UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
OR
OR
OR
Date of event requiring this shell company report ________________
Commission file number
(Exact name of Registrant as specified in its charter)
Basic Sanitation Company of the State of São Paulo-SABESP
(Translation of the Registrant’s name into English)
Federative Republic of
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbols(s) | Name of each exchange on which registered |
| Common Shares, without par value | Not traded | New York Stock Exchange* |
|
each representing one Common Share |
| 1 |
Shares are not listed for trading, but only in connection with the registration of American Depositary Receipts pursuant to the requirements of the New York Stock Exchange.
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Shares of Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Accelerated Filer o | |
| Non-accelerated Filer o | Emerging Growth Company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. o
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has
filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its
audit report.
| 2 |
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| U.S. GAAP o | Other o |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow
Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o
| 3 |
TABLE OF CONTENTS
| 4 |
| 5 |
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
General
We maintain our books and records in reais. We prepare our financial statements in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (the “IASB”). Our audited financial statements as of December 31, 2022 and 2021 for each of the years in the three-year period ended December 31, 2022 are included in this annual report on Form 20-F.
Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them.
Other Information
In this annual report, unless the context otherwise requires, references to “we,” “us,” “our,” “Company,” or “SABESP” refer to Companhia de Saneamento Básico do Estado de São Paulo – SABESP.
In addition, references to:
| · | “ANA” are to the National Water and Sanitation Agency (Agência Nacional de Águas e Saneamento Básico); | |
| · | “ARSESP” are to the São Paulo State Public Services Regulatory Agency (Agência Reguladora de Serviços Públicos do Estado de São Paulo); | |
| · | “ADR” or “ADRs” are to American Depositary Receipt or American Depositary Receipts, respectively; | |
| · | “ADS” or “ADSs” are to American Depositary Share or American Depositary Shares, respectively; | |
| · | “B3” are to B3 S.A. – Brasil, Bolsa, Balcão; | |
| · | “Basic Sanitation Law” are to Law No. 11,445/2007 of the Federative Republic of Brazil, as amended; | |
| · | “BNDES” are to Brazilian National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social); | |
| · | “Brazil” are to the Federative Republic of Brazil; | |
| · | “Brazilian Corporate Law” are to Law No. 6,404/1976 of December 15, 1976, as amended; | |
| · | “Central Bank” are to the Central Bank of Brazil; |
| 6 |
| · | “Coverage” indicators are to (a) the number of homes that are actually connected to the water network or sewage collection network, plus the number of homes for which the water and sewage networks are available for connection, but which are not connected to those networks (referred to as “feasible” or “connectable” homes), as a portion of (b) the total number of homes within the urbanized service area covered by our contract with the municipality (i.e., the “serviceable area”); | |
| · | “COVID-19” or “Coronavirus” are to the SARS-CoV-2 2019 coronavirus pandemic; | |
| · | “CVM” are to the Comissão de Valores Mobiliários, the Brazilian securities and exchange commission; |
| · | “FAPESP” are to the Fundação de Amparo à Pesquisa do Estado de São Paulo, the São Paulo State Research Foundation; | |
| · | “federal government” and “Brazilian government” are to the federal government of the Federative Republic of Brazil and “São Paulo state government” are to the state government of the State of São Paulo; | |
| · | “IBRD” are to the International Bank for Reconstruction and Development; | |
| · | “IDB” are to the Interamerican Development Bank; | |
| · | “New Legal Framework for Basic Sanitation” are to Law No. 14,026/2020 of the Federative Republic of Brazil; | |
| · | “¥” or “Japanese Yen” are to the official currency of Japan; | |
| · | “program contract” are to certain inter-federative cooperation agreements entered into within the scope of associated management (pursuant to Art. 241 of the Brazilian Federal Constitution), whereby the provision of public services is delegated to third parties or liabilities, services, personnel or goods necessary for the continuity of public services are totally or partially transferred to third parties; | |
| · | “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil; | |
| · | “Regional Systems” are to the area where the regional systems’ executive office operates, comprising 334 municipalities in the interior and coastline regions of the State of São Paulo; | |
| · | “São Paulo metropolitan region,” with respect to our operations, are to the area where the metropolitan executive office operates, comprising 41 municipalities, including the city of São Paulo; | |
| · | “Service” indicators are to (a) the number of homes that are actually connected to the water network or sewage collection network, as a portion of (b) the total number of homes within a given serviceable area; | |
| · | “Sewage Treatment Coverage” indicators are to the amount of consumer units connected to the sewage treatment system; | |
| · | “State” are to the State of São Paulo, which is also our controlling shareholder; | |
| · | “URAE” are to Regional Unit for Drinking Water Supply and Sewage Services (Unidade Regional de Serviços de Abastecimento de Água Potável e Esgotamento Sanitário); | |
| · | “U.S. dollars” or “US$” are to the United States dollar, the official currency of the United States; | |
| · | “water crisis” are to the drought we experienced from late 2013 and throughout most of 2015. This drought, the most serious that our service region has experienced in the previous 80 years, primarily affected the Cantareira System, our largest water production system; and | |
| · | “WHO” are to the World Health Organization. |
Information in this annual report related to liters, water and sewage volumes, number of employees, kilometers, water and sewage connections, population served, operating productivity, water production, water and sewage lines (in kilometers), water loss index and investment in programs has not been audited.
Market Information
We make statements in this annual report about our market share and other information relating to Brazil and the industry in which we operate. We have made these statements on the basis of information from third-party sources and publicly available information that we believe is reliable, such as information and reports from the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística – “IBGE”), and the State Data Analysis System Foundation (Fundação Sistema Estadual de Análise de Dados – “SEADE”), among others. We have no reason to believe that any of this information is inaccurate in any material respect.
| 7 |
References to urban and total population in this annual report are estimated based on research prepared by SEADE entitled “Projections of Population and Residences for the municipalities of the State of São Paulo: 2010-2050” (Projeção da População e dos Domicílios para os Municípios do Estado de São Paulo: 2010-2050).
Our Contracts and the Municipalities We Serve
Throughout this document, we refer to the 375 municipalities we serve directly and the two municipalities which we account for in our wholesale segment (Mogi das Cruzes and São Caetano do Sul), since our revenue for the fiscal year 2022 is derived from these municipalities. Most of our contracts with the municipalities we serve are program contracts which have a term of 30 years.
CAUTIONARY STATEMENTS ABOUT FORWARD-LOOKING STATEMENTS
This annual report includes forward-looking statements, mainly in Items 3 through 5. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. These forward-looking statements are subject to risks, uncertainties and assumptions, including, among other factors:
| · | general economic, political, demographical, health and other conditions in Brazil and in other countries, including military conflict between Russia and Ukraine, the imposition of sanctions and trade embargos and its impacts on the global economy; | |
| · | fluctuations in inflation, interest rates and exchange rates in Brazil; | |
| · | the potential impacts of the New Tariff Structure to be implemented, its uncertainties, as well as unpredictability about the revenues we expect to earn with the new structure; | |
| · | the impact of widespread health developments, such as COVID-19, and its effects on our operating revenues and financial condition; | |
| · | the interests of our controlling shareholder; | |
| · | any increase in delinquencies by our customers; | |
| · | our potential corporate reorganization, that is currently being discussed by the State government that may include a change in our control; | |
| · | the regulations issued by ARSESP regarding several aspects of our business, including resetting and adjusting our tariffs; | |
| · | changes in applicable laws and regulations, as well as the enactment of new laws and regulations, including those relating to environmental, tax and employment matters in Brazil; | |
| · | existing and future governmental regulation for sanitation services, competition in our concession area, and other matters; | |
| · | the impacts on our business of probable increases in the frequency of extreme weather conditions, including droughts and intensive rain and other climatic events; | |
| · | our ability to continue to use certain reservoirs under current terms and conditions; | |
| · | availability of our water supply, springs and storage systems; | |
| · | the impact on our business of lower water consumption practices adopted by our customers during the water crisis which resulted in water savings and have not returned to their prior standards despite us maintaining a continuous supply of water to the São Paulo metropolitan region; | |
| · | the size and growth of our customer base and its consumption habits; | |
| · | any measures that we may be required to take to ensure the provision of water to our customers; | |
| · | the potential impacts on our business caused by the enactment of the New Legal Framework for Basic Sanitation, which introduced several changes that directly affect our operations, including the requirement to participate in new public bids in case the entity is not part of the administration of the holder, and the prohibition on entering into program contracts, agreements, partnership agreements and other unstable instruments for the provision of public sanitation services; |
| 8 |
| · | the potential impact of the enactment of reference standards that should be taken into account by subnational sanitation regulatory agencies (municipal, intermunicipal, district and state) in their regulatory performance, since the New Legal Framework for Basic Sanitation determined that ANA is to be the regulatory authority of the sanitation sector at national level; | |
| · | our ability to comply with the requirements regarding water and sewage service levels included in our agreements with municipalities, especially as a result of the changes brought by the New Legal Framework for Basic Sanitation, which establish that, by 2033, 90% and 99% of the population served must have access to sewage collection and treatment and access to drinking water, respectively; | |
| · | the municipalities’ ability to terminate our existing concession agreements prior to their expiration date and our ability to renew such agreements; | |
| · | our ability to collect amounts owed to us by our controlling shareholder, states, the federal government and municipalities; | |
| · | our capital expenditure program and other liquidity and capital resources requirements; | |
| · | the effects of the agreement for provision of water and sewage services in the city of São Paulo, which we executed with the State and the city of São Paulo considering that ARSESP has limited the pass-through to tariff of values transferred to municipal infrastructure funds to 4%; | |
| · | our management’s expectations and estimates relating to our future financial performance; | |
| · | our level of debt and limitations on our ability to incur additional debt; | |
| · | our ability to access financing with favorable terms in the future; | |
| · | the costs we incur in complying with environmental laws and any penalties for failure to comply with these laws; | |
| · | the outcome of our pending or future legal proceedings; | |
| · | the delay or postponement in investment in our sewage system; | |
| · | the possibility to be subject to other regulatory agencies other than ARSESP; | |
| · | power shortages, rationing of energy supply or significant changes in energy tariffs; and | |
| · | other risk factors as set forth under “Item 3.D. Risk Factors.” |
The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “plan,” “intend,” “expect” and similar words are intended to identify forward-looking statements. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this annual report might not occur. Our actual results could differ substantially from those anticipated in our forward-looking statements. Forward-looking statements speak only as of the date they were made, and we do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law. Any such forward-looking statements are not an indication of future performance and involve risks.
PART I
| ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not applicable.
| ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
| ITEM 3. | KEY INFORMATION |
| A. | [RESERVED] |
| 9 |
| B. | Capitalization and Indebtedness |
Not applicable.
| C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
| D. | Risk Factors |
Risks Relating to Brazil
The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions, could adversely affect us and the market price of our common shares and ADSs.
The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, changes in interest rates, tax policies, price and tariff controls, currency devaluation or appreciation, capital controls and limits on imports. Our business, financial condition and results of operations, as well as the market price of our common shares or ADSs, may be adversely affected by changes in public policy at federal, state and municipal levels with respect to public tariffs and exchange controls, as well as other factors, such as:
| · | expansion or retraction of the Brazilian economy; | |
| · | the regulatory environment related to our business operations and concession agreements; | |
| · | interest rates and monetary policies; | |
| · | exchange rates and exchange controls and restrictions on remittances abroad; | |
| · | currency fluctuations; | |
| · | increased unemployment; | |
| · | availability of credit; | |
| · | changes in labor regulations; | |
| · | political elections and social and political instability; | |
| · | inflation; | |
| · | liquidity of the Brazilian capital and lending markets; | |
| · | tax and regulatory policies and laws; | |
| · | economic and social instability; | |
| · | water and electricity shortages and rationing; | |
| · | the impact of widespread health developments, such as COVID-19 and any variants and the Brazilian government’s response to them and, inter alia, its impacts on water consumption, labor laws and other regulations affecting our industry. For more information regarding risks relating to infectious diseases including the novel coronavirus, see “—Risks Relating to Our Business— Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the outbreak of COVID-19;” and | |
| · | other political, foreign policy, social and economic developments in or affecting Brazil. |
Uncertainty as to whether the Brazilian government will implement changes in policy or regulation affecting these or other factors in the future, may affect economic performance and contribute to economic uncertainty in Brazil, as well as higher volatility in the Brazilian capital markets and the securities of Brazilian issuers, which may have an adverse effect on us. We cannot predict the measures that the federal government will take due to mounting macroeconomic pressures or otherwise. Economic and political instability and uncertainty has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian capital markets and the securities of Brazilian issuers, which may adversely affect us. We cannot predict what future policies will be adopted by current or future Brazilian governments, or whether these policies will result in adverse consequences to the Brazilian economy or cause an adverse effect on us.
| 10 |
Changes in Brazilian tax law or conflicts in its interpretation may adversely affect us.
The Brazilian government has frequently discussed and implemented various changes in tax regimes, including the entering into or modification of tax treaties, that may affect companies and their customers. These changes include changes in the current tax rates, the creation of temporary or permanent taxes and/or the cancellation of benefits in effect, the proceeds of which are allocated to government projects. These changes may result in increases in our tax liabilities, which could adversely affect our profitability. In addition, certain tax laws may be interpreted by tax authorities in a way that is controversial. As a result, we may be adversely affected in the event of a different interpretation from the one relied upon to carry out our transactions. We cannot assure that we will be able to maintain our projected cash flow and profitability following any increases in Brazilian taxes applicable to our operations, which may adversely affect our results.
There are currently proposals in the Brazilian Congress to implement a tax reform. Among the proposals under discussion, is the possibility of a complete change in the taxation system for consumption, replacing certain federal, state and/or municipal taxes, such as, for example, the tax on manufactured products (Imposto sobre Produtos Industrializados), the social integration program (Programa de Integração Social), the contribution for social security financing (Contribuição para o Financiamento da Seguridade Social – “COFINS”), the circulation of goods and services tax (Imposto sobre Circulação de Mercadorias e Serviços) and the service tax (Imposto Sobre Serviços), with one or more taxes levied on consumption. We also highlight Bill No. 2,337/2021, which proposes significant changes to the income tax legislation, such as the gradual decrease of the income tax rate for companies from 15% to 12.5% in 2022 and 10% in 2023.
Uncertainty about changes in tax regimes may have an adverse effect on our business, results of operations and financial condition.
Ongoing political instability has adversely affected the Brazilian economy and may have an adverse effect on our financial condition and results of operations.
Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies.
Brazil has experienced amplified economic and political instability, as well as heightened volatility, as a result of various ongoing investigations by the Brazilian Federal Prosecutors’ Office (Ministério Público Federal), the Brazilian Federal Police (Polícia Federal), the CVM, and other Brazilian public entities who are responsible for corruption and cartel investigations. In addition, certain foreign entities, such as the U.S. Department of Justice, the SEC and the Office of the Attorney General of Switzerland (Bundesanwaltschaft), have also conducted and still conduct their own investigations. These investigations have negatively impacted the Brazilian economy and political environment and have contributed to a decline in market confidence in Brazil. In addition, they may lead to further allegations and charges against Brazilian federal and São Paulo state government officials and senior management of Brazilian industry.
Numerous elected officials, public servants and executives and other personnel of major companies have been subject to investigation, arrest, criminal charges and other proceedings. There can be no assurance that other federal or state officials or senior management of Brazilian industry will not be charged with corruption-related crimes or other investigations into corruption. Additional allegations, trials and convictions may lead to political instability and a decline in confidence by consumers and foreign direct investors in the stability and transparency of the Brazilian government and Brazilian companies and may have a material adverse effect on Brazil’s economic growth, on the demand for securities issued by Brazilian companies, and on access to the international financial markets by Brazilian companies.
Government interference in the economy may adversely impact the macroeconomic indicators mentioned (for more information, see “Item 3.D. Risk Factors—Risks Relating to Brazil—The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions, could adversely affect us and the market price of our common shares and ADSs”), affecting market activity and us.
In October 2022, Luis Inácio Lula da Silva was elected president of Brazil for a four-year term beginning in 2023. The uncertainties regarding the new government's ability to implement changes related to monetary, fiscal and social security policies, especially given that the federal legislative branch is controlled by opposition parties, as well as the post-election political atmosphere, with significant protests and strikes, may contribute to economic instability. These uncertainties and any new measures that the new government may implement may increase the volatility of the Brazilian securities market.
The President has the power to impose policies and issue governmental acts regarding the Brazilian economy that may affect our operations and financial performance. We cannot predict what policies the new President elect will impose, much less whether such new policies or changes in current policies will have an adverse effect on our business or the Brazilian economy.
| 11 |
In addition, Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened volatility in the securities issued by Brazilian companies. For example, presidential elections occurred in October 2022, with Luiz Inácio Lula da Silva defeating Jair Messias Bolsonaro, in one of the closest presidential races in history. In the aftermath of the 2022 election results, there were mass protests and demonstrations throughout Brazil by supporters of former president Jair Bolsonaro disputing the election results. On January 8, 2023, protesters stormed government buildings in Brasilia, the country’s capital, including the Congress, the Supreme Court and the Presidential Palace, which prompted the Supreme Court to order participants and certain politicians to be imprisoned and resulted in new investigations. It is unclear whether this heightened state of political and social tension will dissipate or intensify in coming months as the country awaits definition regarding the political and economic agenda of the new administration, which could contribute to increased macroeconomic and political instability.
Historically, the political landscape in Brazil has influenced the performance of the Brazilian economy. In particular, political crisis have affected investor confidence as well as public opinion, which has adversely affected the economic development in Brazil and, consequently, may impact the trading price of our common shares and ADSs.
Any of the above factors may create additional political uncertainty, which could harm the Brazilian economy and, consequently, our business, results of operations and financial condition and the trading price of our common shares and ADSs.
Inflation and the Brazilian government’s measures to combat inflation may contribute to economic uncertainty in Brazil, adversely affecting us and the market price of our common shares or ADSs.
Brazil has historically experienced high rates of inflation and the Brazilian government’s measures to combat it have had and may in the future have significant effects on the Brazilian economy and our business, financial condition and results of our operations. Tight monetary policies with high interest rates may restrict Brazil’s growth, the availability of credit and our cost of funding. Conversely, other Brazilian governmental actions, including lowering interest rates, intervention in the foreign exchange market and actions to adjust or fix the value of the real, may trigger increases in inflation. Brazil’s General Price Index (Índice Geral de Preços – Mercado – “IGP-M”) index, recorded inflation of 5.45% in 2022, 17.78% in 2021 and 23.14% in 2020. The Special Clearing and Settlement System (Sistema Especial de Liquidação e Custódia – “SELIC”), the official overnight interest rate in Brazil, was 13.65%, 9.15% and 1.90% at the end of 2022, 2021 and 2020, respectively. However, the COPOM has frequently adjusted the interest rate in situations of economic uncertainty and to achieve objectives under the economic policy of the Brazilian government. For example, in response to the COVID-19 outbreak, the COPOM reduced the SELIC target rate to 2% between August 2020 and March 2021, after which it was raised numerous times, most recently to 13.75% to mitigate the increase in inflation, where it remains as of the date of this annual report. Inflation, along with government measures to combat inflation and public speculation about possible future government measures, has had significant negative effects on the Brazilian economy, and contributed to economic uncertainty in Brazil and heightened volatility in the Brazilian securities market, which may have an adverse effect on us if such policies are reinstated.
The Brazilian annual inflation rates, as measured by the Amplified Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo – “IPCA”), were 5.79%, 10.06% and 4.52% during 2022, 2021 and 2020, respectively. In 2021, the IPCA reached its highest accumulated annual inflation since 2015, according to data provided by IBGE. In 2022, the accumulated inflation slowed down compared to 2021. If Brazil continues to experience substantial high inflation or deflation in the future, our business, financial condition or results of operations may be adversely affected, including our ability to comply with our obligations. In addition, a substantial increase in inflation may weaken investors’ confidence in Brazil, causing a decrease in the market price of our common shares or ADSs.
Exchange rate instability and developments and the perception of risk in other countries, especially in the United States and in emerging market countries, may adversely affect us, our foreign currency denominated debt and the market price of our common shares or ADSs and our ability to service our foreign currency denominated obligations.
Brazil’s currency has been characterized historically by high degrees of volatility and has depreciated periodically in relation to the U.S. dollar and other foreign currencies during recent decades. At different points over this period, the Brazilian government has implemented various economic plans and exchange rate policies, including sudden devaluations, periodic mini devaluations during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets.
The current floating exchange rate system has also contributed to significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and other currencies. As of December 31, 2020, the exchange rate was R$5.19 to US$1.00, representing a depreciation of 28.9% as compared to the rate prevailing as of December 31, 2019. During 2021, the real was very volatile and depreciated by 7.4% against the U.S. dollar by year-end. During 2022, there was an appreciation of the real by 6.5% against the U.S. dollar and by 18.4% against the Japanese Yen. As of April 19, 2023, the commercial selling rate as reported by the Central Bank was R$5.0467 per US$1.00. There can be no assurance that the real will not depreciate further against the U.S. dollar.
| 12 |
Exchange rate fluctuations will affect the U.S. dollar equivalent of the real price of our common shares on the B3, as well as the U.S. dollar equivalent of any distributions we make in reais with respect to our common shares.
Depreciation of the Brazilian real against the U.S. dollar has created inflationary pressures in Brazil and has caused increases in interest rates, which could negatively affect the growth of the Brazilian economy as a whole and harm our financial condition and results of operations, curtail our access to financial markets and prompt government intervention, including recessionary governmental policies. Depreciation of the Brazilian real against the U.S. dollar could also lead to decreased consumer spending, inflationary pressures and reduced economic growth.
In the event of a significant devaluation of the Brazilian real in relation to the U.S. dollar or other currencies, our ability to meet our foreign currency denominated obligations could be adversely affected because our tariff revenue and other sources of income are denominated solely in reais. In addition, because we have debt denominated in foreign currencies, any significant devaluation of the real will increase our financial expenses as a result of foreign exchange losses that we must record. This would also increase our total debt, which could lead us to breach any debt/EBITDA covenants we are subject to in certain financings. We had total foreign currency denominated debt of R$2,775.8 million as of December 31, 2022, and we anticipate that we may incur additional amounts of foreign currency denominated debt in the future. We do not currently have any derivative instruments in place to protect us against a devaluation of the real in relation to any foreign currency. A devaluation of the real may adversely affect us and the market price of our common shares or ADSs. For more information, see Note 5.1(a) to our 2022 financial statements. Further, the market price of securities of Brazilian companies is affected to varying degrees by economic and market conditions in other countries, including the United States, China and other Latin American and emerging market countries. Although economic conditions in these countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market price of securities of Brazilian issuers. Crises in other emerging market countries or economic policies of other countries may diminish investor interest in securities of Brazilian issuers, including ours. This could adversely affect the market price of our common shares or ADSs and could also make it more difficult for us to access the capital markets and finance our operations in the future, on acceptable terms or at all.
In the past, the adverse development of economic conditions in emerging markets resulted in a significant flow of funds out of Brazil and a decrease in the quantity of foreign capital invested in Brazil. Changes in the prices of securities of public companies, lack of available credit, reductions in spending, general slowdown of the global economy, exchange rate instability and inflationary pressure may adversely affect, directly or indirectly, the Brazilian economy and securities market. Global economic downturns and related instability in the international financial system have had, and may continue to have, a negative effect on economic growth in Brazil. Global economic downturns reduce the availability of liquidity and credit to fund the continuation and expansion of business operations worldwide.
In addition, global financial crises have caused, and in the future may again cause, significant consequences to Brazil, such as stock and credit market volatility, unavailability of credit, higher interest rates, a general slowdown of the world economy, volatile exchange rates, and inflationary pressure, among others, which may, directly or indirectly, materially and adversely affect us and the price of securities issued by Brazilian companies, including our common shares and ADSs.
Downgrades in Brazil’s credit rating could adversely affect our credit rating, the cost of our indebtedness and the trading price of the securities.
Rating agencies periodically evaluate Brazil and its sovereign ratings, based on a number of factors, including macroeconomic trends, fiscal and budgetary conditions, debt metrics and the prospect of changes in any of these factors. Downgrades in Brazil’s credit rating can lead to downgrades in our credit rating and increase the cost of our indebtedness as investors may require a higher rate of return to compensate a perception of increased risk. Brazil lost its investment-grade status from all three major rating agencies (Standard & Poor's, Moody's and Fitch) in 2015 and, consequently, the trading prices of securities in the Brazilian debt and equity market were negatively affected.
The latest update regarding Brazil's sovereign risk ratings made by global rating agencies are: (i) Moodys reaffirmed Brazil's sovereign rating at Ba2 and maintained the outlook stable according to the last report published on April 12, 2022; (ii) Fitch maintained the rating at BB- with a stable outlook according to the report published on December 20, 2022; and (iii) S&P Global followed the same path as the previous ones, reaffirming the rating at BB- with a stable outlook, according to the report published on June 15, 2022.
Any further downgrade in Brazil's sovereign credit rating may increase investors' perception of risk on the country and, consequently, of Brazilian companies (including us), which may increase future funding costs and negatively affect interest and profit margins, impacting the trading price of our common shares and ADSs.
| 13 |
Brazil’s economy is vulnerable to external and internal shocks, which may have a material adverse effect on Brazil’s economic growth and on the trading markets for securities.
Brazil’s economy is vulnerable to external shocks, including adverse economic and financial developments in other countries. For example, an increase in interest rates in the international financial markets may adversely affect the trading markets for securities of Brazilian issuers. In addition, a drop in the price of commodities produced by Brazil could adversely affect the Brazilian economy. A decline in the economic growth or demand for imports of any of Brazil’s major trading partners could also have a negative impact on Brazil’s exports and adversely affect Brazil’s economic growth.
In addition, because international investors’ reactions to events occurring in one emerging market country sometimes produce a “contagion” effect, in which an entire region or class of investment is disfavored by international investors, Brazil could be adversely affected by negative economic or financial developments in other countries. Brazil has been adversely affected by such contagion effects on several occasions, including following the 1998 Russian crisis, the 2001 Argentine crisis and the 2008 global economic crisis. We cannot assure that any situations like those described above will not negatively affect investor confidence in emerging markets or the economies of Latin America, including Brazil.
In February 2022, the Russian president Vladimir Putin announced the beginning of a special military operation in the Donbas region in eastern Ukraine, which resulted in an armed conflict between these countries. Since then, other European countries and the United States have imposed packages of financial and economic sanctions that, in various ways constrain: (i) transactions with numerous Russian entities and individuals; (ii) transactions in Russian sovereign debt; and (iii) investment, trade, and financing to, from, or in certain regions of Ukraine. In addition, the military conflict between Russia and Ukraine has increased many commodity prices, such as the prices of energy and oil. While the invasion continues toward major Ukrainian cities, the United States, the European Union and the United Kingdom and other jurisdictions are likely to impose additional material, financial and economic, sanctions and export controls, including against the Russian energy sector, in which the country is an important global producer. Such actions and sanctions have impacted and may continue to impact adversely and materially the Russian economy and, consequently, the economies of other countries that maintain commercial relations with Russia (including Brazil). Additionally, it is not possible to predict whether additional sanctions against Russia will be applied and, if so, to what degree these sanctions will impact Brazil’s economy. All this tension caused by the conflict in Ukraine has already triggered an inflationary process on commodities (mainly oil), which may significantly impact the business and the market price of the shares of companies all over the world, including us. Further, this conflict has caused substantial daily oscillations in the global capital markets (including in Brazil), which may have a material adverse effect on our business and financial performance, including through higher volatility in foreign currency exchange rates, higher inflation rates in Brazil, as well as increases in exchange rates.
The Russia and Ukraine conflict has led to an increase in fuel and gas prices. If this continues simultaneously with a possible appreciation of the U.S. dollar, it would put additional pressure on inflation and could hinder the Brazilian economic recovery. The global supply of agricultural commodities was also impacted, and in case there is an increase in the price of such commodities, the demand for Brazilian production would increase, thus raising export rates and increasing domestic prices. Such a scenario could bring uncertainty for the global economy and could negatively impact the Brazilian economy and inflation levels.
Brazil’s economy is also subject to risks arising from the development of several domestic macroeconomic factors. These include general economic and business conditions of the country, the level of consumer demand, the general confidence in the political conditions in the country, present and future exchange rates, the level of domestic debt, inflation, interest rates, the ability of the Brazilian government to generate budget surpluses and the level of foreign direct and portfolio investment.
Our operating conditions have been, and will continue to be, affected by the growth rate of gross domestic product (“GDP”) in Brazil, because of the correlation between GDP growth and water demand. Therefore, any change in the level of economic activity may adversely affect the liquidity of, and the market for, our securities and consequently our financial conditions and the results of our operations.
Disruption or volatility in global financial and credit markets could have a material adverse effect on us.
Volatility and uncertainty in global financial and credit markets have generally led to a decrease in liquidity and an increase in the cost of funding for Brazilian and international issuers and borrowers. Such conditions may adversely affect our ability to access capital and liquidity on financial terms acceptable, if at all. If we are unable to access capital and liquidity on reasonable financial terms acceptable to us or at all, our financial condition and results of operations may be adversely affected. In addition, the economic and market conditions of other countries, including the United States, countries in the European Union and emerging markets, may affect the volume of foreign investments in Brazil. If the level of foreign investment declines, our access to capital may likewise decline, which could negatively affect our business, ability to take advantage of strategic opportunities and, ultimately, the trading price of our ADSs.
| 14 |
Risks Relating to Our Control by the State of São Paulo
We are controlled by the State of São Paulo, whose interests may differ from the interests of non-controlling shareholders, including holders of ADSs.
As the São Paulo state government owns the majority of our common shares, it is able to control the election of a majority of the members of our Board of Directors and appoint our senior management and with that determine our operating policies and strategy. As of December 31, 2022, the State owned 50.3% of our outstanding common shares. In addition, pursuant to the State Constitution of São Paulo, the Governor of São Paulo, the legal representative of our controlling shareholder, is the competent authority to make these decisions. Both through its control of our Board of Directors as well as by enacting State decrees, the State has in the past directed our company to engage in business activities and make expenditures that promoted political, economic or social goals, that did not necessarily enhance business, financial condition or results of operations. For example, the State issued Decree No. 64,879/2020 setting out emergency measures as a result of the coronavirus outbreak, including exempting customers under the “Residential Social” and “Residential Favela” categories from paying water and sewage bills between March and September, 2020, for all municipalities we serve.
The State of São Paulo has the power to appoint up to 9 out of the 11 members of our Board of Directors and, through them, influence the choice of a majority of the executive officers responsible for our day-to-day management. Consequently, the State is empowered to approve most matters prescribed by law. Upon Tarcísio Gomes de Freitas assuming the governance of the State of São Paulo, the São Paulo state government replaced all of our executive officers.
On March 27, 2023 we published our management proposal setting out the matters to be discussed at our Ordinary and Extraordinary General Shareholders' meeting to be held on April 28, 2023. In accordance with the recommendation from our controlling shareholder, we are proposing to replace all board members, except for four (the director appointed by the employees, the minority shareholders and the CEO, who is part of the Board of Directors as long as he is the CEO, and one other). These changes are subject to obtaining approval at the shareholders' meeting. We cannot predict the impact of these or any other potential future changes to the Board of Directors on our business, financial condition or results of operation and whether such changes will be the interests of other minority shareholders, including ADR holders.
Additionally, the São Paulo state government, as our controlling shareholder, may take measures related to business planning, strategies, acquisitions, asset disposals, partnerships, financings or similar transactions, that may be contrary to the interests of other minority shareholders, including ADR holders.
Our controlling shareholder is currently discussing proposals for our corporate reorganization. We cannot guarantee that any potential reorganization will not have a material adverse effect on our business, financial condition or results of operations.
On February 28, 2023, the State Privatization Program’s Board (Conselho Diretor do Programa Estadual de Desestatização – “CDPED”), which has authority over our corporate reorganization plan, agreed to proceed with arrangements for hiring consultancy services for the study of our privatization. On April 10, 2023, the São Paulo state government signed a contract with the International Finance Corporation (“IFC”), an agency linked to the World Bank, which will act as the advisor in this process. As of the date of this annual report, we have not received any details about the proposals being discussed for our privatization and we cannot assure that CDPED will give us guidance on our potential corporate reorganization, the terms of such guidance, or that any potential reorganization will not have a material adverse effect on our business, financial condition or results of operation.
Our right to withdraw water from the Guarapiranga and Billings reservoirs is being challenged judicially by minority shareholders of EMAE.
We withdraw water for use in the São Paulo metropolitan region from the Guarapiranga and Billings reservoirs. Empresa Metropolitana de Águas e Energia S.A. (“EMAE”), a company that is also controlled by the State of São Paulo, has a concession to produce hydroelectric energy using water from the same reservoirs. EMAE commenced various lawsuits against us in the past seeking compensation for the water we withdraw from these reservoirs. Those lawsuits have now been settled by way of an agreement between EMAE and our company.
However, on April 11, 2016, we were also named in a separate lawsuit filed by minority shareholders of EMAE against the State of São Paulo, as controlling shareholder of EMAE. The minority shareholders are seeking an order to require the State to stop us from withdrawing water from the reservoirs without paying compensation to EMAE, and to allow EMAE to pump water from the reservoirs for its hydroelectric facilities. The plaintiffs allege that the State, in its capacity as controlling shareholder of EMAE, has acted unduly to EMAE’s detriment and in our favor. This lawsuit was dismissed, and an appeal was filed, but the Court upheld the dismissal of the claim stating that the State operated in compliance with the legal system, in the public interest. An appeal was filed with the higher courts on March 8, 2023.
| 15 |
In addition, on August 7, 2017 we were named in a new lawsuit against us, EMAE and the National Electric Energy Agency (Agência Nacional de Energia Elétrica – “ANEEL”), brought by Alvaro Luiz de Lima de Alvares Otero, another minority shareholder of EMAE, requesting the annulment of ANEEL’s order approving the settlement agreement mentioned above, as well as our condemnation for indemnifying EMAE for damages suffered by EMAE. The plaintiff alleges that the order is illegal and harmful, jeopardizing the operational viability of the Henry Borden hydroelectric power plant, as well as the energy security of the State of São Paulo, the Southeast region of Brazil and Brazil as a whole. The judge dismissed this lawsuit without judgment on the merits, but this decision is currently being appealed.
The settlement agreement between EMAE and us mentioned above does not necessarily terminate the separate lawsuits. If one of the ongoing lawsuits by minority shareholders of EMAE requires the State to make a different decision regarding water use from what was agreed between EMAE and the State of São Paulo, our ability to withdraw water from the Guarapiranga and Billings reservoirs may be compromised. If we were no longer able to withdraw water from these reservoirs, we would have to transport water from locations further away, which would increase our water transportation costs and may affect our ability to provide adequate service in the region, which may have an adverse effect on our financial condition and results of operations. In addition, we may be ordered to pay any indemnity to EMAE if the agreement is judicially invalidated, which could have material adverse effects on our financial condition and operating results. For more information, see “Item 7. Major Shareholders and Related Party Transactions.”
Risks Relating to Our Business
Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the outbreak of COVID-19.
Our financial and operating performance may be adversely affected by the outbreak of pandemics such as COVID-19, as well as other catastrophes and health epidemics on a regional or global scale. Such outbreaks may result, at different levels, in the adoption of governmental and private measures, including restrictions, as a whole or in part, on the circulation and transportation of persons, goods and services and consequently, in the closure of private establishments and public offices, interruptions to the supply chain, reduction of consumption in general by the population and increased intervention in their economies.
The impact of the COVID-19 pandemic on the global economy and financial markets was significant in 2020 and 2021 and continued to a lesser extent in 2022. It also introduced new habits that impacted consumption and, as a result, our business.
Although restrictions imposed to contain the spread of COVID-19 were lifted in 2022, various companies continue to adopt partial remote working regimes. This affected the volume of sales in the commercial, industrial and public categories which would have been higher had it not been for the partial remote working policies adopted by these companies. In addition, the adverse macroeconomic impact of the COVID-19 pandemic in Brazil had a detrimental impact on many parts of Brazilian society and led to increased delinquencies which negatively impacted our results of operations. Our allowance for doubtful accounts increased by 21.5% for the year ended December 31, 2022 compared to the same period in 2021, and 43.4% for the year ended December 31, 2021, compared to the same period in 2020.
Epidemics, such as COVID-19 and any new variants, natural disasters and other catastrophes may have a negative and significant effect on the world economy and on Brazil’s economy, and include or may include reduction in the level of economic activity; currency devaluation and volatility; increase in the fiscal deficit and constraints to the capacity of the Federal Government or State Governments to make investments and payments and to contract services or acquire goods; delays in judicial, arbitral and/or administrative proceedings; imposition, even if only temporarily, of a more onerous tax treatment of our business activities; decrease the liquidity available in the international and/or Brazilian market; and volatility in the price of raw materials and other inputs, among other effects.
We cannot assure that future events, such as other health catastrophes and epidemics, will not result in the spread of contagious viruses, such as COVID-19 and other variants, that may lead to a renewed imposition of remote work regimes and the closure of non-essential commercial, industrial and public establishments. The occurrence of any of these events and their duration may have material adverse effects on our operating results and financial condition, as well as the trading price of our common shares and ADSs.
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.
Our current Tariff Structure (as defined in “Item 4.B. Business Overview—Tariffs—Tariff Structure”) is based on the pricing regulation approved by State Decree No. 41,446/1996 and has been in force since the 1970s. Accordingly, it no longer reflects the socioeconomic changes the State of São Paulo has undergone over the past decades. Considering the need to adapt to new circumstances, ARSESP accepted our request to update our Tariff Structure to reflect the new consumption profile of our customers. This process was developed in parallel with the Third Ordinary Tariff Revision, both of which were completed on April 8, 2021.
| 16 |
Our current Tariff Structure applies different price ranges for the following categories of users: (i) residential customers (Residential Normal, Residential Social and Residential Vulnerable) and non-residential customers (including commercial, industrial and public customers, as described in “Item 4.B. Business Overview— Tariffs - Tariff Structure”); (ii) the metropolitan regions of São Paulo and the regional system; (iii) water and sewage, with no difference in prices for sewage collection and treatment; and (iv) the charge of a minimum consumption of 10 m³/month and differences in prices per range, with progressive increases in the price as consumption increases.
The New Tariff Structure (as defined in “Item 4.B. Business Overview—Tariffs—New Tariff Structure”), which was expected to be adopted as of 2022, introduces: (i) new classifications for residential customers (Residential, Residential Social, Residential Vulnerable and Residential Collective) and non-residential customers (Commercial, Commercial Assistance, Commercial Collective, Industrial and Public Wholesale, Water Truck, Sewage Cleaning Truck); (ii) different prices for water, sewage collection and treatment sewage services; (iii) the unification of our pricing schedules, which partially reduces subsidies between the regions; and (iv) the charging of a fixed component that reflects fixed costs per connection and another variable part that reflects consumption (a binomial price).
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 is scheduled for the first half of 2024 which aims 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 will be implemented following the public consultation scheduled for the first half of 2024. For more information, see “Item 4.B. Business Overview—Tariffs—New Tariff Structure.”
The transition period during which the New Tariff Structure will be implemented may lead to uncertainties as well as unpredictability about the revenues we expect to earn with the new structure, given that it is difficult to determine the customer reclassification as a result of price changes, which can lead to differences in our revenues compared to those projected based on the current Tariff Structure. We cannot assure what the result of the implementation of the New Tariff Structure will be and if it will have an adverse effect on our business, financial condition or results of operations. For more information, see “Item 4.B. Business Overview—Tariffs—New Tariff Structure.”
Certain terms of our agreement to provide water and sewage services in the city of São Paulo could have a material adverse effect on us.
The provision of water and sewage services in the city of São Paulo accounted for 45.1% of our gross operating revenues from sanitation services (excluding revenues relating to the construction of concession infrastructure) in the year ended December 31, 2022.
On June 23, 2010, the State and the city of São Paulo executed an agreement in the form of a convention (“convênio”) with our intermediation and ARSESP’s consent, under which they agreed to manage the planning and investment for the basic sanitation system of the city of São Paulo on a joint basis. In accordance with the convênio, we executed a service contract on June 23, 2010, with the State and the city of São Paulo, to provide these services for the following 30 years. Among other principal terms of this service contract, we must transfer 7.5% of the gross revenues we obtain from this contract and subtract (i) COFINS and the Programa de Formação do Patrimônio do Servidor Público (“PASEP”) taxes, and (ii) unpaid bills for services provided to properties owned by the city of São Paulo, to the Municipal Fund for Environmental Sanitation and Infrastructure (Fundo Municipal de Saneamento Ambiental e Infraestrutura), established by Municipal Law No. 14,934/2009. For more information, see “Item 7.B. Related Party Transactions—Agreement with the State and the city of São Paulo” for a further discussion of the principal terms of the convênio and the principal terms of the service contract we executed in accordance with the convênio.
Since the Second Ordinary Tariff Revision, ARSESP is passing-through to the tariffs up to 4% of the municipal revenue that is transferred by us to a legally established municipal infrastructure fund. Within the scope of the Second Ordinary Tariff Revision, which was concluded in April 2021, our only contract that provides for this and complies with ARSESP’s requirements is with the municipality of São Paulo. Accordingly, 4% of the funds transferred to the São Paulo Municipal Fund for Environmental Sanitation and Infrastructure were transferred to tariffs for the revision cycle ending in April 2021. For more information, see “Item 4.B. Business Overview—Tariffs,” especially “Item 4.B. Business Overview—Tariffs—Tariff Readjustment and Revisions.”
| 17 |
Prior to May 9, 2018, our tariff had never included any pass-through to tariffs related to the transfer of 7.5% of the gross revenues obtained from providing sanitation services in the municipality of São Paulo to the São Paulo Municipal Fund for Environmental Sanitation and Infrastructure.
The transfer of 4% was subsequently regulated by ARSESP Resolution No. 870/2019 of May 2019, which established the criteria and conditions to permit the transfer of 4% of the revenue from service providers through the tariff, excluding COFINS and PASEP taxes and, in accordance with the agreement with the City of São Paulo, and unpaid bills in respect of publicly owned properties. In addition, for recognition as part of the tariff, municipal funds for environmental sanitation and infrastructure must be established by the municipality through a legal act, which specifies the allocation of resources. For the third tariff cycle (2021-2024) ARSESP provided that a 4% limit will apply to transfers to municipal funds and that these transfers must be previously approved by ARSESP and recognized as part of the tariffs. As established by ARSESP, if the concessionaire and the municipality decide to transfer amounts greater than 4% of the revenue, the excess will not be recognized as a financial component of tariffs and will be restricted to the municipality.
Considering that ARSESP has limited the pass-through to tariff of values transferred to municipal infrastructure funds to 4%, the mandatory contractual transfer of the remaining 3.5% of the gross revenues, subtracting (i) COFINS and PASEP taxes and (ii) unpaid bills of publicly owned properties in the city of São Paulo, to the Municipal Fund for Environmental Sanitation and Infrastructure will not be passed through to customers in full and we cannot assure you when and if this will happen and may have an adverse effect on our business, financial condition or results of operations.
From 2010 to December 31, 2022, we transferred approximately R$5.2 billion to the São Paulo Municipal Fund for Environmental Sanitation and Infrastructure. For additional information on ARSESP regulations, see “Item 4.B. Business Overview—Tariffs” and “Item 4.B. Business Overview— Government Regulations Applicable to Our Contracts— Establishment of ARSESP.”
On July 13, 2021, the city of São Paulo filed a public civil action against us, the State of São Paulo and ARSESP aiming, in general terms, to discuss the possibility of including the charge to the Municipal Fund for Environmental Sanitation and Infrastructure (“FMSAI”) in the tariff adjustment provided for in Resolution No. 870/2019, which in practice was already being transferred pursuant to Resolution No. 794/2018, with a view to, in summary: (i) the recognition of illegality of the transfer of the charge of 7.5% of our gross revenue, related to FMSAI, the water and sewage tariff practiced in the City of São Paulo; (ii) establishing our liability for damages caused to users affected by ARSESP Resolutions 794/2018 and 870/2019; and (iii) the recognition of the inexistence of liabilities to be paid to us for the transfers to FMSAI made by it since 2010, since they would already be included in the tariff value from the beginning.
On August 19, 2021, the city of São Paulo requested the suspension of the process in view of the ongoing negotiations in search of an amicable solution to the dispute. On September 13, 2021, the suspension of the case for a period of ninety days was granted. On August 15, 2022, the city of São Paulo reported that the settlement negotiations were still ongoing, and, as of the date of this annual report, there have been no further developments.
We have not yet been named and cannot predict the outcome of this proceeding, which, if unfavorable, could have an adverse economic impact on us.
Any failure to obtain new financing may adversely affect our ability to continue our capital expenditure program.
Our capital expenditure program will require resources of approximately R$26.2 billion in the period from 2023 through 2027. In 2022, we recorded R$5.4 billion in capital expenditures. We funded and intend to continue funding these capital expenditures with cash generated by our operations, issuances of debt securities in the domestic and international capital markets as well as borrowings in Brazilian reais and foreign currencies. A significant portion of our financing needs is obtained through long-term financing at attractive interest rates from Brazilian federal public banks, multilateral agencies and international governmental development banks. If the Brazilian government changes its policies regarding public financing or amounts available for water and sewage services, or if we fail to obtain long-term financing at attractive interest rates from domestic and international multilateral agencies and development banks in the future, we may not be able to meet our obligations or finance our capital expenditure program, which could have a material adverse effect on our business, financial condition or results of operations.
Furthermore, Brazilian public and private financial institutions are legally limited up to a certain percentage of their shareholder’s equity to provide loans to public sector entities, including, for example, us. These limitations could adversely affect our ability to continue our capital expenditure program and, consequently, may adversely affect our business, financial condition or results of operations.
Our debt includes financial covenants that impose indebtedness limits on us. Our failure to comply with these covenants could seriously impair our ability to finance our capital expenditure program, which could have a material adverse effect on us. For more information on these covenants, see “Item 5.B. Liquidity and Capital Resources—Indebtedness Financing—Financial Covenants.”
| 18 |
Any substantial monetary judgment against us in legal proceedings may have a material adverse effect on our financial condition.
We are currently a party to numerous legal proceedings relating to civil, corporate, environmental, labor and tax claims filed against us. These claims involve substantial amounts of money and other remedies. We have established provisions for all amounts in dispute that represent a present obligation as a result of a past event and is probable there will be outflow to settle the referred obligation in the view of our legal advisors and due to disputes that are covered by laws, administrative decrees, decrees or court rulings that have proven to be unfavorable. As of December 31, 2022, the estimated total claims asserted amounted to R$54,317.3 million (net of R$207.6 million in escrow deposits), including contingent liabilities. We have recognized provisions totaling R$1,610.8 million (net of escrow deposits) as of December 31, 2022. These provisions do not cover all legal proceedings involving monetary claims filed against us and it may be insufficient to cover the ultimate resolution of these claims. Any unfavorable judgment in relation to these proceedings may have a material adverse effect on our financial condition, reputation and image. For more information, see “Item 8.A. Financial Statements and Other Financial Information—Legal Proceedings” and Note 20 to our 2022 Financial Statements included in this annual report.
We are subject to anti-corruption, anti-bribery, anti-money laundering, sanctions and antitrust laws and regulations. Our violation of any such laws or regulations could have a material adverse effect on our reputation, our results of operations and our financial condition.
We are subject to anti-corruption, anti-bribery, anti-money laundering, sanctions, antitrust and other similar laws and regulations. We are required to comply with the applicable laws and regulations of Brazil, and we may become subject to such laws and regulations in other jurisdictions. There can be no assurance that our internal policies and procedures will be sufficient to prevent or detect any inappropriate practices, fraud or violations of these laws or regulations by our employees, officers, executives, partners, agents and service providers, nor that any such persons will not take actions in violation of our policies and procedures. Any violations, whether actual or perceived, by us or any of our employees, directors, officers, partners, agents and service providers of these laws or regulations or our internal policies or procedures could have a material adverse effect on our reputation, our ability to obtain financing our business, financial condition or results of operations.
Our business is subject to cyberattacks and security and privacy breaches.
Our business involves the collection, storage, processing and transmission of customers’, suppliers and employees’ personal or sensitive data. We also use key information technology systems for controlling water, sewage and commercial, administrative and financial operations. We may be subject to breaches of the information technology systems we use for these purposes. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions, or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. Due to the COVID-19 outbreak, we started to use new communication software and systems. However, we cannot assure that these systems adequately protect data and information to avoid confidentiality breaches or will not affect our capacity to operate.
The techniques used to obtain unauthorized, improper or illegal access to our systems, our data or our customers’ data, to disable or degrade service, or to sabotage systems are constantly evolving, may be difficult to detect quickly, and often are not recognized until launched against a target. Unauthorized parties may attempt to gain access to our systems or facilities through various means, including, among others, hacking into our systems or those of our customers, partners or vendors, or attempting to fraudulently induce our employees, customers, partners, vendors or other users of our systems into disclosing usernames, passwords or other sensitive information, which may in turn be used to access our information technology systems. Certain efforts may be supported by significant financial and technological resources, making them even more sophisticated and difficult to detect.
Our information technology and infrastructure may be vulnerable to cyberattacks or security breaches, and third parties may be able to access our customers’, suppliers’ and employees’ personal or proprietary information that are stored on or accessible through those systems. Our security measures may also be breached due to human error, malfeasance, system errors or vulnerabilities, or other irregularities. Any actual or perceived breach of our security could interrupt our operations, result in our systems or services being unavailable, result in improper disclosure of data, materially harm our reputation and brand, result in significant legal and financial exposure, lead to loss of customer confidence in our products and services, and adversely our business, financial condition or results of operations. In addition, any breaches of network or data security at our suppliers (including data center and cloud computing providers) could have similar negative effects. Actual or perceived vulnerabilities or data breaches may lead to claims against us. We cannot guarantee that the protections we have in place to protect our operating technology and information technology systems are sufficient to protect against cyberattacks and security and privacy breaches.
| 19 |
Failure by us to comply with the LGPD or any further privacy laws enacted in Brazil could adversely affect our reputation, business, financial condition or results of operations.
We are subject to data privacy laws, such as Law No. 12,965/2014 (the “Brazilian Internet Act”) and the Brazilian General Law for Personal Data Protection (Law No. 13,709/2018) (“LGPD”) and their related regulations, including regulations to be enacted by the Brazilian National Data Protection Authority (“ANPD”).
The LGPD came into effect on September 18, 2020 and provides a comprehensive regulation for the use of personal data in Brazil. The legislation provides for the application of administrative sanctions (art. 52, 53 and 54), which came into effect on August 1, 2021. If we do not carry out the data processing operation in accordance with the LGPD, we may be subject to sanctions, individually or cumulatively, of warning, obligation to disclose the incident, temporary blocking and/or exclusion of personal data, suspension, prohibition, partial or total, of the exercise of the activity of processing personal data and fine of up to 2% (two percent) of the company, group or conglomerate’s revenue in Brazil in its last fiscal year, excluding taxes, up to the global amount of R$50,000,000 (fifty million reais) per infringement. The application of the sanctions provided for in the LGPD is exclusively the responsibility of the ANPD.
We may also be held liable for material, moral, individual or collective damage caused by non-compliance with the obligations established by the LGPD and other data protection legislation, being subject to risks, such as (i) the filing of lawsuits claiming damages resulting from violations, based not only on LGPD, but also on sectorial legislation that are still in force; and (ii) the application of penalties provided for in the Consumer Defense Code and the Brazilian Internet Act by relevant consumer protection agencies, such as the Federal District Prosecutor’s Office and the National Consumer Secretariat (Secretaria Nacional do Consumidor).
The LGPD significantly transformed the data protection system in Brazil and it was inspired on European legislation (the General Data Protection Regulation).
The LGPD establishes detailed rules for the collection, use, processing, storage and disposal of personal data. It affects all economic sectors, including the relationship between customers and financial institutions, employees and employers and other relationships in which personal data is processed, both in the digital and physical environment. The ANPD is the agency with overall responsibility to: (i) ensure the protection of personal data, in accordance with the law; (ii) deliberate, at an administrative level, on a terminative character, upon the interpretation of the LGPD; (iii) supervise the compliance with, and apply penalties in the event of data processing performed in violation of, LGPD; (iv) implement simplified mechanisms for recording complaints about the processing of personal data in violation of the LGPD; and (v) inform the competent authorities the criminal offenses of which it becomes aware.
Any failure by us to adhere to the LGPD or any further privacy laws or regulations enacted or approved in Brazil also carries the risk of individual or collective lawsuits, claim of compensation for damages arising from violations, especially in cases of security incidents that result in unauthorized access to personal data. The application of penalties, the publicizing of the infraction or the imposition of obligations to indemnify for failures in the protection of personal data and inadequacy of the LGPD could adversely affect our reputation, and our results and, consequently, the value of our shares.
Industrial accidents, equipment failure, environmental hazards or other natural phenomena may adversely affect our operations, assets and reputation and might not be covered by our insurance policies.
Currently, we substantially withdraw our water supply from surface sources from rivers and reservoirs, with a small portion being withdrawn from groundwater. Our reservoirs are filled by impounding water from rivers and streams, by diverting the flow from nearby rivers, or by a combination of both methods. As of December 31, 2022, we had 229 dams for water supply purposes, which are all the dams used as part of our operations. Our operations may be hampered by numerous factors, including unexpected or unusual geological and/or geotechnical operating conditions, industrial accidents, floods or droughts or other environmental occurrences that could result in structural damages and eventually rupture our reservoirs, dams and other facilities or equipment.
Our water and sewage pipes are susceptible to degradation caused by factors such as aging, intense traffic, interventions resulting from disorderly urban planning and action by other companies, which may provoke accidents in the networks, increasing the risk of physical loss of water and affect the regular provision of our services, impacting our customers, the society and the environment. Regarding sanitary sewage, our sewage pipes may be obstructed due to misuse resulting from the improper release of solid waste and rainwater in the sewage systems.
| 20 |
In particular, the increasing degradation of watershed areas (Mananciais) may affect the quantity and quality of water available to meet demand from our customers. For more information, see “Item 4.B. Business Overview—Description of Our Activities—Water Operations—Water Distribution” and “Item 4.B. Business Overview—Description of Our Activities—Sewage Operations—Sewage System.”
The occurrence of any of these events could lead to personal injury or death, adverse social impacts on the communities located near our facilities, monetary losses and possible legal liability arising from environmental and social damages, other environmental and social damages, the loss of prime materials and damage to our reputation and image. For more information, see “Item 4.B. Business Overview—Water Operations—Water Resources.”
It is not always possible to obtain insurance against all such risks due to the high premiums associated with insuring against them or for other reasons. Moreover, insurance against risks such as water contamination or other problems involving our water supply to customers and for environmental related liabilities and damages as a result of our activities is not generally available to us or to other companies in our industry on acceptable terms. Our insurance will not cover all potential risks associated with our operations and insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. Losses from these events may cause us to incur significant costs that could have a material adverse effect on our financial performance and results of operations. To the extent that we incur losses not covered by our insurance policies, the funds available for sustaining our current operations and for our expansion activities will be reduced. See also “Item 3.D.— Risks Relating to Environmental Matters and Physical and Transition Climate Risks— Compliance with environmental laws and environmental liability could have a material adverse effect on us, our reputation and image” and “Item 4.B. Business Overview—Insurance.”
Risks Relating to Suppliers
Adverse weather conditions may interrupt the supply of electricity and water and adversely impact our operations.
Electricity and the price we pay for it has a significant impact on our operating results. Any material interruptions in the supply of energy could have a considerable negative effect on our activities, financial condition, results of operations and prospects.
The Brazilian power generation system is based on hydro, thermal, wind and solar energy, with the majority of energy being produced by hydroelectric powerplants. Between September 2020 and May 2021, the National Interconnected System (Sistema Interligado Nacional) recorded the lowest volume of rainfall in 91 years. However, in 2022 there was a significant improvement in the volume of rainfall, reverting the water crisis experienced in 2021 and resulting in the best reservoir storage in the last 10 years. Nevertheless, it is not possible to predict rain patterns in the future. Increases in the price of energy could have a material impact on our business, financial condition, or results of operations. Moreover, electricity shortages could lead to instability in water supply and sewage collection and treatment services, which could adversely affect our reputation and operations. Additionally, as one of the largest electricity consumers in the State of São Paulo, a potential increase in electricity tariffs due to a shortage of hydroelectric power could have a significant financial impact on us.
Finally, adverse weather conditions and continuous droughts can interrupt the electricity supply and may impact our distribution of water and prevent us from providing water to our customers and perform our obligations in accordance with the terms of our concession agreements. For more information, see “Item 4.B. Business Overview—Energy Consumption.”
Our business may be adversely affected by reliance on services and products from third-party suppliers.
We rely on third parties to supply services, products and equipment used in our facilities. If these third parties fail to comply with deadlines or contractual conditions, we may be adversely affected by any delays or higher costs and penalized for any resulting failure by us to perform a necessary service to the population. If we have to turn to other suppliers to cover any shortfall, changes in market conditions may significantly increase the cost of projects or operations, making them unfeasible, which may have an adverse effect on our results of operations and financial results.
The ability of these third parties to fulfill their obligations may be adversely affected by financial and economic crises or other factors. In addition, various supply chain risks, such as strikes or lockouts, loss of or damage to equipment or its components while in transit or storage, natural disasters, contagious diseases that prevent free circulation, and war, may limit the supply of products and/or equipment used in our operations and facilities.
In some cases, there are only a few suppliers for products we use, such as chlorine, sodium hypochlorite, ferric chloride, and fluosilicic acid. If any supplier discontinues the production or sale of its products, we may not be able to purchase these products from other suppliers for the same price or on the same terms. In this case, the provision of services may be significantly jeopardized, which could adversely impact our financial condition and results of operations.
| 21 |
Risks Relating to Our Clients
We may face difficulties in collecting overdue amounts owed to us by municipal government entities.
As of December 31, 2022, our total trade receivables were R$4,706.3 million. Of this amount, certain municipal government entities owed us R$982.7 million. Of the total amount owed by municipalities, R$20.6 million was overdue by between 30 and 360 days and R$20.7 million was overdue by over 360 days.
Certain entities associated with municipal governments for which we provide services also do not make regular payments. We cannot guarantee if or when these entities will make payments on a regular basis or pay the amounts they owe us. If these municipalities and related entities do not pay the amounts they owe us, our business, financial condition or results of operations may be adversely affected.
We are owed some substantial unpaid debts. We cannot assure you as to when or whether we will be paid.
Historically, the State and some State entities have delayed payment of substantial amounts owed to us related to water and sewage services. As of December 31, 2022, the State owed us R$96.7 million for water and sewage services. Additionally, the State 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 is required to reimburse us.
With respect to payment of pensions on behalf of the State, we had a contested credit amount of R$1,482.1 million as of December 31, 2022. We do not record this contested amount as a reimbursement credit for actuarial liability due to the uncertainty of payment by the State. We also had an uncontested credit amounting to R$1,060.0 million which is recorded as related-party receivables. See note 11(a) to our 2022 financial statements.
In addition, as of December 31, 2022, we had a provision for an actuarial liability in the amount of R$2,002.1 million with respect to future supplemental pension payments for which the State does not accept responsibility.
In addition, certain municipalities and other government entities also owe us payments. See (“Item 3.D Risk Factors—Risks Relating to Our Clients — We may face difficulties in collecting overdue amounts owed to us by municipal government entities.” We cannot assure you when or if the State and such municipalities will pay the contested credit amounts, which are still under discussion, and the remaining overdue amounts they owe us. The amounts owed to us by the State, municipalities and other government entities for water and sewage services and reimbursements for pensions paid may increase in the future.
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.
Part of the success of our operations and the implementation of our strategy depends on the knowledge, skills and efforts of our management and certain key employees – including employees in the IT area which are in high demand across all sectors. If the key members of our management or employees choose to no longer participate in the management of our business, we may not be able to find equally qualified professionals to replace them. The New Legal Framework for Basic Sanitation established that, by 2033, 99% of the population will have access to drinking water and 90% will have access to sewage treatment and collection. The increase in companies operating in our industry as a result of the New Legal Framework for Basic Sanitation, may lead members of our management or other professionals to leave us. Furthermore, the SEC has proposed mandatory clawback rules that would require listed companies, such as us, to adopt a clawback policy providing for recovery of incentive-based compensation awarded to executive officers if the company is required to prepare an accounting restatement resulting from material noncompliance with financial reporting requirements. However, these proposals have not yet been finalized and the specific long-term impact on us is not yet clear. There is the potential that new compensation rules will make it more difficult for us to attract and retain professionals by capping the amount of variable compensation compared to fixed pay, requiring the deferral of certain types of compensation over time, implementing “clawback” requirements, or making other changes deemed onerous by such professionals. The loss of members of management and the difficulty in hiring professionals with similar expertise and experience could have a negative effect on our results of operations, financial condition and our reputation.
Risks Relating to Regulatory Environment
Pursuant to the New Legal Framework for Basic Sanitation, ANA will be responsible for issuing reference norms. Any non-compliance by municipalities or sanitation operators will prevent them from accessing financings and sources of funds managed or operated by the federal government.
Provisional Measure No. 1,154 of January 1, 2023 altered the attributes and structure of ANA and delegated to the Ministry of Cities the competence to implement basic sanitation actions and programs. Further, Federal Decree No. 11,333/2023 created the National Secretariat for Environmental Sanitation, linked to the Ministry of Cities, attributing to the National Secretariat for Environmental Sanitation competencies that were previously attributed exclusively to ANA.
| 22 |
On April 5, 2023, the federal government issued Decree No. 11,467/2023, which delegated to ANA the power to issue reference norms for the sanitation sector, as originally established in the New Legal Framework for Basic Sanitation. The National Secretariat for Environmental Sanitation, is now responsible for issuing the guidelines for federal basic sanitation policy. Accordingly, ANA’s rules will apply to the basic sanitation sector nationwide, setting the guidelines for regulation and supervision by the regulatory entities at the state, municipal and regional level, and ensuring regulatory uniformity in the sector and legal certainty for the provision and regulation of services. ARSESP will be subject to these guidelines and will be required to incorporate any reference guidelines issued by ANA. We cannot guarantee that any potential changes to the regulatory framework of ARSESP will not have an adverse effect on our business, financial condition or results of operations.
The New Legal Framework for Basic Sanitation prohibits program contracts for basic sanitation services, resulting in uncertainties for our current and future concessions.
The Basic Sanitation Law, which establishes national guidelines for basic sanitation, was amended by the New Legal Framework for Basic Sanitation which brought about several changes that directly affect our operations.
The current regulation prohibits the provision of public basic sanitation services by any party other than municipal and state’s public administration from being formalized through program contracts, agreements, partnership agreements and other unstable instruments for the provision of public basic sanitation services. Previously, we provided services in several Municipalities through contracts which did not require bidding procedures.
The current program contracts and contracts that comply with Law No. 11,445/2007 will remain in effect until the end of their contractual term, provided that they set targets for the universalization of services by December 31, 2033, and that those that did not set such targets established them by March 31, 2022. Therefore, except in the Municipalities where the State shares ownership with the Municipalities, the renewal of these contracts, once they expire, will require a bidding process and, as such, we cannot guarantee that we will be able to maintain our current customer base and size of operations.
If our potential privatization is implemented through a sale of the shares the State of São Paulo holds in us, our current program-contracts may be affected. For more information, see “Item 3D. Risk Factors—Risks Relating to Regulatory Environment—Any sale of our shares to the private sector which removes the State as our majority shareholder brings uncertainties regarding the maintenance of current program contracts” and “Item 3D. Risk Factors—Risks Relating to Our Control by the State of São Paulo—Our controlling shareholder is currently discussing proposals for our corporate reorganization. We cannot guarantee that any potential reorganization will not have a material adverse effect on our business, financial condition or results of operations.”
Any sale of our shares to the private sector which removes the State as our majority shareholder brings uncertainties regarding the maintenance of current program contracts.
The New Legal Framework for Basic Sanitation provides that, in the event of the sale of the State’s share control to the private sector, the current program contracts may be replaced with new concession contracts, subject to the State Privatization Program. The framework also establishes that if there is a change in the clauses of these program contracts, such proposals must be presented to the public entities holding the service, who must, within 180 days, manifest their opinion if in disagreement, after which the proposal will be considered as approved. However, prior approval by the public entities that executed the program contract is only required if the majority shareholder requests an amendment to the contract's purpose or certain other sections of the contract at the time of the change of control. Regardless of that, most of our contracts have a termination clause in the event of a change in our control. We cannot assure you that all the public entities holding the service will agree to any proposed amendments to the contracts and that the result of those negotiations would not have a material impact on our revenues or operations.
Municipalities may terminate our concessions before they expire in certain circumstances. The indemnification payments we receive in such cases may be less than the value of the investments we made, or may be paid over an extended period, adversely affecting our business, financial condition or results of operations.
Municipalities have a right to terminate our concessions early if we fail to comply with our contractual or legal obligations or if the municipalities determine to do so in a takeover proceeding (retomada de serviços). The resumption of services must be justified by public interest. In these circumstances, the municipalities have to determine that it is no longer in the public interest to continue to provide water and sewage services under the terms and conditions of the current concession. Under Federal Decree No. 11,467/2023, the municipalities and regulator are responsible for identifying potential contractual irregularities and adopting the required actions. Accordingly, we cannot assure all our contracts are complying with the new rules and will be not terminated by the municipalities. The Basic Sanitation Law provides that on the early termination of a concession a valuation of the assets that relate to the services provided must be carried out in order to calculate the unamortized portion of investments for purposes of assessing any related indemnification payments due to the service provider. The resulting indemnification payment may be less than the remaining value of the investments the sanitation service provider made. Alternatively, there may be an extension of the maturity dates for the payments. The municipalities may also refuse to make indemnification payments voluntarily, potentially leading to judicial disputes. In the case of a judicial dispute, there is a risk that the judicial decision will consider the indemnification as undue or set it at a lower value than the investments already made.
| 23 |
The New Legal Framework for Basic Sanitation assigns to ANA the authority to introduce reference norms on the methodology for calculating indemnities due to investments made and not yet amortized or depreciated, which will be incorporated into ARSESP’s regulatory framework and be applicable to all our contracts that are subject to ARSESP's supervision.
On August 31, 2021, ANA published the opening of Subsidy Taking No. 01/2021, intended to collect contributions from society for the preparation of the reference norms for the methodology of calculating asset indemnities for the water and sewage segments.
Based on contributions received from society and other studies, ANA will prepare the Regulatory Impact Analysis Report related to this reference norms for a second stage of social participation, which will include a public consultation. Future concession contracts will have their indemnification methodology defined together with the other contractual rules provided for in ANA’s reference norms. We do not know the effects that the asset indemnity calculation methodology will have on our business.
The New Legal Framework provides that the transfer of services from one provider to another will be conditioned, in each case, on the indemnity of investments linked to reversible assets not yet amortized or depreciated, under the terms of Law No. 8,987/1995. In these cases, the holder of the services may assign payment to the provider who will assume the service. It is not possible to guarantee that future bids will take into account previous resolution of this issue before the bidding processes.
Additionally, we are party to proceedings related to indemnification issues regarding the resumption of water supply and sewage collection services by certain municipalities. For more information, see Note 20 to our 2022 financial statements included in this annual report. Other municipalities may seek to terminate their concession agreements before the contractual expiration date. If this occurs and we do not receive adequate indemnification for our investments, or the indemnification is paid over an extended period, our business, financial condition or results of operations may be adversely affected.
Current regulatory uncertainty, especially with regard to the New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.
The New Legal Framework for Basic Sanitation changes certain regulations and definitions to a later date, which could have a significant impact on our operations. Moreover, ANA was assigned with the authority to edit reference norms to serve as guidelines to be observed by other regulatory agencies, pursuant to Article 23, of the Basic Sanitation Law, thereby potentially reducing their autonomy. If these national guidelines are not followed, certain consequences may apply to the operators, such as blocking access to funding or financings provided or managed by the federal government or federal entities.
Among the supervening definitions, the regionalized provision of sanitation services stands out as one of the requirements of the new legislation that allows providers to have access to the technical and financial resources of the federal government.
This model of providing regionalized sanitation provides for the establishment of regional sanitation units by state governments within one year of enactment of the law. In the State of São Paulo, State Law No. 17,383 was enacted on July 5, 2021, creating four URAEs. The municipalities operated by us coincide with URAE 1 – Southeast. On December 2, 2021, State Decree No. 66,289 was issued, which deals with the adhesion of municipalities to the URAEs. We cannot assure voluntary adhesion by all municipalities that are part of URAE1 – Southeast and their effect on our operations.
Since 2022, ANA has been conducting public consultations. On January 4, 2022, ANA initiated Public Consultation No. 01/2022 regarding the proposal for a reference standard on indicators and standards of quality, efficiency and effectiveness for evaluating the provision, maintenance and operation of water supply and sewage systems. On November 11, 2022, ANA initiated Public Consultation No. 008/2022 regarding the reference standard that addresses the methodology for indemnification of assets in the water and sewage sectors, which will impact our future contracts. As of the date of this annual report, there has not been an update regarding this public consultation or any other proposal for reference standards. The outcome of these public consultations and their impact on our business are still uncertain. For more information on ARSESP regulations and these pending measures, see “Item 4.B. Business Overview—Government Regulations Applicable to Our Contracts—The Basic Sanitation Law and the New Legal Framework for Basic Sanitation.”
| 24 |
Risks Relating to Environmental Matters and Physical and Transition Climate Risks
Compliance with environmental laws and environmental liability could have a material adverse effect on us, our reputation and image.
We are subject to extensive Brazilian federal, state and municipal laws and regulations relating to the protection of human health and the environment. These laws and regulations set, among others, environmental licensing requirements and potable water standards, as well as standards for effluents which limit or prohibit the discharge of untreated sewage received in our operations. Also, we may experience accidents such as leaks or broken pipes that can lead to liability for environmental damages.
We are party to environmental proceedings and could be subject to other types of criminal, administrative and civil proceedings for non-compliance with environmental laws and regulations, including licensing requirements, that could expose us to administrative penalties and criminal sanctions, such as fines, closure orders and significant indemnification obligations. These expenses may lead us to reduce expenditure on strategic investments, which may adversely affect our business, financial condition, results of operations, reputation or image.
We are party to environmental proceedings that could have a material adverse impact on us, including civil processes and investigations relating, among others, to the release of untreated sewage into waterways or the disposal of sludge generated by treatment plants. We are also involved in proceedings challenging the water withdrawing during the 2014-2015 water crisis. Any unfavorable judgment in relation to these proceedings, or any material environmental liabilities, may have a material adverse effect on our reputation, image, business, financial conditions or results of operations. For more information on these proceedings, see “Item 8.A. Financial Statements and Other Financial Information—Legal Proceedings.” For more information on investments in environmental programs, see “Item 4.A. History and Development of the Company—Main Projects of our Capital Expenditure Program,” “Item 4.B. Business Overview—Description of our Activities—Sewage Operations—Sewage Treatment and Disposal,” “Item 4.B Business Overview—Environmental Matters” and “Item 4.B. Business Overview— Environmental Matters—Environmental Regulation.” For more information on the water crisis, see “Item 4.B. Business Overview—The 2014-2015 Water Crisis.”
Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations.
We experience decreases in our water supply from time to time due to droughts. The 2020-2021 and 2021-2022 rainy seasons, which ended in September 2021 and September 2022, respectively, recorded below-average rainfall compared to the expected long-term average. This decreased rainfall compromises the recovery of water storage levels that are necessary to serve the population during dry months, which run from April to September.
The 2022-2023 rainy season, which started in October 2022, registered above-average rainfall compared to the expected long-term average in the period until the month of March, which is the period expected to have the most intense rain. However, it is not possible to predict the behavior of the rain in the future. If we undergo consecutive periods of drought we may be required to adopt measures to mitigate the impacts and maintain the water supply in our area of operation.
In 2014 and 2015 we experienced a severe drought in the metropolitan region of São Paulo, the most severe drought in the last 80 years at the time, which was more intense in the northwest region of the State of São Paulo, resulting in the lowest level of rainfall and water inflow ever recorded in the Cantareira System, the largest water production system in the metropolitan region of São Paulo. This drought severely affected the level of water sources that supply the metropolitan region of São Paulo, forcing us to adopt a series of measures from 2014 to April 2016 to mitigate its impact and maintain the water supply for the then 20.9 million inhabitants at that moment served in the metropolitan region of São Paulo. For more information, see “Item 4.B. Business Overview—The 2014-2015 Water Crisis.” With the return of the rainfall to its historical average, the volume of water available to the population of the São Paulo metropolitan region returned to a normal level. However, heightened public awareness of the need to conserve water during the crisis and other more recent droughts resulted in our customers continuing to adopt lower water consumption practices. As a result of this new behavior and ongoing awareness, the volume of water billed to our clients did not return to the volume of water billed before the water crisis in 2013. Accordingly, this change in consumption practice due to the 2014-2015 water crisis has had a continued effect on our results of operations since then.
There is a risk that there might be further period of drought similar or more severe to those of 2014-2015, 2020-2021 and 2021-2022 in the future, forcing us to adopt similar or more severe measures as those adopted in 2014-2015, what can cause a material impact on consumption habits. These uncertainties could have a material adverse effect on our results of operations and financial condition.
| 25 |
Extreme Weather Conditions and Climate Change may have a material adverse impact on our business, financial condition or results of operations.
Our business may be affected by droughts, and by other extreme weather conditions, such as torrential rain and other changes in climate patterns. A possible increase in the severity of extreme weather conditions in the future may adversely affect the water available for abstraction, treatment, and supply, whether from the standpoint of quality or quantity. Droughts could adversely affect the water supply systems, resulting in a decrease in the volume of water distributed and billed as well as in the revenue derived from water supply services. For more information, see “Item 3.D. Risk Factors— Risks Relating to Environmental Matters and Physical and Transition Climate Risks—Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations.” Extreme climate conditions may compromise our facilities’ conditions to operate and supply of inputs. Additionally, increases in air temperature could affect demand for water.
Since we are dependent upon energy supplies to conduct our business, extreme weather events may also reduce water levels in the reservoirs that power hydroelectric power plants in Brazil, which may cause energy shortages, which could affect water and sewage services. Increased electricity prices may also adversely affect our costs and results of operations. For more information, see “Item 3.D. Risk Factors—Risks relating to Our Suppliers—Adverse weather conditions may interrupt the supply of electricity and water and adversely impact our operations” and “Item 4.B. Business Overview—Energy Consumption.”
In February 2023, there were torrential rains on the northern coast of the State of São Paulo, especially in the city of São Sebastião, where we operate. Within 24 hours, 683mm of rain fell in São Sebastião. It was the highest volume of rainfall recorded in Brazil within such a short period of time since records began. As a result, our water treatment plants in the region were damaged, and the water supply was interrupted for some days due to siltation, the inability to store water, and lack of electricity. If similar incidents occur in the future or become more frequent, these events may have a material adverse effect on our results of operations and financial condition.
We cannot predict all of the effects of extreme weather events, making it difficult to estimate the resources needed to mitigate these effects. It is possible that as a result of the difficulty to predict these events, we may be required to make substantial investments or incur substantial costs in their remediation, which may have a material adverse impact on our business, financial condition or results of operations. We also cannot guarantee that we will be able to pass on any of these additional costs and expenses to our customers.
New laws and regulations relating to climate change and changes in existing regulation may result in increased liabilities and increased capital expenditures, which could have a material adverse effect on us.
We are currently subject to federal and state laws, as well as international regulations on climate change, that establish global goals to reduce greenhouse gas (“GHG”) emissions, which we endeavor to comply with. Among these laws, we highlight Decree No. 65,881 of July 20, 2021, which provides for the State of São Paulo’s adhesion to the “Race to Zero” and “Race to Resilience” campaigns, which aims, among other issues, to reduce GHG emissions and to foster climate resilience. Decree No. 65,881/2021 also provides for the development of the 2050 Climate Action Plan (PAC 2050) by the São Paulo state government, which will likely include benchmark targets for various sectors, including sanitation.
Decree No. 11,075 of May 29, 2022, established the National System for Reduction of Greenhouse Gas Emissions and the terms for the development of the Sectoral Plans for Climate Change Mitigation. It is not possible to establish the impact of this decree on our activities, as the provisions are subject to elaboration by the relevant Ministries.
With Brazil’s current adherence to international agreements, as well as the clear guidelines of the State government on reducing emissions, in addition to the establishment of new legislation, it is possible that we may have to invest in further actions to reduce and mitigate emissions. We may be required to adopt new standards to improve our energy use efficiency and minimize the release of GHGs for the systems already in operation or when we obtain environmental licenses for new enterprises. We may also need to incur substantial new expenditures, to comply with new climate change regulations, that may require us, for example, (i) to adapt and improve our operations to achieve more sustainable processes and to reduce the emission of GHGs; (ii) to implement new facilities and equipment for the utilization of biogas and generated sludge; (iii) to expand the use of clean and renewable energy sources and alternative fuels; or (iv) to offset GHG emissions through intensified conservation and reforestation activities. Accordingly, new climate change regulations represent a great challenge for us given the diverse and dispersed processes we use at our operational facilities and the fact that changes in process design affect both our current operations and future projects. New expenditures resulting from new climate change regulations and from the prevention or correction of effects of extreme weather could have a material adverse effect on our results of operations. For more information, see “Item 4.B. Business Overview—Environmental Matters—Climate Change Regulations: Reduction of Greenhouse Gases (GHG) Emissions” and “Item 4.B. Business Overview—Energy Consumption.”
| 26 |
Risks Relating to Our Common Shares and ADSs
We may not always be in a position to pay dividends or interest on shareholders’ equity and ADSs.
Depending on our future results, our shareholders may not receive dividends or interest on own capital if we do not generate a profit. Despite the requirement to distribute a minimum of 25% of the adjusted annual net income to shareholders in accordance with Brazilian Corporate Law, our future financial position may not permit us to distribute dividends or pay interest on own capital.
The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell our common shares underlying the ADSs at the price and time you desire.
Investing in securities from emerging markets such as Brazil involves greater risk than investing in securities of issuers in major securities markets, and these investments are often considered to be more speculative in nature. The Brazilian securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets. Accordingly, although you are entitled to withdraw the common shares underlying the ADSs from the depositary at any time, your ability to sell the common shares underlying the ADSs at a price and time at which you wish to do so may be substantially limited. There is also significantly greater concentration in the Brazilian securities market than in major securities markets. The ten largest companies in terms of market capitalization represented approximately 47% of the aggregate market capitalization of the B3 as of December 31, 2022.
Investors who exchange ADSs for common shares may lose their ability to remit foreign currency abroad and obtain Brazilian tax advantages.
The Brazilian custodian for the common shares underlying our ADSs must obtain a certificate of registration from the Central Bank in order to be entitled to remit U.S. dollars abroad for payments of dividends and other distributions relating to our common shares or upon sales of our common shares. If an ADR holder decides to exchange ADSs for the underlying common shares, the holder will be entitled to continue to rely on the custodian’s certificate of registration for five business days from the date of exchange. After that period, the holder may not be able to obtain and remit U.S. dollars abroad upon sale of our common shares, or distributions relating to our common shares, unless he or she obtains his or her own certificate of registration or registers the investment under CMN Resolution No. 4,373/2014, dated September 29, 2014, (the “4,373 Holder”) which entitles registered foreign investors to buy and sell on a Brazilian stock exchange. If the holder does not obtain a certificate of registration or register under Resolution No. 4,373/2014, the holder will generally be subject to less favorable tax treatment on gains with respect to our common shares.
If a holder attempts to obtain his or her own certificate of registration, the holder may incur expenses or suffer delays in the application process, which could delay his or her ability to receive dividends or distributions relating to our common shares or the return of his or her capital in a timely manner. The custodian’s certificate of registration or any foreign capital registration obtained by a holder may be affected by future legislative changes, and additional restrictions applicable to the holder, the disposition of the underlying common shares or the repatriation of the proceeds of disposition may be imposed in the future.
From time to time there are proposals to tax dividends paid by Brazilian companies and changes to the taxation of interest on equity. If such proposals were to be realized, this would increase the tax expenses associated with any dividend, interest on equity or distributions made by Brazilian companies, which could impact us or our shareholders and the value of our common shares and ADSs. Uncertainty regarding the implementation by the current government of related changes in monetary, fiscal and pension policies, as well as pertinent legislation, could contribute to economic instability. These uncertainties and new measures could increase the volatility of Brazilian securities markets.
In addition, we cannot assure that there will not be changes to other applicable laws and regulations, or their interpretation, that may increase our tax burden or reduce tax incentives available to us or our investors, or that the tax incentives will be effectively maintained on their current terms until the end of their effective term, or that tax incentives will be able to be renewed on favorable conditions after the expiration of their current terms. Any such changes could impact us, our shareholders or our investors and the value of our common shares and ADSs.
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.
| 27 |
Mandatory arbitration provisions in our bylaws may limit the ability of a holder of our ADSs to enforce liability under U.S. securities laws.
Under our bylaws, any disputes among us, our shareholders and our management with respect to the Novo Mercado rules, the Brazilian Corporate Law and Brazilian capital markets regulations will be resolved by arbitration conducted pursuant to the B3 Arbitration Rules in the Market Arbitration Chamber. Any disputes among shareholders and ADR holders, and any disputes between us and our shareholders and ADR holders, will also be submitted to arbitration. As a result, a court in the United States might require that a claim brought by an ADR holder predicated upon the U.S. securities laws be submitted to arbitration in accordance with our bylaws. In that event, a purchaser of ADSs would be effectively precluded from pursuing remedies under the U.S. securities laws in the U.S. courts. However, a court in the United States could allow claims predicated upon the U.S. securities laws brought by holders who purchased ADSs on the NYSE to be submitted to U.S. courts.
A holder of our common shares and ADSs might be unable to exercise preemptive rights and tag-along rights with respect to the common shares.
U.S. holders of common shares and ADSs may not be able to exercise the preemptive rights and tag-along rights relating to common shares unless a registration statement under the U.S. Securities Act of 1933, as amended (the “Securities Act”), is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to our common shares relating to these rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration is available, an ADR holder may receive only the net proceeds from the sale of his or her preemptive rights and tag-along rights or, if these rights cannot be sold, they will lapse and the ADR holder will receive no value for them.
Holders of our ADSs do not have the same voting rights as our shareholders.
Holders of our ADSs do not have the same voting rights as holders of our shares. Holders of our ADSs are entitled to the contractual rights set forth for their benefit under the deposit agreements. ADS holders exercise voting rights by providing instructions to the depositary, as opposed to attending shareholders meetings or voting by other means available to shareholders. In practice, the ability of a holder of ADSs to instruct the depositary as to voting will depend on the timing and procedures for providing instructions to the depositary, either directly or through the holder’s custodian and clearing system. The deposit agreement also provides that if the depositary does not receive any instructions from a holder of ADRs, the ADR holder may be deemed to have given a discretionary proxy to a person designated by our company and the underlying shares may be voted by such person. However, we have chosen not to designate any person to exercise these deemed proxy rights with respect to any annual or special general meetings, and ADSs for which no specific voting instructions were received by the Depositary were therefore not voted at that meeting.
If we issue new shares or our shareholders sell shares in the future, the market price of your ADS may be reduced.
Sales of a substantial number of shares, or the belief that this may occur, could decrease the prevailing market price of our common and preferred shares and ADS by diluting the shares’ value. If we issue new shares or our existing shareholders sell shares they hold, the market price of our common and preferred shares, and of the ADS, may decrease significantly. Such issuances and sales also might make it more difficult for us to issue shares or ADS in the future at a time and a price that we deem appropriate and for you to sell your securities at or above the price you paid for them. Our controlling shareholder, the State of São Paulo, may decide to undertake a corporate reorganization, for a variety of reasons which could have the effect of diluting existing shareholders and ADS holders or lead to a change of control. For more information, see “Item 3.D. —Risk Factors Risks Relating to Our Control by the State of São Paulo —Our controlling shareholder is currently discussing proposals for our corporate reorganization. We cannot guarantee that any potential reorganization will not have a material adverse effect on our business, financial condition or results of operations.”
| 28 |
| ITEM 4. | INFORMATION ON THE COMPANY |
A. History and Development of the Company
Overview
Companhia de Saneamento Básico do Estado de São Paulo – SABESP is a mixed capital company (sociedade de economia mista) with limited liability and for indefinite duration. We were incorporated on September 6, 1973, under the laws of the Federative Republic of Brazil. We are registered with the Commercial Registry of the State of São Paulo (Junta Comercial do Estado de São Paulo) under registration number NIRE 35300016831. Our principal executive offices are located at Rua Costa Carvalho, 300, 05429-900 São Paulo, SP, Brazil. Our telephone number is +55 11 3388-8000. Our agent for service of process in the United States is CT Corporation System, with offices at 818 West Seventh Street – Team 1, Los Angeles, CA 90017. We are allowed to operate, in a subsidiary form, in other Brazilian locations and abroad. For more information, see “Item 4.B. Business Overview— Government Regulations Applicable to Our Contracts—Provision of Essential Basic Sanitation Services in Brazil.”
On June 29, 1973, pursuant to State Law No. 119/1973, Companhia Metropolitana de Águas de São Paulo, Superintendência de Águas e Esgotos da Capital, and Companhia Metropolitana de Saneamento de São Paulo merged to form our Company with the purpose of implementing the directives of the Brazilian government set forth in the National Water Supply and Sanitation Plan (Plano Nacional de Saneamento). The National Water Supply and Sanitation Plan was a program sponsored by the Brazilian government, which financed capital investments in, and assisted in the development of, state-controlled water and sewage companies. Since our formation, other São Paulo state governmental and state-controlled companies involved in water supply and sewage collection and treatment in the State of São Paulo have been merged into our company.
We have been integrated into the São Paulo state governmental structure and our strategies have been formulated in conjunction with the strategies of the São Paulo Secretariat for Environment, Infrastructure and Logistics (Secretaria de Meio Ambiente, Infraestrutura e Logística do Estado de São Paulo).
Our capital expenditure budget is subject to approval by the State legislature and is approved in conjunction with the budget of the State Secretariat for Environment, Infrastructure and Logistics as a whole. Our financial statements and accounting records are subject to review by the State Court of Audit (Tribunal de Contas), as are all accounts of the State.
In 1994, we were registered with the CVM as a publicly-held company and are therefore subject to the CVM’s rules, including those relating to the periodic disclosure of extraordinary facts or relevant events. Our common shares have been listed on the B3 under the ticker “SBSP3” since June 4, 1997.
In 2002, we joined the Novo Mercado segment of the B3, which is the listing segment in Brazil with the highest corporate governance requirements. In the same year, we registered our common shares with the Securities and Exchange Commission (“SEC”), and started trading our shares in the form of ADR – level III on the New York Stock Exchange (“NYSE”) under the ticker “SBS.”
The State of São Paulo, our controlling shareholder, is required by State Law No. 11,454/2003 to own at least 50% plus one of our common shares. In 2004, the State of São Paulo carried out a secondary offer of common shares of our company in the Brazilian and international markets, owning after that 50.3% of our common shares. As of December 31, 2022, the State owned the same 50.3% of our common shares.
State Law No. 12,292/2006 amended State Law No. 119/1973, which created our company, and now authorizes us to provide water and sewage services outside of the State of São Paulo, both to other states of Brazil and to other countries. This law also authorizes us to own interests in other public or private-public companies and Brazilian or international consortia. In addition, this law permits us to incorporate subsidiaries and enter into a partnership with or acquire interests in a private company with a corporate purpose related to the sanitation business.
In December 2007, State Supplementary Law No. 1,025/2007 provided for the expansion of the scope of services to be provided by us related to environmental sanitation and energy, and also provided for the creation of regulatory agencies for the supervision of water and sewage services, created ARSESP, the regulatory agency that regulates and supervises the services we provide.
On February 28, 2023, CDPED, which has authority over our corporate reorganization plan, agreed to proceed with arrangements for hiring consultancy services for the study of our Privatization. On April 10, 2023 the São Paulo state government signed a contract with the IFC, an agency linked to the World Bank, which will act as the advisor in this process.
We are currently awaiting guidance from CDPED, which has authority over our corporate reorganization plan. For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Control by the State of São Paulo—Our controlling shareholder is currently discussing proposals for our corporate reorganization. We cannot guarantee that any potential reorganization will not have a material adverse effect on our business, financial condition or results of operations.”
| 29 |
As of December 31, 2022, we provided water and sewage services directly to a large number of residential, commercial and industrial private consumers, as well as to a variety of public entities. As of the same date, we serve directly in 375 of the 645 municipalities in the State, including in the city of São Paulo. We also supplied water and accounted for two municipalities in the São Paulo metropolitan region on a wholesale basis. In addition, we have three partnerships with private companies to supply water and sewage services, which are: Águas de Castilho, Águas de Andradina e Sesamm and Serviços de Saneamento de Mogi Mirim S.A. (the latter only for sewage services).
In the basic sanitation segment, we have also established two other special purpose companies, in which we participate as a minority shareholder, which are: Aquapolo Ambiental S.A. and Attend Ambiental S.A. Aquapolo Ambiental S.A. commenced operations in the second half of 2012 and operates the largest water recycling facility in the southern hemisphere. Aquapolo Ambiental S.A. has the capacity to supply up to 1,000 liters per second to industries in the Capuava petrochemical cluster of the São Paulo metropolitan region, but is currently only providing approximately 450 liters per second as a result of demand. Attend Ambiental S.A. commenced operations in the second half of 2014 to operate a pre-treatment plant for non-domestic effluent in the São Paulo metropolitan region.
We are also qualified to plan, operate and maintain systems of production, storage, conservation and sale of energy for us or for third parties, and to sell services, products and rights that directly or indirectly arise from our assets, business and activities. Accordingly, we created Paulista Geradora de Energia S.A., which was formed in 2015, focuses on the implementation and commercial exploration of water potential in small hydroelectric power plants, located at Vertedouro Cascata and the Guaraú Water Treatment Plant, with a total capacity of 7 MW. On January 20, 2023, the Guaraú plant began operations, with a capacity of 4.1 MW. The Vertedouro Cascata plant, which has a capacity of 2.9 MW, will start operations in June 2023. For more information, see “Note 11 to the Financial Statements - Investments.”
On October 28, 2022, we formed Cantareira Energia SP, in partnership with Pacto SP Energia I, which will operate in the production and sale of electricity. Cantareira Energia SP will establish four photovoltaic power generation plants on floating structures in our reservoirs, the first being in the Jaguari reservoir, part of the Cantareira System, with a capacity of 5MW and expected to start operating in 2023.
On December 7, 2022, we formed Infranext Soluções em Pavimentação S/A to construct a plant for the production and sale of cold made asphalt for use in our asphalt replacement services.
On December 22, 2022, we acquired 20% of FOXX URE-BA S.A (“URE-BA”) pursuant to the concession agreement entered into with the municipality of Barueri for the construction of a power generation plant from urban solid waste (resíduos sólidos urbanos). URE-BA will produce energy through the thermal treatment of urban solid waste, with a total installed capacity of 20MW and sales of approximately 16MW, in addition to a treatment capacity of 300 thousand tons of urban solid waste per year. It will be the first power generation plant operating from the incineration of urban solid waste in Brazil. This project is intended to further our commitment to sustainability and quality of life, reducing the use of landfills and promoting a circular economy to mitigate some of the impacts of urban solid waste on climate change. Sewage treatment plants generate a large amount of sludge from sewage treatment. As sludge disposal is costly, the partnership with URE-BA forms part of our studies to reduce the costs of sludge disposal and to create additional value.
Our results of operations and financial condition are generally affected by: (i) our ability to raise tariffs, control costs and improve productivity; (ii) the general economic conditions in Brazil and abroad; (iii) climate conditions; (iv) impacts of regulation for sanitation services; and (v) the impact of pandemics such as COVID-19. Following the water crisis, the volume of water billed in the São Paulo metropolitan region continued below 2013 levels as many of our customers continue to apply some of the lower water consumption practices adopted during water crisis. The new Legal Framework for Basic Sanitation introduced several changes that directly affect our business. Our financial and operating performance may be adversely affected by pandemics such as COVID-19, as well as other catastrophes and health epidemics. For more information, see “Item 3.D. Risk Factors— Risks Relating to Environmental Matters and Physical and Transition Climate Risks— Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations” and “Item 4.B Business Overview—The 2014-2015 Water Crisis,” and for information on the COVID-19 pandemic, see “Item 3.D. Risk Factors—Risks Relating to Our Business— Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the outbreak of COVID-19.” For more information on regulatory risks, see “Item 3.D. Risk Factors— Risks Relating to Regulatory Environment.”
Our Strengths
We believe that our strong business position and future prospects derive from the following strengths:
Well-established business with significant size, scale and know-how to operate in complex urban settings. We are one of the largest water and sewage service providers in the world, according to studies by Global Water Intelligence, which considered the estimated revenue in 2020. We provide water services directly to approximately 28.0 million people and supply water on a wholesale basis to an additional urban population of approximately 0.6 million people. As of December 31, 2022, we had an effective water coverage ratio of 98% in respect of all regions in which we operate. We also provide sewage services directly to approximately 24.7 million people, achieving an effective sewage service ratio of 92% in respect of all regions in which we operate as of December 31, 2022. Our significant size and scale have required us to operate in complex urban settings such as shantytowns (favelas) and environments without urban planning, thereby enabling us to develop well-trained personnel, skills for operating in adverse conditions that we believe our competitors lack.
| 30 |
Operations in Brazil’s most populous and wealthy state. The State of São Paulo, which is located in the most developed and economically active region of Brazil, is the most populous state in Brazil, with an estimated total population of 45.3 million as of December 31, 2022. The city of São Paulo had an estimated total population of 12 million as of the same date, while the São Paulo metropolitan region had a total population of 21.4 million. Based on its GDP, the State of São Paulo is the wealthiest state and has the largest economy of any state in Brazil. The GDP of the State of São Paulo was approximately R$2.4 trillion representing approximately 31.2% of Brazil’s total GDP, according to the most recent data collected by the IBGE in 2020. The State of São Paulo generates more revenue from water and sewage services than any other Brazilian state.
Strong Base of Contracted Business. We have formal agreements with 374 of the 645 municipalities in the State of São Paulo, including agreements with the cities of São Paulo and Guarulhos, respectively the first and second largest municipalities in the State of São Paulo. Most of our contracts have a 30-year term. For the year ended December 31, 2022, income from these agreements accounted for 99.2% of our gross operating revenues from sanitation services (excluding revenues relating to the construction of concession infrastructure).
Access to low-cost and diverse sources of financing. Our strong cash flow generation from operations and our role as an essential public service provider place us in a privileged position in our industry to obtain low cost, long-term financing from Brazilian public banks, and domestic and international multilateral agencies and development banks. We do not depend on a limited number of sources of financing, but instead have access to various funding alternatives in the Brazilian and international markets to fund our working capital needs and our capital expenditure programs.
Strong corporate governance practices. In 2002, we joined the Novo Mercado segment of the B3, which is the listing segment in Brazil with the highest corporate governance requirements. Additionally, in 2016 Federal Law No. 13,303/16 came into force in Brazil and set new corporate governance standards for Brazilian government-owned and mixed capital companies like our company, as well as their subsidiaries. This law also set new rules that these companies must follow in public bidding procedures when contracting with third parties. As a result, we are committed to certain corporate governance standards that are not otherwise required by Brazilian Corporate Law, which provides heightened protection to our shareholders and enhances the quality of information we disclose to the market.
High quality operations. We believe that we adhere to high standards of service and employ the best available technology in the sanitation business to control the quality of the water we abstract, process and distribute. Of our 16 laboratories in total, our central laboratory and 13 of our regional laboratories are accredited by the National Institute of Metrology, Quality and Technology, Standardization and Industrial Quality (Instituto Nacional de Metrologia, Qualidade e Tecnologia – “INMETRO”), and comply with the ABNT NBR ISO IEC 17025 standard, thereby assuring the quality and accuracy of our test results. Moreover, our laboratories and field teams use the latest equipment to detect substances controlled by regulations and have highly trained teams to handle contingencies and customer complaints. We believe our technology enhances the efficiency and quality of our operations.
Our Strategy
Our mission is to provide sanitation services, contributing to improvements in quality of life and the environment. Our goal is to become a global reference in the provision of basic sanitation services in a sustainable, competitive and innovative manner, focused on the needs of our clients. To this end, our strategic objectives are based upon the guiding principles of water availability, excellence in the provision of services, sustainable growth, fostering and expanding our operating base, innovation and technology, motivation of personnel and expansion of our sewage treatment coverage.
Secure water availability in the areas where we operate. Our goal is to secure the availability of water in the areas where we operate, as well as to promote a rational and integrated use of water resources, respecting demand and critical levels of water for each region, and allocating resources in the short, medium and long run in order to guarantee access to water. Our goal is to consistently meet the needs of our consumers with our services.
Ensure the quality and availability of our services in our existing service area through excellence in service provision and improving our operating efficiency. Our goal is to maintain the water coverage ratio, coupled with a high standard of quality and availability of our services, and meet the expected growth in our operations. We also intend to increase our sewage coverage by adding 1.2 million sewage connections by 2027. In addition, we seek to reduce both physical and non-physical water loss. For more information, see “Item 4.A. History and Development of the Company—Capital Expenditure Program.”
| 31 |
We also aim to improve our processes and controls by implementing a new management model based on the Excellence in Management Model and new Enterprise Resource Planning (“ERP”) and Customer Relationship Management systems, ensuring compliance with regulatory requirements and serving as a structural tool for digital transformation through the utilization of new technologies focused on process automation, customer experience, and management of analytical information. The implementation of the ERP system started in 2017 and was finalized in 2021.
Through these projects we intend to increase our speed and productivity in responding to regulatory changes; to strengthen and streamline our financial, commercial and administrative structure; to provide a solid and integral base of information to support the decision-making process; and to increase the efficiency of our operations while also reducing costs.
Continue to seek sustainable growth. Our goal is to grow while balancing our economic and financial results with environmental and social considerations, to secure positive financial results so as to guarantee investments for the provision of services, as well as to provide adequate and just remuneration for our shareholders. We seek to act as citizens and to promote the well-being of the communities we operate in and the protection of the environment. We aim to apply our principles of financial growth and sustainability to each business unit, assigning goals and setting clear responsibilities for each unit so as to strengthen our financial results. To achieve this goal, we intend to use our best efforts to reduce operating costs and increase productivity and profitability. We plan to improve the management of our assets, as well as to continue to reduce our total operating expenses by automating some of our facilities, streamlining operational processes, implementing integrated planning and further investing in internal technological research and development.
We also plan to continue our efforts to improve our collection of overdue trade receivables from municipalities to which we provide services, from the State and from other governmental entities, including by exploring opportunities to offset these outstanding debts against certain possessory or property rights over utilities relating to water and sewage systems. We intend to continue to fund our working capital needs and estimated capital expenditure programs with diversified sources of financing, such as domestic and international development banks and multilateral agencies. We will continue to seek market opportunities for low-cost financing and restructuring of our indebtedness if and when advantageous and appropriate.
Since 2008, we have expanded into activities that complement water and sewage services in which we may leverage our know-how, size, scale and profitability. These activities include consulting and management of sanitation systems.
Currently, we provide water and/or sewage services to three other municipalities through special purpose companies in partnership with private companies. For more information, see “Item 4.A. Information on the Company—History and Development of the Company—Overview.”
Maintain and expand our operating base. We intend to maintain and expand our operating base by searching for new business opportunities. We also regularly explore the possibility of providing water and sewage services in municipalities in the State of São Paulo in which we currently have no operations or to which we currently supply water and provide sewage treatment solely on a wholesale basis, which on aggregate represent a total population of approximately 14.5 million. We evaluate possible expansion opportunities in terms of proximity to our existing service areas to maximize return on investment and improve our financial performance. In June 2010, we entered into a 30-year agreement with the State and city of São Paulo for the provision of water and sewage services in the city of São Paulo, which in the year ended December 31, 2022, accounted for 45.1% of our gross operating revenues from sanitation services (excluding revenues relating to the construction of concession infrastructure). Between January 1, 2007 and December 31, 2022, we entered into agreements with 351 municipalities (including our services agreement with the city of São Paulo). These 351 municipalities accounted for 95.4% of our total revenues (excluding revenues relating to the construction of concession infrastructure) for the year ended December 31, 2022 and 94.5% of our intangible assets and contract assets as of the same date. As of December 31, 2022, one of our concessions had expired. This municipality accounted for 0.1% of our total revenues (excluding revenues relating to the construction of concession infrastructure) for the year ended December 31, 2022 and 0.02% of our intangible assets and contract assets as of the same date. From January 1, 2023 through 2030, 23 concession agreements will expire, accounting for 3.8% of our revenues (excluding revenues relating to the construction of concession infrastructure) for the year ended December 31, 2022 and 2.2% of our intangible assets and contract assets as of the same date, will expire.
Seek opportunities to adopt and develop innovative technology. We stimulate the creation, adoption and diffusion of innovative solutions aiming to generate value and to improve our provision of basic sanitation services while promoting environmental protection and maintaining our competitiveness and profitability. In accordance with our bylaws, our activities comprise water supply, sanitary sewage services, urban rainwater management and drainage services, urban cleaning services, solid waste management services, and also related activities, including the planning, operation, maintenance and commercialization of energy, and the commercialization of services, products, benefits and rights that directly or indirectly arise from our assets, operations and activities. We are also authorized to carry out activities through subsidiaries in other Brazilian locations and in other countries.
| 32 |
In 2021, our Board of Directors approved the revision of our New Business Policy, which established, among others, the rules to be observed when searching for partners in developing new business opportunities. In accordance with this policy, we have since incorporated three special purpose entities. For more information, see “Item 4.A. Information on the Company—History and Development of the Company—Overview.”
Additionally, in April 2022, we issued a public call for proposals to select a strategic partner to conduct studies, develop, and implement solutions for generating value from sludge generated in wastewater treatment plants. Various solutions were presented, such as the generation of electric power, organic fertilizers, and organomineral fertilizers, which may generate new business opportunities for us in the future.
Establish efficient and competitive ways of motivating, retaining and attracting personnel. We intend to provide our personnel with programs for professional and personal development, growth opportunities and recognition. These programs include competitive benefit packages and a healthy and collaborative work environment. We seek to raise workplace satisfaction, well-being, engagement and productivity. In 2022, we received the Great Place to Work certification for the second time, a recognition awarded by the Great Place to Work consulting firm.
Expand our sewage treatment coverage. Our goal is to progress in the implementation of sewage collection and treatment structures in an economically and technologically viable way. We had an effective sewage coverage ratio of 92% as of December 31, 2022, and plan to increase this ratio to 95% by 2027, by adding over 1.2 million sewage connections by 2027 and the indicator of consumer units connected to the sewage treatment system from 83% to 90% by 2027. These investments are necessary to restore the quality of the rivers and lakes, providing new sources for water supply. In addition, there are municipalities in the State of São Paulo representing a total population of approximately 14.5 million to which we currently do not provide water or sewage services, or to which we currently supply water solely on a wholesale basis. Our strong presence in the State and experience in providing water and sewage services places us in a privileged position to expand our sewage services to these additional municipalities in the State of São Paulo as well as to other Brazilian states and abroad. For more information, see “Item 4.B. Business Overview—Description of our Activities—Sewage Operations” and “Item 4.B. Business Overview—Competition” and “Item 4.B. Business Overview—Tariffs.”
Our strategic objectives also focus on our political and institutional relationships as well as on our commitment to the market to increase shareholder value.
In 2022 we invested R$5.4 billion and between 2023 and 2027 we plan to invest an additional R$26.2 billion to improve and expand our water and sewage systems, increase water security, and meet the growing demand for water and sewage services in the State of São Paulo, thereby encouraging these customers to continue using our services.
We believe that our overall strategy will enable us to meet the demand for high quality water and sewage services in the State of São Paulo as well as in other Brazilian states and abroad, while creating shareholder value and strengthening our results of operations and our financial condition.
In 2022, we initiated a review of our strategic planning to address the evolving landscape of the sanitation sector and to identify our priorities.
State of São Paulo
The State of São Paulo is one of 26 states that, together with the Federal District of Brasília, constitute the Federative Republic of Brazil. The State of São Paulo is located in the southeastern region of the country, which also includes the States of Minas Gerais, Espírito Santo and Rio de Janeiro, and which is, according to IBGE, the most developed and economically active region of Brazil. The State of São Paulo is located on the Atlantic coast of Brazil and is bordered by the states of Rio de Janeiro and Minas Gerais to the north, the state of Paraná to the south and the state of Mato Grosso do Sul to the west.
The State of São Paulo occupies approximately 3.0% of Brazil’s land mass and encompasses an area amounting to approximately 96,000 square miles. According to the SEADE, the State of São Paulo had an estimated total population of 45.3 million as of December 31, 2022. The city of São Paulo, capital of the State of São Paulo, had an estimated total population of 12 million, with a total population of 21.4 million inhabitants in the São Paulo metropolitan region, as of December 31, 2022. The São Paulo metropolitan region encompasses 39 municipalities and is the largest metropolitan region in the Americas and the fourth largest metropolitan region in the world, according to the United Nations’ Data Booklet “The World’s Cities in 2018,” with approximately 47% of the total population of the State of São Paulo as of December 31, 2022. In the most recent data collected by the IBGE, the GDP of the State of São Paulo was approximately R$2.4 trillion, representing approximately 31.2% of Brazil’s total GDP, and making it the largest economy of any state in Brazil based on GDP. According to the IBGE, the State of São Paulo is also the leading Brazilian state in terms of manufacturing and industrial activity, with a strong position in car manufacturing, pharmaceuticals, computer manufacturing, steel making and plastics, among other activities, as well as a leading position in the banking and financial services industries. The State of São Paulo is the leading export state in Brazil, according to the Brazilian Ministry of Development, Industry and Foreign Trade (Ministério do Desenvolvimento, Indústria e Comércio Exterior).
| 33 |
Corporate Organization
We currently have six management divisions, each of which is supervised by one of our executive officers.
Our Board of Directors allocates responsibilities to our executive officers following an initial proposal made by our Chief Executive Officer, in accordance with our bylaws. The Chief Executive Officer is responsible for coordinating all management divisions in accordance with the policies and directives established by our shareholders’ meeting, our Board of Directors and board of executive officers, including the coordination, evaluation and control of all functions related to the Chief Executive Officer’s office and staff, integrated planning, business management and corporate organization, communication, ombudsman, compliance, risk management, audit and quality.
The Chief Executive Officer represents our company before third parties and certain powers can be granted to attorneys-in-fact. The executive officers described below report to the Chief Executive Officer:
| · | the Corporate Management Officer, who is responsible for marketing (commercial processes), human resources and social responsibility, legal affairs, information technology, asset management, supplies and contracts; |
| · | the Chief Financial Officer and Investor Relations Officer, who is responsible for financial planning, collection of revenues, allocating financial resources to our divisions, conducting capital markets and other debt incurrence transactions, as well as managing debt levels, controlling accounting and regulatory affairs, corporate governance, identifying new business opportunities and managing investor relations; |
| · | the Technology, Enterprises and Environment Officer is responsible for environmental management, technological and operational development, quality control of water and sewage, the development, coordination and execution of special investment programs, projects, and research innovation; and |
| · | the Chief Operating Officer for the São Paulo metropolitan region Division and the Chief Operating Officer for the Regional Systems Division, who are responsible for managing the operation, maintenance, execution of works and services for water and sewage supply systems (including for the services that we provide on a wholesale basis), sales and call center services, and have overall responsibility for the financial and operational performance of their divisions. The Chief Operating Officers are also responsible for sanitation advisory services to independent municipalities, negotiating contracts for water supply and sewage treatment services and for mediation and negotiation with communities and local governments, aimed at aligning our interests with the interests of our clients. |
On March 27, 2023, we published our management proposal which outlines the matters to be discussed at our Ordinary and Extraordinary General Shareholders' meeting to be held on April 28, 2023. One of the matters that will be voted on at the meeting, is an amendment to our Bylaws to include a further executive officer and rearrange the responsibilities assigned to each officer. Once the proposal is approved, our board of executive officers will be composed of the following seven executive officers: Chief Executive Officer, People and Corporate Management Officer, Chief Financial and Investor Relations Officer, Engineering and Innovation Officer, Regulation and New Business Officer, Operation and Maintenance Officer and Customer Officer.
Capital Expenditure Program
Our capital expenditure budget is subject to approval by the State legislative chamber. This approval is obtained simultaneously with the approval of the budget of the São Paulo Secretariat for Environment, Infrastructure and Logistics. We are also subject to supervision from the Court of Audit of the State of São Paulo (Tribunal de Contas do Estado de São Paulo), with regard to our accounting, financial and budgetary activities and our operating assets.
Our capital expenditure program is designed to improve and expand our water and sewage system and to increase and protect our water sources in order to sustain water security, meet the growing demand for water and sewage services in the State of São Paulo and improve the overall environmental impact of our activities. Our capital expenditure program has four specific goals with respect to the municipalities we serve:
| (i) | to continue to increase water security and meet increased demand for treated water; |
| (ii) | to expand the percentage of households connected to our sewage system; |
| (iii) | to increase the treatment of sewage collected; and |
| (iv) | to increase operating efficiency and reduce water loss. |
We have budgeted investments in the total amount of R$26.2 billion from 2023 through 2027. The following table sets forth our planned capital expenditures for water and sewage infrastructure for the years indicated:
| 34 |
|
2023 |
2024 |
2025 |
2026 |
2027 |
Total | |
| (in millions of reais) | ||||||
| Water | 1,986 | 1,843 | 1,907 | 1,540 | 1,656 | 8,932 |
| Sewage Collection | 2,388 | 2,394 | 2,566 | 2,712 | 2,380 | 12,440 |
| Sewage Treatment | 644 | 714 | 1,084 | 1,183 | 1,217 | 4,842 |
| Total | 5,018 | 4,951 | 5,557 | 5,435 | 5,253 | 26,214 |
We invested R$5.4 billion, R$5.0 billion and R$4.4 billion in 2022, 2021 and 2020, respectively. The following table sets forth the investments we have made by segment and region for the years indicated:
| Year ended December 31, | ||||||||
| 2022 | 2021 | 2020 | ||||||
| (in millions of reais, except percentages) | ||||||||
| Water | Sewage | Water | Sewage | Water | Sewage | |||
| São Paulo Metropolitan Region | 1,484.7 | 2,439.7 | 1,398.3 | 2,385.8 | 1,647.6 | 1,518.9 | ||
| Regional Systems | 680.9 | 784.3 | 551.8 | 647.1 | 469.0 | 744.0 | ||
| Total | 2,165.6 | 3,224.0 | 1,950.1 | 3,032.9 | 2,116.6 | 2,262.9 | ||
The following table sets forth the number of water and sewage connections made in 2022 and the goals for the 2023 to 2027 period:
|
Accomplished (in thousands) |
Goals (in thousands) | ||||||
|
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
Total | |
| Water | 183.5 | 190 | 190 | 190 | 190 | 190 | 950 |
| Sewage Collection | 226.5 | 230 | 230 | 230 | 230 | 230 | 1,150 |
New consumers are responsible for covering part of the costs of connection to the water distribution network if they are located more than 20 meters away from the existing network. Beyond this distance, the customer must cover the additional costs of connection to the network from their premises, including the costs of purchasing and installing the water meter and related labor costs. We perform the installation, inspections and periodic measurements of the water meter. After the installation is completed, the customer is responsible for the water meter.
New sewage connections are made substantially on the same basis as the water network connections. We cover the costs of installing the first twenty meters of sewage network extension from the existing collection network to the new sewage connections for all consumers, and the consumer is responsible for the remaining costs.
Our capital expenditure program from 2023 through 2027 will continue to focus on achieving our targets by making regular investments to maintain and expand our infrastructure and to reduce water losses in the 375 municipalities we served as of December 31, 2022.
Main Projects of Our Capital Expenditure Program
The following is a description of the main projects in our capital expenditure program.
Investments in Water – We have a series of ongoing and scheduled projects involving water production and distribution. For the period from 2023 through 2027, we plan to spend R$8.9 billion in water-related investments. The main programs are:
Metropolitan Water Program
Demand for our water services has grown steadily over the years in the São Paulo metropolitan region and has at times exceeded the capacity of our water systems. On account of the high demand, prior to September 1998, a portion of our customers in this region received water only on alternate days of the week. We refer to this as “water rotation.” Further, the metropolitan region lacks water resources, which requires us to obtain water from increasingly distant sources. In order to address this situation, we implemented the Metropolitan Water Program (Programa Metropolitano de Água) to improve regular water supply to the entire São Paulo metropolitan region. This program terminated in 2000 and the water rotation measure was eliminated, but we have nevertheless maintained our investment plans for the region.
| 35 |
Since 2000, the Metropolitan Water Program has increased the production capacity by 13.1 m³/s, with the aim of improving the structure of the supply system in the São Paulo metropolitan region, by expanding the water production, and distribution systems. In March 2018 we concluded the interconnection of the Jaguari (part of the Paraíba do Sul Basin) and Atibainha reservoirs (part of the PCJ River Basin, Cantareira System), which is also strategic to guarantee secure access to water for the metropolitan region of São Paulo. Through such interconnection, we are able to transfer 5.13 m³/s (annual average) to 8.5 m³/s (maximum) of water from Jaguari to Atibainha. Since May 2018, the transfer of water also works in the opposite direction, from the Atibainha reservoir to the Jaguari reservoir, allowing us to optimize the reservation capacity of both reservoirs, while benefiting the population of the Paraíba Valley.
With regard to PPP São Lourenço, as of December 31, 2022, the estimated amount of the PPP contract was R$6.0 billion (including R$2.2 billion in construction and maintenance and operation of the system). After monetary adjustment, the contract amounts to approximately R$7.8 billion and has a 25-year term, four years of which was dedicated to the construction, while the other 21 years will be dedicated to service delivery. These services include the operation and maintenance of the sludge treatment system of the water treatment plant and disposal of the waste thus generated; electromechanics and civil maintenance of the untreated water pumping stations, of the water treatment plant and the untreated water pipeline; preservation and cleaning, surveillance and property security. The system indirectly benefits the entire São Paulo metropolitan region as it is connected to the metropolitan system, which increases the volume of available water.
Reversal of the Itapanhaú River
This is the third major project of the many structural interventions to ensure water security in the São Paulo metropolitan region. Through the reversal of the Itapanhaú River basin to the Biritiba reservoir, part of the Alto Tietê Production System is expected to have the capacity to pump an average of 2 m3/s (maximum of 2.5 m3/s) of water to the Biritiba reservoir. The project aims to improve water security in the São Paulo metropolitan region and is expected to directly benefit approximately 4.5 million residents that receive water from the Alto Tietê Production System as well as indirectly benefit the population of the greater São Paulo region. The construction works began in June 2020 and are estimated to finish in 2024. This project is partially funded out of our own resources and from funds provided by Caixa Econômica Federal.
Program for Reduction of Water Loss
The Program for the Reduction of Water Loss aims to achieve a steady reduction in water loss in the long term, through the implementation of various operational and maintenance improvement measures, in addition to important actions to renew and improve the infrastructure.
As a result, the rate of total losses index has decreased gradually, from 41.0% in 2004 to 28.8% in 2022. The loss in liters per connection per day, considered the most suitable index, has also shown a decrease. In 2022, the index reached 249 liters per connection per day compared to 547 liters per connection per day in 2004.
The losses in the municipality of Guarulhos were accounted for in this index as of January 2021. The losses in the municipality of Santo André were accounted for in this index as of January 2022 and Mauá will be accounted for in this index as of January 2023. Accordingly, the goal for 2023 is to reach an index of 248 liters per connection per day, including these municipalities. Part of the resources allocated, to the program came from our own resources and the remainder from financing granted by the Japan International Cooperation Agency (“JICA”), BNDES and by incentivized debentures provided for in Law No. 12,431/2011.
Coastal Water Program
The Coastal Water Program (Programa Água no Litoral) covers long-term activities aimed at expanding the water production and distribution capacity in the Baixada Santista metropolitan region on the southern coast, as well as in the municipalities of the northern coast of the State of São Paulo. The program aims to benefit approximately three and a half million people, including the local population and tourists. It also aims to improve the reliability of the local systems, eliminating existing and potential deficiencies and irregularities in the water supply. To achieve this goal, since 2013 we have invested in improving water supply systems in several municipalities, such as the implementation of the Mambu Branco Production System located in Itanhaém, which is currently being expanded to increase its water flow from 1.6 m³/s to 3.2 m³/s.
Another part of the Program in the Baixada Santista is the implementation of the Melvi Water Treatment Plant, located in Praia Grande with a capacity of 1.27 m³/s, and the construction of 5 metallic reservoirs in Santos, Bertioga, Peruíbe, Itanhaém and Guarujá. Additionally, there are plans to build a reservoir center with a capacity of 30,000 m³ in Praia Grande and to expand the Jurubatuba System to ensure the water supply to the population of Guarujá, mainly during the summer season.
On the northern coast, the Program is expanding the Água Branca supply system in Ilhabela and also foresees investments to increase the reservoir capacity through the construction of new reservoirs. The capacity of treatment, adduction and reservoirs will also be expanded in São Sebastião and Caraguatatuba. Besides the treatment and adduction projects, investments are foreseen to expand the coverage area with water distribution in São Sebastião and in Ubatuba.
| 36 |
Sustainable and Inclusive Sanitation Program
The Sustainable and Inclusive Sanitation Program integrates water security and social inclusion and is focused on the Guarapiranga reservoir area in the São Paulo Metropolitan Region, benefiting more than 1 million people. The Program aims to reduce water losses by replacing our water networks and implementing water supply infrastructure in houses with underdeveloped facilities, as well as to improve maintenance and safety control of Guarapiranga reservoir and to expand and optimize sewage collection, and treatment in the area. The Program is supported by funds from the World Bank as well as our own funds.
Investments in Sewage—We have a series of ongoing and scheduled projects involving the collection, removal and treatment of sewage. For the period from 2023 through 2027, we plan to invest R$17.3 billion in sewage collection and treatment. The main programs are:
Tietê Project
We have been working in the metropolitan region of São Paulo in sanitation programs that aim to contribute to the revitalization of rivers and streams, and its main program is the Tietê Project.
Established in 1992, the project aims to contribute to the progressive revitalization of the Tietê river and its tributaries, in the Alto Tietê basin, where the metropolitan region of São Paulo is located, through the expansion and optimization of the sewage collection, transportation and treatment system. Considering the complexity and challenges faced to implement infrastructure projects in crowded and disorderly urbanized areas such as São Paulo, it was necessary to structure the project in stages.
From 1992 to the end of 2022, investments totaled US$3.5 billion. Part of the resources allocated to the Tietê Project are our own capital and the remainder comes from financings granted by the IDB, BNDES, Caixa Econômica Federal and IFC.
During this period, 5 thousand kilometers of trunk sewers, interceptors and sewer collection networks were built and the treatment capacity of our plants almost tripled. As a result, the treated sewage outflow in the metropolitan region of São Paulo today is five and a half times greater than that in 1992, an increase equivalent to the sewage generated by a population of 12 million people. As a result, sewage collection that served 70% of the urbanized area of the metropolitan region of São Paulo in 1992 increased by more than 90% by the end of 2022.
Currently, Stage III is underway and we have made progress of over 90%. Stage IV is also underway, with some important projects already completed. It is estimated that the scope defined for Stages III and IV will be completed by 2027.
Finally, we would like to highlight the Novo Rio Pinheiros Project, which is part of the Tietê Project. The Pinheiros River is one of the main tributaries of the Tietê River in the São Paulo metropolitan region, and the improvements in the Pinheiros River had a direct impact on improving the quality of Tietê’s waters. It is important to point out that the large sewage collection and interception infrastructure built over time as part of the Tietê Project allows the complementary improvements carried out in the Novo Rio Pinheiros River to be immediately connected to the Barueri treatment plant. This project concluded in 2022.
The Novo Rio Pinheiros Project was an initiative promoted by the State of São Paulo to coordinate several state and municipal entities in an effort to clean up the Pinheiros river in order to reintegrate it into the city and make it a leisure and tourism area. The project includes sewage services, riverbed dredging, programs for the collection and reduction of inadequate urban waste disposal, as well as environmental education actions.
We were encouraged to participate in this initiative as it is relevant for the Tietê Project and we took part in the project by offering an accelerated expansion of the sewage collection network and the installation of new sewage connections in areas not yet served. In places where the connection to the existing infrastructure is not possible due to settlements along the river bank, we installed small sewage treatment plants on the river’s tributaries as part of the project. More than 650 thousand residences were connected to the sewage treatment system. These initiatives are being contracted based on performance (Performance Contract), a form of service contracting that set goals to be achieved by the contractors, with the compensation varying according to the achievement of the proposed targets. That is, compensation will take place upon completion of the construction and will also have a variable part, depending on the final result achieved. Performance evaluation considers targets such as the number of new residences connected to the sewage network and stream water quality.
Clean Stream Program
The Clean Stream Program (Programa Córrego Limpo), a partnership between the State of São Paulo, our company, and the city of São Paulo, aims to decontaminate urban streams in the city of São Paulo by eliminating the discharge of sewage into streams and rainwater runoff routes, cleaning streams and banks, and removing and relocating low-income households located on the banks of streams.
| 37 |
Since 2007, we have decontaminated and preserved 161 urban streams, benefiting approximately 2.9 million people. Part of the investment related to the Tietê Project and Novo Rio Pinheiros benefits the Clean Stream Program. In 2022, four streams were decontaminated.
Clean Wave Program
The Clean Wave Program (Programa Onda Limpa) is the largest environmental sanitation program on the Brazilian coast. Its main goal is to improve and expand the sewage systems in the municipalities of the metropolitan region of Baixada Santista and the northern coast of the State of São Paulo, seeking the universalization of sewage services in the region. The program will improve public health and bathing on the region's beaches, benefiting approximately 3.5 million people, including the local population and tourists who visit the region, especially in the summer months.
The first stage began in 2007, with investments only in Baixada Santista and, among the initiatives performed, 110,000 sewage connections, 7 sewage treatment plants, and 2 preconditioning plants were implemented. This was financed with our own resources and through financings from JICA and BNDES. From the beginning of the Program until 2022, the investments resulted in an increase in the sewage collection coverage rate from 53% to 85% and treatment of 100% of the collected sewage.
The second stage of the Program began in 2018 and aims to build approximately 450 km of sewage collection networks, 48,000 new sewage connections, 3 new sewage treatment plants and improvements and expansions in existing sewage plants with investments in all nine municipalities of Baixada Santista. In 2019, sewage collection and removal works began in the municipalities of Praia Grande, Mongaguá, São Vicente and Itanhaém. We expect to complete this stage in 2026. The second stage of the Program is financed with our own resources and Infrastructure Debentures (Debêntures de Infraestrutura) and by the IFC.
The third stage of the Program in Baixada Santista will be carried out between 2026 and 2033 and aims to reach the targets established in the New Legal Framework for Basic Sanitation in Baixada Santista. On the northern coast, the Clean Wave Program arrived in 2019, aiming to intensify investments in sanitation in the four municipalities of the region - Caraguatatuba, São Sebastião, Ubatuba and Ilhabela.
Other Policies and Programs
Nossa Guarapiranga
The Nossa Guarapiranga Project launched in December 2011 is still running. Its main objective is to improve the water quality in the Guarapiranga basin, an urban water source for the São Paulo metropolitan region, which supplies more than 4 million people.
We carried out actions on three fronts as part of this project: (i) we installed ecobarriers at the mouth of the reservoir’s main effluents in order to retain solid residue in the Guarapiranga basin; (ii) we developed diagnosis and control services for the removal of water plants that obstruct water extraction; and (iii) we removed and disposed of solid residue that had accumulated at the water surface of the dam in the reservoir. Two vessels were built specifically for this purpose. We work as a collaborative team with the municipal government of São Paulo in the Nossa Guarapiranga Project, with the municipal government of São Paulo transporting all of the residue collected through these fronts to a sanitary landfill. In 2022, we removed an average of 147 m³/month of solid residue and approximately 910 m3/month of water plants from this basin.
Água Legal Program
Created in 2017, the Legal Water Program (Água Legal) aims to promote the proper installation of water distribution systems in communities of high social vulnerability, where residents are poorly supplied with improvised pipes subject to contamination. In 2022, the program brought more comfort and health to approximately 120 thousand people in the metropolitan region of São Paulo by replacing precarious and irregular facilities with networks and water meters that bring quality water to the taps. Since the beginning of the Program, approximately 680 thousand people in the metropolitan region of São Paulo had their private connections standardized.
Pró-Conexão
In 2012, the State of São Paulo approved a program to subsidize connections to the sewage system for low-income families, of which 80% of the capital expenditures is provided by the São Paulo state government and 20% by us.
From 2012 to 2019, when the first phase ended, the program benefited 29.7 thousand families, with sewage connections, new internal installations and replacement of precarious and irregular sewage pipes, providing safe and legally compliant infrastructure for these households.
| 38 |
In 2019, the original term of the program provided for in State Decree No. 58,208/2012 expired and the program was suspended between 2020 and 2022. In February 2022, our Board of Directors approved the renewal of the program. In December 2022, the São Paulo state government published the State Decree No. 67,298, which extended the Pro-Connection Program (Programa Pró-Conexão) for a further five years. By 2027, we expect more than 65,000 new sewage connections.
We believe that this program can increase the efficiency of our other sewage collection programs and help improve water quality in the region’s rivers and basins as well as improve quality of life for low-income families. For more information, see “Item 7.B. Related Party Transactions—Agreements with the State.”
B. Business Overview
Our Operations
As of December 31, 2022, we provided water and sewage services to 375 municipalities in the State of São Paulo under concession agreements, program agreements, other forms of legal arrangements or without formal agreements. We also supplied treated water and account for on a wholesale basis to two municipalities located in the São Paulo metropolitan region and conurbations. The majority of these concessions have 30-year terms. Between January 1, 2007 and December 31, 2022, we entered into agreements with 351 municipalities in accordance with the Basic Sanitation Law, of which none were entered into in 2022. As of December 31, 2022, these 351 municipalities accounted for 95.4% of our gross operating revenues from sanitation services (excluding revenues relating to the construction of concession infrastructure). In addition to the contracts, the municipalities entered into cooperation contracts with the State of São Paulo, delegating the regulation and monitoring of the provision of services to ARSESP. As of December 31, 2022, one of our agreements or concessions had expired but we continued to provide water and sewage services to this municipality. From January 1, 2023 through 2030, 23 concession agreements will expire, accounting for 3.8% of our revenues (excluding revenues relating to the construction of concession infrastructure) for the year ended December 31, 2022 and 2.2% of our intangible assets and contract assets as of the same date, will expire.
We operate water and sewage systems in the State of São Paulo, which includes the city of São Paulo, Brazil’s largest city. According to the IBGE, the State of São Paulo is Brazil’s most populous state and the state with the highest GDP in Brazil. For the year ended December 31, 2022, we generated net operating revenue of R$22,055.7 million and profit of R$3,121.3 million. Our total assets amounted to R$57,207.8 million and our total shareholders’ equity amounted to R$27,333.5 million as of December 31, 2022. As of December 31, 2022, we provided water and sewage services to a broad range of residential, commercial, industrial and governmental customers in 375 of the 645 municipalities in the State of São Paulo, including the city of São Paulo. Substantially all of our concessions or program agreements have 30-year terms.
We also supplied water and sewage treatment services on a wholesale basis to two municipalities located in the São Paulo metropolitan region (Mogi das Cruzes and São Caetano do Sul). Agreements to provide services on a wholesale basis must comply with the Basic Sanitation Law, which requires that the service be supervised by an independent agency, stipulates registration of the cost of the service with the rules published by ARSESP. Our agreements currently comply with the provisions of the Basic Sanitation Law. For more information on these agreements, see Note 10 to our 2022 financial statements.
The Brazilian courts could oblige us to continue to supply water to the municipalities serviced through our wholesale segment, even when we have not received payments due to us. If they do not pay, we have no way of ensuring that negotiations with these municipalities or legal action taken against them will result in payments being made. The municipalities Mogi das Cruzes and São Caetano do Sul have historically paid for our services on time.
In 2022, we invoiced approximately 2,177.6 million cubic meters of water and 1,904.6 million cubic meters of sewage collected from these municipalities. In 2022, our revenues from wholesale water services were R$96.3 million and from wholesale sewage services were R$31.7 million.
For the year ended December 31, 2022, the São Paulo metropolitan region (including the municipalities to which we provide water on a wholesale basis) accounted for 71.5% of our operating revenue (excluding revenues relating to the construction of concession infrastructure), while the Regional Systems accounted for 28.5%.
As of December 31, 2022, we provided water services through 10.1 million water connections to approximately 28.0 million people, representing approximately 62% of the total population of the State of São Paulo, and had a water coverage ratio of 98% with respect to all regions. As of that date, we provided sewage services through 8.6 million sewage connections to approximately 24.7 million people and had an effective sewage service ratio of 92%. As of December 31, 2022, we operated using 91,638 kilometers of water pipes and water transmission lines and 63,557 kilometers of sewer lines. We also provide water and/or sewage services to four other municipalities through special purpose companies.
For more information on laws and regulations related to our concession operations, see “—Government Regulations Applicable to our Contracts.”
| 39 |
Description of Our Activities
As set forth in Article 2 of our bylaws, we are permitted to render basic sanitation services with the goal of providing basic sanitation services to the entire population in the municipalities where we conduct our activities without harming our long-term financial sustainability. Our activities comprise water supply, sanitary sewage services, urban rainwater management and drainage services, urban cleaning services, solid waste management services and related activities, including the planning, operation, maintenance and commercialization of energy, and the commercialization of services, products, benefits and rights that directly or indirectly arise from our assets, operations and activities. We are allowed to act in a subsidiary form in other Brazilian locations and abroad. For more information, see “—Government Regulations Applicable to Our Contracts—Establishment of ARSESP.” For a description of our operating segments please see Note 25 to our financial statements as of and for the year ended December 31, 2022.
Operating segments are presented in our annual report in a manner consistent with the internal reporting provided to our chief operating decision maker, which is the Board of Directors and the board of executive officers, as determined under IFRS 8. Under Brazilian GAAP, prior to our conversion to IFRS, the financial information for construction services was not separately presented and construction costs related to concessions were capitalized within property, plant and equipment. As a result, our chief operating decision maker did not review the results of this business. Following our conversion to IFRS, our chief operating decision maker decided to continue to exclude the construction results from the internal reporting of our revenues and expenses, thus not basing their decisions on discrete financial information for that business. Consequently, the business did not qualify as an operating segment under IFRS 8. Nonetheless, after our conversion to IFRS and for IFRS financial statement purposes only, we started to record such results separately as construction revenue and costs under IFRIC 12. Although such information is available discretely, it is not analyzed by our chief operating decision maker as such and is not the basis for operational decisions.
We set forth below a description of our activities.
Water Operations
Our supply of water to our customers generally involves water extraction from various sources, subsequent treatment and distribution to our customers’ premises. In 2022, we produced approximately 2,857.9 million cubic meters of water. The São Paulo metropolitan region (including the municipalities to which we supply water on a wholesale basis) currently is, and has historically been, our core market, accounting for approximately 68% of water invoiced by volume in 2022.
The following table sets forth the volume of water that we produced and invoiced for the periods indicated:
| Year ended December 31, | |||||
|
2022 |
2021 |
2020 | |||
| (in millions of cubic meters) | |||||
| Produced: | |||||
| São Paulo metropolitan region | 1,981.4 | 1,984.2 | 2,032.0 | ||
| Regional Systems | 876.5 | 880.5 | 874.7 | ||
| Total | 2,857.9 | 2,864.7 | 2,906.7 | ||
| Invoiced: | |||||
| São Paulo metropolitan region | 1,430.9 | 1,419.4 | 1,351.3 | ||
| Wholesale (1) | 47.8 | 49.7 | 50.1 | ||
| Regional Systems | 698.9 | 683.2 | 682.5 | ||
| Subtotal | 2,177.6 | 2,152.3 | 2,083.9 | ||
| Santo André (2) | - | - | 53.9 | ||
| Mauá (3) | - | 21.5 | 29.5 | ||
| Residencial Social/Favela (4) | - | - | 45.8 | ||
| Total | 2,177.6 | 2,173.8 | 2,159.2 | ||
| (1) | Wholesale includes volumes of reuse water and non-domestic sewage; |
| (2) | Billed volume in the retail segment in 2022 and 2021 and in the wholesale/retail segment in 2020; |
| (3) | Billed volume in the wholesale/retail segments in 2022 and 2021 and in the wholesale segment in 2020; and |
| (4) | Volume exempt from paying water and sewage bills in 2020. |
| 40 |
The difference between the volume of water produced and the volume of water invoiced generally represents both physical and non-physical water loss. For more information, see “—Water Loss.” In addition, we do not invoice:
| · | water discharged for periodic maintenance of water transmission lines and water storage tanks; |
| · | water supplied for municipal uses such as firefighting; |
| · | water consumed in our own facilities; and |
| · | estimated water loss associated with water we supply to shantytowns (favelas). |
Seasonality
Although seasonality does not affect our results in a significant way, in general, higher water demand is observed during the summer and lower water demand during the winter. The summer coincides with the rainy season, while the winter corresponds to the dry season. The demand in the coastal region is increased by tourism, with the greatest demand occurring during the Brazilian summer holiday months.
Water Resources
We can withdraw water only to the extent permitted by the Department of Water and Electric Energy (Departamento de Águas e Energia Elétrica – “DAEE”) pursuant to water rights granted by it. Depending on the geographic location of the river basin or if the river crosses more than one state (federal domain), the approval of ANA, a federal agency under the Ministry of Environment and Climate Change (Ministério do Meio Ambiente e Mudança do Clima) is required. We currently withdraw substantially all of our water supply from surface sources from rivers and reservoirs, with a small portion being withdrawn from groundwater. Our reservoirs are filled by impounding water from rivers and streams, by diverting the flow from nearby rivers, or by a combination of both methods. For more information on water usage regulation, see “—Environmental Matters—Water Usage.”
In order to supply water to the São Paulo metropolitan region, as of December 31, 2022 we relied nine water producing systems comprising the interconnected water system of the São Paulo metropolitan region, and the Guarulhos water supply system. The total capacity of the water sources available for treatment in this area is 81.8 m³/s. The average monthly verified production for the water systems of the São Paulo metropolitan region was 61.6 m³/s during 2022. The Cantareira, Guarapiranga and Alto Tietê Systems produce 77.4% of the water we distributed in the São Paulo metropolitan region in 2022.
In 2022, the Cantareira system accounted for 34.3% of the water that we supplied to the São Paulo metropolitan region (including the municipalities to which we supplied water on a wholesale basis), which represented 71.5% of our operating revenues from sanitation services (excluding revenues relating to the construction of concession infrastructure) for the year. For more information, see “Item 3.D. Risk Factors—Risks Relating to Environmental Matters and Physical and Transition Climate Risks — Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations.”
Current river basin committees are authorized to charge both for water usage and the dumping of sewage into water bodies. We participate in the decentralized and integrated management of water resources established by the National Policy on Water Resources. We are represented by our employees on the State River Basin Committees and the Federal Committees that act in the State of São Paulo and in the National and State Councils on Water Resources.
The following table sets forth the water production systems from which we produce water for the São Paulo metropolitan region:
| Production Rate(1) | |||||
| 2022 | 2021 | 2020 | |||
| (in cubic meters per second) | |||||
| Water production system: | |||||
| Cantareira | 21.1 | 22.3 | 24.6 | ||
| Guarapiranga | 13.6 | 13.4 | 12.7 | ||
| Alto Tietê | 13.0 | 12.7 | 13.6 | ||
| Rio Claro | 3.6 | 3.3 | 3.6 | ||
| Rio Grande (Billings reservoir) | 4.5 | 4.4 | 4.3 | ||
| Alto Cotia | 0.9 | 0.8 | 1.1 | ||
| Ribeirão da Estiva | 0.1 | 0.1 | 0.1 | ||
| São Lourenço | 4.5 | 4.4 | 3.1 | ||
| Guarulhos | 0.3 | 0.3 | 0.3 | ||
| Total | 61.6 | 61.7 | 63.4 | ||
| (1) | Average of the year ended December 31, 2022, 2021 and 2020. |
| 41 |
The Guarapiranga and Billings reservoirs and a portion of some of the reservoirs of the Alto Tietê system are owned by other companies controlled by the State. In the cities of the interior region of São Paulo, our principal source of water consists of surface water from nearby rivers and from wells, whereas in coastal areas, our principal source of water consists of surface water from rivers and mountain springs. For additional information on the Alto Tietê system, see “Item 7.B. Related Party Transactions—Agreements with the State.”
Statewide, we estimate that we are able to supply nearly all of the demand for water in all of the areas where we operate, subject to droughts and extraordinary climate events. We installed 183.5 thousand, 178.9 thousand and 220.4 thousand new water connections in 2022, 2021 and 2020, respectively. The interconnected water system of the São Paulo metropolitan region serves 31 municipalities, of which 29 are operated directly by us under this system. Through this system, we serve the other two municipalities on a wholesale basis whereas distribution is the responsibility of the companies or departments related to each municipality.
In order to reach the final customer, the water is stored and transported through a complex and interconnected system. This water system requires permanent operational supervision, engineering inspection, maintenance, and quality monitoring and measurement control.
To ensure the continuous provision of regular water supply, we intend to invest R$8.9 billion from 2023 to 2027 to increase our water production and distribution capacities as well as to improve the water supply systems. In 2022, our total investment in water supply systems amounted to R$2.2 billion, of which R$1.5 billion were invested in the São Paulo metropolitan region.
Water Treatment
We treat all water at our water treatment facilities prior to dispatching it to our water distribution network. We operate 237 treatment facilities, of which nine are a part of the Metropolitan Production System—located in the São Paulo metropolitan region and account for approximately 70% of all water we produced in 2022. The type of treatment used depends on the nature of the source and quality of the untreated water. For example, water abstracted from rivers requires more treatment than water withdrawn from groundwater sources. All of the water we treat receives fluoridation treatment.
Water Distribution
We distribute water through our networks of water pipes and water transmission lines. Storage tanks and pumping stations regulate the volume of water flowing through the networks in order to maintain adequate pressure and continuous water supply.
The following table sets forth the total number of kilometers of water pipes and water transmission lines and the number of connections in our network as of the dates indicated:
| As of December 31, | |||||
| 2022 | 2021 | 2020 | |||
| Water distribution pipes and water transmission lines (in kilometers) | 91,638 | 88,904 | 87,568 | ||
| Number of connections (in thousands) | 10,113 | 9,840 | 10,088 | ||
Our water transmission lines are mostly made of steel, cast iron or concrete.
As of December 31, 2022, our water distribution pipes and water transmission lines included: (i) 49,073 kilometers in the São Paulo metropolitan region; and (ii) 42,564 kilometers in the Regional Systems.
| 42 |
Water transmission lines that require maintenance are cleaned and their lining is replaced. We are typically notified of water main fractures or breaks by the public through a toll-free number maintained by us. We consider the condition of the water pipes and water transmission lines in the São Paulo metropolitan region to be adequate as of the date of this annual report. Due to age, external factors such as traffic, the dense population, and commercial and industrial development, water pipes and water transmission lines in the São Paulo metropolitan region are somewhat more susceptible to degradation than those in the Regional Systems. To counter these effects, we have a maintenance program in place for water pipes and water transmission lines that is intended to address anticipated fractures and clogs due to brittleness and encrustation, and to help ensure water quality in the region.
The new customers whose water pipes are more than 20 meters away from the water transmission lines are responsible for covering part of the costs of connecting to our water distribution network. They must cover the costs of connecting to the network from the customer’s premises, including costs of purchasing and installing the water meter and related labor costs. We perform the installation of the water meter and conduct periodical inspections and measurements. After completion of installation, the customer is responsible for the water meter.
The following table (as of December 31, 2022) sets forth projected new water connections for the periods indicated in thousands:
| 2023 | 2024 | 2025 | 2026 | 2027 | 2023 – 2027 | ||||||
| Total | 190 | 190 | 190 | 190 | 190 | 950 |
Water Loss
The difference between the volume of water produced and the volume of water invoiced generally represents both physical and non-physical water loss. We exclude the following from our calculation of water loss: (i) water discharged for periodic maintenance of water transmission lines and water storage tanks; (ii) water supplied for municipal uses such as firefighting; (iii) water we consume in our facilities; and (iv) estimated water loss related to the supply of water to shantytowns (favelas).
As of December 31, 2022, we experienced 249 liters per connection per day of water loss. We have a Program for Reduction of Water Loss in place that aims to reduce total water loss to around 248 liters per connection per day in 2023.
Real water loss (water physically lost) decreased from 22.2% in December 2008 to 19.1% in December 2022. Our strategy to reduce water loss has two approaches:
| · | reduction in the level of physical loss, which results mainly from leakage. To this end we are replacing and repairing water transmission lines and pipes and installing probing and other equipment, including strategically located pressure regulating valves; and |
| · | reduction of non-physical loss, which results primarily from the inaccuracy of our water meters installed at our customers’ premises and from clandestine and illegal use. To this end we are upgrading and replacing inaccurate water meters, increase anti-fraud actions and expanding our anti-fraud personnel. |
We are taking measures to decrease physical loss by reducing response time to fix leakages and by better monitoring of non-visible water main fractures. Among other initiatives, we have adopted the following measures to reduce physical water loss:
| · | the introduction of technically advanced valves to regulate water pressure throughout our water transmission lines in order to maintain appropriate water pressure downstream. These valves are programmed to respond automatically to variations in demand. During peak usage, the flow of water in the pipes is at its highest point; however, when demand decreases, pressure builds up in the water transmission lines and the resulting stress on the network can cause significant water loss through cracks and an increase in ruptures of the pipes. The technically advanced valves are equipped with probes programmed to feed data to the valve in order to reduce or increase pressure to the water transmission lines as water usage fluctuates; the reconfiguration of interconnected water distribution to permit the distribution of water at lower pressure; | |
| · | the implementation of routine operational leak detection surveys to reduce overall water loss; | |
| · | the monitoring and improvement of accounting metrics with respect to water connections, especially for large volume customers; | |
| · | regular checking on inactive customers and monitoring non-residential customers that are accounted for as residential customers and, therefore, billed at a lower rate; | |
| · | preventing fraud with the use of new, and more sophisticated water meters that are more accurate and less prone to tampering; |
| 43 |
| · | installing water meters where none are present; and | |
| · | conducting preventive maintenance of existing and newly installed water meters. |
Water Quality
We believe that we supply high quality treated water that is consistent with the standards set by Brazilian law, which are similar to the standards set in the United States of America and Europe. Pursuant to the Brazilian Ministry of Health (Ministério da Saúde) regulations, we have significant statutory obligations regarding the quality of treated water.
In general, the State of São Paulo has excellent water quality from underground or surface water sources. However, high rates of population growth, increased urbanization and disorganized occupation of some areas of the São Paulo metropolitan region have reduced the quantity and quality of water available to serve the population in the southern area of the São Paulo metropolitan region and in the coastal region. Currently, we successfully treat this water to make it potable. We are also investing in improvements of our water transmission lines and our treatment systems to ensure the quality and availability of water for the upcoming years.
Water quality is monitored at all stages of the distribution process, including at the water sources, water treatment facilities and in the distribution network. We have 15 regional laboratories, one central laboratory, and laboratories located in all water treatment facilities that monitor water quality, as required by our standards and those set by law. Our laboratories analyze an average of 85 thousand water samples per month, which are collected from customers' residences. Our central laboratory located in the city of São Paulo is responsible for organic compound analysis using the chromatographic and spectrometric methods as well as heavy metals analysis by Inductively Coupled Plasma. Our central laboratory and 13 of our regional laboratories have obtained the ABNT NBR ISO IEC 17025 accreditation (accreditation for general requirements for the competence of testing and calibration laboratories) awarded by INMETRO.
All chemical products used for water treatment are analyzed and follow strict specifications set out in recommendations made by the National Health Foundation (Fundação Nacional de Saúde), ABNT, and the National Standard Foundation, and the American Water Works Association (“AWWA”), to eliminate toxic substances that are harmful to human health. From time to time, we face problems with the proliferation of algae, which may cause an unpleasant taste and odor in the water. In order to mitigate this problem, we work on: (i) fighting algae growth at the water source and (ii) using advanced treatment processes at the water treatment facilities that involve the use of powdered activated carbon and oxidation by potassium permanganate. The algae growth creates significant additional costs for water treatment because of the higher volumes of chemicals used to treat the water. We also participate in the Clean Stream Program to clean important streams in the city of São Paulo. Other initiatives also aimed at improving the water quality in the water sources located in the of São Paulo metropolitan region are Nossa Guarapiranga Pró-Conexão and Água Legal Program. For more information, see “—Main Projects of Our Capital Expenditure Program— Clean Stream Program,” and “—Other Policies and Programs.”
We believe that there are no material instances where our standards are not being met. However, we cannot be certain that future breaches of these standards will not occur.
Fluoridation
As required by Brazilian law, we add fluoride to the water at our treatment facilities prior to its distribution into the water supply network. Fluoridation primarily consists of adding fluorosilicic acid to water at between 0.6 mg/L and 0.8 mg/L to assist in the prevention of tooth decay among the population.
Sewage Operations
We are responsible for the collection, removal, treatment and final disposal of sewage. As of December 31, 2022, we covered the sewage operations of approximately 91% and 93% of the households in the municipalities in which we operate in the São Paulo metropolitan region and in the Regional Systems, respectively. During 2022, we covered the sewage operations of 92% of the households in the municipalities in which we operated in the State of São Paulo. We installed 226.5 thousand, 225.5 thousand and 258.9 thousand new sewage connections in 2022, 2021 and 2020, respectively.
Sewage System
The purpose of our sewage system is to collect and treat sewage and to adequately dispose of the treated sewage. As of December 31, 2022, we were responsible for the operation and maintenance of 63,557 kilometers of sewage lines, of which approximately 34,355 kilometers are located in the São Paulo metropolitan region and 29,202 kilometers are located in the Regional Systems, respectively.
| 44 |
The following table sets forth the total number of kilometers of sewage lines and the total number of sewage connections in our network for the periods indicated:
| As of December 31, | |||||
| 2022 | 2021 | 2020 | |||
| Sewage lines (in kilometers) | 63,557 | 61,122 | 59,660 | ||
| Sewage connections (in thousands) | 8,610 | 8,418 | 8,518 | ||
Our sewage system is generally designed to operate by gravitational flow, although pumping stations are required in certain parts of the system to ensure the continuous flow of sewage. Where pumping stations are required, we use sewage lines made of cast iron.
The public sewage system operated by us was structured in order to receive, in addition to household effluents, a portion of non-domestic effluents (such as industrial sewage and sewage from other non-domestic sources) for treatment together with household effluents. Non-domestic effluents have characteristics that are qualitatively and quantitatively different from household effluents. As a result, the discharge of non-domestic effluents into the public sewage system is subject to compliance with specific legal demands with the purpose of protecting the sewage collection and treatment systems, the health and safety of operators and the environment. The current environmental legislation establishes standards for the discharge of these effluents into the public sewage system and stipulates that such effluents be subject to pretreatment. These standards are defined in State Decree No. 8,468/1976.
Before the discharge is permitted, we carry out acceptance studies that assess the capacity of the public sewage system to receive it as well as the compliance with regulations. Upon the conclusion of these studies, the technical and commercial conditions for receiving the discharge are established, which are then formalized in a document signed by us and the effluent producer. Failure to comply with these conditions can lead to the application of penalties. In extreme cases, the State of São Paulo Environmental Company (Companhia Ambiental do Estado de São Paulo – “CETESB”) is notified in order for the applicable measures to be taken. Effluents from our treatment facilities must comply with limitation guidelines for release of effluents into receiving water bodies. Additionally, the quality of the water in the receiving water body must not be impaired by the release of such effluents, as established by State Law No. 997/1976 regulated by State Decree No. 8,468/1976 and Conama Resolution No. 357/2005, as amended by Conama Resolution No. 430/2011 and Conama Resolution No. 397/2008.
We considered the condition of the sewage lines in the São Paulo metropolitan region to be adequate as of the date of this annual report. Due to a greater volume of sewage collected, a higher population and more extensive commercial and industrial development, the sewage lines in the São Paulo metropolitan region are more deteriorated than those of the Regional Systems. To counter the effects of deterioration, we maintain an ongoing program for the maintenance of sewage lines intended to address anticipated fractures arising from obstructions caused by system overloads.
Unlike the São Paulo metropolitan region, the interior region of São Paulo State does not generally suffer obstructions caused by sewage system overload. The coastal region, however, experiences obstructions in its sewage lines primarily due to infiltration of sand, especially during the rainy season in the summer months. In addition, the sewage coverage ratio in the coastal region is lower than in the other regions served by us, at approximately 83% as of December 31, 2022.
New sewage connections are made on substantially the same basis as connections to water lines: we assume the cost of installation for the first 20 meters of sewage lines from the sewage network to all customers’ sewage connections and the customer is responsible for the remaining costs.
The following table (as of December 31, 2022) sets forth projected new sewage connections for the periods indicated:
| (in thousands) | |||||||||||
|
2023 |
2024 |
2025 |
2026 |
2027 |
2023-2027 | ||||||
| Total | 230 | 230 | 230 | 230 | 230 | 1,150 |
Sewage Treatment and Disposal
In 2022, approximately 75% and 99% of the consumer units of the sewage services used our sewage treatment system in the São Paulo metropolitan region and the Regional Systems, respectively, or 83% of the consumer units of our sewage services in the State of São Paulo, was connected at our treatment facilities and afterwards discharged into receiving water bodies such as rivers and the Atlantic Ocean, in accordance with applicable legislation. Though we have not yet reached full coverage of sewage collection and treatment services in the regions where we operate, we are making efforts to reach this goal.
| 45 |
As of December 31, 2022, we operate 581 sewage treatment facilities including eight ocean outfalls, of which the five largest, located in the São Paulo metropolitan region, have a treatment capacity of approximately 24.5 cubic meters of sewage per second.
In the São Paulo metropolitan region, the treatment process used by most treatment facilities is the activated sludge process.
Sewage treatment in the Regional Systems will vary according to the particularities of each area. In the interior region of São Paulo State, treatment consists largely of stabilization ponds. We have secondary treatment facilities in the interior region of São Paulo State that have treatment capacity of approximately 16.8 cubic meters of sewage per second. Similar to our disposal process for treated sewage collected in the São Paulo metropolitan region, the majority of sewage collected in the coastal region receives treatment and disinfection and is then discharged into rivers and also into the Atlantic Ocean through our ocean outfalls, in accordance with applicable legislation. We have 45 sewage treatment facilities in the coastal region (including the outfalls).
In this regard, we are a party to a number of legal proceedings related to environmental matters. For more information, see “Item 8.A. Financial Statements and Other Financial Information— Legal Proceedings.” In addition, our capital expenditure program includes projects to increase the amount of sewage that we treat. For more information, see “Item 4.A. History and Development of the Company—Capital Expenditure Program” and “Item 4.B. Business Overview—Environmental Matters—Environmental Regulation— Sewage Requirements.”
Sludge Disposal
The generation of sludge is inherent in the sanitation cycle. The treatment of water and sewage produces residue which needs to be disposed of appropriately to prevent harm to the environment. Sludge removed from the treatment process typically contains water and a very small proportion of solids. We use filter presses, belt filter presses, drying beds and centrifugation machines, among other processes, to dewater the sludge, which reduces the volume of residues for transportation and final disposal and, consequently, reduces the costs of these activities. In addition, after dehydration, the calorie value of the sludge increases, and the conditions for its mixing with other components improve, which can be an opportunity for the advancement of new uses and products. Our technological innovation actions aim to test technologies seeking full scale use of sludge in our operations.
Currently, the sludge generated through our activities goes mainly to landfills authorized to receive it. In some cases, in return, we treat the leachate generated in these landfills.
Current legislation and the population at large demand advances in the search for alternative technologies that minimize the generation of and find beneficial uses for sludge. In light of these demands, we work on several fronts, seeking innovative approaches to the destination and final disposal of sludge. For instance, since 2018 we produce an agricultural organic fertilizer in the municipality of Botucatu, Sabesfértil, which is produced by biodrying sewage sludge. This project was approved by the Ministry of Agriculture and allows for the sale of such fertilizer.
Additionally, using financing from Funding Authority for Studies and Projects (Financiadora de Estudos e Projetos – “FINEP”), we are also developing two other projects. The first project is a plasma gasification system which uses specialist technology to transform sludge from sewage treatment plants into a solid vitreous product, weighing 5% of its initial weight, which can be re-used in construction work. The second project consists of a sludge dryer that uses sunlight and automated processes, resulting in a final product that weighs 25% of its initial weight.
Sludge disposal must comply with State and Federal law requirements, such as Federal Law No. 12,305/2010, regulated by Federal Decree No. 10.936/2012, State Law No. 12,300/2006, regulated by State Decree No. 54,645/2009, and CONAMA Resolution No. 498/2020, which revoked CONAMA Resolution No. 375/2006, introducing new guidelines for the use of sewage sludge in the soil. Therefore, in addition to agricultural use, it is possible to use sludge for the recovery of degraded soils, creating opportunities for using sludge from sewage treatment plants in the interior of the State of São Paulo as a soil conditioner, due to its proximity to farms and favorable sludge conditions. This change opens a new opportunity for the use of sludge which corresponds to the sewage treatment of approximately 8 million inhabitants.
Our technical staff participate into different thematic groups of the sanitation sector, which contributes to the technical improvement of the regulations which apply to the use and appropriate disposal of the sludge.
Principal Markets in Which We Operate
As of December 31, 2022, we operated water and sewage systems in 375 of the 645 municipalities in the State of São Paulo. In addition, we supplied water and accounted for on a wholesale basis to two municipalities located in the São Paulo metropolitan region with a total population of approximately 0.6 million people.
| 46 |
The following table provides a breakdown of gross revenues from sanitation services by geographic market for the years indicated:
| Year ended December 31, | |||||
| 2022 | 2021 | 2020 | |||
| (in millions of R$) | |||||
| São Paulo metropolitan region | 13,318.8 | 11,529.2 | 11,529.2 | ||
| Regional Systems | 5,311.2 | 4,775.0 | 4,775.0 | ||
| Total | 18,630.0 | 16,304.2 | 16,304.2 | ||
Competition
For contracts, where the municipality delegates the provision of sanitation services to us, we have a natural monopoly. However, we also compete in the market (see Market competition below), in which we service consumers in specific segments using alternative sources of water.
Natural monopoly
As of December 31, 2022, we provided water and/or sewage services to 375 municipalities in the State of São Paulo under concession agreements and program agreements. As of December 31, 2022, one of our concessions had expired. This municipality accounted for 0.1% of our total revenues (excluding revenues relating to the construction of the concession infrastructure).
On December 31, 2022, there were 270 municipalities operating their own water and/or sewage systems in the State of São Paulo, with a total population of approximately 14.5 million, or approximately 32% of the population of the state.
The competition for municipal concessions arises mainly from the municipalities, as they may commence bidding procedures which we may not win or resume the water and sewage services that were granted to us and start providing these services directly to the local population. In this latter case, the municipal governments would be required to indemnify us for the unamortized portion of our investment. For more information, see “Item 3.D. Risk Factors—Risks relating to Regulatory Environment—Municipalities may terminate our concessions before they expire in certain circumstances. The indemnification payments we receive in such cases may be less than the value of the investments we made, or may be paid over an extended period, adversely affecting our business, financial condition or results of operations.” In the past, municipal governments have terminated our concessions agreements before the expiration date. Furthermore, municipal governments have tried to expropriate our assets in an attempt to resume the provision of water and sewage services to local populations. For more information, see “Item 8.A. Financial Statements and Other Financial Information—Legal Proceedings.”
The New Legal Framework for Basic Sanitation brought a significant change to the relationship between the municipality as granting authority and us as service provider since it introduced the mandatory use of public bids for the execution of future contracts for the provision of sanitation services, which has the potential to intensify competition between public companies and the private sector. For more information, see “Item 3D. Risk Factors—Risks relating to Regulatory Environment— The New Legal Framework for Basic Sanitation prohibits program contracts for basic sanitation services, resulting in uncertainties for our current and future concessions.”
Market competition
In the State of São Paulo, we face competition from private and municipal water and sewage service providers.
In recent years, we have also experienced an increasing level of competition in the market for the supply of water, including to residential condominiums and non-residential customers who collect their own water from undergrounds wells or use water trucks. Several large industrial customers located in municipalities we serve also use their own wells to meet their water needs. This competition is taxed distinctly, and more than two thirds of the deep wells are illegal and extract water without regular concessions. One of the reasons for the competition in respect of alternative sources of water is generally the need for water with fewer technical specifications than the water made available to the public.
This trend has increased in recent years, especially since the 2014-2015 water crisis, when non-residential customers and residential condominiums sought independent solutions to supply water and to dispose of non-residential, commercial and industrial sludge in the São Paulo metropolitan region. Private companies offer stand-alone water treatment solutions inside the facilities of their customers.
| 47 |
Additionally, competition in non-residential, commercial and industrial sewage treatment in the São Paulo Metropolitan region has increased in recent years as private companies have started to offer customized solutions for customers' facilities. We have also set special tariffs for commercial and industrial customers to help maintain these customers through fixed demand contracts.
Competition for new municipalities
As foreseen in our Articles of Incorporation, we may operate through subsidiaries in any part of Brazil or abroad to provide sanitation services, making us also a potential competitor for other state sanitation companies and private and municipal water and sewage service providers, both Brazilian and foreign.
By prohibiting the renewal of a program contract, the New Legal Framework for Basic Sanitation imposes mandatory bidding processes for municipalities to hire companies providing basic sanitation services. This opened up a new business environment in which state-owned and private companies can compete. Participating in a bidding process is now the only method of maintaining and/or expanding our market, whether in the State of São Paulo or in other states.
With regard to the provision of water and sewage services we participated in two bids, one in February 2021, in the municipality of Orlândia, State of São Paulo and the other in September 2020, in partnership with Iguá Saneamento S/A, in the metropolitan region of Maceió, in the State of Alagoas. In both the criterion was the highest award, however we were not successful in either of the two bids.
On April 30, 2021, there was an auction for the concession of the Company for Water and Sewage of the State of Rio de Janeiro (Companhia Estadual de Águas e Esgotos do Rio de Janeiro – “CEDAE”) and Iguá Saneamento S.A. won the auction to explore block 2 of this concession. We had the option to become a minority shareholder in the special purpose company, however, we decided not to exercise this option.
Billing Procedures
The procedure for billing and payment of our water and sewage services is largely the same for all customer categories. In the current Tariff Structure, water and sewage bills are based on water usage determined by monthly water meter readings. Larger customers, however, have their meters read every 15 days to monitor consumption and thus avoid water losses resulting from leakages. Sewage billing is included as part of the water bill and is based on the water meter reading.
The readings of the water meters for billing purposes are carried out by our own team and by third parties through mobile application, with simultaneous printing and delivery of the bill to the customer or, when the customer so chooses, the bill can be forwarded by e-mail or mail to an address of the customer’s choice.
Water and sewage bills can be paid at certain banks and other locations in the State of São Paulo. These funds are paid over to us after deducting average banking fees ranging from R$0.32 to R$1.72 per transaction for collection and remittance of these payments. Customers must pay their water and sewage bills by the due date if they wish to avoid paying a fine. We generally charge a penalty fee and interest on late bill payments.
In addition, since 2019, we used an Internet of Things (“IoT”) application to monitor the daily consumption of 100 thousand customers representing approximately 2% of the connections and 45% of the Metropolitan region of São Paulo revenue. In 2021, we use the IoT application for 3,500 customers of the Regional Systems. The implementation of IoT is scheduled for over 160 thousand customers in the city of São Paulo by 2024. This technology has helped us improve our customer care management. We believe this model has become a benchmark in the utilities sector, as the entire management is carried out by monitoring the quantity and quality indicators of the data delivered, an innovative approach in relation to telemetry in the sanitation sector.
Customer relationship
One of our clear objectives every year is to improve our relationship with customers, as well as their experience and satisfaction. We understand that in order to achieve this, it is necessary to act in a competitive and transparent manner, expanding the channels and digital tools that can ensure customer satisfaction and the quality of the services offered.
In 2022, we applied digital transformation to the implementation of new relationship channels. With the migration to the virtual environment, the process gained greater agility, especially in the effectiveness of service, due to a more intelligent system, and simpler, faster negotiations. An example of this was the consolidation of our WhatsApp, the Chat Bot, and the new Cloud-based service platform, which provides more consistency for our customers, in addition to supporting new Omnichannel management channels and tools (simultaneous and interconnected use of different communication channels).
| 48 |
Throughout the year, we also rolled out mobile service vans that park in different locations to facilitate access by our customers. This initiative allows negotiation of overdue bills, updating of customer records, requesting water and/or sewage connections, requesting consumption revisions, or requesting repairs to networks.
Also in 2022, we inaugurated a customer relationship center in Itapetininga, located in the countryside of São Paulo. This new customer relationship center serves customers in all 375 municipalities in which we operate and is fully interconnected with the first customer relationship center in the city of São Paulo.
Performance monitoring of customer service is done through indicators of service quality, amount of calls received, solution on first contact, and other important monitoring metrics. Analysis of this data contributes to the improvement of the customer experience and the strengthening of the relationship with this public.
Furthermore, all our channels are accessible with tools that facilitate access for customers with disabilities.
During 2020, we implemented partnerships with the Iti and PicPay and, in 2021, with AgZero digital wallets, offering additional options for our customers to pay their water bills. In 2022, aiming to expand the options for payments of bills by customers, we now offer the option to pay bills in full or in installments through debit or credit cards at our physical service centres.
With these main pillars we seek to improve customer satisfaction, which in 2022 was 83%, according to the annual satisfaction survey conducted by the GMR Market Intelligence Institute and modernize our customer relationships and bring about significant cost savings.
We also continue to provide an ombudsman service to customers. This channel exclusively handles complaints, suggestions, reports, critiques and information requests.
Tariffs
Tariff adjustments follow the guidelines established by the Basic Sanitation Law and ARSESP regulations. The guidelines also establish procedural steps and the terms for the annual adjustments. The adjustments must be announced 30 days prior to the effective date of the new tariffs. Pursuant to the most recent tariff revision, both the base date and future adjustments take place in April. Tariffs have historically been adjusted once a year and for periods of at least 12 months. For more information, see “—Government Regulations Applicable to our Contracts—Tariff Regulation in the State of São Paulo” for additional information regarding our tariffs.
Under the Basic Sanitation Law, states have been required to establish independent regulators responsible for the regulation of basic sanitation services, including tariff regulation. To exercise this assignment, the State of São Paulo enacted State Supplementary Law No. 1,025/2007, that established ARSESP, which regulates and supervises the services we provide to the State and also to the municipalities that have agreed to its jurisdiction. The guidelines by which we readjust our tariffs are defined pursuant to State Decree No. 41,446/1996, which were ratified by the Basic Sanitation Law and regulated by resolutions issued by ARSESP.
In regard to municipalities that have not explicitly selected ARSESP as their regulator, the Basic Sanitation Law allows the municipality to create other regulatory agencies of their own.
ARSESP can also grant some tariff exemptions. For example, on April 14, 2023, ARSESP published Resolution No. 1,400/2023, which (i) allows for tariff exemptions for customers in the Residential Social and Residential Vulnerable categories in the municipality of São Sebastião, a municipality that suffered from torrential rains in February, and (ii) allows for hotels and inns in the municipality that accommodated the homeless population during heavy rain to be placed under the Social Assistance Entity tariff. The resolution's effects will remain valid as long as Decree No. 67,502/2023 is in force. Any amounts not billed by us will be subject to a compensatory adjustment. For more information about the torrential rains in São Sebastião, see “Item 3D – Risks Relating to Environmental Matters and Physical and Transition Climate Risks – Extreme Weather Conditions and Climate Change may have a material adverse impact on our business, financial condition or results of operations.”
Tariff Readjustment and Revisions
Tariff readjustment and revision are mechanisms through which tariffs may be monetarily altered. Such mechanisms are provided for in laws, contracts and regulatory standards and allow the maintenance of the economic and financial balance of the concessionaire and of the concession agreement itself.
| 49 |
Pursuant to Basic Sanitation Law, revisions may be ordinary or extraordinary. The ordinary tariff review takes place every four years and aims at maintaining the economic and financial balance of service provision. This review considers the expectations of costs, expenses, investments and demand in order to preserve the financial and economic balance of the concession agreement, as was the case with our tariff revision. This revision calculates the required revenue (or balance revenue), the annual Factor X that allows us to share productivity gains with consumers and the annual General Quality Index (“IGQ”), which encourages quality improvement. In addition, it is important to recognize all investments made during the “inter-cycle” period by the concessionaire, such as us, and to redefine their efficient operating costs according to the evolution of other service providers and the rate of return according to the country’s socioeconomic scenario.
Extraordinary tariff revisions, on the other hand, may occur at any time regardless of the readjustments mentioned above and revisions in case there are material changes in conditions that affect the financial and economic balance of the concession agreement.
The approved regulatory model adopted by ARSESP for the industry defines a maximum price (P0), based on the guarantee of the economic and financial balance of the provider, such as us, in its business segment and on efficient costs projected for the tariff cycle, in order to encourage the provider to permanently seek to reduce its costs. Accordingly, an average tariff is established, expressed in reais per cubic meter, which reflects the economic cost of providing water and sewage services in a certain tariff cycle. The methodology is based on a discounted cash flow model, which aims to calculate the average tariff (P0), ensuring that the Net Present Value (“NPV”) of the tariff cycle is equal to zero and taking into account a rate of return equal to the Weighted Average Cost of Capital (“WACC”).
Further to revisions, the tariffs are adjusted annually in the years between periodic tariff reviews. In accordance with ARSESP regulations, we use the IPCA price index (accumulated over the past 12 months), minus a productivity factor calculated as part of the periodic tariff review (Factor X) and, since 2020, the adjustment of IGQ that can be zero, positive or negative, according to the deviation between the targets we set and the actual values.
Third Ordinary Tariff Revision - OTR (April 2021 – April 2024 Cycle)
The results of the Third Ordinary Tariff Revision were released on April 8, 2021, marking the beginning of a new four-year cycle from 2021 to 2024.
The main details of the Third Ordinary Tariff Revision include:
| · | the final regulatory asset base (“RAB”) was set at R$55.9 billion; | |
| · | the WACC was set at 8.10%; | |
| · | the Final P0 was set at R$4.9534/m³ with the implementation of the compensatory adjustments, which as of October 2020 translated into a P0 of R$5.1213/m3 as of February 2021; | |
| · | a limit of 4% will be applied to transfers to municipal funds recognized in tariffs. For tariff recognition, the municipal funds for environmental sanitation and infrastructure will be established by the service holder by an act of law, which will specify the destination of the funds; | |
| · | the target for water losses defined by ARSESP was 215.07 liters/connection per day, in two tariff cycles (from 2021 to 2028), starting from 258.2 liters/connection per day in 2020 and 252.8 liters/connection per day in 2021; and | |
| · | the sharing criteria of the alternative revenues for the third tariff cycle (2021-2024). Until the Second Ordinary Tariff Revision, all revenues earned by us were passed on to the consumer through social equality adjustments, considering the composition of the revenue required for the calculation of the tariff. In total, considering the historical share of reused water in the total indirect revenues and the adoption of a percentage of 100% for other activities, the share value of indirect revenues in the Third Ordinary Tariff Revision is 35% (accordingly, this percentage will be returned to users in the form of social equality adjustments, while we will remain with 65% of the revenue). |
At the same time, a review of the tariff structure, which has been in force since the 1970s with minor changes in 1997, was carried out. Due to the complexity and challenges of the review of the tariff structure, ARSESP decided to carry out a specific regulatory action, with the objective of amplifying the studies and allowing the participation of various players in the sector.
The New Tariff Structure was initially expected to be implemented in 2022. However, on March 17, 2022, ARSESP published Resolution No. 1,278 which postponed the implementation of the New Tariff Structure. On April 6, 2023, ARSESP published Resolution No. 1,395 which revoked Resolution No. 1,278 and maintained the current Tariff Structure. For 2021, 2022 and 2023, the tariff structure continued to be based on the current structure. For more information, see “—New Tariff Structure.”
| 50 |
Extraordinary Tariff Revision
On December 21, 2022, ARSESP published Notice of Public Consultation No. 14/2022 regarding the Extraordinary Tariff Revision in response to the request for clarification and revision prepared by us. This Extraordinary Review was a result of our request to ARSESP for clarification as the readjustment, authorized in May 2021 and 2022, was considered insufficient for the maintenance of our economic and financial equilibrium, among other subjects.
On April 6, 2023, ARSESP published Resolution No. 1,394/2023 related to the Extraordinary Tariff Revision and compensatory adjustments and Resolution No. 1,395/2023, which presents the new tariff values, authorizing us to apply a total tariff readjustment of 9.5609% to our current tariffs, composed of the following adjustments:
| · | Inflation Index (February 2022 to February 2023) of 5.5964%; | |
| · | Efficiency Factor (Factor X) of 0.2142%; | |
| · | General Quality Index (IGQ 2023) of 0.1280% to be discounted; | |
| · | Result of the Extraordinary Tariff Revision of 5.5532%; and | |
| · | Compensatory Adjustment (referring to FY2021) of 1.4040% to be discounted. |
Tariff Readjustment
In addition to revisions, the tariffs are adjusted annually in the years between periodic tariff reviews. In our agreements, we use the IPCA price index (accumulated for twelve months), minus a productivity factor calculated in the periodic tariff review (Factor X). As of 2021, the adjustment for the IGQ can be zero, positive or negative, according to the deviation between the established goal and the actual values.
On April 8, 2021, ARSESP released a tariff readjustment. The impact of the tariff readjustment for residential and non-residential, residential social and wholesale (water and sewage treatment) customers in 2021 was 7.6%, negative 1.0% and 5.45%, respectively, corrected by the compensatory adjustment due to the difference in the calculation of the IGQ in 2019 for the application of the IGQ of 2020 and the difference between the COFINS/PASEP taxes calculated between the Second and Third Ordinary Tariff Revision. Further, the real tariff adjustments for the residential category for 2022, 2023 and 2024 were set at 1.5%, 3% and 4.6%, respectively, minus Factor X ± Factor Q, together with the expansion of beneficiaries in the vulnerable residential category and the resources intended for the commercial programs for 2019-2020. For the other categories in the periods from 2022 to 2024 the adjustment will be equal to IPCA - Factor X +/- Factor Q.
On March 17, 2022 ARSESP released Resolution No. 1,278 providing for a tariff adjustment of 12.8019%, consisting of: (i) inflation of 10.5437% accrued between February 2021 and February 2022, measured according to the IPCA index; (ii) efficiency factor (Factor X) to be discounted by 0.2142%; (iii) compensatory adjustment of 2.3932%; and (iv) IGQ 2020 to be discounted by 0.1490%. The tariff readjustment was effective as of May 10, 2022.
On April 6, 2023, ARSESP published Resolution No. 1,394/2023 related to the Extraordinary Tariff Revision and Resolution No. 1,395/2023, which presents the new tariff values, authorizing us to apply a total tariff readjustment of 9.5609% to our current tariffs. For more information, see “Item 4B. Business Overview—Tariffs—Extraordinary Tariff Revision.”
Tariff Structure
Simultaneously with our Third Ordinary Tariff Revision, our Tariff Structure, which has been in force since the 1970s and underwent only minor changes in 1997, was revised. In light of the complexity and challenges related to the revision of our Tariff Structure, ARSESP carried out specific regulatory actions, including further research on the topic and allowing the participation of several actors in the sector as part of the study. Based on these studies and discussions with the public, ARSESP defined the regulatory guidelines to be followed by us when presenting our proposal for a new tariff structure that, after review, resulted in the tariff structure proposal, that was subject to Public Consultation. On April 8, 2021, ARSESP published the results of Third Ordinary Tariff Revision and the New Tariff Structure, see “—New Tariff Structure” below.
Our tariff structure in place is based on the tariff regulation approved by State Decree No. 41,446/1996 and is divided into two categories: residential and non-residential (the “Tariff Structure”). The residential category is subdivided into standard residential, residential-social and shantytown (favela). The residential-social tariffs apply to residences of low-income families, residences of persons unemployed for up to 12 months and collective living residences. The favela tariffs apply to residences in shantytowns characterized by a lack of urban infrastructure. The latter two sub-categories were instituted to assist lower-income customers by providing lower tariffs for consumption. The non-residential category consists of: (i) commercial, industrial and public customers; (ii) non-profit entities that pay 50.0% of the prevailing non-residential tariff; (iii) government entities that adhere to the Rational Use of Water Program (Programa de Uso Racional da Água – “PURA”) pay 75.0% of the prevailing non-residential tariff; and (iv) public entities that have entered into program agreements, for municipalities with a population of up to 30.0 thousand and with half or more classified according to their degree of social vulnerability by the Social Vulnerability Index of São Paulo (Índice Paulista de Vulnerabilidade Social) 5 and 6, of the SEADE, obtained through the analysis of the 2000 Census figures, and start to receive tariff benefits, in accordance with our normative ruling, for the category of public use, at the municipality level. The tariffs are equal to those offered to the commercial/entity of social assistance and that corresponds to 50.0% of the public tariffs without contractual provisions referred to in item (iv) above.
| 51 |
There are tariff tables with the values due for each consumption pricing ranges for the abovementioned categories: up to 10 m³, from 11 to 20 m³, from 21 to 50 m³ and above 50 m³. The “Residential Social” and “Residential Favela” categories have five consumption pricing ranges: up to 10 m³, from 11 to 20 m³, from 21 to 30 m³, 31 to 50 m³ and above 50 m³. The amount charged is always progressive.
Large consumers and municipalities served by wholesale have separate tariff tables.
New Tariff Structure
The New Tariff Structure (as defined below) was initially expected to be implemented from May, 2022. However, on March 17, 2022, ARSESP published Resolution No. 1,278 which postponed the implementation of the New Tariff Structure. 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 is scheduled for the first half of 2024 with a view to implementing 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 will be implemented following the public consultation scheduled for the first half of 2024. For more information, see “Item 3.D. Risk Factor—Risks Relating to Our Business—Our current tariff structure is outdated and does not reflect the current socioeconomic changes the State of São Paulo has undergone over the past decades. Any updates to the tariff structure may lead to uncertainties in the market as well as unpredictability about our future revenues.”
The Tariff Structure in place, applied different pricing ranges for the following categories of users: (i) residential customers (Residential Normal, Residential Social and Residential Vulnerable) and non-residential customers (including commercial, industrial and public customers, as described in “— Tariff Structure”); (ii) the metropolitan regions of São Paulo and the regional system; (iii) water and sewage, with no difference in prices for sewage collection and treatment; and (iv) the charge of a minimum consumption of 10 m³/month and differences in prices per range, with progressive increases in the price as consumption increases.
The New Tariff Structure that was expected to be implemented and defined by ARSESP, was defined considering four groups: (i) minimum consumption versus fixed tariff with a portion being determined by reference to volume of water used; (ii) tariffs segregated by type of service (such as water, sewage collection and sewage treatment); (iii) social tariff; and (iv) non-residential tariffs (the “New Tariff Structure”).
Under the New Tariff Structure, ARSESP would adopt a single tariff table for all the municipalities where we operate. i.e., the tariff tables would be merged. According to ARSESP, this measure would partially reduce subsidies between regions, but would not completely eliminate them, since there are cost differences between regions.
It should be noted that there are various tariff tables in the current Tariff Structure. The tables applied in the interior region present a sewage tariff equivalent of 80% of the water tariff. As a result, in the São Paulo metropolitan region the tariffs for water and sewage are divided 50% each, whereas in the interior the division is 56% water and 44% sewage (as a result of the 80% ratio).
ARSESP would establish the following customer groups under the New Tariff Structure:
| (i) | Residential: referring to family homes, where the use of water is mainly intended for personal hygiene, food and cleaning. The residential category would be further broken down into Residential Individual, Residential Collective, Social Residential and Vulnerable Residential; and | |
| (ii) | Non-Residential: referring to other customer units, where the use of water is related to the type of activity, service or production process. The non-residential category would be further broken down into: (a) Commercial: customer units whose main activity is the sale of products and/or services, which includes Commercial Individual, Commercial Collective, and Commercial Assistance; (b) Industrials: establishments that carry out transformation/industrialization activities; and (c) Public: buildings intended for government activities or government facilities. In addition, the tariff structure would contain the segments of wholesale sector and tanker trucks, including water trucks and tank cleaners. |
| 52 |
ARSESP would establish the following attributes to the New Tariff Structure: (i) unified for our entire area of operation, without segregation by region; (ii) differentiated tariffs for the following services: water, sewage collection and sewage treatment; (iii) binomial tariff, with a fixed component which must partially or fully reflect the fixed costs of providing the service, and a variable component related to the volume of water used which must reflect variable costs; (iv) there would be no fixed component for the sewage treatment service tariff, and the fixed costs of the service would be distributed across the fixed component of the other services (i.e., water and sewage collection); (v) tariffs would be divided in blocks, including progressive tariffs between consumption ranges; (vi) the fixed component would be billed per connection (charged at R$/month), while the variable component would be billed, progressively, by volume (charged at R$/m³); (vii) the volume of sewage collected to be billed would be equal to the measured volume of water, if the connection includes sewage collection service; and (viii) the treated sewage volume to be billed would be equal to the volume of sewage collected, if the connection includes sewage treatment.
Furthermore, the New Tariff Structure introduced a high level of uncertainty about the market and revenues that we would obtain in the tariff cycle, due to the unpredictability of changes in customers’ tariff classification, which may lead us to realize significantly more or less revenue than projected for the cycle. Considering the high level of uncertainty, even without the implementation of the new structure, ARSESP established a variation limit for the annual revenue, so that:
| · | if our effective revenue exceeds 102.5% of the required recalculated revenue, the entire additional amount would be reverted to social equality adjustments in the annual tariff adjustment process; and | |
| · | if our effective revenue is less than 97.5% of the required recalculated revenue, the entire outstanding amount would be offset in the annual tariff adjustment process. |
For more information, see “Item 3.D. Risk Factor—Risks Relating to Our Business—Our current tariff structure is outdated and does not reflect the current socioeconomic changes the State of São Paulo has undergone over the past decades. Any updates to the tariff structure may lead to uncertainties in the market as well as unpredictability about our future revenues.”
Fixed Demand Agreements (Take-or-Pay)
On November 2, 2018, ARSESP published Resolution No. 818/2018 which provides the criteria for the execution and inspection of water and sewage service contracts for large non-residential users, as well as the execution of new contracts and the revision of the existing contracts to the new rules. This Resolution consolidates all the regulatory guidelines for the execution of contracts with large users, and establishes the minimum and maximum limits of the tariffs to be applied and a system for the prior approval by the regulator of the standard contract template to be used and also requires the disclosure of the contracts in force on our website and the results of the inspections of these contracts on the ARSESP website.
In May 2020, we established a loyalty policy for large clients in the non-residential segment, which were encouraged to enter into a contract with us in order to apply a differentiated rate according to the contracted fixed monthly demand. The purpose of this policy is to retain the base of this customer segment.
Water and sewage services tariffs
In the current Tariff Structure, we establish separate tariff schedules for our services in each of the São Paulo metropolitan regions and each of the interior region of São Paulo State and coastal regions which comprise our Regional Systems, depending upon whether a customer is located in the São Paulo metropolitan region or the Regional Systems. Each tariff schedule incorporates regional cross-subsidies, taking into account the customers’ type and volume of consumption. Tariffs paid by customers with high monthly water consumption rates exceed our costs of providing water service. We use the excess tariff billed to high-volume customers to compensate for the lower tariffs paid by low-volume customers. Similarly, tariffs for non-residential customers are established at levels that subsidize residential customers. In addition, the tariffs for the São Paulo metropolitan region generally are higher than tariffs in the interior region of São Paulo State and coastal regions. In 2022, 2021 and 2020, the average tariff calculated for the Regional Systems was approximately 20% below the average tariff of the São Paulo metropolitan region. The implementation of the New Tariff Structure, which would unify our tariff tables, was suspended by Resolution No. 1,278/2022 and will resume after the Public Consultation scheduled for the first semester of 2024, according to ARSESP's regulatory agenda for 2023-2024 which was approved in Resolution No. 1,388/2023.
The following table sets forth the water tariffs by (i) customer category and class; and (ii) volume of water consumed, charged in cubic meters during the years and period stated in the São Paulo metropolitan region:
| 53 |
| Customer Category Consumption |
As from May 10, |
As from May 10, |
As from May 11, |
|
2023 |
2022 |
2021 | |
| Residential | (in reais) | ||
| Standard Residential: | |||
0-10(1) |
3.58 | 3.27 | 2.90 |
| 11-20 | 5.62 | 5.13 | 4.54 |
| 21-50 | 14.00 | 12.78 | 11.33 |
| Above 50 | 15.43 | 14.08 | 12.48 |
| Social: | |||
| 0-10(1) | 1.11 | 1.02 | 0.91 |
| 11-20 | 1.92 | 1.75 | 1.55 |
| 21-30 | 6.84 | 6.24 | 5.53 |
| 31-50 | 9.74 | 8.89 | 7.88 |
| Above 50 | 10.77 | 9.83 | 8.71 |
| Shantytown (favela): vulnerable social starting in 2021 | |||
| 0-10(1) | 0.85 | 0.78 | 0.69 |
| 11-20 | 0.96 | 0.88 | 0.78 |
| 21-30 | 3.23 | 2.95 | 2.61 |
| 31-50 | 9.74 | 8.89 | 7.88 |
| Above 50 | 10.77 | 9.83 | 8.71 |
| Non-Residential | |||
| Commercial/Industrial/Governmental: | |||
| 0-10(1) | 7.19 | 6.57 | 5.82 |
| 11-20 | 14.00 | 12.78 | 11.33 |
| 21-50 | 26.84 | 24.50 | 21.72 |
| Above 50 | 27.96 | 25.52 | 22.62 |
| Social Welfare Entities: | |||
| 0-10(1) | 3.59 | 3.28 | 2.91 |
| 11-20 | 6.99 | 6.38 | 5.65 |
| 21-50 | 13.47 | 12.29 | 10.89 |
| Above 50 | 13.99 | 12.77 | 11.32 |
| Public Entities with contract | |||
| 0-10(1) | 5.39 | 4.92 | 4.36 |
| 11-20 | 10.48 | 9.57 | 8.48 |
| 21-50 | 20.18 | 18.42 | 16.33 |
| Above 50 | 20.98 | 19.15 | 16.97 |
(1) The minimum volume charged is for ten cubic meters per month.
For more information, see “—Tariff Readjustment and Revisions—Tariff Readjustment.”
Sewage charges in each region are fixed and are based on the same volume of water charged. In the São Paulo metropolitan region and the coastal region, the sewage tariffs are equal to the water tariffs. In the majority of the municipalities of the interior region of the State of São Paulo, sewage tariffs are approximately 20.0% lower than water tariffs. Wholesale water rates are the same for all municipalities served in the São Paulo metropolitan region. We also make available sewage treatment services to those municipalities in line with the applicable contracts and tariffs. In addition, various industrial customers pay an additional sewage charge, depending on the characteristics of the sewage they produce. Each category and class of customer pays tariffs according to the volume of water consumed. The tariff paid by a certain category and class of customer increases progressively according to the increase in the volume of water consumed. The first tranche (0-10) corresponds to the minimum fee that is charged to our customers for the consumption of water.
Under the New Tariff Structure that was expected to be implemented from May, 2022, this difference would no longer exist as the tariff tables would be unified. Additionally, the minimum bill would be replaced by a two-part bill consisting of a fixed and a variable installment depending on the volume consumed. For more information on the differences between our current Tariff Structure and the New Tariff Structure, see “—New Tariff Structure.”
Government Regulations Applicable to our Contracts
Basic sanitation services in Brazil are subject to extensive federal, state and local legislation and regulation that, among other matters, regulates:
| · | the development of public-private partnerships (“PPP”); | |
| · | the need for a public bidding process for the appointment of water and sewage services providers via concession agreements; |
| 54 |
| · | the need for setting up an agreement for the appointment of public water and sewage services providers; | |
| · | the joint management of public services through cooperation agreements, allowing for a program agreement without the need for a public bidding process for the service provider; | |
| · | the planning, regulation and inspection of basic sanitation services prohibited by service providers; | |
| · | minimum requirements for water and sewage services; | |
| · | water usage; | |
| · | water quality and environmental protection; and | |
| · | governmental restrictions on the incurrence of debt applicable to state-controlled companies. |
PLANASA
Until 1970, Brazil’s sanitation sector mainly consisted of small-scale projects, the absence of a standardized tariff system and shortage of financial, human and technical resources.
The National Plan of Basic Sanitation (Plano Nacional de Saneamento Básico – “PLANASA”) was created in 1971, aiming to provide universal access to sanitation services in urban areas and to establish an adequate tariff policy, among other things. Afterwards, SABESP was created under State Law No. 119/1973 as a mixed capital company to provide basic sanitation services in the State of São Paulo while also acknowledging the autonomy of the municipalities within the State.
Pursuant to the Brazilian Constitution, the authority to develop and provide public water and sewage services are the joint responsibility of the federal government, the states and the municipalities. Article 216 of the Constitution of the State of São Paulo establishes that the State must provide the conditions for the efficient management and adequate expansion of water and sewage services rendered by its agencies and state-controlled companies or any other concessionaire under its control.
Pursuant to Article 175 of the Brazilian Constitution, the rendering of public services, such as water and sewage services, is the responsibility of the applicable public authority. However, any such public authority has the right to render these services directly or through a concession granted to a third party after a bidding process.
Additionally, Article 241 of the Brazilian Constitution establishes the legal regime for managing the rendering of public services among different federal, state and municipal government entities, including the total or partial transfer among these entities of fees, services, personnel and essential goods needed to render such public services. For example, these services can be rendered through a public consortium or a cooperation agreement under Federal Law No. 11,107 of April 6, 2005, also known as the Law on Public Consortia and Cooperation Agreements (Lei de Consórcios Públicos e Convênio de Cooperação), which, in turn, created a program contract which allowed for the dispensation of the bidding process for companies like ours. This dispensation was irrefutable until the enactment of the New Legal Framework for Basic Sanitation.
However, the New Legal Framework for Basic Sanitation, amending the Basic Sanitation Law, established that the provision of sanitation services may be carried out by joint management, under a public consortium or cooperation agreement entered exclusively by municipalities. The New Legal Framework for Basic Sanitation also established restrictions for the adjustment of program agreements with public companies and mixed-capital companies. For more information, see “Item 3.D. Risk Factors–Risks relating to Regulatory Environment–The New Legal Framework for Basic Sanitation prohibits program contracts for basic sanitation services, resulting in uncertainties for our current and future concessions.”
PLANASA was the first attempt to outline long-term universalization targets for water and sewage services, but it was discontinued in 1986.
The Basic Sanitation Law and the New Legal Framework for Basic Sanitation
Until 2007, the sanitation sector was predominantly self-regulated by the service providers and tariffs were determined by direct negotiation between state and municipal governments and companies.
The Basic Sanitation Law came into effect on January 5, 2007, effectively revoking and substituting the PLANASA model, establishing nationwide guidelines for basic sanitation and seeking to create the appropriate solutions for the provision of basic sanitation considering the particular conditions in each state and municipality. The Basic Sanitation Law also sought to facilitate the cooperation between the state and municipalities in the rendering of public services.
| 55 |
On July 16, 2020, the New Legal Framework for Basic Sanitation was enacted, which aimed to make water and sewage services universal by 2033. The new law delegated to ANA the authority to establish national reference rules on sanitation services and excludes the possibility of executing new program contracts, among other relevant changes to the sector. As a result of the new legislation, the Basic Sanitation Law and Laws No. 9,984/2000, No. 12,305/2010, No. 10,768/2003, No. 13,089/2015, No. 11,107/2005 and No. 13,529/2017 were amended.
Prior to the New Legal Framework for Basic Sanitation, we provided services in various municipalities through contracts that did not require bidding processes. These were important contracts for the expansion of water and sewage services in the State of São Paulo. The current program contracts will remain in effect until the end of their contractual term, subject to the universalization targets for services being met by December 31, 2033. For the contracts that did not have established targets, the targets were included by March 31, 2022.
In summary, we highlight the following points from the new framework: (a) the authority to edit reference standards for the regulation of public basic sanitation services was attributed to ANA, reducing the scope of autonomy of the regional regulatory agencies; (b) the creation of the Interministerial Committee on Basic Sanitation (regulated by Decree No. 10,430/2020), with the authority to determine the allocation of federal resources for sanitation; and (c) the definition of the power of concession to carry out public basic sanitation services: (i) the municipalities and the Federal District, in the case of local services; (ii) the State, together with the municipalities that effectively share operational facilities that are part of metropolitan regions, conurbations and micro-regions, instituted by complementary state law, in the case of shared services between the State and municipalities.
The New Legal Framework for Basic Sanitation establishes regionalized provision through the provision of one or more components of integrated basic public sanitation services in a given region whose territory covers more than one municipality, structured as follows: (i) the regional basic sanitation units, which consist of entities established by State Law, consist of a group of municipalities, which are not necessarily adjacent to each other, aimed at adequately meeting the hygiene and public health requirements, or to provide economic and technical feasibility for the least economically favored municipalities; and (ii) reference blocks, which are groups of municipalities, which are not necessarily adjacent to each other, established by the federal government and formally created through the municipalities’ voluntary joint management. The reference blocks will be created by the federal government if the States have not created the regional basic sanitation infrastructure. Regionalized provision aims at gaining scale in the provision of services and conditions the access to federal resources to the groups of municipalities. In São Paulo, State Law No. 17,383, of July 5, 2021, was published, which created four URAEs, with the municipalities operated by us coinciding with the URAE 1 – Southeast.
The Basic Sanitation Law, as amended by the New Legal Framework for Basic Sanitation, provided in article 11-B, first paragraph, that contracts in force that did not have the new universalization targets that guarantee the service of 99% of the population with drinking water and 90% of the population with sewage collection and treatment by December 2033 had until March 31, 2022, to include these targets. Further, according to article 10-B of the same law, service operators must comply with financial and economic parameters that will measure their ability to provide sanitation services and meet the service standards established by law in a timely manner.
On June 1, 2021, Federal Decree No. 10,710/2021 was enacted, establishing the methodology for demonstrating the economic and financial capacity of public service providers for drinking water supply or sanitary sewage. Article 10 of this decree stipulates that an application for proof of economic-financial capacity must be submitted to the regulatory entity responsible for inspecting the contracts by December 31, 2021. On April 1, 2022, Federal Decree No. 11,030/2022 was enacted, amending the provisions of Federal Decree No. 10,588/2020, which, in turn, provided for the regularization of operations and technical and financial support from the Brazilian government and the respective allocation of federal resources in the sanitation sector. We cannot assure that the entirety of our contracts will be deemed “regular” by the regulator or by the municipalities.
The Decree does not apply to concessions and public-private partnerships that (i) have been procured or submitted to public consultation prior to the date of its publication; and (ii) are subject to studies already contracted by federal bodies prior to the date of publication of this decree.
On April 5, 2023, the federal government enacted new rules related to the New Legal Framework for Basic Sanitation, which replaced and revoked Federal Decree No. 10,710/2021 and Federal Decree No. 10,588/2020. The following new federal decrees were enacted:
| · | Federal Decree No. 11,466/2023 extending the deadline for basic sanitation services providers to demonstrate their economic and financial capacity to satisfy their existing agreements to facilitate the achievement of the universalization targets for basic sanitation in Brazil; and |
| 56 |
| · | Federal Decree No. 11,467/2023 regulating the regionalized provision of public basic sanitation services and permitting technical and financial support to be provided to adapt these services in line with of the New Legal Framework for Basic Sanitation, including the allocation of federal public resources and financings with federal resources or resources managed or operated by federal entities. The new provisions modify certain provisions of the revoked decrees, but do not represent big changes to the scenario for us. |
Functions of ANA
The New Legal Framework for Basic Sanitation assigns to ANA the responsibility for the publication of technical norms for the regulation of public basic sanitation services. ANA is also the authority responsible for introducing reference standards on the methodology for calculating indemnities due to investments made and not yet amortized or depreciated. Currently, there is considerable legal uncertainty regarding the indemnity for non-amortized assets, and we expect that the reference standards will mitigate this situation.
With the approval of the New Legal Framework for Basic Sanitation, ANA has the authority to issue reference norms. These norms must be considered by subnational sanitation regulatory agencies (municipal, intercity, district and state) in their regulatory action.
According to the New Legal Framework for Basic Sanitation, ANA will have the role of issuing reference norms on:
| · | quality and efficiency standards in the services provided, maintenance and operation of basic sanitation systems; | ||
| · | tariff regulation of public sanitation services; | ||
| · | standardization of instruments for the provision of public sanitation services executed by the holder of the public service and the delegate; | ||
| · | targets for universalization of public sanitation services; | ||
| · | criteria for regulatory accounting; | ||
| · | progressive reduction and control of water loss; | ||
| · | methodology to calculate amounts due as indemnity for the investments made and not yet amortized or depreciated; | ||
| · | governance of regulatory entities; | ||
| · | reuse of treated sanitary effluents, in accordance with environmental and public health standards; | ||
| · | parameters for determining the expiry of the provision of public basic sanitation services; | ||
| · | rules and goals for replacing the unitary system for the absolute separator system for effluent treatment; | ||
| · | system to assess the compliance with targets for expanding and universalizing the coverage of public sanitation services; and | ||
| · | minimum standards for the full coverage service provision and for the economic and financial sustainability of public sanitation services. |
Provisional Measure No. 1,154 of January 1, 2023 altered the attributes and structure of ANA and delegated to the Ministry of Cities the competence to implement basic sanitation actions and programs. Further, Federal Decree No. 11,333/2023 created the National Secretariat for Environmental Sanitation, linked to the Ministry of Cities, attributing to the National Secretariat for Environmental Sanitation competencies that were previously attributed exclusively to ANA.
On April 5, 2023, the federal government issued Decree No. 11,467/2023, which delegated to ANA the power to issue reference norms for the sanitation sector, as originally established in the New Legal Framework for Basic Sanitation. The National Secretariat for Environmental Sanitation, is now responsible for issuing the guidelines for federal basic sanitation policy.
Accordingly, ANA’s rules will apply to the basic sanitation sector nationwide, setting the guidelines for regulation and supervision by the regulatory entities at the state, municipal and regional level, and ensuring regulatory uniformity in the sector and legal certainty for the provision and regulation of services. ARSESP will be subject to these guidelines and will be required to incorporate any reference guidelines issued by ANA within a reasonable timeframe, which may not be less than twelve months from the publication of the respective reference standards.
| 57 |
ANA Standards
As a result of the New Legal Framework for Basic Sanitation, ANA was given the role of amending reference standards for the regulation of the sanitation sector at the national level. Between September 27, 2022, and October 26, 2022, ANA received contributions to Public Consultation 07/2022 for the preparation of an agenda for the period of 2022-2024 with topics that should be standardized.
On November 4, 2021, ANA published Resolution No. 106, aiming to approve Reference Standard No. 2, which provides for the standardization of amendments to the Program and Concession Agreements, for the provision of drinking water and sanitary sewage services, to incorporate the goals of 99% of water service and 90% of sewage collection and treatment as provided for in article 11-B of Law No. 11.445/2007, modified by Law No. 14.026/2020.
On November 11, 2022, ANA opened Public Consultation No. 008/2022 on the reference standard that establishes the methodology for indemnification of assets for the water and sewage segments. Future contracts will have their indemnification methodology defined in conjunction with other contractual rules provided by ANA's reference standards. We cannot predict the effects that the asset compensation calculation methodology will have on our business.
As of the date of this annual report, ANA has not yet published the results of these Public Consultations.
For 2023 and 2024, the following topics and discussions are planned by ANA:
| · | risk matrix for water and sewage contracts | |
| · | procedures for mediation and arbitration; | |
| · | indemnification of assets; | |
| · | guidelines for defining the regulatory model for water and sewage services; | |
| · | organizational model of subnational regulatory agencies, transparency and accountability; | |
| · | standardization and quality indicators and efficiency of water and sewage services; | |
| · | guidelines for progressive targets for universalization of water supply and sewage services and evaluation system; | |
| · | general conditions for service provision, customer service, and measurement, billing, and collection; | |
| · | tariff structure for water and sewage services; and | |
| · | tariff readjustment for water and sewage services. |
National Plan for Basic Sanitation (PLANSAB)
The National Plan for Basic Sanitation (“PLANSAB”) is an instrument of the public sanitation project established by the Basic Sanitation Law, with an expected duration of 20 years. The plan contains a diagnosis of Brazil’s basic sanitation infrastructure divided into four segments: (i) coverage deficits, (ii) a government program, (iii) investments made and (iv) political and institutional aspects. The program also provides estimates for investments to achieve coverage targets.
Short, medium and long-term objectives were prepared for 2018, 2023 and 2033, respectively, based on the historical evolution and current water and sewage infrastructure.
The New Legal Framework for Basic Sanitation provides that PLANSAB will contain proposals for programs, projects and actions necessary to achieve the objectives and goals of the federal basic sanitation policy, with identification of the sources of financing and expansion of public and private investments in the sector. Additionally, it establishes that PLANSAB should include (i) a specific program for basic sanitation actions in rural areas; (ii) specific water security actions; and (iii) basic sanitation actions in underdeveloped urban areas occupied by low-income populations in irregular areas but which are already long-established considering the nature and length of the occupation are not at risk. Furthermore, it created the Interministerial Committee on Basic Sanitation with the authority to coordinate, integrate, articulate and evaluate the management of the National Basic Sanitation Plan at the federal level. For more information, see “Item 3.D. Risk Factors— Risks relating to Regulatory Environment— Current regulatory uncertainty, especially with regard to the New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.”
| 58 |
Provision of Essential Basic Sanitation Services in Brazil
The provider of the basic sanitation service undertakes to organize the service and provide it to the population. Public services can be provided directly by government entities themselves, through agencies that integrate the respective administrative structures (centralized direct provision of public services); or through bodies created by these government entities in the form of independent federal agencies, foundations or state-owned companies (decentralized direct provision).
However, article 175 of the Federal Constitution permits a public authority to grant a concession to an entity outside the administrative structure. The current wording of article 10, caput, of Law No. 1,445/2007, as amended by the New Legal Framework for Basic Sanitation prohibits the provision of public basic sanitation services by entities that are not part of the granting authority’s structure. For more information, see “Item 3.D. Risk Factors— Risks relating to Regulatory Environment—The New Legal Framework for Basic Sanitation prohibits program contracts for basic sanitation services, resulting in uncertainties for our current and future concessions.”
Our Concession Agreements
From 1998 to 2005, our contracts with municipalities have been regulated by the Federal Concessions Law No. 8,987/1995. Generally, these contracts have a 30-year term, and the total value of the concession is set by the discounted cash flow method. Under this method, when the expected contractual cash flow is reached, the total value of the concession and assets is amortized to zero on our books and we receive no payment for the assets. If the concession is terminated prior to the end of the 30-year term, thereby interrupting the normal contractual cash flow, we are paid an amount equal to the present value of the expected cash flow over the years remaining in the concession, adjusted for inflation.
However, our concessions can be revoked unilaterally at any time if certain standards of quality and safety are not met, in the event of default of the terms of the concession agreement, or due to changes in public interest since the concession was granted, or due to non-conformity with the New Legal Framework for Basic Sanitation.
A municipality that chooses to assume the direct control of its water and sewage services must terminate the current relationship by duly compensating the service provider and the investments unamortized. Subsequently, the municipality will be in charge of rendering services or of conducting a public bidding process to grant the concession to potential concessionaires. For more information, see “Item 3.D. Risk Factors— Risks relating to Regulatory Environment— Municipalities may terminate our concessions before they expire in certain circumstances. The indemnification payments we receive in such cases may be less than the value of the investments we made or may be paid over an extended period, adversely affecting our business, financial condition or results of operations.”
The current concessions are based on a standard form of agreement between us and the municipality. Each agreement received the prior approval of the legislative council of each municipality. In municipalities that are part of metropolitan regions, conurbations and microregions, the State of São Paulo is also included as a party. The assets comprising the existing municipal water and sewage systems are transferred from the municipality to us in order for us to provide the contracted services. Until 1998, we acquired municipal concessions and the existing water and sewage assets in exchange for our common shares issued at book value. Since 2011, we use the WACC set by ARSESP as a discount rate to analyze the financial and economic feasibility of the service agreements with municipalities.
The main provisions of our existing concession agreements are as follows:
| · | we assume all responsibility for providing water and sewage services in the municipality; | |
| · | according to the municipal laws authorizing the concession, we are permitted to collect tariffs for our services and tariff readjustments follow the guidelines established by the Basic Sanitation Law and ARSESP; | |
| · | as a general rule, to date, we are exempt from municipal taxes, and no royalties are payable to the municipality with respect to the concession; | |
| · | we are granted rights of way on municipal property for the installation of water pipes and water transmission lines, and sewage lines; and | |
| · | upon termination of the concession, for any reason, we are required to return the assets that comprise the municipality’s water and sewage system to the municipality and the municipality is required to pay us the non-amortized value of the assets relating to the concession. |
These assets have been considered to be intangible assets since January 2008. See Note 3.8 to our financial statements. Under concession agreements executed prior to 1998, the reimbursement for the assets may be through payment of either:
| · | the book value of the assets; or |
| 59 |
| · | the market value of the assets as determined by a third-party appraiser in accordance with the terms of the specific agreement. |
The model form concession agreement follows the provisions of the Basic Sanitation Law in force at the time these agreements were signed, but did not include all the changes introduced by the New Legal Framework for Basic Sanitation. Its main conditions include the implementation of the targets based on the planning of services by the public authority, services' inspection and regulation rules, the appointment of a regulatory and inspection agency, as well as the periodic disclosure of management reports with financial statements.
In addition to the 30-year term contracts, the municipalities entered into cooperation agreements with the State of São Paulo, delegating the regulation and inspection of the provision of services to ARSESP.
Program Agreements
Federal Law No. 11,107/2005, which regulates Article 241 of the Brazilian Constitution introduced significant changes in the relationship among municipalities, states and companies providing public sanitation services, prohibiting the latter from exercising the activities of planning, oversight and regulation, including tariff regulation, of the services. The law also created the program agreement, a contract to be followed when Brazilian states and municipalities enter into agreements for the provision of public services with mixed capital companies. The program agreement provides the guidelines for the joint management of public services by Brazilian states and municipalities with mixed capital companies, removing the need for bidding processes.
However, as previously mentioned, the New Legal Framework for Basic Sanitation prohibits the formalization of program contracts, agreements, partnership agreements and other unstable instruments for the provision of public basic sanitation services by companies which are not subsidiaries of the entity which administers the concessions.
The Constitution of the State of São Paulo provides that the State shall assure the correct operation, necessary expansion and efficient administration of water and sewage services in the state by a company under its control. On January 13, 2006, the Governor of the State of São Paulo enacted State Decree No. 50,470/2006, amended by State Decrees No. 52,020/2007, dated July 30, 2007, and No. 53,192/2008, dated July 1, 2008, which regulate the provision of water and sewage services in the State. Pursuant to these decrees, it was previously possible to enter into agreements with municipalities in connection with the provision of water and sewage services by means of a “program agreement without a public bidding process.” Following the entry into force of the Public Consortia and Cooperation Agreements Law, we adopted the administration of public services through cooperation agreements and program agreement which can be used simultaneously.
As of the date of this annual report, the decrees mentioned above have not been amended, and certain provisions, such as those related to the formalization of program contracts, do not conform with the New Legal Framework for Basic Sanitation.
Agreements with Municipalities and Metropolitan Regions
Pursuant to the Brazilian Constitution, in metropolitan regions, conurbations and microregions, the authority to develop public water and sewage systems is shared by the states and municipalities. However, for municipalities which are not a part of the types of regions cited above (metropolitan regions, conurbations and microregions), the primary responsibility for providing water and sewage services to residents rests with the municipality.
We provide basic sanitation services for municipalities, conurbations and metropolitan regions. In these municipalities, operations are regionalized and contracts are structured considering the financial and economic conditions of the entire region. The regulation including taxes, control and oversight are the responsibilities of ARSESP (State Supplementary Law 1,025/2007 – Articles No. 6 and No. 10).
In January 2015, the federal government issued the Metropolitan Bylaws (Law No. 13,089/2015), which established general guidelines for the planning, management and execution of public services of common interest in metropolitan regions and in conurbations as defined by the states, as well as general rules on integrated urban development plans and other instruments for interfederal governance instruments.
With the enactment of the New Legal Framework for Basic Sanitation, regionalized service provision is clearly encouraged, especially by requiring the creation of regional basic sanitation units or reference blocks that aim to group municipalities and encourage the provision of basic sanitation services in more isolated and low-profit municipalities. Additionally, despite formally granting authority to municipalities, these municipalities will not have access to financing with federal resources if they are not part of a regionalized group, thus leaving little or no margin to exercise their authority.
| 60 |
Due to this recent legislative change and the uncertainties that surround the prohibition of program contracts, along with other possible forms of joint interests, as is the case of associated management through a cooperation agreement, or even possible corporate arrangements, it is not yet possible to confirm the impact of the New Legal Framework for Basic Sanitation.
State Law No. 17,383 of July 5, 2021 was published, which created four URAEs, and the municipalities operated by us coincide with URAE 1 – Southeast. On December 12, 2021, State Decree No. 66,289 was published, which regulates this law.
ARSESP
ARSESP was created by Complementary Law No. 1,025, of December 7, 2007, and regulated by Decree No. 52,455 of December 7, 2007, with the objective of regulating, controlling and supervising piped gas and basic sanitation services that are under state ownership, as well as services and activities related to energy for which the Brazilian government is responsible, or basic sanitation services that may be delegated to the State of São Paulo by the competent agencies.
ARSESP's creation was a result of two important legal frameworks – Federal Law No. 11,107 of April 6, 2005, which provides for general rules for contracting public consortia, and the Basic Sanitation Law of January 5, 2007, which establishes national guidelines for basic sanitation.
According to the provisions and limitations of Complementary Law No. 1,025/2007 and Decree No. 52,455/2007, ARSESP is responsible for regulating, controlling and supervising the services of piped gas and basic sanitation of state ownership within the State of São Paulo, without prejudice to municipal competencies and prerogatives.
In respect of basic sanitation services for municipalities, ARSESP is responsible for supervising, controlling and regulating, including tariffs, which are delegated to the State of São Paulo, in compliance with the provisions of the laws and regulations, national and state guidelines for basic sanitation, the instruments and contracts that delegated powers to the agency. In the exercise of its regulatory, control and supervision powers, ARSESP also has a series of attributions, such as receiving, investigating and forwarding solutions related to user complaints.
For its services, ARSESP charges a fee of 0.50% of the total annual invoiced amount of the net operating revenue of taxes (excluding revenues related to the construction of the concession infrastructure) of the municipality. This fee is charged on the annual revenue directly obtained with the service provision, less any taxes levied on it, both from municipalities that have executed program contracts with us, as well as from municipalities located in metropolitan areas.
ARSESP Resolution No. 1,388 of 2023 established the regulatory agenda for 2023 and 2024, which includes:
| · | analysis of the federal government's Reference Standards (NRs) for the definition of universalization indicators and targets; | |
| · | program for the conservation of water sources; | |
| · | risk matrix for our contracts; | |
| · | methodology for annual certification of investments in the Sanitation sector; | |
| · | methodology for the reversibility of assets in the basic sanitation sector; | |
| · | analysis of efficiency in expenses with electricity by sanitation concessionaires; | |
| · | calculation methodology of the sharing of efficiency gains (Factor X) for regulated gas pipeline and basic sanitation companies; and | |
| · | our tariff structure. |
Consumer Relations in the State of São Paulo
Our services are regulated by ARSESP who the terms and conditions of contracts for the supply of public services of water supply and sewage with retail customers, stating that the invoices must be issued and sent to the customer and not the owner of the property. Currently, more than 90% of our water and sewage connections are billed to the user of the services, as foreseen in ARSESP regulation. In respect of our debt collection, implemented a new digital platform in 2021 that brought improvements to our customer relationship. This new digital platform now identifies customers by their registration number in the national registries of individuals or companies and by information that is necessary for the registration of their services and for the judicial collection of outstanding charges in case of default. We continuously update our customers' registration information; however, we still face difficulties in updating this information in areas with a high concentration of social vulnerability and default.
| 61 |
For more information, see “Item 3.D Risk Factors— Risks relating to Regulatory Environment— Current regulatory uncertainty, especially with regard to the New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.”
Operations in the City of São Paulo and Certain Metropolitan Regions
We are a concessionary of the State of São Paulo tasked with providing operate basic sanitary services in metropolitan regions, microregions and urban conglomerates instituted by state law.
The State of São Paulo, pursuant to Article No. 25, Paragraph 3 of the Brazilian Constitution, enacted the LCE to create the metropolitan regions of São Paulo (LCE No. 94/1974), Baixada Santista (LCE No. 815/1996), Campinas (LCE No. 870/2000), Vale do Paraíba and Litoral Norte (LCE No. 1,166/2012), Sorocaba No. (LCE No. 1,241/2014) and Ribeirão Preto (LCE No. 1,290/2016), and the urban clusters of Jundiaí (LCE No. 1,146/2011), Piracicaba (LCE No. 1,178/2012) and Franca (LCE No. 1,323/2018).
On June 18, 2009, Municipal Law No. 14,934/2009 repealed Municipal Law 13,670/2003, which had assigned the responsibility for the city of São Paulo’s planning, regulating and supervising the provision of water supply and sewage collection services exclusively to the city of São Paulo. On June 23, 2010, the State and the city of São Paulo entered into a formal agreement with the purpose of sharing the planning of the provision of water supply and sewage collection services; delegating oversight and regulation, including tariff regulation, to ARSESP; and authorizing the maintenance of water supply and sewage collection services in the city of São Paulo for a 30-year term (renewable for the same period).
In January 2015, the federal government issued the Metropolitan Bylaws (Law No. 13,089/2015), which established general guidelines for the planning, management and execution of public services of common interest in metropolitan areas and in conurbations as defined by the States, as well as general rules on integrated urban development plans and other interfederal governance instruments.
The New Legal Framework for Basic Sanitation outlined the entities responsible for the provision of basic sanitation services. However, there are still several uncertainties regarding regionalized provisions, including the creation of new forms, such as regional basic sanitation units and reference blocks. Accordingly, as of the date of this annual report it is not possible to describe how these new forms will be implemented.
State Law No. 17,383 of July 5, 2021 was published, which created four URAEs, and the municipalities operated by us coincide with URAE 1 – Southeast. On February 12, 2021, State Decree No. 66,289 was published, which regulates the aforementioned law.
The São Paulo metropolitan region (including the municipalities to which we provide water on a wholesale basis, but excluding the concession infrastructure construction revenue) accounted for 71.5% of our operating revenue from services in 2022.
We cannot predict how the shared management of these operations will be carried out in the São Paulo metropolitan region and other metropolitan regions we operate in or what effect it may have on our business, financial condition or results of operations. For more information, see “Item 3.D. Risk Factors— Risks relating to Regulatory Environment — Current regulatory uncertainty, especially with regard to the New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.”
The 2014-2015 Water Crisis
Prior to 2014, we planned our supply of water to the São Paulo metropolitan region based on the water supply during the driest period on record, which was from 1953 to 1954. However, water inflow to the Cantareira reservoirs throughout 2014 and most of 2015 was less than half the inflow recorded in 1953, the previous most critical year. Consequently, the volume of water stored in the reservoirs in 2014 and 2015 declined significantly until September 2015, when the reservoirs once again held more water than 12 months previously for the first time since the beginning of the water crisis. Once rainfall returned the level of water in the reservoirs that provide water to the population of the São Paulo metropolitan region to normal levels, the measures taken during the water crisis to continue services to consumers were gradually discontinued starting in early 2016.
For more information on the water production systems which we use to produce water for the São Paulo metropolitan region, see “Item 4.B. Business Overview—Description of Our Activities—Water Operations—Water Resources.”
| 62 |
Cantareira System
The Cantareira System is located in the northern area of the São Paulo metropolitan region. It uses water extracted from the PCJ River Basin and the Juqueri River Basin and consists of six reservoirs interconnected by a complex water network of tunnels and pipes, located along the municipalities of São Paulo, Mairiporã, Nazaré Paulista, Piracaia, Vargem, and Joanópolis. The latter two are located on the border of the state of Minas Gerais, approximately 100 kilometers from the city of São Paulo. Gravity forces the flow of water from one reservoir to another, and once the water reaches the Paiva Castro reservoir, located in the Juqueri River Basin, it is pumped to the Guaraú water treatment plant.
Prior to February 2014 and the water crisis, this system supplied water to approximately 8.9 million people, with an average extraction of up to 33 m³/s to serve the São Paulo metropolitan region. After the water crisis, when conditions returned to normal levels, this system supplies water to approximately 7.0 million people. Since May 2017, the volume of water that may be extracted from the Cantareira System is now based on the volume of water available in the reservoirs. A minimum of 10 m³/s of water may be released to serve the metropolitan region of Campinas and Jundiaí, which is located downstream from the reservoirs. This flow is defined in Joint Resolution Nos. 926/2017 and 925/2017, both dated May 29, 2017.
In May 2017, the concession that regulates the volume of water that may be extracted from the Cantareira System, issued by ANA and DAEE was renewed for a period of 10 years and will allow us to withdraw from the system is divided into five tranches: (i) if the volume of water available is higher than 60% of the reservoirs’ capacity, we can withdraw up to 33 m3/s; (ii) if the volume of water is between 40% and 60% of the reservoirs’ capacity, we can withdraw up to 31 m3/s; (iii) if the volume of water is between 30% and 40% of the reservoirs’ capacity, we can withdraw up to 27 m3/s; (iv) if the volume of water is between 20% and 30% of the reservoirs’ capacity, we can withdraw up to 23 m3/s; and (v) if the volume of water available is lower than 20% of the reservoirs’ capacity, we can withdraw up to 15.5 m3/s.
The following table shows the volume of water stored in the systems that serve the São Paulo metropolitan region as of March 2020, December 2020, March 2021, December 2021, March 2022, December 2022 and March 2023.
| March 2023 | December 2022 | March 2022 | December 2021 | March 2021 | December 2020 | March 2020 | Total Storage Capacity | |
| Cantareira | 800.9 | 414.7 | 444.4 | 244.5 | 518.8 | 355.1 | 632.2 | 982.0(1)(2) |
| Guarulhos | 1.0 | 0.6 | 1.0 | 0.4 | 0.6 | - | - | 1.0 |
| Guarapiranga | 146.6 | 145.0 | 155.0 | 98.3 | 122.6 | 97.1 | 141.4 | 171.2 |
| Rio Grande | 113.1 | 113.3 | 115.7 | 94.6 | 98.1 | 89.4 | 98.8 | 112.2 |
| Rio Claro | 5.8 | 5.9 | 6.3 | 6.3 | 7.0 | 6.0 | 13.4 | 13.7 |
| Alto Tietê | 409.0 | 270.8 | 332.7 | 225.1 | 341.2 | 301.8 | 497.9 | 560.3 |
| Cotia | 16.5 | 8.6 | 15.6 | 6.5 | 13.2 | 10.5 | 16.9 | 16.5 |
| São Lourenço | 86.9 | 72.3 | 86.5 | 68.1 | 57.4 | 54.1 | 87.8 | 88.8 |
| (1) | The Cantareira system’s total storage capacity is 982.0 million m³ available above the water intake level, plus 287.5 million m³ below the water intake level (known as the “technical reserve”). | |
| (2) | Amounts included since the May 2017 water right renewal do not include the water from the Cantareira System’s technical reserve, which is water stored below the water intake level. |
In order to continue to meet consumer demand in the São Paulo metropolitan region and reduce water production in the Cantareira system to the current limits set by ANA and DAEE, we adopted a series of measures from February 2014 to early 2016 to maintain continuous water supply.
With the return of historical average rainfall in the rainy season from October 2015 to March 2016, water levels for the São Paulo metropolitan region returned to normal and we gradually discontinued the measures that we had taken during the water crisis.
In addition to the measures taken to meet consumer demand in the São Paulo metropolitan region, we made and continue to make short and medium-term investments in projects to increase water availability, transfer water between different reservoir systems and expand water treatment production capacity.
Our production of treated water was expanded by 6.0 m³/s with the completion of the São Lourenço Project. In addition, an additional 13 m³/s was made available to our reservoirs through interconnections to other reservoirs in the State of São Paulo, which will be available to us if reservoirs levels once again become low. Completion of these projects results in improved water security for the Integrated Water Supply System (Sistema Integrado de Abastecimento de Água).
Additionally, we continue to take measures to maintain the water supply to the metropolitan region of São Paulo in the adequate quantity and quality for the population. These measures are implemented to keep the system in operation, with renovation of its structures and constructions, in addition to adjustments for operational flexibility by increasing the transfer of treated water between the producing systems of the Integrated Metropolitan System. We have carried out specific studies on the likelihood of new water scarcity events similar to the 2014-2015 water crisis. These studies aim to promote better management of water resources in order to offer greater guarantee of supply, reconciling acceptable risks with the capacity to invest in any necessary expansions.
| 63 |
Measures to Combat the COVID-19 Pandemic
To counter the COVID-19 pandemic, in 2020 and 2021 we implemented various emergency measures to mitigate health, social, and economic impacts resulting from the spread of the virus. In partnership with other companies, entities, and public agencies, we implemented measures to limit our employees’ exposure to possible infection, purchase essential protective equipment and seeking alternatives to avoid possible service interruptions. Where possible we adopted remote working arrangements and also established sanitary protocols, with rules for reducing circulation for safe work, social distancing, personal hygiene and sanitation of the facilities, in addition to communication and monitoring actions.
As a result of our commitment to social well-being during the COVID-19 pandemic, in 2020, we distributed food baskets, hygiene kits and water tanks for the most vulnerable population, and installed public washbasins, sanitized the surroundings of certain public hospitals and health centers, suspended supply cuts and exempted tariffs for the “Residential Social” and “Residential Favela” customer categories. Additionally, in 2021, we contributed to vaccination campaigns carried out by the State Health Secretariat donating tablets to be used in the registration system of the population being vaccinated.
On February 3, 2021, our Board of Executive Officers approved certain measures for commercial clients aiming to help them maintain their businesses during the COVID-19 pandemic and to pay their debts in the future. These measures for commercial customers were in effect until August 2021.
The quarantine decree in the State of São Paulo in 2020 and 2021 directly impacted our revenues as a consequence of the change in the consumption mix, caused by the increase in volumes in the residential categories and a reduction in the commercial, industrial and public categories whose average tariffs are higher, leading to a reduction in the total average tariff in addition to increases in delinquencies in certain categories, which continued through 2021 and to a lesser extent in 2022. In 2020, our revenues from the residential sector were also affected, since consumers in the “Social Residential” and “Residential Favela” categories were exempted from paying water and sewage bills between the months of April and August of 2020. For more information, see “Item 3D. Risk Factors—Risks relating to our Business— Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the outbreak of COVID-19.”
Marketing Channels
As of December 31, 2022, we were the concessionaire responsible for the provision of water supply and collection, treatment and disposal of sewage services directly to end consumers for 375 municipalities in the State of São Paulo. For more information on our marketing channels aimed at individual customers, see “Item 4.B Business Overview — Customer relationship.”
We also supplied water and sewage services and accounted for on a wholesale basis to two municipalities located in the São Paulo metropolitan region. It is the responsibility of these municipalities to then distribute the water to end consumers. Because of our distribution infrastructure, end consumers to whom we offer water services on a wholesale basis cannot alternatively acquire such services directly from us. For more information on service concessions, see “—Wholesale Operations.”
For more information on our marketing channels aimed at municipalities, see “Item 4.B Business Overview — Competition— Competition for new Municipalities.”
Energy Consumption
Energy is essential to our operations, and as a result we are one of the largest users of energy in the State of São Paulo. In the year ended December 31, 2022, we used approximately 2.0% of the total energy consumption in the State of São Paulo. To date, we have not experienced any major disruptions in energy supply. Any significant disruption of energy to us could have a material adverse effect on our business, financial condition, results of operations or prospects. Energy prices have a significant impact on our results of operations. In 2022, we purchased approximately 64% of our total energy consumption in the Free Market where we can more efficiently negotiate the supply of energy; and the remainder of our energy consumption comes from the Regulated Market.
Additionally, we are developing projects that aim to generate clean, renewable and sustainable energy. In 2019, we began to structure a Distributed Power Generation Program focused on solar energy. The program estimates that until 2024 we will have a generation capacity of around 61 megawatt, with a daily average output of 12 megawatts, corresponding to about 4.5% of our total energy consumption (base year 2018). By 2022, we have installed 5 Photovoltaic Plants, with an installed power generation capacity of 6 MW. The credits obtained in this distributed generation are being used to offset energy consumption of low voltage installations, which have a higher tariff. As such, about 74% of energy consumption carried out in low voltage will be supplied by renewable energy. The investment of approximately R$310 million foreseen in this program has an estimated payback of 7 to 8 years.
| 64 |
Most of the energy produced in Brazil comes from hydroelectric power plants. For more information on energy, see “Item 3.D. Risk Factors—Risks Relating to Environmental Matters and Physical and Transition Climate Risks— Extreme Weather Conditions and Climate Change may have a material adverse impact on our business, financial condition or results of operations” and “Item 3.D. Risk Factors—Risks relating to Suppliers—Adverse weather conditions may interrupt the supply of electricity and water and adversely impact our operations.”
Insurance
We maintain insurance covering, among other things, fire or other damage to our property and office buildings and third-party liability. We also maintain insurance coverage for directors’ and officers’ liability (“D&O Insurance”). We currently obtain our insurance policies by means of public bids involving major Brazilian and international insurance companies that operate in Brazil. As of December 31, 2022, we had paid a total aggregate amount of R$19.6 million in premiums. In addition, we paid R$4.9 million for a D&O Insurance policy, covering R$5.3 billion in assets, third-party liabilities and D&O Insurance. We do not have insurance coverage for business interruption risk because we do not believe that the high premiums for such insurance are justified by the low risk of major interruption of our activities. In addition, we do not have insurance coverage for liabilities arising from water contamination or other problems involving our water supply to customers and for environmental related liabilities and damages. We believe that we maintain insurance at levels customary in Brazil for our type of business.
Intellectual Property
Trademarks
We have secured registration of our logo and composite trademark (“Sabesp”) at the Brazilian Institute of Industrial Property (Instituto Nacional da Propriedade Industrial – “INPI”). In addition, we have registered with the INPI several other trademarks, such as: “Sabesp Soluções Ambientais”, “Projeto Tietê”, “Programa Córrego Limpo”, “Programa Onda Limpa”, “PROL – Programa de Reciclagem do Óleo de Fritura”, “Revista DAE”, “Ligação Sabesp”, “Agente da Gente – Sabesp na Comunidade”, “PURA – Programa de Uso Racional da Água”, “Sabesp Inteligência Ambiental”, “Uso Racional da Água”, “Parque da Integração”, “Sabesp Semana do Meio Ambiente”, “Água Sabesp Aquífero Guarani”, “Água Sabesp Estação Cantareira”, “Contrato de Fidelização Sabesp”, “Esgoto Não Doméstico Sabesp”, “PEA – Programa de Educação Ambiental – Sabesp”, “Sabesp Abraço Verde”, “Água de Reúso Sabesp”, “Eu Sou Guardião das Águas Sabesp Eu Não Desperdiço”, “Calculadora de Sonhos”, “Parque Sabesp Mooca”, “Parque Sabesp Butantã”, “Parque Sabesp Cangaíba”, “Programa Água Legal Sabesp”, “Signos – Sistema de Informação Geográfica no Saneamento Sabesp”, “Sistema de Suporte a Decisões Sabesp”, “Fertilizante Sabesfértil Sabesp”, “Pitch Sabesp”, “Novos Negócios Sabesp”, “Centrais de Geração Hidrelétrica Sabesp”, “Biogás Sabesp”, “Energia Fotovoltaica Sabesp”, “Energia Eólica Sabesp”, “Resíduos Sólidos Urbanos Sabesp”, “Fertilizantes Sabesp”, “Tocha de Plasma Sabesp”, “Serviços Técnicos Sabesp”, “Afinidades Sabesp”, “Fibra Ótica nas Redes Sabesp”, “Geosabesp Sabesp”, “Waste To Energy Sabesp”, “Redução de Perdas Sabesp”, “Serviços Imobiliários Sabesp”, and “Clubinho Sabesp”, which is a tool for environmental education directed to children through our website, and of its characters: “Super H2O”, “Gota Borralheira”, “Gotucho”, “Ratantan”, “Dr. Gastão”, “Cauã”, “Denis”, “Gabi”, “Iara”, “Sayuri” and “Cadu.”
We have also filed applications with the INPI for registration of the following trademarks: “Somos Água Sabesp”; “Somos Água Somos Amazônia Sabesp”; and “Hydria Sistema Sabesp.”
Patents
We have two patents granted by the INPI: (i) a device for the removal of supernatants during the sewage treatment process and (ii) a rotary device used to clean water reservoirs transported by trucks with high-pressure hydrojetting systems.
We have also filed eighteen patent applications for the following additional devices or inventions, currently awaiting the INPI’s decisions, some of which have been jointly filed with certain Brazilian universities as a result of our cooperation agreements with these institutions:
| · | a biofilter odor control unit; | |
| · | a digital leakage detection system, jointly filed with the University of São Paulo (Universidade de São Paulo – “USP”); | |
| · | a chemical composition sensor, its fabrication process and use to measure pH in microfluid systems, jointly filed with USP; |
| 65 |
| · | a bubble removal system, autonomous microlaboratory and use of autonomous microlaboratory to monitor water quality, jointly filed with USP; | |
| · | a modular system for the treatment of sanitary sludge and process using this system; | |
| · | a box for installation of water meters; | |
| · | a three-phase separator for UASB reactors with the Federal University of Minas Gerais (Universidade Federal de Minas Gerais – “UFMG”); | |
| · | a drinking water sampling device for quality control; | |
| · | a fluid turbidity analysis system and method for fluid turbidity analysis; | |
| · | a device for sewage collection wells; | |
| · | a device for water meters installation; | |
| · |
water leakage detection equipment patent applications, jointly filed with FAPESP and São Paulo State University Júlio de Mesquita Filho (Universidade Estadual Paulista Júlio de Mesquita Filho – “UNESP”): · method and simulation bench for leakage in lines; · method and system for analyzing and providing a quality index for a noise correlator; · automatic frequency band selection process and system in noise correlation for leak detection; and · system and process for estimating leakage noise propagation speed and delay in at least one duct; | |
| · | a water collection device, device installation kit and process and water sample collection method; and | |
| · | two more patent applications that are in the confidentiality period. |
In addition to these Brazilian patent applications, we also filed two international patent applications under the Patent Cooperation Treaty (“PCT”), which are in the process of registration in the European Union.
For more information on our cooperation agreements with Brazilian universities and FAPESP, see “Item 5. Operating and Financial Review Prospects—C. Research and Development, Patents and Licenses, etc.—Research and innovation.”
Software
We have adopted an internal policy that provides for an active and effective audit and prevention of unauthorized software use. We have acquired the software licenses for all our workstations.
We have also developed certain computer programs for management and control of water and sewage treatment facilities, as well as for third-party services management, called “AQUALOG” (Control Water Treatment Plants), “SGL” (Bid Management System), “SCORPION” (Software to Operational Control), “Electronic Price Quotation,” “PREGÃO SABESP ONLINE,” “SISDOC” (Document Control System), “system for analyzing the metrological behavior of water meters,” “MPLT” (Standardized Model of Technical Report), “SGH” (Hydrometry Management System), “SIA” (Audit Information System), “NETCONTROL” (Automation System of Sanitary Control Laboratories), “SAN” (Navigation Support System), “online software for managing specific articles published in the DAE engineering journal,” “Dashboard panel,” “COP” (Online Control of Water Losses), “GEL” (Power Management System), “CADGEO,” “LIGGEO,” “Intellectual Property Management System,” “SOE” (Business Organization System), “Application for Predicting the Concentration of Cyanobacteria through Artificial Intelligence”, “Sabesp PM Mobile”, “Sabesp Decision Support System - SSD”, Frequency Band for Leakage Noise Correlators (BAFCORV) and “Hydria Sabesp” - Specialist System for the management and control of the water treatment process and Electric energy management system.
Among them, we highlight:
| · | AQUALOG is a software designed to monitor water treatment through the employment of artificial intelligence. In 2001, we completed the first rendering of services based on the AQUALOG software to a third party with the automation of a water treatment plant in the city of Jaguará do Sul, State of Santa Catarina. We have entered into an agreement to license the software to Sanesul, in the state of Mato Grosso do Sul and to Teuto’s drugs factory, in the city of Anapólis, state of Goiás; | |
| · | SGL is an electronic price quotation system that allows us to view and control all bid and acquisition proceedings in real time; |
| 66 |
| · | CADGEO and LIGGEO are computer programs used to locate the water and sewage infrastructure in times of installation, maintenance or expansion in real time via satellite; | |
| · | “Application for Predicting the Concentration of Cyanobacteria through Artificial Intelligence,” is an application that was developed as a result of a joint research project by us, FAPESP and the Federal University of São Paulo (Universidade Federal de São Paulo – “UNIFESP”); | |
| · | “Sabesp PM Mobile” is a mobile application to register and assist our technicians in monitoring and managing asset maintenance activities; | |
| · | Frequency Band for Leakage Noise Correlators (“BAFCORV”), developed from a joint research project with FAPESP and UNESP; and | |
| · | “Sabesp Decision Support System - SSD” is a software that contains graphic interfaces for updating data, queries of information in the form of graphs and tables, regarding the operation of water-producing systems and dissemination of data to society through newsletters generated by the system. |
We have also registered all of these programs at the INPI.
Domain Names
We own the domain names described below which have been registered with the relevant entity in Brazil, Registro.br:
· www.sabesp.com.br; and
· www.revistadae.com.br.
Environmental Matters
Our environmental management is inherent to the provision of our services and the essence of our business. Our performance is guided by the standards established in our environmental policy, which is monitored by the Environmental Committee, which allows us to plan in an integrated manner and ensure the sustainability of our operations. Our environment management is based on two pillars of action: (i) environmental compliance and improvement of operational facilities; and (ii) spreading a culture of sustainability and cherishing the environment among our stakeholders. We prioritize the internal and external dissemination of knowledge and experience on the best environmental practices. Thus, we promote corporate environmental management programs that rely on the involvement of collaborators, the communities we service and partnerships with non-governmental organizations.
In order to consolidate our environmental culture, we have an Environmental Corporate Management Superintendency and Environmental Management Teams allocated in our business units.
We have the following ongoing environmental management programs:
| · | Development of the Corporate Greenhouse Gas Management Program (Programa Corporativo de Gestão de Emissões de Gases de Efeito Estufa) which focuses on several lines of action including: the preparation of annual inventories on emissions; the promotion of awareness-raising activities on climate issues; encouraging the reduction of GHG emissions in our operations; conducting studies to identify the potential for carbon sequestration and storage in our forest reserves; performing risk and resilience assessments in relation to climate change; and adhering to the relevant national and international initiatives and guidelines. For more information, see “Item 4.B. Business Overview—Environmental Matters—Climate Change Regulations: Reduction of Greenhouse Gases (GHG) Emissions”; | |
| · | Corporate Program for Obtaining and Maintaining Licenses for Water Treatment Plants, Sewage Treatment Plants and Sewage Pumping Stations (Programa Corporativo de Obtenção e Manutenção de Licenças de Estações de Tratamento de Água, Estações de Tratamento de Esgotos e Estações Elevatórias de Esgotos), in order to meet the requirements of the licensing authority, in addition to structuring operations for the renewal and maintenance of these licenses. For that purpose, we have a program since 2017, approved by CETESB, related to the operational licenses of the sewage pumping stations. In 2022, a similar program was approved for water treatment plants and wastewater treatment plants. |
| 67 |
| · | Corporate Program for Obtaining and Maintaining Grants for the Use of Water Resources (Programa Corporativo de Obtenção e Manutenção das Outorgas de Uso de Recursos Hídricos), including water collection, releases and dams. The grant provides the necessary resources to subsidize the process of use and payment for water resources. We are the biggest payer for water use in the State of São Paulo. | |
| · | The Environmental Education Program (Programa de Educação Ambiental – “PEA”), an important tool for strengthening the effectiveness of our sanitation activities, which propitiates connections with the communities we service through over several environmental education projects. The activities developed by the PEA are organized with the following objectives: raise awareness on the intrinsic value of water; protect the environment; preserve streams; improve the quality of the environment; raise awareness on sanitation activities; raise awareness on the conscious use of water; and direct capacitation and production of guiding material, which involve activities with civil society groups, education centers, municipal governments and non-governmental organizations; | |
| · | Management of our institutional representation in the State and National Systems of Water Resources, including training of company representatives to participate in: (i) the creation of criteria for water usage charges, (ii) preparation and review of river basin plans (Planos de Bacias), (iii) review of water bodies’ classifications, and (iv) analysis of legislations regarding the protection of water sources; | |
| · | The SABESP 3Rs Program (Programa SABESP 3Rs) for the reduction, re use and recycling of waste from administrative activities, in partnership with waste and recycling collecting cooperatives and which includes employee training enabling them to act as multipliers in the roll-out of the program; | |
| · | The progressive implementation and maintenance of the Environmental Management System (“EMS”) in our water and sewage treatment plants aiming to improve the efficiency of the systems, manage the risks and implement preventive actions to avoid impacts on the environment, considering the relevance of these plants for our core activity. Since 2015, we have been working on the EMS with a mixed model, whereby the ISO 14001 standard is applied to a limited number of certified plants, while the other plants adopt the environmental management model developed internally (named SGA-SABESP), without aiming certification. The EMS is currently in place in 622 treatment plants, 36 of which are ISO 14001 certified, representing 76% of our treatment plants. We expect to implement the EMS in all plants by 2024; | |
| · | Development of the Corporate Program for Sustainable Wastewater Treatment Plants, which aims to disseminate our culture of sustainability and the application of technologies and practices to transform the by-products generated in sewage treatment plants, specifically, biogas, sludge and effluent, in sustainable resources for beneficial use, with added value for the market, considering their energy use and contribution for the reduction of GHG emissions. Currently, the program includes 11 wastewater treatment plants which have a sustainability seal, and there are plans to increase this number given that new plants are in the operational improvement study phase; and | |
| · | Corporate Program of Environmental Recovery Commitment Terms (Programa Corporativo de Termos de Compromisso de Recuperação Ambiental) arising from the environmental licensing of new ventures, which includes obligations of forest restoration with environmental compensation purposes, when necessary. This program aims to the planting and maintenance of 1 million seedlings of regional and native species in the period of ten years, in order to deal with current obligations, as well as to new terms of commitment for environmental recovery related to the implementation of new projects. The action is part of the Springs Program (Programa Nascentes) created by the São Paulo state government and prioritizes the restoration of water spring protection areas. |
To provide technical support for environmental programs, we carry out corporate training on topics related to environmental management. This initiative aims to promote continuous professional development with specific content for aimed at strategic, management and operational teams.
In addition to corporate environmental management actions, we have several projects and initiatives underway to benefit the environment, such as actions to protect, water springs, projects for the rational use of water, reuse of effluents, projects for the use of photovoltaic energy and biogas as a vehicle fuel, as well as other environmental projects focused on the engagement of the population at large.
We are also signatory of United Nations Global Compact and support the 17 United Nations Sustainable Development Goals, which aims to stimulate actions in areas of crucial importance to humanity, the planet, countries and the companies.
Climate Change Regulations: Reduction of Greenhouse Gases (GHG) Emissions
We are required to comply with laws and regulations related to climate change, including international agreements and treaties to which Brazil is signatory. It is worth noting that the State Decree No. 65,881 of July 20, 2021 provides for the State of São Paulo’s adhesion to the “Race to Zero” and “Race to Resilience” campaigns, which aims, among other issues, to reduce GHG emissions and promote climate resilience.
This decree establishes, among other aspects, that the Climate Action Plan 2050 being developed by the São Paulo state government, which will likely include benchmark targets for several sectors, including the sanitation sector, must include intermediate goals for the reduction of GHG emissions defined by the Kyoto Protocol for the years 2030 and 2040 with the objective of gradually implementing actions to achieve neutral net emissions by 2050.
| 68 |
The State Policy on Climate Change in the State of São Paulo (Law No. 13,798/2009), regulated by Decree No. 55.947/2010, is under review by the Secretariat for Environment, Infrastructure and Logistics of the State of São Paulo.
The National Climate Change Policy (Law No. 12,187/2009) is also in force, regulated by Decree No. 9,578/2018. Considering that sanitation activities may be directly impacted by weather conditions and extreme events, we developed a Corporate Program for the Management of Greenhouse Gas Emissions, that includes activities to quantify emissions in annual corporate inventories of GHG, in addition to the incentive to mitigate the emissions in business activities. Several actions were already implemented within the ambit of this program.
Our corporate risk management process covers climate risks and is integrated with our business strategy, which includes disclosure practices for these risks, as well as a corporate governance structure aligned with the highest market standards.
Accordingly, the improvement of our climate plan is part of our strategy, as mentioned in the initiatives, and is an evolutionary process that includes aspects related to governance, strategy, risk management, and GHG metrics. We are in the process of preparing a diagnosis to align current practices with the guidelines of the Task Force on Climate-related Financial Disclosures (Força-Tarefa para Divulgações Financeiras relacionadas às Mudanças Climáticas).
In 2022, we concluded the corporate inventory of GHGs for 2021, thus totaling 15 inventories since 2007. We noted that the trend observed in the previous inventories persists, specifically that activities regarding sewage collection and treatment remain our largest sources of GHG emissions, representing approximately 85% of total GHG emissions. Electric energy represents approximately 13.7% and other activities represent approximately 1.3%.
We improve our efficiency as we increase our service rates to the population in the municipalities where we operate. In respect of sewage, we expect an increase in the organic loads and, accordingly, in the biogas generation, waste in the treatment plants and GHG emissions, as we increase the flows that are treated. On the other hand, sanitation activities directly contribute to the reduction of GHG emissions in the aquatic ecosystem, which is aligned with the Climate Action Plan 2050 and which enables us to remove an average of approximately 1 million tons of CO2, that would likely be released annually into the environment in the event the sewage generated by the population were discharged without any treatment. In addition to the benefits of reducing GHG emissions resulting from the expansion of sewage treatment systems, we are also searching for less carbon-intensive alternatives to expand the available actions for the reduction of GHG emissions.
In order to improve our medium and long-term strategy, we are currently in the process of soliciting bids for a consulting service to develop a plan for reducing GHG emissions. This plan is aligned with the State Decree No. 65,881, which outlines the State of São Paulo's adherence to the UN campaigns “Race to Zero” and “Race to Resilience. ”
As part of our Corporate Program for the Management of Greenhouse Gas Emissions, we have already implemented and planned a series of actions aimed at reducing GHG emissions. Some of these actions include:
| · | the use of complementary technologies and the optimization of the operations in sewage treatment plants; |
| · | the expansion of the beneficial use of biogas and generated sludge; |
| · | the expansion of the use of clean and renewable energy sources and alternative fuels; and |
| · | the offset of GHG emissions through the intensification of forest conservation and restoration activities. |
Among the actions that have already been implemented, or are being implemented, we highlight some examples, as described in the paragraphs below.
Although Brazil’s electricity generation is mainly composed of clean sources derived from hydroelectricity, this composition is subject to variation, which may contribute to the worsening of the greenhouse effect and climate change due to associated GHG emissions. As our activities can be categorized as electricity-intensive, we have widely discussed the topic of energy. Despite the large proportion of renewable energy sources in Brazil’s electricity generation network (92% in 2022), we are committed to contributing to the energy transition by taking advantage of generation potential, increasing the use of incentivized energy sources in the Free Contracting Environment (“ACL”), and implementing energy efficiency actions, including technologies such as Pump-as-Turbine and the replacement of equipment and installations for more energy efficient alternatives.
| 69 |
In 2022, incentivized energy from ACL represented 5% of our energy consumption, and in 2023 we will increase this to 24%. The Distributed Photovoltaic Energy Generation Program started operating two more photovoltaic plants, totaling 5 operating plants in the municipalities of Orindiúva, Elias Fausto, Euclides da Cunha, Monte Alto, and Paraguaçu Paulista, with a total generation capacity of 6 MW. The implementation of this program is scheduled to be completed in 2024, with an estimated generation capacity of 60 MW. We also use solar energy in other operational processes such as radio data transmission, flow measurement systems in wastewater treatment plants, effluent disinfection systems, lighting for administrative unit headquarters, and a floating photovoltaic power plant project.
Another important sustainability initiative, aimed at reducing GHG emissions, is the production of agricultural compost, Sabesfértil”, from sludge from a wastewater treatment plant in the municipality of Botucatu. Similar projects for the use of sludge from wastewater treatment plants are under development at our other plants.
The use of a portion of the biogas generated in the Franca wastewater treatment plant for the production of vehicle fuel to supply part of our fleet in the municipality is another notable initiative with positive results in reducing GHG emissions. Additionally, we have initiatives and projects to cover sewage treatment anaerobic lagoons to capture and burn the generated biogas, in order to minimize GHG emissions. Projects for methane reduction in wastewater treatment plants, including the implementation of energy recovery for self-generation of electricity, are also under development. The development of a small hydro generator for wastewater treatment plants is also part of our ongoing research.
In the coastal region, we are developing a system for the solar drying of wastewater treatment plant sludge with forced ventilation and mechanized mixing and fragmentation of the sludge. A similar project is already in operation in a wastewater treatment plant located in the central-west region of the state.
We are also implementing actions in the management of our corporate vehicle fleet aimed at sustainability. To optimize our fleet management, we opted for continued use leasing contracts, and through the fleet renewal program, 90.8% of light vehicles and 73.5% of heavy vehicles were replaced. One of the great benefits achieved by this initiative was the reduction of annual gasoline consumption from 3.2 million liters in 2011 to around 95,000 liters in 2022, resulting in a 96% reduction in GHG emissions. We have also contracted a Sustainable Corporate Mobility Strategic Plan 2030 for the adoption of vehicles powered by sustainable fuels.
The maintenance and restoration activities of forest reserves carried out by us in addition to climate adaptation, play an important role in carbon sequestration and storage, in order to contribute to the reduction in the greenhouse effect. Of note is the preservation of around 44,000 hectares within conservation units, with nine thousand hectares of water mirrors and 33,000 hectares, where the main metropolitan springs are located. We also own the São Francisco Reserve inserted in the Serra do Mar State Park, in São Sebastião, on the northern coast, with 2,580,971.00 square meters, in order to protect the São Francisco system catchment.
As part of the process of cultural change, we have instituted awareness-raising and training activities on the subject of climate change through training sessions and content provided in courses aimed at internal and external audiences.
Ratifying our commitment to this global agenda, in 2020 we joined the São Paulo Environmental Agreement, an initiative of the Secretariat for Environment, Infrastructure and Logistics of the State of São Paulo, which recognizes the signatories as part of a community of leaders in climate change, with a special focus on sustainable development. We maintain a partnership with the United Nations Framework Convention on Climate Change since 2021, when we participated in COP 26 in Scotland, and 2022. when we participated at COP 27, held in Egypt. reaffirming our commitment to climate and sustainability issues.
The management of GHG emissions involves costs and expenses related to the implementation of more rigorous control mechanisms, the adoption of pollution prevention measures and actions to minimize the generation of these gases. We have been seeking subsidized financing to cover part of these costs.
If these measures affect our costs of operations, we may not be able to pass them on to final consumers.
For more information, see “—Tariffs.”
Since our financial performance is closely linked to climate patterns that influence the qualitative and quantitative availability of water, extreme weather conditions may cause adverse effects on our business and operations. Long-term effects of extreme weather conditions cause significant alterations in the physical environment that may create unfavorable circumstances, which could affect our operations.
Droughts also lower reservoir levels available for hydroelectric plants, which may lead to power shortages, particularly since hydroelectric power accounts for most of Brazil’s electric power supply. Lack of electric energy could lead to instability in water supply and sewage collection and treatment services, which could damage our reputation and operation. In addition, because we are one of the largest consumers of electricity in the State of São Paulo, a potential increase in electricity tariffs due to a shortage of hydroelectric power could have a significant economic impact on us. Our strategy to address climate change is divided in two main actions: (i) adaptative actions to increase water security and adaptative resilience to potential effects of extreme events; and (ii) management of GHG emissions, consisting of quantification and monitoring of emissions and implementation of mitigating measures, as mentioned above. For more information about the impacts that climate change has on our activities, see “Item 3.D. Risk Factors—Risks Relating to Environmental Matters and Physical and Transition Climate Risks— Extreme Weather Conditions and Climate Change may have a material adverse impact on our business, financial condition or results of operations.”
| 70 |
With regard to the risk of reduced water availability, we are working to adapt to a new scenario of water scarcity due to the risks associates with the effects of climate change through initiatives such as the identification of opportunities to increase our effectiveness, resilience and flexibility of our water treatment and supply systems, as well as to increase the capacity of our water reservoirs, the expansion of water conservation practices and alternatives to management demand as the Program for Reduction of Water Loss, the Program for Rational Water Usage, Corporate Environmental Education Program and the expansion of the planned reutilization of effluents for urban and industrial purposes, maintenance of reserves and forest restoration projects, among others.
For more information, see “Item 3.D. Risk Factors—Risks Relating to Environmental Matters and Physical and Transition Climate Risks— New laws and regulations relating to climate change and changes in existing regulation may result in increased liabilities and increased capital expenditures, which could have a material adverse effect on us.” and “Item 3.D. Risk Factors—Risks Relating to Environmental Matters and Physical and Transition Climate Risks—Extreme Weather Conditions and Climate Change may have a material adverse impact on our business, financial condition or results of operations.”
Public Bidding Procedures
Pursuant to the Federal Public Bidding Law, the public bid process commences with publication by the granting body, entity or administrative unit through which the government acts (the “Public Administration”) in a federal, state or municipal official newspaper, as the case may be, and another leading Brazilian newspaper. The publication announces that the Public Administration will carry out a public bidding contest pursuant to provisions set forth in an edital (invitation to bid). The invitation to bid must specify, among other terms: (i) the purpose, duration and goals of the bid; (ii) the participation of bidders, either individually or forming a consortium; (iii) a description of the qualifications required for adequate performance of the services covered by the bid; (iv) the deadlines for the submission of the bids; (v) the criteria used for the selection of the winning bidder; and (vi) a list of the documents required to establish the bidder’s technical, financial and legal capabilities.
The invitation to bid is binding on the Public Administration. Bidders may submit their proposals either individually or in consortia, as provided for in the invitation to bid. After receiving proposals, the Public Administration will evaluate each proposal according to the following criteria, which must have been set forth in the invitation to bid:
| · | the technical quality of the proposal; |
| · | lowest cost or lowest public service tariff offered; |
| · | a combination of the criteria above; or |
| · | the largest amount offered in consideration for a concession. |
Currently, Brazilian government-owned and mixed capital companies such as us must comply with Law No. 13,303/2016 when conducting public bidding procedures and contracting third parties. Law No. 13,303/2016 established new corporate governance rules to be followed. Our Internal Bidding and Contracting Regulations were published in June 2018, contemplating the new legal guidelines.
The provisions of State Law No. 6,544/1989 of November 2, 1989 as amended (the “State Public Bidding Law”), parallel the provisions of the Federal Public Bidding Law. The Federal and State Public Bidding Laws will apply to us in the event that we seek to secure new concessions. Moreover, these bidding laws currently apply to us with respect to obtaining goods and services from third parties for our business operations or in connection with our capital expenditure program, in each case subject to certain exceptions.
Additionally, the New Legal Framework for Basic Sanitation, enacted on July 16, 2020 and, which amended the Basic Sanitation Law, introduced the need for bidding for the provision of basic sanitation services by a company which is not a subsidiary of the holder of public services. This will lead to our increased participation in bidding procedures in order to expand our market share.
| 71 |
Water Usage
State law establishes the basic principles governing the use of water resources in the State of São Paulo in accordance with the State constitution. These principles include:
| · | rational utilization of water resources, ensuring that their primary use is to supply water to the population; | |
| · | optimizing the economic and social benefits resulting from the use of water resources; | |
| · | protection of water resources against actions which could compromise current and future use; | |
| · | defense against critical hydrological events which could cause risk to the health and safety of the population or economic and social losses; | |
| · | development of hydro-transportation for economic benefit; | |
| · | development of permanent programs of conservation and protection of underground water against pollution and excessive exploitation; and | |
| · | prevention of soil erosion in urban and rural areas, with a view to protecting against physical pollution and silting of water resources. |
Among other instruments established by the State Water Policy, Law No. 7,663 of December 30, 1991, the competent public authority grants for the right to use water for the implementation of any enterprise that demands the use of surface or underground water resources (for water collection and release of effluents), as well as for the execution of services that alter the regime or quality of such water resources. In the case of rivers under the federal government’s domain (rivers crossing more than one state), ANA is the public authority which grants the authorization. With respect to the rivers under a state’s domain, the applicable state authority has jurisdiction to grant the right of use. In the State of São Paulo, DAEE is the public authority responsible for granting such authorizations.
State Law No. 12,183/2005, which was enacted on December 29, 2005, established the basis for charging for the use of the water resources under the domain of the State of São Paulo. To apply such charging, the law provides for, among other provisions, the participation of the River Basins Committees, the formulation of criteria by such committees, the creation of basin agencies and the organization of a registered list of water resource users. The basin committee’s proposals regarding the criteria to calculate the amounts to be charged at each basin must be approved by the State Water Resource Council and formalized by a decree issued by the State Governor.
In accordance with current legislation, the river basin committees prepare and approve rules and criteria for the implementation of the charge, and the National Water Agency, Department of Water and Electric Energy and the Basin Agencies (Agências da Bacia), are authorized to charge users, such as us, for the capture of water or release of effluents into water bodies. Charging for the use of water is in the process of gradual implementation by the State of São Paulo, and only the northern coast watershed still needs to be addressed, with the implementation expected to begin in 2023.
Charging for the use of water from rivers of federal domain began in 2003 in the Paraíba do Sul basin, and since then, it has been implemented in all the watersheds in which we operate. Once the implementation in the northern coast is concluded, the State of São Paulo will have the charge implemented in all Water Resources Management Units within the scope of state watershed committees. Currently, the charge is implemented in two of the four federal committees in the State of São Paulo - PCJ and Paraíba do Sul, while the other two - Grande and Paranapanema - have no forecast for implementation.
In 2022, we paid approximately R$105.2 million for the collection and discharge into federal and state-controlled rivers.
Water Quality
Attachment XX of the Consolidation Administrative Rule No. 5 from September 28, 2017, issued by the Ministry of Health of the federal government, provides the standards for potable water for human consumption in Brazil. This rule is similar to the U.S. Safe Drinking Water Act and the regulations enacted by the U.S. Environmental Protection Agency, which establishes rules for sampling and limits related to substances that are potentially hazardous to human health.
In compliance with Brazilian law, the physical-chemical, organic and bacteriological analyses carried out for water quality control must follow several national and international standards, such as: Standard Methods for the Examination of Water and Wastewater from the institutions such as the American Public Health Association, AWWA and Water Environment Federation; United States Environmental Protection Agency; standards published by the International Standardization Organization; and methodologies proposed by the WHO.
| 72 |
Decree No. 5,440/2005 provides that the quality of water must be disclosed to consumers. We have been complying with this regulation by publishing the required information in monthly bills and annual reports delivered to all consumers that we serve.
Environmental Regulation
The implementation and operation of water and sewage systems are subject to federal, state and municipal laws and regulations on environmental and water-resource protection. The National Environmental Council (Conselho Nacional de Meio Ambiente – “CONAMA”) is the federal agency responsible for the regulation of potentially polluting activities. In the State of São Paulo, CETESB is the governmental entity responsible for the control, supervision, monitoring and licensing of polluting activities, pursuant to State Law No. 997/1976, as amended by State Decree No. 8,468/1976 and its amendments.
The control and environmental planning instruments are defined by several legal instruments, such as State Law No. 997/1976, regulated by Decree No. 8,468/1976 and its amendments, which regulates environmental pollution control and establishes the standards for discharge of effluents at state level; CONAMA Resolution No. 05/1988, which requires licensing of sanitation projects that cause significant alterations to the environment; Supplementary Law No. 140/2011, which regulates (i) environmental licenses; (ii) federal, state and local jurisdiction over environmental issues; (iii) the list of activities subject to licensing; and (iv) environmental impact studies and reports; State Law No. 9,509/1977, regulated by State Decree No. 47,400/2002, which outlines the state environmental policy; CONAMA Resolution No. 357/2005, amended by CONAMA Resolution No. 430/2011, which establishes the standards for discharge of effluents; and DAAE Ordinance No. 1,630/2017 and ANA Resolution No. 1,941/2017, which regulate the concession of grants for the right to use water and interfere in water resources on the State and federal level, respectively; and CONAMA Resolution 302/2002, which establishes the mapping of an Environmental Plan for the Conservation and Use of the Surroundings of Artificial Reservoirs (Plano Ambiental de Conservação e Uso do Entorno de Reservatórios Artificiais – “PACUERA”) for public supply projects focused on environmental licensing as a way of making use and preservation compatible. In addition, the Brazilian Forestry Code (Law No. 12,651/2012) establishes the requirement to maintain permanent preservation areas, in certain cases covered with natural vegetation, surrounding water springs and reservoirs, due to their environmental importance as sources of water security, geologic stability, biodiversity and soil nutrition. Our reservoirs were in operation prior to this legal requirement, and accordingly only new reservoirs are subject to PACUERA.
As for environmental licensing and concessions of water and sewage treatment plants and pumping stations, we have corporate programs in progress to obtain and maintain the legal requirements to comply with these regulations. For more information, see “—Environmental Matters.” We also have a Corporate Program for Environmental Recovery Commitment Terms (Programa Corporativo de Termos de Compromisso de Recuperação Ambiental), which includes obligations for forest restoration for environmental compensation, where necessary.
We use and protect an area of approximately 44 thousand hectares in total within conservation units, as defined in Law No. 9,985/2000, with 9 thousand hectares of water mirrors and 33 thousand hectares of protected areas surrounding water sources, thus protecting the main water-producing systems of the São Paulo metropolitan region. It should be noted that in the case of the Cantareira System, the Environmental Protection Area (Área de Proteção Ambiental – “APA”) management plan for the Cantareira System was recently approved through Decree No. 65,244 of October 14, 2020.
The licensing process, usually, is composed of three stages, including the following licenses which can be renewed:
| · | preliminary license – granted in the planning stage, approving the location and concept and attesting to the project’s environmental feasibility; | |
| · | installation license – authorizing the beginning of works for the installation of the project, subject to compliance with approved plans, programs and projects, including environmental control measures and other necessary technical requirements; and | |
| · | operation license – authorizing the operation of a unit or activity, subject to compliance with the technical requirements contained in the installation license. |
Projects with significant environmental impact are subject to specific studies prepared by multidisciplinary teams that present a series of recommendations focused on minimizing the environmental impact. These studies are then submitted for analysis and approval by the government authorities.
| 73 |
It is noteworthy that we have the Corporate Program for Obtaining and Maintaining Licenses for Water Treatment Plants, Sewage Treatment Plants and Sewage Pumping Stations (Programa Corporativo de Obtenção e Manutenção de Licenças de Estações de Tratamento de Água, Estações de Tratamento de Esgotos e Estações Elevatórias de Esgotos), in order to meet the requirements of the licensing authority, in addition to structuring operations for the renewal and maintenance of these licenses. For that purpose, we have a program, approved by CETESB, related to the operational licenses of the Sewage Pumping Stations. We are also developing a similar program for the Water Treatment Plants and the Sewage Treatment Plants, which started in 2022 and is expected to end in 2027, according to the CETESB Executive Officers’ Resolution 012/2022/C, of January 28, 2022, that approved the Adequacy Program of Water Treatment Plants and the Sewage Treatment Plants in São Paulo State.
Sewage Requirements
State law sets forth regulations regarding pollution control and environmental preservation in the State of São Paulo. According to this law, in areas in which there is a public sewage system, all effluents of a “polluting source” must be discharged to such system, as is the case for industrial enterprises. It is the responsibility of the polluting source to connect itself to the public sewage system. All effluents to be discharged are required to meet the standards and conditions established by the applicable environmental law, which allows such effluents to be treated by our treatment facilities and discharged in an environmentally safe manner. Effluents that do not comply with such criteria are prohibited from being discharged into the public sewage system. State legislation also establishes that liquid effluents, except those related to basic sanitation, be subjected to pre-treatment so that they meet the required mandatory levels before being discharged into the public sewage system. Effluents from our treatment facilities must comply with effluent limitation guidelines and meet the water quality standards of the receiving water bodies established by federal and state legislation. For more information, see “—Sewage Operations—Sewage System.”
The CETESB is authorized under State law to monitor discharges of effluents into the water bodies, among other things. The CETESB also issues the environmental licenses to the polluting sources, including sewage treatment plants. For more information, see “—Environmental Matters.”
State and federal water resource legislation establishes the charging of fees for the discharge of treated effluents into water bodies. This charge is already in effect in the majority of river basins. For more information, see “—Environmental Matters—Water Usage.”
Lending Limits of Brazilian Financial Institutions
CMN Resolution No. 4,589/17 dated as of June 29, 2017, which replaced CMN Resolution No. 2,827/2001 dated as of March 30, 2001, as amended, limits the amount that Brazilian financial institutions may lend to public sector companies, such as us. Financing of projects which are put up for international bid and any financing in reais provided to the Brazilian counterpart of such international bids are excluded from these limits.
Scope of Business
State Law No. 12,292/2006, dated as of March 2, 2006, and amended State Law No. 119/1973, dated as of June 29, 1973, which created our Company, authorizes us to provide water and sewage services outside the State of São Paulo (in other states of Brazil and other countries). This law also authorizes us to own interests in other public or private-public companies and Brazilian or international consortia. In addition, this law permits us to incorporate subsidiaries and enter into a partnership with or acquire interests in a private company with a corporate purpose related to the sanitation business.
In connection with the scope of our services, State Supplementary Law No. 1.025/2007 amended State Law No. 119/1973 and expanded the range of services that we can render, with the inclusion of urban rainwater drainage and management, urban cleaning and solid waste management, as well as power generation, storage, conservation and sales activities, for our own or third-party use.
| C. | Organizational Structure |
Not applicable.
| D. | Property, Plant, Equipment, Intangible Assets and Contract Assets |
Our principal property, plant and equipment comprise administrative facilities which are stated at historical costs less depreciation. The reservoirs, water treatment facilities, water distribution networks consisting of water pipes, water transmission lines, water connections and water meters, sewage treatment facilities, and sewage collection networks consisting of sewer lines and sewage connections are recorded as contract assets and intangible assets (concession assets). As of December 31, 2022, we operated through 91,638 kilometers of water pipes and water transmission lines and 63,557 kilometers of sewer lines. As of the same date, we operated 237 water treatment facilities and 581 sewage treatment facilities, including eight ocean outfalls, as well as 16 water quality control laboratories.
| 74 |
As of December 31, 2022, the total net book value of our property, plant and equipment, intangible assets and contract assets (including concession assets) and contract assets was R$48,273.8 million.
All of our material properties are located in the State of São Paulo.
| ITEM 4A. | UNRESOLVED STAFF COMMENTS |
Not applicable.
| ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our audited financial statements included elsewhere in this annual report. The financial statements included elsewhere in this annual report have been prepared in accordance with IFRS as issued by the IASB. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in “Risk Factors.”
In the following discussion, references to increases or decreases in any period are made by comparison with the corresponding prior period, except as the context otherwise indicates.
A. Operating and Financial Review and Prospects Overview
As of December 31, 2022, 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 375 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. In December 2018, July 2019 and July 2020, we entered into agreements with the municipalities of Guarulhos, Santo André and Mauá, respectively, and began operations in these municipalities for the direct supply of water and sewage services in January 2019, August 2019 and November 2020, respectively.
The São Paulo metropolitan region, which includes the city of São Paulo, is our most important service region. With a total population of approximately 21.4 million, the São Paulo metropolitan region accounted for 71.5%, 70.7% and 70.7% of our operating revenue in 2022, 2021 and 2020 (excluding revenues relating to the construction of concession infrastructure), respectively. As of December 31, 2022, 66.2% of the concession intangible assets reflected on our balance sheet were located in this region. In an effort to respond to demand in the São Paulo metropolitan region, we have concentrated a major portion of our capital expenditure program to expand the water and sewage systems and to increase and protect water sources in this region. Our capital expenditure program is our most significant liquidity and capital resource requirement.
Factors Affecting Our Results of Operations
Business Drivers and Measures
General Factors Affecting our Business
Our results of operations and financial condition are generally affected by our ability to raise tariffs, control costs and improve productivity, general economic conditions in Brazil and abroad, climate conditions, impacts of regulation for sanitation services, global and local catastrophes and health epidemics such as COVID-19 and extreme weather events.
In 2015, our business was significantly affected by the most severe drought recorded in our service area in the previous 80 years. Heightened public awareness of the need to conserve water during the crisis resulted in our customers adopting lower water consumption practices during the water crisis and these practices have been partially integrated into our consumers’ daily habits. As a result of this new behavior, the volume of water billed to our clients did not return to the volume of water billed before the water crisis in 2013. This change in consumption practice as a result of the 2014-2015 water crisis has had a continued effect on our results of operations since the 2014-2015 crisis.
In 2020 and 2021 and to a lesser extent in 2022, the COVID-19 pandemic significantly impacted economic activity and markets around the world and its development and impacts in the future remain uncertain. In addition, the high and persistent inflation rate caused by the disruptions in the supply chains worldwide and the increase in electricity tariffs due to droughts in Brazil is affecting the economy and increasing interest rates.
| 75 |
In the event of a significant devaluation of the real in relation to the U.S. dollar or other currencies, our ability to meet our foreign currency denominated obligations could be adversely affected because our tariff revenue and other sources of income are denominated solely in reais. In addition, we have debt denominated in foreign currencies, any significant devaluation of the real will increase our financial expenses as a result of foreign exchange losses that we must record. A devaluation of the real may adversely affect us and the market price of our common shares or ADSs. For more information, see Note 5.1(a) to our 2022 financial statements.
In the second quarter of 2020 and partially in 2021, the São Paulo state government decreed a quarantine throughout the State, restricting business activities in order to avoid the accelerated spread of COVID-19. We experienced a change in the consumption mix, due to the increase in volumes in the residential category and a reduction in the public, commercial and industrial categories which have higher tariffs, leading to a reduction in the total average tariff. These changes in consumption patterns impacted the total volume of water billed and the average tariff, which had an impact on our revenues and results of operations.
Although restrictions imposed to contain the spread of COVID-19 were lifted in 2022, various companies continue to adopt partial remote working regimes. This affected the volume of sales in the commercial, industrial and public categories which would have been higher had it not been for the partial remote working policies adopted by these companies. In addition, the adverse macroeconomic impact of the COVID-19 pandemic in Brazil had a detrimental impact on many parts of Brazilian society and led to increased delinquencies which negatively impacted our results of operations. Our allowance for doubtful accounts increased by 21.5% for the year ended December 31, 2022 compared to the same period in 2021, and 43.4% for the year ended December 31, 2021, compared to the same period in 2020. See Note 10(c) and 29 to our financial statements included in this annual report.
For more information about the impact the COVID-19 outbreak had on our operations, see “Item 3.D. Risk Factors—Risks Relating to Our Business—Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the outbreak of COVID-19.”
Effects of Tariff Increases
Our results of operations and financial condition are highly dependent on tariff increases for our water and sewage services. Since the enactment of the Basic Sanitation Law in 2007, as a general rule, regulatory agencies are responsible for setting, adjusting and reviewing tariffs, taking into consideration, among other factors, the following:
| · | political considerations arising from our status as a state-controlled company; | |
| · | anti-inflation measures enacted by the federal government from time to time; | |
| · | impacts of the New Tariff Structure, which was postponed and will be resumed after the Public Consultation scheduled for the first half of 2024, | |
| · | impacts of health epidemics such as COVID-19; and | |
| · | when necessary, the readjustment to maintain the original balance between each party’s obligation and economic gain (equilíbrio econômico-financeiro) under the agreement. |
Readjustment of our tariffs continues to be set annually and depend on the parameters established by the Basic Sanitation Law and ARSESP. The guidelines also establish procedural steps and the terms for annual adjustments. The annual adjustments must be announced 30 days prior to the effective date of the new tariffs. For more information, see “4.B. Business Overview—Tariffs.”
The following table sets forth, for the years indicated, the percentage increase of our tariffs, as compared to three inflation indexes:
| Year ended December 31, | |||||
| 2022 | 2021 | 2020 | |||
| Increase in average tariff(1) | 12.80% | 7.00% | 3.40% | ||
| Inflation – IPC – FIPE | 7.32% | 9.73% | 5.62% | ||
| Inflation – IPCA | 5.79% | 10.06% | 4.52% | ||
| Inflation – IGP-M | 5.45% | 17.78% | 23.14% | ||
| (1) | See “Item 4.B. Business Overview—Tariffs” for addition information on tariff increases. |
| Sources: | Central Bank, Fundação Getulio Vargas (“FGV”), IBGE, and Fundação Instituto de Pesquisas Econômicas. |
| 76 |
On March 17, 2022, ARSESP released Resolution No. 1,278 providing for a tariff adjustment of 12.8019%, consisting of: (i) inflation of 10.5437% accrued between February/2021 and February/2022, measured according to the IPCA index; (ii) efficiency factor (Factor X) to be discounted by 0.2142%; (iii) compensatory adjustment of 2.3932%; and (iv) IGQ 2020 to be discounted by 0.1490%. This tariff adjustment became effective on May 10, 2022.
Effects of Brazilian Economic Conditions
As a company with all of its operations in Brazil, our results of operations and financial condition are affected by general economic conditions in Brazil, particularly by the economic activity and the inflation rate. For example, the general performance of the Brazilian economy may affect our cost of capital and inflation may affect our costs and margins. The Brazilian economic environment has been characterized by significant variations in economic growth rates. However, as our product is viewed as essential, in normal conditions our sales revenue demonstrates stability.
General Economic Conditions
In 2020, Brazilian GDP decreased 3.3% in comparison with 2019. Brazil’s trade surplus in 2020 was US$50.9 billion and at year-end the country had US$355.62 billion in currency reserves. The average unemployment rate in Brazil in 2020 was 14.2%.
In 2021, Brazilian GDP increased 5.0% in comparison with 2020. Brazil’s trade surplus in 2021 was US$61.2 billion and at year-end the country had US$ 362.2 billion in currency reserves. The average unemployment rate in Brazil in 2021 was 11.1%.
In 2022, Brazilian GDP increased 2.9% in comparison with 2021. Brazil’s trade surplus in 2022 was US$61.8 billion and at year-end the country had US$324.7 billion in currency reserves. The average unemployment rate in Brazil in 2022 was 7.9%.
Interest Rates
As a political monetary instrument of the federal government, the SELIC rate influences the behavior of other interest rates in the country, including the rates related indebtedness denominated in local currency. The SELIC rate has historically been high. However, a series of rate reductions in 2018, brought the SELIC rate down to 6.50% as of December 31, 2018. In 2019 the SELIC rate decreased to 4.50% and in 2020, in response to the COVID-19 outbreak, COPOM further reduced the SELIC target rate to 2.00%. Since then, the SELIC rate has been gradually increased, reaching 13.75%, where it remains as of the date of this annual report.
We have not contracted any derivative financial instruments or any hedging instruments to mitigate interest rate fluctuations.
Inflation
Inflation affects our financial performance by increasing our costs of services rendered and operating expenses. Part of our real-denominated debt is directly indexed to take into account the effects of inflation. Additionally, we are exposed to the mismatch between the inflation adjustment indices of our loans and financing and those of our receivables. Water supply and sewage service tariffs do not necessarily follow the increases in inflation adjustment and interest rates affecting our debt. We cannot assure you that our tariffs will be increased, in future periods, to offset, in full or in part, the effects of inflation.
Inflation adjustments derive from collections from or payment to third parties, as contractually required by law or court decision, and are recognized on an accrual basis. Inflation adjustments included in these agreements and decisions are not considered embedded derivatives, since they are deemed as inflation adjustments for us. See Notes 3.19, 5.1 and 29 of the financial statements for the impacts of inflation adjustments on our financial performance and debt.
Currency Exchange Rates
We had total foreign currency-denominated indebtedness of R$2,775.8 million as of December 31, 2022, of which R$312.6 million relates to the current portion of our long-term foreign currency-denominated obligations. In the event of significant devaluations of the real in relation to the U.S. dollar or other currencies, the cost of servicing our foreign currency-denominated obligations would increase as measured in reais, particularly as our tariff and other revenue is based solely in reais. In addition, any significant devaluation of the real will increase our financial expenses as a result of foreign exchange losses that we must record. In 2020, the 28.9% depreciation of the real against the dollar and the 35.7% depreciation of the real against the Yen led to a foreign exchange loss of R$2,180.2 million. In 2021, the 7.4% depreciation of the real against the dollar and the 3.9% appreciation of the real against the Yen led to a foreign exchange gain of R$48.5 million. In 2022, the 6.5% appreciation of the real against the dollar and the 18.4% appreciation of the real against the Yen led to a foreign exchange gain of R$492.3 million. However, since most of our debt denominated in foreign currencies is long-term debt with a long amortization schedule, a devaluation of the real would principally impact cash flows regarding the current portion of our long-term debt.
| 77 |
We manage our indebtedness portfolio closely to decrease the cost of servicing our indebtedness as a whole and our exposure to exchange rate fluctuations. We do not have any exposure to derivatives tied to foreign currencies. However, we have certain external financing contracts that contain clauses that allow the replacement of the foreign currency with our domestic currency.
The following table shows the fluctuation of the real against the U.S. dollar, the period-end exchange rates and the average exchange rates as of or for the years indicated:
| Year ended December 31, | |||||
| 2022 | 2021 | 2020 | |||
| (in reais, except percentages) | |||||
| Depreciation (appreciation) of the real versus U.S. dollar(1) | (6.50%) | 7.39% | 28.93% | ||
| Period-end exchange rate – US$1.00 | 5.2177 | 5.5805 | 5.1967 | ||
| Average exchange rate – US$1.00(2) | 5.1653 | 5.3956 | 5.1578 | ||
| (1) | Represents the comparison with period-end exchange rate. Source: Central Bank. | |
| (2) | Represents the average for period indicated. |
The following table shows the fluctuation of the real against the Yen, the period-end exchange rates and the average exchange rates as of or for the years indicated:
| Year ended December 31, | |||||
| 2022 | 2021 | 2020 | |||
| (in reais, except percentages) | |||||
| Depreciation (appreciation) of the real versus Yen(1) | (18.36%) | (3.89%) | 35.75% | ||
| Period-end exchange rate – ¥1.00 | 0.0396 | 0.0485 | 0.0504 | ||
| Average exchange rate – ¥1.0(2) | 0.0395 | 0.0491 | 0.0484 | ||
| (1) | Represents the comparison with period-end exchange rate. Source: Central Bank. | |
| (2) | Represents the average for period indicated. |
During the years ended December 31, 2022, 2021 and 2020 we did not enter into any forward exchange transactions.
For more information on exchange rates, see “Item 3.D. Risk Factors—Risks Relating to Brazil—Exchange rate instability and developments and the perception of risk in other countries, especially in the United States and in emerging market countries, may adversely affect us, our foreign currency denominated debt and the market price of our common shares or ADSs and our ability to service our foreign currency denominated obligations” and “Item 5.B. Liquidity and Capital Resources—Indebtedness Financing—Financial Covenants.”
Effects of Extreme Weather Events
The southeastern region of Brazil, particularly the southern region of the state of Minas Gerais, the PCJ River Basin (from which we extract the water used in the Cantareira System), and the northern area of the São Paulo metropolitan region, experienced below average rainfall from late 2012 throughout 2014 and most of 2015.
In order to balance supply and demand despite restricted water availability, we adopted a series of measures from February 2014 until April 2016. The heightened public awareness of the need to conserve water during the crisis resulted in our customers adopting lower water consumption practices during the water crisis and these practices have been partially integrated into our consumers’ daily habits. As a result, the total volume of water billed to our clients did not return to the volume of water billed in 2013, since the water crisis had a strong impact on the consumer profile, which did not return to its former state before the crisis. This change in consumption practice as a result of the 2014-2015 water crisis has had a continued effect on our results of operations since the 2014-2015 crisis.
| 78 |
The 2021-2022 water season which ended in September 2022 had a lower-than-average rainfall compared to the expected long-term average. The water inflows were also below average in the three main systems (Cantareira, Guarapiranga and Alto Tietê) that supply the São Paulo metropolitan region.
In February 2023, there were torrential rains on the northern coast of the State of São Paulo, especially in the municipality of São Sebastião, where we operate. Within 24 hours, 683mm of rain fell in the municipality of São Sebastião. It was the highest volume of rainfall recorded in Brazil within such a short period of time since records began. As a result, our water treatment plants in the region were damaged, and the water supply was interrupted for some days due to siltation, the inability to store water, and lack of electricity. If similar incidents occur in the future or become more frequent, these events may have a material adverse effect on our results of operations and financial condition.
For more information, see “Item 3.D. Risk Factors—Risks Relating to Environmental Matters and Physical and Transition Climate Risks— Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations” and “Item 4.B. Business Overview—The 2014-2015 Water Crisis.”
Critical Accounting Estimates and Judgments
We make estimates and judgments concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and judgments that have a significant risk of causing material adjustment to the carrying amount of our assets and liabilities within the next financial year are mentioned below.
Allowance for Doubtful Accounts
We establish an allowance for doubtful accounts in an amount that our management considers sufficient to cover expected losses, based on an analysis of trade receivables, in accordance with the accounting policy stated in Note 3.4 to our financial statements as of December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020. Bad debt expense, net of recoveries, is included in selling expenses, and was R$782.1 million, R$643.7 million and R$444.8 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The methodology for determining the allowance for doubtful accounts requires significant estimates, considering a number of factors, including historical collection experience, current economic trends, expected future losses, the aging of the trade receivables portfolio, recoveries of previously written off receivables and other factors. Actual results could differ from those estimates.
Intangible Assets Arising from Concession and Program Contracts
As of December 31, 2022, we had intangible assets of R$39,320.9 million and contract assets of R$8,614.0 million.
We recognize intangible assets arising from concession contracts under IFRIC 12. We estimate the fair value of construction and other work on the infrastructure to recognize the cost of the intangible asset, which is recognized when the infrastructure is built and provided that it will generate future economic benefits. The great majority of our contracts for service concession arrangements entered into with each grantor is under service concession agreements in which we have the right to receive, at the end of the contract, a payment equivalent to the asset balance of the concession intangible asset, which in this case, is amortized over the useful life of the underlying physical assets; thus, at the end of the contract, the remaining value of the intangible would be equal to the residual value of the related physical asset.
The fair value of construction and other work on the infrastructure is recognized as revenue, at its fair value, when the infrastructure is built, provided that this work is expected to generate future economic benefits. The accounting policy for the recognition of construction revenue is described in Note 3.3 “Operating Revenue” to our financial statements.
Intangible assets related to concession agreements and program contracts, when there is no right to receive the residual value of the assets at the end of the contract, are amortized on a straight-line basis over the period of the contract or the useful life of the underlying asset, whichever is shorter.
The recognition of fair value for the intangible assets arising on concession contracts is subject to assumptions and estimates, and the use of different assumptions could affect the carrying amounts of these assets. The amortization of intangible assets and estimated useful lives of the underlying assets also requires significant assumptions and estimates, which different assumptions and estimates, and changes in future circumstances, could affect amortization of intangible assets and remaining useful lives of the underlying assets and can have a significant impact on the results of operations.
| 79 |
Provisions and Contingent Liabilities
We are a party to a number of legal proceedings involving significant monetary claims. These legal proceedings include, among other types, disputes with customers and suppliers and tax, labor, civil, environmental and other proceedings. For a more detailed discussion of these legal proceedings, see Note 20 to our financial statements included in this annual report. We recognize provisions for legal proceedings in which our company has a present obligation as a result of past events (either due to an explicit agreement or duty, known as a legal obligation; or due to our past actions, known as a constructive obligation), it is probable that an outflow of resources embodying economic benefits will be necessary to settle the obligation and the amount of obligation can be estimated reliably. Therefore, we are required to make judgments regarding future events for which we often seek the advice of legal counsel. As a result of the significant judgment required in assessing and estimating these provisions, actual losses realized in future periods could differ significantly from our estimates and could exceed the amounts which we have provisioned.
As of December 31, 2022, we were party to judicial and administrative proceedings, relating to civil, environmental and tax matters, amounting to R$1,610.8 million (after deducting court escrow deposits in the amount of R$37.5 million) with respect to which we recognized provisions based on the criteria described above, as shown in Note 3.15 to our financial statements included in this annual report. As of the same date, the proceedings with respect to which we have contingent liabilities (i.e., no provisions have been recognized) totaled R$52,706.5 million, of which we believe R$43,568.0 million out of those have a remote probability of an outflow of resources embodying economic benefits exists.
Pension Benefits
The present value of the pension obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost (income) for pensions include a discount rate and a mortality table. Any changes in these assumptions will impact the carrying amount of pension obligations.
We determine the appropriate discount rates at the end of each year, which is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. The discount rate was increased from 5.26% in 2021 to 6.15% in 2022 under Plan G0 and was increased from 5.53% in 2021 to 6.19% in 2022 under Plan G1 in order to follow the volatility in the rates applicable to the Brazilian government NTN – B, long term notes, which term is similar to the duration of the pension benefits, as described in Notes 3.19 (a) and 22 to our financial statements included in this annual report.
Other key assumptions for pension obligations are based in part on current market conditions. Additional information on the pension plans under Plan G0 and G1 is disclosed in Note 22 to our financial statements included in this annual report.
Deferred income tax and social contribution
We recognize and settle taxes on income based on the results of operations verified according to the Brazilian Corporate Law, taking into consideration the provisions of the tax laws. We recognize deferred tax assets and liabilities based on the differences between the accounting balances and the tax bases of assets and liabilities.
We regularly review the recoverability of deferred tax assets and do not recognize deferred tax assets if it is probable that these assets will not be realized, based on historic taxable income, the projection of future taxable income and the estimated period to reverse temporary differences. This process requires the use of estimates and assumptions. The use of different estimates and assumptions could result in the non-recognition of a significant amount of deferred tax assets.
As of December 31, 2022 and 2021, we recognized R$189.3 million and R$283.7 million as deferred income tax liabilities, net of the deferred tax assets and liabilities, as disclosed in Note 19 to our financial statements included in this annual report.
Unbilled revenue
We recognize unbilled revenue which corresponds to services rendered for which readings have not been made yet. They are recognized based on monthly estimates calculated according to average billings. Additional information on revenue and accounts receivable are described in Notes 3.3 and 10 to our financial statements included in this annual report.
Certain Transactions with our Controlling Shareholder
Reimbursement Due from the State
Reimbursement due from the State for pensions paid represent supplementary pensions (Plan G0) that we pay, on behalf of the State, to former employees of state-owned companies which merged to form our company. These amounts must be reimbursed to us by the State, as primary obligor.
| 80 |
In November 2008, we entered into the third amendment to the agreement with the State relating to payments of pension benefits made by us on its behalf. The State acknowledged that it owed us an outstanding balance of R$915.3 million as of September 30, 2008, relating to payments of pension benefits made by us on its behalf. We provisionally accepted, but it is not recognized in our books, the reservoirs in the Alto Tietê System as partial payment in the amount of R$696.3 million, subject to the transfer of the property rights of these reservoirs to us. See Note 11 to our financial statements included in this annual report and “Item 7. Major Shareholders and Related Party Transactions.”
On March 18, 2015, we, the State and DAEE, with the intervention of the Department of Sanitation and Water Resources, executed an agreement in the amount of R$1,012.3 million, consisting of R$696.3 million in principal amount and R$316.0 million in monetary adjustment of the principal through February 2015. For detailed information on this agreement, see “Item 7.B. Related Party Transactions—Agreements with the State” and Note 11(a)(iv) to our financial statements included in this annual report.
As of December 31, 2022 and 2021, the amounts not recognized related to pension benefits paid by us on behalf of the State totaled R$1,482.1 million and R$1,375.1 million respectively. As a result, we also recognized the obligation related to pension benefits, maintained with the beneficiaries and pensioners of Plan G0. As of December 31, 2022 and 2021, the pension benefit obligations of Plan G0 totaled R$2,002.1 million and R$2,192.1 million, respectively. For detailed information on the pension benefit obligations refer to Note 22 to our financial statements included in this annual report.
Accounts Receivable from the State for Water and Sewage Services Rendered
Certain of these accounts receivable have been overdue for a long period. We have entered into agreements with the State with respect to these accounts receivable. For more information on these agreements, see Note 10 to our financial statements included in this annual report and “Item 7. Major Shareholders and Related Party Transactions.”
Use of Guarapiranga and Billings reservoirs
We withdraw water for use in the São Paulo metropolitan region from the Guarapiranga and Billings reservoirs. EMAE, a company that is also controlled by the State of São Paulo, has a concession to produce hydroelectric energy using water from the same reservoirs. EMAE commenced various lawsuits against us in the past seeking compensation for the water we withdraw from these reservoirs. Those lawsuits have now been settled, by way of an agreement between EMAE and our company.
The settlement agreement requires us to make certain installment payments to EMAE in settlement of the claim for compensation for our capture and use of the water, as well as apportionment of the maintenance, operation and monitoring costs for the reservoirs. For more information, see “Item 7. Major Shareholders and Related Party Transactions” and See Note 11(b) to our financial statements included in this annual report.
Results of Operations
The following table sets forth, for the years indicated, certain items from our income statements of operations, each expressed as a percentage of net operating revenue:
| Year ended December 31, | ||||||||
| 2022 | 2021 | 2020 | ||||||
| (in millions of reais, except percentages) | ||||||||
| Net operating revenue | 22,055.7 | 100.0% | 19,491.1 | 100.0% | 17,797.5 | 100.0% | ||
| Operating costs | (14,350.9) | (65.1)% | (12,800.1) | (65.7)% | (11,179.6) | (62.8)% | ||
| Gross profit | 7,704.8 | 34.9% | 6,691.0 | 34.3% | 6,617.9 | 37.2% | ||
| Selling expenses | (912.0) | (4.1)% | (825.8) | (4.2)% | (751.3) | (4.2)% | ||
| Allowance for doubtful accounts | (782.1) | (3.5)% | (643.7) | (3.3)% | (448.8) | (2.5)% | ||
| Administrative expenses | (1,398.5) | (6.3)% | (1,124.1) | (5.8)% | (1,051.2) | (5.9)% | ||
| Other operating income (expenses), net and equity results of investments in affiliates | 33.0 | 0.1% | 0.2 | 0.0% | 121.8 | 0.7% | ||
| Profit from operations before finance income (expenses) and income tax and social contribution | 4,645.2 | 21.1% | 4,097.6 | 21.0% | 4,492.4 | 25.2% | ||
| Financial result, net | (372.4) | (1.7)% | (927.4) | (4.8)% | (3,166.4) | (17.8)% | ||
| Profit before income tax and social contribution | 4,272.8 | 19.4% | 3,170.2 | 16.3% | 1,326.0 | 7.5% | ||
| Income tax and social contribution | (1,151.5) | (5.2)% | (864.3) | (4.4)% | (352.7) | (2.0)% | ||
| Profit for the year | 3,121.3 | 14.2% | 2,305.9 | 11.8% | 973.3 | 5.5% | ||
| 81 |
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Net operating revenue
Net operating revenue for the year ended December 31, 2022 increased by R$2,564.6 million, or 13.2%, to R$22,055.7 million from R$19,491.1 million for the same period in 2021.
Net operating revenue, excluding construction revenue, for the year ended December 31, 2022 increased by R$2,077.6 million, or 13.7%, to R$17,191.9 million from R$15,114.3 million for the same period in 2021. Construction revenue was R$4,863.8 million for the year ended December 31, 2022 and R$4,376.7 million for the same period in 2021. The main factors that led to the increase were:
| · | an average tariff adjustment of 12.8% since May 2022; | |
| · | an increase of 0.9% in the total billed volume; and | |
| · | an increase in the average tariff due to an increase in the billed volume in the non-residential categories. |
Operating costs
Our operating costs for the year ended December 31, 2022 increased by R$1,550.8 million, or 12.1%, to R$14,350.9 million from a loss of R$12,800.1 million for the same period in 2021. As a percentage of net operating revenue, cost of services decreased to 65.1% in for the year ended December 31, 2022 from 65.7% for the same period in 2021.
The increase in operating cost was mainly due to:
| · | an increase of R$476.0 million in construction costs, associated with increased investments; | |
| · | an increase of R$252.6 million in costs with salaries, payroll charges and benefits and pension plan obligations, due to: (i) an average salary adjustment of 12.9% in May 2022 and the application of an additional 1% salary increase referring to the Career and Salary Plan in February 2022; and (ii) an increase in overtime payments, in the amount of R$24.5 million; | |
| · | an increase of R$234.5 million in treatment supplies, due to: (i) the increase in product prices, some of which were impacted by increased prices in the international market due to increasing inflation, such as aluminum sulfate, ferric chloride and aluminum polychloride; and (ii) a higher application of algaecides, coagulants and disinfectants in several water treatment plants to maintain raw water quality; and | |
| · | an increase of R$207.2 million in service costs, mainly with (i) R$42.3 million in system maintenance; (ii) R$40.7 million with surveillance; (iii) R$27.9 million with technical services; (iv) R$21.6 million with effluent transportation; and (v) R$12.9 million in maintenance of furniture and installations. |
Gross Profit
As a result of the factors discussed above, gross profit for the year ended December 31, 2022 increased by R$1,013.8 million, or 15.2%, to R$7,704.8 million from R$6,691.0 million for the same period in 2021. As a percentage of net operating revenue, our gross profit margin increased to 34.9% for the year ended December 31, 2022 from 34.3% for the same period in 2021.
Selling Expenses
Selling expenses for the year ended December 31, 2022 increased by R$86.2 million, or 10.4%, to R$912.0 million from R$825.8 million for the same period in 2021. As a percentage of net operating revenue, selling expenses were 4.1% in 2022 compared to 4.2% in 2021. The main reasons for the increase in selling expenses were:
| · |
Increase of R$74.9 million in services, mainly due to higher expenses with customer service, in the amount of R$65.8 million; and
| |
| · | Higher expenses with salaries, payroll charges and benefits and pension plan obligations, of R$40.6 million, mostly due to the average salary adjustment of 12.9% in May 2022 and the application of an additional 1% salary increase referring to the Career and Salary Plan in February 2022. |
| 82 |
Allowance for Doubtful Accounts
Our allowance for doubtful accounts for the year ended December 31, 2022 increased by R$138.4 million, or 21.5%, to R$782.1 million from R$643.7 million for the same period in 2021, mainly due to higher provisioning arising from the increase in delinquencies in 2022.
Administrative Expenses
Administrative expenses for the year ended December 31, 2022 increased by R$274.4 million, or 24.4%, to R$1,398.5 million from R$1,124.1 million for the same period in 2021, mainly due to:
| · |
an increase of R$191.1 million in general expenses, mainly due to higher expenses with lawsuits, in the amount of R$162.6 million;
| |
| · |
an increase in expenses with salaries, payroll charges and benefits and pension plan obligations, of R$46.5 million, mostly due to the average salary adjustment of 12.9% in May 2022 and the application of an additional 1% salary increase referring to the Career and Salary Plan in February 2022; and
| |
| · |
an increase of R$20.6 million in depreciation and amortization, as a result of the increase in property, plant and equipment and intangible assets.
|
Other Operating Income (Expenses), Net and Equity in Results of Investments in Affiliates
Other operating income and expenses, net, was R$33.0 million for the year ended December 31, 2022 compared with R$0.2 million for the same period in 2021, an increase of R$32.8 million.
Other operating income consists of gains and losses from sales of property, plant and equipment, sale of contracts awarded in public bids, right to sell electricity, indemnities and reimbursement of expenses, fines and collaterals, property leases, reuse of water, PURA projects and services, net of COFINS and PASEP.
Other operating expenses consist mainly of derecognition of concessions assets due to obsolescence, discontinued construction works, unproductive wells, projects considered economically unfeasible, losses on property, plant and equipment and recognition and reversal of estimated losses with asset indemnification.
Financial Result, Net
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.
The financial result, net, for the year ended December, 31 2022 increased by R$555.0 million to an expense of R$372.4 million from an expense of R$927.4 million for the same period in 2021. As a percentage of net operating revenues, the financial result, amounted to 1.7% for the year ended December, 31 2022 compared to 4.8% for the same period in 2021. This variation was due to:
| · |
an increase of R$437.5 million in interest and charges on borrowings and financing in local currency, mainly due to: (i) an increase in interest payments on debentures, in the amount of R$286.0 million, due to the 29th and 30th debentures issued in 2022 which added R$148.6 million in financial expenses; and (ii) an increase in the average interbank deposit rate (taxa depósito interbancários) (from 5.06% in 2021 to 12.45% in 2022) impacting interest expenses on funding in local currency;
| |
| · |
an increase of R$31.7 million in other financial expenses, mainly due to: (i) an increase of R$49.8 million related to contracts for the cleanup of the Pinheiros River as several contracts are performance contracts where the payment flow commences mainly after the completion of the works and the update of accounts payable is recorded as a financial expense from the moment the project starts operating, which occurred under several contracts in 2022; and (ii) a decrease of R$17.4 million in interest on lawsuits;
| |
| · |
an increase of R$276.5 million in financial revenues, mainly on financial investments in 2022, as a result of the increase in the average interbank deposit rate (taxa depósito interbancários);
|
| 83 |
| · |
positive variation of R$443.5 million from foreign exchange variations on borrowings and financing, as a result of the appreciation of the real against the dollar and the yen in 2022 (6.5% and 18.4%, respectively), compared to the depreciation of the real against the dollar and the appreciation of the real against the yen in 2021 (-7.4% and 3.9%, respectively);
| |
| · |
an increase of R$74.0 million in other monetary variations in 2022 compared to 2021, mainly for lawsuits, in the amount of R$62.7 million; and
| |
| · |
an increase of R$342.9 million in monetary and exchange variations on assets, largely due to higher recognition, in R$314.4 million in 2022, referring to an inflation adjustment on our agreement from 2015 with the São Paulo state government (GESP 15), mainly due to a court decision preventing the transfer of reservoirs from the Alto Tietê Production System.
|
This increase was partially offset by a decrease of R$35.6 million from monetary variations on borrowings and financing due to the decrease in the rate of inflation as measured by the IPCA index (from 10.06% in 2021 to 5.78% in 2022).
Profit before income tax and social contribution
As a result of the factors discussed above, profit before income tax and social contribution for the year ended December 31, 2022 increased by R$1,102.6 million, to R$4,272.8 million from R$3,170.2 million for the same period in 2021. As a percentage of net operating revenue, our profit before income tax and social contribution increased to 19.4% for the year ended December 31, 2022 compared to 16.3% for the same period in 2021.
Income Tax and Social Contribution
Income tax and social contribution expense for the year ended December 31, 2022 increased by R$287.2 million, or 33.2%, to R$1,151.5 million from R$864.3 million for the same period in 2021. This increase was mainly due to:
| · |
an increase in net operating revenue, in the amount of R$2,564.6 million, offset by the increase in operating costs and administrative/selling expenses, in the amount of R$2,049.8 million;
| |
| · |
foreign exchange variation gains of R$443.5 million; and
| |
| · |
a higher inflation adjustment on the 2015 GESP Agreement, in the amount of R$314.4 million.
|
Profit for the year
As a result of the factors discussed above, our profit for the year ended December 31, 2022 increased by R$815.4 million, to R$3,121.3 million from R$2,305.9 million for the same period in 2021. As a percentage of net operating revenue, our profit for the year ended December 31, 2022 increased to 14.2% from 11.8% for the same period in 2021.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
For a discussion of our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, see “Item 5. Operating and Financial Review and Prospects — A. Results of Operations — Year Ended December 31, 2021 Compared to Year Ended December 31, 2020” of our annual report on Form 20-F for the year ended December 31, 2021, filed with the SEC on April 28, 2022.
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 capital markets. As of December 31, 2022, we had R$1,867.5 million in cash and cash equivalents. The outstanding current indebtedness was R$2,246.0 million as of December 31, 2022, of which R$312.6 million was denominated in foreign currency. Long-term indebtedness was R$16,712.7 million as of December 31, 2022, of which R$2,463.2 million consisted of foreign currency-denominated obligations.
| 84 |
Our management expects that with the decrease in defaults as a result of us having entered into contract with the municipalities of Guarulhos, Santo André and Mauá, improved water security due to the works carried out, and the generation of operating cash and availability of credit lines for investments, we will have sufficient funds to meet our commitments and not compromise our planned investments.
In the second quarter of 2020 and partially in 2021, the São Paulo state government decreed a quarantine throughout the State, restricting business activities in order to avoid the accelerated spread of COVID-19. We experienced a direct impact on revenues as a consequence of the change in the consumption mix, due to the increase in volumes in the residential category and a reduction in the public, commercial and industrial categories which have higher tariffs, leading to a reduction in the total average tariff, in addition to increases in delinquencies, which continued through 2021. Accordingly, these changes in consumption patterns impacted the total volume of water billed and the average tariff, which had an impact on our revenues and results of operations.
Although restrictions imposed to contain the spread of COVID-19 were lifted in 2022, various companies continue to adopt partial remote working regimes. This affected the volume of sales in the commercial, industrial and public categories which would have been higher had it not been for the partial remote working policies adopted by these companies. In addition, the adverse macroeconomic impact of the COVID-19 pandemic in Brazil had a detrimental impact on many parts of Brazilian society and led to increased delinquencies which negatively impacted our results of operations. Our allowance for doubtful accounts increased by 21.5% for the year ended December 31, 2022 compared to the same period in 2021, and 43.4% for the year ended December 31, 2021, compared to the same period in 2020.
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$3,967.6 million, R$3,913.8 million and R$4,978.2 million for the years ended December 31, 2022, 2021 and 2020, 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 a slight increase in net cash generated in 2022 of 1.4%.
Net Cash Used in Investing Activities
Net cash used in investing activities was R$2,878.3 million, R$2,663.2 million and R$6,768.7 million for the years ended December 31, 2022, 2021 and 2020, 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.
Net Cash Generated by (Used in) Financing Activities
Our net cash generated by financing activities was R$60.3 million for the year ended December 31, 2022, compared to our net cash used in financing activities was R$929.0 million and R$66.4 million for the same periods in 2021 and 2020, respectively. 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.
Indebtedness Financing
Transition from LIBOR to SOFR
The London Interbank Offered Rate (“LIBOR”), the financial reference rate for loan agreements with Multilateral Development Banks (such as IDB and IBRD) ceased to exist as of December 2021 and was replaced by Secured Overnight Finance Rate (“SOFR”). According to the development banks, the changes allow the risk of inconsistencies in financings to be minimized. As a result of this change, in 2021, we amended our loan agreements with IDB and IBRD which now use SOFR as the reference rate.
| 85 |
Indebtedness financing
Our total financial indebtedness increased by 7.0%, from R$17,723.8 million as of December 31, 2021 to R$18,958.7 million as of December 31, 2022. In addition, during the same period, our total indebtedness denominated in foreign currency decreased by 15.8%, from R$3,296.1 million as of December 31, 2021 to R$2,775.8 million as of December 31, 2022.
As of December 31, 2022, we had R$16,712.7 million in long-term indebtedness outstanding (excluding the current indebtedness), of which R$2,463.2 million consisted of foreign currency-denominated long-term debt. We had an outstanding current indebtedness of R$2,246.0 million as of December 31, 2022. As of December 31, 2022, R$312.6 million of this current portion of long-term indebtedness was denominated in foreign currency. As of December 31, 2022, our S&P domestic rating was brAAA and our S&P global rating was BB-. Our Moody’s national rating was AAA.br as of December 31, 2022, while our Fitch national rating was AAA(bra) and our Fitch global ratings were BB (foreign currency) and BB+ (local currency), as of the same date.
Various contractual agreements we have entered into, including certain financing agreements with Caixa Econômica Federal and BNDES, provide for liens over a portion of our cash flows from the payment of water and sewage provision tariffs. In addition, we provide as guarantees a portion of our cash flow generation to transactions related to PPPs.
Pursuant to these agreements, cash received from operations is required to pass through designated accounts. In the event of a default under the relevant agreement, such cash and future cash flows that are required to be deposited in such accounts become restricted and are subject to security interests in favor of the relevant creditor. As of December 31, 2022, a substantial portion of our monthly cash flows from operations was subject to these liens. As of that date, the total amount of our secured debt, including indebtedness benefiting from these liens, was R$2,735.6 million (R$2,718.3 million of principal and R$17.3 million related to interest and charges). For more information, see “—Indebtedness Financing—Financial Covenants—Local currency denominated indebtedness” and Note 17 to our financial statements included in this annual report. The following table sets forth information on our indebtedness outstanding as of December 31, 2022:
| December 31, 2022 | |||||
| Current | Noncurrent | Total | Final Maturity | Interest Rates(1) | |
| (in thousands of R$) | |||||
| Denominated in local currency: | |||||
| 12th issue of debentures | 45,450 | 67,681 | 113,131 | 2025 | TR + 9.5% |
| 17th issue of debentures | 144,632 | - | 144,632 | 2023 | CDI + 0.75% (1st series) & IPCA + 4.5% (2nd series) & IPCA + 4.75% (3rd series) |
| 18th issue of debentures | 49,937 | 45,649 | 95,586 | 2024 | TJLP + 1.92% (1st and 3rd series) & IPCA + 8.25% (2nd series) |
| 22nd issue of debentures | 199,901 | 326,433 | 526,334 | 2025 | CDI + 0.58% (1st series) & CDI + 0.90% (2nd series) & PCA + 6.00% (3rd series) |
| 23rd issue of debentures | - | 864,910 | 864,910 | 2027 | CDI + 0.49% (1st series) & CDI + 0.63% (2nd series) |
| 24th issue of debentures | - | 488,478 | 488,478 | 2029 | IPCA + 3.20% (1st series) & IPCA + 3.37% (2nd series) |
| 26th issue of debentures | - | 1,239,645 | 1,239,645 | 2030 | IPCA + 4.65% (1st series) & IPCA + 4.95% (2nd series) |
| 27th issue of debentures | 299,614 | 698,339 | 997,953 | 2027 | CDI + 1.60% (1st series) & CDI + 1.80% (2nd series) & CDI + 2.25% (3rd series) |
| 28th issue of debentures | - | 1,197,756 | 1,197,756 | 2028 | CDI + 1.20% (1st series) & CDI + 1.44% (2nd series) & CDI + 1.60% (3rd series) |
| 29th issue of debentures | - | 1,275,295 | 1,275,295 | 2036 | CDI + 1.29% (1st series) & IPCA + 5.3058% (2nd series) & IPCA + 5.4478% (3rd series) |
| 30th issue of debentures | - | 998,110 | 998,110 | 2029 | CDI + 1.30% (1st series) & CDI + 1.58% (2nd series) |
| Caixa Econômica Federal | 99,767 | 1,422,145 | 1,521,912 | 2023/2042 | TR + 5% to 9.5% |
| National Bank for Economic and Social Development (BNDES) PAC | 6,736 | - | 6,736 | 2023 | 1.82% + TJLP |
| National Bank for Economic and Social Development (BNDES) PAC II 9751 | 7,214 | 23,344 | 30,558 | 2027 | 1.72% + TJLP |
| National Bank for Economic and Social Development (BNDES) PAC II 9752 | 4,887 | 15,884 | 20,771 | 2027 | 1.72% + TJLP |
| National Bank for Economic and Social Development (BNDES) Onda Limpa | 26,949 | 33,617 | 60,566 | 2025 | 1.92% + TJLP |
| 86 |
| National Bank for Economic and Social Development (BNDES) Tietê III | 154,437 | 656,264 | 810,701 | 2028 | 1.66% + TJLP |
| National Bank for Economic and Social Development (BNDES) 2015 | 33,807 | 390,127 | 423,934 | 2035 | 2.18% + TJLP |
| National Bank for Economic and Social Development (BNDES) 2014 | 6,572 | 16,525 | 23,097 | 2026 | 1.76% + TJLP |
| Inter-American Development Bank (IDB) 2202 | 181,349 | 2,164,009 | 2,345,358 | 2035 | CDI + 0.86% |
| Inter-American Development Bank (IDB) INVEST | 37,340 | 853,725 | 891,065 | 2034 | CDI + 1.90% & CDI + 2,70% |
| Inter-American Development Bank (IDB) INVEST 2022 | 14,100 | 452,085 | 466,185 | 2036 | CDI + 2.50% |
| International Finance Corporation – IFC | 80,000 | 670,996 | 750,996 | 2032 | CDI + 2.00% |
| Leases (Concession Agreements, Program Contracts and Contract Assets) | 44,453 | 313,391 | 357,844 | 2035 | 7.73% to 10.12% + IPC |
| Leases (Others) | 72,109 | 29,265 | 101,374 | 2027 | 5.20% to 15.39% |
| Other | 6,241 | 5,867 | 12,108 | 2025 | TJLP + 1.5% (FINEP) & 3.0% (FEHIDRO) |
| Interest and others charges | 417,878 | - | 417,878 | ||
| Total denominated in local currency | 1,933,373 | 14,249,540 | 16,182,913 | ||
| Denominated in foreign currency: | |||||
|
Inter-American Development Bank (IDB) US$105,133,000 (2021 - US$71,441,00) |
53,628 | 474,697 | 528,325 | 2025 to 2044 | LIBOR + 1.12% to 3.31% |
|
International Bank for Reconstruction and Development (IBRD) US$78,197,000 (2021 – US$76,712,000) |
31,722 | 365,648 | 397,370 | 2034 | LIBOR + 2.85% |
|
JICA 15 - ¥ 8,067,010,000 (2021 - ¥ 9,219,440,000) |
45,602 | 273,610 | 319,212 | 2029 | 1.8% & 2.5% |
|
JICA 18 - ¥ 7,253,120,000 (2021 - ¥ 8,289,280,000) |
41,001 | 245,865 | 286,866 | 2029 | 1.8% & 2.5% |
|
JICA 17 - ¥ 3,753,048,000 (2021 - ¥ 3,706,564,000) |
11,424 | 136,227 | 147,651 | 2035 | 1.2% & 0.01% |
|
JICA 19 - ¥ 26,296,011,000 (2021 - ¥ 28,109,529,000) |
71,761 | 967,124 | 1,038,885 | 2037 | 1.7% & 0.01% |
|
IDB 1983AB – US$ 7,692,000 (2021 – US$ 15,385,000) |
39,962 | - | 39,962 | 2023 | LIBOR + 2.08% to 2.38% |
| Interest and other charges | 17,487 | - | 17,487 | ||
| Total denominated in foreign currency | 312,587 | 2,463,171 | 2,775,758 | ||
| Total loans and financing | 2,245,960 | 16,712,711 | 18,958,671 |
| (1) | TR was 0.2072% per month as of December 31, 2022; CDI stands for Interbank Deposit Rate (Certificado de Depósitos Interbancários – “CDI”), which was 13.65% per annum as of December 31, 2022; IGP-M was 5.45% per annum as of December 31, 2022; “TJLP” stands for Long-term Interest Rate (Taxa de Juros a Longo Prazo), published quarterly by the Central Bank, which was 7.2% per annum as of December 31, 2022; and USD LIBOR was 3.40% medium rate of 12 months in 2022. |
The following table shows the maturity profile of our debt, as of December 31, 2022, for the period indicated:
| 2023 | 2024 | 2025 | 2026 | 2027 | After 2028 | Total | |||||||
| (in millions of reais) | |||||||||||||
| Loans and financing | 2,246.0 | 2,041.3 | 2,189.6 | 2,061.1 | 2,675.7 | 7,745.0 | 18,958.7 |
As of December 31, 2022, R$965.7 million of our foreign currency denominated indebtedness, net of transaction costs, was denominated in U.S. dollars and R$1,792.6 million was denominated in Japanese Yen. This indebtedness consisted principally of:
| · | R$528.3 million (US$105.1 million) in U.S. dollar-denominated loans contracted with the Inter-American Development Bank, or the IDB, which were entered into in 2000, amounting to US$200 million. |
| 87 |
| (i) | to finance the second phase of the Tietê Project, under which payments of principal are made in semiannual installments with final maturity in July 2025. The principal amount accrues interest at USD LIBOR plus a variable spread paid semiannually; | ||
| (ii) | a loan to finance the fourth phase of the Tietê Project, entered into in November 2019, amounting to US$300.0 million, under which payments of principal are made in semi-annual installments with final maturity in May 2044. The principal amount accrues interest at USD LIBOR plus a variable spread paid semi-annually. This contract allows for the replacement of the currency, index and interests; | ||
| · | R$397.4 million (US$78.2 million) in U.S. dollar denominated loans contracted with the IBRD which was entered into on October 28, 2009, amounting to US$100.0 million, for the financing of the Water Source Program (Programa Mananciais), a program ended in 2017, which consisted of various projects that focused on the preservation and improvement of water sources in the metropolitan region of São Paulo. The loan matures in March 2034. Repayments of principal will be made in semi-annual installments starting in September 2019 after a grace period of ten years. The principal amount accrues interest at USD LIBOR plus a variable spread, paid semi-annually. This contract allows for the replacement of the currency, index and interests; | ||
| · | R$40.0 million (US$7.7 million) in U.S. dollar denominated loans from the AB Loan financing contracted with the IDB in May 2008. Under this loan, payments of principal are made in annual installments with final maturity in May 2023. The principal amount accrues interest at USD LIBOR plus a rate varying from 2.08% to 2.38%, paid semi-annually. The proceeds were used to repay an outstanding series of debt securities in connection with the implementation of our investment plan; and | ||
| · | R$1,792.6 million (¥45,369.2 million) in Japanese Yen denominated loans contracted with the JICA, composed of the following: (i) ¥11.524.3 million denominated loans contracted in August 2004 for the financing of the environmental recovery program for the Baixada Santista metropolitan region, called the Clean Wave Program (Programa Onda Limpa). Under these loans, the payments of principal are made in semi-annual installments with final maturity in August 2029. The principal amount accrues interest at a rate that varies from 1.8% to 2.5% per year, paid semi-annually; (ii) ¥2.830.4 million in denominated loans contracted in October 2010 for the financing of the environmental improvement program in the basin of the Billings dam. The loan matures in October 2035, with repayments of principal made in semi-annual installments. The principal amount accrues interest at a rate that varies from 0.01% to 1.2% per year, paid semi-annually; (iii) ¥10.361.6 million denominated loans contracted in February 2011 to complement the financing for the first stage of the Clean Wave Program (Programa Onda Limpa), with commercial conditions similar to the loan entered into in August 2004. These funds were used for the provision of works and services in the Baixada Santista metropolitan region. The credit agreement expires in 18 years with final maturity in August 2029. The principal amount accrues interest at a rate that varies from 1.8% to 2.5% per year, paid semi-annually; and (iv) ¥31,736.6 million denominated loan in February 2012 for the financing of the Program for Water Loss Reduction (Programa de Redução de Perdas de Água). The loan matures in February 2037. Repayments of principal will be made in semi-annual installments starting in February 2019 after a grace period of seven years. The principal amount accrues interest at a rate that varies from 0.01% to 1.7% per year, paid semi-annually. | ||
Our borrowings from multilateral institutions and with government agencies, such as the IDB, IBRD and JICA are guaranteed by the federal government, and have a counter-guarantee from the State of São Paulo. For more information on the terms of these loan agreements, see “Item 7.B. Related Party Transactions—Government Guarantees of Financing.”
Our outstanding domestic debt was R$16,182.9 million as of December 31, 2022 and consisted primarily of real-denominated loans from federal and state-owned banks, in particular, Caixa Econômica Federal and BNDES, as well as debentures issued in June 2010, February 2011, October 2013, February 2018, May 2019, July 2019, July 2020, December 2020, July 2021, December 2021 and March 2022 and financial leasing.
The following summarizes our principal real-denominated borrowings:
| · | from 2003 to 2019, we entered into several financing agreements with Caixa Econômica Federal, pursuant to which repayments of principal are paid in up to in 60, 180 or 240 months in monthly installments commencing 30 days following the applicable grace period, which varies from 10 to 48 months from the date of signature of the line of credit agreement. The final maturity is 2042. The principal amount accrues interest from 5.0% to 8.0%. The financing agreements are collateralized (i) by the pledge of collections of monthly billings of water supply and sewage services up to three monthly installments until reaching the total amount of the debt, or (ii) by a monthly plan of billings corresponding to the minimum of three times the monthly charge, depending on the terms of the relevant financing agreement. As of December 31, 2022, the outstanding debt was R$1,521.9 million; |
| 88 |
| · | in May 2008, we entered into a R$174.0 million financing agreement with BNDES. Repayments of the principal amount are being made in 150 successive monthly installments, with final maturity in 2025. The principal amount accrues interest at the TJLP, but limited to 6.0% per year, plus 2.15% per year. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. The financing agreement is collateralized by part of the billings from the provision of water and sewage services. As of December 31, 2022, the outstanding debt was R$6.7 million; | |
| · | in March 2010, we entered into a R$294.3 million financing agreement with BNDES. Repayments of the principal amount are being made in 156 successive monthly installments, with final maturity in 2025. The principal amount accrues interest at the TJLP, but limited to 6.0% per year, plus 1.92% per year. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. The financing agreement is collateralized by part of the billings from the provision of water and sewage services. As of December 31, 2022, the outstanding debt was R$60.5 million; | |
| · | in September 2010, we entered into a US$600 million financing agreement with IDB to finance the third phase of Tietê Project. In May 2020, the debit balance of this loan was converted into reais, with semi-annual payments and maturity in September 2035. The main amount accrues interest using the real CDI plus a fixed rate of 0.06% and a variable margin in effect for loans from the bank’s ordinary capital, paid semi-annually. As of December 31, 2022, the outstanding debt was R$2,345.4 million. | |
| · | in 2011, we entered into financial leases in the total amount of R$49.6 million with certain contractors for the construction of infrastructure on land we own. During the construction phase, we recognized a contract asset (as of December 31, 2018, with the adoption of IFRS 15 - Revenue from contract with customer, since 1 January 2018, assets related to concessions under construction, registered under the scope of IFRIC 12 - Concession Contracts, are classified as Contract Assets during the construction period and are transferred to Intangible Assets only after completion of the works. For more information, see Notes 3.3 (b) and 14 to our 2022 financial statements included in this annual report) and the related liability of the lease at fair value. Upon the conclusion of the construction, we began paying the rental of the infrastructure (in 240 installments) and the lease was updated accordingly to the contract. On August 31, 2013, SES Campo Limpo Paulista and Várzea Paulista started operations, and the corresponding amount as of December 31, 2014 was of R$138,602 million. As of December 31, 2022, the outstanding debt was R$357.8 million; | |
| · | in March 2012, we entered into a R$180.8 million financing agreement with BNDES. Amortization of the principal amount is being made in up to 156 successive monthly installments, with the final maturity in 2027. The principal amount accrues interest at the TJLP but it is limited to 6.0% per year plus a yearly 1.72%. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. This financing agreement is collateralized with a portion of the revenues from the provision of water and sewage services. As of December 31, 2022, the outstanding debt was R$51.4 million; | |
| · | in February 2013, we entered into a R$1.3 billion financing agreement with BNDES. Amortization of the principal amount is being made in up to 144 successive monthly installments with the final maturity in 2028. The principal amount accrues interest at the TJLP but is limited to 6.0% per year plus a yearly 1.66%. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. This financing agreement is collateralized with a portion of the revenues from the provision of water and sewage services. As of December 31, 2022, the outstanding debt was R$810.7 million; | |
| · | in June 2014, we entered into a R$61.1 million financing agreement with BNDES. In September 2021 the contract was amended and its value changed to R$38.6 million. Amortization of the principal amount is being made in up to 108 successive monthly installments after the grace period of 36 months, with the final maturity in 2026. The principal amount accrues interest at the TJLP but is limited to 6.0% per year plus a yearly 1.76%. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. This financing agreement is collateralized with a portion of the revenues from the provision of water and sewage services. As of December 31, 2022, the outstanding debt was R$23.1 million; | |
| · | in June 2015, we entered into a R$747.4 million financing agreement with BNDES. Amortization of the principal amount is being made in up to 204 successive monthly installments after the grace period of 36 months, with the final maturity in 2035. The principal amount accrues interest at the TJLP but is limited to 6.0% per year plus a yearly 2.18%. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. This financing agreement is collateralized with a portion of the revenues from the provision of water and sewage services. As of December 31, 2022, the outstanding debt was R$423.9 million; | |
| · | in October 2015, we entered into a R$48.3 million financing agreement with Funding Authority for Studies and Projects (Financiadora de Estudos e Projetos – “FINEP”). Repayments of the principal amount shall be paid in up in 91 successive monthly installments after the grace period of 30 months, with the final maturity in 2025. The principal amount accrues interest at the TJLP, but it limited to 6.0% per year plus a yearly 1.5%. If TJLP exceeds 6% per year, such excess will be added to the principal amount. This financing agreement is collateralized with a portion of the revenues from the provision of water and sewage services. As of December 31, 2022, the outstanding debt was R$12.1 million; |
| 89 |
| • | in November 2020, we entered into a loan with Inter-American Investment Corporation (“IDB Invest”), an agent of the IDB, as creditor, the principal amount of which is R$950 million, divided into two tranches which will expire in August 2034 and 2029, respectively. The first tranche named “Long Term” (in the total principal amount R$508 million) bears interest at the CDI rate plus 2.70% per year, with principal payments and semi-annual interest payments. The second tranche named “Medium Term” (in the total principal amount of R$442 million) bears interest at CDI plus 1.90% per year, with principal and semi-annual interest payments. The resources of the Long Term tranche are used to finance our investment plan between 2020 and 2026, whereas the Medium Term tranche is used to refinance debts. As of December 31, 2022, the outstanding debt was R$891.1 million; | |
| • | in June 2022, we entered into a loan with IDB Invest, an agent of IDB, as creditor, in the amount of R$470 million, intended for the expansion of the sewage collection and treatment system under the Tietê River Depollution Project – Stage IV. The loan bears interest at 100% of the CDI rate plus a spread of 2.50% per annum, with half-yearly interest and amortization payments and a total term of up to 14 years and six months, with a grace period of up to twelve months. As of December 31, 2022, the outstanding debt was R$466.2 million; and | |
| • | in June 2022, we entered into a loan with IFC, as creditor, in the amount of R$760 million, intended for the execution of the Novo Rio Pinheiros Program, the improvement of sanitation services in the coastal regions of the State of São Paulo and the improvement of water supply in municipalities located on the coast of the State of São Paulo and in the Metropolitan Region of São Paulo. The loan bears interest of 100% of the CDI rate plus a spread of 2.00% per annum, with half-yearly interest and amortization payments and a total term of up to 10 years and six months, with a grace period of up to twelve months. As of December 31, 2022, the outstanding debt was R$751.0 million. |
Additionally, we have the following outstanding debt from debentures issuances:
In June 2010, we issued our twelfth issuance of debentures in the aggregate principal amount of R$500 million, to the FGTS, based on the FGTS’s program to finance companies in the sanitation, transport and real estate businesses. The debentures will mature in June 2025 and bear monthly interest based on the TR plus 9.5% per year. The proceeds of this issuance were used to fund a portion of our capital expenditure program for the supply of water and sewage system. As of December 31, 2022, the outstanding debt of the twelfth issuance of debentures was R$113.1 million.
In January 2013, we issued our seventeenth issuance of debentures in three series in the aggregate principal amount of R$1.0 billion, the first for R$424.7 million with maturity date of January 2018 and with an interest rate of 0.75% per year plus the CDI rate, the second for R$395.2 million with a maturity of January 2020 and with the interest rate of 4.50% per year plus IPCA variation and the third for R$180.1 million with a maturity date of January 2023 and with an interest rate of 4.75% per year plus IPCA variation. The proceeds of this issuance were used to pay our financial commitments in 2013. As of December 31, 2022, the outstanding debt of the seventeenth issuance of debentures was R$144.6 million.
In October 2013, we issued our eighteenth issuance of debentures, the third tranche out of those three also subscribed exclusively by BNDES. These debentures are divided in three series: the first and third series will mature in October 2024 and the second, in November 2024. The debentures of the first and third series, in the aggregate principal amount of R$77.1 million and R$115.7 million, respectively, bear interest at 1.92% per year, plus the TJLP. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. The debentures of the second series, in the aggregate principal amount of R$82.6 million, bear interest at the rate of the IPCA index plus 8.26% per year. In December 2013, BNDES subscribed to the debentures of the first and second series. In December 2014 and July 2015, BNDES subscribed in part to the debentures of the third series and in May 2020, BNDES subscribed another 8 debentures, and the remaining 20 debentures were canceled. As of December 31, 2022, the outstanding debt of the eighteenth issuance of debentures was R$95.6 million.
We have used the funds raised from the three issuances for investments primarily in the Program for Water Loss Reduction and on improvements and reforms of the Rio Grande’s water treatment plant, including other projects for water supply and sewage collection systems in the São Paulo northern coast, Paraíba Valley and Mantiqueira Regions.
In February 2018, we issued our twenty-second issuance of debentures in three series in the aggregate principal amount of R$750 million. The first, second and third series will mature in February 2021, 2023 and 2025 respectively. The debentures of the first series (in the aggregate principal amount of R$100 million) bear interest at a rate of CDI plus 0.58% per year, with semi-annual interest payments. The second series (in the aggregate principal amount R$400 million) bears interest at a rate of CDI plus 0.90% per year, with semi-annual interest payments. The third series (in the aggregate principal amount R$250 million) bears interest at a rate of IPCA plus 6.00% per year, with annual interest payments. The proceeds from these issuances were used to strengthen our cash position and refinance outstanding financial commitments in 2018. As of December 31, 2022, the outstanding debt of the twenty-second issuance of debentures was R$526.3 million.
In May 2019, we issued our twenty-third issuance of debentures divided into two series in the aggregate principal amount of R$866.8 million. The first and second series will mature in May 2024 and 2027 respectively. The debentures of the first series (in the aggregate principal amount of R$491.8 million) bear interest at a rate of CDI plus 0.49% per year, with semi-annual interest payments. The second series (in the aggregate principal amount R$375 million) bears interest at a rate of CDI plus 0.63% per year, with semi-annual interest payments. The proceeds from these issuances were used to strengthen our cash position and refinance outstanding financial commitments in 2019. As of December 31, 2022, the outstanding debt of the twenty-third issuance of debentures was R$864.9 million.
| 90 |
In July 2019, we issued our twenty-fourth issuance of debentures divided into two series in the aggregate principal amount of R$400 million. The first and second series will mature in July 2026 and 2029 respectively. The debentures of the first series (in the aggregate principal amount of R$100 million) bear interest at a rate of IPCA plus 3.20% per year, with annual interest payments. The second series (in the aggregate principal amount R$300 million) bears interest at a rate of IPCA plus 3.37% per year, with annual interest payments. The proceeds from these issuances are intended to support investment in infrastructure projects in some municipalities in which our company render services. As of December 31, 2022, the outstanding debt of the twenty-fourth issuance of debentures was R$488.5 million.
In July 2020, we issued our twenty-sixth issuance of debentures divided into two series in the aggregate principal amount of R$ 1.045 billion. The first and second series will mature in July 2027 and 2030 respectively. The debentures of the first series (in the aggregate principal amount of R$600 million) bear interest at a rate of IPCA plus 4.65% per year, with annual interest payments. The second series (in the aggregate principal amount of R$445 million) bears interest at a rate of IPCA plus 4.95% per year, with annual interest payments. The proceeds from these issuances are intended to support investment in infrastructure projects in certain municipalities in which we provide services. As of December 31, 2022, the outstanding debt of the twenty-sixth issuance of debentures was R$1,239.6 million.
In December 2020, we issued our twenty-seventh issuance of debentures divided into three series in the aggregate principal amount of R$1 billion. The first, second and third series will mature in December 2023, 2025 and 2027 respectively. The debentures of the first series (in the aggregate principal amount of R$300 million) bear interest at a rate of CDI plus 1.60% per year, with semi-annual interest payments. The second series (in the aggregate principal amount of R$400 million) bears interest at a rate of CDI plus 1.80% per year, with semi-annual interest payments. The third series (in the aggregate principal amount of R$300 million) bears interest at a rate of CDI plus 2.25% per year, with semi-annual interest payments. The proceeds from these issuances were used to strengthen our cash position and refinance outstanding financial commitments in 2021. As of December 31, 2022, the outstanding debt of the twenty-seventh issuance of debentures was R$998.0 million.
In July 2021, we issued our twenty-eighth issuance of debentures divided into three series in the aggregate principal amount of R$1.2 billion. The first, second and third series will mature in July 2024, 2026 and 2028 respectively. The debentures of the first series (in the aggregate principal amount of R$127.8 million) bear interest at a rate of CDI plus 1.20% per year, with semi-annual interest payments. The second series (in the aggregate principal amount of R$888.2 million) bears interest at a rate of CDI plus 1.44% per year, with semi-annual interest payments. The third series (in the aggregate principal amount of R$184 million) bears interest at a rate of CDI plus 1.60% per year, with semi-annual interest payments. The proceeds from these issuances were used to strengthen our cash position and refinance outstanding financial commitments in 2021. As of December 31, 2022, the outstanding debt of the twenty-eighth issuance of debentures was R$1,197.8 million.
In December 2021, we issued our twenty-ninth issuance of debentures divided into three series in the aggregate principal amount of R$1.25 billion. The first, second and third series will mature in December 2026, 2031 and 2036 respectively. The debentures of the first series (in the aggregate principal amount of R$500 million) bear interest at a rate of CDI plus 1.29% per year, with semi-annual interest payments. The second series (in the aggregate principal amount of R$600 million) bears interest at a rate of IPCA plus 5.3058% per year, with annual interest payments. The third series (in the aggregate principal amount of R$150 million) bears interest at a rate of IPCA plus 5.4478% per year, with annual interest payments. The proceeds from the issuance of the first series are intended to refinance commitments due to mature and to replenish our cashflows. The proceeds from the issuance of the second and third series are intended to support investment in infrastructure projects in certain municipalities in which we provide services and to support the reimbursement of costs incurred in connection with infrastructure projects. As of December 31, 2022, the outstanding debt of the twenty-ninth issuance of debentures was R$1,275.3 million.
Additionally, in March 2022, we issued our thirtieth issuance of debentures divided into two series in the aggregate principal amount of R$1.0 billion. The first and second series will mature in March 2027 and March 2029, respectively. The first series (in the aggregate principal amount of R$500 million) bears interest at a rate of CDI plus 1.30% per year, with semi-annual interest payments. The second series (in the aggregate principal amount of R$500 million) bears interest at a rate of CDI plus 1.58% per year, with semi-annual interest payments. The proceeds from these issuances were used to replenish and reinforce our cash position and to refinance commitments in 2022. As of December 31, 2022, the outstanding debt of the thirtieth issuance of debentures was R$998.1 million.
Part of our real-denominated indebtedness is indexed to take into account the effects of inflation. This debt provides for inflation-based increases to the principal amount, determined by reference to the IPCA.
| 91 |
Financial Covenants
We are subject to financial covenants under the agreements evidencing or governing our outstanding indebtedness.
Indebtedness
Foreign currency denominated indebtedness
With respect to our indebtedness denominated in U.S. dollars, including our borrowings from the IDB and IFC, we are subject to financial covenants, including limitations on our ability to incur debt. For example:
The financial covenants in our Loan No. 1212 from the IDB require as follows:
| · | our tariff revenues must be sufficient to cover the operational expenses of our system, including administrative, operating and maintenance expenses, and depreciation; | |
| · | our tariff revenues must provide a return on the balance sheet value of our property, plant, and equipment of not less than 7%; and | |
| · | during project execution, the balance of our short-term borrowings must not exceed 8.5% of our total equity. |
This loan agreement contains an early maturity clause in the event of non-compliance on our part of any obligation stipulated therein or in other contracts with the bank relating to the financing of the above-mentioned projects.
The financial covenants in our AB Loan Agreements with the IDB (No. 1983AB) require as follows:
| · | our debt service coverage ratio must be greater than or equal to 2.35:1.00; and | |
| · | our ratio of Net Debt (defined as all borrowed money, including debentures, less interest and financial charges that have been provisioned for the current period) to Adjusted EBITDA (defined as our net income before net financial expenses, income tax and social contribution tax, depreciation and amortization, non-operating income or expenses, and extraordinary items net of income tax and social contribution, as set forth in our consolidated financial statements), each determined on a consolidated basis, must be less than 3.65:1.00. |
This contract contains an early maturity clause. In the event of non-compliance with the terms of the contract, the BID can request the anticipated payment of part or all of the loan. The contract also contains cross-default provisions whereby an event of non-compliance on our part relating to any other of our debts with BID or third-parties (in this case, if over US$25 million) allows IDB to request the early payment of the loan.
The financial covenants in our Loan with IDB Invest (No. 13069-01) require as follows:
| · | our debt service coverage ratio must be greater than or equal to 2.35:1.00; and | |
| · | our ratio of Net Debt (defined as all borrowed money, including debentures and Eurobonds, less interest and financial charges that have been provisioned for the current period) to Adjusted EBITDA (defined as our net income before net financial expenses, income tax and social contribution tax, depreciation and amortization, non-operating income or expenses, and extraordinary items net of income tax and social contribution, as set forth in our consolidated financial statements), each determined on a consolidated basis, must be less than 3.50:1.00. |
This loan agreement contains an early maturity clause in the event of non-compliance on our part of any obligation stipulated therein or in other contracts with the bank relating to the financing of the above-mentioned projects.
Any significant devaluation of the real will affect the total portion of our debt denominated in foreign currencies when measured in reais. As a result, the Adjusted Total or Net Debt in reais will be affected, with consequent impact on the ratio between Adjusted Total or Net Debt to adjusted EBITDA.
As of December 31, 2022, and 2021, we had met all the requirements of these loans and financing agreements.
Local currency denominated indebtedness
With respect to our outstanding indebtedness denominated in reais, we are subject to financial covenants.
The covenant clauses apply to all of our indebtedness with BNDES, including the 18th issuance of debentures held by BNDES, which totaled R$95.6 million as of December 31, 2022. The only financing agreement which is exempt from the renegotiated financing is contract No. 08.2.0169.1.
| 92 |
In summary, the BNDES financings specify two bands for the ratios of Adjusted Net Debt / Adjusted EBITDA, Adjusted EBITDA / Adjusted Financial Expenses, and Other Onerous Debt / Adjusted EBITDA. The financings also specify a collateral mechanism by which we assign a portion of our tariff payment receivables to BNDES in order to provide a partial guarantee of the amounts due under the financings. Under this mechanism, each month we must ensure that a portion of the tariff payments which we receive are deposited on a daily basis into a blocked collateral account, before being released to a regular movements account later in the day provided that BNDES has not notified the bank that we are in default. If the ratio of Adjusted EBITDA / Adjusted Financial Expenses is equal to or higher than 3.50, the ratio of Adjusted Net Debt / Adjusted EBITDA equal to or lower than 3.00, and the Other Onerous Debt / Adjusted EBITDA equal to or lower than 1.00, the amount that must pass through this blocked collateral account is R$13.4 million per month. If one of the three ratios mentioned above are not met in any two or more quarters, consecutive or not, within a twelve-month period, yet remain within the following band of ratios: Adjusted EBITDA / Adjusted Financial Expenses lower than 3.50 but equal to or higher than 2.80, Adjusted Net Debt / Adjusted EBITDA equal to or lower than 3.80 but higher than 3.00, and Other Onerous Debt / Adjusted EBITDA equal to or lower than 1.30 but higher than 1.00, the amount that must pass through the blocked collateral account is automatically increased by 20%.
The current covenant clauses are:
| A. | Maintenance of the following ratios, calculated quarterly and relative to amounts accumulated over the last 12 months at the time of disclosure of reviewed quarterly financial statements or audited annual financial statements: |
| · | Adjusted EBITDA / Adjusted Financial Expenses equal to or higher than 3.50; | |
| · | Adjusted Net Debt / Adjusted EBITDA equal to or lower than 3.00; and | |
| · | Other Onerous Debt / Adjusted EBITDA equal to or lower than 1.00 (where “Other Onerous Debt” is equal to the sum of (i) social security liabilities and health care plans, (ii) installment payments of tax debt and (iii) installment payments of debt with electricity providers). |
| B. | If any one of the ratios specified in A. above are not met in any two or more quarters, consecutive or not, within a twelve-month period, we shall be deemed to be in non-compliance with the first band ratios and must, as a result, automatically increase the amount passing through the blocked collateral account by 20%, provided that the following second band ratios are met: |
| · | Adjusted EBITDA / Adjusted Financial Expenses lower than 3.50 but equal to or higher than 2.80; | |
| · | Adjusted Net Debt / Adjusted EBITDA equal to or lower than 3.80 but higher than 3.00; and | |
| · | Other Onerous Debt / Adjusted EBITDA equal to or lower than 1.30 but higher than 1.00. |
| C. | If any one of the second band ratios specified in B. above are not met for any one quarter, or if we are required to but fails to ensure that the increased monthly amount specified in B. above passes through the blocked collateral account, then we shall be deemed to be in non-compliance with its ratio covenants, in which case BNDES may at its discretion: |
| · | require us to provide additional financial guarantees within a deadline specified by BNDES, which may not be less than 30 days; | |
| · | suspend the release of funds; and/or | |
| · | declare the financings to be immediately due and payable. |
As of December 31, 2022, the amount that must pass through the blocked collateral account is R$274.4 million per month, not including the financial guarantees for financing contract No. 08.2.0169.1.
The financial covenants applicable to financing contract No. 08.2.0169.1 are the following:
| · Adjusted EBITDA / Adjusted Net Operational Revenue equal to or higher than 38%; | ||
| · Adjusted EBITDA / Adjusted Financial Expenses equal to or higher than 2.35; and | ||
| · Adjusted Net Debt / Adjusted EBITDA equal to or lower than 3.20. |
BNDES will annually verify the maintenance of the ratios mentioned above for contract 08.2.0169.1 by reviewing our audited annual financial statements, which must be presented to BNDES or published by April 30 of the following year to which the financial statements refer. If we maintain all of the financial covenants for contract 08.2.0169.1, BNDES will reduce the interest charged on this loan from 2.15% to 1.82% per annum. If the financial covenants are maintained, the interest rate is reduced as of June 16 of the same year in which the financial covenants were verified until June 15 of the subsequent year.
| 93 |
The financing agreement established with BNDES in March 2010 is subject to a cross-default clause. For example, the early maturity of any of our debts, the financial contracts and/or amounts of which may compromise the obligations stipulated in the indenture shall cause the early maturity of such agreement.
Additionally, since 2018, we are subject to financial covenants under the new financing agreements executed with Caixa Econômica Federal. These financial covenants require us to maintain the following financial indexes, calculated for the past twelve months on a quarterly basis:
| · | Adjusted EBITDA / Adjusted Financial Expenses, equal to or greater than 2.80; | |
| · | Adjusted Net Debt / Adjusted EBITDA, equal to or lower than 3.80; |
| · | Other Onerous Debt / Adjusted EBITDA equal to or lower than 1.30. |
These agreements provide that disbursements may be suspended if any of these covenants are not being complied with. In the event of non-compliance with the terms of these agreements, Caixa Econômica Federal may request the anticipated payment of the entire loan.
The agreements with Caixa Econômica Federal also contain a cross-default clause and an early maturity clause, in the event of non-compliance with the terms of the contract, the Caixa Econômica Federal can request the anticipated payment of part or all of the loan. See Note 16 to our financial statements included in this annual report.
With respect to our outstanding debentures, the twelfth issuance requires us to maintain an Adjusted Current Ratio (current assets divided by current liabilities, excluding from current liabilities the current portion of noncurrent debts incurred by us that is recorded in current liabilities) higher than 1.0:1.0 and an EBITDA/Financial Expenses Ratio equal to or higher than 1.5:1.0. The twelfth debenture issuance has an early maturity clause, which is triggered if our credit ratings are downgraded two levels below the “brAA-” Brazil National Scale rating assigned to our debentures by the credit rating agency S&P at the time of their issuance. On July 11, 2018, our credit rating and the one assigned to the twelfth debenture issuance by S&P were both “brAAA.” This issuance has a cross-default clause.
The fourteenth and eighteenth issuances follow the covenants included in the BNDES loans, as described above, and contain a cross-default clauses.
The table below shows the more restrictive covenants ratios and our financial covenants ratios as of December 31, 2022.
The twenty-second, twenty-third, twenty-fourth, twenty-sixth, twenty-seventh, twenty-eighth, twenty-ninth and thirtieth debenture issuances require us to maintain an adjusted EBITDA/paid financial expenses ratio equal to or higher than 1.5:1.0 and an adjusted net debt/adjusted EBITDA ratio equal to or lower than 3.50:1.0. These issuances have a cross acceleration clause.
| Restrictive Ratios | Ratio as of December 31, 2022 | ||
| Adjusted EBITDA / Adjusted financial expenses | Equal to or higher than 2.80:1.00 | 3.57 | |
| EBITDA/Paid financial expenses | Equal to or higher than 2.35:1.00 | 4.71 | |
| Adjusted net debt / Adjusted EBITDA | Equal to or lower than 3.80:1.00 | 2.45 | |
| Net debt/Adjusted EBITDA | Equal to or lower than 3.50:1.0 | 2.35 | |
| Adjusted total debt / Adjusted EBITDA | Lower than 3.65:1.00 | 2.61 | |
| Other onerous debt1/ Adjusted EBITDA | Equal to or lower than 1.30:1.00 | 0.31 | |
| Adjusted current ratio | Higher than 1.0 | 1.50 |
| (1) | “Other Onerous Debts” correspond to the sum of social security liabilities, health care plan, installment payment of tax debts and installment payment of debts with the electricity supplier. |
As of December 31, 2022 and 2021, we complied with all the covenants of our loans and financing agreements.
Capital Requirements
We have, and expect to continue having, substantial liquidity and capital resource requirements. These requirements include debt-service obligations, capital expenditures to maintain, improve and expand our water and sewage systems, and dividend payments and other distributions to our shareholders, including the State.
| 94 |
Capital Expenditures
Historically, we have funded and plan to continue funding our capital expenditures with funds generated by operations and with long-term financing from international and national multilateral agencies and development banks. We generally include in our capital expenditure program for the following year the amount of investment that was not realized in the previous year. In 2022, we recorded R$5.4 billion to improve and expand our water and sewage system and to protect our water sources in order to meet the growing demand for water and sewage services in the State of São Paulo. We have budgeted investments in the amount of approximately R$26.2 billion from 2023 through 2027. For more information, see “Item 4.A. History and Development of the Company—Capital Expenditure Program.”
Dividend Distributions
We are required by our bylaws to make dividend distributions, which can be made as payments of interest on shareholders’ equity to our shareholders in an amount equal to or higher than 25% of the amounts available for distribution. In addition, our dividend policy, which was approved at the annual shareholders’ meeting held on April 27, 2018, establishes that this percentage shall be maintained until the universalization of basic sanitation services in the areas where we operate. We declared dividends of R$872.2 million, R$644.3 million and R$272.0 million in the fiscal years ended on December 31, 2022, 2021 and 2020, respectively. For more information, see “Item 7.B. Related Party Transactions—Dividends.”
Judicial bonds
As of December 31, 2022, we have judicial bonds issued in our favor in the inflation adjusted amount of R$2,807.3 million, which are not recognized in our financial statements because of the difficulty to obtain a reasonable estimate to measure such assets, due to the uncertainties related to the beginning and the end of the payments. Judicial bonds are recognized upon the beginning of their receipt or when they are traded. For more information on judicial bonds, see Note 10 to our financial statements included in this annual report.
| C. | Research and Development, Patents and Licenses, Etc. |
Research and innovation
The advancement of research and technological development is part of our strategic guidelines, and aims to implement innovation in operations, processes and services. Such efforts seek to increase organizational efficiency, reflecting in greater customer satisfaction, improved quality of life, environmental sustainability and competitiveness, with improved productivity and quality of our processes and services.
Our strategic innovation process goes beyond the development of new technologies, products and services. It involves the creation of new business models, new ways of meeting the needs of consumers, new organizational processes, new ways of competing and cooperating in the business environment and improvements to service delivery, while at the same time promoting protection of the environment and public health.
We set up a Corporate “Research, Technological Development and Innovation” Program, which allows us to differentiate the financial resources spent specifically for this purpose within our budget structure. In 2022, we allocated R$36.5 million to Research, Development and Innovation (“RD&I”), projects. These resources are a differential in our results and indicate our capacity for innovation and pioneering, which can bring fiscal, tariff and financial advantages. We carry out several actions for the implementation of innovative technological solutions systematically throughout our company. These solutions are aimed at improving construction and operational processes for water and wastewater systems, water and wastewater treatment solutions, asset control and management, renewable energy generation processes, energy efficiency, user relationship technologies, circular economy projects, waste reduction, and utilization methods, among others. These are solutions that are in the scalability stage of technological development and have already passed the research and development phase. Some may even represent new business opportunities.
In addition, based on programs already in place in the power and gas sectors, we maintain a portfolio of prioritized projects with ARSESP in its Quadrennial Research and Technological Development Program for Innovation in Basic Sanitation Services (the “PD&I Program”), which requires the application of the 0.05% of revenue to RD&I projects. Accordingly, the first cycle of the program, covering the tariff cycle 2021-2024, is ongoing, comprising 12 projects selected by ARSESP in the amount of R$37.8 million. For more information, see “—Tariff Readjustment and Revisions.”
Pursuant to our Technical Cooperation agreement with IDB, we finance actions for the improvement and technological innovation of water supply management facilities during water crises, using modern analytical tools, available experiences and practices and theoretical analysis. This cooperation agreement provides for resources of approximately US$328 thousand, non-refundable, to be debited from the bank’s ordinary capital resources destined to the Strategic Program for Infrastructure Development. The project is in its final development phase.
As a result of this activity, proposals have been made to increase the resilience of the water supply systems, which corresponds to one of the components of the agreements signed between the IDB and the State of São Paulo, assigned for execution by us. It is complemented by two other sequential activities: (i) Systematization of the process for public call for technological innovation projects, (ii) Development and implementation of a digital platform for open innovation. Both are described in the Open Innovation chapter.
| 95 |
In line with business planning, the structuring of RD&I actions is based on the concept of a circular economy, that is, focused on the intelligence of nature, the circular process opposes the traditional linear production process. As part of this concept, residues are inputs for the production of new products and new cycles. We have highlighted below certain RD&I projects that use the concept of a circular economy, which strongly supports resource recovery, as part of the processes for the water and sewage treatment.
The sequential implementation of integrated actions for liquid, solid and gaseous sewage treatment phases at the sewage treatment plant in the municipality of Franca aims to optimize processes and transform the site into a resource recovery plant. Since 2018, a biogas upgrade project in this sewage treatment plants has been producing biomethane for vehicle use as a result of the partnership with the Fraunhofer Institute in Stuttgart, Germany. This sewage treatment plant treats an average of 500 liters per second of sewage and produces around 2,500 m³ of biogas per day. The upgrade system can produce biomethane to replace 1,500 liters of common gas daily. The biomethane currently supplies part of the Sabesp Franca fleet. As a result of the tests carried out we are studying the replication of the technology in six other large-scale sewage treatment plants located in the metropolitan region of São Paulo and in the state's countryside.
In addition, to enable the commercialization of the biomethane produced, which is currently used to supply our fleet in the municipality of Franca, one of the steps is its certification as a product in accordance with the requirements of the National Agency for Petroleum, Natural Gas and Biofuels (“ANP”) Resolution No. 886/2022. To meet these requirements, a risk assessment study using The Hazard and Operability Study Methodology is being carried out by us since 2021. This study focused on the quality of the upgrading system and should consider biogas and biomethane quality monitoring and upgrading system facilities inspection. The final report will be submitted for ANP approval in 2023. It is an important initiative aiming beyond a new source of income, a substitution of fossil fuels for clean energy; reduction of GHG emissions, and inclusion of biomethane as a new fuel in the Brazilian energy matrix.
At the same plant, we developed and are operating a sludge dryer based on solar radiation, financed by FINEP) as part of the “Technological Innovations Plan of Sabesp for Sanitation” financed by the FINEP Inova Brasil program.
The project also provides for other actions in the planning and contracting phase, such as the use of energy from hydraulic and solar sources, in addition to other beneficial applications of biogas. This circular economy project in the municipality of Franca sewage treatment plant received first place in the 2019 edition of the Ideas en Acción award of IDB.
At the Barueri sewage treatment plant, we implemented a plasma gasification system for the processing of sludge generated. A new gas treatment system was installed to improve the quality of the gases generated. At the end of the process, this system generates inert residue with a drastic reduction in its volume, with a potential for reuse as in construction, meaning it does not need to be disposed of in landfills. This project was also funded by FINEP.
In order to generate clean energy to improve the efficiency of sewage treatment, we installed solar-powered aerators, increasing the energy efficiency of sewage treatment. Test results indicate that this technology can be replicated and adapted elsewhere.
In 2021, the studies foreseen in the partnership maintained with UNESP were concluded to assess the technical and environmental feasibility of using sludge from the Water Treatment Plant as raw material for the base and sub-base of pavements. This corresponds to the first phase of a project which the final objective is to add value to this by-product that would transform waste into a raw material to be used in pavements, demonstrating its beneficial use and potential for additional revenue generation.
We also developed biofiltration units for odor control to be installed in the sewage and pumping stations in Pinheiros and Pomar, in the city of São Paulo. This is an example of a project fostered by studies developed internally by us. A major portion of this project also received financing from FINEP. Projects such as this are extremely important to reduce the emission of odorous substances in the atmosphere from the transport and treatment of sewage, which can help mitigate socio-economic and environmental impacts.
From our partnership with FAPESP financial resources are invested equally to subsidize and support the development of basic and applied research projects under the Program for Support of Research in Partnership for Technological Innovation for research projects in academic or research institutions, whose themes originated from the demands pointed out by the operational areas. This partnership has already resulted in 17 projects with different universities, such as: USP, Technological Institute of Aeronautics, UNIFESP, National Institute for Space Research and UNESP. The partnership provides for a non-refundable financing of R$50 million, divided equally between us and FAPESP. The first and second collaborative call for proposals to select projects to finance led to the filing of seven national patent applications before the INPI, two international patent applications under the PCT” before the World Intellectual Property Organization and two software registration requests. The 12 projects selected in the 2022 third call for proposal are currently in the development phase.
| 96 |
Another innovative project that we have recently implemented is the Pinheiros River Oxygenation System. This project is being developed within the scope of the Novo Rio Pinheiros Program, coordinated by the São Paulo state government. The project consists of the implementation of an innovative oxygenation technology called SDOx. This technology, unlike conventional aeration technologies, has the potential to transfer a greater amount of oxygen to the water, through a supersaturated solution and its dispersion in the water. The goal of this project is to enhance the natural self-purification process by artificially increasing the oxygen levels of the water. The project is in its first year of operation, with satisfactory results in terms of the gradual increase in oxygen concentration in the upper channel of the river. This test is intended to verify the technical-economic feasibility of the technology, with a view to replicating it in other water bodies of different sizes in order to improve their quality.
Open Innovation
We are investing in the development and implementation of actions as part of Open Innovation, integrating ideas, thoughts, processes and research from players from various internal and external segments of our company, capable of presenting innovative solutions with technologies from the most diverse productive sectors of the market aiming to improve our processes, products and services. Startups, specifically, are stimulated by challenges and are made viable by proposing and validating solutions for the most varied problems, with the objective of achieving scale and acceleration, with a positive impact for their new products and businesses. This is a pro-active measure to stimulate the sanitation market that can lead to the development of solutions for our needs.
We also conduct tests with innovative solutions that emerge from market demands, at different evolutionary stages of development, to assess their potential for application in our activities. These technological cooperation initiatives, in addition to allowing us to propose technological solutions that improve our processes and services, also provide market companies with the opportunity to effectively test their solutions in the sanitation environment, in operational practices, verify the effectiveness of their solutions and, as needed, identify needs for improvement.
With this open innovation process, we provide the market with the foundations for an innovative ecosystem aimed at the sanitation sector.
In order to add greater efficiency to the Open Innovation process, and with the experience acquired from the Pitch Sabesp project, we have developed a study for methodological systematization to execute public calls for the acquisition of innovative technological solutions in the context of a public company, contracting the Fundação Instituto de Administraçãoto develop the work, which is in the final phase of consolidation. This work also provided elements for another action in the same direction: the development of a digital platform for access by the foreign market, aiming at proposing challenges for the capture of ideas and innovative technological solutions. These two actions are complementary to the Technical Cooperation with the IDB mentioned above, in accelerating and enhancing our initiatives.
Additionally, we have a second agreement with FAPESP to focus on supporting the execution of scientific and/or technological research in micro, small and medium enterprises in the State of São Paulo, through the Small Enterprises Innovation Program aimed at accelerating start-ups focused on the development of innovative projects that solve challenges faced by us. In 2022, the first public call was carried out.
We publish the DAE Magazine, a quarterly engineering journal published by a specialized team of opinion makers that in 2022 totaled more than 230 issues since its first edition. This journal was indicated in the Qualis/CAPES system as “B1” category in July, 2019 for the 2021-2024 period. Through the publication of technical and scientific articles on basic and environmental sanitation, we aim to encourage and disseminate improvements in processes, innovations and technological advances.
| D. | Trend Information |
We expect to continue to operate in a competitive and regulated environment which will pose continued risks to our existing businesses, placing the profitability of our assets under pressure. The following list sets out, what we believe to be, the most important trends, uncertainties and events that are reasonably likely to continue to have a material effect on our revenues, income from continuing operations, profitability, liquidity and capital resources, or that may cause reported financial information to be not necessarily indicative of future operating results or financial condition:
| · | Our business, operations, and financial condition may continue to be affected by the COVID-19 pandemic and its consequences, as follows: |
| 97 |
| o | The impact of the COVID-19 pandemic on the global economy and financial markets was significant in 2020 and 2021 and continued to a lesser extent in 2022. It also introduced new habits that impacted consumption and, as a result, our business. Although restrictions imposed to contain the spread of COVID-19 were lifted in 2022, various companies continue to adopt partial remote working regimes. This affected the volume of sales in the commercial, industrial and public categories which would have been higher had it not been for the partial remote working policies adopted by these companies. These changes and new habits could have a material adverse effect on our results of operations and financial condition. For more information, see “—A. Operating and Financial Review and Prospects Overview—Factors Affecting Our Results of Operations—General Factors Affecting our Business” and “Item 3.D. Risk Factors—Risks Relating to our Business—Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the outbreak of COVID-19.” | ||
| o | In addition, the adverse macroeconomic impact of the COVID-19 pandemic in Brazil had a detrimental impact on many parts of Brazilian society and led to increased delinquencies which negatively impacted our results of operations. Our allowance for doubtful accounts increased by 21.5% for the year ended December 31, 2022 compared to the same period in 2021, and 43.4% for the year ended December 31, 2021, compared to the same period in 2020. | ||
| · | On February 28, 2023, CDPED, which has authority over our corporate reorganization plan, agreed to proceed with arrangements for hiring consultancy services to study various structures for our proposed privatization. On April 10, 2023 the São Paulo state government signed a contract with the IFC, an agency linked to the World Bank, which will act as the advisor in this process. We are currently awaiting guidance from CDPED. As of the date of this annual report, a decision has not been made on the model for our potential privatization. We cannot assure that CDPED will give us guidance on our potential corporate reorganization, the terms of such guidance, or that any potential reorganization will not have a material adverse effect on our business, financial condition or results of operation. For more information, see “Item 3.D. Risk Factors— Risks Relating to Our Control by the State of São Paulo—Our controlling shareholder is currently discussing proposals for our corporate reorganization. We cannot guarantee that any potential reorganization will not have a material adverse effect on our business, financial condition or results of operations.”
| ||
| · | There are various uncertainties surrounding the New Legal Framework for Basic Sanitation, including the new requirement to participate in public bids in case the entity is not part of the administration of the holder, the prohibition on entering into program contracts, agreements, partnership agreements and other unstable instruments for the provision of public sanitation services. Previously, we provided services in several Municipalities through contracts which did not require bidding procedures. The current program contracts and contracts that comply with Law No. 11,445/2007 will remain in effect until the end of their contractual term. For the program contracts that did not have established targets for the universalization of services by December 31, 2033, the targets were included by March 31, 2022, as required by the New Legal Framework for Basic Sanitation. Therefore, except in the Municipalities where the State shares ownership with the Municipalities, the renewal of these contracts, once they expire, will require a bidding process and, as such, we cannot guarantee that we will be able to maintain our current customer base and size of operations. If our potential privatization is implemented through a sale of the shares the State of São Paulo holds in us, our current program contracts may be replaced with new concession contracts. For more information, see “Item 3.D. Risk Factors—Risks relating to Regulatory Environment—The New Legal Framework for Basic Sanitation prohibits program contracts for basic sanitation services, resulting in uncertainties for our current and future concessions.”
| ||
| · | Provisional Measure No. 1,154 of January 1, 2023 altered the attributes and structure of ANA and delegated to the Ministry of Cities the competence to implement basic sanitation actions and programs. Further, Federal Decree No. 11,333/2023 created the National Secretariat for Environmental Sanitation, linked to the Ministry of Cities, attributing to the National Secretariat for Environmental Sanitation competencies that were previously attributed exclusively to ANA. On April 5, 2023, the federal government issued Decree No. 11,467/2023, which delegated to ANA the power to issue reference norms for the sanitation sector, as originally established in the New Legal Framework for Basic Sanitation. The National Secretariat for Environmental Sanitation, is now responsible for issuing the guidelines for federal basic sanitation policy. Accordingly, ANA’s rules will apply to the basic sanitation sector nationwide, setting the guidelines for regulation and supervision by the regulatory entities at the state, municipal and regional level, and ensuring regulatory uniformity in the sector and legal certainty for the provision and regulation of services. ARSESP will be subject to these guidelines and will be required to incorporate any reference guidelines issued by ANA. We cannot guarantee that any potential changes to the regulatory framework of ARSESP will not have an adverse effect on our business, financial condition or results of operations. For more information, see “Item 3.D. Risk Factors—Risks relating to Regulatory Environment—The New Legal Framework for Basic Sanitation prohibits program contracts for basic sanitation services, resulting in uncertainties for our current and future concessions” and “—Pursuant to the New Legal Framework for Basic Sanitation, ANA will be responsible for issuing reference norms. Any non-compliance by municipalities or sanitation operators will prevent them from accessing financings and sources of funds managed or operated by the federal government.” | ||
| 98 |
| · | Our business is not only adversely affected by droughts but also by other extreme weather conditions, such as torrential rain and other changes in climate patterns. A possible increase in the frequency of extreme weather conditions in the future may adversely affect the water available for abstraction, treatment, and supply. For more information, see “Item 3.D. Risk Factors— Risks Relating to Environmental Matters and Physical and Transition Climate Risks — Extreme Weather Conditions and Climate Change may have a material adverse impact on our business, financial condition or results of operations” and “Item 3.D. Risk Factors— Risks Relating to Environmental Matters and Physical and Transition Climate Risks — Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations.” The 2020-2021 and 2021-2022 rainy season, which ended in September 2021 and September 2022, respectively, recorded below-average rainfall compared to the expected long-term average. The investments made by us in water, including interconnections and a construction of a new Water System since the 2014 – 2015 water crisis proved to be effective in providing operational resilience and the ability to satisfactorily overcome the below average rainfall we face throughout 2020-2021 and 2021-2022 rainy season. Although we are taking actions to mitigate the risks involving climate change and extreme weather conditions, we cannot predict all of the effects of extreme weather events, therefore making it difficult to estimate the resources needed to implement any actions to mitigate these effects. We may be required to make substantial investments or incur substantial costs for their remediation, which may have a material adverse impact on our business, financial conditions or results of operations. If there are consecutive periods of drought, we may have to adopt measures to mitigate the impacts and maintain the water supply in its area of operation.
| |
| · | There are uncertainties arising from the implementation of our New Tariff Structure. The New Tariff Structure was expected to be adopted as of 2022. However, on March 17, 2022, ARSESP published Resolution No. 1,278 which postponed the implementation 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 is scheduled for the first half of 2024 which aims 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 will be implemented following the public consultation scheduled for the first half of 2024. The transitional period during which we will implement this New Tariff Structure may lead to uncertainties in the market as well as unpredictability about the revenues we expect to earn as of the moment it will be implemented. For more information, see “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.”
| |
| · | Global macroeconomic factors, such as the developments in respect of the ongoing war between Russia and Ukraine and fluctuations in inflation, interest rates and exchange rates, as well as any resulting effects on the global economy and capital markets may have a material effect on our revenues, income from continuing operations, profitability, liquidity, capital resources and the price of our securities. For more information, see “Item 3.D. Risk Factors—Risks relating to Brazil.” |
In addition to the information set out above, see “Cautionary Statements About Forward-Looking Statements” for further information related to our forward-looking statements, and “Item 3.D. Risk Factors” for a description of certain factors that could affect our industry and our own performance in the future.
| E. | Off-Balance Sheet Arrangements |
We had no off-balance sheet arrangements as of December 31, 2022.
| F. | Tabular Disclosure of Contractual Obligations |
Our debt obligations and other contractual obligations as of December 31, 2022 were as follows:
| Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | |
| (in millions of reais) | |||||
| Loans and financing | 2,246.0 | 4,230.9 | 4,736.7 | 7,745.0 | 18,958.6 |
| Estimated interest payments(1) | 1,394.3 | 3,300.5 | 2,587.9 | 5,677.8 | 12,960.5 |
| Accounts payable to suppliers and contractors | 430.9 | - | - | - | 430.9 |
| Services payable | 723.2 | - | - | - | 723.2 |
| Program contract commitments | 100.0 | 2.3 | 2.3 | 12.4 | 117.0 |
| Purchase obligations(2) | 4,568.0 | 4,505.0 | 1,424.8 | 830.2 | 11,328.0 |
| Total | 9,462.4 | 12,038.7 | 8,751.7 | 14,265.4 | 44,518.2 |
| (1) | Estimated interest payments on loans and financing were determined considering the interest rates as of December 31, 2022. However, our loans and financing are subject to variable interest indexation and foreign exchange fluctuations, and these estimated interest payments may differ significantly from payments actually made. The debt agreements have cross-default clauses. |
| (2) | The purchase obligations are the contractual obligations of investments and expenses. |
| 99 |
We believe that we can meet the maturity schedule through a combination of funds generated by operations, the net proceeds of new issuances of debt securities in the Brazilian and international capital markets and additional borrowings from domestic and foreign lenders. Our borrowings are not affected by seasonality. For information concerning the interest rates on our indebtedness outstanding as of December 31, 2022, see Note 17 to our financial statements as of December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020, included elsewhere in this annual report.
| ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
| A. | Directors and Senior Management |
Under our bylaws and Brazilian Corporate Law, we are managed by our Board of Directors (Conselho de Administração), which currently consists of ten directors, and a board of executive officers (Diretoria), which currently consists of six executive officers.
As our controlling shareholder, the State has the ability to elect the majority of our Board of Directors and, therefore, our direction and future operations. Upon the election of a new State governor and any resulting change in the administration of the State, all or some of the members of our Board of Directors, including our chairman, have historically been replaced by designees of the new administration. Our Board of Directors may in turn replace some or all of the executive officers. For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Control by the State of São Paulo— We are controlled by the State of São Paulo, whose interests may differ from the interests of non-controlling shareholders, including holders of ADSs.”
Board of Directors
Our bylaws provide for a minimum of seven and a maximum of eleven directors. The members of our Board of Directors are elected at a general shareholders’ meeting to serve a two-year term. Such terms may be renewed three consecutive times. Pursuant to our bylaws and Federal Laws No. 13,303/2016 and No. 6.404/1976, our employees have the option to elect one member of our Board of Directors. Accordingly, we supported the unions in the first election of the member of our Board of Directors representing the employees, which was concluded on August 18, 2021. Provided the conformity with the candidacy requirements and the electoral process as verified by our Eligibility and Advisory Committee, the representative was announced to our shareholders, who met and elected the directors with a two-year term, at the General Shareholders’ Meeting, which took place on April 28, 2022. In addition, pursuant to Brazilian Corporate Law, at least one member of the Board of Directors of mixed capital companies, such as us, must be appointed by the minority shareholders. Finally, according to the Novo Mercado rules and Federal Law No. 13,303/16, at least two, or 25.0% (whichever is greater), of the Board of Directors must be comprised of independent members.
All the current members of our Board of Directors were elected at the annual shareholders’ meeting held on April 28, 2022 and joined our Board of Directors on May 2, 2022, except for André Gustavo Salcedo Teixeira Mendes, who was elected on January 12, 2023 and joined our Board of Directors on January 13, 2023. The tenure of all the directors will end after our annual shareholders’ meeting to be held in April 2024 when the current members are expected to be reelected. Currently, we have five members considered independent under the Novo Mercado rules and Federal Law No. 13,303/16.
On March 27, 2023 we published our management proposal setting out the matters to be discussed at our Ordinary and Extraordinary General Shareholders' meeting to be held on April 28, 2023. In accordance with the recommendation from our controlling shareholder, we are proposing to replace all board members, except for four (the director appointed by the employees, the minority shareholders and the CEO, who is part of the Board of Directors as long as he is the CEO, and one other). These changes are subject to obtaining approval at the shareholders' meeting. We cannot predict the impact of these or any other potential future changes to the Board of Directors on our business, financial condition or results of operation and whether such changes will be the interests of other minority shareholders, including ADR holders.
Our Board of Directors ordinarily meets once a month or, when necessary for the interests of our company, when called by a majority of the directors or the chairman. Its responsibilities include the establishment of policy and general orientation of our business, and the appointment and supervision of our executive officers.
The following are the names, ages, positions, dates of election, date of entry and brief biographical descriptions of the current members of our Board of Directors:
| 100 |
| Director | Age | Position | Date Elected | Date of Entry | |||
| Mario Engler Pinto Junior | 66 | Chairman | April 28, 2022 | May 2, 2022 | |||
| Claudia Polto da Cunha | 55 | Member | April 28, 2022 | May 2, 2022 | |||
| Ronaldo Coppa | 66 | Employee Representative Member | April 28, 2022 | May 2, 2022 | |||
| Francisco Luiz Sibut Gomide | 77 | Independent Member(1) | April 28, 2022 | May 2, 2022 | |||
| Francisco Vidal Luna | 76 | Independent Member(1) | April 28, 2022 | May 2, 2022 | |||
| Leonardo Augusto de Andrade Barbosa | 46 | Member | April 28, 2022 | May 2, 2022 | |||
| Luís Eduardo Alves de Assis | 66 | Independent Member(1) | April 28, 2022 | May 2, 2022 | |||
| Marcelo Munhoz Auricchio | 52 | Independent Member(1)(2) | April 28, 2022 | May 2, 2022 | |||
| Wilson Newton de Mello Neto | 51 | Independent Member(1)(3) | April 28, 2022 | May 2, 2022 | |||
| André Gustavo Salcedo Teixeira Mendes | 45 | Member | January 12, 2023 | January 13, 2023 |
| (1) | These members comply with the independence requirements established by Federal Law No. 13,303/16 and the Novo Mercado rules. | |
| (2) | Member appointed by the minority shareholders. | |
| (3) | Independent member since November 29, 2021. |
Mario Engler Pinto Junior. Mr. Engler has been the Chairman of our Board of Directors since May 2018. Before that, he served as member of our Board of Directors from 2006 to 2011 and as member of our Audit Committee from 2006 to 2009. He holds a PhD degree in Commercial Law from USP. Mr Engler is now a professor at FGV Law School, and the coordinator for the Executive Master Program, where he conducts legal research regarding contractual and corporate arrangements in the public and private sectors. Mr Engler has been a lawyer since 1979 and served for 30 years as public attorney for the State of São Paulo from 1984 to 2014. In the last years, he has been an arbitrator and executive officer and director for private companies and state-owned companies.
Claudia Polto da Cunha. Mrs. Cunha has been a member of our Board of Directors since May 2020, having previously served in the same position from 2014 to 2016. She holds a master's degree in Administrative Law from USP, and an undergraduate law degree from the same institution. She has been a state attorney since 1991 and served as Deputy State Attorney General of the State between 2020 and 2022. She currently serves as Advisory Attorney, responsible for coordinating companies and foundations. She is also Chairwoman of the Board of Directors of Companhia Paulista de Securitização and member of the Board of Directors of Empresa Metropolitana de Transportes Urbanos de São Paulo (“EMTU”), where she served in the same position between 2012 and 2014. She was special advisor to the Secretary of Finance and Planning in 2019, Executive Secretary of the State Capital Defense Council (“CODEC”), from 2006 to 2016, and Advisor to the Attorney-General of São Paulo from 1995 to 2006. Mrs. Cunha was also a member of the Board of Directors of Companhia do Metropolitano de São Paulo (“METRO”) from 2007 to 2012, and Executive Officer at Companhia Paulista de Parcerias (“CPP”), from 2006 to 2016.
Ronaldo Coppa. Mr. Coppa has been an employee representative member of our Board of Directors since May 2022. He has a degree in Economics and a Master’s of Business Administration (“MBA”) in Controllership and Public Management, both from USP. Mr. Coppa has a long career at Sabesp, having worked with us since 1999 in managerial positions in the Controllership, Economic-Financial and Business Unit areas in the Metropolitan Office.
Francisco Luiz Sibut Gomide. Mr. Gomide has been an independent member of our Board of Directors since May 2017. He was a member of our Audit Committee from May 2017 to August 2017. He holds a bachelor’s degrees in Civil Engineering and in Economic Sciences from the Federal University of Paraná (Universidade Federal do Paraná – “UFPR”) and a PhD in Hydrology and Water Resources from the Colorado State University. He was the Minister of Mines and Energy in 2002, the CEO of Espírito Santo Centrais Elétricas S.A. between 1995 and 2001, the CEO of the Energy Company of Mato Grosso do Sul between 1997 and 2001, the General Brazilian Diretor of Itaipu Binacional between 1993 and 1995, the CEO of the Energy Company of Paraná (Companhia Paranaense de Energia – Copel) between 1986 and 1993 and the Chief Financial Officer of the same company from 1983 to 1985. Mr. Gomide was also a professor at UFPR from 1970 to 1995. Between 1969 and 1982, he was a hydraulic engineer and hydrologist at the Energy Company of Paraná.
Francisco Vidal Luna. Mr. Luna has been an independent member of our Board of Directors since May 2013. Mr. Luna was also a member of our Audit Committee from April 2013 to September 2016 and was reappointed in May 2020. He has a doctorate in Economics from the Business, Economics and Accounting School at USP and is a retired professor at the same university. He was member of the Board of Directors of BNDES. In the public sector, he has served as the Secretary of Planning for the state and city of São Paulo. He has also worked at the Treasury Department for the State of São Paulo and the Federal Planning Bureau, among other roles. In the private sector, he was the Executive Chairman of Banco Inter American Express S.A, member of the Board of Directors and member of the Audit Committee of Gafisa, and member of the Audit Committee of the Petrobrás Conglomerate. He is currently a member of the Audit Committee of Desenvolve SP, a member of the Board of Trustees of the Fundação Faculdade de Medicina – FFM and a member of the Board of Trustees of Fundação Instituto de Pesquisas Econômicas (“FIPE”).
| 101 |
Leonardo Augusto de Andrade Barbosa. Mr. Barbosa has been a member of our Board of Directors since December 2021. He holds a bachelor’s degree in Law from UFMG, a master’s and a PhD degree from the University of Brasília (Universidade de Brasília – “UnB”), and a post doctorate at the University of Michigan Law School. He currently serves as Head of Institutional Relationships at the National Confederation of Financial Institutions (CNF). He is a professor on the Professional Master in Legislative Studies course at the House of Representatives’ School of Government. Mr Barbosa is also a legislative attorney (on a leave of absence) at the House of Representatives, where he has performed several functions, including Clerk of the House between May 2018 and February 2021, Deputy Clerk for Technical and Legal Advice, Head of the Legal Counsel for the Office of the Clerk, Chief Advisor for Official Conduct (2009-2010), and Chief of Staff of the Minority Leadership (2005-2006).
Luís Eduardo Alves de Assis. Mr. Assis has been an independent member of our Board of Directors since January 2021. He holds a degree in Economics from the University of São Paulo, a master’s degree from the State University of Campinas and an MBA from Scuola Superiore Enrico Mattei, Milan, Italy. He is currently president of Fator Seguradora and a contributor to the newspaper O Estado de São Paulo. Mr. Assis was an independent member of our Board of Directors from May 2014 to May 2020 and a member of our Audit Committee from May 2016 to May 2020. He was the director of Monetary Policy at the Central Bank of Brazil, professor at the Department of Economics at Pontifical Catholic University of São Paulo (Pontifícia Universidade Católica de São Paulo – “PUC-SP”) and FGV São Paulo. He has developed an extensive career in the financial market, serving as Chief Economist and Investment Director at Citibank, President of HSBC Investment Bank Brasil, Chief Operating Officer of HSBC Bank Brasil, Senior Executive of Strategic Planning at the HSBC Group in London and Regional Director of Latin America at HSBC.
Marcelo Munhoz Auricchio. Mr. Auricchio has been an independent member of our Board of Directors since May 2022. He holds a degree in Entrepreneurial Management and Electronics from Universidade Paulista and is completing an MBA in Value Investing. Mr. Auricchio has over 36 years of experience in the industrial sector. He built his career at the Mahle Metal Leve Group and was a partner and director of Safety/Robotics at the Módena Contric Group from 2010 to May 2022. He has also been member of the Board of Directors, Coordinator of the Operations Committee, and Coordinator of the Photovoltaic Committee of the Eternit Group since 2011, a member of the Board of Directors of the Paranapanema Group since April 2022, Chairman of the Board of Directors of Mineradora SAMA since 2022, and was an alternate member of the Fiscal Council of the Unipar Group in 2017.
Wilson Newton de Mello Neto. Mr. de Mello Neto has been a member of our Board of Directors since October 2019 and is an independent member of our Board of Directors since November 2021. He is also a member of our Audit Committee since December 2021. He holds a bachelor’s degree in Law from PUC-SP. He was the CEO of Investe São Paulo from April 2019 to May 2021. He was Vice-President of Corporate Affairs and General Secretary at Danone from May 2015 to March 2019; Director of Corporate Affairs at JBS S.A. from September 2014 to May 2015; Vice-President of Corporate Affairs at BRF S.A. from June 2010 to August 2013; Legal and New Business Director at Tishman Speyer Ltda. from March 2009 to May 2010; Vice-President of Corporate Affairs at Walmart Brasil Ltda. from March 2004 to April 2007; and partner at Machado, Meyer, Sendacz e Opice Advogados from June 1992 to February 2004 and from May 2007 to February 2009. Mr. de Mello Neto was also Vice-President of the Brazilian Supermarket Association (Associação Brasileira de Supermercados) from May 2004 to April 2007; member of the Executive Board of the Brazilian Association of Advertisers (Associação Brasileira de Anunciantes) from May 2015 to March 2019; and Chairman of the Board of Directors of the Brazilian Food Industry Association (Associação Brasileira da Indústria de Alimentos) from March 2018 to March 2019.
André Gustavo Salcedo Teixeira Mendes. Mr. Mendes has been a member of our Board of Directors since January 2023. He received a bachelor’s degree in Electrical and Production Engineering from the Pontifícia Universidade Católica of Rio de Janeiro (“PUC-Rio”), a master’s degree in Electrical Engineering from PUC-Rio, an MBA in Public-Private Partnerships and Concessions from Fundação Escola de Sociologia e Política de São Paulo, and has certifications CGA, from the Brazilian Financial and Capital Markets Association (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais), and CP³P-F, from APMG International. Mr. Mendes was Chief Financial Officer of Akad Seguros (2022), New Business Executive Officer of Iguá Saneamento (2019-2021), an independent consultant for Climate Bonds Initiative (2020-2021) and worked at BNDES (2003-2019) where he held several positions. Mr. Mendes has significant experience in capital markets, with emphasis on infrastructure finance, public-private partnerships, mergers and acquisitions, and new business structuring.
Board of Executive Officers
Our board of executive officers is composed of six executive officers appointed by our Board of Directors for a two-year term. Such terms may be renewed three consecutive times. Our executive officers are responsible for all matters concerning our day-to-day management and operations. Members of our board of executive officers have individual responsibilities established by our Board of Directors and our bylaws.
On March 27, 2023, we published our management proposal which outlines the matters to be discussed at our Ordinary and Extraordinary General Shareholders' meeting to be held on April 28, 2023. One of the matters that will be voted on at the meeting, is an amendment to our Bylaws to include a further executive officer and rearrange the responsibilities assigned to each officer. Once the proposal is approved, our board of executive officers will be composed of the following seven executive officers: Chief Executive Officer, People and Corporate Management Officer, Chief Financial and Investor Relations Officer, Engineering and Innovation Officer, Regulation and New Business Officer, Operation and Maintenance Officer and Customer Officer.
The following are the names, ages, positions, dates of election, date of entry and brief biographical descriptions of our board of executive officers:
| 102 |
| Executive Officer | Age | Position | Date Elected | Date of Entry | |||
| André Gustavo Salcedo Teixeira Mendes | 45 | Chief Executive Officer | January 12, 2023 | January 13, 2023 | |||
| Sabrina de Menezes Correa Furstenau Sabino | 43 | Corporate Management Officer | February 9, 2023 | February 10, 2023 | |||
| Paula Alessandra Bonin Costa Violante | 53 | Technology, Enterprises and Environment Officer | January 30, 2023 | February 9, 2023 | |||
| Bruno Magalhães D’Abadia | 36 | Regional Systems Officer | January 30, 2023 | February 24, 2023 | |||
| Catia Cristina Teixeira Pereira | 49 | Chief Financial Officer and Investor Relations Officer | February 9, 2023 | March 1, 2023 | |||
| Roberval Tavares de Souza | 51 | Metropolitan Region Officer | January 30, 2023 | February 9, 2023 |
André Gustavo Salcedo Teixeira Mendes. See Mr Mendes’s curriculum vitae in “Board of Directors.”
Sabrina de Menezes Correa Furstenau Sabino. Mrs. Menezes received a degree in International Relations from Pontifícia Universidade Católica de Minas Gerais and has built a career that combines the experiences of people and business management. She was Head of Talent Acquisition and Management (2020 to 2022) at XP Inc, Head of Research (2017 to 2019) at Egon Zehnder International, Project Leader (2010 to 2017) at Falconi Consultores de Resultado, having worked on productivity, organizational structure, strategic and operating planning projects at several companies, such as Petrobras, Paranapanema, Companhia Energética de Brasília, Vale, and TAM, as well as in public bodies such as the Education Secretariat of Minas Gerais (Secretaria de Educação de Minas Gerais) and the Office of the Chief of Staff of Rio de Janeiro.
Paula Alessandra Bonin Costa Violante. Mrs. Violante received a bachelor’s degree in Chemical Engineering from Universidade Federal de São Carlos, a master’s degree in Civil Engineering (hydraulics and sanitation) from Escola de Engenharia de São Carlos at Universidade de São Paulo and a supervised master’s degree from CIRSEE (Centre International de Recherche Sur L’Eau et L’Environnement) of SUEZ – France. She also attended a Controllership and Finance course at Fundação Instituto de Pesquisas Contábeis, Atuariais e Financeiras (“FIPECAFI”) and a Business Development Program from Fundação Dom Cabral (in company). Mrs. Violante was an Engineering and Operational Development Officer at Iguá Saneamento (2019 to January 2023) and an Operations Officer at SPAT (2017 to December 2018). She also worked in operational technical support in concession contracts for Mexico and Angola at Odebrecht Ambiental (September 2016 to July 2017). She was Contract Officer for several concessions in the State of São Paulo and State of Espírito Santo, in addition to having worked in corporate engineering (January 2009 and November 2013) at Foz do Brasil. She was a volunteer, as a senior examiner and rapporteur for management awards: Iberoamericano Award and Brazilian National Quality Award. She actively participated in groups and technical chambers of hydrographic basins, in the contracts she worked in.
Bruno Magalhães D’Abadia. Mr. D’Abadia received a bachelor’s degrees in Mechatronics Engineering from UnB and in Accounting from Uninter, an MBA in Production Engineering from Centro Universitário de Anápolis, an MBA in Stock Market Analysis from Instituto Brasiliero de Mercado de Capitas (“IBMEC”), and a master’s degree in Economics from UnB. Mr. D’Abadia was a State Secretary for the Administration of Goiás (August 2019 to November 2022), the Chair of the National Council of the Government’s Secretaries of State (May 2022 to November 2022), a legislative consultant of public finance (January 2015 to January 2019 and November 2022 to January 2023), the Chair of the Fiscal Council of Companhia de Saneamento de Goiás (February 2020 to January 2023), a member of the Fiscal Council of Companhia de Investimentos e Parcerias do Estado de Goiás (August 2019 to January 2023), the Chair of the Board of Directors of Companhia de Investimentos e Parcerias do Estado de Goiás (March 2019 to August 2019), a member of the Board of Directors of Companhia de Saneamento de Goiás (April 2019 to August 2019), and an external control auditor at Brazilian Federal Court of Auditors (March 2012 to January 2015) and engineer at Petrobras (September 2008 to October 2010), among others.
Catia Cristina Teixeira Pereira. Mrs. Pereira received a bachelor’s degree in Economics from Universidade Federal Fluminense, an MBA in Finance from IBMEC, an MBA in Controllership and Finance from Universidade Federal Fluminense, and an MBA in Economic Engineering from Universidade do Estado do Rio de Janeiro. She worked at Ball as Chief Financial Officer (March 2021 to February 2022), was a Director of the Center of Shared Services for South America, for structuring and implementation (July 2018 to March 2021), and Treasury Manager for South America (2006 to June 2018). She was also Treasury Control and Planning Manager (2003 to 2006) and Treasury Coordinator (2000 to 2003) at Embratel, among other position. She has a Black Belt Six Sigma certification and participated in several courses, training sessions, and conferences on finance, strategy, and leadership in Brazil and abroad and, in November 2022, she concluded the Board of Directors Member course of the Instituto Brasileiro de Governança Corporativa.
| 103 |
Roberval Tavares de Souza. Mr. Souza received a bachelor’s degree in Civil Engineering from Mogi das Cruzes University (Universidade de Mogi das Cruzes), a specialization degree in Basic Sanitation Engineering from Faculdade de Saúde Pública at Universidade de São Paulo, an MBA in Business Management from FGV, and attended extension courses in Innovation Leadership at Massachusetts Institute of Technology. Mr. Souza is sanitation consultant (2022), worked at Sabesp from 1992 and 2021, in several management positions, such as Head of Central Business Unit and Head of South Business Unit, Interception and Isolated Systems Manager at the Sewage Treatment Business Unit, Administrative and Finance Manager at the Sewage Treatment Business Unit, Regional Manager of Operation, Maintenance, and Commercial Department of the East Business Unit. He was also a president of the São Paulo Institute in Management Excellence (Instituto Paulista de Excelência em Gestão) (2012 to 2014) and president of the Brazilian Association of Sanitation and Environmental Engineering (Associação Brasileira de Engenharia Sanitária e Ambiental) (2016 to 2020).
| B. | Compensation |
Pursuant to Brazilian Corporate Law, our shareholders are responsible for establishing the aggregate amount of compensation we pay to the members of our Board of Directors, members of our fiscal committee and our executive officers. According to Resolution No. 80 issued by CVM, we have to periodically disclose certain information on the aggregate compensation such as averages and fringe benefits.
In 2022, 2021 and 2020, the aggregate compensation, including taxes, social contribution charges and benefits in kind granted that we paid to members of our Board of Directors, board of executive officers and fiscal committee for services in all capacities was R$7.5 million, R$7.8 million and R$ 7.9 million, respectively.
The table below sets forth the breakdown of the total compensation received by our directors and members of our board of executive officers and fiscal committee and other data related to their compensation for the periods indicated:
| 2022 | 2021 | 2020 | |||
| Total compensation per administrative body | |||||
| Board of Directors | 1,872 | 1,771 | 1,726 | ||
| Board of Executive Officers | 5,345 | 5,776 | 5,797 | ||
| Fiscal Committee | 331 | 296 | 342 | ||
| Total amount of compensation | 7,548 | 7,843 | 7,865 | ||
| Number of members (in individuals) | |||||
| Board of Directors | 11 | 10 | 10 | ||
| Board of Executive Officers | 6 | 6 | 6 | ||
| Fiscal Committee | 5 | 4 | 5 | ||
| Fixed annual compensation | |||||
| Salary | |||||
| Board of Directors | 1,440 | 1,362 | 1,328 | ||
| Board of Executive Officers | 2,729 | 2,940 | 2,959 | ||
| Fiscal Committee | 255 | 228 | 263 | ||
| Direct and indirect benefits | |||||
| Board of Directors | 432 | 409 | 398 | ||
| Board of Executive Officers | 1,311 | 1,396 | 1,399 | ||
| Fiscal Committee | 76 | 68 | 79 | ||
| Variable compensation | |||||
| Bonus | |||||
| Board of Directors | - | - | - | ||
| Board of Executive Officers | 1,305 | 1,440 | 1,439 | ||
| Fiscal Committee | - | - | - | ||
| Maximum amount of compensation | |||||
| Board of Directors | 234 | 234 | 234 | ||
| Board of Executive Officers | 974 | 991 | 989 | ||
| Fiscal Committee | 68 | 68 | 68 | ||
| Minimum amount of compensation | |||||
| Board of Directors | 140 | 133 | 140 | ||
| Board of Executive Officers | 959 | 935 | 971 | ||
| Fiscal Committee | 68 | 68 | 68 | ||
| Average amount of compensation | |||||
| Board of Directors | 174 | 177 | 171 | ||
| Board of Executive Officers | 957 | 963 | 953 | ||
| Fiscal Committee | 68 | 68 | 68 | ||
At our general shareholders’ meeting held on April 28, 2022, our shareholders approved the amount of R$7.1 million in aggregate compensation payable to the members of our Board of Directors, members of our fiscal committee, members of our audit committee and our executive officers in 2022. The remuneration for 2023 will be decided by the General Shareholders’ Meeting to be held on April 28, 2023.
| 104 |
Profit Sharing and Pension Plans
We have established a pension and benefit fund to provide our employees with retirement and pension benefits. The plans of employees who joined up to December 1, 2019, are managed by Fundação SABESP de Seguridade Social – SABESPREV, and new employees joining from January 1, 2020, are managed by Fundação CESP, both closed supplementary pension entities in self-management mode. This pension plan provides benefit payments to former employees and their families. Both we and our employees make contributions. Our total contributions to the pension plan totaled R$39.4 million, R$35.4 million and R$ 36.0 million in 2022, 2021 and 2020, respectively. In addition to the pension plan under SABESPREV and Fundação CESP, we are also required to pay supplemental pension payments relating to the employment contract of certain employees prior to the creation of SABESP, which we called a plan G0. Based on independent actuarial reports, as of December 31, 2022, our obligation under these both plans (G0 and G1) totaled R$2,150.2 million. For more information on our pension plans, see Note 22 to our financial statements included in this annual report.
Beginning in 2020, payments under the profit-sharing plan were based both on general goals that evaluate us as a whole and on other goals that evaluate the performance our different business units. Payments are proportionally reduced annually if the goals are not completely achieved.
We recorded profit-sharing expenses of R$96.2 million, R$88.4 million and R$91.0 million in 2022, 2021 and 2020, respectively. We do not have a stock-option plan for our employees.
| C. | Board Practices |
The members of our Board of Directors are elected at an annual shareholders’ meeting to serve a two-year term. Such term may be renewed three consecutive times. Our next annual shareholders’ meeting will be held on April 28, 2023. Our Board of Directors ordinarily meets once a month or when called by a majority of the directors or the chairman. For more information, see “Item 6.A. Directors and Senior Management—Board of Directors.”
Our board of executive officers is composed of six executive officers appointed by our Board of Directors for a two-year term. Such term may be renewed three consecutive times. Although our bylaws provide that the meetings of our board of executive officers shall be held at least twice a month, meetings are held on a weekly basis or, whenever called by the chief executive officer or by two officers without specific designation jointly. For more information, see “Item 6.A. Directors and Senior Management—Board of Executive Officers.”
None of our directors and/or executive officers is a party to an employment contract providing for benefits upon termination of employment. However, the director who is the representative of the employees will remain as an employee after his tenure, maintaining all benefits he was entitled to as an employee prior to his election.
Fiscal Committee (Conselho Fiscal)
Our fiscal committee, which is established on a permanent basis, consists of a minimum of three and a maximum of five sitting members and the same number of alternates. Our fiscal committee currently consists of three sitting members and five alternates. All of the current members of our fiscal committee were elected at the shareholders’ meeting held on April 28, 2022. The primary responsibility of the fiscal committee, which is independent from management and from the external auditors appointed by our Board of Directors, is to review our financial statements and report on them to our shareholders. Our fiscal committee generally meets once a month.
The following are the names, ages, position, date of election, date of entry and brief biographical descriptions of the current and alternate members of our fiscal committee:
| Fiscal Committee Members | Age | Position | Date Elected | Date of Entry | |||
| Fabio Bernacchi Maia | 52 | Member | April 28, 2022 | May 4,2022 | |||
| Edson Tomas De Lima Filho | 70 | Member | April 28, 2022 | May 4,2022 | |||
| Maria Elvira Lopes Gimenez (1) | 52 | Member | April 28, 2022 | May 4,2022 | |||
| Humberto Macedo Puccinelli | 65 | Alternate | April 28, 2022 | May 4,2022 | |||
| Izadora Rodrigues Normando Simões | 47 | Alternate | April 28, 2022 | May 4,2022 | |||
| João Henrique Poiani | 52 | Alternate | April 28, 2022 | May 4,2022 | |||
| Marcelo Gomes Sodré | 66 | Alternate | April 28, 2022 | May 4,2022 | |||
| Massao Fábio Oya(1) | 41 | Alternate | April 28, 2022 | May 4,2022 |
(1) Member indicated by the minority shareholders.
| 105 |
Fabio Bernacchi Maia. Mr. Maia has been a member of our fiscal committee since May 2020. He holds an MBA in Business Management from the Administration Institute Foundation of the University of São Paulo, an MBA in Public Management from FGV, and an undergraduate degree in Business Administration from São Judas Tadeu University. He began his career at EMTU in 1994, where he held several positions until early 2016, such as Financial Controllership Manager and Administrative and Finance Director. Since 2016, he has served in CODEC, where he was Executive Secretary from July 2017 to January 2019 and in the first three months of 2020. Currently, he is Deputy Executive Secretary of CODEC. Mr. Maia has been a sitting member of the Fiscal Council of EMAE since 2017, and alternate member of the Fiscal Council of METRO since 2019. He was also a sitting member of the Fiscal Council of Companhia de Seguros do Estado de São Paulo (“COSESP”) from 2017 to 2018.
Edson Tomas de Lima Filho. Mr. Lima Filho has been a member of our fiscal committee since May 2020. He holds a bachelor’s degree in Economics from Mogi das Cruzes University (Universidade de Mogi das Cruzes) and a master’s degree in Public Administration from FGV. He is also an alternate Fiscal Councilor for EMAE. He was the Executive Secretary for Administration at the Municipal Health Secretariat of São Paulo (Secretaria Municipal da Saúde de São Paulo) from 2021 to 2023. He was the President of the Municipal Authority for Urban Cleaning of the municipality of São Paulo from 2017 to 2021. He was Chief Executive Officer of COSESP from 1999 to 2004 and Chairman of the Board of Directors from 1999 to 2004 and in 2018 for the same company. He held several positions in public sector entities: Chairman of the Board of Directors of São Paulo’s Road Development Company (Desenvolvimento Rodoviário S.A. – “DERSA”) from March 2015 to April 2018; member of the Board of Directors of EMTU from June 2007 to June 2010; member of the Board of Directors of Banco Nossa Caixa S.A. from 2001 to 2002; member of the Board of Directors of CETESB from 1999 to 2001, where he was also Director of Corporate Management from January 2007 to January 2011 and from January 2015 to December 2016 and an alternate Fiscal Councilor from 2021 to 2022. Mr. Lima Filho was also a member of the Advisory Board of Fundação Mario Covas between July 2001 and April 2002 and a member of the Board of Directors of the Brazilian Society of Sciences and Insurance from 1999 to 2001.
Maria Elvira Lopes Gimenez. Mrs Gimenez has been a member of our fiscal committee since May 2021. She holds a bachelors’ degree in Economics with specialization in Corporate Governance. She is currently a sitting member of the Fiscal Council of São Martinho S.A., WLM Participações e Comercio de Máquinas e Veículos S.A. and Minupar Participações S.A., and an alternate member at Whirlpool S.A., Bicicletas Monark S.A., Pettenati Indústria Têxtil S.A., Tronox Pigmentos do Brasil S.A., Companhia de Ferro Ligas da Bahia – Ferbasa, Banco Pine S.A. and Rossi Residencial S.A.. Previously, she was a sitting member of AES Tietê S.A., an alternate member of the Companhia Providência Ind. e Com. S.A., Eucatex S.A., São Martinho S.A., Whirlpool S.A., Centro de Diagnósticos S.A. and us. She also worked at Solução Governança Corporativa e Consultoria Ltda/Jorge Lepeltier Consultores Associados, between 2013 and 2019.
Humberto Macedo Puccinelli. Mr. Puccinelli has been a member of our fiscal committee since May 2021. He holds a degree in Economics from PUC-SP. He has been the Technical Assistant of the State Treasury since January 2004. He was also a member of our fiscal committee from 2011 to 2020. He worked at the Economy and Planning Secretariat of the State of São Paulo as Assistant Secretary in 2003, at the State Treasury from 1996 to 2002, at the Health State Department as Assistant Secretary from 1995 to 1996, and at the Economy and Planning Secretariat State of São Paulo (Secretaria de Planejamento e Gestão do Estado de São Paulo) from 1985 to 1995.
Izadora Rodrigues Normando Simões. Mrs. Simões has been a member of our Fiscal Council since May 2022. She holds a law degree from Universidade Paulista, a postgraduate degree in Administrative Law from the PUC-SP and in Civil Procedural Law from the Superior School of the Attorney General’s Office of the State of São Paulo. She is currently Technical Advisor at the São Paulo state government Secretariat and a member of the Fiscal Council of the Brazilian Hemophilia Association. Ms. Simões was Cabinet Advisor at DETRAN-SP (from 2017 to 2019), member of the Thematic Chamber of Legal Effort of the National Traffic Council (from 2017 to 2018), Legal Advisor at Brazilian Federation of Hemophilia (2017), Legal Advisor at the Association for Incentive to the Special Work Center (since 2016).
João Henrique Poiani. Mr. Poiani has been a member of our Fiscal Council since May 2022. He holds an Electrical Engineering degree from UNESP and an Executive MBA in Marketing from Escola Superior de Propanganda e Marketing. He worked at Telefônica from 1996 to 2008 as Executive at the Marketing, Strategic Planning, Engineering and Opertaions segments, serving in the last years as Superintendent of Operation and Maintenance of Networks. On January 2011, Mr. Poiani took office as Chief Operating Officer of DERSA, a body linked to the Secretaria Estadual de Logística e Transportes do Estado de São Paulo, holding as main responsibilities the Management of the Coastal Crossings of the São Paulo State and the Operation of Highways in concession process. On March 2015, he has also held the position of Chief Operating Officer at PRODESP, a State-owned Company linked to Secretaria de Estado de Governo, where he was in charge of the Operation of the Data Center and the Outsourcing Services provided to State bodies. He served as the Chief Information Officer at DETRAN-SP from 2019 to 2022.
| 106 |
Marcelo Gomes Sodré. Mr. Sodré has been a member of our Fiscal Council since May 2022. He holds a bachelor’s degree in Law from PUC-SP, and a bachelor’s degree in Philosophy from USP. He has a master’s degree and a Ph.D. in Law from PUC-SP. He joined the State Attorney General’s Office in 1981, and worked in the Legal Department of the Environmental Secretariat from 1997 to 2014; he was also the Director of Procon SP Foundation (1988 to 1994). He was a member of the State Board of Education, of the Advisory Board of the Procon SP Foundation and of the Board of the Conselho da Escola Superior PGE/SP, and a member of the Boards of the Brazilian Institute for Consumer Defense, Greenpeace, and Alana Institute. He is a professor (both undergraduate and graduate) at PUC-SP Law School, of which he was Deputy Dean (from June 2009 to June 2013). He was advisor to the commission responsible for drafting the Brazilian Consumer Defense Code (Federal Law 8,078, 1990).
Massao Fábio Oya. Mr Oya has been a member of our fiscal committee since May 2021. He holds an MBA in Finance and Controllership Management. He is currently a member of the fiscal council of the following companies: Companhia de Ferro Ligas da Bahia – Ferbasa since April 2017, Rossi Residencial S.A. since April 2017, Tronox Pigmentos do Brasil S.A. since April 2013, Whirlpool S.A. since April 2021, Bicicletas Monark S.A. since April 2015, Heleno & Fonseca Construtécnica S.A. since May 2021, and Terra Santa Propriedades Agrícolas S.A. since April 2022, acting also as an alternate member of the fiscal council of: Schulz S.A. since April 2017, Tupy S.A. since May 2020, Mahle Metal Leve S.A. since May 2020 and São Martinho S.A. since July 2022. He is also currently a member of the Board of Directors of Pettenati Indústria Têxtil S.A. since October 2018 and was a member of the Board of Directors for Minupar Participações S.A. from June 2021 to April 2022. He was a sitting member of the fiscal council of the following companies: TIM Participações S.A. from September 2011 to January 2012 and from March 2012 to April 2012, Companhia de Saneamento do Paraná – Sanepar from April 2011 to April 2012, Wetzel S.A. from Apr 2011 to April 2012, Bardella S.A – Indústrias Mecânicas from April 2013 to April 2015, General Shopping S.A. from October 2012 to April 2013, Companhia Providência Ind. e Comércio from April 2014 to March 2016, Companhia Paranaense de Energia – COPEL from April 2015 to April 2017 and from April 2010 to April 2011, Companhia de Saneamento do Estado de São Paulo - Sabesp from April 2015 to April 2017 and from April 2013 to April 2014, Pettenati Indústria Têxtil S.A. from October 2014 to October 2018, WLM Participações e Comércio de Máquinas e Veículos S.A. from October 2011 to April 2020), Whirlpool S.A. from April 2018 to July 2020), Eucatex S.A. – Indústria e Comércio from June 2019 to July 2020 and from April 2015 to April 2016), São Martinho S.A. from July 2017 to July 2020), Banco do Estado do Rio Grande do Sul S.A. from April 2017 to February 2021, Mantris - Gestão em Saúde Corporativa Ltda from June 2018 to March 2021, and Centro de Imagem Diagnósticos S.A. from April 2021 to April 2022.
Audit Committee
Our bylaws provide for an audit committee to be comprised of three board members, who will cumulatively comply with the requirements of (i) independence, (ii) technical expertise, and (iii) identifying and complying with applicable exemptions in accordance with the United States Securities and Exchange Commission, or the SEC, and New York Stock Exchange, or NYSE, rules. Our Board of Directors determined that Francisco Vidal Luna qualifies as a Coordinator and as Financial Expert under the SEC rules. Additionally, our Board of Directors also determined that Wilson Newton de Mello Neto also qualifies as Financial Expert. The current members were appointed by the Board of Directors. Pursuant to our bylaws, the members of our audit committee may be appointed simultaneously to their election to the Board of Directors or by a subsequent resolution at a board of director’s meeting.
The audit committee is mainly responsible for assisting and advising the Board of Directors in its responsibilities to ensure the quality, transparency and integrity of our published financial information and financial statements. The audit committee is also responsible for supervising all matters relating to the Code of Conduct and Integrity, accounting, internal controls, the internal and independent audit functions, compliance, risk management and internal policies, such as the related parties transaction policy. The audit committee and its members have no decision-making powers or executive functions.
The minimum availability required from each member of the audit committee is thirty hours per month. Under our bylaws, the members shall exercise their roles for the same period as their corresponding term of office, or until otherwise resolved by the general shareholders’ meeting or by resolution of the Board of Directors. In the event that an audit committee member resigns or is removed from office after exercising any portion of his or her term, such member may only rejoin the audit committee at least three years from the end of such member’s term. All of our audit committee members are independent.
The following are the names, positions and dates of election, date of entry of the members of our audit committee:
| Audit Committee Members | Position | Date Elected | Date of Entry | ||
| Francisco Vidal Luna | Coordinator and Financial Expert | April 28, 2022 | May 2, 2022 | ||
| Wilson Newton de Mello | Member and Financial Expert | April 28, 2022 | May 2, 2022 |
See curriculum vitae above in “—Board of Directors.”
| 107 |
Eligibility and Advisory Committee
In accordance with Federal Law No. 13,303/16, and pursuant to our bylaws, as approved at the extraordinary shareholders’ meeting held on April 27, 2018, we created an Eligibility and Advisory Committee, responsible for supervising the process for the appointment and evaluation of members of our Board of Directors, executive board and fiscal committee.
This committee is composed of up to three members, elected by a general shareholders’ meeting, without a fixed term of office. Members must have at least three years’ professional experience in public administration, or three years’ experience in the private sector in an area in which, or related to which, we operate.
The following are the names, positions and dates of election of the members of our Eligibility and Advisory Committee:
| Eligibility and Advisory Committee | Position | Date Elected | Date of Entry | ||
| Fábio Aurélio Aguilera Mendes | Member | June 3, 2019 | June 4, 2019 | ||
| Carla Almeida | Member | November 24, 2021 | November 29, 2021 | ||
| Paula Cristina Nassif Elias de Lima | Member | June 3, 2019 | June 4, 2019 |
Fábio Aurélio Aguilera Mendes. Mr. Mendes holds a bachelor’s degree in Law from Faculdade de Direto de Itu. He is currently the Coordinator of Administration, Contracts and Agreements of the Department of Infrastructure and Environment and a member of the Environmental Clearinghouse (Câmara de Compensação Ambiental) of the State of São Paulo. He was a technical advisor for CETESB between September 2015 and March 2019 and a cabinet technical advisor at the State Environmental Department between June and September 2015. He held several positions as technical assistant in the São Paulo state government between May 2007 and June 2015 and worked for the Development Foundation at UNESP as an administrative assistant between December 2006 and May 2007.
Carla Almeida. Mrs. Almeida holds a bachelors’ degree in architecture with specialization in Project Management – PMI Methodology by SENAC. She has been an advisor to the Head of the Office of the State Secretariat for Environment, Infrastructure and Logistics since January 2019. She has performed several activities in the public sector, such as: Executive Advisor to the Housing Development and Urbanism Company from June 2016 to August 2018, Advisor to the Office of the São Paulo state government from February 2015 to June 2016, Coordinator of the Managing Committee of the Government Spending Improvement Program from June 2012 to February 2015, among others.
Paula Cristina Nassif Elias de Lima. Ms. Lima is a business administrator and graduated from the School of Economics, Accounting and Administrative Sciences at Mackenzie University and is a lawyer and holds a degree from Faculdades Metropolitanas Unidas. She has worked in CETESB from December 1988 to July 2016, serving as an assistant to the executive board between December 1988 and May 2008, Director of the Human Resources Department of the Environmental Department between May 2008 and January 2016, and Human Resources Management Department between January 2016 and July 2016. She is currently the Director of the Human Resources Department of the State Secretariat for Environment, Infrastructure and Logistics where she has held this position since July 2016.
Members of the Eligibility and Advisory Committee may attend the Board of Directors’ meetings where matters related to this committee are discussed and have the right to speak, but not to vote, in accordance with our bylaws.
This committee is also responsible for providing methodological and procedural support to the Board of Directors to evaluate the performance of officers and other members of statutory committees.
We expect that a written charter addressing the committee’s purpose and detailing its required responsibilities will be approved by the Board of Directors.
| D. | Employees |
One of our strategic guidelines is to value people. We have adopted the competency-based people management model, which is continually to ensure towards innovation, flexibility, continuous improvement, high performance and engagement of the workforce. The competency-based people management is a model that allows us to integrate our processes and includes continuous education, career management, quality of life, management of our organizational culture and wellbeing and human resources services, among others. The last organizational wellbeing survey was carried out in 2022 and applied by the global consulting company Great Place to Work. We obtained a favorability index of 72% and, based on this result and the assessment of our People’s Management Practices, we were certified for the second time as a “Great Place to Work.”
Our compensation policy is linked to our employees’ careers and salary plan set out in accordance with our competency management model and with the remuneration standards in our market sector. We have a profit-sharing program, through which we establish indicators and targets for our employees in order to encourage our employees’ to achieve corporate objectives and assess their performance.
| 108 |
In order to identify the training needs of our employees and establish training and development plans, we maintain the Sabesp Corporate University (Universidade Empresarial Sabesp – “UES”). Among the UES programs, we have a leadership development program, which is intended to develop an innovative leadership culture that leads to actions aimed at establishing a new organizational culture, with a greater focus on results, innovation and competitiveness. In addition, to develop and stimulate the culture of innovation and entrepreneurship through the generation and sharing of employee ideas, we hold the Sabesp entrepreneur award from time to time.
As of December 31, 2022, we had 12,999 full-time employees, 27 interns and 474 apprentices (aprendizes), as defined by Federal Law No. 10,097/2000, dated December 19, 2000, as amended.
The following table sets forth the number of our full-time employees by main category of activity and geographic location as of the dates indicated:
| As of December 31, | |||||
| 2022 | 2021 | 2020 | |||
| Number of employees by category of activity: | |||||
| Projects and operations | 9,037 | 9,223 | 9,445 | ||
| Administration | 1,906 | 1,925 | 1,932 | ||
| Finance | 362 | 362 | 395 | ||
| Marketing | 995 | 1,005 | 1,034 | ||
| Number of employees by corporate division: | |||||
| Head office | 1,426 | 1,400 | 1,307 | ||
| São Paulo metropolitan region | 5,586 | 5,721 | 5,971 | ||
| Regional Systems | 5,287 | 5,394 | 5,528 | ||
| Total number of employees | 12,299 | 12,515 | 12,806 | ||
The average tenure of our employees is approximately 21.5 years. We also outsource certain services such as maintenance, delivery of water and sewage bills, meter reading, catering and security. We believe that our relations with our employees are generally satisfactory.
Approximately 62% of all our employees are members of unions. The five main unions that represent our employees are (i) the Union of Workers in Water, Sewage and Environment of the State of São Paulo; (ii) workers union of Santos Urban Industries, Baixada Santista region, South Coast and Vale Ribeira; (iii) the Union of Engineers of the State of São Paulo; (iv) the Union of Attorneys of the State of São Paulo; and (v) the Union of Industrial Technicians of the State of São Paulo.
The collective bargaining agreement signed in 2019 resulted in: (i) a salary increase of 4.99% (which corresponds to the inflation adjustment for the period); (ii) a 4.99% increase in meal vouchers; (iii) a 4.99% increase in food assistance; (iv) a 38.59% increase in nursery stipends; (v) maintenance of the clause from the 2018/2019 collective bargaining agreement which guarantees the employment of 98% of our employees; and (vi) maintenance of the Christmas food stipend on an exceptional basis.
As a result of the COVID-19 pandemic, the collective bargaining agreement for the 2019/2020 period was maintained, with no readjustment to salaries and benefits, except for (i) the base salary of engineers, in compliance with current legislation, and (ii) nursery assistance, as a result of the gradual transfer of costs of the now closed Child Learning Center (“CCI”), as adjusted in the collective negotiations of 2019/2020, however without financial impacts since the readjustment was funded with the resources following CCI’s closure.
The collective bargaining agreement signed in 2021 resulted in: (i) a salary increase of 7.79% (which corresponds to the inflation adjustment for the period); (ii) a 7.79% increase in meal vouchers; (iii) a 7.79% increase in food assistance; (iv) a 9.84% increase in nursery stipends, as a result of the gradual transfer of costs of the now closed CCI, as adjusted in the collective negotiations of 2019/2020, however without financial impacts since the readjustment was funded with the resources following CCI’s closure; (v) maintenance of the clause from the 2020/2021 collective bargaining agreement which guarantees the employment of 98% of our employees; and (vi) maintenance of the Christmas food stipend on an exceptional basis.
The collective bargaining agreement signed in 2022 resulted in: (i) a salary increase of 12.26% (which corresponds to the inflation adjustment for the period); (ii) a 12.26% increase in meal vouchers; (iii) a 12.26% increase in food assistance; (iv) a 12.26% increase in nursery stipends; (v) maintenance of the clause from the 2021/2022 collective bargaining agreement which guarantees the employment of 98% of our employees; and (vi) maintenance of the Christmas food stipend on an exceptional basis.
| 109 |
In 2022, 2021 and 2020 there were no strikes. Under Brazilian law, our non-administrative employees are considered “essential employees” and, therefore, are limited in their right to strike.
To promote the health and safety of our employees, we maintain an occupational health and safety management system, which covers all our employees and is based on preventive and protective measures in order to avoid or minimize exposure of employees to the risks associated with work, as well as reducing or eliminating occupational accidents and diseases. In 2022, we recorded 153 accidents, with a frequency rate of 8.8 and a severity rate of 169. We recorded no deaths in 2022 and no cases of employees on leave due to occupational diseases. The absenteeism rate recorded was 5.0%.
Despite all efforts to contain the spread of COVID-19 since the beginning of the pandemic, in 2022 we registered the contamination of 2,709 employees and 2 deaths as a result of COVID-19.
| E. | Share Ownership |
As of December 31, 2022, less than 1% of our common shares were owned by our directors and executive officers. For more information, see “Item 7.A. Major Shareholder.”
| ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
| A. | Major Shareholder |
Our outstanding capital stock consists of 683,509,869 common shares, without par value. Under state laws, the State is required to own at least one-half plus one of our outstanding common shares. All of our shareholders, including the State, have the same voting rights. The following table sets forth ownership information for each of our shareholders that beneficially owned 5.0% or more of our common shares and for our officers and directors, individually and as a group, as of December 31, 2022:
| Shares | % | ||
| State of São Paulo(1) | 343,506,670 | 50.3% | |
| Directors and executive officers of Sabesp | 100 | - | |
| Others: | |||
| In Brazil | 257,339,311 | 37.6% | |
| Abroad (NYSE) (2)(3) | 82,663,788 | 12.1% | |
| Total(3) | 683,509,869 | 100.0% |
| (1) | It includes 343,506,664 shares held by the Secretariat of Finance and Planning of the State of São Paulo (Secretaria da Fazenda e Planejamento do Estado de São Paulo) in addition to six shares held by CPP, which is an entity controlled by the State of São Paulo. |
| (2) | Shares traded as American Depositary Receipts (ADR) on the New York Stock Exchange, through The Bank New York Mellon, the depositary bank for our ADRs. |
| (3) | Each ADR corresponds to 1 share. |
In the U.S., our common shares, which are evidenced by ADRs, are listed in the form of ADSs on the NYSE. As of December 31, 2022, 12.1% of our outstanding common shares were held in the United States in the form of ADSs. According to the ADR depositary’s records, which contain information regarding the ownership of our ADSs, there were, as of December 31, 2022, 26 recorded holders of ADSs in the United States.
On April 10, 2023, the São Paulo state government signed the contract with IFC, an agency linked to the World Bank, which will act as the advisor in this process. We are currently awaiting guidance from CDPED, which has authority over our corporate reorganization plan, including the formation of the controlling company, or any other type of corporate reorganization, including a change of control, pursuant to the recent changes to the basic sanitation law. As of the date of this annual report, a decision has not been made on the model for our potential corporate reorganization. For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Control by the State of São Paulo—Our controlling shareholder is currently discussing proposals for our corporate reorganization. We cannot guarantee that any potential reorganization will not have a material adverse effect on our business, financial condition or results of operations.”
| 110 |
| B. | Related Party Transactions |
Transactions with the State of São Paulo
We have entered into extensive transactions with the State, which is our controlling shareholder, and we expect to continue to do so. The State is our largest customer. It owns some of the facilities that we use in our business, it is one of the governmental entities that regulate our business, and it has assisted us in obtaining financing on favorable terms.
Many of our transactions with the State reflect policies of the State that depend on decisions of elected officials or public servants and are accordingly subject to change. Among the practices that could change are those described below concerning the provision of State guarantees, and the terms on which we use state-owned reservoirs.
Rendering Services
We provide water and sewage services to the federal government, state and municipal governments and government entities in the ordinary course of our business. Gross revenue from sales to the State, including State entities, totaled R$662.0 million in 2022, R$522.6 million in 2021 and R$501.8 million in 2020. Our accounts receivable from the State for sanitation services totaled R$96.7 million, R$76.6 million and R$74.3 million, as of December 31, 2022, 2021 and 2020, respectively. In addition, as required by law, we invest our cash and cash equivalents with government financial institutions.
Payment of Pensions
Pursuant to a law enacted by the State, certain former employees of some state-owned companies that provided services to us in the past and later merged to form our company acquired a legal right to receive supplemental pension benefit payments. These rights are referred to as “Plan G0.” These amounts are paid by us, on behalf of the State, and are claimed by us as reimbursements from the State, as primary obligor. In 2022, 2021 and 2020, we made payments to former employees of R$205.2 million, R$185.4 million and R$181.6 million, respectively in respect of Plan G0. The State made reimbursements in 2022, 2021 and 2020 in the amounts of R$186.7 million, R$179.8 million and R$173.9 million, respectively.
Agreements with the State
In September 1997, we and the State entered into a memorandum of understanding providing that we would, in effect, apply dividends we declared that were otherwise payable to the State to offset accounts receivable in connection with the provision of water and sewage services to the State and its controlled entities.
On December 11, 2001, we entered into an agreement with the State and the DAEE. Pursuant to this agreement, the State acknowledged and agreed, subject to an audit by a state-appointed auditor, to pay us amounts it owed to us in respect of:
| · | water and sewage services we provided to governmental agencies, State owned autonomous entities and foundations through December 1, 2001, and that was not offset in accordance with the September 1997 memorandum of understanding, in the total amount of R$358.2 million. This amount was renegotiated and included in the second amendment to this agreement discussed below; and |
| · | supplemental retirement and pension benefits we paid from March 1986 to November 2001 on behalf of the State to former employees of the State owned companies which merged to form our company; as we did not reach an agreement regarding these amounts, a joint inquiry has commenced in order to ensure agreement between us and the State, in the total amount of R$320.6 million. This amount was renegotiated and included in the third amendment to this agreement discussed below. |
The agreement provided that the DAEE would transfer to us ownership of the Taiaçupeba, Jundiaí, Biritiba, Paraitinga and Ponte Nova reservoirs (herein after referred to as “the reservoirs”), which form the Alto Tietê system, and that the fair value of these assets would reduce the amounts owed to us by the State.
| 111 |
Under the December 2001 agreement, in 2002, a state-owned construction company (Companhia Paulista de Obras e Serviços), on behalf of the State, and an independent appraisal firm (Engenharia de Avaliações), on our behalf, presented their valuation reports relating to the reservoirs. Under the agreement, the arithmetic average of these appraisals is deemed the fair value of the reservoirs. The appraisals contained in these reports were in the amounts of R$335.8 million and R$341.2 million, respectively. Because we had already made investments in these reservoirs by then, the arithmetic average of the appraisals submitted to our Board of Directors by August 2002, R$300.9 million, was net of a percentage corresponding to these investments. Our Board of Directors approved the valuation reports. This amount was updated until September 2008 according to IPCA index and amounted to R$696.3 million.
Under the December 2001 agreement, for amounts due in excess of the fair value of the reservoirs, the State is to make payments in 114 consecutive monthly installments. The nominal amount owed by the State would not be indexed to inflation or earn interest if there was a delay in concluding the appraisal of fair value. The installments will be indexed on a monthly basis by the IGP-M index, plus 6.0% per year, starting on the date the first installment becomes due.
On October 29, 2003, the Public Prosecution Office of the State of São Paulo (Ministério Público do Estado de São Paulo), on behalf of the people of the State, brought a civil public action in a Trial Court of the State of São Paulo (12 Vara da Fazenda Pública do Estado de São Paulo) alleging that a transfer to us of ownership of the Alto Tietê system reservoirs from the DAEE would be illegal. An injunction against the transfer of ownership of such reservoirs was granted but was later reversed. However, in October 2004, the court of first instance handed down its judgment on the civil public action and declared the agreement between us, DAEE and State of São Paulo null and void. It was confirmed by the Court, declaring the legal transaction in question null and void. Appeals in higher courts were also judged unfavorably. We have assessed that it is not probable that we will ultimately prevail in our appeal, which would prohibit the transfer of the reservoirs in payment of the accounts receivable due from the State. The December 2001 agreement also provided that the legal advisors of the State would carry out specific analyses, which have commenced, to ensure agreement among the parties as to the methodology employed in determining the amount of reimbursement for pension benefits owed to us by the State. The commencement of payments with respect to pension amounts owed to us by the State has been postponed until these analyses are completed, the appraisal report is approved and the credit assignments relating to the transfer of the reservoirs are formalized. As discussed above, the transfer of these reservoirs is currently being disputed and we are not certain whether the transfer will be legally permitted. Under the December 2001 agreement, the first payment was to be made in July 2002.
On March 22, 2004, we and the State entered into a first amendment to the December 2001 agreement. Under this amendment, the State acknowledged that it owed R$581.8 million to us relating to unpaid accounts receivable from the State until February 29, 2004, and we acknowledged that we owed an aggregate amount of R$518.7 million to the State as dividends, in the form of interest on shareholders’ equity. Accordingly, we and the State agreed to offset each other’s credit up to the limit of R$404.9 million, which was an amount adjusted up to February 2004. The outstanding balance of R$176.9 million (as of February 29, 2004) of the State’s consolidated debt would be paid in consecutive monthly installments from May 2005 until April 2009. These installments would be indexed according to the IPCA index, plus an interest rate of 0.5% per month. Upon the execution of the first amendment, part of the debt that the State owed to us for the use of water and sewage services through February 2004 was offset by the debt that we owed to the State as dividends, in the form of interest on shareholders’ equity. The outstanding balance of R$113.8 million as dividends in the form of interest on shareholders’ equity that we owed to the State was netted against accounts overdue after February 2004. The first amendment did not amend the provisions of the December 2001 agreement regarding the supplemental retirement and pension benefits we paid from March 1986 to November 2001 on behalf of the State to former employees of the state-owned companies.
On December 28, 2007, we and the State entered into a second amendment to the December 2001 agreement, pursuant to which the State agreed to pay:
(i) the outstanding balance under the first amendment, in the amount of R$133.7 million (as of November 30, 2007), in 60 consecutive monthly installments, beginning on January 2, 2008, and (ii) the amount of R$236.1 million relating to part of the accounts overdue and unpaid from March 2004 through October 2007 regarding the provision of water supply and sewage collection services. As part of this amendment, we agreed to pay during the period from January through March 2008 the outstanding balance of dividends in the amount of R$400.8 million, in the form of interest on shareholders’ equity, due from March 2004 through December 2006. We paid these amounts as agreed. Under the second amendment, dividends payable by us are no longer required to be applied to offset accounts receivable from the State, and as a result, we are currently unable to determine the amount, if any, of the declared dividends that the State will apply to current and future accounts receivable owed to us by the State or its entities. In addition, pursuant to the second amendment, we and the State agreed on complying with certain mutual obligations relating (i) to the improvement of payment processes and budget management procedures; (ii) the rationalization of the use of water and the volume of water and sewage bills under the responsibility of the State; (iii) the recording of government entities with accounts overdue in a delinquency system or reference file; and (iv) the possibility of interrupting water supply to these entities in case of non-payment of water and sewage bills. Finally, this second amendment did not amend the provisions of the December 2001 agreement regarding the supplemental retirement and pension benefits we paid from March 1986 through November 2001 on behalf of the State to former employees of the State-owned companies that merged to form our Company.
| 112 |
In 2007, we received payment installments from the State in the amount of R$326.0 million. As of December 31, 2007, our dividends payable to the State, due from 2004 through 2007, were in the amount of R$552.0 million. We are currently unable to determine the amount, if any, of the declared dividends that the State will apply to current and future accounts receivable owed to us by the State or its entities. The second amendment no longer requires that dividends be applied to offset accounts receivable from the State.
On March 26, 2008, we entered into a commitment agreement (termo de compromisso) with the State with the purpose of finding an alternate solution to the deadlock related to the amount owed by the State to us in connection with the supplemental retirement and pension benefits we paid from March 1986 to November 2001 on behalf of the State to former employees of the state-owned companies which merged to form our Company. In this agreement, we and State committed to hiring specialized companies to carry out new valuations of the amounts owed to us by the State and of the reservoirs. An independent consulting firm, FIPECAFI, has been retained to resolve the disagreement and validate the amount we paid from March 1986 through November 2001 on behalf of the State to former employees of the state-owned companies that merged to form our Company, which the State has not yet agreed to reimburse us hereinafter referred to as the “Disputed Reimbursement Amount.” In addition, FIPECAFI performed, together with another independent consulting firm, a new evaluation of the reservoirs that might be transferred to us as amortization of the reimbursement payable by the State to us.
On November 17, 2008, we, the State and DAEE entered into a third amendment to the December 2001 agreement, pursuant to which the State recognized a debt balance payable to us totaling R$915.3 million, hereinafter referred to as the “Undisputed Reimbursement Amount,” as adjusted by the IPCA index. We accepted on a provisional basis the reservoirs as part of the payment of the Undisputed Reimbursement Amount and offered to the State a provisional settlement, recognizing a credit totaling R$696.3 million, corresponding to the value of the reservoirs located in the Alto Tietê region. We and the State have agreed that the final offset will only be recorded when the effective transfer of the reservoirs is recorded at the Real Estate Registry. The outstanding balance of Undisputed Reimbursement Amount, amounting to R$219.0 million, was being paid by the State in 114 consecutive monthly installments and was totally paid in 2018.
On March 18, 2015, we, the State and DAEE, with the intervention of the Department of Sanitation and Water Resources, executed a term of agreement, in the amount of R$1,012.3 million, of which R$696.3 million refers to the principal amount and R$316.0 million refers to the monetary adjustment of the principal through February 2015.
The principal amount is payable in 180 installments, as follows:
| · | The first 24 installments were settled by an immediate transfer of 2,221,000 preferred shares issued by the São Paulo Company of Electric Power Transmission (Companhia de Transmissão de Energia Elétrica Paulista), totaling R$87.2 million, based on the share closing price as of March 17, 2015. As of April 20, 2016, we sold these shares for R$111.1 million; and |
| · | The amount of R$609.1 million, payable in 156 monthly installments, was adjusted by the IPCA index until the initial payment date on April 5, 2017, after which installments are adjusted by the IPCA index plus simple interest of 0.5% per month. |
Given that the lawsuit regarding the transfer of the reservoirs is pending final and unappealable court decision, the agreement also provides for the following:
| · | If transfer is possible and the reservoirs are effectively transferred to us and registered at the authority’s office, we will reimburse to the State the amounts paid in replacement of the reservoirs (principal amount) in 60 monthly installments adjusted by the IPCA index until the payment date of each installment; and |
| · | If the transfer of the reservoirs is not possible, the State will pay us, in addition to the principal amount, the inflation adjustment credit in the amount of R$316.0 million in 60 installments, following payment of the principal amount. The amount will be adjusted based on the IPCA index at the start date of payments and, as of that date, IPCA will be incurred plus 0.5% simple interest rate/month over the amount of each installment. |
In addition to the Undisputed Reimbursement Amount, there is an outstanding balance relating to the Disputed Reimbursement Amount. As of December 31, 2022, the Disputed Reimbursement Amount amounted to R$1,482.1 million, but due to the uncertainty regarding the recovery of the amount our management decided not to recognize the reimbursements. See Note 11 to our financial statements included in this annual report regarding the Disputed Reimbursement Amount. We and the State have agreed that the dispute relating to the Disputed Reimbursement Amount will not prevent us from carrying out the commitments made in the December 2001 agreement.
In addition, the third amendment to the December 2001 agreement provides for the regularization of the monthly flow of benefits. While we are liable for the monthly flow of benefits to the former employees of the state-owned companies that merged to form our Company, the State shall reimburse us based on criteria identical to those applied when determining the Undisputed Reimbursement Amount. Should there be no preventive court decision, the State will assume the flow of monthly payment of benefits portion deemed as undisputed.
| 113 |
Finally, the third amendment to the December 2001 agreement established that the Public Attorney’s Office of the State of São Paulo, or the Public Attorney’s Office, would issue a revised interpretation of the calculation and eligibility criteria applicable to the Disputed Reimbursement Amount. At that time, we believed that the Public Attorney’s Office would issue a revised interpretation which would have helped us bring the negotiations with the State to a conclusion. However, contrary to our expectations, the Public Attorney’s Office interpretation of the calculation and eligibility criteria applicable to the Disputed Reimbursement Amount refuted the reimbursement of the largest portion of this amount. As of December 31, 2022, we had made a provision of R$2,002.1 million in our pension obligations accounts in respect of the pension benefit obligation of Plan G0.
Even though the negotiations with the State are still progressing, we cannot assure you that we will recover the receivables related to the Disputed Reimbursement Amount.
We will not waive the receivables from the State to which we consider ourselves to be legally entitled. Accordingly, we will take all possible actions to resolve the issue at all administrative and court levels. Should this conflict persist, we will take all the necessary actions to protect our interests. On March 24, 2010, we sent to the controlling shareholder the official letter approved by our executive committee, proposing that the matter be discussed at the B3 Arbitration Chamber. In June 2010, we sent a settlement proposal to the Secretary of Treasury, which was denied, and on November 9, 2010, we filed a civil lawsuit against the State of São Paulo seeking full reimbursement of the amounts paid as benefits granted by Law No. 4,819/1958.
Agreement with the State and the city of São Paulo
On June 23, 2010 the State and the city of São Paulo executed an agreement in the form of a convênio, to which we and ARSESP consented, under which they agreed to manage the planning and investment for the basic sanitation system of the city of São Paulo on a joint basis. The principal terms of this convênio were as follows:
| · | the State and the city of São Paulo would execute a separate agreement with us, granting us exclusive rights to provide water and sewage services in the city of São Paulo; | |
| · | ARSESP would regulate and oversee our activities regarding water and sewage services in the city of São Paulo, including tariffs; | |
| · | a management committee (Comitê Gestor), consisting of six members appointed for two-year terms, with the State and the city of São Paulo given the right to appoint three members each, would be responsible for planning water and sewage services for the city and for reviewing our investment plans; and | |
| · | we may participate in management committee meetings but may not vote. |
In application of the convênio, we executed a separate contract with the State and the city of São Paulo, also dated June 23, 2010, to regulate the provision of these services for the following 30 years. The principal terms of this contract are as follows:
| · | The total investment stated in the contract must be equal to 13% of gross revenues from the provision of services to the city of São Paulo, net of the taxes on revenues. |
| · | We must transfer 7.5% of the gross revenues obtained from providing sanitation services in the municipality of São Paulo and subtract (i) COFINS and PASEP taxes, and (ii) unpaid bills of publicly owned properties in the city of São Paulo, to the Municipal Fund for Environmental Sanitation and Infrastructure (Fundo Municipal de Saneamento Ambiental e Infraestrutura), established by Municipal Law No. 14,934/2009. | |
| · | Our investment plan must be compatible with the sanitation plans of the State, the city of São Paulo and, if necessary, the Metropolitan region. | |
| · | ARSESP will ensure that the tariffs will adequately compensate us for the services we provide and that tariffs may be adjusted in order to restore the original balance between each party’s obligations and economic gain (equilíbrio econômico financeiro). |
We currently have an investment plan in place that reflects our obligations under the convênio and addresses their compatibility with the sanitation plans of the State, the city of São Paulo and, if necessary, the São Paulo metropolitan region. The investment plan is not irrevocable and is reviewed every four years by our management committee. For more information, see “Item 3.D Risk Factors—Risks Relating to Our Business— Certain terms of our agreement to provide water and sewage services in the city of São Paulo could have a material adverse effect on us.”
Dividends
We regularly pay dividends to our shareholders, including the State of São Paulo. In the past, we have withheld part of the dividends to which the State was entitled in order to offset it against our pending receivables from the State as described above.
| 114 |
In accordance with our agreements with the State, we do not anticipate that we will withhold dividends to which the State was entitled in order to offset it against our pending receivables from the State in the near future.
Government Guarantees of Financing
In some situations, the federal government, the State or government agencies guarantee our performance under debt- and project-related agreements.
Furthermore, the federal government has guaranteed, and the State has provided a counter-guarantee, in respect of the financial agreements we entered into with the IDB (i) in 1992 and 2000 for the total original aggregate amount of US$600 million related to the financing of the first and second phases of the Tietê River recovery project to reduce pollution; (ii) in 2010 for the aggregate amount of US$600 million related to the financing of the third phase of the Tiête River project; and (iii) in 2019 for the aggregate amount of U.S.$300 million related to the financing of the fourth phase of the Tietê River project. The federal government has also guaranteed, and the State of São Paulo has provided a counter-guarantee, in respect of the financial agreement we entered with the IBRD (i) in 2009 for the amount of US$100 million for the Water Source Program (Programa Mananciais); and (ii) in 2019 for the amount of U.S.$250 million related to the financing of the Sustainable and Inclusive Sanitation Program (Programa Saneamento Sustentável e Inclusivo).
We also entered into credit agreements with JICA, which were guaranteed by the federal government, with counter-guarantee from the State of São Paulo, for the financing of (i) the Clean Wave Program for the Baixada Santista metropolitan region, on August 6, 2004, for an aggregate principal amount of ¥21,320 million; (ii) the second phase of the Clean Wave Program, in February 2011, for an aggregate principal amount of ¥19,169 million; (iii) the environmental improvement program in the basin of the Billings dam, in October 2010, for an aggregate principal amount of U.S.$6,208 million; and (iv) the Program for Water Loss Reduction, in February 2012, for an aggregate principal amount of ¥33,584 million.
For more information on the aforementioned loans, see “Item 5.B. Liquidity and Capital Resources—Indebtedness Financing.”
Use of Reservoirs
We withdraw water for use in the São Paulo metropolitan region from the Guarapiranga and Billings reservoirs. We do not pay any fees for the use of these reservoirs, although we are responsible for maintaining them and funding their operating costs. The State incurs no operating costs on our behalf.
EMAE, a company that is also controlled by the State of São Paulo, has a concession to produce hydroelectric energy using water from the same reservoirs. EMAE commenced various lawsuits against us in the past seeking compensation for the water we withdraw from these reservoirs. Those lawsuits have now been settled by way of an agreement between EMAE and us.
The settlement agreement settled the compensation arrangements between EMAE and our company. It requires us to pay the following amounts to EMAE:
| · | R$46.3 million, plus inflation adjustments indexed to the IPCA index, payable in five annual installments from April 2017 through April 2022, plus | |
| · | R$6.6 million, plus inflation adjustments indexed to the IPCA index, payable in 25 annual installments from October 2017 through October 2042. |
If we fail to pay any installment to EMAE when due, all remaining amounts to be paid under the agreement will become immediately due and payable.
On April 11, 2016, we were also named in a separate lawsuit filed by minority shareholders of EMAE against the State of São Paulo, as controlling shareholder of EMAE. On August 7, 2017 we were named in a new lawsuit against us, EMAE and the National Electric Energy Agency (Agência Nacional de Energia Elétrica – “ANEEL”), brought by Alvaro Luiz de Lima de Alvares Otero, another minority shareholder of EMAE, requesting the annulment of ANEEL’s order approving the settlement agreement mentioned above, as well as our condemnation for indemnifying EMAE for damages suffered by EMAE. The settlement agreement between EMAE and us does not necessarily put an end to the separate lawsuits. For more information, see “Item 3.D. Risk Factors — Risks Relating to Our Control by the State of São Paulo — Our right to withdraw water from the Guarapiranga and Billings reservoirs is being challenged judicially by minority shareholders of EMAE.”
If one of the ongoing lawsuits by minority shareholders of EMAE requires the State to make a different decision regarding water use from what was agreed between EMAE and the State of São Paulo, our ability to withdraw water from the Guarapiranga and Billings reservoirs may be compromised. If we were no longer able to withdraw water from these reservoirs, we would have to transport water from locations farther away, which would increase our water transportation costs and may affect our ability to provide adequate service in the region, which may have an adverse effect on our financial condition and results of operations. In addition, we may be ordered to pay any indemnity to EMAE if the agreement is judicially invalidated, which could have material adverse effects on our financial condition and operating results.
| 115 |
Agreements with Lower Tariffs
We have entered into agreements with public entities, including State entities and municipalities, which manage approximately 11,326 properties. Under these agreements, these public entities pay a different tariff which is approximately 25.0% lower than the tariff that applies for the public entities that have not entered into these agreements, provided such entities implement PURA, which has a fixed target for reduction or maintenance of water consumption, according to technical evaluations carried out by us. These agreements are valid for a 12-month term with automatic renewal for equal periods. Pursuant to the terms of these agreements, if these entities fail to make any payment on a timely basis to us, we have the right to cancel the agreement, thereby revoking the 25.0% tariff reduction.
Personnel Assignment Agreement among Entities Related to the State Government
We have personnel assignment agreements with entities related to the São Paulo state government, under which the expenses are fully passed on and monetarily reimbursed. The expenses related to personnel assigned by us to other São Paulo state government entities in 2022, 2021 and 2020 amounted to R$1.0 million, R$1.0 million and R$2.1 million, respectively.
In 2022 and 2021, there were no expenses related to personnel assigned by other entities. In 2020 these expenses amounted to R$0.1 million.
Non-operating Assets
As of December 31, 2022 and 2021, we had an amount of R$3.6 million related to a land and lending structures.
Transactions with SABESPREV Pension Fund
SABESPREV is a pension fund we established to provide our employees with retirement and pension benefits. The assets of SABESPREV are independently held, but we nominate 50.0% of SABESPREV’s Board of Directors, including the chairman of the board, who has the deciding vote pursuant to the applicable legislation. Both we and our employees make contributions to SABESPREV pension plans. We contributed R$25.4 million, R$22.4 million and R$21.7 million in 2022, 2021 and 2020, respectively. On May 29, 2001, a federal law was enacted which, among other provisions, limits the amount mixed capital companies, like us, may contribute to their pension plans. Specifically, the ordinary contributions made by us to our pension plans may not exceed the contributions made by the beneficiaries of these plans.
Our original pension plan (the Defined Benefit Plan) has an actuarial deficit. We have commenced studies to manage this deficit and have also created a new, Defined Contribution Plan (SABESPREV Mais). Our new plan was approved by Previc in June 2010, after which our old plan stopped accepting new members. Contributions to the new plan are also shared between plan members and us, and benefits are established based on the balance of the individual member’s account when payment on his or her benefit begins. This balance consists of contributions and profitability obtained when applying resources. We intended to have members of the old plan migrate their reserves to the new plan. This migration was interrupted by a judicial order as a result of proceedings brought by representative entities for our employees and ex-employees. In October 2010, the judge presiding over the case pronounced in an interim decision that people and reserves were not allowed to migrate between the plans until a further decision was made. This decision also prevents the plan from charging contributions to account for the deficit for those who remained covered by the original plan. In September 2012, the judge presiding over the case ordered a financial expert inspection and in early 2013 a financial expert was appointed to the case. The results of this inspection were unfavorable to the representative entities for our employees and ex-employees and in 2016 the proceeding was dismissed, revoking the interim decision made in October 2010.
In 2016, participants were again offered the ability to migrate according to the rules established by the regulatory authority. The Retiree and Pensioner Association filed a judicial proceeding questioning the amounts that were transferred from the benefits plan to the individual accounts of the participants who migrated to the Defined Contribution Plan. On March 14, 2018, the judge presiding over the case held that the adjustment of the Defined Benefit Plan’s actuarial deficit was permitted and terminated the lawsuit related to the migration process of members from the Defined Benefit Plan to the Defined Contribution Plan.
Our adhesion to SABESPREV’s fixed contribution plan ended on December 1, 2019 and on January 1, 2020 the fixed contribution plan operated by Fundação CESP, a closed supplementary pension entity and private health plan operator, came into force. The new plans are open to new employees and to those who do not subscribe to SABESPREV’s pension plans.
| 116 |
Compensation of Management
The compensation paid by us to the members of our Board of Directors, board of executive officers and fiscal committee amounted to R$6.2 million, R$6.4 million and R$6.4 million in 2022, 2021 and 2020, respectively, and it refers to salaries and other short-term benefits management. An additional R$1.3 million, R$1.4 million and R$1.4 million related to the bonus program was accrued to executive officers in 2022, 2021 and 2020.
For more information on management compensation, see “Item 6.B. Directors and Senior Management—Compensation.”
Loan agreement through credit facility
We hold interests in some companies. Although we do not hold the majority of shares in any of the companies in which we hold interests, we are party to shareholders’ agreements which provide for the power of veto with regard to certain management proposals and decisions. Due to our significant influence on these companies by way of shareholders’ agreements, for accounting purposes, these companies are accounted for by applying the equity method of accounting.
Aquapolo Ambiental S.A.
We entered into a loan agreement with the special purpose enterprise Aquapolo Ambiental S.A. on March 30, 2012 under which we made loan to finance the operation, until the borrowings and financing requested with financial institutions is granted.
As of December 31, 2022, the principal and interest balance of this agreement was R$13.0 million, recorded as current assets under “Other Assets.”
The loan agreement originally expired on April 30, 2015, was extended to October 30, 2015 and on November 25, 2015 a new amendment changed the payment schedule for three annual installments, the first of which maturing on December 30, 2021 and the last on December 30, 2023.
Águas de Andradina
We granted a loan to the SPE Águas de Andradina S/A to finance the operations of this company.
As of December 31, 2022, the balance of principal and interest of this agreement totaled R$0.2 million and R$2.0 million, recorded under current assets and noncurrent assets, respectively, in “Other assets” at CDI + 3% p.a.
We signed the loan agreement on August 17, 2021. The principal with the readjustment, accrued interest and any taxes levied thereon will be due by August 31, 2025.
Pró-Conexão
In 2012, the State of São Paulo approved a project to subsidize connections to the sewage system for low-income families, of which 80% of the capital expenditures should be provided by the São Paulo state government and 20% by us.
The program brought more comfort and health to 29.7 thousand families (104 thousand people) with sewage connections, new internal installations and replacement of precarious and irregular sewage pipes, providing safe and legally compliant infrastructure to these households.
In 2019, the original term of the program provided for in State Decree No. 58,208/2012 expired. During 2021 and the beginning of 2022, negotiations for renewing the program with the Secretariat for Environment, Infrastructure and Logistics were resumed. In February 2022, our Board of Directors approved the renewal of the program. In December 2022, the São Paulo state government published the State Decree 67,298, which extended the Pro-Connection Program (Programa Pró-Conexão) for a further five years. By 2027, we expect an investment of more than R$259 million and more than 65,000 sewage connections.
A large part of this work was executed by our own personnel, which considerably reduced the need for investment.
| C. | Interests of Experts and Counsel |
Not applicable.
| 117 |
| ITEM 8. | FINANCIAL INFORMATION |
| A. | Financial Statements and Other Financial Information |
For more information, see “Item 18. Financial Statements.”
Legal Proceedings
We are currently subject to numerous legal proceedings relating to civil, tax, labor, corporate and environmental issues arising in the normal course of our business. Several individual disputes account for a significant part of the total amount of claims against us. Our material legal proceedings are described in Note 20 to our financial statements included in this annual report, and that description is incorporated by reference under this Item.
Civil Public Actions Related to Environmental Matters
We are subject to administrative and judicial proceedings, including proceedings initiated by CETESB, the State of São Paulo Public Prosecutor Office and non-governmental organizations. These proceedings result from alleged environmental damage and relief sought against us includes: (i) cessation of the release of raw sewage into certain local bodies of water; (ii) remedies, in some cases, for environmental damages that have not yet been specified and evaluated by the court’s technical experts; (iii) requirements to install and operate sewage treatment facilities in locations referred to in the civil public actions; and (iv) imposition of a limit on water extracted from the water springs most affected by the water crisis. In certain cases, we are subject to daily fines for non-compliance. In our response to these lawsuits, we note that the installation and operation of sewage treatment facilities in locations referred to in the civil public actions is included in our investment plan. There have already been unfavorable judicial decisions against us and their effects may include: (i) early execution of works or services that were considered for execution in future years in our long-term investment plan; (ii) payments related to environmental indemnification; and (iii) a negative impact on our image in national and international markets and in public bodies.
Although we are not able to predict the final outcome of these lawsuits, we believe that the outcome, if unfavorable to us, may have a material adverse effect on us. We recognize provisions for classify certain of these proceedings as defined in Note 3.15 to our financial statements included in this annual report. As of December 31, 2022, we have provisions totaling R$406.9 million for the matters stated in Note 20 to our financial statements included in this annual report.
Other Legal Proceedings
On December 30, 2003, the Civil Entity Coordination Committee of Piracicaba filed a civil class action against us, the National Water Agency and the State of São Paulo Treasury Department seeking, among other claims relief for: (i) the termination of use of 31 m3/s of water from one of the municipality’s reservoirs; (ii) the creation of a schedule to regulate water use and withdrawal from the Piracicaba river basin by the Cantareira system to eliminate possible damage to populations downstream; and (iii) the development of an environmental impact study on the Cantareira system evaluating the impact of water use and withdrawal on the various basins that constitute the system. In August 2012, this civil public action was decided favorably for us in two lower courts, and the plaintiff’s appeal to a higher court seeking special and extraordinary recourse was denied based on inadmissibility. The Brazilian Federal Supreme Court (Supremo Tribunal Federal) ordered the referral of the proceeding to the tribunal for analysis of its general repercussion, with the subsequent return to that court. The amount involved in this proceeding as of December 31, 2022 was R$32.8 billion. We have assessed that we do not have a current obligation as a result of a past event, and accordingly have not made any provisions.
Dividends and Dividend Policy
Amounts Available for Distribution
At each annual shareholders’ meeting, the Board of Directors is required to recommend the allocation of net profits for the preceding fiscal year. For the purposes of Brazilian Corporate Law, net profits are defined as net income after income tax and social contribution tax for such fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to employees’ and management’s participation in our profits. In accordance with Brazilian Corporate Law, the amounts available for dividend distribution are the amounts equal to half of the net profit as increased or reduced by:
| · | the amount intended to form the legal reserve; and | |
| · | the amount intended to form the reserves for contingencies and any written-off amounts of the same reserves formed in previous fiscal years. |
We are required to maintain a legal reserve, to which we must allocate 5.0% of net profits for each fiscal year until the amount for such reserve equals 20.0% of our paid-in capital. However, we are not required to make any allocations to our legal reserve in respect of any fiscal year in which the aggregate amount of the legal reserve plus our other established capital reserves exceeds 30.0% of our capital. Net losses, if any, may be offset against the legal reserve. As of December 31, 2022, 2021 and 2020 the balance of our legal reserve was R$1,688.4 million, R$1,532.4 million and R$1,417.1 million, respectively, which was equal to 11.3%, 10.2% and 9.4%, respectively, of our capital.
| 118 |
Brazilian Corporate Law also provides for two discretionary allocations of net profits that are subject to approval by the shareholders at each annual shareholders’ meeting. First, a percentage of net profits may be allocated to a contingency reserve for anticipated losses that are deemed probable in future years. Any amount so allocated in a prior year must be either reversed in the fiscal year in which the loss was anticipated if such loss does not in fact occur, or written off in the event that the anticipated loss occurs. Second, if the mandatory distributable amount exceeds the sum of realized net profits in any given year, such excess may be allocated to an unrealized revenue reserve. Under Brazilian Corporate Law, realized net profits is defined as the amount of net profits that exceeds the net positive result of equity adjustments and profits or revenues from operations with financial results after the end of the next succeeding fiscal year.
Under Brazilian Corporate Law, any company may authorize the creation of a discretionary reserve in its bylaws. Bylaws which authorize the allocation of a percentage of a company’s net income to the discretionary reserve must also indicate the purpose, criteria for allocation and maximum amount of the reserve. We may also allocate a portion of our net profits for discretionary allocations for plan expansion and other capital investment projects, the amount of which would be based on a capital budget previously presented by management and approved by our shareholders. Under Law No. 10,303/2001 of October 31, 2001, as amended, capital budgets for more than one year must be revised at each annual shareholders’ meeting. After completion of the relevant capital projects, we may retain the allocation until the shareholders vote to transfer all or a portion of the reserve to capital or retained earnings. As of December 31, 2022, 2021 and 2020 we had an investment reserve of R$10,390.5 million, R$8,297.5 million and R$6,751.3 million, respectively.
The amounts available for distribution may be further increased by a reversion of the contingency reserve for anticipated losses constituted in prior years but not realized. The amounts available for distribution are determined on the basis of our financial statements prepared in accordance with Brazilian GAAP.
The legal reserve is subject to approval by the shareholder vote at our annual shareholders’ meeting and may be transferred to capital but is not available for the payment of dividends in subsequent years.
Mandatory Distribution
Brazilian Corporate Law generally requires that the bylaws of each Brazilian corporation specify a minimum percentage of the amounts available for distribution by such corporation for each fiscal year that must be distributed to shareholders as dividends, also known as the mandatory distributable amount. Under our bylaws, the mandatory distributable amount has been fixed at an amount equal to not less than 25.0% of the amounts available for distribution, to the extent amounts are available for distribution at the end of each given fiscal year.
The mandatory distribution is based on a percentage of adjusted net income, not lower than 25.0%, rather than a fixed monetary amount per share. Brazilian Corporate Law, however, permits a publicly held company, such as us, to suspend the mandatory distribution if the Board of Directors and the Fiscal Committee report to the shareholders’ meeting that the distribution would be inadvisable in view of our financial condition. The suspension is subject to the approval of holders of common shares. In this case, the Board of Directors must file a justification for such suspension with the CVM. Profits not distributed by virtue of the suspension mentioned above shall be attributed to a special reserve and, if not absorbed by subsequent losses, must be paid as dividends as soon as the financial condition of such company permits such payments.
Payment of Dividends
We are required by Brazilian Corporate Law and by our bylaws to hold an annual shareholders’ meeting by the fourth month after the end of each fiscal year at which an annual dividend may be declared. The decision to distribute annual dividends is based on the financial statements prepared for the relevant fiscal year. Under Brazilian Corporate Law, dividends generally are required to be paid within 60 days following the date the dividend was declared, unless a shareholders’ resolution sets forth another date for payment, which, in either case, must occur prior to the end of the fiscal year in which the dividend was declared. A shareholder has a three-year period from the dividend payment date to claim dividends (or interest payments on shareholders’ equity as described under “—Record of Dividend Payments and Interest on Shareholders’ Equity”) distributed on his or her shares, after which the amount of the unclaimed dividends reverts to us. The depositary will set the currency exchange date to be used for payments to ADS holders as soon as practicable upon receipt of those payments from us.
Our bylaws allow us to pay interim dividends from preexisting and accumulated profits related to the current or preceding fiscal year.
| 119 |
In general, shareholders who are not residents of Brazil must register with the Central Bank to have dividends, sales proceeds or other amounts with respect to their shares eligible to be remitted outside of Brazil. The common shares underlying our ADSs are held in Brazil by Banco Bradesco S.A., as the custodian and agent for the depositary, which is the registered owner of the common shares underlying the ADSs. Our current registrar is Banco Bradesco S.A. The depositary electronically registers the common shares underlying the ADSs with the Central Bank and, therefore, is able to have dividends, sales proceeds or other amounts with respect to these shares eligible to be remitted outside Brazil. For more information, see “Item 10.D. Exchange Controls.”
Payments of cash dividends and distributions, if any, will be made in Brazilian reais to the custodian on behalf of the depositary, which will then convert such proceeds into U.S. dollars and will cause such U.S. dollars to be delivered to the depositary for distribution to holders of ADSs. For more information, see “Item 10.D. Exchange Controls.” Under current Brazilian law, dividends generally paid to shareholders who are not Brazilian residents, including holders of ADSs, will not be subject to Brazilian withholding income tax, except for dividends declared based on profits generated prior to December 31, 1995. For more information, see “Item 10.E. Taxation.”
Record of Dividend Payments and Interest on Shareholders’ Equity
Brazilian corporations are permitted to distribute dividends in the form of a tax-deductible notional interest expense on shareholders’ equity in accordance with Law No. 9,249/1995 of December 26, 1995, as amended. The amount of tax-deductible interest that may be paid is calculated by applying the daily pro rata variation of the government’s long-term interest rate (TJLP) on the shareholders’ equity during the relevant period and cannot exceed the greater of:
| · | 50.0% of net income (before taking into account such distribution and any deductions for income taxes and after taking into account any deductions for social contributions on net profits) for the period in respect of which the payment is made; or | |
| · | 50.0% of earnings reserves and retained earnings. |
Any payment of interest on shareholders’ equity to holders of ADSs or common shares, whether or not they are Brazilian residents, is subject to Brazilian withholding income tax at the rate of 15.0% or 25.0% if the beneficiary is resident in a low tax jurisdiction (tax haven). For more information, see “Item 10.E. Taxation.” The amount paid to shareholders as interest on shareholders’ equity, net of any withholding tax, may be included as part of the mandatory dividends distributable amount as prescribed in Brazilian Corporate Law.
Dividends and interest on shareholders’ equity over the minimum established in a company’s bylaws are recognized when approved by the shareholders in the general shareholders’ meeting. Consequently, the amount of R$741.3 million recognized as of December 31, 2022 correspond to the minimum established by law of 25.0% of the net income and the difference of R$130.9 million will be recorded in 2023 after the annual general meeting.
Distributions of dividends
The following table sets forth the distributions of dividends that we made or intend to make to our shareholders in respect of our 2022, 2021 and 2020 earnings. All these amounts distributed or to be distributed were or will be in the form of interest on shareholders’ equity.
| Year ended December 31, | Aggregate amount proposed | Payment Dates | Payment per share | Payment per ADS | |||
| (in millions of reais) | (in reais) | ||||||
| 2022(1) | 872.2 | June 26, 2023 | 1.28 | 1.28 | |||
| 2021 | 644.3 | June 27, 2022 | 0.94 | 0.94 | |||
| 2020 | 272.0 | June 28, 2021 | 0.40 | 0.40 |
(1) Subject to approval by the Annual Shareholders’ Meeting to be held on April 28, 2023.
We intend to declare and pay dividends and/or interest on shareholders’ equity, as required by Brazilian Corporate Law, our bylaws and our dividend policy. Our Board of Directors may propose the distribution of interest on shareholders’ equity, calculated based on our semi-annual or quarterly financial statements. The declaration of dividends is annual, including dividends in excess of the mandatory distribution, and requires approval by the vote of the majority of the holders of our common shares. The proposed distribution of dividends should consider (i) the need for investments to universalize basic sanitation services; (ii) the achievement of our corporate purpose, as set forth in our bylaws; (iii) the cash generation and cash requirements; and (iv) our economic and financial sustainability. The amount of any distributions will depend on many factors, such as our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our Board of Directors and shareholders. Within the context of our tax planning, we may in the future continue to determine that it is in our best interest to distribute interest on shareholders’ equity.
| 120 |
| B. | Significant Changes |
Other than as disclosed in this annual report, no significant change has occurred since the date of the audited financial statements included in this annual report.
| ITEM 9. |
THE OFFER AND LISTING
|
| A. | Offer and Listing Details |
Market for our Common Shares
Our common shares have been listed on the B3 under the trading symbol “SBSP3” since June 4, 1997 and, starting on April 24, 2002, have been included in the Novo Mercado segment of that exchange.
Market of our ADSs
Our ADSs, each of which represents one of our common shares are listed on the NYSE under the trading symbol “SBS.”
| B. | Plan of Distribution |
Not applicable.
| C. | Markets |
Trading on the Brazilian Stock Exchange
Our common shares are traded on the B3, the only Brazilian stock exchange that trades shares. Trading on the B3 is limited to brokerage firms and a limited number of authorized entities. The CVM and the B3 have discretionary authority to suspend trading in shares of a particular issuer under certain circumstances.
Trading on B3 is conducted every business day between 10:00 a.m. and 5:00 p.m. (or 6:00 p.m. depending on the season) on the B3 automated system. The B3 also permits trading from 5:30 p.m. to 6:00 p.m. during a different trading period called the “after market.” The after-market session is restricted to certain stocks that were traded in the portfolios IBOV and/or IBrX and that were traded on the same day during the regular negotiation. Trading during aftermarket is subject to regulatory limits on price volatility and on the volume of shares transacted through internet brokers. The timeframes for negotiation above are subject to updates by the B3.
In order to maintain better quality control over the fluctuation of its index, the B3 has adopted a “circuit breaker” system pursuant to which trading sessions are suspended (i) for a period of 30 minutes whenever the index of this stock exchange falls more than 10% from the index registered for the previous day; (ii) for one hour if the index of this stock exchange falls 15% or more from the index registered for the previous day, after the reopening of trading; and (iii) for a certain period of time to be defined by the B3, if the index of this stock exchange falls 20% or more from the index registered for the previous day, after the reopening of trading. The minimum and maximum price is based on a reference price for each asset, which will be the previous session’s closing quote, when considering the asset at the beginning of the day before the first trade, or the price of the day’s first trade. The asset’s reference price will be altered during the session if there is an auction sparked by the intraday limit being breached. In this case the reference price will become whatever results from the auction.
The B3 settles the sale of shares two business days after they have taken place, without monetary adjustment of the purchase price. The shares are paid for and delivered through a settlement agent affiliated with the B3. The B3 performs multilateral compensation for both the financial obligations and the delivery of shares. According to the B3’s regulations, financial settlement is carried out by the Central Bank’s reserve transfer system. The securities are transferred by the B3’s custody system. Both delivery and payment are final and irrevocable.
Trading on the B3 is significantly less liquid than trading on the NYSE or other major exchanges in the world. Although any of the outstanding shares of a listed company may trade on the B3, in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by a controlling group or by government entities.
| 121 |
Trading on the B3 by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or a “non-Brazilian holder,” is subject to certain limitations under Brazilian foreign investment regulations. With limited exceptions, non-Brazilian holders may trade on Brazilian stock exchanges in accordance with the requirements of CMN Resolution No. 4,373/2014, which requires that securities held by non-Brazilian holders be maintained in the custody of financial institutions authorized by the Central Bank and by the CVM or in deposit accounts with financial institutions. In addition, Resolution No. 4,373/2014 requires non-Brazilian holders to restrict their securities trading to transactions on the B3 or qualified over-the-counter markets. With limited exceptions, non-Brazilian holders may not transfer the ownership of investments made under Resolution No. 4,373/2014 to other non-Brazilian holders through a private transaction. For more information, see “Item 10.E. Taxation—Brazilian Tax Considerations—Taxation of Gains” for a description of certain tax benefits extended to non-Brazilian holders who qualify under Resolution No. 4,373/2014.
The Novo Mercado Segment
Since April 24, 2002, our common shares have been listed on the Novo Mercado segment of the B3. The Novo Mercado is a listing segment designed for the trading of shares issued by companies that voluntarily undertake to abide by certain additional corporate governance practices and disclosure requirements in addition to those already required under Brazilian law. A company with shares listed on the Novo Mercado segment must follow good practices of corporate governance. These rules generally increase shareholders’ rights and enhance the quality of information provided to shareholders. On April 18, 2002, June 19, 2006, April 23, 2012 and April 27, 2018 our shareholders approved changes to our bylaws to comply with the Novo Mercado requirements.
In addition to the obligations imposed by current Brazilian law, a company listed on the Novo Mercado is obligated to, among others:
| · | maintain only common shares; | |
| · | hold public offerings of shares in a manner favoring diversification of the company’s shareholder base and broader access to retail investors; | |
| · | grant tag along rights for all shareholders in connection with a transfer of control of the company; | |
| · | limit the term of all members of the Board of Directors to two years; | |
| · | hold a tender offer by the company’s controlling shareholder (the minimum price of the shares to be offered will be determined by an appraisal process) if it elects to delist from the Novo Mercado, unless a waiver is granted by the company’s shareholders; | |
| · | maintain a related party transactions policy, including (i) the criteria to be followed in the performance and approval of related party transactions, (ii) the procedures for identifying conflicts of interest and establishing voting restrictions for conflicted shareholders, directors and executive officers, and (iii) the procedures for identifying related parties and related party transactions; | |
| · | the chairman of the Board of Directors is prohibited from simultaneously holding the position of chief executive officer; | |
| · | the Board of Directors must disclose its opinion on takeover proposals within 15 days from the presentation of the proposal; |
| · | relevant facts, notices to market or to shareholders and press releases must be made in English simultaneously with the disclosure made in Portuguese; | |
| · | ensure that at least two or 20.0% (whichever is greater) of the members of the Board of Directors are independent, as defined under the Novo Mercado regulation; | |
| · | maintain a minimum free float of at least (i) 25.0% of the capital stock of the company, or (ii) 15.0% of the capital stock of the company, in the event that the average daily trading volume (in the past twelve months) is equal to or greater than R$25.0 million; | |
| · | the company must have an internal audit committee; | |
| · | disclose information on the share ownership of controlling shareholders and certain related parties on a monthly basis; | |
| · | resolve and require the shareholders, directors, and members of the fiscal committee of the company to resolve any and all disputes among them by arbitration before the Chamber of Market Arbitration (Câmara de Arbitragem do Mercado); and |
| 122 |
| · | the company must adopt and publish a code of conduct approved by the Board of Directors, as well as policies for (i) compensation; (ii) election of board and committee members; (iii) risk management; (iv) related party transactions; and (v) the purchasing and trading of securities. |
Regulation of Brazilian Securities Markets
The Brazilian securities markets are principally governed by Law No. 6,385/1976 of December 7, 1976, and the Brazilian Corporate Law, each as amended and supplemented, and by regulations issued by the CVM, which has regulatory authority over the stock exchanges and securities markets generally, by the CMN, and by the Central Bank, which has licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions. These laws and regulations, among others, provide for disclosure requirements applicable to issuers of traded securities, protection of minority shareholders and criminal penalties for insider trading and price manipulation. They also provide for licensing and oversight of brokerage firms and governance of the Brazilian stock exchanges. Nevertheless, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets.
Under Brazilian Corporate Law, a company is either public (companhia aberta), such as we are, or closely held (companhia fechada). All public companies, including us, are registered with the CVM and are subject to reporting requirements. A company registered with the CVM may have its securities traded on the Brazilian stock exchanges or in the Brazilian over-the-counter market. Our common shares are listed and traded on the B3 and may be traded privately subject to certain limitations.
To be listed on a Brazilian stock exchange a company must apply for registration with the CVM and the stock exchange where the head office of the company is located.
We have the option to ask that trading in our securities on the B3 be suspended in anticipation of a material announcement. Trading may also be suspended on the initiative of the B3 or the CVM, among other reasons, based on or due to a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to the inquiries by the CVM or the São Paulo Stock Exchange.
The Brazilian over-the-counter market consists of direct trades between individuals in which a financial institution registered with the CVM serves as intermediary. No special application, other than registration with the CVM, is necessary for securities of a public company to be traded in this market. The CVM requires that it be given notice of all trades carried out in the Brazilian over-the-counter market by the respective intermediaries.
Trading on the B3 by non-residents of Brazil is subject to limitations under Brazilian foreign investment and tax legislation. The Brazilian custodian for our common shares underlying the ADSs must, on behalf of the depositary for our ADRs, obtain registration from the Central Bank to remit U.S. dollars abroad for payments of dividends, any other cash distributions, or upon the disposition of the shares and sales proceeds thereto. In the event that a holder of ADSs exchanges ADSs for common shares, the holder will be entitled to continue to rely on the custodian’s registration for five business days after the exchange. Thereafter, the holder may not be able to obtain and remit U.S. dollars abroad upon the disposition of our common shares, or distributions relating to our common shares, unless the holder obtains a new registration. For more information, see “Item 10.D. Exchange Controls.”
| D. | Selling Shareholders |
Not applicable.
| E. | Dilution |
Not applicable.
| F. | Expenses of the Issue |
Not applicable.
| ITEM 10. |
ADDITIONAL INFORMATION
|
| A. | Share Capital |
Not applicable.
| 123 |
| B. | Memorandum and Articles of Association |
The following is a summary of the material terms of our common shares, including related provisions of our bylaws and Brazilian Corporate Law. This description is qualified by reference to our bylaws and to Brazilian law.
Corporate Purposes
We are a mixed capital company (sociedade de economia mista) of unlimited duration, incorporated on September 6, 1973, with limited liability, duly organized and operating under Brazilian Corporate Law. As set forth in Article 2 of our bylaws, our corporate purpose is to render basic sanitation services, aimed at the universalization of basic sanitation in the State of São Paulo without harming our long-term financial sustainability. Our activities comprise water supply, sanitary sewage services, urban rainwater management and drainage services, urban cleaning services, solid waste management services and related activities, including the planning, operation, maintenance and commercialization of energy, and the commercialization of services, products, benefits and rights that directly or indirectly arise from our assets, operations and activities. We are allowed to act, in a subsidiary form, in other Brazilian locations and abroad.
Directors’ Powers
In addition to the general provisions of Brazilian law, our Board of Director’s Internal Charter contains the specific provisions set out below regarding a director’s power to vote on a proposal, arrangement or contract in which that director has a material interest. Under Brazilian Corporate Law, a director or an executive officer is prohibited from voting in any meeting or with respect to any transaction in which that director or executive officer has a conflict of interest with the company and must disclose the nature and extent of the conflicting interest to be recorded in the minutes of the meeting. In any case, a director or an executive officer may not transact any business with the company, including any borrowing, except on reasonable or fair terms and conditions that are identical to the terms and conditions prevailing in the market or offered by third parties.
According to our Board of Director’s Internal Charter, when a matter involves a conflict of interest with ours or a particular interest in the matter, each member of the Board of Directors shall (i) declare his impediment in a timely manner, as soon as he becomes aware of the fact, (ii) refrain from intervening in the matter in discussion or deliberation, (iii) include the fact in the minutes of the meeting, and (iv) abstain from discussions and deliberations.
Under our bylaws, our shareholders are responsible for establishing the compensation we pay to the members of our Board of Directors, members of the fiscal committee and the executive officers.
Pursuant to Brazilian Corporate Law, each member of our board of executive officers must be a resident in Brazil. Our bylaws do not establish any mandatory retirement age limit.
See also “Item 6.A. Directors and Senior Management.”
Description of Common Shares
General
Each common share entitles the holder thereof to one vote at our annual or special shareholders’ meetings. According to the Brazilian Corporate Law and CVM regulation, our shareholders’ meetings must be called by publication of a notice in a newspaper of general circulation in our principal place of business (in our case, the publication “Valor Econômico”) and on the website of the same newspaper, currently the city of São Paulo, no later than 21 days prior to the day of the meeting (and, on second call, 8 days prior to the meeting). As per the resolution passed at our Ordinary and Extraordinary General Shareholders' Meeting held on April 28, 2022, we shall also make the publications required by the Brazilian Corporate Law in the Diário Oficial do Estado de São Paulo, the official government publication of the State of São Paulo. The quorum to hold shareholders’ meetings on first call requires the attendance of shareholders, either in person or by proxy, representing at least 25.0% of the shares entitled to vote and, on second call, the meetings can be held with the attendance of shareholders, also either in person or by proxy, representing any number of shares entitled to vote.
Under Brazilian Corporate Law, our common shares are entitled to dividends or other distributions made in respect of our common shares in proportion to their share of the amount available for the dividend or distribution. For more information, see “Item 8.A. Financial Statements and Other Financial Information—Dividends and Dividend Policy” for a more complete description of payment of dividends and other distributions on our common shares. In addition, upon any liquidation of our Company, our common shares are entitled to our remaining capital after paying our creditors in proportion to their ownership interest in us.
In principle, a change in shareholder rights, such as the reduction of the compulsory minimum dividend, is subject to a favorable vote of the shareholders representing at least one half of our voting shares. Under some circumstances that may result in a change in the shareholder rights, such as the creation of preferred shares, Brazilian Corporate Law requires the approval of a majority of the shareholders who would be adversely affected by the change attending a special meeting called for such reason. It should be emphasized, however, that our bylaws expressly prevent us from issuing preferred shares. Brazilian Corporate Law specifies other circumstances where a dissenting shareholder may also have appraisal rights.
| 124 |
According to Brazilian Corporate Law, neither a company’s bylaws nor actions taken at a general meeting of shareholders may deprive a shareholder of certain rights, such as:
| · | the right to participate in the distribution of profits; | |
| · | the right to participate equally and ratably in any remaining residual assets in the event of liquidation of the company; | |
| · | the right to supervise the management of the corporate business as specified in Brazilian Corporate Law; | |
| · | the right to preemptive rights in the event of a subscription of shares, debentures convertible into shares or subscription bonuses (except in some circumstances specified under Brazilian corporate law); and | |
| · | the right to withdraw from the company in the cases specified in Brazilian Corporate Law. |
Pursuant to Brazilian Corporate Law and our bylaws, each of our common shares carries the right to one vote at our shareholders’ meetings. We may not restrain or deny that right without the consent of the holders of a majority of the shares affected.
Neither Brazilian Corporate Law nor our bylaws expressly address:
| · | staggered terms for directors; | |
| · | cumulative voting, except as described below; or | |
| · | measures that could prevent a takeover attempt. |
However, under the laws of the State of São Paulo, the State is required to own at least a majority of our outstanding common shares.
According to Brazilian Corporate Law and its regulations, shareholders representing at least 10 percent of our capital, may request that a multiple voting procedure be adopted to entitle each share to as many votes as there are board members and to give each shareholder the right to vote cumulatively for only one candidate or to distribute their votes among several candidates. Pursuant to Brazilian Corporate Law, shareholder action must be taken at a shareholders meeting, duly called for and not by written consent.
Pursuant to regulations promulgated by the CVM, the 10% threshold requirement for the exercise of multiple voting procedures may be reduced depending on the amount of capital stock of the company. Considering our current capital stock, shareholders representing 5% of our voting capital may demand the adoption of a multiple voting procedure.
Pursuant to Brazilian Corporate Law, non-controlling holders of common shares issued by a mixed capital company (sociedade de economia mista), irrespective of its interest percentage in the company’s voting capital, may also have exercise the right of elect separately a member of the Board of Directors and an alternate, if they are not entitled to elect more members by means of the multiple voting procedure.
In addition, our bylaws provide for the participation of one employee representative in the Board of Directors, with a term of office coinciding with that of the other directors. The director representing the employees will be chosen by vote of the employees, with our administrative collaboration when requested, in a direct election, with no automatic renewal for successive periods.
Preemptive Rights
Each of our shareholders has a general preemptive right to subscribe for shares or securities convertible into shares in any capital increase, in proportion to his or her ownership interest in us, except in the event of the grant and exercise of any option to acquire shares of our capital stock. The preemptive rights are valid for a 30-day period from the publication of the announcement of the capital increase. Shareholders are also entitled to sell this preemptive right to third parties. Under Brazilian Corporate Law, we may amend our bylaws to eliminate preemptive rights or to reduce the exercise period in connection with a public offering of shares or an exchange offer made to acquire another company.
| 125 |
In the event of a capital increase by means of the issuance of new shares, holders of ADSs, or of common shares, would, except under circumstances described above, have preemptive rights to subscribe for any class of our newly issued shares. However, an ADS holder may not be able to exercise the preemptive rights relating to the common shares underlying his or her ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Common Shares and ADSs—A holder of our common shares and ADSs might be unable to exercise preemptive rights and tag-along rights with respect to the common shares.”
Redemption and Rights of Withdrawal
Brazilian Corporate Law provides that, under limited circumstances, a shareholder has the right to withdraw his or her equity interest from the company and to receive payment for the portion of shareholder’s equity attributable to his or her equity interest. This right of withdrawal may be exercised by dissenting our shareholders in the event that at least half of all voting shares outstanding authorize us:
| · | to reduce the mandatory distribution of dividends; | |
| · | to merge into another company or to consolidate with another company, subject to the conditions set forth in Brazilian Corporate Law; | |
| · | to participate in a centralized group of companies, as defined under Brazilian Corporate Law and subject to the conditions set forth therein; | |
| · | to change our corporate purpose; | |
| · | to split up, subject to the conditions set forth in Brazilian Corporate Law; | |
| · | change in the preferences, advantages and conditions for redemption or amortization of one or more classes of preferred shares, or creation of a new more favored class; | |
| · | creation of beneficiary parts; | |
| · | company dissolution; | |
| · | to transform into another type of company; | |
| · | to transfer all of our shares to another company or to receive shares of another company in order to make the company whose shares are transferred a wholly owned subsidiary of such company, known as incorporação de ações; or | |
| · | to acquire control of another company at a price which exceeds the limits set forth in Brazilian Corporate Law. |
The right of withdrawal lapses 30 days after publication of the minutes of the shareholders’ meeting that approved a corporate action described above. We would be entitled to reconsider any action giving rise to withdrawal rights within 10 days following the expiration of such rights if the withdrawal of shares of dissenting shareholders would jeopardize our financial condition. Brazilian Corporate Law allows companies to redeem their shares at their economic value, subject to the provisions of their bylaws and certain other requirements. Our bylaws currently do not provide that our capital stock will be redeemable at its economic value and, consequently, any redemption pursuant to Brazilian Corporate Law would be made based on the book value per share, determined on the basis of the last balance sheet approved by the shareholders. However, if a shareholders’ meeting giving rise to redemption rights occurred more than 60 days after the date of the last approved balance sheet, a shareholder would be entitled to demand that his or her shares be valued on the basis of a new balance sheet dated within 60 days of such shareholders’ meeting. In this case, the company will immediately pay 80% of the reimbursement amount calculated based on the last balance sheet and, once the new balance sheet is drawn up, will pay the balance within 120 days from the date of the general shareholders’meeting.
In addition, the rights of withdrawal in the third, fourth and eighth bullet points above may not be exercised by holders of shares if such shares (i) are liquid, defined as being part of the Bovespa index (Índice Bovespa) or other stock exchange index (as defined by the CVM), and (ii) are widely held, such that the controlling shareholder or companies it controls have less than 50.0% of our shares. Our common shares are included on the Bovespa index.
We may cancel the right of withdrawal if the payment amount has a material adverse effect on our finances.
Conversion Right
Not applicable because our capital stock is only comprised of common shares.
| 126 |
Special and General Meetings
Unlike the laws governing corporations incorporated under the laws of the United States’ state of Delaware, the Brazilian corporate law does not allow shareholders to approve matters by written consent obtained as a response to a consent solicitation procedure. All matters subject to approval by the shareholders must be approved in a general meeting, duly convened pursuant to the provisions of Brazilian corporate law. Shareholders may be represented at a shareholders’ meeting by attorneys-in-fact who are (i) shareholders of the corporation, (ii) a Brazilian attorney, (iii) a member of management or (iv) a financial institution.
General shareholders’ meetings shall be called, convened and deliberated under Brazilian Corporate Law to address all matters of interest to the company. General shareholders’ meetings may be called by publication of a notice in a newspaper of general circulation in our principal place of business (in our case, the publication “Valor Econômico”) and on the website of the same newspaper, and the first call should be made at least 21 days prior to the meeting (and, on second call, 8 days prior to the meeting). As per the resolution passed at our Ordinary and Extraordinary General Shareholders' Meeting held on April 28, 2022, we shall also make the publications required by the Brazilian Corporate Law in the Diário Oficial do Estado de São Paulo, the official government publication of the State of São Paulo.
At duly called and convened meetings, our shareholders are empowered to take any action regarding our business. Shareholders have the exclusive right, during our annual shareholders’ meetings required to be hold within the first 4 months following the end of our fiscal year, to approve our financial statements and to determine the allocation of our net income and the distribution of dividends related to the fiscal year immediately preceding the meeting. The members of our Board of Directors are generally elected at annual shareholders’ meetings. However, according to Brazilian corporate law, they can also be elected at extraordinary shareholders’ meetings. At the request of shareholders holding a sufficient number of shares, a fiscal committee can be established and its members elected at any general shareholders’ meeting.
A special shareholders’ meeting may be held concurrently with the annual shareholders’ meeting and at other times during the year. Our shareholders may take the following actions, among others, exclusively at shareholders’ meetings:
| · | election and dismissal of the members of our Board of Directors and our Fiscal Committee, if the shareholders have requested the setup of the latter; | |
| · | approval of the aggregate compensation of the members of our Board of Directors and Board of Executive Officers, as well as the compensation of the members of the Fiscal Committee; | |
| · | amendment of our bylaws; | |
| · | approval of our merger, consolidation or spin-off; | |
| · | approval of our dissolution or liquidation, as well as the election and dismissal of liquidators and the approval of their accounts; | |
| · | granting stock awards and approval of stock splits or reverse stock splits; | |
| · | approval of stock option plans for our management and employees, as well as for the management and employees of other companies directly or indirectly controlled by us; | |
| · | approval, in accordance with the proposal submitted by our Board of Directors, of the distribution of our net income and payment of dividends; | |
| · | authorization to delist from the Novo Mercado and to become a private company, except if the cancellation is due to a breach of the Novo Mercado; | |
| · | regulations by management, and to retain a specialized firm to prepare a valuation report with respect to the value of our shares, in any such events; | |
| · | approval of our management accounts and our financial statements; | |
| · | approval of any primary public offering of our shares or securities convertible into our shares; and |
| · | deliberate upon any matter submitted by the Board of Directors. |
Limitations on Rights to Own Securities
There are no limitations under Brazilian law and our bylaws on the rights of non-residents or foreign shareholders to own securities, including the rights of such non-resident or foreign shareholders to hold or exercise voting rights.
| 127 |
Equal Treatment Provisions
Pursuant to our bylaws and the Novo Mercado regulations, any party that acquires our control must extend a tender offer for the shares held by non-controlling shareholders at the same conditions and purchase price paid to the controlling shareholder. In addition, State Law No. 119/1973, which created our Company, requires the State to hold the majority of our shares at all times.
Reserves
General
The Brazilian Corporate Law provides that all discretionary allocations of “adjusted income” are subject to shareholder approval and may be added to capital or distributed as dividends in subsequent years. In the case of our capital reserve and the legal reserve, they are also subject to shareholder approval; however, the use of their respective balances is restricted to being added to capital or absorbed by losses. They cannot be used as a source for income distribution to shareholders.
Investment Reserve
Our investment reserve is composed specifically of internal funds for expansion of water and sewage service systems. As of December 31, 2022, we had an investment reserve of R$10,390.5 million.
Legal Reserve
Under Brazilian Corporate Law, we are required to record a legal reserve to which we must allocate 5% of the adjusted net income each year until the amount of the reserve equals 20.0% of paid-in capital. Any accumulated deficit may be charged against the legal reserve. As of December 31, 2022, the balance of our legal reserve was R$1,688.4 million.
Arbitration
In connection with our listing with the Novo Mercado segment of the B3, we, our shareholders, directors and officers have undertaken to refer to arbitration any and all disputes or controversies arising out of the Novo Mercado rules or any other corporate matters. For more information, see “Item 9.C. Markets.” Under our bylaws, any dispute among us, our shareholders and our management with respect to the application of Novo Mercado rules, the Brazilian Corporate Law, the application of the rules and regulations regarding Brazilian capital markets, will be resolved by arbitration conducted pursuant to the B3 Arbitration Rules in the Market Arbitration Chamber. Any dispute among shareholders, including holders of ADSs, and any dispute between us and shareholders, including holders of ADSs, will also be submitted to arbitration.
Options
There are currently no outstanding options to purchase any of our common shares.
| C. | Material Contracts |
For a description of the material contracts entered into by the State and us, see “Item 7.B. Related Party Transactions—Transactions with the State of São Paulo” and “Item 7.B. Related Party Transactions—Agreements with the State.”
| D. | Exchange Controls |
The right to convert dividend or interest payments and proceeds from the sale of shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, that the relevant investments have been registered with the Central Bank and the CVM. Such restrictions on the remittance of foreign capital abroad may hinder or prevent the custodian for our common shares represented by our ADSs or the holders of our common shares from converting dividends, distributions or the proceeds from any sale of these shares into U.S. dollars and remitting the U.S. dollars abroad. Holders of our ADSs could be adversely affected by delays in, or refusal to grant any, required government approval to convert Brazilian currency payments on the common shares underlying our ADS and to remit the proceeds abroad.
Accordingly, the proceeds from the sale of ADSs by ADR holders outside Brazil are not subject to Brazilian foreign investment controls, and holders of the ADSs are entitled to favorable tax treatment under certain circumstances. For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Common Shares and ADSs— Investors who exchange ADSs for common shares may lose their ability to remit foreign currency abroad and obtain Brazilian tax advantages” and “Item 10.E. Taxation—Brazilian Tax Considerations.”
| 128 |
Since March 30, 2015, CMN Resolution No. 4,373/2014, of September 29, 2014, has been in full effect, providing for the issuance of depositary receipts in foreign markets in respect to shares of Brazilian issuers. The CMN Resolution No. 4,373/2014, among other acts, revoked CMN Resolution No. 1,927/1992, of May 18, 1992, CMN Resolution No. 1,289/1987, of March 20, 1987, and CMN Resolution No. 2,689/2000, of January 26, 2000. Under Brazilian law relating to foreign investment in the Brazilian capital markets, foreign investors registered with the Central Bank and the CVM and acting through (i) authorized custodial accounts managed by local agents; and (ii) local intermediaries (such as securities broker-dealers), may buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of registration for each transaction. Foreign investors may register their investment under Law No. 14,286/2021, of December 29, 2021, or under CMN Resolution No. 4,373, of September 20, 2014.
The Law No. 14,286/2021 is the main legislation concerning investment of direct foreign capital and foreign direct equity in companies based in Brazil. It is applicable to investments of at least US$100,000 that enter Brazil in the form of foreign currency, goods or services to local private companies. Foreign investment portfolios (i.e. investments into securities traded on stock exchanges or over-the-counter markets) are regulated by CMN Resolution No. 4,373/2014, and Resolution No. 13/2020, of November 18, 2020, which regulates the filing of transactions and disclosure of information by foreign investors, all reflecting the provisions of CMN Resolution No. 4,373/2014.
As of November 18, 2020, foreign investors that intend to be registered with the CVM shall fulfill the requirements under CVM Resolution No. 13/2020. In accordance with CMN Resolution No. 4,373/2014 the definition of a foreign investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered abroad. In order to become a 4,373 Holder, a foreign investor must:
| · | appoint at least one representative in Brazil, with powers to perform actions relating to its investment; | |
| · | appoint an authorized custodian in Brazil for its investments, which must be a financial institution or entity duly authorized by the Central Bank or CVM; | |
| · | appoint a tax representative in Brazil; | |
| · | through its representative in Brazil, register itself as a foreign investor with the CVM (not applicable to individual non-resident investors); | |
| · | hire a local intermediary (e.g. a securities broker-dealer) for trading securities in local stock exchanges, including for purposes of acquiring shares of Brazilian companies listed in the local stock exchange; | |
| · | through its representative in Brazil, register its foreign investment with the Central Bank and report it periodically to the CVM; and | |
| · | be registered with the Federal Tax Authority (Secretaria da Receita Federal – “RFB”), pursuant to RFB Normative Instruction No. 1,548/2015, of February 13, 2015, and RFB Normative Instruction No. 1,863/2018, of December 27, 2018. |
| E. | Taxation |
This summary contains a description of certain Brazilian and U.S. federal income tax consequences of the purchase, ownership and disposition of common shares or ADSs by a holder.
The summary is based upon the tax laws of Brazil and the federal income tax laws of the United States as in effect on the date of this annual report, which laws are subject to change, possibly with retroactive effect, regarding the U.S. federal income tax, and to differing interpretations. Holders of common shares or ADSs should consult their own tax advisors as to the Brazilian, U.S. or other tax consequences of the purchase, ownership and disposition of common shares or ADSs, including, in particular, the effect of any non-Brazilian, non-U.S., state or local tax laws.
Although there presently is no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions in the past regarding such a treaty. No assurance can be given, however, as to if or when a treaty will enter into force or how it will affect the U.S. holders of common shares or ADSs.
Brazilian Tax Considerations
The following discussion summarizes the principal Brazilian tax consequences of the acquisition, ownership and disposition of common shares or ADSs by a holder that is not domiciled in Brazil for purposes of Brazilian taxation (a “non-Brazilian holder”). It is based on Brazilian laws and regulations as currently in effect, and, therefore, any change in such law may change the consequences described below. Each non-Brazilian holder should consult his or her own tax adviser concerning the Brazilian tax consequences of an investment in common shares or ADSs.
| 129 |
A non-Brazilian holder of ADSs may withdraw them in exchange for common shares in Brazil. Pursuant to Brazilian law, the non-Brazilian holder may invest in the common shares under CMN Resolution 4,373/2014 or as a foreign direct investment under Law No. 4,131/1962.
Taxation of Dividends
As a result of the tax legislation adopted on December 26, 1995, dividends based on profits generated after January 1, 1996, including dividends paid in kind, payable by us in respect of common shares or ADSs, are exempt from withholding income tax. Dividends relating to profits generated prior to January 1, 1996 may be subject to Brazilian withholding income tax at varying rates, depending on the year the profits were generated.
Beginning in 2008, the Brazilian accounting rules were significantly modified in order to align them with IFRS. After the issuance of such new rules, a transitory tax regime (regime tributário de transição – “RTT”), was created mainly to ensure neutrality of the new accounting rules in connection with the calculation and payment of corporate taxes on income. Thus, according to the RTT, Brazilian companies had, only for purposes of calculation of their taxable profit, to use the accounting rules and criteria that existed until December 2007.
As a result of the application of the RTT, the accounting profit of a Brazilian company might be significantly higher (or lower) than its taxable profit. Although this specific matter has not been expressly regulated by law, the Brazilian tax authorities issued a normative instruction stating that the amount of dividends paid in excess of the profit of a company determined as per the accounting rules and criteria that existed until December 2007 should be subject to taxation.
On April 14, 2014, Law No. 12,973 was issued to, among other, terminate the RTT and regulate how corporate taxable income should be assessed taking as a starting point the accounting profit calculated according to the new accounting rules introduced as from 2008. Such Law states that dividends related to all accounting profits generated between January 2008 and 31 December 2013 in excess of the established methods and criteria in force in December 31, 2007, are not subject to withholding tax, and does not integrate the calculation of income tax and social contribution. With reference to 2014, the law is not clear, but tax authorities state that dividends paid in excess of the profit of a company determined as per the accounting rules and criteria that existed until December 2007 should be subject to withholding income tax at the rate of 15%, or 25% if the non-Brazilian holder is domiciled in a country or location that does not impose income tax or where the maximum income tax rate is lower than 20% (“Nil or Low Taxation Jurisdiction”). As of 2015, in view of the termination of the RTT, there would be no differences between the accounting and the taxable profit, so that dividends generated since 2015 should be fully paid with no Brazilian withholding tax implications.
Taxation of Gains
Gains realized on disposition of common shares are subject to income tax in Brazil, regardless of whether the sale or the disposition is made by a non-Brazilian holder to a resident or person domiciled in Brazil. This is due to the fact that the common shares are considered assets located in Brazil for purposes of Law No. 10,833/2003.
Thus, for purposes of taxation, gains realized in a sale or disposition of common shares carried out on a Brazilian stock exchange (which includes transactions carried out on the organized over-the-counter market):
| · | are exempt from income tax when assessed on a non-Brazilian holder that (1) has registered its investment in Brazil with the Central Bank under the rules of CMN Resolution No. 4,373/2014, and (2) is not a resident of or domiciled in a Nil or Low Taxation Jurisdiction; or | |
| · | are subject to income tax at a rate of 15% in the case of gains realized by a Non-Brazilian Holder that (1) is not a 4,373 Holder, and (2) is not resident or domiciled in a Low or Nil Tax Jurisdiction; and | |
| · | are subject to income tax at a rate of up to 25% in the case of gains realized by a Non-Brazilian Holder that is resident or domiciled in a Low or Nil Tax Jurisdiction. |
Any other gains assessed on the disposition of the common shares that are not carried out on the Brazilian stock exchange are subject to income tax at (i) a flat rate of 15% for a 4,373/2014 holder that is not a resident of or domiciled in a Nil or Low Taxation Jurisdiction; (ii) a flat rate of 25.0% for a non-Brazilian holder that is a resident of or domiciled in a Nil or Low Taxation Jurisdiction; (iii) progressive rates that may vary from 15.0% to 22.5% (15.0% for the part of the gain that does not exceed R$5.0 million, 17.5% for the part of the gain that exceeds R$5.0 million but does not exceed R$10.0 million, 20.0% for the part of the gain that exceeds R$10.0 million but does not exceed R$30.0 million and 22.5% for the part of the gain that exceeds R$30.0 million), for all other non-Brazilian holders.
In the case of redemption of securities or capital reduction by a Brazilian corporation, such as ourselves, the positive difference between the amount effectively received by the non-Brazilian holder and the corresponding acquisition cost is treated, for tax purposes, as capital gain derived from disposition of common shares not carried out on a Brazilian stock exchange.
| 130 |
Any exercise of preemptive rights relating to the common shares will not be subject to Brazilian income tax. Any gain on the sale or assignment of preemptive rights relating to the common shares by a non-Brazilian holder of common shares will be subject to Brazilian taxation at the same rate applicable to the sale or disposition of common shares.
There is no assurance that the current preferential treatment for non-Brazilian holders of common shares under CMN Resolution No. 4,373/2014 will continue in the future or that it will not be changed in the future.
Sale of ADSs by non-Brazilian holder to another non-Brazilian holder
Gains realized outside Brazil by a non-Brazilian holder on the disposition of ADSs should not be subject to Brazilian tax. As mentioned above, according to Law No. 10,833/2003 of December 2003, the disposition of assets located in Brazil by a non-Brazilian holder, whether to other non-Brazilian holder or Brazilian holders, may be subject to taxation in Brazil. Although our understanding is that the ADSs do not fall within the definition of assets located in Brazil for the purposes of Law no. 10,833, considering the general and unclear scope of it and the lack of definitive judicial court ruling to act as the leading case in respect thereto, we are unable to predict whether such understanding will ultimately prevail in Brazilian courts.
In case the ADSs are considered assets located in Brazil, gains on disposition of ADSs by a non-Brazilian holder to either a resident in Brazil or to a non- Brazilian resident may be subject to income tax in Brazil according to the rules described below for ADSs or the tax rules applicable to common shares, as applicable.
Exchange of ADSs for common shares
Although there is no clear regulatory guidance, the withdrawal of ADSs in exchange for common shares is not subject to Brazilian income tax to the extent that, as described above, ADSs do not fall within the definition of assets located in Brazil for the purposes of Law No. 10,833/2003.
Upon receipt of the underlying common shares in exchange for ADSs, non-Brazilian holders may also elect to register with the Central Bank the U.S. dollar amount of such preferred shares or common shares as a foreign portfolio investment under Resolution No. 4,373/2014 or as a foreign direct investment under Law No. 4,131/1962.
Exchange of common shares for ADSs
With reference to the deposit of common shares in exchange for ADSs, the difference between the acquisition cost of the common shares and the market price of the common shares may be subject to Brazilian income tax at progressive rates that may vary from 15.0% to 22.5% (15.0% for the part of the gain that does not exceed R$5.0 million, 17.5% for the part of the gain that exceeds R$5.0 million but does not exceed R$10.0 million, 20.0% for the part of the gain that exceeds R$10.0 million but does not exceed R$30.0 million and 22.5% for the part of the gain that exceeds R$30.0 million), except for non-Brazilian holders located in a Nil or Low Taxation Jurisdiction, which, in this case, would be subject to income tax at a flat rate of 25.0%. In some circumstances, there may be arguments to claim that this taxation is not applicable in the case of a non-Brazilian holder that is a 4,373 Holder and is not a resident of or domiciled in a Nil or Low Taxation Jurisdiction.
Discussion on Low or Nil Taxation Jurisdictions
On June 24, 2008, Law No. 11,727/2008 was enacted defining the concept of a “privileged tax regime” in connection with transactions subject to transfer pricing and thin capitalization rules. In this conception, privileged tax regimes are more comprehensive than tax havens. A “privileged tax regime” is considered to be a jurisdiction which: (i) does not tax income or taxes income at a maximum rate lower than 20.0%; (ii) grants tax advantages to a non-resident entity or individual (a) without requiring substantial economic activity in the jurisdiction of such non-resident entity or individual or (b) to the extent such non- resident entity or individual does not conduct substantial economic activity in the jurisdiction of such non-resident entity or individual; (iii) does not tax income generated abroad, or imposes tax on income generated abroad at a maximum rate lower than 20.0%; or (iv) restricts the ownership disclosure of assets and ownership rights or restricts disclosure about economic transactions. On 2014 the Brazilian Revenue Service Ordinance 488 was published, reducing from 20% to 17% the minimum threshold for certain specific cases. The reduced 17% threshold applies only to countries and regimes aligned with international standards of fiscal transparency in accordance with rules to be established by the Brazilian tax authorities.
Notwithstanding the fact that the “privileged tax regime” concept was enacted in connection with Brazilian transfer pricing and thin capitalization rules, there is no assurance that Brazilian tax authorities will not attempt to apply the concept of privileged tax regimes to other types of transactions, such as investments in the Brazilian financial and capital markets. We recommend that prospective investors consult their own tax advisors from time to time to verify any possible tax consequences of Law No. 11,727/2008 and Ordinance 488/2014.
| 131 |
Interest Attributed to Shareholders’ Equity
According to Brazilian laws and our bylaws, we may opt to distribute income as interest attributed to shareholders’ equity as an alternative to the payment of dividends.
Distribution of an interest on equity charge attributed to shareholders’ equity with respect to common shares or ADSs as an alternative form of payment to shareholders, including non-Brazilian holders of common shares or ADSs, is subject to Brazilian withholding income tax at the rate of 15% or 25%, in case of a Nil or Low Taxation Jurisdiction holder.
Such payments, subject to certain limitations and requirements, are deductible for Brazilian corporate income tax purposes by the payor. This interest is limited to the daily pro rata variation of the federal government’s long-term interest rate, as determined by the Central Bank from time to time, and cannot exceed the greater of:
| (a) | 50% of net income (after the social contribution on net profits and before the provision for corporate income tax, and the amounts attributable to shareholders as interest on net equity) for the period with respect to which the payment is made; or | |
| (b) | 50% of the sum of retained earnings and earnings reserves as of the date of the beginning of the period with respect to which the payment is made. |
Tax on foreign exchange transactions (“IOF/Exchange”)
Pursuant to Decree No. 6,306/2007, dated December 14, 2007, as amended, the conversion of Brazilian currency into foreign currency and the conversion of foreign currency into Brazilian currency may be subject to the Tax on Foreign Exchange Transactions or IOF/Exchange. Currently, for most exchange transactions, the rate of IOF/Exchange is 0.38%. However, exchange transactions carried out for the inflow of funds in Brazil for investments in the Brazilian financial and capital market made by a foreign investor (including a Non-Resident Holder, as applicable) are subject to IOF/Exchange at a 0%. The IOF/Exchange rate will also be 0% for the outflow of funds from Brazil related to these types of investments, including payments of dividends and interest on shareholders’ equity and the repatriation of funds invested in the Brazilian market.
On March 15, 2022, the Decree 10,997/2022 was published, establishing an immediate reduction to zero of the IOF/Exchange.
The Brazilian government may increase the rate of the IOF/Exchange to a maximum of 25.0% at any time, but such an increase would not apply retroactively.
Tax on transactions involving bonds and securities (“IOF/Bonds Tax”)
The IOF may also be imposed on any transactions involving bonds and securities, including those carried out on Brazilian futures and commodities stock exchanges. As a general rule, the rate of this tax for transactions involving common shares or ADSs is currently zero. The executive branch, by a Presidential Decree, may increase the IOF rate by up to 1.5% per day, but only with respect to future transactions.
U.S. Federal Income Tax Considerations
The following discussion is a summary of certain U.S. federal income tax consequences of the acquisition, ownership and disposition of common shares or ADSs as of the date hereof. This discussion applies only to a beneficial owner of common shares or ADSs that is a “U.S. holder.” As used herein, the term “U.S. holder” means a beneficial owner of a common share or ADS that, for U.S. federal income tax purposes, is:
| · | an individual who is a citizen or resident of the United States; | |
| · | a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; | |
| · | an estate the income of which is subject to U.S. federal income taxation regardless of its source; or | |
| · | a trust if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury Department regulations to be treated as a U.S. person. |
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds common shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. A U.S. holder that is a partner of a partnership holding common shares or ADSs should consult its tax advisors.
| 132 |
Except where noted, this discussion deals only with common shares or ADSs held as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”), and does not deal with U.S. holders that may be subject to special U.S. federal income tax rules, such as dealers in securities or currencies, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, banks or other financial institutions, tax-exempt organizations, insurance companies, real estate investment trusts, regulated investment companies, persons holding common shares or ADSs as part of a hedging, integrated, conversion or constructive sale transaction or a straddle, persons liable for alternative minimum tax, pass-through entities and investors in a pass-through entity, persons owning 10% or more of our stock, or persons whose “functional currency” is not the U.S. dollar.
This discussion is based upon the provisions of the Code, and existing and proposed U.S. Treasury Department regulations, administrative pronouncements of the Internal Revenue Service (the “IRS”), and judicial decisions as of the date hereof. Such authorities may be repealed, revoked or modified so as to result in U.S. federal income tax consequences different from those discussed below, possibly with retroactive effect. In addition, this discussion is based, in part, upon representations made by the Depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance with their terms.
Except as specifically described below, this discussion assumes that we are not a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes. Please see the discussion under “—Passive Foreign Investment Company Rules” below. Further, this discussion does not address the U.S. federal estate and gift, alternative minimum tax, Medicare tax on net investment income, state, local or non-U.S. tax consequences of acquiring, holding or disposing of common shares or ADSs.
ADSs
In general, for U.S. federal income tax purposes, U.S. holders of ADSs will be treated as the owners of the underlying common shares that are represented by such ADSs. Deposits or withdrawals of common shares by U.S. holders for ADSs will not be subject to U.S. federal income tax. However, the U.S. Treasury Department has expressed concerns that parties involved in transactions wherein depositary shares are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by the holders of ADSs. Accordingly, the analysis of the creditability of Brazilian income taxes described herein could be affected by future actions that may be taken by the U.S. Treasury Department.
Taxation of Dividends
The gross amount of distributions paid to a U.S. holder (including Brazilian taxes that are withheld, if any, and any payments of interest on shareholders’ equity, as described above under “—Brazilian Tax Considerations”) will be treated as dividend income to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such income generally will be includable in a U.S. holder’s gross income as ordinary income when actually or constructively received by the U.S. holder, in the case of common shares, or when actually or constructively received by the Depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits for a taxable year, the distribution will first be treated as a tax-free return of capital to the extent of the U.S. holder’s adjusted tax basis in the common shares or ADSs, causing a reduction in such adjusted tax basis (and thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized on a subsequent disposition of our common shares or ADSs), and thereafter as capital gain recognized on a sale or exchange. Because we do not expect to maintain calculations of earnings and profits in accordance with U.S. federal income tax principles, U.S. holders should expect that a distribution will generally be treated as a dividend for U.S. federal income tax purposes. Distributions of additional common shares or ADSs to U.S. holders that are part of a pro rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.
The amount of any dividend paid in reais will equal the U.S. dollar value of the reais received calculated by reference to the exchange rate in effect on the date the dividend is received by the U.S. holder, in the case of common shares, or by the Depositary, in the case of ADSs, regardless of whether the reais are converted into U.S. dollars. If the reais received as a dividend are not converted into U.S. dollars on the date of receipt, the U.S. holder will have a tax basis in the reais equal to their U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the reais will be foreign currency gain or loss that is treated as U.S. source ordinary income or loss. If dividends paid in reais are converted into U.S. dollars at the applicable spot rate on the day they are received by the U.S. holder or the Depositary, as the case may be, U.S. holders generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. U.S. holders should consult their own tax advisors regarding the treatment of any foreign currency gain or loss if any reais received by the U.S. holder or the Depositary or its agent are not converted into U.S. dollars on the date of receipt.
| 133 |
Certain dividends received by certain non-corporate U.S. holders may be eligible for preferential tax rates so long as (1) specified holding period requirements are met, (2) the U.S. holder is not under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property, (3) the company paying the dividend is a “qualified foreign corporation” and (4) the company is not a PFIC for U.S. federal income tax purposes in the year of distribution or the prior year. We do not believe that we were classified as a PFIC for our prior taxable year, nor do we expect to be classified as a PFIC for the current taxable year. We generally will be treated as a qualified foreign corporation with respect to our ADSs so long as the ADSs remain listed on the NYSE. Based on existing guidance, however, it is not entirely clear whether dividends received with respect to the common shares (to the extent not represented by ADSs) will be eligible for this treatment, because the common shares are not themselves listed on a U.S. exchange. U.S. holders should consult their own tax advisors about the application of this preferential tax rate to dividends paid directly on common shares.
Subject to certain complex limitations and conditions (including a minimum holding period requirement), Brazilian income taxes withheld on dividends, if any, may be treated as foreign income taxes eligible for credit against a U.S. holder’s U.S. federal income tax liability. Alternatively, if a U.S. holder does not elect to claim a foreign income tax credit for any foreign taxes paid during the taxable year, all foreign income taxes paid may instead be deducted in computing such U.S. holder’s taxable income. For purposes of calculating the foreign tax credit, dividends paid on our common shares or ADSs will be treated as income from sources outside the United States. For the purposes of the U.S. foreign tax credit limitations, the dividends paid by us should generally constitute “passive category income” for most U.S. holders. The rules governing the foreign tax credit are complex and recent changes to the foreign tax credit rules introduced additional requirements and limitations. U.S. holders should consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
Taxation of Capital Gains
For U.S. federal income tax purposes, a U.S. holder generally will recognize taxable gain or loss on any sale, exchange or other taxable disposition of a common share or ADS in an amount equal to the difference between the U.S. dollar value of the amount realized for the common share or ADS and the U.S. holder’s adjusted tax basis in the common share or ADS, determined in U.S. dollars. Such gain or loss will generally be capital gain or loss. The capital gain or loss will be long-term capital gain or loss if at the time of sale, exchange or other taxable disposition the U.S. holder has held our common shares or ADSs for more than one year. Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by a U.S. holder will generally be treated as U.S. source gain or loss. A U.S. holder is likely not to be able to use the foreign tax credit arising from Brazilian income tax imposed, if any, on the disposition of a common share or ADS.
Passive Foreign Investment Company Rules
Based upon our current and projected income, assets, activities and business plans, we do not expect the common shares or ADSs to be considered shares of a PFIC for our current fiscal year (although the determination cannot be made until the end of such fiscal year), and we intend to continue our operations in such a manner that we do not expect to be classified as a PFIC in the foreseeable future. However, because the determination of whether the common shares or ADSs constitute shares of a PFIC will be based upon the composition of our income, assets and the nature of our business, as well as the income, assets and business of entities in which we hold at least a 25% interest, from time to time, and because there are uncertainties in the application of the relevant rules, there can be no assurance that the common shares or ADSs will not be considered shares of a PFIC for any fiscal year. If the common shares or ADSs were shares of a PFIC for any fiscal year, U.S. holders (including certain indirect U.S. holders) may be subject to adverse tax consequences, including the possible imposition of an interest charge on gains or “excess distributions” allocable to prior years in the U.S. holder’s holding period during which we were determined to be a PFIC. If we are deemed to be a PFIC for a taxable year, dividends on our common shares or ADSs would not be qualified dividend income eligible for preferential rates of U.S. federal income taxation. In addition, a U.S. holder that owns common shares or ADSs during any taxable year that we are treated as a PFIC would generally be required to file IRS form 8621. U.S. holders should consult their own tax advisors regarding the application of the PFIC rules (including any information reporting requirements in connection therewith) to the common shares or ADSs.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to dividends in respect of our common shares or ADSs or the proceeds received on the sale, exchange, or redemption of our common shares or ADSs, in each case to the extent treated as being paid within the United States (and in certain cases, outside of the United States) to a U.S. holder unless a U.S. holder establishes its status as an exempt recipient, and backup withholding may apply to such amounts if the U.S. holder does not establish its status as an exempt recipient or fails to provide a correct taxpayer identification number and certify that such U.S. holder is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. holder will be allowed as a refund or credit against such U.S. holder’s U.S. federal income tax liability provided the U.S. holder timely furnishes the required information to the IRS.
In addition, U.S. holders should be aware that additional reporting requirements apply with respect to the holding of certain foreign financial assets, including stock of foreign issuers which is not held in an account maintained by a financial institution, if the aggregate value of all of such assets exceeds US$50,000. U.S. holders should consult their own tax advisors regarding the application of the information reporting rules to our common shares and ADSs and the application of these additional reporting requirements for foreign financial assets to their particular situation.
| 134 |
| F. | Dividends and Payments Agents |
Not applicable.
| G. | Statements by Experts |
Not applicable.
| H. | Documents on Display |
We are subject to the periodic reporting and other informational requirements of the U.S. Securities Exchange Act of 1934, as amended and supplemented (the “Exchange Act”). Accordingly, we are required to file reports and other information with the SEC. You may inspect and copy reports and other information filed by us at the public reference facilities maintained by the SEC at 100 F Street, N.W., Washington D.C. 20549. Our filings will also be available at the SEC’s website at http://www.sec.gov. Reports and other information may also be inspected and copied at the offices of the NYSE at 20 Broad Street, New York, New York 10005.
Our website is located at http://www.sabesp.com.br and our investor relations website is located at http://www.ri.sabesp.com.br. (These URLs are intended to be an inactive textual reference only. They are not intended to be an active hyperlink to our website. The information on our website, which might be accessible through a hyperlink resulting from this URL is not, and shall not be deemed to be, incorporated into this annual report.)
We also furnish to the depositary annual reports in English including audited annual financial statements and reviewed quarterly financial statements in English for each of the first three quarters of the fiscal year. We also furnish to the depositary English translations or summaries of all notices of shareholders’ meetings and other reports and communications that are made generally available to holders of common shares.
| I. | Subsidiary Information |
Not applicable.
| ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risk
We are exposed to various market risks, in particular, foreign currency risk and interest rate risk. We are exposed to foreign currency risk because a substantial portion of our financial indebtedness is denominated in foreign currencies, primarily the U.S. dollar, while we generate all of our net operating revenues in reais. Similarly, we are subject to interest rate risk based upon changes in interest rates, which affect our net financial expenses. For more information on our market risks, see Note 5 to our financial statements included in this annual report.
Exchange Rate Risk
As of December 31, 2022 and 2021, R$2,775.8 million and R$3,296.1 million, or 14.6% and 18.6%, respectively, of our debt obligations were denominated in foreign currencies. As a result, we are exposed to exchange rate risks that may adversely affect our financial condition and results of operations, as well as our ability to meet debt service obligations.
Exchange Rate Sensitivity
We estimate that the potential loss to us in connection with U.S. dollar and Yen-denominated debt that would have resulted as of December 31, 2022, 2021 and 2020 from each hypothetical instantaneous and unfavorable 1% change in the U.S. dollar and Yen against the real would have been approximately R$27.8 million, R$33.0 million and R$35.5 million, respectively. Consistent with these estimates, a hypothetical instantaneous and unfavorable 10% change in this exchange rate would have resulted in losses of approximately R$277.6 million, R$329.6 million and R$354.8 million as of December 31, 2022, 2021 and 2020, respectively.
The fluctuation of the real in relation to the U.S. dollar and Yen for the years ended December 31, 2022, 2021 and 2020 were as follows:
| 135 |
| Year ended December 31, | ||||||
| 2022 | 2021 | 2020 | ||||
| (in percentages) | ||||||
| Depreciation (appreciation) of the real in relation to the U.S. dollar | (6.5) | 7.4 | 28.9 | |||
| Depreciation (appreciation) of the real in relation to the Yen | (18.4) | (3.9) | 35.7 | |||
We have not contracted derivative financial instruments in the years ended December 31, 2022, 2021 and 2020.
For more information regarding foreign currency risk, see Note 5.1(a) to our 2022 financial statements included in this annual report.
As of December 31, 2022, 2021 and 2020, we had no short-term indebtedness outstanding, other than the current portion of long-term debt.
Interest Rate Risk
As of December 31, 2022 and 2021, R$1,640.4 million, or 8.7%, and R$1,643.0 million, or 9.3%, respectively, of our total debt outstanding balance denominated in reais was based on variable rates of interest based on the UPR, which is equivalent to the TR. In addition, as of December 31, 2022 and 2021, R$9,551.0 million, or 50.4%, and R$7,743.8 million, or 43.7%, and respectively, of our total debt denominated in reais was subject to interest rates based on the CDI. As of December 31, 2022 and 2021, R$972.6 million and R$894.3 million, respectively, of our foreign-currency denominated debt was based on the IDB and the IBRD variable rates of interest, which are determined based on the cost of funding of these multilateral organizations in each period.
As of December 31, 2022 and 2021, we did not have any derivative contracts outstanding which limited exposure to changes in the UPR or the CDI or in the IDB or IBRD variable rates. However, we are obliged by law to invest our excess cash with financial institutions controlled by the Brazilian government. We invest these excess funds, which totaled R$1,867.5 million and R$717.9 million as of December 31, 2022 and 2021, respectively, mainly in short-term instruments. As a result, our exposure to Brazilian interest rate risk is partially limited by our real-denominated floating interest time deposits investments, which generally earn interest based on the CDI. In addition to our exposure with respect to existing indebtedness, we may become exposed to interest rate volatility with respect to indebtedness incurred in the future.
We estimate that we would have suffered a loss over periods of one year, respectively, of up to R$189.6 million, R$177.2 million and R$172.6 million if a hypothetical instantaneous and unfavorable change of 100 basis points in the interest rates applicable to financial liabilities as of December 31, 2022, 2021 and 2020, respectively, had occurred. Consistent with these estimates, a hypothetical instantaneous and unfavorable 1000 basis points change in these interest rates would have resulted in losses of approximately R$1,895.9 million, R$1,772.4 million and R$1,725.9 million as of December 31, 2022, 2021 and 2020, respectively. This sensitivity analysis is based on the assumption of an unfavorable 100 basis point movement of the interest rates applicable to each homogeneous category of financial liabilities and sustained over a period of one year, as applicable, and that such movement may or may not affect interest rates applicable to any other homogenous category of financial liabilities.
A homogeneous category is defined according to the currency in which financial liabilities are denominated and assumes the same interest rate movement within each homogeneous category (i.e., U.S. dollars). As a result, our interest rate risk sensitivity model may overstate the effect of interest rate fluctuation on these financial instruments, as consistently unfavorable movements of all interest rates are unlikely.
The tables below provide information about our interest rate-sensitive instruments. For variable interest rate debt, the rate presented is the weighted average rate calculated as of December 31, 2022. For the foreign currency denominated obligations, these amounts have been converted at the selling rates as of December 31, 2022 and do not represent amounts which may actually be payable with respect to such obligations on the dates indicated.
| 136 |
| As of December 31, 2022 | |||||||||||
| Expected maturity date | |||||||||||
| 2023 | 2024 | 2025 | 2026 and after | Total | Average annual interest rate | ||||||
| (in millions, except percentages) | |||||||||||
| Assets | |||||||||||
| Cash equivalents denominated in reais | 1,867.5 | - | - | - | 1,867.5 | ||||||
| Liabilities | |||||||||||
| Long-term debt (current and noncurrent portion) | |||||||||||
| Floating rate, denominated in reais indexed by TR or UPR | 150.6 | 144.7 | 127.7 | 1,217.4 | 1,640.4 | 9.5% | |||||
| Floating rate, denominated in reais indexed by TJLP | 273.7 | 257.9 | 215.8 | 688.3 | 1,435.7 | 9.1% | |||||
| Floating rate, denominated in reais indexed to the IPCA | 230.1 | 187.5 | 163.0 | 2,510.9 | 3,091.5 | 11.1% | |||||
| Floating rate, denominated in reais indexed by CDI | 1,158.6 | 1,133.3 | 1,362.1 | 5,897.0 | 9,551.0 | 15.2% | |||||
| Fixed rate, denominated in reais | 120.4 | 62.8 | 55.6 | 225.5 | 464.3 | ||||||
| Floating rate, denominated in U.S. dollars | 132.3 | 85.3 | 95.6 | 659.4 | 972.6 | 4.2% | |||||
| Fixed rate, denominated in Yen | 180.3 | 169.8 | 169.8 | 1,283.3 | 1,803.2 | 1.4% | |||||
| Total long-term debt | 2,246.0 | 2,041.3 | 2,189.6 | 12,481.8 | 18,958.7 | 11.7% | |||||
UPR stands for Standard Reference Unit (Unidade Padrão Referência) and is equal to TR, which was 0.2072% per month as of December 31, 2022; CDI stands for Interbank Deposit Rate (Certificado de Depósitos Interbancários), which was 13.65% per annum as of December 31, 2022; IGP-M was 5.45% per annum as of December 31, 2022; TJLP stands for Long-term Interest Rate (Taxa de Juros a Longo Prazo), published quarterly by the Central Bank, which was 7.2% per annum as of December 31, 2022.
The percentage of our indebtedness subject to fixed and floating interest rate is as follows:
| As of December 31, | |||||
| 2022 | 2021 | 2020 | |||
| Floating rate debt: | |||||
| Denominated in U.S. dollars | 2.3% | 2.6% | 2.5% | ||
| Denominated in reais | 82.9% | 78.4% | 76.7% | ||
| Fixed rate debt: | |||||
| Denominated in reais | 2.5% | 3.0% | 2.7% | ||
| Denominated in Yen | 9.5% | 13.6% | 15.6% | ||
| Denominated in U.S. dollars | 2.8% | 2.4% | 2.5% | ||
| Total | 100.0% | 100.0% | 100.0% | ||
| ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
| A. | Debt Securities |
Not applicable.
| B. | Warrants and Rights |
Not applicable.
| C. | Other Securities |
Not applicable.
| D. | American Depositary Shares |
In the United States, our common shares trade in the form of ADSs. Following a ratio change effected on January 24, 2013, each ADS represents one common share of our company. Following a stock split which took place on April 25, 2013, we issued two new ADSs for each ADS currently trading and distributed them to our holders on April 29, 2013. The ADSs are issued by The Bank of New York Mellon, as Depositary pursuant to a Deposit Agreement. The ADSs commenced trading on the NYSE on May 10, 2002.
| 137 |
Fees and Expenses
The following table summarizes the fees and expenses payable by holders of ADSs:
| Persons depositing common shares or ADS holders must pay: | For: |
| US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) | Issuance of ADSs, including issuances resulting from a distribution of common shares or rights or other property |
| US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) | Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates |
|
US$0.05 (or less) per ADS or portion thereof (to the extent not prohibited by the rules of any stock exchange on which the ADSs are listed for trading) |
Any cash distribution to you |
| A fee equivalent to the fee that would be payable if securities distributed to you had been common shares and the common shares had been deposited for issuance of ADSs | Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS holders |
| US$0.05 (or less) per ADS or portion thereof per calendar year (in addition to any cash distribution fee that the depositary has collected during the year) | Depositary services |
| Registration or transfer fees |
Transfer and registration of common shares on our common share register to or from the name of the depositary or its agent when you deposit or withdraw common shares |
| Expenses of the depositary |
Cable, telex and facsimile transmissions expenses (when expressly provided in the deposit agreement) Expenses of the depositary in converting foreign currency to U.S. dollars |
| Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or common share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes | As necessary |
| Any charges incurred by the depositary or its agents for servicing the deposited securities | As necessary |
Payment of Taxes
The depositary may deduct the amount of any taxes owed from any payments to you. It may also sell deposited securities, by public or private sale, to pay any taxes owed. You will remain liable if the proceeds of the sale are not sufficient to pay the taxes. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any proceeds, or send to you any property, remaining after it has paid the taxes.
Reimbursement of Fees
The Bank of New York Mellon, as depositary, has agreed to reimburse us for expenses we incur in connection with the establishment, administration and maintenance of the ADS facility, including but not limited to, NYSE annual stock exchange listing fees, and other DR program-related expenses. The depositary has also agreed to pay its standard out-of-pocket expenses for providing services to registered DR holders, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, U.S. IRS tax reporting, mailing required tax forms, stationery, postage, facsimile, and telephone calls.
The depositary collects fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
Reimbursement of Fees Incurred in 2022
From January 1, 2022 to December 31, 2022, we received reimbursements in the amount of US$1,767,298.19 for expenses incurred by us related to the administration and maintenance of the ADS facility, including but not limited, any DR program-related expenses.
PART II
| ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
Not applicable.
| 138 |
| ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Not applicable.
| ITEM 15. | CONTROLS AND PROCEDURES |
| A. | Disclosure Controls and Procedures |
We carried out an evaluation under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer and Investor Relations Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, including those defined in the United States Exchange Act Rule 13(a)-15(e), as of the year ended December 31, 2022.
As a result of this analysis, our principal executive officer and principal financial officer concluded that (i) our disclosure controls and procedures were both designed and effective at the reasonable assurance level as of December 31, 2022; (ii) that the information required to be disclosed in our filings and submissions under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms; and (iii) that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer and Investor Relations Officer, as appropriate to allow timely decisions regarding required disclosure.
| B. | Management’s Report on Internal Control over Financial Reporting |
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS, as issued by the IASB.
Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, as issued by the IASB, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer and Investor Relations Officer, our management conducted an assessment of our internal control over financial reporting as of December 31, 2022 based on the criteria established in “Internal Control - Integrated Framework” issued by COSO in 2013.
As a result of the assessment described above, our management concluded that as of December 31, 2022, we maintained effective internal control over financial reporting based on the criteria established in “Internal Control — Integrated Framework” issued by COSO in 2013.
Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting. That report is included below.
| C. | Attestation Report of the Registered Public Accounting Firm |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Companhia de Saneamento Básico do Estado de São Paulo – SABESP
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Companhia de Saneamento Básico do Estado de São Paulo – SABESP (the “Company”) as of December 31, 2022, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control – Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the financial statements of the Company as of and for the year ended December 31, 2022, and our report dated April 25, 2023 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Grant Thornton Auditores Independentes Ltda.
São Paulo, Brazil
April 25, 2023
| D. | Changes in internal control over financial reporting |
There have been no changes in our internal control over financial reporting during the fiscal year ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 139 |
| ITEM 16. | [RESERVED] |
| ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
At our board meeting held on June 29, 2005, we established an audit committee, as defined under section 3(a)(58) of the Exchange Act. Our Board of Directors has determined that Francisco Vidal Luna qualifies as an audit committee Coordinator, and as Financial Expert as defined for the purposes of this Item 16A in Item 16 of Form 20-F. Francisco Vidal Luna is an “independent director” within the meaning of the SEC rules. Additionally, our Board of Directors also determined that Wilson Newton de Mello Neto qualifies as Financial Expert.
| ITEM 16B. | CODE OF ETHICS |
We have adopted a code of ethics and conduct called the Code of Conduct and Integrity, which applies to all of our employees, including our directors, chief executive officer, chief financial officer and investor relations and head of accounting, as well as our suppliers and third-party contractors. To ensure compliance with our Code of Conduct and Integrity, we have set up an ethics committee, an external whistleblowing hotline, an ombudsman, and a customer service channel. In addition, we implemented a Corporate Responsibility Procedure that defines the consequences in cases of violation of the Code, to ensure the receipt of internal and external reports. The external channel can receive anonymous whistle blowing. The results of the investigations are forwarded to the Audit Committee. Recurring cases are reported to the ethics commission, which urges the related departments to develop preventive actions. In 2022, 396 events were reported to the whistleblower hotline. During 2022, 48 of our employees or outsourced employees received penalties (21 warnings, 2 suspensions and 25 dismissals). Our ethics commission is also responsible for addressing relevant inquiries and interpreting the norms of the Code of Ethics and Integrity for all of our employees. Our Code of Conduct and Integrity is available on our web site at https://ri.sabesp.com.br/en/corporate-governance/code-of-conduct-and-integrity/. If we amend the provisions of our Code of Conduct and Integrity, or if we grant any waiver of such provisions, we will disclose the amendment or waiver on our web site at the same address. You can obtain copies of our Code of Conduct and Integrity, without charge, upon request to sabesp.ri@sabesp.com.br.
Federal Law No. 13,303/16, State Decree 62,349/16 and the new Novo Mercado rules require the adoption of a Code of Conduct that should include, among other provisions, guidelines to avoid conflicts of interests, forbiddance of fraudulent acts and corruption, whistleblowing channels, protective measures to avoid retaliation regarding whistleblowers, periodic training on the content of such code and sanctions in case of code violations. For additional information, see “Item 16G—Corporate Governance—Corporate Governance Practices of Brazilian Government-Controlled Companies.”
| ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Grant Thornton Auditores Independentes served as our independent registered public accounting firm for the years ended December 31, 2022, 2021 and 2020. Grant Thornton Auditores Independentes’ activity began with the review of our interim financial information for the third quarter of 2020.
The following table presents the aggregate fees for professional services and other services rendered to us by Grant Thornton Auditores Independentes in 2022 and 2021:
| Year ended December 31, | |||
| 2022 | 2021 | ||
| (in millions of reais) | |||
| Audit Fees(1) | 1.4 | 1.6 | |
| Audit-Related Fees | 0.1 | - | |
| Tax Fees | - | - | |
| All Other Fees | - | - | |
| Total | 1.5 | 1.6 | |
| (1) | Audit Fees are the fees billed by our independent auditors for the audit of our annual financial statements, reviews of interim financial statements and attestation services that are provided in connection with statutory and regulatory filings or engagements. |
| 140 |
Pre-approval policies and procedures
Pursuant to Brazilian law, our Board of Directors is responsible, among other matters, for the selection, dismissal and oversight of our independent registered public accounting firm. Our management is required to obtain the Board of Directors’ approval before engaging an independent registered public accounting firm to provide any audit or permitted non-audit services to us. The Brazilian Federal and State Public Bidding Laws also apply to us with respect to obtaining services from third parties for our business, including the services provided by our independent registered public accounting firm. As part of the bidding process, the independent registered public accounting firm is required to submit proposals, and is then selected by us based on certain criteria including technical expertise and cost.
Except as disclosed above, KPMG Auditores Independentes and Grant Thornton Auditores Independentes did not provide any non-audit services to us.
| ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
None.
| ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS |
Not applicable.
| ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
Not applicable.
| ITEM 16G. | CORPORATE GOVERNANCE |
Required Changes to Corporate Governance Practices of Brazilian Government-Controlled Companies
As a Brazilian mixed capital company (sociedade de economia mista), we are subject to Federal Law No. 13,303/16, which requires the adoption of strong corporate governance practices and stringent public bidding procedures when contracting with third parties. Additionally, it requires us to publish periodically a series of documents and reports to demonstrate our level of commitment to our business objectives, the financial impact of those commitments, and our policies and practices in terms of corporate governance and sustainability, among other things. Those documents and reports must be accompanied by further explanations, in plain language, that can be understood by the general public.
Among other requirements, this law sets out the following rules:
| · | At least two or 25% of the members of the Board of Directors must be independent, in accordance with the definition of director independence set by Brazilian law (or, for companies whose minority shareholders exercise multiple votes, at least one of the directors must be independent). | |
| · | All directors and officers must have the same term of office, which may not be longer than two years. They may be re-elected up to a maximum of three times consecutively. | |
| · | The performance of the executive officers, directors and members of board committees must be subjected to yearly evaluation with respect to, at a minimum, the following matters: |
| (a) | the lawfulness and effectiveness of their management performance; | |
| (b) | their contribution to the company’s income for the year; and | |
| (c) | their contribution to furthering the objectives in the company’s business plan and compliance with its long-term strategy. |
The federal law requires that all officers and directors of the company must satisfy certain technical standards, in addition to the general requirement that they be of good reputation and have knowledge of the business sector concerned. These technical standards include satisfying both Point 1 and Point 2 below:
| 1. | The individual must satisfy at least one of the requirements under (a), (b) or (c) of this Point 1: | |||||
| (a) | a minimum of 10 years’ experience in an appointed position, in either the public or private sector, in a business area that is similar or related to the company’s business purpose; or | |||||
| (b) | a minimum of four years’ exercise of any one of (i), (ii) or (iii) below: | |||||
| (i) | a senior management position in a company with a similar business purpose or similar size; or | |||||
| (ii) | a position in the public sector that involves a high degree of trust (i.e., at level DAS-4 or higher); or | |||||
| (iii) | a position as professor or researcher in the company’s business sectors; or | |||||
| 141 |
| (c) | a minimum of four years’ practice as an independent professional in one or more areas that are directly or indirectly related to the company’s business sectors; |
and:
| 2. | The individual must satisfy the requirements of both (a) and (b) of this Point 2: | |||
| (a) | the individual must have received sufficient training for the position for which she or he has been nominated; and | |||
| (b) | the individual must not have been declared ineligible for such position in accordance with applicable law. | |||
Additionally, annually, the Directors receive specific training on the Code of Conduct and Integrity, risk management policy, corporate and capital market legislation, Disclosure of Information, Anti-Corruption Law (Law No. 12,846/2013), and other topics related to the activities of the state-owned companies.
Our corporate governance structure and governing documents, such as our bylaws, Board of Director’s Internal Charter, Executive Board’s Internal Charter and Fiscal Council’s Internal Charter, as well as certain corporate policies, as applicable, are in accordance with Federal Law No. 13,303/16.
These policies, such as the Nominating Policy and Compensation Policy, are also in compliance with the Novo Mercado Regulation and the State Decree No. 62,349/2016.
For a description of corporate governance obligations imposed by Brazilian law on companies listed on the Novo Mercado segment, see “Item 9.C. Markets—Trading on the Brazilian Stock Exchange—The Novo Mercado Segment.”
Significant Differences between our Current Corporate Governance Practices and NYSE Corporate Governance Standards
We are subject to the NYSE corporate governance listing standards. As a foreign private issuer, the standards applicable to us are considerably different than the standards applied to U.S. listed companies. Under the NYSE rules, we are required only to: (a) have an audit committee or audit board, pursuant to an applicable exemption available to foreign private issuers, that meets certain requirements, as discussed below, (b) provide prompt certification by our chief executive officer of any material non-compliance with any corporate governance rules, and (c) provide a brief description of the significant differences between our corporate governance practices and the NYSE corporate governance practice required to be followed by U.S. listed companies.
In view of Brazilian Law 13,303/2016 and new requirements of Novo Mercado Listing Regulations, the following discussion summarizes the significant differences between our current corporate governance practices and those required of U.S. listed companies:
Majority of Independent Directors
The NYSE rules require that a majority of the board must consist of independent directors. Independence is defined by various criteria, including the absence of a material relationship between the director and the listed company. While the Brazilian Corporate Law did not previously have a similar requirement, Federal Law No. 13,303/2016 established that at least 25% of the members of the Board of Directors must be independent. Under the Novo Mercado Regulations, our Board of Directors must evaluate the independence of directors before their election to the board. Such evaluation shall be based on a declaration prepared by the nominee. Additionally, Brazilian Corporate Law, Federal Law No. 13,303/2016 and the CVM have established rules that require directors to meet certain qualification requirements applicable to a company’s directors. However, they do not require that we have a majority of independent directors, as required under the NYSE rules. Under our current bylaws, approved on April 29, 2021, our Board of Directors must have a minimum of seven members, and 25% of the board must be independent, as established by Federal Law No. 13,303/2016. Currently, five of our ten directors are independent, pursuant to the Novo Mercado Listing Regulations and Federal Law No. 13,303/2016. We believe these rules provide adequate assurances that our directors are independent.
| 142 |
Executive Sessions
NYSE rules require that the non-management directors must meet at regularly scheduled executive sessions without management present. The Brazilian Corporate Law does not have a similar provision. According to this Law, up to one-third of the members of the Board of Directors can be elected from management. Our bylaws provide that the CEO shall integrate the Board of Directors, while holding such position. All other members of our Board of Directors meet the NYSE’s definition of “non-management” directors. There is no requirement in the Brazilian Corporate Law that non-management directors meet regularly without management. However, the Internal Charter of the Board of Directors establishes that, by resolution of the Chairman of the Board, meetings may be held exclusively for external directors, without the presence of executives. Our Board of Directors consists of nine non-management directors.
Fiscal Council
Under the Brazilian Corporate Law, the Conselho Fiscal (“fiscal council”), is a corporate body independent of management and a company’s external auditors. The fiscal council may be either permanent or non-permanent, in which case it is appointed by the shareholders to act during a specific fiscal year.
A fiscal council is not equivalent to, or comparable with, a U.S. audit committee. The primary responsibility of the fiscal council is to review management’s activities and a company’s financial statements, and to report its findings to the company’s shareholders. The Brazilian Corporate Law requires fiscal council members to receive as compensation at least 10% of the average annual amount paid to a company’s executive officers. The Brazilian Corporate Law requires a fiscal council to be composed of a minimum of three and a maximum of five sitting members and respective alternates.
Under the Brazilian Corporate Law, the fiscal council may not contain members that (i) are on our board of directors, (ii) are on the board of executive officers, (iii) are employed by us or a controlled company, or (iv) are spouses or relatives of any member of our management, up to the third degree.
Currently, our fiscal council consists of three sitting members and five alternates. The fiscal council members generally meet once a month.
Audit Committee
NYSE rules require that listed companies have an audit committee that (i) is composed of a minimum of three independent directors who are all financially literate, (ii) meets the SEC rules regarding audit committees for listed companies, (iii) has at least one member who has accounting or financial management expertise and (iv) is governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities. However, as a foreign private issuer, we need only to comply with the requirement that the audit committee meets the SEC rules regarding audit committees for listed companies to the extent compatible with Brazilian Corporate Law and Federal Law No. 13,303/16 (the Brazilian State-owned Companies Law). Our audit committee, which is not equivalent to, or comparable with, a U.S. audit committee, provides assistance to our Board of Directors on matters involving accounting, internal controls, financial reporting and compliance. The audit committee is mainly responsible for assisting and advising the Board of Directors in its responsibilities to ensure the quality, transparency and integrity of our published financial information and financial statements. The audit committee is also responsible for supervising all matters relating to the Code of Ethics and Integrity, accounting, internal controls, the internal and independent audit functions, compliance, risk management and internal policies, such as the related parties’ transaction policy. The audit committee comprises three members appointed by the Board of Directors, and, pursuant to our bylaws, the members of our audit committee may be appointed simultaneously to their election to the Board of Directors or by a subsequent resolution. The members of the audit committee shall perform their duties for the duration of their respective terms as board members or until otherwise decided by the shareholders’ meeting or by the Board of Directors. In the event that an audit committee member resigns or is removed from office after exercising any portion of his or her term, such member may only rejoin the audit committee at least three years from the end of his or her term. Since December 22, 2022, when Eduardo de Freitas Teixeira resigned, the members of our audit committee have been Francisco Vidal Luna and Wilson Newton de Mello Neto. All members meet the independent membership requirements of the SEC and NYSE as well as other NYSE requirements. Both are Financial Expert within the scope of the SEC rules covering the disclosure of financial experts on audit committees in periodic filings pursuant to the U.S. Securities Exchange Act of 1934. Francisco Vidal Luna is the committee’s Coordinator.
Nomination/Corporate Governance and Compensation Committees
NYSE rules require that listed companies have a nomination/corporate governance committee and a compensation committee composed entirely of independent directors and governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities. Required responsibilities for the nomination/corporate governance committee include, among other things, identifying and selecting qualified board member nominees and developing a set of corporate governance principles applicable to the company. Required responsibilities for the compensation committee include, among other things, reviewing corporate goals relevant to the chief executive officer’s compensation, evaluating the chief executive officer’s performance, approving the chief executive officer’s compensation levels and recommending to the board non-chief executive officer compensation, incentive-compensation and equity-based plans.
| 143 |
Under the Brazilian Corporate Law, we are not required to have a nomination/corporate governance committee or compensation committee. However, Federal Law No. 13,303/16 and State Decree No. 62,349/2016 established the requirement of a committee with the responsibilities of verifying the nomination process of the members of the management and of the fiscal council. In our annual shareholders’ meeting, held on April 27, 2018, our bylaws were amended in order to, among other things, create the Eligibility and Advisory Committee in compliance with Federal Law No. 13,303/2016 and State Decree No. 62,349/2016.
This committee must be composed of up to three members, elected by a general shareholders’ meeting, without a fixed term of office. Members must have at least three years’ professional experience in public administration, or three years’ experience in the private sector in an area in which, or related to which, we operate.
Candidates are assessed based on the CODEC Resolution No. 02/2023 and on our nomination policy, approved by the Board of Directors, which follows the guidelines defined by Federal Law No. 13,303/2016, State Decree No. 62,349/2016 and Novo Mercado Listing Regulations.
Members of the Eligibility and Advisory Committee may attend Board of Directors’ meetings where matters related to this committee are discussed and will have the right to speak, but not to vote, in accordance with our bylaws.
This committee is also responsible for verifying the compliance of the evaluation process of the members of the management and of the fiscal council, as well as providing methodological and procedural support to the Board of Directors to evaluate the performance of officers and other members of statutory committees.
The performance evaluation, individual and collective, held annually, of the members of the management and the members of committees, observing the following minimum requirements, according to the terms of Federal Law No. 13,303/2016:
| (a) | presentation of the acts of management, regarding the lawfulness and effectiveness of the management; | |
| (b) | contribution to the earnings for the year; and | |
| (c) | achievement of the purposes established in the business plan and fulfillment of the long-term strategy. |
We expect that a written charter addressing the committee’s purpose and detailing its required responsibilities will be approved by the Board of Directors.
Under the Brazilian Corporate Law, the total amount available for compensation of our directors and executive officers and for profit-sharing payments to our executive officers is established by our shareholders at a general shareholders’ meeting. The individual compensation and profit-sharing of each executive officer, as well as the compensation of our board and committee members is set out according to our remuneration policy, approved by the Board of Directors, which follows the guidelines from the São Paulo state government and CODEC.
Shareholder Approval of Equity Compensation Plans
NYSE rules require that shareholders be given the opportunity to vote on all equity compensation plans and material revisions thereto, with limited exceptions. We do not currently have any equity compensation plan. If such a plan were to be implemented, there is no requirement under Brazilian Corporate Law for the plan to be approved by our shareholders. However, if the issuance of new shares in connection with any equity compensation plan exceeded the authorized capital under our bylaws, the increase in capital would require shareholder approval.
Corporate Governance Guidelines
NYSE rules require that listed companies adopt and disclose corporate governance guidelines. We are in compliance with the adoption of corporate governance provisions and guidelines required under the Novo Mercado Regulations, Federal Law No. 13,303/2016 and State Decree 62,349/2016. For more information, see “Item 9.C Markets—Trading on the Brazilian Stock Exchange—The Novo Mercado Segment” and “Item 16.G—Corporate Governance—Required Changes to Corporate Governance Practices of Brazilian Government-Controlled Companies,” our Report on Brazilian Code of Corporate Governance and our policies available on “Corporate Governance” section of our Investor Relations website. We believe that such corporate governance guidelines applicable to us do not conflict with the guidelines established by the NYSE. Our corporate governance guidelines and practices are available on our website at www.sabesp.com.br at the following location: Investor Relations – Corporate Governance.
Code of Ethics and Integrity
NYSE rules require that listed companies adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. The adoption and disclosure of a formal code is not required under the Brazilian Corporate Law.
| 144 |
However, Federal Law No. 13,303/2016, State Decree 62,349/2016 and the Novo Mercado Regulations require the adoption of a Code of Conduct and Integrity that should include, among other provisions, guidelines regarding conflicts of interests, fraudulent acts and corruption, whistleblowing channels, bribes, protective measures to avoid retaliation regarding whistleblowers, periodic training on the content of such code and sanctions in case of code violations. We adopt and disclose a Code of Ethics and Integrity which complies with the requirements made by the Brazilian laws and regulations, as well as addresses the matters required to be addressed by the applicable NYSE and SEC rules.
We have had a Code of Ethics and Integrity since 2006, and the latest version was approved by the Board of Directors in February 2021. It is available on https://ri.sabesp.com.br/en/corporate-governance/code-of-conduct-and-integrity/, and on the Brazilian Securities Commission (www.cvm.com.br).
The Code of Conduct and Integrity is introduced to Company’s Officers, Board of Directors, Board of Auditors, Audit Committee, Eligibility and Counselling Committee and to all the other employees during the integration program which is tailored to their positions.
Moreover, we require our suppliers and other related third-party to comply with our Code of Ethics and Integrity, through a contractual agreement. Any non-compliance is subjected to sanctions under the contract and other measures under applicable laws and regulations.
Any breach of the Code of Conduct and Integrity is subject to internal investigations and disciplinaries measures applicable on a case-by-case basis. The Code of Conduct and Integrity is frequently updated in order to comply with new laws and regulations.
Internal Audit Function
NYSE rules require that listed companies maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control. Our internal audit department is connected to the Board of Directors through the audit committee and reports to our Chief Executive Officer. Our internal audit is responsible for evaluating (i) the adequacy of internal controls, (ii) the effectiveness of the risk management and of the governance processes, (iii) the reliability of the process of collecting, measuring, classifying, accumulating, recording and disclosing events and transactions, to prepare financial statements, and (iv) the proper application of the principle of segregation of duties, to avoid the occurrence of conflicts of interest and fraud.
Anticorruption Compliance
Law No. 12,846, of August 1, 2013 (the “Anticorruption Law” or the “Clean Company Act”), currently regulated by Decree No. 11,129/2022, introduced to the Brazilian legal system the concept of strict liability for legal entities involved in harmful acts against the national and foreign public administration, as defined in the Anticorruption Law, subjecting the violation company to penalties both in administrative and civil law. Similar to the Foreign Corrupt Practices Act of the United States, to which we are also subject, the Anticorruption Law considers that an effective implementation of Compliance Programs may be used to mitigate the administrative penalties to be applied as a consequence of a harmful act against the public administration, which can be up to 20% of the company’s annual gross revenue.
We have a Compliance Program which was approved by the Board of Directors and is updated periodically. The last update was in December 2018. The program was established in accordance with the Brazilian Anticorruption Law, Foreign Corrupt Practices Act, Federal Law No. 13,303/2016, the Novo Mercado Regulations, and Brazilian Office of the Comptroller General’s (CGU) guidelines.
As a semi-public company, our Compliance Program encompasses two distinct situations – active corruption and passive corruption, as established in Brazilian anti-corruption legislation – and follows the recommendations of the Organization for Economic Cooperation and Development, the United Nations Office on Drugs and Crimes, and the World Bank to establish an ethical culture. Our program incorporates and focuses on high management, structural functioning, the provision of complaint hotlines, monitoring of third-party relations, governance and internal controls, risk management, training and communication.
The program currently consists of a set of internal mechanisms and procedures related to integrity, monitoring and incentives to report irregularities. The program also focuses on the effective implementation of the Code of Conduct and Integrity as well as other policies and guidelines aimed at preventing fraud, corruption and other harmful acts against public administration.
We periodically review our management of anti-fraud and anti-corruption measures, consolidating the measures in a structured corporate program. In 2022, we resumed a new cycle of mapping and analyzing the risks of fraud and corruption and of the controls necessary to the business profile. Our current portfolio has 19 risks. For risks classified as moderate to critical, we implement mitigating actions.
| 145 |
As part of the program, we created the Conduct and Integrity Learning Track (Trilha de Aprendizagem de Conduta e Integridade) which consists of a continuous training program directed to the entire company staff, reinforcing the importance of acting in accordance with laws, regulations and internal policies. The main topics covered are: integrity, ethics, sexual and moral harassment, diversity, corruption, fraud and conflicts of interest.
In 2022, we also conducted online training on Preventing and Combating Fraud and Corruption based on national and international standards to disseminate best practices and adopt a culture of integrity for our employees and business partners. We also train our directors, officers and members of the Fiscal Council on issues related to corporate governance.
To engage employees and leadership on topics such as nepotism, conflicts of interest, donations, sponsorships, gifts, and hospitality, among others, we launched the Moments of Compliance project in 2022. In 2022, we held 32 meetings in different areas, involving over 6,000 employees, with the objective of covering the entire company by the end of 2023.
Further, we provide the Trust Channel, which is a tool made available to employees make inquiries on any questions related to the ethical behavior within our business. We ensure confidentiality and anonymity to whoever uses this tool.
We also provide complaint hotlines to report cases of fraud, corruption, unlawful acts, breaches of the Code of Conduct and Integrity and other activities that could harm our interests and principles. This information is available and is easily accessible and identifiable on our website. Anonymity is guaranteed in all cases, except when there is a court decision to the contrary.
For related-party transactions, the establishment of special purpose vehicles or when required, background checks are adopted in order to detect information relating to history and reputation, relationships with public agencies or agents, company corporate structure and restrictive lists, including corruption proceedings and investigations, to ensure that the terms and conditions of the transaction do not result in a material risk of violation of applicable anti-corruption laws.
Among the compliance practices, we encourage the adoption of integrity measures among our suppliers by providing contractual clauses to ensure compliance with ethical standards and the prohibition of fraud and corruption practices, in addition to monitoring related party transactions.
In recognition of our commitment to ethical behavior in our business practices, we have been listed in the Pro-Ethics Companies list by the Office of the Comptroller General of the federal government for the last two evaluation cycles. Additionally, we scored over nine points in the self-evaluation conducted in 2022 by the Integrity Indicators of the Ethos Institute, demonstrating a high level of maturity in our Integrity Program.
Our department responsible for the application and improvement of the Compliance Program acts with autonomy, independence and impartiality and reports to the CEO. Depending on the individuals involved in the allegations, the department may file a report to the Board of Directors, Fiscal Committee and Audit Committee, to which it also makes periodical reports on its activities.
As a result of our efforts, we did not register any corruption cases in 2022.
Citizens’ Access to Information at Sabesp
Federal Law No. 12,527/2011 (LAI), regulated by State Decree No. 58.052/2012 and State Decree No. 61.559/2015 determines that government entities must create Citizen Information Services – SIC units which receive and manage information requests from the public, and make available to citizens information requested or otherwise provided the reasons for denial of such information requests.
In order to comply with LAI, we implemented the Citizen Information Service – SIC, structuring the internal flow of information to serve citizens within the terms provided by this law. We also made a Transparency Portal (Portal da Transparência) available on our website, which includes basic information required by law, software for citizens to request information and a list of frequently requested information, according to the standards of the São Paulo state government.
These duties are linked to the Risk and Compliance Management Superintendent whose main assumption is the transparency, quality of information and compliance with strategic rules of a listed company.
| ITEM 16H. | MINE SAFETY DISCLOSURE |
Not applicable.
| 146 |
| ITEM 16I. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
Not applicable.
| ITEM 16J. | INSIDER TRADING POLICIES |
Not applicable.
PART III
| ITEM 17. | FINANCIAL STATEMENTS |
Not applicable.
| ITEM 18. | FINANCIAL STATEMENTS |
The following financial statements, together with the reports of the independent registered public accounting firms, are filed as part of this annual report. For more information, see “Index to Financial Statements.”
| ITEM 19. | EXHIBITS |
(b) List of Exhibits
| Item | Description |
| 1.1* | Bylaws of the Registrant (English translation) (incorporated by reference to the Form 6-K filed on May 20, 2022). |
| 2.1 | Description of Securities registered under Section 12 of the Exchange Act. |
| 4.1* | Agreement between the Registrant and the State Department of Water and Energy (Departamento de Águas e Energia Elétrica—DAEE), dated April 24, 1997 (English translation) (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form F-1 filed on April 8, 2002 (the “April 8, 2002 Form F-1”). |
| 4.2* | Protocol of Understanding between the Registrant and the State of São Paulo, dated September 30, 1997 (English translation) (incorporated by reference to Exhibit 10.2 to the April 8, 2002 Form F-1). |
| 4.3* | Agreement between the Registrant and the State of São Paulo, through the Secretariat of Finance, dated September 10, 2001 (English translation) (incorporated by reference to Exhibit 10.3 to the April 8, 2002 Form F-1). |
| 4.4* | Agreement between the Registrant and the State of São Paulo, through the Secretariat of the Treasury, dated December 11, 2001 (English translation) (incorporated by reference to Exhibit 10.4 to the April 8, 2002 Form F-1). |
| 4.5* | Amendment to the Agreement, dated April 24, 1997, between the Registrant and the DAEE, dated March 16, 2000 (English translation) (incorporated by reference to Exhibit 10.5 to the April 8, 2002 Form F-1). |
| 4.6* | Amendment to the Agreement, dated April 24, 1997, between the Registrant and the DAEE, dated November 21, 2001 (English translation) (incorporated by reference to Exhibit 10.6 to the April 8, 2002 Form F-1). |
| 4.7* | First Amendment to the Agreement, dated December 11, 2001, between the Registrant and the State of São Paulo, dated March 22, 2004. (English translation) (incorporated by reference to Exhibit 4.7 to the Form 20-F filed on June 28, 2004). |
| 4.8* | Second Amendment to the Agreement, dated December 11, 2001, between the Registrant and the State of São Paulo, dated December 28, 2007. (English translation) (incorporated by reference to the Form 6-K filed on February 25, 2008). |
| 4.9* | Third Amendment to the Agreement, dated December 11, 2001, between the Registrant and the State of São Paulo, dated November 17, 2008. (English translation) (incorporated by reference to the Form 6-K filed on December 23, 2008). |
| 4.10* | Commitment Agreement, between the Registrant and the State of São Paulo, dated March 26, 2008. (English translation) (incorporated by reference to the Form 6-K filed on April 28, 2008). |
| 4.11* | Agreement Executed between the Registrant and the São Paulo City Government, dated November 14, 2007 (English Translation) (incorporated by reference to the Form 6-K filed on March 12, 2008). |
| 4.12* | Amendment to the Agreement Executed between the Registrant and the São Paulo City government, dated February 10, 2008 (English translation) (incorporated by reference to the Form 6-K filed on May 12, 2008). |
| 4.14* | The Audit Committee Charter dated August 12, 2021 (English translation) (incorporated by reference to the Form 6-K filed on September 2, 2021). |
| 4.15* | Convention between the State and the city of São Paulo, dated June 23, 2010, with the intermediation and consent of the Registrant and of ARSESP (English translation) (incorporated by reference to the Form 6-K filed on July 13, 2010). |
| 4.16* | Contract to provide public water supply and sewage services, among the Registrant, the State and the city of São Paulo, dated June 23, 2010 (English translation) (incorporated by reference to the Form 6-K filed on July 13, 2010). |
| 4.17* | Term of Agreement between the Registrant, the State of São Paulo and the DAEE, dated March 18, 2015 (English translation) (incorporated by reference to the Form 6-K filed on April 15, 2015). |
| 4.18* | Notice of Transactions with Related Parties, dated November 9, 2016, (English translation) (incorporated by reference to the Form 6-K filed on November 16, 2016). |
| 4.19* | First Amendment to the Private Instrument of Settlement and Other Covenants between the Registrant and EMAE, dated October 19, 2017 (English translation) (incorporated by reference to the Form 6-K filed on November 9, 2017). |
| 147 |
| 148 |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP
| By: | /s/ André Gustavo Salcedo Teixeira Mendes | |
|
Name: André 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 |
Date: April 25, 2023
| 149 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Financial Statements as at December 31, 2022 and 2021
And for the years ended
December 31, 2022, 2021 and 2020
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Companhia de Saneamento Básico do Estado de São Paulo – SABESP
Opinion on the financial statements
We have audited the accompanying balance sheets of Companhia de Saneamento Básico do Estado de São Paulo – SABESP (the “Company”) as of December 31, 2022 and 2021, and the related statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the two-year period then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated April 25, 2023 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
1. Provisions for environmental claims (Notes 3.15, 6.2 (e) and 20)
The Company is a defendant in judicial and administrative environmental lawsuits, arising from the normal course of its operations, related to fines applied by public and competent authorities on potential environmental damage caused by the Company in the municipalities where it operates. This area requires critical judgments and evaluations made by management, supported by its legal counsel, in determining the estimates related to the recognition of liabilities, measurement of involved amounts, evaluation of the likelihood of loss in the various disputes and appropriate disclosure of existing lawsuits and litigations (contingent liabilities), in view of their relevance in relation to the financial statements.
The environmental claims classified as probable loss and subject to a provision recorded in the financial statements amounted to approximately R$ 407 million as of December 31, 2022. Additionally, the contingent environmental liabilities, classified as possible, therefore, not subject to recognition of a provision according to the IFRS, came to approximately R$ 3 billion as of December 31, 2022.
Certain laws and regulations in Brazil have a high level of complexity and, therefore, the measurement, recognition, classification and disclosure related to such lawsuits require a certain level of judgment by the Company’s management for the recognition of loss estimates and disclosures in its financial statements and, for this reason, we consider this issue to be a critical audit matter.
The primary procedures we performed to address this critical audit matter included:
| · | Tested management’s process for determining the amounts recorded and disclosed related to the amounts of environmental judicial claims, which included evaluating the design and operating effectiveness of the internal controls over the Company’s environmental judicial claims financial reporting and disclosures, including controls related to the review and approval of the determination of the likelihood of loss and estimated loss amounts; |
| · | Obtained and evaluated letters from the Company’s legal advisors in relation to the environmental lawsuits, including their assessment of the likelihood of loss and estimates of potential payments in the event of loss. We compared these assessments and estimates to those used by the Company and evaluated the sufficiency and adequacy of the Company’s provisions and disclosures. |
| · | Evaluated the data, critical assumptions and methodology used by the Company’s specialist, to determine the amounts recorded and disclosed related to the Company’s environmental judicial claims; |
| · | Evaluated whether the assumptions used were reasonable considering the past performance of the Company´s claims experience. |
| · | Evaluated the disclosures made in the financial statements regarding the adherence to the applicable standards; |
/s/
We have served as the Company’s auditor since 2020.
April 25, 2023
Auditor Firm ID
| F-2 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Financial Position as of December 31, 2022 and 2021 Amounts in thousands of reais |
| Assets |
Note |
December 31, 2022 |
December 31, 2021 |
| Current | |||
| Cash and cash equivalents | 7 | ||
| Financial investments | 8 | ||
| Trade receivables | 10 (a) | ||
| Accounts receivable from related parties | 11 (a) | ||
| Inventories | |||
| Restricted cash | 9 | ||
| Recoverable taxes | 18 (a) | ||
| Other assets |
|
| |
| Total current assets |
|
| |
| Noncurrent | |||
| Trade receivables | 10 (a) | ||
| Accounts receivable from related parties | 11 (a) | ||
| Escrow deposits | |||
| Water and Basic Sanitation National Agency – ANA | |||
| Other assets | |||
| Investments | 12 | ||
| Investment properties | 13 | ||
| Contract assets | 14 | ||
| Intangible assets | 15 | ||
| Property, plant and equipment | 16 | ||
|
|
| ||
| Total noncurrent assets |
|
| |
| Total assets |
|
|
The accompanying notes are an integral part of these financial statements. |
| F-3 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statement of Financial Position as of December 31, 2022 and 2021 Amounts in thousands of reais |
| Liabilities and equity |
Note |
December 31, 2022 |
December 31, 2021 |
| Current | |||
| Trade payables and contractors | |||
| Borrowings and financing | 17 | ||
| Labor and social obligations | 21 | ||
| Taxes and contributions | 18 (b) | ||
| Interest on capital | 24 (b) | ||
| Provisions | 20 (a) | ||
| Services payable | 23 | ||
| Public-Private Partnership - PPP | 15 (d) | ||
| Program Contract Commitments | 15 (c) (iv) | ||
| Other liabilities |
|
| |
| Total current liabilities |
|
| |
| Noncurrent | |||
| Borrowings and financing | 17 | ||
| Deferred income tax and social contribution | 19 (a) | ||
| Deferred Cofins and PASEP | |||
| Provisions | 20 (a) | ||
| Pension plan obligations | 22 | ||
| Public-Private Partnership - PPP | 15 (d) | ||
| Program Contract Commitments | 15 (c) (iv) | ||
| Other liabilities |
|
| |
| Total non-current liabilities |
|
| |
|
|
| ||
| Total liabilities |
|
| |
| Equity | |||
| Capital stock | |||
| Earnings reserves | |||
| Other comprehensive loss |
|
| |
| Total equity | 24 |
|
|
| Total equity and liabilities |
|
|
The accompanying notes are an integral part of these financial statements. |
| F-4 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Income Statements for the Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
|
Note |
2022 |
2021 |
2020 | |
| Net operating revenue | 28 (b) | |||
| Operating costs | 29 |
( |
( |
( |
| Gross profit |
|
|
| |
| Selling expenses | 29 | ( |
( |
( |
| Allowance for doubtful accounts | 29 | ( |
( |
( |
| Administrative expenses | 29 | ( |
( |
( |
| Other operating income (expenses), net | 31 | ( |
||
| Equity results of investments in affiliaties | 12 |
|
|
|
| Profit from operations before finance income (expenses) and income tax and social contribution | ||||
| Financial expenses | 30 | ( |
( |
( |
| Financial revenues | 30 | |||
| Exchange result, net | 30 |
|
|
( |
| Financial result, net |
( |
( |
( | |
| Profit before income tax and social contribution |
|
|
| |
| Income tax and social contribution | ||||
| Current | 19 (d) | ( |
( |
( |
| Deferred | 19 (d) |
|
|
|
| Income tax and social contribution | ( |
( |
( | |
|
Profit for the year |
|
|
| |
| Earnings per share – basic and diluted (in reais) | 25 |
|
|
|
The accompanying notes are an integral part of these financial statements. |
| F-5 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Comprehensive Income for the Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais |
|
Note |
2022 |
2021 |
2020 | |
| Profit for the year | ||||
| 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 |
22 | |||
| Other |
|
|
| |
|
Total comprehensive income for the year |
|
|
|
The accompanying notes are an integral part of these financial statements. |
| F-6 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Changes in Equity for the Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
|
Earnings reserves |
||||||||
|
Note |
Capital stock |
Legal Reserve |
Investment reserve |
Complementary minimum dividend |
Retained earnings |
Other comprehensive loss |
Total | |
| Balances as of December 31, 2019 |
|
|
|
|
|
( |
| |
| Net income for the year | ||||||||
| Actuarial gains (losses) |
|
|
|
|
|
|
| |
| Total comprehensive income for the year | ||||||||
| Legal reserve | 24 (b) | ( |
||||||
| Interest on capital (R$ per share) | 24 (b) | ( |
( | |||||
| Complementary minimum dividends of 2019, approved (R$ |
( |
( | ||||||
| Complementary minimum dividends (R$ |
24 (b) | ( |
||||||
| Withholding income tax on interest on capital attributable as minimum mandatory dividends | 24 (b) | ( |
( | |||||
| Transfer to investments reserve | 24 (e) |
|
|
|
|
( |
|
|
| Balances as of December 31, 2020 |
|
|
|
|
|
( |
| |
| Net income for the year | ||||||||
| Actuarial gains (losses) | 22 |
|
|
|
|
|
|
|
| Total comprehensive income for the year | ||||||||
| Legal reserve | 24 (b) | ( |
||||||
| Interest on capital (R$ per share) | 24 (b) | ( |
( | |||||
| Complementary minimum dividends of 2020, approved (R$ |
( |
( | ||||||
| Complementary minimum dividends (R$ |
24 (b) | ( |
||||||
| Withholding income tax on interest on capital attributable as minimum mandatory dividends | 24 (b) | ( |
( | |||||
| Transfer to investments reserve | 24 (e) |
|
|
|
|
( |
|
|
| Balances as of December 31, 2021 |
|
|
|
|
|
|
| |
The accompanying notes are an integral part of these financial statements. |
| F-7 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Changes in Equity for the Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Net income for the year | ||||||||
| Actuarial gains (losses) | 22 |
|
|
|
|
|
|
|
| Total comprehensive income for the year | ||||||||
| Legal Reserve | 24 (b) | ( |
||||||
| Interest on capital (R$ per share) | 24 (b) | ( |
( | |||||
| Complementary minimum dividends of 2021, approved (R$ |
( |
( | ||||||
| Complementary minimum dividends (R$ |
24 (b) | ( |
||||||
| Withholding income tax on interest on capital attributable as minimum mandatory dividends | 24 (b) | ( |
( | |||||
| Transfer to investments reserve | 24 (e) |
|
|
|
|
( |
|
|
| Balances as of December 31, 2022 |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements. |
| F-8 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Cash Flows for the Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais |
December 31, 2022 |
December 31, 2021 |
December 31, 2020 | |
| Cash flow from operating activities | |||
| Profit before income tax and social contribution | |||
| Adjustments for: | |||
| Depreciation and amortization | |||
| Residual value of property, plant and equipment, intangible assets and investment properties written-off | |||
| Bad debt expense | |||
| Agreement signed with the municipality of Mauá | ( | ||
| Provisions and inflation adjustment of provisions | |||
| Interest calculated on borrowings and financing payable | |||
| Inflation adjustment and exchange (losses) gains on borrowings and financing | ( |
||
| Interest and inflation adjustments on liabilities | |||
| Interest and inflation adjustments on assets | ( |
( |
( |
| Finance charges from customers | ( |
( |
( |
| Construction margin on intangible assets arising from concession agreements | ( |
( |
( |
| Provision for Consent Decree (TAC) and Knowledge Retention Program (PRC) | ( |
||
| Equity results of investments in affiliaties | ( |
( |
( |
| Interest and monetary restatement (PPP) | |||
| Transfer to the São Paulo Municipal Government | |||
| Pension plan obligations | |||
| Other adjustments | |||
| Changes in assets | |||
| Trade receivables | ( |
( |
( |
| Accounts receivable from related parties | ( |
||
| Inventories | ( |
( |
( |
| Recoverable taxes | ( |
( | |
| Escrow deposits | |||
| Other assets | ( | ||
| Changes in liabilities | |||
| Trade payables and contractors | ( |
( |
( |
| Services payable | ( |
( | |
| Accrued payroll and related taxes | ( | ||
| Taxes and contributions payable | |||
| Deferred Cofins and Pasep | |||
| Provisions | ( |
( |
( |
| Pension plan obligations | ( |
( |
( |
| Other liabilities |
( |
( |
( |
| Cash generated from operations | |||
| Interest paid | ( |
( |
( |
| Income tax and social contribution paid |
( |
( |
( |
|
Net cash generated from operating activities |
|||
| Cash flows from investing activities | |||
| Acquisition of contract assets and intangible assets | ( |
( |
( |
| Restricted cash | ( |
( | |
| Financial investments | ( | ||
| Investment properties | ( |
||
| Investment increase/(decrease) | ( | ||
| Purchase of property, plant and equipment |
( |
( |
( |
| Net cash used in investing activities | ( |
( |
( |
The accompanying notes are an integral part of these financial statements. |
| F-9 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Cash Flows for the Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais (continued) |
December 31, 2022 |
December 31, 2021 |
December 31, 2020 | |
| Cash flows from financing activities | |||
| Borrowings and financing | |||
| Proceeds from loans | |||
| Payment of loans | ( |
( |
( |
| Payment of interest on capital | ( |
( |
( |
| Public-Private Partnership - PPP | ( |
( |
( |
| Program Contract Commitments |
( |
( |
( |
| Net cash generated by (used in) financing activities | ( |
( | |
|
|
|
| |
| Increase / (decrease) in cash and cash equivalents |
|
|
( |
| Represented by: | |||
| Cash and cash equivalents at the beginning of the year | |||
| Cash and cash equivalents at the end of the year |
|
|
|
| Increase / (decrease) in cash and cash equivalents |
|
|
( |
The accompanying notes are an integral part of these financial statements. |
| F-10 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| 1 | Operations |
Companhia de Saneamento Básico do Estado de São Paulo ("SABESP" or "Company") is a mixed-capital company headquartered in São Paulo, at Rua Costa Carvalho, 300, CEP 05429-900, controlled by the State of São Paulo. The Company is engaged in the provision of basic and environmental sanitation services in the State of São Paulo, as well as it supplies treated water and sewage services on a wholesale basis.
In addition to providing basic sanitation services in the State of São Paulo, SABESP may performs these activities in other states and countries, and can operate in drainage, urban cleaning, solid waste handling and energy markets. SABESP aims to be a world reference in the provision of sanitation services, in a sustainable, competitive and innovative manner, with a focus on customers.
As of December 31, 2022, the Company operated water and sewage services in 375 municipalities of the State of São Paulo, 351 have already signed contracts, pursuant to Law 11,445/2007. Most of these municipalities’ operations are based on 30-year concession, program and services contracts, except for the municipalities of Guarulhos, Mauá, Santo André, São Bernardo do Campo, São João da Boa Vista and Tejupá, which have a 40-year term.
The table below shows a summary of the contractual situation of the municipalities served:
|
December 31, 2022 |
December 31, 2021 | |
| Total municipalities that have already signed contracts | ||
| Balance – intangible and contract assets | ||
| Percentage of intangible and contract assets | ||
| Revenue from sanitation services (excluding construction revenue) | ||
| Percentage of revenue from sanitation services (excluding construction revenue) | ||
| Municipalities with expired contracts: | ||
| Balance – intangible and contract assets | ||
| Percentage of intangible and contract assets | ||
| Revenue from sanitation services (excluding construction revenue) | ||
| Percentage of revenue from sanitation services (excluding construction revenue) | ||
| Municipalities with concession agreements due by 2030: | ||
| Balance – intangible and contract assets | ||
| Percentage of intangible and contract assets | ||
| Revenue from sanitation services (excluding construction revenue) | ||
| Percentage of revenue from sanitation services (excluding construction revenue) | ||
| Municipality of São Paulo: | ||
| Percentage of intangible and contract assets | ||
| Percentage of revenue from sanitation services (excluding construction revenue) | ||
| F-11 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
The Company's shares have been listed in the “Novo Mercado” (New Market) segment of B3 under the ticker symbol SBSP3 since April 2002 and on the New York Stock Exchange (NYSE) as American Depositary Receipts (“ADRs”) Level III, under the SBS code, since May 2002.
Since 2008, the Company has been setting up partnerships with other companies, which resulted in the following companies: Sesamm, Águas de Andradina, Saneaqua Mairinque, Aquapolo Ambiental, Águas de Castilho, Attend Ambiental, 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 vote in certain issues jointly with associates, indicating the shared control in the management of investees, except for Saneaqua Mairinque, which, as of August 2020, no longer has a shared control.
Economic instability worsened by COVID-19
Regarding the effects of COVID-19, the Company emphasizes the migration, in 2020, of the billed volume of the public, commercial, and industrial categories that have average tariffs higher than the tariff charged from the residential category. However, since 2021, the billed volume has been resuming for these categories with consequent recovery in the average tariff price.
Expenses with allowance for doubtful accounts are still rising over the same period in 2021, due to the higher delinquency in 2022.
New Legal Sanitation Framework
On July 15, 2020, Federal Law 14,026/2020, known as New Legal Framework for Basic Sanitation, was sanctioned. The new law expands competition in the sector by extinguishing program contracts, encourages the region-wise provision of services to promote economies of scale, and provides for strengthening the service regulation.
| F-12 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
Additionally, the New Legal Framework imposes performance goals to reach 99% of the population served with drinking water and 90% with sewage collection and treatment by December 31, 2033, encouraging operators to increase efficiency. The new Law also granted the National Water Agency (ANA) with power to edit reference rules to regulate sanitation services, aiming to standardize the operation of the regulatory agencies and minimize regulatory uncertainties, thus creating a more stable and attractive environment for investments in the sector.
On May 31, 2021, Federal Decree 10,710 was published, regulating article 10-B of Law 11,445/2007, establishing the methodology for proving the economic and financial capacity of public providers of drinking water supply and sewage services, to make it possible the compliance with the universalization goals by 2033. Said Decree determined economic and financial evaluation metrics on service providers to prove their ability to make investments within the intended deadlines and several conditions for current contracts to be considered regular. Any adjustments to them should be made by March 31, 2022, in line with paragraph 1 of article 11-B of the New Legal Framework.
According to the aforementioned Decree, as of December 30, 2021, the Company presented a requirement to the São Paulo State Utility Services Regulatory Agency (ARSESP) containing documents that prove its capacity to maintain the provision of services in the operated area by meeting the goals of universal water and sewage collection and treatment by 2033, defined by the New Legal Framework, attested and certified by independent auditor and certifying body. As of March 28, 2022, ARSESP recognized the Company’s economic-financial capacity, under the applicable legislation.
In this new context, the Company understands that it is important to highlight that i) it has 366 regular contracts that have already been adapted to the provisions of the New Legal Framework, which ensure 99.5% of revenue; ii) it has access to public capital and the private capital market, due to its sound reputation, favoring the maintenance and/or expansion of its operating base and compliance with the universalization of services within the deadline established by the new law; and iii) it has high governance level.
Management expects that the funds raised with the gradual recovery of the economic activities, 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 financial statements were approved by Management on April 25, 2023.
| F-13 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| 2 | Basis of preparation and presentation of the financial statements |
The financial statements of the Company have been prepared in accordance with the International Financial Reporting Standards – IFRS as issued by the International Accounting Standards Board – IASB. All material information related to the financial statements, and this information alone, is being disclosed and corresponds to the information used by the Company’s Management in its administration.
The financial statements have been prepared under the historical cost except for certain financial instruments measured at fair value when required by the standards.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires Management to exercise its judgment in the process of applying the Company's accounting policies. The areas involving a higher degree to judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are described in Note 6.
3 Summary of Significant Accounting Policies
The main accounting policies applied in the preparation of these financial statements are defined below and have been applied consistently in all years presented.
3.1 Cash and cash equivalents
Cash and cash equivalents include cash in hand, bank deposits, overdraft accounts and other short-term highly liquid investments with maturities and intention of use by the Company’s Management in a period lower than three months.
3.2 Financial assets and liabilities
Financial Asset - Classification
The Company classified its financial assets according to the following categories: measured at amortized cost, measured at fair value through other comprehensive income and measured at fair value through profit or loss. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of the financial assets at inception. As of December 31, 2022 and 2021, the Company did not have financial assets classified as fair value through other comprehensive income and fair value through profit or loss.
| F-14 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| · | Amortized cost |
This comprises financial assets that meet the following conditions: (i) it is held within the business model whose objective is to hold financial assets to collect contractual cash flows; and (ii) the contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Presented as current assets, except for those with maturity of more than 12 months after the reporting date (these are classified as noncurrent assets). The Company's financial assets measured at amortized cost include cash and cash equivalents, financial investments, restricted cash, accounts receivable from related parties, accounts receivable from related parties, other receivables, receivables from the Water and Basic Sanitation National Agency – ANA. Financial assets measured at amortized cost are recorded at fair value and subsequently at amortized cost, under the effective interest rate method, except for trade receivables, which is initially measured at transaction price, as it contains no financing items, and is subsequently measured at amortized cost.
Financial Liabilities - Classification
The Company classifies its financial liabilities measured at amortized cost. Classification depends on the purpose to which the financial liabilities were assumed. This category comprises balances payable to contractors and suppliers, borrowings and financing, services payable, balances payable from public-private partnership (PPP), and program contract commitments.
The effective interest rate method is adopted to calculate the amortized cost of a financial liability and allocate its interest expense under the respective period. The effective interest rate exactly deducts the estimated future cash flows (including fees, transaction costs and other issue costs) throughout the financial liability’s estimated life or, when appropriate, during a shorter period, for initial recognition of the net carrying amount.
Impairment of financial assets
| · | Trade receivables |
Due to the charactheristics of the Company’s accounts receivable such as (i) insignificant financial component, (ii) non-complex receivables portfolio, and (iii) low credit risk, the Company adopted the simplified approach of expected credit loss, which consists in recognizing the expected credit loss based on the total asset’s useful life.
The methodology to calculate the allowance for doubtful accounts consisted of using an estimate calculated based on the average default observed in the last 36 months, per maturity range, in addition to estimating the recovery of credits overdue for more than 360 days, based on the track record of the last three years. For estimate purposes, it also considered the category of private and public customers, and segregated accounts receivable among the regular consumption accounts and agreements. The Company also concluded that the estimates of the macroeconomic indicators Gross Domestic Product (GDP), Unemployment Rate and the Extended Consumer Price Index (IPCA) were not impacted, given that it carried out correlation analyses of these indicators and its default history, which did not result in significant correlation between them.
| F-15 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| · | Deposit transactions and financial investments measured at amortized cost |
The Company analyzes changes in the rates of investments in bank deposits certificates and information obtained from regulatory agencies about the financial institutions. The likelihood of delinquency over 12 months and during the terms of these investments was based on historical data provided by credit rating agencies for each credit level and analyzed in terms of sensitivity based on current returns.
These deposits and financial investments are subject to an insignificant risk of change in value.
3.3 Operating income
(a) Revenue from sanitation services
Revenue from water supply and sanitation services are recognized as the water is consumed and services are provided. Revenues, including unbilled revenues, are recognized at the fair value of the consideration received or receivable for the rendering of those services. Revenue is shown net of value-added tax, rebates and discounts. Unbilled revenues represent incurred revenues in which the services were provided, but not yet billed until the end of the each period and are recorded as trade receivables based on monthly estimates of the completed services.
Revenues are recognized based on IFRS 15 (Revenue from Contracts with Customers), which establishes a five-step model applicable over revenue from a contract with a customer. Revenues are recognized when the Company: i) it identifies the contracts with customers; ii) it identifies the different obligations in the contract; iii) it determines the transaction price; iv) it allocates the transaction price to the performance obligations in the contracts; and (v) it satisfies all performance obligations. Disputed amounts are recognized as revenue when collected.
(b) Construction revenue
Revenue from concession construction contracts is recognized in accordance with IFRS 15 (Revenue from Contracts with Customers) and IFRIC 12 (Service Concession Arrengements), as all performance obligations are satisfied over time. During the construction phase of the contract, an asset is classified as contract assets, as the Company estimates that the fair value of its consideration is equivalent to expected construction costs plus margin. The fee represents the additional margin related to the work performed by the Company in relation to such construction contracts and it is added to construction costs, resulting in the construction revenue.
| F-16 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
3.4 Trade receivables and allowance for doubtful accounts
Trade receivables are amounts due from customers for services performed in the ordinary course of business. These are classified as current assets, except when maturity exceeds 12 months after the end of the reporting period. In these cases, they are presented as noncurrent assets.
The Company establishes an allowance for doubtful accounts for receivable balances at an amount that Management considers to be sufficient to cover eventual losses, as described in Note 3.2.
3.5 Inventories
Inventories comprise supplies for consumption and maintenance of the water and sewage systems are stated at the lower between the average cost of acquisition or net realizable value, and are classified in current assets.
3.6 Investment properties
Investment properties are recorded at the acquisition or construction cost, less accumulated depreciation, except for the land group, calculated by the straight-line method at rates that consider the estimated useful life of the assets. Expenditures related to repairs and maintenance are recorded in the income statement when incurred.
The Company also maintains some assets for undetermined use in the future, i.e. it is not defined if the Company will use these assets in the operation or sell them in the short term during the ordinary course of business.
3.7 Contract asset
The Contract Asset (works in progress) is the right to consideration in exchange for goods or services transferred to the customers. As determined by IFRS 15 - Revenue from contract with customer, assets related to the concession under construction, recorded under the scope of IFRIC 12 – Service Concession Arrengements, should be classified as contract asset during the construction period and transferred to the intangible assets only after the completion of the works.
A Contract Asset is recognized at fair value, including the capitalization of labor, construction margin, interest, and other financial charges capitalized during the construction period of qualifying assets, where applicable, based on the weighted average rate of borrowings in effect on the capitalization date. A qualifying asset necessarily requires a substantial period, established by the Company as being higher than 12 months, to be ready for use, considering the completion period of the works, given that most of them take on average more than 12 months to be completed, which corresponds to one fiscal year of the Company.
| F-17 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
The infrastructure construction values are recognized as revenue, at fair value, provided that they generate future economic benefits. The accounting policy to recognize construction revenue is described in Note 3.3 (b).
3.8 Property, plant and equipment
Property, plant and equipment comprise mainly administrative facilities not composing the assets subject to the concession agreements. Those assets are stated at acquisition or construction cost less depreciation and impairment losses, as applicable. Where applicable, interest, other finance charges, and inflationary effects resulting from financing effectively applied to construction in progress are recorded as the cost of the respective property, plant and equipment for the qualifying assets. A qualifying asset necessarily requires a substantial period, established by the Company as being higher than 12 months, to be ready for use, considering the completion period of the works, given that most of them take on average more than 12 months to be completed, which corresponds to one fiscal year of the Company.
Subsequent costs included in the existing asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that the future economic benefit associated with the item will flow to the Company and the cost of the item can be reliably measured. Repairs and maintenance are charged to the income statement of the year, as incurred.
The depreciation of property, plant, and equipment begins when such an item becomes available for use, in its location, and under the necessary condition, when this asset becomes operational. Depreciation is calculated using the straight-line method and the average rates are presented in Note 16 (a). Land is not depreciated.
The useful lives of assets are revised and adjusted, where applicable, at the end of each year.
Gain and losses on disposals are determined by the difference between the proceeds with the carrying amount and are recognized in other operating income (expenses) in the income statement.
3.9 Intangible assets
Intangible assets are those arising from concession contracts, and the main costs are transferred from the Contract Asset, as described in Note 3.7.
| F-18 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
The intangible has its amortization initiated when the intangible assets are available for use in the location and necessary condition when this asset becomes operational. The amortization reflects the period in which it is expected that the asset’s future economic benefits are consumed by the Company, which may be the final term of the concession or their useful life.
The amortization of the intangible assets ends when the asset is fully consumed or it is disposed of, whatever occurs first.
Donations in assets, received from third parties and governmental entities, to allow the Company to render water supply and sewage services are recorded in the Company’s financial statements at zero cost, since these assets are controlled by the concession grantor.
Financial resources received as donations for the construction of infrastructure are recorded under “Other operating income”.
(a) Concession agreements/program contracts/service contracts
The Company operates concession agreements including the rendering of basic sanitation, environmental, water supply and sewage services signed with the granting authorities. The infrastructure used by SABESP subject to service concession arrangements is considered to be controlled by the concession grantor when:
| (i) | The granting authority controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price; and |
| (ii) | The granting authority controls the infrastructure, i.e., retains the right to take back the infrastructure at the end of the concession. |
The rights over the infrastructure operated under the concession agreements are accounted for as an intangible asset as the Company has the right to charge for the use of the infrastructure assets, and the users (consumers) must pay SABESP for the services.
Intangible assets related to the concessions, are amortized on a straight-line basis over the period of the contract, or the useful life of the underlying asset, whichever occurs first.
The details referring to amortization of intangible assets are described in Note 15 (c).
| F-19 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
(b) Software license of use
Software licensing is capitalized based on the acquisition costs and other implementation costs. Amortizations are recorded according to the useful life and the expenses associated with maintaining them are recognized in profit or loss when incurred.
3.10 Impairment of non-financial assets
Property, plant and equipment, intangible assets and other noncurrent assets with defined useful lives, are yearly reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company does not have assets with indefinite useful life and assessed that there are no indications of impairment losses, mainly supported by Law 14,026/2020, which ensures that basic sanitation public utilities will have assured its economic and financial sustainability to public sanitation services through tariffs or indemnity.
3.11 Trade payables and contractors
Trade payables and contractors are obligations to pay for goods or services acquired from suppliers in the ordinary course of business and are initially measured at fair value, which generally correspond to the bill and subsequently at amortized cost, being classified as current liabilities, except when the maturity exceeds 12 months after the reporting date and are, otherwise, being presented as noncurrent liabilities.
3.12 Borrowings and financing
Borrowings and financing are initially recognized at fair value, upon receipt of funds, net of transaction costs. Subsequently, borrowings and financing are stated at amortized cost, as presented in Note 17. Borrowings and financing are classified as current liabilities unless the Company has an unconditional right to defer the settlement of the liability for at least 12 months after the end of the reporting date.
The bonds issued by the Company are not convertible into shares and are recorded similarly to borrowings.
3.13 Borrowing costs
Borrowing costs consist of interest rates and other charges incurred by the Company and arise from borrowing and financing agreements, including exchange variation.
| F-20 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
Costs attributable to the acquisition, construction, or production of an asset, which, necessarily, requires a substantial time to be ready for use or sale are capitalized as part of the cost of these assets. Other borrowing costs are recognized as expenses in the period they are incurred. The capitalization occurs during the construction period of the asset, considering the weighted average rate of borrowings effective on the capitalization date.
The Company analyses foreign currency-denominated borrowings or financing as if they were contracted in local currency, restricting the capitalization of interest and/or exchange variation by the amount that would be capitalized if they were contracted in the domestic market in similar lines of credit and loans.
3.14 Salaries, payroll charges and contributions
Salaries, vacations, Christmas bonuses, profit sharing and additional payments negotiated in collective labor agreements plus related charges and contributions are recorded on the accrual basis.
The profit sharing plan for its employees is based on operational and financial targets, and a provision is created when it is contractually required or when there is a past practice that created a constructive obligation, and is recorded on the accrual basis period as operating cost, selling and administrative expenses or capitalized in assets.
3.15 Provisions, legal obligations, escrow deposits and contingent assets
Provisions related to claims are recognized when: i) the Company has a present (legal or constructive) obligation resulting from a past event; ii) it is probable that an outflow of resources that comprise economic benefits will be required to settle the obligation; and iii) the amount can be reliably estimated. Where there are a number of similar obligations, the likelihood that an outflow of resources will be required to settle an obligation is determined by considering the nature of the obligations as a whole.
Provisions are measured at the present value of the disbursements expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognized as financial expense.
For financial statement presentation purposes, the provision is stated net of escrow deposits, based on the legal offset right.
Escrow deposits not linked to the related obligations are recorded in noncurrent assets and adjusted by the indexes defined by the competent authorities.
| F-21 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
The Company does not recognize contingent liabilities in the financial statements since it either does not expect outflows to be required or the amount of the obligation cannot be reliably measured.
Contingent assets are not recognized in the statements of financial position.
3.16 Environmental costs
Costs related to ongoing environmental programs are expensed in the income statement, when there is a taxable event. Ongoing programs are designed to minimize the environmental impact of the operations and to manage the environmental risks inherent to the Company's activities.
3.17 Income taxes – current and deferred
Income taxes expenses comprise current and deferred income tax and social contributions.
Current taxes
The provision for income tax and social contribution
is calculated based on the taxable profit for the year and the rates effective at the end of the year.
Deferred taxes
Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax basis of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction that at the time of the transaction affects neither accounting nor taxable profit nor loss, except for business combinations. Deferred income tax is determined using tax rates (and laws) effective at the end of the reporting period and are expected to be applied when the related income tax and social contribution are realized.
| F-22 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
Deferred income tax and social contribution assets are recognized only to the extent that it is probable that future taxable profit will be available for which temporary differences can be utilized and tax losses can be carryforward.
Deferred taxes assets and liabilities are offset when there is a legally enforceable right of offsetting current tax assets against current tax liabilities and when deferred income tax assets and liabilities are related to income taxes levied by same tax authority over the tax entity.
3.18 Taxes on revenues
Revenues from sanitation services are recognized on accrual
basis for PASEP (Programa de Formação do Patrimônio do Servidor Público) and Cofins (Contribuição
para o Financiamento da Seguridade Social), calculated at the rates of
The taxes related to PASEP and Cofins incident on amounts invoiced to public entities are due when invoices are received.
These taxes are calculated by the non-cumulativeness regime and presented net, as deductions from gross revenues. The lines over “other operating income” and “financial revenues” are presented net of such taxes on the income statement.
In addition, revenues from sanitation services are also subject
to the Regulatory, Control and Oversight Fee (TRCF - Taxa de Regulação, Controle e Fiscalização), whose taxable
event is the performance of regulatory, control and monitoring activities by ARSESP, calculated at
3.19 Pension plan obligations
(a) Defined benefit
The Company makes contributions to defined benefit plans on a contractual basis and sponsored thereby. The regular contributions comprise the net administrative expenses and are recognized in the income statement for the period.
Liabilities from defined benefit pension plan obligations correspond to the present value of the defined benefit obligation at the end of the reporting period, less the fair value of the plan’s assets. The defined benefit obligation (G1) and (G0) are calculated on an annual basis by independent actuaries, using the projected unit credit method. The estimated future cash outflow is discounted to its present value, using the interest rates of Government bonds with maturities that approximate the maturity of the related liability.
| F-23 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
Referring to actuarial gains and losses deriving from adjustments based on the experience and changes in actuarial assumptions are directly recorded under equity, as other comprehensive income (OCI), so that the plan's net assets or liabilities are recognized in the statement of financial position in order to reflect the full amount of plan’s deficit or surplus.
In an event where a curtailment relates to only some of the employees covered by a plan, or where only part of an obligation is settled, the gain or loss includes a proportionate share of the past service cost and actuarial gains and losses. The proportionate share is determined on the basis of the present value of the obligations before and after the curtailment or settlement.
(b) Defined contribution
The Company makes contributions to defined contribution plans on a contractual basis and sponsored thereby, a supplementary private pension entity that provides post-employment benefits to its employees, in which the Company makes fixed and equal contributions to employees, within the limits set by regulation. In this model, the benefits paid are directly related to the amount contributed, with no deficits to be covered by the Company.
3.20 Financial revenues and expenses
Financial revenue is primarily comprised of interest and inflation adjustments resulting from financial investments, escrow deposits and negotiations with customer to pay by installments, calculated using the effective interest rate method.
Financial expenses are primarily comprised of interest, inflation adjustments and exchange rate changes on borrowings and financing, provisions, public-private partnership and program contract commitments. These financial income and expenses are calculated using the effective interest rate method.
Inflation adjustments and exchange gains and losses derive from the collection or payment to third parties, as contractually required by law or court decision, and recognized on an accrual basis pro rata temporis. Inflation adjustments included in the agreements are not considered embedded derivatives, since they are deemed as inflation adjustment rates for the Company’s economic scenario.
| F-24 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
3.21 Leases
Leases are recognized at the present value of the contractual obligations, presented in assets as Right of Use (Note 15 (f)) and in liabilities as Leases (Note 17 (b)), except for short-term contracts (12 months or less) and/or low value (below US$ 5 thousand – R$ 26 thousand), which are recorded in the income statement recognized as an expense when incurred.
3.22 Other current and noncurrent assets and liabilities
Other assets are stated at acquisition cost, net of any impairment loss, where applicable. The amounts recognized as other liabilities are stated at known or estimated amounts, including, where applicable, related charges and inflation adjustments.
3.23 Dividends and interest on capital
The Company uses the tax benefits of distributing dividends as interest on capital, as permitted by Brazilian Law and based on the Bylaws. This distribution of dividend is accounted for in accordance with Brazilian Law 9,249/95 for tax deductibility purposes, limited to the daily pro rata fluctuation of the Long-term Interest Rate (TJLP). The benefit attributed to the shareholders is recognized in the current liability against Equity, based on its by-laws. Dividends and interest on capital over the minimum established in the by-laws are recognized when approved by the shareholders in the shareholders’ meeting, except for taxes incurring in the distribution of interest on capital. The tax benefit of the interest on capital is accrued in the income statement of the year, under the same recognition basis of expenses with interest on capital.
3.24 Present value adjustment
Current and noncurrent financial assets and liabilities arising from long- or short-term transactions are adjusted to present value based on market discount rates as of the transaction date, when the effects are significant.
3.25 Segment information
Operating segments are determined in a manner consistent with the internal reporting to the Company’s chief operating decision maker (“CODM”), which, in the case of SABESP, is comprised of the Board of Directors and Board of Executive Officers, to make strategic decisions, allocate resources and evaluate performance.
The Company determined that it has one operating segment which is sanitation services.
The accounting policies used to determine segment information are the same as those used to prepare the Company’s financial statements.
| F-25 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
The measurement of the result per segment is the profit from operations before other net operating expenses and equity accounting, which excludes construction costs and revenue.
The CODM analyzes asset and liabilitity information on a consolidated basis. Consequently, the Company does not disclose segment information on assets and liabilities.
Substantially all noncurrent assets and revenue generated from customers are located in the São Paulo State. Consequently, financial information is not disclosed by geographic area.
3.26 Translation into foreign currency
(a) Functional and reporting currency
Items included in the financial statements are measured using the currency of the primary economic environment in which the company operates ("the functional currency"). The financial statements are presented in Brazilian reais (R$), which is also the Company's functional currency. All financial information has been stated in reais and rounded to the next thousand, except where otherwise indicated.
(b) Foreign currency translation
Foreign currency-denominated transactions are translated into Brazilian reais using the exchange rates prevailing at the transaction dates. Statement of financial position accounts are translated by the exchange rate prevailing at reporting date.
Exchange gains and losses resulting from the settlement of these transactions and the translation of foreign currency-denominated cash assets and liabilities are recognized in the income statement, except for borrowings and financing referring to property, plant and equipment or intangible assets in progress, where exchange losses are recognized as corresponding entry to the asset while construction is in progress, as described in Note 3.13.
| F-26 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| 4 | Changes in accounting practices and disclosures |
| 4.1 | New standards, amendments and interpretations effective for periods beginning on or after January 1, 2022 |
The amendments to IFRS 3 – Reference to the Conceptual Framework; IAS 16 – Proceeds Before Intended Use; IAS 37 – Onerous Contracts – Cost of Fulfilling a Contract and annual improvements to the IFRSs: Cycle 2018-2020: IFRS 1 – First-Time Adoption of International Financial Reporting Standards, IFRS 9 – Financial Instruments, IFRS 16 – Leases and IAS 41 – Biological Asset and Agriculture, did not impact the disclosures or amounts recognized in the annual financial statements.
| 4.2 | New standards, amendments and interpretations to existing standards that are not yet effective |
The Company did not early adopt these standards and is assessing the impacts of the new and revised IFRS below on the disclosures or amounts recognized in the financial statements:
|
Standard |
Description |
Impact |
|
|
||
|
|
|
| F-27 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
|
|
| |
|
|
|
|
| F-28 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
|
|
| |
|
|
|
1 Effective for annual periods beginning on or after January 1, 2023.
2 The effective date of the amendments has not yet been defined by IASB.
3 The amendments to IFRS Practice Statement 2 do not have an effective date or transition requirements.
There are no other standards and interpretations not yet adopted that may, in the opinion of Management, have a significant impact on the result for the year of equity disclosed by the Company in its financial statements.
| F-29 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| 5 | Risk Management |
| 5.1 | Financial Risk Management |
Financial risk factors
The Company's activities are affected by Brazilian economic scenario, making it exposed to market risk (exchange rate and interest rate), credit risk and liquidity risk. Financial risk management is focused on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance.
The Company has not utilized derivative instruments in any of the reported periods.
| (a) | Market risk |
Foreign currency risk
Foreign exchange exposure implies market risks associated with currency fluctuations, since the Company has foreign currency-denominated liabilities, arising from long-term funding, in development institutions, at more attractive interest rates, in U.S. dollars and 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 in losses due to exchange rate fluctuations that would impact liability balances of foreign currency-denominated borrowings and financing raised in the market and related financial expenses. The Company does not maintain hedge or swap contracts or any derivative financial instrument to hedge against this risk.
Part of the financial debt, totaling R$
| F-30 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| December 31, 2022 | December 31, 2021 | |||||||||||||||
| Foreign currency (in thousands) | R$ | Foreign currency (in thousands) | R$ | |||||||||||||
| Borrowings and financing – US$ | ||||||||||||||||
| Borrowings and financing – Yen | ||||||||||||||||
| Interest and charges from borrowings and financing – US$ | ||||||||||||||||
| Interest and charges from borrowings and financing – Yen | ||||||||||||||||
| Total exposure | ||||||||||||||||
| Borrowing cost – US$ | ( | ) | ( | ) | ||||||||||||
| Borrowing cost – Yen | ( | ) | ( | ) | ||||||||||||
| Total foreign-currency denominated borrowings (Note 17) | ||||||||||||||||
The
December 31, 2022 | December 31, 2021 | Variation | ||||||||||||
| US$ | R$ | R$ | - | % | ||||||||||
| Iene | R$ | R$ | - | % |
In 2022 there was a decrease related to the Exchange variation in borrowings and financing, in the amount of R$
The probable scenario below presents the effect on the income statements for the next 12 months considering the projection of the U.S. dollar and the Yen.
The Company understands that the scenario presented is reasonable, given the instability of the Brazilian real against the U.S. dollar and the Yen.
| F-31 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Scenario I (Probable) | ||||
| (*) | ||||
| Net currency exposure as of December 31, 2022 in US$ - Liabilities | ||||
| US$ rate as of December 31, 2022 | ||||
| Exchange rate estimated according to the scenario | ||||
| Difference between the rates | ( | ) | ||
| Effect on the net financial result R$ - gain/(loss) | ( | ) | ||
| Net currency exposure as of December 31, 2022 in Yen - Liabilities | ||||
| Yen rate as of December 31, 2022 | ||||
| Exchange rate estimated according to the scenario | ||||
| Difference between the rates | ( | ) | ||
| Effect on the net financial result R$ - gain/(loss) | ( | ) | ||
| Total effect on the net financial result in R$ - gain/(loss) | ( | ) | ||
| (*) |
Interest rate risk
This risk arises from the possibility that the Company could incur losses due to fluctuations in interest rates, increasing the financial expenses related to borrowings and financing.
The Company has not entered into any derivative contract to hedge against this risk; however continually monitors market interest rates, in order to evaluate the possible need to replace its debt.
| F-32 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
The table below provides the borrowings and financing subject to variable interest rates:
December 31, 2022 | December 31, 2021 | |||||||
| CDI(i) | ||||||||
| TR(ii) | ||||||||
| IPCA(iii) | ||||||||
| TJLP(iv) | ||||||||
| SOFR(v) | ||||||||
| Interest and charges | ||||||||
| Total |
| (i) |
| (ii) |
| (iii) |
| (iv) |
| (v) |
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 by the Company do not necessarily follow the increases in the inflation indexes to adjust borrowings, financing and interest rates affecting indebtedness
As of December 31, 2022, 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 would have been R$
(b) Credit risk
Credit risk arises from cash and cash equivalents, financial investments, as well as credit exposures to wholesale basis and retail customers, including outstanding accounts receivable, restricted cash and accounts receivable from related parties. Credit risk exposure to customers is mitigated by sales to a dispersed base.
The maximum exposures to credit risk as of December 31, 2022 is the carrying amount of instruments classified as cash and cash equivalents, financial investments, restricted cash, trade receivables and accounts receivable from related parties in the balance sheet date. See additional information in Notes 7, 8, 9, 10 and 11.
| F-33 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
Regarding the financial assets held with financial institutions, the credit quality was assessed by reference to external credit ratings (if available) or to historical information about the bank’s default rates. For the credit quality of the banks, such as deposits and financial investments, the Company considers the lower rating published by three main international rating agencies (Fitch, Moody's and S&P), according to internal policy of market risk management:
|
Banks |
Fitch |
Moody's |
Standard Poor's |
| Banco do Brasil S/A | - | ||
| Banco Santander Brasil S/A | - | ||
| Brazilian Federal Savings Bank | |||
| Banco Bradesco S/A | |||
| Itaú Unibanco Holding S/A | - | ||
| Banco BV | - | ||
| Banco BTG Pactual S/A |
The table below shows the rating assessment released by the Fitch agency, for deposit transactions and financial investments in local currency:
| December 31, 2022 | December 31, 2021 | |||||||
| Cash and cash equivalents and financial investments | ||||||||
| AA(bra) | ||||||||
| AAA(bra) | ||||||||
| Other (*) | ||||||||
| (*) |
(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 liquidity risk management considers the assessment of its liquidity requirements to ensure it has sufficient cash to meet its operating and capital expenditures needs, as well as the payment of debts.
| F-34 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
The funds held by the Company are invested in interest-bearing current accounts, time deposits and securities, selecting instruments with appropriate maturity or liquidity sufficient to provide margin as determined by projections mentioned above.
The table below shows the financial liabilities of the Company, by relevant maturities, including the installments of principal and future interest to be paid according to the agreement. Future interest was calculated based on the contractual clauses for all agreements. For agreements with floating interest rate, the interest rates used correspond to the base dates above.
| 2022 | 2023 | 2024 | 2025 | 2026 | 2027 onwards | Total | ||||||||||||||||||||||
| As of December 31, 2022 | ||||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||
| Borrowings and financing | ||||||||||||||||||||||||||||
| Trade payables and contractors | ||||||||||||||||||||||||||||
| Services payable | ||||||||||||||||||||||||||||
| Public-Private Partnership – PPP | ||||||||||||||||||||||||||||
| Program Contract Commitments | ||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||
Cross default
The Company has borrowings and financing agreements including cross default clauses, e.g., the early maturity of any debt, may imply the early maturity of these agreements. The indicators are continuously monitored in order to avoid the execution of these clauses and the more restrictive ones are showed in Note 17 (c).
(d) Sensitivity analysis on interest rate risk
The table below shows the sensitivity analysis of the financial instruments, prepared in accordance with IFRS 7, in order to evidence the balances of main financial assets and liabilities, calculated at a rate projected for the twelve-month period after December 31, 2022, or until the final settlement of each contract, whichever occurs first, considering a likely scenario.
| F-35 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
The purpose of the sensitivity analysis is to measure the impact of changes in the market over the financial instruments, considering constant all other variables. In the time of settlement the amounts can be different from those presented, due to the estimates used in the measurement.
|
December 31, 2022 | ||
|
Indicators |
Exposure |
Scenario I (Probable) |
| Assets | ||
| CDI | ||
| Financial income | ||
| Liabilities | ||
| CDI | ( |
|
| Interest to be incurred | ( | |
|
|
| |
| CDI net exposure | ( |
( |
| Liabilities | ||
| TR | ( |
|
| Expenses to be incurred | ( | |
| IPCA | ( |
|
| Expenses to be incurred | ( | |
| TJLP | ( |
|
| Interest to be incurred | ( | |
| SOFR (***) | ( |
|
| Interest to be incurred | ( | |
|
| ||
| Total expenses to be incurred, net |
( | |
| (*) Source: Focus-BACEN Report of December 31, 2022 |
| (**) Source: B3 of December 31, 2022 |
| (***) Source: Bloomberg |
| F-36 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| 5.2 | Capital management |
The Company’s objectives when managing capital are ensure its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders, and to 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 as shown in the statement of the financial position plus net debt.
| December 31, 2022 | December 31, 2021 | |||||||
| Total borrowings and financing (Note 17) | ||||||||
| (-) Cash and cash equivalents (Note 7) | ( | ) | ( | ) | ||||
| (-) Financial investments (Note 8) | ( | ) | ( | ) | ||||
| Net debt | ||||||||
| Total equity | ||||||||
| Total capital (shareholders + providers of capital) | ||||||||
| Leverage ratio | % | % | ||||||
As of December 31, 2022, the leverage ratio decreased
to
| F-37 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| 5.3 | Fair value estimates |
The Company considers that balances from trade receivables (current) and trade payables and contractors by carrying amount, less impairment approximate their fair values, considering the short maturity. Long-term trade receivables also approximate their fair values, as they will be adjusted by inflation and/or will bear contractual interest rates over time.
| 5.4 | Financial instruments |
The Company did not have financial assets classified as fair value through other comprehensive income and fair value through profit or loss. The Company’s financial instruments included in the amortized cost category comprise cash and cash equivalents, restricted cash, trade receivables, balances with related parties, other receivables, and balances receivable from the Water and Basic Sanitation National Agency – ANA, trade payables and contractors, borrowings and financing, services payable, balances payable deriving from the Public Private Partnership-PPP and program contract commitments, which are non-derivative financial assets and liabilities with fixed or determinable payments, not quoted in an active market, except for cash equivalents and financial investments.
The estimated fair values of the financial instruments are as follows:
Financial assets
| December 31, 2022 | December 31, 2021 | |||||||||||||||
| Carrying amount | Fair value | Carrying amount | Fair value | |||||||||||||
| Cash and cash equivalents | ||||||||||||||||
| Financial investments | ||||||||||||||||
| Restricted cash | ||||||||||||||||
| Trade receivables | ||||||||||||||||
| Water and Basic Sanitation National Agency – ANA | ||||||||||||||||
| Other assets | ||||||||||||||||
Additionally, SABESP has financial instrument assets
receivables from related parties, in the amount of R$
| F-38 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
Financial liabilities
| December 31, 2022 | December 31, 2021 | |||||||||||||||
| Carrying amount | Fair value | Carrying amount | Fair value | |||||||||||||
| Borrowings and financing | ||||||||||||||||
| Trade payables and contractors | ||||||||||||||||
| Services payable | ||||||||||||||||
| Program contract commitments | ||||||||||||||||
| Public-Private Partnership - PPP | ||||||||||||||||
To obtain fair value of borrowings and financing, the following criteria have been adopted:
| (i) | Agreements with CEF (Brazilian Federal Savings Bank) were projected until their final maturities, at the average interest rate plus TR x DI and the average contractual term, were adjusted to present value by a funding rate specific for the Company in similar contracts, plus TR x DI, on the end of the reporting period. TR x DI rates were obtained with B3. |
| (ii) | The debentures were projected up to the final maturity date according to contractual rates (IPCA, DI, TJLP or TR), and adjusted to present value considering the future interest rate published by ANBIMA in the secondary market, or by equivalent market rates, or the Company’s shares traded in the Brazilian market. |
| (iii) | Financing – BNDES corresponds to instruments valued at their carrying amount restated until the maturity date, and are indexed by the long-term interest rate (TJLP). |
These financings have specific characteristics and conditions defined in the financing agreements with BNDES, between independent parties, and reflect the conditions for these types of financing. Brazil does not have a consolidated market of long-term debts with the same characteristics of BNDES financing; thus, the offering of credit to the entities in general, with such long-term characteristics, is usually restricted to BNDES.
| F-39 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| (iv) | Other financings in local currency are considered by carrying the amount restated until the maturity date, adjusted to present value at future market interest rates. The future rates used were obtained on the website of B3. |
| (v) | Agreements with IDB and IBRD were projected until final maturity in origin currency, using the contracted interest rates plus SOFR’s future rate, obtained with Bloomberg, adjusted to present value using the exchange coupon curve obtained with B3, plus future LFT, disclosed by ANBIMA in the secondary market. All the amounts obtained were translated into Brazilian reais at the exchange rate of December 31, 2022. |
| (vi) | Agreements with JICA were projected until final maturity in origin currency, using the contracted interest rates, translated to the U.S. dollar and adjusted to present value using the exchange coupon curve obtained with B3, plus future LFT, disclosed by ANBIMA in the secondary market. The amounts obtained were translated into Brazilian reais at the exchange rate of December 31, 2022. |
| (vii) | Lease and finance leases based on IFRS 16 correspond to instruments valued at their carrying amount restated until the maturity date, and are indexed by a fixed contractual rate. Thus, the Company discloses the amount recorded as of December 31, 2022 as market value. |
Financial instruments referring to financial investments and borrowings and financing are classified as Level 2 in the fair value hierarchy.
Considering the nature of other financial instruments, assets and liabilities, the balances recognized in the statement of financial position approximate the fair values, except for borrowings and financing, considering the maturities close to the end of the reporting date, comparison of contractual interest rates with market rates in similar operations at the end of the reporting period, their nature and maturity terms.
| 6 | Key accounting estimates and judgments |
The preparation of the financial statements requires management to disclose certain judgments (except for those involving estimates) that have a significant impact on the amounts recognized based on experience and other factors deemed as relevant, which affect the values of assets and liabilities and which may present results that may differ from the actual results.
| F-40 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
The Company establishes estimates and assumptions regarding the future, which are reviewed on a timely basis. Such accounting estimates, by definition, may differ from the actual results. The effects arising from the reviews of the accounting estimates are recognized in the period in which the estimates are reviewed.
6.1 Key accounting judgments in the application of accounting policies
The Company assessed the main accounting policies that involve judgments, except those that involve estimates, and concluded that none of them have a significant effect.
6.2 Main sources of uncertainties in the estimates
The areas that require a higher level of judgment and have greater complexity, as well as those in which assumptions and estimates that are significant for the financial statements are disclosed as follows:
| (a) | Allowance for doubtful accounts |
The Company establishes an allowance for doubtful accounts in an amount that Management considers sufficient to cover expected losses (see Note 10 (c) ), based on an analysis of trade receivables, in accordance with the accounting policy stated in Notes 3.2 and 3.4.
The methodology for determining such losses requires significant estimates, considering several factors, among which an evaluation of receipts historical, current economic trends, estimates of forecast write-offs, the aging of the accounts receivable portfolio and expectation of future losses. Although the Company believes that the assumptions used are reasonable, the actual results may be different.
| (b) | Intangible assets arising from concession agreements and program contracts |
Intangible assets are those arising from concession contracts, and the main costs are transferred from the Contract Asset, as described in Note 3.7.
Intangible assets under Concession Agreements, Service Agreements and Program Contracts, are amortized on a straight-line basis according to the lower of the period of the contract or the useful life of the asset or contract period. Additional information on the accounting for intangible assets arising from concession agreements is described in Notes 3.9 and 15.
The recognition of the fair value of the intangible assets arising an exchange for an asset, involving concession agreements is subject to assumptions and estimates, and the use of different assumptions may affect the accounting records. Different assumptions and future changes in the useful life of these intangible assets may have significant impacts on the result of the operations.
| F-41 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| (c) | Pension plan obligations – Pension Plans |
The Company sponsors a defined benefit plan and the defined contribution plan, as described in Notes 3.19 and 22.
Defined pension plan obligations recognized in the statement of financial position consist of the present value of the defined benefit obligation on the reporting date less the fair value of the plan’s assets. The obligation of such benefit is calculated on an annual basis by independent actuaries, using the projected credit unit method. The present value of the defined benefit obligation is determined by discounting estimated future cash outflows, using interest rates compatible with market returns, which are denominated in the currency in which benefits will be paid and with maturity terms close to those of corresponding pension plan obligation.
| (d) | Deferred income tax and social contribution |
The Company recognizes and settles taxes on income based on the results of operations calculated according to Brazilian Corporation Law, taking into consideration the provisions of the tax laws. Deferred tax assets and liabilities are recorded based on the differences between the accounting balances and the tax bases of the assets and liabilities.
The Company regularly reviews the recoverability of deferred tax assets and recognizes a provision for impairment if it is probable that these assets will not be realized, based on the historic taxable income, on the projection of future taxable income and on the estimated period for reversing the temporary differences. These calculations require the use of estimates and assumptions. The use of different estimates and assumptions could result in a provision for impairment of all or a significant part of the deferred tax asset. Additional information on deferred taxes is described in Notes 3.17 and 19.
| (e) | Provisions |
The provisions for civil, labor, environmental and tax risks are created based on Notes 3.15 and 20. Judgments regarding future events may significantly differ from actual estimates and exceed the amounts provisioned. The provisions are revised and adjusted taking into consideration changes in the circumstances involved.
| (f) | Unbilled revenue |
Unbilled revenue corresponds to services rendered for which readings have not been made yet. They are recognized based on monthly estimates calculated according to average billing. Additional information on revenue and accounts receivable are described in Notes 3.3 and 10.
| F-42 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| 7 | Cash and cash equivalents |
|
December 31, 2022 |
December 31, 2021 | |
| Cash and banks | ||
| Cash equivalents |
|
|
| Total |
|
|
Cash and cash equivalents include cash, bank deposits and high-liquidity short-term financial investments, mainly represented by repurchase agreements (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.
The average yield of cash equivalents corresponded to
| 8 | 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:
| December 31, 2022 | December 31, 2021 | |||||||
| Banco BV | ||||||||
| Banco Itaú Unibanco S/A | ||||||||
| Banco Bradesco S/A | ||||||||
| Banco BTG Pactual S/A | ||||||||
| Banco do Brasil S/A | ||||||||
| F-43 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
The average yield of financial investments corresponds
to
| 9 | Restricted cash |
| December 31, 2022 | December 31, 2021 | |||||||
| Agreement with the São Paulo municipal government (i) | ||||||||
| Brazilian Federal Savings Bank – escrow deposits | ||||||||
| Other | ||||||||
| (i) |
| 10 | Trade receivables |
(a) Financial position balances
|
December 31, 2022 |
December 31, 2021 | |
| Private sector: | ||
| General (i) and special customers (ii) | ||
| Agreements (iii) |
|
|
|
|
| |
| Government entities: | ||
| Municipal |
| F-44 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Federal | ||
| Agreements (iii) |
|
|
|
|
| |
| Wholesale customers – Municipal governments: (iv) | ||
| Mogi das Cruzes | ||
| São Caetano do Sul |
|
|
| Total wholesale customers – Municipal governments |
|
|
| Unbilled supply |
|
|
| Subtotal | ||
| Allowance for doubtful accounts |
( |
( |
| Total |
|
|
| Current | ||
| Noncurrent |
|
|
| Total |
|
|
| (i) |
| (ii) |
| (iii) |
| (iv) |
| F-45 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
(b) The aging of trade receivables is as follows
| December 31, 2022 | December 31, 2021 | |||||||
| Current | ||||||||
| Past-due: | ||||||||
| Up to 30 days | ||||||||
| From 31 to 60 days | ||||||||
| From 61 to 90 days | ||||||||
| From 91 to 120 days | ||||||||
| From 121 to 180 days | ||||||||
| From 181 to 360 days | ||||||||
| Over 360 days | ||||||||
| Total past-due | ||||||||
| Total | ||||||||
(c) Allowance for doubtful accounts
| Changes in assets | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Balance at beginning of the year | ||||||||||||
| Losses | ||||||||||||
| Recoveries | ( | ) | ( | ) | ( | ) | ||||||
| Balance at the end of the year | ||||||||||||
| F-46 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Reconciliation of estimated/historical losses of income | December 31, 2022 | December 31, 2021 | December 31, 2020 | |||||||||
| Write-offs | ( | ) | ( | ) | ( | ) | ||||||
| (Losses)/reversal with state entities - related parties | ( | ) | ||||||||||
| (Losses) with the private sector / government entities | ( | ) | ( | ) | ( | ) | ||||||
| Recoveries | ||||||||||||
| Amount recorded expense (Note 29) | ( | ) | ( | ) | ( | ) | ||||||
The Company does not have customers representing 10% or more of its total revenues.
As of December
31, 2022, the Company has judicial bonds issued in its favor in the inflation adjusted amount of R$
| Debtor | December 31, 2022 | |||
| Municpality of São Paulo | ||||
| Municpality of Cotia | ||||
| Municpality of Cachoeira Paulista | ||||
| Others | ||||
| TOTAL | ||||
| 11 | Related-Party Balances and Transactions |
(a) São Paulo State
(i) Accounts receivable, interest on capital payable, revenue and expenses
| F-47 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| December 31, 2022 | December 31, 2021 | |||||||
| Accounts receivable | ||||||||
| Current: | ||||||||
| Sanitation services (ii) | ||||||||
| Allowance for losses | ( | ) | ( | ) | ||||
| Reimbursement for retirement and pension benefits paid (G0): | ||||||||
| - monthly flow (payments) (iii) and (iv) | ||||||||
| - GESP Agreement – 2015 (vi) | ||||||||
| Total current | ||||||||
| Noncurrent: | ||||||||
| Agreement for the installment payment of sanitation services | ||||||||
| Reimbursement of additional retirement and pension benefits paid (G0): | ||||||||
| - GESP Agreement – 2015 (vi) | ||||||||
| Total noncurrent | ||||||||
| Total receivables | ||||||||
| Assets: | ||||||||
| Sanitation services | ||||||||
| Reimbursement of additional retirement and pension benefits (G0) | ||||||||
| Total | ||||||||
| Liabilities: | ||||||||
| Interest on capital payable | ||||||||
| F-48 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| 2022 | 2021 | 2020 | ||||||||||
| Revenue from sanitation services | ||||||||||||
| Payments received from related parties | ( | ) | ( | ) | ( | ) | ||||||
| Payment received from reimbursement referring to Law 4,819/58 | ( | ) | ( | ) | ( | ) | ||||||
(ii) Sanitation services
The Company provides water supply and sewage services to the São Paulo State Government and other companies related to it in accordance with usual market terms and conditions, as considered by management, except for the settlement of credits which can be made according to items (iii) of this Note.
(iii) Reimbursement of additional retirement and pension benefits paid
Refers to additional retirement and pension benefits provided for in State Law 4,819/58 ("Benefits") paid by the Company to former employees and pensioners, referred to as Go.
Under the GESP Agreement, executed in 2001, the São Paulo State recognizes its liability from charges arising from the Benefits, provided that the payment criteria set forth by the State Department of Personnel (DDPE), based on legal guidance of the Legal Consultancy of the Department of Finance and of the State Attorney General's Office (PGE).
As explained on item (iv), during the assessment of the debt due from State of São Paulo to the Company there were certain divergences in the calculation and eligibility criteria of the benefits paid by the Company on behalf of GESP.
See additional information about the G0 plan in Note 22 (ii).
As a result of a court decision, the responsibility for making the payments returned to SABESP.
(iv) Disputed amounts
On November 17, 2008 the Company and the São Paulo State signed the third amendment to the GESP Agreement, when the reimbursements called disputed and undisputed were quantified. The amendment established the efforts to calculate the so-called Disputed Reimbursement of the Benefits. Under the fourth clause of the amendment, the Disputed Reimbursement represents the difference between the Undisputable Reimbursement and the amount actually paid by the Company as pension benefits and pensioners set out in Law 4,819/58, for which, the Company understands, the State of São Paulo is originally liable, but paid by SABESP under a court order.
| F-49 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
By entering into the third amendment, the State's Legal Representative (PGE) agreed to reassess the differences that gave rise to the Disputed Amount of benefits set out in Law 4,819/58. At the time, the expectation was based on the willingness of the PGE to reanalyze the issue and the implied right of the Company to the reimbursement, including based on opinions from outside legal advisors.
However, the latest opinions issued by the PGE and received on September 4 and 22, 2009 and January 4, 2010, refute the reimbursement of previously defined as Disputed Amount.
The third amendment also provides for the regularization of the monthly flow of benefits. While SABESP is responsible for the monthly payments, the São Paulo State shall reimburse the Company based on the criteria identical to those applied in the calculation of the Undisputed Amount. Should there be no preventive court decision, the State will directly assume the monthly payment flow of the portion deemed as undisputed.
Even though the negotiations with the State are still in progress, it is not possible to assure that the Company will recover the disputed receivables without dispute.
Continuing the actions that aim to recover the credit that Management understands to be owed by the São Paulo State, related to the divergences in the reimbursement of the additional retirement and pension benefits paid by the Company, SABESP: (i) on March 24, 2010, addressed a message to the Controlling Shareholder by sending a letter resolved by the Executive Board proposing that the matter be discussed at B3’s Arbitration Chamber; (ii) in June 2010, sent to the Treasury Department a proposal of an agreement to settle said pending matters. The proposal was not accepted; (iii) on November 9, 2010, filed a lawsuit against the São Paulo State seeking full reimbursement of the amounts paid as benefits provided for in Law 4,819/1958 to settle the Disputed Amount under discussion between the Company and the São Paulo State. Despite the lawsuit, the Company will insist on reaching an agreement during the course of the lawsuit, as it believes that a reasonable agreement is better for the Company and its shareholders than waiting for the end of the lawsuit.
As of December 31, 2022 and 2021, the disputed amounts
between SABESP and State of São Paulo, corresponding to additional retirement and pension benefits paid (Law 4,819/1958), totaled
R$
(v) 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 December 31,
2022 and 2021, the amounts corresponding to such actuarial liability were R$
| F-50 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
(vi) GESP Agreement - 2015
On March 18, 2015, the Company, the São Paulo
State, and DAEE, through the Department of Sanitation and Water Resources, entered into an Agreement totaling R$
The principal will be paid in 180 installments, as follows:
| ● | The first 24 installments were settled upon the transfer of preferred shares issued by Companhia de Transmissão de Energia Elétrica Paulista (CTEEP), totaling R$ , based on the share closing price of March 17, 2015, which were sold on April 20, 2016; and |
| ● | The amount of R$ |
On July 22, 2022, the decision regarding the lawsuit
that challenged the possibility of transferring the reservoirs was published in the State Official Gazette, preventing the transfer of
the reservoirs to SABESP. Accordingly, as provided for in the agreement, the São Paulo State will pay SABESP, in addition to the
principal, inflation adjustment of R$
In July 2022, R$
As of December 31, 2022, the balance receivable was R$
(b) Use of Reservoirs – EMAE
Empresa Metropolitana de Águas e Energia S.A. - EMAE planned to receive for the credit and obtain financial compensation for alleged past and future losses in electricity generation arising from water collection, and compensation for costs already incurred and to be incurred with the operation, maintenance and inspection of the Guarapiranga and Billings reservoirs used by SABESP in its operations.
| F-51 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
On October 28, 2016, the Company entered into an agreement based on a Private Transaction Agreement and Other Adjustments to settle the disputes involving the two companies and the SABESP will continue using the reservoirs.
As of December 31, 2022, the Company recorded R$
(c) Agreements with reduced tariffs for State Entities that join the Rational Water Use Program (PURA)
The Company has signed agreements with government entities related to the São Paulo State Government that benefit them with a reduction of 25% in the tariff of water supply and sewage services when they are not in default. These agreements provide for the implementation of the rational water use program, which takes into consideration the reduction in water consumption.
(d) Guarantees
The São Paulo State provides guarantees for some borrowings and financing of the Company and does not charge any fee with respect to such guarantees, see Note 17.
(e) Personnel assignment agreement among entities related to the São Paulo State Government
The Company has personnel assignment agreements with entities related to the São Paulo State Government, whose expenses are fully charged.
In 2022, the expenses related to personnel assigned by
SABESP to other state government entities amounted to R$
In 2022 and 2021, there were not expenses related to
personnel assigned by other entities to SABESP (In 2020, the expenses related to personnel assigned by other entities to SABESP were R$
(f) Non-operating assets
As of December 31, 2022 and 2021, the Company had an
amount of R$
| F-52 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
(g) SABESPREV
The Company sponsors a defined benefit plan (G1 Plan),
which is operated and administered by SABESPREV. The net actuarial liability recognized as of December 31, 2022 amounted to R$
(h) Compensation of Management Key Personnel and Fiscal Council
The compensation of the Executive Officers, members of the Audit Committee and Boards of Directors and Fiscal Councils of the Companies controlled by the São Paulo State complies with the guidelines of the State Capital Defense Council (CODEC) and is defined at the Annual Shareholders’ Meeting, as per article 152 of Brazilian Corporation Law.
CODEC defines that the proposal for global and individual compensation of the statutory bodies for publicly held companies listed in B3’s Novo Mercado segment, controlled by the State, must be prepared by the Board of Directors under the Company’s Bylaws, within the scope of the Institutional Compensation Policy and submitted for approval of the Annual Shareholders’ Meeting.
In addition to the monthly compensation, the members of the Board of Directors, Fiscal Council and Executive Board receive annual reward equivalent to a monthly fee, calculated on a prorated basis in December of each year. The purpose of this reward is to define a compensation similar to the Christmas bonus paid to the Company’s registered employees, given that the relationship of Management with the Company has a statutory nature.
Benefits paid to Executive Officers only - meal vouchers, food vouchers, healthcare, private pension, annual rest (with the characteristic of paid leave of thirty (30) calendar days, with additional payment corresponding to one third of the monthly fees for such rest), and FGTS.
SABESP pays bonuses for purposes of compensation of its Executive Officers, in accordance with the guidelines of the São Paulo State, such as a motivation policy, provided that the Company actually calculates quarterly, semi-annual and annual profits, and distributes mandatory dividends to shareholders, even if in the form of interest on capital. Annual bonuses cannot exceed six times Management’s monthly compensation or 10 % of the interest on capital paid by the Company, prevailing the shortest amount.
Expenses related to the compensation of the members of
the Fiscal Council appointed by the controlling shareholder and Management members totaled R$
Additional amounts of R$
| F-53 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
(i) Loan agreement through credit facility
The Company holds interest in certain Special Purpose Entities (SPEs), not holding the majority interest but with cast vote and power of veto in some issues, with no ability to use such power of veto in a way to affect returns over investments. Therefore, these SPEs are considered for accounting purposes as joint arrangements.
Aquapolo Ambiental
The Company entered into a loan agreement through credit facility with the SPE Aquapolo Ambiental S/A to finance the operations of this company, until the borrowings and financing requested with financial institutions is granted.
As of December 31, 2022, the balance of principal and interest
of this agreement totaled R$
The loan agreement originally matured on April 30, 2015 but was extended to October 30, 2015 and on November 25, 2015 a new amendment changed the payment schedule for three annual installments, the first of which maturing on December 30, 2021 and the last on December 30, 2023.
Águas de Andradina
The Company entered into a loan agreement through credit facility with the SPE Águas de Andradina S/A to finance the operations of this company.
As of December 31, 2022, the balance of principal and
interest of this agreement totaled R$
This agreement was signed on August 17, 2021. The principal with the readjustment, accrued interest and any taxes must be paid full by August 31, 2025.
(j) FEHIDRO
In April 2021, the Company entered into three financing
agreements within the scope of the State Water Resources Fund – FEHIDRO. The funds will be allocated
to the execution of sanitary sewage works and services in the municipalities of São Paulo, Itapecerica da Serra and Vargem Grande
Paulista. The total investment amount is R$
| F-54 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
As of December 31, 2022, the balance of these financing
was R$
| 12 | Investments |
The Company holds interest in certain Special Purpose Entities (SPE). Although SABESP has no majority shares of its investees, the shareholders’ agreement provides for the power of veto in certain management issues, however, with no ability to use such power of veto in a way to affect the returns over the investments, indicating participating shared control (joint venture – IFRS 11).
The Company holds interest recognized by the equity accounting in the following investees:
| (a) | Sesamm |
As of August 15, 2008, Sesamm – Serviços de Saneamento de Mogi Mirim S/A was incorporated for a period of 30 years from the date the concession agreement with the municipality for the purpose of providing complementary services to the sewage diversion system and implementing and operating sewage treatment system in the municipality of Mogi Mirim, including the disposal of solid waste.
Sesamm's capital as of December 31, 2022,
totaled R$
The operations initiated in June 2012.
| (b) | Águas de Andradina |
As of September 15, 2010, the Company, Águas de Andradina S.A. was incorporated, with indefinite term, for the purpose of providing water supply and sewage services to the municipality of Andradina.
As of December 31, 2022, the capital of Águas
de Andradina totaled R$
| F-55 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
The Company pledges as guarantee 100% of its shares in Águas de Andradina as a counter guarantee for the issuance of Letters of Guarantee with BNDES.
The operations initiated in October 2010.
| (c) | Águas de Castilho |
As of October 29, 2010, the Company, Águas de Castilho, was incorporated for the purpose of providing water supply and sewage services to the municipality of Castilho.
As of December 31, 2022, the company’s
capital was R$
The Company pledges as guarantee 100% of its shares in Águas de Castilho as a counter guarantee for the issuance of Letters of Guarantee with BNDES.
The operations initiated in January 2011.
| (d) | Attend Ambiental |
As of August 23, 2020, Attend Ambiental S/A was incorporated with the purpose of implementing and operating a pre-treatment station of non-domestic effluents and sludge transportation in the metropolitan region of São Paulo, as well as the development of other related activities and the creation of similar infrastructures in other locations in Brazil and abroad.
As of December 31, 2022, the capital totaled
R$
The operations initiated in December 2014.
| (e) | Aquapolo Ambiental S/A. |
As of October 8, 2009, the Company, Aquapolo Ambiental S.A., was incorporated for the purpose of producing, providing and trading reused water for Quattor Química S.A., Quattor Petroquímica S.A., Quattor Participações S.A. and other companies comprising the Petrochemical Complex of Capuava and the metropolitan region of São Paulo.
| F-56 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
As of December 31, 2022, the capital of Aquapolo
totaled R$
The Company pledges 100% of the interest held in Aquapolo Ambiental S/A as a guarantee for the borrowing obtained through a debenture issue.
The operations initiated in October 2012.
| (f) | Paulista Geradora de Energia |
As of April 13, 2015, the Company acquired shares from Empresa Paulista Geradora de Energia S/A - PGE, jointly with Servtec Investimentos e Participações Ltda ("Servtec) and Tecniplan Engenharia e Comércio Ltda ("Tecniplan"), which operational purpose is the implementation and commercial exploration of water potential in small hydroelectric power plants (PCHs), located at the Guaraú and Vertedouro Cascata Water Treatment Stations.
As of December 31, 2022, the company’s share
capital was R$
As of December 31, 2022, operations had not initiated yet.
| (g) | Cantareira SP Energia |
On October 28, 2022, Cantareira SP Energia S/A was created with the purpose of developing, producing, and selling photovoltaic energy; selling and purchasing energy; renting, loaning, and leasing own or third-party assets; operating and maintaining energy generation plants; and holding an interest in other companies.
As of December 31, 2022, the company’s share capital was R$ 1,000, divided into 1,000,000 registered common shares with no par value, of which SABESP holds an interest of 49%, while Pacto SP Energia I Ltda. holds an interest of 51%.
As of December 31, 2022, operations had not initiated yet.
| F-57 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| (h) | FOXX URE-BA Ambiental S/A |
As of December 22, 2022, SABESP acquired shares from FOXX URE-BA Ambiental S/A, for R$ 40,000 for the acquisition of 20% of the company’s share capital, corresponding to R$ 13,852. The difference paid, of R$ 26,148, was recorded in intangible assets under “Right of use – Investments”. As of December 23, 2022, the Company contributed R$ 865. The business purpose of FOXX URE-BA is to provide services, under a concession regime, related to the treatment and final disposal of solid urban waste, including all waste from domestic and commercial collection, sweeping, pruning, cleaning of streets and other public highways, and the urban drainage system, the provision of these services and related activities to third parties with which it has executed contracts for such a purpose, including investments and works of the treatment unit, implemented and operated by the company, for the treatment and final disposal of waste, operation of revenue sources, carbon credits, and the byproduct resulting from the treatment process and final disposal of urban solid waste, as well as selling electricity.
As of December 31, 2022, the company’s share capital was R$ 69,258, divided into 69,257,657 registered common shares with no par value, of which SABESP holds an interest of 20%, while FOXX Inova Ambiental S/A holds an interest of 80%.
| (i) | Infranext Soluções em Pavimentação S/A |
On December 7, 2022, SPE Infranext Soluções e Pavimentação S/A was created to sell cold asphalt and related products, provide related services, make investments, and hold interest in other companies.
As of December 31, 2022, the company’s share capital was R$ 7,050, divided into 7,050,000 registered common shares with no par value. The company’s total share capital will be R$ 12,000, divided into 12,000,000 registered, book-entry common shares, of which SABESP will hold an interest of 45% and DVS – Locação de Equipamentos Ltda. will hold an interest of 55%. The unpaid capital, totaling R$ 4,950, will be paid by SABESP in 2023.
As of December 31, 2022, operations had not initiated yet.
Below is a summary of the investees’ financial information and SABESP’s equity interest:
| F-58 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Company | Equity |
Contribution | Dividends distributed | Profit (loss) for the year | ||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | 2022 | 2022 | 2022 | 2021 | 2020 | |||||||||||||||||||||||||
| Sesamm | ( | ) | ||||||||||||||||||||||||||||||
| Águas de Andradina | ||||||||||||||||||||||||||||||||
| Águas de Castilho | ||||||||||||||||||||||||||||||||
| Saneaqua Mairinque¹ | ( | ) | ||||||||||||||||||||||||||||||
| Attend Ambiental | ( | ) | ||||||||||||||||||||||||||||||
| Aquapolo Ambiental | ( | ) | ||||||||||||||||||||||||||||||
| Paulista Geradora de Energia (*) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Cantareira SP Energia | ||||||||||||||||||||||||||||||||
| FOXX URE-BA Ambiental | ||||||||||||||||||||||||||||||||
| Infranext Soluções em Pavimentação (**) | ||||||||||||||||||||||||||||||||
| (*) |
| (**) |
| (¹) |
| Company | Investments | Contribution | Dividends distributed |
OCI (***) |
Reclassification | Equity in the earnings of subsidiaries | Interest percentage | |||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2020 | 2020 | 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| Sesamm | ( | ) | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Águas de Andradina | % | % | % | |||||||||||||||||||||||||||||||||||||||||||||
| Águas de Castilho | % | % | % | |||||||||||||||||||||||||||||||||||||||||||||
| Saneaqua Mairinque² | ( | ) | ( | ) | % | % | % | |||||||||||||||||||||||||||||||||||||||||
| Attend Ambiental | ( | ) | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Aquapolo Ambiental | ( | ) | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
| Paulista Geradora de Energia | ( | ) | ( | ) | ( | ) | % | % | % | |||||||||||||||||||||||||||||||||||||||
| Cantareira SP Energia | % | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| FOXX URE-BA Ambiental | % | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Infranext Soluções em Pavimentação | % | — | — | |||||||||||||||||||||||||||||||||||||||||||||
| Total | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Other investments | ||||||||||||||||||||||||||||||||||||||||||||||||
| Overall total | ||||||||||||||||||||||||||||||||||||||||||||||||
| (***) |
| F-59 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| (²) |
| 13 | Investment properties |
| December 31, 2021 | Additions | Depreciation | December 31, 2022 | |||||||||||||
| Investment properties | ( | ) | ||||||||||||||
| December 31, 2020 | Write-offs and disposals | Depreciation | December 31, 2021 | |||||||||||||
| Investment properties | ( | ) | ( | ) | ||||||||||||
| December 31, 2019 | Transfers | Depreciation | December 31, 2020 | |||||||||||||
| Investment properties | ( | ) | ( | ) | ||||||||||||
As of December 31, 2022 and 2021, the market value of
these properties was approximately R$
| 14 | Contract assets |
| December 31, 2021 | Additions (i) | Transfers | Transfers of works to intangible assets (ii) | December 31, 2022 (iii) | ||||||||||||||||
| Total contract assets | ( | ) | ||||||||||||||||||
| (i) |
| F-60 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| (ii) |
| (iii) |
As of December 31, 2022, contract assets include leases
recognized before December 31, 2019 in accordance with IAS 17 amounting to R$
| December 31, 2020 | Additions | Transfers | Transfers of works to intangible assets | December 31, 2021 | ||||||||||||||||
| Total contract assets | ( | ) | ||||||||||||||||||
| December 31, 2019 | Additions | Transfers | Transfers of works to intangible assets | December 31, 2020 | ||||||||||||||||
| Total contract assets | ( | ) | ||||||||||||||||||
(a) Capitalization of interest and other finance charges
In 2022, the Company capitalized interest and inflation
adjustment, including related foreign currency exchange effects in the contract asset, totaling R$
(b) Construction margin
The Company is primarily responsible for the construction and installation of the concession infrastructure related to the concession, using own efforts or hiring outsourcing services, receiving the risks and benefits. Accordingly, the Company recognizes revenue from construction service corresponding to the cost of construction increased by gross margin.
Generally, the constructions related to the concessions are performed by third parties, in such case, the margin of the Company is lower, normally, to cover eventual administration costs, and the responsibility of the primary risk. In 2022 and 2021 the margin was 2.3%.
| F-61 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
Construction margin for 2022, 2021 and 2020 were R$
(c) Expropriations
As a result of the construction of priority projects related to water and sewage systems, the Company was required to expropriate third-parties' properties, and the owners of these properties will be compensated either amicably or through courts.
The costs of such expropriations are recorded in contract
assets during construction. In 2022 and 2021, the total referring to expropriations was R$
| 15 | Intangible assets |
(a) Statement of financial position details
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Cost | Accumulated amortization | Net | Cost | Accumulated amortization | Net | |||||||||||||||||||
| Intangible right arising from: | ||||||||||||||||||||||||
| Concession agreements – equity value | ( | ) | ( | ) | ||||||||||||||||||||
| Concession agreements – economic value | ( | ) | ( | ) | ||||||||||||||||||||
| Program contracts | ( | ) | ( | ) | ||||||||||||||||||||
| Program contracts – commitments | ( | ) | ( | ) | ||||||||||||||||||||
| Services contracts – São Paulo | ( | ) | ( | ) | ||||||||||||||||||||
| Software license of use | ( | ) | ( | ) | ||||||||||||||||||||
| Right of use – other assets | ( | ) | ( | ) | ||||||||||||||||||||
| Right of use - investments | ||||||||||||||||||||||||
| Total | ( | ) | ( | ) | ||||||||||||||||||||
(b) Changes
| F-62 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| December 31, 2021 | Addition | Transfer of contract assets | Transfers | Write-offs and disposals | Amortization | December 31, 2022 | ||||||||||||||||||||||
| Intangible right arising from: | ||||||||||||||||||||||||||||
| Concession agreements – equity value (*) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Concession agreements – economic value | ( | ) | ( | ) | ||||||||||||||||||||||||
| Program contracts (*) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Program contracts – commitments | ( | ) | ||||||||||||||||||||||||||
| Services contracts – São Paulo | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Software license of use | ( | ) | ||||||||||||||||||||||||||
| Right of use – Other assets | ( | ) | ( | ) | ||||||||||||||||||||||||
| Right of use – Investments | ||||||||||||||||||||||||||||
| Total | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| (*) |
| December 31, 2020 | Addition | Transfer of contract assets | Transfers | Write-offs and disposals | Amortization | December 31, 2021 | ||||||||||||||||||||||
| Intangible right arising from: | ||||||||||||||||||||||||||||
| Concession agreements – equity value (*) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Concession agreements – economic value | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Program contracts (*) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Program contracts – commitments | ( | ) | ||||||||||||||||||||||||||
| Services contracts – São Paulo | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Software license of use | ( | ) | ||||||||||||||||||||||||||
| Right of use – Other assets | ( | ) | ( | ) | ||||||||||||||||||||||||
| Total | ( | ) | ( | ) | ||||||||||||||||||||||||
| (*) |
| F-63 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| December 31, 2019 | Addition | Contract renewal | Transfer of contract assets | Transfers | Write-offs and disposals | Amortization | December 31, 2020 | |||||||||||||||||||||||||
| Intangible right arising from: | ||||||||||||||||||||||||||||||||
| Concession agreements – equity value (*) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Concession agreements – economic value | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Program contracts (*) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Program contracts – commitments | ( | ) | ||||||||||||||||||||||||||||||
| Services contracts – São Paulo | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Software license of use | ( | ) | ||||||||||||||||||||||||||||||
| Right of use – Other assets | ( | ) | ||||||||||||||||||||||||||||||
| Total | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| (*) |
As of June 30, 2020, a contract was signed for the provision of treatment services and final disposal of solid waste and collection of garbage tax in the Municipality of Diadema for 40 years. In order to reach the best operationalization format, treatment services and final disposal of solid waste are in the study phase and, based on contractual provision, are subject to a partnership between SABESP and a private party, which will occur by means of a public call.
(c) Intangible arising from concession agreements
The Company operates public utility service concession agreements for water supply and sewage services mostly based on agreements that set out rights and obligations relative to the exploration of assets related to the public utility service (See Note 3.9 (a)). The agreements provide for the return of the assets to the granting authority at the end of the concession period.
As of December 31, 2022 and 2021, the Company operated
in
The services provided by the Company are billed at a price regulated and controlled by São Paulo State Sanitation and Energy Regulatory Agency (ARSESP).
| F-64 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
Intangible rights arising from concession agreements include:
(i) Concession agreements – equity value
These refer to municipalities assumed until 2006, except for the municipalities assumed by economic value through assets valuation report prepared by independent experts. The amortization of assets is calculated according to the straight-line method, which considers the assets useful life.
(ii) Concession agreements – economic value
From 1999 through 2006, the negotiations for new concessions were conducted on the basis of the economic and financial result of the transaction, determined in a valuation report issued by independent appraisers.
The amount determined in the related contract, after the transaction is closed with the municipal authorities, realized through the subscription of the Company's shares or in cash, is recorded as "concession agreements" and amortized over the period of the related concession (usually 30 years). As of December 31, 2022 and 2021 there were no amounts pending related to these payments to the municipalities.
Intangible assets are amortized on a straight-line basis over the period of the concession agreements or for the useful lives of the underlying assets, whichever is shorter.
(iii) Program contracts
These refer to the renewal of contracts previously referred to as concession agreements whose purpose is to provide sanitation services. The amortization of the assets acquired until the dates of signatures of the program contracts is calculated according to the straight-line method, which considers the assets’ useful lives. Assets acquired or built after the signature dates of program contracts are amortized during the contracted period (mostly, 30 years) or during the useful lives of underlying assets, whichever is shorter.
(iv) Program contracts - Commitments
After the enactment of the regulatory framework in 2007, renewals of concessions started to be made through of program contracts. In some of these program contracts, the Company undertook the commitment to financially participate in social and environmental actions. The assets built within the program contracts are recorded as intangible assets and are amortized by the straight-line method in accordance with the duration of the program contract (mostly, 30 years).
| F-65 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
As of December 31, 2022 and 2021, the amounts not yet
disbursed were recorded under “program contract commitments”, in current liabilities, totaling R$
(v) Services agreement with the Municipality of São Paulo
On June 23, 2010, the Company entered into an agreement with the State of São Paulo and the Municipality of São Paulo to regulate the provision of water and sewage services in the municipality of São Paulo for a 30-year period, which is extendable for an another 30-year period.
Also on June 23, 2010, an agreement was signed between the state and municipal government, and SABESP and the Sanitation and Energy Regulatory Agency of the State of São Paulo (“ARSESP”) are the consenting and intervening parties, whose main aspects are the following:
1. The State and the Municipality of São Paulo grant to SABESP the right to explore the sanitation services in the capital of the State of São Paulo, which consists of the obligation to provide such service and charge the respective tariff for this service;
2. The State and the Municipality sets forth ARSESP as the agency responsible for regulating the tariff, controlling and monitoring the services.
3. The evaluation model of the contract was the discounted cash flow, which considered the financial and economic sustainability of SABESP’s operations in the metropolitan region of São Paulo;
4. All operating costs, taxes, investments and the opportunity cost of investors and the creditors of SABESP’s were considered in the cash flow analysis;
5. The agreement provides for investments established in the agreement comply with the minimum of 13% of the gross revenue from the municipality of São Paulo, net of the taxes on revenues. Investment plans referring to SABESP’s execution shall be compatible with the activities and programs foreseen in the state, municipal sanitation plans, and where applicable, the metropolitan plan. The investment plan is not definite and will be revised by Managing Committee every four years, especially as to investments to be made in the following period;
6. The payment related to the Municipal Fund of Environmental
Sanitation and Infrastructure to be applied in the sanitation service within the municipality must
be recovered through the tariffs charges. Such payment represents
| F-66 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
7. The opportunity cost of the investors and the creditors was established by the Weighted Average Cost of Capital (WACC) methodology. The WACC was the interest rate used to discount the cash flow of the operation; and
8. The agreement considers the recovery of net assets in operation, preferably evaluated through equity valuation or carrying amount monetarily restated, as defined by ARSESP. In addition, the agreement provides for the remuneration of investments to be made by SABESP, so that there is no residual value at the end of the agreement.
Referring to the recovery through tariff, mentioned in item 6 above, of transfer to the Municipal Fund of Environmental Sanitation and Infrastructure, ARSESP issued in April 2013, the Resolution no. 413, postponing the application of Resolution no. 407 until the conclusion of the tariff revision process, the transfer to the bill of services of amounts referring to the municipal charges which were stipulated in Resolution no. 407. The postponement to apply Resolution no. 407 was due to a request by the São Paulo State Government to analyze, among other things, methods to reduce the impact on consumers.
As of April 18, 2014, ARSESP Resolution no. 484 was published with the final results of SABESP’s Tariff Revision, however, both the São Paulo Municipal Government, through Official Letter no. 1,309/2014-SGM/GAB and the São Paulo State Government through a petition filed by the São Paulo State Office, through the Official Letter ATG/Official Letter no. 092/2014-CC, requested a postponement of the effects of ARSESP Resolution no. 413, published in the São Paulo State Official Gazette on March 20, 2013, until the conclusion of the revision of the Agreement entered into between the São Paulo Municipal Government, the São Paulo State and SABESP.
On May 9, 2018, ARSESP announced the final result of the Second Ordinary Tariff Revision and, as of this revision cycle, ARSESP has been passing-on on the tariffs up to 4% of municipal revenue, which is transferred from SABESP to the Municipal Fund for Environmental Sanitation and Infrastructure legally created. Under the Second Ordinary Tariff Revision, concluded in May 2018, the only contract providing for that transfer and meeting the requirements of ARSESP was the one executed with the municipality of São Paulo. Accordingly, 4% of the funds transferred to the Municipal Fund for Environmental Sanitation and Infrastructure of São Paulo were passed-on to the tariffs of the tariff cycle ended in April 2021.
The Municipal Government of São Paulo and the Company have not reached an agreement to define the percentage of the Municipal Fund for Environmental Sanitation and Infrastructure transfer to the tariffs charged by the Company in the Municipality of São Paulo, which led to the filing by the municipality claiming the percentage provided for in the contract between the parties. The municipality required the suspension of the lawsuit and SABESP has not yet been summoned.
| F-67 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
At the time of execution of the agreement, the municipality of São Paulo and the Company did not agree to settle the pending financial issues existing, related to the rendering water supply and sewage services to the properties of the Municipality, and for that reason, the Company filed lawsuits for collection of the aforementioned amounts, which remain in progress and are recorded under allowance for doubtful accounts.
As of December 31, 2022 and 2021, the agreement entered
into with the Municipality of São Paulo accounted for
(d) Public-Private Partnership - PPP
SABESP carries out operations related to the PPPs mentioned below. These operations and their respective obligations and guarantees are supported by agreements executed according to Law 11,079/2004.
Alto Tietê Production System
The Company and the special purpose entity CAB-Sistema Produtor Alto Tietê S/A (currently SPAT Saneamento S/A), formed by Galvão Engenharia S.A. and Companhia Águas do Brasil – Cab Ambiental, signed in June 2008 the contract of Public-Private Partnership of Alto Tietê production system.
The service contract is valid for 15 years and has the purpose of expanding the capacity of the Taiaçupeba Water Treatment Station, from 10 thousand to 15 thousand of liters per second. The operation started in October 2011.
SABESP monthly transfers funds
from tariffs collected for services provided to the SPE CAB Sistema Produtor Alto Tietê S/A,
in the amount of R$
The guarantee has been effective since the beginning of the operation and will be valid until the end, termination, intervention, annulment or caducity of the Administrative Concession, or other events of extinction provided for in the Concession Agreement or in the legislation applicable to administrative concessions, including in the event of bankruptcy or dissolution of the SPE.
São Lourenço Production System
In August 2013, the Company and the special purpose entity Sistema Produtor São Lourenço S/A, formed by of Construções e Comércio Camargo Corrêa S/A and Construtora Andrade Gutierrez S/A, signed the Public-Private Partnership agreements of the São Lourenço Production System.
| F-68 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
In May 2018, the control of SPE Sistema Produtor São Lourenço S/A was transferred to CGGC Construtora do Brasil Ltda, previously formed of Construções e Comércio Camargo Corrêa S/A and Construtora Andrade Gutierrez S/A.
The objective of the contract is: a) the construction of a water production system, mainly consisting of a water pipeline connecting Ibiúna to Barueri, a water collection station in Ibiúna, a water treatment station in Vargem Grande Paulista and water reservoirs; and b) the provision of services for a 25-year term, aiming at rendering services to operate the dehydration system, drying and final disposal of sludge, maintenance and works of the São Lourenço Production System.
The works started in April 2014 and The São Lourenço Production System (SPSL) PPP started operating on July 10, 2018.
Since the beginning of operations, the Company monthly
transfers funds from tariffs collected for services provided to the SPE Sistema Produtor São Lourenço S/A, in the amount
of R$
The guarantee will become effective as of the beginning of the system’s appropriate operation, duly accepted by SABESP, valid until the occurrence of any of the following events, whichever occurs first: (i) the original payment date of the last installment of interest / amortization of the principal taken out by the SPE to execute the works; (ii) the end, termination, intervention, annulment, caducity of the Administrative Concession, or other extinction events provided for in the Concession Agreement or in the law applicable to administrative concessions, including bankruptcy or extinction of the SPE.
Intangible assets were accrued based on the physical evolution of the works, with the Public-Private Partnership accounts being the corresponding entries in liabilities.
The discount rates used in the agreements of the Public-Private
Partnerships Alto Tietê and São Lourenço are
The amounts recorded in intangible assets are shown in the table below:
| F-69 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| December 31, 2022 | December 31, 2021 | |||||||
| Alto Tietê | ||||||||
| São Lourenço | ||||||||
| Total | ||||||||
The obligations assumed by the Company as of December 31, 2022 and 2021 are shown in the table below:
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Current liabilities | Noncurrent liabilities | Total liabilities | Current liabilities | Noncurrent liabilities | Total liabilities | |||||||||||||||||||
| Alto Tietê | ||||||||||||||||||||||||
| São Lourenço | ||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||
(e) Amortization of intangible assets
The amortization average rate totaled
(f) Right of use
| F-70 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Nature | December 31, 2022 | December 31, 2021 | ||||||
| Leases - Contract Assets | ||||||||
| Leases - Concession Agreements and Program Contracts | ||||||||
| Cost | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| (=) Net | ||||||||
| Other assets (*) | ||||||||
| Vehicles | ||||||||
| Properties | ||||||||
| Equipment | ||||||||
| Other assets | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| (=) Net | ||||||||
| Right of use | ||||||||
| (*) |
Lease liability corresponds to total future fixed lease payments, adjusted to present value, considering an incremental rate on borrowings. For further information, see Note 17.
The table below shows the impact in the income statements:
| Impact in the income statement | ||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2020 | ||||||||||
| Right-of-use amortization | ( | ) | ( | ) | ( | ) | ||||||
| Financial result – interest expenses | ( | ) | ( | ) | ( | ) | ||||||
| Short-term and low-value lease expenses | ( | ) | ( | ) | ( | ) | ||||||
| Decrease of the income of the year | ( | ) | ( | ) | ( | ) | ||||||
(g) Performance Agreements
SABESP has performance agreements for the construction of assets, in which the contractor is paid for the delivery of results, not only for the execution of the construction works.
The performance agreements have basically three phases: (i) implementation of the scope - construction of the asset; (ii) calculation of the performance of the asset built; and (iii) payment of fixed installments.
| F-71 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
SABESP monitors the performance of the agreement and recognizes the assets when future economic benefits are generated for the Company so that costs can be reliably measured. The performance value is part of the asset’s cost, as it has better performance and, consequently, generates additional future economic benefits for the Company.
The limit to be paid to the supplier corresponds to 120% of the base value of the agreement. In most agreements, when the minimum performance percentage is not reached, the amount to be paid to the supplier will be the cost of the materials used in the construction of the assets only.
As of December 31, 2022 and 2021, the accounting balances
of these agreements recorded in contract asset were R$
| 16 | Property, plant and equipment |
(a) Statement of financial position details
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||
| Cost | Accumulated depreciation | Net | Annual Depreciation average rate | Cost | Accumulated depreciation | Net | Annual Depreciation average rate | |||||||||||||||||||||||||
| Land | ||||||||||||||||||||||||||||||||
| Buildings | ( | ) | % | ( | ) | % | ||||||||||||||||||||||||||
| Equipment | ( | ) | % | ( | ) | % | ||||||||||||||||||||||||||
| Transportation equipment | ( | ) | % | ( | ) | % | ||||||||||||||||||||||||||
| Furniture and fixtures | ( | ) | % | ( | ) | % | ||||||||||||||||||||||||||
| Other | ( | ) | % | ( | ) | % | ||||||||||||||||||||||||||
| Total | ( | ) | % | ( | ) | % | ||||||||||||||||||||||||||
(b) Changes
| F-72 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| December 31, 2021 | Additions | Transfers | Write-offs and disposals | Depreciation | December 31,2022 | |||||||||||||||||||
| Land | ||||||||||||||||||||||||
| Buildings | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Equipment | ( | ) | ( | ) | ||||||||||||||||||||
| Transportation equipment | ( | ) | ( | ) | ||||||||||||||||||||
| Furniture and fixtures | ( | ) | ( | ) | ||||||||||||||||||||
| Other | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Total | ( | ) | ( | ) | ||||||||||||||||||||
| December 31,2020 | Additions | Transfers | Write-offs and disposals | Depreciation | December 31, 2021 | |||||||||||||||||||
| Land | ||||||||||||||||||||||||
| Buildings | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Equipment | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Transportation equipment | ( | ) | ||||||||||||||||||||||
| Furniture and fixtures | ( | ) | ( | ) | ||||||||||||||||||||
| Other | ( | ) | ||||||||||||||||||||||
| Total | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| December 31, 2019 | Additions | Transfers | Write-offs and disposals | Depreciation | December 31, 2020 | |||||||||||||||||||
| Land | ||||||||||||||||||||||||
| Buildings | ( | ) | ( | ) | ||||||||||||||||||||
| Equipment | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Transportation equipment | ( | ) | ||||||||||||||||||||||
| Furniture and fixtures | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Other | ( | ) | ( | ) | ||||||||||||||||||||
| Total | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| F-73 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| 17 | Borrowings and financing |
| Borrowings and financing outstanding balance | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Financial institution | Current | Noncurrent | Total | Current | Noncurrent | Total | ||||||||||||||||||
| Local currency | ||||||||||||||||||||||||
| 12th issue debentures | ||||||||||||||||||||||||
| 14th issue debentures | ||||||||||||||||||||||||
| 17th issue debentures | ||||||||||||||||||||||||
| 18th issue debentures | ||||||||||||||||||||||||
| 21st issue debentures | ||||||||||||||||||||||||
| 22nd issue debentures | ||||||||||||||||||||||||
| 23rd issue debentures | ||||||||||||||||||||||||
| 24th issue debentures | ||||||||||||||||||||||||
| 26th issue debentures | ||||||||||||||||||||||||
| 27th issue debentures | ||||||||||||||||||||||||
| 28th issue debentures | ||||||||||||||||||||||||
| 29th issue debentures | ||||||||||||||||||||||||
| 30th issue debentures | ||||||||||||||||||||||||
| Brazilian Federal Savings Bank | ||||||||||||||||||||||||
| Brazilian Development Bank - BNDES PAC | ||||||||||||||||||||||||
| Brazilian Development Bank - BNDES PAC II 9751 | ||||||||||||||||||||||||
| Brazilian Development Bank - BNDES PAC II 9752 | ||||||||||||||||||||||||
| Brazilian Development Bank - BNDES ONDA LIMPA | ||||||||||||||||||||||||
| Brazilian Development Bank - BNDES TIETÊ III | ||||||||||||||||||||||||
| Brazilian Development Bank - BNDES 2015 | ||||||||||||||||||||||||
| Brazilian Development Bank - BNDES 2014 | ||||||||||||||||||||||||
| F-74 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Inter-American Development Bank - BID 2202 | ||||||||||||||||||||||||
| Inter-American Development Bank - BID INVEST | ||||||||||||||||||||||||
| Inter-American Development Bank - BID INVEST 2022 | ||||||||||||||||||||||||
| International Finance Corporation - IFC | ||||||||||||||||||||||||
| Leases (Concession Agreements, Program Contracts and Contract Assets) | ||||||||||||||||||||||||
| Leases (Others) | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
| Interest and charges | ||||||||||||||||||||||||
| Total in local currency | ||||||||||||||||||||||||
| Borrowings and financing outstanding balance | December 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Financial institution | Current | Noncurrent | Total | Current | Noncurrent | Total | ||||||||||||||||||
| Foreign currency | ||||||||||||||||||||||||
| Inter-American Development Bank - BID 1212 – US$30,834 thousand (US$41,112 thousand in December 2021) | ||||||||||||||||||||||||
| Inter-American Development Bank - BID 4623 – US$74,299 thousand (US$30,329 thousand in December 2021) | ||||||||||||||||||||||||
| International Bank of Reconstruction and Development -BIRDs 7662 e 8906 – US$78,197 thousand (US$76,712 thousand in December 2021) | ||||||||||||||||||||||||
| JICA 15 – ¥8,067,010 thousand (¥9,219,440 thousand in December 2021) | ||||||||||||||||||||||||
| JICA 18 – ¥7,253,120 thousand (¥8,289,280 thousand in December 2021) | ||||||||||||||||||||||||
| JICA 17 – ¥3,753,048 thousand (¥3,706,564 thousand in December 2021) | ||||||||||||||||||||||||
| JICA 19 – ¥26,296,011 thousand (¥28,109,529 thousand in December 2021) | ||||||||||||||||||||||||
| BID 1983AB – US$7,692 thousand (US$15,385 thousand in December 2021) | ||||||||||||||||||||||||
| Interest and charges | ||||||||||||||||||||||||
| Total in foreign currency | ||||||||||||||||||||||||
| Total borrowings and financing |
| F-75 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
|
Exchange rate as of December 31, 2022: US$ As of December 31, 2022, the Company did not have balances of borrowings and financing, raised during the year, to mature within 12 months. |
| F-76 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
|
Local currency |
Guarantees |
Maturity |
Annual interest rates |
Inflation adjustment |
| 12th issue debentures | ||||
| 14th issue debentures | ||||
| 17th issue debentures | ||||
| 18th issue debentures | ||||
| 21st issue debentures | ||||
| 22nd issue debentures | ||||
| 23rd issue debentures | ||||
| 24th issue debentures | ||||
| 26th issue debentures | ||||
| 27th issue debentures | ||||
| 28th issue debentures | ||||
| 29th issue debentures | ||||
| 30th issue debentures | ||||
| Brazilian Federal Savings Bank | ||||
| Brazilian Development Bank - BNDES PAC | ||||
| Brazilian Development Bank - BNDES PAC II 9751 | ||||
| Brazilian Development Bank - BNDES PAC II 9752 |
| F-77 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Brazilian Development Bank - BNDES ONDA LIMPA | ||||
| Brazilian Development Bank - BNDES TIETÊ III | ||||
| Brazilian Development Bank - BNDES 2015 | ||||
| Brazilian Development Bank - BNDES 2014 | ||||
| Inter-American Development Bank – BID 2202 | ||||
| Inter-American Development Bank – BID INVEST | ||||
| Inter-American Development Bank – BID INVEST 2022 | ||||
| International Finance Corporation – IFC | ||||
| Leases (Concession Agreements, Program Contracts and Contract Assets) | ||||
| Leases (Others) | ||||
| Other |
|
Foreign currency |
Guarantees |
Maturity |
Annual interest rates |
Exchange rate changes |
| Inter-American Development Bank - BID 1212 - US$30,834 thousand | ||||
| Inter-American Development Bank - BID 4623 - US$74,299 thousand | ||||
| International Bank for Reconstruction and Development – BIRDs 7662 and 8906 - US$78,197 thousand | ||||
| JICA 15 – ¥8,067,010 thousand |
| F-78 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| JICA 18 – ¥7,253,120 thousand | ||||
| JICA 17– ¥3,753,048 thousand | ||||
| JICA 19– ¥26,296,011 thousand | ||||
| BID 1983AB – US$7,692 thousand |
| (*) |
(i) Payment schedule – book value as of December 31, 2022
| 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 to 2044 | TOTAL | |||||||||||||||||||||||||
| LOCAL CURRENCY | ||||||||||||||||||||||||||||||||
| Debentures | ||||||||||||||||||||||||||||||||
| Brazilian Federal Savings Bank | ||||||||||||||||||||||||||||||||
| BNDES | ||||||||||||||||||||||||||||||||
| BID 2202 | ||||||||||||||||||||||||||||||||
| BID INVEST | ||||||||||||||||||||||||||||||||
| BID INVEST 2022 | ||||||||||||||||||||||||||||||||
| IFC | ||||||||||||||||||||||||||||||||
| Leases (Concession Agreements, Program Contracts and Contract Assets) | ||||||||||||||||||||||||||||||||
| Leases (Others) | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Interest and charges | ||||||||||||||||||||||||||||||||
| F-79 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| TOTAL IN LOCAL CURRENCY | ||||||||||||||||||||||||||||||||
| FOREIGN CURRENCY | ||||||||||||||||||||||||||||||||
| BID | ||||||||||||||||||||||||||||||||
| BIRD | ||||||||||||||||||||||||||||||||
| JICA | ||||||||||||||||||||||||||||||||
| BID 1983AB | ||||||||||||||||||||||||||||||||
| Interest and charges | ||||||||||||||||||||||||||||||||
| TOTAL IN FOREIGN CURRENCY | ||||||||||||||||||||||||||||||||
| Overall Total |
(ii) Changes
| December 31, 2021 | Addition (lease) | Funding | Borrowing costs | Monetary and Exchange variation | Inflation adjustment / exchange variation and incorporated interest – Capitalized | Interest paid | Amortization | Accrued interest | Provision for interest and fees – Capitalized | Expenses with borrowing costs | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
| LOCAL CURRENCY | ||||||||||||||||||||||||||||||||||||||||||||||||
| Debentures | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Brazilian Federal Savings Bank | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| BNDES | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| BID 2202 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| BID INVEST | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| IFC | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| BID INVEST 2022 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| F-80 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Leases (Concession Agreements, Program Contracts and Contract Assets) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Leases (Others) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Other | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| TOTAL IN LOCAL CURRENCY | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| FOREIGN CURRENCY | ||||||||||||||||||||||||||||||||||||||||||||||||
| BIDs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| BIRD | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| JICA | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| BID 1983AB | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| TOTAL IN FOREIGN CURRENCY | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| TOTAL | ( | ) | ( | ) | ( | ) | ( | ) |
| December 31, 2020 | Addition (lease) | Funding | Borrowing costs | Monetary and Exchange variation | Inflation adjustment / exchange variation and incorporated interest – Capitalized | Interest paid | Amortization | Accrued interest | Provision for interest and fees – Capitalized | Expenses with borrowing costs | December 31, 2021 | |||||||||||||||||||||||||||||||||||||
| LOCAL CURRENCY | ||||||||||||||||||||||||||||||||||||||||||||||||
| Debentures | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Brazilian Federal Savings Bank | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| BNDES | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| BID 2202 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| BID INVEST | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| F-81 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Leases (Concession Agreements, Program Contracts and Contract Assets) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Leases (Others) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Other | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| TOTAL IN LOCAL CURRENCY | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| FOREIGN CURRENCY | ||||||||||||||||||||||||||||||||||||||||||||||||
| BIDs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| BIRD | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| JICA | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| BID 1983AB | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| TOTAL IN FOREIGN CURRENCY | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| TOTAL | ( | ) | ( | ) | ( | ) |
| December 31, 2019 | Foreign/local currency translation | Addition (lease) | Funding | Borrowing costs | Monetary and exchange variation | Inflation adjustment / exchange variation and incorporated interest – Capitalized | Interest paid | Amortization | Accrued interest | Provision for interest and fees – Capitalized | Expenses with borrowing costs | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
| LOCAL CURRENCY | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debentures | — | — | ( | ) | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Brazilian Federal Savings Bank | — | — | — | — | — | ( | ) | ( | ) | — | ||||||||||||||||||||||||||||||||||||||||||
| BNDES | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| BID 2202 | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| BID INVEST | — | — | ( | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| F-82 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Leases (Concession Agreements, Program Contracts and Contract Assets) | — | — | — | — | — | — | ( | ) | ( | ) | — | — | ||||||||||||||||||||||||||||||||||||||||
| Leases (Others) | — | — | — | — | — | ( | ) | ( | ) | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | ( | ) | ( | ) | — | ||||||||||||||||||||||||||||||||||||||||||
| TOTAL IN LOCAL CURRENCY | ( | ) | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||
| FOREIGN CURRENCY | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| BIDs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| BIRD | — | — | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Eurobonds | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| JICA | — | — | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| BID 1983AB | — | — | — | ( | ) | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| TOTAL IN FOREIGN CURRENCY | ( | ) | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| TOTAL | — | ( | ) | ( | ) | ( | ) |
| F-83 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
(a) Main events in 2022
| (i) | Debentures |
As of March
18, 2022, the Company raised R$
The 30th issue debentures was as follows:
|
Value |
Maturity |
Remuneration | |
| Series 1 | R$ |
||
| Series 2 | R$ |
| · | The covenants agreed for the 30th issues debentures 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/paid financial expenses equal to or higher than 1.5;
- Disposal
of operating assets, termination of licenses, loss of concession or loss of the Issuer’s ability to execute and operate public sanitation
services in areas of the São Paulo State which, individually or jointly during the term of the agreement, lead to a reduction of
the Issuer’s net sales and/or service revenue of more than twenty- five percent (
The failure to comply with the covenants for at least two consecutive quarters, or for two non-consecutive quarters within twelve months, will cause the early termination of the agreement (in which case the 30-day cure period does not apply).
The
contracts have a cross acceleration clause, i.e. the early maturity of any of the Company’s debts, in an individual or aggregate
amount equal to or higher than R$
| F-84 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
In the first quarter of 2022, the Company paid the final
amortization of the 14th issue debentures, totaling R$
In the second quarter of 2022, the Company paid the final
amortization of the 21st issue debentures, totaling R$
IDB INVEST 2022
On July 15, 2022, the Company raised R$
The proceeds raised from this contract will be exclusively used to cover the costs of the Tietê River Cleaning Project.
The principal will be amortized in semi-annual payments in June and December, starting in June 2023 and ending in June 2036. Interests mature semi-annually in December and June, starting in December 2022 and ending in June 2036, at CDI + 2.5% p.a.
| ● | The covenants agreed upon for IDB INVEST 2022 are: |
Calculated every quarter, when disclosing the quarterly information or annual financial statements:
- Net debt/adjusted EBITDA equal to or lower than 3.50;
- Adjusted EBITDA/paid financial expenses equal to or higher than 2.35;
They should be maintained for two (2) consecutive quarters or not, for any four (4) consecutive quarters.
International Finance Corporation (IFC)
On July 27, 2022, the Company raised R$
The funds raised will be used to finance:
| ● | the capital expenses related to the New Pinheiros River program; |
| ● | the capital expenses to improve sanitation in the São Paulo coastal regions; and |
| F-85 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| ● | the capital expenses to improve water supply in municipalities of the São Paulo coastal region and suburbs of the São Paulo municipality. |
The principal will be amortized in semi-annual payments in April and October, starting in April 2023 and ending in April 2032. Interests mature semi-annually in October and April, starting in October 2022 and ending in April 2032, at CDI + 2.0% p.a.
| ● | The covenants agreed upon for IFC are: |
Calculated every quarter, when disclosing the quarterly information or annual financial statements:
- Net debt/adjusted EBITDA equal to or lower than 3.50;
- Adjusted EBITDA/paid financial expenses equal to or higher than 2.35;
They should be maintained for two (2) consecutive quarters or not, for any four (4) consecutive quarters.
(b) Leases
The Company has work service agreements which includes specific assets under lease terms. During the construction period, works are capitalized to intangible assets in progress and the lease amount is recorded in the same proportion.
The amounts payable for the right of use of assets are also recorded in this line (Note 15 (f)).
(c) Financial commitments - Covenants
The table below shows the more restrictive covenants ratios as of December 31, 2022.
|
Covenants | |
| Adjusted EBITDA / Adjusted Financial Expenses | |
| EBITDA / Financial Expenses Paid | |
| Adjusted Net Debt / Adjusted EBITDA |
| F-86 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Net Debt / Adjusted EBITDA | |
| Total Adjusted Debt / Adjusted EBITDA | |
| Other Onerous Debt (1) / Adjusted EBITDA | |
| Adjusted Current Ratio | |
| (1) The contractual definition of “Other Onerous Debts” corresponds to the sum of pension plan obligations and healthcare plan, installment payments of tax debts, and installments payments of debts with the electricity supplier. | |
As of December 31, 2022 and 2021, the Company met the financial debt covenants as set forth by its borrowing and financing agreements.
(d) Borrowings and financing – Credit Limits
| Agent | December 31, 2022 | |||
| (in millions of reais (*) | ||||
| Brazilian Federal Savings Bank | ||||
| Brazilian Development Bank – BNDES | ||||
| Inter-American Development Bank – BID | ||||
| International Bank for Reconstruction and Development - IBRD | ||||
| Other | ||||
| TOTAL | ||||
| (*) |
Financing resources contracted have specific purposes, which have been released for the execution of their respective investments, according to the progress of the works.
| 18 | Taxes recoverable/payable |
(a) Current assets
| F-87 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| December 31, 2022 | December 31, 2021 | |||||||
| Recoverable taxes | ||||||||
| Income tax and social contribution | ||||||||
| Withholding income tax (IRRF) on financial investments | ||||||||
| Other federal taxes | ||||||||
| Total | ||||||||
(b) Current liabilities
| December 31, 2022 | December 31, 2021 | |||||||
| Taxes and contributions payable | ||||||||
| Cofins and Pasep | ||||||||
| INSS (social security contribution) | ||||||||
| IRRF (withholding income tax) | ||||||||
| Other | ||||||||
| Total | ||||||||
On February 08, 2023, the Federal Supreme Court (STF) unanimously decided that a final decision favorable to companies on taxes paid on a continuous base would lose its effects if the STF later rules against it.
The Company analyzed the matter judged in this decision, which covers Social Contribution on Net Profit, as well as other taxes that fit into the decision granted, and did not identify any impact on the Financial Statements.
| 19 | Deferred taxes and contributions |
| (a) | Statement of financial position details |
| F-88 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| December 31, 2022 | December 31, 2021 | |||||||
| Deferred income tax assets | ||||||||
| Provisions | ||||||||
| Pension obligations - G1 | ||||||||
| Donations of underlying asset on concession agreements | ||||||||
| Credit losses | ||||||||
| Other | ||||||||
| Total deferred tax assets | ||||||||
| Deferred income tax liabilities | ||||||||
| Temporary difference on concession of intangible asset | ( | ) | ( | ) | ||||
| Capitalization of borrowing costs | ( | ) | ( | ) | ||||
| Profit on supply to government entities | ( | ) | ( | ) | ||||
| Actuarial gain/loss – G1 Plan | ( | ) | ( | ) | ||||
| Construction margin | ( | ) | ( | ) | ||||
| Borrowing costs | ( | ) | ( | ) | ||||
| Total deferred tax liabilities | ( | ) | ( | ) | ||||
| Deferred tax assets (liabilities), net | ( | ) | ( | ) | ||||
(b) Realization
| December 31, 2022 | December 31, 2021 | |||||||
| Deferred income tax assets | ||||||||
| to be realized within 12 months | ||||||||
| to be realized after one year | ||||||||
| Total deferred tax asset | ||||||||
| Deferred income tax liabilities | ||||||||
| to be realized within 12 months | ( | ) | ( | ) | ||||
| to be realized after one year | ( | ) | ( | ) | ||||
| Total deferred tax liabilities | ( | ) | ( | ) | ||||
| Deferred tax liability, net | ( | ) | ( | ) | ||||
| F-89 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
(c) Changes
| Deferred income tax assets | December 31, 2021 | Variação líquida | December 31, 2022 | |||||||||
| Provisions | ||||||||||||
| Pension obligations - G1 | ) | |||||||||||
| Donations of underlying asset on concession agreements | ) | |||||||||||
| Credit losses | ||||||||||||
| Other | ||||||||||||
| Total | ||||||||||||
| Deferred income tax liabilities | ||||||||||||
| Temporary difference on concession of intangible asset | ( | ) | ( | ) | ||||||||
| Capitalization of borrowing costs | ( | ) | ( | ) | ( | ) | ||||||
| Profit on supply to governmental entities | ( | ) | ( | ) | ||||||||
| Actuarial (gain)/loss – G1 | ( | ) | ( | ) | ||||||||
| Construction margin | ( | ) | ( | ) | ||||||||
| Borrowing costs | ( | ) | ( | ) | ||||||||
| Total | ( | ) | ( | ) | ( | ) | ||||||
| Deferred tax liabilities, net | ( | ) | ( | ) | ||||||||
| F-90 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Deferred income tax assets | December 31, 2020 | Net change | December 31, 2021 | |||||||||
| Provisions | ||||||||||||
| Pension obligations - G1 | ) | |||||||||||
| Donations of underlying asset on concession agreements | ) | |||||||||||
| Credit losses | ||||||||||||
| Other | ) | |||||||||||
| Total | ||||||||||||
| Deferred income tax liabilities | ||||||||||||
| Temporary difference on concession of intangible asset | ( | ) | ( | ) | ||||||||
| Capitalization of borrowing costs | ( | ) | ( | ) | ( | ) | ||||||
| Profit on supply to governmental entities | ( | ) | ( | ) | ||||||||
| Actuarial (gain)/loss – G1 | ( | ) | ( | ) | ( | ) | ||||||
| Construction margin | ( | ) | ( | ) | ||||||||
| Borrowing costs | ( | ) | ( | ) | ||||||||
| Total | ( | ) | ( | ) | ( | ) | ||||||
| Deferred tax liabilities, net | ( | ) | ( | ) | ||||||||
| Deferred income tax assets | December 31, 2019 | Net change | December 31, 2020 | |||||||||
| Provisions | ||||||||||||
| Pension obligations - G1 | ) | |||||||||||
| Donations of underlying asset on concession agreements | ) | |||||||||||
| Credit losses | ||||||||||||
| Other | ) | |||||||||||
| Total | ||||||||||||
| Deferred income tax liabilities | ||||||||||||
| Temporary difference on concession of intangible asset | ( | ) | ( | ) | ||||||||
| Capitalization of borrowing costs | ( | ) | ( | ) | ||||||||
| Profit on supply to governmental entities | ( | ) | ( | ) | ||||||||
| Actuarial (gain)/loss – G1 | ( | ) | ( | ) | ||||||||
| Construction margin | ( | ) | ( | ) | ||||||||
| Borrowing costs | ( | ) | ( | ) | ( | ) | ||||||
| Total | ( | ) | ( | ) | ||||||||
| Deferred tax liabilities, net | ( | ) | ( | ) | ||||||||
| F-91 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| December 31, 2022 | December 31, 2021 | December 31, 2020 | ||||||||||
| Opening balance | ( | ) | ( | ) | ( | ) | ||||||
| Net change in the year: | ||||||||||||
| - corresponding entry to the income statement | ||||||||||||
| - corresponding entry to valuation adjustments to equity (Note 22) | ( | ) | ||||||||||
| Total net change | ||||||||||||
| Closing balance | ( | ) | ( | ) | ( | ) | ||||||
(d) Reconciliation of the effective tax rate
The amounts recorded as income tax and social contribution expenses in the financial statements are reconciled to the statutory rates, as shown below:
| F-92 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| December 31, 2022 | December 31, 2021 | December 31, 2020 | ||||||||||
| Profit before income taxes | ||||||||||||
| Statutory rate | % | % | % | |||||||||
| Estimated expense at the statutory rate | ( | ) | ( | ) | ( | ) | ||||||
| Tax benefit of interest on equity | ||||||||||||
| Permanent differences | ||||||||||||
| Provision – Law 4,819/1958 – G0 (i) | ( | ) | ( | ) | ( | ) | ||||||
| Donations | ( | ) | ( | ) | ( | ) | ||||||
| Other differences | ||||||||||||
| Income tax and social contribution | ( | ) | ( | ) | ( | ) | ||||||
| Current income tax and social contribution | ( | ) | ( | ) | ( | ) | ||||||
| Deferred income tax and social contribution | ||||||||||||
| Effective rate | % | % | % | |||||||||
| (i) |
| 20 | Provisions |
| (a) | Lawsuits and proceedings that resulted in provisions |
(I) Statement of financial position details
The Company is party to a number of legal claims and administrative proceedings arising from the normal course of business, including civil, tax, labor and environmental matters. Management recognizes provisions in the financial statements consistently with the recognition and measurement criteria established in Note 3.15. The ultimate timing and amounts of the payments depends on the outcome of the court cases.
| F-93 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Provisions | Escrow deposits | Provisions net of deposits | Provisions | Escrow deposits | Provisions net of deposits | |||||||||||||||||||
| Customer claims (i) | ( | ) | ( | ) | ||||||||||||||||||||
| Supplier claims (ii) | ( | ) | ( | ) | ||||||||||||||||||||
| Other civil claims (iii) | ( | ) | ( | ) | ||||||||||||||||||||
| Tax claims (iv) | ( | ) | ( | ) | ||||||||||||||||||||
| Labor claims (v) | ( | ) | ( | ) | ||||||||||||||||||||
| Environmental claims (vi) | ( | ) | ( | ) | ||||||||||||||||||||
| Total | ( | ) | ( | ) | ||||||||||||||||||||
| Current | — | — | ||||||||||||||||||||||
| Noncurrent | ( | ) | ( | ) | ||||||||||||||||||||
(II) Changes
| December 31, 2021 | Additional provisions | Interest and inflation adjustment | Use of the accrual | Amounts not used(reversal) | December 31,2022 | |||||||||||||||||||
| Customer claims (i) | ( | ) | ( | ) | ||||||||||||||||||||
| Supplier claims (ii) | ( | ) | ( | ) | ||||||||||||||||||||
| Other civil claims (iii) | ( | ) | ( | ) | ||||||||||||||||||||
| Tax claims (iv) | ( | ) | ( | ) | ||||||||||||||||||||
| Labor claims (v) | ( | ) | ( | ) | ||||||||||||||||||||
| Environmental claims (vi) | ( | ) | ( | ) | ||||||||||||||||||||
| Subtotal | ( | ) | ( | ) | ||||||||||||||||||||
| Escrow deposits | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Total | ( | ) | ( | ) | ||||||||||||||||||||
| F-94 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| December 31, 2020 | Additional provisions | Interest and inflation adjustment | Use of the accrual | Amounts not used (reversal) | December 31, 2021 | |||||||||||||||||||
| Customer claims (i) | ( | ) | ( | ) | ||||||||||||||||||||
| Supplier claims (ii) | ( | ) | ( | ) | ||||||||||||||||||||
| Other civil claims (iii) | ( | ) | ( | ) | ||||||||||||||||||||
| Tax claims (iv) | ( | ) | ( | ) | ||||||||||||||||||||
| Labor claims (v) | ( | ) | ( | ) | ||||||||||||||||||||
| Environmental claims (vi) | ( | ) | ( | ) | ||||||||||||||||||||
| Subtotal | ( | ) | ( | ) | ||||||||||||||||||||
| Escrow deposits | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Total | ( | ) | ( | ) | ||||||||||||||||||||
| December 31, 2019 | Additional provisions | Interest and inflation adjustment | Use of the accrual | Amounts not used (reversal) | December 31, 2020 | |||||||||||||||||||
| Customer claims (i) | ( | ) | ( | ) | ||||||||||||||||||||
| Supplier claims (ii) | ( | ) | ( | ) | ||||||||||||||||||||
| Other civil claims (iii) | ( | ) | ( | ) | ||||||||||||||||||||
| Tax claims (iv) | ( | ) | ( | ) | ||||||||||||||||||||
| Labor claims (v) | ( | ) | ( | ) | ||||||||||||||||||||
| Environmental claims (vi) | — | ( | ) | |||||||||||||||||||||
| Subtotal | ( | ) | ( | ) | ||||||||||||||||||||
| Escrow deposits | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Total | ( | ) | ( | ) | ||||||||||||||||||||
| F-95 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
(b) Lawsuits deemed as contingent liabilities
The Company is party to lawsuits and administrative proceedings relating to environmental, tax, civil and labor claims, which are assessed as contingent liabilities in the financial statements, since it either does not expect outflows to be required or the amount of the obligation cannot be reliably measured. Contingent liabilities, net of escrow deposits, are represented as follows:
| December 31, 2022 | December 31, 2021 | |||||||
| Customer claims (i) | ||||||||
| Supplier claims (ii) | ||||||||
| Other civil claims (iii) | ||||||||
| Tax claims (iv) | ||||||||
| Labor claims (v) | ||||||||
| Environmental claims (vi) | ||||||||
| Total | ||||||||
(c) Explanation on 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 |
These lawsuits include lawsuits filed by some suppliers alleging underpayment of monetary restatements and the economic and financial imbalance of the agreements, and are in progress at different courts.
| (iii) | Other civil claims |
| F-96 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
These mainly refer to indemnities for property damage, pain and suffering, and loss of profits allegedly caused to third parties, such as vehicle accidents, claims, challenges on the methodology to collect tariffs, among others, filed at different court levels.
| (iv) | Tax claims |
Tax claims refer mainly to issues related to tax collections and fines in general challenged due to disagreements regarding notification or differences in the interpretation of legislation by the Company's Management.
The Municipality of São Paulo, through Law 13,476/2022,
revoked the exemption of the service tax held by the Company until then and issued tax deficiency notices related to sewage services and
ancillary activities, in the adjusted amount of R$
| (v) | Labor claims |
The Company is a party to a number of labor lawsuits, involving issues such as overtime, shift schedule, health hazard premium and hazardous duty premium, prior notice, change of function, salary equalization, service outsourcing and other, which are at various court levels.
| (vi) | Environmental claims |
These refer to several administrative proceedings and lawsuits filed by government entities, including Companhia Ambiental do Estado de São Paulo – CESTESB and the Public Prosecution Office of the State of São Paulo, which aim at certain obligations to do and not to do, with the provision of fines for non-compliance, and imposition of compensation for environmental damages allegedly caused by the Company.
| F-97 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
The main objects in which the Company is involved are: a) blame SABESP for discharging or releasing sewage without proper treatment; b) invest in the water and sewage treatment system of the municipality, under penalty of paying a fine; c) pay compensation for environmental damages; amongst others.
(d) Other concession-related legal proceedings
The Company is a party to concessions-related legal proceedings, in which it challenges compensatory issues for the resumption of sanitation services by some municipalities or by the right to continue operating said services.
The amount recorded as indemnities receivable in noncurrent
assets, referring to municipalities of Cajobi, Macatuba, Álvares Florence, Embaúba, Araçoiaba da Serra and Itapira
was R$
(e) Environmental lawsuits with settlements
In 2022, the Company executed court agreements totaling
R$
(f) Guarantee insurance for escrow deposit
On May 25, 2022, 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$
| F-98 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| 21 | Labor and social obligations |
| December 31, 2022 | December 31, 2021 | |||||||
| Salaries and payroll charges | ||||||||
| Provision for vacation | ||||||||
| Healthcare plan (i) | ||||||||
| Provision for profit sharing (ii) | ||||||||
| Consent Decree (TAC) | ||||||||
| Knowledge Retention Program (PRC) | ||||||||
| Total | ||||||||
(i) Health plan – Medical Assistance
Benefits granted are paid after the event, free of choice,
and are sponsored by the contributions SABESP and the employees. In 2022, the Company contributed
(ii) Profit sharing
The profit sharing program was implemented in accordance with an agreement with the labor union. Payment corresponds to up to one-month salary for each employee, depending on performance of goals reached from January to December, and should be paid in the subsequent year.
| 22 | Pension plan obligations |
The Company has Post-Employment Benefit Plans in the following modalities: Defined Benefit (BD) – G1 (i) and G0 (ii); Defined Contribution (CD) – Sabesprev Mais (iii) and VIVEST (iv), whereby only the latter is open for new adhesions. See the reconciliation expenses with such plans in item (v).
Statements of defined benefit plans
Summary of pension obligations – Liabilities
| F-99 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||
| G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | |||||||||||||||||||
| Present value of the defined benefit obligations | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Fair value of the plan’s assets | ||||||||||||||||||||||||
| Total pension plan obligations (deficit) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Changes in Liabilities
| December 31, 2022 | December 31, 2021 | |||||||||||||||||||||||
| G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | |||||||||||||||||||
| Plan’s liabilities | ||||||||||||||||||||||||
| Defined benefit obligation, beginning of the year | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Current service cost | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Interest costs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Actuarial (gains)/losses recorded as other comprehensive income | ||||||||||||||||||||||||
| Benefits paid | ||||||||||||||||||||||||
| Defined benefit obligation, end of the year | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Plan’s assets | ||||||||||||||||||||||||
| Fair value of the plan’s assets, beginning of the year | ||||||||||||||||||||||||
| Expected return of the plan’s assets | ||||||||||||||||||||||||
| Company’s contributions | ||||||||||||||||||||||||
| Participant’s contributions | ||||||||||||||||||||||||
| Benefits paid | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Actuarial gains/(losses) recorded as other comprehensive income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Fair value of the plan’s assets, end of the year | ||||||||||||||||||||||||
| Total pension plan obligations (deficit) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| F-100 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
Changes in equity - Other comprehensive income
Pursuant to IAS 19, the Company recognized gains/(losses), from changes in actuarial assumptions under equity, such as equity valuation adjustments, as shown below:
| December 31, 2022 | December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | ||||||||||||||||||||||||||||
| Actuarial gains/(losses) on obligations | ||||||||||||||||||||||||||||||||||||
| Actuarial gains/(losses) recorded as other comprehensive income | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Total gains/(losses) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Deferred income tax and social contribution | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Equity valuation adjustments | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
The amounts recognized in the year are as follows:
| December 31, 2022 | December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | G1 Plan | G0 Plan | Total | ||||||||||||||||||||||||||||
| Cost of service, net | ||||||||||||||||||||||||||||||||||||
| Interest cost rates | ||||||||||||||||||||||||||||||||||||
| Expected return on the plan’s assets | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Amount received from State of São Paulo (undisputed) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Total expenses | ||||||||||||||||||||||||||||||||||||
Obligations’ maturity:
| F-101 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| December 31, 2022 | ||||||||
| G1 Plan | G0 Plan | |||||||
| Payment of benefits expected in 2023 | ||||||||
| Payment of benefits expected in 2024 | ||||||||
| Payment of benefits expected in 2025 | ||||||||
| Payment of benefits expected in 2026 | ||||||||
| Payment of benefits expected in 2027 or after | ||||||||
| Total | ||||||||
| Duration | ||||||||
Actuarial assumptions:
December 31, 2022 | December 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
G1 Plan | G0 Plan | G1 Plan | G0 Plan | G1 Plan | G0 Plan | |||||||||||||||||||
| Discount rate – actual rate (NTN-B) | ||||||||||||||||||||||||
| Inflation rate | ||||||||||||||||||||||||
| Nominal rate of salary growth | ||||||||||||||||||||||||
| Mortality table |
Sensitivity analysis
Sensitivity analysis of the defined benefit pension plan as of December 31, 2022 regarding the changes in the main assumptions are:
|
Impact on the present value of the defined benefit obligations | |||
|
Assumption |
Change in the assumption |
G1 |
G0 |
|
Discount rate |
Increase of 1.0% | ||
|
Decrease of 1.0% |
|
| |
|
Life expectation |
Increase of 1 year | ||
|
Decrease of 1 year |
|
| |
| F-102 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
|
Wage growth rate |
Increase of 1.0% | ||
|
Decrease of 1.0% |
|
|
| (i) | G1 Plan |
Managed by Sabesprev, this defined benefit plan (“G1 Plan”), receives similar contributions established in a plan of subsidy of actuarial study of Sabesprev, as follows:
| · |
| · |
The active participants as of December 31,
2022 totaled
The contributions of the Company and participants
of the G1 Plan in 2022 were R$
Estimated expenses for the coming year
| 2023 | ||||
| Cost of services, net | ||||
| Regular and extraordinary contributions expected from participants | ( | ) | ||
| Interest costs | ||||
| Net profitability on financial assets | ( | ) | ||
| Expenditures to be recognized by the employer | ( | ) | ||
Plan’s assets
The plan’s investment policies and strategies are aim at getting consistent returns and reduce the risks associated to the utilization of financial assets available on the Capital Markets through diversification, considering factors, such as the liquidity needs and the long-term nature of the plan liability, types and availability of financial instruments in the local and international markets, general economic conditions and forecasts as well as requirements under the law. The plan's asset allocation management strategies are determined with the support of reports and analysis prepared by Sabesprev
| F-103 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
and independent financial advisors:
| December 31, 2022 | % | December 31, 2021 | % | |||||||||||||
| Total fixed income | ||||||||||||||||
| Total equities | ||||||||||||||||
| Total structured investments | ||||||||||||||||
| Other | ||||||||||||||||
| Fair value of the plan’s assets | ||||||||||||||||
Restrictions with respect to asset portfolio investments, in the case of federal government securities:
i) instruments securitized by the National Treasury will not be permitted;
ii) derivative instruments must be used for hedge.
Restrictions with respect to asset portfolio investments, in the case of variable-income securities for internal management, are as follows:
i) day-trade operations will not be permitted;
ii) sale of uncovered share is prohibited;
iii) swap operations without guarantee are prohibited
iv) leverage will not be permitted, i.e., operations with derivatives representing leverage of asset or selling short, such operations cannot result in losses higher than invested amounts.
As of December 31, 2022, Sabesprev did not have financial assets issued by the Company in its own portfolio; however, said assets could have been part of the investment fund portfolio invested by the Foundation. The real estate held in the portfolio is not used by the Company.
On December 21, 2022, SABESP and SABESPREV, mutually agreed to execute an Admission of Debt Instrument, where SABESP recognizes as legitimate, valid, net, certain, and enforceable the debt related to its share of responsibility in the balancing of the deficit of SABESPREV’s Basic Benefits Plan (G1 Plan), collateralizing the Contract for Revenue Binding and Assignment of Credit Transfer, executed between the parties on February 9, 2023.
(ii) G0 Plan
| F-104 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
Pursuant to State Law 4,819/1958, employees who started providing services prior to May 1974 and retired as an employee of the Company acquired a legal right to receive supplemental pension payments, which rights are referred as "G0 Plan ". The Company pays these supplemental benefits on behalf of the State of São Paulo and makes claims for reimbursements from the State Government, which are recorded in the “Accounts receivable from related parties” line, limited to the amounts considered virtually certain that will be reimbursed by the State of São Paulo.
The number of active participants of Plan - Go as of
December 31, 2022 was
Estimated expenses for 2023
| 2023 | ||||
| Interest cost rate | ||||
| Expense to be recognized | ||||
(iii) Sabesprev Mais Plan
As of December 31, 2022, this Defined Contribution Plan
administered by Sabesprev had
With respect to the Sabesprev Mais plan, the contributions from the sponsor represent 100% over the total basic contribution from the participants.
(iv) VIVEST
Administered by VIVEST, the sponsor's contributions correspond to the result obtained by applying a percentage of 100% to the basic contribution made by the participant.
As of December 31, 2022, there were
(v) Reconciliation of expenses with pension obligations
| F-105 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| December 31, 2022 | December 31, 2021 | December 31, 2020 | ||||||||||
| G1 Plan (i) | ||||||||||||
| G0 Plan (ii) | ||||||||||||
| Sabesprev Mais Plan (iii) | ||||||||||||
| VIVEST Plan (iv) | ||||||||||||
| Subtotal | ||||||||||||
| Expenses capitalized in assets | ( | ) | ( | ) | ( | ) | ||||||
| Other | ||||||||||||
| Pension plan obligations (Note 29) | ||||||||||||
| 23 | Services payable |
The services account records the balances payable, mainly
from services received from third parties, such as supply of electric power, reading of hydrometers and delivery of water and sewage bills,
cleaning, surveillance and security services, collection, legal counsel services, audit, marketing and advertising and consulting services,
among others. The amounts payable to the municipal governments related to transfers provided for in the concession agreements are also
recorded. The balances as of December 31, 2022 and 2021 were R$
| 24 | Equity |
(a) Share capital
As of December 31, 2022 and 2021, the authorized and
fully subscribed and paid-in capital, in the amount of R$
| December 31, 2022 | December 31, 2021 | |||||||||||||||
| Number of shares | % | Number of shares | % | |||||||||||||
| State Department of Finance | ||||||||||||||||
| Other shareholders | ||||||||||||||||
| F-106 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| In Brazil (1) | ||||||||||||||||
| Abroad (2) (3) | ||||||||||||||||
| (1) |
| (2) |
| (3) |
(b) Distribution of earnings
Shareholders are entitled to a minimum mandatory dividend of 25% of the adjusted net income under Brazilian GAAP, calculated according to the Brazilian corporate law. The dividends do not bear interest and the amounts not claimed within three years from the date of the Shareholders' Meeting that approved them mature in favor of the Company.
| 2022 | 2021 | 2020 | ||||||||||
| Profit for the year | ||||||||||||
| (-) Legal reserve - 5% | ||||||||||||
| Minimum mandatory dividend – 25% | ||||||||||||
| Dividend per share and per ADS | ||||||||||||
| F-107 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
On April 28, 2022, the Shareholders’ General Meeting
approved the distribution of complementary minimum dividends in the amount of R$
The Company proposed dividends as interest on capital
ad referendum of the Annual Shareholders’ Meeting of 2023, in the amount of R$
The Company charged interest on capital to minimum dividends
by its net withholding income tax. The amount of R$
The balance payable of interest on capital as of December
31, 2021 of R$
(c) Legal reserve
(d) Investments reserve
Earnings reserve - investments reserve is specifically formed by the portion corresponding to own funds assigned to the expansion of the water supply and sewage treatment systems, based on capital budget approved by the Management.
As of December 31, 2022 and 2021, the balance of investment
reserve totaled R$
| F-108 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
Pursuant to paragraph four of article 49 of the by-laws, the Board of Directors may propose to the Shareholders’ Meeting that the remaining balance of profit for the year, after deducting the legal reserve and minimum mandatory dividends, be allocated to an investment reserve that will comply with the following criteria:
| I- | its balance, jointly with the balance of the other earnings reserves, except for reserves for contingencies and realizable profits, may not exceed the capital stock; and |
| II- | the reserve is intended to guarantee the investment plan and its balance may be used: |
a) to absorb losses, whenever necessary;
b) to distribute dividends, at any moment;
c) in share redemption, reimbursement or purchase transactions authorized by law;
d) in incorporation of the capital stock.
(e) Allocation of the profit for the year
| 2022 | 2021 | 2020 | ||
| Profit | ||||
| (+) | Profit for the year | |||
| (-) | Legal reserve – 5% | |||
| (-) | Minimum mandatory dividends | |||
| (-) | Complementary minimum dividends | |||
| Investment reserve recorded | ||||
Management will send for approval at the Shareholders’
Meeting, a proposal to reallocate retained earnings the amount of R$
(f) Retained earnings
Retained earnings (accumulated losses): the statutory balance of this account is zero as all retained earnings must be distributed or allocated to an earnings reserve.
| F-109 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
(g) Other comprehensive loss
Gains and losses arising from changes in the actuarial assumptions are accounted for as equity valuation adjustments, net of the effects of income tax and social contribution effects. See Note 22, the breakdown of amounts recorded in 2022 and 2021.
| G1 plan | G0 plan | Total | ||||||||||
| Balance as of December 31, 2021 | ( | ) | ||||||||||
| Actuarial gains/(losses) for the year (Note 22) | ( | ) | ||||||||||
| Balance as of December 31, 2022 | ( | ) | ||||||||||
| 25 | Earnings per share |
Basic and diluted
Basic earnings per share is calculated by dividing the equity attributable to the Company’s owners by the weighted average number of outstanding common shares during the year. 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.
| 2022 | 2021 | 2020 | ||||||||||
| Earnings attributable to Company’s owners | ||||||||||||
| Weighted average number of common shares issued | ||||||||||||
| Basic and diluted earnings per share (reais per share) | ||||||||||||
| 26 | Operating segment information |
| F-110 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
Management, comprised of the Board of Directors and Board of Executive Officers, has determined the operating segment used to make strategic decisions, as sanitation services.
Result
| 2022 | ||||||||||||
| Sanitation (i) | Reconciliation to the financial statements (ii) | Balance as per financial statements | ||||||||||
| Gross operating revenue | ||||||||||||
| Gross sales deductions | ( | ) | ( | ) | ||||||||
| Net operating revenue | ||||||||||||
| Costs, selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | ||||||
| Income from operations before other operating expenses, net and equity accounting | ||||||||||||
| Other operating income / (expenses), net | ||||||||||||
| Equity accounting | ||||||||||||
| Financial result, net | ( | ) | ||||||||||
| Income from operations before taxes | ||||||||||||
| Depreciation and amortization | ( | ) | — | ( | ) | |||||||
Result
| F-111 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| 2021 | ||||||||||||
| Sanitation (i) | Reconciliation to the financial statements (ii) | Balance as per financial statements | ||||||||||
| Gross operating revenue | ||||||||||||
| Gross sales deductions | ( | ) | ( | ) | ||||||||
| Net operating revenue | ||||||||||||
| Costs, selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | ||||||
| Income from operations before other operating expenses, net and equity accounting | ||||||||||||
| Other operating income / (expenses), net | ( | ) | ||||||||||
| Equity accounting | ||||||||||||
| Financial result, net | ( | ) | ||||||||||
| Income from operations before taxes | ||||||||||||
| Depreciation and amortization | ( | ) | — | ( | ) | |||||||
| (i) |
| (ii) |
Result
| F-112 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| 2020 | ||||||||||||
| Sanitation (i) | Reconciliation to the financial statements (ii) | Balance as per financial statements | ||||||||||
| Gross operating revenue | ||||||||||||
| Gross sales deductions | ( | ) | ( | ) | ||||||||
| Net operating revenue | ||||||||||||
| Costs, selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | ||||||
| Income from operations before other operating expenses, net and equity accounting | ||||||||||||
| Other operating income / (expenses), net | ||||||||||||
| Equity accounting | ||||||||||||
| Financial result, net | ( | ) | ||||||||||
| Income from operations before taxes | ||||||||||||
| Depreciation and amortization | ( | ) | — | ( | ) | |||||||
| (i) |
| (ii) |
| 27 | Insurance |
| F-113 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
The Company has insurance that covers, among others, fire and other damage to its assets and office buildings, and liability insurance against third parties. It also has civil liability insurance for the members of the Board of Directors and Board of Executive Officers (“D&O insurance”) and guarantee insurance for escrow deposit (as described in Note 20 (f)) and traditional guarantee insurance. Insurance is contracted by means of bidding processes that count on the participation of the main Brazilian and international insurance companies operating in Brazil.
The risk assumptions adopted, given their nature, are not within the scope of a financial statement audit, and consequently have not been examined by our independent auditors.
As of December 31, 2022, the Company’s insurance was as follows:
| Coverage | ||||
| Specified risks – fire | ||||
| Engineering risk | ||||
| Guarantee insurance for escrow deposit and traditional guarantee (*) | ||||
| Civil liability– D&O (Directors and Officers) | ||||
| Civil liability – works | ||||
| Civil liability – operations | ||||
| Other | ||||
| Total | ||||
| (*) |
| 28 | Operating revenue |
(a) Revenue from sanitation services:
| F-114 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| 2022 | 2021 | 2020 | ||||||||||
| Metropolitan Region of São Paulo | ||||||||||||
| Regional Systems | ||||||||||||
| Total | ||||||||||||
(b) Reconciliation from gross operating income to net operating income:
| 2022 | 2021 | 2020 | ||||||||||
| Revenue from sanitation services (i) | ||||||||||||
| Construction revenue | ||||||||||||
| Sales tax | ( | ) | ( | ) | ( | ) | ||||||
| Regulatory, Control and Oversight Fee (TRCF) | ( | ) | ( | ) | ( | ) | ||||||
| Net revenue | ||||||||||||
| (i) |
| 29 | Operating costs and expenses |
| 2022 | 2021 | 2020 | ||||||||||
| Operating costs | ||||||||||||
| Salaries, payroll charges and benefits | ( | ) | ( | ) | ( | ) | ||||||
| Pension plan obligations | ( | ) | ( | ) | ( | ) | ||||||
| Construction costs (Note 26) | ( | ) | ( | ) | ( | ) | ||||||
| General supplies | ( | ) | ( | ) | ( | ) | ||||||
| Treatment supplies | ( | ) | ( | ) | ( | ) | ||||||
| Outsourced services | ( | ) | ( | ) | ( | ) | ||||||
| Electricity | ( | ) | ( | ) | ( | ) | ||||||
| F-115 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| General expenses | ( | ) | ( | ) | ( | ) | ||||||
| Depreciation and amortization | ( | ) | ( | ) | ( | ) | ||||||
| ( | ) | ( | ) | ( | ) | |||||||
| Selling expenses | ||||||||||||
| Salaries, payroll charges and benefits | ( | ) | ( | ) | ( | ) | ||||||
| Pension plan obligations | ( | ) | ( | ) | ( | ) | ||||||
| General supplies | ( | ) | ( | ) | ( | ) | ||||||
| Outsourced services | ( | ) | ( | ) | ( | ) | ||||||
| Electricity | ( | ) | ( | ) | ( | ) | ||||||
| General expenses | ( | ) | ( | ) | ( | ) | ||||||
| Depreciation and amortization | ( | ) | ( | ) | ( | ) | ||||||
| ( | ) | ( | ) | ( | ) | |||||||
| Bad debt expense, net of recoveries (Note 10 (c)) | ( | ) | ( | ) | ( | ) | ||||||
| Administrative expenses | ||||||||||||
| Salaries, payroll charges and benefits | ( | ) | ( | ) | ( | ) | ||||||
| Pension plan obligations | ( | ) | ( | ) | ( | ) | ||||||
| General supplies | ( | ) | ( | ) | ( | ) | ||||||
| Outsourced services | ( | ) | ( | ) | ( | ) | ||||||
| Electricity | ( | ) | ( | ) | ( | ) | ||||||
| General expenses | ( | ) | ( | ) | ( | ) | ||||||
| Depreciation and amortization | ( | ) | ( | ) | ( | ) | ||||||
| Tax expenses | ( | ) | ( | ) | ( | ) | ||||||
| ( | ) | ( | ) | ( | ) | |||||||
| Operating costs and expenses | ||||||||||||
| Salaries, payroll charges and benefits | ( | ) | ( | ) | ( | ) |
| F-116 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Pension obligations | ( | ) | ( | ) | ( | ) | ||||||
| Construction costs (Note 26) | ( | ) | ( | ) | ( | ) | ||||||
| General supplies | ( | ) | ( | ) | ( | ) | ||||||
| Treatment supplies | ( | ) | ( | ) | ( | ) | ||||||
| Outsourced services | ( | ) | ( | ) | ( | ) | ||||||
| Electricity | ( | ) | ( | ) | ( | ) | ||||||
| General expenses | ( | ) | ( | ) | ( | ) | ||||||
| Depreciation and amortization | ( | ) | ( | ) | ( | ) | ||||||
| Tax expenses | ( | ) | ( | ) | ( | ) | ||||||
| Bad debt expense, net of recoveries (Note 10 (c)) | ( | ) | ( | ) | ( | ) | ||||||
| ( | ) | ( | ) | ( | ) |
| 30 | Financial Income (Expenses) |
| 2022 | 2021 | 2020 | ||||||||||
| Financial expenses | ||||||||||||
| Interest and charges on borrowings and financing – local currency | ( | ) | ( | ) | ( | ) | ||||||
| Interest and charges on borrowings and financing – foreign currency | ( | ) | ( | ) | ( | ) | ||||||
| Other financial expenses | ( | ) | ( | ) | ( | ) | ||||||
| Income tax over international remittance | ( | ) | ||||||||||
| Inflation adjustment on borrowings and financing | ( | ) | ( | ) | ( | ) | ||||||
| Other inflation adjustments | ( | ) | ( | ) | ( | ) | ||||||
| Interest and inflation adjustments on provisions | ( | ) | ( | ) | ( | ) | ||||||
| Total financial expenses | ( | ) | ( | ) | ( | ) | ||||||
| Financial income | ||||||||||||
| Inflation adjustment gains | ||||||||||||
| F-117 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Income on financial investments | ||||||||||||
| Interest income | ||||||||||||
| Cofins and Pasep | ( | ) | ( | ) | ( | ) | ||||||
| Other | ||||||||||||
| Total financial income | ||||||||||||
| Financial income (expenses), net before exchange rate changes | ( | ) | ( | ) | ( | ) | ||||||
| Exchange gains (losses) | ||||||||||||
| Exchange rate changes on borrowings and financing | ( | ) | ||||||||||
| Exchange rate changes on assets | ( | ) | ||||||||||
| Other exchange rate changes | ( | ) | ||||||||||
| Exchange rate changes, net | ( | ) | ||||||||||
| Financial income (expenses), net | ( | ) | ( | ) | ( | ) |
| 31 | Other operating income (expenses), net |
| 2022 | 2021 | 2020 | ||||||||||
| Other operating income, net | ||||||||||||
| Other operating expenses | ( | ) | ( | ) | ||||||||
| Other operating income (expenses), net | ( | ) | ||||||||||
Other operating income includes revenue from the sale of property, plant and equipment, sale of contracts awarded in public bids, right to sell electricity, indemnities and reimbursement of expenses, fines and guarantees, property leases, reuse water, PURA projects and services, net of Cofins and Pasep.
| F-118 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
Other operating expenses usually record the derecognition of concessions assets due to obsolescence, discontinued construction works, unproductive wells, projects considered economically unfeasible, losses on property, plant and equipment, estimated losses and operational assets indemnification.
| 32 | Commitments |
The Company has agreements to manage and maintain its activities, as well as to build new projects aiming at achieving the objectives proposed in its target plan. Below, the main unrecorded committed amounts as of December 31, 2020:
| 1 year | 1-3 years | 3-5 years | More than 5 years | Total | ||||||||||||||||
| Contractual obligations – Expenses | ||||||||||||||||||||
| Contractual obligations – Investments | ||||||||||||||||||||
| Total | ||||||||||||||||||||
| 33 | Supplemental cash flow information |
| 2022 | 2021 | 2020 | ||||||||||
| Total additions to contract assets (Note 14) | ||||||||||||
| Total additions to intangible assets (Note 15 (b)) | ||||||||||||
| Items not affecting cash (see breakdown below) | ( | ) | ( | ) | ( | ) | ||||||
| Total additions to intangible assets as per statement of cash flows | ||||||||||||
| F-119 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
| Investments and financing operations affecting intangible assets but not cash: | ||||||||||||
| Interest capitalized in the year (Note 14 (a)) | ||||||||||||
| Contractors payable | ||||||||||||
| Program contract commitments | ||||||||||||
| Performance agreements | ||||||||||||
| Right of use | ||||||||||||
| Construction margin (Note 26) | ||||||||||||
| Agreement with the municipality of Mauá | ||||||||||||
| Total | ||||||||||||
| 34 | Events after the reporting period |
| ● | Replacement of the CEO |
On January 12, 2023, the Board of Directors elected Mr. André Gustavo Salcedo Teixeira Mendes as CEO of the Company, replacing Mr. Benedito Pinto Ferreira Braga Junior. Additionally, under paragraph 2 of article 8 and article 12 of the Bylaws, Mr. André Gustavo Salcedo Teixeira Mendes will be part of the Board of Directors as long as he holds office as CEO.
| ● | Election of new Executive Board members |
At a meeting held on January 30, 2023, the new members elected for the Executive Board were:
(i) Mr. Bruno Magalhães D’Abadia, as Technology, Project, and Environment Officer, to replace Mr. Alceu Segamarchi Junior;
(ii) Mr. Roberval Tavares de Souza, as Regional Systems Officer, to replace Mr. Antônio Carlos Teixeira;
| F-120 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements Years ended December 31, 2022, 2021 and 2020 Amounts in thousands of reais, unless otherwise indicated |
(iii) Ms. Paula Alessandra Bonin Costa Violante, as Metropolitan Officer, to replace Mr. Ricardo Daruiz Borsari.
Furthermore, on February 9, 2023, the Board of Directors elected new members for the Executive Board:
(i) Ms. Catia Cristina Teixeira Pereira, as Chief Economic, Financial, and Investor Relations Officer, as of March 1, 2023;
(ii) Ms. Sabrina de Menezes Correa Furstenau Sabino, as Chief Corporate Management Officer.
Finally, further to the Material Fact disclosed on January 30, 2023, the Company informs that the Board of Directors rectified the resolution regarding the positions to be held on the Executive Board on that date, whereby the Executive Officers elected at that meeting will now be responsible for the following Offices:
| ● | Mr. Bruno Magalhães D’Abadia, Regional Systems Board |
| ● | Mr. Roberval Tavares de Souza, Metropolitan Board |
| ● | Ms. Paula Alessandra Bonin Costa Violante, Technology, Project, and Environment Board |
| ● | Amendment to the Extraordinary Tariff Revision |
On February 16, 2023, the São Paulo State Utility Services Regulatory Agency (ARSESP) approved an amended schedule of the Extraordinary Tariff Revision, as follows:
| Stages | Date |
| Until |
| F-121 |
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2022, 2021 and 2020
Amounts in thousands of reais, unless otherwise indicated
| ● | Extraordinary Tariff Revision Result and Annual Tariff Readjustment |
On April 6, 2023, in continuity to the Material Facts released on December 21, 2022 and February 16, 2023, SABESP informed its shareholders and the market in general that, the São Paulo State Utility Services Regulatory Agency (ARSESP) released Resolution nº 1,394/2023 related to the Extraordinary Tariff Revision and the Resolution nº 1,395/2023, which presents the new tariff values, authorizing the Company to apply a total tariff readjustment of 9.5609% to its current tariffs, result of the following composition:
| ● | Contract with International Finance Corporation – IFC |
On April 7, 2023, SABESP informed its shareholders and the market in general, the ratification of the unenforceability of the bidding process for hiring specialized technical services to provide support and consultancy to the State in carrying out studies on SABESP's Privatization was published in the Official Gazette of the State of São Paulo.
In this regard, the contract with International Finance Corporation – IFC was signed on April 10, 2023. IFC is an agency linked to the World Bank, which will act as the advisor in this process.
| F-122 |