20-F 1 sbsform20f_2012.htm FORM 20-F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20----F
(cid:1)(cid:1)(cid:1)(cid:1) REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
(cid:2)(cid:2)(cid:2)(cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2012
(cid:1)(cid:1)(cid:1)(cid:1) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the transition period from ________________ to _______________________
OR
(cid:1)(cid:1)(cid:1)(cid:1) SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report__________________________
Commission file number 001----31317
Companhia de Saneamento Básico do Estado de São Paulo–SABESP
(Exact name of Registrant as specified in its charter)
Basic Sanitation Company of the State of São Paulo----SABESP
(Translation of the Registrant’s name into English)
Federative Republic of Brazil
(Jurisdiction of incorporation or organization)
Rua Costa Carvalho, 300
05429----900 São Paulo, SP, Brazil
(Address of principal executive offices)
Rui de Britto Álvares Affonso
raffonso@sabesp.com.br
(+55 11 3388 8247)
Rua Costa Carvalho, 300 05429----900 São Paulo, SP, Brazil
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares (1), without par value
American Depositary Shares, evidenced by American Depositary Receipts, each representing
one Common Share (2)
Name of each exchange on which registered
New York Stock Exchange*
New York Stock Exchange
(1) On April 22, 2013 our shareholders approved a stock split, following which each common share represented three new Common Shares.
* Not for trading purposes, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the Securities and Exchange
Commission.
(2) Until January 23, 2013, each American Depositary Share represented two Common Shares. As of January 24, 2013, each American Depositary Share represents one
Common Share.
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.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
683,509,869 Shares of Common Stock
Yes (cid:2)(cid:3)No (cid:1)(cid:4)
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 (cid:1)(cid:3)No (cid:2)(cid:4)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past
90 days.
Yes (cid:2)(cid:3)No (cid:1)(cid:4)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted 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 and post such files).
Yes (cid:2)(cid:3)No (cid:1)(cid:4)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:2)(cid:3)Accelerated filer (cid:1)(cid:3)Non-accelerated filer (cid:1)(cid:4)
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP (cid:1)(cid:3)International Financial Reporting Standards as issued by the International Accounting Standards Board (cid:2)(cid:3)Other (cid:1)(cid:4)
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
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).
Item 17 (cid:1)(cid:3)Item 18 (cid:1)(cid:4)
Yes (cid:1)(cid:3)No (cid:2)(cid:4)
TABLE OF CONTENTS
PART I
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 1.
OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 2.
KEY INFORMATION
ITEM 3.
ITEM 4.
INFORMATION ON THE COMPANY
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10. ADDITIONAL INFORMATION
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING
PART II
[RESERVED]
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
ITEM 16.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16G. CORPORATE GOVERNANCE
ITEM 16H. MINE SAFETY DISCLOSURE
PART III
ITEM 17.
ITEM 18.
ITEM 19.
SIGNATURES
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
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General
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
We maintain our books and records in reais. We prepare our consolidated financial statements in accordance with International Financial Reporting Standards, or
IFRS, as issued by the International Accounting Standards Board, or the IASB. Our consolidated financial statements as of December 31, 2012 and 2011 and for the
three years ended December 31, 2012 have been audited, as stated in the report appearing herein, and are included in this annual report on Form 20-F.
We also prepare individual financial statements in accordance with accounting practices adopted in Brazil, or Brazilian GAAP, which include the pronouncements
issued by the CPC, for certain purposes, including for the calculation of dividends.
Convenience Translations
We have translated some of the real amounts contained in this annual report into U.S. dollars. The rate used to translate such amounts in respect of the year ended
December 31, 2012 was R$2.0435 to US$1.00, which was the commercial rate for the purchase of U.S. dollars in effect on December 31, 2012, as reported by the
Central Bank. The U.S. dollar equivalent information presented in this annual report is provided solely for the convenience of the reader and should not be construed
as implying that the real amounts represent, or could have been or could be converted into, U.S. dollars at the above rate. See “Item 3.A. Selected Financial Data—
Exchange Rates” for more detailed information regarding the Brazilian foreign exchange system and historical data on the exchange rate of the real against the
U.S. dollar.
Rounding
Some percentages and numbers included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables
may not be an arithmetic aggregation of the figures that precede them.
Other Information
In this annual report, unless the context otherwise requires, references to “we,” “us,” “our,” “Company,” or “SABESP” refer to Companhia de Saneamento Básico
do Estado de São Paulo – SABESP.
In addition, references to:
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“real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil;
“U.S. dollars” or “US$” are to the United States dollar, the official currency of the United States;
“Brazil” are to the Federative Republic of Brazil;
“State” are to the State of São Paulo, which is also our controlling shareholder;
“federal government” and “Brazilian government” are to the federal government of the Federative Republic of Brazil and “state government” are to the state
government 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 38
municipalities, including the city of São Paulo;
“Regional systems” are to the area where the Regional systems executive office operates, comprising 325 municipalities in the interior and coastline regions
of the State of São Paulo;
“water coverage ratio” are to the ratio between the number of residences connected to the water supply network, divided by the number of urban residences in
a certain area; and
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“sewage coverage ratio” are to the ratio between the number of residences connected to the sewage collection network, divided by the number of urban
residences in a certain area.
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 rate, sewage lines (in kilometers), savings achieved and investment in improvement 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), or IBGE, and the State Data Analysis System Foundation
(Fundação Sistema Estadual de Análise de Dados) or SEADE, among others. We have no reason to believe any of this information is inaccurate in any material
respect.
References to urban and total population in this annual report are estimated based on a research prepared by SEADE: “Projections for the State of São Paulo –
Population and Residences until 2025” (Projeções para o Estado de São Paulo – População e Domicílios até 2025).
3
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:
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general economic, political, demographical and other conditions in Brazil and in other emerging market countries;
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;
fluctuations in inflation, interest rates and exchange rates in Brazil;
the interests of our controlling shareholder;
our ability to collect amounts owed to us by our controlling shareholder and by municipalities;
our ability to continue to use certain reservoirs under current terms and conditions;
our capital expenditure program and other liquidity and capital resources requirements;
droughts, water shortages, intensive rain and other climatic events;
power shortages, rationing of energy supply or significant changes in energy tariffs;
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;
the lack of formal agreements between our company and certain municipalities to which we provide water and sewage services, including cities comprising
metropolitan regions, and the fact that the State and municipal governments share competency regarding these services;
the municipalities’ ability to terminate our existing concession agreements prior to their expiration date and our ability to renew such agreements;
our ability to provide water and sewage services in additional municipalities and to maintain the right to provide the services for which we currently have
contracts;
the size and growth of our customer base;
our ability to comply with the requirements regarding water and sewage service levels included in our agreements with municipalities;
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;
our exposure to probable increases in the frequency of extreme weather conditions;
the outcome of our pending or future legal proceedings;
our management’s expectations and estimates relating to our future financial performance;
4
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the regulations issued by the São Paulo State Sanitation and Energy Regulatory Agency, or ARSESP, regarding several aspects of our business, including
limitations on our ability to set and adjust our 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.
5
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
PART I
Not applicable.
ITEM 3.
KEY INFORMATION
A.
Selected Financial Data
The following selected financial data should be read in conjunction with our consolidated financial statements (including the notes thereto), “Item 5. Operating
and Financial Review and Prospects” and “Presentation of Financial and Other Information.”
The selected financial data as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 have been derived from our
consolidated financial statements, prepared in accordance with IFRS, and included in this annual report. The selected financial data as of December 31, 2010, 2009
and 2008 and for the years ended December 31, 2009 and 2008 have been derived from our consolidated financial statements, prepared in accordance with IFRS,
which is not included in this annual report.
We have included information with respect to the dividends and/or interest attributable to shareholders’ equity paid to holders of our common shares since
January 1, 2008 in reais and in U.S. dollars translated from reais at the commercial market selling rate in effect as of the payment date under the caption “Item 8.
Financial Information—Dividends and Dividend Policy—Payment of Dividends.” We prepare individual financial statements in accordance with Brazilian GAAP for
certain purposes, including for the calculation of dividends.
The following tables present our selected financial data as of and for each of the periods indicated.
IFRS Summary Financial Data
Year ended December 31,
2012
(in millions of
U.S. dollars)
2012
2011
2010
2009
2008
(in millions of reais, except per share and per ADS(1) data)
Statement of operations data:
Net operating revenues
Cost of sales and services
Gross profit
Selling expenses
Administrative expenses
Operating profit
Financial income (expenses), net
Net income
Earnings per share – basic and diluted (2)
Earnings per ADS – basic and diluted (*) (2)
Dividends and interest on shareholders’ equity per
share (2)
Dividends and interest on shareholders’ equity per
ADS (*) (2)
Weighted average number of common shares
outstanding (2)
______________
(1) American Depositary Shares, or ADSs.
5,262.7
(3,163.9)
2,098.8
(341.5)
(355.3)
1,392.4
(147.5)
935.6
1.37
1.37
0.32
0.32
10,754.4
(6,465.4)
4,289.0
(697.8)
(726.1)
2,845.3
(301.4)
1,911.9
2.80
2.80
0.66
0.66
9,941.6
(6,031.1)
3,910.5
(619.5)
(846.6)
2,354.3
(633.6)
1,223.4
1.79
1.79
0.43
0.43
9,231.0
(5,194.5)
4,036.5
(712.9)
(653.2)
2,672.2
(379.4)
1,630.5
2.39
2.39
0.57
0.57
8,579.5
(5,087.3)
3,492.2
(614.4)
(717.1)
2,120.3
(10.0)
1,507.7
2.21
2.21
0.58
0.58
7,809.3
(4,482.9)
3,326.4
(499.7)
(580.0)
2,121.2
(973.0)
862.9
1.26
1.26
0.43
0.43
683,509,869
683,509,869
683,509,869
683,509,869
683,509,869
(*) On January 10, 2013, our board of directors approved a change in the ratio of American Depositary Receipts (“ADRs”), to common shares on the New York Stock Exchange (“NYSE”), from 1:2 to 1:1.
We have calculated the earnings per ADS and dividends and interest on shareholders’ equity per ADS for the 2012, 2011, 2010, 2009 and 2008, according to a ratio of 1:1 for comparison purposes.
(2) On April 22, 2013, our shareholders approved a stock split, following which each common share represented three new common shares. Therefore, the per share information in the selected financial data
has been revised to give effect to the stock split retrospectively to all periods presented.
6
2012
(in millions of U.S.
dollars)
As of December 31,
2012
2011
2010
(in millions of reais)
2009
2008
187.6
10,761.9
13,054.0
669.1
3,769.0
202.8
7,320.9
5,733.1
3,035.8
1,143.2
(978.1)
(277.1)
383.4
21,991.9
26,675.8
1,367.4
7,701.9
414.4
14,960.2
11,715.6
6,203.7
2,336.2
(1,998.8)
(566.3)
356.5
20,141.7
25,215.0
1,630.0
6,966.3
247.5
14,669.1
10,545.9
6,203.7
2,717.1
(2,008.3)
(548.0)
249.6
18,546.8
23,350.6
1,242.1
7,022.5
354.3
13,668.8
9,681.8
6,203.7
2,083.0
(2,091.4)
1,226.5
190.4
16,917.5
20,243.1
1,009.9
5,548.0
365.4
11,804.5
8,438.6
6,203.7
2,072.5
(1,964.0)
36.9
179.4
15,462.8
18,711.3
1,446.6
5,414.3
275.0
11,386.3
7,325.0
6,203.7
2,103.9
(1,640.3)
(295.2)
(995.1)
(2,033.5)
(2,211.1)
(1,901.5)
(1,982.4)
(1,545.9)
Balance sheet data:
Property, plant and equipment
Intangible assets
Total assets
Current portion of long-term loans and financing
Long-term loans and financing
Interest on shareholders’ equity payable
Total liabilities
Equity
Capital stock
Other financial information:
Cash generated from by operating activities
Cash used in investing activities
Cash provided by (used in) financing activities
Purchases of intangible assets and property, plant and
equipment as presented in our statement of cash
flow
Operating Data
Number of water connections (in thousands)
Number of sewage connections (in thousands)
Percentage of population with water connections
(in percentages)
Percentage of population with sewer connections
(in percentages)
Percentage of treated sewer (3) (in percentages)
Volume of water billed during period (in millions of
cubic meters)
Water loss percentage during period (average)
(in percentages)(4)
Water loss per connection (average)(5)
Number of employees
______________
2012
7,679
6,128
99
83
77
2,094
25.7
393
15,019
As of and for the year ended December 31,
2010
2009
2011
7,481
5,921
99
82
76
2,045
25.6
395
14,896
7,295
5,718
99
81
75
1,992
26.0
403
15,330
7,118
5,520
99
80
74
1,917
26.0
402
15,103
2008
6,945
5,336
99
79
72
1,878
27.9
436
16,649
(2) On April 22, 2013, our shareholders approved a stock split, following which each common share represented three new common shares. Therefore, the per share information in the selected financial data
has been revised to give effect to the stock split retrospectively to all periods presented.
(3) Treated sewage as a percentage of collected sewage.
(4) Includes both physical and non-physical water loss. Water loss percentage represents the quotient of (i) the difference between (a) the total amount of water produced by us less (b) the total amount of
water invoiced by us to customers minus (c) the volume of water set out below that we exclude from our calculation of water loss, divided by (ii) the total amount of water produced.
We exclude the following from our calculation of water loss: (i) water discharged for periodic maintenance of water mains 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 favelas (shantytowns).
(5) Measured in liters/connection per day, according to the method by which we measure water loss, based on worldwide market practice for the sector. See “Item 4.B. Business Overview—Description of
Our Activities—Water Operations—Water Loss.”
7
Exchange Rates
In the past, the Brazilian National Monetary Council (Conselho Monetário Nacional), or the CMN, has introduced changes to the Brazilian foreign exchange
regime, such as unifying the Commercial and Floating Markets and easing the rules governing the ability of Brazilian residents to acquire foreign currency, among
others. On March 24, 2010, the CMN and the Central Bank approved Resolution No. 3,844, which led to a series of measures to consolidate and simplify Brazilian
foreign exchange market regulations.
The Brazilian foreign exchange system allows any person or legal entity to purchase or sell foreign currency and make international transfers of reais, regardless of
the amount, subject to certain regulatory procedures.
The Brazilian currency has experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies in recent decades. Between
2003 and mid-2008, the real appreciated significantly against the U.S. dollar with the exchange rate reaching R$1.634 in August 2008. Primarily as a result of the
global financial crisis, the real depreciated 32.0% against the U.S. dollar during 2008 and closed the year at R$2.337 per US$1.00. The real strengthened again by
25.5% in 2009 and 4.3% in 2010, but depreciated against the U.S. dollar by 12.6% in 2011 and 8.94% in 2012. On December 31, 2012, 2011 and 2010, the
real/U.S. dollar exchange rate was R$2.043, R$1.876 and R$1.666 per US$1.00, respectively.
The Central Bank sometimes intervenes in the market to combat instability in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian
government will continue to let the real float freely or will intervene in the exchange rate through a currency band system or other proceedure. The real may fluctuate
against the U.S. dollar substantially in the future. For further information on this risk, see “Item 3.D. Risk Factors—Risks Relating to Brazil—Exchange rate instability
may adversely affect us and the market price of our common shares or ADSs.”
Exchange rate fluctuations will affect the U.S. dollar equivalent of the real price of our common shares on the São Paulo Stock Exchange (BM&FBOVESPA
S.A. - Bolsa de Valores, Mercadorias e Futuros), or the BM&FBOVESPA, as well as the U.S. dollar equivalent of any distributions we make in reais with respect to
our common shares.
The following tables set forth the selling rate, expressed in reais per U.S. dollar (R$/US$), for the periods indicated.
Year ended December 31,
Year end
Average(1)
High
Low
R$ per US$1.00
2008
2009
2010
2011
2012
Month ended
October 31, 2012
November 30, 2012
December 31, 2012
January 31, 2013
February 28, 2013
March 31, 2013
April 30, 2013
May 2013 (through May 8, 2013)
______________
Source: Central Bank
(1) Average of the exchange rates on the last day of each period.
2.3370
1.7412
1.6662
1.8758
2.0435
1.8375
1.9935
1.7593
1.6746
1.9550
R$ per US$1.00
2.5004
2.4218
1.8811
1.9016
2.1121
Period end
Average(1)
High
Low
2.0298
2.0678
2.0778
2.0311
1.9733
1.9828
2.0022
2.0094
2.0382
2.1074
2.1121
2.0471
1.9893
2.0185
2.0244
2.0143
2.0313
2.1074
2.0435
1.9883
1.9754
2.0138
2.0017
2.0030
8
1.5593
1.7024
1.6554
1.5345
1.7024
2.0224
2.0312
2.0435
1.9883
1.9550
1.9528
1.9736
2.0030
The following tables set forth the selling rate, expressed in reais per Japanese Yen (R$/¥1.00):
Year ended December 31,
Year end
Average(1)
High
Low
R$ per ¥1.00
0.0258
0.0188
0.0205
0.0243
0.0237
0.0180
0.0213
0.0201
0.0211
0.0245
R$ per ¥1.00
0.0272
0.0268
0.0212
0.0249
0.0263
Period end
Average(1)
High
Low
0.0255
0.0237
0.0218
0.0214
0.0214
0.0205
0.0205
0.0203
0.0255
0.0248
0.0228
0.0212
0.0209
0.0206
0.0205
0.0203
0.0259
0.0257
0.0235
0.0216
0.0214
0.0218
0.0218
0.0205
0.0144
0.0186
0.0183
0.0186
0.0211
0.0252
0.0237
0.0218
0.0209
0.0203
0.0199
0.0199
0.0203
2008
2009
2010
2011
2012
Month ended
October 31, 2012
November 30, 2012
December 31, 2012
January 31, 2013
February 28, 2013
March 31, 2013
April 30, 2013
May 2013 (through May 8, 2013)
______________
Source: Central Bank
(1) Average of the exchange rates on the last day of each period.
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:
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the regulatory environment related to our business operations and concession agreements;
interest rates;
exchange rates and exchange controls and restrictions on remittances abroad;
currency fluctuations;
inflation;
liquidity of the Brazilian capital and lending markets;
tax and regulatory policies and laws;
economic and social instability; and
other political, diplomatic, social and economic developments in or affecting Brazil.
For example, the Brazilian government may change its tax policy, such as changing tax rates or imposing temporary taxes. If overall taxes are increased, we may
be unable to immediately recover the difference from our consumers, which may have an adverse effect on our financial condition and results of operations.
Uncertainty over whether the Brazilian government will implement changes in policies or regulations affecting these factors or others may contribute to economic
uncertainty in Brazil and to heightened volatility in the Brazilian securities market and in securities issued abroad by Brazilian issuers, which could have a material
adverse effect on us and on 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 experienced extremely high rates of inflation in the past. Inflation and the Brazilian government’s measures to combat inflation have had significant
negative effects on the Brazilian economy, contributing to economic uncertainty and heightened volatility in the Brazilian securities market. The Brazilian
government’s measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit
and reducing economic growth. The Special Clearing and Settlement System (Sistema Especial de Liquidação e Custódia), or SELIC, the official overnight interest
rate in Brazil, equaled 7.14%, 10.91% and 10.66% at the end of 2012, 2011 and 2010, respectively, in line with the target rate set by the Brazilian Committee on
Monetary Policy (Comitê de Política Monetária).
The annual rate of inflation, as measured by the General Market Price Index (Índice Geral de Preços—Mercado), or IGP-M index, fell from 9.95% in 2000 to
3.83% in 2006, increased to 7.75% in 2007 and further increased to 9.81% in 2008. According to the IGP-M index, Brazil underwent deflation of 1.71% in 2009,
followed by inflation of 7.81%, 5.1% and 11.32% in 2012, 2011 and 2010, respectively. Brazilian governmental actions, including interest rate decreases, intervention
in the foreign exchange market and actions to adjust or fix the value of the real, may trigger increases in inflation. If Brazil experiences high inflation again, our costs
and expenses may rise, we may be unable to increase our tariffs to counter the effects of inflation, and our overall financial performance may be adversely affected. 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.
Additionally, in the event of an increase in inflation, the Brazilian government may choose to raise official interest rates. Increases in interest rates would not only
affect our cost of funding, but could also have a material adverse effect on us and may also adversely affect the market price of our common shares or ADSs.
Exchange rate instability may adversely affect us and the market price of our common shares or ADSs.
The Brazilian currency experienced frequent and substantial devaluations in relation to the U.S. dollar and other foreign currencies during the decades leading up
to the mid-1990s. Throughout this period, the Brazilian government implemented various economic plans and exchange rate policies, including sudden devaluations,
periodic mini-devaluations (during which the frequency of adjustments ranged from daily to monthly), floating exchange rate systems, exchange controls and dual
exchange rate markets. From time to time since that period, there have continued to be significant fluctuations in the exchange rate between the Brazilian real and the
U.S. dollar and other currencies. For example, the real appreciated 13.8%, 9.5% and 20.7% against the U.S. dollar in 2005, 2006 and 2007, respectively. In 2008,
primarily as a result of the global financial crisis, the real depreciated 32.0% against the U.S. dollar and closed the year at R$2.337 per US$1.00. The real
strengthened again by 25.5% in 2009 and 4.3% in 2010, but depreciated against the U.S. dollar by 12.6% in 2011 and 8.94% in 2012. On December 31, 2012, 2011
and 2010, the real/U.S. dollar exchange rate was R$2.043, R$1.876 and R$1.666 per US$1.00, respectively. There can be no assurance that the real will not depreciate
further against the U.S. dollar. As of April 23, 2013, the commercial selling rate as reported by the Central Bank was R$2.0435 per US$1.00.
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Depreciation of the real against the U.S. dollar could create inflationary pressures in Brazil and cause 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 real against the U.S. dollar could also lead to decreased consumer spending,
deflationary pressures and reduced growth of the economy as whole.
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, 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. We had a total foreign currency denominated debt of R$3,215.8 million as of December 31, 2012 and we anticipate that we may incur substantial additional
amounts of foreign currency denominated debt in the future. In 2012, our results of operations were negatively affected by the 8.94% depreciation of the real against
the U.S. dollar, and an appreciation of the real against the yen by 2.43% which led to a R$50.5 million negative impact on our foreign exchange result, net. 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.
Developments and the perception of risk in other countries, especially in the United States and in emerging market countries, may adversely affect the market
price of Brazilian securities, including our common shares and ADSs.
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 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.
The global financial crisis has caused significant consequences, including in 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 have and may continue to, directly or
indirectly, materially and adversely affect us and the price of securities issued by Brazilian companies, including our common shares and ADSs.
Risks Relating to Our Control by the State of São Paulo
We are controlled by the State of São Paulo, whose interests may differ from the interests of non-controlling, including holders of ADSs.
As it owns the majority of our common shares, the State of São Paulo is able to determine our operating policies and strategy, control the election of a majority of
the members of our board of directors and appoint our senior management. As of April 23, 2013, the State owned 50.3% of our outstanding common shares.
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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 but that did not necessarily enhance our business and results of operations. The State
may direct our company to act in this manner again in the future. These decisions by the State may not be in the interests of our non-controlling, including holders of
ADSs. See “Item 5.A. Operating and Financial Review and Prospects—Certain Transactions with Controlling Shareholder.”
Following the elections for State governor in 2010, the new governor appointed Ms. Dilma Seli Pena as our chief executive officer in 2011, and Mr. Edson de
Oliveira Giriboni, the Secretary of State for the State Secretariat for Sanitation and Water Resources (Secretaria de Saneamento e Recursos Hídricos do Estado de São
Paulo), was elected as chairman of our board of directors. Future changes in policy by State government may cause changes in all or some of the members of our
management, which may have a material adverse effect on our business and results of operations.
The State and some State entities owe us substantial unpaid debts. We cannot assure you as to when or whether the State will pay us.
Historically, the State and some State entities have delayed payment of substantial amounts owed to us related to water and sewage services. Aditionally, 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. As of December 31, 2012, the State owed us R$65.5 million for water and sewage services. With respect to
payment of pensions on behalf of the State, we had a non-contested reimbursement in the amount of R$196.9 million as of December 31, 2012 for actuarial liability,
and a contested amount of R$1,351.2 million as of the same date. We do not record this contested amount as a reimbursement for actuarial liability due to the
uncertainty of payment by the State. In addition, as of December 31, 2012, we had a provision for an actuarial liability in the amount of R$1,547.2 million in respect of
future supplemental pension payments the State does not accept responsibility for paying. The amounts owed to us by the State for water and sewage services and
reimbursements for pensions paid may increase in the future.
We have entered into agreements with the State to settle the overdue amounts that relate to water and sewage services. For a detailed discussion of these
agreements, see “Item 7.B. Related Party Transactions, Agreements with the State of São Paulo” and Note 8 of our consolidated financial statements. Under these
agreements, the State agreed that the amounts due with respect to water and sewage services through December 2007 could be settled through the application of
dividends payable by us to the State. In December 2007, the State agreed to pay us the outstanding balance as of November 30, 2007 of R $133.7 million in
60 consecutive monthly installments, beginning on January 2, 2008, and an amount of R$236.1 million relating to a portion of the unpaid invoices from March 2004
through October 2007 for water and sewage services. We agreed to pay the State, in the period from January through March 2008, the outstanding balance of
dividends owed to it in respect of interest on shareholders’ equity in our company from March 2004 through December 2006, in the amount of R$400.8 million.
In March 2008, we entered into a commitment agreement with the State to settle the outstanding debt related to the reimbursement of the pension benefits we paid
on the State’s behalf. For a detailed discussion of this commitment agreement, see “Item 7.B. Related Party Transactions―Agreements with the State of São Paulo.”
Under this commitment agreement, we and the State agreed that the amounts owed to us with respect to the pensions we paid on behalf of the State could be partially
settled through the transfer of certain reservoirs to us that we use in the Alto Tietê System, which are owned by the State. Following this commitment agreement, in
November 2008 we and the State entered into a formal agreement relating to the pension benefits we paid on the State’s behalf. Under this agreement, the State
acknowledged that it owed us a total of R$915.3 million in this regard as of September 30, 2008, and we provisionally accepted the reservoirs in the Alto Tietê System
as partial payment (R$696.3 million) subject to the transfer of the property rights in the reservoirs to us. In November 2008, the State began to pay us the remaining
balance of R$219.0 million in 114 monthly installments through to early 2018. However, on October 29, 2003 the Public Prosecutor’s Office of the State of São Paulo
(Ministério Público do Estado de São Paulo) commenced legal proceedings alleging that the transfer of ownership of the Alto Tietê System reservoirs to us would be
illegal, on the basis that there is no specific legislative authorization for the transfer. We are unable to predict, however, whether and when these reservoirs will be
transferred to us and therefore whether and when we will receive payment or assets equivalent to the R$696.3 million owed. See “Item 8.A. Financial Information—
Consolidated Statements and Other Financial Information—Legal Proceedings—Other Legal Proceedings.”
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In addition to the R$915.3 million that the State acknowledged that it owed us under the November 2008 agreement, we are also negotiating with the State in
respect to the further amount that the State does not accept that it owes us. We are not able to assure you that we will be successful in these negotiations. Accordingly,
as of December 31, 2012, we have not recorded R$1,351.2 million related to the reimbursement that we believe is due to us for the pension benefits we paid on the
State’s behalf, but we have recorded R$1.547.2 million in pension obligations.
We cannot assure you when or if the State will pay the remaining overdue amounts it owes us. Due to the State’s history of not paying us in a timely manner for
water and sewage services, and not reimbursing us in a timely manner for the pension benefits we paid on its behalf, we cannot assure you that the amount of account
receivables owed to us by the State and some State entities will not significantly increase in the future.
In addition, certain municipalities and other government entities also owe us money. See “—We may face difficulties in collecting overdue amounts owed to us by
municipalities to which we provide water on a wholesale basis and municipal government entities.”
A state controlled company that has a concession to produce energy in the Guarapiranga and Billings reservoirs may require us to pay damages for the use of
water from these reservoirs.
Empresa Metropolitana de Águas e Energia S.A., or EMAE, may require us to financially compensate them for our use of water from the Guarapiranga and
Billings reservoirs, which they view as a loss of electricity that could otherwise be generated and sold. Additionally, payments to EMAE, which we were supposed to
have made by a specific deadline, were not made. As such, EMAE has requested compensation from us. In the event water from these reservoirs was no longer made
available to us, we would have to bring water in from locations further away, which would increase the risk of not being able to provide adequate service in the region,
as well as an increase in water transportation costs.
The majority shareholder of both EMAE and us, the state of São Paulo, may force a resolution regarding the dispute of water use from the Guarapiranga and
Billings reservoirs, which may have an adverse affect on our business.
Additionally, in the event we are required to make payments and compensation, our cash position and overall liquidity may be adversely affected.
We may be required to pay substantial charges for the use of reservoirs that are not our property.
We use the Billings and Guarapiranga reservoirs in order to provide water services. We are entitled to withdraw water from these reservoirs under a grant from the
State Department of Water and Energy (Departamento de Águas e Energia Elétrica do Estado de São Paulo), or DAEE. We are not currently charged for the use of
these reservoirs and are uncertain as to whether we will continue to be able to use the reservoirs without paying charges, or what the likely fee scale would be if one
were imposed. We may also be required to pay additional maintenance and operational costs for our use of these reservoirs. If we were required to pay substantial
charges to the owner or additional maintenance or operational costs for our use of these reservoirs, we could be materially and adversely affected.
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Risks Relating to Our Business
The Brazilian Basic Sanitation Law is still in the process of implementation and interpretation, and doubts remain as to its full impact on the industry.
ARSESP, the regulator, has the function to implement regulations under the Basic Sanitation Law within the State of São Paulo, and is in the process of
reviewing, implementing and proposing changes to São Paulo State water and sewage regulations, including potentially significant changes to the tariff
methodology and structure applicable to our business. The current regulatory uncertainty, and any of the changes that are currently proposed, may have an
adverse effect on our business.
Although Law No. 11,445, or the Basic Sanitation Law, has been in effect since early 2007, the full implementation of a number of its provisions remains subject
to regulations that have not yet been published. Federal Decree No. 7,217, which was enacted on June 21, 2010, and Law 11,445 implemented a first series of new
principles under the Basic Sanitation Law, including the following:
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for public-public partnership contracts (or program contracts), public hearings must be held with respect to bid announcements, and technical and economic
viability studies must be carried out;
the rights and obligations of customers and service providers, including penalties, are determined by the owner of the public service, not by the regulatory
agency;
the technical and financial viability of the provision of water and sewage services should be determined based on (i) capital contributions necessary to offer
the services and (ii) expected revenues from the provision of the service; and
when a regulated service is to be provided by different service providers, those providers must execute an agreement regulating their respective activities.
We cannot currently anticipate all the effects that the Basic Sanitation Law and the decree will have on our business and operations, if any.
The Basic Sanitation Law requires states to establish independent regulators with the responsibility of monitoring basic sanitation services and regulating tariffs.
Federal law No. 11,445/07 and São Paulo State Law No. 1,025/07 established the ARSESP, which regulates and supervises the basic sanitation services that we
provide in municipalities that have agreed to come under ARSESP’s jurisdiction. For the municipalities that have not yet agreed to come under ARSESP’s jurisdiction
for which we currently provide basic sanitation services, we determine tariffs based on State Decree 41,446/96. ARSESP has proposed or enacted a number of
regulatory changes, including the following:
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In 2008, the tariff adjustment formula was reviewed. In 2009, ARSESP opened the methodology for tariff revisions for public discussion and hearings. In
2010, ARSESP published Resolution No. 156. This resolution established the methodology and general criteria for the valuation of our regulatory asset base
to be used for purposes of tariff review processes and auditing. During 2011 and 2012 ARSESP held further public consultations regarding the methodology
for tariff revisions, which was finally specified and disclosed in April 2012. In November 2012, ARSESP published a preliminary technical note for public
consultation, proposing a preliminary initial maximum average tariff (P0) and efficiency gains factor (X), based on a preliminary evaluation of assets held by
us. Following further public consultations, in March 2013 ARSESP published two resolutions, Resolution No. 406 and Resolution No. 407.
Resolution No. 406 sets out the following: (i) an initial maximum average tariff (P0) and a preliminary asset base value to apply until the conclusion of an
external audit of our asset base, resulting in a tariff revision of 2.3509%; (ii) authorizes the repayment to consumers of the regulation and supervision rate of
0.5% immediately after the conclusion of the operational adjustments necessary for the inclusion of this rate in the bills in the municipalities where it will be
charged; (iii) ARSESP also establishes an annual tariff adjustment formula, to be implemented during the second tariff cycle, consisting of the IPCA variation
(a consumer price index) for the period, adjusted by an efficiency factor designed to transfer a portion of our productivity gains to consumers, and further
adjusted to reflect changes in service quality to be defined and applied as of the third year of the second tariff cycle. According to ARSESP’s timetable the
final maximum average tariff (P0) will be announced in August 2013 after the asset base value presented by us is audited.
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(cid:1)
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A tariff revision of to a rate of 2.3509% was implemented in April 2013 pursuant to Resolution No. 406. Additionally, we will pass an inspection fee of 0.5%
to consumers immediately after the conclusion of the operational adjustments necessary for the inclusion of this rate in the bills to municipalities where it will
be charged.
Resolution No. 407 authorizes us to pass on to the service bill legal charges defined by municipal legislation, which under the Program Contracts and the
Sewage and Water Supply Service Contracts must be considered in the tariff revision.
In April 2013, ARSESP passed Resolution No. 413, which effectively suspended Resolution No. 407, thereby postponing the authorization for the passing on of a
municipal tax to consumers’ bills, which, prior to this Resolution, had been established in Resolution No. 407. The final decision regarding Resolution No. 407 has
been postponed until August 2013.
In August 2012, ARSESP published Resolution No. 346, which established the principle that users should be compensated for any interruptions in water supply.
Implementation of this regulation has been suspended pending further technical discussions.
In 2011, ARSESP altered the standard contract that we are required to use in our relationships with retail customers, requiring that invoices be sent to the consumer
of the service rather than the owner of the property. We estimate that this change will affect ongoing legal disputes, particularly those regarding collection procedures,
as well as business discussions in general. Since this change is still being implemented, we are not currently able to predict its impact on our business.
In 2009 ARSESP enacted rules regarding the following:
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general terms and conditions for water and sewage services;
procedures for communication regarding any failure in our services;
penalties for deficiencies in the provision of basic sanitation services; and
procedures for confidential treatment of our customers’ private information.
We are currently evaluating the enforceability and legality of some of these rules. Implementation of these rules started during 2011, is currently ongoing, and is
expected to continue for the next few years. The implementation of the above mentioned rules will impact our commercial and operations processes, and may
adversely affect us in ways we cannot currently predict.
The Basic Sanitation Law also allows municipalities to create their own regulatory agencies rather than being subjected to overview by ARSESP, and a number of
municipalities have therefore created their own regulatory agencies. For example:
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The municipality of Lins, which had decided in 2007 to create its own regulatory authority, revisited this decision in 2010 and transferred the regulation of
water activities in Lins, including the setting of tariffs, to ARSESP. Lins has retained, however, the power to ultimately approve the tariff set by ARSESP.
The municipalities in which the hydrographic basins of the Piracicaba, Capivari and Jundiaí rivers are located created a consortium for the regulation and
supervision of our activities in that area in 2011. We are currently involved in legal proceedings in which this consortium is claiming that it has jurisdiction
over our activities in the municipality of Piracaia and that ARSESP has no right to regulate our activities or set tariffs in the municipality. We cannot predict
the outcome of this case or how it may impact our business.
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If other municipalities create new agencies or retain regulatory powers, we will be subject to regulation and supervision by them and to any limitations on our
services that they may set. We cannot foresee any changes that any such new agency may implement regarding our business. If any such changes are unfavorable,
they could materially and adversely affect us.
For more information on ARSESP regulations, see “Information on the Company—Business Overview—Government Regulation——”Tariff Regulation in the
State of São Paulo” and “Consumer Relations in the State of São Paulo.”
New joint entities will be set up to oversee basic sanitation services in metropolitan regions, including the São Paulo Metropolitan Region. 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 or what effect
this may have on our business, financial condition or results of operations.
There are some pending cases before the Brazilian Supreme Court regarding whether the right to execute concession and program agreements in metropolitan
regions belongs to the State or the municipal government. On February 28, 2013 the Brazilian Supreme Court decided a pending case on this matter related to the State
of Rio de Janeiro. A majority of the court held that the State of Rio de Janeiro and municipal governments must set up new joint entities to oversee the planning,
regulation and auditing of basic sanitation services in metropolitan regions. On March 6, 2013, the court ruled that this decision would come into effect after a 24-
month period over the State of Rio de Janeiro. Such decision may be considered a relevant precedent on this matter and therefore similar decisions may be taken on
other pending cases as well as on new cases that can be initiated. The São Paulo metropolitan region (including the municipalities to which we provide water on a
wholesale basis), one of which new decisions on such pending or new cases may apply, accounted for 74.1% of our gross revenue from services in 2012 (excluding
revenues relating to the construction of concession infrastructure). We cannot predict how the shared management of these operations could be carried out in the São
Paulo Metropolitan Region and other municipalities we operate or what effect it may have on our business, financial condition or results of operation.
The 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 54.7% of our gross operating revenues (excluding revenues relating to the
construction of concession infrastructure) in the year ended December 31, 2012.
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:
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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) would be responsible for planning water and sewage services for the City and for reviewing our investment plans.
The management committee consists of six members appointed for two-year terms. The State and the City of São Paulo have the right to appoint three
members each. 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:
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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, which total approximately R$500 million per year.
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(cid:1) We must transfer 7.5% of the gross revenues we derive under the convênio, 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.
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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 these obligations and addresses their compatibility with the sanitation plans for 363 in which we
operate, that includes the City of São Paulo and the Metropolitan region. The investment plan is not irrevocable and will be reviewed by our management committee
every four years, particularly with respect to the investments to be executed in the subsequent period.
Because we were not previously required to invest 13% of our gross revenues or transfer 7.5% of our gross revenues to the São Paulo Municipal Sanitation and
Infrastructure Fund as described above, our existing tariff and adjustment formula do not account for these requirements. Although ARSESP is required to ensure that
the tariffs will adequately compensate us for the services we provide, and ARSESP has published Resolution No. 407 authorizing us to pass on specified charges to the
municipalities and include these charges in our tariff revisions, Resolution No. 407 has not yet been implemented and the final decision concerning this has been
postponed until August 2013. If we cannot pass on these charges to our customers, our financial condition and results of operations could be materially adversely
affected. For further information see “Risk Factors – Risks Relating to Our Business – The Brazilian Basic Sanitation Law is still in the process of implementation and
interpretation, and doubts remain as to its full impact on the industry. ARSESP, the regulator, has the function to implement regulations under the Basic Sanitation
Law within the State of São Paulo, and is in the process of reviewing, implementing and proposing changes to São Paulo State water and sewage regulations, including
potentially significant changes to the tariff methodology and structure applicable to our business. The current regulatory uncertainty, and any of the changes that are
currently proposed, may have an adverse effect on our business.”
We currently lack formal agreements or concessions with 67 of the municipalities to which we provide service, and 38 of our existing concession agreements
will expire between 2013 and 2034. We may face difficulties in continuing to provide water and sewage services in return for payment in these and other
municipalities, and we cannot assure you that they will continue to purchase services from us on the same terms or at all.
As of December 31, 2012, we provided service to 363 municipalities, of which we held formal 30-year agreements with 258 municipalities (including the City of
São Paulo). We executed 33 of these agreements during 2012. The 258 municipalities with which we had formal agreements at year-end accounted for 69.9 % of our
total revenues for the year ended December 31, 2012 and 63.5% of our intangible assets as of December 31, 2012. Of the 67 served municipalities for which we lacked
formal agreements at year-end, we were in the process of actively renegotiating with all municipalities, including the municipality of Santos. Together, these 67
municipalities accounted for 18.6% of our total revenues for the year ended December 31, 2012 and 26.7% of our intangible assets as of that same date. Between 2013
and 2034, 38 of our existing concession agreements will expire. These 38 concession agreements accounted for 9.4% of our total revenues for the year ended
December 31, 2012 and 8.1% of our intangible assets as of that same date.
We may not be able to continue providing service on current terms, or at all, in the municipalities for which we do not have formal agreements, including the 67
for which we are renegotiating expired agreements. In particular, the lack of formal concessions or contractual rights in these municipalities means that we may not be
able to enforce our right to continue to provide services and we may face difficulties in being paid on a timely basis, or at all, for the services that we provide. If we are
successful in renegotiating the expired agreements, or executing formal agreements with the municipalities for which we have never had agreements, those agreements
may not contain terms that are as favorable as those under which we currently operate. We cannot make any such assumption because the Basic Sanitation Law
prevents us from planning, regulating and monitoring our services and it requires more stringent control by the municipalities or by ARSESP. The municipalities for
which we do not have formal agreements may choose to start providing water and sewage services directly themselves, or may run public tenders to select another
provider. They may set eligibility requirements for which we do not qualify and, if we do qualify and participate in these tenders, we may not win. In addition, our
ability to continue operating without formal agreements may be modified or cancelled by federal, state or municipal governments, court decisions or other factors.
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Any of these events could have a material adverse effect on our business, results of operations and financial condition. See “Item 4.B. Business Overview—Our
Operations” and “Item 4.B. Business Overview—Government Regulation—Concessions—Public Consortia and Cooperation Agreement Law for Joint Management.”
In the municipalities with which we did not have formal agreements by December 31, 2012, we continued operating with municipal approval or with judicial
support.
The 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.
The municipalities have the right to terminate our concessions if we fail to comply with our contractual or legal obligations, or if the municipality determines in
expropriation proceedings that early termination of the concession is in the public interest. If a municipality terminates our concession, we are entitled to be
indemnified for the unamortized portion of our investments.
The Basic Sanitation Law provides that on early termination of a concession, the entity that provides sanitation services should carry out a valuation of the assets
that relate to the services we provide, in order to calculate the unamortized portion of our investments. This valuation uses the criteria defined in the service contract
or, in the absence of a contract, is based on customary practice with respect to the services for the preceding 20 years. The resulting indemnification payment may be
less than the remaining value of the investments we made.
In addition, the São Paulo State constitution permits the municipalities to pay us this compensation in installments over 25 years. Receiving compensation over
this extended period after termination of a significant concession would have a material adverse effect on our financial condition. The Brazilian Supreme Court
suspended this deferred payment mechanism in a 1997 decision, but we cannot assure you that the mechanism will not be reinstated. This case is still awaiting a final
decision, but on March 15, 2004 the Attorney General issued an opinion that this payment method is unconstitutional. The Basic Sanitation Law reduced the maximum
time period for payment of indemnification in such cases to four years. This provision applies to concession agreements entered into prior to the enactment of the
Basic Sanitation Law only to the extent that the concession agreement does not contain a contractual indemnification provision, or we have not otherwise entered into
an agreement with the municipality with regard to such early termination. These provisions have not yet been tested by the courts and we are therefore unable to
predict the effect of the Basic Sanitation Law on our rights to indemnification for the early termination of any particular concession.
In 1997, the municipality of Santos enacted a law in order to repossess our water and sewage systems in Santos. We have adopted the necessary judicial measures
to contest this and continue to operate our services in Santos as of December 31, 2012.
In 1995, the municipality of Diadema terminated its concession agreement with us. We commenced legal proceedings against the municipality, which were settled
in 1996, but the municipality did not comply with the terms of the settlement. In December 2008, we entered into a memorandum of understanding with the State of
São Paulo, the municipality of Diadema and the State Secretariat for Sanitation and Water Resources, previously known as the State Secretariat for Sanitation and
Energy (Secretaria de Saneamento e Energia do Estado de São Paulo). Under this memorandum of understanding the parties agreed to conclude negotiations and
settle all outstanding amounts, and we agreed to stay the collection proceedings we had filed against the municipality. In 2011 we and the municipality of Diadema
agreed to develop shared infrastructure for water and sewage services through a mixed capital company to be called Companhia de Agua e Esgoto de Diadema, or
CAED. According to the agreement, the amount owed to us by Diadema would be repaid through the issuance of shares in CAED. However, CAED has not yet been
established, and we cannot predict whether or when it will be created or begin operations. Feasibility studies have been completed and indicate that CAED would have
a viable business, but the Diadema municipal authorities have started new negotiations to amend the legislation that provided for the setting up of CAED. We can give
no assurance that we will recover the amount owed to us by Diadema, whether through an investment in CAED or otherwise.
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For further information on these proceedings, see “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Legal
Proceedings.”
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, we may suffer material harm to our financial position.
We may face difficulties in collecting overdue amounts owed to us by municipalities to which we provide water on a wholesale basis and municipal government
entities.
As of December 31, 2012, our total accounts receivable was R$4,098.0 million. Of this amount, certain municipalities to which we provide water on a wholesale
basis owed us R$1,677.7 million, and certain municipal government entities owed us R$792.1 million. Of the total amount owed by municipalities, R$174.3 million
was overdue by between 30 and 360 days and R$1,453.3 million was overdue by over 360 days.
The Brazilian courts are entitled to obligate us to continue to supply water to these municipalities, even when we have not received payments due to us. We have
no way of ensuring that negotiations with these municipalities or legal action taken against the municipalities will result in payments being made. Some 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 owed to us. If the municipalities and related entities do not pay the amounts owed to us, we may suffer material harm
to our financial position.
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$9.9 billion in the period from 2013 through 2016. In 2012 we recorded R$2.5 billion
in capital expenditures.
We have funded these capital expenditures with cash generated by our operations as well as borrowings in Brazilian reais and foreign currencies, and we intend to
continue to fund our capital expenditures from these sources. A significant portion of our financing needs has been provided by the Brazilian federal public
government banks. We have obtained long-term financing at attractive interest rates from multilateral agencies and domestic and international governmental
development banks. If the Brazilian government changes its policies regarding the financing of 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 and financial condition.
Governmental agencies, institutional lenders and multilateral agencies constitute our main sources of financing in addition to cash generated by our operations and
issuances of debt securities in the domestic and international capital markets. Brazilian financial institutions are legally limited up to a certain percentage of their
shareholder’s equity to provide loans to public sector entities, such as us. These limitations could adversely affect our ability to continue our capital expenditure
program.
Our debt includes financial covenants that impose indebtedness limits on us, which could have a material adverse effect on us. For further information on these
covenants, see “Item 5.B. Liquidity and Capital Resources—Capital Sources—Indebtedness Financing—Financial Covenants.” 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.
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Compliance with environmental laws and environmental liability payments could have a material adverse effect on us.
We are subject to extensive Brazilian federal, state and municipal laws and regulations relating to the protection of human health and the environment. These laws
and regulations set water potability standards and limit or prohibit the discharge or spillage of effluent produced in our operations, particularly raw sewage. We
occasionally suffer accidents such as leakages or breaks in pipes that could lead to liability for damages under environmental law. We could be subject to various types
of criminal, administrative and civil proceedings for non-compliance with environmental laws and regulations, which could expose us to penalties and criminal
sanctions, such as fines, closure orders and significant indemnification obligations. The scope and enforcement of environmental laws in Brazil are becoming more
stringent, and our capital expenditures and environmental compliance costs may increase substantially as a result. These expenses may lead us to reduce expenditure
on strategic investments, which could harm our business. In addition, Brazilian courts are enforcing environmental laws more stringently than in the past, which may
result in fines or liability for damages that are significantly higher than those we currently anticipate. We are party to various environmental proceedings that could
have a material adverse impact on us, including civil processes and investigations relating to the release of untreated sewage into waterways and the disposal of sludge
generated by treatment plants. Any unfavorable judgment in relation to these proceedings, or any material unforeseen environmental liabilities, may have a material
adverse effect on us. For further information on these proceedings, see “Item 8.A. Financial Information-Consolidated Statements and Other Financial Information-
Legal Proceedings.” For further information on investments in environmental programs, see “Item 4.A - Main Projects of our Capital Expenditure Program,” “Item
4.B – Busniess Overview – Sewage Treatment and Disposal ,” “Item 4.B – Business Overview - Environmental Matters” and “Item 4.B – Business Overview -
Environmental Regulation.”
New laws and regulations relating to climate change and changes in existing regulation, as well as the physical effects of climate change, may result in
increased liabilities and increased capital expenditures, which could have a material adverse effect on us.
Current federal, state and municipal laws and regulations on climate change establish global goals, which we intend to meet concerning greenhouse gas emissions
and this may require us to increase our investments in order to comply with these laws. Currently, however, if we increase our capital expenditures for this purpose, we
may be required to reduce expenditures on other strategic investments.
In addition, climate change may lead to increases in extreme weather events such as droughts or torrential rain, which may affect our ability to deliver our services
and require us to take action such as:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
investing in seeking new water sources located further from major consumer centers;
investing in new technologies;
adopting water conservation practices and implementing alternative demand management systems such as economic mechanisms or educational programs;
and
increasing our reserve capacity.
We have not attempted to evaluate the investments that may be necessary as a result of climate change. It may require us to increase expenditures, whether for
compliance with changes in environmental regulations or for preventing or remedying the physical effects of climate change. We may be required to adopt new
standards aimed at improving energy efficiency and minimizing emissions of greenhouse gases when we renew our operating systems licenses or seek to obtain
licenses for new ventures. See “Item 4.B. Business Overview—Environmental Matters—Climate Change Regulations: Reduction of Greenhouse Gases (GHG).”
An increase in sea levels could cause additional intrusion of salt water in the river estuaries where we collect water for treatment, which could generate problems in
our treatment, water supply and sanitation systems in coastal areas, including physical damage to facilities and networks. Additionally, increases in air temperature
could affect demand for water. Climate change may also reduce water levels in the reservoirs that power hydroelectric plants in Brazil, which may cause energy
shortages and increase electricity prices, which may adversely affect our costs and operations.
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We cannot predict all of the effects of climate change. We have not provisioned any funds for climate change events as current technology and contrasting
scientific understandings of climate change make it difficult to predict potential expenses and liabilities. We may need to make substantial new expenditures, either to
comply with new environmental regulations linked to climate change or to prevent or correct the physical effects of climate change, any of which could have a material
adverse effect on our results of operations.
We are exposed to risks associated with the provision of water and sewage services.
Our industry is affected by the following additional risks relating to the provision of water and sewage services:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
The state and federal government agencies that manage water resources impose substantial charges for the abstraction of water from bodies of water and the
discharge of sewage. We may not be able to pass these charges on to our customers. See “Item 4.B. Business Overview—Government Regulation—Water
Usage.”
The degradation of watershed areas may affect the quantity and quality of water available to meet demand from our customers. See “Item 4.A. History and
Development of the Company—Capital Expenditure Program” and “—Main Projects of Our Capital Expenditure Program.”
In addition to the risks discussed under “—The terms of our new agreement to provide water and sewage services in the City of São Paulo could have a
material adverse effect on us,” we may not be able to increase our tariffs on a timely basis, or at all, in order to pass on increases in inflation or operating
expenses, including taxes, to our customers. These constraints may have an adverse effect on our ability to fund our capital expenditure program and
financing activities, and to meet our debt service requirements. See “Item 5.A. Operating and Financial Review and Prospects—Factors Affecting Our
Results of Operations—Effects of Tariff Increases.”
In addition to the risks discussed under “— New laws and regulations relating to climate change and changes in existing regulation, as well as the physical
effects of climate change, may result in increased liabilities and increased capital expenditures, which could have a material adverse effect on us,” we are
exposed to various weather-related risks, since our financial performance is closely linked to climate patterns. The expected increase in the frequency of
extreme weather conditions in the future may adversely affect both the quality and quantity of waters available for abstraction, treatment, and supply.
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. An increase in heavy rainfall could impact water quality and the regular operation of water sources, including abstraction
of waters from our dams, due to increased soil erosion, silting, pollution and eutrophication of aquatic ecosystems. See “Item 5.A. Operating and Financial
Review and Prospects—Factors Affecting Our Results of Operations—Effects of Climate Change (Drought and Intense Rainfalls).”
(cid:1) We are dependent upon energy supplies to conduct our business. Any shortages or rationing of energy may prevent us from providing water and sewage
services, and may also cause material damage to our water and sewage systems when we resume operations. Also, we may not be able to pass on any
significant increases in energy tariffs to our customers. See “Item 4.A. History and Development of the Company-Energy Consumption.”
Any of the above may have a material adverse effect on us.
Any substantial monetary judgment against us in legal proceedings may have a material adverse effect on us.
We are party to a number of legal proceedings involving significant monetary claims. These legal proceedings include, among others, civil, environmental, tax,
labor, criminal and other proceedings. As of December 31, 2012, the total value of all outstanding claims against us was R$36,866.9 million (net of R$330.2 million in
court deposits). A substantial monetary judgment against us in one or more of these legal proceedings may have a material adverse effect on our financial condition.
We have provisioned a total aggregate amount of R$1,189.2 million (net of court deposits) as of December 31, 2012 to cover probable losses related to legal
proceedings. This provision does not cover all legal proceedings involving monetary claims filed against us and it may be insufficient to cover our liabilities related to
these claims. Any unfavorable judgment in relation to these proceedings may have a material adverse effect on us. For more information, see “Item 8.A. Financial
Information—Consolidated Statements and Other Financial Information—Legal Proceedings.”
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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 our annual net income to shareholders, 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 51.8% of the aggregate market capitalization of the BM&FBOVESPA as of December 31, 2012. The top ten stocks in terms of trading
volume accounted for approximately 43.0%, 47.2% and 48.8% of all shares traded on the BM&FBOVESPA in 2012, 2011 and 2010, respectively.
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 under Resolution No. 2,689, dated January 26, 2000, of the
CMN, 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. 2,689, 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.
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 and those of these other persons 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.
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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, Brazilian Corporate Law and Brazilian
capital markets regulations will be resolved by arbitration conducted pursuant to the BM&FBOVESPA Arbitration Rules in the Market Arbitration Chamber. Any
disputes among shareholders, including ADR holders, and any disputes between us and our shareholders, including 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.
A holder of our common shares and ADSs might be unable to exercise preemptive rights and tag----along rights with respect to the common shares.
U.S. holders of common shares and ADSs may not be able to exercise the preemptive rights and tag-along rights relating to common shares unless a registration
statement under the U.S. Securities Act of 1933, as amended, or the Securities Act, 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.
A holder of our ADSs may find it more difficult than a holder of our common shares to exercise his or her voting rights at our shareholders’ meetings.
Holders may exercise voting rights with respect to the common shares represented by our ADRs only in accordance with the deposit agreement relating to our
ADRs. Neither Brazilian law nor our bylaws limit the ability of ADR holders to exercise their voting rights with respect to the underlying common shares through the
depositary. However, the additional procedural steps involved in communicating with ADR holders impose practical limitations on the exercise of voting rights. For
example, our common shareholders will receive notice of shareholders’ meetings through publication of a notice in an official government publication in Brazil and
will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADR holders, by comparison, will not receive notice directly
from us; instead, in accordance with the deposit agreement, we will provide the notice to the depositary, which in turn will mail the notice of the meeting to ADR
holders as soon as practicable after publication, along with a statement as to the manner in which holders may give voting instructions, but only if we request the
depositary to do so. To exercise their voting rights, ADR holders must then give instructions to the depositary. Due to these procedural steps, the process for
exercising voting rights may take longer for ADR holders than for holders of common shares. The deposit agreement 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 chose not to designate any person to exercise these deemed proxy rights with respect to the annual
general meeting held to approve our financial statements for 2012, and ADSs for which no specific voting instructions were received by the Depositary were therefore
not voted at that meeting.
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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. 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. See
“Item 4.B. Business Overview—Government Regulation—Concessions—Public Consortia and Cooperation Agreement Law for Joint Management.”
We believe we are one of the largest water and sewage service providers in the world (based on the number of customers in 2012, according to the 14th edition of
the Pinsent Masons Water Yearbook 2012-2013). 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 gross domestic product, or GDP, in Brazil.
For the year ended December 31, 2012, we generated consolidated net revenue of R$10,754.4 and consolidated net income of R$1,911.9. Our total consolidated assets
amounted to R$26,675.8 and our total shareholders’ equity amounted to R$11,715.6 as of December 31, 2012.
As of December 31, 2012, we provided water and sewage services to a broad range of residential, commercial, industrial and governmental customers in 363 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. At year-
end 2012 we lacked formal agreements for 67 of the municipalities we serve, each of which we are in the process of actively renegotiating, including in the
municipality of Santos. From January 1, 2013 through 2034, 38 further concessions will expire, and we will seek to replace them with program agreements.
We also supply water on a wholesale basis to six municipalities in the São Paulo metropolitan region in which we do not operate water distribution systems
(together covering a total estimated urban population of approximately 3.5 million). Five of these municipalities also utilize our sewage treatment services. For the
year ended December 31, 2012, the São Paulo metropolitan region (including the municipalities to which we provide water on a wholesale basis) accounted for 74.1%
of our gross operating revenue (excluding revenues relating to the construction of concession infrastructure), while the Regional Systems accounted for 25.9%.
As of December 31, 2012, we provided water services through 7.7 million water connections to approximately 24.2 million people, representing approximately
59% of the urban population of the State of São Paulo, and had a water coverage ratio of approximately 99% in respect of all regions. As of that date, we provided
sewage services through 6.1 million sewage connections to approximately 21.0 million people and had an effective sewage coverage ratio of 83%. As of December 31,
2012, we operated using 67,647 kilometers of water pipes and mains and 45,778 kilometers of sewer lines.
We also provide water and/or sewage services to four other municipalities through special purpose companies. In addition, we provide consulting services
regarding the rational use of water and commercial and operational management in Panama and Honduras through a partnership with Latin Consult. In addition we
recently set up two new activities in partnership with other companies: Aquapolo Ambiental S.A., a joint venture with a private sanitation services operator, which
commenced operations in the second half of 2012 and operates the largest water recycling facility in the southern hemisphere, supplying up to 1,000 liters per second to
industries in the Capuava petrochemical cluster in the São Paulo metropolitan region; and Attend Ambiental, a joint venture with Estre Ambiental S.A., which is
constructing a pre-treatment and processing plant for non-domestic effluent in the São Paulo metropolitan region that is expected to commence operations in the second
half of 2013.
The State of São Paulo, our controlling shareholder, is required by law to own at least 50% plus one of our common shares. As of May 8, 2013, the State owned
50.3% of our outstanding common shares. As a mixed capital company, we are an integral part of the State governmental structure. Our strategy and major policy
decisions are formulated in conjunction with the State Secretariat for Sanitation and Water Resources as part of the State’s overall strategic planning. The majority of
the members of our board of directors and our board of executive officers are nominated by the State government.
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In addition, 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
Sanitation and Water Resources as a whole. Our consolidated financial statements and accounting records are subject to review by the State Accounts Tribunal
(Tribunal de Contas), as are all accounts of the State.
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 believe we are one of the largest water and
sewage service providers in the world. We provide water services directly to approximately 24.2 million people and supply water on a wholesale basis to an additional
urban population of approximately 3.5 million people. As of December 31, 2012, we had an effective water coverage ratio of approximately 99% in respect of all
regions in which we operate. We also provide sewage services directly to approximately 21.0 million people, achieving an effective sewage coverage ratio of 83% in
respect of all regions in which we operate as of December 31, 2012. During the year ended December 31, 2012, our net operating revenues (including revenues
relating to the construction of concession infrastructure) increased by 8.2% as compared to 2011. Our significant size and scale have required us to operate in complex
urban settings such as favelas (shantytowns) and environments without urban planning, which has enabled us to develop skill in operating in adverse conditions,
well-trained personnel and a specialized structure that we believe our competitors lack.
Operations in Brazil’s most populous and wealthy state. The State of São Paulo, which is located in the most developed and economically active region of
Brazil, is the most populous state in Brazil, with an estimated total population of 43.9 million as of December 31, 2012. The city of São Paulo had an estimated total
population of 11.0 million as of the same date, while the São Paulo metropolitan region had a total population of 20.8 million. Based on its GDP, the State of São
Paulo is the wealthiest state and largest economy in Brazil. The GDP of the State of São Paulo was approximately R$1.2 trillion in 2010, representing approximately
33% of Brazil’s total GDP. The State of São Paulo generates more revenue from water and sewage services than any other Brazilian state.
Strong Base of Contracted Business. Of the 363 municipalities we serve, we have executed 30-year agreements with 258 of the municipalities in the last six
years, including the agreement with the City of São Paulo, which we executed in June 2010. For the year ended December 31, 2012, the income from the 258
municipalities with which we have formal long-term contracts accounted for 69.9% of our gross operating revenues (including revenues relating to the construction of
concession infrastructure).
Access to low----cost and diverse sources of financing. Our strong cash flow generation from operations and our role as an essential public service provider places
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 BM&FBOVESPA, which is the listing segment in Brazil with the
highest corporate governance requirements. As a result, we are committed to certain corporate governance standards that are not otherwise required by Brazilian law,
which provides heightened protection to our shareholders and enhances the quality of information we disclose to the market. On December 1, 2007, we became part of
the BM&FBOVESPA Corporate Sustainability Index, or ISE, which reflects our high degree of commitment to sustainable environmental and social practices.
Commencing February 2013, our shares have also been included in the Dow Jones Sustainability™ Emerging Markets Index.
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. All of our water quality control laboratories operate in accordance with the ABNT NBR ISO 9001 standard,
the highest international water quality standard. In addition to our central laboratory, 12 of our regional laboratories are accredited by the National Institute of
Metrology, Standardization and Industrial Quality, or INMETRO, and comply with the ABNT NBR ISO IEC 17025 standard, thereby assuring the quality and
accuracy of our test results. Moreover, our laboratories and field teams use the latest equipment to detect substances controlled by regulations and have highly trained
teams to handle contingencies and customer complaints. We believe our technology enhances the efficiency and quality of our operations.
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Our Strategy
Our mission is to provide water and sewage services, contributing to improvements in quality of life and the environment. To this end, our strategic objectives are
based upon the guiding principles of growth, quality, universalization of sanitation services and social, economic and environmental sustainability, while focusing on
reaching excellence in customer service. Our strategic objectives also focus on our political and institutional relationships as well as on our commitment to the market
to increase shareholder value. We seek to implement these guiding principles through the following strategies:
Continue to seek growth while improving our financial results by reducing operating costs, increasing productivity and profitability and prudently managing
our levels of indebtedness. We aim to apply our principles of financial growth and sustainability to each business unit, assigning goals and setting clear responsibilities
to 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 accounts receivable 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.
Improve operating efficiency and reduce water loss. We seek to reduce both physical water loss, which results mainly from leakage; non-physical water loss,
which results primarily from inaccurate water meters installed at customers’ premises and at our water treatment facilities; and clandestine and illegal water use. In
order to achieve more consistent long-term results, we have developed a comprehensive 12 year program to reduce our water loss rate. The first four years of the
program from 2009 to 2012 were funded by BNDES. From 2013 to 2016 the program will be funded by a loan granted by the government of Japan through the Japan
International Cooperation Agency, or JICA. The program focuses on renewing our water distribution infrastructure and improving maintenance and control services as
a means of reducing physical water loss. We are also seeking to reduce physical water loss by creating smaller water supply districts through the construction of
district metering areas, which reduce system pressure and pipe bursts, and allow leaks to be detected and repaired more efficiently. The program also seeks to reduce
non-physical water loss by upgrading and replacing inaccurate water meters and through inspections of non-authorized water consumption in water service
connections.
Ensure the quality and availability of our services in our existing service area. Our goal is to maintain an effective water coverage ratio of around 100%,
coupled with a high standard of quality and availability, and meet the expected population growth by adding 1.3 million water connections between 2013 and 2020.
We also intend to increase our sewage coverage ratio to 95% by 2020 by adding 1.9 million sewage connections. In addition, we are also developing short, medium
and long-term marketing strategies, such as client segmentation and tailor-made solutions for different types of clients, which we believe will help us increase our
customer base. We also seek to improve our customer support strategies by modernizing our telephone and internet-based customer support and to continuously
measure the level of satisfaction of our clients.
Maintain and continue to expand our existing service areas. We intend to maintain and expand our operating base by executing new agreements. To this end,
we are actively seeking to develop closer relationships with the municipal governments that we currently serve in order to increase customer loyalty and thereby renew
all or substantially all our concession agreements as they expire. 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, 2012 accounted for 54.7% of our gross operating revenues
(excluding revenues relating to the construction of concession infrastructure). Between January 1, 2007 and December 31, 2012, we entered into 258 30-year
agreements with municipalities (including our services agreement with the city of São Paulo), of which 33 were entered into in 2012. These 33 municipalities
accounted for 4.3% of our total revenues for the year ended December 31, 2012 and 4.2% of our intangible assets as of the same date. As of December 31, 2012, 67 of
our concessions had expired and are currently being renegotiated. These 67 municipalities accounted for 18.6% of our total revenues for the year ended December 31,
2012 and 26.7% of our intangible assets as of the same date. From January 1, 2013 through 2034, 38 concession agreements, accounting for 9.4% of our revenues for
the year ended December 31, 2012 and 8.1% of our intangible assets as of the same date, will expire.
26
We have also developed a platform to offer specialized services in the field of sustainability, environmental preservation and water resource management to our
large industrial, commercial and residential customers in order to encourage these customers to continue to use our water services. We also intend to continue to
expand our sewage services. A significant portion of our capital expenditure program, representing approximately R$9.9 billion between 2013 and 2016, is designed to
achieve this goal. We also regularly explore the possibility of executing agreements for the provision of 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 together
represent a total population of approximately 17 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. We also intend to study and take advantage of opportunities in other Brazilian states and in other
countries to expand our services and increase our market share.
Expand our water and sewage services. We had an effective sewage coverage ratio of 83% as of December 31, 2012 and plan to increase this ratio to 95% by
2020 by adding over 1.9 million sewage connections. In addition, there are municipalities in the State of São Paulo representing a total population of approximately
17 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. Further, we seek to deepen our relationships with strategic clients that consume high volumes of
water (more than 500 cubic meters per month) by applying special tariffs to these clients.
Seek selective opportunities to expand our business. Since 2008 we have expanded into various activities that complement our water and sewage services, such
as urban rainwater management and drainage services, urban cleaning services and solid waste management services. For example:
(cid:1) We have cooperation agreements to exchange technology with six regional basic sanitation companies in Brazil, as well as with international providers such
as Mekorot National Water Company of Israel, Sociedade General Aguas de Barcelona S/A – Agbar of Spain, Instituto Costarricence de Acueductos y
Alcantarillados of Costa Rica, Empresa Pública de Medellin of Colombian and Agua y Saneamientos Argentinos – AYSA of Argentina, which will allow us
to exchange know-how and identify future opportunities.
(cid:1) We have executed memoranda of understanding with three municipalities to study the possibility of operating landfills, for which we are currently carrying
out feasibility studies.
(cid:1) We are planning to install small hydroelectric power plants in our water treatment plants in Guaraú and Cascata in conjunction with the Servitec/Tecniplan
consortium. We expect to start construction of the first two plants, with capacities of 4 and 2 MW, in the first half of 2013.
(cid:1) We are working with the basic sanitation company of the state of Alagoas to transfer technology for the reduction of water loss in the city of Maceió.
(cid:1) We have licensed our proprietary “Aqualog” software, which monitors water treatment remotely, to the basic sanitation company of the state of Espírito
Santo.
27
(cid:1)
(cid:1)
In partnership with the consultancy firm Latin Consult, we are providing consulting services to the Instituto de Acueductos y Alcantarillados Nacionales, the
company responsible for water and sewage services in the central provinces of Panama, in the field of sustainable water use and to implement a new model for
commercial and operational management.
Also in partnership with Latin Consult, we are providing consulting services to nine municipalities in Honduras to implement a new commercial and
operational management model.
(cid:1) We have set up Aquapolo Ambiental S.A., a joint venture with a private sanitation services operator, which commenced operations in the second half of 2012
and operates the largest water recycling facility in the southern hemisphere, supplying up to 1,000 liters per second to industries in the Capuava petrochemical
cluster in the São Paulo metropolitan region.
(cid:1) We have set up Attend Ambiental, a joint venture with Estre Ambiental S.A., which is constructing a pre-treatment and processing plant for non-domestic
effluent in the São Paulo metropolitan region that is expected to commence operations in September 2013.
We are looking into (i) construction of a plant to produce energy from solid residue as well as (ii) the production and distribution of bio methane from gas
generated in our sewage treatment processes.
We are also evaluating the formation of an investment vehicle expected to be known as Sabesp Participações through which we intend to expand our business
through equity investments.
We intend to continue to selectively seek new business opportunities in which we may leverage our know-how, size and scale.
Establish efficient and competitive ways of attracting, retaining and motivating our personnel. We intend to become a reference in human resource
management, providing our personnel with growth opportunities and recognition. We seek to raise workplace satisfaction levels by establishing programs for the
professional and personal development of our employees, setting competitive benefit packages and creating a healthy and collaborative work environment.
Streamline internal processes. We are implementing plans to increase our speed and productivity in responding to regulatory changes; strengthen and streamline
our financial, commercial and administrative structure; and increase the efficiency of our operations; while also reducing costs. To this end, in 2012 we began
implementing an enterprise resourcing planning system to integrate all of our operational systems (financial, accounting, human resources, legal, purchasing and bid
preparation) into a single platform alongside our management information system.
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, in other Brazilian
states and abroad, while strengthening our results of operations and our financial condition and creating shareholder value.
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 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 43.9 million as of December 31, 2012. The city of São Paulo, capital of the State of São Paulo, had an
estimated total population of 11.0 million, with a total population of 20.8 million inhabitants in the São Paulo metropolitan region, as of December 31, 2012. The São
Paulo metropolitan region encompasses 39 municipalities and is the largest metropolitan region in the Americas and the sixth largest metropolitan region in the world,
according to the United Nations’ World Urbanization Prospects, 2011 Revision, with approximately 47% of the total population of the State of São Paulo as of
December 31, 2012.
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According to the IBGE, the GDP of the State of São Paulo was approximately R$1.2 trillion in 2010, representing approximately 33% 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).
History
Until the end of the nineteenth century, water and sewage services in the State of São Paulo were generally provided by private companies. In 1875, the Province
of São Paulo granted a concession for the provision of water and sewage services to Companhia Cantareira de Água e Esgotos. In 1893, the government of the
Province of São Paulo assumed responsibility for the provision of water and sewage services from Companhia Cantareira de Água e Esgotos and formed the Office of
Water and Sewers (Repartição de Água e Esgotos), a government agency. Since that time, water and sewage services in the São Paulo metropolitan region have been
administered by the State government. Historically, water and sewage services in substantially all other municipalities of the State were administered directly by the
municipalities, either by municipal water and sewage departments or through autarquias of the municipal government. Autarquias are relatively autonomous public
bodies with separate legal standing, assets and revenues, created by law to carry out the administration of public services where the government deems that a
decentralized administrative and financial structure would be advantageous.
In 1954, in response to dramatic population growth in the São Paulo metropolitan region, the State government created the Department of Water and Sewers
(Departamento de Águas e Esgotos) as an autarquia of the State. The Department of Water and Sewers provided water and sewage services to various municipalities
in the São Paulo metropolitan region.
A major restructuring of the entities providing water and sewage services in the State of São Paulo occurred in 1968, with the creation of the Water Company of
the São Paulo metropolitan Region (Companhia Metropolitana de Água de São Paulo), or the COMASP, the purpose of which was to provide potable water on a
wholesale basis for public consumption in the various municipalities of the São Paulo metropolitan region. All assets relating to the production of potable water for the
São Paulo metropolitan region previously owned by the Department of Water and Sewers were transferred to COMASP. In 1970, the State government created the
Superintendence of Water and Sewers of the city of São Paulo (Superintendência de Água e Esgoto da Capital), or the SAEC, to distribute water and collect sewage in
the city of São Paulo. All assets relating to water services previously owned by the Department of Water and Sewers were transferred to the SAEC. Also in 1970, the
State created the Basic Sanitation Company of the São Paulo metropolitan Region (Companhia Metropolitana de Saneamento de São Paulo), or the SANESP, to
provide sewage treatment services for the São Paulo metropolitan region. All assets relating to sewage services previously owned by the Department of Water and
Sewers were transferred to the SANESP. The Department of Water and Sewers was subsequently closed.
On June 29, 1973, pursuant to State Law n. 119, COMASP, the SAEC and the SANESP merged to form our Company with the purpose of implementing the
directives of the Brazilian government set forth in the National Water Supply and Sanitation Plan (Plano Nacional de Saneamento). We were incorporated under the
laws of Brazil as a limited company (sociedade anônima), for indefinite duration. The National Water Supply and Sanitation Plan was a program sponsored by the
Brazilian government, which financed capital investments in, and assisted in the development of, state-controlled water and sewage companies. Since our formation,
other 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. The State has always been our controlling shareholder, as required by State Law No. 119. We have therefore been integrated into the State
governmental structure and our strategies have been formulated in conjunction with the strategies of the State Department of Water Resources and Sanitation.
Additionally, a majority of the members of our board of directors and our management are appointed by the State Government.
29
Our capital expenditure budget is subject to approval by the State legislative chamber. This approval is obtained simultaneously with the approval of the budgets
of the Department of Sanitation, of the Department of Energy and of the State of São Paulo. 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.
We provide 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, in 363 of the 645 municipalities in the State, including in the city of São Paulo. We also supply water on a wholesale basis to six municipalities in the São
Paulo metropolitan region in which we do not operate water distribution systems, and five of these municipalities also utilize our sewage treatment services. Currently,
we are the fifth largest water and sewage service company in the world in terms of number of clients, according to the 14th edition of the Pinsent Masons Water
Yearbook (2012-2013).
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 BM&FBOVESPA under the ticker “SBSP3” since June 4, 1997.
In 2002, we joined the Novo Mercado segment of the BM&FBOVESPA, which is the listing segment in Brazil with the highest corporate governance
requirements. In the same year, we registered our common shares with the Securities and Exchange Commission, or SEC, and started trading our shares in the form of
American Depositary Receipts – level III (“ADRs”) on the New York Stock Exchange, or NYSE.
In 2004, the State of São Paulo carried out a secondary offer of common shares of our company in the Brazilian and international markets. On December 1, 2007,
we became part of the BM&FBOVESPA ISE, which reflects our high degree of commitment to sustainable environmental and social practices.
In December 2007, Law No. 1,025, which 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.
Since 2008, we have expanded into various activities that complement our water and sewage services, often through partnerships with private companies such as
the following:
(cid:1) We have created four special purpose companies (SESAMM – Serviços de Saneamento de Mogi Mirim S/A; Águas de Castilho S.A.; Águas de Andradina
S.A.; and Saneaqua Mairinque S.A.) to operate water and/or sewage concessions granted by four municipalities in the State of São Paulo, all of which are
already operating.
(cid:1) We are planning to install small hydroelectric power plants in our water treatment plants in Guaraú and Cascata in conjunction with the Servitec/Tecniplan
consortium. We expect to start construction of the first two plants, with capacities of 4 and 2 MW, in the first half of 2013.
(cid:1)
(cid:1)
In partnership with the consultancy firm Latin Consult, we are providing consulting services to the Instituto de Acueductos y Alcantarillados Nacionales, the
company responsible for water and sewage services in the central provinces of Panama, in the field of sustainable water use and to implement a new model for
commercial and operational management.
Also in partnership with Latin Consult, we are providing consulting services to nine municipalities in Honduras to implement a new commercial and
operational management model.
(cid:1) We have set up Aquapolo Ambiental S.A., a joint venture with a private sanitation services operator, which commenced operations in the second half of 2012
and operates the largest water recycling facility in the southern hemisphere, supplying up to 1,000 liters per second to industries in the Capuava petrochemical
cluster in the São Paulo metropolitan region.
30
(cid:1) We have set up Attend Ambiental, a joint venture with Estre Ambiental S.A., which is constructing a pre-treatment and processing plant for non-domestic
effluent in the São Paulo metropolitan region that is expected to commence operations in September 2013.
Although we do not necessarily hold a majority stake in these companies, the shareholders’ agreements provide us with veto powers or qualified votes on certain
business matters.
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 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 organization, corporate communication, audit, ombudsman, and regulatory matters. 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:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
the Corporate Management Officer, who is responsible for marketing, human resources and quality control programs, legal affairs, information technology,
asset management, legal and procurement, and contracts;
the Chief Financial Officer and Investor Relations Officer, who is responsible for financial planning, costs and tariffs, raising capital and allocating financial
resources to divisions of our company, conducting capital markets and other debt incurrence transactions and managing debt levels, financial controls,
accounting, corporate governance and investor relations;
the Technology, Enterprises and Environment Officer, who is responsible for environmental planning and management, technology and operation
engineering, quality control, the development, coordination and execution of special investment programs, projects, and new businesses, 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 planning and works 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 autonomous municipalities and for mediation and negotiation
with communities and local governments, aimed at aligning our interests with the interests of our clients.
Capital Expenditure Program
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 meet
the growing demand for water and sewage services in the State of São Paulo. Our capital expenditure program has four specific goals with respect to the municipalities
we serve:
(i) to continue to meet the maximum 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.
Our capital expenditures from 2010 through 2012 totaled R$7.1 billion. These investments focused primarily on building up our infrastructure and reducing water
loss. We have budgeted investments in the total amount of R$9.9 billion from 2013 through 2016. We invested R$2.5 billion, R$2.4 billion and R$2.2 billion in 2012,
2011 and 2010, respectively.
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The following table sets forth our planned capital expenditures for water and sewage infrastructure for the years indicated.
Water
Sewage Collection
Sewage Treatment
Total
2013
Planned Capital Expenditures
2015
2016
2014
Total
1,014.9
1,130.1
444.5
2,589.5
981.1
1,153.1
488.4
2,622.7
923.9
1,018.2
469.8
2,411.9
784.4
948.0
542.2
2,274.6
3,704.2
4,249.4
1,945.0
9,898.6
Our capital expenditure program from 2013 through 2016 will continue to focus on achieving our targets by making regular investments to maintain and expand
our infrastructure and to reduce water loss in the 363 municipalities we served as of December 31, 2012.
Main Projects of Our Capital Expenditure Program
The following is a description of the main projects in our capital expenditure program.
Metropolitan System Investment Program
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. As a result, 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
“rotation.” In order to remedy 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 rotation was eliminated, but we have maintained our investment plans for the
region. In the second phase of the Metropolitan Water Program, which started in 2006 and is expected to run through 2018, we are expanding the capacity of our water
storage tanks by 210,000 cubic meters and constructing 44 water pumping stations and 240 kilometers of mains pipelines. The investment in this phase is expected to
reach R$2.7 billion and the construction is expected to expand our water production capacity by 13.2 cubic meters. At the moment, the program is being updated to
meet future demands through 2020. In 2012, we invested approximately R$95.2 million in this project.
Total investments made from 2006 to December 31, 2012 amounted to R$1.3 billion, including our own funds and financing from Caixa Econômica Federal and
by Banco Nacional de Desenvolvimento Econômico e Social (“BNDES”).
São Lourenço Project
The metropolitan region suffers from a water shortage, which requires us to obtain water from increasingly distant sources. In order to remedy this situation, we
are currently developing a new supply system called São Lourenço, which will expand our production capacity by 4.7 m3/s and should be able to benefit a population
of almost 1.5 million people. We have already concluded the project’s conceptual studies and are currently developing its infrastructural projects. In November 2012,
a public notice concerning the completion of construction projects through Public-Private Partnerships (Parceria Público-Privada) (“PPP”) was published.
Alto Tietê Public Private Partnership
In June 2008 we formed the Alto Tietê Public Private Partnership with a special purpose company known as Cab Spat, whose main shareholders are Cab
Ambiental and Galvão Engenharia S.A. The Alto Tietê PPP is part of the Metropolitan Water Program and aims to improve the reliability, flexibility and availability
of the integrated water system that serves the São Paulo metropolitan region. Through this PPP, Cab Spat carried out certain infrastructure works, which was
completed in December 2011, and expanded the Alto Tietê System nominal capacity from 10 cubic meters per second to 15 cubic meters per second. We intend to
complete payment for these investments by 2024.
32
Cab Spat has also undertaken to perform maintenance on the Alto Tietê System’s dams on an ongoing basis. This maintenance work consists of civil engineering,
electromechanical and operational services, as well as sludge treatment, water adduction and water supply.
The total estimated cost for this project is R$1.0 billion. As of December 31, 2012 we had invested approximately R$350 million.
Tietê Project
The Tietê river crosses the São Paulo metropolitan region and receives most of the region’s run-off and wastewater. The environmental status of the river reached
a critical level in 1992. In an effort to reverse the situation, the State of São Paulo created a recovery program designed to reduce pollution of the Tietê river by
installing sewage collection lines along the banks of the Tietê river and its tributaries. These lines collect raw sewage and deliver it to our sewage treatment facilities.
We carried out the first phase of the program between 1992 and 1998.
In the first phase of the Tietê Project, we completed the construction of three additional sewage treatment facilities in June 1998. This involved total investment of
US$1.1 billion, of which US$450 million was financed by the Inter-American Development Bank, or IADB, approximately US$100 million by Caixa Econômica
Federal, and approximately US$550 million by us.
The second phase of the project, which was carried out from 2000 through 2008, involved installing 290,000 sewage connections and more than 1,500 kilometers
of sewage collection networks, branch collectors and interceptors. Total investments in this phase amounted to approximately US$500 million, of which US$200
million was financed by the IADB, R$60 million by BNDES directly, and R$180 million by BNDES through another financial institution.
The main objective of the second phase was to continue expanding and optimizing the sewage system in the São Paulo metropolitan region, focusing primarily on
improvements to expand the delivery of raw sewage to the sewage treatment facilities that were built in the first phase. Upon the conclusion of the second phase of the
project in 2008, we were able to collect approximately 5,000 liters of raw sewage per second and send it to the five sewage treatment plants in our integrated system for
treatment. As part of the second phase of the Tietê Project, we implemented a geographic information system named SIGNOS. SIGNOS is a management information
system which automates and integrates various business processes, including project management, maintenance, operations and customer service and maps out our
entire municipal infrastructure in the São Paulo metropolitan region.
The first and second phases of the Tietê Project contributed to an increase from 70.0% to 84.0% in the sewage collection rate and an increase from 24.0% to 70.0%
in the treatment of sewage collected in the São Paulo metropolitan region. As a result, the sewage collection system covered a total of 15.8 million people (5.1 million
more than the number of people served when the Tietê Project was initiated), and the sewage treatment system covered 11.1 million people (8.5 million more than the
number of people served when the Tietê Project was initiated). The five principal sewage treatment facilities in the São Paulo metropolitan region have an aggregate
installed capacity of 18 cubic meters of sewage per second and currently treat an aggregate of 15.7 cubic meters of sewage per second. We plan to build additional
collection lines to direct more raw sewage to our treatment facilities.
The third phase of the Tietê Project aims to remediate the water quality in the Tietê river basin by expanding collection levels to 87.0% and sewage treatment
levels to 84.0% in the São Paulo metropolitan region. The total estimated cost of the third phase is approximately US$2 billion, of which US$600 million will be
financed by a loan from the IADB entered into on September 3, 2010. The third phase consists principally of the following items:
(cid:1)
improvements to the effluent collection system through collection networks and home connections;
33
(cid:1)
(cid:1)
removal and transport of effluent for treatment through branch collectors and interceptors; and
the construction between 2009 and 2016 of new sewage treatment plants in the São Paulo metropolitan region.
Approximately 45% of the work for the third phase is under construction, and a further 26% is in the process of public tender. Following completion of the third
phase of the Tietê Project, the sewage collection system will serve an additional 1.5 million people and the sewage treatment system will serve an additional 3.0 million
people. We have invested R$698 million in the third phase, R$328 million of which during 2012.
We are currently planning the fourth and final phase of the Tietê Project, which is expected to be constructed between 2014 and 2020. The main objective of the
fourth phase is to put an end to all discharge of untreated sewage into the Tietê river in the area for which we are the water services provider.
Corporate Program for Reduction of Water Loss
The objective of the Corporate Program for Reduction of Water Loss (Programa Corporativo de Redução de Perdas de Água) is to reduce water loss efficiently by
integrating and expanding existing initiatives in our business units. This program has a 12-year term that began in 2009. We have invested R$1.0 billion in this
project so far, including R$328.0 million invested in 2012, and anticipate total investments of approximately R$5.5 billion throughout the term of the program.
Funding for the program will come from our own resources as well as from credit facilities provided by JICA, Caixa Econômica Federal and BNDES. The program
aims to reduce the incidence of water loss from 436 liters per connection per day in December 2008 to 280 liters per connection per day in 2020, which is equivalent to
reducing water loss from 27.8% in December 2009 to 19% in 2020. As of December 31, 2012, the water loss index remained relatively stable at 25.7%. Our aim was
to keep the water loss index at 25.2% but this was not possible due to (i) contractual difficulties in our efforts to reduce losses in the Baixada Santista area, we have
since become party to new contracts, (ii) difficulty in replacing service connections, specifically in urban areas, and (iii) more accuracy in water volumes in the Guaraú
Water Treatment Station which is located within our main water producing system.
New Life Program
The New Life Program (Programa Vida Nova) consists of various projects that focus on the preservation and improvement of water reserves in the São Paulo
metropolitan region, especially in the Guarapiranga and Billings reservoirs. The resources will be mostly invested in the creation of infrastructure to collect sewage
and transport it to treatment plants in order to reduce the discharge of effluent into water sources. The program also includes the protection of green spaces and the
urbanization of favelas (shantytowns) and is expected to directly benefit 58,000 families by 2015.
The State government, local authorities and the federal government are expected to invest approximately R$1.3 billion in this program. Our total investments in
the program are expected to amount to R$355 million, of which we invested R$37.3 million during 2012 for a total of R$81.7 million as of December 31, 2012. The
State Secretariat for Sanitation and Water Resources coordinates the program with the involvement of our company and the Urban Development Company of São
Paulo (Companhia de Desenvolvimento Habitacional e Urbano), or the CDHU, and local governments in the region.
Clean Stream Program
The Clean Stream Program (Programa Córrego Limpo), a partnership between the State, acting through our company, and the municipality 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 of properties located on the banks of streams. Total investments made in this program amounted to R$710.3 million as of December 31, 2012,
of which we had invested R$110 million. 116 urban streams have been decontaminated since 2007, benefiting approximately 1.7 million people, and we expect to
decontaminate a further 33 streams in 2013, benefiting over 305 thousand people.
34
Regional Systems Investment Programs
We currently have a number of projects in progress and planned for our Regional Systems. These relate to the abstraction of water as well as to the collection,
removal and disposal of sewage. We invested approximately R$1.2 billion, R$1.1 billion and R$0.9 billion in these projects in 2012, 2011 and 2010, respectively, and
we have budgeted for additional capital expenditures of approximately R$2.8 billion from 2013 through 2016.
Clean Wave Program
The main goals of the Clean Wave Program (Programa Onda Limpa) are to improve and expand the sewage systems in the municipalities comprising the Baixada
Santista metropolitan region, increasing the sewage collection rate to 95%, and treating 100% of the collected sewage, thereby improving bathing water quality at
82 beaches in the region by the end of the decade. This project is being carried out in two phases, the first of which has started and the second of which is in the
planning phase. The first stage is expected to be completed by 2016, aiming at increasing the sewage collection rate to 82%. The funds will come from our own
resources as well as from loan agreements entered with JICA and from the Government Severance Indemnity Fund for Employees (Fundo de Garantia por tempo de
Serviço), or FGTS.
As of December 31, 2012, we had invested approximately R$1.7 billion in this program, of which R$135.7 million was invested during 2012. As a result, sewage
collection increased from 53% to 71%, and the treatment of collected sewage rose from 96% to 100%.
After completing the construction of sewage treatment plants and installation of networks, we are prioritizing the connection of customers to the sewage collection
system. As of December 31, 2012, we had completed 79,000 domestic connections, compared to a target of 123,000 at the same date.
Additionally, complimentary works of the first stage shall be executed between 2013 and 2016, including an addition of 37 thousand sewage connections due to
the population increase motivated by the economic development of the region. We expect to evaluate the service of sewage collection rate by 82% by the end of this
phase. These works have an approximated investment value of R$400 million and are currently being bid for.
The second phase is in planning for the period between 2015 and 2020.
Northern Coast Clean Wave Program
The Northern Coast Clean Wave Program (Programa Onda Limpa Litoral Norte) aims at expanding the collection and treatment of sewage on the northern coast
of the State of São Paulo, intending to benefit 600 thousand people, including the local population as well as tourists that visit the region each year. The program aims
to increase the collection and treatment of sewage rate in the region from 36.0% in 2008 to 85.0%, thereby improving the health and well-being of the population and
stimulating economic development through an increase in tourism.
During 2012, we continued work on two sewage treatment plants in the city of São Sebastião and other sewage system projects in the cities of Ubatuba, Ilhabela
and São Sebastião, which we expect to complete in 2013. The funds will come from our own resources, as well as from loan agreements entered with BNDES, with
Caixa Econômica Federal and from the FGTS. As of December 31, 2012, we had invested R$125.9 million in this program, of which R$24.3 million was invested
during 2012. We expect to invest a total of R$500.0 million in this project by 2018.
Coastal Water Program
The Coastal Water Program (Programa Água no Litoral) combines various long-term activities to expand water production capacity in the Baixada Santista
metropolitan region and the southern coast of the State of São Paulo. The program aims to benefit approximately three million people, including both the local
population and tourists. It aims to increase the level of reliability of the local systems, eliminating existing and potential deficiencies and irregularities in the water
supply. Through this program we aim to reach universal coverage in these regions, increase the availability of treated water and improve the quality of water available
to the population. The fund will come from our own funds and financing from Caixa.
35
During the first phase of this program we have focused on increasing water production from the Mambu/Branco water system in order to satisfy demand and
improve water quality in the southern part of the Baixada Santista metropolitan region. This phase, which is approaching finalization, aims to increase production from
Mambu/Branco from 0.6 cubic meters per second to 1.6 cubic meters per second.
As of December 31, 2012, we had invested R$569.1 million in this program, of which R$129.3 million was invested during 2012. We expect to invest a total of
R$1.1 billion in this project by the end of 2013.
New Policies and Programs
Nossa Guarapiranga
In December 2011, we launched the Nossa Guarapiranga project, the main objective of which is to remediate the water quality in the Guarapiranga basin, which is
a water source for the São Paulo metropolitan region. The basin serves one million people directly in the areas near Guarapiranga, and indirectly serves a further
two million people who consume the water from the basin. Through capital investment of R$12.2 million, we installed 11 drains to collect residue from rivers in the
Guarapiranga basin. The fund will come from our own funds.
Pró-Conexão
In December 2011, the municipality of São Paulo approved a project to subsidize connections to the sewage system for low-income families. The project involves
capital expenditures of up to R$349.5 million of which 80% will be provided by the State government and 20% by us. In the first year of the program we completed
approximately 700 connections, which was less than our initial goal but focused on areas of importance for water sources such as the southern part of the São Paulo
metropolitan region, near the Billings reservoir. We believe that this program will increase the efficiency of our sewage collection programs and help improve water
quality in the region’s rivers and basins, as well as improving quality of life for low-income families.
We expect that this program will create 192,000 new connections over the next eight years, benefiting approximately 800 thousand people.
Water is Life
The Water is Life program, established in November 2011, aims to provide water and sewage services to 41 low-income and isolated communities in the regions
of Alto Paranapanema and Vale do Ribeira, covering approximately 13 thousand people. In this project we are responsible for supplying water to, and the
municipalities are responsible for installing, Individual Sanitary Units (Unidades Sanitárias Individuais), a technology designed for low-income and isolated
communities. Regarding the supply of water, we invested approximately R$700 thousand in well drilling. We expect to invest approximately R$15.6 million by
2014. An amount of approximately R$6 million was estimated for sewage infrastructure contruction, to be financed by the State Government. However, this estimated
funding is currently being increased to support this project.
B. Business Overview
Our Operations
As of December 31, 2012, we provided water and sewage services to 363 municipalities in the State of São Paulo under concession agreements, program
agreements, other forms of legal arrangements or without formal agreements. We also supply treated water on a wholesale basis to six municipalities located in the
São Paulo metropolitan region. Article 2 of our bylaws permits us to carry out the following activities: provision of water supply and sewage services, urban rain
water management and drainage services, urban cleaning services and solid waste management services. In addition, our bylaws authorize us to carry out other related
activities, including the planning, operation and maintenance of production systems, the storage, preservation and trading of energy, and the trading of services,
products, benefits and rights that, directly or indirectly, result from our assets, projects and activities, and the right to operate a subsidiary anywhere in Brazil or abroad
to provide the services mentioned above.
36
Following the enactment of the Basic Sanitation Law, which regulates the basic sanitation industry in Brazil, we currently operate under two different contractual
environments: (i) for concession agreements that have expired, we are currently renegotiating or will negotiate new agreements that follow the terms and conditions of
the Basic Sanitation Law, known as “program agreements”; and (ii) for concession agreements that have not expired, we will continue to operate under the terms and
conditions of the existing concession agreements, except in circumstances where the Basic Sanitation Law applies even though the concession agreement is still in
force. For further information on this topic, see “Government Regulation—Concessions—Public Consortia and Cooperation Agreement Law for Joint Management.”
As of December 31, 2012, 67 of our concessions were still in the process of being regularized through formal agreements. See “3.D. Risk Factors—Risks Relating
to Our Business—We currently lack formal agreements or concessions with 67 of the municipalities to which we provide service, and 38 of our existing concession
agreements will expire between 2013 and 2034. We may face difficulties in continuing to provide water and sewage services in return for payment in these and other
municipalities, and we cannot assure you that they will continue to purchase services from us on the same terms or at all.”
Concessions
Pursuant to the Brazilian Constitution, the authority to develop public water and sewage systems is shared by the states and municipalities, with the municipalities
having primary responsibility for providing water and sewage services to their residents. 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 of São Paulo by a company under its control.
According to the Basic Sanitation Law, existing concessions will remain in effect until payment of indemnification is made based on the valuation of investments.
The Basic Sanitation Law provides that our new concession agreements be planned, supervised and regulated by the municipalities together with the State under a new
model of associated management that will allow for better control, supervision, transparency and efficiency in the provision of public services.
As of December 31, 2012, we provided water and sewage services to 363 municipalities. Substantially all of these concessions have 30-year terms. Due to court
orders, we temporarily suspended our services in four other municipalities (Cajobi, Iperó, Álvares Florence and Macatuba) that accounted for less than 0.1% of our
gross operating revenues and our intangible assets as of December 31, 2012. For more information, see “Item 8.A. Financial Information—Consolidated Statements
and Other Financial Information—Legal Proceedings—Concession-Related Legal Proceedings.” Between January 1, 2007 and December 31, 2012, we entered into
contracts with 258 municipalities (including our services agreement with the city of São Paulo) in accordance with the Basic Sanitation Law, of which 33 were entered
into in 2012. As of December 31, 2012, these 258 municipalities accounted for 69.9% of our gross operating revenues (including revenues relating to the construction
of concession infrastructure). In addition to the contracts that have 30-year terms, the municipalities entered into cooperation contracts with the State of São Paulo,
delegating the regulation and monitoring of the provision of services to ARSESP. As of December 31, 2012, 67 of our concessions had expired but we continued to
provide water and sewage services to all 67 municipalities and were in negotiations with these municipalities to execute program agreements to substitute the expired
concessions. From January 1, 2013 through 2034, 38 concessions will expire.
Following the increase in the demand for regulatory work, we created a regulatory affairs department, which focuses on regulatory matters and has centralized
communication with the regulatory agencies, driving business to the new regulatory regime and proposing matters in which we have an interest to ARSESP.
In April 2011, we created a specific area in our Financial, Economic and Investor Relations Office responsible for costs and tariffs, given the subject’s importance
to the continuation of our business. We also created a statutory Regulatory Affairs Committee. The committee is composed of our Chief Executive Officer, our Chief
Financial Officer and Investor Relations Officer, our Metropolitan Officer and our Regional Systems Officer and is responsible for defining the guidelines, strategies
and regulatory recommendations for our Company and coordinating the work of the Regulatory Affairs Department.
37
The current concessions are based on a standard form of agreement between us and the relevant municipality. Each agreement received the prior approval of the
legislative council of each municipality. The assets comprising the existing municipal water and sewage systems are transferred from the municipality to us in order
for us to provide the contracted services. Until 1998, we acquired municipal concessions and the existing water and sewage assets in exchange for our common shares
issued at book value. Since 1998, we have acquired concessions and water and sewage assets by paying the municipality an amount equal to the present value of
30 years of estimated cash flows from the date of acquisition of the concession, assuming a discount of at least 12%. For reference purposes, ARSESP has set the
discount rate for concession contracts at 8.06% since 2011.
The main provisions of our existing concession agreements are as follows:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
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 without prior authorization of the municipality.
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 mains, 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 2.10 to our financial statements. Under concession agreements
executed prior to 1998, the reimbursement for the assets may be through payment of either:
o the book value of the assets; or
o the market value of the assets as determined by a third-party appraiser in accordance with the terms of the specific agreement.
In Brazil, there are three federal legal regimes for contracting water and sewage services: (i) public concessions, regulated by Law No. 8,987/1995, which require
a prior public bidding process; (ii) administration of public services through cooperation agreements between the federal government and local public authorities at
State and municipal level without the need for a public bidding process, regulated by the Public Consortia and Cooperation Agreement Law; and (iii) public-private
partnerships, regulated by Law No. 11,079/2004, used to grant concessions to private companies to provide public services and used in relation to construction works
associated with the provision of public services. Until 2005, we had adopted the regime for public concessions. Following the entry into force of the Public Consortia
and Cooperation Agreement Law, we adopted the administration of public services through cooperation agreements, which can be used alongside the other two
regimes.
Since 1998, 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.
Federal Law No. 11,107, or the Federal Public Consortia and Cooperation Agreement Law, established the legal basis for the administration of public service
contracts, giving greater rights and obligations to municipalities who are responsible for sanitation services and setting out more clearly the provision of services and
the responsibilities of the parties. New agreements entered into following the expiry of concession agreements under the previous law will follow this new model. See
“—Government Regulation—Concessions—Public Consortia and Cooperation Agreement Law for Joint Management.”
38
Our new agreement model follows the provisions of the Basic Sanitation Law. Its main contractual provisions include the joint execution of planning, supervision
and regulation of services, the appointment of a regulatory authority for the services, and periodic disclosure of financial statements.
Furthermore, the economic and financial formulas in new agreements must be based on the discounted cash flow methodology and on the revaluation of returnable
assets. Pursuant to the Basic Sanitation Law, the preexisting assets will be returned to the grantor of the concession. We will carry out all new investments and the
municipalities will record them as assets. The municipalities will then transfer possession of these assets to us for our use and management and will also record a credit
in the same amount of the assets recorded in our favor. According to Article 42 of the Basic Sanitation Law and the new agreement model, investments made during
the contractual period are the property of the applicable municipality, which in turn generates receivables for us that are to be recovered through the operation of the
services. These receivables may also be used as guarantees in funding operations.
Another important development was that the new agreement model includes exemptions from municipal taxes applicable on our operational areas and the
possibility of the revaluation of our assets that existed prior to the execution of the program agreements in cases involving the early resumption of services by the
concession authority.
Municipalities have the inherent power under Brazilian law to terminate concessions prior to their contractual expiration dates for reasons of public interest. The
municipalities of Diadema and Mauá, two municipalities we previously served, terminated our concessions in February 1995 and December 1995, respectively. The
municipality of Mauá terminated our concession with our consent. The municipality of Diadema terminated our concession without our consent after asserting that we
did not provide adequate water and sewage services. In 2011 we and the municipality of Diadema agreed to develop shared infrastructure for water and sewage
services through CAED. According to the agreement, the amount owed to us by Diadema would be repaid through the issuance of shares in CAED. However, CAED
has not yet been established, and we cannot predict whether or when it will be created or begin operations. The receivables owed to us by Mauá and Diadema total
R $85.9 million and R $60.3 million, and have not been recognized in our financial statements due to the uncertainty of our ability to collect. Despite these
developments, we currently supply water on a wholesale basis to both Diadema and Mauá. For further information on these matters, see “Item 8.A. Financial
Information—Consolidated Statements and Other Financial Information—Legal Proceedings – Concession – Related Legal Proceedings.”
We currently do not anticipate that other municipalities will seek to terminate concessions due to our close relationship with municipal governments, recent
improvements in the water and sewage services we provide, and the obligation of the municipality to repay us for the return of the concession. However, we cannot be
certain that other municipalities will not seek to terminate their concessions in the future. See “Item 3.D. Risk Factors—Risks Relating to Our Business—The
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.”
In addition, we are currently involved in litigation with respect to municipalities that intend to expropriate our water and sewage systems, or to terminate
concession agreements before paying us any indemnification. For a detailed discussion on these proceedings, see “Item 8.A. Financial Information—Consolidated
Statements and Other Financial Information—Legal Proceedings—Concession-Related Legal Proceedings.”
Operations in the City of São Paulo and Certain Metropolitan Regions
As of December 31, 2012, 67 concessions had expired which jointly accounted for 18.6% of our gross revenues. We entered into 33 agreements in the year ended
December 31, 2012, bringing the total number of program agreements entered into between 2007 and 2012 to 258. These 33 new agreements accounted for 4.3% of
our total revenues and 4.2% of our intangible assets as of December 31, 2012.
39
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:
(cid:1)
(cid:1)
(cid:1)
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) would be responsible for planning water and sewage services for the city and for reviewing our investment plans.
The management committee consists of six members appointed for two-year terms. The State and the City of São Paulo have the right to appoint three
members each. 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:
(cid:1)
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, which total approximately R$500 million per year.
(cid:1) We must transfer 7.5% of the gross revenues we derive under the convênio, 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.
(cid:1)
(cid:1)
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).
(cid:1) We currently have an investment plan in place that reflects these obligations and addresses their compatibility with the sanitation plans for the 363
municipalities in which we operate, that include, the City of São Paulo and, if necessary, the Metropolitan region. The investment plan is not irrevocable and
will be reviewed by our management committee every four years, particularly with respect to the investments to be executed in the subsequent period.
Wholesale Operations
Wholesale Water Services
We provide water services on a wholesale basis to six municipalities located in the São Paulo metropolitan region (Diadema, Mauá, Santo André, São Caetano do
Sul, Guarulhos and Mogi das Cruzes). Agreements to provide water services on a wholesale basis must comply with the Basic Sanitation Law, which designates these
services as “interdependent activities” and regulates each stage of the service. The law requires that the service be supervised by an independent agency, stipulates
registration of the cost of the service, and requires assurance of payment among the several service providers in order to continue the provision of the services, in
accordance with the rules to be published by ARSESP. Our agreements currently comply with the provisions of the Basic Sanitation Law. In 2012, the revenues from
wholesale water services were R$187.4 million.
In 2011, we and the municipality of Diadema agreed to develop shared infrastructure for water and sewage services through a mixed capital company to be called
Companhia de Agua e Esgoto de Diadema, or CAED. According to the agreement, the amount owed to us by Diadema would be repaid through the issuance of shares
in CAED. However, CAED has not yet been established, and we cannot predict whether or when it will be created or begin operations. Feasibility studies have been
completed and indicate that CAED would have a viable business, but the Diadema municipal authorities have started new negotiations to amend the legislation that
provided for the setting up of CAED. We can give no assurance that we will recover the amount owed to us by Diadema, whether through an investment in CAED or
otherwise. For further information on this outstanding debt, see Note 9 to our consolidated financial statements included elsewhere in this annual report.
40
Wholesale Sewage Services
We provide sewage services on a wholesale basis to the municipalities of Mogi das Cruzes, Santo André, São Caetano, Mauá and Diadema. Our agreement with
Santo André for these services was executed with the intervention of the Public Prosecution Office. Our agreements with the other municipalities resulted from our
environmental efforts and municipal authorities’ awareness of environmental issues. Through these agreements, in 2012 we treated approximately 35 million cubic
meters of sewage from these municipalities. We believe this illustrates our commitment to social and environmental responsibility. In 2012, our revenues from
wholesale sewage services were R$23.8 million.
In December 2008, we entered into a five-year agreement for the collection and treatment of 20% of the sewage generated by the city of Guarulhos. We have not
yet started to provide these services, and such services will only commence when the works on linking the Guaralhos sewage to our sewage system are finalized.
These works are the responsibility the Guarulhos sanitation company.
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. See “—Government Regulation—
Concessions—Public Consortia and Cooperation Agreement Law for Joint Management.” For a description of our operating segments please see Note 21 to our
consolidated financial statements as of and for the year ended December 31, 2012.
Operating segments are presented in our annual report in a manner consistent with the internal reporting provided to management, comprised of the board of
directors and the board of executive officers, pursuant to 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 management
did not review the results of this business. Following our conversion to IFRS, our management decided to continue to exclude the construction results from the
management reporting of our revenues and expenses, thus not basing his decisions on discrete financial information for that business. The characteristics described in
paragraph 5(b) of IFRS 8 for separate operating segments are thus not fulfilled for this particular business. Nonetheless, after our conversion to IFRS and for IFRS
consolidation purposes only, we started to record such results separately as construction revenue and costs under IFRIC 12. Although such information is available
discretely, however, it is not analyzed by our management 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 abstraction of water from various sources, subsequent treatment and distribution to our customers’
premises. In 2012, we produced approximately 3.1 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 71% of water invoiced by volume in 2012.
41
The following table sets forth the volume of water that we produced and invoiced for the periods indicated.
Produced:
São Paulo metropolitan region
Regional systems
Total
Invoiced:
São Paulo metropolitan region
Wholesale
Regional systems
Reused water
Total
2012
Year ended December 31,
2011
(in millions of cubic meters)
2010
2,235.3
823.5
3,058.8
1,181.9
297.5
614.0
0.4
2,093.8
2,182.8
809.2
2,992.0
1,150.6
297.3
596.8
0.3
2,045.0
2,164.4
787.9
2,952.3
1,119.2
293.3
579.5
0.3
1,992.3
The difference between the volume of water produced and the volume of water invoiced generally represents both physical and non-physical water loss. See “—
Water Loss.” In addition, we do not invoice:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
water discharged for periodic maintenance of water mains 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 favelas (shantytowns).
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 abstract water only to the extent permitted by DAEE pursuant to water usage 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 the National Water Agency (Agência Nacional de Águas), or ANA, a federal agency under
the Ministry of the Environment is required. We currently abstract substantially all of our water supply from rivers and reservoirs, with a small portion being
abstracted 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.
In order to supply water to the São Paulo metropolitan region, we rely on 20 reservoirs of non-treated water and 210 reservoirs of treated water, which are located
in the areas under the influence of the eight water producing systems comprising the interconnected water system of the São Paulo metropolitan region. The capacity
of the water sources available for treatment in this area is 72 cubic meters per second. Total current installed capacity is 73.2 cubic meters per second, which can be
treated from the interconnected water system of the São Paulo metropolitan region. Average verified production during 2012 on the interconnected water system of the
São Paulo metropolitan region was 69.4 cubic meters per second. The Cantareira, Guarapiranga and Alto Tietê systems, as a whole, supplied 84.7% of the water we
produced for the São Paulo metropolitan region in 2012.
In 2012, the Cantareira system accounted for 47.1% 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 74.1% of our gross operating revenues (excluding revenues relating to the construction of concession
infrastructure) for the year. The authorization (outorga) for the Cantareira system to use the water in the Piracicaba water basin was renewed on August 6, 2004, for a
ten-year period.
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Water basin committees are authorized to charge both for water usage and the dumping of sewage into water bodies. Since February 2003, we have been incurring
expenses in connection with the use of water from the Paraíba do Sul river basin and, since January 2006, from the Piracicaba, Capivari and Jundiaí river basins. At the
end of 2010, we started to incur expenses in connection with the use of water from the Sorocaba and Médio Tietê river basins and, since 2012, from Baixada Santista
basin. During 2013 we may start to incur expenses in connection with the use of water from the Alto Tietê basin – where the metropolitan region of São Paulo is
located, and also in the basins of Baixo Tietê, Tietê/Batalha, Tietê/Jacaré, Baixo Pardo e Grande, Mogi Guaçu, Pardo, Sapucaí Mirim/Grande, Serra da Mantiqueira,
Ribeira do Iguape/Litoral Sul, Pontal do Paranapanema and Turvo/Grande.
ARSESP has adjusted our tariffs according to the formula that we have used since 2003. According to the formula, “non-controllable” costs, such as costs related
to water use, are passed on to our customers through our tariffs. Although we expect to continue to pass on these expenses to our customers through our tariffs, we are
uncertain as to whether the river basin committees will change the terms of the charges currently applied and whether we will be able to pass on these costs to our
customers. On March 2013, ARSESP disclosed Resolution 406, in which the annual tariff readjustment formula was approved, which will be used in the second tariff
cycle. This formula consists of IPCA percentage variation for the referred period adjusted by the efficiency factor which transfers part of the productivity gains to the
users and by an adjustment factor for the variations in the quality of the services rendered, and this last adjustment is still to be defined and applied from the second
tariff cycle in three years’ time. Regarding the mentioned resolution, the cost for the use of water shall be included in our consumers’ bill. For more information on
water usage regulation, see “—Water Usage.”
The following table sets forth the water production systems from which we produce water for the São Paulo metropolitan region:
Water production system:
Cantareira
Guarapiranga
Alto Tietê
Rio Claro
Rio Grande (Billings reservoir)
Alto Cotia
Baixo Cotia
Ribeirão da Estiva
Total
______________
2012
Production Rate(1)
2011
(in cubic meters per second)
2010
32.7
13.7
12.4
3.7
4.7
1.2
0.9
0.1
69.4
31.5
12.6
13.0
4.0
4.6
1.2
0.9
0.1
67.9
32.7
13.0
10.9
3.9
4.8
1.1
0.8
0.1
67.3
(1) Average of the twelve months ended December 31, 2012, 2011 and 2010.
We own all of the reservoirs in our production systems other than the Guarapiranga and Billings reservoirs and a portion of some of the reservoirs of the Alto Tietê
system, which is owned by other companies controlled by the State. We currently do not pay any charges with respect to the use of these reservoirs. In
December 2001, we entered into an agreement with the State whereby the State, among other things, agreed to transfer the remaining reservoirs in the Alto Tietê
system to us. We accepted, on a temporary basis, the reservoirs in the Alto Tietê System as part of the payment until the State transfers the property rights with respect
to the reservoirs to us. We are unable to assure you whether and when these reservoirs will be transferred to us because the Public Prosecution Office of the State of
São Paulo filed a civil public action alleging that a transfer to us of ownership of the Alto Tietê System reservoirs is illegal.
43
In January 2009, we began operating, monitoring and maintaining the reservoirs in the Alto Tietê system, formed by the Ponte Nova, Paraitinga, Biritiba, Jundiaí
and Taiaçupeba reservoirs. 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.
The coastal region is provided with water principally by surface water from rivers and mountain springs.
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 were able to meet the demand for water in the São Paulo metropolitan region, primarily as a result of our water conservation program, reductions in
water loss, and the installation of new water connections. We installed 212,775, 207,900 and 189,400 new water connections in 2012, 2011 and 2010, respectively.
The interconnected water system of the São Paulo metropolitan region serves 30 municipalities, of which 24 are operated directly by us under this system.
Through this system, we serve the other six municipalities on a wholesale basis, and the distribution is made by other 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 continued provision of regular water supply in the São Paulo metropolitan region, we intend to invest R$3.7 billion from 2013 to 2016 to increase
our water production and distribution capacities as well as to improve the water supply systems. In 2012, our total investment in water supply systems amounted to
R$1.0 billion.
Water Treatment
We treat all water at our water treatment facilities prior to placing it into our water distribution network. We operate 214 treatment facilities, of which the eight
largest, located in the São Paulo metropolitan region, account for approximately 70% of all water we produced in 2012. The type of treatment used depends on the
nature of the source and quality of the untreated water. Water abstracted from rivers requires extensive treatment, while water drawn from groundwater sources
requires less treatment. All water treated by us also receives fluoridation treatment.
Water Distribution
We distribute water through our own networks of water pipes and mains, ranging in size from 2.5 meters to 100 millimeters in diameter. Storage tanks and
pumping stations regulate the volume of water flowing through the networks to maintain adequate pressure and continuous water supply. The following table sets forth
the total number of kilometers of water pipes and mains and the number of connections in our network as of the dates indicated.
Water distribution pipes and mains (in kilometers)
Number of connections (in thousands)
2012
67,647
7,679
As of December 31,
2011
66,389
7,481
2010
65,379
7,295
More than 90.0% of the water pipes in our water distribution network are made of cast iron or polyvinylchloride, or PVC. Distribution pipes at customers’
residences typically are made from high-density polyethylene tubing. Our water mains are mostly made of steel, cast iron or concrete.
As of December 31, 2012, our water distribution pipes and mains included: (i) 34,816 kilometers in the São Paulo metropolitan region; and (ii) 32,832 kilometers
in the Regional systems.
As of December 31, 2012, we had 405 storage tanks in the São Paulo metropolitan region with a total capacity of 2.0 million cubic meters, and 1,759 storage tanks
in the Regional systems. As of that date, we had 124 treated water pumping stations in the São Paulo metropolitan region aqueduct system, including stations at
treatment facilities, intermediate trunk transfer pumping stations and small booster stations serving local areas.
44
Water mains 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 mains 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 mains 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 mains 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 are responsible for covering part of the costs of connecting to our water distribution network that is related to the connection of customers
water pipes that are more than 20 meters away from the water mains. Thereafter, the customer 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 sets forth projected new water connections for the periods indicated.
in thousands
2013
2014
2015
2016
2017
2018
2019
2020
95
80
175
99
77
176
99
78
177
94
78
172
85
79
164
84
80
164
76
82
158
76
82
158
2013
---- 2020
708
636
1,344
São Paulo metropolitan region
Regional systems
Total
Water Loss
The difference between the amount of water produced and the amount of water invoiced generally represents both physical and non-physical water loss. Water
loss percentage represents the quotient of (i) the difference between (a) the total amount of water produced by us less (b) the total amount of water invoiced by us to
customers minus (c) the volume of water set out below that we exclude from our calculation of water loss, divided by (ii) the total amount of water produced by us.
We exclude the following from our calculation of water loss: (i) water discharged for periodic maintenance of water mains 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 associated with water we supply to favelas (shantytowns).
Among the principal indicators utilized to measure rates of water loss are the following:
(cid:1)
(cid:1)
Index of Revenue Loss (IRL), in %; and
Index of total loss per connection, (TLdC) in liters/connection per day.
These indicators are calculated by applying the following formulas:
Vproduced – (Vbilled + Vused)
IRL = ______________________________________
Vproduced
Vproduced – (Vmicromeasured + Vused)
(TLdC) = _____________________________________________________
Nconnection x nº of days of a given period
Where:
Vproduced: corresponds to the volume of water produced at a given period;
Vbilled: corresponds to the volume of water billed at a given period;
45
Vmicromeasured: corresponds to the volume of water micromeasured at a given period;
Vused: corresponds to the volume of water used for operational, public, private and social needs (supply shantytown areas) at a given period;
and
Nconnections: corresponds to the average number of active water connections.
Since 2005, we have used a method of measuring our water loss based on worldwide market practice for the industry. According to this measurement method,
average water loss is calculated by dividing (i) average annual water loss by (ii) the average number of active water connections multiplied by 366. The result of this
calculation is the number of liters of water lost per connection per day.
Using this calculation method, as of December 31, 2012, we experienced 474 liter/connection per day of water loss in the São Paulo metropolitan region and
270 liter/connection per day in the Regional systems, averaging 393 liter/connection per day. We plan to reduce total water loss to around 280 liters/connection and,
in terms of percentage, to 19% by 2020.
Our strategy to reduce water loss has two approaches:
(cid:1)
(cid:1)
reduction in the level of physical loss, which results mainly from leakage. To this end we are primarily replacing and repairing water mains 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 at our water
treatment facilities, and from clandestine and illegal use. To this end we are upgrading and replacing inaccurate water meters and expanding our anti-fraud
personnel.
We are taking measures to decrease physical loss by reducing response time to fix leakages to less than 24 hours and by better monitoring non-visible water mains
fractures. Among other initiatives, we have adopted the following measures to reduce physical water loss:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
the introduction of technically advanced valves to regulate water pressure throughout our water mains 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 mains 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 mains as water usage fluctuates. As of December 31, 2012, we had installed 1,828 valves at strategic points
in the network, with 1,077 valves being installed in the São Paulo metropolitan region and 751 in the Regional systems;
the reconfiguration of interconnected water distribution to permit the distribution of water at lower pressure;
the implementation of routine operational leak detection surveys in high water pressure areas to reduce overall water loss;
the monitoring of and improved accounting 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, more sophisticated water meters that are more accurate and less prone to tampering;
installing water meters where none are present; and
46
(cid:1)
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 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. These laws set certain standards that govern water quality.
In general, the State of São Paulo has excellent water quality from underground or superficial water sources. However, high rates of population growth, increased
urbanization and disorganized occupation of some areas of the São Paulo metropolitan region has 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 also
work to recover the quality of water of mains and invest in improvements of 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 on 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 statute. Our laboratories analyze an average of 50,000 samples per month on distributed water, with samples collected from 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 atomic absorption technique. All of our laboratories have obtained the ABNT NBR ISO 9001 certification and our central laboratory and 12 of our regional
laboratories have obtained the ABNT NBR ISO IEC 17025 accreditation (accreditation for general requirements for the competence of testing and calibration
laboratories) awarded by the INMETRO.
All chemical products used for water treatment are analyzed and follow strict specifications set out in recommendations made by the National Health Foundation
(Fundação Nacional de Saúde), or NHF, the Brazilian Association of Technical Rules (Associação Brasileira de Normas Técnicas), or the ABNT, and the American
Water Works Association, 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, which 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. In 2012, we did not detect
significant algae growth. We participate in the New Life Program which includes a Water Source Program (Programa Mananciais), together with other organizations
engaged in the promotion of urban development and social inclusion to mitigate the pollution problem in the São Paulo metropolitan region. In addition, we also
participate in the Clean Stream Program to clean up important streams in the city of São Paulo. Other initiatives also aimed at improving the water quality in our water
sources located in the metropolitan region of São Paulo are Guarapiranga and Pró-Conexão. See “—Capital Expenditure Program—Main Projects of Our Capital
Expenditure Program—Metropolitan System Investment Program—New Life Program and Clean Stream Program.”
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 have adopted a water fluoridation program designed to assist in the prevention of tooth decay among the population.
Fluoridation primarily consists of adding fluorosilicic acid to water at 0.7 parts per million. We add fluoride to the water at our treatment facilities prior to its
distribution into the water supply network.
47
Sewage Operations
We are responsible for the collection and removal of sewage through our sewage systems and for its subsequent disposal with or without prior treatment. As of
December 31, 2012, we collected approximately 87% of all the sewage produced in the municipalities in which we operate in the São Paulo metropolitan region. In
addition, during the year ended December 31, 2012, we collected approximately 76% of all the sewage produced in the municipalities in which we operate in the
Regional systems. During 2012, we collected approximately 83% of all the sewage produced in the municipalities in which we operated in the State of São Paulo. We
installed 240,687, 246,400 and 233,500 new sewage connections in 2012, 2011 and 2010, 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, 2012, we were responsible
for the operation and maintenance of 45,778 kilometers of sewage lines, of which approximately 24,087 kilometers are located in the São Paulo metropolitan region
and 21,691 kilometers are located in the Regional systems, respectively.
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.
Sewage lines (in kilometers)
Sewage connections (in thousands)
2012
45,778
6,128
As of December 31,
2011
45,073
5,921
2010
44,287
5,718
Our sewage system comprises a number of systems built at different times and constructed primarily from clay pipes and, more recently, PVC tubing. Sewage
lines larger than 0.5 meters in diameter are primarily made of concrete. Our sewage system is generally designed to operate by gravitational flow, although pumping
stations are required in certain parts of the system to ensure the continuous flow of sewage. Where pumping stations are required, we use sewage lines made of cast
iron.
The public sewage system operated by us was structured in order to receive industrial sewage and sewage from non-domestic sources for treatment together with
domestic sewage. Industrial sewage has physical, chemical and/or biological characteristics that are qualitatively different from household effluents. As a result, the
discharge of industrial sewage 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 of operators and the environment. The current environmental legislation establishes standards for the discharge of these effluents into
the public sewage system. These standards are defined in Article 19A of State Decree No. 8,468 dated September 8, 1976. To ensure compliance with legislation,
periodic inspections of the sewage produced by all industrial clients are conducted, and we also request self-monitoring reports from non-domestic sewage-producing
sources.
The discharge of these effluents into the public sewage system is based on technical and administrative procedures. Before the discharge is permitted, we carry out
acceptance studies that assess the capacity of the public sewage system to receive the discharge 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 and the obligation of the effluent producer to conduct certain
adjustments to their business practices in a given time frame. Non-compliance with these penalties and adjustments may ultimately result in the suspension of the
connection and notification of the environmental protection agency (Companhia Ambiental do Estado de São Paulo), or the CETESB, in order for the applicable
measures to be taken. 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. Effluent limitation guidelines consist of a set of parameters that must be verified before the effluents are
discharged into a water body. Water quality standards are based on the classification of water bodies, and take into account the current and expected use of water.
These standards have historically become more and more rigorous as water is a scarce resource.
48
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, with approximately 59% of all residences in the coastal region
currently connected to our sewage network as of December 31, 2012.
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 sets forth projected new sewage connections for the periods indicated.
São Paulo metropolitan region
Regional systems
Total
Sewage Treatment and Disposal
2013
2014
2015
2016
2017
2018
2019
2020
107
110
217
128
114
242
135
111
246
135
108
243
125
118
243
117
118
235
105
123
228
121
101
222
2013-
2020
973
903
1,876
In 2012, approximately 68% and 94% of the sewage we collected in the São Paulo metropolitan region and the Regional systems, respectively, or 77% of the
sewage we collected in the State of São Paulo, was treated at our treatment facilities and afterwards discharged into receiving water bodies such as inland waters and
the Atlantic Ocean, in accordance with applicable legislation. Our sewage treatment facilities have a limited capacity. The sewage collected that is not directly
connected to sewage treatment plants is discharged directly, untreated, to inland waters.
We currently operate 493 sewage treatment facilities and nine ocean outfalls, of which the five largest, located in the São Paulo metropolitan region, have
treatment capacity of approximately 18 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, where there is a liquid phase and a
solid phase that generates sludge. During the first stage, a biological mass grows, forms flakes and is continually re-circulated and put in contact with organic matter,
always with the presence of oxygen (aerobic). The activated sludge process is strictly biological and aerobic, in which the raw sewage and the activated sludge are
mixed, agitated and aerated in units known as secondary decanters where the solid part is separated from the treated wastewater. The settled sludge returns to the
aeration tank or is removed for specific treatment.
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 where the organic matter is treated and discharged to receiving waters. There are 402 secondary treatment facilities in the interior region
of São Paulo State that have treatment capacity of approximately 13.7 cubic meters of sewage per second.
The majority of sewage collected in the coastal region receives treatment and disinfection and is then discharged into rivers and into the Atlantic Ocean through
our ocean outfalls. We have 72 sewage treatment facilities in the coastal region.
49
Our sewage collection system is currently not sufficiently extensive to transport all sewage collected by us to our treatment facilities. As a result, a portion of the
sewage collected by us is discharged untreated into receiving waters. We are a party to a number of legal proceedings related to environmental matters. See “Item 8.A.
Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings.” In addition, our capital expenditure program includes projects
to increase the amount of sewage that we treat. See “Item 4.A. History and Development of the Company—Capital Expenditure Program” and “4.B Business
Overview—Government Regulation—Environmental Regulation—Sewage Requirements.”
Sludge Disposal
The creation of sludge is inherent to 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
presses, drying beds and centrifugation machines to abstract the water from the sludge.
Sludge generated in our sanitation activities is disposed of in landfill in conformity with applicable law. Since landfills have low available capacity throughout the
State of São Paulo, we are seeking other alternatives to disposal in order to reduce the total volume deposited in landfills. Amongst other proposed techniques, we plan
to incinerate and compost sludge, which would produce energy and soil for agricultural use as by products, respectively.
In 2013, under the partnership with Fapesp (Fundação de Amparo à Pesquisa do Estado de São Paulo), we aim to encourage the use of sludge generated in our
water treatment processes to cover landfills, the use of sludge from sewage treatment processes to recover degraded areas and using it for civil construction projects.
Sludge disposal must comply with State and Federal law requirements, such as Resolution No. 375 of August 29, 2006 of the CONAMA, Federal Law
No. 12,305/2010, Federal Decree No. 7,404/2010, State Law No. 12,300/2006 and State Decree No. 54,645/2009.
Principal Markets in Which We Operate
As of December 31, 2012, we operated water and sewage systems in 363 of the 645 municipalities in the State of São Paulo as well as sewage systems in 362 of
them. In addition, we currently supply water on a wholesale basis to six municipalities located in the São Paulo metropolitan region with an urban population of
approximately 3.5 million.
The following table provides a breakdown of gross revenues from water supply and sewage services by geographic market for the periods indicated.
São Paulo metropolitan region
Regional systems
Total
2012
Year ended December 31,
2011
(in millions of R$)
2010
6,625.0
2,309.7
8,934.7
6,144.7
2,165.4
8,310.1
The following table provides a breakdown of gross revenues from water supply and sewage services by category of activity for the periods indicated.
Water supply
Sewage services
Total
2012
Year ended December 31,
2011
(in millions of R$)
2010
4,947.9
3,986.8
8,934.7
4,610.2
3,699.9
8,310.1
50
5,699.6
1,956.3
7,655.9
4,257.2
3,398.7
7,655.9
Competition
In the State of São Paulo, there are approximately 277 municipalities that operate their own water and sewage systems and that collectively have a total population
of approximately 13.5 million, or approximately 31% of the population of the State of São Paulo, excluding the population of the municipalities to which we provide
water services on a wholesale basis.
The competition for municipal concessions arises mainly from the municipalities, as they may resume the water and sewage services that were granted to us and
start providing these services directly to the local population. In this case, the municipal governments would be required to indemnify us for the unamortized portion of
our investment. See “—Business Overview—Our Operations—Concessions.” 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. See “Item 8.A. Financial Information—Consolidated Statements and Other Financial Information—Legal Proceedings.” We negotiate expired
concession agreements and concession agreements close to expiration with the municipalities in an attempt to maintain our existing areas of operations. 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 of water supply to large customers. Several large industrial customers
located in municipalities served by us use their own wells to supply themselves with water. In addition, competition for the disposal of non-residential, commercial
and industrial sludge in the São Paulo metropolitan region has increased in recent years as private companies offer stand-alone solutions inside the facilities of their
customers. We have also established new tariff schedules for commercial and industrial customers in order to assist us in retaining these customers. For this group of
customers, we have a special authorization from ARSESP to establish different tariffs than the ones that agency establishes for regular consumers.
Billing Procedures
The procedure for billing and payment of our water and sewage services is largely the same for all customer categories. Water and sewage bills are based upon
water usage determined by monthly water meter readings. Larger customers, however, have their meters read every 15 days to avoid non-physical loss resulting from
faulty water meters. Sewage billing is included as part of the water bill and is based on the water meter reading.
The majority of the bills for water and sewage services are delivered to our customers in person, mainly through one of our employees or through independent
contractors who are also responsible for reading water meters. The remainder, by judicial determination, is sent by mail. Water and sewage bills can be paid at some
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$0.29 to R$1.15 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 2012, 2011 and 2010, we received payment of 94.7%, 94.8% and 95.5%, respectively, of the amount billed to our retail customers, and 95.5%, 94.7%
and 94.4%, respectively, of the amount billed to those customers other than State entities, within 30 days after the due date. In 2012, 2011 and 2010, we received
100.7%, 96.0% and 97.1%, respectively, of the amount billed to the State entities. Amounts in excess of 100.0% reflect our recovery of amounts billed in prior years.
With respect to wholesale supply, in 2012, 2011 and 2010, we received payment of 50.1%, 54.7% and 58.3%, respectively, of the amount billed within 30 days.
We monitor water meter readings by use of hand-held computers and transmitters. The system allows the meter reader to input the gauge levels on the meters into
the computer and automatically print the bill for the customer. The hand-held computer tracks water consumption usage at each metered location and prepares bills
based on actual meter readings. Part of the water meter monitoring for billing purposes is carried out by our own personnel, trained and supervised by us, and part of it
is carried out by third-party contractors that employ and train their own personnel whose training we supervise.
51
Tariffs
Tariff adjustments follow the guidelines established by the Basic Sanitation Law and ARSESP. The guidelines also establish procedural steps and the terms for
the annual adjustments. The adjustments have to be announced 30 days prior to the effective date of the new tariffs, which take effect in September and last for a
period of at least 12 months.
Tariffs have historically been adjusted once a year and for periods of at least 12 months. See “—Government Regulation—Tariff Regulation in the State of São
Paulo” for additional information regarding our tariffs.
With the publication of the Basic Sanitation Law, the regulation of basic sanitation services, including tariff regulation, became the responsibility of an
independent regulator. To exercise this assignment, the State of São Paulo created ARSESP, which regulates and supervises the services we provide to the State and
also to the municipalities that have agreed to its jurisdiction through a cooperation agreement entered into by that municipality.
In regards 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. In 2007, the municipality of Lins decided to create its own regulatory authority, although it revised this decision in 2010, transferring to
ARSESP the regulation of the water activities performed in Lins, including for the setting of tariffs. The municipality of Lins has reserved, however, the power to
ultimately approve the tariff set by ARSESP. The municipalities in which the hydrographic basins of the Piracicaba, Capivari and Jundiaí rivers are located created a
consortium for the regulation and supervision of our activities in that area in 2011. We are currently involved in legal proceedings in which this consortium is claiming
that it has jurisdiction over our activities in the municipality of Piracaia and that ARSESP has no right to regulate our activities or set tariffs in the municipality. We
cannot predict the outcome of these proceedings or how it may impact our business. See “Government Regulation—Tariff Regulation in the State of São Paulo” for
additional information.
In August 2010, ARSESP approved a 4.05% adjustment for our water and sewage tariffs, starting on September 11, 2010. In 2012 and 2011, we readjusted our
prices by 5.15% and 6.83% starting on September 11, 2012 and on September 11, 2011, respectively. On April 22, 2013, ARSESP approved a revision to tariff index to
a rate of 2.3509% to be applied linearly on tariffs. These adjustments were valid for all municipalities served by us, except for the municipalities of Lins and Magda,
which have different rules and readjustment dates. The tariffs in the municipality of São Bernardo do Campo are adjusted pursuant to a different methodology due to
the difference between the tariffs charged in that municipality when we assumed the service and the tariffs we were charging in other metropolitan municipalities we
serve. The adjustments in São Bernardo do Campo were set so that in September 2012 the tariff charged in this municipality and the tariff charged in the other
municipalities of the region became the same. With respect to the municipality of Lins, our tariff is adjusted in January according to the variation of the IPCA for the
last twelve-month period ended November 30. In regards to Magda, adjustments are expected to be made by 2015.
Regarding the tariff revision process, led by ARSESP, it was agreed that we should have delivered a proposal of a new tariff structure by the end of April, 2013.
However, we have requested that the deadline be extended a year and we still cannot say whether this request will be accepted by the regulator. Until the new tariff
structure we propose is approved by ARSESP, we will continue to use our current tariff structure. As such, we currently divide tariffs into two categories: residential
and non-residential. The residential category is subdivided into standard residential, residential social and favela (shantytowns). 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) ”not-for-profit” entities that pay 50.0% of the
prevailing non-residential tariff; (iii) government entities that have entered into a water loss reduction agreement with us and 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 30,000 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.
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We established a new tariff schedule, effective May 2002, for commercial and industrial customers that consume at least 5,000 cubic meters of water per month
and that enter into fixed demand agreements (take-or-pay) with us for at least one-year terms. In October 2007, the minimum volume for entering into these
agreements was reduced from 5,000 cubic meters per month to 3,000 cubic meters per month. We believe this tariff schedule will help prevent our commercial and
industrial customers from switching to the use of private wells. Since 2008, we have been authorized by ARSESP to establish tariffs for non-residential customers,
such as industrial and commercial customers, that consume more than 3,000 cubic meters per month, with a maximum tariff equal to the tariffs applicable to
non-residential customers that consume more than 50 cubic meters per month. In 2010, ARSESP authorized a reduction in the minimum volume of consumption for
customers that enter into demand agreements with us to a minimum of 500 cubic meters per month.
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. 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.
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 equal the water tariffs. In the interior São Paulo State region, sewage tariffs are approximately 20.0% lower than water tariffs. Wholesale water rates are
the same for all municipalities served. 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 following table sets forth the water and sewage services tariffs by (i) customer category
and class and (ii) volume of water consumed, charged in cubic meters during the years and period stated in the São Paulo metropolitan region.
Customer Category Consumption
Residential
Standard Residential:
0-10(1)
11-20
21-50
Above 50
Social:
0-10(1)
11-20
21-30
31-50
Above 50
Favela (shantytown):
0-10(1)
11-20
21-30
31-50
Above 50
2013(5)
2012(4)
As of December 31,
2011(3)
2010(2)
1.63
2.55
6.37
7.02
0.55
0.96
3.37
4.82
5.32
0.42
0.48
1.59
4.82
5.32
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1.59
2.49
6.22
6.86
0.54
0.94
3.29
4.71
5.20
0.41
0.47
1.55
4.71
5.20
1.52
2.37
5.92
6.52
0.51
0.89
3.13
4.48
4.95
0.39
0.45
1.47
4.48
4.95
1.42
1.22
5.54
6.10
0.48
0.83
2.93
4.19
4.63
0.37
0.42
1.38
4.19
4.63
Customer Category Consumption
Non-Residential
Commercial/Industrial/Governmental:
0-10(1)
11-20
21-50
Above 50
Social Welfare Entities:
0-10(1)
11-20
21-50
Above 50
Government entities that employ the Rational Use of Water Program
(Programa de Uso Racional da Água), or PURA, with reduction
agreement:
0-10(1)
11-20
21-50
Above 50
______________
(1) The minimum volume charged is for ten cubic meters per month.
(2) From September 11, 2010 to September 10, 2011.
(3) From September 11, 2011 to September 10, 2012.
(4) From September 11, 2012 to April 21, 2013.
(5) Since April 22, 2013.
2013(5)
2012(4)
As of December 31,
2011(3)
2010(2)
3.28
6.37
12.21
12.72
1.64
3.19
6.13
6.36
2.45
4.77
9.18
9.54
3.20
6.22
11.93
12.43
1.60
3.12
5.99
6.21
2.40
4.66
8.97
9.32
3.04
5.92
11.35
11.82
1.52
2.97
5.70
5.91
2.28
4.43
8.53
8.86
2.85
5.54
10.62
11.06
1.42
2.78
5.34
5.53
2.14
4.15
7.98
8.29
In 2012, 2011 and 2010, the average tariff calculated for the Regional systems was approximately 30% below the average tariff of the São Paulo metropolitan
region.
The Basic Sanitation Law requires states to establish independent regulators with the responsibility of monitoring basic sanitation services and regulating tariffs.
Federal law No. 11,445/07 and São Paulo State Law No. 1,025/07 established the ARSESP, which regulates and supervises the basic sanitation services that we
provide in municipalities that have agreed to come under ARSESP’s jurisdiction. For the municipalities that have not yet agreed to come under ARSESP’s jurisdiction
for which we currently provide basic sanitation services, we determine tariffs based on State Decree 41,446/96. ARSESP has proposed or enacted a number of
regulatory changes, including the following:
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In 2008, the tariff adjustment formula was reviewed. In 2009, ARSESP opened the methodology for tariff revisions for public discussion and hearings. In
2010, ARSESP published Resolution No. 156. This resolution established the methodology and general criteria for the valuation of our regulatory asset base
to be used for purposes of tariff review processes and auditing. During 2011 and 2012 ARSESP held further public consultations regarding the methodology
for tariff revisions, which was finally specified and disclosed in April 2012. In November 2012, ARSESP published a preliminary technical note for public
consultation, proposing a preliminary initial maximum average tariff (P0) and efficiency gains factor (X), based on a preliminary evaluation of assets held by
us. Following further public consultations, in March 2013 ARSESP published two resolutions, Resolution No. 406 and Resolution No. 407.
Resolution No. 406 sets out the following: (i) an initial maximum average tariff (P0) and a preliminary asset base value to apply until the conclusion of an
external audit of our asset base, resulting in a tariff revision of 2.3509%; (ii) authorizes the repayment to consumers of the regulation and supervision rate of
0.5% immediately after the conclusion of the operational adjustments necessary for the inclusion of this rate in the bills in the municipalities where it will be
charged; (iii) ARSESP also establishes an annual tariff adjustment formula, to be implemented during the second tariff cycle, consisting of the IPCA variation
(a consumer price index) for the period, adjusted by an efficiency factor designed to transfer a portion of our productivity gains to consumers, and further
adjusted to reflect changes in service quality to be defined and applied as of the third year of the second tariff cycle. According to ARSESP’s timetable the
final maximum average tariff (P0) will be announced in August 2013 after the asset base value presented by us is audited.
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A tariff revision of to a rate of 2.3509% was implemented in April 2013 pursuant to Resolution No. 406. Additionally, we will pass an inspection fee of 0.5%
to consumers immediately after the conclusion of the operational adjustments necessary for the inclusion of this rate in the bills to municipalities where it will
be charged.
Resolution No. 407 authorizes us to pass on to the service bill legal charges defined by municipal legislation, which under the Program Contracts and the
Sewage and Water Supply Service Contracts must be considered in the tariff revision.
In April 2013, ARSESP passed Resolution No. 413, which effectively suspended Resolution No. 407, thereby postponing the authorization for the passing on to
consumers of billing of taxes to municipalities, which prior to this Resolution had been established in Resolution No. 407. The final decision regarding Resolution
No. 407 has been postponed until August 2013.
In August 2012, ARSESP published Resolution No. 346, which established the principle that users should be compensated for any interruptions in water supply.
Implementation of this regulation has been suspended pending further technical discussions.
Marketing Channels
As of December 31, 2012, we were the concessionaire for the provision of water supply and collection, treatment and disposal of sewage services directly to end
consumers for 363 municipalities of the State of São Paulo. We also supply water on a wholesale basis to six municipalities located in the São Paulo metropolitan
region. It is the responsibility of these municipalities to then distribute the water to end consumers. We provide sewage services to five of these municipalities.
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 “4.B. Business Overview—Wholesale Operations.”
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, 2012, we
used 1.76% 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. See “Item 3.D. Risk Factors—
Risks Relating to Our Business—We are exposed to risks associated with the provision of water and sewage services.”
Energy prices have a significant impact on our results of operations. An average increase in energy prices of 17.6% in 2003 negatively affected our results of
operations in 2004. In 2012, 44% of our total energy consumption occurred within the “free market,” where we can more efficiently negotiate the supply of energy.
This energy was provided by Companhia Energética São Paulo, or CESP, pursuant to a long-term contract expired in October 2012. As of October 2012, we entered
into long-term contracts with AES Tiête (39%) and Tractebel Energia S.A. (61%) to provide these services until 2015.
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, 2012, we had paid a total aggregate amount of R$6.5 million in premiums.
In addition, we paid R$1.5 million for a D&O insurance policy, covering R$4.4 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.
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Environmental Matters
Our environmental policy establishes environmental management directives that allow us to become a contributing force to environmental sustainability and
excellence. These directives are based on a systematic approach to the environment, which allows us to develop a plan that integrates economic, environmental and
social dimensions of our work with sustainable use of natural resources.
In order to coordinate the environmental demands with the specific needs of the different places we operate, we have implemented 20 Environmental Management
Centers (Núcleos de Gestão Ambiental), or NGAs. The NGAs are closely involved in operational matters, providing decision-making support at a local level and
seeking to ensure that environmental guidelines are respected throughout our organization. In this manner, they help contribute to the ongoing improvement of our
environmental performance.
We have the following environmental management programs:
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execution of an Environmental Management System, or EMS, in our water and sewage treatment stations (“WTS” and “STS”). The EMS is present in 65
stations and we intend to expand it to 129 plants by the end of 2013. We also expect to have it implemented in 302 WTSs and STSs by 2018. Additionally,
we pursue the ISO 14001 certification for our strategic plants. As of December 31, 2012, we have ISO 14001 certification for 50 STSs.
participation in the Carbon Disclosure Project;
conception and formation of the Corporate Management of Greenhouse Gas Program (Programa Corporativo de Gestão de Emissões de Gases de Efeito
Estufa);
formation and implementation of a corporate program for obtaining and maintaining environmental licenses and granting of water usage rights (Programa
Corporativo de Manutenção e Obtenção do Licenciamento Ambiental);
the implementation of the Environmental Education Program (PEA SABESP), including over one hundred environmental education actions and projects
involving the community and other stakeholders;
management of our institutional representation in the State and National Systems of Water Resources Management, including training of company
representatives to participate in councils of the National and State Systems for the Management of Water Resources (Sistemas Nacional e Estadual de
Gerenciamento de Recursos Hídricos e Meio Ambiente), training of the representatives for participation in the process of establishing criteria for the charging
of water usage, monitoring of water basin plans (Planos das Bacias), water bodies classification programs and the establishment or review of specific
legislation on the matter; and
implementation of the SABESP 3-Rs Program (Programa SABESP 3Rs) for the reduction, re-use and recycling of waste of administrative activities, a
program involving the two largest administrative areas of our Company with plans to include all other administrative areas.
In addition to corporate environmental management initiatives, since 2008, we have launched several projects to benefit the environment by engaging the
community and third parties with non-governmental organizations, including:
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Oil Recycling Program (Programa de Reciclagem de Óleo de Fritura);
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(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
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Program of Lectures on Environmental Management (Ciclos de Conferências de Gestão Ambiental);
Supporters of Sustainability (Audiências de Sustentabilidade);
‘Nossa Guarapiranga’ Project (Programa Nossa Guarapiranga);
Environmental Support Actions (ecomobilizações);
First Green Building (Primeiro Predio Verde Certificado);
Recycling programs;
Reforestation Program and Seedling Plantation Program
Green Post (Ecoposto Sabesp);
(cid:1) Maintaining of environmentally protected areas;
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(cid:1)
Green Life Program (Programa Verde Vida); and
Support and sponsoring of environmentally important projects and initiatives;
Climate Change Regulations: Reduction of Greenhouse Gases (GHG)
We are required to comply with laws and regulations related to climate change, including international agreements and treaties to which Brazil is a signatory.
The São Paulo State Climate Change Policy (Law No. 13,798), enacted on November 9, 2009, seeks to reduce global emissions of carbon dioxide by 20.0% by
2020 compared with 2005 levels. Brazil’s Climate Change Policy (Law No. 12,187), enacted on December 29, 2009, establishes a voluntary national commitment to
reduce Brazil’s currently projected GHG emissions for 2020 by a percentage between 36.1% and 38.9%. If legislation requires us to reduce our emissions, we may do
so by transforming biogas from the treatment of sewage into energy, for example, which may lead to potential economic gains.
We have begun significant initiatives, such as the corporate program for water loss reduction and the implementation of small hydroelectric power plants, to reduce
GHG emissions during the coming years. We recently launched the Aquapolo project, the fifth largest project in the world to use reclaimed water production for
industrial purposes, which uses treated sewage as input. This project, capable of producing 1,000 liters per second (Ps) of reclaimed water, will increase the supply of
treated water for the São Paulo metropolitan region and may potentially reduce GHG emissions. Our investments in the Aquapolo project amounted to approximately
R$252 million. We created our inventory of GHG emissions for the year 2008 and in 2012 updated this inventory for the years 2009 and 2010. Moreover, we are
developing a management program for GHG emissions.
At this point, it is still not possible to predict if climate change policies will provide opportunities or generate new costs for us. Reducing our emissions of carbon
dioxide will involve costs and expenses related to implementing more stringent control mechanisms, adopting pollution prevention measures and actions to minimize
the generation of GHGs. We may not receive financial incentives to offset all or part of these costs. In addition, if limitations in GHG emissions affect our supply
chain and increase our costs, we may not be able to pass on these costs to our end consumers. See “4.B. Business Overview—Tariffs.”
Regulation of GHG emissions could also benefit us in the short term, since we may be able to obtain subsidies, financial investments and tax incentives for
projects to protect and restore water sources, conserve water, treat sewage, conserve energy, increase energy efficiency, and promote self-generated energy, among
other projects that seek to reduce the impact of climate change.
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Carbon Disclosure Project
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Carbon Disclosure Project Investors. We participate in the Carbon Disclosure Project, a global initiative focused on the financial risks related to climate
change. Through this project, main international institutional investors ask the world’s largest companies to demonstrate that they are managing carbon
effectively. We have received and responded to the project’s questionnaires since 2006. The companies that opt to have their answers disclosed to the public,
as in our case, have their answers published in an international website of public interest. The questionnaire asks mainly questions related to the aspects of
climate change and corporate governance, the physical, financial and regulatory effects of climate change, and opportunities that affect or could positively or
negatively affect us.
Carbon Disclosure Project Supply Chain. On December 2010, we adhered to the Carbon Disclosure Project Supply Chain 2011. We only participated in this
program in 2011 due to the low support of suppliers.
Physical Effects of Climate Change
Since our financial performance is closely linked to climate patterns that influence the availability of water (in terms of quantity and quality of water resources),
extreme weather conditions may adversely affect our business and operations. If long-term climate change causes significant alterations in environmental conditions,
such as an increase in the frequency of extreme weather conditions, this could affect the quality and quantity of water available for abstraction, treatment and supply,
affecting the costs of services and tariffs.
An increase in heavy rainfall can impact water quality and the regular operation of water sources, including abstraction of water from our dams, through increased
soil erosion, silting, pollution and eutrophication of aquatic ecosystems. In addition, increased flows of rainwater into sewage systems may overwhelm the capacity of
sewage treatment plants. We may need to build larger reservoirs, since it is not feasible to increase the size of our existing reservoirs, or increase operational capacity
by further automating our existing equipment. To increase automation, we would need to purchase and operate tools to measure dam levels and volumes, river output
and the rain in hydrographic basins, create mathematical models for real time operations, and train technicians to operate these systems. As an alternative, we may
need to implement new production systems.
In the case of prolonged periods of drought, for example, reduced water levels in dams can cause an increase in the concentration of plant matter by increasing
eutrophication and, consequently, increasing water treatment costs and operational complexity. In addition, prolonged periods of drought in watersheds such as the São
Paulo metropolitan region, where most of our production is concentrated, may result in the growth of vegetation in the reservoir flooding areas, which can impact water
quality due to the accumulation of organic matter. In such cases our production costs may increase, affecting our financial margins and the quality of water we
produce. 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 energy supply. A lack of rainwater could lead to instability in domestic water supplies and in sewage collection and treatment services,
which could damage our reputation. 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.
We are also the concessionaire for water and sewage services for all the coastal municipalities of the State of São Paulo. A rise in the sea level would result in
increased salinity of inland water supplies, which may affect water treatment in these areas. Rising sea levels may also increase infiltration rates and alter the runoff
regime of the sewage systems, which may affect the sanitary system.
Extreme climate changes may also affect the extraction, production and transportation of the materials necessary for our operations, such as water treatment
materials, and may lead to an increase in the cost of these materials. A rise in air temperature could also increase consumer demand for water, increasing the need to
expand both water supply and sewage treatment.
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See “Item 3.D. Risk Factors—Risks Relating to Our Business—New laws and regulations relating to climate change and changes in existing regulation, as well as
the physical effects of climate change, may result in increased liabilities and increased capital expenditures, which could have a material adverse effect on us.”
Government Regulation
Basic sanitation services in Brazil are subject to an extensive federal, state and local legislation and regulation that, among other matters, regulates:
the granting of concessions to provide water and sewage services;
the development of public private partnerships;
the need of a public bidding process for the appointment of private water and sewage services providers;
the need of setting up an agreement for the appointment of public water and sewage services providers;
the joint management of public services through cooperation, allowing for a program agreement without the need for a public bidding process for the service
provider, subject to the condition that the planning, execution and monitoring activities are not executed by the service provider;
minimum requirements for water and sewage services;
water usage;
water quality and environmental protection; and
governmental restrictions on the incurrence of indebtedness applicable to state-controlled companies.
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General
Pursuant to Article 23 of the Brazilian Constitution, 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 provides that, by law, the State must provide the conditions for 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. State law
authorized our formation to plan, provide and operate water and sewage services in the State and also acknowledged the autonomy of the municipalities.
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.
In Brazil, there are three federal legal regimes for contracting water and sewage services: (i) public concessions, regulated by Law No. 8,987/1995, which require
a prior public bidding process; (ii) administration of public services through cooperation agreements between the federal government and local public authorities at
State and municipal level without the need for a public bidding process, regulated by the Public Consortia and Cooperation Agreement Law; and (iii) public-private
partnerships, regulated by Law No. 11,079/2004, used to grant concessions to private companies to provide public services and used in relation to construction works
associated with the provision of public services. Until 2005, we had adopted the regime for public concessions. Following the entry into force of the Public Consortia
and Cooperation Agreement Law, we adopted the administration of public services through cooperation agreements, which can be used alongside the other two
regimes.
The Public Consortia and Cooperation Agreement Law and the Basic Sanitation Law have caused significant impacts in the development of the state sanitation
policy and the regulatory structuring of the industry.
Because we are the legal concessionaire for the State of São Paulo for water and sewage services, serving approximately 59% of the State’s population and
providing sanitation services through concession agreements, the Consortium Law affects us on the expiry of our concession agreements entered into in the 1970s
when the Brazilian Sanitation Plan (Plano Nacional de Saneamento), or PLANASA, was created. The Consortium Law has caused important changes in the
relationship among municipalities, states and public sanitation service providers, most notably in mixed capital companies, such as us, because of the implementation
of the program agreements as a substitute for concession agreements.
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In addition, the Basic Sanitation Law in its role as a general guideline for the development of the Brazilian sanitation industry, addresses the conditions for the
delegation of water and sewage services, the exercise of ownership by the granting authority and the regulatory conditions for the industry. The Basic Sanitation Law
also provides for a significant amendment to Article 42 of the Concessions Law, which establishes the termination of concessions prior to the expiration date and the
reversibility conditions for unamortized assets. The amendment requires that the service provider be compensated for unamortized assets, prioritizing an agreement
between the parties setting out the criteria for calculation and payments of indemnity.
The Basic Sanitation Law
On January 5, 2007, Federal Law No. 11,445, or the Basic Sanitation Law, was enacted, establishing nationwide guidelines for basic sanitation and seeking to
create appropriate solutions for the situation of each state and municipality, facilitating the technical cooperation between the state and municipalities. In addition, the
federal government will enact its public policy to facilitate access to financing alternatives that are compatible with the costs and terms of the sanitation industry, in
substitution of the PLANASA model. On June 21, 2010, the federal government enacted Federal Decree No. 7,217, regulating the Basic Sanitation Law. See “Risk
Factors—Risks Relating to our Business—The Brazilian Basic Sanitation Law is still in the process of implementation and interpretation, and doubts remain as to its
full impact on the industry. ARSESP, the regulator, has the function to implement regulations under the Basic Sanitation Law within the State of São Paulo, and is in
the process of reviewing, implementing and proposing changes to São Paulo State water and sewage regulations, including potentially significant changes to the tariff
methodology and structure applicable to our business. The current regulatory uncertainty, and any of the changes that are currently proposed, may have an adverse
effect on our business.”
The Basic Sanitation Law establishes the following principles for basic sanitation public services: universalization, integrality, efficiency and economic
sustainability, transparency of actions, social control and integration of infrastructure and services with the management of water resources. It does not define the
ownership of the sanitation services, but establishes the minimum liability for the exercise of ownership, such as the development of the sanitation plan, definition of
the person responsible for regulation and control and, establishment of the rights and obligations of the users and of the social control mechanisms. It also defines the
regionalized performance of the services (i.e., one single provider serves two or more owners, for which there may be one plan for the combination of services).
In addition, the Basic Sanitation Law defines the guidelines and objectives of the federal basic sanitation policy to be observed when securing public funds
generated or operated by agencies or entities of the federal government, and foresees the possibility of having subsidies as an instrument of social policy to ensure
access to basic sanitation services to everyone, particularly the low-income population. The subsidies may be granted either directly, through tariffs or indirectly,
depending on the characteristics of the beneficiaries and on the source of the funds.
Furthermore, the Basic Sanitation Law also provides that the sanitation services may be interrupted by the service provider, in the event of default of payment of
the tariffs by the customer, among other reasons, after written notice, as long as minimum health requirements are met.
The Basic Sanitation Law also establishes the criteria for the reversal of assets at the time of termination of the agreement and with regard to the concessions, such
as those that have expired or are effective for an indefinite term, or those that were not formalized by an agreement. In addition, the Basic Sanitation Law provides the
basis for calculating the amount of an indemnity due, which must be calculated by a specialized institution chosen by mutual agreement between the parties.
Pursuant to the Basic Sanitation Law, the parties of the concession may enter into an agreement with respect to the payment of the indemnification due to the
concessionaire. However, in the absence of an agreement, the Basic Sanitation Law establishes that the indemnification must be paid in no more than four equal and
successive annual installments, with the first installment payable by the last business day of the fiscal year in which the assets are reversed.
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Tariff Regulation in the State of São Paulo
The tariffs for our services are subject to Federal and State regulation.
On December 16, 1996, the governor of the State of São Paulo issued a decree which approved the existing tariff system and allowed us to continue to set our own
tariffs. We used to set our tariffs based on the general objectives of maintaining our financial condition and preserving “social equality” in terms of the provision of
water and sewage services to the population while providing a return on investment. The governor’s decree also directs us to apply the following criteria in
determining our tariffs:
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category of use;
capacity of the water meter;
characteristics of consumption;
volume consumed;
fixed and floating costs;
seasonal variations of consumption; and
social and economic conditions of residential customers.
With the enactment of the Basic Sanitation Law and Federal Consortium Law, we are prohibited from planning, overseeing and regulating services, which includes
determining the tariff policy to be adopted. Such activities are to be exercised by the owner of the concession. Other than the responsibility for planning, the
remaining activities may not be delegated.
The current tariff structure maintains different tariff schedules, depending upon whether a customer is located in the São Paulo metropolitan region or the Regional
systems. There are four levels of volume consumed for each category of customer, except for the residential social and favelas (shantytowns). 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. Customers are billed on a monthly basis. Water and sewage bills are based upon water usage determined by monthly water meter
readings. Larger customers, however, have their meters read every 15 days to avoid nonphysical loss resulting from faulty water meters. Sewage billing is included as
part of the water bill and is based on the water meter reading. We are also authorized to enter into individual contracts with certain customers, such as municipalities,
to supply water or sewage services on a wholesale basis.
The Basic Sanitation Law requires states to establish independent regulators with the responsibility of monitoring basic sanitation services and regulating tariffs.
Federal law No. 11,445 and São Paulo State Law No. 1,025/07 established the ARSESP, which regulates and supervises the basic sanitation services that we provide in
municipalities that have agreed to come under ARSESP’s jurisdiction. For the municipalities that have not yet agreed to come under ARSESP’s jurisdiction for which
we currently provide basic sanitation services, we determine tariffs based on State Decree 41,446/96. ARSESP has proposed or enacted a number of regulatory
changes, including the following:
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In 2008, the tariff adjustment formula was reviewed. In 2009, ARSESP opened the methodology for tariff revisions for public discussion and hearings. In
2010, ARSESP published Resolution No. 156. This resolution established the methodology and general criteria for the valuation of our regulatory asset base
to be used for purposes of tariff review processes and auditing. During 2011 and 2012 ARSESP held further public consultations regarding the methodology
for tariff revisions, which was finally specified and disclosed in April 2012. In November 2012, ARSESP published a preliminary technical note for public
consultation, proposing a preliminary initial maximum average tariff (P0) and efficiency gains factor (X), based on a preliminary evaluation of assets held by
us. Following further public consultations, in March 2013 ARSESP published two resolutions, Resolution 406 and Resolution 407.
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(cid:1)
(cid:1)
(cid:1)
Resolution No. 406 sets out the following: (i) an initial maximum average tariff (P0) and a preliminary asset base value to apply until the conclusion of an
external audit of our asset base, resulting in a tariff revision of 2.3509; (ii) authorizes the repayment to consumers of the regulation and supervision rate of
0.5% immediately after the conclusion of the operational adjustments necessary for the inclusion of this rate in the bills in the municipalities where it will be
charged; (iii) ARSESP also establishes an annual tariff adjustment formula, to be implemented during the second tariff cycle, consisting of the IPCA variation
(a consumer price index) for the period, adjusted by an efficiency factor designed to transfer a portion of our productivity gains to consumers, and further
adjusted to reflect changes in service quality to be defined and applied as of the third year of the second tariff cycle. According to ARSESP’s timetable the
final maximum average tariff (P0) will be announced in August 2013 after the asset base value presented by us is audited.
A tariff revision of to a rate of 2.3509% was implemented in April 2013 pursuant to Resolution No. 406. Additionally, we will pass an inspection fee of 0.5%
to consumers immediately after the conclusion of the operational adjustments necessary for the inclusion of this rate in the bills to municipalities where it will
be charged.
Resolution No. 407 authorizes us to pass on to the service bill legal charges defined by municipal legislation, which under the Program Contracts and the
Sewage and Water Supply Service Contracts must be considered in the tariff revision.
In April 2013, ARSESP passed Resolution No. 413, which effectively suspended Resolution No. 407, thereby postponing the authorization for the passing on to
consumers of billing of taxes to municipalities, which prior to this Resolution had been established in Resolution No. 407. The final decision regarding Resolution
No. 407 has been postponed until August 2013.
In August 2012, ARSESP published Resolution No. 346, which established the principle that users should be compensated for any interruptions in water supply.
Implementation of this regulation has been suspended pending further technical discussions.
Furthermore, since Law No. 11,445 permits municipalities to create their own regulatory agencies rather than being subjected to overview by ARSESP, a number
of municipalities created their own regulatory agencies. The municipality of Lins, which had decided in 2007 to create its own regulatory authority, revised this
decision in 2010 and transferred the regulation of the water activities performed in Lins, including the setting of tariffs, to ARSESP. Lins has retained, however, the
power to ultimately approve the tariff set by ARSESP. The municipalities of São Bernardo do Campo and Magda retained the power to readjust the tariffs applied
therein. Additionally, the municipalities in which the hydrographic basins of the Piracicaba, Capivari and Jundiaí rivers are located created a consortium for the
regulation and supervision of our activities in that area in 2011. We are currently involved in legal proceedings in which this consortium is claiming that it has
jurisdiction over our activities in the municipality of Piracaia and that ARSESP has no right to regulate our activities or set tariffs in the municipality. We cannot
predict the outcome of this case or how it may impact our business. See “Risk Factors—Risks Relating to Our Business—The Brazilian Basic Sanitation Law is still in
the process of implementation and interpretation, and doubts remain as to its full impact on the industry. ARSESP, the regulator, has the function to implement
regulations under the Basic Sanitation Law within the State of São Paulo, and is in the process of reviewing, implementing and proposing changes to São Paulo State
water and sewage regulations, including potentially significant changes to the tariff methodology and structure applicable to our business. The current regulatory
uncertainty, and any of the changes that are currently proposed, may have an adverse effect on our business.”
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Consumer Relations in the State of São Paulo
In 2011 ARSESP altered the standard contract that we are required to use in our relationships with retail customers, requiring that invoices be sent to the consumer
of the service rather than the owner of the property. We estimate that this change will affect ongoing legal disputes, particularly those regarding collection procedures,
as well as business discussions in general. Since this change is still being implemented, we are not currently able to predict its impact on our business.
In 2009 ARSESP enacted rules regarding the following:
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general terms and conditions for water and sewage services;
procedures for communication regarding any failure in our services;
penalties for deficiencies in the provision of basic sanitation services; and
procedures for confidential treatment of our customers’ private information.
We are currently evaluating the enforceability and legality of some of these rules. Implementation of these rules started during 2011, is currently ongoing, and is
expected to continue for the next few years. The implementation of these rules will impact our commercial and operations processes, and may adversely affect us in
ways we cannot currently predict.
Regarding changes to the communication process for the reporting of failures, ARSESP has modified the rules and standards for supervision and reporting of
incidents. We have implemented these requested changes. Currently, part of the reporting of incidents occurs online, through the Incident Reporting System (“Sistema
de Comunicação de Incidentes”) established by ARSESP, which introduces greater transparency and control to our operations.
We are attentive to these regulatory changes, have been working toward meeting ARSESP’s requirements and recommendations, and have presented technical,
legal and factual reasons for any conduct that ARSESP may find irregular. As a result, we are subject to few regulatory infractions and to limited fines. See “Risk
Factors—Risks Relating to Our Business—The Brazilian Basic Sanitation Law is still in the process of implementation and interpretation, and doubts remain as to its
full impact on the industry.” ARSESP, the regulator, has the function of implementing regulations under the Basic Sanitation Law within the State of São Paulo, and is
in the process of reviewing, implementing and proposing changes to São Paulo State water and sewage regulations, including potentially significant changes to the
tariff methodology and structure applicable to our business. The current regulatory uncertainty, and any of the changes that are currently proposed, may have an
adverse effect on our business.”
Concessions
Concessions for providing water and sewage services are formalized by agreements executed between the state or municipality, as the case may be, and a
concessionaire to which the performance of these services is granted in a given municipality or region. Our concessions normally have a contractual term of up to 30
years. However, our concessions in general can be revoked at any time if certain standards of quality and safety are not met, or in the event of default of the terms of
the concession agreement.
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. Subsequently, the municipality will be in charge of rendering services or of conducting a public bidding process to grant the concession to potential
concessionaires, including agreements with public companies directly. Although the Constitution of the State of São Paulo determines that the relevant municipality
would have to pay us for the unamortized book value of the assets related to any concession and assume any corresponding debt, with the exclusion of any amounts
that have been paid to us by the municipality, upon termination or non-renewal of the concession, the payment for termination may not be effected immediately, and
any termination could negatively affect our cash flows, operating results and financial situation. The Basic Sanitation Law reduced the maximum time period for
payment of indemnification in such cases to four years. See “Item 3.D. Risk Factors—Risks Relating to Our Business—The 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.”
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The Federal Concessions Law No. 8,987/1995 and the State Concessions Law No. 7,835/1992 require that the granting of a concession by the government be
preceded by a public bidding process. However, the Federal Public Bidding Law No. 8,666/1993, which establishes the rules for the public bidding process, provides
that a public bidding process can be waived under certain circumstances, including in the case of services to be provided by a public entity created for such specific
purpose on a date prior to the effectiveness of this law, provided that the contracted price is compatible with what is practiced in the market. Furthermore, a provision
of the Federal Public Bidding Law, as amended by the Public Consortia and Cooperation Agreement Law, provides that the program contracted can be executed with
waiver of a public bidding process.
In the majority of municipalities where we operate, the new contracts have been formalized pursuant to the provisions of the Federal Public Bidding Law that
allows the public bidding process to be waived under certain circumstances. In addition, there are pending cases before the Brazilian Supreme Court regarding whether
the right to execute concession and program agreements in the metropolitan regions belongs to the State or the municipal government. On February 28, 2013 the
Brazilian Supreme Court decided a pending case on this matter related to the State of Rio de Janeiro. A majority of the court held that the State and municipal
governments must set up new joint entities to oversee the planning, regulation and auditing of basic sanitation services in metropolitan regions. On March 6, 2013, the
court ruled that this decision would come into effect after a 24-month period with respect to the State of Rio de Janeiro. The São Paulo metropolitan region accounted
for 74.1% of our gross operating revenue in 2012 (excluding revenues relating to the construction of concession infrastructure). 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 operation. See “Item 3.D. Risk Factors—Risks Relating to Our Business –”The Brazilian Basic Sanitation Law is still in the
process of implementation and interpretation, and doubts remain as to its full impact on the industry. ARSESP, the regulator, has the function of implementing
regulations under the Basic Sanitation Law within the State of São Paulo, and is in the process of reviewing, implementing and proposing changes to São Paulo State
water and sewage regulations, including potentially significant changes to the tariff methodology and structure applicable to our business. The current regulatory
uncertainty, and any of the changes that are currently proposed, may have an adverse effect on our business.”
On June 18, 2009, Municipal Law No. 14,934/2009 was enacted and this law revoked Law No. 13,670/2003, which had originally created the discussion on
whether the State or the Municipality was the one with the power to grant and monitor formal concessions for water and sewage services in the city of São Paulo. On
June 23, 2010, we entered into a formal agreement with both the State and the city of São Paulo to regulate the provision of water and sewage services in the city of
São Paulo for a 30-year period, which may be extended for an additional 30-year period.
Public Consortia and Cooperation Agreement Law for Joint Management
On April 6, 2005, the federal government enacted Federal Law No. 11,107, or the Federal Public Consortia and Cooperation Agreement Law, which regulates
Article 241 of the Brazilian Constitution. This statute provides general principles to be observed when a public consortia enters into contracts with the Brazilian
political divisions and subdivisions (the federal government, states, the Federal District and municipalities) aiming at the joint management of public services of
common interests.
Federal Decree No. 6,017/2007 details the conditions of establishment of joint management and the execution of the program agreement regulating the Public
Consortia and Cooperation Agreement Law. This federal legislation introduces significant changes in the relationship among municipalities, states and companies
providing public sanitation services, prohibiting the latter from exercising activities of planning, oversight and regulation, including tariff regulation, of the services and
creating the program agreement for contracting entities whose share control is held by one of the Brazilian political divisions and subdivisions upon waiver of the
public bidding process and compliance with concession legislation, as applicable.
On January 13, 2006, the Governor of the State of São Paulo enacted State Decree No. 50,470, amended by State Decrees No. 52,020, dated July 30, 2007, and
No. 53,192, dated July 1, 2008, which provide for the rendering of water and sewage services in the State of São Paulo. According to these decrees, we may enter into
agreements with municipalities in connection with the provision of water and sewage services by means of the so-called “program agreement without a public bidding
process.” In addition, these decrees establish that we will continue to render services in the areas covered by the concession granted by the State.
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Based on these statutes, in January 2007 we executed our first program agreement with the municipality of Lins, located in the State of São Paulo. Subsequently,
we formalized agreements with other municipalities in the State of São Paulo. These other municipalities transferred the oversight and regulation of our services to the
State of São Paulo through a cooperation agreement.
On June 8, 2006, the State of São Paulo enacted Decree No. 50,868 creating the Commission for the Regulation of Sanitation Service of the State of São Paulo
(Comissão de Regulação do Serviço de Saneamento do Estado de São Paulo – CORSANPA) to regulate sanitation services. The Commission for the Regulation of
Sanitation Service of the State of São Paulo is directly subordinated to the State Secretariat for Sanitation and Water Resources.
The main duty of the Commission for the Regulation of Sanitation Service of the State of São Paulo was conducting studies for the creation of a regulatory agency
for the basic sanitation industry and the presentation of legal and regulatory measures. The completion of such duties resulted in the publication of supplementary Law
No. 1,025 of December 7, 2007, which created ARSESP. Furthermore, Supplementary Law No. 1,025/2007 maintained the State Sanitation Council (Conselho
Estadual de Saneamento – CONESAN), created by Supplementary Law No. 7,750/92, as an advisory council to define and implement the state basic sanitation policy,
and the State Sanitation Fund (Fundo Estadual de Saneamento -FESAN). The State Sanitation Fund is connected to the State Secretariat for Sanitation and Water
Resources, and collects and manages resources that support State-approved programs, as well as the development of technology, management and human resources
and a sanitation information system, in addition to other support programs.
ARSESP regulates the basic sanitation services that belong to the State, relating to the federal and municipal jurisdictions and prerogatives, and is responsible for:
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the compliance with and enforcement of state and federal basic sanitation legislation;
the publication of the organizational platform for the services, indicating the types of services provided by the State, as well as the equipment and facilities
that compose the system;
the acceptance, where applicable, of the legal attributions of the jurisdictional authority;
the establishment, in accordance with the tariff guidelines defined by Decree No. 41,446/96, of tariffs and other methods that provide compensation for our
services, adjustment and review of such tariffs and methods to ensure the financial-economic balance of services and low-cost tariffs through mechanisms
that increase service efficiency and lead to the distribution of productivity gains to society; and
the approval, oversight and regulation (including tariff issues) of the sewage treatment and wholesale water supply agreements entered into between the state
supplier and other suppliers, pursuant to Article 12 of the Basic Sanitation Law.
With respect to municipal basic sanitation, ARSESP oversees and regulates services (including tariff issues) that have been delegated by municipalities to the State
as a result of cooperation agreements that authorize program agreements between the municipalities and us for as long as it is convenient to the municipality’s public
interest.
For its services, ARSESP charges 0.50% of the annual total invoice from gross operating revenue (excluding revenues relating to the construction of concession
infrastructure) of the municipality. This fee is collected from municipalities that have a signed program agreement with us and the municipalities located in the
metropolitan regions.
In connection with the scope of our services, Supplementary Law No. 1,025/2007 expanded the range of services that we can render, with the inclusion of urban
rainwater drainage and management, urban cleaning and solid waste management, as well as the operation of power generation, storage, conservation and sales
activities, for our own or third-party use.
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In addition, the rules simplified the process for the expansion of our business in Brazil and abroad, authorizing us:
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to participate in the controlling block or the capital of other companies;
to create subsidiaries, which may become majority or minority shareholders in other companies; and
to establish partnerships with national or foreign companies, including other state or municipal basic sanitation companies, in order to expand our activities,
share technology and expand investments related to basic sanitation services.
Public----Private Partnerships
The PPP is a form of agreement with the public administration used for the concession of services to private enterprises, as well as for construction works coupled
with the provision of services. PPPs are regulated by the State of São Paulo through Law No. 11,688, which was enacted on May 19, 2004. PPPs may be used for:
(i) implantation, expansion, improvement, reform, maintenance or management of public infrastructure; (ii) provision of public services; and (iii) exploitation of public
assets and non-material rights belonging to the State.
Payment is conditioned upon performance. The payment may be collected through: (i) tariffs paid by users; (ii) use of resources from the budget; (iii) assignment
of credits belonging to the State; (iv) transfer of rights related to the commercial exploitation of public assets; (v) transfer of real property and other property of assets;
(vi) public debts securities; and (vii) other revenues.
In our case, payment is conditional upon performance and is collected through the use of resources from the budget.
Public Bidding Procedures
Pursuant to the Federal Public Bidding Law, the public bid process commences with publication by the granting authority in a federal, state or municipal official
newspaper, as the case may be, and another leading Brazilian newspaper. The publication announces that the granting authority 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 granting authority. Bidders may submit their proposals either individually or in consortia, as provided for in the invitation to
bid. After receiving proposals, the granting authority will evaluate each proposal according to the following criteria, which must have been set forth in the invitation to
bid:
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the technical quality of the proposal;
lowest cost or lowest public service tariff offered;
a combination of the criteria above; or
the largest amount offered in consideration for the concession.
The provisions of State Law No. 6,544 of November 2, 1989, as amended, or the State Public Bidding Law, parallel the provisions of the Federal Public Bidding
Law. The Federal and State 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.
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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:
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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.
Under State law, implementation of any project that involves the use of surface or underground water requires prior authorization or licensing from the competent
government authority. In order to implement these principles, authorizations granting a right of use are required from the relevant public authority for water usage
(whether for collection, release of effluents or otherwise), modification of the regime and modification of the quality or the quantity of the existing water. 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. DAEE has, as its objectives, establishing (i) a policy for the use of water resources with a view to developing the water business of
the State, and (ii) plans, studies and projects related to the use of water resources, directly or by means of agreements with third parties.
Our main operating units have been granted water usage rights; however, we also have several operating units where water rights are not in place. To help obtain
the remaining water rights, we have established a corporate program for obtaining and maintenance of grants. We expect to receive water usage rights for all of our
operating units by 2013.
In July 2000, ANA was established to develop the National System for Water Resources Management. According to existing law, the hydrographic basins
committees are authorized to charge users, such as us, for the abstraction of water from, or dumping of sewage into, water bodies controlled by these agencies. Since
2003 and as of December 31, 2012, we have paid R$119.5 million to ANA, DAEE and water basins agencies. These institutions have used these amounts to pay for
expenses related to the National and the State Systems for the Management of Water Resources (Sistema Nacional e Sistema Estadual de Gerenciamento de Recursos
Hídricos) and principally to sponsor studies, programs, projects and constructions provided for in the Water Basin Plan (Plano de Bacia). Resources for these projects
may be loaned or provided to governmental agencies and corporations, including us, for use in projects related to the conservation and recovery of water resources.
State Law No. 12,183, 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 formulation of criteria by the basin committees, the creation of basin
agencies and the organization of a registered list of water resource users. The basin committee’s proposals regarding the criteria to calculate the amounts to be charged
at each basin must be approved by the State Water Resource Council, and formalized by a decree issued by the State Governor.
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Water Quality
Administrative Rule No. 2,914/2011, 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 follow the methodologies of the
Standard Methods for Water and Wastewater (21st edition) of the American Water Works Association.
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 strict federal, state and municipal laws and regulations on environmental and
water-resource protection. The National Environmental Council (Conselho Nacional de Meio Ambiental), or the CONAMA, is the federal agency responsible for the
regulation of potentially polluting activities. In the State of São Paulo, the Companhia Ambiental do Estado de São Paulo, or CETESB, is the governmental entity
responsible for the control, supervision, monitoring and licensing of polluting activities, pursuant to State Law No. 997 of 1976 and State Law No. 13,542 of 2009.
The CETESB regulates the control of environmental pollutants.
The control and environmental planning instruments are defined by several legal instruments, such as State Law No. 997/1976, which regulates environmental
pollution control; CONAMA Resolution No. 05/1988, which requires licensing of sanitation projects that cause significant alterations to the environment; CONAMA
Resolution No. 237/1997, 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 Decree No. 47,400/2002 and related articles from State Law No. 9,509/1997 regarding
environmental licensing; and State Decree No. 8,468/76, CONAMA Resolution No. 357/2005, CONAMA Resolution No. 397/08 and CONAMA Resolution
No. 430/11 and the granting of rights for using and interfering with water resources (Portaria Departamento de Águas e Energia Elétrica 717/96). 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. The licensing process is composed of three
stages, including the following licenses:
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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.
We have established a program (Programa Corporativo de Manutenção e Obtencão do Licenciamento Ambiental) to obtain all necessary licenses in an effort to
bring us into full compliance with environmental regulations by 2015. As of the date of this annual report, we were not in possession of all licenses required in
connection with our operations. Our failure to obtain such licenses may result in the imposition of fines and penalties. With respect to new operations, feasibility and
environmental compliance are carried out throughout respective projects.
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Sewage Requirements
State law sets forth regulations regarding pollution control and environmental preservation in the State of São Paulo. State law establishes the conditions and
limitations for waste discharge that impact water, air and soil resources. 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. 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. National sanitation guidelines are also established in Article 45 of Federal Law
No. 11,455/2007.
The CETESB is authorized under State law to monitor discharges of pollutants into the environment and to enforce the requirements of State law. The CETESB is
responsible for issuing preliminary installation and operation licenses granted to the pollution sources, including sewage treatment facilities.
The CETESB also regulates the discharge of effluents into water bodies and must approve all of our treatment facilities in accordance with federal and state
regulations. State and federal water resource legislation establishes the charging of fees for the discharge of treated effluents into water bodies. This provision is
already in force in relation to some water basins, and is in different stages of implementation in remaining basins. See “—Government Regulation—Water Usage.”
Governmental Restrictions on Incurrence of Debt
On June 30, 1998, the CMN issued Resolution No. 2,515/98 amending certain conditions that must be observed with respect to external credit operations (i.e.,
foreign currency borrowings) of states, the Federal District of Brasilia, municipalities and their respective autarquias (agencies), foundations and non-financial
companies, including us. This resolution provides, among other things, that, with certain exceptions applicable to the importation of goods and services:
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the proceeds of external credit operations must be exclusively used to refinance outstanding financial obligations of the borrower, with preference given to
those obligations that have a higher cost and a shorter term, and, until used for such purposes, the proceeds shall remain deposited, as directed by the Central
Bank, in a pledged account; and
the total amount of the contractual obligation must be subject to monthly deposits in a pledged account, equal to the total debt service obligation, including
principal and interest, divided by the number of months that the obligation is to be outstanding.
The CMN resolution further provides that the requirements described above do not apply to financing transactions involving multilateral or official organizations
such as the International Bank for Reconstruction and Development, or IBRD, the IADB or the JICA. The Central Bank regulation implementing this resolution
provides, among other things, that the account referred to in the first bullet point above must be an account opened in a federal financial institution, which is to hold
such funds until released for the purpose of refinancing outstanding obligations of the borrower. The Central Bank regulation further provides that the account
described in the second bullet point above must be an escrow account to be opened in a federal financial institution and to secure the payment of principal and interest
on the external debt.
Our foreign currency-denominated transactions are also subject to the approval of the National Secretariat of Treasury (Secretaria do Tesouro Nacional) and the
Central Bank. After reviewing the financial terms and conditions of the transaction, the National Secretariat of Treasury and the Central Bank will issue an approval
for the closing of the foreign exchange transaction relating to the entry of the funds into Brazil and, following such entry and at our request, an electronic certificate of
registration through which all scheduled payments of principal, interest and expenses will be remitted by us. The electronic certificate of registration grants the
borrower access to the market for foreign exchange.
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Lending Limits of Brazilian Financial Institutions
The CMN Resolution No. 2,827 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, dated as of March 2, 2006, and amended State Law No. 119, dated as of June 29, 1973, which created our Company, authorizes us to
provide water and sewage services outside 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.
C. Organizational structure
Not applicable.
D. Property, Plant, Equipment and Intangible 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 mains, water connections and water meters, sewage treatment facilities, and sewage collection
networks consisting of sewer lines and sewage connections are recorded as intangible assets (concession assets). As of December 31, 2012, we operated through
67,647 kilometers of water pipes and mains and 45,778 kilometers of sewer lines. As of that same date, we operated 214 water treatment facilities and 502 sewage
treatment facilities (including nine ocean outfalls), as well as 16 water quality control laboratories.
We own our headquarters building and all other major administrative buildings. We have pledged some of our properties as collateral to the federal government in
connection with a long-term financing transaction we have entered into with the IBRD that was guaranteed by the federal government. We have also pledged part of
our assets in the amount of R$249.0 million as collateral as of December 31, 2012, with respect to our indebtedness under the Special Program for Payment of Federal
and Social Security Related Taxes in Installments (Programa de Parcelamento Especial para Impostos Federais e Previdenciários), or PAES program.
As of December 31, 2012, the total net book value of our property, plant and equipment and intangible assets (including concession assets) was
R$22,375.3 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 consolidated
financial statements included elsewhere in this annual report. The consolidated 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.
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A. Operating and Financial Review and Prospects
Overview
As of December 31, 2012, we operated water and sewage systems in the State of São Paulo, including in the city of São Paulo, Brazil’s largest city, and in 363
municipalities in the State of São Paulo, which represented 56.3% of all municipalities in the State. We also provided water services on a wholesale basis to
six municipalities located in the São Paulo metropolitan region in which we did not operate water distribution systems.
The São Paulo metropolitan region, which includes the city of São Paulo, is our most important service region. With a total population of approximately
20.8 million, the São Paulo metropolitan region accounted for 74.1%, 73.9% and 74.5% of our gross operating revenue in 2012, 2011 and 2010 (excluding revenues
relating to the construction of concession infrastructure), respectively. As of December 31, 2012, 57.8% 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 and because the region represents the principal opportunity to
increase our net operating revenue, 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
Our results of operations and financial condition are generally affected by our ability to raise tariffs, general economic conditions in Brazil and, in some previous
periods, meteorological conditions.
In 2008, our net income was strongly affected by the global financial and economic crisis, which began in 2008 and whose effects were still present in 2009,
resulting in a depreciation of the Brazilian real against the U.S. dollar, which adversely affected our obligations denominated in foreign currency.
In order to ensure our economic and financial strength, we have been working on increasing our efficiency and productivity gains. For this reason, we have
attempted to reduce costs. In 2009, we decreased our staff by 9.3% pursuant to an Agreement for the Adjustment of Conduct (Termo de Ajustamento de Conduta), or
TAC, with the State Public Attorney’s Office (Ministério Público Estadual). Pursuant to the TAC, we laid off retirees who were still working for us, as well as
employees representing approximately 2% of our workforce. Our results of operations for the 2012, 2011 and 2010 fiscal years were also affected by a provision for
severance payments in the amount of R$49.9 million for employees who resigned in 2012, R$47.0 million for employees who resigned in 2011 and R$19.0 million for
employees who resigned in 2010.
In 2012, our costs and expenses increased 4.2% compared to an increase of 56.3% in our net income. In 2012, the volume invoiced increased 2.7% compared to
2011. The other increases are mainly related to the agreement with São Paulo, construction costs and credit write-offs, which amount to R $22.1 million,
R$237.5 million and R$71.9 million, respectively.
Effects of Tariff Increases
Our results of operations and financial condition are highly dependent upon our ability to increase tariffs for our water and sewage services. Since the enactment
of the Basic Sanitation Law in 2007, as a general rule, regulatory agencies will be responsible for setting, adjusting and reviewing tariffs, taking into consideration,
among other factors, the following:
(cid:1)
(cid:1)
(cid:1)
political considerations arising from our status as a State-controlled company;
anti-inflation measures enacted by the federal government from time to time; and
when necessary, the readjustment to maintain the original balance between each party’s obligation and economic gain (equilíbrio econômico-financeiro)
under the agreement.
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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, which
take effect in September and remain in place for a period of at least 12 months.
The following table sets forth, for the periods indicated, the percentage increase of our tariffs, as compared to three inflation indexes:
Increase in average tariff(1)
Inflation – IPC – FIPE
Inflation – IPCA
Inflation – IGP-M
______________
2012
Year ended December 31,
2011
2010
5.2%
5.1%
5.8%
7.8%
6.8%
5.8%
6.5%
5.1%
4.1%
6.4%
5.9%
11.3%
(1) Since 2007, tariff readjustments have taken effect in September, one month after the readjustment announcement.
Sources: Central Bank, Fundação Getulio Vargas, or FGV, and Fundação Instituto de Pesquisas Econômicas.
On April 22, 2013, ARSESP approved a revision to tariff index to a rate of 2.3509% to be applied linearly on tariffs. See “4.B. Business Overview – Tariffs.”
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, our sales revenue has demonstrated high stability over the past three years.
General Economic Conditions
The year 2010 was characterized by a strong recovery of the Brazilian economy, with a GDP growth of 7.5%, after two years of a global crisis.
At that same year, Brazil had US$288.6 billion in currency reserves and its trade surplus was US$20.3 billion. The average unemployment rate in Brazil’s
principal metropolitan regions was 6.7% in 2010.
In 2011, Brazilian GDP increased 2.7% in comparison with 2010. At that same year, Brazil had US$352 billion in currency reserves and its trade surplus was
US$29.8 billion. The average unemployment rate in Brazil’s principal metropolitan regions was 6% in 2011.
In 2012, Brazilian GDP increased 0.9% in comparison with 2011. At that same year, Brazil had US$378 billion in currency reserves and its trade surplus was
US$19.4 billion, the worst it has been in the last decade. The average unemployment rate in Brazil’s principal metropolitan regions was 5.5% in 2012, the lowest it has
been since March 2002.
Interest Rates
In 2010, the Central Bank increased interest rates, and the official interest rate, as defined by the SELIC overnight rate target, was 10.66% as of December 31,
2010. In 2011, until the month of August, the Central Bank continued increasing the SELIC rate, reaching 12.50% in July. In the month of August, the Central Bank
started decreasing the SELIC, closing 2011 at 11.00%. This downward trend was maintained in 2012, with the SELIC rate closing the year of 2012 at 7.25%. The
reduction of the domestic interest rates to reduce the cost of debt, with interest rates linked to SELIC rate.
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With respect to our foreign currency-denominated debt, observed a reduction in the cost of the debt linked to floating interest rates, since international interest rates
have substantially reduced following the global crisis of 2008. With regards to our fixed rate foreign currency denominated capital market debt, we have observed that
it has been negotiated at the secondary bond markets with a reduction in the final yield, which may favor us, in the future, aiming to reduce interest costs and improve
debt profile.
We have not utilized any derivative financial instruments or any hedging instruments to mitigate interest rate fluctuations. However, we prioritise long term debt
in foreign currency alongside multilateral organizations and official foreign government agencies and take advantage of market opportunities to preform “liability
management” to reduce cost and anticipate refinancing situations.
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 adjustement 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 2.22, 3.1 and 24 of the Consolidated Financial Statements for the impacts of inflation adjustments on our financial performance and debt.
Currency Exchange Rates
We had total foreign currency-denominated indebtedness of R$3,215.8 million as of December 31, 2012, of which R$197.7 million relates to our 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. For example,
in 2008, the 32.0% devaluation of the real against the dollar and the 62.9% devaluation of the real against the yen increased our financial expenses and negatively
affected our overall results of operations for that year. In contrast, in 2009 and 2010, the 25.5% and 4.3% appreciations of the real against the U.S. dollar and the
27.1% appreciation and 9.0% depreciation of the real against the yen, respectively, led to foreign exchange gains of R$528.4 million and R$66.1 million, respectively.
In 2011, the 12.6% depreciation of the real against the U.S. dollar and the 18.6% depreciation of the real against the yen, respectively, led to a foreign exchange loss of
R$382.3 million. In 2012, the 8.94% depreciation of the real against the U.S. dollar offset by the 2.4% appreciation of the real against the yen, respectively, led to a
foreign exchange loss of R$50.5 million. However, since most of our debt denominated in foreign currencies is long-term debt with a long amortization schedule, a
devaluation of the real would principally impact cash flows regarding the current portion of our long-term debt.
We manage our indebtedness portfolio closely to decrease the cost of servicing our indebtedness as a whole and our exposure to exchange rate fluctuations. We do
not speculate in foreign currencies, and we do not have any exposure to derivatives tied to foreign currencies.
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 periods
indicated:
Depreciation (appreciation) of the real versus U.S. dollar
Period-end exchange rate – US$1.00
Average exchange rate – US$1.00(1)
______________
(1) Represents the average for period indicated.
Source: Central Bank.
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2012
8.9%
R$2.0435
R$1.9550
Year ended December 31,
2011
12.6%
R$1.8758
R$1.6746
2010
(4.3)%
R$1.6662
R$1.7593
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 periods
indicated:
Depreciation (appreciation) of the real versus yen
Period-end exchange rate – ¥1.00
Average exchange rate – ¥1.00 (1)
______________
(1) Represents the average for period indicated.
Source: Central Bank.
2012
(2.4)%
0.0237
0.0245
Year ended December 31,
2011
18.6%
0.0243
0.0211
2010
9.0%
0.0205
0.0201
From time to time, we may enter into forward exchange transactions to mitigate foreign currency exposure. In addition, we have monitored, overseen and
controlled our foreign currency-denominated indebtedness, taking advantage of market opportunities to improve the profile of our indebtedness and reduce our costs.
During the years ended December 31, 2012, 2011 and 2010 we had no forward exchange transactions.
Effects of Climate Change (Drought and Intense Rainfalls)
We operate in a region of Brazil that has been prone to droughts, although historically droughts have not impacted all of our water supply systems equally. Brazil
experienced a prolonged and severe drought during 2000 and 2001. As a result, from mid-June to mid-September of 2000, we rationed water in the south of the São
Paulo metropolitan region, affecting approximately 3.5 million people, or approximately 20% of the total population of this region, which reduced our total water
production by approximately 8%. In March 2004 when our reservoirs were at extremely low levels, we implemented a water usage reduction bonus program. After
returning to normal rainfall levels, which occurred between 2004 and early 2005, the condition of our reservoirs improved. In 2007 and 2008, rainfall exceeded the
levels of previous years, increasing the volume of water held in our reservoirs and thereby providing a cushion to meet demand. In 2009, rainfall levels were higher
than the historic average. In 2012, rainfall levels reached almost historic averages, but the rainfall was irregular among our systems, with more rainfall in smaller
systems. As of December 31, 2012, our reservoirs had a utilization rate of 50.6%, compared to a 62.8% utilization as of December 31, 2011.
Critical Accounting Estimates and Assumptions
We make estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The
estimates and assumptions 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 record an allowance for doubtful accounts in an amount that our management considers sufficient to cover probable losses, based on an analysis of customer
accounts receivable, in accordance with the accounting policy stated in Note 2.6 to our consolidated financial statements as of December 31, 2012 and 2011 and for the
years ended December 31, 2012, 2011 and 2010. Provisions for the allowance for doubtful accounts are included in selling expenses, net of recoveries. The net charge
to this allowance was R$192.3 million, R$120.4 million and R$232.5 million in 2012, 2011 and 2010, 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, estimates of forecast write-offs, the aging of the accounts receivable portfolio and other factors. While we believe that
the estimates used are reasonable, actual results could differ from those estimates.
Fair Value of Financial Instruments
Management estimates the fair value of financial instruments using information available in the market and appropriate estimating methodologies. Management
uses considerable personal judgment to interpret the information available in the market when developing estimates of fair value. Therefore, the estimates presented
may not necessarily indicate the value that would be obtained for the financial instruments if they were realized on the market. The use of different market
assumptions and/or estimating methodologies could have a material effect on the estimated fair values.
Indemnities Receivable
Indemnities receivable is a long-term asset representing amounts receivable from the municipalities of Diadema and Mauá as indemnification for their unilateral
termination of our water and sewage service concessions in 1995. As of each of December 31, 2009 and 2010, this asset amounted to R$146.2 million. In 2011, we
decided to record a provision for losses related to the amount receivable from Mauá and in 2012 we recognized a provision for losses related to Diadema, amounting to
R$85.9 million and R$60.3 million, respectively, due to the uncertainty in collection.
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Prior to their termination, pursuant to our concession contracts, we invested in the construction of water and sewage systems in these municipalities to meet our
concession service commitments. Upon the unilateral termination of the concessions by the municipalities of Diadema and Mauá, our assets were impounded by the
municipal authorities, which took on the responsibility of providing water and sewage services in these areas. At that time, we reclassified our property, plant and
equipment balances relating to the impounded assets as long-term assets (indemnities receivable) and recorded impairment charges to reduce the carrying value of the
assets to the estimated recoverable amounts which we had contractually agreed as fair compensation with these municipal authorities.
Our rights to recover these amounts are being disputed by the municipalities, and no amounts have been received to date. We continue to believe that we have the
right to receive those amounts, and we continue to monitor the status of the legal proceedings. The ultimate amounts to be received however, if any, will most likely be
subject to a final court decision. Therefore, actual amounts received could differ from those recorded. For more information, see Note 9 to our consolidated financial
statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010.
Valuation of Long----Lived Assets
As of December 31, 2012, we had property, plant and equipment and intangible assets of R$383.4 million and R$21,991.9 million, respectively.
Property, plant and equipment, intangibles and other noncurrent assets with definite useful lives, are reviewed annually for impairments or whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. The Company does not have assets with indefinite useful lives and concluded that
there are no indications of impairment losses.
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 the Company’s contracts for service concession arrangements entered with each grantor is under service concession agreements in which the Company has
the right to receive, at the end of the contract, a payment equivalent to the unamortized 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 2.5 “Gross Operating
Revenue.”
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.
Investments made and not recovered through rendering of services, within the terms of our agreement, must be indemnified by the concession grantor; (1) with
cash or cash equivalents or also, in general, (2) with a contract extension. These investments are amortized over the useful life of the asset.
Law 11445/07 prescribes that, whenever possible, basic sanitation public utilities shall have their economic and financial sustainability ensured through the
consideration received from service collection, preferably as tariffs and other public charges, which may be established for each service or both. Therefore,
investments made and not recovered through these services, within the original term of the contract, are recorded as intangible assets and amortized over the useful life
of the asset, taking into consideration a solid track record of concession renewal and, therefore, the continuity of services.
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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 balances recorded. 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.
Provision
As of December 31, 2012, we were party to judicial and administrative proceedings, relating to civil, environmental and tax matters, amounting to
R$1,189.2 million (excluding the amount of R$317.0 million related to court deposits) with respect to which we considered the risk of loss as probable. As of that date,
proceedings with respect to which we considered the risk of loss as possible amounted to R$2,796.7 million, and those with respect to which we considered the risk of
loss as remote amounted to R$32,881.0 million.
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 16 to our
consolidated financial statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010. We accrue for probable losses
resulting from these claims and proceedings when we determine that the likelihood that a loss has occurred is probable and the amount of such loss can be reasonably
estimated. 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 for risks, actual losses realized in future periods could differ significantly from our estimates and could
exceed the amounts which we have provisioned.
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 reduced from 5.75% in 2011 to 4.0% in 2012 under Plan G0 and from
5.75% in 2011 to 4.1% in 2012 under Plan G1 in order to follow the decrease in the rates applicable to the Brazilian Government NTN – B, long term notes, which
term is similar to the duration of the pension benefits. Since the Company applied the “corridor” approach, actuarial losses exceeding the “corridor” limit are
accounted for in the following years, as described in Notes 2.21 (a) and 17 (b) to our consolidated financial statements as of December 31, 2012 and 2011 and for the
years ended December 31, 2012, 2011 and 2010.
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 17.
The Company adopts the “corridor” method to recognize actuarial gains and losses. Actuarial gains and losses arising from experience adjustments and changes in
actuarial assumptions in excess of the greater of 10% of the fair value of plan assets or 10% of the present value of the defined benefit obligation are charged or
credited to income over the employees’ expected average remaining working lives. The higher the number of plan retirees the smaller is the average remaining
working period of plan participants. For plans substantially composed of retirees and pensioners, the Company immediately records all actuarial gains and losses in
excess of the limits of the corridor, i.e. on the first day of the subsequent year after the calculation of the referred actuarial gains or losses. The expenses related to the
pension plan are recognized in profit and loss for the year as cost of sales and services, selling expenses or administrative expenses, according to the employee’s
allocation.
Differences in actual experience or changes in assumptions could affect the carrying amount of pension obligations and expenses recognized in our results.
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The amendments to IAS 19 alter the accounting for both defined benefit plans and severance pay benefits. The most significant change refers to the accounting for
changes in defined benefit obligations and plan assets. These amendments require the recognition of changes in defined benefit obligations and in the fair value of the
plan assets as they occur, and, therefore, the elimination of the “corridor” approach allowed in the previous version of IAS 19 and the early recognition of past cost of
services. In addition, the amendments require all actuarial gains and losses to be immediately recognized through other comprehensive income so that the net asset or
liability of the pension plan is recognized in the consolidated statement of financial position to reflect the full amount of the plan’s deficit or surplus. Additionally,
interest expenses and the return expected on the plan assets used in previous version of IAS 19 were replaced by a “net interest” amount, calculated based on the
discount rate of the asset or liability of the net defined benefit. The amendments to IAS 19 are effective for annual periods beginning on or after January 1, 2013 and
require retrospective adoption. Based on Management’s preliminary evaluation, the impact of the Company’s early adoption of the amendments to IAS 19 in the year
ending December 31, 2013, would be a reduction in the Company’s equity on January 1, 2013 in the amount of R$468,220 (R$34,370 increase in equity on January 1,
2012). This effect represents the full recognition of actuarial gains and losses through other comprehensive income.
Deferred income tax and social contribution
The Company recognizes and settles 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. Pursuant to IAS 12, the Company recognizes deferred tax assets and liabilities based on the differences between the
accounting balances and the tax bases of 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 historic taxable income, the projection of future taxable income and the estimated period to reverse temporary differences. These calculations
require the use of estimates and assumptions. The use of different estimates and assumptions could result in provision for impairment of all or a significant amount of
deferred tax assets.
As of December 31, 2012 and 2011, we have recognized R$141.4 million and R$179.5 million, respectively, as deferred income tax assets, net of the deferred tax
liabilities, as disclosed in Note 15 to our consolidated financial statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and
2010.
Certain Transactions with 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.
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. Since November 2008, the State has been paying the remaining balance in the amount of
R$219.0 million in 114 successive monthly installments. See Note 8 to our consolidated financial statements as of December 31, 2012 and 2011 and for the years
ended December 31, 2012, 2011 and 2010 and “Item 7. Major Shareholders and Related Party Transactions.”
As of December 31, 2012 and 2011, the amounts not recorded related to the pension benefits paid on behalf of the State by the Company, totaled R$1,351,210 and
R$1,290,663, respectively, including the amount of R$696,283 related to the transfer of the reservoirs in the Alto Tietê system. As a result, the Company also
recognized the obligation related to the pension benefit maintained with the beneficiaries and pensioners of Plan G0. As of December 31, 2012 and 2011, the pension
benefit obligations of Plan G0 totaled R$1,547,161 and R$1,512,078, respectively. For detailed information on the pension benefit obligations refer to Note 17 of our
Consolidated Financial Statements.
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 further information on these agreements, see Note 8 to our consolidated financial statements as ofDecember 31, 2012 and 2011 and for the years ended
December 31, 2012, 2011 and 2010 and “Item 7. Major Shareholders and Related Party Transactions.”
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Use of Certain Assets
In our operations, we use the Guarapiranga and Billings reservoirs, which are also used by another entity controlled by the São Paulo State Government (Empresa
Metropolitana de Águas e Energia S.A. – EMAE), according to grants from the relevant competent body and in compliance with the prevailing legislation.
EMAE has requested the payment of receivables and financial compensation for the use of water from these reservoirs, and the reimbursement of damages related
to nonpayment in due course.
The Company understands that no amounts are due for the use of these reservoirs but it is responsible for their maintenance and operating costs. If these reservoirs
are not available by the Company it may need to collect water in more distant places and there could be the risk of making services in the region unfeasible and
increasing sourcing cost.
Three lawsuits were filed, two of them requesting injunctions to toll the statute of limitations and another to seek a decision by arbitration, as prescribed by an
arbitration clause in the agreement entered into between the São Paulo State Government and another electric company, in 1958, which we claim we are not bound to
as our predecessor only participated as an intervening party.
In February 2012, the decision to submit to arbitration was established by the judge during the first hearing, which is subject to appeal. Notwithstanding, if an
arbitration proceeding is filed, we will take all available judicial actions to defend our position. The Company’s management assessed this risk as a possible loss, and
believes it is not possible to estimate the total amount involved in this process since the extent was not determined.
Results of Operations
The following table sets forth, for the periods indicated, certain items in our statement of operations, each expressed as a percentage of net operating revenues:
Net operating revenues
Cost of sales and services
Gross profit
Selling expenses
Administrative expenses
Other operating income (expenses), net
Operating profit
Financial income (expenses), net
Profit before income tax and social contribution
Income tax and social contribution
Net income for the year
2012
10,754.4
(6,465.4)
4,289.0
(697.8)
(726.1)
(19.8)
2,845.3
(301.4)
2,543.9
(632.0)
1,911.9
100.0%
(60.1)%
39.9%
(6.5)%
(6.7)%
(0.2)%
26.5%
(2.8)%
23.7%
(5.9)%
17.8%
Year ended December 31,
2011
(in millions of reais, except percentages)
9,941.6
(6,031.1)
3,910.5
(619.5)
(846.6)
(90.1)
2,354.3
(633.6)
1,720.7
(497.3)
1,223.4
100.0%
(60.7%)
39.3%
(6.2%)
(8.5%)
(0.9%)
23.7%
(6.4%)
17.3%
(5.0%)
12.3%
2010
9,231.0
(5,194.5)
4,036.5
(712.9)
(653.2)
1.8
2,672.2
(379.4)
2,292.8
(662.3)
1,630.5
100.0%
(56.3)%
43.7%
(7.7)%
(7.1)%
(cid:1)
28.9%
(4.1)%
24.8%
(7.2)%
17.7%
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Net operating revenues
Net operating revenues increased by R$812.8 million, or 8.2%, to R$10,754.4 million in 2012 from R$9,941.6 million in 2011.
78
Net operating revenues relating to water services increased by R$310.0 million, or 7.3%, to R$4,585.6 million in 2012 from R$4,275.6 million in 2011. This
increase was principally due to:
(cid:1)
(cid:1)
an average 2.4% increase in the volume of water invoiced in 2012; and
the effect of the 6.83% tariff increase in September 2011, and the 5.15% tariff increase in September 2012.
Net operating revenues relating to sewage services increased by R$263.0, or 7.7%, to R$3,694.2 million in 2012 from R$3,431.2 million in 2011. This increase
was principally due to:
(cid:1)
(cid:1)
an average 3.2% increase in the volume of sewage services invoiced in 2012; and
the effect of the 6.83% tariff increase in September 2011, and the 5.15% tariff increase in September 2012.
Gross revenue from construction increased by R$239.8 million, or 10.7%, to R$2,474.6 million in 2012 from R$2,234.8 million in 2011. See Note 2.5(b) to our
consolidated financial statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 for a description of the accounting
policies applicable to our construction services business.
Cost of Sales and Services
The cost of sales and services increased by R$434.3 million, or 7.2%, to R$6,465.4 million in 2012 from R$6,031.1 million in 2011. As a percentage of net
operating revenues, cost of sales and services decreased to 60.1% in 2012 from 60.7% in 2011.
The increase in costs of sales and services was principally due to the following factors:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
an increase in construction costs of R$237.5 million, or 10.9%, compared with the previous year. Such change was mainly due to higher investment in 2012;
an increase of R$80.1 million, or 6.8%, in salaries and related charges due to the following factors: (i) an increase of 6.17% in salaries since May 2012,
resulting in an increase of approximately R $88.7 million; and (ii) an increase in the provision we made for termination benefits, in the amount of
R$17.2 million, due to a higher number of employees requesting retirement and the adoption of a new law, which increased the required notice from 30 to
90 days in cases of dismissal without cause. These increases were partially offset by a decrease in the actual cost with respect to the actuarial calculation in
2012 related to our defined contribution plan in the amount of R$12.5 million;
an increase of R $56.5 million, or 8.4% , in costs of outsourced services, mainly due to: (i) vehicle rentals in the amount of R $22.9 million; (ii) the
R$17.0 million increase in the Alto Tietê PPP due to the initiation of operations in September 2011; (iii) services of maintenance and repositioning of
pavement in the amount of R$13.7 million, as part of intensified efforts to prevent water losses; (iv) expenses related to the security of our assets in the
amount of $14.9 million, due to increases in equipment purchases and areas being monitored; and (v) water and sewage systems maintenance, which
amounted to R$5.9 million. The increase in costs of outsourced services was partially offset by a decrease of R$19.7 million related to socio-environmental
programs established pursuant to an agreement with the municipality of São Paulo;
an increase of R$31.7 million, or 8.6%, in general expenses, mainly due to: (i) the R$22.1 million provision pursuant to our service agreement with the
municipality of São Paulo and (ii) beginning in February 2012, charges for water usage in the Baixada Santista reservoir, amounting to R$6.9 million;
an increase of R$23.1 million, or 14.9%, in water-treatment expenses, mainly due to increased consumption and the substitution of water-treatment products
in order to meet increased demand while maintaining the same efficiency levels in water treatment;
79
(cid:1)
(cid:1)
an increase of R$21.9 million, or 14.9%, in maintenance expenses, mainly due to: (i) preventive and corrective maintenance of the water and sewage
operation systems in the amount of R$8.7 million and (ii) maintenance of water and sewage network connections in the amount of R$7.2 million; and
an increase of R$6.1 million, or 1%, in the cost of electricity due to increased consumption and higher energy tariffs. This increased consumption and
increase in tariffs was partially offset by a discount of 15% , on the fees for usage of distribution systems related to basic sanitation applied since
September 2011.
These increases were partially offset by a decrease of R$22.5 million, or 3.0%, in depreciation and amortization expenses, which decreased from R$739.1 million
to R$716.6 million, mainly due to the revision in the amortization criteria occurred in 2011 of intangible assets in connection with our service agreement with the
municipality of São Paulo.
Gross Profit
As a result of the factors discussed above, gross profit for the year ended December 31, 2012 increased by R$378.5 million, or 9.7%, from R$3,910.5 million in
2011 to R$4,289.0 million in 2012. As a percentage of net operating revenues, gross profit increased to 39.9% in 2012 from 39.3% in 2011.
Selling Expenses
Selling expenses increased by R$78.3 million, or 12.6%, to R$697.8 million in 2012 from R$619.5 million in 2011. As a percentage of net operating revenues,
selling expenses increased to 6.49% in 2012 from 6.2% in 2011.
The increase in selling expenses was principally due to the following factors:
(cid:1)
(cid:1)
(cid:1)
an increase of R$71.9 million, or 59.7%, from R$120.4 million in 2011 to R$192.3 million in 2012, mainly due to account receivables allowance for losses.
This increase was due mainly to additional provisions of R $14.4 million related to private clients, R $8.8 million related to municipal entities and
R$35.1 million related to state entities;
an increase of R$3.6 million or 1.8%, in expenses related to outsourced services mainly due to new billing technology related to the reading of usage,
issuance of bills and delivering bills, which cost approximately R$11.3 million, in addition to an increase in the number of connections and inflation
adjustments of the contracts in the metropolitan region of São Paulo. This increase was partially offset by: a decrease of R$4.5 million resulting from reduced
services provided related to the implementation of the Rationed Water Use Program (“Programa de Uso Racional da Água” or “PURA”) in city schools; and
an increase of R$2.2 million, or 1.1%, in personnel salaries and related charges as a result of: a 6.17% salary readjustments as of May 2011, which had an
impact of approximately R$2.7 million.
Administrative Expenses
Administrative expenses decreased by R$120.5 million, or 14.2%, to R$726.1 million in 2012 from R$846.6 million in 2011. As a percentage of net operating
revenues, administrative expenses decreased to 6.7% in 2012 from 8.5% in 2011.
The decrease in administrative expenses was principally due to the following factors:
(cid:1)
(cid:1)
a decrease of R$146.5 million, or 34.6%, in salaries and related charges, mainly due to (i) the recognition of an actuarial liability in 2011 in the amount of
R$157.5 million related to the supplementary pension plan (plan G0) of the State of São Paulo;
a decrease of R$6.7 million, or 30.3%, in amortization costs of software in 2012.
The decrease was partially offset by the following:
80
(cid:1)
(cid:1)
an increase in service expenses in the amount of R$22.9 million, or 18.2%, mainly on services provided by third parties relating to: (i) advertising campaigns
focused on socio-environmental programs, in the amount of R$16.7 million and (ii) engagement of consultants and specialized service providers, in the
amount of R$5.6 million;
an increase in tax expenses in the amount of R$7.4 million, or 12.0%, due to: (i) R$3.7 million in property taxes and (ii) regulatory tax to ARSESP in the
amount of R$3.2 million.
Other Operating Income (Expenses), Net
Other operating income (expenses), net, decreased by R$70.3 million, or 78.0%, to R$19.8 million expense in 2012 from R$90.1 million expense in 2011. Other
operating expenses showed a decrease of R$71.1 million, or 43.7%, mainly due to: (i) provision for losses related to an indemnificatory liability related to the
concession for the municipality of Mauá in the amount of R$85.9 million in 2011, (ii) asset write-offs in 2011 related to asset obsolescence, in the amount of
R$35.3 million, and (iii) write-offs in 2011 relating to studies and projects that were not economically viable in the amount of R$6.1 million. These decreases were
partly offset by the provision for losses for the indemnification of assets related to the concession for the municipality of Diadema, in the amount of R$60.3 million in
2012.
Financial income (expenses), net
Financial income (expenses), net, consists primarily of interest on our indebtedness and foreign exchange losses (or gains) in respect of our indebtedness, offset
partially by interest income on cash and cash equivalents and inflation based indexation accruals, mainly relating to agreements entered into with some customers to
settle overdue accounts receivable.
Financial income (expenses), net decreased by R$332.2 million, or 52.4%, to a R$301.4 million expense in 2012 from a R$633.6 million expense in 2011. As a
percentage of net revenues from sales and services, financial income (expenses), net decreased to 2.80% in 2012 from 6.4% in 2011.
The decrease in financial income (expenses), net was principally due to:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
a decrease in foreign exchange loss related to loans and financing of R$331.8 million as a result of the 8.9% depreciation of the real against the U.S. dollar in
2012, compared to a depreciation of 12.6% of the real against the U.S. dollar in 2011, and the 2.4% appreciation of the real against the Japanese Yen in 2012,
compared to a depreciation of 18.6% of the real against the Japanese Yen in 2011;
a decrease of R$48.7 million in interest expenses mainly due to the amortization of our eighth, ninth and thirteenth debentures in June and October 2011, and
February 2012, respectively;
a decrease of R$46.4 million in expenses relating to judicial proceedings mostly involving clients; and
a decrease of R$36.3 million in inflation adjustments, mainly relating to our contracts with municipalities.
The decrease in financial income (expenses), net was partially offset by:
(cid:1)
(cid:1)
a decrease in interest rates related to our cash positions, in the amount of R$108.5 million, or 39.9%; and
a decrease of R$22.8 million in the inflation adjustments, mainly due to amounts received as a result of the concession of the exclusive rights concerning the
deposit of salaries of our employees in 2011.
Profit before income tax and social contribution
As a result of the factors discussed above, income before income taxes increased by 47.8%, to R$2,543.9 million in 2012 from R$1,720.7 million in 2011. As a
percentage of net operating revenues, our income before income taxes increased to 23.7% in 2012 from 17.3% in 2011.
81
Income Taxes and Social Contribution
Income taxes increased by R$134.7 million, or 27.1%, to R$632.0 million in 2012 from R$497.3 million in 2011. This increase was principally due to a higher
taxable income in 2012.
Net Income for the year
As a result of the factors discussed above, net income increased to R$1,911.9 million in 2012 from R$1,223.4 million in 2011. As a percentage of net operating
revenues, our net income increased to 17.8% in 2012 from 12.3% in 2011.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Net operating revenues
Net operating revenues increased by R$710.6 million, or 7.7%, to R$9,941.6 million in 2011 from R$9,231.0 million in 2010.
Net operating revenues relating to water services increased by R$332.7 million, or 8.4%, to R$4,275.6 million in 2011 from R$3,942.9 million in 2010. This
increase was principally due to:
•
•
an average 2.6% increase in the volume of water invoiced in 2011; and
the effect of the 4.1% tariff increase in September 2010, and the 6.83% tariff increase in September 2011.
Net operating revenues relating to sewage services increased by R$273.6 million, or 8.7%, to R$3,431.2 million in 2011 from R$3,157.4 million in 2010. This
increase was principally due to:
•
•
an average 3.6% increase in the volume of sewage services invoiced in 2011; and
the effect of the 4.1% tariff increase in September 2011, and the 6.83% tariff increase in September 2011.
Gross revenue from construction increased by R$104.1 million, or 4.9%, to R$2,234.8 million in 2011 from R$2,130.7 million in 2010. See Note 2.5(b) to our
consolidated financial statements as of and for the year ended December 31, 2012 for a description of the accounting policies applicable to our construction services
business.
Cost of Sales and Services
The cost of sales and services increased by R$836.6 million, or 16.1%, to R$6,031.1 million in 2011 from R$5,194.5 million in 2010. As a percentage of net
revenue from sales and services, cost of sales and services increased to 60.7% in 2011 from 56.3% in 2010.
The increase in costs of sales and services was principally due to the following factors:
(cid:1)
(cid:1)
an increase of R$216.2 million, or 41.3%, as a result of our increased amortization expense related to our intangible assets for the services contract entered
into with the municipality of São Paulo as well as to 99 expired or informal agreements, which are in the process of being formalized as program agreements.
During 2011, we had a full year of the amortization of intangible assets related to the services contract entered into with the municipality of São Paulo in 2010
and relating to those 99 expired or informal agreements. Under the aforementioned agreements, the related intangible assets generate greater amortization
expense as they are amortized to zero (instead of a residual guaranteed amount reimbursed by the granting municipality at the end of the previous respective
concession contracts). This increase is also due to the beginning of operations in 2011 of sites that had previously been under construction;
an increase of R$198.9 million, or 20.2%, in salaries and related charges as a result of: (i) the R$61.2 million adjustment in 2010 of actuarial calculation due
to the migration of employees from defined benefit plan to defined contribution plan “SabesprevMais”; (ii) an increase of R$18.1 million due to the payment
of termination fees related to the FGTS, incurred as a result of increased layoffs in 2011; (iii) 8% salary readjustments since May 2011, which had a total
impact of R$81.3 million; and (iv) the increase of R$21.6 million from the 2011 Cost of Sales and Services figure due to the higher expense relating to the
profit sharing program as compared to 2010;
82
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
an increase of R$166.4 million, or 82.1%, in general expenses, mainly due to the R$158.8 million provision (corresponding to 7.5% of the gross revenue of
capital after deduction of COFINS and PASEP) pursuant to the agreement with the municipality of São Paulo;
an increase of R$65.1 million, or 10.8%, in costs of outsourced services, mainly due to (i) water and sewage systems maintenance, which amounted to
R$16.9 million; (ii) the R$14.7 million increase in the Alto Tietê PPP designated amount for the contract’s second year, and the initiation of operations in
September 2011; (iii) maintenance, in the amount of R$9.2 million, of water and sewer networks and connections in order to minimize losses and meet project
deadlines set forth by ARSESP; (iv) the transport of mud in the amount of R$7.1 million as a result of increased demand for water treatment, which causes
increased quantities of mud to be transported; (v) an increase of R$6.3 million resulting from socio-environmental services established together with the
municipality of São Paulo; (vi) R$4.4 million in costs related to mail and telegrams for the delivery of water bills in certain areas via post following judicial
decisions; and (vii) vehicle rentals in the amount of R$2.8 million as part of the second phase of the renovation of our fleet. The increase in costs of
outsourced services was partially offset by a decrease in telephone and data transmission charges in the amount of R$5.7 million, mainly due to the execution
of a contract with Telecomunicações de São Paulo S.A., which involves landlines and long-distance data transfers as well as corporate cellular phones at
lower costs to us;
an increase of R$53.9 million, or 10.2%, in the cost of electric energy due to the increase in consumption and higher energy tariffs;
an increase of R $18.3 million, or 13.4% , in water-treatment products, mainly due to: (i) an increase of approximately 43% in the consumption of
polyaluminium chloride, readjusted by approximately 11%. This product was used principally in the Guaraú water treatment station in place of aluminum
sulfate, guaranteeing maximum outflow without compromising the quality of the treated water. This increase was partially offset on R$2.0 million by the
decrease of the use of activated charcoal due to climate conditions, as well as due to the decelerated proliferation of algae in the reservoirs of the Alto Tietê
System and Guarapiranga/Billings;
an increase of R$12.4 million, or 9.1%, in product-related expenses, mainly due to connection with the maintenance of our water and sewer structure (in the
amount of R$7.4 million) and with the increased expenses with fuel and lubricants for vehicles (in the amount of R$1.8 million), resulting from an increase of
22% in the fuel price and from the expansion of our vehicle fleet.
Gross Profit
As a result of the factors discussed above, gross profit decreased by R$126.0 million, or 3.1%, to R$3,910.5 million in 2011 from R$4,036.5 million in 2010. As a
percentage of net operating revenues, gross profit decreased to 39.3% in 2011 from 43.7% in 2010.
Selling Expenses
Selling expenses decreased by R$93.4 million, or 13.1%, to R$619.5 million in 2011 from R$712.9 million in 2010. As a percentage of net operating revenues,
selling expenses decreased to 6.2% in 2011 from 7.7% in 2010.
The decrease in selling expenses was primarily due to the following factors:
(cid:1)
a decrease of R$112.1 million, or 48.2%, in credit write-offs, mainly as a result of additional provisions established in 2010 of R$34.2 million related to
private clients and R$139.1 million related to public municipal entities (R$54.8 million of which related to the municipality of São Paulo);
83
(cid:1)
(cid:1)
(cid:1)
(cid:1)
a decrease of R$14.1 million, or 6.5%, in expenses with outsourced services mainly related to the agreement with the municipality of São Paulo and the
R$34.4 million decrease in the provision established in 2011 for new services to be provided under that agreement, and a R$4.9 million increase resulting
from services provided to satisfy the schedule for implementing the Rationed Water Use Program (“Programa de Uso Racional da Água” or “PURA”) in city
schools. This decrease was partially offset by the following increases: (i) R$11.1 million in billing services, mainly resulting from new billing technology
related to the reading of usage, issuance of bills and delivering bills, in addition to an increase in the number of connections and adjustments of the contracts in
the metropolitan region of São Paulo; and (ii) expenses in the amount of R$3.3 million relating to services for the collection of credits;
an increase of R$19.1 million, or 10.4 %, in personnel salaries and related charges as a result of: (i) the R$9.3 million adjustment in 2010 of the actuarial
calculation due to the migration of employees from defined benefit plan to defined contribution plan “Sabesprev Mais”; (ii) a R$1.4 million increase due to the
payment of termination fees related to the FGTS, incurred as a result of increased layoffs in 2011; and (iii) 8% salary readjustments since May 2011, which
had a total impact of R$3.9 million;
an increase of R$9.1 million, or 13.0%, in general expenses, mainly due to (i) water bills for banking institutions in the amount of R$4.2 million; and (ii) the
R$3.3 million increase in tax provisions relating to the services rendered in the cities of São José dos Campos, Pindamonhangaba and Botucatu, resulting from
increased collection during 2011 as compared to 2010;
an increase of R$3.5 million, or 89.6%, in depreciation and amortization expenses, mainly due to the adjustment in amortization of intangible assets in
connection with the agreement with the municipality of São Paulo.
Administrative Expenses
Administrative expenses increased by R$193.4 million, or 29.6%, to R$846.6 million in 2011 from R$653.2 million in 2010. As a percentage of net operating
revenues, administrative expenses increased to 8.5% in 2011 from 7.1% in 2010.
The increase in administrative expenses was primarily due to:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
an increase of R$187.4 million, or 79.6%, in salaries and related charges, mainly due to (i) the covering of actuarial liability in the amount of R$157.5 million
related to the supplementary pension plan (plan G0) of the State of São Paulo (based on the non-recurring actuarial calculation performed on December 31,
2010); (ii) the cover of actuarial liability in the amount of R$22.2 million related to the supplementary pension plan (plan G0) of the State of São Paulo for
2011; (iii) a R$3.0 million increase due to the payment of termination fees related to the FGTS, incurred as a result of increased layoffs in 2011; and (iv) 8%
salary readjustments since May 2011, which had the total impact of R$9.1 million;
an increase of R $36.7 million, or 21.3%, in general expenses due to (i) the need for larger contingency provisions in the amount of R$59.7 million,
particularly in connection with environmental issues in the municipalities of Guareí and Paraguaçu Paulista. This increase was partially offset by the
R$17.9 million provisioning made in 2010 for losses relating to third party claims;
a decrease of R $24.8 million, or 16.5% , in services provided by third parties in connection with a variety of matters, including: (i) a decrease of
R$18.4 million in advertisement campaigns due to the termination of certain advertisement agreements; and (ii) a R$5.5 million decrease due to reorganization
and management performance related to the work of consultants and specialized service providers;
a decrease of R$3.1 million, or 12.2%, in depreciation expenses due to the decreased immobilized assets of the controlling shareholder.
84
Other Operating Income (Expenses), Net
Other operating income (expenses), net decreased by R$91.9 million in 2011, to R$90.1 million expense in 2011 from R$1.8 million income in 2010. This
increase was primarily due to the provision made in the amount of R$85.9 million related to assets used for our concession in the municipality of Mauá, and to the
write-off of assets in the amount of R$35.3 million.
Finance Cost, Net
Finance cost, net, consists primarily of interest on our indebtedness and foreign exchange losses (or gains) in respect of our indebtedness, offset partially by
interest income on cash and cash equivalents and inflation based indexation accruals, mainly relating to agreements entered into with some customers to settle overdue
accounts receivable.
Finance cost, net increased by R$254.2 million, or 67.0%, to R$633.6 million in 2011 from R$379.4 million in 2010. As a percentage of net revenues from sales
and services, finance cost, net increased to 6.4% in 2011 from 4.1% in 2010.
The increase was principally due to:
(cid:1)
(cid:1)
(cid:1)
an increase in foreign exchange loss related to loans and financing of R$448.5 million as a result of the 12.6% depreciation of the real against the U.S. dollar
in 2011, compared to an appreciation of 4.3% of the real against the U.S. dollar in 2010;
a decrease of R$46.0 million in monetary indexation, mainly due to (i) a higher expense in 2010 amounting to R$20.0 million, due to the alteration of the unit
price of our eleventh debentures issuance between their issuance date and their effective offering date in 2010; (ii) the depreciation of the real against the
Japanese Yen upon the disbursement by Japan International Cooperation Agency (JICA) of R$14.0 million in 2011; and (iii) a decrease in the volume of
refinancing of debt in 2011 as compared to 2010, amounting to a decrease of R$12.0 million; and
other monetary revisions relating to our contracts in the amount of R$41.2 million.
The increase in finance cost, net was partially offset by:
(cid:1)
(cid:1)
(cid:1)
an increase of R$153.5 million in interest income and other financial income due to the increase in our cash and cash equivalents;
a decrease of R$95.5 million in financial expenses relating to judicial proceedings as a result of the lower interest income regarding the proceedings involving
clients and service providers in 2011; and
a decrease of R$33.6 million in interest expenses mainly due to the amortization of our eighth and ninth debentures in June and October 2011, respectively.
Income before Income Taxes
As a result of the factors discussed above, income before income taxes decreased by R $572.1 million, or 24.9% , to R $1,720.7 million in 2011 from
R$2,292.8 million in 2010. As a percentage of net operating revenues, our income before income taxes decreased to 17.3% in 2011 from 24.8% in 2010.
Income Taxes
Income taxes decreased by R$165.0 million, or 24.9%, to R$497.3 million in 2011 from R$662.3 million in 2010. The decrease was primarily due to a decrease in
taxable income in 2011.
85
Net Income
As a result of the factors discussed above, net income decreased to R$1,223.4 million in 2011 from R$1,630.5 million in 2010. Net profit margin decreased to
12.3% in 2011 from 17.7% in 2010.
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, 2012, we had R $1,921.2 million of cash and cash equivalents. The outstanding current portion of our long-term
indebtedness was R $1,367.4 million as of December 31, 2012, of which R $197.7 million was denominated in foreign currency. Long-term indebtedness was
R$7,701.9 million as of December 31, 2012, of which R$3,018.1 million consisted of foreign currency-denominated obligations. We believe that we have sufficient
sources of liquidity and capital to meet our liquidity and capital requirements for the next few years, in light of our current financial position and our expected cash
generated by operating activities.
Cash Flow
Cash Provided by Operating Activities
Cash provided by operating activities is the single largest source of our liquidity and capital resources, and we anticipate that it will continue to be so in the future.
Our cash generated by operating activities was R$2,336.2 million, R$2,717.1 million and R$2,083.0 million in 2012, 2011 and 2010, respectively. The main driver of
our cash flow from operating activities relates to our strong revenue stream, which is due to the fact we are expanding our infrastructure.
Cash Used in Investing Activities
Our cash used in investing activities was R$1,998.8 million, R$2,008.3 million and R$2,091.4 million in 2012, 2011 and 2010, respectively. The main driver of
our cash flow from investing activities relates to the purchases of intangibles assets, as required under our concession and program contracts, which is due to the fact
that the we are expanding our infrastructure.
Cash Used in Financing Activities
Our cash used in financing activities was R$566.3 million, R$548.0 million in 2012 and 2011, respectively, and our cash provided by our finaning activities was
R$1,226.5 million in 2010. The main driver of our cash flow 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 shareholders’equity.
Indebtedness Financing
Our total financial indebtedness increased by 5.5%, from R$8,596.3 million as of December 31, 2011 to R$9,069.3 as of December 31, 2012. In addition, during
the same period, our total foreign denominated indebtedness recorded increased by 5.3%, from R$3,053.4 million as of December 31, 2011 to R$3,215.8 as of
December 31, 2012, mainly related to loan agreement 2,202/OC-BR with Inter-American Development Bank (IADB) to finance the third stage of the Tietê River
Project.
As of December 31, 2012, we had R$7,701.9 million in long-term indebtedness outstanding (excluding the current portion of long-term indebtedness), of which
R$3,018.1 million consisted of foreign currency-denominated long-term debt. We had an outstanding current portion of long-term indebtedness of R$1,367.4 million
as of December 31, 2012. As of December 31, 2012, R$197.7 million of this current portion of long-term indebtedness was denominated in foreign currency. As of
December 1, 2012, our Standard & Poor’s Rating Service domestic rating was brAA+ and our S&P international rating was BB+.
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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 operations. In addition to Caixa Econômica Federal and BNDES, we have granted liens over a portion of our cash flows deriving from
our operations in connection with agreements relating to securitization transactions, the Alto Tietê PPP and arrangements relating to the lease of certain assets.
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, 2012, 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$2,291.1 million.
The following table sets forth information on our indebtedness outstanding as of December 31, 2012:
Current
Noncurrent
Total
Final Maturity
December 31, 2012
Denominated in local currency
Banco do Brasil
10th issue debentures
11th issue debentures
12th issue debentures
14th issue debentures
15th issue debentures
16th issue debentures
1st issue debentures – Aquapolo
Caixa Econômica Federal
National Bank for Economic and Social Development
(BNDES)
National Bank for Economic and Social Development
(BNDES) Coastal region
National Bank for Economic and Social Development
(BNDES) PAC
National Bank for Economic and Social Development
(BNDES) PAC II 9751
National Bank for Economic and Social Development
(BNDES) PAC II 9752
National Bank for Economic and Social Development
(BNDES) Onda Limpa
Financial leasing
Other
Interest and others charges
380.631
36.459
472.500
-
-
-
-
847
117.217
4.154
16.309
8.447
-
-
19.230
-
5.416
108.514
100.306
252.166
535.949
499.511
284.649
791.451
499.457
157.020
931.004
-
97.855
80.244
6.500
13.000
216.026
215.774
2.923
-
480.937
288.625
1.008.449
499.511
284.649
791.451
499.457
157.867
1.048.221
4.154
114.164
88.691
6.500
13.000
235.256
215.774
8.339
108.514
2014 UPR + 8.50%
TJLP + 1.92% (1st & 3rd series) & IPCA + 9.53% (2nd
series)
2020
2015 DI + 1.95% (1st series) & DI + 1.4% (2nd series)
2025
TR + 9.5%
TJLP + 1.92% (1st & 3rd series) and IPCA + 9.19% (2nd
series)
2022
2019 DI + 0.99% (1st series) & IPCA + 6.2% (2nd series)
2015 DI + 0.30% to 0.70%
TR + 8.75%
2029
2011 /2032 UPR + 6.8% (average)
2013
3% + TJLP
2019
2.5% + TJLP
2023
2.15% + TJLP
2027
1.72% + TJLP
2027
1.72% + TJLP
2025
1.92% + TJLP
2011/ 2018/
2025
TJLP + 6% / 12%
Total denominated in local currency
1.169.724
4.683.835
5.853.559
Denominated in foreign currency
Inter-American Development Bank (IADB)
US$417,295,000 (2011 - US$ 386,862,000)
International Bank for Reconstruction and Development
(IBRD) US$26,864,000 (2011 - US$ 10,316,000)
Eurobonds - US$ 140,000,000 (2011 - US$ 140,000,000)
Eurobonds - US$ 350,000,000 (2011 – US$ 350,000,000)
JICA 15 - ¥ 19,591,310,000 (2011 - ¥ 20,743,740,000)
JICA 18 - ¥ 17,614,720,000 (2011 - ¥ 18,650,880,000)
JICA 17 - ¥ 324,213,000 (2011 - ¥ 62,292,000)
JICA 19 - ¥ 5,407,000
IADB 1983AB - US$ 202,115,000 (2011 - US$
226,058,000)
Interest and others charges
77.967
-
-
-
27.335
24.578
-
-
48.926
18.861
770.494
54.492
285.655
708.076
437.371
392.894
7.524
1
361.587
-
848.461
2017 to 2035
0.99% to 3.00%
54.492
285.655
708.076
464.706
417.472
7.524
1
410.513
18.861
2034
2016
2020
2029
2029
2035
2037
0.82%
7.50%
6.25%
1.8% & 2.5%
1.8% & 2.5%
1.2% & 0.01%
1.7% & 0.01%
2023
2.49% to 2.99%
Total denominated in foreign currency
Total loans and financing
______________
197.667
1.367.391
3.018.094
7.701.929
3.215.761
9.069.320
(1) UPR stands for Standard Reference Unit (Unidade Padrão Referência) and is equal to the TR, which was 0.00% per month as of December 31, 2012; CDI stands for Interbank Deposit Rate (Certificado de
Depósitos Interbancários), which was 6.90% per annum as of December 31, 2012; IGP-M was 7.81% per annum as of December 31, 2012; TJLP stands for Long-term Interest Rate (Taxa de Juros a
Longo Prazo), published quarterly by the Central Bank, which was 5.00% per annum as of December 31, 2012.
(2) This line item represents the aggregate amount outstanding under financing agreements we have entered into with Caixa Econômica Federal, which mature on different dates and bear different interest
rates. The numbers above reflect the range of maturities and the weighted average interest rate under these agreements.
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The following table shows the maturity profile of our debt, as of December 31, 2012, for the period indicated (in millions of reais):
Loans and financing
2013
1,367.4
2014
763.1
2015
1,270.8
2016
790.8
2017
520.2
After 2018
4,357.0
Total
9,069.3
Substantially all of our foreign currency-denominated indebtedness of R$2,319.7 million, net of transaction costs, as of December 31, 2012 was denominated in
U.S. dollars. This indebtedness consisted principally of:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
R$848.5 million (US$417.3 million) in U.S. dollar denominated loans contracted with the Inter-American Development Bank, or the IADB, composed of the
following: (i) loan to finance the first phase of the Tietê Project in 1992 and its second phase in 2000, under which payments of principal are made in
semiannual installments with final maturity in July 2025. The principal amount of this loan is adjusted semiannually for the variation of the U.S. dollar, and
accrues interest at a rate varying from 0.99% to 3.00% plus LIBOR; (ii) credit agreement executed in September 2010 with the IADB for the financing of the
third phase of the Tietê Project. This loan matures on September 3, 2035. Amortizations will be made in semiannual installments after a grace period of six
years. The principal amount accrues interest at LIBOR. We have pledged as collateral part of our receivables from our sales and services up to the amount
due;
R$54.5 million (US$26.9 million) in U.S. dollar denominated loans contracted with the International Bank for Reconstruction Development - 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). The loan
matures in March 2034. Amortizations will be in semi-annual installments starting on September 2019. The principal amount accrues interest at the USD
LIBOR plus a variable spread;
R$410.5 million (US$202.1 million) in U.S. dollar denominated loans from the AB Loan financing contracted with the IADB in May 2008. Under this loan,
payments of principal are made in annual installments with final maturity in May 2023. The principal amount is adjusted semiannually for the LIBOR plus
spread and accrued interest at a rate varying from 1.875% to 2.375%. This loan was used to repay an outstanding series of debt securities in connection with
the implementation of our investment plan; and
R$993.7 million (US$490.0 million) in U.S. dollar denominated Eurobonds issued in November 2006 (US$140.0 million with an interest rate of 7.5%) and in
December 2010 (US$350.0 million with an interest rate of 6.25%). Under these bonds, the payments of interest are made in semi-annual installments and
principal will be paid at the final maturity in 2016 and 2020, respectively. The proceeds from the offering were used to repay financial commitments
throughout 2007 and 2011.
R $889.7 million ( ¥37,535.6 million) in Japanese yen denominated loans contracted with the JICA, composed of the following: (i) ¥21,320.0 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 this loan, amortizations are made in semi-annual installments and principal will be paid at the end of
the contract with final maturities in August 2029. The principal amount accrues interest at rates that vary from 1.8% to 2.5% per year; (ii) ¥6,208 million in
denominated loans contracted in October 2010 for the financing of the environmental improvement program in the basin of the Billings dam, part of the New
Life Program (Programa Vida Nova). The loan matures in October 2035. Amortizations will be made in semi-annual installments after a grace period of
seven years, starting on October 2017. The principal amount accrues interest at a rate varying from 0.01% to 1.2%; (iii) ¥19,169.0 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 will be used for the provision of works and services in the Baixada Santista metropolitan region.
The credit agreement expires in 18 years and interest varies from 1.8% to 2.5% per year; and (iv) ¥33,584 million denominated loan in February 2012 for the
financing of the Corporate Program for Water Loss Reduction (Programa corporativo para Redução de Perdas). The loan matures on February 2037.
Amortizations will be in semi-annual installments starting on September 2019. The principal amount accrues interest at a rate varying from 0.01% to 1.7%.
The first disbursement of ¥6 billion connected to the Corporate Program for Water Loss Reduction was in March 2013.
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Our borrowings from multilateral institutions, such as the IADB, IBRD and JICA, have in the past been, and in the future are likely to be, guaranteed by the State
or the federal government. We do not pay fees for these guarantees. Under some of the loan agreements with the IADB, IBRD and JICA; we have granted a guarantee
(contra garantia) to the federal government. For further 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$5,853.6 million as of December 31, 2012 and consisted primarily of real-denominated loans from federal and state-owned
banks, in particular, Banco do Brasil S.A., Caixa Econômica Federal and BNDES, as well as debentures issued in November 2009, June 2010, September 2010,
February 2011, February 2012 and November 2012, the first debentures issuance of our investee (Aquapolo) in August 2011 and financial leasing.
The following summarizes our principal borrowings from federal and State-owned banks:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
in March 1994, we entered into a loan agreement with Banco do Brasil S.A., or Banco do Brasil, in the amount of R$2.3 billion. Amortizations of the
principal amount are made in 240 successive monthly installments, with final maturity in 2014. The principal amount accrues interest at the daily government
interest rate plus 8.50% per annum and monetary adjustment;
from 1996 to 2012, we have entered into several line of credit agreements with Caixa Econômica Federal, pursuant to which amortizations of principal are
paid in 60, 120, 180 or 240 months in monthly installments commencing 30 days following the applicable grace period, which varies from 14 to 48 months
from the date of signature of the line of credit agreement. The final maturity is 2036. The principal amount accrues interest from 5.0% to 9.5%. The lines of
credit are collateralized (i) by collections of daily billings of water supply and sewage services up to 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 line of credit agreement;
in August 2002, we entered into a line of credit agreement with BNDES. The final maturity date is February 2013. The principal amount accrues interest at
the long-term rate fixed by the TJLP but limited to 6.0% per year, plus 3.0% per year. If the TJLP exceeds 6.0%, such excess will be added to the principal
amount payable at maturity. The line of credit agreement is collateralized by part of the billings from the provision of water and sewage services. On
February 15, 2013 we made our last interest and amortization payment;
in November 2007, we entered into a R$129.9 million credit agreement with BNDES. Amortizations of the principal amount will be made in 96 successive
monthly installments, with final maturity in 2019. The principal amount accrues interest at the TJLP, but limited to 6.0% per year, plus 2.50% per year. If the
TJLP exceeds 6.0% per year, such excess will be added to the principal amount. The credit agreement is collateralized by part of the billings from the
provision of water and sewage services;
89
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
in November 2007, we entered into a R$174.5 million credit agreement with BNDES. Amortizations of the principal amount will be made in 150 successive
monthly installments, with final maturity in 2023. The principal amount accrues interest at the TJLP, but is 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;
in May 2008, we entered into a R$174.0 million financing agreement with BNDES. Amortizations of the principal amount will be made in 150 successive
monthly installments, with final maturity in 2023. 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;
in March 2010, we entered into a R$294.3 million financing agreement with BNDES. Amortizations of the principal amount will be made in 156 successive
monthly installments commencing 30 days after the 24-month grace period, 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;
in March 2012, we entered into a R$180.8 million credit agreement with BNDES. The amortization of the principal shall be paid in up to 156 successive
monthly installments beginning 30 days after the grace period of 36 months, 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 credit
agreement is guaranteed partly by the earnings of water and sewage services; and
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 recognize an intangible assets and the related liability of the lease at fair value. Upon the conclusion of the construction,
which is estimated to 2013 and 2014, we start to pay the rental of the infrastructure (in 240 installments) and the lease is updated accordingly to the contract.
On December 31, 2012, there were no constructions completed. These contracts are recognized as financial leasing.
Under BNDES program, in the amount of R$826.1 million, we issued two out of three tranches of debentures. In November 2009, we issued our tenth debentures
in the aggregate principal amount of R$275.4 million. The debentures are divided in three series: the first and third series will mature in November 2020 and the
second in December 2020. 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 9.53% per year. This issuance was entirely subscribed by
BNDES. We used the funds raised from it for investments primarily in the Corporate 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 2011, we issued our fourteenth debentures, the second 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 February 2022 and the second, in March 2022. The debentures of the first and third
series, in the aggregate principal amount of R$77.1 million and R$115.7 million, respectively, 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 9.20% per year. We have been used the funds raised from this fourteenth issuance for investments primarily in the Corporate
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.
90
Additionally, in June 2010, we issued 500,000 debentures to the FGTS, based on the FGTS’s program to finance companies in the sanitation, transport and real
estate businesses (our twelfth issuance). The debentures bear interest based on the TR plus 9.5% per year and will mature in June 2025. The debentures bear a grace
period of four years in respect of payments, and we may redeem the debentures starting in July 2014. We used the proceeds from the twelfth issuance to fund a portion
of our capital expenditure program in the water supply and sewage system.
In August 2011, the joint-controlled entity “Aquapolo” issued 326,732 debentures, registered as its first issuance of simple debentures, nonconvertible, in a single
series amounting to R$326.7 million. The debentures will mature in August 2029 and bear interest, paid monthly, at the TR plus 8.75% per year. The proceeds from
the first issuance were used to build the Aquapolo plant and infrastructure designed to treat industrial water from this petrochemical industrial center in Mauá
municipality.
In February 2012, we issued our fifteenth issuance of debentures in two series in the aggregate principal amount of R$771.0. The first and second series will
mature in February 2017 and 2019, respectively. The debentures of the first series (in the aggregate principal amount of R$287.3 million) bear interest at a rate of CDI
plus 0.99% per year. The second series (in the aggregate principal amount R$483.7 million) bears interest at a rate of IPCA plus 6.2% per year. The net proceeds were
used to repay financial commitments throughout 2012, including the early redemption of our thirteenth debentures issuance.
In November 2012, we carried out our sixteenth debentures issuance of R$500 million, with a maturity date of December 2015 and bearing interest, each quarter
with an interest rate of between 0.30% and 0.7% per year plus the CDI rate. These proceeds of this issuance were used to pay the Company’s financial commitments
for 2012 and 2013.
In January 2013, we carried out our seventeenth debentures issuance of R $1.0 billion in three series, the first for R $424.7 million with maturity date of
January 2018 and with an interest rate of 0.75% per year plus the CDI rate, the second for R$395.2 million with a maturity of January 2020 and with the interest rate of
4.50% per year plus IPCA variation and the third for R$180.1 million with a maturity date of January 2023 and with an interest rate of 4.75% per year plus IPCA
variation. The proceeds of these issuances were used to pay our financial commitments for 2013
In March 2013 we made the first and second series amortization payments and the early redemption of the remaining balance of the 1st series of the eleventh
debenture issuance. This issuance was due to mature on March 2015.
All of our real-denominated indebtedness is indexed to take into account the effects of inflation. Most of our real-denominated debt provides for inflation-based
increases in principal amounts; the increases are determined by reference to the TR plus an agreed margin.
Financial Covenants
We are subject to financial covenants under the agreements evidencing or governing our outstanding indebtedness.
Foreign currency denominated indebtedness
With respect to our indebtedness denominated in U.S. dollars, we are subject to financial covenants, including but not limited to those set forth in the loan
agreements entered into with the IADB. Each of these agreements contains, among other provisions, limitations on our ability to incur debt. The financial covenants
related to loan agreements 713, 896 and 1212 consider - Tariffs must: (a) produce revenues sufficient to cover the system’s operating expenses, including
administrative, operating, maintenance, and depreciation expenses; (b) provide a return on the balance sheet value of property, plant, and equipment not less than 7%;
and (c) during project execution, the balances of short-term loans must not exceed 8.5% of total equity. These agreements have a cross default clause with IADB. The
financial covenants related to AB Loan agreements (1983AB) consider the Company’s ratio of debt service coverage, determined on a consolidated basis, which must
be higher than or equal to 2.35:1.00; and the total adjusted debt over EBITDA, determined on a consolidated basis, which must be lower than or equal to 3.65:1.00.
This agreement has a cross default clause. See Note 13 of our Consolidated Financial Statements.
91
The indentures relating to our US$ 140.0 million 7.5% notes due 2016 and US$ 350.0 million 6.25% notes due 2020 prohibit, subject to some exceptions, the
incurrence of additional debt in the event that: (i) the ratio of Adjusted Total Debt to adjusted EBITDA (as defined in the related indentures) is greater than 3.65:1.00:
or (ii) the Debt Service Coverage Ratio (as defined in the related indentures) is less than 2.35:1.00. The agreement has a cross default clause.This agreement has a
cross default clause. See Note 13 of our Consolidated Financial Statements.
We do not believe that these covenants will impose constraints on our ability to finance our capital expenditure program or, more generally, to develop our
business and enhance our financial performance.
Local currency denominated indebtedness
All of our contracts require us to maintain (i) adjusted EBITDA/Adjusted net operating revenues equal to or higher than 38%, (ii) adjusted EBITDA/adjusted
financial expenses equal to or higher than 2.35:1.00; and (iii) adjusted net debt/adjusted EBITDA equal to or lower than 3.65:1.00.
In addition, all of our financing agreements with the Caixa Econômica Federal and most of our financing agreements with BNDES are subject to a Performance
Improvement Agreement (Acordo de Melhoria de Desempenho). The Performance Improvement Agreement, dated May 28, 2007, as amended in August 2012, was
entered into between us and the federal government, and the Caixa Econômica Federal and BNDES as intervening parties. Pursuant to this agreement, we were
required to comply with at least four of eight financial and operating ratios during the subsequent five years. If we fail to comply with any of the ratios required by the
Caixa Econômica Federal and BNDES, either may suspend our credit lines and we will be prevented from entering into any other financing agreements with those
entities. We have the ability, however, to renegotiate the ratios if needed.
Our financing agreement with the federal government and Banco do Brasil S.A. and our credit agreements with Caixa Econômica Federal do not contain material
financial covenants. The agreement with Caixa Econômica Federal has a cross default clause. This agreement has a cross default clause. See Note 13 of our
Consolidated Financial Statements.
With respect to our outstanding debentures, the eleventh and twelfth issuances require 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 the Company that are 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. These issuances have a cross default clause.This agreement has a cross default clause. See
Note 13 of our Consolidated Financial Statements.
The tenth and fourteenth issuance requires us to maintain (i) an EBITDA/net operational revenue ratio equal to or higher than 38%; (ii) an EBITDA/financial
expenses ratio equal to or higher than 2.35:1.0; and (iii) a net debt/EBITDA ratio equal to or higher than 3.65:1.0. These issuances have a cross default clause. This
agreement has a cross default clause. See Note 13 of our Consolidated Financial Statements.
The fifteenth and sixteenth issuance requires us to maintain (i) an EBITDA/paid financial expenses ratio equal to or higher than 1.5:1.0 and (ii) an adjusted total
debt/EBITDA ratio equal to or lower than 3.65:1.0. These issuances have a cross default clause. This agreement has a cross default clause. See Note 13 of our
Consolidated Financial Statements.
The first issuance of debentures of our jointly-owned subsidiary Aquapolo requires its (i) debt service coverage ratio (cash generation/debt service) not to exceed
1.2:1.0; (ii) adjusted current liquidity ratio higher than 1.0:1.0; and (iii) limits its ability to incur futher indebtedness in an amount greater than R$20 million. This
issuance has a cross default clause. This agreement has a cross default clause. See Note 13 of our Consolidated Financial Statements.
The agreement signed between our jointly-owned subsidiary SESAMM – Serviços de Saneamento de Mogi Mirim S.A. and Caixa Econômica Federal requires its
(i) subscribed and paid-in capital stock to, correspond to, at least, twenty per cent (20%) of the total amount of investments in funds from this financing; (ii) a debt
service coverage ratio (ICSD) of, at least, 1.3:1.0 during the amortization phase; and (iii) indebtedness limit of up to one twelfth (1/12) of annual gross revenue or up to
the amount corresponding to three (3) monthly installments, under the agreement, whichever is higher.
92
The table below shows the more restrictive covenants ratios and our actual financial covenants ratios as of December 31, 2012.
Adjusted EBITDA/Adjusted net operating revenues
Adjusted EBITDA/Adjusted financial expenses
Adjusted net debt/Adjusted EBITDA
Adjusted current ratio
EBITDA/Paid financial expenses
Restrictive Ratios
Equal to or higher than 38%
Equal to or higher than 2.35:1.00
Equal to or lower than 3.65:1.00
Higher than 1.0:1.0
Equal to or higher than 1.5:1.0
Ratio as of December 31, 2012
43%
6.10:1.00
2.01:1.00
1.32:1.00
6.12:1.00
As of December 31, 2012 and 2011, we had met all the requirements set forth by its loan and financing agreements.
Capital Requirements
We have, and expect to continue to have, 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.
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 2012, we recorded R $2.5 billion in the water and sewage treatment infrastructure under our capital
expenditure program. We have budgeted investments in the amount of approximately R$9.9 billion from 2013 through 2016.
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. We declared dividends of R$534.3 million, R$578.7 million and R$456.0 in 2012, 2011
and 2010, respectively. See “Item 7.B. Related Party Transactions – Dividends.”
C. Research and Development, Patents and Licenses, Etc.
Our policy is to invest continually in the modernization of equipment and in the technology needed to identify, evaluate and improve our provision of basic
sanitation services while promoting environmental protection and maintaining our competitiveness and profitability. Our research and development activity is divided
into committees according to strategy and complexity. In 2012, 2011 and 2010, we invested R$6.3 million, R$3.2 million and R$3.8 million, respectively, in research
and development.
In order to further develop our expansion plans, we created a new division for research, technology development and innovation in May 2010. Among other
initiatives, the new division is responsible for: monitoring technological trends, defining our research projects portfolio, obtaining funding from development agencies,
developing an intellectual property protection policy and establishing cooperation agreements for the development of researches that are of interest. The new division
will also enable us to increase the quality of our procedural processes and technology portfolio.
93
With respect to our partnership with the State of São Paulo Research Foundation (Fundação de Amparo à Pesquisa do Estado de São Paulo) to develop and
support research projects involving researchers from graduate schools, the State of São Paulo and our employees. This partnership provides R$50 million in incentives,
to be paid equally by each of the two institutions. Under this partnership, 12 projects have been approved and nine of them are currently underway. They are related
to: (i) the development of technology related to the use of filtering membranes in water and sewage treatment, (ii) alternatives for the treatment, mud disposal and use
in water and sewage treatment stations, (iii) new technologies for the implementation, operation and maintenance of water distribution and sewage collection systems,
(iv) new technologies for improvements in unitary operations processes, (v) water quality monitoring, (vi) energetics efficiency and (vii) sanitary economy.
We also started a partnership with Fraunhofer Institute in Germany, in order to obtain biomethane from the sewage treatment process to be used as fuel for cars. In
the second semester of 2013, it will start to fill up a fleet of 49 cars, instead of gasoline, as a 3-year test. This project will contribute to reduce pollutant emission into
the atmosphere. We are investing R$900 thousand in this system while our German partner is investing R$5.1 million.
Seeking energy efficiency in our operations, we projected an equipment to calculate the correct oxygen dosage to be used in air difusors, which are used in the
sewage treatment process. The project aims also to find the best cleaning period and when these devices have to be replaced.
Additionally, we have developed custom made biofilters to reduce the odor from sewage pumping stations and sewage treatment plants.
Intellectual Property
Trademarks
We have secured registration of our logo and composite trademark at the Brazilian Institute of Industrial Property (Instituto Nacional da Propriedade Industrial),
or the INPI. We have registered with the INPI the following trademarks: “Sabesp,” “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” “Clubinho Sabesp,” “Cauã,” “Denis,” “Gabi,” “Gotucho,” “Gota Borralheira,”
“Dr. Gastão,” “Iara,” “Ratantan,” “Sayuri” and “SuperH20.” Cauã, Denis, Gabi, Gotucho, Gota Borralheira, Dr. Gastão, Iara, Sayuri and Ratantan are some of the
characters of our children’s club (Clubinho SABESP), which is a tool for environmental education directed to children through our website.
We have also filed applications with the INPI for registration of the following trademarks: “Parque Da Integração,” “Programa de Recuperação Ambiental,”
“Signos” (Sistema De Informação Geográfica No Saneamento), “Scorpion,” “Semana do Meio Ambiente Sabesp,” “Eficaz,” “Água de Reúso Sabesp,” “Água Sabesp
Aquífero Guarani,” “Água Sabesp Estação Cantareira,” “Contrato de Fidelização Sabesp,” “Esgotos não Domésticos Sabesp,” “Cine Sabesp”, “Ecoposto Sabesp”,
“PEA – Programa de Educação Ambiental”, “Sabesp Abraço Verde” and the following character of the Clubinho SABESP: “Cadu.”
Patents
We have a patent granted by the INPI for a constructive device in a building hydraulic simulator used for didactic purposes. We have also filed patent requests for
the following additional devices:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
a water consumption measurement unit;
a biofilter odor control unit;
a device for the removal of supernatants in the treatment of sewage; and
a mobile device for the calibration of hydrometers.
rotary devices used to clean water reservoirs transported by trucks with high-pressure hydrojetting systems.
94
We are currently awaiting responses to our patent requests from the INPI. While the requests are under consideration, we are granted the exclusive right to use
these devices.
Software
We have adopted an internal policy that provides for an active and effective audit and prevention of unauthorized software. 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” (Cotação Eletrônica de Preços), “PREGÃO SABESP ONLINE,” “SISDOC – Sistema de Controle de Documentos,” “Sistema de análise
do comportamento metrológico de hidrômetros,” “Modelo padronizado de Laudo técnico-MPLT,” and “SGH” - hydrometry management system (Sistema de Gestão
de Hidrometria) and online software for managing specific articles published in the DAE magazine. We have also secured registration of these programs at the INPI.
AQUALOG is a Brazilian 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. We currently have a temporary license for the AQUALOG software and are awaiting its final registration with the INPI.
SGL is an electronic price quotation system that allows us to view and control all bid and acquisition proceedings in real time.
Domain Names
We own the domain names described below which have been registered with the relevant entity in Brazil, Regristro.br:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
www.sabesp.com.br;
www.corregolimpo.com.br;
www.projetotiete.com.br;
www.revistadae.com.br;
blogdasabesp.com.br;
blogsabesp.com.br;
sustentabilidadesabesp.com.br;
clubinhosabesp.com.br; and
superh2o.com.br.
D. Trend Information
Several factors may affect our future results of operations, liquidity and capital resources, including:
(cid:1)
(cid:1)
the interests of our controlling shareholder;
regulations issued by ARSESP regarding several aspects of our business, including with respect to our ability to adjust our tariffs and the competency of state
and municipalities to manage their sanitation affairs;
95
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
Brazilian economic conditions;
meteorological conditions;
the effects of any continued international financial turmoil that may affect liquidity in the Brazilian capital and lending markets;
the effects that further changes in the Basic Sanitation Law and its interpretation may have on the basic sanitation industry in Brazil and on us;
the effects of inflation in our results of operations;
the effects of fluctuations in the value of the Brazilian real and in interest rates on our net interest income;
the effects from the increase in tariff that occurred on September, 2012, the tariff revision in April 2013 and future tariff changes;
the renewal of our concession agreements; and
the formalization of agreements with certain of the municipalities we serve.
Each of these factors is described in more detail under “5.A. Operating and Financial Review and Prospects.”
In addition, you should read “3.D. Risk Factors” for a discussion of the risks we face in our business operations, which could affect our business, results of
operations or financial condition.
E. Off----Balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31, 2012.
F. Tabular Disclosure of Contractual Obligations
Our debt obligations and other contractual obligations as of December 31, 2012 were as follows:
Loans and financing
Estimated interest payments(1)
Operating and capital lease obligations(2)
Alto Tietê PPP
Pension plan contributions(3)
PAES program(4)
Purchase obligations(5)
Total
______________
Less than 1 year
1----3 years
3----5 years
More than 5
years
Total
1,367.4
431.1
21.6
62.4
229.4
19.0
2,356.8
4,487.7
2,033.9
931.0
166.3
58.5
477.9
-
1,591.5
5,259.1
(in millions of reais)
1,311.0
651.4
153.6
141.3
507.2
-
51.9
2,816.4
4,357.0
1,801.7
2,521.7
635.7
1,881.0
-
1.0
11,198.1
9,069.3
3,815.2
2,863.2
897.9
3,095.5
19.0
4,001.2
23,761.3
(1) Estimated interest payments on loans and financing were determined considering the interest rates as of December 31, 2012. 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) Includes capital lease obligations which are collateralized by part of the billings from the provision of water and sewage services.
(3) Consists of pension plan contributions estimated for the following years.
(4) The PAES program, as set forth by Law No. 10,684, dated May 30, 2003.
(5) The purchase obligations are the contractual obligations of investments and expenses and consider the estimated inflation adjustments for each year.
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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, 2012, see Note 13 to our consolidated financial statements as of
December 31, 2012 and 2011 and for the years ended December 31 2012, 2011, 2010 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 nine
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 control the election 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. 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 ours
or from minority shareholders’ interests, and which could have a material adverse effect on us.”
Board of Directors
Our bylaws provide for a minimum of five and a maximum of 15 directors. The members of our board of directors are elected at a general shareholders’ meeting
to serve renewable two-year terms. Pursuant to our bylaws, our employees have the option to elect one member of our board of directors. Currently, our employees
have not elected a director. 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, at least 20.0% of the board of directors must be comprised of
independent members.
Seven of the current members of our board of directors, Edson de Oliveira Giriboni, Dilma Seli Pena, Walter Tesch, Alberto Goldman, Jerônimo Antunes,
Reinaldo Guerreiro and Alexander Bialer were elected at the general shareholders’ meeting held on April 23, 2012. The directors Claudia Polto da Cunha and
Francisco Vidal Luna were elected at the general shareholders’ meeting held on April 22, 2013. The tenure of all the directors will end upon the election of the new
members at the general shareholders’ meeting to be held in April 2014. Currently, we have four directors considered independent under the Novo Mercado rules.
Our board of directors ordinarily meets once a month or 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 and brief biographical descriptions of the current members of our board of directors:
Director
Edson de Oliveira Giriboni
Claudia Polto da Cunha
Dilma Seli Pena
Walter Tesch
Alberto Goldman
Jerônimo Antunes
Reinaldo Guerreiro
Francisco Vidal Luna
Alexander Bialer
______________
Age
60
45
63
69
75
57
60
66
66
Position
Chairman
Director
Director
Director
Director
Independent Director*
Independent Director*
Independent Director*
Independent Director*
Date Elected
April 23, 2012
April 22, 2013
April 23, 2012
April 23, 2012
April 23, 2012
April 23, 2012
April 23, 2012
April 22, 2013
April 23, 2012
* These directors comply with the independence requirements established by the Novo Mercado rules.
97
Edson Giriboni. Mr. Giriboni has been the chairman of our board of directors since April 2011. Mr. Giriboni holds a degree in civil engineering from the Escola
Politécnica of the Universidade de São Paulo, a degree in business administration from the Associação Educacional de Itapetininga, and post-graduate degrees from
the Universidade de Campinas and the Universidade Federal de Minas Gerais. Mr. Giriboni has been the Secretary of Sanitation and Water Resources of the State of
São Paulo since January 2011. He is also a State Deputy in São Paulo. Mr. Giriboni was the general manager of Fepasa and the vice-mayor of the city of Itapetininga
where he also worked at the Municipal Department of Works and Public Utilities, and subsequently, in the Municipal Department of Industry and Development.
Claudia Polto da Cunha. Ms. Cunha has been a member of our board of directors since April 2013. She holds a law degree and a master’s degree in Public Law
from Faculdade de Direito at Universidade de São Paulo, USP. She has been a state attorney for the state of São Paulo since 2001, acting as the Corporate Matters
Officer for Companhia Paulista de Parcerias, and Executive Secretary at State Council for Protection of Capitals of the State (Conselho de Defesa dos Capitais do
Estado), since 2006. Ms. Cunha is member of the board of directors at Empresa Metropolitana de Transportes Urbanos, and member of the Fiscal Committee at
Companhia de Desenvolvimento Habitacional e Urbano. She was member of the board of directors at Companhia do Metropolitano de São Paulo, member of Fiscal
Committee at Rede Ferroviária Federal, as well as member of the board of trustees at Fundação de Proteção e Defesa do Consumidor.
Dilma Seli Pena. Ms. Pena has been a member of our board of directors since January 2007 and our Chief Executive Officer since January 2011. She holds a
master’s degree in public administration from FGV and a degree in geography from the Universidade de Brasília. In 1976, she began her career as a public servant
working for the Research Institute of Applied Economics (Instituto de Pesquisa Econômica Aplicada), or IPEA. She was director of the sanitation division of the
Urban Policy Secretariat of the Ministry of Planning Office (Secretaria de Política de Saneamento Urbano), director of the strategic investments division of the
Ministry of Planning (Investimentos Estratégicos do Ministério de Planejamento) and director of the Brazilian National Water Agency (Agência Nacional de Águas).
She was a deputy secretary of the Economics and Planning Secretariat of the São Paulo state government (Secretaria de Economia e Planejamento do Estado de São
Paulo) and an effective member of the Environmental Board of the Industry Federation of the State of São Paulo (Conselho Ambiental da Federação das Indústrias do
Estado de São Paulo). From 2007 to 2011, she was responsible for the State Secretariat of Sanitation and Water Resources (formerly known as the State Secretariat of
Sanitation and Energy) and has been the chairperson of the board of directors of EMAE and CESP, companies owned by the State of São Paulo. She has authored a
number of articles, texts and books in the areas of sanitation, water resources and planning.
Walter Tesch. Mr. Tesch has been a member of our board of directors since April 2011. He holds a degree in sociology from the University of Uruguay and a
master’s degree in social sciences from the Pontifical Catholic University of Peru. Mr. Tesch has worked in Peru, Venezuela and several Latin American countries.
Between 2005 and 2008, Mr. Tesch was the head of the administrative district of Parelheiros, a water source region in the city of São Paulo, and until 2010 he was the
deputy Executive Secretary of the “Water Defense” (“Defesa das Águas”) operation, an agreement between the São Paulo Municipal and State governments.
Mr. Tesch is also the author of books on cooperativism and water sources in the city of São Paulo.
Alberto Goldman. Mr. Goldman has been a member of our board of directors since April 2011. Mr. Goldman holds a degree in civil engineering from the Escola
Politécnica of the Universidade de São Paulo. Mr. Goldman was vice-governor of São Paulo from January 2007 to March 2010 and governor of São Paulo from
April 2010 to December 2010. He was a member of our board of directors from April 2009 to March 2010. He was also the State Secretary of Development
(currently, Development, Science and Technology State Department) from January 2007 to February 2009, State Deputy for two terms and Federal Deputy for six
terms. Mr. Goldman was the president of the Budget Mixed Committee in 2000 and rapporteur of the General Telecommunications Law. He was the Special
Secretary of State of the Program Coordination in 1987 and of the Administration Coordination between 1988 and 1990. Mr. Goldman was the Minister of
Transportation from 1992 to 1994.
98
Jerônimo Antunes. Mr. Antunes has been a member of our board of directors since April 2008. He holds a master’s and Ph.D. degree in controllership and
accounting from the Universidade de São Paulo and holds a degree in business administration and accounting. He has been a certified independent accountant and
consultant in accountability and corporate finance since 1977. He has been a professor at FEA-USP since 1999, a professor of several MBA courses, at FIPECAFI
since 2000, at FEA-USP, since 2000, and at FIA – Fundação Instituto de Administração since 2006. He was a professor at the Universidade Federal do Ceará from
2000 to 2005 and in several other institutions. He was a director of FIPECAFI, from 2000 to 2007. He was a board member and director of IBRACON from 1998 to
2006 and a director of Associação Nacional dos Executivos de Finanças, Administração e Contabilidade, or ANEFAC, from 1994 to 2000.
Reinaldo Guerreiro. Mr. Guerreiro has been a member of our board of directors since January 2007. He holds a Ph.D. in accounting and controllership, a
master’s degree in accounting and controllership and a bachelor’s degree in accounting sciences, all of them from FEA-USP. Currently, he is both professor and
Director at FEA-USP. He has also authored the books “A meta da empresa, seu alcance sem mistérios,” “Gestão do lucro,” “Estruturação de sistemas de custos para
gestão de rentabilidade,” and co-authored “Controladoria uma abordagem de gestão econômica” and “Contabilidade gerencial.” He is a researcher at CNPQ and has
published various scientific articles In domestic and international magazines. He is a specialized consultant in financial management. He has worked on various
projects in the areas of financial management, costs, budget and IT in a variety of companies. Other than for us, Mr. Guerreiro does not serve on the board of directors
of any other public companies.
Francisco Vidal Luna. Mr. Luna has been a member of our board of directors since April 2013. He has a doctorate in Economics from the Faculdade de Economia
Administração e Contabilidade at the Universidade de São Paulo. In the public sector, he has served as the Secretary of Planning for the 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. Within the private sector, Mr. Luna was Chairman
and President of Banco Inter American Express S.A. At the governmental level, he served as a member of the advisory board of the Superintendency for the
Development of the Northeast (Superentendência de Desenvolvimento do Nordeste – Sudene), a member of the board of directors of BNDES; superintendent of the
Planning Institute of the Federal Planning Bureau, Special Secretary for Economic Affairs of the Federal Planning Bureau. At the state level, Mr. Luna has also been
the Chairman of the Advisory Board for the division of Economic Affairs of the Secretariat of Finance of the State of São Paulo and executive secretary of the Board
of Financial Coordination of São Paulo. Currently, Mr. Luna is a member of the board of directors and the audit committee of Desenvolve SP, President of the board of
directors of IDBRASIL and the Afro-Brazilian Museum, a member of the board of trustees of Fundação Padre Anchieta and an advisory board member of the Faculty
of Medicine Foundation – FFM.
Alexander Bialer. Mr. Bialer has been a member of our board of directors since April 2003. He holds a degree in mechanical engineering from Instituto
Tecnológico da Aeronáutica—ITA and a specialization degree in systems administration from the FGV. He is a member of the board of directors of AVIANCATACA
and Andritz Hydro Inepar. Until recently he was on the board of Pacific Rubiales and ROMI. In addition, Mr. Bialer was Director of Business Development of GE in
Brazil and Latin America, from which he retired in 2002. He also collaborated with AVON, Máquinas Piratininga and ASEA.
Board of Executive Officers
Our board of executive officers is composed of six executive officers appointed by our board of directors for renewable two year terms. 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.
The following are the names, ages, positions, dates of election and brief biographical descriptions of our board of executive officers:
Executive Officer
Dilma Seli Pena
Manuelito Pereira Magalhães Junior
Rui de Britto Álvares Affonso
Paulo Massato Yoshimoto
Luiz Paulo de Almeida Neto
João Paulo Tavares Papa
Age
63
45
55
60
56
56
Position
Chief Executive Officer
Corporate Management Officer
Chief Financial Officer and Investor Relations
Officer
Metropolitan Region Officer
Regional Systems Officer
Technology, Enterprises and Environment
Officer
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Date Elected
June 2, 2011
June 2, 2011
June 2, 2011
June 2, 2011
June 2, 2011
March 21, 2013
Dilma Seli Pena. See above “—Board of Directors.”
Manuelito Pereira Magalhães Júnior. Mr. Magalhães has been our Corporate Management Officer since January 2011. Mr. Magalhães was a member of our
board of directors from January 2007 to February 2011. He holds a degree in economic sciences and a master’s degree in economic sciences from the Instituto de
Economia, Universidade Estadual de Campinas. He was a member of the board of directors of the Companhia de Engenharia de Tráfego de São Paulo, of the COHAB
and, of the Empresa de Tecnologia de Informação e Comunicação de São Paulo. He was a parliamentary advisor in the Federal Senate. From 1998 to 2002, he was the
special advisor of the Minister of Health. From 2005 to 2006 he was the ombudsman of the National Supplementary Health Agency, or ANS. From 2005 to 2006, he
was the deputy secretary of the Planning Secretariat and the secretary of Planning of the Municipality of São Paulo. He was also the technical advisor, the secretary of
finance and the director of the Department of Advisory, Planning and Management in the municipality of Campinas, State of São Paulo.
Rui de Britto Álvares Affonso. Mr. Affonso has been our Chief Financial Officer and Investor Relations Officer since July 2003. Mr. Affonso holds a Ph.D. and a
master’s degree in economics from the Universidade Estadual de Campinas, or UNICAMP, and a degree in economics from the Universidade de São Paulo. He has
been a professor at UNICAMP since 1986, a professor at FEA-USP from 1983 to 1989, and a director of public economy at Fundação do Desenvolvimento
Administrativo from 1994 to 2003. He also represented Brazil on the board of the Forum of Federations (a non-governmental entity based in Canada) from 2000 to
2006. Mr. Affonso has also held several positions at the State government.
Paulo Massato Yoshimoto. Mr. Yoshimoto has been our metropolitan officer since February 2004. He holds a degree in civil engineering from the Escola de
Engenharia de Lins. Mr. Yoshimoto joined us in 1983, and has held the positions of executive assistant to the operations office and head of the water production and
maintenance and metropolitan planning departments. Mr. Yoshimoto has also held the position of senior planning professional at Empresa Metropolitana de
Planejamento, from 1975 to 1983.
Luiz Paulo de Almeida Neto. Mr. Almeida Neto has been our regional systems officer since January 2011. He holds a degree in civil engineering from the Escola
Politécnica of the Universidade de São Paulo, a business administration degree from Fundação Educacional Votuporanga/SP and a post-graduate degree in sanitary
engineering from Faculdade de Saúde Pública of the Universidade de São Paulo. Mr. Almeida joined us in 1979 and has worked with us as head of the Baixo Tietê
Business Unit responsible for the management of areas located in the hydrographic basins of Baixo Tietê, Tietê-Batalha, São José dos Dourados and Turvo Grande.
Mr. Almeida Neto has authored several articles.
João Paulo Tavares Papa. Mr. Papa has been our Technology, Enterprises and Environmental Officer since March 2013. He graduated as an electric engineer
from the University of Santa Cecília de Santos – SP. Between 2005 and 2012 he was Mayor of Santos for two successive terms. From 1991 to 1995 he was the
regional head of Sabesp, the Baixada Santista region and on the coast of São Paulo. Between 1997 and 2000 he was the Municipality Secretary of Environment and
CEO of the Traffic Engineering Company of Santos. He began his career in the public sector in 1984 as an engineer for the Santos Municipality where he worked in
the public services, transport and traffic sectors.
B. Compensation
Pursuant to Brazilian Corporate Law, our shareholders are responsible for establishing the aggregate amount of compensation we pay to the members of our board
of directors, members of our fiscal committee and our executive officers. According to Instruction No. 480 issued by CVM, we have to periodically disclose certain
information on the aggregate compensation such as averages and fringe benefits.
100
For the year ended December 31, 2012, the aggregate compensation, including 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$4.1 million.
The tables below sets forth the breakdown of the total compensation received by our directors and members of our board of executive officers and fiscal committee
and other data related to their compensation for the periods indicated:
Total compensation per administrative body
Board of directors
Board of executive officers
Fiscal committee
Total amount of compensation
Number of members (in individuals)
Board of directors
Board of executive officers
Fiscal committee
Fixed annual compensation
Salary
Board of directors
Board of executive officers
Fiscal committee
Direct and indirect benefits
Board of directors
Board of executive officers
Fiscal committee
Variable compensation
Bonus
Board of directors
Board of executive officers
Fiscal committee
Maximum amount of compensation
Board of directors
Board of executive officers
Fiscal committee
Minimum amount of compensation
Board of directors
Board of executive officers
Fiscal committee
Average amount of compensation
Board of directors
Board of executive officers
Fiscal committee
2012
Year ended December 31,
2011
(in thousands of R$, except where indicated otherwise)
2010
1,004
2,878
226
4,108
10
6
4
804
1,553
179
200
653
47
-
672
-
148
516
56
50
335
56
100
480
56
1,240
2,442
217
3,899
10
6
5
853
1,265
217
-
495
-
387
681
-
169
444
46
81
276
46
128
407
46
1,215
2,231
229
3,675
10
6
6
903
1,304
229
-
394
-
312
533
-
148
477
38
100
324
38
113
372
38
101
Profit Sharing and Pension Plans
We have established a pension and benefit fund (Fundação SABESP de Seguridade Social), or SABESPREV, to provide our employees with retirement and
pension benefits. This pension plan provides benefit payments to former employees and their families. Both we and our employees make contributions to the pension
plan. We are also required to pay supplemental pension payments relating to the employment contract of certain employees prior to the creation of SABESPREV. Our
total contributions to the pension plan totaled R$7.4 million, R$8.9 million and R$13.8 million in 2012, 2011 and 2010, respectively. Based on independent actuarial
reports, as of December 31, 2012, our obligation under these plans totaled R$2,124.3 million. For further information on our pension plans see Note 17 to our
consolidated financial statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 included elsewhere in this annual
report.
Beginning in 2008, 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 $60.5 million, R $56.6 million and R $52.6 million in 2012, 2011, and 2010, 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 a general shareholders’ meeting to serve renewable two-year terms. Our board of directors ordinarily meets
once a month or when called by a majority of the directors or the chairman. 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 renewable two-year terms. Meetings of our board of
executive officers are held weekly in the case of ordinary meetings or when called by the chief executive officer in the case of special or extraordinary meetings. 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. Those directors and
officers who are also our employees will remain as our employees after their tenure as directors and/or officers, in this case, maintaining all benefits granted to our
employees.
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 members and generally meets once a
month consists of four members and four alternates. Furthermore, each member has its respective alternate. The current members of our fiscal committee were elected
in the shareholders’ meeting held on April 22, 2013. Their tenure will end in 2014. 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 consolidated financial statements and report on them to our
shareholders.
The following are the names, ages, position, date of election and brief biographical descriptions of the current and alternate members of our fiscal committee:
Fiscal Committee Members
José Antonio Xavier
Humberto Macedo Puccinelli
Horácio José Ferragino
Massao Fábio Oya
Tomás Bruginski de Paula
José Rubens Gozzo Pereira
Joaldir Reynaldo Machado
Jorge Michel Lepeltier
Age
52
55
62
31
51
65
64
65
Position
Member
Member
Member
Member
Alternate
Alternate
Alternate
Alternate
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Date Elected
April 22, 2013
April 22, 2013
April 22, 2013
April 22, 2013
April 22, 2013
April 22, 2013
April 22, 2013
April 22, 2013
José Antonio Xavier. Mr. Xavier has been a member of our fiscal committee since April 2011. He holds a degree in economy and a post-graduate degree in
governmental controllership from the Pontifícia Universidade Católica de São Paulo (PUC-SP). Mr. Xavier was an auditor of the State Treasury from 1993 to 1998
and the Technical Director of the State Treasury since 1998. He was a member of the Fiscal Committee at BANESCARD, CESP and CDHU.
Humberto Macedo Puccinelli. Mr. Puccinelli has been a member of our fiscal committee since April 2011. Mr. Puccinelli holds a degree in economics from the
Pontifícia Universidade Católica de São Paulo (PUC-SP). He worked at the Department of Planning from 1985 to 1995, at the Health State Department as secretary
assistant from 1995 to 1996, at the State Treasury from 1996 to 2002, and at the Planning Department as secretary assistant in 2003. Since January 2004 he has been
the Technical Assistant of the State Treasury.
Horácio José Ferragino. Mr. Ferragino was elected to our fiscal committee on April 23, 2012. He holds a degree in accounting from the Faculdades Integradas
Santo Antônio – FISA-SP. He worked in the public sector for the State Fund for School Buildings (FECE – Fundo Estadual de Construções Escolares) from 1970 to
1976, for the School Building Company from 1976 to 1988 (CONESP – Cia de Construções Escolares), for the Educational Development Foundation (FDE –
Fundação para o Desenvolvimento da Educação from 1988 to 1995) and Casa Civil e Secretaria de Gestão Pública (1995 – 2012), where he coordinated projects
involving public purchase policies. He currently works as Project Coordinator for the Department of Planning and Regional Development.
Massao Fábio Oya. Mr. Oya has been a member of our fiscal committee since April 2013. He has a degree in accounting and an MBA with a specialization in
Financial Management from the University of Anchieta. Mr. Oya is a consultant and advises companies on accounting as well as corporate governance. He also serves
on the fiscal committees of several companies, as a sitting member: including COPEL, Wetzel S.A., Banrisul, Sanepar, and as an alternate member: TIM Participações
S.A., EZ TEC Empreendimentos e Participações S.A., Companhia Providência Indústria e Comércio S.A. and Eucatex S.A.
Tomás Bruginski de Paula. Mr. de Paula has been an alternate member of our fiscal committee since April 2006. He holds a degree and a master’s degree in
economics from UNICAMP. He has been a Professor at the Economics Department of Pontifícia Universidade Católica – PUC since 1986. He has been an executive
officer at Companhia Paulista de Parcerias since 2004 and Companhia Paulista de Securitização since 2009. Mr. de Paula has worked as a consultant for several
entities, including the Economic Committee for Latin America (CEPAL), the United Nations Development Program (PNUD), the Brazilian Institute of Municipal
Administration (IBAM), the Brazilian School of Public and Business Administration of FGV (EBAPE/FGV), the State System Data Analysis Foundation (SEADE),
and the Brazilian Electricity Agency in the infrastructure and public policy financing areas. He is also a member of the fiscal committee of the Nossa Caixa
Desenvolvimento and a member of the Board of Directors of DERSA. Mr. de Paula was also a member of the fiscal committee of the São Paulo Company of Electric
Power Transmission.
José Rubens Gozzo Pereira. Mr. Pereira has been an alternate member of our fiscal committee since April 2010. He holds a degree in economics from
Universidade Mackenzie, a graduate degree from FGV and attended international studies extension programs at the Universities of London and Paris. He has been
responsible for the Funding department of the Finance Secretariat since 1989. Mr. Pereira held positions in the public sector in the DAEE, where he was responsible
for the Budget and Financing area; he was an executive officer at Companhia de Engenharia de Tráfego – CET, and in the International Cooperation department of
Companhia Energetica de Silo Paulo – CESP. Mr. Pereira has been the coordinator for the Funding Department of the São Paulo State Government in the Finance
Secretariat since 1991.
Joaldir Reinaldo Machado. Mr. Machado has been an alternate member of our fiscal committee since April 2010. He holds a degree in economics from
Universidade de São Paulo. Mr. Machado has been an employee of SEADE since 1979. He has also held several other management positions, including management
advisor to Empresa Metropolitana de Planejamento – EMPLASA, financial executive of the Finance Department of our Company, chief of staff of the Environment
Secretariat and chief of staff and head of department of the SEADE Foundation. Mr. Machado is currently the chief of staff of the Economy and Planning Secretariat
of the São Paulo State Government.
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Jorge Michel Lepeltier. Mr. Lepeltier has been a member of our fiscal committee since April 2013. He has a graduate degree in Capital Markets, Finances and
Strategic Planning from New York University. He also has a bachelor’s degree in economics and accounting from Pontifíca Universidade Católica de São Paulo.
Mr. Lepeltier has experience with appliance companies, and worked at the Whirlpool Group from May 1978 until August 1993, initially as Treasurer. After two years
as serving as CFO and Director of Investor Relations of the Brasmotor Group, Mr. Lepeltier went on to work at Price Waterhouse for twelve years. Currently,
Mr. Lepeltier is a partner at Jorge Lepeltier Consultores Associados, which offers consulting services in administration, finance, corporate structure and auditing. He
serves on various boards of directors, fiscal committees and auditor committees, and, over the last five years, he has served on the board of directors of the following
companies: AES Tietê S.A., Companhia Paranaense de Energia – Copel and Triunfo Participações e Investimentos S.A., among others. As a fiscal committee member,
he has served on the committees of the following companies: TIM Participações S.A., Cia de Saneamento Básico do Estado de São Paulo – Sabesp and Drogasil S.A.,
among others. As an audit committee member, he has served on the audit committees of the following companies: Triunfo Participações e Investimentos S.A. and
Positivo Informática S.A., among others. Currently, he is a fiscal committee member of Alpargatas S.A., Companhia Providência Indústria e Comércio and M&G
Poliester S.A., and an audit committee member of Anhanguera Educacional Participações S.A., among others.
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. The members are appointed by the board of directors.
The audit committee is responsible for assisting and advising the board of directors in its responsibilities to ensure the quality, transparency and integrity of our
published financial information. To this end, the audit committee supervises all matters relating to accounting, internal controls and the internal and independent audit
functions. 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.
The following are the names, positions and dates of election of the members of our audit committee:
Director
Jerônimo Antunes
Reinaldo Guerreiro
Francisco Vidal Luna
Regulatory Affairs Committee
Position
Coordinator and Financial Expert
Member
Member
Date Elected
April 26, 2012
April 26, 2012
April 25, 2013
Our bylaws provide for a regulatory issues committee to be comprised of our Chief Executive Officer, Chief Financial Officer and Investor Relations Officer,
Metropolitan Officer, and Regional System Officer. The regulatory affairs committee is responsible for defining our regulatory directives, strategies and guidelines
and coordinating our regulatory affairs department, subject to the guidelines defined by our board of directors.
The Chief Executive Officer acts as chairman of our regulatory affairs committee and is responsible for proposing its internal regulations to be approved by the
committee. Pursuant to our bylaws, the head of regulation shall be the executive secretary of the committee.
Under our bylaws, the resolutions of our regulatory affairs committee shall be binding and our executive board shall be entitled to implement them in the scope of
its jurisdiction. Meetings of our regulatory affairs committee are held at least once a month, if ordinary, and when extraordinary can be called by any of our
committee’s members.
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Corporate Governance Practices
The significant differences between our corporate governance practices and NYSE standards can be found on our website, www.sabesp.com.br, at the following
location: Investors Relations – Corporate Governance – SABESP and NYSE Standards. The information found at this website is not incorporated by reference into
this document.
D. Employees
As of December 31, 2012, we had 15,019 full-time employees. In 2012, we had an average of 888 trainees and 560 apprentices (aprendizes), as defined by
federal Law No. 10,097, dated December 19, 2000.
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:
Number of employees by category of activity:
Projects and operations
Administration
Finance
Marketing
Number of employees by corporate division:
Head office
São Paulo metropolitan region
Regional Systems
Total number of employees
2012
As of December 31,
2011
2010
9,919
2,474
454
2172
1513
6,865
6641
15,019
9,782
2,501
454
2,159
1,475
6,861
6,560
14,896
10,092
2,527
477
2,234
1,496
7,135
6,699
15,330
The average tenure of our employees is approximately 17 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 70% of all our employees are members of unions. The five main unions that represent our employees are i) the Sindicato dos Trabalhadores em
Água, Esgoto e Meio Ambiente de São Paulo - SINTAEMA, ii) workers union of Santos Urban Industries, Baixada Santista region, Vale do Ribeira, South Coast and
Vale Ribeira - SINTIUS, iii) the Sindicato dos Engenheiros do Estado de São Paulo - SEESP, iv) the Sindicato dos Advogados de São Paulo - SASP and v) the
Sindicato dos Técnicos Industriais de Nível Médio no Estado de São Paulo – SINTEC. As a result of the 2010 collective bargaining discussions, wages were
temporarily increased by 5.05%. The unions filed a claim with the Labor Court seeking to, among other requests, increase wages by 1.5%, increase the salary base
over which the annual profit distribution is calculated, increase payment of overtime by 100% and increase additional payment of working night hours from 20% to
50%. The Labor Court decided in favor of the unions and we appealed from the decision. The appeal resulted in a partial suspension of the decision; the decision to
increase overtime by 100%, however, was upheld.
In 2011, we entered into an additional collective bargaining agreement, which: (i) increased wages by 6.39% (which corresponds to the adjustment for inflation
for the period) plus a real gain of 1.51%, (ii) established an employment guarantee for 98% of our employees, (iii) increased the number of days permitted under
maternity leave from 120 to 180 days and (iv) increased meal vouchers by 10.07%, among other provisions. Our most recent collective bargaining agreement, entered
into in 2012, resulted in the following: (i) an increase in salaries by 6.17% (which corresponds to the inflation adjustment for the period plus further addition 1.93%),
(ii) the establishment of a guarantee of continued employment for 98% of our employees, (iii) an increase in meal vouchers of 10% and a further increase of 8% in all
other benefits, (iv) stopped extra payments to employees who drive company vehicles.
We have experienced the following strikes in the last seven years, none of which interrupted the essential services that we provide: a one-day strike in May 2006,
a four-day strike in June 2008, a three-day strike in May 2009, an eight-day strike in May 2010, a one-day strike in 2011. In 2007 and 2012 there were no strikes.
Under Brazilian law, our non-administrative employees are considered “essential employees” and, therefore, are limited in their right to strike.
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E. Share Ownership
As of May 08, 2013, the members of the board of directors and the executive officers owned an aggregate of 1,518 common shares. The members of our board of
directors and our executive officers, on an individual basis and as a group, beneficially own less than 0.1% of our common shares. See “Item 7.A. Major Shareholder”
for more information. As of the same date, none of our directors and executive officers owned any stock option plans.
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholder
Our outstanding capital stock as of December 31, 2012, consisted of 227,836,623 common shares, without par value. On April 22, 2013 our shareholders
approved a stock split, following which each common share represented three new common shares. Since then, our outstanding capital stock consists of 683,509,869
common shares, without par value. Under our bylaws and the 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 May 08, 2013.
State of São Paulo
Directors and executive officers of SABESP
Others
Total(1)
______________
Common shares
Shares
343,524,258
1,518
339,958,611
683,509,869
%
50.3%
Less than 0.1%
49.7%
100.0%
(1) As of May 08, 2013, 26.3% of our outstanding common shares were held by 6,239 registered shareholders in Brazil.
As of May 08, 2013, 23.4% of our outstanding common shares were held in the United States, in the form of ADSs. According to the ADS depositary’s records,
which contain information regarding the ownership of our ADSs, there were, on April, 2013, 37 record holders of ADSs in the United States.
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$431.0 million in 2012, R$405.0 million in 2011 and R$383.5 million in 2010. Our accounts
receivable from the State for water supply and sewage services totaled R$65.5 million and R$145.4 million, as of December 31, 2012 and 2011, respectively. In
addition, as required by law, we invest our cash and cash equivalents with government financial institutions.
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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 2012, 2011 and 2010, we made payments to former employees of
R$132.7 million, R$124.4 million and R$118.4 million, respectively, in respect of Plan G0. The State made reimbursements in 2012, 2011 and 2010 in the amount of
R$104.4 million, R$89.5 million and R$85.1 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:
(cid:1)
(cid:1)
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.
Under the December 2001 agreement, in 2002, a State-owned construction company (Companhia Paulista de Obras e Serviços), or the CPOS, on behalf of the
State, and an independent appraisal firm (Engenharia de Avaliações), or the ENGEVAL, on our behalf, presented their valuation reports relating to the reservoirs.
Under the agreement, the arithmetic average of these appraisals is deemed the fair value of the reservoirs. The appraisals contained in these reports were in the
amounts of R$335.8 million and R$341.2 million, respectively. Because we had already made investments in these reservoirs by then, the arithmetic average of the
appraisals submitted to our board of directors by August 2002, R$300.9 million, was net of a percentage corresponding to these investments. Our board of directors
approved the valuation reports. This amount was updated until September 2008 according to IPCA index and amounted to R$696.3 million.
Under the December 2001 agreement, for amounts due in excess of the fair value of the reservoirs, the State 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 (12a 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. This decision was suspended by us, and the State treasury and DAEE appealed the decision. On August 23, 2010, the
appeal was denied. We have petitioned for clarification of the appeal court’s decision and will seek to take the case to the Supreme Court. The effects of the appeal
court’s decision will be suspended until the end of the legal process. We have assessed the risk of loss as probable, which would prohibit the transfer of the reservoirs
in payment of the accounts receivable due from the State.
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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 amount 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.
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.
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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 based on the IPCA. 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, is being paid by the State in 114 consecutive monthly installments, as adjusted by the annual IPCA variation, plus interest accruing at
the annual rate of 6.0%. The first installment was paid in November 2008.
In addition to the Undisputed Reimbursement Amount, there is an outstanding balance relating to the Disputed Reimbursement Amount. As of December 31,
2012, the Disputed Reimbursement Amount plus the reservoirs mentioned above, amounted to R$1,351.2 million, but due to the uncertainty regarding the recovery of
the amount our management decided not to recognize the reimbursements. See Note 8 to our consolidated financial statements as ofDecember 31, 2012 and 2011 and
for the year ended December 31, 2012, 2011 and 2010 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.
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, 2012, we had made a provision of R$1,547.2 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 BM&FBOVESPA Arbitration
Chamber. In June 2010, we sent a settlement proposal to the Secretary of Treasury, which was denied, and (iii) 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. 4,819/58. Regardless of the civil lawsuit, we will continue to
actively seek a settlement with the State government.
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Agreement with the State and the city of São Paulo
On June 23, 2010 the State and the city of São Paulo entered into a convention (convênio) with the intermediation and consent of our Company and of ARSESP
pursuant to which they agreed to jointly manage the planning of and investment in the basic sanitation system of the city of São Paulo, among other things. This
agreement established that the State and the city of São Paulo would enter into an agreement with us, granting us exclusive rights in the provision of water and sewage
services in the city of São Paulo. In addition, the agreement established the role of ARSESP in regulating and overseeing our activities, and established a management
committee that will be responsible for planning the water and sewage services and for reviewing our investment plans. The management committee is composed of six
members appointed for renewable two-year terms. The State and the city of São Paulo have the right to appoint three members each. We are permitted to participate
in the meetings of the management committee, but we are not afforded any voting rights.
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) would be responsible for planning water and sewage services for the city and for reviewing our investment plans.
The management committee consists of six members appointed for two-year terms. The State and the City of São Paulo have the right to appoint three members each.
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, which total approximately R$500 million per year.
• We must transfer 7.5% of the gross revenues we derive under the convênio, 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 these obligations and addresses their compatibility with the sanitation plans of the State, the City of
São Paulo and, if necessary, the Metropolitan region. The investment plan is not irrevocable and will be reviewed by our management committee every four years,
particularly with respect to the investments to be executed in the subsequent period.
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.
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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 IADB (i) in 1992 and 2000 for the total original aggregate amount of US$650.0 million related to the financing of the first and second phases of the Tietê River
recovery project to reduce pollution; and (ii) in 2010 for the aggregate amount of US$600 million related to the financing of the third phase of the Tiête 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
International Bank for Reconstruction and Development (IBRD) in the amount of US$100 million for the Water Source Program (Programa Mananciais).
We also entered into credit agreements with the 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, in 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, as part of the New Life Program (Programa Vida Nova), in October 2010, for an aggregate principal amount of
¥6,208 million; and (iv) the Corporate Program for Water Loss Reduction, in February 2012, for an aggregate principal amount of ¥33,584 million.
The State has also guaranteed a portion of our repayment obligations under loan agreements that we entered into with the federal government in 1994 through its
financial agent, Banco do Brasil S.A. which totaled R$480.9 million as of December 31, 2012.
For more information on the aforementioned loans, see “Item 5.B. Liquidity and Capital Resources—Capital Sources—Indebtedness Financing.”
Use of Reservoirs
We currently use the Guarapiranga and Billings reservoirs, which are also used by another company controlled by the São Paulo State Government, based on a
grant issued by the DAEE. We do not pay any fees with respect to the use of these reservoirs. We are, however, responsible for maintaining them and funding their
operating costs. The State incurs no operating costs on our behalf. If these facilities were not available for our use, we would have to obtain water from more distant
sources, which would be more costly.
Agreements with Lower Tariffs
We have entered into agreements with public entities, including State entities and municipalities, which manage approximately 7,600 properties. Under these
agreements, these public entities pay a different tariff which is approximately 25.0% lower than the tariff that applies for the public entities that have not entered into
these agreements, provided such entities implement our PURA program for the rational use of water, which includes a reduction of at least 10.0% in water
consumption. 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.
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Personnel Assignment Agreement among Entities Related to the State Government
We have personnel assignment agreements with entities related to the State Government, under which the expenses are fully passed on and monetarily reimbursed.
The expenses related to personnel assigned by us to other state government entities in 2012, 2011 and 2010 amounted to R$12.3 million, R $10.9 million and
R$5.6 million, respectively.
In 2012 and 2011, none of our personnel had been assigned by other entities; and in 2010, the expenses related to personnel assigned by other entities to us totaled
R$0.3 million.
Services Obtained from State Government Entities
As of December 31, 2012, 2011 and 2010, we had an outstanding amount payable of R$1.0 million, R$12.1 million and R$11.4 million, respectively, for services
rendered by São Paulo State government entities, including the supply of electric power by CESP.
Non----operating Assets
We lend land, free of charge, to DAEE. Such non-operating assets totaled R$1.0 million, R$2.3 million and R$2.3 million as of December 31, 2012, 2011 and
2010, respectively.
Banco do Brasil
We filed a lawsuit against the Department of Finance of the State São Paulo seeking financial compensation related to the transfer of our exclusive rights in bank
services. On March 27, 2007, the State of São Paulo sold exclusive rights in the provision of banking services administration entities directly and indirectly in favor of
Banco Nossa Caixa. On May 27, 2010, the State of São Paulo sold them in favor of Banco do Brasil. In this lawsuit, we were pleading financial compensation for the
sale of its exclusive rights, requiring a percentage of the values that the State of São Paulo received from each of the financial institutions for the services contract
entered into.
On June 28, 2011, we entered into an agreement with the State of São Paulo whereby we received the amount of R$63.4 million upon reduction, as compensation
of credit held by the State, corresponding to interests on shareholders’ equity in the fiscal year 2010.
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$7.4 million, R$8.9 million and R$13.8 million in 2012,
2011 and 2010, 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 the 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 SABESP, 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.
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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$3.4 million, R$2.8 million
and R $2.8 million in 2012, 2011 and 2010, respectively, and it refers to salaries and other short-term benefits management. An additional R $0.7 million,
R$1.1 million and R$0.8 million related to the bonus program was accrued in 2012, 2011 and 2010.
For further information on management compensation, see “Item 6.B. Compensation.”
Loan agreement through credit facility
The Company holds interests in some companies, not holding the majority interest but with power of veto in some issues. Therefore, these companies are
considered for accounting purposes as jointly controlled entities, and are proportionately consolidated.
The Company entered into a loan agreement through credit facility with the Águas de Andradina S.A., Águas de Castilho S.A., and Aquapolo Ambiental S.A.
to finance the operations of these companies, until the loans and financing required to banks are cleared.
The contracts signed on January 19, 2012 with Águas de Andradina and Águas de Castilho were settled in July 2012, according to the agreement’s provisions.
On July 18, 2012, new agreements were signed with both companies, pursuant to the terms and conditions in the table below. The agreement signed with Aquapolo
Ambiental on March 30, 2012 remains with the same features, according to the table below:
Companies
Credit limit
Principal
disbursed
Interest balance
Águas de Andradina
Águas de Castilho
Aquapolo Ambiental
Aquapolo Ambiental
Total
3,467
675
5,629
19,000
28,771
1,427
403
5,629
19,000
26,459
Interest rate
SELIC + 3.5%
p.a.
SELIC + 3.5%
p.a.
21
6
519 CDI + 1.2% p.a.
1,076 CDI + 1.2% p.a.
1,622
Maturity
07/17/2013
07/17/2013
04/30/2016
04/30/2015
The amount disbursed is recognized in assets, in “Other receivables” and amounts to R$1,830 for principal and R$27 for interest recognized in current assets and
R$24,629 for principal and R$1,595 for interest in noncurrent assets. As of December 31, 2012, the balance of principal and interest of these contracts is R$28,081. In
2012, financial income was impacted by R$1,672, referring to these loans; of which R$1,622 refers to outstanding agreements and R$50 refers to agreements settled in
July 2012.
C.
Interests of Experts and Counsel
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See “Item 3.A. Selected Financial Data” and “Item 18. Financial Statements.”
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Legal Proceedings
In the ordinary course of our business, we are a party to judicial and administrative proceedings relating to civil, environmental, labor and tax matters. As of
December 31, 2012, we estimated that these legal proceedings totaled R$36,866.9 million (excluding the amount of R$330.2 million related to court deposits). This
amount was based on probable, possible and remote losses and on the value attributed to the lawsuit by the plaintiffs in some cases and on the economic value of the
lawsuits in others. Out of the total amount of risks as of December 31, 2012, approximately R$2,496.7 million relate to tariff related legal proceedings and consumers
claims, approximately R$927.7 million relate to contractors’ claims, approximately R$1,158.7 million relate to tax proceedings, approximately R$394.0 million relate
to labor proceedings, approximately R$31,117.9 million relate to civil public actions related to environmental matters and approximately R$771.9 million relate to
other civil matters. As of December 31, 2012, the provision for legal risks totaled R$1,189.2 million (excluding the amount of R$317.0 million related to court
deposits), of which R$521.3 million relate to tariff related legal proceedings and consumers claims, R$115.2 million relate to contractors’ claims, R$68.1 million relate
to tax proceedings, R$171.7 million relate to labor proceedings, R$148.4 million relate to civil public actions related to environmental matters and R$164.5 million
relate to other civil matters.
The table below sets forth, as of December 31, 2012, our estimated risks with respect to legal proceedings, categorized by potential risk of loss:
Expected probable loss
Expected possible loss
Expected remote loss
Total
Total Value
(in millions of reais)
1,189.2
2,796.7
32,881.0
36,866.9
The difference between the provisioned amount and the total amount of the contingencies derives from the methodology for establishing our provisions. This
methodology takes into account the probability of loss of each lawsuit, based on the alleged facts, the claim based on the factual circumstances vis-à-vis the law, as
well as prevailing precedents in similar cases. Once the methodology is applied, as a general rule, we make the provisions only for the lawsuits that are considered as
probable losses.
Judgments regarding future events, the results of which may differ significantly from actual estimates, could exceed the amounts provisioned. Provisions are
revised and adjusted to take into consideration changes in circumstances involved. We may not obtain a favorable outcome in the administrative or court proceedings
to which we are a party. In addition, the total amount of the contingencies, based on the value attributed to the lawsuit by the plaintiff, may not correspond to the
economic value of the lawsuits, which may be substantially higher than the total estimated amount of contingencies. If the economic outcome of these lawsuits is
higher than the amount attributed to the lawsuit by the plaintiff or, in the event the total amount of our provisions are not sufficient to pay the risks due, we could incur
greater costs than those that were originally estimated. If these costs are significant, our results of operations and financial condition could be negatively affected. See
“Item 3.D. Risk Factors—Risks Relating to Our Business—Any substantial monetary judgment against us in legal proceedings may have a material adverse effect on
us.”
Civil Public Actions Related to Environmental Matters
We are subject to administrative and judicial proceedings, including proceedings initiated by the company of Environmental Sanitation Technology (Companhia
de Technologia de Saneamento Ambiental – Cetesb), Public Prosecutor of the State of São Paulo and non-governmental organizations among others. These result from
proceedings alleged environmental damage including proceedings: (i) seeking that we cease releasing raw sewage into certain local water courses; (ii) in some cases
seeking remedies for environmental damages, which have not yet been specified and evaluated by the court’s technical experts; and (iii) seeking to require us to install
and operate sewage treatment facilities in the locations referred to in the civil public actions. In certain case, we are subject to daily fines for non-compliance. In our
response to these lawsuits we emphasize that the installation and operation of sewage treatment facilities in the locations referred to in the civil public actions is
included in our investment plan. There have already been unfavorable judicial decisions against us. The effects may include: (i) investment in works or services not
considered by the long-term investment plan; (ii) early execution of works or services that were considered for execution in future years in the long-term investment
plan; (iii) payments related to environmental indemnification; and (iv) a negative impact on our image in national and international markets and in public bodies.
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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 classify certain of these proceedings as probable loss and possible loss. As of December 31, 2012 we have provisioned R$148.4 million for such matters.
Labor Proceedings
We are party to labor proceedings, regarding compensation for extra working hours, shift substitutions, additional health and risk premiums, dismissed without
cause, work assignment changes, wage parity, among other claims. There have already been partial or full judgments in these proceedings for which we have taken
provisions for claims considered as probable losses. As of December 31, 2012, we were party to approximately 585 labor proceedings and one public civil action filed
by some of our current and former employees. Some of these lawsuits seek to negotiate certain benefits granted by Law No. 4,819 of August 26, 1958. Our position in
these lawsuits is that the State government, and not us, should be responsible for the payments due to the plaintiffs. In the public civil action filed against us and the
State Treasury, a temporary injunction was granted in the trial court requiring us to pay the benefits set forth in Law No. 4,819/58 to all the plaintiffs. A trial court
ruled on April 5, 2005, granting the relief sought under this proceeding and confirming the temporary injunction requiring us to continue to pay the benefits. We have
appealed this decision, but remain subject to the temporary injunction and continue to pay the benefits. There are currently other pending individual lawsuits discussing
the same claims, and up to the date of this report neither we nor the State government had reached an agreement as to the indemnification amounts related to these
proceedings.
In order to continue to seek reimbursement of the amounts related to the payment of retirement benefits and pensions paid by us that our management understands
is in fact owed by the State government, we have taken the following measures: (i) on March 24, 2010, we sent a letter to our controlling shareholder in an attempt to
start an arbitration proceeding before the BM&FBOVESPA arbitration chamber, (ii) In June 2010, we sent a settlement proposal to the Secretary of Treasury, which
was denied, and (iii) 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. 4,819/58 and we are waiting on the court’s decision. Regardless of the civil lawsuit, we will continue to actively seek a settlement with the State
government.
As of December 31, 2012, the total labor proceedings was R$361.7 million for risks considered as probable and possible losses. We have recorded a provision of
R$171.7 million as of December 31, 2012 for these risks, including the lawsuits described in the preceding paragraphs.
Tax Proceedings
Our tax proceedings and our accrual for risks for tax proceedings refer mainly to tax collection suits resulting from different interpretations by us and the
competent government authority with respect to the applicable law. As of December 31, 2012, we had recorded a provision of R$68.1 million for claims whose
likelihood of loss is considered probable. The tax proceedings to which we are party to include the following:
(cid:1) We filed two writs of mandamus with the intention of declaring a municipal law unconstitutional that established a tax for installing water and sewage
sanitation networks in public areas. The first writ of mandamus was partially approved, but subsequently, the municipal law which it contested was repealed.
The second writ of mandamus is pending the municipality’s challenge, but in the first instance it was decided to suspend the tax and that the municipality must
post bond. Management has evaluated the probability of the outcome to be a possible loss, although it is not possible to estimate the total amount involved.
(cid:1)
The City of São Paulo, through the creation of a law, repealed tax exemption concerning sanitation and sewage services that we performed and, after this,
made tax claims regarding such services and ancillary activities, totaling R$264.6 million. The outcome has been evaluated as a possible loss. We made a
petition for a writ of mandamus against the revocation of the tax exemption, and currently are waiting for the petition to be accepted. Also, we filed injunctive
and annulment actions, intending to suspend the claim for credits and to annul such claim on the basis that activities related to sewerage treatment and
ancillary activities are not listed as taxed activities by the City of São Paulo. As there is no final decision, we evaluated the probability of loss as possible.
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(cid:1) We proposed to carry over losses from previous years to offset an income tax liability of approximately R$56.1 million and a social contribution tax liability
of approximately R$8.7 million. These amounts arise from to the period between January and April 2003. In 2005, the Federal Revenue Service denied the
set off of approximately R$11.2 million related to income tax liability and R$0.7 million related to social contribution tax liability, totaling R$11.9 million,
and allowed us to compensate the remaining portion. We appealed this decision, and our request was partially granted. We still await a final decision and as
of December 31, 2012 we classify the possible loss as R$6.8 million and the probable loss as R$1.2 million.
(cid:1)
(cid:1)
(cid:1)
(cid:1)
In 2006, the Federal Revenue Service concluded that, for 2001, we had an income tax liability and social contribution tax liability totaling R$277.0 million
(R$389.5 million, as adjusted as of December 31, 2012) and initiated administrative collection proceedings against us, to which we filed an objection. We
assessed the risk of loss is remote with respect to approximately 90.0% of this amount and a possible risk of loss with respect to the remaining 10.0%.
In 2008, the Federal Revenue Service denied certain requests for compensation to offset income tax and social contribution tax liabilities. We proposed to
offset overpaid income tax and social contribution tax paid against our tax liability. The amount involved in these proceedings was R$47.5 million as of
December 31, 2012. We assessed the risk of loss as possible and no amount has been provisioned for this proceeding.
In 2002, a provisional measure was passed that retroactively required us to make additional tax payments with respect to our 1997 and 1998 fiscal years. In
acordance with this provisional mesaure, we made additional tax payments, and, as a result of certain of these payments, we claimed a tax credit with respect
to our 2002 fiscal year. Subsequently, the Adminstrative Committee of Tax Resources (Conselho Administrativo de Recursos Fiscais) and the Brazilian Tax
Authority (FISCO) ruled that this tax credit was not properly taken. We have appealed this decision and the total amount involved is estimated at R$42.4
million as of December 31, 2012. We have assessed the risk of loss as possible.
On June 23, 2010, we have entered into an settlement with the municipality of São Paulo for public water supply and sewage services. As part of this
settlement, certain tax collections between the parties were settled amicably. As of December 31, 2012, we classify the probable and possible loss at
R$23.9 million and R$39.1 million, respectively.
Condemnation Proceedings
We are party to a significant number of condemnation proceedings arising from the partial or total expropriation or use of private property for water mains, sewer
lines and facilities. Under Brazilian law, the State or the relevant municipality is entitled to condemn private property to the extent required for the construction,
development or improvement of water and sewage systems operated by us. As a result of such proceedings, we provide compensation to affected property owners
based upon appraised fair market values. While such compensation is agreed through negotiations, in other cases we are prosecuted by the property owners. As of
December 31, 2012, the future disbursement was estimated at R$ 533.7 million, with respect to of which R$ 187.8 million was legal proceedings and of which R$
345.9 million was with respect to successfully completed negotiations. These payments are made over the years, according to each court order or settlement. After
making each payment, we will obtain the title to the respective real property which will be recorded as an asset belonging to us after being expropriated. We treat such
payments as investments for accounting purposes and, as a result, have not recorded any corresponding provision.
Concession----Related Legal Proceedings
The Company is a party to concessions-related proceedings, cases in which it can lose the right of operating water supply and sewage collection services in few
municipalities, including the following:
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Municipalities in which we are still operating:
a) the municipality of Tarumã filed a writ of prevention against SABESP to cease operations within Tarumã. At that time the injunction was granted to Tarumã;
however, we subsequently had the injunction overturned, and have resumed operations within the municipality; b) the municipality of Santos issued a law that granted
the municipality the right to provide water and sewage services in place of us. We filed a lawsuit to overturn this decision and won, and the ruling was further upheld
by the court of appeals. The decision is not yet final (transito em julgado), but the likelihood of loss is remote.
Municipalities in which we are not operating:
a) the municiapality of Cajobi filed a lawsuit against us requesting reposession of water and sewage services. Cajobi won this case, and currently provides water
and sewage services. We have appealed this case, but believe the outcome will be unfavorable to us; b) we filed a lawsuit against the municpality of Álvares Florence
requesting the repossession of assets needed to provide water and sewage services, as well as the right to continue operating under our concession agreement. The
court’s ruling was unfavorable to us and we have assesed this case as a probable loss; c) we filed a lawsuit against the municipality of Macatuba, through an interim
injunction, requesting the repossession of assets needed to provide water and sewage services, as well as the right to continue operating under our concession
agreement. The injunction was rejected, and we have not reestablished our services. We view this proceeding as an expected possible loss; d) The municipality of Iperó
filed a lawsuit against us requesting repossession of water and sewage services. In response, we filed a lawuit to maintain possession, which was deemed deemed
groundless at trial court and an appellate court’s decision is pending.
The intangible assets related to such municipalities amount to R$ 16.5 million.
We have filed lawsuits to collect damages from the municipalities of Diadema e Mauá. These damages result from the unilateral termination by these
municipalities of the concession contracts entered with us in 1995. We have invested in the construction of water and sewage collection systems in these municipalities
to render the contracted services. As a result of the termination of these concession agreements, the municipalities started to directly render water and sewage
collection services. We filed judicial claims against municipalities in order to be compensated.
The proceedings against the municipality of Diadema are as follows:
We are currently discussing an agreement among the municipality of Diadema, or Diadema, Companhia de Saneamento de Diadema – Saned, or Saned, and us,
through which we seek to ensure we receive damages owed. Diadema presented a motion to stay execution, but in July of 2008 it was ruled that we could seize money
and financial investments from Saned of up to 10% of the value owed to us at the time. On March 3, 2009, R$2.9 million from Saned’s accounts and financial
investments were blocked and released to us. Subsequently, the court ruled that the seizure was to be executed through weekly deposits that corresponded to 20% of all
of Saned’s accounts receivables and investments. Saned has appealed this decision to the Supreme Court, but the verdict is still pending.
Regarding the motion to stay execution filed by Diadema in October 2009, a verdict was issued that recognized the existence of a loan and its payment, and said
that it was to be paid by court order via a payment notice to government. Both we and Diadema have appealed this ruling, as we do not wish to pay through this
method.
In September 2011, the superior court ruled in our favor, affirming the constitutionality of the municipal law that allows the blocking of ICMS made by the state to
the municipality so we are able to receive the funds owed to us, instead of having this process completed by a court order. In July 2012, appeals were heard and our
appeal was partially upheld. The ruling approved the blocking of ICMS by the state of São Paulo to Diadema. On December 29, 2008, Saned and Diadema signed a
letter of intent with the state of São Paulo and us that aimed to amicably resolve the conflicts between the parties and that would allow us to exclusively provide water
and sewage services in Diadema. In January 2009, the parties presented a joint petition that sought to suspend any new seizures for three months in order to come to an
agreement. The suspension was upheld by the treasury court (Juízo da Fazenda Pública) and subsequently renewed, with the last renewal having occurred in March
2012. However, the seizure of ICMS resumed in December 2012. Diadema filed an appeal against the seizures, and the court upheld this decision. Thus, currently, the
seizing of ICMS has been suspended and is awaiting the verdict of the appeal filed by Diadema. In 2012, we recorded an accounting provision amounting to R$60.3
million relating to this proceeding.
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We are concurrently continuing the process of negotiating an agreement with the current administration of Diadema.
The proceeding against the municipality of Mauá is as follows:
With respect to the collection suit against the municipality of Mauá, the trial court ruled in our favor, ordering the municipality to pay us R$153.2 million as
compensation for our losses. The municipality appealed this decision to the appellate court, which upheld the trial court’s decision in August 2008. The municipality
appealed to the superior court, which has denied the appeal making the decision in our favor final. This was a final decision and we took up the execution proceedings
in October 2012. We are currently waiting for the Municipality of Maua and SAMA’s summons.
The residual value of the property and equipment related to the municipality of Maua, reclassified in December 1999 was R$103,8 million and the balance for
damages to be received was R$85,9 million on December 31, 2010. As decisions were favorable to us we should receive amounts from the municipality through court
orders, which will be recognized only when respective payments are completed, regarding uncertainties related to the full payment of the amounts and the municipality
of Maua’s history of putting the payment of court orders in first place. In December 2011 an accounting provision was registered in the total amount of the total value
of credit retained by the Company from Mauá; the lawsuits are still pending a decision.
We believe that the Company has the legal right to receive amounts from damages and is still monitoring the lawsuits.
Tariff----Related Legal Proceedings and Consumer Claims
As of December 31, 2012, approximately 1,560 lawsuits had been brought by our commercial customers that claim that their tariff rates should be equal to those of
another category of customers and 440 lawsuits in which the claim is to reduce the sewage treatment tariff due to non provision of services, for which customers seek
the reimbursement of the difference between the amounts we collected and those tariffs. We have obtained final decisions both in favor and against us in many of these
lawsuits, and have provisioned R$521.3 million as of December 31, 2012 for those lawsuits for which we have determined that the risk of loss is probable.
Contractors’ Claims
Certain contractors have filed claims against us alleging damages and underpayment of inflation indexation adjustments, monetary losses incurred in connection
with introduction of the real and economic instability of the contract, among other claims. These suits are being handled by different courts, and we have established
provisions for them when the expectation of loss is considered probable. As of December 31, 2012, we had recorded a provision of R$115.2 million for claims whose
likelihood of loss is considered probable.
Other Legal Proceedings
We are party to several civil lawsuits regarding compensation for property damage, moral damage and loss of profits allegedly caused to third parties. These
lawsuits are all currently in different stages and will have provisions allocated to them when losses are deemed probable. As of December 31, 2012, we had recorded a
provision of R$164.5 million, for claims whose likelihood of loss is considered probable.
The Civil Entity Coordination Committee of Piracicaba filed a civil public action against us, the National Water Agency and the State of São Paulo Treasury
Department seeking, among other claims for relief: (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 water 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. 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 Civil Entity Coordination Committee of Piracicaba has made a
subsequent appeal seeking special and extraordinary recourse, and we are waiting to present counterarguments to the same. The amount involved in this
proceeding as of December 31, 2012 is R$18.2 billion. We have assessed the risk of loss as remote, and accordingly have not taken any provisions.
The Public Prosecutor’s Office of the State of São Paulo filed a civil public action against SABESP seeking: (i) the nullification of the contract SABESP
entered with the Municipality of São Paulo on June 23, 2010 regarding the service of water supply and sewage services; (ii) the exclusion of SABESP from
BM&F Bovespa’s CorporateSustainability Index; (iii) sewage treatment coverage of all of the Municipality of São Paulo by 2018. A court denied the request of
the Public Prosecutor’s Office of the State of São Paulo for such injunctive relief, which the Public Prosecutor’s Office of the State of São Paulo subsequently
appealed. We await the results of this appeal. Separately, we have challenged the amount claimed by the Public Prosecutor’s Office of the State of São Paulo
in these proceedings. The amount involved in these proceedings is R$11.7 billion as of December 31, 2012. We have assessed the risk of loss as remote, and
accordingly have not taken 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 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:
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a) the amount intended to form the legal reserve; and
b) 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, 2012,
2011 and 2010 the balance of our legal reserve was R$616.8 million, R$521.2 million and R$460.0 million, respectively, which was equal to 9.9%, 8.4% and 7.4%,
respectively, of our capital.
Brazilian Corporate Law also provides for two discretionary allocations of net profits that are subject to approval by the shareholders at each annual shareholders’
meeting. First, a percentage of net profits may be allocated to a contingency reserve for anticipated losses that are deemed probable in future years. Any amount so
allocated in a prior year must be either reversed in the fiscal year in which the loss was anticipated if such loss does not in fact occur, or written off in the event that the
anticipated loss occurs. Second, if the mandatory distributable amount exceeds the sum of realized net profits in any given year, such excess may be allocated to an
unrealized revenue reserve. Under Brazilian Corporate Law, realized net profits is defined as the amount of net profits that exceeds the net positive result of equity
adjustments and profits or revenues from operations with financial results after the end of the next succeeding fiscal year.
Under Brazilian Corporate Law, any company may authorize in its bylaws the creation of a discretionary reserve. 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. 10,313 of October 3, 2001, 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, 2012, 2011 and 2010 we had an investment reserve of R$4,690.6 million,
R$3,408.6 million and R$2,825.0 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 individual 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 the company’s 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.
119
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, among other things, the shareholders have to decide on the payment of an annual dividend when profits were accrued. 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.
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 Itaú Unibanco 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 Itaú Unibanco 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. 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. See “Item 10.D. Additional
Information—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. 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 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:
(cid:1)
(cid:1)
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). 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 meeting. Consequently, the amounts recognized as of December 31, 2012 correspond to the minimum established by law of 25.0% of the net income and the
difference was recorded on April 22, 2013 totaling R$534.3 million.
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Distributions of dividends
The following table sets forth the distributions of dividends that we made to our shareholders in respect of our 2012, 2011 and 2010 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,
2012
2011
2010
______________
Aggregate amount
distributed
(in millions of reais)
534.3
578.7
456.0(*)
Payment Dates
Payment per share
Payment per ADS
(**)
June 22, 2012
June 28, 2011
0.78
0.85
0.67
(in reais)
0.78
0.85
0.67
(*) We recorded dividends in the amount of R$387.2 million, which pursuant to our bylaws is our minimum dividend amount.
(**) We recorded dividends in the amount of R$454.1 million, which pursuant to our bylaws is our minimum dividend amount. The dividends will be paid until 60 days after the Ordinary General Meeting,
which occurred on April 22, 2013.
Dividend Policy
We intend to declare and pay dividends and/or interest on shareholders’ equity, as required by Brazilian Corporate Law and our bylaws. Our board of directors
may approve the distribution of interest on shareholders’ equity, calculated based on our semiannual 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
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.
B. Significant Changes
Other than as disclosed in this annual report, no significant change has occurred since the date of the audited consolidated financial statements included in this
annual report.
ITEM 9.
THE OFFER AND LISTING
A. Offer and Listing Details
Market Price of Common Shares
Our common shares have been listed on the BM&FBOVESPA under the symbol “SBSP3” since June 4, 1997 and, starting on April 24, 2002, have been included
in the Novo Mercado segment of that exchange. As of December 31, 2012, we had 4,606 registered holders of common shares.
On April 30, 2007, our shareholders approved a reverse stock split of 125 common shares into one common share. Following a ratio change effected on
January 24, 2013, each American Depositary Share currently represents one of our common shares. On April 22, 2013 our shareholders approved a stock split,
following which each common share represented three new common shares. IFRS requires the retroactive restatement of earnings-per-share computations for stock
dividends, stock splits, and reverse splits.
The table below sets forth, for the periods indicated, the reported high and low closing sale prices in reais for common shares on the BM&FBOVESPA. The table
also sets forth prices per ADS assuming that ADSs had been outstanding on all such dates and translated into U.S. dollars at the commercial market rate for the sale of
U.S. dollars for each of the respective dates of such quotations. In addition, the table sets forth the average daily trading volume for our common shares.
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2013
January
February
March
April(2)
May (through May 8, 2013)
2012
First quarter
Second quarter
Third quarter
Fourth quarter
2011
First quarter
Second quarter
Third quarter
Fourth quarter
2010
First quarter
Second quarter
Third quarter
Fourth quarter
2009
First quarter
Second quarter
Third quarter
Fourth quarter
2008
______________
Reais per common share
U.S. dollar equivalent per ADS(1)
Low
High
Low
High
Average daily
trading volume
85.00
90.55
88.70
27.85
27.05
50.42
50.42
68.50
75.67
80.54
39.00
40.10
45.00
39.00
43.03
30.27
30.27
32.36
33.41
37.59
21.87
21.87
25.10
27.50
31.15
18.11
92.31
95.97
96.40
31.38
28.54
92.48
69.66
77.32
92.48
90.50
52.78
47.00
49.50
48.03
52.78
44.47
34.26
37.50
37.90
44.47
37.19
28.86
32.25
35.38
37.19
46.50
41.90
45.63
44.64
13.93
13.45
53.97
53.97
74.85
74.51
76.98
48.75
47.91
56.39
48.75
45.75
32.70
32.70
35.28
38.05
44.53
18.39
18.39
22.56
29.07
35.79
16.08
45.09
48.58
47.87
15.66
14.20
91.52
76.46
74.48
91.52
89.40
56.80
57.71
60.75
61.43
56.80
52.56
39.55
41.63
44.74
52.56
43.66
24.77
32.02
39.18
43.66
56.02
542,029
570,089
561,510
972,318
2,228.5
409,457
372,200
321,627
417,208
534,115
258,827
282,548
267,042
245,275
241,197
311,996
323,739
416,256
265,725
242,943
351,874
360,725
334,721
397,366
306,677
384,463
(1) Following a ratio change effected on January 24, 2013, each ADS represents one common shares.
(2) After April 22, 2013 our common shares are traded considering the stock split.
Market Price of ADSs
Our ADSs, each of which represents one of our common shares, as of the date of this annual report, are listed on the NYSE under the symbol “SBS.” Prior to
June 8, 2007, each ADS represented 250 of our common shares. From that date through January 23, 2013, each ADS represented two of our common shares.
Following a ratio change effected on January 24, 2013, each American Depositary Share currently represents one of our common shares. On April 22, 2013 our
shareholders approved a stock split, following which each common share represented three new common shares. Our ADSs began trading on the NYSE on May 10,
2002 in connection with the initial offering of our equity securities in the United States.
The table below sets forth, for the periods indicated, the reported high and low closing prices for our ADSs on the NYSE.
Price in U.S. dollars per ADS
Low
High
Average daily
trading volume
2013
January(1)
February
March
April(2)
May(2) (through May 8, 2013)
2012
First quarter
Second quarter
Third quarter
Fourth quarter
2011
First quarter
Second quarter
Third quarter
Fourth quarter
2010
First quarter
Second quarter
Third quarter
Fourth quarter
2009
First quarter
Second quarter
Third quarter
Fourth quarter
2008
2007
2006
______________
41.60
45.27
44.44
14.02
13.68
56.62
56.62
68.90
74.49
78.16
46.35
48.60
56.91
46.35
46.74
33.09
33.09
35.33
37.97
45.15
18.03
18.03
22.74
27.74
36.58
16.76
29.15
17.21
45.41
48.37
48.63
15.88
14.31
91.48
76.86
80.18
91.48
88.35
62.63
58.74
62.63
62.07
56.66
53.18
40.16
41.54
45.51
53.18
43.40
25.12
32.27
39.51
43.40
56.35
53.57
35.35
395,050
484,813
595,193
639,891
1,385,549
311,242
325,938
328,410
316,824
321,333
263,370
297,927
284,122
263,200
215,152
275,432
262,525
337,808
266,393
234,667
331,673
382,314
358,534
296,588
292,049
414,961
323,404
321,105
(1) After January 23, 2013 our common shares have traded considering the ratio change. On April 22, 2013 our shareholders approved a stock split, following which each common share represented three new
common shares.
(2) After April 29, 2013 our ADSs are traded considering the stock split.
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B. Plan of Distribution
Not applicable.
C. Markets
Trading on the Brazilian Stock Exchanges
The BM&FBOVESPA stock and futures exchange is a corporation where all stock and futures trades in Brazil are carried out, with the exception of public-debt
bonds, which are traded electronically, and the privatization auctions, which are run by the Rio de Janeiro Stock Exchange.
Trading on the BM&FBOVESPA is limited to brokerage firms and is conducted between 10:00 a.m. and 5:30 p.m. The BM&FBOVESPA also permits trading
from 6:05 p.m. to 7:30 p.m., during a different trading period of time, called the “after market.” Trading on the aftermarket is subject to regulatory limits on price
volatility and on the volume of shares transacted through Internet brokers.
In order to maintain better quality control over the fluctuation of its index, BM&FBOVESPA has adopted a “circuit breaker” system pursuant to which trading
sessions are suspended for a period of 30 minutes or an hour whenever the BM&FBOVESPA index falls below the limits of 10.0% or 15.0%, respectively, in relation
to the index at the closing of the previous trading session. Additionally, BM&FBOVESPA has also implemented an intraday variation limit, which prevents the
closing of a transaction related to a security if the difference between the consideration paid for such security and its price at the closing of the previous trading session
is greater than 10.0%.
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BM&FBOVESPA settles the sale of shares three 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 BM&FBOVESPA. The BM&FBOVESPA performs multilateral compensation for both the
financial obligations and the delivery of shares. According to the BM&FBOVESPA’s regulations, financial settlement is carried out by the Central Bank’s reserve
transfer system. The securities are transferred by the BM&FBOVESPA’s custody system. Both delivery and payment are final and irrevocable.
Trading on the BM&FBOVESPA 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 BM&FBOVESPA, 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. As of the end of 2012, the BM&FBOVESPA had a total market capitalization of approximately
US$1.2 billion (R$2.5 billion) and an average daily trading volume of US$ 3.7 billion (R$7.3 billion). The top ten stocks in terms of 2012 trading volume accounted
for approximately 43.0% of all shares traded on the BM&FBOVESPA as of December 31, 2012. As of December 31, 2012, we accounted for approximately 0.8% of
the market capitalization of all listed companies on BM&FBOVESPA.
Trading on the BM&FBOVESPA 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. 2,689, 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. 2,689 requires non-Brazilian
holders to restrict their securities trading to transactions on the BM&FBOVESPA or qualified over-the-counter markets. With limited exceptions, non-Brazilian
holders may not transfer the ownership of investments made under Resolution No. 2,689 to other non-Brazilian holders through a private transaction. 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. 2,689.
The Novo Mercado Segment
Since April 24, 2002, our common shares have been listed on the Novo Mercado segment of the BM&FBOVESPA. The Novo Mercado is a listing segment
designed for the trading of shares issued by companies that voluntarily undertake to abide by some additional corporate governance practices and disclosure
requirements in addition to those already required under Brazilian law. A company in the Novo Mercado 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, and April 23, 2012,
our shareholders approved changes to our bylaws to comply with the Novo Mercado requirements. In addition, the Novo Mercado provides for the creation of a
Market Arbitration Chamber for conflict resolution between investors and companies listed in the Novo Mercado.
In addition to the obligations imposed by current Brazilian law, a company listed on the Novo Mercado is obligated to:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
maintain only voting shares;
hold public offerings of shares in a manner favoring diversification of the company’s shareholder base and broader access to retail investors;
maintain a minimum free float of at least 25.0% of the outstanding capital stock of the company;
grant tag along rights for all shareholders in connection with a transfer of control of the company;
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(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
limit the term of all members of the board of directors to two years;
ensure that at least 20.0% of the members of the board of directors are independent, as defined under the Novo Mercado regulation;
prepare annual financial statements, including cash flow statements, in compliance with U.S. GAAP or IFRS or reconciled from Brazilian GAAP to
U.S. GAAP or IFRS;
disclose information on a quarterly basis, including share ownership of certain of our employees and directors and amount of free float of shares;
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; and
make greater disclosure of related party transactions.
On May 10, 2011, the Novo Mercado rules were revised and currently establish the following additional obligations:
(cid:1)
(cid:1)
(cid:1)
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; and
the company must have a securities purchase policy and a code of ethics.
Regulation of Brazilian Securities Markets
The Brazilian securities markets are principally governed by Law No. 6,385 of December 7, 1976, and 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 BM&FBOVESPA and may be traded
privately subject to some 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 BM&FBOVESPA be suspended in anticipation of a material announcement. Trading may also be
suspended on the initiative of the BM&FBOVESPA 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.
125
Trading on the BM&FBOVESPA 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 ADSs, 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. 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.
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
Although our bylaws contain no specific provisions regarding a director or executive officer’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.
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.
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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. Brazilian Corporate Law requires that all our
shareholders’ meetings be called by publication of a notice in the Diário Oficial do Estado de São Paulo, the official government publication of the State of São Paulo,
and in a newspaper of general circulation in our principal place of business, currently the city of São Paulo, at least fifteen days prior to the meeting. In addition, the
CVM may also require the first call for a shareholders’ meeting to be up to 30 days before such shareholders’ meeting. 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. See “Item 8.A. Consolidated 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 by-laws expressly prevents us from issuing preferred shares. Brazilian Corporate Law specifies
other circumstances where a dissenting shareholder may also have appraisal rights.
According to Brazilian Corporate Law, neither a company’s bylaws nor actions taken at a general meeting of shareholders may deprive a shareholder of certain
rights, such as:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
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 specific
circumstances under Brazilian 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 addresses:
(cid:1)
(cid:1)
staggered terms for directors;
cumulative voting, except as described below; or
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(cid:1)
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 five per cent 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.
In addition, shareholders owning at least 15.0% of the capital may request the right to elect, separately a member of the Board of Directors.
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. Currently, our bylaws provide our shareholders with preemptive rights with respect to any offering.
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. 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:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
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;
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
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(cid:1)
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 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 BM&FBOVESPA index 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 BM&FBOVESPA index.
This right of withdrawal may also be exercised in the event that the entity resulting from a stock merger as described above, consolidation or spin-off of a listed
company fails to become a listed company within 120 days of the shareholders’ meeting at which such transaction was approved.
We may cancel the right of withdrawal if the payment amount has a material adverse effect on our finances.
Conversion Right
Not applicable because our capital stock is only comprised of common shares.
Special and General Meetings
Unlike the laws governing corporations incorporated under the laws of the 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 may be called by publication of a notice in the Diário Oficial do Estado de São Paulo and in a newspaper of general circulation in
our principal place of business at least 15 days prior to the meeting. Special meetings are convened in the same manner as general shareholders’ meetings and may
occur immediately before or after a general meeting.
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 120 days of 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 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:
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(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
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, if one has been established;
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.
Equal Treatment Provisions
Pursuant to article 40 of 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. 119/73, 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.
Capital Reserve
Our capital reserve is comprised of tax incentives and donations from government agencies and private entities received through December 31, 2007. As of
December 31, 2012, we had a capital reserve of R$124.3 million.
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Investment Reserve
Our investment reserve is comprised specifically of internal funds for expansion of water and sewage service systems. As of December 31, 2012, we had an
investment reserve of R$4,690.6 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, 2012, the balance of our legal
reserve was R$616.8 million.
Arbitration
In connection with our listing with the Novo Mercado segment of the BM&FBOVESPA, 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. 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, Brazilian Corporate Law, the application of the rules
and regulations regarding Brazilian capital markets, will be resolved by arbitration conducted pursuant to the BM&FBOVESPA 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—
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.
Resolution No. 1,927 of the CMN provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. The ADS program
was approved under the Annex V Regulations by the Central Bank and the CVM prior to the issuance of the ADSs. 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. See “Item 3.D. Risk Factors—Risks Relating to Our Common Shares and ADSs—Investors who exchange ADSs for common shares may lose their
ability to remit foreign currency abroad and to obtain Brazilian tax advantages” and “Item 10.E. Taxation—Brazilian Tax Considerations.”
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.
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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.
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 Resolution 2,689, of January 26, 2000, of the CMN (“2,689 holder”).
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.
Taxation of Gains
Gains realized outside Brazil by a non-Brazilian holder on the disposition of ADSs to another non-Brazilian holder are not currently subject to Brazilian tax.
However, according to certain interpretations of Law no. 10,833 of December 2003, or Law No. 10,833, the disposition of assets located in Brazil by a non-Brazilian
holder, whether to other non-Brazilian holder or Brazilian holders, may become subject to taxation in Brazil. Although we believe 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 the courts of Brazil.
In case the argument above does not prevail the gain on disposition of ADSs by a non-Brazilian holder to a resident in Brazil or even 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.
Although there is no clear regulatory guidance, the withdrawal of ADSs in exchange for common shares is not subject to Brazilian income tax provided that the
regulatory rules are appropriately observed in respect to the registration of the investment before the Central Bank of Brazil. The deposit of common shares in
exchange for ADSs may be subject to Brazilian capital income tax at the rate of 15% or 25%, in case the non-Brazilian holder is located in a tax haven, if the
acquisition cost of the common shares is lower than (1) the average price per common share on a Brazilian stock exchange on which the greatest number of such shares
were sold on the day of deposit, or (2) if no common shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of
common shares were sold in the fifteen trading sessions immediately preceding such deposit. In this case, the difference between the acquisition cost and the average
price of the common shares, calculated as above, shall be considered a capital gain.
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For Brazilian purposes, as of January 2009, a tax haven is considered a regime: (i) which does not impose income tax or does so at a rate of 20% or lower, or
(ii) where applicable local legislation imposes restrictions on the disclosure of the shareholding composition or the ownership of investments, or on the ultimate
beneficiary of the income derived from transactions carried out and attributable to a non-Brazilian holder.
On June 24, 2008, Law No. 11,727 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 that meets any of the following requirements: (i) which 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.
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.
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 the non-Brazilian
holder to a resident or person domiciled in Brazil or not, based on the fact that the common shares could be considered as assets located in Brazil for purposes of Law
No. 10,833.
Thus, for purposes of taxation of gains earned in a sale or disposition of common shares carried out on the Brazilian stock exchange (which includes the
transactions carried out on the organized over-the-counter market):
(cid:1)
(cid:1)
are exempt from income tax when assessed by a 2,689 holder and is not a tax haven based holder; and
are subject to income tax at a rate of 15% in any other case, including gains assessed by a non-Brazilian holder that (1) is not a 2,689 holder, or (2) is a 2,689
holder and is not a tax haven based holder but is a tax haven based holder. In these cases, a withholding income tax of 0.005% shall be applicable and can be
offset with the eventual income tax due on the capital gain.
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 a rate of 15%,
except for tax haven holder which, in this case, is subject to income tax at a rate of 25%. In case these gains are related to transactions conducted on the Brazilian
non-organized over-the-counter market with intermediation, the withholding income tax of 0.005% shall also be applicable and can be offset with the eventual
income tax due on the capital gain.
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 market, and is therefore subject to income tax at the rate of 15% or 25%, as the case may be.
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 or ADSs 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 holders of ADSs and non-Brazilian holders of common shares under Resolution 2,689 will
continue in the future or that it will not be changed in the future. Reductions in the rate of tax provided for by Brazil’s tax treaties do not apply to the tax on gains
realized on sales or exchange of common shares.
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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 in respect of the 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
tax-haven based holder. Such payments, subject to certain limitations and requirements, are deductible for Brazilian income tax purposes.
Other Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of common shares or ADSs by a non-Brazilian
holder, except for gift and inheritance taxes, which are levied by some states of Brazil on gifts made or inheritances bestowed by a non-Brazilian holder to individuals
or entities resident or domiciled within such states in Brazil. There is no Brazilian stamp, issue, registration, or similar taxes or duties payable by a non-Brazilian
holder of common shares or ADSs.
Tax on Financial Transactions (Imposto sobre Operações Financeiras, or IOF)
The IOF is a tax on foreign exchange, securities, credit and insurance transactions. The IOF rate may be changed by an Presidential Decree (rather than a law). In
addition, the IOF rate is not subject to the ex-post-facto principle, which provides that laws increasing the rate of or creating new taxes will only come into effect as of
the latter of (i) the first day of the year following their publication, or (ii) ninety days after their publication, and therefore, any increase in the IOF rate has an
immediate effect. A statute increasing the IOF rate will as a result only take effect from its publication date.
Although the maximum rate of IOF is 25% for foreign exchange transactions, the inflow and outflow of funds are generally subject to IOF at a rate of 0.38%;
however, effective as of December 1, 2011, exchange transactions for the inflow of funds in Brazil for investments made by foreign investors are subject to IOF at a
rate of 0% for variable income transactions carried out on the Brazilian stock, futures and commodities exchanges, as well as for acquisitions of common shares of
Brazilian publicly-held companies in public offerings or subscription of common shares related to capital contributions, provided that the company has registered its
common shares for trading on the stock exchange. The IOF rate will also be 0% for the outflow of funds from Brazil related to these type of investments, including
payments of dividends and interest on shareholders’ equity. Lastly, the 0% rate also applies to settlements of simultaneous foreign exchange transactions for the
cancellation of depositary receipts transferred into shares traded on the stock exchange.
The IOF may also be imposed on any transactions involving bonds and securities, including those carried out on Brazilian futures and commodities stock
exchanges. As a general rule, the rate of this tax for transactions involving common shares or ADSs is currently zero, although the assignment of shares traded on
Brazilian stock exchanges to issue depositary receipts traded abroad is subject to IOF at the rate of 1.5%. The executive branch, also by a Presidential Decree, may
increase the IOF rate by up to 1.5% per day, but only with respect to future transactions.
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:
(cid:1)
(cid:1)
(cid:1)
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
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(cid:1)
a trust if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all
substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury Department regulations to be treated as a U.S. person.
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds common shares or ADSs, the tax treatment of a partner will
generally depend upon the status of the partner and the activities of the partnership. A U.S. holder that is a partner of a partnership holding common shares or ADSs
should consult its tax advisors.
Except where noted, this discussion deals only with common shares or ADSs held as capital assets within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended, or the Code, 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 voting 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, or 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, or 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, 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 amounts withheld by the Brazilian taxing authority, 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 ADS, 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.
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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 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.
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 ADS 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 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. 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. Consequently, a U.S. holder may not 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 unless such credit can be applied (subject
to applicable limitations) against U.S. federal income tax due on other income treated as derived from foreign sources. Although we do not believe that U.S. holders
will be entitled to a credit or deduction with respect to any IOF tax paid on our common shares (as discussed above in “—Brazilian Tax Considerations—Tax on
Financial Transactions (Imposto sobre Operações Financeiras, or IOF),” U.S. holders should, however, be entitled to include the amount of the IOF tax paid as part of
their initial tax basis in such common shares.
136
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 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, as well as comply with
additional annual filing requirements imposed under recently enacted legislation. 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 ADSs, in each case to the extent treated as being paid within the United States (and in certain cases, outside of the United States) to a U.S. holder
unless a U.S. holder establishes its status as an exempt recipient, and backup withholding may apply to such amounts if the U.S. holder does not establish its status as
an exempt recipient or fails to provide a correct taxpayer identification number and certify that such U.S. holder is not subject to backup withholding. The amount of
any backup withholding from a payment to a U.S. holder will be allowed as a refund or credit against such U.S. holder’s U.S. federal income tax liability provided the
U.S. holder timely furnishes the required information to the IRS.
In addition, U.S. holders should be aware that additional reporting requirements apply with respect to the holding of certain foreign financial assets, including
stock of foreign issuers which is not held in an account maintained by a financial institution, if the aggregate value of all of such assets exceeds US$50,000.
U.S. holders should consult their own tax advisors regarding the application of the information reporting rules to our common shares and ADSs and the application of
these additional reporting requirements for foreign financial assets to their particular situation.
F. Dividends and Payments Agents
Not applicable.
G. Statements by Experts
Not applicable.
H. Documents on Display
We are subject to the periodic reporting and other informational requirements of the U.S. Securities Exchange Act of 1934, as amended and supplemented, or the
Exchange Act. 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.
137
Our website is located at http://www.sabesp.com.br and our investor relations website is located at http://www.sabesp.com.br/investors. (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 unaudited 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 further information on our market risks,
see Note 3.1 to our consolidated financial statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010 included
elsewhere in this annual report.
Exchange Rate Risk
As of December 31, 2012, 2011 and 2010, R$3,215.8 million, R$3,053.4 million and R$2,248.9, or 35.5%, 35.5% and 27.2%, 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, 2012, 2011 and
2010 from each hypothetical instantaneous and unfavorable 1% change in the U.S. dollar and yen against the real would have been approximately R$32.3 million,
R$30.7 million and R$22.6, respectively. Consistent with these estimates, a hypothetical instantaneous and unfavorable 10% change in this exchange rate would have
resulted in losses of approximately R$323.1 million, R$306.7 million and R$226.0 as of December 31, 2012, 2011 and 2010, respectively.
The fluctuation of the real in relation to the U.S. dollar and yen for the years ended December 31, 2012, 2011 and 2010 were as follows:
Depreciation (appreciation) of the real in relation to the U.S. dollar
Depreciation (appreciation) of the real in relation to the yen
2012
Year ended December 31,
2011
(in percentages)
2010
8.9
(2.4)
12.6
18.6
(4.3)
9.0
We have not utilized derivative financial instruments in the years ended December 31, 2012, 2011 and 2010.
As of December 31, 2012, 2011 and 2010, we had no short-term indebtedness outstanding, other than the current portion of long-term debt.
138
Interest Rate Risk
As of December 31, 2012, 2011 and 2010, R$2,223.8 million, or 24.5%, R$2,537.1 million, or 29.5%, and R$2,259.4 million, or 30.6%, 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, 2012, 2011 and 2010, R$1,835.9, or 20.2%, R$1,882.3 million, or 21.9%, and R$2,064.7 million, or 25.0%, respectively, of our total debt denominated
in reais was subject to interest rates based on the CDI. As of December 31, 2012, 2011 and 2010, R$1,319.5 million, R$747.3 million and R$579.2, respectively, of
our foreign-currency denominated debt was based on the IADB 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, 2012, 2011 and 2010, we did not have any derivative contracts outstanding which limited exposure to changes in the UPR or the CDI or in the
IADB 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$1,796.6 million, R$2,027.0 million and R$1,852.6 million as of December 31, 2012, 2011 and 2010, 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 $90.7 million, R $86.0 million and R $82.6 million if a
hypothetical instantaneous and unfavorable change of 100 basis points in the interest rates applicable to financial liabilities as of December 31, 2012, 2011 and 2010,
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$906.9 million, R$859.6 million and R$826.5 million as of December 31, 2012, 2011 and 2010, 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, 2012. For the foreign currency denominated obligations, these amounts have been converted at the selling rates as of December 31,
2012 and do not represent amounts which may actually be payable with respect to such obligations on the dates indicated.
Assets
Cash equivalents denominated in reais
Liabilities
long-term debt (current and non current portion)
Floating rate, denominated in reais indexed by TR or UPR
Floating rate, denominated in reais indexed by TJLP
Floating rate, denominated in reais indexed by IPCA
Floating rate, denominated in reais indexed by CDI
Fixed rate, denominated in reais
Floating rate, denominated in U.S. dollars
Fixed rate, denominated in Yen
Fixed rate, denominated in U.S. dollars
Total long----term debt.....
As of December 31, 2012
Expected maturity date
2013
2014
2015
After 2016
Total
(in millions, except percentages)
Average
annual
interest rate
1,801.3
1,801.3
533.0
76.4
46.3
514.0
-
76.6
58.3
62.8
1,367.4
139
-
-
213.0
89.0
12.3
270.0
-
72.3
51.9
54.6
763.1
-
-
-
-
1,801.3
1,801.3
113.9
94.1
23.8
860.2
-
72.3
51.9
54.6
1,270.8
1,363.9
589.2
646.9
191.7
215.8
663.4
734.0
1,263.1
5,668.0
2,223.8
848.7
729.3
1,835.9
215.8
884.6
896.1
1,435.1
9,069.3
8.8%
1.7%
13.0%
8.3%
2.6%
2.3%
3.5%
6.2%
2012
As of December 31,
2011
2010
9.8%
62.2%
2.4%
9.9%
15.8%
100.0%
13.3%
63.9%
0.6%
11.2%
11.0%
100.0%
11.7%
72.8%
-
5.3%
10.2%
100.0%
The percentage of our indebtedness subject to fixed and floating interest rate is as follows:
Floating rate debt:
Denominated in U.S. dollars
Denominated in reais
Fixed rate debt:
Denominated in reais
Denominated in Yen
Denominated in U.S. dollars
Total
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
140
C. Other Securities
Not applicable.
D. American Depositary Shares
In the United States, our common shares trade in the form of ADS. 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 22, 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.
Fees and Expenses
The following table summarizes the fees and expenses payable by holders of ADRs:
Persons depositing common shares or ADR holders must pay:
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)
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
US$0.05 (or less) per ADS or portion thereof per calendar year (in addition to the cash distribution
fee of $.02 per ADS that the depositary has collected during the year)
Registration or transfer fees
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
Expenses of the depositary
Taxes and other governmental charges the depositary or the custodian have to pay on any ADR or
common share underlying an ADR, for example, stock transfer taxes, stamp duty or withholding
taxes
Any charges incurred by the depositary or its agents for servicing the deposited securities
Payment of Taxes
For:
Issuance of ADSs, including issuances resulting from a distribution of common shares or rights or
other property
Any cash distribution to you
Distribution of securities distributed to holders of deposited securities which are distributed by the
depositary to ADR holders
Depositary services
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
As necessary
No charges of this type are currently made in the Brazilian market
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 that are related to establishment and maintenance expenses of the
ADS program. The depositary has agreed to reimburse us for our continuing annual stock exchange listing fees. The depositary has also agreed to pay the standard
out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and
distributing dividend checks, electronic filing of United States federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It
has also agreed to reimburse us annually for certain investor relationship programs or special investor relations promotional activities. In certain instances, the
depositary has agreed to provide additional payments to us based on any applicable performance indicators relating to the ADR facility. There are limits on the amount
of expenses for which the depositary will reimburse us, but the amount of reimbursement available to the Company is not necessarily tied to the amount of fees the
depositary collects from investors.
141
The depositary collects its 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 2012
From January 1, 2012 to December 31, 2012, we received reimbursements in the amount of US$3,432,399.9 for standard out-of-pocket maintenance costs for the
ADRs, any applicable performance indicators relating to the ADR facility, marketing fees and legal fees.
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
PART II
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 13a-15(e), as of the year ended December 31, 2012.
As a result of this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were both
designed and effective at the reasonable assurance level as of December 31, 2012, 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 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.
142
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 applicable generally accepted accounting principles. 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 applicable generally accepted accounting principles, 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 CEO and CFO, our management conducted an assessment of our internal control over financial reporting as
of December 31, 2012 based on the criteria established in “Internal Control —Integrated Framework” issued by COSO.
As a result of the assessment described above, our management concluded that as of December 31, 2012, we did maintain effective internal control over financial
reporting based on the criteria established in “Internal Control — Integrated Framework” issued by COSO.
Our independent registered public accounting firm, Deloitte Touche Tohmatsu Auditores Independentes, has issued an audit 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 on Internal Control over Financial Reporting
To the Shareholders, Board of Directors and Management of
Companhia de Saneamento Básico do Estado de
São Paulo – SABESP São Paulo – SP
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, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. 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 Annual 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial
Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). 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
International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (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.
143
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls,
material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements
as of and for the year ended December 31, 2012 of the Company and our report dated May 15, 2013, expressed an unqualified opinion on those financial statements.
/s/ Deloitte Touche Tohmatsu Auditores Independentes
May 15, 2013
São Paulo, Brazil.
d) Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting that occurred during the fiscal year ended December 31, 2012 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16.
[RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
At our board meeting held on June 26, 2006, we established an audit committee, as defined under section 3(a)(58) of the Exchange Act. Our board of directors has
determined that Jerônimo Antunes qualifies as an “audit committee financial expert” as defined for the purposes of this Item 16A in Item 16 of Form 20-F. Jerônimo
Antunes is an “independent director” within the meaning of the SEC rules.
ITEM 16B. CODE OF ETHICS
We have adopted a code of business conduct and ethics, as defined in Item 16B of Form 20-F under the Exchange Act. Our code of business conduct and ethics,
called Code of Ethics and Conduct, applies to all of our employees, including our directors, chief executive officer, chief financial officer and head of accounting, as
well as our suppliers and third-party contractors. To ensure compliance with the Code of Ethics and Conduct, we have an Ethics Committee and an internal Whistle-
blowing Channel, as well as a Corporate Accountability Procedure and an Ombudsman Office as well as a Customer Service that receive external complaints. The
internal channel can receive anonymous whistle blowing. The results of the investigations are forwarded to the Audit Committee. Cases of recurrence are reported to
the Ethics Committee, which urges the related departments to develop preventive actions. In 2012, 160 whistle blowings were recorded, 61% of which were verified
and 39% are under investigation. Out of the total, 22% refer to misconduct, such as moral harassment, discrimination, persecution and unfair treatment. During 2012,
27 of our employees or outsourced employees received penalties (1 warning, 2 suspensions and 24 dismissals). Our Ethics Committee is also responsible for addressing
relevant inquiries and interpreting the norms of the Code of Ethics for all of our employees. Our Code of Ethics and Conduct is available on our web site at
http://www.sabesp.com.br at the following location: Investors Relations – Corporate Governance. If we amend the provisions of our Code of Ethics and Conduct, 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 Ethics
and Conduct, without charge, upon request to sabesp.ri@sabesp.com.br.
144
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Deloitte Touche Tohmatsu Auditores Independentes served as our independent registered public accounting firm for the year ended December 31, 2012. Deloitte
Touche Tohmatsu Auditores Independentes’s activity began with the review of the Quarterly Information (“ITRs”) reporting for the third quarter of 2012.
PricewaterhouseCoopers Auditores Independentes served as our independent registered public accounting firm for the first and second quarter of 2012 and for the
years ended December 31, 2011 and 2010.
The following table presents the aggregate fees for professional services and other services rendered to us by Deloitte Touche Tohmatsu Auditores Independentes
and PricewaterhouseCoopers Auditores Independentes in 2012, 2011 and 2010:
Audit Fees(1)
Audit-Related Fees
Tax Fees
All Other Fees
Total
______________
2012
2.5
–
–
–
2.5
Year ended December 31,
2011
(in millions of reais)
3.9
-
2010
-
-
3.9
2.6
-
-
-
2.6
(1) Audit Fees are the fees billed by PricewaterhouseCoopers 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. Audit fees billed by Deloitte Touche Tohmatsu Auditores Independentes in connection with the audit of our annual financial statements for the year
ended December 31, 2012 and interim review of our quarterly financial information for the quarter ended September 30, 2012.
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 are then selected by us based on certain criteria including technical expertise and cost.
During 2012, 2011 and 2010, PricewaterhouseCoopers Auditores Independentes did not provide non-audit services to us. During 2012, Deloitte Touche
Tohmatsu Auditores Independentes did not provide 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.
145
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
In accordance with CVM Instruction 308/99, as amended, we have contracted Deloitte Touche Tohmatsu Auditores Independentes for the external auditing of us,
replacing PricewaterhouseCoopers Auditores Independentes.
Deloitte Touche Tohmatsu Auditores Independentes’s activity began with the review of ITRs reporting for the third quarter of 2012.
The appointment occurred due to the expiration of the contract with PricewaterhouseCoopers Auditores Independentes, the term of which was limited to
60 months, in compliance with legislation applicable to us (clause 57 of Law 8666/93). This appointment ended upon the issuance of their review report for the second
quarter on August 10, 2012.
PricewaterhouseCoopers Auditores Independentes’s audit reports of our financial statements for December 31, 2011 and 2010 did not contain an adverse opinion
or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope, or accounting principles.
During the fiscal years ended December 31, 2011 and 2010 and through August 10,2012, we have had no disagreements with PricewaterhouseCoopers Auditores
Independentes on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of PricewaterhouseCoopers Auditores Independentes, would have caused PricewaterhouseCoopers Auditores Independentes to make reference to the
subject matter of such disagreements in its report on our financial statements for such periods.
During the fiscal years ended December 31, 2011 and 2010 and through August 10, 2012, there have been no reportable events as defined under Item 16F(a)(1)
(v) of Form 20-F.
We have provided PricewaterhouseCoopers Auditores Independentes with a copy of this annual report prior to its filing with the SEC and requested that
PricewaterhouseCoopers Auditores Independentes furnish a letter addressed to the SEC stating whether it agrees with the statements made in this Item 16F. A copy of
PricewaterhouseCoopers Auditores Independentes’s letter to the SEC dated May 15, 2013 is included as Exhibit 15.1 to this annual report.
On May 22, 2012, we engaged Deloitte Touche Tohmatsu Auditores Independentes as our new independent registered public accounting firm to audit our financial
statements. The decision to engage Deloitte Touche Tohmatsu Auditores Independentes was approved by our board of directors present at a meeting on February 23,
2012.
Prior to the engagement of Deloitte Touche Tohmatsu Auditores Independentes as our independent registered public accounting firm, we had not previously
consulted with Deloitte Touche Tohmatsu Auditores Independentes regarding (1) the application of accounting principles to a specific completed or contemplated
transaction, (2) the type of audit opinion that might be rendered on our financial statements, or (3) a reportable event (as provided in Item 16F(a)(1)(v) of Form 20-F)
during our two most recent fiscal years and any later interim period, including the interim period up to and including the date that Deloitte Touche Tohmatsu Auditores
Independentes was engaged..
ITEM 16G. CORPORATE GOVERNANCE
Significant Differences between our 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. The discussion of the significant differences between our
corporate governance practices and those required of U.S. listed companies follows below.
146
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. Brazilian law does not have a similar requirement. Under Brazilian law, neither our board of
directors nor our management is required to test the independence of directors before their election to the board. However, both the Brazilian Corporate Law and the
CVM have established rules that require directors to meet certain qualification requirements and that address the compensation and duties and responsibilities of, as
well as the restrictions applicable to, a company’s executive officers and directors. Our board of directors must have a minimum of five members and 20% of the
board (even if the board consists of greater than five members) must be independent as defined under Novo Mercado Regulations. Currently, four of our nine directors
are independent, pursuant to the Novo Mercado Listing Regulations. We believe these rules provide adequate assurances that our directors are independent; however,
they do not require that we have a majority of independent directors, as required under the NYSE rules.
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 the Brazilian Corporate Law, up to one-third of the members of the board of directors can be elected
from management. There is no requirement that non-management directors meet regularly without management. Our chairperson and Chief Executive Officer is a
member of our board of directors. All other members of our board of directors meet the NYSE’s definition of “non-management” directors. The non-management
directors on our board do not typically meet in executive session. Our board of directors consists of eight non-management directors.
Fiscal Committee
Under the Brazilian Corporate Law, the Conselho Fiscal, or fiscal committee, is a corporate body independent of management and a company’s external auditors.
The fiscal committee 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
committee is not equivalent to, or comparable with, a U.S. audit committee. The primary responsibility of the fiscal committee is to review management’s activities
and a company’s financial statements, and to report its findings to a company’s shareholders. The Brazilian Corporate Law requires fiscal committee members to
receive as remuneration at least 10% of the average annual amount paid to a company’s executive officers. The Brazilian Corporate Law requires a fiscal committee to
be composed of a minimum of three and a maximum of five members and their respective alternates.
Under the Brazilian Corporate Law, the fiscal committee 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.
Our fiscal committee consists of four members and four alternates and the members 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 meet the SEC rules regarding audit committees for listed companies to the extent compatible with
Brazilian Corporate 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 recommends the appointment of our independent auditors to
our board of directors and reviews the compensation of our independent auditors and helps coordinate their activities. It also evaluates the effectiveness of our internal
financial and legal compliance controls. The audit committee comprises three members elected by the board of directors for a one-year term with the right to
re-election, all three of which are independent. The current members of our audit committee are Jerônimo Antunes, Reinaldo Guerreiro and Francisco Vidal Luna. All
members meet the independent membership requirements of the SEC and NYSE as well as other NYSE requirements. Jerônimo Antunes is the committee’s “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.
147
Nomination/Corporate Governance and Compensation Committees
NYSE rules require that listed companies have a nominating/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
nominating/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.
We are not required under applicable Brazilian law to have a nomination/corporate governance committee or compensation committee. Under the Brazilian
Corporate Law, the total amount available for compensation of our directors and executive officers and for profit-sharing payments to our executive officers is
established by our shareholders at the annual general meeting. The board of directors is then responsible for determining the individual compensation and
profit-sharing of each executive officer, as well as the compensation of our board and committee members. In making such determinations, the board reviews the
performance of the executive officers, including the performance of our chief executive officer, who typically excuses himself from discussions regarding his
performance and compensation.
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. Additionally, under the CVM’s guidelines, we have established (i) the Policy of Publicizing
Acts or Relevant Facts and the Preservation of Confidentiality which requires us to publicly disclose all relevant information and (ii) the Securities Negotiation Policy
which requires management to inform the CVM and the BM&FBOVESPA of any purchases or sales of our securities. We believe the corporate governance guidelines
applicable to us under the Novo Mercado Regulations, as well as the CVM, do not conflict with the guidelines established by the NYSE. Our corporate governance
guidelines and practices are available in our website at www.sabesp.com.br and in our annual management report.
Code of Business Conduct and Ethics
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. Applicable Brazilian law does not have a similar requirement. We have decided to adopt and disclose a code of
ethics and conduct applicable to all our officers, directors and employees. The adoption and disclosure of a formal code is not required under the Brazilian Corporate
Law. We believe our formal code addresses the matters required to be addressed by the applicable NYSE and SEC rules.
148
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 under the supervision of our Chief Executive Officer and our
audit committee and is responsible for our compliance with the requirements of Section 404 of the U.S. Sarbanes Oxley Act of 2002 regarding internal control over
financial reporting. Our internal audit department reports to our chief executive officer and the audit committee.
Citezens’ Access to Information at Sabesp
The federal law nº. 12,527/11 (LAI), regulated by State Decree nº 58.052/12, determines that bodies and entities of the Public Administration must create an unit
to make available Citizen Information Services – SIC in order to serve and guide citizens, receive and manage information requests, as well as make available to the
citizen information of his/her interest and the requirement to present the motives or reasons of request is forbidden.
Sabesp, in order to comply with LAI, implemented the Citizen Information Service - SIC, structuring the internal flow of information to serve citizen within the
terms provided for by laws and is drafting the Table of documents, data and information, defining restrictive information, protecting business strategic information and
pursuing the transparent management. Sabesp also made available at its website basic information required by laws and the software to citizen request information,
according to the standards of the State Government of São Paulo.
These duties are linked to the Risk Management area whose main assumption is the transparency, quality of information and compliance with strategic rules of a
listed company.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 17.
FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this Item.
ITEM 18.
FINANCIAL STATEMENTS
PART III
The following financial statements, together with the Report of Independent Registered Public Accounting Firms, are filed as part of this annual report. See “Index
to Consolidated Financial Statements.”
ITEM 19.
EXHIBITS
Item
1.1
4.1
4.2
4.3
4.4
4.5
Description
By-laws of the Registrant (English translation) (incorporated by reference to the Form 6-K filed on May, 1 2013).
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”).
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).
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).
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).
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).
149
Item
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.14
4.15
4.16
11.1
12.1
12.2
13.1
13.2
15.1
Description
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).
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).
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).
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).
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).
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).
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).
The Audit Committee Charter dated February 11, 2010 (English Translation) (incorporated by reference to the Form 6-K filed on April 20, 2010).
Convention between the State and the city of São Paulo, dated June 23, 2010, with the intermediation and consent of the Registrant and of ARSESP
(English Translation) (incorporated by reference to the Form 6-K filed on July 13, 2010).
Contract to provide public water supply and sewage services, among the Registrant, the State 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).
Code of Ethics and Conduct dated January 26, 2006 (English Translation) (incorporated by reference to the Form 6-K filed on July 7, 2008).
Certification of Dilma Seli Pena, Chief Executive Officer, pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
Certification of Rui de Britto Álvares Affonso, Chief Financial Officer and Investor Relations Officer, pursuant to Section 302 of the Sarbanes
Oxley Act of 2002.
Certification of Dilma Seli Pena, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes
Oxley Act of 2002.
Certification of Rui de Britto Álvares Affonso, Chief Financial Officer and Investor Relations Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
Letter from PricewaterhouseCoopers Auditores Independentes to the SEC, dated May 15, 2013 regarding the change in independent public
accounting firm.
150
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.
1. COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO ---- SABESP
SIGNATURES
2. By: /s/ Dilma Seli Pena
Name: Dilma Seli Pena
Title: Chief Executive Officer
3. By: /s/ Rui de Britto Álvares Affonso
Name: Rui de Britto Álvares Affonso
Title: Chief Financial Officer and Investor
Relations Officer
Date: May 15, 2013
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
IFRS Consolidated Financial Statements
as of December 31, 2012 and 2011
and for the years ended
December 31, 2012, 2011 and 2010
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM,
ON CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors and Shareholders of
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
São Paulo - SP
We have audited the accompanying consolidated balance sheets of Companhia de Saneamento Básico do Estado de São Paulo - SABESP
(the “Company”) as of December 31, 2012, and the related consolidated statements of income, comprehensive income, changes in equity,
and cash flows for the year ended December 31, 2012. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Companhia de
Saneamento Básico do Estado de São Paulo - SABESP as of December 31, 2012, and the results of their operations and their cash flows for
the year ended December 31, 2012, in conformity with International Financial Reporting Standards (IFRS), as issued by the International
Accounting Standards Board (IASB).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 15,
2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte Touche Tohmatsu Auditores Independentes
São Paulo, Brazil
May 15, 2013
F-2
Report of independent registered
public accounting firm
To the Board of Directors and Shareholders of
Companhia de Saneamento Básico do
Estado de São Paulo - SABESP
In our opinion, the consolidated balance sheet as of December 31, 2011 and the related consolidated statements of income, of comprehensive income, of
changes in equity and of cash flows for each of two years in the period ended December 31, 2011 present fairly, in all material respects, the financial
position of Companhia de Saneamento Básico do Estado de São Paulo - SABESP at December 31, 2011, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 2011 in conformity with International Financial Reporting Standards as issued by the
International Accounting Standards Board. These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States) and International Standards of Auditing. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
São Paulo, May 15, 2013
/s/ PricewaterhouseCoopers
Auditores Independentes
F-3
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Balance Sheets as of December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Assets
Note
31, 2012
31, 2011 Liabilities and equity
December
December
December December
Note
31, 2012
31, 2011
Current assets
Cash and cash equivalents
Restricted cash
Trade receivables
Receivable from related parties
Inventories
Recoverable taxes
Other receivables
Total current assets
Noncurrent assets
Trade receivables
Receivable from related parties
Indemnities receivable
Escrow deposits
Deferred income tax and social contribution
Investments property
Intangible assets
Property, plant and equipment
Other receivables
5
6
7
8
7
8
9
15
11
10
12
Current liabilities
1,921,178
2,149,989
Trade payable and contractors
64,977
99,733
Services payable
1,043,166
1,072,659
Current portion of long-term loans and financing
109,273
53,090
129,141
16,040
185,333
Accrued payroll and related charges
44,611
Taxes payable
118,116
Interest on shareholders' equity payable
55,392
Provisions
Public Private Partnership – PPP
3,336,865
3,725,833
Program contracts commitments
Other liabilities
335,687
153,098
333,713 Total current liabilities
170,288
-
60,295 Noncurrent liabilities
53,158
141,356
54,046
54,178
Loans and financing
179,463
Taxes payable
52,585
Accrued taxes on revenues
Provisions
21,991,922
20,141,677
Pension obligations
383,383
226,278
356,468
140,484
Public Private Partnership – PPP
Program contracts commitments
Total noncurrent assets
23,338,928
21,489,151
Other liabilities
Total noncurrent liabilities
Total liabilities
Equity
297,198
389,091
255,557
383,116
1,367,391
1,630,010
267,863
243,876
153,121
181,122
414,355
247,486
565,083
764,070
24,357
148,220
12,693
62,287
170,691
188,451
3,797,370
3,968,668
7,701,929
6,966,285
-
125,404
18,363
114,957
624,074
807,759
2,124,330
2,050,697
331,960
87,407
167,742
416,105
130,978
195,276
11,162,846
10,700,420
14,960,216
14,669,088
18
13
14
16
13
14
16
17
19
Capital stock
Capital reserve
Earnings reserves
6,203,688
6,203,688
124,255
124,255
5,387,634
4,217,953
Total equity
11,715,577
10,545,896
Total assets
26,675,793
25,214,984 Total liabilities and equity
26,675,793
25,214,984
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, 2012, 2011 and 2010
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Continuing operations:
Net operating revenue
Cost of sales and services
Gross profit
Selling expenses
Administrative expenses
Other operating income (expenses), net
Operating profit
Financial expenses
Financial income
Foreign exchange result, net
Financial income (expenses), net
Profit before income tax and social contribution
Income tax and social contribution
Current
Deferred
Net income for the year
attributable to the Company's shareholders
Earnings per share - basic and diluted (in reais)
Earnings per ADS - basic and diluted (in reais)
Note
2012
2011
2010
22
23
23
23
25
24
24
24
15
15
20
20
10,754,435
(6,465,398)
9,941,637
(6,030,977)
9,231,027
(5,194,548)
4,289,037
3,910,660
4,036,479
(697,874)
(726,128)
(19,775)
(619,542)
(846,593)
(90,138)
(712,946)
(653,200)
1,830
2,845,260
2,354,387
2,672,163
(582,822)
332,041
(50,575)
(301,356)
(702,766)
465,926
(396,801)
(633,641)
(789,467)
343,914
66,146
(379,407)
2,543,904
1,720,746
2,292,756
(594,052)
(37,952)
(632,004)
(598,303)
100,976
(497,327)
(697,115)
34,806
(662,309)
1,911,900
1,223,419
1,630,447
2.80
2.80
1.79
1.79
2.39
2.39
The accompanying notes are an integral part of these financial statements.
F-5
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Comprehensive Income for the
Years ended December 31, 2012, 2011 and 2010
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Net income for the year
Total comprehensive income for the year
1,911,900
1,911,900
1,223,419
1,223,419
1,630,447
1,630,447
Note
2012
2011
2010
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, 2012, 2011 and 2010
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Note
Capital stock
Capital reserve
Legal reserve
Earnings reserves
Investments
reserve
Additional
proposed
dividend
Retained
earnings (losses)
Total
Balances as of December 31, 2009
6,203,688
124,255
378,526
1,732,115
Comprehensive income
Net income for the year
Total comprehensive income
Allocation to legal reserves
Interest on shareholders' equity (R$0.57 per share)
19 (e)
19 (c)
Additional proposed dividends
Allocation to investments reserve
Total transactions with owners
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
8,438,584
1,630,447
1,630,447
1,630,447
1,630,447
(81,522)
-
(387,231)
(387,231)
68,761
(68,761)
1,092,933
-
(1,092,933)
-
-
81,522
1,092,933
68,761
(1,630,447)
(387,231)
Balances as of December 31, 2010
6,203,688
124,255
460,048
2,825,048
68,761
-
9,681,800
Comprehensive income
Net income for the year
Total comprehensive income
Allocation to legal reserves
Distributed dividends of 2010, approved (R$0.10 per share)
Interest on shareholders' equity (R$0.43 per share)
19 (e)
19 (c)
19 (c)
Additional proposed dividends
Allocation to investments reserve
Total transactions with owners
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
61,171
-
-
-
-
-
-
-
-
-
-
583,543
-
-
-
(68,761)
-
288,143
-
1,223,419
1,223,419
1,223,419
1,223,419
(61,171)
-
(290,562)
(288,143)
(583,543)
-
(68,761)
(290,562)
-
-
61,171
583,543
219,382
(1,223,419)
(359,323)
Balances as of December 31, 2011
6,203,688
124,255
521,219
3,408,591
288,143
-
10,545,896
Comprehensive income
Net income for the year
Total comprehensive income
Allocation to legal reserves
Distributed dividends of 2011, approved (R$0.42 per share)
Interest on shareholders' equity (R$0.66 per share)
19 (e)
19 (c)
19 (c)
Additional proposed dividends
Allocation to investments reserve
Total transactions with owners
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,911,900
1,911,900
1,911,900
1,911,900
-
-
-
(288,143)
(95,595)
-
-
(454,076)
80,201
(80,201)
-
(288,143)
(454,076)
-
-
1,282,028
-
(1,282,028)
95,595
1,282,028
(207,942)
(1,911,900)
(742,219)
Balances as of December 31, 2012
6,203,688
124,255
616,814
4,690,619
80,201
-
11,715,577
The accompanying notes are an integral part of these financial statements.
F-7
-
-
81,522
-
-
-
-
-
95,595
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Cash Flows for the
Years ended December 31, 2012, 2011 and 2010
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Cash flows from operating activities
Profit before income tax and social contribution
Adjustments for:
Depreciation and amortization
Losses on disposal of property, plant and equipment and intangible assets
Allowance for doubtful accounts and losses due to supply at wholesale
Provision and inflation adjustment
Interest on loans and financing
Inflation adjustment and exchange gains (losses) on loans and financing
Indemnities Receivable
Interest and inflation adjustment losses
Interest and inflation adjustment gains
Financial charges from customers
Provision for Consent Decree (TAC)
Provision for São Paulo agreement
Provision for defined contribution plan
Pension obligations
Margin on intangible assets construction related concession contracts
Other adjustments
Changes in assets
Trade receivable
Receivable from related parties
Inventories
Recoverable taxes
Escrow deposits
Other receivables
Changes in liabilities
Trade payables and contractors
Services payable
Accrued payroll and related charges
Taxes payable
Accrued taxes on revenues
Provisions
Pension obligations
Other liabilities
Cash generated from operations
Interest paid
Income tax and social contribution paid
Note
2012
2011
2010
2,543,904
1,720,746
2,292,756
740,147
12,059
401,576
201,196
406,254
85,122
60,295
24,553
(12,862)
(171,481)
57,332
2,466
5,728
213,747
(50,815)
34,772
(156,914)
60,450
(8,885)
(40,564)
1,020
(53,579)
(25,991)
5,975
(33,345)
(47,717)
10,602
(583,868)
(140,115)
(53,488)
3,487,574
(590,196)
(561,158)
768,769
56,548
289,589
310,075
439,117
442,954
85,918
31,422
(33,589)
(169,941)
46,991
15,386
(8,746)
257,927
(47,589)
4,833
(188,575)
20,455
(8,519)
(62,149)
573
(43,025)
145,451
87,944
(49,582)
(14,649)
1,995
(197,521)
(11,268)
150,855
4,042,395
(736,853)
(588,484)
552,184
16,385
402,694
352,614
450,297
21,139
-
4,112
(59,916)
(178,996)
24,840
80,368
32,587
(11,834)
(49,603)
6,325
(66,687)
36,708
3,484
(157,916)
(14,864)
(30,508)
(66,087)
55,678
(17,525)
(8,316)
(7,455)
(330,256)
(15,881)
118,774
3,435,101
(618,600)
(733,452)
Net cash generated from operating activities
2,336,220
2,717,058
2,083,049
Cash flows from investing activities
Restricted cash
Purchases of property, plant and equipment
Purchases of intangible assets
Net cash used in investing activities
Cash flows from financing activities
Loans and financing
Proceeds from loans
Repayments of loans
Payment of interest on shareholders' equity
Public private partnership – PPP
Program Contracts Commitments
Net cash provided by (used in) financing activities
(Decrease) / Increase in cash and cash equivalents
34,752
(30,647)
(2,002,883)
202,841
(143,684)
(2,067,435)
(189,820)
(87,383)
(1,814,166)
(1,998,778)
(2,008,278)
(2,091,369)
1,627,249
(1,518,240)
(578,705)
(40,285)
(56,272)
1,854,052
(1,979,099)
(422,923)
-
-
3,425,417
(1,800,507)
(398,419)
-
-
(566,253)
(547,970)
1,226,491
(228,811)
160,810
1,218,171
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(Decrease) / Increase in cash and cash equivalents
The accompanying notes are an integral part of these financial statements.
F-8
5
5
2,149,989
1,921,178
1,989,179
2,149,989
771,008
1,989,179
(228,811)
160,810
1,218,171
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
1 General information
Companhia de Saneamento Básico do Estado de São Paulo ("SABESP" or the "Company") is a mixed-capital company headquartered in São Paulo, at
Rua Costa Carvalho, 300, CEP 05429-900, controlled by the São Paulo State Government. 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 on a wholesale basis.
In addition to providing basic sanitation services in the State of São Paulo, SABESP may perform these activities in other states and countries, and can
operate in drainage, urban cleaning, solid waste handling and energy markets. The objective set in the new vision of SABESP is to be recognized as the
company that ensured universal access to water and sewage services in its marketplace, focused on the customer, and in a sustainable and competitive
manner, with excellence in environmental solutions.
As of December 31, 2012, the Company operated water and sewage services in 363 municipalities of the State of São Paulo. Most of these municipalities
operations are based on 30-year concession agreements.
SABESP is temporarily not operating in some municipalities due to judicial orders under ongoing lawsuits: Iperó, Cajobi, Álvares Florense and
Macatuba, the carrying amount of these municipalities' intangible assets was R$16,516 as of December 31, 2012 (R$12,929 as of December 31, 2011).
As of December 31, 2012, 67 concessions had expired and are being negotiated. From 2013 to 2034, 38 concessions will expire. Management believes
that all concessions expired and not yet renewed will result in new contracts, disregarding the risk of discontinuity in the provision of municipal water
supply and sewage services. By December 31, 2012, 258 program and metropolitan contracts were signed (225 contracts on December 31, 2011).
As of December 31, 2012, the carrying amount of the underlying assets used in the 67 concessions of the municipalities under negotiation totaled
R$5,874 million, accounting for 26.71% of total, and the related gross revenue for the year then ended totaled R$2,123 million, accounting for 18.61% of
total.
The Company's operations are concentrated in the municipality of São Paulo, which represents 54.7% of the gross revenues in 2012 (55.1% in 2011 and
54.7% in 2010) and 43.5% of intangible assets (45.6% in 2011).
On June 23, 2010, the State of São Paulo, the Municipality of São Paulo, the Company and the regulatory agency “Sanitation and Energy Regulatory
Agency – ARSESP” signed an agreement to share the responsibility for water supply and sewage services to the Municipality of São Paulo based on a 30-
year concession agreement. This agreement is extendable for another 30 years, pursuant to the law. This agreement sets forth SABESP as the exclusive
service provider and designates ARSESP as regulator, establishing prices, controlling and monitoring services.
Also, on June 23, 2010, the State of São Paulo, the city of São Paulo and SABESP signed the “Public service provision agreement of water supply and
sewage services”, a 30-year concession agreement which is extendable for another 30 years. This agreement involves the following activities:
F-9
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
i. protection of the sources of water in collaboration with other agencies of the State and the City;
ii. capture, transport and treat of water;
iii. collect, transport, treatment and final dispose of sanitary sewage; and
iv. adoption of other actions of basic and environmental sanitation.
In the municipality of Santos, in the Santos coast region, which has a significant population, the Company operates under an authorization by public
deed, a situation similar to other municipalities in that region and in the Ribeira valley, where the Company started to operate after the merger of the
companies that formed it. As of December 31, 2012, the carrying amount of the municipality of Santos’ intangible assets was R$328,693 (R$175,069 in
December 2011) and its gross revenue was R$202,103 (R$196,831 in December 2011 and R$182,511 in 2010).
Article 58 of Law 11445/07 establishes that precarious and expired concessions, as well as those effective for an undetermined period of time, including
those that do not have an instrument formalizing them, will be valid until December 31, 2010. However, Article 2 of Law 12693 of July 24, 2012 allows
program agreements to be executed until December 31, 2016.
The Company’s management understands that the concession agreements not yet renewed are valid and are governed by Laws 8987/95 and 11445/07,
including those municipalities served without an agreement.
Public deeds are valid and governed by the Brazilian Civil Code.
The Company's shares have been listed in the Novo Mercado (New Market) segment of BM&FBOVESPA (the São Paulo Stock Exchange) since April
2002 and on the New York Stock Exchange (NYSE) as American Depositary Receipts (“ADRs”) 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 and Attend Ambiental. 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. For the purposes of accounting classification in the financial statements, these companies
are considered joint ventures.
The financial statements were approved by Management on May 15, 2013.
2 Summary of Significant Accounting Practices
2.1 Basis of Preparation and Presentation of the Financial Statements
The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRS"),
issued by the International Accounting Standards Board ("IASB"). These policies have been consistently applied to all the years presented.
The financial statements have been prepared under the historical cost except for certain financial instruments which were measured at fair value
according to IFRS.
F-10
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to
exercise its judgment in the process of applying the Company's accounting policies. The areas involving a higher degree to judgment or complexity, or
areas where assumptions and estimates are significant to the consolidated financial statements are described in Note 4.
2.2 Consolidated financial statements
The consolidated financial statements include the financial statements of the Company and its investees: Sesamm – Serviços de Saneamento de Mogi
Mirim S/A, Águas de Andradina, Águas de Castilho, Saneaqua Mairinque, Aquapolo Ambiental and Attend Ambiental, which were proportionately
consolidated according to the equity interests held in these investees. The accounting policies of its investees are consistent with the accounting policies
adopted by the Company. The Company shares the control of its investees, which have the same fiscal year basis. The consolidation processes of assets,
liabilities and income statements add the assets, liabilities, revenues and expenses, according to the nature, by applying the percentage of the Company’s
interest held in each investee.
Although SABESP has no majority shares of its investees, the shareholders’ agreement provides for the power of veto in certain management issues,
indicating participating shared control. Therefore, the financial statements were proportionately consolidated.
The following entities were consolidated proportionately:
Sesamm
On August 15, 2008, the Company, together with the companies OHL Médio Ambiente, Inima S.A.U. Unipersonal ("Inima"), Técnicas y Gestión
Medioambiental S.A.U. ("TGM") and Estudos Técnicos e Projetos ETEP Ltda. ("ETEP") incorporated the company Serviços de Saneamento de Mogi
Mirim S.A. - SESAMM ("SESAMM"), for a period of 30 years from the date the concession agreement with the municipality of Mogi Mirim 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, 2012 totaled R$19,532, and was represented by 19,532,409 registered shares without a par value. SABESP holds
36% of its equity interest and Inima holds another 46% of its equity interest. The Company concluded that both, SABESP and Inima, have joint control
over SESAMM. Accordingly, SABESP records their interest over SESAMM applying the proportional consolidation method, equivalent to the 36% of
SESAMM's assets and liabilities, revenues and expenses.
Operations started in June 2012.
Águas de Andradina
On September 15, 2010, the Company, together with the company Companhia de Águas do Brasil – Cab Ambiental incorporated the company Águas de
Andradina S.A., with indefinite term, for the purpose of providing water supply and sewage services to the municipality of Andradina.
As of December 31, 2012, the capital of Águas de Andradina totaled R$2,908, and was represented by 2,908,085 registered shares without a par value.
SABESP holds 30%of its equity interest.
F-11
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Operations started in October 2010.
Águas de Castilho
On October 29, 2010, the Company, together with the Companhia de Águas do Brasil – Cab Ambiental, incorporated the company Águas de Castilho, for
the purpose of providing water supply and sewage services to the municipality of Castilho.
As of December 31, 2012, the company’s capital was R$622, and was represented by 622,160 registered share without par value. SABESP holds 30%
equity interest.
Operations started in January 2011.
Saneaqua Mairinque
On June 14, 2010, the Company, together with the company Foz do Brasil S.A. incorporated the company Saneaqua Mairinque S.A., with indefinite
term, for the purpose of exploring the public service of water supply and sewage services to the municipality of Mairinque.
As of December 31, 2012, the capital of Saneaqua Mairinque totaled R$2,000, and was represented by 2,000,000 registered shares without a par value.
SABESP holds 30% equity interest.
Operations started in October 2010.
Aquapolo Ambiental S.A.
On October 8, 2009, the Company, together with the company Foz do Brasil S.A. incorporated the company Aquapolo Ambiental S.A., for the purpose of
producing, providing and commercializing of reused water for Quattor Química S.A., Quattor Petriquímica S.A., Quattor Participações S.A. and other
companies comprising the Petrochemical Complex.
As of December 31, 2012, the capital of Aquapolo totaled R$36,412, and was represented by 42,419,045 registered shares without a par value. SABESP
holds 49%of its equity interest.
Operations started in October 2012.
Attend Ambiental
On August 23, 2010 the Company and Companhia Estre Ambiental S.A, incorporated the company Attend Ambiental S.A, for constructing and operating
a pretreatment of non-domestic effluent station, mud transportation and related services in the Metropolitan area of São Paulo city as well as implement
similar structures in other areas in Brazil and abroad.
As of December 31, 2012, the capital totaled R$2,000, and was represented by 2,000,000 registered shares without par value. SABESP holds 45% equity
interest. A total of R$11,400 was recorded under the investee’s equity as advance for future capital increase.
Attend is at startup stage and startup is scheduled for September 2013.
See below a summary of financial information of the joint controlled entities:
F-12
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Equity
Current assets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Equity
Operating revenue
Operating expenses
Financial income, net
Net income (loss) for the year
Operating revenue
Operating expenses
Financial income, net
Net income (loss) for the year
Operating revenue
Operating expenses
Financial income, net
Net income (loss) for the year
SESAMM 36%
ÁGUAS DE
ANDRADINA 30%
ÁGUAS DE
CASTILHO 30%
SANEAQUA
MAIRINQUE 30%
AQUAPOLO
AMBIENTAL 49%
ATTEND
AMBIENTAL 45%
2012
875
19,609
822
13,902
5,760
2,199
3,934
4,777
555
801
404
904
868
77
363
2011
414
858
272
15
985
15,247
181,749
32,304
157,047
7,645
1,976
2,570
167
-
4,379
SESAMM 36%
ÁGUAS DE
ANDRADINA 30%
ÁGUAS DE
CASTILHO 30%
SANEAQUA
MAIRINQUE 30%
AQUAPOLO
AMBIENTAL 49%
ATTEND
AMBIENTAL 45%
2,658
14,447
832
11,120
5,153
360
1,300
815
84
761
133
423
256
47
253
2012
561
164
228
28
469
12,424
180,717
10,262
167,498
15,381
5,003
223
127
5,130
(31)
SESAMM 36%
ÁGUAS DE
ANDRADINA
30%
ÁGUAS DE
CASTILHO 30%
SANEAQUA
MAIRINQUE
30%
AQUAPOLO
AMBIENTAL
49%
ATTEND
AMBIENTAL
45%
9,364
(8,775)
85
674
4,611
(4,747)
104
(32)
1,336
(1,203)
22
155
2011
2,931
(2,715)
19
235
3,249
(10,118)
26
(6,843)
-
(1,057)
336
(721)
SESAMM 36%
ÁGUAS DE
ANDRADINA
30%
ÁGUAS DE
CASTILHO 30%
SANEAQUA
MAIRINQUE
30%
AQUAPOLO
AMBIENTAL
49%
ATTEND
AMBIENTAL
45%
9,203
(10,494)
115
(1,176)
2,985
(2,954)
31
62
651
(568)
5
88
2010
2,498
(2,730)
44
(188)
-
(1,438)
-
(1,438)
-
(992)
60
(932)
SESAMM 36%
ÁGUAS DE
ANDRADINA 30%
SANEAQUA
MAIRINQUE 30%
AQUAPOLO
AMBIENTAL 49%
247
(451)
-
(204)
447
(384)
12
75
-
(1.023)
-
(1.023)
-
(638)
95
(543)
F-13
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
2.3 Cash and cash equivalents
Cash and cash equivalents include cash in hand, bank deposits, other short-term highly liquid investments with original maturities less than three
months as from the investment date, with an insignificant risk of change value, as well as current account overdrafts.
2.4 Financial instruments
Classification
The Company classifies its financial assets according to the following categories: measured at fair value through profit or loss, loans and receivables,
held-to-maturity and available for sale. 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, 2012 and 2011, the Company did not have financial assets classified under the
fair value through profit or loss, held-to-maturity and available-for-sale financial instruments category.
Financial assets calculated at fair value through profit or loss
These are financial assets held for trading. A financial asset is classified into this category when mainly acquired for sale purposes in the short term.
These assets are classified as current assets. Gains or losses arising from changes in the fair value of financial assets measured at fair value through
profit or loss are presented in the income statement in 'Financial income' or 'Financial expenses’ in the period they occur, unless the instrument has
been contracted in connection to another transaction. In this case, changes are recognized in the same line item of income affected by this transaction.
Loans and receivables
These comprise receivables which are non-derivative financial assets with fixed or determinable payments, not quoted in an active market. Loans and
receivables are presented in current assets or liabilities, except for those with maturity of more than 12 months after the statement of financial position
date (these are classified as noncurrent assets or liabilities). The Company's loans and receivables include cash and cash equivalents, balances of trade
receivables, receivables from related parties, other receivables, indemnities receivable, receivables from the Water National Agency – ANA, contractors
and suppliers, loans and financing, interest on shareholders’ equity payable, services payable, balances payable from public-private partnership (PPP),
and program contract commitments. Loans and receivables are recorded at fair value and subsequently at amortized cost, under the effective interest
rate method.
2.5 Gross Operating Revenue
F-14
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(a) Revenue from water supply and sewage collection
Revenue from water supply and sewage collection are recognized as the water is consumed and services are provided. Revenues, including the revenues
unbilled, are recognized at the fair value of the consideration received or receivable for the sale of those services. Revenue is shown net of value-added
tax, rebates and discounts. Revenues from unbilled represent incurred revenues in which the services were provided, but not yet billed until the end of
the each period. Water supply and sewage services are recorded as trade receivables based on monthly estimates of the services provided.
The Company recognizes revenue when: i) products are delivered or services are rendered; ii) the amount of revenue can be reliably measured, iii) it is
probable that future economic benefits will flow to the Company and iv) it is probable that the amounts will be collected. The amount of revenue is not
considered to be reliably measurable until all conditions relating to the sale have been satisfied. Amounts in dispute are recognized as revenue when
collected.
(b) Construction revenue
Revenue from concession construction contracts is recognized in accordance with IAS 11 (Construction Contracts), using the percentage-of-completion
method, provided that the applicable conditions for application are fulfilled. The percentage of completion is calculated from the ratio of the actual costs
incurred on the balance sheet date to the planned total costs (cost-to-cost method). Revenue from cost plus contracts is recognized by reference to the
construction costs incurred during the period plus a fee earned. 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 the construction costs incurred and the total is recognized as construction revenue.
2.6 Trade receivables and allowance for doubtful accounts
Trade receivables are amounts due from customers for services performed in the ordinary course of business. If collection is expected in one year or less,
they are classified as current assets. If not, they are presented as noncurrent assets.
The Company records an allowance for doubtful accounts for receivable balances in an amount that is deemed by management to be sufficient to cover
probable losses in accounts receivable, based on the analysis of the history of receipts and current guarantees and it does not expect to incur in
additional significant losses.
2.7 Inventories
Inventories of supplies for consumption and maintenance of the water and sewage systems are stated at the lower of average cost of acquisition or
realizable value, and are classified in current assets.
2.8 Investment property
The investment properties, land, are recorded at the acquisition or construction cost, less accumulated depreciation, calculated on a straight-line basis at
rates that consider the estimated useful life of assets. Expenditures related to repairs and maintenance are recorded in the income statement when
incurred.
F-15
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The Company also maintains few assets for indeterminate use in the future, i.e., it is not defined if the Company will use the property in the operation or
sell the property in the short term during the ordinary course of business.
2.9 Property, plant and equipment
Property, plant and equipment comprise mainly administrative facilities not composing the assets subject-matter of the concession agreements. Those
assets are stated at historical acquisition or construction cost less depreciation, net of impairment charge, when necessary. Interest, other financial
charges and inflationary effects deriving from financing effectively applied to construction in progress are recorded as cost of respective property, plant
and equipment.
Subsequent costs included in the 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 measured reliably. All other repairs and maintenance
are charged to the income statement during the financial period in which they were incurred.
Depreciation is calculated using the straight-line method to allocate their cost and is described in Note 12 (a). Land is not depreciated.
Residual values and the useful lives of assets are reviewed and adjusted, where applicable, at the end of each year.
Gain and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within other operating income
(expenses) in the income statements.
2.10 Intangible assets
Valued at acquisition cost and/or construction of the underlying assets, including construction margin, interest and other financial charges capitalized
during the construction period, in this case, for the qualifying assets. Qualifying assets are assets that, necessarily, take a substantial period to get ready
for its intended use or sale. The Company considers that substantial period means a period greater than 12 months. This period was established by
considering the completion period of the majority of its constructions which is greater than 12 months.
The amortization is calculated when the intangible assets are available for use in the necessary condition established by the Company.
The amortization reflects the period over the expected future economic benefits generated by the intangible asset and can be the period of the contract,
depending on the contract or the useful life of the asset.
The amortization of the intangible assets is discontinued when the asset is fully consumed or it is disposed of, whatever occurs first.
Infrastructure to which the operator is given access by the concession grantor or donations received from third parties is not recognized in the
consolidated balance sheet, since such donations are controlled by the concession grantor.
Financial resources received as donations for the construction of infrastructure are recorded under “Other operating income”.
F-16
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(a) Concession arrangements/programs
The Company operates concession agreements including the rendering of basic sanitation, environmental, water supply and sewage collection services
signed with the concession grantor. The infrastructure used by SABESP subject to service concession arrangements is considered to be controlled by the
concession grantor when:
(i) The grantor controls or regulates what services the operator must provide with the infrastructure, to whom it most provide them, and at what
price; and
(ii) The grantor controls the infrastructure, i.e., retains the right to take back the infrastructure at the end of the concession.
SABESP's rights over infrastructure operated under concession arrangements is accounted for as an intangible asset as SABESP has the right to charge
for use of the infrastructure assets, and users (consumers) have the primary responsibility to pay SABESP for the services.
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 to recognize construction revenue is described in Note 2.5 “Gross
Operating Revenue”.
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.
Investments made and not recovered through rendering of services, within the agreement term, must be indemnified by the concession grantor, (1) with
cash or cash equivalents or also, in general (2) with the contract extension. These investments are amortized over the useful life of asset.
Law 11445/07 prescribes that, whenever possible, basic sanitation public utilities shall have their economic and financial sustainability ensured through
the consideration received from service collection, preferably as tariffs and other public prices, which may be established for each service or both jointly.
Therefore, investments made and not recovered through services rendered, within original term of the contract, are recorded as intangible assets and
amortized over the useful life of the asset, taking into consideration a solid track record of concession renewal and, therefore, the continuity of services.
(b) Software licenses
Software licenses of computer programs and business management systems acquired are capitalized and amortized over their useful lives, and the
expenses associated with maintaining these are recognized as expenses when incurred.
2.11 Impairment of non-financial assets
Property, plant and equipment, intangibles and other noncurrent assets with definite useful lives, are yearly reviewed for impairment or whenever
events or changes in circumstances indicate that the carrying amount may not be recoverable.
F-17
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The Company does not have assets with indefinite useful lives and concluded that there are no indications of impairment losses.
2.12 Payables to suppliers and contractors
Accounts payable to contractors and suppliers are obligations to pay for goods or services purchased from suppliers in the ordinary course of business
and are classified as current liabilities if the payment is due in the period up to one year. Otherwise, the accounts payable are presented as non-current
liabilities and are initially measured at fair value, which generally correspond to the bill and subsequently at amortized cost.
2.13 Loans and financing
Borrowings are initially recognized at fair value, upon receipt of funds, net of transaction costs. Subsequently, borrowings are stated at amortized cost,
as presented in Note 13. Loans and financing are classified as current liabilities unless the Company has an unconditional right to defer settlement of the
liability for at least 12 months after the balance sheet date.
Nonconvertible debentures issued by the Company are recognized in a similar manner to borrowings.
2.14 Loan costs
The cost of loans attributable to acquisition, construction or production of an asset, which, necessarily, requires a substantial time period to be ready for
use or sale are capitalized as part of the cost of these assets. Other borrowing costs are recognized as expenses in the period they are incurred. Borrowing
costs are interest rates and other charges incurred by the Company related to loans, including exchange variation, as described below.
The capitalization occurs during the period in which the asset has been built, considering the weighted average rate of loans effective on the
capitalization date.
For foreign currency-denominated loans or financing, the Company analyzes them as if they were contracted in domestic currency, restricting the
capitalization of interest and/or exchange variation by the amount that would be capitalized if these were contracted in the domestic market.
2.15 Payroll and related charges
Salaries include an accrual for vacations and the 13th salary and additional payments negotiated in collective labor agreements plus related charges and
are recorded on the accruals basis.
2.16 Profit sharing
The Company's profit sharing plan for its employees is based on general targets of the Company as a whole, and based on the performance of each
business units. The Company recognizes a provision when it is contractually required or when there is a practice in the past that created a constructive
obligation. The accrual for profit sharing is recorded on the accrual basis period as operating expenses and as Cost of sales and services.
2.17 Provisions, legal liabilities, judicial deposits, escrow deposits and contingent assets
F-18
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Provisions related to claims are recognized when: i) the Company has a present legal or constructive obligation as a result of past events; ii) it is probable
that an outflow of resources 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 will be required in settlement is determined by considering the class of 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 passage of time is
recognized as interest expense.
For financial statement presentation purposes, the provision is stated net of the related escrow deposits based on the legal right to offset. The bases and
the nature of the provisions for civil, tax, labor and environmental risks are described in Note 16.
Escrow deposits not linked to related liabilities are recorded in noncurrent assets. Escrow deposits are restated for inflation.
Contingent assets are not recognized.
2.18 Environmental costs
Costs related to ongoing environmental programs are expensed in the income statement. Ongoing programs are designed to minimize the
environmental impact of the operations and to manage the environmental risks inherent to the Company's activities.
2.19 Income taxes – current and deferred
In order to calculate the income tax and social contribution, since 2008, the Company has been adopting the Transition Tax Regime (RTT), as provided
for by Law 11941/09, i.e., in the calculation of taxable income considered the accounting criteria of Law 6404/76 preceding the amendments to Law
11638/07.
The RTT will be effective until the enactment of the law ruling the tax effects from new accounting methods, seeking tax neutrality.
This regime was optional in the 2008 and 2009 calendar years and mandatory as of 2010.
The Company opted for adopting RTT in 2009, referring to the calendar years 2008 and 2009. In order to calculate the income tax and social
contribution for the years ended December 31, 2011 and 2010, the Company adopted the prerogatives defined by RTT.
The tax expense for the period comprises current and deferred tax.
Current tax
The provision for income tax and social contribution is based on the taxable income for the year. Income tax was calculated at the rate of 15%, plus a 10%
surtax on annual taxable income exceeding R$240. Social contribution was calculated at the rate of 9% on adjusted net income. Taxable income differs
from the profit disclosed in the income statement because it excludes income or expenses taxable or deductible in other years, as well as permanently
nontaxable or nondeductible items. The provision for income tax and social contribution is calculated individually (by each jointly controlled entity)
based on the tax rates in effect at the end of the reporting period. Management periodically reviews the positions assumed by the Company in the
income tax returns in cases where the applicable tax regulation gives rise to different interpretations. Management recognizes provisions, when
applicable, based on the estimated amounts payable to tax authorities.
F-19
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Deferred taxes
Deferred income tax and social contribution are recognized on the differences between the tax bases and the accounting balances of assets and liabilities,
as prescribed by IAS 12 - Taxes on Income; however, they are not recognized if generated in the first-time recording of assets and liabilities in
transactions that do not affect the tax bases, except for business combinations. Deferred income tax and social contribution are determined based on the
tax rates and laws enacted or substantially enacted at the end of the reporting period and applicable when the respective income tax and social
contribution will be paid.
Deferred income tax and social contribution assets are recognized only to the extent that it is probable that there will be a positive tax base for which
temporary differences can be used and tax loss carryforwards can be offset.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and
when deferred tax assets and liabilities are related to the taxes imposed by the same tax authorities over the same taxable entity.
2.20 Taxes on revenues
Revenues from sales and services are recognized on accrual basis for PASEP and Cofins. Taxes levied on billed amounts to public entities are due when
bills are received.
As these taxes are calculated by the non-cumulativeness regime and presented net of tax credits, as deductions from gross revenues. Debts measured on
“other operating income” are presented as deductions from the respective operating income or expense.
2.21 Pension obligations
(a)
Defined benefit
Liabilities from defined benefit pension plan obligations correspond to the present value of the defined benefit obligation at balance sheet date, less the
fair value of the plan assets, and adjusted by unrecognized actuarial gains or losses. 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 outflows is discounted to its present value,
using the interest rates of the Brazilian National Government bonds with maturities that approximate the maturity of the related liability.
The Company adopts the corridor method to recognize actuarial gains and losses. Actuarial gains and losses arising from experience adjustments and
changes in actuarial assumptions are in excess of the greater of 10% of the fair value of plan assets or 10% of the present value of the defined benefit
obligation are charged or credited to income over the employees' expected average remaining working lives. The higher the number of plan retirees the
smaller is the average remaining working period of plan participants. For plans substantially composed of retirees and pensioners, the Company
immediately records all actuarial gains and losses in excess of the limits of the corridor, i.e. on the first day of the subsequent year after the calculation of
the referred actuarial gains or losses. The expenses related to pension plan are recognized in profit and loss of the year as Cost of sales and services,
selling expenses or administrative expenses, according to employee’s allocation.
F-20
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
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 previously unrecognized 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.
The Company makes contributions to defined benefit plans on a contractual basis and sponsored thereby, managed by Fundação Sabesp de Seguridade
Social – SABESPREV, a supplementary private close-end pension entity. The regular contributions are recognized in the income statement of the period.
(b)
Defined contribution
The Company makes contributions to defined contribution plans (Sabesprev Mais) on a contractual basis and sponsored thereby, managed by Fundação
Sabesp de Seguridade Social – SABESPREV, a supplementary private close-end pension entity that provides post-employment benefits to its employees.
A defined contribution plan is a pension plan according to which the Company makes fixed contributions to a separate entity. The Company has no
obligation of making contributions if the fund does not have sufficient funds to pay to all employees the benefits related to employee’s services in current
and previous period.
2.22 Financial income and expenses
Financial income is primarily comprised of interest, inflation adjustments and exchange variations on escrow deposits and negotiations with customer
to pay by installments, using the effective interest rate method.
Financial expenses are primarily comprised of interest, inflation adjustments and exchange variations on loans and financing, refinancing, provisions,
public-private partnership, program contract commitments and provisions. These financial income and expenses are calculated using the effective
interest rate method.
Inflation adjustments and foreign 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.
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.
2.23 Leases
Lease agreements are classified as financial lease when property, risks and rewards inherent to the ownership of asset to the lessee are transferred.
Other leases are classified as operating leases, recognized as expenses in the income statement on a straight-line basis during the lease period.
F-21
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Financial lease agreements are measured based on the lower of the present value of minimum lease payments or the fair value of leased asset at the start
of the lease. The amounts payable deriving from considerations of financial lease agreements are recognized and allocated between financial expenses
and amortization of financial lease payables so as to obtain a constant interest rate. The corresponding liability is recorded as short- and long-term debt.
2.24 Other current and noncurrent assets and liabilities
Other assets are stated at cost of acquisition, 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 monetary variations.
2.25 Dividends and Interest on shareholders’ equity
The Company uses the tax benefits of distributing dividends as interest on shareholders’ equity, as permitted by Brazilian Law. This distribution of
dividend is accounted for in accordance with Brazilian Law 9249/95 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 shareholders´ equity over the minimum established in the by-laws are recognized when approved by the shareholders in the general
meeting. The tax effects of the interest on shareholders’ equity are recognized in the income statement for the year, under the same recognition basis.
2.26 Present value adjustment
Current and noncurrent financial assets and liabilities are adjusted to present value based on discount rate at current market rate as of the transaction
date, when the effects are relevant.
2.27 Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker, for taking decision,
for allocating resources and assessing performance of the operating segments.
Based on how the Company treats its business and how decision-making of resources allocation is made, two operating segments (water and sewage)
were stated for financial reporting purposes. The segment reporting is detailed in Note 21.
2.28 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$), which is also the Company's functional and presentation currency.
All financial information presented has been presented in reais, except where indicated.
F-22
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(b)Foreign currency translation
Foreign currency-denominated transactions are translated into Brazilian reais using the exchange rates prevailing at the transaction dates. Balance
sheet accounts are translated at the exchange rate prevailing at balance sheet date.
Foreign 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 foreign exchange result in the income statement, except for loans and financing related to property, plant and equipment
or intangible assets in progress, where foreign exchange gains and losses are recognized as contra entry to the asset while construction is in progress.
2.29 New and revised standards and interpretations effective for periods beginning on or after January 1, 2012
Standard
Key requirements
Effectiveness date
Deferred taxes: recovery of underlying assets
(amendments to IAS 12)
January 1, 2012
It amends IAS 12 – Income Tax to provide the
assumption that the recovery of the carrying amount of
an asset measured based on the fair value model of IAS
40 – Investment Property will usually occur through sale.
Due to this amendment, SIC 21 – Income Taxes –
Recovery of Revalued Non-Depreciable Assets would no
longer be applicable to investment property carried at fair
value. The amendments also include in IAS 12 a
remaining guidance previously included in SIC 21, which
was duly removed.
2.30 New and revised standards and interpretations that are not yet effective
The Company did not adopt the new and revised IFRSs below:
IFRS 9 Financial Instruments4
IFRS 10 Consolidated Financial Statements2
IFRS 11 Joint Arrangements2
IFRS 12 Disclosure of Interests in Other Entities2
IFRS 13 Fair Value Measurement2
Amendments to IAS 1 Presentation of Items of Other Comprehensive Income1
Amendments to IFRS 7 Disclosure – Offsetting Financial Assets and Financial Liabilities2
Amendments to IFRS 9 and IFRS 7 Effective Date of IFRS 9 and Transition Disclosures4
Amendments to IFRS 10, 11 and 12 Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition
Guide2
F-23
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
IAS 19 (revised in 2011)
IAS 27 (revised in 2011)
IAS 28 (revised in 2011)
Amendments to IAS 32
Amendments to IFRSs
IFRIC 20
Employee Benefits2
Separate Financial Statements2
Investments in Associates and Joint Ventures2
Offsetting Financial Assets and Financial Liabilities3
2009-2011 Annual Improved Cycle
Stripping Costs in the Production Phase in a Surface Mine2
1 Effective for annual periods beginning on or after July 1, 2012.
2 Effective for annual periods beginning on or after January 1, 2013.
3 Effective for annual periods beginning on or after January 1, 2014.
4 Effective for annual periods beginning on or after January 1, 2015.
The new standards, amendments and interpretations that may affect the Company are as follows:
IFRS 11 supersedes IAS 31 Interest in Joint Ventures. IFRS 11 addresses how a joint arrangement with two or more parties holding joint control should
be classified. SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers will be removed with the issue of IFRS 11. According to
IFRS 11, joint arrangements are classified as joint operations or joint ventures, depending on the rights and obligations of the contractual parties. On the
other hand, according to IAS 31, there are three types of joint arrangements: jointly controlled entities, jointly controlled assets, and jointly controlled
operations. In addition, according to IFRS 11, joint ventures must be recognized by the equity method, while jointly controlled entities may be recorded
by the equity method or by the proportionate accounting method, according to IAS 31.
The adoption of IFRS 11 will result in changes in the accounting for investments held by the Company in Sesamm – Serviços de Saneamento de Mogi
Mirim S/A, Águas de Andradina S.A., Águas de Castilho, Saneaqua Mairinque S.A., Aquapolo Ambiental S.A. and Attend Ambiental S/A, jointly
controlled entities according to IAS 31, currently accounted for the proportionate consolidation method. According to IFRS 11, these jointly controlled
entities will be classified as joint ventures and recorded by the equity method, resulting in the recognition of the Company’s proportionate interest in net
assets, net income for the year, and other comprehensive income in a single account which will be reported in the consolidated statement of financial
position, as well as in the consolidated income statement or comprehensive income as “investment in joint venture” and “equity in earnings of joint
venture”, respectively. Therefore, the consolidated balances as of December 31, 2012 are shown below:
Assets
Total current assets
Investments
Intangible assets
Property, plant and equipment
Total noncurrent assets
Total assets
December 31, 2012
Original
IFRS 11 Effects
After applying
IFRS 11
3,336,865
(6,267)
3,330,598
-
21,991,922
383,383
23,338,928
26,675,793
20,826
(24,396)
(186,673)
(202,834)
(209,101)
20,826
21,967,526
196,710
23,136,094
26,466,692
F-24
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Liabilities and equity
Total current liabilities
Loans and financing
Total noncurrent liabilities
Total liabilities
Total equity
Total liabilities and equity
Net operating revenue
Gross profit
equity in earnings of joint venture of subsidiaries
Operating profit
Income before income tax and social contribution
Net income for the year
Basic and diluted earnings per share (in reais)
IAS 19 Employee Benefit
December 31, 2012
Original
IFRS 11 Effects
After application of
IFRS 11
3,797,370
(39,181)
3,758,189
7,701,929
11,162,846
(169,268)
(169,920)
7,532,661
11,992,926
14,960,216
(209,101)
14,751,115
11,715,577
26,675,793
-
(209,101)
11,715,577
26,466,692
2012
Original
IFRS 11 Effects
After applying IFRS
11
10,754,435
4,289,037
-
2,845,260
2,543,904
1,911,900
2.80
(16,804)
(1,357)
(6,532)
(1,916)
3,768
-
-
10,737,631
4,287,680
(6,532)
2,843,344
2,547,672
1,911,900
2.80
The amendments to IAS 19 change the accounting for both defined benefit plans and severance pay benefits. The most significant change refers to the
accounting for changes in defined benefit obligations and plan assets. These amendments require the recognition of changes in defined benefit
obligations and in the fair value of the plan assets as they occur, and, therefore, the elimination of the corridor approach allowed in the previous version
of IAS 19 and the early recognition of past cost of services. In addition, the amendments require all actuarial gains and losses to be immediately
recognized through other comprehensive income so that the net asset or liability of the pension plan is recognized in the consolidated statement of
financial position so that to reflect the full amount of the plan’s deficit or surplus. Additionally, interest expenses and the return expected on the plan
assets used in previous version of IAS 19 were replaced by a “net interest” amount, calculated based on the discount rate of the asset or liability of the net
defined benefit.
F-25
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The amendments to IAS 19 are effective for annual periods beginning on or after January 1, 2013 and require retrospective adoption. Based on
Management’s preliminary evaluation, the impact of the Company’s adoption of the amendments to IAS 19 in the year ending December 31, 2013, would
be a reduction of in the Company’s equity on January 1, 2013 in the amount of R$468,220 (R$34,370 increase in equity on January 1, 2012). The
retrospective adoption will also impact the results of 2011, which will increase in the amount of R$157,527.
This effect represents the full recognition of actuarial gains and losses through other comprehensive income.
Annual improvements to the 2009-2011 IFRS cycle (May 2012)
The annual improvements to the 2009-2011 IFRS cycle include several amendments to several IFRSs. The amendments to IFRSs are effective to annual
periods beginning on or after January 1, 2013 and include:
• amendments to IAS 16 – Property, Plant and Equipment; and
• amendments to IAS 32 – Financial Instruments: Presentation.
Amendments to IAS 16
The amendments to IAS 16 clarify that spare parts, stand-by equipment and service equipment are classified as property, plant and equipment when
they meet the definition of property, plant and equipment set out in IAS 16, or otherwise as inventory. The Company does not expect significant impacts
on its financial statements.
Amendments to IAS 32
The amendments to IAS 32 clarify that the income tax related to distributions to holders of equity instruments and equity transaction costs should be
accounted pursuant to IAS 12 - Income Taxes. The Company does not expect relevant impacts on its financial statements.
3 Financial Risk Management
3.1 Financial risk factors
The Company's activities are exposed to Brazilian economic environment, exposing it to market risk, such as exchange rate, interest rate, credit risk and
liquidity risk. The Company’s financial risk management is focused on the unpredictability of the financial markets and aims at minimizing adverse
impacts on its financial performance.
The Company has not utilized derivative instruments in any of the reporting periods.
F-26
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(a) Market risk
Foreign currency risk
SABESP’s foreign exchange exposure entails market risks associated with Brazilian real currency fluctuations against the US dollar and the yen.
SABESP’s foreign currency-denominated liabilities mainly include US dollar- and yen-denominated loans.
In case of Brazilian real depreciation in relation to foreign currency in which the debt is denominated, SABESP will incur in monetary loss in relation to
such debt.
SABESP’s specific foreign currency risks are related to exposures caused by its short and long-term debts denominated in foreign currency.
The management of SABESP’s foreign currency exposure considers several current and projected economic factors, besides market conditions.
This risk arises from the possibility of the Company incurring losses due to foreign exchange fluctuations that would affect the balances of market
foreign currency-denominated loans and financing and related financial expenses. The Company does not maintain hedge or swap contracts or any
financial instrument to hedge against this risk, but conducts an active management of debt, taking advantage of opportunities to replace expensive debt
for cheaper debt, reducing the cost through accelerated maturity.
A significant amount of the Company’s financial debt is indexed to the U.S. dollar and Yen, in the total amount of R$3,215.8 million on December 31,
2012 (R$3,053.4 million in December 2011). Below, the Company’s exposure to foreign currency risk:
Loans and financing – US$
Loans and financing – Yen
Interest and charges from loans and financing – US$
Interest and charges from loans and financing – Yen
TOTAL
December 31, 2012
December 31, 2011
Foreign currency
R$
Foreign currency
R$
1,136,274
37,535,650
1,113,236
39,456,912
2,321,976
890,346
12,487
6,374
3,231,183
2,088,208
959,198
13,025
6,646
3,067,077
The table above shows the foreign currency-denominated loans and financing, emphasizing that the balance is gross of loans costs of R$15,422 on
December 31, 2012 (R$13,656 in December 2011).
As of December 31, 2012, had the Brazilian real appreciated or depreciated by 10% against the US dollar and the Yen with all other variables
remaining constant, the effect on pre-tax profit for the year would have been R$323,118 (R$306,708 in December 2011) lower or higher, mainly as a
result of foreign exchange losses or gains on the translation of foreign currency-denominated loans.
Interest rate risk
This risk arises from the possibility that the Company could incur losses due to fluctuations in interest rates, increasing the financial expenses related to
loans and financing.
F-27
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The Company has not entered into any derivative contract to hedge against this risk; however continually monitors market interest rates, in order to
evaluate the possible need to replace its debt.
The table below provides the Company's loans and financing subject to variable interest rate:
UPR(i)
CDI(ii)
TJLP(iii)
IPCA(iv)
LIBOR(v)
Interest and charges
Total
December 31,
2012
December 31,
2011
2,192,684
1,799,830
845,913
697,385
1,243,058
114,421
2,520,936
1,815,000
881,861
180,759
1,123,662
110,999
6,893,291
6,633,217
(i) UPR (Unidade Padrão de Referência), a standard benchmark unit, which is equal to the TR, a managed prime rate.
(ii) CDI (Certificado de Depósito Interbancário), interbank deposit certificate rate
(iii) TJLP (Taxa de Juros a Longo Prazo), long-term interest rate
(iv) IPCA (Índice Nacional de Preços ao Consumidor Amplo), a consumer price index
(v) LIBOR - London Interbank Offered Rate
Another risk to which the Company is exposed is the mismatch between the inflation adjustment indices of its loans and financing with those of its
receivables. Water supply and sewage services tariffs do not necessarily follow the increases in the inflation adjustment and interest rates affecting the
Company's debt.
As of December 31, 2012, if interest rates on loans and financing denominated in Brazilian reais had been 1% higher or lower with all other variables
held constant, the effects on pre-tax profit for the year before taxes would have been R$68,932 (R$66,332 in December 2011) lower or higher, mainly as
a result of a lower or higher interest expense on floating rate loans and financing.
(b)Credit risk
Credit risk arises from cash and cash equivalents, deposits in banks and financial institutions, as well as credit exposures to wholesale and retail
customers, including outstanding accounts receivable, restricted cash, receivables from related parties and indemnities. The Company is required by law
to invest its funds exclusively with Banco do Brasil (rating AA+(bra)). Credit risk exposure is mitigated by sales to a dispersed customer base.
The maximum exposure to credit risk at the reporting date are the carrying amounts of instruments classified as cash equivalents, deposits in banks and
financial institutions, trade receivables, restricted cash, receivables from related parties and indemnities in the balance sheet. (See notes 5, 6, 7, 8 and 9).
F-28
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Regarding the financial assets held with financial institutions, the credit quality that is not past due or subject to provision for impairment can be
assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates. The credit quality of
counterparties which are banks, such as deposits and financial investments, the Company considers the lower rating of the counterparty published by
three mainly international rating agencies (Moody's, Fitch and S&P), according to internal policy of market risk management:
Cash at bank and short term bank deposit
AAA(bra)
AA+(bra)
Others (*)
December 31
2012
2011
1,916,794
507
3,877
1,921,178
43,062
2,104,869
2,058
2,149,989
(*) This category includes current accounts and investment funds in banks that have no credit rating information available.
The available credit rating information of the banks in which the Company made transactions during 2012 is as follow:
Banks
Banco do Brasil S.A.
Banco Santander Brasil S.A.
Caixa Econômica Federal
Banco Bradesco S.A.
Itaú Unibanco Holding S.A.
Fitch
Moody's
Standard Poor's
AAA (bra)
AAA (bra)
AAA (bra)
AAA (bra)
AAA (bra)
Aaa.br
Aaa.br
Aaa.br
Aaa.br
Aaa.br
brAAA
brAAA
-
brAAA
brAAA
For financial assets corresponding to trade receivables, the Company’s credit risk is minimized, given that the client base is diversified.
(c) Liquidity risk
The Company’s liquidity relies mainly on cash generated by operating activities, loans from state and Brazilian federal government financial institutions
and funding in the local and international markets. Management of the liquidity risk considers the assessment of liquidity requirements to ensure that
the Company has enough cash to meet its operating and capital expenditure needs, and debt repayment.
The funds held by the Company are invested in interest-bearing current accounts, time deposits, short-term deposits and securities, selecting
instruments with appropriate maturity or liquidity sufficient to provide margin as determined by projections mentioned above.
F-29
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The table below analyzes the financial assets and liabilities of the Company, into relevant maturities, including the installment of principal and interest
to be paid according to the agreement.
As of December 31, 2012
Liabilities
Loans and financing
Payables to suppliers and contractors
Services payable
Interest on shareholders’ equity
2013
2014
2015
2016
2017
2018
onwards
Total
1,798,489
1,262,826
1,702,103
1,141,226
821,117
6,158,718
12,884,479
297,198
389,091
414,355
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
297,198
389,091
414,355
Pension obligations
229,406
235,667
242,192
249,770
257,442
1,880,988
3,095,465
Public-private partnership (PPP)
Program contract commitments
Other liabilities
41,925
160,784
170,691
41,925
11,227
167,742
41,925
66,052
-
41,925
4,222
-
41,925
1,911
-
305,193
37,204
-
514,816
281,400
338,433
As of December 31, 2011
Liabilities
Loans and financing
Payables to suppliers and contractors
Services payable
Interest on shareholders’ equity
Pension obligations
Public-private partnership (PPP)
Program contract commitments
Other liabilities
Future interest
2012
2013
2014
2015
2016
2017 onwards
Total
2,115,837
1,689,526
1,157,590
946,577
904,410
5,162,889
11,976,829
255,557
383,116
247,486
207,900
40,283
71,088
188,451
-
-
-
212,705
41,925
78,281
195,276
-
-
-
-
-
-
-
-
-
-
-
-
255,557
383,116
247,486
218,855
225,186
232,853
1,837,626
2,935,125
41,925
1,150
-
41,925
62,974
-
41,925
1,144
-
405,118
16,589
-
613,101
231,226
383,727
Future interest was calculated based on the contractual clauses for all agreements. For agreements with floating interest rate, the interest rates used
correspond to December 31, 2012.
3.2 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.
The Company monitors capital based on the leverage ratio. This ratio corresponds to net debt divided by total capital. Net debt corresponds to total
loans and financing less cash and cash equivalents. Total capital is calculated as total equity as shown in the Parent Company’s balance sheet plus net
debt.
F-30
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Total loans and financing
Less: cash and cash equivalents
Net debt
Total equity
Total capital
Leverage ratio
December 31,
2012
December 31,
2011
9,069,320
(1,921,178)
7,148,142
11,715,577
8,596,295
(2,149,989)
6,446,306
10,545,896
18,863,719
16,992,202
38%
38%
As of December 31, 2012, the leverage ratio did not change from December 31, 2011.
3.3 Fair value estimates
It is assumed that the carrying amounts of trade receivables (current), less impairment and trade payables approximate their fair values in view of 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.
3.4 Financial instruments
The estimated fair values of financial instruments are as follows:
Financial assets
Cash and cash equivalents
Restricted cash
Trade receivables
Receivables from related parties
Other accounts receivable
Financial liabilities
Loans and financing
Payables to suppliers and contractors
December 31, 2012
December 31, 2011
Carrying
amount
Fair
value
Carrying amount
Fair
value
1,921,178
64,977
1,378,853
262,371
242,318
9,069,320
297,198
1,921,178
64,977
1,378,853
262,371
242,318
9,418,918
297,198
2,149,989
99,733
1,406,372
355,621
195,876
8,596,295
255,557
2,149,989
99,733
1,406,372
355,621
195,876
8,500,515
255,557
To obtain the fair value of loans and financing, the following criteria have been adopted:
(i) Agreements with Banco do Brasil and CEF (Federal Savings Bank) were projected until final maturity, at contractual rates (projected TR +
spread) and discounted at present value by TR x DI, both rates were obtained from BM&F.
F-31
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(ii) Debentures were projected up to the final mature date (IPCA, DI, TJLP or TR), and discounted to present value considering the future interest
rate published by ANBIMA in the secondary market, as of December 31, 2012 and the Company’s share traded in the Brazilian market.
(iii) BNDES loans are financial instruments valued at carrying amount plus contractual interest rate till mature date, and are indexed by long term
interest rate – TJLP.
These loans have specific features and the terms and conditions defined in the loan agreements with the BNDES at arm’s length, and reflect the
terms and conditions for those types of loan. In Brazil there is no consolidated market for long-term debts with the same characteristics of the
BNDES loans, as credit offering of to entities in general with this long-term characteristic is usually restricted to the BNDES.
(iv) Other financing in local currency is valued at its nominal amounts plus contractual interest incurred through maturity date, discounted to present
value at the future interest rate published on BM&F Bovespa’s website.
(v) Agreements with IADB, IBRD, were projected until final maturity in origin currency, applying interest rates contracted, discounted at present
value at Libor futures rate, obtained from Bloomberg. Eurobonds were priced at market value through quotes published by Bloomberg. All the
amounts obtained were translated into Brazilian reais at the exchange rate of December 31, 2012.
(vi) Agreements with the JICA, were projected until final maturity in origin currency, using interest rates contracted and discounted at present value,
at Tibor futures rate obtained from Bloomberg. The amounts obtained were translated into Brazilian reais at the exchange rate of December 31,
2012.
(vii) Leases are financial instruments valued at their nominal amount plus contractual interest incurred through maturity date, and are indexed to
fixed contractual interest rate, which is a specific rate and cannot be compared to any other rate available in the market. The Company considers
the fair value the same amount recognized in the financial statements for the years ended December 31, 2012 and 2011.
4 Critical accounting estimates and judgments
Estimates and judgments are continually evaluated and are based on historical experience and on other factors, including expectations of future events
that are believed to be reasonable under the circumstances.
The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related
actual results. The estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities
within the next financial year are addressed below:
(a)
Allowance for doubtful accounts
The Company records allowance for doubtful accounts in an amount that management considers sufficient to cover probable losses, based on an analysis
of trade receivables, in
F-32
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
accordance with the accounting policy stated in Note 2.6.
The methodology for determining the allowance for doubtful accounts receivable requires significant estimates, considering a number of factors
including historical receipt experience, current economic trends, estimates of forecast write-offs, the aging of the accounts receivable portfolio and other
factors. While the Company believes that the estimates used are reasonable, actual results could differ from those estimates.
(b)
Intangible assets arising from concession and program contracts
The Company recognizes as intangible the assets arising from concession agreements. The Company estimates 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 the Company's contracts for service concession arrangements entered with each grantor is
under service concession agreements in which the Company has the right to receive, at the end of the contract, a payment equivalent to the unamortized
asset balance of the concession intangible asset, which in this case, are 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.
Concession intangible assets under Concession agreements and Program contracts, in which, at the end of the contract, the Company has no right to
receive a payment equivalent to the unamortized asset balance of the concession intangible, are amortized on a straight-line basis over the useful life of
asset or contract period, whichever is shorter. Additional information on the accounting for intangible assets arising from concession agreements is
described in Note 2.10.
The recognition of fair value for the intangible assets arising on concession agreements is subject to assumptions and estimates, and the use of different
assumptions could affect the balances recorded. Different assumptions and estimates and changes in future circumstances, could affect the remaining
useful lives of the intangible assets and have a significant impact on the results of operations.
(c)
Provisions
The Company is party to a number of legal proceedings involving significant claims. These legal proceedings include, but are not limited to, tax, labor,
civil, environmental, disputes with customers and suppliers and other proceedings. The Company provides for lawsuits for which it is probable that an
outflow of resources will be necessary to settle the liability and the amount of such loss can be reasonably estimated. Judgments regarding future
events, the results of which may differ significantly from actual estimates and could exceed the amounts provisioned. Provisions are revised and
adjusted to take into consideration changes in circumstances involved. Additional information of these legal proceedings is disclosed in Note 16.
(d)
Pension benefits
The Company sponsors the defined benefit plan and the defined contribution plan, as described in Note 17.
The liability recognized in the balance sheet in relation to defined benefit pension plans is the present value of defined benefit obligation on the balance
sheet date, less the fair value of plan assets, and unrecognized actuarial gains and losses. The defined benefit obligation is calculated yearly by
Management, with the assistance of independent actuaries, applying the projected credit unit method. The present value of defined benefit obligation is
determined by discounting the estimated future cash outflows, using interest rates compatible with the market, which are denominated in currency in
which benefits will be paid and with maturity terms close to those of corresponding pension plan obligation.
F-33
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(e)
Deferred income tax and social contribution
The Company recognizes and settles 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. Pursuant to IAS 12, the Company recognizes deferred tax assets and liabilities based on the differences between
the accounting balances and the tax bases of 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, the projection of future taxable income and the estimated period to reverse temporary differences. These
calculations require the use of estimates and assumptions. The use of different estimates and assumptions could result in provision for impairment of all or
a significant amount of deferred tax assets.
5 Cash and Cash Equivalents
Cash and banks
Cash equivalents
December 31,
2012
December 31,
2011
119,846
1,801,332
1,921,178
118,867
2,031,122
2,149,989
Cash and cash equivalents include cash, bank deposits, other high-liquidity short-term investments, represented by Bank Certificates of Deposit (CDBs),
deposited in Banco do Brasil, whose original maturities 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 financial investments corresponds to 101.01% of CDI in December 2012 (100.19% in December 2011).
6 Restricted Cash
As of December 31, 2012, the restricted cash totaled R$64,977 (R$99,733 in December 2011), of which R$54,742 corresponded to proceeds from
services provided to the Municipal Government of São Paulo, net of taxes. These funds shall be reinvested in the water and sewage system of the city of
São Paulo.
7 Trade Receivables
(a) Balance sheet balances
F-34
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Private sector:
General and special customers (i) (ii)
Agreements (iii)
Government entities:
Municipal
Federal
Agreements (iii)
Wholesale customers – Municipal governments: (iv)
Guarulhos
Mauá
Mogi das Cruzes
Santo André
São Caetano do Sul
Diadema
Total wholesale customers – Municipal governments
Unbilled supply
Subtotal
Allowance for doubtful accounts
Total
Current
Noncurrent (v)
December 31, 2012
December 31, 2011
954,021
249,470
885,847
249,929
1,203,491
1,135,776
610,779
3,150
181,271
795,200
578,314
281,398
15,202
620,276
2,072
180,465
578,463
2,517
182,381
763,361
513,218
244,204
14,864
547,764
1,955
164,337
1,677,727
1,486,342
425,843
457,321
4,102,261
(2,723,408)
3,842,800
(2,436,428)
1,378,853
1,406,372
1,043,166
335,687
1,072,659
333,713
1,378,853
1,406,372
(i) General customers - residential and small and mid-sized companies
(ii) Special customers - large consumers, commercial, industries, condominiums and special billing consumers (industrial waste, wells, etc.).
(iii) Agreements - installment payments of past-due receivables, plus monetary restatement and interest.
(iv) Wholesale customers - municipal governments - This balance refers to the sale of treated water to municipalities, which are responsible for
distributing to, billing and charging final customers. Some of these municipalities are questioning in court the tariffs charged by SABESP, which
have full allowance for doubtful accounts. Additionally, the overdue amounts are substantially included in the allowance for doubtful account and
are classified in noncurrent assets.
F-35
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Balance at the beginning of the year
Services provided
Collection – current year services
Collection – previous years’ services
Balance at the end of the year
Current
Noncurrent
2012
2011
1,486,342
394,922
(165,967)
(37,570)
1,343,445
340,068
(167,024)
(30,147)
1,677,727
1,486,342
33,924
1,643,803
26,485
1,459,857
(v) The noncurrent portion consists of trade receivables that are past due and renegotiated with customers and amounts past due related to wholesale to
municipal governments, and the amounts are net of allowance for doubtful account.
(b) The aging of trade receivables is as follows:
Current
Past-due:
Up to 30 days
From 31 to 60 days
From 61 to 90 days
From 91 to 120 days
From 121 to 180 days
From 181 to 360 days
Over de 360 days
Total past-due
Total
(c) Allowance for doubtful accounts
Balance at the beginning of the year
Private sector/government entities
Recoveries
Wholesale customers
Additions for the year
Balance at the end of the year
Current
Noncurrent
December 31,
2012
December 31,
2011
1,096,055
1,129,981
197,936
97,426
61,527
50,729
89,297
139,788
2,369,503
184,958
79,720
50,020
39,686
70,037
137,039
2,151,359
3,006,206
2,712,819
4,102,261
3,842,800
2012
2011
2010
2,436,428
126,823
(49,183)
209,340
2,219,420
83,094
(35,415)
169,329
1,854,231
294,342
(94,021)
164,868
286,980
217,008
365,189
2,723,408
2,436,428
2,219,420
1,242,967
1,480,441
1,132,638
1,303,790
1,075,939
1,143,481
F-36
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reconciliation of allowance for losses to the income statement
2012
2011
2010
Losses (write-off)
Allowance for state entities (related parties)
Allowance for private sector/government entities
Reversal of wholesale supply
Recoveries
Balance
79,454
35,142
126,823
-
(49,183)
192,236
77,905
-
83,094
(5,324)
(35,415)
120,260
37,505
-
294,342
(5,321)
(94,021)
232,505
The Company does not have customers accounting for 10% or more of its revenues.
8 Related-party Balances and Transactions
The Company is a party to transactions with its controlling shareholder, the State Government, and companies related to it.
(a) Receivables, interest on shareholders’ equity payable, and revenue and expenses with the State Government of São Paulo
Receivables
Current:
Water and sewage services (i)
GESP Agreement (iii), (iv) and (v)
Allowance for losses (i)
Reimbursement for pension benefits paid -
Gesp Agreement (ii) and (vi)
Reimbursement for pension benefits paid -
Monthly flow (ii) and (vi)
Total current
Noncurrent:
Reimbursement for pension benefits paid -
GESP Agreement (ii) and (vi)
Total noncurrent
Total receivables from shareholder
Water and sewage services
Reimbursement of additional retirement and
pension benefits
Total
Interest on shareholders’ equity payable to related parties
F-37
December 31, 2012
December 31, 2011
113,027
-
(47,531)
35,278
8,499
116,441
41,360
(12,389)
31,887
8,034
109,273
185,333
153,098
153,098
262,371
65,496
196,875
262,371
228,214
170,288
170,288
355,621
145,412
210,209
355,621
153,368
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Gross revenue from sales and services
Water supply
Sewage services
Collection from related parties
Financial income
2012
2011
2010
228,890
202,094
(481,204)
161,552
216,933
188,059
(425,129)
271,847
204,595
178,935
(401,626)
137,613
Collection of GESP reimbursement referring to Law 4819/58
104,426
89,505
92,215
(i) Water and sewage services
The Company provides water supply and sewage collection 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 which can be made according to items (iii), (iv) and
(v).
An allowance for losses of amounts past due for more than 360 days has been set up due to the uncertainty involving these receipts (R$47,531 in 2012
and R$12,389 in 2011).
(ii) Reimbursement for pension benefits paid
Refers to amounts of supplementary retirement and pension benefits provided for in State Law 4819/58 ("Benefits") paid by the Company to former
employees and pensioners.
Under the Agreement referred on item (iii) with the São Paulo State Government ("GESP" or the "State"), GESP recognizes its liability from charges
arising from the Benefits, provided that the payment criteria set forth by the State Department of Personnel (DDPE), based on legal guidance of the
Legal Consultancy of the Department of Finance and of the State Attorney General's Office (PGE).
As discussed on item (vi), during the assessment of the debt due from GESP to the Company there were certain divergences in the calculation and
eligibility criteria of the benefits paid by the Company on behalf of GESP.
For the years ended December 31, 2012, 2011 and 2010, 2,459, 2,492 and 2,554 retired employees, respectively, received additional retirement benefits,
and for the years ended December 31, 2012, 2011 and 2010, the Company paid R$ 132,704, R$124,421 and R$118,408, respectively. There were 27 active
employees as of December 31, 2012 who will be entitled to these benefits as a result to their retirement as compared to 36 as of December 31, 2011 and
62 as of December 31, 2010.
F-38
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
In January 2004, the payments of supplement retirement and pension benefits were transferred to the Department of Finance and would be made in
accordance with the calculation criteria determined by the PGE. As a result of a court decision, the responsibility for making the payments returned to
SABESP, as originally established.
(iii) GESP Agreement
On December 11, 2001, the Company, the São Paulo State Government (through the State Department of Finance Affairs, currently Department of
Finance) and the Water and Electricity Department (DAEE), with the intermediation of the State Department of Sanitation and Energy (former
Department of Water Resources, Sanitation and Construction Works), entered into the Obligations, Payment Commitment and Other Covenants
Acknowledgement and Consolidation Agreement ("GESP Agreement") for the settlement of outstanding debts between GESP and the Company related
to the provision of water supply and sewage services, and the retirement benefits.
In view of the strategic importance of the Taiaçupeba, Jundiaí, Biritiba, Paraitinga and Ponte Nova reservoirs for ensuring and maintaining the Alto
Tietê water volume, the Company agreed to receive them as partial repayment of the reimbursement related to the Benefits. The DAEE would transfer
the reservoirs to the Company, replacing the amount owed by GESP. However, the São Paulo State Public Prosecution Office challenged the legal validity
of this agreement, and its main argument is the absence of a specific legislative authorization for disposal of DAEE's assets. The Company's
Management, with assistance of its legal advisors, assessed the risk of loss in this lawsuit as probable, in case the legislative authorization is not
obtained, which would hinder the transfer of the related reservoirs as a partial settlement of the balance receivable. For further information see item (vi)
below.
(iv) First Amendment to the GESP Agreement
On March 22, 2004, the Company and the São Paulo State Government amended the terms of the original GESP Agreement, (1) consolidating and
recognizing the amounts due by the São Paulo State Government for water supply and sewage collection services provided, adjusted for inflation
through February 2004; (2) formally authorizing the offset of amounts due by the São Paulo State Government with interest on shareholders’ equity
declared by the Company and any other debt owed to the São Paulo State Government as of December 31, 2003, adjusted for inflation through February
2004; and (3) defining the payment conditions of the remaining liabilities of the São Paulo State Government for the receipt of the water supply and
sewage services.
(v) Second Amendment to the GESP Agreement
On December 28, 2007, the Company and the São Paulo State Government, represented by the Department of Finance, signed the second amendment
to the terms of the original GESP Agreement, agreeing upon the payment in installments of the remaining balance of the First Amendment, amounting
to R$133,709 at November 30, 2007, to be paid in 60 monthly and consecutive installments of the same amount, beginning on January 2, 2008. The last
installment was paid in December 2012.
F-39
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The State and SABESP agreed on immediately resuming their compliance with their mutual obligations under new assumptions: (a) implementation of
an electronic bill management system to facilitate and speed up the monitoring of payment processes and budget management procedures; (b)
structuring of the Rational Water Use Program (PURA) to rationalize the consumption of water and the amount of the water and sewage bills under the
responsibility of the State; (c) establishment, by the State, of criteria for budgeting so as to avoid the reallocation of amounts to a specific water and
sewage accounts as from 2008; (d) possibility of registering state bodies and entities in a delinquency system or reference file; (e) possibility of
interrupting water supply to state bodies and entities in the case of nonpayment of water and sewage bills.
(vi) Third Amendment to the GESP Agreement
On November 17, 2008, GESP, SABESP and DAEE signed the third amendment to the GESP Agreement, through which GESP recognized a debt balance
payable to SABESP totaling R$915,251, adjusted for inflation up to September 2008 in accordance with the fluctuation of the IPCA-IBGE, corresponding
to the Undisputed Reimbursement, determined by FIPECAFI. SABESP accepted on a provisional basis the reservoirs (see item (iii) above) as part of the
payment of the Undisputed Reimbursement and offered to GESP a provisional settlement, recognizing a credit totaling R$696,283, corresponding to the
value of the reservoirs in the Alto Tietê system. The Company did not recognize the reimbursement receivable of R$696,283 related to the reservoirs, as
it is not virtually certain that will be transferred by the State. The final settlement will only be effected with the actual transfer of the property with the
proper Registry of Deeds Office. The remaining balance totaling R$218,967 is being paid in 114 monthly, consecutive installments, totaling R$1,920
each, including the annual IPCA/FIPE fluctuation, plus interest of 0.5% p.m., the first of which fell due on November 25, 2008.
In addition, the third amendment provides for the regularization of the monthly flow of benefits. While SABESP is liable for the flow of monthly
payment of benefits, the State shall reimburse SABESP based on the criteria identical to those applied when determining the Undisputed
Reimbursement. Should there be no preventive court decision, the State will assume the flow of monthly payment of benefits portion deemed as
undisputed.
(vii) Controversial Amount of Benefits
As mentioned before, on November 17, 2008 the Company and the 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.
By entering into the third amendment, the State's Legal Representative (PGE) agreed to reassess the differences that gave rise to the disposed
reimbursement 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, new opinions issued by the PGE and received on September 4 and 22, 2009 and January 4, 2010, refute the reimbursement of amount
previously defined as controversial amount.
F-40
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Even though the negotiations with the State are still in progress, it is not possible to assure that the Company will recover amicably (without dispute) the
receivables related to the Disputed Reimbursement.
As part of the actions intended to recover the receivables that management considers due by the State, related to discrepancies in the reimbursement of
the pension benefits paid by the Company, the Company: (i) on March 24, 2010, reported to the controlling shareholder the official letter approved by
the executive committee, proposing that the matter be discussed at the São Paulo Stock Exchange (BM&FBovespa) Arbitration Chamber; (ii) in June
2010, presented to Department of Finance a proposal to solve the outstanding items, such proposal was not accepted; (iii) on November 9, 2010, filed a
judicial action against the State of São Paulo pleading the entire reimbursement related to employee benefits set out in Law 4,819/58 to finalize the
discussion between the Company and GESP. Despite the legal action the Company will persist to obtain an agreement with GESP since the management
believes that it is the better to the Company and to its shareholders than wait until the end of the judicial action.
The Company's management decided to not recognize the reimbursements which were not considered virtually certain that will be reimbursed by the
State. As of December 31, 2012 and 2011, the amounts not recorded by the Company, related to the pension benefits paid on behalf of the State by the
Company, totaled R$1,351,210 and R$1,290,663, respectively, including the amount of R$696,283 related to the transfer of the reservoirs in the Alto
Tietê system. As a result, the Company also recognized the obligation related to the pension benefit obligations maintained with the beneficiaries and
pensioners of Plan G0. As of December 31, 2012 and 2011, the pension benefit obligations of Plan G0 totaled R$1,547,161 and R$1,512,078, respectively.
For detailed information on the pension benefit obligations refer to Note 17.
(b) Agreements for the use of reservoirs
In its operations, the Company uses the Guarapiranga and Billings reservoirs, which are also used by another entity controlled by the São Paulo State
Government, according to grants from the relevant competent body and in compliance with the prevailing legislation.
EMAE has requested the payment of the receivable and to financial compensation for the use of water from these reservoirs, and the reimbursement of
damages related to the nonpayment in due time.
The Company understands that no amounts are due for the use of these reservoirs but it is responsible for their maintenance and operating costs.
Should these reservoirs not be available for use to the Company, there could be the need to collect water in more distant places and there would be the
risk of making services in the region unfeasible and increasing sourcing cost.
Three lawsuits were filed, two of them requesting injunctions to toll the statute of limitations and another to seek a decision by arbitration, as prescribed
by an arbitration clause in the agreement entered into between the São Paulo State Government and former Light, in 1958.
The plaintiff understands that diverging opinions with SABESP should be resolved in an Arbitration Court, an opinion disputed by SABESP, which in
turn claims it is not bound to an agreement in which its predecessor only participated as intervening party.
F-41
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
In February 2012, the decision to submit to arbitration was established by the judge during the first hearing, which is subject to appeal.
Notwithstanding, if an arbitration proceeding is filed, we will take all available judicial actions to defend our position. The Company’s management
assessed this risk as possible loss and considers that it is not possible to estimate the total amount involved in this process since the extent was not
determined.
(c) Agreements with reduced tariffs with State and Municipal Government Entities that joined the Water Rational Use Program (PURA)
The Company has signed agreements with government entities related to the State Government and municipalities where it operates that benefit from 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 the consumption of water.
(d) Guarantees
The State Government provides guarantees for some loans and financing of the Company and does not charge any fee with respect to such guarantees.
(e) Personnel assignment agreement among entities related to the State Government
The Company has personnel assignment agreements with entities related to the State Government, under which the expenses are fully passed on and
monetarily reimbursed. In 2012, the expenses related to personnel assigned by SABESP to other state government entities amounted to R$12,298
(R$10,888 in December 2011 and R$ 5,640 in December 2010).
No expenses related to personnel assigned by other entities to SABESP were recorded at December 31, 2012 and 2011. In 2010, the expenses related to
personnel assigned by other entities to SABESP totaled R$264.
(f) Services obtained from state government entities
As of December 31, 2012 and 2011, SABESP had an outstanding amount payable of R$958 and R$12,062, respectively, for services rendered by São
Paulo State Government entities.
(g) Non-operating assets
As of December 31, 2012, the Company had an amount of R$969 related to free land lent to DAEE (Water and Electricity Department) (R$2,289 in
December 2011 and 2010).
(h) SABESPREV
The Company sponsors a private defined benefit pension plan, which is operated and administered by Fundação Sabesp de Seguridade Social -
SABESPREV. The net actuarial liability recognized as of December 31, 2012 amounted to R$577,169 (R$538,619 in December 31, 2011) according to
Note 17 (b).
(i) Compensation of key management personnel
Compensation:
F-42
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
SABESP's compensation policy for the Management and officers is set out according to guidelines of the State Government of São Paulo, the CODEC
(State Capital Protection Board), and compensation is based on performance, market competitiveness, or other indicators related to the Company's
business and subject to the shareholders’ approval at an Annual Shareholders' Meeting.
Officers' compensation is limited to the compensation of the State Governor, and the Board of Directors' compensation is equivalent to 30 percent of the
executive committee' overall compensation, contingent on attendance of at least one monthly meeting.
The objective of the compensation policy is to set a private sector management paradigm to retain its staff and recruit competent, experienced and
motivated professionals, considering the level of management efficiency currently required by the Company.
In addition to monthly fee, the members of the Board of Directors and the Executive Committee receive:
Bonuses:
For the purposes of compensating directors and officers of the companies where the State is the controlling shareholder, as an incentive policy,
providing the company records quarterly, half-yearly, and yearly profits, and distributes mandatory dividends to shareholders, even if in the form of
interest on shareholders’ equity. Annual bonuses cannot exceed the lower of six times the monthly compensation of the officers/directors nor 10 percent
of the interest on shareholders’ equity paid by the company.
Annual reward:
Equivalent to one monthly fee, calculated on a prorated basis in December of each year.
The purpose of this reward is to correspond to the thirteenth salary paid to Company employees, as officers and directors' relationship with the
Company is governed by its bylaws and not the labor code.
Benefits paid only to statutory officers - meal ticket, basket of food staples, medical care, weekly paid rest typified as a paid leave of 30 calendar days,
and payment of a premium equivalent to one third of the monthly fee.
Expenses related to the compensation to the members of its board of directors and officers amounted to R$3,211, R$2,614 and R$ 2,601 for the years
ended December 31, 2012, 2011 and 2010, respectively, and they refer to short-term benefits. An additional amount of R$1,074, related to the bonus
program, was recorded in 2012 (R$1,069 in December 2011 and R$ 845 in December 31, 2010).
(j) Loan agreement through credit facility
The Company holds interests in some companies, not holding the majority interest but with power of veto in some issues. Therefore, these companies
are considered for accounting purposes as jointly controlled entities, and are proportionately consolidated.
F-43
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The Company entered into a loan agreement through credit facility with the Águas de Andradina S.A., Águas de Castilho S.A., and Aquapolo Ambiental
S.A. to finance the operations of these companies, until the loans and financing required to banks are cleared.
The contracts signed on January 19, 2012 with Águas de Andradina and Águas de Castilho were settled in July 2012, according to the agreement’s
provisions. On July 18, 2012, new agreements were signed with both companies, pursuant to the terms and conditions in the table below. The agreement
signed with Aquapolo Ambiental on March 30, 2012 remains with the same features, according to the table below:
Companies
Credit limit
Principal
disbursed
Interest
balance
Águas de Andradina
Águas de Castilho
Aquapolo Ambiental
Aquapolo Ambiental
Total
3,467
675
5,629
19,000
28,771
1,427
403
5,629
19,000
26,459
21
6
519
1,076
1,622
Interest rate
SELIC + 3.5% p.a.
SELIC + 3.5% p.a.
CDI + 1.2% p.a.
CDI + 1.2% p.a.
Maturity
07/17/2013
07/17/2013
04/30/2016
04/30/2015
The amount disbursed is recognized in assets, in “Other receivables” and amounts to R$1,830 for principal and R$27 for interest recognized in current
assets and R$24,629 for principal and R$1,595 for interest in noncurrent assets. As of December 31, 2012, the balance of principal and interest of these
contracts is R$28,081. In 2012, financial income was impacted by R$1,672, referring to these loans; of which R$1,622 refers to outstanding agreements
and R$50 refers to agreements settled in July 2012.
9 Indemnities Receivable
(i) Diadema
Indemnities receivable are noncurrent assets that represents amounts receivable from the municipality of Diadema as an indemnity for its unilateral
termination of the concession for water supply and sewage services of the Company in 1995. As of December 31, 2011, this balance totaled R$60,295.
The Company invested in the construction of water and sewage systems in the municipalities of Diadema and Mauá in order to meet the concession
service commitments. For the unilateral termination of the Diadema and Mauá concessions, the municipalities assumed the responsibility of supplying
water and sewage services in those regions. At that time, the Company reclassified the balances of property, plant and equipment related to the assets
used in those municipalities to noncurrent assets (indemnities receivable).
The residual value of property, plant, and equipment items relating to the municipality of Diadema, reclassified in December 1996 was R$75,231, and
the indemnities receivable from the municipality amounted to R$60,295 at December 31, 2011. In December 2012, an allowance account of R$60,295
was recorded, corresponding to the total receivable held by the Company.
SABESP filed lawsuits to collect the amounts due by the municipalities. It proposed the enforcement of the settlement entered into with the municipality
of Diadema and Companhia de Saneamento de Diadema – Saned related to the payment of indemnity, and a motion to stay the execution was filed by
the municipality of Diadema. In July 2008, the judge approved the seizure of cash from Saned's bank accounts and short-term investments (online
seizure) of up to 10% of the adjusted debt, and the amount of R$2,919 were seized and withdrawn on March 3, 2009. Subsequently, the Court of Justice
issued an injunction determining the seizure through weekly deposits by Saned in the amount corresponding to 20% of everything received in its bank
accounts and short-term investments. Saned filed appeals against this decision, and currently an interlocutory appeal filed at the Federal Supreme Court
is pending judgment.
F-44
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
A court decision was issued in October 2009 on the motion to stay execution filed by the municipality of Diadema that recognizes the existence and
collectability of the debt and affirming that the execution against the Municipality should be made through certificate of judgment debt of the
government. SABESP and the municipal government appealed against this decision. SABESP obtained favorable decision in September, 2011 from the
Special Department of the Court of Justice, affirming to be constitutional the municipal law that allowed blocking the transfers of ICMS made by the
State Government to the municipality (instead of payment only through a court-ordered debt bond). In July 2012, Sabesp’s appeal was partially upheld
and the judge sentenced the continuance of execution by blocking the transfers of ICMS made by the State of São Paulo to the municipality of Diadema.
On December 29, 2008, Saned and the Municipality of Diadema entered into a Letter of Intent with the São Paulo State and SABESP for the purpose of
preparing studies and conducting negotiations to guide Diadema's and SABESP's decisions, aiming to establish SABESP as the exclusive provider of
water supply and sewage services for the City of Diadema, by means of an amicable settlement for the conflicts currently existing between the
companies.
In January 2009, the parties filed a joint petition requesting the suspension of new seizures, for a three-month period, trying to enable an agreement.
The suspension was confirmed by the Tax Court. As the settlement on which a possible agreement will be based was maintained, the suspension request
was last renewed in March 2012.
In December 2012, SABESP resumed the execution through the freeze (pledge) of ICMS transfers to the Municipality of Diadema. After the issue of a
court order to freeze the transfers, a supersedeas effect was granted to the extraordinary appeal filed by the Municipality of Diadema against the court’s
decision that authorized the continuation of the execution by means of the transfer pledge.
Currently, the freeze of transfers is suspended and awaiting the judgment on the appeal filed by the Municipality of Diadema against the decision that
sentenced the issue of the court order, as well as the analysis of request for reconsideration submitted by SABESP in view of decision that granted the
supersedeas effect to the extraordinary.
In addition, SABESP carries on the negotiations to enter into a new agreement with the current administration of the Municipality of Diadema.
On the other hand, a public civil action filed by the Public Prosecution Office of the State of São Paulo against the agreement based on the execution filed
against the municipality of Diadema and Saned is pending judgment and since 2004 has been waiting for engineering and accounting expert
examination. After negotiations initiated with the municipality of Diadema, the Public Prosecution Office pleaded the dismissal of the public civil action,
which was rejected and was object of an appeal by SABESP.
F-45
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(ii) Mauá
As regards Mauá, a lower court decision was rendered determining that the Municipality pays the amount of R$153.2 million as compensation for the
investments made in the municipality by SABESP and for loss of profits. This award was confirmed by the Federal Supreme Court, in a final and
unappealable decision, and SABESP has already resumed the execution in October 2012. The summons on the local government of Mauá and SAMA is
currently pending.
The residual value of fixed assets related to the municipality of Mauá, reclassified in December 1999 was R$103,763, and indemnities receivable from
the municipality were R$85,918 at December 31, 2010. Court decisions have been favorable to the Company and the receipt of amounts due by
municipality shall occur as certificate of judgment debt of the government, which will be recognized upon effective receipt, in view of uncertainties
related to the settlement of amounts involved and the track record related to prioritizing payments of certificate of judgment debt of the government in
the municipality of Mauá.
In December 2012 and 2011, the indemnity referring to the municipality of Mauá was fully accrued.
Management believes that the Company has legal rights to receive the indemnities and is monitoring the judicial lawsuits.
10 Intangible Assets
(a) Balance sheet balances (*)
Intangibles arising from:
Service Concession agreements (i)
Concession contracts (ii)
Program contracts (iii)
December 31, 2012
Accumulated
December 31, 2011
Accumulated
Cost
amortization
Net
Cost
amortization
Net
8,432,421
(1,511,981)
6,920,440
8,378,432
(1,630,664)
6,747,768
1,402,854
(292,918)
1,109,936
1,252,422
(247,434)
1,004,988
5,288,541
(1,469,369)
3,819,172
3,914,369
(1,169,810)
2,744,559
Program contracts – commitments (iv)
627,989
(56,898)
571,091
473,327
(38,341)
434,986
Service contract – São Paulo (v)
10,604,942
(1,036,455)
9,568,487
9,781,799
(591,226)
9,190,573
New businesses (vi)
Software licenses
Total
(b) Changes
Intangibles arising from:
Service Concession agreements (i)
Concession contracts – economic value (ii)
Program contracts (iii)
Program contracts – commitments (iv)
Service contract – São Paulo (v)
New businesses (vi)
Software licenses
Total
-
-
55,784
(52,988)
-
2,796
21,400
52,755
(4,923)
(50,429)
16,477
2,326
26,412,531
(4,420,609)
21,991,922
23,874,504
(3,732,827)
20,141,677
December 31, 2011
Additions
Contract renewal
Transfer
Write-offs and
disposals
Amortization
December 31, 2012
6,747,768
1,004,988
2,744,559
434,986
9,190,573
16,477
2,326
20,141,677
984,630
150,963
483,448
154,662
882,868
-
3,029
2,659,600
F-46
(652,973)
(21,602)
(916)
(136,467)
6,920,440
-
652,973
-
-
-
-
-
-
-
-
(49,486)
(16,477)
-
(87,565)
(14)
(3,095)
-
(5,977)
-
-
(10,002)
(46,001)
(58,713)
(18,557)
(449,491)
-
(2,559)
(711,788)
1,109,936
3,819,172
571,091
9,568,487
-
2,796
21,991,922
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
December 31, 2010
Additions
Contract renewal
Transfer
Write-offs and
disposals
Amortization
December 31, 2011
Intangibles arising from:
Service Concession agreements (i)
Concession contracts (ii)
Program contracts (iii)
Program contracts – commitments (iv)
Service contract – São Paulo (v)
New businesses (vi)
Software licenses
6,334,087
982,973
2,134,377
311,276
8,764,958
11,228
7,937
1,125,334
2,166
225,510
139,385
930,961
9,271
3,297
Total
18,546,836
2,435,924
(403,786)
-
403,786
-
-
-
-
-
(63,487)
57,718
(31)
-
(36,234)
-
-
(42,034)
(16,228)
(2,780)
(3,810)
-
(32,383)
-
-
(55,201)
(228,152)
(35,089)
(15,273)
(15,675)
(436,729)
(4,022)
(8,908)
6,747,768
1,004,988
2,744,559
434,986
9,190,573
16,477
2,326
(743,848)
20,141,677
December 31, 2009
Additions
Contracts
renewal
Write-off and disposals
Amortization December 31, 2010
Intangibles arising from:
Service Concession agreements (i)
Concession contracts (ii)
Program contracts (iii)
Program contracts – commitments (iv)
Service contract – São Paulo (v)
New businesses (vi)
Software licenses
Total
14,714,274
961,384
(8,959,148)
(15,857)
(366,566)
810,267
1,124,508
258,803
-
-
9,565
196,695
724,226
62,748
-
300,173
-
205,820
8,658,975
12,129
6,779
-
-
-
-
-
-
-
-
-
(23,989)
(14,530)
(10,275)
(99,837)
(901)
(8,407)
6,334,087
982,973
2,134,377
311,276
8,764,958
11,228
7,937
16,917,417
2,169,781
(15,857)
(524,505)
18,546,836
(*) The Company reclassified amounts among items within intangible assets note, changing neither the opening or closing balances nor the changes in
line items, since this reclassification does not require changing the amortization rates, which did not represented any adjustment to the balance sheet,
the income statement, the statement of cash flow, or equity.
This reclassification, to provide more accurate information, refers to items preceding the signatures of program contracts and service agreements that in
the financial statements for the year ended December 31, 2011 were classified under “Concession contracts”. Previously existing items were classified as
concession contracts prior to the signature of program contracts and service agreements.
F-47
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The amortization term of previously existing items transferred from “Service Concession agreements” to “Concession contracts”, “Program Contracts”
and “Services contract – São Paulo” are amortized over their useful lives, i.e. have the same amortization criteria, regardless of the group they are
classified.
The net effects of these reclassifications are the following: as of December 31, 2011, (R$4,341,877) were reclassified from Service Concession agreements
to program contract R$1,673,779 and to services contract R$2,668,098. As of December 31, 2010, (R$3,938,089) were reclassified from Service
Concession agreements to program contract R$1,269,993 and to services agreements R$2,668,096. As of December 31, 2009, R$351,719 were
reclassified from Service Concession agreements to program contracts. The total balances of intangible assets as of December 31, 2011 and 2010 did not
change.
(c) Construction services
Construction revenue
Construction costs
Construction revenue
Construction costs
Construction revenue
Construction costs
Water
supply
1,054,851
1,036,456
2012
Sewage services
1,419,761
1,387,341
Water
supply
1,066,524
1,044,122
2011
Sewage services
1,168,254
1,142,198
Water
supply
1,051,419
1,028,115
2010
Sewage services
1,079,265
1,052,966
Total
2,474,612
2,423,797
Total
2,234,778
2,186,320
Total
2,130,684
2,081,081
(d) Intangibles arising from concession contracts
The Company operates concession contracts covering the provision of basic and environmental sanitation services, water supply and sewage services. These
concession contracts set out rights and obligations related to the infrastructure and to the public service (See Note 2.10 (a)). A general obligation also exists to
return the concession infrastructure to the concession grantor in good working condition at the end of the concession.
As of December 31, 2012 and 2011, the Company operates in 363 municipalities in the State of São Paulo. In most of these contracts operations are based on
30-year concession period.
The services provided by the Company are billed at a price regulated and controlled by the São Paulo State Sanitation and Energy Regulatory Agency
(ARSESP).
Intangible assets arising on concession contracts include:
F-48
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(i) Service Concession contracts
The concession agreements state that the assets will be handed over to the concession grantor at the end of the agreement, through compensation for the
residual value or fair value of the underlying tangible assets as set forth in each agreement, and amortization is calculated on a straight-line basis, taking
into consideration the useful lives of the tangible assets.
(ii) Concession contracts
From 1999 through 2006, the negotiations for new concessions were conducted based on the economic and financial results of the transaction,
determined in a valuation report issued by independent appraisers.
The amount determined in the related agreement, after the transaction is closed with the municipality, realized through the subscription of Company
shares or in cash, is recorded in this line item and amortized over the related concession period (usually 30 years). As of December 31, 2012 and 2011
there were no outstanding amounts related to these payments to the municipalities.
Intangible assets are amortized on a straight-line basis over the shorter of the concession period or the useful lives of the underlying assets.
(iii) Program contracts
These refer to the renewal of contracts previously referred to as concession contracts whose purpose is to provide sanitation services. The amortization
of the assets acquired until the program contracts’ execution dates is calculated on a straight-line basis, taking into consideration the useful lives of the
assets. Assets acquired or built after the program contracts’ execution dates are amortized over the shorter of the contract period (30 years) or the useful
lives of underlying assets.
(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 undertakes the commitment to financially participate in social and environmental actions. The assets built and
financial commitments assumed within the program contracts are recorded as intangible assets and are amortized on a straight-line basis over the
duration of the program contract (mostly, 30 years).
In 2012, amortization expenses related to the commitments of the program contract were R$18,557 (R$15,675 in 2011 and R$10,275 in 2010).
The amounts not yet disbursed related to commitments under the program contracts are recorded in “Program Contracts – Commitments” in current
liabilities (in the amount of R$148,220 and R$62,287 at December 31, 2012 and 2011, respectively) and noncurrent liabilities (in the amount of
R$87,407 and R$130,978 at December 31, 2012 and 2011, respectively).
(v) Services contract - São Paulo
On June 23, 2010, the Company entered into an agreement with the State of São Paulo and the Municipality of São Paulo to regulate the provision of
water and sewage services in the city of São Paulo for a 30-year period, which is extendable for another 30-year period.
F-49
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Also on June 23, 2010, an agreement was signed between the state and municipal government, and SABESP and the São Paulo State Sanitation and
Energy Regulatory Agency (“ARSESP”) are the consenting and intervening parties, whose main aspects are the following:
1. The State and the Municipality of São Paulo grant Sabesp the right to explore the sanitation service in the capital of the State of São Paulo, which
consists of the obligation to such provide service and charge the respective tariff for this service;
2. The State and the Municipality designate ARSESP as the agency responsible for regulating the tariff, controlling and monitoring the services;
3. The evaluation model of the contract is the discounted cash flows, which considered the financial and economic sustainability of the operation;
4. All operating costs, taxes, investments and the opportunity cost of the investees and the creditors of Sabesp 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 7.5% of the gross revenue from the municipality of São Paulo, net
of the taxes on revenue;
7. The opportunity cost of the investees 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.
The agreement represents approximately 55% of the total revenue of the Company, ensures the judicial and assets security, adequate return to
shareholders and quality services to its customers.
The municipality of São Paulo and the Company did not conclude an agreement to equalize financial pending issues existing until the signature date of
the Agreement related to the rendering of water supply and sewage collection services to the real properties of the municipality, reason that, the
Company filed a suit to collect these accounts, which are accrued for losses.
F-50
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(e) Disposals of underlying concession intangible assets
In 2012, the Company wrote off underlying intangible assets totaling R$10,002 (R$55,201 in December 2011 and R$15,857 in December 2010), due to
obsolescence, theft, disposals and discontinued works, unproductive wells, and economically unfeasible projects, as well as those resulting from the
completion of the inventory taking.
(f) Capitalization of interest and other financial charges
In 2012, the Company capitalized interest and inflation adjustment, including related foreign exchange differences, in concession intangible assets
totaling R$283,016 at an average rate of 5.92% (R$261,886 in December 2011, at an average rate of 5.32% and R$228,899 in December 2010, at an
average rate of 5.76%), during the construction period.
(g) Construction margin
The Company acts as a primary responsible to build and install the infrastructure related to the concession, using own efforts or by outsourcing services,
and is significantly exposed to the related risks and rewards.
The Company, therefore, recognizes revenue from construction service corresponding to the cost of construction plus a fee earned. In general,
concession-related construction works are performed by third parties. In this case the margin is lower and covers the construction management and the
assumption of the primary risk. In 2012, and 2010 the margin was 2.3%.
The consolidated amount of the construction margin for 2012, 2011 and 2010 was R$50,815, R$48,458 and R$49,603, respectively.
(h) Expropriations
As a result of the construction of priority projects related to water and sewage systems, the Company was required to expropriate or establish rights of
way in third-parties' properties, and the owners of these properties will be compensated either amicably or through courts.
The assets received as a result of expropriations are recorded as concession intangible assets after the transaction is completed. In 2012, the total
amount related to expropriations was R$34,731 (R$12,167 in 2011 and R$10,779 in 2010).
(i) Assets pledged as guarantee
As of December 31, 2012 and 2011, the Company had underlying physical assets totaling R$249,034 offered as guarantee to the request for the PAES
(tax debt refinancing program) (Note 14).
(j) Public-Private Partnership (PPP)
The Company and CAB-Sistema Produtor Alto Tietê S.A., special purpose entity, formed by Galvão Engenharia S.A. and Companhia Águas do Brasil –
Cab Ambiental, signed in June 2008 the contract of public-private-partnership of Alto Tietê production system.
The contract last 15 years which purpose is to expand the capacity of treated water of Taiaçupeba from 10 thousand to 15 thousand of liters per second,
whose operation began in October 2011.
F-51
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
As of December 31, 2012 and 2011 the amount recognized as intangible asset related to PPP was R$426,791 and R$474,818, respectively.
(k) Works in progress
The amount of R$5.1 billion is recorded as intangible assets from works in progress at December 31, 2012 (R$5.7 billion at December 31, 2011).
(l) Amortization of intangible assets
The average amortization rate was 4.0% in 2012, 4.3% in 2011 and 3.2% in 2010.
11 Investment property
As of December 31, 2012, the balances of “Investment property”, land, totaled R$54,046 (R$52,585 in December 2011). As of December 31, 2012, the
fair value of these properties totaled R$295,538 (R$284,670 in December 2011).
12 Property, Plant and Equipment
(a) Balance sheet balances
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Works in progress
(b) Changes
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Works in progress
December 31, 2012
Accumulated
December 31, 2011
Accumulated
Cost
depreciation
Net
Cost
depreciation
Net
88,328
233,048
211,393
17,119
16,567
1,448
2,540
-
(33,792)
(131,480)
(10,455)
(10,270)
(1,063)
-
88,328
199,256
79,913
6,664
6,297
385
2,540
570,443
(187,060)
383,383
109,303
39,574
160,915
21,071
27,810
2,758
174,668
536,099
-
(30,142)
(100,626)
(19,549)
(27,601)
(1,713)
-
(179,631)
109,303
9,432
60,289
1,522
209
1,045
174,668
356,468
December 31,
2011
Additions
Transfer
disposals
Depreciation
Write-offs and
December 31,
2012
109,303
9,432
60,289
1,522
209
1,045
174,668
-
2,743
22,316
4,605
983
-
-
(20,349)
190,896
16,825
1,427
5,429
(498)
(172,128)
(626)
(873)
(510)
(7)
(41)
-
-
-
(2,942)
(19,007)
(883)
(283)
(162)
-
88,328
199,256
79,913
6,664
6,297
385
2,540
356,468
30,647
21,602
(2,057)
(23,277)
383,383
F-52
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Works in progress
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Works in progress
(c) Depreciation
December 31,
2010
Additions
Transfer
disposals
Depreciation
Write-offs and
December 31,
2011
119,567
12,031
71,466
1,661
453
1,206
43,222
-
-
9,940
1,050
1,081
174
131,446
(10,264)
(287)
-
-
-
-
-
-
(3)
(1,333)
(4)
(7)
-
-
-
(2,309)
(19,784)
(1,185)
(1,318)
(335)
-
109,303
9,432
60,289
1,522
209
1,045
174,668
249,606
143,691
(10,551)
(1,347)
(24,931)
356,468
December
31, 2009
Write-off and
Additions
Disposals
Depreciation
December
31, 2010
119,885
15,555
45,550
1,504
6,354
1,582
-
190,430
-
-
41,251
1,831
1,079
-
43,222
87,383
(318)
(210)
-
-
-
-
-
-
(3,314)
(15,335)
(1,674)
(6,980)
(376)
-
119,567
12,031
71,466
1,661
453
1,206
43,222
(528)
(27,679)
249,606
The Company reviews the depreciation rates annually: buildings - 2%; equipment - 5%; transportation equipment - 10%, and furniture and fixtures -
6.7%. Land is not depreciated.
The average depreciation rate was 9.8% in 2012, 9.9% in 2011 and 10.1% in 2010.
(d) Capitalization of interest and other financial charges
In 2012, the amount of capitalized interest proportional to the Company’s interests held in jointly controlled entities totaled R$13,655.
F-53
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
13 Loans and Financing
Financial institution
LOCAL CURRENCY
Banco do Brasil
10th issue debentures
11th issue debentures
12th issue debentures
13th issue debentures
14th issue debentures
15th issue debentures
16th issue debentures
1st issue debentures – Aquapolo
Brazilian Federal Savings Bank
Brazilian Development Bank – BNDES
Brazilian Development Bank - BNDES BAIXADA SANTISTA
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
Loans
Other
Interest and finance charges
TOTAL IN LOCAL CURRENCY
FOREIGN CURRENCY
Inter-American Development Bank - BID US$417,295 thousand
( US$386,862 thousand in December 2011)
International Bank for Reconstruction and Development -IBRD –
US$26,864 thousand (US$10,316 thousand in December 2011)
Eurobonds - US$140,000 thousand (US$140,000 thousand in December
2011)
Eurobonds - US$350,000 thousand (US$350,000 thousand in December
2011)
JICA 15– ¥ 19,591,310 thousand (¥ 20,743,740 thousand in December
2011)
JICA 18 – ¥ 17,614,720 thousand (¥ 18,650,880 thousand in December
2011)
JICA 17-¥ 324,213 thousand (¥ 62,292 thousand in December 2011)
JICA 19-¥ 5,407 thousand
BID 1983AB - US$202,115 thousand (US$226,058 thousand in December
2011)
Interest and finance charges
TOTAL IN FOREIGN CURRENCY
December 31, 2012
December 31, 2011
Current
Noncurrent
Total
Current
Noncurrent
Total
380,631
36,459
472,500
-
-
-
-
-
847
117,217
4,154
16,309
8,447
-
-
19,230
-
5,416
108,514
100,306
252,166
535,949
499,511
-
284,649
791,451
499,457
157,020
931,004
-
97,855
80,244
6,500
13,000
216,026
215,774
2,923
-
480,937
288,625
1,008,449
499,511
348,695
2,008
202,500
479,548
283,293
828,243
285,301
1,005,748
1,208,248
-
499,613
-
599,411
284,649
791,451
499,457
157,867
1,048,221
4,154
114,164
88,691
6,500
13,000
235,256
215,774
8,339
108,514
-
-
-
-
110,646
37,554
16,309
6,428
-
-
14,270
-
1,784
101,028
-
279,810
-
-
160,099
917,574
3,491
114,165
67,489
-
-
235,383
49,609
3,503
2,916
499,613
599,411
279,810
-
-
160,099
1,028,220
41,045
130,474
73,917
-
-
249,653
49,609
5,287
103,944
1,169,724
4,683,835
5,853,559
1,440,633
4,102,241
5,542,874
77,967
770,494
848,461
71,591
-
-
-
27,335
24,578
-
-
48,926
18,861
197,667
54,492
285,655
708,076
437,371
392,894
7,524
1
361,587
-
54,492
285,655
708,076
464,706
417,472
7,524
1
410,513
18,861
-
-
-
28,015
25,189
-
-
44,911
19,671
652,141
18,928
723,732
18,928
262,067
262,067
649,024
649,024
476,266
427,843
1,420
-
376,355
-
504,281
453,032
1,420
-
421,266
19,671
3,018,094
3,215,761
189,377
2,864,044
3,053,421
TOTAL LOANS AND FINANCING
1,367,391
7,701,929
9,069,320
1,630,010
6,966,285
8,596,295
Quote as of December 31, 2012 US$2.0435; Yen 0.023720 (US$1.8758; Yen 0.024310 as of December 31, 2011)
During 2012 and 2011 the Company did not have short-term borrowings.
F-54
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
LOCAL CURRENCY
Banco do Brasil
10th issue debentures
11th issue debentures
12th issue debentures
13th issue debentures
14th issue debentures
15th issue debentures
16th issue debentures
1st issue debentures – Aquapolo
Brazilian Federal Savings Bank
Brazilian Development Bank - BNDES
Brazilian Development Bank - BNDES BAIXADA SANTISTA
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
Other
FOREIGN CURRENCY
GUARANTEES
MATURITY
ANNUAL INTEREST
RATES
FOREIGN
EXCHANGE
ADJUSTMENT
SÃO PAULO STATE
GOVERNMENT AND OWN
FUNDS
OWN FUNDS
OWN FUNDS
OWN FUNDS
OWN FUNDS
OWN FUNDS
OWN FUNDS
OWN FUNDS
OWN FUNDS
2014
2020
2015
2025
2012
2022
2019
2015
2029
8.50%
UPR
TJLP +1.92% (series 1 and 3)
and 9.53% (series 2)
CDI + 1.95% (series 1) and CDI
+ 1.4% (series 2)
TR + 9.5%
CDI + 0.65%
TJLP +1.92% (series 1 and 3)
and 9.19% (series 2)
CDI + 0.99% (series 1) and
6.2% (series 2)
CDI + 0.30% to 0.70%
TR + 8.75%
IPCA (series 2)
IPCA (series 2)
IPCA (series 2)
OWN FUNDS
2011/32
6.8% (weighted)
UPR
OWN FUNDS
OWN FUNDS
OWN FUNDS
OWN FUNDS
OWN FUNDS
OWN FUNDS
OWN FUNDS
2013
2019
2023
2027
2027
2025
2011/2018/
2025
3% + TJLP
2.5% + TJLP
2.15% + TJLP
1.72%+TJLP
1.72%+TJLP
1.92% + TJLP
TJLP + 6% /
12%
Inter-American Development Bank - BID US$417,295 thousand
FEDERAL GOVERNMENT
2017 to 2035
0.99% to 3.00%
International Bank for Reconstruction and Development - IBRD US$26,864
thousand
FEDERAL GOVERNMENT
Eurobonds – US$140,000 thousand
Eurobonds – US$350,000 thousand
JICA 15 – ¥19,591,310 thousand
JICA 18– ¥17,614,720 thousand
JICA 17– ¥324,213 thousand
JICA 19– ¥5,407 thousand
BID 1983AB – US$202,115 thousand
-
-
FEDERAL GOVERNMENT
FEDERAL GOVERNMENT
FEDERAL GOVERNMENT
FEDERAL GOVERNMENT
-
F-55
2034
2016
2020
2029
2029
2035
2037
2023
0.82%
7.50%
6.25%
1.8% and 2.5%
1.8% and 2.5%
1.2% and 0.01%
1.7% and 0.01%
2.49% to 2.99%
UPR
US$
US$
US$
US$
Yen
Yen
Yen
Yen
US$
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(i) Payment schedule – book values
LOCAL CURRENCY
Banco do Brasil
Debentures
Brazilian Federal Savings Bank
BNDES
BNDES BAIXADA SANTISTA
BNDES PAC
BNDES PAC II 9751
BNDES PAC II 9752
BNDES ONDA LIMPA
Leases
Other
Interest and charges
TOTAL IN LOCAL CURRENCY
FOREIGN CURRENCY
BID
IBRD
Eurobonds
JICA
BID 1983AB
Interest and finance charges
Foreign currency
Total
2013
2014
2015
2016
2017
2018
2019 to 2036
TOTAL
380,631
509,806
117,217
4,154
16,309
8,447
-
-
19,230
-
5,416
108,514
100,306
359,430
79,283
-
16,309
8,447
813
-
19,230
-
497
-
-
987,885
57,689
-
16,309
8,447
1,083
813
19,230
-
560
-
-
222,478
57,094
-
16,309
8,447
1,083
1,083
19,230
-
631
-
-
224,461
59,715
-
16,309
8,447
1,083
1,083
19,230
-
711
-
-
380,952
63,091
-
16,309
8,447
1,083
1,083
19,230
-
524
-
-
844,997
614,132
-
16,310
38,009
1,355
8,938
119,876
215,774
-
-
480,937
3,530,009
1,048,221
4,154
114,164
88,691
6,500
13,000
235,256
215,774
8,339
108,514
1,169,724
584,315
1,092,016
326,355
331,039
490,719
1,859,391
5,853,559
77,967
-
-
51,913
48,926
18,861
197,667
1,367,391
77,967
-
-
51,913
48,926
-
178,806
763,121
77,967
-
-
51,913
48,926
-
178,806
1,270,822
77,967
-
285,655
51,913
48,926
-
464,461
790,816
88,109
-
-
52,121
48,926
-
189,156
520,195
36,822
-
-
52,329
48,496
-
411,662
54,492
708,076
577,601
117,387
-
848,461
54,492
993,731
889,703
410,513
18,861
137,647
628,366
1,869,218
3,215,761
3,728,609
9,069,320
F-56
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(a) Banco do Brasil
In March 1994, the Company refinanced the existing loan agreements with Caixa Econômica Federal, which assigned loans represented by
receivables from the Federal Government, with Banco do Brasil acting as financial agent. Under the agreement entered into with the Federal
Government, payments are made based on the Price amortization system, monthly indexed by the Standard Benchmark Unit (UPR), which is
equal to the Government's benchmark interest rate (TR), plus interest of 8.5% per year. The interest and principal are monthly paid with final
maturity in 2014. This financing is guaranteed by the State Government of São Paulo by a pledge of its own and Company revenues.
(b) Debentures
(i) 10th issue of debentures
On November 15, 2009, the Company launched 100 debentures, subscribed exclusively by the National Bank for Economic and Social
Development (BNDES). These debentures were distributed in three nonconvertible series, at a nominal value of R$2.753, totaling R$275,370.
This transaction was settled on December 15, 2009, for all series.
Number
Adjustment
Interest
Interest payment
Amortization
Maturity
Series 1
Series 2
Series 3
28
30
42
-
-
TJLP + 1.92% p.a.
Quarterly to November 2012 and
Monthly (starting in December
November 2020
monthly thereafter
2012)
IPCA 9.53% p.a.
Annual
Annual (starting in December
December 2020
2013)
TJLP + 1.92% p.a.
Quarterly to November 2012 and
Monthly (starting in December
November 2020
monthly thereafter
2012)
The proceeds from this issuance will be used in expenditures in water supply and sewage systems in the following projects: Water Treatment
Stations, in Rio Grande, Litoral Norte, Vale do Paraíba and Mantiqueira, Bacia do Piracicaba-Capivari-Jundiaí; and in the loss reduction
program.
In 2012, 2011 and 2010, interest expense related to series 1 totaled R$5,844, R$6,016 and R$6,016, related to series 2 totaled R$9,273, R$8,862
and R$9,156, and related to series 3 totaled R$8,767, R$9,025 and R$9,025, respectively.
The early amortization, fully or partially, of the subscribed debentures, when authorized by BNDES and/or BNDESPAR, shall always occur
jointly, observing the proportionality between the outstanding balances of Series 1, 2 and 3 Debentures of all issues. The agreement does not
include a premium due to early amortization.
Financial covenants – Calculated every quarter, upon the disclosure of interim or annual financial statements:
F-57
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
- EBITDA/Net operating revenue: equal or higher than 38%.
- EBITDA/Financial expenses: equal to or higher than 2.35.
- Net debt/EBITDA: equal to or higher than 3.65.
The agreement has a cross default clause, i.e., the early maturity of any of the Company’s debts, the amount of which may anyhow compromise
the settlement of its obligations provided for in the indenture deed shall imply the early maturity of this agreement.
(ii) 11th issue of debentures
On March 1, 2010, the Company conducted the 11th issue of debentures. On April 30 and May 3, 2010 the Company settled series 1 and 2,
respectively, through a public offering, the proceeds from which will be used to early redeem the 90 promissory notes issued on December 1,
2009, whose features are summarized below:
Number
Adjustment
Interest
Interest payment
Amortization
Maturity
Series 1
810,000
Series 2
405,000
-
-
DI+ 1.95% p.a.
Semiannual (September
and March)
Annual (from March
2013)
DI + 1.40% p.a.
Semiannual (September
and March)
Annual (from March
2012)
March 2015
March 2013
The interest expense in 2012, 2011 and 2010 related to the series 1 was R$82,540, R$107,081 and R$80,077 and R$24,467, R$52,369 and
R$38,103 related to series 2, respectively.
The Issuer, at its sole discretion, as of the 24th month, including, after the issue date, and at the end of each capitalization period, pursuant to the
terms and conditions set forth hereinbelow, by resolution at the Issuer’s Board of Directors’ meeting may early redeem series 1 Debentures, fully
or partially. There will be no optional early redemption for Series 2 debentures. If the issuer elects the early redemption as of the 24th month,
there will be a premium of 1.00% p.a. to the debenture holder, of 0.90% p.a. as of the 30th month and of 0.86% p.a. as of the 36th month.
Financial covenants – Calculated every quarter upon the disclosure of interim or annual financial statements:
. Adjusted current ratio (current assets divided by current liabilities, excluding from current liabilities the current portion of noncurrent debts
incurred by the Company that are recorded in current liabilities) higher than 1.0.
. EBITDA to financial expenses ratio equal to or higher than 1.5.
F-58
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Noncompliance with these obligations will only be typified when verified in the quarterly financial statements for at least two consecutive
quarters or two nonconsecutive quarters within a twelve-month period.
In case of noncompliance with the covenants, the trustee should call an extraordinary debenture holders' meeting within 48 hours from the
acknowledgement of the noncompliance to resolve on the declaration of accelerated maturity of the debentures.
The agreement has a cross default clause, i.e., the early maturity of any of the Company’s debts, in amount equal to or exceeding R$50 million
adjusted by the IPCA variation as of the issue date, in view of contractual default, the amount of which may anyhow to compromise the settlement
of the Company’s monetary obligations arising from the Issue, shall imply the early maturity of this agreement.
(iii) 12th issue of debentures
In June 2010, SABESP issued R$500 million in debentures to Government Severance Indemnity Fund for Employees (FGTS). The debentures
will be invested in program of structures to comply with the goal to universalize the sanitation service in the State of São Paulo, which were used
until 2011. Among the programs that will receive this investment are Vida Nova (water sources), Programa Metropolitano de Água (Water
Metropolitan Program), Programa Metropolitano de Esgoto (Sewage Metropolitan Program), Programas de Água e Esgotos do Interior e Litoral
(Water and Sewage Program inside the state and coastal region).
One of the conditions for approving this transaction is the allocation of 60% of the investments in poor areas.
The issuance of the debentures occurred on September 22, 2010 through a public offer under the Brazilian securities exchange commission rules,
according to CVM Instruction nº 476, simple debentures, nonconvertible, are as follows:
Singe series
Number
500,000
Adjustment
Interest
Interest payment
Amortization
Maturity
TR
9.5% p.a.
Monthly (from July 2010)
Monthly (from July 2014)
June 2025
The interest expense in 2012, 2011 and 2010 related to the single series was R$46,849, R$51,434 and R$26,879, respectively.
The Issuer, at any time, may acquire outstanding debentures, in observance to Article 55, Paragraph 2 of the Brazilian Corporation Law, by means
of previous and express written consent of the debenture holders. The debentures acquired by the Issuer may be cancelled, held in the Issuer’s
treasury, or again outstanding on the market. The debentures acquired by the Issuer to be held in treasury pursuant to this clause, if and when
outstanding again on the market, will be entitled to same remuneration of other outstanding debentures.
F-59
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Reimbursement premiums to which debenture holders are entitled upon optional early redemption on the unit face value of debentures, plus
remuneration and adjustment, if any, and will be calculated according to the following formula:
Premium (%) = P x DD , where
TDC
P = 2% (two per cent); DD = number of running days, as of the date of the optional early redemption until the maturity date; and TDC = total
number of running days as of the 1st to the fourth-eighth (48th) month as of the issue date to maturity date.
Financial covenants – Calculated every quarter with the disclosure of interim or annual financial statements:
. Adjusted current ratio (current assets divided by current liabilities, excluding from current liabilities the current portion of noncurrent debts
incurred by the Company that are recorded in current liabilities) higher than 1.0.
. EBITDA to financial expenses ratio equal to or higher than 1.5.
Noncompliance with these obligations will only be typified when verified in the quarterly financial statements for at least two consecutive
quarters or two nonconsecutive quarters within a twelve-month period.
In case of noncompliance with the covenants, the trustee should call an extraordinary debenture holders' meeting within 48 hours from the
acknowledgement of the noncompliance to resolve on the declaration of accelerated maturity of the debentures.
The agreement has a cross default clause, i.e. the early maturity of any of the Company’s debts, equal to or exceeding R$50 million, adjusted by
IPCA variation as of the issue date, due to contractual default, the amount of which may anyhow compromise the settlement of the Company’s
monetary obligations arising from the Issue, shall imply the early maturity of this agreement.
(iv) 13th issue of debentures
On February 17, 2012, the Company fully redeemed the 13th issue of debentures, in the amount of R$633,343.
(v) 14th issue of debentures
On February 15, 2011, the Company issued 100 debentures through exclusive subscription by the Brazilian Development Bank – BNDES. These
debentures were distributed into three series, not convertible into shares, by the face value of R$2,753.70, totaling R$275,370. The repayment of
operation occurred on April 15, 2011, for all series.
Number
Adjustment
Interest
Interest payment
Amortization
Maturity
Series 1
Series 2
Series 3
28
30
42
-
IPCA
-
TJLP + 1.92% p.a.
Quarterly up to February 2014
and monthly as of this date
Monthly (from March 2014)
February 2022
9.19% p.a.
Annual
Annual (from March 2015)
March 2022
TJLP + 1.92% p.a.
Quarterly up to February 2014
and monthly as of this date
Monthly (from March 2014)
February 2022
F-60
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The proceeds obtained with this issue are allocated to the Company’s investments in water supply and sewage treatment systems in the projects:
ETA Rio Grande, North Coast, Paraíba Valley and Mantiqueira, Bacia do Piracicaba-Capivari-Jundiaí and the Loss Reduction Program.
Interest expenses in 2012 and 2011 referring to the series 1 amounted to R$5,848 and R$5,254, R$8,371 and R$6,916 for series 2, and R$8,772
and R$7,881 for series 3, respectively.
The early amortization, fully or partially of the subscribed debentures, when authorized by BNDES and/or BNDESPAR, shall always occur jointly,
observing the proportionality between the outstanding balance of Series 1, 2 and 3 Debentures of all issues. The agreement does not include
premium due to early amortization.
Financial covenants – Calculated every quarter upon the disclosure of interim or annual financial statements:
- EBITDA/net operating revenue equal to or higher than 38%.
- EBITDA/financial expenses equal to or higher than 2.35.
- Net bank debt/EBITDA equal to or lower than 3.65.
The agreement has a cross default clause, i.e., the early maturity of any of the Company’s debts, the amount of which may anyhow compromise
the settlement of its obligations provided for in the indenture deed, shall imply the early maturity of this agreement.
(vi) 15th issue of Debentures
On February 15, 2012, the Company issued the 15th issue of 77,108 non-convertible unsecured debentures, in two series, for public offering, with
restricted placement efforts, pursuant to CVM Instruction nº 476, totaling R$771,080 and unit value R$10, with the following characteristics:
Number
Adjustment
Interest
Interest payment
Amortization
Maturity
Series 1
28,733
Series 2
48,375
-
IPCA
DI+ 0.99% p.a.
Semiannual
(February and August)
Annual (from February 2015)
February 2017
6.20%
Annual (February)
Annual (from February 2018)
February 2019
F-61
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The proceeds deriving from the 15th Issue of Debentures were set aside to the settlement of financial commitments falling due until December 31,
2012.
Interest expenses referring to series 1 and 2 totaled R$22,336 and R$27,060, respectively, in 2012.
The total optional early redemption of series 1 debentures may occur as of the twenty-fourth (24th) month as of the issue date, inclusive and semi-
annually, on the first business day after the end of each capitalization period of series 1 debentures, until the maturity date of series 1. There will
be no optional early redemption of series 2 Debentures.
Premium of thirty hundredths per cent (0.30%) incurred on the balance of the face value of series 1 debentures, as follows:
Premium = P x (DU) x PU, where,
252
P= 0.30%; DU= number of business days as of the redemption date to the maturity date of the debenture; and PU= unit face value of series 1
debentures, calculated por rata temporis as of the last payment date of series 1 remuneration or as of the issue date, whichever occurs last, until
the date of early redemption.
Financial covenants – Calculated every quarter upon the disclosure of interim or annual financial statements:
- Adjusted Total Debt/ EBITDA: lower than or equal to 3.65; and
- EBITDA /Paid Financial Expenses: equal to or higher than 1.5.
Non-fulfillment of the covenant clauses shall trigger the early maturity of the contract.
The agreement has a cross default clause, i.e., the early maturity of any of the Company’s debts, equal to or exceeding R$90 million, shall imply
the early maturity of this agreement, adjusted by IPCA variation as of the issue date, due to contractual default, the amount of which may
compromise the settlement of the Company’s monetary obligations arising from the Issue.
(vii) 16th issue of Debentures
On November 12, 2012, the Company issued the 16th issue of 50,000 non-convertible, unsecured debentures, in a single series, for public offering,
with restricted placement efforts, pursuant to CVM Instruction nº 476, totaling R$500,000 and unitary value of R$10, with the following
characteristics:
F-62
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Number
Adjustment
Interest
Interest payment
Amortization
Maturity
Single series
50,000
-
DI+ 0.30% to 0.70%
p.a.
Semiannual (May and
November)
Lump sum (in November 2015)
November 2015
The proceeds deriving from the 16th Issue of Debentures will be exclusively set aside to the settlement of the Issuer’s financial commitments in
2012/2013.
Interest expenses corresponding to the single series totaled R$4,504 in 2012.
The optional early redemption of debentures may occur at any time in relation to the total outstanding debentures, from the availability of funds
raised with the Issue (“Total Early Redemption”), without any addition as redemption premium.
Financial covenants – Calculated every quarter upon the disclosure of interim or annual financial statements:
- Adjusted Total Debt/EBITDAlower than or equal to 3.65; and
- EBITDA/Paid Financial Expenses equal to or higher than 1.5.
The failure to comply with the indicators by the Issuer, will result in the early maturity of the contract, when it is verified, for at least two
consecutive quarters, or even for two non-consecutive quarters within a twelve-month period.
The agreement has a cross default clause, i.e., the early maturity of any of the Company’s debts, in the individual or aggregate amount equal to or
exceeding R$90 million due to contractual default, the occurrence of which may anyhow compromise the settlement of the Company’s monetary
obligations arising from the Issue, shall imply the early maturity.
(viii) 1st issue of Debentures - Aquapolo
In August 2011, jointly-owned subsidiary Aquapolo held the 1st issue of 326,732 book-entry, registered non-convertible debentures, totaling
R$326,732, in a single series at the unit value of R$1, whose characteristics are:
Number
Adjustment
Interest
Interest payment
Amortization
Maturity
Single series
326,732
-
TR + 8.75% p.a.
Monthly (from December 2013)
Monthly (from December 2013)
August 2029
F-63
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The proceeds deriving from the 1st issue of debentures will be fully set aside to the works of the Aquapolo project.
Financial covenants – Calculated every quarter upon the disclosure of interim or annual financial statements:
- Debt service coverage ratio (cash generation/debt service) exceeding 1.2;
- Adjusted current liquidity ratio higher than 1.0; and
- Do not contract a single operation or series of operations, any medium and long-term operations, in amount exceeding R$20 million.
The agreement has a cross default clause, i.e., the early maturity of any of the issuer’s debts, in the individual or aggregate amount equal to or
exceeding R$5 million, shall imply the early maturity of the agreement.
(c) Caixa Econômica Federal - Pro-sanitation Program
(i) Water and sewage
Several loan agreements were entered into from 1996 to 2004 under the Pro-Sanitation Program for expanding and improving the water supply
and sewage systems of several municipalities of the State of São Paulo and of the City of São Paulo. Loans are collateralized by the collections of
the daily billings of water supply and sewage services up to the total amount of the debt.
Contractually established repayment terms range from 120 to 180 months, after the beginning of the repayment period.
The balance of these facilities as of December 31, 2012 was R$487,663 (R$563,750 in December 2011).
The contractual charges are:
Contract signed in:
Interest rate
During grace period:
1996
9.5% p.a.
1997
1998 to 2004
6.5% to 8.0% p.a.
6.5% to 8.0% p.a.
Risk rate
1.0% p.a. on amount raised
1.0% p.a. on amount raised
0.6% p.a. or 2% p.a. on outstanding balance
Management fee
0.12% p.m. on the contract amount
2.0% p.a. on amount raised
1.0% p.a. on amount raised or 2% p.a. on
outstanding balance for contracts entered into
between 2003 and 2004
During repayment period:
Management fee
Difference between installment calculation and
a 10.5% p.a. rate less the 9.5% p.a.
1.0% p.a. on the outstanding balance
1.0% p.a. on the outstanding balance
F-64
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(ii) Pró-Sanear Program
In 1997, 1998 and 2008, contracts were signed under the Pró-Sanear Program for the improvement of water and sewage services, with the
involvement of the communities receiving the services, in several municipalities of the Metropolitan Region of São Paulo. The credit facilities are
collateralized by the collections of the daily billings of water supply and sewage services up to the total amount of the debt. Repayment will be
made in 180 months after the beginning of the repayment period. As of December 31, 2012, the balance was R$11,847 (R$14,448 in December
2011).
The financial charges are:
. interest rate - 5.0% p.a.;
. management fee (grace period) - 2.0% p.a. on debt outstanding balance;
. management fee (repayment phase) - 1.0% p.a. on debt outstanding balance;
. risk rate (grace period) - 1.0% p.a. on amounts raised.
(iii) Growth Acceleration Program (PAC)
In 2007, 2008 and 2012, the Company entered into agreements linked to the Universal Water and Sewage Services with several municipalities,
with funds from the Government Severance Indemnity Fund for Employees (FGTS). The credits facilities are guaranteed by a monthly flow of the
billings corresponding to the minimum of three times the monthly charge. Repayments will be made in 240 months after the beginning of the
repayment period. The balance as of December 31, 2012 was R$536,113 (R$440,733 in December 2011).
The financial charges are:
. interest rate – 5% p.a. to 6% p.a.;
. management fee – 1.00% p.a. to 1.40% p.a. during the period of the contract;
. risk rate – 0.3% p.a. on the adjusted debt balance.
(iv) Financial covenants – Calculated every quarter with the disclosure of interim or annual financial statements:
The agreement is subject to AMD – Agreement for Performance Improvement sets targets for financial indicators (billing losses, revenue evasion,
cash and cash equivalents and reduction of the number of days of committed receivables), and operating indicators that, based on the past two
years, are annually projected for the following five years.
F-65
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The agreement has a cross default clause, i.e., the early maturity of any of the Company’s debts, due to contractual default, the occurrence of
which may anyhow compromise the settlement of its monetary obligations deriving from the Issue shall imply the early maturity.
(d) Caixa Econômica Federal - SESAMM
In September 2010, a loan and onlending agreement was signed between Caixa Econômica Federal and the shared controlled investee SESAMM
– Serviços de Saneamento de Mogi Mirim SA, destined to investments in sewage systems in the urban area of the municipality of Mogi Mirim,
within the scope of the sanitation program for all citizens. According to the terms of the agreement signed with the Federal Government,
payments are made by the Price System and monthly indexed by the variation of the Reference Standard Unit – UPR corresponding to the
Benchmark Interest Rate – TR issued by the Government, plus annual interest of 6.0%, management fee of 2% p.a. and credit risk of 0.3% p.a.
Interest rates and principal are monthly paid with final maturity in 2031.
Financial covenants – Calculated every quarter upon the disclosure of interim or annual financial statements:
- Subscribed and paid-in capital stock, corresponding to, at least, twenty per cent (20%) of the total amount of investments in funds from this
financing
- Debt service coverage ratio (ICSD) of, at least, 1.3 during the amortization phase;
- Indebtedness limit of up to one twelfth (1/12) of its annual gross revenue or up to the amount corresponding to three (3) monthly installments,
referring to the agreements in force, whichever is the highest.
(e) BNDES
Contract 01.2.619.3.1 - Entered into in August 2002, totaling up to R$60,000, for the purpose of financing part of the Company's contribution to
the Tietê River Pollution Abatement Project - Stage II, related to loan agreement 1212/OC - BR with the Inter-American Development Bank
(IADB). The contract was settled on August 15, 2012. The outstanding balance as of December 31, 2011 was R$11,638.
Contract 10/669.748-6, amounting to R$180,000, is in performance of works stage and the debt balance as of December 31, 2012 was R$4,154
(R$29,407 in December 2011). The funds are onlent from BNDES to the agents and from the latter to SABESP. The onlending agreement has the
same purpose as the agreement between BNDES and SABESP, and the same interest and repayment terms, as follows:
Interest - TJLP limited to 6% p.a., plus a 3% p.a. spread, paid quarterly during the grace period, and monthly in the repayment period. The TJLP
portion exceeding 6% p.a. will be added to the debt outstanding balance.
F-66
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Loans are collateralized by part of revenues from the provision of water and sewage services.
Financial covenants – Calculated every quarter upon the disclosure of interim or annual financial statements:
. Adjusted current ratio: higher than 1.0.
. EBITDA /Net Operating Revenue: equal to or higher than 38%.
. EBITDA/Debt Service cost: equal to or higher than 1.5.
. Equity to Total Liabilities: equal to or higher than 0.8.
(f) BNDES Baixada Santista (Onda limpa I)
Contract 07.2.0800.1 - In November 2007, the Company entered into a financing agreement with BNDES for the Environmental Recovery
Program of the Santos Metropolitan Region, totaling R$129,973 with interest of 2.5% p.a. plus TJLP.
Repayment will be made in 96 monthly, consecutive installments, starting January 2012 to December 2019.
The agreement is in progress and the outstanding balance as of December 31, 2012 was R$114,164 (2011 R$130,474).
Financial covenants – Calculated every quarter upon the disclosure of interim or annual financial statements:
. Adjusted EBITDA /Adjusted Net Operating Revenue: equal to or higher than 38%.
. Adjusted EBITDA /Adjusted Financial Expenses: equal to or higher than 2.35.
. Adjusted Net Debt/Adjusted EBITDA: equal to or higher than 3.65;
The agreement is subject to AMD – Performance Improvement Agreement which establishes targets for financial ratios (sales losses, revenue
evasion, cash and cash equivalents and reduction of accounts receivable commitment days) and operational ratios which, based on the last two
years, are yearly projected for the next five years.
In the event the levels set out in the Financial Commitments are not met, the Company within ninety (90) days as of the date of BNDES’ written
notice shall create a reinforced guarantee, preferably revenue commitment and assignment, deemed as satisfactory, at BNDES’ discretion, unless
if within such term the levels set out in the financial commitments are recovered, under the power that BNDES may suspend the release of funds
and where applicable, declare the agreement’s early maturity.
(g) BNDES Onda Limpa II
Contract 09.2.1535.1 – In March 2010, a loan agreement was signed with BNDES to the Environmental Recovery Program of the metropolitan
region of Santos coast, in the amount of R$294,349 and interest rates of 1.92% p.a. plus TJLP.
F-67
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The amortization is estimated in 156 monthly and successive installments, from April 2012 to March 2025.
The contract is in performance of working stage and the debt balance as of December 31, 2012 was R$235,256 (R$249,653 in 2011).
Financial covenants – Calculated every quarter upon the disclosure of interim or annual financial statements:
. Adjusted EBITDA / Adjusted Net Operating Revenue: equal to or higher than 38%.
. Adjusted EBITDA /Adjusted Financial Expenses: equal to or higher than 2.35.
. Adjusted Net Debt/Adjusted EBITDA: equal to or lower than 3.65.
The agreement is subject to AMD – Performance Improvement Agreement which establishes targets for financial ratios (sales losses, revenue
evasion, cash and cash equivalents and reduction of accounts receivable commitment days) and operational ratios which, based on the last two
years, are yearly projected for the next five years.
The agreement has a cross default clause, i.e., the early maturity of any of the Company’s debt, due to contractual default the amount of which
may anyhow compromise the settlement of its obligations deriving from this agreement, shall imply the early maturity of this agreement.
(h) BNDES PAC I and II
(i)
metropolitan region of Santos coast, in the amount of R$174,517 and interest rates of 2.15% p.a. plus TJLP.
Contract 08.2.0169.1 – In November 2007, a loan agreement was signed with BNDES to the Environmental Recovery Program of the
The amortization will occur in 150 monthly and successive installments, from January 2011 to December 2023.
The contract is in performance of working stage and the debt balance as of December 31, 2012 was R$88,691 (R$73,917 in 2011).
(ii)
Contract 11.2.0975.1 – On March 5, 2012, a loan agreement was signed with BNDES to the program to expand and optimize the sewage
systems in the metropolitan region of São Paulo, as well as to design the executive project of the São Lourenço production system, totaling
R$135,850 and interest of 1.72% p.a. plus TJLP.
The amortization will occur in 156 monthly and successive installments, from April 2014 to March 2027.
The contract is in performance of working stage and the debt balance as of December 31, 2012 was R$6,500.
F-68
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(iii) Contract 11.2.0975.2 – On March 5, 2012, a loan agreement was signed with BNDES to the program to expand and optimize the sewage
systems of the metropolitan region of São Paulo, as well as to design the executive project of the São Lourenço production system, totaling
R$44,948 with interest rates of 1.72% p.a. plus TJLP.
The amortization will occur in 144 monthly and successive installments, from April 2015 to March 2027.
The contract is in performance of working stage and the debt balance as of December 31, 2012 was R$13,000.
(iv)
Financial covenants – Calculated every quarter upon the disclosure of interim or annual financial statements:
. Adjusted EBITDA /Adjusted Net Operating Revenue: equal to or higher than 38%.
. Adjusted EBITDA /Adjusted Financial Expense: equal to or higher than 2.35.
. Adjusted Net Debt/Adjusted EBITDA: equal to or lower than 3.65.
The agreement is subject to AMD – Performance Improvement Agreement which establishes targets for financial ratios (sales losses, revenue
evasion, cash and cash equivalents and reduction of accounts receivable commitment days) and operational ratios which, based on the last two
years, are yearly projected for the next five years
In the event the levels set out in the Financial Commitments are not met, the Company within ninety (90) days as of the date of BNDES’ written
notice shall create a reinforced guarantee, preferably revenue commitment and assignment, deemed as satisfactory, at BNDES’ discretion, unless
if within that term the levels set out in the financial commitments are recovered, under the power that BNDES may suspend the release of funds
and where applicable, declare the agreement’s early maturity.
(i) Leases
The Company has lease agreements signed as Assets Lease. During the construction period, works are capitalized to intangible assets in progress
and the lease amount is recorded at the same proportion. Works are estimated to be concluded in 2013 and 2014.
After startup, the lease payment period starts (240 monthly installments), whose amount is periodically restated by contracted price index.
No work related to these contracts was in operation on December 31, 2012.
(j) Eurobonds
(i)
On November 3, 2006, the Company issued Eurobonds abroad (Eurobonds 2016) totaling US$140 million. The issue was led by Deutsche
Bank Trust Company Americas and the principal agent was Deutsche Bank Luxembourg S.A. The interest rate is 7.5% p.a., paid semiannually,
and maturity is in November 2016. The funds raised were used for the early repayment and partial issue of US$225 million in the Eurobonds,
with final maturity in June 2008, and the amount redeemed was US$126,948 thousand.
F-69
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
As of December 31, 2012 the balance of the Eurobonds was US$140,000 thousand, corresponding to R$285,655, net of issuance costs amounting
to R$434, that will be amortized during the period of the contract.
Total redemption at the Company’s option in view of changes in the withholding income tax laws. Without any addition as redemption premium.
(ii) On December 9, 2010, the Company concluded the international offer to international qualified foreign institutions of its US$350 million
senior unsecured notes due 2020, with interest rate is 6.25% p.a., paid semi-annually and due on December 2020 (the Eurobonds 2020). The
funds were used for partial repayment of outstanding debts.
As of December 31, 2012 the balance of the Eurobonds was US$350,000 thousand equivalent to R$708,076, net of issuance costs amounting to
R$7,149, that will be amortized during the period of the contract.
On December 16, 2015 and subsequently, the Company in one or in several occasions may redeem the Eurobonds, according to its full or partial
option. This option shall incur the payment of 103.125% premium as of December 16, 2015 of 102.083%; as of December 16, 2016, 101.042%, as
of December 16, 2017 and as of December 16, 2018, 100.000%. In the event of full redemption at the Company’s option due to changes in the
withholding income tax, no addition will occur as redemption premium.
(iii) Financial covenants – Calculated every quarter upon the disclosure of interim or annual financial statements:
Restrict the funding of new debts so that:
. adjusted total debt to EBITDA does not exceed 3.65;
. the Company's debt service coverage ratio, determined on the date this debt was incurred, shall not be lower than 2.35.
Noncompliance with covenants will accelerate the maturity of the contract.
The agreement has a cross default clause, i.e., the early maturity of any indebtedness in view of the Company’s loans or any of its Subsidiaries
with a total principal amount of US$ 25.0 million or more (or its corresponding amount in other currencies) shall imply this agreement’s early
maturity.
(k) Inter-American Development Bank (IADB)
Loan Agreement 713 - In December 1992, the Company entered into a loan agreement with the IADB for US$400 million to finance the first stage
of the Tietê River Pollution Abatement Project. The repayment period started in June 1999 in semiannual installments, subject to annual floating
rate interest, varying according to the loans raised by the Bank in each six-month period, and final maturity in December 2017. In December
1992, the Federal Republic of Brazil signed a guarantee contract with the IADB guaranteeing the funds for the fulfillment of the contractual
obligations. The outstanding balance as of December 31, 2012 was US$125,488 thousand, equivalent to R$256,435 (R$282,605 in December
2011).
F-70
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Loan Agreement 896 - In December 1992, the Company entered into a loan agreement with the IADB for US$50 million to finance the first stage
of the Tietê River Pollution Abatement Project. Semiannual repayments started in June 1999, with annual interest of 3% and final maturity in
December 2016. In December 1992, the Federal Republic of Brazil signed a guarantee contract with the IADB guaranteeing the funds for the
fulfillment of the contractual obligations. The outstanding balance as of December 31, 2012 was US$11,111 thousand, equivalent to R$22,705
(R$26,053 in December 2011).
Loan Agreement 1212 - In July 2000, the Company entered into a loan agreement with the IADB for US$200 million to finance the second stage
of the Tietê River Pollution Abatement Project. In 2008, the amounts to be raised in this contract were summed up. The loan is being amortized
semiannually and final maturity in July 2025. Interest is being paid on a semiannual basis, based on daily balances, at an annual variable rate
according to the costs of loans of the Bank in the preceding six-month period, plus a spread, and changes every six months. The debt balance as of
December 31, 2012 was US$133,615 thousand, equivalent to R$273,043 (R$269,915 in December 2011).
Loan Agreement 2202/OC-BR – On September 3, 2010 the Company and the Inter-American Development Bank (Banco Inter-Americano de
Desenvolvimento or BID) signed the contract for partially finance the third stage of the Tietê River Project, denominated the decontamination of
the Tietê river. The total estimated cost of this investment is US$800 million, of which US$600 million will be financed by the IADB and US$200
million will be invested by the Company´s own resources. The final maturity of the loan is in 25 years with 6-year grace period. Interest is based
on USD-Libor, calculated every quarter, as stipulated in the IADB rules and procedures.
The 1st funding of the agreement executed on September 3, 2010, no. 2202/OC-BR occurred on March 17, 2011. Funds are used to recover the
water quality of Tietê River basin in the Metropolitan Region of São Paulo. The agreement amounts to US$600,000, corresponding to
R$1,036,380, on the contracting date, with final maturity in September 2035. The 1st funding of US$1,829, corresponding to R$3,044, occurred
in the first quarter of 2011.
The balance of this agreement as of December 31, 2012 was US$147,080 thousand, corresponding to R$296,276 (R$145,159 in December 2011),
less part of funding costs amounting to R$4,282, which will be repaid over the agreement term.
Financial covenants – Calculated every quarter upon the disclosure of interim or annual financial statements:
F-71
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
. Loan agreements 713, 896 and 1212 - Tariffs must: (a) produce revenues sufficient to cover the system's operating expenses, including
administrative, operating, maintenance, and depreciation expenses; (b) provide a return on property, plant, and equipment no less than 7%;
and (c) during project execution, the balances of short-term loans must not exceed 8.5% of total equity.
Noncompliance with covenants will accelerate the maturity of the contract.
The agreement has a cross default clause among IADB agreements (same financial bank), i.e., the early maturity will occur in the event of failure
to comply with any obligation therewith or any other agreement signed with IADB related to project finance.
(l) Japan Bank for International Cooperation - JICA
On August 6, 2004, the Company entered into a financing agreement with the JBIC - Japan Bank for International Cooperation, currently JICA -
Japan International Cooperation Agency, no. BZ-P 15, guaranteed by the Federal Government, totaling ¥21,320 million, equivalent to
approximately R$587,643 on the agreement signature date, for the Environmental Recovery Program of Baixada Santista Metropolitan Region.
Total financing period is 25 years, with a seven-year grace period and 18 years of repayment in semi-annual installments. Interest is being paid on
a semiannual basis since 2006, and is 2.5% p.a. for the sewage network and 1.8% p.a. for sewage treatment facilities.
On November 1, 2010 the Company signed with the Japan International Cooperation Agency (JICA) an additional loan agreement referring to the
Onda Limpa Program– 1st Phase, nº BZ-P 17 in the amount of six billion, two hundred and eight million Japanese Yen (JPY 6,208,000,000)
corresponding to R$127,326 on November 30, 2011. Resources will be applied to acquire eligible goods and services require to implementing the
suppliers project, contractors or consultants. The total loan term is 25 years, 7-year grace period and 18 years of amortization, in half-yearly
installments. Interest rates are paid half-yearly as of 2011, 1.2% p.a. for sewage network and 0.01% p.a. for sewage treatment facilities.
On February 15, 2011, the Company and JICA (Japan International Cooperation Agency) signed a supplementary loan agreement related to Onda
Limpa Program – 1st phase, no. BZ-P 18, amounting to nineteen billion, one hundred, sixty-nine million Yen (¥ 19,169,000) corresponding to
R$375,904 on March 31, 2011. Funds will be applied to execute works and services in the Program of Baixada Santista Metropolitan Region. The
loan total term is 25 years, 7-year grace period and 18 years of amortization, in half-yearly installments. Interest rates are paid half-yearly as of
2011, 1.8% p.a. for sewage network and 2.5% p.a. for sewage treatment facilities.
In February 2012, the Company signed a loan agreement for the 2nd phase of the Water Losses Reduction Corporate Program nº BZ -P 19, in the
amount of thirty-three billion, five hundred, eighty-four million Japanese Yen (JPY 33,584,000,000) corresponding to R$709,294 on the
agreement’s signature date. The loan total term is 25 years, 7-year grace period and 18 years of amortization, in half-yearly installments. Interest
rates are paid half-yearly as of 2013, 1.7% p.a. for sewage network and 0.01% p.a. for sewage treatment facilities.
F-72
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The balance of these loan agreements as of December 31, 2012 were R$889,703 (R$958,733 in December 2011).
(m) AB Loan (IADB 1983AB)
On May 27, 2008, the Company entered into a loan agreement AB loan with IADB, totaling US$250 million, the funding of which was fully in
June 2008. The funds obtained were used to settle Eurobonds 2008 and to partially perform the Company's investment plan.
1983 A
1983 B1
1983 B2
US$
Repayment from
Maturity
100.0 million
100.0 million
50.0 million
May 2011
May 2011
May 2011
May 2023
May 2020
May 2018
Interest (Libor +
spread)
Libor + 2.99%
Libor + 2.69%
Libor + 2.49%
Interest is being paid on a semiannual basis since November 2008. The balance of this loan agreement as of December 31, 2012 was US$202,115
million, equivalent to R$410,513 (R$421,266 in December 2011), less part of the loans costs, totaling R$2,510 (R$2,771 in December 2011), which
will be repaid over the agreement term.
Financial covenants – Calculated every quarter upon the disclosure of interim or annual financial statements:
- The Company’s ratio of debt service coverage, determined on a consolidated basis, must be higher than or equal to 2.35; and
- Total adjusted debt over Ebitda, determined on a consolidated basis, must be lower than or equal to 3.65.
The agreement has a cross default clause, i.e., if a Default Event occurs and continues (whether voluntarily or involuntarily, whether resulting
from the effect of any applicable laws or according to with due to any act or omission to act by any Authority or another one), the IADB through
notification to the Borrower may order the early maturity of loan or part of it as specified in the notice (including accrued interest rates) and all
other obligations are overdue and shall be promptly payable.
(n) International Bank for Reconstruction and Development - IBRD
On October 28, 2009, the Company and “The World Bank” – International Bank for Reconstruction and Development (IBRD) signed a contract
(the IBRD agreement 7662BR) amounting to US$100,000. Resources will be applied in the Environmental Sanitation Program of Alto Tietê
springs– Springs Program. The amortization period will start in September 2019, in half-yearly installments and final maturity in 2034. In
November 2009, a collateral agreement was signed between the Federative Republic of Brazil and IBRD, guaranteeing the provision of funds in
order to comply with obligations provided for in the loan agreement. On December 31, 2012, the balance of this agreement amounted to
US$26,864 thousand, corresponding to R$54,492 (R$18,928 in December 2011), less part of loans costs in the amount of R$405 (R$424 in
December 2011), which will be repaid over the agreement term.
F-73
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(o) Covenants
As of December 31, 2012 and 2011, the Company had met the requirements set forth by its loan and financing agreement.
(p) Loans and financing contracted but not used yet
SABESP in order to comply with its investment plan relies on a fund-raising plan.
Financing resources contracted have specific purposes, which are released for the execution of their respective investments.
Agent
Brazilian Federal Savings Bank
Japan International Cooperation Agency - JICA
Inter-American Development Bank - BID
Brazilian Development Bank - BNDES
International Bank for Reconstruction and Development - BIRD
Others
TOTAL
(*) closing quote of 12/31/2012. (US$1.00 = R$2.0435; ¥ 1.00 = R$0.02372).
14 Taxes Payable
(a) Current assets
Taxes recoverable
COFINS and PASEP
Income tax and social contribution
IRRF (withholding income tax) on financial investments
Other federal taxes
Other state taxes
Other municipal taxes
Total taxes payable
F-74
December 31, 2012
(in millions of reais
(*))
1,125
936
926
550
149
53
3,739
2011
1
85,854
31,125
590
109
437
118,116
December 31,
2012
9.038
100,486
14,472
3,238
1,251
656
129,141
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(b) Liabilities
Income tax and social contribution
COFINS and PASEP
PAES (tax debt refinancing program)
INSS (Social Security Contribution)
IRRF (withholding income tax)
Other
Total
Current
December 31,
2012
110
46,614
19,011
29,412
41,607
16,367
153,121
2011
-
57,073
36,716
25,645
44,172
17,516
181,122
Noncurrent
December 31,
2012
-
-
-
-
-
-
-
2011
-
-
18,363
-
-
-
18,363
The decrease of R$27,634 in current liabilities mainly arises from the payments made in 2012, from the due installments of the Special Tax
Installment Payment Program (Paes).
The reduction of R$18,363 in noncurrent liabilities occurred as a result of payment and transfer flow of long-term to short term balance of the
Parent Company’s Special Tax Installment Payment Program (PAES), according to the information below.
The Company applied for enrollment in PAES on July 15, 2003, in accordance with Law No 10,684 of May 30, 2003, and included in its
application the debts related to COFINS and PASEP which were involved in a legal action challenging application of Law 9718/98, and the
outstanding balance under the Tax Recovery Program (REFIS). The original amount included in PAES was R$316,953, as follows:
Tax
COFINS
PASEP
REFIS
Total
Principal
Fine
Interest
132,499
5,001
112,639
250,139
13,250
509
-
13,759
50,994
2,061
-
53,055
Total
196,743
7,571
112,639
316,953
The loan related to Paes (Special Installment Payment) is being paid in 120 months. The amounts paid in 2012, 2011 and 2010 were R$37,421,
R$36,091 and R$34,744, respectively, and financial expenses of R$1,353 and R$2,761, respectively, were recorded. The outstanding balance as of
December 31, 2012 was R$19,011 (R$55,079 in December 2011). The assets offered as guarantee in REFIS, totaling R$249,034, are still
guaranteeing the amounts in the PAES program.
F-75
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
15 Deferred Taxes and Contributions
(a) Balances
Deferred income tax assets (i)
Provisions
Pension obligations – G1
Pension obligations – G0 (1)
Donations of underlying assets on concession contracts
Allowance for doubtful accounts
Other
Total deferred tax assets
Deferred income tax liabilities (ii)
Temporary difference on concession intangible assets
Capitalization of loans costs
Revenue – government entities
Other
Total deferred tax liabilities
Deferred tax asset, net
December 31
2012
512,107
193,125
85,271
41,312
162,670
103,254
2011
575,473
180,018
85,271
38,213
135,223
78,717
1,097,739
1,092,915
(650,093)
(158,298)
(77,827)
(70,165)
(956,383)
(692,210)
(101,507)
(76,773)
(42,962)
(913,452)
141,356
179,463
(1) Refers to the installment of R$250,798 from accounts receivable adjustment (GESP), which was accrued as loss in previous years.
(b) Realization
Deferred tax assets
to be realized within 1 year
to be realized after 1 year
Total deferred tax assets
Deferred tax liabilities
to be realized within 1 year
to be realized after 1 year
Total deferred tax liabilities
Deferred tax assets
December 31
2012
2011
193,709
904,030
1,097,739
(38,267)
(918,116)
(956,383)
141,356
259,784
833,131
1,092,915
(27,282)
(886,170)
(913,452)
179,463
F-76
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(c) Changes
Deferred income tax assets
Provisions
Pension
obligations
– G1
Pension
obligations
– G0
Donations of
underlying assets
on concession
contracts
Allowance for
doubtful accounts
As of December 31,2009
Recorded in the income statement
As of December 31,2010
Recorded in the income statement
As of December 31, 2011
Recorded in the income statement
As of December 31, 2012
Deferred income tax liabilities
As of December 31, 2009
Recorded in the income statement
As of December 31, 2010
Recorded in the income statement
As of December 31, 2011
Recorded in the income statement
As of December 31, 2012
541,511
(2,117)
539,394
36,079
575,473
(63,366)
512,107
177,736
(15,184)
162,552
17,466
180,018
13,107
193,125
85,271
-
85,271
-
85,271
-
85,271
35,334
2,879
38,213
-
38,213
3,099
41,312
47,806
81,442
129,248
5,975
135,223
27,447
162,670
Temporary difference
of concession intangible
assets
Capitalization of loans
costs
Revenue – government
agencies
(721,620)
10,337
(711,283)
19,073
(692,210)
42,117
(650,093)
(66,507)
(35,832)
(102,339)
832
(101,507)
(56,791)
(158,298)
F-77
(73,005)
37
(72,968)
(3,805)
(76,773)
(1,054)
(77,827)
Other
39,271
10,837
50,108
28,609
78,717
24,537
Total
926,929
77,857
1,004,786
88,129
1,092,915
4,824
103,254
1,097,739
Other
(22,161)
(17,595)
(39,756)
(3,206)
(42,962)
(27,203)
(70,165)
Total
(883,293)
(43,053)
(926,346)
12,894
(913,452)
(42,931)
(956,383)
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(d) Reconciliation of the effective tax rate
The amounts recorded as income and social contribution tax expenses in the financial statements are reconciled to the statutory rates, as shown
below:
Profit before income taxes
Statutory rate
Estimated expenses at statutory rate
Tax benefits from interest on shareholders’ equity
Permanent difference
Provisional Law 4819/58 (i)
Donations
Recovery of tax credits
Other differences
2012
2011
2010
2,543,904
34%
(864,927)
252,355
(32,514)
(11,447)
-
24,529
1,720,746
34%
(585,054)
122,170
(87,118)
(13,692)
37,858
28,509
2,292,756
34%
(779,537)
131,658
(24,088)
(2,820)
-
12,478
Income tax and social contribution
(632,004)
(497,327)
(662,309)
Current income tax and social contribution
Deferred income tax and social contribution
Effective rate
(594,052)
(37,952)
25%
(598,303)
100,976
29%
(697,115)
34,806
29%
(i) Permanent difference related to the provision for actuarial liability (Note 8 (vii)).
Transition Tax Regime (RTT)
For purpose to calculate the income tax and the social contribution related to 2010 and 2009, the Company opted to adopt the Transition Tax
Regime (RTT), which allow eliminate the accounting effects of the Law 11,638/07 and the Provisional Measure 449/08, converted into Law No.
11,941/2009, by the registers in the fiscal books – LALUR and subsidiary controls, without any modification in the bookkeeping.
Since 2008, the Company has adopted the same fiscal practices, since RTT commenced being obligatory and will be valid until the issue of a law
that consider the fiscal effects of the new accounting methods.
16 Provisions
(a) Lawsuits with probable likelihood of loss
(i) Balances
F-78
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The Company is party to a number of claims and legal proceedings arising in the normal course of business, including civil, tax, labor and
environmental matters. Management, recognized provisions at an amount considered sufficient to cover probable losses. These provisions, net of
escrow deposits based on the legal right to offset, are as follows:
Customer claims (i)
Supplier claims (ii)
Other civil claims (iii)
Tax claims (iv)
Labor claims (v)
Environmental claims (vi)
Total
Current
Noncurrent
(ii) Changes
Customer claims (i)
Supplier claims (ii)
Other civil claims (iii)
Tax claims (iv)
Labor claims (v)
Environmental claims (vi)
Subtotal
Escrow deposits
Total
Provisions
Escrow deposits
December 31, 2012
Provisions
Escrow deposits
December 31, 2011
652,663
290,593
169,516
71,141
173,227
149,061
(131,408)
(175,437)
(4,978)
(3,056)
(1,529)
(636)
521,255
115,156
164,538
68,085
171,698
148,425
727,261
422,595
188,546
76,448
156,536
121,179
(108,728)
(1,828)
(10,180)
-
-
-
618,533
420,767
178,366
76,448
156,536
121,179
1,506,201
(317,044)
1,189,157
1,692,565
(120,736)
1,571,829
565,083
941,118
-
(317,044)
565,083
624,074
764,070
928,495
-
(120,736)
764,070
807,759
December 31, 2011
Additional
provisions
Interest and
inflation
adjustment
Amounts used
from provision
Amounts not used
(reversal)
December 31,
2012
727,261
422,595
188,546
76,448
156,536
121,179
1,692,565
(120,736)
1,571,829
93,972
17,575
22,788
10,279
142,976
37,496
325,086
(200,982)
124,104
80,858
36,393
24,501
7,365
34,056
9,383
192,556
(13,840)
178,716
(68,000)
(174,482)
(7,495)
(10,057)
(126,787)
(8,801)
(395,622)
12,736
(382,886)
(181,428)
(11,488)
(58,824)
(12,894)
(33,554)
(10,196)
(308,384)
5,778
(302,606)
652,663
290,593
169,516
71,141
173,227
149,061
1,506,201
(317,044)
1,189,157
(b) Lawsuits with possible likelihood of loss
The Company is party to lawsuits and administrative proceedings relating to environmental, tax, civil and labor claims, which are assessed by
Management whose chances of loss are possible and are not recorded. Liability contingencies, classified as possible loss, are represented as
follows:
Customer claims (i)
Supplier claims (ii)
Other civil claims (iii)
Tax claims (iv)
Labor claims (v)
Environmental claims (vi)
Total
December 31, 2012
December 31, 2011
862,100
775,200
362,200
490,900
190,000
116,300
844,100
699,300
359,600
420,400
145,100
153,300
2,796,700
2,621,800
F-79
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(c) Explanation on the nature of main classes of lawsuits
(i) Customer claims
Approximately 1,560 lawsuits were filed by commercial customers, which claim that their tariffs should correspond to other consumer categories,
and 440 lawsuits which claim a reduction in the sewage tariff due to losses in the system, consequently requesting the refund of amounts charged
by the Company. The Company was granted both favorable and unfavorable final decisions at several court levels and recognized provisions when
the chances of losses are probable. The R$97,278 decrease in the lawsuits classified as probable loss (net of escrow deposits) relates to the
payments made in the year and revisions of expectations caused by favorable decisions to the Company in 2012.
(ii) Supplier claims
Suppliers’ claims include lawsuits filed by some suppliers alleging underpayment of monetary restatements, withholding of amounts related to
the understated inflation rates deriving from Real economic plan, and the economic and financial imbalance of the agreements. These lawsuits
are in progress at different courts and a provision is recognized when the chances of losses are probable. The R$305,611 decrease in lawsuits
whose likelihood of loss is considered probable (net of escrow deposits) is related to the payments made in the period, and the R$75,900 increase
in lawsuits whose likelihood of loss is considered possible is related to interest, fees and update of lawsuits in progress.
(iii) Other civil claims
The Company is a party to several civil lawsuits related to indemnities for property damage, pain and suffering, and loss of profits allegedly
caused to third parties, filled at different court levels, dully accrued when classified as probable losses. The R$13,828 decrease, for lawsuits with
probable chances of loss, was due to favorable decisions to the Company and payments made in 2012.
(iv) Tax claims
F-80
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The provision for tax risks refers mainly to issues related to tax collections challenged due to differences in the interpretation of legislation by the
Company's Management, accrued when classified as probable loss. The R$70,500 increase in lawsuits with chances of possible losses is mainly
related to the restatement deriving from lawsuits filed by the municipality of São Paulo, related to ISS (services tax) collection, as outlined in item
“b” below.
(a) In 2006, the Federal Revenue Service, by means of a tax execution, assessed the Company's compliance with the tax obligations related to
income tax and social contribution for calendar year 2001, and recognized taxes payable adjusted through December 31, 2012 in the amount of
R$389,505 (R$379,277 in December 2011). The Company filed a timely objection and will appeal against the tax assessment at administrative
level and in courts. Managements considers that the likelihood of loss of this administrative proceeding is approximately 90% considered remote
and 10% possible.
(b) The municipality of São Paulo through law revoked the services tax exemption which until them the company withheld and thereafter issued
tax deficiency notices related to the sewage service and ancillary activities, in the updated amount of R$264,627 (December/2011 – R$224,349),
which currently are subject-matter of Tax Foreclosures, classified by the Management as possible losses. SABESP filed a writ of mandamus
against this revocation, which was rejected, and currently is under phase of appealability of Special and Extraordinary Appeals filed. Writs of
prevention and actions for annulment were also filed, aiming the suspension of enforceability of credits and the annulment of tax deficiency
notices, as it understands that notwithstanding the exemption revocation, the sewage activities and ancillary activities are not included in the list
of activities subject to taxation by municipality. Since there is no final decision on the merit, the Company’s Management assessed the risk as
possible losses.
(c) The Federal Revenue Service rejected some offset requests made by the Company for the extinction of IRPJ/CSLL payable, using favorable
amounts, arising from undue payments of IRPJ/CSLL, which were paid based on monthly estimates. The amount involved was adjusted through
December 31, 2012 and is estimated at R$47,498 (R$44,668 in December 2011). Management assessed it has a possible loss.
(d) The Company requested an authorization to offset the Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) of the
period of July, August and September 2002 against the amount of IRPJ paid in excess in 1997 and 1998, due to monetary restatement over the
financial statements (Law 8.200/91), which was anticipated in 1996 due to an injunction, after excluded by giving up the process and adopted the
Provisional Measure 38/02. The Administrative Counsel of Fiscal Resources rejected the credit from 1997. The estimated amount is R$42,403 on
December 31, 2012 (R$40,976 in December 2011). The Company´s Management assessed this claim as a possible loss.
(e) On June 23, 2010, the Company and the municipality of São Paulo signed an agreement to provide water supply and sewage services. The
negotiation of this agreement led to the extinction of some judicial lawsuits, but others were not part of the referred agreement, and lawsuit
proceeds as usual. The remaining judicial lawsuits considered as possible and probable loss are mainly related to taxes and fines. As of December
31, 2012 the amounts of such judicial lawsuits were R$23,882 and R$39,063 (R$27,690 and R$30,118 in December 2011, respectively).
F-81
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(f) In 2005, the Federal Revenue Service partially rejected the Company´s request of offsetting tax credits related to the Corporate Income Tax
(IRPJ) and the Social Contribution on Net Income (CSLL) in the amount of approximately R$56,118, and R$8,659, respectively, which relate to
the period from January to April 2003, for which the Company offset prior year IRPJ and CSLL negative balances. The amounts not ratified by
the authority of IRPJ and CSLL are R$11,164 and R$698, totaling R$11,862 million. As the Company obtained a partial favorable decision on this
matter, the Company´s Management believe likelihood of loss amounts to R$6,782 (R$6,541 in December 2011) and R$1,157 (R$1,116 in
December 2011) are possible and probable, respectively.
(g) SABESP filed two writs of mandamus pleading the declaration of unconstitutional municipal law that levies the collection of taxes deriving
from the use of public areas in the water and sewage network installation for the rendering of basic sanitation public utilities. The first writ of
mandamus was partially granted relief, but will not have any effect because municipal laws were revoked and the second writ of mandamus
awaits judgment on the municipality’s appeal, as this writ of mandamus was granted relief suspending the collection for the use of urban soil and
tendering of collateral. The Management assessed the risk as possible loss, but it was not possible to estimate the amount involved, as it would be
necessary to know the extension of water and sewage networks and other equipment installed in the municipality’s urban soil (public areas), as
well as define the amount of related property based on the metreage applied.
(v) Labor claims
The Company is a party to labor lawsuits, involving issues such as overtime, shift schedule, health hazard premium and hazardous duty premium,
prior notice, change of function, salary equalization, and other. Part of the amount involved is in provisional or final execution at various court
levels, and thus is classified as of probable or possible loss. The Company recognized a provision for claims which likelihood of loss is considered
probable. The R$15,162 addition in lawsuits with probable chances of losses is mainly due to the additional provision for issues related to
overtime and shift schedule, offset by payments mainly referring to shift schedule. The R$44,900 addition in the lawsuits with possible chances of
losses is due to the increased number of lawsuits filed in 2012.
(vi) Environmental claims
Environmental claims refer to several administrative proceedings and lawsuits filed by government entities, including Companhia de Tecnologia
de Saneamento Ambiental – Cetesb, Public Prosecution Office of the State of São Paulo and others, that aim affirmative and negative covenants
and penalty is estimated due to failure to comply in addition to the imposition of indemnity due to environmental damages allegedly caused by
the Company. The amounts accrued represent the best estimate of the Company to date, however, may differ from the amount to be disbursed as
indemnity to alleged damages, in view of the current stage of referred proceedings.
F-82
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
As of December 31, 2012, the total accrued amount represents the R$148,425 (R$121,179 in December 2011).
Among the main lawsuits the Company is involved, there are four public civil actions the subject-matters of which are: a) sentence SABESP to
restrain itself from discharging or releasing sewage without due treatment; b) invest in the water and sewage treatment system of the
municipality, under the penalty of paying a fine; c) payment of indemnity due to environmental damages, amongst others. On December 31, 2012,
the Management classified part of lawsuits as probable chances of losses, in the amount of R$127,514 (December/2011 – R$93,782) and another
part as possible losses in the amount of R$85,081.
(vii) Settlements reached in 2012
During 2012, the Company settled several legal and administrative proceedings, and most of them totaled R$67,417. Out of this amount,
R$58,742 refers to investments and R$8,675 refer to environmental compensations, the later, recorded as “other liabilities”, under the Statement
of Financial Position. The accumulated balance on December 31, 2012, referring to these environmental liabilities amounted to R$28,976.
(viii) Other concession-related legal proceedings
The Company is a party to concessions-related proceedings, cases in which it can lose the right of operating water supply and sewage collection
services in few municipalities, including the following: a) the municipality of Cajobi filed action against SABESP claiming possession, which was
granted relief and maintained the municipality in the possession of water and sewage assets and services, assessed as probable losses; b) the
municipality of Tarumã filed a writ of prevention against SABESP, and the operation is maintained but the final decision is pending, with
expected possible losses; c) The Company filed an ordinary action against the municipality of Santos, the operation is maintained and there is a
final decision at the appellate court favorable to SABESP, with expected remote losses; d) The Company filed an ordinary action against the
municipality of Presidente Prudente, the operation is maintained and there is an appellate court decision favorable to SABESP, with expected
remote losses; e) The Company filed an action to recover possession against the municipality of Álvares Florence, and trial court’s decision was
unfavorable to SABESP; the operation is not maintained with expected possible losses; f) The Company filed an action to recover possession
against the municipality of Macatuba aiming with injunction return to the possession of facilities under concession, the injunction was rejected
and the operation is not maintained in the municipality up to this present date, with expected possible losses; g) The Company filed an action to
recover possession against the municipality of Iperó, which was deemed groundless at trial court and appellate court’s decision is pending.
17 Employee Benefits
F-83
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(a) Health benefit plan
The health benefit plan is managed by Fundação SABESP de Seguridade Social - SABESPREV and consists of optional, free choice, health plans
sponsored by contributions of SABESP and the active participants, as follows:
. Company - 7.8% (December 31, 2011 - 7.5%) on average, of gross payroll;
. Participating employees - 3.21% of base salary and premiums, equivalent to 2.1% of payroll, on average.
(b) Pension plan benefits
Funded plan – G1 (i)
Present value of defined benefit obligations
Fair value of the plan assets
Unrecognized actuarial gains (losses)
Net liabilities recognized for defined benefit obligations
Unfunded plan – G0 (iii)
Present value of defined benefit obligations
Unrecognized actuarial gains (losses) (*)
Net liabilities recognized for defined benefit obligations
Liability as per balance sheet – pension obligations
December 31, 2012
December 31, 2011
2,262,440
(1,657,608)
(27,663)
1,638,220
(1,203,493)
103,892
577,169
538,619
December 31, 2012
December 31, 2011
1,987,718
(440,557)
1,581,600
(69,522)
1,547,161
1,512,078
2,124,330
2,050,697
(*) The increase in 2012 was mainly due to a reduction in the discount rate, from 5.75% in 2011 to 4.0% in 2012. Since the Company applied the
“corridor” approach, actuarial losses exceeding the “corridor” limit are accounted for in the following years, as described in Note 2.21 (a).
(i) Plan G1
The Company sponsors a defined benefit pension plan for its employees ("Plan G1"), which is managed by Fundação SABESP de Seguridade
Social – SABESPREV, the defined benefit plan is sponsored by similar contributions established in a plan of subsidy of actuarial study of
SABESPREV, as follows:
• 0.53% of the portion of the salary of participation up to 20 salaries; and
F-84
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
• 4.5% of the surplus, if any, of the portion of the salary of participation over 20 salaries.
As of December 31, 2012, SABESP had a net actuarial liability of R$577,169 (R$538,619 as of December 31, 2011) representing the difference
between the present value of the Company's defined benefit obligations to the participating employees, retired employees, and pensioners; the
fair value of the related assets; and unrecognized actuarial gains (losses).
Defined benefit obligation, beginning of year
Service cost
Interest cost
Actuarial losses (gains)
Benefits paid
2012
1,638,220
27,764
176,762
488,956
(69,262)
2011
1,572,933
26,869
158,069
(57,583)
(62,068)
Defined benefit obligation, end of year
2,262,440
1,638,220
Fair value of plan assets, beginning of year
Expected return on plan assets
Actuarial gain (loss)
Company's contributions
Employees' contributions
Benefits paid
Fair value of plan assets, end of year
Current service cost
Interest cost
Expected return on plan assets
(Gain) or loss amortization
Curtailment and partial settlement
Gain not recognized of curtailment
Subtotal
Participants contribution
Total recognized in the income statement
2012
1,203,493
147,548
357,400
7,411
11,018
(69,262)
2011
1,113,189
111,307
18,805
8,853
13,407
(62,068)
1,657,608
1,203,493
2011
26,869
158,069
(111,307)
-
-
-
73,631
(13,407)
60,224
2010
27,200
152,470
(122,630)
(10,397)
(61,377)
(15,266)
(30,000)
(15,574)
(45,574)
2012
27,764
176,762
(147,548)
-
-
-
56,978
(11,018)
45,960
F-85
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
In 2012, the expenses related to defined pension plan amounting to R$32,522, R$5,412 and R$8,026, were recorded in cost of sales and services,
selling expenses and administrative expenses, R$46,133, R$7,402 and R$6,689 in 2011 and R$36,936, R$5,388 and R$3,250 in 2010,
respectively.
Curtailment and partial settlement
As of July, 2010, aiming at resolving the deficit related to the Defined Benefit Plan (G1), SABESP and SABESPREV have structured a process
through which the participants may elect to migrate from the Defined Benefit Plan to a Defined Contribution Plan, the SABESPREV Mais.
The migration from plan G1 to SABESPREV Mais resulted in actuarial gain, related to the proportional part of the employees who migrated,
determined by the present value of the assets and liabilities of the pension plan. The Company recognized gain related to curtailment and partial
settlement of the present value of the defined benefit pension plan and the fair value of the plan assets, amounting to R$ 61,377 in 2010. The
Company also recognized prior actuarial gains amounting to R$ 15,266.
The period for the plan migration (from July to November 2010) was suspended through an injunctive relief granted by the Court of Justice of the
State of São Paulo, on October 20, 2010 until the claims from the parties involved are taken into consideration. As of October 20, 2010, 4,023
participants corresponding to 26.0% of the G1 plan migrated to defined contribution plan (Sabesprev Mais).
Estimated expenses
Cost of current service
Interest cost
Expected income from plan assets
Participants contribution
Total additional expense to be recognized
Actuarial assumptions:
Discount rate – real (NTN-B)
Inflation rate
Expected rate of return on assets
Future salary increase
Mortality table
2013
38,823
206,429
(151,139)
(10,876)
83,237
2012
2011
2010
4.10% p.a.
5.00% p.a.
9.30% p.a.
7.10% p.a.
AT-2000
5.75% p.a.
5.00% p.a.
12.53% p.a.
7.10% p.a.
AT-2000
6.0% p.a.
4.0% p.a.
10.2% p.a.
6.1% p.a.
AT-83
Assumptions regarding future mortality experience are set based on mortality table AT-2000 (90% of mortality table AT83). The change did not cause a
relevant impact and this table is more adherent to the plan population.
The number of active participants as of December 31, 2012 was 9,283 (9,833 as of December 31, 2011), and of inactive participants was 6,328
(5,936 as of December 31, 2011).
F-86
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Sensitivity analysis of the pension plan as of December 31, 2012 regarding the changes in the main weighted assumptions are:
Funded plan - G1
Discount rate
Wage increase rate
Life expectation
Plan assets
Change in assumption
Increase of 0.5%
Decrease of 0.5%
Increase of 0.5%
Decrease of 0.5%
Increase of 1 year
Impact on present value of the defined
benefit obligations
Decrease of 6.87%
Increase of 7.70%
Increase of 2.83%
Decrease of 2.53%
Increase of 1.73%
The plan investment policies and strategies are aim at getting consistent returns and reduce the risks associated to the utilization of financial
assets available on the Capital Markets through diversification, considering factors, such as the liquidity needs and the long-term nature of the
plan liability, types and availability of financial instruments in the local market, general economic conditions and forecasts as well as
requirements under the law. The plan's asset allocation management strategies are determined with the support of reports and analysis prepared
by SABESPREV and independent financial consultants:
Segment
Fixed rate securities
Equity securities
Structured investment
Real estate
Loans
Total
December 31,
2012
67%
16%
14%
2%
1%
100%
December 31,
2011
69%
17%
9%
3%
2%
100%
Restrictions with respect to asset portfolio investments, in the case of federal government securities:
i) papers securitized by the National Treasury will not be permitted;
ii) exposure to fluctuations in exchange rates will not be permitted, in the portfolio and derivatives should only be used to hedge existing
exposure.
Restrictions with respect to asset portfolio investments, in the case of variable-income securities for external management, are as follows:
i) day-trade operations will not be permitted;
ii) sale of uncovered share is prohibited;
F-87
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
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.
SABESPREV does not have in its investment portfolio fixed income securities issued by the Company as of December 31, 2012 and 2011. The real
estate held in the portfolio is not used by the Company.
The plan assets had a return of 16.7% in 2012, 13.7% in 2011 and 13.4% in 2010.
The Company expects contributions to Plan G1 for the year ending December 31, 2013 in the amount of R$10,876.
The Company and Sabesprev are in process of negotiation to resolve the actuarial deficit, by continuing migrating participants from the Defined
Benefit Plan to Sabesprev Mais Plan. Management expects to reduce the actuarial deficit due to the change of the referred plans.
(ii) Private pension plan benefits – Defined contribution
As of December 31, 2012, Sabesprev Mais plan, based on defined contribution, had 4,569 active and assisted participants.
With respect to the Sabesprev Mais plan, the contributions from the sponsor represent 100% over the total basic contribution from the
participants.
Regarding the Sabesprev Mais plan, the commitment to all participants who migrated up to December 31, 2012, as per the actuarial report,
amounted to R$12,441 (R$14,688 in December 2011) referred to active participants. The Company has made payments in the amount of R$7,496
in 2012 (R$10,241 in 2011 and R$13,256 in 2010).
(iii) Plan G0
Pursuant to Law 4,819/58, employees who provided services prior to May 1974 and were retired as an employee of the Company acquired a legal
right to receive supplemental pension payments, which rights are referred as "Plan G0". The Company pays these supplemental benefits on behalf
of the State Government and makes claims for reimbursements from the State Government, which are recorded as receivables from related
parties, limited to the amounts considered virtually certain that will be reimbursed by the State Government. As of December 31, 2012, the
Company recorded a defined benefit obligation for Plan G0 of R$1,547,161 (R$1,512,078 in December 2011).
Defined benefit obligation, beginning of year
Service cost
Interest cost
Actuarial (gain) losses
Benefits paid
Unrecognized gains (losses)
Defined benefit obligation, end of year
F-88
2012
2011
1,581,600
400
167,387
(371,035)
(132,704)
1,987,718
(440,557)
1,547,161
1,638,036
548
161,718
(94,281)
(124,421)
1,581,600
(69,522)
1,512,078
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
The amounts recognized in the statement of income are as follows:
Cost of current service
Interest cost
Amortized (gain) / losses
Total
2012
400
167,387
-
167,787
2011
548
161,718
157,527
319,793
In 2012, 2011 and 2010, the expense related to the defined benefit obligation under Plan G0 was recorded in administrative expenses.
Estimated expenses
Cost of current service
Interest cost
Total additional expenses to be recognized
The principal actuarial assumptions used:
Discount rate – real
Inflation rate
Future salary increase
Mortality table
2012
2011
2010
4.0% p.a.
5.0% p.a.
7.1% p.a.
AT-2000
5.75% p.a.
5.0% p.a.
7.1% p.a.
AT-2000
6.0% p.a.
4.0% p.a.
6.1% p.a.
AT-83
Assumptions regarding future mortality experience are set based on mortality table AT-2000 (90% of mortality table AT83). The change did not cause a
relevant impact and this table is more adherent to the plan population.
The number of active participants of Plan - Go as of December 31, 2012 was 27 (36 as of December 31, 2011). The number of beneficiaries, retirees
and dependents as of December 31, 2012 was 2,318 (2,259 on December 31, 2011).
The benefit payable from the Go pension plan expected for 2013 is R$142,267.
The sensitivity analysis of total liabilities of pension plan on December 31, 2012 to the changes in the main weighted
assumptions is:
F-89
2010
9
135,344
-
135,353
2013
296
176,470
176,766
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Plan - G0
Discount rate
Wages increase rate
Life expectation
(c) Profit sharing
Change in assumption
Impact on present value of the defined
benefit obligations
Increase of 0.5%
Decrease of 0.5%
Increase of 0.5%
Decrease of 0.5%
Increase of 1 year
Decrease of 4.96%
Increase of 5.42%
Increase of 0.01%
Decrease of 0.01%
Increase of 2.34%
The Company has a profit sharing program in accordance with an agreement with labor union and Sabesp. The period covered represents the
Company fiscal year, which starts in January and ends in December. The limit of the profit sharing is one month salary for each employee,
depending on performance goals reached. As of December 31, 2012 the profit distribution amounted to R$60,479 (R$56,576 in 2011 and
R$52,600 in 2010).
18 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. This account also records the amounts payable from the percentage in the
revenues of São Paulo local government (Note 10 d (v)).
19 Equity
(a) Authorized capital
The Company is authorized to increase capital by up to R$10,000,000 (R$10,000,000 in December 2011), based on a Board of Directors'
resolution, after submission to the Fiscal Council.
(b) Subscribed and paid-in capital
Subscribed and paid-in capital is represented by 227,836,623 registered, book-entry common shares as of December 31, 2012 and 2011, without
par value, held as follows:
Before Stock Split on April 22, 2013
December 31, 2012
December 31, 2011
São Paulo State Department of Finance
Number of shares
114,508,086
% Number of shares
114,508,086
50.26%
Companhia Brasileira de Liquidação e Custódia
The Bank Of New York ADR Department (equivalent in
shares) (*)
Other
57,523,374
55,602,286
202,877
25.25%
24.40%
0.09%
52,990,545
60,144,856
193,136
227,836,623
100.0%
227,836,623
F-90
%
50.26%
23.26%
26.40%
0.08%
100.0%
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
After Stock Split on April 22, 2013
December 31, 2012
December 31, 2011
São Paulo State Department of Finance
Number of shares
343,524,258
% Number of shares
343,524,258
50.26%
Companhia Brasileira de Liquidação e Custódia
The Bank Of New York ADR Department (equivalent in
shares) (*)
Other
172,570,122
166,806,858
608,631
25.25%
24.40%
0.09%
158,971,635
180,434,568
579,408
683,509,869
100.0%
683,509,869
%
50.26%
23.26%
26.40%
0.08%
100.0%
(*) Each ADR corresponds to 2 shares. As of January 24, 2013, each ADR corresponds to 1 share. See Note 29(v)
Subscribed and paid-in capital was represented by 227,836,623 registered, book-entry common shares, without par value as of January 1, 2012
and December 31, 2012; there was no change during the year.
On April 22, 2013 the Shareholders approved the stock split in the annual Shareholders’ meeting. The stock split was in a portion of 1 (one) to 3
(three) and the total common shares became 683,509,869. The owner of one share will receive 2 (two) more shares.
As required by IAS 33, the Company adjusted retrospectively the calculation of basic and diluted earnings per share and per ADS for the period
presented.
(c) Dividends
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.
F-91
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Net income for the year
(-) Legal reserve - 5%
2012
2011
2010
1,911,900
(95,595)
1,223,419
(61,171)
1,630,447
(81,522)
1,816,305
1,162,248
1,548,925
Minimum mandatory dividend - 25% (R$0.66, R$ 0.43 and R$ 0.57 as of December 31, 2012, 2011 and 2010,
respectively, per share and per ADS)
454,076
290,562
387,231
On April 23, 2012, the Shareholders’ General Meeting approved the distribution of dividends as interest on shareholders’ equity amounting to
R$578,705, for the 2011 fiscal year. Therefore, the amount of R$288,143 related to the surplus minimum mandatory dividends of 25%, set forth
in the Bylaws, recorded in the 2011 equity under “Additional proposed dividends” was transferred to current liabilities, and these amounts were
paid in June 2012. The R$578,705 interest on shareholders’ equity, net of withholding income tax of R$40,882, totaled R$537,823.
The Company proposed dividends as interest on shareholders’equity in the amount of R$534,277 corresponding to R$2.345 per common share.
This interest on shareholders’ equity, net of income tax of R$39,863, totaled R$494,414 to be approved on the Shareholders’ Meeting to be held
on April 22, 2013.
The Company declared dividends payable as interest on shareholders’ equity in the amount of R$454,076, which considers the minimum
dividend amount set forth in the Bylaws. The amount exceeding the minimum mandatory dividend due in the year of R$80,201, was reclassified
in equity to the “Additional proposed dividends” account.
The balance payable as of December 31, 2012 was R$414,355, net of withholding income tax.
(d) Capital reserve
The capital reserve includes tax incentives and donations received by the company and may only be used for future capital increases.
(e) Legal reserve
Earnings reserve - legal reserve is a requirement for all Brazilian corporations and represents accrual of 5% of annual net income determined
based on Brazilian law, up to 20% of capital. However, the Company is not required to make any allocations to our legal reserve in a year in which
the legal reserve, when added to the other established capital and earnings reserves, exceeds 30% of our capital stock. The amounts allocated to
such reserve may only be used to increase the capital stock or to offset losses. Therefore, they are not available for the payment of dividends.
(f) Investments reserve
Earnings reserve - investments reserve is specifically formed by the portion corresponding to own funds assigned to the expansion of the water
supply and sewage treatment systems, based on capital budget approved by the Management.
F-92
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
As of December 31, 2012 and 2011, the balance of investment reserve totaled R$4,690,619 and R$3,408,591, respectively.
Pursuant to Paragraph four of Article 29 of the by-laws, the Board of Directors may propose to the Shareholders’ Meeting that the remaining
balance of net income 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-
II-
its balance, jointly with the balance of the other profit reserves, except for reserves for contingencies and realizable profits, may not
exceed the capital stock;
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) to increase capital stock.
(g) Allocation of profit for the year
Net income for the year
Legal reserve – 5%
Minimum mandatory dividends
Additional proposed dividends
(+)
(-)
(-)
(-)
Investment reserve recorded in 2012
(h) Retained earnings (accumulated losses)
2012
1,911,900
95,595
454,076
80,201
1,282,028
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 at year end.
20 Earnings per Share
Basic and diluted
Basic earnings per share is calculated by dividing the income attributable to the Company’s shareholders 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.
Income attributable to the Company’s shareholders
Weighted average number of common shares issued (*)
Basic and diluted earnings per share (reais per share)
Basic and diluted earnings per ADS (reais per ADS)
F-93
2012
2011
2010
1,911,900
683,509,869
1,223,419
683,509,869
1,630,447
683,509,869
2.80
2.80
1.79
1.79
2.39
2.39
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(*) On January 10, 2013, the board of directors approved the change in the number of American Depositary Receipts (“ADRs”), negotiated in the New
York Stock Exchange (“NYSE”), from actual 1 ADR to 2 shares to 1 ADR to 1 share. As required by IAS 33, the Company adjusted retrospectively the
calculation of basic and diluted earnings per share and per ADS for the periods presented.
21 Segment information
Management, comprised by the Board of Directors and the Board of Executive Officers, has determined the operating segments used to make
strategic decisions, as water supply and sewage services.
(i) Income statement
2012
Water
Sewage
Reconciliation to the
financial statements
Balance as per
financial statements
Gross operating revenue - from external customers
4,947,860
3,986,838
2,474,612
11,409,310
Gross sales deductions
(362,259)
(292,616)
-
(654,875)
Net operating revenue - from external customers
4,585,601
3,694,222
2,474,612
10,754,435
Costs, selling and administrative expenses
(3,414,352)
(2,051,250)
(2,423,797)
(7,889,400)
Income from operations before other operating expenses, net
1,171,249
1,642,972
50,815
2,865,035
Other operating expenses, net
Financial result, net
Income from operations before taxes
(19,775)
(301,356)
2,543,904
Depreciation and amortization
404,803
335,344
-
740,147
F-94
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
2011
Water
Sewage
Reconciliation to the
financial statements
Balance as per
financial statements
Gross operating revenue - from external customers
4,610,204
3,699,916
2,234,778
10,544,898
Gross sales deductions
Net operating revenue - from external
customers
(334,616)
(268,645)
-
(603,261)
4,275,588
3,431,271
2,234,778
9,941,637
Costs, selling and administrative expenses
(3,309,145)
(2,001,647)
(2,186,320)
(7,497,112)
Income from operations before other operating
expenses, net
Other operating expenses, net
Financial result, net
Income from operations before taxes
966,443
1,429,624
48,458
2,444,525
(90,138)
(633,641)
1,720,746
Depreciation and amortization
415,065
353,704
-
768,769
2010
Water
Sewage
Reconciliation to
the financial
statements (**)
Total per Income
Statement
Gross operating revenue - from external customers
4,257,158
3,398,733
2,130,684
9,786,575
Gross sales deductions
(314,282)
(241,266)
-
(555,548)
Net operating revenue - from external customers
3,942,876
3,157,467
2,130,684
9,231,027
Costs, selling and administrative expenses
(2,789,529)
(1,690,084)
(2,081,081)
(6,560,694)
Income from operations before other operating expenses, net
1,153,347
1,467,383
49,603
2,670,333
Other operating expenses, net
Financial result, net
Income from operations before taxes
1,830
(379,407)
2,292,756
Depreciation and amortization
291,841
260,343
-
552,184
F-95
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Explanation on the reconciliation items for the Financial Statements: the impacts on gross revenues from sales and services and in costs are as
follows:
Gross revenue from construction recognized under IFRIC 12
Construction costs recognized under IFRIC 12
Construction margin
Year ended December 31,
2012
2011
2010
(a)
(a)
2,474,612
(2,423,797)
50,815
2,234,778
(2,186,320)
48,458
2,130,684
(2,081,081)
49,603
(a) Revenue from concession construction contracts is recognized in accordance with IAS 11 Construction Contracts, using the percentage-of-
completion method. See Notes 2.5 (b) and 2.10 (a).
(ii) Intangible assets
Reportable segment’s intangible assets are reconciled to total assets as follows:
Intangible asset:
Water supply
Sewage services
Segment assets for reportable segments
Other intangible assets
Total intangible assets
There are no liabilities allocated to the reportable segments.
22 Revenue per Region
(a) Net operating revenue:
Revenue by region
Metropolitan region of São Paulo
Regional Systems (i)
Gross revenue from construction
Service taxes and deductions
Total Net operating revenue (ii)
December 31, 2012
December 31, 2011
9,138,295
11,211,925
8,237,071
10,584,402
20,350,220
18,821,473
1,641,702
1,320,204
21,991,922
20,141,677
2012
2011
2010
6,625,041
2,309,657
2,474,612
(654,875)
6,144,669
2,165,451
2,234,778
(603,261)
5,699,618
1,956,273
2,130,684
(555,548)
10,754,435
9,941,637
9,231,027
F-96
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(i) Including the municipalities operated in inland and at the coast of the State of São Paulo.
(ii) Net operating revenue increased by 8.2% as of December 31, 2012 over 2011. The volume billed was up 2.7% as of December 31, 2012 and the
tariff adjustment has been 5.15% since September 2012 and 6.83% since September 2011. Net operating revenue increased 7.7% as of
December 31, 2011 over 2010. The volume billed was up 3.1% as of December 31, 2011 and the tariff adjustment has been 6.83% since
September 2011 and 4.1% since September 2010.
(b) Reconciliation between gross revenue and net revenue:
Gross revenue from sales and/or services
Construction revenue (Note 10 c)
Sales tax
Net revenues
23 Operating Costs and Expenses
Cost of sales and services
Salaries and payroll charges
Pension obligations (i)
Construction costs (Note 10 c)
General supplies
Treatment supplies
Outsourced services
Electricity
General expenses
Depreciation and amortization
Selling expenses
Salaries and payroll charges
Pension obligations (i)
General supplies
Outsourced services
Electricity
General expenses
Depreciation and amortization
Allowance for doubtful accounts, net of recoveries (Note 7(c))
2012
2011
2010
8,934,698
2,474,612
(654,875)
10,754,435
8,310,120
2,234,778
(603,261)
9,941,637
7,655,891
2,130,684
(555,548)
9,231,027
2012
2011
2010
1,225,452
36,480
2,423,797
169,389
177,965
725,471
589,512
400,719
716,613
1,132,403
49,374
2,186,320
147,464
154,867
668,994
583,418
369,054
739,083
994,631
(11,799)
2,081,081
135,113
136,546
603,924
529,480
202,645
522,927
6,465,398
6,030,977
5,194,548
198,959
6,054
8,327
205,568
629
78,021
8,021
192,295
697,874
194,832
7,942
7,703
201,955
622
78,660
7,435
120,393
619,542
185,012
(1,375)
6,488
216,038
775
69,581
3,922
232,505
712,946
F-97
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Administrative expenses
Salaries and payroll charges
Pension obligations (i)
General supplies
Outsourced services
Electricity
General expenses
Depreciation and amortization
Tax expenses
Cost, Sales and Administrative expenses
Salaries and payroll charges
Pension obligations (i)
Construction costs (Note 10 c)
General supplies
Treatment supplies
Outsourced services
Electricity
General expenses
Depreciation and amortization
Tax expenses
Allowance for doubtful accounts, net of recoveries (Note 7(c))
2012
171,927
104,717
5,244
148,405
1,492
209,765
15,513
69,065
726,128
1,596,338
147,251
2,423,797
182,960
177,965
1,079,444
591,633
688,505
740,147
69,065
192,295
2011
160,262
262,597
4,267
125,502
1,052
208,978
22,251
61,684
846,593
1,487,497
319,913
2,186,320
159,434
154,867
996,451
585,092
656,692
768,769
61,684
120,393
2010
141,749
93,683
5,167
150,300
1,268
172,241
25,335
63,457
653,200
1,321,392
80,509
2,081,081
146,768
136,546
970,262
531,523
444,467
552,184
63,457
232,505
(i) The decrease in pension obligations is due to an increase in actuarial liabilities referring to additional retirement and pension benefits granted
by State Law 4819/58 (Plan G0), in the amount of R$157,527, which impacted the first quarter of 2011.
7,889,400
7,497,112
6,560,694
24 Financial income and expenses
Financial expenses
Interest and charges on loans and financing – local currency
Interest and charges on loans and financing – foreign currency
Other financial expenses
Income tax on international remittances
Inflation adjustment on loans and financing (i)
Inflation adjustment on Sabesprev Mais deficit(ii)
Other inflation adjustments (iii)
Interest and inflation adjustments on provisions
Total Financial expenses
2012
2011
2010
(306,794)
(87,800)
(36,394)
(11,660)
(34,599)
(1,525)
(6,657)
(97,393)
(355,526)
(79,816)
(21,743)
(9,795)
(48,878)
(1,794)
(41,449)
(143,765)
(388,502)
(50,797)
(56,551)
(3,412)
(87,330)
-
(1,248)
(201,627)
(582,822)
(702,766)
(789,467)
F-98
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Financial income
Inflation adjustment gains (iv)
Income on short-term investments
Interest and other income
Total Financial income
Financial, net before exchange rate changes
Foreign exchange result, net
Exchange rate changes on loans and financing
Other exchange rate changes
Exchange gains
2012
66,514
163,421
102,106
332,041
2011
89,361
271,973
104,592
465,926
2010
120,779
137,720
85,415
343,914
(250,781)
(236,840)
(445,553)
(50,523)
(56)
4
(382,304)
(97)
(14,400)
(50,575)
(396,801)
66,191
(214)
169
66,146
Financial income (expenses), net
(301,356)
(633,641)
(379,407)
(i)
(ii)
This inflation adjustment derives from changes in the indexes defined in loan agreements, such as, UPR, IPCA, CDI and TJLP,
corresponding to 0.3%, 5.8%, 6.9% and 5.5%, respectively, in 2012 (1.2%, 6.5%, 10.9% and 6.0%, respectively, in 2011 and 0.7%,
5.9%, 10.6% and 6.0%, respectively, in 2010). The exposures to these rates are shown in Note 3.1.
This inflation adjustment derives from the change in the National Consumer Price Index (INPC) rate of 6.2% in 2012 (6.1% in 2011
and 6.5% in 2010), which is used to adjust the balance of SABESP’s commitment in relation to the deficit of the Sabesprev Mais
pension plan.
(iii) Other expenses related to inflation adjustment mainly arises from the adjustment of liabilities referring to investment commitments
required by the public-private partnerships and mainly from program contracts indexed by the IPC and IPCA of 5.7% and 5.8% in
2012, 6.4% and 6.5% in 2011 and 6.2% and 5.9% in 2010, respectively.
(iv)
These inflation adjustment mainly arises from the changes in the adjustment indexes of overdue trade receivables which can be
IPCA (5.8% in 2012, 6.5% in 2011 and 5.9% in 2010) or IPC-Fipe (Consumer Price Index, 5.1% in 2012, 5.8% in 2011 and 6.4% in
2010), depending on the contract date, and escrow deposits, which are adjusted by the index defined by the Judiciary Branch, which
varied between 6.0% in 2012 and 6.2% in 2011.
25 Other operating income (expenses), net
Other operating income
Other operating expenses (i)
Other operating income (expenses), net
2012
71,764
(91,539)
(19,775)
2011
72,501
(162,639)
(90,138)
2010
39,456
(37,626)
1,830
F-99
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Other operating income is comprised of sale of property, plant and equipment, sale of contracts awarded in public bids, and indemnities and
reimbursement of expenses, fines and collaterals, property leases, reuse water, PURA and Aqualog projects and services.
Other operating expenses consist mainly of write-off of property, plant and equipment due to obsolescence, discontinued construction works,
unproductive wells, projects considered economically unfeasible, losses on property, plant and equipment.
(i) mainly refers to the allowance for losses of the municipality of Diadema in 2012, totaling R$60.295, and the municipality of Mauá in 2011,
totaling R$85,918.
26 Commitments
The Company has agreements to manage and maintain its activities, as well as agreements to build new projects aiming at achieving the
objectives proposed in its target plan. Below are the main committed amounts as of December 31, 2012:
1 year
1-3 year
3-5 year
More than
5 years
Total
Contractual obligations - Expenses
Contractual obligations – Investments
Total
1,145,001
1,258,344
2,403,345
912,264
746,046
1,658,310
37,078
25,811
62,889
996
-
996
2,095,339
2,030,201
4,125,540
27 Additional cash flow information
Non-cash transactions:
Interest capitalized
Contractors
Program contract commitments
Leases
Construction margin
28 Events after the reporting period
(i) Debentures
17th issue of Debentures
December 31, 2012
December 31, 2011
December 31, 2010
296,671
67,631
75,434
166,166
50,815
261,900
33,937
43,325
49,609
47,589
228,899
14,365
62,748
-
49,603
F-100
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
On February 25, 26 and 27, 2013, the Company registered, respectively, the 1st, 2nd and 3rd series of the 17th issue of nonconvertible unsecured
debentures, in three series for public offering, according to Brazilian Securities and Exchange Commission (CVM) Instruction 400, with the
following characteristics:
Issue date: January 15, 2013
Series: Three
Total amount: R$1,000,000,000.00 (one billion reais)
Quantity: 100,000 (one hundred thousand)
Unit amount: R$10,000.00 (ten thousand reais)
Series 1
Amount: R$424,680,000.00 (four hundred twenty four million, six hundred eighty thousand reais)
Quantity: 42,468 (forty-two thousand, four hundred and sixty-eight)
Payment: semi-annually
Amortization: 3 annual installments – January 15, 2016 (33%), 2017 (33%) and 2018 (balance)
Early redemption: none
Interest: DI plus 0.75% p.a.
Series 2
Amount: R$395,230,000.00 (three hundred ninety-five million two hundred and thirty thousand reais)
Quantity: 39,523 (thirty-nine thousand, five hundred and twenty-three)
Payment: annually
Amortization: 2 annual installments – January 15, 2019 and 2020
Early redemption: none
Interest: IPCA plus 4.50% p.a.
Series 3
Amount: R$180,090,000.00 (one hundred eighty million, ninety thousand reais)
Quantity: 18,009 (eighteen thousand and nine)
Payment: annual
Amortization: 3 annual installments – January 15, 2021 (33%), 2022 (33%) and 2023 (balance)
Early redemption: none
Interest: IPCA plus 4.75% p.a.
The proceeds from the issue of debentures will be exclusively used as follows: (i) five hundred million reais (R$500,000,000.00) to repay
financial commitments falling due in 2013; and (ii) five hundred million reais (R$500,000,000.00) for the early redemption of debentures or
other Company’s debt.
There is no estimate of optional early redemption.
11th issue of Debentures
On March 1, 2013, the Company fully redeemed the balance of series 1 of the 11th issue of debentures, in the amount of R$1,060,428.
(ii) BNDES - Tietê Project Phase II
F-101
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
Loan Agreement 01.2.619.3.1 and Onlending Agreement no 10/669.748-6 signed on August 4, 2002, which had the financial settlement of all
obligations deriving from loan and onlending agreements in force, considering that the last installment of interest and amortization was paid on
February 15, 2013.
(iii) BNDES - Tietê Project Phase III.
In February 2013, Companhia de Saneamento Básico do Estado de São Paulo – SABESP obtained a loan with the Brazilian Development Bank
(BNDES), referring to the project to execute the Third Stage of the Tietê River Depollution Program, financed by the Inter-American
Development Bank (IADB). The amount contracted is R$1,350 million and aims at implementing collectors, interceptors, collection networks and
residential sewer connections, and expand the sewage treatment capacity in the metropolitan region of São Paulo. The agreement is effective for
180 months, with a 36-month grace period and finance charges of TJLP + 1.66% p.a.
(iv) PPP – São Lourenço Production System
On February 7, 2013, the Company started the bidding process of Sabesp International Bidding CSS 16.402/2012 – Public-Private Partnership, by
means of Administrative Concession, for the rendering of operation and maintenance services of São Lourenço Production System.
(v) Change in the number of shares – ADRs
The Company’s Board of Directors, in a meeting held on January 10, 2013, approved (i) the change in the number of shares backing the
Company’s American Depositary Receipts (“ADRs”), traded on the U.S. market at the New York Stock Exchange (“NYSE”) from current ratio of
one (1) ADR to two (2) common shares to the new ratio of one (1) ADR to one (1) common share issued by the Company, mainly to promote the
liquidity of these instruments; and (ii) the proposal for the stock split of common shares issued by SABESP, in ratio to be still defined by the
Management, which will be appropriately submitted to the analysis of SABESP’s shareholders at the Extraordinary Shareholders’ Meeting and
once approved, shall result in the amendment to Article 3 of SABESP’s Bylaws, as the number of shares representing the Company’s capital stock
will be changed according to the ratio to be defined.
(vi) Allocation of profit
As of April 22, 2013 the Shareholders approved the allocation of profit of 2012 proposed by the board of Directors, as described in the Note 19 (g),
in the annual Shareholders’ meeting. Therefore, the Company’s proposed additional dividends amounting to R$ 80,201 were declared on April
22, 2013.
F-102
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Years Ended December 31, 2012 and 2011
(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)
(vii) Stock split
As of April 22, 2013 the Shareholders approved the stock split in the annual Shareholders’ meeting. The stock split was in a portion of 1 (one) to 3
(three) and the total common shares became 683,509,869. The owner of one share will receive 2 (two) more shares.
(viii) Tariff
According to the ARSESP Deliberation 406 and article 28 of the Tariff Regulations System, approved by the State decree 41,446 on December 16,
1996, the Board of Directors approved the application of the tariff increase at 2.3509% in the actual tariffs.
The Regulation and Fiscalization fees of 0.5%, authorized by Deliberation 406, will be applied after concluding the operational adjustments to
inform the fees in the invoices.
On Abril 4, 2013 the Company filed Reconsideration of Decision at ARSESP, related to the terms in Deliberation 406 to preserve the Company’s
interests in the tariff revision process.
The ARSESP approved the Deliberation 413, suspendind the Deliberation 407, postponing the repass of the municipalities charges, established in
the Program Agreements and Services Contract, in the tariffs to the moment of the definitive result of the tariffs revision.
(ix) EMAE
With respect to the matter mentioned in note 8(b), in February 2012, the decision to submit to arbitration was established by the judge during the first
hearing, which is subject to appeal. The Company filed a request for suspension which was rejected. In 2013 EMAE filed and arbitration process.
SABESP will take all the available judicial actions to defend its position. The Company’s management assessed this risk as possible loss, and it is
not possible to estimate the total amount since it was not defined in the process.
(x) Program contracts
In 2013, the Company signed Program Contracts with the municipalities of Presidente Prudente, Embu-Guaçu, Glicério and Ibirá to provide
sanitation services.
* * *
F-103
EX-12.1 2 exhibit_121.htm EXHIBIT 12.1
I, Dilma Seli Pena, certify that:
CERTIFICATION
EXHIBIT 12.1
1. I have reviewed this annual report on Form 20-F of Companhia de Saneamento Básico do Estado de São Paulo - Sabesp;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material
respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the company and have:
a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, 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;
c) evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on evaluation; and
d) disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial
reporting.
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the company’s auditors and to the audit committee of the company’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal
control over financial reporting.
Date: May 15, 2013
By: /s/ Dilma Seli Pena
Name: Dilma Seli Pena
Title: Chief Executive Officer
EX-12.2 3 exhibit_122.htm EXHIBIT 12.2
I, Rui de Britto Álvares Affonso, certify that:
CERTIFICATION
EXHIBIT 12.2
1. I have reviewed this annual report on Form 20-F of Companhia de Saneamento Básico do Estado de São Paulo - Sabesp;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects
the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the company and have:
a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, 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;
c) evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on evaluation; and
d) disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial
reporting.
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the company’s auditors and to the audit committee of the company’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal
control over financial reporting.
Date: May 15, 2013
By: /s/ Rui de Britto Álvares Affonso
Name: Rui de Britto Álvares Affonso
Title: Chief Financial Officer and Investor Relations Officer
EX-13.1 4 exhibit_131.htm EXHIBIT 13.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002
EXHIBIT 13.1
In connection with the Annual Report of Companhia de Saneamento Básico do Estado de São Paulo – Sabesp (the “Company”) on Form 20-F for
the fiscal year ended December 31, 2012, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), I, Dilma
Seli Pena, Chief Executive Officer, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the U.S. Sarbanes Oxley
Act of 2002, that to the best of my knowledge:
(i) the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: May 15, 2013
By: /s/ Dilma Seli Pena
Name: Dilma Seli Pena
Title: Chief Executive Officer
EX-13.2 5 exhibit_132.htm EXHIBIT 13.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002
EXHIBIT 13.2
In connection with the Annual Report of Companhia de Saneamento Básico do Estado de São Paulo – Sabesp (the “Company”) on Form 20-F for
the fiscal year ended December 31, 2012, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), I, Rui de
Britto Álvares Affonso, Chief Financial Officer and Investor Relations Officer, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant
to section 906 of the U.S. Sarbanes Oxley Act of 2002, that to the best of my knowledge:
(i) the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: May 15, 2013
By: /s/ Rui de Britto Álvares Affonso
Name: Rui de Britto Álvares Affonso
Title: Chief Financial Officer and Investor Relations Officer
EX-15 6 exhibit_15.htm EXHIBIT 15
May 15, 2013
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Commissioners:
We have read the statements made by Companhia de Saneamento Básico do Estado de São Paulo - SABESP, (copy
attached), which we understand will be filed with the Securities and Exchange Commission, pursuant to Item 16.F of Form
20-F, as part of the Form 20-F of Companhia de Saneamento Básico do Estado de São Paulo - SABESP, dated May 15,
2013. We agree with such statements concerning our Firm in such Form 20-F.
Very truly yours,
/s/ PricewaterhouseCoopers Auditores Independentes