UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
20549 FORM 20-F
o¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31 2021, 2023
OR
o¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________toFOR THE TRANSITION PERIOD FROM ________________ TO ________________
OR
o¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company reportreport: ________________
Commission file number 001-31317
Companhia de Saneamento Básico do Estado de São Paulo-SABESP
(Exact name of Registrant as specified in its charter)
Basic Sanitation Company of the State of São Paulo-SABESP
(Translation of the Registrant’s name into English)
Federative Republic of Brazil BrazilD5
(Jurisdiction of incorporation or organization)
Rua Costa Carvalho, 300
05429-900 São Paulo, SP, Brazil
(Address of principal executive offices)
Osvaldo GarciaCatia Cristina Teixeira Pereira
osvaldogarcia@sabesp.com.brcatiapereira@sabesp.com.br ((++55 11 3388 8247)
Rua Costa Carvalho, 30005429-900São Paulo, SP, Brazil
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbols(s) | Name of each exchange on which registered |
Common Shares, without par value | Not traded | New York Stock Exchange* |
American Depositary Shares, evidenced by American Depositary Receipts, each representing one Common Share | SBS | New York Stock Exchange |
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Shares are not listed for trading, but only in connection with the registration of American Depositary Receipts pursuant to the requirements of the New York Stock Exchange.
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Shares of Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.1934 from their obligations under those Sections.
Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitionsdefinition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x | Accelerated Filer o |
Non-accelerated Filer o | Emerging Growth Company ☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow
Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o Nox
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Yesx No
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If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP o | International Financial Reporting Standards as issued by the International Accounting Standards Board x | Other o |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o Nox
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TABLE OF CONTENTS
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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
General
We maintain our books and records in reais. We prepare our consolidated financial statements (“Consolidated Financial Statements”) in accordance with International Financial Reporting Standards or “IFRS,”(“IFRS”), as issued by the International Accounting Standards Board or the “IASB.”(“IASB”). Our audited consolidated financial statements as of December 31, 20212023 and 20202022 and for each of the three years in the three-year period ended December 31, 20212023 (“2023 Consolidated Financial Statements”) are included in this annual report on Form 20-F.
All financial information for the year ended December 31, 2023 was prepared on a consolidated basis, while all financial information for the years ended December 31, 2022 and 2021 was prepared on an individual basis because we had no subsidiaries to consolidate in those years.
Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them.
Proposed Privatization
On February 28, 2023, the State Privatization Program’s Board (Conselho Diretor do Programa Estadual de Desestatização – “CDPED”), which has authority over corporate reorganization plans involving privatizations of state-owned companies, such as us, agreed to proceed with the hiring of consultancy services to assist with the studies into our proposed privatization, as proposed by the State of São Paulo (“Proposed Privatization”). In April 2023, the State of São Paulo government hired the International Finance Corporation (“IFC”), an agency of the World Bank, as an advisor for this process.
On December 8, 2023, the State of São Paulo enacted State Law No. 17,853/2023, providing the authorization for our Proposed Privatization and its general guidelines. In accordance with this law, the State of São Paulo may reduce or dilute its controlling interest in us through a sale of its common shares through an auction or secondary offering on the relevant stock exchanges within and outside of Brazil or via a primary public offering of our common shares within and outside of Brazil. The CDPED approved, among others, the recommendation for the structure of our Proposed Privatization on April 17, 2024, pursuant to State Law No. 17,853/2023, which will be sent to the Governor of the State of São Paulo for approval. For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Proposed Privatization—Our Proposed Privatization is subject to the fulfillment of certain legal requirements and may be subject to further conditions precedent. If we are not able to fulfill these formal requirements, or to meet such conditions precedent, our Proposed Privatization will not be completed, which may materially adversely affect our prospects and the market price of our common shares and ADSs” and “Item 3.D. Risk Factors—Risks Relating to Our Proposed Privatization.”
State Law No. 17,853/2023 also provides that, if our Proposed Privatization is consummated, our bylaws will be amended to provide for a special class of preferred share, owned exclusively by the State of São Paulo (referred to as a “golden share”), which will grant the State of São Paulo veto power over proposed changes to: (i) our name and headquarters; (ii) our corporate purpose of providing water and sewage services; and (iii) any provisions in our bylaws regarding limits on the exercise of voting rights attributed to shareholders or groups of shareholders. On April 26, 2024, we called an Extraordinary Shareholders’ Meeting to be held on May 27, 2024, to approve changes to our bylaws conditional upon the consummation of our Proposed Privatization. The proposed changes to our bylaws include, inter alia, an authorized capital provision, the golden share terms and conditions, a provision that will have the effect of avoiding the concentration of more than 30% of our common voting shares in the hands of one or a small group of shareholders and poison pill provisions. For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Proposed Privatization—If our Proposed Privatization is consummated, we will no longer have a controlling shareholder that holds more than 50% of our capital stock, which may make us susceptible to shareholder alliances, shareholder conflicts and other events arising from the absence of a controlling shareholder or a controlling group.”
State Law No. 17,853/2023 further authorizes the creation of a fund to support the universalization of sanitation services in the State of São Paulo (Fundo de Apoio à Universalização do Saneamento no Estado de São Paulo – “FAUSP”), connected to the State Secretariat for the Environment, Infrastructure and Logistics (Secretaria de Meio Ambiente, Infraestrutura e Logística do Estado de São Paulo – “SEMIL”). The purpose of FAUSP is to fund basic sanitation activities, including those aimed at reducing tariffs in the sector, to expedite the goal of providing drinking water to 99% of the population and sewage collection and treatment to 90% of the population (“Universalization Targets”) set by Law No. 14,026/2020 (the “New Legal Framework for Basic Sanitation”), advancing the deadline from 2033 to December 31, 2029, pursuant to State Law No. 17,853/2023.
FAUSP will be administered by a guidance council, which will consist of State Secretariats and members chosen by the Governor of the State of São Paulo (“Guidance Council”). The Guidance Council will: (i) monitor the use of FAUSP’s resources, including its budget and financial performance, as well as opining on necessary adjustments; (ii) review and approve FAUSP’s accounts, based on balance sheets, statements or accounting data; (iii) monitor FAUSP’s capital expenditure, in accordance with the financial planning for funding, grants, loans and other costs, evaluate its adequacy in terms of available funds and the corresponding programs and projects; and (iv) establish certain goals and rules related to the program created by the State of São Paulo under State Law No. 14,687/2012, aimed at subsidizing intra-domiciliary extensions necessary to connect to the public sewage collection system for households of low-income families that agree to join such program in municipalities in which we operate (“Pro-Connection Program”). Our Proposed Privatization, besides being subject to State Law No. 17,853/2023, is also guided by the new rules introduced by the New Legal Framework for Basic Sanitation, which had a profound impact on our sector and is intended to address the lack of water supply and sewage treatment for a significant portion of the Brazilian population. As one of the main instruments for achieving the universalization of sanitation services, the New Legal Framework for Basic Sanitation introduced the Universalization Targets.
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The New Legal Framework for Basic Sanitation also promotes the regionalization of services, based on the formation of groups of municipalities that plan and contract for sanitation services collectively. Although each municipality provides for basic sanitation services, the grouping of municipalities seeks to ensure consistency in planning, monitoring, regulating and remuneration of services, which are essential for achieving technical and economic-financial feasibility of services and, ultimately, the universalization.
In addition to authorizing our Proposed Privatization, State Law No. 17,853/2023 establishes that our Proposed Privatization must comply with the following guidelines, among others: (i) to meet the Universalization Targets in all municipalities that we serve in the State of São Paulo, including rural areas and consolidated informal urban centers; (ii) to bring forward the deadline to meet the Universalization Targets to December 31, 2029; (iii) to reduce tariffs, considering the most vulnerable parts of the population, and (iv) to provide for the creation of annual controls to monitor the achievement of the targets referred to in items (i) and (ii) above, indicating investment needs for the coming years.
To meet the contractual targets set by the New Legal Framework for Basic Sanitation and comply with the guidelines set out in State Law No. 17,853/2023, we need to have sufficient funds, as this requires a large amount of capital expenditures in a short period of time. This will be heightened if our Proposed Privatization is consummated given that it brings the Universalization Targets forward to December 31, 2029 and will require us to make even larger investments to achieve these targets. Currently, certain of our program contracts already include the 2029 deadline for the Universalization Targets regardless of our Proposed Privatization, such as our contract with the city of São Paulo. For further information, see “Item 3.D. Risk Factors—Risks Relating to Our Proposed Privatization—We cannot guarantee compliance with the new Universalization Targets for reasons beyond our control, based on the guidelines outlined in the New Legal Framework for Basic Sanitation and the State Law that authorized our Proposed Privatization.”
Additionally, on February 15, 2024, the SEMIL opened Public Consultation No. 01/2024 with the objective of collecting contributions on the draft concession agreement for public water supply and sanitation services to be entered into by us and the Regional Unit for Drinking Water Supply and Sewage Services (Unidade Regional de Serviços de Abastecimento de Água Potável e Esgotamento Sanitário – “URAE”) of the Southeastern region (“URAE-1”), in case our Proposed Privatization is consummated (“Concession Agreement for URAE-1”). The Concession Agreement for URAE-1 aims to replace most of the program contracts and concession agreements in place with the municipalities of the State of São Paulo which are covered by URAE-1, to bring forward the Universalization Targets to 2029 and implement the new regional structure for services provision. The Concession Agreement for URAE-1 will be applicable to all municipalities that have joined the URAE-1, and it will then be executed between URAE-1 (representing the municipalities) and us.
The following documents, among others, were also discussed in Public Consultation No. 01/2024: (i) annex II of the Concession Agreement for URAE-1, which contains the technical annexes for all municipalities that are part of URAE-1, and which present the indicators and targets for coverage, losses, and quality of service provision to be followed; (ii) internal regulation of the deliberative council of URAE-1, which aims to regulate the functioning of this council; and (iii) URAE-1 regional sanitation plan, which establishes planning of sanitation actions in line with the principles of the National Basic Sanitation Plan (“PLANSAB”).
The Public Consultation No. 01/2024 ended on March 15, 2024, and the SEMIL published a report on the contributions on April 30, 2024. The documents discussed in the Public Consultation were updated, and some of the main topics included in the report refer to: rules for sharing efficiency gains, (ii) components of the Weighted Average Cost of Capital (“WACC”) methodology, (iii) improvement of the incentive and penalty mechanisms for us, in the event of non-compliance with the Universalization Targets, (iv) anticipation of amounts to the Municipal Fund for Environmental Sanitation and Infrastructure (Fundo Municipal de Saneamento Ambiental e Infraestrutura – “FMSAI”), and (v) compensation for flooded areas which are unusable for productive purposes, resulting from the implementation of water reservoirs for the supply of the Integrated Water Supply System of the Metropolitan Region of São Paulo (Sistema Integrado de Abastecimento de Água da Região Metropolitana de São Paulo).
On April 22, 2024, we published a material fact to inform our shareholders and the market in general about the summoning of URAE - 1 representatives for the first meeting of the deliberative council, which will be held on May 20, 2024, as well as inform that the following documents were delivered to these representatives: (i) Concession Agreement for URAE-1 and its annexes, indicating the role of ARSESP, (ii) draft internal regulation of the deliberative council of URAE-1, and (iii) draft of the regional basic sanitation plan, pursuant to article 17 of Federal Law No. 11,445/2007. The internal regulations of the deliberative council of URAE-1 – Southeastern will establish the competencies, attributions, organization and other guidelines for the deliberative council.
In the city of São Paulo, the City Council opted to pass a legislative proposal regarding our Proposed Privatization, which was approved through Municipal Law No. 18,107/2024, enacted on May 2, 2024. The Municipal Law No. 18,107/2024 authorized the executive branch of the city of São Paulo to enter into contracts, agreements or any other necessary arrangements, individually or by means of a regionalized arrangement, for the provision of water supply and sewage services in the municipality of São Paulo.
Other municipalities may adopt the position that their local legislation requires the City Council to approve new legislation before the municipality can approve certain aspects of our Proposed Privatization, such as adherence to the URAE and entering into the new Concession Agreement with the URAE-1.
The draft Concession Agreement for URAE-1 introduces significant changes to our current economic-regulatory model. For more information, see “Item 4.B. Business Overview—Tariff Readjustments and Reviews—Economic-regulatory model in the draft Concession Agreement for Public Water Supply and Sanitation Services for the URAE-1 Southeastern region.”
For the risks associated with our Proposed Privatization, see “Item 3.D. Risk Factors—Risks Relating to Our Proposed Privatization.”
Other Information
In this annual report, unless the context otherwise requires, references to “we,” “us,” “our,” “Company,” or “SABESP” refer to Companhia de Saneamento Básico do Estado de São Paulo – SABESP.
In addition, references to:
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· | “ANA” are to the National Water and Sanitation Agency (Agência Nacional de Águas e Saneamento Básico); |
· | “ARSESP” are to the São Paulo State Public Services Regulatory Agency |
· | “ADR” or “ADRs” are to American Depositary Receipt or American Depositary Receipts, respectively; |
· | “ADS” or “ADSs” are to American Depositary Share or American Depositary Shares, respectively; |
· | “B3” are to B3 S.A. – Brasil, Bolsa, Balcão; | |
· | “Basic Sanitation Law” are to Law No. 11,445/2007 of the Federative Republic of Brazil, as amended; |
· | “BNDES” are to Brazilian National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social); |
· | “Brazil” are to the Federative Republic of Brazil; |
· | “Brazilian Constitution” are to the Constitution of the Federative Republic of Brazil of 1988; | |
· | “Brazilian Corporate Law” are to Law No. 6,404/1976, as amended; | |
· | “Central Bank” are to the Central Bank of Brazil; |
· | “ |
· | “COFINS” are to the federal taxes based on the turnover of companies. It is the contribution for the financing of social security (Contribuição para o Financiamento da Seguridade Social); | |
· | “COPOM” are to the Comitê de Política Monetária (Monetary Policy Committee) of the BCB, responsible for setting the target for the policy interest rate (SELIC); | |
· | “COVID-19” |
· | “CVM” are to the Comissão de Valores Mobiliários, the Brazilian securities and exchange commission; |
· | “FAPESP” are to the Fundação de Amparo à Pesquisa do Estado de São Paulo, the Research Foundation of the State of São Paulo; | |
· | “FAUSP” are to the Fundo de Apoio à Universalização do Saneamento no Estado de São Paulo, a fund to support the universalization of sanitation services in the State |
· | “federal government” and “Brazilian government” are to the federal government of the Federative Republic of Brazil and |
· | “GDP” are to gross domestic product, which is the standard measure of the value added created through the production of goods and services during a certain period of time, | |
· | “IBRD” are to the International Bank for Reconstruction and Development; |
· | “IDB” are to the |
· | “IDB Invest” are to the Inter-American Investment Corporation; | |
· | “IPCA” are to the Índice Nacional de Preços ao Consumidor Amplo (Extended National Consumer Price Index), the reference for the Brazilian inflation-targeting system; | |
· | “JICA” are to the Japan International Cooperation Agency; | |
· | “New Legal Framework for Basic Sanitation” are to Law No. 14,026/2020 of the Federative Republic of Brazil; |
· | “¥” or “Japanese Yen” are to the official currency of Japan; |
· | “PASEP” are to Programa de Formação do Patrimônio do Servidor Público, a social contribution payable by companies to finance the funds for insurance for unemployment, child benefit and allowance for low paid workers; | |
· | “program contract” are to certain inter-federative cooperation agreements entered into within the scope of associated management (pursuant to |
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· | “Proposed Privatization” are to the privatization plan for our company authorized by the State Law No. 17,853/2023, which was proposed by the State of São Paulo, as further described in “Presentation of Financial and Other Information—Proposed Privatization;” | |
· | “Pro-Connection Program” are to the program created by the State of São Paulo under State Law 14,687/2012, aimed at subsidizing intra-domiciliary extensions necessary to connect to the public sewage collection system, in households of low-income families that agree to join the Pro-Connection Program, in municipalities in which we operate. | |
· | “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil; |
· | “Regional Systems” are to the area where the old regional systems’ executive office |
· | “ |
· | “ | |
· | “service” indicators are to (a) the number of homes that are actually connected to the water network or sewage collection network, as a portion of (b) the total number of homes within a given serviceable area; |
· | “ |
· | “ |
· | “UNESP” are to the Universidade Estadual Paulista Júlio de Mesquita Filho; | |
· | “URAE” are to Regional Unit for Drinking Water Supply and Sewage Services (Unidade Regional de Serviços de Abastecimento de Água Potável e Esgotamento Sanitário) |
· | “URAE-1” are to the URAE of the Southeastern region, as further described in “Presentation of Financial and Other Information—Proposed Privatization;” | |
· | “U.S. dollars” or “US$” are to the United States dollar, the official currency of the United States; |
· | “water crisis” are to the drought we experienced from late 2013 and throughout most of 2015. This drought, the most serious that our service region has experienced in |
· | “WHO” are to the World Health | |
· | “WHT” is the Brazilian federal withholding income tax. |
Information in this annual report related to liters, water and sewage volumes, number of employees, kilometers, water and sewage connections, population served, operating productivity, water production, water and sewage lines (in kilometers), water loss index and investment in programs has not been audited.
Market Information
We make statements in this annual report about our market share and other information relating to Brazil and the industry in which we operate. We have made these statements on the basis of information from third-party sources and publicly available information that we believe is reliable, such as information and reports from the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística – “IBGE”), or IBGE, and the State Data Analysis System Foundation (Fundação Sistema Estadual de Análise de Dados – “SEADE”), or SEADE, among others. We have no reason to believe that any of this information is inaccurate in any material respect.
References to urban and total population in this annual report are estimated based on research prepared by SEADE entitled “Projections of Population and Residences for the Municipalitiesmunicipalities of the State of São Paulo: 2010-2050” (Projeção da População e dos Domicílios para os Municípios do Estado de São Paulo: 2010-2050).
Our Contracts and the Municipalities We Serve
Throughout this document, we refer to the 375 Municipalities376 municipalities we serve directly and the two Municipalitiesmunicipalities which we account for in our wholesale segment (Mogi das Cruzes and São Caetano do Sul), since our revenue for the fiscal year 20212023 is derived from these Municipalities.municipalities. The 376 municipalities include Olimpia, a municipality located in the interior of the State of São Paulo. After executing a public-private partnership with the municipality of Olimpia, on December 11, 2023, we started operating water and sewage services in the city through our wholly-owned subsidiary Sabesp Olimpia S.A. Most of our contracts with the Municipalitiesmunicipalities we serve are program contracts which havewith a term of 30 years.30-year term.
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CAUTIONARY STATEMENTS ABOUT FORWARD-LOOKING STATEMENTS
This annual report includes forward-looking statements, mainly in Items 3 through 5. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. These forward-looking statements are subject to risks, uncertainties and assumptions, including, among other factors:
· | general economic, political, demographical, health and other conditions in Brazil and in other countries, including military conflict between Russia and Ukraine, as well as the conflict between Israel and Hamas, the imposition of sanctions and trade embargos and its impacts on the global |
· | fluctuations in inflation, interest rates and exchange rates in Brazil; |
· | the | |
· | any judicial or other challenges to our Proposed Privatization; | |
· | the potential impacts of the New Tariff Structure to be implemented, its uncertainties, as |
· | the interests of our controlling shareholder; |
· | any increase in delinquencies by our |
· | the regulations issued by ARSESP regarding several aspects of our business, including resetting and adjusting our tariffs; |
· | changes in applicable laws and regulations, as well as the enactment of new laws and regulations, including those relating to environmental, tax and employment matters in Brazil; |
· | existing and future governmental regulation for sanitation services, competition in our concession area, and other matters; |
· | risks relating to our material properties, including difficulties in obtaining or renewing existing licenses, authorizations, approvals and permits to build, expand and/or operate our business facilities and challenges to our ownership and possession of our material properties; | |
· | the impacts on our business of probable increases in the frequency of extreme weather conditions, including droughts and intensive rain and other climatic events; | |
· | our ability to continue to use certain reservoirs under current terms and conditions; |
· | availability of our water supply, springs and storage systems; |
· | the impact on our business of lower water consumption practices adopted by our customers during the water crisis which resulted in water savings and have not returned to their prior standards despite us maintaining a continuous supply of water to the São Paulo metropolitan region; |
· | the size and growth of our customer base and its consumption habits; |
· | any measures that we may be required to take to ensure the provision of water to our customers; |
· | the potential impacts on our business caused by the enactment of the New Legal Framework for Basic Sanitation, which introduced several changes that directly affect our operations, including the requirement to participate in new public bids in case the entity is not part of the administration of the |
· | the potential impact of the enactment of national reference standards that should be taken into account by subnational sanitation regulatory agencies (municipal, intermunicipal, district and state) in their regulatory performance, since the New Legal Framework for Basic Sanitation determined that ANA is |
· | our ability to comply with the requirements regarding water and sewage service levels included in our agreements with |
· | the |
· | our ability to collect amounts owed to us by our controlling shareholder, states, the federal government and |
· | our capital expenditure program and other liquidity and capital resources requirements; |
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· | the effects of the |
· | our management’s expectations and estimates relating to our future financial performance; |
· | our level of debt and limitations on our ability to incur additional debt; |
· | our ability to access financing with favorable terms in the future; |
· | the costs we incur in complying with environmental laws and any penalties for failure to comply with these laws; |
· | the outcome of our pending or future legal proceedings; |
· | the impact of widespread health developments, such as COVID-19, and its effects on our operating revenues and financial condition; | |
· | the delay or postponement in investment in our sewage system; |
· | the possibility to be subject to other regulatory agencies other than ARSESP; |
· | power shortages, rationing of energy supply or significant changes in energy tariffs; |
· | other risk factors as set forth under “Item 3.D. Risk |
The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “plan,” “intend,” “expect” and similar words are intended to identify forward-looking statements. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this annual report might not occur. Our actual results could differ substantially from those anticipated in our forward-looking statements. Forward-looking statements speak only as of the date they were made, and we do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law. Any such forward-looking statements are not an indication of future performance and involve risks.
PART I
ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND |
Not applicable.
ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
ITEM 3. | KEY INFORMATION |
A. | [RESERVED] |
B. | Capitalization and Indebtedness |
Not applicable.
C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
D. | Risk Factors |
Summary of Risk Factors
This section is intended to be a summary of more detailed discussions contained elsewhere in this annual report. The risks described below are not the only ones we face. Our business, results of operations or financial condition could be harmed if any of these risks materialize.
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Risks Relating to Our Proposed Privatization
· | Our Proposed Privatization is subject to the fulfillment of certain legal requirements and may be subject to further conditions precedent. If we are not able to fulfill these formal requirements, or to meet such conditions precedent, our Proposed Privatization will not be completed, which may materially adversely affect our prospects and the market price of our common shares and ADSs. |
· | Our controlling shareholder could suspend or terminate the Proposed Privatization. Additionally, our Proposed Privatization may be challenged, which could delay or prevent its consummation. |
· | If our Proposed Privatization is consummated, the State of São Paulo will no longer be our majority shareholder, which brings uncertainties that are beyond our control regarding the maintenance of our current program contracts. |
· | Our debentures issuances and financing agreements governing our debt contain change of control provisions that are triggered if the State of São Paulo government ceases to be our controlling shareholder, including in connection with our Proposed Privatization. If we are not able to obtain the necessary waivers or approvals from our debenture holders, bank lenders and/or other creditors, regarding our Proposed Privatization, prior to completion of the Proposed Privatization, those debentures, loans and/or obligations could be subject to acceleration, cross-default, cross acceleration or termination, which could materially adversely affect our financial condition and results of operations. |
· | If our Proposed Privatization includes a primary offering of common shares by us, our current shareholders will experience immediate dilution after the offering. In addition, if our Proposed Privatization is consummated, our bylaws will contain provisions that limit the voting rights of all shareholders, including non-Brazilian shareholders, which could prevent or delay transactions that holders of our shares or ADRs may favor. |
· | If our Proposed Privatization is consummated, we will no longer have a controlling shareholder that holds more than 50% of our capital stock, which may make us susceptible to shareholder alliances, shareholder conflicts and other events arising from the absence of a controlling shareholder or a controlling group. |
Risks Relating to Brazil
· | The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions, could adversely affect us and the market price of our common shares and ADSs. |
· | Changes in Brazilian tax laws or conflicts in their interpretation may adversely affect us. |
· | Ongoing political instability has adversely affected the Brazilian economy and may lead to an economic slowdown, which may have an adverse effect on our financial condition and results of operations. |
· | Inflation and the Brazilian government’s measures to combat inflation may contribute to economic uncertainty in Brazil, adversely affecting us and the market price of our common shares or ADSs. |
· | Exchange rate instability and developments and the perception of risk in other countries, especially in the United States and in emerging market countries, may adversely affect us, our foreign currency denominated debt and the market price of our common shares or ADSs and our ability to service our foreign currency denominated obligations. |
· | Downgrades in Brazil’s credit rating could adversely affect our credit rating, the cost of our indebtedness and the trading price of our common shares and ADSs. |
· | Brazil’s economy is vulnerable to external and internal shocks, which may have a material adverse effect on Brazil’s economic growth and on the trading markets for securities. |
· | Disruption or volatility in global financial and credit markets could have a material adverse effect on us. |
Risks Relating to Our Control by the State of São Paulo
· | We are controlled by the State of São Paulo, whose interests may differ from the interests of non-controlling shareholders, including holders of ADSs. |
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· | Our right to withdraw water from the Guarapiranga and Billings reservoirs is being challenged judicially by minority shareholders of EMAE. |
· | Transactions with related parties, including as part of our Proposed Privatization, may not have comparable market terms available and may not be entered into on an arm’s length basis, which could expose us to lawsuits and affect our financial results. |
Risks Relating to Our Business
· | Our current tariff structure is outdated and does not reflect the current socioeconomic changes the State of São Paulo has undergone over the past decades. Any updates to the tariff structure may lead to uncertainties in the market as well as unpredictability about our future revenues. |
· | Certain terms of our agreement to provide water and sewage services in the city of São Paulo could have a material adverse effect on us. |
· | Any failure to obtain new funding or to comply with covenants in our existing financing agreements may adversely affect our ability to continue our capital expenditure program. |
· | Any substantial monetary judgment against us or any of our directors and officers in legal proceedings may have a material adverse effect on our reputation, business or operating or financial condition and/or results. |
· | We are subject to anti-corruption, anti-bribery, anti-money laundering, sanctions and antitrust laws and regulations. Our violation of any such laws or regulations could have a material adverse effect on our reputation, our results of operations and our financial condition. |
· | Our business is subject to cyberattacks and security and privacy breaches. |
· | Failure to comply with the LGPD or any further privacy and data protection laws enacted in Brazil could adversely affect our reputation, business, financial condition or results of operations. |
· | Our failure to protect our intellectual property rights may negatively impact us. |
· | Industrial accidents, equipment failure, environmental hazards or other natural phenomena may adversely affect our operations, assets and reputation and might not be covered by our insurance policies. |
· | We cannot guarantee that our third-party suppliers and/or service providers will not become involved in any irregular practices. |
· | Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes. |
· | If we are not successful in addressing issues related to the occupational health and safety of our employees and the facilities where we conduct our activities, our results and operations could be adversely affected. |
· | If any of our assets are deemed assets dedicated to providing an essential public service, they will not be available for liquidation and will not be subject to attachment to secure a judgment. |
· | If our Proposed Privatization is completed, we will no longer be a state-controlled company and will be subject to the Brazilian Bankruptcy Law. |
· | Strikes, work stoppages or labor unrest by our employees or by the employees of our suppliers or contractors could adversely affect our business. |
· | If we do not remedy the material weakness in our internal controls, the reliability of our financial statements may be materially affected. |
Risks Relating to Suppliers
· | Any interruptions in the supply of electricity and water may adversely affect our operations. |
· | Our business may be adversely affected by reliance on services and products from third-party suppliers. |
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Risks Relating to Our Clients
· | We are owed some substantial unpaid debts. We cannot assure you as to when or whether we will be paid. |
Risks Relating to Our Management
· | We depend on the technical qualifications of the members of our management, and we cannot guarantee that we will be able to maintain them or replace them with suitable individuals. |
Risks Relating to the Regulatory Environment
· | Pursuant to the New Legal Framework for Basic Sanitation, ANA will be responsible for issuing reference standards. Any non-compliance will prevent municipalities or operators from accessing financings and public resources managed or operated by the Brazilian government. |
· | The regionalization of services, established in the New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations. |
· | The New Legal Framework for Basic Sanitation prohibits new program contracts for basic sanitation services, resulting in uncertainties for our current and future customer base and size of operations. |
· | Municipalities may terminate contracts before they expire in certain circumstances. The indemnification payments we receive in such cases may be less than the value of the investments we made, or may be paid over an extended period, adversely affecting our business, financial condition, or results of operations. |
· | We cannot guarantee compliance with the new Universalization Targets for reasons beyond our control, based on the guidelines outlined in the New Legal Framework for Basic Sanitation and the State Law that authorized our Proposed Privatization. |
· | If the water from our water sources (mananciais) does not meet our water treatment conditions, we may have to interrupt the water treatment process until we are able to treat the water or to substitute the supply of water from another water source. |
· | Risks associated with the collection, treatment and disposal of wastewater and the operation of water utilities may impose significant costs that may not be covered by insurance, which could result in increased insurance premiums. |
· | We are exposed to risks of delays or failures in payments associated with the provision of water and sewage services. |
· | Our water loss and other operational metrics indicate that we will need to make investments in our infrastructure. If any such investments are insufficient in adequately reducing water loss rates, this could have a material adverse effect on us. |
· | Securing new concessions, new public-private partnerships and new acquisitions involve risks related to the integrations of the adjudicated or acquired businesses, the situation of the assets and the regularity of the operations related to the concessions. |
· | Risks related to encumbrances, which may adversely affect us in the event of default on the obligations guaranteed by our properties. |
· | We may not be able keep in force or timely renew all permits and/or licenses for use and operation necessary for the development of our activities. |
· | According to the Brazilian law regulating concessions and public-private partnership matters, our corporate structure is composed of some special purpose entities, which may result in our responsibility for tax, labor, environmental protection, consumer and bankruptcy matters originated from our subsidiaries. |
· | We are subject to intervention by the Court of Auditors of the State (Tribunal de Contas do Estado) as well as questioning by third parties related to our concession and program contracts. |
· | We are subject to penalties related to our registrations, authorizations, licenses and permits for the development of our activities. |
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Risks Relating to Environmental Matters and Physical and Transition Climate Risks
· | Noncompliance with environmental laws and environmental liability could have a material adverse effect on us, our reputation and image. |
· | Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations. |
· | Extreme Weather Conditions and Climate Change may have a material adverse impact on our business, financial condition or results of operations. |
· | New laws and regulations relating to climate change and changes in existing regulation may result in increased liabilities and increased capital expenditures, which could have a material adverse effect on us. |
Risks Relating to Our Common Shares and ADSs
· | We may need to raise additional funds in the future and may issue additional common shares, which may result in a dilution of your interest in our common shares underlying the ADS. In addition, a dilution of your interest in our common shares underlying the ADS may occur in the event of our merger, consolidation or any other corporate transaction of similar effect in relation to companies that we may acquire in the future. |
· | International judgments may not be enforceable when considering our directors or officers’ status of residency. |
· | We may not always be in a position to pay dividends or interest on shareholders’ equity and ADSs. |
· | The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell our common shares underlying the ADSs at the price and time you desire. |
· | Investors who exchange ADSs for common shares may lose their ability to remit foreign currency abroad and obtain Brazilian tax advantages. |
· | A holder of common shares or ADSs may face difficulties in protecting his or her interests as a shareholder because we are a Brazilian mixed capital company. |
· | Mandatory arbitration provisions in our bylaws may limit the ability of a holder of our ADRs to enforce liability under U.S. securities laws. |
· | A holder of our common shares and ADSs might be unable to exercise preemptive rights and tag-along rights with respect to the common shares. |
· | Holders of our ADSs do not have the same voting rights as our shareholders. |
· | If we issue new shares or our shareholders sell shares in the future, the market price of your ADS may be reduced. |
· | Judgments of Brazilian courts with respect to our common shares are required to be payable only in reais. |
· | Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of our shares or ADS. |
Risks Relating to Our Proposed Privatization
Our Proposed Privatization is subject to the fulfillment of certain legal requirements and may be subject to further conditions precedent. If we are not able to fulfill these formal requirements, or to meet such conditions precedent, our Proposed Privatization will not be completed, which may materially adversely affect our prospects and the market price of our common shares and ADSs.
Our Proposed Privatization requires that we fulfill certain legal requirements, in particular obtaining legislative authorization and approval of the transaction structure by the Governor of the State of São Paulo, following the recommendation from the Board of Directors of the CDPED, a body subordinate to the Governor of the State of São Paulo.
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The State Legislative Assembly granted legislative authorization for our Proposed Privatization in December 2023, through the approval of Law 17,853/2023 of the State of São Paulo, which, among others, authorized the executive branch of the state to privatize us and to define the model for our Proposed Privatization to be carried out, based on certain broad guidelines provided for our Proposed Privatization.
Furthermore, State Law No. 9,361/1996, which stipulates general rules for privatizations, provides that the model for the privatization in the State of São Paulo must be approved by the CDPED. This approval was granted on April 17, 2024, and the CDPED: (a) established the timetable of our Proposed Privatization, determining that the public offering must take place in time to use the first quarter financial results of 2024; (b) established the structure of the public offering in a two stage process, with the selection of a strategic investor in the first stage; (c) proposes investment agreement, lock-up agreement and other agreements for the strategic investor; (d) established the guarantee of stability for employees, in accordance with State Law No. 17,853/2023, for a period of 18 months from the effective completion of our Proposed Privatization; and (e) recommended the offering of ordinary shares owned by the State of São Paulo to employees. The determination of the minimum share price and the percentage of the State of São Paulo’s stake in our capital share to be sold, as well as the details of the investment and lock-up agreements will be decided at a future meeting of the CDPED.
The CDPED also forwarded to the representatives of the deliberative council of URAE-1, for their first meeting, the drafts of the Concession Agreement for URAE-1, the internal regulation of the deliberative council, and the regional sanitation plan. On April 22, 2024, we published a material fact to inform our shareholders and the market in general about the summoning of URAE - 1 representatives for the first meeting of the deliberative council, which will be held on May 20, 2024, as well as inform that the following documents were delivered to these representatives: (i) Concession Agreement for URAE-1 and its annexes, indicating the role of ARSESP, (ii) draft internal regulation of the deliberative council of URAE-1, and (iii) draft of the regional basic sanitation plan, pursuant to article 17 of Federal Law No. 11,445/2007. For further information, see “Presentation of Financial and Other Information—Proposed Privatization.”
Additionally, the CDPED approved certain amendments to our bylaws, in order to: (a) establish our authorized capital; (b) create the golden share, which will be exclusively held by the State of São Paulo, giving them veto power over proposed changes to: (i) our name and headquarters, (ii) our corporate purpose of providing water and sewage services, and (iii) any provision in our bylaws regarding limits on the exercise of voting rights attributed to shareholders or groups of shareholders; (c) limit the exercise of voting rights to 30% of our voting shares; (d) limit our Board of Executive Officers to the maximum of seven members; (e) establish that our Board of Directors’ appointment will be conducted by means of slate; (f) prohibit the election of more than three members of our Board of Directors by the State of São Paulo; (g) provide that at least three members of our Board of Directors must be considered independent under the Novo Mercado Regulation; (h) create the Eligibility and Compensation Committee, Sustainability and Corporate Responsibility Committee, and Related Parties’ Transaction Committee; (i) enable us to execute indemnity agreements (contratos de indenidade); (j) provide poison pill provisions to be triggered if any shareholder or group of shareholders holds more than 30% of our capital stock; and (k) adapt our bylaws to the best corporate governance practices.
If we fail to fulfill any of these legal requirements or fail to meet the conditions precedent potentially set forth by the Governor of the State of São Paulo, or if market conditions are not met, we will not be able to complete our Proposed Privatization. In addition, we cannot guarantee that our shareholders will approve the changes to our bylaws necessary to implement our Proposed Privatization, such as the restrictions on voting rights and the poison pill. Any failure to consummate our Proposed Privatization may have a material adverse effect on our future prospects and the market price of our common shares and ADRs. In addition, we would have already spent considerable management time on this process and incurred costs in relation to advisers, legal counsels, independent auditors, and others as part of this process.
For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Proposed Privatization—Our controlling shareholder could suspend or terminate the Proposed Privatization. Additionally, our Proposed Privatization may be challenged, which could delay or prevent its consummation.”
Our controlling shareholder could suspend or terminate the Proposed Privatization. Additionally, our Proposed Privatization may be challenged, which could delay or prevent its consummation.
Our controlling shareholder may suspend or terminate our Proposed Privatization in case it determines that certain criteria of, or market conditions for, our Proposed Privatization are not in the public interest. State Law No. 17,853/2023 authorizes our Proposed Privatization. However, the Governor of the State of São Paulo has the constitutional power to suspend or terminate our Proposed Privatization if he decides that it is not in the public interest, for example, if it does not meet certain criteria, such as market conditions.
OurProposed Privatization would bring forward the deadline to meet the Universalization Targets to December 31, 2029. However, in case our Proposed Privatization is not concluded, the original target of 2033 for the universalization of water supply and sanitary sewage set out in the New Legal Framework for Basic Sanitation would be maintained. Additionally, we would still need to comply with the Universalization Targets stipulated in our contracts with the municipalities. Some of our contracts, such as our contract with the city of São Paulo, states that we will have to comply with the Universalization Targets in the city by the 2029 regardless of our Proposed Privatization being consummated. Bringing forward the deadline to achieve the Universalization Targets increases the challenge of meeting them. Failure to comply with the deadline could lead to sanctions being imposed by the regulatory agency, potentially resulting in the forfeiture of the concession. Additionally, the Concession Agreement for URAE-1, which was under public consultation, also introduces the universalization factor, which is a tariff mechanism that penalizes us in the event of non-compliance with the Universalization Targets (“Factor U”). For further information, see “Item 4.B. Business Overview—Tariff Readjustments and Reviews.”
Additionally, the model and other aspects of our Proposed Privatization, such as the legislative proceeding that resulted in the enactment of Law 17,853/2023 by the State of São Paulo, may be or are being challenged by regulatory bodies, consumer groups and other interested parties, and subsequently suspended by the Brazilian courts, which may delay or even prevent the completion of our Proposed Privatization and have adverse legal and reputational effects on us. Further, the Brazilian courts or regulatory bodies may require us to further adjust the structure of our Proposed Privatization, which may impede or delay it. As of the date of this annual report, there are several ongoing lawsuits challenging in court certain aspects of our Proposed Privatization. See “Item 8.A. Consolidated Financial Statements and Other Financial Information—Legal Claims Related to our Proposed Privatization” for further information about legal proceedings related to our Proposed Privatization.
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In addition, the decision of the State of São Paulo government to proceed with our Proposed Privatization may be affected by market conditions and political decisions, which may also adversely affect our Proposed Privatization and operations. Certain politicians are actively opposed to our Proposed Privatization. As a result, if our Proposed Privatization is consummated, it could be challenged by members of opposition parties.
If our Proposed Privatization is consummated, the State of São Paulo will no longer be our majority shareholder, which brings uncertainties that are beyond our control regarding the maintenance of our current program contracts.
On December 8, 2023, Law No. 17,853/2023 of the State of São Paulo authorized our Proposed Privatization. According to the New Legal Framework for Basic Sanitation, in case of a change of control of state-owned companies, the program contracts in force may be replaced by new concession agreements. If the controller of the public company does not express the need to change the term, object or other clauses of the contract at the time of the privatization, prior approval for the privatization by the public entity contractor is not required. However, if contractual changes are proposed by the State of São Paulo, a proposal to replace the existing contracts must be submitted to the contracting municipalities, which will have 180 days to decide whether to agree to the revised terms. Failure to do so within this period will constitute consent to the proposed contractual changes.
In this respect, the SEMIL published, on February 15, 2024, Public Consultation No. 01/2024, with the objective of collecting contributions on the draft Concession Agreement for URAE-1 to be signed between us and URAE-1, which provides for the proposal of contractual changes and therefore is intended to replace all current contracts with the municipalities covered by URAE-1. The following documents, among others, were also discussed in this Public Consultation: (i) annex II of the Concession Agreement for URAE-1, which contains the technical annexes for all municipalities that are part of URAE-1, and which present the indicators and targets for coverage, losses, and quality of service provision to be followed; (ii) internal regulation of the deliberative council of URAE-1, which aims to regulate the functioning of this council; and (iii) URAE-1 regional sanitation plan, which establishes planning of sanitation actions in line with the principles of the PLANSAB. The Public Consultation No. 01/2024 ended on March 15, 2024, and the SEMIL published a report on the contributions on April 30, 2024. For further information, see “Presentation of Financial and Other Information—Proposed Privatization.”
Some of our program contracts, including the contract with the city of São Paulo, include termination clauses in the event of transfer and/or change of control. These termination clauses are based on paragraph 6, article 13 of Federal Law No. 11,107/2005, which was revoked by article 9 of Federal Law No. 14,026/2020. If the municipalities adopt the understanding that these termination clauses are still effective despite their revocation, and if the current program contracts are not replaced by the Concession Agreement for URAE-1 prior to our Proposed Privatization, the municipalities could declare a termination of their respective program contracts as a result of the completion of our Proposed Privatization, thus adversely affecting our business, financial condition, or results of operations. Further, any reduction in revenues as a result may lead to us no longer being in compliance with the financial covenants contained in our existing financings.
Also, if any municipality with an existing program contract with similar termination provisions decides not to join URAE-1, the termination of their respective program contracts could also be triggered by the completion of our Proposed Privatization, thus adversely affecting our business, financial condition, or results of operations.
Finally, we cannot assure that all the municipalities that as of the date of this annual report are our clients will obtain whenever needed the necessary legislative authorization, have adhered to any URAE and/or will maintain their existing program contracts or execute concession agreements with us. In case municipalities that represent a substantial part of our revenues do not maintain or execute their agreements with us, our business, financial condition, or results of operations may be adversely affected, and we may be prevented from accessing public funding.
Our debentures issuances and financing agreements governing our debt contain change of control provisions that are triggered if the State of São Paulo government ceases to be our controlling shareholder, including in connection with our Proposed Privatization. If we are not able to obtain the necessary waivers or approvals from our debenture holders, bank lenders and/or other creditors, regarding our Proposed Privatization, prior to completion of the Proposed Privatization, those debentures, loans and/or obligations could be subject to acceleration, cross-default, cross acceleration or termination, which could materially adversely affect our financial condition and results of operations.
As of December 31, 2023, the outstanding balance of our indebtedness totaled R$19.5 billion, of which (i) R$7.3 billion relate to debenture issuances in the local market, (ii) R$3.0 billion relate to financing agreements executed with entities such as BNDES, the Brazilian Federal Savings Bank (Caixa Econômica Federal – “CEF”) and the Funding Authority for Studies and Projects (Financiadora de Estudos e Projetos – “FINEP”), and (iii) R$8.4 billion relate to financing agreements executed with multilateral entities, including IFC, IDB Invest, IBRD and JICA, of which R$5.0 billion are guaranteed by the Brazilian government with a counter-guarantee from the State of São Paulo.
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Our debenture issuances contain change of control provisions that will be triggered if our Proposed Privatization is consummated. If we complete our Proposed Privatization but fail to obtain prior waivers from the debenture holders in connection to the Proposed Privatization, we would be subject to acceleration or termination and cross-default or cross acceleration of other financial instruments to which we are party. As of the date of this annual report, the general meetings of the debenture holders of our 27th, 28thand 30th debentures issuances were held, through which the debenture holders granted waivers for our Proposed Privatization subject to certain conditions (such as the payment of a waiver fee, the shareholder structure to take place after the Proposed Privatization and the non-occurrence of rating downgrade event). On April 29, 2024, we called, in the second convocation, the general meeting of the debenture holders of our 26th debenture issuance, and we also expect to call, also in the second convocation, the general meetings of the debenture holders of our 22nd, 23rd, 24th, 25th and 29th debentures issuances expected to be held in May 2024 to obtain the applicable waivers in connection with the Proposed Privatization (in exchange for a waiver fee to be paid to the debenture holders and the fulfillment of the criteria and conditions agreed with the debentures holders). The waiver fee being proposed in the management proposals for the general meetings of the debenture holders to be held in the second convocation, is of 0.10%, to be applied to the updated outstanding balance of the debentures calculated on the date of the general meeting.
At the date of this annual report, we cannot guarantee that the required waivers will be granted by requisite debenture holders within the terms required and waiver fee proposed. If we fail to obtain the required waivers by the requisite debenture holders, or if the waivers are not granted on the terms required for the completion of the Proposed Privatization (in current process of definition), we may need to renegotiate the terms of such required waivers or early redeem certain of those issuances (if permitted), which may affect the timetable for the completion of our Proposed Privatization and materially adversely affect our financial condition and results of operations. In addition, even if the waivers are granted by the debenture holders, in case there is a rating downgrade as a result of our Proposed Privatization this would lead to the early maturity of our debenture issuances.
On March 28, 2024, we sent a notice to the fiduciary agent and to the debenture holders of our 12th debentures issuance, requesting the early redemption of the outstanding balance of those debentures by June 3, 2024, pursuant to the terms and conditions described on the indenture.
In addition to the debentures, certain financing agreements also contain change of control provisions that will be triggered if our Proposed Privatization is consummated. We have sent waiver requests to the lenders under these agreements, and we are currently in negotiations to obtain them.
25.1% of our outstanding financing agreements, namely those executed with the IBRD, IDB Invest and JICA, are guaranteed by the Brazilian government with a counter-guarantee from the State of São Paulo. We have sent waiver requests to these lenders, and approvals are conditioned on the maintenance of the counter-guarantees by the Brazilian government and the State of São Paulo. As of the date of this annual report, we already received the waiver from IBRD, which was granted considering the confirmation of our commitment to perform the obligations under the loan agreements and to achieve the objectives of the related projects, and that the change of control will not affect the validity, terms and conditions of the loan agreements and guarantee agreements. As of the date of this annual report, we have not received confirmation of maintenance of the guarantee and counter-guarantees by the Brazilian government and the State of São Paulo, respectively.
Accordingly, if we are unable to obtain the necessary waivers or approvals regarding our Proposed Privatization from the debenture holders or the lenders or if we do not have sufficient funds to prepay certain of our debts prior to the consummation of our Proposed Privatization, these change of control provisions may be triggered, leading to an acceleration, cross-default, cross-acceleration and/or termination, as applicable, of a significant portion of our outstanding debt, which could have a material adverse effect on our financial condition and results of operations. In addition, any change to the structure of our Proposed Privatization, may require us to obtain further waivers in respect of such changes.
Additionally, if there are any changes to the structure of our Proposed Privatization or the terms under which the waiver requests were prepared within the scope of the debenture issuances and financial contracts indicated above, we will have to request new waivers or approvals from the creditors and the debentures holders, considering the new structure. For more information about our indebtedness, see “Item 5.B. Liquidity and Capital Resources—Indebtedness Financing,” for more information about our Proposed Privatization, see “Presentation of Financial and Other Information—Proposed Privatization,” and for more information about waivers and creditor’s approvals, see “Item 5.B. Liquidity and Capital Resources—Indebtedness Financing—Waivers and Creditor’s Approvals.”
If our Proposed Privatization includes a primary offering of common shares by us, our current shareholders will experience immediate dilution after the offering. In addition, if our Proposed Privatization is consummated, our bylaws will contain provisions that limit the voting rights of all shareholders, including non-Brazilian shareholders, which could prevent or delay transactions that holders of our shares or ADRs may favor.
As of the date of this annual report, it has not been decided whether our Proposed Privatization will include a primary offering of common shares and/or ADSs. If our Proposed Privatization includes a primary offering of common shares and/or ADSs by us, our shareholders will experience immediate dilution after the offering to the extent the offering price per ADS is greater than the book value per share of our common shares.
The absence of a single controlling shareholder or group of controlling shareholders may create difficulties for our shareholders to approve certain transactions, because, among other things, the minimum quorum required by law for the approval of certain matters may not be reached. We and our shareholders may not be afforded the same protections provided by Brazilian Corporate Law against abusive measures taken by other shareholders and, as a result, may not be compensated for any losses incurred. Any sudden and unexpected changes in our management, changes in our corporate policies or strategic direction, takeover attempts or any disputes among shareholders regarding their respective rights may adversely affect our business and results of operations.
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If our Proposed Privatization is consummated, we will no longer have a controlling shareholder that holds more than 50% of our capital stock, which may make us susceptible to shareholder alliances, shareholder conflicts and other events arising from the absence of a controlling shareholder or a controlling group.
If our Proposed Privatization is consummated and certain conditions set forth in Law No. 17,853/2023 are fulfilled, the State of São Paulo will no longer hold, directly or indirectly, at least 50% plus one voting common shares representing our share capital. Also, the laws governing our Proposed Privatization provide that the State of São Paulo government will have a golden share. This golden share, which will be exclusively held by the State of São Paulo, will give them veto power over proposed changes to: (i) our name and headquarters; (ii) our corporate purpose of providing water and sewage services; and (iii) any provisions in our bylaws regarding limits on the exercise of voting rights attributed to shareholders or groups of shareholders. For more information, see “Presentation of Financial and Other Information—Proposed Privatization.”
On April 26, 2024, we called an Extraordinary Shareholders’ Meeting to be held on May 27, 2024, to approve changes to our bylaws conditional upon the consummation of our Proposed Privatization. If approved and our Proposed Privatization is consummated, our bylaws will set forth, inter alia, an authorized capital provision, the golden share terms and conditions, a provision that will have the effect of avoiding the concentration of more than 30% of our common voting shares in the hands of one or a small group of shareholders, as well as poison pill provisions to be triggered if any shareholder or group of shareholders hold 30% or more of our capital stock, pursuant to the Law No. 17,853/2023 and approved by the CDPED on April 17, 2024.
The absence of a controlling shareholder or control group holding more than 50% of our capital stock may hinder the decision-making procedure within the scope of our corporate activities, giving rise to conflicts between shareholders and other events arising from the absence of a controlling shareholder or control group. In addition, we and our shareholders may have greater difficulties in identifying those responsible for situations of abuse of voting rights and conflicts of interest.
The absence of a controlling shareholder or control group holding more than 50% of our capital stock may leave us susceptible to the emergence of a group of shareholders acting jointly (even if without the execution of a formal shareholders' agreement), which will exercise control and, consequently, have decision-making power over our activities. If this occurs, we may experience instability or suffer sudden and unexpected changes in corporate and strategic policies, including through the replacement of its managers.
Further, if our Proposed Privatization is consummated, we cannot assure you that our current management will be reelected or what changes to our policies and corporate strategy any new management might implement. Any sudden or unexpected instability or change in our management, business plan and strategic direction, or dispute between shareholders concerning their respective rights, may adversely affect our business and results of operations.
Risks Relating to Brazil
The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions, could adversely affect us and the market price of our common shares and ADSs.
The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, changes in interest rates, tax policies, price and tariff controls, foreign exchange rate controls, currency devaluation or appreciation, capital controls and limits on imports.imports and exports. Our business, financial condition and results of operations, as well as the market price of our common shares or ADSs, may be adversely affected by changes in public policy at federal, state and municipal levels with respect to public tariffs and exchange controls, as well as other factors, such as:
· | expansion or retraction of the Brazilian economy; |
· | the regulatory environment related to our business operations and concession agreements; |
· | interest rates and monetary policies; | |
· | exchange rates and exchange controls and restrictions on remittances abroad; |
· | currency fluctuations; |
· | increased unemployment; |
· | availability of credit; |
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· | changes in labor and private pensions regulations; |
· | political elections and social and political instability; |
· | inflation; |
· | liquidity of the Brazilian capital and lending markets; |
· | tax and regulatory policies and laws; |
· | commodity prices; | |
· | modifications to laws and regulations according to political, social and economic interests; | |
· | import and export controls; | |
· | public debt; | |
· | economic, political and social instability; | |
· | water and electricity shortages and rationing; |
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· | other political, foreign policy, social and economic developments in or affecting Brazil. |
Uncertainty as to whether the Brazilian government will implement changes in policy or regulation affecting these or other factors in the future, may affect economic performance and contribute to economic uncertainty in Brazil, as well as higher volatility in the Brazilian capital markets and the securities of Brazilian issuers, which may have an adverse effect on us. our activities and results of operations, and may also adversely affect the trading price of our common shares and ADSs.
We cannot predict the measures that the federalBrazilian government will take due to mounting macroeconomic pressures or otherwise. Economic and political instability and uncertainty has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian capital markets and the securities of Brazilian issuers, which may adversely affect us.us and our common shares and ADSs. For more information, see “Item 3.D. Risk Factors—Risks Relating to Brazil—Ongoing political instability has adversely affected the Brazilian economy and may lead to an economic slowdown, which may have an adverse effect on our financial condition and results of operations.” We cannot predict what future policies will be adopted by current or future Brazilian governments, or whether these policies will result in adverse consequences to the Brazilian economy or cause an adverse effect on us.
Changes in Brazilian tax laws or conflicts in their interpretation may adversely affect us.
The Brazilian government has frequently discussed and implemented various changes to the tax regime, including entering into or modifying tax treaties, that may affect companies and their customers. These changes include changes to the current tax rates, the creation of temporary or permanent taxes and/or the cancellation of benefits in effect, the proceeds of which are allocated to government projects. These changes may result in increases in our tax liabilities, which could adversely affect our profitability and results of operations. In addition, certain tax laws may be interpreted by tax authorities in a way that is controversial. As a result, we may be adversely affected in the event of a different interpretation from the one we currently reply upon to carry out our transactions. We cannot assure that we will be able to maintain our projected cash flows and profitability following any increases in Brazilian taxes applicable to our operations, which may adversely affect our results of operations and financial condition.
Brazil is currently undergoing tax reforms which will significantly impact the business environment, such as the recent constitutional reform of taxes on consumption of goods and services.
On December 15, 2023, the National Congress approved the final wording of Constitutional Amendment Bill (PEC) No. 45/2019, which was enacted on December 20, 2023, as Constitutional Amendment No. 132/2023 (“EC 132”). EC 132 substantially changes the way Brazil taxes goods and services by replacing several of the current “indirect taxes” (ICMS, IPI, ISS and PIS/Cofins) by three new ones: a Goods and Services Tax (IBS), a Contribution on Goods and Services (CBS) and an Excise Tax (IS).
EC 132 will not produce immediate effects, as there is a seven-year transition period, from 2026 to 2032, for the full implementation of the tax reform on consumption taxes. The current indirect taxes (ICMS, IPI, ISS and PIS/Cofins) will coexist and will gradually be replaced by IBS, CBS and IS until completion of the tax reform by 2033.
The next step is the regulation of EC 132 through legislation (complementary and ordinary laws). The Executive Branch must present to the National Congress in the half of 2024 (180 days as of the enactment of EC 132) the bills of law introducing the framework for the new taxes created by the tax reform (IBS, CBS and IS). It is expected that the standard rate for the sum of IBS and CBS, to be generally levied on any type of services and goods (with some limited exceptions), would be around 27%.
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We also highlight that a tax reform on income and payroll taxation is on the agenda of the Brazilian government. EC 132 provides that the executive branch must submit to the National Congress by the first half of 2024 (90 days as of the enactment of EC 132) bills of law for reforming income and payroll taxation. As of the date of this annual report, the executive branch has not yet submitted the respective bills of law.
An attempt to reform income taxation was submitted through Bill of Law No. 2,337/2021. Although the House of Representatives approved this bill in September 2021, it has since stalled in the Senate. This initiative proposes significant changes to the income tax legislation, such as (i) repealing the exemption from income tax on the distribution of dividends by Brazilian companies (and imposing a general 15% income tax rate), (ii) the gradual decrease of the combined Brazilian corporate income tax rates, and (iii) extinguishing the possibility of deducting expenses from the payment of interest on shareholder’s equity (juros sobre o capital próprio – JCP). It is likely that the income and payroll taxation reform resulting from EC 132 will foresee similar provisions to those attempted in Bill of Law No. 2,337/2021.
The impacts caused by changes in tax regimes cannot yet be properly measured. There may be an increase in the tax burden on certain sectors and activities, such as basic sanitation, which could impact our business, results of operations and financial condition. We cannot predict the effects of changes in Brazilian tax laws, and if they may have an adverse effect on our business, financial condition or results of operations.
Ongoing political instability has adversely affected the Brazilian economy and may lead to an economic slowdown, which may have an adverse effect on our financial condition and results of operations.
Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies.
Brazil has experienced amplified economic and political instability, as well as heightened volatility, as a result of variousseveral ongoing investigations by national and foreign agencies responsible for corruption and cartel investigations, such as the Brazilian Federal Prosecutors’ Office (Ministério Público Federal – “MPF”), the Brazilian Federal Police (Polícia Federal), the CVM, and other Brazilian public entities who are responsible for corruption and cartel investigations. In addition, certain foreign entities, such as the U.S. Department of Justice and the SEC, and the Office of the Attorney General of Switzerland (Bundesanwaltschaft), have also conducted and still conduct their own investigations.among others. These investigations have negatively impacted the Brazilian economy and political environment and have contributed to a decline in market confidence in Brazil. In addition, they may lead to further allegations
Allegations, trials and charges againstconvictions of Brazilian federalgovernment and State of São Paulostate government officials and senior management of Brazilian industry.
Numerous elected officials, public servants and executives and other personnel of major companies have been subject to investigation, arrest, criminal charges and other proceedings. There can be no assurance that other federal or state officials or senior management of Brazilian industry will not be charged with corruption-related crimes or other investigations into corruption. Additional allegations, trials and convictions may lead to political instability and a decline in confidence by consumers and foreign direct investors in the stability and transparency of the Brazilian government and Brazilian companies and may have a material adverse effect on Brazil’s economic growth, on the demand for securities issued by Brazilian companies, and on access to the international financial markets by Brazilian companies.
Government interference inFurthermore, the economy, orPresident has the results of future elections may impact adversely the macroeconomic indicators mentioned (see “Item 3.D. Risk Factors—Risks Relatingpower to Brazil—The Brazilian government has exercised,impose policies and continues to exercise, significant influence overissue governmental acts (Medidas Provisórias) regarding the Brazilian economy. This influence, as well as Brazilian politicaleconomy that may affect our operations and economic conditions, could adversely affect us andfinancial performance. We cannot predict what policies the market price of our common shares and ADSs”), affecting market activity and us.
Also, presidential electionsPresident will be heldimpose, much less whether such new policies or changes in Brazil in 2022. Historically, in election years, especially presidential elections, there has been political instability, which if repeated, maycurrent policies will have an adverse effect on our business or the Brazilian capital markets, resultingeconomy. Additionally, the uncertainties regarding the Brazilian government’s ability to implement changes related to monetary, fiscal and social security policies, especially given that the federal legislative branch is currently controlled by opposition parties, may contribute to economic instability. Any difficulty the Brazilian government has in reduced levelsgaining a majority in the National Congress could result in a standoff in the National Congress, political distress and massive demonstrations and/or strikes, which could adversely affect our operations. These uncertainties and any new measures that may be implemented may increase the volatility of foreign investment in Brazil.the Brazilian securities market.
AnyHistorically, political crises have affected investor confidence as well as public opinion, and any of the above factors may create additional political uncertainty, which could harm the Brazilian economy and, consequently, our business, results of operations, and financial condition and the trading price of our common shares and ADSs.
Inflation and the Brazilian government’s measures to combat inflation may contribute to economic uncertainty in Brazil, adversely affecting us and the market price of our common shares or ADSs.
Brazil has historically experienced high rates of inflation and the Brazilian government’s measures to combat it have had and may in the future have significant effects on the Brazilian economy and our business, financial condition and results of our operations. Tight monetary policies with high interest rates may restrict Brazil’s growth, the availability of credit and our cost of funding. Conversely, other Brazilian governmental actions, including lowering interest rates, intervention in the foreign exchange market and actions to adjust or fix the value of the real, may trigger increases in inflation. Brazil’s General Price Index (Índice Geral de Preços – Mercado – “IGP-M”), or IGP-M index,used to measure the country’s inflation, recorded deflation of 3.18% for the year ended December 31, 2023, inflation of 5.45% for the year ended December 31, 2022 and inflation of 17.78% in 2021, 23.1% in 2020, and 7.30% in 2019.for the year ended December 31, 2023. The Special Clearing and Settlement System (Sistema Especial de Liquidação e Custódia), or SELIC, the Brazilian federal funds rate and official overnight interest rate in Brazil, was 9.15%11.75%, 1.90%13.75% and 4.40% at9.25% in the end ofyears ended December 31, 2023, 2022 and 2021, 2020 and 2019, respectively. However, the COPOM has frequently adjusted the interest rate in situations of economic uncertainty and to achieve objectives under the economic policy of the Brazilian government. For example, in response to the COVID-19 outbreak, the COPOM reducedSince year-end 2023, the SELIC target rate has gradually been reduced to 2% between August 2020 and March 2021, after which it was raised numerous times, most recently to 11.75% to mitigate the increase in inflation, 10.75%, where it remains as of the date of this annual report. Inflation, along with government measures to combat inflation and public speculation about possible future government measures, has had significant negative effects on the Brazilian economy, and contributed to economic uncertainty in Brazil and heightened volatility in the Brazilian securities market, which may have an adverse effect on us if such policies are reinstated.
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The Brazilian annual inflation rates, as measured by the Amplified Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo), or IPCA, were 10.06%4.62%, 4.52%,5.79% and 4.31% during10.06% in the years ended December 31, 2023, 2022 and 2021, 2020 and 2019, respectively. TheIn 2021, the IPCA in 2021 reached its highest accumulated annual inflation since 2015, according to data provided by IBGE. In 2022, the Brazilian Institute of Geographyaccumulated inflation slowed down compared to 2021, and Statistics (Instituto Brasileiro de Geografia e Estatística - IBGE).it continued to slow down in 2023. However, the inflation rates in the years ended December 31, 2023, 2022 and 2021 were all above the predetermined and previously announced target ranges, which were 5.31%, 5.03% and 3.32%, respectively. If Brazil continues to experienceonce again experiences substantial high inflation or deflation in the future, our business, financial condition or results of operations may be adversely affected, including our ability to comply with our obligations. In addition, a substantial increase in inflation may weaken investors’ confidence in Brazil, causing a decrease in the market price of our common shares or ADSs.
Exchange rate instability and developments and the perception of risk in other countries, especially in the United States and in emerging market countries, may adversely affect us, our foreign currency denominated debt and the market price of our common shares or ADSs and our ability to service our foreign currency denominated obligations.
Brazil’s currency has been characterized historically by high degrees of volatility and has depreciated periodically in relation to the U.S. dollar and other foreign currencies during recent decades. At different points over this period, the Brazilian government has implemented various economic plans and exchange rate policies, including sudden devaluations, periodic mini devaluations during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets.
The current floating exchange rate system has also contributed to significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and other currencies. As of December 31, 2019, the exchange rate was R$4.03 to US$1.00, representing a depreciation of 4.0% as compared to the rate prevailing as of December 31, 2018. As of December 31, 2020, the exchange rate was R$5.19 to US$1.00, representing a depreciation of 28.9% as compared to the rate prevailing as of December 31, 2019. Further, duringDuring 2021, the real was very volatile and depreciated by 7.4% against the U.S. dollar by year-end. During 2022, there was an appreciation of the real by 6.5% against the U.S. dollar and by 18.4% against the Japanese Yen. As of April 22, 2022,December 31, 2023, the commercial selling rate as reported by the Central Bank was R$4.734.8413 per US$1.00. As of April 24, 2024, the commercial selling rate as reported by the Central Bank was R$5.1592 per US$1.00. There can be no assurance that the real will not depreciate further against the U.S. dollar.
Exchange rate fluctuations will affect the U.S. dollar equivalent of the real price of our common shares on the São Paulo Stock Exchange (B3 S.A. – Brasil, Bolsa, Balcão, or “B3,”), as well as the U.S. dollar equivalent of any distributions we make in reais with respect to our common shares.
Depreciation of the Brazilian real against the U.S. dollar has created inflationary pressures in Brazil and has caused increases in interest rates, which could negatively affect the growth of the Brazilian economy as a whole and harm our financial condition and results of operations, curtail our access to financial markets and prompt government intervention, including recessionary governmental policies. Depreciation of the Brazilian real against the U.S. dollar could also lead to decreased consumer spending, inflationary pressures and reduced economic growth.
In the event of a significant devaluation of the Brazilian real in relation to the U.S. dollar or other currencies, our ability to meet our foreign currency denominated obligations could be adversely affected because our tariff revenue and other sources of income are denominated solely in reais. In addition, because we have debt denominated in foreign currencies, any significant devaluation of the real will increase our financial expenses as a result of foreign exchange losses that we must record. This willwould also increase our total debt, whatwhich could lead us to breach any debt/EBITDA covenants we are subject to in certain financings. We had total foreign currency denominated debt of R$3,296.1 million2.7 billion as of December 31, 2021,2023, and we anticipate that we may incur additional amounts of foreign currency denominated debt in the future. We doIn December 2023, our Board of Directors approved our Hedging Policy, which is available on our website but not currently have anyincorporated herein, and in April 2024, we entered into derivative instruments in place(plain vanilla swaps), effective from April 2024 until December 2024, to fully protect us against a devaluation of the real against the U.S. dollar or the Yen. However, we cannot guarantee that we will be able to renew these derivative instruments in relationthe future or, if we are able to any foreign currency. renew them that it would be on the same terms or at a price that is equally as favorable to us.
A devaluation of the real may adversely affect us and the market price of our common shares or ADSs. For more information, see Note 5.1(a) to our 2021 financial statements.2023 Consolidated Financial Statements. Further, the market price of securities of Brazilian companies is affected to varying degrees by economic and market conditions in other countries, including the United States, China and other Latin American and emerging market countries. Although economic conditions in these countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market price of securities of Brazilian issuers. Crises in other emerging market countries or economic policies of other countries may diminish investor interest in securities of Brazilian issuers, including ours. This could adversely affect the market price of our common shares or ADSs and could also make it more difficult for us to access the capital markets and finance our operations in the future, on acceptable terms or at all.
In the past, the adverse development of economic conditions in emerging markets resulted in a significant flow of funds out of Brazil and a decrease in the quantity of foreign capital invested in Brazil. Changes in the prices of securities of public companies, lack of available credit, reductions in spending, general slowdown of the global economy, exchange rate instability and inflationary pressure may adversely affect, directly or indirectly, the Brazilian economy and securities market. Global economic downturns and related instability in the international financial system have had, and may continue to have, a negative effect on economic growth in Brazil. Global economic downturns reduce the availability of liquidity and credit to fund the continuation and expansion of business operations worldwide.
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In addition, global financial crises have caused, and in the future may again cause, significant consequences to Brazil, such as stock and credit market volatility, unavailability of credit, higher interest rates, a general slowdown of the world economy, volatile exchange rates, and inflationary pressure, among others, which may, directly or indirectly, materially and adversely affect us and the price of securities issued by Brazilian companies, including our common shares and ADSs.
Downgrades in Brazil’s credit rating could adversely affect our credit rating, the cost of our indebtedness and the trading price of the securities.our common shares and ADSs.
Rating agencies regularlyperiodically evaluate Brazil and its sovereign ratings, taking into accountbased on a number of factors, including macroeconomic trends, fiscal and budgetary conditions, indebtednessdebt metrics and the prospect of changechanges in any of these factors. Downgrades in Brazil’s credit rating can lead to downgrades in our credit rating and increase the cost of our indebtedness as investors may require a higher rate of return to compensate a perception of increased risk. In January 2018, StandardBrazil lost its investment-grade status from all three major rating agencies (Standard & Poor’s, loweredMoody’s and Fitch) in 2015 and, consequently, the trading prices of securities in the Brazilian debt and equity market were negatively affected.
As of the date of this annual report, Brazil’s sovereign credit rating to BB-ratings were BB with a stable outlook, which it confirmed in November 2021. In February 2018, Fitch downgraded Brazil’s credit rating to BB-, which it reaffirmed in December 2021 with a negative outlook. Moody’s rating is Ba2 with a stable outlook and BB with a stable outlook by S&P, Moody’s and Fitch, respectively, which was reaffirmedis below investment grade.
Any further downgrade in December 2021.
As a result of the downgrading, the trading price of securities of Brazilian issuers was adversely affected. An extension or worsening of the current Brazilian recession could lead to additional downgrading.
We cannot assure you that rating agencies will maintain Brazil’s sovereign credit ratings, and any further downgrading of Brazil’s sovereign credit ratingsrating may adversely affect theincrease investors’ perception of risk on the country and, consequently, of investorsBrazilian companies (including us), which may increase future funding costs and as a result, increase of the future debt issuances costnegatively affect interest and profit margins, impacting the trading price of our common shares and ADSs.
Brazil’s economy is vulnerable to external and internal shocks, which may have a material adverse effect on Brazil’s economic growth and on the trading markets for securities.
Brazil’s economy is vulnerable to external shocks, including adverse economic and financial developments in other countries. For example, an increase in interest rates in the international financial markets may adversely affect the trading markets for securities of Brazilian issuers. In addition, a drop in the price of commodities produced by Brazil could adversely affect the Brazilian economy. A decline in the economic growth or demand for imports of any of Brazil’s major trading partners could also have a negative impact on Brazil’s exports and adversely affect Brazil’s economic growth.
In addition, because international investors’ reactions to events occurring in one emerging market country sometimes produce a “contagion” effect, in which an entire region or class of investment is disfavored by international investors, Brazil could be adversely affected by negative economic or financial developments in other countries. Brazil has been adversely affected by such contagion effects on several occasions, including following the 1998 Russian crisis, the 2001 Argentine crisis and the 2008 global economic crisis. We cannot assure that any situations like those described above will not negatively affect investor confidence in emerging markets or the economies of Latin America, including Brazil.
In February 2022,Global markets are experiencing volatility following the Russian president Vladimir Putin announced the beginningescalation of a special military operationgeopolitical tensions, in the Donbas regionparticular in eastern Ukraine, which resulted in an armed conflict between these countries. Since then, other European countries and the United States have imposed packages of financial and economic sanctions that, in various ways constrain: (i) transactionsconnection with numerous Russian entities and individuals; (ii) transactions in Russian sovereign debt; and (iii) investment, trade, and financing to, from, or in certain regions of Ukraine. In addition, the military conflictconflicts between Russia and Ukraine has increased many commodity prices, such as the prices of energy and oil. While the invasion continues toward major Ukrainian cities,also between Israel and Hamas. Economic sanctions imposed by the United States, the European Union, and the United Kingdom and other jurisdictions are likelycountries as a direct consequence of these conflicts may impact supply chains, lead to impose additional material,market disruptions, including significant volatility in commodity prices and the global financial system, including through credit and economic, sanctionscapital markets instability.
The escalation of the Russia-Ukraine and export controls, including againstIsrael-Hamas conflicts may increase geopolitical tensions around the Russian energy sector, in which the country is an important global producer. Such actionsworld and sanctions have impactedcause further disruption to international trade, industrial supply chains and may continue to impact adversely and materially the Russian economy and, consequently, the economies of other countries that maintain commercial relations with Russia (including Brazil). Additionally, it is not possible to predict whether additional sanctions against Russia will be applied and, if so, to what degree these sanctions will impact Brazil’s economy. Nor is it possible to predict the extent of Russian reaction to these sanctions. All this tension caused by the conflict in Ukraine has already triggered an inflationary process on commodities (mainly oil),transport, increase market price volatility, which may significantly impact the business and the market price of the shares of companies all over the world, including us. Further, this conflict has caused substantial daily oscillations in the global capital markets (including in Brazil), which may have a material adverse effect onadversely affect our business and financial performance, including through higher volatility in foreign currency exchange rates, higher inflation rates in Brazil,cost of operations, as well as increases in exchange rates.limit our ability to obtain foreign financing to fund our operations and capital expenditures.
Brazil’s economy is also subject to risks arising from the development of several domestic macroeconomic factors. These include general economic and business conditions of the country, the level of consumer demand, the general confidence in the political conditions in the country, present and future exchange rates, the level of domestic debt, inflation, interest rates, the ability of the Brazilian Governmentgovernment to generate budget surpluses and the level of foreign direct and portfolio investment.
Our operating conditions have been, and will continue to be, affected by the growth rate of GDPgross domestic product (“GDP”) in Brazil, because of the correlation between GDP growth and water demand. Therefore, any change in the level of economic activity may adversely affect the liquidity of, and the market for, our securities and consequently our financial conditions and the results of our operations.
Disruption or volatility in global financial and credit markets could have a material adverse effect on us.
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Volatility and uncertainty in global financial and credit markets have generally led to a decrease in liquidity and an increase in the cost of funding for Brazilian and international issuers and borrowers. Such conditions may adversely affect our ability to access capital and liquidity on financial terms acceptable, if at all. If we are unable to access capital and liquidity on reasonable financial terms acceptable to us or at all, our financial condition and results of operations may be adversely affected. In addition, the economic and market conditions of other countries, including the United States, countries in the European Union and emerging markets, may affect the volume of foreign investments in Brazil. If the level of foreign investment declines, our access to capital may likewise decline, which could negatively affect our business, ability to take advantage of strategic opportunities and, ultimately, the trading price of our ADSs.
Risks Relating to Our Control by the State of São Paulo
We are controlled by the State of São Paulo, whose interests may differ from the interests of non-controlling shareholders, including holders of ADSs.
As the State of São Paulo state government owns the majority of our common shares, it is able to control the election of a majority of the members of our Board of Directors and appoint our senior management and with that determine our operating policies and strategy. As of December 31, 2021,2023, the State of São Paulo owned 50.3% of our outstanding common shares. In addition, pursuant to
Our operations affect the commercial, industrial, and social development policies promoted by the State Constitution of São Paulo, and the GovernorState of São Paulo may pursue some of its macroeconomic and social objectives through us. Therefore, we may, subject to legal and bylaws limitations, engage in activities that give preference to the legal representativeobjectives of the State of São Paulo rather than to our own economic and business objectives, which may incur costs or engage in transactions that may not necessarily meet the interest of our controlling shareholder, is the competent authority to make these decisions.other investors. Both through its control of our Board of Directors as well as by enacting State decrees, the State of São Paulo has, in the past, directed our company to engage in business activities and make expenditures that promoted political, economic or social goals, that did not necessarily enhance business, financial condition or results of operations. For example, the State of São Paulo issued Decree No. 64,879/2020 in March 2020 setting out emergency measures as a result of the coronavirusCOVID-19 outbreak, including exempting customers under the “Residential Social” and “Residential Favela”Vulnerable” categories from paying water and sewage bills between March and September of 2020, for all Municipalitiesmunicipalities we serve. This exemption was extended until September 15, 2020. The São Paulo state government may direct our company to act in this manner again in the future, depending on the evolution
As of the pandemic indate of this annual report, the State of São Paulo. These decisions by the State may not be in the interests of our non-controlling shareholders, including holders of ADs.
The State of São Paulo has the power to appoint up to 9 out of the 11 members of our Board of Directors and, through them, influence the choice of a majority of the executive officers responsible for our day-to-day management. Consequently,management, and consequently, the State of São Paulo is empowered to approve most matters prescribed by law. We cannot guarantee that there will not be changes toAt our Board of Directors or Executive Officers and whether such changes may have a material adverse effectOrdinary General Shareholders’ Meeting held on our business, financial condition or results of operations, especially during new elections periods.
Our controlling shareholder is currently discussing proposals for our corporate reorganization. We cannot guarantee that any potential reorganization will not have a material adverse effect on our business, financial condition or results of operations.
On September 29, 2021, the State Privatization Program’s Board (Conselho Diretor do Programa Estadual de Desestatização - CDPED), which has authority over our corporate reorganization plan, in view of the New Sanitation Regulatory Framework (Federal Law No. 14,026/2020), as well as State Law No. 17,383/2021, which established the Regional Unit for Drinking Water Supply and Sewage Services forApril 25, 2024, the State of São Paulo unanimously resolved: (i)appointed 9 out of the 11 elected members, of which 5 members were elected as independent members pursuant to recommendFederal Law No. 13,303/2016 (including the hiring byChairwoman of the Treasury and Planning Secretariat (Secretaria da Fazenda e Planejamento do Estado deBoard of Directors).
Additionally, the State of São Paulo), government, as our controlling shareholder, may take measures related to business planning, strategies, acquisitions, asset disposals, partnerships, financings or similar transactions, that may be contrary to the interests of other minority shareholders, including ADR holders. However, if our Proposed Privatization is consummated, the interest of the International Finance Corporation – IFC,State of São Paulo government will be diluted and the exercise of its voting rights will be limited to provide consulting services toonly 30% of our voting shares. Also, as provided in State Law No. 17,853/2023, which approved our Proposed Privatization, if our Proposed Privatization is consummated, the State consisting in the identification and analysis of possible alternatives for restructuring our share capital; and (ii) at each relevant stage of the work to be carried out by the IFC, the matter should return to the CDPED for evaluation and continuation. As of the date of this annual report, a decision has not been made on the model for our potential corporate reorganization. Also, election for state governorSão Paulo government will be held in 2022 which leadentitled to further uncertainty about any future plans fora preferential share with veto power (referred to as a golden share) over proposed changes to: (i) our name and headquarters; (ii) our corporate reorganization. We cannot assure that CDPED will give us guidance on our potential corporate reorganization, the termspurpose of such guidance, or that any potential reorganization will not have a material adverse effect on our business, financial condition or results of operation. See “—Regulatory Risks—Current regulatory uncertainty, especially with regard to the New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.”
We are owed some substantial unpaid debts. We cannot assure you as to when or whether we will be paid.
Historically, the State and some State entities have delayed payment of substantial amounts owed to us related toproviding water and sewage services. Asservices; and (iii) any provisions in our bylaws regarding limits on the exercise of December 31, 2021, the State owed us R$76.6 million for water and sewage services. Additionally, the State also owes us substantial amounts relatedvoting rights attributed to reimbursementsshareholders or groups of state-mandated special retirement and pension payments that we make to some of our former employees for which the State is required to reimburse us.
With respect to payment of pensions on behalf of the State, we had a contested credit amount of R$1,375.1 million as of December 31, 2021. We do not record this contested amount as a reimbursement credit for actuarial liability due to the uncertainty of payment by the State. We also had an uncontested credit amounting to R$741.9 million which is recorded as related-party receivables. See note 11(a) to our 2021 financial statements.
In addition, as of December 31, 2021, we had a provision for an actuarial liability in the amount of R$2,192.1 million with respect to future supplemental pension payments for which the State does not accept responsibility.
In addition, certain Municipalities and other government entities also owe us payments. See “—Risks Relating to Our Business— We may face difficulties in collecting overdue amounts owed to us by municipal government entities.” We cannot assure you when or if the State and such Municipalities will pay the contested credit amounts, which are still under discussion, and the remaining overdue amounts they owe us. The amounts owed to us by the State, Municipalities and other government entities for water and sewage services and reimbursements for pensions paid may increase in the future.shareholders.
Our right to withdraw water from the Guarapiranga and Billings reservoirs is being challenged judicially by minority shareholders of EMAE.
We withdraw water for use in the São Paulo metropolitan region from the Guarapiranga and Billings reservoirs. Empresa Metropolitana de Águas e Energia S.A. (“EMAE”), or EMAE, a company that is also controlled by the State of São Paulo (although it is in the process of being privatized, with a public auction of shares held by the State of São Paulo having already taken place), has a concession to produce hydroelectric energy using water from the same reservoirs. EMAE commenced various lawsuits against us in the past seeking compensation for the water we withdraw from these reservoirs. Those lawsuits have now been settled by way of an agreement between EMAE and our company.
However, on April 11, 2016, we were also named in a separate lawsuit filed by minority shareholders of EMAE against the State of São Paulo, as controlling shareholder of EMAE. The minority shareholders are seeking an order to require the State of São Paulo to stop us from withdrawing water from the reservoirs without paying compensation to EMAE, and to allow EMAE to pump water from the reservoirs for its hydroelectric facility.facilities. The plaintiffs allege that the State of São Paulo, in its capacity as controlling shareholder of EMAE, has acted unduly to EMAE’s detriment and in favor of our company.favor. This lawsuit was dismissed, and is currently underan appeal was filed, but the Court upheld the dismissal of the claim stating that the State of São Paulo operated in compliance with the legal system and in the public interest. A further appeal was filed with the higher courts on March 8, 2023. Both the extraordinary appeal and the special appeal were dismissed, and an interlocutory appeal was filed against both decisions. As of the date of this annual report, the lawsuit has been received by the plaintiffs.Brazilian Superior Court of Justice (Superior Tribunal de Justiça – “STJ”), which has not handed down its judgment.
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In addition, on August 7, 2017, we were named in a new lawsuit against us, EMAE and the National Electric Energy Agency (Agência Nacional de Energia Elétrica, or ANEEL) – “ANEEL”), brought by Alvaro Luiz de Lima de Alvares Otero, another minority shareholder of EMAE, requesting the annulment of ANEEL’s order approving the settlement agreement mentioned above, as well as our condemnation for indemnifying EMAE for damages suffered by EMAE. The plaintiff alleges that the order is illegal and harmful, jeopardizing the operational viability of the Henry Borden hydroelectric power plant, as well as the energy security of the State of São Paulo, the Southeast region of Brazil and Brazil as a whole. The judge dismissed this lawsuit without judgment on the merits, butmerits. As of the date of this decision is currently being appealed.
annual report, we are awaiting judgment of the plaintiff’s appeal.
The settlement agreement between EMAE and us mentioned above does not necessarily terminate the separate lawsuits.
If one of the ongoing lawsuits by minority shareholders of EMAE requires the State of São Paulo to make a different decision regarding water use from what was agreed between EMAE and the State of São Paulo, our ability to withdraw water from the Guarapiranga and Billings reservoirs may be compromised. If we were no longer able to withdraw water from these reservoirs, we would have to transport water from locations further away, which would increase our water transportation costs and may affect our ability to provide adequate service in the region, which may have an adverse effect on our financial condition and results of operations. In addition, we may be ordered to pay any indemnity to EMAE if the agreement is judicially invalidated, which could have material adverse effects on our financial condition and operating results. SeeFor more information, see “Item 7. Major Shareholders and Related Party Transactions.”
Transactions with related parties, including as part of our Proposed Privatization, may not have comparable market terms available and may not be entered into on an arm’s length basis, which could expose us to lawsuits and affect our financial results.
We are a company controlled by the State of São Paulo and certain transactions that we enter into with companies controlled by the State of São Paulo or governmental entities have no comparable market terms available. Additionally, we cannot guarantee that these transactions have been or will be entered into on an arm’s length basis. This risk will remain even after the consummation of our Proposed Privatization because the State of São Paulo will remain our significant shareholder.
Furthermore, we must comply with Brazilian antitrust and competition regulations, as well as with the disclosure requirements of the CVM, the SEC, and the stock exchanges on which our securities are listed. Any noncompliance with applicable requirements relating to related party transactions could adversely affect our financial condition, may result in regulatory penalties and may expose us to lawsuits from third parties.
Risks Relating to Our Business
Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the outbreak of COVID-19.
Our financial and operating performance may be adversely affected by pandemics such as COVID-19, as well as other catastrophes and health epidemics. The impact of the COVID-19 pandemic on the global economy and financial markets has been significant in 2020 and continued in 2021.
In late December 2019 the outbreak of a new contagious disease originated in Wuhan, Hubei province of China, was reported to the WHO. The SARS-CoV-2 strain of the coronavirus virus was identified, with cases and fatalities soon confirmed in multiple provinces in China, as well as in several other countries. On March 11, 2020, the WHO confirmed that its spread and severity had escalated to the point of a pandemic. Coronavirus cases have been diagnosed in virtually every country, including Brazil, and travels have been suspended or restricted by certain airlines and governments. Further, extended shutdowns of certain businesses and disruptions in financial markets have been reported globally.
In the second quarter of 2020 and partially in 2021, the São Paulo state government decreed a quarantine throughout the State, restricting business activities in order to avoid the accelerated spread of COVID-19. We experienced a direct impact on revenues as a consequence of the change in the consumption mix, due to the increase in volumes in the residential category and a reduction in the public, commercial and industrial categories which have higher tariffs, leading to a reduction in the total average tariff, in addition to increases in delinquencies, which continued through 2021. Accordingly, these changes in consumption patterns impacted the total volume of water billed and the average tariff, which had an impact on our revenues and results of operations.
In 2020, total volume in the retail category increased by 0.9%. If the categories are considered separately, the total volume of water billed in the residential category increased by 2.6%, whereas the commercial, industrial and public categories were strongly impacted by new consumption patterns, leading to a decrease in consumption of 9.5%, 6.1% and 18.8%, respectively. This pattern of consumption caused material effects on our results of operations and financial condition, particularly as the prices charged to customers in the residential category are lower than in the commercial, industrial and public categories. In 2020, our revenues from the residential sector were also affected as consumers in the “Residential Social” and “Residential Favela” categories were exempt from the payment of water and sewage bills for all Municipalities we serve from April 1, 2020, until September 15, 2020. Due to the approval of a state of public calamity mentioned above, the tariff readjustment published by ARSESP in April was postponed and the tariff readjustment of 3.4026%, which included a compensatory adjustment for the postponement of the annual tariff readjustment, was only applied on August 15, 2020.
Additionally, in the context of the COVID-19 pandemic, on February 3, 2021, our Board of Executive Officers approved certain measures for commercial clients aiming to help them maintain their businesses during the COVID-19 pandemic and to pay their debts in the future. These measures for commercial customers were in effect until August 2021. We cannot assure that other similar measures will not be adopted by our executive board or that these clients will be able to honor their debts after any grace period granted.
With COVID-19 vaccines becoming more broadly available, many employees have returned to on-site work. However, we cannot guarantee that future developments regarding the spread of COVID-19 or the emergence of new variants will not result in a return to remote working arrangements and the closure of non-essential commercial, industrial, as well as public, establishments. In addition, several companies announced that they would continue to employ partial remote working arrangements which could result in a new consumption pattern. This could affect our revenues since the tariffs charged to customers in the residential category are lower than in the commercial, industrial and public categories. In addition, we continued to experience increased delinquencies in 2021. In 2021, our allowance for doubtful accounts increased by R$198.9 million, which represents an increase of 44.7% compared to the same period of 2020. For more information, see Note 10(c) and 29 to our financial statements included in this annual report.
We provide a critical service to our customers which means that we must keep our employees who operate our businesses safe and minimize unnecessary risk of exposure to the virus. The extent to which COVID-19 will continue to impact our business, operations, and financial condition, will depend on future developments, which are uncertain and cannot be predicted. Accordingly, we currently cannot estimate the potential impact on our financial position, results of operations and cash flows. However, all these uncertainties and the factors mentioned above could have a material adverse effect on our results of operations and financial condition.
Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations.
We experience decreases in our water supply from time to time due to droughts. The 2020-2021 rainy season, which ended in September 2021, recorded below-average rainfall compared to the expected long-term average. During this period, the Cantareira System received 70.4% of the expected rainfall, while the Alto Tietê System received 71.6% and the Guarapiranga System received 76.8%. Water inflow was also below average in the three main systems that supply the metropolitan region of São Paulo, with the Alto Tietê System (our second largest System) recording inflows close to its minimum historic levels between April and September. The 2019-2020 rainy season, which ended in September 2020, also had below-average rainfall compared to the expected long-term average. During this period, the Cantareira System received 74% of the expected rainfall, while the Alto Tietê System received 72% and the Guarapiranga System received 68%.
The 2021-2022 rainy season, which started in October 2021, recorded below-average rainfall compared to the expected long-term average. From October 2021 to March 2022, the Cantareira System received 84.5% of the historical average rainfall, while the Alto Tietê System received 75.5% and the Guarapiranga System received 85.2%. The total reservoir storage was 59.5% in March 2022, compared to 59.6% in 2021. Water inflow was also below average in some of the main systems that supply the metropolitan region of São Paulo, with the Cantareira System (our largest System) recording inflows of 68% of the historical average and Alto Tietê System recording inflows of 84% of the historical average in the first months of the 2021-2022 rainy season.
In 2014 and 2015 we experienced a severe drought in the metropolitan region of São Paulo, the most severe drought in the last 80 years to date, which was more intense in the northwest region of the State of São Paulo, resulting in the lowest level of rainfall and water inflow ever recorded in the Cantareira System, the largest water production system in the metropolitan region of São Paulo. This drought severely affected the level of water sources that supply the metropolitan region of São Paulo, forcing us to adopt a series of measures from 2014 to April 2016 to mitigate its impact and maintain the water supply for the then 20.9 million inhabitants at that moment served in the metropolitan region of São Paulo. See “Item 4.B. Business Overview—The 2014-2015 Water Crisis.”
With the return of the rainfall to its historical average, the volume of water available to the population of the São Paulo metropolitan region returned to a normal level. However, heightened public awareness of the need to conserve water during the crisis and other more recent droughts resulted in our customers continuing to adopt lower water consumption practices. As a result of this new behavior and ongoing awareness, the volume of water billed to our clients did not return to the volume of water billed before the water crisis in 2013. Accordingly, this change in consumption practice due to the 2014-2015 water crisis has had a continued effect on our results of operations since then.
There is a risk that there might be further period of drought similar or more severe to those of 2014-2015 and 2020-2021 in the future, forcing us to adopt similar or more severe measures as those adopted in 2014-2015, what can cause a material impact on consumption habits. These uncertainties could have a material adverse effect on our results of operations and financial condition.
Certain terms of our agreement to provide water and sewage services in the city of São Paulo could have a material adverse effect on us.
The provision of water and sewage services in the city of São Paulo accounted for 44.5% of our gross operating revenues from sanitation services (excluding revenues relating to the construction of concession infrastructure) in the year ended December 31, 2021.
On June 23, 2010, the State and the city of São Paulo executed an agreement in the form of a convention (“convênio”) with our intermediation and ARSESP’s consent, under which they agreed to manage the planning and investment for the basic sanitation system of the city of São Paulo on a joint basis. In accordance with the convênio, we executed a service contract on June 23, 2010, with the State and the city of São Paulo, to provide these services for the following 30 years. Among other principal terms of this service contract, we must transfer 7.5% of the gross revenues we obtain from this contract and subtract (i) COFINS and PASEP taxes, and (ii) unpaid bills for services provided to properties owned by the city of São Paulo, to the Municipal Fund for Environmental Sanitation and Infrastructure (Fundo Municipal de Saneamento Ambiental e Infraestrutura), established by Municipal Law No. 14,934/2009. See “Item 7.B. Related Party Transactions—Agreement with the State and the city of São Paulo” for a further discussion of the principal terms of the convênio and the principal terms of the service contract we executed in accordance with the convênio.
On May 9, 2018, ARSESP announced the result of the Second Ordinary Tariff Revision and since this revision cycle, ARSESP is passing-through to the tariffs up to 4% of the municipal revenue that is transferred by us to a legally established municipal infrastructure fund. Within the scope of the Second Ordinary Tariff Review, which was concluded in April 2021, our only contract that provides for this and complies with ARSESP’s requirements is with the municipality of São Paulo. Accordingly, 4% of the funds transferred to the São Paulo Municipal Fund for Environmental Sanitation and Infrastructure were transferred to tariffs for the revision cycle ending in April 2021. See “Item 4.B. Business Overview—Tariffs,” especially “Item 4.B. Business Overview—Tariffs—Tariff Readjustment and Revisions.”
Prior to May 9, 2018, our tariff had never included any pass-through to tariffs related to the transfer of 7.5% of the gross revenues obtained from providing sanitation services in the municipality of São Paulo to the São Paulo Municipal Fund for Environmental Sanitation and Infrastructure.
The transfer of 4% was subsequently regulated by ARSESP Resolution No. 870/2019 of May 2019, which established the criteria and conditions to permit the transfer of 4% of the revenue from service providers through the tariff, excluding COFINS and PASEP taxes, and unpaid bills in respect of publicly owned properties. In addition, for recognition as part of the tariff, municipal funds for environmental sanitation and infrastructure must be established by the municipality through a legal act, which specifies the allocation of resources. As established by ARSESP, if the concessionaire and the municipality decide to transfer amounts greater than 4% of the revenue, the excess will not be recognized as a financial component of tariffs and will be restricted to the municipality.
Considering that ARSESP has limited the pass-through to tariff of values transferred to municipal infrastructure funds to 4%, the mandatory contractual transfer of the remaining 3.5% of the gross revenues, subtracting (i) COFINS and PASEP taxes and (ii) unpaid bills of publicly owned properties in the city of São Paulo, to the Municipal Fund for Environmental Sanitation and Infrastructure will not be passed through to customers in full and we cannot assure you when and if this will happen and may have an adverse effect on our business, financial condition or results of operations.
From 2010 to December 31, 2021, we transferred approximately R$4.6 billion to the São Paulo Municipal Fund for Environmental Sanitation and Infrastructure. For additional information on ARSESP regulations, see “Item 4.B. Business Overview—Tariffs” and “Item 4.B. Business Overview— Government Regulations Applicable to Our Contracts—Rules Enacted by ARSESP.”
The technical note approved by ARSESP on July 30, 2020 which established the methodology to be used for the calculation of the maximum tariff, also establishes that for the third tariff cycle (2021-2024) a 4% limit will be applied to transfers to municipal funds, with transfers made to funds previously approved by ARSESP or those provided for in Article 15 of ARSESP Resolution No. 870/2019 being recognized as part of the tariffs. If the concessionaire and the municipality decide to transfer amounts greater than 4% of revenue, the excess will not be recognized as a financial component of the tariffs and will be restricted to the municipality.
On July 13, 2021, the Municipality of São Paulo filed a public civil action against us, the State of São Paulo and ARSESP aiming, in general terms, to discuss the possibility of including the charge to FMSAI in the tariff adjustment provided for in Resolution No. 870/2019, which in practice was already being transferred since Deliberation No. 794/2018, with a view to, in summary: (i) the recognition of illegality of the transfer of the charge of 7.5% of our gross revenue, related to FMSAI, the water and sewage tariff practiced in the City of São Paulo; (ii) establishing our liability for damages caused to users affected by ARSESP Resolutions 794/2018 and 870/2019; and (iii) the recognition of the inexistence of liabilities to be paid to us for the transfers to FMSAI made by it since 2010, since they would already be included in the tariff value from the beginning.
On August 19, 2021, the Municipality requested the suspension of the process in view of the ongoing negotiations in search of an amicable solution to the dispute. On September 13, 2021, the suspension of the case for a period of ninety days was granted. We have not yet been named and cannot predict the outcome of this proceeding, which, if unfavorable, could have an adverse economic impact on us.
Our current tariff structure is outdated and does not reflect the current socioeconomic changes the State of São Paulo has undergone over the past decades. The approved updateAny updates to the tariff structure and its implementation may lead to uncertainties in the market as well as unpredictability about our future revenues.
Our current Tariff Structure (as defined in “Item 4.B. Business Overview—Tariffs—Tariff Structure”) is based on the pricing regulation approved by State Decree No. 41,446/1996 and has been in force since the 1970s.1996. Accordingly, it no longer reflects the socioeconomic changes the State of São Paulo has undergone over the past decades. Considering the need to adapt to new circumstances, ARSESP accepted our request to update our Tariff Structure to reflect the new consumption profile of our customers. This process was developed in parallel with the Third Ordinary Tariff Revision, both of which were completed onin April 8, 2021.
Our current Tariff Structure applies different pricing ranges for the following categories of users: (i) residential customers (Residential Normal, Residential Social and Residential Favela) and non-residential customers (including commercial, industrial and public customers, as described in “Item 4.B. Business Overview— Tariffs - Tariff Structure”); (ii) the metropolitan regions of São Paulo and the regional system; (iii) water and sewage, with no difference in prices for sewage collection and treatment; and (iv) the charge of a minimum consumption of 10 m³/month and differences in prices per range, with progressive increases in the price as consumption increases. In 2021, 2020 and 2019, the average price calculated for the regional systems was approximately 20% below the average price of the São Paulo metropolitan region. See “Item 4.B. Business Overview—Tariffs –Tariff Structure.”
The New Tariff Structure (as defined in “Item 4.B. Business Overview—Tariffs—New Tariff Structure”) introduces: (i) new classifications for residential customers (Residential, Residential Social, Residential Vulnerable and Residential Collective) and non-residential customers (Commercial, Commercial Assistance, Commercial Collective, Industrial and Public Wholesale, Water Truck, Sewage Cleaning Truck); (ii) different prices for water, sewage collection and treatment sewage services; (iii) the unification of our pricing schedules, which partially reduces subsidies between the regions; and (iv) the charging of a fixed component that reflects fixed costs per connection and another variable part that reflects consumption (a binomial price). The New Tariff Structure was expected to be adopted as of 2022. However, onOn March 17, 2022, ARSESP published Resolution No. 1,278 relating to the tariff readjustment, which also postponed the applicationadoption of the New Tariff Structure until the resolution of outstanding definitions necessary for its implementation. On March 1, 2023, ARSESP published Resolution No. 1,388 setting out the regulatory agenda for 2023-2024. As part of this agenda, a public consultation was scheduled for the first half of 2024 aiming to an undetermined date.
The transition period during whichimplement the postponed New Tariff Structure will be implemented may lead to uncertainties as well as unpredictability about the revenues we expect to earn with the new structure, given that it is difficult to determine the customer reclassification as a result of price changes,Structure. However, on April 6, 2023, ARSESP published Resolution No. 1,395 which can lead to differences in our revenues compared to those projected based onrevoked Resolution No 1,278 and maintained the current Tariff Structure. A new tariff structure may be implemented subject to the views obtained during a public consultation. As of the date of this annual report, we cannot confirm that a new tariff structure will be implemented, or when it would be implemented, and the draft Concession Agreement for URAE-1 expressly maintains the current tariff structure at least until the end of the first tariff cycle of this new agreement (which will be on 2029). For more information, see “Item 4.B. Business Overview—Tariffs—New Tariff Structure.”
We cannot assure what the result of the implementation of the New Tariff Structure will be and if it will have an adverse effect on our business, financial condition or results of operations. For more information, see “Item 4.B. Business Overview—Tariffs—New Tariff Structure.”
Certain terms of our agreement to provide water and sewage services in the city of São Paulo could have a material adverse effect on us.
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The provision of water and sewage services in the city of São Paulo accounted for 45% of our gross operating revenues from sanitation services (excluding revenues relating to the construction of concession infrastructure) in the year ended December 31, 2023.
On June 23, 2010, the State and the city of São Paulo executed a convention agreement (convênio) with our intermediation and ARSESP’s consent, under which they agreed to manage the planning and investment for the basic sanitation system of the city of São Paulo on a joint basis. In accordance with this convention, we executed a service contract on June 23, 2010, with the State and the city of São Paulo, to provide these services for the next 30 years. Among other principal terms of this service contract, we must transfer 7.5% of the gross revenues we obtain from this contract and subtract (i) COFINS and PASEP taxes, and (ii) unpaid bills for services provided to properties owned by the city of São Paulo, to the FMSAI, established by Municipal Law No. 14,934/2009. For more information, see “Item 7.B. Related Party Transactions—Agreement with the State and the city of São Paulo” for a further discussion of the principal terms of this convention and the service contract we executed in accordance with this convention.
Since the second ordinary tariff revision, which was concluded in 2018 ("Second Ordinary Tariff Revision"), the result of which is published in ARSESP Resolution No. 794/2018, ARSESP is passing-through to the tariffs up to 4% of the municipal revenue that is transferred by us to a legally established municipal infrastructure fund. For more information, see “Item 4.B. Business Overview—Tariffs,” especially “Item 4.B. Business Overview—Tariffs—Tariff Readjustment and Revisions.”
Prior to May 9, 2018, our tariff had never included any pass-through of amounts related to the transfer of 7.5% of the gross revenues obtained from providing sanitation services in the municipality of São Paulo to FMSAI.
The transfer of 4% of revenues from service providers in different in municipalities to municipal funds was subsequently regulated by ARSESP Resolution No. 870/2019, which established the criteria and conditions to permit the transfer of 4% of the revenue from service providers through the tariff, excluding COFINS and PASEP taxes. In addition, for recognition as part of the tariff, municipal funds for environmental sanitation and infrastructure must be established by the municipality through a legal act, which specifies the allocation of resources. For the fourth tariff cycle (2021-2024) ARSESP provided that a 4% limit will apply to transfers to municipal funds and that these transfers must be previously approved by ARSESP and recognized as part of the tariffs.
Considering that ARSESP has limited the pass-through to tariff of values transferred to municipal infrastructure funds to 4%, the mandatory contractual transfer of the remaining 3.5% of the gross revenues (subtracting (i) COFINS and PASEP taxes and (ii) unpaid bills of publicly owned properties in the city of São Paulo) to FMSAI will not be passed through to customers in full and we cannot assure you when and if this will happen and if it may have an adverse effect on our business, financial condition or results of operations.
From 2010 to December 31, 2023, we transferred approximately R$5.9 billion to FMSAI. For additional information on ARSESP regulations, see “Item 4.B. Business Overview—Tariffs” and “Item 4.B. Business Overview— Government Regulations Applicable to Our Contracts—Establishment of ARSESP.”
On July 13, 2021, the city of São Paulo filed a public civil action against us, the State of São Paulo and ARSESP, aiming, in general terms, to discuss the possibility of including the charge to FMSAI in the tariff adjustment provided for in Resolution No. 870/2019, which in practice was already being transferred pursuant to Resolution No. 794/2018. In summary, this public civil action seeks: (i) the recognition of illegality of the transfer of 7.5% of our gross revenue, related to FMSAI, to the water and sewage tariff applicable in the city of São Paulo; (ii) to establish our liability for any damages caused to users affected by ARSESP Resolutions 794/2018 and 870/2019; and (iii) the recognition of the inexistence of liabilities to be paid to us for the transfers to FMSAI made by it since 2010, since they would already be included in the tariff value from the beginning.
On August 19, 2021, the city of São Paulo requested the suspension of the process in view of the ongoing negotiations in search of an amicable solution to the dispute. On September 13, 2021, the suspension of the case for a period of ninety days was granted. On August 15, 2022, the city of São Paulo reported that the settlement negotiations were still ongoing, and, as of the date of this annual report, there have been no further developments.
We have not yet been named and cannot predict the outcome of this proceeding, which, if unfavorable, could have an adverse economic impact on us.
The draft Concession Agreement for URAE-1, which was submitted for Public Consultation No. 01/2024, provides for the full acknowledgment of tariff payments to the FMSAI for the municipality of São Paulo, which means that the 7.5% rate will be recognized in the tariffs. The Public Consultation No. 01/2024 ended on March 15, 2024, and the SEMIL published a report on the contributions on April 30, 2024. See “Presentation of Financial and Other Information—Proposed Privatization” for further information about the contributions for this public consultation, and “Item 4.B. Business Overview—Tariffs—New Tariff Structure” for further information about our tariff structure.
Any failure to obtain new funding or to comply with covenants in our existing financing agreements may adversely affect our ability to continue our capital expenditure program.
Our capital expenditure program will require resources of approximately R$23.847.4 billion in the period from 20222024 through 2026. In 2021,2028. For the year ended December 31, 2023, we recorded R$56.3 billion in capital expenditures. We funded and we intend to continue funding these capital expenditures with cash generated by our operations, issuances of debt securities in the domestic and international capital markets as well as borrowings in Brazilian reais and foreign currencies. A significant portion of our financing needs is obtained through long-term financing at attractive interest rates from Brazilian federal public banks, multilateral agencies and international governmental development banks. If the Brazilian government changes its policies regarding public financing or amounts available for water and sewage services, or if we fail to obtain long-term financing at attractive interest rates from domestic and international multilateral agencies and development banks in the future, we may not be able to meet our obligations or finance our capital expenditure program, which could have a material adverse effect on our business, financial condition or results of operations.
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Furthermore, Brazilian public and private financial institutions are legally limited up to a certain percentage of their shareholder’s equity to provide loans to public sector entities, including, for example, us. These limitations could adversely affect our ability to continue our capital expenditure program and, consequently, may adversely affect our business, financial condition or results of operations.
Our debt includes financial covenants that impose indebtedness limits, on us.as well as several non-financial covenants, including the pledging of assets, provision of financial statements and audit reports, no rating downgrade event after our Proposed Privatization and compliance with environmental laws and licenses, among others. Our failure to comply with any of these covenants could seriously impair our ability to finance our capital expenditure program, which could have a material adverse effect on us. For furthermore information on these covenants, see “Item 5.B. Liquidity and Capital Resources—Indebtedness Financing—Financial Covenants.”
Extreme Weather ConditionsIf our Proposed Privatization is completed and Climate Change may have a material adverse impact on our business, financial condition or results of operations.
Our business may be affected by droughts, and by other extreme weather conditions, such as torrential rain and other changes in climate patterns. A possible increase in the severity of extreme weather conditions in the future may adversely affect the water available for abstraction, treatment, and supply, whether from the standpoint of quality or quantity. Droughts could adversely affect the water supply systems, resulting in a decrease in the volume of water distributed and billed as well as in the revenue derived from water supply services. For further information, see “3 Item 3.D. Risk Factors— Risks Relating to Our Business—Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations.” Extreme climate conditions may compromise our facilities’ conditions to operate and supply of inputs. Additionally, increases in air temperature could affect demand for water.
Since we are dependent upon energy supplies to conduct our business, extreme weather events may also reduce water levels in the reservoirs that power hydroelectric power plants in Brazil, which may cause energy shortages, which could affect water and sewage services. Increased electricity prices may also adversely affect our costs and operations. For further information, see “Item 3.D. Risk Factors—Risks relating to Our Business—Adverse weather conditions may interrupt the supply of electricity and water and adversely impact our operations” and “Item 4.B. Business Overview—Energy Consumption.”
We cannot predict all of the effects of extreme weather events, therefore making it difficult to estimate the resources needed to address these mitigations. It is possible that as a result of these difficulties to predict events, we may be required to make substantial investments or incur substantial costs in their remediation, which may have a material adverse impact on our business, financial condition or results of operations. We also cannot guarantee that we will be able to pass on any of these additional costs and expenditures to our customers.
New laws and regulations relating to climate change and changes in existing regulation may result in increased liabilities and increased capital expenditures, which could have a material adverse effect on us.
We are currently subject to federal and state laws, as well as international regulations on climate change, that establish global goals to reduce greenhouse gas emission, which we endeavor to comply with. Among these laws, we highlight Decree No. 65,881 of July 20, 2021, which provides forno longer controlled by the State of São Paulo’s adhesionPaulo, we will no longer have access to (i) guarantees for our new debt obligations from the “RaceBrazilian government or (ii) financings from certain international multilateral agencies and development banks who only lend to Zero” and “Race to Resilience” campaigns, which aims, among other issues, to reduce greenhouse gas emissions and to foster climate resilience.
With Brazil’s current adherence to international agreements, as well as the clear guidelines of the State government on reducing emissions, in addition to the establishment of new legislation, it is possiblesovereign or quasi-sovereign entities. This could mean that we maywill not be able to receive financings at the same tenors or interest rates that we have to invest in further actions to reduce and mitigate emissions. We may be required to adopt new standards to improve our energy use efficiency and minimize the release of greenhouse gases for the systems already in operation or when we obtain environmental licenses for new enterprises. We may also need to incur substantial new expenditures, to comply with new climate change regulations, that may require us, for example, (i) to adequate and improve our operations to achieve more sustainable processes and to reduce the emission of Greenhouse Gases ("GHG"); or (ii) to implement new facilities and equipment for biogas utilization and its subproducts, considering the dispersion and diversity of processes in our operational facilities. Further, we may also incur in new expenditures to prevent or correct the physical effects of extreme weather events. New expenditures resulting from new climate change regulations and from the prevention or correction of effects of extreme weather could have a material adverse effect on our results of operations. For more information, see “Item 4.B. Business Overview—Environmental Matters—Climate Change Regulations: Reduction of Greenhouse Gases (GHG) Emissions” and “Item 4.B. Business Overview—Energy Consumption.”
Compliance with environmental laws and environmental liability could have a material adverse effect on us.
We are subject to extensive Brazilian federal, state and municipal laws and regulations relating to the protection of human health and the environment. These laws and regulations set, among others, environmental licensing requirements and potable water standards, as well as standards for effluents which limit or prohibit the discharge of untreated sewage received in the past. Accordingly, if our operations. Also, weProposed Privatization is consummated, our funding costs may experience accidents such as leaks or broken pipes that can lead to liability for environmental damages.
We are party to environmental proceedings and could be subject to other types of criminal, administrative and civil proceedings for non-compliance with environmental laws and regulations, including licensing requirements, that could expose us to administrative penalties and criminal sanctions, such as fines, closure orders and significant indemnification obligations. These expenses may lead us to reduce expenditure on strategic investments, which may adversely affect our business, financial condition or results of operations.
We are party to environmental proceedings that could have a material adverse impact on us, including civil processes and investigations relating, among others, to the release of untreated sewage into waterways or the disposal of sludge generated by treatment plants. We are also involved in proceedings challenging the water withdrawing during the 2014-2015 water crisis. Any unfavorable judgment in relation to these proceedings, or any material environmental liabilities, may have a material adverse effect on our business, financial conditions or results of operations. For further information on these proceedings, see “Item 8.A. Financial Statements and Other Financial Information—Legal Proceedings.” For further information on investments in environmental programs, see “Item 4.A. History and Development of the Company—Main Projects of our Capital Expenditure Program,” “Item 4.B. Business Overview—Description of our Activities—Sewage Operations—Sewage Treatment and Disposal,” “Item 4.B Business Overview—Environmental Matters” and “Item 4.B. Business Overview— Environmental Matters—Environmental Regulation.” For further information on the Water Crisis, see “Item 4.B. Business Overview—The 2014-2015 Water Crisis.”increase.
Any substantial monetary judgment against us or any of our directors and officers in legal proceedings may have a material adverse effect on us.our reputation, business or operating or financial condition and/or results.
We are currently a party to numerousseveral legal proceedings relating to civil, corporate, environmental, labor and tax claims filed against us. These claims involve substantial amounts of money and other remedies. As of December 31, 2023, the total estimated amount of claims related to our legal proceedings was R$57.1 billion (net of R$263.8 million in court deposits), including contingent liabilities and remote loss contingencies.
We have establishedrecognized provisions for all amounts in dispute that represent a present obligation as a result of a past event and where it is probable that there will be an outflow to settle the referredthis obligation in the view of our legal advisors and due to disputesin light of precedents that are covered bycover laws, administrative decrees, decrees or court rulings that have proven to be unfavorable. As of December 31, 2021,2023, the estimated total amount of accrued provisions for claims assertedwith a probable likelihood of loss was R$1.8 billion (net of R$132.8 million in court deposits). As of December 31, 2023, claims classified as contingent liabilities amounted to R$54,071.6 million (net55.2 billion, of which R$173.7 million in escrow deposits), including10.1 billion relate to claims where we classified the risk of loss as possible and R$45.1 billion relate to claims where we classified the risk of loss as remote. In our financial statements, we only disclose information about contingent liabilities. We have recognized provisions totaling R$1,448.5 million (net of escrow deposits)liabilities we classified as of December 31, 2021. Thesepossible loss and do not record or disclose information related to remote contingencies.
In addition, our provisions do not cover all legal proceedings involving monetary claims filed against us and it may be insufficient to cover the ultimate resolution of these claims. Anyamount arising from final unfavorable judgment in relation to these proceedingsdecisions rendered against us, which may have a material adverse effect on our financial condition.condition, reputation and image. Further, one or more of our directors and officers are and/or may become parties to civil, administrative, criminal or tax judicial, administrative or arbitration proceedings, in which the initiation and/or outcome may adversely affect them and impair their ability to perform their duties with us, which could lead to a material adverse effect on our reputation, business or operating or financial condition and/or results. For more information, see “Item 8.A. Consolidated Financial Statements and Other Financial Information—Legal Proceedings” and Note 20 to our 20212023 Consolidated Financial Statements included in this annual report.
We are subject to anti-corruption, anti-bribery, anti-money laundering, sanctions and antitrust laws and regulations. Our violation of any such laws or regulations could have a material adverse effect on our reputation, our results of operations and our financial condition.
We are subject to anti-corruption, anti-bribery, anti-money laundering, sanctions, antitrust and other similar laws and regulations. We are required to comply with the applicable laws and regulations of Brazil, and we may become subject to such laws and regulations in other jurisdictions. We may be subject to investigations and proceedings by authorities for alleged infringements of these laws. These proceedings may result in penalties, fines, damages, sanctions or other forms of liability that could have a material adverse effect on our reputation, business, financial condition and results of operations. There can be no assurance that our internal policies and procedures will be sufficient to prevent, or detect and timely implement corrective measures in relation to any unlawful and inappropriate practices, fraud or violations of these laws or regulations by our employees, officers, executives, partners, agents and service providers, nor that any such persons will not take actions in violation of our policies and procedures. We may in the future discover instances in which we have failed to comply with applicable laws and regulations or internal controls. If any such subsidiaries, employees or other persons engage in fraudulent, corrupt or other unfair business practices or otherwise violate applicable laws, regulations or internal controls, we could become subject to one or more enforcement actions or otherwise be found to be in violation of such laws.
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Any violations, whether actual or perceived, by us or any of our employees, directors, officers, partners, agents and service providers of these laws or regulations or our internal policies or procedures could haveresult in penalties, damages, fines and sanctions and represent a material adverse effect on our reputation, business, our ability to obtain financing our business, financial condition or results of operations.
Our business is subject to cyberattacks and security and privacy breaches.
Our business involves the collection, storage, processing and transmission of customers’, suppliers and employees’ personal or sensitive data. We also use key information technology systems for controlling water, sewage and commercial, administrative and financial operations. We may be subject to breaches of the information technology systems we use for these purposes. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions, or cause shutdowns. Computer programmers and hackers may also may be able to develop and deploy viruses, worms and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. Due to the COVID-19 outbreak, we started to use new communication software and systems. However, we currently cannot assure that these systems adequately protect data and information to avoid confidentiality breaches or that they will not affect our capacity to operate.
The techniques used to obtain unauthorized, improper or illegal access to our systems, our data or our customers’ data, to disable or degrade service, or to sabotage systems are constantly evolving, and it may be difficult to detect quickly, and often are not recognized until launched against a target. Unauthorized parties may attempt to gain access to our systems or facilities through various means, including, among others, hacking into our systems or those of our customers, partners or vendors, or attempting to fraudulently induce our employees, customers, partners, vendors or other users of our systems into disclosing usernames, passwords or other sensitive information, which may in turn be used to access our information technology systems. Certain efforts may be supported by significant financial and technological resources, making them even more sophisticated and difficult to detect.
Our information technology and infrastructure may be vulnerable to cyberattacks or security breaches, and third parties may be able to access our customers’, suppliers’ and employees’ personal or proprietary information that are stored on or accessible through those systems. Our security measures may also be breached due to human error, malfeasance, system errors or vulnerabilities, or other irregularities. Any actual or perceived breach of our security could interrupt our operations, result in our systems or services being unavailable, result in improper disclosure of data, materially harm our reputation and brand,trademark, result in significant legal and financial exposure, lead to a loss of customer confidence in our products and services, and adversely affect our business, financial condition or results of operations. In addition, any breaches of network or data security at our suppliers (including data center and cloud computing providers) could have similar negative effects. Actual or perceived vulnerabilities or data breaches may lead to claims against us.
We cannot guarantee that the protections we have in place to protect our operating technology and information technology systems are sufficient to protect against cyberattacks and security and privacy breaches.
For more information, see “Item 16.K. Cybersecurity.”
Failure by us to comply with the LGPD or any further privacy and data protection laws enacted in Brazil could adversely affect our reputation, business, financial condition or results of operations.
We are subject to data privacy laws, such as Law No. 12,965/2014 (the “Brazilian(“Brazilian Internet Act”) and the Law No. 13,709/2018 (“Brazilian General Law for Personal Data Protection - LGPD (Law No. 13,709/2018)Law” or “LGPD”) and their related regulations, including regulations to be enacted by the Brazilian National Data Protection Authority (ANPD)(“ANPD”).
The LGPD, came into effect oneffective from September 18, 2020 and provides a comprehensive regulation for the use of personal data in Brazil. The legislation provides for the application of2020—excluding its administrative sanctions, (art. 52, 53 and 54), which came into effect on August 1, 2021. If we do not carry out2021—provides a comprehensive regulation on the processing of personal data in Brazil. It established detailed rules for the collection, use, processing, operationstorage, and disposal of personal data, which is applicable to all economic sectors and the relationships between customers and companies, employees and employers and others where personal data is processed, both in accordancethe digital and physical environment.
Additionally, the LGPD established the ANPD, a public administration authority responsible for ensuring, implementing, and supervising compliance with the LGPD. The ANPD responsibilities include: (i) investigation, including the authority to issue regulations, deliberate on the interpretation of the LGPD, and request information from controllers and processors; (ii) enforcement, in cases of non-compliance with the LGPD, wethrough administrative proceedings; and (iii) education, with the responsibility to disseminate information and promote knowledge of the LGPD and security measures.
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Failure to comply with the LGPD, especially regarding ensuring data subjects’ rights, providing clear information about our personal data processing activities, adhering to the original purpose of data collection, observing legal data storage periods, and implementing required security standards, could subject us to the administrative sanctions of article 52 of the LGPD, enforced by the ANPD. These sanctions, which may be subject to sanctions,applied individually or cumulatively, of warning, obligation to disclose theinclude warnings, mandatory incident disclosure, temporary blocking and/or deletion of personal data, suspension or prohibition partial or total, of the exercise of the activity ofdata processing personal dataactivities, daily fines and finefines of up to 2% (two percent) of the company, groupcompany’s, group’s, or conglomerate’s revenue in Brazil in itsfor the last fiscal year, excluding taxes, up to the global amountwith a maximum of R$50,000,000 (fifty50.0 million reais) per infringement. The application of the sanctions provided for inviolation.
Moreover, non-compliance with the LGPD is exclusively the responsibility of the National Data Protection Authority – ANPD.
Weand other data protection laws may also be held liableexpose us to liability for material, moral, individual, or collective damage caused by non-compliance with the obligations established by the LGPD and other data protection legislation,damages, being subject to risks, such as (i) the filing of lawsuits claiming damages resulting from violations, based not only on the LGPD, but also on other sectorial legislation that are still in force;legislation; and (ii) the application of penalties provided for in the Consumer Defense Code (Law No. 8078/1990) and the Brazilian Internet Act by relevant consumer protection agencies, such as the Federal District Prosecutor’s OfficeMPF and the National Consumer Secretariat (Secretaria Nacional do Consumidor), since before the validity of the LGPD and the complete structuring of the ANPD, especially in cases of security incidents that result in improper access to personal data.
The LGPD significantly transformed the data protection system in Brazil and it was inspired on European legislation (the General Data Protection Regulation – “GDPR”).
The LGPD establishes detailed rules for the collection, use, processing, storage and disposal of personal data. It affects all economic sectors, including the relationship between customers and financial institutions, employees and employers and other relationships in which personal data is processed, both in the digital and physical environment. The ANPD is the agency with overall responsibility to: (i) ensure the protection of personal data, in accordance with the law; (ii) deliberate, at an administrative level, on a terminative character, upon the interpretation of the LGPD; (iii) supervise the compliance with, and apply penalties in the event of data processing performed in violation of, LGPD; (iv) implement simplified mechanisms for recording complaints about the processing of personal data in violation of the LGPD; and (v) inform the competent authorities the criminal offenses of which it becomes aware.
Any failure by us Failure to adhere to the LGPD or any further privacy laws or regulations enacted or approved in Brazil also carriesleads to the risk of individual or collective lawsuits claimand claims for compensation of compensation for damages, arising from violations, especially in cases of information security incidents that result in unauthorized access to personal data.
We cannot guarantee that our personal data processing activities will always be secure and will not be subject to fines and other types of sanctions. The application of penalties, the publicizing of the infractioninfractions or the imposition of obligations to indemnifycompensate for failures in the protection of personal data and inadequacy ofor compliance with the LGPD could adversely affect our reputation, and our results and, consequently, the value of our shares.common shares and ADSs.
Our failure to protect our intellectual property rights may negatively impact us.
We own and license from third parties several intellectual property assets, including trademarks, patents, software, copyrights, and domain names. Therefore, we rely on intellectual property laws and registration authorities in Brazil and abroad, as well as on license agreements, to protect our intellectual property.
Events such as the rejection of patent applications or trademark registrations by the National Institute of Industrial Property (“INPI”), or the unauthorized use or other improper appropriation of our intellectual property assets, especially the “Sabesp” trademark and related brands, can diminish the value of our brands or affect our reputation. Furthermore, we cannot guarantee that the measures taken to protect our intellectual property rights will be sufficient against potential illicit actions by third parties. Similarly, third parties may claim that our products or services, or even our intellectual property assets, violate their intellectual property rights.
Any dispute or litigation related to intellectual property assets, even if it concerns assets of low relevance to our operations, can be costly and time-consuming. Therefore, any situation that affects the protection of our intellectual property assets may have adverse impacts on our business.
Industrial accidents, equipment failure, environmental hazards or other natural phenomena may adversely affect our operations, assets and reputation and might not be covered by our insurance policies.
Currently, we substantially withdraw our water supply from surface sources from rivers and reservoirs, with a small portion being withdrawn from groundwater. Our reservoirs are filled bywith impounding water from rivers and streams, by diverting the flow from nearby rivers, or by a combination of both methods. We have 229As of December 31, 2023, we had 230 dams for water supply purposes, which isare all the total amount of dams used by us. as part of our operations.
Our operations may be hampered by numerous factors, including unexpected or unusual geological and/or geotechnical operating conditions, industrial accidents, floods and/or droughts or other environmental occurrences that could result in structural damages and eventually rupture of our reservoirs, dams and other facilities or equipment.
Our water and sewage pipes are susceptible to degradation caused by factors such as aging, intense traffic, interventions resulting from disorderly urban planning and action by other companies, which may provoke accidents in the networks, increasing the risk of physical loss of water and leakage of sewage, which could affect the regular provision of our services, impacting our customers, the society and the environment. Regarding sanitary sewage, our sewage pipes may also be obstructed due to misuse resulting from the improper release of solid waste and rainwater in the sewage systems.systems, which could also lead to the risks mentioned above.
In particular, the increasing degradation of watershed areasour water sources (Mananciaismananciais) may affect the quantity and quality of water available to meet demand from our customers. SeeFor more information, see “Item 4.B. Business Overview—Description of Our Activities—Water Operations—Water Distribution” and “Item 4.B. Business Overview—Description of Our Activities—Sewage Operations—Sewage System.”
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The occurrence of any of these events could lead to personal injury or death, adverse social impacts on the communities located near our facilities, monetary losses and possible legal liability arising from environmental and social damages, other environmental and social damages, the loss of prime materials and damage to our reputation. Seereputation and image. For more information, see “Item 4.B. Business Overview—Water Operations—Water Resources.”
It is not always possible to obtain insurance against all such risks due to the high premiums associated with insuring against them or for other reasons. Moreover, insurance against risks such as water contamination or other problems involving our water supply to customers and for environmental related liabilities and damages as a result of our activities is not generally available to us or to other companies in our industry on acceptable terms. Our insurance will not cover all potential risks associated with our operations and insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. Losses from these events may cause us to incur significant costs that could have a material adverse effect on our financial performance and results of operations. To the extent that we incur losses not covered by our insurance policies, the funds available for sustaining our current operations and for our planned expansion activities will be reduced. See also “—“Item 3.D.— Risks Relating to Our Business— ComplianceEnvironmental Matters and Physical and Transition Climate Risks— Noncompliance with environmental laws and environmental liability could have a material adverse effect on us”us, our reputation and image” and “Item 4.B. Business Overview—Insurance.”
Adverse weather conditionsWe cannot guarantee that our third-party suppliers and/or service providers will not become involved in any irregular practices.
Our internal controls, corporate policies and procedures, Code of Conduct and Integrity and compliance program may interruptnot be sufficient to prevent irregularities in the operations of third-party suppliers and/or service providers. We have no control over and cannot guarantee that certain of our third-party suppliers and/or service providers will not experience labor-related issues or issues related to environmental legislation and sustainability and, if such third-party suppliers or service providers do so, we may suffer financial losses, damage to our image and, consequently, reduce the value of our common shares and ADSs.
In addition, if our third-party suppliers and service providers fail to comply with their labor or environmental obligations and laws related to social security and the environment, we may be held subsidiary and/or jointly liable for such non-compliance, which may result in fines, obligation to pay the amounts in question and other sanctions that may substantially and negatively affect us. We may also be held liable for the bodily injury or death of employees of third parties who are providing services to us within our facilities or for environmental damages caused, which may adversely affect our reputation and business.
Furthermore, if our third-party suppliers and/or service providers act in breach of ethical business practices and fail to comply with applicable laws and regulations, such as any laws against child or slave labor or environmental protection, our reputation could be adversely affected, as could negative publicity or the imposition of joint or several liability.
Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes.
Our financial and operating performance may be adversely affected by the outbreak of pandemics, as well as other catastrophes and health epidemics on a regional or global scale. Such outbreaks may result, at different levels, in the adoption of governmental and private measures, including restrictions, as a whole or in part, on the circulation and transportation of persons, goods and services and consequently, in the closure of private establishments and public offices, interruptions to the supply chain, reduction of consumption in general by the population and increased intervention in their economies.
The impact of the COVID-19 pandemic on the global economy and financial markets was significant in 2020 and 2021 and gradually reduced in 2022 and 2023. It also introduced new habits that impacted consumption and, as a result, our business.
Although restrictions imposed to contain the spread of COVID-19 were lifted in 2022, various companies continue to adopt partial remote working regimes. This affected the volume of sales in the commercial, industrial and public categories in 2022, which would have been higher had it not been for the partial remote working policies adopted by these companies. However, in 2023, the volume of sales returned to the normal levels we observed before the COVID-19 pandemic. In addition, the adverse macroeconomic impact of the COVID-19 pandemic in Brazil had a detrimental impact on many parts of Brazilian society and led to increased delinquencies which negatively impacted our results of operations. Our allowance for doubtful accounts decreased by 16.5% for the year ended December 31, 2023 compared to the year ended December 31, 2022, and increased by 21.5% for the year ended December 31, 2022, compared to the year ended December 31, 2021.
Epidemics, natural disasters and other catastrophes may have a negative and significant effect on the world economy and on Brazil’s economy, and include or may include reduction in the level of economic activity; currency devaluation and volatility; increase in the fiscal deficit and constraints to the capacity of the Brazilian government or state governments to make investments and payments and to contract services or acquire goods; delays in judicial, arbitral and/or administrative proceedings; imposition, even if only temporarily, of a more onerous tax treatment of our business activities; decrease the liquidity available in the international and/or Brazilian market; and volatility in the price of raw materials and other inputs, among other effects.
We cannot assure that future events, such as other health catastrophes and epidemics will not result in the spread of contagious viruses that may lead to a renewed imposition of remote work regimes and the closure of non-essential commercial, industrial and public establishments. The occurrence of any of these events and their duration may have material adverse effects on our operating results and financial condition, as well as the trading price of our common shares and ADSs.
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If we are not successful in addressing issues related to the occupational health and safety of our employees and the facilities where we conduct our activities, our results and operations could be adversely affected.
Our operations are subject to extensive federal, state and municipal legislation on occupational health and safety, the implementation of which is overseen by government agencies. Failure to comply with these laws and regulations may result in administrative and criminal penalties, as well as legal repercussions in the labor, civil, tax and/or criminal spheres. There is a possibility of accidents involving our employees and outsourced workers if the technical and legal recommendations are not properly adopted.
The provision of sanitation and waste management services, including the handling of chemicals and hazardous waste, involves operational risks such as equipment defects or malfunctions, problems in training professionals, failures and natural disasters and other unexpected occurrences, which may result in accidents involving our employees, or the need to shut down or reduce the operation of our facilities while corrective actions are taken.
We also need to meet a quota for people with disabilities, which varies from 2% to 5% depending on the total number of employees, and we need to adapt our facilities to provide accessibility and reasonable accommodation for these employees. If we do not comply with these quotas, fines may be imposed by the competent authority, in accordance with the Brazilian Law on the Inclusion of People with Disabilities (Law No. 13,146/2015, as amended) and Law No. 8,213/1991, as well as possible legal proceedings filed by labor authorities seeking compliance with said quota and the potential payment of collective moral damages.
If any of our assets are deemed assets dedicated to providing an essential public service, they will not be available for liquidation and will not be subject to attachment to secure a judgment.
Regardless of the consummation of our Proposed Privatization, a substantial portion of our assets, including our sewage treatment facilities, could be deemed by Brazilian courts to be related to the provision of essential public services. Accordingly, these assets would not be available for liquidation or attachment. In either case, these assets would revert to the relevant municipalities pursuant to Brazilian law and the applicable program contracts. We cannot assure you that any indemnity we receive for such assets would be equal to the market value of the assets or sufficient to reimburse the investments made by us in such assets, which could adversely affect our financial condition.
If our Proposed Privatization is completed, we will no longer be a state-controlled company and will be subject to the Brazilian Bankruptcy Law.
Law No. 11,101/2005, as amended (the “Brazilian Bankruptcy Law”) governs judicial recovery, extrajudicial recovery and bankruptcy. The Brazilian Bankruptcy Law states, in article 2, item I, that its provisions do not apply to federal or state government-controlled and mixed capital companies such as us and our subsidiaries. However, the Brazilian Constitution establishes that mixed capital companies, which operate a commercial business, will be subject to the legal regime applicable to private corporations in respect of civil, commercial, labor and tax matters (article 173, item II, of the Brazilian Constitution). The discussion about the application of the Brazilian Bankruptcy Law to state-controlled companies (including mixed capital companies) is currently subject to the Extraordinary Appeal No. 1,249,945/MG with the Brazilian Supreme Court (Supremo Tribunal Federal – “STF”). The Extraordinary Appeal discusses the constitutionality of article 2, item I, of the Brazilian Bankruptcy Law, which excludes public companies, even those that carry out economic activities in the strict sense of the word, in competition with the private sector, from the legal regime of judicial and extrajudicial reorganization and bankruptcy, given the provisions of article 173, paragraph 1, item II, of the Brazilian Constitution. The Extraordinary Appeal had its general repercussion declared, but its merits are still pending judgment by the STF. Thus, we cannot assure whether the provisions relating to judicial and extrajudicial recovery and liquidation proceedings of the Brazilian Bankruptcy Law would apply to us.
If the Proposed Privatization is consummated, we will no longer be a state-controlled company and, in principle, would be subject to the Brazilian Bankruptcy Law.
Strikes, work stoppages or labor unrest by our employees or by the employees of our suppliers or contractors could adversely affect our business.
As of the date of this annual report, approximately 65% of our employees were labor union members and, in accordance with Brazilian law, all of our employees were represented by labor unions, regardless of their filiation to the labor union. We face strikes and work stoppages from time to time. Disagreements on issues involving our Proposed Privatization, changes in our business strategy, reductions in our personnel, as well as potential employee contributions and benefits, could lead to labor unrest. We cannot ensure that future strikes or work stoppages will not affect our operations or administrative routines or will not affect our Proposed Privatization.
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Strikes, work stoppages, or other forms of labor unrest at our company or our subsidiaries or any of our major suppliers, contractors or their facilities could impair our ability to complete major projects and adversely impact the results of our operations, financial condition, and ability to achieve our long-term objectives. For further information regarding strikes, labor unions and work stoppages, see “Item 6.D. Directors, Senior Management And Employees —Employees.”
If we do not remedy the material weakness in our internal controls, the reliability of our financial statements may be materially affected.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on the effectiveness of our system of internal control. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance IFRS Accounting Standards. As a public company, we are required to comply with the Sarbanes-Oxley Act and other rules that govern public companies. In particular, we are required to certify our compliance with Section 404 of the Sarbanes-Oxley Act, which requires us to furnish annually a report by management on the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm is required to report on the effectiveness of our internal control over financial reporting.
A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements would not be prevented or detected on a timely basis. In the course of completing our assessment of internal control over financial reporting as of December 31, 2023, we did not design nor maintain effective internal control over our financial reporting because a material weakness in internal control over financial reporting was identified as of that date related to an inadequate function in our revenue billing system, which allowed the direct insertion and execution of scripts in our Information Technology (“IT”) production environment, and allowed users with administrative access to change file data during the file transfer interface (FTP) from the revenue billing system to the accounting system without adequately designed and implemented segregation of duties controls. This material weakness could have resulted in undue changes to our billing system, potentially compromising the integrity and reliability of the related interfaces between the revenue billing system and the accounting system.
Our internal controls department is responsible for overseeing the implementation of action plans and reports periodically to the Board of Directors and the Audit Committee. If our future efforts are not sufficient to remedy all the inconsistencies identified, we could continue to experience material weaknesses in our internal controls in the future. Any such material weaknesses could adversely affect our ability to accurately prepare our financial statements, which may result in a restatement of our historical financial statements or in misstatements in our future financial statements and, consequently, adversely affect our business and financial condition. See “Item 15—Controls and Procedures” for further details.
Risks Relating to Suppliers
Any interruptions in the supply of electricity and water andmay adversely impactaffect our operations.
Electricity and the price we pay for it hashave a significant impact on our operating results. Any material interruptions in the supply of energy could have a considerable negative effect on our activities, our financial situation, our operatingcondition, results of operations and prospects.
The Brazilian power generation system is based on hydro, thermal, wind and solar energy, with the majority of energy being produced by hydroelectric powerplants. InAlthough Brazil recorded the lowest volume of rainfall in 91 years in 2020 and 2021, Brazil experienced a critical hydrological year with below-average rainfall compared to the expected long-term average, which increased the electricity price and caused a material impact on our operating results. The situation requires constant monitoring and the Federal Government will keep monitoring the system in 2022 and controlling2023, the demand through tariff flags, which are a surcharge levied on electricity consumptionEl Niño phenomenon reversed the water crisis experienced in prior years and produced the best reservoir storage in the Regulated Contracting Environment andlast 14 years. Nevertheless, it is not possible to predict rain patterns in the Free Contracting Environment, raising the System Service Charge. Any resulting increasesfuture. Increases in the price of energy could have a material impact on our business, financial condition, or results of operations. Also,Moreover, electricity shortages of electric energy could lead to instability in water supply and sewage collection and treatment services, which could damageadversely affect our reputation and operations. In addition,Additionally, as we are one of the largest electricity consumers of electricity in the State of São Paulo, a potential increase in electricity tariffs due to a shortage of hydroelectric power could have a significant financial impact on us.
Finally, adverse weather conditions and continuous droughts can interrupt the electricity supply and may impact our distribution of water and prevent us from providing water to our customers and perform our obligations in accordance with the terms of our concession agreements. For more information, see “Item 4.B. Business Overview—Energy Consumption.”
We may face difficulties in collecting overdue amounts owed to us by municipal government entities.
As of December 31, 2021, our total trade receivables were R$4,198.4 million. Of this amount, the Municipalities of Mogi das Cruzes and São Caetano do Sul, for which we provide water on a wholesale basis, owed us R$28.0 million, and certain municipal government entities owed us R$865.7 million. Of the total amount owed by Municipalities, R$20.4 million was overdue by between 30 and 360 days and none was overdue by over 360 days.
Certain entities associated with municipal governments for which we provide services also do not make regular payments. We cannot guarantee if or when these entities will make payments on a regular basis or pay the amounts they owe us. If these Municipalities and related entities do not pay the amounts they owe us, ourOur business financial condition or results of operations may be adversely affected.affected by reliance on services and products from third-party suppliers.
Regulatory Risks
The complexityWe rely on third parties to supply services, products and equipment used in our facilities. If these third parties fail to comply with deadlines or contractual conditions, we may be adversely affected by any delays or higher costs and penalized for any resulting failure by us to perform a necessary service to the population. If we have to turn to other suppliers to cover any shortfall, changes in market conditions may significantly increase the cost of the process of demonstrating our economic and financial capacity established under the terms of Federal Decree No. 10,710/2021 and Federal Decree No. 10,588/2020, as amended by Federal Decree No. 11,030/2022,projects or operations, making them unfeasible, which may have an adverse effect on our business,results of operations and financial conditionsresults.
The ability of these third parties to fulfill their obligations may be adversely affected by financial or operating results.
Law No. 11,445/2007,economic crises or other factors. In addition, several supply chain risks, such as amended by Law No. 14,026/2020, providedstrikes or lockouts, loss of or damage to equipment or its components while in article 11-B§1transit or storage, natural disasters, contagious diseases that contractsprevent free circulation, or war, may limit the supply of products and/or equipment used in force that did not haveour operations and facilities. Further, the new universalization targets that guarantee the service of 99%imposition of the population with drinkingUniversalization Targets for water supply and 90%sanitary sewage set out in the New Legal Framework for Basic Sanitation may adversely affect the availability of third party services and the population with sewage collectionsupple or products and treatment by December 2033 hadequipment as the entire sanitation industry is looking to include these targets until March 31, 2022.
Further, according to article 10-B, service operators must comply with financial and economic parameters that will measure their ability to provide sanitation services and meet the service standards established by law in a timely manner.these targets.
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On June 1, 2021, Federal Decree No. 10,710/2021 was enacted, establishingIn some cases, there are only a few suppliers for products we use, such as chlorine, sodium hypochlorite, ferric chloride, and fluosilicic acid. There are also highly specialized suppliers for information systems platforms that we use in our commercial, financial and administrative processes.
If any supplier discontinues the methodologyproduction or sale of its products and services, we may not be able to purchase these products and services from other suppliers for demonstrating the economicsame price or on the same terms. In this case, the provision of our services or our ability to maintain our commercial, financial and administrative processes may be significantly jeopardized, which could adversely impact our financial condition and results of operations. Additionally, the Universalization Targets for sanitation could lead to a shortage of raw materials and affect the capacity of public service providers for drinking water supply or sanitary sewage. Article 10 of this decree stipulates that an application for proof of economic-financial capacity must be submittedcurrent hydrometer suppliers to the regulatory entity responsible for inspecting the contracts by December 31, 2021. meet our future demand.
Risks Relating to Our Clients
We submitted the request related to this requirement to ARSESP. The regulator has now recognized our economic and financial capacity for the 370 Municipalities that are part of URAE1-Southeast, with documentary reservations for six Municipalities that, until the date of delivery of the documentation to ARSESP, had not agreed to the amendments to their contracts. Until March 31, 2022, we executed 240 amendments to the contracts with the Municipalities under our operations, with the aim to incorporate or adapt the universalization of the goals required by Section 11-B of Federal Law No. 11,445/2007, amended by Federal Law No. 14,026/2020. The Municipalities that have not yet formalized the respective amendments represent approximately 1.4% of our total annual revenue. On April 1, 2022, Federal Decree No. 11,030/2022 was enacted, amending the provisions of Federal Decree No. 10,588/2020, which, in turn, provided for the regularization of operations and technical and financial support from the Brazilian Government and the respective allocation of federal resources in the sanitation sector.owed some substantial unpaid debts. We cannot assure you as to when or whether we will be paid.
Historically, the State of São Paulo and some State entities have delayed payment of substantial amounts related to water and sewage services owed to us. As of December 31, 2023, the State of São Paulo owed us R$120.4 million for water and sewage services. Additionally, the State of São Paulo also owes us substantial amounts related to reimbursements of state-mandated special retirement and pension payments that we make to some of our former employees for which the State of São Paulo is required to reimburse us.
With respect to payment of pensions on behalf of the State of São Paulo, we had a contested credit of R$1.5 billion as of December 31, 2023 recorded in the line item “disputed amount.” We do not record this contested amount as a reimbursement credit for actuarial liability due to the uncertainty of payment by the State of São Paulo, considering that the entiretyamount is under judicial discussion in a civil lawsuit filed on November 9, 2010 against the State of São Paulo. We also had an uncontested credit of R$1.0 billion which is recorded as related-party receivables, recorded in the line item “undisputed amount.” For further information, see Note 11(a) to our contracts2023 Consolidated Financial Statements.
In addition, as of December 31, 2023, we recorded a provision for an actuarial liability of R$2.1 billion with respect to future supplemental pension payments for which the State of São Paulo does not accept responsibility. For further information, see Note 11(v) to our 2023 Consolidated Financial Statements.
In addition, certain municipalities and other government entities also owe us payments. We cannot assure you when or if the State of São Paulo and such municipalities will be deemed “regular”pay the contested credits, which are still under discussion, and the remaining overdue amounts they owe us. The amounts owed to us by the regulator or byState of São Paulo, municipalities and other government entities for water and sewage services and reimbursements for pensions paid may increase in the Municipalities.future, given that we are currently making some payments on behalf of the State of São Paulo. For further information, see “Item 7.B. Related Party Transactions—Agreements with the State of São Paulo.”
The adequacy of our contracts that were amended willRisks Relating to Our Management
We depend on the analysis by the federal regulator (ANA), according to Federal Decree No. 10,588/2020. Accordingly, astechnical qualifications of the datemembers of this annual report,our management, and we cannot measureguarantee that we will be able to maintain them or replace them with suitable individuals.
Part of the effectssuccess of Federal Decree No. 10,710/2021our operations and are currentlythe implementation of our strategy depends on the knowledge, skills and efforts of our management and certain key employees. If the members of our management or key employees choose to no longer participate in the management of our business and/or resign, we may not be able to find skilled professionals to replace them. The New Legal Framework for Basic Sanitation established that by 2033 the Universalization Targets must be met. The increase in positioncompanies operating in our industry as a result of the New Legal Framework for Basic Sanitation, may lead members of our management or other professionals to assess whether its implementation willleave us. The loss of members of management and key employees, as well as the difficulty in hiring professionals with similar expertise and experience could have an adversea negative effect on our business,results of operations, financial condition or results of operations.and our reputation.
Risks Relating to the Regulatory Environment
AccordingPursuant to the New Legal Framework for Basic Sanitation, ANA will be responsible for issuing reference norms whosestandards. Any non-compliance by Municipalities or sanitation operators will prevent themmunicipalities or operators from accessing financingfinancings and sources of funds managed or operated by the Federal Government.
Considering that the rules established by ANA may conflict with the rules in force of subnational regulatory agencies, including ARSESP, we cannot guarantee that we will have full access to financings andpublic resources managed or operated by the Brazilian government.
According to Federal Government.Law No. 11,445/2007 and Federal Law No. 9,984/2000, both modified by the New Legal Framework for Basic Sanitation on Federal Law No. 14,026/2020, ANA can issue reference standards (guidelines) for how subnational regulatory agencies should regulate certain topics in the sector. Consequently, ANA’s reference standards can apply to the basic sanitation sector nationwide, setting the guidelines for regulation and supervision by the regulatory entities at the state, municipal, and district levels, and ensuring regulatory uniformity in the sector and legal certainty for the provision and regulation of the service.
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Nevertheless, the application of the reference standards is not mandatory a priori. The lackNew Legal Framework for Basic Sanitation provided that the access to financing and public resources managed or operated by the Brazilian government depends on compliance with the reference standards, by the sanitation service titleholders, service providers, and the subnational regulatory agencies, such as ARSESP. Accordingly, there is an incentive for adherence to these reference standards.
Moreover, Federal Decree No. 11,468/2023 created the National Secretariat for Environmental Sanitation, linked to the Ministry of this accessCities, with several competences, including: (i) coordination of the implementation of the Federal Basic Sanitation Policy in Brazil; (ii) proposition of national guidelines for financing the sanitation sector; and (iii) definition of guidelines for the preparation of reference standards.
Non-compliance by any municipalities with the reference standards could adversely affect our activities, especially as we and any non-complying municipalities would be prevented from accessing public resources from the Brazilian government.
The regionalization of services, established in the New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.
The New Legal Framework for Basic Sanitation created mechanisms to encourage the creation of clusters of municipalities to plan and procure sanitation services as a group, with the aim of ensuring gains in scale and cross-subsidizing tariffs. In this sense, the New Legal Framework for Basic Sanitation establishes that the access to public resources from the Brazilian government by municipalities and operators is conditional upon the creation of regionalized structures, with governance rules, and the effective adhesion of municipalities to the region. Federal Decree No. 11,599/2023, published on July 12, 2023, provides that the adhesion to the regionalized governance structures must be completed within 180 days from the date of their establishment by the municipalities.
Regionalized structures include regional units and reference blocks, as well as micro-regions, urban agglomerations, metropolitan regions and public consortiums, among others. The New Legal Framework for Basic Sanitation provides that each state had one year since it came into force to regionalize the services through one of those structures.
In the State of São Paulo, State Law No. 17,383/2021 created four URAEs. This law defines that municipalities must join the URAEs within 180 days from its publication, in accordance with Federal Decree No. 11,599/2023. In December 2021, State Decree No. 66,289/2021 set January 1, 2022 as the deadline for the municipalities to adhere to the URAEs, which has been subsequently extended to February 15, 2023 by the State Decree No. 67,880/2023, published on August 15, 2023, for 180 days from its publication. The State Law No. 17,583/2023, that approved our Proposed Privatization, included new municipalities to URAE-1. As of the date of this annual report, 371 out of 375 (disregarding Olímpia) municipalities in which we operate have adhered to URAE-1.
Failure by the municipalities to adhere to the URAE-1 may adversely affect our business, financial condition, or results of operations, since we and non-adherent municipalities will not have access to federal financing.
The proposed Concession Agreement for URAE-1 to be signed between us and URAE-1 after the completion of our Proposed Privatization was subject to a public consultation held by the SEMIL. This public consultation ended on March 15, 2024, and the SEMIL published a report on the contributions on April 30, 2024. For more information, please see “Presentation of Financial and Other Information—Proposed Privatization” and “Item 3.D. Risk Factors—Risks Relating to Our Proposed Privatization.”
The New Legal Framework for Basic Sanitation prohibits new program contracts for basic sanitation services, resulting in uncertainties for our current and future concessions.customer base and size of operations.
Law No. 11,445/2007, which establishes national guidelinesThe New Legal Framework for basicBasic Sanitation prohibits the provision of sanitation was amendedservices by Law No. 14,026/2020, which became known asany bodies or entities of Public Administration, at Federal, State, District, and Municipal levels, through program contracts, covenant, partnership agreement, or other instruments of a precarious nature.
The program contracts that were executed prior to the New Legal Framework for Basic Sanitation and brought about several changes that directly affect our operations.
As provided, the provision of public basic sanitation services by any party other than municipal and state’s public administration can no longer be formalized through program contracts, agreements, partnership agreements and other unstable instruments for the provision of public basic sanitation services were prohibited. As such, except in the Municipalities where the State shares ownership with the Municipalities, any current expired contract we hold with Municipalities can only be renewed through a bidding process under Law No. 8,666/1993, as amended.
Previously, we provided services in several Municipalities through contracts which did not require bidding procedures. The current program contracts and contracts that comply with Law No. 11,445/2007 will remain in effect until the end of their contractual term provided thatas long as they are amended to reflect the contracts setnew targets for the universalization of services until December 31, 2033, and those who have not set such targets had to establish them until March 31, 2022. Pursuant to current legislation, except in the Municipalities where the State shares ownership with the Municipalities the renewal of these contracts, once they expire, will require a bidding process, and therefore we cannot guarantee that we will be able to maintain our current customer base and size of operations. Prior to the implementation ofprovided by the New Legal Framework for Basic Sanitation. As confirmed by ARSESP on Basic Sanitation,March 28, 2022, we proved our market expansion could be undertaken through program contracts that did not require a bidding process. Undereconomic and financial capacity to fulfill the New Legal Framework on Basic Sanitation, this important mechanism for expanding operations inUniversalization Targets by 2033, as required by the state of São Paulo is no longer available to us, which may increase uncertainty with respect to our plans for expansion of our market share.
Any sale of our shares to the private sector which removes the State as our majority shareholder brings uncertainties regarding the maintenance of current program contracts.
The New Legal Framework for Basic Sanitation, establishes that,amending the existing program contracts to comply with the new targets imposed by the New Legal Framework for Basic Sanitation.
Accordingly, once our program contracts terminate, we will be required to participate in a bidding process to continue to provide the services previously provided under these program contracts. Also, in the event of the sale of the State’s share control to the private sector, the currentour program contracts are replaced by the Concession Agreement for URAE-1, valid until 2060, as a result of our Proposed Privatization (which will not require bidding process), once this concession agreement terminates, we will also be required to participate in a bidding process to continue to provide the same services. If we are not successful in such bidding processes, our customer base and size of operations may be replaced with new concession contracts, subject to the State Privatization Program, where applicable. The framework also establishes that if there is a change in the clauses of these program contracts, such proposals must be presented to the public entities holding the service, who must, within 180 days, manifest their opinion if in disagreement, afterreduced, which the proposal will be considered as approved. However, prior approval by the public entities that executed the contract related to the program is only required if the majority shareholder requests an amendment to the term, purpose or certain other sections of the contract at the time of the change of control. Regardless of that, most ofmay adversely affect our contracts have a termination clause in the event of a change in our control. We cannot assure you that all the public entities holding the service will agree to any proposed amendments to the contracts and that the result of those negotiations would not have a material impact on our revenues or operations.
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For more information about our Proposed Privatization, please see “Item 3.D. Risk Factors—Risks Relating to Our Proposed Privatization—If our Proposed Privatization is consummated, the State of São Paulo will no longer be our majority shareholder, which brings uncertainties that are beyond our control regarding the maintenance of our current program contracts.”
Municipalities may terminate our concessionscontracts before they expire in certain circumstances. The indemnification payments we receive in such cases may be less than the value of the investments we made, or may be paid over an extended period, adversely affecting our business, financial condition, or results of operations.
Municipalities have athe right to terminate our concessionscontracts early if we fail to comply with our contractual or legal obligations (forfeiture or “caducidade”), including in the event of non-compliance with the Universalization Targets, or if the Municipalities determinemunicipalities decide to do so in a takeover proceedingresume the services based on public interest (retomada de serviçosencampação). The resumptionIn the first scenario (caducidade), indemnification will be guaranteed to us for any assets not amortized or depreciated, but will only be paid following a contract termination administrative process, in which we will have the opportunity to present our defense for maintaining the contract and discuss the amount to be paid as compensation for the unamortized assets. It is not possible to predict how long such an administrative process will take, nor whether we will receive the compensation we believe we are owed. In addition to the forfeiture penalty, other penalties may be applied, such as the suspension of servicesthe right to participate in bidding process or enter into public agreements with the government, including public entities other than the one that imposed the sanction. In the second scenario (encampação), indemnification must be justified by public interest.paid prior to the contract termination, and it will also cover any assets not amortized or depreciated. In these circumstances,this case, the Municipalities have to determinemunicipality must demonstrate that it is no longer in the public interest to continue to provide water and sewage services under the terms and conditionsconcession contract through the approval of the current concession. Under Federal Decree No. 10,588/2020, as amended by Federal Decree No. 11,030/2022, the Municipalities, and regulator are responsible for identifying potential contractual irregularities and adopting the required actions. Accordingly, we cannot assure all our contracts are complying with the new rules anda specific local law.
In either case, public entities will be not terminated by the Municipalities. The Basic Sanitation Law provides that on the early termination of a concession a valuation of the assets that relateobligated to the services provided must be carried out in order to calculate the unamortized portion of investmentsindemnify us for purposes of assessing any related indemnification payments due to the service provider. The resulting indemnification payment may be less than the remaining value of the investments the sanitation service provider made. Alternatively, there may be an extension of the maturity dates for the payments. The Municipalities may also refuserelated to make indemnification payments voluntarily, potentially leading to judicial disputes. In the case of a judicial dispute, there is a risk that the judicial decision will consider the indemnification as undueany assets not amortized or set it at a lower value than the investments already made.
depreciated. The New Legal Framework for Basic Sanitation assigns to ANA the authority to introduceissue a reference norms onstandard regarding the methodology for calculating indemnities due tofor investments made and not yet amortized or not depreciated.
On August 31, 2021,4, 2023, ANA published the opening of Subsidy TakingResolution No. 01/2021, intended to collect contributions from society161/2023, that approved Reference Norm No. 3, which provides for the preparation ofthis methodology. However, considering that ARSESP may or may not incorporate the reference norms in its regulatory framework, as explained above, ARSESP has published Public Consultation No. 07/2023 aiming to define its methodology on this point. The comment period for Public Consultation No. 07/2023 finished on November 10, 2023, and on April 16, 2024, ARSESP published Resolution No. 1,515/2024, which established the methodology and criteria for the methodologyreversal and possible indemnification of calculating asset indemnities forassets at the water and sewage segments.
Based on contributions received from society and other studies, ANA will prepare the Regulatory Impact Analysis Report (RIA) related to this reference norms for a second stage of social participation, which will include a public consultation. Future concession contracts will have their indemnification methodology defined together with the other contractual rules provided for in ANA’s reference norms. We do not know the effects that the asset indemnity calculation methodology will have on our business.
The New Legal Framework provides that the transfer of services from one provider to another will be conditioned, in each case, on the indemnity of investments linked to reversible assets not yet amortized or depreciated, under the terms of Law No. 8,987/1995. In these cases, the holderend of the services may assign payment toconcessions in the provider who will assume the service. It is not possible to guarantee that future bids will take into account previous resolution of this issue before the bidding processes.
Additionally, we are party to proceedings related to indemnification issues regarding the resumption of watersanitation sector (water supply and sewage collection services by certain Municipalities. For more information, see Note 20 toservices) in the State of São Paulo under the supervision and regulation of ARSESP.
We cannot prevent any municipalities from terminating our 2021 financial statements included in this annual report. Other Municipalities may seek to terminate their concession agreementscontract before the contractual expiration date.date based on the events above described. If this occurs and we do not receive adequate indemnification for our investments, or the indemnification is paid over an extended period, our business, financial condition, or results of operations may be materially adversely affected. We also cannot predict the effects that ANA or ARSESP’s methodology may have on our business, as it is possible that the indemnification payments may be lower than the remaining value of the investments we made. Further, once the methodology is determined, municipalities may also refuse to make indemnification payments voluntarily, potentially leading to judicial disputes. In case of judicial disputes, there is a risk that the judicial decision will consider the indemnification as undue or that it would be set at a lower value than the investments we already made. Finally, it is important to highlight that we are a party to proceedings related to indemnification issues regarding the resumption of water supply and sewage collection services by certain municipalities. For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Proposed Privatization—If our Proposed Privatization is consummated, the State of São Paulo will no longer be our majority shareholder, which brings uncertainties that are beyond our control regarding the maintenance of our current program contracts” and Note 20 to our 2023 Consolidated Financial Statements included elsewhere in this annual report.
Current regulatory uncertainty, especiallyWe cannot guarantee compliance with regard tothe new Universalization Targets for reasons beyond our control, based on the guidelines outlined in the New Legal Framework for Basic Sanitation may have an adverse effect onand the State Law that authorized our business, financial condition or results of operations.Proposed Privatization.
The New Legal Framework for Basic Sanitation defers certain regulationsset a target of December 31, 2033 for the universalization of water and definitionssewage services in Brazil. Nevertheless, State Law No. 17,853/2023, which authorized our Proposed Privatization brought these targets forward to December 31, 2029.
In addition to anticipating the universalization deadline, rural areas and consolidated informal centers were included in our service area. The terms of the Concession Agreement for URAE-1, which was the subject of Public Consultation No. 01/2024, also introduced a new set of targets to be achieved simultaneously. Compliance with the new set of targets will be monitored on an annual basis, unlike under the previous model where the targets were verified in periods ranging from 4 to 5 years.
Under the current proposed model, compliance with the targets will be monitored and, if these targets are not met, it could lead to a later date,reduction in the tariff adjustment index (Índice de Reajuste Tarifário – IRT) through the application of Factor U. The Public Consultation No. 01/2024 ended on March 15, 2024, and the SEMIL published a report on the contributions on April 30, 2024. See “Presentation of Financial and Other Information—Proposed Privatization” for further information about the contributions for this public consultation, and “Item 4.B. Business Overview—Tariffs—New Tariff Structure” for further information about our new tariff structure.
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Although much of the effort to achieve these objectives falls on us, there are imponderable elements that are beyond our control, and which could affect our ability to achieve these targets – such as, for instance, delays in issuing environmental licenses and municipal authorizations to carry out construction works, processes for vacating areas of interest, the possible finding of archaeological sites, among others –, which could materially adversely affect our business, financial condition, or results of operations.
If the water from our water sources (mananciais) does not meet our water treatment conditions, we may have to interrupt the water treatment process until we are able to treat the water or to substitute the supply of water from another water source.
Our water supplies are potentially subject to contamination by sewage infiltration into our water distribution networks, which can alter their quality. If this occurs, we do not distribute the contaminated water and maintenance and disinfection is carried out in the distribution network, which generates additional costs for our business.
In addition, water sources may possibly be contaminated by third parties through irregular or accidental dumping of large quantities of contaminating products that affect the final quality of the water. We seek to mitigate this risk through continuous monitoring of our water sources, in addition to our own water treatment systems at our treatment plants, which have technology and tools to detect and act to prevent the distribution of water that does not meet the required standards. All of our concessions are insured against operational risks and damage to third parties arising from this type of event.
Risks of contamination in our distribution system include failures in the maintenance procedures of our networks, which may eventually carry undesired material to the supply networks if not correctly carried out. If we are found to be liable for consequences of water contamination arising out of human exposure to hazardous substances in our water supplies or other damage, we would be subject to administrative, civil and/or criminal enforcement actions, litigation and other proceedings or obligations to recover the environmental damages and indemnify the persons that were affect by the contamination, and we would also suffer adverse reputational impacts. Proceedings for the management of environmental contamination, redressing of environmental damages or indemnification of the affected population usually involve significant costs and may last several years. Additionally, claims or complaints from residents or communities located around our sites may have adverse effects on our business and reputation. Occasionally, residents or communities may have claims or complaints against us if they believe that our activities may be harming their health or well-being. If we are unsuccessful in adequately managing these claims or recommendations, they may be referred to the environmental authorities or may be the subject of legal (civil and/or criminal lawsuits) or administrative proceedings, which could affect our operating and financial results, as well as our image.
Furthermore, cleaning up water sources can be very expensive and if we are required to do so, it could have a material and adverse effect on our business, operating results and financial condition. In the event that our water supply does not meet treatment conditions, we may have to interrupt or stop the use of that water supply until we are able to treat the water or to substitute the supply of water from another water source. We may incur significant costs in order to adapt the treatment of raw water (through expansion of current treatment facilities or development of new treatment methods), use water from a more distant water source, and if there is a need to interrupt the water supply, we will need to warn our consumers. Using a new water source is generally associated with increased costs compared to an existing water source and as indicated above.
Additionally, the increase in the population density of the contributing basins is also another factor that can lead to a reduction in the quantity of raw water. Any reduction in the amount of raw water available to us can have a negative effect on our financial results and activities.
Water and sewage treatment involve environmental risks in the event there is a system failure. For example, if there is an overflow in a sewage treatment plant, the sewage could impact neighboring areas or even natural water resources, which could have a significant impact on our operations. Moreover, ANA was assigned with the authority to edit reference norms to serve as guidelines to be observed by other regulatory agencies, pursuant to Article 23, of the Law No. 11,445/2007, thereby potentially reducing their autonomy. If these national guidelines are not followed, certain consequences may apply to the operators, such as blocking access to funding or financings provided or managed by the Federal Government or federal entities.
Among the supervening definitions, the regionalized provision of sanitation services stands out as one of the requirements of the new legislation that allows providers to have access to the technical and financial resources of the federal government.
This model of providing regionalized sanitation provides for the establishment of regional sanitation units by state governments within one year of enactment of the law. In the state of São Paulo, State Law No. 17,383 was enacted on July 5, 2021, creating four URAEs. The Municipalities operated by us coincide with URAE 1 – Southeast. On December 2, 2021, State Decree No. 66,289 was issued, which deals with the adhesion of Municipalities to the URAEs. We cannot assure voluntary adhesion by all Municipalities that are part of URAE1 – Southeast and theirmaterial adverse effect on our reputation, financial condition and results of operations. In addition, sludge, a byproduct of the sanitation process, needs to be disposed of appropriately in order to prevent harm to the environment. In some cases, the landfills in which the sludge is deposited are not located in the same municipalities as the water and sewage treatment facilities and, therefore, we are required to transport the sludge to the closest landfill, which increases the risk of contamination. Furthermore, some landfills may stop operating, which may increase our operating costs. These events could also lead to environmental liabilities in the administrative, criminal and civil spheres, as mentioned above.
Any of the above events could have a material adverse effect on our financial condition, results of operations, cash flow, liquidity, and reputation.
Risks associated with the collection, treatment and disposal of wastewater and the operation of water utilities may impose significant costs that may not be covered by insurance, which could result in increased insurance premiums.
The wastewater collection, treatment and disposal operations of our utilities are subject to substantial regulation and involve significant environmental risks. If collection or sewage systems fail, there are pipe leaks, bursts, overflow or our systems do not otherwise operate properly, untreated wastewater or other contaminants could spill onto nearby properties or into nearby streams and rivers, potentially causing damage to persons or property, injury to the environment including aquatic life and economic damages, which may not be recoverable in rates. This risk is most acute during periods of substantial rainfall or flooding, which are the main causes of sewer overflow and system failure.
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Liabilities resulting from such damage could adversely and materially affect our business, results of operations and financial condition. In the event that we are deemed liable for any damage caused by overflow, losses might not be covered by insurance policies, and such losses may make it difficult to secure insurance with the same coverage and insured amounts in the future at acceptable insurance premium rates. Similarly, any related business interruption or other losses might not be covered by insurance policies, which would also make it difficult for us to secure insurance in the future at acceptable insurance premium rates.
We may also incur liabilities under environmental laws and regulations requiring investigations and recovery of environmental contamination at our properties or at off-site locations where there have been adverse environmental impacts. The discovery of previously unknown conditions, or the imposition of cleanup obligations in the future, could result in significant costs, and could adversely affect our reputation and financial condition, results of operations, cash flow and liquidity. Such remediation losses may not be covered by our current insurance policies, or the insured amount may not be sufficient and may make it difficult for us to secure the coverage as part of insurance policies in the future at acceptable insurance premiums with similar types of coverage and amounts.
On January 4, 2022, ANA initiated Public Consultation No. 01/2022 regarding
We cannot guarantee that our existing insurance policies are adequate and sufficient for all circumstances that may arise, or against all inherent risks and amounts of damages that may occur. We cannot guarantee that we will be able to renew our existing insurance policies, and if they are renewed, we cannot guarantee that it will be renewed under the proposal forsame conditions and coverage originally purchased, or at reasonable commercial rates, or on acceptable terms, whether in terms of costs or coverage. The occurrence of a reference standard on indicatorssignificant uninsured or uninsurable loss, in part or in full, or the failure of our subcontractors to comply with their indemnity obligations, may adversely affect our operations and standardsour reputation.
We are exposed to risks of quality, efficiency and effectiveness for evaluatingdelays or failures in payments associated with the provision maintenanceof water and operationsewage services.
Based on our contracts, we must meet certain service provision targets and continue to provide water supply and sewage services to clients with overdue payments and who may not perform regular payments. In those cases, we cannot assure when the payments will be made in return for the services provided, at the same time we are subject to significant charges related to the provision of water supply and sewage systems. The outcomepublic services, such as those related to the water abstraction or to the discharge of this public consultationsewage into the water resources, and there is still uncertain, as well as any new ANA reference standardsa risk that such charges may be edited and we cannot guarantee that our operations will not be fully passed-on to our customers.
The tariffs charged by us may not be increased in line with the relevant charges or inflation adjustments and operating expenses, including taxes, or may not be increased in a timely fashion, due to legal and contractual restrictions that prevent us from passing on to our customers any increases in our cost structure.
Our water loss and other operational metrics indicate that we will need to make investments in our infrastructure. If any such investments are insufficient in adequately reducing water loss rates, this could have a material adverse effect on us.
Reducing levels of physical water losses (caused by leaks and overflows) depends mainly on investments made in identifying and repairing leaks, managing pressure in distribution networks and operational improvement programs and renewal of the distribution network. Reducing levels of non-physical water losses (which result from unauthorized consumption (theft) or inaccurate measurement) depends mainly on investments made in the acquisition and installation of water meters, the re-registration of customers and combat of irregularities, such as illegal water connections. If we do not make sufficient investment in activities and projects to reduce our levels of water loss, we could be materially and adversely affected. These investments must mainly be aligned with the goals established in contracts with municipalities and the ideal levels of losses in supply systems.
Furthermore, the New Legal Framework for Basic Sanitation establishes, among other things, that providers of public water supply and sewage services must meet qualitative and quantitative targets. Among these targets is the reduction of losses in the distribution of treated water. If we do not implement the necessary actions to reduce the loss rates, or if the projects aimed at reducing water loss levels do not produce satisfactory results, our cash flow, operating income and financial situation could be adversely affected. For more information on ARSESP regulations and these pending measures,about the New Legal Framework for Basic Sanitation, see “Item 4.B. Business Overview—Government Regulations Applicable to Our Contracts—The Basic Sanitation Law and the New Legal Framework for Basic Sanitation.”
Securing new concessions, new public-private partnerships and new acquisitions involve risks related to the integrations of the adjudicated or acquired businesses, the situation of the assets and the regularity of the operations related to the concessions.
There may be risks related to the new concessions, new public-private partnerships and to the contracts held by us, such as: (i) the assets related to the contract may be different from the description provided in the public bidding documents, in the public-private partnership contracts and in the other contracts; (ii) the absence of and/or the irregularity of required environmental licenses; (iii) the absence of grants for the operation of wells; or (iv) land irregularities.
In addition, we may face difficulties transferring the assets related to the contracts, or they may be in a bad state, which may result in the need to incur additional investments. These irregularities make it difficult to enter or prevent us from entering into financing agreements with financial institutions, which may compromise the achievement of the targets originally included in our contracts.
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Additionally, in the case of companies acquired by us, there may be delays in obtaining the consent of the granting authority or their creditors in order to confirm the change of control or we may not obtain such consents at all.
Risks related to encumbrances, which may adversely affect us in the event of default on the obligations guaranteed by our properties.
There may be risks in relation to some of our properties subject to encumbrances and legal restrictions, such as unavailability and easements (right-of-way).
According to real estate record certificates, we believe that some properties are burdened with unavailability, a judicial measure that imposes significant restrictions on certain assets. Its purpose is to prevent the debtor from dissipating his assets or asset squandering while the judicial process is not concluded. Although the ownership of the assets remains with the defendant, the exercise of some powers and privileges normally associated with property rights (e.g. alienation or encumbrance) will only be possible with the prior authorization of the same court that determined the unavailability.
Non-payment of the amounts that generated the unavailability may lead to the forced sale of the properties, and the proceeds of any sale would be used to pay the outstanding debts. In these cases, the new owners of the properties may seek possession of the assets, which could lead to the need to relocate the activities carried out in these locations.
Additionally, some of the properties are encumbered by easements. In case the existing easements are not being respected, the respective beneficiaries can demand that their area be vacated and enforce the real right of such easements, as well as the losses and damages incurred.
We may not be able keep in force or timely renew all permits and/or licenses for use and operation necessary for the development of our activities.
We may not be able to keep in force or renew with the appropriate public authorities all permits and/or licenses for use and operation necessary for the development of our activities, which are issued by the municipalities’ mayor offices, by the appropriate fire department and by the responsible environmental authorities.
If we are unable to obtain or renew such permits, we may be subject to fines and the closing of any irregular facilities, with the interruption of the activities carried out by us at such facilities. Any factors that impact the failure to obtain or renew such licenses and permits may cause us to incur additional costs, which may force us to reallocate resources to meet any additional charges. Failure to obtain, maintain or renew environmental licenses and authorizations may also lead to environmental, administrative or, criminal or civil liabilities.
Additionally, we cannot guarantee that licenses, permits, licenses and authorizations, such as use and operating permits and/or documents relating to the regularity of built-up areas, have not been breached in the past when in the process of obtaining or renewing them. For example, the existence of a built-up area without prior authorization from the relevant city hall, or in disagreement with the project approved, could lead to risks and liabilities for the property if the area is not regularized and it is inspected by the responsible bodies. These risks include: (i) the impossibility of registering the construction; (ii) the refusal for us to issue an operating license; (iii) the refusal for us to take out or renew property insurance; and (v) the interdiction of the property.
According to the Brazilian law regulating concessions and public-private partnership matters, our corporate structure is composed of some special purpose entities, which may result in our responsibility for tax, labor, environmental protection, consumer and bankruptcy matters originated from our subsidiaries.
Pursuant to Federal Law No. 11,079/2004, the execution of public-private partnerships must be preceded by the incorporation of a special purpose entity. In the event of one of our subsidiaries incorporated for such purpose does not comply with the contractual obligations or its financial disability to honor with the due capital contribution installments, as provided in the public-private partnership agreement, as their controlling shareholder and/or guarantor are the same, we may be liable to perform supplementary investments and to provide additional services in order to maintain the minimum financial rates provided for under the relevant agreements.
Federal Law No. 8,987/1995, or the Federal Concession Law, which establishes provisions for concessions and permission of public services, sets forth that the concessionaire, incorporated as a special purpose entity or not is responsible for the provision of the service granted in the concession, and is liable for any and all damages to the public entity, users or third parties, it being understood that the inspection carried out by the competent authority does not exclude nor mitigates such liability, which may significantly adversely affect our business and results. In the case of the concessionaire is incorporated as a consortium, the consortium leading company is liable before the public grantor for the compliance with the concession agreement, without prejudice to the joint and several liability of the additional members of the consortium. The risks inherent to our subsidiaries also include bankruptcy and potential enforcement of piercing the corporate veil by the Brazilian Courts and any event impacting the image of our partners, business partners and service providers of our subsidiaries may adversely affect our brand.
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Additionally, we may be liable for certain obligations of our subsidiaries, including tax, labor, environmental protection, regulatory and consumer matters, which, in the event they materialize, may adversely affect our business and results.
We are subject to intervention by the Court of Auditors of the State (Tribunal de Contas do Estado) as well as questioning by third parties related to our concession and program contracts.
Through a request made by the City Council or any interested third party, the Court of Auditors from the State of São Paulo or from the municipality of São Paulo can intervene in our concession and program contracts to investigate their conditions. If any procedure is installed against us or any of our subsidiaries, the Audit Court can propose suspension of the contract, which could interrupt our operations and cause us to lose any investments made in connection with the concession.
In addition, we may be subject to questioning by third parties, including the MPF and State’s Public Prosecutor’s Office (Ministério Público Estadual) regarding our contracts. We may also be subject to investigations and legal proceedings that may require the termination of our contracts and/or amendments to these contracts and/or the prohibition from entering into further agreements with the public entity that granted the contract.
The occurrence of any of these events could have a material adverse effect on our results of operations or financial condition.
We are subject to penalties related to our registrations, authorizations, licenses and permits for the development of our activities.
We depend on licensing and registration before federal, state and municipal authorities and agencies, as well as operating permits. We cannot guarantee that we will be able to obtain all the necessary licenses, permits and authorizations, or obtain their renewals in a timely manner. Obtaining the necessary licenses, permits and authorizations depends on clearance from environmental agencies and other authorities, whose deadlines we do not control. The failure to obtain or renew such licenses may prevent us from operating our units and lead to suspension and closing of irregular units, as well as the application of fines. Our strategy may be adversely affected if it is impossible to open and operate new units or the operations our current units are suspended or terminated due to the failure to obtain or renew the required registrations, permits and licenses, which may adversely affect our results of operations.
In addition, we are required to comply with the administrative limitations provided by environmental laws, such as the preservation of environmentally protected areas, and of nature conservation areas (e.g., parks, reserves, protected areas, etc.). Our non-compliance with these restrictions may result in penalties and other liabilities, including substantial fines, criminal/administrative sanctions and the obligation to repair and/or indemnify any damages.
Risks Relating to Environmental Matters and Physical and Transition Climate Risks
Noncompliance with environmental laws and environmental liability could have a material adverse effect on us, our reputation and image.
We are subject to extensive Brazilian federal, state and municipal laws and regulations relating to the protection of human health and the environment. These laws and regulations set, among others, environmental licensing and water grants requirements, as well as drinking water standards, limits for receiving effluents from non-domestic sources into our treatment systems and the quality standards that must be met by the sewage that is treated at the plants before being discharged into the waterways. We may also experience accidents such as leaks or broken pipes that can lead to liability for environmental damages (i.e groundwater and soil contamination) and infractions.
We are a party to several environmental proceedings and could be subject to other types of criminal, administrative and civil proceedings for non-compliance with environmental laws and regulations, including licensing requirements and water grants, that could expose us to administrative penalties and criminal sanctions, such as fines, closure orders and significant indemnification obligations. Furthermore, we are a party to commitment terms regarding the regularization of licenses and water grants requirements for our operation, that may lead us to administrative, civil and criminal liabilities, if they are not fulfilled. Such expenses may lead us to reduce expenditure on strategic investments, which may adversely affect our business, financial condition, results of operations or reputation.
We are also a party to environmental proceedings related to the release of untreated sewage into waterways or the disposal of sludge generated by treatment plants, which subject us to civil proceedings and investigations related to recovery and indemnifications of the caused damages. In addition, we are involved in civil/administrative proceedings challenging the water withdrawn during the 2014-2015 water crisis. Any unfavorable judgment in relation to these proceedings, or any material environmental liabilities, may have a material adverse effect on our reputation, business, financial conditions or results of operations.
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For more information on these proceedings, see “Item 8.A. Consolidated Financial Statements and Other Financial Information—Legal Proceedings.” For more information on investments in environmental programs, see “Item 4.A. History and Development of the Company—Main Projects of our Capital Expenditure Program,” “Item 4.B. Business Overview—Description of our Activities—Sewage Operations—Sewage Treatment and Disposal,” “Item 4.B Business Overview—Environmental Matters” and “Item 4.B. Business Overview— Environmental Matters—Environmental Regulation.”
Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations.
We experience decreases in our water supply from time to time due to droughts. The 2019-2020, 2020-2021, 2021-2022 and 2022-2023 rainy seasons recorded below-average rainfall compared to the expected long-term average. This decreased rainfall compromises the recovery of water storage levels that are necessary to serve the population during dry months, which run from April to September. It is not possible to predict the behavior of rain in the future, especially considering the climate change worsening. If we undergo consecutive periods of droughts, we may be required to adopt measures to mitigate the impacts and maintain the water supply in our area of operation.
The droughts in 2014 and 2015 severely affected the level of water sources that supply the metropolitan region of São Paulo, forcing us to adopt a series of measures from 2014 to April 2016 to mitigate its impact and maintain the water supply served in the metropolitan region of São Paulo. In addition, in 2021, Brazil’s south-central region was affected by the worst drought in recent history. Between March and May 2021, dry weather in Brazil’s south-central region led to a shortage of water held in rivers, lakes, soil and aquifers, compared with the seasonal average for the past twenty years. With the return of the rainfall to its historical average, the volume of water available to the population of the São Paulo metropolitan region returned to a normal level. However, heightened public awareness of the need to conserve water during the crisis and other more recent droughts resulted in our customers continuing to adopt lower water consumption practices. Accordingly, this change in consumption practice due to the 2014-2015 water crisis has had a continued effect on our results of operations since then, emphasizing the importance of sustainable management of water resources and the significant impacts that water shortages can have on consumption habits, our business and our operating results. For more information, see “Item 4.B. Business Overview—The 2014-2015 Water Crisis.”
There is a risk that there might be further periods of drought in the future when we consider what has happened in the past, forcing us to adopt similar or more severe measures as those adopted in 2014-2015, which can cause further material changes to consumption habits. These uncertainties could have a material adverse effect on our results of operations and financial condition.
Extreme Weather Conditions and Climate Change may have a material adverse impact on our business, financial condition or results of operations.
Our business may be affected by droughts, and by other extreme weather conditions, such as torrential rain and other changes in climate patterns. A possible increase in the severity of extreme weather conditions in the future may adversely affect the water available for abstraction, treatment, and supply, whether from the standpoint of quality or quantity. Droughts could adversely affect the water supply systems, resulting in a decrease in the volume of water distributed, and consequently, the volume of water billed (i.e. the revenue derived from water supply services). For more information, see “Item 3.D. Risk Factors—Risks Relating to Environmental Matters and Physical and Transition Climate Risks— Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations.” Extreme climate conditions may compromise our facilities’ conditions to operate and supply of inputs. Additionally, increases in air temperature could affect demand for water.
Since we are dependent upon energy supplies to conduct our business, extreme weather events may also reduce water levels in the reservoirs that power hydroelectric power plants in Brazil, which may cause energy shortages, which could affect water and sewage services. Increased electricity prices may also adversely affect our costs and results of operations. For more information, see “Item 3.D. Risk Factors—Risks relating to Our Suppliers—Any interruptions in the supply of electricity and water may adversely affect our operations” and “Item 4.B. Business Overview—Energy Consumption.”
In February 2023, there were torrential rains on the northern coast of the State of São Paulo, especially in the city of São Sebastião, where we operate. Within 24 hours, 683mm of rain fell in São Sebastião. It was the highest volume of rainfall recorded in Brazil within such a short period of time since records began. As a result, our water treatment plants in the region were damaged, and the water supply was interrupted for some days due to siltation, the inability to store water, and lack of electricity. If similar incidents occur in the future or become more frequent, these events may have other additional material adverse effects on our results of operations and financial condition.
We cannot predict all of the effects of extreme weather events, making it difficult to estimate the resources needed to mitigate these effects. It is possible that as a result of the difficulty to predict these events, we may be required to make other significant investments or incur substantial costs in their remediation or prevention measures, which may have a material adverse impact on our business, financial condition or results of operations. We also cannot guarantee that we will be able to pass on any of these additional costs and expenses to our customers.
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New laws and regulations relating to climate change and changes in existing regulation may result in increased liabilities and increased capital expenditures, which could have a material adverse effect on us.
We are currently subject to federal and state laws, as well as international regulations on climate change, that establish global goals to reduce greenhouse gas (“GHG”) emissions, which we endeavor to comply with. Among these laws, we highlight Decree No. 65,881 of July 20, 2021, which provides for the State of São Paulo’s adhesion to the “Race to Zero” and “Race to Resilience” campaigns, which aims, among other issues, to reduce GHG emissions and to foster climate resilience. Decree No. 65,881/2021 also provides for the development of the 2050 Climate Action Plan (PAC 2050) by the State of São Paulo government, which will likely include benchmark targets for various sectors, including sanitation.
Additionally, the potential approval of new regulation could introduce additional obligations concerning the reduction of GHG emissions in the future to comply with potential emission limits. On December 21, 2023, the Chamber of Deputies approved the new text of Bill No. 2.148/2015 that establishes the Brazilian Greenhouse Gas Emissions Trading System, which has been treated as a Market Brazilian Carbon Regulation. This is a regime for limiting GHG emissions and selling assets representing the emission, emission reduction or removal of GHG in the country. The model called cap-and-trade has already been adopted in other places, such as in Mexico and in European countries. It is possible that we may have to invest in further actions to reduce and mitigate emissions to comply with the limits established in legislations and new regulations, if they are approved.
With Brazil’s current adherence to international agreements, as well as the clear guidelines of the state government on reducing emissions, in addition to the establishment of new legislation, it is possible that we may have to invest in further actions to reduce and mitigate emissions. We may be required to adopt new standards to improve our energy use efficiency and minimize the release of GHGs for the systems already in operation or when we obtain environmental licenses for new enterprises. We may also need to incur substantial new expenditures, to comply with new climate change regulations, that may require us, for example, (i) to adapt and improve our operations to achieve more sustainable processes and to reduce the emission of GHGs; (ii) to implement new facilities and equipment for the utilization of biogas and generated sludge; (iii) to expand the use of clean and renewable energy sources and alternative fuels; or (iv) to offset GHG emissions through intensified conservation and reforestation activities. Accordingly, new climate change regulations represent a great challenge for us given the diverse and dispersed processes we use at our operational facilities and the fact that changes in process design affect both our current operations and future projects.
On March 6, 2024, the SEC approved new rules that will require significant climate-related disclosures by public companies, including evaluation and disclosure of material climate-related risks and opportunities, GHG emissions inventory, climate-related targets and goals, and financial impacts of physical and transition risks (the “SEC Climate Rules”). A large number of petitions that seek judicial review of the SEC Climate Rules have been filed. On April 4, 2024, the SEC voluntarily stayed implementation of these new rules pending completion of judicial review of consolidated legal challenges by the Court of Appeals for the Eight Circuit. Assuming that the SEC Climate Rules are ultimately upheld in their present form, our legal, accounting, and other compliance expenses may increase significantly, and compliance efforts may divert management time and attention.
In addition, the CVM approved Resolution No. 193/2023, which establishes, on a voluntary basis, the option for publicly held companies to prepare and disclose a report of financial information related to sustainability, based on the international standard issued by the International Sustainability Standards Board (“ISSB”). Any company that voluntarily decides to prepare the sustainability report has the obligation to follow the international standard issued by the ISSB. According to CVM Resolution No. 193/2023, there will only be an obligation to prepare and disclose such information as of January 1, 2026.
We may be exposed to legal or regulatory action or claims as a result of the SEC Climate Rules and CVM Resolution No. 193/2023. Although we are still in the process of assessing the scope and impact of these rules given how recently they were adopted and the subsequent legal challenges, some of these risks could have a material adverse effect on our business, financial condition, results of operations and the prices of our securities.
New expenditures resulting from new climate change regulations and from the prevention or correction of effects of extreme weather could have a material adverse effect on our results of operations. For more information, see “Item 4.B. Business Overview—Environmental Matters—Climate Change Regulations: Reduction of Greenhouse Gases (GHG) Emissions” and “Item 4.B. Business Overview—Energy Consumption.”
Risks Relating to Our Common Shares and ADSs
We may need to raise additional funds in the future and may issue additional common shares, which may result in a dilution of your interest in our common shares underlying the ADS. In addition, a dilution of your interest in our common shares underlying the ADS may occur in the event of our merger, consolidation or any other corporate transaction of similar effect in relation to companies that we may acquire in the future.
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We may have to raise additional funds (in order to finance, for example, capital expenditures and consideration due in connection with new concessions) in the future through private or public offerings of shares or other securities convertible into shares issued by us. The funds we raise through the public distribution of shares or securities converted into shares may be obtained with the exclusion of right of first refusal of our existing shareholders, including investors in our common shares underlying the ADS, as provided by the Brazilian Corporate Law, which may dilute the interest of our then-existing investors. In addition, a dilution of your interest in our common shares underlying the ADS may occur in the event of merger, consolidation or any other corporate transaction of similar effect in relation to companies that we may acquire in the future.
International judgments may not be enforceable when considering our directors or officers’ status of residency.
All our directors and officers named in this annual report reside in Brazil. We, our directors and officers and the members of our audit committee have not agreed to receive service in the United States. Substantially all of our director and officers’ assets are located in Brazil. As a result, it may not be possible to file service within the United States or other jurisdictions outside of Brazil to such persons, pledge their assets, or enforce decisions under civil liability or securities laws of the United States or the laws of other jurisdictions against them or us in the courts of the United States, or in the courts of other jurisdictions outside of Brazil.
We may not always be in a position to pay dividends or interest on shareholders’ equity and ADSs.
Depending on our future results, our shareholders may not receive dividends or interest on own capital if we do not generate a profit. Despite the requirement to distribute a minimum of 25% of the adjusted annual net income to shareholders in accordance with Brazilian Corporate Law, our future financial position may not permit us to distribute dividends or pay interest on own capital.
The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell our common shares underlying the ADSs at the price and time you desire.
Investing in securities from emerging markets such as Brazil involves greater risk than investing in securities of issuers in major securities markets, and these investments are often considered to be more speculative in nature. The Brazilian securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets. Accordingly, although you are entitled to withdraw the common shares underlying the ADSs from the depositary at any time, your ability to sell the common shares underlying the ADSs at a price and time at which you wish to do so may be substantially limited. There is also significantly greater concentration in the Brazilian securities market than in major securities markets. The ten largest companies in terms of market capitalization represented approximately 42.6% of the aggregate market capitalization of the B3 as of December 31, 2021.
Investors who exchange ADSs for common shares may lose their ability to remit foreign currency abroad and obtain Brazilian tax advantages.
The Brazilian custodian for the common shares underlying our ADSs must obtain a certificate of registration from the Central Bank in order to be entitled to remit U.S. dollars abroad for payments of dividends and other distributions relating to our common shares or upon sales of our common shares. If an ADR holder decides to exchange ADSs for the underlying common shares, the holder will be entitled to continue to rely on the custodian’s certificate of registration for five business days from the date of exchange. After that period, the holder may not be able to obtain and remit U.S. dollars abroad upon sale of our common shares, or distributions relating to our common shares, unless he or she obtains his or her own certificate of registration or registers the investment under CMN Resolution No. 4,373/2014, dated September 29, 2014, (the “4,373(“4,373 Holder”) which entitles registered foreign investors to buy and sell on a Brazilian stock exchange. If the holder does not obtain a certificate of registration or register under Resolution No. 4,373/2014, the holder will generally be subject to less favorable tax treatment on gains with respect to our common shares.
If a holder attempts to obtain his or her own certificate of registration, the holder may incur expenses or suffer delays in the application process, which could delay his or her ability to receive dividends or distributions relating to our common shares or the return of his or her capital in a timely manner. The custodian’s certificate of registration or any foreign capital registration obtained by a holder may be affected by future legislative changes, and additional restrictions applicable to the holder, the disposition of the underlying common shares or the repatriation of the proceeds of disposition may be imposed in the future.
Further, during the 2018 presidential campaign, the then main contender and current Minister of Economy proposed taxingFrom time to time there are proposals to tax dividends paid by Brazilian companies and changes into the taxation method of interest on equity. If this campaign promisesuch proposals were to be realized, this would increase the tax expenses associated with any dividend, interest on equity or distributions made by Brazilian companies, which could impact us or our shareholders and the value of our common shares and ADSs. Uncertainty regarding the implementation by the current government of related changes in monetary, fiscal and pension policies, as well as pertinent legislation, could contribute to economic instability. These uncertainties and new measures could increase the volatility of Brazilian securities markets.
In addition, we cannot assure that there will not be changes to other applicable laws and regulations, or their interpretation, that may increase our tax burden or reduce tax incentives available to us or our investors, or that the tax incentives will be effectively maintained on their current terms until the end of their effective term, or that tax incentives will be able to be renewed on favorable conditions after the expiration of their current terms. Any such changes could impact us, our shareholders or our investors and the value of our common shares and ADSs.
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A holder of common shares or ADSs may face difficulties in protecting his or her interests as a shareholder because we are a Brazilian mixed capital company.
We are a mixed capital company (sociedade de economia mista) organized under the laws of Brazil, and all of our directors and officers and our controlling shareholder reside in Brazil. All of our assets are located in Brazil. As a result, it may not be possible for a holder to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain requirements are met, a holder may face more difficulty in protecting his or her interests in the case of actions by our directors, officers or our controlling shareholder than would shareholders of a corporation incorporated in a state or other jurisdiction of the United States. In addition, under Brazilian law, none of our assets which are essential to our ability to render public services are subject to seizure or attachment. Furthermore, the execution of a judgment against our controlling shareholder may be delayed, since the State may only be able to pay a judgment if it is provided for in its budget in a subsequent fiscal year. None of the public property of our controlling shareholder is available for seizure or attachment, either prior to or after judgment.
Mandatory arbitration provisions in our bylaws may limit the ability of a holder of our ADSsADRs to enforce liability under U.S. securities laws.
Under our bylaws, any disputes among us, our shareholders and our management with respect to the Novo Mercado listing rules (“Novo Mercado Listing Regulation”), the Brazilian Corporate Law and Brazilian capital markets regulations will be resolved by arbitration conducted pursuant to the B3 Arbitration Rules in the Market Arbitration Chamber. Any disputes among shareholders and ADR holders, and any disputes between us and our shareholders and ADR holders, will also be submitted to arbitration. As a result, a court in the United States might require that a claim brought by an ADR holder predicated upon the U.S. securities laws be submitted to arbitration in accordance with our bylaws. In that event, a purchaser of ADSs would be effectively precluded from pursuing remedies under the U.S. securities laws in the U.S. courts. However, a court in the United States could allow claims predicated upon the U.S. securities laws brought by holders who purchased ADSs on the NYSE to be submitted to U.S. courts.
A holder of our common shares and ADSs might be unable to exercise preemptive rights and tag-along rights with respect to the common shares.
U.S. holders of common shares and ADSs may not be able to exercise the preemptive rights and tag-along rights relating to common shares unless a registration statement under the U.S. Securities Act of 1933, as amended or the (“Securities Act,Act”), is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to our common shares relating to these rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration is available, an ADR holder may receive only the net proceeds from the sale of his or her preemptive rights and tag-along rights or, if these rights cannot be sold, they will lapse and the ADR holder will receive no value for them.
Holders of our ADSs do not have the same voting rights as our shareholders.
Holders of our ADSs do not have the same voting rights as holders of our shares. Holders of our ADSs are entitled to the contractual rights set forth for their benefit under the deposit agreements. ADS holders exercise voting rights by providing instructions to the depositary, as opposed to attending shareholders meetings or voting by other means available to shareholders. In practice, the ability of a holder of ADSs to instruct the depositary as to voting will depend on the timing and procedures for providing instructions to the depositary, either directly or through the holder’s custodian and clearing system. The deposit agreement also provides that if the depositary does not receive any instructions from a holder of ADRs, the ADR holder may be deemed to have given a discretionary proxy to a person designated by our company and the underlying shares may be voted by such person. However, we have chosen not to designate any person to exercise these deemed proxy rights with respect to any annual or special general meetings, and ADSs for which no specific voting instructions were received by the Depositary were therefore not voted at that meeting.
If we issue new shares or our shareholders sell shares in the future, the market price of your ADS may be reduced.
Sales of a substantial number of shares, or the belief that this may occur, could decrease the prevailing market price of our common and preferred shares and ADSADSs by diluting the shares’ value. If we issue new shares or our existing shareholders sell shares they hold, the market price of our common and preferred shares, and of the ADS,ADSs, may decrease significantly. Such issuances and sales also might make it more difficult for us to issue shares or ADSADSs in the future at a time and a price that we deem appropriate and for you to sell your securities at or above the price you paid for them. Our controlling shareholder, the sState of São Paulo, may decide to undertake a corporate reorganization, for a variety of reasonssuch as the Proposed Privatization, which could have the effect of diluting existing shareholders and ADS holders or lead to a change of control. See “—Our controlling shareholder
Judgments of Brazilian courts with respect to our common shares are required to be payable only in reais.
If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of our common shares, we may not be required to discharge our obligations in a currency other than reais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reais must only be satisfied in Brazilian currency at the exchange rate, as determined by the Central Bank of Brazil, in effect (1) on the date of actual payment, (2) on the date on which such judgment is currently discussing proposalsrendered or (3) on the date on which collection or enforcement proceedings are commenced. The then prevailing exchange may not provide non-Brazilian investors with full compensation for any claim arising out of or related to our corporate reorganization. We cannot guarantee that any potential reorganization will not have a material adverse effect on our business, financial conditionobligations under the common shares or results of operations.”the common shares represented by ADRs.
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Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of our shares or ADS.
Law No. 10,833/2003, provides that the disposition of assets located in Brazil by a non-resident to either a Brazilian resident or a non-resident is subject to taxation in Brazil, regardless of whether the disposition occurs outside or within Brazil. This provision results in the imposition of withholding income tax on the gains arising from a disposition of our common or preferred shares by a non-resident of Brazil to another non-resident of Brazil. There is no judicial guidance as to the application of Law No. 10,833/2023 and, accordingly, we are unable to predict whether Brazilian courts may decide that it applies to dispositions of our ADSs between non-residents of Brazil. However, in the event that the disposition of assets is interpreted to include a disposition of our ADSs, this tax law would accordingly result in the imposition of withholding taxes on the disposition of our ADSs by a non-resident of Brazil to another non-resident of Brazil.
ITEM 4. | INFORMATION ON THE COMPANY |
A. History and Development of the Company Overview
Overview
Companhia de Saneamento Básico do Estado de São Paulo – SABESP is a mixed capital company (sociedade de economia mista) with limited liability.liability and for indefinite duration. We were incorporated on September 6, 1973, under the laws of the Federative Republic of Brazil. We are registered with the Commercial Registry of the State of São Paulo (Junta Comercial do Estado de São Paulo) under registration number NIRE 35300016831. Our principal executive offices are located at Rua Costa Carvalho, 300, 05429-900 São Paulo, SP, Brazil. Our telephone number is +55 11 3388-8000. Our agent for service of process in the United States is CT Corporation System, with offices at 818 West Seventh Street – Team 1, Los Angeles, CA 90017. We are allowed to operate, in a subsidiary form, in other Brazilian locations and abroad. SeeFor more information, see “Item 4.B. Business Overview—Government Regulations Applicable to Our Contracts—Contracts for the Provision of Essential Basic Sanitation Services in Brazil.”
We operatePursuant to State Law No. 119/1973, Companhia Metropolitana de Águas de São Paulo, Superintendência de Águas e Esgotos da Capital, and Companhia Metropolitana de Saneamento de São Paulo merged to form our Company with the purpose of implementing the directives of the Brazilian government set forth in the National Water Supply and Sanitation Plan (Plano Nacional de Saneamento). The National Water Supply and Sanitation Plan was a program sponsored by the Brazilian government, which financed capital investments in, and assisted in the development of, state-controlled water and sewage systems incompanies. Since our formation, other governmental and state-controlled companies of the stateState of São Paulo which includesinvolved in water supply and sewage collection and treatment in the cityState of São Paulo Brazil’s largest city. According tohave been merged into our company.
We have been integrated into the IBGE, the state of São Paulo is Brazil’s most populous state and the state with the highest gross domestic product, or GDP, in Brazil. For the year ended December 31, 2021, we generated net operating revenue of R$19,491.1 million and profit of R$2,305.9 million. Our total assets amounted to R$53,165.5 million and our total shareholders’ equity amounted to R$24,931.9 million as of December 31, 2021. As of December 31, 2021, we provided water and sewage services to a broad range of residential, commercial, industrial and governmental customers in 375.structure of the 645 Municipalities in the state of São Paulo, including the city of São Paulo. Substantially all of our concessions or program agreements have 30-year terms. As of December 31, 2021, we lacked formal agreements for 8 of the Municipalities we serve. In addition to the 8 contracts expired in December 2021, from January 1, 2022, through 2030, 25 concession agreements will expire, accounting for 4.0% of our revenues (excluding revenues relating to the construction of concession infrastructure) the year ended December 31, 2021 and 2.5% of our intangible assets and contract assets as of the same date, will expire.
We also supplied water and sewage treatment services on a wholesale basis to two Municipalities, Mogi das Cruzes and São Caetano do Sul, located in the São Paulo metropolitan region. For the year ended December 31, 2021, the São Paulo metropolitan region (including the Municipalities to which we provide water on a wholesale basis) accounted for 70.7% of our operating revenue (excluding revenues relating to the construction of concession infrastructure), while the Regional Systems accounted for 29.3%.
As of December 31, 2021, we provided water services through 9.8 million water connections to approximately 27.8 million people, representing approximately 62% of the total population of the stateState of São Paulo and had a water coverage ratio of 98% with respect to all regions. As of that date, we provided sewage services through 8.4 million sewage connections to approximately 24.6 million people and had an effective sewage service ratio of 85%. As of December 31, 2021, we operated using 88,904 kilometers of water pipes and water transmission lines and 61,122 kilometers of sewer lines. We also provide water and/or sewage services to four other Municipalities through special purpose companies.
In addition, weour strategies have three partnerships with private companies: Aquapolo Ambiental S.A., Attend Ambiental S.A. and Paulista Geradora de Energia S.A. Aquapolo Ambiental S.A. commenced operations in the second half of 2012 and operates the largest water recycling facility in the southern hemisphere. Aquapolo Ambiental S.A. has the capacity to supply up to 1,000 liters per second to industries in the Capuava petrochemical cluster of the São Paulo metropolitan region, but is currently only providing approximately 450 liters per second as a result of demand. Attend Ambiental S.A. commenced operations in the second half of 2014 to operate a pre-treatment plant for non-domestic effluent in the São Paulo metropolitan region. Paulista Geradora de Energia S.A., which was formed in 2015, focuses on the implementation and commercial exploration of water potential in small hydroelectric power plants, located at Vertedouro Cascata and the Guaraú Water Treatment Plant, with a total capacity of 7 MW. Until the date of this annual report, we had not yet started the operations. See “Note 11 to the Financial Statements - Investments.”
In addition, we provide consulting services regarding the rational use of water, the updating of institutional models, and commercial and operational management in Panama, through a consortium.
The State of São Paulo, our controlling shareholder, is required by State Law No. 11,454/2003 to own at least 50% plus one of our common shares. As of December 31, 2021, the State owned 50.3% of our outstanding common shares. As a mixed capital company, we are an integral part of the São Paulo state governmental structure. Our strategy and major policy decisions arebeen formulated in conjunction with the State Secretariat for Infrastructure and Environment as partstrategies of the State’s overall strategic planning. The majority of the members of our Board of Directors and our board of executive officers are nominated by the São Paulo state government.SEMIL.
In addition, ourOur capital expenditure budget is subject to approval by the State of São Paulo legislature and is approved in conjunction with the budget of the State Secretariat for Environment, Infrastructure and EnvironmentLogistics as a whole. Our financial statementsConsolidated Financial Statements and accounting records are subject to review by the State Accounts TribunalCourt of Audit (TribunalPlano Nacional de ContasSaneamento), as are all accounts of. The National Water Supply and Sanitation Plan was a program sponsored by the State.
Our results of operationsBrazilian government, which financed capital investments in, and financial condition are generally affected by: (i) our ability to raise tariffs, control costs and improve productivity; (ii) the general economic conditions in Brazil and abroad; (iii) climate conditions; (iv) impacts of regulation for sanitation services; and (v) the impact of pandemics such as COVID-19. Following the water crises, the volume of water billedassisted in the São Paulo metropolitan region continued below 2013 levels as manydevelopment of, our customers continue to apply some of the lower water consumption practices adopted during water crisis. The new Legal Framework for Basic Sanitation introduced several changes that directly affect our business. The COVID-19 pandemic resulted in increased in volumes of water billed in the residential categories and a reduction in the public, commercial and industrial categories which have higher average tariffs, leading to a reduction in the total average tariff, in addition to increases in delinquencies, which are reflected in our results, with a direct impact on revenues. For further information on the water crisis, see “Item 3.D. Risk Factors— Risks Relating to Our Business— Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations” and “Item 4.B Business Overview—The 2014-2015 Water Crisis,” and for information on the COVID-19 pandemic, see “Item 3.D. Risk Factors—Risks Relating to Our Business— Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the outbreak of COVID-19.” For further information, on regulatory risks, see “Item 3.D. Risk Factors— Regulatory Risks.”
Our Strengths
We believe that our strong business position and future prospects derive from the following strengths:
Well-established business with significant size, scale and know-how to operate in complex urban settings. We are one of the largeststate-controlled water and sewage service providers in the world, according to studies by Global Water Intelligence, which considered the estimated revenue in 2020. We provide water services directly to approximately 27.8 million peoplecompanies. Since our formation, other governmental and supply water on a wholesale basis to an additional urban populationstate-controlled companies of approximately 0.6 million people. As of December 31, 2021, we had an effective water coverage ratio of 98% in respect of all regions in which we operate. We also provide sewage services directly to approximately 24.6 million people, achieving an effective sewage service ratio of 85% in respect of all regions in which we operate as of December 31, 2021. Our significant size and scale have required us to operate in complex urban settings such as shantytowns (favelas) and environments without urban planning, thereby enabling us to develop well-trained personnel, skills for operating in adverse conditions that we believe our competitors lack.
Operations in Brazil’s most populous and wealthy state. The state of São Paulo, which is located in the most developed and economically active region of Brazil, is the most populous state in Brazil, with an estimated total population of 45.0 million as of December 31, 2021. The city of São Paulo had an estimated total population of 11.9 million as of the same date, while the São Paulo metropolitan region had a total population of 21.3 million. Based on its GDP, the state of São Paulo is the wealthiest state and has the largest economy of any state in Brazil. The GDP of the state of São Paulo was approximately R$ 2.4 trillion representing approximately 31.8% of Brazil’s total GDP, according to the most recent data collected by the IBGE in 2019. The state of São Paulo generates more revenue from water and sewage services than any other Brazilian state.
Strong Base of Contracted Business. We have formal agreements with 367 of the 645 Municipalities in the state of São Paulo, including agreements with the cities of São Paulo and Guarulhos, respectively the first and second largest Municipalities in the State of São Paulo. Most of our contracts have a 30-year term. For the year ended December 31, 2021, income from these agreements accounted for 95% of our gross operating revenues from sanitation services (excluding revenues relating to the construction of concession infrastructure).
Access to low-cost and diverse sources of financing. Our strong cash flow generation from operations and our role as an essential public service provider places usPaulo involved in a privileged position in our industry to obtain low cost, long-term financing from Brazilian public banks, and domestic and international multilateral agencies and development banks. We do not depend on a limited number of sources of financing, but instead have access to various funding alternatives in the Brazilian and international markets to fund our working capital needs and our capital expenditure programs.
Strong corporate governance practices. In 2002, we joined the Novo Mercado segment of the B3, which is the listing segment in Brazil with the highest corporate governance requirements. Additionally, in 2016 Federal Law No. 13,303/16 came into force in Brazil and set new corporate governance standards for Brazilian government-owned and mixed capital companies like our company, as well as their subsidiaries. This law also set new rules that these companies must follow in public bidding procedures when contracting with third parties. As a result, we are committed to certain corporate governance standards that are not otherwise required by Brazilian Corporate Law, which provides heightened protection to our shareholders and enhances the quality of information we disclose to the market.
High quality operations. We believe that we adhere to high standards of service and employ the best available technology in the sanitation business to control the quality of the water we abstract, process and distribute. Of our 16 laboratories in total, our central laboratory and 13 of our regional laboratories are accredited by the National Institute of Metrology, Quality and Technology, Standardization and Industrial Quality, or INMETRO, and comply with the ABNT NBR ISO IEC 17025 standard, thereby assuring the quality and accuracy of our test results. Moreover, our laboratories and field teams use the latest equipment to detect substances controlled by regulations and have highly trained teams to handle contingencies and customer complaints. We believe our technology enhances the efficiency and quality of our operations.
Our Strategy
Our mission is to provide sanitation services, contributing to improvements in quality of life and the environment. Our goal is to become a global reference in the provision of basic sanitation services in a sustainable, competitive and innovative manner, focused on the needs of our clients. To this end, our strategic objectives are based upon the guiding principles of water availability, excellence in the provision of services, sustainable growth, fostering and expanding our operating base, innovation and technology, motivation of personnel and expansion of our sewage treatment coverage.
Secure water availability in the areas where we operate. Our goal is to secure the availability of water in the areas where we operate, as well as to promote a rational and integrated use of water resources, respecting demand and critical levels of water for each region, and allocating resources in the short, medium and long run in order to guarantee access to water. Our goal is to consistently meet the needs of our consumers with our services. Furthermore, specifically during 2015 to 2018, we implemented a series of short-term and medium-term initiatives that improved the water security for the metropolitan region of São Paulo. For more information, see “—Capital Expenditure Program.”
Ensure the quality and availability of our services in our existing service area through excellence in service provision and improving our operating efficiency. Our goal is to maintain the water coverage ratio, coupled with a high standard of quality and availability of our services, and meet the expected growth in our operations. We also intend to increase our sewage coverage by adding 1.2 million sewage connections by 2026. In addition, we seek to reduce both physical and non-physical water loss. See “—Capital Expenditure Program.”
We also seek to improve our processes and controls by implementing: (i) a new management model based on the Management Excellence Model that seeks to improve the alignment of management processes and the dissemination of best practices within the company; (ii) an enterprise resourcing planning system, or “ERP system” allowing integration with SAP (administrative/financial modules), and a customer relationship management system, or “CRM system” (Net@suite), to replace our commercial and management information systems, ensuring compliance with regulatory requirements and serving as a structuring tool for digital transformation, through the application of new technologies (Analytics, IA, IoT, Omnichannel, RPA, among others) focused on automation process, customer experience and management of analytical information. The ERP system was implemented in April 2017. The complete implementation of the Net@suite took place in October 2021.
Through these projects we intend to increase our speed and productivity in responding to regulatory changes; to strengthen and streamline our financial, commercial and administrative structure; to provide a solid and integral base of information to support the decision-making process; and to increase the efficiency of our operations while also reducing costs.
Continue to seek sustainable growth. Our goal is to grow while balancing our economic and financial results with environmental and social considerations, to secure positive financial results so as to guarantee investments for the provision of services, as well as to provide adequate and just remuneration for our shareholders. We seek to act as citizens and to promote the well-being of the communities we operate in and the protection of the environment. We aim to apply our principles of financial growth and sustainability to each business unit, assigning goals and setting clear responsibilities for each unit so as to strengthen our financial results. To achieve this goal, we intend to use our best efforts to reduce operating costs and increase productivity and profitability. We plan to improve the management of our assets, as well as to continue to reduce our total operating expenses by automating some of our facilities, streamlining operational processes, implementing integrated planning and further investing in internal technological research and development.
We also plan to continue our efforts to improve our collection of overdue trade receivables from Municipalities to which we provide services, from the State and from other governmental entities, including by exploring opportunities to offset these outstanding debts against certain possessory or property rights over utilities relating to watersupply and sewage systems. We intend to continue to fund our working capital needscollection and estimated capital expenditure programs with diversified sources of financing, such as domestic and international development banks and multilateral agencies. We will continue to seek market opportunities for low-cost financing and restructuring of our indebtedness if and when advantageous and appropriate.
Since 2008, we have expanded into activities that complement water and sewage services in which we may leverage our know-how, size, scale and profitability. These activities include consulting and management of sanitation systems.
Currently, we provide water and/or sewage services to four other Municipalities through special purpose companies in partnership with private companies. See “Item 4. Information on the Company—History and Development of the Company—Overview.”
Maintain and expand our operating base. We intend to maintain and expand our operating base by searching for new business opportunities. We also regularly explore the possibility of providing water and sewage services in Municipalities in the state of São Paulo in which we currently have no operations or to which we currently supply water and provide sewage treatment solely on a wholesale basis, which on aggregate represent a total population of approximately 14.4 million. We evaluate possible expansion opportunities in terms of proximity to our existing service areas to maximize return on investment and improve our financial performance. In June 2010, we entered into a 30-year agreement with the State and city of São Paulo for the provision of water and sewage services in the city of São Paulo, which in the year ended December 31, 2021, accounted for 44.5% of our gross operating revenues from sanitation services (excluding revenues relating to the construction of concession infrastructure). Between January 1, 2007 and December 31, 2021, we entered into agreements with 342 Municipalities (including our services agreement with the city of São Paulo), of which none were entered into in 2021. These 342 Municipalities accounted for 95% of our total revenues (excluding revenues relating to the construction of concession infrastructure) for the year ended December 31, 2021 and 93.8% of our intangible assets and contract assets as of the same date. As of December 31, 2021, eight of our concessions had expired. These 8 Municipalities accounted for 0.3% of our total revenues (excluding revenues relating to the construction of concession infrastructure) for the year ended December 31, 2021 and 0.5% of our intangible assets and contract assets as of the same date. From January 1, 2022 through 2030, 25 concession agreements will expire, accounting for 4.0% of our revenues (excluding revenues relating to the construction of concession infrastructure) the year ended December 31, 2021 and 2.5% of our intangible assets and contract assets as of the same date, will expire.
Seek opportunities to adopt and develop innovative technology. We stimulate the creation, adoption and diffusion of innovative solutions aiming to generate value and to improve our provision of basic sanitation services while promoting environmental protection and maintaining our competitiveness and profitability. In accordance with our bylaws, our activities comprise water supply, sanitary sewage services, urban rainwater management and drainage services, urban cleaning services, solid waste management services, and also related activities, including the planning, operation, maintenance and commercialization of energy, and the commercialization of services, products, benefits and rights that directly or indirectly arise from our assets, operations and activities. We are also authorized to carry out activities through subsidiaries in other Brazilian locations and in other countries.
In 2021, our Board of Directors approved the revision of our New Business Policy, which established, among others, the rules to be observed when searching for partners in developing new business opportunities. On this direction, in December 2021, we published a public call for studies, development and implementation of solutions to take advantage of photovoltaic energy generation potential in the State of São Paulo and inhave been merged into our company.
We have been integrated into the municipalities where we operate. For more information, see “Item 5. Operating and Financial Review Prospects—C. Research and Development, Patents and Licenses, etc.”
Establish efficient and competitive ways of motivating, retaining and attracting personnel. We intend to provide our personnel with programs for professional and personal development, growth opportunities and recognition. These programs include competitive benefit packages and a healthy and collaborative work environment. We seek to raise workplace satisfaction, well-being, engagement and productivity.
Expand our sewage treatment coverage. Our goal is to progress in the implementation of sewage collection and treatment structures in an economically and technologically viable way. We had an effective sewage coverage ratio of 92% as of December 31, 2021, and plan to increase this ratio to 95% by 2026, by adding over 1.2 million sewage connections by 2026 and the indicator of consumer units connected to the sewage treatment system from 79% to 90% by 2026. These investments are necessary to restore the qualitygovernmental structure of the rivers and lakes, providing new sources for water supply. In addition, there are Municipalities in the stateState of São Paulo representing a total populationand our strategies have been formulated in conjunction with the strategies of approximately 14.4 millionthe SEMIL.
Our capital expenditure budget is subject to which we currently do not provide water or sewage services, or to which we currently supply water solely on a wholesale basis. Our strong presence inapproval by the State and experience in providing water and sewage services places us in a privileged position to expand our sewage services to these additional Municipalities in the state of São Paulo as well as to other Brazilian stateslegislature and abroad. For more information, see “Item 4.B. Business Overview—Description of our Activities—Sewage Operations” and “Item 4.B. Business Overview—Competition” and “Item 4.B. Business Overview—Tariffs.”
Our strategic objectives also focus on our political and institutional relationships as well as on our commitment to the market to increase shareholder value.
In 2021 we invested R$5.0 billion and between 2022 and 2026 we plan to invest an additional R$23.8 billion to improve and expand our water and sewage systems, increase water security, and meet the growing demand for water and sewage servicesis approved in the state of São Paulo, thereby encouraging these customers to continue using our services.
We believe that our overall strategy will enable us to meet the demand for high quality water and sewage services in the state of São Paulo as well as in other Brazilian states and abroad, while creating shareholder value and strengthening our results of operations and our financial condition.
State of São Paulo
The state of São Paulo is one of 26 states that, togetherconjunction with the Federal District of Brasília, constitute the Federative Republic of Brazil. The state of São Paulo is located in the southeastern region of the country, which also includes the States of Minas Gerais, Espírito Santo and Rio de Janeiro, and which is, according to IBGE, the most developed and economically active region of Brazil. The state of São Paulo is located on the Atlantic coast of Brazil and is bordered by the states of Rio de Janeiro and Minas Gerais to the north, the state of Paraná to the south and the state of Mato Grosso do Sul to the west.
The state of São Paulo occupies approximately 3.0% of Brazil’s land mass and encompasses an area amounting to approximately 96,000 square miles. According to the SEADE, the state of São Paulo had an estimated total population of 45.0 million as of December 31, 2021. The city of São Paulo, capital of the state of São Paulo, had an estimated total population of 11.9 million, with a total population of 21.3 million inhabitants in the São Paulo metropolitan region, as of December 31, 2021. The São Paulo metropolitan region encompasses 39 Municipalities and is the largest metropolitan region in the Americas and the fourth largest metropolitan region in the world, according to the United Nations’ Data Booklet “The World’s Cities in 2018,” with approximately 47% of the total population of the state of São Paulo as of December 31, 2021. In, the most recent data collected by the IBGE, the GDP of the state of São Paulo was approximately R$2.4 trillion, representing approximately 31.8% of Brazil’s total GDP, and making it the largest economy of any state in Brazil based on GDP. According to the IBGE, the state of São Paulo is also the leading Brazilian state in terms of manufacturing and industrial activity, with a strong position in car manufacturing, pharmaceuticals, computer manufacturing, steel making and plastics, among other activities, as well as a leading position in the banking and financial services industries. The state of São Paulo is the leading export state in Brazil, according to the Brazilian Ministry of Development, Industry and Foreign Trade (Ministério do Desenvolvimento, Indústria e Comércio Exterior), currently Ministry of Economy (Ministério da Economia).
History
Until the end of the nineteenth century, water and sewage services in the state of São Paulo were generally provided by private companies. In 1875, the Province of São Paulo granted a concession for the provision of water and sewage services to Cantareira Water and Sewage Company (Companhia Cantareira de Água e Esgotos). In 1893, the government of the Province of São Paulo assumed responsibility for the provision of water and sewage services from Cantareira Water and Sewage Company and formed the Office of Water and Sewers (Repartição de Água e Esgotos), a government agency. Since that time, water and sewage services in the São Paulo metropolitan region have been administered by the São Paulo state government. Historically, water and sewage services in substantially all other Municipalitiesbudget of the State were administered directlySecretariat for Environment, Infrastructure and Logistics as a whole. Our Consolidated Financial Statements and accounting records are subject to review by the Municipalities, either by municipal water and sewage departments or through autarquiasState Court of the municipal government. Autarquias are relatively autonomous public bodies with separate legal standing, assets and revenues, created by law to carry out the administration of public services where the government deems that a decentralized administrative and financial structure would be advantageous.
In 1954, in response to dramatic population growth in the São Paulo metropolitan region, the São Paulo state government created the Department of Water and SewersAudit (Departamento de Águas e Esgotos) as an autarquia of the State. The Department of Water and Sewers provided water and sewage services to various Municipalities in the São Paulo metropolitan region.
A major restructuring of the entities providing water and sewage services in the state of São Paulo occurred in 1968, with the creation of the Water Company of the São Paulo metropolitan Region (Companhia Metropolitana de Água de São Paulo), or the “COMASP,” the purpose of which was to provide potable water on a wholesale basis for public consumption in the various Municipalities of the São Paulo metropolitan region. All assets relating to the production of potable water for the São Paulo metropolitan region previously owned by the Department of Water and Sewers were transferred to COMASP. In 1970, the São Paulo state government created the Superintendence of Water and Sewers of the City of São Paulo (Superintendência de Água e Esgoto da Capital), or the “SAEC,” to distribute water and collect sewage in the city of São Paulo. All assets relating to water services previously owned by the Department of Water and Sewers were transferred to the SAEC. Also in 1970, the State created the Basic Sanitation Company of the São Paulo metropolitan Region (Companhia Metropolitana de Saneamento de São Paulo), or the SANESP, to provide sewage treatment services for the São Paulo metropolitan region. All assets relating to sewage services previously owned by the Department of Water and Sewers were transferred to the SANESP. The Department of Water and Sewers was subsequently closed.
On June 29, 1973, pursuant to State Law No. 119/1973, COMASP, SAEC and SANESP merged to form our Company with the purpose of implementing the directives of the Brazilian government set forth in the National Water Supply and Sanitation Plan (Plano Nacional de Saneamento). We were incorporated under the laws of Brazil as a sociedade anônima for indefinite duration. The National Water Supply and Sanitation Plan was a program sponsored by the Brazilian government, which financed capital investments in, and assisted in the development of, state-controlled water and sewage companies. Since our formation, other São Paulo state governmental and state-controlled companies of the State of São Paulo involved in water supply and sewage collection and treatment in the stateState of São Paulo have been merged into our company. The State has always been our controlling shareholder, as required by State Law No. 11,454/2003.
We have therefore been integrated into the governmental structure of the State of São Paulo state governmental structure and our strategies have been formulated in conjunction with the strategies of the São Paulo Secretariat for Infrastructure and Environment (Secretaria de Infraestrutura e Meio Ambiente do Estado de São Paulo). Additionally, a majority of the members of our Board of Directors and our management are appointed by the State Government.
SEMIL.
Our capital expenditure budget is subject to approval by the State legislative chamber. This approvalof São Paulo legislature and is obtained simultaneouslyapproved in conjunction with the approval of the budget of the São PauloState Secretariat for Environment, Infrastructure and Environment. WeLogistics as a whole. Our Consolidated Financial Statements and accounting records are also subject to supervision fromreview by the State Court of Audit (Tribunal de Contas), as are all accounts of the State of São Paulo (Tribunal de Contas do Estado de São Paulo), with regard to our accounting, financial and budgetary activities and our operating assets.Paulo.
In 1994, we were registered with the CVM as a publicly-heldpublicly held company and are therefore subject to the CVM’s rules, including those relating to the periodic disclosure of extraordinary facts or relevant events. Our common shares have been listed on the B3 under the ticker “SBSP3” since June 4, 1997.
In 2002, we joined the Novo Mercado segment of the B3, which is the listing segment in Brazil with the highest corporate governance requirements. In the same year, we registered our common shares with the Securities and Exchange Commission or SEC,(“SEC”) and started trading our shares in the form of ADR – level III on the New York Stock Exchange or NYSE,(“NYSE”) under the ticker “SBS.”
The State of São Paulo, our controlling shareholder, is required by State Law No. 8,523/1993, as amended by State Law No. 11,454/2003 to own at least 50% plus one of our common shares. In 2004, the State of São Paulo carried out a secondary offer of common shares of our company in the Brazilian and international markets.markets, which secured their ownership to 50.3% of our common shares. As of December 31, 2023, the State of São Paulo owned 50.3% of our common shares. On December 8, 2023, State Law No. 17,853/2023 was enacted and authorized the State of São Paulo to initiate our Proposed Privatization. For more information, see “Presentation of Financial and Other Information—Proposed Privatization.”
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State Law No. 12,292/2006 amended State Law No. 119/1973, which created our company, and now authorizes us to provide water and sewage services outside of the stateState of São Paulo, both to other states of Brazil and to other countries. This law also authorizes us toprovides that we can own interests in other public or private-public companies, and in Brazilian or international consortia.consortia, subject to authorization from the State of São Paulo. In addition, this law permits us toprovides that we can incorporate subsidiaries and enter into a partnership with or acquire interests in a private company with a corporate purpose related to the sanitation business.business, subject to previous legislative authorization.
In December 2007, State Supplementary Law No. 1,025/2007 whichprovided for the expansion of the scope of services to be provided by us related to environmental sanitation and energy, and also provided for the creation of regulatory agencies for the supervision of water and sewage services, created ARSESP, the regulatory agency that regulates and supervises the services we provide.
In September 2017,On December 11, 2023, we started operating water and sewage services in Olimpia, a municipality located in the interior of the State of São Paulo, obtained approval for State Law No. 16,525/2017, which authorizesthrough our wholly-owned subsidiary Sabesp Olimpia S.A. This new contract with the Statemunicipality of São Paulo to set up a controlling company to hold all of the shares that the State of São Paulo holds in our company. Once established, the controlling company could sell shares to other minority shareholders, including private companies and state-owned companies, provided, however, that the state of São Paulo will continue to hold a majority of the common shares of the controlling company. We are currently awaiting guidance from the State Privatization Program’s Board (Conselho Diretor do Programa Estadual de Desestatização - CDPED),Olimpia, which has authority over our corporate reorganization plan, includingapproximately 56 thousand inhabitants as of December 31, 2023, is the formationfirst bidding process we won without being part of a consortium under the controlling company, or any other type of corporate reorganization, including a change of control, pursuant to the recent changes to the basic sanitation law. For further information, see “Item 3.D. Risk Factors—Risks Relating to Our Control by the State of São Paulo—Our controlling shareholder is currently discussing proposalsNew Legal Framework for our corporate reorganization. We cannot guarantee that any potential reorganization will not have a material adverse effect on our business, financial condition or results of operations.”Basic Sanitation.
As of December 31, 2021,2023, we provided water and sewage services directly to a large number of residential, commercial and industrial private consumers, as well as to a variety of public entities,entities. As of the same date, we served directly in 375376 of the 645 Municipalitiesmunicipalities in the State, including in the city of São Paulo. We also supplied water and accounted for two municipalities in the São Paulo metropolitan region on a wholesale basisbasis. In addition, we have four partnerships with private companies to supply water and sewage services, which are: Águas de Castilho, Águas de Andradina, Saneaqua Mairinque and Sesamm - Serviços de Saneamento de Mogi Mirim S.A. (the latter only for sewage services).
In the basic sanitation segment, we also established two Municipalitiesother special purpose companies, in which we participate as a minority shareholder, which are: Aquapolo Ambiental S.A. and Attend Ambiental S.A.. Aquapolo Ambiental S.A. commenced operations in the second half of 2012 and operates the largest water recycling facility in the southern hemisphere. Aquapolo Ambiental S.A. has the capacity to supply up to 1,000 liters per second to industries in the Capuava petrochemical cluster of the São Paulo metropolitan region. Attend Ambiental S.A. commenced operations in the second half of 2014 to operate a pretreatment plant for non-domestic effluent in the São Paulo metropolitan region.
We are also qualified to plan, operate and maintain systems of production, storage, conservation and sale of energy for us or for third parties, and to sell services, products and rights that directly or indirectly arise from our assets, business and activities. Accordingly, in 2015 we incorporated Paulista Geradora de Energia S.A., which focuses on the implementation of a water treatment plant, with a total capacity of 7 MW. On March 20, 2023, the Guaraú plant began operations, with a capacity of 4.1 MW. The Vertedouro Cascata plant, which has a capacity of 2.9 MW, started operations in April 2024. For more information, see Note 12 to our 2023 Consolidated Financial Statements – Investments.
On October 28, 2022, we incorporated Cantareira SP Energia, in partnership with Pacto SP Energia I, which will produce and sell electricity. Cantareira SP Energia will establish four photovoltaic power generation plants on floating structures in our reservoirs in the region of Bragança Paulista. These plants will have a production capacity of 5 MW each and operate at 34,5KV (medium voltage), totaling a production of 20 MW. The plants are in the process of obtaining authorization from the concessionaire Energisa Sul Sudeste (ESS) and will have a twelve-month deadline for construction and start of operations from the date the authorization is granted.
On December 22, 2022, we acquired 20% of Foxx URE–BA S.A (“UREBA”). UREBA was renamed in January 29, 2024 to Barueri Energia Renovável S.A. pursuant to the concession agreement entered into with the municipality of Barueri for the construction of a power generation plant from urban solid waste. UREBA will produce energy through the thermal treatment of urban solid waste, with a total installed capacity of 20 MW and sales of approximately 16 MW, in addition to a treatment capacity of 300 thousand tons of urban solid waste per year. It will be the first power generation plant operating from the incineration of urban solid waste in Brazil. This project is intended to further our commitment to sustainability and quality of life, reducing the use of landfills and promoting a circular economy to mitigate some of the impacts of urban solid waste on climate change. The construction is expected to be completed by October 2026, and operations are expected to start in February 2027.
Our results of operations and financial condition are generally affected by: (i) our ability to raise tariffs, control costs and improve productivity; (ii) the general economic conditions in Brazil and abroad; (iii) climate conditions; (iv) impacts of regulation for sanitation services; and (v) the impact of natural disasters and pandemics. The new Legal Framework for Basic Sanitation introduced several changes that directly affect our business. For more information, see “Item 3.D. Risk Factors—Risks Relating to Environmental Matters and Physical and Transition Climate Risks—Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations” and for information on natural disasters and pandemics, see “Item 3.D. Risk Factors—Risks Relating to Our Business—Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes.” For more information on regulatory risks, see “Item 3.D. Risk Factors—Risks Relating to the Regulatory Environment.”
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Our Strengths
We believe that our strong business position and future prospects derive from the following strengths:
Well-established business with significant size, scale and know-how to operate in complex urban settings. We are one of the largest water and sewage service providers in the world, according to the ranking published in 2023 by Global Water Intelligence, which considered the estimated revenue in 2022. We provide water services directly to approximately 28.1 million people and supply water on a wholesale basis to an additional urban population of approximately 0.6 million people. As of December 31, 2023, we had an effective water coverage ratio of 98% in respect of all regions in which we operate. We also provide sewage services directly to approximately 24.9 million people, achieving an effective sewage coverage ratio of 93% in respect of all regions in which we operate as of December 31, 2023. Our significant size and scale have required us to operate in complex urban settings such as urban areas occupied by low-income populations in irregular areas (favelas) and environments without urban planning, thereby enabling us to develop well-trained personnel, with skills for operating in adverse conditions that we believe our competitors lack.
Operations in Brazil’s most populous and wealthy state. The State of São Paulo, which is located in the most developed and economically active region of Brazil, is the most populous state in Brazil, with an estimated total population of 45.5 million as of December 31, 2023. The city of São Paulo had an estimated total population of 12.0 million as of the same date, while the São Paulo metropolitan region had a total population of 21.5 million. Based on its GDP, the State of São Paulo is the wealthiest state and has the largest economy of any state in Brazil. The GDP of the State of São Paulo was approximately R$3.2 trillion representing approximately 30% of Brazil’s total GDP in 2023. Through us and other water and sanitation companies, the State of São Paulo generates more revenue from water and sewage services than any other Brazilian state.
Strong Base of Contracted Business. We have formal agreements with 374 of the 645 municipalities in the State of São Paulo, including agreements with the cities of São Paulo and Guarulhos, respectively the first and second largest municipalities in the State of São Paulo. Most of our contracts have a 30-year term. For the year ended December 31, 2023, income from these agreements accounted for 99.2% of our gross operating revenues from sanitation services (excluding revenues relating to the construction of concession infrastructure).
Access to low-cost and diverse sources of financing. Our strong cash flow generation from operations and our role as an essential public service provider place us in a privileged position in our industry to obtain low cost, long-term financing from Brazilian public banks, and domestic and international multilateral agencies and development banks. We do not depend on a limited number of sources of financing, but instead have access to various funding alternatives in the Brazilian and international banking and capital markets to fund our working capital needs and our capital expenditure programs.
Strong corporate governance practices. In 2002, we joined the Novo Mercado segment of the B3, which is the listing segment in Brazil with the highest corporate governance requirements. Additionally, Federal Law No. 13,303/2016 came into force in Brazil and set new corporate governance standards for Brazilian government-owned and mixed capital companies like our company, as well as their subsidiaries. This law also set new rules that these companies must follow in public bidding procedures when contracting with third parties. As a result, we are committed to certain corporate governance standards that are not otherwise required by Brazilian Corporate Law, which provides heightened protection to our shareholders and enhances the quality of information we disclose to the market.
High quality operations. We believe that we adhere to high standards of service and employ the best available technology in the sanitation business to control the quality of the water we abstract, process and distribute. Our central laboratory and all of our 16 regional laboratories are accredited by the National Institute of Metrology, Quality and Technology, Standardization and Industrial Quality (Instituto Nacional de Metrologia, Qualidade e Tecnologia – “INMETRO”), and comply with the ABNT NBR ISO IEC 17025 standard, thereby assuring the quality and accuracy of our test results. Moreover, our laboratories and field teams use the latest equipment to detect substances controlled by regulations and have highly trained teams to handle contingencies and customer complaints. We believe our technology enhances the efficiency and quality of our operations.
Our Strategy
In 2023, we reviewed our corporate strategy, strategic objectives, indicators and goals, as well as our mission and vision. We defined our purpose to be aligned with our overreaching goal of contributing to an improvement in the quality of life in the areas in which we operate.
We reorganized ourselves by creating a new executive board and an area dedicated to coordinating and centralizing the management of all ESG related aspects of our business. Sustainability is at the core of our new organizational structure and our new strategic drivers, which are:
Purpose – To transform the lives of Brazilians for a more inclusive and sustainable society.
Vision – To be a global reference in innovation and sustainability in the sanitation sector.
Mission – To provide sanitation services with excellence.
In addition, we have set our strategic goals across the following areas:
Internal Procedures. Increase the efficiency of our projects and strengthen our supply chain.
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Customers and Market. Be competitive to maintain and expand our market presence and be a benchmark in service provision in Brazil.
People and Innovation. Be a modern, inclusive and innovative company.
Sustainability. Promote the universalization of sanitation services to generate positive impacts on Brazilian society and the environment and maximize our economic and financial results to ensure our growth and sustained performance.
These strategic drivers and goals are the corner stones of our ambition that we set in 2023 of striving to become what we believe to be the best sanitation company in the world. By renewing our strategy, we have placed people and the environment at the heart of our business. The intention is to ensure the transformation of lives towards a more inclusive and sustainable society, to provide our services with excellence and seek to become a global benchmark in the sanitation sector.
The guiding principles behind our strategy are:
Universalization. Working towards the universalization of sanitation services in the municipalities we operate, including people living in underdeveloped urban areas occupied by low-income populations in irregular areas.
Professional and personal development. Identify talent, provide continuous access to operational, technological and managerial knowledge and create environments that enhance values.
Integration of service provision. Implement new technologies and systems that centrally serve our company more efficiently as a whole.
Development of objectives and goals for improving the socio-environmental aspects of the areas in which we operate. Comply with environmental requirements, expand sewage treatment and reduce the discharge of untreated sewage into water bodies, and also expand ESG actions to mitigate socio-environmental and corporate governance risks.
Financial return. Secure positive financial results to guarantee investments for the provision of services, as well as to provide what we believe to be adequate and just remuneration for our shareholders. To achieve this goal, we intend to use our best efforts to reduce operating costs and increase productivity and profitability. We plan to improve the management of our assets, as well as to continue to reduce our total operating expenses by automating some of our facilities, streamlining operational processes, implementing integrated planning and further investing in internal technological research and development.
Growth in new businesses. Operate in new sectors that generate financial opportunities and contribute to the execution of our corporate strategy. Consider the water cycle as a whole (circular economy), from water collection, treatment and distribution, sewage collection and treatment and the return of these products to nature efficiently and in harmony with the environment and society.
Reuse of raw materials. Within the concept of a circular economy, encourage as much as possible the reuse of raw materials from our core activities.
Maintain and expand our operating base. We intend to maintain and expand our operating base by searching for new business opportunities. We also regularly explore the possibility of providing water and sewage services in municipalities in the State of São Paulo in which we currently have no operations or to which we currently supply water and provide sewage treatment solely on a wholesale basis. We evaluate possible expansion opportunities in terms of proximity to our existing service areas to maximize return on investment and improve our financial performance.
State of São Paulo
The State of São Paulo is one of 26 states that, together with the Federal District of Brasília, constitute the Federative Republic of Brazil. The State of São Paulo is located in the southeastern region of the country, which also includes the States of Minas Gerais, Espírito Santo and Rio de Janeiro, and which is, according to IBGE, the most developed and economically active region of Brazil. The State of São Paulo is located on the Atlantic coast of Brazil and is bordered by the states of Rio de Janeiro and Minas Gerais to the north, the state of Paraná to the south and the state of Mato Grosso do Sul to the west.
The State of São Paulo occupies approximately 3.0% of Brazil’s land mass and encompasses an area amounting to approximately 96 thousand square miles. According to the SEADE, the State of São Paulo had an estimated total population of 45.5 million as of December 31, 2023. The city of São Paulo, capital of the State of São Paulo, had an estimated total population of 12.0 million, with a total population of 21.5 million inhabitants in the São Paulo metropolitan region, as of December 31, 2023. The São Paulo metropolitan region encompasses 39 municipalities and is the largest metropolitan region in the Americas and the fifth largest metropolitan region in the world, according to the World Population Review website in 2024, with approximately 47% of the total population of the State of São Paulo as of December 31, 2023. According to the most recent data collected by the IBGE, the GDP of the State of São Paulo was approximately R$3.2 trillion, representing approximately 30% of Brazil’s total GDP, and making it the largest economy of any state in Brazil based on GDP. According to the IBGE, the State of São Paulo is also the leading Brazilian state in terms of manufacturing and industrial activity, with a strong position in car manufacturing, pharmaceuticals, computer manufacturing, steel making and plastics, among other activities, as well as a leading position in the banking and financial services industries. The State of São Paulo is the leading exporting state in Brazil, according to the Brazilian Ministry of Development, Industry and Foreign Trade (Ministério do Desenvolvimento, Indústria e Comércio Exterior).
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Corporate Organization
In 2023, we updated our governance structure to what we believe is more consistent and dynamic. One of the main pillars of this transformation was the reorganization of the departments under the responsibility of each director and the creation of new structures intended to optimize our growth within the context of the recent regulatory changes in the sanitation sector.
These changes were intended to allow us to become more agile in our decision-making processes through a more horizontal and dynamic structure, which enables us to reach what we believe to be more scalable, and effective solutions for the adoption sustainable and innovative best practices, to analyze data to more effectively utilize financial resources.
We currently have sixseven management divisions, each of which is supervised by one of our executive officers.
Our Board of Directors allocates responsibilities to our executive officers following an initial proposal made by our Chief Executive Officer, in accordance with our bylaws. The Chief Executive Officer is responsible for coordinating all management divisions in accordance with the policies and directives established by our shareholders’ meeting, our Board of Directors and boardBoard of executive officers,Executive Officers, including the coordination, evaluation and control of all functions related to the Chief Executive Officer’s office and staff, integrated planning, business management and corporate organization, communication, ombudsman, regulatory affairs,quality, ESG, digital transformation and corporate strategy. The Chief Executive Officer is also responsible for overseeing the compliance and risk management area, led by the statutory officer appointed by the Board of Directors, as well as administratively overseeing the audit and quality.corporate compliance and risk management areas.
The Chief Executive Officer represents our company before third parties and certain powers can be granted to attorneys-in-fact. The executive officers described below report to the Chief Executive Officer:
· | the Chief People and Corporate Management Officer, who is responsible for |
· | the Chief Financial Officer and Investor Relations Officer, who is responsible for financial planning, revenue generation and financial resource procurement, management and monitoring of billing and revenue collection, |
· | the |
· | the Chief | |
· | the Chief | |
· | The Chief Regulation and New Business Officer is responsible for managing |
Capital Expenditure Program
Our capital expenditure budget is subject to approval by the legislative chamber of the State of São Paulo. This approval is obtained simultaneously with the approval of the budget of the São Paulo Secretariat for Environment, Infrastructure and Logistics. We are also subject to supervision from the Court of Audit of the State of São Paulo (Tribunal de Contas do Estado de São Paulo), with regard to our accounting, financial and budgetary activities and our operating assets.
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Our capital expenditure program is designed to improve and expand our water and sewage system and to increase and protect our water sources in order to sustain water security, meet the growing demand for water and sewage services in the stateState of São Paulo and improve the overall environmental impact of our activities. Our capital expenditure program has four specific goals with respect to the Municipalitiesmunicipalities we serve:
(i) | to continue to increase water security and meet increased demand for treated water; |
(i) to continue to increase water security and meet increased demand for treated water;
(ii) | to expand the percentage of households connected to our sewage system; |
(ii) to expand the percentage of households connected to our sewage system;
(iii) | to increase the treatment of sewage collected; and |
(iii) to increase the treatment of sewage collected; and
(iv) to increase operating efficiency and reduce water loss.
(iv) | to increase operating efficiency and reduce water loss. |
We currently have budgeted investments in the total amount of R$23.847.4 billion from 20222024 through 2026. We invested R$5.0 billion, R$4.4 billion2028, which we intend to fund with cash generated by our operations and R$5.1 billion in 2021, 2020long-term borrowings and 2019, respectively.
financing. The following table sets forth our planned capital expenditures for water and sewage infrastructure for the years indicated:indicated, which does not consider the effects of our Proposed Privatization:
2022 | 2023 | 2024 | 2025 | 2026 | Total | 2024 | 2025 | 2026 | 2027 | 2028 | Total | |
(in millions of reais) | ||||||||||||
System Expansion | 4,046 | 8,062 | 8,235 | 7,216 | 6,352 | 33,911 | ||||||
Water | 2,209 | 2,026 | 1,853 | 1,926 | 1,869 | 9,883 | 1,028 | 1,624 | 1,301 | 1,228 | 1,172 | 6,353 |
Sewage Collection | 1,869 | 1,989 | 2,005 | 2,534 | 2,235 | 10,632 | ||||||
Sewage Treatment | 616 | 558 | 668 | 624 | 864 | 3,330 | ||||||
Sewage | 3,017 | 6,438 | 6,934 | 5,988 | 5,180 | 27,558 | ||||||
System Enhancement, Efficiency and Asset Renewal | 3,104 | 2,792 | 1,911 | 1,750 | 1,710 | 11,267 | ||||||
Loss Control and Reduction | 929 | 876 | 511 | 494 | 504 | 3,314 | ||||||
Operational Development (Energy, Automation, Retrofits) | 2,175 | 1,916 | 1,401 | 1,256 | 1,205 | 7,953 | ||||||
Others | 983 | 640 | 199 | 162 | 196 | 2,180 | ||||||
Total | 4,694 | 4,573 | 4,526 | 5,084 | 4,968 | 23,845 | 8,132 | 11,494 | 10,346 | 9,129 | 8,257 | 47,358 |
We invested R$6.3 billion, R$5.4 billion and R$5.0 billion in the years ended December 31, 2023, 2022 and 2021, respectively.
The following table sets forth the number of water and sewage connections made in 2023 and the goals for the 2024 to 2028 period:
Accomplished (in thousands) | Goals (in thousands) | ||||||
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | Total | |
Water | 187.5 | 194.9 | 196.9 | 182.5 | 180.1 | 254.2 | 1,008.6 |
Sewage Collection | 191.4 | 262.9 | 292.0 | 236.9 | 206.8 | 290.5 | 1,289.2 |
New consumers are responsible for covering part of the costs of connection to the water distribution network if they are located more than 20 meters away from the existing network. Beyond this distance, the customer must cover the additional costs of connection to the network from their premises, including the costs of purchasing and installing the water meter and related labor costs. We perform the installation, inspections and periodic measurements of the water meter. After the installation is completed, the customer is responsible for the water meter.
New sewage connections are made substantially on the same basis as the water network connections. We cover the costs of installing the first 20 meters of sewage network extension from the existing collection network to the new sewage connections for all consumers, and the consumer is responsible for the remaining costs.
Our capital expenditure program from 20222024 through 20262028 will continue to focus on achieving our targets by making regular investments to maintain and expand our infrastructure and to reduce water losses in the 375 Municipalities376 municipalities we served as of December 31, 2021.2023.
Main Projects of Our Capital Expenditure Program
The following is a description of the main projects in our capital expenditure program.
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Investments in Water – We have a series of ongoing and scheduled projects involving water production and distribution. For the period from 20222024 through 2026,2028, we plan to spend R$9.96.4 billion in water-related investments.expanding water systems. The main programs are:
Metropolitan Water Program
Demand for our water services has grown steadily over the years in the São Paulo metropolitan region and has at times exceeded the capacity of our water systems. On account of the high demand, prior to September 1998, a portion of our customers in this region received water only on alternate days of the week. We refer to this as “water rotation.” Further, the metropolitan region lacks water resources, which requires us to obtain water from increasingly distant sources. In order to address this situation, we implemented the Metropolitan Water Program (Programa Metropolitano de Água) to improve regular water supply to the entire São Paulo metropolitan region. This program terminated in 2000 and the water rotation measure was eliminated, but we have nevertheless maintained our investment plans for the region.
Since 2000, the Metropolitan Water Program has increased the production capacity by 13.1 m³/s, with the aim of improvingand improved the structure of the supply system in the São Paulo metropolitan region, by expanding the water production and distribution systems. In March 2018, we concluded the interconnection of the Jaguari reservoir (part of the Paraíba do Sul River Basin) and Atibainha reservoirsreservoir (part of the PCJ River Basin, Cantareira System), which is also strategic to guarantee secure access to water for the metropolitan region of São Paulo.Paulo metropolitan region. Through suchthis interconnection, we are able to transfer 5.13 m³/s (annual average) to 8.5 m³/s (maximum) of water from the Jaguari reservoir to Atibainha.the Atibainha reservoir. Since May 2018, the transfer of water also works in the opposite direction, from the Atibainha reservoir to the Jaguari reservoir, allowing us to optimize the reservation capacity of both reservoirs, while benefiting the population of the Paraíba Valley.Valley (Vale do Paraíba).
With regard to PPPthe public-private partnership (“PPP”) São Lourenço, as of December 31, 2021, the initial estimated amount of the PPP contract, which has a 25-year term, was R$6.0 billion (including R$2.22.7 billion in construction and maintenance and operation of the system). AfterAs of the date of this annual report, after monetary adjustment, the estimated amount of the contract amounts tois of approximately R$7.8 billion and has a 25-year term, four10.3 billion. Four years of which wasthis PPP contract were dedicated to the construction, while the other 21 years will be dedicated to service delivery. These services include the operation and maintenance of the sludge treatment system of the water treatment plant and disposal of the waste thus generated; electromechanicelectromechanics and civil maintenance of the untreated water pumping stations, of the water treatment plant and the untreated water pipeline; and preservation and cleaning, surveillance and property security. The system indirectly benefits the entire São Paulo metropolitan region as it is connected to the metropolitan system, which increases the volume of available water.
Reversal of the Itapanhaú River
This is the third major project of the many structural interventions to ensure water security in the São Paulo metropolitan region. Through the reversal of the Itapanhaú River basin to the Biritiba reservoir, part of the Alto Tietê Production Systemproduction system is expected to have the capacity to pump an average of 2 m3/s (maximum of 2.5 m3/s) of water to the Biritiba reservoir. The project aims to improve water security in the São Paulo metropolitan region and is expected to directly benefit approximately 4.5 million residents that receive water from the Alto Tietê Production Systemproduction system as well as indirectly benefit the population of the greater São Paulo region. The construction works began in June 2020 and are estimated to finish in 2022.2025. This project is partially funded out of our own resources and from funds provided by Caixa Econômica Federal.CEF.
Program for Reduction of Water Loss
The Program for theWater Loss Reduction of Water Loss(Programa de Redução de Perdas de Água) aims to achieve a steady reduction in water loss in the long term, through the implementation of various operational and maintenance improvement measures, in addition to important actions to renew and improve the infrastructure.
As a result, the rate of our total losses index has decreased gradually, from 41.0%34% in 20042008 to 27,9% in 2021.30% for the year ended December 31, 2023. The loss in liters per connection per day, considered the most suitable index, has also shown a decrease. In 2021,For the year ended December 31, 2023, the index reached 252260 liters per connection per day 54% less than 2004, when the indicator registered 547compared to 430 liters per connection per day.day in 2008.
The losses in the municipality of Guarulhos were accounted for in this index as of January 2021. The losses in the municipality of Santo André were accounted for in this index as of January 2022 and Mauá will be accounted for in this index as of January 2022. The losses accounted in the municipality of Guarulhos will lead to an increase of about 10 liters per connection per day in the loss index.2024. Accordingly, the goal for 20222024 is to reach an index of 250255 liters per connection per day, including the municipality of Santo André.these municipalities. Part of the resources allocated to the program came from our own resources, and the remainder from financing granted by the Japan International Cooperation Agency (JICA),JICA, BNDES, and by incentivized debentures provided for in Law No. 12,431/2011.
For more information on water loss and our Program for Water Loss Reduction, see “Item 4.B. Business Overview— Description of Our Activities— Water Operations— Water Distribution” and “Item 5.B. Liquidity and Capital Resources—Indebtedness Financing—Indebtedness Financing.”
Coastal Water Program
The Coastal Water Programcoastal water program (Programa Água no Litoral) combines variouscovers long-term activities to expandaimed at expanding the water production and distribution capacity in the Baixada Santista metropolitan region on the southern coast, as well as onin the “northern coast”municipalities of the northern coast of the State of São Paulo. The program aims to benefit approximately three and a half million people, including both the local population and tourists. It also aims to increaseimprove the level of reliability of the local systems, eliminating existing and potential deficiencies and irregularities in the water supply. In order to reachTo achieve this goal, since 2013 we have been investinginvested in upgradingimproving water treatment plantssupply systems in several Municipalities since 2013,municipalities, such as Mambu-Brancothe implementation of the Mambu Branco Production System located in Itanhaém, which was already expanded in 2023 to increase its water flow from 1.6 m³/s to 3.2 m³/s.
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Another part of the coastal water program in the Baixada Santista is the implementation of the Melvi Water Treatment Plant, located in Itanhaém. This expansion is financed by incentivized debentures. In addition, we will build a Melvi Water Treatment Plant in Praia Grande with a capacity of 1.27 m³/s, and fivethe construction of 5 metallic reservoirs in Santos, Bertioga, Peruíbe, Itanhaém and Guarujá. Additionally, there are plans to build a reservoir center with a capacity of 30,000 m³ in Praia Grande and to implement a desalination plant, with 400 liters per second of treatment capacity to ensure the water supply to the population of Guarujá, which together will increasemainly during the reservation capacity in the region.
summer season.
InOn the northern coast, we have made numerous investments aimed atthe Program is expanding water security, improving and increasing the capacity of water production units, and we have implemented certain actions to optimize water distribution units to meet demand in the high season. Among the investments initiated, we highlight the expansion of the Água Branca Water Treatment Plantsupply system in Ilhabela.Ilhabela and also foresees investments to increase the reservoir capacity through the construction of new reservoirs. The capacity of treatment, adduction and reservoirs will also be expanded in São Sebastião and Caraguatatuba. Besides the treatment and adduction projects, investments are foreseen to expand the coverage area with water distribution in São Sebastião and in Ubatuba.
Sustainable and Inclusive Sanitation Program
The Sustainablesustainable and Inclusive Sanitation Programinclusive sanitation program (Programa Saneamento Sustentável e Inclusivo) integrates water security and social inclusion and is focused on the Guarapiranga reservoir area in the São Paulo Metropolitan Region,metropolitan region, benefiting more than 1 million people. The Program aims to reduce water losses by replacing our water networks and implementing water supply infrastructure in houses with underdeveloped facilities, as well as to improve maintenance and safety control of Guarapiranga reservoir and to expand and optimize sewage collection, and treatment in the area. The Program is supported by funds from the World Bank as well as our own funds.
Investments in Sewage—We have a series of ongoing and scheduled projects involving the collection, removal and treatment of sewage. For the period from 20222024 through 2026,2028, we plan to invest R$13.927.6 billion in expanding sewage collection and treatment.systems. The main programs are:
Tietê Project
We have been working in the metropolitan region of São Paulo inmetropolitan region on sanitation programs that aim to contribute to the revitalization of rivers and streams, and its main program is the Tietê Project.
Established in 1992, the project aims to contribute to the progressive revitalization of the Tietê river and its tributaries, in the Alto Tietê basin, where the metropolitan region of São Paulo metropolitan region is located, through the expansion and optimization of the sewage collection, transportation and treatment system.
Considering the complexity and challenges faced to implement infrastructure projects in crowded and disorderly urbanized areas such as São Paulo, it was necessary to structure the project in stages.
From 1992 to the end of 2021, the2023, investments totaled US$3.3 billion, of which R$898 million were disbursed in 2021.3.8 billion. Part of the resources allocated to the Tietê Project are our own capital and the remainder comes from financings granted by the Inter-American Development Bank - IDB Invest, BNDES, CEF and Caixa Econômica Federal.IFC.
During this period, 1.8 million domestic sewage connections were built and 4.85 thousand kilometers of trunk sewers, interceptors trunk collectors and sewer collection networks were built to collect and transport the sewage to treatment incapacity of our plants whose installed capacity for treatment almost tripled and the equivalent to the sewage generated by 12 million people was directed to treatment.
tripled. As a result, the treated sewage outflow in the metropolitan region of São Paulo metropolitan region today is five and a half times greater than that in 1992. This1992, an increase of approximately 450%, is equivalent to the sewage generated by a population of 12 million people. As a result, sewage collection that served 70% of the urbanized area of the metropolitan region of São Paulo metropolitan region in 1992 increased by more than 90%93% by the end of 2021. Sewage treatment increased from 24% to 85% of the volume collected.
By 2025, the program aims to increase the sewage collection rate in the metropolitan region of São Paulo to 92% and the treatment rate to 90% of the total collected, with the conclusion of the third stage, now under way with a 88% progress, and the works already planned for the fourth stage, with priority interventions currently in concurrent execution.2023.
Finally, we would like to highlight the Novo Rio Pinheiros Project, which is part of the Tietê Project. The Pinheiros River is one of the main tributaries of the Tietê River in the São Paulo metropolitan region, and the improvements in the Pinheiros River will havehad a direct impact on improving the quality of Tietê’s waters. It is important to point out that the large sewage collection and interception infrastructure built over time as part of the Tietê Project allows the complementary improvements carried out in the Novo Rio Pinheiros River to be immediately connected to the Barueri treatment station. We expectedplant.
In 2022, the Novo Rio Pinheiros Project was completed, and we believe it enhanced the quality of life in regions of extreme social vulnerability. There were more than 650 thousand properties connected to conclude these improvements in 2022, which will be an important milestone forour collection network and that had sewage treatment, approximately 1.8 million people served and the reintegration of the river into the life of the city of São Paulo.
Integra Tietê Program
Continuing the efforts initiated by the Tietê Project.Project, the Integra Tietê Program, an initiative that encompasses short, medium and long-term measures aimed at cleaning up and revitalizing the Tietê River, was launched in March 2023.
The Novo Rio Pinheiros Projectprogram is an initiative promotedcoordinated by SEMIL, and it involves collaboration from several bodies: us, EMAE, the stateState of São Paulo to coordinate several stateEnvironmental Company (Companhia Ambiental do Estado de São Paulo – “CETESB”), the Department of Water and municipal entities in an effort to clean up the Pinheiros river in order to reintegrate it intoElectric Energy (Departamento de Águas e Energia Elétrica – “DAEE”), Government Secretaries, the city hall of the municipalities involved and make it a leisure and tourism area. The project includes sewage services, riverbed dredging, programsalso the civil society partnership of the United Nations High Commissioner for the collection and reduction of inadequate urban waste disposal, as well as environmental education actions.Refugees.
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WeWithin the program, we were encouragedresponsible for the pillar focused on improving public health and the quality of life in the areas in which we operate, including initiatives aimed at expanding sewage treatment capacity at treatment plants, as well as enhancing sewage collection networks to participatemeet the deadlines stipulated in this initiative as it is relevantLaw No. 11,445/2017 (as updated by Law No. 14,026/2020). These efforts also contribute to the Tietê Project and we took part in the project by offering an accelerated expansiongradual restoration of the sewage collection network andwater quality of the installation of new sewage connections in areas not yet served, which is expectedTietê River.
The program aims to connect approximately 533 thousand residences2 million properties to the sanitation system, ensuring that their sewage treatment system.undergoes proper treatment. In places where the connectiontotal, more than 6 million people will be served with a complete sanitation cycle, which is equivalent to the existing infrastructure is not possible due to settlements along the river bank, as parta population of the project we will install small sewage treatment plants on the river’s tributaries. Until 2021, approximately 516 thousand residences were connected to the sewage treatment system, that is, an advance of 97% in relation to the established goal. These initiatives are being contracted based on performance (Performance Contract), a form of service contracting that set goals to be achieved by the contractors, with the compensation varying according to the achievement of the proposed targets. That is, compensation will take place upon completion of the construction and will also have a variable part, depending on the final result achieved. Performance evaluation considers targets such as the number of new residences connected to the sewage network and stream water quality.city like Rio de Janeiro.
Clean Stream Program
The Clean Stream Programclean stream program (Programa Córrego Limpo), a partnership between the State of São Paulo, our company, and the city of São Paulo, aims to decontaminate urban streams in the city of São Paulo by eliminating the discharge of sewage into streams and rainwater runoff routes, cleaning streams and banks, and removing and relocating low-income households located on the banks of streams.
Since 2007, we decontaminated and preserved 161 urban streams, have been decontaminated and preserved, benefiting approximately 2.9more than 3.5 million people. The program is supported by funds from the Caixa Econômica Federal as well as our own funds. Part of the investment related to the Integra Tietê ProjectProgram and Novo Rio Pinheiros benefits the Clean Stream Program.
In 2021,Program. We monitor water quality in streams on a monthly basis and carry out preventive and corrective maintenance actions that aim to maintain the program benefited more than 182.5 thousand people, contributing to the collection and treatment of an additional 137 liters per second of sewage.program’s depollution results.
Clean Wave Program
The Clean Wave Programclean wave program (Programa Onda Limpa) is the largest environmental sanitation program on the Brazilian coast. Its main goal is to improve and expand the sewage systems in the Municipalities that covermunicipalities of the metropolitan region of Baixada Santista and the northnorthern coast of the State of São Paulo, seeking the universalization of sewage services in the region. The program will improve public health and bathing on the condition of 82region’s beaches, and will benefitbenefiting approximately 43.5 million people, including localsthe local population and tourists who visit the coast,region, especially in the summer months.
Due to the complexity and challenges involved in the implementation of infrastructure projects in coastal regions, the Program was structured in stages. In theThe first stage startedbegan in 2007, with investments only in Baixada Santista and, among other actions 110 thousandthe initiatives performed, 110,000 sewage connections, 7 sewage treatment plants, and 2 preconditioning plants were implemented, resulting in the increase of the sewage coverage ratio from 53% to 84% in 2021, reaching 100% treatment of the sewage collected.implemented. This stage was financed bywith our own fundsresources and financingthrough financings from JICA and BNDES. From the beginning of the Program until 2023, the investments resulted in an increase in the sewage collection coverage rate to 86% and treatment of 100% of the collected sewage.
The second stage of the programProgram began in 2018 and aims to implementbuild approximately 450 kilometerskm of sewage collection network, 48 thousandnetworks, 48,000 new sewage connections, three3 new sewage treatment plants and improvements toand expansions in existing sewage treatment plants. In 2019, we began works on sewage collection networks and new connections in the Municipalities of Praia Grande, Mongaguá, São Vicente and Itanhaém. During this phase,plants with investments in all nine municipalities of Baixada Santista. In 2019, sewage collection and removal works began in the nine Municipalitiesmunicipalities of the Baixada Santista are planned.Praia Grande, Mongaguá, São Vicente and Itanhaém. We expect to complete this stage in 2026. The second stage of the Program is financed with our own resources and Infrastructure Debentures (Debêntures de Infraestrutura) and by incentivized debentures. We expect to conclude this stage by 2025, reaching a sewage collection index of 90%, and treating all collected sewage of the Baixada Santista.IFC.
The execution of the third stage of the program, which aims to achieve universal sewage collection and treatment, is estimatedProgram in Baixada Santista will be carried out between 2026 and 2033 and aims to provide sewage collection indexreach the targets established in the New Legal Framework for Basic Sanitation in Baixada Santista. On the northern coast, the Clean Wave Program arrived in 2019, aiming to intensify investments in sanitation in the four municipalities of 95%the region - Caraguatatuba, São Sebastião, Ubatuba and treatment of all sewage collected.Ilhabela.
Other Policies and Programs
Nossa Guarapiranga
The Nossa Guarapiranga Project, launched in December 2011, is still running. Its main objective is to improve the water quality in the Guarapiranga basin, an urban water source for the São Paulo metropolitan region, which supplies more than 4 million people.
We carried out actions on three fronts as part of this project: (i) we installed ecobarriers at the mouth of the reservoir’s main effluents in order to retain solid residue in the Guarapiranga basin; (ii) we developed diagnosis and control services for the removal of water plants that obstruct water extraction; and (iii) we removed and disposed of solid residue that had accumulated at the water surface of the dam in the reservoir. Two vessels were built specifically for this purpose. We work as a collaborative team with the municipal government of São Paulo in the Nossa Guarapiranga Project, with the municipal government of São Paulo transporting all of the residue collected through these fronts to a sanitary landfill. In 2021,2023, we removed an average of 226242.6 m³/month of solid residue and approximately 4113,191.8 m3/month of water plants from this basin.
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Água Legal Program
Created in 2017, the Legal Water Programlegal water program (Água Legal)Legal) aims to promote the proper installation of water distribution systems in communities of high social vulnerability,underdeveloped urban areas occupied by low-income populations in irregular areas, where residents are poorly supplied with improvised pipes subject to contamination. In 2021,For the year ended December 31, 2023, the program brought more comfort and health to approximately 53,000120 thousand people in the metropolitan region of São Paulo metropolitan region by replacing precarious and irregular facilities with networks and water meters that bring quality water to the taps. Since the beginning of the Program, approximately 560,000680 thousand people in the metropolitan region of São Paulo metropolitan region had their private connections standardized.
Pro-Connection Program (Programa Pró-Conexão)
In 2012, the State of São Paulo approved a program to subsidize connections to the sewage system for low-income families,Pro-Connection Program, of which 80% of the capital expenditures is provided by the State of São Paulo state government and 20% by us.
TheFrom 2012 to 2019, when the first phase ended, the program brought more comfort and health to approximately 104,000 peoplebenefited 29.7 thousand families, with sewage connections, new internal installations and replacement of precarious and irregular sewage pipes, providing safe and legally compliant infrastructure for these households. Most of the work for this program was executed by our own personnel, which considerably reduced the need for investments.
In 2019, the original term of the program provided for in State Decree No. 58,208/2012 expired.expired and the program was suspended between 2020 and 2022. In February 2022, our Board of Directors approved the renewal of the program. In December 2022, the State of São Paulo government published State Decree No. 67,298, which extended the Pro-Connection Program for a further five years.
State Law No. 17,853/2023 authorized the government of the State of São Paulo to adopt measures for our Proposed Privatization and to create the Fund to Support the Universalization of Sanitation in the State of São Paulo, which will be administered by a Guidance Council. For more information about the duties of the Guidance Council regarding the Pro-Connection Program, see “Presentation of Financial And Other Information—Proposed Privatization.”
We believe that this programthe Pro-Connection Program can increase the efficiency of our other sewage collection programs and help improve water quality in the region’s rivers and basins as well as improve quality of life for low-income families. For more information, see “Item 7.B. Related Party Transactions—Agreements with the State.State of São Paulo.”
B. Business Overview
Our Operations
As of December 31, 2021,2023, we provided water and sewage services to 375 Municipalities376 municipalities in the stateState of São Paulo (including the municipality of Olímpia) under concession agreements, program agreements or other forms of legal arrangements or without formal agreements. We also supplied treated water on a wholesale basis to two Municipalities located in the São Paulo metropolitan region and conurbations.arrangements. The majority of these concessions have 30-year terms. Between January 1, 2007 and December 31, 2021,2023, we entered into agreements with 342 Municipalities (including our services agreement with the Municipalities of São Paulo and Guarulhos)352 municipalities in accordance with the Basic Sanitation Law, of which none wereonly one was entered into in 2021.2023, between Sabesp Olimpia S.A. and the municipality of Olimpia. As of December 31, 2021,2023, these 342 Municipalities352 municipalities accounted for 95.0%95.4% of our gross operating revenues from sanitation services (excluding revenues relating to the construction of concession infrastructure). In addition to the contracts, the Municipalitiesmunicipalities entered into cooperation contracts with the State of São Paulo, delegating the regulation and monitoring of the provision of services to ARSESP. As of December 31, 2021, eight2023, one of our agreements or concessions had expired but we continued to provide water and sewage services to these Municipalities.this municipality. From January 1, 20222024 through 2030, 252031, 23 concession agreements will expire, accounting for 4.0%3.9% of our revenues (excluding revenues relating to the construction of concession infrastructure) for the year ended December 31, 20212023 and 2.5%2.1% of our intangible assets and contract assets as of the same date, will expire.
We operate water and sewage systems in the State of São Paulo, which includes the city of São Paulo, Brazil’s largest city. According to the IBGE, the State of São Paulo is Brazil’s most populous state and the state with the highest GDP in Brazil. For the year ended December 31, 2023, we generated net operating revenue of R$25,572.1 million and profit of R$3,523.5 million. Our total assets amounted to R$61,471.0 million and our total shareholders’ equity amounted to R$29,857.4 million as of December 31, 2023. As of December 31, 2023, we provided water and sewage services to a broad range of residential, commercial, industrial and governmental customers in 376 of the 645 municipalities in the State of São Paulo, including the city of São Paulo. Substantially all of our concessions or program agreements have 30-year terms.
We also supplied water and sewage treatment services on a wholesale basis to two municipalities located in the São Paulo metropolitan region (Mogi das Cruzes and São Caetano do Sul). Agreements to provide services on a wholesale basis must comply with the Basic Sanitation Law, which requires that the service be supervised by an independent agency and stipulates registration of the cost of the service in accordance with the rules published by ARSESP. Our agreements currently comply with the provisions of the Basic Sanitation Law. For more information on these agreements, see Note 10 to our 2023 Consolidated Financial Statements.
The Brazilian courts can oblige us to continue to supply water to the municipalities serviced through our wholesale segment, even when we have not received payments due to us. If they do not pay, we have no way of ensuring that negotiations with these municipalities or legal action taken against them will result in payments being made. The municipalities of Mogi das Cruzes and São Caetano do Sul have historically paid for our services on time.
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For the year ended December 31, 2023, we invoiced approximately 2,236.2 million cubic meters of water and 1,967.6 million cubic meters of sewage collected from these municipalities. For the year ended December 31, 2023, our revenues from wholesale water services were R$103.4 million and from wholesale sewage services were R$37.7 million.
As of December 31, 2023, we provided water services through 10.3 million water connections to approximately 28.1 million people, representing approximately 62% of the total population of the State of São Paulo, and had a water coverage ratio of 98% with respect to all regions. As of that date, we provided sewage services through 8.8 million sewage connections to approximately 24.9 million people, achieving an effective sewage coverage ratio of 93%. As of December 31, 2023, we operated using 93,163 kilometers of water pipes and water transmission lines and 63,635 kilometers of sewer lines. We also provide water and/or sewage services to four other municipalities through special purpose companies.
For more information on laws and regulations related to our concession operations, see “—Government Regulations Applicable to our Contracts.”
Description of Our Activities
As set forth in ArticleIn accordance with article 2 of our bylaws, we are permitted to render basic sanitation services with the goal of providing basic sanitation services to the entire population in the Municipalitiesmunicipalities where we conduct our activities without harming our long-term financial sustainability. Our activities comprise water supply, sanitary sewage services, urban rainwater management and drainage services, urban cleaning services, solid waste management services and related activities, including the planning, operation, maintenance and commercialization of energy, and the commercialization of services, products, benefits and rights that directly or indirectly arise from our assets, operations and activities. We are allowed to act in a subsidiary form in other Brazilian locationsstates and abroad. SeeFor more information, see “—Government Regulations Applicable to Our Contracts—Establishment of ARSESP.” For a description of our operating segments please see Note 2526 to our financial statements as of and for the year ended December 31, 2021.2023 Consolidated Financial Statements.
Operating segments are presented in our annual report in a manner consistent with the internal reporting provided to our chief operating decision maker,makers, which isare the Board of Directors and the boardBoard of executive officers,Executive Officers, as determined under IFRS 8. Under Brazilian GAAP,generally accepted accounting principles (“BR GAAP”), prior to our conversion to IFRS, the financial information for construction services was not separately presented and construction costs related to concessions were capitalized within property, plant and equipment. As a result, our chief operating decision makermakers did not review the results of this business. Following our conversion to IFRS, our chief operating decision makermakers decided to continue to exclude the construction results from the internal reporting of our revenues and expenses, thus not basing their decisions on discrete financial information for that business. Consequently, the business did not qualify as an operating segment under IFRS 8. Nonetheless, afterfollowing our conversion to IFRS and for IFRS financial statement purposes only, we started to record such results separately as construction revenue and costs under IFRIC 12. Although such information is available discretely, it is not analyzed by our chief operating decision makermakers as such and is not the basis for operational decisions.
We set forth below a description of our activities.
Wholesale Operations
Wholesale Water Services
As of December 31, 2021, we provided water services on a wholesale basis to two Municipalities located in the São Paulo metropolitan region (Mogi das Cruzes and São Caetano do Sul). Agreements to provide water services on a wholesale basis must comply with the Basic Sanitation Law which requires that the service be supervised by an independent agency, stipulates registration of the cost of the service with the rules published by ARSESP. Our agreements currently comply with the provisions of the Basic Sanitation Law No. 11,445/2007. In 2021, we invoiced approximately 49.7 million cubic meters of water to these Municipalities and the revenues from wholesales water services were R$92.0 million. For more information on this agreement, see Note 10 to our 2021 financial statements.
The Brazilian courts could oblige us to continue to supply water to the Municipalities serviced through our wholesale segment, even when we have not received payments due to us. If they do not pay, we have no way of ensuring that negotiations with these Municipalities or legal action taken against them will result in payments being made. The Municipalities Mogi das Cruzes and São Caetano do Sul have historically paid for our services on time.
Wholesale Sewage Services
Currently, we provide sewage services on a wholesale basis to the Municipalities of Mogi das Cruzes and São Caetano do Sul.
Through these agreements, in 2021 we invoiced approximately 15.8 million cubic meters of sewage collected from these Municipalities served on a wholesale basis. In 2021, our revenues from wholesale sewage services were R$20.0 million.
Water Operations
Our supply of water to our customers generally involves water extraction from various sources, subsequent treatment and distribution to our customers’ premises. In 2021,For the year ended December 31, 2023, we produced approximately 2.864.72,985.2 million cubic meters of water. The São Paulo metropolitan region (including the Municipalities to which we supply water on a wholesale basis) currently is, and has historically been, our core market, accounting for approximately 70% of water invoiced by volume in 2021.
The following table sets forth the volume of water that we produced and invoiced for the periods indicated:
Year ended December 31, | |||||
2023 | 2022 | 2021 | |||
(in millions of cubic meters) | |||||
Produced: | |||||
Total | 2,985.2 | 2,857.9 | 2,864.7 | ||
Invoiced: | |||||
Residential |
1,918.0 | 1,869.5 | 1,884.2 | ||
Commercial |
189.2 | 182.1 | 169.6 | ||
Industrial |
35.4 | 34.5 | 34.4 | ||
Public | 47.1 | 43.7 | 35.9 | ||
Total Retail |
2,189.7 | 2,129.8 | 2,124.1 | ||
Wholesale (1) |
46.5 | 47.8 | 49.7 | ||
Total |
2,236.2 | 2,177.6 | 2,173.8 |
Wholesale includes volumes of reuse water and non-domestic sewage; |
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Year ended December 31, | |||||
2021 | 2020 | 2019 | |||
(in millions of cubic meters) | |||||
Produced: | |||||
São Paulo metropolitan region | 1,984.2 | 2,032.0 | 2,012.5 | ||
Regional Systems | 880.5 | 874.7 | 860.7 | ||
Total | 2,864.7 | 2,906.7 | 2,873.2 | ||
Invoiced: | |||||
São Paulo metropolitan region | 1,419.4 | 1,351.3 | 1,296.4 | ||
Wholesale (1) | 49.7 | 50.1 | 48.1 | ||
Regional Systems | 683.2 | 682.5 | 666.3 | ||
Subtotal | 2,152.3 | 2,083.9 | 2,010.8 | ||
Santo André (2) | - | 53.9 | 67.1 | ||
Mauá (3) | 21.5 | 29.5 | 34.8 | ||
Residencial Social/Favela (4) | - | 45.8 | - | ||
Total | 2,173.8 | 2,159.2 | 2,112.7 |
(1) Wholesale includes volumes of reuse water and non-domestic sewage;
(2) Billed volume in the retail segment in 2021 and in the wholesale/retail segment in 2020 and 2019;
(3) Billed volume in the wholesale/retail segments in 2021 and in the wholesale segment in 2020 and 2019; and
(4) Volume exempt from paying water and sewage bills in 2020.
The difference between the volume of water produced and the volume of water invoiced generally represents both physical and non-physical water loss. SeeFor more information, see “—Water Loss.” In addition, we do not invoice:
·water discharged for periodic maintenance of water transmission lines and water storage tanks;
·water supplied for municipal uses such as firefighting;
·water consumed in our own facilities; and
·estimated water loss associated with water we supply to shantytowns (favelas).
· | water discharged for periodic maintenance of water transmission lines and water storage tanks; |
· | water supplied for municipal uses such as firefighting; |
· | water consumed in our own facilities; and |
· | estimated water loss associated with water we supply to urban areas occupied by low-income populations in irregular areas (favelas). |
Seasonality
Although seasonality does not affect our results in a significant way, in general, we observe higher water demand is observed during the summer and lower water demand during the winter. The summer coincides with the rainy season, while the winter corresponds to the dry season. The demand in the coastal region is increased by tourism, with the greatest demand occurring during the Brazilian summer holiday months.
Water Resources
We can withdraw water only to the extent permitted by the Department of Water and Electric Energy (Departamento de Águas e Energia Elétrica – DAEE) pursuant to water rights granted by it. Depending on the geographic location of the river basin or if the river crosses more than one state (federal domain), the approval of ANA, a federal agency under the Ministry of Regional DevelopmentEnvironment and Climate Change (Ministério do Meio Ambiente e Mudança do Clima) is required. We currently withdraw substantially all of our water supply from surface sources from rivers and reservoirs, with a small portion being withdrawn from groundwater. Our reservoirs are filled by impounding water from rivers and streams, by diverting the flow from nearby rivers, or by a combination of both methods. For more information on water usage regulation, see “—Environmental Matters—Water Usage.”
In order to supply water to the São Paulo metropolitan region, as of December 31, 20212023 we relied on 20 reservoirs of non-treated water and 265 reservoirs of treated water, which are located in the areas under the influence of the nine ten water producing systems comprising the interconnected water system of the São Paulo metropolitan region, including Cabuçu and the GuarulhosTanque Grande (Guarulhos) water supply system. The total capacity of the water sources available for treatment in this area is 82.380.8 m³/s. Total current installed capacity is 81.7 m³/s and can be distributed to the São Paulo metropolitan region. AverageThe average monthly verified production for the water systems of the São Paulo metropolitan region was 61.7m³64.8 m³/s during 2021.2023. The Cantareira, Guarapiranga and Alto Tietê Systemsproduction systems produce 78.6%approximately 80.2% of the water we distributed in the São Paulo metropolitan region in 2021.
In March 2018, we began operations of one of the important projects for the interconnected water system ofyear ended December 31, 2023.
For the São Paulo metropolitan region with the beginning of the transfer of water from the Jaguari reservoir to the Atibainha reservoir. The interconnection between the Jaguari and Atibainha reservoirs has an average flow of 5.13 m3/s and represents an important increase in water security for the Cantareira System and for the water supply in the São Paulo metropolitan region. For more information see “—Capital Expenditure Program—Main Projects of Our Capital Expenditure Program—Investments in Water.”
The construction of the São Lourenço Production System, another important project for the interconnected water system of the São Paulo metropolitan region, began in April 2014 and was completed in April 2018 and operations began in July 2018. The São Lourenço Production System represents an increase of 6.4m3/s in water availability and 6.0m³ production capacity of the region’s integrated system and is the ninth interconnected production system for the Metropolitan Region. For more information see “—Capital Expenditure Program—Main Projects of Our Capital Expenditure Program— Investments in Water.”
In 2021,year ended December 31, 2023, the Cantareira system accounted for 36.1%40.9% of the water that we supplied to the São Paulo metropolitan region (including the Municipalitiesmunicipalities to which we supplied water on a wholesale basis), which represented 70.7% of our operating revenues from sanitation services (excluding revenues relating to the construction of concession infrastructure) for the year.. For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Business— Environmental Matters and Physical and Transition Climate Risks—Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations.”
Current river basin committees are authorized to charge both for water usage and the dumping of sewage into water bodies. We participate in the decentralized and integrated management of water resources established by the National Policy on Water Resources. We are represented by our employees on the State River Basin Committees and the Federal Committees that act in the stateState of São Paulo and in the Nationalnational and State Councilsstate councils on Water Resources.water resources.
The following table sets forth the water production systems from which we produce water for the São Paulo metropolitan region:
Production Rate(1) | Production Rate(1) | Production Rate(1) | ||||||||||
2021 | 2020 | 2019 | 2023 | 2022 | 2021 | |||||||
(in cubic meters per second) | (in cubic meters per second) | (in cubic meters per second) | ||||||||||
Water production system: | Water production system: | |||||||||||
Cantareira | Cantareira | 22.3 | 24.6 | 23.8 | 26.5 | 21.1 | 22.3 | |||||
Guarapiranga | Guarapiranga | 13.4 | 12.7 | 12.7 | 13.1 | 13.6 | 13.4 | |||||
Alto Tietê | Alto Tietê | 12.7 | 13.6 | 14.3 | 12.4 | 13.0 | 12.7 | |||||
Rio Claro | Rio Claro | 3.3 | 3.6 | 3.1 | 3.5 | 3.6 | 3.3 | |||||
Rio Grande (Billings reservoir) | Rio Grande (Billings reservoir) | 4.4 | 4.3 | 4.3 | 4.6 | 4.5 | 4.4 | |||||
Alto Cotia | Alto Cotia | 0.8 | 1.1 | 1.2 | 1.0 | 0.9 | 0.8 | |||||
Ribeirão da Estiva | Ribeirão da Estiva | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | |||||
São Lourenço | São Lourenço | 4.4 | 3.1 | 3.1 | 3.3 | 4.5 | 4.4 | |||||
Guarulhos | 0.3 | 0.3 | 0.3 | |||||||||
Cabuçu and Tanque Grande (Guarulhos) | 0.3 | 0.3 | 0.3 | |||||||||
Total | Total | 61.7 | 63.4 | 62.9 | 64.8 | 61.6 | 61.7 | |||||
(1) | Average of the year ended December 31, 2021, 2020 and 2019.
| |||||||||||
(1) | Average of the years ended December 31, 2023, 2022 and 2021. |
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The Guarapiranga and Billings reservoirs and a portion of some of the reservoirs of the Alto Tietê production system are owned by other companies controlled by the State.State of São Paulo. In the cities of the interior region of São Paulo, our principal source of water consists of surface water from nearby rivers and from wells, whereas in coastal areas, our principal source of water consists of surface water from rivers and mountain springs. For additional information on the Alto Tietê production system, see “Item 7.B. Related Party Transactions—Agreements with the State.State of São Paulo.”
Statewide, we estimate that we are able to supply nearly all of the demand for water in all of the areas where we operate, subject to droughts and extraordinary climate events. We installed 178.9187.5 thousand, 220.4183.5 thousand and 204.8178.9 thousand new water connections in 2021, 2020the years ended December 31, 2023, 2022 and 2019,2021, respectively. The interconnected water system of the São Paulo metropolitan region serves 31 Municipalities,municipalities, of which 29 are operated directly by us under this system. Through this system, we serve the other two Municipalitiesmunicipalities on a wholesale basis whereas distribution is the responsibility of the companies or departments related to each municipality.
In order to reach the final customer, the water is stored and transported through a complex and interconnected system. This water system requires permanent operational supervision, engineering inspection, maintenance, and quality monitoring and measurement control.
To ensure the continuous provision of regular water supply, we intend to invest R$23.8 billion from 2022 to 2026 to increase our water production and distribution capacities as well as to improve the water supply systems. In 2021, our total investment in water supply systems amounted to R$1.9 billion, of which R$1.4 billion were invested in the São Paulo metropolitan region.
Water Treatment
We operate 235 treatment facilities, and we treat all water at our water treatment facilities prior to dispatching it to our water distribution network. We operate 246 treatment facilities, of which nine are a part of the Metropolitan Production System—located in the São Paulo metropolitan region and account for approximately 70% of all water we produced in 2021. The type of treatment used depends on the nature of the source and quality of the untreated water. For example, water abstracted from rivers requires more treatment than water withdrawn from groundwater sources. All of the water we treat receives fluoridation treatment.
Water Distribution
We distribute water through our networks of water pipes and water transmission lines. Storage tanks and pumping stations regulate the volume of water flowing through the networks in order to maintain adequate pressure and continuous water supply.
The following table sets forth the total number of kilometers of water pipes and water transmission lines and the number of connections in our network as of the dates indicated:
As of December 31, | As of December 31, | As of December 31, | ||||||||
2021 | 2020 | 2019 | 2023 | 2022 | 2021 | |||||
Water distribution pipes and water transmission lines (in kilometers) | 88,904 | 87,568 | 81,324 | 93,163 | 91,638 | 88,904 | ||||
Number of connections (in thousands) | 9,840 | 10,088 | 9,933 | 10,286 | 10,113 | 9,840 |
More than 90% of the water pipes in our water distribution network are made of cast iron or polyvinylchloride, or PVC. Distribution pipes at customers’ residences typically are made from high-density polyethylene tubing. Our water transmission lines are mostly made of steel, cast iron or concrete.
As of December 31, 2021, our water distribution pipes and water transmission lines included: (i) 47,249 kilometers in the São Paulo metropolitan region; and (ii) 41,655 kilometers in the Regional Systems.
As of December 31, 2021, we had 427 storage tanks in the São Paulo metropolitan region with a total capacity of 2.4 million cubic meters, and 2,204 storage tanks in the Regional Systems. Furthermore, we had 157 treated water pumping stations in the São Paulo metropolitan region aqueduct system, including stations at treatment facilities, intermediate trunk transfer pumping stations and small booster stations serving local areas.
Water transmission lines that require maintenance are cleaned and their lining is replaced. We are typically notified of water main fractures or breaks by the public through a toll-free number maintained by us. We consider the condition of the water pipes and water transmission lines in the São Paulo metropolitan region to be adequate as of the date of this annual report. Due to age, external factors such as traffic, the dense population, and commercial and industrial development, water pipes and water transmission lines in the São Paulo metropolitan region are somewhat more susceptible to degradation than those in the Regional Systems.interior of the State of São Paulo and in the coastal regions of São Paulo. To counter these effects, we have a maintenance program in place for water pipes and water transmission lines that is intended to address anticipated fractures and clogs due to brittleness and encrustation, and to help ensure water quality in the region.
The new customers whose water pipes are more than 20 meters away from the water transmission lines are responsible for covering part of the costs of connecting to our water distribution network. They must cover the costs of connecting to the network from the customer’s premises, including costs of purchasing and installing the water meter and related labor costs. We perform the installation of the water meter and conduct periodical inspections and measurements. After completion of installation, the customer is responsible for the water meter.
The following table (as of December 31, 2023) sets forth projected new water connections for the periods indicated in thousands:
2022 | 2023 | 2024 | 2025 | 2026 | 2022 – 2026 | ||||||
São Paulo metropolitan region | 127 | 135 | 135 | 135 | 125 | 657 | |||||
Regional Systems | 65 | 65 | 65 | 65 | 65 | 325 | |||||
Total | 192 | 200 | 200 | 200 | 190 | 982 |
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2024 | 2025 | 2026 | 2027 | 2028 | 2024 – 2028 | ||||||
Total | 195 | 197 | 182 | 180 | 254 | 1,008 |
Water Loss
The difference between the volume of water produced and the volume of water invoiced generally represents both physical and non-physical water loss. We exclude the following from our calculation of water loss: (i) water discharged for periodic maintenance of water transmission lines and water storage tanks; (ii) water supplied for municipal uses such as firefighting; (iii) water we consume in our facilities; and (iv) estimated water loss related to the supply of water to shantytowns urban areas occupied by low-income populations in irregular areas ((favelas)favelas).
As of December 31, 2021,2023, we experienced 279 liters/260 liters per connection per day of water loss in the São Paulo metropolitan region and 208 liter/connection per day of water loss in the Regional Systems, averaging 252 liter/connection of water loss per day.loss. We have a Program for Reduction of Water Loss Reduction in place that aims to reduce total water loss to around 250 liters/255 liters per connection per day and the Water Metered Loss Index to 28,5% by 2022.in 2024.
Real water loss (water physically lost) decreased from 22.2% in December 2008 to 18% in19.5% for the year ended December 2021.31, 2023. Our strategy to reduce water loss has two approaches:
· | reduction in the level of physical loss, which results mainly from leakage. To this end, we are replacing and repairing water transmission lines and pipes and installing probing and other equipment, including strategically located pressure regulating valves; and |
· | reduction of non-physical loss, which results primarily from the inaccuracy of our water meters installed at our customers’ premises and from clandestine and illegal use. To this end we are upgrading and replacing inaccurate water meters, increase anti-fraud actions and expanding our anti-fraud personnel. |
We are taking measures to decrease physical loss by reducing response time to fix leakages and by better monitoring of non-visible water main fractures. Among other initiatives, we have adopted the following measures to reduce physical water loss:
· | the introduction of technically advanced valves to regulate water pressure throughout our water transmission lines in order to maintain appropriate water pressure downstream. These valves are programmed to respond automatically to variations in demand. During peak usage, the flow of water in the pipes is at its highest point; however, when demand decreases, pressure builds up in the water transmission lines and the resulting stress on the network can cause significant water loss through cracks and an increase in ruptures of the pipes. The technically advanced valves are equipped with probes programmed to feed data to the valve in order to reduce or increase pressure to the water transmission lines as water usage fluctuates; |
· | the implementation of routine operational leak detection surveys to reduce overall water loss; |
· | the monitoring and improvement of accounting metrics with respect to water connections, especially for large volume customers; |
· | regular checking on inactive customers and monitoring non-residential customers that are accounted for as residential customers and, therefore, billed at a lower rate; |
· | preventing fraud with the use of new, and more sophisticated water meters that are more accurate and less prone to tampering; |
· | installing water meters where none are present; and |
· | conducting preventive maintenance of existing and newly installed water meters. |
Water Quality
We believe that we supply high quality treated water that is consistent with the standards set by Brazilian law, which are similar to the standards set in the United States of America and Europe. Pursuant to the Brazilian Ministry of Health (Ministério da Saúde) regulations, we have significant statutory obligations regarding the quality of treated water.
In general, the stateState of São Paulo has excellent water quality from underground or surface water sources. However, high rates of population growth, increased urbanization and disorganized occupation of some areas of the São Paulo metropolitan region have reduced the quantity and quality of water available to serve the population in the southern area of the São Paulo metropolitan region and in the coastal region. Currently, we successfully treat this water to make it potable. We are also investing in improvements of our water transmission lines and our treatment systems to ensure the quality and availability of water for the upcoming years.
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Water quality is monitored at all stages of the distribution process, including at the water sources, water treatment facilities and in the distribution network. We have 1516 regional laboratories, one central laboratory, and laboratories located in all water treatment facilities that monitor water quality, as required by our standards and those set by law. Our laboratories analyze an average of 8568 thousand specimenswater testing samples per month, on distributed water, with sampleswhich are collected from customers’ residences. Our central laboratory located in the city of São Paulo is responsible for organic compound analysis using the chromatographic and spectrometric methods as well as heavy metals analysis by Inductively Coupled Plasma (ICP).Plasma. Our central laboratory and 1316 of our regional laboratories have obtained the ABNT NBR ISO IEC 17025 accreditation (accreditation for general requirements for the competence of testing and calibration laboratories) awarded by the National Institute of Metrology, Quality and Technology, or INMETRO.
All chemical products used for water treatment are analyzed and follow strict specifications set out in recommendations made by the National Health Foundation (Fundação Nacional de Saúde), or NHF, ABNT, and the National Standard Foundation, or NSF, and the American Water Works Association or AWWA,(“AWWA”), to eliminate potentially toxic substances that are harmful to human health. From time to time, we face problems with the proliferation of algae, which may cause an unpleasant taste and odor in the water. In order to mitigate this problem, we work on: (i) fighting algae growth at the water source and (ii) using advanced treatment processes at the water treatment facilities that involve the use of powdered activated carbon and oxidation by potassium permanganate. The algae growth creates significant additional costs for water treatment because of the higher volumes of chemicals used to treat the water. We also participate in the Clean Stream Program to clean important streams in the city of São Paulo. Other initiatives also aimed at improving the water quality in the water sources located in the of São Paulo metropolitan region are Nossa Guarapiranga Pró-Conexão and Água Água Legal Program. SeeFor more information, see “—Main Projects of Our Capital Expenditure Program—Clean Stream Program,” and “—Other Policies and Programs.”
We believe that there are no material instances where our standards are not being met. However, we cannot be certain that future breaches of these standards will not occur.
Fluoridation
As required by Brazilian law, we add fluoride to the water at our treatment facilities prior to its distribution into the water supply network. Fluoridation primarily consists of adding fluorosilicic acid to water at between 0.6 mg/L and 0.8 mg/L to assist in the prevention of tooth decay among the population.
Sewage Operations
We are responsible for the collection, removal, treatment and final disposal of sewage. As of December 31, 2021,2023, we collected approximately 84% and 87% of allcovered the sewage producedoperations of approximately 93% of the households in the Municipalitiesmunicipalities in which we operate in the São Paulo metropolitan region and in the Regional Systems, respectively. During 2021, we collected approximately 85% of all the sewage produced in the Municipalities in which we operated in the state of São Paulo.operate. We installed 225.5191.4 thousand, 258.9226.5 thousand and 237.3225.5 thousand new sewage connections in 2021, 2020the years ended December 31,2023, 2022 and 2019,2021, respectively.
Sewage System
The purpose of our sewage system is to collect and treat sewage and to adequately dispose of the treated sewage. As of December 31, 2021,2023, we were responsible for the operation and maintenance of 61,12263,635 kilometers of sewage lines, of which approximately 32,577 kilometers are located in the São Paulo metropolitan region and 28,545 kilometers are located in the Regional Systems, respectively.lines.
The following table sets forth the total number of kilometers of sewage lines and the total number of sewage connections in our network for the periods indicated:
As of December 31, | As of December 31, | As of December 31, | ||||||||
2021 | 2020 | 2019 | 2023 | 2022 | 2021 | |||||
Sewage lines (in kilometers) | 61,122 | 59,660 | 55,983 | 63,635 | 63,537 | 61,122 | ||||
Sewage connections (in thousands) | 8,418 | 8,518 | 8,326 | 8,776 | 8,610 | 8,418 |
Our sewage system comprises a number of systems built at different times and constructed primarily from clay pipes and, more recently, PVC tubing. Sewage lines larger than 0.5 meters in diameter are primarily made of concrete. Our sewage system is generally designed to operate by gravitational flow, although pumping stations are required in certain parts of the system to ensure the continuous flow of sewage. Where pumping stations are required, we use sewage lines made of cast iron.
The public sewage system operated by us was structured in order to receive, in addition to household effluents, a portion of non-domestic effluents (such as industrial sewage and sewage from other non-domestic sources) for treatment together with household effluents. Non-domestic effluents have characteristics that are qualitatively and quantitatively different from household effluents. As a result, the discharge of non-domestic effluents into the public sewage system is subject to compliance with specific legal demands with the purpose of protecting the sewage collection and treatment systems, the health and safety of operators and the environment. The current environmental legislation establishes standards for the discharge of these effluents into the public sewage system and stipulates that such effluents be subject to pretreatment.pretreatment if they do not meet the required standards. These standards are defined in State Decree No. 8,468/1976.
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Before the discharge is permitted, we carry out acceptance studies that assess the capacity of the public sewage system to receive it as well as the compliance with regulations. Upon the conclusion of these studies, the technical and commercial conditions for receiving the discharge are established, which are then formalized in a document signed by us and the effluent producer. Failure to comply with these conditions can lead to the application of penalties. In extreme cases, the State of São Paulo Environmental Company (Companhia Ambiental do Estado de São Paulo), or CETESB is notified in order for the applicable measures to be taken. Effluents from our treatment facilities must comply with limitation guidelines for release of effluents into receiving water bodies. Additionally, the quality of the water in the receiving water body must not be impaired by the release of such effluents, as established by State Law No. 997/1976 regulated by State Decree No. 8,468/1976 and Conamathe National Environmental Council (Conselho Nacional de Meio Ambiente – “CONAMA”) Resolution No. 357/2005, as amended by ConamaCONAMA Resolution No. 430/2011 and Conama Resolution No. 397/2008.2011.
We considered the condition of the sewage lines in the São Paulo metropolitan region to be adequate as of the date of this annual report. Due to a greater volume of sewage collected, a higher population and more extensive commercial and industrial development, the sewage lines in the São Paulo metropolitan region are more deteriorated than those of the Regional Systems.interior of the State of São Paulo and of the coastal region of the State of São Paulo. To counter the effects of deterioration, we maintain an ongoing program for the maintenance of sewage lines intended to address anticipated fractures arising from obstructions caused by system overloads.
Unlike the São Paulo metropolitan region, the interior region of São Paulo State does not generally suffer obstructions caused by sewage system overload. The coastal region, however, experiences obstructions in its sewage lines primarily due to infiltration of sand, especially during the rainy season in the summer months. In addition, the sewage coverage ratio in the coastal region is lower than in the other regions served by us, at approximately 83%85% as of December 31, 2021.2023.
New sewage connections are made on substantially the same basis as connections to water lines: we assume the cost of installation for the first 20 meters of sewage lines from the sewage network to all customers’ sewage connections, and the customer is responsible for the remaining costs.
The following table (as of December 31, 2023) sets forth projected new sewage connections for the periods indicated:
in thousands | |||||||||||
2022 | 2023 | 2024 | 2025 | 2026 | 2022-2026 | ||||||
São Paulo metropolitan region | 151 | 165 | 165 | 165 | 165 | 811 | |||||
Regional Systems | 69 | 75 | 75 | 75 | 75 | 369 | |||||
Total | 220 | 240 | 240 | 240 | 240 | 1,180 |
(in thousands) | |||||||||||
2024 | 2025 | 2026 | 2027 | 2028 | 2024-2028 | ||||||
Total | 263 | 292 | 237 | 207 | 290 | 1,289 |
Sewage Treatment and Disposal
In 2021,For the year ended December 31, 2023, approximately 69% and 99% of the consumer units of the sewage services used our sewage treatment system in the São Paulo metropolitan region and the Regional Systems, respectively, or 79%85% of the consumer units of our sewage services in the stateState of São Paulo was connected at our treatment facilities and afterwards discharged into receiving water bodies such as rivers and the Atlantic Ocean, in accordance with applicable legislation. Though we have not yet reached full coverage of sewage collection and treatment services in the regions where we operate, we are making efforts to reach this goal.
We currentlyAs of December 31, 2023, we operate 596 sewage treatment facilities, including eight ocean outfalls, and 570 sewage treatment facilities, of which the five largest, located in the São Paulo metropolitan region, have a treatment capacity of approximately 24.5 cubic meters of sewage per second.
In the São Paulo metropolitan region, the treatment process used by most treatment facilities is the activated sludge process.
Sewage In other regions, sewage treatment in the Regional Systems will varyvaries according to the particularities of each area. In the interior region of São Paulo State, treatment consists largely of stabilization ponds. We have secondary treatment facilities in the interior region of São Paulo State that have treatment capacity of approximately 16.721 cubic meters of sewage per second. Similar to our disposal process for treated sewage collected in the São Paulo metropolitan region, the majority of sewage collected in the coastal region receives treatment and disinfection and is then discharged into rivers and also into the Atlantic Ocean through our ocean outfalls, in accordance with applicable legislation. We have 4536 sewage treatment facilities in the coastal region.region (including the outfalls).
In this regard, we are a party to a number of legal proceedings related to environmental matters. SeeFor more information, see “Item 8.A. Consolidated Financial Statements and Other Financial Information—Legal Proceedings.” In addition, our capital expenditure program includes projects to increase the amount of sewage that we treat. SeeFor more information, see “Item 4.A. History and Development of the Company—Capital Expenditure Program” and “Item 4.B. Business Overview—Environmental Matters—Environmental Regulation—Sewage Requirements.”
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Sludge Disposal
The generation of sludge is inherent in the sanitation cycle. The treatment of water and sewage produces residue which needs to be disposed of appropriately to prevent harm to the environment. Sludge removed from the treatment process typically contains water and a very small proportion of solids. We use filter presses, belt filter presses, drying beds and centrifugation machines, among other processes, to dewater the sludge, which reduces the volume of residues for transportation and final disposal and, consequently, reduces the costs of these activities. In addition, after dehydration, the calorie value of the sludge increases, and the conditions for its mixing with other components improve, which can be an opportunity for the advancement of new uses and products. Our technological innovation actions aim to test technologies seeking full scalefull-scale use of sludge in our operations.
Currently, the sludge generated through our activities goes mainly to landfills authorized to receive it. In some cases, in return, we treat the leachate generated in these landfills.
Current legislation and the population at large demand advances in the search for alternative technologies that minimize the generation of and find beneficial uses for sludge. In light of these demands, we work on several fronts, seeking innovative approaches to the destination and final disposal of sludge. For instance, since 2018, we produce an agricultural organic fertilizer in the municipality of Botucatu, Sabesfértil, which is produced by biodrying sewage sludge. This project was approved by the Ministry of Agriculture and allows for the sale of such fertilizer.
In April 2022, the Public Call No. 0870/2022 was issued to select partners for studies, development and implementation of solutions to recover sludge from sewage treatment plants. This public call divided the sewage treatment plants (Estação de Tratamento de Esgoto – “ETE”) into four lots, which are: ETE Barueri (lot 1), ETE Suzano and ETE São Miguel (lot 2), ETE ABC (lot 3) and the ETEs Pararangaba, Lavapés, Taubaté-Tremembé and Campos do Jordão (lot 4). Among the solutions presented are the production of fertilizer from compost, the production of biotechnological fertilizer and the production of biogas. Lot 4 is in the process of obtaining its preliminary license, and the construction is scheduled to begin in the second half of 2024. The other lots are still in the preliminary study phase.
Additionally, usingwe have used financing from Funding Authority for Studies and Projects (Financiadora de Estudos e Projetos, or FINEP), we are also developingFINEP, to develop two other projects. The first project is a plasma gasification system which uses specialist technology to transform sludge from sewage treatment plants into a solid vitreous product, weighing 5% of its initial weight, which can be re-used in construction work. The second project consists of a sludge dryer that uses sunlight and automated processes, resulting in a final product that weighs 25% of its initial weight.
Sludge disposal must comply with State and Federal law requirements, such as Federal Law No. 12,305/2010, regulated by Federal Decree No. 10.936/2012,2022, State Law No. 12,300/2006, regulated by State Decree No. 54,645/2009, and CONAMA Resolution No. 498/2020, which revoked CONAMA Resolution No. 375/2006, introducing new guidelines for the use of sewage sludge in the soil. In the State of São Paulo, CETESB has reissued the technical standard P4.230, second edition, of May 2021, which addresses the “application of sludge from biological treatment systems of sanitary liquid effluents in soil – guidelines and criteria for the project and operation.” Therefore, in addition to agricultural use, it is possible to use sludge for the recovery of degraded soils, creating opportunities for using sludge from sewage treatment plants in the interior of the State of São Paulo as a soil conditioner, due to its proximity to farms and favorable sludge conditions. This change opens a new opportunity for the use of sludge which corresponds to the sewage treatment of approximately 8 million inhabitants.
Our technical staff participate intoin different thematic groups of the sanitation sector, which contributes to the technical improvement of the regulations which apply to the use and appropriate disposal of the waste.sludge.
Principal Markets in Which We Operate
As of December 31, 2021,2023, we operated water and sewage systems in 375376 of the 645 Municipalitiesmunicipalities in the stateState of São Paulo.Paulo (including the municipality of Olímpia). In addition, we supplied water and accounted for on a wholesale basis to two Municipalitiesmunicipalities located in the São Paulo metropolitan region with a total population of approximately 21.30.6 million people.
The following table provides a breakdown of gross revenues from sanitation services by geographic market for the years indicated:
Year ended December 31, | |||||
2021 | 2020 | 2019 | |||
(in millions of R$) | |||||
São Paulo metropolitan region | 11,529.2 | 10,722.4 | 11,849.8 | ||
Regional Systems | 4,775.0 | 4,435.4 | 4,284.3 | ||
Total | 16,304.2 | 15,157.8 | 16,134.1 |
Competition
For contracts, where the municipality delegates the provision of sanitation services to us, we have a natural monopoly. However, we also compete in the market (see Market competition below), in which we service consumers in specific segments using alternative sources of water.
Natural monopoly
As of December 31, 2021,2023, we provided water and/or sewage services to 375 Municipalities376 municipalities in the stateState of São Paulo under concession agreements and program agreements. As of December 31, 2021, eight2023, one of our concessions had expired. These eight MunicipalitiesThis municipality accounted for 0.3%0.1% of our total revenues (excluding revenues relating to the construction of the concession infrastructure).
OnAs of December 31, 2021,2023, there were 270 Municipalities269 municipalities operating their own water and/or sewage systems in the stateState of São Paulo, with a total population of approximately 14.414.5 million, or approximately 32% of the population of the state.
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The competition for municipal concessions arises mainly from the Municipalities,municipalities, as they may commence bidding procedures which we may not win or resume the water and sewage services that were granted to us and start providing these services directly to the local population. In this latter case, the municipal governments would be required to indemnify us for the unamortized portion of our investment. SeeFor more information, see “Item 3.D. Risk Factors—Risks relating to the Regulatory Risks—Environment—Municipalities may terminate our concessionscontracts before they expire in certain circumstances. The indemnification payments we receive in such cases may be less than the value of the investments we made, or may be paid over an extended period, adversely affecting our business, financial condition, or results of operations.” In the past, municipal governments have terminated our concessions agreements before the expiration date. Furthermore, municipal governments have tried to expropriate our assets in an attempt to resume the provision of water and sewage services to local populations. SeeFor more information, see “Item 8.A. Consolidated Financial Statements and Other Financial Information—Legal Proceedings.”
The New Legal Framework for Basic Sanitation brought a significant change to the relationship between the municipality as granting authority and us as service provider since it introduced the mandatory use of public bids for the execution of future contracts for the provision of sanitation services, which has the potential to intensify competition between public companies and the private sector. SeeFor more information, see “Item 3D. Risk Factors—Risks relating to the Regulatory Risks—Environment— The New Legal Framework for Basic Sanitation prohibits new program contracts for basic sanitation services, resulting in uncertainties for our current and future concessions.customer base and size of operations.”
Market competition
In the stateState of São Paulo, we face competition from private and municipal water and sewage service providers.
In recent years, we have also experienced an increasing level of competition in the market for the supply of water, including to residential condominiums and non-residential customers who collect their own water from undergroundsunderground wells or use water trucks. Several large industrial customers located in Municipalitiesmunicipalities we serve also use their own wells to meet their water needs. This competition is taxed distinctly, and more than two thirds of the deep wells are illegal and extract water without regular concessions. One of the reasons for the competition in respect of alternative sources of water is generally the need for water with fewer technical specifications than the water made available to the public.
This trend has increased in recent years, especially since the 2014-2015 water crisis, when non-residential customers and residential condominiums sought independent solutions to supply water and to dispose of non-residential, commercial and industrial sludge in the São Paulo metropolitan region. Private companies offer stand-alone water treatment solutions inside the facilities of their customers.
Additionally, competition in non-residential, commercial and industrial sewage treatment in the São Paulo metropolitan region has increased in recent years as private companies have started to offer customized solutions for customers’ facilities. We have also set special tariffs for commercial and industrial customers to help maintain these customers through fixed demand contracts.
Competition for new Municipalitiesmunicipalities
As described in our bylaws, we may operate through subsidiaries in any part of Brazil or abroad to provide sanitation services. We believe this makes us a potential competitor for other state sanitation companies and private and municipal water and sewage service providers, both Brazilian and foreign.
By prohibiting the renewal of a program contract, the New Legal Framework for Basic Sanitation imposes mandatory bidding processes for Municipalitiesmunicipalities to hire companies providing basic sanitation services. This opened up a new business environment in which state-owned and private companies can compete. Participating in a bidding process is now the only method of maintaining and/or expanding our market share, whether in the State of São Paulo or in other states.
With regard to the provision of water and sewage services we participated in two bids, one in February 2021, in the Municipalitymunicipality of Orlândia, State of São Paulo and the other in September 2020, in partnership with Iguá Saneamento S/A, in the metropolitan region of Maceió, in the State of Alagoas. In both the criterion was the highest award,award; however we were not successful in either of the two bids.
On April 30, 2021, there was an auction for the concession of the Company for Water and Sewage of the State of Rio de Janeiro (Companhia Estadual de Águas e Esgotos do Rio de Janeiro – CEDAE) and Iguá Saneamento S.A. won the auction to explore block 2 of this concession. We had the option to become a minority shareholder in the special purpose company; however, we decided not to exercise this option.
In 2023, we participated in two public bids on our own. On May 22, 2023, we won the concession under Public Call No. 2/2023 from the municipality of Olimpia for the fixed fee of R$148.0 million to supply water and sewage services for a 30-year term. The bidding criteria to select the winner was based on the highest fee paid for the concession. We signed the concession agreement on October 11, 2023, which initiated a transitional phase of 60 days. On December 11, 2023, the concession assets were transferred to us, and the Notice of Continuation (Edital de Prossecução) was issued, marking the beginning of the 30-year concession period. The municipality of Olimpia is located 430 km from the capital of São Paulo and has a population of approximately 56,000 people as of December 31, 2023. The municipality has complete water and sewage service coverage and will require operational, commercial and efficiency efforts, as well as efforts to reduce and control water losses from us.
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On September 22, 2023, the municipality of Igarapava also opened a public bid for the concession of its sanitation services, in which the bidding criteria was also based on the highest fee paid for the concession. We came in second and filed a lawsuit against the bidding decision. As of the date of this annual report, the municipality of Igarapava had already signed an agreement with the winning bidder and this lawsuit continues under discussion by the São Paulo Court of Justice, currently awaiting a forensic examination to determine the amount that should be compensated to us.
Billing Procedures
The procedure for billing and payment of our water and sewage services is largely the same for all customer categories. In the current Tariff Structure, water and sewage bills are based on water usage determined by monthly water meter readings. Larger customers, however, have their meters read every 15 days to monitor consumption and thus avoid water losses resulting from leakages. Sewage billing is included as part of the water bill and is based on the water meter reading.
The readings of the water meters for billing purposes are carried out by our own team and by third parties through portable data collectors, using a mobile application, developed by us, with simultaneous printing and delivery of the bill to the customer or, when the customer so chooses, the bill can be forwarded by e-mail or mail to an address of the customer’s choice.
Water and sewage bills can be paid at certain banks and other locations in the stateState of São Paulo. These funds are paid over to us after deducting average banking fees ranging from R$0.300.33 to R$1.551.78 per transaction for collection and remittance of these payments. Customers must pay their water and sewage bills by the due date if they wish to avoid paying a fine. We generally charge a penalty feefine and interest on late bill payments. Delinquent customers are subject to administrative payment collection proceedings, water supply cuts and judicial payment collection proceedings.
In 2023, we had a reduction in delinquency rates due to intensified payment collection proceedings, such as blacklisting of delinquent customers, the execution of supply cuts and the holding of auctions to negotiate the debt of customers (Feirões de Negociação) (“Large credit campaigns”).
In addition, since 2019, we used an Internet of Things (“IoT”IoT”) application to monitor the daily consumption of 100 thousand100,000 customers representing approximately 2% of the connections and 45% of the Metropolitan region ofrevenue derived from the São Paulo revenue.metropolitan region. In 2021, we useused the IoT application for 3,500 customers of the Regional Systems. Forinterior of the State of São Paulo and in the coastal regions of São Paulo. In 2022 and 2023, we expanded our operations, installing more than 100,000 new devices in the central area of the city of São Paulo. The implementation of IoT is scheduled for over 160 thousandto serve another 40,000 customers in the city of São Paulo.Paulo is planned to happen by 2024. This technology has helped us improve our customer care management. We believe this model has become a benchmark in the utilities sector, as the entire management is carried out by monitoring the quantity and quality indicators of the data delivered, an innovative approach in relation to telemetry in the sanitation sector.
Customer relationship
In 2023, we set up our customer executive office (Diretoria de Clientes) (“Customer Office”), which reaffirms our commitment to having the client at the center of our strategy. The new office intends to foster constructive and inclusive commercial relationships with our customers, focusing on excellence and innovation of the customer’s experience, ensuring their satisfaction, which we expect to translate to increased collection on bills and increased revenues. To deliver on this premise, the Customer Office is structured around two main pillars: Customer Experience and Billing Protection.
To ensure the integration of operational procedures involving customer relationships, such as customer service, service provision, billing, collection and customer satisfaction assessment, the Operations and Maintenance Office established 15 Customer Services Departments (SaCs) which operate under the guidance of the Customer Office.
One of our clear objectives every year is to improve our relationship with customers, as well as their experience and satisfaction. We understand that in order to achieve this, it is necessary to act in a competitive and transparent manner, expanding the channels and digital tools that can ensure customer satisfaction and the quality of the services offered.
In 2023, we intensified our digital transformation by expanding our services to digital relationship channels. With the migration to the virtual environment, the process gained greater agility, especially in the effectiveness of service, due to a more intelligent system, and simpler, faster negotiations. An example of this was the consolidation of our WhatsApp, the Chat Bot, and the new Cloud-based service platform, which provides more consistency for our customers, in addition to supporting new Omnichannel management channels and tools (simultaneous and interconnected use of different communication channels).
Throughout the year, we conducted two Large credit campaigns with delinquent customers, which resulted in over 500,000 agreements. Additionally, we maintained our strategy of using mobile service vans stationed in several locations to facilitate access for our customers. This initiative allows negotiation of overdue bills, updating of customer records, requesting water and/or sewage connections, requesting consumption revisions, or requesting repairs to networks.
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Customer relationship
We constantly seek to improve our servicesalso opened a new cloud-based virtual agency, which is much faster, secure, intuitive and modernize our relationships with our customers. In 2020, the digital transformationpersonalized. This platform was accelerated by the need for quick responses motivated by the COVID 19 pandemic. To face the challenge in this scenario and maintaindeveloped based on customer feedback.
Performance monitoring of customer service a rapid digital transformation inis done through indicators of service channels was necessary, includingquality, amount of calls received, solution on first contact, and other important monitoring metrics. Analysis of this data contributes to the adjustmentimprovement of contracts with service providers, the reallocation of teams to remote servicecustomer experience and the expansion of options of services offered by our 24-hour call center and electronic channels, such as the Sabesp Mobile application.
In the telephone service, we invested in simplifying processes and adjusting customer relationship procedures, giving our customers more autonomy and enabling them to provide self-service. We have three main digital channels: the virtual agency on our website, our Sabesp Mobile application, and Sabesp Fácil, a hotsite developed at the outsetstrengthening of the COVID-19 pandemic, which enables the customer to inform the reading of their water meter and thus avoiding any reading based on average consumption, exchange of documents in digital form, eliminating the need for the customer to travel to a face-to-face service agency. In addition, we created the possibilityrelationship with this public.
Furthermore, all our channels are accessible with tools that facilitate access for customers to simulate their monthly consumption by observing their habits, allowing the adoption of consumption reduction practices, especially in a period when everyone is isolated at home. The simulator can be accessed either through the Sabesp Mobile application or through the address www.simuladordeconsumo.sabesp.com.br.
For real estate projects, we implemented an exclusive service system for entrepreneurs, the EiMob, responsible for simplifying the processes of opening new requests, analysis by us and delivery of the requested services, enabling the process to be fully digitized in view of the unavailability of in person service. In addition to recording requests quickly and simply, the customer can also monitor the progress of all his orders in the timeline available on EiMob, where the customer is informed by email whenever there is an update in the process.
During 2020, we implemented partnerships with the Iti and PicPay and, in 2021, with AgZero digital wallets, offering additional options for our customers to pay their water bills.
In respect of telephone services, we implemented several improvements in our processes and procedures, in addition to unifying our telephone service platform, which brought greater flexibility and a larger portfolio of services to customers seeking assistance through this channel.
The implementation of a unified channel (Omnichannel) integrating all services and optimizing processes is still at the design stage, scheduled for completion in 2021, and is aimed at further cost reduction and higher customer satisfaction.disabilities.
With these main pillars we seek to improve customer satisfaction, which in 2021for the year ended December 31, 2023 was 85%84%, which was practically stable when compared to the 2022 ratings of 83%, according to the annual satisfaction survey conducted by the GMR Market Intelligence Institute and modernize our customer relationships and bring about significant cost savings.
We also continue to provide an ombudsman service to customers. This channel exclusively handles complaints, suggestions, reports, critiques and information requests.
In addition, to facilitate access for customers with disabilities, we offer support in Brazilian Sign Language and our telephone channels have an option for people with hearing and speech disabilities. For people with visual impairments, we issue bills in braille.
Tariffs
Tariff adjustments follow the guidelines established by the Basic Sanitation Law and ARSESP regulations. The guidelines also establish procedural steps and the terms for the annual adjustments. The adjustments have tomust be announced 30 days prior to the effective date of the new tariffs. Pursuant to the most recent tariff revision,review, both the base date and future adjustments take place in April.May, every year. Tariffs have historically been adjusted once a year and for periods of at least 12 months. See “—Government Regulations Applicable to our Contracts—Tariff Regulation in the State of São Paulo” for additional information regarding our tariffs.
Under the Basic Sanitation Law, Federal Law No. 11,445/2007, as amended by Law No. 14,026/2020, states have been required to establishconstitute independent regulators responsible for the regulation of basic sanitation services, including tariff regulation. To exercise this assignment,comply with such obligation, the State of São Paulo enacted State Supplementary Law No. 1,025/2007, that establishedcreated ARSESP, which regulatesan entity responsible for regulating and supervisessupervising the services we provide to the State and also to the Municipalitiesmunicipalities that have agreed to its jurisdiction. The guidelines by which we readjust our tariffs are defined pursuant toprovided in State Decree No. 41,446/1996, which were ratified by Federalthe Basic Sanitation Law No. 11,445/2007 and are further regulated by resolutions issued by ARSESP.
In regardWith respect to Municipalitiesmunicipalities that have not explicitly selected ARSESP as their regulator, the Basic Sanitation Law allowspermits the municipality to create otherits own regulatory agenciesagency. However, in the draft Concession Agreement for URAE-1 which was published as Public Consultation No. 01/2024 by the State of their own.São Paulo government, ARSESP was appointed as the regulator for all municipalities included in URAE-1. The Public Consultation No. 01/2024 ended on March 15, 2024, and the SEMIL published a report on the contributions on April 30, 2024. For further information, see “Presentation of Financial and Other Information—Proposed Privatization.”
ARSESP can also grant certain tariff exemptions. For example, on April 14, 2023, ARSESP published Resolution No. 1,400/2023, which (i) allows for tariff exemptions for customers in the Residential Social and Residential Vulnerable categories in the municipality of São Sebastião, a municipality that suffered from torrential rains in February 2023, and (ii) allows for hotels and inns in the municipality that accommodated the homeless population during heavy rain to be placed under the Social Assistance Entity tariff. The resolution’s effects remained valid for 180 days, pursuant to Decree No. 67,502/2023. Any amounts not billed by us will be subject to a compensatory adjustment. For more information about the torrential rains in São Sebastião, see “Item 3D—Risks Relating to Environmental Matters and Physical and Transition Climate Risks—–Extreme Weather Conditions and Climate Change may have a material adverse impact on our business, financial condition or results of operations.”
As provided for in State Law No. 17,853/2023, if our Proposed Privatization is consummated, the State of São Paulo government will allocate at least 30% of the proceeds from the sale of its stake to FAUSP. The funds allocated to FAUSP will be used primarily to reduce tariffs, considering the most vulnerable parts of the population. The State of São Paulo government has announced that in case our Proposed Privatization is consummated, the tariff reduction will be: (i) 10% for the first tiers of Residential Vulnerable and Residential Social, (ii) 1% for the first tier of the normal residential category, and (iii) 0.5% for the first tier of the commercial, social assistance commercial, industrial and public categories with and without a contract.
Tariff ReadjustmentReadjustments and RevisionsReviews
Tariff readjustmentreadjustments and revisionreviews are mechanisms through which tariffs may be monetarily altered. Such mechanisms are provided for in laws, contracts and regulatory standards and allow the maintenance of the economic and financial balance of the concessionaire and of the concession agreement itself.
Pursuant to the Basic Sanitation Law, No. 11,445/2007, revisionsreviews may be ordinary or extraordinary. The ordinary tariff review takes place every four years and aims at maintaining the economic and financial balance of service provision.the provision of the services. This review takes into accountconsiders the expectations of costs, expenses, investments and demand in order to preserve the financial and economic balance of the concession agreement, as was the case with our tariff revision. This revisionreview. The review calculates the required revenue (or balance revenue), the annual X periodic tariff review (“Factor X”) that allows us to share productivity gains with consumers and the annual IGQ - General Quality Index (“IGQ”), which encourages quality improvement. In addition, it is important to recognize all investments made during the “inter-cycle” period by the concessionaire, such as us, and to redefine their efficient operating costs according to the evolution of other service providers and the rate of return (WACC) according to the country’s socioeconomic scenario.
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Extraordinary tariff revisions,reviews, on the other hand, may occur at any time regardless of the readjustments mentioned above and revisionsreviews in case there are material changes in conditions that affect the financial and economic balance of the concession agreement.
Further to revisions, the tariffs are annually adjusted in the years between periodic tariff reviews. Following ARSESP regulations, we use the IPCA price index (accumulated in 12 months), minus a productivity factor calculated in the periodic tariff review (X Factor) and, as of 2020, the adjustment of IGQ - General Quality Index that can be naught, positive or negative, according to the deviation between the established goal and the actual values.
Annually, ARSESP publishes a Regulatory Agenda to discuss the main issues of the year. The Regulatory Agenda for the period from 2019 to 2021 mainly involved matters related to the Third Ordinary Tariff Revision and the results were released in April 2022.
In this period the following matters were discussed:
The approved regulatory model adopted by ARSESP for the industry defines a maximum price (P0)average tariff (“P0”), based on the guarantee of the economic and financial balance of the provider, such as us, in its business segment and on efficient costs projected for the tariff cycle, in order to encourage the provider to permanently seek to reduce its costs. Accordingly, an average tariff is established, expressed in reais per cubic meter, which reflects the economic cost of providing water and sewage services in a certain tariff cycle. The methodology is based on a discounted cash flow model, which aims to calculate the average tariff (P0),P0, ensuring that the Net Present Value (NPV) of the tariff cycle is equal to zero and taking into account a rate of return equal to the Weighted Average CostWACC.
Further to the reviews, the tariffs are adjusted annually in the years between periodic tariff reviews. In accordance with ARSESP regulations, we use the IPCA price index (accumulated over the past 12 months), minus a productivity factor calculated as part of Capital (WACC)the Factor X and, since 2020, the adjustment of IGQ that can be zero, positive or negative, according to the deviation between the targets we set and the actual values.
Third Ordinary Tariff Review – OTR (April 2021 – April 2024 Cycle)
The results of the third ordinary tariff review were released on April 8, 2021, marking the beginning of a new four-year cycle from 2021 to 2024 (“Third Ordinary Tariff Review”).
The highlights of the Third Ordinary Tariff Review were:
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· | the Final P0 was set at R$4.9534/m³ with the implementation of the compensatory adjustments, translated into a P0 of R$5.1213/m3 as of February 2021; | |
· | a limit of 4% will be applied to transfers to municipal funds recognized in tariffs. For tariff recognition, the municipal funds for environmental sanitation and infrastructure will be established by the service holder by an act of law, which will specify the destination of the |
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Third Ordinary Tariff Revision - OTR (April 2021 – April 2024 Cycle)
The resultsAt the same time, a review of the Third Ordinary Tariff Revision were released on April 8, 2021, marking the beginning of a new four-year cycle from 2021 to 2024.
Simultaneously, a revision of our Tariff Structure,tariff structure, which has been in force since the 1970s and underwentwith minor changes in 1997, also took place. In light ofwas carried out. Due to the complexity and challenges relatedof the review of the tariff structure, ARSESP decided to the revision of our Tariff Structure, ARSESP carriedcarry out a specific regulatory actions, including further research onaction, with the topicobjective of amplifying the studies and allowing the participation of several actorsvarious players in the sector as part of study. Based on these studies and discussions with the public, ARSESP defined the regulatory guidelinessector.
The New Tariff Structure was initially expected to be followedimplemented in 2022. However, on March 17, 2022, ARSESP published Resolution No. 1,278, which postponed the implementation of the New Tariff Structure. On April 6, 2023, ARSESP published Resolution No. 1,395, which revoked Resolution No. 1,278 and maintained the current Tariff Structure. On April 8, 2024, ARSESP published Resolution No. 1,514, which revoked Resolution No. 1,395, and maintained the current Tariff Structure.
The draft Concession Agreement for URAE-1 provides for the maintenance of the current tariff structure, at least until the end of the first tariff cycle of the new agreement (2029).
Extraordinary Tariff Review
On December 21, 2022, ARSESP published a notice for the Public Consultation No. 14/2022 regarding the extraordinary tariff review in response to the request for clarification and revision prepared by us when presenting(“Extraordinary Tariff Review”). This Extraordinary Review was a result of our proposalrequest to ARSESP for aclarification regarding the readjustments, authorized in May 2021 and 2022, which we considered insufficient for the maintenance of our economic and financial equilibrium, among other subjects.
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On April 6, 2023, ARSESP published Resolution No. 1,394/2023 related to the Extraordinary Tariff Review and compensatory adjustments and Resolution No. 1,395/2023, which presented the new tariff structure that, after review, resultedvalues, authorizing us to apply a total tariff readjustment of 9.5609% to our current tariffs, consisting of the following adjustments:
· | Inflation Index (February 2022 to February 2023) of 5.5964%; | |
· | Efficiency Factor (Factor X) of 0.2142%, which was calculated in the third ordinary tariff review and is applied annually as a reduction factor for the tariff readjustment; | |
· | General Quality Index (IGQ 2023) of 0.1280% to be discounted; | |
· | Result of the Extraordinary Tariff Review of 5.5532%; and | |
· | Compensatory Adjustment (referring to FY2021) of 1.4040% to be discounted. |
This tariff adjustment became effective on May 10, 2023.
Tariff Readjustment
In addition to reviews, the tariffs are adjusted annually in the years between periodic tariff structure proposal,reviews. In our agreements, we use the was subjectIPCA price index (accumulated for 12 months), minus a productivity factor calculated during the Factor X. As of Public Consultation. 2021, the adjustment for the IGQ can be zero, positive or negative, according to the deviation between the established goal and the actual values.
On April 8, 2021, ARSESP published the results of Third Ordinary Tariff Revision and the New Tariff Structure. The main details of the Third Ordinary Tariff Revision include:
The tariff structure for 2021 was based on the current Tariff Structure.readjustment. The impact of the tariff adjustmentreadjustment for residential and non-residential, residential social and wholesale (water and sewage treatment) customers in 2021 was 7.6%, negative 1.0% and 5.45%, respectively, corrected by the compensatory adjustment due to the difference in the calculation of the IGQ in 2019 for the application of the IGQ of 2020 and the difference between the COFINS/COFINS / PASEP taxes calculated between the Secondsecond ordinary tariff review and Third Ordinary Tariff Revision.Review. Further, the real tariff readjustmentsadjustments for the residential category for 2022, 2023 and 2024 were set at 1.5%, 3% and 4.6%, respectively, minus Factor X ± Factor Q (which is a component of the tariff readjustment that may increase the adjustment index depending on the fulfillment of certain defined indicators, such as the number of complaints and leaks, in order to incentivize the efficiency improvement without compromising the quality of the services), together with the expansion of beneficiaries in the vulnerable residential category and the resources intended for the commercial programs offor 2019-2020. For the 2019-2020.
Tariff Readjustment
In addition to revisions, the tariffs are adjusted annuallyother categories in the years between periodic tariff reviews. In our agreements, we use the IPCA price index (accumulated for twelve months), minus a productivity factor calculated in the periodic tariff review (X Factor). As of 2021,periods from 2022 to 2024, the adjustment for the General Quality Index (IGQ) canwill be zero, positive or negative, accordingequal to the deviation between the established goal and the actual values. On April 10, 2019, ARSESP released a tariff readjustment of 4.7242% to the current tariffs, which consists of: (i) the IPCA variation during the effective period of 4.5754%; (ii) the efficiency factor (X Factor) of 0.6920%; and (iii) the compensatory adjustment of 0.8408%. This tariff readjustment was effective as of May 11, 2019.
On April 9, 2020, ARSESP released a tariff readjustment of 2.4924%, consisting of: (i) the IPCA variation during the period of 3.3032%; (ii) the efficiency factor (X Factor) of 0.6920%; and (iii) the Quality– Factor (Q Factor) of -0.1188%. Due to the state of public calamity resulting from the COVID-19 pandemic, ARSESP postponed this readjustment initially for 90 days. However, due to the on-going effects of the COVID-19 pandemic, ARSESP further postponed. On July 15, 2020, ARSESP issued Resolution No. 1,021 authorizing us to apply a tariff readjustment of 3.4026% to our current tariffs, which consist of: (i) an annual readjustment of 2.4924%, and (ii) a compensatory adjustment of 0.8881%. The compensatory adjustment of 0.8881% refers to the compensation for the postponement of the annual tariff readjustment. This tariff readjustment was effective as of August 15, 2020.
On April 8, 2021, ARSESP released a tariff adjustment for residential and non-residential, residential social and wholesale (water and sewage treatment) customers in 2021of 7.6%, negative 1.0% and 5.45%, respectively, starting on May 10, 2021. See “—Third Ordinary Tariff Revision X +/- OTR (May 2021 – April 2024 Cycle).”Factor Q.
On March 17, 2022, ARSESP released Resolution No. 1,278, providing for a tariff adjustment of 12.8019%, consisting of: (i) inflation of 10.5437% accrued between February/February 2021 and February/February 2022, measured according to the IPCA index; (ii) efficiency factor (Factor X) to be discounted by 0.2142%; (iii) compensatory adjustment of 2.3932%; and (iv) IGQ 2020 to be discounted by 0.1490%. The tariff readjustment was effective as of May 10, 2022.
On April 6, 2023, ARSESP published Resolution No. 1,394/2023 related to the Extraordinary Tariff Review and Resolution No. 1,395/2023, which presented the new tariff charts will becomevalues, authorizing us to apply a total tariff readjustment of 9.5609% to our current tariffs. This tariff adjustment became effective on May 10, 2022.2023. On April 8, 2024, ARSESP published Resolution No. 1,514, which authorized us to apply a total tariff readjustment of 6.4469% to our current tariffs, starting on May 10, 2024. For more information, see “Item 4B. Business Overview—Tariffs—Extraordinary Tariff Review.”
ARSESP Regulatory AgendaEconomic-regulatory model in the draft Concession Agreement for Public Water Supply and Sanitation Services for the period 2022 – 2023. The main matters that will be discussed include:URAE-1 Southeastern region
·Criteria for defining large non-residential users;
·Creation of a methodology to promote and encourage a watershed conservation program;
·Annual investment certification methodology;
·Asset reversibility methodology; and
·Methodology for analysis of efficiency in electricity expenses.
COVID-19-related measures
Among the measures to mitigate the economic effectsA draft of the COVID-19 pandemic supportedConcession Agreement for URAE-1 was published as Public Consultation No. 01/2024 by ARSESP Resolutions released in 2020, we announced an exemption from the payment of water and sewage bills for customers in the “Residential Social” and “Residential Favela” categories, which covered more than 2.5 million people across the State of São Paulo. The measure was initially validPaulo government, and provides for three months (April, May and June 2020) for bills issued from April 1, but was subsequently extendedsignificant changes to September 15, 2020.our current economic-regulatory model. We cannot guarantee that these changes will not have a significant financial impact on us. Among the relevant changes, we highlight:
· | Adoption of a retroactive methodology for tariff recognition of investments (i.e. the P0 calculation will not include the capital expenditure projection for the cycle, it will only incorporate the investments already made). |
· | Changes of the tariff review equation for the first two cycles of the Concession Agreement for URAE-1, with the inclusion of the Factor U and updates to the regulatory asset base (“RAB”) and market achieved in the reference year. In the first two cycles, the RAB will be updated annually. Additionally, similar to the previous model, inflation, Factor Q and Factor X are considered. |
· | The Factor U will be applied annually as a reducing factor of up to 10% as part of the tariff readjustments. |
· | The WACC will be applied before taxes. |
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· | New concepts: the application tariff (for service users) and equilibrium tariff (to be received by us). The difference will be compensated mainly by FAUSP (created by State Law No. 17,853/2023), which provides resources for basic sanitation actions, including those aimed at tariff moderation in the sector, in order to achieve and anticipate the targets set out in article 11-B of Federal Law No. 11,445/2007. |
· | On a monthly basis, we must calculate the difference between the regulatory revenue received from the market by applying the application tariff and the regulatory revenue received from the market by applying the equilibrium tariff. |
· | The valuation of new investments will be made using the depreciated replacement cost (DRC) method. |
· | The remuneration of regulatory working capital will deduct the earnings from financial investments. |
· | The failure to implement regulatory accounting by 2026 will result in a penalty of 100% of accessory revenues being allocated to tariff moderation and a greater sharing of efficiency with tariff moderation already in the second tariff cycle of the Concession Agreement for URAE-1. |
· | The new model stipulates that we will be entitled to integrate a portion of the efficiency gains they achieve over multiple cycles. |
· | Several parts of the methodology need to be regulated by ARSESP. |
The effectsPublic Consultation No. 01/2024 ended on March 15, 2024, and the SEMIL published a report on the contributions on April 30, 2024. For further information, see “Presentation of Financial and Other Information—Proposed Privatization.”
Tariff Structure
Simultaneously with our Third Ordinary Tariff Review, our Tariff Structure, which has been in force since the 1970s and underwent only minor changes in 1997, was revised. In light of the payment exemption forcomplexity and challenges related to the “Residential Social”review of our Tariff Structure, ARSESP carried out specific regulatory actions, including further research on the topic and “Residential Favela” categories were consideredallowing the participation of several players in the calculationsector as part of the P0study. Based on these studies and discussions with the public, ARSESP defined the regulatory guidelines to be followed by us when presenting our proposal for a new tariff structure that, after review, resulted in the tariff structure proposal that was subject to Public Consultation, commenced on February 9, 2021. On April 8, 2021, ARSESP published the results of the Third Ordinary Tariff Revision, totaling R$127.2 million in our favor.
On April 17, 2020, ARSESP published Resolutions onReview and the topic of reduced revenues in the short-term resulting from the economic effects of the COVID-19 pandemic. Suspending on an exceptional and transitory basis, from May to December 2020, the payment of the TRCF - Regulation, Control and Inspection Fee, paid by us to ARSESP. During this period, the payment we transfer to ARSESP decreased from 0.50% to 0.25% of our annual revenues. The postponed transfers will be monetarily adjusted and paid in 24 equal monthly installments. ARSESP also postponed the implementation of the Four-year Research and Technological Development Program for Innovation in Sanitation Services scheduled from 2020 to 2021. The value of the Authorized Amount of financial resources for the year 2020 (2017- 2020 Cycle), inflation-adjusted by the accumulated IPCA of 2020, will form a part of the calculation of the Authorized Amount to be invested in 2021 and 2022.
In the context of the COVID-19 pandemic, on February 3, 2021, in accordance with our credit policy and procedures, our Board of Executive Officers approved certain measures for commercial clients aiming to help them maintain their businesses during the COVID-19 pandemic and to pay their debts in the future. These measures for commercial customers were in effect until August 2021.
New Tariff Structure, see “—New Tariff Structure” below.
Our tariff structure that is currently in place is based on the tariff regulation approved by State Decree No. 41,446/1996 and is divided into two categories: residential and non-residential (the “Tariff(“Tariff Structure”). The residential category is subdivided into standard residential, residential-social and shantytown (favela).vulnerable residential. The residential-social tariffs apply to residences of low-income families, residences of persons unemployed for up to 12 months, and collective living residences. The favela tariffs for vulnerable residential apply to residences in shantytownsurban areas occupied by low-income populations in irregular areas characterized by a lack of urban infrastructure. The latter two sub-categories were instituted to assist lower-income customers by providing lower tariffs for consumption. The non-residential category consists of: (i) commercial, industrial and public customers; (ii) non-profit entities that pay 50.0% of the prevailing non-residential tariff; (iii) government entities that adhere to the Rational Use of Water Program (Programa de Uso Racional da Água – PURA)“PURA”) and pay 75.0% of the prevailing non-residential tariff; and (iv) public entities that have entered into program agreements, for Municipalitiesmunicipalities with a population of up to 30.0 thousand and with half or more classified according to their degree of social vulnerability by the Social Vulnerability Index of São Paulo (Índice Paulista de Vulnerabilidade Social) 5 and 6, of the SEADE, obtained through the analysis of the 2000 Census figures, andwhich start to receive tariff benefits, in accordance with our normative ruling, for the category of public use, at the municipality level. The tariffs are equal to those offered to the commercial/entity of social assistancenon-profit entities mentioned in item (ii) above and that corresponds to 50.0% of the public tariffs without contractual provisions referred to in item (iv) above.
There are tariff tables with the values due for each consumption pricing ranges for the abovementioned categories: up to 10 m³, from 11 to 20 m³, from 21 to 50 m³ and above 50 m³. The “Residential Social” and “Residential Favela”Vulnerable” categories have five consumption pricing ranges: up to 10 m³, from 11 to 20 m³, from 21 to 30 m³, 31 to 50 m³ and above 50 m³. The amount charged is always progressive.
Large consumers and Municipalitiesmunicipalities served by wholesale have separate tariff tables.
On April 8, 2021, ARSESP published the results of the New Tariff Structure, as described below.
New Tariff Structure
As provided for in State Law No. 17.853/2023, regarding our Proposed Privatization, if our Proposed Privatization is consummated, the State of São Paulo government will allocate at least 30% of the proceeds from the sale of its stakes to FAUSP. The funds allocated to FAUSP will be used primarily to reduce tariffs, considering the most vulnerable parts of the population. As of the date of this annual report, we cannot predict what the new tariff structure will be.
The New Tariff Structure (as defined below) was initially expected to be adopted as ofimplemented from May 2022. However, on March 17, 2022, ARSESP published Resolution No. 1,278 relating to the tariff readjustment,1,278/2022 which also postponed the applicationimplementation of the New Tariff StructureStructure. On March 1, 2023, ARSESP published Resolution No. 1,388/2023 setting out the regulatory agenda for 2023-2024. As part of this agenda, a public consultation is scheduled for the first half of 2024 with a view to an undetermined date.implementing the postponed New Tariff Structure. The draft of the Concession Agreement for URAE-1, published as a public consultation by the State of São Paulo government, provides in its Annex IV for the maintenance of the current tariff structure until 2029. For more information, see “Item 3.D. Risk Factor—Risks Relating to Our Business—Our current tariff structure is outdated and does not reflect the current socioeconomic changes the State of São Paulo has undergone over the past decades. Any updates to the tariff structure may lead to uncertainties in the market as well as unpredictability about our future revenues.”
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The Tariff Structure in place applied different pricing ranges for the following categories of users: (i) residential customers (Residential Normal, Residential Social and Residential Favela)Vulnerable) and non-residential customers (including commercial, industrial and public customers, as described in “— Tariff Structure”); (ii) the metropolitan regionsinterior of the State of São Paulo and in the regional system;coastal regions of São Paulo; (iii) water and sewage, with no difference in prices for sewage collection and treatment; and (iv) the charge of a minimum consumption of 10 m³/month and differences in prices per range, with progressive increases in the price as consumption increases.
The new tariff structureNew Tariff Structure that willwas expected to be implemented and defined by ARSESP was defined considering four groups: (i) minimum consumption versus fixed tariff with a portion being determined by reference to the volume of water used; (ii) tariffs segregated by type of service (such as water, sewage collection and sewage treatment); (iii) social tariff; and (iv) non-residential tariffs (the “New(“New Tariff Structure”).
Under the New Tariff Structure, ARSESP adopted the application ofwould adopt a single tariffstariff table for all the municipalities where we operate. i.e.,operate, meaning the existing tariff tables willwould be merged. According to ARSESP, this measure would partially reducesreduce subsidies between regions, but doeswould not completely eliminate them, since there are cost differences between regions.
It should be noted that there are various tariff tables inThe draft Concession Agreement for URAE-1, which was under Public Consultation No. 01/2024, provides for the maintenance of the current Tariff Structure. The tables applied intariff structure, at least until the interior region present a sewage tariff equivalent of 80%end of the water tariff. As a result, in the São Paulo metropolitan region the tariffs for water and sewage are divided 50% each, whereas in the interior the division is 56% water and 44% sewage (as a resultfirst tariff cycle of the 80% ratio)new agreement (2029).
ARSESP established the following customer groups in the scope of the New Tariff Structure:
ARSESP established the following attributes to the New Tariff Structure: (i) unified for our entire area of operation, without segregation by region; (ii) differentiated tariffs for the following services: water, sewage collection and sewage treatment; (iii) binomial tariff, with a fixed component which must partially or fully reflect the fixed costs of providing the service, and a variable component related to the volume of water used which must reflect variable costs; (iv) there will be no fixed component for the sewage treatment service tariff,The Public Consultation No. 01/2024 ended on March 15, 2024, and the fixed costsSEMIL published a report on the contributions on April 30, 2024. See “Presentation of the service will be distributed across the fixed component of the other services (i.e., waterFinancial and sewage collection); (v) tariffs will be divided in blocks, including progressive tariffs between consumption ranges; (vi) the fixed component will be billed per connection (charged at R$/month), while the variable component will be billed, progressively, by volume (charged at R$/m³); (vii) the volume of sewage collected to be billed will be equal to the measured volume of water, if the connection includes sewage collection service; and (viii) the treated sewage volume to be billed will be equal to the volume of sewage collected, if the connection includes sewage treatment.
Furthermore, this tariff structure update introduces a high level of uncertaintyOther Information—Proposed Privatization” for further information about the marketcontributions for this public consultation, and revenues that we will obtain in the new tariff cycle, due to the unpredictability of changes in customers’ tariff classification, which may lead us to realize significantly more or less revenue than projected for the cycle. Considering the high level of uncertainty, ARSESP established a variation limit for the annual revenue, so that:
The New Tariff Structure provides for a transition plan with gradual implementation. The New Tariff Structure was initially expected to be implemented from May, 2022. However, on March 17, 2022, ARSESP published Resolution No. 1,278 relating to the tariff readjustment, which also postponed the application of the New Tariff Structure to an undetermined date. See “Item 3.D. Risk Factor—Risks Relating to Our Business—Our current Tariff Structuretariff structure is outdated and does not reflect the current socioeconomic changes the State of São Paulo has undergone over the past decades. The approved updateAny updates to the tariff structure and its implementation may lead to uncertainties in the market as well as unpredictability about our future revenues.”revenues” for further information about our current tariff structure.
Fixed Demand Agreements (Take-or-Pay)
After the 1998 tariff readjustment, non-residential tariffs became approximately twice as high as residential tariffs, which caused large customers to start migrating to alternative sources, either for water supply or for sewage disposal and/or treatment. In practice, if large customers perceive our prices as being too high, they will seek alternative sources (such as drilling their own wells or purchasing water from water trucks), leading them to abandon or underuse our installed network. As a result, we introduced special tariffs in 2002 for large customers through what we call “Firm Demand Agreements” (Contratos de Demanda Firme) which established a minimum volume and decreasing tariffs as water consumption increases. Such contracts are designed to make us more competitive and encourage consumption in specific segments.
On November 2, 2018, ARSESP published Resolution No. 818/2018, which provides the criteria for the execution and inspection of water and sewage service contracts for large non-residential users, as well as the execution of new contracts and the revision of the existing contracts to the new rules. This Resolutionresolution consolidates all the regulatory guidelines for the execution of contracts with large users and establishes the minimum and maximum limits of the tariffs to be applied and a system for the prior approval by the regulator of the standard contract template to be used, and also requires the disclosure of the contracts in force on our website and the results of the inspections of these contracts on the ARSESP website.
In May 2020, we established a loyalty policy for large clients in the non-residential segment, which were encouragedencouraging them to enter into a contract with us in order to apply a differentiated rate according to the contracted fixed monthly demand. The purpose of this policy is to retain the base of this customer segment.
We believe this tariff schedule will help prevent certain commercial and industrial customers from switching to the use of private wells. In 2010, ARSESP authorized a reduction in the minimum volume of consumption for customers that enter into fixed demand agreements with us to a minimum of 500 cubic meters per month.
Water and sewage services tariffs
InUnder the current Tariff Structure, we establish separate tariff schedules for our services in each of the São Paulo metropolitan regions and each of the interior regionregions of the State of São Paulo State and the coastal regions, which comprise our Regional Systems, depending uponon whether a customer is located in the São Paulo metropolitan region or the Regional Systems.interior of the State of São Paulo and in the coastal regions of São Paulo. Each tariff schedule incorporates regional cross-subsidies, taking into account the customers’customer type and volume of consumption. TariffsWhere tariffs paid by customers with high monthly water consumption rates exceed our costs of providing water service. Weservices, we use the excess tariff billed to high-volume customers to compensate for the lower tariffs paid by low-volume customers. Similarly, tariffs for non-residential customers are establishedset at levels that subsidize residential customers. In addition, the tariffs for the São Paulo metropolitan region generally are higher than tariffs in the interior region of the State of São Paulo State and the coastal regions. In 2021, 2020the years ended December 31, 2023, 2022 and 2019,2021, the average tariff calculated for the Regional Systemsinterior of the State of São Paulo and in the coastal regions of São Paulo was approximately 20% below the average tariff of the São Paulo metropolitan region.
The implementationfollowing table sets forth the water tariffs by (i) customer category and class; and (ii) volume of water consumed, charged in cubic meters during the New Tariff Structure, which was postponed to an undetermined date by ARSESP according to Deliberation No. 1,278/2022, will unifyyears and period stated in the tariff tables.São Paulo metropolitan region:
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Customer Category Consumption | As from May 10, | As from May 10, | As from May 11, |
2024 | 2023 | 2022 | |
Residential | (in reais) | ||
Standard Residential: | |||
0-10(1) |
3.83 | 3.58 | 3.27 |
11-20 | 6.01 | 5.62 | 5.13 |
21-50 | 14.98 | 14.00 | 12.78 |
Above 50 | 16.50 | 15.43 | 14.08 |
Social: | |||
0-10(1) | 1.19 | 1.11 | 1.02 |
11-20 | 2.05 | 1.92 | 1.75 |
21-30 | 7.32 | 6.84 | 6.24 |
31-50 | 10.42 | 9.74 | 8.89 |
Above 50 | 11.51 | 10.77 | 9.83 |
Urban areas occupied by low-income populations in irregular areas (favelas): vulnerable social starting in 2021: | |||
0-10(1) | 0.91 | 0.85 | 0.78 |
11-20 | 1.03 | 0.96 | 0.88 |
21-30 | 3.45 | 3.23 | 2.95 |
31-50 | 10.42 | 9.74 | 8.89 |
Above 50 | 11.51 | 10.77 | 9.83 |
Non-Residential | |||
Commercial/Industrial/Governmental: | |||
0-10(1) | 7.69 | 7.19 | 6.57 |
11-20 | 14.98 | 14.00 | 12.78 |
21-50 | 28.71 | 26.84 | 24.50 |
Above 50 | 29.90 | 27.96 | 25.52 |
Social Welfare Entities: | |||
0-10(1) | 3.84 | 3.59 | 3.28 |
11-20 | 7.48 | 6.99 | 6.38 |
21-50 | 14.41 | 13.47 | 12.29 |
Above 50 | 14.97 | 13.99 | 12.77 |
Public Entities with contract: | |||
0-10(1) | 5.76 | 5.39 | 4.92 |
11-20 | 11.22 | 10.48 | 9.57 |
21-50 | 21.59 | 20.18 | 18.42 |
Above 50 | 22.44 | 20.98 | 19.15 |
(1)The minimum volume charged is for ten cubic meters per month.
For more information, see “—Tariff Readjustments and Reviews—Tariff Readjustment.”
Sewage charges in each region are fixed and are based on the same volume of water charged. In the São Paulo metropolitan region and the coastal region, the sewage tariffs are equal to the water tariffs. In the majority of the Municipalitiesmunicipalities of the interior region of the State of São Paulo, sewage tariffs are approximately 20.0% lower than water tariffs. Wholesale water rates are the same for all Municipalities served.municipalities served in the São Paulo metropolitan region. We also make availableprovide sewage treatment services to those Municipalitiesmunicipalities in line with the applicable contracts and tariffs. In addition, various industrial customers pay an additional sewage charge, depending on the characteristics of the sewage they produce. Each category and class of customer pays tariffs according to the volume of water consumed. The tariff paid by a certain category and class of customer increases progressively according to the increase in the volume of water consumed. The first categorytranche (0-10) corresponds to the minimum fee that is charged to our customers for the consumption of water.
WhenUnder the New Tariff Structure is in effect,that was expected to be implemented from May 2022, this difference willwould no longer exist as the tariff tables willwould be unified. Additionally, the minimum bill willwould be replaced by billing in two partsa two-part bill consisting of a fixed and a variable installment according todepending on the volume consumed. For more information on the differences between our current Tariff Structure and the New Tariff Structure, see “—New Tariff Structure.”
The following table sets forth the water and sewage services tariffs by (i) customer category and class; and (ii) volume of water consumed, charged in cubic meters during the years and period stated in the São Paulo metropolitan region:
Customer Category Consumption | As from May 10, | As from May 11, | As of August 15, | As of May 11, |
2022 | 2021 | 2020 | 2019 | |
Residential | ||||
Standard Residential: | ||||
0-10(1) | 3.27 | 2.90 | 2.71 | 2.62 |
11-20 | 5.13 | 4.54 | 4.24 | 4.10 |
21-50 | 12.78 | 11.33 | 10.58 | 10.23 |
Above 50 | 14.08 | 12.48 | 11.65 | 11.27 |
Social: | ||||
0-10(1) | 1.02 | 0.91 | 0.92 | 0.89 |
11-20 | 1.75 | 1.55 | 1.58 | 1.53 |
21-30 | 6.24 | 5.53 | 5.61 | 5.43 |
31-50 | 8.89 | 7.88 | 8.00 | 7.74 |
Above 50 | 9.83 | 8.71 | 8.84 | 8.55 |
Shantytown (favela): vulnerable social starting in 2021 | ||||
0-10(1) | 0.78 | 0.69 | 0.70 | 0.68 |
11-20 | 0.88 | 0.78 | 0.80 | 0.77 |
21-30 | 2.95 | 2.61 | 2.65 | 2.56 |
31-50 | 8.89 | 7.88 | 8.00 | 7.74 |
Above 50 | 9.83 | 8.71 | 8.84 | 8.55 |
Non-Residential | ||||
Commercial/Industrial/Governmental: | ||||
0-10(1) | 6.57 | 5.82 | 5.44 | 5.26 |
11-20 | 12.78 | 11.33 | 10.58 | 10.23 |
21-50 | 24.50 | 21.72 | 20.27 | 19.60 |
Above 50 | 25.52 | 22.62 | 21.11 | 20.42 |
Social Welfare Entities: | ||||
0-10(1) | 3.28 | 2.91 | 2.72 | 2.63 |
11-20 | 6.38 | 5.65 | 5.28 | 5.11 |
21-50 | 12.29 | 10.89 | 10.17 | 9.84 |
Above 50 | 12.77 | 11.32 | 10.57 | 10.22 |
Public Entities with contract | ||||
0-10(1) | 4.92 | 4.36 | 4.07 | 3.94 |
11-20 | 9.57 | 8.48 | 7.92 | 7.66 |
21-50 | 18.42 | 16.33 | 15.24 | 14.74 |
Above 50 | 19.15 | 16.97 | 15.84 | 15.32 |
(1) The minimum volume charged is for ten cubic meters per month.
See “—Tariff Readjustment and Revisions—Tariff Readjustment.”
ANA Regulations
As a result of the New Framework, ANA was assigned the role of issuer of reference standards for the regulation of the sanitation sector at the national level. As a result, ANA released an agenda for the period 2021-2023 with the topics that should be the subject of standardization.
The first rule approved in this context refers to the parameters for the provision of public service for the management of urban solid waste (Reference Standard No. 1) through the publication of Resolution No. 79/2021 on June 14, 2021.
On November 4, 2021, ANA published Resolution No. 106, aiming to approve Reference Standard No. 2, which provides for the standardization of amendments to the Program and Concession Agreements, for the provision of drinking water and sanitary sewage services, to incorporate the goals of 99% of water service and 90% of sewage collection and treatment as provided for in article 11-B of Law No. 11.445/2007, modified by Law No. 14.026/2020.
For the year 2022, the following topics and discussions are planned by ANA:
Government Regulations Applicable to our Contracts
Basic sanitation services in Brazil are subject to extensive federal, state and local legislation and regulation that, among other matters, regulates:
· | the development of |
· | the need for a public bidding process for the appointment of water and sewage |
· | the need for setting up an agreement for the appointment of public water and sewage |
· | the joint management of public services between federative entities through cooperation agreements, allowing for a program agreement without the need for a public bidding process for the service provider; |
· | the planning, regulation and inspection of basic sanitation services prohibited by service providers; |
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· | minimum requirements for water and sewage services; |
· | water usage; |
· | water quality and environmental protection; and |
· | governmental restrictions on the incurrence of debt applicable to state-controlled companies. |
PLANASA
Until 1970, Brazil’s sanitation sector mainly consisted of small-scale projects, the absence ofwithout a standardized tariff system and shortage of financial, human and technical resources.
The National Plan of Basic Sanitation (Plano Nacional de Saneamento Básico– “PLANASA”), or “PLANASA” was created in 1971, aiming to provide universal access to sanitation services in urban areas and to establish an adequate tariff policy, among other things. Afterwards, SABESP wasFollowing that, we were created under State Law No. 119/1973 as a mixed capital company to provide basic sanitation services in the stateState of São Paulo while also acknowledging the autonomy of the Municipalitiesmunicipalities within the State.
Pursuant to the Brazilian Constitution, the authorityBrazilian government, the states and the municipalities have concurrent powers with respect to develop and provide public water and sewage services are the joint responsibility of the federalBrazilian government, the states and the Municipalities. Articlemunicipalities. Thus, article 216 of the Constitution of the State of São Paulo establishes that the State must provide the conditions for the correct operation, efficient management and adequate expansion of water and sewage services rendered by its agencies and state-controlled companies or any other concessionaireconcessionaires under its corporate control.
Pursuant to Articlearticle 175 of the Brazilian Constitution, the rendering of public services, such as water and sewage services, is of the responsibility of the applicable public authority. However, any such public authority has the right to render these services directly or through a concession granted to a third party after a bidding process.
Additionally, Articlearticle 241 of the Brazilian Constitution establishes the legal regime for managing the renderingjoint management of public services among different federal, state and municipal government entities, including the total or partial transfer among these entities of fees, services, personnel and essential goods needed to render such public services. For example, these services can be rendered through a public consortium or a cooperation agreement under Federal Law No. 11,107 of April 6, 11,107/2005, also known as the Law on Public Consortia and Cooperation Agreements (Lei de Consórcios Públicos e Convênio de Cooperação), which, in turn, created a program contract which allowed for the dispensation of theexemption from bidding process for companies like ours. This dispensationexemption was irrefutable until the enactment of the New Legal Framework for Basic Sanitation.
However, the New Legal Framework for Basic Sanitation, amending the Basic Sanitation Law, No. 11,445/2007, established that the provision of sanitation services may be carried out by joint management, under a public consortium or cooperation agreement entered into exclusively by Municipalities.federative entities. The New Legal Framework for Basic Sanitation also established restrictions for the adjustment of program agreements with public companies and mixed-capital companies. SeeFor more information, see “Item 3.D. Risk Factors–Factors—Risks relating to the Regulatory Risks–Environment—The New Legal Framework for Basic Sanitation prohibits new program contracts for basic sanitation services, resulting in uncertainties for our current and future concessions.customer base and size of operations.”
PLANASA was the first attempt to outlineat outlining long-term universalization targets for water and sewage services, but it was discontinued in 1986.
The Basic Sanitation Law and the New Legal Framework for Basic Sanitation
Until 2007, the sanitation sector was predominantly self-regulated by the service providers and tariffs were determined by direct negotiation between state and municipal governments and companies.
The Basic Sanitation Law No. 11,445/2007 wentcame into effect on January 5, 2007, effectively revoking and substituting the PLANASA model, establishing nationwide guidelines for basic sanitation and seeking to create the appropriate solutions for the provision of basic sanitation considering the particular conditions in each state and municipality. The Basic Sanitation Law also sought to facilitate the cooperation between the state and Municipalitiesmunicipalities in the rendering of public services.
On July 16, 2020, the New Legal Framework for Basic Sanitation was enacted, which aimed to make water and sewage services universal by 2033. The new law delegated to ANA the authority to establish national reference rules on sanitation services to ANA and excludesexcluded the possibility of executing new program contracts, among other relevant changes tofor the sector. As a result of the new legislation, the Basic Sanitation Law and Laws No. 11,445/2007, No. 9,984/2000, No. 12,305/2010, No. 10,768/2003, No. 13,089/2015, No. 11,107/2005 and No. 13,529/2017 were amended.
Prior to the New Legal Framework for Basic Sanitation, we provided services in various municipalities through contracts that did not require bidding processes. These were important contracts for the expansion of water and sewage services in the State of São Paulo. The current program contracts will remain in effect until the end of their contractual term, subject to the Universalization Targets for services being met by December 31, 2033. For our contracts that did not establish targets, the targets were included in our contracts by March 31, 2022.
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In summary, we highlight the following points from the new framework: (a) the authority to edit reference standards for the regulation of public basic sanitation services was attributed to ANA, reducing the scope of autonomy of the regional regulatory agencies; (b) the creation of the Interministerial Committee on Basic Sanitation (regulated by Decree No. 10,430/2020), with the authority to determine the allocation of federal resources for sanitation; and (c) the definition of the power of concession to carry out public basic sanitation services: (i) the Municipalitiesmunicipalities and the Federal District, in the case of local services; (ii) the State,state, together with the Municipalitiesmunicipalities that effectively share operational facilities that are part of metropolitan regions, conurbations and micro-regions, instituted by complementary state law, in the case of shared services between the Statestate and Municipalitiesmunicipalities. Despite formally granting authority to Municipalities, it is possible that these Municipalities will not have easy access to financing when providing these services without combined efforts with other Municipalities, thus leaving little or no margin to exercise their authority.
Additionally,Decree No. 10,430/2020 was partially revoked and amended by Decree No. 11,467/2023, which, among others, assigned new powers to the New Legal FrameworkInterministerial Committee for Basic Sanitation provides forand changed the creationcomposition of an intermunicipal public entity aimed atthis body. Decree No. 11,467/2023, in turn, was completely revoked by Decree No. 11,599/2023, which regulates the joint managementregionalized provision of sanitation services, pursuant to article 241understood as the integrated provision of one or more components of public basic sanitation services in a given region whose territory covers more than one municipality, with uniformization of regulation and supervision and with compatibility of planning between the Federal Constitution.holders. This decree determines that a bidding process must be held for the provision of public sanitation services and reiterates the prohibition on signing precarious instruments, agreements, partnership agreements and program contracts, which may be maintained until they expire.
The New Legal Framework for Basic Sanitation establishes the regionalized provision through the provision of one or more components of integrated basic public sanitation services in a given region whose territory covers more than one municipality, structured as follows: (i) the regional basic sanitation units, which consist of entities established by State Law,state law, consist of a group of Municipalities,municipalities, which are not necessarily adjacent to each other, aimed at adequately meeting the hygiene and public health requirements, or to provide economic and technical feasibility for the least economically favored Municipalities;municipalities; and (ii) reference blocks, which are groups of Municipalities,municipalities, which are not necessarily adjacent to each other, established by the federalBrazilian government and formally created through the Municipalities’municipalities’ voluntary joint management. The reference blocks will be created by the federalBrazilian government if the States have not created the regional basic sanitation infrastructure within one year of the enactment of the new law.infrastructure. Regionalized provision aims at gainingis intended to gain scale in the provision of services and to provide for conditions theto access to federal resources to the groups of Municipalities.municipalities. In São Paulo, State Law No. 17,383, of July 5, 17,383/2021 was published, which created four s Regional Unit for Drinking Water Supply and Sewage Service - URAEs, with the municipalities operated by us coinciding with the URAE 1URAE-1 – Southeast.
Southeastern. On December 8, 2023, the State Law No. 11,445/2007,17,853/2023 was enacted, amending the provisions of State Law No. 17,383/2021, to include five additional municipalities to URAE-1: Águas de Santa Bárbara, Bofete, Nova Guataporanga, Dourado and Socorro.
The Basic Sanitation Law, as amended by Law No. 14,026/2020,the New Legal Framework for Basic Sanitation, provided in article 11-B, first paragraph, that contracts in force that did not haveinclude the new universalization targets that guarantee the service of 99% of the population with drinking water and 90% of the population with sewage collection and treatmentUniversalization Targets which must be met by December 2033 had until March 31, 2022 to include these targets.Universalization Targets. Further, according to article 10-B of the same law, service operators must comply with financial and economic parameters that will measure their ability to provide sanitation services and meet the service standards established by law in a timely manner.
On June 1, 2021,12, 2023, Federal Decree No. 10,710/202111,598/2023 was enacted, revoking Decree No. 11,466/2023, which had revoked Decree No. 10,710/2021, establishing the methodology for demonstrating the economic and financial capacity of public service providers for drinking water supply or sanitary sewage. Article 10 of this decree stipulates that an application for proof of economic-financial capacity must be submitted to the regulatory entity responsible for inspecting the contracts by December 31, 2021. We submitted2023. One of the request related to this requirement to ARSESP. The regulator recognizedmain changes was the exclusion of the prior provision that the contracts for the public provision of such services made by the public companies which do not prove their economic and financial capacity must be declared invalid.
On March 28, 2022, ARSESP confirmed our economic and financial capacity was evidenced for the 370 Municipalities that are part of URAE1-Southeast, with documentary reservations for six Municipalities that, until the date of delivery of the documentation to ARSESP, had not agreed to the amendments to their contracts. Until March 31, 2022, we executed 240 amendments to the contracts with the Municipalities under our operations, with the aim to incorporate or adapt the universalization of the goals required by Section 11-B of Federal Law No. 11,445/2007, amended by Federal Law No. 14,026/2020. The Municipalities that have not yet formalized the respective amendments represent approximately 1.4% of our total annual revenue. For more information, see “Item 3.D. Risk Factors—Regulatory Risks—The complexity of the process of demonstrating our economic and financial capacity established under the terms of the New Legal Framework for Basic Sanitation and the Federal Decree No. 10,710/2021 and Federal Decree No. 10,588/2020, as amended by Federal Decree No. 11,030/2022, may have an adverse effect on our business, financial conditions or operating results.”
On December 24, 2020, Federal Decree No. 10,588/2020 as amended by Federal Decree No. 11,030/2022 was published, enabling technical and financial support towards2021. Following the adaptation of public basic sanitation services to the provisions of Law No. 14,026/2020, as well as for the allocation of federal public resources and financing with federal resources or resources managed or operated by federal entities.
According to this decree, the distribution of resources and the financing of projects with federal resources will be conditioned to, among others:
(i) performance of the provider in terms of technical, economic and financial management, which will have to be proven by a declaration from the regulatory agency;
(ii) efficiency and effectiveness in the provision of public basic sanitation services, proven through a declarationprocedure established by the regulatory agency; and
(iii) proper operation and maintenance of projects previously financed with federal resources.
Also according to the decree, the activities that will be supportedapplicable legislation, ARSESP’s decision was later confirmed by the federal government are, among others:ANA.
(a) the processFunctions of transition of the holder of the public basic sanitation services to a regionalized mechanism;
(b) structuring the form service provision and governance in each regionalized mechanism, in order to establish the responsibilities of each federative entity and the best form of management;
(c) the preparation or updating of municipal or regional basic sanitation plans; and
(d) the definition of the regulatory and inspection entity for public basic sanitation services, including delegation as necessary.
The Decree does not apply to concessions and public-private partnerships that (i) have been procured or submitted to public consultation prior to the date of its publication; and (ii) are subject to studies already contracted by federal bodies prior to the date of publication of this decree.ANA
The New Legal Framework for Basic Sanitation assigns to ANA the responsibility for the publication of technical norms for the regulation of public basic sanitation services. ANA is also the authority responsible for introducing reference standards onfor the methodology for calculating indemnities due to investments made and not yet amortized or depreciated. Currently, there is considerable legal uncertainty regarding the indemnity for non-amortized assets, and we expect that the reference standards will mitigate this situation.
With the approval of Law No. 14,026/2020,the New Legal Framework for Basic Sanitation, ANA has the authority to issue reference norms.standards. These norms must be considered by subnational sanitation regulatory agencies (municipal, intercity, district and state) in their regulatory action.
According to Law No. 14,026/2020,the New Legal Framework for Basic Sanitation, ANA will have the role of issuing reference normsstandards on:
·Quality and efficiency standards in the services provided, maintenance and operation of basic sanitation systems;
·Tariff regulation of public sanitation services;
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· | tariff regulation of public sanitation services; | ||
· | standardization of instruments for the provision of public sanitation services executed by the holder of the public service and the delegate; |
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Another change introducedProvisional Measure No. 1,154/2023 (later converted into Law No. 14,600/2023) altered the attributes and structure of ANA and delegated to the Ministry of Cities the responsibility for the implementation of basic sanitation actions and programs. Further, Federal Decree No. 11,333/2023 created the National Secretariat for Environmental Sanitation, linked to the Ministry of Cities, attributing to the National Secretariat for Environmental Sanitation competencies that were previously attributed exclusively to ANA. On April 5, 2023, Federal Decree No. 11,468 replaced and revoked the provisions of Federal Decree No. 11,333/2023 and approved the regimental structure and the table of commissioned positions and functions of trust of the ministry of cities and relocated and transformed commissioned positions and functions of trust, including the Interministerial Committee of Basic Sanitation.
Accordingly, ANA’s rules will apply to the basic sanitation sector nationwide, setting the guidelines for regulation and supervision by the regulatory entities at the state, municipal and regional level, and ensuring regulatory uniformity in the sector and legal certainty for the provision and regulation of services. ARSESP will be subject to these guidelines and will be required to incorporate any reference guidelines issued by ANA within a reasonable timeframe, which may not be less than 12 months from the publication of the respective reference standards.
ANA Standards
As a result of the New Legal Framework for Basic Sanitation, ANA was given the role of amending reference standards for the regulation of the sanitation sector at the national level. Between September 27, 2022, and October 26, 2022, ANA received contributions to Public Consultation No. 07/2022 for the preparation of an agenda for 2022-2024 with topics that should be standardized. This public consultation resulted in ANA Resolution No. 138 of December 14, 2022 which approved ANA’s regulatory agenda for the period from 2022 to 2024.
On November 4, 2021, ANA published Resolution No. 106, approving Reference Standard No. 2, which provides for the standardization of amendments to the Program and Concession Agreements, to include the Universalization Targets as provided for in article 11-B of Law No. 11.445/2007, as modified by Law No. 14.026/2020.
On November 11, 2022, ANA published the Public Consultation No. 08/2022 regarding the Reference Standard No. 3 that provides for the methodology calculating the indemnification of unamortized or depreciated investments made in the water and sewage segments. Future concession agreements will have their indemnification methodology defined in conjunction with other contractual rules provided by ANA’s reference standards. Public Consultation No. 08/2022 resulted in ANA Resolution No. 161/2023, which approved Reference Standard No. 3 that sets the methodology for calculating the indemnification/amortization of assets. We cannot predict the effects that this methodology will have on our business. For more information, see “Item 3.D. Risk Factors—Risks relating to the Regulatory Framework isEnvironment—Municipalities may terminate contracts before they expire in certain circumstances. The indemnification payments we receive in such cases may be less than the value of the investments we made, or may be paid over an extended period, adversely affecting our business, financial condition, or results of operations.”
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For 2024, the following topics and discussions are planned by ANA:
· | standardization and quality indicators and efficiency of water and sewage services; | |
· | guidelines for progressive targets for universalization of water supply and sewage services and evaluation system; | |
· | general conditions for service provision, customer service, and measurement, billing, and collection; | |
· | tariff structure for water and sewage services; and | |
· | tariff readjustment for water and sewage services. |
ANA, through resolutions, has addressed governance practices applied to subnational regulatory entities (entidades reguladoras infranacionais or “ERIs”) operating in the basic sanitation sector. Requirements and procedures have been established for ERIs responsible for regulating and overseeing public sanitation services. This includes verifying compliance with reference standards. ANA also defined the methodology for indemnifying investments that ANA will issue reference normshave been made but are not yet amortized or depreciated in contracts for water supply and sanitation services. Furthermore, a risk matrix has been established for contracts related to solid waste managementpublic water supply and urban rainwater managementsanitation services. The following resolutions stand out in this context:
ANA Resolution No. 134/2022 regulates the requirements and drainage services, since the activities integrateprocedures to be followed by subnational entities responsible for regulating and overseeing public sanitation services as well asand specifically addresses the verification of compliance with reference standards.
ANA Resolution No. 161/2023 approved ANA’s Reference Standard No. 3, which addresses the methodology for the indemnification of investments that have been made but are not yet amortized or depreciated in contracts for water supply sewage collection and treatment.sanitation services.
ANA Resolution No. 177/2024 approved ANA’s Reference Standard No. 4, establishing governance practices for ERIs operating in the basic sanitation sector.
ANA Resolution No. 178/2024 approved ANA’s Reference Standard No. 5 to regulate public sanitation services. This reference standard specifically addresses the risk matrix for contracts related to public water supply and sanitation services.
National Plan for Basic Sanitation (PLANSAB)
The National Plan for Basic Sanitation (PLANSAB)PLANSAB is an instrument of the public sanitation project established by the Basic Sanitation Law, with an expected duration of 20 years. The plan contains a diagnosis of Brazil’s basic sanitation infrastructure divided into four segments: (i) coverage deficits, (ii) a government program, (iii) investments made and (iv) political and institutional aspects. The program also provides estimates for investments to achieve coverage targets.
Short, medium and long-term objectives were prepared for 2018, 2023 and 2033, respectively, based on the historical evolution and current water and sewage infrastructure.
The New Legal Framework for Basic Sanitation provides that PLANSAB will contain proposals for programs, projects and actions necessary to achieve the objectives and goals of the federal basic sanitation policy, with identification of the sources of financing and expansion of public and private investments in the sector. Additionally, it establishes that PLANSAB should include (i) a specific program for basic sanitation actions in rural areas; (ii) specific water security actions; and (iii) basic sanitation actions in underdeveloped urban areas occupied by low-income populations in irregular areas but which are already long-established considering the nature and length of the occupation are not at risk. Furthermore, it created the Interministerial Committee on Basic Sanitation with the authority to coordinate, integrate, articulate and evaluate the management of the National Basic Sanitation PlanPLANSAB requirements at the federal level. SeeAny changes to PLANSAB could impact us. For more information, see “Item 3.D. Risk Factors—Risks relating to the Regulatory Risks — Current regulatory uncertainty, especially with regard toEnvironment— The regionalization of services, established in the New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.”
Contracts for the Provision of Essential Basic Sanitation Services in Brazil
In Brazil, there are three federal legal regimes for contractingThe provider of the basic sanitation service undertakes to organize the supply of water and sewage services: (i) public concessions, regulatedservices and to provide it to the population. Public services can be provided directly by Law No. 8,987/1995, which require a prior public bidding process; (ii) administrationgovernment entities themselves, through agencies that integrate the respective administrative structures (centralized direct provision of public servicesservices); or through cooperation agreements betweenbodies created by these government entities in the form of independent federal government and local public authorities at State and municipal level withoutagencies, foundations or state-owned companies (decentralized direct provision).
Article 175 of the need forBrazilian Constitution also permits a public bidding process, regulated by the Public Consortia and Cooperation Agreement Law No. 11,107/2005; and (iii) concessions regulated by Law No. 11,079/2004 (i.e., public-private partnerships (PPPs)), usedauthority to grant concessionsa concession to private companiesan entity outside the administrative structure for the purpose to provide public services and used in relation to construction works associated with the provision of public services.
The Federal Concessions Law No. 8,987/1995 and the State Concessions Law No. 7,835/1992 require that the granting of a concession by the government be preceded by a public bidding process. However, the Federal Public Bidding Law No. 8,666/1993, which establishes the rules for the public bidding process, provides that a public bidding process can be waived under certain circumstances, including in the case of services to be provided by a public entity created for such specific purpose on a date prior to the effectiveness of this law, provided that the contracted price is compatible with what is practiced in the market. This provision was maintained by Law No. 14,133/2021. Furthermore, a provision of the Federal Public Bidding Law, as amended by the Public Consortia and Cooperation Agreement Law, provides that the program agreement can be executed with waiver of a public bidding process.
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However,The current wording of article 10, caput, of Law No. 11,445/2007, as amended by the New Legal Framework for Basic Sanitation, prohibited the execution of program contracts, agreements, partnership and other unstable instruments forrequires the provision of public basic sanitation services by entities that are not part of the granting authority’s structure. Seestructure through concession agreements subject to bidding processes, expressly prohibiting program contracts. For more information, see “Item 3.D. Risk Factors—Risks relating to the Regulatory Risks—Environment—The New Legal Framework for Basic Sanitation prohibits new program contracts for basic sanitation services, resulting in uncertainties for our current and future concessions.customer base and size of operations.”
Our Concession Agreements
From 1998 to 2005, our contracts with Municipalities have beenmunicipalities were regulated by the Federal Concessions Law No. 8,987/1995. Generally, these contracts have a 30-year term, and the total value of the concession is set byusing the discounted cash flow method. Under this method, when the expected contractual cash flow is reached, the total value of the concession and assets is amortized to zero on our books and we receive no payment for the assets. If the concession is terminated prior to the end of the 30-year term, thereby interrupting the normal contractual cash flow, we are paid an amount equal to the present value of the expected cash flow over the years remaining in the concession, adjusted for inflation.
However, ourOur concessions can be revoked unilaterally at any time (i) if certain standards of quality and safety are not met, (ii) in the event of default of the terms of the concession agreement, or(iii) due to changes in public interest since the concession was granted, or (iv) due to non-conformity with the New Legal Framework for Basic Sanitation. In such cases, we are entitled to compensation and remuneration for the investments made. However, the contracts may provide for fines or retentions, depending on the grounds for termination.
A municipality that chooses to assume the direct control of its water and sewage services must terminate the current relationship with the service provider by duly compensating the service provider and the investments unamortized.for their unamortized investments. Subsequently, the municipality will be in charge of rendering services or of conducting a public bidding process to grant the concession to potential concessionaires. SeeFor more information, see “Item 3.D. Risk Factors—Risks relating to the Regulatory Risks— Environment—Municipalities may terminate our concessionscontracts before they expire in certain circumstances. The indemnification payments we receive in such cases may be less than the value of the investments we made, or may be paid over an extended period, adversely affecting our business, financial condition, or results of operations”.operations.”
The current concessions are based on a standard form of agreement between us and the municipality. Each agreement received the prior approval of the legislative council of each municipality. In municipalities that are part of metropolitan regions, conurbations and microregions, the State of São Paulo is also included as a party. The assets comprising the existing municipal water and sewage systems are transferred from the municipality to us in order for us to provide the contracted services. Until 1998, we acquired municipal concessions and the existing water and sewage assets in exchange for our common shares issued at book value. Since 2011, we use the WACC set by ARSESP as a discount rate to analyze the financial and economic feasibility of the service agreements with municipalities.
The main provisions of our existing concession agreements are:
· | we assume all responsibility for providing water and sewage services in the municipality; | |
· | according to the municipal laws authorizing the concession, we are permitted to collect tariffs for our services and tariff readjustments follow the guidelines established by the Basic Sanitation Law and ARSESP; | |
· | to date, we are not required to pay most municipal taxes, and no royalties are payable to the municipality with respect to the concession; | |
· | we are granted rights-of-way on municipal property for the installation of water pipes and water transmission lines, and sewage lines; and | |
· | upon termination of the concession, for any reason, we are required to return the assets that comprise the municipality’s water and sewage system to the municipality, and the municipality is required to pay us the non-amortized value of the assets relating to the concession, if any. |
These assets have been considered to be intangible assets since January 2008. See Notes 3.8 and 3.10 to our 2023 Consolidated Financial Statements. Under concession agreements executed prior to 1998, the reimbursement for the assets may be through payment of either:
· | the book value of the assets; or | |
· | the market value of the assets as determined by a third-party appraiser in accordance with the terms of the specific agreement. |
The model form concession agreement follows the provisions of the Basic Sanitation Law in force at the time these agreements were signed, but did not include all the changes introduced by the New Legal Framework for Basic Sanitation. Its main conditions include the implementation of the targets based on the planning of services by the public authority, services’ inspection and regulation rules, the appointment of a regulatory and inspection agency, as well as the periodic disclosure of management reports with Consolidated Financial Statements.
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In addition to the 30-year term contracts, the municipalities entered into cooperation agreements with the State of São Paulo, delegating the regulation and inspection of the provision of services to ARSESP.
Our Program Agreements
Federal Law No. 11,107/2005, or the Federal Public Consortia and Cooperation Agreement Law, which regulates Articlearticle 241 of the Brazilian Constitution, introduced significant changes into the relationship among Municipalities,municipalities, states and companies providing public sanitation services, prohibiting the latter from exercising the activities of planning, oversight and regulation, including tariff regulation, of the services. The law also created the program agreement, a contract to be followed when Brazilian states and Municipalitiesmunicipalities enter into agreements for the provision of public services with mixed capital companies. The program agreement provides the guidelines for the joint management of public services by Brazilian states and Municipalitiesmunicipalities with mixed capital companies, removing the need for bidding processes.
However, as previously mentioned, the New Legal Framework for Basic Sanitation prohibits the formalization of program contracts, agreements, partnership agreements and other unstable instruments for the provision of public basic sanitation services by companies which are not subsidiaries of the entity which administers the concessions.
The Constitution of the State of São Paulo provides that the State shallmust assure the correct operation, necessary expansion and efficient administration of water and sewage services in the state by a company under its control. On January 13, 2006, the Governor of the State of São Paulo enacted State Decree No. 50,470/2006, amended by State Decrees No. 52,020/2007, dated July 30, 2007, and No. 53,192/2008, dated July 1, 2008, which regulate the provision of water and sewage services in the State. Pursuant to these decrees, it was previously possible to enter into agreements with Municipalitiesmunicipalities in connection with the provision of water and sewage services by means of a “program agreement without a public bidding process.” Following the entry into force of the Public Consortiachanges to the public consortia and Cooperation Agreementscooperation agreements law (Federal Law No. 11,107/2005), introduced by the New Legal Framework for Basic Sanitation, we adopted the administration of public services through cooperation agreements and program agreementagreements which can be used simultaneously.
As of the date of this annual report, the decrees mentioned above have not been amended, andamended. However, certain provisions, such as those related to the formalization of program contracts, do not conform with the New Legal Framework for Basic Sanitation.
Public-Private Partnerships
Public-Private Partnerships, or “PPPs,” are long-term The New Legal Framework for Basic Sanitation prohibits the formalization of program contracts, between private partiesagreements, partnership agreements and government entities,other unstable instruments for providing a public asset or service, in which the private parties bears significant risk and management responsibility, and remuneration is linked to performance. PPPs are regulated by the State of São Paulo through Law No. 11,688/2004, which was enacted on May 19, 2004. PPPs may be used for: (i) implantation, expansion, improvement, reform, maintenance or management of public infrastructure; (ii) provision of public services; and (iii) exploitation of public assets and non-material rights belonging to the State.
Payment is conditioned upon performance. The payment may be collected through: (i) tariffs paid by users; (ii) use of resources from the budget; (iii) assignment of credits belonging to the State; (iv) transfer of rights related to the commercial exploitation of public assets; (v) transfer of real property and other property of assets; (vi) public debts securities; and (vii) other revenues.
We do not currently provide any basic sanitation services to Municipalities through PPPs.by companies which are not subsidiaries of the entity which administers the concessions. However, the existing program agreements will remain in force and effect until the end of their contractual term.
Agreements with Municipalities and Metropolitan Regions
The state of São Paulo, pursuant to Article No. 25, Paragraph 3 of the Brazilian Constitution, enacted the State Supplementary Law, or “LCE,” to create the metropolitan regions of São Paulo (LCE No. 94/1974), Baixada Santista (LCE No. 815/1996), Campinas (LCE No. 870/2000), Vale do Paraíba and Litoral Norte (LCE No. 1,166/2012), Sorocaba No. (LCE No. 1,241/2014) and Ribeirão Preto (LCE No. 1,290/2016), and the urban clusters of Jundiaí (LCE No. 1,146/2011), Piracicaba (LCE No. 1,178/2012) and Franca (LCE No. 1,323/2018).
Pursuant to the Brazilian Constitution, in metropolitan regions, conurbations and microregions, the authority to develop public water and sewage systems is shared by the states and Municipalities.municipalities. However, for Municipalitiesmunicipalities which are not a part of the types of regions cited above (metropolitan regions, conurbations and microregions), the primary responsibility for providing water and sewage services to residents rests with the municipality.
We provide basic sanitation services for Municipalities,municipalities, conurbations and metropolitan regions. In these Municipalities,municipalities, operations are regionalized and contracts are structured considering the financial and economic conditions of the entire region. The regulation including taxes, control and oversight are the responsibilities of ARSESP (State Supplementary Law 1,025/2007 – Articlesarticles No. 6 and No. 10).
In January 2015, the federal government issued the Metropolitan Bylaws (Law No. 13,089/2015), which established general guidelines for the planning, management and execution of public services of common interest in metropolitan regions and in conurbations as defined by the states, as well as general rules on integrated urban development plans and other instruments for interfederal governance instruments.
With the enactment of the New Legal Framework for Basic Sanitation, regionalized service provision is clearly encouraged, especially by requiring the creation of regional basic sanitation units or reference blocks that aim to group Municipalitiesmunicipalities and encourage the provision of basic sanitation services in more isolated and low-profit Municipalities.municipalities. Additionally, despitedespite formally granting authority to Municipalities,municipalities, these Municipalitiesmunicipalities will not have access to financing with federal resources if they are not part of a regionalized group, thus leaving little or no margin to exercise their authority.authority.
Due to this recent legislative change and the uncertainties that surround the prohibition of program contracts, along with other possible forms of joint interests, as is the case of associated management through a cooperation agreement, or even possible corporate arrangements, it is not yet possible to confirm the impact of the New Legal Framework for Basic Sanitation.
State Law No. 17,383 of July 5, 17,383/2021 was published, which created four Regional Units for Drinking Water Supply and Sewage Services - URAEs, and the municipalities operated by us coincide with URAE 1 - Southeast.URAE-1 – Southeastern. On December 12, 2021, State Decree No. 66,289 was published, which regulates this law.
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Establishment of ARSESP
On June 8, 2006,ARSESP was created by Complementary Law No. 1,025/2007, and regulated by Decree No. 52,455/2007, with the objective of regulating, controlling and supervising piped gas and basic sanitation services that are under state ownership, as well as services and activities related to energy for which the Brazilian government is responsible, or basic sanitation services that may be delegated to the State of São Paulo enactedby the competent agencies.
ARSESP’s creation was a result of two important legal frameworks – Federal Law No. 11,107/2005, which provides for general rules for contracting public consortia, and the Basic Sanitation Law of January 5, 2007, which establishes national guidelines for basic sanitation.
According to the provisions and limitations of Complementary Law No. 1,025/2007 and Decree No. 50,868/2006, creating52,455/2007, ARSESP is responsible for regulating, controlling and supervising the Commission for the Regulationservices of Sanitation Servicepiped gas and basic sanitation of state ownership within the State of São Paulo, (Comissão de Regulação do Serviço de Saneamento do Estado de São Paulo), or “CORSANPA,”without prejudice to regulatemunicipal competencies and prerogatives.
In respect of basic sanitation services. CORSANPA was directly subordinatedservices for municipalities, ARSESP is responsible for supervising, controlling and regulating, including tariffs, which are delegated to the State Secretariat for Infrastructure and Environment. The main duty of CORSANPA was conducting studies for the creation of a regulatory agency for the basic sanitation industry and the presentation of legal and regulatory measures.
The completion of such duties resulted in the publication of State Supplementary Law No. 1,025/2007 of December 7, 2007, which created the São Paulo State Sanitation and Energy Regulatory Agency (Agência Reguladora de Saneamento e Energia do Estado de São Paulo), or “ARSESP,” and partially revoked Supplementary Law No. 7,750/1992. Furthermore, Supplementary Law No. 1,025/2007 maintained CONESAN, as an advisory council to define and implement the state basic sanitation policy, and the State Sanitation Fund (Fundo Estadual de Saneamento) or “FESAN.” FESAN is connected to the State Secretariat for Infrastructure and Environment and collects and manages resources that support state-approved programs, as well as the development of technology, management and human resources and a sanitation information system, in addition to other support programs.
On August 5, 2009, the State of São Paulo, enacted Decree No. 54,644/2009, which revoked Decree No. 50,868/2006 and regulatedin compliance with the composition, organization and operationprovisions of the State Sanitation Council (Conselho Estadual de Saneamento), or “CONESAN” created by Supplementary Law No. 7,750/1992.
In connection with the scope of our services, Supplementary Law No. 1,025/2007 expanded the range of services that we can render, with the inclusion of urban rainwater drainagelaws and management, urban cleaningregulations, national and solid waste management, as well as the operation of power generation, storage, conservation and sales activities,state guidelines for our own or third-party use.
In addition, the rules simplified the process for the expansion of our business in Brazil and abroad, authorizing us to:
ARSESP regulates the basic sanitation, servicesthe instruments and contracts that belongdelegated powers to the State, relating toagency. In the federal and municipal jurisdictions and prerogatives, and is responsible for:
With respect to municipal basic sanitation, ARSESP oversees and regulates services (including tariff issues) that have been delegated by Municipalities to the State as a resultexercise of cooperation agreements that authorize program agreements between the Municipalities and us for as long as it is convenient to the municipality’s public interest. Currently, all of our service agreements signed pursuant to Law No. 11,445/2007 had their regulationits regulatory, control and supervision services delegatedpowers, ARSESP also has a series of attributions, such as receiving, investigating and forwarding solutions related to ARSESP.user complaints.
For its services, ARSESP charges a fee of 0.50% of the total annual total invoice frominvoiced amount of the net operating revenue of taxes (excluding revenues relatingrelated to the construction of the concession infrastructure) of the municipality. This fee is collectedcharged on the annual revenue directly obtained with the service provision, less any taxes levied on it, both from Municipalitiesmunicipalities that have an executed program agreementcontracts with us, and the Municipalitiesas well as from municipalities located in the metropolitan regions.
Rules Enacted by ARSESP
In 2009, ARSESP enacted rules regardingResolution No. 1,388/2023 established the following:regulatory agenda for 2023 and 2024, which includes:
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· | methodology for the reversibility of assets in the basic sanitation sector; | |
· | analysis of efficiency in expenses with electricity by sanitation concessionaires; | |
· | calculation methodology of the sharing of efficiency gains (Factor X) for regulated gas pipeline and basic sanitation companies; and | |
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The implementation of these
ARSESP has addressed the methodology and other more recent rules will particularly impact our commercial and operational processes and may adversely affect us in ways we cannot currently predict. Implementation of these rules started in 2011 and is expected to continuecriteria for updating the Regulatory Remuneration Base (Base de Remuneração Regulatória), along with the procedures for the next few years.Annual Certification of Investments for companies in the basic sanitation sector. Topics covered include asset control for basic sanitation concessionaires, general conditions for the provision and use of public urban cleaning and solid waste management services, and the risk allocation matrix associated with the provision of water supply and sewage services.
Consumer Relations in the State of São Paulo
In 2011,Our services are regulated by ARSESP alteredwho establishes the standard contract that we are required to use in our relationshipsterms and conditions of public services contracts for water supply and sewage services with retail customers. This alteration requirescustomers and determined that the invoices must be issued and sent to the user of the service rather thancustomer and not the owner of the property connected to the public water supply and sewage systems. Since 2011, we have implemented several measures and instituted new rules to update our client registry.property. Currently, more than 90% of our water and sewage connections are billed to the user of ourthe services, as foreseen under current regulations. Relatedin ARSESP regulation. In respect of our debt collection, we implemented a new digital platform in 2021 that brought improvements to our customer relationship. This new digital platform now identifies customers by their registration number in the collectionnational registries of debt, we are also faced withindividuals or companies and by information that is necessary for the challengeregistration of collecting customers’ taxpayer identification numbers, which are required to register for ourtheir services and are needed for the judicial collection of outstanding feescharges in the eventcase of nonpayment.default. We continuously update our customers’ registration information, butinformation; however, we still face difficulties in updating this information in areas with a high concentrationsconcentration of social vulnerability and noncompliance.default.
Regarding changesFor more information, see “Item 3.D. Risk Factors—Risks relating to the communication process for the reportingRegulatory Environment—The regionalization of failures, ARSESP has modified the rules and standards for supervision and reporting of incidents. We have implemented these requested changes. Currently, we receive a portion of the reported incidents online, through the Incident Reporting System (“Sistema de Comunicação de Incidentes”)services, established by ARSESP, which introduces greater transparency and control to our operations.
Pursuant to rules provided in ARSESP Resolution No. 846/2018, enacted on December 20, 2018, certain procedures were established to report incidents and interruptions in the provision of water and sewage services through the Supervision Support System (SAFI).
The implementation of these rules, which began in 2011 and was completed in 2018, required certain adjustments to our business and operations, but so far have not adversely affected us. We created a handbook on how to report incidents and interruptions in order to standardize the understanding and usage of the Incident Reporting System (including roles, responsibilities and a step-by-step guide), as well as a training series, directed to each business unit, in order to address the subject and its importance. The goal was to promote a broad communication to all stakeholders mentioned by the ARSESP rules in each available information channel.
We are attentive to these regulatory changes, have been working toward meeting ARSESP’s requirements and recommendations, and have presented technical, legal and factual reasons for any conduct that ARSESP may find irregular. As a result, we are subject to few regulatory infractions and to limited fines. See “Item 3.D Risk Factors—Regulatory Risks— Current regulatory uncertainty, especially with regard to the New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.”
Our Current Concession Agreements
The current concessions are based on a standard form of agreement between us and the municipality. Each agreement received the prior approval of the legislative council of each municipality. In the Municipalities included in metropolitan regions, conurbations and microregions, the State of São Paulo is also included as a party. The assets comprising the existing municipal water and sewage systems are transferred from the municipality to us in order for us to provide the contracted services. Until 1998, we acquired municipal concessions and the existing water and sewage assets in exchange for our common shares issued at book value. Since 1998, we have acquired concessions and water and sewage assets by paying the municipality an amount equal to the present value of the contracts’ estimated cash flows from the date of acquisition of the concession. In 2011, ARSESP set the Weighted Average Cost of Capital (WACC) at 8.06%, due to the First Ordinary Tariff Revision, and in October 2017 the discount rate was updated to 8.11% due to the Second Ordinary Tariff Revision. In July 2020, the discount rate was updated to 8.10% as a result of the Third Ordinary Tariff Revision. See “—Tariffs.” Since 2011, we have used ARSESP’s WACC as a discount rate used to analyze the financial and economic feasibility of the service agreements with Municipalities.
The main provisions of our existing concession agreements are as follows:
These assets have been considered to be intangible assets since January 2008. See Note 3.8 to our financial statements. Under concession agreements executed prior to 1998, the reimbursement for the assets may be through payment of either:
Our agreement model follows the provisions of the Basic Sanitation Law. Its main contractual provisions include the joint execution of planning, supervision and regulation of services, the appointment of a regulatory authority for the services, and periodic disclosure of financial statements.
Furthermore, the economic and financial formulas must be based on the discounted cash flow methodology and on the revaluation of returnable assets. Pursuant to the Basic Sanitation Law, the preexisting assets will be returned to the grantor of the concession. We will carry out all new investments and the Municipalities will record them as assets. The Municipalities will then transfer possession of these assets to us for our use and management and will also record a credit in the same amount of the assets recorded in our favor. According to Article 42 of the Basic Sanitation Law, investments made during the contractual period are the property of the applicable municipality, which in turn generates receivables for us that are to be recovered through the operation of the services. These receivables may also be used as guarantees in funding operations.
Another important development was the exemptions from municipal taxes applicable on our operational areas and the possibility of the revaluation of our assets that existed prior to the execution of the agreements in cases involving the early resumption of services by the concession authority.
As of December 31, 2021, we provided water and sewage services to 375 Municipalities. The majority of these concessions have 30-year terms. Between January 1, 2007 and December 31, 2021, we entered into agreements with 342 Municipalities (including our services agreement with the city of São Paulo and Guarulhos) in accordance with the Basic Sanitation Law, of which 17 were entered into in 2020. As of December 31, 2021, these 342 Municipalities accounted for 95.0% of our gross operating revenues from sanitation services (excluding revenues relating to the construction of concession infrastructure). In addition to the contracts that have 30-year terms, the Municipalities entered into cooperation contracts with the State of São Paulo, delegating the regulation and monitoring of the provision of services to ARSESP. As of December 31, 2021, eight of our agreements or concessions had expired but we continued to provide water and sewage services to these Municipalities. From January 1, 2022 through 2030, 25 concession agreements will expire, accounting for 4.0% of our revenues (excluding revenues relating to the construction of concession infrastructure) the year ended December 31, 2021 and 2.5% of our intangible assets and contract assets as of the same date, will expire.
We currently do not anticipate that other Municipalities will seek to terminate concessions due to our close relationship with municipal governments, recent improvements in the water and sewage services we provide, and the obligation of the municipality to repay us for the return of the concession. However, we cannot be certain that other Municipalities will not seek to terminate their concessions in the future. See “Item 3.D. Risk Factors—Regulatory Risks—Municipalities may terminate our concessions before they expire in certain circumstances. The indemnification payments we receive in such cases may be less than the value of the investments we made, or may be paid over an extended period, adversely affecting our business, financial condition or results of operations.”
Operations in the City of São Paulo and Certain Metropolitan Regions
We are a concessionary of the stateState of São Paulo tasked with providing operate basic sanitary services in metropolitan regions, microregions and urban conglomerates instituted by state law.
The stateState of São Paulo, pursuant to Articlearticle No. 25, Paragraph 3 of the Brazilian Constitution, enacted the State Supplementary Law, or “LCE,”LCE to create the metropolitan regions of São Paulo (LCE No. 94/1974), Baixada Santista (LCE No. 815/1996), Campinas (LCE No. 870/2000), Vale do Paraíba and Litoral Norte (LCE No. 1,166/2012), Sorocaba No. (LCE No. 1,241/2014) and Ribeirão Preto (LCE No. 1,290/2016), and the urban clusters of Jundiaí (LCE No. 1,146/2011), Piracicaba (LCE No. 1,178/2012) and Franca (LCE No. 1,323/2018).
On June 18, 2009, Municipal Law No. 14,934/2009 repealed Municipal Law 13,670/2003, which had assigned the responsibility for the city of São Paulo’s planning, regulating and supervising the provision of water supply and sewage collection services exclusively to the city of São Paulo. On June 23, 2010, the State and the city of São Paulo entered into a formal agreement with the purpose of sharing the planning of the provision of water supply and sewage collection services; and delegating oversight and regulation, including tariff regulation, to ARSESP; and authorizing the maintenance of water supply and sewage collection services in the city of São Paulo for a 30-year term (renewable for the same period).
In January 2015, the federal government issued the Metropolitan Bylaws (Law No. 13,089/2015), which established general guidelines for the planning, management and execution of public services of common interest in metropolitan areasregions and in conurbations as defined by the States, as well as general rules on integrated urban development plans and other interfederal governance instruments.
The New Legal Framework for Basic Sanitation outlined the entities responsible for the provision of basic sanitation services. However, there are still several uncertainties regarding regionalized provisions, including the creation of new forms, such as regional basic sanitation units and reference blocks. Accordingly, as of the date of this annual report, it is not possible to describe how these new forms will be implemented.
State Law No. 17,383 of July 5, 17,383/2021 was published, which created four Regional Units for Drinking Water Supply and Sanitary Sewage Services - URAEs, and the municipalities operated by us coincide with URAE 1 - Southeast.URAE-1 – Southeastern. On February 12,2021,12, 2021, State Decree No. 66,289 was published, which regulates the aforementionedthis state law.
The São Paulo metropolitan region (including the Municipalities to which we provide water on a wholesale basis, but excluding the concession infrastructure construction revenue) accounted for 70.7% of our operating revenue from services in 2021.
We cannot predict how the shared management of these operations will be carried out in the São Paulo metropolitan region and other metropolitan regions we operate in or what effect it may have on our business, financial condition or results of operations. SeeFor more information, see “Item 3.D. Risk Factors—Risks relating to the Regulatory Risks — Current regulatory uncertainty, especially with regard toEnvironment—The regionalization of services, established in the New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.”
Tariff Regulation in the State of São Paulo
The tariffs for our services are subject to Federal and State regulation.
On December 16, 1996, the Governor of the State of São Paulo issued the decree No. 41,446/1996, which updated the existing tariff system and allowed us to continue to set our own tariffs. The guidelines by which we readjust our tariffs are defined pursuant to State Decree No. 41,446/1996, which were ratified by Federal Law No. 11,445/2007 and regulated by resolutions issued by ARSESP.
Our tariffs are based on the general objectives of maintaining our financial condition and preserving “social equality” in terms of the provision of water and sewage services to the population while providing a return on investment. The governor’s decree also directs us to apply the following criteria in determining our tariffs:
With the enactment of the Basic Sanitation Law and Federal Consortium Law, we are prohibited from planning, overseeing and regulating services, which includes determining the tariff policy to be adopted. Such activities are to be exercised by the owner of the concession. Except for the responsibility for planning, the remaining activities may be delegated.
The current Tariff Structure maintains different tariff schedules, depending upon whether a customer is located in the São Paulo metropolitan region or the Regional Systems. There are four levels of volume consumed for each category of customer, except for the residential-social and shantytown (favelas) categories. The residential-social tariffs apply to residences of low-income families, residences of persons unemployed for up to 12 months and collective living residences. The favela tariffs apply to residences in shantytowns characterized by a lack of urban infrastructure. The latter two subcategories were instituted to assist lower income customers by providing lower tariffs for consumption. Customers are billed on a monthly basis. Water and sewage bills are based upon water usage determined by monthly water meter readings. Larger customers, however, have their meters read every 15 days to avoid nonphysical loss resulting from faulty water meters. Sewage billing is included as part of the water bill and is based on the water meter reading. We are also authorized to enter into individual contracts with certain customers, such as Municipalities, to supply water or sewage services on a wholesale basis.
On April 8, ARSESP published the results of Third Ordinary Tariff Revision and the new Tariff Structure. For more information on the differences as a result of the New Tariff Structure, see “Item 4.B. Business Overview—Tariffs—New Tariff Structure.”
Furthermore, since Law No. 11,445/2007 permits Municipalities to create their own regulatory agencies rather than being subjected to overview by ARSESP, a number of Municipalities created their own regulatory agencies.
In November 2013 the Regulatory Agency of São Bernardo do Campo was created. However, when the contract was signed with the municipality of São Bernardo do Campo in 2019, the regulation and supervision of services were delegated to ARSESP. See “Item 3.D. Risk Factors — Regulatory Risks — Current regulatory uncertainty, especially with regard to New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.”
The 2014-2015 Water Crisis
Prior to 2014,The southeastern region of Brazil, particularly the southern region of the state of Minas Gerais, the PCJ River Basin (from which we planned our supply of water to the São Paulo metropolitan region based onextract the water supply during the driest period on record, which was from 1953 to 1954. However, water inflow toused in the Cantareira reservoirs throughout 2014System), and most of 2015 was less than half the inflow recorded in 1953, the previous most critical year. Consequently, the volume of water stored in the reservoirs in 2014 and 2015 declined significantly until September 2015, when the reservoirs once again held more water than 12 months previously for the first time since the beginning of the water crisis. Once rainfall returned the level of water in the reservoirs that provide water to the populationnorthern region of the São Paulo metropolitan region, to normal levels,experienced below average rainfall from late 2012 throughout 2014 and most of 2015, which mainly affected the measures taken during the water crisis to continue services to consumers were gradually discontinued starting in early 2016. AsCantareira System (the largest system of December 31, 2021, the reservoirs in the São Paulo metropolitan region contained 743 million m3 of water storage for treatment, compared to 913 billion m3 available for treatment as of December 31, 2020, not including the technical reserve of 287,5 million m³region). The average monthly water production in 2021 for the São Paulo metropolitan region was 61,7 cubic meters per second, or m³/s, compared to 63,0 m³/s in 2020 and 62.9 m³/s in 2019.
For more information on the water production systems which we use to produce water for the São Paulo metropolitan region, see “Item 4.B. Business Overview—Description of Our Activities—Water Operations—Water Resources.”
Cantareira System
The Cantareira System is located in the northern area of the São Paulo metropolitan region. It uses water extracted from the PCJ River Basin and the Juqueri River Basin and consists of six reservoirs interconnected by a complex water network of tunnels and pipes, located along the Municipalitiesmunicipalities of São Paulo, Mairiporã, Nazaré Paulista, Piracaia, Vargem, and Joanópolis. The latter two are located on the border of the state of Minas Gerais, approximately 100 kilometers from the city of São Paulo. Gravity forces the flow of water from one reservoir to another, and once the water reaches the Paiva Castro reservoir, located in the Juqueri River Basin, it is pumped to the Guaraú water treatment plant.
Prior to February 2014 and the water crisis, this system supplied water to approximately 8.9 million people, with an average extraction of up to 33 m³/s to serve the São Paulo metropolitan region. After the water crisis, when conditions returned to normal levels, this system suppliessupplied water to approximately 7.0 million people, with an annual average water production of up to 24.6 m³/s in 2020 in order to serve the São Paulo metropolitan region.people. Since May 2017, the volume of water that may be extracted from the Cantareira System is now based on the volume of water available in the reservoirs. A minimum of 10 m³/s of water may be released to serve the metropolitan region of Campinas and Jundiaí, which is located downstream from the reservoirs. This flow is defined in Joint Resolution Nos. 926/2017 and 925/2017, both dated May 29, 2017.
In May 2017, the concession that regulates the volume of water that may be extracted from the Cantareira System, issued by ANA and DAEE, was renewed for a period of 10 years and will allow usyears. Under that concession what we are allowed to withdraw from the system is divided into five tranches: (i) if the volume of water available is higher than 60% of the reservoirs’ capacity, we can withdraw up to 33 m3/s; (ii) if the volume of water is between 40% and 60% of the reservoirs’ capacity, we can withdraw up to 31 m3/s; (iii) if the volume of water is between 30% and 40% of the reservoirs’ capacity, we can withdraw up to 27 m3/s; (iv) if the volume of water is between 20% and 30% of the reservoirs’ capacity, we can withdraw up to 23 m3/s; and (v) if the volume of water available is lower than 20% of the reservoirs’ capacity, we can withdraw up to 15.5 m3/s.
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The following table shows the volume of water stored in the systems that serve the São Paulo metropolitan region as of December 2018, March 2019, December 2019, March 2020, December 2020, March 2021, December 2021, March 2022, December 2022, March 2023, December 2023 and March 2022:2024.
March 2022 | December 2021 | March 2021 | December 2020 | March 2020 | December 2019 | March 2019 | December 2018 | Total Storage Capacity | March 2024 | December 2023 | March 2023 | December 2022 | March 2022 | December 2021 | March 2021 | Total Storage Capacity | |
Cantareira | 444.4 | 244.5 | 518.8 | 355.1 | 632.2 | 396.4 | 542.4 | 387.8 | 982.0(1)(2) | 765.8 | 703.3 | 800.9 | 414.7 | 444.4 | 244.5 | 518.8 | 982(1)(2) |
Guarulhos | 1.0 | 0.4 | 0.6 | - | 1.0 | ||||||||||||
Cabuçu and Tanque Grande (Guarulhos) | 0.9 | 0.8 | 1.0 | 0.6 | 1.0 | 0.4 | 0.6 | 0.99 | |||||||||
Guarapiranga | 155.0 | 98.3 | 122.6 | 97.1 | 141.4 | 110.5 | 155.8 | 103.3 | 171.2 | 150.8 | 92.8 | 146.6 | 145.0 | 155.0 | 98.3 | 122.6 | 171.19 |
Rio Grande | 115.7 | 94.6 | 98.1 | 89.4 | 98.8 | 93.0 | 113.1 | 92.4 | 112.2 | 112.6 | 112.2 | 113.1 | 113.3 | 115.7 | 94.6 | 98.1 | 112.18 |
Rio Claro | 6.3 | 7.0 | 6.0 | 13.4 | 14.0 | 10.5 | 13.7 | 5.6 | 5.3 | 5.8 | 5.9 | 6.3 | 7.0 | 13.67 | |||
Alto Tietê | 332.7 | 225.1 | 341.2 | 301.8 | 497.9 | 430.3 | 511.9 | 282.6 | 560.3 | 430.7 | 330.9 | 409.0 | 270.8 | 332.7 | 225.1 | 341.2 | 560.31 |
Cotia | 15.6 | 6.5 | 13.2 | 10.5 | 16.9 | 12.2 | 16.8 | 7.1 | 16.5 | 14.8 | 13.2 | 16.5 | 8.6 | 15.6 | 6.5 | 13.2 | 16.5 |
São Lourenço | 86.5 | 68.1 | 57.4 | 54.1 | 87.8 | 52.3 | 87.2 | 59.1 | 88.8 | 88.0 | 51.9 | 86.9 | 72.3 | 86.5 | 68.1 | 57.4 | 88.82 |
(1) | The Cantareira system’s total storage capacity is 982.0 million m³ available above the water intake level, plus 287.5 million m³ below the water intake level (known as the “technical reserve”). |
(2) | Amounts included since the May 2017 water right renewal do not include the water from the Cantareira System’s technical reserve, which is water stored below the water intake level. |
In order to continue to meet consumer demand in the São Paulo metropolitan region and reduce water production in the Cantareira system to the current limits set by ANA and DAEE, we adopted the followinga series of measures from February 2014 to early 2016 to maintain continuous water supply:
The first foursupply. These measures resultedto continue services to consumers were gradually discontinued, starting in significant water savings and helped to offsetearly 2016, with the reduced volumeincrease of the level of water extracted fromin the Cantareira System. The extraction of water from the technical reserve was critical to maintaining a continuous supply ofreservoirs that provide water to the population.
With the returnpopulation of historical average rainfall in the rainy season from October 2015 to March 2016, water levels for the São Paulo metropolitan region returnedregion.
The heightened public awareness of the need to normal and we gradually discontinuedconserve water during the measures that we had takencrisis resulted in our customers adopting practices to reduce water consumption during the water crisis, and these practices have been partially integrated into our consumers’ daily habits even after the water crisis.
Emergency Projects and Projects Implemented to Meet the Water Demand of the São Paulo Metropolitan Region
In addition to the measures taken to meet consumer demand in the São Paulo metropolitan region, we made and continue to make short and medium-term investments in projects to increase water availability, transfer water between different reservoir systems and expand water treatment production capacity.
Our production of treated water was expanded by 6.0 m³/s with the completion of the São Lourenço Project. In addition, an additional 13 m³/s was made available to our reservoirs through interconnections to other reservoirs in the stateState of São Paulo, which will be available to us if reservoirsreservoir levels once again become low. Completion of these projects results in improved water security for the Integrated Water Supply System (Sistema Integrado de Abastecimento de Água), or SIM.
The main projects include:
of the Metropolitan Region of São Paulo, which consists of a set of water sources, water treatment plants and pipelines that provide and treat water for the São Paulo metropolitan region.
Additionally, we continue to take measures to maintain the water supply to the metropolitan region of São Paulo metropolitan region in the adequate quantity and quality for the population. These measures are implemented to keep the system in operation, with renovation of its structures and constructions, in addition to adjustments for operational flexibility by increasing the transfer of treated water between the producing systems of the Integrated Water Supply System of the Metropolitan System.Region of São Paulo. We have carried out specific studies on the likelihood of new water scarcity events similar to the 2014-2015 water crisis.crisis happening. These studies aim to promote better management of water resources in order to offer greater guarantee ofensure better supply, reconciling acceptable risks with the capacity to invest in any necessary expansions.
Measures to Combat the COVID-19 Pandemic
To counter the COVID-19 pandemic, while we maintained essential water supply and sewage collection and treatment services to our more than 28 million customers, we implemented emergency measures to mitigate health, social, and economic impacts resulting from the spread of the virus.
In partnership with other companies, entities, and public agencies, we implemented measures to limit our employees’ exposure to possible infection, anticipate essential purchases of protective equipment and seeking alternatives to avoid possible service interruptions. In March 2020, when the COVID-19 pandemic was declared, approximately 5,900 employees from administrative staff and employees aged 60 years or above or employees with preexisting health conditions were working remotely.
For employees in the essential services category, who work in our facilities or on the streets, we organized shifts, distributed specific protective equipment and adopted measures to expand the cleaning and hygiene protocols of workplaces. We established sanitary protocols, with rules for reducing circulation for safe work, social distancing, personal hygiene and sanitation of the facilities, in addition to communication and monitoring actions.
To keep our staff informed about preventive measures, corporate rules, symptoms, and other doubts about the pandemic, we maintained the COVID-19 Prevention Information Center active and provided our employees with access to the telemedicine system of the Albert Einstein Hospital. Through the Emotional Health Program, we provided information for the psychological well-being and mental health of our teams.
During 2020 and partially in 2021, we closed all of our on-site agencies and concentrated service to our clients through our digital channels, such as the virtual agency and the Sabesp Mobile application, as well as telephone and chat channels.
After July 2021, which was the most critical period of contagion, we gradually reopened our branches, in a safe way for customers and employees, following health and distancing protocols. Employees on remote working only started to return to on-site work after having the complete vaccination cycle, based on the specifications contained in the leaflet of each immunization product.
As a result of our commitment to social well-being during the COVID-19 pandemic, in 2020, we distributed food baskets, hygiene kits and water tanks for the most vulnerable population, and installed public washbasins, sanitized the surroundings of certain public hospitals and health centers, suspended supply cuts and exempted tariffs for the “Residential Social” and “Residential Favela” customer categories. Additionally, in 2021, we contributed to vaccination campaigns carried out by the State Health Secretariat donating tablets to be used in the registration system of the population being vaccinated.
Additionally, in the context of COVID-19 pandemic, on February 3, 2021, our Board of Executive Officers approved certain measures for commercial clients aiming to help them maintain their businesses during the COVID-19 pandemic and to pay their debts in the future. These measures for commercial customers were in effect until August 2021.
Since August 2021, following government guidelines and considering the decrease in the number of cases of contamination, the reduction in hospitalizations and, especially the advance of vaccinations, our employees have gradually returned to on-site work as they completed the vaccination cycle, always observing the instructions of our Sanitary Protocol.
See item 6.D. - Employees for more information about other measures we adopted to protect our employees.
Facing an economic crisis and the COVID-19 pandemic simultaneously demanded an effort from us in the reallocation of available resources, adapting to the new scenario marked by a decrease in revenues, an increase in defaults, as well as increased uncertainty and exchange rate volatility.
Conscious that in the midst of the pandemic, water is an even more essential resource for preserving the population’s health, our first objective was to make our economic and financial conditions feasible for us to ensure the maintenance of operations and access to services, in particular for the more socially vulnerable population.
The quarantine decree in the State of São Paulo in 2020 and 2021 directly impacted our revenues as a consequence of the change in the consumption mix, caused by the increase in volumes in the residential categories and reduction in the commercial, industrial and public categories whose average tariffs are higher, leading to a reduction in the total average tariff in addition to increases in delinquencies in certain categories, which continued through 2021. In 2020, our revenues from the residential sector were also affected, since consumers in the “Social Residential” and “Residential Favela” categories were exempted from paying water and sewage bills between the months of April and August of 2020.
Marketing Channels
As of December 31, 2021,2023, we were the concessionaire responsible for the provision of water supply and collection, treatment and disposal of sewage services directly to end consumers for 375 Municipalities376 municipalities in the stateState of São Paulo. For more information on our marketing channels aimed at individual customers, see “Item 4.B Business Overview—Customer relationship.”
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We also supplied water and sewage services on a wholesale basis to two Municipalitiesmunicipalities located in the São Paulo metropolitan region.region which we accounted for on a wholesale basis. It is the responsibility of these Municipalitiesmunicipalities to then distribute the water to end consumers. Because ofDue to our distribution infrastructure, end consumers to whom we offer water services on a wholesale basis cannot alternatively acquire such services directly from us. For more information on service concessions, see “—Wholesale“Item 4.B Business Overview—Water Operations.”
For more information on our marketing channels aimed at municipalities, see “Item 4.B Business Overview—Competition—Competition for new Municipalities.”
Energy Consumption
Energy is essential to our operations and, as a result, we are one of the largest users of energy in the stateState of São Paulo. In the year ended December 31, 2021,2023, we used 2,657 GWh, which represents approximately 2.10%1.92% of the total energy consumption in the stateState of São Paulo. ToAs of the date of this annual report, we have not experienced any major disruptions in energy supply. Any significant disruption of energy to us could have a material adverse effect on our business, financial condition, results of operations or prospects. Energy prices have a significant impact on our results of operations. In 2021,For the year ended December 31, 2023, we purchased approximately 62,7%64.7% of our total energy consumption in the Free Marketindependent energy contracting market (Ambiente de Contratação Livre or Mercado Livre de Energia – “ACL”) where we can more efficiently negotiate the supply of energy;energy because we can take advantage of market opportunities; and the remainder of our energy consumption comes from the Regulated Market. This allowed usregulated energy contracting market (Ambiente de Contratação Regulado or Mercado Cativo – “RCL”) where energy is valued through tariffs set by the regulatory agency, which in this case is the National Electric Energy Agency (Agência Nacional de Energia Elétrica – “ANEEL”), due to save approximately R$ 224 million, compared to what we expect we would have spent if we purchased allthe natural monopoly characteristic of our total energy consumption in the Regulated Market.this service.
Additionally, we are developing projects that aim to generate clean, renewable and sustainable energy. In 2019, we began to structure a Distributed Power Generation Programdistributed power generation program (Programa de Geração Distribuída – Energia Fotovoltaica) focused on solar energy. The program estimates that until 20232025 we will have a power generation capacity of 61 megawatt,around 60 MW, with a daily average output of 21 megawatts,12 MW, corresponding to about 4.5% of our total energy consumption (base year 20218)2018). By 2021,2023, we have opened 3 Photovoltaic Plants,had installed 16 photovoltaic power generation plants, with an installeda power generation capacity of 3.6 MWp.19.5 MW. The credits obtained inas part of this distributed generation will bewere used to offset energy consumption of low voltage installations, which have a higher tariff. As such, about 60%74% of energy consumption carried out in low voltage will be supplied by renewable energy. The investment of approximately R$250310.0 million foreseen in this program has an estimated payback of 7 to 8 years.
Most of the energy produced in Brazil comes from hydroelectric power plants. For more information on energy, see “Item 3.D. Risk Factors—Risks Relating to Our Business— Environmental Matters and Physical and Transition Climate Risks—Extreme Weather Conditions and Climate Change may have a material adverse impact on our business, financial condition or results of operations” and “Item 3.D. Risk Factors—Risks relating to Our Business—Adverse weather conditions may interruptSuppliers—Any interruptions in the supply of electricity and water andmay adversely impactaffect our operations.”
Insurance
We aim to maintain insurance covering, among other things, fire or other damage to our property and office buildings and third-party liability.liabilities. We also maintain insurance coverage for directors’ and officers’ liability (D(“D&O insurance)Insurance”). We currently obtain our insurance policies by means of public bids involving major Brazilian and international insurance companies that operate in Brazil. As of December 31, 2021,2023, we had paid a total aggregate amount of R$19.124.9 million in premiums. In addition, we paidpremiums (of which R$ 4.94.95 million for aare related to our D&O Insurance policy). Our insurance policy, coveringpolicies covered R$4,97.3 billion in assets and third-party liabilities, andincluding R$100.0 million for our D&O insurance.Insurance. On February 26, 2024, we renewed our D&O Insurance policy, increasing our coverage to R$200.0 million. We do not have insurance coverage for business interruption risk because we dobelieve that the low risk of significant interruption to our activities does not believe thatjustify the high premiums for such insurance are justified by the low risk of major interruption of our activities.insurance. In addition, we do not have insurance coverage for liabilities arising from water contamination or other problems involving our water supply to customers and for environmental relatedenvironmental-related liabilities and damages. We believe that we maintain insurance at levels customary in Brazil for our type of business.
For further information, see “Item 3.D. Risk Factors—Risks Relating to the Regulatory Environment—Risks associated with the collection, treatment and disposal of wastewater and the operation of water utilities may impose significant costs that may not be covered by insurance, which could result in increased insurance premiums.”
Intellectual Property
Trademarks and copyrights
We have secured registration of our logo and compositenominative trademark (“Sabesp”) at the Brazilian Institute of Industrial Property (Instituto(Instituto Nacional da Propriedade Industrial), or INPI.Industrial – “INPI”). In addition, we have registered with the INPI several other trademarks, such as: “Sabesp Soluções Ambientais”,Ambientais,” “Projeto Tietê,”, “Programa Córrego Limpo”,Limpo,” “Programa Onda Limpa”,Limpa,” “PROL – Programa de Reciclagem do Óleo de Fritura”,Fritura,” “Revista DAE”,DAE,” “Ligação Sabesp”,Sabesp,” “Agente da Gente – Sabesp na Comunidade”,Comunidade,” “PURA – Programa de Uso Racional da Água”,Água,” “Sabesp Inteligência Ambiental”,Ambiental,” “Uso Racional da Água”,Água,” “Parque da Integração”,o,” “Sabesp Semana do Meio Ambiente”,Ambiente,” “Água Sabesp Aquífero Guarani”,Guarani,” “Água Sabesp Estação Cantareira”,Cantareira,” “Contrato de Fidelização Sabesp”,Sabesp,” “Esgoto Não Doméstico Sabesp”,Sabesp,” “PEA – Programa de Educação Ambiental – Sabesp”,Sabesp,” “Sabesp Abraço Verde”,Verde,” “Água de Reúso Sabesp”,Sabesp,” “Eu Sou Guardião das Águas Sabesp Eu Não Desperdiço”,o,” “Calculadora de Sonhos”,Sonhos,” “Parque Sabesp Mooca”,Mooca,” “Parque Sabesp Butantã,”, “Parque Sabesp Cangaíba”,ba,” “Programa Água Legal Sabesp”,Sabesp,” “Signos – Sistema de Informaçãoões Geográficaficas no Saneamento Sabesp”,Sabesp,” “Sistema de Suporte a Decisões Sabesp”,Sabesp,” “Fertilizante Sabesfértil Sabesp”,Sabesp,” “Pitch Sabesp”,Sabesp,” “Novos Negócios Sabesp”,Sabesp,” “Centrais de Geração Hidrelétrica Sabesp”,Sabesp,” “Biogás Sabesp”,Sabesp,” “Energia Fotovoltaica Sabesp”,Sabesp,” “Energia Eólica Sabesp”,Sabesp,” “Resíduos Sólidos Urbanos Sabesp”,Sabesp,” “Fertilizantes Sabesp”,Sabesp,” “Tocha de Plasma Sabesp”,Sabesp,” “Serviços Técnicos Sabesp”,Sabesp,” “Afinidades Sabesp”,Sabesp,” “Fibra Ótica nas Redes Sabesp”,Sabesp,” “Geosabesp Sabesp”,Sabesp,” “Waste To Energy Sabesp”,Sabesp,” “Redução de Perdas Sabesp”,Sabesp,” “Serviços Imobiliários Sabesp,” “Somos Água Sabesp”, “Hydria Sistema Sabesp,” and “Clubinho Sabesp”,Sabesp,” which is a tool for environmental education directed to children through our website, and of its characters: “Super H2O”,H2O,” “Gota Borralheira”, “Gotucho”, “Ratantan”,Borralheira,” “Gotucho,” “Ratantan,” “Dr. Gastão”o,” “Cauã, “Cauã”, “Denis”, “Gabi”, “Iara”, “Denis,” “Gabi,” “Iara,” “Sayuri” and “Cadu”.“Cadu.”
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We have also filed applications with the INPI for registration of the following trademarks: “Somos Águanominative and composite (name + logo) trademark: “Sani”; “Água Viva Sabesp”; “Somos Água Somos Amazônia Sabesp”“Sabesp 50 anos”; and “Hydria Sistema Sabesp”“3S Sabesp.” Additionally, we also filed applications with the Escola de Belas Artes da UFRJ for registration of copyright for the character ‘Sani’.
Patents
We have twofive patents granted by the INPI: (i) a device for the removal of supernatants during the sewage treatment process, and (ii) a rotary device used to clean water reservoirs transported by trucks with high-pressure hydrojetting systems.systems, (iii) a bubble removal system, autonomous microlaboratory, and use of an autonomous microlaboratory to monitor water quality, together with USP, (iv) a chemical composition sensor, its fabrication process and its use to measure pH in microfluid systems, together with USP, and (v) water leakage detection equipment: method and simulation bench for leakage in lines, together with FAPESP and UNESP.
We have also filed fifteentwelve patent applications for the following additional devices or inventions, currently awaiting the INPI’s decisions, some of which have been jointly filed with certain Brazilian universities as a result of our cooperation agreements with these institutions:
· | a biofilter odor control unit; |
· | a modular system for the treatment of sanitary sludge and process using this system; |
· | a box for installation of water | ||
· | a three-phase separator for UASB reactors with | ||
·
| a fluid turbidity analysis system and method for fluid turbidity analysis; | ||
· | a device for sewage collection wells; | ||
· | a device for water meters installation; |
· | water leakage detection equipment patent applications, jointly filed with FAPESP and
· method and system for analyzing and providing a quality index for a noise correlator; · automatic frequency band selection process and system in noise correlation for leak detection; and · system and process for estimating leakage noise propagation speed and delay in at least one | |
· | a water collection device, device installation kit and process and water sample collection method; and | |
· | one more patent application that is in the confidentiality period. |
In addition to these Brazilian patent applications, we also filed threetwo international patent applications under the Patent Cooperation Treaty (“PCT”)., which are in the process of registration in the European Union.
For more information on our cooperation agreements with Brazilian universities and FAPESP, see “Item 5. Operating and Financial Review Prospects—C. Research and Development, Patents and Licenses, etc.—Research and innovation.”
Software
We have adopted an internal policy that provides for an active and effective audit and prevention of unauthorized software use. We have acquired the software licenses for all our workstations.
We have also developed certain computer programs for management and control of water and sewage treatment facilities, as well as for third-party services management, called “AQUALOG” (Control Water Treatment Plants), “SGL” (Bid Management System), “SCORPION” (Software to Operational Control), “Electronic Price Quotation,” “PREGÃO SABESP ONLINE,” “SISDOC” (Document Control System), “system for analyzing the metrological behavior of water meters,” “MPLT” (Standardized Model of Technical Report), “SGH” (Hydrometry Management System), “SIA” (Audit Information System), “NETCONTROL” (Automation System of Sanitary Control Laboratories), “SAN” (Navigation Support System), “online software for managing specific articles published in the DAE engineering journal,” “Dashboard panel,” “COP” (Online Control of Water Losses), “GEL” (Power Management System), “CADGEO,” “LIGGEO,” “Intellectual Property Management System,” “SOE” (Business Organization System), “Application for Predicting the Concentration of Cyanobacteria through Artificial Intelligence”,Intelligence,” “Sabesp PM Mobile”,Mobile,” “Sabesp Decision Support System - SSD”,– SSD,” Frequency Band for Leakage Noise Correlators (BAFCORV) and “Hydria Sabesp” -– Specialist System for the management and control of the water treatment process and Electric energy management system.
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Among them, we highlight:
· | AQUALOG is a software designed to monitor water treatment through the employment of artificial intelligence. In 2001, we completed the first rendering of services based on the AQUALOG software to a third party with the automation of a water treatment plant in the city of Jaguará do Sul, State of Santa Catarina. We have entered into an agreement to license the software to Sanesul, in the state of Mato Grosso do Sul and to Teuto’s drugs factory, in the city of Anapólis, state of Goiás; |
· | SGL is an electronic price quotation system that allows us to view and control all bid and acquisition proceedings in real time; |
· | CADGEO and LIGGEO are computer programs used to locate the water and sewage infrastructure in times of installation, maintenance or expansion in real time via satellite; |
· | “Application for Predicting the Concentration of Cyanobacteria through Artificial Intelligence,” is an application that was developed as a result of a joint research project by us, FAPESP and the Federal University of São Paulo (Universidade Federal de São Paulo– |
· | “Sabesp PM Mobile” is a mobile application to register and assist our technicians in monitoring and managing asset maintenance activities; |
· | Frequency Band for Leakage Noise Correlators |
· | “Sabesp Decision Support System |
We have also registered all of these programs at the INPI.
Domain Names
We own the domain names described below, which have been registered with the relevant entity in Brazil, Registro.br:
· www.sabesp.com.br;
·www.revistadae.com.br; and
· www.revistadae.com.br.Sabesp2via.net.
Environmental Matters
Considering the multidisciplinary nature of sanitation services, in addition to elaborating a corporate climate strategy, we also undertake several initiatives aimed at preserving the environment. Our current corporate strategy places sustainability as essential to our business, and environmental fronts and initiatives have gained strength and have reflected our commitment to proactively address the most current environmental and climate challenges.
Our environmental management is inherent toin the provision of our services and the essence of our business. Our performance is guided by the standards established in our environmental policy, which isand monitored by the Environmental Committee, which allows us to plan in an integrated manner andto ensure the sustainability of our operations. Our environmentWith the recent organizational restructuring, the environmental licensing process for works and projects, which was previously decentralized among our various business areas, has been centralized in a single department, enabling a global overview that covers all phases of the process, from conception to decommissioning of facilities. Additionally, our management is based on two pillars of action: (i)compliance with the conditions of the environmental licenses has also been incorporated into this area. For more information about our organizational restructuring, see “Item 4.A. History and Development of the Company—Corporate Organization.”
This centralized management brings us several benefits. By concentrating the licensing process in a single area, we enhanced the efficiency of our management, standardized and simplified procedures, and optimized internal communication. This also provides a more comprehensive and integrated perspective of activities, enabling a more strategic and consistent approach to environmental issues. Additionally, by incorporating the management of compliance with environmental license conditions, we reinforce our commitment to legal compliance and improvement of operational facilities; and (ii) spreading a culture of cherishing the environment among our stakeholders. We prioritize the internal and external dissemination of knowledge and experience on the best environmental practices. Thus, we promote corporate environmental management programs that rely on the involvement of collaborators, the communities we service and partnerships with non-governmental organizations.sustainability.
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Although this centralized management brings us benefits, it is essential to ensure effective communication between the different areas involved to guarantee that processes are conducted in a transparent and integrated manner. The training of the team responsible for environmental licensing is also crucial to ensure they have the necessary expertise to conduct these activities efficiently.
In order to consolidate our environmental culture, we have an Environmental Corporate Management Superintendency and Environmental Management Teams allocated in our business units.
We have the following ongoing environmental management programs:programs allocated to the Environmental, Regulatory and Sustainability corporate areas.
Management of climate issues such as:
· |
· | Corporate |
· | Corporate |
· |
· | Management of our institutional representation in the |
· |
· | The progressive implementation and maintenance of the Environmental Management System |
· |
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· | Corporate |
To provide technical support for environmental programs, we carry out corporate training on topics related to environmental management. This initiative aims to promote continuous professional development with specific content aimed at strategic, management and operational teams.
In addition to corporate environmental management actions, we have several projects and initiatives underway to benefit the environment, such as actions to protect water springs, projects for the rational use of water, reuse of effluents, projects for the use of photovoltaic energy and biogas as a vehicle fuel,fuels, as well as other environmental projects focused on the engagement of the population at large.
We are alsoa signatory of the United Nations Global Compact, and supportssupport the 17 United Nations Sustainable Development Goals which aimsand maintain a partnership with the United Nations Framework Convention on Climate Change (UNFCCC). These initiatives aim to stimulate actions in areas of crucial importance to humanity, the planet, countries and companies, including the companies.enhancement of sanitation services for the preservation of the environment, quality of life and the mitigation of climate change.
Climate Change Regulations: Reduction of Greenhouse Gases (GHG) Emissions
We are required to comply with laws and regulations related to climate change, including international agreements and treaties to which Brazil is signatory. It is worth noting that the State Decree No. 65,881 of 07/20/2165,881/2021 provides for the State of São Paulo’s adhesion to the “Race to Zero” and “Race to Resilience” campaigns, which aims, among other issues, to reduce greenhouse gasGHG emissions and promote climate resilience.
This decree establishes, among other aspects, that the Climate Action Plan 2050 must be approved, within 12 monthsbeing developed by the State of São Paulo government, which will likely include benchmark targets for several sectors, including the enactment of this decree, whichsanitation sector, must include intermediate goals for the reduction of greenhouse gasGHG emissions defined by the Kyoto Protocol for the years 2030 and 2040 andwith the neutralizationobjective of gradually implementing actions to achieve neutral net emissions by 2050.
TheAt the state level, we are also subject to the State Policy on Climate Change infor the State of São Paulo (Law No. 13,798/2009), regulated by Decree No. 55.947/2010, is under review by68,308/2024. At the Secretariat of Infrastructure and Environment offederal level, we are subject to the State of São Paulo.
The National Climate Change Policy (Law No. 12,187/2009) is also in force,, regulated by Decree No. 9,578/2018.
Considering that sanitation activities may be directly impacted by weather conditions and extreme climate events, we developed a Corporate Program for the Management of Greenhouse Gas Emissions, that includes activities to quantify emissions in annual corporate inventories of GHG, in addition to the incentive to mitigate the emissions in business activities. Several actions were already implemented within the ambit of this program.
Our corporate risk management process covers climate risks and is integrated with our business strategy, which includes disclosure practices for these risks, as well as a corporate governance structure aligned with the highest market standards.
Accordingly, the improvement of our climate plan is part of our strategy, as mentioned in the initiatives, and is an evolutionary process that includes aspects related to governance, strategy, risk management, and GHG metrics. We are in the process of preparing a diagnosis to align current practices with the guidelines of the Task Force on Climate-related Financial Disclosures (Força-Tarefa para Divulgações Financeiras relacionadas às Mudanças Climáticas).
In 2021,2024, we concluded the corporate inventory of greenhouse gasesGHGs for 2020,2023, thus totaling 1417 inventories since 2007. We notedOur GHG emissions inventories for 2023 and 2022 confirmed that the trend observed in the previous inventories persists, specifically that activities regarding sewage collection and treatment remainactivities (arising from internal activities or processes), are our largest sourcesmain source of greenhouse gasGHG emissions, representing approximately 92%accounting for 77.5% of our total greenhouse gas emissions. Electric energy represents approximately 7%annual GHG emissions in the year ended December 31, 2023, and 91.8% in the year ended December 31, 2022. Furthermore, electricity accounted for 4.55% of our total annual GHG emissions in the year ended December 31, 2023, and 5.7% in the year ended December 31, 2022, while other activities representaccounted for approximately 1%.17.94% in the year ended December 31, 2023, and 2.5% in the year ended December 31, 2022.
We are more efficientimprove our efficiency as we increase our service rates to the population in the municipalities where we operate. Regarding theIn respect of sewage, we expect an increase in the organic loads and, accordingly, in the biogas generation, waste in the treatment plants and GHG emissions, as we increase the flows that are treated. On the other hand, sanitation activities directly contribute to the reduction of GHG emissions in the aquatic ecosystem, which enables usis aligned with the Climate Action Plan 2050. In addition to remove an averagethe benefits of approximately 1 million tonsreducing GHG emissions resulting from the expansion of CO2, that would likely be released annually intosewage treatment systems, we are also searching for less carbon-intensive alternatives to expand the environment in the event the sewage generated by the population were discharged without any treatment.
Studies are under development to define the corporate targetsavailable actions for the reduction of GHG emissions, aimingemissions.
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In order to enhanceimprove our medium and long-term strategy, we are currently in the various current actions that are in lineprocess of organizing bids for a consulting service to develop a plan for reducing GHG emissions. This plan is aligned with the global guidelines and the Climate Plan that is being developed byState Decree No. 65,881, which outlines the State of São Paulo, as mentioned above. EndeavoringPaulo’s adherence to the reduction in the GHG emissions,UN campaigns “Race to Zero” and “Race to Resilience.”
As part of our Corporate Program for the Management of Greenhouse Gas Emissions, include the following actions:
·the optimizationwe have already implemented and planned a series of the operations in the sewage treatment plants;
·the expansionactions aimed at reducing GHG emissions. Some of the beneficial use of biogas and generated sludge;these actions include:
· | the use of complementary technologies and the optimization of the operations in sewage treatment plants; |
·the expansion of the use of renewable energy sources and alternative fuels; and
· | the expansion of the beneficial use of biogas and generated sludge; |
·the offset of CHG emissions through the intensification of forest conservation and restoration activities.
· | the expansion of the use of clean and renewable energy sources and alternative fuels; and |
· | the offset of GHG emissions through the intensification of forest conservation and restoration activities. |
Among the actions that have already been implemented, or are being implemented, we highlight some examples, as described in the paragraphs below:below.
Regarding the use of energy generation potential, our Distributed Generation Program – Photovoltaic Energy is being implemented, with completion expected in 2023 and totaling 60 MW of power, distributed in 30 locations.
Considering thatAlthough Brazil’s electricity generation mainly consists of clean sources derived from hydroelectricity, this composition is subject to variation, which may contribute to the worsening of the greenhouse effect and climate change due to associated GHG emissions. As our activities can be categorized as electricity-intensive, we have widely discussed the topic of energy. Despite the large proportion of renewable energy sources in Brazil’s electricity generation network (87.4% for the provision of basic sanitation services,year ended December 31, 2023), we are committed to contributing to the energy consumption is of great importance, our strategy for more efficient energy management is based on reducing expenses and consumption of electricity andtransition by taking advantage of generation potential, bringing several environmental benefits.
Our Distributed Generation Program – Photovoltaic Energy is being implemented, with completion expected in 2023 and totaling 60 MW of power, distributed in 30 locations. Considering that energy consumption is an important element in the provision of basic sanitation services, our strategy of more efficient energy management is based on reducing expenses and consumption of electricity and taking advantage of generation potential, bringing several environmental benefits.
A further initiative we have employed isincreasing the use of incentivized energy sources in the ACL, and implementing energy efficiency actions, including technologies such as pump-as-turbine and the replacement of equipment and installations for more energy efficient alternatives.
In 2022, incentivized energy from ACL represented five percent (5%) of our energy consumption, and for the year ended December 31, 2023, we increased this to 14% due to our purchases in the ACL market and what we produced in our distributed power generation program (Programa de Geração Distribuída – Energia Fotovoltaica). Our distributed power generation program started operating 11 more photovoltaic power generation plants, totaling 16 operating plants in the municipalities of Orindiúva, Elias Fausto, Euclides da Cunha, Monte Alto, Gastão Vidigal, Paraguaçu Paulista, Suzano, Tremembé, Mirante do Paranapanema, Campina do Monte Alegre, Fernandópolis, Bernardino de Campos, Presidente Prudente, Eugênio de Melo, Assis, and Jales with a total generation capacity of 19,5 MW. The implementation of this program is scheduled to be completed in 2025, with an estimated generation capacity of 60 MW. We also use solar energy in other operational processes such as theradio data transmission, of data from reservoirs via radio, flow measurement systems in Sewage Treatment Plants,wastewater treatment plants, effluent disinfection systems, lighting for administrative unit headquarters, and a floating photovoltaic power plant project.
Another important sustainability initiative, aimed at reducing GHG emissions, is the production of our administrative headquarters, thermosolar systemsagricultural compost, Sabesfértil,” from sludge from a wastewater treatment plant in the municipality of Botucatu. Similar projects for the optimizationuse of the sludge drying processes from Sewage Treatment Plants and studies for the installation of floating photovoltaicwastewater treatment plants are under development at our other plants.
In order to optimize vehicle fleet management, we structured
The use of a Corporate Fleet Renewal Program, resulting in an 96% reduction in GHG emissions from this source. Additionally, we use partportion of the biogas generated at the Sewage Treatment Plant in the MunicipalityFranca wastewater treatment plant for the production of Franca to produce vehicularvehicle fuel to supply part of our fleet in that Municipality, whichthe municipality is another importantnotable initiative that contributeswith positive results in reducing GHG emissions. Additionally, we have initiatives and projects to cover sewage treatment anaerobic lagoons to capture and burn the generated biogas, in order to minimize GHG emissions. Projects for methane reduction in wastewater treatment plants, including the implementation of energy recovery for the self-generation of electricity, are also under development. The development of a small hydro generator for wastewater treatment plants is also part of our ongoing research.
In the coastal region, we are developing a system for the solar drying of wastewater treatment plant sludge with forced ventilation and mechanized mixing and fragmentation of the sludge. A similar project is already in operation in a wastewater treatment plant located in the central-west region of the state.
We are also implementing actions in the management of our corporate vehicle fleet aimed at sustainability. To optimize our fleet management, we opted for continued use leasing contracts, and through the fleet renewal program, 97.1% of light vehicles and 73.5% of heavy vehicles were replaced. One of the great benefits achieved by this initiative was the reduction of annual gasoline consumption from 3.2 million liters in 2011 to around 89 thousand liters for the year ended December 31, 2023, resulting in a 97% reduction in GHG emissions. In this context,We have also contracted a sustainable corporate mobility strategic plan 2030 for the adoption of vehicles powered by sustainable fuels.
We also adopt some discretionary measures, as the maintenance and restoration activities of forest reserves carried out by us in addition to climate adaptation, alsowhich play an important role in carbon sequestration and storage, in order to contribute to the reduction in the greenhouse effect. Of note is the preservation of around 44,00049,000 hectares within conservation units, with nine thousand hectares of water mirrorsfloods areas and 35,00039,000 hectares of rain forest, where the main metropolitan springs are located. We also own the São Francisco Reserve inserted in the Serra do Mar State Park, in São Sebastião, on the northern coast, with 2,580,971.00 square meters, in order to protect the São Francisco system catchment.
As part of the process of cultural change, we have instituted awareness-raising and training activities on the subject of climate change through training sessions and content provided in courses aimed at internal and external audiences.
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Ratifying our commitment to this global agenda, in 2020 we joined the São Paulo Environmental Agreement, an initiative of the Secretary ofSecretariat for Environment, Infrastructure and EnvironmentLogistics of the State of São Paulo, which recognizesrecognized the signatories as part of a community of leaders in climate change, with a special focus on sustainable development. We were also part ofmaintain a partnership with the 26th United Nations ConferenceFramework Convention on Climate Change COP26, reaffirmingsince 2021, when we participated in COP 26 in Scotland, in COP 27 in Egypt, and in COP 28 in Dubai, where we reaffirmed our commitment to climate and sustainability issues.
Based on the priorities defined by our management and the creation of our sustainability and corporate governance superintendence (Superintendencia de Sustentabilidade e Governança Corporativa) in May 2023, our first endeavor 100% dedicated to this topic, we are currently further developing our corporate ESG strategy, including the improvement of our corporate climate strategy and related issues.
The management of greenhouse gasGHG emissions involves costs and expenses related to the implementation of more rigorous control mechanisms, the adoption of pollution prevention measures and actions to minimize the generation of these gases. We have been seeking subsidized financing to cover part of these costs.costs, that may increase over the years.
If these measures affect our costs of operations, we may not be able to pass them on to final consumers.
SeeFor more information, see “—Tariffs.”
Since our financial performance is closely linked to climate patterns that influence the qualitative and quantitative availability of water, extreme weather conditions may cause adverse effects on our business and operations. Long-term effects of extreme weather conditions cause significant alterations in the physical environment that may create unfavorable circumstances, which could affect our operations.
Droughts also lower reservoir levels available for hydroelectric plants, which may lead to power shortages, particularly since hydroelectric power accounts for most of Brazil’s electric power supply. Lack of electric energy could lead to instability in water supply and sewage collection and treatment services, which could damage our reputation and operation. In addition, because we arethis is one of the largest consumersbiggest costs of electricity in the state of São Paulo,production, a potential increase in electricity tariffs due to a shortage of hydroelectric power could have a significant economic impact on us. Our strategy to address climate change is divided ininto two main actions: (i) adaptative actions to increase water security and adaptative resilience to potential effects of extreme events; and (ii) management of GHG emissions, consisting of quantification and monitoring of emissions and implementation of mitigating measures, as mentioned above. For more information about the impacts that climate change has on our activities, see “Item 3.D. Risk Factors—Risks Relating to Our Business— Environmental Matters and Physical and Transition Climate Risks—Extreme Weather Conditions and Climate Change may have a material adverse impact on our business, financial condition or results of operations.”
With regard to the risk of reduced water availability, we are working to adapt to a new scenario of water scarcity due to the risks associates with the effects of climate change through initiatives such as the identification of opportunities to increase our effectiveness, resilience and flexibility of our water treatment and supply systems, as well as to increase the capacity of our water reservoirs, the expansion of water conservation practices and alternatives to management demand as the Program for Reduction of Water Loss, the Program for Rational Water Usage, Corporate Environmental Education ProgramPEA and the expansion of the planned reutilization of effluents for urban and industrial purposes, maintenance of reserves and forest restoration projects, among others.
For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Business— Environmental Matters and Physical and Transition Climate Risks—New laws and regulations relating to climate change and changes in existing regulation may result in increased liabilities and increased capital expenditures, which could have a material adverse effect on us.” andAnd “Item 3.D. Risk Factors—Risks Relating to Our Business—Environmental Matters and Physical and Transition Climate Risks—Extreme Weather Conditions and Climate Change may have a material adverse impact on our business, financial condition or results of operations.”
Public Bidding Procedures
The relevant rules for public bidding in relation to our activities are provided by Federal Law No. 14,133/2021 (“New Bidding Law”), Federal Law No. 8,987/1995 (“Concession Law”) and Federal Law No. 11,079/2004 (“PPP Law”). Other local laws on public procurement may also be applicable.
Pursuant to the Federal PublicNew Bidding Law, the public bid process commences with publication by the granting body, entity or administrative unit through which the government acts (the “Public(“Public Administration”) in athe federal, state or municipal official newspaper, as the case may be, and another leading Brazilian newspaper.gazette. The publication announces that the Public Administration will carry out a public bidding contest pursuant to provisions set forth in an edital (invitation to bid). The invitation to bid must specify, among other terms: (i) the purpose, duration and goals of the bid; (ii) the participation of bidders, either individually or forming a consortium; (iii) a description of the qualifications required for adequate performance of the services covered by the bid; (iv) the deadlines for the submission of the bids; (v) the criteria used for the selection of the winning bidder; and (vi) a list of the documents required to establish the bidder’s technical, financial and legal capabilities.
The invitation to bid is binding on the Public Administration. Bidders may submit their proposals either individually or in consortia, as provided for in the invitation to bid. After receiving proposals, the Public Administration will evaluate each proposal according to the following main criteria (among others), which must have been set forth in the invitation to bid:
·the technical quality of the proposal;
·lowest cost or lowest public service tariff offered;
·a combination of the criteria above; or
·the largest amount offered in consideration for a concession.
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· | the technical quality of the proposal; |
· | lowest cost or lowest public service tariff offered; |
· | a combination of the criteria above; or |
· | the largest amount offered in consideration for a concession. |
Currently, Brazilian government-owned and mixed capital companies such as us must comply with Law No. 13,303/2016 when conducting public bidding procedures and contracting third parties. Law No. 13,303/2016 also established new corporate governance rules to be followed. Our Internal Bidding and Contracting Regulations were published in June 2018, contemplating the new legal guidelines.guidelines introduced by Law No. 13,303/2016.
The provisions of State Law No. 6,544/1989, of November 2, 1989 as amended or the (“State Public Bidding Law,Law”), parallel the provisions of the Federal Public Bidding Law.federal rules on public procurement. The Federalfederal and Statestate public bidding laws on public procurement will apply to us in the event that we seek to secure new concessions.
Moreover, these bidding lawsrules set by Law No. 13,303/2016 currently apply to us with respect to obtaining goods and services from third parties for our business operations or in connection with our capital expenditure program, in each case subject to certain exceptions.
Additionally, the New Legal Framework for Basic Sanitation, enacted on July 16, 2020 and which amended the Basic Sanitation Law, No. 11,445/2007, introduced the need for bidding for the provision of basic sanitation services by a company which is not a subsidiary of the holder of public services. This will lead to our increased participation in bidding procedures in order to expand our market share.
Water Usage
State law establishes the basic principles governing the use of water resources in the stateState of São Paulo in accordance with the State constitution. These principles include:
· | rational utilization of water resources, ensuring that their primary use is to supply water to the population; |
· | optimizing the economic and social benefits resulting from the use of water resources; |
· | protection of water resources against actions which could compromise current and future use; |
· | defense against critical hydrological events which could cause risk to the health and safety of the population or economic and social losses; |
· | development of hydro-transportation for economic benefit; |
· | development of permanent programs of conservation and protection of underground water against pollution and excessive exploitation; and |
· | prevention of soil erosion in urban and rural areas, with a view to protecting against physical pollution and silting of water resources. |
Among other instruments established by the State Water Policy, Law No. 7,663 of December 30, 7,663/1991, the competent public authority grants for the right to use water for the implementation of any enterprise that demands the use of surface or underground water resources (for water collection and release of effluents), as well as for the execution of services that alter the regime or quality of such water resources. In the case of rivers under the federal government’s domain (rivers(interstate rivers, crossing more than one state), ANA is the public authority which grants the authorization. With respect to the rivers under a state’s domain, the applicable state authority has jurisdiction to grant the right of use. In the stateState of São Paulo, DAEE is the public authority responsible for granting such authorizations.
State Law No. 12,183/2005, which was enacted on December 29, 2005 established the basis for charging for the use of the water resources under the domain of the State of São Paulo. To apply suchState Law No. 12,183/2005 establishes the basis for charging for the law providesuse of water resources in the state of São Paulo. The criteria for among other provisions,calculating the participationamount of the River Basins Committees,charge are proposed by the formulation of criteria by suchriver basin committees, the creation of basin agencies and the organization of a registered list of water resource users. The basin committee’s proposals regarding the criteria to calculate the amounts to be charged at each basin must be approved bysubmitted for approval to the State Water Resource Councilstate water resources council and formalized by a specific decree issued by the Governor of the State Governor.of São Paulo.
In accordance with current legislation, the river basin committees prepare and approve rules and criteria for the implementation of the charge,charges, and the National Water Agency, and the Department of Water and Electric Energy and the Basin Agencies (Agências da Bacia) are authorized to charge users, likesuch as us, for the capture of water collection or releasedischarge of effluents into water bodies.
The state of São Paulo has a total of 21 river basin committees, four of which operate in basins that extend across more than one state, classified as interstate. Charging for the use of water is inresources has already been implemented by all river basin state committees. Among the process of gradual implementation by the State of São Paulo, where the largest individual contributors are located, and it is a management tool of the Policy on Water Resources to promote the rational use of water and finance programs and actions established by theinterstate river basin plans. In 2021, we paid approximately R$105.7 million for the use of water resources.
Charging for the use of water from rivers of federal domain began in 2003 in the Paraíba do Sul basin, andcommittees, charging for the use of water from riversresources has already been established in two of state domain began in 2007 inthem and one has the Paraíba do Sul, Piracicaba, Capivari and Jundiaí basins. Subsequently,implementation of charges were implementedscheduled for 2025, while the other does not yet have a clear schedule on when it will start charging for water use.
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For the year ended December 31, 2023, we paid approximately R$102.4 million for the use of water from the Sorocabacollection and Médio Tietê, Baixo Tietêdischarge into federal and Baixada Santista river basins. In 2014, charges were implemented for the use of water from the Alto Tietê river basin, and in 2016, from the Tietê / Batalha, Tietê / Jacaré and Ribeira de Iguape river basins. In 2017, charges were implemented for the use of water from the Sapucaí Mirim/Grande, Baixo Pardo/Grade, Mogi Guaçu and Pardo river basins. In 2018, the charge of the Turvo Grande/Médio Paranapanema/Pontal do Paranapanema was implemented. In 2019, charges were implemented for the use of water in the Alto Paranapanema river basins. In 2021, the charge started at the São José dos Dourados Committee and the process to charge in the North Coast watersheds will start in 2022. With the conclusion of the North Coast process, the State of São Paulo will have the charge implemented in all UGRHIs – Water Resources Management Units within the scope of state watershed committees. In the State of São Paulo there are still four Federal committees, namely PCJ, Paraíba do Sul, Grande and Paranapanema, and the charge is implemented in two, PCJ and Paraíba do Sul. As for the others, there is still no forecast for their implementation.state-controlled rivers.
Water Quality
Attachment XX of the Consolidation Administrative Rule No. 5 from September 28, 2017, issued by the Ministry of Health of the federal government, provides the standards for potable water for human consumption in Brazil. This rule is similar to the U.S. Safe Drinking Water Act and the regulations enacted by the U.S. Environmental Protection Agency, which establishes rules for sampling and limits related to substances that are potentially hazardous to human health.
In compliance with Brazilian law, the physical-chemical, organic and bacteriological analyses carried out for water quality control must follow several national and international standards, such as: Standard Methods for the Examination of Water and Wastewater from the institutions such as the American Public Health Association, (APHA), American Water Works Association (AWWA)AWWA and Water Environment Federation (WEF);Federation; United States Environmental Protection Agency (EPA);Agency; standards published by the International Standardization Organization (ISO);Organization; and methodologies proposed by the World Health Organization (WHO).WHO.
Decree No. 5,440/2005 provides that the quality of water must be disclosed to consumers. We have been complying with this regulation by publishing the required information in monthly bills and annual reports delivered to all consumers that we serve.
Environmental Regulation
The development, implementation and operation of water and sewage systems are subject to federal, state and municipal laws and regulations on environmental and water-resource protection.
The NationalCONAMA and the Federal Environmental CouncilAgency (ConselhoInstituto Nacional dedo Meio Ambiente e dos Recursos Naturais Renováveis – “IBAMA”), or the CONAMA, is are the federal agencyagencies responsible for the regulation of potentially polluting activities. In the stateState of São Paulo, CETESB is the governmental entity responsible for the control, supervision, monitoring and licensing of polluting activities, pursuant to State Law No. 997/1976, modified by State Law No. 9.477/1996, as amended by State Decree No. 8,468/1976 and its amendments.
The control and environmental planning instruments are defined by several legal instruments, such as State Law No. 997/1976, regulated by Decree No. 8,468/1976 and its amendments, which regulates environmental pollution control and establishes the standards for discharge of effluents at state level; CONAMA Resolution No. 05/1988, which requires licensing of sanitation projects that cause significant alterations to the environment; Supplementary Law No. 140/2011, which regulates (i) environmental licenses; (ii) federal, state and local jurisdiction over environmental issues; (iii) the list of activities subject to licensing; and (iv) environmental impact studies and reports; State Law No. 9,509/1977,1997, regulated by State Decree No. 47,400/2002, which outlines the state environmental policy; CONAMA Resolution No. 357/2005, amended by CONAMA Resolution No. 430/2011, which establishes the standards for discharge of effluents; and DAAEDAEE (São Paulo State Department of Water and Electricity) Ordinance No. 1,630/2017 and ANA Resolution No. 1,941/2017, which regulate the concession of grants for the right to use water and interfere in water resources on the State and federal level, respectively; and CONAMA Resolution 302/2002, which establishes the mapping of an Environmental Plan for the Conservation and Use of the Surroundings of Artificial Reservoirs (Plano Ambiental de Conservação e Uso do Entorno de Reservatórios Artificiais, or PACUERA) – “PACUERA”) for public supply projects focused on environmental licensing as a way of making use and preservation compatible. In addition, the Brazilian Forestry Code (Law No. 12,651/2012) establishes the requirement to maintain permanent preservation areas, in certain cases covered with natural vegetation, surrounding water springs and reservoirs, due to their environmental importance as sources of water security, geologic stability, biodiversity and soil nutrition. Our reservoirs were in operation prior to this legal requirement, and accordingly only new reservoirs are subject to PACUERA.
As forEnvironmental Licensing
According to Federal Law No. 6,938/1981, the construction, installation, expansion and operation of enterprises and activities that use natural resources, that are effectively or potentially polluting, or that are capable, in any case, of causing environmental damages, requires prior environmental licensing. In the State of São Paulo, State Law No. 997/1976 sets forth the main principles and obligations regarding environmental licensing and concessions of water and sewage treatment plants and pumping stations, we have corporate programs in progressthe State level.
Pursuant to obtain and maintain the legal requirements to comply with these regulations. See “—Environmental Matters.” We also have a Corporate Program for Environmental Recovery Commitment Terms (Programa Corporativo de Termos de Compromisso de Recuperação Ambiental), which includes obligations for forest restoration for environmental compensation, where necessary.
We use and protect an area of approximately 44 thousand hectares in total within conservation units, as defined inSupplementary Law No. 9,985/2000,140/2011, IBAMA (as the competent federal environmental agency) is mainly responsible for the environmental licensing of activities and enterprises (i) located or developed jointly in Brazil or neighboring countries or 2 or more States; (ii) located or developed in the territorial sea, continental platform or exclusive economic zoning, indigenous lands or Federal protected areas; and (iii) considered of military interest or that involve nuclear energy. The law also establishes that the municipal environmental authorities are only authorized to oversee the environmental licensing of activities and enterprises with 9 thousand hectares of water mirrors and 35 thousand hectares ofa strictly local environmental impact or that are in protected areas surrounding water sources, thus protectingcreated by the main water-producing systemsmunicipality. For any other enterprises or activities, the state environmental agency is responsible of issuing the São Paulo metropolitan region. It should be noted that in the case of the Cantareira System, the Environmental Protection Area (Área de Proteção Ambiental, or APA) management plan for the Cantareira System was recently approved through Decree No. 65,244 of October 14, 2020.required environmental licenses (residual competence).
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The licensing process usually is composedconsists of three stages, including the following licenses which can be renewed:
· | preliminary license – granted in the planning stage, approving the location and concept and attesting to the project’s environmental feasibility; |
· | installation license – authorizing the beginning of works for the installation of the project, subject to compliance with approved plans, programs and projects, including environmental control measures and other necessary technical requirements; and |
· | operation license – authorizing the operation of a unit or activity, subject to compliance with the technical requirements contained in the installation license. |
ProjectsEnvironmental licenses are valid for a limited period and must be periodically renewed. As a rule, renewal requests for operational license must be filed up to 120 days prior to the expiration date, so that the validity of the environmental license is automatically extended until the environmental authority’s decision and/or issuance of the renewed license. Furthermore, environmental licenses usually stipulate technical conditions, with significantthe purpose of mitigating the environmental impact are subject toimpacts associated with the licensed enterprise/activity. Compliance with such technical conditions is a requirement for the validity of the environmental license.
The environmental licensing requires the drafting of specific studies prepared by multidisciplinary teams that present a series of recommendations focused on minimizing the environmental impact. Projects with significant environmental impact are subject to an Environmental Impact Assessment and Environmental Impact Report (Estudo de Impacto Ambiental e Relatório de Impacto Ambiental) and, as per Federal Law No. 9,985/2000, an environmental offset must be paid (with the minimum amount being half a percent of the estimated total implementation costs). These studies are then submitted for analysis and approval by the government authorities.
ItThe development, installation, operation and/or expansion of effectively or potentially polluting activities without a valid environmental license or without compliance to its technical conditions constitute an administrative infraction and an environmental crime, subject to applicable administrative and criminal penalties, in addition to the obligation to repair any environmental damage in the civil sphere. The applicable administrative sanctions include the immediate suspension of works/activities and daily or simple fines ranging from R$500.00 to R$10,000,000.00. The maximum amount has historically only been applied in extreme cases where the lack of the environmental license is noteworthy that weassociated with major environmental impact and/or risks to human health. If the absence of a valid environmental license is associated with the occurrence of environmental damage, environmental civil liability may also apply, jointly and severally with all those liable and regardless of fault and/or intent.
We have corporate programs in progress to obtain and maintain the environmental licenses and concessions for our water and sewage treatment plants and pumping stations to comply with these regulations. Our Corporate Program for Obtaining and Maintaining Licenses for Water Treatment Plants, Sewage Treatment Plants and Sewage Pumping Stations (Programa Corporativo de Obtenção e Manutenção de Licenças de Estações de Tratamento de Água, Estações de Tratamento de Esgotos e Estações Elevatórias de Esgotos), in orderassists us to meet the requirements of the licensing authority, in addition to structuring operations for the renewal and maintenance of these licenses. For that purpose, we have a program, approved by CETESB, related to the operational licenses of the Sewage Pumping Stations. For more information, see “Item 4.B. Business Overview—Environmental Matters.”
We also have a Corporate Program for Environmental Recovery Commitment Terms (Programa Corporativo de Termos de Compromisso de Recuperação Ambiental), which covers forest restoration for environmental compensation, where applicable.
We are also structuringdeveloping a similar program for the Water Treatment Plantsour water treatment plants and the Sewage Treatment Plants,our sewage treatment plants, which arestarted in their final stage of conclusion,2022 and is expected to end in 2027, according to the CETESB Executive Officers’ Resolution 012/2022/C,,of January 28, 2022, that approved thean Adequacy Program of Water Treatment Plants (“ETAs”) and ETEs in the State of São Paulo.
Use of Water Resources
According to Federal Law No. 9,433/1997, any use of water resources that may impact the natural system, quantity or quality of water in water bodies requires prior authorization. Consequently, our use of water resources (such as water supply and/or effluent discharge) requires a water grant and/or formal waiver, provided that all legal requirements are met.
The authority responsible for issuing the water grant depends on the domain of the water body, for example, whether it is under Federal or State domain. If the water body falls under Federal domain, the ANA is responsible, and the Sewage Treatment Plantslegal requirements are outlined in Federal Law No. 9,433/1997 and ANA’s Resolution No. 1,941/2017. For water bodies under the domain of the State of São Paulo, State.the Department of Water and Electrical Energy (Departamento de Águas e Energia Elétrica) is the responsible authority, and the legal requirements are outlined in DAEE’s Ordinance No. 1,630/2017.
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Noncompliance with the applicable law regarding the use of water resources may result in environmental liabilities, such as administrative infraction and environmental crime, without prejudice to the obligation to indemnify eventual damages caused to the environment. At the administrative federal level, sanctions can range from simple warning, the application of fines ranging from R$100.00 to R$50,000,000.00 and the prohibition of the source of use of water resources, which may indirectly impact related developed activities. This amount can be doubled in the event of a repeat offense. In addition, water pollution may subject the offender to fines ranging from R$5,000.00 to R$50,000,000.00.
Sewage Requirements
State law sets forth regulations regarding pollution control and environmental preservation in the stateState of São Paulo. According to this law, in areas in which there is a public sewage system, all effluents of a “polluting source” must be discharged to such system, as is the case for industrial enterprises. It is the responsibility of the polluting source to connect itself to the public sewage system. All effluents to be discharged are required to meet the standards and conditions established by the applicable environmental law, which allows such effluents to be treated by our treatment facilities and discharged in an environmentally safe manner. Effluents that do not comply with such criteria are prohibited from being discharged into the public sewage system. State legislation also establishes that liquid effluents, except those related to basic sanitation, be subjected to pre-treatmentpretreatment so that they meet the required mandatory levels before being discharged into the public sewage system. Effluents from our treatment facilities must comply with effluent limitation guidelines and meet the water quality standards of the receiving water bodies established by federal and state legislation. SeeFor more information, see “—Sewage Operations—Sewage System.”
The CETESB is authorized under State law to monitor discharges of effluents into the water bodies, among other things. The CETESB also issues the environmental licenses to the polluting sources, including sewage treatment plants. For more information, see “—Environmental Matters.”
State and federal water resource legislation establishes the charging of fees for the discharge of treated effluents into water bodies. This charge is already in effect in the majority of river basins. SeeFor more information, see “—Environmental Matters—Water Usage.”
Especially Protected Areas or Spaces
We use and protect an area of approximately 49 thousand hectares in total within conservation units, as defined in Law No. 9,985/2000. This includes 9 thousand hectares of water bodies and 39 thousand hectares of protected areas surrounding water sources, effectively protecting the main water-producing systems of the São Paulo metropolitan region. For the Cantareira System, the management plan for the Environmental Protection Area (Área de Proteção Ambiental) of the Cantareira System was approved through Decree No. 65,244/2020.
Environmental Liabilities
From the perspective of environmental civil liability, any individual or legal entity that directly or indirectly causes any damage to the environment through action or omission may be held liable to remedying it. Federal Law No. 6,938/1981 sets forth the strict liability standard in the civil sphere, which is applied regardless of the existence of fault or intent. Evidence of any connection between the damage and the enterprise or activity of a particular party is sufficient to trigger its obligation to remedy the environmental damage.
Moreover, environmental civil liability is applied jointly and severally to all parties directly or indirectly involved in the activity that led to environmental damage. Therefore, if multiple parties are responsible for the damage, the party with greater financial resources may be forced to remedy all the damage, but it retains the right to seek recourse against the other responsible parties, either through contractual agreements or by demonstrating before the courts that the environmental damage or loss was attributable to the other party.
It is also possible to pierce the corporate veil whenever it presents an obstacle for the recovery of environmental damages in the civil sphere, with no requirement to prove fraud or improper use of the legal entity. The failure to remediate the environmental damage, for example, is sufficient to allow the piercing of the corporate veil. In such cases, the shareholders can be held personally liable in the civil sphere for environmental damages.
There is no limit to the amount that the courts may award to cover the costs of repairing the damage, or, if the damage is irreparable, to compensate for the environmental damage. Furthermore, a recent precedent set forth by the STF has eliminated statutes of limitation for lawsuits seeking reparation or compensation for environmental damage.
In the administrative sphere, any action or omission that violates legal regulations related to the usage, enjoyment, support, protection, and restoration of the environment constitutes an environmental administrative infraction as per the Federal Decree No. 6,514/2008, regardless of whether an environmental damage has occurred.
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The specifics of the penalties vary significantly depending on the administrative infraction, its severity and the economic capacity of the wrongdoer. Apart from single and daily fines, other administrative penalties, such as the following, may apply: (i) warnings; (ii) restriction of rights; (iii) seizures of products/byproducts and closure of facilities; (iv) prohibition to enter into contracts with public entities; (v) suspension of any relevant permits; (vi) suspension of any financial or fiscal benefits; and (vii) full or partial suspension of activities.
According to a significant jurisprudence of the STJ, administrative environmental liability is subjective, holding only those who effectively cause the infraction accountable.
Environmental criminal liability is subjective, personal, and non-transferable. Criminal sanctions applicable to legal entities include (i) fines; (ii) penalties restricting rights, consisting of partial or total suspension of activities, temporary interdiction of establishment, work or activity and prohibition of contracting with the public authorities, as well as obtaining subsidies or donations from public authorities; and, (iii) provision of services to the community, consisting of funding environmental programs and projects, carrying out works to restore degraded areas, maintaining public spaces, and contributions to public environmental or cultural entities.
The criminal liability of legal entities does not exclude that of natural persons who are authors, co-authors or participants in the same act. Directors, administrators, members of the board of directors and technical body, auditors, managers, representatives and agents of a legal entity can also be held responsible, facing imprisonment of 1 to 6 months, or fines, or both penalties cumulatively.
Lending Limits of Brazilian Financial Institutions
CMN Resolution No. 4,995/22 dated as of March 24, 2022, which replaced CMN Resolution No. 4,589/17 dated as of June 29, 2017, which replaced CMN Resolution No. 2,827/2001 dated as of March 30, 2001, as amended, limits the amount that Brazilian financial institutions may lend to public sector companies such as us. Financing of projects which are put up for international bid and any financing in reais provided to the Brazilian counterpart of such international bids are excluded from these limits.
Scope of Business
State Law No. 12,292/2006, dated as of March 2, 2006, and amended by State Law No. 119/1973, dated as of June 29, 1973, which created our Company,us, authorizes us to provide water and sewage services outside the stateState of São Paulo (in other states of Brazil and other countries). This law also authorizes us to own interests in other public or private-public companies and Brazilian or international consortia. In addition, this law permits us to incorporate subsidiaries and enter into a partnership with or acquire interests in a private company with a corporate purpose related to the sanitation business.
In connection with the scope of our services, State Supplementary Law NoNo. 1.025/2007 amended State Law No. 119/1973 and expanded the range of services that we can render, with the inclusion of urban rainwater drainage and management, urban cleaning and solid waste management, as well as power generation, storage, conservation and sales activities, for our own or third-party use.
C. | Organizational Structure |
Not applicable.
D. | Property, Plant, Equipment, Intangible Assets and Contract Assets |
Our principal property, plant and equipment comprise administrative facilities which are stated at historical costs less depreciation. The reservoirs, water treatment facilities, water distribution networks consisting of water pipes, water transmission lines, water connections and water meters, sewage treatment facilities, and sewage collection networks consisting of sewer lines and sewage connections are recorded as contract assets and intangible assets (concession assets). As of December 31, 2021,2023, we operated through 88,90493,163 kilometers of water pipes and water transmission lines and 61,12263,635 kilometers of sewer lines. As of the same date, we operated 246235 water treatment facilities and 578596 sewage treatment facilities, (includingincluding eight ocean outfalls),outfalls, as well as 16 water quality control laboratories.
As of December 31, 2021,2023, the total net book value of our property, plant and equipment, intangible assets and contract assets (including concession assets) and contract assets was R$45,345.151,880.6 million.
All of our material properties are located in the stateState of São Paulo.
ITEM 4A. | UNRESOLVED STAFF COMMENTS |
Not applicable.
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ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our audited financial statementsConsolidated Financial Statements included elsewhere in this annual report. The financial statementsConsolidated Financial Statements included elsewhere in this annual report have been prepared in accordance with IFRS as issued by the IASB. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in “Risk“Item 3.D. Risk Factors.”
In the following discussion, references to increases or decreases in any period are made by comparison with the corresponding prior period, except as the context otherwise indicates.
All financial information for the year ended December 31, 2023 was prepared on a consolidated basis, while all financial information for the years ended December 31, 2022 and 2021 was prepared on an individual basis because we had no subsidiaries to consolidate in those years.
A. Operating and Financial Review and Prospects Overview
As of December 31, 2021,2023, we operated water and sewage systems in the stateState of São Paulo, including in the city of São Paulo, Brazil’s largest city. Our operations extended into a total of 375 Municipalities,376 municipalities, or 58% of all Municipalitiesmunicipalities in the state. We also provided water services and accounted for on a wholesale basis to two Municipalitiesmunicipalities located in the São Paulo metropolitan region in which we did not operate water distribution systems. In December 2018 and July 2019, we entered into agreements with the Municipalities of Guarulhos, Santo André and Mauá, respectively, and began operations in these Municipalities for the direct supply of water and sewage services in January 2019, August 2019 and November 2020, respectively.
The São Paulo metropolitan region, which includes the city of São Paulo, is our most important service region. With a total population of approximately 21.3 million, the São Paulo metropolitan region accounted for 70.7%, 70.7% and 73.4% of our operating revenue in 2021, 2020 and 2019 (excluding revenues relating to the construction of concession infrastructure), respectively. As of December 31, 2021, 66.5% of the concession intangible assets reflected on our balance sheet were located in this region. In an effort to respond to demand in the São Paulo metropolitan region, we have concentrated a major portion of our capital expenditure program to expand the water and sewage systems and to increase and protect water sources in this region. Our capital expenditure program is our most significant liquidity and capital resource requirement.
Since December 11, 2023, we started providing water and sewage services in Olimpia, through our wholly-owned subsidiary Sabesp Olimpia S.A. As a result, we started to present our financial information on a consolidated basis starting with our 2023 Consolidated Financial Statements. Prior to that date, we did not have any subsidiaries whose results we consolidated on a line by line basis.
Factors Affecting Our Results of Operations
Business Drivers and Measures
General Factors Affecting our Business
Our results of operations and financial condition are generally affected by our ability to raise tariffs, control costs and improve productivity, general economic conditions in Brazil and abroad, climate conditions, impacts of regulation for sanitation services, global and local catastrophes and health epidemics such as COVID-19 and extreme weather events.
In 2015, our business was significantly affected by the most severe drought recorded in our service area in the previous 80 years. Heightened public awareness of the need to conserve water during the crisis resulted in our customers adopting lower water consumption practices during the water crisis and these practices have been partially integrated into our consumers’ daily habits. As a result of this new behavior, the volume of water billed to our clients did not return to the volume of water billed before the water crisis in 2013. This change in consumption practice as a result of the 2014-2015 water crisis has had a continued negative effect on our results of operations since the 2014-2015 crisis.
In 2020 and to a lesser extent in 2021, the COVID-19 pandemic significantly impacted economic activity and markets around the world. Its severity, magnitude, duration and its impacts are uncertain, rapidly changing and difficult to predict. The economic reopening due to the progress in vaccinations and increase in commodity prices supported the growth in the Brazilian GDP of 4.6% in 2021. On the other hand, the high and persistent inflation rate caused by the disruptions in the supply chains worldwide and the increase in electricity tariffs due to droughts in Brazil is affecting the economy and increasing interest rates.
In the event of a significant devaluation of the real in relation to the U.S. dollar or other currencies, our ability to meet our foreign currency denominated obligations could be adversely affected because our tariff revenue and other sources of income are denominated solely in reais. In addition, as we have debt denominated in foreign currencies, any significant devaluation of the real will increase our financial expenses as a result of foreign exchange losses that we must record. AAccordingly, a devaluation of the real may adversely affect us and the market price of our common shares or ADSs. In December 2023, our Board of Directors approved our Hedging Policy, which is available on our website but is not incorporated herein, and in April 2024, we entered into derivative instruments (plain vanilla swaps), effective from April 2024 until December 2024, to fully protect us against a devaluation of the real against the U.S. dollar or the Yen. For more information with respect to our foreign currency risk, see Note 5.1(a) to our 2021 financial statements.2023 Consolidated Financial Statements.
In the second quarter of 2020 and partially in 2021, the State of São Paulo state government decreed a quarantine throughout the State, restricting business activities in order to avoid the accelerated spread of COVID-19. WeAs a result, we experienced a direct impact on revenues as a consequence of the change in the consumption mix, due to the increase in volumes in the residential category and a reduction in the public, commercial and industrial categories which have higher tariffs, leading to a reduction in the total average tariff, in addition to increases in delinquencies, which continued through 2021. Accordingly, thesetariff. These changes in consumption patterns impacted the total volume of water billed and the average tariff, which had ana negative impact on our revenues and results of operations.
operations in 2021.
With COVID-19 vaccines becoming more broadly available, many employees have returnedAlthough restrictions imposed to on-site work. However, we cannot guarantee that future developments regardingcontain the spread of COVID-19 or the emergence of new variants will not resultwere lifted in a return to remote working arrangements and the closure of non-essential commercial, industrial, as well as public, establishments, which would affect adversely our revenues. In addition, several2022, various companies announced that they would continue to employadopt partial remote working arrangements which could result in a new consumption pattern.regimes. This also could affect our revenues sinceaffected the tariffs charged to customers in the residential category are lower thanvolume of sales in the commercial, industrial and public categories. For more information aboutcategories in 2022 which would have been higher had it not been for the partial remote working policies adopted by these companies. However, for the year ended December 31, 2023, the consumption mix largely returned to pre-COVID-19 levels, thus no longer impacting our revenues. In addition, the adverse macroeconomic impact of the COVID-19 outbreak has over our operations, see “Item 3.D. Risk Factors—Risks Relatingpandemic in Brazil had a detrimental impact on many parts of Brazilian society and led to Our Business—Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the outbreak of COVID-19.”
In addition, we continued to experience increased delinquencies in 2021. In 2021,which negatively impacted our results of operations. Our allowance for doubtful accounts increased by R$198.9 million, which represents an increase of 44.7%21.5% for the year ended December 31, 2022, compared to the same period of 2020. For more information on delinquencies, see Note 10(c)in 2021. However, we did not experience the same effects in the year ended December 31, 2023 as our allowance for doubtful accounts decreased by 16.5% compared to the same period in 2022. See Notes 10 (Trade receivables) and 29 (Operating costs and expenses) to our financial statements2023 Consolidated Financial Statements included in this annual report.
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Effects of Tariff Increases
Our results of operations and financial condition are highly dependent on tariff increases for our water and sewage services. Since the enactment of the Basic Sanitation Law in 2007, as a general rule, regulatory agencies are severally responsible for setting, adjusting and reviewing tariffs, taking into consideration, among other factors, the following:
factors:
· | political considerations arising from our status as a state-controlled company; |
· | anti-inflation measures enacted by the federal government from time to time; |
· | impacts of the New Tariff Structure, which was postponed |
· | impacts of health epidemics such as COVID-19; and |
· | when necessary, the readjustment to maintain the original balance between each party’s obligation and economic gain (equilíbrio econômico-financeiro) under the agreement. |
Readjustment of our tariffs continues to be set annually and dependdepends on the parameters established by the Basic Sanitation Law and ARSESP. The guidelines also establish procedural steps and the terms for annual adjustments. The annual adjustments must be announced 30 days prior to the effective date of the new tariffs. SeeFor more information, see “4.B. Business Overview—Tariffs.”
The following table sets forth, for the years indicated, the percentage increase of our tariffs, as compared to three inflation indexes:
Year ended December 31, | Year ended December 31, | Year ended December 31, | ||||||||
2021 | 2020 | 2019 | 2023 | 2022 | 2021 | |||||
Increase in average tariff(1) | 7,00% | 3.4026% | 4.72% |
9.56% |
12.80% | 7.00% | ||||
Inflation – IPC – FIPE | 9,73% | 5.62% | 4.40% |
3.15% |
7.32% | 9.73% | ||||
Inflation – IPCA | 10,06% | 4.52% | 4.31% |
4.62% |
5.79% | 10.06% | ||||
Inflation – IGP-M | 17,78% | 23.14% | 7.30% |
(3.18)% |
5.45% | 17.78% |
(1) | See “Item 4.B. Business Overview—Tariffs” for addition information on tariff increases. |
Sources: | Central Bank, Fundação Getulio Vargas (“FGV”), |
On March 17, 2022,April 6, 2023, ARSESP releasedpublished Resolution No. 1,278 providing for1,394/2023 related to the Extraordinary Tariff Review and Resolution No. 1,395/2023, which presented the new tariffs and authorized us to apply a total tariff readjustment of 9.5609% to our current tariffs. This tariff adjustment of 12.8019%, consisting of: (i) inflation of 10.5437% accrued between February/2021 and February/2022, measured according to the IPCA index; (ii) efficiency factor (Factor X) to be discounted by 0.2142%; (iii) compensatory adjustment of 2.3932%; and (iv) IGQ 2020 to be discounted by 0.1490%. The new tariff charts will becomebecame effective on May 10, 2022.
2023. On April 8, 2024, ARSESP published Resolution No. 1,514, which authorized a total tariff readjustment of 6.4469% to our current tariffs, starting on May 10, 2024.
Effects of Brazilian Economic Conditions
As a company with all of its operations in Brazil, our results of operations and financial condition are affected by general economic conditions in Brazil, particularly by the economic activity and the inflation rate. For example, the general performance of the Brazilian economy may affect our cost of capital and inflation may affect our costs and margins. The Brazilian economic environment has been characterized by significant variations in economic growth rates. However, as our product is viewed as essential, in normal conditions our sales revenue demonstrates stability.
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General Economic Conditions
In 2019, Brazilian GDP increased 1.1% in comparison with 2018. Brazil’s trade surplus in 2019 was US$46.6 billion and at year-end the country had US$356.9 billion in currency reserves. The average unemployment rate in Brazil in 2019 was 11.9%.
In 2020, Brazilian GDP decreased 4.1% in comparison with 2019. Brazil’s trade surplus in 2020 was US$50.9 billion and at year-end the country had US$355.62 billion in currency reserves. The average unemployment rate in Brazil in 2020 was 13.9%.
In 2021, Brazilian GDP increased 4.6%5.0% in comparison with 2020. Brazil’s trade surplus in 2021 was US$61.2 billion and at year-end the country had US$ 330.9362.2 billion in currency reserves. The average unemployment rate in Brazil in 2021 was 11.1%14.0%.
According to the Focus Market Readout of March 4,In 2022, Brazilian GDP is expected to increase 0.42%increased 2.9% in comparison with 2021. Brazil’s trade surplus in 2022 was US$61.8 billion and at year-end the country had US$324.7 billion in currency reserves. The average unemployment rate in Brazil in 2022 was 9.6%.
For the year ended December 31, 2023, Brazilian GDP increased 2.9% in comparison with 2022. Brazil’s trade surplus for 2022the year ended December 31, 2023 was US$98.8 billion and according toat year-end the IMF projection, dated September 22,country had US$355.0 billion in currency reserves. The average unemployment rate in Brazil for the expected growth is 0.3%year ended December 31, 2023 was 7.8%.
Interest Rates
As a political monetary instrument of the federal government, the SELIC rate influences the behavior of other interest rates in the country, including the rates related indebtedness denominated in local currency. The SELIC rate has historically been high. However, a series of rate reductions in 2018, brought the SELIC rate down to 6.50% as of December 31, 2018. In 2019 the SELIC rate decreased to 4.50% and in 2020, in response to the COVID-19 outbreak, COPOM further reduced the SELIC target rate to 2.00%. Subsequently, it gradually increased, reaching 13.75% in the first half of 2023. Since then, the SELIC rate has been gradually increased,decreased, reaching 11.75%10.75%, where it remains as of the date of this annual report.
We have not contracted any derivative financial instruments or any hedging instruments to mitigate interest rate fluctuations.
Inflation
Inflation affects our financial performance by increasing our costs of services rendered and operating expenses. Part of our real-denominated debt is directly indexed to take into account the effects of inflation. Additionally, we are exposed to the mismatch between the inflation adjustment indices of our loans and financing and those of our receivables. Water supply and sewage service tariffs do not necessarily follow the increases in inflation adjustment and interest rates affecting our debt. We cannot assure you that our tariffs will be increased, in future periods, to offset, in full or in part, the effects of inflation.
Inflation adjustments derive from collections from or payment to third parties, as contractually required by law or court decision, and are recognized on an accrual basis. Inflation adjustments included in these agreements and decisions are not considered embedded derivatives, since they are deemed as inflation adjustments for us. See Notes 3.19,3.21, 5.1 and 2930 of the financial statementsour 2023 Consolidated Financial Statements for the impacts of inflation adjustments on our financial performance and debt.
Currency Exchange Rates
We had total foreign currency-denominated indebtedness of R$3,296.12,745.9 million as of December 31, 2021,2023, of which R$359.1249.8 million relates to the current portion of our long-term foreign currency-denominated obligations. In the event of significant devaluations of the real in relation to the U.S. dollar or other currencies, the cost of servicing our foreign currency-denominated obligations would increase as measured in reais, particularly as our tariff and other revenue is based solely in reais. In addition, any significant devaluation of the real will increase our financial expenses as a result of foreign exchange losses that we must record. In 2019, the 4.0% depreciation of the real against the dollar and the 5.3% depreciation of the real against the Yen led to a foreign exchange loss of R$234.0 million. In 2020, the 28.9% depreciation of the real against the dollar and the 35.7% depreciation of the real against the Yen led to a foreign exchange loss of R$2,180.2 million. In 2021, the 7.4% depreciation of the real against the dollar and the 3.9% appreciation of the real against the Yen led to a foreign exchange gain of R$48.5 million. In 2022, the 6.5% appreciation of the real against the dollar and the 18.4% appreciation of the real against the Yen led to a foreign exchange gain of R$492.3 million. For the year ended December 31, 2023, the 7.2% depreciation of the real against the dollar and the 13.5% appreciation of the real against the Yen led to a foreign exchange gain of R$310.7 million. However, since most of our debt denominated in foreign currencies is long-term debt with a long amortization schedule, a devaluation of the real would principally impact cash flows regarding the current portion of our long-term debt.
We manage our indebtedness portfolio closely to decrease the cost of servicing our indebtedness as a whole and our exposure to exchange rate fluctuations. We do not have any exposure to derivatives tied to foreign currencies. However, we have certain external financing contracts that contain clauses that allow the replacement of the foreign currency with our domestic currency.
The following table shows the fluctuation of the real against the U.S. dollar, the period-end exchange rates and the average exchange rates as of or for the years indicated:
Year ended December 31, | Year ended December 31, | Year ended December 31, | ||||||||
2021 | 2020 | 2019 | 2023 | 2022 | 2021 | |||||
(in reais, except percentages) | (in reais, except percentages) |
(in reais, except percentages) | ||||||||
Depreciation (appreciation) of the real versus U.S. dollar(1) | 7.39% | 28.93% | 4.02% | (7.21)% |
(6.50)% | 7.39% | ||||
Period-end exchange rate – US$1.00 | 5.5805 | 5.1967 | 4.0307 | 4.8413 |
5.2177 | 5.5805 | ||||
Average exchange rate – US$1.00(2) | 5.3956 | 5.1578 | 4.1096 | 4.9953 |
5.1653 | 5.3956 |
(1) | Represents the comparison with period-end exchange rate. Source: Central Bank. |
(2) | Represents the average for period indicated. |
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The following table shows the fluctuation of the real against the Yen, the period-end exchange rates and the average exchange rates as of or for the years indicated:
Year ended December 31, | Year ended December 31, | Year ended December 31, | ||||||||
2021 | 2020 | 2019 | 2023 | 2022 | 2021 | |||||
(in reais, except percentages) | (in reais, except percentages) | (in reais, except percentages) | ||||||||
Depreciation (appreciation) of the real versus Yen(1) | (3.89%) | 35.75% | 5.33% | (13.52)% | (18.36)% | (3.89)% | ||||
Period-end exchange rate – ¥1.00 | 0.0485 | 0.0504 | 0.0371 | 0.0342 | 0.0396 | 0.0485 | ||||
Average exchange rate – ¥1.0(2) | 0.0491 | 0.0484 | 0.0377 | 0.0356 | 0.0395 | 0.0491 |
(1) | Represents the comparison with period-end exchange rate. Source: Central Bank. |
(2) | Represents the average for period indicated. |
DuringIn the years ended December 31, 2021, 20202023, 2022 and 20192021, we did not enter into any forward exchange transactions.
In April 2024, we entered into derivative instruments (plain vanilla swaps), effective from April 2024 until December 2024, to fully protect us against a devaluation of the real against the U.S. dollar or the Yen.
For furthermore information on exchange rates, see “Item 3.D. Risk Factors—Risks Relating to Brazil—Exchange rate instability and developments and the perception of risk in other countries, especially in the United States and in emerging market countries, may adversely affect us, our foreign currency denominated debt and the market price of our common shares or ADSs and our ability to service our foreign currency denominated obligations” and “Item 5.B. Liquidity and Capital Resources—Indebtedness Financing—Financial Covenants.”
Effects of Extreme Weather Events
The southeastern region of Brazil, particularly the southern region of the state of Minas Gerais, the PCJ River Basin (from which we extract the water used in the Cantareira System), and the northern area of the São Paulo metropolitan region, experienced below average rainfall from late 2012 throughout 2014 and most of 2015. During the October 2015 – March 2016 rainy season, the level of rainfall in the region returned to the normal levels expected for the period. Improved rainfall in the rainy season that began in October 2015, the collaborative efforts between us and the population we serve and emergency construction works conducted by us throughout 2014 and 2015 to combat the water crisis, resulted in a partial restoration of the water levels of the Cantareira system. As of December 31, 2021, the reservoirs in the São Paulo metropolitan region, where our largest market is located, contained 743.4 million m3 of water storage for treatment, compared to 913.1 million m3 available for treatment as of December 31, 2020. The measurements for these years do not include the technical reserve of 287,5 million m³.
In order to balance supply and demand despite restricted water availability, we adopted a series of measures from February 2014 until April 2016. The heightened public awareness
In February 2023, there were torrential rains on the northern coast of the need to conserve water duringState of São Paulo, especially in the crisis resultedmunicipality of São Sebastião, where we operate. Within 24 hours, 683mm of rain fell in our customers adopting lower water consumption practices during the water crisis and these practices have been partially integrated into our consumers’ daily habits.municipality of São Sebastião. It was the highest volume of rainfall recorded in Brazil within such a short period of time since records began. As a result, our water treatment plants in the total volume of water billed to our clients did not return to the volume of water billed in 2013, sinceregion were damaged, and the water crisis hadsupply was interrupted for a strong impact onnumber of days, the consumer profile, which did not returninability to its former state beforestore water, and lack of electricity. If similar incidents occur in the crisis. This change in consumption practice asfuture or become more frequent, these events may have a result of the 2014-2015 water crisis has had a continuedmaterial adverse effect on our results of operations since the 2014-2015 crisis.and financial condition.
The 2020-2021 water season which ended in September 2021 had a lower-than-average rainfall comparedAccording to the expected long-term average. The Cantareira System received 70,4%National Meteorological Institute (Inmet), Brazil experienced nine heatwaves in 2023, as a result of the expected volume, whileimpacts of the Alto TietêEl Niño phenomenon (above-average warming of the waters of the Equatorial Pacific Ocean), which tends to increase temperatures in various regions of the planet, as well as increase the global temperature of the earth's and ocean’s surface.
Extreme events such as heat waves, usually followed by torrential storms, can interrupt the electricity supply at our water pumping and treatment plants, due to trees falling on the electricity distribution networks, preventing the full production of water for supply to our consumers. In addition, torrential rain destabilizes the soil and can damage our water distribution networks.
Considering the existing structure, which enables the transfer of treated water between the producing systems of the Integrated Water Supply System received 71.6%of the Metropolitan Region of São Paulo, we are able to implement measures to re-establish and the Guarapiranga System received 76.8%. The water inflows were also below averagemaintain regularity in the three main systems that supplydistribution of water to serve our consumers. However, if similar incidents occur in the São Paulo metropolitan region, with the Alto Tietê system recording inflows close to its minimum historic levels between Aprilfuture or become more frequent, these events could have an adverse effect on our operating results and to September.
financial situation.
For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Business— Environmental Matters and Physical and Transition Climate Risks—Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations” and “Item 4.B. Business Overview—The 2014-2015 Water Crisis.”
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Critical Accounting Estimates and Judgments
We make estimates and judgments concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and judgments that have a significant risk of causing material adjustment to the carrying amount of our assets and liabilities within the next financial year are mentioned below.
Allowance for Doubtful Accounts
We establish an allowance for doubtful accounts in an amount that our management considers sufficient to cover expected losses, based on an analysis of trade receivables, in accordance with the accounting policy stated in Note 3.43.5 to our financial statements2023 Consolidated Financial Statements as of December 31, 20212023 and 20202022 and for the years ended December 31, 2021, 20202023, 2022 and 2019.2021. Bad debt expense, net of recoveries, is included in selling expenses, and was R$643.7652.9 million, R$444.8782.1 million and R$128.1643.7 million for the years ended December 31, 2021, 20202023, 2022 and 2019,2021, respectively.
The methodology for determining the allowance for doubtful accounts requires significant estimates, considering a number of factors, including historical collection experience, current economic trends, expected future losses, the aging of the trade receivables portfolio, recoveries of previously written off receivables and other factors. Actual results could differ from those estimates.
Intangible Assets Arising from Concession and Program Contracts
As of December 31, 2021,2023, we had intangible assets of R$36,503.844,012.9 million and contract assets of R$8,550.17,393.1 million.
We recognize intangible assets arising from concession contractsagreements under IFRIC 12. We estimate the fair value of construction and other work on the infrastructure to recognize the cost of the intangible asset, which is recognized when the infrastructure is built and provided that it will generate future economic benefits. The great majority of our contracts for service concession arrangements entered into with each grantor is under service concession agreements in which we have the right to receive, at the end of the contract, a payment equivalent to the asset balance of the concession intangible asset, which, in this case, is amortized over the useful life of the underlying physical assets; thus, at the end of the contract, the remaining value of the intangible would be equal to the residual value of the related physical asset.
The fair value of construction and other work on the infrastructure is recognized as revenue, at its fair value, when the infrastructure is built, provided that this work is expected to generate future economic benefits. The accounting policy for the recognition of construction revenue is described in Note 3.3 “Operating Revenue”3.4 (Operating Revenue) to our financial statements.2023 Consolidated Financial Statements.
Intangible assets related to concession agreements and program contracts, when there is no right to receive the residual value of the assets at the end of the contract, are amortized on a straight-line basis over the period of the contract or the useful life of the underlying asset, whichever is shorter.
The recognition of fair value for the intangible assets arising on concession contractsagreements is subject to assumptions and estimates, and the use of different assumptions could affect the carrying amounts of these assets. The amortization of intangible assets and estimated useful lives of the underlying assets also requires significant assumptions and estimates which different assumptions and estimates, and changes in future circumstances, could affect amortization of intangible assets and remaining useful lives of the underlying assets and can have a significant impact on the results of operations.
Provisions and Contingent Liabilities
We are a party to a number of legal proceedings involving significant monetary claims. These legal proceedings include, among other types, disputes with customers and suppliers and tax, labor, civil, environmental and other proceedings. For a more detailed discussion of these legal proceedings, see Note 20 to our financial statements2023 Consolidated Financial Statements included in this annual report. We recognize provisions for legal proceedings in which our company has a present obligation as a result of past events (either due to an explicit agreement or duty, known as a legal obligation; or due to our past actions, known as a constructive obligation), it is probable that an outflow of resources embodying economic benefits will be necessary to settle the obligation and the amount of obligation can be estimated reliably. Therefore, we are required to make judgments regarding future events for which we often seek the advice of legal counsel. As a result of the significant judgment required in assessing and estimating these provisions, actual losses realized in future periods could differ significantly from our estimates and could exceed the amounts which we have provisioned.
As of December 31, 2021,2023, we were party to judicial and administrative proceedings, relating to civil, environmental and tax matters, amounting to R$1,448.5 million1.8 billion (after deducting court escrow deposits in the amount of R$32.0132.8 million) with respect to which we recognized provisions based on the criteria described above, as shown in Note 3.143.16 to our financial statements2023 Consolidated Financial Statements included in this annual report. As of the same date, the proceedings with respect to which we haveDecember 31, 2023, claims classified as contingent liabilities (i.e., no provisions have been recognized) totaledamounted to R$52,623.1 million,55.2 billion, of which R$10.1 billion relate to claims where we believeclassified the risk of loss as possible and R$44,228.3 million out45.1 billion relate to claims where we classified the risk of thoseloss as remote. In our financial statements, we only disclose information about contingent liabilities we classified as possible loss and do not record or disclose information related to remote contingencies. For further information, see “Item 3.D. Key Information—Risk Factors—Risks Relating to our Business—Any substantial monetary judgment against us or any of our directors and officers in legal proceedings may have a remote probability of an outflow of resources embodying economic benefits exists.material adverse effect on our reputation, business or operating or financial condition and/or results.”
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Pension Benefits
The present value of the pension obligations depends on a number ofseveral factors that are determined on an actuarial basis using a few assumptions. Besides the number of assumptions. Theemployees, the assumptions used in determining the net cost (income) for pensions include a discount rate and a mortality table. Any changes in these assumptions will impact the carrying amount of pension obligations.
We determine the appropriate discount rates at the end of each year, which is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. The discount rate was increaseddecreased from 3.07% in 20206.15% for the year ended December 31, 2022 to 5.26% in 20215.37% for the year ended December 31, 2023 under Plan G0 and was increaseddecreased from 3.44% in 20206.19% for the year ended December 31, 2022 to 5.53% in 20215.47% for the year ended December 31, 2023 under Plan G1 in order to follow the volatility in the rates applicable to the Brazilian Governmentgovernment NTN – B, long term notes, which term is similar to the duration of the pension benefits, as described in Notes 3.19 (a)3.20(a) and 22 to our financial statements2023 Consolidated Financial Statements included in this annual report. The discount rate was increased from 5.26% in 2021 to 6.15% in 2022 under Plan G0 and was increased from 5.53% in 2021 to 6.19% in 2022 under Plan G1 in order to follow the volatility in the rates applicable to the Brazilian government NTN – B, long term notes, which term is similar to the duration of the pension benefits, as described in Notes 3.19(a) and 22 to our 2022 Consolidated Financial Statements.
Other key assumptions for pension obligations are based in part on current market conditions. Additional information on the pension plans under Plan G0 and G1 is disclosed in Note 22 to our financial statements2023 Consolidated Financial Statements included in this annual report.
Deferred income tax and social contribution
We recognize and settle taxes on income based on the results of operations verified according to the Brazilian Corporate Law, taking into consideration the provisions of the tax laws. We recognize deferred tax assets and liabilities based on the differences between the accounting balances and the tax bases of assets and liabilities.
We regularly review the recoverability of deferred tax assets and do not recognize deferred tax assets if it is probable that these assets will not be realized, based on historic taxable income, the projection of future taxable income and the estimated period to reverse temporary differences. This process requires the use of estimates and assumptions. The use of different estimates and assumptions could result in the non-recognition of a significant amount of deferred tax assets.
As of December 31, 2021,2023, we recognized R$98.1 million as deferred income tax assets, and 2020,as of December 31, 2022, we have recognized R$283.7 million and R$320.7189.3 million as deferred income tax liabilities, net of the deferred tax assets and liabilities, as disclosed in Note 19 to our financial statements2023 Consolidated Financial Statements included in this annual report.
Unbilled revenue
We recognize unbilled revenue which corresponds to services rendered for which readings have not been made yet. They are recognized based on monthly estimates calculated according to average billings. Additional information on revenue and accounts receivable are described in Notes 3.33.4, 3.5 and 10 to our financial statements2023 Consolidated Financial Statements included in this annual report.
Certain Transactions with our Controlling Shareholder
Reimbursement Due from the State
Reimbursement due from the State of São Paulo for pensions paid represent supplementary pensions (Plan G0) that we pay, on behalf of the State of São Paulo, to former employees of state-owned companies which merged to form our company. These amounts must be reimbursed to us by the State of São Paulo, as the primary obligor.
In November 2008, we entered into the third amendment to the agreement with the State of São Paulo relating to payments of pension benefits made by us on its behalf. The State of São Paulo acknowledged that it owed us an outstanding balance of R$915.3 million as of September 30, 2008, relating to payments of pension benefits made by us on its behalf. We provisionally accepted, but it is not recognized in our books, the reservoirs in the Alto Tietê Systemproduction system as partial payment in the amount of R$696.3 million, subject to the transfer of the property rights of these reservoirs to us. See Note 11 to our financial statements2023 Consolidated Financial Statements included in this annual report and “Item 7. Major Shareholders and Related Party Transactions.”
On March 18, 2015, we, the State of São Paulo and DAEE, with the intervention of the Department of Sanitation and Water Resources, executed an agreement in the amount offor R$1,012.3 million, consisting of R$696.3 million in principal amount and R$316.0 million in monetary adjustment of the principal through February 2015. For detailed information ondetails about this agreement, see “Item 7.B. Related Party Transactions—Agreements with the State”State of São Paulo” and Note 11(a)(iv)(vi) to our financial statements2023 Consolidated Financial Statements included in this annual report.
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As of December 31, 20212023 and 2020,2022, the amounts not recognized related to pension benefits paid by us on behalf of the State of São Paulo totaled R$1,375.11,583.4 million and R$1,281.41,482.1 million, respectively. As a result, we also recognized the obligation related to pension benefits, maintained with the beneficiaries and pensioners of Plan G0. As of December 31, 20212023 and 2020,2022, the pension benefit obligations of Plan G0 totaled R$2,192.12,098.6 million and R$2,549.52,002.1 million, respectively. For detailed information on the pension benefit obligations refer to Note 22 to our financial statements2023 Consolidated Financial Statements included in this annual report.
Accounts Receivable from the State of São Paulo for Water and Sewage Services Rendered
Certain of these accounts receivable have been overdue for a long period. We have entered into agreements with the State of São Paulo with respect to these accounts receivable. For furthermore information on these agreements, see Note 10 to our financial statements2023 Consolidated Financial Statements included in this annual report and “Item 7. Major Shareholders and Related Party Transactions.”
Use of Guarapiranga and Billings reservoirs
We withdraw water for use in the São Paulo metropolitan region from the Guarapiranga and Billings reservoirs. EMAE, a company that is also controlled by the State of São Paulo, has a concession to produce hydroelectric energy using water from the same reservoirs. EMAE commenced various lawsuits against us in the past seeking compensation for the water we withdraw from these reservoirs. Those lawsuits have now been settled, by way of an agreement between EMAE and our company.
The settlement agreement requires us to make certain installment payments to EMAE in settlement of the claim for compensation for our capture and use of the water, as well as apportionment of the maintenance, operation and monitoring costs for the reservoirs. For more information, see “Item 7. Major Shareholders and Related Party Transactions” and See Note 11(b) to our financial statements2023 Consolidated Financial Statements included in this annual report.
Results of Operations
The following table sets forth, for the years indicated, certain items from our income statements of operations, each expressed as a percentage of net operating revenue:
Year ended December 31, | ||||||||
2021 | 2020 | 2019 | ||||||
(in millions of reais, except percentages) | ||||||||
Net operating revenue | 19,491.1 | 100.0% | 17,797.5 | 100.0% | 17,983.7 | 100.0% | ||
Operating costs | (12,800.1) | (65.7%) | (11,179.6) | (62.8%) | (10,137.7) | (56.4)% | ||
Gross profit | 6,691.0 | 34.3% | 6,617.9 | 37.2% | 7,846.0 | 43.6% | ||
Selling expenses | (825.8) | (4.2)% | (751.3) | (4.2)% | (803.4) | (4.5)% | ||
Allowance for doubtful accounts | (643.7) | (3.3)% | (448.8) | (2.5)% | (128.1) | (0.7)% | ||
Administrative expenses | (1,124.1) | (5.8)% | (1,051.2) | (5.9)% | (1,187.9) | (6.6)% | ||
Other operating income (expenses), net and equity results of investments in affiliates | 0.2 | 0.0% | 121.8 | 0.7% | (15.0) | (0.1)% | ||
Profit from operations before finance income (expenses) and income tax and social contribution | 4,097.6 | 21.0% | 4,492.4 | 25.2% | 5,711.6 | 31.8% | ||
Financial result, net | (927.4) | (4.8)% | (3,166.4) | (17.8)% | (1,033.7) | (5.7)% | ||
Profit before income tax and social contribution | 3,170.2 | 16.3% | 1,326.0 | 7.5% | 4,677.9 | 26.0% | ||
Income tax and social contribution | (864.3) | (4.4)% | (352.7) | (2.0)% | (1,310.4) | (7.3)% | ||
Profit for the year | 2,305.9 | 11.8% | 973.3 | 5.5% | 3,367.5 | 18.7% |
Year ended December 31, | ||||||||
2023 | 2022 | 2021 | ||||||
Net operating revenue | 25,572.1 | 100.0% | 22,055.7 | 100.0% | 19,491.1 | 100.0% | ||
Operating costs | (16,051.9) | (62.8)% | (14,350.9) | (65.1)% | (12,800.1) | (65.7)% | ||
Gross profit | 9,520.2 | 37.2% | 7,704.8 | 34.9% | 6,691.0 | 34.3% | ||
Selling expenses | (984.1) | (3.8) % | (912.0) | (4.1)% | (825.8) | (4.2)% | ||
Allowance for doubtful accounts | (652.9) | (2.6)% | (782.1) | (3.5)% | (643.7) | (3.3)% | ||
Administrative expenses | (1,597.5) | (6.2)% | (1,398.5) | (6.3)% | (1,124.1) | (5.8)% | ||
Other operating income (expenses), net and equity results of investments in affiliates | 60.3 | 0.2% | 33.0 | 0.1% | 0.2 | 0.0% | ||
Profit from operations before finance income (expenses) and income tax and social contribution | 6,346.0 | 24.8% | 4,645.2 | 21.1% | 4,097.6 | 21.0% | ||
Financial result, net | (1,592.0) | (6.2)% | (372.4) | (1.7)% | (927.4) | (4.8)% | ||
Profit before income tax and social contribution | 4,754.0 | 18.6% | 4,272.8 | 19.4% | 3,170.2 | 16.3% | ||
Income tax and social contribution | (1,230.5) | (4.8)% | (1,151.5) | (5.2)% | (864.3) | (4.4)% | ||
Profit for the year | 3,523.5 | 13.8% | 3,121.3 | 14.2% | 2,305.9 | 11.8% |
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Year Ended December 31, 20212023 Compared to Year Ended December 31, 2020 2022
Net operating revenue
Net operating revenue for the year ended December 31, 2023 increased by R$1,693.63,516.4 million, or 9.5%15.9%, to R$19,491.125,572.1 million from R$22,055.7 million in 2021 from R$17,797.5 million in 2020.
As ofthe year ended December 31, 2021, net2022.
Net operating revenue, excluding construction revenue, for the year ended December 31, 2023 increased by R$1,033.42,779.9 million, or 7.3%16.2%, to R$15,114.319,971.8 million from R$17,191.9 million in 2021 fromthe year ended December 31, 2022. Construction revenue was R$14,080.95,600.3 million for the year ended December 31, 2023 compared to R$4,863.8 million in 2020. The construction revenue was R$4,376.7 million in 2021 and R$3,716.6 million in 2020.the year ended December 31, 2022. The main factors that led to the increase were:
· | ||
· | an average tariff adjustment of 9.6% since May 2023; | |
· | an increase of 3.0% in the total billed volume; and | |
· |
Operating costs
Our operating costs for the year ended December 31, 2023 increased by R$1,620.51,701.0 million, or 14.5%11.9%, to R$12,800.116,051.9 million from R$14,350.9 million in 2021 from R$11,179.6 million in 2020.the year ended December 31, 2022. As a percentage of net operating revenue, cost of services increaseddecreased to 65.7%62.8% for the year ended December 31, 2023 from 65.1% in 2021 from 62.8% in 2020.the year ended December 31, 2022.
The increase in operating cost was principallymainly due to the following factors:to:
· | an increase of R$ | |
· | an increase of R$ | |
· | an increase of R$ |
Gross Profit
As a result of the factors discussed above, gross profit for the year ended December 31, 20212023 increased by R$73.11,815.4 million, or 1.1%23.6%, to R$6,691.09,520.2 million from R$6,617.97,704.8 million in the same period of 2020.year ended December 31, 2022. As a percentage of net operating revenue, our gross profit margin decreasedincreased to 34.3%37.2% for the year ended December 31, 2023 from 34.9% in 2021 from 37.2% in 2020.the year ended December 31, 2022.
Selling Expenses
Selling expenses for the year ended December 31, 2023 increased by R$74.572.1 million, or 9.9%7.9%, to R$825.8984.1 million 2021 from R$751.3912.0 million in 2020.the year ended December 31, 2022. As a percentage of net operating revenue, selling expenses were 4.2% in 2021 and 4.2% in 2020.3.8% for the year ended December 31, 2023 compared to 4.1% for the year ended December 31, 2022. The main reasonreasons for the increase in selling expenses was (i) the increase of R$53.3 million in expenses with services, mainly with hydrometer readings and bill deliveries, in the amount of R$48.9 million; and (ii) an increase of R$7.2 million in depreciation, due to the increase in property, plant and equipment owned by us.were:
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· | an increase of R$40.0 million in costs with salaries, payroll charges and benefits and pension plan obligations, mainly due to the provision recorded for employees who joined the IDP in 2023; and | |
· | an increase of R$21.4 million in service expenses, mainly due to: (i) an increase of R$11.2 million in expenses for technical services to reduce water losses; and (ii) an increase of R$10.2 million in expenses related to credit recovery. |
Allowance for Doubtful Accounts
Our allowance for doubtful accounts increasedfor the year ended December 31, 2023 decreased by R$198.9129.2 million, or 44.7%16.5%, to R$643.7652.9 million from R$782.1 million in 2021 from R$444.8 million in 2020, mainly due to the increased delinquencies recorded in 2021.year ended December 31, 2022, as we (i) initiated more payment collections proceedings for customers with bad credits reports, (ii) entered into a greater number of credit recovery contracts, and (iii) held more Large credit campaigns (in August, September and December of 2023).
Administrative Expenses
Administrative expenses for the year ended December 31, 2023 increased by R$72.9199.0 million, or 6.9%14.2%, to R$1,124.11,597.5 million from R$1,398.5 million in 2021 fromthe year ended December 31, 2022, mostly as a result of the R$1,051.2177.0 million increase in 2020, mainlyexpenses with salaries, payroll charges and benefits and pension plan obligations, due to:
to the following factors:
· | an increase of R$ |
· | an |
These increases were partially offset by a decrease of R$52.0 million in expenses with salaries, charges and benefits, mainly due to the reduction of the G0 defined benefit plan participant base, pursuant to Law No. 4,819/58, reflected in the actuarial assumptions.
Other Operating Income (Expenses), Net and Equity in Results of Investments in Affiliates
Other operating expense,income and expenses, net, was R$21.860.3 million for the year ended December 31, 2023 compared to R$33.0 million in 2021 compared with R$107.7 million in operating income, net in 2020, resulting in a negative variationthe year ended December 31, 2022, an increase of R$129.5 million, mainly due to the following factors:
27.3 million. Other operating income consists of gains and losses from sales of property, plant and equipment, sale of contracts awarded in public bids, right to sell electricity, indemnities and reimbursement of expenses, fines and collaterals, property leases, reuse of water, PURA projects and services, net of COFINS and PASEP.
Other operating expenses consist mainly of derecognition of concessions assets due to obsolescence, discontinued construction works, unproductive wells, projects considered economically unfeasible, losses on property, plant and equipment and recognition and reversal of estimated losses with asset indemnification.
Financial Result, Net
FinancialThe financial result net consists primarily of interest on our indebtedness and foreign exchange losses (or gains) in respect to our indebtedness, offset partially by interest income on cash and cash equivalents and financial investments and inflation-based indexation accruals, mainly relating to agreements entered into with certain customers to settle overdue accounts receivable.
FinancialThe financial result, net, decreasedfor the year ended December, 31 2023 increased by R$2,239.01,219.6 million to a financialan expense net of R$927.41,592.0 million from an expense of R$372.4 million in 2021 from a financial expense, net of R$3,166.4 million in 2020.the year ended December 31, 2022. As a percentage of net operating revenues, the financial result net amounted to 4.8%6.2% for the year ended December, 31 2023 compared to 1.7% in 2021 compared with a financial expense of 17.8% in 2020.the year ended December 31, 2022. This variation was due to the lower appreciation of the U.S. dollar and the depreciation of the Japanese Yen against the Brazilian real in 2021 (7.4% and -3.9%, respectively), compared to the appreciation of both currencies in 2020 (28.9% and 35.8%, respectively)to:
· | an increase of R$522.3 million in other financial expenses, due to (i) the R$387.1 million increase in interest on PPPs; (ii) the R$49.7 million increase in interest charged on performance agreements, as a result of the higher number of construction works being undertaken; and (iii) increased provisioning for interest charged on lawsuits, of R$37.0 million; | |
· | an impact of R$321.5 million in monetary and exchange variations on assets, due to the recognition of R$325.6 million relating to the non-recurring monetary adjustment on the GESP 2015 agreement in 2022, resulting from the judicial order prohibiting the transfer of the reservoirs of the Alto Tietê production system. For further information about the transfer of the reservoirs of the Alto Tietê production system, see “Item 5. Operating and Financial Review Prospects—A. Operating and Financial Review and Prospects Overview—Certain Transactions with our Controlling Shareholder—Reimbursement Due from the State;” |
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· | a decrease of R$182.1 million in exchange variations on borrowings and financing, due to a lower depreciation of the Yen against the real in 2023 (-13.5%), when compared to the depreciation recorded in 2022 (-18.4%); and | |
· | an increase of R$155.4 million in interest and charges on domestic borrowings and financing, mainly due to an increase in our borrowings as a result of further loans from the IFC in 2022, IDB Invest in July 2022, and IDB Invest in May 2023, which increased our interest charges by R$90.0 million. The average annual CDI rate also increased from 12.45% for the year ended December 31, 2022 to 13.21% for the year ended December 31, 2023. |
Profit before income tax and social contribution
As a result of the factors discussed above, profit before income tax and social contribution for the year ended December 31, 2023 increased by R$1,844.2481.2 million, to R$3,170.24,754.0 million from R$4,272.8 million in 2021 from R$1,326.0 million in 2020.2022. As a percentage of net operating revenue, our profit before income tax and social contribution increaseddecreased to 16.3% in 202118.6% for the year ended December 31, 2023 compared to 7.5%19.4% in 2020.the year ended December 31, 2022.
Income Tax and Social Contribution
Income tax and social contribution expense for the year ended December 31, 2023 increased by R$511.679.0 million, or 145.1%,6.9% to R$864.31,230.5 million from R$1,151.5 million in 2021 fromthe year ended December 31, 2022, mainly due to the R$352.73,516.4 million increase in 2020.net operating revenue. This increase was mainly due to:offset by:
· |
· | a |
Profit for the year
As a result of the factors discussed above, our profit for the year ended December 31, 2023 increased by R$402.2 million, to R$2,305.93,523.5 million from R$3,121.3 million in 2021 from R$973.3 million in 2020.the year ended December 31, 2022. As a percentage of net operating revenue, our profit for the year increasedended December 31, 2023 decreased to 11.8%13.8%, from 14.2% in 2021 from 5.5% in 2020.the year ended December 31, 2022.
Year Ended December 31, 20202022 Compared to Year Ended December 31, 20192021
For a discussion of our results of operations for the year ended December 31, 20202022 compared to the year ended December 31, 2019,2021, see “Item 5. Operating and Financial Review and Prospects — A. Results of Operations — Year Ended December 31, 20202022 Compared to Year Ended December 31, 2019”2021” of our annual report on Form 20-F for the year ended December 31, 2020,2022, filed with the SEC on April 28, 2021.2023.
B. Liquidity and Capital Resources
Capital Sources
In order to satisfy our liquidity and capital requirements, we have primarily relied on cash provided by operating activities, long-term borrowings from Brazilian federal governmental financial institutions, and long-term financing from multilateral organizations and from domestic and international development banks, and also from the capital markets. As of December 31, 2021,2023, we had R$717.9838.5 million in cash and cash equivalents. The outstanding current indebtedness was R$1,830.62,616.5 million as of December 31, 2021,2023, of which R$359.1249.8 million was denominated in foreign currency. Long-term indebtedness was R$15,893.216,919.9 million as of December 31, 2021,2023, of which R$2,937.02,496.1 million consisted of foreign currency-denominated obligations.
Our managementManagement expects that with the decrease in defaults as a result of us having entered into contract with the Municipalities of Guarulhos, Santo André and Mauá, improved water security due to the works carried out, and the generation of operating cash and availability of credit lines for investments, we will have sufficient funds to meet our commitments and not compromise our planned investments, given the works we carried out to improve our water security and to reduce defaults, as well as the cash we generated from operations and the availability of credit lines for investments.
In the second quarter of 2020 and partially in 2021, the State of São Paulo state government decreed a quarantine throughout the State, restricting business activities in order to avoid the accelerated spread of COVID-19. We experienced a direct impact on revenues as a consequence of the change in the consumption mix, due to the increase in volumes in the residential category and a reduction in the public, commercial and industrial categories which have higher tariffs, leading to a reduction in the total average tariff, in addition to increases in delinquencies, which continued through 2021. Accordingly, these changes in consumption patterns impacted the total volume of water billed and the average tariff, which had an impact on our revenues and results of operations.
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Additionally,Although restrictions imposed to contain the spread of COVID-19 were lifted in 2022, various companies continue to adopt partial remote working regimes. This affected the volume of sales in the contextcommercial, industrial and public categories which would have been higher had it not been for the partial remote working policies adopted by these companies. In addition, the adverse macroeconomic impact of COVID-19 pandemic, on February 3, 2021, our Board of Executive Officers approved certain measures for commercial clients aiming to help them to maintain their businesses during the COVID-19 pandemic in Brazil had a detrimental impact on many parts of Brazilian society and led to pay their debtsincreased delinquencies which negatively impacted our results of operations. Our allowance for doubtful accounts increased by 16.5% for the year ended December 31, 2023 compared to the same period in the future. These measuresyear ended December 31, 2022, and increased by 21.5% for commercial customers remainedthe year ended December 31, 2022, compared to the same period in force until August 2021.the year ended December 31, 2021.
In order to finance the constant investment needs in our infrastructure, we use third party funds to complement our own resources. The impacts of COVID- 19 in attracting borrowings and financings is still uncertain, however, weWe believe that we currently have sufficient sources of funds to implement our shortshort- and medium termmedium-term strategy.
Cash Flows
Net Cash Generated from Operating Activities
Cash generated from operating activities is the single largest source of our liquidity and capital resources, and we expect that it will continue to be so in the future. Our net cash generated from operating activities was R$3,913.84,854.4 million, R$4,978.23,967.6 million and R$4,197.23,913.8 million infor the years ended December 31, 2023, 2022 and 2021, 2020 and 2019, respectively. The main driver of our cash flow from operating activities relates to our cash collections from customers, which is due to the nature of our business and to the fact that we are expanding our infrastructure. TheThere was an increase in net cash generated from operating activities in 2021 is principally due to the increase in income tax and social contribution paid in 2021.year ended December 31, 2023 of 22.4%.
Net Cash Used in Investing Activities
Net cash used in investing activities was R$2,663.24,905.5 million, R$6,768.72,878.3 million and R$3,267.32,663.2 million infor the years ended December 31, 2023, 2022 and 2021, 2020 and 2019, respectively. The main driver of our net cash outflow for investing activities relates to purchases of intangible assets, as required under our concession and program contracts, which is due to the fact that we are expanding our infrastructure and service coverage. Additionally, we redeemed partThere was an increase in net cash used in investing activities for the year ended December 31, 2023 of the financial investments to repay the 25th debentures issuance.70.4%.
Net Cash Used inGenerated by (Used in) Financing Activities
Our net cash used inby financing activities was R$977.8 million for the year ended December 31, 2023, compared to (i) R$60.3 million in net cash generated for the year ended December 31, 2022 and (ii) R$929.0 million R$66.4 million and R$1,705.9 million in 2021, 2020 and 2019, respectively.net cash used for the year ended December 31, 2021. The main driver of our cash flows from financing activities relates to the proceeds and repayments of loans used to finance purchases of intangible assets related to our concession and program contracts, in order to support the expansion of our services.services and our payment of interest on capital. For the year ended December 31, 2023, (i) our financings decreased by R$435.9 million compared to 2022 and (ii) our amortizations increased by R$234.4 million compared to 2022. In addition, payments of interest on capital increased by R$220.1 million for the year ended December 31, 2023 compared to the year ended December 31, 2022.
Indebtedness Financing
Transition from LIBOR to SOFR
The London Interbank Offered Rate (“LIBORLIBOR”), the financial reference rate for loan agreements with Multilateral Development Banksmultilateral development banks (such as IDB Invest and IBRD), ceased to exist as of December 2021 and was replaced by Secured Overnight Finance Rate (“SOFR”SOFR”). According to the development banks, the changes allow the risk of inconsistencies in financings to be minimized. As a result of this change, in 2021, we amended our loan agreements with IDB Invest and IBRD, which now use SOFR as the reference rate.
Indebtedness financing
Our total financial indebtedness increased by 2.7%3.0%, from R$17,258.618,958.7 million as of December 31, 20202022 to R$17,723.819,536.4 million as of December 31, 2021.2023. In addition, during the same period, our total indebtedness denominated in foreign currency decreased by 7.1%1.1%, from R$3,547.82,775.8 million as of December 31, 20202022 to R$3,296.12,745.9 million as of December 31, 2021.2023.
As of December 31, 2021,2023, we had R$15,893.216,919.9 million in long-term indebtedness outstanding (excluding the current indebtedness), of which R$2,937.02,496.1 million consisted of foreign currency-denominated, long-term debt. We had an outstanding current indebtedness of R$1,830.62,616.5 million as of December 31, 2021.2023. As of December 31, 2021,2023, R$359.1249.8 million of this current portion of long-term indebtedness was denominated in foreign currency. As of December 31, 2021,2023, our S&P domestic rating was brAAA“brAAA” and our S&P global rating was BB-.“BB-”. Our Moody’s national rating was AAA.br“AAA.br” as of December 31, 2021,2023, while our Fitch national rating was AAA(bra)“AAA(bra)” and our Fitch global ratings were BB“BB” (foreign currency) and BB+“BB+” (local currency), as of the same date.
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Various contractual agreements we have entered into, including certain financing agreements with Caixa Econômica Federal CEF and BNDES, provide for liens over a portion of our cash flows from the payment of water and sewage provision tariffs. In addition, we provide as guarantees a portion of our cash flow generation to transactions related to PPPs.
Pursuant to these agreements, cash received from operations is required to pass through designated accounts. In the event of a default under the relevant agreement, such cash and future cash flows that are required to be deposited in such accounts become restricted and are subject to security interests in favor of the relevant creditor. As of December 31, 2021,2023, a substantial portion of our monthly cash flows from operations was subject to these liens. As of that date, the total amount of our secured debt, including indebtedness benefiting from these liens, was R$3,210.64,998.7 million (R$3,192.84,887.2 million of principal and R$17.8111.5 million related to interest and charges). SeeFor more information, see “—Indebtedness Financing—Financial Covenants—Local currency denominated indebtedness” and Note 17 to our financial statements2023 Consolidated Financial Statements included in this annual report. The following table sets forth information on our indebtedness outstanding as of December 31, 2021:2023:
December 31, 2021 | December 31, 2023 | |||||||||||
Current | Noncurrent | Total | Final Maturity | Interest Rates(1) | Current | Noncurrent | Total | Final Maturity |
Interest Rates(1) | |||
(in thousands of R$) | (R$ in thousands) | |||||||||||
Denominated in local currency: | ||||||||||||
12th issue of debentures | 45,450 | 113,049 | 158,499 | 2025 | TR + 9.5% | 45,450 | 22,385 | 67,835 | 2025 | TR + 9.5% | ||
14th issue of debentures | 25,388 | - | 25,388 | 2022 | TJLP + 1.92% (1st & 3rd series) & IPCA | |||||||
17th issue of debentures | 102,252 | 101,982 | 204,234 | 2023 | CDI + 0.75% (1st series) & IPCA + 4.5% (2nd series) & | |||||||
18th issue of debentures | 48,479 | 92,677 | 141,156 | 2024 | TJLP + 1.92% (1st and 3rd series) & IPCA + 8.25% (2nd series) |
46,692 | - | 46,692 | 2024 | TJLP + 1.92% (1st and 3rd series) & IPCA + 8.25% (2nd series | ||
21st issue of debentures | 174,849 | - | 174,849 | 2022 | CDI + 0.60% (1st series) & | |||||||
22nd issue of debentures | 200,000 | 508,530 | 708,530 | 2025 | CDI + 0.58% (1st series) & CDI + 0.90% (2nd series) & IPCA + 6.00% (3rd series) | 170,957 | 170,616 | 341,573 | 2025 | CDI + 0.58% (1st series) & CDI + 0.90% (2nd series) & PCA + 6.00% (3rd series) | ||
23rd issue of debentures | - | 864,776 | 864,776 | 2027 | CDI + 0.49% (1st series) & CDI + 0.63% (2nd series) | 490,810 | 374,279 | 865,089 | 2027 | CDI + 0.49% (1st series) & CDI + 0.63% (2nd series) | ||
24th issue of debentures | - | 461,350 | 461,350 | 2029 | IPCA + 3.20% (1st series) & IPCA + 3.37% (2nd series) | - | 512,122 | 2029 | IPCA + 3.20% (1st series) & IPCA + 3.37% (2nd series) | |||
26th issue of debentures | - | 1,168,317 | 2030 | IPCA + 4.65% (1st series) & IPCA + 4.95% (2nd series) | - | 1,302,042 | 2030 | IPCA + 4.65% (1st series) & IPCA + 4.95% (2nd series) | ||||
27th issue of debentures | - | 997,433 | 2027 | CDI + 1.60% (1st series) & CDI + 1.80% (2nd series) & | 200,000 | 498,634 | 698,634 | 2027 | CDI + 1.60% (1st series) & CDI + 1.80% (2nd series) & CDI + 2.25% (3rd series) | |||
28th issue of debentures | - | 1,197,395 | 2028 | CDI + 1.20% (1st series) & CDI + 1.44% (2nd series) &
| 127,715 | 1,070,457 | 1,198,172 | 2028 | CDI + 1.20% (1st series) & CDI + 1.44% (2nd series) & CDI + 1.60% (3rd series) | |||
29th issue of debentures | - | 1,230,602 | 1,230,602 | 2036 | CDI + 1.29% (1st series) & IPCA + 5.3058% (2nd series) & IPCA + 5.4478% (3rd series)
| - | 1,314,136 | 2036 | CDI + 1.29% (1st series) & IPCA + 5.3058% (2nd series) & IPCA + 5.4478% (3rd series) | |||
30th issue of debentures | 125,000 | 873,231 | 998,231 | 2029 | CDI + 1.30% (1st series) & CDI + 1.58% (2nd series) | |||||||
Brazilian Federal Savings Bank (CEF) | 108,210 | 1,508,275 | 1,616,485 | 2023/2042 | TR + 5% to 9.5% |
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Caixa Econômica Federal | 98,784 | 1,380,170 | 1,478,954 | 2021/2042 | TR + 5% to 9.5% | ||
National Bank for Economic and Social Development (BNDES) PAC | 13,394 | 6,665 | 20,059 | 2023 | 1.82% + TJLP | ||
National Bank for Economic and Social Development (BNDES) PAC II 9751 | 7,161 | 30,308 | 37,469 | 2027 | 1.72% + TJLP | ||
National Bank for Economic and Social Development (BNDES) PAC II 9752 | 4,851 | 20,619 | 25,470 | 2027 | 1.72% + TJLP | ||
National Bank for Economic and Social Development (BNDES) Onda Limpa | 26,751 | 60,089 | 86,840 | 2025 | 1.92% + TJLP | ||
National Bank for Economic and Social Development (BNDES) Tietê III | 117,593 | 617,251 | 734,844 | 2028 | 1.66% + TJLP | ||
National Bank for Economic and Social Development (BNDES) 2015 | 33,558 | 420,685 | 454,243 | 2035 | 2.18% + TJLP | ||
National Bank for Economic and Social Development (BNDES) 2014 | 6,524 | 22,874 | 29,398 | 2026 | 1.76% + TJLP | ||
Inter-American Development Bank (IDB) 2202 | 181,349 | 2,344,403 | 2,525,752 | 2035 | CDI + 0.86% | ||
IDB INVEST | 34,800 | 890,400 | 925,200 | 2034 | CDI + 1.90% & CDI + 2,70% | ||
Leases (Concession Agreements, Program Contracts and Contract Assets) | 36,640 | 360,671 | 397,311 | 2035 | 7.73% to 10.12% + IPC | ||
Leases (Others) | 69,306 | 56,663 | 125,969 | 2023 | 4.25% to 12.34% | ||
Other | 4,790 | 9,274 | 14,064 | 2025 | TJLP + 1.5% (FINEP) & 3.0% (FEHIDRO) | ||
Interest and others charges | 239,581 | - | 239,581 | ||||
Total denominated in local currency | 1,471,500 | 12,956,183 | 14,427,683 | ||||
Denominated in foreign currency: | |||||||
Inter-American Development Bank (IDB) US$71,441,000 (2020 - US$61,610,00) | 57,357 | 327,263 | 384,620 | 2025 to 2044 | LIBOR + 1.12% to 3.31% | ||
International Bank for Reconstruction and Development (IBRD) US$76,712,000 (2020 – US$82,792,000) | 33,927 | 386,328 | 420,255 | 2034 | LIBOR + 2.85% | ||
JICA 15 - ¥ 9,219,440,000 (2020 - ¥ 10,371,870,000) | 55,858 | 391,008 | 446,866 | 2029 | 1.8% & 2.5% | ||
JICA 18 - ¥ 8,289,280,000 (2020- ¥ 9,325,440,000) | 50,223 | 351,398 | 401,621 | 2029 | 1.8% & 2.5% | ||
JICA 17 - ¥ 3,706,564,000 (2020- ¥ 3,349,203,000) | 12,833 | 165,900 | 178,733 | 2035 | 1.2% & 0.01% | ||
JICA 19 - ¥ 28,109,529,000 (2020 - ¥ 29,923,047,000) | 87,901 | 1,272,803 | 1,360,704 | 2037 | 1.7% & 0.01% | ||
IDB 1983AB – US$ 15,385,000 (2020 – US$ 23,077,000) | 42,927 | 42,336 | 85,263 | 2023 | LIBOR + 2.08% to 2.38% | ||
Interest and others charges | 18,091 | - | 18,091 | ||||
Total denominated in foreign currency | 359,117 | 2,937,036 | 3,296,153 | ||||
Total loans and financing | 1,830,617 | 15,893,219 | 17,723,836 | ||||
Brazilian National Bank for Economic and Social Development (BNDES) PAC II 9751 | 7,286 | 16,316 | 23,602 | 2027 | 1.72% + TJLP |
Brazilian National Bank for Economic and Social Development (BNDES) PAC II 9752 | 4,936 | 11,107 | 16,043 | 2027 | 1.72% + TJLP |
Brazilian National Bank for Economic and Social Development (BNDES) Onda Limpa | 27,219 | 6,766 | 33,985 | 2025 | 1.92% + TJLP |
Brazilian National Bank for Economic and Social Development (BNDES) Tietê III | 200,693 | 652,175 | 852,868 | 2028 | 1.66% + TJLP |
Brazilian National Bank for Economic and Social Development (BNDES) 2015 | 34,146 | 360,021 | 394,167 | 2035 | 2.18% + TJLP |
Brazilian National Bank for Economic and Social Development (BNDES) 2014 | 6,638 | 10,107 | 16,745 | 2026 | 1.76% + TJLP |
Inter-American Development Bank (IDB) 2022 | 181,349 | 1,983,615 | 2,164,964 | 2035 | CDI + 0.86% |
Inter-American Investment Corporation (IDB Invest) | 39,550 | 814,840 | 854,390 | 2034 | CDI + 1.90% & CDI + 2,70% |
Inter-American Investment Corporation (IDB Invest) 2022 | 14,100 | 438,241 | 452,341 | 2036 | CDI + 2.50% |
Inter-American Investment Corporation (IDB Invest) 2023 | 14,100 | 447,791 | 461,891 | 2036 | CDI + 0.50% |
International Finance Corporation (IFC) 2022 | 22,800 | 713,910 | 736,710 | 2032 | CDI + 2.00% |
International Finance Corporation (IFC) 2023 | - | 986,651 | 986,651 | 2033 | CDI + 1.70% |
Leases (Concession Agreements, Program Contracts and Contract Assets) | 49,884 | 259,326 | 309,210 | 2035 | 7.73% to 10.12% + IPC |
Leases (Others) | 68,499 | 73,801 | 142,300 | 2027 | 9.32% to 15.24% |
Other | 3,003 | 2,910 | 5,913 | 2025 | TJLP + 1.5% (FINEP) & 3.0% (FEHIDRO) |
Interest and others charges | 377,398 | - | 377,398 | ||
Total denominated in local currency | 2,366,705 | 14,423,754 | 16,790,459 | ||
Denominated in foreign currency: | |||||
Inter-American Development Bank (IDB) US$172,743,000 (2022 – US$105,133,000) | 49,759 | 762,208 | 811,967 | 2025 to 2044 | SOFR + 4.72% to 6.60531% |
International Bank for Reconstruction and Development (IBRD) US$107,445,000 (2022 – US$78,197,000) | 29,433 | 477,554 | 506,987 | 2034 | SOFR + 6.00% to 7.1% |
JICA 15 – ¥ 6,914,580,000 (2022 – ¥ 8,067,010,000) | 39,437 | 197,180 | 236,617 | 2029 | 1.8% & 2.5% |
JICA 18 - ¥ 6,216,960,000 (2022 – ¥ 7,253,120,000) | 35,457 | 177,168 | 212,625 | 2029 | 1.8% & 2.5% |
JICA 17 - ¥ 3,464,352,000 (2022 – ¥ 3,753,048,000) | 9,879 | 108,880 | 117,759 | 2035 | 1.2% & 0.01% |
JICA 19 - ¥ 24,482,493,000 (2022 – ¥ 26,296,011,000) | 62,059 | 774,200 | 836,259 | 2037 | 1.7% & 0.01% |
Interest and other charges | 23,677 | - | 23,677 | ||
Total denominated in foreign currency | 249,701 | 2,496,190 | 2,745,891 | ||
Total loans and financing | 2,616,406 | 16,919,944 | 19,536,350 |
(1) | TR was |
The following table shows the maturity profile of our debt, as of December 31, 2021,2023, for the period indicated:
2022 | 2023 | 2024 | 2025 | 2026 | After 2027 | Total | |||||||
(in millions of reais) | |||||||||||||
Loans and financing | 1,830.6 | 1,635.0 | 1,923.6 | 2,050.2 | 1,915.5 | 8,368.9 | 17,723.8 |
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2024 | 2025 | 2026 | 2027 | 2028 | After 2029 | Total | |||||||
(in millions of reais) | |||||||||||||
Loans and financing | 2,614.4 | 2,362.2 | 2,248.2 | 2,382.7 | 1,679.3 | 8,247.6 | 19,536.4 |
Referring to allAs of December 31, 2023, R$1,318.9 million of our foreign currency-denominatedcurrency denominated indebtedness, the amount of R$890.1 million, net of transaction costs, as of December 31, 2021, was denominated in U.S. dollars and R$2,387.91,403.3 million was denominated in Japanese Yen. ThisAs of December 31, 2023, our outstanding indebtedness principally consisted principally of:
· | R$ |
(i) | to finance the second phase of the Tietê Project, under which payments of principal are made in semiannual installments with final maturity in July 2025. The principal amount accrues interest at USD LIBOR plus a variable spread paid semiannually; |
(ii) | a loan to finance the fourth phase of the Tietê Project, entered into in November 2019, amounting to US$300.0 million, under which payments of principal are made in semi-annual installments with final maturity in May 2044. The principal amount accrues interest at USD LIBOR plus a variable spread paid semi-annually. This contract allows for the replacement of the currency, index and interests; |
· | R$ |
· |
· | R$ |
Our borrowings from multilateral institutions and with government agencies, such as the IDB Invest, IBRD and JICA, are guaranteed by the federal government, and have a counter-guarantee from the stateState of São Paulo. For furthermore information on the terms of these loan agreements, see “Item 7.B. Related Party Transactions—Government Guarantees of Financing.”
Our outstanding domestic debt was R$14,427.716,790.5 million as of December 31, 20212023 and consisted primarily of real-denominated loans from federal and state-owned banks, in particular, Caixa Econômica Federal CEF and BNDES, as well as debentures issued in June 2010, February 2011, January 2013, October 2013, June 2017, February 2018, May 2019, July 2019, July 2020, December 2020, July 2021, and December 2021, March 2022 and March 2024 and financial leasing.
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The following summarizes our principal real-denominated borrowings:
· | from 2003 to 2019, we entered into several financing agreements with |
· | in May 2008, we entered into a R$ |
· | in March 2010, we entered into a R$294.3 million financing agreement with BNDES. Repayments of the principal amount are being made in 156 successive monthly installments, with final maturity in 2025. The principal amount accrues interest at the TJLP, but limited to 6.0% per year, plus 1.92% per year. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. The financing agreement is collateralized by part of the billings from the provision of water and sewage services. As of December 31, |
· | in September 2010, we entered into a US$600 million financing agreement with IDB to finance the third phase of the Tietê Project. In May 2020, the |
· | in 2011, we entered into financial leases in the total amount of R$49.6 million with certain contractors for the construction of infrastructure on land we own. During the construction phase, we recognized a contract asset (as of December 31, 2018, with the adoption of IFRS 15 |
· | in March 2012, we entered into a R$180.8 million financing agreement with BNDES. Amortization of the principal amount is being made in up to 156 successive monthly installments, with the final maturity in 2027. The principal amount accrues interest at the TJLP but it is limited to 6.0% per year plus a yearly 1.72%. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. This financing agreement is collateralized with a portion of the revenues from the provision of water and sewage services. As of December 31, |
· | in February 2013, we entered into a R$ |
· | in June 2014, we entered into a R$61.1 million financing agreement with BNDES. In September 2021, the contract was amended and its value changed to R$38.6 million. Amortization of the principal amount is being made in up to 108 successive monthly installments after the grace period of 36 months, with the final maturity in 2026. The principal amount accrues interest at the TJLP but is limited to 6.0% per year plus a yearly 1.76%. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. This financing agreement is collateralized with a portion of the revenues from the provision of water and sewage services. As of December 31, |
· | in June 2015, we entered into a R$747.4 million financing agreement with BNDES. Amortization of the principal amount is being made in up to 204 successive monthly installments after the grace period of 36 months, with the final maturity in 2035. The principal amount accrues interest at the TJLP but is limited to 6.0% per year plus a yearly 2.18%. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. This financing agreement is collateralized with a portion of the revenues from the provision of water and sewage services. As of December 31, |
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· | in October 2015, we entered into a R$48.3 million financing agreement with |
• | in November 2020, we entered into a loan with | |
• | in June 2022, we entered into a loan with IDB Invest, an agent of IDB, as creditor, in the amount of R$470.0 million, intended for the expansion of the sewage collection and treatment system under the Tietê River Depollution Project – Stage IV. The loan bears interest at 100% of the CDI rate plus a spread of 2.50% per annum, with half-yearly interest and amortization payments and a total term of up to 14 years and 6 months, with a grace period of up to 12 months. As of December 31, 2023, the outstanding debt was R$452.3 million; | |
• | in June 2022, we entered into a loan with IFC, as creditor, in the amount of R$760.0 million, intended for the execution of the Novo Rio Pinheiros Program, the improvement of sanitation services in the coastal regions of the State of São Paulo and the improvement of water supply in municipalities located on the coast of the State of São Paulo and in the São Paulo metropolitan region. The loan bears interest of 100% of the CDI rate plus a spread of 2.00% per annum, with half-yearly interest and amortization payments and a total term of up to 10 years and 6 months, with a grace period of up to 12 months. As of December 31, 2023, the outstanding debt was R$736.7 million; | |
• | in May 2023, we entered into a loan with IDB Invest, as creditor, in the amount of R$470.0 million, to support the fourth phase of the Rio Tietê Depollution Project, which started in 1995 and aims to improve access to sanitation services in the São Paulo region and help the recovery of the polluted Tietê River. The project has already improved access to sanitation services for 12 million people, and this financing will benefit around 1.32 million more. The project involves rehabilitating and expanding wastewater treatment plants and constructing a new one. The loan is a result of collaboration between IDB Invest and Société de Promotion et de Participation pour la Coopération Economique (“Proparco”) to support the water and sanitation sector in Brazil, and Proparco will guarantee the loan. The loan bears interest of 100% of the CDI rate plus a spread of 0.50% per annum, with half-yearly interest and amortization payments and a total term of up to 14 years, with a grace period of up to 12 months. Proparco will receive a fee of 2.00% per annum for providing the guarantee, with semi-annual payments. As of December 31, 2023, the outstanding debt was R$461.9 million; and | |
• | in June 2023, we entered into a loan with IFC, as creditor, in the amount of R$1.0 billion, to achieve annual social goals, making it a sustainability linked loan. The resources are being directed to investments in basic sanitation infrastructure in the São Paulo metropolitan region from 2021 to 2025 and will be linked to the Novo Rio Pinheiros Program, which is part of Integra Tietê. Investments are being destined for the expansion of the sanitary sewage system, promoting the improvement of water quality in the Pinheiros River. The loan bears interest of 100% of the CDI rate plus a spread of 1.70% per annum, with half-yearly interest and amortization payments and a total term of up to 10 years, with a grace period of up to 24 months. As of December 31, 2023, the outstanding debt was R$986.7 million. | |
Additionally, we have the following outstanding debt from debentures issuances:
Under the BNDES Debentures program,In June 2010, we issued in February 2011, our fourteenth tranchetwelfth issuance of debentures in the second tranche outaggregate principal amount of three, allR$500.0 million, to the Severance Indemnity Fund (Fundo de Garantia do Tempo e Serviço – “FGTS”), based on the FGTS’s program to finance companies in the sanitation, transport and real estate businesses. The debentures will mature in June 2025 and bear monthly interest based on the TR plus 9.5% per year. The proceeds of them subscribed exclusively by BNDES. Thesethis issuance were used to fund a portion of our capital expenditure program for the supply of water and sewage system. As of December 31, 2023, the outstanding debt of the twelfth issuance of debentures are dividedwas R$67.9 million. On March 28, 2024, we sent a notice to the fiduciary agent and to the debentures holder, through which we requested the full early redemption of the debentures of our 12th Issuance, pursuant to the terms and conditions of the indenture.
In January 2013, we issued our seventeenth issuance of debentures in three series: the first and third series matured in February 2022 and the second, in March 2022. The debentures of the first and third series in the aggregate principal amount of R$77.1 million and R$115.7 million, respectively, bore interest at 1.92% per year, plus the TJLP. If the TJLP exceeded 6.0% per year, such excess was added to the principal amount. The debentures of the second series,1.0 billion, which were fully repaid in the aggregate principal amount of R$82.6 million, bore interest at the rate of the IPCA index plus 9.20% per year. As of December 31, 2021, the outstanding debt of the fourteenth issuance of debentures was R$25.4 million.January 2023.
In October 2013, we concludedissued our eighteenth issuance of debentures, the third tranche out of those three also subscribed exclusively by BNDES. These debentures are divided in three series: the first and third series will mature in October 2024 and the second, in November 2024. The debentures of the first and third series, in the aggregate principal amount of R$77.1 million and R$115.7 million, respectively, bear interest at 1.92% per year, plus the TJLP. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. The debentures of the second series, in the aggregate principal amount of R$82.6 million, bear interest at the rate of the IPCA index plus 8.26% per year. In December 2013, BNDES subscribed to the debentures of the first and second series. In December 2014 and July 2015, BNDES subscribed in part to the debentures of the third series and in May 2020, BNDES subscribed another 8eight additional debentures, and the remaining 20 debentures were canceled. As of December 31, 2021,2023, the outstanding debt of the eighteenth issuance of debentures was R$141.247.0 million.
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We have used the funds raised from the three issuances for investments primarily in the Program for Water Loss Reduction and on improvements and reforms of the Rio Grande’s water treatment plant, including other projects for water supply and sewage collection systems in the São Paulo Northern Coast,northern coast, Paraíba Valley and Mantiqueira Regions.
In June 2010, we carried out our twelfth issuance of debentures, totaling R$500 million, to the FGTS, based on the FGTS’s program to finance companies in the sanitation, transport and real estate businesses. The debentures will mature in June 2025 and bear monthly interest based on the TR plus 9.5% per year. The proceeds of this issuance were used to fund a portion of our capital expenditure program in the water supply and sewage system. As of December 31, 2021, the outstanding debt of the twelfth issuance of debentures is R$158.5 million.
In January 2013, we carried out our seventeenth issuance of debentures of R$1.0 billion in three series, the first for R$424.7 million with maturity date of January 2018 and with an interest rate of 0.75% per year plus the CDI rate, the second for R$395.2 million with a maturity of January 2020 and with the interest rate of 4.50% per year plus IPCA variation and the third for R$180.1 million with a maturity date of January 2023 and with an interest rate of 4.75% per year plus IPCA variation. The proceeds of this issuance were used to pay our financial commitments for 2013. As of December 31, 2021, the outstanding debt of the seventeenth issuance of debentures is R$204.3 million.
In June 2017, we carried out our twenty-first issuance of debentures in two series in the aggregate principal amount of R$500 million. The first and second series will mature in June 2020 and 2022, respectively. The debentures of the first series (in the aggregate principal amount of R$150 million) bear interest at a rate of CDI plus 0.60% per year. The debentures of the second series (in the aggregate principal amount of R$350 million) bear interest at a rate of CDI plus 0.90% per year. The proceeds of this issuance were used to strengthen our cash position and refinance financial commitments which mature in 2017. As of December 31, 2021, the outstanding debt of the twenty-first issuance of debentures is R$174.8 million.
In February 2018, we carriedissued our twenty-second issuance of debentures in three series in the aggregate principal amount of R$750750.0 million. The first, second and third series will mature in February 2021, 2023 and 2025 respectively. The debentures of the first series (in the aggregate principal amount of R$100 million) bear interest at a rate of CDI plus 0.58% per year, with semi-annual interest payments. The second series (in the aggregate principal amount R$400400.0 million) bears interest at a rate of CDI plus 0.90% per year, with semi-annual interest payments. The third series (in the aggregate principal amount R$250250.0 million) bears interest at a rate of IPCA plus 6.00% per year, with annual interest payments. The proceeds from these issuances were used to strengthen our cash position and refinance outstanding financial commitments in 2018. As of December 31, 2021,2023, the outstanding debt of the twenty-second issuance of debentures iswas R$708.5341.6 million.
In May 2019, we issued our twenty-third issuance of debentures divided into two series in the aggregate principal amount of R$866.8 million. The first and second series will mature in May 2024 and 2027, respectively. The debentures of the first series (in the aggregate principal amount of R$491.8 million) bear interest at a rate of CDI plus 0.49% per year, with semi-annual interest payments. The second series (in the aggregate principal amount of R$375375.0 million) bears interest at a rate of CDI plus 0.63% per year, with semi-annual interest payments. The proceeds from these issuances were used to strengthen our cash position and refinance outstanding financial commitments in 2019. As of December 31, 2021,2023, the outstanding debt of the twenty-third issuance of debentures was R$864.8865.1 million.
In July 2019, we issued our twenty-fourth issuance of debentures divided into two series in the aggregate principal amount of R$400400.0 million. The first and second series will mature in July 2026 and 2029, respectively. The debentures of the first series (in the aggregate principal amount of R$100100.0 million) bear interest at a rate of IPCA plus 3.20% per year, with annual interest payments. The second series (in the aggregate principal amount R$300300.0 million) bears interest at a rate of IPCA plus 3.37% per year, with annual interest payments. The proceeds from these issuances are intended to support investment in infrastructure projects in some Municipalitiesmunicipalities in which our company renderrenders services. As of December 31, 2021,2023, the outstanding debt of the twenty-fourth issuance of debentures was R$461.4512.1 million.
In July 2020, we issued our twenty-sixth issuance of debentures divided into two series in the aggregate principal amount of R$ 1.0451,045.0 billion. The first and second series will mature in July 2027 and 2030, respectively. The debentures of the first series (in the aggregate principal amount of R$600600.0 million) bear interest at a rate of IPCA plus 4.65% per year, with annual interest payments. The second series (in the aggregate principal amount of R$445445.0 million) bears interest at a rate of IPCA plus 4.95% per year, with annual interest payments. The proceeds from these issuances are intended to support investment in infrastructure projects in certain Municipalitiesmunicipalities in which we provide services. As of December 31, 2021,2023, the outstanding debt of the twenty-sixth issuance of debentures was R$1,168.31,302.0 million.
In December 2020, we issued our twenty-seventh issuance of debentures divided into three series in the aggregate principal amount of R$11.0 billion. The first, second and third series will mature in December 2023, 2025 and 2027, respectively. The debentures of the first series (in the aggregate principal amount of R$300300.0 million) bear interest at a rate of CDI plus 1.60% per year, with semi-annual interest payments. The second series (in the aggregate principal amount of R$400400.0 million) bears interest at a rate of CDI plus 1.80% per year, with semi-annual interest payments. The third series (in the aggregate principal amount of R$300300.0 million) bears interest at a rate of CDI plus 2.25% per year, with semi-annual interest payments. The proceeds from these issuances were used to strengthen our cash position and refinance outstanding financial commitments in 2021. As of December 31, 2021,2023, the outstanding debt of the twenty-seventh issuance of debentures iswas R$997.4698.6 million.
In July 2021, we issued our twenty-eighth issuance of debentures divided into three series in the aggregate principal amount of R$1.2 billion. The first, second and third series will mature in July 2024, 2026 and 2028, respectively. The debentures of the first series (in the aggregate principal amount of R$127.8 million) bear interest at a rate of CDI plus 1.20% per year, with semi-annual interest payments. The second series (in the aggregate principal amount of R$888.2 million) bears interest at a rate of CDI plus 1.44% per year, with semi-annual interest payments. The third series (in the aggregate principal amount of R$184184.0 million) bears interest at a rate of CDI plus 1.60% per year, with semi-annual interest payments. The proceeds from these issuances were used to strengthen our cash position and refinance outstanding financial commitments maturing in 2021. As of December 31, 2021,2023, the outstanding debt of the twenty-eighth issuance of debentures was R$1,197.41,198.2 million.
In December 2021, we issued our twenty-ninth issuance of debentures divided into three series in the aggregate principal amount of R$1.25 billion. The first, second and third series will mature in December 2026, 2031 and 2036, respectively. The debentures of the first series (in the aggregate principal amount of R$500500.0 million) bear interest at a rate of CDI plus 1.29% per year, with semi-annual interest payments. The second series (in the aggregate principal amount of R$600600.0 million) bears interest at a rate of IPCA plus 5.3058% per year, with annual interest payments. The third series (in the aggregate principal amount of R$150150.0 million) bears interest at a rate of IPCA plus 5.4478% per year, with annual interest payments. The proceeds from the issuance of the first series are intendedwere used to strengthen our cash position and refinance commitments due to mature and to replenish our cashflows.outstanding financial commitments. The proceeds from the issuance of the second and third series are intended to support investment in infrastructure projects in certain Municipalitiesmunicipalities in which we provide services and to support the reimbursement of costs incurred in connection with infrastructure projects. As of December 31, 2021,2023, the outstanding debt of the twenty-ninth issuance of debentures was R$1,230.61,314.1 million.
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Additionally, inIn March 2022, we issued our thirtieth issuance of debentures divided into two series in the aggregate principal amount of R$1.0 billion. The first and second series will mature in March 2027 and March 2029, respectively. The first series (in the aggregate principal amount of R$500500.0 million) bears interest at a rate of CDI plus 1.30% per year, with semi-annual interest payments. The second series (in the aggregate principal amount of R$500500.0 million) bears interest at a rate of CDI plus 1.58% per year, with semi-annual interest payments. The proceeds from these issuances will bewere used to replenish and reinforce our cash position and to refinance commitments maturing in 2022. As of December 31, 2023, the outstanding debt of the thirtieth issuance of debentures was R$998.2 million.
Additionally, in March 2024, we issued our thirty-first issuance of debentures divided into three series in the aggregate principal amount of R$2.94 billion. The first, second and third series will mature in February 2029, 2031 and 2034, respectively. The first series (in the aggregate principal amount of R$507.0 million) bears interest at a rate of CDI plus 0.49% per year, with semi-annual interest payments. The second series (in the aggregate principal amount of R$1.73 billion) bears interest at a rate of CDI plus 1.10% per year, with semi-annual interest payments. The third series (in the aggregate principal amount of R$699.0 million) bears interest at a rate of CDI plus 1.31% per year, with semi-annual interest payments. The proceeds from these issuances are intended to replenish and reinforce our cash position and to refinance commitments due to mature in 2024. This issuance of debentures is characterized as “ESG bonds for the use of sustainable and blue resources”, reflecting our commitment to allocate the entirety of the proceeds to projects outlined in the Sustainable Finance Framework (as mentioned above), which was duly verified and validated by a second opinion issued by Attest ESG of Exame Ltda, an independent appraiser.
Part of our real-denominated indebtedness is indexed to take into account the effects of inflation. This debt provides for inflation-based increases to the principal amount, determined by reference to the IPCA.
In October 2021, the outstanding debt of our twenty-fifth issuance of debentures, amounting to R$1.59 billion was repaid in its entirety on the maturity date.
Financial Covenants
We are subject to financial covenants under the agreements evidencing or governing our outstanding indebtedness.
Indebtedness
Foreign currency denominated indebtedness
With respect to our indebtedness denominated in U.S. dollars, including our borrowings from the IDB and IFC, we are subject to financial covenants, including limitations on our ability to incur debt. For example:
The financial covenants in our Loanloan No. 1212 from the IDB require as follows:require:
· | our tariff revenues must be sufficient to cover the operational expenses of our system, including administrative, operating and maintenance expenses, and depreciation; |
· | our tariff revenues must provide a return on the balance sheet value of our property, plant, and equipment of not less than 7%; and |
· | during project execution, the balance of our short-term borrowings must not exceed 8.5% of our total equity. |
This loan agreement contains an early maturity clause in the event of non-compliance on our part of any obligation stipulated therein or in other contracts with the bank relating to the financing of the above-mentioned projects.
The financial covenants in our AB Loan Agreementsloan No. 13069-01 with the IDB (No. 1983AB) require as follows:Invest require:
· | our debt service coverage ratio must be greater than or equal to 2.35:1.00; and |
· | our ratio of |
This contract contains an early maturity clause. In the event of non-compliance with the terms of the contract, the BID can request the anticipated payment of part or all of the loan. The contract also contains cross-default provisions whereby an event of non-compliance on our part relating to any other of our debts with BID or third-parties (in this case, if over US$25 million) allows IDB to request the early payment of the loan.
The financial covenants in our Loan with IDB Invest (No. 13069-01) require as follows:
This loan agreement contains an early maturity clause in the event of non-compliance on our part ofwith any obligation stipulated therein or in other contracts with the bank relating to the financing of the above-mentioned projects.
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Any significant devaluation of the real will affect the total portion of our debt denominated in foreign currencies when measured in reais. As a result, the Adjusted Total or Net Debtnet debt in reais will be affected, with consequent impact on the ratio between Adjusted Total or Net Debtnet debt to adjusted EBITDA.
As of December 31, 2021,2023, and 2020,2022, we had met all the requirementsfinancial covenants of these loans and financing agreements.
Local currency denominated indebtedness
With respect to our outstanding indebtedness denominated in reais, we are subject to financial covenants.
The covenant clauses apply to all of our indebtedness with BNDES, including the14th and 18th issuancesthe 18th issuance of debentures held by BNDES, which totaled R$166.61,384.4 million as of December 31, 2021. The only financing agreement which is exempt from the renegotiated financing is contract No. 08.2.0169.1.2023.
In summary, the BNDES financings specify two bands for the ratios of Adjusted Net Debtadjusted net debt / Adjustedadjusted EBITDA, Adjustedadjusted EBITDA / Adjusted Financial Expenses,adjusted financial expenses, and Other Onerous Debtother onerous debt / Adjustedadjusted EBITDA. The financings also specify a collateral mechanism by which we assign a portion of our tariff payment receivables to BNDES in order to provide a partial guarantee of the amounts due under the financings. Under this mechanism, each month we must ensure that a portion of the tariff payments which we receive are deposited on a daily basis into a blocked collateral account, before being released to a regular movements account later in the day provided that BNDES has not notified the bank that we are in default. If the ratio of Adjustedadjusted EBITDA / Adjusted Financial Expensesadjusted financial expenses is equal to or higher than 3.50, the ratio of Adjusted Net Debtadjusted net debt / Adjustedadjusted EBITDA equal to or lower than 3.00, and the Other Onerous Debtother onerous debt / Adjustedadjusted EBITDA equal to or lower than 1.00, the amount that must pass through this blocked collateral account is R$13.4 million per month. If one of the three ratios mentioned above areis not met in any two or more quarters, consecutive or not, within a twelve-month period, yet remain within the following band of ratios: Adjustedadjusted EBITDA / Adjusted Financial Expensesadjusted financial expenses lower than 3.50 but equal to or higher than 2.80, Adjusted Net Debtadjusted net debt / Adjustedadjusted EBITDA equal to or lower than 3.80 but higher than 3.00, and Other Onerous Debtother onerous debt / Adjustedadjusted EBITDA equal to or lower than 1.30 but higher than 1.00, the amount that must pass through the blocked collateral account is automatically increased by 20%.
The current covenant clauses are:
A. | Maintenance of the following ratios, calculated quarterly and relative to amounts accumulated over the last 12 months at the time of disclosure of reviewed quarterly |
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B. | If any one of the ratios specified in A. above |
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C. | If any one of the second band ratios specified in B. above |
· | require us to provide additional financial guarantees within a deadline specified by BNDES, which may not be less than 30 days; |
· | suspend the release of funds; and/or |
· | declare the financings to be immediately due and payable. |
As of December 31, 2021,2023, the amount that must pass through the blocked collateral account is R$250.9288.8 million per month, not including the financial guarantees for financing contract No. 08.2.0169.1.month.
The financial covenants applicable to financing contract No. 08.2.0169.1 are the following:
BNDES will annually verify the maintenance of the ratios mentioned above for contract 08.2.0169.1 by reviewing our audited annual financial statements, which must be presented to BNDES or published by April 30 of the following year to which the financial statements refer. If we maintain all of the financial covenants for contract 08.2.0169.1, BNDES will reduce the interest charged on this loan from 2.15% to 1.82% per annum. If the financial covenants are maintained, the interest rate is reduced as of June 16 of the same year in which the financial covenants were verified until June 15 of the subsequent year.
The financing agreement established with BNDES in March 2010 is subject to a cross-default clause. For example, the early maturity of any of our debts, the financial contracts and/or amounts of which may compromise the obligations stipulated in the indenture shall cause the early maturity of such agreement.
Additionally, since 2018, we are subject to financial covenants under the new financing agreements executed with CEFCaixa Econômica Federal.. These financial covenants require us to maintain the following financial indexes, calculated for the past twelve12 months on a quarterly basis:
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These agreements provide that disbursements may be suspended if any of these covenants are not being complied with. In the event of non-compliance with the terms of these agreements, Caixa Econômica Federal CEF may request the anticipated payment of the entire loan.
The agreements with Caixa Econômica Federal CEF also contain a cross-default clause and an early maturity clause, inclause. In the event of non-compliance with the terms of the contract, the Caixa Econômica Federal CEF can request the anticipated payment of part or all of the loan. See Note 1617 to our financial statements2023 Consolidated Financial Statements included in this annual report.
With respect to our outstanding debentures, the twelfth issuance requires us to maintain an Adjusted Current Ratioadjusted current ratio (current assets divided by current liabilities, excluding from current liabilities the current portion of noncurrent debts incurred by us that is recorded in current liabilities) higher than 1.0:1.0 and an EBITDA/Financial Expenses Ratiofinancial expenses ratio equal to or higher than 1.5:1.0. The twelfth debenture issuance has an early maturity clause, which is triggered if our credit ratings are downgraded two levels below the “brAA-” Brazil National Scale rating assigned to our debentures by the credit rating agency S&P at the time of their issuance. On July 11, 2018, our credit rating and the one assigned to the twelfth debenture issuance by S&P were both “brAAA.” This issuance has a cross-default clause.
The fourteenth and eighteenth issuances followissuance follows the covenants included in the BNDES loans, as described above, and contain a cross-default clauses.
The seventeenth issuance requires us to maintain an adjusted EBITDA/paid financial expenses ratio equal to or higher than 1.5:1.0 and an adjusted total debt/adjusted EBITDA ratio equal to or lower than 3.65:1.0. This issuance has a cross-default clause.
The table below shows the more restrictive covenants ratios and our financial covenants ratios as of December 31, 2021.2023.
The twenty-first, twenty-second, twenty-third, twenty-fourth, twenty-sixth, twenty-seventh, twenty-eighth, twenty-ninth, thirtieth and thirtieththirty-first debenture issuances require us to maintain an adjusted EBITDA/paid financial expenses ratio equal to or higher than 1.5:1.0 and an adjusted net debt/adjusted EBITDA ratio equal to or lower than 3.50:1.0. These issuances have a cross accelerationcross-acceleration clause.
Restrictive Ratios | |||
Equal to or higher than 2.80:1.00 | |||
EBITDA/ | Equal to or higher than 2.35:1.00 | ||
Equal to or lower than 3.80:1.00 | |||
Equal to or lower than 3.50:1.0 | |||
Equal to or lower than 1.30:1.00 | |||
Higher than 1.0 |
(1) | “ |
As of December 31, 20212023 and 2020,2022, we complied with all the covenants of our loans and financing agreements.
Waivers and Creditors’ Approvals
As our Proposed Privatization would lead to the State of São Paulo no longer being our controlling shareholder, as well as amendments to some of our corporate documents to reflect such change, we are in the process of obtaining waivers and prior consents from certain creditors that included covenants and restrictions concerning to such provisions in their agreements. Under the agreements referred to below, a change in control rating downgrade event triggered by our Proposed Privatization, the consequent amendment of our corporate documents and certain investments that could affect our capital structure could lead to an acceleration, cross-default, cross acceleration or termination of certain agreements governing our debt, if we are unsuccessful in obtaining the following waivers and prior consents:
· | Inter-American Investment Corporation (IDB Invest), Inter-American Development Bank (IDB) and Société De Promotion Et De Participation Pour La Coopération Economique S.A. (Proparco): Loan Agreement No. 12676-0, entered into between IDB Invest, IDB and us on June 24, 2022, and amended as per the Loan Agreement No. 12676-02 / 14488-01, dated May 4, 2023, with a guarantee provided by Proparco under a Reimbursement Agreement dated May 4, 2023; |
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· | Inter-American Investment Corporation (IDB Invest) and Inter-American Development Bank (IDB): Loan Agreement No. 13069-01, entered into between IDB Invest, IDB and us on November 10, 2020; |
· | International Finance Corporation (IFC): (i) Loan Agreement No. 46253, entered into between IFC and us on June 27, 2022 and amended on October 11, 2023; and (ii) Loan Agreement No. 47451, entered into between IFC and us on June 14, 2023; |
· | International Bank for Reconstruction and Development (IBRD): (i) Loan Agreement No. 7662-BR, entered into between IBRD and us on October 28, 2009, subject to IBRD general conditions dated July 1, 2005, as amended up until February 12, 2008; and (ii) Loan Agreement No. 8916-BR, entered into between IBRD and us on November 29, 2019, subject to the IBRD general conditions dated July 14, 2017; |
· | Japan International Cooperation Agency (JICA): (i) Loan Agreement No. BZ-P15, entered into between JICA and us on August 6, 2004; (ii) Loan Agreement No. BZ-P17, entered into between JICA and us on October 14, 2010; (iii) Loan Agreement No. BZ-P18, entered into between JICA and us on February 15, 2011; and (iv) Loan Agreement No. BZ-P19, entered into between JICA and us on February 23, 2012; |
· | BNDES: (i) Credit Facility Agreement No. 09.2.1535.1, entered into between BNDES and us on March 1, 2010; (ii) Credit Facility Agreement No. 11.2.0975.1 entered into between BNDES and us on March 5, 2012; (iii) Credit Facility Agreement No. 11.2.0975.2, entered into between BNDES and us on March 5, 2012; (iv) Credit Facility Agreement No. 12.2.1381.1, entered between BNDES and us in February 22, 2013; (v) Credit Facility Agreement No. 14.2.0535.1, entered into between BNDES and us on June 30, 2014; (vi) Credit Facility Agreement No. 15.2.0313.1, entered into between BNDES and us on June 25, 2015; (vii) Contract for the Fiduciary Assignment of Credit Rights and Other Covenants No. 09.2.1175.2 and 09.6.0110.2, entered into between BNDES, BNDESPAR and us on November 26, 2009; (viii) Subscription Promise Agreement for Simple Debentures in Private Issuances and Other Covenants No. 09.2.1175.1 and 09.6.0110.1, entered into between BNDES, BNDESPAR and us on December 26, 2009; (ix) Indenture of our 10th Issuance of Debentures, entered into between BNDES, BNDESPAR and us on November 26, 2009, as amended; and (x) Indenture of our 18th Issuance of Debentures, issued by us in September 12, 2013, as amended; |
· | Brazilian Federal Savings Bank (CEF): Entered into until 2008: (i) Loan and Onlending Agreement No. 162.694-99, entered into CEF and us on September 19, 2007; (ii) Loan and Onlending Agreement No. 162.696-17, entered into CEF and us on July 14, 2006; (iii) Loan and Onlending Agreement No. 162.703-01, entered into CEF and us on July 14, 2006; (iv) Loan and Onlending Agreement No. 162.704-15, entered into CEF and us on July 14, 2006; (v) Loan and Onlending Agreement No. 162.723-41, entered into CEF and us on July 14, 2006; (vi) Loan and Onlending Agreement No. 162.726-75, entered into CEF and us on July 14, 2006; (vii) Loan and Onlending Agreement No. 162.727-89, entered into CEF and us on July 14, 2006; (viii) Loan and Onlending Agreement No. 162.743-82, entered into CEF and us on July 14, 2006; (ix) Loan and Onlending Agreement No. 191.305-91, entered into CEF and us on September 19, 2007; (x) Loan and Onlending Agreement No. 191.307-18, entered into CEF and us on July 14, 2006; (xi) Loan and Onlending Agreement No. 191.308-22, entered into CEF and us on July 14, 2006; (xii) Loan and Onlending Agreement No. 191.311-79, entered into CEF and us on September 19, 2007; (xiii) Loan and Onlending Agreement No. 191.313-97, entered into CEF and us on September 19, 2007; (xiv) Loan and Onlending Agreement No. 191.314-00, entered into CEF and us on September 19, 2007; (xv) Loan and Onlending Agreement No. 191.318-47, entered into CEF and us on September 19, 2007; (xvi) Loan and Onlending Agreement No. 191.320-80, entered into CEF and us on September 19, 2007; (xvii) Loan and Onlending Agreement No. 191.341-33, entered into CEF and us on September 19, 2007; (xviii) Loan and Onlending Agreement No. 191.342-47, entered into CEF and us on September 19, 2007; (xix) Loan and Onlending Agreement No. 191.343-52, entered into CEF and us on September 19, 2007; (xx) Loan and Onlending Agreement No. 191.344-66, entered into CEF and us on September 19, 2007; (xxi) Loan and Onlending Agreement No. 191.345-71, entered into CEF and us on July 14, 2006; (xxii) Loan and Onlending Agreement No. 191.346-85, entered into CEF and us in September 19, 2007; (xxiii) Loan and Onlending Agreement No. 191.347-99, entered into CEF and us on September 19, 2007; (xxiv) Loan and Onlending Agreement No. 191.348-02, entered into CEF and us on September 19, 2007; (xxv) Loan and Onlending Agreement No. 191.349-16, entered into CEF and us on September 19, 2007; (xxvi) Loan and Onlending Agreement No. 191.351-61, entered into CEF and us on September 19, 2007; (xxvii) Loan and Onlending Agreement No. 215.654-50, entered into CEF and us on December 26, 2007; (xxviii) Loan and Onlending Agreement No. 215.655-65, entered into CEF and us on December 23, 2008; (xxix) Loan and Onlending Agreement No. 217.033-79, entered into CEF and us on September 19, 2007; (xxx) Loan and Onlending Agreement No. 228.503-94, entered into CEF and us on May 14, 2008; (xxxi) Loan and Onlending Agreement No. 228.504-07, entered into CEF and us on December 23, 2008; (xxxii) Loan and Onlending Agreement No. 228.510-87, entered into CEF and us on May 14, 2008; (xxxiii) Loan and Onlending Agreement No. 228.529-99, entered into CEF and us on May 14, 2008; (xxxiv) Loan and Onlending Agreement No. 228.544-88, entered into CEF and us on May 14, 2008; (xxxv) Loan and Onlending Agreement No. 228.584-70, entered into CEF and us on May 14, 2008; (xxxvi) Loan and Onlending Agreement No. 228.593-81 and 228.594-95, entered into CEF and us on May 14, 2008; (xxxvii) Loan and Onlending Agreement No. 228.595-09, entered into CEF and us on May 14, 2008; (xxxviii) Loan and Onlending Agreement No. 228.605-26, 228.607-44, 228.608-59 and 228.610-91 entered into CEF and us on May 14, 2008; (xxxix) Loan and Onlending Agreement No. 228.613-22, entered into CEF and us on May 14, 2008; (xxxx) Loan and Onlending Agreement No. 228.620-15 and 228.621-29, entered into CEF and us on May 14, 2008; (xxxxi) Loan and Onlending Agreement No. 228.623-47, 228.625-67 and 228.626-71, entered into CEF and us on May 14, 2008; (xxxxii) Loan and Onlending Agreement No. 228.638-13, entered into CEF and us on May 14, 2008; (xxxxiii) Loan and Onlending Agreement No. 228.650-83, 228.651-97 and 228.652-00, entered into CEF and us on May 14, 2008; (xxxxiv) Loan and Onlending Agreement No. 228.661-11 and 228.798-50, entered into CEF and us on May 14, 2008; (xxxxv) Loan and Onlending Agreement No. 228.682-66, 228.683-70, 228.684-84, 228.685-99 and 228.686-02, entered into CEF and us on May 14, 2008; (xxxxvi) Loan and Onlending Agreement No. 228.700-80, entered into CEF and us in May 14, 2008; (xxxxvii) Loan and Onlending Agreement No. 228.708-63, 228.709-77, 228.710-04 and 228.810-18, entered into CEF and us on May 14, 2008; (xxxxviii) Loan and Onlending Agreement No. 228.726-85, entered into CEF and us on May 14, 2008; (xxxxix) Loan and Onlending Agreement No. 228.725-71, 228.728-02, 228.730-44, 228.733-77, 228.737-13, 228.804-39 and 228.805-44, entered into CEF and us on May 14, 2008; (xxxxx) Loan and Onlending Agreement No. 228.738-27, 228.740-60 and 228.741-74, entered into CEF and us on May 14, 2008; (xxxxxi) Loan and Onlending Agreement No. 228.758-70, entered into CEF and us on May 14, 2008; (xxxxxii) Loan and Onlending Agreement No. 228.811-22, entered into CEF and us on May 14, 2008; (xxxxxiii) Loan and Onlending Agreement No. 245.173-67, entered into CEF and us on December 23, 2008; (xxxxxiv) Loan and Onlending Agreement No. 245.175-86, entered into CEF and us on December 23, 2008; (xxxxxv) Loan and Onlending Agreement No. 245.178-17, entered into CEF and us on December 23, 2008; (xxxxxvi) Loan and Onlending Agreement No. 245.179-21, entered into CEF and us on December 23, 2008; (xxxxxvii) Loan and Onlending Agreement No. 245.182-78, entered into CEF and us on December 23, 2008; (xxxxxviii) Loan and Onlending Agreement No. 245.185-00, entered into CEF and us on December 23, 2008; (xxxxxix) Loan and Onlending Agreement No. 245.186-14, entered into CEF and us on December 23, 2008; (xxxxxx) Loan and Onlending Agreement No. 245.188-32, entered into CEF and us on December 23, 2008; (xxxxxxi) Loan and Onlending Agreement No. 245.189-46, entered into CEF and us on December 23, 2008; (xxxxxxii) Loan and Onlending Agreement No. 245.190-75, entered into CEF and us on December 23, 2008; (xxxxxxiii) Loan and Onlending Agreement No. 245.192-93, entered into CEF and us on December 23, 2008; (xxxxxxiv) Loan and Onlending Agreement No. 245.201-05, entered into CEF and us on December 23, 2008; (xxxxxxv) Loan and Onlending Agreement No. 245.204-37, entered into CEF and us on December 23, 2008; (xxxxxxvi) Loan and Onlending Agreement No. 245.206-57, entered into CEF and us on December 23, 2008; (xxxxxxvii) Loan and Onlending Agreement No. 245.216-72, entered into CEF and us on December 23, 2008; (xxxxxxviii) Loan and Onlending Agreement No. 248.095-77, entered into CEF and us on December 23, 2008; |
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· | Brazilian Federal Savings Bank (CEF): Entered into after 2008: (i) Loan and Onlending Agreement No. 346.783-87, entered into CEF and us on October 31, 2012; (ii) Loan and Onlending Agreement No. 346.806-52, 346.812-39 and 346.826-92, entered into CEF and us on August 14, 2012; (iii) Loan and Onlending Agreement No. 346.771-43, 346.827-05, 346.875-95, 346.903-32 and 346.959-04, entered into CEF and us on February 28, 2012; (iv) Loan and Onlending Agreement No. 353.694-49, entered into CEF and us on February 28, 2012; (v) Loan and Onlending Agreement No. 376.611-30, entered into CEF and us on July 20, 2012; (vi) Loan and Onlending Agreement No. 376.744-31, entered into CEF and us on July 20, 2012; (vii) Loan and Onlending Agreement No. 376.746-51, entered into CEF and us on July 20, 2012; (viii) Loan and Onlending Agreement No. 376.749-83, entered into CEF and us on July 20, 2012; (ix) Loan and Onlending Agreement No. 376.751-36, entered into CEF and us on July 20, 2012; (x) Loan and Onlending Agreement No. 376.804-66, entered into CEF and us on July 20, 2012; (xi) Loan and Onlending Agreement No. 376.806-85, entered into CEF and us on July 20, 2012; (xii) Loan and Onlending Agreement No. 376.809-16, entered into CEF and us on July 20, 2012; (xiii) Loan and Onlending Agreement No. 376.812-63, entered into CEF and us on July 20, 2012; (xiv) Loan and Onlending Agreement No. 376.817-13, entered into CEF and us on July 20, 2012; (xv) Loan and Onlending Agreement No. 376.820-60, entered into CEF and us on July 20, 2012; (xvi) Loan and Onlending Agreement No. 376.821-74, entered into CEF and us on July 20, 2012; (xvii) Loan and Onlending Agreement No. 376.831-99 and 376.858-19, entered into CEF and us on July 20, 2012; (xviii) Loan and Onlending Agreement No. 376.840-09, entered into CEF and us on July 20, 2012; (xix) Loan and Onlending Agreement No. 376.844-45, entered into CEF and us on July 20, 2012; (xx) Loan and Onlending Agreement No. 376.852-55, entered into CEF and us on July 20, 2012; (xxi) Loan and Onlending Agreement No. 376.860-52, entered into CEF and us on July 20, 2012; (xxii) Loan and Onlending Agreement No. 410.509-12, 410.546-61, 410.549-93, 410.551-46, 410.608-12 and 410.622-98 entered into CEF and us on December 2, 2013; (xxiii) Loan and Onlending Agreement No. 427.646-35, 427.682-81, 427.738-42 and 427.751-25, entered into CEF and us on June 30, 2014; (xxiv) Loan and Onlending Agreement No. 475.819-31, entered into CEF and us on August 28, 2017; (xxv) Loan and Onlending Agreement No. 505.895-25, 505.914-53, 505.924-78, 505.929-28, 505.934-93, 505.948-55, 505.951-12, 505.954-44, 505.955-50 and 505.957-78, entered into CEF and us on December 28, 2018; (xxvi) Loan and Onlending Agreement No. 505.911-20, entered into CEF and us on December 28, 2018; (xxvii) Loan and Onlending Agreement No. 505.923-64, entered into CEF and us on December 28, 2018; (xxviii) Loan and Onlending Agreement No. 505.926-97, entered into CEF and us on December 28, 2018; (xxix) Loan and Onlending Agreement No. 505.927-00, entered into CEF and us on December 28, 2018; (xxx) Loan and Onlending Agreement No. 505.930-57, entered into CEF and us on December 28, 2018; (xxxi) Loan and Onlending Agreement No. 505.931-61, entered into CEF and us on December 28, 2018; |
· | Financiadora de Estudos e Projetos (FINEP): Loan Agreement No. 0915003700 entered between FINEP and us on October 2015; |
· | 22nd, 23rd, 24th, 26th, 27th, 28th, 29th and 30th Issuances of Debentures. |
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Additionally, as of the date of this annual report, we have identified that we will need to obtain prior consents from certain creditors to update the net debt or adjusted net debt definition in the credit agreements referred below:
· | Inter-American Investment Corporation (IDB Invest), Inter-American Development Bank (IDB) and Société De Promotion Et De Participation Pour La Coopération Economique S.A. (Proparco): Loan Agreement No. 12676-0, entered into between IDB Invest, IDB and us on June 24, 2022, and amended as per the Loan Agreement No. 12676-02 / 14488-01, dated May 4, 2023, with a guarantee provided by Proparco under a Reimbursement Agreement dated May 4, 2023; |
· | Inter-American Investment Corporation (IDB Invest) and Inter-American Development Bank (IDB): Loan Agreement No. 13069-01, entered into between IDB Invest, IDB and us on November 10, 2020; |
· | BNDES: (i) Credit Facility Agreement No. 09.2.1535.1, entered into between BNDES and us on March 1st, 2010; (ii) Credit Facility Agreement No. 11.2.0975.1 entered into between BNDES and us on March 5, 2012; (iii) Credit Facility Agreement No. 11.2.0975.2, entered into between BNDES and us on March 5, 2012; (iv) Credit Facility Agreement No. 12.2.1381.1, entered into between BNDES and us on February 22, 2013; (v) Credit Facility Agreement No. 14.2.0535.1, entered into between BNDES and us on June 30, 2014; (vi) Credit Facility Agreement No. 15.2.0313.1, entered into between BNDES and us on June 25, 2015; (vii) Subscription Promise Agreement for Simple Debentures on Private Issuances and Other Covenants No. 09.2.1175.1 and 09.6.0110.1, entered into between BNDES, BNDESPAR and us on December 26, 2009; (viii) Indenture of our 10th Issue of Debentures, entered into between BNDES, BNDESPAR and us on November 26, 2009, as amended; and (ix) Indenture of our 18th Issue of Debentures, issued by us on September 12, 2013, as amended; |
· | Brazilian Federal Savings Bank (CEF): Entered into after 2017: (i) Loan and Onlending Agreement No. 505.895-25, 505.914-53, 505.924-78, 505.929-28, 505.934-93, 505.948-55, 505.951-12, 505.954-44, 505.955-50 and 505.957-78, entered into CEF and us on December 28, 2018; (ii) Loan and Onlending Agreement No. 505.911-20, entered into CEF and us on December 28, 2018; (iii) Loan and Onlending Agreement No. 505.923-64, entered into CEF and us on December 28, 2018; (iv) Loan and Onlending Agreement No. 505.926-97, entered into CEF and us on December 28, 2018; (v) Loan and Onlending Agreement No. 505.927-00, entered into CEF and us on December 28, 2018; (vi) Loan and Onlending Agreement No. 505.930-57, entered into CEF and us on December 28, 2018; (vii) Loan and Onlending Agreement No. 505.931-61, entered into CEF and us on December 28, 2018; |
· | 22nd, 23rd, 24th, 26th, 27th, 28th, 29th and 30th Issuances of Debentures. |
Additionally, on March 28, 2024, we sent a notice to the fiduciary agent and to the Debentures holder, through which we requested the full early redemption of the Debentures of our 12th Issuance, pursuant to the terms and conditions of the indenture.
As of the date of this annual report we have received waivers in respect of the following financings:
· | International Bank for Reconstruction and Development (IBRD): We have received on April 5, 2024, a waiver letter from IBRD confirming that they do not intend to trigger the event of suspension or the event of acceleration as a result of our Proposed Privatization under the following financing agreements: (i) Loan Agreement No. 7662-BR, entered into between IBRD and us on October 28, 2009, subject to IBRD general conditions dated July 1, 2005, as amended up until February 12, 2008; and (ii) Loan Agreement No. 8916-BR, entered into between IBRD and us on November 14, 2018, subject to the IBRD general conditions dated July 14, 2017. The waiver was granted by IBRD considering the confirmation of our commitment to perform the obligations under the loan agreements and to achieve the objectives of the related projects, and the fact that the change of control will not affect the validity, terms and conditions of the loan agreements and guarantee agreements. As of the date of this annual report, we have not received confirmation of maintenance of the guarantee and the counter-guarantees by the Brazilian government and the State of São Paulo, respectively. |
· | 27th, 28th and 30th Issuances of Debentures: On April 29, 2024, April 25, 2024 and April 26, 2024, the general meetings of the debentures holders of the 27th, 28th and 30th debentures issuances, respectively, were held, through which the debenture holders granted the waivers in respect of change of control provisions that would be triggered if our Proposed Privatization is consummated and to the update of the net debt definition in the indentures, subject to certain conditions (such as the payment of a waiver fee, the shareholder structure to take place after the Proposed Privatization and the non-occurrence of a rating downgrade event). |
For more information about our indebtedness, see “—Indebtedness Financing”, and for more information about our Proposed Privatization, see “Presentation of Financial and Other Information—Proposed Privatization.”
For more information about waivers and creditor’s approvals, see “Item 3.D. Risk Factors—Certain agreements governing our debt contain change of control provisions that are triggered if the State of São Paulo government ceases to be our controlling shareholder, including in connection with our Proposed Privatization. If we are not able to obtain the necessary waivers or approvals from our creditors regarding our Proposed Privatization prior to completion of the Proposed Privatization, such agreements would be subject to acceleration, cross-default, cross acceleration or termination, which would materially adversely affect our financial condition and results of operations.”
Capital Requirements
We have, and expect to continue having, substantial liquidity and capital resource requirements. These requirements include debt-service obligations, capital expenditures to maintain, improve and expand our water and sewage systems, and dividend payments and other distributions to our shareholders, including the State.State of São Paulo.
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Capital Expenditures
Historically, we have funded and plan to continue funding our capital expenditures with funds generated by operations and with long-term financing from international and national multilateral agencies and development banks. We generally include in our capital expenditure program for the following year the amount of investment that was not realized in the previous year. In 2021,For the year ended December 31, 2023, we recorded R$5.06.3 billion to improve and expand our water and sewage system and to protect our water sources in order to meet the growing demand for water and sewage services in the stateState of São Paulo. We have budgeted investments in the amount of approximately R$23.847.4 billion from 20222024 through 2026. See2028. For more information, see “Item 4.A. History and Development of the Company—Capital Expenditure Program.”
Dividend Distributions
We are required by our bylaws to make dividend distributions, which can be made as payments of interest on shareholders’ equity to our shareholders in an amount equal to or highergreater than 25% of the amounts available for distribution. In addition, our dividend policy, which was approved at the annual shareholders’ meeting held on April 27, 2018, establishes that this percentage shall be maintained until the universalization of basic sanitation services in the areas where we operate. We declared dividends of R$644.3984.5 million, R$272.0872.2 million and R$941.0644.3 million in the fiscal years ended on December 31, 2023, 2022 and 2021, 2020 and 2019 and, respectively. SeeFor more information, see “Item 7.B. Related Party Transactions—Dividends.”
Judicial payment orders (precatório)
As of December 31, 2023, we have judicial payment orders issued in our favor in the inflation adjusted amount of R$3,085.3 million, which are not recognized in our Consolidated Financial Statements because of the difficulty to obtain a reasonable estimate to measure such assets, due to the uncertainties related to the beginning and the end of the payments. Judicial payment orders are recognized upon the beginning of their receipt or when they are traded. For more information on judicial payment orders, see Note 10 to our 2023 Consolidated Financial Statements included in this annual report.
C. | Research and Development, Patents and Licenses, |
Research and innovation
The advancement of research and technological development is part of our strategic guidelines, and aims to implement innovation in operations, processes and services. Such efforts seek to increase organizational efficiency, reflecting in greater customer satisfaction, improved quality of life, environmental sustainability and competitiveness, with improved productivity and quality of our processes and services.
Our strategic innovation process goes beyond the development of new technologies, products and services. It involves the creation of new business models, new ways of meeting the needs of consumers, new organizational processes, new ways of competing and cooperating in the business environment and improvements to service delivery, while at the same time promoting protection of the environment and public health.
We set up a Corporate “Research, Technological Development and Innovation” Program, which allows us to differentiate the financial resources spent specifically for this purpose within our budget structure. In 2021,For the year ended December 31, 2023, we allocated R$26.532.1 million to Research, Development and Innovation or (“RD&I,&I”), projects. These resources are a differential in our results and indicate our capacity for innovation and pioneering, which can bring fiscal, tariff and financial advantages. We carry out several actions for the implementation of innovative technological solutions systematically throughout our company. These solutions are aimed at improving construction and operational processes for water and wastewater systems, water and wastewater treatment solutions, asset control and management, renewable energy generation processes, energy efficiency, user relationship technologies, circular economy projects, waste reduction, and utilization methods, among others. These are solutions that are in the scalability stage of technological development and have already passed the research and development phase. Some may even represent new business opportunities.
In addition, in September 2019, based on programs already in place in the power and gas sectors, we maintain a portfolio of prioritized projects with ARSESP created thein its Quadrennial Research and Technological Development Program for Innovation in Basic Sanitation Services (the “PD(PD&I Program”)Program), establishingwhich requires the application of the 0.05% of revenue required in Research and Technological Developmentto RD&I projects. ARSESP also approved the Elaboration and Evaluation Manual of the PD&I Program. In 2020, we filed a portfolio of PD&I Program projects for analysis and selection by ARSESP. However, due to the effects of COVID-19 pandemic, ARSESP temporarily suspended the implementation of the PD&I Program. Accordingly, in 2021 the first cycle of the program, covering the tariff cycle 2021-2024, was resumed,is ongoing, comprising 912 projects selected by ARSESP in the amount of R$30.937.8 million. SeeFor more information, see “—Tariff ReadjustmentReadjustments and Revisions.Reviews.”
In February 2020, we signed a Technical CooperationPursuant to our technical cooperation agreement with IDB to finance(“Technical Cooperation Agreement”), projects focused on actions for the improvement and technological innovation of water supply management facilities during water crises were completed, using modern analytical tools, available experiences and practices and theoretical analysis. This cooperation agreement provides for resources of approximately US$328 thousand,0.3 million, non-refundable, to be debited from the bank’s ordinary capital resources destined to the Strategic Programstrategic program for Infrastructure Development, with our counterpart ininfrastructure development, which enabled actions to increase the amountresilience of US$30 thousand. The project is in its final development phase.
This activitywater supply systems, which corresponds to one of the components of the Technical Cooperationagreements signed between the IDB and the State of São Paulo, assigned for execution by us. It is complemented by two other sequential activities: (i) Systematization of the process for public call for technological innovation projects and (ii) Development and implementation of a digital platform for open innovation. Both are described in the For further information, see “Item 5. Operating and Financial Review Prospects—C. Research and Development, Patents and Licenses, etc.—Open Innovation chapter.Innovation.”
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In line with business planning, the structuring of RD&I actions is based on the concept of a circular economy,economy; that is, focused on the intelligence of nature, the circular process opposes the traditional linear production process. As part of this concept, residues are inputs for the production of new products and new cycles. We have highlighted below certain RD&I projects that use the concept of a circular economy, which strongly supports resource recovery, as part of the processes for the water and sewage treatment.
The sequential implementation of integrated actions for liquid, solid and gaseous sewage treatment phases at the sewage treatment plant in the Municipalitymunicipality of Franca aims to optimize processes and transform the site into a resource recovery plant. Since 2018, a biogas upgrade project in one of ourthis sewage treatment plants, located in the Municipality of Franca,plant has been producing biomethane for vehicle use. The project was developed inuse as a result of the partnership with the Fraunhofer Institute in Stuttgart, Germany. This sewage treatment plant treats an average of 500 liters per second of sewage and produces around 2,500 m³ of biogas per day. The upgrade system can produce biomethane to replace 1,500 liters of common gas daily. The biomethane currently supplies part of the Sabespour Franca fleet. As a result of the tests carried out, we can replicate this initiativeare studying the replication of the technology in six other large-scale sewage treatment plants located in the São Paulo metropolitan region.region and in the state’s interior.
In addition, to enable the commercialization of the biomethane produced, which is currently used to supply our fleet in the municipality of Franca, one of the steps is its certification as a product in accordance with the requirements of the National Agency for Petroleum, Natural Gas and Biofuels (ANP)(“ANP”) Resolution No. 685/2017.886/2022. To meet these requirements, a risk assessment study using The Hazard and Operability Study – HAZOP Methodology is beinghas been carried out by us since 2021. This study focusedfocuses on the quality of the upgrading system and should consider biogas and biomethane quality monitoring and upgrading system facilities inspection. The final report will be submitted tofor ANP approval by the end of 2022.approval. It is an important initiative aiming beyond a new source of income, a substitution of fossil fuels for clean energy; reduction of greenhouse gasGHG emissions, and inclusion of biomethane as a new fuel in the Brazilian energy matrix.
At the same plant, we developed and are operating a sludge dryer based on solar radiation financed by the Funding Authority for Studies and Projects (Financiadora de Estudos e Projetos, or FINEP) as part of the “Technological Innovations Plan of Sabesp for Sanitation” financed by the FINEP Inova Brasil program.
The project also provides for other actions in the planning and contracting phase, such as the use of energy from hydraulic and solar sources, in addition to other beneficial applications of biogas. This circular economy project in the Municipalitymunicipality of Franca sewage treatment plant received first place in the 2019 edition of the Ideas en Acción award offrom the IDB.
At the Barueri sewage treatment plant, we implemented a plasma gasification system for the processing of sludge generated. A new gas treatment system was installed to improve the quality of the gases generated. This system continues in the adjustment phase to ensure it is fully operational in a continuous and safe way. At the end of the process, thethis system generates inert residue with a drastic reduction in its volume, with a potential for reuse as raw material in construction, meaning it does not need to be disposed of in landfills. This project was also funded by FINEP.
In order to generate clean energy to improve the efficiency of sewage treatment, we installed solar-powered aerators, increasing the energy efficiency of sewage treatment. Test2023, preliminary results indicate that this technology can be replicated and adapted elsewhere. Shortage of water is an increasingly imminent problem in large urban centers. Accordingly, an increasingly conscious use of water and the search for alternative ways of reusing water are essential. With regard to projects that use the concept of the circular economystudies conducted under the Program for Support of Research in the processes of water treatment, we have undertaken testsPartnership for the use of ceramic membranes for the ultrafiltration of silicon carbide for the recovery of waste water from water treatment plants. Test results point to the feasibilityTechnological Innovation (PITE-SABESP/FAPESP) were presented. These studies were carried out in the use of this technology.
In 2021, the studies foreseen in the partnership maintainedcollaboration with the São Paulo State University Júlio de Mesquita Filho - UNESP were concluded to assess the technical and environmental feasibility of using sludge from the Water Treatment Plant as raw material for beneficial use in geotechnical works. Additionally, partnerships with EMBRAPA were also established for the base and sub-baseproduction of pavements. This corresponds to the first phase of a project which the final objective iscontrolled-release fertilizer. These partnerships aim to add value to this by-product that would transformbyproduct, transforming waste into a raw material for civil engineering and agriculture in order to be used in pavements, demonstrating itsdemonstrate the beneficial use of the byproduct and its potential forto generate additional revenue generation.revenue.
We also developed biofiltration units for odor control to be installed in the sewage and pumping stations in Pinheiros and Pomar, in the city of São Paulo. This is an example of a project fostered by studies developed internally by us. A major portion of this project also received financing from FINEP. Projects such as this are extremely important to reduce the emission of odorous substances in the atmosphere from the transport and treatment of sewage, which can help mitigate socio-economic and environmental impacts.
FromAs a component of our partnership with FAPESP, financial resources are invested equally to subsidize and support the development of basic and applied research projects under the Program for Support of Research in Partnership for Technological Innovation for research projects in academic or research institutions, whose themes originated from the demands pointed out by the operational areas. This partnership has already resulted in 17 projects with different universities, such as: University of São Paulo - USP, Technological Institute of Aeronautics, - ITA, Federal University of São Paulo - UNIFESP, National Institute for Space Research - INPE and São Paulo State University - UNESP. The partnership provides for a non-refundable financing of R$ 5050.0 million, divided equally between us and FAPESP. The first and second collaborative call for proposals to select projects to finance led to the filing of seven national patent applications before the INPI, (the Brazilian Institutetwo of Industrial Property),which were granted in 2023, two international patent applications under the Patent Cooperation Treaty (“PCT”)PCT before the WIPO (WorldWorld Intellectual Property Organization)Organization and two software registration requests. In March 2020, we launchedThe 12 projects selected in the 2022 third call for proposal to which we will finance projects up to a total of R$18 million. The submitted projects were analyzed for scientific merit by FAPESP’s ad hoc reviewers and 12 selected will be startare currently in 2022.the development phase.
Another innovationinnovative project that we have recently implemented is the Pinheiros River Oxygenation System. This project is part of the work frontsbeing developed within the scope of the Novo Rio Pinheiros Program, coordinated by the government of the State of São Paulo.Paulo government. The project consists of the implementation of an innovative oxygenation technology called SDOx. This technology, unlike conventional aeration technologies, has the potential to transfer 90%a greater amount of the used oxygen to the liquid medium,water, through a processsupersaturated solution and its dispersion in the water. The goal of oxygen dissolution at the molecular level. To implement this project we invested R$28.4 million through an integrated contract, which includesis to enhance the preparation of studies and projects, implementation of works, operation and monitoringnatural self-purification process by artificially increasing the oxygen levels of the Pinheiros River over the five yearswater. The project is in its second year of operation, with satisfactory results in terms of the contract. The purpose is also to carry out technical and scientific studies to evaluategradual increase in oxygen concentration in the technology and its effects on the purification and improvementupper channel of the water quality of the Pinheiros River. The construction work of the Oxygenation Plant was completed. The assisted pre-operation of the system started in November 21 and adjustments to the system are in progress.river. This test aimsis intended to verify the technical-economic feasibility of thisthe technology, with a view to replicating it in other water bodies of different sizes in order to improve their quality.
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With the data obtained with the project, a study is carried out by CETESB to assess the improvement in air quality around the Pinheiros River has shown a connection between the improvement in air quality and the improvement in the river’s water quality, as a result of the sanitation actions that we implemented in the Pinheiros River basin.
In the management of water resources used for public water supply, it was approved by our Executive Board to hire particle analyzers, which will be used to automate hydrobiological monitoring (i.e., algae bloom monitoring). The goal of this monitoring is to reduce the action time for raw water management activities, reducing operational costs with algaecide products and promoting greater quality stability in the water sent to treatment.
Open Innovation
We are investinginvest in the development and implementation of actionsinitiatives as part of Open Innovation, integratingour open innovation concept, a concept embedded in our actions, with no specific program established. This concept generates ideas, thoughts, processes, prospect for solutions, shares needs, and exchanges knowledge and research from players from variouswith the participation of internal and external segments of our company, capablecompany. These contributions span a diverse range of presentingsectors, enabling us to harness innovative solutions withand technologies to enhance our processes, products and services. With this, we seek innovative solutions from the most diverse productive sectors of the market, aimingincluding startups, for the development of solutions.
Specifically, we encourage startups to improve our processes, products and services. Startups, specifically, are stimulated bytake on challenges and are made viable by proposing and validatingpropose validated solutions for the most varied problems, with the objectivea wide array of achieving scaleproblems. Their goal is to achieve scalability and acceleration, withultimately creating a positive impact foron their new products and businesses. This proactive approach aims to stimulate the sanitation market and potentially lead to the development of solutions that cater to our specific needs.
We also run the project, Pitch Sabesp, which is a partnership among sanitation companies, participating in collaborative networks and coworking, among others.
Pitch Sabesp was a public competition launched in 2018, in which 27 challenges were posed in five different areas of the sanitation sector, with a focusperform tests on innovative solutions that could add competitive advantagesarise in response to market demands, at various stages of development, to evaluate their suitability for application within our operations. These collaborative technological initiatives not only enable us to propose technology-driven enhancements to our productsprocesses and services. Several selectedservices but also afford external companies in the market an opportunity to rigorously trial their solutions were tested in real sanitation environments. This provides a controlled environmentplatform for assessing the effectiveness of their solutions and, on a pilot scale. Some of them were technically discarded during the testing phase, but others proved to be aptwhen necessary, identifying areas for future implementation on an operational scale. improvement.
One of them thatour open innovation initiatives is in the projectcontracting phase is the application ofand uses a technology of filter gardens arranged in sequential compartments and planted with specific plant species, as an ecological wayform of treating effluents. Another one whose testing has begun uses patented equipment for generating nanobubbles in the liquid medium in aerobic sewage treatment units, to increase the rate of oxygen and, therefore, the efficiency of the process. Tests were also started with a technology to unclog the membranes of air diffusers in WWTPs aeration tanks.effluent treatment.
Collaborative Networks for Innovation, in which we participate, provide integration with the different spheres of government, startups, companies, universities, development institutions, etc. All players seek to add knowledge and experience, to build joint solutions for the challenge of implementing open innovation in the public sector. The participation of the Urban Living Labs working group (urban sustainability laboratory - ULL) associated with an international consortium, the Belmont Forum, supported by the nexus among water use, food and power generation, or FEW.
We also conduct tests with innovative solutions that emerge from market demands, at different evolutionary stages of development, to assess their potential for application in our activities. These technological cooperation initiatives, in addition to allowing us to propose technological solutions that improve our processes and services, also provide market companies with the opportunity to effectively test their solutions in the sanitation environment, in operational practices, verify the effectiveness of their solutions and, as needed, identify needs for improvement.
WithThrough this open innovation process,program, we provideare laying the market with the foundationsgroundwork for an innovative ecosystem aimed atwithin the sanitation sector.
In order to add greaterenhance the efficiency to the Open Innovationof our open innovation process, and withdrawing upon the experience acquiredgained from the Pitch Sabesp project, we have been developingwhich was a study for methodological systematizationpublic call issued by us in 2018 to execute public callsengage with the startup market for the acquisition of innovative solutions, we developed a systematic methodology for conducting public calls aimed at acquiring innovative technological solutions inwithin the contextframework of a public company, contractingcompany. To execute this initiative, we engaged the Fundação Instituto de Administração – FIA to develop the work, which isparticipate in the final phase of consolidation. This workproject. The project was successfully concluded, and this effort has also provided elementsyielded valuable insights for another action in the same direction: the development of a digital platform for access by the foreign market, aiming at proposing challengesdesigned for the capture ofinternational market. This digital platform will enable us to challenge ourselves and search for innovative ideas and innovative technological solutions. These two actions are complementary toBoth initiatives, the project and the digital platform, complement the Technical Cooperation Agreement with the IDB, mentioned above.thereby accelerating and enriching our collaborative efforts.
Additionally,Furthermore, we haveentered into a second agreement with FAPESP, to focuswhich is focused on supporting the execution ofproviding support for scientific and/orand technological research inwithin micro, small and medium enterprises in the State of São Paulo, throughPaulo. This initiative is part of the Small Enterprises Innovation Program aimed at accelerating start-ups focused on the development ofsmall enterprises’ innovation program, which aims to accelerate startups dedicated to innovative projects that solveaddress the challenges faced by us.we face. In 2021, the prioritization of three themes for2022, we successfully launched the first public callcall. In 2023, nine qualified proposals were evaluated, of which one was approved internally.to commence the project development phase, focusing on topics of great interest to us: hydrometry and reduction of losses.
We also publish the DAE Magazine on a quarterly basis, which is an engineering journal publishedproduced by a specializeddedicated team of opinion makersleaders that in 2021 totaled more than 230 issueshad released over 240 editions since its firstinaugural edition. This journal was indicatedranked as “B1” category publication in the Qualis/CAPES system from the “B2” to “B1” category in July 2019, a ranking applicable for the 2021-2024 period.period of 2021-2024. Through the publicationdissemination of technical and scientific articles oncovering topics related to basic and environmental sanitation, we aimDAE Magazine’s objective is to encouragefoster and disseminate improvementspropagate advancements in processes, innovations and technological advances.breakthroughs.
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In 2019, our circular economy project in the Municipality of Franca sewage treatment plant was recognized, with first place in the “Ideas en Acción 2019” award for innovative companies in water and sanitation organized by the Inter-American Development Bank (IDB) and the International Water Association (IWA) in Guayaquil, Ecuador.
In 2020, we won the “Ideas en acción” award in the “Business Management for Innovation” category promoted by IDB for our innovative ideas and entrepreneurship. In the 2021 edition of this award, we were invited to participate in the project evaluation process and will welcome future finalists to present our open innovation process, our management of technological innovation and our projects under development. The award is scheduled for early 2022.
D. | Trend Information |
We expect to continue to operate in a competitive and regulated environment which will pose continued risks to our existing businesses, placing the profitability of our assets under pressure. The following list sets out, what we believe to be, the most important trends, uncertainties and events that are reasonably likely to continue to have a material effect on our revenues, income from continuing operations, profitability, liquidity and capital resources, or that may cause reported financial information to be not necessarily indicative of future operating results or financial condition:
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If our Proposed Privatization is consummated the Universalization Targets will be brought forward from 2023 to 2029, compliance with which includes imponderable elements that are beyond our control. For |
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· | Thereare various uncertainties surrounding the New Legal Framework for Basic Sanitation, including the new requirement to participate in public bids in case the entity is not part of the administration of the holder and the prohibition on entering into program contracts, agreements, partnership agreements and other unstable instruments for the provision of public sanitation services. | |
· | Provisional Measure No. 1,154/2023 (later converted into Law No. 14,600/2023) altered the attributes and structure of ANA and delegated to the Ministry of Cities the responsibility for the implementation of basic sanitation actions and programs. Further, Federal Decree No. 11,333/2023 created the National Secretariat for Environmental Sanitation, linked to the Ministry of Cities, attributing to the National Secretariat for Environmental Sanitation competencies that were previously attributed exclusively to ANA. On April 5, 2023, Federal Decree No. 11,468 replaced and revoked the provisions of Federal Decree No. 11,333/2023 and approved a new regimental structure and commissioned positions and functions of trust for the Ministry of Cities, reassigning and transforming commissioned positions and functions of trust. On April 5, 2023, the federal government issued Decree No. 11,467/2023, which delegated to ANA the power to issue reference standards for the sanitation sector, as originally established in the New Legal Framework for Basic Sanitation. The National Secretariat for Environmental Sanitation is now responsible for issuing the guidelines for federal basic sanitation policy. On July 12, 2023, Federal Decree No. 11,599 replaced and revoked the provisions of Federal Decree No. 11,467/2023 and introduced discipline to the regionalized provision of sanitation services, with the uniformization of regulations and supervision and compatibility of planning among service holders, established the requirement to hold a bidding process for the provision of public sanitation services and reiterated the prohibition on signing documents of precarious nature, agreements, partnership agreements and program contracts, which may be maintained until their expiry. Accordingly, ANA’s rules will apply to the basic sanitation sector nationwide, setting the guidelines for regulation and supervision by the regulatory entities at the state, municipal and regional level, and ensuring regulatory uniformity in the sector and legal certainty for the provision and regulation of services. We cannot guarantee that any potential changes to the regulatory framework of ARSESP will not have an adverse effect on our business, financial condition or results of operations. For more information, see “Item 3.D. Risk Factors—Risks relating to the Regulatory Environment—The New Legal Framework for Basic Sanitation prohibits new program contracts for basic sanitation services, resulting in uncertainties for our current and future customer base and size of operations” and “Item 3.D. Risk Factors—Risks relating to the Regulatory Environment—Pursuant to the New Legal Framework for Basic Sanitation, ANA will be responsible for issuing reference standards. Any non-compliance will prevent municipalities or operators from accessing financings and public resources managed or operated by the Brazilian government.” |
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· | Our business is not only adversely affected by droughts but also by other extreme weather conditions, such as torrential rain and other changes in climate patterns. A possible increase in the frequency of extreme weather conditions in the future, such as heatwaves, usually followed by torrential storms, can interrupt the power supply at our pumping and water treatment plants due to trees falling on the electricity distribution networks, which prevents the full production of water for supply to our consumers, may adversely affect the water available for abstraction, treatment, and supply. For more information, see “Item 3.D. Risk Factors—Risks Relating to |
· | There are uncertainties arising from the implementation of our New Tariff Structure. The New Tariff Structure was expected to be adopted as of 2022. However, on March 17, 2022, ARSESP published Resolution No. 1,278 |
In addition to the information set out above, see “Cautionary Statements About Forward-Looking Statements” for further information related to our forward-looking statements, and “Item 3.D. Risk Factors” for a description of certain factors that could affect our industry and our own performance in the future.
E. | Off-Balance Sheet Arrangements |
We had no off-balance sheet arrangements as of December 31, 2021.2023.
F. | Tabular Disclosure of Contractual Obligations |
Our debt obligations and other contractual obligations as of December 31, 2021 were as follows:2023 were:
Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | |
(in millions of reais) | (in millions of reais) | |||||||||
Loans and financing | 1,830.6 | 3,558.6 | 3,965.7 | 8,368.9 | 17,723.8 | 2,616.4 | 4,610.5 | 4,062.0 | 8,247.5 | 19,536.4 |
Estimated interest payments(1) | 937.3 | 2,129.9 | 1,732.6 | 4,116.0 | 8,915.8 | |||||
Interest payments(1) | 1,626.4 | 2,627.0 | 1,737.7 | 2,615.2 | 8,606.3 | |||||
Accounts payable to suppliers and contractors | 236.8 | - | - | - | 236.8 | 456.2 | - | - | - | 456.2 |
Services payable | 469.0 | - | - | - | 469.0 | 750.7 | - | - | - | 750.7 |
Program contract commitments | 77.5 | 37.6 | 2.3 | 13.0 | 130.4 | 21.6 | 2.4 | 2.4 | 11.6 | 38.0 |
Purchase obligations(2) | 3,405.8 | 2,486.8 | 1,612.9 | 1,121.8 | 8,627.3 | 6,103.4 | 5,087.3 | 2,752.2 | 2,773.0 | 16,715.9 |
Total | 6,957.0 | 8,212.9 | 7,313.5 | 13,619.7 | 36,103.1 | 11,574.7 | 12,327.2 | 8,554.3 | 13,647.3 | 46,103.5 |
(1) | Estimated interest payments on loans and financing were determined considering the interest rates as of December 31, |
(2) | The |
We believe that we can meet the maturity schedule through a combination of funds generated by operations, the net proceeds of new issuances of debt securities in the Brazilian and international capital markets and additional borrowings from domestic and foreign lenders. Our borrowings are not affected by seasonality. For information concerning the interest rates on our indebtedness outstanding as of December 31, 2021,2023, see Note 17 to our financial statements as of December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019,2023 Consolidated Financial Statements, included elsewhere in this annual report.
ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
A. | Directors and Senior Management | ||
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Under our bylaws and Brazilian Corporate Law, we are managed by our Board of Directors (Conselho de Administração), which currently consists of teneleven directors, and a boardBoard of executive officersExecutive Officers (Diretoria), which currently consists of sixseven executive officers.
As our controlling shareholder, the State has the ability to elect the majority of our Board of Directors and, therefore, our direction and future operations. Upon the election of a new Governor for the State governorof São Paulo and any resulting change in the administration of the State of São Paulo, all or some of the members of our Board of Directors, including our chairman, have historically been replaced by designees of the new administration. Our Board of Directors may in turn replace some or all of the executive officers. SeeFor more information, see “Item 3.D. Risk Factors—Risks Relating to Our Control by the State of São Paulo—We are controlled by the State of São Paulo, whose interests may differ from the interests of non-controlling shareholders, including holders of ADSs.”
Board of Directors
Our bylaws provide for a minimum of seven and a maximum of eleven directors. The management proposal to the Extraordinary General Shareholder’s Meeting to be held on May 27, 2024 proposes the approval of our amended bylaws, which states that the Board of Directors shall be composed of nine members. The members of our Board of Directors are elected at a general shareholders’ meeting to serve a two-year term. Such termsterm may be renewed three consecutive times. Pursuant to our bylaws and Federal Laws No. 13,303/2016 and No. 6.404/1976, our employees have the option to elect one member of our Board of Directors. Accordingly, we supported the unions in the first election of the member of our Board of Directors representing the employees, which was concluded on August 18, 2021. Provided the conformity with the candidacy requirements and the electoral process as verified by our Eligibility and Advisory Committee, the representative was announced to our shareholders, who will meet and elect the directors with a two-year term, at the General Shareholders’ Meeting, which will take place on April 28, 2022.
In addition, pursuant to Law No. 6,404/1976 of December 15, 1976, as amended, or the “BrazilianBrazilian Corporate Law,” at least one member of the Board of Directors of mixed capital companies, such as us, must be appointed by the minority shareholders. Finally, according to the Novo Mercado rules and Federal Law No. 13,303/16,2016, at least two, or 25.0% (whichever is greater), of the Board of Directors must be comprised of independent members.
On April 25, 2024, our Ordinary and Extraordinary General Shareholders’ meeting was held, at which some of the more relevant matters voted on were the election of members of the Board of Directors to serve until the 2026 Annual Shareholders’ Meeting, the appointment of the chair of the Board of Directors, the election of members of the Fiscal Council to serve until the 2025 Annual Shareholders’ Meeting, the nomination of members to the Audit Committee and the election of members to the Eligibility Committee.
All the current members of our Board of Directors were elected at the annual shareholders’ meetingOrdinary and Extraordinary General Shareholders’ Meeting held on April 28, 2020 and joined25, 2024. Seven of these members were already part of our Board of Directors and remained on May 14,2020, except for Luis Eduardo Alves de Assis who was elected and joinedthe recommendation of our Boardcontrolling shareholder. The terms of Directors on January 21, 2021, and Leonardo Augusto de Andrade Barbosa, who was elected on November 24, 2021 and joined our Boardoffice of Directors on December 1, 2021. The tenure of all the current directors will end after our annualthe general shareholders’ meeting to be held in April 20222026, when the current members are expected towill be reelected.up for re-election. Currently, we have six members considered independent under the Novo Mercado rules Listing Regulation and Federal Law No. 13,303/16.2016.
Our Board of Directors ordinarily meets once a month or, when necessary for the interests of our company, when called by a majority of the directors or the chairman. Its responsibilities include the establishment of policy and general orientation of our business, and the appointment and supervision of our executive officers.
The following are the names, ages,year of birth, positions, dates of election date of entry and brief biographical descriptionsbiographies of the current members of our Board of Directors:Directors as of the date of this annual report:
Director | Position | Date | Date of | |||||
May 4, 2023 | April 25, 2024 | |||||||
Anderson Marcio de Oliveira | ||||||||
Member | May 8, 2023 | April | ||||||
Member | January 13, 2023 | April | ||||||
Antônio Júlio Castiglioni Neto | Member | August 24, 2023 | April 25, 2024 | |||||
Eduardo | Independent Member(1) | May 4, 2023 | April | |||||
Independent Member(1) | May 4, 2023 | April | ||||||
Member | May 4, 2023 | April 25, 2024 | ||||||
Ana Silvia Corso Matte | 1958 | Independent Member(1) | April 26, 2024 | April | ||||
Independent Member(1) | April 26, 2024 | |||||||
Member(3) | April 26, 2024 | February 29, 2024 | ||||||
Gustavo Rocha Gattass | 1975 | Independent Member(1)(2) | April | |||||
April |
(1) | These members comply with the independence requirements established by Federal Law No. 13,303/ |
(2) | Member appointed by the minority shareholders. | |
(3) |
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Mario Engler Pinto Junior. Karla Bertocco Trindade.Mr. Engler Ms. Bertocco has been the Chairmanchairwomen of our Board of Directors since May 2018. Before that, he served2023. She holds a bachelor’s degrees in public administration from Fundação Getúlio Vargas and in Law from the Pontifical Catholic University of São Paulo, a postgraduate degree in Administrative Law from Fundação Getúlio Vargas, and she participated in the Diversity Program in Boards of Directors of the Brazilian Institute of Corporate Governance. She is currently a partner at Jive Investiments (former Mauá Capital) and an independent member of the Board of Directors of Orizon Valorização de Resíduos (ORVR3). Mrs. Bertocco worked as an advisor to our CEO (2003 to 2006), State Sanitation Coordinator (2007), Institutional Relations Officer at ARSESP (2008 to 2010), General Officer of the Regulatory Agency for Delegated Public Transportation Services of the São Paulo State – ARTESP (2011 to 2015), Undersecretary of Partnerships and Innovation (2015 to 2018), she was our CEO (2018) and the Executive Government and Infrastructure Officer at BNDES (2019). She was also a member of the Board of Directors of Companhia Riograndense de Saneamento (2020 to 2022), where she held the position of Coordinator of the Innovation and Sustainability Committee, and was a member of the Boards of Directors of Equatorial Energia (2022 to 2023), Sabesp (2018), Companhia Paulista de Parcerias do Estado de São Paulo (2015 to 2018), and DERSA – Desenvolvimento Rodoviário S.A. (2011 to 2015).
Anderson Marcio de Oliveira. Mr. Oliveira has been a member of our Board of Directors from 2006 to 2011 and as member of our Audit Committee from 2006 to 2009.since May 2023. He holds a PhDbachelor’s degree in Commercial Lawlaw from Getúlio Vargas Foundation Law School (the Universidade Católica de Pernambuco, a master’s degree in public law from the Universidade Federal de Pernambuco, and a master’s degree in regulatory law from Fundação Getúlio Vargas, – FGV)as well as a Master of Laws (LLM) in state law and regulation also from Fundação Getúlio Vargas. He also holds a degree from Harvard Kennedy School in “Creating Collaborative Solutions: Innovation in Governance” and “Infrastructure in a Market Economy: Public-Private Partnership in a Changing World.” Mr. Oliveira is nowcurrently a professorProgram Director at the same institution. At FGV Law School, Mr. Engler is the coordinator for the professional master’s programMinistry of Mines and conducts legal research regarding contractual and corporate arrangementsEnergy, where he coordinates actions in the publicelectricity, oil and private sectors.gas, and mining sectors, including the capitalization of Eletrobras (2019 to 2023). He has beenwas a lawyer since 1979Director of the Investment Partnership Program of the Brazilian Presidency, where he monitored and served for 30 yearsstructured projects in the electricity sector, covering generation, transmission, and distribution segments (2016 to 2019). Mr. Oliveira also acted as publican attorney for the StateBNDES (2010 to 2016). He is currently a member of São Paulo from 1984 to 2014. In the last years, he has been an arbitratorFiscal Councils of Nuclebrás and executive officer and director for private companies and state-owned enterprises.Santos Port Authority.
Benedito Pinto Ferreira Braga JuniorAndré Gustavo Salcedo Teixeira .Mendes. Mr. BragaSalcedo has been our Chief Executive Officer and a member of our Board of Directors since January 2019.2023. He hasholds a bachelor’s degree in Civil Engineeringelectrical and production engineering from the SchoolPontifícia Universidade Católica of Engineering of São Carlos of the University of São Paulo (EscolaRio de Engenharia de São Carlos da Universidade de São Paulo – USP)Janeiro (PUC-Rio), a master’s degree in Hydrologyelectrical engineering from Stanford University, a master’s degreePUC-Rio, an MBA in HydraulicsPPPs and concessions from USP,Fundação Escola de Sociologia e Política de São Paulo and a PhD in Water Resourceshas CGA certification from Stanford University.ANBIMA, and CP³P-F from APMG International. Mr. Salcedo has been our Chief Executive Officer since January 2023. He was Secretarythe Chief Financial Officer of SanitationAkad Seguros (2022), New Business Executive Director at Iguá Saneamento (2019 to 2021), an independent consultant for the Climate Bonds Initiative (2020 to 2021), and Water Resourceshe worked at BNDES (2003 to– 2019), where he held several positions. Mr. Salcedo has extensive experience in the capital markets, particularly in infrastructure financing, public-private partnerships, mergers and acquisitions, and the structuring of the State of São Paulo from January 2015 to May 2018 and was the Chairmannew businesses.
Antônio Júlio Castiglioni Neto. Mr. Castiglioni has been a member of our Board of Directors since August 2023. He holds a bachelor’s and master’s degrees in law from January 2015Universidade Federal do Espírito Santo. He is currently the President of Companhia do Metropolitano de São Paulo – Metrô. He was the President of Companhia Docas do Espírito Santo (CODESA) from March 2019 to April 2018.2022, leading the first privatization of a port authority in Brazil. He was the Chief Executive Officer of the Regulatory Agency of Espírito Santo between 2015 and 2019. He has been a State Attorney since 2005, with a significant track record of creating business models based on concessions, authorizations, and public-private partnerships.
Eduardo Person Pardini. Mr. Braga wasPardini has been an independent member of our Board of Directors and Coordinator of our Audit Committee since May 2023. He holds a bachelor’s degree in accounting from the Faculdade de Ciências Econômicas de São Paulo, with a postgraduate degree in administration with a focus on finance from Fundação Álvares Penteado, and several degrees in extension courses in Brazil and abroad, such as business strategy from Wharton Business School of the University of Pennsylvania, corporate management from Fundação Getúlio Vargas, ethics and corporate governance from Milliken University, and innovation from the Massachusetts Institute of Technology. He is currently a main partner at CrossOver Consulting & Auditing. He is also an Executive Officer of the Internal Control Institute Chapter Brazil, a member of the Audit Committee of Companhia de Saneamento de Santa Catarina, and a professor in the area of risk-based auditing in the MBA program at Trevisan Business School. Mr. Pardini has over 43 years of experience as an external and internal auditor, senior executive of multinational and Brazilian companies, professor, and speaker on auditing, internal controls, risk management, and governance for government entities and private sector entities.
Karolina Fonsêca Lima. Mrs. Lima has been an independent member of our Board of Directors and a member of our Audit Committee since May 2023. She holds a bachelor’s degree in accounting from Universidade Federal do Maranhão and in law from Ceuma University. She was the Polytechnic Schoolhead of Universitythe of Concremat Engenharia e Tecnologia in São Paulo from 1980 to 2019. He was Co-ChairmanLuiz do Maranhão between 2019 and 2023. She worked at Companhia Docas do Maranhão between 2002 and 2019, as chief auditor, as a member of the International OrganizingTechnical Audit Committee, the Eligibility Committee, and the Correctional Technical Committee of the World Water Forum in Brasilia (2018), in Korea (2015) and ChairmanMinistry of Infrastructure. She has been a member of the Statutory Audit Committee in France (2012). Heof Companhia de Processamento de Dados do Estado de São Paulo since May 2023. She is Honorary Presidentalso an Associate of the World Water Council – WWC,Brazilian Institute of which he was the President from 2012 to 2018. Mr. Braga was also the President of the Intergovernmental Council of UNESCO’s International Hydrological Program from 2008 to 2009, President of the International Water Resources Association – IWRA, from 1998 to 2000, as well as Director of the National Water Agency from 2001 to 2009.Corporate Governance (IBGC).
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Claudia PoltoNerylson Lima da CunhaSilva.. Mrs. Cunha Mr. Silva has been a member of our Board of Directors since May 2020, having previously served2023. He holds a bachelor’s degree in economics from União Educacional de Brasília, with a specialization degree in controllership and finance from Universidade Católica de Brasília, and a master’s degree in business administration from Universidade de Brasília. He currently serves as the same positionTreasury Undersecretary at the São Paulo State Treasury Department. Mr. Silva was the Undersecretary of Planning, Budget, and Administration of the Ministry of Infrastructure from 2019 to 2023, Deputy Undersecretary of Planning, Budget, and Administration at the Ministry of Finance from 2016 to 2018, Deputy Secretary for Planning, Budget, and Administration of the Ministry of Finance from 2014 to 2016. She holds a master's degree in Administrative Law2016, Budget and Financial Execution Manager from 2008 to 2011, and Project Manager from 2007 to 2008 at the University of São Paulo – USP, and an undergraduate law degree fromNational Treasury Secretariat. Additionally, he was the same institution. She has been a state attorney since 1991, and currently serves as Deputy State Attorney General. She is also ChairwomanChair of the BoardFiscal Council of Directors of Companhia Paulista de SecuritizaçãoINFRAERO Aeroportos, and a member of the BoardFiscal Councils of Directors of Empresa Metropolitana de Transportes Urbanos - EMTU, where she served in the same position between 2012EPL Logísticas, and 2014. She was special advisor to the Secretary of Finance and Planning in 2019, Executive Secretary of the State Capital Defense Council — CODEC, from 2006 to 2016, and Advisor to the Attorney-General of São Paulo from 1995 to 2006. Mrs. CunhaViracopos Airport. He was also a member of the Board of Directors of Companhia do Metropolitano de São Paulo – METROBB Seguridade from 20072016 to 2012,2019 and Executive Officer at Companhia Paulista de Parcerias — CPP,Chair of the Board of Directors of SERPRO from 20062014 to 2016.2019.
Eduardo de Freitas Teixeira.Ana Silvia Corso Matte. Mr. Teixeira has beenMrs. Corso Matte was elected to be an independent member of our Board of Directors since May 2020 andon April 25, 2024. She holds a bachelor’s degree in law from UFRGS with a postgraduate degree in Human Resources from PUC-IAG. She has solid experience in executive positions, serving as member of our Audit Committee since May 2020. He holds a master’s degree in Economics from the Federal UniversityBoard of Rio de JaneiroDirectors and an undergraduate degree in Economics from the same institution. He is currently alsomember of thematic committees. She has been a member of the Board of Directors of Empresa Metropolitana de Águas eNorte Energia (EMAE). Mr. Teixeira began his career at the Central of Bank in 1977, remaining in that institution until 1998. In 1991 he founded the consulting firm Creta Planejamento, in which he continues to work. Also in the private sector, he was Chief Financial Officer S.A (Belo Monte) since January 2023 and a member of the BoardPeople Committee of Directors of HRT Participações (currently PetroRio) from 2009 to 2012 andIBGC since August 2021. She has been a member of the BoardPeople Committee of Directors of Viracopos Airport from 2015 to 2018. In the public sector, Mr. Teixeira served as Deputy Secretary for Economic Affairs of the Ministry of Finance from 1985 to 1988, member of the Fiscal Council of Banco do Brasil from 1987 to 1989 and the Brazilian Federal Savings Bank (Caixa Econômica Federal) from 1986 to 1988, Executive Secretary of the Ministry of Economy in 1990, Chairman of the Board of Directors and CEO of PetrobráEletrobrás from 1990 to 1991, member of the Board of Directors of Itaipú Binacional from 1990 to 1991, Chairman of the Board of Directors of Banco do Brasil in 1990 and Minister of State for Infrastructure and member of the National Monetary Council in 1991.
Francisco Luiz Sibut Gomide. Mr. Gomide has been an independent member of our Board of DirectorsS.A since May 2017. HeAugust 2022. She was a member of our Audit Committee from May 2017 to August 2017. He holds a bachelor’s degrees in Civil Engineering and in Economic Sciences from the Federal University of Paraná (Universidade Federal do Paraná) and a PhD in Hydrology and Water Resources from the Colorado State University. He was the Minister of Mines and Energy in 2002, the CEO of ESCELSA – Espírito Santo Centrais Elétricas S.A. between 1995 and 2001, the CEO of the Energy Company of Mato Grosso do Sul between 1997 and 2001, the General Brazilian Diretor of Itaipu Binacional between 1993 and 1995, the CEO of the Energy Company of Paraná (Companhia Paranaense de Energia – Copel) between 1986 and 1993 and the Chief Financial Officer of the same company from 1983 to 1985. Mr. Gomide was also a professor at the Federal University of Paraná (Universidade Federal do Paraná) from 1970 to 1995. Between 1969 and 1982, he was a hydraulic engineer and hydrologist at the Energy Company of Paraná.
Francisco Vidal Luna. Mr. Luna has been an independent member of our Board of Directors since May 2013. Mr. Luna was also a member of our Audit Committee from April 2013 to September 2016 and was reappointed in May 2020. He has a doctorate in Economics from the Business, Economics and Accounting School at the University of São Paulo (Universidade de São Paulo - USP) and is a retired professor at the same university. He was member of the Board of Directors of BNDES. In the public sector, he has served as the Secretary of Planning for the state and city of São Paulo. He has also worked at the Treasury Department for the State of São Paulo and the Federal Planning Bureau, among other roles. In the private sector, he was the Executive Chairman of Banco Inter American Express S.A, member of the Board of Directors and member of the AuditPeople Committee of Gafisa, and member of the Audit Committee of the PetrobráEletrobrás Conglomerate. He is currently a member of the Audit Committee of Desenvolve SP, a member of the Board of Trustees of the Fundação Faculdade de Medicina - FFM and a member of the Board of Trustees of FIPE - Fundação Instituto de Pesquisas Econômicas.from April 2021 to August 2022.
Leonardo AugustoEduardo França de Andrade BarbosaLa Peña. . Mr. Barbosa has been La Peña member of our Board of Directors since December 2021. He holds a bachelor’s degree in Law from the Federal University of Minas Gerais (Universidade Federal de Minas Gerais), a master’s and a PhD degree from the University of Brasília (Universidade de Brasília), and a post doctorate at the University of Michigan Law School. He is currently the Chief Executive Officer of the Brazilian Legislative Institute (the Federal Senate’s School of Government) and Interlegis Program. He is also a professor at the Professional Master in Legislative Studies of the House of Representatives’ School. As a federal public servant, Mr. Barbosa has performed several functions in the House of Representatives, among which Clerk of the House between May 2018 and February 2021, Deputy Clerk for Technical and Legal Advice, Head of the Legal Counsel for the Office of the Clerk, Chief Advisor for Official Conduct (2009-2010), and Chief of Staff of the Minority Leadership (2005-2006).
Luís Eduardo Alves de Assis. Mr. Assis has beenwas elected to be an independent member of our Board of Directors since January 2021.on April 25, 2024. He holds a bachelor’s degree in Economicsadministration from PUC-RJ and an MBA from the University of Michigan. He is a founding shareholder of Alis Investimentos. He served as Managing Director at Credit Suisse Brazil - Head ECM. From April 2017 to May 2018, he served as Executive Director at BTG Pactual - ECM. He joined Flow CTVM as one of the partners responsible for building the equity area after the merger of Flow with Brasil Plural. He was appointed by FIP Brasil Energias Renováveis as a member of the Board of Directors of the following renewable energy companies: Bons Bentos da Serra SA, Eólicas do Sul S.A. and RBO Energia S.A.
Aurélio Fiorindo Filho. Mr. Fiorindo Filho was elected to be the employee representative member of our Board of Directors on April 25, 2024. He has been our employee since 1992, working as an Engineer and Manager in various areas, mainly related to the execution of works, maintenance, and operation of water supply and sewage systems, commercial services and customer service, billing, and collection. He served at ATTEND Ambiental from 2020 to 2023 as a member of the Board Directors. He was our Superintendent of the Metropolitan West (MO) and Center (MC) Business Units from 2015 to 2023. He was a Department Manager - UGR - São Paulo,Mateus from 2011 to 2015, Division Manager - Maintenance Hub - São Mateus from 2006 to 2011, and Sector Manager of the Maintenance Hubs (Mooca, Sé, and Vila Mariana) from 2000 to 2006. He holds a master’sbachelor’s degree in civil engineering from Universidade Camilo Castelo Branco and in Business Administration from Universidade Paulista (UNIP). He holds a specialization degree in Basic Sanitation Engineering from the State UniversitySchool of Campinas - UNICAMP andPublic Health of USP; an MBA in Administration for Engineers from Scuola Superiore Enrico Mattei, Milan, Italy. He is currently presidentMauá Institute of Fator Seguradora and a contributorTechnology; Project Management from Vanzolini Foundation; an MBA in Business Management from FIA USP.
Gustavo Rocha Gattass. Mr. Gattass was elected to the newspaper O Estado de São Paulo. Mr. Assis wasbe an independent member of our Board of Directors, from May 2014 to May 2020 and a member ofproposed by our Audit Committee from May 2016 to May 2020. He was the director of Monetary Policy at the Central Bank of Brazil, professor at the Department of Economics at PUC-SP and FGV-SP. He has developed an extensive career in the financial market, serving as Chief Economist and Investment Director at Citibank, President of HSBC Investment Bank Brasil, Chief Operating Officer of HSBC Bank Brasil, Senior Executive of Strategic Planning at the HSBC Group in London and Regional Director of Latin America at HSBC.
Walter Luis Bernardes Albertoni. Mr. Albertoni has been an independent member of our Board of Directors since May 2020.minority shareholders, on April 25, 2024. He holds an undergraduate lawa bachelor’s degree in economics from the Pontifical Catholic University of São Paulo (Pontifícia Universidade Católica de São Paulo – PUC-SP), withPUC-RJ. He is currently a graduate diploma in corporate and tax law from INSPER and civil procedural law from PUC-SP. Mr. Albertoni has more than 28 years of experience as a legal practitioner, with an emphasis on corporate, civil, civil procedural, tax and commercial law, as well as contracts analysis and drafting. He also has 15 years of experience as an outsourced legal officer at Association of Capital Market Investors - AMEC, acting in the institutional defense of the rights and interests of shareholders not participating in control blocks from 2006 to 2021, and acts as a board member of Banco Bradesco S.A. since March 2020, member of the Board of Directors of Companhia Energética de Brasília - CEB S.A since April 2019, Fiscal Council member of Banco BradescoPRIO S.A. from 2017 to 2020, Fiscal Council member of Indústrias Romi(since 2020), Canacol Energy Ltd. (since 2023) and Serena Energia S.A. from 2017 to 2020, and 2021 to present date, (since 2017). Mr. Gattass was a member of the AuditBoard of Directors of Copasa S.A. between 2017 and 2023, a member of the Board of Directors and the Strategic Committee of Dataprev S.A. from 2018 to 2021,BR Distribuidora between 2015 and 2016, an alternate member of the Board of Directors of Mahle Metal Leve S.A. since April 2017, Fiscal Council member of Petrobrás elected by the preferred shareholders from 2013 to 2018, member of the Board of Directors of Paranapanema S.A. from 2016 to August 2017, alternate Fiscal Council member of Ser Educacional S.A. since April 2015, alternate Fiscal Council Member of SANEPAR S.A. since April 2017, Fiscal Council member of BRADESPAR S.A. in 2016, alternate Fiscal Council Member of MILLS S.A. in 2016, member of the Advisory Committee of the State-Owned Companies of B3 S.A. – Brasil, Bolsa, Balcão (as part of the Destaque de Estatais Program), alternate member of National Financial System Resource Council - CRSFN from 2011 to 2015, consultant to the Merger and Acquisitions Committee from 2013 to 2017 and a member of the Strategic Committee of Petrobras S.A. between 2015 and 2016. He also worked at BTG Pactual as partner responsible for Disclosure of Information to the Market - CODIM from 2007 to 2009.
Wilson Newton de Mello Neto. Mr. de Mello Neto has been a member of our Board of Directors since October 2019Company Analysis area and isas an independent member of our Board of Directors since November 2021. He is also a member of our Audit Committee since December 2021. He holds a bachelor’s degreeanalyst for the Oil and Gas sector between 2009 and 2015 and as an analyst for the Electricity sector and Sanitation between 2009 and 2010; at UBS Pactual as an analyst for the Oil and Gas sector between 2006 and 2009; at UBS as an analyst for the Oil and Gas sector between 2005 and 2006, as an analyst for the Electricity, Sanitation and Highways sector between 2000 and 2006 and as an analyst for the Electricity sector between 1998 and 2000; and at Banco Icatu as an analyst for the Oil, Gas and Electricity sector in Law from the Pontifical Catholic University of São Paulo (Pontifícia Universidade Católica de São Paulo - PUC/SP). He was the CEO of Investe São Paulo from April 2019 to May 2021. He was Vice-President of Corporate Affairs and General Secretary at Danone from May 2015 to March 2019; Director of Corporate Affairs at JBS S.A. from September 2014 to May 2015; Vice-President of Corporate Affairs at BRF S.A. from June 2010 to August 2013; Legal and New Business Director at Tishman Speyer Ltda. from March 2009 to May 2010; Vice-President of Corporate Affairs at Walmart Brasil Ltda. from March 2004 to April 2007; and partner at Machado, Meyer, Sendacz e Opice Advogados from June 1992 to February 2004 and from May 2007 to February 2009. Mr. de Mello Neto was also Vice-President of the Brazilian Supermarket Association (Associação Brasileira de Supermercados - ABRAS) from May 2004 to April 2007; member of the Executive Board of the Brazilian Association of Advertisers (Associação Brasileira de Anunciantes - ABA) from May 2015 to March 2019; and Chairman of the Board of Directors of the Brazilian Food Industry Association (Associação Brasileira da Indústria de Alimentos - ABIA) from March 2018 to March 2019.1998.
Board of Executive Officers
Our boardBoard of executive officers is composedExecutive Officers consists of sixseven executive officers appointed by our Board of Directors for a two-year term. Such termsterm may be renewed three consecutive times. Our executive officers are responsible for all matters concerning our day-to-day management and operations. Members of our boardBoard of executive officersExecutive Officers have individual responsibilities established by our Board of Directors and our bylaws.
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On April 28, 2023, at our Ordinary and Extraordinary General Meeting, our shareholders approved an amendment to our bylaws to include a further executive officer and rearrange the responsibilities assigned to each officer. Our Board of Executive Officers currently consists of the following seven executive officers: Chief Executive Officer, Chief People and Corporate Management Officer, Chief Financial Officer and Investor Relations Officer, Chief Engineering and Innovation Officer, Chief Regulation and New Business Officer, Chief Operation and Maintenance Officer and Chief Customer Officer.
The following are the names, ages,year of birth, positions, dates of election, and brief biographies of the members of our Board of Executive Officers as of the date of entry and brief biographical descriptions of our board of executive officers:this annual report:
Executive Officer | Position | Date | Date of | ||||
Chief Executive Officer | June | ||||||
Chief People and Corporate Management Officer | June | ||||||
June | |||||||
June | |||||||
Chief Financial Officer and Investor Relations Officer | |||||||
June | |||||||
Caio Marcelo de Medeiros Melo | 1972 | Chief Customer Officer | August 11, 2023 | August 10, 2023 |
Benedito Pinto Ferreira Braga Junior.André Gustavo Salcedo Teixeira Mendes. See Benedito’s Mr. Salcedo has been our Chief Executive Officer since January 2023. For further information, see Mr. Salcedo’s curriculum vitae above, “—Board in “Board of Directors.”
Adriano Candido StringhiniSabrina de Menezes Correa Furstenau Sabino.. Mr. Stringhini Mrs. Sabino has been our Chief People and Corporate Management Officer since January 2019. He is also the current Governor (Board of Governors) of the World Water CouncilApril 2023, and was re-elected for the 2019-2022 and he was elected as Vice-Chairman of the Board of Aberje – Associação Brasileira de Comunicação Empresarialsame position in 2020. He has a master’s degree in Law from the Law School of University of São Paulo (Faculdade de Direito da Universidade de São Paulo – USP). and an Executive Certificate from Harvard Kennedy School in Public Policy (2020/2021). He also holds certificates from London Business School in Sustainable Leadership and Corporate Responsibility; from Cambridge University in Business Sustainability Management; from NYU/Stern in Sustainable Finance and ESG Investing; from IMD Business School in Digital Disruption, and from IBGC - Board Member Certificate. He was our Head of Communication from April 2009 to January 2019 and Head of Legal Affairs from 2007 to 2009. He was the Head Lawyer of Funding Authority for Studies and Projects (Financiadora de Estudos e Projetos - Finep-SP) of the Ministry of Science and Technology (Ministério da Ciência e Tecnologia) from 2002 to 2007. He was advisor to the Chief Executive Officer of the Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica – CADE) between 1999 and 2001. He was a professor in undergraduate and graduate courses of several institutions, among them: Fundação Getúlio Vargas - FGV, Mackenzie University and School of Law of the Lawyers of São Paulo Institute (Escola Paulista de Advocacia do Instituto dos Advogados de São Paulo – IASP).
Alceu Segamarchi Junior. Mr. Segamarchi has been our Technology, Enterprises and Environment Officer since February 2020. He holdsJune 2023. She received a degree in Civil Engineeringinternational relations from the Pontifical Catholic University of Campinas (Pontifícia Universidade Católica de CampinasMinas Gerais and has built a career that combines the experiences of people and business management. She was Head of Talent Acquisition and Management (2020 to 2022) at XP Inc., Head of Research (2017 to 2019) at Egon Zehnder International, Project Leader (2010 to 2017) at Falconi Consultores de Resultado, having worked on productivity, organizational structure, strategic and operating planning projects at several companies, such as Petrobras, Paranapanema, Companhia Energética de Brasília, Vale, and TAM, as well as in public bodies such as the Education Secretariat of Minas Gerais (Secretaria de Educação de Minas Gerais) and the Office of the Chief of Staff of Rio de Janeiro. She also participated in the IBGC course – PUC CampinasGovernance Workshop for State-Owned Companies, held on December 7, 2023.
Paula Alessandra Bonin Costa Violante. Mrs. Violante has been our Chief Engineering and Innovation Officer since April 2023, and was re-elected for the same position in June 2023. She received a bachelor’s degree in chemical engineering from Universidade Federal de São Carlos, a master’s degree in civil engineering (hydraulics and sanitation) from Escola de Engenharia de São Carlos at Universidade de São Paulo and a supervised master’s degree from CIRSEE (Centre International de Recherche Sur L’Eau et L’Environnement), of SUEZ – France. She also attended a university extension in Public Administration from the Getúlio Vargas Foundation (controllership and finance course at Fundação Getúlio Vargas – FGV),Instituto de Pesquisas Contábeis, Atuariais e Financeiras (FIPECAFI) and a diplomabusiness development program from the PrivatizationFundação Dom Cabral. Mrs. Violante was an Engineering and Infrastructure Program from Harvard University. HeOperational Development Officer at Iguá Saneamento (2019 to January 2023) and an Operations Officer at SPAT (2017 to December 2018). She also worked in operational technical support in concession agreements for Mexico and Angola at Odebrecht Ambiental (September 2016 to July 2017). She was Superintendent at the Department of Water and Electricity ofContract Officer for several concessions in the State of São Paulo (Departamento de Águas e Energia Elétrica do Estado de São Paulo - DAEE), from February 2019and the State of Espírito Santo, in addition to February 2020 and from March 2011 to January 2015. Mr. Segamarchi was also Nacional Secretary of Environmental Sanitation of the Ministry of Cities (Saneamento Ambiental do Ministério das Cidades) from May 2016 to April 2017 andhaving worked in the municipality of Sorocaba from April 2017 to December 2018 as Secretary of Sanitation. He also held several leadership positions at Companhia Paulista de Trens Metropolitanos - CPTM from 1996 tocorporate engineering (January 2009 and November 2013). She was a volunteer, as a senior examiner and rapporteur for management awards: Iberoamericano Award and Brazilian National Quality Award. She actively participated in groups and technical chambers of hydrographic basins, in the contracts she worked at Ferrovia Paulista S.A. - Fepasa until 1996, where he began his career in 1980.in.
Monica Ferreira do Amaral Porto.Bruno Magalhães D’Abadia. Mrs. PortoMr. D’Abadia has been our Regional SystemsChief Regulation and New Business Officer since September 2020. She holdsApril 2023, and was re-elected for the same position in June 2023. He received a bachelor’s degreedegrees in civilmechatronics engineering from the University of São Paulo - USP,Universidade de Brasília (UnB) and in accounting from Uninter, an MBA in production engineering from Centro Universitário de Anápolis, an MBA in stock market analysis from Instituto Brasiliero de Mercado de Capitas (IBMEC), and a master’s degree andin economics from UnB. Mr. D’Abadia was a doctorate in hydraulic engineering, and Habilitation in Environmental Engineering fromState Secretary for the same institution. She has worked as a professor at the Hydraulic and Environmental Engineering DepartmentAdministration of USP since 1984 and has worked as a Full Professor of this department since 2005, and as Senior Professor since August 2019. She was also advisor to our Presidency from SeptemberGoiás (August 2019 to September 2020 and a member of our Board of Directors from March to September 2019. Ms. Porto was assistant secretaryNovember 2022), the Chair of the SecretariatNational Council of Sanitation and Water Resources - SSRH from Januarythe Government’s Secretaries of State (May 2022 to November 2022), a legislative consultant of public finance (January 2015 to March 2018. She is currentlyJanuary 2019 and November 2022 to January 2023), the Chair of the Fiscal Council of Companhia de Saneamento de Goiás (February 2020 to January 2023), a member of the ManagementFiscal Council of Companhia de Investimentos e Parcerias do Estado de Goiás (August 2019 to January 2023), the Secretariat of Infrastructure and Environment of the State of São Paulo since January 2019 and member of the Management Council of the Secretariat of Infrastructure and Urbanism of the municipality of São Paulo since January 2017. Mrs. Porto was also president of the Integration Committee of the Paraíba do Sul River basin between 2016 and 2018, representing SSRH. She served as chairwomanChair of the Board of TrusteesDirectors of the Hydraulic Technology Center Foundation between 2018 andCompanhia de Investimentos e Parcerias do Estado de Goiás (March 2019 and between 2008 and 2014 she acted as Chief Executive Officer of the abovementioned Foundation. She was also an alternateto August 2019), a member of the Board of GovernorsDirectors of Companhia de Saneamento de Goiás (April 2019 to August 2019), and an external control auditor at the World Water Council Board, as a delegateBrazilian Federal Court of USP from 2013Auditors (March 2012 to 2018. Between 1998January 2015) and 2014, she was a member of several international entities in the area of water resources such as: Advisory Committee for the World Water Quality Assessment, United Nations Environment Program, Stockholm Water Prize Committee,engineer at Petrobras (September 2008 to October 2010), among others. She was also chairwoman of the Brazilian Water Resources Association from 1996 to 1997.
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Osvaldo GarciaCatia Cristina Teixeira Pereira. . Mr. GarciaMrs. Pereira has been our Chief Financial Officer and Investor Relations Officer since July 2021.March 2023, and was re-elected for the same position in June 2023. She received a bachelor’s degree in economics from Universidade Federal Fluminense, an MBA in finance from IBMEC, an MBA in controllership and finance from Universidade Federal Fluminense, and an MBA in economic engineering from Universidade do Estado do Rio de Janeiro. She worked at Ball as Chief Financial Officer (March 2021 to February 2022), was a Director of the Center of Shared Services for South America, for structuring and implementation (July 2018 to March 2021), and Treasury Manager for South America (2006 to June 2018). She was also Treasury Control and Planning Manager (2003 to 2006) and Treasury Coordinator (2000 to 2003) at Embratel, among other positions. She has a Black Belt Six Sigma certification and participated in several courses, training sessions, and conferences on finance, strategy, and leadership in Brazil and abroad and, in November 2022, she concluded the Board of Directors Member course of the Brazilian Institute of Corporate Governance (Instituto Brasileiro de Governança Corporativa).
Roberval Tavares de Souza. Mr. Souza has been our Chief Operations and Maintenance Officer since April 2023, and was re-elected for the same position in June 2023. He received a bachelor’s degree in civil engineering from Universidade de Mogi das Cruzes, a specialization degree in basic sanitation engineering from Faculdade de Saúde Pública at Universidade de São Paulo, an MBA in business management from FGV, and attended extension courses in innovation leadership at Massachusetts Institute of Technology. Mr. Souza is sanitation Consultant (2022) and he worked with us from 1992 and 2021 in several management positions, such as Head of Central business unit and Head of South business unit, Interception and Isolated Systems Manager at the sewage treatment business unit, Administrative and Finance Manager at the sewage treatment business unit, Regional Manager of Operation, Maintenance, and Commercial Department of the East business unit. He was also a president of the São Paulo Institute in Management Excellence (Instituto Paulista de Excelência em Gestão) (2012 to 2014) and president of the Brazilian Association of Sanitation and Environmental Engineering (Associação Brasileira de Engenharia Sanitária e Ambiental) (2016 to 2020).
Caio Marcelo de Medeiros Melo. Mr. Melo has been our Chief Customer Officer since August 2023. He holds a bachelor’s degree in Civil Engineeringeconomics from FaculdadeUniversidade de EngenhariaBrasília. He served as the Director of Universidade Federal de Juiz de Fora. He has been ChairmanMergers and Acquisitions for the investment banking arm of the Board of Directors of Metrô SãSantander Brazil S.A. from April 2021 to April 2023 and was a Managing Partner at Estater Gestão Paulo since 2019. He was Chief Executive Officer of Caixa Participações S/Ae Finanças from September2017 to 2020. From 1998 to 2016, to January 2019, Advisor to the CEO in Caixa Econômica Federal for strategic affairs from June 2016 to September 2016, National Secretary for Water Infrastructure at Ministry of National Integration from January 2015 to May 2016, National Secretary for Environmental Sanitation of the Ministry of Cities from June 2012 to January 2015, Vice President of Housinghe worked at the São Paulo Association of Public Works Entrepreneurs – APEOP from December 2007 to May 2012. Technical Director, Construction Coordinator and Production Engineer at Múltipla Engenharia Ltda from January 1988 to May 2012. He participated in several study groups, commissions and representations, including: Member ofBNDES, holding various executive positions, including heading the Board of Directors of Banco Pan (2018 to 2019), Caixa Imóveis (2017-2019), Caixa Participações S/A (2016 to 2019), Titular Board Member of the Hydrographic Basins Committee of the Piracicaba, Capivari and Jundiaí Rivers (2015-2016), President of the Management Committee of Interáguas Program (2014-2016), Representative of SNSA/MCidades in the World Water Council (2012-2014) and Titular Board Member of National Water Resources Council (2015-2016) and of the Cities Council (2012-2014).
Ricardo Daruiz Borsari. Mr. Borsari has been our Metropolitan Region Officer since September, 2020. He has a degree in Civil Engineering and a master’s degree in Civil Engineering from the Polytechnic School of University of São Paulo (Escola Politécnica da Universidade de São Paulo – USP). He was our Regional Systems Officer from January 2019 to August 2020. He was also SecretaryDepartment of Sanitation and Water ResourcesUrban Transport, and for eight years, he served as the Superintendent of Capital Markets, responsible for managing the Stateequity portfolio of São Paulo from May to December 2018. He workedBNDESPAR, which included significant investments in several positions at the DAEE, among them: Engineer since 1978, Executive Officer from January 2015 to May 2018various infrastructure and from June 2001 to February 2007, Executive Officer of Engineering and Construction Works from August 2010 to October 2011, Executive Officer of the Technology Center of Hydraulic and Water Resources from July 2008 to October 2011. He was Executive Secretary of the Alto Tietê River Basin Committee from 2001 to 2005 and from 2017 to 2018 and Chief Executive Officer and member of the Board of Directors of Metropolitan Water and Energy Company (Empresa Metropolitana de Águas e Energia – EMAE) from 2011 to 2015. He was a member of the Board of Directors of Companhia Energética de São Paulo - CESP between April 2015 and May 2018. Mr. Borsari was a professor at several institutions, including: School of Engineering of Mackenzie University from 1979 to 1980, School of Engineering of Fundação Armando Álvares Penteado – FAAP from 1982 to 1986, Polytechnic School of USP from 1989 to 2004, and Pontifical University Catholic of São Paulo – PUCSP, from 1997 to 2001.
utilities sectors.
B. | Compensation |
Pursuant to Brazilian Corporate Law, our shareholders are responsible for establishing the aggregate amount of compensation we pay to the members of our Board of Directors, members of our fiscal committeeFiscal Council and our executive officers. According to InstructionResolution No. 48080 issued by CVM, we have to periodically disclose certain information on the aggregate compensation such as averages and fringe benefits.
In 2021, 2020the years ended December 31, 2023, 2022 and 2019,2021, the aggregate compensation, including benefits in kindtaxes, social contribution charges and benefits-in-kind granted that we paid to members of our Board of Directors, boardBoard of executive officersExecutive Officers and fiscal committeeFiscal Council for services in all capacities was R$7.810.5 million, R$ 7.97.5 million and R$6.77.8 million, respectively.
The table below sets forth the breakdown of the total compensation received by our directors and members of our boardBoard of executive officersExecutive Officers and fiscal committeeFiscal Council and other data related to their compensation for the periods indicated:
2021 | 2020 | 2019 | |||
Total compensation per administrative body | |||||
Board of Directors | 1,771 | 1,726 | 1,417 | ||
Board of Executive Officers | 5,776 | 5,797 | 5,000 | ||
Fiscal Committee | 296 | 342 | 275 | ||
Total amount of compensation | 7,843 | 7,865 | 6,692 | ||
Number of members (in individuals) | |||||
Board of Directors | 10 | 10 | 9 | ||
Board of Executive Officers | 6 | 6 | 6 | ||
Fiscal Committee | 4 | 5 | 4 | ||
Fixed annual compensation | |||||
Salary | |||||
Board of Directors | 1,362 | 1,328 | 1,084 | ||
Board of Executive Officers | 2,940 | 2,959 | 2,487 | ||
Fiscal Committee | 228 | 263 | 212 | ||
Direct and indirect benefits | |||||
Board of Directors | 409 | 398 | 334 | ||
Board of Executive Officers | 1,396 | 1,399 | 1,165 | ||
Fiscal Committee | 68 | 79 | 62 | ||
Variable compensation | |||||
Bonus | |||||
Board of Directors | - | - | - | ||
Board of Executive Officers | 1,440 | 1,439 | 1,348 | ||
Fiscal Committee | - | - | - | ||
Maximum amount of compensation | |||||
Board of Directors | 234 | 234 | 205 | ||
Board of Executive Officers | 991 | 989 | 867 | ||
Fiscal Committee | 68 | 68 | 67 | ||
Minimum amount of compensation | |||||
Board of Directors | 133 | 140 | 121 | ||
Board of Executive Officers | 935 | 971 | 802 | ||
Fiscal Committee | 68 | 68 | 67 | ||
Average amount of compensation | |||||
Board of Directors | 177 | 171 | 153 | ||
Board of Executive Officers | 963 | 953 | 810 | ||
Fiscal Committee | 68 | 68 | 69 |
2023 | 2022 | 2021 | |||
(R$ in thousands) | |||||
Total compensation per administrative body | |||||
Board of Directors |
2,185 | 1,872 | 1,771 | ||
Board of Executive Officers |
7,919 | 5,345 | 5,776 | ||
Fiscal Council |
354 | 331 | 296 | ||
Total amount of compensation |
10,458 | 7,548 | 7,843 | ||
Number of members (in individuals) | |||||
Board of Directors |
11 | 11 | 10 |
121 |
Board of Executive Officers |
6 | 6 | 6 | ||
Fiscal Council |
4 | 5 | 4 | ||
Fixed annual compensation | |||||
Salary | |||||
Board of Directors |
3,855 | 1,440 | 1,362 | ||
Board of Executive Officers |
4,054 | 2,729 | 2,940 | ||
Fiscal Council |
272 | 255 | 228 | ||
Direct and indirect benefits | |||||
Board of Directors |
503 | 432 | 409 | ||
Board of Executive Officers |
1,991 | 1,311 | 1,396 | ||
Fiscal Council |
82 | 76 | 68 | ||
Variable compensation | |||||
Bonus | |||||
Board of Directors |
- | - | - | ||
Board of Executive Officers |
2,073 | 1,305 | 1,440 | ||
Fiscal Council |
- | - | - | ||
Maximum amount of compensation | |||||
Board of Directors |
164 | 234 | 234 | ||
Board of Executive Officers |
1,736 | 974 | 991 | ||
Fiscal Council |
57 | 68 | 68 | ||
Minimum amount of compensation | |||||
Board of Directors |
138 | 140 | 133 | ||
Board of Executive Officers |
924 | 959 | 935 | ||
Fiscal Council |
57 | 68 | 68 | ||
Average amount of compensation | |||||
Board of Directors |
193 | 174 | 177 | ||
Board of Executive Officers |
1,440 | 957 | 963 | ||
Fiscal Council |
87 | 68 | 68 |
At our general shareholders’ meetingOrdinary and Extraordinary General Shareholders’ Meeting held on April 29, 2021, and at our extraordinary general shareholders’ meeting held on November 24, 202125, 2024, our shareholders approved the amount of R$8.010.5 million in aggregate compensation payable to the members of our Board of Directors, membersFiscal Council and Board of our fiscal committee, members of our audit committee and our executive officersExecutive Officers in 2021. The remuneration for 2022 will be decided by the General Shareholders’ Meeting to be held on April 28, 2022.2024.
Profit Sharing and Pension Plans
We have established a pension and benefit fund to provide our employees with retirement and pension benefits. The plans of employees who joined up to December 1, 2019, are managed by Fundação SABESP de Seguridade Social – SABESPREV,(“SABESPREV”), and new employees joining from January 1, 2020, are managed by Fundação CESP, both closed supplementary pension entities in self-management mode. This pension plan provides benefit payments to former employees and their families. Both we and our employees make contributions. Our totalordinary contributions to the pension plan totaled R$35.440.9 million, R$ 36.039.4 million and R$37.035.4 million in 2021, 2020the years ended December 31, 2023, 2022 and 2019,2021, respectively. In addition to the pension plan under SABESPREV and Fundação CESP, we are also required to pay supplemental pension payments relating to the employment contract of certain employees prior to the creation of SABESP, which we called a plan G0. Based on independent actuarial reports, as of December 31, 2021,2023, our obligation under these both plans (G0 and G1) totaled R$2,321.72,142.9 million. For furthermore information on our pension plans, see Note 22 to our financial statements2023 Consolidated Financial Statements included in this annual report.
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Beginning in 2020, payments under the profit-sharing plan were based both on general goals that evaluate us as a whole and on other goals that evaluate the performance our different business units. Payments are proportionally reduced annually if the goals are not completely achieved.
We recorded profit-sharing expenses of R$88.497.5 million, R$91.096.2 million and R$93.588.4 million in 2021, 2020the years ended December 31, 2023, 2022 and 2019,2021, respectively. We do not have a stock-option plan for our employees.
C. | Board Practices |
The members of our Board of Directors are elected at an annual shareholders’ meeting to serve a two-year term. Such term may be renewed three consecutive times. Our next annual shareholders’ meeting will be held on April 28, 2022. Our Board of Directors ordinarily meets once a month or when called by a majority of the directors or the chairman. SeeFor more information, see “Item 6.A. Directors and Senior Management—Board of Directors.”
Our boardBoard of executive officers is composedExecutive Officers consists of sixseven executive officers appointed by our Board of Directors for a two-year term. Such term may be renewed three consecutive times. Although our bylaws provide that the meetings of our boardBoard of executive officersExecutive Officers shall be held at least twice a month, meetings are held on a weekly basis or whenever called by the chief executive officerour Chief Executive Officer or by two officers without specific designation jointly. SeeFor more information, see “Item 6.A. Directors and Senior Management—Board of Executive Officers.”
None of our directors and/or executive officers is a party to an employment contract providing for benefits upon termination of employment. Currently, noneHowever, the director who is the representative of our directors and officers are also employees. However, if that happens, theythe employees will remain as employeesan employee after theirhis tenure, as directors and/or officers, in this case, maintaining all benefits grantedhe was entitled to our employees.as an employee prior to his election.
Fiscal CommitteeCouncil (Conselho Fiscal)
Our fiscal committee,Fiscal Council, which is established on a permanent basis, consists of a minimum of three and a maximum of five sitting members and generally meets once a month.the same number of alternates. Our fiscal committeeFiscal Council currently consists of five sitting members and five alternates. All of the current members of our fiscal committeeFiscal Council were elected at the shareholders’ meetingOrdinary and Extraordinary General Shareholders’ Meeting held on April 29, 2021, except Tarcila Reis Jordão25, 2024. Seven of these members were already part of our Fiscal Council and Jaime Alves de Freitas, who were electedremained on November 24, 2021 and joinedthe recommendation of our fiscal committee in December 1, 2021.controlling shareholder. The primary responsibility of the fiscal committee,Fiscal Council, which is independent from management and from the external auditors appointed by our Board of Directors, is to review our financial statementsConsolidated Financial Statements and report on them to our shareholders. Our Fiscal Council generally meets once a month.
On April 25, 2024, our Ordinary and Extraordinary General Shareholders’ meeting was held, at which some of the more relevant matters voted on were the election of members of the Board of Directors to serve until the 2026 Annual Shareholders’ Meeting, the appointment of the chair of the Board of Directors, the election of members of the Fiscal Council to serve until the 2025 Annual Shareholders’ Meeting, the nomination of members to the Audit Committee and the election of members to the Eligibility Committee.
The following are the names, ages,year of birth, position, date of election, date of entry and brief biographical descriptionsbiographies of the current and alternate members of our fiscal committee:Fiscal Committee as of the date of this annual report:
Fiscal | Position | Date | Date of | ||||
Member | May 4, 2023 | April 25, 2024 | |||||
Eduardo Alex Barbin Barbosa | 1975 | Member | August 24, 2023 | April 25, 2024 | |||
Natália Resende Andrade Ávila | 1987 | Member | May 4, 2023 | April 25, 2024 | |||
Carlos Augusto Gomes Neto(1) | 1982 | Member | April | ||||
Member | |||||||
April | |||||||
Alternate | |||||||
Alternate | | ||||||
Alternate | April 25, 2024 | ||||||
Gustavo Carvalho Tapia Lira | 1978 | Alternate | May | April 25, 2024 | |||
Ricardo Bertucci | 1977 | Alternate(1) | April 26, 2024 | April 25, 2024 |
(1) Member indicated by the minority shareholders.
(1) | On the recommendation of our controlling shareholder, Carlos Augusto Gomes Neto will be replaced by Mr. Cleber Stefani at the next Extraordinary Shareholder’s Meeting, which will be held on May 27, 2024. |
(2) | Member appointed by the minority shareholders. |
Fabio Bernacchi MaiaAndré Isper Rodrigues Barnabé.. Mr. MaiaBarnabé has been a member of our fiscal committeeFiscal Council since May 2020.2023. He holds a bachelor’s degree in Law from the Pontifical Catholic University of São Paulo (PUC-SP), a specialization degree in Economic Law from Fundação Getúlio Vargas of São Paulo (FGV-SP), and is enrolled in a master’s program in State Law at the University of São Paulo (USP). He worked at Queiroz, Maluf Sociedade de Advogados as an MBAassociate attorney from 2015 to 2017, at the São Paulo State Transport Regulatory Agency (ARTESP) as superintendent of the Institutional Affairs Office from 2017 to 2019, at the Santos Port Authority (SPA) as an advisor to the Business Development and Regulation Office in Business2019, at Empresa de Planejamento e Logística S.A. (EPL) as an advisor to the Planning Office from 2019 to 2022, and at the IDB as a consultant for Products and External Services from 2022 to 2023. Since January 2023, Mr. Barnabé has been the Executive Secretary of Partnerships in Investments in the São Paulo State Government.
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Eduardo Alex Barbin Barbosa. Mr. Barbosa has been a member of the Company’s Fiscal Council since August 2023. He holds a bachelor’s degree in law from Universidade Anchieta, postgraduate degrees in Public Law from the São Paulo School of Judicature and in Economics and Health Management from the Administration Institute FoundationPublic Health School of the University of São Paulo, and an MBA in PublicGovernment Management Policies from Fundação Getúlio Vargas, and an undergraduate degree in Business Administration from São Judas Tadeu University. He began his career at Empresa Metropolitanathe Escola Paulista de Transportes Urbanos deDireito. Mr. Barbosa is currently the Chief of Staff of the Social Development Department of the São Paulo - EMTU in 1994, where he held several positions until early 2016, such as Financial Controllership Manager State. He was advisor to the CEO’s Office at the Foundation for Education Development between July 2020 and Administrative and Finance Director. Since 2016, he has served inJanuary 2023, Chief of Staff at the State Capital Defense Council (CODEC), where he was Executive Secretary from July 2017 toDepartment of Health of the São Paulo State between January 2019 and inJuly 2020, Legislative Legal Advisor at the first three months of 2020. Currently, he isSão Paulo City Council between August 2018 and January 2019, Deputy Executive Secretary of the Human Rights Department of the Municipality of São Paulo between June 2017 and August 2018, Technical Advisor at the Accounting Court of the São Paulo State Capital Defense Council (CODEC). Mr. Maiabetween February 2015 and June 2017, Chief of Staff at the São Paulo State Department of Justice and Citizenship from February 2014 to February 2015, Cabinet Advisor at the São Paulo State Land Institute from February 2009 to February 2014, and also worked as a freelance lawyer from January 2005 to January 2009.
Natália Resende Andrade Ávila. Mrs. Ávila has been a sitting member of theour Fiscal Council since May 2023. Mrs. Ávila holds a degree in Engineering from the University of Empresa MetropolitanaBrasília (UnB), in Law from the Higher Education Institution in Brasília (UniCEUB), and in Accounting from FIPECAFI. She is a specialist in Constitutional Law from Universidade Gama Filho, in Tax Law from Universidade Estácio de Águas e EnergiaSá, holds a master’s degree in Environmental Technology and Water Resources from UnB, is enrolled in a Master of Laws (LLM) program from the University of London, and in a Ph.D. program in Environmental Technology and Water Resources from UnB. She has been a Federal Prosecutor since 2017,2015 and alternatecurrently serves as Legal Consultant at the Ministry of Infrastructure. She was a Fiscal Council member at the Port of Santos (2019 to 2021) and served as Legal Advisor (2017 to 2019) and Chief of Staff (2018 to 2019) at the Special Secretariat of the Fiscal CouncilInvestment Partnership Program of Companhia do Metropolitano de São Paulo - METRÔ since 2019. He wasthe Brazilian Presidency. She also worked as a Substitute Legal Consultant – General Coordinator of Agreements (2016 to 2017) and Advisor in the Legal Consultancy to the Ministry of National Integration (2015 to 2016). She is also a sitting member of the Fiscal CouncilAirport Infrastructure Regulation Committee of Companhia de Seguros do Estado de São Paulo from 2017 to 2018.FGV Direito Rio and Coordinator of the National Chamber of Infrastructure and Regulation.
Ernesto Mascellani NetoCarlos Augusto Gomes Neto. . Mr. MascellaniGomes Neto has been a member of our Fiscal Council since April 2024. He works at the São Paulo State Department of Treasury and Planning as coordinator of Financial Administration, serving as director of the Department of Tax Policy Studies, and director of Collection, Billing, and Debt Recovery. He is a specialist fiscal committee since September 2020.assistant to the Executive Board of Tax Administration. He holds a bachelor’s degree in International RelationsInformation Systems from Fundação Armando Alvares Penteado - FAAPUNIGUAÇU, a postgraduate degree in Information Technology from FIA, and a graduateMaster’s degree in Public Managerial SkillsEconomics from the São Paulo State University - UNESP. He is currently the Chief Executive Officer of the State Traffic Department of the São Paulo State - DETRAN-SP. Mr. Mascellani Neto was Special Project Supervisor at the São Paulo State Data Processing Company - Prodesp from 2019 to 2020, Housing Service Officer at the Urban Development and Housing Company - CDHU of São Paulo from 2015 to 2019, Coordinator of Technical, Technological and Vocational Education Department of Economic Development, Science, Technology and Innovation of the São Paulo State from 2013 to 2015, among other positions.FGV.
Edson TomasGisomar Francisco de Lima Filho.Bittencourt Marinho. Mr. Lima FilhoMarinho has been a member of our fiscal committeeFiscal Council, proposed by the minority shareholders, since May 2020.April 2024. He holds a bachelor’s degree in Economics and a postgraduate degree in Economic Engineering and Industrial Administration from Mogi das Cruzesthe Federal University (Universidadeof Rio de Mogi das Cruzes) andJaneiro (UFRJ), a master’s degree in PublicBusiness Administration from Getúlio Vargas Foundation (Fundação Getúlio Vargas - FGV). Currently, he is the President of the Municipal Authority for Urban Cleaning of the municipality of São Paulo (AMLURB)COPPEAD/UFRJ and an alternate Fiscal Councilor for CETESB.MBA in Electric Energy Business Management by FGV/CEMAR. He was Chief Executive Officer of the Insurance Company of the State of São Paulo (COSESP) from 1999 to 2004 and Chairman of the Board of Directors from 1999 to 2004 and in 2018 for the same company. He held several positions in public sector entities: Chairman of the Board of Directors of São Paulo’s Road Development Company (Desenvolvimento Rodiviário S.A. - DERSA) from March 2015 to April 2018; member of the Board of Directors of Empresa Metropolitana de Transportes Urbanos (EMTU) from June 2007 to June 2010; member of the Board of Directors of Banco Nossa Caixa S.A. from 2001 to 2002; member of the Board of Directors of CETESB from 1999 to 2001, where he was also Director of Corporate Management from January 2007 to January 2011 and from January 2015 to December 2016. Mr. Lima Filho was alsois currently a member of the Advisory Board of Fundação Mario Covas between July 2001 and April 2002consultant-project director at Galeazzi & Associados (since Aug/2023) and a member of the Board of Directors of Elestrobras S.A. (since Apr/2023). Mr. Marinho was the Brazilian Societyfinancial and investor relations administrative officer of SciencesLight S.A. between Feb/2021 and Insurance from 1999 to 2001.Oct/2022, financial and investor relations officer of Log-in Logísti-ca Intermodal S.A. between Aug/2018 and Aug/ 2020, financial and investor relations officer at Unidas S.A. between Jun/2011 and Mar/2018. At Cemar – Companhia Energética do Maranhão S.A. he served as financial administrative officer between Mar/2008 and May/2011, as financial administrative manager between Nov/2005 and Feb/2008 and as controller between Mar/2004 and Oct/2005. He was also general controller at Hotéis Othon S.A. between Aug/2003 and Feb/2004, financial administrative officer at Mastersaf – Tecnologia em Serviços de Legislação S.A. between Dec/2000 and Mar/2003, investor relations and financial planning manager at Lojas Americanas S.A. between Mar/1995 and Nov/2000 and administrative financial supervisor at Baker Hughes Equipamentos Ltda – Baker Oil Tools Division between Sep/1988 and Feb/1993.
Tarcila Reis JordãoDiego Allan Vieira Domingues. Mrs. JordãoMr. Domingues has been aan alternate member of our fiscal committeeFiscal Council since December 2021. SheMay 2023. Mr. Domingues holds a bachelor’s degree in Lawmechanical engineering from the Federal University of Bahia (Universidade Federal da Bahia)Faculdade de Engenharia Industrial (FEI), is enrolled in a professional master’s degreesprogram in Comparative Politics from the London School of Economics and Political Scienceat Fundação Getúlio Vargas (FGV), and in Researcha postgraduate program in Public Law and Public Management at Instituição Damásio de Jesus. He worked in Project Engineering at Mangels from the University of Paris 1 (Panthéon-Sorbonne). She also holds a PhD in Public Law from Sciencespo Paris and has a post doctorate project2005 to 2010, at the Massachusetts Institute of Technology. She is currently the Undersecretary of Partnerships at the ProjectsFinancial Planning and Strategic ActionsControl Center of the São Paulo State Treasury Department as an analyst and director from 2010 to 2017, at the Fundação para o Desenvolvimento da Educação (FDE) as an advisor to the CEO’s office and Supervisor of Planning and Projects from 2017 to 2018, at the São Paulo State Treasury and Planning Department as coordinator of State Financial Administration in 2018, and as director of the São Paulo State Finance Department in 2021. Mr. Domingues was a member of the Fiscal Councils of Empresa Paulista de Planejamento Metropolitano S.A. (EMPLASA) from April 2018 to December 2020, Companhia Paulista de Obras e Serviços (CPOS) from April 2019 to March 2020, and Companhia Paulista de Securitização (CPSEC) from May 2020 to March 2022.
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Itamar Paulo de Souza Júnior. Mr. Souza Júnior has been an alternate member of our Fiscal Council since August 2023. He holds a bachelor’s degree in advertising and marketing and a professorpostgraduate degree in business management. He is currently a Coordinator at the Law School of the Getúlio Vargas Foundation (Escola de Direito da Fundação Getúlio Vargas). Mrs. Jordão was a consultant to the Department of ConcessionsSocial Development. He served as a Special Legislative Coordinator at the São Paulo City Council from May 2021 to January 2023, a Legislative Advisor at the São Paulo City Council from December 2019 to April 2021, a Coordinator at the São Paulo State Department of Social Development from May 2018 to December 2018, and Public-Private Partnershipshe worked in commercial activities in the private sector.
Pedro Monnerat Heidenfelder. Mr. Heidenfelder has been an alternate member of our Fiscal Council since May 2023. Mr. Heidenfelder holds a bachelor’s a degree in Law from Universidade Federal Fluminense and has certificates in administrative justice and principles of administrative procedure and implications in administrative justice, with award-winning projects in public law and applied sciences from Universidade Federal Fluminense. He has been a São Paulo State Prosecutor since 2019.
Gustavo Carvalho Tapia Lira. Mr. Lira has been an alternate member of our Fiscal Council since May 2023. He holds a bachelor’s degree in Administration and a master’s degree in Political Economy, both from the Pontifical Catholic University of São Paulo. Since 2021, he has been Undersecretary of Budget at the Department of Budget and Management, and subsequently at the Department of Treasury and Planning. From 2013 to 2021, he was a technical advisor to the Office of the International Finance Corporation (2014-2018), DirectorSão Paulo State Secretariat of Planning and Management, Treasury and Planning and Projects, Budget and Management, heading the Partnership Unit with the Private SectorEconomic Advisory area from 2015 to 2017, serving as Undersecretary of Planning and Budget in 2018, and being part of the Office of the Chief of Staff of the Municipal Government of Salvador, State of Bahia (2013), among others.
Maria Elvira Lopes Gimenez. Mrs Gimenez has been a member of our fiscal committee since May 2021. She holds a bachelors’ degree in Economics with specialization in Corporate Governance, with focus on performance of Fiscal Councils in Publicly Held Companies. She is currently a sitting member of the Fiscal Council of WLM Participações e Comercio de Máquinas e Veículos S.A.Planning and Banco do Estado do Rio Grande do Sul S. A., and alternate member at Bicicletas Monark S.A., Pettenatti Indústria Têxtil S.A., Tronox Pigmentos do Brasil S.A., Companhia de Ferro Ligas da Bahia – Ferbasa, Rossi Residencial S.A., and Eucatex S.A. Previously, she was a sitting member of AES Tietê S.A., an alternate member of the Companhia Providência Ind. e Com. S.A., Companhia de Saneamento do Estado de São Paulo - Sabesp, Whirlpool S.A., and São Martinho S.A.. She also worked at Solução Governança Corporativa e Consultoria Ltda/Jorge Lepeltier Consultres Associados, between 2013 and 2019.
Humberto Macedo Puccinelli. Mr. Puccinelli has been a member of our fiscal committee since May 2021. He holds a degree in Economics from the Pontificial University of São Paulo (Pontifícia Universidade Católica de São Paulo - PUC-SP). He has been the Technical Assistant of the State Treasury since January 2004. He was also a member of our fiscal committee from 2011 to 2020. He worked at the Economy and Planning Secretariat State of São Paulo as Assistant Secretary in 2003, at the State Treasury from 1996 to 2002, at the Health State Department as Assistant Secretary from 1995 to 1996, and at the Economy and Planning Secretariat State of São Paulo (Secretaria de Planejamento e Gestão do Estado de São Paulo) from 1985 to 1995.
Cassiano Quevedo Rosas de Ávila. Mr. Ávila has been an alternate member of our fiscal committee since May 2020. He holds a degree in Law from Sorocaba Law School (FADI), and a graduate degree in Public and State Law from Itu Law School (Faculdade de Direito de Itu - FADITU), a graduate degree in Administrative Law from the Pontifical University of São Paulo (Pontifícia Universidade Católica de São Paulo – PUC-SP) and a graduate degree in Environmental Law from Mackenzie Presbyterian University (Universidade Presbiteriana Mackenzie). He also holds a master’s degree in Management and Public Policies from the Getúlio Vargas Foundation (Fundação Getúlio Vargas - FGV). Mr. Ávila is currently the Director of Traffic Education and Inspection at the São Paulo State Traffic Department (DETRAN-SP). He was advisor at SPTrans from 2002 to 2008 and at the São Paulo Housing and Urban Development Company - CDHU from 2008 to 2018. He was Director of Administration and Infrastructure at SPTrans in 2018 and Chief of Staff at the São Paulo State Housing Secretariat, where he also served as Secretary of the Public-Private Partnerships Group of the São Paulo Social Housing Agency - Casa PaulistaBudget Coordination from 2019 to 2020.
Nanci Cortazzo Mendes Galuzio. Ms. Galuzio has been2021. From 2009 to 2013, he held the position of Public Executive in the Economic Advisory of the Department of Economy and Planning. He also worked as a member of our fiscal committee since May 2020. Ms. Galuzio holds a bachelor’s degree in Law from Pontifical University of São Paulo (Pontifícia Universidade Católica de São Paulo – PUC/SP), and a postgraduate degree in Business Law and Business Management Information Systems from the same institution. She also graduated from George Washington University. Currently, she is the Administrative and Financial Directortechnician at the Fundação Florestal of the Infrastructure and Environment Secretariat of the São Paulo State Government. Previously, she workedProcon-SP from 2005 to 2008. He currently serves as Corporate Management Director of Companhia Paulistana de Securitização from 2011 to 2013, Legal Manager at Emplasa S.A. from 2003 to 2011. She was a member of the Board of Directors of EMAE from 2014 to 2017 andEMTU. He has also served as a member of the Board of Directors of CPOSCETESB in 2018 and as a Fiscal Council member of the following entities: CETESB (2022-2023), FDE (2021-2023), CPTM (2020-2022), Desenvolve SP (2019-2020), both from 2018 to 2019.Companhia Paulista de Parcerias (2018-2020), São Paulo Previdência (2016-2018), and CPETUR (2015-2016)
Jaime Alves de FreitasRicardo Bertucci.. Mr. FreitasBertucci has been aan alternate member of our fiscal committeeFiscal Council, proposed by the minority shareholders, since December 2021.April 2024. He holds bachelors’ degreesa bachelor’s degree in Accountingaccounting from the Catholic SchoolFederal University of AdministrationParaná and Economics of Curitiba (Faculdade Católica de Administraçãoa postgraduate degree in Controllership from FAE Business School. He is currently a partner at Audicontrol Auditoria e Economia – Curitiba)Controle (since 2011) and Law from the University Center of the Federal District (Centro Universitário do Distrito Federal), and an MBA in Finance from IBMEC Brasília.a partner at Audicontrol Contadores Associados (since 2016). He has beenexperience in the Coordinator ofaccounting area for over 25 years, having worked in the Controller Office of the Secretariat of Finance of São Pauloauditing and control area since January 2019, member of the Board of Directors of SPPREV since June 2021, and2000. He serves as a member of the Fiscal Council of PREVCOM since June 2021. He was Chairman of the Boards of Directors of Companhia Paulista Alliança Saúde Parcerias (CPP) from May 2020 to February 2021, of Desenvolvimento Rodoviárioe Participações S.A. (DERSA) from January 2019 to November 2020, of Cia Paulista de Obras e Serviços (CPOS) from February 2019 to July 2020, and Judge General of the Central Bank of Brazil from June 2006 to July 2018. Mr. Freitas was also Deliberative Adviser to the Central Bank Foundation of Private Retirement Plan (CENTRUS), SecretaryCentrais Elétricas Brasileiras S.A. – Eletrobras and temporary President of the Board of Control of Financial Activities (COAF) of the Ministry of Finance from August 2000 to January 2006, among others.
Massao Fábio Oya. Mr Oya has been a member of our fiscal committee since May 2021.He holds an MBA in Finance and Controllership Management. He is currently a member of the fiscal council of the following companies: Companhia de Ferro Ligas da Bahia – Ferbasa since April 2017, Rossi Residencial S.A. since April 2017, Tronox Pigmentos do Brasil S.A. since April 2013 and Bicicletas Monark S.A. since April 15), acting also as anna alternate member of the Fiscal Council of: Schulzof Equatorial Energia S.A, Celpa – Centrais Elétricas do Pará S.A. since April 2017), General Shopping S.A. since April 2019, Tupy S.A. since May 2020 and Mahle Metal Leve S.A. since May 2020). He was a sitting member of the Fiscal Council of the following companies: TIMCemar – Companhia Energética do Maranhão, Tijoá – Tijoá Participações e Investimentos S.A. from September 2011 to January 2012 and from March 2012 to April 2012,, CSE Energia – Centro de Soluções Estratégicas S.A., Sanepar – Companhia de Saneamento do Paraná and TPI – Sanepar from April 2011 to April 2012, Wetzel S.A. from Apr 2011 to April 2012, Bardella S.A – Indústrias Mecânicas from April 2013 to April 2015, General Shopping S.A. from October 2012 to April 2013, Companhia Providência Ind. e Comércio from April 2014 to March 2016, Companhia Paranaense de Energia – COPEL from April 2015 to April 2017 and from April 2010 to April2011, Companhia de Saneamento do Estado de São Paulo - Sabesp from April 2015 to April 2017 and from April 2013 to April 2014, Pettenati Indústria Têxtil S.A. from October 2014 to October 2018, WLMTriunfo Participações e Comércio de Máquinas e VeículosInvestimentos S.A. from October 2011 to April 2020), Whirlpool S.A. from April 2018 to July 2020), Eucatex S.A. – Indústria e Comércio from June 2019 to July 2020 and from April 2015 to April 2016), São Martinho S.A. from July 2017 to July 2020) and Banrisul – Banco do Estado do Rio Grande do Sul S.A. from April 2017 to February 2021.
Audit Committee
Our bylaws provide for an audit committeeAudit Committee to be comprised of three board members, who will cumulatively comply with the requirements of (i) independence, (ii) technical expertise, and (iii) identifying and complying with applicable exemptions in accordance with the United States Securities and Exchange Commission, or the SEC, and New York Stock Exchange, or NYSE, rules. Our Board of Directors determined that Eduardo de Freitas TeixeiraPerson Pardini qualifies as a Coordinator and as Financial Expert under the SEC rules. The current members were appointed by the Board of Directors. Pursuant to our bylaws, the members of our audit committeeAudit Committee may be appointed simultaneously to their election to the Board of Directors or by a subsequent resolution at a board of director’s meeting.
The audit committeeAudit Committee is mainly responsible for assisting and advising the Board of Directors in its responsibilities to ensure the quality, transparency and integrity of our published financial information and financial statements.Consolidated Financial Statements. The audit committeeAudit Committee is also responsible for supervising all matters relating to the Code of Conduct and Integrity, accounting, internal controls, the internal and independent audit functions, compliance, risk management and internal policies, such as the related partiesparty’s transaction policy. The audit committeeAudit Committee and its members have no decision-making powers or executive functions.
The minimum availability required from each member of the audit committeeAudit Committee is thirty hours per month. Under our bylaws, the members shall exercise their roles for the same period as their corresponding term of office, or until otherwise resolved by the general shareholders’ meetingOrdinary and Extraordinary General Shareholders’ Meeting or by resolution of the Board of Directors. In the event that an audit committeeAudit Committee member resigns or is removed from office after exercising any portion of his or her term, such member may only rejoin the audit committeeAudit Committee at least three years from the end of such member’s term. All of our audit committeeAudit Committee members are independent.
We currently have three members on our Audit Committee. The following are thetheir names, positions, and dates of election as of the date of entry of the members of our audit committee:this annual report:
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Audit Committee Members | Position | Date | Date of | ||
Eduardo | Coordinator and Financial Expert | May | |||
Member | May 4, 2023 | ||||
Member | April 26, 2024 |
On April 25, 2024, our Ordinary and Extraordinary General Shareholders’ meeting was held, at which some of the more relevant matters voted on were the election of members of the Board of Directors to serve until the 2026 Annual Shareholders’ Meeting, the appointment of the chair of the Board of Directors, the election of members of the Fiscal Council to serve until the 2025 Annual Shareholders’ Meeting, the nomination of members to the Audit Committee and the election of members to the Eligibility Committee.
See curriculum vitae above in “—Board of Directors.”
Eligibility and Advisory Committee
In accordance with Federal Law No. 13,303/16,2016, and pursuant to our bylaws, as approved at the extraordinary shareholders’ meeting held on April 27, 2018, we created an Eligibility and Advisory Committee responsible for supervising the process for the appointment and evaluation of members of our Board of Directors, executive boardBoard of Executive Officers and fiscal committee.Fiscal Council.
This committee is composedconsists of up to three members, elected by a general shareholders’ meeting,the Ordinary and Extraordinary General Shareholders’ Meeting, without a fixed term of office. Members must have at least three years’ professional experience in public administration, or three years’ experience in the private sector in an area in which, or related to which, we operate.
The following are the names, positions and dates of election of the members of our Eligibility and Advisory Committee:
Eligibility | Position | Date | Date of | ||
Member | April 26, 2024 | ||||
Member | April 26, 2024 | ||||
Member | April 26, 2024 |
Fábio Aurélio Aguilera Mendes.Jardel Rolando Almeida Garcia. Mr. MendesAlmeida Garcia holds a bachelor’s degree in Lawlaw from Universidade Candido Mendes, registered with the Supreme Court of the State of Colorado. He has an MBA in Telecommunications Regulation. He has been our Legal Superintendent since August 2023. He worked at Ball Corporation from November 2013 to April 2023 as Legal and Compliance Director for South America (Brazil, Argentina, Chile, Peru, Paraguay, Uruguay, Ecuador and Colombia). He worked at Construtora Queiroz Galvão S/A from June 2010 to October 2013 as head of the Legal Practice in Latin America and the Caribbean. He also worked at San Antonio International from May 2009 to May 2010 as Legal Manager for about a year, having been responsible for operations in Brazil. He worked at Bastos-Tigre, Coelho da Rocha e Lopes Advogados from February 2009 to April 2009 as a Senior Associate in the Infrastructure Sector, having also worked with mergers and acquisitions and Project Development/Financing.
Michael Breslin. Mr. Breslin holds a bachelor’s degree in Data Processing from the Faculdade de Direto de Itu.Tecnologia at Universidade Mackenzie, a postgraduate degree in Systems Analysis from the same university, and an MBA in Strategic Business Management from Fundação Getúlio Vargas (FGV). Mr. Breslin has been our Superintendent of Compliance and Risk since 2017 and coordinator of our Corporate Risk Management and Ethics Committees since 2018. He is currentlyheld the Coordinatorposition of Administration, Contractsadvisor to the Corporate Management Office between August 2011 and AgreementsSeptember 2017. Between June 2013 and September 2017, he served as Project Management Officer (PMO), leading the Financial and Supplies fronts in the SAP ECC ERP implementation project. Prior to that, he served as Senior Manager of Risk Management, Compliance and Internal Audit Management at Deloitte from 2002 to 2011.
Nilton João dos Santos. Mr. Santos holds a master's degree in business administration from Universidade Presbiteriana Mackenzie and a bachelor’s degree in Data Processing Technology from Universidade Cruzeiro do Sul. He has been our People Superintendent since 2016. He held the role of Department Manager of Infrastructure and Environment andHuman Resources Management from 1992 to 2015. He served as Health Officer of Sabesprev (our Social Security Foundation) from March 2015 to February 2016, responsible for the Health Plan management. Prior to that, he served as a member of the Environmental Clearinghouse (Câmara de Compensação Ambiental)Decision-Making Board of Sabesprev from 2010 to 2014 and as a member of the state of São Paulo.Fiscal Council from 2016 to 2019. He was a technical advisor for CETESB between September 2015as coordinator and March 2019professor of the Lato Sensu graduate courses at Universidade Presbiteriana Mackenzie and a cabinet technical advisor at the State Environmental Departmentresearcher between from August 2000 to June and September 2015. He held several positions as technical assistant
Recent developments in the São Paulo State Government between May 2007 and June 2015 and worked for the Development Foundation at São Paulo State University – UNESP as an administrative assistant between December 2006 and May 2007.
Carla Almeida. Mrs. Almeida holds a bachelors’ degree in architecture with specialization in Project Management – PMI Methodology by SENAC. She has been an advisor to the Headstructure of the Office of the State Secretariat for Infrastructure and Environment since January 2019. She has performed several activities in the public sector, such as: Executive Advisor to the Housing Development and Urbanism Company from June 2016 to August 2018, Advisor to the Office of the São Paulo State Government from February 2015 to June 2016, Coordinator of the Managing Committee of the Government Spending Improvement Program from June 2012 to February 2015, among others.
Paula Cristina Nassif Elias de Lima. Ms. Lima is a business administrator and graduated from the School of Economics, Accounting and Administrative Sciences at Mackenzie University and is a lawyer and holds a degree from Faculdades Metropolitanas Unidas. She has worked in CETESB from December 1988 to July 2016, serving as an assistant to the executive board between December 1988 and May 2008, Director of the Human Resources Department of the Environmental Department between May 2008 and January 2016, and Human Resources Management Department between January 2016 and July 2016. She is currently the Director of the Human Resources Department of the State Secretariat for Infrastructure and Environment where she has held this position since July 2016.
Members of the Eligibility and Advisory Committee may attend the Board of Directors’ meetings where matters related to this committee are discussed and haveDirectors' committees
On October 19, 2023, our Board of Directors approved important developments for our corporate governance structure with the right to speak, but not to vote, in accordance with our bylaws.
This committee is also responsible for providing methodological and procedural supportcreation of three non-statutory advisory committees to the Board of Directors, to evaluatenamely the performanceSustainability and Innovation Committee, the Strategy and New Business Committee and the People and Culture Committee. The Board of officersDirectors decided that these Committees should consist of at least 3 and otherat most 5 members of statutory committees.
We expect that a written charter addressing the committee’s purpose and detailing its required responsibilities will be approved by the Board of Directors.
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Sustainability and Innovation Committee
The Sustainability and Innovation Committee is a reflection of our commitment to socio-environmental responsibility and the search for innovative solutions. Through this committee, we intend to integrate sustainable practices into all our operations, promoting innovation and competitiveness in a conscious way and aligned with the demands of contemporary society. Currently, the Sustainability and Innovation Committee has the specific tasks of supervising and dealing with issues and matters related to, without limitation: initiatives and projects related to innovation and new technologies, focused at competitiveness and socio-environmental and financial sustainability; technologies related to innovation and sustainability, including for the purpose of developing strategic projects for our business; policies, procedures and guidelines that are the responsibility of the Board of Directors and that should be observed by us and/or our subsidiaries regarding innovation and management of environmental, social and governance risks – ESG; initiatives aimed at human and social rights, as well as the implementation and maintenance of practices that foster diversity and inclusion in the various initiatives and projects related to climate transition, adaptation, and resilience, including but not limited to climate scenarios, low-carbon economy, and greenhouse gas management policy.
Strategy and New Business Committee
The Strategy and New Business Committee reflects the importance attached to human capital and the development of a solid and inclusive organizational culture. The Strategy and New Business Committee will be dedicated to promoting employee appreciation and development policies, ensuring a healthy, diverse and favorable environment for the professional and personal growth of all team members. Currently, the main objective of the Strategy and New Business Committee is to promote, discuss, review and supervise the initiatives and projects related to the elaboration and review of our corporate strategy, as well as new ventures. Its tasks include guiding the planning, negotiation and implementation of these initiatives, as well as dealing with issues such as potential negotiations and transactions, studies for participation in new businesses, strategic planning, market monitoring, analysis of technological trends, and definition of strategic policies and guidelines. The Strategy and New Business Committee aims to extract the best value for us and improve our market position, considering aspects such as structure, economic feasibility and alignment to the business strategy.
People and Culture Committee
The People and Culture Committee focuses on the definition of strategic guidelines that will drive our growth and expansion, aligned with our long-term objectives. The People and Culture Committee will be responsible for identifying business opportunities, assessing risks and defining the strategies necessary for the conquest of new markets and consolidation of the company's position as a relevant player in its industry. Currently, the main mission of this committee is to promote, review and supervise initiatives and projects to improve the management of our human capital, ensuring its strategic alignment. Its assignments include dealing with issues such as remuneration, recruitment, organizational culture, organizational redesign, performance goals, compensation plans, benefits, evaluation of the Board of Directors, recruitment of leaders, and management of relationships with trade unions and class entities. In addition, the People and Culture Committee addresses issues related to health, job safety, diversity and inclusion, as well as oversees performance assessment processes and sets goals for employees and management. This committee seeks to ensure the implementation and development of a healthy, equitable and productive work environment, contributing to our effective and sustainable development.
D. | Employees |
One of our strategic guidelines is to value people. We have adopted the competency-based people management model, which is continually to ensure towards innovation, flexibility, continuous improvement, high performance and engagement of the workforce. The competency-based people management is a model that allows us to integrate our processes and includes continuous education, career management, quality of life, management of our organizational culture and wellbeingwell-being and human resources services, among others. The last organizational wellbeingwell-being survey was carried out in 20212023 and applied by the global consulting company Great Place to Work. We obtained a favorability index of 72% and, based on this result and the assessment64%, which means that 64% of our People’s Management Practices, we were certified asrespondents agree that Sabesp is a “Great Placegood place to Work”.work.
Our compensation policy is linked to our employees’ careers and salary plan set out in accordance with our competency management model and with the remuneration standards in our market sector. We have a profit-sharing program, through which we establish indicators and targets for our employees in order to encourage our employees’employees to achieve corporate objectives and assess their performance.
In order to identify the training needs of our employees and establish training and development plans, we maintain the Sabesp Corporate University (Universidade Empresarial Sabesp – UES)“UES”). Among the UES programs, we have a leadership development program, which is intended to develop an innovative leadership culture that leads to actions aimed at establishing a new organizational culture, with a greater focus on results, innovation and competitiveness. In addition, to develop and stimulate the culture of innovation and entrepreneurship through the generation and sharing of employee ideas, we hold the Sabesp entrepreneur award from time to time.
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As of December 31, 2021,2023, we had 12,51511,170 full-time employees 165(disregarding the 18 employees assigned by us to other State of São Paulo government bodies, the 36 employees working for labor unions and the 567 employees transferred by municipalities), no interns and 493471 apprentices (aprendizes), as defined by Federal Law No. 10,097/2000, dated December 19, 2000, as amended.
The following table sets forth the number of our full-time employees by main category of activity and geographic location as of the dates indicated:
As of December 31, | As of December 31, | As of December 31, | ||||||||
2021 | 2020 | 2019 | 2023 | 2022 | 2021 | |||||
Number of employees by category of activity: | ||||||||||
Projects and operations | 9,223 | 9,445 | 10,212 | 7,455 | 9,037 | 9,223 | ||||
Administration | 1,925 | 1,932 | 2,163 | 2,005 | 1,906 | 1,925 | ||||
Finance | 362 | 395 | 419 | 216 | 362 | 362 | ||||
Marketing | 1,005 | 1,034 | 1,151 | 1,493 | 995 | 1,005 | ||||
Number of employees by corporate division: | ||||||||||
Head office | 1,400 | 1,307 | 1,451 | 687 | 1,426 | 1,400 | ||||
São Paulo metropolitan region | 5,721 | 5,971 | 6,425 | 5,651 | 5,586 | 5,721 | ||||
Regional Systems | 5,394 | 5,528 | 6,069 | |||||||
Interior and coastal region | 4,832 | 5,287 | 5,394 | |||||||
Total number of employees | 12,515 | 12,806 | 13,945 | 11,170 | 12,299 | 12,515 |
The average tenure of our employees is approximately 20.521.8 years. We also outsource certain services such as maintenance, delivery of water and sewage bills, meter reading, catering and security. We believe that our relations with our employees are generally satisfactory.
Approximately 65% of all our employees are members of unions.unions, although all our employees are covered by the collective bargaining agreements of the union that represents them. The five main unions that represent our employees are (i) the Union of Workers in Water, Sewage and Environment of the State of São Paulo – SINTAEMA;(“Sintaema”); (ii) workers unionthe Union of Workers in Santos Urban Industries, Baixada Santista region, South Coast and Vale Ribeira – SINTIUS;Ribeira; (iii) the Union of Engineers of the State of São Paulo – SEESP;Paulo; (iv) the Union of Attorneys of the State of São Paulo – SASP;Paulo; and (v) the Union of Industrial Technicians of the State of São Paulo – SINTEC.
The collective bargaining agreement signed in 2019 resulted in: (i) a salary increase of 4.99% (which corresponds to the inflation adjustment for the period); (ii) a 4.99% increase in meal vouchers; (iii) a 4.99% increase in food assistance; (iv) a 38.59% increase in nursery stipends; (v) maintenance of the clause from the 2018/2019 collective bargaining agreement which guarantees the employment of 98% of our employees; and (vi) maintenance of the Christmas food stipend on an exceptional basis.
As a result of the COVID-19 pandemic, the collective bargaining agreement for the 2019/2020 period was maintained, with no readjustment to salaries and benefits, except for (i) the base salary of engineers, in compliance with current legislation, and (ii) nursery assistance, as a result of the gradual transfer of costs of the now closed Child Learning Center (“CCI”), as adjusted in the collective negotiations of 2019/2020, however without financial impacts since the readjustment was funded with the resources following CCI’s closure.Paulo.
The collective bargaining agreement signed in 2021 resulted in: (i) a salary increase of 7.79% (which corresponds to the inflation adjustment for the period); (ii) a 7.79% increase in meal vouchers; (iii) a 7.79% increase in food assistance; (iv) a 9.84% increase in nursery stipends, as a result of the gradual transfer of costs of the now closed Child Learning Center (“CCI”),CCI, as adjusted in the collective negotiations of 2019/2020, however without financial impacts since the readjustment was funded with the resources following CCI’s closure; (v) maintenance of the clause from the 2020/2021 collective bargaining agreement which guarantees the employment of 98% of our employees; and (vi) maintenance of the Christmas food stipend on an exceptional basis.
The collective bargaining agreement signed in 2022 resulted in: (i) a salary increase of 12.26% (which corresponds to the inflation adjustment for the period); (ii) a 12.26% increase in meal vouchers; (iii) a 12.26% increase in food assistance; (iv) a 12.26% increase in nursery stipends; (v) maintenance of the clause from the 2021/2022 collective bargaining agreement which guarantees the employment of 98% of our employees; and (vi) maintenance of the Christmas food stipend on an exceptional basis.
The collective bargaining agreement signed in 2023, in force until April 2024, resulted in: (i) a salary increase of 4.52% (which corresponds to the inflation adjustment for the period); (ii) a 4.52% increase in meal vouchers; (iii) a 4.52%% increase in food assistance; (iv) a 4.52% increase in nursery stipends; (v) maintenance of the clause from the 2022/2023 collective bargaining agreement which guarantees the employment of 98% of our employees; and (vi) maintenance of the Christmas food stipend on an exceptional basis.
In 2021, 20202023, in order to streamline our operations, we launched the IDP to enable us to plan dismissals gradually and 2019in accordance with our budgetary resources. Additionally, it allowed us to pass on knowledge, preventing our activities from being disrupted. A total of 1,854 employees joined the IDP, and as of December 31, 2023, 930 of our employees left the company. The remaining dismissals will take place until the end of June 2024. The IDP accounted for 81% of our dismissals for the year ended December 31, 2023, and the remainder were part of our normal course of business.
In addition, as provided for in State Law No. 17.853/2023, if our Proposed Privatization is consummated, we will not be able to terminate without cause any of our direct employees for a period of 18 months, counted from the date of the consummation of our Proposed Privatization.
In 2022 and 2021 there were no strikes. In 2023, we experienced two strikes. Under Brazilian law, lasting one day each, which did not interrupt the essential services that we provide. In our non-administrative employees50 years, there has been no record of strikes that have caused the complete interruption of our activities. This is because, according to Federal Law No. 7,783/1989, water treatment and supply and sewage collection and treatment services are consideredclassified as “essential employees” and, therefore, are limited in theiractivities”, which limits the right to strike.strike in such a way that in the event a strike occurs, there must not be any interruption of essential services or activities. If the unions or employees fail to comply with this criterion, the strike becomes illegal, resulting in fines for the unions and the risk of termination for the employees involved.
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To promote the health and safety of our employees, we maintain an occupational health and safety management system, which covers all our employees and is based on preventive and protective measures in order to avoid or minimize exposure of employees to the risks associated with work, as well as reducing or eliminating occupational accidents and diseases. In 2021,2023, we recorded 114117 accidents, with a frequency rate of 4.675.46 and a severity rate of 140.94.49. We recorded no deathdeaths in 20212023 and nohad 11 cases of employees on leave due to occupational diseases. The absenteeism rate recorded was 2.6%2.4%. During 2020, to counter the COVID-19 pandemic, we implemented several measures to limit our employees’ exposure to possible infection. We closed all of our on-site agencies and concentrated service to our clients through our digital channels. In March 2020, as soon as the pandemic was declared, approximately 5,900 employees from administrative staff and employees aged 60 years or above or employees with preexisting health conditions were working remotely.
For employees in the essential services category, who work in our facilities or on the streets, we organized shifts, distributed specific personal protective equipment and have adopted measures to expand the cleaning and hygiene protocols at workplaces. We also established the Sabesp Sanitary Protocol for the entire company, with rules for reducing circulation for safe work, social distancing, personal hygiene and sanitation of our facilities, in addition to communication and monitoring actions on the latest health policies.
In addition, we anticipated the vaccination campaign against the flu and pneumonia, with 81% of our employees being immunized, and reinforced our internal communication with daily updates in our channels of information about health care and practical tips for adapting to remote work.
To help employees cope with the emotional pressure resulting from the long period of social isolation and the impacts of the COVID-19 pandemic, we made available the Emotional Support Program - COVID-19, a telephone service offering psychological guidance. In parallel, we conduct regular surveys with the support of an external consultancy of psychologists to monitor the emotional health status of employees and accompany them during the isolation.
We also implemented the Home-Office Wellbeing (Home-Office do Bem) project, a platform which brings together initiatives such as quizzes, live videos, webinars, virtual communities and daily self-care videos, encouraging employees to take a different look at themselves and their daily lives and discover new paths to improve quality of life, health and mental well-being, in particular during the COVID-19 pandemic.
Despite all efforts to contain the spread of COVID-19 since the beginning of the pandemic, in 2021 we registered the contamination of 1,385 employees and 44 deaths as a result of COVID-19.
E. | Share Ownership |
As of December 31, 2021,2023, less than 1% of our common shares were owned by our directors, members of our Fiscal Council and executive officers. SeeFor more information, see “Item 7.A. Major Shareholder” for more information.Shareholder.”
F. | Disclosure of a registrant’s action to recover erroneously awarded compensation |
Not applicable.
ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
A. | Major Shareholder |
OurAs of the date of this annual report, our outstanding capital stock consists of 683,509,869 common shares, without par value. Under state laws, the State is required to own at least one-half plus one of our outstanding common shares. All of our shareholders, including the State, have the same voting rights. The following table sets forth ownership information for each of our shareholders that beneficially owned 5.0% or more of our common shares and for our officers and directors, individually and as a group, as of December 31, 2021:2023:
Shares | % | Shares | % | |||
State of São Paulo(1) | 343,506,670 | 50.3 | 343,506,670 | 50.3% | ||
Directors and executive officers of Sabesp | 200 | - | ||||
Directors, members of the Fiscal Council and executive officers | 4,510 | less than 1.0% | ||||
Others: | ||||||
In Brazil | 234,965,965 | 34.4 | 262,114,142 | 38.3% | ||
Abroad (NYSE) (2)(3) | 105,037,234 | 15.3 | 77,884,547 | 11.4% | ||
Total(3) | 683,509,869 | 100.0% | 683,509,869 | 100.0% |
(1) | It includes 343,506,664 shares held by the Secretariat of Finance and Planning of the State of São Paulo (Secretaria da Fazenda e Planejamento do Estado de São Paulo) in addition to six shares held by Companhia Paulista de Parcerias, |
(2) | Shares traded as American Depositary Receipts (ADR) on the New York Stock Exchange, through The Bank New York Mellon, the depositary bank for our ADRs. |
(3) | Each ADR corresponds to 1 share. |
In the U.S., our common shares, which are evidenced by ADRs, are listed in the form of ADSs on the NYSE. As of December 31, 2021, 15.3%2023, 11.4% of our outstanding common shares were held in the United States in the form of ADSs. According to the ADR depositary’sDepositary’s records, which contain information regarding the ownership of our ADSs, there were, as of December 31, 2021, 272023, 26 recorded holders of ADSs in the United States.
In September 2017, the State of São Paulo obtained approval forOn December 8, 2023, State Law No. 16,525/2017, which authorizes17,853/2023 was enacted and authorized the executive branch of the State of São Paulo to set up a controlling company to hold all of the shares thatinitiate our Proposed Privatization. If our Proposed Privatization is consummated, the State of São Paulo owns inwill no longer be our company. On September 29, 2021, the CDPED, in view of the New Sanitation Regulatory Framework (Federal Law No. 14,026/2020), as well as the State Law No. 17,383/2021, which established the Regional Unit for Drinking Water Supply and Sewage Services for the State of São Paulo, the CDPED resolved to recommend the hiring by the Secretary of Treasury and Planning of the State of São Paulo (Secretaria da Fazenda e Planejamento do Estado de São Paulo), of the International Finance Corporation – IFC, to provide consulting services to the State, consisting of the identification and analysis of possible alternatives for the restructuringcontrolling shareholder with more than 50% of our share capital. We are currently awaiting guidance from the State Privatization Program’s Board (Conselho Diretor do Programa Estadual de Desestatização - CDPED), which has authority over our corporate reorganization plan, including the formation of the controlling company, or any other type of corporate reorganization, including a change of control, pursuant to the recent changes to the basic sanitation law. As of the date of this annual report, a decision has not been made on the model for our potential corporate reorganization.equity stake. For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Control by the State“Presentation of São Paulo—Our controlling shareholder is currently discussing proposals for our corporate reorganization. We cannot guarantee that any potential reorganization will not have a material adverse effect on our business, financial condition or results of operations.Financial and Other Information—Proposed Privatization.”
B. | Related Party Transactions |
Transactions with the State of São Paulo
We have entered into extensive transactions with the State of São Paulo, which is our controlling shareholder, and we expect to continue to do so. The State of São Paulo is our largest customer. It owns some of the facilities that we use in our business, it is one of the governmental entities that regulate our business, and it has assisted us in obtaining financing on favorable terms.
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Many of our transactions with the State of São Paulo reflect policies of the State that depend on decisions of elected officials or public servants and are accordingly subject to change. Among the practices that could change are those described below concerning the provision of State of São Paulo guarantees, and the terms on which we use state-owned reservoirs.
Rendering Services
We provide water and sewage services to the federal government, state and municipal governments and government entities in the ordinary course of our business. Gross revenue from sales to the State of São Paulo, including State of São Paulo entities, totaled R$776.0 million for the year ended December 31, 2023, R$662.0 million for the year ended December 31, 2022 and R$522.6 million in 2021, R$501.8 million in 2020 and R$556.6 million in 2019.for the year ended December 31, 2021. Our accounts receivable from the State of São Paulo for sanitation services totaled R$76.6120.4 million, R$74.396.7 million and R$103.376.6 million, as of December31, 2023, 2021, 20202022 and 2019,2021, respectively. In addition, as required by law, we invest our cash and cash equivalents with government financial institutions.
Payment of Pensions
Pursuant to a law enacted by the State of São Paulo, certain former employees of some state-owned companies that provided services to us in the past and later merged to form our company acquired a legal right to receive supplemental pension benefit payments. These rights are referred to as “Plan G0.” These amounts are paid by us, on behalf of the State of São Paulo, and are claimed by us as reimbursements from the State, as primary obligor. In 2021, 2020the years ended December 31, 2023, 2022 and 2019,2021, we made payments to former employees of R$185.4214.0 million, R$181.6205.2 million and R$184.8185.4 million, respectively in respect of Plan G0. The State of São Paulo made reimbursements in 2021, 2020the years ended December 31, 2023, 2022 and 20192021 in the amounts of R$179.8189.7 million, R$173.9186.7 million and R$152.1179.8 million, respectively.
Agreements with the State of São Paulo
In September 1997, we and the State of São Paulo entered into a memorandum of understanding providing that we would, in effect, apply dividends we declared that were otherwise payable to the State of São Paulo to offset accounts receivable in connection with the provision of water and sewage services to the State of São Paulo and its controlled entities.
On December 11, 2001, we entered into an agreement with the State of São Paulo and the DAEE. Pursuant to this agreement, the State of São Paulo acknowledged and agreed, subject to an audit by a state-appointed auditor, to pay us amounts it owed to us in respect of:
· | water and sewage services we provided to governmental agencies, State of São Paulo owned autonomous entities and foundations through December 1, 2001, and that was not offset in accordance with the September 1997 memorandum of understanding, in the total amount of R$358.2 million. This amount was renegotiated and included in the second amendment to this agreement discussed below; and |
· | supplemental retirement and pension benefits we paid from March 1986 to November 2001 on behalf of the State of São Paulo to former employees of the |
The agreement provided that the DAEE would transfer to us ownership of the Taiaçupeba, Jundiaí, Biritiba, Paraitinga and Ponte Nova reservoirs (herein after referred to as “the(“the reservoirs”), which form the Alto Tietê production system, and that the fair value of these assets would reduce the amounts owed to us by the State.State of São Paulo.
Under the December 2001 agreement, in 2002, a state-owned construction company (Companhia Paulista de Obras e Serviços), or the CPOS, on behalf of the State of São Paulo, and an independent appraisal firm (Engenharia de Avaliações), or the ENGEVAL, on our behalf, presented their valuation reports relating to the reservoirs. Under the agreement, the arithmetic average of these appraisals is deemed the fair value of the reservoirs. The appraisals contained in these reports were in the amounts of R$335.8 million and R$341.2 million, respectively. Because we had already made investments in these reservoirs by then, the arithmetic average of the appraisals submitted to our Board of Directors by August 2002, R$300.9 million, was net of a percentage corresponding to these investments. Our Board of Directors approved the valuation reports. This amount was updated until September 2008 according to IPCA index and amounted to R$696.3 million.
Under the December 2001 agreement, for amounts due in excess of the fair value of the reservoirs, the State of São Paulo is to make payments in 114 consecutive monthly installments. The nominal amount owed by the State of São Paulo would not be indexed to inflation or earn interest if there was a delay in concluding the appraisal of fair value. The installments will be indexed on a monthly basis by the IGP-M index, plus 6.0% per year, starting on the date the first installment becomes due.
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On October 29, 2003, the Public Prosecution Office of the State of São Paulo (Ministério Público do Estado de São Paulo), on behalf of the people of the State of São Paulo, brought a civil public action in a Trial Court of the State of São Paulo (1212ª Vara da Fazenda Pública do Estado de São Paulo) alleging that athe transfer to us of ownership of the Alto Tietê production system reservoirs from the DAEE would be illegal. An injunction against the transfer of ownership of suchthose reservoirs was granted but was later reversed. However, in October 2004, the courtTrial Court of first instance handed down its judgment on the civil public action andState of São Paulo declared the agreement between us, DAEE and State of São Paulo null and void. It was confirmed by the Court, declaring the legal transaction in questionto be null and void. Appeals in higher courts were also judged unfavorably. We have assessed that it is not probable that we will ultimately not prevail in our appeal, which would prohibit the transfer of the reservoirs in payment of the accounts receivable due from the State.State of São Paulo. The December 2001 agreement also provided that the legal advisors of the State of São Paulo would carry out specific analyses, which have commenced, to ensure agreement among the parties as to the methodology employed in determining the amount of reimbursement for pension benefits owed to us by the State.State of São Paulo. The commencement of payments with respect to pension amounts owed to us by the State of São Paulo has been postponed until these analyses are completed, the appraisal report is approved and the credit assignments relating to the transfer of the reservoirs are formalized. As discussed above, the transfer of these reservoirs is currently being disputed and we are not certain whether the transfer will be legally permitted. Under the December 2001 agreement, the first payment was to be made in July 2002.
On March 22, 2004, we and the State of São Paulo entered into a first amendment to the December 2001 agreement. Under this amendment,agreement in which the State of São Paulo acknowledged that it owed R$581.8 million to us relating to unpaid accounts receivable from the State untilthrough February 29, 2004, and we acknowledged that we owed an aggregate amount of R$518.7 million to the State of São Paulo as dividends, in the form of interest on shareholders’ equity. Accordingly, we and the State of São Paulo agreed to offset each other’s credit up to the limit of R$404.9 million, which was an amount adjusted up tothrough February 2004. The outstanding balance of R$176.9 million (as of February 29, 2004) of the State’sState of São Paulo’s consolidated debt would be paid in consecutive monthly installments from May 2005 until April 2009. These installments would be indexed according to the IPCA index, plus an interest rate of 0.5% per month. Upon the execution of the first amendment, part of the debt that the State of São Paulo owed to us for the use of water and sewage services through February 2004 was offset by the debt that we owed to the State of São Paulo as dividends, in the form of interest on shareholders’ equity. The outstanding balance of R$113.8 million as dividends in the form of interest on shareholders’ equity that we owed to the State of São Paulo was netted against accounts overdue after February 2004. The first amendment did not amend the provisions of the December 2001 agreement regarding the supplemental retirement and pension benefits we paid from March 1986 to November 2001 on behalf of the State of São Paulo to former employees of the state-owned companies.
On December 28, 2007, we and the State of São Paulo entered into a second amendment to the December 2001 agreement, pursuant to which the State of São Paulo agreed to pay:
(i) the outstanding balance under the first amendment, in the amount of R$133.7 million (as of November 30, 2007), in 60 consecutive monthly installments, beginning on January 2, 2008, and (ii) the amount of R$236.1 million relating to part of the accounts overdue and unpaid from March 2004 through October 2007 regarding the provision of water supply and sewage collection services. As part of this amendment, we agreed to pay during the period from January through March 2008 the outstanding balance of dividends in the amount of R$400.8 million, in the form of interest on shareholders’ equity, due from March 2004 through December 2006. We paid these amounts as agreed. Under the second amendment, dividends payable by us are no longer required to be applied to offset accounts receivable from the State of São Paulo, and as a result, we are currently unable to determine the amount, if any, of the declared dividends that the State of São Paulo will apply to current and future accounts receivable owed to us by the State of São Paulo or its entities. In addition, pursuant to the second amendment, we and the State of São Paulo agreed on complyingto comply with certain mutual obligations relating (i) to the improvement of payment processes and budget management procedures; (ii) the rationalization of the use of water and the volume of water and sewage bills under the responsibility of the State;State of São Paulo; (iii) the recording of government entities with accounts overdue in a delinquency system or reference file; and (iv) the possibility of interrupting water supply to these entities in case of non-payment of water and sewage bills. Finally, this second amendment did not amend the provisions of the December 2001 agreement regarding the supplemental retirement and pension benefits we paid from March 1986 through November 2001 on behalf of the State of São Paulo to former employees of the State-ownedstate-owned companies that merged to form our Company.
In 2007, we received payment installments from the State of São Paulo in the amount of R$326.0 million. As of December 31, 2007, our dividends payable to the State of São Paulo, due from 2004 through 2007, were in the amount of R$552.0 million. We are currently unable to determine the amount, if any, of the declared dividends that the State of São Paulo will apply to current and future accounts receivable owed to us by the State of São Paulo or its entities. The second amendment no longer requires that dividends be applied to offset accounts receivable from the State.State of São Paulo.
On March 26, 2008, we entered into a commitment agreement (termo de compromisso) with the State of São Paulo with the purpose of finding an alternate solution to the deadlock related to the amount owed by the State of São Paulo to us in connection with the supplemental retirement and pension benefits we paid from March 1986 to November 2001 on behalf of the State of São Paulo to former employees of the state-owned companies which merged to form our Company. In this agreement, we and State of São Paulo committed to hiring specialized companies to carry out new valuations of the amounts owed to us by the State of São Paulo and of the reservoirs. An independent consulting firm, FIPECAFI, has been retained to resolve the disagreement and validate the amount we paid from March 1986 through November 2001 on behalf of the State of São Paulo to former employees of the state-owned companies that merged to form our Company, which the State of São Paulo has not yet agreed to reimburse us hereinafter referred to as the “Disputed Reimbursement Amount.” In addition, FIPECAFI performed, together with another independent consulting firm, a new evaluation of the reservoirs that might be transferred to us as amortization of the reimbursement payable by the State of São Paulo to us.
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On November 17, 2008, we, the State of São Paulo and DAEE entered into a third amendment to the December 2001 agreement, pursuant to which the State of São Paulo recognized a debt balance payable to us totaling R$915.3 million, hereinafter referred to as the “Undisputed Reimbursement Amount,” as adjusted by the IPCA index. We accepted on a provisional basis the reservoirs as part of the payment of the Undisputed Reimbursement Amount and offered to the State of São Paulo a provisional settlement, recognizing a credit totaling R$696.3 million, corresponding to the value of the reservoirs located in the Alto Tietê region. We and the State of São Paulo have agreed that the final offset will only be recorded when the effective transfer of the reservoirs is recorded at the Real Estate Registry. The outstanding balance of Undisputed Reimbursement Amount, amounting to R$219.0 million, was being paid by the State of São Paulo in 114 consecutive monthly installments and was totally paid in 2018.
On March 18, 2015, we, the State of São Paulo and DAEE, with the intervention of the Department of Sanitation and Water Resources, executed a term of agreement in the amount offor R$1,012.3 million, of which R$696.3 million refers to the principal amount and R$316.0 million refers to the monetary adjustment of the principal through February 2015. On July 22, 2022, the decision regarding the lawsuit that challenged the possibility of transferring the reservoirs was published in the State of São Paulo’s Official Gazette (Diário Oficial do Estado de São Paulo), preventing the transfer of the reservoirs to us until the judgment is final and no longer subject to appeal.
The principal amount is payable in 180 installments, as follows:
· | The first 24 installments were settled by an immediate transfer of 2,221,000 preferred shares issued by the São Paulo Company of Electric Power Transmission (Companhia de Transmissão de Energia Elétrica Paulista |
· | The amount of R$609.1 million, payable in 156 monthly installments, was adjusted by the IPCA index until the initial payment date on April 5, 2017, after which installments are adjusted by the IPCA index plus simple interest of 0.5% per month. |
Given that the lawsuit regarding the transfer of the reservoirs is pending final and unappealable court decision, the agreement also provides for the following:
· | If transfer is possible and the reservoirs are effectively transferred to us and registered at the authority’s office, we will reimburse to the State of São Paulo the amounts paid in replacement of the reservoirs (principal amount) in 60 monthly installments adjusted by the IPCA index until the payment date of each installment; and |
· | If the transfer of the reservoirs is not possible, the State of São Paulo will pay us, in addition to the principal amount, |
In addition to the Undisputed Reimbursement Amount, there is an outstanding balance relating to the Disputed Reimbursement Amount. As of December 31, 2021,2023, the Disputed Reimbursement Amount amounted to R$1,375.11,583.4 million, but due to the uncertainty regarding the recovery of the amount our management decided not to recognize the reimbursements. See Note 11 to our financial statements2023 Consolidated Financial Statements included in this annual report regarding the Disputed Reimbursement Amount. We and the State of São Paulo have agreed that the dispute relating to the Disputed Reimbursement Amount will not prevent us from carrying out the commitments made in the December 2001 agreement.
In addition, the third amendment to the December 2001 agreement provides for the regularization of the monthly flow of benefits. While we are liable for the monthly flow of benefits to the former employees of the state-owned companies that merged to form our Company, the State of São Paulo shall reimburse us based on criteria identical to those applied when determining the Undisputed Reimbursement Amount. Should there be no preventive court decision, the State of São Paulo will assume the flow of monthly payment of benefits portion deemed as undisputed.
Finally, the third amendment to the December 2001 agreement established that the Public Attorney’s Office of the State of São Paulo, or the Public Attorney’s Office, would issue a revised interpretation of the calculation and eligibility criteria applicable to the Disputed Reimbursement Amount. At that time, we believed that the Public Attorney’s Office would issue a revised interpretation which would have helped us bring the negotiations with the State of São Paulo to a conclusion. However, contrary to our expectations, the Public Attorney’s Office interpretation of the calculation and eligibility criteria applicable to the Disputed Reimbursement Amount refuted the reimbursement of the largest portion of this amount. As of December 31, 2021,2023, we had made a provision of R$2,132.12,098.6 million in our pension obligations accounts in respect of the pension benefit obligation of Plan G0.
Even though the negotiations with the State of São Paulo are still progressing, we cannot assure you that we will recover the receivables related to the Disputed Reimbursement Amount.
We willhave not waivewaived the receivables from the State of São Paulo to which we consider ourselves to be legally entitled. Accordingly, we will take all possible actions to resolve the issue at all administrative and court levels. Should this conflict persist, we will take all the necessary actions to protect our interests. On March 24, 2010, we sent to the controlling shareholder the official letter approved by our executive committee, proposing that the matter be discussed at the B3 Arbitration Chamber. In June 2010, we sent a settlement proposal to the Secretary of Treasury, which was denied, and on November 9, 2010, we filed a civil lawsuit against the State of São Paulo seeking full reimbursement of the amounts paid as benefits granted by Law No. 4,819/1958. Regardless of the civil lawsuit, we will continue to actively seek a settlement with the São Paulo state government.
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Agreement with the State and the city of São Paulo
On June 23, 2010, the State of São Paulo and the city of São Paulo executed an agreement in the form of a convênio, to which we and ARSESP consented, under which they agreed to manage the planning and investment for the basic sanitation system of the city of São Paulo on a joint basis. The principal terms of this convênio were as follows:were:
· | the State of São Paulo and the city of São Paulo would execute a separate agreement with us, granting us exclusive rights to provide water and sewage services in the city of São Paulo; |
· | ARSESP would regulate and oversee our activities regarding water and sewage services in the city of São Paulo, including tariffs; |
· | a management committee (Comitê Gestor), consisting of six members appointed for two-year terms, with the State of São Paulo and the city of São Paulo given the right to appoint three members each, would be responsible for planning water and sewage services for the city and for reviewing our investment plans; and |
· | we may participate in management committee meetings but may not vote. |
In application of the convênio, we executed a separate contract with the State of São Paulo and the city of São Paulo, also dated June 23, 2010, to regulate the provision of these services for the following 30 years. The principal terms of this contract are as follows:are:
· |
· |
· |
· | ARSESP will ensure that the tariffs will adequately compensate us for the services we provide and that tariffs may be adjusted in order to restore the original balance between each party’s obligations and economic gain (equilíbrio econômico financeiro). | |
· | we are responsible for paying the municipal urban property tax (Imposto Predial e Territorial Urbano – IPTU) and the federal rural property tax (Imposto Territorial Rural – ITR) for our properties located in the city of São Paulo. |
We currently have an investment plan in place that reflects our obligations under the convênio and addresses their compatibility with the sanitation plans of the State of São Paulo, the city of São Paulo and, if necessary, the São Paulo metropolitan region. The investment plan is not irrevocable and is reviewed every four years by our management committee. For more information, see “Item 3.D3.D. Risk Factors—Risks Relating to Our Business— Certain terms of our agreement to provide water and sewage services in the city of São Paulo could have a material adverse effect on us.”
Dividends
We regularly pay dividends to our shareholders, including the State of São Paulo. In the past, we have withheld part of the dividends to which the State of São Paulo was entitled in order to offset it against our pending receivables from the State of São Paulo as described above.
In accordance with our agreements with the State of São Paulo, we do not anticipate that we will withhold dividends to which the State of São Paulo was entitled in order to offset it against our pending receivables from the State of São Paulo in the near future.
Government Guarantees of Financing
In some situations, the federal government, the State of São Paulo or government agencies guarantee our performance under debt- and project-related agreements.
Furthermore, the federal government has guaranteed, and the State of São Paulo has provided a counter-guarantee, in respect of the financial agreements we entered into with the IDB (i) in 1992 and 2000 for the total original aggregate amount of US$600 million related to the financing of the first and second phases of the Tietê River recovery project to reduce pollution; (ii) in 2010 for the aggregate amount of US$600 million related to the financing of the third phase of the Tiête River project; and (iii) in 2019 for the aggregate amount of U.S.$300 million related to the financing of the fourth phase of the Tietê River project. The federal government has also guaranteed, and the State of São Paulo has provided a counter-guarantee, in respect of the financial agreement we entered with the IBRD (i) in 2009 for the amount of US$100 million for the Water Source Program (Programa Mananciais); and (ii) in 2019 for the amount of U.S.$250 million related to the financing of the Sustainable and Inclusive Sanitation Program (Programa Saneamento Sustentável e Inclusivo).
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We also entered into credit agreements with JICA, which were guaranteed by the federal government, with counter-guarantee from the State of São Paulo, for the financing of (i) the Clean Wave Program for the Baixada Santista metropolitan region, on August 6, 2004, for an aggregate principal amount of ¥21,320 million; (ii) the second phase of the Clean Wave Program, in February 2011, for an aggregate principal amount of ¥19,169 million; (iii) the environmental improvement program in the basin of the Billings dam, in October 2010, for an aggregate principal amount of U.S.$6,208 million; and (iv) the Program for Water Loss Reduction, in February 2012, for an aggregate principal amount of ¥33,584 million.
For more information on the aforementioned loans, see “Item 5.B. Liquidity and Capital Resources—Indebtedness Financing.”
Use of Reservoirs
We withdraw water for use in the São Paulo metropolitan region from the Guarapiranga and Billings reservoirs. We do not pay any fees for the use of these reservoirs, although we are responsible for maintaining them and funding their operating costs. The State of São Paulo incurs no operating costs on our behalf.
EMAE, a company that is also controlled by the State of São Paulo, has a concession to produce hydroelectric energy using water from the same reservoirs. EMAE commenced various lawsuits against us in the past seeking compensation for the water we withdraw from these reservoirs. Those lawsuits have now been settled by way of an agreement between EMAE and us.
The settlement agreement settled the compensation arrangements between EMAE and our company. It requires us to pay the following amounts to EMAE:
· | R$46.3 million, plus inflation adjustments indexed to the IPCA index, payable in five annual installments from April 2017 through April 2022, plus |
· | R$6.6 million, plus inflation adjustments indexed to the IPCA index, payable in 25 annual installments from October 2017 through October 2042. |
If we fail to pay any installment to EMAE when due, all remaining amounts to be paid under the agreement will become immediately due and payable.
On April 11, 2016, we were also named in a separate lawsuit filed by minority shareholders of EMAE against the State of São Paulo, as controlling shareholder of EMAE. On August 7, 2017, we were named in a new lawsuit against us, EMAE and the National Electric Energy Agency (Agência Nacional de Energia Elétrica, or ANEEL),ANEEL, brought by Alvaro Luiz de Lima de Alvares Otero, another minority shareholder of EMAE, requesting the annulment of ANEEL’s order approving the settlement agreement mentioned above, as well as our condemnation for indemnifying EMAE for damages suffered by EMAE. The settlement agreement between EMAE and us does not necessarily put an end to the separate lawsuits. For more information, see “Item 3.D. Risk Factors — Factors—Risks Relating to Our Control by the State of São Paulo — Our right to withdraw water from the Guarapiranga and Billings reservoirs is being challenged judicially by minority shareholders of EMAE.”
If one of the ongoing lawsuits by minority shareholders of EMAE requires the State of São Paulo to make a different decision regarding water use from what was agreed between EMAE and the State of São Paulo, our ability to withdraw water from the Guarapiranga and Billings reservoirs may be compromised. If we were no longer able to withdraw water from these reservoirs, we would have to transport water from locations farther away, which would increase our water transportation costs and may affect our ability to provide adequate service in the region, which may have an adverse effect on our financial condition and results of operations. In addition, we may be ordered to pay any indemnity to EMAE if the agreement is judicially invalidated, which could have material adverse effects on our financial condition and operating results.
Agreements with Lower Tariffs
We have entered into agreements with public entities, including State of São Paulo entities and Municipalities,municipalities, which manage approximately 11,32611,527 properties. Under these agreements, these public entities pay a different tariff which is approximately 25.0% lower than the tariff that applies for the public entities that have not entered into these agreements, provided such entities implement our Program for Rational Use of Water (Programa de Uso Racional da Água – PURA),PURA, which has a fixed target for reduction or maintenance of water consumption, according to technical evaluations carried out by us. These agreements are valid for a 12-month term with automatic renewal for equal periods. Pursuant to the terms of these agreements, if these entities fail to make any payment on a timely basis to us, we have the right to cancel the agreement, thereby revoking the 25.0% tariff reduction.
Personnel Assignment Agreement among Entities Related to the State Government
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We have personnel assignment agreements with entities related to the State Government,of São Paulo government, under which the expenses are fully passed on and monetarily reimbursed. The expenses related to personnel assigned by us to other State of São Paulo state government entities in 2021, 2020the years ended December 31, 2023, 2022 and 20192021 amounted to R$0.18.2 million, R$2.10.8 million and R$4.90.7 million, respectively.
In the years ended December 31, 2023, 2022 and 2021, there were nowe did not incur any expenses related to personnel assigned by other entities. In 2020 and 2019 amounted to R$0.1 million and R$0.1 million, respectively.
Non-operating Assets
As of December 31, 20212023 and 2020,2022, we had an amount of R$3.6 million related to a land and lending structures.
Transactions with SABESPREV Pension Fund
SABESPREV is a pension fund we established to provide our employees with retirement and pension benefits. The assets of SABESPREV are independently held, but we nominate 50.0% of SABESPREV’s Board of Directors, including the chairman of the board, who has the deciding vote pursuant to the applicable legislation. Both we and our employees make contributions to SABESPREV pension plans. We contributed R$22.427.4 million, R$21.725.4 million and R$22.522.4 million in 2021, 2020the years ended December 31, 2023, 2022 and 2019,2021, respectively. On May 29, 2001, a federal law was enacted which, among other provisions, limits the amount mixed capital companies, like us, may contribute to their pension plans. Specifically, the ordinary contributions made by us to our pension plans may not exceed the contributions made by the beneficiaries of these plans.
Our original pension plan (the (“Defined Benefit Plan)Plan”) has an actuarial deficit.deficit which are being equalized in accordance with Complementary Law No. 109/2001 and the Brazilian regulation. We have commenced studies to manage this deficit and have also created a new Defined Contribution Plan (SABESPREV Mais).(SABESPREV Mais) for new employees. Our new plan was approved by Previc in June 2010, after which our old plan stopped accepting new members. Contributions to the new plan are also shared between plan members and us, and benefits are established based on the balance of the individual member’s account when payment on his or her benefit begins. This balance consists of contributions and profitability obtained when applying resources. We intended to have members of the old plan migrate their reserves to the new plan. This migration was interrupted by a judicial order as a result of proceedings brought by representative entities for our employees and ex-employees. In October 2010, the judge presiding over the case pronounced in an interim decision that people and reserves were not allowed to migrate between the plans until a further decision was made. This decision also prevents the plan from charging contributions to account for the deficit for those who remained covered by the original plan. In September 2012, the judge presiding over the case ordered a financial expert inspection and in early 2013 a financial expert was appointed to the case. The results of this inspection were unfavorable to the representative entities for our employees and ex-employees and in 2016 the proceeding was dismissed, revoking the interim decision made in October 2010.
In 2016, participants were again offered the ability to migrate according to the rules established by the regulatory authority. The Retiree and Pensioner Association filed a judicial proceeding questioning the amounts that were transferred from the benefits plan to the individual accounts of the participants who migrated to the Defined Contribution Plan. On March 14, 2018, the judge presiding over the case held that the adjustment of the Defined Benefit Plan’s actuarial deficit was permitted and terminated the lawsuit related to the migration process of members from the Defined Benefit Plan to the Defined Contribution Plan.
Our adhesion to SABESPREV’s fixed contribution plan ended on December 1, 2019 and on January 1, 2020 the fixed contribution plan operated by Fundação CESP,, a closed supplementary pension entity and private health plan operator, came into force. The new plans are open to new employees and to those who do not subscribe to SABESPREV’s pension plans.
Compensation of Management
The compensation paid by us to the members of our Board of Directors, boardBoard of executive officersExecutive Officers and fiscal committeeFiscal Council amounted to R$6.48.6 million, R$6.2 million and R$6.4 million in the years ended December 31, 2023, 2022 and R$5.3 million in 2021, 2020 and 2019, respectively, and it refers to salaries and other short-term benefits management. An additional R$1.41.9 million, R$1.41.3 million and R$1.31.4 million related to the bonus program was accrued to executive officers in 2021, 2020the years ended December 31, 2023, 2022 and 2019.2021.
For furthermore information on management compensation, see “Item 6.B. Directors and Senior Management—Compensation.”
Loan agreement through credit facility
We hold interests in some companies. Although we do not hold the majority of shares in any of the companies in which we hold interests, we are party to shareholders’ agreements which provide for the power of veto with regard to certain management proposals and decisions. Due to our significant influence on these companies by way of shareholders’ agreements, for accounting purposes, these companies are accounted for by applying the equity method of accounting.
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Aquapolo Ambiental S.A.
We entered into a loan agreement with the special purpose enterprise Aquapolo Ambiental S.A. on March 30, 2012 under which we made loan to finance the operation, until the borrowings and financing requested with financial institutions is granted.
As of December 31, 2021,2023, the principal and interest balance of this agreement was R$11.9 millionzero as we settled this loan and R$11.0 million,paid it in full in July 2023, recorded as current and non-current assets under “Other Accounts Receivable.Assets.”
The loan agreement originally expired on April 30, 2015, was extended to October 30, 2015 and on November 25, 2015 a new amendment changed the payment schedule for three annual installments, the first of which maturing on December 30, 2021 and the last on December 30, 2023.
Águas de Andradina
We granted a loan to the SPE Águas de Andradina S/A to finance the operations of this company.
As of December 31, 2021,2023, the balance of principal and interest of this agreement totaled R$0.10.7 million and R$1.02.8 million, recorded under current assets and noncurrent assets, respectively, in “Other assets” at CDI + 3% p.a..p.a.
We signed the loan agreement on August 17, 2021. The principal with the readjustment, accrued interest and any taxes levied thereon will be due by August 31, 2025.
Pró-Conexão
In 2012, the State of São Paulo approved a project to subsidize connections to the sewage system for low-income families, of which 80% of the capital expenditures should be provided by the State of São Paulo state government and 20% by us.
The program brought more comfort and health to 29.7 thousand families (104 thousand people) with sewage connections, new internal installations and replacement of precarious and irregular sewage pipes, providing safe and legally compliant infrastructure to these households.
In 2019, the original term of the program provided for in State Decree No. 58,208/2012 expired. During 2021expired and the beginning of 2022, negotiations for renewing the program with the Secretariat for Infrastructurewas suspended between 2020 and the Environment were resumed.2022. In February 2022, our Board of Directors approved the renewal of the program. In December 2022, the State of São Paulo government published State Decree No. 67,298, which extended the Pro-Connection Program for a further five years.
A large partOn December 8, 2023, the State of this work was executedSão Paulo government published State Law No. 17,853/2023, which authorized the executive branch of the State of São Paulo to implement measures for our Proposed Privatization and created the FAUSP, which will be administered by our own personnel, which considerably reduceda Guidance Council. For more information about the need for investment.duties of the Guidance Council, see “Presentation Of Financial And Other Information—Proposed Privatization.”
C. | Interests of Experts and Counsel |
Not applicable.
ITEM 8. | FINANCIAL INFORMATION |
A. | Consolidated Financial Statements and Other Financial Information |
SeeFor more information, see “Item 18. Consolidated Financial Statements.”
Legal Proceedings
We are currently subject to numerousseveral legal proceedings relating to civil (including customer and supplier), tax, labor, corporate and environmental issues arising in the normal course of our business. These claims involve substantial amounts of money and other remedies. As of December 31, 2023, the total estimated amount of claims related to our legal proceedings was R$57.1 billion (net of R$263.8 million in court deposits), including contingent liabilities and remote loss contingencies. Several individual disputes account for a significant part of the total amount of claims against us. Our material
We recognized provisions for all amounts in dispute that represent a present obligation as a result of a past event and where it is probable that there will be an outflow to settle this obligation in the view of our legal advisors and in light of precedents that cover laws, administrative decrees, decrees or court rulings that have proven to be unfavorable. As of December 31, 2023, the total amount of accrued provisions for claims with a probable likelihood of loss was R$1.8 billion (net of R$132.8 million in court deposits). As of December 31, 2023, claims classified as contingent liabilities amounted to R$55.2 billion, of which R$10.1 billion relate to claims where we classified the risk of loss as possible and R$45.1 billion relate to claims where we classified the risk of loss as remote. In our financial statements, we only disclose information about contingent liabilities we classified as possible loss and do not record or disclose information related to remote contingencies. See also “Item 3.D. Key Information—Risk Factors—Risks Relating to our Business—Any substantial monetary judgment against us or any of our directors and officers in legal proceedings may have a material adverse effect on our reputation, business or operating or financial condition and/or results” for further information on this matter.
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The table below sets out our provisions and escrow deposits per type of claim as of December 31, 2023:
As of December 31, 2023 | |||||
Provisions for probable claims | Escrow deposits | Provisions net of deposits | |||
Types of Claims | (in millions of reais) | ||||
Customer claims | 175.3 | (6.0) | 169.2 | ||
Supplier claims | 334.3 | (91.0) | 243.3 | ||
Other civil claims | 128.0 | (1.2) | 126.8 | ||
Tax claims | 101.8 | (18.2) | 83.6 | ||
Labor claims | 727.1 | (16.2) | 710.9 | ||
Environmental claims | 492.7 | (0.1) | 492.6 | ||
Total | 1,959.2 | (132.8) | 1,826.4 |
Civil Claims (including Customer and Supplier Claims)
Our civil, customer and supplier claims refer mainly to (i) indemnities for material damage, moral damage, and loss of profits allegedly caused to third parties, such as through vehicle accidents, insurance claims, challenges on the tariff billing method, among others, filed at different court levels; (ii) challenge of the tariffs. In those lawsuits, customers claim that their tariffs should be equal to those of other consumer categories, or claim for the reduction of sewage tariff due to system losses, consequently requiring the refund of amounts charged by us, or claim for the reduction of tariffs for being eligible to be in the Residential Social or Residential Vulnerable categories; and (iii) monetary adjustment updates and claims regarding economic-financial imbalance in contracts filed by certain suppliers. As of the date of this annual report, these cases are describedin progress in various judicial instances.
As of December 31, 2023, our provisions for civil claims (including customer and supplier claims), net of judicial deposits, amounted to R$539.3 million, of which R$169.2 million related to customer claims, R$243.3 million related to supplier claims and R$126.8 million related to other civil claims, as set out in the table above and as further detailed in Note 20 to our financial statements2023 Consolidated Financial Statements.
As of December 31, 2023, the main civil claims we were a party to are described below:
· | Lawsuit No. 0009597-63.2002.8.26.0053 filed by us: We filed a lawsuit against Concessionária Ecovias dos Imigrantes S.A. requesting to access certain areas necessary to implement sanitation works along the highways of Anchieta – Imigrantes system, free of charge and based on a concession agreement. If an unfavorable judgement is rendered against us, we may be financially impacted, since we will need to start making payments to Concessionária Ecovias dos Imigrantes S.A. for the use of these areas. As of the date of this annual report, the lawsuit is awaiting trial. As of December 31, 2023, we were unable to assess the amount involved in this lawsuit but assess the risk of loss as probable. |
· | Lawsuit No. 0026962-04.2000.8.26.0053 filed by Conserta Comércio e Construções Ltda.: Conserta Comércio e Construções Ltda. filed a lawsuit against us, questioning, among others, (i) the unilateral termination of an administrative contract; (ii) the prohibition of contracting with us; and (iii) payment of penalties. As of the date of this annual report, Conserta filed a motion to challenge a special appeal (agravo em recurso special), which is awaiting judgement. As of December 31, 2023, we recorded a provision of R$7.5 million for the part of the lawsuit for which we assess the risk of loss as probable. We assessed the risk of loss for the remainder as remote in the amount of R$366.6 million. |
· | Lawsuit No. 2263215-97.2021.8.26.0000 filed by Subcondominio Eldorado Business Tower (“Eldorado”) (Main File No. 1011195-34.2020.8.26.0011):: Eldorado filed a lawsuit – declaratory action combined with a request for restitution of undue payments – against us, seeking to have the right to charge consumption for the supply of water and sewage collection for commercial use. The court recognized this claim as an “incident of repetitive demands” (incidente de demandas repetivas – IRDR), which is intended to align the jurisprudence on this subject matter. As of the date of this annual report, as a result of a decision favorable to us, Eldorado filed a special appeal, which is pending judgment. As of December 31, 2023, we were unable to assess the amount involved in this lawsuit but assess the risk of loss as possible. |
· | Lawsuit No. 0161765-88.2011.8.26.0100 filed by Associação dos Aposentados e Pensionistas – “AAPS” (Compliance with Sentence No. 0056668-84.2020.8.26.0100): The AAPS filed a lawsuit against us, among others, seeking the maintenance of the health plan under the same conditions, with the payment of an amount equivalent to twice the amount paid by the retiree, which was decided against us. As of the date of this annual report, the enforcement of the judgment was suspended due to a new settlement agreement entered into by the parties. As of December 31, 2023, the amount involved in this lawsuit was R$19.6 million and we assess the risk of loss as possible. |
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· | Lawsuit No. 0017957-69.2004.8.26.0100 filed by Etesco Construções e Comércio Ltda.: Etesco Construções e Comércio Ltda. filed a claim against us, claiming breach of contract and payment of losses and damages. The lawsuit was now converted to a special appeal, which as of the date of this annual report is pending judgement. As of December 31, 2023, the amount involved in this lawsuit was R$461.9 million and we assess the risk of loss as remote. |
· | Public Civil Action No. 1064120-94.2021.8.26.0100 filed by the Public Prosecutor’s Office: The Public Prosecutor’s Office filed a public civil action against us, asking us to stop charging the minimum consumption tariff to multiple units when there is only one water meter in the property. This action has been suspended in the first instance due to the revision of the Superior Court of Justice’s Theme 414/STJ (Tema 414/STJ) (special appeal No. 1.937.891). As of December 31, 2023, we were unable to assess the amount involved in this lawsuit but assess the risk of loss as possible. |
· | Public Civil Action No. 1113127-60.2018.8.26.0100 filed by the Association for the Defense of Consumer Rights (“Assecivil”): Assecivil filed a public civil action against us, seeking for us and others to stop charging the contingency tariff and, as a result, to refund any amounts allegedly overcharged, among others. As of the date of this annual report, Assecivil filed an appeal, which was denied. As of December 31, 2023, we were unable to assess the amount involved in this lawsuit but assess the risk of loss as remote. |
Tax Claims
Tax claims refer mainly to issues related to tax collections and fines in general which are being challenged due to disagreements regarding notification or differences in the interpretation of legislation by our management. As of December 31, 2023, our provision for tax claims, net of judicial deposits, amounted to R$83.6 million, as set out in the table above and as further detailed in Note 20 to our 2023 Consolidated Financial Statements.
As of December 31, 2023, the main tax claims we were a party to are described below:
·Tax Foreclosure No. 0042514-40.1100.8.26.0090 filed by the Municipality of São Paulo (Prefeitura de São Paulo): The Municipality of São Paulo (Prefeitura de São Paulo) filed a tax foreclosure against us, requesting us to pay unpaid ISS for sewage services, and penalties for the failure to comply with certain obligations during the period between January 2003 and May 2006. This tax foreclosure remains suspended as of the date of this annual report. As of December 31, 2023, the amount involved in this tax foreclosure was R$216.7 million and we assess the risk of loss as remote.
·Tax Foreclosure No. 0045219-11.1100.8.26.0090 filed by the Municipality of São Paulo (Prefeitura de São Paulo): The Municipality of São Paulo (Prefeitura de São Paulo) filed a tax foreclosure against us, requesting us to pay unpaid ISS for sewage services, as well as penalties for the failure to comply with certain obligations during the period between January 2003 and May 2006. This tax foreclosure remains suspended as of the date of this annual report. As of December 31, 2023, the amount involved in this tax foreclosure was R$825.1 million and we assess the risk of loss as remote.
·Administrative Infraction Notice No. 19515003023200606 filed by the Brazilian Federal Tax Revenue: The Brazilian Federal Tax Revenue issued an administrative infraction notice against us for alleged non-compliance with the legislation on corporate income tax, social contribution on net income, withholding income tax and tax on industrialized products in 2001. As of the date of this annual report, the case is awaiting trial before the Administrative Tax Appeals Council (Conselho Administrativo de Recursos Fiscais). As of December 31, 2023, in respect of this lawsuit we assess the risk of loss as (i) remote for R$514.6 million; and (ii) possible for R$59.5 million.
Labor Claims
We are a party to several labor claims, involving issues such as overtime, shift schedules, additional payment due to unhealthy and hazardous work conditions, prior notice, change of function, salary equalization, service outsourcing and other, which are at various court levels. In addition, there are currently approximately 500 individual claims questioning the legality of our salary and position plan due to the absence of seniority-based promotion criteria. All of these lawsuits are in the initial phase, and we assess the risk of loss as possible. As of December 31, 2023, our total provision for labor claims, net of judicial deposits, amounted to R$710.9 million, as set out in the table above and as further detailed in Note 20 to our 2023 Consolidated Financial Statements included in this annual report, and that description is incorporated by reference under this Item.report.
As of December 31, 2023, the main labor claims we were a party to are described below:
· | Public Civil Action No. 0066100-26.2009.5.02.0038 filed by Sindicato dos Engenheiros no Estado de São Paulo (“SEESP”): SEESP filed a public civil action against us, seeking, (i) the suspension of all dismissals without cause resulting from the TAC; (ii) the annulment of the Conduct Adjustment Agreement entered by us with the Labor Public Prosecutor’s Office (“TAC”); (iii) the immediate reinstatement of employees dismissed as from April 1, 2009, with the payment of salaries and other rights; (iv) for us to refrain from dismissing without cause any employee who already retired and those who will retire under the INSS; and (v) payment of a fine to the Worker Support Fund (Fundo de Amparo ao Trabalhador), in case of non-compliance with obligations. As of the date of this annual report, this action is awaiting a judgment on its merits. As of December 31, 2023, we assess the risk of loss as possible. |
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· | Public Civil Action No. 0000025-14.2015.5.02.0064 filed by Labor Public Prosecutor’s Office: The Labor Public Prosecutor’s Office filed a public civil action against us, seeking for us to refrain from outsourcing essential services and activities and, in the event of non-compliance with such obligation, payment of daily fines. The Labor Public Prosecutor’s Office appealed against the decision that dismissed the action, and as of the date of this annual report, the action is awaiting judgement before the Superior Labor Court (“TST”). As of December 31, 2023, the amount involved in this action was R$217.4 million and we assess the risk of loss as possible. |
· | Public Civil Action No. 0060800-58.2006.5.02.0048 filed by AAPS: The AAPS filed a public civil action against us, seeking for us to reclassify the retirees and pensioners based on our new positions/roles structure and pay the benefits applicable to their role in the new structure. Although the lawsuit has not yet reached a final decision, AAPS has begun the provisional enforcement of the conviction, in order to guarantee the credit of all 2,873 members in a single lawsuit. The Superior Labor Court (TST) ruled in favor of AAPS and we appealed this decision to the STF, including the decision that AAPS can proceed with the enforcements upon presentation of powers of attorney in favor of each attorney, which are pending trial as of the date of this annual report. As of December 31, 2023, we recorded a provision of R$417.1 million for the part of the lawsuit for which we assess the risk of loss as probable. We assessed the risk of loss for the remainder as remote in the amount of R$1,373.6 million. |
· | Collective Labor Actions No. 1001005-47.2019.5.02.0049, 1001008-43.2019.5.02.0003, 1001042-62.2019.5.02.0053, 1001028-41.2019.5.02.0033 and 1000987-07.2019.5.02.0023 filed by Sintaema: Sintaema filed collective labor actions against us, requesting us to pay employees the difference between the payments received and the highest amount paid to a worker who performs the same function (paradigm). As of the date of this annual report, Sintaema’s appeal against the decision that dismissed the claim is awaiting judgment of admissibility. As of December 31, 2023, the amount involved in these lawsuits was R$658.4 million and we assess the risk of loss as possible. |
· | Collective Labor Action No. 1000863-10.2021.5.02.0005 filed by Sintaema: Sintaema filed a collective labor action against us, requesting us to pay the defendants (managers) the difference between the payments received and the highest amount paid to a worker who performs the same function (paradigm). The action was dismissed without resolution on the merits; however, in an appeal to the Superior Labor Court (TST), it ordered the return of the case to the lower court so that the Sintaema’s claim could be analyzed. In a new first-instance judgment, the ruling was favorable to us. As of the date of this annual report, Sintaema appealed the first-instance decision, and this appeal is awaiting judgment. As of December 31, 2023, the amount involved in this action was R$1.3 billion and we assess the risk of loss as possible. |
Civil Public Actions Related to Environmental MattersClaims
We are subject to administrative and judicial proceedings,environmental claims, including proceedingsclaims initiated by CETESB, the State of São Paulo Public Prosecutor Office and non-governmental organizations. As of December 31, 2023, our provision for environmental claims, net of judicial deposits, amounted to R$492.6 million, as set out in the table above and as further detailed in Note 20 to our 2023 Consolidated Financial Statements included in this annual report.
These proceedingsclaims result from alleged environmental damage and relief sought against us includes:including, but is not limited to: (i) cessation of the release of raw sewage into certain local bodies of water; (ii) remedies, in some cases, for environmental damages that have not yet been specified and evaluated by the court’s technical experts; (iii) requirements to install and operate sewage treatment facilities in locations referred to in the civil public actions; and (iv) imposition of a limit on water extracted from the water springs most affected by the water crisis. In certain cases, we are subject to daily fines for non-compliance. In our response to these lawsuits,claims, we note that the installation and operation of sewage treatment facilities in locations referred to in the civil public actions is included in our investment plan. There have already been unfavorable judicial decisions against us and their effects may include: (i) early execution of works or services that were considered for execution in future years in our long-term investment plan; (ii) payments related to environmental indemnification;indemnification and/or recovery; and (iii) a negative impact on our image in national and international markets and in public bodies.
As of December 31, 2023, the main environmental claims we are party to are described below:
· | Public Civil Action No. 0005930-92.2014.4.03.6109 filed by the MPF and the Public Prosecutor’s Office of the State of São Paulo: The MPF and the Public Prosecutor’s Office of the State of São Paulo filed a lawsuit against us, questioning the water management of the Cantareira System, including our authorization (outorga), among others. As of the date of this annual report, the action is waiting for the closing arguments. As of December 31, 2023, the amount involved in this action was R$3.5 million and we assess the risk of loss as possible. |
· | Public Civil Action No. 1045396-33.2014.8.26.0053 filed by the Public Prosecutor’s Office of the State of São Paulo: The Public Prosecutor’s Office of the State of São Paulo filed a lawsuit against us, questioning the water management of the Alto Rio Tietê Producer System, including our authorization (outorga), among others. The appeal of Public Prosecutor’s Office of the State of São Paulo is currently awaiting judgment. As of December 31, 2023, the amount involved in this lawsuit was R$1.7 million and we assess the risk of loss as remote. |
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· | Public Civil Action No. 1000060-22.2015.8.26.0198 filed by the Public Prosecutor’s Office of the State of São Paulo: The Public Prosecutor’s Office of the State of São Paulo filed a lawsuit against us, claiming, among others: (i) the cessation of sewage discharge; (ii) the comprehensive promotion of the collection and treatment of domestic and industrial sewage generated in the municipality; and (iii) the compensation resulting from environmental and public health damages. As of the date of this annual report, this action remains suspended due to settlement negotiations. As of December 31, 2023, the amount involved in this lawsuit was R$898.1 million and we assess the risk of loss as possible. |
· | Public Civil Action No. 1006803-16.2017.8.26.0477 filed by the Public Prosecutor’s Office of the State of São Paulo: The Public Prosecutor’s Office of the State of São Paulo filed a lawsuit against us, seeking us, in an urgent provisional injunction, under penalty of daily fine, to: (i) submit to the Court and CETESB a detailed schedule outlining the dates of treatment of the subsystems of Praia Grande; and (ii) commence operation of primary treatment units in Praia Grande and prevent discharge of untreated sewage, among others. As of the date of this annual report, this action is in the expert evidence phase (prova pericial). As of December 31, 2023, the amount involved in this lawsuit was R$820.7 million and we assess the risk of loss as possible. |
· | Public Civil Action No. 0008961-48.2009.8.26.0281 filed by the Public Prosecutor’s Office of the State of São Paulo: The Public Prosecutor’s Office of the State of São Paulo filed a lawsuit against us, among others, requesting us to: (i) restore the primitive conditions of the soil, water bodies, both surface and underground, and vegetation, degraded by the discharge of sewage in non-compliance with environmental standards; (ii) cease releasing untreated sewage into the environment in Itatiba; and (iii) pay compensation to the material damage caused to the soil, water resources and other surface and underground water bodies, as well as moral damages. As of the date of this annual report, the action is pending judgement of the appeal. As of December 31, 2023, the amount involved in this lawsuit was R$480.3 million and we assess the risk of loss as possible. |
· | Public Civil Action No. 5014844-77.2020.4.03.6100 filed by us: We filed a lawsuit against the Instituto Chico Mendes de Conservação da Biodiversidade challenging an unfounded demand in their authorization for the Atibainha/Jaguari reservoirs' interconnection work. As of the date of this annual report, the action is awaiting trial. As of December 31, 2023, the amount involved in this lawsuit was R$0.1 million and we assess the risk of loss as possible. |
· | Public Civil Action No. 5001853-26.2021.4.03.6103 filed by the MPF: The MPF filed a lawsuit against us, demanding compliance with the ICMBio Authorization for the Atibainha/Jaguari interconnection work. As of the date of this annual report, the action is awaiting a court order. As of December 31, 2023, the amount involved in this lawsuit was R$11.0 thousand and we assess the risk of loss as possible. |
· | Public Civil Action No. 0009222-95.2014.8.26.0197 filed by the Public Prosecutor’s Office of the State of São Paulo: The Public Prosecutor’s Office of the State of São Paulo filed a lawsuit against us and the Municipality of Francisco Morato, among others, requesting us to: (i) comply with certain obligations in connection with the municipality of Francisco Morato and its river basin; (ii) indemnify as a result of environmental damages; and (iii) pay daily fines. As of the date of this annual report, this action remains suspended due to settlement negotiations. As of December 31, 2023, the amount involved in this lawsuit was R$820.5 million and we assess the risk of loss as possible. |
· | Lawsuit No. 0002275-07.2014.8.26.0106 filed by the Public Prosecutor’s Office of the State of São Paulo: The Public Prosecutor’s Office of the State of São Paulo filed a lawsuit against us and the Municipality of Caieiras, seeking for us and others to (i) cease the release, discharge, dump, disposal, infiltration, and/or accumulation of untreated domestic and industrial sewage or effluents into any waterway in the Municipality; (ii) collect and treat the domestic and industrial sewage generated in Caieiras; and (iii) pay compensation for the material damage caused to the environment and to public property, as well as moral damages. As of the date of this annual report, this lawsuit is in the expert evidence phase. As of December 31, 2023, the amount involved in this lawsuit was R$287.9 million and we assess the risk of loss as possible. |
Although we are not able to predict the final outcome of these lawsuits, we believe that the outcome, if unfavorable to us, may have a material adverse effect on us. We recognize provisions for classify certain of these proceedings as defined in Note 3.15 to our financial statements included in this annual report. As of December 31, 2021, we have provisions totaling R$331.3 million for the matters stated in Note 20 to our financial statements included in this annual report.
Other Legal Proceedings
On December 30, 2003, the Civil Entity Coordination Committee
EMAE Lawsuits
We were named in a lawsuit filed by minority shareholders of Piracicaba filed a civil class actionEMAE against us, the National Water Agency and the State of São Paulo, Treasury Departmentas controlling shareholder of EMAE, seeking an order to require the State of São Paulo to stop us from withdrawing water from the reservoirs without paying compensation to EMAE, and to allow EMAE to pump water from the reservoirs for its hydroelectric facilities. In addition, on August 7, 2017, we were named in a lawsuit against us, EMAE and ANEEL, brought by Alvaro Luiz de Lima de Alvares Otero, another minority shareholder of EMAE, requesting the annulment of ANEEL’s order approving the settlement agreement, as well as our condemnation for indemnifying EMAE for damages suffered by EMAE. See “Item 3.D. Key Information—Risk Factors—Risks Relating to our Business—Our right to withdraw water from the Guarapiranga and Billings reservoirs is being challenged judicially by minority shareholders of EMAE” for further information on this matter.
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Proceedings Against Directors and Officers
Certain of our directors and officers are parties to judicial proceedings against them.
· | Action of Public Interest (Ação Popular) No. 1043661-47.2023.8.26.0053: Ms. Paula Alessandra Bonin Costa Violante is a defendant in the Action of Public Interest, which seeks the annulment of Ms. Violante’s appointment as our Chief Engineering and Innovation Officer considering article 17, paragraph 2, item IV, of Law No. 13,303/2016, as she was a former director of Iguá Saneamento and this company entered into transactions with us in the past three years. On July 17, 2023, the Public Prosecutor’s Office submitted its opinion, stating that the Chairman of the Board of Directors should also be a defendant, as she approved Ms. Violante’s nomination. On August 23, 2023, a decision was issued, summoning the author to make the changes requested by the Public Prosecutor’s Office. In response to this, the plaintiff claimed for the inclusion of Ms. Karla Bertocco Trindade, arguing that Ms. Bertocco was responsible for Ms. Violante’s nomination and, therefore, should be condemned to pay damages. Ms. Bertocco has not yet been served. This action is in an initial phase, with Ms. Violante indicating the evidence she wishes to produce. As of the date of this annual report, the external counsel of Ms. Violante has classified the chance of loss as possible. |
· | Action of Public Interest (Ação Popular) No. 1057310-79.2023.8.26.0053: Mr. Andre Gustavo Salcedo Teixeira Mendes is a defendant in the Action of Public Interest, which seeks the annulment of Mr. Salcedo’s appointment as our Chief Executive Officer considering article 17, paragraph 2, item IV, of Law No. 13,303/2016, as he was a former director of Iguá Saneamento and this company entered into transactions with us in the past three years. As of the date of this annual report, the parties presented their arguments, and the case is awaiting manifestation of the Public Ministry. As of the date of this annual report, the external counsel has classified the chance of loss as possible. |
· | PublicCivil Action for Administrative Misconduct (Ação Civil Pública por Improbidade Administrativa) No. 1043567-83.2020.4.01.3400: On September 12, 2019, the MPF filed the Public Civil Action against Mr. Andre Gustavo Salcedo Teixeira Mendes and Mr. Caio Marcelo de Medeiros Melo, among others, for alleged misconducts described in articles 10 and 11 of Law No. 8,429/1992 (The Law of Administrative Improbity) when both held technical positions at BNDES at the time. On August 22, 2023, the complaint was admitted, and the court determined the service of the summons upon the defendants. After being summoned, Mr. Salcedo and Mr. Melo filed motions for clarification of the decision admitting the complaint and filed their answers to the complaint. So far, the court has been analyzing the motions for clarification filed by Mr. Salcedo and Mr. Melo but has not yet rendered a decision. To this date, no ruling has been rendered on the merit of the case. As of March 2024, the external counsel of Mr. Salcedo and Mr. Melo classified the chance of loss in this Public Civil Action as remote, as there is no evidence to prove that Mr. Salcedo and Mr. Melo engaged in or was involved in any form of administrative improbity. |
· | PublicCivil Action for Administrative Misconduct (Ação Civil Pública por Improbidade Administrativa) No. 1043501-06. 2020.4.01.3400: On On September 12, 2019, the MPF filed the Public Civil Action against Mr. Andre Gustavo Salcedo Teixeira Mendes and Mr. Caio Marcelo de Medeiros Melo, among others, for alleged misconducts described in articles 10 and 11 of Law No. 8,429/1992 (The Law of Administrative Improbity) when both held technical positions at BNDES at the time. On May 8, 2023, the complaint was admitted, and the court determined the service of the summons upon the defendants. At the date of this report, Mr. Salcedo and Mr. Melo were still waiting to be summoned to answer the complaint. On the other hand, one of the defendants, after being summoned, filed a motion for clarification of the decision admitting the complaint. Since October 14, 2023, the court has been analyzing this motion of clarification, but has not yet rendered a decision. So far, there has been no decision regarding the merits of the case. As of March 2024, the external counsel of Mr. Salcedo and Mr. Melo classified the chance of loss in this public civil action as remote, given the absence of evidence demonstrating the involvement of Mr. Salcedo and Mr. Melo in any form of administrative impropriety. |
· | Criminal Proceeding No. 1006459-54.2019.4.01.3400:The MPF pressed charges against Mr. Andre Gustavo Salcedo Teixeira Mendes and Mr. Caio Marcelo de Medeiros Melo, as well as other multiple individuals, for alleged offenses described in article 288 of the Brazilian Penal Code and articles 4 and 23 of the Federal Law No. 7,492/1986, when both held technical positions at BNDES at the time. However, the Criminal Court rejected the indictments filed against Mr. Salcedo and Mr. Melo, excluding them from the case. The MPF appealed, resulting in Appeal No. 1006459-54.2019.4.01.3400, regarding Mr. Salcedo, and Appeal No. 1029506-23.2020.4.01.3400, regarding Mr. Melo. As of April 26, 2024, both appeals are pending a decision. The main proceeding continued with regards to other individuals, and, on March 15, 2023, these individuals were acquitted. As of the date of this annual report, the chance of loss is classified by Mr. Salcedo’s and Mr. Melo’s external counsels as remote. |
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· | PublicCivil Action for Administrative Misconduct (Ação Civil Pública por Improbidade Administrativa) No. 1043581-67.2020.4.01.3400: On September 12, 2019, the MPF filed the Public Civil Action against Mr. Caio Marcelo de Medeiros Melo, among others, for alleged misconducts described in article 11 of Law No. 8,429/1992 (The Law of Administrative Improbity) when he held a technical position at BNDES at the time. On May 23, 2023, the complaint against Mr. Melo was dismissed, while partially accepted against other defendants, and the court determined the service of the summons upon them. Subsequently, the MPF lodged an interlocutory appeal against the dismissal of the complaint against Mr. Melo. The defense then submitted an interlocutory appeal challenging the acceptance of the complaint against the other defendants, which was granted on January 18, 2024, with the court granting a suspensive effect pending appeal review. The MPF then appealed the decision granting the preliminary injunction requested by the other defendants’ defense. Since March 2024, the court has been deliberating on both appeals without rendering a decision. So far, there has been no decision regarding the merits of the case. As of March 2024, the external counsel classified the chance of loss in this public civil action as remote, given the absence of evidence demonstrating the involvement of Mr. Melo in any form of administrative impropriety. |
Legal Claims Related to our Proposed Privatization
The model and other aspects of our Proposed Privatization, such as the legislative proceeding that resulted in the enactment of Law No. 17,853/2023 by the State of São Paulo, could be challenged by regulatory bodies, consumer groups or suspended by the Brazilian courts. As of the date of this annual report, there are ongoing claims relief for:challenging in court certain aspects of our Proposed Privatization mainly questioning: (i) the termination of use of 31 m3/s of water from oneadherence of the municipality’s reservoirs;municipalities to URAE-1; (ii) formal aspects of the creationlegislative process of a schedule to regulate water use and withdrawal from the Piracicaba river basin by the Cantareira system to eliminate possible damage to populations downstream; andLaw No. 17,853/2023 or municipal laws; (iii) the developmenthiring of an environmental impact study onthird parties to analyze the Cantareira system evaluatingfeasibility of our Proposed Privatization; (iv) the impactabsence of water usepublic interest in our Proposed Privatization; and withdrawal on(v) the various basins that constitute the system. In August 2012, this civilvalidity of amending concession agreements containing anti-privatization clauses, among others. All of these claims are public action was decided favorably for us in two lower courts, and the plaintiff’s appeal to a higher court seeking special and extraordinary recourse was denied based on inadmissibility. We are currently awaiting a court decision on the action brought by the plaintiffwere not necessarily filed against us. For example, some were filed against the decisionsState of inadmissibility cited. The amount involved inSão Paulo government, the Governor of São Paulo, the São Paulo City Council, or other public persons/entities.
As of the date of this proceeding asannual report, the most relevant claims questioning our Proposed Privatization are:
· | Public Action No. 1032870-44.2023.8.26.0562 filed by Mr. Tanivaldo Monteiro Dantes: Mr. Tanivaldo Monteiro Dantes filed a lawsuit against us, the Municipal Government of Santos, and the Mayor of Santos, Mr. Rogério Santos, on the grounds that if we are privatized that would allow private entities to benefit from public contracting conditions and cause the violation of the “anti-privatization clause” in existing agreements between the parties. |
· | Direct Unconstitutionality Action (Ação Direta de Inconstitucionalidade) No. 7470 filed by Partido Socialismo e Liberdade (“PSOL”) and Partido dos Trabalhadores (“PT”): The political parties PSOL and PT filed a lawsuit in the STF challenging the constitutionality of the URAEs Decree under the Brazilian Constitution. The Attorney General’s Office supported such Decree’s partial unconstitutionality with respect to the weighted voting of the states. PSOL and PT appealed the decision that denied the preliminary injunction. As of the date of this annual report, this lawsuit is pending a final decision. |
· | Direct Unconstitutionality Action (Ação Direta de Inconstitucionalidade) No. 2340393-54.2023.8.26.0000 filed by PT: The political party PT filed a lawsuit in the São Paulo Judicial Court claiming that Law No. 17,853/2023 (which approved our Proposed Privatization) violates the Constitution of the State of São Paulo, which preliminary injunction was denied by the rapporteur judge. As of the date of this annual report, this lawsuit is awaiting a final judgment. |
· | Direct Unconstitutionality Action (Ação Direta de Inconstitucionalidade) No. 2005198-47.2024.8.26.0000 filed by Partido Democrático Trabalhista (“PDT”): The political party PDT filed a lawsuit in the São Paulo Judicial Court claiming that Law No. 17,853/2023 (which approved our Proposed Privatization) contravenes the Constitution of the State of São Paulo, which preliminary injunction was denied by the rapporteur judge. As of the date of this annual report, this lawsuit is awaiting a final judgment. |
See also “Item 3.D. Key Information—Risk Factors—Risks Relating to Our Proposed Privatization—Our controlling shareholder could suspend or terminate the Proposed Privatization. Additionally, our Proposed Privatization may be challenged, which could delay or prevent its consummation.”
Explanatory Notes
For a further discussion of December 31, 2021 is R$30.9 billion. We have assessed that we do not have a current obligation as a result of a past event, and accordingly have not made any provisions.ongoing litigation involving us see note 20 to our 2023 Consolidated Financial Statements.
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Dividends and Dividend Policy
Amounts Available for Distribution
At each annual shareholders’ meeting, the Board of Directors is required to recommend the allocation of net profits for the preceding fiscal year. For the purposes of Brazilian Corporate Law, net profits are defined as net income after income tax and social contribution tax for such fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to employees’ and management’s participation in our profits. In accordance with Brazilian Corporate Law, the amounts available for dividend distribution are the amounts equal to half of the net profit as increased or reduced by:
· | the amount intended to form the legal reserve; and |
· | the amount intended to form the reserves for contingencies and any written-off amounts of the same reserves formed in previous fiscal years. |
We are required to maintain a legal reserve, to which we must allocate 5.0% of net profits for each fiscal year until the amount for such reserve equals 20.0% of our paid-in capital. However, we are not required to make any allocations to our legal reserve in respect of any fiscal year in which the aggregate amount of the legal reserve plus our other established capital reserves exceeds 30.0% of our capital. Net losses, if any, may be offset against the legal reserve. As of December 31, 2021, 20202023, 2022 and 20192021 the balance of our legal reserve was R$1,532.41,864.6 million, R$1,417.11,688.4 million and R$1.368.4,1,532.4 million, respectively, which was equal to 10.2, 9.4%12.4%, 11.3% and 9.1%10.2%, respectively, of our capital.
Brazilian Corporate Law also provides for two discretionary allocations of net profits that are subject to approval by the shareholders at each annual shareholders’ meeting. First, a percentage of net profits may be allocated to a contingency reserve for anticipated losses that are deemed probable in future years. Any amount so allocated in a prior year must be either reversed in the fiscal year in which the loss was anticipated if such loss does not in fact occur, or written off in the event that the anticipated loss occurs. Second, if the mandatory distributable amount exceeds the sum of realized net profits in any given year, such excess may be allocated to an unrealized revenue reserve. Under Brazilian Corporate Law, realized net profits is defined as the amount of net profits that exceeds the net positive result of equity adjustments and profits or revenues from operations with financial results after the end of the next succeeding fiscal year.
Under Brazilian Corporate Law, any company may authorize the creation of a discretionary reserve in its bylaws. Bylaws which authorize the allocation of a percentage of a company’s net income to the discretionary reserve must also indicate the purpose, criteria for allocation and maximum amount of the reserve. We may also allocate a portion of our net profits for discretionary allocations for plan expansion and other capital investment projects, the amount of which would be based on a capital budget previously presented by management and approved by our shareholders. Under Law No. 10,303/2001 of October 31, 2001, as amended, capital budgets for more than one year must be revised at each annual shareholders’ meeting. After completion of the relevant capital projects, we may retain the allocation until the shareholders vote to transfer all or a portion of the reserve to capital or retained earnings. As of December 31, 2021, 20202023, 2022 and 20192021 we had an investment reserve of R$8,297.512,753.4 million, R$6,751.310,390.5 million and R$6,098.68,297.5 million, respectively.
The amounts available for distribution may be further increased by a reversion of the contingency reserve for anticipated losses constituted in prior years but not realized. The amounts available for distribution are determined on the basis of our financial statementsConsolidated Financial Statements prepared in accordance with BrazilianBR GAAP.
The legal reserve is subject to approval by the shareholder vote at our annual shareholders’ meeting and may be transferred to capital but is not available for the payment of dividends in subsequent years.
Mandatory Distribution
Brazilian Corporate Law generally requires that the bylaws of each Brazilian corporation specify a minimum percentage of the amounts available for distribution by such corporation for each fiscal year that must be distributed to shareholders as dividends, also known as the mandatory distributable amount. Under our bylaws, the mandatory distributable amount has been fixed at an amount equal to not less than 25.0% of the amounts available for distribution, to the extent amounts are available for distribution at the end of each given fiscal year.
The mandatory distribution is based on a percentage of adjusted net income, not lower than 25.0%, rather than a fixed monetary amount per share. Brazilian Corporate Law, however, permits a publicly held company, such as us, to suspend the mandatory distribution if the Board of Directors and the Fiscal CommitteeCouncil report to the shareholders’ meeting that the distribution would be inadvisable in view of our financial condition. The suspension is subject to the approval of holders of common shares. In this case, the Board of Directors must file a justification for such suspension with the CVM. Profits not distributed by virtue of the suspension mentioned above shall be attributed to a special reserve and, if not absorbed by subsequent losses, must be paid as dividends as soon as the financial condition of such company permits such payments.
Payment of Dividends
We are required by Brazilian Corporate Law and by our bylaws to hold an annual shareholders’ meeting by the fourth month after the end of each fiscal year at which an annual dividend may be declared. The decision to distribute annual dividends is based on the financial statementsConsolidated Financial Statements prepared for the relevant fiscal year. Under Brazilian Corporate Law, dividends generally are required to be paid within 60 days following the date the dividend was declared, unless a shareholders’ resolution sets forth another date for payment, which, in either case, must occur prior to the end of the fiscal year in which the dividend was declared. A shareholder has a three-year period from the dividend payment date to claim dividends (or interest payments on shareholders’ equity as described under “—Record of Dividend Payments and Interest on Shareholders’ Equity”) distributed on his or her shares, after which the amount of the unclaimed dividends reverts to us. The depositary will set the currency exchange date to be used for payments to ADS holders as soon as practicable upon receipt of those payments from us.
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Our bylaws allow us to pay interim dividends from preexisting and accumulated profits related to the current or preceding fiscal year.
In general, shareholders who are not residents of Brazil must register with the Central Bank to have dividends, sales proceeds or other amounts with respect to their shares eligible to be remitted outside of Brazil. The common shares underlying our ADSs are held in Brazil by Banco Bradesco S.A., as the custodian and agent for the depositary, which is the registered owner of the common shares underlying the ADSs. Our current registrar is Banco Bradesco S.A. The depositary electronically registers the common shares underlying the ADSs with the Central Bank and, therefore, is able to have dividends, sales proceeds or other amounts with respect to these shares eligible to be remitted outside Brazil. For more information, see “Item 10.D. Exchange Controls.”
Payments of cash dividends and distributions, if any, will be made in Brazilian reais to the custodian on behalf of the depositary, which will then convert such proceeds into U.S. dollars and will cause such U.S. dollars to be delivered to the depositary for distribution to holders of ADSs. SeeFor more information, see “Item 10.D. Exchange Controls.” Under current Brazilian law, dividends generally paid to shareholders who are not Brazilian residents, including holders of ADSs, will not be subject to Brazilian withholding income tax, except for dividends declared based on profits generated prior to December 31, 1995. For more information, see “Item 10.E. Taxation.”
Record of Dividend Payments and Interest on Shareholders’ Equity
Brazilian corporations are permitted to distribute dividends in the form of a tax-deductible notional interest expense on shareholders’ equity in accordance with Law No. 9,249/1995, of December 26, 1995, as amended. The amount of tax-deductible interest that may be paid is calculated by applying the daily pro rata variation of the government’s long-term interest rate (TJLP) on the shareholders’ equity during the relevant period and cannot exceed the greater of:
· | 50.0% of net income (before taking into account such distribution and any deductions for income taxes and after taking into account any deductions for social contributions on net profits) for the period in respect of which the payment is made; or |
· | 50.0% of earnings reserves and retained earnings. |
Any payment of interest on shareholders’ equity to holders of ADSs or common shares, whether or not they are Brazilian residents, is subject to Brazilian withholding income tax at the rate of 15.0% or 25.0% if the beneficiary is resident in a low tax jurisdiction (tax haven). For more information, see “Item 10.E. Taxation.” The amount paid to shareholders as interest on shareholders’ equity, net of any withholding tax, may be included as part of the mandatory dividends distributable amount as prescribed in Brazilian Corporate Law.
Dividends and interest on shareholders’ equity over the minimum established in a company’s bylaws are recognized when approved by the shareholders in the general shareholders’ meeting.Ordinary and Extraordinary General Shareholders’ Meeting. Consequently, the amount of R$547.6836.8 million recognized as of December 31, 20212023 correspond to the minimum established by law of 25.0% of the net income and the difference of R$96.7147.7 million will be recorded in 20222024 after the annual general meeting.
Distributions of dividends
The following table sets forth the distributions of dividends (being the minimum mandatory dividends plus complementary minimum dividends) that we made or intend to make to our shareholders in respect of our 2021, 20202023, 2022 and 20192021 earnings. All these amounts distributed or to be distributed were or will be in the form of interest on shareholders’ equity.
Year ended December 31, | Aggregate amount proposed | Payment Dates | Payment per share | Payment per ADS | |||
(in millions of reais) | (in reais) | ||||||
2021(1) | 644.3 | June 27, 2022 | 0.94 | 0.94 | |||
2020 | 272.0 | June 28, 2021 | 0.40 | 0.40 | |||
2019 | 941.0 | May 29, 2020 | 1.38 | 1.38 |
Year ended December 31, | Aggregate amount proposed | Payment Dates | Payment per share | Payment per ADS | |||
(in millions of reais) | (in reais) | ||||||
2023(1) | 984.5 | June 24, 2024 | 1.44 | 1.44 | |||
2022 | 872.2 | June 26, 2023 | 1.28 | 1.28 | |||
2021 | 644.3 | June 27, 2022 | 0.94 | 0.94 |
(1) Subject to approvalApproved by the AnnualOrdinary and Extraordinary General Shareholders’ Meeting to bemeeting held on April 28, 2022.25, 2024.
We intend to declare and pay dividends and/or interest on shareholders’ equity, as required by Brazilian Corporate Law, our bylaws and our dividend policy. Our Board of Directors may propose the distribution of interest on shareholders’ equity, calculated based on our semi-annual or quarterly financial statements.Consolidated Financial Statements. The declaration of dividends is annual, including dividends in excess of the mandatory distribution, and requires approval by the vote of the majority of the holders of our common shares. The proposed distribution of dividends should consider (i) the need for investments to universalizefor the universalization of basic sanitation services; (ii) the achievement of our corporate purpose, as set forth in our bylaws; (iii) the cash generation and cash requirements; and (iv) our economic and financial sustainability. The amount of any distributions will depend on many factors, such as our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our Board of Directors and shareholders. Within the context of our tax planning, we may in the future continue to determine that it is in our best interest to distribute interest on shareholders’ equity.
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B. | Significant Changes |
Other than as disclosed in this annual report, no significant change has occurred since the date of the audited financial statementsConsolidated Financial Statements included in this annual report.
ITEM 9. | THE OFFER AND LISTING
|
A. | Offer and Listing Details |
Market for our Common Shares
Our common shares have been listed on the São Paulo Stock Exchange (B3)B3 under the trading symbol “SBSP3” since June 4, 1997 and, starting on April 24, 2002, have been included in the Novo Mercado segment of that exchange.
Market of our ADSs
Our ADSs, each of which represents one of our common shares are listed on the NYSE under the trading symbol “SBS.”
B. | Plan of Distribution |
Not applicable.
C. | Markets |
Trading on the Brazilian Stock Exchange
Our common shares are traded on the B3, the only Brazilian stock exchange that trades shares. Trading on the B3 is limited to brokerage firms and a limited number of authorized entities. The CVM and the B3 have discretionary authority to suspend trading in shares of a particular issuer under certain circumstances.
Trading on the B3 is conducted every business day frombetween 10:00 a.m. toand 5:5500 p.m. (São Paulo time) and occurs on the B3 electronic trading system called PUMA (Plataforma Unificada Multiativos). The B3 also permits trading from 5:30 p.m. to 6:00 p.m. during a different trading period called(São Paulo time) on an online system known as the “after market.” The after-market sessionmarket”, which is restrictedconnected to certain stocks that were traded in the portfolios IBOV and/or IBrXtraditional broker dealers and that were tradedbrokerage firms operating on the same day during the regular negotiation.internet. Trading during aftermarket is subject to regulatory limits on price volatility and on the volume of shares transacted through internet brokers. The timeframes for negotiation above are subject to updates by the B3. Trading of securities listed on the B3, including the special listing segments known as the Novo Mercado, Level 1 and Level 2, may also be made outside of the traditional exchanges in the non-organized Brazilian Over the Counter, or OTC market.
In order to maintain better quality control over the fluctuation of its index, the B3 has adopted a “circuit breaker” system pursuant to which trading sessions are suspended (i) for a period of 30 minutes whenever the index of this stock exchange falls more than 10% from the index registered for the previous day; (ii) for one hour if the index of this stock exchange falls 15% or more from the index registered for the previous day, after the reopening of trading; and (iii) for a certain period of time to be defined by the B3, if the index of this stock exchange falls 20% or more from the index registered for the previous day, after the reopening of trading. The minimum and maximum price is based on a reference price for each asset, which will be the previous session’s closing quote, when considering the asset at the beginning of the day before the first trade, or the price of the day’s first trade. The asset’s reference price will be altered during the session if there is an auction sparked by the intraday limit being breached. In this case the reference price will become whatever results from the auction.
The B3 settles the sale of shares two business days after they have taken place, without monetary adjustment of the purchase price. The shares are paid for and delivered through a settlement agent affiliated with the B3. The B3 performs multilateral compensation for both the financial obligations and the delivery of shares. According to the B3’s regulations, financial settlement is carried out by the Central Bank’s reserve transfer system. The securities are transferred by the B3’s custody system. Both delivery and payment are final and irrevocable.
Trading on the B3 is significantly less liquid than trading on the NYSE or other major exchanges in the world. Although any of the outstanding shares of a listed company may trade on the B3, in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by a controlling group or by government entities.
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Trading on the B3 by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or a “non-Brazilian holder,” is subject to certain limitations under Brazilian foreign investment regulations. With limited exceptions, non-Brazilian holders may trade on Brazilian stock exchanges in accordance with the requirements of CMN Resolution No. 4,373/2014, which requires that securities held by non-Brazilian holders be maintained in the custody of financial institutions authorized by the Central Bank and by the CVM or in deposit accounts with financial institutions. In addition, Resolution No. 4,373/2014 requires non-Brazilian holders to restrict their securities trading to transactions on the B3 or qualified over-the-counter markets. With limited exceptions, non-Brazilian holders may not transfer the ownership of investments made under Resolution No. 4,373/2014 to other non-Brazilian holders through a private transaction. SeeFor more information, see “Item 10.E. Taxation—Brazilian Tax Considerations—Taxation of Gains” for a description of certain tax benefits extended to non-Brazilian holders who qualify under Resolution No. 4,373/2014.
The Novo Mercado Segment
Since April 24, 2002, our common shares have been listed on the Novo Mercado segment of the B3. The Novo Mercado is a listing segment designed for the trading of shares issued by companies that voluntarily undertake to abide by certain additional corporate governance practices and disclosure requirements in addition to those already required under Brazilian law. A company with shares listed on the Novo Mercado segment must follow good practices of corporate governance. These rules generally increase shareholders’ rights and enhance the quality of information provided to shareholders. On April 18, 2002, June 19, 2006, April 23, 2012 and April 27, 2018 our shareholders approved changes to our bylaws to comply with the Novo Mercado requirements. Listing Regulation.
In addition to the obligations imposed by current Brazilian law, a company listed on the Novo Mercado is obligated to, among others:
· | maintain only common shares; |
· | hold public offerings of shares in a manner favoring diversification of the company’s shareholder base and broader access to retail investors; |
· | grant tag along rights for all shareholders in connection with a transfer of control of the company; |
· | limit the term of all members of the |
· | hold a tender offer by the company’s controlling shareholder (the minimum price of the shares to be offered will be determined by an appraisal process) if it elects to delist from the Novo Mercado, unless a waiver is granted by the company’s shareholders; |
· | maintain a related party transactions policy, including (i) the criteria to be followed in the performance and approval of related party transactions, (ii) the procedures for identifying conflicts of interest and establishing voting restrictions for conflicted shareholders, directors and executive officers, |
· | the chairman of the |
· | the |
· |
· | ensure that at least two, or 20.0% (whichever is greater), of the |
· | maintain a minimum free float of at least (i) |
· | the company must have an internal audit committee; |
· | disclose information on the share ownership of controlling shareholders and certain related parties on a monthly basis; |
· | resolve and require the shareholders, directors, and members of the fiscal |
· | the company must adopt and publish a code of conduct approved by the |
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Regulation of Brazilian Securities Markets
The Brazilian securities markets are principally governedmarket is regulated and supervised by Law No. 6,385/1976 of December 7, 1976,the CMN and the Brazilian Corporate Law, each as amended and supplemented, and by regulations issued by the CVM,Central Bank, which has regulatorygeneral authority over the stock exchanges and securities markets generally, bymarkets. The CMN regulates and supervises the CMN,activities of the CVM and by the Central Bank, which has, among other powers, licensing authority over brokerage firms and also regulates foreign investment and foreign exchange transactions. The Brazilian securities markets are generally governed by Law No. 6,385/1976, or the “Securities Market Law”, as amended, and Brazilian Corporate Law, as amended, as well as by rules and regulations issued by the CVM, the CMN and the Central Bank. These laws and regulations provide for, among others, provide for disclosure requirements, applicable to issuers of traded securities, protection of minority shareholders and criminal penaltiessanctions for insider trading and price manipulation. They also provide formanipulation, protection of minority shareholders, licensing and oversightprocedures, supervision of brokerage firms and the governance of the Brazilian stock exchanges. Nevertheless, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets.
Under the Brazilian Corporate Law, a company is either publicrequired to be publicly-held (companhia aberta), such as we are, or closely held (companhia fechada). before listing its shares. All publicpublicly-held companies including us, are registered with the CVM and are subject to Brazilian reporting requirements.requirements relating to the periodic disclosure of information and material facts. A company registered with the CVM may havetrade its securities tradedeither on the Brazilian stock exchangesexchange markets, including the B3, or inon the Brazilian over-the-counterOTC market. Our common shares areShares of companies listed and traded on the B3 and may not simultaneously trade on the OTC market. The OTC market consists of direct trades between persons in which a financial institution registered with the CVM serves as an intermediary.
The securities of a listed company may also be traded privately subject to certain limitations.
No special application, other than registration with the CVM (and, in case of organized OTC markets, in the applicable OTC market), is necessary for securities of a publicly-held company to be traded in this market. To be listed on a Brazilian stock exchangethe B3, a company must apply for registration with the CVMB3 and the CVM.
The OTC is divided into two categories: (1) an organized OTC market, in which the transactions are supervised by self-regulating entities authorized by the CVM; and (2) a non-organized OTC market, in which the transactions are not supervised by self-regulating entities authorized by the CVM. In either case, transactions are directly traded among persons, outside of the stock exchange wheremarket, through a financial institution authorized by the head officeCVM. The institution is required to be registered with the CVM (and with the relevant OTC market), but there is no need for a special license to trade securities of a publicly listed company on the company is located.OTC market.
We have the option to ask thatThe trading in ourof securities on the B3 may be suspended under certain circumstances, including at the request of a company in anticipation of a disclosure of material announcement.information. Trading may also be suspended on the initiative of the B3 or the CVM, among other reasons, based on or due to a belief that a company has provided inadequate information regarding a materialsignificant event or has provided inadequate responses to the inquiries by the CVM or the São Paulo Stock Exchange.B3, among other reasons.
The Brazilian over-the-counter market consists of direct trades between individuals in which a financial institution registered with the CVM serves as intermediary. No special application, other than registration with the CVM, is necessary for securities of a public company to be traded in this market. The CVM requires that it be given notice of all trades carried out in the Brazilian over-the-counter market by the respective intermediaries.
TradingAdditionally, trading on the B3 by non-residents of Brazil is subject to limitations under Brazilian foreign investment and tax legislation. The Brazilian custodian for our common shares underlying the ADSs must, on behalf of the depositary for our ADRs, obtain registration from the Central Bank to remit U.S. dollars abroad for payments of dividends, any other cash distributions, or upon the disposition of the shares and sales proceeds thereto. In the event that a holder of ADSs exchanges ADSs for common shares, the holder will be entitled to continue to rely on the custodian’s registration for five business days after the exchange. Thereafter, the holder may not be able to obtain and remit U.S. dollars abroad upon the disposition of our common shares, or distributions relating to our common shares, unless the holder obtains a new registration. SeeFor more information, see “Item 10.D. Exchange Controls.”
D. | Selling Shareholders |
Not applicable.
E. | Dilution |
Not applicable.
F. | Expenses of the Issue |
Not applicable.
ITEM 10. | ADDITIONAL INFORMATION
|
A. | Share Capital |
Not applicable.
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B. | Memorandum and Articles of Association |
The following is a summary of the material terms of our common shares, including related provisions of our bylaws and Brazilian Corporate Law. This description is qualified by reference to our bylaws and to Brazilian law. If our Proposed Privatization is consummated, we will need to make certain amendments to our bylaws. For further information about our Proposed Privatization, see “Presentation of Financial and Other Information—Proposed Privatization.”
Corporate Purposes
We are a mixed capital company (sociedade de economia mista) of unlimited duration, incorporated on September 6, 1973, with limited liability, duly organized and operating under Brazilian Corporate Law. As set forth in Articlearticle 2 of our bylaws, our corporate purpose is to render basic sanitation services, aimed at the universalization of basic sanitation in the stateState of São Paulo without harming our long-term financial sustainability. Our activities comprise water supply, sanitary sewage services, urban rainwater management and drainage services, urban cleaning services, solid waste management services and related activities, including the planning, operation, maintenance and commercialization of energy (for us or third parties), and the commercialization of services, products, benefits and rights that directly or indirectly arise from our assets, operations and activities. We are allowed to act, in a subsidiary form, in other Brazilian locations and abroad.
Directors’ Powers
In addition to the general provisions of Brazilian law, our Board of Director’s Internal Charterinternal charter contains the specific provisions set out below regarding a director’s power to vote on a proposal, arrangement or contract in which that director has a material interest. Under Brazilian Corporate Law, a director or an executive officer is prohibited from voting in any meeting or with respect to any transaction in which that director or executive officer has a conflict of interest with the company and must disclose the nature and extent of the conflicting interest to be recorded in the minutes of the meeting. In any case, a director or an executive officer may not transact any business with the company, including any borrowing, except on reasonable or fair terms and conditions that are identical to the terms and conditions prevailing in the market or offered by third parties.
According to our Board of Director’s Internal Charter,internal charter, when a matter involves a conflict of interest with ours or a particular interest in the matter, each member of theour Board of Directors shall (i) declare his impediment in a timely manner, as soon as he becomes aware of the fact, (ii) refrain from intervening in the matter in discussion or deliberation, (iii) include the fact in the minutes of the meeting, and (iv) abstain from discussions and deliberations.
Under our bylaws, our shareholders are responsible for establishing the compensation we pay to the members of our Board of Directors, membersBoard of the fiscal committeeExecutive Officers and the executive officers.Fiscal Council.
Pursuant to Brazilian Corporate Law, each memberonly natural persons can be elected as members of our boardBoard of Directors or our Board of Executive Officers. However, the appointment of a director or an executive officers must beofficer residing or domiciled abroad is subject to the appointment of a residentrepresentative residing in Brazil. the country, pursuant to the Brazilian Corporate Law.
Our bylaws do not establish any mandatory retirement age limit.
See also “Item 6.A. Directors and Senior Management.”
Description of Common Shares
General
Each common share entitles the holder thereof to one vote at our annual or special shareholders’ meetings. According to the Brazilian Corporate Law and CVM regulation, our shareholders’ meetings must be called by publication of a notice in a newspaper of general circulation in our principalmain place of business (in our case, the publicationnewspaper “Valor Econômico”), and on the website of the same newspaper, currently the city of São Paulo, at least 21 days prior to the day of the meeting.meeting (and, on second call, 8 days prior to the meeting). As per the resolution passed at our Ordinary and Extraordinary General Shareholders’ Meeting held on April 28, 2022, we shall also make the publications required by the Brazilian Corporate Law in the Diário Oficial do Estado de São Paulo, the official government publication of the State of São Paulo. The quorum to hold shareholders’ meetings on first call requires the attendance of shareholders, either in person or by proxy, representing at least 25.0% of the shares entitled to vote and, on second call, the meetings can be held with the attendance of shareholders, also either in person or by proxy, representing any number of shares entitled to vote.vote (except as otherwise provided by Brazilian Corporate Law).
Under Brazilian Corporate Law, our common shares are entitled to dividends or other distributions made in respect of our common shares in proportion to their share of the amount available for the dividend or distribution. SeeFor more information, see “Item 8A.8.A. Consolidated Financial Statements and Other Financial Information—Dividends and Dividend Policy” for a more complete description of payment of dividends and other distributions on our common shares. In addition, upon any liquidation of our Company, our common shares are entitled to our remaining capital after paying our creditors in proportion to their ownership interest in us.
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In principle, a change in shareholder rights, such as the reduction of the compulsory minimum dividend, is subject to a favorable vote of the shareholders representing at least one half of our voting shares. Under some circumstances that may result in a change in the shareholder rights, such as the creation of preferred shares, Brazilian Corporate Law requires the approval of a majority of the shareholders who would be adversely affected by the change attending a special meeting called for such reason. It should be emphasized, however, that our bylaws expressly prevent us from issuing preferred shares. Brazilian Corporate Law specifies other circumstances where a dissenting shareholder may also have appraisal rights.
According to Brazilian Corporate Law, neither a company’s bylaws nor actions taken at a general meeting of shareholders may deprive a shareholder of certain rights, such as:
· | the right to participate in the distribution of profits; |
· | the right to participate equally and ratably in any remaining residual assets in the event of liquidation of the company; |
· | the right to supervise the management of the corporate business as specified in Brazilian Corporate Law; |
· | the right to preemptive rights in the event of a subscription of shares, debentures convertible into shares or subscription bonuses (except in some |
· | the right to withdraw from the company in the cases specified in Brazilian Corporate Law. |
Pursuant to Brazilian Corporate Law and our bylaws, each of our common shares carries the right to one vote at our shareholders’ meetings. We may not restrain or deny that right without the consent of the holders of a majority of the shares affected.
Neither Brazilian Corporate Law nor our bylaws expressly address:
· | staggered terms for directors; |
· | cumulative voting, except as described below; or |
· | measures that could prevent a takeover attempt. |
However, under the laws of the State of São Paulo, the State is required to own at least a majority of our outstanding common shares.
According to Brazilian Corporate Law and its regulations, shareholders representing at least 10 percent10% of our capital, may request that a multiple voting procedure be adopted to entitle each share to as many votes as there are board members and to give each shareholder the right to vote cumulatively for only one candidate or to distribute their votes among several candidates. Pursuant to Brazilian Corporate Law, shareholder action must be taken at a shareholders meeting, duly called for and not by written consent.
Pursuant to regulations promulgated by the CVM, the 10% threshold requirement for the exercise of multiple voting procedures may be reduced depending on the amount of capital stock of the company. Considering our current capital stock, shareholders representing 5% of our voting capital may demand the adoption of a multiple voting procedure.
Pursuant to Brazilian Corporate Law, non-controlling holders of common shares issued by a mixed capital company (sociedade de economia mista), irrespective of its interest percentage in the company’s voting capital, may also have exercise the right of elect separately a member of the Board of Directors and an alternate, if they are not entitled to elect more members by means of the multiple voting procedure.
In addition, our bylaws provide for the participation of one employee representative in the Board of Directors, with a term of office coinciding with that of the other directors. The director representing the employees will be chosen by vote of the employees, with our administrative collaboration when requested, in a direct election, with no automatic renewal for successive periods.
Preemptive Rights
Each of our shareholders has a general preemptive right to subscribe for shares or securities convertible into shares in any capital increase, in proportion to his or her ownership interest in us, except in the event of the grant and exercise of any option to acquire shares of our capital stock. The preemptive rights are valid for a 30-day period from the publication of the announcement of the capital increase. Shareholders are also entitled to sell this preemptive right to third parties. Under Brazilian Corporate Law, we may amend our bylaws to eliminate preemptive rights or to reduce the exercise period in connection with a public offering of shares or an exchange offer made to acquire another company.
In the event of a capital increase by means of the issuance of new shares, holders of ADSs, or of common shares, would, except under circumstances described above, have preemptive rights to subscribe for any class of our newly issued shares. However, an ADS holder may not be able to exercise the preemptive rights relating to the common shares underlying his or her common shares or the common shares underlying his or her ADSs unless a registration statement under the Securities Act, is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Common Shares and ADSs—A holder of our common shares and ADSs might be unable to exercise preemptive rights and tag-along rights with respect to the common shares.”
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Redemption and Rights of Withdrawal
Brazilian Corporate Law provides that, under limited circumstances, a shareholder has the right to withdraw his or her equity interest from the company and to receive payment for the portion of shareholder’s equity attributable to his or her equity interest. This right of withdrawal may be exercised by dissenting our shareholders in the event that at least half of all voting shares outstanding authorize us:
· | to reduce the mandatory distribution of dividends; |
· | to merge into another company or to consolidate with another company, subject to the conditions set forth in Brazilian Corporate Law; |
· | to participate in a centralized group of companies, as defined under |
· | to change our corporate purpose; |
· | to split up, subject to |
· | ||
· | to create beneficiary parts; | |
· | to dissolute the |
· | to transform into another type of company; |
· | to transfer all of our shares to another company or to receive shares of another company in order to make the company whose shares are transferred a |
· | to acquire control of another company at a price which exceeds the limits set forth in Brazilian Corporate Law. |
The right of withdrawal lapses 30 days after publication of the minutes of the shareholders’ meeting that approved a corporate action described above. We would be entitled to reconsider any action giving rise to withdrawal rights within 10 days following the expiration of such rights if the withdrawal of shares of dissenting shareholders would jeopardize our financial condition. Brazilian Corporate Law allows companies to redeem their shares at their economic value, subject to the provisions of their bylaws and certain other requirements. Our bylaws currently do not provide that our capital stock will be redeemable at its economic value and, consequently, any redemption pursuant to Brazilian Corporate Law would be made based on the book value per share, determined on the basis of the lastmost recent balance sheet approved by the shareholders. However, if a shareholders’ meeting giving rise to redemption rights occurred more than 60 days after the date of the lastmost recent approved balance sheet approved, a shareholder would be entitled to demand that his or her shares be valued on the basis of a new balance sheet dated within 60 days of such shareholders’ meeting. In this case, the company will immediately pay 80% of the reimbursement amount calculated based on the most recent balance sheet and, once the next balance sheet is finalized, will pay the balance within 120 days from the date of the general shareholders’ meeting.
In addition, the rights of withdrawal in the third, fourth and eighth bullet points above may not be exercised by holders of shares if such shares (i) are liquid, defined as being part of the Bovespa index (Índice Bovespa) or other stock exchange index (as defined by the CVM), and (ii) are widely held, such that the controlling shareholder or companies it controls have less than 50.0% of our shares. Our common shares are included on the Bovespa index.
This right of withdrawal may also be exercised in the event that the entity resulting from a stock merger as described above, consolidation or spin-off of a listed company fails to become a listed company within 120 days of the shareholders’ meeting at which such transaction was approved.
We may cancel the right of withdrawal if the payment amount has a material adverse effect on our finances.
Conversion Right
Not applicable because our capital stock is only comprised of common shares.
Special and General Meetings
Unlike the laws governing corporations incorporated under the laws of the United States’ state of Delaware, the Brazilian corporate law does not allow shareholders to approve matters by written consent obtained as a response to a consent solicitation procedure. All matters subject to approval by the shareholders must be approved in a general meeting, duly convenedassembled pursuant to the provisions of Brazilian corporate law. Shareholders may be represented at a shareholders’ meeting by attorneys-in-fact who are (i) shareholders of the corporation, (ii) a Brazilian attorney, (iii) a member of management or (iv) a financial institution.
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Ordinary and Extraordinary General shareholders’ meetingsShareholders’ Meetings shall be called, convenedorganized, assembled and deliberated under Brazilian Corporate Law to address all matters of interest to the company. Ordinary and Extraordinary General shareholders’ meetingsShareholders’ Meetings may be called by publication of a notice in a newspaper of general circulation in our principal place of business (in our case, the publication “Valor Econômico”), and on the website of the same newspaper, and the first call should be made at least 21 days prior to the meeting. In our case, the first call is made 30 days in advance, as recommended by the CVM. Themeeting (and, on second call, should be made at least 8 days in advance, if quorum is not reached, pursuantprior to the meeting). As per the resolution passed at our Ordinary and Extraordinary General Shareholders’ Meeting held on April 28, 2022, we shall also make the publications required by Brazilian Corporate Law.Law in the in the Official Gazette of the State of São Paulo (Diário Oficial do Estado de São Paulo), the official government publication of the State of São Paulo.
At duly calledorganized and convenedassembled meetings, our shareholders are empowered to take any action regarding our business. Shareholders have the exclusive right, during our annual shareholders’ meetings, which are required to be holdheld within 120 days ofthe first four months following the end of our fiscal year, to approve our financial statementsConsolidated Financial Statements and to determine the allocation of our net income and the distribution of dividends related to the fiscal year immediately preceding the meeting. The members of our Board of Directors are generally elected at annual shareholders’ meetings. However, according to Brazilian corporate law, they can also be elected at extraordinary shareholders’ meetings. At the request of shareholders holding a sufficient number of shares, a fiscal committeecouncil can be established, and its members elected, at any general shareholders’ meeting.meetings.
A special shareholders’ meeting may be held concurrently with the annual shareholders’ meeting and at other times during the year. Our shareholders may take the following actions, among others, exclusively at shareholders’ meetings:
· | election and dismissal of the members of our Board of Directors and our Fiscal |
· | approval of the aggregate compensation of the members of our Board of Directors and Board of Executive Officers, as well as the compensation of the members of the Fiscal |
· | amendment of our bylaws; |
· | approval of our merger, consolidation or spin-off; |
· | approval of our dissolution or liquidation, as well as the election and dismissal of liquidators and the approval of their accounts; |
· | granting stock awards and approval of stock splits or reverse stock splits; |
· | approval of stock option plans for our management and employees, as well as for the management and employees of other companies directly or indirectly controlled by us; |
· | approval, in accordance with the proposal submitted by our Board of Directors, of the distribution of our net income and payment of dividends; |
· | authorization to delist from the Novo Mercado and to become a private company, except if the cancellation is due to a breach of the Novo |
· | regulations by management, and to retain a specialized firm to prepare a valuation report with respect to the value of our shares, in any such events; |
· | approval of our management accounts and our |
· | approval of any primary public offering of our shares or securities convertible into our shares; and |
· | deliberate upon any matter submitted by the Board of Directors. |
Limitations on Rights to Own Securities
There are no limitations under Brazilian law and our bylaws on the rights of non-residents or foreign shareholders to own securities, including the rights of such non-resident or foreign shareholders to hold or exercise voting rights.
Equal Treatment Provisions
Pursuant to our bylaws and the Novo Mercadoregulations, Listing Regulation, any party that acquires our control must extend a tender offer for the shares held by non-controlling shareholders at the same conditions and purchase price paid to the controlling shareholder. In addition, State Law No. 119/1973, which created our Company, requires the State to hold the majority of our shares at all times.
Reserves
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General
The Brazilian Corporate Law provides that all discretionary allocations of “adjusted income” are subject to shareholder approval and may be added to capital or distributed as dividends in subsequent years. In the case of our capital reserve and the legal reserve, they are also subject to shareholder approval; however, the use of their respective balances is restricted to being added to capital or absorbed by losses. They cannot be used as a source for income distribution to shareholders.
Investment Reserve
Our investment reserve is composedconsists specifically of internal funds for expansion of water and sewage service systems. As of December 31, 2021,2023, we had an investment reserve of R$8,297.512,753.4 million.
Legal Reserve
Under Brazilian Corporate Law, we are required to record a legal reserve to which we must allocate 5% of the adjusted net income each year until the amount of the reserve equals 20.0% of paid-in capital. Any accumulated deficit may be charged against the legal reserve. As of December 31, 2021,2023, the balance of our legal reserve was R$1,532.41.864,6 million.
Arbitration
In connection with our listing with the Novo Mercado segment of the B3, we, our shareholders, directors and officers have undertaken to refer to arbitration any and all disputes or controversies arising out of the Novo Mercadorules Listing Regulation or any other corporate matters. For more information, see “Item 9.C. Markets.” Under our bylaws, any dispute among us, our shareholders and our management with respect to the application of Novo Mercadorules, Listing Regulation, the Brazilian Corporate Law, the application of the rules and regulations regarding Brazilian capital markets, will be resolved by arbitration conducted pursuant to the B3 Arbitration Rules in the Market Arbitration Chamber. Any dispute among shareholders, including holders of ADSs, and any dispute between us and shareholders, including holders of ADSs, will also be submitted to arbitration.
Options
There are currently no outstanding options to purchase any of our common shares.
C. | Material Contracts |
For a description of the material contracts entered into by the State of São Paulo and us, see “Item 7.B. Related Party Transactions—Transactions with the State of São Paulo” and “Item 7.B. Related Party Transactions—Agreements with the State.State of São Paulo.”
D. | Exchange Controls |
The right to convert dividend or interest payments and proceeds from the sale of shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, that the relevant investments have been registered with the Central Bank and the CVM. Such restrictions on the remittance of foreign capital abroad may hinder or prevent the custodian for our common shares represented by our ADSs or the holders of our common shares from converting dividends, distributions or the proceeds from any sale of these shares into U.S. dollars and remitting the U.S. dollars abroad. Holders of our ADSs could be adversely affected by delays in, or refusal to grant any, required government approval to convert Brazilian currency payments on the common shares underlying our ADS and to remit the proceeds abroad.
Accordingly, the proceeds from the sale of ADSs by ADR holders outside Brazil are not subject to Brazilian foreign investment controls, and holders of the ADSs are entitled to favorable tax treatment under certain circumstances. SeeFor more information, see “Item 3.D. Risk Factors—Risks Relating to Our Common Shares and ADSs— Investors who exchange ADSs for common shares may lose their ability to remit foreign currency abroad and to obtain Brazilian tax advantages” and “Item 10.E. Taxation—Brazilian Tax Considerations.”
Since March 30, 2015, CMN Resolution No. 4,373/2014, of September 29, 2014, has been in full effect, providing for the issuance of depositary receipts in foreign markets in respect to shares of Brazilian issuers. The CMN Resolution No. 4,373/2014, among other acts, revoked CMN Resolution No. 1,927/1992, of May 18, 1992, CMN Resolution No. 1,289/1987, of March 20, 1987, and CMN Resolution No. 2,689/2000, of January 26, 2000. Under Brazilian law relating to foreign investment in the Brazilian capital markets, foreign investors registered with the Central Bank and the CVM and acting through (i) authorized custodial accounts managed by local agentsagents; and (ii) local intermediaries (such as securities broker-dealers), may buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of registration for each transaction. Foreign investors may register their investment under Law No. 4,131/1962, of September 3, 1962,14,286/2021, as amended,regulated by BCB Resolution No. 278, or under CMN Resolution No. 4,373, of September 20, 4,373/2014.
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The Law No. 4,131/196214,286/2021, regulated by BCB Resolution No. 278, is the main legislation concerning investment of direct foreign capital and foreign direct equity in companies based in Brazil. It is applicable to any amountinvestments of capitalat least US$100,000 that entersenter Brazil in the form of foreign currency, goods or services.services to local private companies. Foreign investment portfolios (i.e. investments into securities traded on stock exchanges or over-the-counter markets) are regulated by CMN Resolution No. 4,373/2014, CVM Instruction No. 559/2015, of March 27, 2015, which regulates the approval of ADR programs by the CVM, and CVM InstructionResolution No. 560/2015,13/2020, of March 27, 2015,November 18, 2020, which regulates the filing of transactions and disclosure of information by foreign investors, all reflecting the provisions of CMN Resolution No. 4,373/2014.
As of January 1, 2016,November 18, 2020, foreign investors that intend to be registered with the CVM shall fulfill the requirements under CVM InstructionResolution No. 560/2015.13/2020. In accordance with CMN Resolution No. 4,373/2014 the definition of a foreign investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered abroad. In order to become a 4,373 Holder, a foreign investor must:
· | appoint at least one representative in Brazil, |
· | appoint |
· | appoint a tax representative in Brazil; |
· | through its representative in Brazil, register itself as a foreign investor with the |
· | hire a local intermediary (e.g. a securities broker-dealer) for trading securities in local stock exchanges, including for purposes of acquiring shares of Brazilian companies listed in the local stock exchange; | |
· | through its representative in Brazil, register its foreign investment with the Central |
· | be registered with the Federal Tax Authority (Secretaria da Receita Federal – “RFB”), |
E. | Taxation |
This summary contains a description of certain Brazilian and U.S. federal income tax consequences of the purchase, ownership and disposition of common shares or ADSs by a holder.
The summary is based upon the tax laws of Brazil and the federal income tax laws of the United States as in effect on the date of this annual report, which laws are subject to change, possibly with retroactive effect, regarding the U.S. federal income tax, and to differing interpretations. Holders of common shares or ADSs should consult their own tax advisors as to the Brazilian, U.S. or other tax consequences of the purchase, ownership and disposition of common shares or ADSs, including, in particular, the effect of any non-Brazilian, non-U.S., state or local tax laws.
Although there presently is no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions in the past regarding such a treaty. No assurance can be given, however, as to if or when a treaty will enter into force or how it will affect the U.S. holders of common shares or ADSs.
Brazilian Tax Considerations
The following discussion summarizes the principal Brazilian tax consequences of the acquisition, ownership and disposition of common shares or ADSs by a holder that is not domiciled in Brazil for purposes of Brazilian taxation (a “non-Brazilian holder”). It is based on Brazilian laws and regulations as currently in effect, and, therefore, any change in such law may change the consequences described below. Each non-Brazilian holder should consult his or her own tax adviseradvisor concerning the Brazilian tax consequences of an investment in common shares or ADSs.
A non-Brazilian holder of ADSs may withdraw them in exchange for common shares in Brazil. Pursuant to Brazilian law, the non-Brazilian holder may invest in the common shares under CMN Resolution No. 4,373/2014 or as a foreign direct investment under Law No. 4,131/1962.14,286/2021, as regulated by BCB Resolution No. 278.
Taxation of Dividends
As a result of the tax legislation adopted on December 26, Pursuant to Law No. 9,249/1995, dividends based on profits generated after January 1, 1996, including dividends paid in kind, payable by us in respect of common shares or ADSs, are exempt from withholding income tax.WHT. Dividends relating to profits generated prior to January 1, 1996 may be subject to Brazilian withholding income taxWHT at varying rates, depending on the year the profits were generated.
Additionally, currently there are discussions in the Brazilian Congress regarding a potential income tax reform aimed at revoking the aforementioned exemption and imposing income taxation on the payment of dividends. As of the date of this annual report, it is not possible to predict if the taxation of dividends will be effectively approved by the Brazilian Congress and how this taxation of dividends would be implemented. For more information on the income tax reform, see “Item 3.D. Risk Factors—Changes in Brazilian tax laws or conflicts in their interpretation may adversely affect us.”
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Beginning in 2008, the Brazilian accounting rules were significantly modified in order to align them with IFRS. After the issuance of such new rules, a transitory tax regime (regime tributário de transição), or RTT, was created mainly to ensure neutrality of the new accounting rules in connection with the calculation and payment of corporate taxes on income. Thus, according to the RTT, Brazilian companies had, only for purposes of calculation of their taxable profit, to use the accounting rules and criteria that existed until December 2007.
As a result of the application of the RTT, the accounting profit of a Brazilian company might be significantly higher (or lower) than its taxable profit. Although this specific matter has not been expressly regulated by law, the Brazilian tax authorities issued a normative instruction stating that the amount of dividends paid in excess of the profit of a company determined as per the accounting rules and criteria that existed until December 2007 should be subject to taxation.
On April 14, 2014, Law No. 12,973 was issued to, among other, terminate the Transitory Regime (RTT) and regulate how corporate taxable income should be assessed taking as a starting point the accounting profit calculated according to the new accounting rules introduced as from 2008. Such Law states that dividends related to all accounting profits generated between January 2008 and 31 December 2013 in excess of the established methods and criteria in force in December 31, 2007, are not subject to withholding tax, and does not integrate the calculation of income tax and social contribution. With reference to 2014, the law is not clear, but tax authorities state that dividends paid in excess of the profit of a company determined as per the accounting rules and criteria that existed until December 2007 should be subject to withholding income tax at the rate of 15%, or 25% if the non-Brazilian holder is domiciled in a country or location that does not impose income tax or where the maximum income tax rate is lower than 20% (“Nil or Low Taxation Jurisdiction”). As of 2015, in view of the termination of the RTT, there would be no differences between the accounting and the taxable profit, so that dividends generated since 2015 should be fully paid with no Brazilian withholding tax implications.
Taxation of Gains
GainsSale of common shares in Brazil
Pursuant to Law No. 10,833/2003, gains from the disposition of assets located in Brazil by a non-Brazilian resident, whether to another non-Brazilian resident or a Brazilian resident, are subject to taxation in Brazil. This regulation applies regardless of whether the disposition of assets is conducted in Brazil or abroad.
In view of the regulation above, gains realized on disposition of common shares are subject to income tax in Brazil, regardless of whether the sale or the disposition is made by a non-Brazilian holder to a non-Brazilian resident or person domiciled in Brazil.Brazilian resident. This is due to the fact that the common shares can beare considered assets located in Brazil for purposes of Law No. 10,833/2003.
Thus, gains, for purposes of taxation ofthe law, gains earnedrealized in a sale or disposition of common shares carried out on a Brazilian stock exchange (which includes transactions carried out on the organized over-the-counter market):
· | are exempt from income tax when assessed on a non-Brazilian holder that (1) has registered its investment in Brazil with the Central Bank under the rules of CMN Resolution No. 4,373/2014, and (2) is not a resident of or domiciled in a Nil or Low Taxation Jurisdiction; or |
· | are subject to income tax at a rate of 15% in the case of gains realized by a |
· | are subject to income tax at a rate of up to 25% in the case of gains realized by a |
In these cases, a withholding income taxThe disposition of common shares carried out on the Brazilian stock exchange is subject to WHT at athe rate of 0.005% will be applied andon the sale value. This WHT can later be offset withagainst the eventual income tax due on the capital gain. A 4,373 Holder that is not resident or domiciled in a Low Tax Jurisdiction is not subject to WHT.
Any other gains assessed on the disposition of the common shares that are not carried out on the Brazilian stock exchange are subject to income tax at (i) a flat rate of 15% for a 4,373/20144,373 holder that is not a resident of or domiciled in a Nil or Low Taxation Jurisdiction; (ii) a flat rateJurisdiction, although different interpretations may be raised to sustain the application of 25.0% for a non-Brazilian holder that is a resident of or domiciled in a Nil or Low Taxation Jurisdiction; (iii)the progressive rates that may vary from 15.0% to 22.5% (15.0% for the part of the gain that does not exceed R$5.0 million, 17.5% for the part of the gain that exceeds R$5.0 million but does not exceed R$10.0 million, 20.0% for the part of the gain that exceeds R$10.0 million but does not exceed R$30.0 million and 22.5% for the part of the gain that exceeds R$30.0 million); ); (ii) a flat rate of 25.0% for a non-Brazilian holder that is a resident of or domiciled in a Nil or Low Taxation Jurisdiction, whether a 4,373 Holder or not, although there are arguments to sustain the application of the progressive rates from 15% to 22.5%, instead of the 25% rate, to the 4,373 Holder; (iii) progressive rates that may vary from 15.0% to 22.5% for all other non-Brazilian holders. holders that are not 4,373 Holders and are not resident in a Low or Nil Taxation Jurisdiction.
If these gains are related to transactions conducted on the Brazilian non-organized-over-the-counternon-organized over-the-counter market with intermediation withholding income taxof a financial institution, or if the capital gains are earned by a holder resident or domiciled in a Low or Nil Taxation Jurisdiction, the WHT of 0.005% shallon the sale value will also be applicableapply and can be used to offset with the eventual income tax due on the capital gain.
In the case of redemption of securitiesordinary shares or ADSs or capital reduction by a Brazilian corporation, such as ourselves,us, the positive difference between the amount effectively received by the non-Brazilian holder and the corresponding acquisition cost is treated, for tax purposes, as capital gain derived from disposition of common shares not carried out on a Brazilian stock exchange.exchange and is therefore subject to the tax treatment described above.
Any exercise of preemptive rights relating to the common shares will not be subject to Brazilian income tax. Any gain on the sale or assignment of preemptive rights relating to the common shares by a non-Brazilian holder of common shares will be subject to Brazilian taxation at the same rate applicable to the sale or disposition of common shares.
There is no assurance that the current preferential treatment for non-Brazilian holders of common shares under CMN Resolution No. 4,373/2014 will continue in the future or that it will not be changed in the future. Reductions in the rate of tax provided for by Brazil’s tax treaties do not apply to the tax on gains realized on sales or exchange of common shares.
Sale of ADSs by non-Brazilian holder to another non-Brazilian holder
Gains realized outside Brazil by a non-Brazilian holder on the disposition of ADSs shouldwould not be subject to Brazilian tax. As mentioned above, according to Law No. 10,833/2003 of December 2003,income tax, based on the disposition of assets located in Brazil by a non-Brazilian holder, whether to other non-Brazilian holder or Brazilian holders, may become subject to taxation in Brazil. Although we believeargument that the ADSs dowould not fall within the definition of assets located in Brazil for the purposes of Law no. 10,833,No. 10,833/2003. However, considering the general and unclear scope of it and the lack of definitive judicial court ruling to act as the leading case in respect thereto, we are unable to predict whether such understanding will ultimately prevail in the courts of Brazil.Brazilian courts.
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In case the ADSs are considered assets located in Brazil, gains on disposition of ADSs by a non-Brazilian holder to either a resident in Brazil or even to a non- Braziliannon-Brazilian resident may be subject to income tax in Brazil according to the rules described below for ADSs or the tax rules applicable to common shares, as applicable.ADSs.
Exchange of ADSs for common shares
Although there is no clear regulatory guidance, the withdrawal of ADSs in exchange for common shares is not subject to Brazilian income tax to the extent that, as described above, ADSs do not fall within the definition of assets located in Brazil for the purposes of Law No. 10,833/2003.2003, and as long as the regulatory rules are duly observed with respect to the registration of the investment before the Central Bank.
Upon receipt of the underlying common shares in exchange for ADSs, non-Brazilian holders may also elect to register with the Central Bank the U.S. dollar amount of such preferred shares or common shares as a foreign portfolio investment under Resolution No. 4,373/2014 or as a foreign direct investment under Law No. 4,131/1962.14,286/2021, as regulated by BCB Resolution No. 278.
Exchange of common shares for ADSs
With reference to theThe deposit of common shares in exchange for ADSs may be subject to Brazilian income tax on capital gains, which in this case is the difference between the acquisition cost of the common shares and the market price of the common shares. For more information, see the rates outlined above on “Item 10.E. Taxation—Taxation of Gains—Sale of common shares may be subject to Brazilian income tax at progressive rates that may vary from 15.0% to 22.5% (15.0% for the part of the gain that does not exceed R$5.0 million, 17.5% for the part of the gain that exceeds R$5.0 million but does not exceed R$10.0 million, 20.0% for the part of the gain that exceeds R$10.0 million but does not exceed R$30.0 million and 22.5% for the part of the gain that exceeds R$30.0 million), except for non-Brazilian holders located in a Nil or Low Taxation Jurisdiction, which, in this case, would be subject to income tax at a flat rate of 25.0%. In some circumstances, there may be arguments to claim that this taxation is not applicable in the case of a non-Brazilian holder that is a 4,373 Holder and is not a resident of or domiciled in a Nil or Low Taxation Jurisdiction.Brazil.”
Discussion on Low or Nil Taxation Jurisdictions
On June 24, 2008, 4, 2010, the Brazilian tax authorities enacted Normative Ruling No. 1,037/2010 listing (1) the countries and jurisdictions considered as Low or Nil Taxation Jurisdictions; and (2) the privileged tax regimes, in which the definition is provided by Law No. 11,727/2008.
A Low or Nil Taxation Jurisdiction is a country or location that (1) does not impose taxation on income, (2) imposes income tax at a maximum rate lower than 17.0% or (3) imposes restrictions on the disclosure of shareholding composition or the ownership of the investment. The list of jurisdictions considered Low or Nil Taxation Jurisdictions by the Brazilian tax authorities is currently provided in Normative Ruling No. 1,037/2010.
Law No. 11,727/2008, was enacted definingwhich became effective as of January 1, 2009, introduced the concept of a “privileged tax regime” in connection with transactions subject to transfer pricing and thin capitalization rules. In this conception, privileged tax regimes are more comprehensive than tax havens. AUnder such law, a “privileged tax regime” is considered to be a jurisdiction which:tax regime that meets any of the following requirements: (i) does not tax income or taxes income at a maximum rate lower than 20.0%17.0%; (ii) grants tax advantages to a non-resident entity or individual (a) without requiring substantial economic activity in the jurisdiction of such non-resident entity or individual or (b) to the extent such non- residentnon-resident entity or individual does not conduct substantial economic activity in the jurisdiction of such non-resident entity or individual; (iii) does not tax income generated abroad, or imposes tax on income generated abroad at a maximum rate lower than 20.0%17.0%; or (iv) restricts the ownership disclosure of assets and ownership rights or restricts disclosure about economic transactions. On 2014 the Brazilian Revenue Service Ordinance 488 was published, reducing from 20% to 17% the minimum threshold for certain specific cases. The reduced 17% threshold applies only to countries and regimes aligned with international standards of fiscal transparency in accordance with rules to be established by the Brazilian tax authorities.
Notwithstanding the fact that the “privileged tax regime” concept was enacted in connection with Brazilian transfer pricing and thin capitalization rules, there is no assurance that Brazilian tax authorities will not attempt to apply the concept of privileged tax regimes to other types of transactions, such as investments in the Brazilian financial and capital markets. We recommend that prospective investors consult their own tax advisors from time to time to verify any possible tax consequences of Law No. 11,727/2008 and Ordinance 488/2014.2008.
Interest Attributed to Shareholders’ Equity
According to Brazilian lawsLaw No. 9,249/1995, as amended, and our bylaws, we may opt to distribute income as interest attributed to shareholders’ equity as an alternative to the payment of dividends.
Distribution of an interest on equity charge attributed to shareholders’ equity with respect to common shares or ADSsdividends and treat such Payments as an alternative form of payment to shareholders, including non-Brazilian holders of common shares or ADSs, is subject todeductible expenses for Brazilian withholdingcorporate income tax atpurposes by the rate of 15% or 25%, in case of a Nil or Low Taxation Jurisdiction holder.
Such payments, subject topayor, as far as certain limitations and requirements,limits are deductible for Brazilian income tax purposes. Thisobserved. Such interest is limited to the daily pro rata variation of the federal government’s long-term interest rate (TJLP), as determined by the Central Bank from time to time, andmultiplied by the sum of certain Brazilian company’s net equity accounts. The amount of deduction cannot exceed the greater of:
(a) | 50% of net income (after the social contribution on net profits and before the provision for corporate income tax, and the amounts attributable to shareholders as interest on net equity) for the period with respect to which the payment is made; or |
(b) | 50% of the sum of retained earnings and earnings reserves as of the date of the beginning of the period with respect to which the payment is made. |
Distribution of an interest on shareholders’ equity with respect to common shares or ADSs is subject to WHT at the rate of 15% or 25%, in case of a Nil or Low Taxation Jurisdiction holder.
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The amount paid to shareholders as interest on shareholders’ equity, net of any withholding tax, may be included as part of the mandatory dividends distributable amount as prescribed in the Brazilian Corporate Law.
We cannot assure you that the Brazilian government will not try to increase the withholding income tax on interest on shareholders’ equity in the future or extinguish it altogether.
Tax on foreign exchange transactions (“IOF/Exchange”)
Pursuant to Decree No. 6,306/2007, dated December 14, 2007, as amended, or Decree No. 6,306/2007, the conversion of Brazilian currency into foreign currency (e.g., for purposes of paying dividends and interest) and the conversion of foreign currency into Brazilian currency may be subject to the Tax on Foreign Exchange Transactions or IOF/Exchange. Currently, for most exchange transactions, the rate of IOF/Exchange is 0.38%. However, exchange transactions carried out for the inflow of funds in Brazil for investments in the Brazilian financial and capital market made by a foreign investor (including a Non-Resident Holder,non-resident holder, as applicable) under the rules of CMN Resolution No. 4,373/2014 are subject to IOF/Exchange at a 0%. The IOF/Exchange rate will also be 0% for the outflow of funds from Brazil related to these types of investments, including payments of dividends and interest on shareholders’ equity and the repatriation of funds invested in the Brazilian market.
On March 15, 2022, the Decree 10,997/2022 was published, establishing an immediate reduction ofNotwithstanding the IOF/Exchange for some transactions, such asrates currently in force, the reduction of the rate applicable to short-term foreign loan operations to zero. In other cases, however, the rate reduction is gradual over the next years and it is expected that the IOF-Exchange rate will be decreased to zero for all transactions as of 2029.
The Brazilian government may increase the rate of the IOF/Exchange to a maximum of 25.0% of the amount of the foreign exchange transaction at any time, but such an increase would not apply retroactively.
Tax on transactions involving bonds and securities (“IOF/Bonds Tax”Bonds”)
TheIn addition to the IOF/Exchange, the IOF may also be imposed on any transactions involving bonds and securities, including those carried out on Brazilian futures and commodities stock exchanges. As a general rule,exchanges (known as IOF/Bonds). Currently, the rate of this tax for transactions involving common shares or ADSs is currently zero. The executive branch, also by a Presidential Decree, may increase the IOF rate by up to 1.5% per day, but only with respect to future transactions.
Other Brazilian Taxes
Certain Brazilian states impose donation and inheritance taxes on donations or bequests made by individuals or entities not domiciled or residing in Brazil to individuals or entities domiciled or residing within such states. There are no Brazilian stamp, issue, registration or similar taxes or duties payable by holders of our shares or ADS.
U.S. Federal Income Tax Considerations
The following discussion is a summary of certain U.S. federal income tax consequences of the acquisition, ownership and disposition of common shares or ADSs as of the date hereof. This discussion applies only to a beneficial owner of common shares or ADSs that is a “U.S. holder.” As used herein, the term “U.S. holder” means a beneficial owner of a common share or ADS that, for U.S. federal income tax purposes, is:
· | an individual who is a citizen or resident of the United States; |
· | a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; |
· | an estate the income of which is subject to U.S. federal income taxation regardless of its source; or |
· | a trust if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury Department regulations to be treated as a U.S. person. |
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds common shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. A U.S. holder that is a partner of a partnership holding common shares or ADSs should consult its tax advisors.
Except where noted, this discussion deals only with common shares or ADSs held as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended or the Code,(“Internal Revenue Code”), and does not deal with U.S. holders that may be subject to special U.S. federal income tax rules, such as dealers in securities or currencies, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, banks or other financial institutions, tax-exempt organizations, insurance companies, real estate investment trusts, regulated investment companies, persons holding common shares or ADSs as part of a hedging, integrated, conversion or constructive sale transaction or a straddle, persons liable for alternative minimum tax, pass-through entities and investors in a pass-through entity, persons owning 10% or more of our stock, or persons whose “functional currency” is not the U.S. dollar.
This discussion is based upon the provisions of the Internal Revenue Code, and existing and proposed U.S. Treasury Department regulations, administrative pronouncements of the Internal Revenue Service or the IRS,(“IRS”), and judicial decisions as of the date hereof. Such authorities may be repealed, revoked or modified so as to result in U.S. federal income tax consequences different from those discussed below, possibly with retroactive effect. In addition, this discussion is based, in part, upon representations made by the Depositarydepositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.
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Except as specifically described below, this discussion assumes that we are not a passive foreign investment company or PFIC,(“PFIC”) for U.S. federal income tax purposes. Please see the discussion under “—Passive Foreign Investment Company Rules” below. Further, this discussion does not address the U.S. federal estate and gift, alternative minimum tax, Medicare tax on net investment income, state, local or non-U.S. tax consequences of acquiring, holding or disposing of common shares or ADSs.
ADSs
In general, for U.S. federal income tax purposes, U.S. holders of ADSs will be treated as the owners of the underlying common shares that are represented by such ADSs. Deposits or withdrawals of common shares by U.S. holders for ADSs will not be subject to U.S. federal income tax. However, the U.S. Treasury Department has expressed concerns that parties involved in transactions wherein depositary shares are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by the holders of ADSs. Accordingly, the analysis of the creditability of Brazilian income taxes described herein could be affected by future actions that may be taken by the U.S. Treasury Department.
Taxation of Dividends
The gross amount of distributions paid to a U.S. holder (including Brazilian taxes that are withheld, if any, and any payments of interest on shareholders’ equity, as described above under “—Brazilian Tax Considerations”) will be treated as dividend income to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such income generally will be includable in a U.S. holder’s gross income as ordinary income when actually or constructively received by the U.S. holder, in the case of common shares, or when actually or constructively received by the Depositary,depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Internal Revenue Code. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, the distribution will first be treated as a tax-free return of capital to the extent of the U.S. holder’s adjusted tax basis in the common shares or ADSs, causing a reduction in such adjusted tax basis (and thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized on a subsequent disposition of our common shares or ADSs), and thereafter as capital gain recognized on a sale or exchange. Because we do not expect to maintain calculations of earnings and profits in accordance with U.S. federal income tax principles, U.S. holders should expect that a distribution will generally be treated as a dividend for U.S. federal income tax purposes. Distributions of additional common shares or ADSs to U.S. holders that are part of a pro rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.
The amount of any dividend paid in reais will equal the U.S. dollar value of the reais received calculated by reference to the exchange rate in effect on the date the dividend is received by the U.S. holder, in the case of common shares, or by the Depositary,depositary, in the case of ADSs, regardless of whether the reais are converted into U.S. dollars. If the reais received as a dividend are not converted into U.S. dollars on the date of receipt, the U.S. holder will have a tax basis in the reais equal to their U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the reais will be foreign currency gain or loss that is treated as U.S. source ordinary income or loss. If dividends paid in reais are converted into U.S. dollars at the applicable spot rate on the day they are received by the U.S. holder or the Depositary,depositary, as the case may be, U.S. holders generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. U.S. holders should consult their own tax advisors regarding the treatment of any foreign currency gain or loss if any reais received by the U.S. holder or the Depositarydepositary or its agent are not converted into U.S. dollars on the date of receipt.
Certain dividends received by certain non-corporate U.S. holders may be eligible for preferential tax rates so long as (1) specified holding period requirements are met, (2) the U.S. holder is not under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property, (3) the company paying the dividend is a “qualified foreign corporation” and (4) the company is not a PFIC for U.S. federal income tax purposes in the year of distribution or the prior year. We do not believe that we were classified as a PFIC for our prior taxable year, nor do we expect to be classified as a PFIC for the current taxable year. We generally will be treated as a qualified foreign corporation with respect to our ADSs so long as the ADSs remain listed on the NYSE. Based on existing guidance, however, it is not entirely clear whether dividends received with respect to the common shares (to the extent not represented by ADSs) will be eligible for this treatment, because the common shares are not themselves listed on a U.S. exchange. U.S. holders should consult their own tax advisors about the application of this preferential tax rate to dividends paid directly on common shares.
Subject to certain complex limitations and conditions (including a minimum holding period requirement), Brazilian income taxes withheld on dividends, if any, may be treated as foreign income taxes eligible for credit against a U.S. holder’s U.S. federal income tax liability. Alternatively, if a U.S. holder does not elect to claim a foreign income tax credit for any foreign taxes paid during the taxable year, all foreign income taxes paid may instead be deducted in computing such U.S. holder’s taxable income. For purposes of calculating the foreign tax credit, dividends paid on our common shares or ADSs will be treated as income from sources outside the United States. For the purposes of the U.S. foreign tax credit limitations, the dividends paid by us should generally constitute “passive category income” for most U.S. holders. The rules governing the foreign tax credit are complex.complex and recent changes to the foreign tax credit rules introduced additional requirements and limitations (though the application of some of these changes has been deferred pending further guidance). U.S. holders should consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
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Taxation of Capital Gains
For U.S. federal income tax purposes, a U.S. holder generally will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a common share or ADS in an amount equal to the difference between the U.S. dollar value of the amount realized for the common share or ADS and the U.S. holder’s adjusted tax basis in the common share or ADS, determined in U.S. dollars. Such gain or loss will generally be capital gain or loss. The capital gain or loss will be long-term capital gain or loss if at the time of sale, exchange or other taxable disposition the U.S. holder has held our common shares or ADSs for more than one year. Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by a U.S. holder will generally be treated as U.S. source gain or loss. A U.S. holder is likely not to be able to useThe rules governing the foreign tax credit are complex and recent changes to the foreign tax credit rules introduced additional requirements and limitations (though the application of some of these changes has been deferred pending further guidance). U.S. holders should consult their tax advisors regarding the availability of foreign tax credits arising from Brazilian income tax imposed, if any, on the disposition of a common share or ADS.ADS under their particular circumstances.
Passive Foreign Investment Company Rules
Based upon our current and projected income, assets, activities and business plans, we do not expect the common shares or ADSs to be considered shares of a PFIC for our current fiscal year (although the determination cannot be made until the end of such fiscal year), and we intend to continue our operations in such a manner that we do not expect to be classified as a PFIC in the foreseeable future. However, because the determination of whether the common shares or ADSs constitute shares of a PFIC will be based upon the composition of our income, assets and the nature of our business, as well as the income, assets and business of entities in which we hold at least a 25% interest, from time to time, and because there are uncertainties in the application of the relevant rules, there can be no assurance that the common shares or ADSs will not be considered shares of a PFIC for any fiscal year. If the common shares or ADSs were shares of a PFIC for any fiscal year, U.S. holders (including certain indirect U.S. holders) may be subject to adverse tax consequences, including the possible imposition of an interest charge on gains or “excess distributions” allocable to prior years in the U.S. holder’s holding period during which we were determined to be a PFIC. If we are deemed to be a PFIC for a taxable year, dividends on our common shares or ADSs would not be qualified dividend income eligible for preferential rates of U.S. federal income taxation. In addition, a U.S. holder that owns common shares or ADSs during any taxable year that we are treated as a PFIC would generally be required to file IRS form 8621. U.S. holders should consult their own tax advisors regarding the application of the PFIC rules (including any information reporting requirements in connection therewith) to the common shares or ADSs.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to dividends in respect of our common shares or ADSs or the proceeds received on the sale, exchange, or redemption of our common shares or ADSs, in each case to the extent treated as being paid within the United States (and in certain cases, outside of the United States) to a U.S. holder unless a U.S. holder establishes its status as an exempt recipient, and backup withholding may apply to such amounts if the U.S. holder does not establish its status as an exempt recipient or fails to provide a correct taxpayer identification number and certify that such U.S. holder is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. holder will be allowed as a refund or credit against such U.S. holder’s U.S. federal income tax liability provided the U.S. holder timely furnishes the required information to the IRS.
In addition, U.S. holders should be aware that additional reporting requirements apply with respect to the holding of certain foreign financial assets, including stock of foreign issuers which is not held in an account maintained by a financial institution, if the aggregate value of all of such assets exceeds US$50,000. U.S. holders should consult their own tax advisors regarding the application of the information reporting rules to our common shares and ADSs and the application of these additional reporting requirements for foreign financial assets to their particular situation.
F. | Dividends and Payments Agents |
Not applicable.
G. | Statements by Experts |
Not applicable.
H. | Documents on Display |
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We are subject to the periodic reporting and other informational requirements of the U.S. Securities Exchange Act of 1934, as amended and supplemented or the (“Exchange Act.Act”). Accordingly, we are required to file reports and other information with the SEC. You may inspect and copy reports and other information filed by us at the public reference facilities maintained by the SEC at 100 F Street, N.W., Washington D.C. 20549. Our filings will also be available at the SEC’s website at http://www.sec.gov. Reports and other information may also be inspected and copied at the offices of the NYSE at 20 Broad Street, New York, New York 10005.
Our website is located at http://www.sabesp.com.br and our investor relations website is located at http://www.ri.sabesp.com.br. (These URLs are intended to be an inactive textual reference only. They are not intended to be an active hyperlink to our website. The information on our website, which might be accessible through a hyperlink resulting from this URL is not, and shall not be deemed to be, incorporated into this annual report.)
We also furnish to the depositary annual reports in English including audited annual financial statementsConsolidated Financial Statements and reviewed quarterly financial statementsConsolidated Financial Statements in English for each of the first three quarters of the fiscal year. We also furnish to the depositary English translations or summaries of all notices of shareholders’ meetings and other reports and communications that are made generally available to holders of common shares.
I. | Subsidiary Information |
On December 11, 2023, we started operating water and sewage services in Olimpia, a municipality located in the interior of the State of São Paulo, through our wholly-owned subsidiary Sabesp Olimpia S.A. This new contract with the municipality of Olimpia, which has approximately 56 thousand inhabitants as of December 31, 2023, is the first bidding process we won without being part of a consortium under the New Legal Framework for Basic Sanitation.
J. | Annual Report to Security Holders |
Not applicable.
ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risk
We are exposed to various market risks, in particular, foreign currency risk and interest rate risk. We are exposed to foreign currency risk because a substantial portion of our financial indebtedness is denominated in foreign currencies, primarily the U.S. dollar, while we generate all of our net operating revenues in reais. Similarly, we are subject to interest rate risk based upon changes in interest rates, which affect our net financial expenses. For furthermore information on our market risks, see Note 5 to our financial statements2023 Consolidated Financial Statements included in this annual report.
Exchange Rate Risk
As of December 31, 2021,2023 and 2020,2022, R$3,296.12,745.9 million and R$3,547.82,775.8 million, or 18.6%14.1% and 20.6%14.6%, respectively, of our debt obligations were denominated in foreign currencies. As a result, we are exposed to exchange rate risks that may adversely affect our financial condition and results of operations, as well as our ability to meet debt service obligations.
Exchange Rate Sensitivity
We estimate that the potential loss to us in connection with U.S. dollar and Yen-denominated debt that would have resulted as of December 31, 2021, 20202023, 2022 and 20192021 from each hypothetical instantaneous and unfavorable 1% change in the U.S. dollar and Yen against the real would have been approximately R$33.027.5 million, R$35.527.8 million and R$63.633.0 million, respectively. Consistent with these estimates, a hypothetical instantaneous and unfavorable 10% change in this exchange rate would have resulted in losses of approximately R$329.6274.6 million, R$354.8277.6 million and R$635.9329.6 million as of December 31, 2021, 20202023, 2022 and 2019,2021, respectively.
The fluctuation of the real in relation to the U.S. dollar and Yen for the years ended December 31, 2023, 2022 and 2021 2020 and 2019 were as follows:were:
Year ended December 31, | Year ended December 31, | Year ended December 31, | ||||||||||
2021 | 2020 | 2019 | 2023 | 2022 | 2021 | |||||||
(in percentages) | (in percentages) | |||||||||||
Depreciation (appreciation) of the real in relation to the U.S. dollar | 7.4 | 28.9 | 4.0 | (7.2) | (6.5) | 7.4 | ||||||
Depreciation (appreciation) of the real in relation to the Yen | (3.9) | 35.7 | 5.3 | (13.5) | (18.4) | (3.9) |
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We havedid not contractedcontract derivative financial instruments in the years ended December 31, 2021, 20202022 and 2019.2021. In April 2024, we entered into derivative instruments (plain vanilla swaps), effective from April 2024 until December 2024, to fully protect us against a devaluation of the real against the U.S. dollar or the Yen.
For furthermore information regarding foreign currency risk, see Note 5.1(a) to our 2020 financial statements2023 Consolidated Financial Statements included in this annual report.
As of December 31, 2021, 20202023, 2022 and 2019,2021, we had no short-term indebtedness outstanding, other than the current portion of long-term debt.
Interest Rate Risk
As of December 31, 20212023 and 2020,2022, R$1,643.01,689.3 million, or 9.3%8.7%, and R$1,624.31,640.4 million, or 9.4%8.7%, respectively, of our total debt outstanding balance denominated in reais was based on variable rates of interest based on the UPR,Standard Reference Unit (Unidade Padrão Referência – “UPR”), which is equivalent to the TR.Reference Rate (Taxa de Referência – “TR”). In addition, as of December 31, 20212023 and 2020,2022, R$7,743.810,223.1 million, or 43.7%52.3%, and R$7,891.99,551.0 million, or 45.7%50.4%, and respectively, of our total debt denominated in reais was subject to interest rates based on the CDI. As of December 31, 20212023 and 2020,2022, R$894.31,334.5 million and R$863.6972.6 million, respectively, of our foreign-currency denominated debt was based on the IDB and the IBRD variable rates of interest, which are determined based on the cost of funding of these multilateral organizations in each period.
As of December 31, 2021,2023 and 2020,2022, we did not have any derivative contracts outstanding which limitedrelated to our exposure to changes in the UPR or the CDI or in the IDB or IBRD variable rates. However, we are obliged by law to invest our excess cash with financial institutions controlled by the Brazilian government. We invest these excess funds, which totaled R$717.9838.5 million and R$396.41,867.5 million as of December 31, 2023 2021 and 20222020,, respectively, mainly in short-term instruments. As a result, our exposure to Brazilian interest rate risk is partially limited by our real-denominated floating interest time deposits investments, which generally earn interest based on the CDI. In addition to our exposure with respect to existing indebtedness, we may become exposed to interest rate volatility with respect to indebtedness incurred in the future.
We estimate that we would have suffered a loss over periods of one year, respectively, of up to R$177.2195.4 million, R$172.6189.6 million and R$132.4177.2 million if a hypothetical instantaneous and unfavorable change of 100 basis points in the interest rates applicable to financial liabilities as of December 31, 2021, 20202023, 2022 and 2019,2021, respectively, had occurred. Consistent with these estimates, a hypothetical instantaneous and unfavorable 1000 basis points change in these interest rates would have resulted in losses of approximately R$1,772.41,953.6 million, R$1,725.91,895.9 million and R$1,324.51,772.4 million as of December 31, 2021, 20202023, 2022 and 2019,2021, respectively. This sensitivity analysis is based on the assumption of an unfavorable 100 basis point movement of the interest rates applicable to each homogeneous category of financial liabilities and sustained over a period of one year, as applicable, and that such movement may or may not affect interest rates applicable to any other homogenous category of financial liabilities.
A homogeneous category is defined according to the currency in which financial liabilities are denominated and assumes the same interest rate movement within each homogeneous category (i.e., U.S. dollars). As a result, our interest rate risk sensitivity model may overstate the effect of interest rate fluctuation on these financial instruments, as consistently unfavorable movements of all interest rates are unlikely.
The tables below provide information about our interest rate-sensitive instruments. For variable interest rate debt, the rate presented is the weighted average rate calculated as of December 31, 2021.2023. For the foreign currency denominated obligations, these amounts have been converted at the selling rates as of December 31, 20212023 and do not represent amounts which may actually be payable with respect to such obligations on the dates indicated.
As of December 31, 2021 | |||||||||||
Expected maturity date | |||||||||||
2022 | 2023 | 2024 | 2025 and after | Total | Average annual interest rate | ||||||
(in millions, except percentages) | |||||||||||
Assets | |||||||||||
Cash equivalents denominated in reais | 717.9 | - | - | - | 717.9 | ||||||
Liabilities | |||||||||||
Long-term debt (current and noncurrent portion) | |||||||||||
Floating rate, denominated in reais indexed by TR or UPR | 149.7 | 139.5 | 138.9 | 1,214.9 | 1,643.0 | 7.8% | |||||
Floating rate, denominated in reais indexed by TJLP | 248.5 | 231.1 | 220.2 | 781.1 | 1,480.9 | 7.2% | |||||
Floating rate, denominated in reais indexed to the IPCA | 206.5 | 124.8 | 177.5 | 2,523.0 | 3,031.8 | 16.2% | |||||
Floating rate, denominated in reais indexed by CDI | 758.4 | 717.6 | 1,039.0 | 5,228.8 | 7,743.8 | 10.5% | |||||
Fixed rate, denominated in reais | 108.4 | 81.6 | 49.9 | 288.2 | 528.1 | ||||||
Floating rate, denominated in U.S. dollars | 138.3 | 133.6 | 91.3 | 531.1 | 894.3 | 3.0% | |||||
Fixed rate, denominated in Yen | 220.8 | 206.8 | 206.8 | 1,767.5 | 2,401.9 | 1.4% | |||||
Total long-term debt | 1,830.6 | 1,635.0 | 1,923.6 | 12,334.6 | 17,723.8 | 9.5% |
As of December 31, 2023 | |||||||||||
Expected maturity date | |||||||||||
2024 | 2025 | 2026 | 2027 and after | Total | Average annual interest rate | ||||||
(in millions, except percentages) | |||||||||||
Assets | |||||||||||
Cash equivalents denominated in reais | 838.5 | - | - | - | 838.5 | ||||||
Liabilities | |||||||||||
Long-term debt (current and noncurrent portion) | |||||||||||
Floating rate, denominated in reais indexed by TR or UPR | 158.7 | 137.3 | 122.1 | 1,271.2 | 1,689.3 | 9.7% | |||||
Floating rate, denominated in reais indexed by TJLP | 309.3 | 262.7 | 250.5 | 545.5 | 1,368.0 | 8.4% |
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Floating rate, denominated in reais indexed to the IPCA | 252.0 | 170.5 | 128.4 | 2,506.3 | 3,057.2 | 9.7% | |||||
Floating rate, denominated in reais indexed by CDI | 1,527.8 | 1,448.5 | 1,478.4 | 5,768.4 | 10,223.1 | 12.7% | |||||
Fixed rate, denominated in reais | 119.0 | 97.7 | 53.8 | 182.4 | 452.9 | ||||||
Floating rate, denominated in U.S. dollars | 94.7 | 98.6 | 68.2 | 1,073.0 | 1,334.5 | 3.2% | |||||
Fixed rate, denominated in Yen | 155.0 | 146.8 | 146.8 | 962.8 | 1,411.4 | 1.2% | |||||
Total long-term debt | 2,616.5 | 2,362.1 | 2,248.2 | 12,309.6 | 19,536.4 | 10.5% |
UPR stands for Standard Reference Unit (Unidade Padrão Referência) and is equal to TR, which was 0.0274%0.0690% per month as of December 31, 2021;2023; CDI stands for Interbank Deposit Rate (Certificado de Depósitos Interbancários), which was 9.15%11.65% per annum as of December 31, 2021;2023; IGP-M was 17.78%3.18% per annum as of December 31, 2021;2023; TJLP stands for Long-term Interest Rate (Taxa de Juros a Longo Prazo), published quarterly by the Central Bank, which was 5.32%6.55% per annum as of December 31, 2021.2023.
The percentage of our indebtedness subject to fixed and floating interest rate is as follows:
As of December 31, | As of December 31, | As of December 31, | ||||||||
2021 | 2020 | 2019 | 2023 | 2022 | 2021 | |||||
Floating rate debt: | ||||||||||
Denominated in U.S. dollars | 2.6% | 2.5% | 19.0% | 4.2% | 2.3% | 2.6% | ||||
Denominated in reais | 78.4% | 76.7% | 48.0% | 83.6% | 82.9% | 78.4% | ||||
Fixed rate debt: | ||||||||||
Denominated in reais | 3.0% | 2.7% | 4.0% | 2.3% | 2.5% | 3.0% | ||||
Denominated in Yen | 13.6% | 15.6% | 16.0% | 7.2% | 9.5% | 13.6% | ||||
Denominated in U.S. dollars | 2.4% | 2.5% | 13.0% | 2.7% | 2.8% | 2.4% | ||||
Total | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
A. | Debt Securities |
Not applicable.
B. | Warrants and Rights |
Not applicable.
C. | Other Securities |
Not applicable.
D. | American Depositary Shares |
In the United States, our common shares trade in the form of ADSs. Following a ratio change effected on January 24, 2013, each ADS represents one common share of our company. Following a stock split which took place on April 25, 2013, we issued two new ADSs for each ADS currently trading and distributed them to our holders on April 29, 2013. The ADSs are issued by The Bank of New York Mellon, as Depositaryour depositary pursuant to a Deposit Agreement.deposit agreement. The ADSs commenced trading on the NYSE on May 10, 2002.
Fees and Expenses
The following table summarizes the fees and expenses payable by holders of ADSs:
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Persons depositing common shares or ADS holders must pay: | For: |
US$5.00 (or less) per 100 ADSs (or portion | Issuance of ADSs, including issuances resulting from a distribution of common shares or rights or other property |
US$5.00 (or less) per 100 ADSs (or portion | Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates |
US$0.05 (or less) per ADS or portion thereof (to the extent not prohibited by the rules of any stock exchange on which the ADSs are listed for trading) | Any cash distribution to you |
A fee equivalent to the fee that would be payable if securities distributed to you had been common shares and the common shares had been deposited for issuance of ADSs | Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS holders |
US$0.05 (or less) per ADS or portion thereof per calendar year (in addition to any cash distribution fee that the depositary has collected during the year) | Depositary services |
Registration or transfer fees | Transfer and registration of common shares on our common share register to or from the name of the depositary or its agent when you deposit or withdraw common shares |
Expenses of the depositary | Cable, telex and facsimile transmissions expenses (when expressly provided in the deposit agreement) Expenses of the depositary in converting foreign currency to U.S. dollars |
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or common share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes | As necessary |
Any other charges incurred by the depositary or its agents for servicing the deposited securities | As necessary |
Payment of Taxes
The Bank of New York Mellon, as depositary may deduct the amount of any taxes owed from any payments to you. It may also sell deposited securities, by public or private sale, to pay any taxes owed. You will remain liable if the proceeds of the sale are not sufficient to pay the taxes. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any proceeds, or send to you any property, remaining after it has paid the taxes.
Reimbursement of Fees
The Bank of New York Mellon, as depositary, has agreed to reimburse us for expenses we incur in connection with the establishment, administration and maintenance of the ADS facility, including but not limited to, NYSE annual stock exchange listing fees, and other DRADR program-related expenses. The depositary has also agreed to pay its standard out-of-pocket expenses for providing services to registered DRADR holders, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, U.S. IRS tax reporting, mailing required tax forms, stationery, postage, facsimile, and telephone calls.
The depositary collects fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
Reimbursement of Fees Incurred in 20212023
From January 1, 20212023 to December 31, 2021,2023, we received reimbursements in the amount of US$1,697,662.10R$5.6 million net of income tax for expenses incurred by us in 2022, related to the administration and maintenance of the ADS facility, including but not limited, any DR program-related expenses.
PART II
ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
Not applicable.
ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Not applicable.
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ITEM 15. | CONTROLS AND PROCEDURES |
A. | Disclosure Controls and Procedures |
We carried out an evaluation under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer and Investor Relations Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, including those defined in the United States Exchange Act Rule 13(a)-15(e), as of the year ended December 31, 2021.2023.
As a result of this analysis, our principal executive officer and principal financial officer concluded
Based upon that (i) our disclosure controls and procedures were both designed and effective at the reasonable assurance level as of December 31, 2021; (ii) that the information required to be disclosed in our filings and submissions under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms; and (iii) that this information is accumulated and communicated to our management, includingevaluation, our Chief Executive Officer and Chief Financial Officer and Investor Relations Officer concluded that, as appropriate to allow timely decisions regarding required disclosure.
of December 31, 2023, the design and operation of the Company's disclosure controls and procedures were not effective because of the material weakness in our internal control over financial reporting described below which has not been remediated.
B. |
Our management is responsible for establishing and maintaining adequate internal controlscontrol over financial reporting.
Ourreporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. A company’s internal control over financial reporting is a process designed by, or under the supervision of, its Chief Executive Officer and Chief Financial Officer, and effected by such company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS as issued by the IASB.
Our internal control over financial reportingIASB, and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, as issued by the IASB, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.that:
· | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; |
· | provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with IFRS as issued by the IASB, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
· | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in the internal control over financial reporting, such that there is a reasonable possibility that a material misstatement in the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer and Investor Relations Officer, our management conducted an assessment of our internal control over financial reporting as of December 31, 20212023 based on the criteria established in “Internal Control - Integrated Framework” issued by COSOthe Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013.
As a result of the Based on such assessment described above,and criteria, our management concluded thathas identified control deficiencies, as of December 31, 2021, we maintained effective internal control over financial reporting based on the criteria established2023, that represent a material weakness in “Internal Control — Integrated Framework” issued by COSO in 2013.
Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting. That report is included below.
For the year ended December 31, 2023, a material weakness was identified related to inadequate design and implementation of certain controls in our revenue billing system, which allowed direct insertion and execution of scripts in the Information Technology (“IT”) production environment, and allowed users with administrative access to change file data during the file transfer interface (FTP) from the revenue billing system to the accounting system without adequately designed and implemented segregation of duties controls. This material weakness could have resulted in undue changes to the billing system, potentially compromising the integrity and reliability of the related interfaces between the revenue billing system and the accounting system.
The material weakness did not result in any identified misstatements to the consolidated financial statements and there were no changes to previously released financial results. Although this material weakness did not result in any material misstatement of our consolidated financial statements for the periods presented, it could lead to a material misstatement of account balances or disclosures. Accordingly, management has concluded that these control deficiencies constitute a material weakness.
C. | Actions for Remediation of Material Weakness |
Management immediately started to address the identified material weakness by conducting an internal review of the controls and systems and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated.
Our management immediately established actions and efforts to remediate the identified material weakness in the functionality of the system and the FTP file interface. These actions included:
· | Removal of the function to execute scripts by the system; |
· | Removal of consultants' privileged access to the system; |
· | Assessment of the execution logs of changes to billing information through the system function, ensuring that they were motivated by a formal demand; |
· | Restriction of write access to the FTP Server by a service account and read-only access for other users; |
· | Retention for 2 years of the log of actions performed in the FTP server; and |
· | Assessment of the FTP server log to identify exceptions that must be justified and forwarded to the manager for validation. |
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D. | Attestation Report of the Registered Public Accounting Firm |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors and Shareholders
Companhia de Saneamento Básico do Estado de São Paulo – SABESP
São Paulo – SP, Brazil
Opinion on internal controlInternal Control over financial reportingFinancial Reporting
We have audited the internal control over financial reporting of Companhia de Saneamento Básico do Estado de São Paulo – SABESPSABESP' (the “Company”) as of December 31, 2021,2023, based on criteria established in the 2013 Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”(the “COSO criteria”). In our opinion, the Company maintained,did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2021,2023, based on criteria established in the 2013 Internal Control – Integrated Framework issued by COSO.COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated statement of financial statementsposition of the Company as of December 31, 2023, the related consolidated statements of income and comprehensive income, changes in equity, and cash flows for the year ended December 31, 2021,2023, and the related notes (collectively referred to as “the consolidated financial statements”)” and our report dated April 27, 2022May 3, 2024 expressed an unqualified opinion on those financial statements.thereon.
Basis for opinionOpinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 15, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, andrisk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitationsA material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness has been identified and described in management’s assessment. This material weakness related to inadequate design and implementation of certain controls in the Company’s revenue billing system, which allowed direct insertion and execution of scripts in the Information Technology production environment and allowed users with administrative access to change file data during the file transfer interface from the revenue billing system to the accounting system without adequately designed and implemented segregation of duties controls.
This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and this report does not affect our report dated May 3, 2024 on those consolidated financial statements.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Grant Thornton Auditores Independentes
May 3, 2024, São Paulo – SP, Brazil
April 27, 2022BDO RCS Auditores Independentes SS Ltda.
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Changes in internal control over financial reporting |
As a result of the implementation of our customer relationship management systemThere have been no changes in October 2021, we made certain changes to our internal control over the financial reporting process during the fiscal year ended December 31, 2021. According to our analysis of its internal control, we concluded2023 that none of these changeshave materially affect,affected, or are reasonably likely to materially affect, our internal control environment over financial reporting.
ITEM 16. | [RESERVED] |
ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
At our boardBoard of Directors’ meeting held on June 29, 2005, we established an audit committee,Audit Committee, as defined under section 3(a)(58) of the Exchange Act. Our Board of Directors has determined that Eduardo de Freitas TeixeiraPerson Pardini qualifies as an audit committeeAudit Committee Coordinator and as Financial Expert, as defined for the purposes of this Item 16A in Item 16 of Form 20-F. Eduardo de Freitas TeixeiraPerson Pardini is an “independent director” within the meaning of the SEC rules.
ITEM 16B. | CODE OF ETHICS |
We have adopted a code of ethics and conduct called the Code of Conduct and Integrity, which applies to all of our employees, including our directors, chief executive officer, chief financial officerChief Executive Officer, Chief Financial Officer and investor relationsInvestor Relations Officer and head of accounting, as well as our suppliers and third-party contractors. To ensure compliance with theour Code of Conduct and Integrity, we have set up an Ethics Commission andethics committee, an external Whistle-Blower Channel, as well aswhistleblowing hotline, an ombudsman, and a customer service channel. In addition, we implemented a Corporate AccountabilityResponsibility Procedure that defines the consequences in cases of violation of the Code of Conduct and an Ombudsman Office as well as a Customer Service that receiveIntegrity, to ensure the receipt of internal and external complaints.reports. The external channel can receive anonymous whistle blowing. The results of the investigations are forwarded to the Audit Committee. Recurring cases are reported to the Ethics Commission,ethics commission, which urges the related departments to develop preventive actions. In 2021, 2122023, 572 events were reported to the Whistle-Blower Channel.whistleblower hotline. During 2021, 522023, 80 of our employees or outsourced employees received penalties (23(21 warnings, six11 suspensions and 2348 dismissals). Our Ethics Commissionethics commission is also responsible for addressing relevant inquiries and interpreting the norms of the Code of EthicsConduct and Integrity for all of our employees. Our Code of Conduct and Integrity is available on our web site at https://ri.sabesp.com.br/en/corporate-governance/code-of-conduct-and-integrity/. If we amend the provisions of our Code of Conduct and Integrity, or if we grant any waiver of such provisions, we will disclose the amendment or waiver on our web site at the same address. You can obtain copies of our Code of Conduct and Integrity, without charge, upon request to sabesp.ri@sabesp.com.br.
Federal Law No. 13,303/16,2016, State Decree No. 62,349/162016 and the new Novo Mercadorules Listing Regulation require the adoption of a Code of Conduct that should include, among other provisions, guidelines to avoid conflicts of interests, forbiddance of fraudulent acts and corruption, whistleblowing channels, protective measures to avoid retaliation regarding whistleblowers, periodic training on the content of such code and sanctions in case of code violations. For additional information, see “Item 16G—16.G. Corporate Governance—Corporate Governance Practices of Brazilian Government-Controlled Companies.”
ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
BDO RCS Auditores Independentes SS Ltda. served as our independent registered public accounting firm for the year ended December 31, 2023. BDO RCS Auditores Independentes SS Ltda.’s activity began with the review of our interim financial information for the third quarter of 2023.
Grant Thornton Auditores Independentes served as our independent registered public accounting firm for the years ended December 31, 2022, 2021 and 2020. Grant Thornton Auditores Independentes’ activity began with the review of our interim financial information for the third quarter of 2020.
KPMG Auditores Independentes served as our independent registered public accounting firm for the years ended December 31, 2019, 2018, 2017, and 2016.
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The following table presents the aggregate fees for professional services and other services rendered to us by BDO RCS Auditores Independentes SS Ltda. in 2023 and Grant Thornton Auditores Independentes and KPMG Auditores Independentes in 2021 and 2020:2022:
Year ended December 31, | Year ended December 31, | Year ended December 31, | ||||
2021 | 2020 | 2023 | 2022 | |||
(in millions of reais) | (in millions of reais) | |||||
Audit Fees(1) | 1.6 | 1.7 | 1.2 | 1.4 | ||
Audit-Related Fees | - | - | - | 0.1 | ||
Tax Fees | - | - | - | - | ||
All Other Fees | - | - | - | - | ||
Total | 1.6 | 1.7 | 1.2 | 1.5 |
(1) | Audit Fees are the fees billed by our independent auditors for the audit of our annual |
Pre-approval policies and procedures
Pursuant to Brazilian law, our Board of Directors is responsible, among other matters, for the selection, dismissal and oversight of our independent registered public accounting firm. Our management is required to obtain the Board of Directors’ approval before engaging an independent registered public accounting firm to provide any audit or permitted non-audit services to us. The Brazilian Federal and State Public Bidding Laws also apply to us with respect to obtaining services from third parties for our business, including the services provided by our independent registered public accounting firm. As part of the bidding process, the independent registered public accounting firm is required to submit proposals, and is then selected by us based on certain criteria including technical expertise and cost.
Except as disclosed above, KPMGGrant Thornton Auditores Independentes and Grant ThorntonBDO RCS Auditores Independentes SS Ltda. did not provide any non-audit services to us.
ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
None.
ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS |
Not applicable.
ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
On October 7, 2020,September 11, 2023, we retained Grant ThorntonBDO RCS Auditores Independentes SS Ltda. as our new independent registered public accounting firm to audit our financial statements, replacing KPMGGrant Thornton Auditores Independentes. KPMGGrant Thornton Auditores Independentes did not resign, decline to stand or was dismissed but rather the appointment of Grant ThorntonBDO RCS Auditores Independentes SS Ltda. occurred due to the expiry of our contract with KPMGGrant Thornton Auditores Independentes, which was limited to 60 months in compliance with legislation applicable to us (Clause 57 of Law No. 8,666/93)1993). The decision to engage Grant ThorntonBDO RCS Auditores Independentes SS Ltda. was approved by our audit committeeAudit Committee at a meeting on September 8, 2020August 9, 2023 and by our board of directors at a meeting on September 17, 2020.August 10, 2023.
KPMGGrant Thornton Auditores Independentes’ audit reports to our financial statements for 20192022 and 2021 did not contain an adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope, or accounting principles.
During the financial years ended December 31, 20192022 and 20182021 and through September 17, 2020,August 10, 2023: (i) we had no disagreements (as defined in Item 16F(a)(1)(iv) of Form 20-F and the related instructions) with KPMGGrant Thornton Auditores Independentes on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMGGrant Thornton Auditores Independentes, would have caused KPMGGrant Thornton Auditores Independentes to make reference to the subject matter of such disagreements in its reports on our financial statements and ICFR - Internal control Over Financial Reporting for such periods.periods, and (ii) there were no “reportable events” requiring disclosure pursuant to Item 16F(a)(1)(v) of Form 20-F.
During the fiscal years ended December 31, 2020,2022 and 20192021 and the subsequent interim period through March 31, 2021,prior to September 30, 2023, neither we nor anyone acting on our behalf has consulted with Grant ThorntonBDO RCS Auditores Independentes SS Ltda. regarding (i) the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements or the effectiveness of internal control over financial reporting, and neither a written report or oral advice was provided to us that Grant ThorntonBDO RCS Auditores Independentes SS Ltda. concluded was an important factor considered by us in reaching a decision as to any accounting, auditing, or financial reporting issue, (ii) any matter that was the subject of a disagreement within the meaning of Item 16F(a)(1)(iv) of Form 20-F, or (iii) any reportable event within the meaning of Item 16F(a)(1)(iv) of Form 20-F, other than these matters in the ordinary course of the audit.
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We have provided KPMGGrant Thornton Auditores Independentes with a copy of this annual report prior to its filing with the SEC and requested that KPMGGrant Thornton Auditores Independentes furnish a letter addressed to the SEC stating whether it agrees with the statements made in this Item 16F. A copy of KPMGGrant Thornton Auditores Independentes’sIndependentes’ letter to the SEC dated April 27, 2021May 3, 2024 is included as Exhibit 15.1 to this annual report.
Prior to the engagement of Grant ThorntonBDO RCS Auditores Independentes SS Ltda. as our independent registered public accounting firm, we had not previously consulted with Grant ThorntonBDO RCS Auditores Independentes SS Ltda. regarding (1) the application of accounting principles to a specific completed or contemplated transaction, (2) the type of audit opinion that might be rendered on our financial statements, or (3) a reportable event (as provided in Item 16F(a)Item16F(a)(1)(v) of Form 20-F) during our two most recent fiscal years and any later interim period, including the interim period up to and including the date that Grant ThorntonBDO RCS Auditores Independentes SS Ltda. was engaged.
ITEM 16G. | CORPORATE GOVERNANCE |
Required Changes to Corporate Governance Practices of Brazilian Government-Controlled Companies
As a Brazilian mixed capital company (sociedade de economia mista), we are subject to Federal Law No. 13,303/16,2016, which requires the adoption of strong corporate governance practices and stringent public bidding procedures when contracting with third parties. Additionally, it requires us to publish periodically a series of documents and reports to demonstrate our level of commitment to our business objectives, the financial impact of those commitments, and our policies and practices in terms of corporate governance and sustainability, among other things. Those documents and reports must be accompanied by further explanations, in plain language, that can be understood by the general public.
Among other requirements, this law sets out the following rules:
· | At least two or 25% |
· | All directors and officers must have the same term of office, which may not be longer than two years. They may be re-elected up to a maximum of three times consecutively. |
· | The performance of the executive officers, directors and members of board committees must be subjected to yearly evaluation with respect to, at a minimum, the following matters: |
(a) | the lawfulness and effectiveness of their management performance; |
(b) | their contribution to the company’s income for the year; and |
(c) | their contribution to furthering the objectives in the company’s business plan and compliance with its long-term strategy. |
The federal law requires that all officers and directors of the company must satisfy certain technical standards, in addition to the general requirement that they be of good reputation and have knowledge of the business sector concerned. These technical standards include satisfying both Point 1 and Point 2 below:
1. | The individual must satisfy at least one of the requirements under (a), (b) or (c) of this Point 1: |
(a) | a minimum of 10 years’ experience in an appointed position, in either the public or private sector, in a business area that is similar or related to the company’s business purpose; or |
(b) | a minimum of four years’ exercise of any one of (i), (ii) or (iii) below: |
(i) | a senior management position in a company with a similar business purpose or similar size; or |
(ii) | a position in the public sector that involves a high degree of trust (i.e., at level DAS-4 or higher); or |
(iii) | a position as professor or researcher in the company’s business sectors; or |
(c) | a minimum of four years’ practice as an independent professional in one or more areas that are directly or indirectly related to the company’s business sectors; |
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and:
2. | The individual must satisfy the requirements of both (a) and (b) of this Point 2: |
(a) | the individual must have received sufficient training for the position for which she or he has been nominated; and |
(b) | the individual must not have been declared ineligible for such position in accordance with applicable law. | |||
Additionally, annually, our directors receive specific training on our Code of Conduct and Integrity, our risk management policy, corporate and capital market legislation, disclosure of information, the Brazilian anticorruption law (Federal Law No. 12,846/2013) (“Anticorruption Law”), and other topics related to the activities of the state-owned companies.
Our corporate governance structure and governing documents, such as our bylaws, Board of Director’s Internal Charter, Executive Board’s Internal Charter and Fiscal Council’s Internal Charter, as well as certain corporate policies, as applicable, are in accordance with Federal Law No. 13,303/16.2016.
These policies, such as the Nominating Policy and Compensation Policy, are also in compliance with the Novo Mercado Listing Regulation and the State Decree No. 62,349/2016.
For a description of corporate governance obligations imposed by Brazilian law on companies listed on the Novo Mercado segment, see “Item 9.C. Markets—Trading on the Brazilian Stock Exchange—The Novo Mercado Segment.” If our Proposed Privatization is consummated, we will need to make certain changes to our corporate governance practices. For further information about our Proposed Privatization, see “Presentation of Financial and Other Information—Proposed Privatization.”
Significant Differences between our Current Corporate Governance Practices and NYSE Corporate Governance Standards
We are subject to the NYSE corporate governance listing standards. As a foreign private issuer, the standards applicable to us are considerably different than the standards applied to U.S. listed companies. Under the NYSE rules, we are required only to: (a) have an audit committee or audit board, pursuant to an applicable exemption available to foreign private issuers, that meets certain requirements, as discussed below, (b) provide prompt certification by our chief executive officerChief Executive Officer of any material non-compliance with any corporate governance rules, and (c) provide a brief description of the significant differences between our corporate governance practices and the NYSE corporate governance practice required to be followed by U.S. listed companies.
In view of Brazilian Law 13,303/2016 and new requirements of Novo Mercado Listing Regulations,Regulation, the following discussion summarizes the significant differences between our current corporate governance practices and those required of U.S. listed companies:
Majority of Independent Directors
The NYSE rules require that a majority of the board must consist of independent directors. Independence is defined by various criteria, including the absence of a material relationship between the director and the listed company. While the Brazilian Corporate Law did not previously have a similar requirement, Federal Law No. 13,303/2016 established that at least 25% of the members of the Board of Directors must be independent. Under the Novo Mercado Regulations, Listing Regulation, our Board of Directors must evaluate the independence of directors before their election to the board. Such evaluation shall be based on a declaration prepared by the nominee. Additionally, Brazilian Corporate Law, Federal Law No. 13,303/2016 and the CVM have established rules that require directors to meet certain qualification requirements applicable to a company’s directors. However, theywe do not require that we have a majority of independent directors,board members, as required under the NYSE rules.rules for U.S. companies. Under our current bylaws, approved on April 29, 2021,28, 2023, our Board of Directors must have a minimum ofat least seven and no more than eleven members, and at least two, or 25% (whichever is greater), of the boardBoard of Directors must be independent members, as established by Federal Law No. 13,303/2016 and as defined under Novo Mercado Regulations.2016. Currently, six of our teneleven directors are independent, pursuant to the Novo Mercado Listing RegulationsRegulation and Federal Law No. 13,303/2016. We believe these rules provide adequate assurances that our directors are independent.
Executive Sessions
NYSE rules require that the non-management directors must meet at regularly scheduled executive sessions without management present. The Brazilian Corporate Law does not have a similar provision. According to this Law, up to one-third of the members of the Board of Directors can be elected from management. Our bylaws provide that the CEO shall integrate the Board of Directors, while holding such position. All other members of our Board of Directors meet the NYSE’s definition of “non-management” directors. There is no requirement in the Brazilian Corporate Law that non-management directors meet regularly without management. However, the Internal Charter of the Board of Directors establishes that, by resolution of the Chairman of the Board, meetings may be held exclusively for external directors, without the presence of executives. Our Board of Directors consists of nine non-management directors.
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Fiscal Council
Under the Brazilian Corporate Law, the Conselho Fiscal, or fiscal council, Council, is a corporate body independent of management and a company’s external auditors.management. The fiscal councilFiscal Council may be either permanent or non-permanent, in which case it is appointed by the shareholders to act during a specific fiscal year.
A fiscal councilFiscal Council is not equivalent to, or comparable with, a U.S. audit committee. The primary responsibility of the fiscal councilFiscal Council is to review management’s activities and a company’s financial statements,Consolidated Financial Statements, and to report its findings to the company’s shareholders. The Brazilian Corporate Law requires fiscal councilFiscal Council members to receive as compensation at least 10% of the average annual amount paid to a company’s executive officers. The Brazilian Corporate Law requires a fiscal councilFiscal Council to be composedconsist of a minimum of three and a maximum of five sitting members and respective alternates.
Under the Brazilian Corporate Law, the fiscal councilFiscal Council may not contain members that (i) are on our boardBoard of directors,Directors, (ii) are on the boardBoard of executive officers,Executive Officers, (iii) are employed by us or a controlled company, or (iv) are spouses or relatives of any member of our management, up to the third degree.
Currently, our fiscal councilFiscal Council consists of five sitting members and his/herfive alternates. The fiscal councilFiscal Council members generally meet once a month.
Audit Committee
NYSE rules require that listed companies have an audit committee that (i) is composedconsists of a minimum of three independent directors who are all financially literate, (ii) meets the SEC rules regarding audit committees for listed companies, (iii) has at least one member who has accounting or financial management expertise and (iv) is governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities. However, as a foreign private issuer, we need only to comply with the requirement that the audit committeeAudit Committee meets the SEC rules regarding audit committees for listed companies to the extent compatible with Brazilian Corporate Law and Federal Law No. 13,303/16 (the2016 an advisory Brazilian State-owned Companies Law). Our audit committee,Audit Committee, which is not equivalent to, or comparable with, a U.S. audit committee, provides assistance to our Board of Directors on matters involving accounting, internal controls, financial reporting and compliance. The audit committeeAudit Committee is mainly responsible for assisting and advising the Board of Directors in its responsibilities to ensure the quality, transparency and integrity of our published financial information and financial statements.our Consolidated Financial Statements. The audit committeeAudit Committee is also responsible for supervising all matters relating to the Code of EthicsConduct and Integrity, accounting, internal controls, the internal and independent audit functions, compliance, risk management and internal policies, such as the related parties’ transaction policy. The audit committeeOur Audit Committee comprises of three members appointed by the Board of Directors, and, pursuant to our bylaws, the members of our audit committeeAudit Committee may be appointed simultaneously to their election to the Board of Directors or by a subsequent resolution. The members of the audit committeeour Audit Committee shall perform their duties for the duration of their respective terms as board members or until otherwise decided by the shareholders’ meeting or by the Board of Directors. In the event that an audit committeeAudit Committee member resigns or is removed from office after exercising any portion of his or her term, such member may only rejoin the audit committeeAudit Committee at least three years from the end of his or her term. The current members of our audit committeeAudit Committee are Eduardo de Freitas Teixeira, Wilson Newton de Mello NetoPerson Pardini, Karolina Fonsêca Lima and Francisco Vidal Luna.Karla Bertocco Trindade. All members meet the independent membership requirements of the SEC and NYSE as well as other NYSE requirements. Eduardo de Freitas TeixeiraPerson Pardini is the committee’s Coordinator and Financial Expert within the scope of the SEC rules covering the disclosure of financial experts on audit committees in periodic filings pursuant to the U.S. Securities Exchange Act of 1934.
Nomination/Corporate Governance and Compensation Committees
NYSE rules require that listed companies have a nomination/corporate governance committee and a compensation committee composedthat consists entirely of independent directors and governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities. Required responsibilities for the nomination/corporate governance committee include, among other things, identifying and selecting qualified board member nominees and developing a set of corporate governance principles applicable to the company. Required responsibilities for the compensation committee include, among other things, reviewing corporate goals relevant to the chief executive officer’s compensation, evaluating the chief executive officer’s performance, approving the chief executive officer’s compensation levels and recommending to the board non-chief executive officer compensation, incentive-compensation and equity-based plans.
Under the Brazilian Corporate Law, we are not required to have a nomination/corporate governance committee or compensation committee. However, Federal Law No. 13,303/162016 and State Decree No. 62,349/2016 established the requirement of a committee with the responsibilities of verifying the nomination process of the members of the management and of the fiscal council.Fiscal Council. In our annual shareholders’ meeting, held on April 27, 2018, our bylaws were amended in order to, among other things, create the Eligibility and Advisory Committee in compliance with Federal Law No. 13,303/2016 and State Decree No. 62,349/2016.
This committee must be composedconsist of up to three members, elected by a general shareholders’ meeting,the Ordinary and Extraordinary General Shareholders’ Meeting, without a fixed term of office. Members must have at least three years’ professional experience in public administration, or three years’ experience in the private sector in an area in which, or related to which, we operate.
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Candidates are assessed based on the CODECState Capital Defense Council (Conselho de Defesa dos Capitais do Estado – “CODEC”) Resolution No. 03/201802/2023 and on our nomination policy, approved by the Board of Directors, which follows the guidelines defined by Federal Law No. 13,303/2016, State Decree No. 62,349/2016 and Novo Mercado Listing Regulations.
Members of the Eligibility and Advisory Committee may attend Board of Directors’ meetings where matters related to this committee are discussed and will have the right to speak, but not to vote, in accordance with our bylaws.
This committee is also responsible for verifying the compliance of the evaluation process of the members of the management and of the fiscal council, as well as providing methodological and procedural support to the Board of Directors to evaluate the performance of officers and other members of statutory committees.Regulation.
The performance evaluation, individual and collective, held annually, of the members of the management and the members of committees, observing the following minimum requirements, according to the terms of Federal Law No. 13,303/2016:
(a) | presentation of the acts of management, regarding the lawfulness and effectiveness of the management; |
(b) | contribution to the earnings for the year; and |
(c) | achievement of the purposes established in the business plan and fulfillment of the long-term strategy. |
We expect that a written charter addressing the committee’s purpose and detailing its required responsibilities will be approved by the Board of Directors.
Under the Brazilian Corporate Law, the total amount available for compensation of our directors and executive officers and for profit-sharing payments to our executive officers is established by our shareholders at the annual general shareholders’ meeting.Ordinary and Extraordinary General Shareholders’ Meeting. The individual compensation and profit-sharing of each executive officer, as well as the compensation of our board and committee members is set out according to our remuneration policy, approved by the Board of Directors, which follows the guidelines from the State of São Paulo state government and the CODEC (State Capital Protection Board).CODEC.
Shareholder Approval of Equity Compensation Plans
NYSE rules require that shareholders be given the opportunity to vote on all equity compensation plans and material revisions thereto, with limited exceptions. We do not currently have any equity compensation plan. If such a plan were to be implemented, there is no requirement under Brazilian Corporate Law for the plan to be approved by our shareholders. However, if the issuance of new shares in connection with any equity compensation plan exceeded the authorized capital under our bylaws, the increase in capital would require shareholder approval.
Corporate Governance Guidelines
NYSE rules require that listed companies adopt and disclose corporate governance guidelines. We are in compliance with the adoption of corporate governance provisions and guidelines required under the Novo Mercado Regulations, Listing Regulation, Federal Law No. 13,303/2016 and State Decree No. 62,349/2016. SeeFor more information, see “Item 9.C Markets—Trading on the Brazilian Stock Exchange—The Novo Mercado Segment” and “Item 16.G—Corporate Governance—Required Changes to Corporate Governance Practices of Brazilian Government-Controlled Companies,” our Report on the Brazilian Code of Corporate Governance and our policies available on “Corporate Governance” section of our Investor Relations website. We believe that such corporate governance guidelines applicable to us do not conflict with the guidelines established by the NYSE. Our corporate governance guidelines and practices are available on our website at www.sabesp.com.br at the following location: Investor Relations – Corporate Governance.
Code of EthicsConduct and Integrity
NYSE rules require that listed companies adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. The adoption and disclosure of a formal code is not required under the Brazilian Corporate Law.
However, Federal Law No. 13,303/2016, State Decree No. 62,349/2016 and the Novo Mercado RegulationsListing Regulation require the adoption of a Code of Conduct and Integrity that should include, among other provisions, guidelines to avoidregarding conflicts of interests, forbiddance of fraudulent acts and corruption, whistleblowing channels, bribes, protective measures to avoid retaliation regarding whistleblowers, periodic training on the content of such code and sanctions in case of code violations. We adopt and disclose a Code of EthicsConduct and Integrity which complies with the requirements made by the Brazilian laws and regulations, as well as addresses the matters required to be addressed by the applicable NYSE and SEC rules.
We have had a Code of EthicsConduct and Integrity since 2006, and the latest version was approved by the Board of Directors in February 2021. It is available on https://ri.sabesp.com.br/en/corporate-governance/code-of-conduct-and-integrity/, and on the Brazilian Securities Commission (www.cvm.com.br).
The Code of Conduct and Integrity is introduced to Company’s Officers,our Board of Directors, Board of Executive Officers, Board of Auditors, Audit Committee, Eligibility and Counselling Committee and to all the other employees during the integration program which is tailored to their positions.
Moreover, we require our suppliers and other related third-party to comply with our Code of EthicsConduct and Integrity, as well and thethrough a contractual agreement. Any non-compliance acts areis subjected to sanctions under the contract and other measures according tounder applicable laws and regulations.
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Any breach of the Code of Conduct and Integrity is subject to internal investigations and disciplinaries measures applicable on a case-by-case basis. The Code of Conduct and Integrity is frequently updated in order to comply with new laws and regulations.
Internal Audit Function
NYSE rules require that listed companies maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control. Our internal audit department is connected to the Board of Directors through the audit committee and reports to our Chief Executive Officer.Officer and is overseen by our Audit Committee. Our internal audit is responsible for evaluating (i) the adequacy of internal controls, (ii) the effectiveness of the risk management and of the governance processes, (iii) the reliability of the process of collecting, measuring, classifying, accumulating, recording and disclosing events and transactions, to prepare financial statements,Consolidated Financial Statements, and (iv) the proper application of the principle of segregation of duties, to avoid the occurrence of conflicts of interest and fraud.
Anticorruption Compliance
The Anticorruption Law (Federal Law No. 12,846, of August 1, 2013 (the “Anticorruption Law” or the “Clean Company Act”)12,846/2013), as further regulated by Decree No. 8,420/2015,11,129/2022, introduced to the Brazilian legal system the concept of strict liability for legal entities involved in harmful acts against the national and foreign public administration, as defined in the Anticorruption Law, subjecting the violation company to penalties both in administrative and civil law. Similar to the Foreign Corrupt Practices Act (FCPA) of the United States, to which we are also subject, the Anticorruption Law considers that an effective implementation of Compliance Programscompliance programs may be used to mitigate the administrative penalties to be applied as a consequence of a harmful act against the public administration, which can be up to 20% of the company’s annual gross revenue.
We haveadopt a Compliance Program which was approved by theour Board of Directors. Periodically, our Audit Committee, an advisory body of our Board of Directors, and is updated periodically.monitors our Compliance Program. The last update was in December 2018.monitoring took place on November 22, 2023. The program was established in accordance with the Brazilian Anticorruption Law, the Foreign Corrupt Practices Act, Federal Law No. 13,303/2016, the Novo Mercado Regulations, Listing Regulation, and the guidelines of the Brazilian Office of the Comptroller General’s (CGU) guidelines.General (“CGU”).
As a semi-public company, ourOur Compliance Program encompassesaddresses two distinct situations, – active corruption and passive corruption as established(as defined in Brazilian anti-corruption legislation –the Anticorruption Law) and follows the recommendations of the Organization for Economic Cooperation and Development, the United Nations Office on Drugs and Crimes, and the World Bank to establish an ethicalethics culture. Our programCompliance Program incorporates and focuses on highsenior management, structural functioning, the provision of complaint hotlines, monitoring of third-party relations, governance and internal controls, risk management, training and communication.
The programCompliance Program currently consists ofincludes a set of internal mechanisms and procedures related to integrity, monitoring and incentives to report irregularities. The programCompliance Program also focuses on the effective implementation of theour Code of Conduct and Integrity as well as other policies and guidelines aimed at preventing fraud, bribery, corruption and other harmful acts against the public administration.
We periodically review our managementhandling of anti-fraud, anti-bribery and anti-corruption measures, consolidating the measures in a structured corporate program. In 2021,2023, we resumedinitiated a new cycle of mappingour integrity risk analysis and analyzing the risks of fraudcontrol (fraud, bribery and corruption and of the controls necessary to the business profile. Currently, we review 14 macro processes with greater exposure to the risks of fraud and corruption, totaling 54 assessed processes.corruption). Our current portfolio hasrisk review maps out 19 risks. For risks classified as moderate to critical, we implement mitigating actions.
As part of the program,Compliance Program, we created the Conduct and Integrity Learning Track (Trilha de Aprendizagem de Conduta e Integridade) which consists of a continuous training program directed to theaimed at our entire company staff, reinforcing the importance of acting in accordance with laws, regulations and internal policies. The main topics covered are: integrity, ethics, sexual and moral harassment, diversity, corruption, fraud and conflicts of interest.
In 2021,2023, for employees who are involved in processes with greater exposure to integrity risks, we also conducted online trainingtrainings on Preventingpreventing and Combating Fraudcombating fraud and Corruptioncorruption, based on national and international standards to disseminate best practices and adoptfor a culture of integrity for our employees.integrity. We also train our directors, officers and members of theour Fiscal Council on issues related to corporate governance, especially corporate and integritycapital markets legislation, disclosure of information, our Code of Conduct and Integrity, the Anticorruption Law, among others.
In 2023, we providealso carried out specific training on anti-corruption legislation for the Directors and Officers of our Special Purpose Companies (“SPEs”), including the teams from our new business and compliance areas.
To engage employees who work inand leadership on topics such as nepotism, conflicts of interest, donations, sponsorships, gifts, and hospitality, among others, we covered the complaints investigation process.entire company with the moments of compliance project (Projeto Momentos de Conformidade), which consisted of numerous online meetings lasting between 45 to 60 minutes with all our areas to discuss integrity related topics.
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Further, we provide the Trust Channel,a confidential channel, which is a tool made available to employees make inquiries on any questions related to the ethical behavior within our business. We ensure confidentiality and anonymity to whoever uses this tool.channel.
We also providehave complaint hotlines to report cases of fraud, bribery, corruption, unlawful acts, breaches of the Code of Conduct and Integrity and other activities that could harm our interests and principles. This information is available to the general public and is easily accessible and identifiable on our website. Anonymity is guaranteed in all cases, except when there is a court decision to the contrary.
For related-party transactions, the establishment of special purpose vehicles or when required,When entering into business and professional relationships with higher risks, we carry out background checks are adopted in order to detect information relating to history and reputation, relationships with public agencies or agents, company corporate structure and restrictive lists, including corruption proceedings and investigations, to ensure that the terms and conditions of the transaction do not result in a material risk of violation of applicable anti-corruption laws.laws or a reputational exposure, in order to assist the decision making and risk management of those responsible for the transactions.
Among theour compliance practices, we encourage the adoption of integrity measures among our suppliers by providingrequiring contractual clauses to ensure compliance with ethical standards and the prohibition of fraud and corruption practices, in addition to monitoring related party transactions.
OurIn recognition of our commitment to ethical behavior in our business practices, we scored more than nine points in the self-assessment carried out in 2023 by the Integrity Indicators of the Ethos Institute, demonstrating a high level of maturity in our Compliance Program.
The department responsible for the application and improvement of the Compliance Programour compliance program acts with autonomy, independence and impartiality and reports to the CEO.impartiality. Depending on the individuals involved in the allegations, the department may file a report to the Board of Directors, Fiscal CommitteeCouncil and Audit Committee, to which it also makes periodical reports on its activities.
As a result of our efforts, we did not register any corruption cases in 2021.2023.
Citizens’ Access to Information at Sabesp
Federal Law No. 12,527/2011 (LAI), regulated by State Decree No. 58.052/2012 and State Decree No. 61.559/201568.155/2023 determines that government entities must create Citizen Information Services – SIC units which receive and manage information requests from the public, and make available to citizens information requested or otherwise provided the reasons for denial of such information requests.
In order to comply with LAI, we implemented the Citizen Information Service – SIC, structuring the internal flow of information to serve citizens within the terms provided by this law. We also made a Transparency Portal (Portal da Transparência) available on our website, which includes basic information required by law, software for citizens to request information and a list of frequently requested information, according to the standards of the State of São Paulo state government.
These duties are linked to the Risk Management areaSuperintendence of Compliance and Risks (Superintendência de Conformidade e Riscos) whose main assumption is the transparency, quality of information and compliance with strategic rules of a listed company.
ITEM 16H. | MINE SAFETY DISCLOSURE |
Not applicable.
ITEM 16I. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
Not applicable.
ITEM16J. | INSIDER TRADING POLICIES |
Not applicable.
ITEM16K. | CYBERSECURITY |
Cybersecurity Risk Management and Strategy
In the ever-evolving digital age, effective cybersecurity management has become an undeniable priority for organizations of all sizes. In this context, a proactive and comprehensive approach is essential to ensure the protection of digital assets and maintain the trust of customers and stakeholders.
Our business involves the collection, storage, processing and transmission of customers’, suppliers and employees’ personal or sensitive data. As a result, we may be subject to breaches of the information technology systems we use for these purposes. See "Item 3.D—Risk Factor—Risks Relating to Our Business—Our business is subject to cyberattacks and security and privacy breaches" for further details on this matter. When we face a cybersecurity incident, we believe we act quickly to contact the responsible teams. We then develop an action plan to resolve the issue and subsequently identify improvement measures to be implemented quickly to prevent the incident from becoming recurring.
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Our action plan is prepared by our cybersecurity team in collaboration with other responsible parties impacted by the incident. This plan is designed to address not only immediate measures, but also short, medium and long-term strategies. This plan is subject to analysis by our audit, risks and LGPD areas to ensure its compliance and effectiveness. Furthermore, in cases where the severity of the incident is considerable for us, the incident is promptly communicated to our Board of Directors and/or our Audit Committee for assessment. We believe we adopt a proactive stance, with investment in adequate resources, which makes it possible to mitigate cyber threats and protect our digital assets in the modern age. Additionally, we engage independent third parties on an as-needed basis to assess our cybersecurity capabilities, including to identify ongoing situations and assess how to mitigate any impacts on us and, if necessary, take preventive action, as well as to follow global market trends. The results of these assessments are shared with our audit committees, including the Fiscal Council. We believe the hiring of new professionals (cybersecurity service providers, auditors, consultancies, among others) reflects our dedication to continuously improving our processes and adopting what we understand to be cutting-edge tools, all with the aim of maintaining a safe environment. However, we also recognize the importance of a quick response to specific incidents when necessary. Therefore, we have flexibility to carry out targeted hirings in response to emerging demands. Our surveillance covers not only internal systems, but also service providers that have access to our environment to ensure all aspects of our ecosystem are being constantly monitored and protected.
Given we consider cyber risk to be one of our main corporate risks, we work on the various layers of security, implementing security barriers at different levels of the environment, including firewalls, antivirus, access policies, among others. Diversifying defenses increases infrastructure resilience and reduces the likelihood of successful cyber-attacks. We periodically analyze cyber risks and identify possible vulnerabilities, providing actions to mitigate them. All our employees, as well as service providers, are part of this scope, and actions are taken according to each identified situation.
We believe that one of the important points for combating cyber-attacks is an organizational culture that values cyber security, which is essential for strengthening defenses against digital threats. Accordingly, we take continuous action to strengthen this culture, including disseminating guidance booklets, lives and videos on the matter. Individuals should be aware of recommended security practices and should recognize signs of suspicious activity and understand their responsibilities in protecting the organization's data. Additionally, we have an information security procedure in place for information technology, available to all employees, which outlines conduct, responsibilities and operational boundaries for employees and business units.
As of the date of this annual report, we have not identified any risks from cybersecurity threats that have materially affected or are reasonably likely to materially affect our business strategy, results of operations, or financial condition. See "Item 3.D—Risk Factor—Risks Relating to Our Business—Our business is subject to cyberattacks and security and privacy breaches." for further details on this matter.
Cybersecurity Governance
We have instituted a governance structure for monitoring cyber risks. Our audit committees monitor the matter in meetings held at least once a year and, in such meeting, the information technology department presents the actions taken, facilitating discussions and enabling the proposal of new actions to address the matter, as necessary. These committees monitor these actions periodically, whether at ordinary or extraordinary meetings. We have a Corporate Risks area responsible for carrying out annual assessments of the main risks we face, including cyberattacks. In this assessment, we consider both the potential impact and the probability of occurrence of each cyber risk. Based on these criteria, we determine the necessary level of reporting, which ranges from reporting to our local management (for low impact risks and remote probability) to reporting to our Board of Directors (for high impact risks and imminent probability).
We have also established a security area as part of our organizational structure that acts continuously and promptly on issues related to cybersecurity, with ongoing reporting to superiors on the progress of its activities. The reporting process takes place at meetings with our Chief Information Officer and at our Audit Committee’s annual meeting, where we present the progress of cybersecurity initiatives led by our security team, including our monitoring measures related to the risk of cyberattack to ensure the transparency of our activities and strategic guidance. The security area team is responsible for assessing and managing cybersecurity risks and has in-depth expertise in information and technology security, with a solid academic background and extensive professional experience in relevant areas, such as cybersecurity, computer networks, and other related topics. The team is prepared to deal with the challenges that cybersecurity presents.
In addition, we have a Security Operations Center (SOC) dedicated to the continuous monitoring of our systems, who reports to our security team. Using specialized processes, procedures and tools, the SOC aims to identify any potential security incidents. If a potential threat is detected, protocols are activated, with the mobilization of responsible teams and the use of appropriate tools. After confirming the incident, we conduct a thorough analysis of its causes, identifying the mitigation and/or remediation measures necessary to resolve the problem. During this process, we consider the relevance of each action for the effective resolution of the incident.
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PART III
ITEM 17. | FINANCIAL STATEMENTS |
Not applicable.
ITEM 18. | FINANCIAL STATEMENTS |
The following financial statements,Consolidated Financial Statements, together with the reports of the independent registered public accounting firms, are filed as part of this annual report. SeeFor more information, see “Index to Consolidated Financial Statements.”
ITEM 19. | EXHIBITS |
(a) Index to Consolidated Financial Statements
Page | |
Report of BDO RCS Auditores Independentes SS Ltda. (PCAOB 5485) | F-2 |
Report of Grant Thornton Auditores Independentes (PCAOB 5270) | F-5 |
Statements of Financial Position as of December 31, 2023 and 2022 | F-6 |
Income Statements for the Years ended December 31, 2023, 2022 and 2021 | F-8 |
Statements of Comprehensive Income for the Years ended December 31, 2023, 2022 and 2021 | F-9 |
Statements of Changes in Equity for the Years ended December 31, 2023, 2022 and 2021 | F-10 |
Statements of Cash Flows for the Years ended December 31, 2023, 2022 and 2021 | F-12 |
Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 | F-14 |
(b) List of Exhibits
Item | Description |
1.1* | Bylaws of the Registrant (English translation) (incorporated by reference to the Form 6-K filed on |
2.1 | Description of Securities registered under Section 12 of the Exchange Act. |
4.1* | Agreement between the Registrant and the State Department of Water and Energy (Departamento de Águas e Energia Elétrica—DAEE), dated April 24, 1997 (English translation) (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form F-1 filed on April 8, 2002 |
4.2* | Protocol of Understanding between the Registrant and the State of São Paulo, dated September 30, 1997 (English translation) (incorporated by reference to Exhibit 10.2 to the April 8, 2002 Form F-1). |
4.3* | Agreement between the Registrant and the State of São Paulo, through the Secretariat of Finance, dated September 10, 2001 (English translation) (incorporated by reference to Exhibit 10.3 to the April 8, 2002 Form F-1). |
4.4* | Agreement between the Registrant and the State of São Paulo, through the Secretariat of the Treasury, dated December 11, 2001 (English translation) (incorporated by reference to Exhibit 10.4 to the April 8, 2002 Form F-1). |
4.5* | Amendment to the Agreement, dated April 24, 1997, between the Registrant and the DAEE, dated March 16, 2000 (English translation) (incorporated by reference to Exhibit 10.5 to the April 8, 2002 Form F-1). |
4.6* | Amendment to the Agreement, dated April 24, 1997, between the Registrant and the DAEE, dated November 21, 2001 (English translation) (incorporated by reference to Exhibit 10.6 to the April 8, 2002 Form F-1). |
4.7* | First Amendment to the Agreement, dated December 11, 2001, between the Registrant and the State of São Paulo, dated March 22, 2004. (English translation) (incorporated by reference to Exhibit 4.7 to the Form 20-F filed on June 28, 2004). |
4.8* | Second Amendment to the Agreement, dated December 11, 2001, between the Registrant and the State of São Paulo, dated December 28, 2007. (English translation) (incorporated by reference to the Form 6-K filed on February 25, 2008). |
4.9* | Third Amendment to the Agreement, dated December 11, 2001, between the Registrant and the State of São Paulo, dated November 17, 2008. (English translation) (incorporated by reference to the Form 6-K filed on December 23, 2008). |
4.10* | Commitment Agreement, between the Registrant and the State of São Paulo, dated March 26, 2008. (English translation) (incorporated by reference to the Form 6-K filed on April 28, 2008). |
4.11* | |
The Audit Committee Charter dated August 12, 2021 (English translation) (incorporated by reference to the Form 6-K filed on September 2, 2021). | |
Convention between the State and the city of São Paulo, dated June 23, 2010, with the intermediation and consent of the Registrant and of ARSESP (English translation) (incorporated by reference to the Form 6-K filed on July 13, 2010). | |
Contract to provide public water supply and sewage services, among the Registrant, the State of São Paulo and the city of São Paulo, dated June 23, 2010 (English translation) (incorporated by reference to the Form 6-K filed on July 13, 2010). |
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP
By: | /s/ | |
Name: Title: Chief Executive Officer | ||
By: | /s/ | |
Name: Title: Chief Financial Officer and Investor Relations Officer |
Date: April 27, 2022
May 3, 2024
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Consolidated Financial Statements as atof December 31, 20212023 and 20202022
And for the years ended
December 31, 2021, 20202023, 2022 and 20192021
F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
São Paulo - SP, Brazil
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statement of financial position of Companhia de Saneamento Básico do Estado de São Paulo - SABESP (the “Company”) as of December 31, 2023, the related consolidated statements of income and comprehensive income, changes in equity, and cash flows for the year ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated May 3, 2024 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F-2 |
1. | Concession agreements / Program contracts / Service contracts (Intangible assets) |
As disclosed in Note 15 to the consolidated financial statements, the Company has intangible assets of R$ 44,012,858 thousand as at December 31, 2023. The majority of the intangible assets is comprised of assets that are recorded as a result of the concession agreements, program contracts and service contracts and their costs are transferred from contract assets. These intangible assets begin to be amortized when they become available for use, in the appropriate condition and when the assets operation begin. The amortization reflects the period during which the Company expects to consume the economic benefits arising from the assets, whether corresponding to the concession term or the assets’ useful lives. The intangible assets amortization ceases when the assets are fully consumed or written-off, whichever occurs first, or when there is indication of impairment.
We identified the evaluation of the intangible assets impairment as a critical audit matter because of management’s judgments and assumptions used in the impairment analysis, including: (i) considerations of regulatory requirements, (ii) expected useful lives of intangible assets, and (iii) expected start date of amortization and completion date of the intangible asset construction. Auditing management’s judgments and assumptions involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters.
The primary procedures we performed to address this critical audit matter included:
▪ | Evaluating the appropriateness of management’s policies and procedures to record intangible assets including management’s assessment of current and expected regulations and potential impact of such regulations on assumptions used in the impairment analysis. |
▪ | Testing the reasonableness of management’s judgments and assumptions used in the impairment analysis through: (i) assessing the reasonableness of the methodology used by management to develop the impairment analysis with regard to events or changes in circumstances that would indicate the carrying amount may not be recoverable, (ii) testing the completion date and the start date of amortization for a sample of intangible assets, and (iii) testing the reasonableness of the expected useful lives of intangible assets for a sample of assets against concession terms and expected useful lives of similar assets. |
2. | Materials acquired and recorded under contract assets |
As disclosed in Note 14 to the consolidated financial statements, the Company has contract assets totaling R$ 7,393,096 thousand, as at December 31, 2023. The contract assets (construction work in progress) represent the right to receive consideration for goods or services transferred to customers. Contract assets include various types of items acquired including inventory which have not yet been applied to the construction in progress.
We identified the existence of certain balances of inventory acquired and recorded under contract assets as a critical audit matter because of management’s processes and procedures to support the existence of certain of these balances. Auditing these balances involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters.
The primary procedures we performed to address this critical audit matter included:
§ | Testing management’s inventory counting procedures related to these balances, including assessment of the reasonableness of certain reconciling items. |
3. | Public Private Partnerships (PPPs) – PPP São Lourenço |
As disclosed in Note 15 (d) to the consolidated financial statements, the Company has transactions related to PPPs entered into based on Law No. 11.079/2004. As at December 31, 2023, PPPs liabilities totaled R$ 3,286,614 thousand, of which R$ 3,233,852 thousand refers to PPP “Sistema Produtor São Lourenço (“PPP São Lourenço”). As for PPP São Lourenço, the construction work began in April 2014 and PPP São Lourenço began operating in full on July 10, 2018.
F-3 |
We identified the PPP São Lourenço liability balance as a critical audit matter because of management’s judgments and assumptions used in the calculation of the liability balance. Auditing management’s judgments and assumptions involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters.
The primary procedures we performed to address this critical audit matter included:
§ | Evaluating terms and conditions of the PPP São Lourenço agreement. |
§ | Testing management’s calculation of the PPP São Lourenço liability balance through: (i) testing inputs against the agreement and other supporting evidence obtained during the audit, (ii) evaluating the reasonableness and accuracy of formulas used by management in the calculation which supported the PPP São Lourenço liability balance, and (iii) assessing the reasonableness of the effective interest rate used in the management’s calculation. |
We have served as the Company's auditor since 2023.
May 3, 2024, São Paulo-SP, Brazil
BDO RCS Auditores Independentes SS Ltda.
F-4 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
São Paulo – SP
Opinion on the financial statements
We have audited the accompanying balance sheets of Companhia de Saneamento Básico do Estado de São Paulo – SABESP (the “Company”) as of December 31, 2021 and 2020,2022, and the related statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the two yeartwo-year period then ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020,2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021,2022, in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated April 27, 2022 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
1. Provisions for environmental claims (Notes 3.15, 6.2 (e) and 20)
The Company is a defendant in judicial and administrative environmental lawsuits, arising from the normal course of its operations, related to fines applied by public and competent authorities on potential environmental damage caused by the Company in the municipalities where it operates. This area requires critical judgments and evaluations made by management, supported by its legal counsel, in determining the estimates related to the recognition of liabilities, measurement of involved amounts, evaluation of the likelihood of loss in the various disputes and appropriate disclosure of existing lawsuits and litigations (contingent liabilities), in view of their relevance in relation to the financial statements.
The environmental claims classified as probable loss and subject to a provision recorded in the financial statements amounted to approximately R$ 331 million as of December 31, 2021. Additionally, the contingent environmental liabilities, classified as possible, therefore, not subject to recognition of a provision according to the IFRS, came to approximately R$ 3 billion as of December 31, 2021.
Certain laws and regulations in Brazil have a high level of complexity and, therefore, the measurement, recognition, classification and disclosure related to such lawsuits require a certain level of judgment by the Company’s management for the recognition of loss estimates and disclosures in its financial statements and, for this reason, we consider this issue to be a critical audit matter.
The primary procedures we performed to address this critical audit matter included:
/s/ Grant Thornton Auditores Independentes Ltda.
We have served as the Company’s auditor since 2020.
São Paulo, Brazil
April 27, 2022from 2020 to 2022.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders, Board of Directors of and Management of
Companhia de Saneamento Básico do Estado de São Paulo – SABESP
São Paulo – SP
Opinion on the Financial Statements
We have audited the accompanying Income statement, comprehensive income, changes in equity, and cash flows of Companhia de Saneamento Básico do Estado de São Paulo – SABESP (the Company) for the year ended December 31, 2019, and the related notes (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.
We served as the Company’s auditor from 2016 to 2020.
/s/ KPMG Auditores Independentes
São Paulo, SP, BrasilBrazil
April 30, 2020
Auditor Firm ID 1124April 25, 2023
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Financial Position as of December 31, 2021 and 2020
Amounts in thousands of reais
Assets | Note | December 31, 2021 | December 31, 2020 | |||
Current | ||||||
Cash and cash equivalents | 7 | 717,929 | 396,401 | |||
Financial investments | 8 | 2,433,385 | 3,411,146 | |||
Trade receivables | 10(a) | 2,695,077 | 2,204,029 | |||
Accounts receivable from related parties | 11(a) | 173,657 | 168,054 | |||
Inventories | 113,506 | 104,848 | ||||
Restricted cash | 9 | 28,467 | 35,742 | |||
Recoverable taxes | 18(a) | 276,104 | 22,672 | |||
Other assets | 64,873 | 97,946 | ||||
Total current assets | 6,502,998 | 6,440,838 | ||||
Noncurrent | �� | |||||
Trade receivables | 10(a) | 223,234 | 246,957 | |||
Accounts receivable from related parties | 11(a) | 644,895 | 638,591 | |||
Escrow deposits | 141,667 | 164,942 | ||||
Water and Basic Sanitation National Agency – ANA | 20,666 | 26,463 | ||||
Other assets | 161,369 | 148,164 | ||||
Investments | 12 | 79,437 | 63,417 | |||
Investment properties | 13 | 46,126 | 46,274 | |||
Contract assets | 14 | 8,550,102 | 7,969,164 | |||
Intangible assets | 15 | 36,503,834 | 34,405,575 | |||
Property, plant and equipment | 16 | 291,157 | 268,251 | |||
Total noncurrent assets | 46,662,487 | 43,977,798 | ||||
Total assets | 53,165,485 | 50,418,636 |
|
F-5 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Consolidated Statements of Financial Position as of December 31, 20212023 and 20202022
Amounts in thousands of reais
Liabilities and equity | Note | December 31, 2021 | December 31, 2020 | |||
Current | ||||||
Trade payables and contractors | 236,763 | 263,741 | ||||
Borrowings and financing | 17 | 1,830,617 | 3,034,449 | |||
Labor and social obligations | 21 | 426,616 | 410,943 | |||
Taxes and contributions | 18(b) | 257,130 | 266,819 | |||
Interest on capital | 24(b) | 548,006 | 231,611 | |||
Provisions | 20(a) | 809,821 | 760,209 | |||
Services payable | 23 | 469,027 | 453,750 | |||
Public-Private Partnership - PPP | 15(d) | 142,757 | 130,207 | |||
Program Contract Commitments | 15(c)(iv) | 77,652 | 162,541 | |||
Other liabilities | 294,538 | 185,860 | ||||
Total current liabilities | 5,092,927 | 5,900,130 | ||||
Noncurrent | ||||||
Borrowings and financing | 17 | 15,893,219 | 14,224,175 | |||
Deferred income tax and social contribution | 19 | 283,739 | 320,716 | |||
Deferred Cofins and PASEP | 159,456 | 149,444 | ||||
Provisions | 20(a) | 638,672 | 492,093 | |||
Pension plan obligations | 22 | 2,321,662 | 2,868,594 | |||
Public-Private Partnership - PPP | 15(d) | 2,917,428 | 3,045,066 | |||
Program Contract Commitments | 15(c)(iv) | 44,995 | 68,939 | |||
Other liabilities | 881,528 | 555,775 | ||||
Total noncurrent liabilities | 23,140,699 | 21,724,802 | ||||
Total liabilities | 28,233,626 | 27,624,932 | ||||
Equity | ||||||
Capital stock | 15,000,000 | 15,000,000 | ||||
Earnings reserves | 9,885,485 | 8,194,706 | ||||
Other comprehensive loss | 46,374 | (401,002) | ||||
Total equity | 24 | 24,931,859 | 22,793,704 | |||
Total equity and liabilities | 53,165,485 | 50,418,636 |
Assets | Note | December 31, 2023 | December 31, 2022 |
Current | |||
Cash and cash equivalents | 7 | 838,484 | 1,867,485 |
Financial investments | 8 | 2,426,752 | 1,677,873 |
Trade receivables | 10 (a) | 3,584,287 | 3,062,574 |
Accounts receivable from related parties | 11 (a) | 261,280 | 205,793 |
Inventories | 86,008 | 124,247 | |
Restricted cash | 9 | 54,944 | 37,474 |
Recoverable taxes | 18 (a) | 494,647 | 242,906 |
Other assets | 37,048 | 66,312 | |
Total current assets | 7,783,450 | 7,284,664 | |
Noncurrent | |||
Trade receivables | 10 (a) | 272,436 | 215,234 |
Accounts receivable from related parties | 11 (a) | 935,272 | 950,950 |
Escrow deposits | 130,979 | 170,093 | |
Deferred income tax and social contribution | 19 (a) | 98,076 | - |
Water and Basic Sanitation National Agency – ANA | 2,673 | 9,193 | |
Other assets | 159,017 | 146,362 | |
Investments | 12 | 161,863 | 110,765 |
Investment properties | 13 | 46,678 | 46,726 |
Contract assets | 14 | 7,393,096 | 8,613,968 |
Intangible assets | 15 | 44,012,858 | 39,320,871 |
Property, plant and equipment | 16 | 474,559 | 338,939 |
Total noncurrent assets | 53,687,507 | 49,923,101 | |
Total assets | 61,470,957 | 57,207,765 |
The accompanying notes are an integral part of these consolidated financial statements.
|
F-6 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
IncomeConsolidated Statements for the
Years endedof Financial Position as of December 31, 2021, 20202023 and 20192022
Amounts in thousands of reais unless otherwise indicated
Liabilities and equity | Note | December 31, 2023 | December 31, 2022 |
Current | |||
Trade payables and contractors | 456,215 | 430,946 | |
Borrowings and financing | 17 | 2,616,406 | 2,245,960 |
Labor and social obligations | 21 | 807,440 | 498,504 |
Taxes and contributions | 18 (b) | 511,972 | 293,461 |
Interest on capital | 24 (b) | 837,391 | 741,725 |
Provisions | 20 (a) | 1,064,367 | 924,038 |
Services payable | 23 | 750,732 | 723,242 |
Public-Private Partnership - PPP | 15 (d) | 487,926 | 222,413 |
Program Contract Commitments | 15 (c) (iv) | 21,969 | 100,188 |
Other liabilities | 853,424 | 476,865 | |
Total current liabilities | 8,407,842 | 6,657,342 | |
Noncurrent | |||
Borrowings and financing | 17 | 16,919,944 | 16,712,711 |
Deferred income tax and social contribution | 19 (a) | - | 189,278 |
Deferred Cofins and PASEP | 164,097 | 159,723 | |
Provisions | 20 (a) | 762,065 | 686,746 |
Pension plan obligations | 22 | 2,142,871 | 2,150,191 |
Public-Private Partnership - PPP | 15 (d) | 2,798,688 | 2,736,768 |
Program Contract Commitments | 15 (c) (iv) | 12,047 | 12,197 |
Other liabilities | 406,027 | 569,276 | |
Total non-current liabilities | 23,205,739 | 23,216,890 | |
Total liabilities | 31,613,581 | 29,874,232 | |
Equity | |||
Capital stock | 15,000,000 | 15,000,000 | |
Earnings reserves | 14,711,014 | 12,155,890 | |
Other comprehensive income | 146,362 | 177,643 | |
Total equity | 24 | 29,857,376 | 27,333,533 |
Total equity and liabilities | 61,470,957 | 57,207,765 |
The accompanying notes are an integral part of these consolidated financial statements.
Note | 2021 | 2020 | 2019 | |||||
Net operating revenue | 28(b) | 19,491,061 | 17,797,541 | 17,983,654 | ||||
Operating costs | 29 | (12,800,042) | (11,179,667) | (10,137,637) | ||||
Gross profit | 6,691,019 | 6,617,874 | 7,846,017 | |||||
Selling expenses | 29 | (825,879) | (751,286) | (803,404) | ||||
Allowance for doubtful accounts | 29 | (643,730) | (444,826) | (128,099) | ||||
Administrative expenses | 29 | (1,124,069) | (1,051,181) | (1,187,844) | ||||
Other operating income (expenses), net | 31 | (21,841) | 107,656 | (18,748) | ||||
Equity results of investments in affiliaties | 12 | 22,079 | 14,136 | 3,701 | ||||
Profit from operations before finance income (expenses) and income tax and social contribution | 4,097,579 | 4,492,373 | 5,711,623 | |||||
Financial expenses | 30 | (1,448,295) | (1,324,759) | (1,173,425) | ||||
Financial revenues | 30 | 472,408 | 336,731 | 372,842 | ||||
Exchange result, net | 30 | 48,464 | (2,178,343) | (233,098) | ||||
Financial result, net | (927,423) | (3,166,371) | (1,033,681) | |||||
Profit before income tax and social contribution | 3,170,156 | 1,326,002 | 4,677,942 | |||||
Income tax and social contribution | ||||||||
Current | 19(d) | (961,556) | (460,721) | (1,155,463) | ||||
Deferred | 19(d) | 97,269 | 108,037 | (154,962) | ||||
Income tax and social contribution | (864,287) | (352,684) | (1,310,425) | |||||
Profit for the year | 2,305,869 | 973,318 | 3,367,517 | |||||
Earnings per share – basic and diluted (in reais) | 25 | 3.37 | 1.42 | 4.93 |
|
F-7 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Consolidated Statements of Comprehensive Income for the
Years ended December 31, 2021, 20202023, 2022 and 20192021
Amounts in thousands of reais, unless otherwise indicated
Note | 2023 | 2022 | 2021 | |
Net operating revenue | 28 | 25,572,056 | 22,055,720 | 19,491,061 |
Operating costs | 29 | (16,051,866) | (14,350,903) | (12,800,042) |
Gross profit | 9,520,190 | 7,704,817 | 6,691,019 | |
Selling expenses | 29 | (984,060) | (911,967) | (825,879) |
Allowance for doubtful accounts | 10 (c) | (652,920) | (782,057) | (643,730) |
Administrative expenses | 29 | (1,597,548) | (1,398,507) | (1,124,069) |
Other operating income (expenses), net | 31 | 27,925 | 8,327 | (21,841) |
Equity results of investments in affiliaties | 12 | 32,393 | 24,551 | 22,079 |
Profit from operations before financial income (expenses) and income tax and social contribution | 6,345,980 | 4,645,164 | 4,097,579 | |
Financial expenses | 30 | (2,708,617) | (1,956,266) | (1,448,295) |
Financial revenues | 30 | 805,905 | 1,091,531 | 472,408 |
Exchange result, net | 30 | 310,716 | 492,321 | 48,464 |
Financial result, net | (1,591,996) | (372,414) | (927,423) | |
Profit before income tax and social contribution | 4,753,984 | 4,272,750 | 3,170,156 | |
Income tax and social contribution | ||||
Current | 19 (d) | (1,545,671) | (1,230,234) | (961,556) |
Deferred | 19 (d) | 315,218 | 78,751 | 97,269 |
Total Income tax and social contribution | (1,230,453) | (1,151,483) | (864,287) | |
Profit for the year | 3,523,531 | 3,121,267 | 2,305,869 | |
Earnings per share – basic and diluted (in reais) | 25 |
Note | 2021 | 2020 | 2019 | |||||
Profit for the year | 2,305,869 | 973,318 | 3,367,517 | |||||
Other comprehensive income (loss) | 447,376 | 511,169 | (363,076) | |||||
Items which will not be subsequently reclassified to the income statement: | ||||||||
Actuarial gains and (losses) on defined benefit Plans, net of income tax | 22 | 447,376 | 511,152 | (363,059) | ||||
Other | — | 17 | (17) | |||||
Total comprehensive income for the year | 2,753,245 | 1,484,487 | 3,004,441 |
The accompanying notes are an integral part of these consolidated financial statements.
|
F-8 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Consolidated Statements of Changes in EquityComprehensive Income for the
Years ended December 31, 2021, 20202023, 2022 and 20192021
Amounts in thousands of reais unless otherwise indicated
Note | 2023 | 2022 | 2021 | |
Profit for the year | 3,523,531 | 3,121,267 | 2,305,869 | |
Other comprehensive income | (31,281) | 131,269 | 447,376 | |
Items which will not be subsequently reclassified to the income statement: | ||||
Actuarial gains and (losses) on defined benefit Plans, net of income tax | 22 | (31,281) | 131,269 | 447,376 |
Total comprehensive income for the year | 3,492,250 | 3,252,536 | 2,753,245 |
The accompanying notes are an integral part of these consolidated financial statements.
Earnings reserves | ||||||||||||||||
Note | Capital stock | Legal Reserve | Investment reserve | Additional dividend proposed | Retained earnings | Other comprehensive loss | Total | |||||||||
Balances as of December 31, 2018 | 15,000,000 | 1,200,030 | 3,840,422 | 60,331 | — | (549,095) | 19,551,688 | |||||||||
Net income for the year | — | — | — | — | 3,367,517 | — | 3,367,517 | |||||||||
Actuarial gains (losses) | — | — | — | — | — | (363,076) | (363,076) | |||||||||
Total comprehensive income for the year | — | — | — | — | 3,367,517 | (363,076) | 3,004,441 | |||||||||
Legal reserve | 24 (b) | — | 168,376 | — | — | (168,376) | — | — | ||||||||
Interest on capital (R$ | per share)24 (b) | — | — | — | — | (799,785) | — | (799,785) | ||||||||
2018 additional proposed dividends, approved (R$0.08827 per share) | — | — | — | (60,331) | — | — | (60,331) | |||||||||
Additional proposed dividends | 24 (b) | — | — | — | 141,203 | (141,203) | — | — | ||||||||
Withholding income tax on interest on capital attributable as minimum mandatory dividends | 24 (b) | — | — | — | (60,230) | — | — | (60,230) | ||||||||
Transfer to investments reserve | 24 (e) | — | — | 2,258,153 | — | (2,258,153) | — | — | ||||||||
Balances as of December 31, 2019 | 15,000,000 | 1,368,406 | 6,098,575 | 80,973 | — | (912,171) | 21,635,783 | |||||||||
Net income for the year | — | — | — | — | 973,318 | — | 973,318 | |||||||||
Actuarial gains (losses) | — | — | — | — | — | 511,169 | 511,169 | |||||||||
Total comprehensive income for the year | — | — | — | — | 973,318 | 511,169 | 1,484,487 | |||||||||
Legal reserve | 24 (b) | — | 48,666 | — | — | (48,666) | — | — | ||||||||
Interest on capital (R$ | per share)24 (b) | — | — | — | — | (231,163) | — | (231,163) | ||||||||
2019 additional proposed dividends, approved (R$0.11847 per share) | — | — | — | (80,973) | — | — | (80,973) | |||||||||
Additional proposed dividends (R$ 0.05970 per share) | 24 (b) | — | — | — | 40,806 | (40,806) | — | — | ||||||||
Withholding income tax on interest on capital attributable as minimum mandatory dividends | 24 (b) | — | — | — | (14,430) | — | — | (14,430) | ||||||||
Transfer to investments reserve | 24 (e) | — | — | 652,683 | — | (652,683) | — | — | ||||||||
Balances as of December 31, 2020 | 15,000,000 | 1,417,072 | 6,751,258 | 26,376 | — | (401,002) | 22,793,704 | |||||||||
Net income for the year | — | — | — | — | 2,305,869 | — | 2,305,869 |
|
F-9 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Consolidated Statements of Changes in Equity for the
Years ended December 31, 2021, 20202023, 2022 and 20192021
Amounts in thousands of reais, unless otherwise indicated
Earnings reserves | ||||||||
Note | Capital stock | Legal Reserve | Investment reserve | Complementary minimum dividend | Retained earnings | Other comprehensive loss | Total | |
Balances as of December 31, 2020 | 15,000,000 | 1,417,072 | 6,751,258 | 26,376 | - | (401,002) | 22,793,704 | |
Net income for the year | - | - | - | - | 2,305,869 | - | 2,305,869 | |
Actuarial gains (losses) | - | - | - | - | - | 447,376 | 447,376 | |
Total comprehensive income for the year | - | - | - | - | 2,305,869 | 447,376 | 2,753,245 | |
Legal reserve | 24 (b) | - | 115,293 | - | - | (115,293) | - | - |
Interest on capital (R$0.80122 per share) | 24 (b) | - | - | - | - | (547,645) | - | (547,645) |
Complementary minimum dividends of 2020, approved (R$0. 03859 per share) | - | - | - | (26,376) | - | - | (26,376) | |
Complementary minimum dividends (R$ 0.14148 per share) | 24 (b) | - | - | - | 96,700 | (96,700) | - | - |
Withholding income tax on interest on capital attributable as minimum mandatory dividends | 24 (b) | - | - | - | (41,069) | - | - | (41,069) |
Transfer to investments reserve | 24 (e) | - | - | 1,546,231 | - | (1,546,231) | - | - |
Balances as of December 31, 2021 | 15,000,000 | 1,532,365 | 8,297,489 | 55,631 | - | 46,374 | 24,931,859 | |
Net income for the year | - | - | - | - | 3,121,267 | - | 3,121,267 | |
Actuarial gains (losses) | 22 | - | - | - | - | - | 131,269 | 131,269 |
Total comprehensive income for the year | - | - | - | - | 3,121,267 | 131,269 | 3,252,536 | |
Legal reserve | 24 (b) | - | 156,063 | - | - | (156,063) | - | - |
Interest on capital (R$1.08455 per share) | 24 (b) | - | - | - | - | (741,301) | - | (741,301) |
Complementary minimum dividends of 2021, approved (R$0.08139 per share) | - | - | - | (55,631) | - | - | (55,631) | |
Complementary minimum dividends (R$ 0.19145 per share) | 24 (b) | - | - | - | 130,857 | (130,857) | - | - |
Withholding income tax on interest on capital attributable as minimum mandatory dividends | 24 (b) | - | - | - | (53,930) | - | - | (53,930) |
Transfer to investments reserve | 24 (e) | - | - | 2,093,046 | - | (2,093,046) | - | - |
Balances as of December 31, 2022 | 15,000,000 | 1,688,428 | 10,390,535 | 76,927 | - | 177,643 | 27,333,533 |
Actuarial gains (losses) | 22 | — | — | — | — | — | 447,376 | 447,376 | ||||||||
Total comprehensive income for the year | — | — | — | — | 2,305,869 | 447,376 | 2,753,245 | |||||||||
Legal Reserve | 24(b) | — | 115,293 | — | — | (115,293) | — | — | ||||||||
Interest on shareholder's equity (R$ | per share)24(b) | — | — | — | — | (547,645) | — | (547,645) | ||||||||
2020 additional proposed dividends, approved (R$0.03859 per share) | — | — | — | (26,376) | — | — | (26,376) | |||||||||
Additional proposed dividends (R$ 0.14148 per share) | 24(b) | — | — | — | 96,700 | (96,700) | — | — | ||||||||
Withholding income tax on interest on capital attributable as minimum mandatory dividends | 24(b) | — | — | — | (41,069) | — | — | (41,069) | ||||||||
Transfer to investments reserve | 24(e) | — | — | 1,546,231 | — | (1,546,231) | — | — | ||||||||
Balances as of December 31, 2021 | 15,000,000 | 1,532,365 | 8,297,489 | 55,631 | — | 46,374 | 24,931,859 |
The accompanying notes are an integral part of these consolidated financial statements.
|
F-10 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Consolidated Statements of Cash FlowsChanges in Equity for the
Years ended December 31, 2021, 20202023, 2022 and 20192021
Amounts in thousands of reais, unless otherwise indicated
Net income for the year | - | - | - | - | 3,523,531 | - | 3,523,531 | |
Actuarial gains (losses) | 22 | - | - | - | - | - | (31,281) | (31,281) |
Total comprehensive income for the year | - | - | - | - | 3,523,531 | (31,281) | 3,492,250 | |
Legal Reserve | 24 (b) | - | 176,177 | - | - | (176,177) | - | - |
Interest on capital (R$1.22433 per share) | 24 (b) | - | - | - | - | (836,839) | - | (836,839) |
Complementary minimum dividends of 2022, approved (R$0.11255 per share) | - | - | - | (76,927) | - | - | (76,927) | |
Complementary minimum dividends (R$ 0.21607 per share) | 24 (b) | - | - | - | 147,689 | (147,689) | - | - |
Withholding income tax on interest on capital attributable as minimum mandatory dividends | 24 (b) | - | - | - | (54,641) | - | - | (54,641) |
Transfer to investments reserve | 24 (e) | - | - | 2,362,826 | - | (2,362,826) | - | - |
Balances as of December 31, 2023 | 15,000,000 | 1,864,605 | 12,753,361 | 93,048 | - | 146,362 | 29,857,376 |
The accompanying notes are an integral part of these consolidated financial statements.
December 31, 2021 | December 31, 2020 | December 31, 2019 | ||||
Cash flow from operating activities | ||||||
Profit before income tax and social contribution | 3,170,156 | 1,326,002 | 4,677,942 | |||
Adjustments for: | ||||||
Depreciation and amortization | 2,253,322 | 2,037,112 | 1,780,094 | |||
Residual value of property, plant and equipment, intangible assets and investment properties written-off | 27,754 | 16,590 | 45,434 | |||
Bad debt expense | 643,730 | 444,826 | 128,099 | |||
Agreement signed with the municipality of Mauá | - | (280,774) | - | |||
Agreement signed with the municipality of Santo André | - | - | (1,336,908) | |||
Provisions and inflation adjustment | 380,624 | 444,090 | 384,620 | |||
Interest calculated on borrowings and financing payable | 647,980 | 559,931 | 568,679 | |||
Inflation adjustment and exchange gains (losses) on borrowings and financing | 177,269 | 2,267,179 | 280,526 | |||
Interest and inflation adjustment on liabilities | 37,202 | 20,931 | 46,038 | |||
Interest and inflation adjustment on assets | (171,173) | (46,946) | (39,547) | |||
Finance charges from customers | (349,491) | (344,513) | (364,291) | |||
Construction margin on intangible assets arising from concession agreements | (98,402) | (86,477) | (65,172) | |||
Provision for Consent Decree (TAC) and Knowledge Retention Program (PRC) | 3,195 | 1,684 | (130,345) | |||
Equity results of investments in affiliaties | (22,079) | (14,136) | (3,701) | |||
Interest and monetary restatement (PPP) | 464,398 | 424,639 | 397,576 | |||
Provision from São Paulo agreement | 131,878 | 142,232 | 135,013 | |||
Pension plan obligations | 176,673 | 136,585 | 267,423 | |||
Other adjustments | 15,152 | 5,283 | 5,863 | |||
7,488,188 | 7,054,238 | 6,777,343 | ||||
Changes in assets | ||||||
Trade receivables | (742,260) | (213,084) | (72,538) | |||
Accounts receivable from related parties | 20,665 | 83,419 | 26,358 | |||
Inventories | (8,658) | (34,394) | (4,858) | |||
Recoverable taxes | (253,432) | (342,127) | 239,437 | |||
Escrow deposits | 43,865 | 35,630 | (12,302) | |||
Other receivables | 31,386 | (36,264) | (1,966) | |||
Changes in liabilities | ||||||
Trade payables and contractors | (245,501) | (248,404) | (349,037) | |||
Services payable | (116,601) | (162,560) | (114,957) | |||
Accrued payroll and related taxes | 12,478 | (185,020) | 159,794 | |||
Taxes and contributions | 196,255 | 384,676 | 63,276 | |||
Deferred Cofins/PASEP | 10,012 | 5,751 | 2,863 | |||
Provisions | (184,433) | (227,596) | (241,674) | |||
Pension obligations | (215,937) | (123,014) | (221,784) | |||
Other liabilities | (68,260) | (13,306) | (92,637) | |||
Cash generated from operations | 5,967,767 | 5,977,945 | 6,157,318 | |||
Interest paid | (845,445) | (626,625) | (737,326) | |||
Income tax and social contribution paid | (1,208,569) | (373,112) | (1,222,747) | |||
Net cash generated from operating activities | 3,913,753 | 4,978,208 | 4,197,245 | |||
Cash flows from investing activities | ||||||
Acquisition of contract assets and intangible assets | (3,696,669) | (3,299,657) | (3,195,247) | |||
Restricted cash | 7,275 | (9,724) | 5,882 | |||
Financial investments | 1,076,468 | (3,411,146) | - | |||
Investment increase/(decrease) | - | (5,734) | 240 | |||
Purchase of property, plant and equipment | (50,281) | (42,407) | (78,159) | |||
Net cash used in investing activities | (2,663,207) | (6,768,668) | (3,267,284) |
|
F-11 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Consolidated Statements of Cash Flows for the
Years ended December 31, 2021, 20202023, 2022 and 20192021
Amounts in thousands of reais
December 31, 2023 | December 31, 2022 | December 31, 2021 | |
Cash flow from operating activities | |||
Profit before income tax and social contribution | 4,753,984 | 4,272,750 | 3,170,156 |
Adjustments for: | |||
Depreciation and amortization | 2,790,586 | 2,450,849 | 2,253,322 |
Residual value of property, plant and equipment, intangible assets and investment properties written-off | 8,354 | 10,110 | 27,754 |
Bad debt expense | 652,920 | 782,057 | 643,730 |
Provisions and inflation adjustment of provisions | 458,889 | 630,689 | 380,624 |
Interest calculated on borrowings and financing payable | 1,314,359 | 1,091,592 | 647,980 |
Inflation adjustment and exchange (losses) gains on borrowings and financing | (163,322) | (301,716) | 177,269 |
Interest and inflation adjustments on liabilities | 17,024 | 22,225 | 37,202 |
Interest and inflation adjustments on assets | (96,256) | (400,057) | (171,173) |
Finance charges from customers | (374,902) | (328,486) | (349,491) |
Construction margin on intangible assets arising from concession agreements | (125,603) | (109,369) | (98,402) |
Provision for Consent Decree (TAC) and Knowledge Retention Program (PRC) | 356,300 | (1,238) | 3,195 |
Equity results of investments in affiliaties | (32,393) | (24,551) | (22,079) |
Interest and monetary adjustments on PPP | 1,001,078 | 489,197 | 464,398 |
Transfer to the São Paulo Municipal Government | 195,874 | 167,714 | 131,878 |
Pension plan obligations | 238,751 | 183,262 | 176,673 |
Other adjustments | 21,997 | 15,488 | 15,152 |
Total Adjustments | 11,017,640 | 8,950,516 | 7,488,188 |
Changes in assets | |||
Trade receivables | (835,324) | (489,885) | (742,260) |
Accounts receivable from related parties | (4,553) | (295,091) | 20,665 |
Inventories | 38,239 | (10,741) | (8,658) |
Recoverable taxes | (251,741) | 33,198 | (253,432) |
Escrow deposits | 72,469 | 5,348 | 43,865 |
Other assets | 36,091 | 18,264 | 31,386 |
Changes in liabilities | |||
Trade payables and contractors | (394,188) | (220,462) | (245,501) |
Services payable | (168,384) | 86,501 | (116,601) |
Accrued payroll and related taxes | 19,377 | 73,126 | 12,478 |
Taxes and contributions payable | 186,810 | 120,853 | 196,255 |
Deferred Cofins and Pasep | 4,374 | 267 | 10,012 |
Provisions | (243,241) | (468,398) | (184,433) |
Pension plan obligations | (249,488) | (239,174) | (215,937) |
Other liabilities | (868,699) | (722,549) | (68,260) |
Cash generated from operations | 8,359,382 | 6,841,773 | 5,967,767 |
Interest paid | (1,936,419) | (1,505,488) | (845,445) |
Income tax and social contribution paid | (1,568,611) | (1,368,686) | (1,208,569) |
Net cash generated from operating activities | 4,854,352 | 3,967,599 | 3,913,753 |
Cash flows from investing activities | |||
Acquisition of contract assets and intangible assets | (3,991,325) | (3,550,537) | (3,696,669) |
Restricted cash | (17,470) | (9,007) | 7,275 |
Financial investments | (742,843) | 755,512 | 1,076,468 |
Investment properties | (6,625) | (648) | - |
Purchase of property, plant and equipment | (147,249) | (73,668) | (50,281) |
Net cash used in investing activities | (4,905,512) | (2,878,348) | (2,663,207) |
December 31, 2021 | December 31, 2020 | December 31, 2019 | ||||
Cash flows from financing activities | ||||||
Borrowings and financing | ||||||
Proceeds from loans | 2,922,811 | 4,777,474 | 1,793,388 | |||
Payment of loans | (2,896,604) | (3,244,099) | (2,148,198) | |||
Payment of interest on capital | (254,218) | (890,095) | (739,996) | |||
Public-Private Partnership - PPP | (579,486) | (543,346) | (548,079) | |||
Program Contract Commitments | (121,521) | (166,283) | (63,057) | |||
Net cash used in financing activities | (929,018) | (66,349) | (1,705,942) | |||
Increase / (decrease) in cash and cash equivalents | 321,528 | (1,856,809) | (775,981) | |||
Represented by: | ||||||
Cash and cash equivalents at the beginning of the year | 396,401 | 2,253,210 | 3,029,191 | |||
Cash and cash equivalents at the end of the year | 717,929 | 396,401 | 2,253,210 | |||
Increase / (decrease) in cash and cash equivalents | 321,528 | (1,856,809) | (775,981) | |||
The accompanying notes are an integral part of these consolidated financial statements.
|
F-12 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Consolidated Statements of Cash Flows for the
Years ended December 31, 2023, 2022 and 2021
Amounts in thousands of reais (continued)
December 31, 2023 | December 31, 2022 | December 31, 2021 | |
Cash flows from financing activities | |||
Borrowings and financing | - | ||
Proceeds from loans | 2,371,111 | 2,807,026 | 2,922,811 |
Payment of loans | (1,771,090) | (1,536,724) | (2,896,604) |
Payment of interest on capital | (823,671) | (603,541) | (254,218) |
Public-Private Partnership - PPP | (673,645) | (590,201) | (579,486) |
Program Contract Commitments | (81,357) | (16,255) | (121,521) |
Capital increase | 811 | - | - |
Net cash generated by (used in) financing activities | (977,841) | 60,305 | (929,018) |
Increase / (decrease) in cash and cash equivalents | (1,029,001) | 1,149,556 | 321,528 |
Represented by: | |||
Cash and cash equivalents at the beginning of the year | 1,867,485 | 717,929 | 396,401 |
Cash and cash equivalents at the end of the year | 838,484 | 1,867,485 | 717,929 |
Increase / (decrease) in cash and cash equivalents | (1,029,001) | 1,149,556 | 321,528 |
The accompanying notes are an integral part of these consolidated financial statements.
F-13 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
1 | Operations |
Companhia de Saneamento Básico do Estado de São Paulo ("SABESP" or the "Company") is a mixed-capital company headquartered in the municipality of São Paulo, at Rua Costa Carvalho, 300, CEP 05429-900, controlled by the State of São Paulo.Paulo State. The Company is engaged in the provision of basic and environmental sanitation services in the State of São Paulo as well as itState and supplies treated water and sewage services on a wholesale basis.
In addition to providing basic sanitation services in the State of São Paulo, SABESP may performs theseperform activities in other states and countries, and can operate in drainage, urban cleaning, solid waste handling and energy markets. SABESP aims to be a world reference in the provision of sanitation services, in a sustainable, competitive and innovative manner, with a focus on customers.
As of December 31, 2021,2023, the Company operated water and sewage services in 375 municipalities of the State of São Paulo 342State, 351 of which have already signed contracts, pursuantaccording to Law 11,445/2007. Most of these municipalities’ operations are based on 30-year concession,term, program and servicesservice contracts, except for the municipalities of Guarulhos, Mauá, Santo André, São Bernardo do Campo, São João da Boa Vista and Tejupá, which have a 40-year term.
The table below shows a summary of the contractual situation of the municipalities served:
December 31, 2021 | December 31, 2020 | |
Total municipalities that have already signed contracts | 342 | 342 |
Balance – intangible and contract assets | 42,260,091 | 39,440,568 |
Percentage of intangible and contract assets | 93.80% | 93.08% |
Revenue from sanitation services (excluding construction revenue) | 15,490,808 | 14,406,803 |
Percentage of revenue from sanitation services (excluding construction revenue) | 95.01% | 95.05% |
Municipalities with expired contracts: | 8 | 8 |
Balance – intangible and contract assets | 214,329 | 264,931 |
Percentage of intangible and contract assets | 0.48% | 0.63% |
Revenue from sanitation services (excluding construction revenue) | 41,194 | 39,088 |
Percentage of revenue from sanitation services (excluding construction revenue) | 0.25% | 0.26% |
Municipalities with concession agreements due by 2030: | 25 | 25 |
Balance – intangible and contract assets | 1,127,920 | 1,436,529 |
Percentage of intangible and contract assets | 2.50% | 3.39% |
Revenue from sanitation services (excluding construction revenue) | 653,408 | 597,483 |
Percentage of revenue from sanitation services (excluding construction revenue) | 4.01% | 3.94% |
Municipality of São Paulo: | ||
Percentage of intangible and contract assets | 43.11% | 37.94% |
Percentage of revenue from sanitation services (excluding construction revenue) | 44.45% | 44.58% |
Schedule of summary of contractual | ||
December 31, 2023 | December 31, 2022 | |
Total municipalities that have already signed contracts | 351 | 351 |
Balance – intangible and contract assets | 48,759,219 | 45,292,307 |
Percentage of intangible and contract assets | 95.12% | 94.49% |
Revenue from sanitation services (excluding construction revenue) | 20,510,427 | 17,767,561 |
Percentage of revenue from sanitation services (excluding construction revenue) | 95.35% | 95.37% |
Municipalities with expired contracts: | 1 | 1 |
Balance – intangible and contract assets | 11,309 | 11,519 |
Percentage of intangible and contract assets | 0.02% | 0.02% |
Revenue from sanitation services (excluding construction revenue) | 17,559 | 15,236 |
Percentage of revenue from sanitation services (excluding construction revenue) | 0.08% | 0.08% |
Municipalities with concession agreements due by 2030: | 23 | 23 |
Balance – intangible and contract assets | 1,051,209 | 1,072,138 |
Percentage of intangible and contract assets | 2.05% | 2.24% |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Revenue from sanitation services (excluding construction revenue) | 833,418 | 711,452 |
Percentage of revenue from sanitation services (excluding construction revenue) | 3.87% | 3.82% |
Municipality of São Paulo: | ||
Percentage of intangible and contract assets | 43.40% | 43.33% |
Percentage of revenue from sanitation services (excluding construction revenue) | 44.95% | 45.14% |
The Company's shares have been listed inon the “Novo Mercado” (New Market) segment of B3 under the ticker symbol SBSP3 since April 2002 and on the New York Stock Exchange (NYSE) as Level III American Depositary Receipts (“ADRs”) Level III,, under the SBS, code, since May 2002.
Since 2008, the Company has been setting up partnerships with other companies, which resulted in the following companies: Sesamm, Águas de Andradina, Saneaqua Mairinque, Aquapolo Ambiental, Águas de Castilho, Attend Ambiental, and Paulista Geradora de Energia.Energia, Cantareira SP Energia, FOXX URE-BA Ambiental and Infranext Soluções em Pavimentação. Although SABESP has no majority interest in the capital stock of these companies, the shareholders’ agreements provide for the power of veto and casting vote invotes on certain issues jointly with associates, indicating the shared control in the management of these investees, except for Saneaqua Mairinque, which, as of August 2020, no longer has a shared control.
Economic instability worsened by COVID-19• Municipality of Estância Turística de Olímpia
In July 2023, the Municipal Government of Olímpia – SP (“Olímpia”) approved the bidding process referring to Tender 02/2023, whose subject was the granting of a concession for providing public water supply and sewage services for 30 years, and awarded the contract to SABESP, with a fixed concession fee of R$ 148 million.
The global economic instability worsened in early 2020 with the outbreakmunicipality of a new coronavirus, which was considered pandemic by the World Health Organization (WHO). Accordingly, SABESP has been taken several preventive measures to ensure the continuity and quality of the services provided to the population, which have become even more essential. ItOlímpia is worth noting that any interruption in water supply by a basic sanitation company may compromise compliance with WHO’s recommendations for everyone to keep good hygiene habits, such as washing hands correctly and more frequently.
The Company implemented a number of preventive measures so that its employees are not exposed to situations of risks, such as: (i) employeeslocated 430 km from the administrative sectors (especially) and those with more than 60 yearscapital city of age are working under a remote system; (ii) restriction of domestic and international trips; (iii) anticipation of the influenza and pneumonia vaccination campaign, (iv) closing of all branches that assist the public, concentrating services in the digital channels, to protect customers and employees; among others.
|
Regarding the effects of Covid-19, we highlight the migration of billed volume from the public, commercial and industrial categories that have higher average tariffs to the residential category, which showed a slight recovery in 2021 when compared to 2020.
Expenses with allowance for doubtful accounts still show a significant growth due to the increase in delinquency in the period.
Management expects that with the gradual resumption of economic activities, improved water security, due to the works carried out, the generation of operating cash, added to the credit lines available for investments, the financial resources will be sufficient to honor its commitments and not jeopardize the necessary investments.
New Legal Sanitation Framework
On July 15, 2020, the Brazilian President sanctioned Federal Law 14,026/2020, known as the New Legal Framework for Basic Sanitation. The new law expands competition in the sector, by extinguishing program contract.
Additionally, the New Legal Framework imposes performance goals to reach 99% of the population served with drinking water and 90% with sewage collection and treatment by December 31, 2033, encouraging operators to increase efficiency. It also granted the Water and Basic Sanitation National Agency (ANA) with authority to edit reference rules to regulate sanitation with a view to minimize regulatory uncertainties, thus creating a more stable and attractive environment for investments in the sector.
On May 31, 2021, Federal Decree No. 10,710 was edited, which regulates Art. 10-B of Law No. 11,445/2007, establishing the methodology for proving the economic and financial capacity of providers of public services for the supply of drinking water and sanitary sewage, with a view to enabling the achievement of universalization goals by 2033. The aforementioned regulation imposes metrics for the economic-financial evaluation of service providers to prove their ability to make investments within the intended period, in addition to a series of conditions so that the contracts in force can be considered regular, whose eventual adaptations must occur until March 31, 2022, in line with the provisions of Art. 11-B, §1, of the new law.
According to the aforementioned Decree, as of December 30, 2021, the Company presented a requirement to the São Paulo, State Utility Services Regulatory Agency (ARSESP) containing documents that prove its capacity to maintain the provisionhas an estimated population of services in the operated area to meet the goals of universal56 thousand inhabitants, and universalized water and sewage collectioncoverage. The municipality will require operational, commercial, efficiency, and treatment by 2033, definedwater loss reduction efforts from the Company.
As established by the New Legal Framework, attested byBid Notice (Bid Notice), the independent auditor and certifying body and at an extraordinary meeting held on March 28, 2022, ARSESP unanimously resolvedwinning bidder should create, before the signing of the agreement, a special purpose entity (SPE) to recognizeexecute the proven economic and financial capacityterms of Sabesp, as describedthe Concession Agreement. The contract value estimated in note 34.the Bid Notice is R$ 1,182,495 (base date of August 2022), corresponding to the Granting Authority’s estimate of the cumulative concession revenues, while estimated investments amount to R$ 81,112 (base date of August 2022) for the entire duration of the concession.
F-15 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
In this new context,
The Concession Agreement for the provision of public water supply and sewage services in the Municipality of Olímpia was executed on October 11, 2023.
Of the total, the amount corresponding to the fixed concession totaling R$ 148 million, 50% has already been paid by SABESP on August 30, 2023, i.e. R$ 74 million as a condition for the contract signing, and 50%, duly authorized by IPCA, will be paid by SABESP Olímpia S/A by 365 days after the payment of the first installment.
A monthly variable concession fee will be paid by the 10th day of the subsequent month, corresponding to 1% of the net tariff revenue.
To ensure faithful compliance with the obligations to be assumed by the Concessionaire, upon the signing of the agreement, proof of guarantee of the contractual obligations must be presented to the granting authority, in an amount corresponding to 5% of the estimated investment value.
Given that SABESP owns 100% of the SPE and meets control requirements, the Company understands it is importantconsolidated SABESP Olímpia S/A, following the Accounting Policy described in Note 3.1.
The operations started in December 2023.
· | Privatization and Proposal of New Concession Agreements |
On September 18, 2023, the Board of the State Privatization Program (CDPED) resolved to highlight that i) it has contracts that already include goals that meet or even anticipate those definedrecommend that:
(i) the Investment Partnerships Secretariat and the Environment, Infrastructure, and Logistics Secretariat take the necessary steps to submit the draft of the Company’s privatization law to the Governor’s office; and
(ii) SABESP, under article 5, II combined with article 7, paragraph 2, and paragraph 4 of Law 9,361/96, starts the procedure for the selection and hiring of coordinating banks and other services required for the future public offering.
F-16 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
As of September 30, 2023, as provided for in paragraph 2 of article 14 of Federal Law 14,026/2020 (“New Legal Sanitation Framework”), the São Paulo State sent Official Letters to the municipalities operated by the Company with proposals to change the conditions of the concession agreements in effect (“Communication”).
The Communication highlights general aspects of the proposal for a new concession agreement (“New Agreement”) aiming at replacing the existing agreements, under article 14 of the New Legal Sanitation Framework, which correspondindicating that the following guidelines will be observed under the New Agreement to around 70%be executed with these municipalities:
(a) the anticipation of revenue; ii) it has accessachieving the universalization goals established in the New Sanitation Framework for 2029, subject to public capitalany shorter deadlines contractually outlined;
(b) the extension of the concession agreement for 2060;
(c) the obligation of SABESP to serve the population residing in consolidated informal urban settlements and rural areas, covering the private capital market dueentire municipal territory; and
(d) the detailing of investments to its sound reputation, favoringbe made in each municipality.
As of December 11, 2023, State Law 17,853 was enacted. It authorized the maintenance and/or expansionExecutive Branch of its operating base andthe São Paulo State to promote privatization measures of Companhia de Saneamento Básico do Estado de São Paulo – SABESP. Among other aspects, as provided for in article 2, the model adopted for the privatization of SABESP must observe the following guidelines:
(i) compliance with the universalization goals of water supply and sewage services withinin all municipalities of the deadline establishedState served by the new law;Company, considering the inclusion of rural areas and consolidated informal urban centers, under Federal Law 14,026, of July 15, 2020;
(ii) anticipation, to December 31, 2029, of the achievement of the universalization goals, subject to any shorter deadlines contractually agreed upon;
(iii) tariff reduction, preferably considering the most vulnerable population;
(iv) provision for the creation of an annual control to monitor compliance with the goals, with indications of investment requirements for the next few years;
(v) provision of quality services, aiming at improving the quality of treated water and reducing its loss;
F-17 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
(vi) guarantee, in the contractual instruments resulting from the privatization, to the employees listed in SABESP’s permanent staff at the time of the publication of this law, of stability, with the maintenance of their employment contract for 18 (eighteen) months from the date of effective completion of the Company’s privatization process.
As of December 21, 2023, the Company concluded the selection of financial institutions that will be the global coordinators of the financial institutions union responsible for structuring the Company’s potential follow-on. The selected Global Coordinators are i) BTG Pactual; ii) Bank of America; iii) it has high governance level;CITI; and iv) it has current contractsUBS - BB.
As of February 15, 2024, as reported by the Company in a Material Fact, the São Paulo State opened a public consultation regarding the following documents:
(a) the draft of the Concession Agreement to be executed between the Regional Unit of Drinking Water Supply and Sewage Services 1 ("URAE-1") Southeast and SABESP, with the granting authoritiesindication of the involvement of the São Paulo State Utility Services Regulatory Agency, along with the specific technical exhibits of the Municipalities comprising URAE-1, in addition to other contractual exhibits;
(b) the draft of the charter of URAE-1’s Decision-Making Board; and
(c) the draft of the Regional Sanitation Plan, under article 17 of Federal Law 11,445, of 2007.
The aforementioned Public Consultation on the privatization of Sabesp was concluded on March 15, 2024, with a significant number of suggestions submitted by the public. A total of 976 contributions were received through the Internet, in addition to 135 oral statements made at the eight public hearings held by the São Paulo State on the matter.
The next steps of the privatization consist of the São Paulo State's publication of the Public Consultation Contributions Report, concluded on March 15, 2024, with the revised documents sent to URAE 1 - Southeast for resolution.
Management expects that ensure 95%the funds raised with the improved water security from the works carried out, the generation of revenue.operational cash, and credit lines available for investments, will be sufficient to meet the Company’s commitments and not compromise the necessary investments.
Approvals
The consolidated financial statements were approved by Management on April 27, 2022.May 3, 2024.
F-18 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
2 | Basis of preparation and presentation of the consolidated financial statements |
The Company’s consolidated financial statements of the Company have been prepared in accordance withaccording to the International Financial Reporting Standards – IFRS, as issued by the International Accounting Standards Board – IASB. All material information related to the financial statements, and this information alone, is being disclosed and corresponds to the information used by the Company’s Management in its administration.
The consolidated financial statements have been prepared under the historical cost except for certain financial instruments measured at fair value when required by the standards.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires Management to exercise its judgment in the process of applying the Company's accounting policies. The areas involving a higher degree to judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are described in Note 6.
3 Summary of Significant Accounting Policies
3 | Summary of material information on accounting policies |
The mainmaterial information of the accounting policies applied in the preparation of these consolidated financial statements are defined below. These policiesbelow and have been applied consistently in all years presented.
3.1Consolidation
The Company controls an entity when (i) it has power over the investee; (ii) it is exposed to, or has rights to, variable returns from its involvement with the investee; and (iii) it has the ability to use its power to affect its returns.
When the Company does not hold the majority of voting rights in an investee, it will have power over the investee when the voting rights are sufficient to give it the practical ability to unilaterally conduct the relevant activities of the investee. When assessing whether SABESP's voting rights in an investee are sufficient to give it power, the Company considers all relevant facts and circumstances, including (i) the Company's proportionate interest in voting rights regarding the interests of other voting right holders; (ii) potential voting rights held by the Company, other voting right holders, or other parties; (iii) rights arising from other contractual agreements; and (iv) any additional facts and circumstances that indicate whether the Company has the ability to conduct the relevant activities of the investee.
F-19 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
The financial statements of the subsidiary are included in the consolidated financial statements from the date the Company obtains control until the date when such control ceases to exist. Revenues and expenses of a subsidiary acquired or disposed of during the fiscal year are included in the results from the date the Company obtains control until the date when the Company ceases to control the subsidiary.
The subsidiary's financial statements have been prepared for the same reporting date as the parent company.
All intragroup balances, revenues, expenses, and unrealized gains and losses from intragroup transactions have been eliminated. Other comprehensive results of the parent company, where applicable, will be directly recorded in the Company’s equity, under “other comprehensive results”.
As of December 31, 2023, SABESP held 100% of direct interest in Sabesp Olímpia S/A.
3.2Cash and cash equivalents
Cash and cash equivalents include cash in hand, bank deposits, overdraft accounts and other short-term highly liquid investments with maturities and intention of use by the Company’s Management in a period lower than three months.
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3.2 3.3Financial assets and liabilities
Financial Assetassets - Classification
The Company classified its financial assets according to the following categories: measured at amortized cost, measured at fair value through other comprehensive income and measured at fair value through profit or loss. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of the financial assets at inception. As of December 31, 20212023 and 2020,2022, the Company did not have financial assets classified as fair value through other comprehensive income and fair value through profit or loss.
Amortized cost |
This comprisescategory includes financial assets that meet the following conditions: (i) it isassets held within the business model whose objective is to hold financial assets to collect contractual cash flows; and (ii) the contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
Presented as current assets, except for those with a maturity of more than 12 months after the reporting date, (thesewhich are classified as noncurrent assets).assets. The Company's financial assets measured at amortized cost include cash and cash equivalents, financial investments, restricted cash, balances of trade receivables, accounts receivable from related parties, other receivables,assets and receivables from the Water and Basic Sanitation National Agency – ANA.(ANA). Financial assets measured at amortized cost are recorded at fair value and subsequently at amortized cost, under the effective interest rate method, except for trade receivables, which isare initially measured at transaction price, as it contains no financing items, and isare subsequently measured at amortized cost.
Financial Liabilitiesliabilities - Classification
The Company classifies its financial liabilities measured at amortized cost. ClassificationThe classification depends on the purpose tofor which the financial liabilities were assumed. This category comprisesincludes balances payable to contractors and suppliers, borrowings and financing, services payable, balances payable from public-private partnershipPublic-Private Partnerships (PPP), and program contract commitments.
The effective interest rate method is adopted to calculate the amortized cost of a financial liability and allocate its interest expense under the respective period. The effective interest rate exactly deducts the estimated future cash flows (including fees, transaction costs and other issue costs) throughoutover the estimated life of the financial liability’s estimated lifeliability or, when appropriate, during a shorter period, for the initial recognition of the net carrying amount.
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Impairment of financial assets
Trade receivables
· | Accounts receivable |
Due to the charactheristicscharacteristics of the Company’s accounts receivable such as (i) insignificant financial component,component; (ii) non-complex receivables portfolio,portfolio; and (iii) low credit risk, the Company adopted the simplified approach of expected credit loss, whichwas adopted – it consists inof recognizing the expected credit loss based on the total asset’s useful life.
The methodology to calculate the allowance for doubtful accounts consisted of using an estimate calculated based on the average default observed in the last 36 months, per maturity range, in addition to estimating the recovery of credits overdue for more than 360 days, based on the track record of the last three years. For estimate purposes, itIt also considered the category of private and public customers, and segregated accounts receivable among the regular consumption accounts and agreements. The Company also concluded that the estimates of the macroeconomic indicators Gross Domestic Product (GDP), Unemployment Rate and the Extended Consumer Price Index (IPCA) were not impacted, given that it carried out correlation analyses of these indicators and itstheir default history, which did not result in a significant correlation between them.
Deposit transactions and financial investments measured at amortized cost
F-21 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
· | Deposit transactions and financial investments measured at amortized cost |
The Company analyzes changes in the rates of investments in bank depositsdeposit certificates and information obtained from regulatory agencies about the financial institutions. The likelihood of delinquency over 12 months and during the terms of these investments was based on historical data provided by credit rating agencies for each credit level and analyzed in terms of sensitivity based on current returns.
These deposits and financial investments are subject to an insignificant risk of change in value.
3.3 3.4Operating income
(a) Revenue from sanitation services
Revenue from water supply and sanitation services are recognized as the water is consumed and services are provided. Revenues, including unbilled revenues, are recognized at the fair value of the consideration received or receivable for the rendering of those services. Revenue is shown net of value-added tax, rebates and discounts. Unbilled revenues represent incurred revenues in which the services were provided, but not yet billed until the end of the each period and are recorded as trade receivables based on monthly estimates of the completed services.
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Revenues are recognized based on IFRS 15 (RevenueRevenue from Contracts with Customers),Customers, which establishes a five-step model applicable overto revenue from a contract with a customer. Revenues are recognized when the Company:when: i) it identifies the contracts with customers; ii) it identifies the different obligations in the contract;contract obligations; iii) it determines the transaction price; iv) it allocates the transaction price to the performance obligations in the contracts; and (v) it satisfies all performance obligations. Disputed amounts are recognized as revenue when collected.
(b) Construction revenue
Revenue from concession construction contracts is recognized in accordance with IFRS 15 (Revenue from Contracts with Customers) and IFRIC 12 (Service Concession Arrengements), as all performance obligations are satisfied over time. During the construction phase of the contract, an asset is classified as a contract assets, asasset, in which the Company estimates that the fair value of its consideration is equivalent to expected construction costs plus margin. The fee represents the additional margin related to the work performed by the Company in relation to such construction contracts and it is added to construction costs, resulting in the construction revenue.
F-22 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
3.4 3.5Trade receivables and allowance for doubtful accounts
Trade receivables are amounts due from customers for services performed in the ordinary course of business. These are classified as current assets, except when maturity exceeds 12 months after the end of the reporting period. In these cases,date, when they are presented as noncurrent assets.
The Company establishes an allowance for doubtful accounts for receivable balances at an amount that Management considers to be sufficient to cover eventual losses, as described in note 3.2.Note 3.3.
3.5 3.6Inventories
Inventories comprise supplies for consumption and maintenance of the water and sewage systems and are stated at the lower oflowest between the average cost of acquisition or net realizable value and are classified in current assets.
3.6 3.7Investment properties
Investment properties are recorded at the acquisition or construction cost, less accumulated depreciation, except for the land group, calculated by the straight-line method at rates that consider the estimated useful life of the assets. Expenditures related to repairs and maintenance are recorded in the income statement when incurred.
The Company also maintains some assets for undetermined use in the future, i.e. it is not defined if the Companywhether they will use these assetsbe used in the operation or sell themsold in the short term during the ordinary course of business.
3.8Contract Assets
Contract Assets (construction work in progress) represent the right to consideration in exchange for goods or services transferred to customers. As established by IFRS 15 - Revenue from Contracts with Customers, assets subject to the concession under construction, recorded under the scope of IFRIC 12 – Service Concession Arrangements, must be classified as Contract Asset during the construction period and transferred to Intangible Assets after the conclusion of the works.
A Contract Asset is recognized at fair value, including the capitalization of labor, construction margin, interest, and other financial charges capitalized during the construction period of qualifying assets, where applicable, based on the weighted average rate of borrowings in effect on the capitalization date. A qualifying asset necessarily requires a substantial period, established by the Company as being higher than 12 months, to be ready for use, considering the completion period of the works, given that most of them take on average more than 12 months to be completed, which corresponds to one fiscal year of the Company.
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
3.7 Contract asset
The Contract Asset (works in progress) is the right to consideration in exchange for goods or services transferred to the customers. As determined by IFRS 15 - Revenue from contract with customer, assets related to the concession underinfrastructure construction recorded under the scope of IFRIC 12 – Service Concession Arrengements, should be classifiedvalues are recognized as contract asset during the construction period and transferred to the intangible assets only after the completion of the works.
A contract asset is initially recognizedrevenue, at fair value, and includesprovided that they generate future economic benefits. The accounting policy to recognize construction margin and borrowing costs capitalizedrevenue is described in qualifying assets, when applicable, during the period in which the asset is in the construction phase, based on the weighted average rate of borrowings in effect on the capitalization date. A qualifying asset is an asset that necessarily requires a substantial period of time to be ready for its intended use or sale.Note 3.4 (b).
3.8 3.9Property, plant and equipment
Property, plant and equipment comprise mainly administrative facilities not composing the assets subject-matter ofsubject to the concession agreements. Those assets are stated at historical acquisition or construction cost less depreciation net ofand impairment losses, when necessary. Interest,as applicable. Where applicable, interest, other finance charges, and inflationary effects resulting from financing effectively applied to construction in progress are recorded as the cost of the respective property, plant and equipment in this case, for the qualifying assets, as applicable. Qualifying assets are assets that,assets. A qualifying asset necessarily requiredrequires a substantial period, to get ready for its intended use or sale. Theestablished by the Company defined that this period isas being higher than 12 months.months, to be ready for use, considering the completion period of the works, given that most of them take on average more than 12 months to be completed, which corresponds to one fiscal year of the Company.
Subsequent costs are included in the existing asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that the future economic benefit associated with the item will flow to the Company and the cost of the item can be reliably measured. Repairs and maintenance are charged to the income statement of the year, as incurred.
The depreciation of property, plant, and equipment begins when such an item becomes available for use, in its location, and under the necessary condition, when this asset becomes operational. Depreciation is calculated using the straight-line method to allocate their cost and the average rates are presented in Note 16 (a). Land is not depreciated.
Residual values and theThe useful lifelives of assets are revised and adjusted, where applicable, at the end of each year.
GainGains and losses on disposals are determined by the difference between the proceeds with the carrying amountsales value and residual book balance and are recognized in profit or loss, under other operating income (expenses) in the income statement..
3.10Intangible assets
Intangible assets are those arising from concession contracts, and the main costs are transferred from the Contract Asset, as described in Note 3.8.
The amortization of an intangible assets begins when it becomes available for use, in its location and necessary condition when this asset becomes operational. The amortization reflects the period in which it is expected that the asset’s future economic benefits are consumed by the Company, which may be the final term of the concession or their useful life.
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
3.9 Intangible assets
Intangibles are stated at acquisition cost and/or construction of the underlying assets, including construction margin, interest and other finance charges capitalized during the construction period, in this case, for the qualifying assets. Qualifying assets are assets that, necessarily, take a substantial period to get ready for its intended use or sale. The Company considers that substantial period means a period greater than 12 months. This period was established by considering the completion period of the majority of its constructions, which is greater than 12 months, which corresponds to one fiscal year of the Company.
The intangible has its amortization initiated when the intangible assets are available for use in location and the necessary condition when this asset becomes operational.
The amortization of intangible assets reflects the period over the expected future economic benefits generated by the intangible asset are consumed by the Company and can be the period of the contract or the useful life of the asset.
The amortization of the intangible assets is discontinuedends when the asset is totallyfully consumed or it is disposed of,written off, whatever occurs first.
Donations in assets, received from third parties and governmentalgovernment entities to allow the Company to render water supply and sewage services are not recorded in the Company’sconsolidated financial statements, at zero cost, since these assets are controlledowned by the concession grantor.granting authority.
Financial resources received as donations for theinfrastructure construction of infrastructure are recorded under “Other operating income”.
(a) Concession agreements/program contracts/service contracts
The Company operates concession agreements including the rendering of basic sanitation, environmental, water supply and sewage services signed with the concession grantor.granting authorities. The infrastructure used by SABESP subjectrelated to service concession arrangements is considered to be controlled by the concession grantorgranting authority when:
(i) | The |
(ii) | The |
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The rights over the infrastructure operated under the concession agreements are accounted for as an intangible asset as the Company has the right to charge for the use of the infrastructure assets, and the users (consumers) have the primary responsibility tomust pay SABESP for the services.
The fair value of construction and other works on the infrastructure is recognized as revenue, as its fair value, when the infrastructure is built, provided that this work is expected to generate future economic benefits. The accounting policy to recognize construction revenue is described in Note 3.3 (b).
Intangible assets and investments made and not recovered through rendering of services related to the concessions, are amortized on a straight-line basis over the contract period of the contract, or the useful life of the underlying asset, whichever occurs first.
The details referring to the amortization of intangible assets are described in Note 15 (c).
F-25 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
(b) Software license of use
Software licensing is capitalized based on the acquisition costs and other implementation costs. Amortizations are recorded according to the useful life and the expenses associated with maintaining them are recognized as expensesin profit or loss when incurred.
3.10 3.11Impairment of non-financial assets
Property, plant and equipment, intangible assets and other noncurrent assets with defined useful lives are yearly reviewed for impairment on an annual basis, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company does not have assets with indefinite useful life and assessed that there are no indications of impairment losses, mainly supported by Law 14,026/2020, which ensures that basic sanitation public utilities will have assured its economic and financial sustainability to public sanitation services through tariffs or indemnity.
3.11 3.12Trade payables and contractors
Trade payables and contractors are obligations to pay for goods or services acquired from suppliers in the ordinary course of business and are initially measured at fair value, which generally correspondcorresponds to the bill and subsequently at amortized cost, being classified as current liabilities, except when the maturity exceeds 12 months after the reporting date, and are, otherwise, being presented as noncurrent liabilities.
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3.12 3.13Borrowings and financing
Borrowings and financing are initially recognized at fair value, upon receipt of funds, net of transaction costs. Subsequently, borrowingscosts and financing are stated at amortized cost, as presented incost. See Note 17. Borrowings and financing are classified as current liabilities unless the Company has an unconditional right to defer the settlement of the liability for at least 12 months after the end of the reporting date.
NonconvertibleThe bonds issued by the Company are recognized in a similar mannernot convertible into shares and are recorded similarly to borrowings.
3.13 3.14Borrowing costs
Borrowing costs consist of interest rates and other charges incurred by the Company and arise from borrowing and financing agreements, including exchange variation.
F-26 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
Costs attributable to the acquisition, construction, or production of an asset, which, necessarily, requires a substantial time period to be ready for use or sale are capitalized as part of the cost of these assets. Other borrowing costs are recognized as expenses in the period they are incurred. Borrowing costs are interest rates and other charges incurred by the Company related to borrowings, including exchange variation, as described below.
The capitalization occurs during the construction period in whichof the asset, has been built, considering the weighted average rate of borrowings effective on the capitalization date.
ForThe Company analyses foreign currency-denominated borrowings or financing the Company analyzes them as if they were contracted in local currency, restricting the capitalization of interest and/or exchange variation by the amount that would be capitalized if thesethey were contracted in the domestic market in similar lines of credit and loans.
3.14 3.15Salaries, payroll charges and social contributions
Salaries, vacations, Christmas bonus,bonuses, profit sharing and additional payments negotiated in collective labor agreements plus related charges and contributions are recorded on thean accrual basis.
The profit sharingprofit-sharing plan for its employees is based on operational and financial targets, and a provision is created when it is contractually required or when there is a past practice that created a constructive obligation, and is recorded on the accrual basis period as operating cost, selling and administrative expenses or capitalized in assets.
3.15 3.16Provisions, legal obligations, escrow deposits and contingent assets
Provisions related to claims are recognized when: i) the Company has a present (legal or constructive) obligation resulting from a past event; ii) it is probable that an outflow of resources that comprise economic benefits will probably be required to settle the obligation; and iii) the amount can be reliably estimated. Where there are a number ofseveral similar obligations, the likelihood that an outflow of resources will be required to settle an obligation is determined by considering the nature of thethese obligations as a whole.
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Provisions are measured at the present value of the disbursements expected to be required to settle thean obligation using a pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the obligation. The increase in the provisionobligation due to the passage of time is recognized as a financial expense.
For financial statement presentation purposes, the provision is stated net of escrow deposits, based on the legal offset right. Escrow deposits not linked to the related obligations are recorded in noncurrent assets.
Escrow deposits not linked to the related obligations are recorded in noncurrent assets and adjusted by the indexes defined by the competent authorities.
F-27 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
The Company does not recognize contingent liabilities in the consolidated financial statements since it either does not expect outflows to be required or the amount of the obligation cannot be reliably measured.
Contingent assets are not recognized in the statements ofconsolidated financial position.statements.
3.16 3.17Environmental costs
Costs related to ongoing environmental programs are expensed in the income statement, when there is any indication of ana taxable event. Ongoing programs are designed to minimize the environmental impact of the operations and to manage the environmental risks inherent to the Company's activities.
3.17 3.18Income taxes – currentCurrent and deferred income tax and social contribution
Income taxes expenses comprise current and deferred income tax and social contributions.
Current taxes
The provision for income tax and social contribution is calculated based on the taxable incomeprofit for the year and the rates effective at the end of the year. The income tax was accrueddefined at a rate of 15%, plus a 10% surtax on taxable income exceeding R$ 240240.. The social contribution was accrueddefined at a rate 9%of 9% over the adjusted net income. Taxable income differs from net income (profit presented in the income statement), because it excludes income andor expenses taxable or deductible in other years, and excludes items not permanently taxable or not deductible. Income tax and social contribution are accrued based on legislation in place in the end of the year. The Company periodically evaluates and measures the positions taken in the income tax return with respect toregarding situations in which the applicable tax regulations are subject to interpretation. It establishes provisions, where appropriate, based on amounts expected to be paid to the tax authorities.
Deferred taxes
Deferred taxes are fully recognized on temporary differences arising between the tax basis of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred taxes are not accounted for if they arise from the initial recognition of an asset or liability in a transaction that does not affect the tax basis, except in business combinations. Deferred taxes are determined using tax rates (and laws) effective at the end of the reporting period and are expected to be applied when the related income tax and social contribution are realized.
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Deferred taxes
Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax basis of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction that at the time of the transaction affects neither accounting nor taxable profit nor loss, except for business combinations. Deferred income tax is determined using tax rates (and laws) effective at the end of the reporting period and expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.
Deferred income tax and social contribution assets are recognized only to the extent that it is probable that future taxable profit will be available for which temporary differences can be utilizedused and tax losses can be carryforward.offset.
Deferred taxestax assets and liabilities are offset when there is a legally enforceable right of offsettingto offset current tax assets against current tax liabilities and when deferred income tax assets and liabilities are related to income taxes levied by the same tax authority over the tax entity.
3.18 3.19Taxes on revenues
Revenues from sanitation services are recognized on accrual basis for PASEP (Programa de Formação do Patrimônio do Servidor Público)subject to Pasep (Public Servant Fund) and Cofins (Contribuição para o Financiamento da Seguridade Social), calculated at the(Contribution for Social Security Financing) rates of 1.65% and 7.60%, except for financial revenues that are calculated at the rates of 0.65% and 4.00%, respectively.
The taxes related to PASEPPasep and Cofins taxes incident on billed amounts invoiced to public entities are due when invoicesthe billes are received.
These taxes are calculated by the non-cumulativeness regime of noncumulative taxation and presented net of the corresponding credits, such as deductions from gross revenues. Tax debts calculated overThe lines “other operating income” and “financial revenues” are presented as deductions fromnet of such taxes on the respective operating income.income statement.
In addition, revenues from sanitation services are also subject to the Regulatory, Control and Oversight Fee (TRCF - Taxa de Regulação, Controle e Fiscalização)(TRCF), whose taxable event is the performance of regulatory, control and monitoring activities by ARSESP,São Paulo State Public Services Regulatory Agency (ARSESP), calculated at 0.50% of the annual revenue directly generated by the service provided less taxes levied on the service.
3.20Pension plan obligations
(a) Defined benefit
The Company makes contributions to defined benefit plans sponsored by it on a contractual basis. Regular contributions comprise the net administrative expenses and are recognized in the result of the period in which they are due.
Pension plan liabilities correspond to the present value of the obligation on the reporting date, less the fair value of the plan’s assets. The defined benefit obligations (G1), as well as the additional retirement and pension plan (G0), are calculated on an annual basis by independent actuaries, using the projected unit credit method. The estimated future cash outflows are discounted to their present value, using the interest rates of Government bonds with maturities that approximate those of the related liability.
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
3.19 Pension plan obligations
(a) Defined benefit
The Company makes contributions to defined benefit plans on a contractual basis and sponsored thereby. The regular contributions comprise the net administrative expenses and are recognized in the income statement for the period.
Liabilities from defined benefit pension plan obligations correspond to the present value of the defined benefit obligation at the end of the reporting period, less the fair value of the plan’s assets. The defined benefit obligation (G1) and (G0) are calculated on an annual basis by independent actuaries, using the projected unit credit method. The estimated future cash outflow is discounted to its present value, using the interest rates of Government bonds with maturities that approximate the maturity of the related liability.
Referring toRegarding actuarial gains and losses derivingarising from adjustments based on the experience and changes in actuarial assumptions are directly recorded under equity, as other comprehensive income (OCI), so that the plan's net assetsasset or liabilities areliability is recognized in the statement of financial position in order to reflect the full amount of plan’s deficit or surplus.
In anthe event where aof curtailment relatesor settlement of the plan, related to only some of the employees covered by athe plan, or where only part of an obligation is settled, the gain or loss includes a proportionateproportional share of the past service cost and actuarial gains and losses. The proportionateproportional share is determined based on the basis of the present value of the obligations before and after the curtailment or settlement.
(b) Defined contribution
The Company makes contributions to defined contributionbenefit plans sponsored by it on a contractual basis, and sponsored thereby, a supplementary private pension entity thatwhich provides post-employment benefits to its employees, in which the Company makes fixed and equal contributions to employees, within the limits set by regulation. In this model, the benefits paid are directly related to the amount contributed, with no deficits to be covered by the Company.
3.20 3.21Financial revenues and expensesincome (expenses)
Financial revenueincome is primarily comprised of interest and inflation adjustments resulting from financial investments, escrow deposits and negotiations with customercustomers to pay by installments, calculated using the effective interest rate method.
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Financial expenses are primarily comprised ofrefer to interest, inflation adjustments, and exchange rate changesvariation mainly on borrowings and financing, provisions, public-private partnership and program contract commitments. These financial incomecommitments, and expenses are calculated using the effective interest rate method.
Inflation adjustments and exchangeadjustment gains and losses derivearise from the collection or payment to third parties, as contractually required by law or court decision, and recognized on an accrual basis pro rata temporis. Inflation adjustments included in the agreements are not considered embedded derivatives, since they are deemed as inflation adjustment rates for the Company’s economic scenario.
F-30 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
3.21 3.22Leases
Leases are recognized at the present value of the contractual obligations, presented in assets as Right of Use (Note 15 (j)(f)) and in liabilities as Leases (Note 17 (b)), except for short-term contracts (12 months or less) and/or low value (below US$ 5 thousand – R$ 24 thousand), which are recorded in the income statement recognized as an expenseexpenses when incurred.
3.22 3.23Other current and noncurrent assets and liabilities
Other assets are statedrecorded at acquisition cost, net of any impairment loss, where applicable. The amounts recognized as otherOther liabilities are statedrecorded at known or estimated amounts, including, where applicable, related charges and inflation adjustments.financial charges.
3.23 3.24Dividends and interest on capital
The Company uses the tax benefitsbenefit of distributing dividends as interest on capital, as permitted by Brazilian Lawlaw and based on the Bylaws. This distribution of dividend isInterests are accounted for in accordance with Brazilianunder Law 9,249/951995 for tax deductibilitytax-deductibility purposes, limited to the daily pro rata fluctuationvariation of the Long-term Interest Ratelong-term interest rate (TJLP). The benefit attributed to the shareholders is recognized in the current liability against Equity, based on its by-laws. Dividends and interest on capitalEquity. Any amount over the minimum established in the by-laws aremandatory is recognized when approved by the shareholders in the shareholders’ meeting,General Meeting, except for taxes incurring in the distribution of interest on capital. The tax benefit of the interest on capital is accrued in the income statementprofit/loss of the year, under the same recognition basis of expenses with interest on capital.expenses.
3.24 3.25Present value adjustment
Current and noncurrent financial assets and liabilities arising from long- or short-term transactions are adjusted to present value based on market discount rates as of the transaction date, when the effects are significant.
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3.25 3.26Segment information
Operating segments are determined in a manner consistent with the internal reporting to the Company’s chief operating decision maker (“CODM”), which, in the case of SABESP, is comprised of the Board of Directors and the Board of Executive Officers, to make strategic decisions, allocate resources and evaluate performance.
Consequently, theThe Company determined that it has one operating segment which is sanitation services.
F-31 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
The accounting policies used to determine segment information are the same as those used to prepare the Company’s consolidated financial statements.
The measuremeasurement of the segment’sresult per segment is the profit or loss is operating incomefrom operations before other net operating expenses net and equity accounting, which excludes construction revenuecosts and related costs.revenue.
The CODM analyzes asset and liabilitityliability information on a consolidated basis. Consequently, the Company does not disclose segmentsegregated information on assets and liabilities.
Substantially all of the Company’s noncurrent assets and revenue generated from customers are located in the São Paulo State. Consequently, financial information is not disclosed by geographic area.
3.26 3.27Translation into foreignForeign currency translation
(a) Functional and reporting currency
Items included in the consolidated financial statements are measured using the currency of the primarymain economic environment in which the company operates ("the functional currency"). The consolidated financial statements are presented in Brazilian reais (R$), which is also the Company's functional currency. All financial information has been statedpresented in Brazilian reais and rounded to the next thousand, except where otherwise indicated.
(b) Foreign currency translation
Foreign currency-denominated transactions are translated into Brazilian reais using the exchange rates prevailing aton the transaction dates. StatementStatements of financial position accountsbalances are translated by the exchange rate prevailing aton the reporting date.
Exchange gains and losses resulting from the settlement of these transactions and the translation of foreign currency-denominated cashmonetary assets and liabilities are recognized in the income statement, except for borrowings and financing referring to property, plant and equipment or intangible assets in progress, where exchange losses are recognized as corresponding entry to the asset while construction is in progress, as described in Note 3.12.3.14.
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
4 | Changes in accounting practices and disclosures |
4.1 | New standards, amendments and interpretations effective for periods beginning on or after January 1, |
New standardsIFRS 17 – Insurance Contracts - The Company has no contracts that meet the definition of insurance contract according to this Standard.
The amendments to IAS 1 - Presentation of Financial Statements and revisionsIFRS Practice Statement 2 – Making Materiality Judgments; IAS 12 - Income Taxes – Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction (“single transaction”); IAS 12 – Income Taxes – International Tax Reform – Pillar Two Model Rules; IAS 8 - Accounting Policies, Changes in Estimates, and Errors—Definition of Accounting Estimates, did not impact the disclosures or amounts recognized in the annual consolidated financial statements.
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4.2 | New standards, amendments and interpretations |
The Company did not early adopt these standards and is assessing the impacts of the new and revised IFRS below on the disclosures or amounts recognized in the consolidated financial statements:
Schedule of recognized financial statements | ||
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Standard | Description | Impact |
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Amendments to IFRS 10 - Consolidated Statements and IAS 28 – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
| Clarify situations that involve the sale or contribution of assets between an investor and its
| The Company is assessing the impacts and effects of the amendments; however, it does not expect any effects from the amendments. |
F-33 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
Amendments to IAS 1 – Classification of Liabilities as Current or Non-Current | These amendments to IAS 1 only affect the presentation of liabilities as current or non-current in the statement of financial position and not the amount or
| The Company does not expect any impacts from this standard.
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Amendments to IAS 7 – Statament of Cash Flows and IFRS | The amendments
| The Company does not expect effects from |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
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The amendments do not impact the gain or |
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1 Effective for annual periods beginning on or after January 1, 2022.
2 Effective for annual periods beginning on or after January 1, 2023.
3 The effective date of the amendments has not yet been defined by IASB.
4 The amendments to IFRS Practice Statement 2 do not have an effective date or transition requirements.
1 | Effective for annual periods beginning on or after January 1, 2024. |
2 | The effective date of the amendments has not yet been defined by IASB. |
There are no other standards and interpretations not yet adopted that may, in the opinion of Management, have a significant impact on the result for the year of equity disclosed by the Company in its consolidated financial statements.
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5 | Risk |
5.1 | Financial Risk Management |
Financial risk factors
The Company's activities are affected by the Brazilian economic scenario, making it exposed to market risk (exchange rate and interest rate), credit risk and liquidity risk. Financial risk management is focused on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance.
The Company has not utilized derivative instruments in any of the reported periods.
(a) | Market risk |
Foreign currency risk
Foreign exchange exposure implies market risks associated with currency fluctuations, since the Company has foreign currency-denominated liabilities, arising from long-term funding, in development institutions, at more attractive interest rates, in U.S. dollars and YenYen.
F-35 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
The management of currency exposure considers several current and projected economic factors, besides market conditions.
This risk arises from the possibility that the Company may incur in losses due to exchange rate fluctuations that would impact liability balances of foreign currency-denominated borrowings and financing raised in the market and related financial expenses. The Company does not maintain hedge or swap contracts or any derivative financial instrument to hedge against this risk.
Part of the financial debt, totaling R$ 3.321.4892,785,853 as of December 31, 20212023 (R$ 3,563,1702,809,441 as of December 31, 2020)2022), is indexed to the U.S. dollar and Yen. The exposure to exchange risk is as follows:
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Schedule of exposure to exchange risk
Schedule of exposure to exchange risk | ||||||||||||
December 31, 2021 | December 31, 2020 | December 31, 2023 | December 31, 2022 | |||||||||
Foreign currency (in thousands) | R$ | Foreign currency (in thousands) | R$ | Foreign currency (in thousands) | R$ | Foreign currency (in thousands) | R$ | |||||
Borrowings and financing – US$ | 163,538 | 912,624 | 167,479 | 870,338 | 280,188 | 1,356,474 | 191,022 | 996,695 | ||||
Borrowings and financing – Yen | 49,324,813 | 2,390,774 | 52,969,560 | 2,671,255 | 41,078,385 | 1,405,702 | 45,369,189 | 1,795,259 | ||||
Interest and charges from borrowings and financing – US$ | 4,121 | 5,540 | 15,510 | 6,985 | ||||||||
Interest and charges from borrowings and financing – Yen | 13,970 | 16,037 | 8,167 | 10,502 | ||||||||
Total exposure | 3,321,489 | 3,563,170 | 2,785,853 | 2,809,441 | ||||||||
Borrowing cost – US$ | (22,486) | (12,342) | (37,520) | (31,037) | ||||||||
Borrowing cost – Yen | (2,850) | (2,966) | (2,442) | (2,646) | ||||||||
Total foreign-currency denominated borrowings (Note 17) | 3,296,153 | 3,547,862 | 2,745,891 | 2,775,758 |
The 7.11.1% decrease in the balance of the foreign currency-denominated debt from December 31, 20202023, compared to December 31, 2021 results from2022, was mainly impacted by the amortizationdepreciation of debt installments.
the US dollar and Yen against the Brazilian real. The table below shows the prices and exchange rate variation forvariations in the period:
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In 2021, there was a decrease in the liabilities of borrowings and financing contracts, in the amount of R$ 251,709 (in 2020 - R$ 2,811 increase), related to the exchange rate variation of loan and financing agreements. As of December 31, 2021, if the Brazilian real had depreciated or appreciated by 10 percentage points, in addition to the impacts mentioned above, against the U.S. dollar and Yen with all other variables held constant, effects on results before taxes on the year would have been R$ 332,149 (R$ 356,317 as of December 31, 2020), lower or higher, mainly as a result of exchange losses or gains on the translation of foreign currency-denominated loans.
The probable scenario below presents the effect in the income statements for the next 12 months considering the projection of the U.S. dollar and the yen.
The Company understands that the scenario presented is reasonable, given the instability of the Brazilian real against the U.S. dollar and the Yen.
F-36 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Schedule of prices exchange variations | |||
December 31, 2023 | December 31, 2022 | Variation | |
US$ | R$ 4.8413 | R$ 5.2177 | -7.2% |
Iene | R$ 0.03422 | R$ 0.03957 | -13.5% |
Borrowings and financing decreased R$ 309,854 in 2023 (a decrease of R$ 488,614 in 2022), see Note 17 (ii). As of December 31, 2023, if the Brazilian real had depreciated or appreciated by 10 percentage points, in addition to the impacts already mentioned above, against the U.S. dollar and Yen with all other variables held constant, the effects on the result before funding costs in the year would have been R$ 278,586 in 2023 (R$ 280,944 in 2022), lower or higher.
The probable scenario below presents the effect on the income statements for the next 12 months considering the projected rates of the U.S. dollar and the Yen.
The Company understands that the scenario presented is reasonable, given the instability of the Brazilian real against the U.S. dollar and the Yen.
Schedule of scenario of effect on the income statement | ||
Probable scenario | ||
(*) | ||
Net currency exposure as of December 31, | ||
US$ rate as of December 31, | 2023 | |
Exchange rate estimated according to the scenario |
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Difference between the rates | ||
Effect on the net financial result R$ - | ||
Net currency exposure as of December 31, | ||
Yen rate as of December 31, | 2023 | |
Exchange rate estimated according to the scenario |
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Difference between the rates | ||
Effect on the net financial result R$ - | (69,012) | |
Total effect on the net financial result in R$ - | (113,478) | |
(*) | For the probable scenario in U.S. |
F-37 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
Interest rate risk
This risk arises from the possibility that the Company could incur losses due to fluctuations in interest rates, increasing the financial expenses related to borrowings and financing.
The Company has not entered into any derivative contract to hedge against this risk; however continually monitors market interest rates, in order to evaluate the possible need to replace its debt.
The table below provides the borrowings and financing subject to different inflation adjustment indices:
Schedule of borrowings and financing subject to different inflation adjustment indices | ||
December 31, 2023 | December 31, 2022 | |
CDI(i) | 9,966,111 | 9,251,150 |
TR(ii) | 1,684,711 | 1,635,587 |
IPCA(iii) | 3,038,378 | 3,073,435 |
TJLP(iv) | 1,365,806 | 1,433,029 |
SOFR(v) | 1,356,473 | 996,697 |
Interest and charges | 392,906 | 424,856 |
Total | 17,804,385 | 16,814,754 |
(i) | CDI – (Certificado de Depósito Interbancário), an interbank deposit certificate |
TR – Interest Benchmark Rate |
(iii) | IPCA – (Índice Nacional de Preços ao Consumidor Amplo), a consumer price index |
(iv) | TJLP – (Taxa de Juros a Longo Prazo), a long-term interest rate index |
(v) | SOFR – Secured Overnight Financing Rate |
F-38 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
The table below provides the Company's borrowings and financing subject to variable interest rates:
December 31, 2021 | December 31, 2020 | |||
CDI(i) | 7,612,299 | 7,836,988 | ||
TR(ii) | 1,638,079 | 1,619,416 | ||
IPCA(iii) | 3,019,459 | 2,176,547 | ||
TJLP(iv) | 1,478,740 | 1,517,657 | ||
LIBOR(v) | 912,626 | 870,337 | ||
Interest and charges | 243,696 | 164,439 | ||
Total | 14,904,899 | 14,185,384 |
Another risk to which the Company is exposed, is the mismatch of monetary restatementinflation adjustment indices of its debts with those of its service revenues. Tariff adjustments of services provided by the Company do not necessarily follow the increases in the inflation indexes to adjust borrowings, financing and interest rates affecting indebtedness
As of December 31, 2021,2023, if interest rates on borrowings and financing had been 1 percentage point higher or lower with all other variables held constant, the effects on profit before taxes for the year would have been R$ 149,049178,044 (R$ 141,854168,148 as of December 31, 2020)in 2022) lower or higher, mainly as a result of lower or higher interest expense on floating rate borrowings and financing.
(b) Credit risk
Credit risk arises fromis related to cash and cash equivalents, financial investments, as well as credit exposures to wholesale basis and retail customers, including outstanding accounts receivable, restricted cash and accounts receivable from related parties. Credit risk exposure to customers is mitigated by sales to a dispersed base.
The maximum exposuresexposure to credit risk as of December 31, 20212023 is the carrying amount of instruments classified as cash and cash equivalents, financial investments, restricted cash, trade receivables and accounts receivable from related parties in the balance sheet date. See additional information in Notes 7, 8, 9, 10 and 11.
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Regarding the financial assets held with financial institutions, the credit quality was assessed by reference to external credit ratings (if available) or to historical information about the bank’s default rates. For the credit quality of the banks, such as deposits and financial investments, the Company considersassesses the lower rating published by three main international rating agencies (Fitch, Moody's and S&P), according to internal policy of market risk management:as follows:
Schedule of credit risk | |||
Banks | Fitch | Moody's | Standard Poor's |
Banco do Brasil S/A | AAA.br | - | |
Banco Santander Brasil S/A | - | AAA.br | brAAA |
Brazilian Federal Savings Bank | AAA.br | brAAA | |
Banco Bradesco S/A | AAA(bra) | AAA.br | brAAA |
Banco Itaú Unibanco | AAA(bra) | AAA.br | |
Banco BV | - | AA.br | brAAA |
Banco BTG Pactual S/A | AAA.br |
F-39 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
The table below shows the rating assessment releaseddisclosed by the Fitch, agency, for deposit transactions and financial investments in local currency (R$ - domestic rating):is as follows:
Schedule of rating assessment | ||||||
December 31, 2021 | December 31, 2020 | December 31, 2023 | December 31, 2022 | |||
Cash and cash equivalents and financial investments | ||||||
AA(bra) | 1,905,810 | 2,662,685 | - | 2,237,629 | ||
AAA(bra) | 970,474 | 891,243 | 2,940,690 | 1,011,685 | ||
Other (*) | 275,030 | 253,619 | ||||
Others (*) | 324,546 | 296,044 | ||||
3,151,314 | 3,807,547 | 3,265,236 | 3,545,358 |
(*) |
(c) Liquidity risk
Liquidity is primarily reliant upon cash provided by operating activities and borrowings and financing obtained in the local and international capital markets, as well as the payment of debts. The liquiditymanagement of this risk management considers the assessment of its liquidity requirements to ensure it has sufficient cash to meet its operating and capital expenditures needs,needs.
The funds held are invested in interest-bearing current accounts, time deposits and securities, with instruments with appropriate maturity or liquidity sufficient to provide margin as well asdetermined by the paymentprojections mentioned above.
The table below shows the financial liabilities, by maturity, including the installments of debts.principal and future interest. For agreements with floating interest rates, the interest rates used correspond to the base date of December 31, 2023.
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
The funds held by the Company are invested in interest-bearing current accounts, time deposits and securities, selecting instruments with appropriate maturity or liquidity sufficient to provide margin as determined by projections mentioned above.
The table below shows the financial liabilities of the Company, by relevant maturities, including the installments of principal and future interest to be paid according to the agreement. Future interest was calculated based on the contractual clauses for all agreements. For agreements with floating interest rate, the interest rates used correspond to the base dates above.
Schedule of liquidity risk | |||||||||||||||||||||
2022 | 2023 | 2024 | 2025 | 2026 | 2027 onwards | Total | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 onwards | Total | ||||||||
As of December 31, 2021 | |||||||||||||||||||||
As of December 31, 2023 | |||||||||||||||||||||
Liabilities | |||||||||||||||||||||
Borrowings and financing | 2,767,867 | 2,749,335 | 2,939,155 | 2,976,535 | 2,721,792 | 12,484,891 | 26,639,575 | 4,242,785 | 3,793,478 | 3,444,022 | 3,345,107 | 2,454,561 | 10,862,692 | 28,142,645 | |||||||
Trade payables and contractors | 236,763 | — | — | — | — | — | 236,763 | 456,215 | - | - | - | - | - | 456,215 | |||||||
Services payable | 469,027 | — | — | — | — | — | 469,027 | 750,732 | - | - | - | - | - | 750,732 | |||||||
Public-Private Partnership – PPP | 429,942 | 430,440 | 379,684 | 351,586 | 351,586 | 4,068,466 | 6,011,704 | 488,086 | 449,838 | 464,863 | 480,389 | 496,434 | 6,210,305 | 8,589,915 | |||||||
Program Contract Commitments | 77,465 | 36,442 | 1,126 | 1,126 | 1,126 | 12,983 | 130,268 | 21,622 | 1,215 | 1,215 | 11,550 | 38,032 | |||||||||
Total | 5,959,440 | 4,244,531 | 3,910,100 | 3,826,711 | 2,952,210 | 17,084,547 | 37,977,539 |
Cross default
The Company has borrowings and financing agreements including cross default clauses, e.g.i.e., the early maturity of any debt may imply the early maturity of these agreements. The indicators are continuously monitored in order to avoid the execution of these clauses, and the moremost restrictive ones are showed in Note 17 (c).
(d) Sensitivity analysis on interest rate risk
The table below shows the sensitivity analysis of the financial instruments, prepared in accordance with IFRS 7, in order to evidence the balances of main financial assets and liabilities, calculated at a rate projected for the twelve-month period after December 31, 2021,2023, or until the final settlement of each contract, whichever is shorter,occurs first, considering a likely scenario.
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The purpose of the sensitivity analysis is to measure the impact of changes in the market overon the financial instruments, considering constant all other variables. InAt the time of settlement the amounts can be different from those presented, due to the estimates used in the measurement.
December 31, 2021 | ||||
Indicators | Exposure | Scenario I (Probable) | ||
Assets | ||||
CDI | 1,533,614 | 11.79%(**) | ||
Financial income | 180,813 | |||
Liabilities | ||||
CDI | (7,612,299) | 11.79%(**) | ||
Interest to be incurred | (897,490) | |||
CDI net exposure | (6,078,685) | (716,677) | ||
Liabilities | ||||
TR | (1,638,079) | 0.0276%(**) | ||
Expenses to be incurred | (452) | |||
IPCA | (3,019,459) | 5.0302%(*) | ||
Expenses to be incurred | (151,885) | |||
TJLP | (1,478,740) | 6.4400%(***) | ||
Interest to be incurred | (95,231) | |||
LIBOR | (912,626) | 0.536%(**) | ||
Interest to be incurred | (4,892) | |||
Total expenses to be incurred, net | (969,137) |
F-41 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Schedule of sensitivity analysis on interest rate risk | ||
December 31, 2023 | ||
Indicators | Exposure | Probable scenario |
Assets | ||
CDI | 3,233,218 | 10.0400%(**) |
Financial income | 324,615 | |
Liabilities | ||
CDI | (9,966,111) | 10.0400%(**) |
Interest to be incurred | (1,000,598) | |
CDI net exposure | (6,732,893) | (675,983) |
Liabilities | ||
TR | (1,684,711) | 0.0064%(**) |
Expenses to be incurred | (108) | |
IPCA | (3,038,378) | 3.9000%(*) |
Expenses to be incurred | (118,497) | |
TJLP | (1,365,806) | 6.4300%(*) |
Interest to be incurred | (87,821) | |
SOFR (***) | (1,356,473) | 4.8193%(**) |
Interest to be incurred | (65,373) | |
Total expenses to be incurred, net | (947,782) |
(*) | Source: BACEN of December 31, 2023 |
(**) | Source: B3 of December 31, 2023 |
(***) | Source: Bloomberg |
5.2 | Capital management |
The Company’s objectives when managing capital are to ensure its abilityit continues to continue as a going concernincrease investments in order toinfrastructure, provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital.
F-42 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
Capital is monitored based on the leverage ratio, which corresponds to net debt divided by total capital (shareholders and providers of capital). Net debt corresponds to total borrowings and financing less cash and cash equivalents and financial investments. Total capital is calculated as total equity plus net debt, as shown in the statement of the financial position plus net debt.position.
Schedule of capital management | ||
December 31, 2023 | December 31, 2022 | |
Total borrowings and financing (Note 17) | 19,536,350 | 18,958,671 |
(-) Cash and cash equivalents (Note 7) | (838,484) | (1,867,485) |
(-) Financial investments (Note 8) | (2,426,752) | (1,677,873) |
Net debt | 16,271,114 | 15,413,313 |
Total equity | 29,857,376 | 27,333,533 |
Total (shareholders plus providers of capital) | 46,128,490 | 42,746,846 |
Leverage ratio | 35% | 36% |
December 31, 2021 | December 31, 2020 | |||
Total borrowings and financing (Note 17) | 17,723,836 | 17,258,624 | ||
(-) Cash and cash equivalents (Note 7) | (717,929) | (396,401) | ||
(-) Financial investments (Note 8) | (2,433,385) | (3,411,146) | ||
Net debt | 14,572,522 | 13,451,077 | ||
Total equity | 24,931,859 | 22,793,704 | ||
Total capital (shareholders + providers of capital) | 39,504,381 | 36,244,781 | ||
Leverage ratio | 37% | 37% |
As of December 31, 2021, the leverage ratio remained at 37% compared to December 31, 2020, mainly due to the increase in total equity, resulting from the profit of December 31, 2021, mitigated by the decrease in cash and cash equivalents.
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5.3 | Fair value estimates |
The Company considers that balances from trade receivables (current) and trade payables and contractors by carrying amount less impairment approximate their fair values, considering the short maturity. Long-term trade receivables also approximate their fair values, as they will be adjusted by inflation and/or will bear contractual interest rates over time.
5.4 | Financial instruments |
The Company did not have financial assets classified as fair value through other comprehensive income and fair value through profit or loss. The Company’s financial instruments included in the amortized cost category comprise cash and cash equivalents, financial investments, restricted cash, trade receivables, balances with related parties, other receivables,assets and balances receivable from the Water and Basic Sanitation National Agency – ANA, trade payables and contractors,(ANA), accounts payable to suppliers, borrowings and financing, services payable, balances payable deriving from the Public Private Partnership-PPP and program contract commitments, which are non-derivative financial assets and liabilities with fixed or determinable payments, not quoted in an active market, except for cash equivalents and financial investments.
The estimated fair values of the financial instruments are as follows:
Financial assets
December 31, 2021 | December 31, 2020 | |||||||
Carrying amount | Fair value | Carrying amount | Fair value | |||||
Cash and cash equivalents | 717,929 | 717,929 | 396,401 | 396,401 | ||||
Financial investments | 2,433,385 | 2,433,385 | 3,411,146 | 3,411,146 | ||||
Restricted cash | 28,467 | 28,467 | 35,742 | 35,742 | ||||
Trade receivables | 2,918,311 | 2,918,311 | 2,450,986 | 2,450,986 | ||||
Water and Basic Sanitation National Agency – ANA | 20,666 | 20,666 | 26,463 | 26,463 | ||||
Other assets | 226,242 | 226,242 | 246,110 | 246,110 |
Additionally, SABESP has financial instrument assets receivables from related parties, in the amount of R$818,552 as of December 31, 2021 (R$806,645 as of December 31, 2020), which were calculated in accordance with the conditions negotiated between related parties. The conditions and additional information referring to these financial instruments are disclosed in Note 11 to the financial statements. Part of this balance, in the amount of R$741,910 (R$732,391 as of December 31, 2020), refers to reimbursement of additional retirement and pension plan - G0 and is indexed by IPCA plus simple interest of 0.5% p.m. This interest rate approximates that one practiced by federal government bonds (NTN-b) with terms similar to those of related-party transactions.
F-43 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Financial liabilities
The estimated fair values of the financial instruments were as follows:
December 31, 2021 | December 31, 2020 | |||||||
Carrying amount | Fair value | Carrying amount | Fair value | |||||
Borrowings and financing | 17,723,836 | 17,947,954 | 17,258,624 | 17,702,649 | ||||
Trade payables and contractors | 236,763 | 236,763 | 263,741 | 263,741 | ||||
Services payable | 469,027 | 469,027 | 453,750 | 453,750 | ||||
Program contract commitments | 122,647 | 122,647 | 231,480 | 231,480 | ||||
Public-Private Partnership - PPP | 3,060,185 | 3,060,185 | 3,175,273 | 3,175,273 |
Financial Assets
Schedule of estimated fair values of the financial instruments | ||||
December 31, 2023 | December 31, 2022 | |||
Carrying amount | Fair value | Carrying amount | Fair value | |
Cash and cash equivalents | 838,484 | 838,484 | 1,867,485 | 1,867,485 |
Financial investments | 2,426,752 | 2,426,752 | 1,677,873 | 1,677,873 |
Restricted cash | 54,944 | 54,944 | 37,474 | 37,474 |
Trade receivables | 3,856,723 | 3,856,723 | 3,277,808 | 3,277,808 |
Water and Basic Sanitation National Agency – ANA | 2,673 | 2,673 | 9,193 | 9,193 |
Other assets | 196,065 | 196,065 | 212,674 | 212,674 |
ToAdditionally, SABESP has financial instrument assets receivables from related parties, totaling R$1,196,545 as of December 31, 2023 (R$1,156,743 as of December 31, 2022), which were calculated under the conditions negotiated between related parties. The conditions and additional information related to these financial instruments are disclosed in Note 11. Part of this balance, totaling R$1,076,174 (R$1,060,040 as of December 31, 2022), refers to reimbursement of additional retirement and pension plan - G0, indexed by IPCA plus simple interest of 0.5% p.m. On the transaction date, this interest rate approximated that of National Treasury Notes (NTN-b) with a term similar to the terms of related-party transactions.
Financial liabilities
Schedule of financial liabilities | ||||
December 31, 2023 | December 31, 2022 | |||
Carrying amount | Fair value | Carrying amount | Fair value | |
Borrowings and financing | 19,536,350 | 19,950,055 | 18,958,671 | 19,260,133 |
Trade payables and contractors | 456,215 | 456,215 | 430,946 | 430,946 |
Services payable | 750,732 | 750,732 | 723,242 | 723,242 |
Program contract commitments | 34,016 | 34,016 | 112,385 | 112,385 |
Public-Private Partnership - PPP | 3,286,614 | 3,286,614 | 2,959,181 | 2,959,181 |
F-44 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
The criteria adopted to obtain the fair valuevalues of borrowings and financing the following criteria have been adopted:are as follows:
(i) | Agreements with CEF (Brazilian Federal Savings Bank) were projected until their final maturities, at the average interest rate plus TR x DI and the average contractual term, were adjusted to present value by a funding rate specific for the Company in similar contracts, plus TR x DI, on the end of the reporting period. TR x DI rates were obtained with B3. |
(ii) | The debentures were projected up to the final maturity date according to contractual rates (IPCA, DI, TJLP or TR), and adjusted to present value considering the future interest rate published by |
(iii) | Financing – BNDES corresponds to instruments valued at their carrying amount restated until the maturity date, and are indexed by the long-term interest rate (TJLP). |
These financings have specific characteristics and conditions defined in the financing agreements with BNDES, between independent parties, and reflect the conditions for these types of financing. Brazil does not have a consolidated market of long-term debts with the same characteristics of BNDES financing; thus, the offering of credit to the entities in general, with such long-term characteristics, is usually restricted to BNDES.
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(iv) | Other financings in local currency are considered by the carrying |
(v) | Agreements with IDB and IBRD were projected until final maturity in origin currency, using the contracted interest rates |
F-45 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
(vi) | Agreements with |
(vii) | Lease and finance |
Financial instruments referring to financial investments and borrowings and financing are classified as Level 2 in the fair value hierarchy.
Considering the nature of other financial instruments, assets and liabilities, the balances recognized in the statement of financial position approximate the fair values, except for borrowings and financing, considering the maturities close to the end of the reporting date, comparison of contractual interest rates with market rates in similar operations at the end of the reporting period, their nature and maturity terms.
6 | Key accounting estimates and judgments |
The preparation of the consolidated financial statements requires managementManagement to make certaindisclose judgments (except for those involvingthat involve estimates) that have a significant impact on the amounts recognized based on experience and other factors deemed as relevant, which affect the values of assets and liabilities and which may present results that may differ from the actual results.
|
The Company establishes estimates and assumptions regarding the future, which are reviewed on a timely basis. Such accounting estimates, by definition, may differ from the actual results. The effects arising from the reviews of the accounting estimates are recognized in the period in which the estimates are reviewed.
6.1 Key accountingMain judgments in applying the application of accounting policies
The Company assessed the main accounting policies that involve judgments, except for those that involve estimates, and concluded that none of them have a significant effect.
6.2 Main sources of uncertainties in the estimates
The areas that require a higher level of judgment and have greater complexity, as well as those in which assumptions and estimates that are significant for the consolidated financial statements are disclosed as follows:
F-46 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
(a) | Allowance for doubtful accounts |
The Company establishes an allowance for doubtful accounts in an amount that Management considers sufficient to cover expected losses (see Note 10 (c)), ), based on an analysis of trade receivables, in accordance with the accounting policy stated in Notes 3.23.3 and 3.4.3.5.
The methodology for determining such losses requires significant estimates, considering several factors, among which an evaluation of receipts historical, current economic trends, estimates of forecast write-offs, the aging of the accounts receivable portfolio and expectation of future losses. Although the Company believes that the assumptions used are reasonable, the actual results may be different.
(b) | Intangible assets arising from concession agreements and program contracts |
The Company recognizes as intangibleIntangible assets are those arising from concession agreementscontracts, and estimates the fair value of constructions and other infrastructure works to recordmain costs are transferred from the cost of intangible assets, which are recognized upon the construction of the infrastructure, and it is likely that such asset will generate future economic benefits.Contract Asset, as described in Note 3.8.
Intangible assets under Concession Agreements, Service Agreements and Program Contracts, are amortized on a straight-line basis according to the period of the contract or the useful life of the asset or contract period, which occurs first.the lowest of them. Additional information on the accounting for intangible assets arising from concession agreements is described in Notes 3.93.10 and 15.
The recognition of the fair value of the intangible assets arising from an exchange for an asset, involving concession agreements is subject to assumptions and estimates, and the use of different assumptions may affect the accounting records. Different assumptions and future changes in the useful life of these intangible assets may have significant impacts on the result of the operations.operations.
|
(c) | Pension |
The Company sponsors a defined benefit plan and the defined contribution plan, as described in Notes 3.193.20 and 21.22.
Defined pension plan obligations recognized in the statement of financial position consist of the present value of the defined benefit obligation on the reporting date less the fair value of the plan’s assets. The obligation of such benefit is calculated on an annual basis by independent actuaries, using the projected credit unit method. The present value of the defined benefit obligation is determined by discounting estimated future cash outflows, using interest rates compatible with market returns, which are denominated in the currency in which benefits will be paid and with maturity terms close to those of corresponding pension plan obligation.
F-47 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
(d) | Deferred income tax and social contribution |
The Company recognizes and settles taxes on income based on the results of operations calculated according to Brazilian Corporation Law, taking into consideration the provisions of the tax laws. Deferred tax assets and liabilities are recorded based on the differences between the accounting balances and the tax bases of the assets and liabilities.
The Company regularly reviews the recoverability of deferred tax assets and recognizes a provision for impairment if it is probable that these assets will not be realized, based on the historic taxable income, on the projection of future taxable income and on the estimated period for reversing the temporary differences. These calculations require the use of estimates and assumptions. The use of different estimates and assumptions could result in a provision for impairment of all or a significant part of the deferred tax asset. Additional information on deferred taxes is described in Notes 3.163.18 and 19.
(e) | Provisions |
The provisions for civil, labor, environmental and tax risks are created based on Notes 3.153.16 and 20. Judgments regarding future events may significantly differ from actual estimates and exceed the amounts provisioned. The provisions are revised and adjusted to taketaking into consideration changes in the circumstances involved.
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(f) | Unbilled revenue |
Unbilled revenue corresponds to services rendered for which readings have not been made yet. They are recognized based on monthly estimates calculated according to average billing. Additional information on revenue and accounts receivable are described in Notes 3.33.4 and 10.
7 | Cash and cash equivalents |
Cash and cash equivalents
Schedule of Cash and cash equivalents | ||||||
December 31, 2021 | December 31, 2020 | December 31, 2023 | December 31, 2022 | |||
Cash and banks | 146,853 | 74,033 | 31,187 | 139,844 | ||
Cash equivalents | 571,076 | 322,368 | 807,297 | 1,727,641 | ||
Total | 717,929 | 396,401 | 838,484 | 1,867,485 | ||
F-48 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
Cash and cash equivalents include cash, bank deposits and high-liquidity short-term financial investments, mainly represented by repurchase agreements, fund shares (accruing Interbank Deposit Rate - CDI interest rates) and CDBs, whose original maturities or intention of realization are lower than three months, which are convertible into a cash amount and subject to an insignificant risk of change in value.
TheAs of December 31, 2023, the average yield of cash equivalents correspondscorresponded to 96.0096.25% of CDI in(95.69% as of December 2021 (95.82% in December 2020)31, 2022).
8 | Financial investments |
The Company has financial investments in Bank Deposit Certificate - CDB, with daily liquidity, which it does not intend to use in the next three months, as shown below:
Schedule of financial investments | ||||||
December 31, 2021 | December 31, 2020 | December 31, 2023 | December 31, 2022 | |||
Banco BV | 262,465 | 253,066 | 322,240 | 289,909 | ||
Banco Itaú S/A | 366,906 | 354,296 | ||||
Banco Itaú Unibanco S/A | - | 403,732 | ||||
Banco Bradesco S/A | 524,791 | 506,136 | 643,445 | 578,752 | ||
Banco BTG Pactual S/A | 367,361 | 354,299 | 449,241 | 404,363 | ||
Banco do Brasil S/A | 911,862 | 1,943,349 | 1,011,826 | 1,117 | ||
2,433,385 | 3,411,146 | 2,426,752 | 1,677,873 |
TheAs of December 31, 2023, the average yield of the financial investments correspondscorresponded to 101.57103.3% of CDI in December 20212023 (98.95102.90% inas of December 2020)31, 2022).
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9 | Restricted cash |
Schedule of restricted cash
December 31, 2021 | December 31, 2020 | |||
Agreement with the São Paulo municipal government (i) | 21,464 | 29,599 | ||
Brazilian Federal Savings Bank – escrow deposits (ii) | 740 | 272 | ||
Other | 6,263 | 5,871 | ||
28,467 | 35,742 |
Schedule of restricted cash | ||
December 31, 2023 | December 31, 2022 | |
Agreement with the São Paulo Municipal Government (i) | 47,749 | 30,231 |
Brazilian Federal Savings Bank – escrow deposits | 365 | 433 |
Other | 6,830 | 6,810 |
54,944 | 37,474 |
(i) | Refers to the amount deducted from the transfer of 7.5% of the revenue earned in the municipality to the Municipal Fund for Environmental Sanitation and Infrastructure, corresponding to eventual amounts unpaid by direct management bodies, foundations and government agencies, as established in the agreement entered into with |
F-49 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
10 | Trade receivables |
(a) Financial position balances
Schedule of financial position
Schedule of financial position balances | ||||||
December 31, 2021 | December 31, 2020 | December 31, 2023 | December 31, 2022 | |||
Private sector: | ||||||
General (i) and special customers (ii) | 2,042,023 | 1,663,738 | 2,200,921 | 2,287,782 | ||
Agreements (iii) | 514,616 | 398,367 | 839,010 | 416,550 | ||
2,556,639 | 2,062,105 | 3,039,931 | 2,704,332 | |||
Government entities: | ||||||
Municipal | 586,810 | 473,201 | 623,601 | 609,731 | ||
Federal | 7,869 | 3,859 | 8,036 | 10,644 | ||
Agreements (iii) | 278,844 | 333,740 | 374,372 | 372,943 | ||
873,523 | 810,800 | 1,006,009 | 993,318 | |||
Wholesale customers – Municipal governments: (iv) | ||||||
Mogi das Cruzes | 3,580 | 3,582 | 4,343 | 4,048 | ||
São Caetano do Sul | 24,464 | 18,808 | 45,333 | 45,367 | ||
Total wholesale customers – Municipal governments | 28,044 | 22,390 | 49,676 | 49,415 | ||
Unbilled supply | 740,193 | 713,310 | 1,138,316 | 959,260 | ||
Subtotal | 4,198,399 | 3,608,605 | 5,233,932 | 4,706,325 | ||
Allowance for doubtful accounts | (1,280,088) | (1,157,619) | (1,377,209) | (1,428,517) | ||
Total | 2,918,311 | 2,450,986 | 3,856,723 | 3,277,808 | ||
Current | 2,695,077 | 2,204,029 | 3,584,287 | 3,062,574 | ||
Noncurrent | 223,234 | 246,957 | 272,436 | 215,234 | ||
2,918,311 | 2,450,986 | |||||
Total | 3,856,723 | 3,277,808 |
(i) | General customers - residential and small and mid-sized companies; |
(ii) | Special customers - large consumers, commercial, industries, condominiums and special billing customers (fixed demand agreements, industrial waste, wells, among others); |
(iii) | Agreements - installment payments of past-due receivables, plus |
(iv) | Wholesale basis customers - municipal governments - This balance refers to |
F-50 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
(b) The aging of trade receivables is as follows
Schedule of aging of trade receivables
December 31, 2021 | December 31, 2020 | |||
Current | 1,896,535 | 1,793,104 | ||
Past-due: | ||||
Up to 30 days | 502,164 | 340,760 | ||
From 31 to 60 days | 267,723 | 177,103 | ||
From 61 to 90 days | 182,977 | 120,488 | ||
From 91 to 120 days | 155,018 | 88,323 | ||
From 121 to 180 days | 258,718 | 113,060 | ||
From 181 to 360 days | 95,751 | 82,365 | ||
Over 360 days | 839,513 | 893,402 | ||
Total past-due | 2,301,864 | 1,815,501 | ||
Total | 4,198,399 | 3,608,605 |
The increase in the past-due balance was mainly due to higher delinquency in the private sector.
Schedule of the aging of trade receivables | ||
December 31, 2023 | December 31, 2022 | |
Current | 2,723,975 | 2,244,754 |
Past-due: | ||
Up to 30 days | 627,986 | 489,709 |
From 31 to 60 days | 271,476 | 248,128 |
From 61 to 90 days | 181,639 | 165,306 |
From 91 to 120 days | 127,421 | 150,941 |
From 121 to 180 days | 290,610 | 281,530 |
From 181 to 360 days | 57,289 | 58,702 |
Over 360 days | 953,536 | 1,067,255 |
Total past-due | 2,509,957 | 2,461,571 |
Total | 5,233,932 | 4,706,325 |
F-51 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
(c) Allowance for doubtful accounts
Schedule of allowance for doubtful accounts
December 31, 2021 | December 31, 2020 | December 31, 2019 | |||||||
Schedule of allowance for doubtful accounts | |||||||||
Changes in assets | December 31, 2023 | December 31, 2022 | December 31, 2021 | ||||||
Balance at beginning of the year | 1,157,619 | 1,042,015 | 1,099,442 | 1,428,517 | 1,280,088 | 1,157,619 | |||
Additions | 182,547 | 176,776 | 54,064 | ||||||
Constitution/(reversal) of losses | 21,103 | 209,360 | 182,547 | ||||||
Recoveries | (60,078) | (61,172) | (111,491) | (72,411) | (60,931) | (60,078) | |||
Balance at the end of the year | 1,280,088 | 1,157,619 | 1,042,015 | 1,377,209 | 1,428,517 | 1,280,088 |
Schedule of reconciliation of estimated/historic losses of income
Schedule of estimated reconciliation | |||||||||
Reconciliation of estimated/historical losses of income | December 31, 2021 | December 31, 2020 | December 31, 2019 | December 31, 2023 | December 31, 2022 | December 31, 2021 | |||
Write-offs | (508,055) | (329,512) | (179,929) | (703,325) | (636,366) | (508,055) | |||
(Losses)/reversal with state entities - related parties | (13,206) | 290 | (5,597) | (903) | 2,738 | (13,206) | |||
(Losses) with the private sector / government entities | (182,547) | (176,776) | (54,064) | ||||||
(Losses)/reversal with the private sector / government entities | (21,103) | (209,360) | (182,547) | ||||||
Recoveries | 60,078 | 61,172 | 111,491 | 72,411 | 60,931 | 60,078 | |||
Amount recorded expense (Note 29) | (643,730) | (444,826) | (128,099) | (652,920) | (782,057) | (643,730) |
The Company does not have customers representingindividually accounting for 10% or more of its total revenues.
F-52 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
(d) Judicial Payment Order
The Company has judicial payment order issued as a result of final and unappealable lawsuits for the collection of unpaid water and sewage bills from public entities. These bills are considered allowance for doubtful accounts ('PECLD') in their entirety, and the updated values of said bills, calculated according to the respective judicial payment order, are not recognized due to uncertainties regarding their realization.
(a) Accounts receivable, interest on capital payable, revenueAs of December 31, 2023, the Company has judicial payment order issued in its favor, currently totaling R$ 3,085,265 (R$ 2,807,318 as of December 31, 2022), which, as mentioned above, are fully provisioned at their original value and expensesdo not have their respective updates recognized in the consolidated financial statements.
The reversal of the PECLD for the original bills and their update are recognized when uncertainties regarding their realization are mitigated, i.e. when the realization value becomes determinable due to the predictability of the commencement of its receipt or when negotiated with São Paulothird parties.
Schedule
The Company did not negotiate its judicial payment order in the current fiscal year or in the comparative years, and there are no ongoing negotiations, as follows:
Schedule of judicial bonds | ||
Debtor | December 31, 2023 | December 31, 2022 |
Municipality of São Paulo | 3,042,927 | 2,656,113 |
Municipality of Cotia | 15,456 | 103,729 |
Municipality of Cachoeira Paulista | 14,964 | 13,672 |
Others | 11,918 | 33,804 |
TOTAL | 3,085,265 | 2,807,318 |
Additionally, the Company negotiated registered warrants for overdue bills with the municipalities of accounts receivable, interest on capital payable, revenueGuarulhos, Santo André, and expensesMauá in previous fiscal years, which are currently suspended as they serve as collateral for the fulfillment of contracts entered into with Sao Paulothe municipalities.
December 31, 2021 | December 31, 2020 | |||
Accounts receivable | ||||
Current: | ||||
Sanitation services (i) | 127,614 | 109,078 | ||
Allowance for losses (i) | (52,333) | (39,127) | ||
Reimbursement for retirement and pension benefits paid (G0): | ||||
- monthly flow (payments) (ii) and (vi) | 11,930 | 22,726 | ||
- GESP Agreement – 2015 (iv) | 86,446 | 75,377 | ||
Total current | 173,657 | 168,054 | ||
Noncurrent: | ||||
Agreement for the installment payment of sanitation services | 1,361 | 4,303 | ||
Reimbursement of additional retirement and pension benefits paid (G0): | ||||
- GESP Agreement – 2015 (iv) | 643,534 | 634,288 | ||
Total noncurrent | 644,895 | 638,591 | ||
Total receivables from shareholders | 818,552 | 806,645 | ||
Assets: | ||||
Sanitation services | 76,642 | 74,254 | ||
Reimbursement of additional retirement and pension benefits (G0) | 741,910 | 732,391 | ||
Total | 818,552 | 806,645 | ||
Liabilities: | ||||
Interest on capital payable to related parties | 275,240 | 116,180 |
Schedule of loan agreement through credit facility
2021 | 2020 | 2019 | ||||
Revenue from sanitation services | 522,608 | 501,756 | 556,574 | |||
Payments received from related parties | (439,349) | (520,881) | (546,365) | |||
Payment received from reimbursement referring to Law 4,819/58 | (179,787) | (173,874) | (152,112) |
F-53 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
(a) São Paulo State
(i) Accounts receivable, interest on capital payable, revenue and expenses
Schedule of loan agreement through credit facility | ||
December 31, 2023 | December 31, 2022 | |
Accounts receivable | ||
Current: | ||
Sanitation services (ii) | 169,515 | 144,937 |
Allowance for losses | (50,498) | (49,595) |
Reimbursement for retirement and pension benefits paid (G0): | ||
- monthly flow (payments) (iii) and (iv) | 36,241 | 13,376 |
- GESP Agreement – 2015 (vi) | 106,022 | 97,075 |
Total current | 261,280 | 205,793 |
Noncurrent: | ||
Agreement for the installment payment of sanitation services | 1,361 | 1,361 |
Reimbursement of additional retirement and pension benefits paid (G0): | ||
- GESP Agreement – 2015 (vi) | 933,911 | 949,589 |
Total noncurrent | 935,272 | 950,950 |
Total receivables | 1,196,552 | 1,156,743 |
Assets: | ||
Sanitation services | 120,378 | 96,703 |
Reimbursement of additional retirement and pension benefits (G0) | 1,076,174 | 1,060,040 |
Total | 1,196,552 | 1,156,743 |
Liabilities: | ||
Interest on capital payable | 420,564 | 372,550 |
F-54 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
Schedule of loan agreement through credit facility | |||
2023 | 2022 | 2021 | |
Revenue from sanitation services | 775,988 | 661,955 | 522,608 |
Payments received from related parties | (741,089) | (632,501) | (439,349) |
Payment received from reimbursement referring to Law 4,819/58 | (189,713) | (186,690) | (179,787) |
(ii) Sanitation services
The Company provides water supply and sewage services to the São Paulo State Government and other companies related to it in accordance withterms and conditions deemed by Management as usual market terms and conditions, as considered by management, except for the settlement of credits, which canmay be made according to itemsitem (iii) of this Note.
The Company recognized R$ 52,333 as(iii) Reimbursement of December 31, 2021 (R$ 39,127 as of December 31, 2020additional retirement and R$ 39,417 as of December 31, 2019) as allowance for losses.pension benefits paid
Refers to additional retirement and pension benefits provided for in State Law 4,819/581958 ("Benefits") paid by the Company to former employees andor pensioners, referred to as Go.G0.
Under the GESP Agreement, referred on item (iii)executed in 2001, the São Paulo State recognizes its liability fromacknowledges being responsible for the charges arising from the Benefits, provided that the payment criteria set forthestablished by the State Personnel Expenses Department of Personnel (DDPE), be met, based on legal guidance of the Legal ConsultancyCounsel of the Treasury Department of Finance and of the State Attorney General'sGeneral Office (PGE).
As discussed onexplained in item (vi)(iv), during the assessmentSão Paulo State’s validation of the debtamounts due from State of São Paulo to the Company there were certainbecause of the Benefits found divergences inregarding the calculation and eligibility criteria of the benefits paidBenefits applied by the Company on behalf of GESP.Company.
See additional information about the GoG0 plan in Note 22 (ii).
As a result of a court decision, SABESP is responsible for the responsibility for making the payments returned to SABESP.payments.
(iv) Disputed amounts
On December 11, 2001,As of November 17, 2008 the Company and the São Paulo State signed the Third Amendment to the GESP Agreement, when the disputed and undisputed amounts were calculated. The amendment established the efforts to calculate the Disputed Amount of the Benefits. According to clause four of such instruments, the Disputed Amount consists of the difference between the Undisputed Amount and the amount actually paid by the Company as additional retirement and pension benefits provided for in Law 4,819/1958, for which the State of São Paulo (through the State Department of Finance Affairs, currently Department of Finance and Planning) and the Water and Electricity Department (DAEE), with the intermediation of the State Department of Infrastructure and Environment (former Department of Water Resources, Sanitation and Construction Works), entered into the Obligations, Payment Commitment and Other Covenants Acknowledgement and Consolidation Agreement ("GESP Agreement")was originally responsible for the settlement of outstanding debts between State of São Paulo and the Company related to sanitation services and to the retirement benefits.
In view of the strategic importance of the Taiaçupeba, Jundiaí, Biritiba Mirim, Paraitinga and Ponte Nova reservoirs for ensuring and maintaining the Alto Tietê water volume, the Company agreed to receive them as partial repayment of the reimbursement related to the Benefits. The DAEE would transfer the reservoirs to the Company, replacing the amount owed by State of São Paulo. However, the São Paulo State Public Prosecution Office challenges the legal validity of this agreement, and its main argument is the lack of bidding and the absencebecause of a specific legislative authorization for disposal of DAEE's assets. There is an unfavorable decision to SABESP not yet unappealable. See additional information in item (iv) below.court decision.
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
On March 22, 2004,
By entering into the Third Amendment, the State Attorney General Office (PGE) agreed to reassess the differences that gave rise to the Disputed Amount of the benefits provided for in Law 4,819/1958. At the time, this expectation was based on the willingness of the PGE to reassess the matter and the implied right of the Company signed the first amendment to the GESP Agreement, settling the amounts due by the State of São Paulo for water supply and sewage services provided, monetarily adjusted through February 2004; and formally authorizing the offset of amounts due by the São Paulo State Government with interestreimbursement, including based on capital declared by the Company and any other debt owed to the State of São Paulo as of December 31, 2003, monetarily adjusted through February 2004; and defining the payment conditions of the remaining liabilities of the State of São Paulo for the receipt of the water supply and sewage services.opinions from external legal counsel.
On December 28, 2007,However, the Company and the São Paulo State Government, representedrecent opinions issued by the Department of Finance, signedPGE received on September 4 and 22, 2009 and January 4, 2010, denied the second amendment to the termsreimbursement of the original GESP Agreement, agreeing upon the payment in installments of the remaining balance of the First Amendment. In December 2012 the last installment was paid.
On November 17, 2008, State of São Paulo, SABESP and DAEE signed the third amendment to the GESP Agreement, through which State of São Paulo recognized a debt balance payable to SABESP of R$915,251, monetarily adjusted until September 2008 in accordance with the fluctuation of the IPCA-IBGE, corresponding to the Undisputed Reimbursement, determined by FIPECAFI. SABESP accepted on a provisional basis the reservoirsportion previously defined as part of the payment of the Undisputed Reimbursement and offered to State of São Paulo a provisional settlement, recognizing a credit totaling R$696,283, corresponding to the value of the reservoirs in the Alto Tietê system. The remaining debit balance of R$ 218,967 was fully settled in 2018.
The Company had not recognize in its Financial Statements the amount receivable of R$696,283 related to the Reservoirs, as it is not virtually certain that will be transferred by the São Paulo State. In March 2015, SABESP and the State of São Paulo entered into an agreement to pay the amounts receivable, totaling R$ 696,283 (more information in item (iv) of this note).Disputed Amount.
The third amendment also provides for the regularization of the monthly flow of benefits. While SABESP is responsible for the monthly payments, the São Paulo State shall reimburse the Company based on the criteria identical to those applied when determiningin the calculation of the Undisputed Amount. Should there be no preventive court decision, the State will directly assume the monthly payment flow of the portion deemed as undisputed.
Even though the negotiations with the State are still in progress, it is not possible to assure that the Company will recover the Disputed Amount in a friendly way.
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On March 18, 2015,Continuing the Company,actions that aim to recover the State ofcredit that Management understands to be owed by the São Paulo andState, related to the Department of Water and Electricity (DAEE), and the Sanitation and Water Resources Department as the intervening party, entered into a Term of Agreementdivergences in the amountreimbursement of R$ 1,012,310, of which R$ 696,283 referthe additional retirement and pension benefits paid by the Company, SABESP: (i) on March 24, 2010, addressed a message to the principalControlling Shareholder by sending a letter resolved by the Executive Board proposing that the matter be discussed at B3’s Arbitration Chamber; (ii) in June 2010, sent to the Treasury Department a proposal of an agreement to settle said pending matters. The proposal was not accepted; (iii) on November 9, 2010, filed a lawsuit against the São Paulo State seeking full reimbursement of the Undisputedamounts paid as benefits provided for in Law 4,819/1958 to settle the Disputed Amount mentioned in item (iii) and R$ 316,027 corresponding to the inflation adjustment of the principal until February 2015.
The Principal Amount will be paid in 180 installments, as follows:
Considering the lawsuit which objects the possibility of transferring the reservoirs is pending final and unappealable court decision, the agreement also provides for the following situations:
As of December 31, 2021, the balance receivable totaled R$ 86,446 in current assets (R$ 75,377 as of December 31, 2020) and R$ 643,534 in noncurrent assets (R$ 634,288 as of December 31, 2020).
As mentioned before, on November 17, 2008under discussion between the Company and the São Paulo State signedState. Despite the third amendment tolawsuit, the GESP Agreement, whenCompany will insist on reaching an agreement during the reimbursements called disputed and undisputed were quantified. The amendment established the efforts to calculate the so-called Disputed Reimbursementcourse of the Benefits. Underlawsuit, as it believes that a reasonable agreement is better for the fourth clauseCompany and its shareholders than waiting for the end of the amendment,lawsuit.
As of December 31, 2023 and 2022, the Disputed Reimbursement represents the differencedisputed amounts between the Undisputable ReimbursementSABESP and the amount actually paid by the Company asSão Paulo State, referring to additional retirement and pension benefits paid (Law 4,819/1958), totaled R$ 1,583,449and pensioners set out in Law 4,819/58,R$ 1,482,140, respectively, for which allowances for doubtful accounts were recorded for the Company understands, the State of São Paulo is originally liable, but paid by SABESP under a court order.total amount.
F-56 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
By entering into the third amendment, the State's Legal Representative (PGE) agreed to reassess the differences that gave rise to the Disputed Amount of benefits set out in Law 4,819/58. At the time, the expectation was based on the willingness of the PGE to reanalyze the issue and the implied right of the Company to the reimbursement, including based on opinions from outside legal advisors.(v) Actuarial Liability
However, the latest opinions issued by the PGE and received on September 4 and 22, 2009 and January 4, 2010, refute the reimbursement of previously defined as Disputed Amount.
Even though the negotiations with the State are still in progress, it is not possible to assure that the Company will recover the disputed receivables without dispute.
As part of the actions intended to recover the receivables that management considers due by the State, related to discrepancies in the reimbursement of the pension benefits paid by the Company, SABESP: (i) on March 24, 2010, reported to the controlling shareholder the official letter approved by the executive committee, proposing that the matter be discussed at the São Paulo Stock Exchange (B3) Arbitration Chamber; (ii) in June 2010, presented to Department of Finance a proposal to solve the outstanding items, such proposal was not accepted; (iii) on November 9, 2010, filed a judicial action against the State of São Paulo pleading the entire reimbursement related to employee benefits set out in Law 4,819/58 to finalize the discussion between the Company and State of São Paulo. Despite the legal action, the expectation of which is a possible gain, the Company will persist to obtain an agreement with GESP since the management believes that it is the best course of action to the Company and to its shareholders than waiting until the end of the lawsuit.
As of December 31, 2021 and 2020, the disputed amounts between SABESP and State of São Paulo, corresponding to additional retirement and pension benefits paid (Law 4,819/1958), totaled R$ 1,375,137 and R$ 1,281,409, respectively. The Company recorded allowances for doubtful accounts for such amounts.
The Company also recognized an actuarial liability corresponding to additional retirement and pension benefits paid to employees, retired employees, and pensioners of Plan G0.the G0 Plan. As of December 31, 20212023 and 2020,2022, the amounts corresponding to thesuch actuarial liability totaledwere R$ 2,192,0622,098,622 and R$ 2,549,5412,002,075, respectively. For moredetailed information on additional retirement and pension benefits, see Note 22.
(vi) GESP Agreement - 2015
On March 18, 2015, the Company, the São Paulo State, and Department of Water and Electric Energy (DAEE), through the Department of Sanitation and Water Resources, entered into an Agreement totaling R$ 1,012,310, R$ 696,283 of which referring to the principal of the Undisputed Amount mentioned in item (iii) and R$ 316,027 to the inflation adjustment of the principal until February 2015.
The principal will be paid in 180 installments, as follows:
· | The first 24 installments were settled upon the transfer of preferred shares issued by Companhia de Transmissão de Energia Elétrica Paulista (CTEEP), totaling R$ , based on the share closing price of March 17, 2015, which were sold on April 20, 2016; and |
· | The amount of R$ 609,109, is being paid in 156 monthly installments, adjusted by the IPCA until the initial payment date, i.e. April 5, 2017. As of this date, the installments are being adjusted by IPCA plus a simple interest of 0.5% per month. |
As of July 22, 2022, the decision regarding the lawsuit that challenged the possibility of transferring the reservoirs was published in the State Official Gazette, preventing the transfer of the reservoirs to SABESP. Accordingly, as provided for in the agreement, the São Paulo State will pay SABESP, in addition to the principal, an inflation adjustment of R$ 316,027 (restated until February 2015) in 60 installments, beginning in April 2030. The amount will be adjusted by IPCA until the initial date of the payments and, as of that date, IPCA plus simple interest of 0.5% per month will be levied on the amount of each installment.
In July 2022, R$ 325,561 referring to the adjustment for inflation until that date was recorded at present value.
As of December 31, 2023, the balance receivable was R$ 106,022 in current assets (R$ 97,075 as of December 31, 2022) and R$ 933,911 in noncurrent assets (R$ 949,589 as of December 31, 2022).
F-57 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
(b) Use of Reservoirs – EMAE
Empresa Metropolitana de Águas e Energia S.A. - EMAE(EMAE) planned to receive for the credit and obtain financial compensation for alleged past and future losses in electricity generation arising from water collection, and compensation for costs already incurred and to be incurred with the operation, maintenance and inspection of the Guarapiranga and Billings reservoirs used by SABESP in its operations.
OnAs of October 28, 2016, the Company entered into an agreement based on a Private Transaction Agreement and Other Adjustments to settle the disputes involving the two companiesfully and thecompletely and SABESP will continue using the reservoirs.
As of December 31, 2021,2023, the Company recordedbalance of the agreement totaled R$ 7,9568,876 and R$ 88,26499,279 in Other Liabilities, under current and noncurrent liabilities, respectively (in December 31, 2020,2022, R$ 17,2558,456 and R$ 73,66095,033). In 2021, the amount of R$ 19,209 was paid.
(c) Agreements with reduced tariffs for State Entities that join the Rational Water Use Program (PURA)
The Company has signed agreements with government entities related to the São Paulo State Government that benefit them with a reduction of 25% in the tariff of water supply and sewage services when they are not in default. These agreements provide for the implementation of the rational water use program, which takes into consideration the reduction in water consumption.
(d) Guarantees
The São Paulo State provides guarantees for some of the Company’s borrowings and financing of the Company and does not charge any fee with respect to such guarantees, seerelated fees. See Note 17.
(e) Personnel assignment agreement among entities related to the São Paulo State Government
The Company has personnel assignment agreements with entities related to the São Paulo State Government, whose expenses are fully charged.
In 2023, expenses with employees assigned to other state entities totaled R$ 8,165 (R$ 800 in 2022 and R$ 734 in 2021).
No expenses with employees from other entities assigned to the Company were recorded in 2023, 2022 and 2021.
F-58 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
In 2021, the expenses related to personnel assigned by SABESP to other state government entities amounted to R$ 734 (R$ 2,108 in 2020 and R$ 4,881 in 2019).
In 2021, there were not expenses related to personnel assigned by other entities to SABESP (In 2020 and 2019, the expenses related to personnel assigned by other entities to SABESP were R$ 13 and R$ 139, respectively.
(f) Non-operating assets
As of December 31, 20212023 and 2020,2022, the Company had an amount of R$ 3,613 related to a land and lent structures.
(g) SABESPREV
The Company sponsors a private defined benefit pension plan (G1 Plan), which is operated and administered by SABESPREV. The net actuarial liability recognized as of December 31, 2021 amounted to2023 totaled R$ 129,60044,249 (R$(R$ 319,053148,116 as of December 31, 2020), according to2022). See Note 22.
(h) Compensation of the Fiscal Council and Management Key Personnel and Fiscal Council
The compensation of the Executive Officers, members of the Audit Committee and Boards of Directors and Fiscal Councils of the Companies controlled by the São Paulo State complies with the guidelines of the State Capital Defense Council (CODEC) and is defined at the Annual Shareholders’ Meeting, as per article 152 of Brazilian Corporation Law.
CODEC defines that the proposal for global and individual compensation of the statutory bodies for publicly held companies listed in B3’s Novo Mercado segment, controlled by the State, must be prepared by the Board of Directors under the Company’s Bylaws, within the scope of the Institutional Compensation Policy and submitted for approval of the Annual Shareholders’ Meeting.
In addition to the monthly compensation, the members of the Board of Directors, Fiscal Council and Executive Board receive an annual reward equivalent to a monthly fee, calculated on a prorated basis referring to fees in effect in December of each year. The purpose of this reward is to define a compensation similar to the Christmas bonus paid to the Company’s registered employees, given that the relationship of Management with the Company has a statutory nature.
Benefits paid to Executive Officers only - meal vouchers, food vouchers, healthcare, private pension, annual rest (with the characteristic of paid leave of thirty (30) calendar days, with additional payment corresponding to one third of the monthly fees for such rest), and FGTS.
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SABESP pays bonuses for purposes of compensation of its Executive Officers, in accordance withunder the guidelines of the São Paulo State, such as a motivation policy, provided that the Company actually calculates quarterly, semi-annual and annual profits, and distributes mandatory dividends to shareholders, even if in the form of interest on capital. Annual bonuses cannot exceed six times Management’s monthly compensation or 10 % of the interest on capital paid by the Company, prevailing the shortest amount.
F-59 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
Expenses related to the compensation of the members of the Fiscal Council appointed by the controlling shareholder and Management members totaled R$ 6,3698,550, R$ 6,175 and R$ 6,4266,369 in 20212023, 2022 and 2020,2021, respectively.
Additional amounts of R$ 1,4401,885, R$ 1,305 and R$ 1,439,1,440, referring to the executive officers’ bonus program, were paidrecorded in 20212023, 2022 and 2020,2021, respectively.
(i) Loan agreement through credit facility
The Company holds interest in certain Special Purpose Entities (SPEs), in which it does not holdinghold the majority interest but withhas cast vote and power of veto in some issues, with no ability tomatters but cannot use such power of veto in a way to affect the returns overof its investments. Therefore, these SPEs are considered for accounting purposes as joint arrangements.
Aquapolo Ambiental
The Company entered into a loan agreement through credit facility with the SPE Aquapolo Ambiental S/A to finance the operations of thisthat company, until the borrowings and financing requested with financial institutions isare granted.
As of December 31, 2021, the balance of principal and interest of this agreement totaled R$ 11,884 and R$ 11,021, recorded under current assets and noncurrent assets, respectively, in “Other assets” (R$ 9,420 and R$ 23,866 as of December 31, 2020), at CDI + 1.2% p.a..
The loan agreement originally matured on April 30, 2015, but was extended to October 30, 2015 and on2015. On November 25, 2015, a new amendment changed the payment schedule for three annual installments, the first of which maturingmatures on December 30, 2021 and the last on December 30, 2023.
This agreement was settled on July 21, 2023.
Águas de Andradina
The Company entered into a loan agreement through a credit facility with the SPE Águas de Andradina S/A to finance the operations of that company.
As of December 31, 2023, the balance of principal and interest of this company.agreement totaled R$ 694 and R$ 2,814, which was recorded in “Other assets” under current and noncurrent assets (R$ 242 and R$ 2,814, respectively, as of December 31, 2022), at CDI + 3% p.a.
This agreement was executed on August 17, 2021. The amount of principal adjustment, accrued interest, and any other taxes must be paid in full by August 31, 2025.
F-60 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Sabesp Olímpia
The Company formalized a loan agreement through a credit facility with Sabesp Olímpia S/A, making available the necessary funds for the payment of the first installment of the Fixed Concession Fee to the Municipality of Estância Turística de Olímpia, which was a prerequisite for the signing of the water and sewage concession agreement.
As of December 31, 2021,2023, the balance of principal and interest of this agreement totaled R$ 34 and R$ 1,00978,611, which was recorded under current assets and noncurrent assets, respectively, in “Other assets” under noncurrent assets, at CDI + 3%2% p.a..
This agreement was signedexecuted on August 17, 2021.September 26, 2023. The principal withand the readjustment, accruedaccumulated interest and any taxes levied thereon, shallon the principal must be fully reimbursedrepaid by the Borrower, to SABESP, until August 31, 2025.September 2040.
(j) FEHIDRO
In April 2021, the Company entered into three financing agreements within the scope ofunder the State Fund for Water Resources Fund – FEHIDRO.(FEHIDRO). The funds will be allocated toaimed at the execution of sanitary sewage works and sewage services in the municipalities of São Paulo, Itapecerica da Serra and Vargem Grande Paulista. The total investment amount istotaled R$ 10.8 million, R$ 8.7, million of which, R$ 8.7 million, or 80% of the total, will be financed by FEHIDRO and R$ 2.1 million,, or 20% of the total, from counterpart ofwill be financed by SABESP. The financing interest rate is 3.00% p.a., with a total term of 59 months, with an 18-month18 months of which corresponds to the grace period, and 41 months to amortization.
As of amortization.December 31, 2023, the balance of these financings totaled R$ 1.3 million (as of December 31, 2022 – R$ 5.1 million).
12 | Investments |
The Company holds interestinterests in certain Special Purpose Entities (SPE). Although SABESP has no majority shares of its investees, the shareholders’ agreement provides for the power of veto in certain management issues, however, with no ability to use such power of veto in a way to affect the returns over the investments, indicating participating shared control (joint venture – IFRS 11)., except for SABESP Olímpia, in which the Company holds a stake of 100% and meets the control requirements, consolidated this SPE, according to the Accounting Policy described in Note 3.1.
The Company holds interest recognized by the equity accounting in the following investees:
F-61 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
(a) | Sesamm |
As of August 15, 2008, Sesamm – Serviços de Saneamento de Mogi Mirim S/A was incorporated for a period of 30 yearsyear term from the signature date of the concession agreement with the municipality, for the purpose of providing complementaryto provide services to complement the implementation of the sewage diversionremoval system and implementing and operatingimplementation of the operation of the sewage treatment system in the municipality of Mogi Mirim, including the disposal of solid waste.
Sesamm's capital asAs of December 31, 2021, totaled2023, the company’s share capital was R$ 19,532, and was represented bydivided into registered common shares without awith no par value.value, of which SABESP holds an interest of 36% of its equity interest and, while GS Inima holds an interest of 64%.
The operations initiated in June 2012.
(b) | Águas de Andradina |
As of September 15, 2010, Águas de Andradina S.A. was incorporated, for an indefinite term, to provide water supply and sewage services to the municipality of Andradina.
As of December 31, 2023, the company’s share capital was R$ 17,936, divided into registered common shares with no par value, of which SABESP holds an interest of 30%, while Iguá holds an interest of 70%.
The Company pledges 100% of the interest held in Águas de Andradina as a guarantee for the issue of Letters of Guarantee with BNDES.
The operations initiated in October 2010.
(c) | Águas de Castilho |
As of October 29, 2010, Águas de Castilho was incorporated to provide water supply and sewage services in the municipality of Castilho.
As of December 31, 2023, the company’s share capital was R$ 2,785, divided into registered shares with no par value, of which SABESP holds an interest of 30%, whilw Iguá holds an interest of 70%.
The Company pledges 100% of the interest held in Águas de Castilho as a guarantee for the issue of Letters of Guarantee with BNDES.
The operations initiated in January 2011.
F-62 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
The operations initiated in June 2012.
As of September 15, 2010, the Company, Águas de Andradina S.A. was incorporated, with indefinite term, for the purpose of providing water supply and sewage services to the municipality of Andradina.
As of December 31, 2021, the capital of Águas de Andradina totaled R$ 17,936, divided into registered common shares without a par value. SABESP holds 30% of its equity interest and Iguá 70%.
The Company pledges as guarantee 100% of its shares in Águas de Andradina as a counter guarantee for the issuance of Letters of Guarantee with BNDES.
The operations initiated in October 2010.
As of October 29, 2010, the Company, Águas de Castilho, was incorporated for the purpose of providing water supply and sewage services to the municipality of Castilho.
As of December 31, 2021, the company’s capital was R$ 2,785, and was represented by registered shares without a par value. SABESP holds a 30% interest and Iguá 70%.
The Company pledges as guarantee 100% of its shares in Águas de Castilho as a counter guarantee for the issuance of Letters of Guarantee with BNDES.
The operations initiated in January 2011.
(d) | Attend Ambiental |
As of August 23, 2020,2010, Attend Ambiental S/A was incorporated with the purpose of implementingto implement and operatingoperate a pre-treatment station of non-domestic effluents and sludge transportation in the metropolitan region of São Paulo, as well as the development of other related activities and the creation of similar infrastructures in other locations in Brazil and abroad.
As of December 31, 2021,2023, the company’s share capital totaledwas R$ 37,677, and was represented by 23,494, divided into registered common shares without awith no par value.value, of which SABESP holds a 45%an interest andof 45%, while Estre 55%holds an interest of 55%.
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The operations initiated in December 2014.
(e) | Aquapolo Ambiental S/A. |
As of October 8, 2009, the Company, Aquapolo Ambiental, S.A., was incorporated forwith the purpose of producing, providingsupplying, and trading reusedselling reuse water forto Quattor Química S.A., Quattor Petroquímica S.A., Quattor Participações S.A. and other companies comprisingthat are part of the Petrochemical ComplexCenter of Capuava and the metropolitan region of São Paulo.Paulo ABC region.
As of December 31, 2021,2023, the company’s share capital of Aquapolo totaledwas R$ 36,412, and was represented bydivided into registered common shares without awith no par value.value, of which SABESP holds 49%an interest of its equity interest.49%, while GS Inima Industrial holds an interest of 51%.
The Company pledges as guarantee to the loan acquired through the issuance of debentures, 100% of its sharesthe interest held in Aquapolo Ambiental S/A.A as a guarantee for the borrowing obtained through a debenture issue.
The operations initiated in October 2012.
(f) | Paulista Geradora de Energia |
As of April 13, 2015, the Company acquired shares from Empresa Paulista Geradora de Energia S/A, - PGE, jointly with Servtec Investimentos e Participações Ltda ("Servtec)(“Servtec”) and Tecniplan Engenharia e Comércio Ltda ("Tecniplan"), which operationalwhose purpose is the implementation and commercial exploration of water potentialhydraulic potentials in small hydroelectric power plants (PCHs),Small Hydroelectric Power Plants (SHPPs) located at the Guaraú and Vertedouro Cascata Water Treatment Stations.
As of December 31, 2020,2023, the company’s share capital of Paulista Geradora de Energia was R$ 8,67928,989, represented bydivided into registered common shares without awith no par value, inof which SABESP holds aan interest of 25% interest,, Servtec holds 37.5%, and Tecniplan 37.5%.
As of December 31, 2021, operations had not initiated yet.
F-63 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Below is a summary of the investees’ financial information and SABESP’s equity interest:
Schedule of the investees' financial statements and equity interestThe operations initiated in March 2023.
Company | Equity | Dividends distributed | Profit (loss) for the year | |||||||||||||
2021 | 2020 | 2019 | 2021 | 2021 | (*) | 2020 | 2019 | |||||||||
Sesamm | 58,421 | 51,514 | 45,923 | (2,152) | 9,059 | — | 7,332 | 4,418 | ||||||||
Águas de Andradina | 29,591 | 29,576 | 30,065 | (2,320) | 2,424 | (89) | 778 | 7,271 | ||||||||
Águas de Castilho | 9,384 | 8,533 | 7,242 | (592) | 1,428 | 15 | 1,613 | 1,767 | ||||||||
Saneaqua Mairinque¹ | — | 4,013 | 4,783 | — | — | — | (770) | (871) | ||||||||
Attend Ambiental | 23,493 | 11,409 | 7,486 | — | 4,701 | 7,383 | 3,923 | (18,217) | ||||||||
Aquapolo Ambiental | 58,172 | 41,903 | 37,772 | (9,000) | 25,269 | — | 19,131 | 16,283 | ||||||||
Paulista Geradora de Energia | 6,153 | 6,692 | 7,144 | — | (539) | — | (452) | (481) |
Company | Investments | Dividends distributed | Other Comprehensive Income | Reclassification | Equity in the earnings of subsidiaries | Interest percentage | ||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2020 | 2021 | (*) | 2020 | 2019 | 2021 | 2020 | 2019 | |||||||||||||
Sesamm | 21,032 | 18,546 | (775) | — | — | 3,261 | — | 2,640 | 1,591 | 36% | 36% | 36% | ||||||||||||
Águas de Andradina | 8,877 | 8,873 | (696) | — | — | 727 | (27) | 233 | 2,181 | 30% | 30% | 30% | ||||||||||||
Águas de Castilho | 2,815 | 2,560 | (178) | — | — | 429 | 4 | 485 | 529 | 30% | 30% | 30% | ||||||||||||
Saneaqua Mairinque² | — | — | — | 17 | (1,203) | — | — | (248) | (262) | 4,6% | 4,6% | 30% | ||||||||||||
Attend Ambiental | 10,572 | 5,134 | — | — | — | 2,116 | 3,322 | 1,765 | (8,198) | 45% | 45% | 45% | ||||||||||||
Aquapolo Ambiental | 28,504 | 20,532 | (4,410) | — | — | 12,382 | — | 9,374 | 7,979 | 49% | 49% | 49% | ||||||||||||
Paulista Geradora de Energia | 1,538 | 1,673 | — | — | — | (135) | — | (113) | (119) | 25% | 25% | 25% | ||||||||||||
Total | 73,338 | 57,318 | (6,059) | 17 | (1,203) | 18,780 | 3,299 | 14,136 | 3,701 | |||||||||||||||
Other investments | 6,099 | 6,099 | ||||||||||||||||||||||
Overall total | 79,437 | 63,417 |
As of October 28, 2022, Cantareira SP Energia S/A was created with the purpose of developing, producing, and selling photovoltaic energy; selling and purchasing energy; renting, loaning, and leasing own or third-party assets; operating and maintaining energy generation plants; and holding an interest in other companies.
As of December 31, 2023, the company’s share capital was R$ 1,000, divided into registered common shares with no par value, of which SABESP holds an interest of 49%, while Pacto SP Energia I Ltda. holds an interest of 51%.
As of December 31, 2023, operations had not initiated yet.
(h) | FOXX URE-BA Ambiental S/A |
As of December 22, 2022, SABESP acquired shares from FOXX URE-BA Ambiental S/A, for R$ 26,148, was recorded in intangible assets under “Right of use – Investments”. As of December 23, 2022, the Company contributed R$ 865. The business purpose of FOXX URE-BA is to provide services, under a concession regime, related to the treatment and final disposal of solid urban waste, including all waste from domestic and commercial collection, sweeping, pruning, cleaning of streets and other public highways, and the urban drainage system, the provision of these services and related activities to third parties with which it has executed contracts for such a purpose, including investments and works of the treatment unit, implemented and operated by the company, for the treatment and final disposal of waste, operation of revenue sources, carbon credits, and the byproduct resulting from the treatment process and final disposal of urban solid waste, as well as selling electricity.
for the acquisition of 20% of the company’s share capital, corresponding to R$ . The difference paid, of R$As of December 31, 2023, the company’s share capital was R$ 69,258, divided into registered common shares with no par value, of which SABESP holds an interest of 20%, while FOXX Inova Ambiental S/A holds an interest of 80%.
(i) | Infranext Soluções em Pavimentação S/A |
As of December 7, 2022, SPE Infranext Soluções e Pavimentação S/A was created to sell cold asphalt and related products, provide related services, make investments, and hold interest in other companies.
F-64 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Schedule of investment properties
December 31, 2020 | Write-offs and disposals | Depreciation | December 31, 2021 | |||||
Investment properties | 46,274 | (100) | (48) | 46,126 |
December 31, 2019 | Transfers | Depreciation | December 31, 2020 | |||||
Investment properties | 47,562 | (1,240) | (48) | 46,274 |
December 31, 2018 | Transfers | Depreciation | December 31, 2019 | |||||
Investment properties | 47,620 | (9) | (49) | 47,562 |
As of December 31, 20212023, the company’s share capital was R$ 7,050, divided into registered common shares with no par value. The company’s total share capital will be R$ 12,000, divided into registered, book-entry common shares, of which SABESP will hold an interest of 45% and 2020, the market valueDVS – Locação de Equipamentos Ltda. will hold an interest of these properties was approximately R$386,00055 and R$383,000, respectively.%.
As of December 31, 2023, operations had not initiated yet.
Schedule of contract assets
December 31, 2020 | Additions (i) | Transfers | Transfers of works to intangible assets (ii) | December 31, 2021 (iii) | ||||||
Total contract assets | 7,969,164 | 4,759,789 | 2,412 | (4,181,263) | 8,550,102 |
As of August 11, 2023, Sabesp Olímpia S/A was incorporated with the corporate purpose of providing public water supply and sewage services in the municipality of Olímpia/SP, under the Concession Agreement resulting from the Bid Notice 02/2023.
As of December 31, 2023, the company’s share capital was R$ 811, divided into registered common shares with no par value. The company’s total share capital will be R$ 8,111, divided into registered common shares with no par value, of which SABESP will hold an interest of 100%.
The operations initiated in December 2023.
The Company holds equity interest valued by the equity accounting in the following investees:
Schedule of the investees financial statements and equity interest | |||||||||
Company | Equity |
Contribution | Dividends distributed | Profit (loss) for the year | |||||
2023 | 2022 | 2021 | 2023 | 2023 | 2023 | (*) | 2022 | 2021 | |
Sesamm | 61,275 | 59,371 | 58,421 | - | (18,485) | 20,389 | - | 14,825 | 9,059 |
Águas de Andradina | 34,088 | 30,777 | 29,591 | - | - | 3,311 | - | 1,186 | 2,424 |
Águas de Castilho | 12,784 | 10,787 | 9,384 | - | - | 1,997 | - | 1,403 | 1,428 |
Attend Ambiental | 43,263 | 29,729 | 23,493 | - | (4,215) | 17,749 | - | 8,177 | 4,701 |
Aquapolo Ambiental | 102,442 | 73,926 | 58,172 | - | (9,000) | 37,516 | - | 30,496 | 25,269 |
Paulista Geradora de Energia (**) | 42,307 | 10,486 | 6,153 | 30,093 | - | 1,728 | - | (744) | (539) |
Cantareira SP Energia | 10,650 | 1,000 | - | 10,114 | - | (464) | - | - | - |
FOXX URE-BA Ambiental | 63,309 | 69,258 | - | 4,325 | - | (1,686) | (8,588) | - | - |
Infranext Soluções em Pavimentação (***) | 4,699 | 7,050 | - | - | - | (2,351) | - | - | - |
Sabesp Olímpia | (3,066) | - | - | 811 | - | (3,877) | - | - | - |
(*) | The |
(**) | In October 2022, it was agreed at the |
(***) | Infranext’s share capital will be R$ 12,000. As of December 31, 2023, SABESP had an outstanding payable amount of R$ 4,950. |
F-65 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Investiments | Contribution | Dividends distributed | Reclassification (***) | Equity in the earnings of subsidiaries | Interest percentage | |||||||
2023 | 2022 | 2023 | 2023 | 2023 | 2023 | (*) | 2022 | 2021 | 2023 | 2022 | 2021 | |
Sesamm | 22,059 | 21,374 | - | (6,655) | - | 7,340 | - | 5,337 | 3,261 | 36% | 36% | 36% |
Águas de Andradina | 10,225 | 9,233 | - | - | - | 992 | - | 356 | 700 | 30% | 30% | 30% |
Águas de Castilho | 3,835 | 3,236 | - | - | - | 599 | - | 421 | 433 | 30% | 30% | 30% |
Attend Ambiental | 19,469 | 13,379 | - | (1,897) | - | 7,987 | - | 3,680 | 5,438 | 45% | 45% | 45% |
Aquapolo Ambiental | 50,196 | 36,223 | - | (4,410) | - | 18,383 | - | 14,943 | 12,382 | 49% | 49% | 49% |
Paulista Geradora de Energia | 6,861 | 6,429 | - | - | - | 432 | - | (186) | (135) | 25% | 25% | 25% |
Cantareira SP Energia | 5,212 | 490 | 4,949 | - | - | (227) | - | - | - | 49% | 49% | - |
FOXX URE-BA Ambiental | 12,663 | 13,852 | 865 | - | - | (337) | (1,717) | - | - | 20% | 20% | - |
Infranext Soluções em Pavimentação | - | 450 | - | - | 608 | (1,058) | - | - | - | 45% | 45% | - |
Total | 130,520 | 104,666 | 5,814 | (12,962) | 608 | 34,111 | (1,717) | 24,551 | 22,079 | |||
FOXX URE-BA Ambiental (**) | 25,244 | - | ||||||||||
Other investments | 6,099 | 6,099 | ||||||||||
Overall total | 161,863 | 110,765 |
(*) | Refers to changes in the equity of investees, as their financial statements for the year ended December 31, 2022 were issued after the disclosure of SABESP’s consolidated financial statements. |
(**) | The amount presented refers to the fair value adjustment in the acquisition of FOXX URE-BA in 2023. |
(***) | The amount of the investee’s loss exceeding the investment was reclassified to Noncurrent Liabilities. |
13 | Investment Properties |
Schedule of investment properties | |||
December 31, 2022 | Depreciation | December 31, 2023 | |
Investment properties | 46,726 | (48) | 46,678 |
F-66 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
December 31, 2021 | Additions | Depreciation | December 31, 2022 | |
Investment properties | 46,126 | 648 | (48) | 46,726 |
December 31, 2020 | Write-offs and disposals | Depreciation | December 31, 2021 | |
Investment properties | 46,274 | (100) | (48) | 46,126 |
As of December 31, 2021,2023, the market value of these properties was approximately R$393,600 (R$ 386,000 as of December 31,2022).
14 | Contract assets |
Schedule of contract assets | |||||
December 31, 2022 | Additions (i) | Transfers | Transfers of works to intangible assets (ii) | December 31, 2023 (iii) | |
Total contract assets | 8,613,968 | 6,026,053 | 384 | (7,247,309) | 7,393,096 |
(i) | The largest additions of the period are located in the municipalities of São Paulo, Guarulhos and Itanhaém, in the amounts of R$ 2,528 million, R$ 377 million and R$ 180 million, respectively. |
(ii) | The largest transfers of the period are located in the municipalities of São Paulo, Franca and São Bernardo do Campo, in the amounts of R$ 3,306 million, R$ 314 million and R$ 260 million, respectively. |
(iii) | The largest works are located in the municipalities of São Paulo, Francisco Morato and Guarulhos, in the amounts of R$ 2,053 million, R$ 255 million and R$ 252 million, respectively. |
As of December 31, 2023, there were no leases amounts recorded in the contract assets include leases recognized before December 31, 2019 in accordance with IAS 17 amounting to R$ 276,893(R$ 276,893 as of December 31, 2020)2022). The leases are cost of the works, and since June 2020 the complementary works are being carried out by the Company.
December 31, 2019 | Additions (i) | Transfers | Transfers of works to intangible assets (ii) | December 31, 2020 (iii) | ||||||
Total contract assets | 7,617,714 | 3,984,158 | 55,706 | (3,688,414) | 7,969,164 |
December 31, 2021 | Additions (i) | Transfers | Transfers of works to intangible assets | December 31, 2022 | |
Total contract assets | 8,550,102 | 5,240,528 | 2,702 | (5,179,364) | 8,613,968 |
December 31, 2018 | Additions | Write-offs | Transfers | Transfers of works to intangible assets | December 31, 2019 | |||||||
Total contract assets | 7,407,948 | 3,532,283 | (4,910) | 10,710 | (3,328,317) | 7,617,714 |
F-67 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
December 31, 2020 | Additions | Transfers | Transfers of works to intangible assets | December 31, 2021 | |
Total contract assets | 7,969,164 | 4,759,789 | 2,412 | (4,181,263) | 8,550,102 |
(a) Capitalization of interest and other finance charges
In 2021, theThe Company capitalizedcapitalizes interest, inflation adjustments, and inflation adjustment, including related foreign currency exchange effectsvariations in the contract asset, totaling R$ 300,792638,208 (R$(R$ 238,330622,803 in 20202022 and R$ 233,251300,792 in 2019)2021) during the construction period.
(b) Construction margin
The Company is primarily responsible for the construction and installation of the concession infrastructure, relatedeither by using its employees or contracting third parties, and is significantly exposed to the concession, using own efforts or hiring outsourcing services, receiving theits risks and benefits.
Accordingly, the Company recognizes revenue from construction serviceservices corresponding to the cost of construction costs increased by gross margin. Generally, the constructions
Constructions related to the concessions are usually performed by third parties, inparties. In such a case, the margin of the Company is lower, normally, to cover eventual administration costs and the assumption of responsibility of thefor primary risk.risk is lower. In 20212023 and 20202022 the margin was 2.3%.
|
Construction margin for 2021, 20202023, 2022 and 20192021 were R$ 98,402125,603, R$ 86,477109,369 and R$ 65,17298,402, respectively.
(c) Expropriations
As a result of the construction of priority projects related to water and sewage systems, the Company wasis required to expropriate third-parties'third party properties, and thewhose owners of these properties will beare compensated either amicably or through courts.court.
The costs of such expropriations are recorded in the contract assets during construction.asset the execution of the works. In 20212023 and 2020,2022, the total referring to expropriations was R$ 67,71458,682 and R$ 33,13662,599, respectively.
(a) Statement of financial position details
December 31, 2021 | December 31, 2020 | |||||||||||
Cost | Accumulated amortization | Net | Cost | Accumulated amortization | Net | |||||||
Intangible right arising from: | ||||||||||||
Concession agreements – equity value | 696,728 | (205,671) | 491,057 | 671,904 | (188,129) | 483,775 | ||||||
Concession agreements – economic value | 1,497,968 | (816,527) | 681,441 | 1,446,261 | (711,596) | 734,665 | ||||||
Program contracts | 24,804,170 | (7,652,149) | 17,152,021 | 23,160,119 | (6,799,812) | 16,360,307 | ||||||
Program contracts – commitments | 1,709,757 | (391,800) | 1,317,957 | 1,709,757 | (338,834) | 1,370,923 | ||||||
Services contracts – São Paulo | 22,834,803 | (6,676,032) | 16,158,771 | 20,579,676 | (5,707,072) | 14,872,604 | ||||||
Software license of use | 1,133,833 | (535,099) | 598,734 | 978,085 | (437,460) | 540,625 | ||||||
Right of use – other assets | 173,715 | (69,862) | 103,853 | 141,782 | (99,106) | 42,676 | ||||||
Total | 52,850,974 | (16,347,140) | 36,503,834 | 48,687,584 | (14,282,009) | 34,405,575 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
(b) Changes
December 31, 2020 | Addition | Transfer of contract assets | Transfers | Write-offs and disposals | Amortization | December 31, 2021 | ||||||||
Intangible right arising from: | ||||||||||||||
Concession agreements – equity value (*) | 483,775 | — | 24,656 | 467 | (148) | (17,693) | 491,057 | |||||||
Concession agreements – economic value | 734,665 | — | 52,275 | (14) | (242) | (105,243) | 681,441 | |||||||
Program contracts (*) | 16,360,307 | 17,690 | 1,640,733 | 13,744 | (8,840) | (871,613) | 17,152,021 | |||||||
Program contracts – commitments | 1,370,923 | — | — | — | — | (52,966) | 1,317,957 | |||||||
Services contracts – São Paulo | 14,872,604 | 14,950 | 2,307,851 | (13,827) | (13,745) | (1,009,062) | 16,158,771 | |||||||
Software license of use | 540,625 | — | 155,748 | — | — | (97,639) | 598,734 | |||||||
Right of use – Other assets | 42,676 | 140,321 | — | — | (4,103) | (75,041) | 103,853 | |||||||
Total | 34,405,575 | 172,961 | 4,181,263 | 370 | (27,078) | (2,229,257) | 36,503,834 |
15 | Intangible assets |
(a) Statement of financial position details
Schedule of financial position details | ||||||
December 31, 2023 | December 31, 2022 | |||||
Cost | Accumulated amortization | Net | Cost | Accumulated amortization | Net | |
Intangible right arising from: | ||||||
Concession agreements – equity value | 747,925 | (241,808) | 506,117 | 722,730 | (223,404) | 499,326 |
Concession agreements – economic value | 1,686,384 | (1,048,624) | 637,760 | 1,585,271 | (933,232) | 652,039 |
Concession agreements – new contracts | 148,000 | (411) | 147,589 | - | - | - |
Program contracts | 30,267,977 | (9,583,480) | 20,684,497 | 26,875,408 | (8,537,949) | 18,337,459 |
Program contracts – commitments | 1,709,757 | (497,731) | 1,212,026 | 1,709,757 | (444,765) | 1,264,992 |
Services contracts – São Paulo | 29,161,286 | (8,967,701) | 20,193,585 | 25,584,703 | (7,714,252) | 17,870,451 |
Software license of use | 1,300,504 | (787,280) | 513,224 | 1,249,881 | (654,477) | 595,404 |
Right of use – other assets | 217,204 | (99,144) | 118,060 | 170,921 | (95,869) | 75,052 |
Right of use - investments | - | - | - | 26,148 | - | 26,148 |
Total | 65,239,037 | (21,226,179) | 44,012,858 | 57,924,819 | (18,603,948) | 39,320,871 |
(b) Changes
Schedule of obligations assumed | |||||||
December 31, 2022 | Addition | Transfer of contract assets | Transfers | Write-offs and disposals | Amortization | December 31, 2023 | |
Intangible right arising from: | |||||||
Concession agreements – equity value (*) | 499,326 | 22 | 27,774 | (934) | (307) | (19,764) | 506,117 |
Concession agreements – economic value | 652,039 | 60 | 115,841 | 63 | (119) | (130,124) | 637,760 |
Concession agreements – new contracts | - | 148,000 | - | - | - | (411) | 147,589 |
Program contracts (*) | 18,337,459 | 159 | 3,337,155 | 93,417 | (4,933) | (1,078,760) | 20,684,497 |
Program contracts – commitments | 1,264,992 | - | - | - | - | (52,966) | 1,212,026 |
Services contracts – São Paulo | 17,870,451 | 430 | 3,717,006 | (113,378) | (2,237) | (1,278,687) | 20,193,585 |
Software license of use | 595,404 | 1,397 | 49,533 | (88) | - | (133,022) | 513,224 |
Right of use – Other assets | 75,052 | 108,405 | - | - | (31) | (65,366) | 118,060 |
Right of use – Investments | 26,148 | - | - | (26,148) | - | - | - |
Total | 39,320,871 | 258,473 | 7,247,309 | (47,068) | (7,627) | (2,759,100) | 44,012,858 |
(*) | As of December 31, 2023, intangible assets include leases recognized before December 31, 2018 in accordance with IAS 17 amounting to R$ 374,679 - R$ 43,738 recognized as concession agreements – equity value and R$ 330,941 recognized as program contracts (R$ 222,572 as of December 31, 2022 – R$ 54,356 recognized as concession agreements – equity value and R$ 168,216 recognized as program contracts). |
F-69 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
December 31, 2021 | Addition | Transfer of contract assets | Transfers | Write-offs and disposals | Amortization | December 31, 2022 | |
Intangible right arising from: | |||||||
Concession agreements – equity value (*) | 491,057 | - | 27,166 | (144) | (115) | (18,638) | 499,326 |
Concession agreements – economic value | 681,441 | 13 | 48,428 | 33,576 | (9) | (111,410) | 652,039 |
Program contracts (*) | 17,152,021 | 6,635 | 2,132,675 | 2,944 | (2,800) | (954,016) | 18,337,459 |
Program contracts – commitments | 1,317,957 | - | - | - | - | (52,965) | 1,264,992 |
Services contracts – São Paulo | 16,158,771 | 208 | 2,855,284 | (41,133) | (6,063) | (1,096,616) | 17,870,451 |
Software license of use | 598,734 | 214 | 115,811 | 6 | - | (119,361) | 595,404 |
Right of use – Other assets | 103,853 | 42,182 | - | - | (67) | (70,916) | 75,052 |
Right of use – Investments | - | 26,148 | - | - | - | - | 26,148 |
Total | 36,503,834 | 75,400 | 5,179,364 | (4,751) | (9,054) | (2,423,922) | 39,320,871 |
(*) | As of December 31, 2022, intangible assets include leases recognized before December 31, 2018 in accordance with IAS 17 amounting to R$ 222,572 - R$ 54,356 recognized as concession agreements – equity value and R$ 168,216 recognized as program contracts (R$ 245,681 as of December 31, 2021 – R$ 65,012 recognized as concession agreements – equity value and R$ 180,669 recognized as program contracts). |
December 31, 2020 | Addition | Transfer of contract assets | Transfers | Write-offs and disposals | Amortization | December 31, 2021 | |
Intangible right arising from: | |||||||
Concession agreements – equity value (*) | 483,775 | - | 24,656 | 467 | (148) | (17,693) | 491,057 |
Concession agreements – economic value | 734,665 | - | 52,275 | (14) | (242) | (105,243) | 681,441 |
Program contracts (*) | 16,360,307 | 17,690 | 1,640,733 | 13,744 | (8,840) | (871,613) | 17,152,021 |
Program contracts – commitments | 1,370,923 | - | - | - | - | (52,966) | 1,317,957 |
Services contracts – São Paulo | 14,872,604 | 14,950 | 2,307,851 | (13,827) | (13,745) | (1,009,062) | 16,158,771 |
Software license of use | 540,625 | - | 155,748 | - | - | (97,639) | 598,734 |
Right of use – Other assets | 42,676 | 140,321 | - | - | (4,103) | (75,041) | 103,853 |
Total | 34,405,575 | 172,961 | 4,181,263 | 370 | (27,078) | (2,229,257) | 36,503,834 |
(*) | As of December 31, 2021, intangible assets include leases recognized before December 31, 2018 in accordance with IAS 17 amounting to R$ 245,681 - R$ 65,012 recognized as concession agreements – equity value and R$ 180,669 recognized as program contracts (R$ 269,561 as of December 31, 2020 – R$ 76,454 recognized as concession agreements – equity value and R$ 193,107 recognized as program contracts). |
December 31, 2019 | Addition | Contract renewal | Transfer of contract assets | Transfers | Write-offs and disposals | Amortization | December 31, 2020 | |||||||||
Intangible right arising from: | ||||||||||||||||
Concession agreements – equity value (*) | 1,494,853 | 1 | (1,031,830) | 47,154 | 1,440 | (858) | (26,985) | 483,775 | ||||||||
Concession agreements – economic value | 712,852 | — | — | 113,320 | (1,403) | (42) | (90,062) | 734,665 | ||||||||
Program contracts (*) | 13,819,700 | 303,472 | 1,031,830 | 2,075,268 | (51,570) | (5,423) | (812,970) | 16,360,307 | ||||||||
Program contracts – commitments | 1,364,875 | 58,323 | — | — | — | — | (52,275) | 1,370,923 | ||||||||
Services contracts – São Paulo | 14,390,763 | 20,940 | — | 1,382,656 | (23,645) | (9,990) | (888,120) | 14,872,604 | ||||||||
Software license of use | 471,706 | — | — | 70,016 | 78,169 | — | (79,266) | 540,625 | ||||||||
Right of use – Other assets | 70,698 | 28,549 | — | — | — | — | (56,571) | 42,676 | ||||||||
Total | 32,325,447 | 411,285 | — | 3,688,414 | 2,991 | (16,313) | (2,006,249) | 34,405,575 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
December 31, 2018 | First-time adoption of IFRS 16 | Addition | Contract renewal | Transfer to indemnities receivable | Transfer of contract assets | Transfers | Write-offs and disposals | Amortization | December 31, 2019* | |||||||||||
Intangible right arising from: | ||||||||||||||||||||
Concession agreements – equity value (*) | 4,073,344 | — | 2 | (2,690,660) | (4,345) | 131,809 | 76,804 | (8,311) | (83,790) | 1,494,853 | ||||||||||
Concession agreements – economic value | 1,232,009 | — | 2,034 | (532,173) | — | 89,041 | 1,956 | (569) | (79,446) | 712,852 | ||||||||||
Program contracts (*) | 8,777,929 | — | 1,338,443 | 3,223,773 | — | 970,534 | 137,283 | (10,312) | (617,950) | 13,819,700 | ||||||||||
Program contracts – commitments | 1,079,551 | — | 331,328 | — | — | — | — | — | (46,004) | 1,364,875 | ||||||||||
Services contracts – São Paulo | 13,391,452 | — | 3,867 | (940) | — | 2,054,940 | (228,583) | (20,739) | (809,234) | 14,390,763 | ||||||||||
Software license of use | 458,175 | — | — | — | — | 81,993 | (991) | — | (67,471) | 471,706 | ||||||||||
Right of use – Other assets | — | 64,955 | 48,278 | — | — | — | — | — | (42,535) | 70,698 | ||||||||||
Total | 29,012,460 | 64,955 | 1,723,952 | — | (4,345) | 3,328,317 | (13,531) | (39,931) | (1,746,430) | 32,325,447 |
As of June 30, 2020, a contract was signed for the provision of treatment services and final disposal of solid waste and collection of garbage tax in the Municipality of Diadema for 40 years. In order toTo reach the best operationalization format, treatment services and final disposal of solid waste are in the study phase and, based on the contractual provision, are subject to a partnership between SABESP and a private party, which will occur by means ofthrough a public call.
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(c) Intangible arising from concession agreements
The Company operates public utility service concession agreements for water supply and sewage services mostly based on agreements that set outdefine rights and obligations relativeregarding to the exploration of assets related to the provision of public utility serviceservices (See Note 3.93.10 (a)). The agreements provide for the return of the assets to the concession grantorgranting authority at the end of the concession period.
As of December 31, 20212023 and 2020,2022, the Company operated in 375376 municipalities in the State of São Paulo (372State, including the municipality of Olímpia (375 as of December 31, 2019)2022). Most of these contracts have a 30-year concession period,agreements are valid for 30 years, except for the contracts entered into with the municipalities of Guarulhos, Mauá, Santo André, São Bernardo do Campo, São João da Boa Vista and Tejupá, which were signed forhave a period of 40 years.year term.
The provision of services providedis remunerated in the form of tariffs, regulated by the Company are billed at a price regulated and controlled by São Paulo State Sanitation and Energy Regulatory Agency (ARSESP).ARSESP.
Intangible rights arising from concession agreements include:
(i) Concession agreements – equity value
These referRefer to municipalities assumed until 2006, except for the municipalities assumed by the economic value through assetsan asset valuation report prepared by independent experts. The amortization of the assets is calculated according to theon a straight-line method,basis, which considers the assetsassets’ useful life.
(ii) Concession agreements – economic value
From 1999 throughto 2006, the negotiations forrelated to new concessions were conducted based on the basis of the economic and financial resultresults of the transaction, determineddefined in a valuation report issued by independent appraisers.
The amount determined in the related contract, after the transaction is closed with the municipal authorities, realized through the subscription of the Company's shares or in cash, is recorded as "concession agreements" and amortized over the period of the related concession (usually 30 years). As of December 31, 2021 and 2020 there were no amounts pending related to these payments to the municipalities.
Intangible assets are amortized on a straight-line basis over the period of the concession agreements or for the useful lives of the underlying assets, whichever is shorter.
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
The amount defined in the respective contract, after the transaction is closed with the municipality, realized upon subscription of the Company's shares or in cash, is recorded in this line and amortized throughout the respective concession (usually 30 years). As of December 31, 2023 and 2022 there were no pending amounts related to these payments to the municipalities.
Intangible assets are amortized on a straight-line basis over the term of the contracts or the useful life of the underlying assets, whichever is shorter.
(iii) Concession agreements – New Contracts
These refer to contracts awarded through bidding processes following the New Legal Sanitation Framework. The assets are amortized over the contracted period or the useful life of the underlying assets, whichever is shorter.
(iv) Program contracts
These referRefer to the renewal of contracts previously referred to as concession agreements whose purpose is to provide sanitation services. The amortization of the assets acquired untilup to the signature dates of signatures of the program contracts is calculated according to theon a straight-line method,basis, which considers the assets’ useful lives.life. Assets acquired or built after the signature dates of program contracts are amortized duringover the contracted period (mostly,(most of which for 30 years) or during the useful liveslife of the underlying assets, whichever is shorter.
(iv)(v) Program contracts - Commitments
AfterSince the enactmenteffectiveness of the regulatory frameworkBasic Sanitation Regulation in 2007, renewals of concessions started to be madecontracts have been renewed through of program contracts. In some of these program contracts, the Company undertook the commitment to financially participate in social and environmental actions.initiatives. The assets built withinand the financial commitments assumed in the program contracts are recorded as intangible assets and are amortized byon a straight-line basis under the straight-line method in accordance with the durationterm of the program contract (mostly, 30 years).contract.
As of December 31, 20212023 and 2020,2022, the amounts not yet disbursed were recorded under “programin “Program contract commitments”, inunder current liabilities, totaling R$ 77,65221,969 and R$ 162,541100,188, respectively, and inunder noncurrent liabilities, totaling R$ 44,99512,047 and R$ 68,93912,197, respectively.
(v)
F-72 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
(vi) Services agreement with thecontracts - Municipality of São Paulo
OnAs of June 23, 2010, the Company entered into an agreement with the State of São Paulo State and the Municipality of São Paulo to regulate the provision ofprovide water supply and sewage services in the municipality of São Paulo for a 30-year period, which is30 years, extendable for an another 30-year period.30 years.
Also on June 23, 2010, an agreement was signed between the state and municipal government, and SABESPState and the Sanitation and Energy Regulatory Agency ofMunicipality signed an Agreement, with SABESP as the State of São Paulo (“ARSESP”) are the consenting and intervening parties,party, whose main aspects are the following:are:
1. The State and the Municipality of São Paulo grant to SABESP the right to explore the sanitation services in the capital of the State of São Paulo State, which consists ofincludes the obligation to provide such serviceservices and the right to charge the respective tariff for this service;
2. The State and the Municipality sets forth ARSESP as the agency responsible for regulating (including the tariff,tariff), controlling and monitoring the services.services;
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3. The evaluation model of the contractused was the discounted cash flow, which considered the financial and economic sustainability of SABESP’s operations in the metropolitan region of São Paulo;
4. All operating costs, taxes, investments, and the opportunity cost of SABESP’s investors and the creditors of SABESP’s were considered in the cash flow analysis;
5. The opportunity cost of SABESP’s creditors and investors was based on the Weighted Average Cost of Capital (WACC) methodology. This cost was used as a discount rate of the cash flow, calculated at 7.75% at the time;
6. The agreement provides for investments established in the agreement comply with the minimum ofcorresponding to 13% of the gross revenue from services provided in the municipalityMunicipality of São Paulo, net of the taxes on revenues.Cofins and Pasep taxes. Investment plans referring to SABESP’s execution shall be compatible with the activities and programs foreseenprovided for in the state, municipalState and Municipal sanitation plans, andas well as in the Metropolitan sanitation plan, where applicable, the metropolitan plan.applicable. The investment plan is not definite andInvestment Plan will be revised by the Managing Committee every four years, especially as toregarding investments to be made in the followingsubsequent period;
6.7. The payment relatedamount transferred to the Municipal Fund offor Environmental Sanitation and Infrastructure (FMSAI) to be appliedinvested in the sanitation service withinservices in the municipality must be recovered through tariff charges, as agreed upon in the tariffs charges. Such payment represents 7.5%contract. This amount accounts for 7.5% of the total revenue from services provided in the municipalityMunicipality of São Paulo, net of the taxes on revenueCofins and Pasep, and delinquency is retained in the period, recognizedmunicipalities until it is settled. Amounts transferred to FMSAI are recorded in profit or loss as operatingoperational cost;
7. The opportunity cost of the investors and the creditors was established by the Weighted Average Cost of Capital (WACC) methodology. The WACC was the interest rate used to discount the cash flow of the operation; and
F-73 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
8. The agreement considersprovides for the recoveryremuneration of net assets in operation, preferably evaluatedcalculated through equity valuation or carrying amount monetarily restated,adjusted for inflation, as defined by ARSESP. In addition, the agreementit provides for the remuneration of investments to be made by SABESP, so that there is no residual value at the end of the agreement.Agreement.
ReferringAs of December 16, 2016, as a result of the 1st Four-Year Review, the 1st amendment to the contract was signed, updating the exhibits related to the Coverage Targets Plan and service quality, the Investment Plan, and the Investment Compatibility Strategy.
Regarding to the recovery through tariff, mentioned in item 6 above, of transferthe amount transferred to the Municipal Fund offor Environmental Sanitation and Infrastructure, ARSESP issuedthrough tariff charges, mentioned in item 7 above, in April 2013, theARSESP issued Resolution no. 413, postponing the application of Resolution no. 407 and suspending, until the conclusion of the tariff revisionreview process, the transfer to the bill of services of amounts referringcorresponding to the municipal charges which were stipulatedto consumers, as established in Resolution no. 407. The postponement to applyof Resolution no. 407 was due to a request by the São Paulo State Government to analyze, among other things, methods to reduce the impact on consumers.
As of April 18, 2014, ARSESP published Resolution no. 484 was published with the final resultsresult of SABESP’s Tariff Revision, however, both the São Paulo Municipal Government, through Official Letter no. 1,309/2014-SGM/GAB and the São Paulo State Government through a petition filed by the São Paulo State Office, through the Official Letter ATG/Official Letter no. 092/2014-CC, requested a postponement of the effects of ARSESP Resolution no. 413, published in the São Paulo State Official Gazette on March 20, 2013, until the conclusion of the revision of the Agreement entered into between the São Paulo Municipal Government, the São Paulo State and SABESP.
As of |
On May 9, 2018, ARSESP announced the final result of the Second Ordinary Tariff Revision and, as of this revision cycle, ARSESP has been passing-on ontransferring the tariffs up to 4% of municipal revenue, which is transferred from SABESP to the Municipal Fund for Environmental Sanitation and Infrastructure legally created. Under the Second Ordinary Tariff Revision, concluded in May 2018, the only contract providing for that transfer and meeting the requirements of ARSESP was the one executed with the municipality of São Paulo. Accordingly, 4% of the funds transferred to the Municipal Fund for Environmental Sanitation and Infrastructure of São Paulo were passed-ontransferred to the tariffs of the tariff cycle ended in April 2021.
The Municipal Government of São Paulo, the São Paulo State Governments, ARSESP and the Company have not reached an agreement to define the percentage of the Municipal Fund for Environmental Sanitation and Infrastructure transfer to the tariffs charged by the Company in the Municipality of São Paulo, which led to the filing of a lawsuit by the municipality claiming the percentage provided for in the contract between the parties. TheAs requested by the municipality, required the suspension of the lawsuit and SABESP has not yet been summoned.is currently suspended.
F-74 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
At the time of execution of the agreement, the municipalityMunicipality of São Paulo and the Company did not conclude an agreementagree to settle the pending financial issues existing, related to the rendering of water supply and sewage services to the properties of the Municipality, and for that reason, the Company filed lawsuits for collection of the aforementioned amounts, which remain in progress and are recorded under allowance for doubtful accounts.
The agreement represents 44.45% of the total revenue of the Company asAs of December 31, 2021 (2023 and 2022, the agreement entered into with the Municipality of São Paulo accounted for 44.5844.95% asand 45.14%, respectively, of December 31, 2020),the Company’s sanitation revenue, which ensures legal and ensures the judicial and assets security.
property security to SABESP.
(d) Public-Private Partnership - PPP
SABESP carries out operations related to the PPPs mentioned below. These operations and their respective obligations and guarantees are supported by agreements executed according to Law 11,079/2004.
Alto Tietê Production System (PPP SPAT)
The CompanyIn June 2008, SABESP and the special purpose entity CAB-Sistema Produtor Alto Tietê S/A (currently SPAT Saneamento S/A), formed by Galvão Engenharia S.A. and Companhia Águas do Brasil – Cab Ambiental, signed in June 2008 the contractcontracts of the Public-Private Partnership of the Alto Tietê production system.
The service contract is valid for 15 years and has the purpose of expandingsystem, to expand the capacity of the Taiaçupeba Water Treatment Station, from 10 thousand to 15 thousand litters per second, valid for 15 years from the commencement of liters per second. the works.
The operationworks started in February 2009 and the SPAT PPP started operating in October 2011.
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As of December 31, 2021 and 2020, the carrying amounts related to this PPP recorded in intangible assets were R$ 269,062 and R$ 287,645, respectively. In 2020 and 2019, a discount rate of 8.20% p.a. was used to calculate the present value adjustment of this contract.
SABESP monthly transfers funds from tariffs collected for services provided to the SPE CAB Sistema Produtor Alto Tietê S/A, in the amount oftotaling R$ 13,26514,740, corresponding to monthly remuneration. This amount is annually adjusted by the IPC – FIPE and is monthly recorded in a restricted account, as established in the contracts. If SABESP complies with its monthly obligations with the SPE, the funds from the restricted account will be released.
The guarantee has been effective since the beginning of the operation and will be valid until the end, termination, intervention, annulment or caducity of the Administrative Concession, or other events of extinction provided for in the Concession Agreement or in the legislation applicable to administrative concessions, including in the event of bankruptcy or dissolution of the SPE.
São Lourenço Production System (PPP SPSL)
In August 2013, the Company and the special purpose entity Sistema Produtor São Lourenço S/A, formed by of Construções e Comércio Camargo Corrêa S/A and Construtora Andrade Gutierrez S/A, signed the Public-Private Partnership agreementscontracts of the São Lourenço Production System.System, valid for 25 years from the commencement of the works.
F-75 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
In May 2018, the control of SPE Sistema Produtor São Lourenço S/A was transferred to CGGC Construtora do Brasil Ltda, previously formed ofby Construções e Comércio Camargo Corrêa S/A and Construtora Andrade Gutierrez S/A.
The objective of the contract is: a)(i) the construction of a water production system, mainly consisting of a water pipeline connecting Ibiúna to Barueri, a water collection station in Ibiúna, a water treatment station in Vargem Grande Paulista and water reservoirs; and b)(ii) for the provisionoperation of services for a 25-year term, aiming at rendering servicesthe system to operate the dehydration system, dryingdewater, dry and provide final disposal of sludge, maintenance and works of the São Lourenço Production System.System project.
The works started in April 2014 and Thethe São Lourenço Production System (SPSL) PPP started operating on July 10, 2018.
Since the beginning of operations, the Company monthly transfers funds from tariffs collected for services provided to the SPE Sistema Produtor São Lourenço S/A, in the amount of R$ 36,51942,904, corresponding to monthly remuneration plus any interests and charges. This amount is annually adjusted by the IPC – FIPE and is monthly recorded in a restricted account, as established in the contracts. If the Company complies with its monthly obligations with the SPE, the funds from the restricted account will be released.
The guarantee has become effective since the start of operations of the system, with acceptance by SABESP, and will be valid until one of the following events occurs, whichever occurs first: (i) the original payment date of the last installment of interest/amortization of main financing that the SPE may contract for the performance of the works; (ii) end, termination, intervention, annulment or caducity of the Administrative Concession, or other events of extinction provided for in the Concession Agreement or the legislation applicable to administrative concessions, including in the event of bankruptcy or dissolution of the SPE.
Intangible assets were accrued based on the physical evolution of the works, with the Public-Private Partnership accounts being the corresponding entries in liabilities.
The discount rates used in the agreements of the Public-Private Partnerships Alto Tietê and São Lourenço are 8.20% and 14.85% p.a., respectively, for the calculation of the present value adjustment.
The amounts recorded in intangible assets are as follows:
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
The guarantee will become effective as of the beginning of the system’s appropriate operation, duly accepted by SABESP, valid until the occurrence of any of the following events, whichever occurs first: (i) the original payment date of the last installment of interest / amortization of the principal taken out by the SPE to execute the works; (ii) the end, termination, intervention, annulment, caducity of the Administrative Concession, or other extinction events provided for in the Concession Agreement or in the law applicable to administrative concessions, including bankruptcy or extinction of the SPE.
Schedule of Intangible assets | ||
December 31, 2023 | December 31, 2022 | |
Alto Tietê | 235,224 | 251,545 |
São Lourenço | 2,556,002 | 2,725,900 |
Total | 2,791,226 | 2,977,445 |
As of December 31, 2021 and 2020, the carrying amounts recorded in the Company’s intangible assets, related to this PPP, amounted to R$ 2,895,798 and R$ 3,065,445, respectively. Intangible assets are accrued for based on the physical evolution of the construction, with a counter-entry in the Private-Public Partnership (PPP) liabilities account. In 2021, a discount rate of 7.80% p.a. was used to calculate the adjustment to present value of the agreement.
The obligations assumed by the Company as of December 31, 20212023 and 20202022 are shown in the table below:
December 31, 2021 | December 31, 2020 | |||||||||||
Current liabilities | Noncurrent liabilities | Total liabilities | Current liabilities | Noncurrent liabilities | Total liabilities | |||||||
Alto Tietê | 69,442 | 102,873 | 172,315 | 59,429 | 149,726 | 209,155 | ||||||
São Lourenço | 73,315 | 2,814,555 | 2,887,870 | 70,778 | 2,895,340 | 2,966,118 | ||||||
Total | 142,757 | 2,917,428 | 3,060,185 | 130,207 | 3,045,066 | 3,175,273 |
Schedule of obligations assumed by the Company | ||||||
December 31, 2023 | December 31, 2022 | |||||
Current liabilities | Noncurrent liabilities | Total liabilities | Current liabilities | Noncurrent liabilities | Total liabilities | |
Alto Tietê | 52,762 | - | 52,762 | 91,782 | 36,645 | 128,427 |
São Lourenço | 435,164 | 2,798,688 | 3,233,852 | 130,631 | 2,700,123 | 2,830,754 |
Total | 487,926 | 2,798,688 | 3,286,614 | 222,413 | 2,736,768 | 2,959,181 |
(e) Amortization of intangible assetsIntangible Assets
The average amortization average rate totaled 4.95.4% as of December 31, 20212023 (4.75.2% as of December 31, 20202022 and 4.24.9% as of December 31, 2019)2021).
(f) Software licenseLeases and right of use
Schedule of right of use | ||
Nature | December 31, 2023 | December 31, 2022 |
Leases - Contract Assets | - | 276,893 |
Leases - Concession and Program Contracts | ||
Cost | 588,600 | 405,431 |
Accumulated amortization | (213,921) | (182,859) |
(=) Net | 374,679 | 222,572 |
Right of use - Other assets | ||
Vehicles | 205,593 | 153,384 |
Properties | 11,566 | 11,711 |
Equipment | 45 | 5,826 |
Accumulated amortization | (99,144) | (95,869) |
(=) Net | 118,060 | 75,052 |
Total – Leases and Right of use | 492,739 | 574,517 |
The software license of use is capitalized based on the costs incurred to acquire software and make them ready for use. As of April 10, 2017, the Company implemented the Integrated Business Management System (Enterprise Resource Planning – SAP ERP), which includes the administrative/financial module. The implementation of the commercial module is in progress.
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
The implementation of the commercial module Net@Suíte system was concluded on October 13, 2021.
(g) Right of use
Nature | December 31, 2021 | December 31, 2020 | ||
Leases - Contract Assets | 276,893 | 276,893 | ||
Leases - Concession Agreements and Program Contracts | ||||
Cost | 405,446 | 405,426 | ||
Accumulated amortization | (159,765) | (135,865) | ||
(=) Net | 245,681 | 269,561 | ||
Other assets (*) | ||||
Vehicles | 142,003 | 115,208 | ||
Properties | 6,570 | 15,508 | ||
Equipment | 9,841 | 4,541 | ||
Other assets | 15,301 | 6,525 | ||
Accumulated amortization | (69,862) | (99,106) | ||
(=) Net | 103,853 | 42,676 | ||
Right of use | 626,427 | 589,130 |
(*) From January to December 2021, costs and accumulated totaling R$ 108,406, referring to expired rights of use, were written off.
LeaseThe lease liability corresponds to total future fixed lease payments, adjusted to present value, considering an incremental rate on borrowings. For further information, see Note 17.
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The table below shows the impact in the income statements:
Schedule of impact in the income statements | |||||||||
Impact in the income statement | Impact in the income statement | ||||||||
December 31, 2021 | December 31, 2020 | December 31, 2019 | December 31, 2023 | December 31, 2022 | December 31, 2021 | ||||
Right-of-use amortization | (75,041) | (79,834) | (65,413) | (96,429) | (105,551) | (75,041) | |||
Financial result – interest expenses | (68,730) | (62,956) | (54,791) | ||||||
Financial result – interest expense and inflation adjustment | (75,108) | (72,050) | (68,730) | ||||||
Short-term and low-value lease expenses | (22,467) | (13,845) | (51,855) | (26,776) | (25,365) | (22,467) | |||
Decrease of the income of the year | (166,238) | (156,635) | (172,059) | (198,313) | (202,966) | (166,238) |
(h)(g) Performance Agreements
SABESP has performance agreements for the construction of assets, in which the contractor is paid for the delivery of results, not only for the execution of the construction works.
The performance agreements have basically three phases: (i) implementation of the scope - construction of the asset; (ii) calculation of the performance of the asset built; and (iii) payment of fixed installments.
SABESP monitors the performance of the agreement and recognizes the assets when future economic benefits are generated for the Company so that costs can be reliably measured. The performance value is part of the asset’s cost, as it has better performance and, consequently, generates additional future economic benefits for the Company.
F-78 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
The limit to be paid to the supplier corresponds to 120%120% of the base value of the agreement. In most agreements, when the minimum performance percentage is not reached, the amount to be paid to the supplier will be the cost of the materials used in the construction of the assets only.
As of December 31, 20212023 and 2020,2022, the accounting balances of these agreements recorded in contract asset and intangible assets were R$ 737,657183,876 and R$ 306,738,138,550, and in intangible assets they totaled R$ 871,4882,191,361 and R$ 265,940,2,126,106, respectively.
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16 | Property, plant and equipment |
(a) Statement of financial position details
Schedule of statement of financial position details
Schedule of statement of financial position details | ||||||||||||||||||||||||
December 31, 2021 | December 31, 2020 | December 31, 2023 | December 31, 2022 | |||||||||||||||||||||
Cost | Accumulated depreciation | Net | Annual Depreciation average rate | Cost | Accumulated depreciation | Net | Annual Depreciation average rate | Cost | Accumulated depreciation | Net | Annual Depreciation average rate | Cost | Accumulated depreciation | Net | Annual Depreciation average rate | |||||||||
Land | 94,213 | — | 94,213 | — | 94,213 | — | 94,213 | — | 94,228 | - | 94,228 | - | 94,228 | - | 94,228 | - | ||||||||
Buildings | 86,703 | (41,205) | 45,498 | 2.1% | 86,860 | (41,513) | 45,347 | 2.1% | 125,672 | (44,726) | 80,946 | 2.2% | 90,311 | (42,343) | 47,968 | 2.1% | ||||||||
Equipment | 397,782 | (282,628) | 115,154 | 15.1% | 372,103 | (271,087) | 101,016 | 14.8% | 443,380 | (313,193) | 130,187 | 14.2% | 412,828 | (291,963) | 120,865 | 15.3% | ||||||||
Transportation equipment | 10,434 | (7,962) | 2,472 | 9.9% | 10,319 | (7,350) | 2,969 | 9.9% | 14,625 | (10,384) | 4,241 | 9.9% | 12,578 | (10,083) | 2,495 | 9.9% | ||||||||
Furniture and fixtures | 36,561 | (14,482) | 22,079 | 6.7% | 31,232 | (13,813) | 17,419 | 6.7% | 41,049 | (15,876) | 25,173 | 6.8% | 38,528 | (15,032) | 23,496 | 6.7% | ||||||||
Other | 11,982 | (241) | 11,741 | 5.0% | 7,618 | (331) | 7,287 | 4.9% | 140,548 | (764) | 139,784 | 6.5% | 50,189 | (302) | 49,887 | 5.0% | ||||||||
Total | 637,675 | (346,518) | 291,157 | 11.1% | 602,345 | (334,094) | 268,251 | 11.2% | 859,502 | (384,943) | 474,559 | 9.7% | 698,662 | (359,723) | 338,939 | 11.2% |
(b) Changes
Schedule of changes in property, plant, and equipment
Schedule of changes in property, plant, and equipment | ||||||||||||||||||
December 31, 2020 | Additions | Transfers | Write-offs and disposals | Depreciation | December 31, 2021 | December 31, 2022 | Additions | Transfers | Write-offs and disposals | Depreciation | December 31, 2023 | |||||||
Land | 94,213 | — | — | — | — | 94,213 | 94,228 | - | - | - | - | 94,228 | ||||||
Buildings | 45,347 | 3,181 | (1,965) | (5) | (1,060) | 45,498 | 47,968 | 5,832 | 28,459 | (14) | (1,299) | 80,946 | ||||||
Equipment | 101,016 | 38,807 | (3,398) | (365) | (20,906) | 115,154 | 120,865 | 55,449 | (18,121) | (641) | (27,365) | 130,187 | ||||||
Transportation equipment | 2,969 | 97 | 69 | — | (663) | 2,472 | 2,495 | - | 2,432 | - | (686) | 4,241 | ||||||
Furniture and fixtures | 17,419 | 4,477 | 1,647 | (206) | (1,258) | 22,079 | 23,496 | 6,522 | (3,060) | (72) | (1,713) | 25,173 | ||||||
Other | 7,287 | 3,719 | 865 | — | (130) | 11,741 | 49,887 | 79,446 | 10,826 | - | (375) | 139,784 | ||||||
Total | 268,251 | 50,281 | (2,782) | (576) | (24,017) | 291,157 | 338,939 | 147,249 | 20,536 | (727) | (31,438) | 474,559 |
December 31, 2019 | Additions | Transfers | Write-offs and disposals | Depreciation | December 31, 2020 | |||||||
Land | 92,962 | — | 1,251 | — | — | 94,213 | ||||||
Buildings | 41,705 | 5,430 | (713) | — | (1,075) | 45,347 | ||||||
Equipment | 152,273 | 26,055 | (49,188) | (174) | (27,950) | 101,016 | ||||||
Transportation equipment | 1,984 | 298 | 1,351 | — | (664) | 2,969 | ||||||
Furniture and fixtures | 18,219 | 4,087 | (3,712) | (103) | (1,072) | 17,419 | ||||||
Other | 7,250 | 6,537 | (6,446) | — | (54) | 7,287 | ||||||
Total | 314,393 | 42,407 | (57,457) | (277) | (30,815) | 268,251 |
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December 31, 2018 | Additions | Transfers | Write-offs and disposals | Depreciation | December 31, 2019 | |||||||
Land | 92,979 | — | (17) | — | — | 92,962 | ||||||
Buildings | 40,125 | 3,497 | 15 | — | (1,932) | 41,705 | ||||||
Equipment | 116,086 | 63,216 | 3,149 | (429) | (29,749) | 152,273 | ||||||
Transportation equipment | 3,473 | 308 | (1,117) | (2) | (678) | 1,984 | ||||||
Furniture and fixtures | 13,578 | 5,266 | 734 | (162) | (1,197) | 18,219 | ||||||
Other | 1,371 | 5,872 | 66 | — | (59) | 7,250 | ||||||
Total | 267,612 | 78,159 | 2,830 | (593) | (33,615) | 314,393 |
F-79 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
December 31, 2021 | Additions | Transfers | Write-offs and disposals | Depreciation | December 31, 2022 | |
Land | 94,213 | - | 15 | - | - | 94,228 |
Buildings | 45,498 | 4,657 | (976) | (45) | (1,166) | 47,968 |
Equipment | 115,154 | 27,849 | 1,988 | (781) | (23,345) | 120,865 |
Transportation equipment | 2,472 | 175 | 658 | (3) | (807) | 2,495 |
Furniture and fixtures | 22,079 | 2,646 | 394 | (149) | (1,474) | 23,496 |
Other | 11,741 | 38,341 | (30) | (78) | (87) | 49,887 |
Total | 291,157 | 73,668 | 2,049 | (1,056) | (26,879) | 338,939 |
December 31, 2020 | Additions | Transfers | Write-offs and disposals | Depreciation | December 31, 2021 | |
Land | 94,213 | - | - | - | - | 94,213 |
Buildings | 45,347 | 3,181 | (1,965) | (5) | (1,060) | 45,498 |
Equipment | 101,016 | 38,807 | (3,398) | (365) | (20,906) | 115,154 |
Transportation equipment | 2,969 | 97 | 69 | - | (663) | 2,472 |
Furniture and fixtures | 17,419 | 4,477 | 1,647 | (206) | (1,258) | 22,079 |
Other | 7,287 | 3,719 | 865 | - | (130) | 11,741 |
Total | 268,251 | 50,281 | (2,782) | (576) | (24,017) | 291,157 |
Schedule of borrowings and financing outstanding
Borrowings and financing outstanding balance | December 31, 2021 | December 31, 2020 | ||||||||||
Financial institution | Current | Noncurrent | Total | Current | Noncurrent | Total | ||||||
Local currency | ||||||||||||
12th issue debentures | 45,450 | 113,049 | 158,499 | 45,450 | 158,425 | 203,875 | ||||||
14th issue debentures | 25,388 | 0 | 25,388 | 51,873 | 24,205 | 76,078 | ||||||
17th issue debentures | 102,252 | 101,982 | 204,234 | 91,850 | 183,335 | 275,185 | ||||||
18th issue debentures | 48,479 | 92,677 | 141,156 | 45,918 | 135,105 | 181,023 | ||||||
21st issue debentures | 174,849 | 0 | 174,849 | 175,000 | 174,769 | 349,769 | ||||||
22nd issue debentures | 200,000 | 508,530 | 708,530 | 99,969 | 678,149 | 778,118 | ||||||
23rd issue debentures | 0 | 864,776 | 864,776 | 0 | 864,678 | 864,678 | ||||||
24th issue debentures | 0 | 461,350 | 461,350 | 0 | 414,994 | 414,994 | ||||||
25th issue debentures | 0 | 0 | 0 | 1,442,610 | 0 | 1,442,610 | ||||||
26th issue debentures | 0 | 1,168,317 | 1,168,317 | 0 | 1,047,767 | 1,047,767 | ||||||
27th issue debentures | 0 | 997,433 | 997,433 | 0 | 997,000 | 997,000 | ||||||
28th issue debentures | 0 | 1,197,395 | 1,197,395 | 0 | 0 | 0 | ||||||
29th issue debentures | 0 | 1,230,602 | 1,230,602 | 0 | 0 | 0 | ||||||
Brazilian Federal Savings Bank | 98,784 | 1,380,170 | 1,478,954 | 90,382 | 1,324,459 | 1,414,841 | ||||||
Brazilian Development Bank - BNDES PAC | 13,394 | 6,665 | 20,059 | 13,185 | 20,247 | 33,432 | ||||||
Brazilian Development Bank - BNDES PAC II 9751 | 7,161 | 30,308 | 37,469 | 7,159 | 37,447 | 44,606 | ||||||
Brazilian Development Bank - BNDES PAC II 9752 | 4,851 | 20,619 | 25,470 | 4,851 | 25,470 | 30,321 | ||||||
Brazilian Development Bank - BNDES ONDA LIMPA | 26,751 | 60,089 | 86,840 | 26,751 | 86,809 | 113,560 | ||||||
Brazilian Development Bank - BNDES TIETÊ III | 117,593 | 617,251 | 734,844 | 86,823 | 542,519 | 629,342 | ||||||
Brazilian Development Bank - BNDES 2015 | 33,558 | 420,685 | 454,243 | 33,558 | 454,126 | 487,684 | ||||||
Brazilian Development Bank - BNDES 2014 | 6,524 | 22,874 | 29,398 | 5,143 | 23,017 | 28,160 | ||||||
Inter-American Development Bank - BID 2202 | 181,349 | 2,344,403 | 2,525,752 | 181,349 | 2,524,798 | 2,706,147 | ||||||
Inter-American Development Bank - BID INVEST | 34,800 | 890,400 | 925,200 | 44,815 | 898,060 | 942,875 | ||||||
Leases (Concession Agreements, Program Contracts and Contract Assets) | 36,640 | 360,671 | 397,311 | 28,847 | 399,896 | 428,743 | ||||||
Leases (Others) | 69,306 | 56,663 | 125,969 | 36,576 | 9,300 | 45,876 | ||||||
Other | 4,790 | 9,274 | 14,064 | 3,778 | 11,382 | 15,160 | ||||||
Interest and charges | 239,581 | 0 | 239,581 | 158,918 | 0 | 158,918 | ||||||
Total in local currency | 1,471,500 | 12,956,183 | 14,427,683 | 2,674,805 | 11,035,957 | 13,710,762 |
F-80 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Borrowings and financing outstanding balance | December 31, 2021 | December 31, 2020 | ||||||||||
Financial institution | Current | Noncurrent | Total | Current | Noncurrent | Total | ||||||
Foreign currency | ||||||||||||
Inter-American Development Bank - BID 1212 – US$41,112 thousand (US$51,390 thousand in December 2020) | 57,357 | 172,071 | 229,428 | 53,412 | 213,649 | 267,061 | ||||||
Inter-American Development Bank - BID 4623 – US$30,329 thousand (US$ 10.220 thousand in December 2020) | 0 | 155,192 | 155,192 | — | 46,474 | 46,474 | ||||||
International Bank of Reconstruction and Development -BIRDs 7662 e 8906 – US$76,712 thousand (US$82,792 thousand in December 2020) | 33,927 | 386,328 | 420,255 | 31,594 | 393,949 | 425,543 | ||||||
JICA 15 – ¥9,219,440 thousand (¥10,371,870 thousand in December 2020) | 55,858 | 391,008 | 446,866 | 58,117 | 464,936 | 523,053 | ||||||
JICA 18 – ¥8,289,280 thousand (¥9,325,440 thousand in December 2020) | 50,223 | 351,398 | 401,621 | 52,253 | 417,846 | 470,099 | ||||||
JICA 17 – ¥3,706,564 thousand (¥3,349,203 thousand in December 2020) | 12,833 | 165,900 | 178,733 | 11,260 | 156,738 | 167,998 | ||||||
JICA 19 – ¥28,109,529 thousand (¥29,923,047 thousand in December 2020) | 87,901 | 1,272,803 | 1,360,704 | 91,456 | 1,415,683 | 1,507,139 | ||||||
BID 1983AB – US$15,385 thousand (US$23,077 thousand in December 2020) | 42,927 | 42,336 | 85,263 | 39,975 | 78,943 | 118,918 | ||||||
Interest and charges | 18,091 | 0 | 18,091 | 21,577 | 0 | 21,577 | ||||||
Total in foreign currency | 359,117 | 2,937,036 | 3,296,153 | 359,644 | 3,188,218 | 3,547,862 | ||||||
Total borrowings and financing | 1,830,617 | 15,893,219 | 17,723,836 | 3,034,449 | 14,224,175 | 17,258,624 |
|
17 | Borrowings and financing |
Schedule of borrowings and financing outstanding | ||||||
December 31, 2023 | December 31, 2022 | |||||
Financial institution | Current | Noncurrent | Total | Current | Noncurrent | Total |
Local currency | ||||||
12th issue debentures | 45,450 | 22,385 | 67,835 | 45,450 | 67,681 | 113,131 |
17th issue debentures | - | - | - | 144,632 | - | 144,632 |
18th issue debentures | 46,962 | - | 46,962 | 49,937 | 45,649 | 95,586 |
22nd issue debentures | 170,957 | 170,616 | 341,573 | 199,901 | 326,433 | 526,334 |
23rd issue debentures | 490,810 | 374,279 | 865,089 | - | 864,910 | 864,910 |
24th issue debentures | - | 512,122 | 512,122 | - | 488,478 | 488,478 |
26th issue debentures | - | 1,302,042 | 1,302,042 | - | 1,239,645 | 1,239,645 |
27th issue debentures | 200,000 | 498,634 | 698,634 | 299,614 | 698,339 | 997,953 |
28th issue debentures | 127,715 | 1,070,457 | 1,198,172 | - | 1,197,756 | 1,197,756 |
29th issue debentures | - | 1,314,136 | 1,314,136 | - | 1,275,295 | 1,275,295 |
30th issue debentures | 125,000 | 873,231 | 998,231 | - | 998,110 | 998,110 |
Brazilian Federal Savings Bank | 108,210 | 1,508,275 | 1,616,485 | 99,767 | 1,422,145 | 1,521,912 |
Brazilian Development Bank - BNDES PAC | - | - | - | 6,736 | - | 6,736 |
Brazilian Development Bank - BNDES PAC II 9751 | 7,286 | 16,316 | 23,602 | 7,214 | 23,344 | 30,558 |
Brazilian Development Bank - BNDES PAC II 9752 | 4,936 | 11,107 | 16,043 | 4,887 | 15,884 | 20,771 |
Brazilian Development Bank - BNDES ONDA LIMPA | 27,219 | 6,766 | 33,985 | 26,949 | 33,617 | 60,566 |
Brazilian Development Bank - BNDES TIETÊ III | 200,693 | 652,175 | 852,868 | 154,437 | 656,264 | 810,701 |
Brazilian Development Bank - BNDES 2015 | 34,146 | 360,021 | 394,167 | 33,807 | 390,127 | 423,934 |
Brazilian Development Bank - BNDES 2014 | 6,638 | 10,107 | 16,745 | 6,572 | 16,525 | 23,097 |
Inter-American Development Bank - IDB 2202 | 181,349 | 1,983,615 | 2,164,964 | 181,349 | 2,164,009 | 2,345,358 |
Inter-American Development Bank - IDB INVEST | 39,550 | 814,840 | 854,390 | 37,340 | 853,725 | 891,065 |
Inter-American Development Bank - IDB INVEST 2022 | 14,100 | 438,241 | 452,341 | 14,100 | 452,085 | 466,185 |
Inter-American Development Bank - IDB INVEST 2023 | 14,100 | 447,791 | 461,891 | - | - | - |
International Finance Corporation – IFC 2022 | 22,800 | 713,910 | 736,710 | 80,000 | 670,996 | 750,996 |
International Finance Corporation – IFC 2023 | - | 986,651 | 986,651 | - | - | - |
Leases (Concession Agreements, Program Contracts and Contract Asset) | 49,884 | 259,326 | 309,210 | 44,453 | 313,391 | 357,844 |
Leases (Others) | 68,499 | 73,801 | 142,300 | 72,109 | 29,265 | 101,374 |
Other | 3,003 | 2,910 | 5,913 | 6,241 | 5,867 | 12,108 |
Interest and other charges | 377,398 | - | 377,398 | 417,878 | - | 417,878 |
Total in local currency | 2,366,705 | 14,423,754 | 16,790,459 | 1,933,373 | 14,249,540 | 16,182,913 |
F-81 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Schedule of borrowings terms
Borrowings and financing outstanding balance | December 31, 2023 | December 31, 2022 | ||||
Financial institution | Current | Noncurrent | Total | Current | Noncurrent | Total |
Foreign currency | ||||||
Inter-American Development Bank - IDB 1212 – US$20,556 thousand (US$30,834 thousand in December 2022) | 49,759 | 49,759 | 99,518 | 53,628 | 107,256 | 160,884 |
Inter-American Development Bank - IDB 4623 – US$152,187 thousand (US$74,299 thousand in December 2023) | - | 712,449 | 712,449 | - | 367,441 | 367,441 |
International Bank of Reconstruction and Development (IBRD) – IBRDs 7662 e 8906 – US$107,445 thousand (US$78,197 thousand in December 2022) | 29,433 | 477,554 | 506,987 | 31,722 | 365,648 | 397,370 |
JICA 15 – ¥6,914,580 thousand (¥8,067,010 thousand in December 2022) | 39,437 | 197,180 | 236,617 | 45,602 | 273,610 | 319,212 |
JICA 18 – ¥6,216,960 thousand (¥7,253,120 thousand in December 2022) | 35,457 | 177,168 | 212,625 | 41,001 | 245,865 | 286,866 |
JICA 17 – ¥3,464,352 thousand (¥3,753,048 thousand in December 2022) | 9,879 | 107,880 | 117,759 | 11,424 | 136,227 | 147,651 |
JICA 19 – ¥24,482,493 thousand (¥26,296,011 thousand in December 2022) | 62,059 | 774,200 | 836,259 | 71,761 | 967,124 | 1,038,885 |
BID 1983AB – US$7,692 thousand (US$7,692 thousand in December 2022) | - | - | - | 39,962 | - | 39,962 |
Interest and charges | 23,677 | - | 23,677 | 17,487 | - | 17,487 |
Total in foreign currency | 249,701 | 2,496,190 | 2,745,891 | 312,587 | 2,463,171 | 2,775,758 |
Total borrowings and financing | 2,616,406 | 16,919,944 | 19,536,350 | 2,245,960 | 16,712,711 | 18,958,671 |
Exchange rate as of December 31, 2023: US$4.8413; ¥0.03422 (as of December 31, 2022: US$5.2177; ¥0.03957). As of December 31, 2023, the Company did not have balances of borrowings and financing, raised during the year, to maturing within 12 months. | ||||||
F-82 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
Schedule of borrowings terms | ||||
Local currency | Guarantees | Maturity | Annual interest | Inflation adjustment |
12th issue debentures | Own funds | 2025 | TR + 9.5% | |
17th issue debentures | Own funds | 2023 | CDI +0.75% (Series 1) and 4.5% (Series 2) and 4.75% (Series 3) | IPCA (Series 2 and 3) |
18th issue debentures | Own funds | 2024 | TJLP + 1.92 % (Series 1 and 3) and 8.25% (Series 2) | IPCA (Series 2) |
22nd issue debentures | Own funds | 2025 | CDI +0.58% (Series 1) and CDI + 0.90% (Series 2) and 6.0% (Series 3) | IPCA (Series 3) |
23rd issue debentures | Own funds | 2027 | CDI +0.49% (Series 1) and CDI + 0.63% (Series 2) | |
24th issue debentures | Own funds | 2029 | 3.20% (Series 1) and 3.37% (Series 2) | IPCA (Series 1 and 2) |
26th issue debentures | Own funds | 2030 | 4.65% (series 1) and 4.95% (series 2) | IPCA (series 1 and 2) |
27th issue debentures | Own funds | 2027 | CDI +1.60% (Series 1) and CDI + 1.80% (Series 2) and 2.25% (Series 3) | |
28th issue debentures | Own funds | 2028 | CDI +1.20% (Series 1) and CDI + 1.44% (Series 2) and 1.60% (Series 3) | |
29th issue debentures | Own funds | 2036 | CDI +1.29% (Series 1) and 5.3058% (Series 2) and 5.4478% (Series 3) | IPCA (series 2 and 3) |
30th issue debentures | Own funds | 2029 | CDI +1.30% (Series 1) and 1.58% (Series 2) | |
Brazilian Federal Savings Bank | Own funds | 5% to 9.5% | TR | |
Brazilian Development Bank - BNDES PAC | Own funds | 2023 | TJLP+1.82% | |
Brazilian Development Bank - BNDES PAC II 9751 | Own funds | 2027 | TJLP+1.72% | |
Brazilian Development Bank - BNDES PAC II 9752 | Own funds | 2027 | TJLP+1.72% | |
Brazilian Development Bank - BNDES ONDA LIMPA | Own funds | 2025 | TJLP+1.92% | |
Brazilian Development Bank - BNDES TIETÊ III | Own funds | 2028 | TJLP+1.66% | |
Brazilian Development Bank - BNDES 2015 | Own funds | 2035 | TJLP+2.18% | |
Brazilian Development Bank - BNDES 2014 | Own funds | 2026 | TJLP+1.76% | |
Inter-American Development Bank – | Government | 2035 | CDI+0.86% | |
Inter-American Development Bank – | Own funds | 2034 | CDI+1.90% and CDI+2.70% | |
Inter-American Development Bank – IDB INVEST 2022 | Own funds | 2036 | CDI+2.50% | |
Inter-American Development Bank – IDB INVEST 2023 | Own funds | 2036 | CDI+0.50% | |
International Finance Corporation – IFC | Own funds | 2032 | CDI+2.00% | |
Leases (Concession Agreements, Program Contracts and Contract | 2035 | 7.73% to 10.12% | IPC | |
Leases (Others) | ||||
Other | Own funds | 2025 | 3% (FEHIDRO) and TJLP + 1.5% (FINEP) |
|
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|
F-83 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
(i) Payment schedule – book value as of December 31, 2021
Schedule of borrowings payment schedule
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 to 2044 | TOTAL | |||||||||
LOCAL CURRENCY | ||||||||||||||||
Debentures | 596,418 | 694,806 | 1,062,558 | 1,194,424 | 1,074,178 | 1,153,648 | 1,556,497 | 7,332,529 | ||||||||
Brazilian Federal Savings Bank | 98,784 | 94,055 | 93,315 | 99,152 | 105,355 | 111,936 | 876,357 | 1,478,954 | ||||||||
BNDES | 209,832 | 203,103 | 196,438 | 176,274 | 166,466 | 154,029 | 282,181 | 1,388,323 | ||||||||
BID 2202 | 181,349 | 181,349 | 181,349 | 181,349 | 181,349 | 181,349 | 1,437,658 | 2,525,752 | ||||||||
BID INVEST | 34,800 | 37,340 | 39,550 | 44,300 | 106,390 | 108,728 | 554,092 | 925,200 | ||||||||
Leases (Concession Agreements, Program Contracts and Contract Assets) | 36,640 | 39,132 | 40,228 | 44,322 | 30,846 | 30,481 | 175,662 | 397,311 | ||||||||
Leases (Others) | 69,306 | 40,094 | 9,640 | 5,656 | 1,273 | 0 | 0 | 125,969 | ||||||||
Other | 4,790 | 4,719 | 2,393 | 2,162 | 0 | 0 | 0 | 14,064 | ||||||||
Interest and charges | 239,581 | 0 | 0 | 0 | 0 | 0 | 0 | 239,581 | ||||||||
TOTAL IN LOCAL CURRENCY | 1,471,500 | 1,294,598 | 1,625,471 | 1,747,639 | 1,665,857 | 1,740,171 | 4,882,447 | 14,427,683 | ||||||||
FOREIGN CURRENCY | ||||||||||||||||
BID | 57,357 | 57,357 | 57,357 | 61,811 | 8,908 | 8,908 | 132,922 | 384,620 | ||||||||
BIRD | 33,927 | 33,928 | 33,928 | 33,928 | 33,928 | 33,928 | 216,688 | 420,255 | ||||||||
JICA | 206,815 | 206,815 | 206,815 | 206,815 | 206,815 | 206,815 | 1,147,034 | 2,387,924 | ||||||||
BID 1983AB | 42,927 | 42,336 | 0 | 0 | 0 | 0 | 0 | 85,263 | ||||||||
Interest and charges | 18,091 | 0 | 0 | 0 | 0 | 0 | 0 | 18,091 | ||||||||
TOTAL IN FOREIGN CURRENCY | 359,117 | 340,436 | 298,100 | 302,554 | 249,651 | 249,651 | 1,496,644 | 3,296,153 | ||||||||
Overall Total | 1,830,617 | 1,635,034 | 1,923,571 | 2,050,193 | 1,915,508 | 1,989,822 | 6,379,091 | 17,723,836 |
Foreign currency | Guarantees | Maturity | Annual interest rate | Exchange rate changes |
Inter-American Development Bank - IDB 1212 - US$20,556 thousand | Government | 2025 | SOFR + 4.72% (*) | US$ |
Inter-American Development Bank - IDB 4623 - US$152,187 thousand | Government | 2044 | SOFR + 6.60531% (*) | US$ |
International Bank for Reconstruction and Development (IBRD) – IBRDs 7662 and 8916 - US$107,445 thousand | Government | 2034 | SOFR + 6.0% and 7.1% (*) | US$ |
JICA 15 – ¥6,914,580 thousand | Government | 2029 | 1.8% and 2.5% | Yen |
JICA 18 – ¥6,216,960 thousand | Government | 2029 | 1.8% and 2.5% | Yen |
JICA 17– ¥3,464,352 thousand | Government | 2035 | 1.2% and 0.01% | Yen |
JICA 19– ¥24,482,493 thousand | Government | 2037 | 1.7% and 0.01% | Yen |
F-84 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
(ii) Changes
Schedule of changes in borrowings
December 31, 2020 | Addition (lease) | Funding | Borrowing costs | Monetary and exchange variation | Inflation adjustment / exchange variation and incorporated interest – Capitalized | Interest paid | Amortization | Accrued interest | Provision for interest and fees – Capitalized | Expenses with borrowing costs | December 31, 2021 | |||||||||||||
LOCAL CURRENCY | ||||||||||||||||||||||||
Debentures | 6,756,504 | — | 2,450,000 | (25,717) | 225,106 | — | (387,618) | (1,963,282) | 258,114 | 139,563 | 15,298 | 7,467,968 | ||||||||||||
Brazilian Federal Savings Bank | 1,418,832 | — | 156,488 | — | 685 | — | (113,030) | (93,064) | 79,966 | 33,236 | — | 1,483,113 | ||||||||||||
BNDES | 1,370,902 | — | 207,136 | — | — | — | (88,084) | (186,179) | 51,122 | 37,688 | 259 | 1,392,844 | ||||||||||||
BID 2202 | 2,730,195 | — | — | — | — | — | (97,829) | (181,349) | 63,964 | 73,506 | 955 | 2,589,442 | ||||||||||||
BID INVEST | 944,513 | — | — | — | — | — | (33,276) | (18,340) | 63,380 | — | 665 | 956,942 | ||||||||||||
Leases (Concession Agreements, Program Contracts and Contract Assets) | 428,743 | — | — | — | — | — | (52,250) | (31,432) | 52,250 | — | — | 397,311 | ||||||||||||
Leases (Others) | 45,876 | 140,187 | — | — | — | — | (15,782) | (76,013) | 31,701 | — | — | 125,969 | ||||||||||||
Other | 15,197 | — | 2,921 | (32) | — | — | (718) | (3,986) | 690 | 22 | — | 14,094 | ||||||||||||
TOTAL IN LOCAL CURRENCY | 13,710,762 | 140,187 | 2,816,545 | (25,749) | 225,791 | — | (788,587) | (2,553,645) | 601,187 | 284,015 | 17,177 | 14,427,683 | ||||||||||||
FOREIGN CURRENCY | ||||||||||||||||||||||||
BIDs | 317,302 | — | 108,728 | (7,620) | 22,979 | — | (8,488) | (53,197) | 7,936 | — | 197 | 387,837 | ||||||||||||
BIRD | 426,860 | — | — | (3,377) | 30,814 | — | (2,481) | (32,965) | 1,789 | — | 241 | 420,881 | ||||||||||||
Eurobonds | 2,684,321 | — | 34,360 | (76) | (108,851) | 10,198 | (43,184) | (216,190) | 35,315 | 5,802 | 192 | 2,401,887 | ||||||||||||
JICA | 119,379 | — | — | — | 6,536 | — | (2,705) | (40,607) | 1,753 | 777 | 415 | 85,548 | ||||||||||||
BID 1983AB | 3,547,862 | — | 143,088 | (11,073) | (48,522) | 10,198 | (56,858) | (342,959) | 46,793 | 6,579 | 1,045 | 3,296,153 | ||||||||||||
TOTAL IN FOREIGN CURRENCY | 17,258,624 | 140,187 | 2,959,633 | (36,822) | 177,269 | 10,198 | (845,445) | (2,896,604) | 647,980 | 290,594 | 18,222 | 17,723,836 |
(i) Payment schedule – book value as of December 31, 2023
Schedule of borrowings payment schedule | ||||||||
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 to 2044 | TOTAL | |
LOCAL CURRENCY | ||||||||
Debentures | 1,206,894 | 1,336,415 | 1,214,740 | 1,368,020 | 658,827 | 781,623 | 778,277 | 7,344,796 |
Brazilian Federal Savings Bank | 108,210 | 114,964 | 122,140 | 129,752 | 137,707 | 142,986 | 860,726 | 1,616,485 |
BNDES | 280,918 | 260,466 | 250,531 | 237,817 | 84,241 | 34,146 | 189,291 | 1,337,410 |
IDBs – National | 249,099 | 260,899 | 330,209 | 315,069 | 420,959 | 385,919 | 1,971,432 | 3,933,586 |
IFCs | 22,800 | 44,200 | 61,800 | 80,800 | 123,600 | 181,600 | 1,208,561 | 1,723,361 |
Leases (Concession Agreements, Program Contracts and Contract Asset) | 118,383 | 97,096 | 53,629 | 36,184 | 38,901 | 42,692 | 64,625 | 451,510 |
Other | 3,003 | 2,768 | 142 | - | - | - | - | 5,913 |
Interest and other charges | 377,398 | - | - | - | - | - | - | 377,398 |
TOTAL IN LOCAL CURRENCY | 2,366,705 | 2,116,808 | 2,033,191 | 2,167,642 | 1,464,235 | 1,568,966 | 5,072,912 | 16,790,459 |
FOREIGN CURRENCY | ||||||||
IDB | 49,759 | 69,148 | 38,778 | 38,778 | 38,778 | 38,778 | 537,948 | 811,967 |
IBRD | 29,433 | 29,433 | 29,433 | 29,433 | 29,433 | 40,238 | 319,584 | 506,987 |
JICA | 146,832 | 146,831 | 146,831 | 146,831 | 146,831 | 146,712 | 522,392 | 1,403,260 |
Interest and other charges | 23,677 | - | - | - | - | - | - | 23,677 |
TOTAL IN FOREIGN CURRENCY | 249,701 | 245,412 | 215,042 | 215,042 | 215,042 | 225,728 | 1,379,924 | 2,745,891 |
Total | 2,616,406 | 2,362,220 | 2,248,233 | 2,382,684 | 1,679,277 | 1,794,694 | 6,452,836 | 19,536,350 |
F-85 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
December 31, 2019 | Foreign/local currency translation | Addition (lease) | Funding | Borrowing costs | Monetary and exchange variation | Inflation adjustment / exchange variation and incorporated interest – Capitalized | Interest paid | Amortization | Accrued interest | Provision for interest and fees – Capitalized | Expenses with borrowing costs | December 31, 2020 | ||||||||||||||
LOCAL CURRENCY | ||||||||||||||||||||||||||
Debentures | 3,711,228 | — | — | 3,507,640 | (52,328) | 86,939 | — | (161,494) | (572,871) | 201,150 | 26,073 | 10,167 | 6,756,504 | |||||||||||||
Brazilian Federal Savings Bank | 1,429,250 | — | — | 74,485 | — | — | — | (111,601) | (84,821) | 73,067 | 38,452 | — | 1,418,832 | |||||||||||||
BNDES | 1,201,411 | — | — | 213,514 | — | — | — | (47,164) | (81,213) | 47,668 | 36,427 | 259 | 1,370,902 | |||||||||||||
BID 2202 | — | 2,807,371 | — | — | — | — | — | (37,613) | (90,674) | 22,668 | 27,886 | 557 | 2,730,195 | |||||||||||||
BID INVEST | — | — | — | 950,000 | (7,125) | — | — | — | — | 1,638 | — | — | 944,513 | |||||||||||||
Leases (Concession Agreements, Program Contracts and Contract Assets) | 459,671 | — | — | — | — | — | — | (51,431) | (30,928) | 51,431 | — | — | 428,743 | |||||||||||||
Leases (Others) | 74,453 | — | 28,549 | — | — | — | — | (9,108) | (56,571) | 8,553 | — | — | 45,876 | |||||||||||||
Other | 9,898 | — | — | 7,250 | — | — | — | (671) | (1,962) | 651 | 31 | — | 15,197 | |||||||||||||
TOTAL IN LOCAL CURRENCY | 6,885,911 | 2,807,371 | 28,549 | 4,752,889 | (59,453) | 86,939 | — | (419,082) | (919,040) | 406,826 | 128,869 | 10,983 | 13,710,762 | |||||||||||||
FOREIGN CURRENCY | ||||||||||||||||||||||||||
BIDs | 2,316,190 | (2,807,371) | — | 52,141 | (6,635) | 845,246 | 48,246 | (45,010) | (121,088) | 10,490 | 24,695 | 398 | 317,302 | |||||||||||||
BIRD | 357,880 | — | — | — | (2,029) | 102,029 | 1,217 | (7,572) | (31,216) | 5,659 | 752 | 140 | 426,860 | |||||||||||||
Eurobonds | 1,413,956 | — | — | — | — | 457,931 | — | (104,170) | (1,868,676) | 90,941 | 9,195 | 823 | — | |||||||||||||
JICA | 2,106,908 | — | — | 40,830 | (117) | 715,956 | 17,841 | (43,758) | (200,597) | 40,172 | 6,897 | 189 | 2,684,321 | |||||||||||||
BID 1983AB | 163,864 | — | — | — | (152) | 59,078 | — | (7,033) | (103,482) | 5,843 | 618 | 643 | 119,379 | |||||||||||||
TOTAL IN FOREIGN CURRENCY | 6,358,798 | (2,807,371) | — | 92,971 | (8,933) | 2,180,240 | 67,304 | (207,543) | (2,325,059) | 153,105 | 42,157 | 2,193 | 3,547,862 | |||||||||||||
TOTAL | 13,244,709 | — | 28,549 | 4,845,860 | (68,386) | 2,267,179 | 67,304 | (626,625) | (3,244,099) | 559,931 | 171,026 | 13,176 | 17,258,624 |
(ii) Changes
Schedule of changes in borrowings | ||||||||||||
December 31, 2022 | Addition (lease) | Funding | Borrowing costs | Monetary and Exchange variation | Inflation adjustment / exchange variation and incorporated interest – Capitalized | Interest paid | Amortization | Accrued interest | Provision for interest and fees – Capitalized | Expenses with borrowing costs | December 31, 2023 | |
LOCAL CURRENCY | ||||||||||||
Debentures | 8,166,366 | - | - | (2,043) | 114,228 | 21,421 | (839,833) | (741,812) | 628,580 | 176,739 | 11,172 | 7,534,818 |
Brazilian Federal Savings Bank | 1,526,185 | - | 174,058 | - | 22,023 | 5,475 | (122,843) | (106,982) | 98,428 | 24,670 | - | 1,621,014 |
BNDES | 1,380,993 | - | 190,000 | - | 10,326 | 2,464 | (97,829) | (241,992) | 78,745 | 18,516 | 249 | 1,341,472 |
IDB 2202 | 2,450,550 | - | - | - | - | - | (328,627) | (181,349) | 135,524 | 175,689 | 955 | 2,252,742 |
IDB INVEST 2020 | 943,619 | - | - | - | - | - | (138,676) | (37,340) | 27,360 | 104,739 | 665 | 900,367 |
IFC 2022 | 774,525 | - | - | - | - | - | (114,131) | (15,200) | 15,029 | 96,160 | 914 | 757,297 |
IFC 2023 | - | - | 1,000,000 | (13,652) | - | - | (2,434) | - | 11,335 | 11,090 | 303 | 1,006,642 |
IDB INVEST 2022 | 469,327 | - | - | - | - | - | (72,245) | (14,100) | 71,305 | - | 256 | 454,543 |
IDB INVEST 2023 | - | - | 470,000 | (1,083) | - | - | (41,022) | (7,050) | 43,263 | - | 23 | 464,131 |
Leases (Concession Agreements, Program Contracts and Contract Asset) | 357,844 | - | - | - | - | - | (54,135) | (48,634) | 54,135 | - | - | 309,210 |
Leases (Others) | 101,374 | 108,405 | - | - | - | - | (39,918) | (88,452) | 60,891 | - | - | 142,300 |
Other | 12,130 | - | 3,629 | - | 60 | - | (587) | (9,884) | 566 | 9 | - | 5,923 |
TOTAL IN LOCAL CURRENCY | 16,182,913 | 108,405 | 1,837,687 | (16,778) | 146,637 | 29,360 | (1,852,280) | (1,492,795) | 1,225,161 | 607,612 | 14,537 | 16,790,459 |
FOREIGN CURRENCY | ||||||||||||
IDBs | 532,693 | - | 384,824 | (5,137) | (45,895) | - | (33,808) | (51,178) | 36,929 | - | 1,027 | 819,455 |
IBRD | 399,762 | - | 173,547 | (3,032) | (30,374) | - | (22,089) | (31,009) | 27,663 | 57 | 490 | 515,015 |
JICA | 1,803,109 | - | - | - | (231,877) | 105 | (26,795) | (157,785) | 23,697 | 763 | 204 | 1,411,421 |
IDB 1983AB | 40,194 | - | - | - | (1,813) | - | (1,447) | (38,323) | 909 | 311 | 169 | - |
TOTAL IN FOREIGN CURRENCY | 2,775,758 | - | 558,371 | (8,169) | (309,959) | 105 | (84,139) | (278,295) | 89,198 | 1,131 | 1,890 | 2,745,891 |
TOTAL | 18,958,671 | 108,405 | 2,396,058 | (24,947) | (163,322) | 29,465 | (1,936,419) | (1,771,090) | 1,314,359 | 608,743 | 16,427 | 19,536,350 |
F-86 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
December 31, 2018 | Addition as per IFRS 16 | Funding | Borrowing costs | Monetary variation and exchange rate changes | Inflation adjustment / exchange rate changes - Capitalized | Interest paid | Amortization | Accrued interest | Provision for interest and fees - Capitalized | Amortization of borrowing costs | December 31, 2019 | |||||||||||||
LOCAL CURRENCY | ||||||||||||||||||||||||
Debentures | 3,486,861 | — | 1,266,755 | (11,814) | 42,692 | — | (234,307) | (1,055,623) | 195,586 | 17,233 | 3,845 | 3,711,228 | ||||||||||||
Brazilian Federal Savings Bank | 1,345,684 | — | 162,767 | — | — | — | (109,128) | (79,404) | 74,421 | 34,910 | — | 1,429,250 | ||||||||||||
BNDES | 1,072,605 | — | 256,981 | (628) | 2,082 | 826 | (83,419) | (131,026) | 60,644 | 23,112 | 234 | 1,201,411 | ||||||||||||
Leases (Concession Agreements, Program Contracts and Contract Assets) | 568,666 | — | — | — | 1,765 | 3,761 | (47,663) | (123,880) | 49,160 | 7,862 | — | 459,671 | ||||||||||||
Leases (Others) (*) | — | 113,233 | — | — | — | — | (1,141) | (42,646) | 5,007 | — | — | 74,453 | ||||||||||||
Other | 9,571 | — | 1,683 | — | 28 | — | (655) | (1,383) | 652 | 2 | — | 9,898 | ||||||||||||
TOTAL IN LOCAL CURRENCY | 6,483,387 | 113,233 | 1,688,186 | (12,442) | 46,567 | 4,587 | (476,313) | (1,433,962) | 385,470 | 83,119 | 4,079 | 6,885,911 | ||||||||||||
FOREIGN CURRENCY | ||||||||||||||||||||||||
BID | 2,399,985 | — | — | — | 40,594 | 49,387 | (83,602) | (171,892) | 26,332 | 54,431 | 955 | 2,316,190 | ||||||||||||
BIRD | 356,420 | — | 2,540 | (2,540) | 12,575 | 1,657 | (10,627) | (12,273) | 8,548 | 1,561 | 19 | 357,880 | ||||||||||||
Deutsche Bank | 292,872 | — | — | — | 13,255 | — | (18,562) | (303,866) | 12,929 | 1,240 | 2,132 | — | ||||||||||||
Eurobonds | 1,358,412 | — | — | — | 54,565 | — | (102,883) | — | 94,095 | 8,943 | 824 | 1,413,956 | ||||||||||||
JICA | 2,036,128 | — | 117,861 | (112) | 104,027 | 3,675 | (35,001) | (155,064) | 32,194 | 3,013 | 187 | 2,106,908 | ||||||||||||
BID 1983AB | 225,592 | — | — | (105) | 8,943 | — | (10,338) | (71,141) | 9,111 | 870 | 932 | 163,864 | ||||||||||||
TOTAL IN FOREIGN CURRENCY | 6,669,409 | — | 120,401 | (2,757) | 233,959 | 54,719 | (261,013) | (714,236) | 183,209 | 70,058 | 5,049 | 6,358,798 | ||||||||||||
Overall Total | 13,152,796 | 113,233 | 1,808,587 | (15,199) | 280,526 | 59,306 | (737,326) | (2,148,198) | 568,679 | 153,177 | 9,128 | 13,244,709 |
December 31, 2021 | Addition (lease) | Funding | Borrowing costs | Monetary and Exchange variation | Inflation adjustment / exchange variation and incorporated interest – Capitalized | Interest paid | Amortization | Accrued interest | Provision for interest and fees – Capitalized | Expenses with borrowing costs | December 31, 2022 | |
LOCAL CURRENCY | ||||||||||||
Debentures | 7,467,968 | - | 1,000,000 | (4,320) | 165,879 | - | (712,966) | (563,504) | 544,116 | 257,951 | 11,242 | 8,166,366 |
Brazilian Federal Savings Bank | 1,483,113 | - | 119,437 | - | 17,247 | 7,131 | (117,041) | (100,855) | 80,422 | 36,731 | - | 1,526,185 |
BNDES | 1,392,844 | - | 200,000 | - | 7,020 | 3,117 | (104,596) | (222,353) | 67,311 | 37,391 | 259 | 1,380,993 |
IDB 2202 | 2,589,442 | - | - | - | - | - | (281,971) | (181,349) | 98,574 | 224,899 | 955 | 2,450,550 |
IDB INVEST | 956,942 | - | - | - | - | - | (108,921) | (34,800) | 129,733 | - | 665 | 943,619 |
IFC | - | - | 760,000 | (9,385) | - | - | (24,978) | - | - | 48,507 | 381 | 774,525 |
IDB INVEST 2022 | - | - | 470,000 | (3,922) | - | - | (30,698) | - | 33,840 | - | 107 | 469,327 |
Leases (Concession Agreements, Program Contracts and Contract Assets) | 397,311 | - | - | - | - | - | (54,390) | (39,467) | 54,390 | - | - | 357,844 |
Leases (Others) | 125,969 | 42,182 | - | - | - | - | (17,659) | (84,437) | 35,319 | - | - | 101,374 |
Other | 14,094 | - | 3,654 | - | 56 | 2 | (789) | (5,669) | 748 | 34 | - | 12,130 |
TOTAL IN LOCAL CURRENCY | 14,427,683 | 42,182 | 2,553,091 | (17,627) | 190,202 | 10,250 | (1,454,009) | (1,232,434) | 1,044,453 | 605,513 | 13,609 | 16,182,913 |
FOREIGN CURRENCY | ||||||||||||
IDBs | 387,837 | - | 226,497 | (6,732) | (20,355) | - | (12,581) | (56,273) | 13,733 | - | 567 | 532,693 |
IBRD | 420,881 | - | 39,417 | (3,166) | (28,665) | 61 | (3,779) | (30,895) | 5,525 | 20 | 363 | 399,762 |
JICA | 2,401,887 | - | 15,546 | - | (437,296) | 3,243 | (33,167) | (177,007) | 26,597 | 3,102 | 204 | 1,803,109 |
BID 1983AB | 85,548 | - | - | - | (5,602) | - | (1,952) | (40,115) | 1,284 | 614 | 417 | 40,194 |
TOTAL IN FOREIGN CURRENCY | 3,296,153 | - | 281,460 | (9,898) | (491,918) | 3,304 | (51,479) | (304,290) | 47,139 | 3,736 | 1,551 | 2,775,758 |
TOTAL | 17,723,836 | 42,182 | 2,834,551 | (27,525) | (301,716) | 13,554 | (1,505,488) | (1,536,724) | 1,091,592 | 609,249 | 15,160 | 18,958,671 |
F-87 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
(a) Main events in 2021
December 31, 2020 | Addition (lease) | Funding | Borrowing costs | Monetary and Exchange variation | Inflation adjustment / exchange variation and incorporated interest – Capitalized | Interest paid | Amortization | Accrued interest | Provision for interest and fees – Capitalized | Expenses with borrowing costs | December 31, 2021 | |
LOCAL CURRENCY | ||||||||||||
Debentures | 6,756,504 | - | 2,450,000 | (25,717) | 225,106 | - | (387,618) | (1,963,282) | 258,114 | 139,563 | 15,298 | 7,467,968 |
Brazilian Federal Savings Bank | 1,418,832 | - | 156,488 | - | 685 | - | (113,030) | (93,064) | 79,966 | 33,236 | - | 1,483,113 |
BNDES | 1,370,902 | - | 207,136 | - | - | - | (88,084) | (186,179) | 51,122 | 37,688 | 259 | 1,392,844 |
BID 2202 | 2,730,195 | - | - | - | - | - | (97,829) | (181,349) | 63,964 | 73,506 | 955 | 2,589,442 |
BID INVEST | 944,513 | - | - | - | - | - | (33,276) | (18,340) | 63,380 | - | 665 | 956,942 |
Leases (Concession Agreements, Program Contracts and Contract Assets) | 428,743 | - | - | - | - | - | (52,250) | (31,432) | 52,250 | - | - | 397,311 |
Leases (Others) | 45,876 | 140,187 | - | - | - | - | (15,782) | (76,013) | 31,701 | - | - | 125,969 |
Other | 15,197 | - | 2,921 | (32) | - | - | (718) | (3,986) | 690 | 22 | - | 14,094 |
TOTAL IN LOCAL CURRENCY | 13,710,762 | 140,187 | 2,816,545 | (25,749) | 225,791 | - | (788,587) | (2,553,645) | 601,187 | 284,015 | 17,177 | 14,427,683 |
FOREIGN CURRENCY | ||||||||||||
IDBs | 317,302 | - | 108,728 | (7,620) | 22,979 | - | (8,488) | (53,197) | 7,936 | - | 197 | 387,837 |
IBRD | 426,860 | - | - | (3,377) | 30,814 | - | (2,481) | (32,965) | 1,789 | - | 241 | 420,881 |
JICA | 2,684,321 | - | 34,360 | (76) | (108,851) | 10,198 | (43,184) | (216,190) | 35,315 | 5,802 | 192 | 2,401,887 |
IDB 1983AB | 119,379 | - | - | - | 6,536 | - | (2,705) | (40,607) | 1,753 | 777 | 415 | 85,548 |
TOTAL IN FOREIGN CURRENCY | 3,547,862 | - | 143,088 | (11,073) | (48,522) | 10,198 | (56,858) | (342,959) | 46,793 | 6,579 | 1,045 | 3,296,153 |
TOTAL | 17,258,624 | 140,187 | 2,959,633 | (36,822) | 177,269 | 10,198 | (845,445) | (2,896,604) | 647,980 | 290,594 | 18,222 | 17,723,836 |
In 2021, there were amortizations in the amounts of R$ 91.7 million, R$ 100.0 million, R$ 175.0 million and R$ 1,585.9 million (of which R$ 1,450.0 million of principal and R$ 135.9 million of interest), referring to the 17th, 22nd, 21st and 25th issuances of debentures, respectively.
28th issue debentures
In July 2021, the Company raised R$ 1.2 billion from the 28th issue of simple and unsecured debentures, not convertible into shares, in up to three series, according to CVM Instruction 476. The funds raised will be used to refinance commitments maturing in 2021 and to recompose the Company’s cash.
The 28th issue debentures was as follows:
Schedule of funding
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29th issue debentures
On December 2021, the Company raised the amount of R$1.25 billion referring to the 29th issue of simple and unsecured type debentures, non-convertible into shares, in up three series, according to CVM Instruction 400.
The funds raised of the first series will be used to refinance commitments maturing and to recompose the Company's cash.
The funds raised of the second and the third series will be used for investment, related to the execution of the projects: (i) Expansion of the Water Supply and Sanitary Sewage Systems in the Metropolitan Region of São Paulo (RMSP) and (ii) Expansion of the Sanitary Sewage System in Baixada Santista.
The 29th issue debentures was as follows:
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F-88 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
The total amount
(a) Main events in 2023
Debentures
In the first quarter of 2023, the Company paid the final amortization of the commission was17th issue debentures, totaling R$ 21,250152,157, of which R$ 145,284 thousand.in principal and R$ 6,873 in interest.
In the first quarter of 2023, the Company paid the final amortization of the 2nd series of the 22nd issue debentures, totaling R$ 214,404, of which R$ 200,000 in principal and R$ 14,404 in interest.
In the fourth quarter of 2023, the Company paid the final amortization of the first series of 17th issue debentures, totaling R$ 321,535, of which R$ 300,000 in principal and R$ 21,535 in interest.
IDB INVEST 2023
In the second quarter of 2023, the Company raised R$ 470.0 million with the Inter-American Investment Corporation (IDB INVEST).
The proceeds raised from this contract will be used to partially finance the Company’s investments related to the 4th Stage of the Tietê River Cleaning Project.
The principal will be amortized in semi-annual payments in December and June, starting in December 2023 and ending in December 2036. Interests mature semi-annually in June and December, starting in June 2023 and ending in December 2036, at CDI + 0.5% p.a.
The loan is collateralized by Société de Promotion et de Participation pour la Coopération Economique (PROPARCO). Interests mature semi-annually in June and December, starting in June 2023 and ending in December 2036, at CDI + 2.0% p.a.
The covenants agreed upon for |
Calculated every quarter, when disclosing the quarterly information or annual financial statements:
- Net debt/adjusted EBITDA lower than or equal to 3.50;
- Adjusted EBITDA/paid financial expenses equal to or higher than 1.5;
- Disposal of operating assets, termination of licenses, loss of concession or loss of the Issuer’s ability to execute and operate public sanitation services in areas of the São Paulo State which, individually or jointly during the term of the agreement, lead to a reduction of the Issuer’s net sales and/or service revenue of more than twenty- five percent (25%). The above limit will be calculated every quarter, taking into consideration the Issuer’s net operating income during the twelve (12) months before the end of each quarter and using the financial information disclosed by the Issuer.
The failure to comply with the covenants for at least two consecutive quarters, or for two non-consecutive quarters within twelve months, will cause the early termination of the agreement (in which case the 30-day cure period does not apply).
The contracts have a cross acceleration clause, i.e. the early maturity of any of the Company’s debts, in an individual or aggregate amount equal to or higher than R$ 166 million for the 28th issue and R$ 175 million for the 29th issue, adjusted by the IPCA inflation index as of the issue date, constitutes a default event and may result in the early maturity of the obligations arising from the Debentures.
· | Calculated every quarter, when disclosing the quarterly information or annual financial statements: |
· | - Net debt/adjusted EBITDA equal to or lower than 3.50; |
· | - Adjusted EBITDA/paid financial expenses equal to or higher than 2.35; |
· | They should be maintained for two (2) consecutive quarters or not, for any four (4) consecutive quarters. |
(b) Leases
The Company has work service agreements which includes specific assets under lease terms. During the construction period, works are capitalized to intangible assets in progress and the lease amount is recorded at the same proportion.
F-89 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
IDB 1983AB
In the second quarter of 2023, the Company paid the final amortization of IDB 1983AB, totaling R$ 39.7 million, of which R$ 38.3 million in principal and R$ 1.4 million in interest.
BNDES PAC 2008
In the second quarter of 2023, the Company paid the final amortization of BNDES PAC 2008, totaling R$ 1.1 million.
IFC 2023
In the second quarter of 2023, the Company contracted financing of R$ 1.0 billion with the International Finance Corporation (IFC). The proceeds raised from this contract will be exclusively used to cover the costs of the New Pinheiros Project.
In the third quarter of 2023, R$ 0.5 billion was raised.
In the fourth quarter of 2023, R$ 0.5 billion was raised.
The principal will be amortized in semi-annual payments in October and April, starting in October 2025 and ending in April 2033. Interests mature semi-annually in October and April, starting in October 2023 and ending in April 2033, at CDI + 1.7% p.a. SABESP must also pay to IFC a commitment fee of 1% p.a. on the portion that has not been disbursed or canceled.
·The covenants agreed upon for IFC 2023 are:
Calculated every quarter, when disclosing the quarterly information or annual financial statements:
- Net debt/adjusted EBITDA equal to or lower than 3.50;
- Adjusted EBITDA/paid financial expenses equal to or higher than 2.35;
They should be maintained for two (2) consecutive quarters or not, for any four (4) consecutive quarters.
F-90 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
(b) Leases
The Company has work service agreements which includes specific assets under lease terms. During the construction period, work costs are capitalized to contract assets and the lease amount is recorded in the same proportion.
After startup, the lease payment period starts (240 monthly installments), whoseand the amount is periodically restated by the contracted price index.
The amounts payable for the right of use of assets are also recorded in this line, (Note(See Note 15 (g)(f)).
(c) Financial commitments - Covenants
The table below shows the moremost restrictive covenants ratios as of December 31, 2021.2023.
Schedule of restrictive covenants ratios
Schedule of restrictive covenants ratios | |
Covenants | |
Adjusted EBITDA / Adjusted Financial Expenses | Equal to or higher than 2.80 |
EBITDA / Financial Expenses Paid | Equal to or higher than 2.35 |
Adjusted Net Debt / Adjusted EBITDA | Equal to or lower than 3.80 |
Net Debt / Adjusted EBITDA | Equal to or lower than 3.50 |
Other Onerous Debt (1) / Adjusted EBITDA | Equal to or lower than 1.30 |
Adjusted Current | Higher than 1.00 |
(1) | The contractual definition of “Other Onerous Debts” corresponds to the sum of pension plan obligations and healthcare plan, installment payments of tax debts, and installments payments of debts with the electricity supplier. |
As of December 31, 20212023 and 2020,2022, the Company met the financial debt covenants asrequirements set forth by its borrowingborrowings and financing agreements.
(d) Borrowings and financing – Credit Limits
Schedule of borrowings and financing - Credit Limits
Agent | December 31, | |
(in millions of reais (*)) | ||
Brazilian Federal Savings Bank | ||
Brazilian Development Bank – BNDES | ||
Inter-American Development Bank | ||
International Bank for Reconstruction and Development | ||
Other | ||
TOTAL |
(*) | Brazilian Central Bank’s exchange sell rate as of December 30, |
|
Financing resources contracted have specific purposes, which have been released for the execution of their respective investments, according to the progress of the works.
(a)Current assets
December 31, 2021 | December 31, 2020 | |||
Recoverable taxes | ||||
Income tax and social contribution | 259,902 | 0 | ||
Withholding income tax (IRRF) on financial investments | 13,041 | 4,391 | ||
Other federal taxes | 3,161 | 18,281 | ||
Total | 276,104 | 22,672 |
As of December 31, 2021, the Company recorded income tax and social contribution recoverable due to the overpayment resulting from these taxes' estimates in the year. In 2020, the balance of these taxes resulted in a liability, which was recorded under "Taxes and Contributions Payable".
(b)Current liabilities
December 31, 2021 | December 31, 2020 | |||
Taxes and contributions payable | ||||
Income tax and social contribution | — | 69,041 | ||
Cofins and Pasep | 111,963 | 93,601 | ||
INSS (social security contribution) | 39,902 | 37,599 | ||
IRRF (withholding income tax) | 49,468 | 21,287 | ||
Other | 55,797 | 45,291 | ||
Total | 257,130 | 266,819 |
F-91 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Financing resources contracted have specific purposes and are released for the execution of their respective investments, according to the progress of the works.
18 |
(a)Schedule of deferred taxesCurrent assets
Schedule of current assets | ||
December 31, 2023 | December 31, 2022 | |
Recoverable taxes | ||
Income tax and social contribution | 462,642 | 206,517 |
Withholding income tax (IRRF) on financial investments | 29,955 | 33,283 |
Other federal taxes | 2,050 | 3,106 |
Total | 494,647 | 242,906 |
(b) Current liabilities
December 31, 2021 | December 31, 2020 | |||
Deferred income tax assets | ||||
Provisions | 503,374 | 436,445 | ||
Pension obligations - G1 | 150,577 | 154,498 | ||
Donations of underlying asset on concession agreements | 47,589 | 50,142 | ||
Credit losses | 183,963 | 155,719 | ||
Other | 127,092 | 134,932 | ||
Total deferred tax assets | 1,012,595 | 931,736 | ||
Deferred income tax liabilities | ||||
Temporary difference on concession of intangible asset | (368,235) | (388,675) | ||
Capitalization of borrowing costs | (404,931) | (390,211) | ||
Profit on supply to government entities | (353,262) | (356,513) | ||
Actuarial gain/loss – G1 Plan | (109,271) | (48,979) | ||
Construction margin | (46,079) | (48,843) | ||
Borrowing costs | (14,556) | (19,231) | ||
Total deferred tax liabilities | (1,296,334) | (1,252,452) | ||
Deferred tax assets (liabilities), net | (283,739) | (320,716) |
Schedule of current liabilities | ||
December 31, 2023 | December 31, 2022 | |
Taxes and contributions payable | ||
Income tax and social contribution | 205,964 | - |
Cofins and Pasep | 141,703 | 134,624 |
INSS (social security contribution) | 44,556 | 44,515 |
IRRF (withholding income tax) | 64,770 | 63,361 |
Other | 54,979 | 50,961 |
Total | 511,972 | 293,461 |
F-92 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
(b) Realization
Schedule of realization
December 31, 2021 | December 31, 2020 | |||
Deferred income tax assets | ||||
to be realized within 12 months | 280,373 | 263,580 | ||
to be realized after one year | 732,222 | 668,156 | ||
Total deferred tax asset | 1,012,595 | 931,736 | ||
Deferred income tax liabilities | ||||
to be realized within 12 months | (31,777) | (31,388) | ||
to be realized after one year | (1,264,557) | (1,221,064) | ||
Total deferred tax liabilities | (1,296,334) | (1,252,452) | ||
Deferred tax liability | (283,739) | (320,716) |
(c) Changes
Schedule of changes
Deferred income tax assets | December 31, 2020 | Net change | December 31, 2021 | |||
Provisions | 436,445 | 66,929 | 503,374 | |||
Pension obligations - G1 | 154,498 | (3,921) | 150,577 | |||
Donations of underlying asset on concession agreements | 50,142 | (2,553) | 47,589 | |||
Credit losses | 155,719 | 28,244 | 183,963 | |||
Other | 134,932 | (7,840) | 127,092 | |||
Total | 931,736 | 80,859 | 1,012,595 | |||
Deferred income tax liabilities | ||||||
Temporary difference on concession of intangible asset | (388,675) | 20,440 | (368,235) | |||
Capitalization of borrowing costs | (390,211) | (14,720) | (404,931) | |||
Profit on supply to governmental entities | (356,513) | 3,251 | (353,262) | |||
Actuarial (gain)/loss – G1 | (48,979) | (60,292) | (109,271) | |||
Construction margin | (48,843) | 2,764 | (46,079) | |||
Borrowing costs | (19,231) | 4,675 | (14,556) | |||
Total | (1,252,452) | (43,882) | (1,296,334) | |||
Deferred tax liabilities, net | (320,716) | 36,977 | (283,739) |
19 | Deferred taxes and contributions |
(a) | Statement of financial position details |
Schedule of deferred taxes | ||
December 31, 2023 | December 31, 2022 | |
Deferred tax assets | ||
Provisions | 666,131 | 560,404 |
Pension plan obligations - G1 | 135,231 | 141,606 |
Donations of underlying assets on concession agreements | 45,140 | 46,088 |
Credit losses | 182,519 | 199,363 |
Other | 382,767 | 171,798 |
Total deferred tax asset | 1,411,788 | 1,119,259 |
Deferred tax liabilities | ||
Temporary difference in the concession of intangible asset | (329,060) | (353,817) |
Capitalization of borrowing costs | (465,510) | (457,669) |
Profit on supply to government entities | (348,514) | (346,650) |
Actuarial gain – G1 Plan | (121,425) | (93,561) |
Construction margin | (40,579) | (43,323) |
Borrowing costs | (8,624) | (13,517) |
Total deferred tax liabilities | (1,313,712) | (1,308,537) |
Deferred tax asset (liability), net | 98,076 | (189,278) |
F-93 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
(b) Realization
Deferred income tax assets | December 31, 2019 | Net change | December 31, 2020 | |||
Provisions | 366,673 | 69,772 | 436,445 | |||
Pension obligations - G1 | 157,998 | (3,500) | 154,498 | |||
Donations of underlying asset on concession agreements | 51,818 | (1,676) | 50,142 | |||
Credit losses | 145,622 | 10,097 | 155,719 | |||
Other | 183,147 | (48,215) | 134,932 | |||
Total | 905,258 | 26,478 | 931,736 | |||
Deferred income tax liabilities | ||||||
Temporary difference on concession of intangible asset | (408,732) | 20,057 | (388,675) | |||
Capitalization of borrowing costs | (409,236) | 19,025 | (390,211) | |||
Profit on supply to governmental entities | (372,289) | 15,776 | (356,513) | |||
Actuarial (gain)/loss – G1 | (54,222) | 5,243 | (48,979) | |||
Construction margin | (83,399) | 34,556 | (48,843) | |||
Borrowing costs | (11,376) | (7,855) | (19,231) | |||
Total | (1,339,254) | 86,802 | (1,252,452) | |||
Deferred tax liabilities, net | (433,996) | 113,280 | (320,716) |
Schedule of realization | ||
December 31, 2023 | December 31, 2022 | |
Deferred tax assets | ||
to be realized in up to 12 months | 366,525 | 318,965 |
to be realized after one year | 1,045,263 | 800,294 |
Total deferred tax asset | 1,411,788 | 1,119,259 |
Deferred tax liabilities | ||
to be realized in up to 12 months | (36,074) | (25,746) |
to be realized after one year | (1,277,638) | (1,282,791) |
Total deferred tax liabilities | (1,313,712) | (1,308,537) |
Deferred tax asset/(liability) | 98,076 | (189,278) |
(c) Changes
Schedule of changes | |||
Deferred tax assets | December 31, 2022 | Net change | December 31, 2023 |
Provisions | 560,404 | 105,727 | 666,131 |
Pension plan obligations – G1 | 141,606 | (6,375) | 135,231 |
Donations of underlying assets on concession agreements | 46,088 | (948) | 45,140 |
Credit losses | 199,363 | (16,844) | 182,519 |
Other | 171,798 | 210,969 | 382,767 |
Total | 1,119,259 | 292,529 | 1,411,788 |
Deferred tax liabilities | |||
Temporary difference in the concession of intangible asset | (353,817) | 24,757 | (329,060) |
Capitalization of borrowing costs | (457,669) | (7,841) | (465,510) |
Profit on supply to government entities | (346,650) | (1,864) | (348,514) |
Actuarial gain – G1 | (93,561) | (27,864) | (121,425) |
Construction margin | (43,323) | 2,744 | (40,579) |
Borrowing costs | (13,517) | 4,893 | (8,624) |
Total | (1,308,537) | (5,175) | (1,313,712) |
Deferred tax asset/(liability) | (189,278) | 287,354 | 98,076 |
F-94 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Deferred income tax assets | December 31, 2018 | Net change | December 31, 2019 | |||
Provisions | 337,833 | 28,840 | 366,673 | |||
Pension obligations - G1 | 157,044 | 954 | 157,998 | |||
Donations of underlying asset on concession agreements | 54,131 | (2,313) | 51,818 | |||
Credit losses | 197,920 | (52,298) | 145,622 | |||
Other | 186,887 | (3,740) | 183,147 | |||
Total | 933,815 | (28,557) | 905,258 | |||
Deferred income tax liabilities | ||||||
Temporary difference on concession of intangible asset | (433,842) | 25,110 | (408,732) | |||
Capitalization of borrowing costs | (420,978) | 11,742 | (409,236) | |||
Profit on supply to governmental entities | (206,978) | (165,311) | (372,289) | |||
Actuarial (gain)/loss – G1 | (36,430) | (17,792) | (54,222) | |||
Construction margin | (86,164) | 2,765 | (83,399) | |||
Borrowing costs | (10,665) | (711) | (11,376) | |||
Total | (1,195,057) | (144,197) | (1,339,254) | |||
Deferred tax assets (liabilities), net | (261,242) | (172,754) | (433,996) |
December 31, 2021 | December 31, 2020 | December 31, 2019 | ||||
Opening balance | (320,716) | (433,996) | (261,242) | |||
Net change in the year: | ||||||
- corresponding entry to the income statement | 97,269 | 108,037 | (154,962) | |||
- corresponding entry to valuation adjustments to equity (Note 21 (b)) | (60,292) | 5,243 | (17,792) | |||
Total net change | 36,977 | 113,280 | (172,754) | |||
Closing balance | (283,739) | (320,716) | (433,996) |
Deferred tax assets | December 31, 2021 | Net change | December 31, 2022 |
Provisions | 503,374 | 57,030 | 560,404 |
Pension plan obligations - G1 | 150,577 | (8,971) | 141,606 |
Donations of underlying assets on concession agreements | 47,589 | (1,501) | 46,088 |
Credit losses | 183,963 | 15,400 | 199,363 |
Other | 127,092 | 44,706 | 171,798 |
Total | 1,012,595 | 106,664 | 1,119,259 |
Deferred tax liabilities | |||
Temporary difference in the concession of intangible asset | (368,235) | 14,418 | (353,817) |
Capitalization of borrowing costs | (404,931) | (52,738) | (457,669) |
Profit on supply to government entities | (353,262) | 6,612 | (346,650) |
Actuarial gain – G1 | (109,271) | 15,710 | (93,561) |
Construction margin | (46,079) | 2,756 | (43,323) |
Borrowing costs | (14,556) | 1,039 | (13,517) |
Total | (1,296,334) | (12,203) | (1,308,537) |
Deferred tax liability, net | (283,739) | 94,461 | (189,278) |
(d) Reconciliation of the effective tax rate
The amounts recorded as income tax and social contribution expenses in the financial statements are reconciled to the statutory rates, as shown below:
F-95 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
December 31, 2021 | December 31, 2020 | December 31, 2019 | ||||
Profit before income taxes | 3,170,156 | 1,326,002 | 4,677,942 | |||
Statutory rate | 34% | 34% | 34% | |||
Estimated expense at statutory rate | (1,077,853) | (450,841) | (1,590,500) | |||
Tax benefit of interest on equity | 200,073 | 126,604 | 312,339 | |||
Permanent differences | ||||||
Provision – Law 4,819/1958 – G0 (i) | (22,640) | (37,675) | (44,426) | |||
Donations | (16,723) | (8,672) | (19,888) | |||
Other differences | 52,856 | 17,900 | 32,050 | |||
Income tax and social contribution | (864,287) | (352,684) | (1,310,425) | |||
Current income tax and social contribution | (961,556) | (460,721) | (1,155,463) | |||
Deferred income tax and social contribution | 97,269 | 108,037 | (154,962) | |||
Effective rate | 27% | 27% | 28% |
(a) Lawsuits and proceedings that resulted in provisions
(I) Statement of financial position details
The Company is party to a number of legal claims and administrative proceedings arising from the normal course of business, including civil, tax, labor and environmental matters. Management recognizes provisions in the financial statements consistently with the recognition and measurement criteria established in Note 3.15. The ultimate timing and amounts of the payments depends on the outcome of the court cases.
Deferred tax assets | December 31, 2020 | Net change | December 31, 2021 |
Provisions | 436,445 | 66,929 | 503,374 |
Pension plan obligations - G1 | 154,498 | (3,921) | 150,577 |
Donations of underlying asset on concession agreements | 50,142 | (2,553) | 47,589 |
Credit losses | 155,719 | 28,244 | 183,963 |
Other | 134,932 | (7,840) | 127,092 |
Total | 931,736 | 80,859 | 1,012,595 |
Deferred tax liabilities | |||
Temporary difference in the concession of intangible asset | (388,675) | 20,440 | (368,235) |
Capitalization of borrowing costs | (390,211) | (14,720) | (404,931) |
Profit on supply to governmental entities | (356,513) | 3,251 | (353,262) |
Actuarial (gain) – G1 | (48,979) | (60,292) | (109,271) |
Construction margin | (48,843) | 2,764 | (46,079) |
Borrowing costs | (19,231) | 4,675 | (14,556) |
Total | (1,252,452) | (43,882) | (1,296,334) |
Deferred tax liabilities, net | (320,716) | 36,977 | (283,739) |
December 31, 2023 | December 31, 2022 | December 31, 2021 | |
Opening balance | (189,278) | (283,739) | (320,716) |
Net change in the year: | |||
- corresponding entry to the income statement | 315,218 | 78,751 | 97,269 |
- corresponding entry to valuation adjustments to equity (Note 22) | (27,864) | 15,710 | (60,292) |
Total net change | 287,354 | 94,461 | 36,977 |
Closing balance | 98,076 | (189,278) | (283,739) |
(d) Reconciliation of the effective tax rate
The amounts recorded as income tax and social contribution expenses in the consolidated financial statements are reconciled to the statutory rates, as shown below:
F-96 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Schedule
Schedule of reconciliation of the effective tax rate | |||
December 31, 2023 | December 31, 2022 | December 31, 2021 | |
Profit before income taxes | 4,753,984 | 4,272,750 | 3,170,156 |
Statutory rate | 34% | 34% | 34% |
Estimated expense at the statutory rate | (1,616,355) | (1,452,735) | (1,077,853) |
Tax benefit of interest on equity | 329,017 | 284,920 | 200,073 |
Permanent differences | |||
Provision – Law 4,819/1958 – G0 (i) | (38,245) | (26,786) | (22,640) |
Donations | (7,046) | (16,588) | (16,723) |
Tax incentives | 62,510 | - | - |
Other differences | 39,666 | 59,706 | 52,856 |
Income tax and social contribution | (1,230,453) | (1,151,483) | (864,287) |
Current income tax and social contribution | (1,545,671) | (1,230,234) | (961,556) |
Deferred income tax and social contribution | 315,218 | 78,751 | 97,269 |
Effective rate | 26% | 27% | 27% |
(i) | Permanent difference related to the provision for the actuarial liability (See Note 22 (ii) and (v)). |
20 | Provisions |
(a) | Lawsuits and proceedings that resulted in provisions |
(I) Statement of lawsuitsfinancial position details
The Company is party to several legal claims and administrative proceedings that resultedarising from the normal course of business, including civil, tax, labor and environmental matters. Management recognizes provisions consistently with the recognition and measurement criteria established in provisionsNote 3.16. The terms and payment amounts are defined based on the outcome of these lawsuits.
December 31, 2021 | December 31, 2020 | |||||||||||
Provisions | Escrow deposits | Provisions net of deposits | Provisions | Escrow deposits | Provisions net of deposits | |||||||
Customer claims (i) | 168,258 | (10,780) | 157,478 | 160,705 | (10,553) | 150,152 | ||||||
Supplier claims (ii) | 477,854 | (123) | 477,731 | 410,734 | (358) | 410,376 | ||||||
Other civil claims (iii) | 95,601 | (2,523) | 93,078 | 86,083 | (2,505) | 83,578 | ||||||
Tax claims (iv) | 57,509 | (2,693) | 54,816 | 59,678 | (2,410) | 57,268 | ||||||
Labor claims (v) | 349,962 | (15,864) | 334,098 | 316,880 | (15,503) | 301,377 | ||||||
Environmental claims (vi) | 331,326 | (34) | 331,292 | 249,582 | (31) | 249,551 | ||||||
Total | 1,480,510 | (32,017) | 1,448,493 | 1,283,662 | (31,360) | 1,252,302 | ||||||
Current | 809,821 | — | 809,821 | 760,209 | — | 760,209 | ||||||
Noncurrent | 670,689 | (32,017) | 638,672 | 523,453 | (31,360) | 492,093 |
F-97 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Schedule of lawsuits and proceedings that resulted in provisions | |||||||
December 31, 2023 | December 31, 2022 | ||||||
Provisions | Escrow deposits | Provisions net of deposits | Provisions | Escrow deposits | Provisions net of deposits | ||
Customer claims (i) | 175,255 | (6,060) | 169,195 | 151,023 | (6,226) | 144,797 | |
Supplier claims (ii) | 334,273 | (90,973) | 243,300 | 257,080 | (53) | 257,027 | |
Other civil claims (iii) | 128,036 | (1,229) | 126,807 | 99,462 | (1,131) | 98,331 | |
Tax claims (iv) | 101,770 | (18,223) | 83,547 | 79,532 | (16,037) | 63,495 | |
Labor claims (v) | 727,133 | (16,235) | 710,898 | 654,277 | (13,979) | 640,298 | |
Environmental claims (vi) | 492,740 | (55) | 492,685 | 406,872 | (36) | 406,836 | |
Total | 1,959,207 | (132,775) | 1,826,432 | 1,648,246 | (37,462) | 1,610,784 | |
Current | 1,064,367 | - | 1,064,367 | 924,038 | - | 924,038 | |
Noncurrent | 894,840 | (132,775) | 762,065 | 724,208 | (37,462) | 686,746 |
(II) Changes
Schedule of changes in provisions | ||||||
December 31, 2022 | Additional provisions | Interest and inflation adjustment | Use of the accrual | Amounts not used (reversal) | December 31, 2023 | |
Customer claims (i) | 151,023 | 39,272 | 32,299 | (34,437) | (12,902) | 175,255 |
Supplier claims (ii) | 257,080 | 114,084 | 18,380 | (54,905) | (366) | 334,273 |
Other civil claims (iii) | 99,462 | 77,082 | 32,483 | (16,810) | (64,181) | 128,036 |
Tax claims (iv) | 79,532 | 19,807 | 6,082 | (721) | (2,930) | 101,770 |
Labor claims (v) | 654,277 | 99,926 | 70,927 | (42,214) | (55,783) | 727,133 |
Environmental claims (vi) | 406,872 | 50,950 | 49,173 | - | (14,255) | 492,740 |
Subtotal | 1,648,246 | 401,121 | 209,344 | (149,087) | (150,417) | 1,959,207 |
Escrow deposits | (37,462) | (151,898) | (4,124) | 57,744 | 2,965 | (132,775) |
Total | 1,610,784 | 249,223 | 205,220 | (91,343) | (147,452) | 1,826,432 |
Schedule of changes in provisions
December 31, 2020 | Additional provisions | Interest and inflation adjustment | Use of the accrual | Amounts not used (reversal) | December 31, 2021 | |||||||
Customer claims (i) | 160,705 | 32,996 | 29,685 | (30,972) | (24,156) | 168,258 | ||||||
Supplier claims (ii) | 410,734 | 92,135 | 90,788 | (71,238) | (44,565) | 477,854 | ||||||
Other civil claims (iii) | 86,083 | 15,477 | 12,850 | (10,056) | (8,753) | 95,601 | ||||||
Tax claims (iv) | 59,678 | 8,630 | 8,054 | (15,133) | (3,720) | 57,509 | ||||||
Labor claims (v) | 316,880 | 100,245 | 36,373 | (66,220) | (37,316) | 349,962 | ||||||
Environmental claims (vi) | 249,582 | 40,477 | 50,957 | (33) | (9,657) | 331,326 | ||||||
Subtotal | 1,283,662 | 289,960 | 228,707 | (193,652) | (128,167) | 1,480,510 | ||||||
Escrow deposits | (31,360) | (39,586) | (11,852) | 48,805 | 1,976 | (32,017) | ||||||
Total | 1,252,302 | 250,374 | 216,855 | (144,847) | (126,191) | 1,448,493 |
December 31, 2019 | Additional provisions | Interest and inflation adjustment | Use of the accrual | Amounts not used (reversal) | December 31, 2020 | |||||||
Customer claims (i) | 253,665 | 16,465 | 19,638 | (78,640) | (50,423) | 160,705 | ||||||
Supplier claims (ii) | 153,654 | 149,566 | 201,259 | (68,801) | (24,944) | 410,734 | ||||||
Other civil claims (iii) | 93,910 | 15,944 | 11,109 | (23,009) | (11,871) | 86,083 | ||||||
Tax claims (iv) | 59,143 | 4,333 | 2,737 | (1,875) | (4,660) | 59,678 | ||||||
Labor claims (v) | 325,129 | 61,782 | 35,541 | (61,039) | (44,533) | 316,880 | ||||||
Environmental claims (vi) | 192,950 | 35,392 | 27,718 | — | (6,478) | 249,582 | ||||||
Subtotal | 1,078,451 | 283,482 | 298,002 | (233,364) | (142,909) | 1,283,662 | ||||||
Escrow deposits | (42,643) | (12,907) | (2,225) | 18,675 | 7,740 | (31,360) | ||||||
Total | 1,035,808 | 270,575 | 295,777 | (214,689) | (135,169) | 1,252,302 |
F-98 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
December 31, 2018 | Additional provisions | Interest and inflation adjustment | Use of the accrual | Amounts not used (reversal) | December 31, 2019 | |||||||
Customer claims (i) | 290,649 | 57,314 | 53,929 | (99,379) | (48,848) | 253,665 | ||||||
Supplier claims (ii) | 67,985 | 54,223 | 102,686 | (42,948) | (28,292) | 153,654 | ||||||
Other civil claims (iii) | 98,302 | 28,888 | 18,713 | (9,766) | (42,227) | 93,910 | ||||||
Tax claims (iv) | 63,335 | 11,821 | 2,918 | (4,982) | (13,949) | 59,143 | ||||||
Labor claims (v) | 302,935 | 167,995 | 61,483 | (112,084) | (95,200) | 325,129 | ||||||
Environmental claims (vi) | 170,419 | 42,198 | 24,358 | (312) | (43,713) | 192,950 | ||||||
Subtotal | 993,625 | 362,439 | 264,087 | (269,471) | (272,229) | 1,078,451 | ||||||
Escrow deposits | (100,763) | (14,051) | (11,844) | 19,191 | 64,824 | (42,643) | ||||||
Total | 892,862 | 348,388 | 252,243 | (250,280) | (207,405) | 1,035,808 |
(b) Lawsuits deemed as contingent liabilities
The Company is party to lawsuits and administrative proceedings relating to environmental, tax, civil and labor claims, which are assessed as contingent liabilities in the financial statements, since it either does not expect outflows to be required or the amount of the obligation cannot be reliably measured. Contingent liabilities, net of escrow deposits, are represented as follows:
December 31, 2021 | December 31, 2020 | |||
Customer claims (i) | 173,875 | 110,508 | ||
Supplier claims (ii) | 1,521,935 | 1,350,308 | ||
Other civil claims (iii) | 852,735 | 758,800 | ||
Tax claims (iv) | 1,548,781 | 1,253,636 | ||
Labor claims (v) | 1,095,841 | 1,005,648 | ||
Environmental claims (vi) | 3,201,716 | 5,981,837 | ||
Total | 8,394,883 | 10,460,737 |
December 31, 2021 | Additional provisions | Interest and inflation adjustment | Use of the accrual | Amounts not used (reversal) | December 31, 2022 | |
Customer claims (i) | 168,258 | 12,258 | 21,316 | (29,363) | (21,446) | 151,023 |
Supplier claims (ii) | 477,854 | 78,481 | 56,934 | (309,321) | (46,868) | 257,080 |
Other civil claims (iii) | 95,601 | 22,485 | 13,708 | (9,248) | (23,084) | 99,462 |
Tax claims (iv) | 57,509 | 18,216 | 7,837 | (1,568) | (2,462) | 79,532 |
Labor claims (v) | 349,962 | 307,352 | 131,139 | (76,884) | (57,292) | 654,277 |
Environmental claims (vi) | 331,326 | 38,632 | 48,511 | (300) | (11,297) | 406,872 |
Subtotal | 1,480,510 | 477,424 | 279,445 | (426,684) | (162,449) | 1,648,246 |
Escrow deposits | (32,017) | (55,546) | (4,779) | 13,832 | 41,048 | (37,462) |
Total | 1,448,493 | 421,878 | 274,666 | (412,852) | (121,401) | 1,610,784 |
December 31, 2020 | Additional provisions | Interest and inflation adjustment | Use of the accrual | Amounts not used (reversal) | December 31, 2021 | |
Customer claims (i) | 160,705 | 32,996 | 29,685 | (30,972) | (24,156) | 168,258 |
Supplier claims (ii) | 410,734 | 92,135 | 90,788 | (71,238) | (44,565) | 477,854 |
Other civil claims (iii) | 86,083 | 15,477 | 12,850 | (10,056) | (8,753) | 95,601 |
Tax claims (iv) | 59,678 | 8,630 | 8,054 | (15,133) | (3,720) | 57,509 |
Labor claims (v) | 316,880 | 100,245 | 36,373 | (66,220) | (37,316) | 349,962 |
Environmental claims (vi) | 249,582 | 40,477 | 50,957 | (33) | (9,657) | 331,326 |
Subtotal | 1,283,662 | 289,960 | 228,707 | (193,652) | (128,167) | 1,480,510 |
Escrow deposits | (31,360) | (39,586) | (11,852) | 48,805 | 1,976 | (32,017) |
Total | 1,252,302 | 250,374 | 216,855 | (144,847) | (126,191) | 1,448,493 |
F-99 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
(b) Lawsuits deemed as contingent liabilities
The Company is a party to lawsuits and administrative proceedings relating to environmental, tax, civil and labor claims, which are assessed as contingent liabilities in the consolidated financial statements, since it either does not expect outflows to be required or the amount of the obligations cannot be reliably measured. Contingent liabilities, net of deposits, are represented as follows:
Schedule of lawsuits deemed as contingent liabilities | ||
December 31, 2023 | December 31, 2022 | |
Customer claims (i) | 158,584 | 200,966 |
Supplier claims (ii) | 968,752 | 1,147,606 |
Other civil claims (iii) | 695,097 | 1,146,048 |
Tax claims (iv) | 1,067,350 | 1,869,583 |
Labor claims (v) | 3,093,735 | 1,471,423 |
Environmental claims (vi) | 4,158,504 | 3,302,843 |
Total | 10,142,022 | 9,138,469 |
(c) Explanation onof the nature of main classes of lawsuits
(i) | Customer claims |
Refer mainly to actions by commerciallawsuits from customers who claimclaiming that their tariffs should correspondbe equal to those of other consumer categories, actions in which customers claim alawsuits for reduction in theof sewage tariff due to system losses, in the system, consequently requestingrequiring the refund of amounts charged by the Company, and actions in which customers pleadlawsuits for reduction of tariff for being eligible to the reduction in tariff under the category as “SocialSocial Welfare Entity”.Entity category.
(ii) | Supplier claims |
These lawsuits includeInclude lawsuits filed by some suppliers alleging underpayment of monetary restatementsadjustments and the economic and financial imbalance of the agreements, and are in progress at different courts.
F-100 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
(iii) | Other civil claims |
TheseRefer mainly refer to indemnities for property damage, pain and suffering, and loss of profits allegedly caused to third parties, such as vehicle accidents, claims, challenges on the methodology to collect tariffs, among others, filed at different court levels.
(iv) | Tax claims |
Tax claims refer mainly to issues related to tax collections and fines in general challenged due to disagreements regarding notification or differences in the interpretation of legislation by the Company's Management, that were accrued and others that were deemed as contingent liabilities.Management.
The municipalityMunicipality of São Paulo, through law,Law 13,476/2022, revoked the servicesexemption of the service tax exemption whichheld by the Company until then the company withheld and thereafter issued tax deficiency notices related to the sewage serviceservices and ancillary activities, in the updatedadjusted amount of R$ 857,688 (R$ 731,809 1,044,035 (R$ 957,199 as of December 31, 2020)2022), which currently are subject-matter ofwere subject to three Tax Foreclosures.tax foreclosures. SABESP filed for a writ of mandamus against thisthe revocation, which was rejected. Writs of preventiondenied. It also filed for provisional measures and actions for annulment, were also filed, aiming at the suspension of enforceability of the credits and the annulment of the tax deficiency notices, as it understands that notwithstanding the exemption revocation of the exemption, sewage activities and ancillary activities are not included inon the list of activities subjectthat may be taxed by the Municipality. Activities related to taxation by municipality. The appellatesewage services reached a favorable outcome, and are awaiting the processing of appeals at a higher level. Regarding the middle activities, the decision was partially favorable and SABESP’s appeal was denied. SABESP filed a special appeal requesting a suspensive effect, which was not admitted at the origin. An interlocutory appeal was filed with the Superior Court of Justice, whose decision was unfavorable to the Company. The Municipality’s special and extraordinary appeal is still pending. The Company deemed the proceeding as contingent liability.main lawsuit remains suspended
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(v) | Labor claims |
The Company is a party to a number ofseveral labor lawsuits, involving issues such as overtime, shift schedule, health hazard premium, and hazardous duty premium, prior notice, change of function, salary equalization, service outsourcing and other,others, which are at various court levels.
(vi) | Environmental claims |
These refer to several administrative proceedings and lawsuits filed by government entities, including Companhia Ambiental do Estado de São Paulo – CESTESB(CETESB) and the Public Prosecution Office of the State of São Paulo State, which aim at certain obligations to do and not to do, with the provision of fines for non-compliance, and imposition of compensation for environmental damages allegedly caused by the Company.
F-101 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
The main objects in which the Company is involved are: a) blame SABESP for discharging or releasing sewage without proper treatment; b) invest in the water and sewage treatment system of the municipality, under penalty of paying a fine; c) pay compensation for environmental damages; amongst others.
The decrease in contingent liabilities was mainly due to reviews of lawsuit expectations, resulting from court decisions favorable to the Company.
(d) Other concession-related legal proceedings
The Company is a party to concessions-related legal proceedings, in which it challenges compensatory issues for the resumption of sanitation services by some municipalities or by the right to continue operating saidsuch services.
The amount recordedrecognized in non-current assets as indemnities receivable, in noncurrent assets, referring to the municipalities of Cajobi, Macatuba, Álvares Florence, Embaúba, Araçoiaba da Serra and Itapira wastotaled R$ 27,539 as December 31, 20212023 (R$ 27,539as of December 31, 2020),2022) with allowance for doubtful accounts in the full amount recorded. None of the above-mentioned municipalities are operated by the Company. When a final judgement grants a municipality is awarded a final an unappealable favorable sentence, allowing itthe right to repossess and operate sanitation service assets and operations, theservices, Brazilian legislation provides for the indemnitypayment of compensation for the Company’s investments.investments made by the Company.
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(e) Environmental lawsuits with settlements
During 2021, theThe Company did not enterentered into a legalcourt agreement with any municipality.in 2023, without the need for environmental compensation.
(f) Guarantee insurance for escrow deposit
OnAs of May 25, 2021,2023, the Company executed an agreement effective for one year for the issue of policies under several types of guarantee insurance. The limit that can be used for guarantee insurance for escrow deposit is R$ 600 million.million. The guarantee insurance for escrow deposit is used in legal claims, where instead of immediately disbursing cash, the Company uses the guarantee provided by the insurance until the end of these proceedings, limited to up to five years.years. As of December 31, 2021,2023, R$ 555364.1 millionwas available for use.
Schedule of employees benefits
December 31, 2021 | December 31, 2020 | |||
Salaries and payroll charges | 58,591 | 53,107 | ||
Provision for vacation | 226,127 | 207,906 | ||
Healthcare plan (i) | 45,915 | 45,768 | ||
Provision for profit sharing (ii) | 88,376 | 91,209 | ||
Consent Decree (TAC) | 5,723 | 8,978 | ||
Knowledge Retention Program (PRC) | 1,884 | 3,975 | ||
Total | 426,616 | 410,943 |
(i) Health plan – Medical Assistance
Since August 1, 2019, the new health plans managed by Fundação CESP (VIVEST), which replaced the previous health plans managed by SABESPREV, have been in effect.
Benefits became post-payment, with the premise of free choice remaining, maintained by contributions from the sponsor and employees. In 2021, the Company participated on average with 8.50% of the gross payroll, totaling R$ 232,850 (in 2020 it was 7.79%, totaling R$ 212,681).
F-102 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
21 | Labor and social obligations |
Schedule of employees benefits | ||
December 31, 2023 | December 31, 2022 | |
Salaries and payroll charges | 69,885 | 70,089 |
Provision for vacation | 256,415 | 254,469 |
Healthcare plan (i) | 86,147 | 70,136 |
Provision for profit sharing (ii) | 97,514 | 96,227 |
Incentivized Dismissal Program - PDI (iii) | 290,202 | - |
Consent Decree (TAC) | 6,093 | 6,114 |
Knowledge Retention Program (PRC) | 1,184 | 1,469 |
Total | 807,440 | 498,504 |
(i) Healthcare plan
Benefits granted are paid after the event, free of choice, and are sponsored by the contributions of SABESP and the employees. In 2023, the Company contributed 9.18%, on average, of gross payroll, totaling R$ 313,034 (8.80% in 2022, totaling R$ 272,460).
(ii) Profit sharing
TheProvision for profit sharing program was implemented in accordance with
Based on an agreement with the labor union. Paymentunions, the Profit Sharing Program corresponds to up to one-monthone month’s salary for each employee, depending on performancesubject to the achievement of the goals reachedestablished, from January to December, and should be paid in April of the subsequent year.
(iii) Incentivized Dismissal Program - PDI
In June 2023, the Company implemented the Incentivized Dismissal Program (PDI or Program) to pacifically reduce the workforce and provide gains in efficiency, increase of competitiveness, and optimization of costs.
The Company has Post-Employment Benefit Plansdeadline for registrations in the following modalities: Defined Benefit (BD) – G1 (i)Program was from June 01 to 30, 2023, and G0 (ii); Defined Contribution (CD) – Sabesprev Mais (iii)the employment terminations started on July 01, 2023 and VIVEST (iv).will end on June 30, 2024. The reconciliation of costs and expenses with such plans is shown in item (v).PDI received registrations from 1,862 employees.
Statements of defined benefit plans
Summary of pension obligations – Liabilities
Schedule of pension plan benefits
December 31, 2021 | December 31, 2020 | |||||||||||
G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | |||||||
Present value of the defined benefit obligations | (2,764,027) | (2,192,062) | (4,956,089) | (3,112,980) | (2,549,541) | (5,662,521) | ||||||
Fair value of the plan’s assets | 2,634,427 | — | 2,634,427 | 2,793,927 | — | 2,793,927 | ||||||
Total pension plan liabilities (deficit) | (129,600) | (2,192,062) | (2,321,662) | (319,053) | (2,549,541) | (2,868,594) |
F-103 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Changes
For all Program participants, compliance with the clauses contained in Liabilitiesthe Collective Bargaining Agreement effective on the date of termination is guaranteed, and the following compensation incentives will be granted:
Schedule
a. | half of the indemnified advance notice, proportional to the service time at SABESP, equivalent to the percentage of the FGTS balance for termination purposes on the date of termination (according to the table below); |
b. | compensation incentive proportional to the service time at SABESP based on the base salary + function bonus, for each complete year of work (according to the table below); and |
c. | health plan: starting from the subsequent month of termination, the health plan will be the responsibility of the policyholder and SABESP will reimburse the monthly fee up to an individual amount of R$ 1,878.30/month for the policyholder and his/her spouse for 24 consecutive and uninterrupted months. If the policyholder chooses a health plan with a monthly fee lower than the reimbursable amount, he/she will not be entitled to any difference, thus not generating any credit or balance to be offset against future installments over the course of the 24 consecutive and uninterrupted months. |
Schedule of compensation balance | ||
Service time at SABESP (years) | % of the FGTS balance | % of the compensation for each complete year of work |
> 15 | 20% | 20% |
11 - 15 | 12.5% | 12.5% |
6 - 10 | 5% | 5% |
0 - 5 | 2.5% | 2.5% |
As of reconciliation of defined benefit obligationsDecember 31, 2023, R$ 359,943
December 31, 2021 | December 31, 2020 | |||||||||||
G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | |||||||
Plan’s liabilities | ||||||||||||
Defined benefit obligation, beginning of the year | (3,112,980) | (2,549,541) | (5,662,521) | (3,067,094) | (3,046,255) | (6,113,349) | ||||||
Current service cost | (32,777) | — | (32,777) | (40,404) | — | (40,404) | ||||||
Interest costs | (205,707) | (158,244) | (363,951) | (208,485) | (206,262) | (414,747) | ||||||
Actuarial (gains)/losses recorded as other comprehensive income | 414,823 | 330,337 | 745,160 | 64,637 | 521,331 | 585,968 | ||||||
Benefits paid | 172,614 | 185,386 | 358,000 | 138,366 | 181,645 | 320,011 | ||||||
Defined benefit obligation, end of the year | (2,764,027) | (2,192,062) | (4,956,089) | (3,112,980) | (2,549,541) | (5,662,521) | ||||||
Plan’s assets | ||||||||||||
Fair value of the plan’s assets, beginning of the year | 2,793,927 | — | 2,793,927 | 2,752,417 | — | 2,752,417 | ||||||
Expected return of the plan’s assets | 184,687 | — | 184,687 | 187,317 | — | 187,317 | ||||||
Company’s contributions | 35,368 | — | 35,368 | 36,010 | — | 36,010 | ||||||
Participant’s contributions | 30,551 | — | 30,551 | 36,608 | — | 36,608 | ||||||
Benefits paid | (172,614) | — | (172,614) | (138,366) | — | (138,366) | ||||||
Actuarial gains/(losses) recorded as other comprehensive income | (237,492) | — | (237,492) | (80,059) | — | (80,059) | ||||||
Fair value of the plan’s assets, end of the year | 2,634,427 | — | 2,634,427 | 2,793,927 | — | 2,793,927 | ||||||
Total pension plan liabilities (deficit) | (129,600) | (2,192,062) | (2,321,662) | (319,053) | (2,549,541) | (2,868,594) |
Changes in equity - Other comprehensive income
Pursuant to IAS19, the Company recognized gains/(losses), from changes in actuarial assumptions under equity, such as equity valuation adjustments, as shown below:
Schedule of (gains)/losses, was recorded due to changesthe provision for employee compensation incentives, of which R$ 290,202 in assumptionscurrent liabilities and R$ 66,741 in noncurrent liabilities under “Labor Obligations”.
December 31, 2021 | December 31, 2020 | December 31, 2019 | ||||||||||||||||
G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | ||||||||||
Actuarial gains/(losses) on obligations | 414,823 | 330,337 | 745,160 | 64,637 | 521,331 | 585,968 | (392,876) | (397,597) | (790,473) | |||||||||
Actuarial gains/(losses) recorded as other comprehensive income | (237,492) | — | (237,492) | (80,059) | — | (80,059) | 445,206 | — | 445,206 | |||||||||
Total gains/(losses) | 177,331 | 330,337 | 507,668 | (15,422) | 521,331 | 505,909 | 52,330 | (397,597) | (345,267) | |||||||||
Deferred income tax and social contribution | (60,292) | — | (60,292) | 5,243 | — | 5,243 | (17,792) | — | (17,792) | |||||||||
Equity valuation adjustments | 117,039 | 330,337 | 447,376 | (10,179) | 521,331 | 511,152 | 34,538 | (397,597) | (363,059) |
F-104 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
22 | Pension plan obligations |
The amounts recognizedCompany has Post-Employment Benefit Plans in the year are as follows:following modalities: Defined Benefit (BD) – G1 (i) and G0 (ii); and Defined Contribution (CD) – Sabesprev Mais (iii) and VIVEST (iv), whereby only the latter is open for new adhesions. See the reconciliation expenses with such plans in item (v).
ScheduleStatements of amounts recognizeddefined benefit plans
Summary of pension plan obligations – Liabilities
Schedule of pension plan benefits | ||||||
December 31, 2023 | December 31, 2022 | |||||
G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | |
Present value of the defined benefit obligations | (2,982,863) | (2,098,622) | (5,081,485) | (2,715,388) | (2,002,075) | (4,717,463) |
Fair value of the plan’s assets | 2,938,614 | - | 2,938,614 | 2,567,272 | - | 2,567,272 |
Total pension plan obligations (deficit) | (44,249) | (2,098,622) | (2,142,871) | (148,116) | (2,002,075) | (2,150,191) |
Changes in income statement
December 31, 2021 | December 31, 2020 | December 31, 2019 | ||||||||||||||||
G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | ||||||||||
Cost of service, net | 2,227 | — | 2,227 | 4,608 | — | 4,608 | 8,609 | 227,367 | 235,976 | |||||||||
Interest cost rates | 205,707 | 158,244 | 363,951 | 208,485 | 206,262 | 414,747 | 224,429 | — | 224,429 | |||||||||
Expected return on the plan’s assets | (184,687) | — | (184,687) | (187,317) | — | (187,317) | (192,965) | — | (192,965) | |||||||||
Amount received from State of São Paulo (undisputed) | — | (91,657) | (91,657) | — | (95,452) | (95,452) | — | (97,300) | (97,300) | |||||||||
Total expenses | 23,247 | 66,587 | 89,834 | 25,776 | 110,810 | 136,586 | 40,073 | 130,067 | 170,140 |
Liabilities
Schedule of reconciliation of defined benefit obligations | ||||||
December 31, 2023 | December 31, 2022 | |||||
G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | |
Plan’s liabilities | ||||||
Defined benefit obligation, beginning of the year | (2,715,388) | (2,002,075) | (4,717,463) | (2,764,027) | (2,192,062) | (4,956,089) |
Current service cost | (41,440) | - | (41,440) | (35,020) | - | (35,020) |
Interest costs | (307,777) | (225,220) | (532,997) | (231,745) | (176,953) | (408,698) |
Actuarial (gains)/losses recorded as other comprehensive income | (120,934) | (85,372) | (206,306) | 126,626 | 161,766 | 288,392 |
Benefits paid | 202,676 | 214,045 | 416,721 | 188,778 | 205,174 | 393,952 |
Defined benefit obligation, end of the year | (2,982,863) | (2,098,622) | (5,081,485) | (2,715,388) | (2,002,075) | (4,717,463) |
Plan’s assets | ||||||
Fair value of the plan’s assets, beginning of the year | 2,567,272 | - | 2,567,272 | 2,634,427 | - | 2,634,427 |
Expected return of the plan’s assets | 294,788 | - | 294,788 | 221,079 | - | 221,079 |
Company’s contributions | 40,898 | - | 40,898 | 39,377 | - | 39,377 |
Participants’ contributions | 35,443 | - | 35,443 | 34,000 | - | 34,000 |
Benefits paid | (202,676) | - | (202,676) | (188,778) | - | (188,778) |
Actuarial gains/(losses) recorded as other comprehensive income | 202,889 | - | 202,889 | (172,833) | - | (172,833) |
Fair value of the plan’s assets, end of the year | 2,938,614 | - | 2,938,614 | 2,567,272 | - | 2,567,272 |
Total pension plan obligations (deficit) | (44,249) | (2,098,622) | (2,142,871) | (148,116) | (2,002,075) | (2,150,191) |
Obligations’ maturity:
December 31, 2021 | ||||
G1 Plan | G0 Plan | |||
Payment of benefits expected in 2022 | 198,074 | 179,875 | ||
Payment of benefits expected in 2023 | 188,437 | 173,944 | ||
Payment of benefits expected in 2024 | 178,787 | 167,140 | ||
Payment of benefits expected in 2025 | 169,738 | 159,604 | ||
Payment of benefits expected in 2026 or after | 2,028,991 | 1,511,499 | ||
Total | 2,764,027 | 2,192,062 | ||
Duration | 11.63 years | 9.24 years |
F-105 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Actuarial assumptions:
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Sensitivity analysisChanges in equity - Other comprehensive income
Sensitivity analysis ofPursuant to IAS 19, the defined benefit pension plan as of December 31, 2021 regarding theCompany recognized gains/(losses), from changes in actuarial assumptions under equity, such as equity valuation adjustments, as shown below:
Schedule of (gains)/losses, due to changes in assumptions | |||||||||
December 31, 2023 | December 31, 2022 | December 31, 2021 | |||||||
G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | |
Actuarial gains/(losses) on the obligations | (120,934) | (85,372) | (206,306) | 126,626 | 161,766 | 288,392 | 414,823 | 330,337 | 745,160 |
Actuarial gains/(losses) on financial assets | 202,889 | - | 202,889 | (172,833) | - | (172,833) | (237,492) | - | (237,492) |
Total gains/(losses) | 81,955 | (85,372) | (3,417) | (46,207) | 161,766 | 115,559 | 177,331 | 330,337 | 507,668 |
Deferred income tax and social contribution | (27,864) | - | (27,864) | 15,710 | - | 15,710 | (60,292) | - | (60,292) |
Equity valuation adjustments | 54,091 | (85,372) | (31,281) | (30,497) | 161,766 | 131,269 | 117,039 | 330,337 | 447,376 |
The amounts recognized in the main assumptions are:
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Managed by Sabesprev, the defined benefit plan (“G1 Plan”), closed to new adhesions since July 2010, receives similar contributions established in a plan of subsidy of actuarial study of Sabesprev,year are as follows:
Schedule of amounts recognized in income statement | |||||||||
December 31, 2023 | December 31, 2022 | December 31, 2021 | |||||||
G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | |
Cost of service, net | 5,997 | - | 5,997 | 1,020 | - | 1,020 | 2,227 | - | 2,227 |
Interest costs | 307,777 | 225,220 | 532,997 | 231,745 | 176,953 | 408,698 | 205,707 | 158,244 | 363,951 |
Expected return of the plan’s assets | (294,788) | - | (294,788) | (221,079) | - | (221,079) | (184,687) | - | (184,687) |
Amount received from the São Paulo State (undisputed) | - | (112,824) | (112,824) | - | (98,174) | (98,174) | - | (91,657) | (91,657) |
Total expenses | 18,986 | 112,396 | 131,382 | 11,686 | 78,779 | 90,465 | 23,247 | 66,587 | 89,834 |
F-106 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
The active participants
Maturity profile of the obligations:
Schedule of obligations maturity | ||
December 31, 2023 | ||
G1 Plan | G0 Plan | |
Payment of benefits expected in 2024 | 223,156 | 190,425 |
Payment of benefits expected in 2025 | 215,853 | 177,004 |
Payment of benefits expected in 2026 | 207,437 | 167,075 |
Payment of benefits expected in 2027 | 197,606 | 156,583 |
Payment of benefits expected in 2028 or susbsequent years | 2,138,811 | 1,407,535 |
Total | 2,982,863 | 2,098,622 |
Duration | 13.10 years | 10.44 years |
Actuarial assumptions used:
Schedule of actuarial assumptions | ||||||
December 31, 2023 | December 31, 2022 | December 31, 2021 | ||||
G1 Plan | G0 Plan | G1 Plan | G0 Plan | G1 Plan | G0 Plan | |
Discount rate – actual rate (NTN-B) | 5.47% p.a. | 5.37% p.a. | 6.19% p.a. | 6.15% p.a. | 5.53% p.a. | 5.26% p.a. |
Inflation rate | 3.90% p.a. | 3.90% p.a. | 5.31% p.a. | 5.31% p.a. | 3.00% p.a. | 3.00% p.a. |
Nominal wage growth rate | 5.98% p.a. | 5.98% p.a. | 7.42% p.a. | 7.42% p.a. | 5.06% p.a. | 5.06% p.a. |
Mortality table | AT-2000 | AT-2000 | AT-2000 | AT-2000 | AT-2000 | AT-2000 |
Sensitivity analysis
Sensitivity analysis of the defined benefit pension plan as of December 31, 2021 totaled 2,930 (3,512 as of December 31, 2020), while inactive participants were 8,109 (7,580 as of December 31, 2020).2023 regarding the changes in the main assumptions are:
The contributions of the Company and participants of the G1 Plan in 2021 were R$ 35,368 (R$ 36,009 in 2020) and R$ 30,551 (R$ 36,608 in 2020), respectively. Of this amount, the Company and the participants’ payments corresponding to the actuarial deficit of the G1 pension plan totaled R$ 28,829 and R$ 23,609, respectively, in 2021 (R$ 26,326 and R$ 26,895, respectively, in 2020).
Estimated expenses for the comig year
Schedule of sensitivity analysis of the defined benefit pension plan assumptions | |||
Impact on the present value of the defined benefit obligations | |||
Assumption | Change in the assumption | G1 | G0 |
Discount rate | Increase of 1.0% | Decrease of R$ 237,084 | |
Decrease of | Increase of R$ 257,540 | Increase of R$ 181,195 | |
Life expectation | Increase of 1 year | Increase of R$ 65,666 | |
Decrease of 1 year |
| Decrease of R$ 83,281 | |
Wage growth rate | Increase of 1.0% | Increase of R$ 40,556 | |
Decrease of 1.0% | Decrease of R$ 42,492 |
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Plan’s assets
The plan’s investment policies and strategies are aim at getting consistent returns and reduce the risks associated to the utilization of financial assets available on the Capital Markets through diversification, considering factors, such as the liquidity needs and the long-term nature of the plan liability, types and availability of financial instruments in the local and international markets, general economic conditions and forecasts as well as requirements under the law. The plan's asset allocation management strategies are determined with the support of reports and analysis prepared by Sabesprev and independent financial advisors:
Schedule Of Plan’s Assets
December 31, 2021 | % | December 31, 2020 | % | |||||
Total fixed income | 1,613,153 | 61.2 | 1,811,164 | 64.8 | ||||
Total equities | 261,665 | 9.9 | 311,958 | 11.2 | ||||
Total structured investments | 599,970 | 22.8 | 575,943 | 20.6 | ||||
Other | 159,639 | 6.1 | 94,862 | 3.4 | ||||
Fair value of the plan’s assets | 2,634,427 | 100 | 2,793,927 | 100 |
F-107 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Restrictions with respect to asset portfolio investments,
(i) | G1 Plan |
Managed by Sabesprev, this defined benefit plan (“G1 Plan”), receives similar contributions established in the casea plan of federal government securities:
i) instruments securitized by the National Treasury will not be permitted;
ii) derivative instruments must be used for hedge.
Restrictions with respect to asset portfolio investments, in the casesubsidy of variable-income securities for internal management, areactuarial study of Sabesprev, as follows:
· | 0.99% of the portion of the salary of participation up to 20 salaries; and |
· | 8.39% of the surplus, if any, of the portion of the salary of participation over 20 salaries. |
i) day-trade operations will not be permitted;
ii) sale of uncovered share is prohibited;
iii) swap operations without guarantee are prohibited
iv) leverage will not be permitted, i.e., operations with derivatives representing leverage of asset or selling short, such operations cannot result in losses higher than invested amounts.
As of December 31, 2020, Sabesprev did not have financial assets issued by the Company in its own portfolio; however, said assets could have been part of the investment fund portfolio invested by the Foundation. The real estate held in the portfolio is not used by the Company.
(ii) G0 Plan
Pursuant to State Law 4,819/1958, employees who started providing services prior to May 1974 and retired as an employee of the Company acquired a legal right to receive supplemental pension payments, which rights are referred as "G0 Plan ". The Company pays these supplemental benefits on behalf of the State of São Paulo and makes claims for reimbursements from the State Government, which are recorded as accounts receivable from related parties, limited to the amounts considered virtually certain that will be reimbursed by the State of São Paulo.
The number of active participants of Plan - Go as of December 31, 2021 was2023 totaled 8 2,715(10 2,843as of December 31, 2020). The number of beneficiaries, retirees and survivors2022), while inactive participants were 8,171 (8,089 as of December 31, 2022).
The contributions of the Company and participants of the G1 Plan in 2023 were R$ 40,898 (R$ 39,377 in 2022) and R$ 35,443 (R$ 34,000 in 2022), respectively. Of this amount, the Company and the participants made payments referring to the actuarial deficit in the amounts of R$ 32,810 and R$ 27,147, respectively, in 2021 was(R$ 1,794 31,556 and R$ 26,168(1,862 as of December 31, 2020), respectively, in 2022).
Estimated expenses for the coming year
Schedule of estimated expenses | |
2024 | |
Cost of services, net | 5,799 |
Interest costs | 274,718 |
Net profitability on financial assets | (274,265) |
Expenditures to be recognized by the Company | 6,252 |
Plan’s assets
The investment policies and strategies of the plan are aimed at obtaining consistent returns and reducing the risks associated with the use of financial assets available in the Capital Markets through diversification, considering factors, such as liquidity needs and the long-term nature of the plan’s liability, types and availability of financial instruments in the local and international markets, general economic conditions and forecasts as well as requirements of the legislation. The allocation of the plan’s assets and its management strategies are determined with the support of reports and analyses prepared by SABESPREV and independent financial advisors.
F-108 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Estimated expenses
Schedule of plans assets | ||||
December 31, 2023 | % | December 31, 2022 | % | |
Total fixed income | 2,714,823 | 92.4 | 1,804,550 | 70.3 |
Total equities | 15,715 | 0.5 | 136,582 | 5.3 |
Total structured investments | 153,333 | 5.2 | 498,825 | 19.4 |
Other | 54,743 | 1.9 | 127,315 | 5.0 |
Fair value of the plan’s assets | 2,938,614 | 100 | 2,567,272 | 100 |
Restrictions with respect to asset portfolio investments, in the case of federal government securities:
i) instruments securitized by the National Treasury;
ii) derivative instruments should be used for 2022hedging only.
The restrictions on portfolio investments in the case of equities for internal management are as follows:
(iii) Sabesprev Mais Plan
i) day-trade transactions;
ii) sale of uncovered share;
iii) unsecured swap transactions; and
iv) leverage, derivative transactions that represent leverage of the asset or short selling will not be allowed, such transactions cannot result in losses higher than the amounts invested.
As of December 31, 2021, this Defined Contribution Plan administered2023, SABESPREV had not have financial assets issued by Sabesprev had 9,463 active and assisted participants (9,587 as of December 31, 2020).
With respect to the Sabesprev Mais plan, the contributions from the sponsor represent 100% over the total basic contribution from the participants.
(iv) VIVEST
Since December 31, 2019, the Sabesprev Mais Plan has not been accepting any new adhesions and, since January 1, 2020, new employees have the option to enrollCompany in Fundação CESP’s Defined Contribution Plan (VIVEST), as well as those who did not enrollits own portfolio; however, such assets could be in the Sabesprev Mais Plan. Asportfolio of investment funds invested by the Foundation. The Properties held in the portfolio are not used by the Company.
On December 31, 2021, it had 46 participants (24 participants21, 2022, SABESP and SABESPREV, mutually agreed to execute an Admission of Debt Instrument, where SABESP recognizes as legitimate, valid, net, certain, and enforceable the debt related to its share of December 31, 2020).responsibility in the balancing of the deficit of SABESPREV’s Basic Benefits Plan (G1 Plan), collateralizing the Contract for Revenue Binding and Assignment of Credit Transfer, executed between the parties on February 9, 2023.
(v) Reconciliation of expenses with pension obligations
December 31, 2021 | December 31, 2020 | December 31, 2019 | ||||
G1 Plan | 23,247 | 25,776 | 40,073 | |||
G0 Plan | 66,587 | 110,810 | 130,067 | |||
Sabesprev Mais Plan | 22,406 | 21,700 | 22,461 | |||
VIVEST Plan | 160 | 58 | — | |||
Subtotal | 112,400 | 158,344 | 192,601 | |||
Expenses capitalized in assets | (4,118) | (4,904) | (6,022) | |||
Other | 5,527 | 5,841 | 8,040 | |||
Pension plan obligations (Note 29) | 113,809 | 159,281 | 194,619 |
F-109 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
(ii) G0 Plan
According to State Law 4,819/1958, employees who started providing services before May 1974 acquired a legal right to receive supplemental pension payments, which rights are referred to as "G0 Plan". The Company pays supplemental retirement and pension amounts on behalf of the São Paulo State and seeks reimbursements of such amounts, which are recorded in the “Accounts receivable from related parties” line, limited to the amounts considered virtually certain to be reimbursed by the São Paulo State.
The number of active participants of Plan - Go as of December 31, 2023 was 6 (8 as of December 31, 2022). The number of beneficiaries, retirees and survivors as of December 31, 2023 was 1,808 (1,750 as of December 31, 2022).
Estimated expenses for the coming year
2024 | |
189,274 | |
Expenses to be recognized | 189,274 |
(iii) Sabesprev Mais Plan
As of December 31, 2023, this Defined Contribution Plan managed by SABESPREV had 9,277 active and assisted participants (9,365 as of December 31, 2022).
The services accountsponsor’s contributions correspond to the result obtained by applying a percentage of 100% to the basic contribution made by the participant.
(iv) VIVEST Plan
Administered by VIVEST, the sponsor's contributions correspond to the result obtained by applying a percentage of 100% to the basic contribution made by the participant.
As of December 31, 2023, there were 68 participants (58 participants as of December 31, 2022).
F-110 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
(v) Reconciliation of expenditures with pension plan obligations
Schedule of reconciliation of expenses with pension obligations | |||
December 31, 2023 | December 31, 2022 | December 31, 2021 | |
G1 Plan (i) | 18,986 | 11,686 | 23,247 |
G0 Plan (ii) | 112,396 | 78,779 | 66,587 |
Sabesprev Mais Plan (iii) | 27,403 | 25,371 | 22,406 |
VIVEST Plan (iv) | 520 | 326 | 160 |
Subtotal | 159,305 | 116,162 | 112,400 |
Capitalized | (3,303) | (3,359) | (4,118) |
Other | 6,603 | 5,684 | 5,527 |
Pension plan obligations (Note 29) | 162,605 | 118,487 | 113,809 |
23 | Services payable |
This line records the balances payable, mainly from services received from third parties, such as supply of electric power, reading of hydrometers and delivery of water and sewage bills, cleaning, surveillance and security services, collection, legal counsel services, audit, marketing and advertising and consulting services, among others. This account also includes theThe amounts payable to the Municipal Fund of Environmental Sanitation and Infrastructure based on a percentage ofmunicipal governments related to transfers provided for in the revenues from São Paulo municipal government (Note 15 (c) (v) (6)).concession agreements are also recorded. The balances as of December 31, 20212023 and 20202022 were R$ 469,027749,226 and R$ 453,750723,242, respectively. The consolidated balance as of December 31, 2023 was R$ 750,732.
24 | Equity |
(a) Share capital
As of December 31, 2021,2023 and 2020,2022, the authorized and fully subscribed and paid-in capital, in the amount of R$ 15,000.00015,000,.000, was composed of registered, book-entry common shares with no par value, as follows:
December 31, 2021 | December 31, 2020 | |||||||
Number of shares | % | Number of shares | % | |||||
State Department of Finance | 343,506,664 | 50.3 | 343,507,729 | 50.26 | ||||
Other shareholders | ||||||||
In Brazil (1) | 234,965,971 | 34.4 | 254,868,646 | 37.29 | ||||
Abroad (2) (3) | 105,037,234 | 15.3 | 85,133,494 | 12.45 | ||||
683,509,869 | 100.0 | 683,509,869 | 100.00 |
|
(b)Distribution of earnings
Shareholders are entitled to a minimum mandatory dividend of 25% of the adjusted net income under Brazilian GAAP, calculated according to the Brazilian corporate law. The dividends do not bear interest and the amounts not claimed within three years from the date of the Shareholders' Meeting that approved them mature in favor of the Company.
2021 | 2020 | 2019 | ||||
Profit for the year | 2,305,869 | 973,318 | 3,367,517 | |||
(-) Legal reserve - 5% | 115,293 | 48,666 | 168,376 | |||
2,190,576 | 924,652 | 3,199,141 | ||||
Minimum mandatory dividend – 25% | 547,645 | 231,163 | 799,785 | |||
Dividend per share and per ADS | 0.80122 | 0.33820 | 1.17012 |
On April 29, 2021, the Shareholders’ General Meeting approved the distribution of additional dividends in the amount of R$ 40,806 related to 2020. Thus, the amount of R$ 26,376, related to the portion exceeding the minimum mandatory dividends of 25%, established in the bylaws, recorded in the 2020 equity under “Additional proposed dividends” was transferred to current liabilities. These amounts started being paid in June 2021.
The Company proposed dividends as interest on capital ad referendum of the Annual Shareholders’ Meeting of 2022, in the amount of R$ 547,645 (R$ 231,163 in 2020) and additional proposed dividends in the amount of R$ 96,700 (R$ 40,806 in 2020), totaling R$ 644,345 (R$ 271,969 in 2020), corresponding to R$ per common share (R$ in 2020), to be resolved on the Shareholders’ Meeting to be held on April 28, 2022. The amount exceeding the minimum mandatory dividend due in the year of R$ 96,700 (R$ 40,806 in 2020) was reclassified into equity to the “Additional proposed dividends” account, this amount includes the withholding income tax of R$ 41,069 (R$ 14,430 in 2020).
F-111 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Schedule of share capital | ||||
December 31, 2023 | December 31, 2022 | |||
Number of shares | % | Number of shares | % | |
São Paulo State | 343,506,664 | 343,506,664 | ||
Other shareholders | ||||
In Brazil (1) | 262,118,658 | 257,339,417 | ||
Abroad (2) (3) | ||||
Total |
(1) | As of December 31, 2023, the common shares traded in Brazil were held by 39,368 shareholders. It includes six shares held by Companhia Paulista de Parcerias (CPP), a company controlled by the São Paulo State Government. |
(2) | Shares traded as American Depositary Receipts (ADR) on the New York Stock Exchange, through The Bank New York Mellon, the depositary bank of the Company's ADRs. |
(3) | Each ADR corresponds to 1 share. |
(b)Distribution of earnings
Shareholders are entitled to a minimum mandatory dividend of 25% of the net income, adjusted according to Brazilian Corporate Law. No interest is accrued on approved dividends, and the amounts not claimed within three years from the date of the General Meeting that approved them will mature in favor of the Company.
Schedule of distribution of earnings | |||
2023 | 2022 | 2021 | |
Profit for the year | 3,523,531 | 3,121,267 | 2,305,869 |
(-) Legal reserve - 5% | 176,177 | 156,063 | 115,293 |
3,347,354 | 2,965,204 | 2,190,576 | |
Minimum mandatory dividend – 25% | 836,839 | 741,301 | 547,645 |
Dividend per share and per ADS |
F-112 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
The General Shareholders' Meeting held on April 28, 2023, approved the distribution of dividends as interest on capital totaling R$ 741,301, corresponding to minimum mandatory dividends and R$ 130,857 as complementary minimum dividends, totaling R$ 872,158, which was paid on June 26, 2023.
The Company proposed, ad referendum of the 2024 General Shareholders’ Meeting, dividends as interest on capital totaling R$ 836,839 (R$ 741,301 in 2022) and complementary minimum dividends in the amount of R$ 147,689 (R$ 130,857 in 2022), totaling R$ 984,528 (R$ 872,158 in 2022), corresponding to R$ per common share (R$ in 2022), to be resolved at the Shareholders’ Meeting to be held on April 25, 2024. The amount of R$ 147,689 (R$ 130,857 in 2022) was reclassified in Equity under “Complementary minimum dividends”, which includes withholding income tax of R$ 54,641 (R$ 53,930 in 2022).
The Company charged interest on capital to minimum dividends by its net withholding income tax. The amount of R$ 41,069 54,641 (R$ 53,930(R$ 14,430 in 2020)2022) referring to withholding income tax was recognized in current liabilities, in order to comply with tax liabilities related to the credit of interest on capital.
The balance payable of interest on capital as of December 31, 20212023 of R$ 548,006837,391 (R$ (R$ 231,611741,725 in 2020)2022) refers to the amount of R$ 547,645836,839 (R$ (R$ 231,163741,301 in 2020)2022) declared in 2021,2023, net of withholding income tax and R$ 361 552declared in prior years (R$ 448 424in 2020)2022).
(c) Legal reserve
Earnings reserve - legal reserve: created by allocating 5% of the net income for the year up to the limit of 20% of the share capital. The Company may not create the legal reserve in the year in which the balance of this reserve, plus the amount of the capital reserves, exceeds 30% of the share capital. The purpose of the legal reserve is to ensure the integrity of the share capital. It can only be used to offset losses or increase capital, but not to pay dividends.dividends.
(d) InvestmentsInvestment reserve
Earnings reserve - investments reserve is specifically formed by the portion corresponding to own funds assigned to the expansion of the water supply and sewage treatment systems, based on capital budget approved by the Management.
As of December 31, 20212023 and 2020,2022, the balance of investment reserve totaled R$ 8,297,48912,753,361 and R$ 6,751,25810,390,535, respectively.
Pursuant to paragraph four of article 28 of the by-laws, the Board of Directors may propose to the Shareholders’ Meeting that the remaining balance of profit for the year, after deducting the legal reserve and minimum mandatory dividends, be allocated to an investment reserve that will comply with the following criteria:
a) to absorb losses, whenever necessary;
b) to distribute dividends, at any moment;
|
c) in share redemption, reimbursement or purchase transactions authorized by law;
d) in incorporation to the capital stock.
(e) Allocation of the profit for the year
2021 | 2020 | 2019 | ||||||
Profit | ||||||||
(+) | Profit for the year | 2,305,869 | 973,318 | 3,367,517 | ||||
(-) | Legal reserve – 5% | 115,293 | 48,666 | 168,376 | ||||
(-) | Minimum mandatory dividends | 547,645 | 231,163 | 799,785 | ||||
(-) | Additional proposed dividends | 96,700 | 40,806 | 141,203 | ||||
Investment reserve recorded | 1,546,231 | 652,863 | 2,258,153 |
Management will send for approval at the Shareholders’ Meeting, a proposal to reallocate retained earnings the amount of R$ 1,546,231 to the Investment Reserve account, in order to meet the investment needs foreseen in the Capital Budget.
(f) Retained earnings
Retained earnings (accumulated losses): the statutory balance of this account is zero as all retained earnings must be distributed or allocated to an earnings reserve.
(g) Other comprehensive loss
Gains and losses arising from changes in the actuarial assumptions are accounted for as equity valuation adjustments, net of the effects of income tax and social contribution effects. See Note 22 (b), the breakdown of amounts recorded in 2021 and 2020.
G1 plan | G0 plan | Total | ||||
Balance as of December 31, 2020 | 95,075 | (496,077) | (401,002) | |||
Actuarial gains/(losses) for the year (Note 22) | 117,039 | 330,337 | 447,376 | |||
Balance as of December 31, 2021 | 212,114 | (165,740) | 46,374 |
F-113 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
According to paragraph four of article 49 of the Bylaws, the Board of Directors may propose to the Shareholders’ Meeting that the remaining balance of the profit for the year, net of legal reserve, and minimum mandatory dividend, be allocated to the creation of an investment reserve that will comply with the following criteria:
I- | its balance, jointly with the balance of the other earnings reserves, except for the reserves for contingency and unrealized profit, may not exceed the capital stock; and |
II- | the purpose of the reserve is to ensure the investment plan and its balance may be used: |
a) in the absorption of losses, whenever necessary;
b) in the distribution of dividends, at any time;
c) in transactions for the redemption, reimbursement or purchase of shares, authorized by law; and
d) in the incorporation of the capital stock.
(e) Allocation of the profit for the year
Schedule of allocation of the profit for the year | ||||
2023 | 2022 | 2021 | ||
Profit | ||||
(+) | Profit for the year | 3,523,531 | 3,121,267 | 2,305,869 |
(-) | Legal reserve – 5% | 176,177 | 156,063 | 115,293 |
(-) | Minimum mandatory dividends | 836,839 | 741,301 | 547,645 |
(-) | Complementary proposed dividends | 147,689 | 130,857 | 96,700 |
Investment reserve recorded | 2,362,826 | 2,093,046 | 1,546,231 |
Management will send for approval at the Shareholders’ Meeting, a proposal to reallocate retained earnings the amount of R$ 2,362,826 to the Investment Reserve account, in order to meet the investment needs foreseen in the Capital Budget.
(f) Retained earnings
The statutory balance of this account is zero because all retained earnings must be distributed or allocated to an earnings reserve.
F-114 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
(g) Other comprehensive loss
Gains and losses arising from changes in actuarial assumptions are accounted for as equity valuation adjustments, net of the effects of income tax and social contribution. See Note 22 for the breakdown of the amounts recorded in 2023 and 2022.
Schedule of other comprehensive loss | |||
Consolidated | G1 plan | G0 plan | Total |
Balance as of December 31, 2022 | 181,617 | (3,974) | 177,643 |
Actuarial gains/(losses) of the year (Note 22) | 54,091 | (85,372) | (31,281) |
Balance as of December 31, 2023 | 235,708 | (89,346) | 146,362 |
Parent Company | G1 Plan | G0 Plan | Total |
Balance as of December 31, 2021 | 212,114 | (165,740) | 46,374 |
Actuarial gains/(losses) of the year (Note 22) | (30,497) | 161,766 | 131,269 |
Balance as of December 31, 2022 | 181,617 | (3,974) | 177,643 |
25 | Earnings per share |
Basic and diluted
Basic earnings per share isare calculated by dividing the equity attributable to the Company’s owners by the weighted average number of outstanding common shares during the year.period. The Company does not have potentially dilutive common shares outstanding or debts convertible into common shares. Accordingly, basic and diluted earnings per share are equal.
Schedule of earnings per share, basic and diluted
Schedule of earnings per share, basic and diluted | |||||||||
2021 | 2020 | 2019 | 2023 | 2022 | 2021 | ||||
Earnings attributable to Company’s owners | 2,305,869 | 973,318 | 3,367,517 | 3,523,531 | 3,121,267 | 2,305,869 | |||
Weighted average number of common shares issued | 683,509,869 | 683,509,869 | 683,509,869 | 683,509,869 | 683,509,869 | ||||
Basic and diluted earnings per share (reais per share) | 3.37 | 1.42 | 4.93 |
F-115 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
26 | Operating segment information |
Management, comprised of the Board of Directors and Board of Executive Officers, has determined the operating segment used to make strategic decisions, such as sanitation services.
Result
Schedule of operating segment information | |||
2023 | |||
Sanitation (i) | Reconciliation to the consolidated financial statements (ii) | Balance as per consolidated financial statements | |
Gross operating revenue | 21,513,442 | 5,600,332 | 27,113,774 |
Gross sales deductions | (1,541,718) | - | (1,541,718) |
Net operating revenue | 19,971,724 | 5,600,332 | 25,572,056 |
Costs, selling, general and administrative expenses | (13,811,665) | (5,474,729) | (19,286,394) |
Income from operations before other operating expenses, net and equity accounting | 6,160,059 | 125,603 | 6,285,662 |
Other operating income / (expenses), net | 27,925 | ||
Equity results of investments | 32,393 | ||
Financial result, net | (1,591,996) | ||
Income from operations before taxes | 4,753,984 | ||
Depreciation and amortization | (2,790,586) | - | (2,790,586) |
2022 | |||
Sanitation (i) | Reconciliation to the financial statements (ii) | Balance as per financial statements | |
Gross operating revenue | 18,629,959 | 4,863,752 | 23,493,711 |
Gross sales deductions | (1,437,991) | - | (1,437,991) |
Net operating revenue | 17,191,968 | 4,863,752 | 22,055,720 |
Costs, selling, general and administrative expenses | (12,689,051) | (4,754,383) | (17,443,434) |
Income from operations before other operating expenses, net and equity accounting | 4,502,917 | 109,369 | 4,612,286 |
Other operating income / (expenses), net | 8,327 | ||
Equity results of investments | 24,551 | ||
Financial result, net | (372,414) | ||
Income from operations before taxes | 4,272,750 | ||
Depreciation and amortization | (2,450,849) | - | (2,450,849) |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
Result
2021 | |||
Sanitation (i) | Reconciliation to the financial statements (ii) | Balance as per financial statements | |
Gross operating revenue | 16,304,206 | 4,376,739 | 20,680,945 |
Gross sales deductions | (1,189,884) | - | (1,189,884) |
Net operating revenue | 15,114,322 | 4,376,739 | 19,491,061 |
Costs, selling, general and administrative expenses | (11,115,383) | (4,278,337) | (15,393,720) |
Income from operations before other operating expenses, net and equity accounting | 3,998,939 | 98,402 | 4,097,341 |
Other operating income / (expenses), net | (21,841) | ||
Equity results of investments | 22,079 | ||
Financial result, net | (927,423) | ||
Income from operations before taxes | 3,170,156 | ||
Depreciation and amortization | (2,253,322) | - | (2,253,322) |
Schedule of operating segment information
2021 | ||||||
Sanitation (i) | Reconciliation to the financial statements (ii) | Balance as per financial statements | ||||
Gross operating revenue | 16,304,206 | 4,376,739 | 20,680,945 | |||
Gross sales deductions | (1,189,884) | — | (1,189,884) | |||
Net operating revenue | 15,114,322 | 4,376,739 | 19,491,061 | |||
Costs, selling, general and administrative expenses | (11,115,383) | (4,278,337) | (15,393,720) | |||
Income from operations before other operating expenses, net and equity accounting | 3,998,939 | 98,402 | 4,097,341 | |||
Other operating income / (expenses), net | (21,841) | |||||
Equity accounting | 22,079 | |||||
Financial result, net | (927,423) | |||||
Income from operations before taxes | 3,170,156 | |||||
Depreciation and amortization | (2,253,322) | — | (2,253,322) |
(i) | See |
(ii) | Construction revenue and related costs are not reported to the CODM. Revenue from construction is recognized in accordance with IFRIC 12 (Concession Agreements) and IFRS 15 (Revenue from Contracts with Customers), as all performance obligations are satisfied over time. See Note 14 (b) |
|
Result
2020 | ||||||
Sanitation (i) | Reconciliation to the financial statements (ii) | Balance as per financial statements | ||||
Gross operating revenue | 15,157,780 | 3,716,616 | 18,874,396 | |||
Gross sales deductions | (1,076,855) | — | (1,076,855) | |||
Net operating revenue | 14,080,925 | 3,716,616 | 17,797,541 | |||
Costs, selling, general and administrative expenses | (9,796,821) | (3,630,139) | (13,426,960) | |||
Income from operations before other operating expenses, net and equity accounting | 4,284,104 | 86,477 | 4,370,581 | |||
Other operating income / (expenses), net | 107,656 | |||||
Equity accounting | 14,136 | |||||
Financial result, net | (3,166,371) | |||||
Income from operations before taxes | 1,326,002 | |||||
Depreciation and amortization | (2,037,112) | — | (2,037,112) |
|
Result
2019 | ||||||
Sanitation (i) | Reconciliation to the financial statements (ii) | Balance as per financial statements | ||||
Gross operating revenue | 16,134,032 | 2,946,566 | 19,080,598 | |||
Gross sales deductions | (1,096,944) | — | (1,096,944) | |||
Net operating revenue | 15,037,088 | 2,946,566 | 17,983,654 | |||
Costs, selling, general and administrative expenses | (9,375,590) | (2,881,394) | (12,256,984) | |||
Income from operations before other operating expenses, net and equity accounting | 5,661,498 | 65,172 | 5,726,670 | |||
Other operating income / (expenses), net | (18,748) | |||||
Equity accounting | 3,701 | |||||
Financial result, net | (1,033,681) | |||||
Income from operations before taxes | 4,677,942 | |||||
Depreciation and amortization | (1,780,094) | (1,780,094) |
F-117 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
27 | Insurance |
The Company has insurance that covers, among others, fire and other damage to its assets and office buildings, and liability insurance against third parties. It also has civil liability insurance for the members of the Board of Directors and Board of Executive Officers (“D&O insurance”) and guarantee insurance for escrow deposit (as described in Note 20 (f)) and traditional guarantee insurance. Insurance is contracted by means of bidding processes that count on the participation of the main Brazilian and international insurance companies operating in Brazil.
The risk assumptions adopted, given their nature, are not within the scope of a financial statement audit, and consequently have not been examined by our independent auditors contracted by the Company.
As of December 31, 2021,2023, the Company’s insurance was as follows:
Schedule of the Company insurance | ||
Amount Insured | ||
Specified risks – fire | ||
Engineering | ||
Guarantee insurance for escrow deposit and traditional guarantee | (*) | 600,000 |
Civil liability– D&O (Directors and Officers) | 100,000 | |
Civil liability – construction works | ||
Civil liability – operations | ||
Other | 29,342 | |
Total | 7,283,266 |
(*) | SABESP has an agreement that allows issuing policies that total such insured amount. Of the total, R$ |
F-118 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
28 | Operating revenue |
Reconciliation from gross operating revenue to net operating revenue:
Schedule of reconciliation from gross operating income to net operating income | |||
2023 | 2022 | 2021 | |
Revenue from sanitation services (i) | 21,513,442 | 18,629,959 | 16,304,206 |
Construction revenue | 5,600,332 | 4,863,752 | 4,376,739 |
Sales tax | (1,457,125) | (1,363,628) | (1,121,905) |
Regulatory, Control and Oversight Fee (TRCF) | (84,593) | (74,363) | (67,979) |
Net revenue | 25,572,056 | 22,055,720 | 19,491,061 |
(a) Revenue from sanitation services:
2021 | 2020 | 2019 | ||||
Metropolitan Region of São Paulo | 11,529,229 | 10,722,384 | 11,849,776 | |||
Regional Systems | 4,774,977 | 4,435,396 | 4,284,256 | |||
Total | 16,304,206 | 15,157,780 | 16,134,032 |
(b) Reconciliation from gross operating income to net operating income:
2021 | 2020 | 2019 | ||||
Revenue from sanitation services (i) | 16,304,206 | 15,157,780 | 16,134,032 | |||
Construction revenue | 4,376,739 | 3,716,616 | 2,946,566 | |||
Sales tax | (1,121,905) | (1,009,358) | (1,035,051) | |||
Regulatory, Control and Oversight Fee (TRCF) | (67,979) | (67,497) | (61,893) | |||
Net revenue | 19,491,061 | 17,797,541 | 17,983,654 |
(i) | Includes the amount of R$ |
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
29 | Operating costs and expenses |
Schedule of operating costs and expenses
Schedule of operating costs and expenses | |||||||||
2021 | 2020 | 2019 | 2023 | 2022 | 2021 | ||||
Operating costs | |||||||||
Salaries, payroll charges and benefits | (2,026,202) | (1,958,395) | (1,938,265) | (2,717,005) | (2,285,765) | (2,026,202) | |||
Pension plan obligations | (36,771) | (37,281) | (49,564) | (36,998) | (29,796) | (36,771) | |||
Construction costs (Note 26) | (4,278,337) | (3,630,139) | (2,881,394) | (5,474,729) | (4,754,383) | (4,278,337) | |||
General supplies | (314,111) | (244,054) | (259,401) | (356,481) | (369,381) | (314,111) | |||
Treatment supplies | (364,542) | (338,756) | (310,380) | (558,557) | (598,993) | (364,542) | |||
Outsourced services | (1,517,196) | (1,251,839) | (1,250,890) | (1,843,213) | (1,724,347) | (1,517,196) | |||
Electricity | (1,462,776) | (1,214,831) | (1,140,160) | (1,514,542) | (1,497,644) | (1,462,776) | |||
General expenses | (717,352) | (622,113) | (647,804) | (967,148) | (831,503) | (717,352) | |||
Depreciation and amortization | (2,082,755) | (1,882,259) | (1,659,779) | (2,583,193) | (2,259,091) | (2,082,755) | |||
(12,800,042) | (11,179,667) | (10,137,637) | (16,051,866) | (14,350,903) | (12,800,042) | ||||
Selling expenses | |||||||||
Salaries, payroll charges and benefits | (265,435) | (271,565) | (270,549) | (347,536) | (306,864) | (265,435) | |||
Pension plan obligations | (4,868) | (5,059) | (6,848) | (3,359) | (4,021) | (4,868) | |||
General supplies | (7,976) | (5,471) | (10,332) | (6,746) | (7,121) | (7,976) | |||
Outsourced services | (343,763) | (290,512) | (360,190) | (439,995) | (418,632) | (343,763) | |||
Electricity | (1,340) | (1,200) | (1,333) | (673) | (1,001) | (1,340) | |||
General expenses | (136,107) | (118,278) | (122,503) | (116,933) | (107,313) | (136,107) | |||
Depreciation and amortization | (66,390) | (59,201) | (31,649) | (68,818) | (67,015) | (66,390) | |||
(825,879) | (751,286) | (803,404) | (984,060) | (911,967) | (825,879) | ||||
Bad debt expense, net of recoveries (Note 10 (c)) | (643,730) | (444,826) | (128,099) | (652,920) | (782,057) | (643,730) | |||
Administrative expenses | |||||||||
Salaries, payroll charges and benefits | (250,557) | (257,829) | (278,507) | (423,948) | (284,562) | (250,557) | |||
Pension plan obligations | (72,170) | (116,941) | (138,207) | (122,248) | (84,670) | (72,170) | |||
General supplies | (11,209) | (14,237) | (3,216) | (23,008) | (23,664) | (11,209) | |||
Outsourced services | (250,801) | (230,054) | (197,357) | (287,744) | (250,293) | (250,801) | |||
Electricity | (1,715) | (1,359) | (1,436) | (2,020) | (1,896) | (1,715) | |||
General expenses | (357,564) | (257,693) | (407,250) | (509,984) | (548,626) | (357,564) | |||
Depreciation and amortization | (104,177) | (95,652) | (88,666) | (138,575) | (124,743) | (104,177) | |||
Tax expenses | (75,876) | (77,416) | (73,205) | (90,021) | (80,053) | (75,876) | |||
(1,124,069) | (1,051,181) | (1,187,844) | (1,597,548) | (1,398,507) | (1,124,069) | ||||
Operating costs and expenses | |||||||||
Salaries, payroll charges and benefits | (2,542,194) | (2,487,789) | (2,487,321) | (3,488,489) | (2,877,191) | (2,542,194) | |||
Pension obligations | (113,809) | (159,281) | (194,619) | ||||||
Pension plan obligations (Note 22 (v)) | (162,605) | (118,487) | (113,809) | ||||||
Construction costs (Note 26) | (4,278,337) | (3,630,139) | (2,881,394) | (5,474,729) | (4,754,383) | (4,278,337) | |||
General supplies | (333,296) | (263,762) | (272,949) | (386,235) | (400,166) | (333,296) | |||
Treatment supplies | (364,542) | (338,756) | (310,380) | (558,557) | (598,993) | (364,542) | |||
Outsourced services | (2,111,760) | (1,772,405) | (1,808,437) | (2,570,952) | (2,393,272) | (2,111,760) | |||
Electricity | (1,465,831) | (1,217,390) | (1,142,929) | (1,517,235) | (1,500,541) | (1,465,831) | |||
General expenses | (1,211,023) | (998,084) | (1,177,557) | (1,594,065) | (1,487,442) | (1,211,023) | |||
Depreciation and amortization | (2,253,322) | (2,037,112) | (1,780,094) | (2,790,586) | (2,450,849) | (2,253,322) | |||
Tax expenses | (75,876) | (77,416) | (73,205) | (90,021) | (80,053) | (75,876) | |||
Bad debt expense, net of recoveries (Note 10 (c)) | (643,730) | (444,826) | (128,099) | (652,920) | (782,057) | (643,730) | |||
(15,393,720) | (13,426,960) | (12,256,984) | (19,286,394) | (17,443,434) | (15,393,720) |
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
30 | Financial |
Schedule of financial income (expenses)
Schedule of financial income (expenses) | |||||||||
2021 | 2020 | 2019 | 2023 | 2022 | 2021 | ||||
Financial expenses | |||||||||
Interest and charges on borrowings and financing – local currency | (517,235) | (348,050) | (331,367) | (1,110,135) | (954,744) | (517,235) | |||
Interest and charges on borrowings and financing – foreign currency | (46,793) | (136,257) | (165,421) | (89,198) | (47,139) | (46,793) | |||
Other financial expenses | (315,013) | (328,413) | (344,508) | (849,489) | (364,117) | (315,013) | |||
Income tax over international remittance | — | (15,134) | (17,650) | ||||||
Inflation adjustment on borrowings and financing | (225,791) | (86,938) | (44,802) | (146,637) | (190,202) | (225,791) | |||
Other inflation adjustments | (172,632) | (142,313) | (107,584) | (301,593) | (183,966) | (172,632) | |||
Interest and inflation adjustments on provisions (i) | (170,831) | (267,654) | (162,093) | ||||||
Interest and inflation adjustment on provisions | (211,565) | (216,098) | (170,831) | ||||||
Total financial expenses | (1,448,295) | (1,324,759) | (1,173,425) | (2,708,617) | (1,956,266) | (1,448,295) | |||
Financial income | |||||||||
Inflation adjustment gains | 198,907 | 120,957 | 91,180 | 219,473 | 541,516 | 198,907 | |||
Income on financial investments | 150,632 | 75,522 | 151,622 | 370,638 | 417,129 | 150,632 | |||
Interest income | 145,866 | 162,576 | 150,054 | 256,116 | 195,274 | 145,866 | |||
Cofins and Pasep | (23,038) | (22,328) | (20,028) | (40,401) | (62,405) | (23,038) | |||
Other | 41 | 4 | 14 | 79 | 17 | 41 | |||
Total financial income | 472,408 | 336,731 | 372,842 | 805,905 | 1,091,531 | 472,408 | |||
Financial income (expenses), net before exchange rate changes | (975,887) | (988,028) | (800,583) | ||||||
Financial income (expenses), net of exchange variation | (1,902,712) | (864,735) | (975,887) | ||||||
Exchange gains (losses) | |||||||||
Exchange rate changes on borrowings and financing (ii) | 48,522 | (2,180,241) | (233,960) | ||||||
Exchange gain (losses) | |||||||||
Exchange rate changes on borrowings and financing | 309,959 | 491,918 | 48,522 | ||||||
Exchange rate changes on assets | (36) | 1,894 | 863 | 767 | 301 | (36) | |||
Other exchange rate changes | (22) | 4 | (1) | (10) | 102 | (22) | |||
Exchange rate changes, net | 48,464 | (2,178,343) | (233,098) | 310,716 | 492,321 | 48,464 | |||
Financial income (expenses), net | (927,423) | (3,166,371) | (1,033,681) | (1,591,996) | (372,414) | (927,423) |
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
31 | Other operating income (expenses), net |
Schedule of other operating income (expenses), net
Schedule of other operating income (expenses), net | |||||||||
2021 | 2020 | 2019 | 2023 | 2022 | 2021 | ||||
Other operating income, net | 71,877 | 70,288 | 75,667 | 99,307 | 64,638 | 71,877 | |||
Other operating expenses | (93,718) | 37,368 | (94,415) | (71,382) | (56,311) | (93,718) | |||
Other operating income (expenses), net | (21,841) | 107,656 | (18,748) | 27,925 | 8,327 | (21,841) |
Other operating income includes revenue from the sale of property, plant and equipment, sale of contracts awarded in public bids, right to sell electricity, indemnities and reimbursement of expenses, fines and guarantees, property leases, reuse water, PURA projects and services, net of Cofins and Pasep.
Other operating expenses consist mainly ofusually record the derecognition of concessions assets due to obsolescence, discontinued construction works, unproductive wells, projects considered economically unfeasible, losses on property, plant and equipment, estimated losses and operational assets indemnification.
The Company has agreements to manage and maintain its activities, as well as agreements to build new projects aiming at achieving the objectives proposed in its target plan. Below, the main unrecorded committed amounts as of December 31, 2020:
1 year | 1-3 years | 3-5 years | More than 5 years | Total | ||||||||||||||||
Contractual obligations – Expenses | 1,147,112 | 745,388 | 187,150 | 790,650 | 2,870,300 | |||||||||||||||
Contractual obligations – Investments | 2,258,647 | 1,741,424 | 1,425,790 | 331,184 | 5,757,045 | |||||||||||||||
Total | 3,405,759 | 2,486,812 | 1,612,940 | 1,121,834 | 8,627,345 |
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
32 | Commitments |
The Company has agreements to manage and maintain its activities, as well as to build new projects aiming at achieving the objectives proposed in its target plan. The main unrecognized committed amounts as of December 31, 2023, are as follows:
Schedule of commitments | |||||
1 year | 1-3 years | 3-5 years | More than 5 years | Total | |
Contractual obligations – Expenses | 1,810,947 | 2,119,426 | 1,460,088 | 2,680,110 | 8,070,571 |
Contractual obligations – Investments | 4,292,490 | 2,967,844 | 1,292,130 | 92,893 | 8,645,357 |
Total | 6,103,437 | 5,087,270 | 2,752,218 | 2,773,003 | 16,715,928 |
33 | Supplemental cash flow information |
Schedule of supplemental cash flow information | |||
2023 | 2022 | 2021 | |
Total additions to contract assets (Note 14) | 6,026,053 | 5,240,528 | 4,759,789 |
Total additions to intangible assets (Note 15 (b)) | 258,473 | 75,400 | 172,961 |
Items not affecting cash (see breakdown below) | (2,293,201) | (1,765,391) | (1,236,081) |
Total additions to intangible and contract assets according to the statement of cash flows | 3,991,325 | 3,550,537 | 3,696,669 |
Investments and financing operations affecting intangible assets but not cash: | |||
Interest capitalized in the year (Note 14 (a)) | 638,208 | 622,803 | 300,792 |
Contractors payable | 419,457 | 414,645 | 218,523 |
Performance agreements | 1,001,528 | 576,392 | 478,177 |
Right of use | 108,405 | 42,182 | 140,187 |
Construction margin (Note 26) | 125,603 | 109,369 | 98,402 |
Total | 2,293,201 | 1,765,391 | 1,236,081 |
Schedule of supplemental cash flow information
2021 | 2020 | 2019 | ||||
Total additions to contract assets (Note 14) | 4,759,789 | 3,948,158 | 3,532,283 | |||
Total additions to intangible assets (Note 15 (b)) | 172,961 | 411,285 | 1,788,907 | |||
Items not affecting cash (see breakdown below) | (1,236,081) | (1,095,786) | (2,125,943) | |||
Total additions to intangible assets as per statement of cash flows | 3,696,669 | 3,299,657 | 3,195,247 | |||
Investments and financing operations affecting intangible assets but not cash: | ||||||
Interest capitalized in the year (Note 14 (a)) | 300,792 | 238,330 | 233,251 | |||
Contractors payable | 218,523 | 142,514 | 252,675 | |||
Program contract commitments | — | 4,422 | 35,817 | |||
Public Private Partnership - São Lourenço PPP (Note 15 (g)) | — | — | 10,591 | |||
Performance agreements | 478,177 | 314,720 | 78,296 | |||
Right of use | 140,187 | 28,549 | 113,233 | |||
Construction margin (Note 26) | 98,402 | 85,976 | 65,172 | |||
Agreement with the Municipality of Mauá | — | 280,774 | — | |||
Agreement with the municipality of Santo André | — | — | 1,336,908 | |||
Total | 1,236,081 | 1,095,786 | 2,125,943 |
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Consolidated Financial Statements Years ended December 31, Amounts in thousands of reais, unless otherwise indicated |
34 | Events after the reporting period |
· | 31st issue debentures |
As of March 18, 2022,5, 2024, the Company raised R$ 1.02.94 billion from the 30th31st issue of simple, unsecured debentures, not convertible into shares, in three series, for public distribution, under the automatic distribution procedure aimed at professional investors, according to CVM Resolution 160, with the following characteristics:
Schedule of unsecured debentures | |||
Value | Rate | Maturity | |
Series 1 | 507,000 | CDI + 0.49% p.a. | 2029 |
Series 2 | 1,734,467 | CDI + 1.10% p.a. | 2031 |
Series 3 | 699,011 | CDI + 1.31% p.a. | 2034 |
Total | 2,940,478 |
· | The covenants agreed upon for the 31st issue are: |
Calculated every quarter, when disclosing the quarterly information or annual financial statements:
- Net debt/adjusted EBITDA lower than or equal to 3.50;
- Adjusted EBITDA/financial expenses equal to or higher than 1.5;
Failure to comply with the financial indices above for at least two series, under CVM Instruction 476.consecutive quarters, or for two non-consecutive quarters within twelve months (in which case the 30-day cure period does not apply), constitutes a default event that may lead to the early maturity of the Debentures.- Disposal of operating assets, termination of licenses, loss of concession, or loss of the Company’s ability to execute and operate public sanitation services in areas of the São Paulo State which, individually or jointly during the term of the agreement, lead to a reduction of the Company’s net sales and/or service revenue of more than twenty- five percent (25%). The firstabove limit will be calculated every quarter, taking into consideration the Company’s net operating income during the twelve (12) months before the end of each quarter and second series will matureusing the financial information disclosed by the Company. Failure to comply with the limit above constitutes a default event that may lead to the early maturity of the Debentures.
The contract has a cross acceleration clause, i.e. the early maturity of any of the Company’s debts, in March 2027an individual or aggregate amount equal to or higher than R$ 198 million, adjusted by the IPCA inflation index as of the issue date, constitutes a default event and March 2029, respectively. The first series, totaling R$ 500.0 million, yields CDI + 1.30% p.a., with semi-annual interest payments. The second series, totaling R$ 500.0 million, yields CDI + 1.58% p.a., also with semi-annual interest payments. may result in the early maturity of the Debentures.
F-124 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
The proceeds from the Issueissue will be used to refinance financial commitments maturingfalling due in 20222024 and to recompose and reinforce the Company’s cash position. The Debentures are characterized as “ESG bonds for the use of sustainable and blue resources”, based on the Company’s commitment to allocate the equivalent amount in projects described in the Sustainable Finance Framework.
· |
The health plans for retirees, former employees, pensioners, and dependents (Digna Mais 1, 2, 3, 4, and 5) comply with Federal Law 9,656/98.
Under articles 30 and 31 of said Law, as well as Regulatory Resolution 279 and subsequent regulations by the National Health Agency, beneficiaries who join these plans are responsible for full cost coverage (monthly premiums and any deficits). Through an amendment to the Adhesion Agreement maintained with VIVEST, SABESP acts as a guarantor to the Health Operator.
Until December 31, 2023, in this guarantor role, the Company recognized debit notes received to cover deficits totaling R$ 47.5 million. The deficits in these portfolios result from a structural imbalance between the fee tables and the profile of the population, leading to expenses exceeding revenues. After this payment, SABESP initiated the collection process from the beneficiaries, resulting in accounts receivable of equal value and the recognition of a loss due to bad debt expenses for the entire amount.
This collection process triggered negotiations with the Association of Retirees and Pensioners of SABESP (AAPS), which resulted in the signing of a judicial agreement on January 31, 2024 (ratified by the judiciary on February 27, 2024), which includes:
a) | Settlement of each beneficiary's deficit by SABESP; |
b) | Migration of beneficiaries to VIVEST's Essência Health Plans or other market plans derived from the Digna Mais plans; |
c) | Withdrawal, by AAPS, of a Lawsuit for Compliance with Ruling 0056668-84.2020.8.26.0100, which sought to merge active and retired individuals into a single plan, potentially leading to a post-employment liability and an expected loss as of December 31, 2022, of R$ 303.9 million. |
As part of the negotiation, VIVEST indicated a potential imbalance in the Essência plans with the migration of retirees, former employees, pensioners, and dependents, resulting from adverse risk selection. Given this scenario, SABESP, to enable the settlement of the Digna Mais plans, entered into a new amendment to the Adhesion Agreement with VIVEST, which includes:
a) | VIVEST will allow migrations to the Essência plans, assuming the portfolio risk; |
F-125 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP Notes to the Consolidated Financial Statements Years ended December 31, 2023, 2022 and 2021 Amounts in thousands of reais, unless otherwise indicated |
b) | SABESP will make a one-time contribution to VIVEST for each person who migrates to one of its Essência plans, subject to approval by the judiciary (as occurred on February 27, 2024), with contributions as follows: |
b.1) R$ 10.0 million, paid in a lump sum in February 2024, based on the 2,909 beneficiaries migrated from Digna Mais plans to Essência plans;
Asb.2) Amount corresponding to the number of beneficiaries who join Essência plans, capped at R$ 160.0 million (1,754 beneficiaries enrolled in Digna Mais plans as of March 17, 2022, ARSESP published Resolution 1,278, which addresses2023), from January 2024 onwards.
This monthly per capita amount will be paid from the 2022 tariff adjustment, in whichentry date of each beneficiary or from January 2024, whichever occurs later, until December 2028, with financial support to mitigate the impacts of annual cost variations to be applied from January 2025 to January 2029 to Essência plans. After the effective payment of all installments, including the last one for December 2028, the Company highlights the following points:
Article 1. Approve the total adjustment of twelve point eight zero one nine percent (12.8019%) on the tariffs charged by Sabesp,will be exempt from any payments to VIVEST. The above amounts will be annually adjusted, with a reference date in January, according to the exhibitsannual adjustment index of the Essência plans.
Until December 31, 2023, before the agreement, there were migrations of 131 beneficiaries, and from January 01 to this resolution, which consists of:
I - Inflation from February 2021March 22, 2024, the migrations came to February 2022, measured by1.185 beneficiaries as a result of the IPCA,agreement, a known impact of 10.5437%.R$ 162.4
II - Efficiency factor (X Factor) million in the provision to be discounted, of 0.2142%.
III - Compensatory adjustment of 2.3932%, according to the calculation provided in NT.F.0010-2022.
IV – GQI 2020 to be discounted, of 0.1490%, according to the calculation provided in NT.F.0010-2022.
Article 6. Sabesp’s current tariff structure remains unchanged.
Paragraph 1. The definitions that depend on the implementation of the new tariff structure are postponed until they become effective.
Resolution 1,278 which defines the new tariff tables was publishedrecorded in the Official Gazette1st quarter of the2024.
· | Tariff readjustment |
As of April 8, 2024, São Paulo State Public Services Regulatory Agency (ARSESP - Agência Reguladora de Serviços Públicos do Estado de São Paulo) released Resolution nº 1,514/2024 authorizing the Company to apply a tariff readjustment of 6.4469% to its current tariffs.
· | Methodology and criteria for the reversal of assets |
As of April 15, 2024, São Paulo State Public Services Regulatory Agency (ARSESP - Agência Reguladora de Serviços Públicos do Estado de São Paulo) published Resolution nº 1,515/2024 that establishes the methodology and criteria for the reversal and possible compensation of assets at the end of concession in the Sanitation sector.
· | Privatization process |
As of April 17, 2024, State Privatization Board (CDPED - Conselho Diretor do Programa Estadual de Desestatização together with the Management Council of the State Program for Public-Private Partnerships (CGPPP - Conselho Gestor do Programa Estadual de Parcerias Público-Privadas) decided to approve the final model for the partial disposal of shares held directly and indirectly by the State, with authorization to proceed with the disposal through Public Offering Distribution of Shares on Marcha stock exchange, according to the art.1, of Decree nº 67,759/2023, including:
(a) Schedule of the privatization process;
(b) Structure of the offer with the participation of strategic investors and criteria for judging the winner of the secondary public offering;
(c) Changes to the Company's Bylaws;
(d) Signing of an Investment Agreement, Lock-up and other agreements with strategic investors;
(e) Guarantee of stability to employees in accordance with law no. 17,853/2023, for a period of 18 months, counting from the date of effective completion of the privatization process;
(f) Recommend the offer of common shares owned by the Government of the State of São Paulo to the Company's employees;
(g) Forwarding of following documents the representatives of the Deliberative Council of URAE – 1 Southeast for the 1st Council meeting:
· | Draft of the concession contract and attachments |
· | Draft of the internal regulations of the URAE-1 Deliberative Council |
· | Draft Regional Basic Sanitation Plan |
The definition of the minimum price and the percentage of the State's share to be disposal, as well as the details of the Investment Agreement, Lock-up, and other conditions will be subject to deliberation at a future meeting of the Board.
· | Derivative financial contracts |
As of April 17, 2022,2024, the Company entered into derivative financial contracts with selected financial institutions aiming to reduce the foreign currency exposure of the existing debts in the amount equivalent to US$ 531 million in the face of fluctuations in the foreign exchange market and will becomemitigate the impacts of these fluctuations on the Company's economic and financial results. The contracts are effective asfrom April 2024 until December, 2024.
· | Ordinary and Extraordinary General Shareholder’s Meeting |
As of April 25, 2024 was held the Annual Shareholder’s Meeting.
· | Privatization process |
The São Paulo City Council approved and the Mayor sanctioned Municipal Law 18,107 of May 10, 2022.02, 2024, that authorize the Municipal Executive Branch to enter into contracts through a regionalized arrangement, aiming to provide water supply and sewage services in the Municipality of São Paulo.
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F-126 |