UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
For the month of June, 2024
(Commission File No. 1-31317)
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 Registrant’s name into English)
Rua Costa Carvalho, 300
05429-900 São Paulo, SP, Brazil
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F ☒ Form 40-F ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes ☐ No ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes ☐ No ☒
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes ☐ No ☒
If “Yes” is marked, indicated below the file number assigned to the registrant in connection with Rule 12g3-2(b):
N/A
CERTAIN TERMS AND CONVENTIONS
All references in this Report of Form 6-K to “we,” “our,” “ours,” “us” or similar terms refer to Sabesp and its consolidated subsidiaries, except where specified or differently required by the context. All references herein to the “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “US$,” “dollars” or “U.S. dollars” are to United States dollars.
Additionally, acronyms used repeatedly, defined and technical terms, specific market expressions and the full names of our main subsidiaries and other entities referenced in this Report on Form 6-K are explained or detailed in the glossary of terms beginning on page 7 to our 2023 Form 20-F.
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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
The information found in this Form 6-K is accurate only as of the date of such information or as of the date of this Form 6-K, as applicable. Our activities, our financial position and assets, the results of transactions and our prospects may have changed since that date.
The reference dates for the quantitative information derived from our unaudited condensed consolidated interim statement of financial position included in this Form 6-K are March 31, 2024, and December 31, 2023, and the reference period for our unaudited condensed consolidated interim income statement are the three-month periods ended March 31, 2024, and 2023 (“Unaudited Condensed Consolidated Interim Financial Statements”).
All financial information for the three-month period ended March 31, 2024, was prepared on a consolidated basis, while all financial information for the three-month period ended March 31, 2023, was prepared on an individual basis because we had no subsidiaries to consolidate.
Our Unaudited Condensed Consolidated Interim Financial Statements, included at the end of this Form 6-K, are prepared in compliance with International Accounting Standard (“IAS”) 34 - Interim Financial Reporting, issued by the International Accounting Standards Board (“IASB”).
Our Unaudited Condensed Consolidated Interim Financial Statements were the subject of limited procedures in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”) for a review of such information by BDO RCS Auditores Independentes SS Ltda., our independent auditors for the three-month period ended March 31, 2024.
Certain figures in this document have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.
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FORWARD-LOOKING STATEMENTS
This press release may contain forward-looking statements. These statements are statements that are not historical facts and are based on management’s current view and estimates of future economic circumstances, industry conditions, company performance and financial results. The words “anticipates”, “believes”, “estimates”, “expects”, “plans” and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.
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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 Unaudited Condensed Consolidated Interim Financial Statements and accompanying notes and other financial information included elsewhere in this Form 6-K and the description of our business in “Item 4. Information on the Company” in our 2023 Form 20-F. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from these discussed in forward-looking statements as a result of various factors, including, without limitation those set forth in “Item 3.D. Risk Factors” in our 2023 Form 20-F.
A. Operating and Financial Review and Prospects Overview
As of March 31, 2024, we operated water and sewage systems in the State of São Paulo, including in the city of São Paulo, Brazil’s largest city. Our operations extended into a total of 376 municipalities, or 58% of all municipalities in the state. We also provided water services and accounted for on a wholesale basis to two municipalities located in the São Paulo metropolitan region in which we did not operate water distribution systems. 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 Olímpia, through our wholly-owned subsidiary Sabesp Olímpia S.A.
The following table sets forth, for the periods indicated, certain items from our income statements, each expressed as a percentage of net operating revenue:
Three-Month Period Ended March 31, | ||||
2024 (unaudited) | 2023 (unaudited) | |||
(in millions of reais, save for %) | ||||
Net operating revenue | 6,560.2 | 100% | 5,698.4 | 100% |
Operating costs | (3,975.4) | (60.6)% | (3,653.7) | (64.1)% |
Gross profit | 2,584.8 | 39.4% | 2,044.7 | 35.9% |
Selling expenses | (210.1) | (3.2)% | (225.7) | (4.0)% |
Allowance for doubtful accounts | (190.5) | (2.9)% | (162.8) | (2.9)% |
Administrative expenses | (538.1) | (8.2)% | (284.7) | (5.0)% |
Other operating income (expenses), net and equity results of investments in affiliates | 16.0 | 0.2% | 20.9 | 0.4% |
Profit from operations before finance income (expenses) and income tax and social contribution | 1,662.1 | 25.3% | 1,392.4 | 24.4% |
Financial result, net | (338.2) | (5.2)% | (259.5) | (4.6)% |
Profit before income tax and social contribution | 1,323.9 | 20.2% | 1,132.9 | 19.9% |
Income tax and social contribution | (500.6) | (7.6)% | (385.7) | (6.8)% |
Profit for the period | 823.3 | 12.5% | 747.2 | 13.1% |
This section is an overview of our consolidated results of operations, net of inter-segment eliminations, which are discussed in greater detail with respect to each segment below.
Net Operating Revenue
Net operating revenue increased by R$861.8 million, or 15.1%, to R$6,560.2 million as of March 31, 2024, from R$5,698.4 million as of March 31, 2023. Excluding the effect of construction revenue, net operating revenue increased by R$704.7 million, or 15.6%, to R$5,223.5 million for the three-month period ended March 31, 2024, compared to R$4,518.8 million for the three-month period ended March 31, 2023. Construction revenue for the three-month period ended March 31, 2024, was R$1,336.8 million, compared to R$1,179.5 million for the three-month period ended March 31, 2023. This increase was mainly due to a tariff readjustment of 9.6% since May 2023 and an increase of 5.3% of the total invoiced amount.
Operating Costs
Our operating costs for the three-month period ended March 31, 2024, increased by R$321.7 million, or 8.8%, to R$3,975.4 million for the three-month period ended March 31, 2024, from R$3,653.7 million for the three-month period ended March 31, 2023. This increase was mainly due to (i) an increase of R$153.7 million in construction costs associated with increased investment; (ii) an increase of R$113.5 million in depreciation and amortization costs due to the entry into operation of certain intangible assets; and (iii) an increase of R$69.2 million in service costs, comprising among other things R$42.9 million related to the maintenance of networks, connections and systems and R$8.9 million to pave and repair sidewalks.
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Gross Profit
As a result of the factors described above, gross profit for the three-month period ended March 31, 2024, increased by R$540.1 million, or 26.4%, to R$2,584.8 million for the three-month period ended March 31, 2024, from R$2,044.7 million for the three-month period ended March 31, 2023. As a percentage of net operating revenue, our gross profit margin increased to 39.4% for the three-month period ended March 31, 2024, from 35.9% for the three-month period ended March 31, 2023.
Selling Expenses
Selling expenses for the three-month period ended March 31, 2024, decreased by R$15.6 million, or 6.9%, to R$210.1 million for the three-month period ended March 31, 2024, from R$225.7 million for the three-month period ended March 31, 2023. This decrease was mainly due to a reduction of (i) R$8.1 million in expenses related to the contracting of services and (ii) R$7.7 million in expenses related to salaries, charges, benefits and social security obligations, mainly due to a decrease in our number of employees.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts for the three-month period ended March 31, 2024, increased by R$27.7 million, or 17.0%, to R$190.5 million for the three-month period ended March 31, 2024, from R$162.8 million for the three-month period ended March 31, 2023. This increase was mainly due to an increase in sanitation revenue.
Administrative Expenses
Administrative expenses for the three-month period ended March 31, 2024, increased by R$253.4 million, or 89.0%, to R$538.1 million for the three-month period ended March 31, 2024, from R$284.7 million for the three-month period ended March 31, 2023. This increase was mainly due to a provision of R$162.4 million for the Agreement with AAPS - Association of Retirees and Pensioners of SABESP, and an increase of R$68.7 million in expenses related to legal proceedings.
Other Operating Income (Expenses), Net and Equity in Results of Investments in Affiliates
Other operating income and expenses, net, for the three-month period ended March 31, 2024, decreased by R$4.9 million, or 23.4%, to R$16.0 million for the three-month period ended March 31, 2024, from R$20.9 million for the three-month period ended March 31, 2023.
Other operating income consists of gains and losses made from the sale of property, plant and equipment, the sale of contracts awarded in public bids, our 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
The financial result 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.
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The financial result, net, for the three-month period ended March 31, 2024, increased by R$78.7 million in expenses, or 30.3%, to R$338.2 million for the three-month period ended March 31, 2024, from R$259.5 million for the three-month period ended March 31, 2023. This increase in expenses was mainly due to (i) a reduction of R$77.5 million in exchange variation gains on borrowings and financing, due to the appreciation of the U.S. dollar and depreciation of the Yen in March 31, 2024 (3.2% and (3.5)%, respectively), compared to the depreciation recorded in respect of both currencies in March 31, 2023 ((2.6)% and (3.3)%, respectively); (ii) an increase of R$67.2 million in other financial expenses, due to the R$60.1 million increase in interest with respect to our public-private partnership agreements (PPPs); and (iii) an increase of R$7.7 million in interest and charges on international borrowings and financing, mainly due to new IDB fundraising.
This increase in expenses was partially offset by (i) an increase of R$32.7 million in financial revenues, mainly due to higher interest charged on overdue bills in March 31, 2024; (ii) a decrease of R$32.2 million in other monetary variations, mainly due to lower monetary variation on PPPs in March 31, 2024; and (iii) a decrease of R$16.5 million in monetary variations on borrowings and financing, mainly due to a decrease in IPCA (from 2.1% in March 31, 2023 to 1.42% in March 31, 2024), as well as higher capitalization of monetary variation on debentures in March 31, 2024, of R$5.5 million.
Profit Before Income Tax and Social Contribution
As a result of the factors discussed above, profit before income tax and social contribution for the three-month period ended March 31, 2024, increased by R$191.0 million, or 16.9%, to R$1,323.9 million for the three-month period ended March 31, 2024 from R$1,132.9 million for the three-month period ended March 31, 2023.
Income Tax and Social Contribution
Income tax and social contribution expense for the three-month period ended March 31, 2024, increased by R$114.9 million, or 29.8%, to R$500.6 million for the three-month period ended March 31, 2024, from R$385.7 million for the three-month period ended March 31, 2023. This increase was mainly offset by (i) an increase of R$559.5 million in costs and expenses, and (ii) a negative variation of R$78.7 million in our financial results.
Profit for the Period
As a result of the factors discussed above, our profit for the three-month period ended March 31, 2024, increased by R$76.1 million, or 10.2%, to R$823.3 million for the three-month period ended March 31, 2024, from R$747.2 million for the three-month period ended March 31, 2023.
Non-GAAP Financial Measures
Our computation of EBITDA, LTM EBITDA, Adjusted EBITDA, LTM Adjusted EBITDA, Adjusted Net Revenue (excluding construction revenue), Adjusted EBITDA Margin, Gross Debt, Net Debt and Total Capital may not be comparable to other similarly titled measures computed by other companies, because other companies may calculate Gross Debt, Net Debt and Total Capital differently. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with IAS 34. These measures are not audited or reviewed by our independent auditors. We urge investors to review the reconciliations of the non-GAAP financial measures presented above.
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”)
We have disclosed EBITDA in this Form 6-K, which is considered a non-GAAP financial measure. A non-GAAP financial measure is any financial measure that is presented other than under all relevant accounting standards under IAS 34. EBITDA refers to net income, before net financial results, income tax and social contribution on profit, and depreciation and amortization.
Our management believes that disclosure of EBITDA provides useful information to investors, financial analysts and the public in their review of our operating performance and their comparison of our operating performance to the operating performance of other companies in the same industry and other industries. This is because EBITDA is generally perceived as a more objective and comparable measure of operating performance. For example, interest expense is dependent on the capital structure and credit rating of a company. However, debt levels, credit ratings and, therefore, the impact of interest expense on earnings vary significantly between companies. Similarly, the tax positions of individual companies can vary because of their differing abilities to take advantage of tax benefits and the different jurisdictions in which they transact business. Finally, companies differ in the age and method of acquisition of productive assets, and thus the relative costs of those assets, as well as in the depreciation method (straight-line, accelerated or units of production), which can result in considerable variation in depreciation and amortization expenses between companies. Therefore, for comparison purposes, our management believes that EBITDA is useful as an objective and comparable measure of operating profitability because they exclude these elements of earnings that do not provide information about the current operations of existing assets.
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Adjusted EBITDA
We calculate Adjusted EBITDA as our net income for the period adjusted by the effect of the Incentivized Dismissal Program - PDI, the Agreement with AAPS – Association of Retirees and Pensioners of Sabesp, construction margin, other operating expenses (income), net, before the net financial result, income and social contribution on profit and depreciation and amortization. Adjusted EBITDA does not have a standardized meaning and may not be comparable to Adjusted EBITDA or similarly-titled measures as used by other companies. Moreover, Adjusted EBITDA has limitations as an indicator of profitability, since Adjusted EBITDA does not consider certain costs in connection with our business, which could adversely affect our profits, such as our financial results, taxes, depreciation and amortization, as well as other items recorded in our income statement and described above. This calculation of Adjusted EBITDA is not the same calculation of Adjusted EBITDA used to measure compliance with covenants included in our financing agreements and debenture issuances.
Adjusted Net Revenue (excluding construction revenue)
Adjusted Net Revenue is calculated by subtracting construction revenue from net revenue. We use Adjusted Net Revenue as a management (non-accounting) indicator, as we believe it is fundamental for measuring our operational profitability. Adjusted Net Revenue is considered a non-GAAP financial measure and is not a measure recognized by Brazilian Accounting Practices or IAS 34, nor should it be considered in isolation or as an alternative to net income, as a measure of operational performance, or as an alternative to operational cash flows, or as a measure of liquidity. It does not have a standardized meaning and may not be comparable to similar measures used by other companies.
Adjusted EBITDA Margin
Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by Adjusted Net Revenue. The Adjusted EBITDA Margin is considered a non-GAAP financial measure and is not a measure recognized by Brazilian Accounting Practices or IAS 34, nor should it be considered in isolation or as an alternative to net income, as a measure of operational performance, or as an alternative to operational cash flows, or as a measure of liquidity. It does not have a standardized meaning and may not be comparable to similar measures used by other companies.
Net Debt
Net Debt is a non-GAAP measure we use to monitor the long-term effects of our debt on our business and to ensure compliance with financial leverage ratios. It is calculated by adding our current and non-current loans and financing, plus derivatives, net, less our cash and cash equivalents. Our definition of Net Debt may not be comparable to Net Debt used by other companies and is not a measure of cash flow, liquidity or resources available for debt service. For a reconciliation of our Net Debt to our total loans and financing and cash and cash equivalents for the relevant periods, see 4.2 to our Unaudited Condensed Consolidated Interim Financial Statements.
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EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin
EBITDA Reconciliation | For the three-month period ended March 31, | For the year ended December 31, | ||
2024 (unaudited) | 2023 (unaudited) | 2023 | 2022 | |
(in millions of reais) | ||||
(+) Net profit (loss) for the period | 823.3 | 747.2 | 3,523.5 | 3,121.3 |
(+) Net financial result | 338.2 | 259.5 | 1,592.0 | 372.4 |
(+) Depreciation and amortization | 773.8 | 657.1 | 2,790.6 | 2,450.8 |
(+) Income and social contribution taxes | 500.6 | 385.7 | 1,230.5 | 1,151.5 |
EBITDA* | 2,435.9 | 2,049.5 | 9,136.6 | 7,096.0 |
(+) Other operating expenses/(income), net(1) | (7.1) | (14.6) | (27.9) | (8.3) |
(+) Incentivized Dismissal Program – PDI(2) | - | - | 529.6 | - |
(+) Agreement with AAPS - Association of Retirees and Pensioners of SABESP(3) | 162.4 | - | - | - |
(+) Construction margin(4) | (30.1) | (26.5) | (125.6) | (109.4) |
ADJUSTED EBITDA* | 2,561.1 | 2,008.4 | 9,512.7 | 6,978.3 |
Net revenue | 6,560.2 | 5,698.4 | 25,572.1 | 22,055.7 |
(+) Construction revenue | (1,336.8) | (1,179.5) | (5,600.3) | (4,863.8) |
Adjusted net revenue (excluding construction revenue)* | 5,223.4 | 4,518.9 | 19,971.8 | 17,191.9 |
Adjusted EBITDA Margin* | 49.0% | 44.4% | 47.6% | 40.6% |
(1) Other operating income refers to gains from the sale of fixed assets, sales of public notices, sale of electricity rights, indemnities and reimbursement of expenses, fines and deposits, property rentals, reclaimed water, projects and services under the Rational Water Use Program (PURA) and are presented net of COFINS and PASEP taxes. Other operating expenses refer to the write-off of concession assets due to obsolescence, decommissioned works, unproductive wells, economically unfeasible projects, losses of fixed assets, and the establishment and reversal of estimated losses related to asset indemnification.
(2) Non-recurring event related to the provision recognized for the Incentivized Dismissal Program – PDI.
(3) Non-recurring event related to the provision of an agreement made with AAPS - Association of Retirees and Pensioners of SABESP.
(4) Construction revenue minus construction cost.
(*) Unaudited.
We adjust such items in the EBITDA as they are either do not constitute part of our business plan or are non-recurring events and, as such, do not contribute to information about our potential for gross cash generation. This calculation of Adjusted EBITDA is not the same calculation of Adjusted EBITDA used to measure compliance with covenants included in our financing agreements and debenture issuances.
Last Twelve Month (“LTM”) EBITDA and Adjusted EBITDA
The table below sets forth a reconciliation of our LTM EBITDA and LTM Adjusted EBITDA to our net profit (loss) for each of the periods presented below:
LTM EBITDA Reconciliation | For the three-month period ended March 31, | For the year ended December 31, 2023 | For the twelve-month period ended March 31, 2024 | |
2024 (unaudited) | 2023 (unaudited) |
(c) – (b) + (a) | ||
(a) | (b) | (c) | ||
(in millions of reais) | ||||
(+) Net profit (loss) for the period | 823.3 | 747.2 | 3,523.5 | 3,599.6 |
(+) Net financial result | 338.2 | 259.5 | 1,592.0 | 1,670.7 |
(+) Depreciation and amortization | 773.8 | 657.1 | 2,790.6 | 2,907.3 |
(+) Income and social contribution taxes | 500.6 | 385.7 | 1,230.5 | 1,345.4 |
LTM EBITDA* | - | - | - | 9,523.0 |
(+) Other operating expenses/(income), net(1) | (7.1) | (14.6) | (27.9) | (20.4) |
(+) Incentivized Dismissal Program – PDI(2) | - | - | 529.6 | 529.6 |
(+) Agreement with AAPS - Association of Retirees and Pensioners of SABESP(3) | 162.4 | - | - | 162.4 |
(+) Construction margin(4) | (30.1) | (26.5) | (125.6) | (129.2) |
LTM ADJUSTED EBITDA* | - | - | - | 10,065.4 |
(1) Other operating income refers to gains from the sale of fixed assets, sales of public notices, sale of electricity rights, indemnities and reimbursement of expenses, fines and deposits, property rentals, reclaimed water, projects and services under the Rational Water Use Program (PURA) and are presented net of COFINS and PASEP taxes. Other operating expenses refer to the write-off of concession assets due to obsolescence, decommissioned works, unproductive wells, economically unfeasible projects, losses of fixed assets, and the establishment and reversal of estimated losses related to asset indemnification.
(2) Non-recurring event related to the provision recognized for the Incentivized Dismissal Program – PDI.
(3) Non-recurring event related to the provision of an agreement made with AAPS - Association of Retirees and Pensioners of SABESP.
(4) Construction revenue minus construction cost.
(*) Unaudited.
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Debt Ratios
As of and for the twelve-month period ended March 31, | As of and for the year ended December 31, | ||
2024 (unaudited) | 2023 | 2022 | |
(in millions of reais, save for %) | |||
Gross Debt(1) | 22,024.3 | 19,536.3 | 18,958.7 |
Net Debt(2)* | 15,832.3 | 16,271.1 | 15,413.3 |
Total Equity | 30,680.7 | 29,857.4 | 27,333.5 |
Total Capital(3)* | 46,513.0 | 46,128.5 | 42,746.8 |
Adjusted EBITDA* | 10,065.4 | 9,512.7 | 6,978.3 |
Leverage ratio (%)(4)* | 34 | 35 | 36 |
Gross Debt / Adjusted EBITDA* | 2.2 | 2.1 | 2.7 |
Net Debt / Adjusted EBITDA* | 1.6 | 1.7 | 2.2 |
Net Debt / Total Equity (%)* | 52 | 54 | 56 |
(1) Gross Debt consists of our current and non-current loans and financing. Gross Debt is a non-GAAP measure (and therefore, not based on a measure calculated and presented in accordance with IAS 34 or other accounting principles) and may not be comparable to other similarly titled measures used by other companies, because other companies may calculate Gross Debt differently.
(2) Net Debt means Gross Debt less cash and cash equivalents and financial investments. Net Debt is a non-GAAP measure, and accordingly, is not based on a measure calculated and presented in accordance with IAS 34 or other accounting principles) and may not be comparable to other similarly titled measures used by other companies, which may calculate Net Debt differently.
(3) Total Capital is calculated by adding Shareholders’ Equity, as shown in the balance sheet, to Net Debt.
(4) Leverage ratio (%) is calculated by dividing net debt by total capital.
(*) Unaudited.
Reconciliation of our Gross Debt, Net Debt, and Total Capital
As of March 31, | As of December 31, | ||
Net Debt Reconciliation | 2024 (unaudited) | 2023 | 2022 |
(in millions of reais) | |||
Current | |||
(+) Loans and financing (current liabilities) | 2,716.4 | 2,616.4 | 2,246.0 |
Non-Current | |||
(+) Loans and financing (noncurrent liabilities) | 19,307.9 | 16,919.9 | 16,712.7 |
Gross Debt(1) | 22,024.3 | 19,536.3 | 18,958.7 |
(+) Cash and Cash Equivalents | (2,019.4) | (838.5) | (1,867.5) |
(+) Financial investments | (4,172.6) | (2,426.8) | (1,677.9) |
Net Debt(2)* | 15,832.3 | 16,271.1 | 15,413.3 |
Total equity | 30,680.7 | 29,857.4 | 27,333.5 |
Total Capital(3)* | 46,513.0 | 46,128.5 | 42,746.8 |
(1) Gross Debt consists of our current and non-current loans and financing.
(2) Net Debt means Gross Debt less cash and cash equivalents and financial investments.
(3) Total capital is calculated as total equity plus net debt, as shown in the statement of financial position.
(*) Unaudited.
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 March 31, 2024, we had R$2,019.4 million in cash and cash equivalents. The outstanding current indebtedness was R$2,716.4 million as of March 31, 2024, of which R$246.3 million was denominated in foreign currency. Long-term indebtedness was R$19,307.9 million as of March 31, 2024, of which R$2,384.8 million consisted of foreign currency-denominated obligations.
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Management expects that 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 order to finance the constant investment needs in our infrastructure, we use third party funds to complement our own resources. We believe that we currently have sufficient sources of funds to implement our short- and medium-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$1,397.4 million and R$395.3 million for the three-month period ended March 31, 2024, and 2023, 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. There was an increase in net cash generated from operating activities in the three-month period ended March 31, 2024, of 253.3%.
Net Cash Used in Investing Activities
Net cash used in investing activities was R$2,284.8 million and R$583.6 million for the three-month period ended March 31, 2024, and 2023, 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. There was an increase in net cash used in investing activities in the three-month period ended March 31, 2024, of 291.5%.
Net Cash Generated by (Used in) Financing Activities
Our net cash generated by financing activities was R$2,068.3 million for the three-month period ended March 31, 2024, compared to R$842.8 million in net cash used for the three-month period ended March 31, 2023. 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 and our payment of interest on capital. For the three-month period ended March 31, 2024, (i) our financings increased by R$2,818.1 million compared to the same period in 2023 and (ii) our amortizations decreased by R$56.2 million compared to the same period in 2023.
Waivers and Creditors’ Approvals
As our Proposed Privatization would lead to the State of São Paulo no longer being our controlling shareholder under our outstanding financings, we obtained 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 bylaws 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. Below is a summary of the waivers, approvals, and amendments received or executed by us since the date of our 2023 Form 20-F:
As of the date of this interim report we have received waivers in respect of the following financings:
· | Inter-American Investment Corporation (IDB Invest) and Inter-American Development Bank (IDB) and 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): On May 29, 2024, we entered into amendment agreements to Loan Agreement No. 13069-01 dated November 10, 2020 and Loan Agreement No. 12676-0, dated June 24, 2022, as amended by 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. The amendments update the definition of “Net Debt” and include mandatory prepayment provisions that will be triggered by a change of control, shareholders exceeding certain shareholding limits being listed on internationally recognized sanction lists, or any funds invested by them being of illicit origin, as determined by the creditors under such financings, as well as a rating downgrade event resulting from our Proposed Privatization within a certain period after privatization or all rating agencies ceasing to publish our ratings. |
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· | International Finance Corporation (IFC): On May 23, 2024, we entered into amendments to Loan Agreement No. 46253, dated June 27, 2022, and amended on October 11, 2023 and Loan Agreement No. 47451, dated June 14, 2023. The amendments include mandatory prepayment provisions which shall be triggered if shareholders exceeding certain shareholding limits are listed on internationally recognized sanction lists or are deemed “prohibited persons” by creditors under such financings. Additionally, a rating downgrade event resulting from our Proposed Privatization within a certain period after privatization will also trigger a mandatory prepayment event under certain of our financing agreements. |
· | International Bank for Reconstruction and Development (IBRD): On April 5, 2024, we received 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. |
· | Japan International Cooperation Agency (JICA): On May 29, 2024, we received correspondence from JICA 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. 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. The consent was granted by JICA considering (i) our commitment to perform the obligations under the loan agreements and to achieve the objectives of the related projects, (ii) the fact that the change of control would not affect the validity, terms and conditions of the loan agreements, (iii) that the Attorney General’s Office of the National Treasury, through “Official Letter SEI No. 25103/2024/MF”, confirmed that the guarantees provided by the Brazilian government under these contracts will remain valid and effective for the entire term of these contracts, and (iv) that there would be no changes to the terms and conditions initially sent to JICA in relation to the initial structure of our Proposed Privatization. In the event of any change to the terms initially indicated by us in relation to the Proposed Privatization, JICA may request that we provide details and additional information or even take further action; |
· | Brazilian Federal Savings Bank (CEF): On May 28, 2024, we received a letter from CEF, in response to a Letter P-0098/2024 which we sent on March 18, 2024, approving: (i) the prior consent for the change in our control; (ii) the authorization for the amendment of corporate documents applicable to the Proposed Privatization; and (iii) the amendment of the definition of “Adjusted Net Debt” in light of the contractual obligations assumed by us in relation to CEF. CEF reserved the right to conduct subsequent evaluations after the conclusion of our Proposed Privatization regarding its outcome and safeguarded its right to accelerate the contracts in the event of any non-compliance with contractual terms not expressly mentioned in the letter, or the declaration of early maturity by any of our other financial institution creditors regarding our respective financing instruments. Regarding contracts No. 191.305-91/2007, No. 228.510-87/2008, No. 228.608-59/2008, No. 228.725-71/2008, No. 228.725-71/2008, No. 228.726-85/2008, No. 245.178-17/2008, No. 245.188-32/2008, No. 245.201-05/2008, and No. 41350915, whose credits were assigned by CEF to the Brazilian government, the National Treasury Secretariat (STN), through Opinion SEI No. 1284/2024/MF, granted consent for our Proposed Privatization, subject to the State of São Paulo complying with the conditions established in the respective instruments. |
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· | BNDES: On May 24, 2024, we received a letter from BNDES, in response to Letter P-0099/2024 which we sent on March 18, 2024, confirming their consent to our Proposed Privatization, capital increase and amendments to our corporate documents, with respect to Credit Facility Agreements No. 09.2.1531.1, No. 11.2.0975.1/11.2.0975.2, No. 12.2.1381.1, No. 14.2.0535.1, and No. 15.2.0313.1, and the Subscription Promise Agreement for Simple Debentures in Private Issuances and Other Covenants No. 09.2.1175.1/09.6.0110.1. The consent was granted by BNDES on the condition that it would reserve the right to evaluate, after the consummation of our Proposed Privatization (i) our new corporate structure; (ii) our new corporate documents; and (iii) the new Concession Agreement entered into with URAE-1, in order to analyze the potential impacts on credit risk assessment based on applicable regulations. The letter also states that the consents are subject to us presenting documents related to the above items upon the consummation of our Proposed Privatization and within 90 days of settlement, extendable by another 30 days at BNDES’ discretion. In relation to the amendment of the definition of “Adjusted Net Debt” used in calculating the financial ratio “Adjusted Net Debt/Adjusted EBITDA,” BNDES indicated that it is still under evaluation and will communicate its decision in due course1. |
· | 22nd, 23rd, 24th, 26th, 27th, 28th, 29th and 30th and 31st Issuances of Debentures: On April 29, 2024, April 25, 2024 and April 26, 2024 and on May 7, 2024, May 15, 2024, May 21, 2024 and May 24, 2024, the general meetings of the debentures holders of the 22nd, 23rd, 24th, 26th, 27th, 28th, 29th 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. These conditions are aligned with the change of control provisions contemplated in our 31st debenture issuance. |
· | 12th Issuance of Debentures: 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. The early redemption took place on June 3, 2024, with the consequent cancellation of the debentures by us. |
· | Financiadora de Estudos e Projetos (FINEP): On April 26, 2024, we repaid in full Loan Agreement No. 0915003700 entered into between FINEP and us in October 2015. |
We also received (i) an opinion from the Office of the General Counsel for the National Treasury (Opinion SEI No. 1188/2024/MF), confirming that the guarantees provided by the Brazilian government for the financings remain valid so long as the financings remain enforceable, regardless of our Proposed Privatization and that the counter-guarantees provided by the State of São Paulo constitute a perfected legal act and are therefore valid for the duration of the loans entered into with JICA, IBRD and IDB as set out above; (ii) the decision of the National Treasury Secretariat, approving the content of the opinion of the Office of the General Counsel for the National Treasury regarding the maintenance of the guarantee provided by the Brazilian government, regardless of our Proposed Privatization (Official Letter SEI No. 25103/2024/MF); (iii) a joint statement the State of São Paulo Secretariat of Environment, Infrastructure, and Logistics and the Secretariat of Investments Partnerships, through Joint Technical Note SPI/CPE SEMIL/SRSB 0027926273/2024, confirming that the counter-guarantees shall be maintained, despite our Proposed Privatization; (iv) the opinion of the Office of the General Counsel of the State of São Paulo (PGE/SP) also confirming the maintenance of the counter-guarantees regardless of our Proposed Privatization (Opinion AEF No. 12/2024); and (v) the administrative decision of the Secretariat of Finance and Planning (SEFAZ/SP), signed by its Executive Secretary, which considered the content of the aforementioned statements and concluded that no further actions or measures are necessary regarding the counter-guarantees by the State of São Paulo.
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For more information about our indebtedness, see “Item 5.B. Liquidity and Capital Resources—Indebtedness Financing” of our 2023 Form 20-F, and for more information about our Proposed Privatization, see “Presentation of Financial and Other Information—Proposed Privatization” of our 2023 Form 20-F.
For more information about waivers and creditor’s approvals, see “Risk Factors— Our debentures issuances and financing agreements contain provisions that would be triggered if the State of São Paulo government ceases to be our controlling shareholder, including as a result of our Proposed Privatization. As a result we obtained waivers and amendments from our debentures holders and creditors in anticipation of the Proposed Privatization. However, if we are not able to comply with their terms or any post privatization conditions, those debentures issuances, loans and/or obligations may be subject to mandatory prepayment, acceleration, cross-default, cross-acceleration or termination, which could materially adversely affect our financial condition and results of operations.”
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. For the three-month period ended March 31, 2024, we recorded R$1.4 billion in capital expenditures 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 State of São Paulo. We have budgeted investments in the amount of approximately R$47.4 billion from 2024 through 2028. For more information, see “Item 4.A. History and Development of the Company—Capital Expenditure Program” of our 2023 Form 20-F.
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OTHER INFORMATION
Risks Factors
Any investment in our business involves a high degree of risk. Before making an investment decision, you should carefully consider the information we include in this Report on Form 6-K, including our Unaudited Condensed Consolidated Interim Financial Statements and accompanying notes, and the additional information in the other reports we file with the Securities and Exchange Commission along with the risks described in our 2023 Form 20-F. These risks may result in material harm to our business and our financial condition and results of operations. In this event, the market price of our shares and ADRs may decline and you could lose part or all of your investment. We have described below certain risks that reflect substantive changes from the risks described in our 2023 Form 20-F.
The State of São Paulo could suspend or terminate the Proposed Privatization. Additionally, our Proposed Privatization may be challenged and expose us to legal claims, which could delay or prevent its consummation.
The State of São Paulo, 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.
Our Proposed Privatization brings forward the deadline to meet the Universalization Targets to December 31, 2029, as compared to the original timeline of December 31, 2033, as set by the New Legal Framework for Basic Sanitation. If our Proposed Privatization is not consummated, the original target of 2033 for the universalization of water supply and sanitary sewage set out in the New Legal Framework for Basic Sanitation will 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 2029 regardless of our Proposed Privatization being consummated.
Bringing forward the deadline to achieve the Universalization Targets increases the challenge of meeting them, and we cannot guarantee that such goals will be met. Failure to comply with the Universalization Targets could lead to sanctions being imposed by the regulatory agency, potentially resulting in the forfeiture of the relevant concession. Additionally, under the Concession Agreement for URAE-1, we will be subject to penalties 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, Law 17,853/2023 establishes the model and other aspects of our Proposed Privatization, including the new bylaws approved at our Extraordinary Shareholders’ Meeting held on May 27, 2024, whose provisions are conditional upon the public offering being consummated, establish that the voting power of any shareholder or group of shareholders, including the State of São Paulo, will be limited to 30% of the shares representing out share capital.
These provisions may also be challenged by regulatory bodies such as the Public Prosecutor’s Office, political parties, consumer groups and other interested parties, and subsequently suspended by the Brazilian courts, including through the granting of precautionary measures, which may delay or even prevent the completion of our Proposed Privatization and have adverse legal and reputational effects on us. Furthermore, Brazilian courts or bodies with regulatory oversight may require certain aspects of the structure of our Proposed Privatization to be adjusted, which may prevent or delay its consummation.
Further, decisions by Brazilian courts or regulatory bodies in favor of our Proposed Privatization may be subject to appeal and further challenges after its completion. As of the date of this interim report, we are aware of certain ongoing civil actions that challenge aspects of our Proposed Privatization on certain grounds, including: (i) the adherence of municipalities to URAE-1; (ii) aspects of the legislative process of State Law No. 17,853/2023 and municipal laws; (iii) the hiring by the Government of the State of São Paulo of third parties to analyze the feasibility of our Proposed Privatization; (iv) the lack of public support for our Proposed Privatization; and (v) the validity of amending our contracts with municipalities which contain anti-privatization clauses. All of these claims are public, and although the actions have not been filed against us directly, they may affect the consummation of our public offering. There is no guarantee that new lawsuits or administrative proceedings, including before the Court of Auditors of the State of São Paulo, have not already been filed or will not be brought in the future, which could adversely affect our business, operations and consequently, our financial condition. See “Legal Proceedings—Legal Claims Related to our Proposed Privatization” in this interim report for further information on this matter.
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Finally, 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 our 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.
The current program contracts entered into with the municipalities of São Paulo who are a part of URAE-1 will eventually be replaced by the Concession Agreement dated May 24, 2024, which was entered into between us and URAE-1 with the intervening consent of the São Paulo State Public Services Regulatory Agency (Agência Reguladora de Serviços Públicos do Estado de São Paulo – ARSESP), upon the consummation of our Proposed Privatization.
Until the Concession Agreement becomes effective (upon the consummation of our Proposed Privatization), the current program contracts with the municipalities remain in force. 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. Municipalities could declare the termination of their respective program contracts as a result of our Proposed Privatization, even though the termination clauses are based on Article 13, paragraph 6 of Federal Law No. 11.107/2005, which was revoked by Article 9 of Federal Law No. 14.026/2020. This could adversely affect our business, financial condition, or results of operations. Further, any reduction in revenues as a result may lead to us no longer being compliant with the financial covenants contained in our existing financings.
Finally, we cannot assure that all the municipalities that as of the date of this interim report are our clients will obtain where applicable the necessary legislative authorization, have adhered to any URAE and/or will maintain their existing program contracts or execute concession agreements with us. As of the date of this interim report, 371 out of 375 municipalities of URAE-1 have adhered to its governance structure. 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.
If our Proposed Privatization is consummated, it may be necessary to notify the Administrative Council for Economic Defense ("CADE") to analyze the market impact of the investment agreement to be signed between the State of São Paulo and the reference investor in respect of the public offering. During this period, the political rights of the reference investor will be suspended until CADE concludes its analysis, which may result in certain conditions being imposed or the operation being prohibited altogether.
If our Proposed Privatization is consummated, we may be required to notify CADE, in accordance with the Law No. 12,529/2011, if the reference investor chosen during the privatization process meets the revenue requirements of Article 88, items I and II, of this law. In this scenario, CADE will analyze the impact of the investment agreement to be entered into between the State of São Paulo and the strategic investor on the market, through which the reference investor will commit to subscribe and pay for shares representing up to 15% of our capital stock.
Law No. 12,529/2011 authorizes CADE to: (i) approve the transaction on the basis that it does not result in significant competitive concerns i.e. it would not eliminate competition in a substantial part of the market, create or reinforce a dominant position or result in the domination of the relevant market for goods and services; (ii) approve the transaction under certain conditions to mitigate any competition-related concerns arising from the transaction, which could include behavioural and/or structural remedies including divestment of assets or restrictions on certain commercial activities; or (iii) prohibit the transaction from proceeding if CADE concludes that the investment agreement harms competition and cannot identify remedies to address such concerns or where no consensus can be reached between CADE and the involved parties on the appropriate remedies.
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CADE’s review period under the ordinary procedure may last up to a maximum of 330 days, pursuant to Article 88, paragraphs 2 and 9, item II, of Law No. 12,529/2011. Under the summary procedure, it may last up to 30 days, according to Article 7, paragraph 2 of CADE Resolution No. 33/2022. During this period, the political rights of the reference investor, including the right to vote at general meetings, will be suspended until CADE approves the transaction. A failure to observe such rules may attract penalties ranging from R$60,000 to R$60 million.
If CADE decides to approve the operation under certain conditions, the investment agreement may need to be amended to reflect such conditions. If CADE does not approve, the reference investor will have to dispose of part or all of the shares they acquired under the public offering, in accordance with CADE’s potential decision to that effect. Both such scenarios may negatively impact the market price of our common shares and ADSs.
Our debentures issuances and financing agreements contain provisions that would be triggered if the State of São Paulo government ceases to be our controlling shareholder, including as a result of our Proposed Privatization. As a result, we obtained waivers and amendments from our debentures holders and creditors in anticipation of the Proposed Privatization. However, if we are not able to comply with the terms and conditions of such waivers following our Proposed Privatization, those debentures issuances, loans and/or obligations may be subject to mandatory prepayment, acceleration, cross-default, cross-acceleration or termination, which could materially adversely affect our financial condition and results of operations.
As of March 31, 2024, the outstanding balance of our indebtedness totaled R$22.0 billion, of which (i) R$10.0 billion relate to debenture issuances in the local market, (ii) R$2.9 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$8.2 billion relate to financing agreements executed with multilateral entities, including IFC, BID, IDB Invest, IBRD and JICA, of which R$4.7 billion are guaranteed by the Brazilian government with a counter-guarantee from the State of São Paulo.
Our debenture issuances (such as the 22nd, 23rd, 24th, 26th, 27th, 28th, 29th, 30th, and 31st issuances) and the financings mentioned above contain clauses and restrictions that may lead to the early maturity, termination, cross-acceleration, or cross-default of other financial instruments to which we are party, including provisions relating to change of control as well as amendments to our bylaws.
If certain conditions of the waivers granted by the debenture holders relating to, among another things, change of control, maintenance of guarantees and ratings downgrades, are not fulfilled following the consummation of our Proposed Privatization, or if there are any changes to the structure of our Proposed Privatization or the terms on which the waiver requests were prepared in relation to our debenture issuances and financial contracts, we may have to request new waivers or approvals from those creditors and/or debentures holders, request to renegotiate the terms of such prior consents or redeem some of these issuances early (if permitted). A failure to obtain the necessary waivers or approvals regarding our Proposed Privatization or prepay certain of our debts prior to the consummation of our Proposed Privatization due to insufficient funds may lead 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. Moreover, any amendments or challenges to the aforementioned approvals or decisions may also have a material adverse effect on our financial condition and results of our operations.
In addition, certain of our financing agreements contain mandatory pre-payment provisions that are triggered if shareholders exceeding certain thresholds of share ownership are included in internationally recognized sanctions list or are otherwise deemed “prohibited persons” by the lenders under such financings. Further, a downgrade in our ratings as a result of our Proposed Privatization within a certain period of its consummation or all rating agencies ceasing to publish our ratings will also lead to a mandatory pre-payment event in respect of certain of our financings.
For more information about our indebtedness, see “Item 5.B. Liquidity and Capital Resources—Indebtedness Financing” in our 2023 Form 20-F, for more information about our Proposed Privatization, see “Presentation of Financial and Other Information—Proposed Privatization” in our 2023 Form 20-F and for more information about waivers and creditor’s approvals, see “Waivers and Creditor’s Approvals” in this interim report.
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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 share of our share capital.
On May 27, 2024, our shareholders approved, at an Extraordinary Shareholders’ Meeting, changes to our bylaws including, among other things, an authorized capital provision and a complete overhaul of our bylaws, conditional upon the settlement of the public offering and the consequent consummation of our Proposed Privatization. In addition, if our Proposed Privatization is consummated, our bylaws will establish, among others, (i) a provision containing the terms and conditions of the golden share to be held exclusively by the government of the State of São Paulo, giving it veto power over proposed changes to: (a) our name and headquarters; (b) our corporate purpose of providing water and sewage services; and (c) any provisions in our bylaws regarding limits on the exercise of voting rights attributed to shareholders or groups of shareholders; (ii) 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 (iii) poison pill provisions whereby any shareholder or group of shareholders holding 30% or more of our capital stock will be obligated to make a public offer for a significant shareholding, pursuant to the Law No. 17,853/2023 and approved by the CDPED on April 17, 2024. This may disincentivize investors and, in turn, potentially limit the our ability to secure investment opportunities from new shareholders.
The absence of a controlling shareholder or control group holding more than 50% of our capital stock may make our decision-making processes more difficult, giving rise to conflicts between shareholders and other obstacles arising out of the absence of a controlling shareholder, such as challenges in identifying those shareholders responsible in situations of abuses of voting rights and conflicts of interest. We would also be more susceptible to the emergence groups of shareholders acting jointly (even if without the execution of a formal shareholders’ agreement), who may 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 our executives.
If, after the settlement of the public offering within the scope of our Proposed Privatization, our creditors believe that certain of our new shareholders exert a sustained and significant influence over our decision-making through, for example, a shareholder alliance, such creditors may trigger cross-acceleration clauses in the financial contracts they maintain with us as a result of a change of control. This could lead to further cross-default situations, cross-acceleration, and, ultimately, require us to prepay the amounts involved in our financial instruments early, which could have a materially adverse effect on our financial situation.
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.
Changes in Brazilian tax laws or conflicts in their interpretation may adversely affect us.
With respect to “Item 3.D. Risk Factors—Risks Relating to Our Common Shares and ADSs—Changes in Brazilian tax laws or conflicts in their interpretation may adversely affect us” in our 2023 Form 20-F, the following paragraphs:
“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%.”
shall be replaced with the following:
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“The next step is the regulation of EC 132 through legislation (complementary and ordinary laws). On April 25, 2024, the executive branch presented to the National Congress Complementary Bill No. 68/24, which introduces the framework for the new taxes created by the tax reform, including IBS and CBS, as well as other measures. 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) will be 26.5%, according to statements made by the representative of the executive branch.”
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.
With respect to “Item 3.D. Risk Factors—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” in our 2023 Form 20-F, the following paragraphs:
“On March 17, 2022, ARSESP published Resolution No. 1,278 relating to the tariff readjustment, which also postponed the adoption 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 implement the postponed New Tariff Structure. However, on April 6, 2023, ARSESP published Resolution No. 1,395 which revoked 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 interim 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.”
shall be replaced with the following:
“On March 17, 2022, ARSESP published Resolution No. 1,278 relating to the tariff readjustment, which also postponed the adoption 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 implement the postponed New Tariff Structure. However, on April 6, 2023, ARSESP published Resolution No. 1,395 which revoked 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. Additionally, the URAE-1 Concession Agreement explicitly maintains the current tariff structure at least until the end of its first tariff cycle, which will be in 2029.
As of the date of this interim report, we cannot confirm that a new tariff structure will be implemented, or when it would be implemented. If a new structure is approved, we cannot ensure what the outcome of its implementation will be or whether it will have an adverse effect on our business, financial condition, or results of our operations. For more information, see “Item 4.B. Business Overview—Tariffs—New Tariff Structure.”
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.
Currently, we are party to, and may in the future be party to, legal proceedings related to civil, corporate, environmental, labor, tax, and/or criminal actions filed against us, which may require us to expend substantial funds and other resources.
Our provisions do not cover all such legal proceedings involving monetary claims filed against us and may be insufficient to cover any amounts arising from unfavorable final decisions, which may have a material adverse effect on our financial condition and reputation. Further, one or more of our directors and officers are and may become parties to civil, administrative, environmental, criminal or tax judicial, administrative or arbitration proceedings, of 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
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Unfavorable judicial, administrative, and arbitral decisions against us, our subsidiaries, executives, and directors, especially in cases involving substantial amounts or those that prevent us from conducting business as initially planned, as well as those that result in the inability to contract with the government or loss of tax benefits, could have an adverse effect on our results, business, reputation, financial situation, and market value of our shares. Regarding our executives, directors, and principal shareholders, unfavorable decisions may negatively affect them, particularly if they involve criminal proceedings related to corruption and/or administrative misconduct, potentially preventing executives from performing their duties in the Company and/or preventing us and our subsidiaries from contracting with the government and/or enjoying tax benefits, which could cause a significant adverse effect on our reputation, business, and/or results, as well as those of our subsidiaries.
Furthermore, the Public Prosecutor’s Office and environmental agencies may initiate administrative procedures to investigate possible environmental damages attributed to our activities. In such cases, recommendations may be issued to us and the licensing authorities which have authority over our activities. We may also need to enter into "conduct adjustment agreements" and/or general "terms of commitments" with the relevant authorities, assuming specific obligations for a determined period. Given that they are extrajudicial enforceable instruments, if there is any non-compliance with the agreed terms imposed on us, we may be subject to risks and penalties, such as fines, enforcement, and filing of lawsuits.
Finally, parliamentary inquiry commissions and regulatory and oversight bodies, such as the State Audit Court (Tribunal de Contas do Estado de São Paulo – TCE), the National Water and Sanitation Agency (Agência Nacional de Águas e Saneamento Básico – ANA) and ARSESP, may question our conduct in respect of our operations, processes, contracts, and procedures, including the structuring and establishment of new partnerships. Our involvement and the involvement of our subsidiaries, partners and administrators in these processes and investigations, as well as unfavorable decisions resulting from such investigations may (i) restrict our ability to conduct our business; (ii) require us to make payments that have not been provisioned for; (iii) affect the continuity or profitability of our service lines; (iv) prevent or delay the execution of our projects as initially planned; (v) require our subsidiaries to comply with public sector legislation, such as Law No. 13.303/16 and its regulatory decree; and (vi) prohibit us from entering into contracts with the public administration to receive fiscal incentives and benefits and access financing and resources. Furthermore, such bodies may initiate processes including judicial, administrative and arbitral proceedings, which may lead to unfavorable decisions and adversely affect our business, financial situation, and reputation, as well as those of our subsidiaries and partners. In addition, contingencies arising from our acquisitions and partnerships, especially if they were not identified when the contracts were signed, may adversely affect the results of operations and our financial condition, results of operations and reputation.
For more information, see “Item 8.A. Consolidated Financial Statements and Other Financial Information—Legal Proceedings” and Note 20 to our 2023 Consolidated Financial Statements included in our 2023 Form 20-F.
We are subject to anti-corruption, anti-bribery, anti-money laundering, sanctions and antitrust laws and regulations in Brazil and abroad. Our violation, whether actual or perceived, 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 the U.S. Foreign Corrupt Practices Act (“FCPA”), and we may become subject to similar laws and regulations in other jurisdictions. The existence of any investigation, inquiry or proceeding of an administrative or judicial nature related to the violation of any of these laws or regulations, in Brazil or abroad, for acts against the public administration by our affiliates or subsidiaries, managers, employees or any third parties acting on our behalf, may result in the application of sanctions, which may include (i) administrative, civil or criminal fines and indemnities (the latter applicable to the directors who participated in the infraction); (ii) an obligation to repair the damage caused; (iii) a criminal conviction; (iv) the loss of the benefits or assets illicitly obtained; (v) partial or full suspension of activities; and (vi) a prohibition on entering into contracts with the government or receiving tax or credit benefits or incentives. There can be no assurance that our internal policies and procedures will be sufficient to prevent, detect and timely implement corrective measures in relation to any unlawful and inappropriate practices, fraud or violations 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.
From time to time, we receive or become aware of complaints or allegations of potential breaches of applicable anti-corruption, anti-bribery or other laws and regulations or our internal policies and procedures (including our procurement processes) through our whistleblower channel or other internal or external sources. Our internal audit team processes these complaints or allegations, and our audit committee may engage outside counsel to investigate given the nature of the complaints or allegations. The findings of our internal audit team and any outside counsel are reported to our audit committee. These complaints or allegations, including certain complaints and allegations that are subject to ongoing investigations by our internal audit team and outside counsel, under the supervision of our audit committee, may lead to formal government inquiries or investigations and harm to our reputation.
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If we or any of our subsidiaries, directors, officers, employees, partners, agents, service providers or other persons are deemed or perceived to have engaged in activities violative of applicable laws, regulations or internal controls or procedures, we could become subject to government enforcement actions, penalties, damages, fines and sanctions, as well as events of default or prepayment events under our outstanding indebtedness, that could result in a material adverse effect on our reputation, business, our ability to obtain financing for our business, our financial condition, our results of operations and the market price of our common shares and ADSs.
Our failure to protect our intellectual property rights may negatively impact us.
With respect to “Item 3.D. Risk Factors—Risks Relating to Our Business— Our failure to protect our intellectual property rights may negatively impact us” in our 2023 Form 20-F, the following paragraphs shall be added as the before the final paragraph:
“Additionally, we have entered into licensing agreements for certain technologies essential to the development of our operations, such as software licensing agreements. If we are unable to renew or maintain the licenses for the necessary intellectual property rights, we may face difficulties in replacing these technologies. Furthermore, if we continue to use these technologies without the necessary licenses, the holders of these intellectual property rights may demand that we cease using such rights and seek compensatory damages.
Furthermore, third parties may claim that the products and/or services we provide infringe their intellectual property rights. Any alleged violation or infringement of intellectual property rights against us may result in costly and time-consuming litigation and, consequently, adversely affect our operational results. If we are not successful in defending against potential claims or reaching settlements, we may be required to pay damages, cease the use of third-party intellectual property, or enter into licensing agreements on unfavorable terms.”
Our insurance policies may not cover or may be insufficient to cover claims which may arise.
Due to the high premiums associated with insurance policies and other factors relating to our risk management, it is not always possible to obtain insurance against all types of risks and liabilities associated with our activities and related assets. We cannot guarantee that our existing insurance policies are adequate and sufficient for all circumstances that may arise or against all inherent risks and for amounts that cover all the losses we may occur.
For example, insurance against risks relating to water contamination or other problems involving our water supply to customers or for environmental responsibilities and indemnities resulting from our activities is generally not available to us nor to other companies in our sector on acceptable terms. As a result, we currently do not have insurance coverage for this risk.
If a claim is not covered by our insurance policies, or if damages exceed the policy limits, we may incur additional costs for the repair or replacement of damaged assets or for compensation to third parties, which could adversely affect our results of operations and reputation. Furthermore, for insured events, coverage is contingent upon the payment of a premium; failure to pay such premium, coupled with the occurrence of an event giving rise to a claim, could put us at further risk, as damages - even if insured - would not be covered by the insurer.
We cannot guarantee that we will be able to renew our existing insurance policies at reasonable rates, and if renewed, we cannot guarantee that they will be renewed under the same conditions and coverage originally acquired, or at reasonable commercial rates, or on acceptable terms, whether in terms of costs or coverage.
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Furthermore, we currently have claims with an estimated value of R$19.8 million currently under review by insurers, and we cannot guarantee that these claims will be fully covered and indemnified by the insurers.
Losses caused by events not covered by insurance, or partially covered, may cause us to incur significant costs and the resources available to maintain our current activities and allocated towards our expansion activities will be reduced, which could ultimately have a material adverse effect on our financial performance and operating results.
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 our Proposed Privatization is consummated, we will no longer be a state-controlled company and, in principle, would be subject to the Brazilian Bankruptcy Law. Furthermore, in accordance with Brazilian law and the terms of the concession contracts we have signed, our assets may revert to the municipalities in the event of bankruptcy and/or judicial or extrajudicial reorganization. We cannot ensure that the compensation received will be equal to the market value of the assets, and thus, our financial condition could be significantly affected.
On the other hand, if our Proposed Privatization is not concluded, we will not benefit from certain provisions under the Brazilian Bankruptcy Law, such as, among other things: (i) the suspension of the statute of limitations on obligations subject to bankruptcy proceedings after the approval of the judicial reorganization process (Article 6, Item I); (ii) the suspension of any lawsuits, including those from individual creditors of the joint partner, related to credits or obligations subject to judicial reorganization or bankruptcy, except for tax credits and those provided for in paragraphs 3 and 4 of Article 49 of the Bankruptcy Law (Article 6, Item II, and paragraphs 7-A and 7-B); (iii) the prohibition of any form of retention, seizure, attachment, sequestration, search and seizure, or judicial or extrajudicial constriction on our assets, arising from judicial or extrajudicial claims whose credits or obligations are subject to judicial reorganization or bankruptcy (Article 6, Item III); or (iv) the possibility of negotiating debts subject to judicial reorganization with creditors and presenting a plan with new payment terms for such debts, which are usually more favorable.
Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes.
With respect to “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” in our 2023 Form 20-F, the following sentence:
“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.”
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shall be replaced with the following language:
“Our allowance for doubtful accounts increased by 17% for the three-month period ended March 31, 2024, compared to the three-month period ended March 31, 2023, and increased by 21.5% for the year ended December 31, 2022, compared to the year ended December 31, 2021.”
We depend on the technical qualifications of the members of our management and certain employees, and we cannot guarantee that we will be able to maintain them or replace them with suitable individuals.
With respect to “Item 3.D. Risk Factors—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” in our 2023 Form 20-F, the following paragraph shall be added:
“In addition, certain of our employees and members of our management have been seconded from other public administration bodies and perform essential activities within the context of our business. We will make a proposal for the retention of such individuals in the context of our Proposed Privatization; however, any refusal by those employees and professionals to continue working for us may negatively impact our activities and operations.”
We are 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 March 31, 2024, the State of São Paulo owed us R$117.9 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 disputed credit of R$1.6 billion as of March 31, 2024, recorded in the line item “disputed amount.” We have not recorded this disputed amount as a reimbursement credit for actuarial liability due to the uncertainty of payment by the State of São Paulo, considering that the amount 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 10(a)(ii) to our Unaudited Condensed Consolidated Interim Financial Statements.
In addition, as of March 31, 2024, 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 10(a)(iii) to our Unaudited Condensed Consolidated Interim 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 pay the contested credits, which are still under discussion, and the remaining overdue amounts they owe us. The amounts owed to us by the State of São Paulo, municipalities and other government entities for water and sewage services and reimbursements for pensions paid may increase in the future, given that we are currently making some payments on behalf of the State of São Paulo. If our Proposed Privatization is consummated and we are no longer controlled by the State of São Paulo, the risk of non-payment may increase, and our financial condition may be affected. For further information, see “Item 7.B. Related Party Transactions—Agreements with the State of São Paulo” in our 2023 Form 20-F.
Environmental, social and governance considerations could expose us to potential liabilities, increased costs (regulatory or otherwise), compliance failures and reputational harm, including with respect to the B3 Green Shares classification we have been granted.
We are subject to laws, regulations and other measures that govern a wide range of topics, including those related to matters beyond our core business. New or amended laws, regulations, policies, and international accords relating to ESG matters, including sustainability, climate change, human capital and diversity, are being developed and formalized in Brazil, the U.S. and elsewhere, which may require us to comply with specific, target-driven frameworks and/or disclosure requirements. For instance, in the U.S., the SEC has proposed broad climate change disclosure requirements which would require significant compliance efforts, if and when adopted. The final form of any of these regulations or other measures is still uncertain. The implementation of these goals and initiatives, as well as compliance with emerging regulatory obligations, and forward-looking milestones may require considerable management time and may result in significant expense to us, and we cannot guarantee that we will achieve our objectives. Moreover, increasingly different stakeholder groups have divergent views on ESG matters, which increases the risk that any action or lack thereof with respect to ESG will be perceived negatively by at least some stakeholders and adversely impact our reputation. Such regulatory regimes could impose significant compliance burdens and costs on us, and as with all new regulation, we could be subject to ambiguous interpretation that could result in inadvertent noncompliance. Our business could be negatively affected by increased regulation of ESG research, ratings and data.
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Additionally, on June 7, 2024, the B3 granted us the B3 Green Shares (B3 Ações Verdes) classification. In compliance with Circular Letter No. 002/2024-VPE, dated May 7, 2024, issued by the B3, S&P Global Ratings Shades of Green (the “Specialized Consultant”), certified that we met the criteria established by B3 and that we derive: (i) more than 50.0% of our annual gross revenue from activities contributing to the green economy; (ii) more than 50.0% of our annual investments and operational expenses allocated to activities contributing to the green economy; and (iii) less than 5.0% of our annual gross revenue derived from fossil fuel activities. However, as the B3 Green Shares classification is provided by a Specialized Consultant, which is a third-party provider, there is no assurance that the scrutiny process meets investor criteria and expectations. We are the first company in Brazil to obtain the B3 Green Shares seal, and there are no standardized processes and regulatory frameworks for this classification. Accordingly, we cannot assure that we will continue to meet the criteria and expectations regarding environmental impact and sustainability performance in upcoming years, and we can give no assurance that we will continue to meet the requirements, voluntary taxonomies or standards, whether currently in place or implemented in the future, to maintain this classification.
Any failure, or perceived failure, by us to comply fully with ESG laws and regulations, or meet evolving and varied stakeholder expectations and standards could harm our business, operating results, and financial condition.
We are subject to obligations regarding respect for the human rights of all of our stakeholders, which may result in additional costs and significant contingencies.
Social risks arise from the potential and actual adverse impacts of our business activities on the human rights of all stakeholders involved in our operations, including our employees, customers, suppliers, investors, and the local communities in which we operate, whether directly or indirectly connected to our activities.
It is essential that we ensure suitable working conditions for our employees, safeguarding their health, safety, and well-being, and ensuring their right to association and participation in union entities, in compliance with local laws and regulations. A workplace identified as hazardous, hostile, or discriminatory may result in legal contingencies and inhibit our ability to attract and retain talent, negotiate with labor unions, prevent incidents of health and safety at work, and drive innovation.
Similarly, if we do not undertake structured and integrated long-term planning initiatives to promote diversity, equity, and inclusion in respect of our workforce and management and leadership, we may face scrutiny and possible judicial challenges.
There is no guarantee that we will successfully manage the above-mentioned social risks in accordance with all national and international parameters and guidelines, which could potentially harm our results of operations and reputation.
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.
With respect to “Item 3.D. Risk Factors— Risks Relating to the Regulatory Environment—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” in our 2023 Form 20-F, the following sentence:
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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.”
shall be replaced with the following language:
“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. Furthermore, other factors such as contingencies not identified during due diligence, lack of synergies, failure to integrate activities, among others, may arise. This could result in increased expenses for us and, as a result, impact our financial condition.”
Our expansion strategy involves acquisitions, which may entail various risks and challenges.
As part of our strategy to expand our activities, we may undertake acquisitions, which will depend on several factors, including our ability to identify suitable companies or assets for acquisition, negotiate appropriate prices, integrate and maintain the quality of operations of the acquired companies or assets, obtain synergies from the integration of the acquired assets, and reduce costs while protecting ourselves from potential contingencies.
We may not achieve the expected gains from acquisitions, which could adversely affect our activities. If we select assets for acquisition that do not perform or integrate as expected, our results of operations and financial condition may be adversely affected.
Potential acquisitions may also require us to increase our debt or access to the financial and capital markets, including through the issuance of new shares and ADSs. This could lead to increased indebtedness and exposure, as well as dilution of our current shareholders' and ADR holders' ownership in our share capital. Acquisitions also pose the risk of exposure to the obligations and contingencies of the acquired companies or assets due to prior acts of management and previously incurred liabilities. The legal due diligence process conducted by us to evaluate the legal and financial situation of potential acquisition targets and any contractual guarantees or indemnities we may receive from our counterparties may be insufficient to protect or indemnify us against potential contingencies. If significant contingencies arise from such acquisitions, as well as any unidentified contingencies during these processes, they could adversely affect our activities and results of operations.
Moreover, we could face setbacks during any acquisition process and, in general, such processes could divert the time and attention of our management team towards transitional or integration-related issues and away from other business needs.
Lastly, we are subject to potential scrutiny by tax authorities due to corporate reorganizations that we may undertake in connection with our acquisitions.
Any failure or delay in implementing acquisitions or other strategic investment operations could have a significant adverse effect on our business and results of operations.
Risks related to encumbrances 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 of our properties are burdened with unavailability, a temporary judicial measure that imposes significant restrictions on certain assets and a taxpayer's rights over such assets to ensure the compliance and payment of overdue taxes by the taxpayer before they can alienate, transfer, or use specific assets previously identified by the public treasury as debt collateral.
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As a rule, the non-payment of debts leading to the declaration of unavailability may result in the forced sale of the properties, the proceeds of which will be used to pay the outstanding debts. In such cases, the new owners of the properties may request possession of the assets, which could require the relocation of activities carried out at these locations.
Furthermore, even if the debts which resulted in the declaration of unavailability have already been paid, the failure to cancel the encumbrance in the property registrations may hinder possible transactions or operations involving such properties in the future.
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, such as payment of fines and compensation for any damages caused by non-compliance with the real right. Additionally, the beneficiaries may file a lawsuit to ensure their right of way is respected.
We do not have and may not be able to keep in force or renew in a timely manner all permits and/or licenses for use and operation necessary for the development of our activities.
As of the date of this interim report, we do not hold the majority of permits, licenses, and/or operational authorizations required for the development of our activities at our operational properties, including those considered relevant, issued by competent public authorities such as municipal governments; for example, operational licenses necessary for the development and regularity of our activities at our units and certificates of completion of works regarding existing constructions at our units, a Fire Department Inspection Certificate required by the state fire department, a Sanitary License required by the responsible environmental authorities, and Technical Responsibility Annotation and Technical Regularity Certificate, as required by professional councils.
Additionally, we cannot guarantee that we will be able to maintain in force or renew the licenses, permits, and authorizations which we currently have in a timely manner, or that competent authorities will not refuse to issue or renew them or delay their issuance or renewal. Similarly, we cannot guarantee that the processes for obtaining or renewing these licenses, permits, authorizations, and registrations will not become more difficult or costly.
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 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.
Non-compliance with environmental laws and environmental liability could have a material adverse effect on us, our reputation and image.
With respect to “Item 3.D. Risk Factors— 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” in our 2023 Form 20-F, the following paragraph shall be added as the penultimate paragraph:
“The STJ, in a recent decision involving the discharge of sewage into a reef and estuary area published on April 24, 2024, determined that the absence or impossibility of technical proof of pollution does not prevent the recognition of environmental damage and the duty to provide material and moral compensation, both individually and collectively. If this judicial interpretation is adopted by the higher courts, it could have a negative impact on our interests in any environmental lawsuits to which we are a party.”
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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.
We may not always be in a position to pay dividends or interest on shareholders’ equity and ADSs.
Pursuant to Brazilian Corporate Law and our bylaws, we are required to distribute to our shareholders a mandatory minimum dividend equivalent to 25% of our adjusted net income for the previous fiscal year.
Except for the mandatory minimum dividend, we can retain profits in statutory reserves for investment and/or capital reserves. If we incur a net loss or a net profit insufficient to allow dividend payments, including the mandatory minimum dividend, management may recommend dividend payments using profit reserves, after offsetting the net loss of the current fiscal year and previous years, if any. If we are able to declare dividends, management may still decide to defer the payment of dividends or, in limited circumstances, not declare dividends. We cannot declare dividends from certain reserves under Brazilian Corporate Law.
Finally, according to Law No. 14,026/2020, the New Legal Framework for Basic Sanitation, the distribution of profits and dividends is prohibited for service providers who are in breach of the objectives and deadlines established in the specific contract for the provision of basic sanitation services. Therefore, if we fail to comply with such objectives and deadlines set forth in our concession agreements, we may not pay dividends and/or interest to our shareholders and ADS holders.
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.
These investments are subject to economic and political risks, such as (i) changes in the regulatory, tax, economic, and political landscape that may affect investors' ability to receive payment, in whole or in part, related to their investments; and (ii) restrictions on foreign investment and the repatriation of invested capital.
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, which may as a result affect the trading prices of our common shares underlying the ADSs.
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Legal Proceedings
The following discussion should be read in conjunction with “Item 8—Financial Information—A. Consolidated Financial Statements and Other Financial Information—Legal Proceedings” of our 2023 Form 20-F:
We are currently subject to several 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 March 31, 2024, the total estimated amount of claims related to our legal proceedings was R$23.1 billion (net of R$258.6 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.
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 March 31, 2024, the total amount of accrued provisions for claims with a probable likelihood of loss was R$2.0 billion (net of R$133.9 million in court deposits). As of March 31, 2024, claims classified as contingent liabilities amounted to R$21.3 billion, of which R$10.6 billion relate to claims where we classified the risk of loss as possible and R$10.7 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” of this interim report for further information on this matter.
The table below sets out our provisions for probable claims, escrow deposits and provisions (net of escrow deposits), per type of claim as of March 31, 2024:
As of March 31, 2024 | |||
Provisions for probable claims | Escrow deposits | Provisions net of escrow deposits | |
Types of Claims | (in millions of reais) | ||
Customer claims | 169.1 | (6.0) | 163.1 |
Supplier claims | 338.6 | (93.8) | 244.8 |
Other civil claims | 140.4 | (1.3) | 139.1 |
Tax claims | 114.2 | (18.6) | 95.6 |
Labor claims | 724.0 | (14.1) | 709.9 |
Environmental claims | 510.8 | (0.1) | 510.7 |
Total | 1,997.1 | (133.9) | 1,863.2 |
Environmental Claims and Conduct Adjustment Agreements
We are involved in 45 environmental Conduct Adjustment Agreements and judicial settlements, which in large part require us to fulfil certain obligations related to reforestation, environmental repair, compensation and indemnification. We are also required to implement and expand domestic sewage systems.
As of the date of this interim report, we have fulfilled our obligations in respect of nine of these agreements and are awaiting confirmation from the responsible authorities. Of the remaining 36 agreements, one commitment term is suspended and the rest are ongoing. For the 35 agreements which are currently being executed, we estimate the total cost of such obligations to be R$1.5 billion, though it is not possible to determine the actual value due to the nature of our obligations. We consider the following agreements to be material:
· | Conduct Adjustment Agreement with the São Paulo State Public Prosecutor's Office and the Municipality of Barueri (Civil Inquiry No. 07/97): We committed to improving the environmental conditions of the hydrographic basins by expanding the municipal sewage system and maintaining a terminal for untreated sewage. We estimate our costs in respect of this agreement to be approximately R$83.0 million. |
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· | Judicial Agreement and Amendment (Case No. 2972/2006) with the São Paulo State Public Prosecutor's Office and the Municipality of Itaquaquecetuba: We committed to remove and treat domestic sewage in the municipality by July 31, 2026. We estimate our costs in respect of this agreement to be approximately R$246.0 million. |
· | Judicial Agreement (Case No. 1528/2010) with the São Paulo State Public Prosecutor's Office and the Municipality of Santana de Parnaíba: We committed to efforts to expand the municipal sewage system. We estimate our costs in respect of this agreement to be approximately R$153.0 million. |
· | Judicial Agreement (Case No. 0004757-82.1994.8.26.0152) with the São Paulo State Public Prosecutor's Office and the Municipality of Cotia: We committed to expanding the sewage system and not discharging untreated sewage in the Cotia River Basin. We are also required to restore and indemnify the municipality for environmental damage and fines. We estimate our costs in respect of this agreement to be approximately R$126.0 million. |
Labor Conduct Adjustment Agreement
We signed a Conduct Adjustment Agreement with the Labor Prosecutor's Office, represented by the Regional Labor Prosecutor's Office of São Paulo, on March 11, 2003, following an investigation concerning fatal accidents involving certain employees of contractors and subcontractors hired by us. Under the Conduct Adjustment Agreement, we assumed various obligations relating to our compliance with workplace health and safety standards and may be subject to fines of R$1,000 per day and per worker found in a non-compliant situation. The Conduct Adjustment Agreement is in effect for an indefinite period and, as of the date of this interim report, we are in compliance with our undertaken obligations and have never been fined or penalized for non-compliance.
Other Legal Proceedings
Common actions for compensation for administrative seizure against the Department of Highways – DER ("DER")
In February 2023, we filed six ordinary actions for damages for administrative seizure against the DER as a result of the expropriation of our properties located in the municipalities of São Paulo, Guarulhos, Arujá, Caraguatatuba and São Sebastião for the purpose of constructing the Mário Covas São Paulo Metropolitan Beltway, as well as implementing the Nova Tamoios – Contornos Highway Project. The DER declared such properties to be of public utility for expropriation purposes through State Decrees No. 57,930/2012 and 59,226/2013.
On April 17, 2023, we filed a petition against the DER, requesting the suspension of the respective actions for 180 days due to negotiations for the execution of an agreement. As of the date of this interim report, we have not yet executed the terms of the agreement for compensation and, as such, have not received any such payments. We cannot assure you that we will receive the amounts claimed.
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 interim report, there are ongoing claims challenging in court certain aspects of our Proposed Privatization mainly questioning: (i) the adherence of the municipalities to URAE-1; (ii) formal aspects of the legislative process of Law No. 17,853/2023 or municipal laws; (iii) the hiring of third parties to analyze the feasibility of our Proposed Privatization; (iv) the absence of public interest in our Proposed Privatization; and (v) the validity of amending concession agreements containing anti-privatization clauses, among others. All of these claims are public and were not necessarily filed against us. For example, some were filed against the State of São Paulo government, the Governor of São Paulo, the São Paulo City Council, or other public persons/entities.
As of the date of this interim report, the most relevant claims questioning our Proposed Privatization are:
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· | 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. As of the date of this interim report, this lawsuit is pending a final decision. | |
· | 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 interim 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 interim report, this lawsuit is pending a final decision. | |
· | 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 interim report, this lawsuit is pending a final decision. | |
· | Direct Unconstitutionality Action (Ação Direta de Inconstitucionalidade) No. 2146345-61.2024.8.26.0000 filed by Diretório Estadual do Partido Socialismo e Liberdade de São Paulo (PSOL), Diretório Estadual do Partido dos Trabalhadores (PT) and Diretório Estadual do Partido Comunista do Brasil (PCdoB): The political parties PSOL, PT and PCdoB filed a lawsuit in the São Paulo Judicial Court requesting the urgent granting of a precautionary measure to immediately suspend the effects of São Paulo Municipal Law No. 18,107, dated May 2, 2024. This law authorized the municipality of São Paulo to adhere to the Concession Agreement we entered into with URAE-1 as part of our Proposed Privatization. Ultimately, it seeks a declaration of unconstitutionality of the aforementioned law, alleging that it fails to comply with the requirement of presenting a prior budgetary and financial impact study, as well as violating the Constitution of the State of São Paulo. As of the date of this interim report, this lawsuit is awaiting a decision. | |
· | Public Civil Action No. 1001846-34.2023.5.02.0071 filed by Federação dos Trabalhadores em Energia, Água e Meio Ambiente (“FENATEMA”): FENATEMA filed a public civil action against us, requesting the suspension of all measures related to our Proposed Privatization on the grounds that there was insufficient analysis as to the labor-related repercussions which would ensue. The request by FENATEMA for a preliminary injunction was denied in December 2023 and, as of the date of this interim report, we are awaiting a judgment in the first instance. We assess the risk of loss as possible. |
Recent Developments
Proposed Privatization
The following discussion should be read in conjunction with “Presentation of Financial and Other Information—Proposed Privatization” of our 2023 Form 20-F.
The proposed Concession Agreement for URAE-1, which has been signed by us and URAE-1, 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” in our 2023 Form 20-F.
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At its first meeting on May 20, 2024, the deliberative council of URAE-1 approved, among other things: (i) the internal regulations of the deliberative council; (ii) the regional basic sanitation plan in accordance with Article 17 of Federal Law No. 11,445/2007; (iii) the appointment of ARSESP as the entity responsible for regulating and supervising the services covered by the Concession Agreement for URAE-1; and (iv) the execution of the Concession Agreement for URAE-1, which will replace the existing contractual instruments executed by the municipalities who are members of URAE-1.
On May 24, 2024, Concession Agreement No. 1/2024 was signed between us and URAE-1, and ARSESP as an intervening party, and its provisions, grants us the capacity to provide water supply and sewage services to the municipalities that are part of URAE-1. The Concession Agreement will become effective upon the consummation of our Proposed Privatization, in accordance with State Law No. 17,853 of December 8, 2023, and will be valid until October 19, 2060.
On May 27, 2024, our Extraordinary General Meeting was held, which approved the comprehensive reform of our bylaws, subject to the condition of the consummation of our Proposed Privatization, to include, among other things:
· | the creation of a special class preferred share (golden share) exclusively owned by the State of São Paulo; |
· | the inclusion of a voting right limit, so that no shareholder or group of shareholders may exercise votes corresponding to more than 30% of the total votes conferred by common shares in each resolution; |
· | the inclusion of poison pill provisions to be triggered if any shareholder or group of shareholders holds more than 30% of our capital stock; |
· | the alteration of the composition of our Board of Directors, which will now have nine members, of which at least three are considered independent, pursuant to the Novo Mercado Regulation. Furthermore, the State of São Paulo will be prohibited from nominating more than three members to the Board of Directors, except for the nominations of independent members; |
· | the nomination of members to the Board of Directors to be conducted by means of a slate, without prejudice to Article 141 of Federal Law No. 6,404/1976; and |
· | the creation of the following statutory committees: the Eligibility and Compensation Committee, Sustainability and Corporate Responsibility Committee, and Related Parties’ Transaction Committee. |
In respect of the golden share, such share will be automatically extinguished if the State of São Paulo ceases to hold common shares representing at least 10% of our capital stock.
The poison pill provisions oblige any shareholder or group of shareholders who becomes the holder of shares corresponding to more than 30% of the total votes conferred by common shares in each resolution to make a public offering for the acquisition of all of our issued shares at a price per share that cannot be lower than the higher of (i) 200% of the issuance price of shares in our most recent capital increase carried out through a public offering within the 36 months preceding the date on which the public offering becomes mandatory, and (ii) 200% of the weighted average unit price of the our issued shares on the stock exchange where the largest volume of our shares is traded during the 90 trading days preceding the date of acquisition or the event that triggered the obligation to carry out the public offering.
**
Dividends and Dividend Policy
The following discussion should be read in conjunction with “Dividends and Dividend Policy” of our 2023 Form 20-F:
In addition to the provisions in our bylaws which entitle our ordinary shareholders to a mandatory minimum dividend of an amount equal to not less than 25.0% of our adjusted net profit, there are also provisions allowing for additional distribution of up to (i) 50.0% of our adjusted net profit for the fiscal years ending December 31, 2026 and 2027, (ii) 75.0% of our adjusted net profit for the fiscal years ending December 31, 2028 and 2029, and (iii) 100.0% of our adjusted net profit for the fiscal years ending December 31, 2030 onwards, subject to the further conditions as set out in our dividend policy.
For the fiscal years ending December 31, 2024, and December 31, 2025, our common shares will be entitled to the mandatory minimum dividend.
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The distribution of dividends exceeding the mandatory distribution may be subject to and/or conditional upon: (i) the U Factor, which may impact the maximum percentage of dividend distribution; and (ii) our financial leverage ratio, which must be equal to or less than 3.25 for the respective fiscal year.
Financing Agreements
The following discussion should be read in conjunction with “Indebtedness Financing” of our 2023 Form 20-F:
· | On April 26, 2024, we repaid our entire debt in the amount of R$48.3 million under the financing agreement granted by with FINEP. |
· | In May 2024, the first series of our 23rd issuance of debentures matured. |
· | On June 3, 2024, our 12th issuance of debentures was fully repaid. |
Financial Derivative Contracts
We entered into global derivative contracts (“CGDs”) with six selected financial institutions: Bank of America Merrill Lynch Banco Múltiplo S.A., Banco BTG Pactual S.A., Citibank, N.A. – Brazilian Branch, Itaú Unibanco S.A., Banco J.P. Morgan S.A., and Banco Santander (Brasil S.A.). The purpose of these contracts is to (i) reduce our exposure to foreign currencies in relation to our outstanding debts denominated in U.S. dollars of US$531 million against exchange rate fluctuations and (ii) mitigate the impacts of these fluctuations on our economic and financial results. We entered into derivative transactions under these CGDs with five financial institutions between April 10, 2024, and April 16, 2024, namely: Bank of America Merrill Lynch Banco Múltiplo, Citibank, N.A. – Brazilian Branch, Itaú Unibanco S.A., Banco J.P. Morgan S.A., and Banco Santander (Brasil S.A.).
Interruption of Services in the Municipality of Igarapava
On June 3, 2024, our services in the Municipality of Igarapava were interrupted and transitioned to a new concessionaire. The net book value of assets related to this municipality was R$11.4 million. The compensation amount calculated by ARSESP is R$57.2 million, as of December 31, 2021, for which the new concessionaire made a judicial deposit. The Municipality of Igarapava and the new concessionaire are currently engaged in a legal dispute over this amount.
Government Regulations Applicable to our Contracts
ANA Standards
On May 8, 2024, ANA published Resolution No. 192, which revoked Resolution No. 106 and approved Reference Standard No. 8, which provides for progressive targets for the universalization of water supply and sanitation, access indicators, and evaluation system. For 2024, the following topics and discussions are planned by ANA:
· | tariff structure for water and sewage services; |
· | tariff adjustment for water and sewage services; and |
· | criteria for private regulatory accounting for water supply and sanitation services. |
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Policy on Duties and Responsibilities
On June 19, 2024, our Policy on Duties and Responsibilities was approved by our Board of Directors. This policy will come into effect upon the consummation of our Proposed Privatization, as per State Law No. 17,853/2023, and will remain in effect for an indefinite period.
The Policy on Duties and Responsibilities aims to: (i) detail and, where applicable, establish the approval authorities for certain matters within the competence of our Board of Directors and Executive Board, in accordance with our bylaws; (ii) strengthen our corporate governance by separating powers to ensure appropriate independence in business decision-making; (iii) minimize, among other things, the risks of actions and documents being approved beyond the established limits and the delegation of powers beyond what is permitted in terms of position/function; and (iv) prevent cases of error, fraud, or corrupt practices.
The main highlights in respect of the Policy on Duties and Responsibilities are set out below:
Board of Directors
According to Article 16, items XVI and XVII of our bylaws, our Board of Directors is responsible for: (i) pre-authorizing the execution of any legal transactions where the amount involved exceeds R$100.0 million, including, among other things, loans and financings, partnerships, and judicial, administrative or arbitral demands; (ii) pre-authorizing the entering into strategic consulting service contracts where the amount involved exceeds R$5.0 million; and (iii) pre-authorizing sponsorships, institutional and financial support where the amount involved exceeds R$1.0 million.
It is also the responsibility of the Board of Directors to approve (i) any real or fiduciary guarantees of any nature to be entered into by us, including mortgages, pledges, fiduciary alienation in guarantee, as well as anything outside of our regular course of business; and (ii) the disposal, acquisition, sale, or encumbrance of our assets. They are also tasked with (i) approving the provisions of the Policy on Duties and Responsibilities and its revisions; (ii) approving (or rejecting) matters defined to be subject to the competence of the Board of Directors; and (iii) establish the delegation of powers to our Executive Board.
Executive Board
According to Article 22, item IV of our bylaws, it is the responsibility of our Executive Board to pre-authorize the execution of any legal transactions where the amount involved is equal to or greater than R$10.0 million, as well as contractual amendments which would raise the total amount of a contract to equal to or greater than R$10.0 million, without prejudice to the powers attributed to our Board of Directors and the General Meeting by law, our bylaws, or the Policy on Duties and Responsibilities, including, among other things, loans and financings, partnerships, and judicial, administrative or arbitral demands
The responsibilities of the Executive Board, for the purposes of the Policy on Duties and Responsibilities, include: (i) approving or rejecting all matters set out in the Policy on Duties and Responsibilities as being within the competence of our Executive Board; (ii) disseminating the rules and ensuring the applicability of the Policy on Duties and Responsibilities, as well as continuously monitoring its application and adherence; (iii) reporting, whenever requested by our Board of Directors, on all matters related to the Policy on Duties and Responsibilities which are deliberated by the Executive Board, as well as on any authority which has been assigned to other positions; and (iv) monitoring the implementation of governance mechanisms that ensure the control and proper approval of the our operations.
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Policy on Related Party Transactions
On June 19, 2024, our Board of Directors approved our new Policy on Related Party Transactions. This policy will come into effect upon the consummation of our Proposed Privatization, as per State Law No. 17,853/2023, and will remain in effect for an indefinite period.
The main provisions are as follows:
· | on a minimum quarterly basis, all Related Party Transactions (as defined in the Policy on Related Party Transactions) must be reported to our audit committee, which will also assess the transaction and the associated disclosures; |
· | when the Related Party (as defined in the Policy on Related Party Transactions) is a member of our Board of Directors, or the shareholder who appointed such member to the Board of Directors, the Related Party Transaction must also be submitted for approval by our Board of Directors, regardless of the approval provisions set out in the Policy on Related Party Transactions; and |
· | the Related Party Transactions Committee (as defined in the Policy on Related Party Transactions) must include in its work plan the monitoring and verification of compliance with the Policy on Related Party Transactions. |
Additionally, under the terms of the Policy on Duties and Responsibilities and in compliance with the Policy on Related Party Transactions:
(i) | our Board of Directors must approve Related Party Transactions when: (a) the amount involved exceeds R$10.0 million; and (b) the transaction involves members of the Board of Directors or members of any statutory and non-statutory committees which advise the Board of Directors; and |
(ii) | the General Meeting must approve the execution of Related Party Transactions that involve the disposal or contribution of assets to another company if the transaction value amounts to more than 50 percent of our total asset value, as per the latest approved balance sheet. |
These policies are available on our website (ri.sabesp.com.br/governanca-corporativa/estatuto-e-politicas/), which is not incorporated by reference into this interim report.
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EXHIBITS
Exhibit Number | Document Description | ||
15.1 | BDO RCS Auditores Independentes SS Ltda. awareness letter. | ||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report in the Form of 6-K to be signed on its behalf by the undersigned, thereunto duly authorized.
COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO – SABESP
| |||
By: | /s/ Andre Gustavo Salcedo Teixeira Mendes | ||
Name: | Andre Gustavo Salcedo Teixeira Mendes | ||
Title: | Chief Executive Officer
| ||
By: | /s/ Catia Cristina Teixeira Pereira | ||
Name: | Catia Cristina Teixeira Pereira | ||
Title: | Chief Financial Officer and Investor Relations Officer |
June 21, 2024
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Companhia de Saneamento Básico do Estado de São Paulo-SABESP
AND SUBSIDIARIES
Interim CONSOLIDATED Financial Statements
As of March 31, 2024, and for the three-month periods ended March 31, 2024, and 2023.
Contents | |
Review Report of BDO RCS Auditores Independentes SS Ltda. for the three-month period ended March 31, 2024, dated May 9, 2024 (PCAOB 5485) | F-3 |
Unaudited Condensed Consolidated Interim Statements of Financial Position as of March 31, 2024 and December 31, 2023 | F-4 |
Unaudited Condensed Consolidated Interim Statements of Income for the three-month periods ended March 31, 2024 and 2023 | F-6 |
Unaudited Condensed Consolidated Interim Statements of Comprehensive Income for the three-month periods ended March 31, 2024 and 2023 | F-7 |
Unaudited Condensed Consolidated Interim Statements of Changes in Equity for the three-month periods ended March 31, 2024 and 2023 | F-8 |
Unaudited Condensed Consolidated Interim Statements of Cash Flows for the three-month periods ended March 31, 2024 and 2023 | F-9 |
Notes to the Unaudited Condensed Consolidated Interim Financial Statements | F-11 |
F-1 |
Companhia de Saneamento Básico do Estado
de São Paulo - SABESP
Unaudited Condensed Consolidated Interim Financial Statements as of March 31, 2024
And for the three months ended
F-2 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareholders and Board of Directors
Companhia de Saneamento Básico do Estado de São Paulo- SABESP
São Paulo – SP
Results of Review of Condensed Consolidated Interim Financial Statements
We have reviewed the condensed consolidated statement of financial position of Companhia de Saneamento Básico do Estado de São Paulo - SABESP (the “Company”) as of March 31, 2024, the related condensed consolidated statements of income, comprehensive income, changes in equity and cash flows for the three-month period ended March 31, 2024, and the related notes (collectively referred to as the “condensed consolidated interim financial statements”) included in the accompanying Securities and Exchange Commission Form 6-K for the period ended March 31, 2024. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements referred to above for them to be in conformity with International Accounting Standard (IAS) 34 - Interim Financial Reporting, as issued by the International Accounting Standards Board (IASB).
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (“PCAOB”), the consolidated statement of financial position of the Company as of December 31, 2023, and the related consolidated statements of income comprehensive income, changes in equity, and cash flows for the year then ended (not presented herein); and in our report dated May 3, 2024, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial position as of December 31, 2023 is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.
Basis for Review Results
This condensed consolidated interim financial statements is the responsibility of the Company’s management. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
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.
São Paulo, June 21, 2024.
/s/BDO RCS Auditores Independentes SS Ltda.
F-3 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Unaudited Condensed Consolidated Interim Statements of Financial Position as of March 31, 2024
Amounts in thousands of reais
Assets | Note | March 31, 2024 | December 31, 2023 |
Current | |||
Cash and cash equivalents | 6 | 2,019,391 | 838,484 |
Financial investments | 7 | 4,172,591 | 2,426,752 |
Trade receivables | 9 (a) | 3,590,432 | 3,584,287 |
Accounts receivable from related parties | 10 (a) | 266,662 | 261,280 |
Inventories | 122,166 | 86,008 | |
Restricted cash | 8 | 45,694 | 54,944 |
Recoverable taxes | 17 (a) | 328,173 | 494,647 |
Other assets | 74,586 | 37,048 | |
Total current assets | 10,619,695 | 7,783,450 | |
Noncurrent | |||
Trade receivables | 9 (a) | 345,801 | 272,436 |
Accounts receivable from related parties | 10 (a) | 932,308 | 935,272 |
Escrow deposits | 124,740 | 130,979 | |
Deferred income tax and social contribution | 18 (a) | 115,285 | 98,076 |
Water and Basic Sanitation National Agency – ANA | 1,879 | 2,673 | |
Other assets | 162,684 | 159,017 | |
Investments | 11 | 170,529 | 161,863 |
Investment properties | 12 | 46,666 | 46,678 |
Contract assets | 13 | 7,582,725 | 7,393,096 |
Intangible assets | 14 | 44,459,122 | 44,012,858 |
Property, plant and equipment | 15 | 484,312 | 474,559 |
Total noncurrent assets | 54,426,051 | 53,687,507 | |
Total assets | 65,045,746 | 61,470,957 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F-4 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Unaudited Condensed Consolidated Interim Statements of Financial Position as of March 31, 2024
Amounts in thousands of reais
Liabilities and equity | Note | March 31, 2024 | December 31, 2023 |
Current | |||
Trade payables and contractors | 490,494 | 456,215 | |
Borrowings and financing | 16 | 2,716,361 | 2,616,406 |
Labor and social obligations | 20 | 742,587 | 807,440 |
Taxes and contributions | 17 (b) | 619,028 | 511,972 |
Interest on capital | 23 (b) | 837,391 | 837,391 |
Provisions | 19 (a) | 1,085,976 | 1,064,367 |
Services payable | 22 | 838,703 | 750,732 |
Public-Private Partnership - PPP | 14 (d) | 435,671 | 487,926 |
Program Contract Commitments | 20,896 | 21,969 | |
Other liabilities | 870,394 | 853,424 | |
Total current liabilities | 8,657,501 | 8,407,842 | |
Noncurrent | |||
Borrowings and financing | 16 | 19,307,946 | 16,919,944 |
Deferred Cofins and PASEP | 169,265 | 164,097 | |
Provisions | 19 (a) | 777,225 | 762,065 |
Pension plan obligations | 21 | 2,131,230 | 2,142,871 |
Public-Private Partnership - PPP | 14 (d) | 2,787,032 | 2,798,688 |
Program Contract Commitments | 12,139 | 12,047 | |
Other liabilities | 522,737 | 406,027 | |
Total non-current liabilities | 25,707,574 | 23,205,739 | |
Total liabilities | 34,365,075 | 31,613,581 | |
Equity | |||
Capital stock | 15,000,000 | 15,000,000 | |
Earnings reserves | 14,711,014 | 14,711,014 | |
Retained earnings | 823,295 | - | |
Other comprehensive income | 146,362 | 146,362 | |
Total equity | 23 | 30,680,671 | 29,857,376 |
Total equity and liabilities | 65,045,746 | 61,470,957 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F-5 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Unaudited Condensed Consolidated Interim Income Statements for three months ended March 31, 2024 and 2023
Amounts in thousands of reais
Note | March 31, 2024 | March 31, 2023 | |
Net operating revenue | 26 | 6,560,246 | 5,698,369 |
Operating costs | 27 | (3,975,427) | (3,653,723) |
Gross profit | 2,584,819 | 2,044,646 | |
Selling expenses | 27 | (210,087) | (225,657) |
Allowance for doubtful accounts | 9 (c) | (190,518) | (162,805) |
Administrative expenses | 27 | (538,138) | (284,679) |
Other operating income (expenses), net | 29 | 7,086 | 14,634 |
Equity results of investments in affiliaties | 11 | 8,893 | 6,334 |
Profit from operations before financial income (expenses) and income tax and social contribution | 1,662,055 | 1,392,473 | |
Financial expenses | 28 | (592,103) | (562,471) |
Financial revenues | 28 | 247,575 | 219,320 |
Exchange result, net | 28 | 6,333 | 83,623 |
Financial result, net | (338,195) | (259,528) | |
Profit before income tax and social contribution | 1,323,860 | 1,132,945 | |
Income tax and social contribution | |||
Current | 18 (c) | (517,774) | (383,488) |
Deferred | 18 (c) | 17,209 | (2,245) |
Total Income tax and social contribution | (500,565) | (385,733) | |
Profit for the year | 823,295 | 747,212 | |
Earnings per share – basic and diluted (in reais) | 24 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F-6 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Unaudited Condensed Consolidated Interim Statements of Comprehensive Income for three months ended March 31, 2024 and 2023
Amounts in thousands of reais
March 31, 2024 | March 31, 2023 | |
Profit for the year | 823,295 | 747,212 |
Other comprehensive income | - | - |
Items which will not be subsequently reclassified to the income statement: | ||
Actuarial gains and (losses) on defined benefit Plans, net of income tax | - | - |
Total comprehensive income for the year | 823,295 | 747,212 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F-7 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Unaudited Condensed Consolidated Interim Statements of Changes in Equity for the
Periods ended March 31, 2024 and 2023
Amounts in thousands of reais
Earnings reserves | ||||||||
Note | Capital stock | Legal Reserve | Investment reserve | Complementary minimum dividend | Retained earnings | Other comprehensive loss | Total | |
Balances as of December 31, 2022 | 23 | 15,000,000 | 1,688,428 | 10,390,535 | 76,927 | - | 177,643 | 27,333,533 |
Net income for the year | - | - | - | - | 747,212 | - | 747,212 | |
Actuarial gains (losses) | - | - | - | - | - | - | - | |
Total comprehensive income for the year | - | - | - | - | 747,212 | 177,643 | 28,080,745 | |
Legal reserve | - | - | - | - | - | - | - | |
Balances as of March 31, 2023 | 23 | 15,000,000 | 1,688,428 | 10,390,535 | 76,927 | 747,212 | 177,643 | 28,080,745 |
Balances as of December 31, 2023 | 23 | 15,000,000 | 1,864,604 | 12,753,363 | 93,047 | - | 146,362 | 29,857,376 |
Net income for the year | - | - | - | - | 823,295 | - | 823,295 | |
Actuarial gains (losses) | - | - | - | - | - | - | - | |
Total comprehensive income for the year | - | - | - | - | 823,295 | 146,362 | 30,680,671 | |
Legal reserve | - | - | - | - | - | - | - | |
Balances as of March 31, 2024 | 23 | 15,000,000 | 1,864,604 | 12,753,363 | 93,047 | 823,295 | 146,362 | 30,680,671 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F-8 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Unaudited Condensed Consolidated Interim Statements of Cash Flows for three months ended March 31, 2024 and 2023
Amounts in thousands of reais
March 31, 2024 | March 31, 2023 | |
Cash flow from operating activities | ||
Profit before income tax and social contribution | 1,323,860 | 1,132,945 |
Adjustments for: | ||
Depreciation and amortization | 773,785 | 657,145 |
Residual value of property, plant and equipment, intangible assets and investment properties written-off | 918 | 3,515 |
Allowance for doubtful accounts | 190,518 | 162,805 |
Provisions and inflation adjustment of provisions | 83,945 | 70,031 |
Interest calculated on borrowings and financing payable | 344,775 | 316,805 |
Inflation adjustment and exchange (losses) gains on borrowings and financing | 47,701 | (13,316) |
Interest and inflation adjustments on liabilities | 5,271 | 6,915 |
Interest and inflation adjustments on assets | (60,490) | (28,976) |
Finance charges from customers | (109,237) | (95,653) |
Construction margin on intangible assets arising from concession agreements | (30,055) | (26,519) |
Provision for Consent Decree (TAC) and Knowledge Retention Program (PRC) | (107,796) | (345) |
Equity results of investments in affiliaties | (8,893) | (6,334) |
Interest and monetary adjustments on PPP | 145,823 | 123,045 |
Transfer to the São Paulo Municipal Government | 174,673 | 155,387 |
Pension plan obligations | 48,879 | 51,921 |
Other adjustments | 4,346 | 4,119 |
Total Adjustments | 2,828,023 | 2,513,490 |
Changes in assets | ||
Trade receivables | (154,632) | (183,680) |
Accounts receivable from related parties | 6,553 | 10,172 |
Inventories | (36,158) | 6,951 |
Recoverable taxes | 166,474 | (23,531) |
Escrow deposits | 12,497 | (742) |
Other assets | (41,024) | (33,323) |
Changes in liabilities | ||
Trade payables and contractors | (419,392) | (414,033) |
Services payable | (86,703) | (274,097) |
Accrued payroll and related taxes | 33,630 | (2,630) |
Taxes and contributions payable | (85,314) | (225,360) |
Deferred Cofins and Pasep | 5,168 | 1,591 |
Provisions | (47,176) | (31,604) |
Pension plan obligations | (60,520) | (58,324) |
Other liabilities | 74,993 | (232,389) |
Cash generated from operations | (631,604) | (1,460,999) |
Interest paid | (473,596) | (543,850) |
Income tax and social contribution paid | (325,403) | (113,335) |
Net cash generated from operating activities | 1,397,420 | 395,306 |
Cash flows from investing activities | ||
Acquisition of contract assets and intangible assets | (571,410) | (570,332) |
Restricted cash | 9,250 | (10,827) |
Financial investments | (1,706,738) | 28,560 |
Purchase of property, plant and equipment | (15,911) | (30,954) |
Net cash used in investing activities | (2,284,809) | (583,553) |
Cash flows from financing activities | ||
Proceeds from loans | 2,939,695 | 121,611 |
Payment of loans | (660,026) | (716,239) |
Public-Private Partnership - PPP | (209,734) | (208,764) |
Program Contract Commitments | (1639) | (39,396) |
Net cash generated by (used in) financing activities | 2,068,296 | (842,788) |
Increase / (decrease) in cash and cash equivalents | 1,180,907 | (1,031,035) |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F-9 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Unaudited Condensed Consolidated Interim Statements of Cash Flows for three months ended March 31, 2024 and 2023
Amounts in thousands of reais
Represented by: | ||
Cash and cash equivalents at the beginning of the period | 838,484 | 1,867,485 |
Cash and cash equivalents at the end of the period | 2,019,391 | 836,450 |
Increase / (decrease) in cash and cash equivalents | 1,180,907 | (1,031,035) |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-10 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
1 | Operations |
Companhia de Saneamento Básico do Estado de São Paulo (SABESP or Company) is a mixed-capital company headquartered in the municipality of São Paulo, at Rua Costa Carvalho, 300, CEP 05429-900, controlled by the São Paulo State. The Company is engaged in the provision of basic and environmental sanitation services in the São Paulo State, and supplies treated water and sewage services on a wholesale basis.
In addition to providing basic sanitation services in the São Paulo State, SABESP may perform 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 March 31, 2024, the Company operated water and sewage services in 376 municipalities of the São Paulo State, including the Municipality of Olímpia, which started being operated by the Company on December 11, 2023, of which 351 of these municipalities have already signed contracts, according to Law 11,445/2007. Most of these municipalities’ operations are based on 30-year concession, program, and service 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:
Schedule of summary of the contractual | |||
March 31, 2024 | December 31, 2023 | March 31, 2023 | |
Municipalities that have already signed contracts: | 351 | 351 | 351 |
Balance – intangible and contract assets | 49,485,788 | 48,759,219 | 45,931,674 |
Percentage of intangible and contract assets | 95.10% | 95.12% | 94.79% |
Revenue from sanitation services (excluding construction revenue) | 5,384,173 | 20,510,427 | 4,678,421 |
Percentage of revenue from sanitation services (excluding construction revenue) | 95.11% | 95.35% | 95.30% |
Other Municipalities - Olímpia: | 1 | 1 | - |
Balance – intangible and contract assets | 146,715 | 147,589 | - |
Percentage of intangible and contract assets | 0.28% | 0.29% | - |
Revenue from sanitation services (excluding construction revenue) | 8,525 | 3,477 | - |
Percentage of revenue from sanitation services (excluding construction revenue) | 0.15% | 0.02% | - |
Municipalities with expired contracts: | 1 | 1 | 1 |
Balance – intangible and contract assets | 11,429 | 11,309 | 11,443 |
Percentage of intangible and contract assets | 0.02% | 0.02% | 0.02% |
Revenue from sanitation services (excluding construction revenue) | 4,361 | 17,559 | 3,822 |
Percentage of revenue from sanitation services (excluding construction revenue) | 0.08% | 0.08% | 0.08% |
Municipalities with concession agreements due by 2030: | 23 | 23 | 23 |
Balance – intangible and contract assets | 1,045,481 | 1,051,209 | 1,064,090 |
Percentage of intangible and contract assets | 2.02% | 2.05% | 2.20% |
Revenue from sanitation services (excluding construction revenue) | 223,943 | 833,418 | 189,704 |
Percentage of revenue from sanitation services (excluding construction revenue) | 3.96% | 3.87% | 3.86% |
Municipality of São Paulo: | |||
Percentage of intangible and contract assets | 43.08% | 43.40% | 43.21% |
Percentage of revenue from sanitation services (excluding construction revenue) | 43.49% | 44.95% | 44.53% |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-11 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
The Company's shares have been listed on the Novo Mercado segment of B3 under ticker SBSP3 since April 2002 and on the New York Stock Exchange (NYSE) as Level III American Depositary Receipts (“ADRs”), under ticker SBS, 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, Paulista Geradora de 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 votes 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.
· | Privatization and Proposal of New Concession Agreements |
As of September 18, 2023, the Board of the State Privatization Program (CDPED) resolved to recommend 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.
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 State of São Paulo send 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, indicating that the following guidelines will be observed under the New Agreement to be executed with these municipalities:
(a) the anticipation of achieving the universalization goals established in the New Sanitation Framework for 2029, subject to any shorter deadlines contractually outlined;
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-12 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
(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 entire municipal territory; and
(d) the detailing of investments to be made in each municipality.
As of December 11, 2023, State Law 17,853 was enacted. It authorized the Executive Branch of the 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 in all municipalities of the State served by the 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;
(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) CITI; and iv) UBS - 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 indication 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 accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-13 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
As informed by the Company in a Material Fact released to its shareholders on April 30, 2024, the São Paulo State Government, through the Secretariat of Environment, Infrastructure, and Logistics (SEMIL), together with the Investment Partnerships Secretariat (SPI), published the result of Public Consultation 01/2024/GS regarding the documents made available within the scope of the Company's Privatization process.
In this context, the São Paulo São Paulo State Government submitted the final versions of the following documents to the municipalities comprising URAE1-Southeast: (a) Draft of the Concession Agreement between URAE 1 - Southeast and the Company and respective exhibits; (b) Draft of the Charter of URAE 1 - Southeast’s Decision-Making Board; and (c) Draft of the Regional Basic Sanitation Plan under Article 17 of Federal Law 11,445/2007.
The next steps of the privatization process consist of the approval and signing of said documents within the scope of URAE 1 - Southeast, followed by approval from the Board of the State Privatization Program (CDPED) of the final conditions of the public offering.
Management expects that the funds raised with the improved water security from the works carried out, the generation of 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 Unaudited Condensed Consolidated Interim Financial Statements was approved by management on June 21, 2024.
2 | Basis of preparation and presentation of the Unaudited Condensed Consolidated Interim Financial Statements |
Presentation of the Unaudited Condensed Consolidated Interim Financial Information
The Unaudited Condensed Consolidated Interim Financial Statements have been prepared and presented in accordance with International Accounting Standard 34, Interim Financial Reporting, within the framework of International Financial Standards as issued by the International Accounting Standards Board.
The Unaudited Condensed Consolidated Interim Financial Statements do not include all the notes and reporting required by the standards for the annual financial statements, and accordingly, should be read in conjunction with the Company’s Annual Report on Form 20-F for the year ended December 31, 2023 as filed with the SEC on May 3rd, 2024. Therefore, in these Unaudited Condensed Consolidated Interim Financial Statements, the notes below were either not presented or are not as detailed as and/or have the same references as those in the annual financial statements (according to numerical references):
i. | Summary of significant accounting policies (Note 3); |
ii. | Changes in accounting practices and disclosures (Note 4); |
iii. | Risk management – Financial instruments (Note 5.4); |
iv. | Key accounting estimates and judgments (Note 6); |
v. | Related-party balances and transactions (Note 11); |
vi. | Investments (Note 12); |
vii. | Intangible assets (Note 15); |
viii. | Borrowings and financing (Note 17); |
ix. | Deferred taxes and contributions (Note 19); |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-14 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
x. | Provisions (Note 20); |
xi. | Pension plan obligations (Note 22); |
xii. | Equity (Note 24); |
xiii. | Insurance (Note 27); |
All material information related to the Unaudited Condensed Consolidated Interim Financial Statements, and this information alone, is being disclosed and corresponds to the information used by the Company’s Management in its administration.
The amounts disclosed in the Notes to the Unaudited Condensed Consolidated Interim Financial Statements are in thousands of Brazilian reais, unless otherwise stated.
3 | Summary of material information on accounting policies |
The significant accounting policy information used in the preparation of the Unaudited Condensed Consolidated Interim Financial Statements as of March 31, 2024, are consistent with those used to prepare the Annual Financial Statements for the year ended December 31, 2023, disclosed in Note 3 of such financial statements.
4 | Risk management |
4.1 | 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 financial performance.
The Company has not utilized derivative instruments in any of the reported periods.
(a) | Market risk |
Foreign currency risk
Foreign currency 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 Yen.
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 losses due to exchange rate fluctuations that would impact liability balances of foreign currency-denominated borrowings and financing 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$ 2,671,887 as of March 31, 2024 (R$ 2,785,853 as of December 31, 2023), is indexed to the U.S. dollar and Yen. The exposure to exchange risk is as follows:
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-15 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Schedule of exposure to exchange risk | ||||
March 31, 2024 | December 31, 2023 | |||
Foreign currency (in thousands) | R$ | Foreign currency (in thousands) | R$ | |
Borrowings and financing – US$ | 272,009 | 1,359,011 | 280,188 | 1,356,474 |
Borrowings and financing – Yen | 39,077,331 | 1,289,943 | 41,078,385 | 1,405,702 |
Interest and charges from borrowings and financing – US$ | 20,264 | 15,510 | ||
Interest and charges from borrowings and financing – Yen | 2,669 | 8,167 | ||
Total exposure | 2,671,887 | 2,785,853 | ||
Borrowing cost – US$ | (38,404) | (37,520) | ||
Borrowing cost – Yen | (2,391) | (2,442) | ||
Total foreign currency-denominated borrowings (Note 16) | 2,631,092 | 2,745,891 |
The 4.2% decrease in the balance of the foreign currency-denominated debt from March 31, 2024, compared to December 31, 2023, was mainly impacted by the depreciation of the Yen against the Brazilian real and amortizations in the period. The table below shows the prices and exchange variations in the period:
Schedule of prices and exchange variations | |||
March 31, 2024 | December 31, 2023 | Var. | |
US$ | R$ 4.9962 | R$ 4.8413 | 3.2% |
Yen | R$ 0.03301 | R$ 0.03422 | -3.5% |
Borrowings and financing fell by R$ 6,335 from January to March 2024 (a decrease of R$ 83,825 from January to March 2023), due to exchange rate changes. See Note 16 (ii). As of March 31, 2024, if the Brazilian real had depreciated or appreciated by 10 percentage points, in addition to the impacts already mentioned above, against the US dollar and Yen with all other variables held constant, the effects on the result before funding costs and taxes on the three-month period ended March 31, 2024 would have been R$ 267,189 (R$ 266,878 for the three-month period ended March 31, 2023), 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.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-16 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Schedule of scenario of effect on the income statement | |
Probable scenario | |
(*) | |
Net currency exposure as of March 31, 2024 in US$ - Liabilities | 272,009 |
US$ rate as of March 31, 2024 | 4.9962 |
Exchange rate estimated according to the scenario | 4.9700 |
Difference between the rates | 0.0262 |
Effect on net financial result R$ - (gain) | 7,127 |
Net currency exposure as of March 31, 2024 in Yen - Liabilities | 39,077,331 |
Yen rate as of March 31, 2024 | 0.03301 |
Exchange rate estimated according to the scenario | 0.03446 |
Difference between the rates | (0.00145) |
Effect on the net financial result R$ - (loss) | (56,662) |
Total effect on the net financial result in R$ - (loss) | (49,535) |
(*) | For the probable scenario in U.S. dollars and Yen, the exchange rates estimated for March 31, 2025 were used, according to the Focus-BACEN and B3’s Benchmark Rate report, of March 31, 2024, respectively. |
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, it continually monitors market interest rates, 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 | ||
March 31, 2024 | December 31, 2023 | |
CDI (i) | 12,672,245 | 9,966,111 |
TR (ii) | 1,656,774 | 1,684,711 |
IPCA (iii) | 2,927,406 | 3,038,378 |
TJLP (iv) | 1,290,064 | 1,365,806 |
SOFR (v) | 1,359,011 | 1,356,473 |
Interest and charges | 399,957 | 392,906 |
Total | 20,305,457 | 17,804,385 |
(i) | CDI - (Certificado de Depósito Interbancário), an interbank deposit certificate |
(ii) | 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 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-17 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Another risk to which the Company is exposed is the mismatch of inflation adjustment indices of its debts with those of its service revenues. Tariff adjustments of services provided do not necessarily follow the increases in the inflation indexes to adjust borrowings, financing and interest rates affecting indebtedness.
As of March 31, 2024, 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 three-month period ended March 31, 2024 would have been R$ 203,055 (R$ 163,164 for the three-month period ended March 31, 2023), lower or higher, mainly as a result of lower or higher interest expense on floating rate borrowings and financing.
(b) | Credit risk |
Credit risk is related to cash and cash equivalents, financial investments, as well as credit exposures of customers, including 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 exposure to credit risk as of March 31, 2024 is the carrying amount of instruments classified as cash and cash equivalents, financial investments, restricted cash, trade receivables, and accounts receivable from related parties on the balance sheet date. See Notes 6, 7, 8, 9, and 10.
Regarding the financial assets held with financial institutions, the credit quality was assessed by reference to external credit ratings (if available) or historical information about the bank’s default rates. For the credit quality of the banks, such as deposits and financial investments, the Company assesses the rating published by three main international agencies (Fitch, Moody's and S&P), as follows:
Schedule of credit risk | |||
Banks | Fitch | Moody's | Standard Poor's |
Banco do Brasil S/A | AAA(bra) | AAA.br | - |
Banco Santander Brasil S/A | - | AAA.br | brAAA |
Brazilian Federal Savings Bank | AAA(bra) | AAA.br | brAAA |
Banco Bradesco S/A | AAA(bra) | AAA.br | brAAA |
Banco Itaú Unibanco S/A | AAA(bra) | AAA.br | - |
Banco BV | - | AA.br | brAAA |
Banco BTG Pactual S/A | AAA(bra) | AAA.br | brAAA |
The rating assessment disclosed by Fitch for deposit transactions and financial investments in local currency is as follows:
Schedule of rating assessment | ||
March 31, 2024 | December 31, 2023 | |
Cash and cash equivalents and financial investments | ||
AAA(bra) | 5,859,198 | 2,940,690 |
Others (*) | 332,784 | 324,546 |
6,191,982 | 3,265,236 |
(*) | As of March 31, 2024, this category includes R$ 329,381 (R$ 322,241 as of December 31, 2023) referring to Banco BV, current accounts, and financial investments, which are not rated by Fitch. |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-18 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
(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 management of this risk considers the assessment of its liquidity requirements to ensure it has sufficient cash to meet its operating and capital expenditure requirements.
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 determined by the projections mentioned above.
The table below shows the financial liabilities, by maturity, including the installments of principal and future interest. For agreements with floating interest rates, the interest rates used correspond to the base date of March 31, 2024.
Schedule of liquidity risk | |||||||
2024 | 2025 | 2026 | 2027 | 2028 | 2029 onwards | Total | |
As of March 31, 2024 | |||||||
Liabilities | |||||||
Borrowings and financing | 3,051,567 | 3,773,001 | 3,368,294 | 3,278,126 | 2,418,568 | 13,595,562 | 29,485,118 |
Trade payables and contractors | 490,494 | - | - | - | - | - | 490,494 |
Services payable | 838,703 | - | - | - | - | - | 838,703 |
Public-Private Partnership - PPP | 432,216 | 446,524 | 461,438 | 476,850 | 492,777 | 6,057,282 | 8,367,087 |
Program Contract Commitments | 20,310 | 1,232 | 1,232 | 1,232 | 1,232 | 11,702 | 36,940 |
Total | 4,833,290 | 4,220,757 | 3,830,964 | 3,756,208 | 2,912,577 | 19,664,546 | 39,218,342 |
Cross default
The Company has borrowings and financing agreements including cross-default clauses, i.e., the early maturity of any debt may imply the early maturity of these agreements. The indicators are continuously monitored to avoid the execution of these clauses, and the most restrictive ones are shown in Note 16 (c).
(d) | Sensitivity analysis on interest rate risk |
The table below shows the sensitivity analysis of the financial instruments, prepared under IFRS 7. To evidence the balances of main financial assets and liabilities, calculated at a rate projected for the twelve-month period after March 31, 2024, or until the final settlement of each contract, whichever occurs first, considering a probable scenario.
The purpose of the sensitivity analysis is to measure the impact of changes in the market on the financial instruments, considering constant all other variables. At the time of settlement, the amounts may be different from those presented, due to the estimates used in the measurement.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-19 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Schedule of sensitivity analysis of the financial instruments | ||
March 31, 2024 | ||
Indicators | Exposure | Probable scenario |
Assets | ||
CDI | 6,162,220 | 9.8500%(**) |
Financial income | 606,979 | |
Liabilities | ||
CDI | (12,672,245) | 9.8500%(**) |
Interest to be incurred | (1,248,216) | |
CDI net exposure | (6,510,025) | (641,237) |
Liabilities | ||
TR | (1,656,774) | 0.0048%(**) |
Expenses to be incurred | (80) | |
IPCA | (2,927,406) | 3.4600%(*) |
Expenses to be incurred | (101,288) | |
TJLP | (1,290,064) | 6.3800%(*) |
Interest to be incurred | (82,306) | |
SOFR (***) | (1,359,011) | 5.0397%(***) |
Interest to be incurred | (68,490) | |
Total expenses to be incurred, net | (893,401) | |
(*) Source: BACEN and LCA as of March 31, 2024 | ||
(**) Source: B3 of March 31, 2024 | ||
(***) Source: Bloomberg |
4.2 | Capital management |
The Company’s objectives when managing capital are to ensure the Company’s ability to continue increasing investments in infrastructure, provide returns for shareholders and benefits for other stakeholders, and maintain an optimal capital structure to reduce the cost of capital.
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 financial position.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-20 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Schedule of capital management | ||
March 31, 2024 | December 31, 2023 | |
Total borrowings and financing (Note 16) | 22,024,307 | 19,536,350 |
(-) Cash and cash equivalents (Note 6) | (2,019,391) | (838,484) |
(-) Financial investments (Note 7) | (4,172,591) | (2,426,752) |
Net debt | 15,832,325 | 16,271,114 |
Total equity | 30,680,671 | 29,857,376 |
Total (shareholders plus providers of capital) | 46,512,996 | 46,128,490 |
Leverage ratio | 34% | 35% |
4.3 | Fair value estimates |
The Company considers that balances from trade receivables (current) and trade payables by carrying amount less impairment approximate their fair values, considering the short maturity. Long-term trade receivables also approximate their fair values, as they are adjusted by inflation and/or will bear contractual interest rates over time.
4.4 | 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 financial instruments included in the amortized cost category comprise cash and cash equivalents, financial investments, restricted cash, trade receivables, balances with related parties, other assets and balances receivable from the Water National Agency (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 were as follows:
Financial Assets
Schedule of estimated fair values of the financial instruments | ||||
March 31, 2024 | December 31, 2023 | |||
Carrying amount | Fair value | Carrying amount | Fair value | |
Cash and cash equivalents | 2,019,391 | 2,019,391 | 838,484 | 838,484 |
Financial investments | 4,172,591 | 4,172,591 | 2,426,752 | 2,426,752 |
Restricted cash | 45,694 | 45,694 | 54,944 | 54,944 |
Trade receivables | 3,936,233 | 3,936,233 | 3,856,723 | 3,856,723 |
ANA | 1,879 | 1,879 | 2,673 | 2,673 |
Other assets | 237,270 | 237,270 | 196,065 | 196,065 |
Additionally, SABESP has financial assets receivable from related parties, totaling R$ 1,198,932 as of March 31, 2024 (R$ 1,196,545 as of December 31, 2023), which were calculated under the conditions negotiated between the related parties. The conditions and additional information related to these financial instruments are disclosed in Note 10. Part of this balance, totaling R$ 1,081,079 (R$ 1,076,174 as of December 31, 2023), 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.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-21 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Financial Liabilities
Schedule of financial liabilities | ||||
March 31, 2024 | December 31, 2023 | |||
Carrying amount | Fair value | Carrying amount | Fair value | |
Borrowings and financing | 22,024,307 | 22,444,692 | 19,536,350 | 19,950,055 |
Trade payables and contractors | 490,494 | 490,494 | 456,215 | 456,215 |
Services payable | 838,703 | 838,703 | 750,732 | 750,732 |
Program Contract Commitment | 33,035 | 33,035 | 34,016 | 34,016 |
Public-Private Partnership - PPP | 3,222,703 | 3,222,703 | 3,286,614 | 3,286,614 |
The criteria adopted to obtain the fair values of borrowings and financing, in preparing the Unaudited Condensed Consolidated Interim Financial Statements as of March 31, 2024, are consistent with those used in the preparation of the Annual Financial Statements for the fiscal year ended December 31, 2023.
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 of this Unaudited Condensed Consolidated Interim Financial Statements, comparison of contractual interest rates with market rates in similar operations at the end of the reporting periods, their nature, and maturity terms.
5 | Key accounting estimates and judgments |
The preparation of the quarterly information requires Management to disclose judgments (except for those that 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 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.
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.
The areas that require a higher level of judgment and greater complexity, as well as assumptions and estimates that are significant for the quarterly information, are: (i) allowance for doubtful accounts; (ii) intangible assets arising from concession agreements and program contracts; (iii) pension plan obligations; (iv) deferred income tax and social contribution; (v) provisions; and (vi) unbilled revenue.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-22 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
6 | Cash and cash equivalents |
Schedule of cash and cash equivalents | ||
March 31, 2024 | December 31, 2023 | |
Cash and banks | 27,042 | 31,187 |
Cash equivalents | 1,992,349 | 807,297 |
Total | 2,019,391 | 838,484 |
Cash and cash equivalents include cash, bank deposits, and high-liquidity short-term financial investments, mainly represented by repurchase agreements, fund shares (accruing 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.
As of March 31, 2024, the average yield of cash equivalents corresponded to 96.67% of CDI (96.25% as of December 31, 2023).
7 | Financial investments |
The Company has financial investments in CDB, with daily liquidity, which it does not intend to use in the next three months, as shown below:
Schedule of financial investments | ||
March 31, 2024 | December 31, 2023 | |
Banco BV | 329,380 | 322,240 |
Banco Bradesco S/A | 657,631 | 643,445 |
Banco BTG Pactual S/A | 459,170 | 449,241 |
Banco do Brasil S/A | 2,726,410 | 1,011,826 |
4,172,591 | 2,426,752 |
As of March 31, 2024, the average yield of the financial investments corresponded to 103.3% of CDI (103.3% as of December 31, 2023).
8 | Restricted cash |
Schedule of restricted cash | ||
March 31, 2024 | December 31, 2023 | |
Agreement with the São Paulo Municipal Government (i) | 38,690 | 47,749 |
Brazilian Federal Savings Bank – escrow deposits | 442 | 365 |
Other | 6,562 | 6,830 |
45,694 | 54,944 |
(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 São Paulo Municipal Government (PMSP). |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-23 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
9 | Trade receivables |
(a) | Statement of financial position details |
Schedule of statement of financial position details | ||
March 31, 2024 | December 31, 2023 | |
Private sector: | ||
General (i) and special customers (ii) | 2,687,984 | 2,200,921 |
Agreements (iii) | 177,638 | 839,010 |
2,865,622 | 3,039,931 | |
Government entities: | ||
Municipal | 598,602 | 623,601 |
Federal | 9,938 | 8,036 |
Agreements (iii) | 658,021 | 374,372 |
1,266,561 | 1,006,009 | |
Wholesale customers – Municipal governments: (iv) | ||
Mogi das Cruzes | 4,134 | 4,343 |
São Caetano do Sul | 8,109 | 45,333 |
São Caetano do Sul Agreement | 76,502 | - |
Total wholesale customers – Municipal governments | 88,745 | 49,676 |
Unbilled supply | 1,092,167 | 1,138,316 |
Subtotal | 5,313,095 | 5,233,932 |
Allowance for doubtful accounts | (1,376,862) | (1,377,209) |
Total | 3,936,233 | 3,856,723 |
Current | 3,590,432 | 3,584,287 |
Noncurrent | 345,801 | 272,436 |
Total | 3,936,233 | 3,856,723 |
(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 inflation adjustment and interest, according to the agreements; and |
(iv) | Wholesale basis customers - municipal governments. This balance refers to the sale of treated water to municipalities, which are responsible for distributing to, billing, and charging final customers. |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-24 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
(b) | The aging of trade receivables is as follows: |
Schedule of the aging trade receivables | ||
March 31, 2024 | December 31, 2023 | |
Current | 2,852,858 | 2,723,975 |
Past-due: | ||
Up to 30 days | 573,435 | 627,986 |
From 31 to 60 days | 265,847 | 271,476 |
From 61 to 90 days | 189,807 | 181,639 |
From 91 to 120 days | 142,875 | 127,421 |
From 121 to 180 days | 304,359 | 290,610 |
From 181 to 360 days | 179,209 | 57,289 |
Over 360 days | 804,705 | 953,536 |
Total past-due | 2,460,237 | 2,509,957 |
Total | 5,313,095 | 5,233,932 |
(c) | Allowance for doubtful accounts |
Schedule of allowance for doubtful accounts | ||
Changes in assets | January to March 2024 | January to March 2023 |
Balance at the beginning of the period | 1,377,209 | 1,428,517 |
Creation/(reversal) of losses | 40,097 | (8,449) |
Recoveries | (40,444) | (19,627) |
Balance at the end of the period | 1,376,862 | 1,400,441 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-25 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Schedule of estimated reconciliation | ||
Reconciliation of estimated/historical losses at the result | January to March 2024 | January to March 2023 |
Write-offs | (190,285) | (190,138) |
(Losses)/reversal with state entities – related parties | (580) | (743) |
(Losses)/reversal with the private sector/government entities | (40,097) | 8,449 |
Recoveries | 40,444 | 19,627 |
Amount recorded as expense (Note 27) | (190,518) | (162,805) |
The Company does not have customers individually representing 10% or more of its total revenues.
(d) | Registered warrants |
The Company has registered warrants 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 registered warrants, are not recognized due to uncertainties regarding their realization.
As of March 31, 2024, the Company has registered warrants issued in its favor, currently totaling R$ 3,232,377 (R$ 3,085,265 as of December 31, 2023), which, as mentioned above, are fully provisioned at their original value and do not have their respective updates recognized in the quarterly information.
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 third parties.
The Company did not negotiate its registered warrants in the current period or in the comparative year and period, and there are no ongoing negotiations, as follows:
Schedule of registered warrants | ||
Debtor | March 31, 2024 | December 31, 2023 |
Municipality of São Paulo | 3,139,801 | 3,042,927 |
São Paulo State Government | 41,359 | - |
Municipality of Cachoeira Paulista | 15,871 | 15,456 |
Municipality of Agudos | 13,061 | 14,964 |
Other | 22,285 | 11,918 |
Total | 3,232,377 | 3,085,265 |
Additionally, the Company negotiated registered warrants for overdue bills with the municipalities of Guarulhos, Santo André, and Mauá in previous fiscal years, which are currently suspended as they serve as collateral for the fulfillment of contracts entered into with the municipalities.
As of May 09, 2024, the Board of Directors approved the adherence to the notice for agreement 1/2024 from the São Paulo Municipal Government (PMSP), whose adherence deadline ends on June 30, 2024. The objective of said Notice is the presentation of direct agreement proposals by holders of registered warrants.
For the adherence to be effective, approval by the Registered Warrants Conciliation Chamber of the Municipal Attorney General Office (PGM) and other subsequent procedures according to the Notice are required, the accuracies of which are still considered uncertain. SABESP may withdraw the proposal at any time, provided it is before the payment made by the Board of Registered Warrants Executions and Calculations of the São Paulo State Court of Justice (Depre), as provided in the Notice.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-26 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
The Company does not expect changes in the recognition method of the municipality of São Paulo's registered warrants until such adherence becomes effective.
10 | Related-party balances and transactions |
(a) | São Paulo State |
(i) | Accounts receivable, interest on capital, revenue, and expenses |
Schedule of accounts receivable, interest on capital, revenues, and expenses | ||
March 31, 2024 | December 31, 2023 | |
Accounts receivable | ||
Current: | ||
Sanitation services | 167,608 | 169,515 |
Allowance for losses | (51,078) | (50,498) |
Reimbursement of additional retirement and pension benefits paid (G0): | ||
- Monthly flow | 41,929 | 36,241 |
- GESP Agreement – 2015 | 108,203 | 106,022 |
Total current | 266,662 | 261,280 |
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 | 930,947 | 933,911 |
Total noncurrent | 932,308 | 935,272 |
Total receivables | 1,198,970 | 1,196,552 |
Assets: | ||
Sanitation services | 117,891 | 120,378 |
Reimbursement of additional retirement and pension benefits paid (G0) | 1,081,079 | 1,076,174 |
Total | 1,198,970 | 1,196,552 |
Liabilities: | ||
Interest on capital payable | 420,564 | 420,564 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-27 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Schedule of loan agreement through credit facility | ||
January to March 2023 | January to March 2024 | |
Revenue from sanitation services | 162,966 | 186,144 |
Payments from related parties | (167,612) | (186,205) |
Payment received from reimbursement referring to Law 4,819/1958 | (52,593) | (47,816) |
(ii) | isputed amounts |
As of March 31, 2024 and December 31, 2023, the disputed amounts between SABESP and the São Paulo State, referring to additional retirement and pension benefits paid (Law 4,819/1958), totaled R$ 1,605,832 and R$ 1,583,449, respectively, for which allowances for doubtful accounts were created for the total amount.
(iii) | Actuarial Liability |
The Company recognized an actuarial liability corresponding to additional retirement and pension benefits paid to employees, retired employees, and pensioners of the G0 Plan. As of Marcy 31, 2024 and December 31, 2023, the amounts corresponding to such actuarial liability were R$ 2,095,517 and R$ 2,098,622, respectively. For detailed information on additional retirement and pension benefits, see Note 21.
(b) | Use of Reservoirs – EMAE |
Empresa Metropolitana de Águas e Energia S.A. (EMAE) planned to receive 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.
As of October 28, 2016, the Company entered into an agreement based on a Private Transaction Agreement and Other Covenants to fully and completely settle the disputes and SABESP will continue using the reservoirs.
As of March 31, 2024, the balance of the agreement totaled R$ 9,197 and R$ 103,572 (R$ 8,876 and R$ 99,279 as of December 31, 2023), recorded in Other liabilities, under current and noncurrent liabilities, respectively.
(c) | Agreements with reduced tariffs for State Entities that join the Rational Water Use Program (PURA) |
The Company has agreements with government entities related to the São Paulo State Government that benefit them with a 25% discount on water supply and sewage services tariffs when they are not in default. These agreements provide for the implementation of the rational water use program, which provides for water consumption reduction.
(d) | Guarantees |
The São Paulo State provides guarantees for some of the Company’s borrowings and financing and does not charge any related fees. See Note 16.
(e) | Personnel assignment agreement among entities related to the São Paulo State Government |
The Company has personnel assignment agreements with entities related to the State Government, whose expenses are fully charged.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-28 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
From January to March 2024, expenses with employees assigned to other state entities totaled R$ 3,518 (R$ 672 from January to March 2023).
No expenses with employees from other entities assigned to the Company were recorded from January to March 2024 and in the same period in 2023.
(f) | Non-operating assets |
As of March 31, 2024 and December 31, 2023, the Company’s land and lent structures totaled R$ 3,613.
(g) | SABESPREV |
The Company sponsors a defined benefit plan (G1 Plan), which is operated and administered by SABESPREV. The net actuarial liability recognized until March 31, 2024, totaled R$ 35,713 (R$ 44,249 as of December 31, 2023). See Note 21.
(h) | Compensation of the Fiscal Council and Management |
From January to March 2024, expenses related to the compensation of the members of the Fiscal Council appointed by the controlling shareholder and Management members totaled R$ 2,470 (R$ 1,658 from January to March 2023).
From January to March 2024, additional amounts of R$ 540, referring to the executive officers’ bonus, were recorded (R$ 285 from January to March 2023).
(i) | Loan agreement through credit facility |
The Company holds interest in certain Special Purpose Entities (SPEs), in which it does not hold the majority interest but has cast vote and power of veto in some matters but cannot use such power of veto in a way to affect the returns of its investments. Therefore, these SPEs are considered for accounting purposes as joint arrangements.
Águas de Andradina
The Company entered into a loan agreement through a credit facility with SPE Águas de Andradina S/A to finance the operations of that company.
As of March 31, 2024, the balance of principal and interest of this agreement totaled R$ 812 and R$ 2,814, which was recorded in “Other assets” under current and noncurrent assets (R$ 694 and R$ 2,814, respectively, as of December 31, 2023), 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.
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 March 31, 2024, the balance of principal and interest of this agreement totaled R$ 81,059, which was recorded in “Other assets” under noncurrent assets, at CDI + 2% p.a.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-29 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
This agreement was executed on September 26, 2023. The principal and the accumulated interest on the principal must be fully repaid by September 2040.
(j) | FEHIDRO |
The Company has financing agreements under the State Fund for Water Resources (FEHIDRO). These funds will be aimed at the execution of works and sewage services. As of March 31, 2024, the balance of these financings totaled R$ 1,136 (R$ 1,278 as of December 31, 2023).
11 | Investments |
The Company holds interests 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 matters, however, it cannot use such power of veto in a way to affect the returns over the investments, implying a mutually shared control (joint venture – IFRS 11), except when 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 2023 to the Annual Financial Statements as of December 31, 2023.
The Company holds equity interest valued by the equity accounting in the following investees:
Schedule of equity interest valued by the equity | ||||||
Equity | Contribution | Profit (loss) for the period | ||||
March 31, 2024 | December 31, 2023 | January to March 2024 | January to March 2024 | (*) | January to March 2023 | |
Sesamm | 65,511 | 61,275 | - | 4,236 | - | 4,630 |
Águas de Andradina | 35,582 | 34,088 | - | 1,494 | - | 389 |
Águas de Castilho | 13,384 | 12,784 | - | 600 | - | 402 |
Attend Ambiental | 47,823 | 43,263 | - | 4,560 | - | 4,016 |
Aquapolo Ambiental | 112,297 | 102,442 | - | 9,855 | - | 8,610 |
Paulista Geradora de Energia - PGE (**) | 42,917 | 42,307 | 590 | 20 | - | (28) |
Cantareira SP Energia | 10,711 | 10,650 | - | 61 | - | (258) |
FOXX URE-BA Ambiental | 62,430 | 63,309 | - | (295) | (584) | (6,549) |
Infranext Soluções em Pavimentação (***) | 4,699 | 4,699 | - | - | - | (340) |
Sabesp Olímpia | (3,121) | (3,066) | - | (55) | - | - |
(*) | The amount presented refers to changes in the equity of the investee, as its financial statements for the year ended December 31, 2023 were issued after the disclosure of SABESP’s financial statements. |
(**) | In 2023, a contribution of R$ 20,600 was defined, with Servtec and Tecniplan paying R$ 14,860 of this amount in the same year. In 2024, Servtec and Tecniplan paid the remaining amount of R$ 590, with the total paid-in amount corresponding to a 75% equity interest. As of March 31, 2024, SABESP had an outstanding payable amount of R$ 5,150. |
(***) | Infranext’s share capital will be R$ 12,000. As of December 31, 2023, SABESP had an outstanding payable amount of R$ 4,950. The information presented refers to the position as of December 31, 2023, the last balance sheet received. |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-30 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Investments | Equity results of investments | Interest percentage | ||||
March 31, 2024 | December 31, 2023 | January to March 2024 | (*) | March 31, 2024 | December 31, 2023 | |
Sesamm | 23,584 | 22,059 | 1,525 | - | 36% | 36% |
Águas de Andradina | 10,673 | 10,225 | 448 | - | 30% | 30% |
Águas de Castilho | 4,015 | 3,835 | 180 | - | 30% | 30% |
Attend Ambiental | 21,521 | 19,469 | 2,052 | - | 45% | 45% |
Aquapolo Ambiental | 55,025 | 50,196 | 4,829 | - | 49% | 49% |
Paulista Geradora de Energia | 6,866 | 6,861 | 5 | - | 25% | 25% |
Cantareira SP Energia | 5,242 | 5,212 | 30 | - | 49% | 49% |
FOXX URE-BA Ambiental | 12,486 | 12,663 | (60) | (117) | 20% | 20% |
Infranext Soluções em Pavimentação (***) | - | - | - | - | 45% | 45% |
Total | 139,412 | 130,520 | 9,009 | (117) | ||
FOXX URE-BA Ambiental – Fair value (**) | 25,018 | 25,244 | ||||
Other investments | 6,099 | 6,099 | ||||
Overall total | 170,529 | 161,863 |
(*) | The amount presented refers to changes in the equity of the investee, as its financial statements for the year ended December 31, 2023 were issued after the disclosure of SABESP’s financial statements. |
(**) | The amount presented refers to the fair value adjustment in the acquisition of FOXX URE-BA in 2024. |
(***) | The amount of the investee’s loss exceeding the investment was reclassified to Noncurrent Liabilities. |
12 | Investment Properties |
Schedule of investment properties | |||
December 31, 2023 | Depreciation | March 31, 2024 | |
Investment properties | 46,678 | (12) | 46,666 |
December 31, 2022 | Depreciation | March 31, 2023 | |
Investment properties | 46,726 | (12) | 46,714 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-31 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
As of March 31, 2024, the market value of these properties was approximately R$ 393,600 (R$ 393,600 as of December 31, 2023).
13 | Contract asset |
Schedule of contract assets | |||||
December 31, 2023 | Additions (i) | Transfers | Transfers of works to intangible assets (ii) | March 31, 2024 (iii) | |
Total contract asset | 7,393,096 | 1,270,667 | 1,952 | (1,082,990) | 7,582,725 |
As of March 31, 2024 and December 31, 2023, the contract asset had no amounts recognized as leases. Leases were part of construction costs and, since June 2020, additional works had been executed by the Company.
December 31, 2022 | Additions | Transfers | Transfers of works to intangible assets | March 31, 2023 | |
Total contract asset | 8,613,968 | 1,204,867 | 280 | (1,105,061) | 8,714,054 |
As of March 31, 2023, the contract asset included R$ 175,145, recorded as a lease (R$ 276,893 as of December 31, 2022). Leases were part of construction costs and, since June 2020, additional works had been executed by the Company.
(i) | The largest additions in the period were located in the municipalities of São Paulo, Guarulhos, and Itanhaém, totaling R$ 558 million, R$ 110 million, and R$ 43 million, respectively. |
(ii) | The largest transfers in the period were located in the municipalities of São Paulo, Cajamar, and Arujá, totaling R$ 403 million, R$ 95 million, and R$ 63 million, respectively. |
(iii) | The largest works were located in the municipalities of São Paulo, Guarulhos, and Francisco Morato, totaling R$ 2,207 million, R$ 320 million, and R$ 260 million, respectively. |
(a) | Capitalization of interest and other finance charges |
The Company capitalizes interest, inflation adjustments, and exchange variations in the contract asset during the construction period. From January to March 2024, the Company capitalized R$ 154,395 (R$ 167,802 from January to March 2023).
(b) | Construction margin |
The Company is primarily responsible for the construction and installation of the concession infrastructure, either by using its employees or contracting third parties, and is significantly exposed to its risks and benefits. Accordingly, the Company recognizes revenue from construction services corresponding to construction costs increased by gross margin.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-32 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Constructions related to the concessions are usually performed by third parties. In such a case, the margin is lower to cover administration costs and the assumption of responsibility for primary risks. As of March 31, 2024 and 2023, the margin was 2.3%.
From January to March 2024, the construction margin was R$ 30,046 (R$ 26,519 from January to March 2023).
(c) | Expropriations |
As a result of the construction of priority projects related to water and sewage systems, the Company is required to expropriate third-party properties, whose owners are compensated either amicably or through court.
The costs of such expropriations are recorded in the contract asset during the execution of the works. From January to March 2024, expropriations totaled R$ 6,750 (R$ 4,015 from January to March 2023).
14 | Intangible assets |
(a) | Statement of financial position details |
Schedule of financial position details | ||||||
March 31, 2024 | December 31, 2023 | |||||
Cost | Accumulated amortization | Net | Cost | Accumulated amortization | Net | |
Intangible right arising from: | ||||||
Concession agreements – equity value | 754,555 | (247,159) | 507,396 | 747,925 | (241,808) | 506,117 |
Concession agreements – economic value | 1,687,440 | (1,085,649) | 601,791 | 1,686,384 | (1,048,624) | 637,760 |
Concession agreements – new contracts | 148,000 | (1,644) | 146,356 | 148,000 | (411) | 147,589 |
Program contracts | 30,924,633 | (9,874,351) | 21,050,282 | 30,267,977 | (9,583,480) | 20,684,497 |
Program contracts – commitments | 1,709,757 | (510,973) | 1,198,784 | 1,709,757 | (497,731) | 1,212,026 |
Service contracts – São Paulo | 29,557,680 | (9,318,616) | 20,239,064 | 29,161,286 | (8,967,701) | 20,193,585 |
Software license of use | 1,310,942 | (822,184) | 488,758 | 1,300,504 | (787,280) | 513,224 |
Right of use – Other assets | 291,027 | (64,336) | 226,691 | 217,204 | (99,144) | 118,060 |
Total | 66,384,034 | (21,924,912) | 44,459,122 | 65,239,037 | (21,226,179) | 44,012,858 |
(b) | Changes |
Schedule of obligations assumed | |||||||
December 31, 2023 | Additions | Transfer of contract asset | Transfers | Write-offs and disposals | Amortization | March 31, 2024 | |
Intangible right arising from: | |||||||
Concession agreements – equity value (*) | 506,117 | - | 6,587 | 39 | (20) | (5,327) | 507,396 |
Concession agreements – economic value | 637,760 | - | 1,089 | (4) | - | (37,054) | 601,791 |
Concession agreements – new contracts | 147,589 | - | - | - | - | (1,233) | 146,356 |
Program contracts (*) | 20,684,497 | 181 | 663,509 | (930) | (606) | (296,369) | 21,050,282 |
Program contracts – commitments | 1,212,026 | - | - | - | - | (13,242) | 1,198,784 |
Service contracts – São Paulo | 20,193,585 | - | 404,279 | (3,949) | (132) | (354,719) | 20,239,064 |
Software license of use | 513,224 | 2,911 | 7,526 | 1 | - | (34,904) | 488,758 |
Right of use – Other assets | 118,060 | 130,667 | - | - | (46) | (21,990) | 226,691 |
Total | 44,012,858 | 133,759 | 1,082,990 | (4,843) | (804) | (764,838) | 44,459,122 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-33 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
December 31, 2022 | Additions | Transfer of contract asset | Transfers | Write-offs and disposals | Amortization | March 31, 2023 | |
Intangible right arising from: | |||||||
Concession agreements - equity value (*) | 499,326 | - | 4,098 | (955) | (6) | (4,994) | 497,469 |
Concession agreements – economic value | 652,039 | - | 2,589 | 331 | (85) | (30,249) | 624,625 |
Program contracts (*) | 18,337,459 | 2 | 569,717 | (288) | (2,055) | (252,011) | 18,652,824 |
Program contracts – commitments | 1,264,992 | - | - | - | - | (13,242) | 1,251,750 |
Service contracts – São Paulo | 17,870,451 | - | 513,453 | (1,720) | (1,056) | (299,179) | 18,081,949 |
Software license of use | 595,404 | - | 15,204 | - | - | (33,105) | 577,503 |
Right of use – Other assets | 75,052 | 320 | - | - | (30) | (17,261) | 58,081 |
Right of use – Investments | 26,148 | - | - | (26,148) | - | - | - |
Total | 39,320,871 | 322 | 1,105,061 | (28,780) | (3,232) | (650,041) | 39,744,201 |
(*) | As of March 31, 2023, Concession agreements – equity value, and Program contracts included leases totaling R$ 51,692 and R$ 165,104 (R$ 54,356 and R$ 168,216 as of December 31, 2022), respectively. |
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. This contract is in the process of termination due to the interest of the Granting Authority in closing it.
(c) | Intangible right arising from concession agreements |
As of March 31, 2024, the amounts not yet disbursed were recorded in “Program contract commitments” under current and noncurrent liabilities, totaling R$ 20,986 and R$ 12,139 (R$ 21,969 and R$ 12,047 as of December 31, 2023), respectively.
(d) | Public-Private Partnership - PPP |
SABESP carries out operations related to the São Lourenço PPP. Such transactions, along with their corresponding guarantees and obligations, are supported by a contract established based on Law 11,079/2004.
In June 2008, SABESP and Alto Tietê PPP (SPAT Saneamento S/A) executed a service agreement for 15 years, with operations ending in October 2011 after conclusion of the works. The end of the obligations related to this PPP occurred in February 2024.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-34 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
The amounts recorded in intangible assets are as follows:
Schedule of intangible assets | ||
March 31, 2024 | December 31, 2023 | |
Alto Tietê | 231,146 | 235,224 |
São Lourenço | 2,513,527 | 2,556,002 |
Total | 2,744,673 | 2,791,226 |
As of March 31, 2024 and December 31, 2023, the obligations assumed by the Company are as follows:
Schedule of obligations assumed by the company | ||||||
March 31, 2024 | December 31, 2023 | |||||
Current liabilities | Noncurrent liabilities | Total liabilities | Current liabilities | Noncurrent liabilities | Total liabilities | |
Alto Tietê | - | - | - | 52,762 | - | 52,762 |
São Lourenço | 435,671 | 2,787,032 | 3,222,703 | 435,164 | 2,798,688 | 3,233,852 |
Total | 435,671 | 2,787,032 | 3,222,703 | 487,926 | 2,798,688 | 3,286,614 |
(e) | Amortization of Intangible Assets |
The average amortization rate totaled 5.1% and 5.0% as of March 31, 2024 and 2023, respectively.
(f) | Leases and right of use |
Schedule of right of use |
Nature | March 31, 2024 | December 31, 2023 |
Leases - Concession and Program Contract | ||
Cost | 582,617 | 588,600 |
Accumulated amortization | (217,041) | (213,921) |
(=) Net | 365,576 | 374,679 |
Right of use – Other assets | ||
Vehicles | 232,477 | 205,593 |
Properties | 58,505 | 11,566 |
Equipment | 45 | 45 |
Accumulated amortization | (64,336) | (99,144) |
(=) Net | 226,691 | 118,060 |
Total - Leases and Right of use | 592,267 | 492,739 |
The lease liability corresponds to total future fixed lease payments, adjusted to present value, considering an incremental rate on borrowings. For further information, see Note 16.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-35 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
The table below shows the impact on the Company’s result:
Schedule of impact in the income statements |
Impact on the result | ||
March 31, 2024 | March 31, 2023 | |
Right of use amortization | (25,110) | (23,037) |
Financial result – interest expense and inflation adjustment | (31,298) | (18,127) |
Expenses of short-term leases with low value | (3,151) | (8,518) |
Reduction of profit for the period | (59,559) | (49,682) |
(g) | Performance Agreements |
As of March 31, 2024, the accounting balances of the agreements in force recorded in contract asset and intangible assets were R$ 182,365 and R$ 2,209,196 (R$ 183,876 and R$ 2,191,361 as of December 31, 2023), respectively.
15 | Property, plant and equipment |
(a) | Statement of financial position details |
Schedule of statement of financial position details | ||||||||
March 31, 2024 | December 31, 2023 | |||||||
Cost | Accumulated depreciation | Net | Annual average depreciation rate | Cost | Accumulated depreciation | Net | Annual average depreciation rate | |
Land | 94,228 | - | 94,228 | - | 94,228 | - | 94,228 | - |
Buildings | 126,959 | (45,197) | 81,762 | 2.2% | 125,672 | (44,726) | 80,946 | 2.2% |
Equipment | 452,917 | (318,950) | 133,967 | 14.1% | 443,380 | (313,193) | 130,187 | 14.2% |
Transportation equipment | 14,904 | (10,810) | 4,094 | 9.9% | 14,625 | (10,384) | 4,241 | 9.9% |
Furniture and fixtures | 41,123 | (16,328) | 24,795 | 6.7% | 41,049 | (15,876) | 25,173 | 6.8% |
Other | 147,120 | (1,654) | 145,466 | 6.5% | 140,548 | (764) | 139,784 | 6.5% |
Total | 877,251 | (392,939) | 484,312 | 9.6% | 859,502 | (384,943) | 474,559 | 9.7% |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-36 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
(b) | Changes |
Schedule of changes in property, plant and equipment | ||||||
December 31, 2023 | Additions | Transfers | Write-offs and disposals | Depreciation | March 31, 2024 | |
Land | 94,228 | - | - | - | - | 94,228 |
Buildings | 80,946 | 603 | 692 | - | (479) | 81,762 |
Equipment | 130,187 | 9,147 | 1,740 | (109) | (6,998) | 133,967 |
Transportation equipment | 4,241 | - | - | - | (147) | 4,094 |
Furniture and fixtures | 25,173 | 382 | (223) | (5) | (532) | 24,795 |
Other | 139,784 | 5,779 | 682 | - | (779) | 145,466 |
Total | 474,559 | 15,911 | 2,891 | (114) | (8,935) | 484,312 |
December 31, 2022 | Additions | Transfers | Write-offs and disposals | Depreciation | March 31, 2023 | |
Land | 94,228 | - | - | - | - | 94,228 |
Buildings | 47,968 | 1,037 | (85) | - | (296) | 48,624 |
Equipment | 120,865 | 16,881 | 87 | (243) | (6,235) | 131,355 |
Transportation equipment | 2,495 | - | 2,059 | - | (149) | 4,405 |
Furniture and fixtures | 23,496 | 3,027 | 291 | (40) | (391) | 26,383 |
Other | 49,887 | 10,009 | - | - | (21) | 59,875 |
Total | 338,939 | 30,954 | 2,352 | (283) | (7,092) | 364,870 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-37 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
16 | Borrowings and financing |
Schedule of borrowings and financing outstanding | ||||||
Borrowings and financing outstanding balance | March 31, 2024 | December 31, 2023 | ||||
Financial institution |
Current | Noncurrent |
Total |
Current | Noncurrent |
Total |
Local currency | ||||||
12th issue debentures | 56,517 | - | 56,517 | 45,450 | 22,385 | 67,835 |
18th issue debentures | 40,975 | - | 40,975 | 46,962 | - | 46,962 |
22nd issue debentures | 174,245 | - | 174,245 | 170,957 | 170616 | 341,573 |
23rd issue debentures | 490,841 | 374,303 | 865,144 | 490,810 | 374,279 | 865,089 |
24th issue debentures | - | 523,163 | 523,163 | - | 512,122 | 512,122 |
26th issue debentures | - | 1,330,768 | 1,330,768 | - | 1,302,042 | 1,302,042 |
27th issue debentures | 200,000 | 498,704 | 698,704 | 200,000 | 498,634 | 698,634 |
28th issue debentures | 127,745 | 1,070,548 | 1,198,293 | 127,715 | 1,070,457 | 1,198,172 |
29th issue debentures | - | 1,332,090 | 1,332,090 | - | 1,314,136 | 1,314,136 |
30th issue debentures | 124,988 | 748,275 | 873,263 | 125,000 | 873,231 | 998,231 |
31st issue debentures | - | 2,933,677 | 2,933,677 | - | - | - |
Brazilian Federal Savings Bank | 110,235 | 1,489,676 | 1,599,911 | 108,210 | 1,508,275 | 1,616,485 |
Brazilian Development Bank - BNDES PAC II 9751 | 7,295 | 14,519 | 21,814 | 7,286 | 16,316 | 23,602 |
Brazilian Development Bank - BNDES PAC II 9752 | 4,943 | 9,885 | 14,828 | 4,936 | 11,107 | 16,043 |
Brazilian Development Bank - BNDES ONDA LIMPA | 27,223 | - | 27,223 | 27,219 | 6,766 | 33,985 |
Brazilian Development Bank – BNDES TIETÊ III | 200,947 | 602,767 | 803,714 | 200,693 | 652,175 | 852,868 |
Brazilian Development Bank - BNDES 2015 | 34,189 | 351,960 | 386,149 | 34,146 | 360,021 | 394,167 |
Brazilian Development Bank - BNDES 2014 | 6,646 | 8,471 | 15,117 | 6,638 | 10,107 | 16,745 |
Inter-American Development Bank – IDB 2202 | 181,349 | 1,893,180 | 2,074,529 | 181,349 | 1,983,615 | 2,164,964 |
Inter-American Development Bank – IDB INVEST | 41,760 | 794,125 | 835,885 | 39,550 | 814,840 | 854,390 |
Inter-American Development Bank – IDB INVEST 2022 | 14,100 | 438,305 | 452,405 | 14,100 | 438,241 | 452,341 |
Inter-American Development Bank – IDB INVEST 2023 | 14,100 | 447,808 | 461,908 | 14,100 | 447,791 | 461,891 |
International Finance Corporation - IFC 2022 | 22,800 | 714,139 | 736,939 | 22,800 | 713,910 | 736,710 |
International Finance Corporation - IFC 2023 | - | 987,006 | 987,006 | - | 986,651 | 986,651 |
Leases (Concession Agreements, Program Contracts, and Contract Asset) | 106,362 | 206,075 | 312,437 | 49,884 | 259,326 | 309,210 |
Leases (others) | 100,102 | 151,548 | 251,650 | 68,499 | 73,801 | 142,300 |
Other | 3,006 | 2,161 | 5,167 | 3,003 | 2,910 | 5,913 |
Interest and other charges | 379,694 | - | 379,694 | 377,398 | - | 377,398 |
Total in local currency | 2,470,062 | 16,923,153 | 19,393,215 | 2,366,705 | 14,423,754 | 16,790,459 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-38 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Borrowings and financing outstanding balance | March 31, 2024 | December 31, 2023 | ||||
Financial institution |
Current | Noncurrent |
Total |
Current | Noncurrent |
Total |
Foreign currency | ||||||
Inter-American Development Bank - IDB 1212 – US$ 15,417 thousand (US$ 20,556 thousand in December 2023) | 51,351 | 25,676 | 77,027 | 49,759 | 49,759 | 99,518 |
Inter-American Development Bank - IDB 4623 – US$ 152,187 thousand (US$ 152,187 thousand in December 2023) | - | 736,321 | 736,321 | - | 712,449 | 712,449 |
International Bank for Reconstruction and Development (IBRD) – IBRDs 7662 and 8916 - US$ 104,405 thousand (US$ 78,197 thousand in December 2023) | 30,375 | 476,883 | 507,258 | 29,433 | 477,554 | 506,987 |
JICA 15 – ¥ 6,338,365 thousand (¥ 6,914,580 thousand in December 2023) | 38,042 | 171,188 | 209,230 | 39,437 | 197,180 | 236,617 |
JICA 18 – ¥ 5,698,880 thousand (¥ 6,216,960 thousand in December 2023) | 34,204 | 153,803 | 188,007 | 35,457 | 177,168 | 212,625 |
JICA 17 – ¥ 3,464,352 thousand (¥ 3,464,352 thousand in December 2023) | 9,530 | 104,054 | 113,584 | 9,879 | 107,880 | 117,759 |
JICA 19 – ¥ 23,575,734 thousand (¥ 24,482,493 thousand in December 2023) | 59,864 | 716,868 | 776,732 | 62,059 | 774,200 | 836,259 |
Interest and other charges | 22,933 | - | 22,933 | 23,677 | - | 23,677 |
Total in foreign currency | 246,299 | 2,384,793 | 2,631,092 | 249,701 | 2,496,190 | 2,745,891 |
Total borrowings and financing | 2,716,361 | 19,307,946 | 22,024,307 | 2,616,406 | 16,919,944 | 19,536,350 |
Exchange rates as of March 31, 2024: US$ 4.9962; ¥ 0.03301 (as of December 31, 2023: US$ 4.8413; ¥ 0.03422). As of March 31, 2024, the Company did not have balances of borrowings and financing raised during the year, maturing within 12 months. | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-39 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Schedule of borrowings terms | ||||
Local currency | Guarantees | Maturity | Annual interest rate | Inflation adjustment |
12th issue debentures | Own funds | 2025 | TR + 9.5% | |
17th issue debentures | Own funds | 2023 | CDI + 0.75% (series 1), 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), 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 CDI+ 1.58% (series 2) | |
31st issue debentures | Own funds | 2034 | CDI +0.49 (series 1) and CDI+1.10% (series 2) and CDI+1.31% (series 3) | |
Brazilian Federal Savings Bank | Own funds | 2024/2042 | 5% to 9.5% | TR |
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 – IDB 2202 | Government | 2035 | CDI + 0.86% | |
Inter-American Development Bank – IDB INVEST | 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 Asset) | 2035 | 7.73% to 10.12% | IPC | |
Leases (others) | 2042 | 9.74% to 15.24% | ||
Other | Own funds | 2025 | 3% (FEHIDRO); TJLP + 1.5% (FINEP) |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-40 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Foreign currency | Guarantees | Maturity | Annual interest rate | Exchange variation |
Inter-American Development Bank - IDB 1212 – US$ 15,417 thousand | Government | 2025 | SOFR +5.13% | US$ |
Inter-American Development Bank - IDB 4623 – US$ 152,187 thousand | Government | 2044 | SOFR + 6.55055% | US$ |
International Bank for Reconstruction and Development (IBRD) – IBRDs 7662 and 8916 - US$ 104,405 thousand | Government | 2034 | SOFR + 6.06% and 7.16% | US$ |
JICA 15 – ¥ 6,338,365 thousand | Government | 2029 | 1.8% and 2.5% | Yen |
JICA 18 – ¥ 5,698,880 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 – ¥ 23,575,734 thousand | Government | 2037 | 1.7% and 0.01% | Yen |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-41 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
(i) Payment schedule – accounting balances as of March 31, 2024
Schedule of borrowings payment | ||||||||
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 to 2044 | TOTAL | |
LOCAL CURRENCY | ||||||||
Debentures | 905,061 | 1,328,730 | 1,217,890 | 1,387,314 | 665,375 | 1,304,027 | 3,218,442 | 10,026,839 |
Brazilian Federal Savings Bank | 82,048 | 115,356 | 122,556 | 130,195 | 138,177 | 143,481 | 868,098 | 1,599,911 |
BNDES | 210,955 | 260,803 | 250,860 | 238,124 | 84,351 | 34,189 | 189,563 | 1,268,845 |
IDBs - National | 139,754 | 260,899 | 330,209 | 315,069 | 420,959 | 385,919 | 1,971,918 | 3,824,727 |
IFCs | 22,800 | 44,200 | 61,800 | 80,800 | 123,600 | 181,600 | 1,209,145 | 1,723,945 |
Leases (Concession Agreements, Program Contracts, Contract Asset, and others) | 151,818 | 133,170 | 64,062 | 22,899 | 58,917 | 19,012 | 114,209 | 564,087 |
Other | 2,254 | 2,771 | 142 | - | - | - | - | 5,167 |
Interest and other charges | 304,965 | 74,729 | - | - | - | - | - | 379,694 |
TOTAL IN LOCAL CURRENCY | 1,819,655 | 2,220,658 | 2,047,519 | 2,174,401 | 1,491,379 | 2,068,228 | 7,571,375 | 19,393,215 |
FOREIGN CURRENCY | ||||||||
IDB | 25,676 | 71,361 | 40,019 | 40,019 | 40,019 | 40,019 | 556,235 | 813,348 |
IBRD | 15,188 | 30,375 | 30,375 | 30,375 | 30,375 | 41,525 | 329,045 | 507,258 |
JICA | 75,585 | 141,639 | 141,639 | 141,639 | 141,639 | 141,526 | 503,886 | 1,287,553 |
Interest and other charges | 19,741 | 3,192 | - | - | - | - | - | 22,933 |
TOTAL IN FOREIGN CURRENCY | 136,190 | 246,567 | 212,033 | 212,033 | 212,033 | 223,070 | 1,389,166 | 2,631,092 |
Total | 1,955,845 | 2,467,225 | 2,259,552 | 2,386,434 | 1,703,412 | 2,291,298 | 8,960,541 | 22,024,307 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-42 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
(II) Changes
Schedule of changes in borrowings | ||||||||||||
December 31, 2023 | Addition (lease) | Funding | Borrowing costs | Inflation adjustment and exchange rate changes | Inflation adjustment / exchange rate change and incorporated interest- Capitalized | Interest paid | Amortization | Accrued interest | Provision for interest and fees - Capitalized | Expenses with borrowing costs | March 31, 2024 | |
LOCAL CURRENCY | ||||||||||||
Debentures | 7,534,818 | - | 2,940,478 | (7,319) | 51,281 | 10,953 | (166,538) | (316,082) | 151,082 | 36,657 | 2,731 | 10,238,061 |
Brazilian Federal Savings Bank | 1,621,014 | - | 7,857 | - | 1,653 | 412 | (31,269) | (26,495) | 25,167 | 6,056 | - | 1,604,395 |
BNDES | 1,341,472 | - | - | - | 1,096 | 553 | (24,734) | (70,274) | 16,743 | 8,191 | 59 | 1,273,106 |
IDB 2202 | 2,252,742 | - | - | - | - | - | (132,871) | (90,674) | 34,753 | 27,317 | 239 | 2,091,506 |
IDB INVEST 2020 | 900,367 | - | - | - | - | - | (61,148) | (18,670) | - | 28,095 | 165 | 848,809 |
IFC 2022 | 757,297 | - | - | - | - | - | - | - | 8,217 | 15,647 | 229 | 781,390 |
IFC 2023 | 1,006,642 | - | - | - | - | - | - | - | 10,690 | 20,362 | 355 | 1,038,049 |
IDB INVEST 2022 | 454,543 | - | - | - | - | - | - | - | 14,842 | - | 64 | 469,449 |
IDB INVEST 2023 | 464,131 | - | - | - | - | - | - | - | 15,038 | - | 17 | 479,186 |
Leases (Concession Agreements, Program Contracts, and Contract Asset) | 309,210 | - | - | - | - | - | (27,329) | - | 30,556 | - | - | 312,437 |
Leases (others) | 142,300 | 130,666 | - | - | - | - | (30,193) | 8,877 | - | - | 251,650 | |
Other | 5,923 | - | - | - | 6 | - | (92) | (751) | 90 | 1 | - | 5,177 |
TOTAL IN LOCAL CURRENCY | 16,790,459 | 130,666 | 2,948,335 | (7,319) | 54,036 | 11,918 | (443,981) | (553,139) | 316,055 | 142,326 | 3,859 | 19,393,215 |
FOREIGN CURRENCY | ||||||||||||
IDBs | 819,455 | - | - | - | 26,441 | - | (2,457) | (25,359) | 13,639 | - | 298 | 832,017 |
IBRD | 515,015 | - | - | (1,321) | 16,589 | - | (16,507) | (15,133) | 10,076 | 3 | 139 | 508,861 |
JICA | 1,411,421 | - | - | - | (49,365) | - | (10,651) | (66,395) | 5,005 | 148 | 51 | 1,290,214 |
TOTAL IN FOREIGN CURRENCY | 2,745,891 | - | - | (1,321) | (6,335) | - | (29,615) | (106,887) | 28,720 | 151 | 488 | 2,631,092 |
Total | 19,536,350 | 130,666 | 2,948,335 | (8,640) | 47,701 | 11,918 | (473,596) | (660,026) | 344,775 | 142,477 | 4,347 | 22,024,307 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-43 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
December 31, 2022 | Addition (lease) | Funding | Borrowing costs | Inflation adjustment and exchange rate changes | Inflation adjustment / exchange rate change and incorporated interest- Capitalized | Interest paid | Amortization | Accrued interest | Provision for interest and fees - Capitalized | Expenses with borrowing costs | March 31, 2023 | |
LOCAL CURRENCY | ||||||||||||
Debentures | 8,166,366 | - | - | (516) | 60,883 | 5,463 | (206,330) | (363,123) | 162,197 | 46,336 | 2,859 | 7,874,135 |
Brazilian Federal Savings Bank | 1,526,185 | - | 50,852 | - | 6,250 | 1,718 | (29,853) | (27,891) | 23,539 | 6,393 | - | 1,557,193 |
BNDES | 1,380,993 | - | - | - | 3,354 | 984 | (25,753) | (61,940) | 19,891 | 5,670 | 65 | 1,323,264 |
IDB 2202 | 2,450,550 | - | - | - | - | - | (165,514) | (90,674) | 26,253 | 58,942 | 239 | 2,279,796 |
IDB INVEST | 943,619 | - | - | - | - | - | (71,521) | (18,670) | 22,661 | 12,244 | 166 | 888,499 |
IFC | 774,525 | - | - | - | - | - | - | - | - | 29,484 | 228 | 804,237 |
IDB INVEST 2022 | 469,327 | - | - | - | - | - | - | - | 18,405 | - | 64 | 487,796 |
Leases (Concession Agreements, Program Contracts, and Contract Asset) | 357,844 | - | - | - | - | - | (13,603) | (10,873) | 13,603 | - | - | 346,971 |
Leases (others) | 101,374 | 320 | - | - | - | - | (4,523) | (20,389) | 9,047 | - | - | 85,829 |
Other | 12,130 | - | 3,629 | - | 22 | - | (161) | (1,581) | 160 | 2 | - | 14,201 |
TOTAL IN LOCAL CURRENCY | 16,182,913 | 320 | 54,481 | (516) | 70,509 | 8,165 | (517,258) | (595,141) | 295,756 | 159,071 | 3,621 | 15,661,921 |
FOREIGN CURRENCY | ||||||||||||
IDBs | 532,693 | - | 50,342 | - | (15,365) | - | (2,474) | (26,343) | 5,062 | - | 237 | 544,152 |
IBRD | 399,762 | - | 18,892 | (1,588) | (10,585) | - | (10,061) | (16,014) | 8,691 | 56 | 106 | 389,259 |
JICA | 1,803,109 | - | - | - | (56,819) | - | (14,057) | (78,741) | 6,635 | 289 | 51 | 1,660,467 |
IDB 1983AB | 40,194 | - | - | - | (1,056) | - | - | - | 661 | 221 | 104 | 40,124 |
TOTAL IN FOREIGN CURRENCY | 2,775,758 | - | 69,234 | (1,588) | (83,825) | - | (26,592) | (121,098) | 21,049 | 566 | 498 | 2,634,002 |
Total | 18,958,671 | 320 | 123,715 | (2,104) | (13,316) | 8,165 | (543,850) | (716,239) | 316,805 | 159,637 | 4,119 | 18,295,923 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-44 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
(a) | Main events in the three-month period ended March 31, 2024 |
Debentures
As of March 05, 2024, the Company raised R$ 2,940.5 billion from the 31st issue of simple, unsecured debentures, not convertible into shares, in three series, with the following characteristics:
Schedule of 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 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 above 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 using 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 an 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 may result in the early maturity of the Debentures.
The proceeds from the issue will be used to refinance financial commitments falling due in 2024 and to recompose and reinforce the 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.
(b) | Lease |
The Company has lease agreements signed as Assets Lease. 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), and 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. See Note 14 (f).
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-45 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
(c) | Covenants |
The table below shows the most restrictive covenants ratios as of March 31, 2024.
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 Ratio | 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 installment payments of debts with the electricity supplier. |
As of March 31, 2024, and December 31, 2023, the Company met the requirements set forth by its borrowings and financing agreements.
(d) | Borrowings and financing – Credit limited |
Schedule of borrowing and financing credit limited | |
Agent | March 31, 2024 |
(in millions of reais (*)) | |
Brazilian Federal Savings Bank | 926 |
Brazilian Development Bank (BNDES) | 30 |
Inter-American Development Bank (IDB) | 739 |
International Bank for Reconstruction and Development (IBRD) | 1,032 |
Other | 7 |
TOTAL | 2,734 |
(*) | Brazilian Central Bank’s exchange rate as of March 31, 2024 (US$ 1.00 = R$ 4.9962; ¥ 1.00 = R$ 0.03301). |
Financing resources contracted have specific purposes and are released for the execution of their respective investments, according to the progress of the works.
17 | Taxes and contributions |
(a) | Current assets |
Schedule of current assets | ||
March 31, 2024 | December 31, 2023 | |
Recoverable taxes | ||
Income tax and social contribution | 272,364 | 462,642 |
Withheld income tax (IRRF) on financial investments | 53,587 | 29,955 |
Other federal taxes | 2,222 | 2,050 |
Total | 328,173 | 494,647 |
(b) | Current liabilities |
Schedule of current liabilities | ||
March 31, 2024 | December 31, 2023 | |
Taxes and contributions payable | ||
Income tax and social contribution | 389,712 | 205,964 |
Cofins and Pasep | 137,048 | 141,703 |
INSS (social security contribution) | 42,136 | 44,556 |
IRRF (withholding income tax) | 5,512 | 64,770 |
Other | 44,620 | 54,979 |
Total | 619,028 | 511,972 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-46 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
18 | Deferred taxes and contributions |
(a) | Statement of financial position details |
Schedule of deferred taxes | ||
March 31, 2024 | December 31, 2023 | |
Deferred income tax assets | ||
Provisions | 678,996 | 666,131 |
Pension plan obligations - G1 | 132,543 | 135,231 |
Donations of underlying assets on concession agreements | 44,594 | 45,140 |
Allowance for doubtful accounts | 190,726 | 182,519 |
Other | 376,281 | 382,767 |
Total deferred tax asset | 1,423,140 | 1,411,788 |
Deferred income tax liabilities | ||
Temporary difference on concession of intangible asset | (325,461) | (329,060) |
Capitalization of borrowing costs | (466,374) | (465,510) |
Profit on supply to government entities | (347,379) | (348,514) |
Actuarial gain – G1 Plan | (121,425) | (121,425) |
Construction margin | (39,893) | (40,579) |
Borrowing costs | (7,323) | (8,624) |
Total deferred tax liabilities | (1,307,855) | (1,313,712) |
Deferred tax asset, net | 115,285 | 98,076 |
(b) | Changes |
Schedule of changes | |||
Deferred income tax assets | December 31, 2023 | Net change | March 31, 2024 |
Provisions | 666,131 | 12,865 | 678,996 |
Pension plan obligations - G1 | 135,231 | (2,688) | 132,543 |
Donations of underlying assets on concession agreements | 45,140 | (546) | 44,594 |
Allowance for doubtful accounts | 182,519 | 8,207 | 190,726 |
Other | 382,767 | (6,486) | 376,281 |
Total | 1,411,788 | 11,352 | 1,423,140 |
Deferred income tax liabilities | |||
Temporary difference on concession of intangible asset | (329,060) | 3,599 | (325,461) |
Capitalization of borrowing costs | (465,510) | (864) | (466,374) |
Profit on supply to government entities | (348,514) | 1,135 | (347,379) |
Actuarial gain – G1 | (121,425) | - | (121,425) |
Construction margin | (40,579) | 686 | (39,893) |
Borrowing costs | (8,624) | 1,301 | (7,323) |
Total | (1,313,712) | 5,857 | (1,307,855) |
Deferred tax asset, net | 98,076 | 17,209 | 115,285 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-47 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Deferred income tax assets | December 31, 2022 | Net change | March 31, 2023 |
Provisions | 560,404 | 12,715 | 573,119 |
Pension plan obligations - G1 | 141,606 | (4,774) | 136,832 |
Donations of underlying assets on concession agreements | 46,088 | (288) | 45,800 |
Allowance for doubtful accounts | 199,363 | (6,693) | 192,670 |
Other | 171,798 | (2,221) | 169,577 |
Total | 1,119,259 | (1,261) | 1,117,998 |
Deferred income tax liabilities | |||
Temporary difference on concession of intangible asset | (353,817) | 3,498 | (350,319) |
Capitalization of borrowing costs | (457,669) | (7,785) | (465,454) |
Profit on supply to government entities | (346,650) | 1,390 | (345,260) |
Actuarial gain – G1 | (93,561) | - | (93,561) |
Construction margin | (43,323) | 686 | (42,637) |
Borrowing costs | (13,517) | 1,227 | (12,290) |
Total | (1,308,537) | (984) | (1,309,521) |
Deferred tax liability, net | (189,278) | (2,245) | (191,523) |
(c) | 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:
Schedule of reconciliation of the effective tax rate | ||
January to March 2023 | January to March 2024 | |
Profit before income taxes | 1,132,945 | 1,323,860 |
Statutory rate | 34% | 34% |
Estimated expense at statutory rate | (385,201) | (450,112) |
Permanent differences: | ||
Provision Law 4,819/1958 – G0 (i) | (10,772) | (6,555) |
Donations | (1,065) | (1,093) |
Agreement with AAPS | - | (55,212) |
Other differences | 11,305 | 12,407 |
Income tax and social contribution | (385,733) | (500,565) |
Current income tax and social contribution | (383,488) | (517,774) |
Deferred income tax and social contribution | (2,245) | 17,209 |
Effective rate | 34% | 38% |
(i) | Permanent difference related to the provision for the actuarial liability. See Note 21 (ii) and (v). |
19 | Provisions |
(a) | Lawsuits and proceedings that resulted in provisions |
(I) | Statement of financial position details |
The Company is a party to several legal claims and administrative proceedings arising 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 Note 3.16 to the Annual Financial Statements as of December 31, 2023. The terms and payment amounts are defined based on the outcome of these lawsuits.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-48 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Schedule of lawsuits and proceedings that resulted in provisions | March 31, 2024 | December 31, 2023 | |||||
| Provisions | Escrow deposits | Provisions net of deposits | Provisions | Escrow deposits | Provisions net of deposits | |
Customer claims (i) | 169,058 | (6,003) | 163,055 | 175,255 | (6,060) | 169,195 | |
Supplier claims (ii) | 338,580 | (93,833) | 244,747 | 334,273 | (90,973) | 243,300 | |
Other civil claims (iii) | 140,447 | (1,301) | 139,146 | 128,036 | (1,229) | 126,807 | |
Tax claims (iv) | 114,215 | (18,577) | 95,638 | 101,770 | (18,223) | 83,547 | |
Labor claims (v) | 723,968 | (14,077) | 709,891 | 727,133 | (16,235) | 710,898 | |
Environmental claims (vi) | 510,781 | (57) | 510,724 | 492,740 | (55) | 492,685 | |
Total | 1,997,049 | (133,848) | 1,863,201 | 1,959,207 | (132,775) | 1,826,432 | |
Current | 1,085,976 | - | 1,085,976 | 1,064,367 | - | 1,064,367 | |
Noncurrent | 911,073 | (133,848) | 777,225 | 894,840 | (132,775) | 762,065 |
(II) | Changes |
Schedule of changes in provisions | ||||||
December 31, 2023 | Additional provisions | Interest and inflation adjustment | Use of the accrual | Amounts not used (reversal) | March 31, 2024 | |
Customer claims (i) | 175,255 | 965 | 5,043 | (12,189) | (16) | 169,058 |
Supplier claims (ii) | 334,273 | 2,027 | 8,957 | (2,741) | (3,936) | 338,580 |
Other civil claims (iii) | 128,036 | 23,512 | 5,480 | (15,564) | (1,017) | 140,447 |
Tax claims (iv) | 101,770 | 11,967 | 4,805 | (101) | (4,226) | 114,215 |
Labor claims (v) | 727,133 | 18,517 | 13,098 | (16,498) | (18,282) | 723,968 |
Environmental claims (vi) | 492,740 | 10,667 | 21,650 | - | (14,276) | 510,781 |
Subtotal | 1,959,207 | 67,655 | 59,033 | (47,093) | (41,753) | 1,997,049 |
Escrow deposits | (132,775) | (1,899) | (2,580) | 1,816 | 1,590 | (133,848) |
Total | 1,826,432 | 65,756 | 56,453 | (45,277) | (40,163) | 1,863,201 |
December 31, 2022 | Additional provisions | Interest and inflation adjustment | Use of the accrual | Amounts not used (reversal) | March 31, 2023 | |
Customer claims (i) | 151,023 | 1,918 | 3,790 | (21,540) | (1,158) | 134,033 |
Supplier claims (ii) | 257,080 | 1,992 | 5,552 | (1,042) | - | 263,582 |
Other civil claims (iii) | 99,462 | 5,701 | 7,154 | (3,478) | (3,793) | 105,046 |
Tax claims (iv) | 79,532 | 11,039 | 1,658 | (7) | (455) | 91,767 |
Labor claims (v) | 654,277 | 9,894 | 13,486 | (5,799) | (14,450) | 657,408 |
Environmental claims (vi) | 406,872 | 22,400 | 18,655 | - | (14,117) | 433,810 |
Subtotal | 1,648,246 | 52,944 | 50,295 | (31,866) | (33,973) | 1,685,646 |
Escrow deposits | (37,462) | (271) | (696) | 533 | 1,461 | (36,435) |
Total | 1,610,784 | 52,673 | 49,599 | (31,333) | (32,512) | 1,649,211 |
(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 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:
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-49 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Schedule of lawsuits deemed as contingent liabilities | ||
March 31, 2024 | December 31, 2023 | |
Customer claims (i) | 161,784 | 158,584 |
Supplier claims (ii) | 1,005,785 | 968,752 |
Other civil claims (iii) | 644,852 | 695,097 |
Tax claims (iv) | 1,156,487 | 1,067,350 |
Labor claims (v) | 3,332,929 | 3,093,735 |
Environmental claims (vi) | 4,316,366 | 4,158,504 |
Total | 10,618,203 | 10,142,022 |
(c) | Explanation of the nature of main classes of lawsuits |
(i) | Customer claims |
Refer mainly to lawsuits from customers claiming that their tariffs should be equal to those of other consumer categories, lawsuits for reduction of sewage tariff due to system losses, consequently requiring the refund of amounts charged by the Company, and lawsuits for reduction of tariff for being eligible to the Social Welfare Entity category.
(ii) | Supplier claims |
Include lawsuits filed by some suppliers alleging underpayment of inflation adjustments and economic and financial imbalance of the agreements, and are in progress at different courts.
(iii) | Other civil claims |
Refer mainly to indemnities for property damage, pain and suffering, and loss of profits allegedly caused to third parties, such as vehicle accidents, claims, and challenges on the methodology to collect tariffs, among others, filed at different court levels.
(iv) | Tax claims |
Tax claims refer mainly 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.
(v) | Labor claims |
The Company is a party to several 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 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 (CETESB) and the Public Prosecution Office of the 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.
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.
(d) | Guarantee insurance |
As of May 24, 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 is R$ 600 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. As of March 31, 2024, R$ 199.7 million was available for use.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-50 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
20 | Labor liabilities and pension plan obligations |
Schedule of employees benefits | ||
March 31, 2024 | December 31, 2023 | |
Salaries and payroll charges | 37,337 | 69,885 |
Provision for vacation | 245,218 | 256,415 |
Provision for Christmas bonus | 21,325 | - |
Healthcare plan (i) | 117,551 | 86,147 |
Provision for profit sharing (ii) | 122,353 | 97,514 |
Incentivized Dismissal Program - IDP (iii) | 192,626 | 290,202 |
Consent Decree (TAC) | 5,161 | 6,093 |
Knowledge Retention Program (KRP) | 1,016 | 1,184 |
Total | 742,587 | 807,440 |
(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 the first quarter of 2024, the Company contributed 8.7%, on average, of gross payroll, totaling R$ 66,605 (9.8% in the first quarter of 2023, totaling R$ 75,505).
The agreement entered into between SABESP and AAPS (Sabesp’s Association of Retirees and Pensioners) regarding financial compensation for 60 months for the VIVEST health plan operator regarding the migration of retirees, former employees, pensioners, and dependents between health plans is recorded in this line.
Until the ratification of the agreement, SABESP was responsible for transferring to VIVEST the amounts referring to deficits in the health plans of retirees, former employees, pensioners, and dependents, and for ensuring that each individual reimbursed the Company for the deficit.
In the first quarter of 2024, the Company recognized the obligations related to the agreement, considering the entire population migrated or those in negotiations for migration, with a total impact of R$ 162,388 on the period’s result, under the general expenses line. Of this amount, R$ 10,237 was paid by March 31, 2024, of which R$ 31,206 was recorded under current liabilities and R$ 120,945 under noncurrent liabilities in “Other Obligations”.
(ii) | Provision for profit sharing |
Based on an agreement with the labor union, the Profit Sharing Program corresponds to up to one month’s salary for each employee, depending on the achievement of the goals established, from January to December, and should be paid in the subsequent year.
(iii) | Incentivized Dismissal Program - IDP |
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 (further details in Note 21 to the Annual Financial Statements as of December, 31, 2023).
As of March 31, 2024, R$ 250,054 was recorded due to the provision for compensation incentives for employees who joined the program, of which R$ 192,626 in current liabilities and R$ 57,428 in noncurrent liabilities under “Labor Obligations”.
21 | Pension plan obligations |
The Company has Post-Employment Benefit Plans in the 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 of expenses with such plans in item (v).
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-51 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Defined benefit plans
Summary of pension plan obligations- Liabilities
Schedule of pension plan benefits | |||
G1 Plan | G0 Plan | Total | |
Pension plan obligations as of December 31, 2023 | (44,249) | (2,098,622) | (2,142,871) |
(Expenses) recognized in 2024 | (1,560) | (47,319) | (48,879) |
Payments made in 2024 | 10,096 | 50,424 | 60,520 |
Pension plan obligations as of March 31, 2024 | (35,713) | (2,095,517) | (2,131,230) |
G1 Plan | G0 Plan | Total | |
Pension plan obligations as of December 31, 2022 | (148,116) | (2,002,075) | (2,150,191) |
(Expenses) / revenues recognized in 2023 | 4,384 | (56,305) | (51,921) |
Payments made in 2023 | 10,124 | 48,200 | 58,324 |
Pension plan obligations as of March 31, 2023 | (133,608) | (2,010,180) | (2,143,788) |
(i) | G1 Plan |
The defined benefit plan (“G1 Plan”) managed by SABESPREV receives similar contributions established in a plan of subsidy of actuarial 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. |
(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 “Balances with related parties” line, limited to the amounts considered virtually certain to be reimbursed by the São Paulo State.
(iii) | Sabesprev Mais Plan |
Managed by SABESPREV, the sponsor's contributions correspond to the result obtained by applying a percentage of 100% to the basic contribution made by the participant.
(iv) | VIVEST Plan |
Managed 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.
(v) | Reconciliation of expenditures with pension plan obligations |
Schedule of reconciliation of expenses with pension obligations | ||
March 31, 2024 | March 31, 2023 | |
G1 Plan (i) | 1,560 | (4,384) |
G0 Plan (ii) | 47,319 | 56,305 |
Sabesprev Mais Plan (iii) | 6,750 | 6,603 |
VIVEST Plan (iv) | 189 | 84 |
Subtotal | 55,818 | 58,608 |
Capitalized | (1,150) | (764) |
Reimbursement of additional retirement and pension benefits paid (G0) | (28,040) | (24,622) |
Other | 1,508 | 1,441 |
Pension plan obligations (Note 27) | 28,136 | 34,663 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-52 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
22 | Services payable |
This line records the balances payable, mainly from services received from third parties, such as the 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. The amounts payable to the municipal governments related to transfers provided for in the concession agreements are also recorded. The parent company’s balances as of March 31, 2024, and December 31, 2023, were R$ 836,294 and R$ 749,226, respectively. The consolidated balances as of March 31, 2024, and December 31, 2023, were R$ 838,703 and R$ 750,732, respectively.
23 | Equity |
(a) | Share capital |
As of March 31, 2024, and December 31, 2023, the authorized, subscribed, and paid-in capital, totaling R$ 15,000,000, was composed of registered, book-entry common shares with no par value, as follows:
Schedule of share capital | ||||
March 31, 2024 | December 31, 2023 | |||
Number of shares | % | Number of shares | % | |
São Paulo State | 343,506,664 | 343,506,664 | ||
Other shareholders | ||||
In Brazil (1) | 266,922,203 | 257,339,417 | ||
Abroad (2) | ||||
Total |
(1) | As of March 31, 2024, the common shares traded in Brazil were held by 49,847 shareholders. It includes six shares held by Cia 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. |
(b) | Interest on capital |
The Annual Shareholders’ Meeting of April 25, 2024, approved the distribution of dividends as interest on capital totaling R$ 836,839, corresponding to a minimum mandatory dividends and R$ 147,689 as minimum supplementary dividends, totaling R$ 984,528, to be paid on June 24, 2024.
24 | Earnings per share |
Basic and diluted
Basic earnings per share are calculated by dividing the equity attributable to owners by the weighted average number of outstanding common shares during the 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.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-53 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
Schedule of earning per share basic and diluted | ||
January to March 2024 | January to March 2023 | |
Profit attributable to the Company’s owners | 823,295 | 747,212 |
Weighted average number of common shares issued | 683,509,869 | 683,509,869 |
Basic and diluted earnings per share (reais per share) |
25 | Operating segment information |
The Company’s Management, composed of the Board of Directors and the Executive Board, has determined the operating segment used to make strategic decisions, such as sanitation services.
Result
Schedule of operating segment information | |||
January to March 2024 | |||
Sanitation (i) | Reconciliation to the income statement (ii) | Balance according to the financial statements | |
Gross operating revenue | 5,661,099 | 1,336,778 | 6,997,877 |
Gross sales deductions | (437,631) | - | (437,631) |
Net operating revenue | 5,223,468 | 1,336,778 | 6,560,246 |
Costs, selling, general, and administrative expenses | (3,607,447) | (1,306,723) | (4,914,170) |
Income from operations before other operating expenses, net and equity accounting | 1,616,021 | 30,055 | 1,646,076 |
Other operating income (expenses), net | 7,086 | ||
Equity results of investments | 8,893 | ||
Financial result, net | (338,195) | ||
Income from operations before taxes | 1,323,860 | ||
Depreciation and amortization | (773,785) | - | (773,785) |
January to March 2023 | |||
Sanitation (i) | Reconciliation to the income statement (ii) | Balance according to the financial statements | |
Gross operating revenue | 4,909,274 | 1,179,534 | 6,088,808 |
Gross sales deductions | (390,439) | - | (390,439) |
Net operating revenue | 4,518,835 | 1,179,534 | 5,698,369 |
Costs, selling, general, and administrative expenses | (3,173,849) | (1,153,015) | (4,326,864) |
Income from operations before other operating expenses, net and equity accounting | 1,344,986 | 26,519 | 1,371,505 |
Other operating income (expenses), net | 14,634 | ||
Equity results of investments | 6,334 | ||
Financial result, net | (259,528) | ||
Income from operations before taxes | 1,132,945 | ||
Depreciation and amortization | (657,145) | - | (657,145) |
(i) | See Note 31 for further information about non-cash items, other than depreciation and amortization that impact segment results, and for additional information on long-lived assets. |
(ii) | Construction revenue and related costs are not reported to the CODM. Revenue from construction is recognized under IFRIC 12 (Concession Agreements) and IFRS 15 (Revenue from Contracts with Customers), as all performance obligations are met over time. See Note 13 (b) for further information. |
26 | Operating revenue |
Reconciliation from gross operating revenue to net operating revenue:
Schedule of reconciliation from gross operating revenue to net operating revenue | ||
January to March 2024 | January to March 2023 | |
Revenue from sanitation services (i) | 5,661,099 | 4,909,274 |
Construction revenue | 1,336,778 | 1,179,534 |
Sales tax | (410,786) | (370,298) |
Regulation, Control and Oversight Fee (TRCF) | (26,845) | (20,141) |
Net revenue | 6,560,246 | 5,698,369 |
(i) | Includes R$ 28,406 from the TRCF charged from customers from January to March 2024 (R$ 24,019 from January to March 2023), referring to the municipalities regulated by ARSESP. |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-54 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
27 | Operating costs and expenses |
Schedule of operating costs and expenses | ||
January to March 2024 | January to March 2023 | |
Operating costs | ||
Salaries, payroll charges, and benefits | (505,690) | (583,855) |
Pension plan obligations | (5,810) | (1,656) |
Construction costs (Note 25) | (1,306,723) | (1,153,015) |
General supplies | (113,440) | (85,831) |
Treatment supplies | (141,370) | (164,899) |
Outsourced services | (504,745) | (435,484) |
Electricity | (393,822) | (395,026) |
General expenses | (283,516) | (227,169) |
Depreciation and amortization | (720,311) | (606,788) |
(3,975,427) | (3,653,723) | |
Selling expenses | ||
Salaries, payroll charges, and benefits | (62,115) | (70,517) |
Pension plan obligations | (840) | (185) |
General supplies | (1,859) | (1,067) |
Outsourced services | (101,066) | (109,177) |
Electricity | (210) | (191) |
General expenses | (26,628) | (27,626) |
Depreciation and amortization | (17,369) | (16,894) |
(210,087) | (225,657) | |
Bad debt expense, net of recoveries (Note 9 (c)) | (190,518) | (162,805) |
Administrative expenses | ||
Salaries, payroll charges, and benefits | (112,499) | (55,142) |
Pension plan obligations | (21,486) | (32,822) |
General supplies | 24,510 | (601) |
Outsourced services | (77,011) | (80,267) |
Electricity | (372) | (583) |
General expenses | (294,810) | (60,011) |
Depreciation and amortization | (36,105) | (33,463) |
Tax expenses | (20,365) | (21,790) |
(538,138) | (284,679) | |
Operating costs and expenses | ||
Salaries, payroll charges, and benefits | (680,304) | (709,514) |
Pension plan obligations (Note 21 (v)) | (28,136) | (34,663) |
Construction costs (Note 25) | (1,306,723) | (1,153,015) |
General supplies | (90,789) | (87,499) |
Treatment supplies | (141,370) | (164,899) |
Outsourced services | (682,822) | (624,928) |
Electricity | (394,404) | (395,800) |
General expenses | (604,954) | (314,806) |
Depreciation and amortization | (773,785) | (657,145) |
Tax expenses | (20,365) | (21,790) |
Bad debt expense, net of recoveries (Note 9 (c)) | (190,518) | (162,805) |
(4,914,170) | (4,326,864) |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-55 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
28 | Financial income (expenses) |
Schedule of financial income (expenses) | ||
January to March 2024 | January to March 2023 | |
Financial expenses | ||
Interest and charges on borrowings and financing – local currency | (276,622) | (273,106) |
Interest and charges on borrowings and financing – foreign currency | (28,720) | (21,049) |
Other financial expenses | (175,160) | (101,732) |
Inflation adjustment on borrowings and financing | (54,036) | (70,509) |
Other inflation adjustments | (13,265) | (50,463) |
Interest and inflation adjustment on provisions | (44,300) | (45,612) |
Total financial expenses | (592,103) | (562,471) |
Financial revenue | ||
Inflation adjustment gains | 55,881 | 60,314 |
Income on financial investments | 110,375 | 103,217 |
Interest income | 92,932 | 66,560 |
Cofins and Pasep | (11,615) | (10,788) |
Other | 2 | 17 |
Total financial income | 247,575 | 219,320 |
Financial income (expenses), net of exchange rate changes | (344,528) | (343,151) |
Exchange gain (losses) | ||
Exchange rate changes on borrowings and financing | 6,335 | 83,825 |
Exchange rate changes on assets | 1 | (201) |
Other exchange rate changes | (3) | (1) |
Exchange rate changes, net | 6,333 | 83,623 |
Financial income (expenses) | (338,195) | (259,528) |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-56 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
29 | Other operating income (expenses), net |
Schedule of operating income (expenses), net | ||
January to March 2024 | January to March 2023 | |
Other operating income, net | 10,291 | 20,352 |
Other operating expenses | (3,205) | (5,718) |
Other operating income (expenses), net | 7,086 | 14,634 |
Other operating income includes revenue from the sale of property, plant and equipment, 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 usually record the derecognition of concession 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.
30 | 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 March 31, 2024 are as follows:
Schedule of commitments | |||||
1 year | 1-3 years | 3-5 years | More than 5 years | Total | |
Contractual obligations – Expenses | 1,854,851 | 2,319,376 | 1,377,556 | 4,349,060 | 9,900,843 |
Contractual obligations - Investments | 4,174,937 | 2,719,760 | 1,136,509 | 82,392 | 8,113,598 |
Total | 6,029,788 | 5,039,136 | 2,514,065 | 4,431,452 | 18,014,441 |
31 | Supplemental cash flow information |
Schedule of Supplemental cash flow information | ||
January to March 2024 | January to March 2023 | |
Total additions to contract assets (Note 13) | 1,270,667 | 1,204,867 |
Total additions to intangible assets (Note 14 (b)) | 133,759 | 322 |
Items not affecting cash (see breakdown below) | (833,016) | (634,857) |
Total additions to intangible and contract assets according to the statement of cash flows | 571,410 | 570,332 |
Investments and financing operations affecting intangible assets but not cash: | ||
Interest capitalized in the period (Note 13 (a)) | 154,395 | 167,802 |
Contractors payable | 453,671 | 240,833 |
Performance agreements | 64,229 | 199,383 |
Right of use | 130,666 | 320 |
Construction margin (Note 25) | 30,055 | 26,519 |
Total | 833,016 | 634,857 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-57 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
32 | Events after the reporting period |
· | Tariff adjustment |
As of April 08, 2024, the São Paulo State Utility Services Regulatory Agency (ARSESP) disclosed Resolution 1,514/2024, authorizing the Company to apply the tariff adjustment of 6.4469%, regarding the tariffs in effect.
· | Methodology and criteria for asset reversal |
As of April 15, 2024, ARSESP disclosed Resolution 1,515/2024, which included the methodology and criteria for reversal and possible indemnification of assets at the end of the concessions of the Basic Sanitation sector.
· | Privatization process |
As of April 17, 2024, the Board of the State Privatization Program (CDPED), together with the Management Council of the State Public-Private Partnership (CGPPP) approved the final model for the partial divestment of movable assets directly and indirectly held by the State, with authorization to proceed with the divestment through a Public Offering for Distribution of Shares on the stock exchange, according to Article 1 of Decree 67,759/2023, including:
(a) Schedule of the privatization process;
(b) Structure of the offering 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) Execution of the Investment Agreement, Lock-up, and other agreements with strategic investors;
(e) Guarantee of stability to employees under Law 17,853/2023, for 18 months from the effective completion date of the privatization process;
(f) Recommendation of the offering of common shares held by the São Paulo State Government to Company employees;
(g) Submission of the following documents to the representatives of URAE - 1 Southwest’s Decision-Making Board for the 1st Board meeting:
• Draft of the concession agreement and exhibits
• Draft of the charter of URAE-1’s Decision-Making Board
• Draft of the Regional Basic Sanitation Plan
The definition of the minimum price and the percentage of the State’s equity interest to be divested, as well as the details of the Investment Agreement, Lock-up, and other conditions will be subject to a resolution at a future Board meeting.
· | Financial derivative agreements |
As of April 17, 2024, the Company executed derivative financial agreements with selected financial institutions to reduce the exposure of the balance in foreign currency of existing debts, totaling US$ 534 million, against fluctuations in the foreign exchange market and mitigate the impacts of these fluctuations on the Company’s economic and financial results. The agreements are valid from April 2024 to December 2024.
· | Annual and Extraordinary Shareholders’ Meeting |
The General Annual Shareholders’ Meeting was held on April 25, 2024.
· | Privatization process |
The São Paulo Municipal Chamber approved, and the Mayor sanctioned Municipal Law 18.107 of May 2, 2024, authorizing the Municipal Executive Power to execute contracts through a regionalized arrangement aimed at providing water supply and sanitation services in the Municipality of São Paulo.
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements. |
F-58 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Unaudited Condensed Consolidated Interim Financial Statements for three months ended March 31, 2024 and 2023 Amounts in thousands of reais
|
· | URAE-1 Southeastern |
As of May 20, 2024, the Deliberative Council of Regional Unit for Drinking Water Supply and Sewage Services – URAE-1 – Southeastern (“URAE-1”), approved the following items of the agenda, among other subjects:
(a) Internal Regulations of the URAE-1 Deliberative Council;
(b) Regional Basic Sanitation Plan, pursuant to article 17 of Federal Law No. 11,445/2007;
(c) Appointment of ARSESP as the entity responsible for regulating and overseeing the services that are the purpose of the Concession Contract;
(d) Signing of the Concession Contract, in a unified manner, for all Municipalities forming part of URAE-1 served by Sabesp, replacing the current contractual instruments entered into by the Municipalities.
As of May 24, 2024, the Concession Agreement No. 1/2024 was signed between the Company and the Deliberative Council of Regional Unit for Drinking Water Supply and Sewage Services – URAE-1 Southeast, and, as an intervening party, the São Paulo State Public Services Regulatory Agency – ARSESP, for the provision of water supply and sewage services to the municipalities that are part of URAE-1 ("Concession Agreement").
The effectiveness of the Concession Agreement is conditional on the conclusion of the Company's privatization process, under the terms of State Law No. 17,853, of December 8, 2023, and will be valid until October 19, 2060.
· | Final model for the partial sale of shares held directly and indirectly by the State of São Paulo |
As of June 3, 2024, the 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), in continuity to the deliberation of April 17, 2024, has deliberated to approve the final model for the partial sale of shares held directly and indirectly by the State of São Paulo, with authorization to proceed with the sale through a public offering of distribution of shares issued by Sabesp (“Public Offering”), according to article 5, I, items “b” and “i” of State Law nº 9,361/1996 and article 21, I, of State Decree nº 67,759/2023, including, among others:
(a) Authorization to sale the common shares issued by Sabesp and owned directly and indirectly by the State of São Paulo, in order to maintain at least of Sabesp's share capital, and may be higher depending on market conditions, by means of the Public Offering to be carried out and registered with CVM, in accordance with the rules and procedures of CVM Resolution nº 160/2022; %
(b) The Public Offering shall aim to select one professional investor to act as Sabesp's reference investor after the privatization, through the priority allocation of common shares, representing of the Company's share capital to the reference investor selected in the Public Offering; %
(c) Common shares of the Public Offering representing 10% of Sabesp’s share capital shall be allocated on a priority basis to employees, as set forth on article 42 of State Law nº 9,361/1996;
(d) Terms and conditions of the Investment Agreement, Lock-up and other agreements to be entered into by the State of São Paulo and the reference investor selected in the Public Offering.
CDPED also ratified the percentage of of Sabesp's share capital as the minimum necessary for the State of São Paulo to maintain the special class preferred share (golden share), as provided for in the new Company's Bylaws, approved on May 27, 2024 by the Shareholders’ General Extraordinary Meeting under suspensive condition of the liquidation of the Public Offering. %
In addition, the Company clarifies that, as decided by its management, there will be no primary offering through issuance of new shares by Sabesp in the Public Offering.
· | Interruption in the services in Igarapava municipality |
On June 1st, 2024, the services in the municipality of Igarapava was interrupted and a new concessionary is providing the services. As of June 1st, 2024, the net book value of the related assets of Igarapava amount R$ 11.4 million.
The indemnity calculated by the ARSESP (Regulator) amount to R$ 57.2 million, based in December 2021. The new concessionary made a judicial deposit in the amount. The municipality and the new concessionary are discussing this amount in the court.
· | Request for São Paulo municipality – registered warrants |
On May 22nd and 23rd the Company requested the total amount of R$ 3,064.5 millions (based in march 2024) to the municipality of São Paulo to receive the registered warrants as described below:
In millions of reais | Total historical value | Total updated value – mar/24 | Total amount, net(*) |
Total | 2,373.8 | 3,064.5 | 1,873.2 |
(*) Amount net of discounts.
· | Selection of the Reference Investor |
On June 20th, the State Privatization Board (CDPED – Conselho Diretor do Programa Estadual de Desestatização) along with the Management Council of the State Program for Public-Private Partnerships (CGPPP – Conselho Gestor do Programa Estadual de Parcerias Público-Privadas), resolved on the additional terms and conditions applicable to the selection of the Reference Investor, within the scope of the approval of the public offering of shares issued by Sabesp and owned by the State (“Public Offering”).
In addition, CDPED, jointly with CGPPP, decided on the minimum price for the sale of shares in the Public Offering by the State, as well as the minimum coverage as a condition for determining the Selected Reference Investor
F-59 |