Standard Financial Statements (“DFP”) -...

Standard Financial Statements (“DFP”)

CESP - Companhia Energética de São Paulo December 31, 2016

DFP - Standard Financial Statements - 12/31/2016 - CESP - Companhia Energética de São Paulo Version: 1

Contents Company Information

Capital ownership structure ................................................................................................................................1 Cash Dividends and Interest on Equity ...............................................................................................................2 Individual Financial Statements

Statement of Financial Position - Assets.............................................................................................................3 Statement of Financial Position - Liabilities .........................................................................................................5 Statement of operations .....................................................................................................................................7 Statement of comprehensive income (loss) ........................................................................................................8 Cash Flow Statement - Indirect Method ..............................................................................................................9 Statements of Changes in Equity

SCE - 1/1/2016 to 12/31/2016 .......................................................................................................................... 10 SCE - 1/1/2015 to 12/31/2015 .......................................................................................................................... 11 SCE - 1/1/2014 to 12/31/2014 .......................................................................................................................... 12 Statement of Value Added ............................................................................................................................... 13 Management Report ........................................................................................................................................ 15 Notes ............................................................................................................................................................... 33 Other Information that the Company Considers to be Material ........................................................................ 104 Reports and Representations Independent Auditor’s Report - Unqualified .................................................................................................... 106 Opinion by the Supervisory Board or Equivalent Body .................................................................................... 112 Officers’ Representation on the Financial Statements ..................................................................................... 113 Officers’ representation on the Independent Auditor’s Report ......................................................................... 114


Page: 1 of 114

Company Information / Capital ownership structure Number of shares Last fiscal year (thousand) 12/31/2016

Paid-in Capital Common shares 109,168 Preferred shares 218,335 Total 327,503 Treasury shares Common shares 0 Preferred shares 0 Total 0


Page: 2 of 114

Company information / Cash Dividends and Interest on Equity

Event Approval Proceeds First payment Type of share Class of share Earnings per share

(Reais / Share)

Annual General Meeting 04/26/2016

Dividend 06/30/2016

Common shares 0,08670


Dividend 06/30/2016

Preferred shares Class A preferred

shares 1,82454


Dividend 06/30/2016

Preferred shares Class B preferred

shares 0,08670

Board of Directors’ Meeting. 11/08/2016

Interest on equity 12/30/2016


Board of Directors’ Meeting. 11/08/2016


Preferred shares Class A preferred

shares 1,82454

Board of Directors’ 11/08/2016



shares 0,39518

Meeting


Dividend 06/30/2017


Annual and Special 04/26/2017

Dividend 06/30/2017


shares 0,48370


Page: 3 of 114

Individual Financial Statements / Statement of Financial Position - Assets

(In thousands of reais) Account code Account description

Last Year Year before last Second year before last 12/31/2016 12/31/2015 12/31/2014

1 Total assets 11,416,449 11,986,763 14,687,886 1.01 Current assets 833,534 994,148 2,948,585 1.01.01 Cash and cash equivalents 1,477 3,558 5,796 1.01.02 Short-term investments 502,552 544,995 2,422,056 1.01.02.01 Short-term investments measured at fair value 502,552 544,995 2,422,056 1.01.02.01.01 Securities held for trading 502,552 544,995 2,422,056 1.01.03 Accounts receivable 165,141 339,567 385,175 1.01.03.01 Trade accounts receivable 165,141 339,567 385,175

1.01.03.01.01 Consumers and resellers / Extraordinary Tariff Adjustment (RTE) and Electric Energy Trade Chamber (CCEE) 165,141 339,567 423,061

1.01.03.01.02 Allowance for doubtful accounts 0 0 (37,886) 1.01.04 Inventories 0 0 34,788 1.01.07 Prepaid expenses 16,086 25,166 6,194 1.01.08 Other current assets 148,278 80,862 94,576 1.01.08.03 Other 148,278 80,862 94,576 1.01.08.03.01 Taxes and contributions to be offset 77,702 4,236 4,473 1.01.08.03.04 Other 70,576 76,626 90,103 1.02 Noncurrent assets 10,582,915 10,992,615 11,739,301 1.02.01 Long-term receivables 3,562,803 3,691,964 3,235,140 1.02.01.03 Accounts receivable 1,885 3,204 4,730 1.02.01.03.01 Trade accounts receivable 1,885 3,204 4,730 1.02.01.04 Inventories 6,977 28,467 0 1.02.01.06 Deferred taxes 799,535 869,431 734,686 1.02.01.06.01 Deferred income and social contribution taxes 799,535 869,431 734,686 1.02.01.07 Prepaid expenses 37,554 52,575 4,807 1.02.01.09 Other noncurrent assets 2,716,852 2,738,287 2,490,917 1.02.01.09.03 Pledges and restricted deposits 767,422 788,857 773,555 1.02.01.09.04 Asset available for reversal 6,337,256 6,337,256 3,529,080 1.02.01.09.05 Provision for contingent asset - Hydro Power Plant (HPP) (4,387,826) (4,387,826) (1,811,718) 1.02.03 Property, plant and equipment 6,979,724 7,260,107 8,494,806


Page: 4 of 114

Individual Financial Statements / Statement of Financial Position - Assets

(In thousands of reais) Account code Account description

Last year Year before last Second year before last

12/31/2016 12/31/2015 12/31/2014

1.02.03.01 Property, plant and equipment in use 6,979,724 7,260,107 8,494,806 1.02.04 Intangible assets 40,388 40,544 9,355 1.02.04.01 Intangible assets 40,388 40,544 9,355 1.02.04.01.01 Service concession arrangement 40,388 40,544 9,355


Page: 5 of 114

Individual Financial Statements / Statement of Financial Position - Liabilities

(In thousands of reais) Account

Account description


code 12/31/2016 12/31/2015 12/31/2014

2 Total liabilities 11,416,449 11,986,763 14,687,886 2.01 Current liabilities 852,390 998,224 2,202,432 2.01.02 Trade accounts payable 10,546 13,925 16,853 2.01.02.01 Trade accounts payable - local 10,546 13,925 16,853 2.01.03 Tax obligations 21,074 56,586 50,030 2.01.03.01 Federal tax liabilities 21,074 56,586 50,030 2.01.03.01.02 Taxes and social contributions 21,074 56,586 50,030 2.01.04 Loans and financing 186,817 206,736 1,149,797 2.01.04.01 Loans and financing 186,817 206,736 1,149,797 2.01.04.01.01 In local currency 5,157 5,158 1,022,827 2.01.04.01.02 In foreign currency 181,660 201,578 126,970 2.01.05 Other liabilities 633,953 720,977 985,752 2.01.05.02 Other 633,953 720,977 985,752 2.01.05.02.01 Dividends and interest on equity payable 156,167 42,463 405,385 2.01.05.02.05 Sector-related charges 229,831 393,642 115,413 2.01.05.02.06 Estimated obligations and Payroll 19,588 31,242 30,194 2.01.05.02.08 Credit assignment investment funds - FIDC 83,151 237,618 290,626 2.01.05.02.09 Other liabilities 145,216 16,012 144,134 2.02 Noncurrent liabilities 3,402,522 3,677,647 3,856,377 2.02.01 Loans and financing 381,577 675,973 605,267 2.02.01.01 Loans and financing 381,577 675,973 605,267 2.02.01.01.01 In local currency 9,904 15,056 20,208 2.02.01.01.02 In foreign currency 371,673 660,917 585,059 2.02.02 Other liabilities 3,020,945 3,001,674 3,251,110 2.02.02.02 Other 3,020,945 3,001,674 3,251,110 2.02.02.02.03 Credit assignment investment funds - FIDC 0 71,704 268,716 2.02.02.02.04 Employee pension entity 0 0 131,891 2.02.02.02.05 Sector-related charges 11,192 20,658 70,969 2.02.02.02.06 Provision for contingencies 2,874,295 2,790,081 2,660,866


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Individual Financial Statements / Statement of financial position - Liabilities


Account description Last year Year before last Second year before last

code 12/31/2016 12/31/2015 12/31/2014

2.02.02.02.07 Socio and environmental obligations 78,050 103,750 101,192 2.02.02.02.08 Other obligations 57,408 15,481 17,476 2.03 Equity 7,161,537 7,310,892 8,629,077 2.03.01 Paid-in capital 5,975,433 5,975,433 5,975,433 2.03.02 Capital reserves 1,929,098 1,929,098 1,929,098 2.03.04 Income reserves 612,941 628,783 1,832,390 2.03.04.04 Unrealized income reserve 612,941 628,783 656,738 2.03.04.08 Proposed additional dividend 0 0 1,175,652 2.03.06 Equity adjustments (1,018,677) (1,044,780) (970,052) 2.03.08 Other comprehensive income (337,258) (177,642) (137,792)


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Individual Financial Statements / Statement of Operations


Account description


code 1/1/2016 to 12/31/2016 1/1/2015 to 12/31/2015 1/1/2014 to 12/31/2014

3.01 Revenue from sales and/or services 1,668,590 2,950,982 4,856,023 3.02 Cost of sales and/or services (785,040) (1,420,607) (1,270,282) 3.03 Gross profit 883,550 1,530,375 3,585,741 3.04 Operating expenses/income (601,322) (1,080,874) (2,570,927) 3.04.02 General and administrative expenses (196,175) (214,657) (226,826) 3.04.04 Other operating income (90,566) (633,912) (2,139,257) 3.04.05 Other operating expenses (314,581) (232,305) (204,844) 3.05 Income before financial income and taxes 282,228 449,501 1,014,814 3.06 Financial income (expenses) 135,203 (358,693) (132,284) 3.06.01 Financial income 101,147 165,008 259,014 3.06.02 Financial expenses 34,056 (523,701) (391,298) 3.07 Income (loss) before income taxes 417,431 90,808 882,530 3.08 Income and social contribution taxes (112,336) (152,165) (322,391) 3.08.01 Current (42,440) (286,910) (759,503) 3.08.02 Deferred (69,896) 134,745 437,112 3.09 Net income (loss) from continuing operations 305,095 (61,357) 560,139 3.11 Income/loss for the period 305,095 (61,357) 560,139 3.99 Earnings per share (Reais/share)


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Individual Financial Statements / Statement of Comprehensive Income (Loss)



code 1/1/2016 to 12/31/2016 1/1/2015 to 12/31/2015 1/1/2014 to 12/31/2014 4.01 Net income for the period 305,095 (61,357) 560,139 4.02 Other comprehensive income (loss) (159,616) (39,850) (204,371) 4.02.01 Adjustment - CPC 33/IAS 19 (159,616) (39,850) (204,371) 4.03 Comprehensive income (loss) for the period 145,479 (101,207) 355,768


Page: 9 of 114

Individual Financial Statements / Cash Flow Statement - Indirect Method (In thousands of reais) Account

Account description


code 1/1/2016 to 12/31/2016 1/1/2015 to 12/31/2015 1/1/2014 to 12/31/2014

6.01 Net cash from operating activities 585,229 1,230,286 3,117,870 6.01.01 Cash from operating activities 1,058,651 1,744,556 4,219,255 6.01.01.01 Income before income and social contribution taxes 417,431 90,808 882,530 6.01.01.02 Depreciation 303,545 460,380 642,499 6.01.01.03 Interest and monetary and exchange gains (losses) (45,683) 449,115 360,128 6.01.01.04 Divestiture / disposal of PPE 1,075 617 353 6.01.01.05 Provision for contingent asset - HPP Três Irmãos 0 580,798 0 6.01.01.06 Employee pension entity - CPC 33/ IAS19 7,786 8,938 3,409 6.01.01.07 Allowance for doubtful accounts 13,379 5,321 (21,030) 6.01.01.08 Provision for contingencies 325,905 248,885 362,678 6.01.01.09 Provision for adjustment to realizable value of storerooms 16,487 0 0 6.01.01.11 Provision for environmental commitments (25,700) 2,558 (8,608) 6.01.01.12 Provision for impairment 0 0 1,997,296 6.01.01.13 Rescheduling of hydrological risk 0 (102,864) 0 6.01.01.14 Bonus for rescheduling of hydrological risk 24,155 0 0 6.01.01.15 Provision for Ad Exitum fees 20,271 0 0 6.01.02 Changes in assets and liabilities (473,422) (514,270) (1,101,385) 6.01.02.01 Interest paid on loans and financing (48,409) (106,224) (136,783) 6.01.02.02 Receivables 171,387 61,514 107,134 6.01.02.03 Taxes and contributions to be offset (73,466) 237 35,018 6.01.02.04 Storeroom 5,714 6,321 176 6.01.02.05 Prepaid expenses (54) 9,990 201 6.01.02.06 Pledges and Restricted Deposits 21,740 (14,770) (163,754) 6.01.02.07 Other receivables (2,971) (6,224) (9,380) 6.01.02.08 Trade accounts payable (3,379) (2,928) (5,054) 6.01.02.09 Taxes and social contributions (6,786) 28,014 (10,507) 6.01.02.10 Payments to private pension entity (167,402) (180,679) (138,804) 6.01.02.11 Sector-related charges (184,718) 102,763 18,975 6.01.02.12 Payments of contingencies (83,215) (89,385) (53,884) 6.01.02.14 Payment sof socio and environmental obligations 0 0 (12,683) 6.01.02.15 Estimated obligations and payroll (11,654) 1,048 (2,100) 6.01.02.16 Other obligations (19,043) (15,579) 20,676 6.01.02.17 Income and social contribution taxes paid (71,166) (308,368) (750,616) 6.02 Net cash from investing activities (13,365) (74,504) (32,483) 6.02.01 In PPE (9,761) (69,221) (32,483) 6.02.02 Additions to intangible assets (3,604) (5,283) 0 6.03 Net cash from financing activities (616,388) (3,035,081) (1,497,184) 6.03.01 Payments of loans and financing (435,258) (1,455,181) (456,330) 6.03.02 Dividends and interest on equity (181,130) (1,579,900) (1,040,854) 6.05 Increase (decrease) in cash and cash equivalents (44,524) (1,879,299) 1,588,203 6.05.01 Opening balance of cash and cash equivalents 548,553 2,427,852 839,649 6.05.02 Closing balance of cash and cash equivalents 504,029 548,553 2,427,852


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Individual Financial Statements / Statement of Changes in Equity / SCE - 1/1/2016 to 12/31/2016

(In thousands of reais)

Account code Account description

Paid-in capital

Capital Reserves, options granted and

treasury shares Income reserves Retained earnings

accumulated losses) Other comprehensive

income (loss) Equity

5.01 Opening balances 5,975,433 1,929,098 628,783 0 (1,222,422) 7,310,892 5.03 Adjusted Opening Balances 5,975,433 1,929,098 628,783 0 (1,222,422) 7,310,892 5.04 Capital transactions with shareholders 0 0 (31,097) (263,737) 0 (294,834) 5.04.06 Dividends 0 0 0 (154,834) 0 (154,834) 5.04.07 Interest on equity 0 0 0 (140,000) 0 (140,000) 5.04.08 Realization of unearned income reserve 0 0 (31,097) 31,097 0 0 5.05 Total comprehensive income (loss) 0 0 0 305,095 (159,616) 145,479 5.05.01 Net income for the period 0 0 0 305,095 0 305,095 5.05.03 Reclassifications to P&L 0 0 0 0 (159,616) (159,616) 5.05.03.02 Adjustment CPC 33 (R1) at December 31, 2016 0 0 0 0 (159,616) (159,616) 5.06 Internal changes in equity 0 0 15,255 (41,358) 26,103 0 5.06.01 Set-up of reserves 0 0 15,255 (15,255) 0 0 5.06.04 Equity adjustment realized 0 0 0 (26,103) 26,103 0

(Depreciation) 5.07 Closing balances 5,975,433 1,929,098 612,941 0 (1,355,935) 7,161,537


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Paid-in capital





5.01 Opening balances 5,975,433 1,929,098 1,832,390 0 (1,107,844) 8,629,077 5.03 Adjusted Opening Balances 5,975,433 1,929,098 1,832,390 0 (1,107,844) 8,629,077 5.04 Capital transactions with shareholders 0 0 (1,203,607) (13,371) 0 (1,216,978) 5.04.06 Dividends 0 0 0 (41,326) 0 (41,326) 5.04.08 Realization of unearned income reserve 0 0 (27,955) 27,955 0 0

5.04.09 Proposed additional dividends - AGM held on 4/23/2015 0 0 (1,175,652) 0 0 (1,175,652)

5.05 Total comprehensive income (loss) 0 0 0 (61,357) (39,850) (101,207) 5.05.01 Net income for the period 0 0 0 (61,357) 0 (61,357) 5.05.03 Reclassifications to P&L 0 0 0 0 (39,850) (39,850) 5.05.03.02 Adjustment CPC 33 (R1) at December 31, 2015 0 0 0 0 (39,850) (39,850) 5.06 Internal changes in equity 0 0 0 74,728 (74,728) 0 5.06.04 Equity adjustment realized 0 0 0 74,728 (74,728) 0

(Depreciation) 5.07 Closing balances 5,975,433 1,929,098 628,783 0 (1,222,422) 7,310,892


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Paid-in capital





5.01 Opening balances 5,975,433 1,929,098 368,223 0 1,044,632 9,317,386 5.03 Adjusted Opening Balances 5,975,433 1,929,098 368,223 0 1,044,632 9,317,386 5.04 Capital transactions with shareholders 0 0 1,017,633 (2,061,710) 0 (1,044,077) 5.04.06 Dividends 0 0 0 (404,543) 0 (404,543) 5.04.07 Interest on equity 0 0 0 (193,000) 0 (193,000) 5.04.08 Income reserve 0 0 28,007 (28,007) 0 0 5.04.09 Realization of unearned income reserve 0 0 (33,405) 33,405 0 0 5.04.10 Statutory reserve 0 0 293,913 (293,913) 0 0 5.04.11 Proposed additional dividends (Note 22.6 (6)) 0 0 1,175,652 (1,175,652) 0 0 5.04.12 Additional dividends paid - AGM held on 4/26/2014 0 0 (446,534) 0 0 (446,534) 5.05 Total comprehensive income (loss) 0 0 0 560,139 (204,371) 355,768 5.05.01 Net income for the period 0 0 0 560,139 0 560,139 5.05.03 Reclassifications to P&L 0 0 0 0 (204,371) (204,371) 5.05.03.02 Adjustment CPC 33 (R1) at December 31, 2014 0 0 0 0 (204,371) (204,371) 5.06 Internal changes in equity 0 0 0 1,501,571 (1,501,571) 0 5.06.04 Equity adjustment realized (depreciation) 0 0 0 183,356 (183,356) 0 5.06.05 Equity adjustment realized (impairment) 0 0 0 1,318,215 (1,318,215) 0 5.07 Closing balances 5,975,433 1,929,098 1,385,856 0 (661,310) 8,629,077


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Individual Financial Statements / Statement of Value Added



code 1/1/2016 to 12/31/2016 1/1/2015 to 12/31/2015 1/1/2014 to 12/31/2014

7.01 Revenues 2,039,402 3,520,809 5,484,591 7.01.01 Sale of goods, products and services 2,052,781 3,526,130 5,463,562 7.01.04 (Reversal of) Allowance for Doubtful Accounts (13,379) (5,321) 21,029 7.02 Inputs acquired from third parties (517,034) (1,027,252) (504,544) 7.02.02 Materials, electric energy, third-party services and other (82,499) (111,934) (104,313) 7.02.04 Other (434,535) (915,318) (400,231) 7.02.04.01 Sector-related charges (2,350) (2,918) (385,983) 7.02.04.02 Electric energy purchased (421,020) (892,200) 0 7.02.04.03 Other operating costs (11,165) (20,200) (14,248) 7.03 Gross value added 1,522,368 2,493,557 4,980,047 7.04 Retentions (303,545) (460,380) (642,499) 7.04.01 Depreciation, amortization and depletion (303,5450 (460,380) (642,499) 7.05 Net value added produced 1,218,823 2,033,177 4,337,548 7.06 Value added received in transfer (229,579) (876,645) (1,744,300) 7.06.02 Financial income 101,147 165,008 259,014 7.06.03 Other (330,726) (1,041,653) (2,003,314) 7.06.03.01 Foreign exchange gains (losses), net 133,328 (310,483) (82,645) 7.06.03.02 Employee pension entity - CPC 33/IAS 19 (7,786) (8,938) 4,935 7.06.03.03 Deferred income and social contribution tax assets (69,896) 134,745 437,112 7.06.03.04 Operating provisions (280,531) (224,376) (224,773) 7.06.03.05 Provision for reduction in realizable value of storerooms (16,487) 0 0 7.06.03.06 Other expenses / (income), net (89,354) (632,601) (2,137,943) 7.07 Total value added to be distributed 989,244 1,156,532 2,593,248 7.08 Distribution of value added 989,244 1,156,532 2,593,248 7.08.01 Personnel 145,864 159,795 166,308 7.08.01.01 Direct compensation 142,997 156,949 157,964 7.08.01.04 Other 2,867 2,846 8,344 7.08.02 Taxes, charges and contributions 236,942 568,358 1,178,744 7.08.02.01 Federal 236,758 568,064 1,178,506


Page: 14 of 114

Individual Financial Statements / Statement of Value Added



code 1/1/2016 to 12/31/2016 1/1/2015 to 12/31/2015 1/1/2014 to 12/31/2014

7.08.02.03 Local 184 294 238 7.08.03 Debt remuneration 301,343 489,736 688,057 7.08.03.01 Interest 74,595 153,114 182,661 7.08.03.02 Rentals 5,503 7,068 7,547 7.08.03.03 Other 221,245 329,554 497,849 7.08.03.03.01 Monetary gains (losses) 24,677 60,104 125,992 7.08.03.03.02 Financial compensation for use of water resources 124,510 138,509 157,143 7.08.03.03.03 Global Reversal Reserve (RGR) 44,543 84,783 146,172 7.08.03.03.04 Research and Development (R&D) 16,625 29,434 48,474 7.08.03.03.05 Electric Energy Service Inspection Fee (TFSEE) 10,890 16,724 20,068 7.08.04 Equity remuneration 305,095 -61,357 560,139 7.08.04.03 Retained profits/loss for the period 305,095 -61,357 560,139

DFP - Standard Financial Statement - 12/31/2016 - CESP - COMPANHIA ENERGÉTICA DE SÃO PAULO Version: 1

Management Report

Page: 15 of 114

Declaration Pursuant to the provisions of items V and VI, article 25 of CVM Ruling No. 480 of December 7, 2009, the Executive Board members of CESP - Companhia Energética de São Paulo, a publicly-held company with head office at Avenida Nossa Senhora do Sabará, 5312, Bairro de Pedreira, in the city and state of São Paulo, enrolled with Brazilian IRS Registry of Legal Entities (“CNPJ”) No. 60.933.603/0001-78, declare that: (i) reviewed, discussed and agreed with the Company’s Financial Statements for the fiscal year ended December 31, 2016; and (ii) reviewed, discussed and agreed with the opinions expressed in the Ernst & Young Auditores Independentes’ report regarding the Company’s Financial Statements for the fiscal year ended December 31, 2016.

Annual Management Report - 2016

I. Message from shareholders Dear Shareholders, The Management of CESP - Companhia Energética de São Paulo, in compliance with legal and statutory provisions, hereby submits to your appreciation the Management Report and the corresponding Financial Statements, together with the Independent Auditor’s report and the Supervisory Board’s opinion for the fiscal year ended December 31, 2016. In 2016, CESP celebrated 50 years of existence, period in which it built its benchmark of excellence in the electric power industry, adopting quality practices and commitment to social and corporate responsibility. Its plants are in an excellent state of conservation and operation, presenting high levels of availability for power production, which exceed ANEEL standards and the average of the industry. In 2016, in compliance with the standards of Brazil’s National Electric Energy Operator System (ONS), the production of CESP’s plants was once again impacted by the water shortage period, requiring ONS to commission a significant volume of thermal energy, to the detriment of hydroelectric production. The Generation Scaling Factor (GSF), which measures the ratio between the effective production of hydroelectric plants and their guaranteed power output, recorded 86.9% in 2016 (84.3% in 2015), resulting in expenses from purchase of energy to the Company. Brazil’s National Electric Energy Agency (ANEEL), through Order No. 190/2016, approved the rescheduling required by CESP regarding the Hydrological Risk of the energy contracted in the regulated market of Porto Primavera Plant, by means of insurance payment. With the expiration of the concession of HPPs Ilha Solteira and Jupiá on July 7, 2015, CESP continued to operate them until June 30, 2016 under the quota system. From July 1, 2016, approximately 220 employees allocated in these plants were terminated and admitted by the new concession operator. Through an agreement entered into in the Labor Court, CESP paid compensation to employees, and received from the new concession operator 50% of expenses incurred with the Unemployment Compensation Fund (“FGTS”) and 100% of expenses incurred with the employees’ notice period, as a refund. Considering its new operational reality resulting from the concession expiration of two of its main plants, CESP began a structural readjustment and cost reduction process, which can already be observed from the second half of 2016. At the end of the year, São Paulo state regulatory agencies authorized a Voluntary Dismissal Program (“PDV”), which should be completed by the end of the first quarter of 2017.


Management Report

Page: 16 of 114

On August 23, 2016, the Steering Committee of the State Privatization Program decided to recommend to the Governor of São Paulo state to resume the work and studies required for the privatization of CESP, pursuant to article 5 of Law 9361 of July 5, 1996. In November, the State Finance Department published a bid notice for contracting advisory services, consisting of the economic and financial evaluation, modeling proposition and sale of movable assets owned by the State, corresponding to shares representing CESP’s capital. The bid winner was Banco Fator S.A. that started the services in December, which are in progress. CESP is characterized as a company with strong cash generation, low operating costs, low working capital requirements, and low indebtedness. Total loans and financing (current and noncurrent liabilities) decrease from R$1,192.0 million in 2015 to R$651.5 million at December 31, 2016 (a 45.3% decrease). In current year, the Company recorded income of R$305.1 million and, considering the realization of reserves and equity adjustments, it is offering to its shareholders dividends in the amount of R$294.8 million, including interest on equity, as described in Note 25.6 - Proposal for Allocation of Profit, in accordance with the Proposal that the Board of Directors is taking to the resolution of the shareholders at the Annual General Meeting to be held on April 26.

II. CESP and its market CESP has 3 HPPs: Engenheiro Sérgio Motta - Porto Primavera (1,540 MW), Paraibuna (87.02 MW) and Jaguari (27.6 MW), totaling 1,654.62 MW of installed capacity. HPPs Ilha Solteira (3,444 MW) and Jupiá (1,551.2 MW), whose concessions expired on July 7, 2015, remained under CESP’s operation and maintenance, under the quota system, until the total takeover of the new concession operator, which took place on January 7, 2016. Production of electric energy The electric energy production of CESP’s plants is scheduled and executed in accordance with the Grid Procedures and coordinated by ONS, ensuring the preservation of its assets and compliance with its social and environmental obligations. The pursuit of efficiency in production is based on the association of the basic resources of availability, water resources and production allocation opportunities in the Brazilian National Interconnected System (SIN). In 2016, CESP produced 2,243 average MW, which corresponded to approximately 2.0% of the electric energy generated by the hydroelectric supply in the SIN, including considering the operation of HPPs Ilha Solteira and Jupiá under the quota system until June 30, 2016.

In average MW 2010 2011 2012 2013 2014* 2015** 2016***

Production 4.674 4.687 4.822 4.103 3.327 2.747 2.243

* Considering the production of HPP Três Irmãos until September/2014 (expiration of the temporary

operation).

** Considering the production of HPPs Ilha Solteira and Jupiá until December 31, 2015.

*** Considering the production of HPPs Ilha Solteira and Jupiá until June 30, 2016.


Management Report

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Sale of power Guaranteed power output CESP’s gross guaranteed power output in 2016 was approximately of 1,081 average MW (excluding HPPs Ilha Solteira and Jupiá, operated under the quota system), sold (i) in the Regulated Market (ACR), with 36 distribution companies; and (ii) in the Free Market (ACL), with 4 free customers and 3 sellers.

The differences between the energy produced, the guaranteed power output and the contracted energy were accounted for and settled at the Electric Energy Trade Chamber (CCEE). On December 22, 2016, Ordinance No. 258 of the Ministry of Mines and Energy (MME) reduced the guaranteed power output of HPP Porto Primavera from 1,017 to 992.6 average MW, given the determination of the Federal Audit Court, due to the limitation of the reservoir in the portion of 257 meters by the operation license. This measure had immediate effect, as from its publication, and the Company filed an administrative appeal with the MME, seeking to revert the effects of this Ordinance. With this reduction, the guaranteed power output in force of CESP totals 1,056.6 average MW. In 2016, CESP sold 1,030 average MW in contracts, a 50% reduction compared with 2015, due to the need to be compatible with the new guaranteed power output coverage of the Company. Generation Scaling Factor (GSF) Due to the worsening of hydrological situation that affected most of the generation agents, ANEEL held a public hearing in 2015, which resulted in a proposal to reschedule hydrological risk in the regulated and free markets. In January 2016, CESP adhered to the rescheduling agreement for this risk, set forth by Law No. 13203 of 12/08/2015, regulated by ANEEL Normative Resolution No. 684 of 12/11/2015, transferring to the consumer the effects arising from hydrological risk in the amount of 350 average MW of its guaranteed power output, contracted in the regulated market for 2016, upon payment of a risk bonus. The rescheduling agreement comprises all energy contracted in the regulated market during the concession period. Similarly, in 2016, the unfavorable hydrological conditions caused the commissioning of the HPPs of the Energy Reallocation Mechanism (MRE), which generated below their guaranteed power output during a large period of the year, resulting in the application of the Generation Scaling Factor (GSF). Accordingly, the generators of MRE bear the deficit between generation and guaranteed power output, which is valued at the Difference Settlement Price (PLD). In this context, CESP was impacted by 138 average MW, which valued at the PLD, represented an additional cost of R$123.6 million. By contrast, on account of the adhesion to the hydrological risk rescheduling in the regulated market, CESP was reimbursed in the amount of R$52 million. Regulated Market (ACR) In 2016, CESP allocated to the electric energy distribution companies the average amount of 335 MW, which represented 33% of the total sold in contracts that year. In relation to 2015, there was a 39.2% reduction in the quantities sold in the Regulated Market (ACR), due to the termination of the contracts related to the 2

nd Existing Electric Energy Auction, effective from

2008 to 2015 and of the contracts effective between the beginning of 2014 and the end of the 1st half of

2015, arising from the 12th Existing Electric Energy Auction.


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CESP earned R$576.5 million in Energy Sale Agreements in the Regulated and Free Markets (CCEARs) with distribution companies. This revenue represented a 28.4% reduction compared with 2015 and is justified by the reductions already mentioned in the amounts sold. Free Market (ACL) In this market segment, the energy portion referring to medium and long-term energy sales contracts corresponded to average 695 MW in 2016, representing 67% of the total amount sold that year. Compared with 2015, there was a 54% reduction in the quantities sold in this market due to the expiration of contracts over the year and the lower availability of energy, due to the expiration of concessions. In the free market, revenues amounted to R$1,035.8 million in long- and medium-term bilateral contracts, whereby 7 customers were served, of which 4 were free consumers and 3 were sellers. The reduction was 48.9% compared with revenue for 2015. Revenues from energy settled in the CCEE The Company’s revenue in the CCEE totaled R$48.3 million, including the Spot Market and the Energy Reallocation Mechanism (MRE). Due to the hydrological and energy balance conditions, the Spot Market resulted in R$35.1 million referring to prior years. Conversely, MRE recorded R$13.2 million. The operation and maintenance of HPPs Ilha Solteira and Jupiá by CESP, under the quota system up to June 30, 2016, provided the Company with revenue of R$385.3 million, accounted for by the CCEE. Revenue CESP’s revenues from sales of energy amounted to R$2,045.9 million, a 41.8% reduction on R$3,517.4 million earned in 2015. Of this total, R$385.3 million refer to revenues earned from the portions of assisted operations in HPPs Ilha Solteira and Jupiá; and R$1,660.6 million derived from bilateral contracts in regulated and free markets.

III. CESP electric system CESP ensures compliance with its commercial commitments, reconciling them to the Availability (ANEEL Resolution No. 614/2014) and Systemic (generation needs to meet systemic demand) regulatory requirements, within the principles of economicity. The efficiency of the SIN’s HPPs is determined by the ONS by means of the Availability Index (AI) calculated through the Equivalent Forced Outage Rate (EFOR) and the Equivalent Planned Outage Factor (EPOF) defined by ANEEL. Under its management, to ensure availability and reliability of supply, the Company has exceeded the reference values established by ANEEL, weighted average of 0.897 for AI and 0.0249 for EFOR. In 2016, AI and EFOR of 0.939 (0.941 in 2015) and 0.0048 (0.0050 in 2015), respectively, were determined.


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The dam safety activities at CESP precede the guidelines of Law No. 12334 of September 20, 2010, which established the National Dams Safety Policy. The current Dam Safety Plan is implemented through a rigorous program of regular and special inspections at the HPPs and monitoring of dam behavior through a wide range of auscultation instruments associated with a preventive and corrective maintenance program. As required by ANEEL Normative Resolution No. 696/15, CESP dams are classified as “B - low accident risk and high potential damage”. The innovations of Law No. 12334 and regulation, such as the Periodic Dam Safety Reviews (“RPSB”) and Emergency Action Plans (EAP) in case of burst, have been developed within the established criteria and deadlines. For operation in flood situations, the HPPs use the Operation System for Emergency Situations (SOSEm), a set of operation and maintenance standards and procedures involving technical, organizational and administrative aspects, aiming to ensure the safety of reservoirs hydraulic operation. This comprises 6 manuals maintained and updated annually.

IV. Corporate sustainability To ensure that the current demands for Sustainability are one of the guiding factors of its management in all phases of its ventures, CESP express the evidence of its public commitment, fully aligned with the main concepts of Corporate Sustainability, among which the following are highlighted: CDP - Driving Sustainable Economies Since 2007, CESP responds the survey of the Driving Sustainable Economies, former Carbon Disclosure Project (CDP), which has collaborated to the reflection on climate changes in the Company. The Climate Changes and Carbon Sequestration Program, the tradition in the annual disclosure of the greenhouse gas (GHG) inventory, the management of opportunities and research and development projects are the highlights of climate changes. CESP is a low carbon intensity company, producing electric energy exclusively from HPPs, in water basins considered of low influence in view of climate changes and with potential opportunities in a future low carbon economy. Ecoteams Ecoteams are multidisciplinary teams formed by employees from different CESP areas, the purpose of which is to contribute to the improvement of certain environmental processes existing in the Company. These groups actions are focused on the following themes: occupational health and safety (in partnership with Internal Committees for Accident Prevention - CIPAs); energy and water conscious consumption; solid waste management; realization of campaigns for recycling and donation of footwear, vegetable oil, radiology films, among other materials. Environmental Management System (“SGA”) This is a set of procedures with emphasis on sustainability and focus on the adoption of practices to reduce at most the environmental impact arising from the Company activities. The SGA of HPP Eng. Sergio Motta is being readjusted and that related to HPPs Paraibuna and Jaguari are under implementation phase.


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Spring program This is a State Government program that aims to reforest springs, streams and rivers that form the basins that supply the reservoirs used to serve urban centers. CESP participates in this program, recovering the surroundings of HPP Jaguari reservoir, in the municipalities of Jacarei, Santa Isabel and Igaratá, in Vale do Paraíba. The recovered area in 2016 totaled 46 hectares, with 77,000 seedlings planted. Corporate Sustainability Index (“ISE”) ISE is a tool for comparative analysis of performance of companies listed in BM&FBOVESPA regarding corporate sustainability, based on economic efficiency, environmental balance, social justice and corporate governance. Every year the participating companies are revalued based on a methodology developed by Fundação Getúlio Vargas (FGV), São Paulo. ISE started in 2005 and CESP was present in ten editions, including in 2016 and will not be part of the current portfolio for 2017. Annual report on social and environmental and economic and financial responsibility The Annual report on Social and Environmental and Economic and Financial Responsibility of CESP aims at gathering and presenting economic, financial, industry, social, environmental and corporate governance data of the Company. This report follows the guidelines from “ANEEL Manual for Preparing the Annual Report on Social and Environmental Responsibilities of Electric Energy Companies”, together with the Global Reporting Initiative (GRI) methodology, including the Electric Utility Sector Supplement (GRI-EU). The internationally recognized GRI methodology establishes a reporting standard aligned with the best practices of governance, environmental, economic and social performance for sustainability reports. Social and environmental manual The procedures related to social and environmental issues adopted by CESP during the rainy season, mainly due to the increase in outflows, were gathered in this manual that integrates the manuals of SOSEm - Operation System for Emergency Situation, aiming the safety of dams, reservoirs, employees and of the communities around the HPPs. Supplier Manual Available on CESP website, it establishes values, principles and guidelines that drive the relationship with suppliers and set CESP Supply Policy. The Supplier Manual was updated in 2015 to include guidelines provided in the Anti-corruption Law.

V. Social Responsibility Diversity CESP kept Selo Paulista da Diversidade (São Paulo State Diversity Seal) - Full Category, granted by São Paulo State government. This seal reflects the policy of non-exclusion concerning racial, social, sexual, ideological and religious differences, among others.


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In 2016 various actions related to this certification were carried out, involving the following activities: speech “Diversities: Living Together, Talking and Building” (VII Semana Interna da Diversidade - SIDI); awareness of employees on the following dates of the Diversity calendar: Women’s Day, International Day for the Elimination of Racial Discrimination; Indian Day; International Day Against Homophobia; National Black Awareness Day and ecumenical celebration at the end of the year. Social actions Website Accessible to Visually Impaired Persons CESP counts on resources that facilitates access to its corporate website, including the Investor Relations module, to visually impaired persons who have screen reader software in their computers and want to know the Company or use any page as a working tool. Instituto Criança Cidadã (ICC) CESP continued its participation as founding and sponsor company of Instituto Criança Cidadã (ICC), contributing to the operation of the 16 educational units of the institution. The voluntary work by employees who assist the institution with technical and administrative orientation is added to the financial support. As in prior years, ICC, an educational entity that has the history of its projects initiated by CESP in 1987, presented in 2016 important actions and achievements that allowed the renewal of recognition of the entity as Federal, State and Municipal Public Utility. In 2016, more than 7,500 services were provided to children, young people and adults, all residents of poor communities in the eastern, southern, northern and western regions of the capital and of the municipality of Guarulhos within the four projects of the institution: Transmitindo Cidadania, Gerando Talentos, Manancial de Produção-Escola de Moda e Beleza and Nossa Comunidade. ICC ensures balanced nutrition, supervised by a nutritionist; comprehensive support for child development by a multidisciplinary health team; primary education, art, education and work orientation, offered by educators, coordinators and educational directors; and activities focused sports and leisure, community development and income generation. Social Inclusion of Apprentices Social inclusion of apprentices, which is promoted by the CESP’s Professional Learning Program, aims to prepare not only good professionals, but mainly better citizens for Brazil. This program includes actions focused on apprentices and their families, conducting, among other activities, speeches and dynamics with apprentices. In 2016, young people participated in events related to organizational environment, such as interpersonal relationship, and also participated in the Internal Week of Accident Prevention (“SIPAT”), where they were able to learn more about prevention of technological dependence, sedentary lifestyle, nutrition and quality of life. Visits to the production units In 2016, CESP’s production units were visited by 41,529 people. Students, engineers, technicians and tourists have on these visits the opportunity to obtain information on the operation of a HPP and also take notice of the various programs developed by the Company in the search for knowledge and conservation of native fauna and flora. In the case of HPP Porto Primavera, visitors also have contact with aspects of the region’s culture in the Museum of Regional Memory.


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Until June 30, CESP still was responsible for HPPs Ilha Solteira and Jupiá and the results of visits to these units are computed in the general result. Porto Primavera received 6,059 visitors in its facilities while Paraibuna received 1,469 visitors.

VI. Social statement of financial position

1 - Calculation basis Amount for 2016 (in thousands of reais) Amount for 2015 (in thousands of

reais)

Net revenue (NR)

2,950,982

1,668,590

Gross operating income (GOI) 883,550 1,530,575

Gross payroll (GP) 181,474 208,621

2 - Internal Social Indicators Amount

(thousand) % on GP % on NR Amount

(thousand) % on GP % on NR

Meal 7,947 4.38% 0.48% 9,431 4.52% 0.32%

Compulsory social charges 31,910 17.58% 1.91% 43,281 20.75% 1.47%

Private pension 6,554 3.61% 0.39% 8,351 4.00% 0.28%

Health 12,717 7.01% 0.76% 10,531 5.05% 0.36%

Education 495 0.27% 0.03% 664 0.32% 0.02%

Professional training and development 639 0.35% 0.04% 695 0.33% 0.02%

Day care or day-care allowance 54 0.03% 0.00% 32 0.02% 0.00%

Other 0 0.00% 0.00% 226 0.11% 0.01%

Total - Internal Social Indicators 60,316 33.24% 3.61% 73,211 35.09% 2.48%

3 - External Social Indicators Amount

(thousand) % on OR % on NR Amount

(thousand) % on GOI % on NR

Education 1,913 0.22% 0.11% 2,959 0.19% 0.10%

Culture 2,910 0.33% 0.17% 6,400 0.42% 0.22%

Sports 418 0.05% 0.03% 1,074 0.07% 0.04%

Other 125,739 14.23% 7.54% 142,092 9.28% 4.82%

Total contributions for the company 130,980 14.82% 7.85% 152,525 9.97% 5.17%

Taxes (less social charges) 205,032 23.21% 12.29% 525,078 34.31% 17.79%

Total - Internal and External Social Indicators 336,012 38.03% 20.14% 677,603 44.27% 22.96%

4 - Environmental Indicators Amount

(thousand) % on OR % on NR Amount

(thousand) % on GOI % on NR

Investments related to production/operation of Company 15,057 1.70% 0.90% 29,554 1.93% 1.00%

Investments in external programs and/or projects 3,278 0.37% 0.20% 6,462 0.42% 0.22%

Total investments in the environment 18,335 2.08% 1.10% 36,016 2.35% 1.22%

5 - Personnel Indicators 2016 2015

Number of employees at the end of the period 568 802

Number of admissions over the period 9 23

Number of interns 0 13

Number of employees with more than 45 years 461 640

Number of women working in the company 103 131

% of management positions occupied by women 5.77% 6.67%

Number of blacks working in the Company 127 179

% of management positions occupied by blacks 1.92% 1.75%

Number of people with disabilities or special needs 9 11


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6 - Significant information on the exercise of corporate citizenship 2016 Goals for 2017

Ratio between the highest and lowest remuneration in the company 21,27 -

Total number of work accidents 13 -

The social and environmental projects developed by the Company were defined by: ( ) directors

(X) directors and

management ( ) all

employees ( ) directors

(X) directors and

management ( ) all

employees

Safety and health standards in the workplace were defined by:

( ) directors and management

( ) all employees

(X) all employees +

CIPA ( ) directors and

management ( ) all

employees

(X) all employees +

CIPA

Regarding union freedom, the right to collective bargaining and the internal representation of workers, the Company:

( ) does not get involved

( ) follows ILO standards

(X) encourages and follows

ILO ( ) will not get

involved ( ) will follow

ILO standards

(X) will encourage and

follow ILO

Private pension comprises: ( ) directors ( ) directors and

management (X) all

employees ( ) directors ( ) directors and

management (X) all

employees

Profit sharing comprises: ( ) directors ( ) directors and

management (X) all

employees ( ) directors ( ) directors and

management (X) all

employees

In the selection of suppliers, the same ethical and social and environmental responsibility patterns adopted by the Company:

( ) are not considered

( ) are suggested (X) are required

( ) will not be considered

( ) will be suggested

(X) will be required

Regarding the participation of employees in voluntary work programs, the Company:

( ) does not get involved ( ) supports

(X) organizes and

encourages ( ) will not get

involved ( ) will support

(X) will organize and

encourage

Total value added to be distributed (in thousands of reais): in 2016: 989.244 in 2015: 1.156.532

Distribution of Value Added (DVA):

23.8% government 15.3% employees 49% government 14% employees 30.6% shareholders 30.3% third parties 0%

retained 5% shareholders 42% third parties 0% retained

VII. Research and Development (R&D) Federal Law No. 9991 of 7/24/2000 established that electric energy companies shall invest a portion of its Net Operating Revenue (NOR) in Research and Development (R&D). For generation companies, this Law establishes the allocation of 0.4% of NOR to R&D, 0.4% to Brazil’s Science and Technology Development Fund (FNDCT) plus 0.2% to the Ministry of Mines and Energy (MME). Since 2005 R$113.6 million have been invested in 91 project, of which 78 are already completed. In 2016, to comply with the provisions of the aforementioned law, CESP paid R$6.7 million to FNDCT and R$3.3 million to MME.


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VIII. Corporate governance Since 2006, CESP is part to BM&FBOVESPA’s Corporate Governance Level 1, a set of rules that governs the relations among the controlling shareholder, the Board of Directors, the Executive Board, the other shareholders and, particularly, the financial market, which is provided with information with quality, agility and transparency. In addition to the procedures required by Corporate Governance Level 1, CESP, adopted the following practices, which were included in its Articles of Incorporation: - Adhesion to the Market Arbitration Chamber of BM&FBOVESPA to eliminate any questions of

corporate nature;

- Tag Along - Right to class B preferred shareholders (CESP 6) to receive an amount per share corresponding to 100% (one hundred percent) of the amount paid to the controlling shareholder, in the event of divesture of the Company's control;

- Board of Directors made up by 20% of independent directors. Investor Relations CESP has an Investor Relations (IR) area that coordinates the distribution of information to the financial market in general, investors, market analysts, financial institutions, regulatory and supervision agencies, through quarterly results conference calls, annual public meetings, corporate website, RI module (http://ri.cesp.com.br), e-mail [email protected] and mailing list. Throughout 2016, approximately 40 events were held with market analysts and investors. CESP is monitored by 12 market analysts, who periodically issue reports with recommendations on the Company’s actions. The list of analysts is available on our investor relations website: ri.cesp.com.br. Board of Directors According to the Company’s Articles of Incorporation, the Board of Directors may be composed of up to 15 members, with at least 20% of independent directors elected for a term of two (2) years. At the Annual General Meeting held in 2015, 13 members were elected, 3 of them were independent directors and one was elected by the preferred shareholders. A member elected by the Company’s employees is also part of the Board of Directors. Member Luiz Gonzaga Vieira de Camargo resigned on 5/31/2016 and Member Renato A. Z. Villela dos Santos resigned on 8/31/2016, 11 members remaining, whose term will expire at the Annual General Meeting to be held in April, 2017. The Board of Directors’ Meetings in their ordinary form, pursuant to our Articles of Incorporation, are held once a month, and on a special form, whenever necessary to the interests of the Company. In 2016, 12 ordinary meetings were held in person against 1 special meeting also in person. The average level of members’ attendance was 87.7%. Executive Board The Executive Board, in accordance with the Articles of Incorporation, is composed of a Chief Executive Officer, a Chief Financial and Investor Relations Officer, a Chief Generation Officer, who also responds as deputy Chief Engineering and Construction Officer, and a Chief Administrative Officer. The Executive Board shall meet, ordinarily, at least twice a month and, on a special basis, by call of the CEO or of other officers. In 2016, 37 Board of Directors’ meetings were held.


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Supervisory Board The Supervisory Board is made up of five members and their respective deputies, elected annually at the Annual General Meeting, with one of the Directors representing the preferred shareholders and another one representing the noncontrolling common shareholders. The term of Supervisory Board Members is unified for one year and they may be reelected under the terms of the law. The Supervisory Board’s meetings are held at least once a month. In 2016, 12 meetings were held in person and the members’ attendance level was 100%. Among other responsibilities, the Supervisory Board has to analyze, on a quarterly basis, the trial balances and other financial statements prepared for the fiscal year, and also express an opinion on the annual management report, stating in such opinion any further information deemed necessary for the resolution at the Annual General Meeting. The Supervisory Board also reports to shareholders in matters related to investment plans or budget, capitalization changes, payment of dividends and corporate reorganizations. This Board is responsible for overseeing management activities and keeping shareholders informed of its findings. Internal audit CESP counts on an Internal Audit Department in connection with the CEO, whose mission is to provide assessments on control system adequacy and efficiency, accuracy of operations, legitimacy of actions carried out and performance quality in relation to defined policies, plans and objectives. It is also responsible for coordinating Corporate Risk Management activities, attending to external audit agencies such as the State Audit Court (‘TCE”), Control and Evaluation Center (“CCA”) of the State Finance Department, among others, in addition to assist the activities of the Supervisory Board. Code of Ethics and Business Conduct CESP’s Code of Ethics and Business Conduct is intended for disseminating the Company’s principles and values to all of its employees, in addition to guiding relations with its stakeholders. Pursuant to good corporate governance practices, in 2015 CESP reviewed such code and, among other updates, the provisions of Federal Law No. 12846 of 8/1/2013 (Anti-Corruption Law) and of State Decree No. 60106 of 1/29/2014 were integrated, which provides for the administrative and civil responsibility of legal entities for the practice of acts against the public, national and international administration. In 2016, CESP promoted a Web-Based Training Session concerning of its Code of Ethics and Business Conduct with the purpose of recycling knowledge and strengthening the awareness of its professionals regarding the principles and values that govern the Company’s relations. The Code is available at intranet (Netcesp) and on CESP's website: (http://www.cesp.com.br). Upon accessing it, a link is already available so that the registration of representation is made, as the case may be. There is also the e-mail [email protected], so that stakeholders can make representations. Environmental policy CESP’s Environmental Policy was approved at the 1643

rd Board of Directors’ Meeting held on May 4,

2015, aimed at disseminating a culture of social and environmental responsibility to employees, service providers, suppliers, surrounding communities and other stakeholders.


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Concerned about the effects that climate changes may have on the society, as well as about the economic, social and environmental dynamics of its hydroelectric power generation activities, CESP has incorporated in its Environmental Policy its commitment to promote sustainable development and exercise of social responsibility, as well as the environmental management of its activities. Supply policy Approved at the 631

st Board of Directors’ Meeting held on January 17, 2012, the Supply Policy was

established to meet, in a planned, integrated, effective and transparent manner, guided by defined guidelines, purchases of materials and services for the Company.

Information security policy The purpose of this Policy is to guarantee information privacy and to protect it previously against unauthorized use. It provides guidance for the use of technological resources only for the purposes approved by CESP, and also aims to ensure data security through backup with “deduplication” and information contingency in in-house environments (at the head office and at Porto Primavera), enabling immediate recovery of data in case of claim, so that the Company’s business does not suffer solution of continuity. Corporate social policy CESP’s Corporate Social Policy presents the principles and guidelines that grounds the Company’s practices in relations with stakeholders shareholders, creditors, customers, employees, partners, community, government and society. This Policy addresses human and labor right practices as well as practices of relationships with suppliers and the community, such as not hiring child labor or analogous to slavery; non-discriminatory hiring; incentive to diversity among employees; promotion of health and safety of employees and third parties; support to educational actions for young people in local communities; narrowing of internal and external communication channels. In 2015, to adjust such policy to the current concepts, the repudiation and prohibition of any practice regarding the sexual exploitation of men, women, children and teenagers were pointed out. The Corporate Social policy is available at intranet and on the Company’s website. Policy of relations with internal entities On March 30, 2007, the Policy of Relations with Internal Entities was implemented, through which CESP recognizes and respects the right of its employees to join and act in Internal Entities, with own legal entity, legally established, and proposes to receive and evaluate proposals and suggestions from employees’ associations, in order to improve the Company’s activities and the relationship with its employees. Health and safety policy Established on September 25, 2006, the Health and Safety Policy reaffirms CESP’s commitment to seek excellence in electric power generation, considering respect for life, protection against occupational health and safety of its employees and service providers, key components of corporate performance and key management responsibility at all levels. CESP still grounds health and safety management on compliance with prevailing legislation and on the search for continuous improvement of production processes. The Company maintains in its organizational structure a formally defined body with the technical competence to diagnose and propose measures for Occupational Health and Safety and issues.


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Union relations policy Approved on March 30, 2007, CESP grounds its relations with Unions on the effective recognition that these entities are the lawful representatives of employees in filing of claims and conducting negotiations so as to resolve labor relations issues.

Disclosure policy The Company’s Disclosure Policy, approved by the Board of Directors on July 15, 2002 aims to establish the rules to be observed by the Chief Investor and other Related Persons Relations Officer regarding the disclosure of Significant Information and the maintenance of confidentiality on relevant acts or facts that have not yet been disclosed to the public. Policy of securities trading issued by the Company itself In 2011, the Board of Directors approved the Policy on Securities Trading Issued by the Company itself, which establishes the rules by which the related parties, as defined in the Policy, should be guided for securities trading issued by the Company itself. Dividend policy In 2011, the Board of Directors also approved the Dividend Policy, which defines the periods and criteria adopted for the payment of dividends and interest on equity. This Policy is based on the rules of the Articles of Incorporation and emphasizes the role of the Board of Directors in the conduction of this Policy. Policy of conversion of class “A” registered preferred shares In 2013, the Board of Directors approved the Policy of Conversion of Class “A” Registered Preferred Shares, which defines the periods and criteria adopted for the conversion of class “A” preferred shares. This Policy is based on article 5 of the Articles of Incorporation and aims to establish the rules that should be observed for the conversion of class “A” registered preferred shares into registered common shares and/or class “B” registered preferred shares. Risk management policy CESP’s Risk Management Policy was submitted to the approval by the Board of Directors on June 7, 2011 and was unanimously approved. The Company has implemented a corporate risk management framework, based on the principles of COSO II - Enterprise Risk Management Integrated Framework (ERM), international pattern on risk management. CESP’s Risk Management Policy establishes the process, methods and criteria for identifying, evaluating, monitoring and reporting of risks and respective control or mitigation actions to be observed by agents responsible for the risk management activity within the scope of the Company. The Risk Committee, the Risk Management Coordination and the Decentralized Risk Management are included in the risk management control organization framework. The Company’s Strategic Risk Matrix was reviewed with the support of the Boards and of the Decentralized Risk Management, and submitted to the Risk Committee’s evaluation and subsequently to the Board of Directors’ appreciation at the 692

nd Annual Meeting on May 10, 2016.


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Risk Committee This is composed of the Chairman and Officers, Executive Coordination Management of the CEO and of the Internal Audit Department. It is incumbent upon the Risk Committee to define the guidelines and strategies for risk management and evaluation of controls, for the follow-up of the action plans presented by the Company’s managing officers, as well as to drive the activities carried out by the Risk Management Coordination. Risk Management Coordination This is responsible for monitoring the actions of the Decentralized Risk Management in the identification, evaluation and monitoring of risks and regular reporting to the Risk Committee. It should also guide the Company’s managing officers regarding the self-assessment control methodology, to ensure the efficiency of controls that mitigate the risks mapped, as well as support the CEO, the Risk Committee and other stakeholders in matters related to risk and control management. Decentralized Risk Management Representatives appointed by the Boards to assist the Managing Officers of the Company's various areas in the identification, evaluation, control and monitoring of risks inherent to the objectives in their areas of responsibilities. It is also incumbent upon the Decentralized Risk Management to position periodically the Risk Management Coordination and its Board of subordination on the risks and controls inherent in the responsibility of their performance. Internal control system CESP complies with the best practices of the Internal Control System, such as: Environment and Control Activities, Risk Assessment, Information, Communication and Monitoring. The Internal Control System is defined as the set of policies, standards and procedures and activities established in the Company to reduce the possibility of financial losses, scratched institutional image, to improve the quality of accounting, financial and managerial information as well as to safeguard compliance with prevailing legislation and regulation to ensure that the objectives are achieved. The Company’s Internal Control System was submitted to the Board of Directors’ appreciation on September 13, 2016, mentioning all external auditors to whom the Company is subject, namely: State Audit Court (“TCE”), Management General Comptroller (“CGA”), Electric Energy Sale Chamber (CCEE), Brazil's National Electric Energy Agency (ANEEL); Brazil's National Electric Energy Operator System (ONS), Environmental Agencies - IBAMA/SEMA/IMASUL; Brazilian Securities and Exchange Commission (“CVM”); and Control and Evaluation Center (“CCA”) in connection with the State Finance Department. The Company’s Internal Control System comprises Corporate Policies, Standards and Procedures, Delegation of Authority Manual “(MDA”), Code of Ethics and Business Conduct, Computerized Systems, Internal Audit body, in addition to Risk Management and other control practices and processes.


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Law No. 13303/2016 Based on Law No. 13303 of June 30, 2016, the set of items already complied with by CESP, in accordance with such Law, was presented to CESP’s Board of Directors on October 18, 2016, such as the Information Disclosure Policy, Dividend Payment Policy, Annual Sustainability Reports (GRI model) and Social and Environmental and Financial and Economic Responsibility Report (ANEEL model), the Code of Ethics and Business Conduct, the risk management model (under review), as well as the existence of a permanent Supervisory Board. Other items requiring actions should be implemented throughout 2017. In compliance with article 23, paragraph 1, item II of Law No. 13303/2016, on November 8, 2016 the Board of Directors approved the Company’s Long-Term Strategy. State Decree No. 62349/2016 On December 26, 2016, State Decree No. 62349/2016 was enacted, regulating the application of Federal Law No. 13303/2016. The Company presented to the Board of Directors, at the Annual Meeting held on January 24, 2017, a schedule of activities to fulfill the obligations arising from such State Decree. Ombudsman CESP, together with the Ombudsman System of São Paulo State Government, makes available on its website a channel of relationship with the purpose of receiving, clarifying and responding any and all expressions of citizen’s interest regarding the Company. It acts as final level in its defense, including causing internal transformation actions aimed at improving the quality of the services provided by the Company. In 2016, the CESP’s Ombudsman recorded 62 expressions. Among the main topics, the instructions and clarifications of doubts related to human resources, equity and environment were highlighted, as well as complaints regarding electric energy distribution companies, an activity that is not part of CESP’s business since 1998. Complaints of citizen warning the Company were also recorded, through the Ombudsman office, in relation to invasions or interventions in border areas of reservoirs. Citizen Information Service In accordance with the provisions of São Paulo State Government (State Decree No. 58052 of May 16, 2012, which regulated Federal Law No. 12527 of November 18, 2011), CESP joined the Citizen Information Service (“SIC”), through which the Company gives access to information requested by citizens and entities, reinforcing the good practices of governance and transparency. Access to the system is done through the website www.sic.sp.gov.br. In 2016, the Company recorded 33 applications received and served through SIC System, which presents various forms of citizen access to information, including on-site, with service in an exclusive room for this service.

IX. Capital markets The Company was not required to resort to capital markets in 2016. Total Payables reduced by 9%, from R$4,675.9 million in 2015 to R$4,254.9 million in 2016.


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The Company’s cash and cash equivalents at the end of 2016 reached R$504 million, reduction by 8.1% compared with 2015. In June 2016, Standard & Poor’s reaffirmed ratings “BB” on the global scale and “brAA-“ on the Company’s Brazilian National Scale. The Stand-Alone Credit Profiles (SACP) remains unchanged in “bbb-“. The negative perspective reflects that of sovereign ratings of Brazil and of São Paulo State. CESP shares in BM&FBOVESPA Class “B” Preferred Shares (CESP6), which represent 64.4% of the Company’s total capital and which are the most traded, appreciated 0.67% in 2016, with a price quotation at the end of the year of R$13.49. The CESP6 traded volume in 2016 reached a daily average of R$20.9 million and 5,503 transactions. Common Shares (CESP3), which represents 33.3% of capital, closed the year with an appreciation of 22.5%, quoted at R$12.50. Class “A” Preferred Shares (CESP5), which represent 2.3% of capital, increased by 48.40% and were traded in the last trading session of the year at R$19.30. Electric Power Index (“IEE”) closed 2016 with an appreciation of 45.6% while IBOVESPA recorded appreciation of 38.9%. In 2016, the Company paid to its shareholders R$41.3 million of dividends referring to 2015 and R$140 million as interest on equity.

X. Economic and financial performance In 2016, CESP reported net income of R$305.1 million, reversing the loss of R$61.4 million recorded in prior year. Among other reasons, this result arises from the reduction of expenses, mainly (i) energy purchased and sector-related charges (which includes the use of the transmission system); (ii) reduction of expenses with personnel, material, third-party services and other; (iii) reduction in provisions recorded under “Other revenues (expenses), net” (against “Provision for contingent assets” in the amount of R$580.8 million of HPPs Ilha Solteira and Jupiá in 2015); and (iv) the appreciation of the Brazilian real against the US dollar this year (against a significant devaluation of the Brazilian real in prior year). On July 7, 2015, the concession of HPPs Ilha Solteira and Jupiá expired. As from that date, the Company has been facing an evident decrease in revenue, since it can no longer rely on the electric energy from those plants traded under the Price Regime. Currently, the Company is temporarily recording two types of revenue: (i) revenues from other plants, based on the prices and quantities of electric energy sold in free markets, both regulated and in the Electric Energy Trade Chamber (CCEE); and (ii) the transitional income as an operator under the Quota System at the plants Ilha Solteira and Jupiá from July 8, 2015 to June 30, 2016, a period known as “assisted operation”. Accordingly, operating revenues for 2016 reached R$2,052.8 million, a reduction of 41.8% compared with 2015, mainly due to the reduction of guaranteed power output arising from the expiration of the concession, on July 7, 2015, of HPPs Ilha Solteira and Jupiá, as well as the termination in the second half of 2016 of the “assisted operation” period of these plants, under the quota system (Notes 26.2 and 26.3). The decrease in operating revenue totaled R$384.2 million, a 33.2% decrease compared with 2015, resulting in Net Operating Revenue of R$1,688.6 million, a 43.5% decrease compared with 2015.

The Cost of Electric Energy Service totaled R$785 million, a 44.7% decrease, separated by items Cost of Electric Energy and Cost of Operation (Note 27). The Cost of Electric Energy decreased by 52% mainly due to Sector-Related Charges (which include


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transmission system charge) and purchase of electric energy. The Cost of Operation decreased by 34.7%, mainly as a result of the decrease in expenses with personnel, material, third-party services and other, as well as depreciation expenses. CESP recorded Gross Operating Income of R$883.6 million in 2016, representing a 42.3% decrease compared with prior year. General and Administrative Expenses decreased by 9.1% and Other Operating Expenses increased by 35.9%, mainly due to higher provisions for labor and environmental contingencies, as a matching entry to the reduction in the provision for civil proceedings. Other Revenues (Expenses), Net decreased by 85.7% and ended 2016 in R$90.6 million, compared with R$633.9 million in 2015, mainly due to the provision for contingent assets in the amount of R$580.8 million related to HPPs Ilha Solteira and Jupiá recorded that year, (Note 27.2), so that Operating Income before Financial Income totaled R$282.2 million, 37.2% lower than in prior year. Adjusted EBITDA for operating provisions totaled R$911.7 million, representing a 47.6% decrease compared with prior year. The Financial Income reached a positive result of R$135.2 million (negative result of R$358.7 million in 2015, see Note 28). Financial Revenues decreased by 38.7% and reached R$101.1 million, mainly due to the decrease in short-term investment yield due to the reduction in cash and cash equivalents and investments. Debt Charges and Other Financial Expenses recorded a 51.3% decrease, totaling R$74.6 million, reflecting the reduction of indebtedness in local currency, as well as Monetary Variations, Net, which closed the year at R$24.7 million (a 58.9% decrease). Foreign Exchange Gains (Losses), net reached R$133.3 million due to an appreciation of 16.5% of the Brazilian real against the US Dollar compared with expenses of R$310.5 million in prior year. The Company recorded Income before Taxes of R$417.4 million. After appropriation of Income and Social Contribution Tax Expenses on taxable income and reversal of deferred taxes, the Company closed 2016 with Net Income of R$305.1 million. Note 25.6 comprises the Management’s proposal, based on net income, less of legal reserve of R$15.3 million and of equity adjustment on the depreciation in the amount of R$26.1 million, increased by the realization of Unrealized Income Reserve in the amount of R$31.1 million. The distribution of profits in the amount of R$294.8 million, corresponding to 100% of the adjusted income for the year, is being proposed, of which R$140 million will be deducted, which were already paid as Interest on Equity.


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I. Economic and Financial Indicators

References 2016 2015 Var.

Average Price - R$ per MWh 178.15 164.93 8.0% Operating Margin (%) 53.0% 36.7% 44.3% US Dollar Fluctuation (%) -16.5% 47.0% - 63.5 pp

Liquidity/indebtedness/Per-Share Equity Value (VPA) 2016 2015 Var.

Indebtedness of Assets 0.37 0.39 -4.4% Participation of third-party capital 0.59 0.64 -7.2% Current Liquidity 0.98 1.02 -4.1% Share Price - R$ 21.87 22.32 -2.0%

EBIT/ EBITDA Statement (CVM Ruling No. 527 dated October 14, 2012) 2016 2015 Var.

Net income for the period 305,095 (61,357) nm

Income and social contribution taxes 112,336 152,165 -26.2% Financial income (expenses) (135,203) 358,693 nm

= EBIT 282,228 449,501 -37.2% Depreciation 303,545 460,380 -34.1%

= EBITDA 585,773 909,881 -35.6%

Provision for contingent assets - 580,798 nm Provision for contingencies 325,905 248,885 30.9%

= ADJUSTED EBITDA 911,678 1,739,564 -47.6%

II. Independent Auditors Pursuant to CVM Ruling No. 381 of January 14, 2003, CESP clarifies that Ernst & Young Auditores Independentes, in 2016, provided solely audit services to this Company. CESP Management understands and declares that these services were provided in full compliance with the independence standards that govern audit services.

The Management


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1. Operations

(Data relating to the power and volume of electric energy was not audited by independent auditors)

1.1. Operations

CESP - Companhia Energetica de Sao Paulo (“CESP” or the “Company”) is a publicly-traded company controlled by São Paulo State Government, with headquarters in the city of São Paulo. Its is primarily engaged in the planning, construction and operation of energy generation systems and sale of electric energy. The Company also performs other supplementary operational activities such as afforestation, reforestation and pisciculture as a means of protecting the environment modified through the construction of reservoirs and facilities. The Company’s shares are traded on the São Paulo Stock Exchange (BM&FBOVESPA S.A.) and since July 28, 2006 have been classified as Corporate Governance Level 1. Accordingly, Company Management has continually improved the disclosure of information to the market. The Company currently runs three Hydro Power Plants (HPP) operating under the price system with 1,654.6 MW of installed capacity and average 1,081 MW of guaranteed power output (Note 15.2). Due to the expiration of the concession of HPPs Ilha Solteira and Jupiá on July 7, 2015, and taking over by the winning bidder of the tender held on November 25, 2015, CESP was responsible for the assisted operation of such plants until June 30, 2016. As a public service concession operator for electric energy generation, CESP’s activities are regulated and inspected by Brazil's National Electric Energy Agency (ANEEL), under the Ministry of Mines and Energy (MME), and operates its power plants in an integrated manner with Brazil’s National Electric Energy Operator System (ONS). Production per plant stems from an order sent by ONS, in accordance with the gross production of the table below (quantitative information not reviewed by independent auditors):

Plant

Gross Production in MWh

2016 2015

1Q 2Q 3Q 1Q Accumulate

d 1Q 2Q 3Q 4Q Accumulate

d

Ilha Solteira (*) - - - - - 2,837,185 2,339,116 140,692 - 5,316,993 Jupiá (*) - - - - - 1,960,104 1,617,804 103,862 - 3,681,770 Porto Primavera 2,394,538 2,259,894 2,294,951 2,364,692 9,314,075 2,306,560 1,949,270 1,608,565 2,145,296 8,009,691 Paraibuna 29,766 28,700 18,077 19,436 95,979 31,422 38,244 53,171 27,140 149,977 Jaguari 2,593 3,141 8,940 34,903 49,577 4,557 2,159 17,563 19,883 44,162

Total 2,426,897 2,291,735 2,321,968 2,419,031 9,459,631 7,139,828 5,946,593 1,923,853 2,192,319 17,202,593

(*) The production of HPPs Ilha Solteira and Jupiá was calculated up to 07.07.2015.

Approximately 51% (51% in 2015) of the Company’s Gross Operating Revenue for the period ended December 31, 2016 stemmed from sale of electric energy to resellers (energy sales agreements/trading agents and distribution companies contracted in auctions of electric energy) and 27% (29% in 2015) stemmed from the supply of electric energy to free consumers, with the remaining 22% (20% in 2015) stemming from spot-market energy under the scope of the Electric Energy Trade Chamber (CCEE), supplying energy under the quota system and other revenues (Note 26.2).


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1.2. Sale of Energy (Energy auction) - Not reviewed by independent auditors

CESP participated in auctions for the supply of electric energy to distribution operation companies operating in the Regulated Market (ACR), i.e. four energy sale auctions from existing generation projects and two energy sales auctions from new ventures. Through auctions, CESP sold average 808 MW of existing power and average230 MW of new energy distributed across contract groups, as follows:

Auction of existing ventures

Supply period

Energy sold by CESP (MWm)

CESP price

(R$)/MWh Base

Average weighted price of participants

Product 2008 2008 to 2015 170.0 83.50 May/05 83.13

Product 2009 2009 to 2016 120.0 93.43 Nov/05 94.91

Product 2014 18M 2014 to 2015 98.0 165.20 Jan/14 98.00

388.0

Auction of new ventures

Supply period

Energy sold by CESP (MWm)

CESP price (R$) Base

Average weighted price of participants

Product 2009 Hydro 2009 to 2038 82.0 124.97 Jul/06 124.83

Product 2010 Hydro 2010 to 2039 148.0 116.00 Jan/06 114.83

230.0

The prices obtained at auction are restated by reference to the Extended Market Price Index (IPCA) on the date of tariff adjustment of distribution companies (Note 26.1).

1.3. Renewal of concessions

Provisional Executive Order (MP) No. 579, dated September 11, 2012 (signed into Law No. 12783/2013), covered electric energy generation, transmission and distribution concessions. This MP offered CESP, in January 2013, early renewal of concessions of HPPs Ilha Solteira and Jupiá, which expired on July 7, 2015. The same treatment was given to HPP Três Irmãos where the first concession term ended in November 2011. The conditions established refer to new revenues to be earned by the Company for the operation of these plants, and compensation amounts for assets not yet amortized relating to the basic project. It also established that where early renewal of concession was not accepted those plants would be auctioned at the end of the concessions. In the meeting held on December 3, 2012, the Company’s shareholders decided not to anticipate renewal of concessions. With this decision, CESP continued to operate HPPs Ilha Solteira and Jupiá normally until the end of the concession period, on July 7, 2015. For more information on HPP Três Irmãos, see Note 32.1. On May 15, 2015, MME published Ordinance No. 218, rectified by Ordinance No. 300 dated June 24, 2015, stating that the auction to choose the new operator of HPPs Ilha Solteira and Jupiá would be held in September 2015. This action was postponed and held on November 25, 2015.


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On June 11, 2015, the MME published Ordinance No. 256, designating CESP as responsible for the provision of electric energy generation services of HPPs Ilha Solteira and Jupiá, from July 8, 2015 until the winning bidder assumes operation of the power plants, with payment under the Quota Regime. On August 18, 2015, with the enactment of MP No. 688, signed into Law No. 13203/2015, the payment of subsidies on granting renewal of electric energy concessions was introduced as from the auction held on November 25, 2015. On June 30, 2016, the Company ended the assisted operation in HPPs Ilha Solteira and Jupiá. HPPs Porto Primavera (concession ending July 2028, already considering the addition of 53 days due to rescheduling of hydrological risk of the regulated market agreements, see Note 14), Paraibuna (concession ending March 2021) and Jaguari (concession ending May 2020) were not covered by MP No. 579 and are operated normally by CESP.

1.4. Hydrological risk

Porto Primavera hydro power plant is a run-of-the river plant located in the Paraná River basin area, west of São Paulo State. The geographical location is considered favorable, since Paraná River is formed by the confluence of two large rivers, Parnaíba River, which descends from the Midwest of Brazil, and Rio Grande River, on the border with the Minas Gerais State. Furthermore, Tiete River is a tributary of the Paraná River, upstream of the Jupiá plant. The Company's plants are in the Paraná River basin, downstream from other hydro power plants, and so benefit from being located near the end of the river flow with only the Itaipu plant downstream from it. The region is tropical with historically high levels of rainfall. Water shortage risks due to rainfall conditions are cyclical, an occasional event. In critical situations, the Granting Authority must act to ensure the economic and financial balance of agents. Unfavorable hydrological situations, usually regional and of short term, are covered by the Energy Reallocation Mechanism (MRE), a hydrological risk sharing financial instrument that the Brazilian Electricity Industry provides and that allows ONS to seek optimization of hydroelectric resources through commissioning by plant, so that temporary shortages at each system generating agent are covered by additional generation from other generators at an Optimization Tariff (“TEO”) at R$ 12.32 per MWh (ANEEL Ratification Ruling No. 2190 of December 13, 2016, effective from January 1, 2017). Over 2016, a TEO of R$12.32 per MWh was applied (ANEEL Ratification Ruling No. 2002 of December 15, 2015). Details regarding the impact arising from hydrological risk in 2016 on the Company’s financial statements and the terms of repricing of GSF can be obtained in Note 14 - Intangible assets.


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2. Presentation of financial statements

Company Management authorized the completion of preparation of these financial statements on March 21, 2017. The Company’s Financial Statements for the years ended December 31, 2016 and 2015 were prepared in accordance with accounting practices adopted in Brazil and in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).

The accounting practices adopted in Brazil comprise Pronouncements, Interpretations and Guidance issued by Brazilian Financial Accounting Standard Board - FASB (“CPC”), which were approved by the Brazilian SEC (CVM) and by Brazil’s National Association of State Boards of Accountancy (“CFC”), including supplementary rules issued by CVM. The Company adopted the pronouncements, interpretations and guidance issued by the Brazilian FASB (“CPC”) and the IASB as well as supplementary rules issued by the CVM and regulatory agencies, which were effective at December 31, 2016.

2.1. Basis of preparation

All amounts presented in these financial statements are expressed in thousands of reais, unless otherwise stated. Non-financial data such as electric energy generation capacity, volumes of electric energy generated, volume of electric energy sold, insurance and related to the environment was not audited by the independent auditors.

2.1.1. Going concern assumption

Management evaluated the Company’s ability to continue as a going concern and is convinced that its operations have the capacity of generating funds so that it is able to continue as a going concern in the future. In addition, Management is not aware of any material uncertainty that may cast significant doubt as to its ability to continue as a going concern. Therefore, these financial statements were prepared based on the going concern assumption. This statement is based on Management’s expectations regarding the Company’s future and is consistent with its business plan. At the beginning of each year, the Company prepares annual and five-year business plans, which comprise annual or multiannual budgets, all capital investment plans, strategic plans and maintenance programs for the Company's facilities. These plans are monitored over the year by the competent agencies and may undergo changes.

2.1.2. “Empresas.Net” System

In the table “Statement of Changes in Equity” of “Empresas.Net” System used for the purposes of preparing and sending documents to CVM and BM&FBovespa, the equity adjustment, although not corresponding to “Other Comprehensive Income”, is presented in the column with this indication, since there is no more appropriate option for presentation in such table.


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2.2. Functional currency and translation of balances and transactions in foreign currency

The items included in the financial statements are measured using the currency of the main economic environment in which the Company operates and are presented in Brazilian reais (R$), the Company’s functional currency. Transactions in foreign currency, i.e. all those which are not carried out in the Company’s functional currency, are translated to the functional currency, at the exchange rates prevailing on the transaction dates. Monetary assets and liabilities expressed in foreign currency are translated using the rate prevailing at the financial statement date. Gains and losses resulting from the settlement of foreign currency transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of operations.

2.3. Changes in presentation

From 2016 onwards, certain accounts have been reclassified to better represent the Company’s economic and financial position, whose effects in 2015 are presented below, in a summarized manner:

Statement of Financial Position: Storeroom was reclassified from short to long term;

Statement of Value Added (SVA):

- ONS/CCEE charges was segregated of “Other operating costs”;

- The Lease amount was adjusted with Other operating costs;

- Employee pension entity unified - contribution to the Employee pension entity plan - CPC33/IAS19.

Statement of financial position

Year ended 2015

Originally disclosed Adjustments Reclassified

Assets Current assets Storeroom 28,467 (28,467) -

1,022,615 (28,467) 994,148

Noncurrent assets Storeroom - 28,467 28,467

10,964,148 28,467 10,992,615

Total assets 11,986,763 - 11,986,763


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Statement of Value Added

Year ended 2015

Originally disclosed Adjustments Reclassified

Generation of value added Operating income (expenses) (Note 26.3) 3,526,130 3,526,130 Allowance for doubtful accounts (5,321) (5,321)

3,520,809 - 3,520,809

Less: Inputs

ONS/CCEE charges - 2,918 2,918 Other operating costs 24,081 (3,881) 20,200

1,028,215 (963) 1,027,252

Gross value added 2,492,594 963 2,493,557

Transfers Employee pension entity - CPC 33/IAS 19 (587) (8,351) (8,938)

(11,317) (8,351) (19,668)

Distribution of value added Personnel: Employee pension entity - contribution to

the plan 8,351 (8,351) -

168,146 (8,351) 159,795

Financing and leases: Leases 6,105 963 7,068

219,323 963 220,286

Total 1,163,920 (7,388) 1,156,532

3. Significant accounting practices

A summary of the significant accounting practices adopted by the Company is as follows:

3.1. Cash and cash equivalents

These comprise cash balances, cash bank deposits and short-term investments maturing within 90 days. These short-term investments are highly-liquid, stated at cost, plus interest accrued through the year-end dates, and subject to an insignificant risk of change in value.

3.2. Financial assets

The asset financial instruments can be classified into the following specific categories: financial assets “measured at fair value through profit or loss”, investments “held to maturity” and financial assets “available for sale”. This classification depends on the nature and purpose of the financial instruments, which is determined upon their initial recognition. All regular purchases or sales of financial assets are recognized or derecognized based on the trading date. Regular acquisitions or disposals correspond to acquisitions or disposals of financial assets that require the delivery of assets within the deadline on an arm’s length basis.

At December 31, 2016, CESP had financial instruments classified under the category “financial assets measured at fair value through profit or loss” and “loans and receivables”.


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3.2.1. Loans and receivables

These are non-derivative financial assets with fixed or determinable payments, but not traded in an active market. These assets are measured at amortized cost, using the effective interest rate method, less any impairment loss. Interest income is recognized by the effective interest rate, except for short-term receivables, in which case interest recognition would be immaterial.

The Company’s major financial assets classified in this category are:

(a) Consumers and resellers (Note 6);

(b) Receivables - CCEE (Note 6).

Accounts receivable from consumers or resellers include amounts for supply of electric energy recorded in accordance with an energy agreement that establish quantity, prices and the form of adjustments.

3.2.2. Measured at fair value through profit or loss

These are financial assets: (i) held for trading in the short term; (ii) designated at fair value for the purpose of checking the effects of the recognition of revenues and expenses, in order to obtain more relevant and consistent accounting information or; (iii) derivatives. These assets are recorded at their respective fair values and any resulting gains or losses are recognized in P&L. The financial assets that the Company has classified in this category are the following:

(a) Cash and cash equivalents (Note 5);

(b) Pledges and restricted deposits (Note 11). 3.2.3. Effective interest rate method

The effective interest rate method is used to calculate the amortized cost of a debt instrument and allocate its interest income over the corresponding period. The effective interest rate is the rate exactly discounting future estimated cash receipts (including all amounts paid or received that are an integral part of the effective interest rate, transaction costs and other premiums or deductions) over the estimated life of the debt instrument, or, when applicable, over a shorter period, to net book value upon initial recognition.

3.2.4. Impairment of financial assets

Financial assets other than those designated at fair value through profit or loss are assessed by impairment indicators at the end of each year. Impairment losses are recognized if, and only if, there is objective evidence of impairment of the financial asset as a result of one or more events that occurred after the initial recognition, with an impact on the estimated future cash flows of the asset.


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Objective evidence may include:

Significant financial difficulty of the issuer or counterparty;

Breach of contract, such as default or late-payment of interest and principal;

Likelihood that the debtor is declared bankrupt. The carrying amount of financial assets is directly reduced due to impairment of all financial assets, except for accounts receivable, in which case the carrying amount is reduced by the use of a provision. Subsequent recoveries of amounts previously derecognized are recorded to the provision. Changes in the book value of the provision are recognized in P&L. The allowance for doubtful accounts is set up, if necessary, based on individual assessment of the loss estimate and is considered sufficient to cover probable losses on realization of receivables. For financial assets recorded at amortized cost, if in a subsequent year, the value of an impairment loss decreases and that decrease can be objectively related to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through P&L, assuming that the carrying amount of the investment on the reversal date does not exceed the possible amortized cost in the event that the impairment had not been recognized.

3.3. Storeroom

The materials in inventories held in storerooms classified under current assets are recorded at the weighted average cost of acquisition, less a provision for reduction to market value, when applicable. Pursuant to CPC 16 (R1) - Inventories, inventories must be stated in the statement of financial position at the lower of cost and net realizable value. The net realizable value is defined as the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. When the net realizable value is determined to be lower than its cost, the amount exceeded should be subject to a provision for impairment loss.

3.4. Taxation

3.4.1. Sales taxes

Sales and service revenues are subject to taxes and contributions, at the following statutory rates:

Contribution Tax on Gross Revenue for Social Security Financing (COFINS) at the rate of 7.60% (cumulative regime), except for Revenues from sale of short-term energy (CCEE) at the rate of 3% (cumulative regime).

Contribution Tax on Gross Revenue for Social Integration Program (PIS) at the rate of 1.65%% (noncumulative regime), except for Revenues from sale of short-term energy (CCEE) at the rate of 0.65% (cumulative regime).

[CN1] Comentário: Precisamos saber se sport-market substitui o termo. Caso contrário, haverá duas ocorrências de curto prazo em que optamos por spot market.


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Upon calculating PIS/COFINS under noncumulative regime, tax credits may be used and these are stated as a reduction of the cost of sales in the statement of operations for the year.

Sales are stated in the statement of operations for the year net of taxes and contributions (net operating revenue).

3.4.2. Income taxes

Current taxes Provision for income tax is based on taxable profit for the year. Taxable profit is different from the profit stated in the statement of operations, as it excludes taxable income or deductible expenses in other years, in addition to permanently excluding nontaxable or nondeductible items. The provision for income and social contribution taxes on net income is calculated at the rates of 25% and 9% respectively. Current income and social contribution tax expenses are calculated based on laws and tax legislation prevailing at the statement of financial position date, in accordance with Brazilian tax legislation. Management periodically reviews positions taken in tax returns regarding situations in which the applicable tax regulation is subject to interpretation that may be different, as the case may be, and sets up provisions, where appropriate, based on expected amounts payable to tax authorities. Deferred taxes Deferred income tax (“deferred tax”) is recognized on temporary differences, at the statement of financial position date, between assets and liabilities recognized in the financial statements and corresponding tax bases used in computing taxable income, including tax losses, where applicable. Deferred tax liabilities are generally recognized on all taxable temporary differences, and deferred tax assets are recognized on all deductible temporary differences only when the Company is likely to recognize future taxable income at an amount sufficient for such deductible temporary differences to be used. Impairment of deferred tax assets is reviewed as of the statement of financial position dates and, when taxable income is no longer likely to be available to fully or partially recover the asset, the asset balance is adjusted to the amount expected to be recovered. Deferred tax assets and liabilities are measured at rates applicable for the period in which liabilities are expected to be settled or assets are expected to be realized, at the rates set forth in prevailing tax legislation at the statement of financial position dates, or when a new legislation is substantially approved. Measurement of deferred tax assets and liabilities reflects tax consequences that would arise if the Company recovered or settled book value of such assets and liabilities as it expected at the statement of financial position dates. Deferred tax assets and liabilities are only offset when the legal right to offset current tax asset against current tax liabilities exists, when such taxes are managed by the same tax authorities, and the Company intends to settle the amount value of its current tax assets and liabilities. Current and deferred income taxes


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These are recognized as expenses or revenues in P&L for the year, unless these relate to items recorded directly in other comprehensive income or equity - whereupon taxes will also be recognized directly in other comprehensive income or equity. Details are disclosed in Note 12.

3.5. Investments

Investments are recorded at the cost of acquisition less the provision for reduction in market value when required or applicable.

3.6. Intangible assets

Intangible assets acquired separately are measured at cost upon their initial recognition. After initial recognition, intangible assets are stated at cost, less accumulated depreciation/ amortization and accumulated impairment, as applicable. Costs are reflected in P&L for the year they are incurred. The useful life of an intangible asset is assessed as finite or indefinite, where in CESP's case there are only intangible assets with finite useful lives.

3.7. Property, plant and equipment (PPE)

The Company adopted fair value to determine the deemed cost of property, plant and equipment the financial statement transition date to IFRS (01/01/2009). CPC 37 / IFRS 1 designates deemed cost as the amount used as a substitute for cost (or depreciated or amortized cost) on a given date. Accordingly, certain PPE items that recorded carrying amount lower and/or higher than fair value had their accounting costs replaced by the values assigned so that the Company's financial position could be expressed with greater reliability. The matching entry of this surplus value was recorded under “Equity adjustments” in equity. The costs directly attributed to works as well as interest and financing charges for loans taken out from third parties during the construction period are recorded in construction in progress. When significant PPE items are substituted, they are recognized as individual assets with specific useful lives and depreciation. Likewise, when significant maintenance occurs, the cost is recognized in the PPE carrying amount, if the recognition criteria are met. All the other repair and maintenance costs are recognized in the statement of operations as incurred. Depreciation is calculated using the straight-line method based on annual rates established and regularly reviewed by ANEEL, which are used and considered by the market as representative of the useful lives of the assets related to the infrastructure of the concession. The residual values and useful lives of assets are reviewed at the end of each year and the effect of any changes in estimates is recorded prospectively. Gains and losses on disposals are determined by comparing P&L with the carrying amount, adjusted for possible provisions for impairment and are recognized in “Gain/Loss on Disposal of Assets and Rights” in the statement of operations.


Notes

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3.8. Impairment of assets

Property, plant and equipment items are tested for impairment when there is evidence of impairment or whenever events or significant changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss results from circumstances where the carrying amount of the asset exceeds its recoverable amount and is recognized in the statement of operations.

The calculation methodology is as follows:

Future cash flow from operations, discounted to present value, for each plant (cash-generating unit - CGU), considered as the lowest level of cash generation. This cash flow covers the remainder of each of the concessions held by the Company, but does not include any period for extension or renewal;

Future cash flow of the compensation amount at the end of concessions, discounted to present value. Management adopted the assumption, solely for accounting purposes, that the minimum compensation amount to be received from the Federal Government in the reversal of asset process shall be the carrying amount of the assets calculated at the deemed cost, and depreciated up to the concession period expiration.

3.9. Contingent assets

The CPC 25/IAS 37 defines Contingent Assets as a possible asset that arises from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the Company's control. Given the inconsistency between the Granting Authority and Company Management with regard to the amount of compensation for the HPPs Três Irmãos, Ilha Solteira and Jupiá, the Company understands that it has the right to receive the amount in accordance with its calculations and shall continue this dispute in court. Accordingly, given the existence of a contingent asset and, in accordance with CPC 25, which covers Provisions, Contingent Liabilities and Contingent Assets, in 2013 and 2015 the Company recorded a provision for contingent assets adjusting the amount recorded of the respective HPPs (Note 32), without prejudice to continue its challenge in courts.

3.10. Financial liabilities

Financial liabilities are initially recognized when the Company becomes a party to the contractual provisions of the instruments. CESP derecognizes a financial liability when its contractual obligations are discharged, canceled, or expired. Financial assets and liabilities are offset and the net amount is presented in the statement of financial position when, and only when, the Company has the legal right to offset the amounts and intends to settley them on a net basis or to realize the asset and to settle the liability simultaneously.

Financial liabilities are initially recognized at fair value plus any attributable transaction costs. After initial recognition, the financial liabilities are measured at amortized cost using the effective interest rate method. The effective interest method is used to calculate the amortized cost of a financial liability and to allocate its interest expense for the respective period. The effective interest rate is the rate that exactly discounts estimated future cash flows (including fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) during the estimated life of the financial liability or, where appropriate, a shorter period, for the initial recognition of the net carrying amount. The main financial liabilities classified in this category are:


Notes

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(a) Loans and financing (Note 16);

(b) Debt charges (Note 16);

(c) Credit assignment investment funds - FIDCs (Note 17).

3.11. Post-employment benefits

The Company sponsors health and pension plans for its employees as a defined benefit (DB) plan, and also a defined contribution (DC) plan, administered by Fundação CESP. A defined contribution plan is a pension plan according to which the Company makes fixed contributions to Fundação CESP, and has no legal or constructive obligations to make contributions if the fund does not have sufficient assets to pay to all employees the benefits related to their service in the current or prior periods. A defined benefit plan is distinct from a defined contribution plan. Usually, defined benefit plans set the pension amount that the employee will receive for his/her retirement, given that it depends on one or more factors such as age, length of contribution and compensation. The amounts of actuarial liabilities associated with the DB plan (contributions, costs, liabilities and/or assets) are calculated on an annual basis by independent actuaries at a base date coinciding with year-end and are recorded as provided for in CPC 33/ IAS 19. The liability recognized in the statement of financial position in connection with the defined benefit pension plans is the present value of the defined benefit obligation at the statement of financial position date, less fair value of plan assets. The adoption of the projected unit credit method adds each year of service as a generating factor for one additional benefit unit, which accumulates up to the calculation of the final obligation. Other actuarial assumptions that consider biometric and economic tables in addition to historical data of benefit plans, obtained from Fundação CESP, are used. Actuarial gains and losses are recorded directly in equity, under “Other comprehensive income”. These actuarial gains and losses are computed by the end of each year, based on the independent actuary’s report.

3.12. Research and Development (R&D) Program

Research and Development (R&D) Investment Program, to which electric energy concession operators are required to allocate 1% of their net operating revenue, pursuant to Law No. 9991/00 and ANEEL Regulations No. 300/08 and No. 316/08. This percentage is paid at the rate of 40% for Brazil’s Science and Technology Development Fund (“FNDCT”) and at 20% for the Energy Research Company (“EPE”) and the Ministry of Mines and Energy (MME). The remaining 40% is intended for the Company’s R&D projects and programs.

3.13. Provision for contingencies

The CPC 25/IAS 37 defines provisions as term or uncertain value liabilities and contingent liability as a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the entity's control. The contingencies, given their different legal nature, were assessed and classified based on Management’s opinion, and that of its internal and external legal advisors with regard to the likelihood of economic and financial risk to the Company. Those assessed as probable losses are provisioned at the amount of ongoing proceedings at the financial statement dates. Those


Notes

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assessed as possible or remote losses are disclosed in the accompanying notes (Note 22).


Notes

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3.14. Obligations and provisions for social and environmental commitments

Social and environmental obligations are recorded to the extent that the Company assumes formal obligations with regulators or has knowledge of potential social and environmental risks where cash disbursements are considered probable and the amounts can be estimated. During the project implementation phase, the provisioned amounts are recorded against construction in progress. After a venture enters into commercial operation, all costs or expenses incurred with social and environmental programs related to operation licenses and maintenance of the venture are recorded directly in P&L for the year.

3.15. Other assets and liabilities

The assets are stated at realizable values and liabilities at known or calculable amounts, discounted to present value, including, when applicable, monetary and foreign exchange gains and losses.

3.16. Payment of dividends and interest on equity

At the end of the year and after deducting the interim dividends paid and the appropriate legal allocations of adjusted net income, the Company records, if applicable, in current liabilities, an amount equivalent to the mandatory minimum dividend not yet paid over the course of the year. The Company’s Articles of Incorporation provide for the payment of mandatory minimum dividends limited to 10% of capital. In addition, according to those articles of incorporation, the Board of Directors decide on the payment of interest on equity and interim dividends. The calculation of adjusted net income for dividend payment purposes considers: i) the amount allocated to the legal reserve; (ii) the realization of the surplus value of the assets determined on the date of transition to international accounting standards, recorded under Equity Adjustment in equity; and (iii) the realization of unearned income reserve. The Company pays interest on equity pursuant to article 9, paragraph 7 of Law No. 9249 of 12/26/95, which is deductible for tax purposes. Dividends and interest on equity that are not claimed within three years are reversed to the Company’s equity.


Notes

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3.17. Earnings per share

Pursuant to accounting pronouncement CPC 41/IAS 33, the Company calculates basic and diluted earnings per share using the weighted average number of total outstanding common and preferred shares for the period corresponding to the income or loss. The basic earnings per share are calculated by dividing net income for the year by the weighted average number of shares issued. Basic earnings per share are equal to diluted earnings given that there are no financial instruments that are potentially dilutive. Earnings per share in prior years are retrospectively adjusted, where applicable, to reflect any bonus capitalization, share groupings or splits. The Company’s Articles of Incorporation assign different rights to preferred Class “A” and “B” shares and common shares on dividends. Accordingly, basic and diluted earnings per share are calculated by the “two class” method. The “two class” method is a profit allocation formula that establishes earnings per preferred Class “A” and “B” and common shares in accordance with the dividends and undistributed profit sharing rights.

3.18. Revenue recognition

The Electric Energy Sales Process is performed according to parameters established by Law No. 10848/04, Decrees No. 5163/04 and No. 5177/04 (which comprise the Electric Energy Trade Chamber - CCEE) and by ANEEL Normative Resolution No. 109/04, which established the Electric Energy Sales Convention. Trade relations between the CCEE participating agents are governed predominantly by medium and long-term electric energy purchase and sale agreements and all agreements between agents under Brazil’s National Interconnected System must be registered with the CCEE. The Company operates in the following electric energy segments:

3.18.1. Electric energy supply

Sale of energy at prices and conditions traded freely to free consumers - large-scale end users who have chosen not to acquire energy from local distribution companies, and with which the Company has supply agreements.

3.18.2. Electric energy supply - auction

In this segment, the Company sells its electric energy to distribution concessionaires through auctions organized by the Granting Authority through medium and long-term electric energy supply agreements.

3.18.3. Electric energy supply - agreements

These refer to the direct sale of energy to trading companies in freely negotiated agreements.


Notes

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3.18.4. Short-term electric energy

CCEE records the differences between the amounts of energy produced, consumed and contracted. The positive or negative differences are settled and priced at the Difference Settlement Price (PLD).

Quantities processed under the Energy Reallocation Mechanism, the hydrological risks sharing mechanism linked to the electric energy optimization under Brazil’s National Interconnected System (SIN), are integrated into the Short-Term Market so that the energy that any MRE agents cease to produce is generated by another agent and volumes are remunerated at an energy optimization rate sufficient to cover variable costs.

3.18.5. Quota system

MME Ordinance No. 256 of June 11, 2015 designated CESP as responsible for the Provision of Electric Energy Generation Service of HPPs Ilha Solteira and Jupiá, from July 8, 2015. Since then, the Company went on to earn revenue through the quota system, established under ANEEL Ratification Ruling No. 1924 of July 28, 2015, which ended on June 30, 2016.

3.19. Determination of profit or loss (P&L)

Expenses are recognized in the statement of operations when there is a decrease (which can be reliably measured) in the future economic benefits stemming from the decrease of an asset or the increase of a liability.

3.20. Segment information

Business segments are defined as business activities from which revenue can be earned and expenses can be incurred, and whose operating income/expenses are regularly reviewed by the Company’s key operating management member, so that decisions can be taken on fund allocation to the segment, performance can be assessed and for which there is individualized financial information available. The main decision maker is the CEO, and the Company has a policy to refer certain matters to joint decisions. The services are provided using an integrated energy generation system, and the operations are managed on a consolidated basis. Accordingly, the Company concluded that it only has one segment that requires reporting which is the generation and sale of energy.

3.21. Statement of Value Added (“SVA”)

The purpose of such statement is to present the profit earned by the Company and its distribution for a given period and is presented by CESP as required by the Brazilian Corporation Law, as part of the interim financial information, but it is not a statement required by, or provided for, under the IFRS.


Notes

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The statement of value added was prepared based on information obtained in the accounting records that serve as a basis for the preparation of the interim financial information and following the provisions in CPC 09 - Statement of Value Added. In the first part, the statement presents the profit earned by the Company, represented by revenues (gross sales revenue, including taxes thereon, other revenues and effects of the allowance for doubtful accounts), by inputs acquired from third parties (cost of sales and acquisitions of materials, electric energy and third-party services, including taxes upon acquisition, effects of losses and impairment of assets, and depreciation and amortization) and by the value added received from third parties (financial income and other revenues). The second part presents profit sharing among the employees, taxes, charges and contributions, debt remuneration and equity remuneration.

3.22. Significant accounting judgment and sources of uncertainties in estimates

The preparation of the financial statements requires that management make judgments and estimates and adopt assumptions that affect the amounts disclosed referring to revenues, expenses, assets and liabilities, as well as the disclosures of contingent liabilities, as at the financial statement reporting date. However, the uncertainty related to these assumptions and estimates could lead to results that would require significant adjustment to the carrying amount of assets or liabilities affected in future periods. Significant assumptions related to sources of uncertainty in future estimates and other important sources of uncertainty in estimates at the statement of financial position date are as follows: Income tax Significant judgment is required to determine the provision for income tax. In many transactions, the final determination of the tax is uncertain. The recognition of deferred income tax assets requires assessing whether it is probable that there is future taxable income sufficient to realize such deferred income tax. The assessment requires consideration of historical taxable income, future taxable income projections as well as the moment of reversal of temporary differences. If CESP cannot generate future taxable income or a significant change occurs in the tax structure or the year in which the temporary differences will be used it is possible that the assessment of likelihood may change, requiring all or part of the deferred income tax asset to be written off. Provision for contingencies It is defined on the basis of evaluation and qualification of risks where the likelihood of loss is considered probable. This assessment is supported by management's judgment and that of its legal advisors considering case law, recent lower and higher court decisions, a history of any agreements and decisions, the experience of management and legal advisors, as well as other significant aspects. Useful lives of property, plant and equipment The useful lives of PPE items are established and regularly reviewed by ANEEL, which are practiced and accepted by the market as representative of the economic useful lives of the assets in connection with the concession infrastructure. Management reviews the economic useful lives of the assets annually, at the end of each year, to validate that these useful lives remain consistent for use in its business.


Notes

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Impairment test of long-term assets There are specific rules to assess the impairment of long-lived assets, particularly PPE. At year end, CESP conducts an analysis to determine whether there is any evidence that the amount representing long-lived assets will not be recoverable. If such evidence is identified, the recoverable amount of assets is estimated by the Company. The recoverable amount of an asset is the highest between: (i) its fair value less cost to sell; and (ii) its value in use. Value in use is measured based on discounted cash flows stemming from the continuous use of an asset until the end of its useful life, or the concession period. When the carrying amount of an asset exceeds its recoverable amount, the Company recognizes a reduction in the book balance of this asset, where applicable. The asset impairment process is subjective and requires significant judgment through performance of analyses. Allowance for doubtful accounts Management individually monitors its receivables and records an allowance for doubtful accounts on probable losses. Pension plans and post-employment benefits The Company recognizes its obligations related to benefit plans to employees and the related costs, net of plan assets, based on actuarial studies prepared annually. The most recent study was conducted on December 31, 2015, adopting the following practices: (i) the cost of liabilities with post-employment benefits is actuarially determined using the projected unit credit method. The discount rate used to calculate the future benefit obligations is an estimate of the interest rate on the date of the statement of financial position, on high quality fixed income investments with maturities that match the expected maturity of obligations; and (ii) the assets of the pension plan are measured at fair value (mark to market). In actuarial calculations, consultants also use subjective factors such as mortality rates, salary growth and turnover forecast. Between the last actuarial study prepared on the reporting date December 31, 2015, and the financial statement date, there were no changes in assumptions and other conditions of the Plan that would have required changes to the criteria adopted. The actuarial assumptions used by the Company may differ materially from actual results due to changes in economic and market conditions, regulatory events, court decisions or shorter/longer life expectancy of participants. However, the Company and its actuaries used assumptions consistent with the internal and external analysis to establish the estimates used. Transactions involving the purchase and sale of energy at the CCEE The electric energy purchase and sale transactions at the CCEE are recognized on an accrual basis in accordance with the information disclosed by the entity or estimates prepared by the Company management, when this information is not available on a timely basis.


Notes

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Amounts recognized as a provision are the best estimate of those required to settle said liabilities at the end of every year, taking into consideration the risks and uncertainties therein. When the provision is measured based on estimated cash flows to settle the obligation, the book value corresponds to the present value of those cash flows.

4. New standards and amendments to existing standards

New pronouncements that became effective from January 1, 2016, which however had no significant effects on the Company’s financial statements are as follows:

Standard Requirement

IFRS 14 - Regulatory deferral accounts

IFRS 14 is an optional standard that allows an entity that conducts rate-regulated activities to continue applying most of its accounting policies to regulatory deferral account balances on first-time adoption of IFRS.

Amendments to IFRS 11 - Joint arrangements:

Accounting for Acquisitions of Interests in Joint Operations

Amendments to IFRS 11 require that a joint operator that is accounting for the acquisition of interest in a joint operation, in which the joint operation activity constitutes a business, apply the principles of IFRS 3 to account for business combinations.

Amendments to IAS 16 and IAS 38 - Clarification on acceptable methods of depreciation and amortization

These amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects an economic benefit model generated from the operation of a business (of which the asset is a part) rather than the economic benefits that are consumed by the use of that asset.

Amendments to IAS 16 and IAS 41 - Agriculture: Bearer Plants

Biological assets that meet the definition of bearer plants no longer feature in the scope of IAS 41. Instead, IAS 16 is being applied. The amendments also require that the product of the bearer plants continue to be considered under the scope of IAS 41 measured at fair value less costs to sell.

Amendments to IAS 27 - Equity method in separate financial statements

These amendments will allow entities to account for investments in subsidiaries, joint ventures and associates using the equity method in their separate financial statements.

IFRS 7 - Financial instruments: Disclosures (i) Servicing contracts

This amendment clarifies that a servicing contract that includes a fee may constitute ongoing involvement in a financial asset. An entity shall assess the nature of this rate and the contract compared to the guidance for continued involvement in IFRS 7 in order to assess whether the disclosures are required.

IAS 19 - Employee benefits This amendment clarifies that the depth of the market for high quality corporate bonds is assessed based on the currency under which the obligation is denominated, rather than the currency of the country where the obligation is located. When there is no deep market for high-quality corporate bonds in that currency, government securities rates should be used.

IAS 34 - Interim Financial Reporting

This amendment clarifies that the required interim reporting should be in the interim financial statements or incorporated by cross-reference between the interim financial statements and wherever they are included in the interim financial report (for example, the report on comments of the management or risk).

Amendments to IAS 1 - Disclosure Initiative

These amendments clarify:

The materiality requirements in IAS 1.

That items of specific lines in the statements of operations, of other comprehensive income and in the statement of financial position can be broken down.

That entities have flexibility as to the sequence in which they present the notes to financial statements.

That the portion of other comprehensive income of associates and joint ventures accounted for using the equity method should be presented on an aggregate basis as a single line item and classified among the items that will be or will not be subsequently reclassified to P&L.


Notes

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Amendments to IFRS 10, IFRS 12 and IAS 28 – Investment entities: Applying the Consolidation Exception

These amendments address issues that have arisen in the application of exceptions for investment entities in accordance with IFRS 10:

The amendments to IFRS 10 clarify that the exemption from the presentation of consolidated financial statements applies to the parent company that is a subsidiary of an investment entity, when such investment entity measures all its subsidiaries at fair value.

Furthermore, the amendments to IFRS 10 clarify that only the subsidiary of an investment entity

that is not itself an investment entity and that provides support services to the investment entity is

consolidated. All other subsidiaries of an investment entity are measured at fair value.

Amendments to IAS 28 allow an investor, in applying the equity method, to retain the measurement at fair value applied by the associated investment entity or joint venture to its interest in the subsidiaries.

Company management evaluated the impacts from amendments to the aforementioned standards issued and understands that their adoption had no significant impact on its financial statements. New or revised standards not yet effective and that will become effective for annual periods beginning on or after January 1, 2017 are as follows:


IFRS 9 - Financial instruments IFRS 9 meets all three aspects of accounting for financial instruments of the project: classification and measurement, impairment loss and hedge accounting.

IFRS 14 - Regulatory deferral accounts

IFRS 14 is an optional rule that allows an entity that conducts rate-regulated activities to continue applying most of its accounting policies to regulatory deferral account balances on first-time adoption of IFRS.

IFRS 15 - Revenue from contracts with customers

Revenues are recognized in an amount that reflects the consideration an entity expects to receive in exchange for transfer of goods or services to a customer.

Amendments to IFRS 10, IFRS

12 and IAS 28 - Investment Entities: Applying the Consolidation Exception

These amendments address the conflict between IFRS 10 and IAS 28 in the treatment of the loss of control of a subsidiary that is sold or contributed to an associate or a joint venture. They clarify that the gain or loss resulting from the sale or contribution of assets that make up a business, as defined in IFRS 3, between an investor and its associate or joint venture, is fully recognized. Any gain or loss resulting from the sale or contribution of assets that do not make up a business, however, is recognized only on the extent of the interests of unrelated investors in the associate or joint venture. The IASB postponed indefinitely the effective date of these amendments, however an entity that elects the early adoption of such amendments should apply them prospectively.


Notes

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Amendments to IAS 7 - Disclosure Initiative

Amendments to IAS 7 - Cash flow statement are part of the IASB's disclosure initiative and require an entity to provide disclosures that enable users of financial statements to assess changes in liabilities arising from financing activities, including both changes arising from cash flows and changes that do not affect the cash. Upon first-time adoption of this amendment, entities are not required to provide comparative information relating to prior periods.

IAS 12 - Recognition of deferred tax assets for unrealized losses

These amendments clarify that an entity should consider whether the tax legislation restricts sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference.

In addition, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances under which taxable profit may include the recovery of certain assets for amounts greater than their carrying amount.

They should be retrospectively applied. However, upon first-time adoption of these amendments, the change in the initial equity of the earliest comparative period may be recognized in the initial retained earnings (or in other equity component, as the case may be), without allocation of the change between the initial retained earnings and other equity components. Entities that elect to adopt this exemption should disclose such fact.

Amendments to IFSR 2 - Classification and measurement of share-based payment transactions

The IASB issued amendments to IFRS 2 - Share-based payments, which address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with characteristics of settlement by the net amount for obligations related to withholding taxes; and accounting when a change in the terms and conditions of a share-based payment transaction changes its cash settlement classification to share settlement classification.

IFRS 16 - Lease IFRS 16 was issued in January 2016 and replaces: IAS 17 - Leases; IFRIC 4 - Determining whether an agreement contains a lease; SIC-15 - Operating leases - Incentives; and SIC-27 - Evaluation of the substance of transactions involving the legal form of a lease. IFRS 16 establishes the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single model in the statement of financial position, similar to accounting for finance leases under IAS 17.

IFRS 16 also requires that lessees and lessors make more comprehensive disclosures than those provided for in IAS 17.

Company Management is assessing the impacts of the aforementioned standards and understands that their adoption will have no significant impact on its financial statements.

5. Cash and cash equivalents

The short-term investments below are readily convertible into a known cash amount and are subject to an insignificant risk of any change in value. These investments refer to Bank Deposit Certificates (CDB), which are characterized as sales of securities with a commitment from the financial institution to repurchase them, from the buyer, and to resell them in the future, and bear interest between 95% and 100% (95% and 100% at December 31, 2015) of the Interbank Deposit Certificate (CDI) rate, and to the Integrated Financial Management System for States and Municipalities (SIAFEM) fund, which is 95% guaranteed by National Treasury Bills and 5% guaranteed by Financial Bills from the State Treasury Department, bearing interest between 95% and 100% of the Interbank Deposit Certificate (CDI) rate.


Notes

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Type of investment 12/31/2016 12/31/2015

Cash Bank demand deposits 1,477 3,558

Short-term investments Banco do Brasil S.A. - SIAFEM Fund 490,161 533,806 Other institutions CDB/ CDI 12,391 11,189

502,552 544,995

504,029 548,553

6. Receivables

The following table summarizes the receivables according to income class, and the description of each class is presented in the following subtopics:

12/31/2016 12/31/2015

Falling due

Overdue above 90 days

(Note 7) (-) Provision

(Note 7) Total Total

Consumers Industrial 49,751 4,172 (4,172) 49,751 93,240

Resellers Selling agents 38,927 - - 38,927 53,594 Electric energy auctions 68,484 2,048 (2,048) 68,484 74,168 Supply - quotas - 5,087 (5,087) - 57,698

107,411 7,135 (7,135) 107,411 185,460

Free electric energy / CCEE Free energy (RTE) (Note 6.2) - 13,712 (13,712) - - CCEE 7,979 - - 7,979 60,867

7,979 13,712 (13,712) 7,979 60,867

Total 165,141 25,019 (25,019) 165,141 339,567

6.1. Consumers and resellers

The Company has a certain degree of concentration in its customer portfolio. At December 31, 2016, the ten major customers account for 68.6% of the total portfolio (57% at 12/31/2015).

6.2. Free Energy - Extraordinary Tariff Readjustment (RTE)

On August 26, 2010, the Superintendence of Economic and Financial Inspection (SFF) of ANEEL issued Order No. 2517, which set the final amounts of free energy to be transferred between distribution and generation companies, signatories to the General Agreement for the Electric Energy Sector, whose balance at December 31, 2016 totals R$13,712 (R$13,712 at 12/31/2015). This issue is under dispute in court (Note 7).

6.3. Short-term energy - CCEE

It represents the variation calculated monthly, resulting from the balance managed by the CCEE, between commitments made by the Company with its market and other CCEE Agents versus the effective behavior of each member of the system. For the year ended December 31, 2016, the Company sold the amount of R$48,261 (R$365,695 in 2015) related to non-contracted energy (revenue), available for sale on the CCEE (Note 26.2).


Notes

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7. Allowance for doubtful accounts From December 2015, allowance for doubtful accounts has been presented as an adjustment account for each receivable, such as Receivables (Note 6) and Other receivables (Note 9). This note shows the sum of balances of allowance for doubtful accounts, on the opening and closing dates, as well as changes (additions/write-offs) entered as a matching entry for accumulated P&L for the period:

Debtor 12/31/2015 (Additions) /

write-offs 12/31/2016

Consumers (Note 6) (4,172) - (4,172) Electric energy auctions (Note 6) (4,096) 2,048 (2,048) Supply - quotas (Note 6) - (5,087) (5,087) CCEE (Note 6) - - - Free energy (RTE) (Note 6.2) (13,712) - (13,712)

Subtotal (Note 6) (21,980) (3,039) (25,019) Other receivables (Note 9) (a) (21,227) (10,340) (31,567)

Total (43,207) (13,379) (56,586)

(a) This refers to the allowance for doubtful accounts presented in Note 9, i.e. R$30,608 for Sundry receivables and R$959 for Other.

8. Taxes to be offset

12/31/2016 12/31/2015

Current Withholding Income Tax (IRRF) to be offset 3,048 1,072 Social Contribution Tax on Net Profit (CSLL) to be offset 1,164 662 IRRF tax loss (*) 52,983 - CSLL tax loss (*) 18,270 - COFINS to be offset 1,839 2,056 PIS to be offset 398 446

77,702 4,236

(*) The income and social contribution tax losses, in the respective amounts of R$52,983 and R$18,270, indicate that in 2016 the Company

overpaid these taxes, mainly due to the write-off of the Provision for Labor Contingencies (Legal Enforcement Agreement in a Health Exposure claim), in the amount of R$169,903, recorded in the 4

th quarter of 2016 (Notes 22 and 23.2 (b)). These amounts will be offset with federal taxes

as from January 2017.

9. Other receivables

12/31/2016 12/31/2015

Current Receivables from disposal of assets and rights 2,122 1,820 Sundry receivables (*) 35,893 25,767 (-) Allowance for doubtful accounts (Note 7a) (30,608) (20,985) FIDC - restricted account 14,655 9,692 Project orders - R&D 47,335 59,411 Other (*) 2,138 1,163 (-) Allowance for doubtful accounts (Note 7a) (959) (242)

70,576 76,626

Noncurrent Receivables from disposal of assets and rights 524 1,843 Assets for disposal 1,361 1,361

1,885 3,204

Total 72,461 79,830

(*) Balances of receivables from various companies and entities with which the Company has transactions. To cover any risks on collection of

receivables, an allowance for doubtful accounts was set up at a total amount of R$31,567 (R$21,227 at 12.31.2015 - Note 7).


Notes

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10. Prepaid expenses

12/31/2016 12/31/2015

Current Insurance 1,065 1,011

Rescheduling of hydrological risk (Note 14) Contract 230 MWm (a) 15,021 15,021 Contract 120 MWm (b) - 9,134

15,021 24,155

16,086 25,166

Noncurrent Rescheduling of hydrological risk (Note 14)

Contract 230 MWm (a) 37,554 52,575

Total 53,640 77,741

(a) Bonus for rescheduling of hydrological risk that will be monthly transferred to P&L from January 2016 to June 2020 (Note 27.1); (b) Bonus for rescheduling of hydrological risk that will be monthly transferred to P&L from January 2016 to December 2016 (Note 27.1);

See explanation on Rescheduling of hydrological risk in Note 13. Changes in the Rescheduling of hydrological risk are as follows:

Current 12/31/2015 Realized

(Note 27.1) Transferred 12/31/2016

Contract 230 MWm (a) 15,021 (15,021) 15,021 15,021 Contract 120 MWm (b) 9,134 (9,134) - -

24,155 (24,155) 15,021 15,021 Noncurrent

Contract 230 MWm (a) 52,575 - (15,021) 37,554

11. Pledges and restricted deposits

12/31/2016 12/31/2015

Noncurrent Judicial deposits (a)

Civil proceedings 138,478 161,085 Labor claims - appeals 88,768 73,870 Tax proceedings 18,592 17,295 Environmental proceedings 441,961 441,991 Other judicial deposits 2,211 2,137

690,010 696,378

Guarantees Restricted deposits - CCEE (b) 13,618 916 Restricted deposits - ANEEL (c) 262 - Subordinated shares - FIDC (d) (Note 15.1) 63,532 91,563

77,412 92,479

Total 767,422 788,857

Judicial deposits referring to expropriation proceedings total R$150,548 at December 31, 2016 and are stated under construction in progress (Note 15.1).

(a) Judicial deposits are recorded at historical amounts and related to provisions for legal contingencies, in the amount of R$690,010 at December

31, 2016 (R$696,378 at 12/31/2015, see Note 22);

(b) Loan secured regarding financial guarantee with the CCEE in an account held in Banco Bradesco S/A; (c) Restricted deposit in guarantee for preparation of a study on hydroelectric inventory of the Rio Pardo stretch, in São Paulo State, between HPPs

Euclides da Cunha and Caconde. (d) Loan secured equivalent to shares held by CESP, in connection with the Credit Assignment Investment Funds (FIDC IV 190 shares) - see Note

17.1, which can only be redeemed at maturity of the last installment, concurrently with the liquidation of the fund, maturing in May 2017. The balance of shares is adjusted monthly at the market quotation value.


Notes

Page: 58 of 114

12. Deferred income and social contribution taxes At December 31, 2016, the Company has total tax credits (nominal) amounting to R$3,255,434; R$2,433,722 referring to income tax (comprised of tax loss of R$599,963, nondeductible temporary differences of R$1,461,163, PPE adjustment - deemed cost of R$385,863, and foreign exchange gain (loss) on loans and financing of R$13,266); R$821,712 referring to social contribution tax (comprised of social contribution tax loss of R$161,560, nondeductible temporary differences of R$526,019, PPE adjustment - deemed cost of R$138,910, and foreign exchange gain (loss) on loans and financing of R$4,777). Under current tax legislation, income and social contribution tax losses may be offset against future taxable income, up to the limit of 30% of taxable income for each year, and are not subject to any statute limitation period. The balances recorded until December 31, 2016, tax loss credits - deferred income and social contribution tax losses - are evidenced by financial projections prepared by Company Management for the next 10 years, which are reviewed annually, as recommended by the Granting Authority and determined by the CVM, which consistently state the realization of income and social contribution tax loss and temporary differences. The projections and corresponding realization of tax credits consider the term of each concession, limited to 10 years, given the subjectivity and uncertainty linked to the concessions. The projections adopted as basic assumptions on the quantity of electric energy billed (MWh) and prices contracted with distributors through electric energy auctions (Product 2009 Hydro and Product 2010 Hydro; Note 1.2); agreement on supply of electric energy to free consumers with terms of service/supply up to 2026; the maintenance of operating expenses and consider the decrease in financial expenses, which evidence the posting of future taxable income. The studies and projections that evidence the posting of income and social contribution tax assets at December 31, 2016 were approved by the Board of Directors at the meeting held on March 21, 2017. Breakdown of balances:

Net assets

12/31/2016 12/31/2015

Income tax Tax losses recorded (a) 209,905 218,670 Tax losses (unrecorded) 390,058 395,221 Temporary differences (unrecorded) 1,461,163 1,437,189 PPE adjustment - deemed cost (ICPC 10) (b) 385,862 395,750 Foreign exchange gains (losses), net on loans and financing (b) (13,266) 18,851

2,433,722 2,465,681 Social contribution tax Social contribution tax recorded (a) 82,901 86,905 Social contribution tax (unrecorded) 78,659 80,683 Temporary differences (unrecorded) 526,019 517,388 PPE adjustment - deemed cost (ICPC 10) (b) 138,910 142,469 Foreign exchange gains (losses), net on loans and financing (b) (4,777) 6,786

821,712 834,231 Provision for unrecorded tax credits (2,455,899) (2,430,481)

799,535 869,431

(a) Up to December 31, 2016, R$19,159 were realized, offset against current taxes; and R$13,341 referring to income tax loss and R$5,818

referring to social contribution tax loss were charged to P&L, as a matching entry to the supplementary deferred tax credits recorded in P&L, amounting to R$6,390 - R$4,576 referring to income tax and R$1,814 referring to social contribution tax.

(b) The realization of deferred tax assets over the quarter mainly refers to the equity adjustment amounting to R$13,447 and settlement of loans amounting to R$43,680.


Notes

Page: 59 of 114

Since 2003, the Company has adopted taxation on a cash basis for foreign exchange gains. As a result, deferred income and social contribution taxes were recorded in liabilities at the rates of 25% and 9% respectively, on taxable temporary differences, represented by unrealized foreign exchange gains (losses) on unsettled loans and financing.

Deferred income tax of R$209,905 and deferred social contribution tax of R$82,901, totaling R$292,806, should be realized within 10 years, as follows:

Years

Year 2017 2018 2019 2020 2021 From 2022

to 2024 2025 and

2026 Total

Estimated realization portion 10,819 28,109 34,469 34,157 25,789 89,912 69,551 292,806

The estimates of tax credits arising from income and social contribution tax losses, and temporarily nondeductible provisions (table above) are supported by the Company’s taxable income projections, which are periodically reviewed and approved by Management. These projections are based on assumptions and the final result may diverge from the projected figure.

13. Storeroom

12/31/2016 12/31/2015

Noncurrent Storeroom 22,753 28,467 (-) Provision for impairment (Notes 15 and 27) (*) (15,776) -

Total 6,977 28,467

(*) With the expiration of the concessions of HPPs Três Irmãos, Ilha Solteira and Jupiá, there remained storeroom items that were not covered by

the legislation for the transfer to the new operators of these plants. According to MP No. 579/2012, signed into Law No. 12783/2013, the transfer to the new operator of the plants that had the concession expired refers only to the assets in operation in connection with the production of electric energy. The Company is negotiating with new operators interested in acquiring certain items. Since the storeroom cost may not be recoverable, in compliance with Accounting Pronouncement CPC 16 (R1) - Inventories, a provision was set up to adjust the realizable value of

storerooms of these plants. In the event the disposal of these storeroom items is successful, the respective costs will be realized and the provision reversed.

14. Intangible assets

The Provisional Executive Order (MP) No. 688, published on August 18, 2015, provides for the rescheduling of the electric energy generation hydrological risk, and instituted a bonus through the granting, and amended other industry related laws. In general, the rescheduling agreement provided for the participation of generators (voluntary) and distributors (compulsory) that are part of the Energy Reallocation Mechanism (MRE) alone, and involved portions of the guaranteed power output from the electric energy generating agent, relating to amounts of the Regulated Market (ACR) and Free Market (ACL) contracts. The rescheduling by generators depended on approval by ANEEL, with retrospective effects to January 1, 2015 and, alternatively included a risk bonus borne by generators and, as an effectiveness clause, that each agent individually renounce any legal proceedings related to hydrological risk. That MP was signed into Law No. 13203, dated December 8, 2015 and the regulatory detailing of the rescheduling procedures occurred through Normative Resolution No. 684 of December 11, 2015, which prompted several internal studies and debates at industry related and institutional associations, particularly during the ANEEL Public Hearing. CESP filed its membership application for the rescheduling of hydrological risk at ACR with ANEEL on


Notes

Page: 60 of 114

January 15, 2016. With regard to the ACL, the decision made was not to participate as it was not considered beneficial, even by other agents, since there was no application to the ACL.

Accordingly, due to the eligibility criteria established by ANEEL resolution, only HPP Porto Primavera agreements were considered, i.e. the 1

st and 2

nd New Electric Energy Auction (“Botox”) and the 4

th

Existing Electric Energy Auction (to expiry in 2016), their main features being:

Transfer of secondary electric energy and hydrological risk (GSF) through a risk bonus of R$9.50/MWh (amount in January 2015);

In 2016, CESP was 100% protected from GSF related to the average 350 MW contracted;

From 2017 to 2028, when the plant concession expires, the protection will be 100% of the average 230 MW referring to the “Botox” agreement;

The impact of the water displacement in 2015 related to these ACR contracts was R$161 million and, at ANEEL’s discretion, the compensation amounted to R$103 million as follows:

- The “Botox” agreement postponement of the risk bonus for 4 years and 6 months (payment as from July 2020);

- Existing Electric Energy Contract: postponement of payment of risk bonus for 1 year and extension of the concession period for HPP Porto Primavera for 53 days. During this period, the guarantee power output of the plant shall be contracted under the regulated market without risk of GSF.

On January 26, 2016, ANEEL Order No. 190 of January 25, 2016 was published in the Federal Official Gazette, approving the rescheduling requested by CESP. Whereas the conditions for the coverage of hydrological risk were accepted, the Company delivered to ANEEL on January 29, 2016, the Rescheduling Agreement executed and a protocol stating the withdrawal from legal proceedings. The accounting impacts were presented in 2015 as follows:

2015

Rescheduling of hydrological risk

Prepaid expenses (Note 10) Intangible assets

Decreased in energy purchased -

CCEE

Current

Contract 230 MWm 15,021 - (15,021) Contract 120 MWm 9,134 26,134 (35,268)

24,155 26,134 (50,289)

Noncurrent Contract 230 MWm 52,575 - (52,575)

Total 76,730 26,134 (102,864)


Notes

Page: 61 of 114

The balance of intangible assets breaks down as follows:

2016 2015

Total Accumulated depreciation /

cost amortization Net Net

In operation Software and use license 12,083 (2,239) 9,844 649 Rescheduling of hydrological risk (*) 26,266 (2,081) 24,185 26,134

38,349 (4,320) 34,029 26,783

In progress Software and use license 6,359 - 6,359 13,761

Total 44,708 (4,320) 40,388 40,544

(*) (*) The rescheduling of the hydrological risk recorded in intangible assets will be amortized on a monthly basis from January 2016 up to July

2028, considering the 53-day increase in HPP Porto Primavera concession.

Changes in the balances for intangible assets are as follows:

Depreciation/ 12/31/2015 Additions Amortization Activation 12/31/2016

In operation Software and use license 649 - (1,679) 10,874 9,844 Rescheduling of hydrological risk 26,134 - (2,081) 132 24,185

26,783 - (3,760) 11,006 34,029

In progress Software and use license 13,761 3,604 - (11,006) 6,359

Total 40,544 3,604 (3,760) - 40,388

Depreciation/ 12/31/2014 Additions Amortization Activation 12/31/2015

In operation Software and use license 877 - (228) - 649 Rescheduling of hydrological risk - - - 26,134 26,134

877 - (228) 26,134 26,783

In progress Software and use license 8,478 5,283 - - 13,761 Rescheduling of hydrological risk - 26,134 - (26,134) -

8,478 31,417 - (26,134) 13,761

Total 9,355 31,417 (228) - 40,544


Notes

Page: 62 of 114

15. Property, plant and equipment (PPE)

The balance of PPE in operation segregated by asset type, with the comments in Notes 15.1 to 15.5, is as follows:

2016 2015

(%) Annual average

Depreciation Total cost Accumulated Net Net

In operation

Land 295,391 - 295,391 293,555

Reservoirs, dams and aqueducts 1.9% 9,239,025 (5,311,858) 3,927,167 4,105,799

Buildings, civil works and improvements 2.1% 2,288,073 (1,259,441) 1,028,632 1,076,339

Machinery and equipment 2.7% 2,687,785 (1,332,028) 1,355,757 1,396,698

Vehicles 2.2% 6,236 (3,455) 2,781 762

Furniture and fixtures 2.1% 3,802 (2,473) 1,329 2,348

14,520,312 (7,909,255) 6,611,057 6,875,501

R&D

Machinery and equipment (795) 8 (787) -

14,519,517 (7,909,247) 6,610,270 6,875,501

In progress

Land 1,895 1,895 1,895

Reservoirs, dams and aqueducts 134,128 - 134,128 122,727

Buildings, civil works and improvements 41,052 - 41,052 41,300 Machinery and equipment under maintenance 2,384 - 2,384 11,743

Machinery and equipment under assembly 33,719 - 33,719 47,276

Judicial deposits 150,548 - 150,548 152,071

Other 5,728 - 5,728 7,594

369,454 - 369,454 384,606

Total 14,888,971 (7,909,247) 6,979,724 7,260,107

On August 11, 2015, ANEEL issued Normative Resolution No. 674, which approved the review of the Manual for Equity Control in the Electric Sector (MCPSE), and maintained annual depreciation rates for granted assets in operation of the electricity industry. The annual depreciation rates used in the electric energy utilities for assets associated with power generation range from 2% to 6.67%. Changes in PPE balances are as follows:

12/31/2015 Additions Depreciation Activation Reclassification/

write-offs

(-) Provision for adjustment of realizable

value of storeroom

(Notes 13 and 27) 12/31/2016

In operation

Land 293,555 - - 2,135 (299) - 295,391

Reservoirs, dams and aqueducts 4,105,799 - (178,798) 166 - - 3,927,167

Buildings, civil works and improvements 1,076,339 - (48,214) 933 (426) - 1,028,632

Machinery and equipment 1,396,698 - (72,126) 31,045 140 - 1,355,757

Vehicles 762 - (110) 2,129 - - 2,781

Furniture and fixtures 2,348 - (545) 16 (490) - 1,329

6,875,501 - (299,793) 36,424 (1,075) - 6,611,057

Liabilities - R&D assets

Machinery and equipment - - 8 (795) - - (787)

6,875,501 - (299,785) 35,629 (1,075) - 6,610,270

In progress

Land 1,895 322 - (2,135) 1,813 - 1,895

Reservoirs, dams and aqueducts 122,727 11,571 - (170) - - 134,128

Buildings, civil works and improvements 41,300 713 - (961) - - 41,052

Machinery and equipment under maintenance 11,743 307 - (9,666) - - 2,384

Machinery and equipment under assembly 47,276 8,344 - (21,901) - - 33,719

Judicial deposits 152,071 290 - - (1,813) - 150,548

Other 7,594 436 - (1,591) - (711) 5,728

384,606 21,983 - (36,424) - (711) 369,454

Liabilities - R&D assets

Machinery and equipment - (795) - 795 - - -

384,606 21,188 - (35,629) - (711) 369,454

Total 7,260,107 21,188 (299,785) - (1,075) (711) 6,979,724


Notes

Page: 63 of 114

12/31/2014 Additions Depreciation Activation Reclassification/

write-offs Ilha Solteira /

Jupiá (Note 32.2) 12/31/2015

In operation

Land 326,978 - - 5,023 1,718 (40,164) 293,555

Reservoirs, dams and aqueducts 4,781,088 - (308,009) - (22,867) (344,413) 4,105,799

Buildings, civil works and improvements 1,139,566 - (73,943) 1,737 22,617 (13,638) 1,076,339

Machinery and equipment 1,699,088 - (76,685) 102,895 (2,085) (326,515) 1,396,698

Vehicles 882 - (120) - - - 762

Furniture and fixtures 3,727 - (1,395) 16 - - 2,348

7,951,329 - (460,152) 109,671 (617) (724,730) 6,875,501

In progress

Land 1,895 3,548 - (5,023) 1,475 - 1,895

Reservoirs, dams and aqueducts 157,312 645 - (54) (30,285) (4,891) 122,727

Buildings, civil works and improvements 48,312 530 - (5,342) - (2,200) 41,300 Machinery and equipment under maintenance 108,968 903 - (49,710) (98) (48,320) 11,743

Machinery and equipment under assembly 119,118 9,439 - (49,538) 98 (31,841) 47,276

Judicial deposits 100,332 53,214 - - (1,475) - 152,071

Other 7,540 942 - (4) - (884) 7,594

543,477 69,221 - (109,671) (30,285) (88,136) 384,606

Total 8,494,806 69,221 (460,152) - (30,902) (812,866) 7,260,107

15.1. Construction in progress

Construction in progress includes mainly expenses with modernization and repowering of machinery and equipment for generation facilities. Accordingly, in view of CPC 20, the Company does not capitalize interest on construction in progress, as it understands that it does not have any qualifying assets. It also includes balances of judicial deposits of R$150,548 (R$152,071 at 12/31/2015), initial and in guarantee for expropriation proceedings, mainly involving HPP Porto Primavera among other proceedings involving CESP plants (Note 11). Judicial deposits relating to labor, civil, tax and environmental proceedings are also reported in Note 11. As from 2009, the surplus delayed costs of the recoverable amount of assets of HPP Engenheiro Sérgio Motta (Porto Primavera), were no longer capitalized and are now recorded directly in P&L (Note 27.2).

15.2. Electric energy concessions

CESP’s generation concessions were granted by decree for each plant at the beginning of studies and construction work and were grouped into a service concession arrangement entered into on November 12, 2004, covering all of the Company’s generation facilities.

HPP

Total machinery

in operation

Installed capacity MW (*)

Guaranteed power

output (*) MW average Start-up (a)

Concession term

Engenheiro Sérgio Motta 14 1,540.0 (c) 1,017.0 01/23/99 07/11/28 (b) Jaguari 2 27.6 14.0 05/05/72 05/20/20 Paraibuna 2 87.0 50.0 04/20/78 03/09/21

Total 18 1,654.6 1,081.0 (a)


Notes

Page: 64 of 114

(a) The consumption of the power plants themselves and losses from transmission to the system’s center of gravity must be deducted from CESP guaranteed power output. These deductions vary each year, but can be estimated at up to 3%.

(b) The concession term after increase of 53 days resulting from the rescheduling of the hydrological risk in 2015 on the original date of 05/19/2028.

(c) On December 21, 2016, SPE/MME Ordinance No. 258 was published, which changed the guaranteed power output of HPP Engº

Sérgio Motta from 1,017 to 992.6 average MW. (*) Data relating to capacity and energy was not reviewed by independent auditors.

15.3. Concession related assets

Under articles 63 and 64 of Decree No. 41019, dated February 26, 1957, the assets and facilities used in electric energy generation, transmission and distribution, including sale, are linked to these services and may not be removed, sold, assigned or mortgaged without prior express authorization from the Regulator. ANEEL Resolution No. 20/99 regulates the disassociation of assets from Public Electric Energy Service concessions, granting prior authorization for the disassociation of assets that are unserviceable for the concession, when intended for sale. It further established that any gain from the disposal should be deposited in a restricted bank account and invested in the concession.

15.4. Deemed cost

Pursuant to Accounting Pronouncement CPC 37 (IFRS 1) and ICPC 10, the Company elect to adopt deemed cost for plants integrated into generation infrastructure, adjusting the opening balances on the transition date at 01/01/2009 at values estimated by independent appraisers. According to ICPC 10, on January 1, 2009, the net effect of the initial adoption of the deemed cost for the plants resulted in an increase in P&L of R$3,553,278, matched against deferred income and social contribution taxes of R$1,208,115 (34%) and the equity adjustment under equity of R$2,345,163, as follows:

01/01/2009

Plant

Deemed cost limited to

recoverable amount

Carrying amount

Surplus value (deficit)

Engº Sérgio Motta 8,917,513 10,912,754 (1,995,241) Ilha Solteira + Três Irmãos 7,780,060 3,326,400 4,453,660 Jupiá 1,207,288 275,394 931,894 Paraibuna 141,296 20,905 120,391 Jaguari 45,618 3,044 42,574

Total 18,091,775 14,538,497 3,553,278 Deferred taxes (1,208,115)

Effect on equity 2,345,163


Notes

Page: 65 of 114

Changes:

PPE R$

Deferred taxes assets /

(liabilities) R$ Equity

R$

Opening balance at 01/01/2009 3,553,278 (1,208,115) 2,345,163 Realized (5,136,277) 1,746,334 (3,389,943)

Balance at 12/31/2015 (1,582,999) 538,219 (1,044,780) Realization for the year 39,550 (13,447) 26,103

Closing balance at 12/31/2016 (1,543,449) 524,772 (1,018,677)

Plant PPE R$

Deferred taxes assets /

(liabilities) R$ Equity

R$

HPP Engº Sérgio Motta (deficit) (1,607,778) 546,644 (1,061,134) HPP Paraibuna 47,829 (16,262) 31,567 HPP Jaguari 16,500 (5,610) 10,890 Total (1,543,449) 524,772 (1,018,677)

The remaining equity adjustment of R$1,018,677 at 12.31.2016 (R$1,044,780 in 2015), is basically the deficit at the Porto Primavera Plant, which will be realized through transfer to the retained earnings account, in accordance with the depreciation or realization of those assets.

15.5. Impairment of assets

In compliance with CPC 01, Management annually prepares internal studies to evaluate the recoverability of the carrying amount of PPE of the Company’s generation facilities in its future operations, considering the following components and assumptions:

Future cash flow from operations, discounted to present value, for each plant considered as the lowest level of cash generation; This flow covers the remaining period of the concession, not including any period for extension or renewal;

Future cash flow of the compensation amount at the end of concession, discounted to present value.

Discount rate compatible with the market (2009: 6.69%; 2010: 6.24%; 2011: 5.70%; 2012: 4.95%; 2013: 5.73%; 2014: 5.44%; 2015: 6.75%; 2016: 7.11% p.a. net of income tax). The impairment test of HPPs belonging to the Company’s generating facilities indicated that there was no need to record a provision for impairment of those assets at December 31, 2016.


Notes

Page: 66 of 114

16. Loans and financing

16.1. Breakdown 12/31/2016 12/31/2015

Charges Current principal

Noncurrent principal Total Charges

Current principal

Noncurrent principal Total

Foreign currency BNDES (1) 1,712 179,876 370,608 552,196 2,647 198,882 659,349 860,878 Other institutions 72 - 1,065 1,137 49 - 1,568 1,617

1,784 179,876 371,673 553,333 2,696 198,882 660,917 862,495

Local currency ELETROBRÁS (2) 5 5,152 9,904 15,061 6 5,152 15,056 20,214

1,789 185,028 381,577 568,394 2,702 204,034 675,973 882,709

There are no covenants on outstanding loans and financing agreements.

16.2. Information on foreign currency transactions

(1) The principal balance at December 31, 2016, corresponding to R$550,484 (R$858,231 at

12.31.2015) refers to the agreement entered into with the National Bank for Economic and Social Development (BNDES) on September 4, 2002, the original amount of which was US$552,650 thousand, with principal amortization as from April 15, 2005, in 88 bimonthly installments, and restated according to UMBNDES, plus a basic spread of 1.91% p.a. and mismatching of 0.95% p.a., with interest due on April 15, 2003. That agreement is guaranteed by the Federal Government and counter guaranteed by the State Government. This refers to a barter agreement comprising debts previously rescheduled under the context of “Brady Plan”, referring to Par Bond amounting to

US$325,516 thousand and Discount Bond amounting to US$227,134 thousand.

16.3. Information on local currency transactions

(2) The balance of the principal of R$15,056 (R$20,208 at 12/31/2015) relating to financing with ELETROBRAS, is as follows:

(a) Balance of R$14,587 (R$19,588 at 12/31/2015) refers to the main financing for construction work and electromechanical assembly at HPP Porto Primavera, with monthly payment at the rate of 5% p.a., maturing up to November 30, 2019.

(b) Balance of R$469 (R$620 at 12/31/2015) refers to the main financing for the acquisition of materials and equipment, formalized through Debt Recognition Instrument (IRD), with quarterly payment remunerated at the fixed rate of 8% p.a., maturing up to August 15, 2020.


Notes

Page: 67 of 114

16.4. Breakdown of the outstanding balance of principal in foreign currency:

12/31/2016 12/31/2015

US$ thousand

(*) US$ thousand

(*)

Currency R$

thousand (equivalent) % R$

thousand (equivalent) %

US$ 551,549 169,234 100.00 859,799 220,190 100.00 551,549 169,234 100.00 859,799 220,190 100.00

16.5. Aging list of principal of loans and financing under Noncurrent liabilities:

Foreign currency Local

currency Total

US$ thousand (*) (equivalent) R$ thousand R$ thousand R$ thousand

2018 59,905 195,235 5,167 200,402 From 2019 to 2020 53,810 175,373 4,737 180,110 From 2021 to 2024 327 1,065 - 1,065

114,042 371,673 9,904 381,577

(*) Translated to US$ at the rate of R$3.2591 at December 31, 2016 (R$3.9048 at December 31, 2015).

16.6. The main currencies and indexes of loans and financing had the following variations:

In years US$ IPCA TR IGP-M IGP-DI

2016 (16.54) 6.29 2.03 7.17 7.18 2015 47.01 10.67 1.70 10.54 10.70

17. Credit assignment investment funds - FIDC

12/31/2016 12/31/2015

Current

Charges Principal Total Total

- FIDC IV 791 82,360 83,151 309,322

791 82,360 83,151 309,322

For projected aging list, see Note 30.1.

17.1. FIDC IV

On June 18, 2007, FIDC IV was received, amounting to R$1,250 million, under the coordination of Banco Bradesco S.A., together with Itaú BBA, Votorantim, ABC Brasil and Fator, with a term of 10 years, monthly principal amortization in 111 installments, maturing on May 8, 2017 and payment of monthly interest indexed by CDI + 1.75% p.a. The fund is associated with 138 electric power sale agreements arising from new electric energy auction in the regulated market. The funds from operations were allocated to the settlement of the Company's debt service obligations. The Company has guarantees in subordinated shares of this transaction amounting to R$63,532 (Note 11).


Notes

Page: 68 of 114

In the FIDC CESP IV structuring, there is a provision that the occurrence of any of the events listed there shall be deemed an Evaluation Event. The Fund Administrator shall convene the General Meeting to decide whether such event should be considered a Settlement Event. If this is the decision, the procedures laid down in the Regulation for the settlement of the Fund should begin.

18. Loan, financing and FIDC statement Breakdown of financial debt

Amounts in R$ thousand

Note Annual financial Final Payment frequency Noncurren

t 12/31/2016 12/31/2015

Agreement Currenc

y charges (%) maturity Charges Principal Charges Current Total Total

Foreign currency 1,784 179,876 371,673 553,333 862,495

BNDES Brady US$ 16.2

item 1 2.86% p.a.+ UMBNDES Apr-2019

(Feb, Apr, Jun, Aug, Oct, Dec)

(Feb, Apr, Jun, Aug, Oct, Dec) 1,712 179,876 370,608 552,196 860,878

Other institutions Half year (Apr and

Oct.)

Half year (Apr and

Oct.)

72 1,065 1,137 1,617

Eletropaulo US$

Div (0.8125% p.a.+ LIBOR) up to 8%

p.a. Apr-2024 72 1,065 1,137 1,617

Local currency 5 5,152 9,904 15,061 20,214 Eletrobrás 5 5,152 9,904 15,061 20,214

Eletrobrás - RGR R$

16,3

item 4

Fixed Rate = 5%

p.a. Nov-2019 Monthly Monthly 5,001 9,586 14,587 19,588

ELETROBRÁS - IRD R$

Fixed Rate = 8% p.a. Aug-2020

Quarter (Feb, May, Aug and

Nov) 5 151 318 474 626

Other debts 791 82,360 83,151 309,322 Credit assignment investment fund 17 791 82,360 83,151 309,322 FIDC IV R$ 1.75% p.a. + CDI May-2017 Monthly Monthly 791 82,360 83,151 309,322

Overall total 2,580 267,388 381,577 651,545 1,192,031

18.1. Changes in loans and financing and FIDC

Local

currency Foreign currency FIDC Total

Opening balance at 12/31/2015 20,214 862,495 309,322 1,192,031

Interest and commissions 1,460 47,293 3,079 51,832

Monetary gains (losses) - - 24,677 24,677

Foreign exchange gains (losses) - (133,328) - (133,328)

Principal amortization (5,357) (175,974) (253,927) (435,258)

Interest amortization (1,256) (47,153) - (48,409)

Closing balance at 12/31/2016 15,061 553,333 83,151 651,545


Notes

Page: 69 of 114

Local

currency Foreign

currency FIDC Total

Opening balance at 12/31/2014 1,043,035 712,029 559,342 2,314,406

Interest and commissions 7,144 54,943 6,356 68,443 Monetary gains (losses) 5,763 - 54,341 60,104 Foreign exchange gains (losses) - 310,483 310,483 Principal amortization (986,605) (157,859) (310,717) (1,455,181) Interest amortization (49,123) (57,101) - (106,224)

Closing balance at 12/31/2015 20,214 862,495 309,322 1,192,031

19. Taxes and social contributions

12/31/2016 12/31/2015

Current COFINS on revenues 10,356 14,017 PIS on revenues 2,234 3,026 State VAT (ICMS) on power supply (tax substitution) 3,111 4,578 Income tax - 18,981 Social Contribution tax - 9,745 Social charges on payroll - company 3,848 4,585 Taxes and social contributions of service providers 1,525 1,654

21,074 56,586

20. Private pension to employees

12/31/2016 12/31/2015

Current Noncurrent Total Total

- Proportional Supplementary Benefit Settled BSPS Agreement (Note 20.2.1) 11,804 118,041 129,845 438,821

- Debt Agreement - other (Note 20.2.2) 27,713 - 27,713 52,014 - Adjustment - CPC 33/IAS 19 (39,517) (118,041) (157,558) (490,835)

- - - -

20.1. Benefit Plans

CESP sponsors retirement and pension benefit plans for its employees and former employees and their beneficiaries, in order to supplement the benefits provided by the official social security system. Fundação CESP is the entity responsible for the administration of benefit plans sponsored by CESP. Through negotiations with unions representing the industry, CESP redesigned the plan in 1997, having the mixed model as the main characteristic, comprising 70% of the actual contribution salary as defined benefit and 30% of the actual contribution salary as defined contribution. This redesign was intended to equate the actuarial deficit and reduce the risk of future deficits. In addition to the plan benefits, CESP offers its employees other benefits such as health and dental care. The defined benefit plan cost is divided equally between the Company and employees. The portion established as defined contribution is divided equally between the Company and employees based on a percentage freely chosen by the participant to the limit of 2.5% of the portion. Funding rates are revalued periodically by an independent actuary.


Notes

Page: 70 of 114

The Proportional Supplementary Benefit Settled (BSPS) is guaranteed to employees participating in the supplementary plan who joined the new model implemented as from January 1, 1998 and who may leave the Company, even if not for retirement purposes. This benefit ensures the proportional supplementation for the service period prior to the date of redesign of the new supplementary plan. The benefit will be paid after the employees’ dismissal and provided that they have complied with the minimum grace periods established in the regulation of the new plan.

20.2. Statement of liabilities to be recorded in accordance with CPC 33 (R1)IAS 19

Based on the actuarial valuation prepared by an independent actuary at December 31, 2016, following the criteria established by CPC 33 (R1)/IAS 19, the assets and liabilities related to the coverage of defined benefit plans - DB are broken down as follows:

20.2.1. Actuarial assumptions

2016 2015

BSPS Defined

Benefit (DB)

Variable Contribution

(VC) BSPS

Defined Benefit

(DB)

Variable Contributi

on (VC)

Rate used for the discount to present value of the

actuarial liabilities 10.59% 10.59% 10.59% 12.85% 12.85% 12.85% Rate of expected return on plan assets 10.59% 10.59% 10.59% 12.85% 12.85% 12.85% Rate used for the discount to present value of the

actuarial liabilities 5.83% 5.83% 5.83% 6.97% 6.97% 6.97% Salary increase rate NA 3.00% NA NA 7.64% NA Inflation rate 4.50% 4.50% 4.50% 5.50% 5.50% 5.50% Turnover rate Funcesp experience Funcesp experience General actuarial table AT 2000 Male/Female AT - 2000 Male Disability entry table LIGHT LIGHT Disability morbidity table AT – 49 AT - 49 Actuarial table of active participants AT 2000 Male/Female AT - 2000 Male Number of active participants 578 809 760 700 956 NA Number of active participants - Retirees not for

disability 4,273 1,512 607 4,429 1,491 534

Number of active participants - Retirees for disability 190 73 27 168 50 17 Number of active participants - pensioners 976 163 50 760 91 22

Fair value of benefit plan assets

BSPS Defined Benefit (DB) Variable Contribution (VC)

2016 2015 2016 2015 2016 2015

Assets Cash and cash equivalents 184 192 55 1 30 - Receivables 21,600 52,882 52 41 12 12 Investment (*) 4,298,045 3,743,251 699,016 620,983 103,146 89,841

4,319,829 3,796,325 699,123 621,025 103,188 89,853

Obligations (91,137) (52,014) (4,373) - - - Funds not related to Pension Schemes (1,290) (963) - - (46,262) (52,368)

Fair value 4,227,402 3,743,348 694,750 621,025 56,926 37,485

(*) This comprises government securities, investment funds, real estate investments, loans and other.

20.2.2. Actuarial valuation

The projected unit credit method was adopted in the actuarial valuation of the plans. The benefit plan net assets is assessed at market values (mark to market). The Company recognizes actuarial gains or losses on equity in other comprehensive income.


Notes

Page: 71 of 114

20.2.2.1. BSPS Plan - Coverage effective until December 31, 1997

This is a Defined Benefit coverage related to a Settled Defined Benefit, which grants a Proportional Supplementary Benefit Settled (“BSPS”), in the form of a life annuity reversible to pension, to participants enrolled up to 12/31/97, of value defined according to the proportion of past of service accumulated up to that date, based on the fulfillment of the regulatory requirements of the grant. The full responsibility for the actuarial insufficiencies of this coverage falls on Sponsor CESP.

20.2.2.2. DB Plan - Coverage effective after December 31, 1997

This is a Defined Benefit coverage, which grants a life annuity reversible to pension, in relation to past of service accumulated after 12/31/97, based on 70% of the actual average monthly salary for the last 36 months of activity, with monthly salary limited to 10 times the amount of the Reference Unit - URE, which corresponds to the amount of R$1,031.87 on the Plan’s implementation date, restated at the same time and general salary adjustment indexes granted by the Sponsor, less 70% of the actual average monthly salary, which corresponds to the actual average amount of the Reference Unit - URE also referring to the last 36 months of activity. For the case of death in service and disability, the benefits integrate all past service (including that accumulated until 12/31/97) and, therefore, do not include only the past service accumulated after 12/31/97. The responsibility for the actuarial insufficiencies of this Coverage is shared equally between the Sponsor and the participants (including assisted participants) and, therefore, only 50% of the insufficiency of the Plan Asset to cover the present value of the actuarial obligation of the Plan will be the responsibility of Sponsor CESP.

20.2.2.3. VC Plan - Coverage effective after December 31, 1997

This refers to an additional supplementary benefit that will be granted concurrently with the other benefits and will be based on the total balance of the participant’s retirement account, multiplied by a conversion factor, which will depend on the participant’s choice. The options for receiving income are: 1. Monthly life annuity with benefits discontinued; 2. Monthly life annuity with benefits continued; 3. Monthly annuity certain that may be of 10, 15 or 20 years.

The participant may choose to receive up to 25% of the account balance in a lump sum, provided that the remaining balance does not generate a payout lower than 10% of the CESP reference unit.


Notes

Page: 72 of 114

20.2.3. Calculations and changes

Sensitivity analysis BSPS Defined

Benefit (DB)


(VC)

Amount of obligations at year-end if: - the discount rate is decreased by 0.25% 4,033,510 538,122 38,007 - the discount rate is increased by 0.25% 3,877,680 575,688 36,306 - the salary growth rate is decreased by 1.00% 431,199 543,548 37,137 - the salary growth rate is increased by 1.00% 431,199 570,536 37,139

Projected cash flow BSPS Defined

Benefit (DB)


(VC)

Estimated employees’ contributions to the plan in the following year: - 5,668 3,970 Benefits expected in the following years: 2017 377,055 23,765 3,065 2018 377,164 23,975 3,103 2019 377,182 24,132 3,131 2020 377,364 24,260 3,157 2021 377,475 24,500 3,193 2022 377,562 24,608 3,215 2023 377,607 24,700 3,235 2024 377,639 24,782 3,251 2025 377,674 24,886 3,269 2026 377,674 24,886 3,269

a) Reconciliation of assets and liabilities

BSPS

Defined Benefit

(DB)

Variable Contributio

n (VC)

2016 2015 2016 2015 2016 2015

Actuarial obligation, net (3,954,134) (3,588,573) (648,964) (511,667) (37,139) (31,596) Fair value of plan assets 4,227,402 3,743,348 694,750 621,025 56,926 37,485 Asset ceiling effect (273,268) (154,775) (45,786) (109,358) (19,787) (5,889)

Total assets (liabilities), net - - - - - -

b) Changes in actuarial liabilities

BSPS Defined Benefit (DB) Variable Contribution

(VC)

2016 2015 2016 2015 2016 2015

Present value of total actuarial obligations, net (3,588,573) (3,696,175) (511,667) (451,126) (31,596) (26,792) Current service cost - - (9,640) (3,889) (3,233) - Interest expense (434,799) (388,778) (65,015) (48,008) (3,764) (2,738) Actuarial gain (loss) (307,733) 167,506 (86,265) (27,837) (1,585) (3,083)

Benefits paid 376,971 328,874 23,623 19,193 3,039 1,017

Present value of total actuarial obligations, net (3,954,134) (3,588,573) (648,964) (511,667) (37,139) (31,596)

c) Changes in plan assets


(VC)

2016 2015 2016 2015 2016 2015

Fair value of plan assets 3,743,348 3,564,284 621,025 560,311 37,485 26,792

Employer contribution 143,471 154,401 4,184 6,149 228 - Employee contribution 14,876 13,948 5,565 5,268 3,898 - Contributions received by the fund - Company - - - - - 713

Expected earnings from plan assets 454,687 383,718 79,234 60,180 4,622 2,544

Earnings from plan assets higher/lower than the discount rate 247,991 (44,129) 8,365 8,310 13,732 8,453

Benefits paid (376,971) (328,874) (23,623) (19,193) (3,039) (1,017)

Fair value of plan assets 4,227,402 3,743,348 694,750 621,025 56,926 37,485


Notes

Page: 73 of 114

d) Changes in actuarial liabilities


(VC)

2016 2015 2016 2015 2016 2015

Balance of actuarial assets (liabilities) - 131,891 - - - - (Revenue) expense for the year - 5,060 6,270 3,705 1,516 173

Contributions paid by the Company (143,471) (154,401) (4,184) (6,149) (228) (913) Contributions paid by participants to the plan (14,876) (13,948) (2,361) (5,268) (2,282) - Remeasurements effect recognized in other

comprehensive income 158,347 31,398 275 7,712 994 740

Balance of actuarial assets (liabilities) - - - - - -

e) Changes in other comprehensive income


(VC)

2016 2015 2016 2015 2016 2015

Actuarial gains (losses) arising from plan

experience 63,356 78,868 6,802 89,230 21 5,563

Actuarial gains (losses) arising from changes in financial assumption 190,408 (246,374) 76,262 (61,393) 1,552 (2,480)

Actuarial gains (losses) arising from changes in demographic assumptions 53,969 - 3,201 - 12 -

Earnings from plan assets (higher)/lower than the discount rate (247,991) 44,129 (8,365) (8,310) (13,732) (8,232)

Changes in asset ceiling 98,605 154,775 (77,625) (11,815) 13,141 5,889

Changes in other comprehensive income over the year 158,347 31,398 275 7,712 994 740

f) Components of P&L for the year


(VC)

2016 2015 2016 2015 2016 2015

Current service cost - - 9,640 3,889 3,233 - Interest expense on obligation 434,799 388,778 65,015 48,008 3,764 2,717

Earnings on financial assets (454,687) (383,718) (79,234) (60,180) (4,622) (2,544) Expense/(revenue) on asset ceiling 19,888 - 14,053 11,988 757 - Employee contribution - - (3,204) - (1,616)

(Revenue) expense for the year - 5,060 6,270 3,705 1,516 173

g) Expense / (Revenue) estimated for 2017

2017

BSPS

Defined Benefit (DB)


(VC) Total

Current service cost - 10,388 3,761 14,149

Interest expense on obligation 399,280 67,499 3,775 470,554

Expected earnings on financial assets (428,219) (72,569) (6,083) (506,871) Expense/(revenue) on asset ceiling 28,939 4,850 2,096 35,885

Employee contribution - (5,565) (3,898) (9,463)

(Revenue) expense for the year - 4,603 (349) 4,254

20.3. Financial equalization of benefit plans with Fundação CESP

To equate and secure cash flow between CESP and Fundação CESP, part of the actuarial liabilities determined by independent actuaries (BSPS and defined benefit plan) is represented by legal instruments formalized by the Company in 1997, with the intervention of the National Supplementary Pension Department (SPC) in the form of intercompany loan agreements and amortizable reserve adjustment agreement, which have a variable clause, as follows:


Notes

Page: 74 of 114

20.3.1. Proportional Supplementary Benefit Settled Agreement

It refers to the balance of the mathematical reserve adjustment agreement for the existing actuarial deficit coverage with Fundação CESP until October 31, 1997, related to the “Proportional Supplementary Benefit Settled”. The original agreement set forth amortization in 240 monthly installments from December 31, 1997 and restatement by the IGP-DI variation plus interest of 6% p.a. or actuarial cost, whichever is higher. On October 28, 2016, an amendment was entered into extending the deadline from November 30, 2017 to December 31, 2027, maintaining the other conditions contracted.

At the end of each year, the surplus or deficit on the actuarial valuation is added to or deducted from the agreement balance and future amortization installments are recalculated based on the new agreement balance.

20.3.2. Debt Agreement

This refers to the balance of the reserve retention settlement debt acknowledgment agreement in force at December 31, 1997, with amortization in 96 monthly installments, restated by the reference rate variation and interest of 8% p.a. At the end of each accounting year of Fundação, the result obtained is compared with actuarial cost (IGP-DI + 6% p.a.), prevailing the higher of them. On April 28, 2004, both agreements were rescheduled between the parties, with a grace period of 24 months for payment of principal and amortization in 143 monthly and consecutive installments, starting in January 2006, with maturity on November 30, 2017. As mentioned above, these agreements have a variable clause for annual adjustment according to actuarial cost, representing, in essence, guarantees for the financial equalization of the benefit plan. Because of this fact, CESP’s liability is recorded in accordance with CPC 33/IAS 19. At December 31, 2016, the difference between the balances presented of these agreements and of the liabilities, recorded in accordance with CPC 33/IAS 19, is due to the difference in methodologies used between CESP and Fundação CESP to assess the financial position of benefit plans, which are adjusted annually by the effects of actuarial gains and losses over time (plan development). In essence, debt agreements are considered collateral for equating cash flows between the Company and Fundação CESP.


Notes

Page: 75 of 114

21. Sector-related charges

2016 2015

Current Global Reversal Reserve (RGR):

- Monthly Portion (a) 38,785 22,753 - Portion Difference - 2015 (h) 20,658 - - Portion Difference - 2014 (b) - 70,969

Financial compensation for use of water resources 10,490 23,467 Electric Energy Service Inspection Fee (TFSEE) 556 1,246 R&D Portion - FNDCT (c) 905 1,836 R&D Portion - MME (c) 452 918 R&D - Projects (d) 132,869 147,545 Electric energy purchased for resale (e) - 76,394 Provision for energy purchase 11,924 - Grid Use Charges - CUSD/CUST (f) 13,087 47,735 Distribution System Use Charge (TUSDg) (g) 105 779

229,831 393,642

Noncurrent Global Reversal Reserve (RGR):

- Portion Difference - 2015 (i) - 20,658 - Portion Difference - 2016 (c) 11,192 -

241,023 414,300

(a) RGR portion related to December 2016, amounting to R$3,484, plus 7 installments of R$5,043, related to RGR difference for 2014 from

Dec/2016 to Jun/2017, pursuant to ANEEL Order No. 2562 of September 23, 2016. (b) RGR portion difference for 2014, whose form of payment was approved by ANEEL Order No. 2562 of September 23, 2016. (c) These refer to provisioned portions of the Annual Research and Development Program (P&D) to be allocated to the Brazil’s Science and

Technology Development Fund (FNDCT) and to the Energy Research Company (EPE), in compliance with Law No. 9991 of July 24, 2000. (d) Fund balance to be invested in Research and Development (R&D) projects, restated by SELIC. (e) This referred to agreements related to energy purchased for resale (Note 27.1), for balancing the energy balance for the year, considering the

expiration of concessions of HPPs Ilha Solteira and Jupiá on July 7, 2015. (f) This refers to the transmission and distribution system use charges (CUST/CUSD), under ANEEL Ratification Rulings No. 1917 of June 30, 2015

and No. 2099 of June 30, 2016.

(g) Payment referring to the distribution system use charges (TUSDg), under ANEEL Ratification Rulings No. 1591 of August 28, 2013 and No. 1641

of October 22, 2013. (h) Difference of 2015 RGR, whose payment method will be defined by ANEEL in 2017. (i) Difference of 2016 RGR, whose payment method will be defined by ANEEL in 2018.

22. Provision for contingencies

The Company is a party to labor, tax, civil and environmental proceedings at different courts and court levels. Company Management, based on the opinion of its legal advisors, sets up provisions when unfavorable outcome is probable.


Notes

Page: 76 of 114

Breakdown:

12/31/2015 Changes 12/31/2016

Balance Restatement Provision

/ (Reversal) (-) Payments

(-) Payments in installments Note 23.2 (b) Balance

Labor Sundry claims 379,734 40,910 48,344 (58,295) (169,903) 240,790

Civil Sundry proceedings 27,041 3,693 (766) (565) - 29,403

Tax Sundry proceedings 18,579 2,944 913 (4) - 22,432

Compensation Environmental proceedings 890,271 132,439 (17,141) (454) - 1,005,115 Civil proceedings 1,081,689 192,083 (122,888) (21,523) - 1,129,361

Expropriations and compensations

Expropriation proceedings - CESP Plants 221,284 40,285 (28,858) (98) - 232,613

Expropriation proceedings - spun-off companies 171,483 24,124 21,250 (2,276) - 214,581

2,364,727 388,931 (147,637) (24,351) - 2,581,670

Total 2,790,081 436,478 (99,146) (83,215) (169,903) 2,874,295

12/31/2014 Changes 12/31/2015

Balance Restatement Provision

/ (Reversal) (-) Payments Balance

Labor Sundry claims 412,213 54,568 (33,367) (53,680) 379,734

Civil Sundry proceedings 25,186 6,086 1,936 (6,167) 27,041

Tax Sundry proceedings 14,898 3,065 641 (25) 18,579

Compensation Environmental proceedings 846,056 151,111 (92,258) (14,638) 890,271 Civil proceedings 956,913 195,071 (62,477) (7,818) 1,081,689

Expropriations Expropriation proceedings - CESP Plants 253,717 55,756 (86,041) (2,148) 221,284 Expropriation proceedings - spun-off companies 151,883 26,264 (1,755) (4,909) 171,483

Sum - compensations and expropriations 2,208,569 428,202 (242,531) (29,513) 2,364,727

Total 2,660,866 491,921 (273,321) (89,385) 2,790,081

At December 31, 2016, contingencies of different nature were evaluated and classified according to the probability of economic and financial risk to the Company, as shown below:

Expected Loss

Total Type Probable Possible Remote

Labor claims 240,790 113,358 5,116 359,264 Sundry civil proceedings 29,403 232,202 2,264 263,869 Tax proceedings 22,432 65,799 9,226 97,457 Environmental proceedings 1,005,115 1,034,156 2,187,428 4,226,699 Civil proceedings 1,129,361 1,247,021 2,485,838 4,862,220 Expropriation proceedings - CESP Plants 232,613 349,664 1,285,730 1,868,007 Expropriation proceedings - spun-off companies 214,581 410,040 1,287 625,908

Total at December 31, 2016 2,874,295 3,452,240 5,976,889 12,303,424

Total at December 31, 2015 2,790,081 4,110,301 6,615,285 13,515,667


Notes

Page: 77 of 114

At December 31, 2016, the amount claimed by plaintiffs in various lawsuits totals R$12,303,424. At the same date, the provision for contingencies whose likelihood of loss is assessed as probable amounts to R$2,874,295, and the Company has judicial deposits in guarantee of lawsuits amounting to R$690,104 (R$696,378 at December 31, 2015), concerning civil, labor, tax and environmental proceedings (Note 11) and R$150,548 (construction in progress - Note 15). At December 31, 2015, the provisions for contingencies amounted to R$13,515,667, which when compared with the amount at December 31, 2016, R$12,303,424, presents a net decrease of R$1,212,243. This decrease is primarily due to the success obtained by the Company in lower court in a civil proceeding referring to contract default, whose likelihood of loss was assessed as remote, amounting to R$2,159,289 at March 31, 2016 and which was written off at June 30, 2016, matched against the restatements and changes in the amount of R$947,046. This success resulted in the payment of ad exitum fees in the amount of R$38,271 recorded under expenses (Note 27.2). Based on the opinion of its legal advisors, Company Management understands that there are no significant future risks not covered by sufficient provisions in its financial statements or that could significantly impact its cash flow. Significant proceedings are summarized below:

22.1. Labor claims

At December 31, 2016, labor claims filed against CESP amounted to R$359,264. CESP maintains provisions recorded to cover potential obligations amounting to R$240,790 represented by 592 lawsuits. The Company has judicial deposits in guarantee of lawsuits amounting to R$88,768 (Note 11). CESP figures as defendant in 48 lawsuits, whose likelihood of loss is assessed as probable, related to health and risk exposure, totaling R$60,946. The remaining lawsuits refer to various proceedings totaling R$179,844 associated with 546 lawsuits. Labor claims whose likelihood of loss is assessed as possible amount to R$113,358, corresponding to 1,055 proceedings, 22 of which refer to State Law No. 4819/58 dealing with lawsuits through which the plaintiffs claim mainly for: (i) payroll transfer directly from the São Paulo State Finance Department; (ii) supplementary retirement difference; (iii) return of the PSAP discount; and (iv) return of the pension discount (11%) arising from EC No. 20/98 amounting to R$921. The remaining balance of R$112,437 corresponds to 1,033 proceedings. Labor Union STIIEC - Sindicato dos Trabalhadores nas Indústrias de Energia Elétrica de Campinas filed a labor claim on November 29, 1994, requiring the payment of health exposure premium on the employee’s entire compensation, under the terms of Law No. 7369/85, which was accepted in all levels of labor court. In the tax foreclosure phase (payment of the obligation), at a hearing held on November 23, 2016 at the Regional Labor Court of the 15

th Chapter, CESP and the Union accepted the reconciliation

proposal of the Vice-President Court Judge and of the Coordinating Court Judge of the Reconciliation Center of the Regional Labor Court, which was approved. Fundação CESP was excluded from this lawsuit, and all employees who adhered to the agreement granted full, irrevocable release in all respects, including relating to any impact on the Supplementary private pension plan of Fundação CESP. In November 2016, the payment of the foreclosure agreement in the amount of R$169,903 was reclassified to “Other liabilities” (Note 23.2 (b)).


Notes

Page: 78 of 114

22.1.1. Possible impact of the monetary restatement on provisions for labor claims

In a decision handed down on August 4, 2015, the Superior Labor Court (TST) changed the understanding and determined that labor credits should be restated by reference to the Extended Consumer Price Index (IPCA-E) and not by the Referential Rate (TR). The decision was handed down based on the judgment made by the Federal Court of Justice (STF), which recognized as unconstitutional the use of TR as monetary restatement rate, since it does not fully restore the value of the currency, not being then able to restore the damaged assets. On October 14, 2015, STF granted a preliminary injunction suspending the effects of the decision handed down by TST. The Company valued the possible impact at R$4,909 at 12/31/2016, to be accounted for if the preliminary injunction is revoked.

22.2. Sundry civil proceedings

22.2.1. Ordinances of the former National Water and Electricity Department (DNAEE)

CESP is involved in proceedings filed by industrial consumers claiming the reimbursement of the amounts allegedly overpaid as electricity tariff in 1986. These amounts arise from the increase in rates imposed by Ordinances No. 38 and No. 45, respectively, of February 28 and March 4, 1986, of the former DNAEE. Proceedings whose likelihood of loss are assessed as probable and possible, at December 31, 2016, amount to R$29,403 and R$3,690, respectively.

22.2.2. AES - Sul lawsuit

This refers to a declaratory action with request for interim relief filed by AES Sul. A preliminary injunction was handed down authorizing the new recognition of amounts in CCEE on behalf of AES Sul on the rationing period occurred in 2001. CESP and other agents obtained a preliminary injunction ruling out the new recognition and settlement determined by that judgment and have joined the claim. The Company has challenged the lawsuit, which is so far pending a court decision. AES Sul is claiming the right not to opt for the relief, which allows settlement in CCEE on its behalf, and the portion of CESP is approximately R$228,512, whose likelihood of loss is assessed as possible.

22.3. Tax proceedings

CESP is involved in tax proceedings estimated at R$97,457, comprising R$22,432 whose likelihood of loss is assessed as probable, related to 8 lawsuits and judicial deposits amounting to R$18,592 (R$17,295 at 31 December 2015). Other 114 lawsuits, whose likelihood of loss is assessed as possible, total R$65,799.

22.4. Environmental proceedings

CESP figures as defendant in environmental proceedings related to the implementation of a fish ladder, riparian forest, conservation unit, slope protection, legal reserve, water table and compensation for economic losses and damages to fish populations.


Notes

Page: 79 of 114

The estimated sum of these proceedings, whose likelihood of loss is assessed as probable and possible, amounts to R$2,039,271 at December 31, 2016, as follows:

Probable Possible Total

Slope protection 225,805 707,567 933,372 Breach of agreement 545,628 253,589 799,217 Parks 195,035 - 195,035 Water table - 3,546 3,546 Other 38,647 69,454 108,101

1,005,115 1,034,156 2,039,271

The Company recorded R$441,961 (R$441,991 at 12/31/2015) as judicial deposits related to environmental proceedings (Note 11).

22.5. Civil proceedings - CESP Plants

22.5.1. Proceedings filed by Fishermen

There are ongoing proceedings against CESP filed by fishermen of HPP Engenheiro Sérgio Motta (Porto Primavera) area, who claim compensation for damages arising from such plant’s reservoir filling up to the limit of 257 meters above sea level. The amount of these proceedings, whose likelihood of loss is assessed as probable and possible, at December 31, 2016, totals R$125,573 and R$669,204, respectively, for 204 proceedings. The analysis of the merits of these proceedings for compensation by part of the legal advisors, the lawsuit stage analysis and decisions already handed down by the courts, which in most cases have been favorable to the Company, indicate that the amounts to be paid, when so decided in court, are substantially lower than those sought by the plaintiffs.

22.5.2. Proceedings filed by Potters

These are proceedings filed by potters impacted by the construction of Hydro Power Plant Engenheiro Sérgio Motta. There are 80 proceedings involving the amount of R$909,039, whose likelihood of loss is assessed as probable, and R$317,697 whose likelihood of loss is assessed as possible at December 31, 2016. The requests made are different, standing out among them the request for extension of the period of 8 years established in the agreements executed between CESP and those impacted for maintenance of the potter activity.

22.5.3. Claims for Breach of Contract and Others

There are 61 ongoing proceedings against CESP for compensation for breach of contract and other matters related to the plants comprising its generating facilities, with a provision of R$51,088 and R$43,661, related to proceedings whose likelihood of loss is assessed as probable. There are other proceedings whose likelihood of loss is assessed as possible, i.e. a claim for breach of contract totaling R$30,998, and 210 proceedings amounting to R$229,122.


Notes

Page: 80 of 114

22.6. Expropriation proceedings - CESP Plants

Provisions are set up amounting to R$232,613 for 36 expropriation proceedings involving the formation of reservoirs of its plants, whose likelihood of loss is assessed as probable by the Company’s legal advisors. The expropriation proceedings whose likelihood of loss is assessed as possible totaled R$349,664 related to 5 lawsuits. In the fourth quarter of 2016, a favorable decision was handed down to the Company in an expropriation proceeding of CESP Plants, resulting in the transfer of R$1,033,731 billion from the likelihood of possible to remote loss. In compliance with a contractual clause, a provision for the payment of ad exitum fees was set up in the amount of R$16,622, recorded under the “Provision for ad exitum fees” in the statement of operations (Notes 23.2.c and 27.2).

22.7. Civil proceedings/ expropriation proceedings - spun-off companies

Various lawsuits are in progress, discussing the amount of compensation to be paid by the Company, due to expropriation of properties located in the areas of plants, involving obligations and legal issues of developments of generation companies AES Tietê, Duke Energy and CTEEP - Companhia de Transmissão de Energia Elétrica Paulista (spun off from CESP), and the responsibility for the payment of existing lawsuits until March 31, 1999 falls on CESP.

At December 31, 2016, the amount sought by the parties subjected to expropriation corresponding to all these lawsuits totals R$625,908. CESP recorded a provision of R$214,581 for obligations related to companies resulting from the split-off process, whose likelihood of loss is assessed as probable.

23. Environmental and other obligations

23.1. Socio and environmental obligations

12/31/2016 12/31/2015

Noncurrent Reforestation (*) 49,250 81,000 Licensing 28,800 22,750

78,050 103,750

(*) This refers to the commitment to purchase areas and carry out reforestation projects in Parque Rio do Peixe, Ivinhema and Porto

Primavera.

Reforestation Licensing Total

Balance at 12/31/2014 75,000 26,192 101,192 Provision / (Reversal) (Note 27) 6,000 (3,442) 2,558

Balance at 12/31/2015 81,000 22,750 103,750

Provision / (Reversal) (Note 27) (31,750) 6,050 (25,700)

Balance at 12/31/2016 49,250 28,800 78,050


Notes

Page: 81 of 114

23.2. Other liabilities

12/31/2016 12/31/2015

Current Fundação CESP (a) 7,983 10,246 Court settlement - Health exposure claim (Note 22.1) (b) 133,678 - Other 3,555 5,766

145,216 16,012

Noncurrent Global Reversal Reserve (RGR) (reversal/amortization) 15,481 15,481 Court settlement - Health exposure claim (Note 22.1) (b) 21,656 - Provision for ad exitum fees (Note 27.2) (c) 20,271 -

57,408 15,481

202,624 31,493

(a) Balance of accountability with the pension entity, particularly including social security contingency with INSS, whose likelihood of loss is

assessed as probable. (b) Labor Union STIIEC - Sindicato dos Trabalhadores nas Indústrias de Energia Elétrica de Campinas filed a labor claim on November 29,

1994, requiring the payment of health exposure premium on the employee’s entire compensation, under the terms of Law No. 7369/85,

which was accepted in all levels of labor court. In the tax foreclosure phase (payment of the obligation), at a hearing held on November 23, 2016 at the Regional Labor Court of the 15

th Chapter, CESP and the Union accepted the reconciliation proposal of the Vice-

President Court Judge and of the Coordinating Court Judge of the Reconciliation Center of the Regional Labor Court, which was approved under the following terms:

(i) R$169,903, the 1

st and 2

nd installments of which, amounting to R$14,596, should be respectively settled on 12/19/2016 and

01/17/2017.

(ii) The remaining balance will be paid in 13 monthly and equal installments and will mature on the 5th business day.

(iii) Fundação CESP was excluded from this lawsuit, and all employees who adhered to the agreement granted full, irrevocable release in all respects, including relating to any impact on the Supplementary private pension plan of Fundação CESP.

(iv) The Regional Labor Court approved the amounts referring to this agreement as compensation, with 70% of the total amount corresponding to interest and 30% of compensation for supplementary pension and attorneys’ fees.

Balance

at 12/31/2015

Payables in installments (Note 22.1) Transfers (-) Payments

Balance at 12/31/2016

Current Court settlement - Health exposure claim (Note 22.1) - - 148,247 (14,569) 133,678

Noncurrent Court settlement - Health exposure claim (Note 22.1) - 169,903 (148,247) - 21,656

- 169,903 - (14,569) 155,334

(c) In November 2016, a favorable decision was handed down to the Company in a expropriation proceeding of CESP Plants, resulting in the transfer of R$1,033,731 billion from the likelihood of possible to remote loss. In compliance with the contractual clause and CPC 25 - Provisions, Contingent Liabilities and Contingent Assets, a provision was set up for the payment of ad exitum fees in the amount of

R$16,622. Another proceeding of the same nature, in the amount of R$3,649, was also provisioned, totaling R$20,271 (Note 27.2).

24. Transactions with related parties

Company Management’s compensation for 2016 amounted to R$2,867 (R$2,846 in 2015), related to fixed and variable compensation amounting to R$2,406 (R$2,365 in 2015) and social charges amounting to R$461 (R$481 in 2015).


Notes

Page: 82 of 114

Transactions with related parties are substantially represented by the following:

Accumulated

at

Balance at 12/31/2016 12/31/2016

Assets Liabilities P&L

Companies Note Nature of transaction Current Noncurrent Current Noncurrent Income/

(expenses)

São Paulo State agencies (b) Assignment of employees 27,150 - - - -

EMAE (c) Rent / condominium fees - - 309 - (4,334)

Eletrobrás 13 Loans - - 5,157 9,904 (1,254)

Fundação CESP 17 Pension entity - - - - (7,786)

Accumulated

at

Balance at 12/31/2015 12/31/2015

Assets Liabilities P&L

Companies Note Nature of transaction Current Noncurrent Current Noncurrent Revenue/ (expense)

CPTM (a) 6 Sale of electric energy - - - - 23,075 Paulo State agencies (b). Assignment of employees 19,090 - - - -

EMAE (c) Rent / condominium fees - - 357 - (4,006)

Eletrobrás 13 Loans - - 5,158 15,056 (1,615)

Fundação CESP 17 Pension entity - - - - (8,938) (a) Amendments entered into with Companhia Paulista de Trens Metropolitanos - CPTM (controlled by the State Government) for the supply of

electricity, as free consumers, under the free market, determined by regulators of the electricity industry, at market prices, obtained in a public offering, with agreement expired on 05/31/2015.

(b) Assignment of employees upon compensation to the State Finance Department, Transportation Department, Water and Electricity Department

(DAEE) and other agencies of the São Paulo State Administration.

12/31/2015 Changes 12/31/2016

Balance Additions Receivables Balance

Assignment of employees 19,090 11,711 (3,651) 27,150

12/31/2014 Changes 12/31/2015

Balance Additions Receivables Balance

Assignment of employees 9,508 12,669 (3,087) 19,090

(c) Property lease agreement (buildings) owned by EMAE – Empresa Metropolitana de Águas e Energia S/A (company of the controlling shareholder), which the Company uses for its headquarters and administrative offices, with restated monthly rent of R$119 and condominium fees of R$190, recorded in current liabilities at 12/31/2016.

25. Equity In accordance with the Corporate Governance practices, the Company’s shareholding structure, as well the shareholders with over 5% of the shares of each type and class, whether directly or indirectly, up to the individual level, are presented below.

25.1. Capital

The paid-up capital of R$5,975,433 is represented by 109,167,751 common shares, with 7,399,122 class A preferred shares and 210,935,800 class B preferred shares. The capital may be increased, according to the Articles of Incorporation, up to the maximum limit of R$17,926,300, by resolution of the Board of Directors.


Notes

Page: 83 of 114

The main shareholders of the Company at December 31, 2016 are as follows:

Number of Shares - In Units

Class A Class B

Common shares %

preferred shares % preferred shares % Total %

São Paulo State Government and Related Companies

São Paulo State Finance Department 102,706,383 94.08 - - 15,135,166 7.18 117,841,549 35.98

Companhia do Metropolitano de São Paulo - METRÔ 1,182,500 1.08 - - - - 1,182,500 0.36

Companhia de Saneamento Básico do Estado de São Paulo - SABESP 6,690 0.01 - - - - 6,690 0.01

Companhia Paulista de Parcerias - CPP - - - - 13,793,103 6.54 13,793,103 4.21 Other 2,175 0.00 - - 400 - 2,575 -

103,897,748 95.17 - - 28,928,669 13.72 132,826,417 40.56

Other Credit Suisse Securities (Europe) - - - - 10,585,954 5.02 10,585,954 3.23 UBS AG (London Branch) - - - - 16,221,830 7.69 16,221,830 4.95 Morgan Stanley - - - - 13,864,717 6.57 13,864,717 4.23 BLACKROCK, INC - - - - - - - - Centrais Elétricas Brasileiras S.A. - Eletrobrás 37,633 0.03 6,664,526 90.07 - - 6,702,159 2.05 HSBC Bank PLC London - - - - 19,924,339 9.44 19,924,339 6.08 The Bank of New York - ADR Department 32,077 0.03 154,224 2.08 - - 186,301 0.06 Individuals 3,582,642 3.28 547,516 7.40 7,781,887 3.69 11,912,045 3.64 Other legal entities 1,610,940 1.48 3,730 0.06 113,628,404 53.87 115,243,074 35.19 Other 6,711 0.01 29,126 0.39 - - 35,837 0.01

5,270,003 4.83 7,399,122 100.00 182,007,131 86.28 194,676,256 59.44

109,167,751 100.00 7,399,122 100.00 210,935,800 100.00 327,502,673 100.00

Paid-up capital per share in R$ thousand 1,991,815 135,000 3,848,618 5,975,433

25.2. Rights of Shares

(a) Class A preferred shares have the following characteristics:

Priority in the reimbursement of capital upon liquidation of the Company, without a premium;

Annual priority dividend, non-cumulative, of 10% (ten percent), calculated on the amount of the paid-up capital represented by class A preferred shares, to be apportioned among these;


Notes

Page: 84 of 114

Right to appoint, jointly with class B preferred shares, a member of the Supervisory Board and a deputy, chosen by the holders of shares, voting separately;

Right to participate in capital increases resulting from the capitalization of reserves and profits, in equal conditions with the common shares and class B preferred shares;

They will not have voting rights and will be unredeemable; and

Class A preferred shares are entitled to the right provided for in article 111, paragraph 1, of Law No. 6404/76.

(b) Class B preferred shares have the following characteristics:

Right to receive an amount per share corresponding to 100% (one hundred percent) of the amount paid per share to the selling controlling shareholder in the event of disposal of the Company's control;

Right to participate in equal conditions with the common shares of the payment of mandatory dividend attributed to such shares under the Articles of Incorporation;

Right to appoint, jointly with class A preferred shares, a member of the Supervisory Board and a deputy, chosen in a separate vote;

Right to participate in capital increases resulting from the capitalization of reserves and profits, in equal conditions with the common shares and class A preferred shares;

They will not have voting rights and shall not acquire this right even in the event of non-payment of dividends; and

They will be irredeemable.

(c) Each common registered share is entitled to one (1) vote in the General Meetings.

(d) Pursuant to article 5 of the Company’s Articles of Incorporation and to the legal provisions

and conditions set forth, shareholders may convert (I) class A preferred shares into common shares and class B preferred shares and (II) common shares into class A preferred shares and class B preferred shares, in both cases, provided that they are paid in. Class B preferred shares of the Company are not convertible.

25.3. Capital reserves

12/31/2016 12/31/2015

Remuneration of Construction in Progress - Equity 1,929,098 1,929,098

Remaining balance of credits resulting from the capitalization of remuneration on own resources used during the construction of PPE, calculated through December 31, 1998, applied to construction in progress.


Notes

Page: 85 of 114

25.4. Equity Adjustment

According to ICPC 10, on 01/01/2009, the net effect of changes in PPE (increase for some assets, and decrease for others), due to the adoption of deemed cost (Note 15.4), net of deferred income and social contribution taxes, was recorded in equity under “Equity adjustment”. The realization is recorded in “Retained earnings” to the extent that depreciation and write-off of fair value adjustment of PPE are recognized in P&L.

Deferred tax Equity PPE R$ asset / (liability) R$ R$

Opening balance at 12/31/2015 (1,582,999) Realization for the year 39,550 (13,447) 26,103

Closing balance at 12/31/2016 (1,543,449) 524,772 (1,018,677)

25.5. Income reserves

12/31/2016 12/31/2015

Legal reserve 98,878 83,623 Statutory reserve 405,546 405,546 Unrealized income reserve (*) 108,517 139,614

612,941 628,783

(*) At the Annual General Meeting held on April 30, 2010, the proposal for set up of the unrealized income reserve was approved,

considering that:

Net income for 2009 of R$763 million was strongly influenced by the positive financial result of exchange gains amounting to R$665 million. Out of this income, the amount of R$580 million was related to financially unrealized exchange gain or loss due to the existence of long-term liabilities. The recognition of this revenue did not result in cash inflows but in unrealized gain (loss). This reserve is realized with the payment of principal installments of loans and financing each year (Note 15.5).

The unrealized income reserve mentioned above was set up based on CVM Guidance No. 13/1987 and CVM/SNC/SEP Circular No. 1/2006, and Item II, of article 197, of Law No. 6404/76, concerning the portions of exchange gains or losses to be realized until 2019.

This reserve, if not absorbed by losses, will be realized according to the schedule below, in the amount of the installments in each year of realization, which will comprise the base of dividends of proposals for the allocation of income to shareholders, in the respective fiscal years, in accordance with item III, of article 202, of Law No. 6404/76.

Breakdown of installments realizable:

Years 2017 2018 2019 Total

Installments Realizable 34,593 38,482 35,442 108,517

25.6. Proposal for allocation of income

According to the Company’s Articles of Incorporation and provided there is sufficient income for such, shareholders are entitled to annual mandatory dividend corresponding to 10% of capital.


Notes

Page: 86 of 114

For the year ended December 31, 2016, the proposal corresponds to allocation of annual mandatory dividend of 100% of adjusted income, as follows:

2016

Net income for the year 305,095 Allocations:

Legal reserve (15,255) Realization of unearned income reserve (Note 25.5) 31,097 Equity adjustment realized (depreciation) (26,103)

Adjusted income for the year (balance for payment of dividends) 294,834

Interest on equity already paid (140,000)

Balance of retained earnings 154,834

Mandatory dividends (154,834)

Balance of retained earnings -

The total amount paid as dividends and interest on equity represents 100% of adjusted income for the year, pursuant to article 202 of Law No. 6404/76.

2016

Net income for the year (a) 305,095 Number of shares (b) 327,502,673

Earnings per share (a / b) R$ 0.93158 2016

Dividends payable (a) 294,834 Number of shares (b) 327,502,673

Dividend per share (a / b) R$ 0.90025 2016

Adjusted income for the year (a) 294,834 Number of shares (b) 327,502,673

Earnings per share (a / b) R$ 0.90025

Description 2016

Allocation of dividends 294,834

Interest on equity already paid IOE per share

Registered common shares 43,141 R$ 0.395185 Class A registered preferred shares 13,500 R$ 1.824541 Class B registered preferred shares 83,359 R$ 0.395185

Interest on equity 140,000

Total interest on equity 140,000

Balance to be allocated 154,834

Mandatory dividends: Dividend per share

Registered common shares 52,804 R$ 0.483700 Class A registered preferred shares - R$ - Class B registered preferred shares 102,030 R$ 0.483700

Total mandatory dividends 154,834


Notes

Page: 87 of 114

26. Revenue

26.1. Energy Sale Agreements in the Regulated Markets (CCEARs) (“CCEAR”) and Price Adjustment

CESP has agreements with 39 distributors for power supply as a result of auctions held (Note 1.2). These agreements have a price adjustment clause based on the IPCA variation, applied on the dates of adjustments of distributors with ANEEL, as follows:

Adjustments in 2016 Products and Prices - R$/MWh Adjustment

in the year (%) Concession operators

Month of adjustment

2009 to 2016

2009 to 2038

2010 to 2039

Energisa Bo February 169.21 220.88 208.18 10.71 Santa Cruz, Leste Paulista e Sul Paulista (a) March 170.73 222.87 210.06 11.70 Ampla March 170.73 222.87 210.06 10.36 Enersul, Cemat, CPFL, AES Sul, Coelba, Cosern, Coelce, Energipe e Celpe April 171.46 223.83 210.96 9.39 Cemig (b) April 172.51 225.20 212.25 10.05 Nacional, Caiuá, Vale Paranapanema e Bragantina May 172.51 225.20 212.25 9.28 Cataguazes e Copel June 173.85 226.95 213.90 9.32 Celtins e Eletropaulo July 174.46 227.75 214.65 8.84

Celesc, Celpa, Escelsa-D, Elektro, Cemar e Energisa PB August 175.37 228.93 215.77 8.74

Ceal e Cepisa September 176.14 229.94 216.72 9.21 Bandeirante, Piratininga e CEEE-D October 176.28 230.12 216.89 8.48 Ceb, Celg October 176.28 230.12 216.89 9.30 Light, Eletroacre November 176.74 230.72 217.45 7.87

(a) Due to the execution of addendums for the extension of the service concession arrangements, the date of tariff review of these

concession operators was changed from February 3 to March 22 each year. (b) Calculation of adjusted base for a longer period -> 13M due to extension;

Adjustments in 2015 Products and Prices - R$/MWh Adjustment

in the year (%) Concession operators

Month of adjustment

2008 to 2015

2009 to 2016

2009 to 2038

2010 to 2039

2014 to 2015

Santa Cruz and Celb February 139.34 152.84 199.52 188.05 175.79 7.14 Ampla March 141.04 154.71 201.96 190.34 175.79 7.70 Enersul, Cemat, CPFL, Cemig, AES Sul, Coelba, Cosern, Coelce, Energipe and Celpe April 142.90 156.75 204.62 192.86 8.13 Nacional, Caiuá, Vale Paranapanema and Bragantina May 143.91 157.86 206.08 194.23 8.17 Cataguazes and Copel June 144.98 159.03 207.60 195.66 8.47 Celtins and Eletropaulo July 146.12 160.29 209.24 197.21 8.89 Celesc, Celpa, Escelsa-D, Ceb, Elektro, Ceal, Cepisa, Cemar and Saelpa August 147.03 138.22 180.44 198.43 9.56 Celg September 147.35 138.55 180.87 198.87 8.53 Bandeirante, Piratininga and CEEE-D October 148.15 139.04 181.50 199.94 9.49 Light, Eletroacre November 149.36 163.84 213.88 201.58 9.93


Notes

Page: 88 of 114

26.2. Energy sold

The following tables show the electric energy sold in the period, as well as the quantity and amounts of its distribution by class of consumption and sales market:

Electric energy sold until December 31 MWh (*) R$ thousand

2016 2015 2016 2015

Supply (1) Industrial 3,470,804 7,521,787 560,777 1,004,413 Public service - 160,432 - 23,075

3,470,804 7,682,219 560,777 1,027,488

Supply Agreements

Selling agents (2) 2,632,661 5,507,992 474,979 997,781 Electric energy auctions (3)

Product 4 CCEAR 2008-2015 - 1,240,228 - 171,865 Product 5 CCEAR 2009-2016 591,757 859,119 98,234 130,690 Product 6 CCENV 2009-2038 720,290 718,320 156,498 142,700 Product 7 CCENV 2010-2039 1,300,034 1,296,480 266,276 242,985 Product CCEAR 2013-2014 18M - 425,810 - 74,853 MCSD (Products 1, 2, 3, 4 and 5) 334,931 290,670 55,539 42,326

2,947,012 4,830,627 576,547 805,419

5,579,673 10,338,619 1,051,526 1,803,200

Power energy 792 - 5 -

Electric Energy Trade Chamber - CCEE (4) Short-Term Electric Energy - ADA - 843,209 - 280,566 Prior-year settlements - - 35,097 63,501 Energy Reallocation Mechanism (MRE) 1,125,700 2,036,814 13,164 21,628

1,125,700 2,880,023 48,261 365,695

Total 10,176,969 20,900,861 1,660,569 3,196,383

(1) Refers to electric energy sales to free consumers in the Free Market (ACL). (2) Refers to electric energy supply to electricity sellers in the Free Market (ACL).

(3) This refers to energy supply of electric energy distribution concession operators through Energy Auctions in the Regulated Market (ACR) and Surplus and Difference Offset Mechanism (MCSD).

(4) It includes billing amounts of electric energy available (ADA and MRE) sold within the scope of the Electric Energy Trade Chamber

(CCEE).

Accumulated for the year until December 31

Summary by Sales Market MWh (*) R$ thousand R$/MWh (Average)

2016 2015 2016 2015 2016 2015

Free Market Free consumers 3,470,804 7,682,219 560,777 1,027,488 161.57 133.75 Selling agents 2,632,661 5,507,992 474,979 997,781 180.42 181.15

6,103,465 13,190,211 1,035,756 2,025,269 169.70 153.54

Regulated Market Electric energy auctions 2,947,012 4,830,627 576,547 805,419 195.64 166.73 Electric Energy Trade Chamber - ADA - 843,209 - 280,566 - 332.74

2,947,012 5,673,836 576,547 1,085,985 195.64 191.40

Total 9,050,477 18,864,047 1,612,303 3,111,254 178.15 164.93

(*) Information not reviewed by independent auditors.

2016 2015

Quota system R$ Thousand

HPP Ilha Solteira 254,397 216,766 HPP Jupiá 130,945 104,209

Total 385,342 320,975


Notes

Page: 89 of 114

26.3. Net operating revenue

In compliance with the requirements of CPC 30 (Revenue), reconciliation between gross revenue for tax purposes and net revenue presented in the statement of operations is as follows:

Note 12/31/2016 12/31/2015

Operating revenues Electric energy revenues Electric energy supply 26.2 560,777 1,027,488 Electric energy supply - agreements 26.2 474,979 997,781 Electric energy supply - auctions 26.2 576,547 805,419 Electric energy supply – Power 26.2 5 - Short-term electric energy 26.2 48,261 365,695

1,660,569 3,196,383 Electric energy supply - quota system 26.2 385,342 320,975 Other revenues 6,870 8,772

2,052,781 3,526,130

Deductions to operating revenue Portion for Global Reversal Reserve (RGR) (44,543) (84,783) Research and Development (R&D) (16,625) (29,434) Service Tax (ISS) (184) (294) COFINS on operating income (154,004) (250,930) PIS on operating income (33,435) (54,474) Financial compensation for use of water resources (124,510) (138,509) Electric Energy Service Inspection Fee (TFSEE) (10,890) (16,724)

(384,191) (575,148)

Net operating revenue 1,668,590 2,950,982

27. Costs and expenses

Costs and expenses by nature are as follows:

2016

Costs and expenses by nature

Cost with electric energy

Operation cost

General and

administrative

expenses

Other operating expenses

Other (expenses)

revenues, net (Note 27.2) Total

Sector-related charges (Nota 27.1) (273,181) - - - (273,181)

Energy purchased (Note 27.1) (147,839) (147,839)

PIS/COFINS credits on transmission system charges 25,031 - - - 25,031

Personnel - (44,219) (130,687) - - (174,906)

Management - (2,867) - - (2,867)

Employee pension entity - CPC 33/IAS 19 - (7,786) - - - (7,786)

Material - (3,232) (3,392) - - (6,624)

Third-party services - (34,056) (41,819) - - (75,875)

Depreciation - (298,053) (4,280) - (1,212) (303,545)

Other charges - ONS/CCEE - (2,350) - - (2,350)

Rentals - (5,503) - - (5,503)

Ad exitum fees - - - (38,271) (38,271)

Provision for contingencies (Note 22) - - (280,531) (45,374) (325,905)

Provision for ad exitum fees (Note 23.2) - - - (20,271) (20,271)

Provision for impairment of storerooms (Notes 13 and 15) - - (16,487) - (16,487)

Allowance for doubtful accounts - - (13,379) - (13,379) Reversal of / (Provision for) social and environmental

commitments (Note 23.1) - - - 25,700 25,700

Delayed costs - - - (2,481) (2,481)

Other expenses - (1,705) (5,277) (4,184) (8,657) (19,823)

Total (395,989) (389,051) (196,175) (314,581) (90,566) (1,386,362)


Notes

Page: 90 of 114

2015

Costs and expenses by nature

Cost with electric energy

Operation cost

General and administrative

expenses

Other operating expenses

Other (expenses)

revenues, net (Note 27.2) Total

Sector-related charges (Nota 27.1) (406,822) - - - - (406,822)

Energy purchased (Note 27.1) (485,378) (485,378)

PIS/COFINS credits on transmission system charges 67,531 - - - - 67,531

Personnel - (56,265) (126,651) - - (182,916)

Management - - (2,846) - - (2,846)

Retirement Incentive Program - (17,314) - - - (17,314)

Employee pension entity - CPC 33/IAS 19 - (8,938) - - - (8,938)

Material - (7,854) (3,439) - - (11,293)

Third-party services - (46,781) (53,861) - - (100,642)

Depreciation - (454,201) (4,866) - (1,313) (460,380)

Other charges - ONS/CCEE - - (2,918) - - (2,918)

Rentals - - (7,068) - - (7,068)

Provision for contingencies (Note 22) - - - (224,376) (24,509) (248,885)

Provision for impairment of assets (Note 15.5) - - - - (580,798) (580,798)

Allowance for doubtful accounts - - - (5,321) - (5,321) Reversal of / (Provision for) social and environmental

commitments (Note 23.1) - - - - (2,558) (2,558)

Delayed costs - - - - (13,782) (13,782)

Other expenses - (4,585) (13,008) (2,608) (10,952) (31,153)

Total (824,669) (595,938) (214,657) (232,305) (633,912) (2,501,481)

27.1. Energy purchased and sector-related charges

2016 2015

Energy purchased (1) CCEE (123,612) (154,821) Rescheduling of hydrological risk (Note 13) - 102,864

CCEE net (123,612) (51,957) Electric energy from MRE - (31,301) Electric energy purchased for resale (2) - (401,972) Bonus for rescheduling of hydrological risk (Notes 10 and 13) (24,155) - Electric energy purchase – Power (72) (148)

(147,839) (485,378)

Use of electricity grid (3) Connection - CTEEP (109) (161) Basic Grid (273,072) (406,661)

(273,181) (406,822)

Total (421,020) (892,200)

(1) Billing and closing amounts at the CCEE arising from the purchase of energy and apportionment among Brazil’s generation companies,

as well as other acquisitions to comply with agreements. (2) Connection and basic grid charges stemming from the use of the transmission system: amounts established by ANEEL Ratification

Ruling No. 1917 of June 30, 2015 and No. 2099 of June 30, 2016.


Notes

Page: 91 of 114

27.2. Other (Expenses) / Revenues, Net

12/31/2016 12/31/2015

Depreciation of unrestricted assets (1,212) (1,313) Provisions for expropriation proceedings - spun-off companies (a) (45,374) (24,509) Reversal of / (Provision for) social and environmental commitments 25,700 (2,558) Provision for contingent assets - HPPs Ilha Solteira and Jupiá (Note 33.2) - (580,798) Provision for ad exitum fees (Note 22.6 and 23.2.c) (20,271) - Delayed costs (reservoir slope protection) (b) (2,481) (13,782) Expenses incurred with agreements (5,720) (7,603) Gain/(loss) on the disposal of assets and rights (544) 802 Ad exitum fees (c) (38,271) - Other revenues, net 6,035 7,956 Other (expenses), net (8,428) (12,107)

Total (90,566) (633,912)

(a) In accordance with CESP the split-off protocol, the obligations referring to expropriation proceedings prior to March 31, 1999 referring to

the plants incorporated by the spun-off companies, are the responsibility of the Company (Note 22.7). (b) As from 2009, the surplus delayed costs of the recoverable amount of assets comprising the Porto Primavera Plant were no longer

capitalized and are now recorded directly in P&L (Note 15.1). (c) Ad exitum fees on the contract default process, of a civil nature, amounting to R$2,159,289 thousand, closed and removed from

contingency (Note 22).

28. Financial income (expenses)

12/31/2016 12/31/2015

Income Short-term investment yield 81,031 156,813 Restatement of subordinated shares - FIDC (Note 11) 8,950 10,803 Restatement of judicial deposits 15,962 149 Other 214 444 (-) PIS/COFINS on financial income (5,010) (3,201)

101,147 165,008

Expenses Debt charges

Foreign currency (47,293) (54,943) Local currency (4,539) (13,500)

(51,832) (68,443)

Other Tax on financial transactions (51) (89) Income tax on remittances abroad - (50,925) Restatement of acquisition of foreign currency - (10,280) Expenses with financial transactions - FIDC (305) (532) Restatement of R&D - projects (11,441) (10,617) Other charges (10,966) (12,228)

(22,763) (84,671)

(74,595) (153,114)

Monetary and foreign exchange gains/(losses), net Local currency (24,677) (60,104) Foreign currency 133,328 (310,483)

108,651 (370,587)

34,056 (523,701)

Financial income (expenses) 135,203 (358,693)


Notes

Page: 92 of 114

29. Income and social contribution taxes - P&L The Company calculates income and social contribution taxes on a monthly basis based on the trial balance for suspension or reduction, which are considered additions/exclusions (temporary or permanent) provided for in legislation, as well as net foreign exchange gains or losses on loans and financing, given the option for taxation on a cash basis. Reconciliation of tax expense and statutory tax rates Reconciliation of the reported tax charges with the amounts calculated by applying a total 34% rate (income tax of 25% and social contribution tax of 9%) on taxable income is as follows:

2016 2015

Income Social

contribution Income Social

contribution tax tax tax tax

Income / (loss) before IRPJ and CSLL 417,431 417,431 90,808 90,808 Statutory rate 25% 9% 25% 9% Expected IRPJ and CSLL expenses at statutory rate (104,334) (37,568) (22,678) (8,173) Adjustments for statutory rate:

(a) Effect of IRPJ and CSLL on permanent differences Interest on Equity (IOE) 35,000 12,600 - - Court settlement - Health exposure claim 42,476 15,291 - - Adjustment of deferred credits (supplementary) 4,576 1,813 84,445 32,087 Other 9,451 (789) 16,649 (1,303)

(b) Effect of IRPJ and CSLL on unrecorded temporary differences (66,803) (24,049) (40,971) (14,749) Provision for contingent assets - HPPs Ilha Solteira and Jupiá - (145,200) (52,272)

Revenue / (expense) recorded (79,634) (32,702) (107,755) (44,410)

Income and social contribution tax expenses: Current (28,864) (13,576) (206,325) (80,585) Deferred (Note 12) (50,770) (19,126) 98,570 36,175

Total in P&L (79,634) (32,702) (107,755) (44,410)

Effective rate 19.1% 7.8% 118.7% 48.9%

As described in Note 12, the Company is limited to the projection of future taxable income for additional recognition of credits on income and social contribution tax loss, as well as on temporary differences. The differences between the statutory and the effective rates stem from the limitation on new recognitions and well as from permanent additions/exclusions.

30. Cash flow statement

Description 2016 2015

Non-cash items: Proposed dividends (payable) 154,834 41,326


Notes

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31. Financial instruments and risk management

The Company’s business comprises primarily power generation for sale to large scale consumers (free market) and public utility concession operators for electric energy distribution (captive market). At December 31, 2016, the market values to the main financial instruments approximate their book values, as follows:

12/31/2016 12/31/2015

Financial assets Loans and receivables

Consumers and resellers (Note 6) 157,162 278,700 Free electric energy / CCEE (Note 6) 7,979 60,867

165,141 339,567

Fair value through profit or loss Subordinated shares - FIDC (Note 11) 63,532 91,563

228,673 431,130

Financial liabilities Valued at amortized cost

Loans and financing (Note 16) 568,394 882,709 FIDC (Note 17) 83,151 309,322

651,545 1,192,031

31.1. Debt-to-equity ratio (liquidity)

Debt-to-equity ratio 12/31/2016 12/31/2015

Loans + Financing + FIDC 651,545 1,192,031 Cash and cash equivalents (Note 5) (504,029) (548,553)

Net debt 147,516 643,478 Equity 7,161,537 7,310,892

Net debt-to-equity ratio 2.1% 8.8%

The table below shows the aging list of the Company’s financial liabilities, corresponding to the remaining year in the statement of financial position up to the contractual maturity date.

Maturity

Above 1 year 2 years 5 years 5 years Total

December 31, 2016 Loans and financing 186,817 200,402 180,110 1,065 568,394 FIDC 83,151 - - - 83,151

269,968 200,402 180,110 1,065 651,545

December 31, 2015 Loans and financing 206,736 220,653 453,726 1,594 882,709 FIDC 237,618 71,704 - - 309,322

444,354 292,357 453,726 1,594 1,192,031

31.2. Currency risk

Indebtedness and the results of Company transactions are significantly affected by the market currency risk factor (US dollar). At December 31, 2016, the total balance of loans and financing, including charges incurred up to that date, amounted to R$553,333 (R$862,495 at 12/31/2015) relating to foreign currency loans, exclusively in the US Dollar.

In thousands of reais Book balance

Liabilities 12/31/2016 12/31/2015

Loans and financing US Dollar - US$ (Note 16) 553,333 862,495

Total 553,333 862,495


Notes

Page: 94 of 114

Currency risk sensitivity analysis

CESP considers that the risk of foreign exchange losses is an increase in the price of the US Dollar (PTAX) on the due date of each installment of loans and financing taken out in foreign currency, having an impact on financial expenses for the year. In compliance with CVM Ruling No. 475/08, and as recommended by CPC 40 and IFRS 7, to determine the effects of unfavorable changes in foreign exchange rates, the Company adopted the minimum negative variation scenarios defined in such ruling and equivalent rates of 25% and 50% on the respective exchange rates used to determine the probable, possible and remote scenarios.

Rate appreciation by

25% 50% Currency Projection

US Dollar: US$/R$ 3.39 4.24 5.08

The result of this analysis reflects the nominal sum of the increase in reais in short-term cash outflow (January to December 2017), based on the debt service payable, including the allocation of interest to each maturity date deducting the short-term amount recorded in the current financial statement, as follows:

In thousands of reais

Scenario Scenario Scenario

Probable Possible Remote

Financial liabilities Risk

Loans and financing in US$ Appreciation of US$ 8,616 64,398 120,180

The Company would have posted, as a result of the projected exchange rate variation, an increase in cash outflow from January to December 2017 of R$8,616 in the probable scenario, R$64,398 in the possible scenario and R$120,180 in the remote scenario. Based on the financial position and the notional value of financial instruments outstanding at December 31, 2016, the Company, adopting variation scenarios, estimated that the effects at December 31, 2017 would be close to those indicated in the scenarios projected in the following table:

Impact on debt balance Projection for 12/31/2017

Liabilities Balance at 12/31/2016

Probable Scenario

Possible Scenario Remote scenario

Loans and financing

US Dollar - US$ 555,333 575,557 719,447 863,336 Total 555,333 575,557 719,447 863,336


Notes

Page: 95 of 114

31.3. Interest / inflation rate risk

This risk derives from the possibility of the Company incurring losses due to fluctuations in interest and inflation rates that increase financial expenses related to loans and financing taken out. The Company has not entered into derivative contracts to hedge against this risk; however, it continually monitors market interest rates in order to assess the need to change the type of its debts. At December 31, 2016, the Company had R$636,484 taken out at variable interest rates and/ or indexed to inflation rates and R$15,061 taken out at fixed rates.


Liabilities Book balance

Pegged to the rates below: 12/31/2016 12/31/2015

Local currency 98,212 329,536

CDI 83,151 309,322 Fixed rate 15,061 20,214

Foreign currency 553,333 862,495 UMBNDES 552,196 860,878 LIBOR 1,137 1,617

Total 651,545 1,192,031

Sensitivity analysis of interest and inflation rate risk CESP considers that the risk of being a debtor in agreements that, further to the fixed rate and spread, have costs with variable indexes (restated at floating interest rates or inflation rates), is the increase of these indexes and the consequent increase in financial expenses relating to the liability, taken out in local and foreign currencies.

The Company grouped liabilities by contracted index and prepared a sensitivity analysis pursuant to CVM Ruling No. 475/08 and as suggested in CPC 40 and IFRS 7, using the scenario disclosed in the Central Bank of Brazil (BACEN) Focus Report dated January 6, 2017 for this liability position. Liabilities in foreign currency considered the translation into reais at the same parity as at this financial statement closing date, so as to reflect only changes in the interest rate scenarios.

Rate % p.a.

Rate appreciation by

Indexes Projection 25% 50%

CDI 11.53 14.41 17.30 UMBNDES 4.32 5.40 6.48 LIBOR 1.31 1.64 1.97

The result of this analysis reflects the nominal sum of the increase in reais in cash outflow, based on total debt service payable in the short term (January to December 2017), including the allocation of interest up to each maturity date deducting the amount recorded as at the date of these financial statements, as follows:


Notes

Page: 96 of 114


Probable Possible Remote Financial liabilities Risk Scenario Scenario Scenario

Pegged to the rates below:

Local currency CDI variation (212) 154 514

Foreign currency

UMBNDES variation - 5,769 11,682

LIBOR variation - 9 18

Total (212) 5,932 12,214

The Company, given the variation in the projected indexes, would have posted a decrease of R$212 in cash outflows in the probable scenario, and increase of R$5,932 in the possible scenario and R$12,214 in the remote scenario compared with short-term cash flow. Based on the financial position and the notional value of financial instruments outstanding at December 31, 2016, the Company, adopting variation scenarios, estimated that the effects at December 31, 2017 would be close to those indicated in the scenarios projected in the following table:

Impact on debt balance Projection for 12/31/2017

Financial Balance at Probable Possible Remote liabilities Risk 12/31/2016 Scenario Scenario Scenario

Local currency CDI CDI variation 83,151 - - -

Fixed Rate No risk 15,061 9,907 9,907 9,907 Foreign currency UMBNDES UMBNDES variation 552,196 386,635 390,808 394,981

LIBOR LIBOR variation 1,137 1,376 1,381 1,385 Total 651,545 397,918 402,096 406,273


Notes

Page: 97 of 114

31.4. Credit risk

This risk arises from the possibility of the Company incurring losses from difficulties in receiving amounts billed to its customers. This risk is assessed by the Company as low, considering that: (1) in terms of receivables stemming from revenue from supply - the concentrated number of its customers, the existence of contractual guarantees, the fact they are public electric energy distribution concession operators under federal supervision, subject to intervention in the concession, and do not have a history of significant losses on realization of their receivables; and (2) in terms of receivables stemming from revenue from supply - the concentrated number and scale of business of its customers, prior credit analysis and the existence of contractual guarantees of at least two months of billing. At December 31, 2016, Company Management understands that there is no credit risk exposure that may significantly affect its future transactions or results.

31.5. Derivative financial instruments

Pursuant to CVM Rule No. 550/2008 dated October 17, 2008, the Company states that:

a) Financial policy adopted by the Company

The Company does not have a policy of using derivative financial instruments. The Company has a debt of approximately R$652 million at December 31, 2016, a significant part of which has been restructured with both national and foreign financial institutions in recent years. In the restructuring process the Company’s main strategy for the monitoring of future risks was to substitute a significant portion of debt in foreign currency for debt in local currency to reduce the foreign exchange exposure in the past.

b) Internal and operating controls on contracting financial transactions

In order to manage the risks associated with each strategy and every negotiation with financial institutions, financial transactions of any nature are approved by the Executive Board and can be brought before the Board of Directors under the conditions established in the Company’s Articles of Incorporation.

c) Derivative transactions

The Company did not contract any derivative transaction up to December 31, 2016.

31.6. Valuation of financial instruments

The Company’s main financial asset and liability instruments at December 31, 2016 are described below, as well as the criteria for their valuation/assessment:

a) Cash and cash equivalents

These include cash, bank checking accounts and short-term investments. The market value of these assets does not differ from the amounts stated in the Company’s statement of financial position.


Notes

Page: 98 of 114

b) Receivables

Free Energy and Short-Term Energy: these receivables basically arise from free energy over the rationing period in and transactions carried out in the current CCEE scope, and were recorded and valued based on information available and on the prices prevailing during the year at the CCEE. There were no transactions relating to these credits or debts that could have an impact on their classification and valuation at the date of these financial statements.

c) Investments

Investments are recorded at the cost of acquisition less the provision for impairment in market value when required or applicable. The market value of other investments approximates their book values.

d) Loans, financing and FIDC

The Company has assets and liabilities measured at fair value through P&L; furthermore, it holds other liabilities that are not measured at amortizable value, which are comparable with amounts taken out in the market.

In operations specific to the electricity industry, subsidized and rescheduled financing that is unique in the market with low liquidity, the Company assumed that the market value is represented by its carrying amount, due to the uncertainties in the variables that should have been considered in creating a pricing model.

The estimated market value of financial instruments was developed through the pricing model, applied individually for each transaction, taking into account future payment flows based on the contractual terms, discounted to present value at rates obtained through the market interest curves, based on information obtained with various financial institutions. The market value of a security, therefore, corresponds to its maturity value (redemption value) at present value by the discount factor (the maturity of the security) obtained from the market interest curve in Brazilian reais, as follows:

12/31/2016 12/31/2015

Liabilities Book value Market value Book value Market value

Local currency FIDC (83,151) (83,150) (309,322) (309,459)

Total (83,151) (83,150) (309,322) (309,459)

32. Insurance coverage

The Company has insurance agreements with coverage determined by experts, considering the nature and the degree of risk to cover losses, if any, on its assets and/ or liabilities as follows:


Insured Type Insurer Coverage Maturity amount

D&O ACE Seguradora S/A Civil liability - D&O 06/2017 2,000

Life - APC Sul América Seguros S/A Indemnity for death or permanent disability of employees 10/2017 5,044

Property risks MAPFRE Seguros Gerais S/A Machinery and equipment of plants’ generation systems 06/2017 396,320

Note: The scope of auditors’ work does not include issuing an opinion on the sufficiency of insurance coverage.


Notes

Page: 99 of 114

33. Assets available for reversal

Breakdown of asset available for reversal 12/31/2016 12/31/2015

Assets available for reversal 6,337,256 6,337,256 Provision for impairment (1,995,310) (1,995,310) Provision for contingent assets (*) (2,392,516) (2,392,516)

Total provisions (4,387,826) (4,387,826)

Assets available for reversal (net) 1,949,430 1,949,430

33.1. HPP Três Irmãos

According to ANEEL Ratification Ruling No.1521 of April 30, 2013, on April 17, 2013 the economic operation of HPP Três Irmãos was completed due to the sale of its guaranteed power output under the price system. The Company depreciated the plant until April 2013 and reclassified the residual value of property, plant and equipment in the amount of R$3,529,080 to “Assets available for reversal” account, which will be used for purposes of comparison with the amount of compensation by the Granting Authority. On November 1, 2012, the Ministry of Mines and Energy - MME, together with the Ministry of Finance - MF, published the Interministerial Ruling No. 580, as amended by Interministerial Ruling No. 602 of November 29, 2012, and revised by the Technical Note of the Energy Research Company - EPE No. EPE-DEE-NT-100/2013-r0 of September 9, 2013 and ANEEL Official Letter No. 126/2013-DR/ANEEL, setting the compensation amount of HPP Três Irmãos at R$1,717,362, depreciated until March 2013 (amounts for June 2012). In the fourth quarter of 2013 various meetings were held with the Ministry of Mines and Energy and the Energy Research Company, attended by management members and the Company’s technicians, in which the breakdown of the plant amounts, according to the calculations made by CESP and EPE, was discussed in details, and an understanding at the administrative level was reached.


Notes

Page: 100 of 114

The Company management understands that it has the right to receive the amount recorded and, according to the terms of the Service Concession Arrangement, it will continue to challenge it in court. Given the existence of a contingent asset and in accordance with CPC 25, which addresses Provisions, Contingent Liabilities and Contingent Assets, the Company recorded a provision, in December 2013, in the amount of R$1,811,718 thousand (amount subject to dispute), adjusting the compensation amount proposed by the Granting authority (amount no longer subject to dispute):

Management compensation 3,529,080 Provision for contingent assets - HPP Três Irmãos (*) (1,811,718)

Net amount (amount no longer subject to dispute) 1,717,362

(*) Breakdown of provision for contingent assets - Statement of operations Equity

HPP Três Irmãos Deferred income

and Realization of social contribution equity Provision taxes adjustment

Amount of regulatory asset 547,520 - - Surplus value (IFRS) 1,264,198 429,827 834,371

Provision for contingent assets 1,811,718 429,827 834,371

On March 27, 2014, the Ministry of Mines and Energy - MME, together with the Ministry of Finance - MF, published the Interministerial Ruling No. 129, setting the compensation amount at R$1,717,362 thousand (referring to June 2012) and the related payment in monthly installments within seven years, and a minimum grace period of 90 days for the first payment. Payment was conditional on the submittal by CESP of the statement in Annex I of such Interministerial Ruling to receive the compensation. However, the submittal of the statement would imply the recognition by the Company that the compensation amount set out in Annex I was sufficient to cover the amount of the investment portion related to reversible assets, not yet amortized or not depreciated, and that no values remain to be pleaded in relation to the concession indicated therein or the manner in which the compensation will be received, as provided for by such Interministerial Ruling. On April 7, 2014, the Company sent an official letter to the Ministry of Mines and Energy - MME, expressing OPPOSITION to Interministerial Ruling No. 129/MME/MF in relation to (i) the compensation amount payable to HPP Três Irmãos; (ii) payment of compensation in monthly installments to be made within seven years; and (iii) the obligation to sign a statement that implies recognition by CESP that the amount established in the Interministerial Ruling is sufficient to cover the amount of the investment portion related to reversible assets, not yet amortized or depreciated, and that no values remain to be pleaded in relation to the concession or the manner in which the compensation will be received. On July 9, 2014, the Company filed a regular procedure action together with a motion for interim relief with the Federal Court in Brasilia, against the Federal Government, claiming the receipt of compensation for investments not yet amortized, in view of the reversal of assets and facilities of HPP Três Irmãos.


Notes

Page: 101 of 114

In the records of the lawsuit, in a decision dated July 29, 2014, the judge dismissed the preliminary injunction requested by CESP, focused on immediate payment of the amount no longer subject to dispute, which totals R$1,717,362 thousand. CESP took measures to revert the decision through an appropriate appeal, but was not successful at the time. After the presentation of defense by Federal Government, on November 28, 2014, a new decision was handed down partially approving the preliminary injunction pleaded to suspend the waiver clause (sole paragraph of article 3 of MME/MF Ordinance No. 129/2014 of 03.28.2014), and which determines that the Federal Government should perform the administrative application for payment in installments of the amount no longer subject to dispute, without prejudice to the litigation of the total amount due. Such decision, however, was suspended by the Federal Regional Court of the First Chapter on the grounds of the appeal filed by the Federal Government, however, the Higher Court of Justice (STJ), upon its appreciation, upheld the dismissal of the interim relief request for the purpose of granting the reinstatement of the lower court decision handed down on November 28, 2014. On September 9, 2015, the judge granted the engineering expertise requested by CESP. Technical assistants have already been appointed by the parties. On February 22, 2017, the Company deposited the first installment of the expert advice fees fixed by the Court, therefore technical work will start soon. On February 29, 2016 a favorable decision was handed down for inclusion of São Paulo State in the dispute as an interested party, based on article 5, sole paragraph of Law No. 9469/97. In December 2015, pursuant to ANEEL Normative Resolution No. 596/2013, CESP sent the differences between the Basic Project and Executive Project of this plant. Concerning the operation of the plant, on March 28, 2014, an auction was held to define the new operator of HPP Três Irmãos. The event subject matter was the plant alone; Pereira Barreto Channel and the locks were out of this dispute. The bid was won by Consórcio Novo Oriente, consisting of an investment fund and Furnas, later named TIJOÁ Participações e Investimentos S/A, with negative goodwill of R$0.87 against the ceiling established by - ANEEL (R$31,623,036.87). However, on that same date, the Federal Audit Court - TCU through a precautionary measure, suspended the result of the auction and determined that ANEEL should not celebrate the service concession arrangement with the winners until its analysis of the impacts and repercussions regarding the fact that Pereira Barreto Channel and the locks had not been subject to that bid. On April 9, 2014, in a plenary session, the Federal Audit Court - TCU upheld the decision that suspended the execution of the agreement referring to the auction of HPP Três Irmãos, until the trial by that body. On August 20, 2014, TCU authorized the execution of the service concession arrangement since the government presented a proposal whereby the National Department of Transport Infrastructure - DNIT would assume responsibility for operating the lock and the channel under a contract to be entered into. On September 10, 2014, with the intervention of Fundo de Investimentos em Participações Constantinopla and Furnas Centrais Elétricas S/A, TIJOÁ Participações e Investimentos S/A entered into a service concession arrangement with the Ministry of Mines and Energy - MME for the electric energy generation in HPP Três Irmãos, with 30 days of assisted operation, effective as from October 10, 2014, for a 30-year period. Therefore, from October 10, 2014, the responsibility for the concession of HPP Três Irmãos belongs to TIJOÁ Participações. On October 1, 2014, CESP entered into a service agreement with TIJOÁ Participações for operation and maintenance of HPP Três Irmãos and related facilities, for a 6-month period, effective from October 10, 2014, for the purpose of facilitating the taking over by TIJOÁ of the entire operation, in an orderly fashion. This agreement expired on April 9, 2015.


Notes

Page: 102 of 114

On October 16, 2014, TIJOÁ Participações entered into an agreement with the National Department of Transport Infrastructure - DNIT, for operation and maintenance of the locks of HPP Três Irmãos and Pereira Barreto Channel, in Tiete River, São Paulo state.

33.2. HPPs Ilha Solteira and Jupiá

The Ministry of Mines and Energy - MME, in the condition of Granting Authority, and ANEEL published the following documents related to HPPs Ilha Solteira and Jupiá:

MME/MF Interministerial Ruling No. 580 of November 1, 2012, amended by Ordinance No. 602 of the same date, setting the amount of R$21,886,060.00 as compensation for the concession of electric energy generation of HPP Ilha Solteira;

MME Ordinance No. 123 of April 14, 2015, as amended by MME Ordinances No. 384 of August 18, 2015 and No. 429 of September 11, 2015, which establish guidelines for the auction of concessions of HPPs already amortized;

MME Ordinance No. 218 of May 15, 2015, amended by Ordinance No. 300 of June 24, 2015 and by Ordinance No. 454 of September 24, 2015, determining that the auction to choose a new operator for HPPs Ilha Solteira and Jupiá be held on November 6, 2015;

MME Ordinance No. 256 of June 11, 2015, making CESP responsible for the Electric Energy Generation of HPPs Ilha Solteira and Jupiá, from July 8, 2015, until the HPPs bid winner takes control;

On July 8, 2015, the operation of HPPs Ilha Solteira and Jupiá expired after the sale of their guaranteed power output under the price system. The Company depreciated the plants until June 2015 and reclassified them at residual value of property, plant and equipment to “Assets available for reversal”.

The Tariff Management Oversight Office of ANEEL (SGT/ANEEL) Technical Note No. 180/2015 of July 13, 2015 established the calculation of the Initial Annual Generation Revenue (RAG) of HPPs, under the quota system, according to the terms of Law No. 12783/2013 for the period from July 2015 to June 2016. This calculation was approved on July 28, 2015 by ANEEL Ratification Ruling No. 1924;

The Provisional Executive Order (MP) No. 688 of August 18, 2015, signed into Law No. 13203/2015 of December 8, 2015, which instituted the bonus for the grant, provided for the bonus for rescheduling of hydrological risk from electric energy generation, and amended other industry-related laws.

Resolution No. 2 of September 18, 2015 of the National Energy Policy Council (CNPE), which establishes the technical and economic parameters of biddings for electric energy generation concessions.

On October 1, 2015, MME published Ordinance No. 458, which defined the amount of R$2,027,810.00 as compensation for HPP Ilha Solteira, relating to the basic project under MP No. 579/2012, signed into Law No. 12783/2013, by reference to the prices for June 2015, considering accumulated depreciation and amortization from the startup date until June 30, 2015. For HPP Jupiá, the Federal Government considers that there is no amount to compensate.


Notes

Page: 103 of 114

On October 9, 2015, CESP filed a claim for damages against the Federal Government requiring the payment to the Company of the amount due for the reversal of assets and facilities related to the operation of HPPs Ilha Solteira and Jupiá concession, considering the restated historical cost of the assets in under concern, in the amount of R$1,561,240,516.13.

On October 28, 2015, MME published Ordinance No. 500 postponing to November 25 the bids of concessions for 29 HPPs already amortized, including HPPs Ilha Solteira and Jupiá.

In December 2015, pursuant to ANEEL Normative Resolution No. 596/2013, CESP sent the proof of investments made for modernization and improvements related to the reversible assets of HPPs Ilha Solteira and Jupiá, the balance of which on July 30, 2015 amounted to R$230 million.

The Federal Government presented its response to this lawsuit on February 16, 2016, and on May 3, 2016, CESP reinforced its claims and rights, in addition to requesting expert accounting and documentary evidence. The Company is awaiting the appointment of the expert examination work.

On June 16, 2016, Federal Government, expressed itself through a request in a single page that there is no evidence to produce, since the records contain sufficient documentary evidence.

On August 26, 2016, São Paulo State filed a petition for its admission as a simple assistant of CESP.

On November 4, 2016 a decision was published summoning the parties regarding the petition for admission of São Paulo State as a simple assistant, so that CESP and the Federal Government express themselves within fifteen (15) days.

On November 25, 2016, CESP expressed its agreement on the admission of São Paulo State to the lawsuit.

On February 22, 2017, Federal Government expressed its disagreement on the admission of São Paulo State to the lawsuit, which is still under appreciation by court.

Since the Granting Authority has already formally expressed its position as to the compensation amount for these plants, which is established at R$2,028 thousand only, the Company understands that it has the right to receive the amount recorded, considering the restated historical cost, and will continue to challenge such amount in court. Given the existence of a contingent asset and in accordance with CPC 25, which addresses Provisions, Contingent Liabilities and Contingent Assets, and pursuant to ANEEL Resolution No. 596/2013, the Company recorded a provision for impairment of these assets (contingent assets) in the amount R$580,798 thousand, restating to the amount recorded up to the outcome of the litigation, as follows:


Notes

Page: 104 of 114

Breakdown of assets available for reversal Venture

Ilha Solteira Jupiá Total

Assets available for reversal 2,165,858 642,318 2,808,176

Provision for impairment (1,657,484) (337,826) (1,995,310) Provision for contingent assets (*) (379,464) (201,334) (580,798)

Total provisions (2,036,948) (539,160) (2,576,108)

Assets available for reversal (net) 128,910 103,158 232,068

(*) Breakdown of provision for contingent assets - HPPs Venture

Ilha Solteira and Jupiá Ilha Solteira Jupiá Total

Plant 2,165,858 642,318 2,808,176 Provision for impairment (1,657,484) (337,826) (1,995,310)

Subtotal 508,374 304,492 812,866 MME Ordinance No. 458 of 10/01/2015 (2,028) - (2,028) Modernization and improvements - ANEEL Resolution No. 596/2013 (126,882) (103,158) (230,040)

Subtotal (128,910) (103,158) (232,068)

Provision for contingent assets (Note 26.2) 379,464 201,334 580,798

34. Material news release

(a) On August 23, 2016, the Steering Committee of the State Privatization Program (CDPED) decided to recommend to the Governor of São Paulo state to resume the work and studies necessary for the privatization of CESP.

(b) On November 5, 2016, the São Paulo State Official Gazette (DOESP) published the Trading

Session Bid Notice No. 45/2016, which established the bidding for purchasing advisory services to be rendered to São Paulo State, consisting of economic and financial valuation, modeling proposition and sale of movable assets owned by the State, corresponding to shares representing CESP’s capital.

35. Subsequent event

On January 24, 2017, the Board of Directors approved a Voluntary Termination Program (PDV), with the following characteristics: i) intended for all employees admitted in the permanent headcount of CESP with an indefinite period employment contract; ii) financial incentive from 3 to 14 salaries, depending on length of service; iii) medical-hospital and dental care for 12 months, from the termination date, limited to 03/31/2018; iv) enrollment term until 02/17/2017; and v) terminations until 03/31/2017. On the same day, the Executive Board disclosed the program to employees. The enrollment to the program was made by 98 employees, with an estimated cost of approximately R$18 million.


Notes

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EXECUTIVE BOARD

MAURO GUILHERME JARDIM ARCE CHAIRMAN ALMIR FERNANDO MARTINS MÁRCIO REA Chief Financial And CHIEF ADMINISTRATIVE OFFICER INVESTOR RELATIONS OFFICER MITUO HIROTA CHIEF GENERATION OFFICER, accumulated with the ENGINEERING AND CONSTRUCTION BOARD MAURO MARQUES ACCOUNTING DEPARTMENT MANAGER ACCOUNTANT - CRC 1SP253079-O-1


Notes

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BOARD OF DIRECTORS

CEO

JOÃO CARLOS DE SOUZA MEIRELLES MEMBERS ADERBAL DE ARRUDA ADRIANO JOSÉ PIRES ANDREA SANDRO CALABI PENTEADO JÚNIOR RODRIGUES CLÓVIS LUIZ CHAVES FERNANDO CARVALHO BRAGA MAURO GENTILE RODRIGUES DA CUNHA MAURO GUILHERME JARDIM PAULO SÉRGIO CORDEIRO RICARDO ACHILLES ARCE NOVAIS RICARDO DARUIZ BORSARI


Other Information that the Company Considers to be Material

Page: 107 of 114

In accordance with the Corporate Governance practices, the Company’s shareholding structure, as well the shareholders with over 5% of the shares of each type and class, whether directly or indirectly, up to the individual level, are presented below.

1. CESP’s shareholding structure

The main shareholders of the Company at December 31, 2016 are as follows:

Number of shares - in units (a)

Class A Class B

Common

shares % preferred

shares % preferred

shares % Total %

São Paulo State Government

and Related Companies:

São Paulo State

Finance Department 102,706,383 94.08 - - 15,135,166 7.18 117,841,549 35.98

Companhia do Metropolitano de

São Paulo - METRÔ 1,182,500 1.08 - - - - 1,182,500 0.36

Companhia de Saneamento Básico

do Estado de São Paulo - SABESP 6,690 0.01 - - - - 6,690 0.01 Companhia Paulista de Parcerias - CPP - - - - 13,793,103 6.54 13,793,103 4.21

Other 2,175 - - - 400 0.00 2,575 -

103,897,748 95.17 - - 28,928,669 13.72 132,826,417 40.56

Other

Centrais Elétricas Brasileiras S/A - ELETROBRÁS (publicly-held company) (a) 37,633 0.03 6,664,526 90.07 - - 6,702,159 2.05

CREDIT SUISSE SECURITIES (EUROPE) LIMITED - - - - 10,585,954 5.02 10,585,954 3.23

UBS AG, LONDON BRANCH - - - - 16,221,830 7.69 16,221,830 4.95

BLACKROCK, INC - - - - - - - -

HSBC Bank PLC London (*) - - - - 19,924,339 9.44 19,924,339 6.08

Morgan Stanley - - - - 13,864,717 6.57 13,864,717 4.23 The Bank of New York - ADR Department 32,077 0.03 154,224 2.08 - - 186,301 0.06

Individuals 3,582,642 3.28 547,516 7.40 7,781,887 3.69 11,912,045 3.64

Other legal entities 1,610,940 1.48 3,730 0.05 113,628,404 53.87 115,243,074 35.19

Other 6,711 0.01 29,126 0.40 - - 35,837 0.01

5,270,003 4.83 7,399,122 100.00 182,007,131 86.28 194,676,256 59.44

109,167,751 100.00 7,399,122 100.00 210,935,800 100.00 327,502,673 100.00

Paid-up capital per shares in R$ thousand 1,991,815 135,000 3,848,618 5,975,433

a) These include shareholders which individually hold less than 5% of the voting capital. (*) The shareholder did not provide information on its capital.


Other Information that the Company Considers to be Material

Page: 108 of 114

1.1. Shareholding structure of shareholders holding more than 5% of the shares of each type and class, up to individuals

Companhia Paulista de Parcerias - CPP Position at 12/31/2016


Shareholders Common shares % Preferred shares % Total %

State Finance Department - - 13,793,103 - 13,793,103 100.00

- - 13,793,103 - 13,793,103 100.00

Centrais Elétricas Brasileiras S.A. Position at 12/31/2016


Shareholders Common shares % Preferred shares % Total %

Class A Class B

Federal Government 554,395,652 51.00 1,544 0.00 554,397,196 41.00 BNDESPAR 141,757,951 13.04 - 18,691,102 7.04 160,449,053 11.86 BNDES 74,545,264 6.86 - 18,262,671 6.88 92,807,935 6.86 FND 45,621,589 4.20 - - - 45,621,589 3.37 FGHAB 1,000,000 0.09 - - - 1,000,000 0.07 Other 269,729,841 24.81 146,920 228,481,566 86.08 498,358,327 36.84

1,087,050,297 100.00 146,920 265,436,883 100.00 1,352,634,100 100.00

Information not reviewed by independent auditors.

1,2. Breakdown of controlling shareholders, managing officers and outstanding shares at December

31, 2016 and 2015

Number of shares in units - 12/31/2016

Class A preferred

shares %

Class B preferred

shares % Total % Common shares %

Controlling shareholder and Control Group 103,897,660 95.17 - - 28,928,269 13.71 132,825,929 40.56 Management:

Board of Directors - - - - - - - - Executive Board 88 0.00 - - 400 0.00 488 0.00

Supervisory Board - - - - - - - - Treasury shares - - - - - - - - Other shareholders 5,270,003 4.83 7,399,122 100.00 182,007,131 86.29 194,676,256 59.44

109,167,751 100.00 7,399,122 100.00 210,935,800 100.00 327,502,673 100.00

Outstanding shares 5,270,003 4.83 7,399,122 100.00 182,007,131 86.29 194,676,256 59.44

Number of shares in units - 12/31/2015

Common shares %

Class A preferred

shares %

Class B preferred

shares % Total %

Controlling shareholder and Control Group 103,897,660 95.17 - - 28,928,269 13.72 132,825,929 40.56 Management: - - - -

Board of Directors - - - - - - - - Executive Board 88 0.00 - - 400 0.00 488 0.00

Supervisory Board - - - - - - - - Treasury shares - - - - - - - - Other shareholders 5,270,003 4.83 7,441,008 100.00 181,965,245 86.28 194,676,256 59.44

109,167,751 100.00 7,441,008 100.00 210,893,914 100.00 327,502,673 100.00

Outstanding shares 5,270,003 4.83 7,441,008 100.00 181,965,245 86.28 194,676,256 59.44

Information not reviewed by independent auditors.


Reports and Representations/ Independent Auditor’s Report - Unqualified

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A free translation from Portuguese into English of Independent Auditor’s Report on Standard Financial

Statements prepared in Brazilian currency in accordance with accounting practices adopted in Brazil and

International Financial Reporting Standards (IFRS), issued by International Accounting Standards Board (IASB)

Independent auditor’s report on financial statements

The Shareholders, Board of Directors and Officers CESP - Companhia Energética de São Paulo

São Paulo - SP Opinion We have audited the accompanying financial statements of Companhia Energética de São Paulo (“CESP” or “Company”), which comprise the statement of financial position as at December 31, 2016, and the related statements of operations, of comprehensive income, of changes in equity and of cash flows for the year then ended, and a summary of significant accounting practices and other explanatory information. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Companhia Energética de São Paulo as at December 31, 2016, its financial performance and its cash flows for the year then ended, in accordance with accounting practices adopted in Brazil and the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). Basis for opinion We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in the “Auditor’s Responsibilities for the audit of the financial statements” section of our report. We are independent of the Company and comply with the relevant ethical principles set forth in the Code of Professional Ethics for Accountants, the professional standards issued by the Brazil’s National Association of State Boards of Accountancy (“CFC”) and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current year. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Impairment of assets In accordance with CPC 01 - Impairment of Assets, equivalent to IAS 36, the Company is annually required to prepare internal studies to assess the recoverability of the carrying amount of its non-financial assets in future operations. Property, plant and equipment items are tested for impairment when there is evidence of impairment or whenever events or significant changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss results from circumstances where the carrying amount of the asset exceeds its recoverable amount and is recognized in P&L for the year. This matter is disclosed in Notes 3.8 and 33 to the financial statements.



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At December 31, 2016, the Company analyzed the recoverability of the carrying amount of its non-financial assets in future operations, specifically for HPPs Porto Primavera, Jaguari and Paraibuna, and identified no indication of loss on its assets. Since December 31, 2014, the Company has recorded a provision for impairment of its PPE related to HPPs Ilha Solteira and Jupiá. At December 31, 2015, the Company recorded the amount of R$580,798 thousand, based on the low expectation of recoverability of those assets. This issue was considered a key audit matter, considering the recent history of losses due to impairment of its assets, the level of judgment that should be exercised by Management to determine their recoverable amounts, as well as the existence of ongoing disputes with the Granting Authority, regarding the expiration of concessions previously held by the Company. How our audit addressed this matter: Our audit procedures included, among others, the involvement of specialists to assist us with the review of the impairment test of assets, assessing the assumptions and methodology used by Company Management, particularly with respect to analysis of recoverable amount, historical analysis of prior year budgets, analysis of Prospective Financial Information (PFI) considered in projections, sensitivity analyses, completeness of supporting documentation to the execution of projections, and reasonability of the methods and assumptions used in the analysis. In addition, we checked for fair value disclosures in accordance with applicable accounting standards. Provision for contingencies In accordance with CPC 25 - Provisions, Contingent Liabilities and Contingent Assets, equivalent to IAS 37, the Company assesses the likelihood of loss related to ongoing lawsuits in which it is involved. This assessment is supported by management’s judgment together with its legal advisors, considering case laws, lower and higher court decisions, the history of settlements and decisions, the experience of management and its legal advisors, and other applicable aspects. These contingencies, in their different legal nature, were assessed and classified based on the opinion of Company Management and of its internal and external legal advisors, according to the likelihood of economic and financial risk of loss for the Company. For those contingencies whose likelihood of loss is assessed as probable a provision is set up. At December 31, 2016, the Company records the amount of R$2,874,295 thousand (R$2,790,081 thousand at 12/31/2015), as provision for contingencies, referring to the lawsuits whose likelihood of loss is assessed as probable and discloses, in the same note, the amount of R$3,452,240 thousand (R$4,110,301 at 12/31/2015), referring to the lawsuits whose likelihood of loss is assessed as possible. This matter is disclosed in Note 22 to the financial statements. This issue was considered a key audit matter due to the significance of the amounts involved in the lawsuits, the judgment, to a same level, exercised by Management, necessary for determining whether a provision should be recorded, as well as the complexity of the legal environment in Brazil.



Page: 111 of 114

How our audit addressed this matter: Our audit procedures included, among others, sending confirmation letters to the external legal advisors involved by Management in the assessment of referred to lawsuits as at December 31, 2016, as well as a discussion with internal and external legal advisors on the most significant lawsuits and their respective likelihood of probable, possible and remote loss, crosschecking reports on contingencies against the lawyers’ responses to confirmation letters. In addition, we checked changes in the balance of provision for contingencies over the year, analyzing changes in the likelihood of loss for significant proceedings and the reasonableness of those changes. We also focused on the adequacy of the Company’s disclosures of each class of provision and other requirements under CPC 25. Deferred income and social contribution taxes According to CPC 32 - Income Taxes, equivalent to IAS 12, a significant judgment is required to determine the provision for income taxes and the recognition of deferred tax credits, and in many transactions, the final determination of the tax is uncertain. The recognition of deferred income tax asset requires assessing if it is probable that future taxable profits will be sufficient to realize such asset. This assessment requires considering the history of taxable profits, expectations of future taxable profits as well as the time of reversal of temporary differences. If the Company may not generate future taxable profits, or if there is a significant change in the tax structure or in the year in which the temporary differences will be used, it is possible that the assessment of likelihood changes, which would require a write-off, in a whole or in part, of the deferred income tax asset previously recognized. The Company is limited to the projection of future taxable profits for additional recognition of credits on income tax and social contribution tax losses, as well as on temporary differences. The differences between statutory and effective rates result from the limitation on new recognition of credits, as well as from permanent additions/exclusions. The Company considers a 10-year period, or the concession period of each cash-generating unit, to recognize deferred taxes due to high subjectivity of maintenance costs, significant volatility in power prices and the effect of the discount rate used in the projections. At December 31, 2016, the Company records the amount of R$799,535 thousand (R$869,431 thousand at 12/31/2015) related to deferred income and social contribution tax assets and discloses the existence of deferred tax assets amounting to R$2,455,899 thousand (R$2,430,481 thousand at 12/31/2015), not recognized in books for exceeding the capacity to generate future taxable profits within the maximum period established. This matter is disclosed in Note 12 to the financial statements. This issue was considered a key audit matter due to the significance of the amounts involved as well as the fact that the Management’s assessment process for deferred income projections is complex, critical and based on assumptions, specifically cost and revenue projections, impacted by expected market or economic future conditions, particularly those related to the Company’s concession. How our audit addressed this matter: Our audit procedures included, among others, the involvement of specialists to assist us in assessing the assumptions and methodology used by the Company, particularly with respect to the projection of statutory profit before tax adjustments, analysis of the reasonableness of projected income before taxes, comparison with prior years, historical analysis of prior years’ budgets, and understanding of the scope of work developed by Management. We also focused on the adequacy of the disclosures made by the Company.



Page: 112 of 114

Other matters Statement of value added The Statements of Value Added (SVA) for the year ended December 31, 2016, prepared under the responsibility of Company Management and presented as supplementary information for IFRS purposes, were submitted to the same audit procedures performed in accordance with the audit of the Company’s financial statements. For the purposes of forming our opinion, we evaluated whether these statements are reconciled with the financial statements and accounting records, as applicable, and whether their form and content are in accordance with the criteria provided for in Accounting Pronouncement CPC 09 - Statement of Value Added. In our opinion, these statements of value added were prepared fairly, in all material respects, in accordance with the criteria provided for in Accounting Pronouncement CPC 09 and are consistent with the overall financial statements. Other information accompanying the financial statements and the auditor’s report Company management is responsible for such other information that is included in the Management Report. Our opinion on the financial statements does not cover the Management Report and we do not express any form of audit conclusion thereon. In connection with the audit of the financial statements, our responsibility is to read the Management Report and, in doing so, consider whether this report is materially inconsistent with the financial statements or with our knowledge obtained in the audit or, otherwise, whether this report appears to be materially misstated. If, based on our work we conclude that there is material misstatement in the Management Report, we are required to report this fact. We have nothing to report on this matter. Responsibilities of Management and those charged with governance for the financial statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting practices adopted in Brazil and with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), and for such internal control as Management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, Management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless Management either intends to liquidate the Company or to cease operations, or has no other realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process.



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Auditor’s Responsibilities for the Audit of Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian and International standards on auditing will always detect material misstatements when they exist. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they can influence, within a reasonable perspective, the economic decisions of users made on the basis of these financial statements. As part of the audit conducted in accordance with Brazilian and International standards on auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

Identify and assess risks of material misstatements of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than one resulting from error, as fraud may involve override of internal controls, collusion, forgery, intentional omissions or misrepresentations.

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management.

Conclude on the appropriateness of Management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast substantial doubt as to the Companies’ ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the corresponding transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.



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From the matters communicated with those charged with governance, we are required to determine those matters that were of most significance in the audit of the financial statements of the current year and are therefore the key audit matters. We are required to describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. São Paulo, March 21, 2017. ERNST & YOUNG Auditores Independentes S.S. CRC-2SP015199/O-6 Marcos Antonio Quintanilha Partner Accountant CRC-1SP132776/O-3

DFP - Standard Financial Statement – 12/31/2016 - CESP - Companhia Energética de São Paulo Version: 1

Reports and Representations / Opinion by the Supervisory Board or Equivalent Bod

Page: 115 of 114

Supervisory Board’s Opinion

The Supervisory Board of CESP - Companhia Energética de São Paulo, in compliance with the provisions of Law No. 6404/76 of December 15, 1976, items I, II and VII of article 163, has examined the Company’s Financial Statements for the year ended December 31, 2016, prepared according to the principles established in chapters XV and XVI of referred to law, with amendments introduced by Law No. 11638 of December 28, 2007, and Pronouncements, Guidance and Interpretations issued by the Brazilian Financial Accounting Standards Board - FASB (“CPC”), approved by the Brazilian Securities and Exchange Commission (“CVM”), which comprise: the Statements of Financial Positions; Statements of Operations; Statements of Changes in Equity; Management Proposal for allocation of income; Cash Flow Statements; and Statements of Value Added for the years ended December 31, 2016 and 2015, supplemented by Accompanying Notes, as well as Management Report on corporate business and main administrative events for the year. Based on the examinations carried out, clarifications provided by the Executive Board and in the Independent Auditor’s Report, this Supervisory Board understands that the Management Report and the Financial Statements are appropriate to be submitted to the appreciation of and approval by Shareholders. This is our Opinion. São Paulo, March 21, 2017. Amancio Acúrcio Gouveia Emília Ticami Manuel Jeremias Leite Caldas Sebastião Eduardo Alves de Castro Vanildo Rolando Neubauer


Reports and Representations / Officers’ Representation on the Financial Statements

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Pursuant to the provisions of items V and VI, article 25 of CVM Ruling No. 480 of December 7, 2009, the Executive Board members of CESP - Companhia Energética de São Paulo, a publicly-held company with head office at Avenida Nossa Senhora do Sabará, 5312, Bairro de Pedreira, in the city and state of São Paulo, enrolled with Brazilian IRS Registry of Legal Entities (“CNPJ”) No. 60.933.603/0001-78, declare that: (i) reviewed, discussed and agreed with the Company’s Financial Statements for the fiscal year ended December 31, 2016; and (ii) reviewed, discussed and agreed with the opinions expressed in the Ernst & Young Auditores Independentes’ report regarding the Company’s Financial Statements for the fiscal year ended December 31, 2016.

DFP - Standard Financial Statements – 12/31/2016 - CESP - Companhia Energética de São Paulo Version: 1

Reports and Representations / Officers’ Representation on the Independent Auditor’s Report

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Pursuant to the provisions of items V and VI, article 25 of CVM Ruling No. 480 of December 7, 2009, the Executive Board members of CESP - Companhia Energética de São Paulo, a publicly-held company with head office at Avenida Nossa Senhora do Sabará, 5312, Bairro de Pedreira, in the city and state of São Paulo, enrolled with Brazilian IRS Registry of Legal Entities (“CNPJ”) No. 60.933.603/0001-78, declare that: (i) reviewed, discussed and agreed with the Company’s Financial Statements for the fiscal year ended December 31, 2016; and (ii) reviewed, discussed and agreed with the opinions expressed in the Ernst & Young Auditores Independentes’ report regarding the Company’s Financial Statements for the fiscal year ended December 31, 2016.

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