20-F 1 sbsform20f_2014.htm FORM 20-F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20‑F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2014
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the tr ansition per iod fr om ________________ to _______________________
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event r equir ing this shell company r epor t__________________________
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)
Feder ative Republic of Br azil
(Jurisdiction of incorporation or organization)
Rua Costa Car valho, 300
05429‑900 São Paulo, SP, Br azil
(Address of principal executive offices)
Rui de Br itto Álvar es Affonso
r affonso@sabesp.com.br
(+55 11 3388 8247)
Rua Costa Car valho, 300 05429‑900 São Paulo, SP, Br azil
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares, without par value
American Depositary Shares, evidenced by American Depositary Receipts, each representing
one Common Share
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
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.
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 No
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 No
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 No
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 No
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 Accelerated filer Non‑accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP International Financial Reporting Standards as issued by the International Accounting Standards Board Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has
elected to follow
Item 17 Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).
Yes No
TABLE OF CONTENTS
PART I
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
KEY INFORMATION
INFORMATION ON THE COMPANY
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
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
PART II
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.
[Reserved]
PART III
ITEM 17.
ITEM 18.
ITEM 19.
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
PART IV SIGNATURES
i
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Gener al
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
We maintain our books and records in reais. We prepare our financial statements in accordance with International Financial Reporting
Standards, or “IFRS”, as issued by the International Accounting Standards Board, or the “IASB”. Our financial statements as of December 31,
2014 and 2013 and for the three years ended December 31, 2014 have been audited, as stated in the report appearing herein, and are included in
this annual report on Form 20‑F.
Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain
tables may not be an arithmetic aggregation of the figures which precede them.
Water Cr isis
Our results and operational performance for the fiscal year ended December 31, 2014, were adversely impacted by the most serious drought
in our serviced region in 84 years. Both the water conservation measures we implemented to mitigate the effects of the drought on our water
supply and a significantly heightened public awareness of the need to conserve water during the current water crisis negatively impacted our
revenues. As of December 31, 2014, the reservoirs in the São Paulo metropolitan region, where our largest market is located, contained 301
billion liters of bulk water storage for treatment, compared to 1,037 billion liters (749.6 billion liters above water intake and 287.5 billion liters
below water intake) available for treatment as of December 31, 2013. Under normal circunstances, we withdraw 6.2 billion liters per day
(equivalent to the total water production of 72 m³/s in February 2014 for the São Paulo metropolitan region) from the reservoirs. This volume
decreased to 4.4 billion during the current drought (equivalent to the total water production of 51.4 m³/s in March 2015 for the São Paulo
metropolitan region). For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Business—The measures we took to mitigate the
effects of the drought resulted in a significant decrease in the volume of water billed and revenues from services we provide, which had a material
adverse effect on our company and that may worsen if the drought escalates in severity” and “Item 4.B. Business Overview—The Current Water
Crisis”.
Convenience Tr anslations
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, 2014 was R$2.6562 to US$1.00, which was the commercial rate for the purchase of U.S. dollars in effect
on December 31, 2014, as reported by the Central Bank. The U.S. dollar equivalent information presented in this annual report is provided solely
for the convenience of the reader and should not be construed as implying that the real amounts represent, or could have been or could be
converted into, U.S. dollars at the above rate. See “Item 3.A. Selected Financial Data—Exchange Rates” for more detailed information regarding
the Brazilian foreign exchange system and historical data on the exchange rate of the real against the U.S. dollar.
Rounding
Some percentages and numbers included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as
totals in certain tables may not be an arithmetic aggregation of the figures that precede them.
Other Infor mation
In this annual report, unless the context otherwise requires, references to “we,” “us,” “our,” “Company,” or “SABESP” refer to Companhia de
Saneamento Básico do Estado de São Paulo – SABESP.
In addition, references to:
“ARSESP” are to the São Paulo State Sanitation and Energy Regulatory Agency (Agência Reguladora de Saneamento e Energia
do Estado de São Paulo);
1
“ADR” or “ADRs” are to American Depositary Receipt or American Depositary Receipts, respectively;
“ADS” or “ADSs” are to American Depositary Share or American Depositary Shares, respectively;
“Brazil” are to the Federative Republic of Brazil;
“Central Bank” are to the Central Bank of Brazil;
“CVM” are to the Comissão de Valores Mobiliários, the Brazilian regulator of securities;
“federal government” and “Brazilian government” are to the federal government of the Federative Republic of Brazil and “state
government” are to the state government of the State of São Paulo;
“real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil;
“Regional Systems” are to the area where the regional systems’ executive office operates, comprising 326 municipalities in the
interior and coastline regions of the state of São Paulo;
“São Paulo metropolitan region,” with respect to our operations, are to the area where the metropolitan executive office operates,
comprising 38 municipalities, including the city of São Paulo;
“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;
“State” are to the State of São Paulo, which is also our controlling shareholder;
“U.S. dollars” or “US$” are to the United States dollar, the official currency of the United States;
“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
“water crisis” are to the drought we have experienced since late 2013. This drought is the most serious drought that our service
region has experienced in 84 years and primarily affects the Cantareira System, our largest water production system.
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.
2
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 that any of this information is inaccurate in any material respect.
References to urban and total population in this annual report are estimated based on 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).
Our contracts and the Municipalities We Serve
Throughout this document, we refer to the 364 municipalities we serve and to our 366 water contracts. This difference results from the fact
that we have two partial water contracts with the municipality of Mogi das Cruzes. These contracts are partial because pursuant to them we serve
only two neighborhoods of this municipality and, as a result, do not include Mogi das Cruzes in the total of municipalities we serve.
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:
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;
availability of the water supply, which may continue to be adversely affected by the current water crisis in São Paulo;
the impact on our business of the water consumption reduction incentive program and other measures we took in 2014 and are
taking in 2015 as well as any other measures we may need to take until the water levels of our reservoirs are normalized and
sufficient to continuously serve the customers in the São Paulo metropolitan region;
the impact on our business of lower water consumption practices adopted by our customers during the current water crisis, which
may remain in place even after the water levels of our reservoirs normalize;
decisions by the São Paulo State Department of Water and Energy (Departamento de Águas e Energia Elétrica do Estado de São
Paulo), or “DAEE”, and the National Water Agency (Agência Nacional de Águas), or “ANA”, limiting the volume of water that
may be extracted from the Cantareira System, the main water system we use to serve the São Paulo metropolitan region, and the
measures that we may be required to take to ensure the provision of water to our customers;
our exposure to probable increases in the frequency of extreme weather conditions, including droughts and intensive rain and
other climatic events;
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;
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;
4
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 and its consumption habits;
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;
the outcome of our pending or future legal proceedings;
our management’s expectations and estimates relating to our future financial performance;
the regulations issued by ARSESP regarding several aspects of our business, including limitations on our ability to set and adjust
our tariffs;
the possibility to be subject to a regulatory agency, other than ARSESP; 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 financial statements (including the notes thereto), “Presentation
of Financial and Other Information” and “Item 5. Operating and Financial Review and Prospects”.
The selected financial data as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 have been derived
from our audited financial statements, prepared in accordance with IFRS, and included in this annual report. The selected financial data as of
December 31, 2012, 2011 and 2010 and for the years ended December 31, 2011 and 2010 have been derived from our audited 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, 2010 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.A. Financial Statements and Other Financial Information—Dividends and Dividend Policy—Payment of
Dividends”.
The following tables present our selected financial data as of and for each of the periods indicated:
IFRS Summar y Financial Data
F or the year ended December 31,
(3)
2014
US$
(4)
2014
US$
2014
R$
2013
R$
(in millions, except per share and per ADS
(5)
2012
R$
(1) data)
(5)
2011
R$
(7)
2010
R$
Statement of oper ations 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(6)(2)
Dividends and interest on shareholders’ equity per
share(2)
Dividends and interest on shareholders’ equity per
ADS(6)(2)
Weighted average number of common shares
outstanding(2)
3,495.4
(2,380.2)
1,115.2
(229.6)
(288.1)
595.6
(198.2)
281.5
0.41
0.41
0.10
0.10
4,221.5
(2,874.6)
1,346.9
(277.3)
(348.0)
719.3
(239.4)
340.0
0.50
0.50
0.12
0.12
11,213.2
(7,635.6)
3,577.6
(736.6)
(924.4)
1,910.7
(635.9)
903.0
1.32
1.32
0.32
0.32
11,315.6
(6,816.3)
4,499.3
(637.1)
(729.1)
3,138.8
(483.2)
1,923.6
2.81
2.81
0.67
0.67
10,737.6
(6,449.9)
4,287.7
(697.3)
(717.4)
2,843.3
(295.7)
1,911.9
2.80
2.80
0.66
0.66
9,927.4
(6,018.7)
3,908.7
(619.3)
(683.6)
2,512.0
(633.0)
1,380.9
2.02
2.02
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
683,509,869
683,509,869
683,509,869
683,509,869
683,509,869
683,509,869
683,509,869
6
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 infor mation:
Cash generated from 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
(3)
2014
US$
(4)
2014
US$
2014
R$
2013
R$
As of December 31,
(5)
2012
(in millions, except per share and per ADS
95.0
8,098.4
9,462.4
376.3
2,985.9
66.9
5,315.2
4,147.3
3,117.2
773.1
(859.6)
68.1
114.8
9,780.7
11,428.1
454.5
3,606.1
80.8
6,419.3
5,008.8
3,764.8
933.8
(1,038.2)
82.3
304.8
25,979.5
30,355.4
1,207.1
9,578.6
214.5
17,051.0
13,304.4
10,000.0
2,480.3
(2,757.7)
218.5
199.5
23,846.2
28,274.3
640.9
8,809.1
457.0
15,343.5
12,930.8
6,203.7
2,777.2
(2,281.5)
(629.7)
(5)
2011
R$
(7)
2010
R$
181.6
20,125.7
24,983.2
1,629.2
6,794.1
247.5
14,438.3
10,544.9
6,203.7
2,698.6
1,883.2
(661.3)
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
R$
(1) data)
196.7
21,967.5
26,476.1
1,342.6
7,532.7
414.4
15,219.4
11,256.8
6,203.7
2,343.2
(1,996.7)
(572.7)
(856.7)
(1,034.7)
(2,748.3)
(2,335.8)
(2,026.1)
(2,068.8)
(1,901.5)
(1) ADS.
(2) On April 22, 2013, our shareholders approved a stock split, following which each common share represented three new common shares. Therefore, per share information in the
selected financial data has been revised to give effect to the stock split retrospective to all periods presented.
(3) Translated at the commercial selling rate at closing for the purchase of U.S. dollars, as reported by the Central Bank, as of March 31, 2015 of R$3.2080 to US$1.00.
(4) Translated at the commercial selling rate at closing for the purchase of U.S. dollars, as reported by the Central Bank, as of December 31, 2014 of R$2.6562 to US$1.00.
(5) Data for 2012 and 2011 have been restated in application of IAS 19 – Employee Benefits (as revised in 2011) and IFRS 11 – Joint Arrangements, as described in our audited
financial statements for the year ended December 31, 2013. With respect to IAS 19 – Employee Benefits, the principal adjustment is the change in the accounting record
method of actuarial gains and losses, such that accumulated differences between actuarial estimates and actual obligations are recognized in Other Comprehensive Income when
they occur. With respect to IFRS 11 – Joint Arrangements, the results of the joint ventures Sesamm – Serviços de Saneamento de Mogi Mirim S/A, Águas de Andradina S/A,
Águas de Castilho S.A., Saneaqua Mairinque, Aquapolo Ambiental S.A. and Attend Ambiental S.A. are recognized using the equity method of accounting in 2014, 2013, 2012
and 2011 rather than through proportional consolidation as previously.
(6) On January 10, 2013, the ratio of ADRs to common shares changed from 1:2 to 1:1. We have adjusted the earnings per ADS and dividends and interest on shareholders’ equity
per ADS for prior years for comparison purposes on the table above.
(7) Data for 2010 has not been restated in application of IAS 19 – Employee Benefits (as revised in 2011) and IFRS 11 – Joint Arrangements. In particular, data for 2010 reflects
the results of the joint-ventures Sesamm – Serviços de Saneamento de Mogi Mirim S/A, Águas de Andradina, Águas de Castilho, Saneaqua Mairinque, Aquapolo Ambiental and
Attend Ambiental through proportional consolidation in 2010 as opposed to the equity method of accounting applicable in 2014, 2013, 2012 and 2011.
Oper ating 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(1) (in percentages)
Volume of water billed during period (in millions of cubic
meters)
Water Billed Loss Index during period (average) (in
percentages)(2)
Water Metered Loss Index during period (average)
(in percentages)(3)
Water loss per connection per day (average)(4)
Number of employees
As of and for the year ended December 31,
2011
2012
2013
7,888
6,340
99
84
78
2,149
24.4
31.2
372
15,015
7,679
6,128
99
83
77
2,094
25.7
31.1
393
15,019
7,481
5,921
99
82
76
2,045
25.6
32.0
395
14,896
2010
7,295
5,718
99
81
75
1,992
26.0
32.3
403
15,330
2014
8,210
6,660
99
85
77
2,069
21.3
29.8
319
14,753
7
(1) Treated sewage as a percentage of collected sewage.
(2) Includes both physical and non‑physical water loss. Water Billed Loss Index represents the quotient of (i) the difference between (a) the total amount of water produced plus
(b) the total amount of water invoiced minus (c) the volume of water excluded from our calculation of water loss, divided by (ii) the total amount of water produced. For more
information, see “Item 4.B. Business Overview—Description of Our Activities—Water Operations—Water Loss”.
We exclude the following from our calculation of water loss: (i) water discharged for periodic maintenance of water transmission lines and water storage tanks; (ii) water
supplied for municipal uses such as firefighting; (iii) water we consume in our facilities; and (iv) estimated water loss related to the supply of water to shantytowns (favelas).
(3) Includes both physical and non‑physical water loss. The Water Metered Loss Index represents the quotient of (i) the difference between (a) the total amount of water produced
minus (b) the total amount of water measured minus (c) the volume of water that we exclude from our calculation of water loss, divided by (ii) the total amount of water
produced. For more information, see “Item 4.B. Business Overview—Description of Our Activities—Water Operations—Water Loss”.
We exclude the following from our calculation of water loss: (i) water discharged for periodic maintenance of water transmission lines and water storage tanks; (ii) water
supplied for municipal uses such as firefighting; (iii) water we consume in our facilities; and (iv) estimated water loss related to the supply of water to shantytowns (favelas).
(4) Measured in liters/connection per day, this amount is calculated by dividing (i) the average annual water loss by (ii) the average number of active water connections multiplied
by the number of days of the year. This calculation method is based on worldwide market practice within the sector. See “Item 4.B. Business Overview—Description of Our
Activities—Water Operations—Water Loss”.
We exclude the following from our calculation of water loss: (i) water discharged for periodic maintenance of water transmission lines and water storage tanks; (ii) water
supplied for municipal uses such as firefighting; (iii) water we consume in our facilities; and (iv) estimated water loss related to the supply of water to shantytowns (favelas).
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. 3,844/2010,
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, 8.94% in 2012 and 14.63% in 2013. On December 31, 2014, 2013 and 2012, the real/U.S. dollar exchange rate was R$2.6562,
R$2.3426 and R$2.0435 per US$1.00, respectively.
8
Since 1999, following Brazil’s implementation of a floating rate regime, the Central Bank has not directly intervened in the exchange
market. However, the Central Bank, using financial instruments at its disposal, may buy and sell foreign currency in the market in order to
influence the exchange rate and decrease volatility with respect to the Brazilian real. We cannot predict whether the Central Bank or the
Brazilian government will continue to let the real float freely or will intervene in the exchange rate through a currency band system or other
procedure. The real may fluctuate against the U.S. dollar substantially in the future. For further information on this risk, see “Item 3.D. Risk
Factors—Risks Relating to Brazil—Exchange rate instability may adversely affect us and the market price of our common shares or ADSs”.
Exchange rate fluctuations will affect the U.S. dollar equivalent of the real price of our common shares on the São Paulo Stock Exchange
(BM&FBOVESPA S.A. ‑ Bolsa de Valores, Mercadorias e Futuros), or the “BM&FBOVESPA”, as well as the U.S. dollar equivalent of any
distributions we make in reais with respect to our common shares.
The following tables set forth the selling rate, expressed in reais per U.S. dollar (R$/US$), for the periods indicated:
Year ended December 31,
2010
2011
2012
2013
2014
Month ended
October 31, 2014
November 30, 2014
December 31, 2014
January 31, 2015
February 28, 2015
March 31, 2015
April 22, 2015
Year end
1.6662
1.8758
2.0435
2.3426
2.6562
Per iod end
2.4442
2.5601
2.6562
2.6623
2.8782
3.2080
3.0186
R$ per US$1.00
Aver age(1)
1.7593
1.6746
1.9550
2.1605
2.3547
High
1.8811
1.9016
2.1121
2.4457
2.7403
R$ per US$1.00
Aver age
2.4483
2.5484
2.6394
2.6342
2.8165
3.1395
3.0809
High
2.5341
2.6136
2.7403
2.7107
2.8811
3.2683
3.1556
Source: Central Bank
(1) Average of the exchange rates on the last day of each month.
The following tables set forth the selling rate, expressed in reais per Japanese Yen (R$/¥1.00):
Year ended December 31,
2010
2011
2012
2013
2014
Month ended
October 31, 2014
November 30, 2014
December 31, 2014
January 31, 2015
February 28, 2015
March 31, 2015
April 22, 2015
R$ per ¥1.00
Year end
0.0205
0.0243
0.0237
0.0223
0.0222
Aver age(1)
0.0201
0.0211
0.0245
0.0221
0.0222
High
0.0212
0.0249
0.0263
0.0248
0.0239
R$ per ¥1.00
Per iod end
0.0218
0.0216
0.0222
0.0226
0.0241
0.0267
0.0252
Aver age
0.0227
0.0219
0.0221
0.0222
0.0237
0.0261
0.0257
High
0.0235
0.0225
0.0235
0.0227
0.0243
0.0271
0.0264
Low
1.6554
1.5345
1.7024
1.9528
2.1974
Low
2.3914
2.4839
2.5607
2.5754
2.6894
2.8655
3.0186
Low
0.0183
0.0186
0.0211
0.0196
0.0212
Low
0.0218
0.0213
0.0213
0.0219
0.0229
0.0239
0.0252
Source: Central Bank
(1) Average of the exchange rates on the last day of each period.
9
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Pr oceeds
Not applicable.
D. Risk Factor s
Risks Relating to Br azil
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:
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 by 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.
10
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.
Inflation and the Brazilian government’s measures to combat it have had and may in the future have significant effects on the Brazilian
economy and our business. Tight monetary policies with high interest rates may restrict Brazil’s growth, the availability of credit and our cost of
funding. Conversely, other Brazilian governmental actions, including lowering interest rates, intervention in the foreign exchange market and
actions to adjust or fix the value of the real, may trigger increases in inflation. The Special Clearing and Settlement System (Sistema Especial de
Liquidação e Custódia), or “SELIC”, the official overnight interest rate in Brazil, equaled 11.65%, 9.90% and 7.14% at the end of 2014, 2013,
and 2012, respectively, in line with the target rate set by the Brazilian Committee on Monetary Policy (Comitê de Política Monetária).
The Brazilian annual inflation rates, as measured by the Amplified Consumer Price Index (Índice Nacional de Preços ao Consumidor
Amplo), or “IPCA”, the Brazilian annual inflation rates were 6.41%, 5.91% and 5.80% during 2014, 2013 and 2012, respectively. If Brazil
experiences increases in inflation, our costs and expenses may rise, we may be unable to increase our tariffs at the same rate 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.
The devaluation of the real to foreign currencies 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, 8.94% in 2012, 14.63% in 2013, and
13.39% in 2014. On December 31, 2014, 2013 and 2012, the real/U.S. dollar exchange rate was R$2.6562, R$2.343 and R$2.043 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 22, 2015, the commercial
selling rate as reported by the Central Bank was R$3.0186 per US$1.00.
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 economic growth.
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$4,346.3 million as of
December 31, 2014 and we anticipate that we may incur additional amounts of foreign currency denominated debt in the future. In 2014, our
results of operations were negatively affected by the 13.39% depreciation of the real against the U.S. dollar, and an appreciation of the real
against the yen by 0.45% which led to a R$345.1 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. For more information, see Note 5(a) of our 2014 financial statements.
11
For further information on exchange rate instability impacts, see “Item 5.B. Liquidity and Capital Resources—Capital Sources—
Indebtedness Financing—Financial Covenants”.
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 Contr ol 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 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 22, 2015, the State owned 50.3% of our
outstanding common shares. 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 2014, the re-elected governor appointed Mr. Jerson Kelman as our Chief Executive Officer in
January 2015, and Mr. Benedito Pinto Ferreira Braga Junior, 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 our Chairman for the current board of directors’ term of
two years, ending in April 2016. 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.
Additionally, the State also owes us substantial amounts related to reimbursements of State‑mandated special retirement and pension payments
that we make to some of our former employees for which the State is required to reimburse us. As of December 31, 2014, the State owed us
R$50.8 million for water and sewage services.
With respect to payment of pensions on behalf of the State, we had a non-contested reimbursement credit in the amount of R$155.5 million
as of December 31, 2014 for reimbursement of additional retirement and pension benefits, and a contested credit amount of R$1,479.7 million as
of the same date. We do not record this contested amount as a reimbursement credit for actuarial liability due to the uncertainty of payment by
the State. In addition, as of December 31, 2014, we had a provision for an actuarial liability in the amount of R$2,053.5 million with respect to
future supplemental pension payments for which the State does not accept responsibility. On March 18, 2015, we, the State and DAEE, with the
intervention of the Department of Sanitation and Water Resources, executed a term of agreement, in the amount of R$1,012.3 million, of which
R$696.3 million refers to the principal amount and R$316.0 million refers to the monetary adjustment of the principal through February 2015.
For a detailed discussion of this agreement, see “Item 7.B. Related Party Transactions—Agreements with the State of São Paulo” and Note 31 of
our 2014 financial statements.
12
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 10 of our 2014
financial statements.
Although the State has complied with agreements negotiated with us in past years, we cannot assure you when or if the State will pay the
contested credit amount, which is still under discussion, and the remaining overdue amounts it owes us. The amounts owed to us by the State for
water and sewage services and reimbursements for pensions paid may increase in the future.
In addition, certain municipalities and other government entities also owe us payments. See “Risks Relating to Our Business—We may face
difficulties in collecting overdue amounts owed to us by 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. As such, EMAE has
requested compensation from us. In the event water from these reservoirs were no longer made available to us, we would have to bring water in
from locations farther away, which would increase the risk of not being able to provide adequate service in the region and increase the costs of
water transportation.
The majority shareholder of both EMAE and us, the State, may force a resolution regarding the dispute of water use from the Guarapiranga
and Billings reservoirs, which may have an adverse effect on our business. Currently, this matter is under judicial review due to various actions
brought by EMAE. On April 10, 2014, we issued an Announcement to the Market to communicate that we are negotiating with EMAE
regarding a potential future agreement. However, no adjustment has been confirmed and no agreement has been executed by either party as of
yet.
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 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 to utilize these reservoirs. If we were required to pay
substantial charges or additional maintenance or operational costs for our use of these reservoirs, we could be materially and adversely affected.
13
Risks Relating to Our Business
The measures we took to mitigate the effects of the drought resulted in a significant decrease in the volume of water billed and revenues from
services we provide, which had a material adverse effect on our company and that may worsen if the drought escalates in severity.
We experience decreases in our water availability from time to time due to droughts. The southeastern region of Brazil, particularly the
southern region of Minas Gerais State and the Piracicaba, Capivari and Jundiaí river basin, or “PCJ River Basin” (from which we extract the water
used in the Cantareira System), and the northern area of the São Paulo metropolitan region have been experiencing below average rainfall since
2012. In late 2013 and throughout 2014 rain levels and water inflow into the reservoirs reach record low levels in 84 years of recorded rainfall in
the region. During the rainy season, from October 2014 to January 2015, the level of rainfall in the region remained significantly below average,
although it reached above average levels in February and March 2015. We expected the water levels in the Cantareira System to recover, but
given the already low levels due to the water shortage during the summers of 2013 and 2014, the amount of rainfall in the region during the rainy
season from October 2014 to March 2015 was not enough to restore the reservoirs to sufficient levels.
The depletion of water storage is worse in the Cantareira System, the largest system of the São Paulo metropolitan region. As a result of the
drought and low water volume in the Cantareira System, DAEE and ANA have, since March 2014, continuously reduced the amount of water we
are permitted to extract from this system. In March 2015, we received authorization to extract only 13.5 cubic meters per second, or m³/s, from the
PCJ River Basin, compared to the period prior to March 2014 when we were allowed to extract up to a total of 31 m³/s.
In order to balance supply and demand despite the restricted water availability, we have adopted and will continue adopting a series of
measures, including: (i) using water from other production systems to serve consumers originally supplied by the Cantareira system; (ii) to offer
discounts (bonus) to consumers that would use below average amounts of water, compared to average consumption; (iii) reducing pressure in the
water distribution lines in order to decrease leakeage; (iv) reducing the volume of water sold to municipalities that own their distribution
network; and (v) to use pumps in order to extract water located below the intakes of the Cantareira system, from the so-called “technical reserve”,
which has never before been used to serve the population. See “Item 4.B. Business Overview—The Current Water Crisis”.
If the drought continues and reservoir levels remain low, we cannot guarantee that the water consumption incentive program (the bonus
program) and other mitigation measures we took in 2014 and are taking in 2015 will be discontinued. In case of this unfortunate scenario, we are
unsure whether we will be able to continuously serve the entire population of our service area, which is a possibility that, in addition to a
reduction in revenue, may also affect our reputation. Furthermore, we cannot guarantee that at the end of the bonus program, per capita
consumption of water will return to levels that existed prior to the current water crisis. A lower consumption per capita may adversely affect our
business and results in the future, including if ARSESP does not approve future price increases to offset the billed volume decline.
The drought has prompted a continuous reduction in the volume of water billed and thus a reduction in revenue. In 2014, the water volume
billed decreased 3.1% and the gross operational revenue fell by 6.7% compared to 2013. Therefore, there was and may continue to be a negative
impact on our financial ratios linked to revenue, such as the debt to EBITDA ratio. We are required to maintain certain financial ratios at
specified levels pursuant to restrictions and covenants of our existing debt agreements and failure to maintain these ratios may lead to a default
under such agreements. Breach of any such covenant may result in a default under certain of our debt agreements and, due to customary cross-
default provisions, could permit some of our creditors to accelerate our indebtedness unless we are able to renegotiate the terms of these
agreements or receive waivers from the affected creditors. If such events were to occur, our financial condition would be adversely affected. See
“Item 5.B. Liquidity and Capital Resources— Indebtedness Financing—Financial Covenants”.
Due to the crisis, we have been obligated and will continue to be obligated to make a series of short-term and medium-term emergency
investments to continue providing water to the population, which resulted in an increase in our costs and changes in our capital expenditure. If
the current water crisis does not end and court orders prevent us from concluding the construction of works related to the emergency investments
designed to increase the bulk water availability for our production systems in 2015, we may need to take more drastic measures, including
implementing a water rotating rationing scheme, which will impose a hardship on the population we serve. Such drastic measures may adversely
and materially affect our business.
14
Assuming that the hydrological stochastic process is stationary, the 2014-2015 drought is a rare event (very low probability). However, the
2014-2015 drought may be an outcome of a non-stationary process, either due to climate or soil use change. In this case, the historic time series of
inflows to the reservoirs would be of limited use in estimate the probability of future rare events. That is, we would be limited in our ability to
evaluate the likelihood that the drought will persist. This uncertainty may impair our ability to plan and react to future events, which may
adversely and materially affect our business. For more information about the water crisis, see “Item 4.B. Business Overview—The Current Water
Crisis”.
We are exposed to risks associated with the provision of water and sewage services.
Our industry is affected by the following risks relating to the provision of water and sewage services:
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. We anticipate incurring significant increases in our energy expenses in 2015. In addition, we may not be able to pass
on any significant increases in energy tariffs to our customers. In March 2015, we filed with ARSESP an extraordinary revision
request based on the decline in the volume of water due to the water crisis and based on the unexpected increase in electricity
tariffs. See “Item 4.B. Business Overview—Energy Consumption”.
In addition to the risks discussed under “— New laws and regulations relating to climate change and changes in existing
regulation, as well as the escalation of the physical effects of extreme weather events, 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 possible increase in the frequency of extreme weather
conditions in the future may adversely affect the water 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 the regular operation of water sources, including
abstraction of water from our dams due to increased soil erosion, silting, and runoff of pollutants that affect the aquatic ecosystems.
See “Item 4.B. Business Overview—The Current Water Crisis”.
We depend on a water right issued by DAEE – ANA in order to extract water from the Cantareira System. The water right was
renewed in 2004 and would have expired in August 2014. However, due to current climate conditions, particularly the severe
drought, the water right was extended until October 31, 2015. We are in the process of gathering technical and analytical data to
present to ANA and DAEE our proposal to renew it before the end of April 2015. The terms of this water right will define the
volume of water that we will be authorized to extract from the PCJ River Basin to provide to the São Paulo metropolitan region.
The current drought may affect the decision of ANA and DAEE. Therefore, we cannot guarantee that we will be able to simply
extend in a timely manner the current water right because there is no way to predict whether the current water crisis will persist,
worsen or be resolved in the immediate future.
In addition to the risks discussed under “—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,” 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”.
15
The increasing 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”.
The state and federal government agencies that manage water resources could 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”.
Any of the above may have a material adverse effect on us.
Current regulatory uncertainty, especially with regard to implementation and interpretation of the Brazilian Basic Sanitation Law, may have
an adverse effect on our business.
Our operations in the state of São Paulo occur both in locations where the planning, monitoring and tariff regulation of basic sanitation
services are responsibilities of the municipalities and in locations where such responsibilities are shared between the State and municipalities but
remain subject to the jurisdiction of the latter.
The Basic Sanitation Law No. 11,445/2007 went into effect in early 2007, and although Federal Decree No. 7,217/2010 (as modified by
Federal Decree No. 8,211/2014) implemented a series of new principles under the Basic Sanitation Law in 2010, the full implementation of a
number of its provisions remains subject to regulations that the federal government has not yet published. Moreover, the Basic Sanitation Law
requires that the federal government, states and municipalities establish independent regulators who monitor basic sanitation services and
regulate tariffs. In compliance with this law, the state of São Paulo established ARSESP in 2007. Currently, our regional and local operations,
including tariff regulation, are monitored and regulated by ARSESP, and the remainder of our operations is in the process of negotiating new
contractual bases. Regulatory agencies determine tariff increases for our water and sewage services, on which our results of operations and
financial condition are highly dependent. As a result, we cannot anticipate all the effects that the Basic Sanitation Law and the decree will have
on our business and operations, if any.
In 2009, ARSESP enacted rules regarding the following: (i) general terms and conditions for water and sewage services; (ii) procedures for
communication regarding any failure in our services; (iii) penalties for deficiencies in the provision of basic sanitation services; and (iv)
procedures for confidential treatment of our customers’ private information. The implementation of these and other more recent rules will
particularly impact our commercial and operations processes, and may adversely affect us in ways we cannot currently predict. Implementation
of these rules started in 2011 and is expected to continue for the next few years. For more information, see “Item 4.B. Business Overview—
Government Regulation—ARSESP Rule Enactments”.
In 2011, ARSESP altered the standard contract that we are required to use in our relationships with retail customers. This alteration requires
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. However, since this change is still being
implemented, we are not currently able to predict its impact on our business.
In August 2012, ARSESP issued Resolution No. 346/2012, which established that users should be compensated for any interruptions in
water supply. Implementation of this regulation has been suspended pending further technical discussions. In 2013, ARSESP held public
consultations that resumed technical discussions on the subject, but the new resolution that will replace Resolution No. 346/2012 has not yet
been published.
The Basic Sanitation Law No. 11,445/2007 also allows municipalities to create their own regulatory agencies rather than being regulated by
ARSESP. As a result, a number of municipalities have created their own regulatory agencies. If other municipalities create new agencies or
retain regulatory powers, we may be subject to their regulation and to any limitations on our services that such agencies may set. We are
involved in legal proceedings that dispute the authority of these new agencies to regulate and monitor our local contracts and our operations in
metropolitan regions and urban clusters instituted by the State. We cannot foresee any changes that any such new agencies may implement
regarding our business. If any such changes are unfavorable, they could materially and adversely affect us.
16
The State of São Paulo, pursuant to Article 25, Section 3 of the Brazilian Constitution, enacted the State Complementary Law, or “LCE”,
creating the metropolitan regions of São Paulo (LCE No. 94/1974), Baixada Santista (LCE No. 815/1996), Campinas (LCE No. 870/2000), Vale
do Paraíba and Litoral Norte (LCE No. 1,166/2012), Sorocaba (LCE No. 1,241/2014), and the urban clusters of Jundiaí (LCE No. 1,146/2011)
and Piracicaba (LCE No. 1,178/2012). These areas incorporate independent municipalities that modify the exercise of their constitutional
competencies, including those related to basic sanitation services, and increase the number of judicial disputes concerning the regulation and
oversight of services in areas currently served by us and regulated by ARSESP. We cannot anticipate the result of these judicial disputes and the
adverse material effects that may result from them, especially if the rules of regulation and monitoring of services issued by municipal agencies
come to coexist with those already published by ARSESP and implemented into our operational and corporate processes since 2011.
For more information on ARSESP regulations, see “Item 4.B. Business Overview—Tariffs—Government Regulation—Tariff Regulation in
the State of São Paulo” and “ARSESP Rule Enactments—Consumer Relations in the State of São Paulo”.
New joint entities have been, and may continue to 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 then
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 must set up new
entities to oversee the planning, regulation and auditing of basic sanitation services in the metropolitan region with the non-partisan
participation of all the municipalities located in the metropolitan region.
On March 6, 2013, the court ruled that this holding would come into effect in the state of Rio de Janeiro after a remaining appeal of its
holding is decided. The court’s holding represents a new paradigm in the management and provision of services. The Supreme Court has yet to
clarify the effects and extension of its decision. The São Paulo metropolitan region (including the municipalities to which we provide water on a
wholesale basis), to which a decision on such pending or new cases may apply, accounted for 70.0% of our gross revenue from services in 2014
(excluding revenues relating to the construction of concession infrastructure).
In January 2015, the Federal Government issued the Metropolitan Bylaws (Law No. 13,089/2015) which establishes general guidelines for
the planning, management and performance of public interest projects in metropolitan regions and in urban clusters instituted by the states; the
general planning standards for integrated urban development and other international governance instruments; and the criteria to receive federal
loans for initiatives related to international governance in the field of urban development.
We cannot predict how the shared management of these operations will be carried out in the São Paulo metropolitan region and other
municipalities in which we operate or what effect the shared management 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 50.4% of our gross operating revenues (excluding
revenues relating to the construction of concession infrastructure) in the year ended December 31, 2014.
On June 23, 2010, the State and the city of São Paulo executed an agreement in the form of a convênio with our and ARSESP’s consent,
under which they agreed to manage the planning and investment for the basic sanitation system of the city of São Paulo on a joint basis. In
application of the convênio, we executed a separate contract dated June 23, 2010 with the State and the city of São Paulo, to regulate the
provision of these services for the following 30 years. Among other principal terms of this separate agreement, we must transfer 7.5% of the gross
revenues we derive under the convênio and subtract (i) COFINS and PASESP 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. See “Item 7.B. Related Party Transactions—Agreement with the State and the
city of São Paulo” for further discussion of the principal terms of the convênio and principal terms of the separate contract we executed in
application of the convênio.
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Because we were not previously required to transfer 7.5% of the gross revenues obtained from providing sanitation services in the
municipality of São Paulo to the São Paulo Municipal Fund for Environmental Sanitation and Infrastructure as established under the convênio,
our existing tariff and adjustment formulas do not account for this requirement. Nonetheless, ARSESP is required to ensure that the tariffs will
adequately compensate us for the services we provide, which includes the pass-through to tariffs.
In March 2013, ARSESP issued Resolution No. 407/2013 authorizing us to pass through to the service bill the 7.5% transfer to the São Paulo
Municipal Sanitation and Infrastructure Fund as a legal charge, as defined by municipal legislation. However, pursuant to the Program Contracts
and the Sewage and Water Supply Service Contracts, this charge must be considered in the tariff revision.
In April 2013, ARSESP issued Resolution No. 413/2013, which suspended Resolution No. 407/2013 until the tariff revision process is
concluded, thereby postponing our authorization to pass the charge through to consumers on the service bill. The postponement of Resolution
No. 407/2013 was due to a request from the São Paulo State Government to analyze, among other things, methods of reducing the impact on
consumers.
In April 2014, ARSESP issued Resolution No. 484/2014, (further ratified by Resolution No. 520, issued November 2014), which establishes
the conclusion of the tariff revision. However, the State and the city of São Paulo requested to maintain the suspension of ARSESP Resolution
No. 407/2013, postponing our authorization to pass the charge through to consumers on the service bill, until the revision of our contract with
the State and city of São Paulo is concluded.
In May 2014, ARSESP issued Resolution No. 488/2014, which maintained the suspension of Resolution ARSESP No. 407/2013 until the
results are obtained in the revision of the contract signed between us, the city and the State of São Paulo, thereby delaying the authorization to
pass the charge through to consumers on the service bill. We cannot know when we will be able to pass the 7.5% charge on to consumers
through the service bill.
As of December 31, 2014, we have transferred approximately R$1.5 billion to the São Paulo Municipal Fund for Environmental Sanitation
and Infrastructure since 2010. We cannot assure you when and how we will recover this amount.
We cannot assure you that this charge will eventually be passed through to customers or that the continued delay in passing this charge
through to customers will not further affect our financial condition. For additional information on ARSESP regulations, see “Item 4.B. Business
Overview—Government Regulation—Tariff Regulation in the State of São Paulo” and “Item 4.B. Business Overview—Government Regulation
—Public Consortia and Cooperation Agreement Law for Joint Management”.
We currently lack formal agreements or concessions with 54 of the municipalities to which we provide service, and 38 of our existing
concession agreements will expire between 2015 and 2030. 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, 2014, we held formal 30‑year agreements with 274 municipalities (including the city of São Paulo) of the 364
municipalities we serve. We entered into 8 of these agreements during 2014. The 274 municipalities with which we had formal agreements at
year-end accounted for 73.4% of our total revenues for the year ended December 31, 2014, and 65.7% of our intangible assets as of December 31,
2014. Of the 54 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 54 municipalities accounted for 16.5% of our total revenues for the year
ended December 31, 2014 and 23.8% of our intangible assets as of that same date. In December 2014, none of our existing concession
agreements expired. Between 2015 and 2030, 38 of our existing concession agreements will expire. These 38 concession agreements accounted
for 8.7% of our total revenues for the year ended December 31, 2014 and 8.0% of our intangible assets as of that same date.
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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 54 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 unamortized assets. 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.
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—Public Consortia and Cooperation
Agreement Law for Joint Management”.
In the municipalities with which we did not have formal agreements by December 31, 2014, we continued operating with municipal
approval or with judicial support.
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.
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 an expropriation proceeding 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 provided, in order to calculate the unamortized portion of its 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 the sanitation service
provider made. Nonetheless, the indemnification payments may not occur voluntarily by the municipality, creating an opportunity for judicial
dispute. If faced with such a situation, there is the risk that the judicial decision will consider the indemnification as undue or set it at a lower
value than that of our investments.
With regards to our operations that lack contracts or have indefinite or overdue timeframes, 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 adopted the necessary
judicial measures to contest this and we filed an ordinary suit against the municipality of Santos, after which the appellate court issued a decision
in our favor. The proceedings were terminated and we have continued operations in the municipality.
In 1995, the municipality of Diadema terminated its concession agreement with us and did not pay the indemnification for our investments.
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 negotiate a solution to all
outstanding amounts, and we agreed to drop the collection proceedings we had filed against the municipality.
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In March 2014, we entered into an agreement with the municipality of Diadema to resolve water supply-related debt and indemnities. This
agreement includes a contract to resume direct supply of water and sewage services to the municipality of Diadema for 30 years. Guarantees are
in place if the municipality of Diadema breaches the agreement entered into with us.
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, 2014, our total accounts receivable was R$4,388.6 million. Of this amount, certain municipalities to which we provide
water on a wholesale basis owed us R$2,158.8 million, and certain municipal government entities owed us R$726.2 million. Of the total amount
owed by municipalities, R$279.8 million was overdue by between 30 and 360 days and R$1,832.7 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 experience a material adverse effect on 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$13.5 billion in the period from 2015 through 2019. In 2014 we
recorded R$3.2 billion in capital expenditures.
In addition to cash generated by our operations, we have funded and intend to continue funding these capital expenditures with issuances of
debt securities in the domestic and international capital markets as well as borrowings in Brazilian reais and foreign currencies. A significant
portion of our financing needs is obtained through long‑term financing at attractive interest rates from Brazilian federal public banks, multilateral
agencies and international governmental development banks. If the Brazilian government changes its policies regarding 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.
Furthermore, Brazilian public and private financial institutions are legally limited up to a certain percentage of their shareholder’s equity to
provide loans to public sector entities, including, for example, us. These limitations could adversely affect our ability to continue our capital
expenditure program.
Our debt includes financial covenants that impose indebtedness limits on us. Our failure to comply with these covenants could seriously
impair our ability to finance our capital expenditure program, which could have a material adverse effect on us. For further information on these
covenants, see “Item 5.B. Liquidity and Capital Resources—Capital Sources—Indebtedness Financing—Financial Covenants”.
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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 potable water 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 that 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. More recently, we are involved in proceedings
challenging the extraction of water resources in the face of the current water crisis. 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 Statements and Other Financial Information—Legal Proceedings”. For further information on investments in environmental
programs, see “Item 4.A. History and Development of the Company—Main Projects of our Capital Expenditure Program”, “Item 4.B. Business
Overview—Sewage Treatment and Disposal”, “Item 4.B Business Overview—Environmental Matters” and “Item 4.B. Business Overview—
Environmental Regulation”. For further information on the Water Crisis, see “Item 4.B. Business Overview—The Current Water Crisis”.
New laws and regulations relating to climate change and changes in existing regulation, as well as the escalation of the physical effects of
extreme weather events, 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 will have 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 strengthen our actions such as:
investing in seeking new water sources located further from major consumer centers;
investing in new technologies;
improvement of water conservation practices and demand management alternatives such as economic mechanisms or educational
programs; and
increasing the capacity of our water reserves.
A rise in sea level could result in increased salinity in the river estuaries where we abstract water, which could affect water treatment in these
areas. Rising sea levels could also cause damage in our sewage collection network.
Additionally, increases in air temperature could affect demand for water. The escalation of extreme weather events may also further reduce
water levels in the reservoirs that power hydroelectric power plants in Brazil, which may cause energy shortages and increase electricity prices,
which may adversely affect our costs and operations.
We cannot predict all of the effects of extreme weather events, therefore making it difficult to predict necessary investments. We have not
provisioned any funds for climate change events as current technology and scientific understandings of climate change make it difficult to
predict potential expenses and liabilities.
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We may be required to adopt new norms to improve our energy use efficiency and minimize the release of greenhouse gases when we renew
the environmental licenses for the systems already in operation or when we obtain environmental licenses for new enterprises.
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 extreme weather events, any of which could have a material adverse effect on our results of operations.
For more information, see “Item 4.B. Business Overview—Environmental Matters—Climate Change Regulations: Reduction of Greenhouse
Gases (GHG) Emissions” and “Item 4.B. Business Overview—Energy Consumption”.
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,
tax, labor, corporate and environmental issues. As of December 31, 2014, the total value of all outstanding claims against us was R$41,964.6
million (net of R$362.5 million in escrow 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$1,220.3 million (net of escrow
deposits) as of December 31, 2014 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 Statements and Other
Financial Information—Legal Proceedings”.
Risks Relating to Our Common Shar es 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 50.7% of the aggregate
market capitalization of the BM&FBOVESPA as of December 31, 2014. The top ten stocks in terms of trading volume accounted for
approximately 46.3%, 41.3% and 43.0% of all shares traded on the BM&FBOVESPA in 2014, 2013 and 2012, 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 the investment under CMN Resolution No. 4,373/2014, dated September 29, 2014, which
entitles registered foreign investors (the “4,373 Holder”) to buy and sell on a Brazilian stock exchange. If the holder does not obtain a certificate
of registration or register under Resolution No. 4,373/2014, the holder will generally be subject to less favorable tax treatment on gains with
respect to our common shares.
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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 are located in Brazil. As a result, it may not be possible for a holder to effect service
of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other
persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based
upon the U.S. federal securities laws may only be enforced in Brazil if certain requirements are met, a holder may face more difficulty in
protecting his or her interests in the case of actions by our directors, officers or our controlling shareholder than would shareholders of a
corporation incorporated in a state or other jurisdiction of the United States. In addition, under Brazilian law, none of our assets which are
essential to our ability to render public services are subject to seizure or attachment. Furthermore, the execution of a judgment against our
controlling shareholder may be delayed, since the State may only be able to pay a judgment if it is provided for in its budget in a subsequent
fiscal year. None of the public property of our controlling shareholder is available for seizure or attachment, either prior to or after judgment.
Mandatory arbitration provisions in our bylaws may limit the ability of a holder of our 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, Law No. 6,404 of
December 15, 1976, as amended (“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 and ADR holders,
and any disputes between us and our shareholders and ADR holders, will also be submitted to arbitration. As a result, a court in the United States
might require that a claim brought by an ADR holder predicated upon the U.S. securities laws be submitted to arbitration in accordance with our
bylaws. In that event, a purchaser of ADSs would be effectively precluded from pursuing remedies under the U.S. securities laws in the
U.S. courts.
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.
Holders of our ADSs do not have the same voting rights as our shareholders.
Holders of our ADSs do not have the same voting rights as holders of our shares. Holders of our ADSs are entitled to the contractual rights
set forth for their benefit under the deposit agreements. ADS holders exercise voting rights by providing instructions to the depositary, as
opposed to attending shareholders meetings or voting by other means available to shareholders. In practice, the ability of a holder of ADSs to
instruct the depositary as to voting will depend on the timing and procedures for providing instructions to the depositary, either directly or
through the holder’s custodian and clearing system. The deposit agreement also provides that if the depositary does not receive any instructions
from a holder of ADRs, the ADR holder may be deemed to have given a discretionary proxy to a person designated by our company and the
underlying shares may be voted by such person. However, we have chosen not to designate any person to exercise these deemed proxy rights
with respect to any annual or special general meetings, and ADSs for which no specific voting instructions were received by the Depositary were
therefore not voted at that meeting.
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ITEM 4. INFORMATION ON THE COMPANY
A. Histor y and Development of the Company
Over view
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—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 2013, 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, 2014, we generated net revenue of R$11,213.2
million and net income of R$903.0 million. Our total assets amounted to R$30,355.4 million and our total shareholders’ equity amounted to
R$13,304.4 million as of December 31, 2014.
As of December 31, 2014, we provided water and sewage services to a broad range of residential, commercial, industrial and governmental
customers in 364 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 2014 we lacked formal agreements for 54 of the municipalities we serve, each of which we
are currently in the process of renegotiation, including in the municipality of Santos. From January 1, 2015 through 2030, 38 further concessions
will expire, and we will seek to replace them with program agreements. In addition to the 364 municipalities we served, we also provided water
service to the municipality of Mogi das Cruzes, pursuant to two partial water contracts under which we service only certain neighborhoods of
that municipality. See “Presentation of Financial and Other Information—Other Information—Our Contracts and the Municipalities We Serve”.
We also supply water on a wholesale basis to 5 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 3.1 million). Four of these municipalities also utilize
our sewage treatment services. For the year ended December 31, 2014, the São Paulo metropolitan region (including the municipalities to which
we provide water on a wholesale basis) accounted for 70.0% of our gross operating revenue (excluding revenues relating to the construction of
concession infrastructure), while the Regional Systems accounted for 30.0%.
As of December 31, 2014, we provided water services through 8.2 million water connections to approximately 25.3 million people,
representing approximately 60% 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 6.7 million sewage connections to approximately 22.4 million
people and had an effective sewage coverage ratio of 85%. As of December 31, 2014, we operated using 70,800 kilometers of water pipes and
water transmission lines and 47,992 kilometers of sewer lines.
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We also provide water and/or sewage services to 4 other municipalities through special purpose companies. In addition, we provide
consulting services regarding the rational use of water and financial, commercial and operational management in Panama, Honduras and
Nicaragua. We serve Panama and Honduras through an agreement with the consultancy firm Latin Consult. We also have two partnerships with
other companies: Aquapolo Ambiental S.A., a joint venture with a private sanitation services operator, and Attend Ambiental S.A., a joint
venture with Estre Ambiental S.A. Aquapolo Ambiental S.A. commenced operations in the second half of 2012 and operates the largest water
recycling facility in the southern hemisphere. Aquapolo Ambiental S.A. has the capacity to supply up to 1,000 liters per second to industries in
the Capuava petrochemical cluster of the São Paulo metropolitan region. Attend Ambiental commenced operations in the second half of 2014 to
operate a pre-treatment plant for non-domestic effluent in the São Paulo metropolitan region.
The State of São Paulo, our controlling shareholder, is required by State Law No. 11,454/2003 to own at least 50% plus one of our common
shares. As of April 22, 2015, 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.
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 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 results of operations and financial condition are generally affected (i) by our ability to raise tariffs, control costs and improve
productivity, (ii) the general economic conditions in Brazil and abroad; and (iii) climate conditions. In order to supply water to the São Paulo
metropolitan region, we use water from eight systems, most of which were affected by the most severe drought in our service region in the last 84
years, of which the Cantareira System, our largest water system, was the most affected. As a result of the drought and the low water inflow in the
Cantareira System, DAEE and ANA have, since 2014, continuously reduced the volume of water we are permitted to extract from this system.
In order to balance supply and demand despite the restricted water availability, we have adopted and will continue adopting a series of
initiatives, amongst which including: (i) using water from other production systems to serve consumers originally supplied by the Cantareira
system; (ii) to offer discounts (bonus) to consumers that would use below average amounts of water, compared to average consumption; (iii)
reducing pressure in the water distribution lines in order to decrease leakeage; (iv) reducing the volume of water sold to municipalities that own
their distribution network; and (v) to use pumps in order to extract water located below the intakes of the Cantareira system, from the so-called
“technical reserve”.
As a result of the severe drought, during the year ended on December 31, 2014, our gross operating revenues decreased by 6.7% as compared
to 2013. For further information on the water crisis see “Item 4.B. Business Overview—The Current Water Crisis”.
Our Str engths
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 25.3 million people and supply
water on a wholesale basis to an additional urban population of approximately 3.1 million people. As of December 31, 2014, 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 22.4 million people, achieving an effective sewage coverage ratio of 85% in respect of all regions in which we operate as of
December 31, 2014. Our significant size and scale have required us to operate in complex urban settings such as shantytowns (favelas) and
environments without urban planning, thereby enabling us to develop well‑trained personnel, skills for operating in adverse conditions that we
believe our competitors lack.
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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 44.9 million as of December 31, 2014. The city
of São Paulo had an estimated total population of 11.1 million as of the same date, while the São Paulo metropolitan region had a total
population of 21.2 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$1.4 trillion in 2012, representing approximately 32.1% 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. Between January 1, 2007 and December 31, 2014, we executed 30‑year agreements with 274 of the
364 municipalities we serve, including an agreement with the city of São Paulo in June 2010. For the year ended December 31, 2014, income
from these 30‑year agreements accounted for 73.4% 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.
High quality operations. We believe that we adhere to high standards of service and employ the best available technology in the sanitation
business to control the quality of the water we abstract, process and distribute. Of our 16 laboratories in total, our central laboratory and 13 of our
regional laboratories are accredited by the National Institute of Metrology, Standardization and Industrial Quality, or INMETRO, and comply
with the ABNT NBR ISO IEC 17025 standard, thereby assuring the quality and accuracy of our test results. Moreover, our laboratories and field
teams use the latest equipment to detect substances controlled by regulations and have highly trained teams to handle contingencies and
customer complaints. We believe our technology enhances the efficiency and quality of our operations.
Our Str ategy
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, social, economic and
environmental sustainability, human capital as a competitive strength and innovation, 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.
26
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 Banco Nacional de
Desenvolvimento Econômico e Social, or “BNDES”. From 2013 to 2017 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 the pressure control and the 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.
See also “Item 4.B. Business Overview— Corporate Program for Reduction of Water Loss”.
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 990 thousands water
connections between 2015 and 2020. We also intend to increase our sewage coverage ratio to 95% by 2020 by adding 1.44 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-based 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, 2014 accounted for 50.4% of our gross operating revenues (excluding revenues relating to the construction of concession
infrastructure). Between January 1, 2007 and December 31, 2014, we entered into agreements with 274 municipalities (including our services
agreement with the city of São Paulo), of which 8 were entered into in 2014. These 274 municipalities accounted for 73.4% of our total revenues
for the year ended December 31, 2014 and 65.6% of our intangible assets as of the same date. As of December 31, 2014, 54 of our concessions
had expired and are currently being renegotiated. These 54 municipalities accounted for 16.5% of our total revenues for the year ended
December 31, 2014 and 23.8% of our intangible assets as of the same date. From January 1, 2015 through 2030, 38 concession agreements,
accounting for 8.7% of our revenues for the year ended December 31, 2014 and 8.0% of our intangible assets as of the same date, will expire.
In 2014 we invested R$3.2 billion and between 2015 and 2019 we plan to invest an additional R$13.5 billion to improve and expand our
water and sewage system, increase water security, and meet the growing demand for water and sewage services in the state of São Paulo, thereby
encouraging these customers to continue using our services. We 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 85% as of December 31, 2014 and plan to increase
this ratio to 95% by 2020 by adding over 1.44 million sewage connections and sewage treatment from 77% to 95% by 2020. These investments
are necessary to restore the quality of the rivers and lakes, providing new sources for water supply. In addition, there are municipalities in the
state of São Paulo representing a total population of approximately 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. Furthermore, 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. For more information, see “Item 4.B. Business Overview
—Description of our Activities—Sewage Operation” and “Item 4.B. Business Overview—Competition”.
27
Seek selective opportunities to expand our business. In accordance with our bylaws, our activities comprise water supply, sanitary sewage
services, urban rainwater management and drainage services, urban cleaning services, solid waste management services, and also related
activities, including the planning, operation, maintenance and commercialization of energy, and the commercialization of services, products,
benefits and rights that directly or indirectly arise from our assets, operations and activities. We are allowed to act, in a subsidiary form, in other
Brazilian locations and abroad. Since 2008, we have expanded into activities that complement water and sewage services in which we may
leverage our know‑how, size, scale and profitability. These activities include consulting and management of sanitation systems.
The following services have already been completed:
Under an agreement with Latin Consult, we provided consulting services to seven municipalities in Honduras to implement a new
commercial and operational management model.
We worked with the basic sanitation company of the state of Alagoas to provide technology for the reduction of water loss in the
city of Maceió. Under this type of contract, we were remunerated based on our success rate, or more specifically, we profited based
on the reduction of water loss achieved in the city of Maceió.
We developed the sanitation plan for the municipality of Barro Alto in the state of Goiás.
We concluded the implementation and the customization of our Aqualog software in the Sanitation Company of Espírito Santo
(Companhia Espírito Santense de Saneamento’s - CESAN) water treatment plant in the municipality of Nova Venécia in the state
of Espírito Santo.
Attend Ambiental S.A., a joint venture with Estre Ambiental S.A., commenced operation of a pre‑treatment and processing plant
for non-domestic effluent in the São Paulo metropolitan region during the second half of 2014.
The following services are still in the process of completion:
An agreement with Latin Consult, we are providing consulting services to the Instituto de Acueductos y Alcantarillados
Nacionales, the company responsible for water and sewage services in Panama, to assist with sustainable water use and implement
a new model for commercial, financial and operational planning and management. The contract is expected to end in 2015.
Since 2014, we have been working in Nicaragua, focusing on consulting and training in management and in the reduction of water
loss. This work is scheduled to end in 2016 and is part of an agreement between Brazil and Japan, in which a bilateral technical
cooperation agreement was formalized between us and Empresa Nicaragüense de Acueductos y Alcantarillados (ENACAL) in
Nicaragua.
We are still in the process of planning a joint venture with Servitec Investimentos e Participações Ltda. and Tecniplan Engenharia
e Comércio Ltda. in which we will install two small hydroelectric power plants with a total capacity of 7 MW. One of the
hydroelectric power plants will be built in our water treatment plant in Guaraú.
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.
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Streamline internal processes. We are implementing plans to increase our speed and productivity in responding to regulatory changes; to
strengthen and streamline our financial, commercial and administrative structure; to provide a solid and integral base of information to support
the decision-making process; and to increase the efficiency of our operations while also reducing costs. To this end, we invest in information
technology to guarantee the resiliency of our business, thus providing an environment of agile, dynamic and secure information technology,
capable of absorbing the demand elasticity of our mission-critical systems and of guaranteeing its continuity in case of datacenter failure
(including systematic, technological and infrastructure remodeling) and procedures to conform to the best information technology and corporate
governance practices.
Additionally, in 2012 we began implementing an enterprise resourcing planning, or “ERP system”, to replace our commercial and
management information systems. We contracted through a bidding process the Águas Claras Consortium, currently Consórcio Nascente, which
consists of Accenture and Engineering and which will provide us with SAP’s ERP system and the Net@suite system. We estimated that the ERP
system would have been implemented in 2014 and the Net@suite in 2015, but during the test phase we concluded that some important system
functionalities should have been adjusted and exhaustively tested before being implemented in order to minimize risks to our business which led
us to postpone the implementation to 2015 and 2016, respectively.
Manage the current adverse climate conditions and mitigate their negative impact. Our goal is to consistently meet the needs of our
consumers with our services, and in 2014, we managed to do so despite the water crisis. We invested R$10.9 billion between 1995 and 2014 to
provide the São Paulo metropolitan region with better access to water sources, more robust production and transport capacity of treated water,
increased treated water capacity from 57 m3/s to 73 m3/s and stronger integration of water production systems and distribution networks.
Furthermore, we have planned a series of short-term and medium-term measures that we expect will increase the ability of our immediate water
supply to cope with the water crisis and significantly improve future water security by the end of the decade. For more information, see “—
Business Overview—The Current Water Crisis”.
We believe that our overall strategy will enable us to meet the demand for high quality water and sewage services in the state of São Paulo as
well as in other Brazilian states and abroad, while creating shareholder value and strengthening our results of operations and our financial
conditions.
State of São Paulo
The state of São Paulo is one of 26 states that, together with the Federal District of Brasília, constitute the Federative Republic of Brazil. The
state of São Paulo is located in the southeastern region of the country, which also includes the States of Minas Gerais, Espírito Santo and Rio de
Janeiro, and which is, according to IBGE, the most developed and economically active region of Brazil. The state of São Paulo is located on the
Atlantic coast of Brazil and is bordered by the states of Rio de Janeiro and Minas Gerais to the north, the state of Paraná to the south and the state
of Mato Grosso do Sul to the west.
The state of São Paulo occupies approximately 3.0% of Brazil’s land mass and encompasses an area amounting to approximately
96,000 square miles. According to the SEADE, the state of São Paulo had an estimated total population of 44.9 million as of December 31,
2014. The city of São Paulo, capital of the state of São Paulo, had an estimated total population of 11.1 million, with a total population of 21.1
million inhabitants in the São Paulo metropolitan region, as of December 31, 2014. 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, 2014.
According to the IBGE, the GDP of the state of São Paulo was approximately R$1.4 trillion in 2012, representing approximately 32.1% 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).
29
Histor y
Until the end of the nineteenth century, water and sewage services in the state of São Paulo were generally provided by private companies.
In 1875, the Province of São Paulo granted a concession for the provision of water and sewage services to Cantareira Water and Sewage
Company (Companhia Cantareira de Água e Esgotos). In 1893, the government of the Province of São Paulo assumed responsibility for the
provision of water and sewage services from Cantareira Water and Sewage Company and formed the Office of Water and Sewers (Repartição de
Água e Esgotos), a government agency. Since that time, water and sewage services in the São Paulo metropolitan region have been administered
by the 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 No. 119/1973, COMASP, SAEC and SANESP merged to form our Company with the purpose of
implementing the directives of the Brazilian government set forth in the National Water Supply and Sanitation Plan (Plano Nacional de
Saneamento). We were incorporated under the laws of Brazil as a 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. 11,454/2003. 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.
Our capital expenditure budget is subject to approval by the State legislative chamber. This approval is obtained simultaneously with the
approval of the budget of the São Paulo Secretariat for Sanitation and Water Resources (Secretaria de Saneamento e Recursos Hídricos do
Estado de 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.
30
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 364 of the 645 municipalities in the State, including in the city of São Paulo. We also supply water on a wholesale
basis to 5 municipalities in the São Paulo metropolitan region in which we do not operate water distribution systems, and four of these
municipalities also utilize our sewage treatment services. Currently, we are the 5th 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 ADR – level III 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. 1,025/2007, 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.
Cor por ate Or ganization
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 corporate organization,
communication, audit, regulatory affairs and ombudsman. The Chief Executive Officer represents our company before third parties and certain
powers can be granted to attorneys‑in‑fact. The executive officers described below report to the Chief Executive Officer:
the Corporate Management Officer, who is responsible for marketing (commercial processes), human resources, quality and social
responsibility, legal affairs, information technology, asset management, supplies, contracts and new business ventures;
the Chief Financial 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, controller, accounting, corporate governance and investor relations, is part of the committee on regulatory
matters and is responsible for implementing the committee’s guidelines with the support of our division responsible for regulatory
matters;
the Technology, Enterprises and Environment Officer is responsible for environmental management, technological and operational
development, quality control of water and sewage, the development, coordination and execution of special investment programs,
projects, research and innovation; and
the Chief Operating Officer for the São Paulo metropolitan region Division and the Chief Operating Officer for the Regional
Systems Division, who are responsible for managing the operation, maintenance, execution of 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. Moreover, the Chief Operating Officers are
part of the committee on regulatory matters and implemented the committee’s guidelines in their respective management teams
with the support of our division on regulatory matters. The Chief Operating Officers are also responsible for sanitation advisory
services to independent municipalities and for mediation and negotiation with communities and local governments, aimed at
aligning our interests with the interests of our clients.
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Capital Expenditur e Pr ogr am
Our capital expenditure program is designed to improve and expand our water and sewage system and to increase and protect our water
sources in order to sustain water security, meet the growing demand for water and sewage services in the state of São Paulo and improve the
overall environmental impact of our activities. Our capital expenditure program has four specific goals with respect to the municipalities we
serve:
(i) to continue to 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 2012 through 2014 totaled approximately R$8.4 billion. We have budgeted investments in the total amount
of R$13.5 billion from 2015 through 2019. We invested R$3.2 billion, R$2.7 billion and R$2.5 billion in 2014, 2013 and 2012, respectively.
The following table sets forth our planned capital expenditures for water and sewage infrastructure for the years indicated:
Water
Sewage Collection
Sewage Treatment
Total
2015
2016
1,518
587
256
2,361
1,919
544
437
2,900
Planned Capital Expenditures
2018
2017
2019
(in millions of reais)
907
1,255
662
2,824
711
1,255
760
2,726
563
1,427
717
2,707
Total
5,618
5,068
2,832
13,518
Our capital expenditure program from 2015 through 2019 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 364 municipalities we served as of December 31, 2014. Nonetheless, this
strategy may be revised due to various mitigation measures taken to confront the current water crisis or due to construction projects beginning
earlier than originally planned.
Main Pr ojects of Our Capital Expenditur e Pr ogr am
The following is a description of the main projects in our capital expenditure 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. On account of the high demand, prior to September 1998, a portion of our customers in this region received water only on
alternate days of the week. We refer to this as “water rotation”. In order to address this situation, we implemented the Metropolitan Water
Program (Programa Metropolitano de Água) to improve regular water supply to the entire São Paulo metropolitan region. This program
terminated in 2000 and the water rotation measure was eliminated, but still we have maintained our investment plans for the region.
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The second phase of the Metropolitan Water Program, originally projected to result in an increase of 13.2 m³/s in water production capacity,
was started in 2006 and terminated in 2014. Within this phase, there was an increase of 7.1 m³/s in water production capacity (5 m³/s of which
can be attributed to the Public Private Partnership, or “PPP”, with Alto do Tietê concluded in 2011). Total investments made from 2006 through
2014 amounted to R$1.9 billion, including our own funds and financing from Caixa Econômica Federal and BNDES as well as the investments
from the Alto Tietê Public Private Partnership. In 2014, we invested approximately R$349 million in this program to respond to consumer
demand during the drought.
In 2013, we initiated the Metropolitan Water Program’s third phase. We plan to increase water production capacity by 9.5 m³/s in the São
Paulo metropolitan region by 2018, including the new São Lourenço System. This new system alone will increase water production capacity by
6.4 m³/s. The projected investments in this third phase may reach R$4.4 billion, including the investments in the São Lourenço PPP. For
information on Public Private Partnerships, see “—Business Overview—Public Private Partnerships”.
Other emergency actions to increase the São Paulo metropolitan region’s water security supply are also being implemented. For more
information, see “—Business Overview—The Current Water Crisis”.
Alto Tietê Public Private Partnership
In June 2008 we formed the Alto Tietê PPP 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 second phase 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 were completed in December 2011, and expanded the Alto Tietê System nominal capacity
from 10 m³/s to 15 m³/s.
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, including the investments and the System’s maintenance, is R$1.0 billion. We intend to complete
payment for these by 2024. For information on Public Private Partnerships, see “—Business Overview—Public Private Partnerships”.
São Lourenço Project
The metropolitan region lacks water sources, which requires us to obtain water from increasingly distant sources. In order to address this
situation, we are, under a PPP contract, currently developing a new supply system called São Lourenço, which will expand our production
capacity by 6.4 m3/s and should be able to benefit a population of almost 1.5 million people. The PPP contract was executed in August 2013 and
construction began in April 2014. The project is being undertaken by Sistema Produtor São Lourenço S.A., which is a special purpose company
controlled by the construction companies Camargo Correa S.A. and Andrade Gutierrez S.A. The new system is expected to begin operation in
late 2017. For more information on Public Private Partnerships, see “—Business Overview—Public Private Partnerships”.
The contract amounts to approximately R$6 billion (including the investment in the construction of R$2.2 billion and the system’s
operation and maintenance) and it has a 25-year term, four years of which will be dedicated to the construction, while the other 21 years will be
dedicated to service delivery. These services include the operation and maintenance of the sludge treatment system of the water treatment station
and disposal of the waste thus generated; electromechanic and civil maintenance of the untreated water pumping stations, of the water treatment
station and the untreated water pipeline; preservation and cleaning, surveillance and property security.
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.
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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 16 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, initiated in 2010, 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 in September 2010 and
approximately R$1.35 billion by a loan from BNDES entered into in February 2013. The third phase consists principally of the following items:
improvements to the effluent collection system through collection networks and home connections;
removal and transport of effluent for treatment through branch collectors and interceptors; and
the construction of new sewage treatment plants in the São Paulo metropolitan region.
Approximately 39% of the tasks were concluded, 36% are under construction, and a further 25% are in preparation for public bidding.
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 approximately R$1.55 billion in the third phase, R$497
million of which was invested in 2014.
Continuing our efforts to eliminate the disposal of in natura sewage in the bodies of water of the São Paulo metropolitan region near the
areas we serve, we have structured the fourth phase of the Tietê Project. The total estimated cost of this phase is approximately US$2 billion.
However, given the current drought, and the necessity to prioritize investment in water, the planning of this project is under revision.
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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 by efficiently integrating and expanding existing initiatives in our business units. This program has a 12‑year term that began in
2009. We have invested R$2.6 billion in this project so far, including R$541 million invested in 2014, and we anticipate total investments of
approximately R$5.1 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 by 2020, which is equivalent to reducing the Water Billed Loss Index from 27.6% in December 2008 to 18% in 2020 and to reducing the
Water Metered Loss Index (based on measured consumption) from 34.1% in December 2008 to 25.9% in 2020. In 2014, our water loss measured
319 liters per connection per day. In 2014, our Water Billed Loss Index was 21.3% and our Water Metered Loss Index averaged 29.8%. We note
that given the negative impact of the current water crisis on our revenue for 2014 and the need to prioritize investment in water production, the
scope and the goals of our Corporate Program for Reduction of Water Loss are under revision.
It is worth noting that the reduction in the water loss indicators in 2014 was due to the intensification of pressure management in the supply
systems, an operational practice designed to manage the current water shortage by reducing its impact on the supply of water available to the
population. This operational practice has been implemented to serve the current temporary and atypical situation.
For more information on the measure we have adopted to confront the water crisis, see “—Business Overview—The Current Water Crisis”.
Water Source Program
The Water Source Program (Programa Mananciais), created in 2009, consists of various projects that focus on the preservation and
improvement of water sources in the São Paulo metropolitan region, especially in the Guarapiranga and Billings reservoirs. The program’s
investments are directed mostly towards 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 shantytowns (favelas)
and is expected to directly benefit 58,000 families by 2015.
To implement this program, as of December 31, 2014, the total amount invested reached R$146.0 million, R$28.6 million of which was
invested in 2014. We estimate we will have invested approximately R$312.5 million in total from our own funds by the end of 2015. In
addition to our company funds, investments in this program will include financing from the federal government, the state government, local
authorities, and the World Bank.
Clean Stream Program
The Clean Stream Program (Programa Córrego Limpo), an agreement 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 low‑income households located on the banks of streams.
The total investments we have made in this program amounted to R$144 million as of December 31, 2014. Since 2007, 148 urban streams
have been decontaminated, benefiting approximately 2.2 million people. In 2014, we had invested R$14 million to decontaminate two large
urban streams, which together serve 320,000 people, and to maintain the 146 streams that had already been decontaminated. Part of the
investment related to the Tietê Program benefit the Clean Stream Program.
In 2013, we began the fourth phase of the Clean Stream Program with the expectation to completely or partially decontaminate more than 20
large streams by the end of 2014, with investments of approximately R$100 million. However, the effects and the consequences of the drought,
as well as the difficulty of the state government to remove and relocate low-income households in risk areas, lead us to revise the goals of this
program.
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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$1.2 billion in these projects in
2014, 2013 and 2012, respectively, and we have budgeted for additional capital expenditures of approximately R$3.5 billion from 2015 through
2019.
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 on the southern coast of the state, increasing the sewage collection rate to 95% and treating
100% of this collected sewage, thereby improving the 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 already begun and the second of which is in the planning phase. The first phase, which
aims to increase the sewage collection rate to 88%, is expected to be completed by 2019. The funds will come from our own resources as well as
from loan agreements entered into with JICA and from the Government Severance Indemnity Fund for Employees (Fundo de Garantia por
Tempo de Serviço), or “FGTS”.
Towards the goal of increasing sewage collection, and given that we have already installed sewage networks, we are now prioritizing
strengthening the connection of our customers to the sewage network. As of December 31, 2014, we completed 85.9 thousand sewage
connections. By 2017, we will complete an additional 33 thousand sewage connections. This work will have an approximated investment value
of R$400 million.
As of December 31, 2014, we had invested approximately R$2.1 billion in the entire program, of which R$187 million was invested during
2014. As a result, sewage collection in the Baixada Santista metropolitan region increased from 53% in 2007 when the program first began to
70% in 2014. Of the 70% of sewage that was collected, all of it was treated.
The expansion and renovation of the Oceanic Sewage Disposal System in the city of Praia Grande, located in the Baixada Santista
metropolitan region, is expected to be concluded by 2019 with investments of approximately R$340 million.
The second phase of the Clean Wave Program is in planning for the period between 2019 and 2024. We estimate investments in the amount
of R$1.8 billion in order to enlarge and implement sewage collection and treatment systems and complete 50 thousand new connections. The
goal of the second phase is to provide full coverage of sewage services in the Baixada Santista metropolitan region.
Northern Coast Clean Wave Program
The Northern Coast Clean Wave Program (Programa Onda Limpa Litoral Norte) aims to expand 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 sewage collection rate in the region from 36.0% in 2008 to 85.0% in 2016, thereby
improving the health and well-being of the population and stimulating economic development through an increase in tourism. As of 2014, the
sewage collection rate was 56%.
The funds in the amount of R$510 million that are necessary to conclude this program until 2016 will come from our own resources, as well
as from loan agreements entered with BNDES and Caixa Econômica Federal. As of December 31, 2014, we had invested R$157 million in this
program, of which R$12.8 million was invested during 2014.
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 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 Econômica Federal.
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During the first phase of this program, we have focused mainly on increasing water production in order to satisfy demand and improve water
quality in the Baixada Santista metropolitan region. In order to reach this goal, we built two water treatment stations, which started operations in
2013: Mambu/Branco, with water treatment capacity of 1.6 m³/s, and Jurubatuba, with water treatment capacity of 2 m³/s.
As of December 31, 2014, we had invested R$934 million in this program, of which R$76 million was invested during 2014. The total
investment estimated in this phase is R$1.1 billion.
The second phase of the program is in planning, with the goal of increasing even further the availability of treated water for the local
population and tourists and improving the quality of the water available to the population in the Baixada Santista metropolitan region in the
coming years.
Other Policies and Programs
Nossa Guarapiranga
In December 2011, we launched the Nossa Guarapiranga project, the main objective of which is to improve the water quality in the
Guarapiranga basin, 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. We installed 11 drains to collect residue
from rivers in the Guarapiranga basin, and since July 2012, we have developed diagnosis and control services for the withdrawal of water plants
that obstruct water extraction and deposit garbage at the bottom of the basin’s dam. The total amount invested from our own funds was R$15.1
million as of December 31, 2014. These actions will continue through 2016 with a total of R$17.9 million invested.
Pró‑Conexão
In December 2011, the State of São Paulo approved a project to subsidize connections to the sewage system for low‑income families.
Initially intended to last 8 years, 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 this period we expect that this program will create 192 thousand new sewage connections benefiting
approximately 800 thousand people.
As of December 2014 we completed approximately 22 thousand sewage connections with total investments worth R$52 million. We
believe that this program will increase the efficiency of our other sewage collection programs and help improve water quality in the region’s
rivers and basins as well as improve quality of life for low‑income families.
Water is Life
The Water is Life program, established in November 2011, aims to provide water and sewage services to low‑income and isolated
communities in the regions of Alto Paranapanema and Vale do Ribeira. We have expected to cover 81 communities in 30 municipalities,
benefiting approximately 15 thousand people. In this project we are responsible for supplying water and for offering technical support to the
municipalities, which with financing from the state government, will include installing Individual Sanitary Units (Unidades Sanitárias
Individuais), a technology better suited for isolated communities. As of December 31, 2014, we concluded projects in 11 communities and we
are currently working in 14 others. We executed more than 78 kilometers of networks and pipelines and we began to operate 24 new wells in
these communities.
A large part of this work was executed by our own personnel, which considerably reduced the need for investment. We expect to to invest
approximately R$7.4 million of R$12.5 million by the end of 2015. However, in light of the current water crisis, we are reevaluating the scope of
this program in order to prioritize investments in the expansion of water availability in the São Paulo metropolitan region.
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B. Business Over view
Our Oper ations
As of December 31, 2014, we provided water and sewage services to 364 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 five 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.
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—Public Consortia and Cooperation Agreement Law for Joint Management”.
As of December 31, 2014, 54 of our agreements or 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 54 of the municipalities to which
we provide service, and 38 of our existing concession agreements will expire between 2015 and 2030. 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, 2014, we provided water and sewage services to 364 municipalities. The majority of these concessions have 30‑year
terms. Due to court orders, we temporarily suspended our services in five other municipalities (Cajobi, Iperó, Álvares Florence, Macatuba and
Embaúba) that accounted for less than 0.1% of our gross operating revenues and our intangible assets as of December 31, 2014. For more
information, see “Item 8.A. Financial Statements and Other Financial Information—Legal Proceedings”. Between January 1, 2007 and
December 31, 2014, we entered into agreements with 274 municipalities (including our services agreement with the city of São Paulo) in
accordance with the Basic Sanitation Law, of which 8 were entered into in 2014. As of December 31, 2014, these 274 municipalities accounted
for 73.4% 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, 2014, 54 of our agreements or concessions had expired but we
continued to provide water and sewage services to these 54 municipalities and were in negotiations with these municipalities to execute program
agreements to substitute the expired concessions. From January 1, 2015 through 2030, 38 concessions will expire.
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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 department 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 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.
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:
we assume all responsibility for providing water and sewage services in the municipality;
according to the municipal laws authorizing the concession, we are permitted to collect tariffs for our services and tariff
readjustments follow the guidelines established by the Basic Sanitation Law and ARSESP;
as a general rule, to date, we are exempt from municipal taxes, and no royalties are payable to the municipality with respect to the
concession;
we are granted rights of way on municipal property for the installation of water pipes and water transmission lines, and sewage
lines; and
upon termination of the concession, for any reason, we are required to return the assets that comprise the municipality’s water and
sewage system to the municipality and the municipality is required to pay us the non‑amortized value of the assets relating to the
concession.
These assets have been considered to be intangible assets since January 2008. See Note 3.8 to our financial statements. Under concession
agreements executed prior to 1998, the reimbursement for the assets may be through payment of either:
the book value of the assets; or
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 the 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. Before 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.
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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. 11,107/2005, 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—Public Consortia and Cooperation
Agreement Law for Joint Management”.
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, which we previously served, terminated our concessions in February 1995 and
December 1995, respectively. In March 2014, we executed a contract to resume direct supply of water and sewage services to the municipality of
Diadema. Concurrently, we entered an agreement with Diadema to resolve water supply-related debt and indemnities. The agreement has set
guarantees in place should a contractual breach occur between us and the Municipality of Diadema.
The Municipality of Mauá signed a contract with us to terminate our concessions. As arranged, we transferred ownership of the related assets
as well as of the provision of services to the Municipality of Mauá. In another contract we entered into with the Basic Sanitation Company of the
Municipality of Mauá (Saneamento Básico do Município de Mauá – SAMA) and the Municipality of Mauá, we were responsible for providing
water on a wholesale basis. However, neither SAMA nor the Municipality of Mauá complied with the stipulations of the agreement, culminating
in a lawsuit brought against both parties. We demanded monetary compensation for our basic sanitary services. In a separate suit, we are
demanding SAMA pay us the correct amount of tariffs for water services it has been receiving without our authorization at a cost below that
contracted.
The receivables owed to us by Mauá, due to the termination of the concession, total R$85.9 million and have not been recognized in our
financial statements due to the uncertainty of our ability to collect them as of December 31, 2014. Despite these developments, we currently
supply water on a wholesale basis to Mauá.
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—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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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 Statements and Other Financial Information—Legal Proceedings”.
Operations in the City of São Paulo and Certain Metropolitan Regions
We are a concessionary of the state of São Paulo tasked with providing operate basic sanitary services in metropolitan regions, microregions
and urban conglomerates instituted by state law.
The State of São Paulo, pursuant to Article No. 25, Paragraph 3 of the Brazilian Constitution, enacted the LCE to create the metropolitan
regions of São Paulo (LCE No. 94/1974), Baixada Santista (LCE No. 815/1996), Campinas (LCE No. 870/2000), Vale do Paraíba and Litoral
Norte (LCE No. 1,166/2012), and Sorocaba No. (LCE 1,241/2014) and the urban clusters of Piracicaba (LCE No. 1,178/2012) and Jundiai (LCE
No. 1,146/2011).
In January 2015, the Federal Government issued the Metropolitan Bylaws (Law No. 13,089/2015), which within the next three years will
establish: general guidelines for the planning, management and performance of public interest initiatives in metropolitan regions and in urban
clusters instituted by the states; the general planning standards for integrated urban development and other international governance instruments;
and the criteria to receive federal loans for initiatives related to international governance in the area of urban development. This law is expected
to enter into effect in the next three years.
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 states or to the municipal governments. In February 2013, the Brazilian Supreme Court decided a pending
case on this matter related to the state of Rio de Janeiro. In its decision, a majority of the court held that the state of Rio de Janeiro must set up
new entities to oversee the planning, regulation and auditing of basic sanitation services in its metropolitan region with the non-partisan
participation of relevant municipalities.
In March 2013, the court ruled that this holding would come into effect in the state of Rio de Janeiro after a remaining appeal of its holding
is decided. The court’s holding represents a new paradigm in the management and provision of services. The Supreme Court has yet to clarify
the effects and extension of its decision which modifies the ability of independent municipalities in metropolitan regions to exercise their
constitutional competencies, including those related to the provision of basic sanitation services, due to public interest initiatives designed to
provide adequate and continuous service to the residents of these municipalities. In these municipalities, operations are regionalized and
contracts are structured considering the financial economic conditions of the entire region. The regulation including taxes, control and oversight
are the responsibilities of ARSESP (LCE 1,025/2007 – Articles No. 6 and No. 10).
The municipalities in which the hydrographic basins of the Piracicaba, Capivari and Jundiaí rivers are located created a consortium known as
the Regulatory Agency of Sanitation Services for the Piracicaba, Capivari and Jundiaí River Basin (Agência Reguladora dos Serviços de
Saneamento das Bacias dos Rios Piracicaba, Capivari e Jundiaí), or ARES-PCJ, in 2011 to regulate and supervise our activities in those areas,
and for similar purposes, in November 2013 the Regulatory Agency of São Bernardo do Campo (AR/SBC) was created. As a result of the
creation of ARES/PCJ, we are currently involved in legal proceedings in which ARES/PCJ is claiming that it has jurisdiction over the regulation
and supervision of our activities in three municipalities (Piracaia, Mombuca and Santa Maria da Serra). We cannot predict the outcome of this
case or how it may impact our business. See “Item 3.D. Risk Factors—Risks Relating to Our Business—Current regulatory uncertainty,
especially with regard to implementation and interpretation of the Brazilian Basic Sanitation Law, may have an adverse effect on our business”.
41
The number of judicial disputes concerning the regulation and oversight of services in areas served by us and regulated by ARSESP has
increased since 2012. Agencies may continue to be created to regulate and oversee our services.
Wholesale Operations
Wholesale Water Services
We provide water services on a wholesale basis to five municipalities located in the São Paulo metropolitan region (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 2014, the revenues from wholesale water services were R$146.8
million. For further information, see “—Regulation of Concessions”.
Wholesale Sewage Services
Currently, we provide sewage services on a wholesale basis to the municipalities of Mogi das Cruzes, Santo André, São Caetano do Sul and
Mauá. We also provided these services to the municipality of Diadema, but in March 2014, we executed a contract to resume direct supply of
water and sewage services to the municipality of 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 2014 we treated approximately 31.4 million cubic
meters of sewage from these municipalities. We believe this illustrates our commitment to social and environmental responsibility. In 2014, our
revenues from wholesale sewage services were R$21.8 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 Guarulhos
sewage to our sewage system are finalized. These works are the responsibility the Guarulhos sanitation company.
Descr iption 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—Public Consortia and Cooperation
Agreement Law for Joint Management”. For a description of our operating segments please see Note 24 to our financial statements as of and for
the year ended December 31, 2014.
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 financial statement
purposes only, we started to record such results separately as construction revenue and costs under IFRIC 12. Although such information is
available discretely, however, it is not analyzed by our management as such and is not the basis for operational decisions.
42
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 2014, we produced approximately 2,840.4 millions of 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 69% of water invoiced by volume in 2014.
The reduction in the volume of water produced in 2014, as compared to 2013, is a result of the water crisis that affects our area of operation.
For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Business: The measures we took to mitigate the effects of the drought
resulted in a significant decrease in the volume of water billed and revenues from services we provide, which had a material adverse effect on our
company and that may worsen if the drought escalates in severity” and “—The Current Water Crisis”.
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
Total
2014
Year ended December 31,
2013
(in millions of cubic meters)
2012
2,001.1
839.3
2,840.4
1,172.4
256.8
639.4
2,068.6
2,220.6
832.0
3,052.6
1,206.9
299.0
628.1
2,134.0
2,235.3
823.5
3,058.8
1,181.9
297.5
614.0
2,093.4
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:
water discharged for periodic maintenance of water transmission lines and water storage tanks;
water supplied for municipal uses such as firefighting;
water consumed in our own facilities; and
estimated water loss associated with water we supply to shantytowns (favelas).
Seasonality
Although seasonality does not affect our results in a significant way, in general, higher water demand is observed during the summer and
lower water demand during the winter. The summer coincides with the rainy season, while the winter corresponds to the dry season. The
demand in the coastal region is increased by tourism, with the greatest demand occurring during the Brazilian summer holiday months.
Water Resources
We can abstract water only to the extent permitted by DAEE pursuant to water right granted by it. Depending on the geographic location of
the river basin or if the river crosses more than one state (federal domain), the approval of ANA a federal agency under the Ministry of 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. For more information on water usage regulation, see “—Water Usage”.
43
In order to supply water to the São Paulo metropolitan region, we rely on 20 reservoirs of non‑treated water and 406 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 total capacity of the water sources available for treatment in this area is 73.7 m³/s. Total current installed
capacity is 73.3 m³/s and can be distributed to the São Paulo metropolitan region. Average verified production for the interconnected water
system of the São Paulo metropolitan region was 62.2 m³/s during 2014. The Cantareira, Guarapiranga and Alto Tietê systems produce 83% of
the water we distributed in the São Paulo metropolitan region in 2014.
In 2014, the Cantareira system accounted for 38.1% 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 70.0% of our gross operating revenues (excluding revenues
relating to the construction of concession infrastructure) for the year. For more information, see “Item 3.D. Risk Factors—Risks Relating to Our
Business—We are exposed to risks associated with the provision of water and sewage services”.
For further information on droughts see “Item 3.D Risk Factors—Risks Relating to Our Business—The measures we took to mitigate the
effects of the drought resulted in a significant decrease in the volume of water billed and revenues from services we provide, which had a material
adverse effect on our company and that may worsen if the drought escalates in severity” and “—The Current Water Crisis”.
Current river basin committees are authorized to charge both for water usage and the dumping of sewage into water bodies. We participate
in the decentralized and integrated management of water resources established by the National Policy on Water Resources. We are represented
by 160 employees on the 21 State River Basin Committees and the four Federal Committees that act in the state of São Paulo and in the National
and State Councils on Water Resources. The State Committees and the Federal Committee of the PCJ River Basin are currently in the process of
changing their representatives and we are working to maintain our current number of representatives. The process is scheduled to be finished by
the end of the first half of 2015.
The following table sets forth the water production systems from which we produce water for the São Paulo metropolitan region:
Water pr oduction system:
Cantareira
Guarapiranga
Alto Tietê
Rio Claro
Rio Grande (Billings reservoir)
Alto Cotia
Baixo Cotia
Ribeirão da Estiva
Total
2014
Pr oduction Rate(1)
2013
(in cubic meters per second)
2012
23.7
14.2
13.8
3.9
4.8
0.9
0.8
0.1
62.2
32.6
13.6
12.1
3.9
4.8
1.2
0.8
0.1
69.1
32.7
13.7
12.4
3.7
4.7
1.2
0.9
0.1
69.4
(1) Average of the twelve months ended December 31, 2014, 2013 and 2012.
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. 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. For additional information on the Alto Tietê system, see “Item 7.B. Related
Party Transactions—Transactions with the State of São Paulo—Agreements with the State”. In the interior cities of São Paulo, our principal
source of water consists of surface water from nearby rivers and from wells.
44
Statewide, we estimate that we are able to supply nearly all of the demand for water in all of the areas where we operate, subject to droughts
and extraordinary climate events. We installed 231,551, 226,421, and 212,775 new water connections in 2014, 2013 and 2012, respectively.
Throughout 2014, we adopted various measures to mitigate the current water crisis, which allowed us to provide water to the population despite
the decreased water availability. We were able to balance supply and demand for water in the São Paulo metropolitan region, as a result of: (i)
using water from other production systems to serve consumers originally supplied by the Cantareira system; (ii) to offer discounts (bonus) to
consumers that would use below average amounts of water, compared to average consumption; (iii) reducing pressure in the water distribution
lines in order to decrease leakeage; (iv) reducing the volume of water sold to municipalities that own their distribution network; and (v) to use
pumps in order to extract water located below the intakes of the Cantareira system, from the so-called “technical reserve”. For more information
on the effects of the drought on the water supply, see “—The Current Water Crisis”.
The interconnected water system of the São Paulo metropolitan region serves 30 municipalities, of which 25 are operated directly by us
under this system. Through this system, we serve the other five municipalities on a wholesale basis, whereas distribution is the responsibility of
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 continuous provision of regular water supply in the São Paulo metropolitan region, we intend to invest R$7.7 billion
(including the investment in the São Lourenço PPP) from 2015 to 2019 to increase our water production and distribution capacities as well as to
improve the water supply systems. In 2014, our total investment in water supply systems amounted to R$1.3 billion.
Water Treatment
We treat all water at our water treatment facilities prior to dispatching it to our water distribution network. We operate 235 treatment
facilities, of which eight located in the São Paulo metropolitan region account for approximately 70.45% of all water we produced in 2014. The
type of treatment used depends on the nature of the source and quality of the untreated water. For example, water abstracted from rivers requires
more treatment than water drawn from groundwater sources requires. All of the water we treat receives fluoridation treatment.
Water Distribution
We distribute water through our own networks of water pipes and water transmission lines, ranging in size from 2.5 meters to 75 millimeters
in diameter. Storage tanks and pumping stations regulate the volume of water flowing through the networks in order to maintain adequate
pressure and continuous water supply.
The following table sets forth the total number of kilometers of water pipes and water transmission lines and the number of connections in
our network as of the dates indicated:
Water distribution pipes and water transmission lines (in kilometers)
Number of connections (in thousands)
As of December 31,
2013
69,619
7,888
2014
70,800
8,210
2012
67,647
7,679
45
More than 90% of the water pipes in our water distribution network are made of cast iron or polyvinylchloride, or PVC. Distribution pipes at
customers’ residences typically are made from high‑density polyethylene tubing. Our water transmission lines are mostly made of steel, cast iron
or concrete.
As of December 31, 2014, our water distribution pipes and water transmission lines included: (i) 36,975 kilometers in the São Paulo
metropolitan region; and (ii) 33,825 kilometers in the Regional Systems.
As of that date, we had 406 storage tanks in the São Paulo metropolitan region with a total capacity of 2 million cubic meters, and 1,936
storage tanks in the Regional Systems. Furthermore, we had 175 treated water pumping stations in the São Paulo metropolitan region aqueduct
system, including stations at treatment facilities, intermediate trunk transfer pumping stations and small booster stations serving local areas.
Water transmission lines that require maintenance are cleaned and their lining is replaced. We are typically notified of water main fractures
or breaks by the public through a toll‑free number maintained by us. We consider the condition of the water pipes and water transmission lines in
the São Paulo metropolitan region to be adequate as of the date of this annual report. Due to age, external factors such as traffic, the dense
population, and commercial and industrial development, water pipes and water transmission lines in the São Paulo metropolitan region are
somewhat more susceptible to degradation than those in the Regional Systems. To counter these effects, we have a maintenance program in place
for water pipes and water transmission lines that is intended to address anticipated fractures and clogs due to brittleness and encrustation, and to
help ensure water quality in the region.
The new customers whose water pipes are more than 20 meters away from the water transmission lines are responsible for covering part of the
costs of connecting to our water distribution network. They must cover the costs of connecting to the network from the customer’s premises,
including costs of purchasing and installing the water meter and related labor costs. We perform the installation of the water meter and conduct
periodical inspections and measurements. After completion of installation, the customer is responsible for the water meter.
The following table sets forth projected new water connections for the periods indicated in thousands:
São Paulo metropolitan region
Regional Systems
Total
Water Loss
in thousands
2015
2016
2017
2018
2019
2020
103
74
177
100
72
172
95
69
164
97
67
164
92
66
158
2015 ‑ 2020
579
414
993
92
66
158
The difference between the amount of water produced and the amount of water invoiced generally represents both physical and non‑physical
water loss.
The Water Billed Loss Index represents the quotient of (i) the difference between (a) the total amount of water produced minus (b) the total
amount of water invoiced plus (c) the volume of water excluded from our calculation of water loss, divided by (ii) the total amount of water
produced.
The Water Metered Loss Index represents the quotient of (i) the difference between (a) the total amount of water produced minus (b) the total
amount of water measured minus (c) the volume of water that we exclude from our calculation of water loss, divided by (ii) the total amount of
water produced.
The Water Loss per Connection per day measured in liters per connection per day represents the quotient of (i) the average annual water loss,
divided by (ii) the average number of active water connections multiplied by the number of days of the year. This calculation method is based on
worldwide market practice for the sector.
We exclude the following from our calculation of water loss: (i) water discharged for periodic maintenance of water transmission lines and
water storage tanks; (ii) water supplied for municipal uses such as firefighting; (iii) water we consume in our facilities; and (iv) estimated water
loss related to the supply of water to shantytowns (favelas).
46
Among the principal indicators utilized to measure rates of water loss are the following:
Water Billed Loss Index (WBLI), in %;
Water Metered Loss Index (based on metered consumption) (WMLI); and
Water Loss per Connection, (TLDC) in liters per connection per day.
These indicators are calculated by applying the following formulas:
Vproduced – (Vinvoiced +
Vused)
Vproduced
Vproduced – (Vmeasured +
Vused)
Vproduced
Vproduced – (Vmeasured +
Vused)
Nconnection x No. of days of a
given period
WBLI =
WMLI =
TLDC =
Where:
Vpr oduced: corresponds to the volume of water produced at a given period;
Vbilled: corresponds to the volume of water billed at a given period;
Vmeasur ed: corresponds to the volume of water measured 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.
Using this calculation method, as of December 31, 2014, we experienced 365 liter/connection per day of water loss in the São Paulo
metropolitan region and 248 liter/connection per day in the Regional Systems, averaging 319 liter/connection per day. We have a Corporate
Program for Reduction of Water Loss in place that aims to reduce total water loss to around 296 liters/connection, Water Billed Loss Index to
18% by 2020 and the Water Metered Loss Index to 25.9% by 2020. Nonetheless, on account of the drought, the negative impacts on our revenue
during 2014 and the necessity to priorize investing in the expansion of water availability, the scope and the goals of our Corporate Program for
Reduction of Water Loss are under revision.
In order to continue to supply water to the population despite its low availability, one of the measures that we adopted was to further reduce
water pressure across our network of operation. Insomuch as the utilization of water sources, real water loss (water physically lost, which
corresponds to about 65% of the Water Metered Loss Index) fell from 22.2% in December 2008 to 19.4% in December 2014. This reduction is
not only the result of initiatives to combat water loss including, for example, strengthening our supply systems’ “pressure management”, but it
can also be attributed to atypical and temporary operations.
For more information on the measure we have adopted to confront the water crisis, see “—The Current Water Crisis”.
Our strategy to reduce water loss has two approaches:
reduction in the level of physical loss, which results mainly from leakage. To this end we are primarily replacing and repairing
water transmission lines and pipes and installing probing and other equipment, including strategically located pressure‑regulating
valves; and
47
reduction of non‑physical loss, which results primarily from the inaccuracy of our water meters installed at our customers’ premises
and from clandestine and illegal use. To this end we are upgrading and replacing inaccurate water meters and expanding our
anti‑fraud personnel.
We are taking measures to decrease physical loss by reducing response time to fix leakages and by better monitoring of non‑visible water
main fractures. Among other initiatives, we have adopted the following measures to reduce physical water loss:
the introduction of technically advanced valves to regulate water pressure throughout our water transmission lines in order to
maintain appropriate water pressure downstream. These valves are programmed to respond automatically to variations in demand.
During peak usage, the flow of water in the pipes is at its highest point; however, when demand decreases, pressure builds up in
the water transmission lines and the resulting stress on the network can cause significant water loss through cracks and an increase
in ruptures of the pipes. The technically advanced valves are equipped with probes programmed to feed data to the valve in order
to reduce or increase pressure to the water transmission lines as water usage fluctuates. As of December 31, 2014, we installed 362
valves at strategic points in the network, with 263 valves in the São Paulo metropolitan region and 99 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 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
conducting preventive maintenance of existing and newly installed water meters.
Water Quality
We believe that we supply high quality treated water that is consistent with the standards set by Brazilian law, which are similar to the
standards set in the United States of America and Europe. Pursuant to the Brazilian Ministry of Health (Ministério da Saúde) regulations, we
have significant statutory obligations regarding the quality of treated water.
In general, the state of São Paulo has excellent water quality from underground or surface water sources. However, high rates of population
growth, increased urbanization and disorganized occupation of some areas of the São Paulo metropolitan region have reduced the quantity and
quality of water available to serve the population in the southern area of the São Paulo metropolitan region and in the coastal region. Currently,
we successfully treat this water to make it potable. We are also investing in improvements of our water transmission lines and our treatment
systems to ensure the quality and availability of water for the upcoming years.
Water quality is monitored at all stages of the distribution process, including at the water sources, water treatment facilities and in the
distribution network. We have 15 regional laboratories, one central laboratory, and laboratories located in all water treatment facilities that
monitor water quality, as required by our standards and those set by law. Our laboratories analyze an average of 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. Our
central laboratory and 13 of our regional laboratories have obtained the ABNT NBR ISO IEC 17025 accreditation (accreditation for general
requirements for the competence of testing and calibration laboratories) awarded by the National Institute of Metrology, Standardization and
Industrial Quality, or INMETRO.
48
All chemical products used for water treatment are analyzed and follow strict specifications set out in recommendations made by the
National Health Foundation (Fundação Nacional de Saúde), or NHF, ABNT, and the National Standard Foundation (NSF) and the American
Water Works Association (AWWA) to eliminate toxic substances that are harmful to human health. From time to time, we face problems with
the proliferation of algae, which may cause an unpleasant taste and odor in the water. In order to mitigate this problem, we work on: (i) fighting
algae growth at the water source and (ii) using advanced treatment processes at the water treatment facilities that involve the use of powdered
activated carbon and oxidation by potassium permanganate. The algae growth creates significant additional costs for water treatment because of
the higher volumes of chemicals used to treat the water. In 2014, we did not detect significant algae growth. We participate in the Water Source
Program (Programa Mananciais) together with other organizations engaged in the promotion of urban development and social inclusion to
mitigate pollution in the São Paulo metropolitan region. In addition, we also participate in the Clean Stream Program to clean important streams
in the city of São Paulo. Other initiatives also aimed at improving the water quality in the water sources located in the of São Paulo metropolitan
region are Nossa Guarapiranga and Pró‑Conexão. See “—Main Projects of Our Capital Expenditure Program—Metropolitan Water Program—
Water Source Program,” “—Clean Stream Program,” and “—New Policies and Programs—Nossa Guarapiranga”.
We believe that there are no material instances where our standards are not being met. However, we cannot be certain that future breaches of
these standards will not occur.
Fluoridation
As required by Brazilian law, we add fluoride to the water at our treatment facilities prior to its distribution into the water supply network.
Fluoridation primarily consists of adding fluorosilicic acid to water at between 0.6 mg/L and 0.8 mg/L to assist in the prevention of tooth decay
among the population.
Sewage Operations
We are responsible for the collection, removal, treatment and final disposal of sewage. As of December 31, 2014, we collected
approximately 87% and 80% of all the sewage produced in the municipalities in which we operate in the São Paulo metropolitan region and in
the Regional Systems, respectively. During 2014, we collected approximately 85% of all the sewage produced in the municipalities in which we
operated in the state of São Paulo. We installed 244,280, 236,647 and 240,687 new sewage connections in 2014, 2013 and 2012, 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, 2014,
we were responsible for the operation and maintenance of 47,992 kilometers of sewage lines, of which approximately 25,644 kilometers are
located in the São Paulo metropolitan region and 22,348 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)
As of December 31,
2013
2014
47,992
6,660
47,103
6,340
2012
45,778
6,128
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.
49
The public sewage system operated by us was structured in order to receive, in addition to household effluents, a portion of non-domestic
effluents (such as industrial sewage and sewage from other non‑domestic sources) for treatment together with household effluents. Non-domestic
effluents have characteristics that are qualitatively and quantitatively different from household effluents. As a result, the discharge of non-
domestic effluents into the public sewage system is subject to compliance with specific legal demands with the purpose of protecting the sewage
collection and treatment systems, the health and safety of operators and the environment. The current environmental legislation establishes
standards for the discharge of these effluents into the public sewage system and stipulates that such effluents be subject to pretreatment. These
standards are defined in State Decree No. 8,468/1976, as amended by State Decree No. 54,487/2009.
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 by us. In extreme cases, the Sao Paulo Sanitation Technology Company (Companhia
Ambiental do Estado de São Paulo), or “CETESB”, is notified in order for the applicable measures to be taken. Effluents from our treatment
facilities must comply with limitation guidelines for release of effluents into receiving water bodies. Additionally, the quality of the water in the
receiving water body must not be impaired by the release of such effluents, as established by State Decree No. 8,468/1976 and Conama
Resolution No. 357/2005, as amended by Conama Resolution No. 430/2011.
We considered the condition of the sewage lines in the São Paulo metropolitan region to be adequate as of the date of this annual report.
Due to a greater volume of sewage collected, a higher population and more extensive commercial and industrial development, the sewage lines
in the São Paulo metropolitan region are more deteriorated than those of the Regional Systems. 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 60% of all residences in the coastal region currently connected to our sewage network as of December 31, 2014.
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
2015
2016
2017
133
109
242
132
110
242
2018
in thousands
130
107
237
132
110
242
2019
2020
2015‑2020
136
101
237
129
108
237
792
645
1,437
In 2014, approximately 68% and 96% 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 rivers and the Atlantic Ocean, in accordance with applicable legislation. Though we have not yet reached full
coverage of sewage collection and treatment services in the regions were we operate, we are making efforts to reach this goal.
50
We currently operate nine ocean outfalls and 515 sewage treatment facilities, 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.
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. There are 419 secondary treatment facilities in the interior region of São Paulo State that have
treatment capacity of approximately 15 cubic meters of sewage per second. Similar to our disposal process for treated sewage collected in the São
Paulo metropolitan region, the majority of sewage collected in the coastal region receives treatment and disinfection and is then discharged into
rivers and also into the Atlantic Ocean through our ocean outfalls, in accordance with applicable legislation. We have 74 sewage treatment
facilities in the coastal region.
We are a party to a number of legal proceedings related to environmental matters. See “Item 8.A. Financial Statements and Other Financial
Information—Legal Proceedings”. In addition, our capital expenditure program includes projects to increase the amount of sewage that we treat.
See “Item 4.A. History and Development of the Company—Capital Expenditure Program” and “Item 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, among other processes, to abstract the water
from the sludge.
Currently, the sludge generated through our activity goes mainly to landfills. In turn, we treat the slurry generated in these landfills.
Current legislation and the population at large demand advances in the search for alternative technologies that minimize the generation of
and find beneficial uses for sludge. In light of these demands, we work on several fronts, seeking innovative approaches to the destination and
final disposal of sludge.
Part of the R$10.7 million invested in research and development in 2014 was used for approached to the disposal and beneficial use of
sludge, in order to meet the Principles for Cleaner Production. Our agreement with the São Paulo State Foundation for Research Support
(Fundação de Amparo à Pesquisa do Estado de São Paulo - FAPESP), or “FAPESP”, initiates projects that use sludge to help recover degraded
areas, cover landfills and yield sand for construction works.
Sludge disposal must comply with State and Federal law requirements, such as Resolution No. 375/2006 of the CONAMA, Federal Law
No. 12,305/2010, Federal Decree No. 7,404/2010, State Law No. 12,300/2006 and State Decree No. 54,645/2009.
Pr incipal Mar kets in Which We Oper ate
As of December 31, 2014, we operated water and sewage systems in 364 of the 645 municipalities in the state of São Paulo. In addition, we
currently supply water on a wholesale basis to five municipalities located in the São Paulo metropolitan region with an urban population of
approximately 3.1 million.
The following table provides a breakdown of gross revenues from water supply and sewage services by geographic market for the periods
indicated:
São Paulo metropolitan region
Regional Systems
Total
51
2014
Year ended December 31,
2013
(in millions of R$)
2012
6,235.3
2,670.1
8,905.4
6,984.4
2,555.7
9,540.1
6,625.0
2,301.7
8,926.7
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
Competition
2014
Year ended December 31,
2013
(in millions of R$)
2012
4,896.7
4,008.7
8,905.4
5,276.1
4,264.0
9,540.1
4,944.2
3,982.5
8,926.7
In the state of São Paulo, there are approximately 276 municipalities that operate their own water and sewage systems and that collectively
have a total population of approximately 13.8 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 “—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 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 industrial customers. Several
large industrial customers located in municipalities we serve use their own wells to meet their water needs. 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 water treatment 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 certain industrial customers, ARSESP has
given us special authorization to establish fixed demand agreements. Since these fixed demand agreements (take-or-pay contracts) with certain of
our industrial customers are not covered by our bonus program, we stopped requiring the fulfillment of this fixed demand contract to encourage
lower water consumption. However, these contracts are subject to the contingency tariff that was implemented in January 2015. For more
information about the water crisis, see “—The Current Water Crisis”.
Billing Pr ocedur es
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$0.30 to R$1.27 per transaction for collection and remittance of these payments.
52
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 2014, 2013 and 2012, we received payment of 94.6%, 95.2% and 94.7%, respectively, of the amount billed to
our retail customers, and 94.3%, 95.0%, and 94.3%, respectively, of the amount billed to those customers other than State entities, within 30 days
after the due date. In 2014, 2013, and 2012, we received 101.1%, 100.5% and 100.7%, 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 2014, 2013 and 2012,
we received payment of 32.8%, 45.8% and 50.1%, 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.
Tar iffs
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
previously would take effect in September. Pursuant to the most recent tariff revision, both the base date and future adjustments will now take
place in April.
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.
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.
In addition, in 2011, the municipalities located in the hydrographic basins of the Piracicaba, Capivari and Jundiaí rivers created a consortium
known as ARES/PCJ to regulate and supervise our activities in those areas, and for similar purposes, in November 2013 the Regulatory Agency
of São Bernardo do Campo (AR/SBC) was created. As a result of the creation of the ARES/PCJ, we are currently involved in legal proceedings in
which ARES/PCJ is claiming that it has jurisdiction over the regulation and supervision of our activities in three municipalities (Piracaia,
Mombuca and Santa Maria da Serra). We cannot predict the outcome of this case or how it may impact our business. See “Item 3.D. Risk Factor
—Risks Relating to Our Business—Current regulatory uncertainty, especially with regard to implementation and interpretation of the Brazilian
Basic Sanitation Law, may have an adverse effect on our business”.
The number of judicial disputes related to the regulation and oversight of services in areas served by us and regulated by ARSESP has
recently increased since 2012. Regional and municipal agencies may continue to be created and may dispute with ARSESP regarding the
regulation and oversight of our services.
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 preliminary tariff revision of 2.3509% to be applied equally on all customer tariffs. These adjustments
were valid for all municipalities we serve, except for the municipalities that possess specific contractual tariff clauses.
53
On November 1, 2013, ARSESP issued Resolution No. 435/2013 which authorizes us to implement a tariff adjustment. Initially, this
adjustment considered an inflation rate of 6.2707% as measured by the IPCA for the period from August 2012 to July 2013. From this number,
ARSESP deducted the efficiency factor, or “X Factor”, of 0.4297% for the period, and this resulted in an adjustment of 5.8410%. Additionally,
ARSESP estimated the gain that we had with the preliminary tariff revision of 2.3509% beginning in April 2013, and this resulted in a further
reduction of 0.9249% in the indicator. Moreover, ARSESP also estimated our loss of 0.6538% resulting from the delay in the reposition of the
IPCA and added that estimated amount. The product of these estimations and considerations resulted in a linear increase of 3.1451% in tariffs
beginning December 11, 2013.
ARSESP Resolution No. 520/2014, published on November 27, 2014, authorizes us to implement a final tariff revision as of December 27,
2014 with a repositioning index of 6.4952%. This percentage corresponds to the index of the 5.4408% tariff revision increase already granted as
a result of the conclusion of the tariff revision, approved by ARSESP Resolution No. 484/2014 of April 10, 2014, and an additional 1% index,
accrued to the index for partial compensation regarding the postponement of the tariff revision application. This additional 1% index may be
revised or supplemented after ARSESP analyzes data related to our loss in revenue on account of the application postponement.
ARSESP Resolution No. 545/2015, published in January 2015, authorized us to implement a contingency tariff mechanism consisting of
additions to water and sewage bills for customers whose monthly consumption exceeds the average monthly consumption verified, between
February 2013 and January 2014. The tariff is subject to a contingency as follows:
i. a 40% increase on the tariff amount applicable to the water consumption portion that exceeds up to 20% of the average; or
ii. a 100% increase on the tariff amount applicable to the water consumption portion that exceeds more than 20% of the average.
Regarding the tariff structure, ARSESP Resolution No. 463/2014, published in January 2014, established April 10, 2014, as the deadline for
publication of the timetable for implementation of our new tariff structure. However, on April 17, 2014, ARSESP issued Resolution
No. 484/2014, which maintains the current Tariff Structure and does not set a date for implementation of the new tariff structure. Until the new
tariff structure 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 shantytown
(favela). The residential-social tariffs apply to residences of low‑income families, residences of persons unemployed for up to 12 months and
collective living residences. The favela tariffs apply to residences in shantytowns characterized by a lack of urban infrastructure. The latter two
sub‑categories were instituted to assist lower‑income customers by providing lower tariffs for consumption. The non‑residential category
consists of: (i) commercial, industrial and public customers; (ii) “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.
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 fixed demand
agreements with us to a minimum of 500 cubic meters per month. These fixed demand agreements are not covered by the water consumption
reduction program, but in order to encourage lower consumption, we stopped requiring the fulfillment of this fixed demand contract. Yet, these
contracts are comprised in the contingency tariff that was implemented in January 2015. For more information about the water crisis, see “—The
Current Water Crisis”.
54
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 Categor y 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
Shantytown (favela):
0‑10(1)
11‑20
21‑30
31‑50
Above 50
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 – 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.
As of
December 27,
2014
As of
December 11,
2013
(reais per m3)
As of
September 11,
2012
1.79
2.80
7.00
7.71
0.61
1.05
3.71
5.29
5.85
0.46
0.53
1.75
5.29
5.85
3.60
7.00
13.41
13.97
1.80
3.50
6.73
6.99
2.70
5.24
10.09
10.48
1.68
2.63
6.57
7.24
0.57
0.99
3.48
4.97
5.49
0.44
0.50
1.64
4.97
5.49
3.38
6.57
12.59
13.12
1.69
3.29
6.32
6.56
2.53
4.92
9.47
9.84
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
3.20
6.22
11.93
12.43
1.60
3.12
5.99
6.21
2.28
4.43
8.53
8.86
55
In 2014, 2013 and 2012, the average tariff calculated for the Regional Systems was approximately 25% 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. 11,445/2007 and São Paulo State Law No. 1,025/2007 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 our Tariff System Regulation, which was approved by State Decree No. 41,446/1996. ARSESP has proposed or
enacted a number of regulatory changes, including the following:
In 2009, ARSESP invited public discussion and hearings to take place regarding the methodology for tariff revisions. In 2010,
ARSESP issued Resolution No. 156/2010. 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. In May 2011, ARSESP disclosed the
applicable weighted average cost of capital (8.06%) and disclosed in April 2012 the methodology for tariff revisions. In
November 2012, ARSESP published a preliminary technical note for public consultation, proposing a preliminary initial
maximum average tariff (P0) and X Factor, based on a preliminary evaluation of assets held by us.
In March 2013, ARSESP published Resolution No. 406/2013, which 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
repositioning index of 2.3509%; (ii) authorizes the pass-through 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 a X 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 tariff cycle. Moreover, in April 2013, we implemented the repositioning index of
2.3509% to current tariff rates. We have not yet begun applying the regulation and supervision rate of 0.5% to all the
municipalities we serve.
Also, in March 2013, ARSESP issued Resolution No. 407/2013 authorizing us to pass through to the service bill the 7.5% transfer
to the São Paulo Municipal Sanitation and Infrastructure Fund as a legal charge, as defined by municipal legislation. Pursuant to
the Program Contracts and the Sewage and Water Supply Service Contracts, this charge must be considered in the tariff revision.
In April 2013, ARSESP issued Resolution No. 413/2013, which effectively suspended Resolution No. 407/2013 until the tariff
revision process is concluded, thereby postponing our authorization to pass the charge through to consumers on the service bill.
The postponement of Resolution No. 407 was due to a request from the Government of the State of São Paulo to analyze, among
other matters, methods of reducing the impact on consumers.
56
On November 1, 2013, ARSESP issued Resolution No. 435/2013, authorizing us to implement a tariff adjustment. Initially, this
adjustment considered an inflation rate of 6.2707% as measured by the IPCA for the period from August 2012 to July 2013. From
this number, ARSESP deducted the X Factor of 0.4297% for the period, and this resulted in an adjustment of 5.8410%.
Additionally, ARSESP estimated the gain that we had with a tariff revision of 2.3509% beginning in April 2013, and this resulted
in a further discount of 0.9249% in the indicator. Moreover, ARSESP also estimated our loss of 0.6538% resulting from the delay
in the reposition of the IPCA and added that estimated amount. The result of these movements and considerations was a linear
tariff adjustment of 3.1451% beginning December 11, 2013.
In April 2014, ARSESP issued Resolution No. 484/2014 (further ratified by ARSESP Resolution No. 520/2014), which, among
other things: (i) establishes that, as of May 11, 2014, a tariff repositioning index of 5.4408% in relation to our current tariffs and an
annual X Factor of 0.9386%, which will be deducted in the upcoming annual tariff adjustments, shall be applied to water services
bills; (ii) allows us to apply the repositioning index arising from the tariff revision at a more opportune future date, when we shall
proceed with a recalculation and monetary adjustment of the applicable amounts, in order to ensure our economic and financial
balance, taking into account the atypical situation in our market due to the lack of rainfall and our measures to encourage water
savings in order to ensure supply; (iii) establishes that the next annual tariff adjustments will occur on April 11, 2015 and April 11,
2016, with the next tariff revision on April 11, 2017; and (iv) ratifies the readjustment rules set forth on Resolution No. 406/2013
and updated the X Factor for the tariff cycle from 0.836% to 0.9386%. The current tariff structure will be kept with respect to our
services until the new structure is approved by ARSESP and implemented. Considering what has been established by Resolution
No. 484/2014, we decided to postpone the application of the repositioning index to an opportune date no later than the end of
December 2014.
In May 2014, ARSESP issued Resolution No. 488/2014, which maintained the suspension of ARSESP Resolution No. 407/2013
until the outcome of the revision of the contract signed between us, the city of São Paulo and the State of the São Paulo is known,
thereby delaying the authorization to pass the charge through to consumers on the service bill. We cannot be certain when the
contract will be revised or when we will be able to pass the 7.5% charge on to consumers through the service bill.
In November 2014, ARSESP published Resolution No. 520/2014 authorizing us to implement a tariff revision as of December 27,
2014 with a repositioning index of 6.4952%. This percentage corresponds to the index of the 5.4408% related to the tariff increase
already granted as a result of the conclusion of the tariff revision, approved by ARSESP Resolution No. 484/2014, and an
additional 1% index, accrued to the index for partial compensation regarding the postponement of the tariff revision application.
This additional 1% index may be revised after ARSESP analyzes data related to our loss in revenue on account of the application
postponement.
In March 2015, we filed with ARSESP an extraordinary revision request motivated by the decline in the volume of water billed
due to the water crisis and the unpredicted increase in electricity tariffs. On March 31, 2015, ARSESP submitted for Public
Consultation a proposal which suggests a total tariff adjustment of 13.87%, 6.36% of which refers to the extraordinary revision and
7.06% to the tariff adjustment by the IPCA minus the X Factor. In the Public Hearing held on April 15, 2015, we proposed a total
tariff increase of 22.70%. We are awaiting ARSESP’s final decision.
The Cur r ent Water Cr isis
Prior to 2014, we planned our supply of water to the São Paulo metropolitan region according to the water supply during the driest period on
record, from 1953 to 1954. However, water inflow to the Cantareira reservoirs throughout 2014 was less than half the inflow of the previously
most critical year, 1953. Consequently, the amount of water stored in the reservoirs in 2014 and 2015 significantly declined. Since May 2014 it
has not been possible to withdraw water by gravity from the PCJ River Basin reservoirs intake. Pumping water out from the technical reserve,
whose elevation is below the intake, has been necessary. Water production in this system decreased from 31.77 m³/s in February 2014 to 14.04
m³ in March 2015.
57
Together with other water systems that were used to support the Cantareira System, the Alto Tietê System reached its maximum production
capacity during the crisis period, which allowed for the transfer of water to areas previously supplied by the Cantareira System.
The Guarapiranga System, with a storage capacity of 171 billion liters of water, has kept favorable levels of water availability since the
beginning of the drought. Accordingly, its water production levels have been high, allowing for the transfer of more water to areas that were
previously supplied by the Cantareira System. Water production in this system increased from 13.77 m³/s in February 2014 to 14.65 m³/s in
March 2015.
Cantareira System
The Cantareira System is located in the northern area of the São Paulo metropolitan region. It uses water extracted from the PCJ River Basin
and the Juqueri River Basin and is comprised of six reservoirs interconnected by a complex water network of tunnels and pipes, located along the
municipalities of São Paulo, Mairiporã, Nazaré Paulista, Piracaia, Vargem, and Joanópolis. The latter two are located on the border of the state of
Minas Gerais, approximately 100 kilometers from the city of São Paulo. Gravity forces the flow of water from one reservoir to another and once
water reaches the Paiva Castro reservoir, located in the Juqueri River Basin, it is pumped to the Guaraú water treatment station.
Under normal conditions, this system supplies water to approximately 9 million people, with an average extraction of up to 31 m³/s to serve
the São Paulo metropolitan region. An additional 5 m³/s may be released to serve the metropolitan region of Campinas and Jundiaí that is located
downstream from the reservoirs.
Water Inflow to the Cantareira System
Our most severe drought in 84 years was recorded in 2014. The table below sets forth water inflow (amount of water that flows into the
reservoirs or natural inflow from river basin), taking into account: (i) historical average and minimum flows; (ii) 1953 as the driest year on record;
(iii) flow along the hydrological year, from October to September; and (iv) inflow during the unconcluded 2014-2015 hydrological year (up to
March 2015).
Water Inflow
Historical Average
Historical Minimum
Drought of 1953
2013/14
2014/15
Oct.
Nov.
Dec.
Jan.
F eb.
Mar ch
Apr il
May
June
July
Aug.
Sep.
(in m³/s)
F or the month of
30.6
14.0
17.5
25.1
5.2
35.0
14.0
26.0
22.1
8.8
53.1
21.8
31.5
22.5
16.0
70.9
26.9
26.9
15.4
11.5
73.9
27.6
34.5
10.5
40.7
66.9
28.1
29.8
18.9
42.6
48.4
24.7
34.6
17.2
38.4
19.9
23.8
10.1
35.3
16.5
20.7
10.0
28.8
13.9
17.6
6.4
24.5
12.0
16.3
8.2
25.6
11.8
16.2
9.0
As a result of the drought, water inflow was significantly affected, remaining below the historical average during all months of 2014 and
below values recorded in 1953, formerly the driest year on record. In addition, high temperatures well above summer averages led to greater
consumption of water and greater evaporation, thereby causing a continuous decrease in the volume stored in the Cantareira System.
Since March 2014, ANA and DAEE have continuously reduced the volume of water we are permitted to extract from the Cantareira System,
which affected our supply of water to the São Paulo metropolitan region. In contrast to the 31 m³/s we were allowed to extract from the PCJ River
Basin before March 2014, in March 2015 we were only permitted to extract 13.5 m³/s, from which we withdrew only 10.4 m³/s. The remaining
water supply was extracted from the Paiva Castro reservoir, located in the Juqueri River Basin, resulting in a production of 14.04 m³ of water at
the Guaraú water treatment station. In March 2015, at the end of the rainy season, the volume of water stored in the Cantareira System, including
the technical reserve, reached only 186.74 million of m3 of water of its entire capacity.
58
The following table sets forth the level of water stored in the systems that serve the São Paulo metropolitan region as of December 2013,
March 2014 and December 2014, and March 2015, at the end of the rainy season:
For the month
Mar ch 2015 December 2014 Mar ch 2014 December 2013
Total Stor age
Capacity
(in millions of m3)
Cantareira
Guarapiranga
Rio Grande
Rio Claro
Alto Tietê
Cotia
(*) Cantareira system total storage capacity = 982.0 million m³ availability above water intake plus (+) 287.5 million m³ availability below
water intake (technical reserve).
1,269.5*
171.19
112.18
13.67
520.70
16.50
186.74
145.81
109.34
5.96
130.91
10.75
555.94
118.58
94.25
13.86
242.13
12.33
419.46
131.79
106.18
13.20
194.30
9.37
71.18
69.57
80.94
4.51
69.63
5.20
In order to continue to meet consumer demand of the São Paulo metropolitan region and decrease water production at the Cantareira System
to the limits set by ANA and DAEE, we have adopted the following measures to maintain continuous water supply to the São Paulo
metropolitan region:
using water from other production systems to serve consumers originally supplied by the Cantareira system;
bonus program/contingency tariff;
reducing pressure in the pipes in order to decrease leakeage;
reducing the volume of treated water sold to municipalities that own their distribution network; and
extracting water from the technical reserve.
The first four measures resulted in significant water savings and helped to offset the reduced volume of water extracted from the Cantareira
System. Moreover, extracting water from the technical reserve was critical for the continuous supply of water to the population.
Using Water from Other Production Systems to Serve Consumers Originally Supplied by the Cantareira System
The Cantareira System is part of the Integrated Water Supply System (Sistema Integrado de Abastecimento de Água), or “SIM”, of the São
Paulo metropolitan region together with another seven production systems that are interconnected through a system of large water mains known
as the Metropolitan Water Main System (Sistema Adutor Metropolitano), or “SAM”. SAM transports treated water to regional reservoirs. From
there, treated water is distributed to the population through distribution networks. This system serves approximately 20 million people.
Throughout the years, we have expanded the capacities of a number of SIM production systems and important SAM water mains, which
further integrated the systems and allowed, among other things, the transfer of water from different production systems to areas that, under normal
conditions, would have been supplied by the Cantareira System. The Alto Tietê and Guarapiranga systems were the ones that most contributed
to that end.
Due to its proximity, the Alto Tietê System has become the main support system for the Cantareira System, which consequently led to the
decrease in the volume of water stored in the Alto Tietê reservoirs. As a precautionary measure, water production in this system was decreased
from 14.97 m³/s in February 2014 to 11.91 m³/s in March 2015.
Moreover, the Guarapiranga System, with a storage capacity of 171 billion liters, now supplies water to an additional 1.3 million people of
the south and southeast regions of the city of São Paulo who were previously served by the Cantareira System. As a result, the number of people
served by the Guarapiranga System increased from 3.9 million people before the current water crisis to 5.2 million after the crisis. Water
production in this system increased from 13.77 m³/s in February 2014 to 14.65 m³/s in March 2015.
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At the end of 2014, with the adoption of these measures, almost 3 million people who used to be served by the Cantareira System were then
served by other systems.
Bonus Program
In February 2014, we approved a water consumption reduction incentive program based on a bonus system, pursuant to which customers
served by the Cantareira System who achieve a 20% reduction in water consumption are entitled to a 30% discount on their service bill. Initially,
this incentive program was scheduled to last seven months or until the water level in the reservoirs normalized and became sufficient to supply
the customers in the São Paulo metropolitan region served by the Cantareira System.
In April 2014, the incentive program was extended for the entire São Paulo metropolitan region until the end of 2014 or until the water level
in the reservoirs normalized. In May 2014, the incentive program was extended to those municipalities we served in Piracicaba, Capivari and the
Jaguari River Basin in the Cantareira System catchment area and was valid for bills issued between June 2014 and December 2014. This latter
extension of the incentive program was suspended on April 17, 2015.
In October 2014, we implemented changes to the discount ranges in the bonus program: (i) customers who reduce water consumption equal
to or more than 10% and less than 15% became entitled to a 10% discount on their service bill; (ii) customers who reduce water consumption
equal to or more than 15% and less than 20% became entitled to a 20% discount on their service bill; and (iii) customers who reduce water
consumption 20% or more became entitled to a 30% discount on their service bill.
In December 2014, we extended the validity of the Water Consumption Reduction Incentive Program until the end of 2015 or until reservoir
levels normalize, whichever occurs first.
The contingency tariff adopted in 2015 was a surcharge to consumers that increased their water consumption above average water
consumption.
Reducing Pressure in the Water Distribution Lines in order to Decrease Leakeage
Reducing water pressure in water distribution lines through operating maneuvers is a routine measure taken by sanitation companies to
reduce water losses. We have been adopting this operating measure in the water supply network of the São Paulo metropolitan region since
1997.
Due to the severity of the water crisis, we intensified measures to decrease water pressure in the water supply network. As a result, some
areas of the São Paulo metropolitan region now have less water availability during part of the day and night. The improvement of hydraulic and
data transmission equipment allows us to monitor the volume of water used in a certain region in real time, remotely gauge existing pressure in
the local water distribution line, and reduce the volume of water loss from leakages and mitigating any effects on water supply.
Reducing the Volume of Treated Water Sold to municipalities that Own their Distribution Network
One of the measures adopted to offset the decreased volume of water extracted from the Cantareira System was to reduce the volume of water
transferred to municipalities located in the area covered by the Cantareira System that we serve on a wholesale basis. The volume of water
transferred was reduced by almost 2 m³/s.
Extracting Water from the Technical Reserve
When our simulations indicated that the working volume of the Cantareira System would be depleted before the following rainy season, we
obtained an authorization from ANA and DAEE to use part of the water from the technical reserve of the Cantareira System.
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Water from the technical reserve had never been used before. As a result, we built dams, water lines, water pipe facilities, and floating pumps
to extract this water. We began using the first layer of the technical reserve, totaling 187 billion liters of water, in mid-May 2014, and the second
layer, totaling 105 billion liters of water, at the end of October 2014.
Below average rainfall continued from October 2014 to January 2015, and water inflow was even lower during this period compared to the
period of October 2013 to January 2014, impeding the recovery of the Cantareira System reservoirs. Accordingly, additional measures were
implemented:
With regard to the bonus program, in December 2014, we extended the validity of the bonus program until the end of 2015, or
until reservoir levels normalize, whichever occurs first.
With regard to the contingency tariff, in January 2015, ARSESP authorized us to implement a contingency tariff mechanism
consisting of additions to water bills for customers who do not reduce their consumption. This contingency tariff mechanism is
such that up to a 20% increase from the average consumption results in a tariff increase of 40% and consumption that exceeds 20%
of the average results in a tariff increase of 100%.
With regard to water losses, due to the severity of the water crisis, we intensified the set of measures to reduce water pressure by
further extending the period during which such pressure is reduced.
Water Savings
As of March 2015, the measures we adopted produced the following results:
the implementation of the bonus program accounted for 19.8% of water savings;
the reduction of pressure in water distribution lines and initiatives mitigating water losses accounted for 41.2% of water savings;
the transfer of water between production systems accounted for 35.6% of water savings;
the reduction of the volume of water transferred to municipalities we serve on a wholesale basis accounted for 3.4% of water
savings.
Emergency Projects and Projects Implemented to Meet the Water Demand of the São Paulo Metropolitan Region
In addition to the abovementioned measures, we are making short and medium-term investments in projects to increase water availability,
transfer water between different reservoir systems and expand water treatment production capacity.
By the end of the decade, an additional 16 m³/s will be added to the metropolitan integrated system, expanding the production and
extraction capacity of reservoirs, and thus resulting in improved water security for SIM. The main projects include:
Alto Tietê System – transfer of additional 4.0 m³/s from Rio Grande - Billings reservoirs to the Alto Tietê System;
Guarapiranga System – transfer of an additional 1 m³/s of which results from the expansion of the transfer capacity of the Billings
reservoir to the Guarapiranga reservoir;
Interconnection of the Jaguari (Paraíba do Sul River Basin) and Atibainha (Cantareira System River Basin) reservoirs – The purpose
of this project is to recover water levels and increase the water security of the Cantareira System. The interconnection will allow
water availability to increase in the Cantareira System by 5.13 m³/s (annual average) to 8.5 m³/s (maximum) by transferring water
from the Jaguari reservoir to the Atibainha reservoir. The budget is estimated at R$830.5 million. The project is undergoing a
bidding process and we are currently negotiating financial support with BNDES. Full completion is expected to occur by the end
of 2017; and
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Implementation of the São Lourenço Production System: the project was initiated in April 2014 and is expected to begin
operations at the end of 2017. This system will have an average water treatment capacity of 6.4 m3/s. For more information, see
“—History and Development of the Company—Capital Expenditures Program”.
The Drought Committee
On February 3, 2015, the State approved Decree No. 61,111, which established the Drought Committee for the São Paulo metropolitan
region (Comitê de Crise Hídrica no Âmbito da Região Metropolitana de São Paulo), or “Drought Committee”, as coordinated by the State
Department for Sanitation and Water Resources (Secretaria de Saneamento e Recursos Hídricos).
The Drought Committee’s main purposes are exchanging information and planning joint actions between its members in relation to the
drought affecting regions in the state. The Drought Committee shall be composed of the Secretaries of (a) Sanitation and Water Resources (who
shall chair the Drought Committee); (b) Chief of Staff; (c) Health; (d) Public Security; (e) the Environment; (f) Agriculture and Supplies; (g)
Energy; and (h) the State Coordinator of Civil Defense. In addition, if invited, the following parties may also compose the Drought Committee:
the mayors of São Paulo and Campinas, as well as the Chairmen of (a) the Intermunicipal Greater ABC Consortium (Consórcio Intermunicipal do
Grande ABC); (b) the Development Consortium of the Alto Tietê Municipalities (Consórcio de Desenvolvimento dos Municípios do Alto Tietê);
(c) the Intermunicipal Consortium of the Juqueri Basin (Consórcio Intermunicipal dos Municípios da Bacia do Juqueri); (d) the Intermunicipal
Consortium of the Western Region of the São Paulo Metropolitan Area (Consórcio Intermunicipal da Região Oeste Metropolitana de São
Paulo); and (e) the Intermunicipal Consortium of the Southeast Region of Greater São Paulo (Consórcio Intermunicipal da Região Sudeste da
Grande São Paulo). Representatives of professional associations, civil society groups and public administration entities may also be included in
the Drought Committee by means of invitations. The State Chief of Staff will monitor the Drought Committee.
In order to fulfill its purposes, the Drought Committee will be in charge of: (i) providing the mayors of the respective São Paulo
metropolitan cities and the users of the water system with information regarding the status of the water systems, the severity of the water crisis
and the decisions made on a governmental level regarding the water supply, in order to provide sufficient time for adaptation; (ii) examining
alongside the city mayors the need to implement restrictions on the use of drinking water for purposes other than human consumption and animal
consumption, by means of enacting local law; (iii) obtaining from the city mayors information necessary to update and/or amend contingency
plans; and (iv) communicating to the public measures and risks related to restrictions on the supply of drinking water.
Mar keting Channels
As of December 31, 2014, we were the concessionaire for the provision of water supply and collection, treatment and disposal of sewage
services directly to end consumers for 364 municipalities of the state of São Paulo. We also supply water on a wholesale basis to five
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 four 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 “—Wholesale Operations”.
Ener gy 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, 2014, we used approximately 1.7% 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”.
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Energy prices have a significant impact on our results of operations. In 2014, approximately 43% of our total energy consumption occurred
within the “free market,” where we can more efficiently negotiate the supply of energy, the rest of our energy consumption comes from the
Regulated Market. Regarding the free market, in October 2012, we entered into long‑term contracts with AES Tiête (39%) and Tractebel Energia
S.A. (61%) to provide these services until 2015.
Most of the energy produced in Brazil comes from hydroelectric power plants. The severe drought in the southeast and central-west regions
of Brazil since the end of 2013, associated with the decisions taken by the Federal Government in recent years, led to a huge increase in energy
prices in 2015. Considering this new scenario, we are anticipating considerable impact in our cost of electricity in 2015.
For more information on energy, 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”.
Insur ance
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, 2014, we had paid a
total aggregate amount of R$6.9 million in premiums. In addition, we paid R$2.2 million for a D&O insurance policy, covering R$4.1 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.
For more information on energy, 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”.
Intellectual Pr oper ty
Trademarks
We have secured registration of our logo and composite trademark at the Brazilian Institute of Industrial Property (Instituto Nacional da
Propriedade Industrial), or 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”, “Reúso
da Água”, “Uso Racional da Água”, “Parque da Integração”, “Clubinho Sabesp”, “Cauã”, “Denis”, “Gabi”, “Gotucho”, “Gota Borralheira”, “Dr.
Gastão”, “Iara”, “Ratantan”, “Sayuri”, “Cadu” and “SuperH2O”. Cauã, Denis, Gabi, Gotucho, Gota Borralheira, Dr. Gastão, Iara, Sayuri,
Ratantan, Cadu and Super H2O 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”, “Signos Net Sistema De Informação Geográfica No
Saneamento”, “Scorpion”, “Sabesp Semana do Meio Ambiente”, “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”, “Projeto Tietê”, “Sabesp Abraço Verde”, “Super H2O”, “Programa Córrego Limpo”, “Parque da Integração”, “Eu Sou
Guardião das Águas Sabesp Eu Não Desperdiço” and “Calculadora de Sonhos”. In addition to these trademarks, we have filed an application to
register the character “Cadu” of Clubinho SABESP.
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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:
a biofilter odor control unit;
a device for the removal of supernatants in the treatment of sewage;
a mobile device for the calibration of hydrometers;
rotary devices used to clean water reservoirs transported by trucks with high-pressure hydrojetting systems; and
leakage detection digital system.
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”, “SGH ‑ hydrometry management system” (Sistema de Gestão de Hidrometria), “SIA – Sistema de Informações de Auditoria”,
“CSI - Sistema Comercial: Serviços e Informações”, “NETCONTROL – Sistema de Automação de Laboratórios de Controle Sanitário”, “SACE-
Sistema de Atendimento Comercial Externo”, “SAN – Sistema de Apoio à Navegação”, “online software for managing specific articles published
in the DAE magazine”, “Dashboard”, “COP - Online Control of Water Losses”, “Sistema de Gestão de Energia Elétrica – GEL”, “CADGEO”,
“LIGGEO” and “Sistema de Gestão de Propriedade Intelectual”. 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.
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:
www.sabesp.com.br;
www.corregolimpo.com.br;
www.projetotiete.com.br;
www.revistadae.com.br;
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www.blogdasabesp.com.br;
www.blogsabesp.com.br;
www.sustentabilidadesabesp.com.br;
www.inovasabesp.com.br;
www.ondalimpa.com.br;
www.programaondalimpa.com.br;
www.clubinhosabesp.com.br; and
www.superh2o.com.br.
Envir onmental Matter s
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.
We have the following ongoing environmental management programs:
participation in the Carbon Disclosure Project, a global initiative focused on the financial risks related to climate change, since
2006;
development of the Corporate Greenhouse Gas Management Program (Programa Corporativo de Gestão de Emissões de Gases de
Efeito Estufa), in line with the guidelines from the São Paulo State Climate Change Policy (PEMC), including the creation of
inventories of greenhouse gases, totaling seven inventories concluded since 2007;
continuation of the actions set forth in the corporate programs for obtaining and maintaining environmental licenses and grants for
the right to use water;
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, including training of
company representatives to participate in: (i) the creation of criteria for water usage charges, (ii) the monitoring of river basin plans
(Planos de Bacias), (iii) review of water bodies’ classifications, and (iv) analysis of legislation regarding the protection of water
sources;
implementation of the SABESP 3‑Rs Program (Programa SABESP 3Rs) for the reduction, re‑use and recycling of waste of
administrative activities, in partnership with waste and recycling collecting cooperatives and which includes employee training
enabling them to act as multipliers in the roll-out of the program; and
implementation of an Environmental Management System, or “EMS”, in our water and sewage treatment stations, which is already
installed in 95 stations, currently being installed in 34 other stations, and will be installed in all of our stations by 2024.
Additionally, we pursue the ISO 14001 certification for our strategic plants. In order to expedite the implementation of EMS, we
are strategically reprioritizing our efforts and we will adopt a mixed model later in 2015. The ISO 14001 model will be maintained
in the certified stations and may be expanded according to our strategy. The other stations will adopt our own EMS model (SGA-
SABESP). As of March 2015 we had 51 ISO 14001 certified stations. However, given this new strategy, we revised the scope of
certification and obtained approval to recertify 35 stations with ISO 14001 starting April 2015.
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In addition to corporate environmental management initiatives, we have several projects and initiatives underway to benefit the environment
by engaging the population at large. In 2014, we invested R$29.8 million in environmental programs and projects directly concerned with the
development and implementation of corporative environmental management programs as well as the Program for Rational Use of Water
(Programa de Uso Racional da Água – PURA). Other investments and related costs that aim to protect the environment are included in the total
value of operational expenses and investments mentioned in this annual report.
Climate Change Regulations: Reduction of Greenhouse Gases (GHG) Emissions
We are required to comply with laws and regulations related to climate change, including international agreements and treaties to which
Brazil is a signatory.
The São Paulo State Climate Change Policy (Law No. 13,798/2009), enacted on November 9, 2009, aims to reduce global emissions of
carbon dioxide by 20.0% by 2020 compared with 2005 levels. Brazil’s Climate Change Policy (Law No. 12,187/2009), 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%. Such targets have not been established for the sanitation sector yet. In this sense we are currently developing a
Corporate Greenhouse Gas Management Program, aimed at reducing the amount of greenhouse gases released into the atmosphere, including the
creation of an inventory to record releases of greenhouse gases.
In 2014, we concluded the corporate inventory of greenhouse gases for 2013, thus totaling seven inventories since 2007. We noted that the
trend observed in the previous inventories persists, specifically that activities regarding sewage collection and treatment remain our largest
sources of greenhouse gas release, representing approximately 88% of total greenhouse gas release. Electric energy represents approximately
10% and other activities represent approximately 2% .
We also participate in initiatives that produce clean energy, such as the installation of a small hydroelectric power plant, in order to reduce
the amount of greenhouse gases released into the atmosphere. We have projects in the research and development stages that entail using biogas
generated in the treatment of sewage, recycling sewage sludge and covering waste lagoons as a possible way to capture the gases released in the
treatment process.
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 “—Tariffs”.
Carbon Disclosure Project
We participate in the Carbon Disclosure Project (CDP), 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.
Physical Effects of Extreme Weather Events
Since our financial performance is closely linked to climate patterns that influence the qualitative and quantitative availability of water, the
further worsening of extreme weather conditions may intensify the adverse effects on our business and operations. The persistence of the long-
term effects of extreme weather conditions causes significant alterations in the physical environment that may create unfavorable circumstances,
which could affect the costs of services and tariffs.
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An increase in heavy rainfall can impact the regular operation of water sources, including abstraction of water from our dams, through
increased soil erosion, silting, runoff of pollutants that affect aquatic ecosystems. In addition, increased flows of rainwater into sewage systems
may overwhelm the capacity of sewage treatment plants. We may need to implement other new production systems, build larger reservoirs, or
increase operational capacity by further automating our existing equipment. To increase automation, we would need to purchase and operate
new equipment to measure the rain, river output and dam levels and volumes in river basins, create new mathematical models for real time
operations, and train new technicians to operate these systems.
In the case of prolonged periods of drought, for example, reduced water levels in dams can greatly impact the production process. Droughts
also lower reservoir levels available for hydroelectric plants, which may lead to power shortages, particularly since hydroelectric power accounts
for most of Brazil’s electric power supply. Lack of electric energy could lead to instability in water supply and sewage collection and treatment
services, which could damage our reputation. 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 could result in increased salinity in the river estuaries where we abstract water, which could affect water treatment in these areas. Rising sea
levels could also cause damage in our sewage collection network.
Extreme climate events 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 drastic rise in air temperature could also increase consumer
demand for water, increasing the need to expand both water supply and sewage treatment.
In this context, our strategy calls for identifying mitigating actions, enlarging their coverage and managing possible operational risks related
to climate change, as well as identifying opportunities to increase our effectiveness and to implement new technologies. With regards to the
intensified risk of reduced water availability, we are working to adapt to a new scenario of water scarcity due to climate change through
initiatives such as the Corporate Programs for Loss Reduction, the Program for Rational Water Usage and the expansion of the planned
reutilization of effluents for urban and industrial purposes, among others.
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 extreme weather events, may result in increased liabilities and increased capital expenditures, which
could have a material adverse effect on us”.
Regarding the drought that affected the Cantareira System from 2013 to 2015, see “Item 3.D. Risk Factors—Risks Relating to Our Business
—The measures we took to mitigate the effects of the drought resulted in a significant decrease in the volume of water billed and revenues from
services we provide, which had a material adverse effect on our company and that may worsen if the drought escalates in severity” and “—The
Current Water Crisis”.
Gover nment 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 PPPs;
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;
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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.
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 State of São Paulo Constitution 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 60% 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.
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.
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The Basic Sanitation Law
On January 5, 2007, Federal Law No. 11,445/2007, 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. 7,217/2010 (as amended by Federal Decree No. 8,211/2014), regulating the Basic Sanitation Law. See
“Item 3.D. Risk Factors—Risks Relating to our Business—Current regulatory uncertainty, especially with regard to implementation and
interpretation of the Brazilian Basic Sanitation Law, 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).
Federal Decree No. 7,217/2010, which was enacted on June 21, 2010, (as modified by Federal Decree No. 8,211/2014 of March 21, 2014)
and Law No. 11,445/2007 implemented the first series of new principles under the Basic Sanitation Law, including the following:
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 (since its function is to ensure full compliance of legislative and contractual conditions);
the regulatory agency’s function is to ensure compliance with the law and with the contractual conditions;
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.
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.
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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.
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:
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
shantytown (favelas) categories. The residential-social tariffs apply to residences of low income families, residences of persons unemployed for
up to 12 months and collective living residences. The favela tariffs apply to residences in shantytowns characterized by a lack of urban
infrastructure. The latter two 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.
Furthermore, since Law No. 11,445/2007 permits municipalities to create their own regulatory agencies rather than being subjected to
overview by ARSESP, a number of municipalities created their own regulatory agencies. The municipality of Lins, which decided in 2007 to
create its own regulatory authority, revisited this decision in 2010 and transferred the regulation of water activities, including the setting of
tariffs, to ARSESP. 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 known as
the Regulatory Agency of Sanitation Services for the Piracicaba, Capivari and Jundiaí River Basin (Agência Reguladora dos Serviços de
Saneamento das Bacias dos Rios Piracicaba, Capivari e Jundiaí), or ARES-PCJ, in 2011 to regulate and supervise our activities in those areas,
and for similar purposes, in November 2013 the Regulatory Agency of São Bernardo do Campo (AR/SBC) was created. As a result of the
creation of the ARES/PCJ, we are currently involved in legal proceedings in which ARES/PCJ is claiming that it has jurisdiction over the
regulation and supervision of our activities in three municipalities (Piracaia, Mombuca and Santa Maria da Serra). We cannot predict the
outcome of this case or how it may impact our business. See “Item 4. Risk Factor – Risks Relating to Our Business - Current regulatory
uncertainty, especially with regard to implementation and interpretation of the Brazilian Basic Sanitation Law, may have an adverse effect on our
business”.
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The number of judicial disputes concerning the regulation and oversight of services in areas served by us and regulated by ARSESP has
increased since 2012. Agencies may continue to be created to regulate and oversee our services.
ARSESP Rule Enactments
In 2009 ARSESP enacted rules regarding the following:
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.
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.
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.
In 2013, we established procedures for communicating scheduled interruptions in the provision of water services by developing the
Communication of Scheduled Interruptions of Basic Sanitation – SISCIP-S.
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.
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—“Current regulatory uncertainty, especially with regard to
implementation and interpretation of the Brazilian Basic Sanitation Law, may have an adverse effect on our business
Regulation of 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.
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A municipality that chooses to assume the direct control of its water and sewage services must terminate the current relationship by duly
compensating the service provider and the investments unamortized. Subsequently, the municipality will be in charge of rendering services or of
conducting a public bidding process to grant the concession to potential concessionaires, including agreements with public companies directly.
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—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 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.
We provide basic sanitation services for municipalities and metropolitan regions. In regards to local operations, the municipalities are
responsible for providing basic sanitation services. Thus, we operate through new contracts executed pursuant to a legal waiver of public tender
under cooperation agreements between the state and municipalities which permit the sharing the management of basic sanitation services.
In regards to metropolitan regions, we conduct our operations based on state legislation and contracts and note pending litigation addressing
the delineation of responsibilities regarding basic sanitation services in municipalities and metropolitan regions. We note in this regard that on
February 28, 2013, the Federal Supreme Court decided a pending case related to the state of Rio de Janeiro, whose effects may impact other
ongoing legal proceedings.
With respect to oversight and to the sharing of responsibilities between states and municipalities with respect to sanitiation services, the
Federal Supreme Court has ruled that the state must set up a public entity, with the non-partisan participation of the metropolitan municipalities,
in order to plan, regulate, and oversee basic sanitation services in these locations. Nevertheless, appeals were introduced against this case and are
still pending.
The São Paulo metropolitan region accounted for 70.0% of our gross operating revenue in 2014 (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 operations. See “Item 3.D. Risk Factors—Risks Relating to Our Business—Current regulatory uncertainty, especially with regard to
implementation and interpretation of the Brazilian Basic Sanitation Law, may have an adverse effect on our business”.
In January 2015, the Federal Government issued a metropolitan statute (Law No. 13,089/2015) which establishes general guidelines for the
planning, management and execution of public interest projects in metropolitan regions and in urban clusters instituted by the states; the general
planning standards for integrated urban development and other international governance instruments; and the criteria to receive federal aid for
initiatives related to international governance in the area of urban development.
On June 18, 2009, Municipal Law No. 14,934/2009 revoked Law No. 13,670/2003, which had assigned to the municipalities alone the
responsibility of planning, regulating and overseeing water and sewage service provision in the city of São Paulo. On June 23, 2010, the state
and the city of São Paulo executed a formal agreement which aims to: share the performance of planning; delegate to ARSESP the responsibility
of overseeing and regulating, including tariff regulation; and authorize the continuation of water and sewage services in the city of São Paulo for
a 30 year period, with the option of extending for an additional 30 year period See “Item 3.D. Risk Factors—Risks Relating to Our Business—
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”.
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Public Consortia and Cooperation Agreement Law for J oint Management
On April 6, 2005, the federal government enacted Federal Law No. 11,107/2005, 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. 50,470/2006, amended by State Decrees
No. 52,020/2007, dated July 30, 2007, and No. 53,192/2008, 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.
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. 50,868/2006 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. On August 5, 2009, the State of São Paulo enacted Decree No. 54,644/2009, which revoked Decree No. 50,868
and regulated the composition, organization and operation of the State Sanitation Council (Conselho Estadual de Saneamento – CONESAN)
created by Supplementary Law No. 7,750/1992.
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. 1,025/2007 of December 7, 2007, which created ARSESP and partially revoked
Supplementary Law No. 7,750/1992. Furthermore, Supplementary Law No. 1,025/2007 maintained the State Sanitation Council, 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:
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;
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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.
In addition, the rules simplified the process for the expansion of our business in Brazil and abroad, authorizing us to:
participate in the controlling block or the capital of other companies;
create subsidiaries, which may become majority or minority shareholders in other companies; and
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 Public-Private Partnership (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 State
Law No. 11,688/2004, which was enacted on May 19, 2004. PPPs may be used for: (i) implantation, expansion, improvement, reform,
maintenance or management of public infrastructure; (ii) provision of public services; and (iii) exploitation of public assets and non‑material
rights belonging to the State.
Payment is conditioned upon performance. The payment may be collected through: (i) tariffs paid by users; (ii) use of resources from the
budget; (iii) assignment of credits belonging to the State; (iv) transfer of rights related to the commercial exploitation of public assets; (v) transfer
of real property and other property of assets; (vi) public debts securities; and (vii) other revenues.
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.
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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:
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. 6,544/1989 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.
Water Usage
State law establishes the basic principles governing the use of water resources in the state of São Paulo in accordance with the State
constitution. These principles include:
rational utilization of water resources, ensuring that their primary use is to supply water to the population;
optimizing the economic and social benefits resulting from the use of water resources;
protection of water resources against actions which could compromise current and future use;
defense against critical hydrological events which could cause risk to the health and safety of the population or economic and
social losses;
development of hydro‑transportation for economic benefit;
development of permanent programs of conservation and protection of underground water against pollution and excessive
exploitation; and
prevention of soil erosion in urban and rural areas, with a view to protecting against physical pollution and silting of water
resources.
Among other instruments established by this Policy, the competent public authority grants for the right to use water for the implementation
of any enterprise that demands the use of surface or underground water resources (for the collection or release of effluents), as well as for the
execution of services that alter the regime or quality of such water resources. In the case of rivers under the federal government’s domain (rivers
crossing more than one state), ANA is the public authority which grants the authorization. With respect to the rivers under a state’s domain, the
applicable state authority has jurisdiction to grant the right of use. In the state of São Paulo, DAEE is the public authority responsible for
granting such authorizations.
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In conducting our principal activities, we have grants for the rights to use water, and there is a corporate program in place to obtain and
maintain the rights to use water for the remaining activities. As of the date of this annual report, we do not own all the required grants for the
right to use water in connection with our operations. However, all of our water-usage activities have filed requests for grants for the right to use
water with the competent authority; many of these requests have been granted and others are under analysis by DAEE and ANA.
State Law No. 12,183/2005, which was enacted on December 29, 2005, established the basis for charging for the use of the water resources
under the domain of the State of São Paulo. To apply such charging, the law provides for, among other provisions, the participation of the River
Basins Committees, the formulation of criteria by such Committees, the creation of basin agencies and the organization of a registered list of
water resource users. The basin committee’s proposals regarding the criteria to calculate the amounts to be charged at each basin must be
approved by the State Water Resource Council, and formalized by a decree issued by the State Governor.
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.
Charging for the use of water is under gradual implementation by the State of São Paulo, where the largest individual contributors are
located, and it is a management tool of the Policy on Water Resources to promote the rational use of water and finance programs and actions
established by the basin plans. In 2014, we paid approximately R$41.2 million for the use of water resources.
Charging for the use of water from rivers of federal domain began in 2003 in the Paraíba do Sul basin, and charging for the use of water from
rivers of state domain began in 2007 in the Paraíba do Sul, Piracicaba, Capivari and Jundiaí basins. Subsequently, charges were implemented for
the use of water from the Sorocaba, Médio Tietê and Baixada Santista basins. In 2013, charges were implemented for the use of water from the
Baixo Tietê basin and, in April 2014, for the use of water from the Alto Tietê River Basin. It is probable that the same will occur in 2015 in the
following basins: Tietê/Batalha, Tietê/Jacaré, Baixo Pardo e Grande, Litoral Norte, Mogi-Guacu, Pardo, Pontal do Paranapanema, Sapucaí
Mirim/Grande, Serra da Mantiqueira, Ribeira do Iguape/Litoral Sul, Turvo/Grande, Alto Paranapanema, Aguapeí/Peixe and Médio
Paranapanema. In 2016, charges for the use of water are expected to be implemented for the basin of São José dos Dourados.
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 Ambiente), or the
“CONAMA”, is the federal agency responsible for the regulation of potentially polluting activities. In the state of São Paulo, CETESB is the
governmental entity responsible for the control, supervision, monitoring and licensing of polluting activities, pursuant to State Law
No. 997/1976 and State Law No. 13,542/2009.
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; State Decree No. 8,468/1976,
CONAMA Resolution No. 357/2005, and CONAMA Resolution No. 397/2008, which establish standards of quality for receiving bodies of
water; State Decree No. 8,468/1976 and CONAMA Resolution No. 430/2011 which establish the standards for discharge of effluents; and
Portaria Departamento de Águas e Energia Elétrica No. 717/1996, which regulates the concession of grants for the right to use water and rights
to interfere in water resources.
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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:
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 been implementing a corporate program to obtain and maintain the environmental licenses for our water treatment stations, sewage
treatment stations and sewage pumping stations in order to comply with environmental regulations by 2017. As of the date of this annual report,
we were not in possession of all licenses required in connection with our operations.
Sewage Requirements
State law sets forth regulations regarding pollution control and environmental preservation in the state of São Paulo. According to this law,
in areas in which there is a public sewage system, all effluents of a “polluting source” must be discharged to such system, as is the case for
industrial enterprises. It is the responsibility of the polluting source to connect itself to the public sewage system. All effluents to be discharged
are required to meet the standards and conditions established by the applicable environmental law, which allows such effluents to be treated by
our treatment facilities and discharged in an environmentally safe manner. Effluents that do not comply with such criteria are prohibited from
being discharged into the public sewage system. State legislation also establishes that liquid effluents, except those related to basic sanitation,
be subjected to pre‑treatment so that they meet the required mandatory levels before being discharged into the public sewage system. Effluents
from our treatment facilities must comply with effluent limitation guidelines and meet the water quality standards of the receiving water bodies
established by federal and state legislation. See “—Sewage Operations—Sewage System”.
The CETESB is authorized under State law to monitor discharges of effluents into the water bodies, among other things. The CETESB also
issues the environmental licenses to the polluting sources, including sewage treatment stations. For more information, see “Item 4.B. Business
Overview—Environmental Matters”.
State and federal water resource legislation establishes the charging of fees for the discharge of treated effluents into water bodies. This
charge is already in force for some river basins, and it is in different implementation stages for the remaining basins. See “—Government
Regulation—Water Usage”.
Governmental Restrictions on Incurrence of Debt
On June 30, 1998, the CMN issued Resolution No. 2,515/1998 amending certain conditions that must be observed with respect to external
credit operations (i.e., foreign currency borrowings) of states, the Federal District of Brasília, 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:
77
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.
Lending Limits of Brazilian F inancial Institutions
The CMN Resolution No. 2,827/2001 dated as of March 30, 2001, as amended, limits the amount that Brazilian financial institutions may
lend to public sector companies, such as us. Financing of projects which are put up for international bid and any financing in reais provided to
the Brazilian counterpart of such international bids are excluded from these limits.
Scope of Business
State Law No. 12,292/2006, dated as of March 2, 2006, and amended State Law No. 119/1973, dated as of June 29, 1973, which created our
Company, authorizes us to provide water and sewage services outside 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. Or ganizational Str uctur e
Not applicable.
D. Pr oper ty, 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 transmission lines, 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, 2014, we operated through 70,800 kilometers of water pipes and water transmission lines and
47,992 kilometers of sewer lines. As of that same date, we operated 235 water treatment facilities and 524 sewage treatment facilities (including
nine ocean outfalls), as well as 16 water quality control laboratories.
78
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.
As of December 31, 2014, the total net book value of our property, plant and equipment and intangible assets (including concession assets)
was R$26,284.4 million.
All of our material properties are located in the state of São Paulo.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our
audited financial statements included elsewhere in this annual report. The financial statements included elsewhere in this annual report have
been prepared in accordance with IFRS as issued by the IASB. This annual report contains forward‑looking statements that involve risks and
uncertainties. Our actual results may differ materially from those discussed in the forward‑looking statements as a result of various factors,
including, without limitation, those set forth in “Risk Factors”.
In the following discussion, references to increases or decreases in any period are made by comparison with the corresponding prior period,
except as the context otherwise indicates.
A. Oper ating and Financial Review and Pr ospects
Over view
As of December 31, 2014, we operated water and sewage systems in the state of São Paulo, including in the city of São Paulo, Brazil’s largest
city. Our operations extended into a total of 364 municipalities, or 56% of all municipalities in the state. We also provided water services on a
wholesale basis to five 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 21.1 million, the São Paulo metropolitan region accounted for 70.0%, 73.2% and 74.2% of our gross operating revenue in 2014,
2013, and 2012 (excluding revenues relating to the construction of concession infrastructure), respectively. As of December 31, 2014, 59.0% 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.
Factor s Affecting Our Results of Oper ations
Our results of operations and financial condition are generally affected by our ability to raise tariffs, control costs and improve productivity,
general economic conditions in Brazil and abroad, and extreme weather events.
Effects of Tariff Increases
Our results of operations and financial condition are highly dependent on tariff increases for our water and sewage services. Since the
enactment of the Basic Sanitation Law in 2007, as a general rule, regulatory agencies are responsible for setting, adjusting and reviewing tariffs,
taking into consideration, among other factors, the following:
79
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.
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. See “4.B. Business Overview – Tariffs”.
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
Year ended December 31,
2013
2012
2014
6.50%
5.20%
6.41%
3.69%
5.84%
3.88%
5.91%
5.51%
5.15%
5.10%
5.80%
7.80%
(1) See “Item 4.B. Business Overview—Tariffs” for addition information on tariff increases.
Sources: Central Bank, F undação Getulio Vargas, or FGV, Instituto Brasileiro de Geografia e Estatística, or IBGE, and F undação Instituto de P esquisas Econômicas.
Effects of Brazilian Economic Conditions
As a company with all of its operations in Brazil, our results of operations and financial condition are affected by general economic
conditions in Brazil, particularly by the economic activity and the inflation rate. For example, the general performance of the Brazilian economy
may affect our cost of capital and inflation may affect our costs and margins. The Brazilian economic environment has been characterized by
significant variations in economic growth rates. However, as our product is viewed as essential, in normal conditions our sales revenue
demonstrates high stability. In 2014, our business was significantly affected by the most severe drought recorded in our service area in the last 84
years.
General Economic Conditions
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 average unemployment rate in Brazil’s principal metropolitan regions was 5.5% in 2012, the lowest it
has been since March 2002.
In 2013, Brazilian GDP increased 2.3% in comparison with 2012. Also in 2013, Brazil had US$375 billion in currency reserves and its trade
surplus was US$2.6 billion, the worst in 13 years, and its trade balance fell 86% in comparison with 2012. The average unemployment rate in
Brazil’s principal metropolitan regions was 5.4%, the lowest rate in history at that time, according to the Brazilian Institute of Geography and
Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE.
In 2014, Brazilian GDP increased 0.1% in comparison with 2013. Also in 2014, Brazil had US$374.0 billion in currency reserves and its
trade deficit was US$3.9 billion, the first negative annual balance since 2000 and the worst since 1998. The average unemployment rate in
Brazil’s principal metropolitan regions was 4.8%, the lowest rate in history according to the Brazilian Institute of Geography and Statistics
(Instituto Brasileiro de Geografia e Estatística), or IBGE.
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Interest Rates
As a political monetary instrument of the federal government, the SELIC rate influences the behavior of other interest rates in the country,
including the rates related indebtedness denominated in local currency. 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%. In 2013, the SELIC rate was kept
at 7.25% until April, after which the Central Bank started to gradually raise it. The SELIC rate was 9.9% at December 31, 2013 and increased to
11.65% at December 31, 2014.
We have not utilized any derivative financial instruments or any hedging instruments to mitigate interest rate fluctuations.
Inflation
Inflation affects our financial performance by increasing our costs of services rendered and operating expenses. Part of our real‑denominated
debt is directly indexed to take into account the effects of inflation. Additionally, we are exposed to the mismatch between the inflation
adjustment indices of our loans and financing and those of our receivables. Water supply and sewage service tariffs do not necessarily follow the
increases in inflation adjustment and interest rates affecting our debt. We cannot assure you that our tariffs will be increased, in future periods, to
offset, in full or in part, the effects of inflation.
Inflation adjustments derive from collections from or payment to third parties, as contractually required by law or court decision, and are
recognized on an accrual basis. Inflation adjustments included in these agreements and decisions are not considered embedded derivatives, since
they are deemed as inflation adjustments for us. See Notes 3.20, 5.1 and 27 of the financial statements for the impacts of inflation adjustments on
our financial performance and debt.
Currency Exchange Rates
We had total foreign currency‑denominated indebtedness of R$4,346.3 million as of December 31, 2014, of which R$238.7 million relates
to the current portion of our long-term foreign currency‑denominated obligations. In the event of significant devaluations of the real in relation
to the U.S. dollar or other currencies, the cost of servicing our foreign currency‑denominated obligations would increase as measured in reais,
particularly as our tariff and other revenue is based solely in reais. In addition, any significant devaluation of the real will increase our financial
expenses as a result of foreign exchange losses that we must record. In 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 led to a foreign exchange loss of R$50.5 million. In 2013, the 14.64% depreciation of the real
against the U.S. dollar offset by the 5.91% appreciation of the real against the yen led to a foreign exchange loss of R$267.8 million. In 2014,
the 13.39% depreciation of the real against the U.S. dollar and the 0.45% appreciation of the real against the yen led to a foreign exchange loss
of R$345.1 million. However, since most of our debt denominated in foreign currencies is long-term debt with a long amortization schedule, a
devaluation of the real would principally impact cash flows regarding the current portion of our long-term debt.
We manage our indebtedness portfolio closely to decrease the cost of servicing our indebtedness as a whole and our exposure to exchange
rate fluctuations. We do not have any exposure to derivatives tied to foreign currencies.
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(2)
Period‑end exchange rate – US$1.00
Average exchange rate – US$1.00(1)
(1) Represents the average for period indicated.
(2) Represents the comparison with period-end exchange rate.
Source: Central Bank.
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Year ended December 31,
2013
(in reais, except percentages)
14.6%
2.3426
2.1605
2014
13.4%
2.6562
2.3547
2012
8.9%
2.0435
1.9550
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(2)
Period‑end exchange rate – ¥1.00
Average exchange rate – ¥1.0(1)
(1) Represents the average for period indicated.
(2) Represents the comparison with period-end exchange rate.
Source: Central Bank.
Year ended December 31,
2013
2014
(in reais, except percentages)
(5.9)%
0.0223
0.0221
(0.45)%
0.0222
0.0222
2012
(2.4)%
0.0237
0.0245
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, 2014, 2013 and 2012 we had no forward
exchange transactions.
For further information on exchange rates, 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” and “Item 5.B. Liquidity and Capital Resources—Capital Sources—Indebtedness
Financing—Financial Covenants”.
Effects of Extreme Weather Events
The southeastern region of Brazil, particularly the southern region of the state of Minas Gerais, the PCJ River Basin (from which we extract
the water used in the Cantareira System), and the northern area of the São Paulo metropolitan region, have been experiencing below average
rainfall since 2012. In late 2013 and throughout 2014 rain levels and water inflow into the reservoirs reach record low levels in 84 years of
recorded rainfall in the region. During the rainy season from October 2014 to January 2015, the level of rainfall in the region remained
significantly below average, although it reached above average levels in February and March 2015. We expected the water levels in the
Cantareira System to recover, but given the already low levels due to the water shortage during the summers of 2013 and 2014, the amount of
rainfall in the region during the rainy season from October 2014 to March 2015 was not enough to restore the reservoirs to sufficient levels.
As of December 31, 2014, the reservoirs in the São Paulo metropolitan region, where our largest market is located, contained 301 billion
liters of bulk water storage for treatment, compared to 1,037 billion liters (749.6 billion liters above water intake and 287.5 billion liters below
water intake) available for treatment as of December 31, 2013. Under normal circunstances, we withdraw 6.2 billion liters per day (equivalent to
the total water production of 72 m³/s in February 2014 for the São Paulo metropolitan region) from the reservoirs. This volume decreased to 4.4
billion during the current drought (equivalent to the total water production of 51.4 m³/s in March 2015 for the São Paulo metropolitan region).
The extent and the consequences of the drought have provoked a continuous reduction in the volume of water billed and thus a reduction in
revenue. Throughout 2014, the water volume billed decreased 3.1% and the gross operational revenue fell by 6.7% compared to 2013.
In order to balance supply and demand despite a restricted water availability, we have adopted and will continue adopting a series of
measures, including: (i) using water from other production systems to serve consumers originally supplied by the Cantareira system; (ii) to offer
discounts (bonus) to consumers that would use below average amounts of water, compared to average consumption; (iii) reducing pressure in the
water distribution lines in order to decrease leakeage; (iv) reducing the volume of water sold to municipalities that own their distribution
network; and (v) to use pumps in order to extract water located below the intakes of the Cantareira system, from the so-called “technical reserve”.
See “Item 4.B. Business Overview—The Current Water Crisis”.
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Cr itical Accounting Estimates and J udgments
We make estimates and judgments concerning the future. The resulting accounting estimates will, by definition, seldom equal the related
actual results. The estimates and judgments that have a significant risk of causing material adjustment to the carrying amount of our assets and
liabilities within the next financial year are mentioned below.
Allowance for Doubtful Accounts
We 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 3.4 to our financial statements as of
December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012. Provisions for the allowance for doubtful accounts are
included in selling expenses, net of recoveries. The net charge to this allowance was R$139.6 million, R$103.9 million and R$192.3 million in
2014, 2013 and 2012, respectively. Wholesale sales losses, amounting to R$219,706, R$218,687 and R$209,340 in 2014, 2013 and 2012,
respectively, were also recorded as revenue reduction.
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.
Intangible Assets Arising from Concession and Program Contracts
As of December 31, 2014, we had intangible assets of R$25,979.6 million.
We recognize intangible assets arising from concession contracts under IFRIC 12. We estimate the fair value of construction and other work
on the infrastructure to recognize the cost of the intangible asset, which is recognized when the infrastructure is built and provided that it will
generate future economic benefits. The great majority of our contracts for service concession arrangements entered with each grantor is under
service concession agreements in which we have the right to receive, at the end of the contract, a payment equivalent to the 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 3.3 “Operating Income” to our financial statements as of December 31, 2014 and 2013 and for the years ended December 31,
2014, 2013 and 2012.
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 No.11,445/2007 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.
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.
83
Provision
As of December 31, 2014, we were party to judicial and administrative proceedings, relating to civil, environmental and tax matters,
amounting to R$1,220.3 million (deducting the amount of R$323.0 million related to escrow 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$3,779.1
million, and those with respect to which we considered the risk of loss as remote amounted to R$36,965.1 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 19 to our financial statements as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and
2012. We accrue provisions for legal proceedings in which it is probable that an outflow will be necessary to settle the liability 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 decreased from 6.46% in
2013 to 6.09% in 2014 under Plan G0 and from 6.36% in 2013 to 6.11% in 2014 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, as described in
Notes 3.19 (a) and 20 (b) to our financial statements as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and
2012.
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 20 to our financial statements as of December 31, 2014 and 2013 and for the years ended December
31, 2014, 2013 and 2012.
Deferred income tax and social contribution
We recognize and settle taxes on income based on the results of operations verified according to the Brazilian Corporate Law, taking into
consideration the provisions of the tax laws. Pursuant to IAS 12, we recognize deferred tax assets and liabilities based on the differences between
the accounting balances and the tax bases of assets and liabilities.
We regularly review the recoverability of deferred tax assets and 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.
84
As of December 31, 2014 and 2013, we have recognized R$209.5 million and R$114.0 million, respectively, as deferred income tax assets,
net of the deferred tax liabilities, as disclosed in Note 18 to our financial statements as of December 31, 2014 and 2013 and for the years ended
December 31, 2014, 2013 and 2012.
Cer tain Tr ansactions with Contr olling Shar eholder
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 10 to our financial statements as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 and “Item 7.
Major Shareholders and Related Party Transactions”.
As of December 31, 2014 and 2013, the amounts not recorded related to pension benefits paid by us on behalf of the State totaled R$1,479.7
million and R$1,412.5 million respectively, including the amount of R$696.3 million related to the transfer of the reservoirs in the Alto Tietê
system. As a result, we also recognized the obligation related to pension benefits, maintained with the beneficiaries and pensioners of Plan G0.
As of December 31, 2014 and 2013, the pension benefit obligations of Plan G0 totaled R$2,053.5 million and R$1,780.3 million, respectively.
For detailed information on the pension benefit obligations refer to Note 20 of our Financial Statements.
On March 18, 2015, we, the State and DAEE, with the intervention of the Department of Sanitation and Water Resources, executed a term of
agreement, in the amount of R$1,012.3 million, of which R$696.3 million refers to the principal amount and R$316.0 million refers to the
monetary adjustment of the principal through February 2015. For detailed information on this agreement, see “Item 7.B. Related Party
Transactions—Agreements with the State of São Paulo” and Note 31 of our 2014 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 10 to our financial statements as of December 31, 2014 and
2013 and for the years ended December 31, 2014, 2013 and 2012 and “Item 7. Major Shareholders and Related Party Transactions”.
Use of Certain Assets
Empresa Metropolitana de Águas e Energia S.A. – EMAE plans to receive credit and to obtain financial compensation for the use of water
from the Guarapiranga and Billings reservoirs, which we use in our operations, as well as reimbursement of damages related to non-payment in
due course.
We understand that no amounts are due for the use of these reservoirs given the grants already made. Should these reservoirs not be available
for our use, there could be a need to collect water in more distant locations and a risk of not being able to properly render services in the region
and an increase in water supply cost.
Several lawsuits were filed by EMAE, among them a lawsuit to enforce an arbitration clause related to the Guarapiranga reservoir, a
proceeding which has already begun and another lawsuit, pleading for financial compensation due to our water abstraction from the Billings
reservoir for public supply. These two lawsuits allege that this conduct has caused permanent and increasing loss in the capacity of the Henry
Borden hydroelectric power plant to generate electricity as well as financial losses.
85
We understand that the expectation for all cases is of possible losses, and for the time being, it is not feasible to estimate the amounts
involved, since they were not determined.
On April 10, 2014, we issued an Announcement to the Market to communicate that we are negotiating with EMAE regarding a potential
future agreement. However, no adjustment has been confirmed, and no agreement has been executed by either party as of yet.
Results of Oper ations
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
2014
Year ended December 31,
2013
2012
(in millions of reais, except percentages)
11,213.2
(7,635.6)
3,577.6
(736.6)
(924.4)
(5.9)
1,910.7
(635.9)
1,274.8
(371.9)
903.0
100.0%
(68.1)%
31.9%
(6.6)%
(8.2)%
(0.1)%
17.0%
(5.7)%
11.4%
(3.3)%
8.1%
11,315.6
(6,816.3)
4,499.3
(637.1)
(729.1)
5.7
3,138.8
(483.2)
2,655.6
(732.0)
1,923.6
100.0%
(60.2)%
39.8%
(5.6)%
(6.4)%
(0.1)%
27.7%
(4.3)%
23.5%
(6.5)%
17.0%
10,737.6
(6,449.9)
4,287.7
(697.3)
(717.4)
(29.7)
2,843.3
(295.7)
2,547.6
(635.7)
1,911.9
100.0%
(60.1)%
39.9%
(6.5)%
(6.7)%
(0.3)%
26.5%
(2.8)%
23.7%
(5.9)%
17.8%
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Net operating revenues
Net operating revenues decreased by R$102.4 million, or 0.9%, to R$11,213.2 million in 2014 from R$11,315.6 million in 2013.
Net operating revenues relating to water services decreased by R$344.8 million, or 7.0%, to R$4,561.2 million in 2014 from
R$4,906.0 million in 2013 and net operating revenues relating to sewage services decreased by R$230.9 million, or 5.8%, to R$3,734.0 million
in 2014 from R$3,964.9 million in 2013. These decreases were principally due to:
a decrease of R$376.4 million due to Water Consumption Reduction Incentive Program; and
an average of 2.2% decrease in both the volume of water and the volume of sewage invoiced in 2014.
These decreases were partially offset by the 3.1% tariff adjustment since December 2013.
Gross revenue from construction increased by R$473.2 million, or 19.4%, to R$2,918.0 million in 2014 from R$2,444.8 million in 2013.
See Note 3.3(b) to our financial statements as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 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$819.3 million, or 12.0%, to R$7,635.6 million in 2014 from R$6,816.3 million in 2013. As a
percentage of net operating revenues, cost of sales and services increased to 68.1% in 2014 from 60.2% in 2013.
The increase in costs of sales and services was principally due to the following factors:
86
an increase of R$133.8 million or 9.5%, in salaries and related charges due to the following factors: (i) an increase of 6.8% in
salaries since May 2014 on account of implementation of our career and wage plan, which had an impact of approximately R$75.6
million; (ii) an increase in the provision of retirement benefits, amounting to R$35.3 million, based on the increased number of
employees who are entitled to request retirement, in addition to the wage increase in the period; and (iii) the increase in overtime
pay, amounting to R$12.4 million, mainly due to a wage adjustment in the period and the increased number of hours worked;
an increase of R$116.1 million in depreciation and amortization, mainly due to the increase in operating intangible assets in 2014,
arising principally from input of the works in operation;
an increase of R$70.4 million or 9.0% in expenses related to services, mainly due to the following factors: (i) expenses totaling
R$32.9 million related to the commencement of operations in Diadema in March 2014; (ii) a reversal of provisions in 2013 in the
amount of R$18.3 million, resulting from the end of the agreement with the municipality of São Paulo; and (iii) higher expenses
with the Corporate Program for Reduction of Water Loss, in the amount of R$19.8 million;
an increase of R$45.8 million in the cost of electricity, mainly due to the average increase of 19.8% in free market tariffs and of
9.2% in regulated market tariffs, partially offset by an average decrease of 14.5% in the Tariff for the Use of Distribution System
(TUSD), as a consequence of Provisional Presidential Decree 579/12 and Law 12,783/13;
an increase of R$20.5 million or 8.5% in expenses related to water-treatment materials, mainly due to increased consumption and
substitution of water-treatment products in order to meet increased demand while maintaining the same efficiency levels in water
treatment;
an increase of R$461.0 million in construction costs due to higher investments in 2014.
Gross Profit
As a result of the factors discussed above, gross profit for the year ended December 31, 2014 decreased by R$921.7 million, or 20.5%, from
R$3,577.6 million in 2014 to R$4,499.3 in 2013. As a percentage of net operating revenues, gross profit decreased to 31.9% in 2014 from
39.8% in 2013.
Selling Expenses
Selling expenses increased by R$99.5 million, or 15.6%, to R$736.6 million in 2014 from R$637.1 million in 2013. As a percentage of net
operating revenues, selling expenses increased to 6.6% in 2014 from 5.6% in 2013. The increase in selling expenses was principally due to the
following factors:
an increase of R$43.7 million in expenses for services, mainly due to the reversal of provisions in 2013 in the amount of R$22.6
million, resulting from the end of the agreement with the municipality of São Paulo and higher expenses related to credit recovery
services and delivering bills in the amount of R$18.3 million;
an increase of R$35.7 million, or 34.4%, in credit write-offs, mainly due to the higher provision of losses with allowance for
doubtful accounts with wholesale customers;
an increase of R$18.8 million, or 8.4%, in salaries and related charges due to the increase of 6.8% in salaries since May 2014 on
account of implementation of our new job and salary plan.
Administrative Expenses
Administrative expenses increased by R$195.3 million, or 26.8%, to R$924.4 in 2014 from R$729.1 million in 2013. As a percentage of net
operating revenues, administrative expenses increased to 8.2% in 2014 from 6.4% in 2013.
87
The increase in administrative expenses was principally due to the following factors:
an increase of R$58.7 million in advertising campaigns, mainly due to the intensification of our water conservation campaign;
an increase of R$44.9 million, or 24.4% in general expenses, mainly due to the expenses on judicial proceedings in the amount of
R$37.1 million;
an increase of R$43.5 million or 14.7%, in salaries and related charges due to the increase of 6.8% in salaries since May 2014
associated with the implementation of our new job and salary plan.
an increase of R$12.1 million in software maintenance; and
an increase of R$7.1 million, in hiring of services due to the commencement of operations in Diadema in March 2014.
Other Operating Income (Expenses), Net
Other operating expenses were R$5.9 million in 2014 compared with R$5.7 million operating income in 2013, an increase of 204.2%. Other
operating expenses showed a increase of R$58.7, mainly due to the following factors: (i) provision for losses of projects amounting to R$21.3
million; (ii) provision for losses for the agreement payments related to the concession for the municipality of Diadema in the amount of R$15.0
million; (iii) write-off of obsolete goods in the amount of R$11.4 million; and (iv) provision for losses of hydrometers in the amount of R$11.4
million. The decrease was partially offset by (i) higher fines applied to suppliers and service providers in the amount of R$25.8 million; and
(ii) higher income from the Program for Rational Use of Water (Programa de Uso Racional da Água – PURA) in the amount of R$20.9 million.
F inancial income (expenses), Net
Financial income (expenses), net consists primarily of interest on our indebtedness and foreign exchange losses (or gains) in respect to our
indebtedness, offset partially by interest income on cash and cash equivalents and inflation based indexation accruals, mainly relating to
agreements entered into with some customers to settle overdue accounts receivable.
Financial income (expenses), net increased by R$152.7 million, or 31.6%, to a R$635.9 million expense in 2014 from a R$483.2 million
expense in 2013. As a percentage of net operating revenues, financial income (expenses), net increased to 5.7% in 2014 from 4.3% in 2013.
The increase in financial income (expenses), net was principally due to:
an increase in foreign exchange losses related to loans and financing of R$77.9 million as a result of the new funding in the amount
of R$458.7 million;
an increase of R$55.2 million in other financial expenses, mainly due to interest expenses totaling R$47.9 million related to the
commencement of operations of two sewage treatment plants financed through leases;
an increase of R$42.8 million in other monetary variations mainly related to inflation adjustments for legal expenses in the amount
of R$38.0 million; and
an increase of R$25.6 million in monetary variations on local loans and financing, mainly due to higher IPCA and TR variations in
2014 of 6.4% and 0.9%, respectively, as compared to 2013 variations of 5.9% and 0.2%, respectively.
The increase in financial income (expenses), net was partially offset by:
88
an increase of R$29.9 million, or 9.9% in financial investments indexed to CDI, held in the period, as a result of the increase in the
Interbank Deposit Certificate (CDI) in 2014 (10.8%), when compared to 2013 (8.2%); and
a decrease of R$21.8 million in interest expenses on local loans and financing, mainly due to the higher interest capitalization
occurred in 2014 when compared to 2013.
Profit before income tax and social contribution
As a result of the factors discussed above, profit before income tax and social contribution decreased by 52.0%, to R$1,274.8 million in 2014
from R$2,655.6 million in 2013. As a percentage of net operating revenues, our profit before income tax and social contribution decreased to
11.4% in 2014 from 23.5% in 2013.
Income Tax and Social Contribution
Income tax and social contribution decreased by R$360.1 million, or 49.2%, to R$371.9 million in 2014 from R$732.0 million in 2013.
This decrease was principally due to a lower taxable income in 2014.
The 2014 effective tax rate of 29%, compared to 28% in 2013, is lower than the 34% standard tax rate because we recorded interest on
shareholder’s equity as a deductible expense, as is permitted by tax law.
Net Income for the year
As a result of the factors discussed above, net income decreased to R$903.0 million in 2014 from R$1,923.6 million in 2013. As a
percentage of net operating revenues, our net income decreased to 8.1% in 2014 from 17.0% in 2013.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Net operating revenues
Net operating revenues increased by R$578.0 million, or 5.4%, to R$11,315.6 million in 2013 from R$10,737.6 million in 2012.
Net operating revenues relating to water services increased by R$323.7 million, or 7.1%, to R$4,906.0 million in 2013 from
R$4,582.3 million in 2012. This increase was principally due to:
an average 2.6% increase in the volume of water invoiced in 2013; and
the effect of the 5.15% tariff increase in September 2012, and the 2.35% tariff adjustment in April 2013 and 3.1% tariff adjustment
in December 2013.
Net operating revenues relating to sewage services increased by R$274.0, or 7.4%, to R$3,964.9 million in 2013 from R$3,690.9 million in
2012. This increase was principally due to:
an average 2.9% increase in the volume of sewage services invoiced in 2013; and
the effect of the 5.15% tariff increase in September 2012, and the 2.35% tariff adjustment in April 2013 and 3.1% tariff adjustment
in December 2013.
Gross revenue from construction decreased by R$19.7 million, or 0.8%, to R$2,444.8 million in 2013 from R$2,464.5 million in 2012. See
Note 3.3(b) to our financial statements as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011 for a
description of the accounting policies applicable to our construction services business.
89
Cost of Sales and Services
The cost of sales and services increased by R$366.4 million, or 5.7%, to R$6,816.3 million in 2013 from R$6,449.9 million in 2012. As a
percentage of net operating revenues, cost of sales and services increased to 60.2% in 2013 from 60.1% in 2012.
The increase in costs of sales and services was principally due to the following factors:
an increase of R$147.3 million or 11.7%, in salaries and related charges due to the following factors: (i) an increase of 6.17% in
salaries since May 2012 and 8.0% since May 2013 associated to the implementation of our new job and salary plan, which had an
impact of approximately R$109.3 million; and (ii) the increase in the provision for pension plan expenses, amounting to R$22.1
million, due to changes in actuarial assumptions;
an increase of R$95.2 million in depreciation and amortization, due to the increase in operating intangible assets in 2013, arising
mainly from input of the works in operation;
an increase of R$63.2 million or 35.6% in expenses related to water-treatment materials, 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;
an increase of R$62.0 million in costs of outsourced services, mainly due to: (i) preventive and corrective sewage system
maintenance in the amount of R$17.7 million; (ii) environmental compensation with the beach recovery service in the amount of
R$9.4 million; (iii) expenses related to consulting, advisory, and specialized services, which amounted to R$9.3 million; (iv)
preventive and corrective maintenance in the water sewage operating systems in the amount of R$9.2 million; and (v) services
provided for conservation of property and operating facilities in the amount of R$5.9 million , due to increase in areas being
monitored; and
an increase of R$21.2 million payable incurred on expropriations, mainly to honor the commitments assumed with the
municipality of Paraguaçu Paulista.
These increases were partially offset by a decrease of R$36.5 million, in the cost of electricity, mainly due to the decrease in the Tariff for the
Use of Distribution System (TUSD), as a consequence of Provisional Presidential Decree 579/12 and Law 12,783/13.
Gross Profit
As a result of the factors discussed above, gross profit for the year ended December 31, 2013 increased by R$211.6 million, or 4.9%, from
R$4,287.7 million in 2012 to R$4,499.3 in 2013. As a percentage of net operating revenues, gross profit decreased to 39.8% in 2013 from
39.9% in 2012.
Selling Expenses
Selling expenses decreased by R$60.2 million, or 8.6%, to R$637.1 million in 2013 from R$697.3 million in 2012. As a percentage of net
operating revenues, selling expenses decreased to 5.6% in 2013 from 6.49% in 2012.
The decrease in selling expenses was principally due to the account receivables allowance for losses, due to the higher recovery of amounts
in 2013, under installment agreements.
This decrease was partially offset by an increase of R$18.7 million in salaries and related charges, due to the 6.17% in salaries since May
2012 and 8.0% since May 2013 associated to the implementation of our’s new job and salary plan, which had an impact of approximately
R$12.5 million.
Administrative Expenses
Administrative expenses increased by R$11.7 million, or 1.6%, to R$729.1 in 2013 from R$717.4 million in 2012. As a percentage of net
operating revenues, administrative expenses decreased to 6.4% in 2013 from 6.7% in 2012.
90
The increase in administrative expenses was principally due to the following factors:
an increase of R$34.6 million in amortization costs of software in 2013;
an increase of R$22.2 million in salaries and related charges due to the following factors: (i) an increase of 6.17% in salaries since
May 2012 and 8.0% since May 2013 associated with the implementation of our new job and salary plan, which had an impact of
approximately R$7.8 million; and (ii) the increase in the provision for pension plan expenses, amounting to R$13.5 million, due to
changes in actuarial assumptions; and
an increase in tax expenses of R$7.3 million, or 12.0% due to: (i) regulatory tax to ARSESP in the amount of R$4.3 million; and
(ii) R$1.0 million in income tax on remittances abroad as a result of the local currency depreciation in 2013.
The increase was partially offset by the following:
a decrease of R$28.9 million, or 19.9% mainly on services provided by third parties relating to advertising campaigns, in the
amount of R$29.4 million; and
a decrease of R$25.3 million in general expenses, mainly due to the expenses on judicial proceedings in the amount of R$14.2
million.
Other Operating Income (Expenses), Net
Other operating income (expenses), net decreased by R$35.4 million, or 119.2%, to R$5.7 million income in 2013 from R$29.7 million
expense in 2012. Other operating expenses showed a decrease of R$37.5, or 40.9%, mainly due to 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. The decrease was
partially offset by the asset write-offs related to asset obsolescence, in the amount of R$17.8 million in 2013.
F inancial 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 increased by R$187.5 million, or 63.4%, to a R$483.2 million expense in 2013 from a R$295.7 million
expense in 2012. As a percentage of net operating revenues, financial income (expenses), net increased to 4.3% in 2013 from 2.80% in 2012.
The increase in financial income (expenses), net was principally due to:
an increase in foreign exchange losses related to loans and financing of R$217.3 million as a result of the 14.6% depreciation of
the real against the U.S. dollar in 2013, compared to a depreciation of 8.9% of the real against the U.S. dollar in 2012;
an increase of R$38.1 million in expenses with inflation adjustment on loans and internal financings, mainly relating to the
seventeenth and eighteenth debentures issued in February and December 2013, respectively.
The increase in financial income (expenses), net was partially offset by:
an increase of R$34.3 million in finance income, mainly due to the investment of interest earned on installment payment plans,
and to the interest on the seventeenth and eighteenth debentures issued; and
91
a decrease of R$10.0 million interest expenses on local loans and financing, mainly due to the repayment of the debt to Banco do
Brasil in 2013, in the of R$380.7 million, associated to the change in debt (issue of the seventeenth debenture in February 2013
and anticipation of the amortization of the 11th debenture balance).
Profit before income tax and social contribution
As a result of the factors discussed above, profit before income tax and social contribution increased by 4.2%, to R$2,655.6 million in 2013
from R$2,547.6 million in 2012. As a percentage of net operating revenues, our profit before income tax and social contribution decreased to
23.5% in 2013 from 23.7% in 2012.
Income Tax and Social Contribution
Income tax and social contribution increased by R$96.3 million, or 15.1%, to R$732.0 million in 2013 from R$635.7 million in 2012. This
increase was principally due to a higher taxable income in 2013.
Net Income for the year
As a result of the factors discussed above, net income increased to R$1,923.6 million in 2013 from R$1,911.9 million in 2012. As a
percentage of net operating revenues, our net income decreased to 17.0% in 2013 from 17.8% in 2012.
B. Liquidity and Capital Resour ces
Capital Sour ces
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, 2014, we had R$1,723.0 million of cash and
cash equivalents. The outstanding current portion of our long-term indebtedness was R$1,207.1 million as of December 31, 2014, of which
R$238.7 million was denominated in foreign currency. Long‑term indebtedness was R$9,578.6 million as of December 31, 2014, of which
R$4,107.6 million consisted of foreign currency-denominated obligations.
As a result of the financial impacts of the current water shortage to date, we have taken steps to minimize its negative effects, including
amongst actions rearranging investments, reducing budget expenses, negotiating overdue credits (mainly with the State and municipalities
served on a wholesale basis), implementing contingency tariffs, and requesting extraordinary tariff revision. For more information, see Note 1 of
our 2014 financial statements.
Our management expects that the cash and cash equivalents available on December 31, 2014, the operating cash generation estimated for
2015 and the lines of credit available for investments are sufficient to meet its short-term liabilities and will not compromise the actions necessary
to overcome the water shortage and preserve our consumers’ water supply.
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 expect that it will continue to
be so in the future. Our cash generated by operating activities was R$2,480.3 million, R$2,777.2 million and R$2,343.2 million in 2014, 2013
and 2012, respectively. The main driver of our cash flow from operating activities relates to our revenue, which is due to the nature of our
business and to the fact that we are expanding our infrastructure. The decrease in cash generated in 2014 is due to the current water crisis, as
previously mentioned.
92
Cash Used in Investing Activities
Our cash used by investing activities was R$2,757.7 million, R$2,281.5 million and R$1,996.7 million in 2014, 2013 and 2012,
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 we are expanding our infrastructure and service coverage.
Cash Provided and Used in F inancing Activities
Our cash provided in financing activities was R$218.5 million in 2014 and our cash used was R$629.7 million and R$572.7 million in 2013
and 2012, respectively. 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 F inancing
Our total financial indebtedness increased by 14.1%, from R$9,450.1 million as of December 31, 2013 to R$10,785.8 million as of
December 31, 2014. In addition, during the same period, our total foreign denominated indebtedness recorded increased by 17.5%, from
R$3,698.6 million as of December 31, 2013 to R$4,346.3 million as of December 31, 2014.
As of December 31, 2014, we had R$9,578.6 million in long-term indebtedness outstanding (excluding the current portion of long-term
indebtedness), of which R$4,107.6 million consisted of foreign currency-denominated long-term debt. We had an outstanding current portion of
long-term indebtedness of R$1,207.1 million as of December 31, 2014. As of December 31, 2014, R$238.7 million of this current portion of
long-term indebtedness was denominated in foreign currency. As of December 23, 2014, our Standard & Poor’s Rating Service domestic rating
was brAA+ and our S&P international rating was BB+. Since July 2013 we also started to be covered by Moody’s America Latina Ltda, by
whom our national rating was Aa1.br and our global rating was Baa3, as of August 29, 2014.
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, 2014, 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$2,631.5 million.
The following table sets forth information on our indebtedness outstanding as of December 31, 2014:
Cur r ent
Noncur r ent
Total
F inal Matur ity*
December 31, 2014
Denominated in local cur r ency:
10th issue debentures
12th issue debentures
14th issue debentures
15th issue debentures
16th issue debentures
17th issue debentures
18th issue debentures
19th issue debentures
Caixa Econômica F ederal
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
National Bank for Economic and Social Development
(BNDES) Tietê III
Financial leasing
Other
Interest and others charges
38,027
45,450
37,038
94,819
498,731
-
-
-
67,085
16,309
10,287
4,068
1,725
20,183
-
8,997
716
125,011
187,352
431,174
239,192
761,497
-
225,379
476,624
276,230
856,316
498,731
1,067,760
1,067,760
202,145
202,145
2020 TJLP + 1.92% (1st & 3rd series) & IPCA +
9.53% (2nd series)
2025 TR + 9.5%
2022 TJLP + 1.92% (1st & 3rd series) & IPCA +
9.19% (2nd series)
2019 CDI + 0.99% (1st series) & IPCA + 6.2%
(2nd series)
2015 CDI + 0.30% to 0.70%
2023 CDI + 0.75% (1st series) & IPCA + 4.5%
(2nd series) & IPCA + 4.75% (3rd series)
2024 TJLP + 1.92% (1st and 3rd series) & IPCA +
8.25% (2nd series)
497,793
1,031,438
497,793
1,098,523
2017 CDI + 0.80% to 1.08%
2015/2037 TR + 5% to 9.5%
65,237
76,975
35,318
25,875
186,374
187,420
473,593
1,886
-
81,546
2019 2.5% + TJLP
87,262
2023 2.15% + TJLP
39,386
2027 1.72% + TJLP
27,600
2027 1.72% + TJLP
206,557
2025 1.92% + TJLP
2028 1.66% + TJLP
2035 7.73% to 10.12% + IPC
2015/2018 TJLP + 2% (Fehidro) & TR + 12.00%
(Presidente Prudente)
187,420
482,590
2,602
125,011
Total denominated in local cur r ency
968,446
5,471,029
6,439,475
Denominated in for eign cur r ency:
Inter-American Development Bank (IADB)
US$541,097,000 (2013 - US$457,748,000)
International Bank for Reconstruction and
Development (IBRD) US$45,860,000 (2013 –
US$37,335,000)
Eurobonds - US$ 140,000,000 (2013 - US$
140,000,000)
Eurobonds - US$ 350,000,000 (2013 – US$
350,000,000)
JICA 15 - ¥ 17,286,450,000 (2013 - ¥ 18,438,880,000)
JICA 18 - ¥ 15,542,400,000 (2013- ¥ 16,578,560,000)
JICA 17 - ¥ 1,029,992,000 (2013 - ¥ 450,484,000)
JICA 19 - ¥ 14,208,068,000 (2013 - ¥ 6,036,325,000)
IADB 1983AB - US$ 154,231,000 (2013 - US$
178,173,000)
Interest and others charges
101,342
1,327,903
1,429,245
2016 to 2035 1.12% to 3.04%
-
-
-
25,619
23,034
-
-
63,596
25,089
121,447
371,655
924,741
358,659
322,166
22,437
314,526
344,078
-
121,447
2034 0.43%
371,655
2016 7.50%
924,741
2020 6.25%
384,278
2029 1.8% & 2.5%
345,200
2029 1.8% & 2.5%
22,437
2035 1.2% & 0.01%
314,526
2037 1.7% & 0.01%
407,674
2023 2.49% to 2.99%
25,089
4,346,292
10,785,767
Total denominated in for eign cur r ency
Total loans and financing
238,680
1,207,126
4,107,612
9,578,641
93
* TR was 0.1053% per month as of December 31, 2014; CDI stands for Interbank Deposit Rate (Certificado de Depósitos Interbancários), which was 11.57% per annum as of
December 31, 2014; IGP‑M was 3.69% per annum as of December 31, 2014; TJLP stands for Long‑term Interest Rate (Taxa de Juros a Longo P razo), published quarterly by
the Central Bank, which was 5.0% per annum as of December 31, 2014.
The following table shows the maturity profile of our debt, as of December 31, 2014, for the period indicated:
Loans and financing
1,207.1
1,098.6
1,300.3
2015
2016
2017
2018
(in millions of reais)
932.7
2019
After 2020
Total
1,017,9
5,229.2
10,785.8
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Referring to all of our foreign currency‑denominated indebtedness, the amount of R$3,254.7 million, net of transaction costs, as of
December 31, 2014 was denominated in U.S. dollars. This indebtedness consisted principally of:
R$1,429.2 million (US$541.1 million) in U.S. dollar denominated loans contracted with the Inter-American Development Bank,
or the IADB, composed of the following: (i) two loans to finance the first phase of the Tietê Project in 1992 and one loan to
finance the second phase in 2000, under which payments of principal are made in semiannual installments with final maturity in
December 2016, December 2017 and 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 1.14% 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 starting in March 2017 after a grace period of six years. The principal
amount accrues interest at USD LIBOR. We have pledged as collateral part of our receivables from our sales and services up to the
amount due;
R$121.4 million (US$45.9 million) in U.S. dollar denominated loans contracted with the IBRD which was entered into on
October 28, 2009, amounting to US$100.0 million, for the financing of the Water Source Program (Programa Mananciais). The
loan matures in March 2034. Amortizations will be made in semiannual installments starting in September 2019 after a grace
period of ten years. The principal amount accrues interest at the USD LIBOR plus a variable spread;
R$407.7 million (US$154.2 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 accrues interest at a rate varying from 2.49% to 2.99%. The
proceeds were used to repay an outstanding series of debt securities in connection with the implementation of our investment plan;
R$1,296.4 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; and
R$1,066.4 million (¥48,066.9 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 these loans, the
payments of principal are made in semi‑annual installments with final maturity 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. The loan matures in October 2035.
Amortizations will be made in semiannual installments after a grace period of seven years, starting in October 2017. The principal
amount accrues interest at a rate that varies from 0.01% to 1.2% per year; (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 were 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 in February 2037. Amortizations will be
made in semiannual installments after a grace period of seven years, starting in February 2019. The principal amount accrues
interest at rates that vary from 0.01% to 1.7% per year.
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Our borrowings from multilateral institutions and with Government Agency, 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$6,439.5 million as of December 31, 2014 and consisted primarily of real‑denominated loans from
federal and state‑owned banks, in particular, Caixa Econômica Federal and BNDES, as well as debentures issued in November 2009, June 2010,
February 2011, February 2012, November 2012, January 2013, October 2013, December 2013 and December 2014, and financial leasing.
The following summarizes our principal borrowings from federal and State‑owned banks:
from 1996 to 2014, we have entered into several financing 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 2038. The principal amount accrues interest from 5.0% to 9.5%. The financing agreements 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 financing
agreement;
in November 2007, we entered into a R$129.9 million financing 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 financing agreement is collateralized by part of the billings from the provision of water and sewage
services;
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 are
being made in 156 successive monthly installments, with final maturity in 2025. The principal amount accrues interest at the
TJLP, but limited to 6.0% per year, plus 1.92% per year. If the TJLP exceeds 6.0% per year, such excess will be added to the
principal amount. The financing agreement is collateralized by part of the billings from the provision of water and sewage
services;
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, we began paying the rental of the infrastructure (in 240 installments)
and the lease was updated accordingly to the contract. On August 31, 2013, SES Campo Limpo Paulista and Várzea Paulista
started operations, and the corresponding amount as of December 31, 2014 was of R$138,602 million;
in March 2012, we entered into a R$180.8 million financing agreement with BNDES. Amortization of the principal amount shall
be paid in up to 156 successive monthly installments 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 financing agreement is guaranteed partly by the earnings of water
and sewage services;
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in February 2013, we entered into a R$1.3 billion financing agreement with BNDES. Amortization of the principal amount shall
be paid in up to 144 successive monthly installments after the grace period of 36 months, with the final maturity in 2028. The
principal amount accrues interest at the TJLP but is limited to 6.0% per year plus a yearly 1.66%. If the TJLP exceeds 6.0% per
year, such excess will be added to the principal amount. The financing agreement is guaranteed partly by the earnings of water and
sewage services;
in December 2013, we entered into a R$415.8 million financing agreement with BNDES. Amortization of the principal amount
shall be paid in up to 108 successive monthly installments after the grace period of 36 months, with the final maturity in 2025.
The principal amount accrues interest at the TJLP but is limited to 6.0% per year plus a yearly 1.66%. If the TJLP exceeds 6.0% per
year, such excess will be added to the principal amount. This financing agreement is guaranteed partly by the earnings of water
and sewage services; and
in June 2014, we entered into a R$61.1 million financing agreement with BNDES. Amortization of the principal amount shall be
paid in up to 108 successive monthly installments after the grace period of 36 months, with the final maturity in 2026. The
principal amount accrues interest at the TJLP but is limited to 6.0% per year plus a yearly 1.76%. If the TJLP exceeds 6.0% per
year, such excess will be added to the principal amount. This financing agreement is guaranteed partly by the earnings of water
and sewage services.
Under BNDES program, in the amount of R$826.1 million, we issued three tranches of debentures. In November 2009, we issued our tenth
tranche of 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. In February 2011, we issued our
fourteenth tranche of 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. In October 2013, we concluded our eighteenth issuance of
debentures, the third tranche out of those three also subscribed exclusively by BNDES. These debentures are divided in three series: the first and
third series will mature in October 2024 and the second, in November 2024. The debentures of the first and third series, in the aggregate
principal amount of R$77.1 million and R$115.7 million, respectively, bear interest at 1.92% per year, plus the TJLP. If the TJLP exceeds 6.0%
per year, such excess will be added to the principal amount. The debentures of the second series, in the aggregate principal amount of
R$82.6 million, bear interest at the rate of the IPCA index plus 8.26% per year. In December 2013, BNDES subscribed to the debentures of the
first and second series. In December 2014, BNDES subscribed in part to the debentures of the third series and will subscribe to the other
debentures of the third series in 2015 and 2016. We have used the funds raised from the three issuances 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.
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. 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.
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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 November 2015 and bearing
interest, each quarter with an interest rate of between 0.30% and 0.7% per year plus the CDI rate. The proceeds of this issuance were used to pay
our 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 this issuance were used to pay our financial
commitments for 2013.
In June 2014, we carried out our nineteenth debentures issuance of R$500 million, with a maturity date of June 2017 and bearing interest,
each semester with an interest rate of between 0.80% and 1.08% per year plus the CDI rate. The proceeds of this issuance were used to pay our
financial commitments for 2014 and 2015.
Part of our real‑denominated indebtedness is indexed to take into account the effects of inflation. This debt provides for inflation‑based
increases to the principal amount, determined by reference to the IPCA.
Financial Covenants
We are subject to financial covenants under the agreements evidencing or governing our outstanding indebtedness.
Foreign currency denominated indebtedness
With respect to our indebtedness denominated in U.S. dollars, we are subject to financial covenants, including but not limited to those set
forth in the loan agreements entered into with the IADB. Each of these agreements contains, among other provisions, limitations on our ability to
incur debt. The financial covenants related to loan agreements 713, 896 and 1212 consider that tariffs must: (a) produce revenues sufficient to
cover the system’s operating expenses, including administrative, operating, maintenance, and depreciation expenses; (b) provide a return on the
balance sheet value of property, plant, and equipment not less than 7%; and (c) during project execution, the balances of short‑term loans must
not exceed 8.5% of total equity. These agreements have a cross-default clause with IADB. The financial covenants related to AB Loan
agreements (1983AB) consider our ratio of debt service coverage, which must be higher than or equal to 2.35:1.00; and the total adjusted debt
over EBITDA, determined on a consolidated basis, which must be lower than or equal to 3.65:1.00. This agreement has a cross-default clause.
See Note 16 to our financial statements.
The indentures relating to our US$ 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.
This agreement has a cross-default clause, i.e. the early maturity of any debt in connection with our loans or the loans of any of our subsidiaries in
a total principal amount of US$25.0 million or more (or the corresponding amount in other currencies) shall imply this agreement’s early
maturity. See Note 16 to our financial statements.
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In addition, any significant devaluation of the real will affect the total debt portion denominated in foreign currencies when measure in
reais. As a result, the Adjusted Total or Net Debt in reais will be affected, with consequent impacts in the ratio between Adjusted Total or Net
Debt to adjusted EBITDA.
As of December 31, 2014 and 2013, we had met all the requirements set forth by these loans and financing agreements.
Local currency denominated indebtedness
With respect to our outstanding indebtedness denominated in reais, we are subject to financial covenants.
Since 2014, we and BNDES have been discussing the standardization of special obligation clauses related to the maintenance of covenants,
in particular the form of calculation, the rules characterizing breach and the establishment of additional guarantees.
At the end of 2014, we and BNDES formalized our intention to standardize the convenant clauses. On February 27, 2015, we concluded
discussions with BNDES and agreed on the renegotiated covenants, effective December 31, 2014 and excluding the EBITDA Margin Index
(over net operating income).
The new clauses from the renegotiated covenants were:
I) maintenance of the following ratios, calculated quarterly and relative to amounts accumulated over the last 12 months at the time of
disclosure of reviewed quarterly financial statements or audited annual financial statements:
- adjusted EBITDA/adjusted financial expenses must be equal to or higher than 3.50;
- adjusted net debt/adjusted EBITDA must be equal to or lower than 3.0;
- other onerous debt(*)/adjusted EBITDA must be equal to or lower than 1.0;
(*) “Other Onerous Debts” is equal to the sum of social security liabilities and health care plans, installment payments of tax debt and
installment payments of debt with the electricity providers.
II) Noncompliance with one or more covenant clauses defined in item (I) will be characterized as a breach when:
a) With regards to indices defined in (I) and within the limits stipulated in item (III), the targets stipulated in item (I) have not been achieved
for at least two quarters, consecutive or not, within a 12-month period; and
b) With regards to indices defined in (I) and beyond the limits stipulated in item (III), the targets stipulated in the chart of item (I) have not
been achieved for at least one quarter within a 12-month period.
III) In the case of breach of one or more of the covenants set forth in (II) (a), the monthly amount relative to the portion of rights granted
fiduciarily, pursuant to the “Right Fiduciary Assignment” clause, will be automatically increased by 20% and made effective by us within 30
days of releasing our audited and/or reviewed financial statements, according to the following limits:
- adjusted EBITDA/adjusted financial expenses must be lower than 3.50, and equal to or higher than 2.80;
- adjusted net debt/adjusted EBITDA must be equal to or lower than 3.80 and higher than 3.0;
- other onerous debt/adjusted EBITDA must be equal to or lower than 1.30 and higher than 1.0;
Failure to meet one or more indices within the range stipulated above, during the same period or periods successive to that which gave rise to
the automatic guarantee, does not create a new obligation to establish an additional covenanted guarantee.
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IV) In the case of breach of any of the covenants set forth in item (II) (b) and/or breach of our obligation with regards to an automatic
guarantee as stipulated in item (III), BNDES and/or debenture holders will be able to, at their exclusive discretion: may require us to establish
additional guarantees within a timeframe defined through written notice; suspend the release of funds; and/or declare the early maturity of the
Subscription of Debentures in Private Issuances and Other Agreements.
The agreements also have a cross-default clause. For example, the early maturity of any of our debts, the financial contracts and/or amounts
of which may compromise the obligations stipulated in the indenture shall cause the early maturity of such agreement.
In addition, all of our financing agreements with 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 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 stipulated for
the period 2012 to 2016. If we fail to comply with any of the ratios required by 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. On March 14, 2013, the Ministry of Cities revoked Normative Instruction 05 of 2008, which regulated the
Agreement on Performance Improvement (Acordo de Melhoria de Desempenho), or API. According to the Instruction, the APIs executed by
March 14, 2013 will remain valid until their respective expiration dates, and it is not necessary to execute or reschedule APIs for new contracts.
Our financing agreement with the federal government and Banco do Brasil and our financing agreements with Caixa Econômica Federal do
not contain material financial covenants. The agreement with Caixa Econômica Federal has a cross-default clause. See Note 16 to our financial
statements.
With respect to our outstanding debentures, the twelfth issuance requires us to maintain an adjusted current ratio (current assets divided by
current liabilities, excluding from current liabilities the current portion of noncurrent debts incurred by us that is recorded in current liabilities)
higher than 1.0:1.0 and an EBITDA/financial expenses ratio equal to or higher than 1.5:1.0. This issuance has a cross-default clause. See Note
16 to our financial statements.
The tenth, fourteenth and eighteenth issuances follow the covenants set forth with BNDES, as described above, and contain a cross-default
clauses. See Note 16 to our financial statements.
The fifteenth, sixteenth, seventeenth and nineteenth issuances require us to maintain an EBITDA/paid financial expenses ratio equal to or
higher than 1.5:1.0 and an adjusted total debt/EBITDA ratio equal to or lower than 3.65:1.0. These issuances have a cross-default clause. See
Note 16 to our financial statements.
The table below shows the more restrictive covenants ratios and our financial covenants ratios as of December 31, 2014.
Adjusted EBITDA / Adjusted financial expenses
Adjusted net debt / Adjusted EBITDA
Adjusted total debt / Adjusted EBITDA
Other onerous debt1/ Adjusted EBITDA
Adjusted current ratio
EBITDA/Paid financial expenses
Restr ictive Ratios
Equal to or higher than 2.80:1.00
Equal to or lower than 3.80:1.00
Equal to or lower than 3.65:1.00
Equal to or lower than 1.30:1.00
Higher than 1.0
Equal to or higher than 2.35:1.00
Ratio as of December 31, 2014
4.01
3.17:1.00
3.64:1.00
0.96
1.33:1.00
4.84:1.00
(1) “Other Onerous Debts” correspond to the sum of social security liabilities, health care plan, installment payment of tax debts and installment payment of debts with the
electricity supplier.
As of December 31, 2014 and 2013, we had met all the requirements set forth by these loans and financing agreements.
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Capital Requir ements
We have, and expect to continue having, substantial liquidity and capital resource requirements. These requirements include debt‑service
obligations, capital expenditures to maintain, improve and expand our water and sewage systems, and dividend payments and other distributions
to our shareholders, including the State.
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 2014, we recorded R$3.2 billion to
improve and expand our water and sewage system and to protect our water source in order to meet the growing demand for water and sewage
services in the state of São Paulo. We have budgeted investments in the amount of approximately R$13.5 billion from 2015 through 2019. See
“Item 4.A. History and Development of the Company – Capital Expenditure Program”.
Dividend Distributions
We are required by our bylaws to make dividend distributions, which can be made as payments of interest on shareholders’ equity to our
shareholders in an amount equal to or higher than 25% of the amounts available for distribution. We declared dividends of R$252.3 million,
R$537.5 million and R$534.3 million in 2014, 2013 and 2012, respectively. See “Item 7.B. Related Party Transactions – Dividends”.
C. Resear ch and Development, Patents and Licenses, Etc.
Our policy is to invest continually in the modernization of equipment and identify and evaluation the technology needed to improve our
provision of basic sanitation services while promoting environmental protection and maintaining our competitiveness and profitability. In 2014,
2013 and 2012, we invested R$10.7 million, R$6.4 million and R$6.3 million, respectively, in research and development.
With respect to our partnership with FAPESP to develop and support research projects involving researchers from graduate schools, the State
of São Paulo and our employees, the projects are equally funded by us and FAPESP. Under this partnership, 12 projects have been approved and
9 of them are currently underway. They are related to: (i) the development of technology related to the use of membrane filtration in water and
sewage treatment, (ii) alternatives for the treatment, use and disposal of sludge from water and sewage treatment plants, (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) monitoring water quality; (vi) energy efficiency and (vii) the sanitary economy.
The nine projects currently underway are in the final phase and have led to several patents and software registrations, including:
“Use of Autonomous Microlaboratories to Monitor Phosphorus in Real Time” – This project consists of the development of a
microlaboratory to detect phosphorus in bodies of water using a more efficient method than traditional processes;
“Intensive Monitoring of São Paulo Metropolitan Region Reservoirs, with emphasis on cyanobacteria and its correlation with
physical and chemical parameters: the Billings case” – One of the results of this project was the development of a forecasting
model to determine the concentration of cyanobacteria in water springs;
“Specialized System for the Detection and Diagnosis of Leaks in Urban Water Lines” – This project represents the first phase of the
development of a water loss detection system with less dependence on manual detection by the site operators. The acoustic signals
derived from the leak are recorded on a portable GPS device that generates a data bank to be posteriorly correlated and analyzed;
and
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“Development and Application of a Continuous Monitoring System of Flocs for Flocculation/Coagulation and Filtration
Optimization” – This project resulted in the construction of a prototype for online detection of the water flocculation index,
optimizing the quantity of chemicals used in a treatment station.
Some of the research institutions with whom we have partnered on the abovementioned projects are the University of São Paulo
(Universidade de São Paulo - USP), the Aeronautic Technical Institute (Instituto Tecnológico de Aeronáutica - ITA), São Paulo State University
(Universidade Estadual Paulista – UNESP), Federal University of São Paulo – UNIFESP, and the National Institute of Spacial Research
(Instituto Nacional de Pesquisas Espaciais – INPE).
In May 2013, we launched a second phase of our agreement with FAPESP. In this second phase, the seven lines of research were defined in
greater detail in order to precisely contemplate our needs. In this phase, 37 proposals were submitted, and 10 proposals were approved according
to the technical-scientific criteria and are currently underway as follows:
Development of a National Correlated Signal Optimized for Locating and Detecting Leaks in Underground Sabesp Water Pipes -
UNESP;
Development of an Aerobic Granular Sludge for Simultaneous Removal of Organic Matter, Nitrogen and Phosphorous from
Sanitary Sewage – USP;
Composting of Sewage Sludge: Evaluation of the Process, Generated Product and its Costs;
Diagnosis, Management and New Treatment Alterrnatives – USP;
Water Demand Forecasting by Artificial Neutral Networks, Numerical Weather Prediction and Spatial-temporal Monitoring in
Ultra-high Resolution in the São Paulo Metropolitan Region – USP;
Monitoring System of Algae Growth by Remote Sensing – INPE;
Saxitoxins in Water Supply: Production of Analytical Standards, Development of Analytical Methodologies and the Study of
Degradation – USP;
Feasibility of Used Water Treatment Sludge as Landfill Cover Material and Soil Compaction on Landfull Construction - USP;
Online Analysis of Water Quality – USP; and
Systems of Classification by Membranes for the Public Supply: Hiring Projects Mechanisms and Treatment of Contaminated
Underground Water – USP.
We have been seeking financing for the project “Sabesp – Technological Innovations for the Sanitation Sector” from the Brazilian Agency
for Innovation – FINEP. The program “FINEP Innovates Brazil” aims at supporting Brazilian companies’ plans for strategic investment in
innovation. These plans must detail a company’s targets and goals for the period during which they will receive financing, pursuant to the
Federal Government’s “Greater Brazil Plan – PBM”. Our project is valued at approximately R$60 million. This project consists of four parts as
follows: (i) production system for reused water in urban and industrial uses; (ii) biofiltration units for odor control; (iii) sludge dryer based on
solar radiation for sewage treatment stations in the city of Franca, Franca Sewage Treatment Station; and (iv) plasma gasification system for solid
waste from sewage treatment plants.
We also entered into an agreement with the Fraunhofer Institute in Germany in 2011 in order to obtain biomethane from the sewage
treatment process to be used as fuel for cars The objective was to mobilize a fleet of 49 cars using biomethane instead of gasoline. However, this
project has been delayed due to a judicial dispute between the supplier of the equipment and the Fraunhofer Institute which has temporarily
impeded the importation of equipment donated to the Fraunhofer Institute.
102
Seeking energy efficiency in our operations, we projected an equipment to calculate the correct oxygen dosage to be used in air diffusors,
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.
D. Tr end Infor mation
Several factors may affect our future results of operations, liquidity and capital resources, including:
the interests of our controlling shareholder;
regulations issued by ARSESP regarding several aspects of our business, with respect to our ability to adjust our tariffs and the
competency of state and municipalities to manage their sanitation affairs;
Brazilian economic conditions;
the effects of extreme weather events;
the effects of any continuous 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 of the tariff revision conducted by ARSESP;
the renewal of our concession agreements;
the impact on our business of the water consumption reduction incentive program and other measures we took in 2014 and are
taking in 2015 as well as any other measures we may need to take until the water levels of our reservoirs are normalized and
sufficient to continuously serve the customers in the São Paulo metropolitan region;
the impact on our business of lower water consumption practices adopted by our customers during the current water crisis, which
may remain in place even after the water levels of our reservoirs normalize;
decisions by DAEE and ANA limiting the volume of water that may be extracted from the Cantareira System, the main water
system we use to serve the São Paulo metropolitan region, and the measures that we may be required to take to ensure the provision
of water to our customers; and
the formalization of agreements with certain of the municipalities we serve.
Some of these factors are 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 Ar r angements
We had no off‑balance sheet arrangements as of December 31, 2014.
103
F. Tabular Disclosur e of Contr actual Obligations
Our debt obligations and other contractual obligations as of December 31, 2014 were as follows:
Less than 1 year
1‑3 years
Loans and financing
Estimated interest payments(1)
Alto Tietê PPP
Accounts payable to suppliers and contractors
Services payable
Program contract commitments
Purchase obligations(2)
Total
1,207.1
478.0
99.5
323.5
319.0
199.6
3,070.3
5,697.0
3‑5 years
(in millions of reais)
1,950.6
759.2
199.1
-
-
1.4
149.2
3,059.5
2,398.9
1,030.1
199.1
-
-
4.1
2,356.3
5,988.5
More than 5
years
Total
5,229.2
1,581.0
423.0
-
-
16.5
5,972.8
13,222.5
10,785.8
3,848.3
920.7
323.5
319.0
221.6
11,548.6
27,967.5
(1) Estimated interest payments on loans and financing were determined considering the interest rates as of December 31, 2014. However, our loans and financing are subject to
variable interest indexation and foreign exchange fluctuations, and these estimated interest payments may differ significantly from payments actually made. The debt
agreements have cross-default clauses.
(2) The purchase obligations are the contractual obligations of investments and expenses and consider the estimated inflation adjustments for each year.
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,
2014, see Note 16 to our financial statements as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013, 2012
included elsewhere in this annual report.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Dir ector s and Senior Management
Under our bylaws and Brazilian Corporate Law, we are managed by our board of directors (Conselho de Administração), which currently
consists of ten directors, and a board of executive officers (Diretoria), which currently consists of six executive officers.
As our controlling shareholder, the State has the ability to elect the majority of our board of directors and, therefore, our direction and future
operations. Upon the election of a new State governor and any resulting change in the administration of the State, all or some of the members of
our board of directors, including our chairman, have historically been replaced by designees of the new administration. Our board of directors
may in turn replace some or all of the executive officers. See “Item 3.D. Risk Factors—Risks Relating to Our Control by the State of São Paulo—
We are controlled by the State of São Paulo, whose interests may differ from the interests of non-controlling shareholders, including holders of
ADSs”.
Board of Directors
Our bylaws provide for a minimum of five and a maximum of 15 directors. The members of our board of directors are elected at a general
shareholders’ meeting to serve a renewable two‑year term. 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 Law No. 6,404/1976 of December 15, 1976, as
amended (“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, Claudia Polto da Cunha, Alberto Goldman, Walter Tesch, Jerônimo Antunes,
Reinaldo Guerreiro, Francisco Vídal Luna and Luis Eduardo de Assis were elected at the annual shareholders’ meeting held on April 30, 2014.
Sidnei Franco da Rocha was elected at the extraordinary shareholders’ meeting held on October 13, 2014, Benedito Pinto Ferreira Braga Junior
was elected at the extraordinary shareholders’ meeting held on January 29, 2015 and Jerson Kelman was elected at the extraordinary
shareholders’ meeting held on February 13, 2015. The tenure of all the directors will end upon the election of members for the new term at the
annual shareholders’ meeting to be held at the end of April 2016. Currently, we have four members considered independent under the Novo
Mercado rules.
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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:
Dir ector
Benedito Pinto Ferreira Braga Junior
Alberto Goldman
Jerson Kelman
Claudia Polto da Cunha
Sidnei Franco da Rocha
Walter Tesch
Jerônimo Antunes
Reinaldo Guerreiro
Francisco Vidal Luna
Luis Eduardo de Assis
Age
67
77
67
47
71
71
59
62
68
58
Position
Chairman
Member
Member
Member
Member
Member
Independent Member*
Independent Member *
Independent Member *
Independent Member *
Date Elected
January 29, 2015
April 30, 2014
February 13, 2015
April 30, 2014
October 13, 2014
April 30, 2014
April 30, 2014
April 30, 2014
April 30, 2014
April 30, 2014
* These members comply with the independence requirements established by the Novo Mercado rules.
Benedito Pinto Ferreira Braga Junior. Mr. Braga has been our chairman since January 2015. He has also been the State Secretary of
Sanitation and Water Resources since January 2015. He holds a degree in Civil Engineering from the São Carlos School of Engineering at the
University of São Paulo (Universidade de São Paulo - USP), with a Master’s degree in Hydrology from Stanford University, and in Hydraulics
from the Polytechnical School at USP and also a Ph.D in Hydrological Resources from Stanford University. He is a professor of Civil and
Environmental Engineering at the Polytechnical School at USP and conducts technical and scientific studies in the field of water resource
planning and management, with an emphasis on conflict resolution with multiple goals. He is also president of the World Water Council
(WWC), responsible for the World Water Forums at The Hague, Kyoto, Mexico and Istanbul, and he is President of the International Forum
Committee. Mr. Braga was President of the Intergovernmental Council of UNESCO International Hydrological Program from 2009 to 2010,
President of the International Water Resources Association (IWRA) from 1998 to 2000 and a member of the board of the directors of the Brazilian
National Water Agency (ANA) from its inception in 1999 to 2009.
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 Polytechnical School at the University of São Paulo (Universidade de São Paulo - USP). 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, the Development, Science and Technology
State Department) from January 2007 to February 2009 and the 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.
Jerson Kelman. Mr. Kelman has been a member of our board of directors since February 2015 and our CEO since January 2015. He holds a
degree in Civil Engineering with a specialization in Hydraulics from the School of Engineering at the Federal University of Rio de Janeiro
(Universidade Federal do Rio de Janeiro - UFRJ), a Master’s degree in Civil Engineering from the Alberto Luiz Coimbra Institute of Graduate
Studies and Research in Engineering at UFRJ and holds a Ph.D in Hydrology and Water Resources from Colorado State University. Mr. Kelman
has also worked as a Water Resources Professor at COPPE-UFRJ since 1974 and served as President of the Brazilian National Water Agency,
General Director of the Brazilian National Energy Agency, CEO of The Light Group between 2010 and 2012, Intervener at Enersul, and a
member of the Brazilian National Council for Energy Policy and Environment and Water Resources, as well as various boards, both in Brazil and
abroad.
105
Claudia Polto da Cunha. Ms. Cunha has been a member of our board of directors since April 2013. She holds a degree in Law and a
Master’s degree in Public Law from the Law School at the University of São Paulo (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 the Paulista Partnership Company (Companhia
Paulista de Parcerias) and the Executive Secretary at the State Council for Capital Protection (Conselho de Defesa dos Capitais do Estado),
since 2006. Ms. Cunha is a member of the board of directors at the Metropolitan Company for Urban Transport (Empresa Metropolitana de
Transportes Urbanos). She was a member of the fiscal committee at the Company for Urban and Housing Development (Companhia de
Desenvolvimento Habitacional e Urbano), a member of the board of directors at the São Paulo Metropolitan Company (Companhia do
Metropolitano de São Paulo), a member of the fiscal committee at Rede Ferroviária Federal, as well as a member of the board of trustees at the
Foundation for Consumor Protection (Fundação de Proteção e Defesa do Consumidor).
Sidnei Franco da Rocha. Mr. Rocha has been a member of our board of directors since October 2014. He holds a degree in Law from Franca
School of Law and is a graduate of Faculdade Francana with a degree in Philosophy, Sciences and Letters. He worked as a reporter and was Press
Secretary in Franca City Hall, the Councilor’s Office and the Mayor’s Office for three terms. He also was President of São Paulo Aviation S.A.
(Viação Aérea São Paulo S/A - VASP) and General Director of Rádio Hertz, where he is currently the President-Director.
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. He was Coordinator of CRHi (Water
Resources Coordination) for the State of São Paulo from January 2011 to January 2015. Mr. Tesch has worked in Peru, Venezuela and several
Latin American countries. Between 2005 and 2009, Mr. Tesch was the Head of the Administrative District of Parelheiros, which is equivalent to
a quarter of the size of the São Paulo municipality and a water source region in the city of São Paulo. He was the Deputy Executive Secretary
from 2009 to 2010 of the Water Defense Operation (Defesa das Águas), an agreement between the São Paulo municipal and state governments.
Mr. Tesch has also authored articles and books on cooperativism and water sources.
Jerônimo Antunes. Mr. Antunes has been a member of our board of directors and Coordinator of the Audit Committee since April 2008. He
holds a Bachelor’s degree in Business Administration and Accounting and both a Masters’ degrees and a doctorate in Controllership and
Accounting from the Business, Economics and Accounting School at the University of São Paulo (Universidade de São Paulo - USP). He has
been a certified independent accountant and consultant in accountability and corporate finance since 1977. He has been a professor of several
MBA courses at USP since 1999, at the Foundation Institute of Accounting, Actuary and Financial Research (Fundação Instituto de Pesquisas
Contábeis, Atuariais e Financeiras - FIPECAFI) since 2000 and at the Foundation Institute of Administration (Fundação Instituto de
Administração - FIA) since 2006, among other institutions. Mr. Antunes has acted as an independent auditor since 1977, an expert and specialist
in accounting examinations since 2005, and President of the Audit Committee of Develop São Paulo (Desenvolve SP) since May 2013. He is a
member of IBGC and was an executive officer of the Insitute of Accounting, Actuary and Financial Research (Instituto de Pesquisas Contábeis,
Atuariais e Financeiras - IPECAFI), the Brazilian Institute of Independent Auditors (Instituto Brasileiro de Auditores Independentes –
IBRACON) and the National Association of Executives in Finance, Administration and Accounting (Associação Nacional de Executivos de
Finanças, Administração e Contabilidade – ANEFAC).
Reinaldo Guerreiro. Mr. Guerreiro has been a member of our board of directors since January 2007. He holds a doctorate in Accounting and
Controllership, a Master’s degree in Accounting and Controllership and a Bachelor’s degree in Accounting Sciences, all of them from the
Business, Economics and Accounting School at the University of São Paulo (Universidade de São Paulo - USP). Currently, he is a professor and
Deputy Head of the Accounting Department at the Business, Economics and Accounting School at USP. He is a researcher at the National
Council for Scientific Development (Conselho Nacional de Desenvolvimento Científico – CNPQ), has authored books in management
accounting and has published various scientific articles in domestic and international magazines. He is a specialized consultant in financial
management. Mr. Guerreiro has worked on various projects in the areas of financial management, costs, budget and IT in a variety of companies,
such as Banco do Brasil, Caixa Econômica Federal, Previ and for the São Paulo Government - GESP.
106
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
Business, Economics and Accounting School at the University of São Paulo (Universidade de São Paulo - USP) and is a retired professor of the
same university. In the public sector, he has served as the Secretary of Planning for the state and city of São Paulo. He has also worked at the
Treasury Department for the State of São Paulo and the Federal Planning Bureau, among other roles. 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 Develop São Paulo (Desenvolve SP), a member of the board of directors
and the audit committee of Gafisa S.A., a member of the board of directors of Tenda S.A., Chairman of the board of directors of IDBRASIL and the
Afro-Brazilian Museum, a member of the board of trustees of the Father Anchieta Foundation (Fundação Padre Anchieta) and an advisory board
member of the Foundation of Medical Faculty (Fundação Faculdade de Medicina – FFM).
Luis Eduardo de Assis. Mr. Assis has been an independent member of our Board of Directors since April 2014. He holds a degree in
Economics from the University of São Paulo (Universidade de São Paulo - USP), a Master's degree from the State University of Campinas
(Universidade Estadual de Campinas – UNICAMP) and an MBA from Scuola Superiore Enrico Mattei in Milan, Italy. He was director of
Monetary Policy of the Central Bank of Brazil and a professor in the Department of Economics at the Pontificial University of São Paulo
(Pontifícia Universidade Católica de São Paulo - PUC-SP) and at the Getulio Vargas Foundation (Fundação Getulio Vargas - FGV-SP). He has
developed his long career in the financial market, having held the positions of Chief Economist and Investment Director at Citibank, Chief
Executive Officer at HSBC Investment Bank Brasil, Chief Operating Officer at HSBC Bank Brasil, Senior Strategic Planning Executive at the
HSBC Group in London and Local Director for Latin America at HSBC. Currently, he serves as the President of Fator Seguradora and writes an
opinion column for the newspaper O Estado de São Paulo.
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
Jerson Kelman
Manuelito Pereira Magalhães Junior
Rui de Britto Álvares Affonso
Paulo Massato Yoshimoto
Luiz Paulo de Almeida Neto
Edson José Pinzan
Age
67
47
57
62
58
60
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
Date Elected
January 9, 2015
June 14, 2013
June 14, 2013
June 14, 2013
June 14, 2013
August 1, 2014
Jerson Kelman. See above “—Board of Directors”.
Manuelito Pereira Magalhães Júnior. Mr. Magalhães has been our Corporate Management Officer since February 2011. He holds a degree
in Economic Sciences from the State University of Campinas (Universidade Estadual de Campinas – UNICAMP). Mr. Magalhães was a member
of our board of directors from January 2007 to February 2011. He was a parliamentary advisor in the Federal Senate. From 2009 to 2011 he was
the Chief Executive Officer of Empresa Paulista de Planejamento Metropolitano – EMPLASA. From 2006 to 2009 he was the Secretary of
Planning of the Municipality of São Paulo and from 2005 to 2006 he was the Deputy Secretary of the Planning Secretariat. From 2003 and 2004
he was Ombudsman of the National Supplementary Health Agency. From 1998 to 2002, he was the special advisor of the Ministry of Health.
107
Rui de Britto Álvares Affonso. Mr. Affonso has been our Chief Financial Officer and Investor Relations Officer since July 2003. Mr. Affonso
holds a doctorate and a Master’s degree in Economics from the State University of Campinas (Universidade Estadual de Campinas – UNICAMP),
and a degree in Economics from the University of São Paulo (Universidade de São Paulo - USP). He has been a professor at UNICAMP since
1986, a professor at the Business, Economics and Accounting School of USP from 1983 to 1989, and a Director of Public Economy at the
Foundation of Administrative Development (Fundação do Desenvolvimento Administrativo) from 1994 to 2003. He also represented Brazil on
the board of the Forum of Federations, a non‑governmental entity located in Canada, from 2000 to 2006. Mr. Affonso has also held several
positions in state government.
Paulo Massato Yoshimoto. Mr. Yoshimoto has been our Metropolitan Region Officer since February 2004. He holds a degree in Civil
Engineering from the Lins School of Engineering (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 Polytechnical School at the University of São Paulo (Universidade de São Paulo - USP), a degree in Business
Administration from the Votuporanga Educational Foundation (Fundação Educacional Votuporanga/SP) and a post‑graduate degree in Sanitary
Engineering from the School of Public Health at USP. 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.
Edson José Pinzan. Mr. Pinzan has been our Technology, Enterprises and Environment Officer since August 2014. He holds a degree in
Social Science from São Paulo State University and a Master’s degree in Geography from the University of São Paulo (Universidade de São
Paulo - USP). He served as our Assistant Executive Director from 1989 to 1995 and from 2013 to 2014. He was also Chief Secretary of Cabinet,
Head of the Department of Integration and Private and Public Partnerships for the City Council of Santos, Head of Cabinet for the President of
City Council, Commercial Director of São Paulo Aviation S.A. (Viação Aérea São Paulo S/A - VASP) and Ombudsman of the Paula Souza Center
(Centro da Paula Souza). Mr. Pinzan worked as a professor at the National Service of Commercial Apprenticeship (Serviço Nacional de
Aprendizagem Comercial – SENAC), University Center of the United Metropolitan Colleges (Centro Universitário das Faculdades
Metropolitanas Unida – FMU) and the Methodist University of São Paulo (Metodista) from 2001 to 2005.
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.
In 2014, 2013 and 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 were R$4.3 million, R$4.2 million and R$4.1 million, respectively.
The tables below sets forth the breakdown of the total compensation received by our directors and members of our board of executive officers
and fiscal committee and other data related to their compensation for the periods indicated:
Year ended December 31,
2014
2012
2013
(in thousands of R$, except where indicated otherwise)
Total compensation per administr ative body
Board of directors
Board of executive officers
Fiscal committee
Total amount of compensation
Number of member s (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
Var iable compensation
Bonus
Board of directors
Board of executive officers
1,051
2,899
303
4,253
9
6
5
802
1,654
232
250
741
71
-
504
1,026
2,929
258
4,213
9
6
5
788
1,673
198
239
690
60
-
566
1,004
2,878
226
4,108
10
6
4
804
1,553
179
200
653
47
-
672
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
Aver age amount of compensation
Board of directors
Board of executive officers
Fiscal committee
-
157
552
64
96
481
64
117
483
61
-
157
530
64
96
471
17
111
469
57
-
148
516
56
50
335
56
100
480
56
108
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 under SABESPREV, which we called as plan G1. Our total contributions to the pension plan
totaled R$23.0 million, R$18.4 million and R$7.4 million in 2014, 2013 and 2012, respectively. In addition to the pension plan under
SABESPREV, we are also required to pay supplemental pension payments relating to the employment contract of certain employees prior to the
creation of SABESPREV, which we called as plan G0. Based on independent actuarial reports, as of December 31, 2014, our obligation under
these both plans (G0 and G1) totaled R$2,729.6 million. For further information on our pension plans see Note 20 to our financial statements as
of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 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.
109
We recorded profit‑sharing expenses of R$72.9 million, R$68.5 million and R$60.5 million in 2014, 2013, and 2012, respectively. We do
not have a stock‑option plan for our employees.
B. Boar d Pr actices
The members of our board of directors are elected at an annual shareholders’ meeting to serve a renewable two‑year term. Our next annual
shareholders’ meeting will be held on April 30, 2015. 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 a renewable two‑year term.
Although our bylaws provide that the meetings of our board of executive officers shall be held twice a month, meetings are held on a weekly
basis. 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.
F iscal Committee (Conselho F iscal)
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. Our fiscal committee currently consists of five members and five alternates. Furthermore, each member has its
respective alternate. The current members of our fiscal committee were elected in the shareholders’ meeting held on April 30, 2014. Their tenure
will end on April 30, 2015. The primary responsibility of the fiscal committee, which is independent from management and from the external
auditors appointed by our board of directors, is to review our financial statements and report on them to our shareholders.
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 Member s
José Antonio Xavier
Humberto Macedo Puccinelli
Horácio José Ferragino
Rui Brasil Assis
Alexandre Luíz Oliveira de Toledo
Tomás Bruginski de Paula
José Rubens Gozzo Pereira
Enio Marrano Lopes
Marcio Rea
Antonio Claudio Zeituni
Age
54
57
64
60
55
54
67
53
50
44
Position
Member
Member
Member
Member
Member
Alternate
Alternate
Alternate
Alternate
Alternate
Date Elected
April 30, 2014
April 30, 2014
April 30, 2014
April 30, 2014
April 30, 2014
April 30, 2014
April 30, 2014
April 30, 2014
April 30, 2014
April 30, 2014
José Antonio Xavier. Mr. Xavier has been a member of our fiscal committee since April 2011. He holds a degree in Economics and a
post‑graduate degree in Governmental Controllership from the Pontificial University of São Paulo (Pontifícia Universidade Católica de São
Paulo - PUC-SP). Mr. Xavier was an auditor of the State Treasury from 1993 to 1998 and has been the Technical Director of the State Treasury
since 1998. He was a member of the fiscal committee at BANESCARD, Energy Company of São Paulo (Companhia Energética de São Paulo –
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 Pontificial University of São Paulo (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 Assistant Secretary from 1995 to 1996, at the State Treasury from
1996 to 2002, and at the Planning Department as Assistant Secretary in 2003. Since January 2004 he has been the Technical Assistant of the
State Treasury.
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Horácio José Ferragino. Mr. Ferragino has been a member of our fiscal committee since April 2012. He holds a degree in Accounting from
the Santo Antonio Integrated Colleges (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 (CONESP – Cia de
Construções Escolares) from 1976 to 1988, for the Educational Development Foundation (FDE – Fundação para o Desenvolvimento da
Educação) from 1988 to 1995 and the Civil House and Secretary of Public Management (Casa Civil e Secretaria de Gestão Pública) from 1995
to 2012, where he coordinated projects involving public purchase policies, and for the Secretariat of Regional Planning and Development as
Counsel for Government Innovation from 2012 to 2015. He currently works for the Secretariat of the Government (Secretaria de Governo) in the
Steering Committee for Reduction and Optimization of Expenses in the Public Sector and teaches several courses in the area of public purchases.
Mr. Ferragino has been a member of the Fiscal Committee for the Official Press of the State of Sao Paulo.
Rui Brasil Assis. Mr. Assis has been a member of our fiscal committee since April 2014. He holds a degree in Civil Engineering from Escola
de Engenharia de Lins. In the public sector, he worked for Lins City Hall from 1980 to 1983, the Water and Electricity Department from 1983 to
1999, the Water Resources, Sanitation and Construction Secretariat from 1999 to 2003, the Energy, Water Resources and Sanitation Secretariat
from 2003 to 2007, the Energy Secretariat from 2007 to 2010 and the Sanitation and Water Resources Secretariat since 2011. Mr. Assis was a
member of the deliberative council of the Foundation Agency of Alto Tietê Water Basis (Fundação Agência de Bacia Hidrográfica do Alto
Tietê) from 2006 to 2014, the fiscal committee of EMAE from 2007 to 2011, board of directors of the Association for Water Management of the
Paraíba do Sul River Basin (AGEVAP) from 2003 to 2006 and the board of directors of the Companhia Ambiental do Estado de São Paulo
(CETESB) from 1999 to 2007.
Alexandre Luíz Oliveira de Toledo. Mr. Toledo has been a member of our fiscal committee since April 2014. He holds a degree in Law from
the University of São Paulo (Universidade de São Paulo - USP). He has 20 years of professional experience in financial institutions, especially
in the area of capital markets, acting in defense of minority shareholders. He has been a member of the fiscal committee and board of directors in
various companies, including CELG, COPEL, CST, CERJ, Sabesp, Usiminas, Ripasa, Plascar, UOL, etc.
Tomás Bruginski de Paula. Mr. de Paula has been an alternate member of our fiscal committee since April 2006. He holds a Master’s degree
in Economics from the State University of Campinas (Universidade Estadual de Campinas – UNICAMP). He has been a professor at the
Economics Department of Pontifícia Universidade Católica – PUC since 1986. He has been an executive officer at the São Paulo Company for
Partnerships (Companhia Paulista de Parcerias) since 2004 and the São Paulo Securities Company (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 at the Getulio Vargas Foundation (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 Develop São
Paulo (DesenvolveSP) and a member of the board of directors of the São Paulo State Highway Company (Desenvolvimento Rodoviária S.A. -
DERSA). Mr. de Paula was also a member of the fiscal committee of the São Paulo Company of Electric Power Transmission (Companhia de
Transmissão de Energia Elétrica Paulista – CTEEP).
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 Mackenzie University and a graduate degree from the Getulio Vargas Foundation 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 Department. He was an
executive officer at Traffic Engineering Company of São Paulo (Companhia de Engenharia de Tráfego – CET) and in the International
Cooperation Department at the Energy Company of São Paulo (Companhia Energética de São Paulo –CESP).
Enio Marrano Lopes. Mr. Lopes has been an alternate member of our fiscal committee since April 2014. He holds a degree in Business
Administration from Faculdades Oswaldo Cruz. Currently, Mr. Lopes is Budget Assistant Coordinator for the Secretariat of Planning and
Management (Secretaria de Planejamento e Gestão)of the State of São Paulo and a member of the Fiscal Committee of the CDHU. He also
served in various positions for the Secretariat of Planning and Management of the State of São Paulo and was a member of the Fiscal Committe of
the São Paulo State Highway Company (Desenvolvimento Rodoviária S.A. - DERSA), the Metropolitan Train Authority of São Paulo (CPTM)
and the Energy Company of São Paulo (Companhia Energética de São Paulo –CESP).
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Marcio Rea. Mr. Rea has been an alternate member of our fiscal committee since April 2014. He holds a degree in business administration.
He is currently an administrative officer of the Energy Company of São Paulo (Companhia Energética de São Paulo –CESP). He was Adviser to
the Secretary of Sanitation and Water Resources from 2014 to 2015) and Manager of the CESP presidency’s Executive Coordination from 2011
to 2014. Mr. Rea was also Special Advisor at the Ministry of Science and Technology (1988 to 1989), Head of Staff of the Labor and Social
Promotion Secretariat (1990 to 1991) and has served in various positions at CESP since 1992.
Antonio Claudio Zeituni. Mr. Zeituni has been an alternate member of our fiscal committee since April 2014. He holds a degree in Law from
the Pontificial University of São Paulo (Pontifícia Universidade Católica de São Paulo - PUC-SP). He worked in various areas of law, such as
banking, civil, family and administrative law, with 18 years’ experience working in financial institutions. He worked at the legal department of
Unibanco S.A., and in law firms, among which is Oliveira de Toledo & Advogados Associados, where he is a partner.
Audit Committee
Our bylaws provide for an audit committee to be comprised of three board members, who will cumulatively comply with the requirements of
(i) independence, (ii) technical expertise, and (iii) identifying and complying with applicable exemptions in accordance with the United States
Securities and Exchange Commission, or the SEC, and New York Stock Exchange, or NYSE, rules. Our Board of Directors determined that
Jerônimo Antunes qualifies as a financial expert under the SEC 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. All of our Audit Committee members are independent.
The following are the names, positions and dates of election of the members of our audit committee:
Dir ector
Jerônimo Antunes
Reinaldo Guerreiro
Francisco Vidal Luna
Regulatory Affairs Committee
Position
Coordinator and Financial Expert
Member
Member
Date Elected
May 14, 2014
May 14, 2014
May 14, 2014
Our bylaws provide for a regulatory issues committee to be comprised of our Chief Executive Officer, Chief Financial 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, under the directives of 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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C. Employees
As of December 31, 2014, we had 14,753 full‑time employees. In 2014, we had an average of 942 interns and 559 apprentices (aprendizes),
as defined by Federal Law No. 10,097/2000, dated December 19, 2000, as amended.
The following table sets forth the number of our full‑time employees by main category of activity and geographic location as of the dates
indicated:
2014
2013
2012
As of December 31,
Number of employees by categor y of activity:
Projects and operations
Administration
Finance
Marketing
Number of employees by cor por ate division:
Head office
São Paulo metropolitan region
Regional Systems
Total number of employees
9,788
2,381
466
2,118
1,481
6,715
6,557
14,753
9,983
2,443
455
2,134
1,510
6,856
6,649
15,015
9,919
2,474
454
2,172
1,513
6,865
6,641
15,019
The average tenure of our employees is approximately 18 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 Union of
Workers in Water, Sewage and Environment of São Paulo ‑ SINTAEMA, (ii) workers union of Santos Urban Industries, Baixada Santista region,
South Coast and Vale Ribeira ‑ SINTIUS, (iii) the Union of Engineers of the State of São Paulo ‑ SEESP, (iv) the Union of Attorneys of the State
of São Paulo ‑ SASP and (v) the Union of Industrial Technicians of the State of São Paulo – SINTEC.
The collective 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 an employment guarantee for 98% of our employees,
(iii) an increase in meal vouchers of 10% and a further increase of 8% in all other benefits, and (iv) an end to extra payments to employees who
drive company vehicles.
In 2013, the collective bargaining agreement resulted in: (i) a salary increase of 8% (which corresponds to the inflation adjustment for the
period plus a real gain of 2.5%), (ii) the establishment of an employment guarantee for 98% of our employees, (iii) an increase of 13.6% in meal
vouchers (vale refeição), and (iv) an increase of 21.5% in food allowance and an additional of 15% for employees who work on flexible work
shifts, among other things.
The collective bargaining agreement signed in 2014 resulted in: (i) a salary increase of 5.2% (which corresponds to the inflation adjustment
for the period); (ii) the establishment of an employment guarantee for 98% of our employees; (iii) an increase of 8% in meal vouchers; (iv) an
increase of 5.2% in food allowance; and (v) the termination of Regional Salary for which Sabesp adopted separate pay scales for Region 1 – São
Paulo metropolitan region, Vale do Paraíba, Baixada Santista, Capivari/Jundiaí and Litoral Norte – and Region 2 – other interior and coast cities.
Region 2 employees received salaries at a ratio of 80% of the salaries of Region 1 employees. As a result of the collective agreement of 2014,
equalization in salaries was conceded for the two regions in two stages: first, on May 1, 2014 with a salary increase from 80% to 90% and
second, on May 1, 2015, from 90% to 100%.
We experienced a two day strike in 2013, which did not interrupt the essential services that we provide. In 2012 and 2014 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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D. Shar e Owner ship
As of April 22, 2015, none of our directors and executive officers owned any of our common shares. See “Item 7.A. Major Shareholder” for
more information.
ITEM 7. MAJ OR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shar eholder
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 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 April 22, 2015:
State of São Paulo
Directors and executive officers of Sabesp
Others
Total(1)
Common shar es
Shar es
343,524,285
-
339,985,584
683,509,869
%
50.3%
-
49.7%
100.0%
(1) As of April 22, 2015, 25.89% of our outstanding common shares were held by 4,767 registered shareholders in Brazil.
As of April 22, 2015, 23.85% 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, in March 2015, 36 record holders of ADSs in
the United States.
B. Related Par ty Tr ansactions
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$412.0 million in 2014, R$449.1 million in 2013
and R$431.0 million in 2012. Our accounts receivable from the State for water supply and sewage services totaled R$50.8 million and
R$63.9 million, as of December 31, 2014 and 2013, respectively. In addition, as required by law, we invest our cash and cash equivalents with
government financial institutions.
Payment of Pensions
Pursuant to a law enacted by the State, certain former employees of some State owned companies that provided services to us in the past and
later merged to form our Company acquired a legal right to receive supplemental pension benefit payments. These rights are referred to as “Plan
G0”. These amounts are paid by us, on behalf of the State, and are claimed by us as reimbursements from the State, as primary obligor. In 2014,
2013 and 2012, we made payments to former employees of R$149.9 million, R$140.1 million and R$132.7 million, respectively, in respect of
Plan G0. The State made reimbursements in 2014, 2013 and 2012 in the amounts of R$112.5 million, R$111.0 million and R$104.4 million,
respectively.
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Agreements with the State
In September 1997, we and the State entered into a memorandum of understanding providing that we would, in effect, apply dividends we
declared that were otherwise payable to the State to offset accounts receivable in connection with the provision of water and sewage services to
the State and its controlled entities.
On December 11, 2001, we entered into an agreement with the State and the DAEE. Pursuant to this agreement, the State acknowledged and
agreed, subject to an audit by a State‑appointed auditor, to pay us amounts it owed to us in respect of:
water and sewage services we provided to governmental agencies, State‑owned autonomous entities and foundations through
December 1, 2001, and that was not offset in accordance with the September 1997 memorandum of understanding, in the total
amount of R$358.2 million. This amount was renegotiated and included in the second amendment to this agreement discussed
below; and
supplemental retirement and pension benefits we paid from March 1986 to November 2001 on behalf of the State to former
employees of the State‑owned companies which merged to form our Company; as we did not reach an agreement regarding these
amounts, a joint inquiry has commenced in order to ensure agreement between us and the State, in the total amount of
R$320.6 million. This amount was renegotiated and included in the third amendment to this agreement discussed below.
The agreement provided that the DAEE would transfer to us ownership of the Taiaçupeba, Jundiaí, Biritiba, Paraitinga and Ponte Nova
reservoirs (herein after referred to as “the reservoirs”), which form the Alto Tietê system, and that the fair value of these assets would reduce the
amounts owed to us by the State.
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 (12 Vara da Fazenda Pública do Estado de São Paulo)
alleging that a transfer to us of ownership of the Alto Tietê system reservoirs from the DAEE would be illegal. An injunction against the transfer
of ownership of such reservoirs was granted but was later reversed. However, in October 2004, the court of first instance handed down its
judgment on the civil public action and declared the agreement between us, DAEE and State of São Paulo null and void. 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.
On March 18, 2015, we, the State and DAEE, with the intervention of the Department of Sanitation and Water Resources, executed a term of
agreement, in the amount of R$1,012.3 million, of which R$696.3 million refers to the principal amount and R$316.0 million refers to the
monetary adjustment of the principal through February 2015.
The principal amount will be paid in 180 installments, as follows:
The first 24 installments will be settled by an immediate transfer of 2,221,000 preferred shares issued by the São Paulo Company of
Electric Power Transmission (Companhia de Transmissão de Energia Elétrica Paulista – CTEEP), totaling R$87.2 million, based
on the share closing price as of March 17, 2015; and
The amount of R$609.1 million will be adjusted by the IPCA until the date when the payments start and will be paid in cash in
156 monthly installments beginning on April 5, 2017. When payments begin, installments will be adjusted by IPCA plus simple
interest of 0.5% per month.
Given that the lawsuit regarding the transfer of the reservoirs is pending final and unappealable court decision, the agreement also provides
for the following:
If transfer is possible and the reservoirs are effectively transferred to us and registered at the authority’s office, we will reimburse to
the State the amounts paid in replacement of the reservoirs (principal amount) in 60 monthly installments adjusted by IPCA until
the payment date of each installment; and
If the transfer of the reservoirs is not possible, the State will pay us, in addition to the principal amount, the inflation adjustment
credit in 60 installments, following payment of the principal amount. The amount will be adjusted based on IPCA at the start date
of payments and, as of that date, IPCA will be incurred plus 0.5% simple interest rate/month over the amount of each installment.
In addition to the Undisputed Reimbursement Amount, there is an outstanding balance relating to the Disputed Reimbursement Amount. As
of December 31, 2014, the Disputed Reimbursement Amount, plus the reservoirs mentioned above, amounted to R$1,479.7 million, but due to
the uncertainty regarding the recovery of the amount our management decided not to recognize the reimbursements. See Note 10 to our financial
statements as of December 31, 2014 and 2013 and for the year ended December 31, 2014, 2013 and 2012 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.
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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, 2014, we had made a provision of R$2,053.5 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 on November 9, 2010, we filed a civil lawsuit against the State of São Paulo seeking full
reimbursement of the amounts paid as benefits granted by Law No. 4,819/1958. Regardless of the civil lawsuit, we will continue to actively seek
a settlement with the State government.
Agreement with the State and the city of São Paulo
On June 23, 2010 the State and the city of São Paulo executed an agreement in the form of a convênio, to which we and ARSESP consented,
under which they agreed to manage the planning and investment for the basic sanitation system of the city of São Paulo on a joint basis. The
principal terms of this convênio were as follows:
the State and the city of São Paulo would execute a separate agreement with us, granting us exclusive rights to provide water and
sewage services in the city of São Paulo;
ARSESP would regulate and oversee our activities regarding water and sewage services in the city of São Paulo, including tariffs;
a management committee (Comitê Gestor), consisting of six members appointed for two-year terms, with the State and the city of
São Paulo given the right to appoint three members each, would be responsible for planning water and sewage services for the city
and for reviewing our investment plans; and
we may participate in management committee meetings but may not vote.
In application of the convênio, we executed a separate contract with the State and the city of São Paulo, also dated June 23, 2010, to regulate
the provision of these services for the following 30 years. The principal terms of this contract are as follows:
The total investment stated in the contract must be equal to 13% of gross revenues from the provision of services to the city of São
Paulo, net of the taxes on revenues, which total approximately R$600 million per year.
We must transfer 7.5% of the gross revenues obtained from providing sanitation services in the municipality of São Paulo and
subtract (i) COFINS and PASEP taxes, and (ii) unpaid bills of publicly owned properties in the city of São Paulo, to the Municipal
Fund for Environmental Sanitation and Infrastructure (Fundo Municipal de Saneamento Ambiental e Infraestrutura), established
by Municipal Law No. 14,934/2009. In April 2013, ARSESP postponed the application of such municipal charges based on a
request from the São Paulo State Government to analyze, among other things, methods to reduce the impact on consumers. In May
2014 ARSESP maintained the suspension of Resolution 407/2013 until the results are obtained in the revision of the contract
signed between us, the city and the State of São Paulo, thereby delaying the authorization to pass the charge through to consumers
on the service bill.
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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 our obligations under the convênio and addresses their compatibility with the
sanitation plans of the State, the city of São Paulo and, if necessary, the São Paulo metropolitan region. The investment plan is not irrevocable
and is reviewed every four years by our management committee. We draft a detailed work plan every two 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.
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 F inancing
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 IBRD in the amount of US$100 million for the Water
Source Program (Programa Mananciais).
We also entered into credit agreements with JICA, which were guaranteed by the federal government, with counter‑guarantee from the State
of São Paulo, for the financing of (i) the Clean Wave Program for the Baixada Santista metropolitan region, on August 6, 2004, for an aggregate
principal amount of ¥21,320 million; (ii) the second phase of the Clean Wave Program, in February 2011, for an aggregate principal amount of
¥19,169 million; (iii) the environmental improvement program in the basin of the Billings dam, in October 2010, for an aggregate principal
amount of ¥6,208 million; and (iv) the Corporate Program for Water Loss Reduction, in February 2012, for an aggregate principal amount of
¥33,584 million.
For more information on the aforementioned loans, see “Item 5.B. Liquidity and Capital Resources—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.
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Agreements with Lower Tariffs
We have entered into agreements with public entities, including State entities and municipalities, which manage approximately 6,604
properties. Under these agreements, these public entities pay a different tariff which is approximately 25.0% lower than the tariff that applies for
the public entities that have not entered into these agreements, provided such entities implement our Program for Rational Use of Water
(Programa de Uso Racional da Água – PURA), which has a fixed target for reduction or maintenance of water consumption, according to
technical evaluations carried out by us. These agreements are valid for a 12‑month term with automatic renewal for equal periods. Pursuant to
the terms of these agreements, if these entities fail to make any payment on a timely basis to us, we have the right to cancel the agreement, thereby
revoking the 25.0% tariff reduction.
Personnel Assignment Agreement among Entities Related to the State Government
We have personnel assignment agreements with entities related to the 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 2014, 2013 and 2012 amounted to
R$9.7 million, R$12.9 million and R$12.3 million, respectively.
The expenses related to personnel assigned by other entities to us totaled R$0.5 million in 2014, and R$1.0 million in both 2013 and 2012.
Services Obtained from State Government Entities
As of December 31, 2014 and 2013, we had an outstanding amount payable of R$2.0 million for services rendered by São Paulo State
government entities, including the supply of electric power by the Energy Company of São Paulo (Companhia Energética de São Paulo –CESP).
Non‑operating Assets
We lend land, free of charge, to DAEE. Such non‑operating assets totaled R$1.0 million as of December 31, 2014 and 2013.
Transactions with SABESPREV Pension F und
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$8.9 million, R$8.4 million and R$7.4 million in 2014, 2013 and 2012, respectively. On May 29, 2001, a federal law was enacted which,
among other provisions, limits the amount mixed capital companies, like us, may contribute to their pension plans. Specifically, the ordinary
contributions made by us to our pension plans may not exceed the contributions made by the beneficiaries of these plans.
Our original pension plan (the Defined Benefit Plan) has an actuarial deficit. We have commenced studies to manage this deficit and have
also created a new, defined contribution plan, SABESPREV Mais. Our new plan was approved by Previc in June 2010, after which our old plan
stopped accepting new members. Contributions to the new plan are also shared between plan members and 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. In September 2012, the judge presiding over the case ordered a financial expert inspection. An
expert was appointed in early 2013 but has not yet revealed the results of the inspection.
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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$3.8
million, R$3.6 million and R$3.4 million in 2014, 2013 and 2012, respectively, and it refers to salaries and other short‑term benefits
management. An additional R$0.5 million, R$0.6 million and R$0.7 million related to the bonus program was accrued to executive officers in
2014, 2013 and 2012.
For further information on management compensation, see “Item 6.A. Directors and Senior Management—Compensation”.
Loan agreement through credit facility
We hold interests in some companies. Although we do not hold the majority of shares in any of the companies in which we hold interests,
we are party to shareholders’ agreements which provide for the power of veto with regard to certain management proposals and decisions. Due
our significant influence on these companies by way of shareholders’ agreements, for accounting purposes, these companies are accounted for by
applying the equity method of accounting.
We entered into a loan agreement through credit facility with the special purpose enterprises, or “SPEs”, Águas de Andradina S.A., Águas de
Castilho S.A., Aquapolo Ambiental S.A. and Attend Ambiental S.A. to finance the operations of these companies, until the loans and financing
required to banks are cleared.
The contracts signed with SPEs Águas de Adradina S.A. and Águas de Castilho S.A. were settled. Other agreements signed with Aquapolo
Ambiental S.A. on March 30, 2012 and Attend Ambiental on May 9, 2014, remain with the same features, according to the table below:
Companies
Attend Ambiental
Aquapolo Ambiental
Aquapolo Ambiental
Total
Cr edit limit
P r incipal
disbur sed
Inter est
balance
Total
5,400
5,629
19,000
30,029
5,400
5,629
19,000
30,029
494
2,559
7,284
10,337
5,894
8,188
26,284
40,366
Inter est r ate
SELIC +
3.5% p.a.
CDI + 1.2%
p.a.
CDI + 1.2%
p.a.
Matur ity
(*)
04/30/2016
04/30/2015
(*) Loan for use agreement with Attend Ambiental has a mature date of 180 days, counted from the date of availability of the amount in the account of the borrower, renewable for
the same period. The credit facility was available to the borrower until December 31, 2014.
The amount disbursed is recognized in assets, in “Other receivables” and amounts to R$24,400 for principal and R$7,778 for interest
recognized in current assets and R$5,629 for principal and R$2,559 for interest in noncurrent assets. As of December 31, 2014, the balance of
principal and interest of these contracts is R$40,366. In 2014, financial income was impacted by R$5,222.
Pró-Conexão
In December 2011, the State of São Paulo approved a project to subsidize connections to the sewage system for low‑income families.
Initially intended to last 8 years, 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 this period we expect that this program will create 192 thousand new sewage connections benefiting
approximately 800 thousand people.
As of December 2014 we completed approximately 22 thousand sewage connections with total investments worth R$52 million. We
believe that this program will increase the efficiency of our other sewage collection programs and help improve water quality in the region’s
rivers and basins as well as improve quality of life for low‑income families.
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C. Inter ests of Exper ts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Financial Statements and Other Financial Infor mation
See “Item 3.A. Selected Financial Data” and “Item 18. Financial Statements”.
Legal Pr oceedings
We are currently subject to numerous legal proceedings relating to civil, tax, labor, corporate and environmental issues arising in the normal
course of our business. Several individual disputes account for a significant part of the total amount of claims against us. Our audited financial
statements only include provisions for probable and reasonably estimable losses and expenses we may incur in connection with pending
proceedings. Our material legal proceedings are described in Note 19 to our audited financial statements included in this annual report, and that
description is incorporated by reference under this Item.
Civil Public Actions Related to Environmental Matters
We are subject to administrative and judicial proceedings, including proceedings initiated by the Companhia Ambiental do Estado de Sao
Paulo (CETESB), the Office of the Public Prosecutor of the State of São Paulo and non-governmental organizations. These proceedings result
from alleged environmental damage and relief sought against us includes: (i) cessation of the release of raw sewage into certain local bodies of
water; (ii) remedies, in some cases, for environmental damages that have not yet been specified and evaluated by the court’s technical experts;
(iii) requirements to install and operate sewage treatment facilities in locations referred to in the civil public actions; and (iv) imposition of a limit
on water extracted from the water springs most affected by the current water crisis. In certain cases, we are subject to daily fines for
non‑compliance. In our response to these lawsuits, we note that the installation and operation of sewage treatment facilities in locations referred
to in the civil public actions is included in our investment plan. There have already been unfavorable judicial decisions against us and their
effects may include: (i) investment in works or services not considered by our long‑term investment plan; (ii) early execution of works or services
that were considered for execution in future years in our 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.
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, 2014 we have
provisioned R$225.6 million for the matters classified as probable losses.
Other Legal Pr oceedings
The Civil Entity Coordination Committee of Piracicaba on December 30, 2003 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 river basin by the
Cantareira system to eliminate possible damage to populations downstream; and (iii) the development of an environmental impact study on the
Cantareira system evaluating the impact of water use and withdrawal on the various basins that constitute the system. In August 2012, this civil
public action was decided favorably for us in two lower courts, and the plaintiff’s appeal to a higher court seeking special and extraordinary
recourse was denied based on inadmissibility. We are currently awaiting a court decision on the action brought by the plaintiff against the
decisions of inadmissibility cited. The amount involved in this proceeding as of December 31, 2014 is R$20.5 billion. We have assessed the risk
of loss as remote, and accordingly have not made any provisions.
The Public Prosecutor’s Office of the State of São Paulo on November 30, 2012 filed a civil public action against us seeking: (i) the
nullification of the contract we entered with the Municipality of São Paulo on June 23, 2010 regarding the service of water supply and sewage
services; (ii) our exclusion from BM&FBovespa’s Corporate Sustainability Index; and (iii) sewage treatment coverage of the entire Municipality
of São Paulo by 2018. The plaintiff’s request for an injunction was denied, and the courts maintained this decision after we presented our
defense. On November 18, 2014, the case was dismissed in the first instance, and the plantiff then appealed this dismissal. We are currently
waiting the court’s ruling on the appeal. The amount involved in these proceedings is R$13.1 billion as of December 31, 2014. We have
assessed the risk of loss as remote, and accordingly have not made any provisions.
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Dividends and Dividend Policy
Amounts Available for Distribution
At each annual shareholders’ meeting, the board of directors is required to recommend the allocation of net profits for the preceding fiscal
year. For purposes of Brazilian Corporate Law, net profits are defined as net income after income tax and social contribution tax for such fiscal
year, net of any accumulated losses from prior fiscal years and any amounts allocated to employees’ and management’s participation in our
profits. In accordance with Brazilian Corporate Law, the amounts available for dividend distribution are the amounts equal to half of the net
profit as increased or reduced by:
the amount intended to form the legal reserve; and
the amount intended to form the reserves for contingencies and any written-off amounts of the same reserves formed in previous
fiscal years.
We are required to maintain a legal reserve, to which we must allocate 5.0% of net profits for each fiscal year until the amount for such
reserve equals 20.0% of our paid‑in capital. However, we are not required to make any allocations to our legal reserve in respect of any fiscal
year in which the aggregate amount of the legal reserve plus our other established capital reserves exceeds 30.0% of our capital. Net losses, if
any, may be offset against the legal reserve. As of December 31, 2014, 2013 and 2012 the balance of our legal reserve was R$758.1 million,
R$713.0 million and R$616.8 million, respectively, which was equal to 12.2%, 11.5% and 9.9%, 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. 10,303/2001 of October 31, 2001, as amended, capital budgets for more than one year must be revised at each
annual shareholders’ meeting. After completion of the relevant capital projects, we may retain the allocation until the shareholders vote to
transfer all or a portion of the reserve to capital or retained earnings. As of December 31, 2014, 2013 and 2012 we had an investment reserve of
R$2,914.0 million, R$5,980.5 million and R$4,690.6 million, respectively.
The amounts available for distribution may be further increased by a reversion of the contingency reserve for anticipated losses constituted in
prior years but not realized. The amounts available for distribution are determined on the basis of our financial statements prepared in accordance
with Brazilian GAAP.
The legal reserve is subject to approval by the shareholder vote at our annual shareholders’ meeting and may be transferred to capital but is
not available for the payment of dividends in subsequent years.
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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.
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. 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. 9,249/1995 of December 26, 1995, as amended. The amount of tax‑deductible interest that may be paid is
calculated by applying the daily pro rata variation of the government’s long-term interest rate (TJLP) on the shareholders’ equity during the
relevant period and cannot exceed the greater of:
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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, 2014 correspond to the minimum established by
law of 25.0% of the net income and the difference of R$252.3 million will be recorded in 2015 after the annual shareholders’ meeting.
Distributions of dividends
The following table sets forth the distributions of dividends that we made to our shareholders in respect of our 2014, 2013 and 2012
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,
2014
2013
2012
Aggregate amount
distributed
(in millions of reais)
252.3
537.5
534.3
Payment Dates
Payment per share
Payment per ADS
(*)
June 27, 2014
June 21, 2013
0.37
0.79
0.78
(in reais)
0.37
0.79
0.78
(*) We recorded dividends in the amount of R$214.5 million, which pursuant to our bylaws is our minimum dividend amount. The dividends will be paid until 60 days after the
annual general meeting, which will occur on April 30, 2015.
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 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, 2014, we had 5,008 registered holders of common
shares.
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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 ADS 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 retrospective application 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.
2015
January
February
March
April 22
2014
First quarter
Second quarter
Third quarter
Fourth quarter
2013
First quarter
Second quarter(2)
Third quarter
Fourth quarter
2012
First quarter
Second quarter
Third quarter
Fourth quarter
2011
First quarter
Second quarter
Third quarter
Fourth quarter
Reais per common share
U.S. dollar equivalent per ADS
(1)
Low
High
Low
High
Average daily
trading volume
13.25
13.27
16.09
17.22
15.98
19.61
19.60
19.30
15.98
19.55
85.00
20.40
19.55
21.40
50.42
50.42
68.50
75.67
80.54
39.00
40.10
45.00
39.00
43.03
17.16
17.12
19.40
18.80
25.96
25.96
24.35
23.97
20.50
32.13
96.40
31.38
23.96
26.55
92.48
69.66
77.32
92.48
90.50
52.78
47.00
49.50
48.03
52.78
5.10
4.93
5.16
5.58
5.83
8.37
8.81
8.47
5.83
8.15
41.90
9.06
8.15
9.70
53.97
53.97
74.85
74.51
76.98
48.75
47.91
56.39
48.75
45.75
6.37
5.96
6.10
6.08
10.83
10.83
10.81
10.78
8.07
15.95
47.87
15.66
10.76
11.28
91.52
76.46
74.48
91.52
89.40
56.80
57.71
60.75
61.43
56.80
1,914,071
1,268,989
1,221,755
1,139,543
1,432,670
1,605,502
1,386,168
1,398,368
1,343,589
1,373,958
557,193
1,755,594
1,719,845
1,401,226
409,457
372,200
321,627
417,208
534,115
258,827
282,548
267,042
245,275
241,197
(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 ADS 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.
2015
January
February
March
April 22
2014
First quarter
Second quarter
Third quarter
Fourth quarter
2013
First quarter(1)
Price in U.S. dollars per ADS
Low
High
Average daily
trading volume
4.86
4.88
5.15
5.56
5.86
8.39
8.86
8.11
5.86
41.60
9.33
6.39
5.90
6.11
6.00
10.93
10.83
10.93
10.86
8.56
48.63
15.88
3.920.716
2,682,100
2,402,920
2,131,500
2,554,714
2,781,129
2,281,039
2,197,585
2,965,438
490,280
1,649,436
Second quarter(2)
Third quarter
Fourth quarter
2012
First quarter
Second quarter
Third quarter
Fourth quarter
2011
First quarter
Second quarter
Third quarter
Fourth quarter
8.38
9.76
41.60
56.62
56.62
68.90
74.49
78.16
46.35
48.60
56.91
46.35
46.74
10.82
11.45
48.63
91.48
76.86
80.18
91.48
88.35
62.63
58.74
62.63
62.07
56.66
2,055,875
1,725,844
490,280
311,242
325,938
328,410
316,824
321,333
263,370
297,927
284,122
263,200
215,152
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(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.
B. Plan of Distr ibution
Not applicable.
C. Mar kets
Tr ading on the Br azilian Stock Exchange
The preferred shares and common shares are traded on the BM&FBovespa, the only Brazilian stock exchange that trades shares. Trading on
the BM&FBovespa is limited to brokerage firms and a limited number of authorized entities. The CVM and BM&FBovespa have discretionary
authority to suspend trading in shares of a particular issuer under certain circumstances.
Trading on the BM&FBOVESPA is conducted between 10:00 a.m. and 5:00 p.m. or from 11:00 a.m. to 6:00 p.m. (during daylight savings
time in Brazil). The BM&FBOVESPA also permits trading from 5:30 p.m. to 6:00 p.m. or from 6:30 p.m. to 7:00 p.m. (during daylight savings
time in Brazil) during a different trading period called the “after market”. Trading during 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 (i) for a period of 30 minutes whenever the index of this stock exchange falls more than 10%
from the index registered for the previous day; (ii) for one hour if the index of this stock exchange falls 15% or more from the index registered for
the previous day, after the reopening of trading; and (iii) for a certain period of time to be defined by the BM&FBovespa, if the index of this stock
exchange falls 20% or more from the index registered for the previous day, after the reopening of trading. The minimum and maximum price is
based on a reference price for each asset, which will be the previous session’s closing quote, when considering the asset at the beginning of the
day before the first trade, or the price of the day’s first trade. The asset’s reference price will be altered during the session if there is an auction
sparked by the intraday limit being breached. In this case the reference price will become whatever results from the auction.
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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 2014, the
BM&FBOVESPA had a total market capitalization of approximately US$844.5 million (R$2.2 billion) and an average daily trading volume of
US$3.1 million (R$7.3 million). The top ten stocks in terms of 2014 trading volume accounted for approximately 46.3% of all shares traded on
the BM&FBOVESPA as of December 31, 2014. As of December 31, 2014, we accounted for approximately 0.5% 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. 4,373/2014, which requires that
securities held by non‑Brazilian holders be maintained in the custody of financial institutions authorized by the Central Bank and by the CVM or
in deposit accounts with financial institutions. In addition, Resolution No. 4,373/2014 requires non‑Brazilian holders to restrict their securities
trading to transactions on the 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. 4,373/2014 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. 4,373/2014.
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:
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;
limit the term of all members of the board of directors to two years;
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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:
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. 6,385/1976 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.
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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 Shar eholder s
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Shar e Capital
Not applicable.
B. Memor andum and Ar ticles 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.
Cor por ate Pur poses
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.
Dir ector s’ Power s
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”.
Descr iption of Common Shar es
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 8A. Financial Statements and Other Financial
Information—Dividends and Dividend Policy” for a more complete description of payment of dividends and other distributions on our common
shares. In addition, upon any liquidation of our Company, our common shares are entitled to our remaining capital after paying our creditors in
proportion to their ownership interest in us.
In principle, a change in shareholder rights, such as the reduction of the compulsory minimum dividend, is subject to a favorable vote of the
shareholders representing at least one half of our voting shares. Under some circumstances that may result in a change in the shareholder rights,
such as the creation of preferred shares, Brazilian Corporate Law requires the approval of a majority of the shareholders who would be adversely
affected by the change attending a special meeting called for such reason. It should be emphasized, however, that our 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:
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:
staggered terms for directors;
131
cumulative voting, except as described below; or
measures that could prevent a takeover attempt.
However, under the laws of the State of São Paulo, the State is required to own at least a majority of our outstanding common shares.
According to Brazilian Corporate Law and its regulations, shareholders representing at least 10 percent of our capital, may request that a
multiple voting procedure be adopted to entitle each share to as many votes as there are board members and to give each shareholder the right to
vote cumulatively for only one candidate or to distribute their votes among several candidates. Pursuant to Brazilian Corporate Law, shareholder
action must be taken at a shareholders meeting, duly called for and not by written consent.
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.
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:
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;
creating preferred shares or increasing an existing class of preferred shares without maintaining the existing ratio with the
remaining class of preferred shares, unless when already set forth in or authorized by the bylaws;
132
to transform into another type of company;
to transfer all of our shares to another company or to receive shares of another company in order to make the company whose shares
are transferred a wholly owned subsidiary of such company, known as incorporação de ações; or
to acquire control of another company at a price which exceeds the limits set forth in Brazilian Corporate Law.
The right of withdrawal lapses 30 days after publication of the minutes of the shareholders’ meeting that approved a corporate action
described above. We would be entitled to reconsider any action giving rise to withdrawal rights within 10 days following the expiration of such
rights if the withdrawal of shares of dissenting shareholders would jeopardize our financial condition. Brazilian Corporate Law allows
companies to redeem their shares at their economic value, subject to the provisions of their bylaws and certain other requirements. Our bylaws
currently do not provide that our capital stock will be redeemable at its economic value and, consequently, any redemption pursuant to Brazilian
Corporate Law would be made based on the book value per share, determined on the basis of the last balance sheet approved by the shareholders.
However, if a shareholders’ meeting giving rise to redemption rights occurred more than 60 days after the date of the last approved balance sheet,
a shareholder would be entitled to demand that his or her shares be valued on the basis of a new balance sheet dated within 60 days of such
shareholders’ meeting.
In 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.
Conver sion Right
Not applicable because our capital stock is only comprised of common shares.
Special and Gener al Meetings
Unlike the laws governing corporations incorporated under the laws of the United States’ state of Delaware, the Brazilian corporate law does
not allow shareholders to approve matters by written consent obtained as a response to a consent solicitation procedure. All matters subject to
approval by the shareholders must be approved in a general meeting, duly convened pursuant to the provisions of Brazilian corporate law.
Shareholders may be represented at a shareholders’ meeting by attorneys‑in‑fact who are (i) shareholders of the corporation, (ii) a Brazilian
attorney, (iii) a member of management or (iv) a financial institution.
General shareholders’ meetings shall be called, convened and deliberated under Brazilian Corporate Law to address all matters of interest to
the company. General shareholders’ meetings may be called by publication of a notice in the Diário Oficial do Estado de São Paulo and in a
newspaper of general circulation in our principal place of business, and the first call should be made at least 15 days prior to the meeting. In our
case, the first call is made 30 days in advance due the issuance of ADRs, as recommended by the CVM. The second call should be made at least 8
days in advance, if quorum is not reached, pursuant to the Brazilian Corporate Law”.
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.
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A special shareholders’ meeting may be held concurrently with the annual shareholders’ meeting and at other times during the year. Our
shareholders may take the following actions, among others, exclusively at shareholders’ meetings:
election and dismissal of the members of our board of directors and our fiscal committee, if the shareholders have requested the
setup of the latter;
approval of the aggregate compensation of the members of our board of directors and board of executive officers, as well as the
compensation of the members of the fiscal committee, 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 Secur ities
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 Tr eatment Pr ovisions
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. 119/1973, which created our Company, requires the State to hold the majority of our shares at all times.
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Reser ves
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. The amount of R$124.3 million referring to the balance of December 2013 was fully capitalized in 2014.
Investment Reserve
Our investment reserve is comprised specifically of internal funds for expansion of water and sewage service systems. As of December 31,
2014, we had an investment reserve of R$2,914.0 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, 2014, the balance of our legal reserve was R$758.1 million.
Ar bitr ation
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. Mater ial Contr acts
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 Contr ols
The right to convert dividend or interest payments and proceeds from the sale of shares into foreign currency and to remit such amounts
outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, that the relevant
investments have been registered with the Central Bank and the CVM. Such restrictions on the remittance of foreign capital abroad may hinder
or prevent the custodian for our common shares represented by our ADSs or the holders of our common shares from converting dividends,
distributions or the proceeds from any sale of these shares into U.S. dollars and remitting the U.S. dollars abroad. Holders of our ADSs could be
adversely affected by delays in, or refusal to grant any, required government approval to convert Brazilian currency payments on the common
shares underlying our ADS and to remit the proceeds abroad.
Accordingly, the proceeds from the sale of ADSs by ADR holders outside Brazil are not subject to Brazilian foreign investment controls,
and holders of the ADSs are entitled to favorable tax treatment under certain circumstances. 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”.
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Since March 30, 2015, CMN Resolution No. 4,373/2014, of September 29, 2014, has been in full effect, providing for the issuance of
depositary receipts in foreign markets in respect to shares of Brazilian issuers. The CMN Resolution No. 4,373/2014, among other acts, revoked
CMN Resolution No. 1,927/1992, of May 18, 1992, CMN Resolution No. 1,289/1987, of March 20, 1987, and CMN Resolution No.
2,689/2000, of January 26, 2000. Under Brazilian law relating to foreign investment in the Brazilian capital markets, foreign investors registered
with the CVM and acting through authorized custodial accounts managed by local agents may buy and sell shares on Brazilian stock exchanges
without obtaining separate certificates of registration for each transaction. Foreign investors may register their investment under Law No.
4,131/1962, of September 3, 1962, as amended, or under CMN Resolution No. 4,373, of September 20, 2014.
The Law No. 4,131/1962 is the main legislation concerning investment of direct foreign capital and foreign direct equity in companies based
in Brazil. It is applicable to any amount of capital that enters Brazil in the form of foreign currency, goods or services. Foreign investment
portfolios are regulated by CMN Resolution No. 4,373/2014, CVM Instruction No. 559/2015, of March 27, 2015, which regulates the approval
of ADR programs by the CVM, and CVM Instruction No. 560/2015, of March 27, 2015, which regulates the filing of transactions and disclosure
of information by foreign investors, all reflecting the provisions of CMN Resolution No. 4,373/2014.
As of January 1, 2016, foreign investors that intend to be registered with the CVM shall fulfill the requirements under CVM Instruction No.
560/2015. In accordance with CMN Resolution No. 4,373/2014 the definition of a foreign investor includes individuals, legal entities, mutual
funds and other collective investment entities, domiciled or headquartered abroad. In order to become a 4,373 Holder, a foreign investor must:
appoint at least one representative in Brazil, with powers to perform actions relating to its investment;
appoint an authorized custodian in Brazil for its investments, which must be a financial institution or entity duly authorized by the
Central Bank or CVM;
appoint a tax representative in Brazil;
through its representative in Brazil, register itself as a foreign investor with the CVM;
through its representative in Brazil, register its foreign investment with the Central Bank; and
be registered with the Federal Tax Authority (Secretaria da Receita Federal), or the “RFB”, pursuant to RFB Normative
Instruction No. 1,470/2014, of May 30, 2014, and RFB Normative Instruction No. 1,548/2015, of February 13, 2015.
E. Taxation
This summary contains a description of certain Brazilian and U.S. federal income tax consequences of the purchase, ownership and
disposition of common shares or ADSs by a holder.
The summary is based upon the tax laws of Brazil and the federal income tax laws of the United States as in effect on the date of this annual
report, which laws are subject to change, possibly with retroactive effect, regarding the U.S. federal income tax, and to differing interpretations.
Holders of common shares or ADSs should consult their own tax advisors as to the Brazilian, U.S. or other tax consequences of the purchase,
ownership and disposition of common shares or ADSs, including, in particular, the effect of any non‑Brazilian, non‑U.S., state or local tax laws.
Although there presently is no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had
discussions in the past regarding such a treaty. No assurance can be given, however, as to if or when a treaty will enter into force or how it will
affect the U.S. holders of common shares or ADSs.
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Br azilian Tax Consider ations
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 CMN Resolution 4,373/2014, as a 4,373 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.
Beginning in 2008, the Brazilian accounting rules were significantly modified in order to align them with IFRS. After the issuance of such
new rules, a transitory tax regime (regime tributário de transição), or RTT, was created mainly to ensure neutrality of the new accounting rules in
connection with the calculation and payment of corporate taxes on income. Thus, according to the RTT, Brazilian companies had, only for
purposes of calculation of their taxable profit, to use the accounting rules and criteria that existed until December 2007.
As a result of the application of the RTT, the accounting profit of a Brazilian company might be significantly higher (or lower) than its
taxable profit. Although this specific matter has not been expressly regulated by law, the Brazilian tax authorities issued a normative instruction
stating that the amount of dividends paid in excess of the profit of a company determined as per the accounting rules and criteria that existed
until December 2007 should be subject to taxation.
On April 14, 2014, Law No. 12,973 was issued to, among other, terminate the Transitory Regime (RTT) and regulate how corporate taxable
income should be assessed taking as a starting point the accounting profit calculated according to the new accounting rules introduced as from
2008. Such Law states that dividends related to all accounting profits generated between January 2008 and 31 December 2013 in excess of the
established methods and criteria in force in 31 December, 2007, are not subject to withholding tax, and does not integrate the calculation of
income tax and social contribution. With reference to 2014, the law is not clear, but tax authorities state that dividends paid in excess of the
profit of a company determined as per the accounting rules and criteria that existed until December 2007 should be subject to withholding
income tax at the rate of 15%, or 25% if the non-Brazilian holder is domiciled in a country or location that does not impose income tax or where
the maximum income tax rate is lower than 20% (“Nil or Low Taxation Jurisdiction”). As of 2015, in view of the termination of the RTT, there
would be no differences between the accounting and the taxable profit, so that dividends generated since 2015 should be fully paid with no
Brazilian withholding tax implications.
Taxation of Gains
Gains realized on disposition of common shares are subject to income tax in Brazil, regardless of whether the sale or the disposition is made
by a non‑Brazilian holder to a resident or person domiciled in Brazil. This is due to the fact that the common shares can be considered assets
located in Brazil for purposes of Law No. 10,833/2003.
Thus, gains, for purposes of taxation of gains earned in a sale or disposition of common shares carried out on a Brazilian stock exchange
(which includes transactions carried out on the organized over‑the‑counter market):
are exempt from income tax when assessed on a non‑Brazilian holder that (1) has registered its investment in Brazil with the
Central Bank under the rules of CMN Resolution No. 4,373/2014, and (2) is not a resident of or domiciled in a Nil or Low
Taxation Jurisdiction; or
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in all other cases, including gains realized by a Non-Resident Holder that is not a 4,373 Holder and/or is a resident of or domiciled
in a Nil or Low Taxation Jurisdiction, subject to income tax at a 15.0% rate. In these cases, a withholding income tax at a rate of
0.005% will be applied and can later 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 at a rate of 15%, except for Nil or Low Taxation Jurisdiction, which, in this case, would be 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.
For Brazilian purposes, as of January 2009, a Nil or Low Taxation Jurisdiction 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. See “—Discussion on Low or Nil Taxation Jurisdictions”.
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 CMN
Resolution No. 4,373/2014 will continue in the future or that it will not be changed in the future. Reductions in the rate of tax provided for by
Brazil’s tax treaties do not apply to the tax on gains realized on sales or exchange of common shares.
Sale of ADSs by non-Brazilian holder to another non-Brazilian holder
Gains realized outside Brazil by a non‑Brazilian holder on the disposition of ADSs to another non‑Brazilian holder are not currently subject
to Brazilian tax. However, according to certain interpretations of Law No. 10,833/2003 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.
Exchange of ADSs for common shares
Although there is no clear regulatory guidance, the withdrawal of ADSs in exchange for common shares is not subject to Brazilian income
tax to the extent that, as described above, ADSs do not fall within the definition of assets located in Brazil for the purposes of Law No. 10,833.
Upon receipt of the underlying common shares in exchange for ADSs, non-Brazilian holders may also elect to register with the Central Bank
the U.S. dollar amount of such preferred shares or common shares as a foreign portfolio investment under Resolution No. 4,373/2014 or as a
foreign direct investment under Law No. 4,131/1962.
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Exchange of common shares for ADSs
With reference to the deposit of common shares in exchange for ADSs, the difference between the acquisition cost of the common shares and
the market price of the common shares may be subject to Brazilian income tax at the rate of 15% or 25%, in case the non‑Brazilian holder is
located in a Nil or Low Taxation Jurisdiction. In some circumstances, there may be arguments to claim that this taxation is not applicable in the
case of a non-Brazilian holder that is a 4,373 Holder and is not a resident in a Nil or Low Taxation Jurisdiction.
Discussion on Low or Nil Taxation J urisdictions
On June 24, 2008, Law No. 11,727/2008 was enacted defining the concept of a “privileged tax regime” in connection with transactions
subject to transfer pricing and thin capitalization rules. In this conception, privileged tax regimes are more comprehensive than tax havens. A
“privileged tax regime” is considered to be a jurisdiction which: (i) does not tax income or taxes income at a maximum rate lower than 20.0%;
(ii) grants tax advantages to a non‑resident entity or individual (a) without requiring substantial economic activity in the jurisdiction of such
non‑resident entity or individual or (b) to the extent such non‑resident entity or individual does not conduct substantial economic activity in the
jurisdiction of such non‑resident entity or individual; (iii) does not tax income generated abroad, or imposes tax on income generated abroad at a
maximum rate lower than 20.0%; or (iv) restricts the ownership disclosure of assets and ownership rights or restricts disclosure about economic
transactions.
Notwithstanding the fact that the “privileged tax regime” concept was enacted in connection with Brazilian transfer pricing and thin
capitalization rules, there is no assurance that Brazilian tax authorities will not attempt to apply the concept of privileged tax regimes to other
types of transactions, such as investments in the Brazilian financial and capital markets. We recommend that prospective investors consult their
own tax advisors from time to time to verify any possible tax consequences of Law No. 11,727/2008.
Interest Attributed to Shareholders’ Equity
According to Brazilian laws and our bylaws, we may opt to distribute income as interest attributed to shareholders’ equity as an alternative
to the payment of dividends.
Distribution of an interest on equity charge attributed to shareholders’ equity with respect to common shares or ADSs as an alternative form
of payment to shareholders, including non‑Brazilian holders of common shares or ADSs, is subject to Brazilian withholding income tax at the
rate of 15% or 25%, in case of a Nil or Low Taxation Jurisdiction holder. Such payments, subject to certain limitations and requirements, are
deductible for Brazilian income tax purposes. This interest is limited to the daily pro rata variation of the Federal Government’s long-term
interest rate, as determined by the Central Bank from time to time, and cannot exceed the greater of:
(a) 50% of net income (after the social contribution on net profits and before the provision for corporate income tax, and the amounts
attributable to shareholders as interest on net equity) for the period with respect to which the payment is made; or
(b) 50% of the sum of retained earnings and earnings reserves as of the date of the beginning of the period with respect to which the
payment is made.
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 foreign exchange transactions (“IOF /Exchange”)
Pursuant to Decree No. 6,306/2007, dated December 14, 2007, as amended, or Decree No. 6,306/2007, the conversion of Brazilian currency
into foreign currency (e.g., for purposes of paying dividends and interest) and the conversion of foreign currency into Brazilian currency may be
subject to the Tax on Foreign Exchange Transactions or IOF/Exchange. Currently, for most exchange transactions, the rate of IOF/Exchange is
0.38%. However, exchange transactions carried out for the inflow of funds in Brazil for investments in the Brazilian financial and capital market
made by a foreign investor (including a Non-Resident Holder, as applicable) are subject to IOF/Exchange at a 0%. The IOF/Exchange rate will
also be 0% for the outflow of funds from Brazil related to these types of investments, including payments of dividends and interest on
shareholders’ equity and the repatriation of funds invested in the Brazilian market.
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The Brazilian government may increase the rate of the IOF/Exchange to a maximum of 25.0% of the amount of the foreign exchange
transaction at any time, but such an increase would not apply retroactively.
Tax on transactions involving bonds and securities (“IOF /Bonds Tax”)
The IOF may also be imposed on any transactions involving bonds and securities, including those carried out on Brazilian futures and
commodities stock exchanges. As a general rule, the rate of this tax for transactions involving common shares or ADSs is currently zero. The
executive branch, 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. Feder al Income Tax Consider ations
The following discussion is a summary of certain U.S. federal income tax consequences of the acquisition, ownership and disposition of
common shares or ADSs as of the date hereof. This discussion applies only to a beneficial owner of common shares or ADSs that is a
“U.S. holder”. As used herein, the term “U.S. holder” means a beneficial owner of a common share or ADS that, for U.S. federal income tax
purposes, is:
an individual who is a citizen or resident of the United States;
a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the
laws of the United States, any state thereof or the District of Columbia;
an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
a trust if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the
authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury
Department regulations to be treated as a U.S. person.
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds common shares or ADSs, the tax treatment
of a partner will generally depend upon the status of the partner and the activities of the partnership. A U.S. holder that is a partner of a
partnership holding common shares or ADSs should consult its tax advisors.
Except where noted, this discussion deals only with common shares or ADSs held as capital assets within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended, or the Code, 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.
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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 on net investment income, state, local or
non‑U.S. tax consequences of acquiring, holding or disposing of common shares or ADSs.
ADSs
In general, for U.S. federal income tax purposes, U.S. holders of ADSs will be treated as the owners of the underlying common shares that are
represented by such ADSs. Deposits or withdrawals of common shares by U.S. holders for ADSs will not be subject to U.S. federal income tax.
However, the U.S. Treasury Department has expressed concerns that parties involved in transactions wherein depositary shares are pre‑released
may be taking actions that are inconsistent with the claiming of foreign tax credits by the holders of ADSs. Accordingly, the analysis of the
creditability of Brazilian income taxes described herein could be affected by future actions that may be taken by the U.S. Treasury Department.
Taxation of Dividends
The gross amount of distributions paid to a U.S. holder (including Brazilian taxes that are withheld, if any, and any payments of interest on
shareholders’ equity, as described above under “—Brazilian Tax Considerations”) will be treated as dividend income to the extent paid out of our
current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such income generally will be includable in
a U.S. holder’s gross income as ordinary income when actually or constructively received by the U.S. holder, in the case of common shares, or
when actually or constructively received by the Depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received
deduction allowed to corporations under the Code. To the extent that the amount of any distribution exceeds our current and accumulated
earnings and profits for a taxable year, the distribution will first be treated as a tax‑free return of capital to the extent of the U.S. holder’s adjusted
tax basis in the common shares or 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.
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 ADSs remain listed on the NYSE. Based on
existing guidance, however, it is not entirely clear whether dividends received with respect to the common shares (to the extent not represented
by ADSs) will be eligible for this treatment, because the common shares are not themselves listed on a U.S. exchange. U.S. holders should
consult their own tax advisors about the application of this preferential tax rate to dividends paid directly on common shares.
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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.
Passive F oreign 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, including in order to comply with additional annual filing requirements imposed under
legislation enacted in 2010. 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 (currently
at a rate of 28 percent) 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.
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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 Exper ts
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.
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 reviewed quarterly financial
statements in English for each of the first three quarters of the fiscal year. We also furnish to the depositary English translations or summaries of
all notices of shareholders’ meetings and other reports and communications that are made generally available to holders of common shares.
I. Subsidiar y Infor mation
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Mar ket 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 5 to our financial statements as of December 31, 2014 and 2013 and for
the years ended December 31, 2014, 2013 and 2012 included elsewhere in this annual report.
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Exchange Rate Risk
As of December 31, 2014 and 2013, R$4,346.3 million and R$3,698.6 million, or 40.3% and 39.1% , 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, 2014, 2013 and 2012 from each hypothetical instantaneous and unfavorable 1% change in the U.S. dollar and yen against the real
would have been approximately R$43.5 million, R$37.0 million and R$32.3 million, respectively. Consistent with these estimates, a
hypothetical instantaneous and unfavorable 10% change in this exchange rate would have resulted in losses of approximately R$434.6 million,
R$369.9 million and R$323.1 million as of December 31, 2014, 2013 and 2012, respectively.
The fluctuation of the real in relation to the U.S. dollar and yen for the years ended December 31, 2014, 2013 and 2012 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
2014
Year ended December 31,
2013
(in percentages)
14.6
(5.9)
13.4
(0.4)
2012
8.9
(2.4)
We have not utilized derivative financial instruments in the years ended December 31, 2014, 2013 and 2012.
For further information regarding foreign currency risk, see Note 5.1(a) of our 2014 financial statements.
As of December 31, 2014, 2013 and 2012, we had no short‑term indebtedness outstanding, other than the current portion of long‑term debt.
Interest Rate Risk
As of December 31, 2014 and 2013, R$1,585.2 million, or 14.7%, and R$1,653.9 million, or 17.5%, 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, 2014 and 2013, R$1,752.3 million, or 16.2%, and R$1,245.9 million, or 13.2%, respectively, of our total debt denominated in
reais was subject to interest rates based on the CDI. As of December 31, 2014 and 2013, R$1,967.1 million and R$1,617.7 million, 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, 2014 and 2013, 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$1,604.8 million and R$1,529.2 million as of December 31, 2014
and 2013, 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$107.9 million, R$94.5 million and
R$88.8 million if a hypothetical instantaneous and unfavorable change of 100 basis points in the interest rates applicable to financial liabilities
as of December 31, 2014, 2013 and 2012, respectively, had occurred. Consistent with these estimates, a hypothetical instantaneous and
unfavorable 1000 basis points change in these interest rates would have resulted in losses of approximately R$1,078.6 million, R$945.0 million
and R$887.5 million as of December 31, 2014, 2013 and 2012, 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.
144
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, 2014. For the foreign currency denominated obligations, these amounts have been
converted at the selling rates as of December 31, 2014 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 noncurrent 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, 2014
Expected maturity date
2015
2016
2017
2018 and
after
Total
Average
annual
interest rate
(in millions, except percentages)
1,604.8
-
-
-
1,604.8
120.7
105.2
94.9
638.6
9.0
166.3
56.0
16.3
114.0
115.6
26.9
235.0
21.9
157.6
48.7
379.0
117.9
131.3
38.0
735.1
22.7
206.1
49.3
-
1,207.0
1,098.7
1,300.4
1,232.6
709.7
1,397.8
143.6
429.1
1,422.3
919.9
924.7
7,179.7
1,585.2
1,061.8
1,557.6
1,752.3
482.7
1,952.3
1,073.9
1,320.0
10,785.8
8.9%
6.9%
13.0%
12.2%
2.2%
1.7%
3.3%
3.3%
UPR stands for Standard Reference Unit (Unidade P adrão Referência) and is equal to TR, which was 0.1053% per month as of December 31, 2014; CDI stands for Interbank
Deposit Rate (Certificado de Depósitos Interbancários), which was 11.57% per annum as of December 31, 2014; IGP‑M was 3.69% per annum as of December 31, 2014; TJLP
stands for Long‑term Interest Rate (Taxa de Juros a Longo P razo), published quarterly by the Central Bank, which was 5.0% per annum as of December 31, 2014.
The percentage of our indebtedness subject to fixed and floating interest rate is as follows:
Floating r ate debt:
Denominated in U.S. dollars
Denominated in reais
Fixed r ate debt:
Denominated in reais
Denominated in Yen
Denominated in U.S. dollars
Total
2014
18.1%
55.2%
4.5%
10.0%
12.2%
100.0%
As of December 31,
2013
16.0%
56.8%
4.0%
9.9%
13.3%
100.0%
2012
10.0%
61.3%
2.4%
10.1%
16.2%
100.0%
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Secur ities
Not applicable.
B. War r ants and Rights
Not applicable.
C. Other Secur ities
Not applicable.
D. Amer ican Depositar y Shar es
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.
F ees and Expenses
The following table summarizes the fees and expenses payable by holders of ADRs:
Persons depositing common shares or ADR holders must pay:
For:
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
Issuance of ADSs, including issuances resulting from a distribution of common
shares or rights or other property
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 $0.02 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
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
146
Payment of Taxes
The depositary may deduct the amount of any taxes owed from any payments to you. It may also sell deposited securities, by public or
private sale, to pay any taxes owed. You will remain liable if the proceeds of the sale are not sufficient to pay the taxes. If the depositary sells
deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any proceeds, or send to you any
property, remaining after it has paid the taxes.
Reimbursement of F ees
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 us is not necessarily tied to the amount of fees
the depositary collects from investors.
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 F ees Incurred in 2014
From January 1, 2014 to December 31, 2014, we received reimbursements in the amount of US$3,242,396.03 for standard out‑of‑pocket
maintenance costs for the ADRs, any applicable performance indicators relating to the ADR facility, marketing fees and legal fees.
147
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
PART II
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
A. Disclosur e Contr ols and Pr ocedur es
We carried out an evaluation under the supervision of and with the participation of our management, including our Chief Executive Officer
and Chief Financial 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, 2014.
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, 2014, 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 and Investor Relations Officer, as appropriate to allow timely decisions regarding required disclosure.
B. Management’s Repor t on Inter nal Contr ol over Financial Repor ting
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with IFRS, as issued by the IASB. Our internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of our assets, (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with IFRS, as issued by the IASB, and that our receipts and expenditures are being made
only in accordance with authorizations of our management and directors, and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our CEO and CFO, our management conducted an assessment of our internal control
over financial reporting as of December 31, 2014 based on the criteria established in “Internal Control —Integrated Framework” issued by COSO
in 2013.
As a result of the assessment described above, our management concluded that as of December 31, 2014, we did maintain effective internal
control over financial reporting based on the criteria established in “Internal Control — Integrated Framework” issued by COSO in 2013.
148
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 Repor t of the Register ed Public Accounting Fir m
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
To the Shar eholder s, Boar d of Dir ector s 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, 2014, based on criteria established in Internal Control - Integrated Framework (2013) 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 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.
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, 2014,
based on the criteria established in Internal Control - Integrated Framework (2013) 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 financial
statements as of and for the year ended December 31, 2014 of the Company and our report dated April 28, 2015 expressed an unqualified opinion
on those financial statements.
/s/ Deloitte Touche Tohmatsu Auditores Independentes
April 28, 2015
São Paulo, Brazil.
D. Changes in inter nal contr ol over financial r epor ting
There have been no changes in our internal control over financial reporting that occurred during the fiscal year ended December 31, 2014
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. [RESERVED]
A. Audit Committee Financial Exper t
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.
B. 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 and investor relations 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 2014, 108 whistle blowings were recorded, 79% of
which were verified and 21% are under investigation. Out of the total, 8% refer to misconduct, such as moral harassment, discrimination,
persecution and unfair treatment. During 2014, 43 of our employees or outsourced employees received penalties (8 warnings, 2 suspensions and
33 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.
C. Pr incipal Accountant Fees and Ser vices
Deloitte Touche Tohmatsu Auditores Independentes served as our independent registered public accounting firm for the years ended
December 31, 2014, 2013 and 2012. Deloitte Touche Tohmatsu Auditores Independentes’s activity began with the review of the Quarterly
Information (“ITRs”) reporting for the third quarter of 2012.
149
The following table presents the aggregate fees for professional services and other services rendered to us by Deloitte Touche Tohmatsu
Auditores Independentes in 2014 and 2013:
Audit Fees(1)
Audit‑Related Fees
Tax Fees
All Other Fees
Total
Year ended December 31,
2013
2014
(in millions of reais)
1.2
-
-
-
1.2
1.4
-
-
-
1.4
(1) Audit Fees are the fees billed by our independent auditors for the audit of our annual financial statements, reviews of interim financial statements and attestation services that
are provided in connection with statutory and regulatory filings or engagements.
Pr e‑appr oval policies and pr ocedur es
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 2013 and 2014, Deloitte Touche Tohmatsu Auditores Independentes did not provide non-audit services to us.
D. Exemptions fr om the Listing Standar ds for Audit Committees
None
E. Pur chases of Equity Secur ities by Issuer and Affiliated Pur chaser s
Not applicable.
F. Change in Registr ant’s Cer tifying Accountant
Not applicable.
G. Cor por ate Gover nance
Significant Differ ences between our Cor por ate Gover nance Pr actices and NYSE Cor por ate Gover nance Standar ds
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.
150
Major ity of Independent Dir ector s
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 10 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 nine 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 the
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 five members and five 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 two‑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.
151
Cor por ate Risks Management Committee
In 2009, our board of executive officers created the Corporate Risks Management Committee with responsibilities to: i) evaluate the
maximum amounts of risk that Management should incur in its operations in order to obtain planned results; ii) evaluate the identification,
measurement, treatment and processing of risks in action plans; iii) forward its statements, proposals and evaluations to the audit committee and
to the board of executive officers for review, as well as submit such statements, proposals and evaluations to the board of directors for approval.
The Corporate Risks Management Committee has a coordinator and consists of representatives from the following management divisions: CEO's
Office; Corporate Management; Technology, Enterprises and Environment; Metropolitan; Economics and Finance and Investor Relations; and
Regional Systems.
Nomination/Cor por ate Gover nance 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.
Shar eholder Appr oval 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.
Cor por ate Gover nance 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.
152
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.
Inter nal 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.
Anticor r uption Compliance
Law No. 12,846, of August 1, 2013 (the “Anticorruption Law”), as further regulated by Decree No. 8,420/2015, introduced the concept of
strict liability for legal entities involved in harmful acts against the public administration, as defined in the Anticorruption Law, subjecting the
violator to penalties both in administrative and civil law. Similar to the Foreign Corrupt Practices Act of the United States, to which we are also
subject, the Anticorruption Law considers that an effective implementation of Compliance Programs may be used to mitigate the administrative
penalties to be applied as a consequence of a harmful act against the public administration. In 2014, we analyzed our current compliance
practices and defined action plans based on the analysis of 2013 corporate corruption and fraud risks.
As a mixed capital company, our Compliance Program encompasses two distinct situations – active corruption and passive corruption – and
follows the recommendations of the Organization for Economic Cooperation and Development, the United Nations Office on Drugs and Crimes,
and the World Bank. Our program incorporates and focuses on high management, structural functioning, the provision of complaint hotlines,
monitoring of third-party relationships, governance and internal controls, risk management, training and communication.
Citizens’ Access to Infor mation at Sabesp
Federal Law No. 12,527/2011 (LAI), regulated by State Decree No. 58.052/2012, determines that government entities must create Citizen
Information Services – SIC units which receive and manage information requests from the public, and make available to citizens information
requested or otherwise provided the reasons for denial of such information requests.
In order to comply with LAI, we implemented the Citizen Information Service - SIC, structuring the internal flow of information to serve
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. We also made available at our website basic information
required by laws and the software to citizens to request information, according to the standards of the São Paulo State Government.
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.
H. Mine Safety Disclosur e
Not applicable.
153
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 Financial Statements”.
ITEM 19. EXHIBITS
Item
1.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.14
4.15
4.16
4.17
11.1
12.1
12.2
Descr iption
By‑laws of the Registrant (English translation) (incorporated by reference to the Form 6‑K filed on May 13, 2014).
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).
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).
Term of Agreement between the Registrant, the State of São Paulo and the DAEE, dated March 18, 2015 (English translation)
(incorporated by reference to the Form 6‑K filed on April 15, 2015).
Code of Ethics and Conduct dated June 1, 2014 (English translation) (incorporated by reference to the Form 6‑K filed on
July 24, 2014).
Certification of Jerson Kelman, 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.
13.1
13.2
Certification of Jerson Kelman, 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.
154
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.
SIGNATURES
COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO ‑
SABESP
By: /s/ Jerson Kelman
Name: Jerson Kelman
Title: Chief Executive Officer
By: /s/ Rui de Britto Álvares Affonso
Name: Rui de Britto Álvares Affonso
Title: Chief Financial Officer and Investor
Relations Officer
Date: April 28, 2015
155
Com panhia de Saneam ento B ásico do Estado de São Pau lo -
SAB ESP
Financial Statem ents as of
Decem ber 31, 2014 and 2013
and for the year s ended
Decem ber 31, 2014, 2013 and 2012
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENTS
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 accompanying statement of financial position of Companhia de Saneamento Básico do Estado de São
Paulo - SABESP (the “Company”) as of December 31, 2014 and 2013, and the related statements of income,
comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31,
2014. 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 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 audits provide a reasonable basis for our opinion.
In our opinion, such 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, 2014 and 2013, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2014, 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, 2014, based on the criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated April 28, 2015 expressed an unqualified opinion on the Company’s internal control over
financial reporting.
/s/ Deloitte Touche Tohmatsu Auditores Independentes
São Paulo, Brazil
April 28, 2015
F-2
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
S ta tem ent of Fina ncia l Pos ition a s of Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais
Assets
Current assets
Cash and cash equivalents
Trade accounts receivable
Accounts receivable from related parties
Inventories
Restricted cash
Recoverable taxes
Other accounts receivable
Total current assets
Noncurrent assets
Trade accounts receivable
Accounts receivable from related parties
Escrow deposits
Deferred income tax and social contribution
Water National Agency – ANA
Other accounts receivable
Investments
Investment properties
Intangible assets
Property, plant and equipment
Total noncurrent assets
Total assets
No te
7
9 (a)
10 (a)
8
17 (a)
9 (a)
10 (a)
18
11
12
13
14
15
De cem b e r 31,
2 014
Decem b er 31,
2 013
1,722,991
1,034,820
121,965
66,487
19,750
148,768
100,664
3,215,445
189,458
102,018
69,488
209,478
122,634
87,286
21,223
54,039
25,979,526
304,845
27,139,995
30,355,440
1,782,001
1,120,053
134,855
58,401
10,333
87,405
61,039
3,254,087
395,512
130,457
54,827
114,030
107,003
94,952
23,660
54,039
23,846,231
199,496
25,020,207
28,274,294
F-3
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
S ta tem ent of Fina ncia l Pos ition a s of Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais
Liab ilities and eq uity
Current liabilities
Trade payables and contractors
Current portion of long-term loans and financing
Accrued payroll and related charges
Taxes and contributions
Interest on shareholders' equity payable
Provisions
Services payable
Public-Private Partnership – PPP
Program Contract Commitments
Other liabilities
Total current liabilities
Noncurrent liabilities
Loans and financing
Deferred Cofins and PASEP
Provisions
Pension obligations
Public-Private Partnership – PPP
Program Contract Commitments
Other liabilities
Total noncurrent liabilities
Total liabilities
Equity
Capital stock
Capital reserve
Earnings reserves
Other comprehensive income
Total equity
Total equity and liabilities
No te
De cem b e r 31, 2 014
Decem b er 31,
2 013
16
17 (b)
22 (c)
19 (a)
21
14 (h)
14 (d) (iv)
16
19 (a)
20 (b)
14 (h)
14 (d) (iv)
22
F-4
323,513
1,207,126
387,971
74,138
214,523
625,092
318,973
38,047
189,551
101,642
3,480,576
9,578,641
129,351
595,255
2,729,598
330,236
18,208
189,172
13,570,461
275,051
640,940
314,926
115,382
456,975
631,374
323,208
20,241
77,360
116,924
2,972,381
8,809,134
129,849
549,008
2,327,016
322,267
88,678
145,160
12,371,112
17,051,037
15,343,493
10,000,000
-
3,694,151
(389,748)
13,304,403
30,355,440
6,203,688
124,255
6,736,389
(133,531)
12,930,801
28,274,294
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
S ta tem ent of Incom e for th e
Y ea r s end ed Decem ber 31, 2014 , 2013 a nd 2012
Am o unts in tho usands o f reais, unless o therwise indicate d
Note
2014
2013
2012
Ne t ope r ating r e ve nue
Operating cost
G r oss pr ofit
Selling expenses
Administrative expenses
Other operating income (expenses), net
Equity results
Ope r ating pr ofit b e for e financial r e sult
Financial expenses
Financial income
Foreign exchange result, net
Financial e xpe nse s, ne t
Pr ofit b e for e incom e tax and social contr ib ution
Income tax and social contribution
Current
Deferred
Pr ofit for the ye ar
Ear nings pe r shar e - b asic and dilute d (in r e ais)
25
26
26
26
28
12
27
27
27
18 (d)
18 (d)
23
F-5
11,213,216
(7,635,599)
11,315,567
(6,816,263)
10,737,631
(6,449,951)
3,577,617
4,499,304
4,287,680
(736,608)
(924,359)
(3,488)
(2,453)
(637,103)
(729,117)
3,296
2,465
(697,252)
(717,377)
(23,175)
(6,532)
1,910,709
3,138,845
2,843,344
(712,293)
422,732
(346,305)
(602,910)
386,110
(266,446)
(578,230)
333,129
(50,571)
(635,866)
(483,246)
(295,672)
1,274,843
2,655,599
2,547,672
(437,417)
65,557
(371,860)
902,983
1.32
(742,578)
10,538
(732,040)
1,923,559
2.81
(593,743)
(42,029)
(635,772)
1,911,900
2.80
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
S ta tem ent of Com p r ehens ive Incom e for th e
Y ea r s end ed Decem ber 31, 2014 , 2013 a nd 2012
Am o unts in tho usands o f reais
Note
2014
2013
2012
Profit for the year
902,983
1,923,559
1,911,900
Other comprehensive income
Items which will not be subsequently reclassified to the
statement of income:
Actuarial gains and (losses) on defined benefit plans
Total comprehensive income for the year
20 (b)
F-6
(256,217)
325,284
(457,862)
(256,217)
646,766
325,284
(457,862)
2,248,843
1,454,038
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
S ta tem ent of Ch a nges in Eq u ity for th e
Y ea r s end ed Decem ber 31, 2014 , 2013 a nd 2012
Am o unts in tho usands o f reais, unless o therwise indicate d
Earn i n gs Re se rv e s
B alan ce s as of De ce m be r 31, 2011
Net income for the year
Actuarial gains (losses)
Total comprehensive income for the year
Legal reserve
Interest on shareholders’ equity (R$1.99 per
share)
2011 additional dividends, approved (R$1.26
per share)
Additional proposed dividends
Transfer to investments reserve
B alan ce s as of De ce m be r 31, 2012
Net income for the year
Actuarial gains (losses)
Total comprehensive income for the year
Legal reserve
Interest on shareholders’ equity (R$0.6684
per share)
2012 additional dividends, approved (R$1.99
per share)
Additional proposed dividends
Withholding income tax on interest on
shareholders’ equity
attributed as minimum mandatory dividends
Transfer to investments reserve
B alan ce s as of De ce m be r 31, 2013
Note
Cap i tal
stock
6,203,688
-
-
-
-
-
-
-
-
6,203,688
-
-
-
-
-
-
-
-
-
6,203,688
Cap i tal
Re se rv e
124,255
-
-
-
-
-
-
-
-
124,255
-
-
-
-
-
-
-
-
-
124,255
Le gal
Re se rv e In v e stm e n ts
Re se rv e
3,408,591
521,219
-
-
-
-
-
-
-
95,595
-
-
-
-
-
-
1,282,028
-
4,690,619
616,814
-
-
-
-
-
-
-
96,178
-
-
-
-
-
-
-
-
712,992
-
1,289,916
5,980,535
A d d i ti on al
d i v i d e n d s
p rop ose d Re tai n e d
e arn i n gs
-
1,911,900
-
1,911,900
(95,595)
288,143
-
-
-
-
-
(288,143)
80,201
-
(80,201)
- (1,282,028)
-
1,923,559
-
1,923,559
(96,178)
80,201
-
-
-
-
-
(80,201)
80,620
(37,758)
-
- (1,289,916)
-
42,862
20(b)
22 (e)
22 (c)
22 (c)
Net income for the year
Actuarial gains (losses)
Total comprehensive income for the year
Legal reserve
Interest on shareholders’ equity (R$0.3138
per share)
2013 additional dividends, approved
(R$0.6684 per share)
20
(b)
22 (e)
22 (c)
Additional proposed dividends
Withholding income tax on interest on
shareholders’ equity
attributed as minimum mandatory dividends
22 (c)
Capitalization of reserves
Transfer to investments reserve
B alan ce s as of De ce m be r 31, 2014
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,796,312
-
10,000,000
-
(124,255)
-
-
-
-
-
-
-
-
-
-
(3,672,057)
605,530
2,914,008
-
-
-
-
-
(42,862)
37,846
(15,844)
-
-
22,002
902,983
-
902,983
(45,149)
(214,458)
-
(37,846)
-
-
(605,530)
-
-
-
-
45,149
-
-
-
-
-
-
758,141
F-7
Oth e r
Com p re h e n si v e
In com e
Total
(953) 10,544,943
-
(457,862)
(457,862)
-
1,911,900
(457,862)
1,454,038
-
(454,076)
-
(454,076)
(456,845)
-
(80,620)
-
-
-
(456,845)
(80,201)
-
-
(288,143)
-
-
-
-
(458,815) 11,256,762
-
325,284
325,284
325,284 2,248,843
-
1,923,559
-
(37,758)
-
-
-
(133,531) 12,930,801
-
(256,217)
(256,217)
-
-
-
-
902,983
(256,217)
646,766
-
(214,458)
(42,862)
-
(15,844)
-
-
-
-
(389,748) 13,304,403
-
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
S ta tem ent of Ca s h Flow s for th e
Y ea r s end ed Decem ber 31, 2014 , 2013 a nd 2012
Am o unts in tho usands o f reais
C ash flo w fr o m o per ating ac tivities
Pr o fit befo r e inc o m e tax and so c ial c o ntr ibutio n
Adjustm ents fo r :
Depreciation and amortization
Residual value of property, plant and equipment and intangible assets written-off
Allowance for doubtful accounts
Provisions and inflation adjustment
Interest calculated on loans and financing payable
Inflation adjustment and foreign exchange gains (losses) on loans and financing
Interest and inflation adjustment losses
Interest and inflation adjustment gains
Financial charges from customers
Margin of fair value on intangible assets arising from concession
Provision for Consent Decree (TAC)
Indemnities receivable
Equity results
Provision from São Paulo agreement
Provision for defined contribution plan – SABESPREV MAIS
Pension obligations
Other adjustments
C hanges in assets
Trade accounts receivable
Accounts receivable from related parties
Inventories
Recoverable taxes
Escrow deposits
Other accounts receivable
C hanges in liabilities
Trade payables and contractors
Services payable
Accrued payroll and related charges
Taxes and contributions payable
Deferred Cofins/Pasep
Provisions
Pension obligations
Other liabilities
C ash gener ated fr o m o per atio ns
Interest paid
Income tax and social contribution paid
Dec em ber 3 1, 2014
Dec em ber 3 1, 2013
Dec em ber 3 1,
2012
1,274,843
2,655,599
2,547,672
1,004,471
48,248
139,589
236,122
379,489
443,414
17,900
(36,227)
(195,948)
(62,520)
52,008
-
2,453
(23,306)
8,395
289,294
43,543
3 ,621,768
363,343
42,670
(8,699)
(148,578)
4,528
(47,590)
(85)
19,071
21,037
28,383
(498)
(196,157)
(172,820)
(6,946)
3 ,519,427
(603,563)
(435,612)
871,073
28,498
103,864
202,730
390,039
340,492
18,401
(7,671)
(234,138)
(50,248)
22,518
-
(2,465)
3,168
9,167
260,003
(33,576)
4,577,454
(11,515)
5,586
(6,133)
31,016
(1,669)
(13,868)
(15,454)
(65,883)
47,594
(146,664)
6,118
(211,502)
(158,442)
(59,211)
3 ,977,427
(533,362)
(666,883)
738,525
12,059
192,236
201,196
404,196
85,122
24,553
(12,862)
(171,481)
(50,072)
57,332
60,295
6,532
2,466
5,728
213,747
34,772
4,3 52,016
56,003
60,450
(8,858)
(29,758)
1,020
(77,613)
(16,898)
5,975
(33,502)
(47,800)
9,625
(583,871)
(140,115)
(53,086)
3 ,493 ,588
(589,189)
(561,158)
Net c ash gener ated fr o m o per ating ac tivities
2,480,252
2,777,182
2,3 43 ,241
C ash flo w s fr o m investing ac tivities
Acquisition of intangibles
Restricted cash
Investment increase
Purchases of tangible assets
(2,658,857)
(2,305,031)
(2,008,699)
(9,417)
(16)
(89,451)
54,644
(369)
(30,743)
34,752
(5,372)
(17,377)
Net c ash used in investing ac tivities
(2,757,741)
(2,281,499)
(1,996,696)
C ash flo w s fr o m financ ing ac tivities
Lo ans and financ ing
Proceeds from loans
Payments of loans
Payment of interest on shareholders' equity
Public-Private Partnership – PPP
Program Contract Commitments
Net c ash gener ated by (used in) financ ing ac tivities
1,258,101
(529,535)
(467,469)
(4,189)
(38,429)
218,479
1,779,529
(1,780,673)
(498,669)
(13,809)
(116,034)
(629,656)
1,620,852
(1,518,240)
(578,705)
(40,285)
(56,272)
(572,650)
Dec r ease in c ash and c ash equivalents
(59,010)
(13 3 ,973 )
(226,105)
Repr esented by:
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Dec r ease in c ash and c ash equivalents
1,782,001
1,722,991
(59,010)
1,915,974
1,782,001
(13 3 ,973 )
2,142,079
1,915,974
(226,105)
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
1 Op e r ational conte xt
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 and
sewage services 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, in a
sustainable and competitive manner, with excellence in customer service.
On December 31, 2014, the Company operated water and sewage services in 364 municipalities of the State of São Paulo. Most of
these municipalities operations are based on 30-year concession, program and services contracts. The Company has two partial
contracts with the municipality of Mogi das Cruzes; however, since most of municipality is serviced by wholesale, it was not included
in the 364 municipalities. On December 31, 2014, the Company had 366 contracts.
SABESP is not temporarily operating in some municipalities due to judicial orders. The lawsuits in progress refer to Álvares Florence,
Cajobi, Embaúba, Iperó and Macatuba, and the carrying amount of these municipalities' intangible assets was R$11,328 as of
December 31, 2014 (R$11,351 as of December 31, 2013).
As of December 31, 2014, 54 concession agreements had expired and are being negotiated. From 2015 to 2030, 38 concession
agreements will expire. Management believes that concession agreements 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, 2014, 274
program and services contracts were signed (266 contracts on December 31, 2013).
As of December 31, 2014, the carrying amount of the underlying assets used in the concessions of the municipalities under
negotiation totaled R$6,182,431, accounting for 23.80% of total, and the related revenue for the year then ended totaled R$1,951,962
on December 31, 2014, accounting for 16.51% of total.
The Company's operations are concentrated in the municipality of São Paulo, which represents 49.42% of the gross revenues on
December 31, 2014 (51.75% in December 2013) and 42.29% of intangible assets (42.46% in December 2013).
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
On June 23, 2010, the State of São Paulo through its Governor, the Municipality of São Paulo represented by its mayor, SABESP as
intervening and consenting party 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:
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, 2014, the carrying amount of the municipality
of Santos’ intangible assets was R$205,261 (R$340,530 in December 2013) and gross revenue in the year ended December 31, 2014
was R$231,493 (R$249,393 in December 2013).
Article 58 of Law 11,445/07 determines 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 12,693 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
8,987/95 and 11,445/07, 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 under the ticker symbol SBSP3
since April 2002 and on the New York Stock Exchange (NYSE) as American Depositary Receipts (“ADRs”) Level III, under the SBS
code, since May 2002. In 2007, SABESP adhered to the Corporate Sustainability Index, or ISE of BM&FBovespa, which reflects the
high level of commitment with sustainable development and social practices.
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.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Water shortage – SABESP’s operations have been influenced by record high temperatures seen in the metropolitan region of São
Paulo, the lowest rainfalls and water inflow over the past 84 years at the reservoirs comprising the Cantareira System, whose level is
below the historical series. At the early stage of water shortage, these reservoirs directly supplied approximately 8.8 million people. In
order to deal with this situation and maintain a non-stop supply, SABESP is:
catching water from the Cantareira System’s technical reserve, i.e., the water availability below the capture by gravity;
adopting new economic incentives to stimulate the Greater São Paulo’s households to reduce water consumption;
relocating water between the reservoirs in order to supply approximately 2.5 million consumers located in regions historically
supplied by the Cantareira System;
intensifying advertising campaigns for the rational use of water;
investing in operating measures to reduce losses, by expanding sectorization and controlling nighttime pressure in the
network;
anticipating investments to increase water security.
It is worth mentioning that water reservation capacity relies on several factors, such as rainfalls, temperature and atmospheric
humidity, as well as the type and soil humidity in water sources regions.
The water shortage in 2014 and its persistence in 2015 also impacted the Company financially. As a result, since 2014 up to date, the
Company has taken decisions to minimize these effects, including rearrangement of investments, expense budget reduction,
negotiation of overdue credits (mainly with the São Paulo State government and municipalities serviced on a wholesale basis),
implementation of contingency tariff, request for extraordinary tariff revision and other actions.
The Company’s Management expects the funds available in cash on December 31, 2014, totaling R$1,722,991, the operating cash
generation estimated for 2015 and the lines of credit available for investments are sufficient to meet its short-term liabilities and not
compromise the actions necessary to overcome the water shortage, preserving our consumers’ supply.
Refers to other disclosures about this issue in Note 25 – operating income and Note 31 - events after the reporting period.
The financial statements were approved by the Management on April 28, 2015.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
2 Basisofp r e p ar ationand p r e se ntationofthe financialstate m e nts
The financial statements of the Company have been prepared in accordance with the IFRS, issued by the International Accounting
Standards Board – IASB), issued by the International Accounting Standards Board “IASB”). These policies have been consistently
applied to all 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.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also
requires Management to exercise its judgment in the process of applying the Company's accounting policies. The areas involving a
higher degree to judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are
described in Note 6.
3 S um m ar y of S ignificant Accou nting Pr actice s
Main accounting policies applied in the preparation of these financial statements are defined below. These policies have been applied
consistently in all years presented.
3.1 C ash and cash e q uiv ale nts
Cash and cash equivalents include cash in hand, bank deposits, other short-term highly liquid investments with original maturities
less than three months as of the investment date, with an insignificant risk of changing value, as well as current account overdrafts.
3.2 Financial asse ts and liab ilitie s
Financial Asse ts - C lassification
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. On December 31, 2014 and 2013, 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.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Loans and r e ce iv ab le s
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, except for those with maturity of more than 12 months after the
statement of financial position date (these are classified as noncurrent assets). The Company's loans and receivables include cash and
cash equivalents, balances of trade accounts receivable, accounts receivable from related parties, other accounts receivables,
receivables from the Water National Agency – ANA. Loans and receivables are recorded at fair value and subsequently at amortized
cost, under the effective interest rate method.
Financial Liab ilitie s - C lassification
The Company classifies its financial liabilities into the following categories: measured at fair value through profit or loss and other
liabilities. Classification depends on the purpose to which the financial liabilities were assumed. As of December 31, 2014 and 2013,
the Company did not have liabilities classified into the fair value through profit or loss category.
Othe r liab ilitie s
This category comprises balances payable to contractors and suppliers, loans and financing, services payable, balances payable from
public-private partnership (PPP), and program contract commitments.
The effective interest rate method is adopted to calculate the amortized cost of a financial liability and allocate its interest expense
under the respective period. The effective interest rate exactly deducts the estimated future cash flows (including fees, transaction
costs and other issue costs) throughout the financial liability’s estimated life or, when appropriate, during a shorter period, for initial
recognition of the net carrying amount.
3.3 Ne t Op e r ating r e v e nue
(a) R e v e nue fr om w ate r and se w age se r v ice s
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 accounts receivable based on monthly estimates of the completed services. Concerning revenues of wholesale municipal
governments, which do not pay the full invoice, the Company records an allowance for doubtful accounts upon invoicing in revenue
reduction account.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
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 ) C onstr uction r e v e nu e
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.
3.4 Tr ad e accounts r e ce iv ab le and allow ance for d oub tful accounts
Trade accounts receivable are amounts due from customers for services performed in the ordinary course of business. These are
classified as current assets, except when maturity exceeds 12 months after the end of the reporting period. In these cases, they are
presented as noncurrent assets.
The Company 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.
3.5 Inv e ntor ie s
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.
3.6 Inv e stm e nt Pr op e r tie s
The investment properties are recorded at the acquisition or construction cost, less accumulated depreciation until these are carried
to this group, where applicable, calculated by the straight-line method at rates that consider the estimated useful life of assets.
Expenditures related to repairs and maintenance are recorded in the statement of income when incurred.
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.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
3.7 Pr op e r ty, p lant and e q u ip m e nt
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 statement of income 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 15(c). Lands are not
depreciated.
Residual values and the useful life of assets are revised and adjusted, where applicable, at the end of each year.
Gain and losses on disposals are determined by the difference between the proceeds with the carrying amount and are recognized
within other operating income (expenses) in the statement of income.
3.8 Intangib le asse ts
Intangibles are stated 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, which corresponds to one fiscal year of SABESP.
The intangible has its amortization initiated when the intangible assets are available for use in location and the necessary condition
established by the Company.
The amortization of intangible assets reflects the period over the expected future economic benefits generated by the intangible asset
are consumed by the Company and can be the period of the contract or the useful life of the asset.
The amortization of the intangible assets is discontinued when the asset is totally consumed or it is disposed of, whatever occurs
first.
Donations in assets to the concession grantor received from third parties and governmental entities to allow the Company to render
water and sewage supply services are not recorded in the Company’s financial statements, since these assets are controlled by the
concession grantor.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Financial resources received as donations for the construction of infrastructure are recorded under “Other operating income”.
(a) C once ssion ar r ange m e nts/p r ogr am s
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 must 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, as its fair value, when the infrastructure
is built, provided that this work is expected to generate future economic benefits. The accounting policy to recognize construction
revenue is described in Note 3.3 “Operating income”.
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 occurs first.
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 by the useful life of asset.
Law 11,445/07 indicates, whenever possible, that basic sanitation public utilities will have the economic and financial sustainability
ensured through the remuneration due to 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 by the useful life of the asset, taking into consideration a solid track record of
concession renewal and, therefore, the continuity of services.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(b ) S oftw ar e lice nse s
Software licensing is capitalized based on the acquisition costs and other implementation costs. Amortizations are recorded according
to the useful lives and the expenses associated with maintaining these are recognized as expenses when incurred.
3.9 Im p air m e nt of non-financial asse ts
Property, plant and equipment, intangibles and other noncurrent assets with definite useful lives, are yearly reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company does not
record assets with indefinite useful life and assessed that there are no indications of impairment losses, mainly supported by Law
11,445/07, which ensures that basic sanitation public utilities will have assured its economic and financial sustainability through
tariffs or via indemnity.
3.10 Tr ad e accounts p ayab le and contr actor s
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 noncurrent liabilities and are initially measured at fair value, which generally correspond to the bill and
subsequently at amortized cost.
3.11 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 16. 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 end of the reporting period.
Nonconvertible debentures issued by the Company are recognized in a similar manner to borrowings.
3.12 Bor r ow ing costs
Borrowing costs 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 local 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 in similar lines of credit.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
3.13 Payr oll and r e late d char ge s
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 accrual basis.
3.14 Pr ofit shar ing
The Company's profit sharing plan for its employees is based on operational and financial targets of the Company as a whole. 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 operating cost.
3.15 Pr ov isions, le gal liab ilitie s, e scr ow d e p osits, se cur itie s d e p osits and continge nt asse ts
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 19.
Escrow deposits not linked to related liabilities are recorded in noncurrent assets. Escrow deposits are indexed for inflation.
Contingent assets are not recognized in the books.
3.16 Env ir onm e ntal costs
Costs related to ongoing environmental programs are expensed in the income statement, when there is any indication of an event.
Ongoing programs are designed to minimize the environmental impact of the operations and to manage the environmental risks
inherent to the Company's activities.
3.17 Incom e taxe s – cur r e nt and d e fe r r e d
Income taxes expenses comprise current and deferred income tax and social contribution.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Current tax
The provision for income tax and social contribution is based on the taxable income for the year. The income tax was accrued at rate
15%, plus 10% surtax on taxable income exceeding R$ 240. The social contribution was accrued at rate 9% over adjusted net income.
Taxable income differs from net income (profit presented in the statement of income), because it excludes income and expenses
taxable or deductible in other years, and excludes items not permanently taxable or not deductible. Income tax and social
contribution are accrued based on legislation in place in the end of the year. Management periodically evaluates and measures the
positions taken in the income tax return with respect to situations in which applicable tax regulations are subject to interpretation. It
establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred tax
Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax basis of assets and
liabilities and their carrying amounts in the financial statements, according to IAS 12. However, the deferred income tax is not
accounted for if it arises from initial recognition of an asset or liability in a transaction that at the time of the transaction affects
neither accounting nor taxable profit nor loss, except for business combinations. Deferred income tax is determined using tax rates
(and laws) effective at the end of the reporting period and expected to apply when the related deferred income tax asset is realized or
the deferred income tax liability is settled.
Deferred income tax and social contribution assets are recognized only to the extent that it is probable that future taxable profit will be
available for which temporary differences can be utilized and tax losses can be carryforward.
Deferred taxes assets and liabilities are offset when there is a legally enforceable right of offsetting current tax assets against current
tax liabilities and when deferred income tax assets and liabilities are related to income taxes levied by same tax authority over the tax
entity.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
3.18 Taxe s on r e v e nue s
Revenues from water and sewage services are recognized on accrual basis for PASEP and Cofins, calculated at the rates of 1.65% and
7.60%, respectively. 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.
3.19 Pe nsion ob ligations
(a) De fine d b e ne fit
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 pension closely-held entity. The regular contributions comprise
the net administrative expenses and are recognized in the statement of income for the period.
Liabilities from defined benefit pension plan obligations correspond to the present value of the defined benefit obligation at the end of
the reporting period, less the fair value of the plan’s assets. The defined benefit obligation (G1) and (G0) are calculated on an annual
basis by independent actuaries, using the projected unit credit method. The estimated future cash outflows is discounted to its
present value, using the interest rates of Government bonds with maturities that approximate the maturity of the related liability.
Referring to actuarial gains and losses deriving from adjustments based on the experience and changes in actuarial assumptions are
directly recorded under equity, as other comprehensive income (OCI), so that the plan's net assets or liabilities are recognized in the
statement of financial position in order to reflect the full amount of plan’s deficit or surplus.
The expenses related to pension plan are recognized in profit and loss of the year as operating cost, selling expenses or administrative
expenses, according to employee’s allocation.
In an event where a curtailment relates to only some of the employees covered by a plan, or where only part of an obligation is settled,
the gain or loss includes a proportionate share of the past service cost and actuarial gains and losses. The proportionate share is
determined on the basis of the present value of the obligations before and after the curtailment or settlement.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(b ) De fine d contr ib ution
The Company makes contributions to defined contribution plans (Sabesprev Mais) on a contractual basis and sponsored thereby,
managed by Sabesprev, a supplementary private pension closely-held 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 has no sufficient funds to pay to all employees the benefits related to
employee’s services in current and previous period.
3.20 Financial incom e and e xp e nse s
Financial income is primarily comprised of interest, inflation adjustments and exchange variations resulting from financial
investments, 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,
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 pro rata temporis.
Inflation adjustments included in the agreements are not considered embedded derivatives, since they are deemed as inflation
adjustment rates for the Company’s economic scenario.
3.21 Le ase s
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 operational lease, recognized as expenses in the statement of income on a straight-line basis
during the lease term.
Financial lease agreements are measured based on the lower amount between the present value of minimum mandatory payments of
the agreement or fair value of asset on the start date the lease agreement. The amounts payable deriving from considerations of
financial lease agreements are recognized and allocated between financial expenses and amortization of financial lease payables so
that to obtain a constant interest rate. The corresponding lessor’s liability is recorded as current and noncurrent debt.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
3.22 Othe r cur r e nt and noncu r r e nt asse ts and liab ilitie s
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.
3.23 Div id e nd s and Inte r e st on S har e hold e r s' Eq u ity
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 shareholders’ meeting. The tax effects of the interest on
shareholders’ equity are recognized in the statement of income of the year, under the same recognition basis.
3.24 Pr e se nt v alue ad justm e nt
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.
3.25 S e gm e nt r e p or ting
Operating segments are reported in a manner consistent with the Management internal reporting to make strategic decisions, allocate
resources and evaluate the operating segment performance.
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 24.
3.26 Tr anslation into for e ign cur r e ncy
(a) Functional and r e p or ting cur r e ncy
Items included in the financial statements are measured using the currency of the primary economic environment in which the
company operates ("the functional currency"). The financial statements are presented in Brazilian reais (R$), which is also the
Company's functional currency. All financial information has been stated in reais and rounded to the next thousand, except where
otherwise indicated.
(b ) For e ign cur r e ncy tr anslation
Foreign currency-denominated transactions are translated into Brazilian reais using the exchange rates prevailing at the transaction
dates. Balance sheet accounts are translated by 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 the statement of income, except for loans and financing referring to
property, plant and equipment or intangible assets in progress, where foreign exchange losses are recognized as corresponding entry
to the asset while construction is in progress, as described in Note 3.12.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
4 C hange s in accounting p r actice s and d isclosur e s
4 .1 Ne w stand ar d s, am e nd m e nts and inte r p r e tations e ffe ctiv e for p e r iod s b e ginning on or afte r Januar y 1, 2014
Ne w stand ar d s and r e v ie w s
S tand ar d
K e y r e q u ir e m e nts
Effe ctiv e ne ss d ate
IFRIC 21 - Levies
January 1, 2014
The
International
Financial Reporting
Interpretations
Committee – IFRIC 21 addresses the issue of when to recognize a
tax liability. This interpretation defines tax and specifies that the
triggering event originating the liability to pay a tax is the
activity generating the payment of tax, as identified by laws. The
interpretation provides guidelines on how different types of taxes
must be recorded; it particularly clarifies that the economic
obligation, as well as the assumption of going concern when
preparing the financial statements, does not imply, severally or
jointly the present liability to pay a tax which will be generated
by the entity’s operations in the future.
Amendments to IFRS 10, IFRS 12
and IAS 27 – Investment Entity
The amendments to IFRS 10 define investment entities and
introduce an exception to the requirement of consolidating the
subsidiaries of an investment entity. With regard to the
exception, an investment entity must measure its interest in
subsidiaries at fair value through profit or loss. The exception
shall not apply to investment entities’ subsidiaries providing
services related to investment entity’s activities.
January 1, 2014
To be classified as an investment entity, certain criteria must be
met. Specifically, an entity will be classified as investment entity
when:
It receives funds from one or more investors in exchange for
investment management services.
Its commitment with investor(s) is to invest funds only to obtain
return on capital, investment income, or both.
Measure and assess the performance of almost all its investments
at fair value.
The amendments to IFRS 12 and IAS 27 introduce new reporting
requirements for investment entities.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
S tand ar d
Amendments to IAS 32 –
Financial Instruments:
Offsetting Financial Assets and
Liabilities
K e y r e q u ir e m e nts
These clarify requirements related to offsetting financial assets
and
liabilities. Specifically, these amendments clarify the
meaning of the expressions “currently has the offset enforceable
legal right” and “simultaneous realization and settlement”.
Effe ctiv e ne ss d ate
January 1, 2014
Amendments to IAS 36 –
Disclosure of the Recoverable
Amount of Non-financial Assets
These exclude the requirement to report the recoverable amount
of a Cash-Generating Unit (CGU) to which goodwill or other
intangible assets, with indefinite useful lives, were allocated, in
case of no impairment or impairment reversal of the related CGU.
January 1, 2014
Additionally, the amendments introduce additional reporting
requirements, applicable when the recoverable amount of an
asset or CGU is measured at fair value, loss sale costs. This new
reporting includes fair value hierarchy, main assumptions and
valuation techniques adopted. These requirements are in line
with the reporting under the IFRS 13 – Fair Value Measurements.
Amendments to IAS 39 –
Financial Instruments: Renewal
of Derivatives and Continuation
of Hedge Accounting
These exempt
the mandatory discontinuance of hedge
accounting when a derivative, designated as hedge instrument, is
renewed under certain circumstances. These amendments also
clarify that any change in fair value of derivative designated as
hedge instrument, resulting from the renewal, must be included
in the evaluation and measurement of the hedge’s effectiveness.
January 1, 2014
Analysis of the impact of the new rules, amendments or interpretations of the rules to the Company:
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
IFR IC 21 - Le v ie s
The application of this interpretation did not materially impact reporting or the amounts recognized in the annual financial
statements.
Am e nd m e nts to IFR S 10, IFR S 12 and IAS 27 – Inv e stm e nt Entity
Since the Company is not an investment entity (adopting the criteria defined by IFRS 10), there were no impacts in the disclosures
and in the amounts recognized in the financial statements.
Am e nd m e nts to IAS 32 – Financial Instr um e nts: Offse tting Financial Asse ts and Liab ilitie s
The Company evaluated if certain financial assets and liabilities are qualified for offsetting based on the criteria of amended standard
and concluded that there are no impacts on the financial statements.
Am e nd m e nts to IAS 36 – R e p or ting of the R e cov e r ab le Am ount of Non-financial Asse ts
The application of these amendments did not impact the Company’s financial statements.
Am e nd m e nts to IAS 39 – Financial Instr um e nts: R e ne w al of De r iv ativ e s and C ontinuation of He d ge Accounting
Since the Company does not have any derivative submitted to renewal, the application of these amendments do not pose impacts on
reporting or on the amounts recognized in the financial statements.
4 .2 Ne w stand ar d s, am e nd m e nts and inte r p r e tations to e xisting stand ar d s that ar e not ye t e ffe ctiv e
The Company did not early adopt the new and revised IFRSs below:
Financial Instruments3
Deferred Regulatory Accounts1
Revenue from Contracts with Customers2
Accounting for Acquisition of Interest in Joint Ventures1
Clarifications of Acceptable Methods of Depreciation and Amortizatoin1
IFRS 9
IFRS 14
IFRS 15
Amendments to IFRS 11
Amendments to IAS 16 and IAS 38
1 Effective for annual periods beginning on or after January 1, 2016.
2 Effective for annual periods beginning on or after January 1, 2017.
3 Effective for annual periods beginning on or after January 1, 2018.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
5 R isk M anage m e nt
5.1 Financial R isk M anage m e nt
Financial r isk factor s
The Company's activities are affected by the Brazilian economic scenario, exposing them to market risk (exchange rate and interest
rate), credit risk and liquidity risk. The Company’s financial risk management is focused on the unpredictability of financial markets
and seeks to minimize potential adverse effects on the Company’s financial performance.
The Company has not utilized derivative instruments in any of the periods reported.
(a) M ar ke t r isk
For e ign cur r e ncy r isk
SABESP’s foreign exchange exposure implies market risks associated with currency fluctuations since the Company has foreign
currency-denominated liabilities, mainly US dollar and yen-denominated short and long-term loans.
The management of SABESP’s foreign currency exposure considers several current and projected economic factors, besides market
conditions.
This risk arises from the possibility that the Company may incur losses due to exchange rate fluctuations that would impact liability
balances of foreign currency-denominated loans and financing raised in the market and related financial expenses. The Company
does not maintain hedge or swap contracts or any derivative financial instrument to hedge against this risk, but conducts an active
management of debt, taking advantage of opportunities to change expensive debts with “cheaper” debts, reducing the cost through
early 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$4,363,898 on
December 31, 2014 (R$3,715,645 in December 2013). Below, the Company’s exposure to foreign exchange risk:
De cem b e r 31, 2 014
Decem b er 31, 2 013
Fo re ign
curre ncy
R $
Fo re ign
curre ncy
R $
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 exposure
Financing cost
Total loans in foreign currency (Note 16)
1,231,188
48,066,910
1,181,256
41,504,249
3,270,282
1,068,527
17,703
7,386
4,363,898
(17,606)
4,346,292
2,767,210
926,790
14,512
7,133
3,715,645
(17,092)
3,698,553
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
The 18% increase in foreign currency-denominated debt between December 31, 2013 and December 31, 2014 was mainly due to the
following reasons:
1) A 4% increase in US dollar-denominated debt and a 16% increase in Yen-denominated debt; and
2) Exchange rate changes, since the US dollar appreciated 13%, from R$2.343 on December 31, 2013 to R$2.656 on December 31,
2014. The US dollar-denominated debt accounts for 75% of foreign currency-denominated debts.
As of December 31, 2014, if the Brazilian real had appreciated or depreciated by 10% against the US dollar and Yen with all other
variables held constant, effects on results before taxes for the year would have been R$436,390 (R$371,564 in December 2013), lower
or higher, mainly as a result of foreign exchange losses or gains on the translation of foreign currency-denominated loans.
Scenario I below presents the effect in income statements for the next 12 months, considering the projected rates of the U.S. dollar
and the Yen. Considering the other variables as remaining constant, the impacts for the next 12 months are shown in scenarios II and
III with possible depreciations of 25% and 50%, respectively, in the Brazilian Real.
S ce nario I
(Pro b ab le )
(*)
S ce nario II
(+2 5% )
S cenario III
(+50% )
Net currency expo sure o n Decem b er 31, 2 014 (Liab ilitie s) in US $
1,231,188
1,231,188
1,231,188
US$ rate on December 31, 2014
Exchange rate estimated according to the scenario
Difference between the rates
2.6562
2.8000
(0.1438)
2.6562
3.5000
(0.8438)
2.6562
4.2000
(1.5438)
Effect on net financial result R$ - (loss)
(177,045)
(1,038,876)
(1,900,708)
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
S ce nario I
(Pro b ab le )
(*)
S ce nario II
(+2 5% )
S cenario III
(+50% )
Net currency expo sure o n Decem b er 31, 2 014 (Liab ilitie s) in Y e n
48,066,910
48,066,910
48,066,910
Yen rate on December 31, 2014
Exchange rate estimated according to the scenario
Difference between the rates
0.02223
0.02334
(0.00111)
0.02223
0.02918
(0.00695)
0.02223
0.03501
(0.01278)
Effect on net financial result in R$ - (loss)
(53,354)
(334,065)
(614,295)
Total effect on net financial result in R$ - (loss)
(2,515,003)
(*) The probable scenario in foreign currency (US dollar and Yen) considered the average exchange rate for the 12-month period after December 31,
2014, according to BM&FBovespa.
(1,372,941)
(230,399)
Inte r e st r ate r isk
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.
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:
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
TR(i)
CDI(ii)
TJLP(iii)
IPCA(iv)
LIBOR(v)
Interest and charges
Total
(i) TR – Interest Benchmark Rate
(ii) CDI (Certificado de Depósito Interbancário), an interbank deposit certificate
(iii) TJLP (Taxa de Juros a Longo Prazo), a long-term interest rate index
(iv) IPCA (Índice Nacional de Preços ao Consumidor Amplo), a consumer price index
(v) LIBOR - London Interbank Offered Rate
De ce m b e r 31, 2014
De ce m b e r 31,
2013
1,578,250
1,712,010
1,059,074
1,492,320
1,953,989
133,776
7,929,419
1,646,546
1,212,010
990,273
1,413,629
1,599,815
120,839
6,983,112
Another risk to which the Company is exposed, is the mismatch between the inflation adjustment indices of its debts with those of its
service revenues. Water supply and sewage services tariffs do not necessarily follow the increases in the inflation indexes to adjust
loans, financing and interest rates affecting the Company's indebtedness.
As of December 31, 2014, 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 profit for the year before taxes would total R$79,294 (R$69,831 in December 2013) lower
or higher, mainly as a result of a lower or higher interest expense on floating rate loans and financing.
(b ) C r e d it r isk
Credit risk arises from cash and cash equivalents, deposits in banks and financial institutions, as well as credit exposures to
wholesale basis and retail customers, including outstanding accounts receivable, restricted cash and accounts receivable from related
parties. Credit risk exposure to customers is mitigated by sales to a dispersed customer base.
The maximum exposures to credit risk at the reporting date are the carrying amounts of instruments classified as cash equivalents,
deposits in banks and financial institutions, restricted cash, trade accounts receivable and accounts receivable from related parties in
the balance sheet date. (See Notes 7, 8, 9 and 10).
Regarding the financial assets held with financial institutions, the credit quality that is not past due or subject to provision for
impairment may 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 main international rating agencies (Fitch, Moody's and S&P),
according to internal policy of market risk management:
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Cash at bank and short-term bank deposits
AAA(bra)
Other (*)
1,722,347
644
1,722,991
(*)This category includes current accounts and investment funds in banks which have no credit rating information available.
The available credit rating information of the banks in which the Company made transactions during 2014 is as follows:
1,781,327
674
1,782,001
De ce m b e r 31,
2014
De ce m b e r 31,
2013
Banks
Banco do Brasil S.A.
Banco Santander Brasil S.A.
Brazilian Federal Savings Bank
Banco Bradesco S.A.
Itaú Unibanco Holding S.A.
(c) Liq uidity r isk
Fitch
M ood y's
S tand ar d
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
The Company's liquidity is primarily reliant upon cash provided by operating activities, loans from Brazilian Federal and State
governmental financial institutions, and financing in the domestic and international capital markets. The liquidity risk management
considers the assessment of its liquidity requirements to ensure it has sufficient cash to meet its Capex and operating expenses needs,
as well as the payment of debts.
The funds held by the Company are invested in interest-bearing current accounts, time deposits and securities, selecting instruments
with appropriate maturity or liquidity sufficient to provide margin as determined by projections mentioned above.
The table below shows the financial liabilities of the Company, by maturities periods, including the installment of principal and
future interest to be paid according to the agreement.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
As o f Dec em ber 3 1, 2014
Liabilities
Loans and financing
Accounts payable to suppliers and contractors
Services payable
Public-private partnership -PPP (*)
Program contract commitments
2015
2016
2017
2018
2019
2020
o nw ar ds
To tal
1,685,090
323,513
318,973
46,038
199,566
1,653,018
-
-
46,038
3,233
1,775,960
-
-
46,038
911
1,336,078
-
-
285,104
591
1,373,623
-
-
285,104
801
6,810,293
-
-
4,658,233
16,504
14,634,062
323,513
318,973
5,366,555
221,606
(*) The Company also considered future commitments (constructions in progress) which is still not recognized in the financial statements related to
São Lourenço PPP, due to the relevance of future cash flows, the impacts on its operations and the fact the Company already has formalized this
commitment through an agreement signed by the parties.
Future interest
Future interest was calculated based on the contractual clauses for all agreements. For agreements with floating interest rate, the
interest rates used correspond to the base dates above.
Cross default
The Company has loan and financing agreements including cross default clauses, i.e., the early maturity of any Company’s debt may
imply the early maturity of these agreements. The indicators are continuously monitored in order to avoid the execution of this
clause.
5.2 C ap ital m anage m e nt
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
statement of financial position plus net debt.
Total loans and financing(Note 16)
(-)Cash and cash equivalents(Note 7)
Net debt
Total equity
Total capital
Leverage ratio
De ce m b e r 31, 2014
De ce m b e r 31,
2013
10,785,767
(1,722,991)
9,450,074
(1,782,001)
9,062,776
13,304,403
7,668,073
12,930,801
22,367,179
20,598,874
41%
37%
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
On December 31, 2014, the leverage ratio increased to 41% from the 37% recorded on December 31, 2013, due to the increase of
R$1,335.7 million in loans and financing mainly resulting from the inflow of financial resources in 2014 and loan agreements in
progress, as well as the effect of the Real depreciation against the U.S. dollar.
5.3 Fair v alue e stim ate s
It is assumed that balances from trade accounts receivable (current) and trade payables to suppliers by carrying amount, less
impairment, approximate their fair values, considering the short maturity. Noncurrent trade accounts receivable also approximate
their fair values, as they will be adjusted by inflation and/or will bear contractual interest rates over time.
5.4 Financial Instr um e nts
On December 31, 2014 and December 31, 2013, the Company neither had financial assets classified into the fair value categories
through profit or loss, held to maturity and available for sale, nor financial liabilities classified as fair value through profit or loss. The
Company’s financial instruments included in the loans and receivables category comprise cash and cash equivalents, restricted cash,
trade accounts receivable, accounts receivable from related parties, other accounts receivable, and balances receivable from the Water
National Agency – ANA. The financial instruments under the “other liabilities” category comprise accounts payable to contractors
and suppliers, loans and financing, balances payable deriving from the Public Private Partnership-PPP and program contract
commitments, which are non-derivative financial assets and liabilities with fixed or determinable payments, not quoted in an active
market.
The estimated fair values of financial instruments are as follows:
Financial assets
De cem b e r 31, 2 014
De cem b e r 31, 2 013
C arrying am o unt
Fair value
Cash and cash equivalents
Restricted cash
Trade accounts receivable
Accounts receivable from related parties
Water National Agency – ANA
Other accounts receivable
Financial liabilities
Loans and financing
Trade payables and contractors
Services payable
Program contract commitments
Public-private partnership - PPP
C arrying am o unt
1,782,001
10,333
1,515,565
265,312
107,003
155,991
1,722,991
19,750
1,224,278
223,983
122,634
187,950
Fair value
1,782,001
10,333
1,515,565
265,312
107,003
155,991
De cem b e r 31, 2 014
De cem b e r 31, 2 013
C arrying am o unt
Fair value
C arrying am o unt
9,450,074
275,051
323,208
166,038
342,508
10,641,611
323,513
318,973
207,759
368,283
Fair value
9,439,094
275,051
323,208
166,038
342,508
1,722,991
19,750
1,224,278
223,983
122,634
187,950
10,785,767
323,513
318,973
207,759
368,283
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
To obtain 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&FBovespa.
(ii) Debentures were projected up to the final maturity date according to contractual rates (IPCA, DI, TJLP or TR), and
discounted to present value considering the future interest rate published by ANBIMA in the secondary market, or by
market equivalent rates, or the Company’s share traded in the Brazilian market.
(iii) BNDES financing are financial instruments valued at carrying amount plus contractual interest rate till mature date, and are
indexed by long term interest rate – TJLP.
These financing have specific characteristics and the terms and conditions defined in the loan agreements with BNDES
between independent parties, and reflect the conditions for those types of loan. In Brazil, a consolidated market of long-term
debts does not exist with the same characteristics of BNDES financing, the offering of credit to the entities in general, with this
long-term characteristic, usually is restricted to BNDES.
(iv) Other financing in local currency are considered by carrying amount plus contractual interest rate till mature date, discounted to present
value considering a future interest rate published by BM&FBovespa.
(v) Agreements with IADB and 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 as of
December 31, 2014.
(vi) Agreements with 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 as of December 31, 2014.
(vii) Leases are financial instruments considered by face value adjusted until maturity date, whose characteristic is the indexation by fixed
contractual rate, which is a specific rate, not compared to any other market rate. Thus, the Company discloses as market
capitalization, the amount recorded on December 31, 2014.
Considering the nature of other financial instruments, assets and liabilities of the Company, the balances recognized in the statement
of financial position approximate the fair values, taking into account the maturities close to the end of the reporting period,
comparison of contractual interest rates with market rates in similar operations at the end of the reporting periods, their nature and
maturity terms.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
6 M ain accounting e stim ate s and judgm e nts
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, by definition, may differ
from 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) Allow ance for d oub tfu l accou nts
The Company records allowance for doubtful accounts in an amount that management considers sufficient to cover probable losses,
based on an analysis of trade accounts receivable, in accordance with the accounting policy stated in Note 3.4.
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 ) Intangib le asse ts ar ising fr om conce ssion and p r ogr am contr acts
The Company recognizes as intangible 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 fixed 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, which occurs first. Additional information on the accounting for
intangible assets arising from concession agreements is described in Note 3.8.
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 the useful
lives of the intangible assets may have significant impacts on the results of operations.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(c) Pr ov isions
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 accrues for lawsuits to
which it is probable that an outflow 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 19.
(d ) Pe nsion b e ne fits
The Company sponsors the defined benefit plan and the defined contribution plan, as described in Note 20.
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. The defined benefit obligation is calculated yearly by 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.
(e ) De fe r r e d incom e tax and social contr ib ution
The Company recognizes and settles taxes on income based on the results of operations verified according to the Brazilian Corporation
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 probably will not be realized, based on the historic taxable income, in the projection of future taxable income and the
estimated period of reversing 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.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
7 C ash and C ash Eq u iv ale nts
Cash and banks
Cash equivalents
De ce m b e r 31, 2014 De ce m b e r 31, 2013
118,226
1,604,765
1,722,991
189,836
1,592,165
1,782,001
Cash and cash equivalents include cash, bank deposits and high-liquidity short-term financial investments, mainly represented by
repurchase agreements (accruing CDI interest rates), deposited at 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 99.68% of CDI in December 2014 (100.00% in December 2013).
8 R e stricte dcash
Agreement with the São Paulo municipal government (i)
Funds raised with the BNDES (ii)
Other
De cem b e r 31, 2 014 Decem b er 31, 2 013
9,176
6,433
4,141
19,750
7,460
-
2,873
10,333
(i) Agreement with the municipal government of São Paulo where the Company transfers 7.5% of the municipality’s revenue to
the Municipal Fund, as per Note 14 (d), item (v);
(ii) Refers to funds raised with the Brazilian Development Bank – BNDES, awaiting the authorization for use.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
9 Tr ade Accounts R e ce ivab le
(a) Financial p osition b alance s
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
De cem b e r 31, 2 014
De cem b er 31, 2 013
852,815
291,367
1,008,335
287,662
1,144,182
1,295,997
533,984
4,671
192,253
730,908
776,674
366,515
2,092
787,305
1,779
224,433
2,158,798
354,678
4,388,566
(3,164,288)
1,224,278
1,034,820
189,458
1,224,278
511,967
4,292
167,642
683,901
661,908
327,451
15,430
700,550
2,114
210,406
1,917,859
474,492
4,372,249
(2,856,684)
1,515,565
1,120,053
395,512
1,515,565
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(*) On March 18, 2014, the São Paulo State Government, the municipality of Diadema and SABESP entered into a “Water Supply and
Sewage Public Utility Services Agreement” in the municipality of Diadema. Through this contract, the State of São Paulo and the
municipality of Diadema have ensured to SABESP (or subsidiary) exclusive rights to render services for a 30-year term.
On this same date, judicial settlements were signed in lawsuits filed by SABESP against the municipality of Diadema and Saned –
a municipal company. Through these settlements, SABESP, the municipality of Diadema and Saned agree to suspend the
execution of suits to collect receivables related to water supply at wholesale and collection of indemnity debt. The debts will
progressively decrease throughout a 30-year period, under the condition that there is a full compliance with the agreements and
provision of services contract.
This balance is fully accrued as losses.
(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 inflation adjusment and interest.
(iv) Wholesale basis customers - municipal governments - This balance refers to the sale of treated water to
municipalities, which are responsible for distributing to, billing and charging final customers. 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 included in the allowance for doubtful accounts.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Changes in accounts receivable on a wholesale basis are as follows:
Balance at beginning of year
Services provided
Receipts
Balance at the end of the year
(b ) The a gin g of tr a de a ccou n ts r eceiva ble is a s follow s:
Current
Past-due:
Up to 30 days
From 31 to 60 days
From 61 to 90 days
From 91 to 120 days
From 121 to 180 days
From 181 to 360 days
Over 360 days
Total past-due
Total
De ce m b e r 31, 2014
De ce m b e r 31, 2013
1,917,859
375,294
(134,355)
2,158,798
1,677,727
424,018
(183,886)
1,917,859
De ce m b e r 31, 2014
De ce m b e r 31, 2013
992,800
136,666
93,534
62,276
54,725
96,079
202,024
2,750,462
3,395,766
4,388,566
1,243,156
191,668
105,542
60,868
51,932
90,498
149,242
2,479,343
3,129,093
4,372,249
The increase in the balance overdue is mainly due to accounts receivable at wholesale, where municipalities served are challenging in
court the tariffs charged by SABESP. These amounts are fully covered by the allowance for doubtful accounts.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(c) Allow ance for d oub tfu l accounts
Balance at beginning of year
Private sector/government entities
Recoveries
Wholesale customers
Additions for the year
De ce m b e r 31, 2014
De ce m b e r 31,
2013
De ce m b e r 31,
2012
2,856,684
130,398
(59,341)
236,679
2,723,408
93,272
(51,654)
218,687
2,436,428
126,823
(49,183)
209,340
307,736
260,305
286,980
Write-offs in the year referring to the bad debt
(132)
(127,029)
-
Balance at end of year
3,164,288
2,856,684
2,723,408
R e conciliation of p r ov ision for losse s in incom e
2014
2013
2012
Losses (write-off)
Provision for state entities (related parties)
Provision for private sector/government entities
Provision for wholesale supply
Recoveries
52,900
(1,341)
130,398
16,973
(59,341)
63,102
(856)
93,272
-
(51,654)
79,454
35,142
126,823
-
(49,183)
Amount recorded as selling expenses
139,589
103,864
192,236
Wholesale sales losses, amounting to R$219,706, R$218,687 and R$209,340 in 2014, 2013 and 2012, respectively, were also recorded
as revenue reduction.
The Company does not have customers representing 10% or more of its revenues.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
10 R e late d Par tie s Balance s and Tr ansactions
The Company is a party to transactions with its controlling shareholder, the State Government, and companies related to it.
(a) Accounts r e ce iv ab le , inte r e st on shar e hold e r s' e q uity p ayab le , r e v e nu e and e xp e nse s w ith the S ão Paulo S tate
G ov e r nm e nt
De cem b e r 31, 2 014
Decem b er 31, 2 013
Accounts receivable
Current:
Water and sewage services (i)
Allowance for losses (i)
Reimbursement for pension benefits paid -
Gesp (G0) Agreement (ii) and (vi)
Reimbursement for pension benefits paid (G0) -
Monthlyflow(ii) and (vi)
“Se Liga na Rede” (Connect to the Network Program) (l)
Total current
Noncurrent:
Reimbursement for pension benefits paid -
Gesp (G0) Agreement (ii) and (vi)
Total noncurrent
Total receivables from shareholder
Assets:
Water and sewage services
Reimbursement of additional retirement and pension benefits (G0)
“Se Liga na Rede” (Connect to the Network Program) (l)
Total
Liabilities:
Interest on shareholders’ equity payable to related parties
Other (see item “g” below)
96,162
(45,333)
43,722
9,753
17,661
121,965
102,018
102,018
223,983
50,829
155,493
17,661
223,983
107,784
1,569
110,615
(46,674)
39,201
9,399
22,314
134,855
130,457
130,457
265,312
63,941
179,057
22,314
265,312
229,605
1,791
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
2 014
2 013
Revenue from water and sewage services
Water supply
Sewage services
Payments received from related parties
Receipt of GESP reimbursement referring to Law 4819/58
(i) Water and sewage services
216,816
195,218
(431,607)
112,534
2 012
228,890
202,094
239,513
209,585
(453,612)
(481,204)
110,912
104,426
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 of credits 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 recorded due to the uncertainty involving these receipts
(R$45,333 in 2014 and R$46,674 in 2013).
(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, referred to as Go.
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.
See additional information about the Go plan in Note 20 (b) (iii).
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
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 to
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 challenges the legal validity of this agreement, and its main argument is the lack of bidding and the
absence of a specific legislative authorization for disposal of DAEE's assets. There is an unfavorable decision to SABESP not yet
unappealable. The Company's legal advisors assess the risk of loss in this lawsuit as probable. See additional information in 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, monetarily adjusted 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, monetarily adjusted 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. In December 2012 the last installment was paid.
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
case of nonpayment of water and sewage bills.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(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, monetarily adjusted 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 has been paid in 114 monthly, consecutive installments, totaling
R$1,920 each, including the annual IPCA-IBGE 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
disputed 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 previously defined as disputed amount.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Even though the negotiations with the State are still in progress, it is not possible to assure that the Company will recover the disputed
receivables without dispute.
As part of the actions intended to recover the receivables that management considers due by the State, related to discrepancies in the
reimbursement of the pension benefits paid by the Company, SABESP: (i) on March 24, 2010, reported to the controlling shareholder
the official letter approved by the executive committee, proposing that the matter be discussed at the São Paulo Stock Exchange
(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 expectation of which is a possible gain, the Company will persist to obtain an agreement with
GESP since the management believes that it is the 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, 2014 and 2013, the amounts not recorded by the Company, related to the pension
benefits paid on behalf of the State by the Company, totaled R$1,479,705 and R$1,412,479, 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, 2014 and
2013, the pension benefit obligations of Plan G0 totaled R$2,053,527 and R$1.780.268, respectively. For detailed information on the
pension benefit obligations refer to Note 20 (b) (iii).
(b ) C ontinge nt asse ts - GES P (not r e cor d e d )
As mentioned above, on December 31, 2014 and on December 31, 2013, SABESP had contingent assets with GESP, not recorded in
assets referring to the additional retirement and pension paid (Law 4,819/58), as follows:
Disputed amounts receivable
Undisputed amount referring to the transfer to SABESP of reservoirs at Alto
Tietê system (original value)(*)
Total
De ce m b e r 31, 2014
De ce m b e r 31, 2013
783,422
696,283
1,479,705
716,196
696,283
1,412,479
(*) See a significant event occurred after the reporting period regarding this matter in Note 31 (c).
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(c) Use of r e se r v oir s - EM AE
Empresa Metropolitana de Águas e Energia S.A. - EMAE plans to receive for the credit and to obtain financial compensation for the
use of water from the Guarapiranga and Billings reservoirs, which SABESP uses in its operations, as well as the reimbursement of
damages related to the failure to pay appropriately.
The Company understands that no amounts are due for the use of these reservoirs given the grants already made. Should these
reservoirs not be available for use to the Company, there could be the need to collect water in more distant places. There is a risk of not
properly rendering services in the region, besides increasing water supply cost.
Several lawsuits were filed by EMAE. Currently, an arbitration proceeding is in progress related to the Guarapiranga reservoir and a
lawsuit related to the Billings reservoir, both pleading for financial compensation due to SABESP’s water collect for public supply,
alleging that this conduct has been causing permanent and growing loss in the capacity of generating electricity of Henry Borden
hydroelectric power plant with financial losses.
SABESP understands that the expectation for all cases is of possible losses, and at this time, it is not feasible to estimate the amounts
involved, since they were not determined.
On April 10, 2014, we issued a Notice to the Market including the information we have been discussing with EMAE about an eventual
future agreement. However, no adjustment was confirmed and no agreement was executed by either party up to date.
(d ) Agr e e m e nts w ith r e d uce d tar iffs w ith S tate and M unicip al Gov e r nm e nt Entitie s that joine d the Rational W ate r
Use Pr ogr am (PUR A).
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 water
consumption.
(e ) Guar ante e s
The State Government provides guarantees for some loans and financing of the Company and does not charge any fee with respect to
such guarantees.
(f) Pe r sonne l assignm e nt agr e e m e nt am ong e ntitie s r e late d to the S tate Gov e r nm e nt
The Company has personnel assignment agreements with entities related to the State Government, whose expenses are fully passed
on and monetarily reimbursed. In 2014, the expenses related to personnel assigned by SABESP to other state government entities
amounted to R$9,651 (R$12,879 in December 2013 and R$12,298 in December 2012).
As of December 31, 2014, expenses related to personnel assigned by other entities to SABESP totaled R$403 (R$695 in December 2013
and R$689 in December 2012).
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(g) S e r v ice s ob taine d fr om state gov e r nm e nt e ntitie s
As of December 31, 2014 and 2013, SABESP had an outstanding amounts payable of R$1,569 and R$1,791, respectively, for services
rendered by São Paulo State Government entities.
(h) Non-op e r ating asse ts
As of December 31, 2014 and 2013, the Company had an amount of R$969 related to free land lent to DAEE (Water and Electricity
Department).
(i) S ab e sp r e v
The Company sponsors a private defined benefit pension plan, which is operated and administered by Sabesprev. The net actuarial
liability recognized as of December 31, 2014 amounted to R$676,071 (R$546,748 in December 2013), according to Note 20 (b).
(j) C om p e nsation of M anage m e nt K e y Pe r sonne l
- Compensation:
SABESP's compensation policy for the Management and officers is set out according to guidelines of the São Paulo State Government,
the CODEC (State Capital protection Board), and are based on performance, market competitiveness, or other indicators related to
the Company's business, and is subject to approval by shareholders 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:
- Annual reward:
Equivalent to a 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 the Company’s employees, as officers and directors'
relationship with the Company is governed by its bylaws and not the labor code.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Benefits paid only to statutory officers - meal ticket, basket of food staples, medical care, annual paid rest typified as a paid leave of
30 calendar days, and payment of a premium equivalent to one third of the monthly fee.
- Bonuses:
SABESP pays bonuses for the purposes of compensating directors and officers of companies over which the State is the controlling
shareholder, as an incentive policy, as long as the company records quarterly, semiannual, and yearly profits, and distributes
mandatory dividends to shareholders, even if in the form of interest on shareholders' equity. Annual bonuses cannot exceed six times
the monthly compensation of the officers/directors or 10 percent of the interest on shareholders' equity paid by the company,
prevailing the shortest amount.
Expenses related to the compensation to the members of its board of directors and officers amounted to R$3,446, R$3,386 and
R$3,211 for the years ended December 31, 2014, 2013 and 2012, respectively, and they refer to short-term benefits. An additional
amount of R$504, related to the bonus program, was recorded in 2014 (R$566 in December 2013 and R$1,074 in December 2012).
(k) Loan agr e e m e nt thr ou gh cr e d it facility
The Company holds interest in certain Special Purpose Entities (SPE), not holding the majority interest but with power of veto in
some issues, with no ability to use such power of veto in a way to affect returns over investments. Therefore, these SPEs are considered
for accounting purposes as jointly-owned subsidiaries.
The Company entered into a loan agreement through credit facility with the SPEs Águas de Andradina S/A, Águas de Castilho S/A,
Aquapolo Ambiental S/A and Attend Ambiental S/A to finance the operations of these companies, until the loans and financing
requested with financial institutions is cleared.
The contracts signed with SPEs Águas de Andradina S/A and Águas de Castilho S/A were settled. Other agreements signed with
Aquapolo Ambiental S/A, on March 30, 2012, and Attend Ambiental S/A, on May 9, 2014, remain with the same characteristics,
according to the table below:
SPE
C r edit lim it
Attend Ambiental
Aquapolo Ambiental
Aquapolo Ambiental
Total
5,400
5,629
19,000
30,029
Pr inc ipal
disbur sed
am o unt
5,400
5,629
19,000
30,029
Inter est balanc e
To tal
494
2,559
7,284
Inter est r ate
SELIC + 3.5 %
p.a.
5,894
M atur ity
(*)
8,188
CDI + 1.2% p.a.
4/30/2016
26,284
CDI + 1.2% p.a.
4/30/2015
10,337
40,366
(*) The loan agreement with SPE Attend Ambiental S/A matures within 180 days, from the date when the respective amount is available in the
borrower’s account, renewable for the same period. Credit facility will be available to the borrower up to December 31, 2014.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
The amount disbursed is recognized in Assets under “Other Receivables” and amounts to R$24,400 for principal and R$7,778 for
interest recognized in Current Assets and R$5,629 for principal and R$2,559 for interest in Noncurrent Assets. As of December 31,
2014, the balance of principal and interest rates of these contracts is R$40,366 (R$32,058 as of December 31, 2013). Between January
and December 2014, financial income recognized was R$5,222 (R$3,977 between January and December 2013).
(l) S e Lig a na R ed e (C onne ct to the Ne tw or k Pr ogr am )
The State Government enacted the State Law nº 14,687/12, creating the pro-connection program, destined to financially subsidize
the execution of household branches necessary to connect to the sewage collecting networks, in low-income households which agreed
to adhere to the program. The program expenditures, except for indirect costs, construction margin and borrowing costs are financed
with 80% of funds deriving from the State Government and the remaining 20% invested by SABESP, which is also liable for the
execution of works. On December 31, 2014, the program total amount was R$67,576 (R$35,513 on December 31, 2013), R$17,661
(R$22,314 on December 31, 2013) recorded in balances receivable from related parties, the amount of R$24,862 (R$9,896 on
December 31, 2013) recorded in the group of intangible assets and R$25,053 (R$3,303 on December 31, 2013) reimbursed by GESP.
11 W ate r National Age ncy -ANA
Refers to agreements executed within the scope of the Hydrographic Basin Depollution Program (PRODES), also known as "Treated
Sewage Purchase Program."
This program does not finance works or equipment, remunerates by results achieved, i.e., by effectively treated sewage. In this
program, the Water National Agency (ANA) makes available funds, which are restricted to a specific current account and applied in
investment funds at the Caixa Econômica Federal - Federal Savings Banks (CEF), until the fulfillment of treated sewage volume is
evidenced, as well as, the reduction of polluting cargoes of each contract.
When resources are made available, liabilities are recorded until funds are released by ANA. After the evidence of targets stipulated in
each contract, the revenue deriving from these funds is recognized, but if these targets are not met, funds will return to the National
Treasury with the appropriate funds earnings. On December 31, 2014, the balances of assets and liabilities were R$122,634
(R$107,003 on December 31, 2013), and the liabilities are recorded under "Other liabilities" of noncurrent liabilities.
12 Inv e stm e nts
The Company holds interest in certain Special Purpose Entities (SPE). Although SABESP has no majority shares of its investees, the
shareholders’ agreement provides for the power of veto in certain management issues, with no ability to use such power of veto in a
way to affect returns over investments, indicating participating shared control (joint venture – IFRS 11).
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
The Company holds interest valued by the equity accounting in the following investees:
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 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, 2014, totaled R$19,532, and was represented by 19,532,409 registered common shares without a
par value. SABESP holds 36% of its equity interest and Inima holds another 46% of its equity interest.
The 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.
On December 31, 2014, the capital of Águas de Andradina totaled R$3,097, divided into 3,096,866 registered common shares
without a par value. SABESP holds 30% of its equity interest. The amount of R$12 is recorded under investee’s equity, as advance for
future capital increase.
The operations started in October 2010.
Águas de Castilho
On October 29, 2010, the Company, together with the company 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.
On December 31, 2014, the company’s capital was R$770, and was represented by 770,000 registered share without par value.
SABESP holds 30% equity interest.
The operations initiated in January 2011.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
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 water supply and sewage public utilities of the municipality of Mairinque.
On December 31, 2014, the capital of Saneaqua Mairinque totaled R$2,000, and was represented by 2,000,000 registered common
shares without a par value. SABESP holds 30% equity interest.
The operations initiated in October 2010.
Attend Ambiental
On August 23, 2010, Sabesp jointly with Companhia Estre Ambiental S.A, incorporated the company Attend Ambiental S.A, for
constructing and operating a pretreatment of non-domestic effluent station, sludge transportation and related services in the city of
São Paulo as well as implement similar structures in other areas in Brazil and abroad.
On December 31, 2014 the capital totaled R$13,400, and was represented by 13,400,000 registered common shares without par
value. SABESP holds 45% equity interest. The total of R$11,400, which was recorded under the investee’s shareholders’ equity as
advance for future capital increase, was fully paid on March 1, 2013.
The operations started in December 2014.
Aquapolo Ambiental S/A.
On October 8, 2009, the Company, together with the company Odebrecht Utilities S/A, formerly Foz do Brasil S.A., incorporated the
company Aquapolo Ambiental S.A., for the purpose of producing, providing and trading reused water for Quattor Química S.A.,
Quattor Petroquímica S.A., Quattor Participações S.A. and other companies comprising the Petrochemical Complex.
On December 31, 2014, the capital of Aquapolo totaled R$36,412, and was represented by 42,419,045 registered common shares
without a par value. SABESP holds 49%of its equity interest.
The operations initiated in October 2012.
See below a summary of financial information of the joint-controlled entities:
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
C o mpa ny
Inves tments
Equity in the ea r nings o f
s ubs idia r ies
Inter es t per centa ge
Equity
P r o f it o r (lo s s ) f o r the yea r
20 1 4
20 1 3
20 1 4
20 1 3
20 1 2
20 1 4
20 1 3
20 1 2
20 1 4
20 1 3
20 1 2
20 1 4
20 1 3
20 1 2
Sesamm
9,644
Águas de Andradina
1,375
Águas de Castilho
860
8,239
1,087
619
1,405
2,479
288
336
241
145
Saneaqua Mairinque
809
931
(122)
209
Attend Ambiental
2,707
-
(2,707)
(1,672)
Aquapolo Ambiental
7,948
9,506
(1,558)
968
Total
20,636
23,089
(2,453)
2,465
674
(32)
155
235
(721)
(6,843)
(6,532)
36%
36%
30%
30%
30%
30%
30%
30%
45%
45%
49%
49%
36%
30%
30%
30%
45%
49%
26,788
22,884
4,582
3,622
2,866
2,064
2,697
3,102
15,999
2,503
1,580
2,407
3,904
6,885
1,871
960
1,119
(107)
802
484
517
(405)
695
783
(111)
6,016
9,731
(6,127)
(3,715)
(1,602)
16,220
19,400
53,042
57,088
17,424
49,644
(3,180)
1,976
(13,966)
(4,046)
7,444
(12,504)
Other investments
587
571
Overall total
21,223
23,660
13 Inv e stm e ntp r op e r tie s
On December 31, 2014, the balance of “Investment properties” is R$54,039 (December/2013 – R$54,039). On December 31, 2014 and
2013, the market value of these properties is approximately R$350,000 and R$296,000, respectively.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
14 Intangib le Asse ts
(a) Financial p osition b alance s
Dec em ber 3 1, 2014
A ccu m u late d
am orti zati on
Cost
8,983,492
1,679,042
7,338,985
808,662
12,916,939
326,045
32,053,165
(1,614,221)
(397,782)
(1,959,832)
(105,753)
(1,930,553)
(65,498)
(6,073,639)
Dec em ber 3 1, 2013
A ccu m u late d
am orti zati on
Cost
8,578,886
1,529,096
6,473,507
693,029
11,555,381
209,156
29,039,055
(1,499,096)
(342,950)
(1,804,940)
(79,709)
(1,430,778)
(35,351)
(5,192,824)
Ne t
7,369,271
1,281,260
5,379,153
702,909
10,986,386
260,547
25,979,526
Ne t
7,079,790
1,186,146
4,668,567
613,320
10,124,603
173,805
23,846,231
De ce m be r
31, 2013 A d d i ti on s
Con tract
re n e w al
Prov i si on
for losse s Tran sfe r W ri te -offs an d d i sp osals A m orti zati on
De ce m be r
31, 2014
Intangible right arising from:
Agreements – equity value (i)
Concession agreements – economic value (ii)
Program contracts (iii)
Program contracts – commitments (iv)
Services contract – São Paulo (v)
Software licenses
Total
(b ) C hange s
Intangible assets arising from:
Agreements – equity value (i)
7,079,790
693,960 (165,093)
(1,598)
(34,011)
(14,542)
(189,235)
7,369,271
Concession agreements – economic value (ii)
1,186,146
150,647
-
-
(57)
(496)
(54,980)
1,281,260
Program contracts (iii)
4,668,567
878,947
165,093
(2,919)
(122,940)
(9,726)
(197,869)
5,379,153
Program contracts – commitments (iv)
613,320
115,632
Services contract – São Paulo (v)
10,124,603
1,264,861
Software licenses
Total
173,805
132,734
23,846,231
3,236,781
-
-
-
-
-
-
-
(26,043)
702,909
(30,352)
112,507
(23,162)
(462,071) 10,986,386
-
-
-
(45,992)
260,547
(34,869)
(44,501)
(47,926)
(976,190) 25,979,526
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
De ce m be r
31, 2012
A d d i ti on s
Con tract
re n e w al
Tran sfe r W ri te -offs an d d i sp osals A m orti zati on
De ce m be r
31, 2013
Intangible assets arising from:
Agreements – equity value (i)
6,896,194
647,318
(310,844)
(6,690)
(3,458)
(142,730)
7,079,790
Concession – economic value (ii)
1,109,936
126,853
-
82
(86)
(50,639)
1,186,146
Program contracts (iii)
3,819,172
733,796
310,844
4,789
(2,390)
(197,644)
4,668,567
Program contracts – commitments (iv)
571,091
65,040
Services contract – São Paulo (v)
9,568,487
975,913
Software licenses
Total
2,646
201,399
21,967,526
2,750,319
-
-
-
-
-
177
5,155
3,513
-
(22,811)
613,320
(21,939)
(398,035)
10,124,603
-
(35,395)
173,805
(27,873)
(847,254)
23,846,231
De ce m be r
31, 2011
A d d i ti on s
Con tract
re n e w al
Tran sfe r W ri te -offs an d d i sp osals A m orti zati on
De ce m be r
31, 2012
Intangible assets arising from:
Agreements – equity value (i)
6,731,822
976,205
(652,973)
(21,602)
(916)
(136,342)
6,896,194
Concession – economic value (ii)
1,004,988
150,963
-
Program contracts (iii)
2,744,559
483,448
652,973
Program contracts – commitments (iv)
434,986
154,662
Services contract – São Paulo (v)
9,190,573
882,868
New businesses
Software licenses
Total
16,477
2,316
-
2,872
20,125,721
2,651,018
-
-
-
-
-
-
-
-
(49,486)
(16,477)
-
(87,565)
(14)
(46,001)
1,109,936
(3,095)
(58,713)
3,819,172
-
(18,557)
571,091
(5,977)
(449,491)
9,568,487
-
-
-
-
(2,542)
2,646
(10,002)
(711,646)
21,967,526
In 2014, the Company signed formalized contracts with the municipalities of Itapevi, Jaborandi, Lucélia, Parapuã, Piedade, Rosana,
Registro and Diadema, all of them with a 30-year term. See information about the agreement with Diadema in Note 9 (a).
(c) C onstr uction se r v ice s
Construction revenue
Construction costs incurred
Margin
W ate r supply
1,204,380
1,181,596
22,784
2 014
S e wage
se rvice s
1,713,656
1,673,920
39,736
To tal
2,918,036
2,855,516
62,520
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Construction revenue
Construction costs incurred
Margin
Construction revenue
Construction costs incurred
Margin
W ate r supply
1,011,412
988,281
23,131
W ate r supply
1,053,543
1,035,171
18,372
2 013
S e wage
se rvice s
1,433,323
1,406,206
27,117
2 012
S e wage
S e rvice s
1,410,939
1,379,239
31,700
To tal
2,444,735
2,394,487
50,248
To tal
2,464,482
2,414,410
50,072
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(d ) Intangib le ar ising fr om conce ssion agr e e m e nts
The Company operates concession agreements covering the provision of basic and environmental sanitation services, water supply and
sewage services. These concession arrangements set out rights and obligations relative to the exploration of assets related to the public
service (See Note 3.8 (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, 2014, the Company operated in 364 municipalities in the State of São Paulo (363 in 2013). 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 Sanitation and Energy Regulatory Agency of the
State of São Paulo (ARSESP).
Intangible rights arising on concession agreements include:
(i) Service concession agreements – equity value
These refer to municipalities assumed until 2006, except for the municipalities assumed by economic value through assets valuation
report prepared by independent experts. The amortization of assets is calculated according to the straight-line method, which
considers the assets useful life.
(ii) Concession agreements – economic value
From 1999 through 2006, the negotiations for new concessions were conducted on the basis of the economic and financial result of
the transaction, determined in a valuation report issued by independent appraisers.
The amount determined in the related contract, after the transaction is closed with the municipal authorities, realized through the
subscription of the Company's shares or in cash, is recorded as "concession agreements" and amortized over the period of the related
concession (usually 30 years). As of December 31, 2014 and 2013 there were no amounts pending related to these payments to the
municipalities.
Intangible assets are amortized on a straight line basis over the period of the concession agreements or for the useful lives of the
underlying assets, whichever is shorter.
(iii) Program contracts
These refer to the renewal of contracts previously referred to as concession agreements whose purpose is to provide sanitation services.
The amortization of the assets acquired until the dates of signatures of the program contracts is calculated according to the straight-
line method, which considers the assets’ useful lives. Assets acquired or built after the signature dates of program contracts are
amortized during the contracted period (30 years) or during the useful lives of underlying assets, whichever is shorter.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(iv) Program contracts - Commitments
After the enactment of the regulatory framework in 2007, renewals of concessions started to be made through of program contracts. In
some of these program contracts, the Company undertook the commitment to financially participate in social and environmental
actions. The assets built and financial commitments assumed within the program contracts are recorded as intangible assets and are
amortized by the straight-line method in accordance with the duration of the program contract (mostly, 30 years).
On December 31, 2014, amortization expenses related to the commitments of the program contract were R$26,043 (R$22,811 in
December 2013 and R$18,557 in December 2012).
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$189,551 and R$77,360 on December 31, 2014 and 2013, respectively) and
noncurrent liabilities (in the amount of R$18,208 and R$88,678 on December 31, 2014 and 2013, respectively). In 2014, the annual
rate of 8.06% was applied (WACC) to calculate the present value adjustment of these contracts.
(v) Services agreement with the Municipality of São Paulo
On June 23, 2010, the Company entered into an agreement with the State of São Paulo and the Municipality of São Paulo to regulate
the provision of water and sewage services in the city of São Paulo for a 30-year period, which is extendable for an another 30-year
period.
Also on June 23, 2010, an agreement was signed between the state and municipal government, and SABESP and the Sanitation and
Energy Regulatory Agency of the State of São Paulo (“ARSESP”) are the consenting and intervening parties, whose main aspects are
the following:
1. The State and the Municipality of São Paulo grant to Sabesp the right to explore the sanitation service in the capital of the State of
São Paulo, which consists of the obligation to provide such service and charge the respective tariff for this service;
2. The State and the Municipality sets forth ARSESP as the agency responsible for regulating the tariff, controlling and monitoring the
services;
3. The evaluation model of the contract was the discounted cash flow, which considered the financial and economic sustainability of
SABESP’s operations in the metropolitan region of São Paulo;
4. All operating costs, taxes, investments and the opportunity cost of investors and the creditors of Sabesp’s were considered in the
cash flow analysis;
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
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 total revenue from the
municipality of São Paulo, net of the taxes on revenue and delinquency in the period, recognized in profit or loss, as operating cost;
7. The opportunity cost of the investors and the creditors was established by the Weighted Average Cost of Capital (WACC)
methodology. The WACC was the interest rate used to discount the cash flow of the operation; and
8. The agreement considers the recovery of net assets in operation, preferably evaluated through equity valuation or carrying amount
monetarily indexed, as defined by ARSESP. In addition, the agreement provides for the remuneration of investments to be made by
SABESP, so that there is no residual value at the end of the agreement.
Referring to the recovery through tariff, mentioned in item 6 above, of transfer to the Municipal Fund of Environmental Sanitation
and Infrastructure, ARSESP issued in April 2013, the Resolution no. 413, postponing the application of Resolution no. 407 until the
conclusion of the tariff revision process, the transfer to the bill of services of amounts referring to the municipal charges which were
stipulated in Resolution no. 407. The postponement to apply Resolution no. 407 was due to a request by the São Paulo State
Government to analyze, among other things, methods to reduce the impact on consumers.
On April 18, 2014, ARSESP Resolution no. 484 was published with the final results of SABESP’s Tariff Revision, however, both the
São Paulo Municipal Government, through Official Letter no. 1,309/14-SGM/GAB and the São Paulo State Government through a
petition filed by the São Paulo State Office, through the Official Letter ATG/Official Letter no. 092/14-CC, requested a postponement
of the effects of ARSESP Resolution no. 413, published in the São Paulo State Official Gazette on March 20, 2013, until the conclusion
of the revision of the Agreement entered into between the São Paulo Municipal Government, the São Paulo Statement Government
and SABESP.
By means of Resolution 488 of May 7, 2014, ARSESP maintained the suspension of the effectiveness of ARSESP Resolution 407,
published on March 22, 2013, until the results obtained in the revision of the Agreement entered into by the São Paulo Municipal
Government, the São Paulo State Government and SABESP postponing authorization for the transfer to the bill of the services related
to the legally established municipal fees that, by force of the Program Agreements and Water Supply and Sewage Services Agreements,
should be included in the Tariff Revision.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
The agreement represents 49.42% of the total revenue of the Company on December 31, 2014, and 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.
(e ) C ap italization of inte r e st and othe r financial char ge s
In 2014, the Company capitalized interest and inflation adjustment, including related foreign currency exchange effects, in
concession intangible assets during the construction period for qualifying assets totaling R$278,265 (R$205,012 in December 2013),
during the period of the construction.
(f) C onstr uction m ar gin
The Company acts as a primary responsible to construct and install the infrastructure related to the concession, using own efforts or
hiring outsourcing services, receiving the risks and benefits.
Therefore, the Company recognizes revenue from construction service corresponding to the cost of construction increased by margin.
Generally, the constructions related to the concessions are performed by third parties, in such case, the margin of the Company is
lower, normally, to cover eventual administration costs, and the responsibility of the primary risk. In 2014 and 2013 the margin was
2.3%.
Construction margin for 2014, 2013 and 2012 were R$62,520, R$50,248 and R$50,072, respectively.
(g) Exp r op r iations
As a result of the construction of priority projects related to water and sewage systems, the Company was required to expropriate
third-parties' properties, and the owners of these properties will be compensated either amicably or through courts.
The assets received as a result expropriations are recorded as concession intangible assets after the transaction is completed. In 2014,
the total amount related to expropriations was R$13,200 (R$61,102 in December 2013 and R$34,731 in December 2012).
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(h) Pu b lic-Pr iv ate -Par tne r ship (PPP)
Alto Tietê Production System
The Company and the special purpose entity CAB-Sistema Produtor Alto Tietê S/A, formed by Galvão Engenharia
S/A. and Companhia Águas do Brasil – Cab Ambiental, signed in June 2008 the contract of public-private- partnership of Alto Tietê
production system.
The 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.
As of December 31, 2014 and 2013, the amounts recognized as intangible asset related to PPP were R$404,447 and R$415,619,
respectively.
In relation to the obligations assumed by the Company on December 31, 2014 and 2013, the balances in current liabilities were
R$38,047 and R$20,241, and under noncurrent liabilities were R$307,991 and R$322,267, respectively. The annual discount rate of
8.06% was applied in 2014, to calculate the present value adjustment of this contract.
São Lourenço Production System
SABESP and the special purpose entity CAB-Sistema Produtor São Lourenço S/A composed of Construções e Comércio Camargo
Corrêa S/A and Construtora Andrade Gutierrez S/A, in August 2013 signed the Public-Private Partnership agreements of São
Lourenço Production System.
The 25-year services agreement, aiming at rendering services to operate the dehydration system, drying and final disposal of sludge,
works and maintenance of the São Lourenço Production System, has an estimated amount of R$6.0 billion, which started on April
2014.
As of December 31, 2014, the carrying amount recorded in the Company’s intangible assets, related to this PPP, was R$22,756, and
liabilities assumed totaling R$22,245 was recorded as noncurrent liabilities.
(i) W or ks in p r ogr e ss
The amount of R$5,180 million is recorded under intangible assets as works in progress on December 31, 2014 (R$6,498 million in
December 2013), and, in 2014, the major projects are located in the municipalities of São Paulo, Praia Grande and São José dos
Campos, totaling R$2,219, R$229 and R$253, respectively.
(j) Am or tization of intangib le asse ts
The amortization average rate totaled 3.8% in 2014, 3.9% in 2013 and 4.0% in 2012.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(k) S oftw ar e lice nse
The software license of use is capitalized based on the costs incurred to acquire software and make them ready for use. In the first
quarter of 2013, the Company started to implement an integrated business management solution (ERP system), which includes the
implementation of administrative/financial module and the commercial module.
15 Pr op e r ty, Plant and Eq u ip m e nt
(a) Financial p osition b alance s
Dec em ber 3 1, 2014
Dec em ber 3 1, 2013
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Total
(b ) C hange s
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Total
Ac c um ulated
depr ec iatio n
C o st
100,533
74,235
299,921
14,051
16,556
688
505,984
-
(31,720)
(152,999)
(6,438)
(9,432)
(550)
(201,139)
Net
100,533
42,515
146,922
7,613
7,124
138
304,845
Ac c um ulated
depr ec iatio n
-
(30,233)
(130,665)
(5,961)
(10,239)
(540)
C o st
88,332
54,187
202,498
13,856
17,060
1,201
377,134
Net
88,332
23,954
71,833
7,895
6,821
661
(177,638)
199,496
D ecember 31 , 20 1 3
88,332
23,954
71,833
7,895
6,821
661
199,496
Additio ns
Tr a ns f er
W r ite-o f f s a nd dis po s a ls
D epr ecia tio n D ecember 31 , 20 1 4
-
28,407
58,002
1,481
1,187
374
89,451
12,201
(8,561)
42,481
(707)
(29)
(884)
44,501
-
-
-
(280)
-
(39)
(3)
(1,285)
(25,114)
(1,056)
(816)
(10)
100,533
42,515
146,922
7,613
7,124
138
(322)
(28,281)
304,845
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
D ecember 31 , 20 1 2
88,328
25,561
69,633
6,615
6,187
386
196,710
Additio ns
Tr a ns f er
W r ite-o f f s a nd dis po s a ls
D epr ecia tio n D ecember 31 , 20 1 3
-
-
24,678
4,096
1,458
511
30,743
4
(133)
(1,358)
(1,795)
(5)
(226)
(3,513)
-
-
(216)
(350)
-
(59)
-
(1,258)
(20,770)
(1,021)
(760)
(10)
88,332
23,954
71,833
7,895
6,821
661
(625)
(23,819)
199,496
W r ite-o f f s a nd dis po s a ls
D epr ecia tio n D ecember 31 , 20 1 2
D ecember 31 , 20 1 1
Additio ns
109,303
9,432
60,217
1,491
97
1,045
181,585
-
-
11,829
4,572
976
-
17,377
Tr a ns f er
(20,349)
18,768
16,825
1,427
5,429
(498)
21,602
(626)
(873)
(510)
(7)
(41)
-
-
(1,766)
(18,728)
(868)
(274)
(161)
88,328
25,561
69,633
6,615
6,187
386
(2,057)
(21,797)
196,710
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Total
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Total
(c) De p r e ciation
The Company anually revises the depreciation rates of: buildings - 2%; equipment- 10%; transportation equipment - 10% and furniture,
fixture and equipment - 6.7%. Lands are not depreciated.
The depreciation average rate was 11.4% in 2014 and 2013 and 9.8% in 2012.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
16 Loans and financing
Lo ans and financing o utstanding b alance
Decem ber 31, 2014
Decem ber 31, 2013
F in a n cia l in stitu tion
DOM ESTIC CURREN CY
Banco do Brasil
10th issue debentures
th
12
th
14
th
15
th
16
issue debentures
issue debentures
issue debentures
issue debentures
17
th
issue debentures
18
th
issue debentures
th
19
issue debentures
Brazilian Federal Savings Bank
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
Brazilian Development Bank - BNDES TIETE III
Leases
Others
Interest and charges
Cu r r en t
N on cu r r en t
Tota l
Cu r r en t
N on cu r r en t
Tota l
-
100,497
-
38,027
45,450
37,038
94,819
498,731
-
-
-
67,085
16,309
10,287
4,068
1,725
20,183
-
8,997
716
125,011
-
187,352
431,174
239,192
761,497
-
225,379
476,624
276,230
856,316
498,731
1,067,760
1,067,760
202,145
497,793
202,145
497,793
1,031,438
1,098,523
65,237
76,975
35,318
25,875
186,374
187,420
473,593
1,886
-
81,546
87,262
39,386
27,600
206,557
187,420
482,590
2,602
125,011
37,171
22,727
20,079
-
-
-
-
-
83,267
16,309
9,370
2,308
-
19,230
-
-
498
113,504
-
220,109
476,702
269,862
820,887
499,434
100,497
257,280
499,429
289,941
820,887
499,434
1,027,925
1,027,925
160,859
160,859
-
-
959,853
1,043,120
81,546
79,644
29,192
20,400
196,821
98,404
382,492
2,431
-
97,855
89,014
31,500
20,400
216,051
98,404
382,492
2,929
113,504
TOTAL IN DOMESTIC CURRENCY
968,446
5,471,029
6,439,475
424,960
5,326,561
5,751,521
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Lo ans and financing o utstanding b alance
Decem ber 31, 2014
Decem ber 31, 2013
F in a n cia l in stitu tion
Cu r r en t
N on cu r r en t
Tota l
Cu r r en t
N on cu r r en t
Tota l
F OREIGN CURREN CY
Inter-American Development Bank - BID 713 – US$75,293
thousand (US$100,391 thousand in December 2013)
Inter-American Development Bank - BID 896 – US$5,555
thousand (US$8,333 thousand in December 2013)
Inter-American Development Bank - BID 1212 – US$113,059
thousand (US$123,337 thousand in December 2013)
Inter-American Development Bank - BID 2202 – US$347,190
thousand (US$243,687 thousand in December 2013)
International Bank for Reconstruction and Development - IBRD –
US$45,860 thousand (US$37,335 thousand in December 2013)
Eurobonds – US$140,000 thousand (US$140,000 in December
2013)
Eurobonds – US$350,000 thousand (US$350,000 thousand in
December 2013)
JICA 15 – ¥17,286,450 thousand (¥18,438,880 thousand in
December 2013)
JICA 18 – ¥15,542,400 thousand (¥16,578,560 thousand in
December 2013)
JICA 17 – ¥1,029,992 thousand (¥450,484 thousand in December
2013)
JICA 19 – ¥14,208,068 thousand (¥6,036,325 thousand in
December 2013)
BID 1983AB – US$154,231 thousand (US$178,173 thousand in
December 2013)
Interest and charges
TOTAL IN FOREIGN CURRENCY
TOTAL LOANS AND FINANCING
66,664
133,329
199,993
58,794
176,382
235,176
7,377
7,378
14,755
6,507
13,014
19,521
27,301
273,007
300,308
24,077
264,854
288,931
-
-
-
-
914,189
914,189
121,447
121,447
371,655
371,655
924,741
924,741
-
-
-
-
564,443
564,443
87,077
87,077
327,640
327,640
813,650
813,650
25,619
358,659
384,278
25,733
386,007
411,740
23,034
322,166
345,200
23,137
346,733
369,870
-
-
22,437
22,437
314,526
314,526
-
-
9,704
9,704
134,010
134,010
63,596
25,089
344,078
-
407,674
25,089
56,087
21,645
359,059
-
415,146
21,645
238,680
4,107,612
4,346,292
215,980
3,482,573
3,698,553
1,207,126
9,578,641
10,785,767
640,940
8,809,134
9,450,074
Exchange rate on December 31, 2014 US$2.6562; ¥0.022230 (US$2.34260; ¥0,022330 on December 31, 2013)
On December 31, 2014, the Company did not record balances of loans and financing raised in 2014 to mature within 12 months.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
DOMESTIC CURRENCY
10th issue debentures
12
th
issue debentures
14
th
issue debentures
th
15
issue debentures
16
th
issue debentures
th
17
issue debentures
18
th
issue debentures
19
th
issue debentures
Brazilian Federal Savings Bank
GUA RA NTEES MA TURITY
A NNUA L INTEREST RA TES
INF LA TION
A DJUSTMENT
OWN FUNDS
2020
OWN FUNDS
2025
TJLP +1.92% (series 1 and 3) and 9.53%
(series 2)
TR + 9.5%
IPCA (series 2)
OWN FUNDS
2022
TJLP +1.92% (series 1 and 3) and 9.19%
(series 2)
IPCA (series 2)
OWN FUNDS
OWN FUNDS
2019
2015
CDI + 0.99% (series 1) and 6.2% (series
2)
IPCA (series 2)
CDI + 0.30% to 0.70%
OWN FUNDS
2023
CDI +0.75 (series 1) and 4.5% (series 2)
and+4.75% (series 3)
IPCA (series 2
and 3)
OWN FUNDS
2024
TJLP + 1.92 % (series 1 and 3)and 8.25%
(series 2)
IPCA (series 2)
OWN FUNDS
2017
CDI + 0.80% to 1.08%
OWN FUNDS
2015/2037
5% to 9.5%
TR
Brazilian Development Bank - BNDES BAIXADA SANTISTA
OWN FUNDS
Brazilian Development Bank - BNDES PAC
Brazilian Development Bank - BNDES PAC II 9751
Brazilian Development Bank - BNDES PAC II 9752
Brazilian Development Bank - BNDES ONDA LIMPA
Brazilian Development Bank - BNDES TIETE III
Leases
Others
OWN FUNDS
OWN FUNDS
OWN FUNDS
OWN FUNDS
OWN FUNDS
2019
2023
2027
2027
2025
2028
2035
2.5% + TJLP
2.15% + TJLP
1.72%+TJLP
1.72%+TJLP
1.92% + TJLP
1,66% + TJLP
7.73% to 10.12%
OWN FUNDS
2015/2018
TJLP + 2% (Fehidro) and 12%
(Presidente Prudente)
IPC
TR
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
G UARANTEES M ATURITY
ANNUAL
INTEREST
RATES
FOREIG N
EX C H ANG E
ADJUSTM ENT
FOREIG N C URRENC Y
Inter-American Development Bank - BID 713 - US$75,293 thousand
FEDERALGOVERNMENT
Inter-American Development Bank - BID 896 - US$5,555 thousand
FEDERALGOVERNMENT
Inter-American Development Bank - BID 1212 - US$113,059 thousand
FEDERALGOVERNMENT
Inter-American Development Bank - BID 2202 - US$347,190 thousand
FEDERALGOVERNMENT
International Bank for Reconstruction and Development - IBRD US$45,860 thousand FEDERALGOVERNMENT
2017
2016
2025
2035
2034
2016
2020
3.04%
3.00%
2.51%
1.12%
0.43%
7.50%
6.25%
-
-
FEDERALGOVERNMENT
2029
1.8% to 2.5%
FEDERALGOVERNMENT
2029
1.8% to 2.5%
FEDERALGOVERNMENT
2035
1.2% to 0.01%
FEDERALGOVERNMENT
2037
1.7% to 0.01%
US$
US$
US$
US$
US$
US$
US$
Yen
Yen
Yen
Yen
Eurobonds – US$140,000 thousand
Eurobonds – US$350,000 thousand
JICA 15 – ¥17,286,450 thousand
JICA 18– ¥15,542,400 thousand
JICA 17– ¥1,029,992 thousand
JICA 19– ¥14,208,068 thousand
BID 1983AB – US$154,231 thousand
-
2023 2.49% to 2.99%
US$
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(i) Payment schedule – accounting balances on December 31, 2014
20 1 5
20 1 6
20 1 7
20 1 8
20 1 9
20 20
20 21 to 20 37
TO TAL
IN D O M ESTIC C U RRENC Y
Debentures
714,065
357,831
880,837
574,842
651,485
363,759
558,159
4,100,978
Brazilian Federal Savings Bank
BNDES
Leasing
Other
Interest and other charges
TOTAL IN DOMESTIC CURRENCY
IN FO REIG N C U RRENC Y
BID
IBRD
Eurobonds
JICA
BID 1983AB
Interests and other charges
TOTAL IN FOREIGN CURRENCY
Overall total
67,085
52,572
8,997
716
125,011
67,921
65,056
21,851
638
-
71,757
68,965
22,675
719
-
75,741
68,965
23,571
529
-
79,015
68,966
24,543
-
-
82,732
654,272
1,098,523
51,350
253,897
629,771
26,313
354,640
482,590
-
-
-
-
2,602
125,011
968,446
513,297
1,044,953
743,648
824,009
524,154
1,820,968
6,439,475
101,342
101,343
142,502
75,838
-
-
48,653
63,596
25,089
-
371,655
48,652
63,596
-
-
-
49,271
63,596
-
-
-
49,890
63,302
-
75,838
4,060
75,838
856,544
1,429,245
8,121
109,266
121,447
-
924,741
-
1,296,396
66,963
46,994
-
66,963
736,049
1,066,441
46,231
60,359
-
-
407,674
25,089
238,680
585,246
255,369
189,030
193,855
1,121,894
1,762,218
4,346,292
1,207,126
1,098,543
1,300,322
932,678
1,017,864
1,646,048
3,583,186
10,785,767
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(a) De b e ntur e s
Balance is stated net of funding costs in the amount of R$8,770 (2013 – R$6,402), which will be amortized during the same
maturity period of each contract.
(i) Ne w loans and financing
De b e ntur e s (19 th issue )
On June 30, 2014, the Company conducted the 19th issue of unsecured non-convertible debentures, in a single series, for tender offer,
in the total amount of R$500,000, amount of 50,000 debentures, unit value of R$10, the characteristics of which are the following:
Num b er
Adjustm ent
Interest rates
Paym e nt o f inte re st
Am o rtizatio n
Maturity
Single series
50,000
-
DI+ 0.80% to 1.08% p.a. Semiannual (June and December)
Lump sum
June/2017
Funds deriving from funding by means of the 19th Issue of Debentures were allocated to the payment of the Company’s financial
commitments.
De b e ntur e s (18th issue – se r ie s 3)
As of October 15, 2013, the Company issued 100 debentures, subscribed exclusively by the Brazilian Development Bank (BNDES).
These debentures were distributed in three nonconvertible series, at the unit value of two thousand, seven hundred, fifty-three reais
and seventy centavos (R$2,753.70), totaling R$275,370. BNDES subscribed and settled the 1st and 2nd series on December 16, 2013.
On December 15, 2014, BNDES subscribed and partially settled the 3rd series, in the amount of R$35,798, corresponding to 13
debentures out of 42 expected. The 29 remaining debentures of the 3rd series must be subscribed until 2016.
The 1st and 3rd series have a total term of 132 months with 36-month grace period and will accrue long-term interest rates (TJLP) +
1.92% p.a. The 2nd series has a total term of 133 months with 37-month grace period, as of October 15, 2014 and will accrue a rate of
8.25% p.a. + IPCA.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Am o unt
Adjustm ent
Interest
Inte rest paym e nt
Am o rtizatio n
Maturity
Series 1
Series 2
Series 3
28
30
42
-
IPCA
-
TJLP + 1.92% p.a. Quarterly to October 2016 and monthly
from then on
Monthly (from
November 2016)
October/2024
8.25% p.a.
AnnualAnnual (from November 2017) November/2024
TJLP + 1.92% p.a. Quarterly to October 2016 and monthly
from then on
Monthly (from
November 2016)
October /2024
The funds will reimburse expenditures in water supply and sewage systems, comprising the following projects: ETA Rio Grande,
Litoral Norte, Vale do Paraíba and Mantiqueira and Bacia do Piracicaba - Capivari - Jundiaí (PCJ), in addition to supporting part of
SABESP’s losses reduction program.
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.
(ii) C ov e nants
For the outstanding contracts, the Company has the following restrictive clauses “covenants”:
Ap p licab le to the 10th issue , 14 th issue and 18th issu e :
Since 2014, the Company and BNDES have been discussing the standardization of special obligation clauses, related to the
maintenance of covenants, with respect with the form of calculation, the rules characterizing default and additional guarantees.
At the end of 2014, the Company and BNDES formalized their intention to standardize the covenants. Thereafter, on February 27,
2015, Sabesp concluded the discussions with BNDES and renegotiated the covenants, effective since December 31, 2014, excluding
the EBITDA Margin indicator (over net operating income).
The new renegotiated covenants were:
I) maintenance the following ratios, quarterly calculated and related to accumulated amounts over the last 12 months, upon the
disclosure of reviewed interim financial statements or audited annual financial statements:
- Adjusted Ebitda / Adjusted financial expenses: equal or higher than 3.50;
- Adjusted net debt / Adjusted Ebitda: equal to or lower than 3.0;
- Other onerous debt(*) / Adjusted Ebitda: equal to or lower than 1.0;
(*) “Other Onerous Debts” correspond to the sum of social security liabilities, health care plan, installment payment of tax debts
and installment payment of debts with the Electricity supplier.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
II) The failure to comply with one or more obligations related to the covenants defined in item (I) will be characterized when:
a) the targets stipulated in item (I), for any of the ratios defined above have not been achieved, for at least, two quarters,
consecutive or not, within a 12-month period, within the limits stipulated in item (III).
b) the targets stipulated in the chart of item (I), for any of the ratios defined above have not been achieved, for at least, one (1)
quarter within a 12-month period, beyond the limits stipulated in item (III).
III) If the failure to comply with one or more than one of covenants under the terms of (II) (a) is characterized, whose limits are
established below, the monthly amount related to the amount of rights assigned on a fiduciary basis pursuant to the “Right
Fiduciary Assignment” clause will be automatically increased by 20% to be made by the Company within thirty (30) days as of the
publication of the audited and/or reviewed financial statements.
- Adjusted Ebitda/Adjusted financial expenses lower than 3.50, and equal to or higher than 2.80;
- Adjusted net debt/Adjusted Ebitda: equal to or lower than 3.80 and higher than 3.0;
- Other onerous debt/Adjusted Ebitda: equal to or lower than 1.30 and higher than 1.0;
The failure to achieve one or more than one ratio within the range stipulated above, during same period or successive periods to
which the automatic reinforcement of guarantee was generated, does not give rise to a new obligation of creating an additional
guarantee covenanted.
IV) If the failure to comply with any of the covenants under the terms of item (II) (b) is characterized, and/or the obligation
stipulated for the Company of automatic reinforcement of guarantee under the terms of item (III), the debenture holders, at their
exclusive discretion: may require the Company to create additional guarantees, within term to be defined by it through notice;
suspend the release of funds; and/or declare the early maturity of the Commitment Agreements for the Subscription of Debentures
in Private Issues and Other Covenants.
The agreements also have 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 such
agreement.
Ap p licab le to the 12th issue :
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 paid financial expenses ratio equal to or higher than 1.5;
- Disposal of operating assets, extinguishment of license, loss of concession or loss of Issuer’s capacity to execute and operate the
basic sanitation public utilities in areas of the State of São Paulo territory, which considered individually or jointly during the deed’s
effectiveness, result in a reduction of net sales revenue and/or services revenue of the Issuer exceeding twenty-five percent (25%).
The limit established above will be calculated quarterly, taking into account the Issuer’s operating income for the twelve (12)
months preceding the end of each quarter and applying the financial information disclosed by the Issuer; and
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Noncompliance with these obligations only will be characterized when verified in its interim financial statements, during at least, two
consecutive quarters, or also 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 early maturity of the debentures.
The agreements have 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.
Ap p licab le to the 15th issu e , 16 th issu e , 17th issue and 19 th issue :
Calculated every quarter upon the disclosure of interim or annual financial statements:
- Adjusted total Debt/Ebitda: lower than or equal to 3.65;
- Ebitda/Paid financial expenses: equal to or higher than 1.5;
- Disposal of operating assets, extinguishment of license, loss of concession or loss of Issuer’s capacity to execute and operate the
basic sanitation public utilities in areas of the State of São Paulo territory, which considered individually or jointly during the deed’s
effectiveness , result in a reduction of net sales revenue and/or services revenue of the Issuer exceeding twenty-five percent (25%).
The limit established above will be calculated quarterly, taking into account the Issuer’s operating income for the twelve (12)
months preceding the end of each quarter and applying the financial information disclosed by the Issuer; and
Non-compliance with the covenant clauses, during, at least, two consecutive quarters, or also two nonconsecutive quarters within a
twelve-month period shall result in the early maturity of the agreement.
The agreements have a cross default clause, i.e., the early maturity of any of the Company’s debts, equal to or exceeding R$90 million
(for the 19th issue, amount equal to or exceeding R$120 million), 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, will
result in the early maturity of these agreements.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(b ) Banco d o Br asil
On March 5, 2014, SABESP paid the last installment of the agreement executed with Banco do Brasil.
(c) Br azilian Fe d e r al S av ings Bank - C EF
(i) R e le v ant fund ing
In 2014, R$19.0 million were raised to finance the works under Tietê Project and Water Metropolitan Program. The proceeds compose
nine loan operations formalized on December 2, 2013 between SABESP and the Brazilian Federal Savings Banks and derive from the
“Sanitation for All Program”, selection of the Ministry of Cities – PAC 2012/2013.
The guarantee of the agreements is the partial binding of the collection deriving from the payment of water and sewage tariffs to the
debt total amount. For the agreements executed, a reserve account is also recorded with balance not lower than the amount
corresponding to the amortization of principal and debt ancillary payment.
(ii) C ov e nants
The agreements have 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 these contracts shall imply the
early maturity.
For the outstanding contracts, formalized between May 28, 2007 and March 13, 2013, the Company has the following restrictive
clauses “covenants”:
AMD – Performance Improvement Agreement (*)
AMD - Performance Improvement Agreement, calculated on a quarterly basis, upon the disclosure of the interim or annual financial
statements:
According to the Normative Ruling no. 05 of January 22, 2008, the agreements which are purpose of investment funds, having as
source of fund, the Government Severance Indemnity Fund for Employees (“FGTS”) or Worker Support Fund (“FAT”), which go
through a selection process of the Ministry of Cities, shall maintain a valid Performance Improvement Agreement (“AMD”) with
financial and operational ratios targets, yearly projected for the following 5 years, based on the average of the last two years.
The Performance Improvement Agreement, dated May 28, 2007 and amended in August 2012, was signed between SABESP and the
federal government and Federal Savings Banks and BNDES as intervening parties. According to this agreement, the Company shall
comply with, at least, four of eight operational and financial ratios, stipulated for the period between 2012 and 2016. If we fail to
comply with five of these ratios, the Federal Savings Bank and BNDES may suspend the disbursements and we would be prevented
from executing any other credit facility agreement with these institutions, until new targets are negotiated. The possibility of
renegotiating the targets, if necessary, is foreseen.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
On March 14, 2013, through the Normative Ruling no. 06, the Ministry of Cities revoked the Normative Instruction no. 05 of January
22, 2008, which regulates the Performance Improvement Agreement. Pursuant to Article 2 of the Normative Instruction no. 06, the
AMDs signed until March 13, 2013 shall remain valid until the expiration date of their related effectiveness period, not being
necessary to execute or renegotiate the AMD in new contracts.
(d ) BNDES
Balance is stated net of borrowing costs in the amount of R$1,011 (2013 – R$531), which will be amortized during the same maturity
period of each contract.
(i) R e le v ant fund ing
In 2014, funding totaled R$89,000, referring to 12.2.1381.1 agreement (BNDES Tietê III), signed in February 2013.
Loans are collateralized by part of revenues from the provision of water and sewage services, up to the total amount of the
outstanding balance.
(ii) C ov e nants
See item (a), (ii), covenants applicable to the 10th issue, 14th issue and 18th issue, of this Note.
Ap p licab le to Baixad a S antista, PAC , Ond a Lim p a, PAC II 9 751, PAC II 9 752:
AMD – Performance Improvement Agreement (*)
(*)See item (c), (ii) of this note.
(e ) Le asing
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 2016.
After startup, the lease payment period starts (240 monthly installments), whose amount is periodically adjusted by contracted price
index.
On August 31, 2013, the operation of Campo Limpo Paulista and Várzea Paulista Sewage Systems started and the corresponding
amounts on December 31, 2014 and 2013 are R$138,602 and R$144,384, respectively.
On March 22, 2014, the Sewage Treatment Station of Campos do Jordão started its operations and its related amount on December
31, 2014 is R$135,303.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(f) Eur ob ond s
Balance is stated net of funding costs in the amount of R$5,142 (R$6,584 in 2013), which will be amortized during the same maturity
period of the contract.
(i) C ov e nants
For the outstanding contracts, the Company has the following restrictive clauses “covenants”:
Calculated every quarter upon the disclosure of interim or annual financial statements:
Restrict the funding of new debts so that:
- adjusted total debt to EBITDA does not exceed 3.65;
- the Company's debt service coverage ratio, determined on the date this debt was incurred, shall not be lower than 2.35.
Noncompliance with covenants will accelerate the maturity of the agreement.
The agreement has a cross default clause, i.e., the early maturity of any indebtedness in view of the Company’s loans or any of its
Subsidiaries (*) with a total principal amount of US$ 25,000,000.00 or more (or its corresponding amount in other currencies) shall
imply this agreement’s early maturity.
(*) As per agreement, subsidiary is: “the company, partnership or another entity from which over 50% of its voting shares are directly
or indirectly owned or controlled by any Person or one or other Person’s Subsidiaries, or their combination”.
(g) Inte r -Am e r ican De v e lop m e nt Bank (IADB)
Balance is stated net of borrowing costs amounting to R$8,017 (R$6,418 in December 2013), which will be amortized during the same
maturity period of each contract.
(i) R e le v ant fund ing
In 2014, funding totaled R$244,203, referring to 2202 agreement (BID 2202).
(ii) C ov e nants
For the outstanding contracts, the Company has the following restrictive clauses “covenants”:
Calculated every quarter upon the disclosure of interim or annual financial statements:
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
- 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 current 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.
(h) Jap an Inte r national C oop e r ation Age ncy - JIC A
(i) R e le v ant fund ing
In 2014, funding totaled R$181,653, referring to BZ-P19 agreement (JICA 19).
Balance is stated net of funding costs amounting to R$2,086 (R$1,466 in 2013), which will be amortized during the same maturity
period of each contract.
(i) AB Loan (IADB 19 83AB)
The balance stated is net of borrowing costs amounting to R$1,994 (R$2,243 in 2013), which will be amortized during the same
maturity period of each contract.
(i) C ov e nants
The Company has the following restrictive clauses “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.
(j) Inte r national Bank for R e constr u ction and De v e lop m e nt - IBR D
Balance is stated net of funding costs amounting to R$366 (R$384 in 2013), which will be amortized during the same maturity
period of each agreement.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(k) C ov e nants
As of December 31, 2014 and 2013, the Company had met the requirements set forth by its loan and financing agreement.
(l) Loans and financing – C r e d it Lim ite d
Age nt
Brazilian Federal Savings Bank
Brazilian Development Bank - BNDES
Inter-American Development Bank – IADB
Japan International Cooperation Agency – JICA
International Bank for Reconstruction and Development – IBRD
Others
TOTAL
(*)Exchange rate as of 12/31/2014. (US$1.00 = R$2.6562; ¥1.00 = R$0.02223).
Br azilian Fe d e r al S av ings Bank - C EF
De ce m b e r 31, 2014
(in millions of reais (*))
2,349
1,924
672
546
144
79
5,714
Agreements were signed in June 2014, which total R$320.8 million financing. These agreements were the purpose of PAC 2013/2014
selection conducted by the Ministry of Cities, and proceeds were allocated to the execution of works of Tietê Project, Water
Metropolitan Program, water supply and sewage works in the municipalities of Hortolândia and Itatiba. Total term is up to 24 years,
with 4-year grace period and interest rates indexed to TR (benchmark interest rate) plus 6% p.a., plus management fee of 1.4% p.a.
and the risk rate of 0.3% p.a..
BNDES
Agreement nº 14.2.0535.1 signed in June 2014, totaling R$61,143, destined to the implementation works of Gênesis Sector and the
execution of interconnection primary network of head offices to the “Fazendinha” Sector, in the municipality of Santana de Parnaíba.
Proceeds derive from the “Sanitation for All Program”, selection of the Ministry of Cities – PAC 2013/2014. The contractual conditions
are: 36-month grace period, 108-month amortization period and interest rates of 1.76% p.a. + long-term interest rate (TJLP). For this
agreement, up to date, no disbursement occurred.
SABESP in order to comply with its investment plan relies on a fund-raising plan.
Financing resources contracted have specific purposes, which have been released for the execution of their respective investments,
according to the progress of the works.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
17 Taxe s and contr ib utions
(a) C ur r e nt asse ts
R e cov e r ab le taxe s
Cofins and Pasep
Income tax and social contribution
Withholding income tax (IRRF) on financial investments
Other federal taxes
Other municipal taxes
Total recoverable taxes
De ce m b e r 31, 2014
De ce m b e r 31, 2013
10,121
132,447
3,718
2,313
169
148,768
-
79,548
2,437
4,764
656
87,405
The increased balance of recoverable taxes, mainly derives from the addition in “Income tax and social contribution”, due to higher
amount paid in the year, in view of the effects of declaration of interest on shareholders’ equity and drop in the taxable income
occurred in the last quarter of 2014.
(b ) C ur r e nt liab ilitie s
Taxe s and contr ib utions p ayab le
Cofins and Pasep
INSS (Social Security contribution)
IRRF (withholding income tax)
Other
Total
De ce m b e r 31, 2014
-
33,324
17,377
23,437
74,138
De ce m b e r 31, 2013
21,797
30,822
39,330
23,433
115,382
The decrease in taxes payable from current liabilities derives from the recovery of Cofins and Pasep credit, thus, generating a
recoverable amount, recorded in current assets under “Taxes recoverable”. In addition, the withholding income tax of interest on
shareholders’ equity also decreased, due to the lower amount declared in 2014.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
18 De fe r r e d Taxe s and C ontr ib u tions
(a) Financial position b alance s
Deferred taxes assets
Provisions
Pension obligations – G0 (1)
Pension obligations – G1
Donations of underlying assets on concession agreements
Allowance for loan losses
Other
Total deferred tax assets
Deferre d taxes liab ilities
Temporary difference on concession intangible assets
Capitalization of borrowing costs
Profit on supply to governmental entities
Actuarial gain/loss –G1 Plan
Other
Total deferred tax liabilities
Deferred tax asset, net
De cem b e r 31, 2 014
De cem b er 31, 2 013
524,728
85,271
229,266
45,742
222,587
112,566
1,220,160
(559,411)
(253,581)
(87,092)
(2,514)
(108,084)
(1,010,682)
209,478
506,568
85,271
215,187
43,901
172,482
87,266
1,110,675
(595,285)
(200,343)
(81,711)
(32,405)
(86,901)
(996,645)
114,030
(1) Refers to the installment of R$250,798 from accounts receivable adjustment (GESP), which was accrued as loss in
previous years.
(b ) R e alization
Defe rre d inco m e tax assets
to be realized within 12 months
to be realized after one year
Total deferred income tax asset
Deferre d inco m e tax liab ilities
to be realized within 12 months
to be realized after one year
Total deferred income tax liabilities
Deferred income tax assets
De cem b e r 31, 2 014
De cem b er 31, 2 013
216,063
1,004,097
1,220,160
(39,836)
(970,846)
(1,010,682)
209,478
216,515
894,160
1,110,675
(37,126)
(959,519)
(996,645)
114,030
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(c) C hange s
Deferred inco m e tax assets
De cem b e r 31, 2 013
Net Variatio n
De cem b er 31, 2 014
Provisions
Pension obligations – G0
Pension obligations – G1
Donations of underlying assets on concession agreements
Credit losses
Other
Total
506,568
18,160
85,271
215,187
43,901
172,482
87,266
-
14,079
1,841
50,105
25,300
524,728
85,271
229,266
45,742
222,587
112,566
1,110,675
109,485
1,220,160
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Deferred inco m e tax liab ilities
De cem b e r 31, 2 013
Net Variatio n
De cem b er 31, 2 014
Temporary difference on intangible asset concession
Capitalization of borrowing costs
Profit on supply to governmental entities
Actuarial gain/loss –G1
Other
Total
Deferred tax asset, net
Deferred tax assets
Provisions
Pension obligations – G0
Pension obligations - G1
Donations of underlying assets on concession agreements
Credit losses
Other
Total
(595,285)
(200,343)
(81,711)
(32,405)
(86,901)
(996,645)
114,030
35,874
(53,238)
(5,381)
29,891
(21,183)
(14,037)
95,448
(559,411)
(253,581)
(87,092)
(2,514)
(108,084)
(1,010,682)
209,478
De cem b e r 31, 2 012
Ne t Variatio n
De cem b er 31, 2 013
512,107
85,271
193,125
41,312
162,670
97,425
1,091,910
(5,539)
-
22,062
2,589
9,812
(10,159)
18,765
506,568
85,271
215,187
43,901
172,482
87,266
1,110,675
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Deferred tax liab ilities
De cem b e r 31, 2 012
Net Variatio n
De cem b er 31, 2 013
Temporary difference on intangible asset concession
Capitalization of borrowing costs
Profit on supply to governmental agencies
Actuarial gain/loss– G1
Other
Total
Deferred tax assets, net
(650,093)
(158,298)
(77,827)
9,405
(69,795)
(946,608)
145,302
54,808
(42,045)
(3,884)
(41,810)
(17,106)
(50,037)
(31,272)
(595,285)
(200,343)
(81,711)
(32,405)
(86,901)
(996,645)
114,030
Opening b alance
Net changes in the year:
- corresponding entry in the statement of income
- corresponding entry in equity valuation adjustment
Total net change
C lo sing b alance
(d ) R e conciliation of the e ffe ctiv e tax r ate
De cem b e r 31, 2 014
114 ,030
De cem b e r 31, 2 013
De cem b er 31, 2 012
14 5,302
14 2 ,6 03
65,557
29,891
95,448
2 09 ,4 78
10,538
(41,810)
(31,272)
114 ,030
(42,029)
44,728
2,699
14 5,302
The amounts recorded as income and social contribution tax expenses in the financial statements are reconciled to the statutory
rates, as shown below:
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Profit before income taxes
Statutory rate
Estimated expenses at statutory rate
Tax benefits from interest on shareholders’ equity
Permanent difference
Provision Law 4,819/58 (i)
Donations
Other differences
2 014
1,274,843
34%
(433,447)
100,327
(48,380)
(7,080)
16,720
2 013
2,655,599
34%
(902,904)
182,596
(33,279)
(12,218)
33,765
Income tax and social contribution
(371,860)
(732,040)
Current income tax and social contribution
Deferred income tax and social contribution
Effective rate
(437,417)
(742,578)
65,557
29%
10,538
28%
(i) Permanent difference related to the provision for actuarial liability (Note 20 (iii)).
2 012
2,547,672
34%
(866,208)
252,355
(32,514)
(11,447)
22,042
(635,772)
(593,743)
(42,029)
25%
(e ) Tr ansition Tax R e gim e (R TT) and Law 12,9 73/2014
For the purposes of calculating the income tax and the social contribution related to 2009 and 2010, 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 Presidential
Decree 449/08, converted into Law No. 11,941/2009, by means of records in the fiscal books – LALUR and auxiliary controls, without
any modification in the bookkeeping and it has been adopting the same tax practices since 2008, as RTT started to be mandatory.
On May 13, 2014, the Provisional Presidential Decree nº 627 of November 11, 2013 was converted into Law nº 12.973 which alters the
federal tax laws on the Corporate Income Tax - IRPJ, Social Contribution on Net Income - CSLL, PIS/PASEP Contribution and
Contribution of Social Security Financing – Cofins and revokes the Transitory Tax Regime - RTT enacted by Law 11,941 of May 27,
2009.
Pursuant to the law, the legal entity could adopt the rules as of January 1, 2014, by means of option to be expressed irreversibly before
the Federal Revenue Service, in relation to the Articles 3, 72 to 75 and 93 to 119, which took effect on the date of publication. The
Company has decided not to adopt such anticipated option.
The analyses prepared by the Company do not show relevant impacts on its operations and its financial statements for the year ended
December 31, 2014.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
19 Pr ov isions
(a) Law suits w ith p r ob ab le like lihood of loss
(i) Financial p osition b alance s
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, 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
Pro visio ns Escro w depo sits De cem b e r, 31, 2 014 Pro visio ns Escro w de po sits
(110,384)
(183,606)
(11,965)
(1,956)
(1,614)
-
(114,463)
(195,478)
(9,990)
-
(2,233)
(807)
524,174
65,376
116,413
55,554
233,233
225,597
638,637
260,854
126,403
55,554
235,466
226,404
621,999
340,100
129,400
59,659
156,060
182,689
Decem b er,
31, 2 013
511,615
156,494
117,435
57,703
154,446
182,689
1,543,318
(322,971)
1,220,347
1,489,907
(309,525)
1,180,382
625,092
918,226
-
(322,971)
625,092
595,255
631,374
858,533
-
(309,525)
631,374
549,008
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(ii) C hange s
Customer claims (i)
Supplier claims (ii)
Other civil claims (iii)
Tax claims (iv)
Labor claims (v)
Environmental claims (vi)
Subtotal
Escrow deposits
Total
Decem b er, 31,
2 013
Additio nal
pro visio ns
Inte rest and
inflatio n
adjustm e nt
Use o f the
accrual
Am o unts no t
use d
(reve rsal)
Decem b er, 31,
2 014
621,999
340,100
129,400
59,659
156,060
182,689
1,489,907
(309,525)
1,180,382
66,895
1,917
31,224
983
123,631
53,829
278,479
(24,999)
253,480
87,987
18,922
37,607
6,818
22,205
21,257
194,796
(21,613)
173,183
(74,308)
(66,608)
(14,507)
(2,313)
(42,107)
(13)
(63,936)
(33,477)
(57,321)
(9,593)
(24,323)
(31,358)
(199,856)
(220,008)
28,698
(171,158)
4,468
(215,540)
638,637
260,854
126,403
55,554
235,466
226,404
1,543,318
(322,971)
1,220,347
(b ) Law suits w ith p ossib le like lihood of loss
The Company is party to lawsuits and administrative proceedings, which are assessed by Management whose chances of loss are
possible and are not recorded as accruals. 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
De cem b e r 31, 2 014
Decem b er 31, 2 013
461,900
1,346,400
447,900
632,100
304,000
586,800
3,779,100
737,800
1,071,000
422,400
570,700
278,700
163,900
3,244,500
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(c) Exp lanation on the natu r e of m ain classe s of law suits
(i) C ustom e r claim s
Approximately 1,240 lawsuits were filed by commercial customers, which claim that their tariffs should correspond to other
consumer categories, 720 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 and 60 lawsuits where customers plead the reduction in tariff under the category as
“Social Welfare Entity”. 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$12,559 increase in the lawsuits classified as probable loss (net of
escrow deposits) is related to the new lawsuits filed and interest rates, fees and updates of lawsuits in progress, partially mitigated by
payments made in the period and revisions of expectations caused by favorable decisions to the Company in 2014. The R$275,900
decrease in lawsuits with chances of possible losses is mainly related to revisions of expectations caused by favorable decisions to the
Company.
(ii) S up p lie r claim s
Suppliers’ claims include lawsuits filed by some suppliers alleging underpayment of inflation adjustment, 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$91,118 decrease in lawsuits whose chances of losses is considered probable (net of escrow deposits) is mainly related to the
payments made in the period and reviews of expectations caused by favorable decisions to the Company during 2014. The R$275,400
increase in lawsuits whose chances of losses is considered possible is related to new lawsuits filed in 2014, as well as interest rates,
fees and update of lawsuits in progress.
(iii) Othe r civ il claim s
These mainly refer to indemnities for property damage, pain and suffering, and loss of profits allegedly caused to third parties, filed at
different court levels, dully accrued when classified as probable losses. The R$25,500 increase in the lawsuits with expectation of
possible losses is related to interest rates, fees and update of lawsuits in progress, and an increase in the number of lawsuits filed in
2014.
(iv ) Tax claim s
Tax claims refer 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$61,400 increase in lawsuits with chances of possible losses
is related to an increase in the number of lawsuits filed in 2014, and mainly to the re-measurement deriving from lawsuits filed by the
municipality of São Paulo, as outlined in item “b” below.
(a) In 2006, the Federal Revenue Service, by means of a tax execution, inspected the Company’s compliance with the tax obligations
related to income tax and social contribution for calendar year 2001, and issued a tax assessment adjusted through December 31,
2014 in the amount of R$431,853 (R$411,890 in December 2013). The Company filed a timely objection and will appeal against the
tax assessment at administrative level and in courts. Management considers that the chances of losses of this administrative
proceeding is approximately 90% considered remote and 10% possible.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(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$357,528
(R$307,817 in December 2013), 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 court decision on the merits, 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, 2014 and is R$53,486 (R$50,065 in December 2013). Management assessed it as a possible loss.
(d) The Company’s request for an authorization to offset taxes was rejected, overdue in the periods of July, August and September
2002 against the amount of IRPJ paid in excess in 1997 and 1998, due to inflation adjustment over the financial statements (Law
8,200/91), which was anticipated in 1996 due to an injunction, after excluded due discontinuance of proceeding and application of
Provisional Measure 38/02. The Administrative Council of Tax Appeals rejected the credit from 1997. The amount involved was
adjusted through December 31, 2014 and is estimated at R$45,401 (R$43,689 in December 2013). The Company’s Management
assessed this claim as a possible loss.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(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, 2014 the amounts of such judicial lawsuits were R$15,746 (R$13,696 in December 2013) and
R$71,677 (R$62,979 in December 2013), respectively.
(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 was granted a partial relief in this matter, the Company's legal counsels believe the chances of losses amount to R$7,288 on
December 31, 2014 (R$6,999 in December 2013) R$1,243 (R$1,194 in December 2013), and these are possible and probable,
respectively.
(g) SABESP filed two writs of mandamus pleading the declaration of unconstitutional municipal laws that levy 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 judged groundless at the lower court and the Court of Justice of São Paulo, in the appeal's records,
partially granted relief to recognize the impossibility of charging the monthly contribution, due to unconstitutionality, deeming as
valid the need of security and other requirements to issue the Statement of Use Permit– TPU, however, this decision had no effect
since the rules, subject-matter of the first writ of mandamus were revoked. The second writ of mandamus was granted partial relief to
prohibit the enforceability of public price and the security for the use of public areas deriving from the municipal laws. The
municipality’s appeal was rejected and is pending judgment at the higher court. 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 length applied.
(v ) Lab or claim s
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 probable loss, and accordingly, accrued. The R$78,787 increase in lawsuits
with probable chances of losses (net of escrow deposits) and the R$25,300 increase in the lawsuits with possible chances of losses are
due to interest rates, fees and updates on lawsuits in progress and the increased number of suits filed in 2014.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(v i) Env ir onm e ntal claim s
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 at this
moment, however, may differ from the amount to be disbursed as indemnity to alleged damages, in view of the current stage of
referred proceedings. The R$42,908 increase in lawsuits with expectation of probable losses (net of escrow deposits) is mainly related
to the complementary estimates of lawsuits in progress and an increase in the number of lawsuits filed in 2014. The R$422,900
increase in the lawsuits with possible losses is due to the increase in the number of lawsuits filed in 2014 and the complementary
estimates of lawsuits in progress.
Among the main lawsuits the Company is involved, there are five 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. Management classified part of lawsuits as probable chances of losses, in the amount of R$187,669 (R$169,939 in December
2013) and another seven lawsuits as possible losses in the amount of R$558,872 (R$145,107 in December 2013), and the main
variation refers to a new lawsuit filed in fourth quarter of 2014, where the amount considered for disclosure purposes refers to the
amount objected by adverse party, and it not possible yet to estimate the Company’s involved amount, in view of the initial stage of
lawsuit.
(v ii) S e ttle m e nts r e ache d in 2014
During 2014, the Company settled several legal and administrative proceedings, and most of them totaled R$28,982. Out of this
amount, R$25,532 refer to works and R$3,450 refer to environmental compensations, the later, recorded as “other liabilities”, under
the Statement of Financial Position. The accumulated balance on December 31, 2014, referring to these environmental liabilities
amounted to R$18,497.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(v iii) Othe r conce ssion-r e late d le gal p r oce e d ings
The Company is party in concessions-related proceedings, cases in which it can lose the right of operating water supply and sewage
collection services in few municipalities, among which we point out: a) the municipality of Cajobi filed action to recover possession
against SABESP, which was granted relief at the lower court and appellate court to maintain the municipality in the possession of
water and sewage assets and services. The Special Appeal filed by SABESP is pending decision but the chances are probable loss; b)
the municipality of Tarumã filed a writ of prevention against SABESP, which was judged groundless, without appeal by plaintiff,
reason that the chances of losses changed to remote loss. The operation is maintained; c) the Company filed an ordinary action
against the municipality of Santos, with favorable decision to Sabesp at the appellate court. On July 11, 2014, the court decision
dismissing the execution proceeding was made available and records were remitted to the general archives; d) The Company filed a
lawsuit to recover possession against the municipality of Álvares Florence, and appellate court decision was unfavorable to SABESP;
the operation is not maintained. Filing of appeals, with expected probable losses; e) The municipality of Macatuba filed against
SABESP an action to recover possession aiming with injunction return to the possession of facilities under concession, the injunction
was granted relief, at the lower and appellate courts. SABESP no longer operates in the municipality up to this present date, with
expected probable losses; f) The Company filed an action to maintain possession against the municipality of Iperó, which was
deemed groundless at lower and appellate courts. Currently, the Company awaits the acceptance of appeals, however, the lawsuit is
suspended for eventual settlement between the parties. The chances are of probable loss; g) The municipality of Embaúba filed a
repossession action against Sabesp, pleading for injunction to keep it in the possession and the motion was granted relief and
complied with on May 20, 2013. The decision was questioned and Sabesp filed an interlocutory appeal against the injunction
decision, which was upheld by the court. The repossession lawsuit is pending judgment, with expectation of probable losses.
See information about EMAE lawsuits in Note 10(c).
20 Em p loye e Be ne fits
(a) He alth b e ne fit p lan
The health benefit plan is managed by Sabesprev and consists of optional, free choice, health plans sponsored by contributions of
SABESP and the active participants, as follows:
. Company: 7.2% (December 31, 2013 – 7.3%) on average, of gross payroll;
. Participating employees: 3.21% of base salary and premiums, equivalent to 2.1% of payroll, on average.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(b ) Pe nsion p lan b e ne fits
Funded plan – G 1 (i)
Present value of defined benefit obligations
Fair value of the plan assets
Net liabilities recognized for defined benefit obligations
Unfunded plan – G 0 (iii)
Present value of defined benefit obligations
Net liabilities recognized for defined benefit obligations
Liab ility as per statem ent o f financial po sitio n – pensio n o b ligatio ns (*)
De cem b e r 31, 2 014
De cem b er 31, 2 013
2,249,794
(1,573,723)
676,071
2,053,527
2,053,527
2 ,72 9 ,59 8
1,988,912
(1,442,164)
546,748
1,780,268
1,780,268
2 ,32 7,016
(*) The increase of liabilities in 2014 is mainly due to the impact of real increase of salaries and benefits and decrease in the discount
rate to 6.11% and 6.09% in 2014 versus 6.36% and 6.46% in 2013, respectively, for G1 and G0 plans.
Pursuant to IAS19, the Company recognizes (gains)/losses under equity, as equity valuation adjustment, as shown below:
As at December 31, 2014
G 1 Plan
G 0 Plan
To tal
Actuarial gain/(loss) on obligations
(113,727)
(198,192)
(311,919)
Gains/(losses) on financial assets
Other
Total gains/(losses)
28,208
(2,397)
-
-
28,208
(2,397)
(87,916)
(198,192)
(286,108)
Deferred income tax and social contribution – G1 Plan
29,891
-
29,891
Other comprehensive income
(58,025)
(198,192)
(256,217)
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
As at December 31, 2013
G 1 Plan
G 0 Plan
To tal
Actuarial gain/(loss) on obligations
432,426
244,121
676,547
Gains/(losses) on financial assets
Other
Total gains/(losses)
Deferred income tax and social contribution – Plan G1
Other comprehensive income
As at December 31, 2012
(312,857)
3,404
122,973
(41,810)
81,163
-
-
244,121
-
244,121
(312,857)
3,404
367,094
(41,810)
325,284
G 1 Plan
G 0 Plan
To tal
Actuarial gain/(loss) on obligations
(488,956)
(371,035)
(859,991)
Gains/(losses) on financial assets
Total gains/(losses)
357,400
-
357,400
(131,556)
(371,035)
(502,591)
Deferred income tax and social contribution – Plan G1
44,729
-
44,729
Other comprehensive income
(i) Plan G1
(86,827)
(371,035)
(457,862)
The Company sponsors a defined benefit pension plan for its employees ("Plan G1"), which is managed by Sabesprev, receives similar
contributions established in a plan of subsidy of actuarial study of SABESPREV, as follows:
1.19% of the portion of the salary of participation up to 20 salaries; and
10.13% of the surplus, if any, of the portion of the salary of participation over 20 salaries.
As of December 31, 2014, SABESP had a net actuarial liability of R$676,071 (R$546,748 on December 31, 2013) 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 plan’s assets.
Defined benefit obligation, beginning of the year
Current service cost
Interest cost
Actuarial (gains)/losses recorded as other comprehensive income
Benefits paid
2 014
1,988,912
30,736
199,528
113,727
(83,109)
2 013
2,262,440
27,947
206,429
(432,426)
(75,478)
Defined benefit obligation, end of the year
2,249,794
1,988,912
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Below, the change of fair value of plan assets during the year:
Fair value of plan’s assets, beginning of year
Expected return on the plan assets
Expected Company's contributions
Expected participants’ contributions
Benefits paid
Financial gain (loss) recorded as other comprehensive income
2 014
1,442,164
144,678
21,223
20,559
(83,109)
28,208
2 013
1,657,608
151,139
10,876
10,876
(75,478)
(312,857)
Fair value of plan’s assets, end of the year
1,573,723
1,442,164
The amounts recognized in the statement of income are as follows:
Current service cost
Interest cost rates
Expected return on plan assets
To tal re co gnize d in the inco m e statem ent
2 014
9,513
199,528
(144,678)
2 013
27,947
206,429
(151,139)
2 012
16,746
176,762
(147,548)
6 4 ,36 3
83,2 37
4 5,9 6 0
In 2014, the expenses related to defined pension plan amounting to R$43,133, R$6,168 and R$15,062, were recorded in operating
cost, selling and administrative expenses.
Estimated expenses
Current service cost
Interest cost rates
Participants contribution
Total additional expense to be recognized
2 015
23,303
80,755
(23,052)
81,006
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Actuarial assumptions:
Discount rate – actual rate (NTN-B)
Inflation rate
Expected rate of return on assets
Future salary increase
Mortality table
2 014
2 013
2 012
6.11% p.a.
6.49% p.a.
13.00% p.a.
8.62% p.a.
AT-2000
6.36% p.a.
5.80% p.a.
12.53% p.a.
7.92% p.a.
AT-2000
4.10% p.a.
5.00% p.a.
9.30% p.a.
7.10% p.a.
AT-2000
The number of active participants as of December 31, 2014 was 8,670 (8,885 as of December 31, 2013), and of inactive participants
was 6,675 (6,597 as of December 31, 2013).
The benefit to be paid of G1 pension plan, expected for 2015 is R$86,042.
The contributions of the Company and participants of Plan G1 for the fiscal year ended December 31, 2014 were R$22,956 (December
2013 – R$18,348) and R$23,621 (December 2013 – R$18,416), respectively.
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 in referred
plans.
S e nsitiv ity analysis of the d e fine d b e ne fit p e nsion p lan as of De ce m b e r 31, 2014 r e gar d ing the change s in the m ain
assum p tions ar e :
Funded plan - G 1
Discount rate
Wage increase rate
Life expectation
C hange in assum ptio n
Im pact o n pre sent value o f the
de fine d b e nefit o b ligatio ns
Increase of 1.0%
Decrease of 1.0%
Increase of 1.0%
Decrease of 1.0%
Increase of 1 year
Decrease of 1 year
Decrease of R$213,044
Increase of R$244,103
Increase of $71,093
Decrease of R$68,916
Increase of R$44,096
Decrease of R$43,248
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Plan’s asse ts
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 and international markets, general
economic conditions and forecasts as well as requirements under the law. The plan's asset allocation management strategies are
determined with the support of reports and analysis prepared by Sabesprev and independent financial advisors:
Fixed income
- NTNB's
- NTNC's
- NTNF's
Government bonds in own portfolio
Fixed income fund quotas
Private credit investment fund quotas
Total fixed income
Equities
Stocks investment fund quotas
Total equities
Structured investments
Equity investment fund quotas
Real estate investment fund quotas
Multimarket investment fund quotas
Total structured investments
Investments abroad
Other
Fair value of plan assets
De cem b e r 31, 2 014
Decem b er 31, 2 013
790,779
139,200
6,206
936,185
120,413
103,736
712,017
132,265
5,858
850,140
80,931
78,034
1,160,334
1,009,105
223,167
223,167
83,204
30,672
28,206
142,082
19,079
29,061
259,717
259,717
76,338
40,220
25,806
142,364
-
30,978
1,573,723
1,442,164
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(a) Fixed income: it is composed of government bonds issued by the National Treasury, between 2017 and 2050. These
instruments are indexed by NTN-b indexed by IPCA (Extended Consumer Price Index), NTN-c indexed by IGPM (General Market
Price Index) and NTN-f which has a fixed index.
(b) Fixed Income Fund Quotas: investment funds that seek return on fixed income assets and shall have at least, 80% of the
portfolio in directly related assets, summed up via derivatives to the risk factor.
(c) Private Credit Investment Fund Quotas: funds that seek return by means of the acquisition of operations representing
corporate debts or disseminated receivables portfolios (rights or bonds), originated and sold by several assignors who anticipate
funds and have receivables from several business activities as guarantee.
(d) Equities: equity fund composed of Brazilian companies’ stocks listed at BM&FBovespa.
(e) Equity Investment Fund Quotas: it is composed of a closed-ended investment fund. The assets under its management are
destined to the acquisition of stocks, debentures, warrants or other securities convertible or swappable into shares issued by
publicly- or closely-held companies.
(f) Real Estate Investment Fund Quotas: Funds investing in real estate projects (commercial buildings, shopping centers,
hospitals, etc.). The return on capital invested occurs by sharing the Fund’s proceeds or sale of its quotas in the Fund.
(g) Multimarket Investment Fund Quotas: they can be classified as Multimercados Referenciados DI or Multimercado Long
& Short, they seek a basic return of CDI or share arbitration, respectively.
(h) Foreign investment: investment fund quotas in global companies’ stocks, mostly, US companies.
(i) Other: basically composed of loans and real estates.
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) derivative instruments must be used for hedge.
Restrictions with respect to asset portfolio investments, in the case of variable-income securities for internal management, are as
follows:
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
i) day-trade operations will not be permitted;
ii) sale of uncovered share is prohibited;
iii) swap operations without guarantee are prohibited;
iv) leverage will not be permitted, i.e., operations with derivatives representing leverage of asset or selling short, such operations
cannot result in losses higher than invested amounts.
At the end of 2014, Sabesprev had in its investment portfolio debentures issued by the Company in the amount of R$1,893. In 2013,
there were no assets issued by the Company in the portfolio. The real estate held in the portfolio is not used by the Company.
The Brazilian capital markets were affected in 2014 by the negative perception about how the macroeconomic policy has been
conducted, inflation remaining at high levels and low economic growth, however, despite this scenario, the plan’s assets improved by
9.92% in 2014 and 7.43% in 2013, and this positive variation was substantially impacted by government bonds (NTNB’s, NTNC’s
and NTNF’s).
Concerning the Fixed Income, investments in fixed income and private credit recorded positive returns impacted by the mark-to-
market effect of federal government bonds, which had a relevant value appreciation in 2014 over 2013.
Concerning Equities, stocks of Brazilian companies listed at the BMF&Bovespa had their prices reduced. The return of main Brazilian
stock index, the Ibovespa, recorded -2.91% in 2014 against -15.50% in 2013.
Concerning the Structured Investments portfolio, the main factors hindering return were investments in Real Estate Investment
Funds and Equity Investment Funds, which had a negative return in the period. The multimarket funds had a return above 2013,
however, they also suffered the impacts of the aforementioned scenario.
(ii) Pr iv ate p e nsion p lan b e ne fits – De fine d contr ib ution
On December 31, 2014, Sabesprev Mais plan, based on defined contribution, had 5,188 active and assisted participants (5,627 in
2013).
With respect to the Sabesprev Mais plan, the contributions from the sponsor represent 100% over the total basic contribution from the
participants.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Regarding the Sabesprev Mais plan, the commitment to all participants who migrated up to December 31, 2014 amounted to
R$9,214 (R$10,613 in December 2013) referred to active participants. The Company has made contributions in the amount of
R$8,936 in 2014 (R$8,446 in December 2013).
(iii) Plan G0
Pursuant to State Law 4,819/58, employees who started providing 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 accounts receivable from related parties, limited to the amounts considered virtually certain that
will be reimbursed by the State Government. As of December 31, 2014, the Company recorded a defined benefit obligation for Plan G0
of R$2,053,527 (R$1,780,268 in December 2013).
Defined benefit obligation, beginning of year
Current interest expense and service costs
Actuarial gains/(losses) recorded as other comprehensive income
Benefits paid
Defined benefit obligation, end of the year
The amounts recognized in the statement of income are as follows:
Interest expense and service costs
Amount received from GESP (undisputed amount)
Total
In 2014, the expense related to the defined benefit obligation under Plan G0 was recorded in administrative expenses.
Estimated expenses
Interest cost rates
Total additional expenses to be recognized
2 014
2 013
1,780,268
224,931
198,192
(149,864)
1,987,718
176,766
(244,121)
(140,095)
2,053,527
1,780,268
2 014
224,931
(82,638)
142,293
2 015
247,859
247,859
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
The main actuarial assumptions used:
Discount rate – actual rate (NTN-B)
Inflation rate
Future salary increase
Mortality table
2 014
2 013
2 012
6.09% p.a.
6.49% p.a.
8.62% p.a.
AT-2000
6.46% p.a.
5.80% p.a.
7.92% p.a.
AT-2000
4.00% p.a.
5.00% p.a.
7.10% p.a.
AT-2000
The number of active participants of Plan - Go as of December 31, 2014 was 22 (24 on December 31, 2013). The number of beneficiaries,
retirees and survivors as of December 31, 2014 was 2,375 (2,412 on December 31, 2013).
The benefit payable from the Go pension plan expected for 2015 is R$157,616.
The se nsitiv ity analysis of d e fine d b e ne fit p e nsion p lan on De ce m b e r 31, 2014 to the change s in the m ain
assum p tions is:
Plan– G 0
Discount rate
Wages growth rate
Life expectation
(c) Pr ofit shar ing
C hange in assum ptio n
Im pact o n pre sent value o f the
de fine d b e nefit o b ligatio ns
Increase of 1.0%
Decrease of 1.0%
Increase of 1.0%
Decrease of 1.0%
Increase of 1 year
Decrease of 1 year
Decrease of R$197,768
Increase of R$194,469
Increase of R$204,121
Decrease of R$185,665
Increase of R$71,258
Decrease of R$68,867
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, commence in January to December. The limit of the profit sharing is one month salary for each
employee, depending on performance goals reached. As of December 31, 2014 the profit sharing accrued amounted to R$72,946
(R$68,495 in December 2013).
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
21 S e r v ice s p ayab le
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 14 (d) (v)). The balances on December 31, 2014 and 2013
were R$318,973 and R$323,208, respectively.
22 Eq uity
(a) Author ize d cap ital
The Company is authorized to increase capital by up to R$15,000,000 (R$10,000,000 in December 2013), based on a Board of
Directors' resolution, after submission to the Fiscal Council.
In the event of capital increase, issue of convertible debentures and/or warrants by means of private subscription, shareholders will
have preemptive right in the proportion of number of shares held, pursuant to Article 171 of Law 6.404/76.
(b ) S ub scr ib e d and p aid -in cap ital
Subscribed and paid-in capital is represented by 683,509,869 registered, book-entry common shares without par value as of
December 31, 2014 (683,509,869 in December 2013), held as follows:
State Department of Finance
Companhia Brasileira de Liquidação e Custódia
The Bank Of New York ADR Department (equivalent in shares) (*)
Other
(*) Each ADR corresponds to 1 share.
De cem b e r 31, 2 014
De cem b e r 31, 2 013
Num b e r o f
shares
343,524,285
169,000,272
170,351,902
633,410
%
50.26%
24.73%
24.92%
0.09%
Num b e r o f
shares
343,524,258
174,076,755
165,291,202
617,654
%
50.26%
25.47%
24.18%
0.09%
683,509,869
100.00%
683,509,869
100.00%
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(c) Distr ib ution of e ar nings
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.
Profit for the year
(-)Legal reserve - 5%
2 014
902,983
(45,149)
857,834
2 013
1,923,559
(96,178)
1,827,381
2 012
1,911,900
(95,595)
1,816,305
Minimum mandatory dividend – 25% (R$0.3138 per share)
214,458
456,845
454,076
On April 30, 2014, the Shareholders’ General Meeting approved the distribution of dividends as interest on shareholders’ equity
amounting to R$537,465, for the 2013 fiscal year. Therefore, the amount of R$42,862 related to the surplus minimum mandatory
dividends of 25%, set forth in the Bylaws, recorded in the 2013 equity under “Additional proposed dividends” was transferred to
current liabilities. These amounts started being paid in June 2014.
The Company proposed dividends as interest on shareholders' equity in the amount of R$214,458, corresponding to R$0.3138 per
common share, net of withholding income tax of R$15,844, to be resolved on the Shareholders’ Meeting to be held on April 30, 2015.
The Company declared dividends payable as interest on shareholders’ equity in the amount of R$214,458, which considers the
minimum dividend amount set forth in the Bylaws. The amount exceeding the minimum mandatory dividend due in the year of
R$37,846 was reclassified into equity to the “Additional proposed dividends” account, this amount includes the withholding income
tax of R$15,844.
Pursuant to CVM Resolution nº 207/1996, the Company imputed interest on shareholders’ equity to the minimum dividend by its
net value of withholding income tax. The amount of R$15,844 referring to the withholding income tax was recognized in current
liabilities, in order to comply with tax liabilities related to the credit of interest on shareholders’ equity.
The interest on shareholders’ equity balance payable as of December 31, 2014, totaling R$214,523, refers to the amount of R$214,458
declared in 2014, net of withholding income tax and R$65 declared in previous years.
(d ) C ap ital r e se r v e
The capital reserve includes tax incentives and donations received by the company and may only be used for future capital increases.
The amount of R$124,255 referring to the balance of December 2013 was fully capitalized in 2014, as per Note 22 (j).
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(e ) Le gal r e se r v e
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, we are not required to make any allocations to our legal reserve in
a year in which the legal reserve, when added to our other established capital and earnings reserves, exceeds 30% of our capital stock.
The amounts allocated to such reserve may only be used to increase our capital stock or to offset losses. Therefore, they are not
available for the payment of dividends.
(f) Inv e stm e nts r e se r v e
Earnings reserve - investments reserve is specifically formed by the portion corresponding to own funds assigned to the expansion of
the water supply and sewage treatment systems, based on capital budget approved by the Management.
As of December 31, 2014 and 2013, the balance of investment reserve totaled R$2,914,008 and, R$5,980,535, respectively.
Pursuant to Paragraph four of Article 28 of the by-laws, the Board of Directors may propose to the Shareholders’ Meeting that the
remaining balance of profit for the year, after deducting the legal reserve and minimum mandatory dividends, be allocated to an
investment reserve that will comply with the following criteria:
I- its balance, jointly with the balance of the other earnings reserves, except for reserves for contingencies and realizable profits,
may not exceed the capital stock;
II- the reserve is intended to guarantee the investment plan and its balance may be used:
a) to absorb losses, whenever necessary;
b) to distribute dividends, at any moment;
c) in share redemption, reimbursement or purchase transactions authorized by law;
d) in incorporation to the capital stock.
(g) Allocation of p r ofit for the ye ar
Profit
(+)
(-)
(-)
(-)
Investment reserve recorded
Profit for the year
Legal reserve – 5%
Minimum mandatory dividends
Additional proposed dividends
2 014
902,983
45,149
214,458
37,846
605,530
2 013
2 012
1,923,559
96,178
456,845
80,620
1,289,916
1,911,900
95,595
454,076
80,201
1,282,028
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
The Management will send for approval at the Shareholders’ Meeting, a proposal to transfer the retained earnings balance, in the
amount of R$605,530 to the Investment Reserve account, in order to meet the investment needs foreseen in the Capital Budget.
(h) R e taine d e ar nings (accu m u late d losse s)
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.
(i) Othe r com p r e he nsiv e incom e
Gains and losses arising from changes in the actuarial assumptions are accounted for as equity valuation adjustment, net of income
tax and social contribution effects. See Note 20 (b), the breakdown of amounts recorded in 2014 and 2013.
Balance on December 31, 2013
Actuarial gains (losses) for the year (Note 20 (b))
Balance on December 31 , 2014
(j) C ap ital incr e ase
G1
G0
Total
62,905
(58,025)
4,880
(196,436)
(198,192)
(394,628)
(133,531)
(256,217)
(389,748)
The Shareholders’ Meeting held on April 30, 2014 approved the capital stock increase from R$6,203,688 to R$10,000,000 due to the
partial capitalization of the earnings reserve and total capital reserve totaling R$3,672,057 and R$124,255, respectively.
In addition, a new limit for the capital increase to R$15,000,000 was also approved, as per Note 22 (a)
23 Ear nings p e r S har e
Basic and d ilute d
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.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Income attributable to the Company’s shareholders
Weighted average number of common shares issued
2 014
2 013
2 012
902,983
683,509,869
1,923,559
683,509,869
1,911,900
683,509,869 (*)
Basic and diluted earnings per share (reais per share)
1.32
2.81
2.80
(*) Amount restated due to the split occurred on April 22, 2013
24 S e gm e nt re porting
Management, comprised by the Board of Directors and the Board of Executive Officers, has determined the operating segments used
to make strategic decisions, such as water supply and sewage services.
(i) Statement of Income
Gross operating income
Gross sales deductions
Net operating income
2014
W ater
Sew age
Rec o nc iliatio n to the financ ial
statem ents
Balanc e as per
financ ial
statem ents
4,896,657 4,008,678
2,918,036
11,823,371
(335,498)
(274,657)
-
(610,155)
4,561,159 3,734,021
2,918,036
11,213,216
Costs, selling and administrative expenses
(3,929,755) (2,511,295)
(2,855,516)
(9,296,566)
Income from operations before other operating expenses, net and equity accounting
631,404
1,222,726
62,520
1,916,650
Other operating income (expenses), net
Equity accounting
Financial result, net
Income from operations before taxes
Depreciation and amortization
(3,488)
(2,453)
(635,866)
1,274,843
526,876
477,595
-
1,004,471
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Gross operating income
Gross sales deductions
Net operating income
2013
W ater
Sew age
Rec o nc iliatio n to the financ ial
statem ents
Balanc e as per
financ ial
statem ents
5,276,056 4,263,965
2,444,735
11,984,756
(370,091)
(299,098)
-
(669,189)
4,905,965 3,964,867
2,444,735
11,315,567
Costs, selling and administrative expenses
(3,512,559) (2,275,437)
(2,394,487)
(8,182,483)
Income from operations before other operating expenses, net and equity accounting 1,393,406
1,689,430
50,248
3,133,084
Other operating income (expenses), net
Equity accounting
Financial result, net
Income from operations before taxes
Depreciation and amortization
Gross operating income
Gross sales deductions
Net operating income
3,296
2,465
(483,246)
2,655,599
461,426
409,647
-
871,073
2012
W ater
Sew age
Rec o nc iliatio n to the financ ial
statem ents
Balanc e as per
financ ial
statem ents
4,944,257
3,982,480
2,464,482
11,391,219
(362,003)
(291,585)
-
(653,588)
4,582,254
3,690,895
2,464,482
10,737,631
Costs, selling and administrative expenses
(3,406,588) (2,043,582)
(2,414,410)
(7,864,580)
Income from operations before other operating expenses, net and equity accounting
1,175,666
1,647,313
50,072
2,873,051
Other operating income (expenses), net
Equity accounting
Financial result, net
Income from operations before taxes
Depreciation and amortization
(23,175)
(6,532)
(295,672)
2,547,672
403,980
334,545
-
738,525
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Explanation on the reconciliation items for the Financial Statements: the impacts on gross operating income and in costs are as
follows:
Gross revenue from construction recognized under IFRIC 12 (a)
Construction costs recognized under IFRIC 12 (a)
Construction margin
2 014
2 013
2 012
2,918,036
(2,855,516)
2,444,735
(2,394,487)
2,464,482
(2,414,410)
62,520
50,248
50,072
(a) Revenue from concession construction contracts is recognized in accordance with IAS 11, Construction Contracts, using the
percentage-of-completion method. See Note 14 (c) and (f).
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(ii) Intangible
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.
25 Op e r ating incom e
(a) R e v e nue fr om w ate r and se w age se r v ice s:
Metropolitan region of São Paulo
Regional Systems (i)
Total (ii)
De cem b e r 31, 2 014
De cem b er 31, 2 013
10,289,735
13,492,613
9,741,582
12,298,412
23,782,348
22,039,994
2,197,178
1,806,237
25,979,526
23,846,231
2014
2013
2012
6,235,276
2,670,059
8,905,335
6,984,364
2,555,657
9,540,021
6,625,041
2,301,696
8,926,737
(i) Including the municipalities operated in countryside and at the coast of the State of São Paulo.
(ii) Revenue from water and sewage services decreased by 6.7% as of December 31, 2014 over 2013, due to the Incentive Program
for Reduction of Water Consumption (Bonus) and the 2.2% decrease in the Company’s total billed volume.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
*Bonus: (a) Sabesp’s Incentive Program for Reduction of Water Consumption
After ARSESP´s approval on an emergency basis by means of Resolution no. 469/2014, SABESP adopted an economic incentive to
encourage the population of Greater São Paulo to reduce water consumption. This measure was adopted due to the record heat and
the unheard lack of rainfall at the Cantareira System, which is at a critical level and supplies almost 8.8 million people.
Consumers who reduce by, at least, 20% the average consumption of the twelve-month period, between February 2013 and January
2014, receive 30% discount in their bills. The discount is applied to a smaller amount, since reduced consumption result in cheaper
bills.
This measure applies to households, commerce and industries supplied by Cantareira System: the entire north area and São Paulo
downtown, part of east and west zones of São Paulo, Barueri, Caieiras, Carapicuíba, Francisco Morato, Franco da Rocha, Itapevi,
Jandira, Osasco and Santana de Parnaíba. In Guarulhos and São Caetano do Sul, also supplied by the Cantareira System,
distribution relies on the the local governments’ responsibilities, which buy water from SABESP. The municipal services shall resolve
on granting this incentive.
Initially, the benefit was valid for the bills of reference months from February to August that reached the consumers March and
September. In Santana de Parnaíba, this measure was applied in the reference months from March to August and consumers received
the bills between April and September.
However, in April 2014, the incentive program for reduction of water consumption was postponed until the end of 2014 to the entire
São Paulo metropolitan region, or until water levels at reservoirs are regularized. Due to the dry weather and the low water volume at
the Cantareira System, the Department of Water and Electricity of the State of São Paulo (DAEE) and the National Water Agency
(ANA) set forth that, we are temporarily required to restrict the water outflow caught from the Cantareira System. In order to supply
this lower water availability and continue supplying the population, we are expanding the use of water from other water mains. This
may increase costs to serve consumers of the metropolitan region of São Paulo. If the situation of the reservoirs affected by dry weather
does not improve, we may be forced to take more drastic measures.
On May 26, 2014, the Incentive Program for Reduction of Water Consumption was expanded to the municipalities operated by
Sabesp which compose by Piracicaba basins, Capivari and Jaguari rivers, located in the coverage area of the Cantareira System.
Likewise, consumers who reduce by, at least, 20% their monthly consumption will be entitled to bonus, compared to the average
consumption of the twelve-month period, between February 2013 and January 2014. These consumers will receive 30% discount on
their water and sewage bills. The participating municipalities are Bragança Paulista, Joanópolis, Nazaré Paulista, Pinhalzinho,
Piracaia, Vargem, Hortolândia, Itatiba, Jarinu, Monte Mor, Morungaba and Paulínia.
Such measure included residential, commercial, industrial and public customers and was valid for the bills issued as of June 2014,
effective until December 2014.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Bonus in stage s
On October 22, 2014, ARSESP published the Resolution nº 514 which approved the bonus by consumption reduction levels according
to SABESP's Incentive Program for Reduction of Water Consumption.
The bonus by consumption reduction levels during the effectiveness period of the Incentive Program for Reduction of Water
Consumption will be:
(a) Thirty percent (30%) bonus for users whose monthly consumption decreased by at, least, twenty percent (20%) in relation to the
average consumption of the period between February 2013 and January 2014.
(b) Twenty percent (20%) bonus for users whose monthly consumption exceeds or is equal to fifteen percent (15%) and lower than
twenty percent (20%) in relation to the average consumption of the period between February 2013 and January 2014.
(c) Ten percent (10%) bonus for users whose monthly consumption exceeds or is equal to ten percent (10%) and lower than fifteen
percent (15%) in relation to the average consumption of the period between February 2013 and January 2014.
The bonus by consumption reduction levels has been applied to all the municipalities that currently already receive such bonus over
the water and sewage collected amounts.
The new levels of the Bonus Program adopted the consumptions after the November 1, 2014 as reference.
The bonus for the period between January and December 2014 totaled R$376,414.
Bonus e ffe ctiv e ne ss is p ostp one d
By means of Resolution 536 of December 18, 2014, ARSESP authorized the postponement of the Incentive Program for Reduction of
Water Consumption’s effectiveness until the end of 2015 or until the reservoir levels are regularized, which occurs first.
See Note 31 (a), the event after the reporting period about the contingency tariff.
(b ) R e conciliation b e tw e e n gr oss op e r ating incom e and ne t op e r ating incom e :
Revenue from water and sewage services
Construction revenue (Note 14 (c))
Sales tax
Net revenues
2014
2013
2012
8,905,335
2,918,036
(610,155)
11,213,216
9,540,021
2,444,735
(669,189)
11,315,567
8,926,737
2,464,482
(653,588)
10,737,631
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
26 Op e r ating C osts and Exp e nse s
Operating costs
Salaries and payroll charges
Pension obligations
Construction costs (Note 14 (c))
General supplies
Treatment supplies
Outsourced services
Electricity
General expenses
Depreciation and amortization
Selling expenses
Salaries and payroll charges
Pension obligations
General supplies
Outsourced services
Electricity
General expenses
Depreciation and amortization
Allowance for doubtful accounts, net of recoveries (Note 9 (c))
Administrative expenses
Salaries and payroll charges
Pension plan
General supplies
Outsourced services
Electricity
General expenses
Depreciation and amortization
Tax expenses
2 014
2 013
2 012
1,494,147
47,855
2,855,516
191,723
261,205
856,960
597,454
404,367
926,372
1,348,933
1,224,335
59,237
36,480
2,394,487
2,414,410
179,771
240,730
786,515
551,630
444,663
810,297
169,096
177,453
724,478
588,183
400,446
715,070
7,635,599
6,816,263
6,449,951
236,109
6,225
4,549
252,628
579
86,590
10,339
139,589
215,083
198,762
8,470
6,995
208,943
557
82,470
10,721
103,864
6,054
8,313
205,393
629
77,848
8,017
192,236
736,608
637,103
697,252
180,845
158,114
5,861
205,341
1,032
228,737
67,760
76,669
176,845
118,600
6,700
116,735
694
183,874
50,055
75,614
168,514
104,717
4,374
145,673
1,175
209,191
15,438
68,295
924,359
729,117
717,377
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
Operating costs and expenses
Salaries and payroll charges
Pension plan
Construction costs (Note 14 (c))
General supplies
Treatment supplies
Outsourced services
Electricity
General expenses
Depreciation and amortization
Tax expenses
Allowance for doubtful accounts, net of recoveries (Note 9 (c))
27 Financial Exp e nse s and Incom e
Financial expenses
Interest and charges on loans and financing – local currency (i)
Interest and charges on loans and financing – foreign currency (ii)
Other financial expenses (iii)
Income tax over international remittance
Inflation adjustment on loans and financing (iv)
Inflation adjustment on Sabesprev Mais deficit (v)
Other inflation adjustments (vi)
Interest and inflation adjustments on provisions (vii)
Total financial expenses
Financial income
Inflation adjustment gains (viii)
Income on short-term investments (ix)
Interest and other income (x)
Total financial income
2 014
2 013
2 012
1,911,101
212,194
2,855,516
202,133
261,205
1,314,929
599,065
719,694
1,004,471
76,669
139,589
9,296,566
1,740,861
186,307
2,394,487
193,466
240,730
1,112,193
552,881
711,007
871,073
75,614
103,864
8,182,483
1,591,611
147,251
2,414,410
181,783
177,453
1,075,544
589,987
687,485
738,525
68,295
192,236
7,864,580
2014
2013
2012
(272,975)
(92,180)
(104,060)
(14,334)
(98,309)
(1,169)
(10,597)
(118,669)
(712,293)
(294,729)
(304,736)
(84,648)
(62,882)
(10,662)
(72,657)
(1,334)
(5,731)
(70,267)
(602,910)
(87,800)
(33,860)
(11,660)
(34,599)
(1,525)
(6,657)
(97,393)
(578,230)
91,930
202,898
127,904
422,732
85,245
151,106
149,759
386,110
66,497
162,928
103,704
333,129
Financial, net before foreign exchange changes
(289,561)
(216,800)
(245,101)
Net foreign exchange gains (losses)
Foreign exchange variation on loans and financing (xi)
Other foreign exchange changes
Foreign exchange gains
Foreign exchange changes, net
(345,105)
(625)
(575)
(267,835)
(50,523)
(6)
1,395
(43)
(5)
(346,305)
(266,446)
(50,571)
Financ ial, net
(63 5,866)
(483 ,246)
(295,672)
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
(i) The variation in interest expenses related to local currency-denominated loans and financing decreased mainly due to
higher capitalization of interest rates in 2014 over 2013.
(ii) The increase in interest expense related to foreign currency-denominated loans and financing mainly reflects the
increased balance of debt due to new funding.
(iii) Other financial expenses increased especially due to the start-up of two sewage treatment stations financed by means of
leasing (Campo Limpo Paulista/Várzea Paulista and Campos do Jordão, respectively, in August 2013 and in March
2014), under IAS 23, the interest paid are recognized as financial expense.
(iv) The monetary variation derives from increase in the indexes defined in loan agreements, such as UPR and IPCA, which
were 0.9% and 6.4%, respectively, in 2014 (0.2% and 5.9% in 2013 and 0.3% and 5.8% in 2012, respectively). The
exposures to these rates are shown in Note 5.1 (d).
(v) The decrease derives from smaller balance of SABESP’s commitments in relation to the deficit of the Sabesprev Mais
pension plan.
(vi) Other monetary variation expenses are mainly adjustment to liabilities referring to investment commitments required
by the public-private partnerships and mainly from program contracts indexed by the IPC/FIPE and IPCA/IBGE of
5.2% and 6.4%, respectively, in 2014, 3.9% and 5.9%, respectively, in 2013 and 5.1% and 5.9%, respectively, in 2012.
(vii) The variation mainly derives from the update of customers and environmental lawsuits which are adjusted for inflation
by the court of justice’s table, considering the consumer price index INPC/IBGE variation which stood at 6.3% in 2014,
5.6% in 2013 and 6.2% in 2012.
(viii) The monetary variations mainly derives from the update of escrow deposits which are adjusted for inflation by
INPC/IBGE which recorded a variation of 6.3% in 2014, compared to 5.6% in 2013 and 6.2% in 2012.
(ix) The increase in financial investments was due to the Company that kept the amounts invested within a longer term
than in 2013, and the market’s higher interest rates which positively impacted the income earned in 2014.
(x) The variation is mainly due to interest rates on agreements and installment payments.
(xi) The increase in expenses mainly reflect the increase in the debt balance due to new funding. Additionally, in 2014 and
2013, the US dollar appreciated, with a variation of 13.4% and 14.6%, respectively (appreciation of 8.9% in 2012).
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
28 Othe r Op e r ating Incom e (e xp e nse s), ne t
Other net operating income, net (i)
Other operating expenses (ii)
Other net operating income (expenses)
2 014
2 013
109,329
(112,817)
57,382
(54,086)
(3,488)
3,296
2 012
68,364
(91,539)
(23,175)
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, and PURA projects and services.
(i) Other operating income increased by R$51.9 million, chiefly due to: (a) higher application of fines to suppliers and
service providers, totaling R$25.8 million; and (b) higher revenue obtained through the Rational Water Use Program
(PURA), totaling R$20.9 million.
Other operating expenses consist mainly of write-off of concession assets due to obsolescence, discontinued construction works,
unproductive wells, projects considered economically unfeasible, losses on property, plant and equipment.
(ii) Other operating expenses increased by R$58.7 million in 2014, chiefly due to: (a) the provision for works and projects,
totaling R$21.3 million; (b) provision for contractual allowance losses, due to agreement with the municipality of
Diadema, totaling R$15.0 million; (c) write-off of obsolete assets, totaling R$11.4 million; and (d) provision for the
write-off of hydrometers, totaling R$11.4 million.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
29 C om m itm e nts
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, main committed amounts as of December 31, 2014 are as follows:
1 year
1-3 years
3-5 years
Mo re than 5 years
To tal
Contractual obligations - Expenses
Contractual obligations - Investments
Total
1,279,797
1,790,549
548,538
1,807,801
3,070,346
2,356,339
51,687
97,535
149,222
3,784,736
2,188,033
5,972,769
5,664,758
5,883,918
11,548,676
The main commitment refers to São Lourenço PPP. See Note 14 (h).
30 Ad d itional infor m ation on cash flow s
Total additions of intangible assets as (Note 14)
2 014
2 013
2 012
3,236,781
2,750,319
2,651,018
Items not affecting cash (see breakdown below)
(577,924)
(445,288)
(642,319)
Total additions to intangible assets as per statement of cash flows
2,658,857
2,305,031
2,008,699
Investments and financing operations affecting intangible assets but not cash:
Interest capitalized in the period(Note 14 (e))
Contractors
Program contract commitments
Public Private Partnership – PPP (Note 14 (h))
Leasing
Construction margin (Notes 14 (f) and 24)
Total
278,265
48,547
62,250
22,245
104,097
62,520
577,924
205,012
(4,887)
28,197
-
166,718
50,248
445,288
283,016
67,631
75,434
-
166,166
50,072
642,319
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
31 Ev e nts afte r the r e p or ting p e r iod
(a) Ad op tion of continge ncy tar iff
On January 7, 2015, ARSESP published the Resolution nº 545, through which it authorizes the contingency tariff to the users whose
monthly consumption exceeds the average seen in the period between February 2013 and January 2014, as follows:
(i) 40% addition over the tariff amount, applicable to the water consumption that exceed until 20% of average; or
(ii) 100% addition over the tariff amount, applicable to the water consumption that exceed more than 20% of average.
All the users are subject to the contingency tariff, including those with firm demand contracts, except for the following cases:
(i) those with water monthly consumption lower than or equal to 10 m³; and
(ii) hospitals, first-aid clinics, nursing homes, police stations, prisons, detention facilities and centers of Fundação CASA
(social and educational treatment center for adolescents).
The contingency tariff will take effect for consumption measured as of the publication of Resolution until December 31, 2015 and shall
only apply to the municipalities’ users:
(i) where the regulation and inspection of sanitation services are the responsibility of ARSESP; and
(ii) who have been included in the SABESP’s Incentive Program to Reduce Water Consumption.
(b ) R e q ue st for e xtr aor d inar y r e v ision
On March 6, 2015, the Company filed with ARSESP a request for extraordinary revision seeking the tariff re-balance, due to the drop
of billed volume and increased electricity price resulting from the worsening of water crisis in 2014, as foreseen in the Technical Note
RTS/01/2012 – Detailed Methodology for SABESP’s Tariff Revision Process- First Tariff Cycle. Until this report’s date of issue, the
Company had not obtained approval from the regulatory body about this extraordinary revision.
(c) Te r m of Agr e e m e nt – Uncontr ov e r sial accounts r e ce iv ab le
On March 18, 2015, the Company, the São Paulo State government and the Water and Electricity Department - DAEE, and the
Sanitation and Water Resources Department as the intervening party, entered into a Term of Agreement under the terms summarized
herein below. See additional information in Note 10 (a), (vi).
On November 17, 2008, the Company, the São Paulo state government and the Water and Electricity Department, and the Sanitation
and Energy Secretariat as intervening party, entered into the Third Amendment to the Term of Acknowledgment, Consolidation of
Obligations, Commitment and Other Covenants aiming at adjusting the undisputed amount of debts relating to retirement and
pension supplementary benefits referred to by São Paulo State Law no. 4,819 of August 26, 1958, paid by the Company and not
reimbursed by the State.
Com panhia de Saneam ento B ásico do Estado de São Pau lo - SAB ESP
Notes to the Fina ncia l S ta tem ents
Y ea r s End ed Decem ber 31, 2014 a nd 2013
Am o unts in tho usands o f reais, unless o therwise indicate d
In referred document, Taiaçupeba, Jundiaí, Biritiba, Paraitinga and Ponte Nova reservoirs were given as temporary and partial
payment of total undisputed amount. However, up to date, it was not possible to transfer the reservoirs due to a lawsuit pending final
and unappealable court decision. Therefore, the State, Sabesp and DAEE, by means of a Term of Agreement signed on March 18, 2015,
agreed to replace the Reservoirs with the debt’s installment payment.
The agreement’s current amount is R$1,012,310, R$696,283 referring to the principal amount (“Principal Amount”) and R$316,027
referring to the inflation adjustment of principal until February 2015.
The Principal Amount will be paid in 180 installments, as follows:
a) The first 24 installments will be settled by immediately transferring 2,221,000 preferred shares issued by Companhia de
Transmissão de Energia Elétrica Paulista - CTEEP, TRPL4, totaling R$87,174, based on the share closing price as of March 17, 2015.
b) The amount of R$609,109 will be adjusted by IPCA (Extended Consumer Price Index) until the date when payments start and
paid in cash, by means of other 156 monthly installments, beginning on April 5, 2017. When payment starts, installments will be
adjusted by IPCA plus simple interest of 0.5% per month.
Considering the lawsuit which objects the possibility of transferring the reservoirs is pending final and unappealable court decision,
the agreement also provides for the following situations:
1) If transfer is possible and the Reservoirs are effectively transferred to Sabesp and registered at the notary’s office, Sabesp will
reimburse to the State the amounts paid in replacement of Reservoirs (Principal Amount) in 60 monthly installments adjusted by
IPCA until the payment date of each installment; and
2) If the transfer of Reservoirs is not possible, the State will pay to Sabesp, in addition to the Principal Amount, the inflation
adjustment credit in 60 installments, starting these payments at the end of Principal Amount installment payment. The amount will
be adjusted by IPCA to the start date of payments and, as of this date, IPCA will be incurred plus 0.5% simple interest rates/month
over the amount of each installment.
(d ) Pr op osal for Extr aor d inar y Tar iff R e v ision - Pu b lic C onsultation
On March 31, 2015, ARSESP submitted for Public Consultation a proposal which suggests a total tariff adjustment of 13.87%, 6.36%
of which refers to the extraordinary revision and 7.06% to the tariff adjustment by the IPCA minus the X Factor. In the Public
Hearing held on April 15, 2015, Sabesp proposed a total tariff increase of 22.70%. The Company is awaiting ARSESP’s final decision.