B		28
7.3		Relevant adjustments for privatization of Cepisa		29
7.3.1			Adjustment to comprise updated balance sheet until June 2017	29
7.3.2Adjustment related to Advance Payments for Future Capital Increases (AFACs)
				31
7.3.3			Tax adjustments –Tax Losses and Negative Base	32
7.3.4			Adjustment of the relaxation of regulatory parameters	32
8.	Capital and Corporate Structuring			34
				3

Product 11 –Privatization Modeling Proposal


8.1	Proposed capital and corporate structuring – Overview		34
8.2	Minimum adjustment of the capital structure – “Stage 1”		36
8.2.1		Symbolic value of shares sale (privatization)	36
8.2.2		Capitalization alternatives	37
8.3	Investor capitalization – “Stage 2”		37
8.4	Eletrobras corporate stake option		39
8.4.1		Justification	39
8.4.2		Eletrobras corporate interest threshold	39
8.4.3		Participation of Eletrobras in the governance of the company	39
8.4.4		Procedure for Eletrobras to increase its shareholding interest	40
8.5	Classes of shares		40
9. Shares offering to active and retired employees			42
9.1	Mechanism		42
9.2	Definition of active and retired employees		42
9.3	Offer General Conditions		42
9.3.1		Offer take and differentiated conditions	43
9.3.2		Offsetting differentiated conditions to Eletrobras	43
9.3.3		Offer Procedure and Purchase Limits	44
9.3.4		Follow-up by minority stakeholders of investor underwriting	44
9.3.5		New controller shares repurchase obligation	44
9.4	Shares not acquired by active and retired employees		45
Section II - Privatization proposal			46
10.	Summary of Cepisa’s privatization proposal		46
10.1	Cepisa’s Corporate Structure		46
10.2	Cepisa’s Sales Price Definition		46
10.2.1		Result of economic-financial evaluations	46
10.2.2 Balance update adjustment			47
10.2.3		Regulatory parameters relaxation adjustment	49
10.3	Sale vs. Liquidation Evaluation and consequent “pure” concession granting		49
10.4	Potentially convertible liabilities		50
10.5	Eletrobras capitalization value – “Stage 1”		51
10.6	Shares offering to active and retired employees		51
10.7	Investor capitalization – “Stage 2”		52
10.8	Cepisa’s final corporate structure		53
10.9	Investors Obligations		53
10.9.1		Financial obligations	53

Product 11 –Privatization Modeling Proposal

Introduction

This document refers to the report of Cepisa Privatization Model Proposal, produced by the Consórcio Mais Energia B. In it, proposals are included regarding the distributor’s privatization modeling, including conceptual models, technical recommendations and calculated values.

The report is divided into three sections, presented below:· Section I - Privatization Context· Section II - Privatization Proposal· Section III - Auction Model Proposal

In Section I - Privatization Context, among other topics, the approach used to structure the modeling, the parameters that were used as guidelines to the analyses developed and conceptual aspects of the modeling are explained, including its main proposals, rationale and legal basis.

In Section II - Privatization Proposal, the technical and quantitative specifications of proposals made in the previous section are presented. The corporate structure is set out thereof as well as the results of the valuation, the calculated values of adjustments in the capital structure and Cepisa's shares, in addition to the share offer conditions to employees, investors’ obligations and expected privatization schedule.

In Section III - Auction Model Proposal, procedural aspects of the auction of the distributor are detailed. In this section, recommendations are made concerning the model and sequence of auctions, auction variables, base of values for investors’ offers and classification criteria and the definition of the winner.

Finally, it should be noted that this document has been developed based on Cepisa’s other privatization processes documentation. Among other items, there served as input for this Privatization Modeling Report, the result of the economical and financial evaluations conducted by Services A and B, as well as the legal, tax, accounting-equity, technical-operational, actuarial, human and environmental resources diligences developed by Service B.

Product 11 –Privatization Modeling Proposal

· Fiscal and tax aspects: relevant fiscal and tax aspects were considered, as well as tax required adjustments, for the definition of the value and the process of privatization and sale of companies· Risk mitigation: as part of the process of definition of the selling price, it was necessary to evaluate the impact and value of not yet provisioned contingencies, as well as possible alternatives to mitigate them, considering the prospects of Eletrobras and the investor in order to reduce risks related to the sale transaction· Stakeholders and investors: to enable and optimize the process of privatization and sales modeling, the study considered the perspective of several Stakeholders (such as, regulating entities, government agencies and consumers), as well as investors, who had their interest in acquiring distributors and their points of view analyzed through market sounding studies· Evaluation of synergies: the possible synergies between the companies were also evaluated and considered in modeling, analyzing the opportunities for synergies of their operations to find possible levers of value· Groupings of grants: likewise, possible groupings for sale of companies were analyzed in order to enable and leverage the value of the sale of the six distributors that are part of this process of privatization· Process and sequencing of the auction: auction models and their procedural aspects, as well as the sale of sequencing alternatives of the distributors were reviewed to increase the possibilities of sale of the distributors and also to create value· Use of tariff lever: in modeling, alternatives were included regarding regulatory levers which provided a review of the level of balance of the grants relating to companies in privatization process, eventually correcting potential lags

When evaluating the nine perspectives addressed, the study made for the modeling of Cepisa sale, along with other distributors, sought to be comprehensive and evaluating all relevant aspects to the process of privatization of the companies, identifying alternatives of the sales process optimization.

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2. Context

2.1 Overview

The process of privatization of Eletrobras’ Distributors was started in the 90’s and resumed in 2016 through Decree 8.893/2016, which qualified as priorities within the framework of the Partnership Program in Investment (PPI) the privatization of the distribution companies and designated the BNDES responsible for the implementation and monitoring of the process of privatization.

In this context, the BNDES hired Consórcio Mais Energia B to assist it in Privatization, involving from economic and financial valuation until the full diligence of current operations. Having completed the basic elements that allow attributing the value resulting from the distribution grants of electric energy, it remains to define how the privatization will actually take place. Such modeling combines corporate aspects, the form of capitalization, sales process, in order to increase the chance of success in attracting investors, as well as offering maximum competitiveness to obtain better conditions of offer to be received.

The guidelines emanated by the sectorial and macroeconomic policy makers, regulators and planning entities, establish the need to offer a quality service in the respective grant areas. One believes that the attraction of an operator from the private sector will have full conditions to raise the efficiency level and to remunerate the necessary investments to the full compliance with the market.

From the regulatory point of view, as a result of Public Hearings 094/2016 and 032/2017 of ANEEL [Brazilian National Electricity Agency] and Public Consultation MME 37/2017, several softening measures were introduced into the regulatory parameters, with the tariff model allowing conditions to bring back to balance the grant. It is unanimously manifested, both the discomfort with the precarious situation of the assignment condition, and the support to the efforts undertaken, so that one is successful with the privatization.

A process of evaluation of market interest (Market Sounding) allowed identifying the existence of companies with recognized competence in the industry - particularly in social economic, geographic realities and similar environmental realities - with capacity to execute the reorganizations required for this process, confirm the reasoning of attractiveness of the privatized companies for potential investors and understand the major elements of concerns. One may also establish a rather specific map of the different level of interest of the market among the several grants.

In this line, the vision of the sector investors could be obtained as to issues such as the grouping of the grants, the process of sale, sensitivity to different corporate models, the structure of capital to face the program of investments, the economic impact of the incorporation of investments to tariffs and the very contingencies bequeathed to the future operator, always with a view to optimize the competitiveness in the future auction.

In short, from this context important lines of direction derive for the model that will be sketched as follows:

Product 11 –Privatization Modeling Proposal

· Incorporation of new investor who will be focused on the improvement of the service and economic, financial and operational recovery of the company· Prioritization of solutions that allowed the transference of all the grants to the investors - seeking models that minimize risk of auctions without interested shareholders· To make possible alternatives and solutions that allow generating value to the current shareholder without losses to the consumers and the public power, including mechanisms that make possible the capture of value in the medium and long terms in the future operation, since there is the need for capitalization of the distributors to make possible the privatization auction· Search for factors that lead to the increase of the rivalry between the potential interested shareholders, in order to provide greater competition

Such guidelines lead to solutions that are highlighted by the mitigation of failure risks, simplicity and pragmatism in the search for alternatives for privatization. Below, we present how the modeling should be structured so as to maximize the success of the process.

2.2 Institutional and Management Model of the Brazilian Electric Industry

The characteristics and peculiarities of the Brazilian electric industry have been considered in the study developed. Both its institutional model and its legal framework have been analyzed and used as parameter for the analyses proposed.

Recently, new laws sought to address emergent challenges within the national scope (as for example Law 12.783/2013, with provision on grants of generation, transmission and distribution of electric energy, reduction of sectorial encumbrances and affordability). In this context, for this report, as noted in the previous section, Decree 8.893/2016 is of particular importance, which resumed the subject of privatizations of the Distributors, being the BNDES responsible for the execution and follow-up of the process.

In fact, the edition of Law No. 13.360/2016, resulting from the conversion of MP 735/2016, brought a series of changes for the industry, including the supposition by CCEE of the competences attributed before to Eletrobras on the management of the account of Global

Reserve of Reversion (“RGR”), as well as the Account of Energy Development (“CDE”) and of the Account of Fuel Consumption (“CCC”) from May 1^st, 2017, at no hard to the performance of Internal or External Control Agencies of the federal public administration on the management of these accounts.

Additionally, Decree No. 9.143/2017, that regulated Law No. 13.360/2017, by bringing provisions on the commercialization of electric energy, tried to provide the incentive to efficiency, to the correct allocation of the risks among the consumers and investors, as well as mitigate the obstacles to attract new investments to the electric energy industry, especially when establishing that the auctions of new energy and existing energy can be carried out fairly ahead of time and more relaxed, in addition to the possibility of the distribution agents to negotiate with free consumers and other agents from the Free Environment Contracting (“ACL”), sale contracts of backed by excess of energy contracted, as per ANEEL regulation.

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Furthermore, it must be highlighted that, by means of the Public Consultation No. 33 (CP

33), of the Ministry of Mines and Energy (“MME”), already closed, on ‘Improvement of the legal landmark of the electric industry’, proposals of legal measures had been discussed that make possible the future of the electric industry, searching sustainability in the long run

In addition, Law No. 13.360/2016 amended Law No. 12.783/2013, with the objective to make possible the bidding of companies under direct or indirect control of the Union, States, Federal District and Municipalities, whose grants had not been extending, foreseeing the possibility of the Union to promote bidding associated with the transference of the shareholding control of the concessionaire, granting a new grant contract for the period of 30 years. This law also establishes the possibility of inversion of the qualification stages and judgment of the auction, so as to guarantee greater speed and efficiency to the bidding process.

It should be stood out that, as far as the bidding of distribution or transmission grant associated to the transfer of control of legal person, provider of public service of electric energy is concerning, dealt with Law No. 12.783/2013, it became necessary to edit a regulatory decree, with the purpose to, among other conditions: i) to establish requirements to be observed by the controller of the responsible legal entity for the provision of the service of distribution of electric energy, for such bid; ii) attributions of the BNDES in the execution and the follow-up of the privatization process; iii) criteria for new concession without control handover (Decree Draft that regulates the bid of distribution grant associated with the utility control handover of legal entity provider of public service of electric energy).

The new grant contract applicable to the mentioned bid associated with the shareholding control handover of the concessionaire, whose draft was elaborated by Aneel at the request of the MME and submitted the public consultation, was object of new public consultation in the period of 08/28/2017 to 09/06/2017, in virtue of adjustments proposed by means of Ordinance MME No. 342/2017, due to the fact that it was noted the existence of unbalance regarding the operational costs, losses of electric energy and loans with resources from RGR, made to assure the continuity of the service provided under the assignment mode and that, by force of provisions of Law No. 12.783/2013, should have been assumed by the new concessionaire, which could make impracticable the intended bid.

Another point to be considered is with regard to the tariff process concerning the provision of public service of electric energy distribution by agency or entity of the federal public administration. It is highlighted that the Ordinance MME No. 388/2016, which approved the terms and conditions for the provision of such services, in accordance with art. 9, Paragraph 1, of Law No. 12.783/2013, was amended by Ordinance MME No. 346/2017, published in the DOU [Federal Official Gazette] on 08/31/2017, to establish that in the tariff process of year 2017, ANEEL should make flexible, in a temporary way, the regulatory parameters and non-technical losses relating to the operating costs in order to enable the economic balance of the grant being bid pursuant to art. 8 of Law No. 12.783/2013.

It is further highlighted that the tariff relaxation resulting from ANEEL’s Technical Notes 351/2017, of 07/24/2017, and 149/2017, of 09/08/2017, which restores levels of regulatory parameters – such as DEC/FEC, PMSO, Non-Technical Losses and RGR - aiming at the economic-financial balance of the grants of electric energy under analysis.

Finally, it is stood out that, considering the schedule foreseen for conclusion of the privatization process, as one will see below, it is quite probable that Ordinances MME 420 to

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425/2016 that designated the Distributors of Eletrobras (Amazonas, Boa Vista, Ceal, Cepisa, Ceron and Eletroacre) as responsible for the provision of the public service of distribution of electric energy until the supposition of a new concessionaire or up to December 31^st, 2017, whichever occurs first, deserve to be amended to extend such service provision deadline for a period that suffices to the conclusion of the privatization process.

2.3 Financial assessment and sales modeling conjuncture

As it shall be shown below, in Item 5 – Relevant Aspects of Valuation, in the course of the due diligence and financial evaluation of Eletrobras’ distributors, relevant issues were identified affecting significantly the value of the shareholder of the companies.

Initially, it was assessed that these organizations have amounts of debts of high values. These debts were accumulated by Eletrobras’ distributors over the years, both with the Holding Company (with loans of various types) and with suppliers. Such debts, in turn, often continue to be rolled over or have increasing cost in relation to the non-payment of the principal or even of interests.

It was also identified that the distributors of Eletrobras have contingencies – additional to those provided on the balance sheets – of significant value. These contingencies, from judicial and administrative proceedings and tax aspects, fiscal and labor not yet materialized, among others, also contribute to the reduction of the value of the equity of the companies.

Additionally, it has found in financial and operational evaluation that these companies demand high values of investments in the early years of the new grant. These investments are required, both to facilitate the improvement of financial performance expected and to meet regulatory metrics of service level.

Thus, even in a valuation in which there is the expectation of bold operational and financial performance optimization of the six distributors of Eletrobras in the privatization process, the factors listed overlapped to improvements, resulting often in a negative value to the shareholder.

It should be emphasized that the financial evaluation has already considered the new draft of the grant contract, resulted from contributions in the Public Hearing No. 094/2016 and the Technical Note No. 182/2017 of ANEEL. The regulatory body also reviewed and identified that these grants are unbalanced, granting regulatory parameter relaxation (Technical Notes No.

351/2017 and No. 149/2017, this last part of the Public Hearing No. 032/2017) to bring the grants back in balance, which will result in increased tariff revenues and reduction of loan value of RGR. Consequently, the financial evaluation conducted by the Consortium considered the relaxation made by ANEEL.

It is also highlighted that, in accordance with the Decree Draft that regulates the grant bid of distribution associated with the transfer of control of legal entity service provider of electric energy, dealt with by Law No. 12.783, of January 11^th, 2013, the distributors of Eletrobras to be privatized that are in areas of grant benefited by the relaxation of regulatory parameters, deriving from the Technical Note No. 351/2017 must have specific treatment. If the value to the shareholders of these companies is positive in light of regulatory flexibilizations granted, the relaxed parameters must be readjusted so that the value to the shareholders of these companies is equal to zero. Thus, the possibility that the consumers of the areas of the grant in question are

Product 11 –Privatization Modeling Proposal

burdened with additional exceptional tariffs to those necessary for the companies holders of the grant operate under financial balance is eliminated.

Thus, the financial evaluation and modeling of sale of the companies conducted by the Consortium considered the necessary legal and regulatory aspects for the privatization process.

The modeling performed also tried to structure sale alternatives so these companies could increase their financial attractiveness and legal security to the investor. So, facing a scenario where the shareholder values of these companies are negative or equal to zero, one optimized their sale potential.

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3. Relevant aspects of the Privatization Process

3.1 Critical points, necessary adjustments and recommendations

In case of Cepisa, there are no critical impediments to its privatization process.

During the process of Legal Due Diligence of Cepisa some critical points were described in the Report and displayed in its Executive Summary. Although not inhibitory to the process of privatization of this distributor, the new investor should be aware of them so that he can make applicable arrangements.

Among the important issues, but not deterrent, to be considered, are highlighted the contracts of financial nature, whose prior consent of the creditor is recommended in order to avoid the prepayment of the debt.

3.2 Consent need in Financing Contracts

Some financing contracts signed by the distributors may have the need to obtain prior and express consent from the creditor in the event of a change of control of the distributor.

Otherwise, according to the terms of each contract, there may be legal and/or financial implications to Cepisa, Eletrobras, investor and, eventually, to the privatization process, depending on the possible prepayment of debt if the commitment to payment is not assumed by the new investor.

Thereby, the financing agreement with the need for consent from the creditor is listed below, and must have their applications addressed by Cepisa and Eletrobras:


No.	Type of document	Lender	Date of Signature
1	Financing Agreement	Caixa Econômica Federal	08/11/2014


Contract

Creditor:	Caixa Econômica Federal
Intervenor:	ELETROBRAS
Object:	Financing rural distribution networks, with resources from the Financing
	Program for Infrastructure and Sanitation - FINISA
Amount:	R$ 94,906,440.00
Interests:	7% per year
Grace Period:	24 months counted from signature of the Agreement and may be extended
	upon ELETROBRAS consent
Principal payment:	120 monthly installments
Guarantees:	Corporate bond of ELETROBRAS; Fiduciary Assignment of Emerging Rights;
	Centralization of the movement of receivables arising from the Emerging
	Rights in the Centralization Account in a minimum amount equal to the
	amount of the balance due
Relevant obligations:	Not applicable
Anticipated maturity:	In cases of: a) default; b) bankruptcy; c) expropriation; d) false declarations; e)
	delay or stoppage of works; f) non-performance of works; g) when suspension
	of disbursements is not enough to ensure compliance; h) application of

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	resources for a variety of purposes; i) legal proceedings affecting credit security; j) if the commitment of this financing is not taken over by the new concessionaire


Other important clauses:	Not applicable

3.3 Deposit of Shares Owned by Eletrobras at FND

The Nominative Share Record Book of all Distributors mentioned blockage of all shares owned by Eletrobras to the benefit of the National Privatization Fund – FND, administered by BNDES, in compliance with the Law no. 9.491/1997.

3.4 Remaining aspects to be considered

Remaining aspects shall be considered, the measures of which are within and outside the scope of Distributors are vital for the privatization process, as per the chart below:

ACTIONS ON DISTRIBUTOR’S SCOPE

Obtaining authorization from Executive Board, Supervisory Board, Board of Directors to perform capital increases on the Distributor

Performance of General Meeting specially convened to approve the Distributors’ capital stock, as well as an increase of capital stock by underwriting of new shares

ACTIONS ON ELETROBRAS’ SCOPE

Obtaining authorization from Executive Board and the Board of Directors to perform the privatization of Distributor Performance of General Meeting convened to approve the privatization of Distributor Performance of the necessary procedures to fulfill CVM [Brazilian Securities and Exchange Commission], NYSE, and Latibex

ACTIONS OUTSIDE THE DISTRIBUTOR’S AND ELETROBRAS’ SCOPE

Obtaining prior approval from CADE provided on articles 88 and 90 of the Law 12.529/2011 and CADE Resolution no. 02/2012 Obtaining prior consent from ANEEL for share control transference (Art. 27 of the Law 8.987/95 Art 4, XI, of Annex I of the Decree 2.335/97, in addition to the provisions of ANEEL Normative Resolution 484/2012) Obtaining approval from the Board of the Investment Partnership Program (CPPI - Conselho do Programa de Parcerias de Investimentos) regarding operational modality, conditions and adjustments to be applied to the privatization (Law 9.491/97) Follow-up, surveillance, and evaluation of the privatization process by the Federal Court of Auditors (TCU - Tribunal de Contas da União) (IN TCU 27/1998)

3.5 Payment methods

Under the Law No. 9.491/97, the payment methods in a privatization process shall be recommended by the National Privatization Council (CND), now replaced with the Board of the Investment Partnership Program of the Presidency of the Republic (CPPI), for approval by the President of the Republic. The latter may authorize remaining payment methods within the scope of the National Privatization Program, as recommended by the CPPI.

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The Law also requires disclosure of selected items on the conditions for disposal of the concerned company’s shareholding control, through publication at the Brazilian Federal Official

Gazette and in nationally recognized newspapers. In particular, the following shall be disclosed:· Any dividend payments to the Federal Government (or to companies controlled by it) and contributions of capital to the capital account provided by it over the last 15 years;· Creation of special shares and the powers defined to them (as applicable).

For the event of Cepisa privatization, the defined payments are recommended to be made in full through the stock exchange (B3), by means of the effective currency, upon sale settlement.

The remaining procedural aspects shall be detailed in the Request for Proposal of Privatization, Manual of Auction Procedures, Procedural Manual for Offering of Shares to Active and Retired Employees and associated agreements.

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As Cepisa met the requirements from these four perspectives, it is concluded that the company would have conditions to be sold in na auction associated with the concession grant.

5. Relevant Aspects of Valuation

5.1 Relaxation of regulatory parameters

It should be taken into consideration that the companies’ valuation already considers, among the flow perspectives, the consequences of the Technical Notes 351/2017 and 149/2017 of ANEEL, the latter being the result of the Open Court 032/2017, providing for loosening of regulatory metrics for financially unbalanced concessions, including Cepisa.

Such ANEEL Technical Notes loosened for the company the regulatory values of the PMSO, Non-technical Losses and RGR metrics of the designation period. As a result, there is increased financial setoff through tariff to the distributors and the resulting decreased volume of RGR loan, increasing the revenues thereof and, accordingly, its cash flow.

Such parameters shall be loosened from the tariff process dated 2017, initiated on September 28 of this year, up to the first regular review of the new utility to be contracted by means of a bid, estimated to be held in 2023.

Such parameters shall be used as auction variables, with their methodology and values being explained in Item 12.7 - Auction´s 2nd stage ranking criteria.

5.2 Debts

The indebtedness levels of Eletrobras distributors are quite high, and the debts may be divided into three major groups: Debts with Eletrobras; Debts with Specific Third Parties and Debts with Other Third Parties. Debts with Eletrobras in turn may be rated according to their origin: Ordinary Resources, RGR, Banco Mundial and Eletrobras related parties.

a) Debts with Eletrobras: refer to funds with the Holding or through it by means of onlending. Since Eletrobras itself holds the credit rights, the debts may be used by the company as means to optimize the capital structure of its distributors.

o World Bank: Eletrobras holds funds obtained with World Bank for the purpose of investing in improved infrastructures, project named by the companies as “Projeto Energia+” [Project Energy+]. Such funds are then lent to distributors as loans and financing.

o RGR (Global Reversal Reserve): Refers to amounts raised by Eletrobras for the distributor with the Global Reversal Reserve (RGR). Thus, the sums are due by the distributor to Eletrobras, associated with funds raised from the RGR. The amounts found in the balance sheet, as of the base date of this report (12/31/2016) are mostly from loans obtained prior to the designation period.

§ RGR pre-PPST (temporary service provision period): Amount of debt arising out of the pre-PPST period, when the funds were aimed at financing investments of the distributors.

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§ RGR PPST (temporary service provision period): Debt amount arising out of the PPST period, initiated in November 2016. Within the scope of the concession agreement termination and beginning of such period, the RGR onlending changed their purpose to maintaining the companies’ activities ensuring the so-called “Appropriate Remuneration”, as defined in the Technical Note 331 dated September 13, 2016. By the end of this Item, the estimated sums of the debts with RGR are provided until the end of February 2018 (date estimated for entry of the potential investors in the operations), considering the fund-raising operations in the service provision period.

o Ordinary Resources: Own fund onlending by Eletrobras to the distributors, through loans, usually with low financing cost and for the purpose of covering operating deficits. Therefore, this debt is directly due from the distributor to the Holding, without involving Third Parties.

o Advance Payment for Future Capital Increase (AFAC): Refers to funds contributed by Eletrobras at the distributors for future capital increases.

Usually, AFACs are paid-up as capital within up to one year of their composition, but that is not a requirement, and they may be kept in the balance sheet as distributor debt. Currently, only Eletrobras is responsible for contributing AFAC sums in the distributors.

o Related Parties: Refer to debts contracted with other Eletrobras distributors or companies, except the Holding. Among the major related parties with effective credits we may mention, for instance, Eletronorte, Furnas and Chesf.

Like in the case of the debts contracted directly with Eletrobras Holding, the company has preference over the funds, and may use the same alternatives as mentioned in the prior item. However, in this group of debts, there are legal and corporate aspects required to be noted vis-à-vis any measure. It should be stressed that variables such as the cash flows, the amount and the own capital structure of the creditor companies may be affected due to an attempted use of such credits.

b) Debts with Specific Third Parties: Debts of such nature are mostly overdue payment liabilities concerning fuel supply agreements (therefore, rated as debt by the Accounting-Equity Due Diligence), due by some of the distributors which are parties to this privatization process. Among the major creditors, we have Petrobras and Cigás.

c) Debts with Other Third Parties: refers to debts contracted with other parties than Eletrobras, its distributors, Petrobras or Cigás. The remaining creditors of the distributors and debt instruments are considered in this group, among which there are domestic public banks, such as Caixa Econômica Federal, private financial institutions and other funding agents. The procedures of the Accounting-Equity Due Diligence also included to the balances of Debts with Third Parties the amounts concerning overdue payments with suppliers, including, for example, overdue liabilities with CCC (Fuel Consumption Account).

The RGR PPST accounting balances reported to this Consortium by Cepisa in December 2016 and June 2017 are shown below:

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from both the reviewed sums provisioned and from identification of unmapped contingencies and their estimated value.

Contingencies, type of rating and amounts derive from the legal, accounting-capital and environmental audits conducted at Cepisa.

There are three types of contingency, according to their probable loss of the concerned sums and, accordingly, incorporation into the valuation process, as listed below:· Probable: o High risk of losing the sum involved in the judicial and administrative proceedings o Usually priced in valuations, decreasing the equity value· Possible: o Potential risk of losing the sum involved in the judicial and administrative proceedings o Usually not priced in valuations, being eventually dealt with in specific negotiations between the selling and the purchasing parties· Remote: o Low risk of losing the sums involved in the judicial and administrative proceedings o Usually not priced in valuations

5.4.2 Current status of contingencies

Find below the amounts and percentages of contingencies for Cepisa, according to their risk rating level.


In R$ MM
DETAILING OF CEPISA CONTINGENCIES
	Likely	Probable	Remote	Total
Litigious	50.98	-	-	50.98
Taxes	12.31	175.79	16.01	204.12
Labor	40.99	63.33	-	104.32
Actuarial	-	-	-	-
Total	104.28	239.12	16.01	359.41

In %
DETAILING OF CEPISA CONTINGENCIES
	Likely	Probable	Remote	Total
Litigious	49%	0%	0%	14%
Taxes	12%	74%	100%	57%
Labor	39%	26%	0%	29%
Actuarial	0%	0%	0%	0%
Total	29%	67%	4%	100%

Note: ‘Litigious’ contingencies refer to materialized lawsuits and include actions from different areas
(taxes, labor, civil, environmental, and regulatory). The others refer to risks mapped in the respective
diligences, which do not have materialized suits.

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Among the contingencies classified as 'Possible', in Tax, there is approximately R$ 107 million regarding non-technical energy loss risks, in addition to R$ 67 million about the note on credits of PIS [Social Integration Program] and COFINS [Contribution for Social Security Financing] on charges.

In addition to the provided contingencies, there are also contingencies concerning environmental adaptations in the amount of R$ 40,829,816.00 required for distributor. Such values, however, were previously deducted from the equity value in the company’s valuation.

It should be stressed that the base date of the contingencies is 12/31/2016 and that such sums are in addition to those provisioned in Cepisa’s balance sheet dated December 2016. The full details of the contingencies are in the audit reports.

5.4.3 Negotiations to deal with contingencies

Dealing with such distributor contingencies is relevant to enable eventual adjustments to the company’s price between the selling and purchasing parties. However, after developing several legal and financial analyses on contingencies, it was concluded that Eletrobras would avoid keeping future liabilities – after privatization – with the purchaser related to contingencies, in addition to eventual legal provisions allowing for the purchaser to question or file actions in the future to Eletrobras.

Thus, the adjustment definition shall occur prior to entering into the share purchase and sale agreement. Therefore, we recommend the distributor privatization to consider prior corporate adjustments between the parties as part of distributor’s sale price definition. As a result, new value adjustments or corrections concerning these items shall not be conducted after the privatization.

Contingencies whose assessments are Probable Loss, due to the high chance they have to lose the sums involved in the respective proceedings, should be deducted from the shareholder’s value prior to transferring the shareholding control. Likewise, contingencies rated as ‘Possible’ and ‘Remote’ Loss should not have their value deducted from the company’s sale price.

· ‘Probable’ Contingencies: their amount shall be discounted from the equity price due to decreased chance of success in the proceeding and resulting probable loss of the value involved in the claim;· ‘Possible’ and ‘Remote’ Contingencies: their amount shall be not discounted from the equity price considering the chance of success in the proceeding and reduced probable loss of the value involved in the claim.

It should be stressed that several possibilities were analyzed to deal with contingencies, but all of them were proven to be financially unfeasible, with great operating complexity or with legal hindrances and risks.

In addition, Eletrobras was identified, due to its State nature and current financial condition, to have legal and financial limitations to offer warranties to the investors in relation to such contingencies.

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purchasing company, being questionable to advance its pricing in the minimum amount· Companies can be privatized at different times – e.g., such as Amazonas, which would not match the different nature groupings· Ungrouped concessions can increase competitiveness between the bidders, increasing competition and resulting into higher final price, but differently from pre-estimated synergies, avoiding the risk of empty offers for a grouping

It should be stressed that grouping can be used for pragmatic aspects, deriving from objective assessment aspects (e.g., grouping to minimize the required capitalization) and the own interest of investors (mitigating risks that a less attractive concession is not successful in the privatization).

In summary, a wide assessment, allied to the discussed context, does not construe as consistent the synergy incorporation to the minimum price and, accordingly, inexistence of returns to the proposed model.

Such recommendation occurs vis-a-vis the instruction that no concession groupings should be conducted since it is construed that an open model shall tend to increase the competition between the shareholders. Thus, there would be not only an increased number of offers –avoiding the chance for auctions without bidders – but also increased prices offered. Such prices, in turn, would be more appropriate to the level of synergy the investors shall have when inserting such companies into their management model.

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7. Adjustments on the Privatization model

7.1 Context

The privatization model is made from the results of the due diligence reports and economic-financial assessments. However, for the final proposal of capital and corporate structuring of the distributor, it is necessary that additional adjustments are conducted.

The adjustments are carried out for the privatization model to meet the required legal instructions and comprise the latest information available concerning the economic-financial condition of the distributor.

Adjustments made follow the stages provided below:

ADJUSTMENTS FOR PRIVATIZATION MODELING

= Mean of Services A and B

(+/-) Consolidated adjustments

Balance Sheet Adjustments

(+/-) Asset and Liability Adjustments

(+) RGR PPST Reincorporation

(-) Reclassification of AFACs as Debt

(-) Tax Adjustments (Tax Loss and Negative Base)

= Adjusted Equity Value

(-) Reduction adjustment of tariff relaxation

= Final Equity Value

The following topics describe the adjustments made. Their amounts are detailed in Section II - Privatization proposal.

7.2 Base amount of valuation – Average between valuations of Services A & B

Under Decree 2.594/98, providing for the National Privatization Program, Cepisa sale model shall consider the financial assessments conducted by Services A and B contracted by the State-owned bank. These evaluations were conducted with the base date of December 2016.

Within such context, based on the equity values drafted by Service A reported through the Letter AD/DEADE3 No. 14/2017, it is proposed that the equity value considered as basis for the financial and corporate model of Cepisa shall be the simple average of the equity values defined by Service A and Service B. The formula is below:

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For positive variation, the shareholder’s value is reduced, and, for negative variation, such amount is increased.

The adjustments excluded the accounts of ‘Liabilities’ concerning variations in the provisions for contingencies, litigations and civil, tax and labor claims. The reason is the probable overlapping between the new provisions made in the statements (after the valuation base date of December 2016) and the amounts of contingencies made by the Consortium. The amounts made are related to the same topics, in addition to the amounts of provisions of the financial statements and discounted from the shareholder’s value. Thus, the adjustment related to provisions for contingencies is avoided to occur in duplicate, leading Eletrobras to make increased contributions than those actually required.

Detailed amounts and the adjustment balances are provided in Item 10.2.2 - Balance update adjustment refer to the consolidated balance between the amounts of December 2016 and June 2017, which may be positive or negative. Balances of fiscal benefit and negative CSLL [Social Contribution on Net Income] basis were also updated to June 2017.

The resulting amount is used as basis for the adjustment in loosened regulatory parameters. The adjustments were solely applied in the equity value, not being extended to any other income.

7.3.2 Adjustment related to Advance Payments for Future Capital Increases (AFACs)

Furthermore, if the distributor has AFACs, another adjustment is made, with the amounts concerning AFACs being considered as debt. Until the updating of the balance sheet dated June 2017 – last updated until this report was concluded – no existing AFAC was used to increase the capital.

Thus, we suggest no new capital increase by using the AFACs of distributors by Eletrobras. As an alternative, its amounts shall now be construed as debts in the balance sheet (and may be used as an additional alternative for the capitalization to be conducted by Eletrobras outlined in

‘Stage 1’, as well as the remaining options provided).

Taking into account that, once approved, the CPPI Resolution with definitions of financial and corporate adjustments to be made in the distributor under privatization, it is not advisable that new corporate amendments are made. It means that, if paying-up of the AFACs is after the CPPI publication, there is great chance that the numbers established in such CPPI Resolution will not comply with the distributor’s capital stock after capital increase by using the AFACs.

Thus, conflicts will be avoided concerning the number of shares to be subscribed, as well as their underwriting amount, in addition to eventual legal conflicts or non-compliances.

We should also consider that there are no relevant financial benefits in paying up the AFACs instead of considering them as debt. The effect upon the equity is neutral, since the new indebtedness amount shall be part of the adjustments of the model. Eventual savings of the distributor with debt taxation costs (e.g., IOF) shall be offset with benefits of the reduced basis for collection of the distributor’s income tax and with adjustments for inflation of the AFACs (e.g., SELIC), which shall be due to Eletrobras.

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It is also stressed that the eventual paying-up of AFACs requires several levels of approvals, including internally at distributor and Eletrobras, as well as externally from the respective governmental agencies (e.g., MME, GCEST and PGFN).

Finally, we note that, until the latest information available for this report, the distributors’

AFACs funds solely derive from Eletrobras. Detailed adjustments and amounts related to the AFACs are found in Section II - Privatization proposal.

7.3.3 Tax adjustments –Tax Losses and Negative Base

In the first semester of 2017, the distributors used part of the Tax Losses (Individual Taxpayer Income Tax – IRPF) and Negative Base (Social Contribution on Net Income – CSLL) to liquidate tax debts. Since the economic-financial analysis of the distributors considers the use of these benefits positively in their cash flow, once used, such benefits must be excluded from the evaluation.

Thus, for the financial modeling, the balances of Tax Loss and Negative Base used between January and June 2017 have been deducted from the tax balances existing in December 2016, base date used in the economic-financial analysis.

7.3.4 Adjustment of the relaxation of regulatory parameters

The adjustment in the relaxation of regulatory parameters aims at complying with ANEEL Technical Note no. 149, dated September 8, 2017, in order to reach the economic equilibrium of the concessions of designated distributors, defined under the terms of Normative Resolution no. 748/2016.

Thus, the Draft of the Decree that will govern the bidding of distribution associated with the transfer of control of legal entity providing the electric power service, as per Law 12.783/2013, establishes that, in case the value to the shareholder of Cepisa resulting from the valuation is positive (which also considers the adjustment of the balance update) based on the relaxation of regulatory parameters, the value of relaxed parameters must be registered so that the value to the shareholder is zero. That is, in case Cepisa had negative value to the shareholder before the relaxation of regulatory parameters, and such relaxation results in positive value to the shareholder, the value of the relaxed parameters must be reduced to the amount necessary for the value to shareholder to be equal zero.

The relaxed regulatory parameters of Cepisa are listed below:

RELAXED PARAMETERS

- Non-Technical Losses

- PMSO

- RGR PPST

The adjustment of the relaxed regulatory parameters is applied to values of equity value (average of services A and B), corrected with the other adjustments specified (balance update, RGR PPST, AFAC, Tax Loss and Negative Base).

In order to zero the value to shareholder, the relaxed values of the relaxed parameters shall be adjusted. The reason is that they have a direct effect to the first years of the concession and

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raise the rate to the consumer in a period in which other exceptional rate adjustments are in force.

As detailed in Section II - Privatization proposal, the relaxed values will be used as variables of the privatization auction, after the eventual adjustment of these parameters to zero the value to shareholder. In addition, the RGR PPST will also be used as an auction variable.

It is also worthwhile noting that in case the value to shareholder of the distributor is negative after the regulatory flexibilization, it will not be necessary to adjust the value of relaxed parameters. In this scenario, the relaxed value shall be fully valid as a base for the bids of investors in the auction.

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This stage, as well as its premises and parameters, is detailed in Item 8.2 - Minimum adjustment of the capital structure – “Stage 1”.

Investor capitalization – “Stage 2”

“Stage 2” is a stage after “Stage 1”, and optional to Eletrobras.

It is important to stress that the capital structure of privatized companies needs to be balanced after the sale. This equilibrium is important to assure that the company will have financial health to honor its obligations – such as investments forecasted for the period of concession – and overcome eventual adverse conditions.

This, the modeling determined that the investor stakeed in acquiring the company, in addition to buying the shares held by Eletrobras at the company of symbolic value, will also invest funds and resources to balance the capital structure of the company.

This stage, as well as its premises and parameters, is detailed in Item 8.3 - Investor capitalization – “Stage 2”.

Eletrobras corporate stake option

In order to allow Eletrobras to have economic and financial benefits in the future with the privatization of its distributors, the modeling foresaw the possibility for the state-owned company to remain as a shareholder of the companies sold, holding only a minimum percentage of corporate stake right after the disposal, being able to increase its corporate stake by up to 30% of the total shares of the distributors within up to six (6) months after the auction.

For such, Eletrobras is entitled to increase its corporate stake up to the limit of 30% of the shares of the capital stock of Cepisa, case in which the investor shall assign its right to subscribe such new shares to Eletrobras, so that it may formalize such increase. Considering the financial conditions of the company and the credit amounts of the debt held by Eletrobras with its distributors, Eletrobras may also pay such new shares by exchanging such debts into investment. These rules will be defined in the Shareholders Agreement to be signed by Eletrobras and the investor, and such agreement will be an attachment to the Purchase and Sale Agreement of the distributor.

Finally, it should be stressed that this alternative is not effectively part of the privatization, but an alternative available to Eletrobras, to be evaluated by it. Therefore, the intent is to include in the purchase and sale agreement of the distributor that Eletrobras may manifest its stake in increasing its corporate stake in the distributors after the privatization, within up to six (6) months from the date of the auction.

In order to be eligible to increase its corporate stake in this stage, Eletrobras must hold one (1) share at the end of “Stage 1”. In case Eletrobras chooses not to increase its stake, such remaining share shall be sold to the investor within six (6) months from the date of the auction.

This stage, as well as its premises and parameters, is detailed in Item 8.4 - Eletrobras corporate stake option.

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number of eligible employees, active and retired; 4) the number of shares of the company; 5) the minimum values to each lot of shares of the company.

The capitalization value also considered the reality of six distributors in privatization procedure by Eletrobras, part of the same initiative. An uniform value was defined to all, considering the similarity of the financial situation in which they are found, as well as the proposed auction model, in which its sales operations interconnect. The definition of a homogeneous sales value of the companies, considering their financial situation, allows for a clearer and greater understanding of the privatization procedure of these companies to investors and to society.

Details on the number of shares and values, among other aspects, are listed in Section II -Privatization proposal and in the Public Notice to the privatization procedure of Cepisa.

8.2.2 Capitalization alternatives

It is recommended that the choice on the alternatives to perform the adjustments to the capital structure of Cepisa should fall exclusively onto Eletrobras. The choice shall be made according to the most attractive options and to the reality of financial availability and credit of the company at the time of the operation.

Recommendation made, it has been noted that Eletrobras could use three main alternatives to make the capitalization, all resulting in subscribing shares of the distributor: (i) conversion of debt credits by distributor to Eletrobras; (ii) assumption of debts of the distributor with third parties; and/or (iii) cash contribution to the distributor’s capital structure.

· Conversion of debt credit of distributor: requires that Eletrobras should waive the right to amortization and interest of the debt credits, which, in part, would be of doubtful liquidation without the privatization. However, no demand is made in terms of cash disbursements by the company;· Assumption of debts of distributor with third parties: requires disbursement of cash for the payment of debts with third parties, according to the negotiation occurred;· Funding of financial resources to the distributor: requires disbursement of capital to allow the contribution to capital.

In order to define the best alternative of capitalization to Eletrobras, a specific analysis shall be carried out by the Holding.

8.3 Investor capitalization – “Stage 2”

Even after the adjustment to the capital structure by Eletrobras to a symbolic value, the recommendation, for the purposes of conclusion of the privatization procedure of Cepisa, is to conduct a new capitalization of the company, however this time by the investor, against the underwriting of new shares. This capitalization has the attributions of:

a) Avoiding the participation of investors effectively committed with the success of the company or without the due financial conditions to make the investments necessary for the organization;

Product 11 –Privatization Modeling Proposal

b) Optimizing the capital structure of the company. After the “Stage 1”, against a symbolic equity value, the capital structure of Cepisa shall consist of approximately 100% of debt.

Thus, the company is not duly capitalized to make the investments and other demands of cash;

c) Demonstrating to society and stakeholders that the privatization of Cepisa has attracted an investor committed to contributing with resources sufficient to cover the investments in the first five years of the concession, fundamental to lever efficiency and the level of service of the company.

The definition of the capitalization value took two factors into consideration: 1) capital structure of companies after adjustments in “Stage 1”; and 2) reference leverage for electric power distributors in Brazil considering that Eletrobras remains as a minor partner of the companies.

In the first factor, it was considered that the capital structure that will serve as basis to be adjusted by the investor is the post-privatization operation structure. That is, any possible debt conversions by Eletrobras have already been considered in order to reach the value defined for the disposal of the shares of the distributor held by Eletrobras to the investor and consequent privatization of Cepisa. At the moment, the company's leverage is close to the theoretical limit, since there is no significant equity value.

In the second factor, a reference capital structure was used for companies of the industry, with a 54% financial leverage. Leverage is calculated as the modulus of net debt divided by the sum of the net debt value modulus and the company's equity value, as follows: (|Net Debt| / [|Net Debt| + Equity Value]).

The value of 54% defined as the investor's post-capitalization leverage goal was calculated according to the methodology used by the More Energy Consortium B. It considers the average of the current weighted average capital cost ("WACC") of the most comparable companies leveraged in the industry. The calculation of the value required from the investor also considered that Eletrobras will exercise the option to reach the maximum value of ownership (30%) in Cepisa through debt conversion, after the privatization.

If Eletrobras does not partially or fully exercise its option, there is no damage to the operation or the investor. The main reflex is that Cepisa will have a more leveraged capital structure than the suggested level (54%). However, as a function of the capitalization made by the investor, the distributor is already more prepared to face the relevant investments foreseen for the first years after privatization. Likewise, the reasons to require the investor’s capitalization remain to be met.

It should be noted that, in addition to the capitalization forecasted for the investor, optimizations of the capital structure tend to be made progressively by the future investor. Thus, new contributions of resources may be demanded so that the financial equilibrium of Cepisa is continuously achieved or even to face cash demands. Accordingly, in case Eletrobras decides to remain as a shareholder of the distributor and does not accompany the investor in eventual future increases of capital of the distributor, it shall be diluted. The same principle applies to eventual minority stakeholders (including Active and Retired Employees who joined the distributor’s Share Offer).

The capitalization values of the investor are listed in Section II - Privatization proposal.

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8.4 Eletrobras corporate stake option

8.4.1 Justification

The privatization modeling considers the possibility of Eletrobras continuing as a minority stakeholder of Cepisa after the disposal of the shareholding control of such distributor. When holding a shareholding interest, even if assuming the risks as a shareholder of the company, Eletrobras may recover part of the investments made with the receipt of dividends or future increase of value and subsequent sale of its shareholding interest.

In such case, Eletrobras shall have the right to increase its shareholding interest at Cepisa after the privatization of the company, having as an alternative not only the contribution to capital, but also the additional conversion of debts into shares. Thus, the state-owned company will not necessarily need to contribute to the capital of Cepisa in case it is willing to exercise the respective option, using the credits of remaining debt eventually held against the privatized company.

The structuring of this alternative to Eletrobras occurs to provide it with an option to generate additional value from the privatization. For such, a financial valuation shall be carried out by Eletrobras, considering, among other aspects, the TIR and VPL of both scenarios.

8.4.2 Eletrobras corporate interest threshold

The corporate interest of Eletrobras should be limited to 30% of the shares of the company. The threshold of 30% was established based on benchmarks and good market practices, in which minority stakeholders have limited participation in the governance and/or management of the company.

The established percentage, in addition to allowing Eletrobras to hold relevant economic interest in the company, will not be equivalent to that of future investor, which will provide the investor with autonomy to act.

The capitalization to be performed by Eletrobras shall also follow the same profile of share categories currently existing at Cepisa. Thus, eventual risks of legal inquiries related to specific corporate adjustments to the privatization procedure may be mitigated.

However, the shareholders agreement set forth in Item 8.4.3 –Participation of Eletrobras in the governance of the company shall be observed. Therefore, the degree of attractiveness of Cepisa privatization to investors, main resource holders and risk takers, should be kept when assuring autonomy in the management of the company.

Such evaluation was also carried out based on market analyses, which included interviews with market experts and potential investors. In general, investors tend to accept the participation of Eletrobras in the company, however without substantial participation in the management of the company.

8.4.3 Participation of Eletrobras in the governance of the company

In the presented model, although Eletrobras holds shares of Cepisa, the state-owned company should preserve minimum rules in the management and governance of Cepisa. Thus, the attractiveness of sale of the distributor would not be reduced duet to the sharing of its management, allowing the highest degree of freedom to the new investor.

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For such, it proposes that, regardless of the shareholding organization of Cepisa after the privatization, a shareholders agreement with the following parameters shall be established:


MODEL OF PROPOSED AGREEMENT
Participation Option	Eletrobras option to increase the participation in the distributor up to 30%
Conditions for the increase of capital	Accompany or increase the participation via debt conversion
Purchase priority	Valid to investor and to Eletrobras
Tag Along	100%
Effectiveness of the agreement	Regardless of controller succession

The objective of this configuration is to preserve the attractiveness of creation of value of the company, overcoming eventual barriers resulting from the sharing of decisions of the company after the privatization.

It is worthwhile noting that, even though not having a role in the management of the company, Eletrobras shall have its rights as a minority stakeholder duly protected. Privatized, Cepisa will become a business corporation, one of the legal requirements for a company engaged in the distribution of electric power. In this case, the rights of the minority stakeholders will be governed by law, as well as the requirement of observance of good corporate governance practices (including the conduction of external audit and the disclosure of financial statements).

In addition, Eletrobras shall have specific aspects set forth in the shareholders agreement and in the obligations of the eventual investor when acquiring Cepisa. The rights of Eletrobras are protected by the conditions detailed in the Public Notice to privatization of the company, and the specific conditions of the purchase and sale agreement of the distributor, including the shareholders agreement.

8.4.4 Procedure for Eletrobras to increase its shareholding interest

The purchase and sale agreement of the distributor and the shareholders agreement establish that Eletrobras will have up to six (6) months from the date of the auction to decide on its interest in increasing its shareholding interest by up to 30% of the shares of the capital stock of Cepisa. Once the decision is made, Eletrobras shall communicate it to the new controller so that it becomes effective.

In case Eletrobras is interested in increasing its participation, the legal and usual procedures for the capitalization of the company shall be observed, considering the rights of minority stakeholders – including active and retired employees acquiring shares of Cepisa. The investor shall not accompany such capitalization, in order to dilute its interest in the distributor and for Eletrobras to achieve the maximum threshold determined for its shareholding interest.

As mentioned, the capitalization to be made by Eletrobras may also be made using debt credits held by the state-owned company with Cepisa. The financial conditions of the capitalization, i.e., the market value per share, shall be the same of Stage 2 and of the auction.

8.5 Classes of shares

During the procedures of increase of capital of the distributor, the assumed premise is that the distributor will observe the legal rules applicable to the matter.

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9. Shares offering to active and retired employees

9.1 Mechanism

According to the applicable legislation, the active and retired employees of the companies directly or indirectly controlled by the Government, included in the National Privatization

Program (“PND”), herein the Investment Partnership Program (“PPI”), are assured the offer of at least ten percent (10%) of the shares representative of its capital.

The offer to active and retired employees is made in parallel with the privatization auction, and its implementation is conditioned to its success, i.e., against the effective transfer of shareholding control.

To take part of the offer, active and retired employees must be qualified according to the criteria established in Item 9.2 – Definition of active and retired employees. After such qualification, active and retired employees shall indicate the number of lots of shares they are willing to reserve, without any purchase obligation.

Each qualified active and retired employee may receive the same number of shares, regardless of title, either at the present or upon retirement.

To negotiate the shares, the active and retired employees must be qualified and must hire a custodian agent, authorized institution accredited with B3, new denomination of BM&FBOVESPA.

9.2 Definition of active and retired employees

For the purposes of the Offer to Active and Retired Employees, active or retired employees of the distributor shall be considered as the following:

1) Employees with labor links with the distributor on the date of publication of the Public Notice in the Federal Official Gazette;

2) Retired employees who meet any of the following requirements: a) Hold labor link with the distributor on the date of request of their retirements; b) Have the last contribution to the social security made as an employee of the distributor; c) Have the last contribution to the social security covered by the distributor, as a result of voluntary dismissal plans; The details on the eligibility criteria of active and retired employees for their eligibility to the auction, including specifications of CNPJ [Corporate Taxpayer ID Number] of companies eventually related, shall be included in the Public Notice to the privatization of Cepisa.

9.3 Offer General Conditions

The table below presents the main conditions of the offer of shares to the active and retired employees, with explicative details in the following items.

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After the stage of offer to the active and retired employees, shares that have not been sold shall be purchased by the winner of the auction, for the same price as previously offered, i.e., with the same discount offered, since the investor already is responsible for the costs of such discount.

9.3.3 Offer Procedure and Purchase Limits

A single offer of shares shall be made, extensive to all active and retired employees of each distributor, of 10% of the total amount of shares held by Eletrobras after the adjustment of the capital structure of “Stage 1”.

Based on the value of the shares for the disposal to the Investor, the value of shares for the Offer to Active and Retired Employees shall be calculated with the application of the discount of 10%, as indicated in Item 10.6 - Shares offering to active and retired employees. In order to allow the Offer, the shares will be grouped so that a lot of shares has value equivalent to R$ 0.01 (one centavo), minimum effective unit for money transactions.

After the qualification stage, the maximum limit of lots of shares that each active and retired employee may acquire will be defined (“Purchase Limit”), through the division of the number of lots offered by the number of qualified persons.

9.3.4 Follow-up by minority stakeholders of investor underwriting

As presented in Item 8.3 - Investor capitalization – “Stage 2”, the investor shall increase its interest in the capital stock against the underwriting of new shares following the liquidation of the auction. At that time, the persons who have acquired shares through the Shares offering to active and retired employees already are considered shareholders of the company.

The value per share (or lot of shares) for the eventual follow-up of the capitalization by the active and retired employees shall be equal to the price per share for the investor underwriting.

9.3.5 New controller shares repurchase obligation

The active and retired employees will be entitled to distribute the acquired shares in the following differentiated conditions:

a) Under the scope of the Offer to the active and retired employees b) In the underwriting of capital with the investor

In case the active and retired employees who acquired shares of the Distributor are interested in selling such shares to the new controller, they may make such sale after three years from the date of the liquidation of the auction. The repurchase of these shares shall be made at the price per share acquired, up to the total maximum value of R$ 100,000.00 (one hundred thousand Brazilian Reais) per Active or Retired Employee.

Moreover, for the repurchase, the value of the shares acquired by the active and retired employees shall be added 10%. Following that, such total must be adjusted by the SELIC of the period for the purposes of inflation adjustment of the values. These values are detailed in Section II - Privatization proposal.

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The addition of 10% to the repurchase value is defined as a form of assuring differentiated conditions to the active and retired employees with a substantial value, since the sale of shares for the privatization of the distributor is made with symbolic value. It is a benefit for the participation in the capitalization of the company and also an stimulation for employees to contribute with the financial and operating success of the company.

The price per share (or lot) shall observe eventual adjustments resulting from grouping, split, bonus, and/or additional underwritings of shares or equivalent operations. Details of the values are also presented in Section II - Privatization proposal.

It is worthwhile noting that the active and retired employee are not prohibited from selling shares they acquired from Cepisa to third parties. However, in case such sale occurs, the obligation and respective share repurchase conditions are cancelled. Exceptions apply to cases of heritage and eventual legal provisions.

9.4 Shares not acquired by active and retired employees

The shares offered in the Shares offering to active and retired employees, eventually not acquired by active and retired employees, shall be purchased by the investor. The purchase shall occur at the differentiated value (already with the discount), since the investor will already be entitled to offset the discount to Eletrobras.

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Section II - Privatization proposal

10. Summary of Cepisa’s privatization proposal

This summary will present the recommendations of Consórcio Mais Energia B in relation to the privatization of Cepisa. The evaluations and recommendations are presented in an objective manner, according to the instructions presented in Section I - Privatization context. They are intended to guide the actions to be taken by Eletrobras and entities responsible for the privatization procedure of the company.

10.1 Cepisa’s Corporate Structure

The corporate structure on the base date of 12/31/2016 is organized according to the table below:


CURRENT CEPISA’S CORPORATE STRUCTURE
Total shares			779,223,552
Capital stock	R$	1,272,747,054.06
Nominal value of shares	R$		1.63335291

Interest		Shares	(%)
Eletrobras		779,223,552	100.00%
Minorities		0	- %

Classes of shares		Shares	(%)
Ordinary		744,131,334	95.50%
Preferential		35,092,218	4.50 %

10.2 Cepisa’s Sales Price Definition

10.2.1 Result of economic-financial evaluations

The economic value of the shares of the company was determined according to the base date of 12/31/2016. Following on, the values were defined, considering the average of the prices for Services A and B, demonstrated in the table below:


ECONOMIC VALUE OF CEPISA - MEAN OF SERVICES A AND B
Service A	R$	91,400,895.59
Service B	R$	495,935,437.78
Mean of Services A and B	R$	293,668,184.68

The definition of the economic value of Cepisa followed the definitions and instructions of Decree no. 2.594/98, Article 30, Paragraph 3, taking into account several aspects relevant to a valuation:

a) Improvement of the operational efficiency level of the company, equal to or even higher than the efficiency levels of the market; and

Product 11 –Privatization Modeling Proposal

b) Evaluations of relevant due diligence for asset valuation (Legal Due Diligence, Accounting-Equity Due Diligence, Technical-Operational Due Diligence, Actuarial Due Diligence, Human Resources Due Diligence, and Environmental Evaluation Report).

The detailing of the relevant information of these reports for the modeling are described in Section I - Privatization context.

10.2.2 Balance update adjustment

As mentioned in Item 7.3.1 – Adjustment to comprise updated balance sheet until June 2017, the entries of the balance of Cepisa were updated to reduce the difference of values between the base date of the valuation (December 2016) and the last available publication of results (June 2017).

The balances of the adjusted values are listed below, by entry, and consolidated in a table, including the positive or negative effect they have to the adjustment value:


ASSET (IN R$ 000) - CEPISA	Dec/16	Jun/17 Adjustment
Current
Cash and cash equivalents	5,200	6,542	1,342
Securities	8	17,521	17,513
Clients	379,675	349,472	(30,203)
Taxes to be recovered	17,440	16,352	(1,088)
Reimbursement rights	124,431	23,016	(101,415)
Warehouse	12,884	15,337	2,453
Services in progress	-	-	-
Regulatory asset	-	-	-
Sureties and judicial deposits	-	-	-
Financial asset	132,800	153,350	20,550
Assets destined to disposal	-	-	-
CDE repayment	-	-	-
Others	60,636	69,920	9,284
Non-current
Clients	209,391	225,652	16,261
Taxes to be recovered	7,668	7,668	-
Taxes to social contributions	-	-	-
Sureties and related deposits	16,272	17,124	852
Reimbursement rights	-	-	-
Regulatory asset	-	-	-
Others	1,437	1,547	110
Investments	146	146	-
Total asset adjustment			(64,341)

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LIABILITIES (IN R$ 000) - CEPISA	Dec/16	Jun/17	Adjustment
Current
Loans and Financing	302,796	529,315	226,519
Lease	-	-	-
Debt charges	-	-	-
Suppliers	246,111	134,079	(112,032)
Taxes payable	215,861	162,433	(53,428)
Social and labor obligations	30,711	33,806	3,095
Reimbursement obligations	-	-	-
Accounts payable to related parties	-	-	-
Estimated obligations	-	-	-
Sectorial charges	10,315	10,503	188
Post-employment benefits	27,609	1,023	(26,586)
Regulatory liabilities	-	-	-
Research and development	11,128	12,785	1,657
Financial liabilities	88,192	70,789	(17,403)
Others	118,133	82,271	(35,862)
Non-current
Loans and Financing	1,378,432	1,548,069	169,637
Lease	-	-	-
Suppliers	-	-	-
Taxes payable	187,972	58,430	(129,542)
Reimbursement obligations	-	-	-
Accounts payable to related parties	-	-	-
Provision for unsecured liability in controlled	-	-	-
Post-employment benefits	3,273	3,273	-
Regulatory liability	-	-	-
Sector charges	-	-	-
Advance for future capital increase	295,402	308,978	n/a
Research and development	54,080	55,900	1,820
Others	503	503	-
Total liabilities adjustment			28,063


CONSOLIDATED VALUE OF ADJUSTMENTS (IN R$ 000) - CEPISA
(+/-) Asset Adjustment	(64,341)
(+/-) Liabilities Adjustment	(28,063)
(+) RGR PPST Reincorporation	483,623
(-) Reclassification of AFACs as Debt	(308,978)
(-) Tax Adjustments (Tax Loss and Negative Base)	(92,488)
Consolidated value of adjustments	(10,247)

The consolidated value of the balances of the entries for the respective period was used as the adjustment value:


CEPISA VALUATION ADJUSTMENTS
Mean of Services A and B	R$	293,668,184.68
Consolidated adjustments	R$	(10,247,473.93)
Adjusted Equity Value	R$	(283,420,710.76)

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10.2.3 Regulatory parameters relaxation adjustment

As described in Item 7.3.4 – Adjustment of the relaxation of regulatory parameters, in case the ‘Adjusted Equity Value’ is greater than zero, the relaxation of the regulatory parameters must be reduced to result an equity value equal to zero. In the case of ‘Adjusted Equity Value’ smaller than zero, there will be no reductions to the relaxation of the rate parameters and no adjustment will be made to the equity value.


CEPISA TARIFF RELAXATION ADJUSTMENTS
Adjusted Equity Value	R$	283,420,710.76
Reduction adjustment of tariff relaxation	R$	(283,420,710.76)
Final Equity Value	R$	-
Reduction percentage of tariff relaxation		61.3%

10.3 Sale vs. Liquidation Evaluation and consequent “pure” concession granting

One of the relevant alternatives that Eletrobras shareholders have is to evaluate the economic feasibility in selling Cepisa associated with the grant of the concession.

In case the state-owned company is willing to sell the company associated with the concession, the respective auction shall be held. Otherwise, or if the proposed adjustments are not accepted and/or made by Eletrobras, the auction shall only be held for the sale of the concession.

Thus, a comparative analysis between the sale price of the distributor associated with the concession and the eventual liquidation price of the company was developed. Thus, it is possible to assess if the sale would be more attractive to the state-owned entity.

Since the sale price considers adjustments to the equity value, the adjustments were also considered in the estimate of the liquidation value. However, exception was made to Tax Adjustments and Negative Base, since these had no impact to the liquidation value, and to AFACs, since they could be paid if the distributor is not sold.

As shown below, in the case of Cepisa, the best economic option is to sell the company, considering the value of assets and of the concession. The balance between selling and liquidating is favorable for the first option, according to the table below:

Product 11 –Privatization Modeling Proposal

10.5 Eletrobras capitalization value – “Stage 1”

In order to adjust the capital structure of Cepisa, the total debt value to be converted by

Eletrobras in exchange for shares of the distributor in “Stage 1” is presented in the table below:


CONVERSION AND ASSUMPTION OF CEPISA’ DEBTS

Final Equity Value	R$	-

Stage 1 - Eletrobras Capitalization	R$	50,000.00
Debt conversion	R$	50,000.00
Debt assumption	R$	-
Adjusted Equity Value – Post Stage 1	R$	50,000.00

Price per share for Eletrobras underwriting	R$	1.63335291
Total shares subscribed by Eletrobras		30,612

The number of new shares subscribed by Eletrobras from these operations is defined pursuant to the price of issuance of the shares.

This is the stage in which the privatization of Cepisa occurs in technical terms. After the adjustment of capital, 10% of the shares shall be offered to Active and Retired Employees, 90% of the shares less one shall be sold to the potential investor, and one share must remain as property of Eletrobras. The possession of this one share is necessary in case Eletrobras wishes to increase its corporate interest.

10.6 Shares offering to active and retired employees

As mentioned, the Brazilian legislation requires that, in a federal privatization, part of the shares directly or indirectly owned by the Government should be sold to the active and retired employees in differentiated conditions.

Thus, the shares of the distributor held by Eletrobras shall be offered to its active and retired employees, according to the conditions below:


OFFERING TO ACTIVE AND RETIRED EMPLOYEES FROM CEPISA

Conditions of differentiated offer
Base value of sale share	R$	0.00006416
Discount over the disposal value for the Investor		10.94%
Share value for differentiated offer	R$	0.00005714

Shares to be offered
Amount of Eletrobras shares		779,254,164
Percentage of Eletrobras shares offered		10.05748877%
Total amount offered		78,373,400
Ordinary		74,790,616
Preferential		3,582,784
Total valued of sharesoffered	R$	5,028.74
Value of shares offered with discount	R$	4,478.48
Value of compensation payable by the Investor	R$	550.26

Product 11 –Privatization Modeling Proposal

Lots of the Shares offering to active and retired employees

Value of the lot of shares with discount R$ 0.01000000 Total quantity of lots in the Offer to Active and Retired Employees 447,848 Amount of shares in the lot 175 Amount of Ordinary shares in the lot 167 Amount of Preferential shares in the lot 8

Re-purchasing process¹by the investor

Lock-up period No lock-up Re-purchasing deadline 03 Years Base value per share for re-purchasing purposes R$ 0.00006416 Base value limit of shares to be re-purchased R$ 100,000.00 Increase on base value of shares 10% Share value with increase R$ 0.00007058 Correction Index SELIC Re-purchasing price per share R$ 0.00007058 + SELIC

1) In the defined modeling, the repurchase conditions by the investor of the offered shares are exclusive rights of the active and retired employees acquiring them, or by individuals that may acquire them by succession (due to death of the original purchaser). In the case of sale of the shares to third parties, the repurchase benefits will be cancelled.

The investor shall offset Eletrobras for the offer of shares with differentiated conditions to employees (according to Decree 2.594/98), in addition to complying with the obligations included in this report, as indicated in Item 10.9 - Investors Obligations.

Shares eventually not purchased by the active and retired employees must be acquired by the investor at the end of the sale of these shares, at the price including the proposed discount. The acquisition of the remaining shares at the discount price shall occur so that the investor is not encumbered, twice, for the financial offset made to Eletrobras in relation to the sale of the shares to the active and retired employees, since the offset to Eletrobras will be made.

10.7 Investor capitalization – “Stage 2”

In the proposed sales model, for the purposes of liquidation of the auction, the investor willing to purchase Cepisa shall make a contribution of capital with the underwriting of new shares at the company. Such capital shall be paid in national currency.


CAPITALIZATION OF INVESTOR ON CEPISA
Adjusted Equity Value – Post Stage 1	R$	50,000.00
Value to be paid by the Investor	R$	720,915,595.51
Adjusted Equity Value – Post Stage 2	R$	720,965,595.51
Amount of share to subscribe to the Investor		11,235,529,593,798
Price per share subscribed	R$	0.00006416

Product 11 –Privatization Modeling Proposal

10.8 Cepisa’s final corporate structure

At the end of the privatization procedure, Cepisa shall present the corporate structure described below, considering the full adhesion of the active and retired employees to the offer of shares:


CEPISA’S FINAL CORPORATE STRUCTURE

Total shares				12,492,680,402,577
Capital stock			R$	2,074,326,370.52
Nominal value of shares			R$		0.00016604

Interest	Ordinary shares	Preferential shares		Total Shares	(%)
Investor	10,731,062,154,927	505,168,319,634		11,236,230,474,561	89.9425%
Eletrobras	1	0		1	0.0000%
Active and Retired	1,199,012,217,021	57,437,710,994		1,256,449,928,015	10.0575%
Other Minorities	0	0		0	%

Shares per Class				Total Shares	(%)
Ordinary				11,930,074,371,949	95.4965%
Preferential				562,606,030,628	4.5035%

Note: assumes the total follow-up by Active and Retired Employees of the capitalization made
by the investor. The final corporate structure, however, shall vary in accordance with the degree
of adhesion to the offer by the Active and Retired Employees and to the follow-up rate of the
capitalization.

The final corporate structure will vary depending on the rate of adhesion of the active and retired employees of Cepisa to the offer of shares.

Shares eventually not acquired by the active and retired employees will be purchased from Eletrobras by the investor. The final participation of Eletrobras, however, shall not be changed.

In case Eletrobras chooses not to increase its corporate interest, the remaining share held by it shall be sold at its base price to the investor within six (6) months from the date of the auction.

10.9 Investors Obligations

The purchase Cepisa, the interested investor must undertake to the following obligations established in the sale proposal:

10.9.1 Financial obligations

i. Underwriting and payment of capital at the company ii. Pay Eletrobras the offsetting amount related to the differentiated conditions of the Shares offering to active and retired employees of Cepisa iii. Purchase from Eletrobras the remaining shares of the offer made to the active and retired employees iv. Fulfill the requests related to the offer of shares to the active and retired employees in accordance with the differentiated conditions established

The values of the financial obligations are defined below:

Product 11 –Privatization Modeling Proposal


INVESTOR OPERATIONS ON CEPISA

Total paid during disposal of Cepisa control	R$	45,521.52
Total value from sale of shares	R$	44,971.26
Amount of sale shares		700,880,763
Price per share	R$	0.00006416
Value compensation to Eletrobras for the offer to active and retired employees	R$	550.26

Capitalization - Stage 2
Amount of subscribed shares		11,235,529,593,798
Price per subscribed share	R$	0.00006416
Value to be paid by the Investor	R$	720,915,595.51

Other Obligations
Re-purchase of remainder from the offer to active and retired employees
Re-purchasing price	R$	0.00005714
Re-purchasing amount		Totality of remainder
Maximum value to be re-purchased	R$	4,478.48
Re-purchase of shares from active and retired employees
Re-purchasing deadline		03 Years
Base value per share for re-purchasing purposes	R$	0.00006416
Base value limit of shares to be re-purchased	R$	100,000.00
Increase on base value of shares		10%
Share value with increase	R$	0.00007058
Correction Index		SELIC
Re-purchasing price per share		R$ 0.00007058 + SELIC

10.9.2	Obligations defined in the Purchase Agreement
	Certain additional obligations are recommended, namely:
	i. Comply with the corporate clauses related to active and retired employees, according to the model proposed below:


Contractual obligations proposals
Private Pension	Maintain current conditions for two years
Health Insurance	Maintain current conditions for two years
Re-qualification of dismissed
personnel	Structure re-qualification program compatible with the best market practices

ii.	Comply with the governance clauses related to the shareholders agreement with Eletrobras, according to the model proposed below:


Proposed Deal Model
Participation Option	Option for Eletrobras to increase participation on the distributor up to
	30%
Conditions for capital increase.	Follow or increase participation via debt conversion
Purchase preference	Mutual for investor and Eletrobras
Tag Along	100%
Deal validity	Independent from controller succession

Product 11 –Privatization Modeling Proposal

11. Cepisa’s privatization schedule

A proposal of schedule¹presenting the key stages of the privatization procedure was developed for the privatization of Cepisa. The objective is to offer an overview of the procedure, complemented by a detailed schedule in terms of specific reports and legal drafts.

The schedule considers the legal requirements of term and the time necessary to make the corporate and financial adjustments, as well as the observance of contractual and corporate aspects. We have observed that this schedule is preliminary and may be subject to changes and adjustments to meet the requirements of the privatization procedure.


Activity	Term
Publication of Resolution CPPI	D + 0
Data Room Opening	D + 9 days
Shareholder’s Meeting of Eletrobras	D + 50 days
Shareholder’s Meeting of Distributor	D + 63 days
Conduction of Public Hearing	D + 70 days¹
Publication of the Public Notice to Privatization	D + 92 days
Auction	D + 145 days²
Auction homologation	D + 168 days²
Shareholder’s Meetings of the Distributor	D + 177 days
Liquidation of the auction and execution of the agreement	D + 177 days
Shareholder’s Meeting of the Distributor	D + 207 days³

Note: Depending on the effective date of the CPI resolution and the internal deadlines for the corporate procedures
of Eletrobras (at times considered in business days), the estimated terms may be changed
1) According to Article 39 of Law 8.666/93, 15 business days before the publication of the Public Notice will be
necessary. Considering that six public hearings shall occur, two weeks have been estimated. Thus, in case more days
are necessary to hold these public hearings, the schedule will be changed
2) Suggestive term, since such terms are stipulated by the Public Notice
3) Suggestive term, however not smaller than 30 days from the date of the last Shareholder’s Meeting of the
Distributor

Product 11 –Privatization Modeling Proposal

As established in the regulation above, the regulatory aspects mentioned below have been made flexible for the area of concession of the distributor:

RELAXED PARAMETERS

- Non-Technical Losses

- PMSO

- RGR PPST

As a form of allowing the reduction of the power rate charged against the consumer, the relaxed parameters shall be used as auction variables. They will be reduced by the bids of investors participating in the auction up to the limit of the relaxations performed by the regulator.

Once the relaxed parameters have a limit, the regulation also established the possibility of offer of values of grant by investors, with their resources being destined to the Government. The grant offer is subsequent to the reduction of the relaxed parameters and has no capped value. Thus, there are no procedural limits for the bids placed by the participants of the auction.

To reduce the operating complexity of an auction with several parameters, the proposal is to establish a single variable for the investor offers. This variable is a reference Index, exclusive and of crescent value, the ‘Combined Discount Index in the Regulatory Flexibility and Grant’ –referred to as Index.

In order to meet the regulatory requirements, the Index value will begin with 0.00 (zero) percentage point (p.p.) and shall not have capped value, with up to two decimal points for bids. The Index will also have two combined intervals, the first representing how investors are willing to reduce the tax relaxed, and the second representing how much they are willing the offer as grant value.

The intermediary values of the Index are described below:

- Values from zero (0.00) to one hundred (100.00):

o The offers in this interval will be related to the discount percentage in the relaxed regulatory parameters offered by the investor, with the percentage being applied linearly to all relaxed parameters in the area of concession of the distributor;

o The values will be used to define the final regulatory parameters of the area of concession of the distributor, according to the Draft of Electric Power Distribution Concession Agreement resulting from Public Hearing 94/2016 of ANEEL and Public Inquiry 037/2017 of the Ministry of Mines and Energy -MME.

- Values above one hundred point zero one (100.01):

o The bids in this interval consider only the values additionally to the initial one hundred (100.00) p.p. and refer to the value of offered grant, with the payment being made to the Government;

Product 11 –Privatization Modeling Proposal

o The value offered by the investor shall be multiplied by a pre-determined reference money value to each one (1.00) percentage point of the Index after 100.01;

For exemplification purposes, we indicate the following cases:

- Index equal to zero (0.00): The tariff is not reduced, nor the grant value. The agreement will be signed with the whole Regulatory Flexibility that served as the base of the auction;

- Index equal to one hundred (100.00): The investor completely waives to the relaxed, without offering grant value. The concession agreement shall be signed without adjustments resulting from the auction, to be applied over the relaxed factors (as per the Draft of Electric power Distribution Concession Agreement resulting from Public Hearings 94/2016 and 032/2017 of ANEEL);

- Index equal to one hundred and ten (110.00): The investor completely waives to the relaxed and offers as grant ten (10) times its reference value for each percentage point. The concession agreement will be signed without adjustments resulting from the auction, to be applied over the relaxed factors. The reference grant value of each percentage point (for instance, R$ 5 million) will be multiplies by 10, and the resulting grant value (in this case, R$ 50 million) will be destined to the Government.

The Index will be valid both to the first stage (in closed envelope) and in the second stage (live bidding). After opening the envelopes, in case of bidders classified to the 2^ndstage, the bids of investors for the highest Index value continue in live bidding until one of them is declared winner.

12.6 Auction Value base for ‘Combined Discount Index in the Regulatory Flexibility and Grant’

The values of the first interval of the Index (from 0.00 to 100.00 p.p.) refer to the Regulatory Flexibility, in which the offered discount is applied linearly over the values of the relaxed parameters by the regulator.

In this context, the values of the regulatory parameters used as variables of the auction should be fixed. Thus, investors will know the amount in which they bids will be placed and that will base the auction. This recommendation also aims at avoiding legal inquiries prior to or after the auction, which may compromise the privatization of the distributor.

For such, the PMSO value and the RGR PPST to be used as auction variables should be fixed. These values will depend on the future definition of ANEEL to be used in the auction and will be informed upon the publication of the invitation to privatization. The additional RGR values eventually not part of the auction will be fully offset via tariff. Values of Non-Technical Losses are already predefined, according to Technical Note 149/2017 of ANEEL.

The table below shows the Consortium estimate for the base of values of the auction variables for the auction of the distributor:

Product 11 –Privatization Modeling Proposal


NOTE	BASE ESTIMATE VALUES FOR AUCTION	CEPISA
l	Index (BID)	Auction Result
2	Contract: Sub clause on Tariff Coverage of RGR	Auction Result
3	Relaxation PMSO 2017	61,339,573
4	Regulatory PMSO 2017	441,967,356
5	Pre-Auction Discount	61.3%
6	2017 PMSO Relaxation Post Pre-Auction Discount	23,730,722
7	Contract: Item II Sub Clause 3 Clause 19 of the Contract	Auction Result
8	Regulatory PNT 2016	13.93%
9	PNT Relaxation	11.48%
10	Adjusted Relaxation	4.44
11	Contract: Item III Sub Clause 3 Clause 19 of the Contract	Auction Result


	EXPLANATORY NOTES
1	Value offered by the auction winner
2	Value to be defined on the Contract Clause that rules the tariff recognition of RGR
	Relaxation base for Operational Costs of 2017 (estimated by the Consortium, according to item 43 of NT 149/2017) -
3	will be informed by Aneel for the Auction
4	Operational Costs considered on the Tariff Process of 2017 (estimated by the Consortium, according to item 43 of
	NT 149/2017) - will be informed by Aneel for the Auction
5	Adjustment to zero Equity Value, as instructed on the Decree Minutes
6	Relaxation base for Operational Costs of 2017, adjusted by Pre-Auction Discount
7	Value to be defined on Item II, Sub-Clause 3, Clause 19 of the Contract
8	Non-Technical Losses considered by the Tariff Process of 2016 (NT 149/2017)
9	Relaxation base of Non-Technical Losses (NT 149/2017)
10	2017 PNT Relaxation adjusted by Post Pre-Auction Discount
11	Value to be defined on Item III, Sub-Clause 3, Clause 19 of the Contract

The values of the second interval of the Index (above 100.01 p.p.) are related to the grant value. As explained, the Index value offered by the investor above 100.00 p.p. shall be multiplied by a reference value to each percentage point related to the grant. The reference value must be monetary, in Real, and defined in the Public Notice to the auction.

The reference value should be based on parameters related to the context of the privatization of the distributor. Thus, the reference value will be established in a logical way and shall maintain a relationship with the other aspects of the auction.

For that, two initial possibilities were identified for the definition of the monetary reference value of each percentage point offered as grant value:

i) Value with magnitude order near the monetary value estimated to each percentage point of the first interval of the Index (part related to rate relaxed discount);

ii) Percentage of the Enterprise Value of the distributor.

Product 11 –Privatization Modeling Proposal

The preliminary values estimated by the Consortium to each one of the two presented possibilities are listed below, as a form of support for the definition of the reference value of each percentage point related to the grant:


REFERENCE VALUE ALTERNATIVES FOR EACH P.P. - GRANT FROM CEPISA
i) Value¹estimated for each Index p.p.	R$ 5.0 Million
ii) Value¹regarding Enterprise Value	R$ 7.2 Million
Enterprise Value	R$ 2,880.7 Million
Percentage Base of Enterprise Value	0.25%
1) Approximate value

12.7 Auction´s 2nd stage ranking criteria

Bids placed in the 1^ststage will be considered as classified to the 2^ndstage of each auction, in the case· of: Being the bid with the highest Combined Discount Index in the Regulatory Flexibility· and Grant Being a bid in the interval of classification

The interval of classification will be defined upon the publication of the Public Notice and is demonstrated as an example in the table below. The representativeness of the interval of classification was also considered in relation to the Enterprise Value of the distributors.

The interval value suggested was secured in relation to its estimated absolute value and its representativeness in relation to the Enterprise Value of the distributor. Thus, an interval was proposed in which these two aspects could not be extremely high or low, stimulating competitiveness of investors in the auction.

Bids will be considered in the interval of classification if their difference to the offer with the highest Index is smaller than or equal to the specific classification interval of the auction. Since there is no limit for the value offered by the Index, the interval of classification shall observe the best bid placed.


Interval of Classification
Auction	5^th
Company	Cepisa
Interval of Classification	20.00

For example, in case the highest bid is of an Index equal to 75.00 in the auction of the distributor, bids greater than or equal to 55.00 (75.00 less 20.00) will be considered as classified. Similarly to this auction, in case the best bid is equal to 110.00, offers greater than or equal to 90.00 will be classified. The Interval of Classification may also be changed until the final draft of the Public Notice is drawn up.

The monetary values of each percentage point (p.p.) of discount in the Index related to discount in the regulatory flexibilization is not fixed, ranging in accordance with the estimate made. Similarly, the nominal values to the Interval of Classification will range.

Product 11 –Privatization Modeling Proposal

The estimate of the Consortium of the approximate average of the monetary values of each percentage point of variation and of the interval of classification is presented below. These are estimated values of reduction in the Enterprise Value of the company, which, on its turn, reflect the Equity Value (value to shareholder).


CLASSIFICATION INTERVAL FOR CEPISA AUCTION
Approximated value for one (1) p.p. variation	R$ 5.0 Million
Classification Interval	20 p.p.
Estimated value for Classification Interval	R$ 100.0 Million
Estimated percentage of Enterprise Value	3.5%

The estimate of value for one percentage point of variation is made based on the economic-financial evaluation model of this Consortium. To every percentage point of discount conceded, the relaxation parameters are adjusted, with key reflections to reductions in the value of Installment A. It also includes the discount to be given in RGR PPST, considering the present value of the amount accumulated until June 2017.

It should be noted that this estimate is based on the average of values found by the Consortium for progressive reductions to the Index in relation to discount in the regulatory flexibilization, since the curve of values is not linear. That is, different values will be obtained to different discount levels to the Index.

The investor, on its turn, shall make its own estimate, according to the modeling of valuation of the distributor, so that it may guide its bid in the auction.

12.8 Auction procedures

Prior to the public auction sessions, interested parties must hand the qualification documentation in conjunction with the economic bids, in sealed envelope.

For an investor to have its bid considered valid in one of the auctions, such investor shall deliver envelopes to all auctions of each round, even if without bid or with the indication of non-interest. For instance, even though the investor is exclusively interested in the company of the 4^thauction, it shall hand envelopes to all other auctions of the round.

This procedure aims at mitigating eventual asymmetries of information from investors in relation to which or how many investors are bidding to each company.

The 3^rd, 4^th, and 5^thauctions will allow bidders to exercise their right to participate in the 2^ndstage, if so desired, as demonstrated in the figure below. The right to participate must be delivered duly filled and signed. The validity of the right is conditioned to the prior delivery of a valid economic bid to the auction in screen.

The chart below illustrates the sequence of deliveries of bids and the right to participate in the auctions.

This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates offuture economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.


Charts
Chart 1 - Socioeconomic characterization of the state of Piauí		10
Chart 2 - Overview of the Brazilian Rate Structure		48




PwC \| Loeser e Portela Advogados \| Siglasul	Prepared for BNDES	4


	Steps: The number of steps per band varies due to the wage spread defined - guided by internal and external
	market information - and compliance with the methodology governing requirements for accessing the complexity
	levels of each job position		40
	1.2.	Rules of movement:	41
	1.3.	Access requirements:	42
2.	Variable compensation		43
3.	Benefits		43
4.	Performance Management		47
	4.1.	Performance matrix	48
5.	Training and development		49
6.	Organizational climate		51




PwC \| Loeser e Portela Advogados \| Siglasul			4


Level of Complexity	Access requirement
I	Access via public exam, without any need for experience.
	Amount of time spent at the previous level of complexity;
II	Result of the performance assessments of the last 3 years.
	Amount of time spent at the previous level of complexity;
III	Result of the performance assessments of the last 3 years;
	Approval from the Executive Board;
IV	Existence of a vacancy.


TABLE OF CONTENTS
INTRODUCTION		4
EXECUTIVE REPORT		7
A.	REGULATORY ASPECTS	7
B.	CORPORATE ASPECTS	8
D.	OPERATING AGREEMENTS AND OBLIGATIONS	9
E.	INTELLECTUAL PROPERTY	10
F.	INSURANCE	10
G.	LABOR ASPECTS	10
H.	CIVIL, COMMERCIAL AND EQUITY LITIGATION	11
I.	TAX LITIGATION	13
J.	REAL ESTATE ASPECTS	14

*** * ***


*Table of contents*

1.	Executive summary		4
2.	Plan types		4
3.	Plan statistics		4
4.	Analysis of assumptions and recommendations		5
	4.1.	Discount rate	5
	4.2.	Wage growth projection	6
	4.3.	Biometric tables	6
	4.4.	Turnover	7
	4.5.	Time of retirement	7
	4.6.	Family composition	7
	4.7.	Health care cost growth rate (HCCTR)	7
5.	Independent calculation of actuarial results		8
6.	Independent review of actuarial commitment		9
7.	Conclusion		10


10.9.2 Obligations defined in the Purchase Agreement		54
11. Cepisa’s privatization schedule		55
Section III - Auction Model Proposal		56
12. Model and Procedure of Auctions		56
12.1	Proposed model	56
12.2	Sequence	57
12.3	The right to participate	57
12.4	The right to withdraw bids	58
12.5	Bid procedures and values	58
12.6	Auction Value base for ‘Combined Discount Index in the Regulatory Flexibility and
	Grant’	60
12.7	Auction´s 2nd stage ranking criteria	62
12.8	Auction procedures	63

CENTRAIS ELÉTRICAS BRASILEIRAS S.A. - ELETROBRÁS

By:	/S/ Armando Casado de Araujo
	Armando Casado de Araujo Chief Financial and Investor Relation Officer