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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20‑F
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2018
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the transition period from ________________ to _______________________
OR
o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report__________________________
Commission file number 001‑31317
Companhia de Saneamento Básico do Estado de São Paulo–SABESP
(Exact name of Registrant as specified in its charter)
Basic Sanitation Company of the State of São Paulo‑SABESP
(Translation of the Registrant’s name into English)
Federative Republic of Brazil
(Jurisdiction of incorporation or organization)
Rua Costa Carvalho, 300
05429‑900 São Paulo, SP, Brazil
(Address of principal executive offices)
Rui de Britto Álvares Affonso
raffonso@sabesp.com.br
(+55 11 3388 8247)
Rua Costa Carvalho, 300 05429‑900 São Paulo, SP, Brazil
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares, 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.
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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.
683,509,869 Shares of Common Stock (SBS)
Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically 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 þ No o
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or an emerging growth
company. See the definitions of "large accelerated filer," "accelerated filer," and "emerging growth company" in Rule 12b-2 of the Exchange
Act.
Large Accelerated Filer þ
Non‑accelerated Filer o
Accelerated Filer o
Emerging Growth Company o
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to
Section 13(a) of the Exchange Act. o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP o International Financial Reporting Standards as issued by the International Accounting Standards Board þ Other o
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has
elected to follow
Item 17 o Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).
Yes o No þ
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards
Codification after April 5, 2012.
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TABLE OF CONTENTS
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING
ADDITIONAL INFORMATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART I
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 1.
OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 2.
KEY INFORMATION
ITEM 3.
ITEM 4.
INFORMATION ON THE COMPANY
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 10.
ITEM 11.
ITEM 12.
PART II
ITEM 13.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15.
ITEM 16.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS
ITEM 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
ITEM 16G. CORPORATE GOVERNANCE
ITEM 16H. MINE SAFETY DISCLOSURE
PART III
ITEM 17.
ITEM 18.
ITEM 19.
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
CONTROLS AND PROCEDURES
[Reserved]
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Page
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General
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 audited financial statements as of
December 31, 2018 and 2017 and for each of the years in the three-year period ended December 31, 2018 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 Crisis
Our results and operational performance for the fiscal year ended December 31, 2018 were partially affected by the new consumption habits
of our consumers that have impacted the volume of water billed. In the years 2014 and 2015, the drought was more intense in the northwest
region of the State of São Paulo, resulting in the lowest stream flow measurements in over 80 years. With the return of the rainfall to historical
levels for the rainy season that began in October 2015 and ended in March 2016, the level of water in the reservoirs that provide water to the
population of the São Paulo metropolitan region returned to normal and the measures taken during the water crisis to continue to service
consumers were gradually discontinued. However, heightened public awareness of the need to conserve water during the crisis resulted in our
customers adopting lower water consumption practices during the water crisis and these practices have been partially integrated into our
consumers’ daily habits. As a result, despite our reservoirs having a higher volume of water available for treatment, the total volume of water
billed to our clients did not return to the volume of water billed in 2013, before the water crisis. As of December 31, 2018, the reservoirs in the
São Paulo metropolitan region, where our largest market is located, contained 943.3 million m3 of water storage for treatment (including the São
Lourenço System, a new supply system which expands our production capacity by 6 m³/s and which commenced operation in July 2018),
compared to 916.8 million m3 available for treatment as of December 31, 2017. The measurements for these years do not include the so called
“technical reserve” of 287.5 million m³. See “Item 4.B. Business Overview—The 2014-2015 Water Crisis”. Average monthly water production
in 2018 for the São Paulo metropolitan region was 60.9 m³/s, compared to 69.1 m³/s in 2013, the year before the water crisis started. For more
information, see “Item 3.D. Risk Factors—Risks Relating to Our Business—“The 2014-2015 water crisis impacted the water supply in the
metropolitan region of São Paulo and affected the water consumption practices that have been influencing the volume of water billed” and “Item
4.B. Business Overview—The 2014-2015 Water Crisis”.
Other Information
In this annual report, unless the context otherwise requires, references to “we”, “us”, “our”, “Company”, or “SABESP” refer to Companhia
de Saneamento Básico do Estado de São Paulo – SABESP.
In addition, references to:
· “ANA” are to Water National Agency (Agência Nacional de Águas);
· “ARSESP” are to the São Paulo State Sanitation and Energy Regulatory Agency (Agência Reguladora de Saneamento e Energia do
Estado de São Paulo);
· “ADR” or “ADRs” are to American Depositary Receipt or American Depositary Receipts, respectively;
· “ADS” or “ADSs” are to American Depositary Share or American Depositary Shares, respectively;
· “Brazil” are to the Federative Republic of Brazil;
· “Central Bank” are to the Central Bank of Brazil;
· “Coverage” indicators are to (a) the number of homes that are actually connected to the water network or sewage collection network,
plus the number of homes for which the water and sewage networks are available for connection but which are not connected to those
networks (referred to as “feasible” or “connectable” homes), as a portion of (b) the total number of homes within the urbanized service
area covered by our contract with the municipality (i.e., the “serviceable area”);
· “CVM” are to the Comissão de Valores Mobiliários, the Brazilian securities and exchange commission;
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· “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;
· “¥” or “Japanese yen” are the official currency of Japan;
· “real”, “reais” or “R$” are to the Brazilian real, the official currency of Brazil;
· “Regional Systems” are to the area where the regional systems’ executive office operates, comprising 332 municipalities in the interior
and coastline regions of the state of São Paulo;
· “São Paulo metropolitan region”, with respect to our operations, are to the area where the metropolitan executive office operates,
comprising 38 municipalities, including the city of São Paulo;
· “Service” indicators are to (a) the number of homes that are actually connected to the water network or sewage collection network, as a
portion of (b) the total number of homes within a given serviceable area;
· “Sewage Treatment Coverage” indicators are to the amount of consumer units connected to the sewage treatment system;
· “State” are to the State of São Paulo, which is also our controlling shareholder;
· “U.S. dollars” or “US$” are to the United States dollar, the official currency of the United States; and
· “water crisis” are to the drought we experienced from late 2013 and throughout most of 2015. This drought, the most serious that our
service region has experienced in more than 80 years, primarily affected 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, water and sewage lines (in kilometers), water loss index and
investment in programs has not been audited.
Market Information
We make statements in this annual report about our market share and other information relating to Brazil and the industry in which we
operate. We have made these statements on the basis of information from third-party sources and publicly available information that we believe
is reliable, such as information and reports from the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e
Estatística), 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 research prepared by SEADE entitled “Projections of
Population and Residences for the Municipalities of the State of São Paulo: 2010-2050” (Projeção da População e dos Domicílios para os
Municípios do Estado de São Paulo: 2010-2050).
Our Contracts and the Municipalities We Serve
Throughout this document, we refer to the 369 municipalities we serve and to our 373 contracts. This difference results from the fact that we
have two partial water contracts with the municipality of Mogi das Cruzes, where the majority of population is serviced on a wholesale basis,
though it has not been included in the total number of municipalities we serve. Additionally, we have a further two contracts, which we entered
with the municipalities of Aguaí and Guarulhos, where the operations did not commence by the end of 2018. Most of our contracts with the
municipalities we serve are program contracts which have a term of 30 years.
Throughout the report we mentioned that we serve five municipalities in our wholesale segment (Guarulhos, Mauá, Mogi das Cruzes, Santo
André and São Caetano do Sul) since our revenue for the fiscal year 2018 is derived from 369 municipalities we serve as part of our retail
operations and five municipalities we serve on a wholesale basis. However, in December 2018, we entered into an agreement with the
municipality of Guarulhos and, as of January 2019, we started operations in the municipality as part of our retail operations. For further
information on this agreement, see “Item 4.B. Business Overview—Wholesale Operations—Wholesale Water Services” and Note 9 to our 2018
financial statements included in this annual report.
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CAUTIONARY STATEMENTS ABOUT FORWARD‑LOOKING STATEMENTS
This annual report includes forward‑looking statements, mainly in Items 3 through 5. We have based these forward‑looking statements
largely on our current expectations and projections about future events and financial trends affecting our business. These forward‑looking
statements are subject to risks, uncertainties and assumptions, including, among other factors:
· general economic, political, demographical 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;
· the impact on our business of lower water consumption practices adopted by our customers during the water crisis, which we do not
know if they will return to their prior standards despite the discontinuation of the measures adopted to serve the São Paulo metropolitan
region during the water crisis;
· any 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 potential corporate reorganization, as approved by State Law No. 16,525 on September 15, 2017, or any other type of
reorganization that might be approved by the government that may include change in control;
· 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, urban conurbations, and the fact that the State and municipal governments share
competency regarding these services;
· the municipalities’ ability to terminate our existing concession agreements prior to their expiration date and our ability to renew such
agreements;
· our ability to provide water and sewage services in additional municipalities and to maintain the right to provide the services for which
we currently have contracts;
· the size and growth of our customer base 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;
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· the costs we incur in complying with environmental laws and any penalties for failure to comply with these laws;
· the outcome of our pending or future legal proceedings;
· the delay or postponement in investment in our sewage system;
· 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 potential impacts of Provisional Measure No. 868/2018 on our business if it is converted into law;
· 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.
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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 audited 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, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 have been
derived from our audited financial statements, presented in accordance with IFRS, and included in this annual report. The selected financial data
as of December 31, 2016, 2015 and 2014 and for the years ended December 31, 2015 and 2014 have been derived from our audited financial
statements, presented in accordance with IFRS, which are 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, 2014 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”.
For the year ended December 31,
2018
R$
2017
R$
2016
R$
2015
R$
(1)
(in millions, except per share and per ADS
data
Selected Income Statement Data:
Net operating revenue
Cost of services
Gross profit
Selling expenses
Allowance for doubtful accounts(*)
Administrative income (expenses)
Operating profit
Financial income (expenses), net
Profit for the year
Earnings per share – basic and diluted
Earnings per ADS – basic and diluted
Dividends and interest on shareholders’ equity per share
Dividends and interest on shareholders’ equity per ADS
Weighted average number of common shares outstanding
16,085.1
(9,086.5)
6,998.6
693.5
(166.7)
(996.9)
5,176.6
(1,264.3)
2,835.1
4.15
4.15
0.99
0.99
683,509,869
14,608.2
(8,779.0)
5,829.2
(686.0)
(82.7)
(1,099.0)
3,961.7
(458.1)
2,519.3
3.69
3.69
0.19
0.19
683,509,869
14,098.2
(9,013.1)
5,085.1
(730.0)
–
(934.9)
3,429.6
699.4
2,947.1
4.31
4.31
1.02
1.02
683,509,869
11,711.6
(8,260.8)
3,450.8
(598.1)
–
45.0
3,044.0
(2,456.5)
536.3
0.78
0.78
0.19
0.19
683,509,869
2014
R$
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
683,509,869
(*) Starting January 1, 2018, we adopted IFRS 9. As a result, in 2018 and 2017 we now recorded our allowance for doubtful accounts in the income statements as a separate item. In 2016,
2015 and 2014, the amounts of allowance for doubtful accounts in the income statements were R$90.5 million, R$2.4 million and R$139.6 million and were presented as part of our
selling expenses.
(1) ADS-American Depositary Share.
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Selected Statement of Financial Position Data
Property, plant and equipment
Contract asset (*)
Intangible assets
Total assets
Current portion of long‑term loans and financing
Long‑term loans and financing
Interest on capital
Total liabilities
Equity
Capital stock
Selected Statements of Cash Flows Data:
Net cash generated from operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Purchases of intangible assets and property, plant and equipment as
presented in our statement of cash flow
2018
R$
2017
R$
2016
R$
2015
R$
2014
R$
267.6
7,407.9
29,012.5
43,565.1
2,103.6
11,049.2
673.8
24,013.4
19,551.7
15,000.0
3,842.9
(2,189.3)
(907.5)
(2,183.2)
255.1
–
33,466.1
39,546.4
1,746.8
10,354.2
598.6
22,033.4
17,513.0
10,000.0
3,301.9
(1,971.4)
(933.6)
(1,976.7)
302.4
–
31,246.8
36,745.0
1,246.6
10,717.6
700.0
21,325.8
15,419.2
10,000.0
3,003.6
(2,130.7)
(625.9)
(2,135.8)
325.1
–
28,513.6
33,706.6
1,526.3
11,595.3
127.4
19,990.0
13,716.6
10,000.0
2,641.4
(2,459.5)
(265.7)
(2,452.1)
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
(2,748.3)
(*) As of December 31, 2018, with the adoption of IFRS 15 - Revenue from contract with customer, since 1 January 2018, assets related to concessions under construction, registered under the scope of
IFRIC 12 - Concession Contracts, have been classified as Contract Assets during the construction period and transferred to Intangible Assets only after completion of the works. For more information
on this adoption, see Note 4.1 to our 2018 financial statements included in this annual report.
Operating Data
Indicator
Number of water connections (in thousands)
Number of sewage connections (in thousands)
Percentage of population with water connections (“service”
indicator) (in percent) (1)
Percentage of population with sewer connections (“service”
indicator) (in percent) (1)
Percentage of population covered by water network (“coverage”
indicator) (in percent) (2)
Percentage of population covered by sewage network (“coverage”
indicator) (in percent) (2)
Percentage of consumer units connected to the sewage treatment
system (“sewage treatment coverage” indicator) (in percent)
Volume of water billed during period (in millions of cubic meters)
Water Billed Loss Index during period (average) (in percent)(3)
Water Metered Loss Index during period (average) (in percent)(4)
Water loss per connection per day (average)(5)
Number of employees
2018
9,053
7,495
95
83
98
90
76
2,107.9
19.5
30.1
293
14,449
2017
8,863
7,302
95
83
98
90
75
2,075.9
20.1
30.7
302
13,672
2016
8,654
7,091
95
82
98
89
74
1,990.3
20.8
31.8
308
14,137
(1) Is equal to (a) the number of homes that are actually connected to the water network or sewage collection network, as a portion of (b) the total number of homes within the serviceable area.
(2) It is equal to (a) the number of homes that are actually connected to the water network or sewage collection network, plus the number of homes for which the water and sewage networks are available
for connection but which are not connected to those networks (referred to as “feasible” or “connectable” homes), as a portion of (b) the total number of homes within the urbanized service area covered
by our contract with the municipality (i.e., the “serviceable area”).
(3) Includes both physical and non‑physical water loss. Water Billed Loss Index represents the quotient of (i) the difference between (a) the total volume of water produced plus (b) the total volume of
water invoiced minus (c) the volume of water excluded from our calculation of water loss, divided by (ii) the total volume 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) Includes both physical and non‑physical water loss. The Water Metered Loss Index represents the quotient of (i) the difference between (a) the total volume of water produced minus (b) the total
volume of water measured minus (c) the volume of water that we exclude from our calculation of water loss, divided by (ii) the total volume 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).
(5) 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).
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
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Not applicable.
D. Risk Factors
Risks Relating to Brazil
The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This influence, as
well as Brazilian political and economic conditions, could adversely affect us and the market price of our common shares and ADSs.
The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and
regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other
measures, changes in interest rates, tax policies, price and tariff controls, currency devaluation or appreciation, capital controls and limits on
imports. Our business, financial condition and results of operations, as well as the market price of our common shares or ADSs, may be
adversely affected by changes in public policy at federal, state and municipal levels with respect to public tariffs and exchange controls, as well
as other factors, such as:
· the regulatory environment related to our business operations and concession agreements;
· interest rates and monetary policies;
· exchange rates and exchange controls and restrictions on remittances abroad;
· currency fluctuations;
· changes in labor regulations;
· political elections;
· 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 change policies or regulations affecting these or other factors may contribute to
economic uncertainty in Brazil and to heightened volatility in Brazilian securities markets and securities issued abroad by Brazilian issuers.
Brazil was downgraded below investment grade by Standard & Poor’s Global Ratings, or S&P, on September 9, 2015, and received a further
downgrade by the same rating agency on February 17, 2016. In addition, Brazil was downgraded below investment grade by Fitch Ratings Inc.,
or Fitch, on December 16, 2015 and received a further downgrade by the same agency on May 5, 2016. Moody’s Investors Service, Inc., or
Moody’s, also downgraded Brazil below investment grade on February 24, 2016. During the first months of 2018, Brazil received additional
downgrades by S&P on January 11, 2018 and Fitch on February 23, 2018.
New and amended Brazilian policies and regulations could have a material adverse effect on our business, financial condition and results of
operations. In addition, uncertainty over whether the acting Brazilian government will have the political power or will to implement other
needed policies or regulations affecting the above or other factors in the future may also contribute to economic uncertainty in Brazil and to
heightened volatility in the securities issued abroad by Brazilian companies.
Following the impeachment of former President Dilma Rousseff, the Vice-President Michel Temer formally took office on August 31, 2016.
Following a divisive presidential race, Congressman Jair Bolsonaro defeated Mr. Fernando Haddad in the second round of elections held on
October 28, 2018, and became Brazil’s president on January 1, 2019.
We cannot assure you that the Brazilian government will continue with its current economic policies, or that these and other developments
in Brazil’s economy and government policies will not, directly or indirectly, adversely affect our business and results of operations.
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Political conditions may have an adverse impact on the Brazilian economy and on our business.
Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political
crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic
deceleration and heightened volatility in the securities issued by Brazilian companies.
The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to a
deteriorating political environment. Various ongoing investigations into allegations of money laundering and corruption being conducted by the
Office of the Brazilian Federal Prosecutor, including the largest such investigation, known as “Operação Lava Jato”, have negatively impacted
the Brazilian economy and political environment. Members of the Brazilian federal government and of the legislative branch as well as senior
officers of large state-owned and private companies have faced or are currently facing allegations of corruption and money laundering as a result
of these investigations. These individuals are alleged to have accepted bribes by means of kickbacks on contracts granted by the government to
several infrastructure, oil and gas and construction companies. Certain of these companies have faced or are currently facing investigations by
the Brazilian Securities Commission (Comissão de Valores Mobiliários), or CVM, and the U.S. Securities and Exchange Commission, or the
SEC. The profits of these kickbacks allegedly financed the political campaigns of political parties forming the government’s coalition, which
funds were unaccounted for or not publicly disclosed. These funds were also allegedly destined toward the personal enrichment of certain
individuals. A number of senior politicians, including members of Congress, former President Luiz Inácio Lula da Silva, and high-ranking
executive officers of major state-owned and private companies in Brazil have been arrested, convicted of various charges relating to corruption,
entered into plea agreements with federal prosecutors and/or have resigned or been removed from their positions. The potential outcome of
Operação Lava Jato as well as other ongoing corruption-related investigations is uncertain, but they have already hurt the image and reputation
of those companies that have been implicated as well as the general market perception of the Brazilian economy, political environment and the
Brazilian capital markets. We have no control over, and cannot predict, whether such investigations or allegations will lead to further political
and economic instability or whether new allegations against government officials will arise in the future.
President Dilma Rousseff was suspended from office on May 12, 2016, when the Brazilian Senate voted to hold a trial on impeachment
charges against her. President Rousseff was replaced by Vice-President Michel Temer, who served as acting President until Ms. Rousseff was
permanently removed from office by the Senate on August 31, 2016 for infringing budgetary laws. Michel Temer then became President for the
remainder of the presidential term, which ended in December 2018. The Temer government was marked by significant political and economic
turmoil, allegations of corruption, political deadlock, slow economic recovery, national transport strikes, low approval rates and foreign trade
disputes, among other factors. Mr. Temer himself has recently been accused by the Federal Public Prosecutor of allegations of corruption. The
potential result of the ongoing corruption scandals and their related investigations is uncertain. Following a divisive presidential race,
Congressman Jair Bolsonaro defeated Mr. Fernando Haddad in the second round of elections held on October 28, 2018, and became Brazil’s
President on January 1, 2019. See “Item 3.D. Risk Factors—Risks Relating to Brazil—The Brazilian government has exercised, and continues to
exercise, significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions, could
adversely affect us and the market price of our common shares and ADSs”.
We cannot assure you that the newly elected federal government will continue with current economic policies, or that these and other
developments in Brazil’s economy and government policies will not, directly or indirectly, adversely affect our business and results of
operations. It is also unclear what changes the newly elected government will make to our sector.
Any of the above factors may create additional political uncertainty, which could harm the Brazilian economy and, consequently, our
business, financial condition, results of operations and the price of our ADSs.
Inflation and the Brazilian government’s measures to combat inflation may contribute to economic uncertainty in Brazil, adversely affecting
us and the market price of our common shares or ADSs.
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 6.40%, 6.90% and 13.65% at the end of 2018, 2017
and 2016, 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, were 3.75%, 2.95% and 6.29% during 2018, 2017 and 2016, 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.
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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 has 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, reaching R$1.634 in August 2008,
although it depreciated by 32.0% against the U.S. dollar during full year 2008, closing 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, 13.39% in
2014 and 47.01% in 2015, falling to R$3.9048 against the U.S. dollar at December 31, 2015. The real fell further during the first months of
2016, reaching a low of R$4.1558 against the U.S. dollar on January 21, 2016, but then regained some value, reaching R$3.2591 per US$1.00 at
December 31, 2016. During 2017, the real remained relatively stable, depreciating only 1.5% against the U.S. dollar by year-end. During 2018,
the real was very volatile and depreciated by 17.1% against the U.S. dollar by year-end. There can be no assurance that the real will not
depreciate further against the U.S. dollar. As of April 17, 2019, the commercial selling rate as reported by the Central Bank was R$3.9225 per
US$1.00.
Exchange rate fluctuations will affect the U.S. dollar equivalent of the real price of our common shares on the São Paulo Stock Exchange
(B3 S.A. – Brasil, Bolsa, Balcão, or B3, formerly BM&FBOVESPA S.A. Bolsa de Valores, Mercadorias e Futuros, or BM&FBOVESPA), as
well as the U.S. dollar equivalent of any distributions we make in reais with respect to our common shares.
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 total foreign currency denominated debt of R$6,669.4 million as of
December 31, 2018 and we anticipate that we may incur additional amounts of foreign currency denominated debt in the future. In 2018, our
results of operations were negatively affected by the 17.1% depreciation of the real against the U.S. dollar, and the depreciation of the real
against the yen by 20.0%, which together led to a R$915.9 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) to our 2018 financial
statements.
For further information on exchange rate instability impacts, see “Item 5.B. Liquidity and Capital Resources—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.
Global financial crises have caused, and in the future may again cause, 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 may, directly or indirectly, materially and adversely affect us and the price of securities issued by
Brazilian companies, including our common shares and ADSs.
Risks Relating to Our Control by the State of São Paulo
We are controlled by the State of São Paulo, whose interests may differ from the interests of non-controlling shareholders, including holders
of ADSs.
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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 December 31, 2018, 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 shareholders, including holders of ADSs. See “Item 5.A. Operating and
Financial Review and Prospects—Certain Transactions with Controlling Shareholder”.
In January 2019, following the elections for State governor in 2018, Mr. João Doria, elected governor, appointed Mr. Benedito Pinto
Ferreira Braga Junior as our Chief Executive Officer with a term expiring in June 2019. Additionally, pursuant to our bylaws, Mr. Benedito
Pinto Ferreira Braga Junior is also a member of our board of directors while holding the position of Chief Executive Officer. The Board of
Directors also elected as part of our executive officers, Mr. Adriano Candido Stringhini as Corporate Management Officer, and Mr. Ricardo
Daruiz Borsari as Regional Systems Officer for a term expiring in June 2019. In March 2019, Monica Ferreira do Amaral Porto joined our board
of directors. We cannot guarantee that there will not be further changes to our Board of Directors or Executive Officers and whether such further
changes may have a material adverse effect on our business and results of operations.
In September 2017, the State of São Paulo obtained approval for State Law No. 16,525/2017, which authorizes the State of São Paulo to set
up a controlling company to hold all of the shares that the State of São Paulo holds in our company. Once formed, this controlling company will
control our company, pursuant to the provisions of Art. 116 of Law No. 6,404 of December 15, 1976, as amended, or the Brazilian Corporate
Law. State Law No. 16,525/2017 allows other minority shareholders, including private companies and state companies, to hold shares of the
controlling company, provided that the State of São Paulo holds the majority of the common shares of the controlling company. If and once
formed, this controlling company may affect future shareholding in and the control of our company. Due to elections for state government in the
second half of 2018, this operation was suspended, and we are currently awaiting guidance from the State Privatization Program’s Board
(Conselho Diretor do Programa Estadual de Desestatização - CDPED), which has authority over our corporate reorganization plan, including
the formation of the controlling company, or any other type of corporate reorganization, including a change of control. We cannot assure that any
potential corporate reorganization, including a change of control, will not have a material adverse effect on our business.
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. As of December 31, 2018, the State owed us R$105.7 million for water and sewage services. Additionally, the State also owes us
substantial amounts related to reimbursements of State‑mandated special retirement and pension payments that we make to some of our former
employees for which the State is required to reimburse us. At the end of 2018 several lawsuits were filed against the Government of the State of
São Paulo for the collection of such debts.
With respect to payment of pensions on behalf of the State, we had a contested credit amount of R$1,107.1 million as of December 31,
2018. 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, 2018, we had a provision for an actuarial liability in the amount of R$2,606.1 million with respect to future
supplemental pension payments for which the State does not accept responsibility. On March 18, 2015, we, the State and the São Paulo State
Department of Water and Energy (Departamento de Águas e Energia Elétrica do Estado de São Paulo), or “DAEE”, with the intervention of the
Department of Sanitation and Water Resources, executed an agreement providing for payment of R$1,012.3 million, of which R$696.3 million
refers to principal and R$316.0 million refers to 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” and Note10 of our 2018 financial statements.
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” and Note 10 of our 2018 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”.
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Our right to withdraw water from the Guarapiranga and Billings reservoirs is being challenged judicially by minority shareholders of
EMAE.
We withdraw water for use in the São Paulo metropolitan area from the Guarapiranga and Billings reservoirs. Empresa Metropolitana de
Águas e Energia S.A., or EMAE, a company that is also controlled by the State of São Paulo, has a concession to produce hydroelectric energy
using water from the same reservoirs. EMAE commenced various lawsuits against us in the past seeking compensation for the water we
withdraw from these reservoirs. Those lawsuits have now been settled by way of an agreement between EMAE and our company (which is
summarized under “Item 7. Major Shareholders and Related Party Transactions”).
On April 11, 2016, we were also named in a separate lawsuit commenced by minority shareholders of EMAE against the State of São Paulo,
as controlling shareholder of EMAE. The minority shareholders are seeking an order to require the State to stop us from withdrawing water
from the reservoirs without paying compensation to EMAE, and to allow EMAE to pump water from the reservoirs for its hydroelectric facility.
The plaintiffs allege that the State, in its capacity as controlling shareholder of EMAE, has acted unduly to EMAE’s detriment and in favor of
our company. The case is in its initial phase.
In addition, on August 7, 2017 we were named in a new lawsuit against us, EMAE and the National Electric Energy Agency (Agência
Nacional de Energia Elétrica, or ANEEL), brought by Alvaro Luiz de Lima de Alvares Otero, another minority shareholder of EMAE,
requesting the annulment of ANEEL’s order approving the settlement agreement mentioned above, as well as our condemnation for
indemnifying EMAE for damages suffered by EMAE. The plaintiff alleges that the order is illegal and harmful, jeopardizing the operational
viability of the Henry Borden hydroelectric power plant, as well as the energy security of the State of São Paulo, the Southeast region of Brazil
and Brazil as a whole. The judge dismissed this lawsuit without judgment on the merits, but this decision is currently being appealed.
The settlement agreement between EMAE and us does not necessarily put an end to the separate lawsuits.
If one of the ongoing lawsuits by minority shareholders of EMAE requires the State to make a different decision regarding water use from
what was agreed between EMAE and the State of São Paulo, our ability to withdraw water from the Guarapiranga and Billings reservoirs may
be compromised. If we were no longer able to withdraw water from these reservoirs, we would have to transport water from locations farther
away, which would increase our water transportation costs and may affect our ability to provide adequate service in the region, which may have
an adverse effect on our financial condition and results of operations.
Risks Relating to Our Business
The 2014-2015 water crisis impacted the water supply in the metropolitan region of São Paulo and affected the water consumption
practices that have been influencing the volume of water billed.
When considering all the water sources that supplied the metropolitan region of São Paulo in the last five hydrological years (which runs
from October to September), the level of rainfall has fallen below the expected historical average. In the hydrological year 2012/2013, rainfall
was 101% of the average expected for the period. In the following years, rainfall has been below the historical average: for the hydrological
years 2013/2014, 2014/2015, 2015/2016, 2016/2017, 2017/2018, the rainfall for thoses periods was 80%, 96%, 97%, 91% and 71% of the
historical average, respectively.
For the years 2014 and 2015, we experienced a severe drought in the metropolitan region of São Paulo, which was more intense in the
northwest region of the State of São Paulo, resulting in the lowest level of rainfall ever recorded in the Cantareira System, the largest production
system in the metropolitan region of São Paulo, over the last 80 years of record. This drought severely affected the level of water sources that
supply the metropolitan region of São Paulo, forcing us to adopt a series of measures to mitigate its impact and maintain the water supply for the
20.9 million inhabitants served in the metropolitan region of São Paulo.
In order to balance supply and demand despite the restricted water availability, we adopted a series of measures from 2014 to April 2016,
including: (i) using treated water from other production systems to serve consumers originally supplied by the Cantareira system; (ii) offering
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 leakage; (iv) adjusting the volume of treated water sold to municipalities that operate their own
distribution network; and (v) using pumps in order to extract water located below the intakes of the Cantareira system, from the so-called
“technical reserve”, which had never before been used to serve the population. See “Item 4.B. Business Overview—The 2014-2015 Water
Crisis”.
With the return of the rainfall to its historical average for the rainy season that began in October 2015 and ended in March 2016, the volume
of water available to the population of the São Paulo metropolitan region returned to a normal level and the measures taken during the water
crisis to continue to service consumers were gradually discontinued. However, heightened public awareness of the need to conserve water
during the crisis resulted in our customers adopting lower water consumption practices during the water crisis and these practices were partially
integrated in our consumers’ daily habits. As a result of this new behavior, despite us having a higher volume of water available for treatment,
the volume of water billed to our clients did not return to the volume of water billed before the water crisis, in 2013. The average monthly water
production in 2018 for the São Paulo metropolitan region was 60.9 cubic meters per second, or m³/s, compared to 60.6 m³/s in 2017, 58.5 m³/s in
2016, 52.0 m³/s in 2015, 62.2 m³/s in 2014 and 69.1 m³/s in 2013, the year before the water crisis started.
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The drought prompted a reduction in the volume of water billed, impacting our revenue especially in 2014 and 2015. In 2014, the water
volume billed decreased 3.1% and the gross operational revenue fell by 6.7% compared to 2013. In 2015, the water volume billed decreased
8.0% and our gross operational revenue increased slightly by 0.5% compared to 2014. In 2016, the volume of water billed increased 4%, and
the gross operational revenue increased by 24.3% compared to 2015. In 2017, the volume of water billed increased 4.3% and the gross
operational revenue increased by 9.9% compared to 2016. In 2018, the volume of water billed increased 1.5% and the gross operational revenue
increased by 16.6% compared to 2017.
Although the investments we made since 2014 have brought improvements to the water security in the metropolitan region of São Paulo,
there is still a risk that there might be further droughts similar or more severe to that of 2014-2015 in the future forcing us to adopt similar
measures as those adopted in 2014-2015.
At the end of March 2019, the total volume of water stored in the reservoirs that supply the metropolitan region of São Paulo was 1,441.3
million m³ (including the volume from São Lourenço System, the ninth system that commenced operations in March 2018) compared to 1,162.8
million m³ at the end of March 2018, 1,223.9 million m³ at the end of March 2017 and 1,178.8 million m³ at the end of March 2016.
We cannot assure you that our consumers will revert to their pre-crisis consumption habits or, if at all, when this will occur nor that this will
not adversely affect our financial condition in the future. See “Item 5.B. Liquidity and Indebtedness Financing—Financial Covenants”.
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 depend on a water right issued by Water National Agency (Agência Nacional de Águas, or ANA) and the São Paulo State Department of
Water and Energy (Departamento de Águas e Energia Elétrica do Estado de São Paulo, or DAEE), in order to extract water from the
Cantareira System. In May 2017, the concession that regulates 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, based on the volume of water available in the reservoirs was
renewed. Under the new terms, the water we are permitted to withdraw from the system is divided into five tranches: (i) if the volume of
water available is higher than 60% of the reservoirs’ capacity, we can withdraw up to 33m3/s; (ii) if the volume of water is between 40%
and 60% of the reservoirs’ capacity, we can withdraw up to 31m3/s; (iii) if the volume of water is between 30% and 40% of the reservoirs’
capacity, we can withdraw up to 27m3/s; (iv) if the volume of water is between 20% and 30% of the reservoirs’ capacity, we can withdraw
up to 23m3/s; and (v) if the volume of water available is lower than 20% of the reservoirs’ capacity, we can withdraw up to 15.5m3/s.
· 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. The Electric Sector
Monitoring Committee (Comitê de Monitoramento do Setor Elétrico– CMSE), has guaranteed the supply of electrical energy to the
National Interconnection System (Sistema Interligado Nacional– SIN) in 2018. Thus, there is no forecast of any shortages or rationing of
energy in 2019. See “Item 4.B. Business Overview—Energy Consumption”.
· 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 reservoirs due to increased soil erosion, silting, and runoff of pollutants that affect the aquatic ecosystems. See
“Item 4.B. Business Overview—Environmental Matters— Climate Change Regulations: Reduction of Greenhouse Gases (GHG)
Emissions”.
· The increasing degradation of watershed areas (Mananciais) 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 “Item 4.A. History and
Development of the Company —Main Projects of Our Capital Expenditure Program”.
· 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 4.B. Business Overview—Tariffs—
Second Ordinary Tariff Revision (2017-2020)” - Tariff Structure - Water and sewage services tariffs and “Item 5.A. Operating and Financial
Review and Prospects—Factors Affecting Our Results of Operations—Effects of Tariff Increases”.
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· 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—Environmental Matters—Water Usage”.
· Our water and sewage pipes are susceptible to degradation caused by factors such as age, intense traffic, population density and commercial
and industrial development, which may provoke accidents in the networks and affect the regular provision of our services, impacting society
and the environment. See “Item 4.B. Business Overview—Description of Our Activities—Water Operations—Water Distribution” and “Item
4.B. Business Overview—Description of Our Activities—Sewage Operations—Sewage System”.
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.
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, No. 8,629/2015 and No. 9,254/2017) 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.
Law No. 13,329/16 instituted a “Special Incentive Regime for the Development of Basic Sanitation” (Regime Especial de Incentivos para o
Desenvolvimento do Saneamento Básico – REISB), seeking to incentivize companies that provide public basic sanitation services to invest more
through tax credits, starting in 2018 and running until 2026. However, article 54-C, which set out the rules for the off-setting of tax credits, was
vetoed by the President of Brazil and, accordingly, we cannot predict what benefits the Special Incentives for the Development of Basic
Sanitation Regime will bring to us. In 2016, Law No. 13,312/2016 amended Law No. 11,445/2007 and now includes the obligation to adopt
environmental criteria that include, among other measures, individual metering of water consumption per habitation unit in condominiums.
However, since this change is still being implemented and shall only come into effect in 2021, we are not currently able to predict its impact on
our business.
The Basic Sanitation Law still 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
No. 11,445/2007 and the Federal Decree No. 7,217/2010 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 operational 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 Regulations Applicable to Our Contracts—Rules Enacted by ARSESP”.
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 user of the service rather than the owner of the property. Since 2011, we have implemented several measures and
instituted new rules for the update of our client registry. Currently, more than 90% of our water and sewage connections are billed to the user of
our services, as foreseen under current regulations. Related to the collection of debt, we are also faced with the challenge of collecting
customers’ taxpayer identification numbers, which are required to register for our services and are needed for the judicial collection of
outstanding fees in the event of nonpayment. We continuously update our customers’ registration information, but we face difficulties in
updating this information in areas with high concentrations of social vulnerability and noncompliance.
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.
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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.
The State of São Paulo, pursuant to Article 25, Section 3 of the Brazilian Constitution, enacted the State Supplementary 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 Ribeirão Preto (LCE No. 1,290/2016), as well as the
urban clusters of Jundiaí (LCE No. 1,146/2011), Piracicaba (LCE No. 1,178/2012) and Franca (LCE No. 1,323/2018). 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.
In July 2018, Provisional Measure No. 844/2018 was issued in order to update Basic Sanitation Law No. 11.445/2007 and amend Law No.
9,984, of July 17, 2000, to assign to the National Water Agency competence to establish reference standards for sanitation services, among other
aspects. This Provisional Measure expired in November 2018 without being converted into law.
On December 28, 2018, Provisional Measure No. 868/2018 was issued with the same purpose of Provisional Measure No. 844/2018, which
aims to amend the Basic Sanitation Law No. 11,445/2017; Law No. 9,984/2000, to attribute to the National Water Agency the power to enact
national reference rules about the sanitation service; Law No. 10,768/2003 to change the role of the Water Resources Specialist; and Law No.
13,529/2017 to authorize the Federal Government to participate in the fund with the exclusive purpose to provide financial support for
specialized technical services. This Provisional Measure is valid until June 3, 2019 and its conversion into law is pending approval by the
National Congress. Although this Provisional Measure has been in force since the date of its publication, it is not yet possible to predict how it
will impact contracts that we may enter into while the measure is in force.
If the Provisional Measure No. 868/2018 is converted into law, it could have a material adverse effect on our business, results of operations
and financial condition.
For more information on ARSESP regulations, see “Item 4.B. Business Overview—Government Regulations Applicable to Our Contracts
—Rules Enacted by ARSESP—Consumer Relations in the State of São Paulo”.
It is not possible to predict the impact of the decision by the Brazilian Supreme Court regarding the shared management of basic sanitation
services in metropolitan areas or the effect that this decision may have on our business, activities, financial condition or results of operations
On March 6, 2013, the Brazilian Supreme Court decided a matter related to the shared management of basic sanitation services in the state
of Rio de Janeiro. In its decision, the court ruled that the state of Rio de Janeiro must establish a new entity, owned by both the state of Rio de
Janeiro and the relevant municipalities, to oversee the planning, regulation and auditing of basic sanitation services in its metropolitan region
with the non-partisan participation of all the municipalities located in the metropolitan region, creating a requirement that the state and the
municipalities must participate jointly in the shared management of public services.
However, this decision is not yet fully effective, as a ruling on a motion for clarification is currently pending, and therefore does not yet
alter the legislative framework regarding basic sanitation that is currently in effect for the State of São Paulo. The São Paulo metropolitan region
(including the municipalities to which we provide water on a wholesale basis, but excluding the concession infrastructure construction revenue)
accounted for 72.2% of our gross operating revenue from services in 2018.
In January 2015, the Federal Government issued the Metropolitan Bylaws (Law No. 13,089/2015), amended by Provisional Measure No.
818 of January 11, 2018, which was subsequently converted into Federal Law No. 13,683/2018 and by Provisional Measure No. 862 of
December 4, 2018, establishing: (i) the general guidelines for the planning, management and performance of public interest initiatives in
metropolitan regions and in urban clusters instituted by the states; (ii) the general planning standards for integrated urban development and other
interfederal governance instruments; and (iii) the criteria to receive federal loans related to urban development. In addition, the Metropolitan
Bylaws foresees mechanisms for integrated management and interfederal governance as well as the sharing of decisions by regional entities.
Despite the Brazilian Supreme Court’s March 6, 2013 decision and the Metropolitan Bylaws, some municipalities in metropolitan regions
and urban clusters, including in metropolitan regions where we operate, have been conducting bidding processes for the concession of sanitation
services without including shared management. We cannot predict the effect of this non- compliance of the shared management requirement on
our business, financial condition or results of operations. Furthermore, we cannot predict how the shared management requirement 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.
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For more information on services in metropolitan regions, see “Item 4.B. Business Overview—Government Regulations Applicable to Our
Contracts—Agreements with Municipalities and Metropolitan Regions”.
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 47.0% of our gross operating revenues (excluding
revenues relating to the construction of concession infrastructure) in the year ended December 31, 2018.
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 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. 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.
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 Sewage and
Water Supply Service Contracts, this charge must be included in the calculation of the tariff.
In April 2013, ARSESP issued Resolution No. 413/2013, which suspended Resolution No. 407/2013 until the conclusion of the first tariff
revision process, 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
established the conclusion of the first 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.
In December 2016, we concluded the first four-year revision of our contract with the city of São Paulo, which altered our service quality,
investment and investment tracking targets. However, the issue of the 7.5% charge was not discussed.
On May 9, 2018, ARSESP announced the final result of the Second Ordinary Tariff Revision. Following this revision cycle, ARSESP will
pass-through to the tariffs up to 4% of the municipal revenue that is transferred by us to a legally established municipal infrastructure fund. Our
only contract that provides for this and complies with ARSESP´s requirements is with the municipality of São Paulo and, accordingly, today 4%
of the funds transferred to the São Paulo Municipal Fund for Environmental Sanitation and Infrastructure are being passed through to our tariffs.
Although ARSESP is required to ensure that the tariffs will adequately compensate us for the services we provide, which includes the above
mentioned pass-through to tariffs, until May 2018 our existing tariff had never included any pass-through to tariffs related to the transfer of 7.5%
of the gross revenues obtained from providing sanitation services in the municipality of São Paulo to the São Paulo Municipal Fund for
Environmental Sanitation and Infrastructure.
Considering that ARSESP has limited to 4% the pass-through to tariff of values transferred to municipal infrastructure funds, the mandatory
transfer of 7.5% of the gross revenues to the Municipal Fund for Environmental Sanitation and Infrastructure, will not be passed through to
customers in full and we cannot assure you when this will happen.
As of December 31, 2018, since 2010 we have transferred approximately R$3.1 billion to the São Paulo Municipal Fund for Environmental
Sanitation and Infrastructure. For additional information on ARSESP regulations, see “Item 4.B. Business Overview—Tariffs” and “Item 4.B.
Business Overview—Government Regulations Applicable to Our Contracts—Rules Enacted by ARSESP”.
On May 24, 2018, as a result of the final result of the Second Ordinary Tariff Revision, we filed a reconsideration request as well as a
clarification and revision request with ARSESP. As part of the clarification and revision request, we requested that ARSESP provide a revision
of the calculation of the financial component related to municipal funds. On February 28, 2019, ARSESP rejected our reconsideration request
and maintained their original calculation of the financial component related to municipal funds. See Item “Item 4.B. Business Overview—Tariffs
—Second Ordinary Tariff Revision (2017-2020).”
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We currently lack formal agreements or concessions with 35 of the municipalities to which we provide service, and 31 of our existing
concession agreements will expire between 2019 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, 2018, we held formal 30-year agreements with 307 municipalities (including the city of São Paulo) of the
369 municipalities we serve. We entered into twenty of these agreements during 2018. The 307 municipalities with which we had formal
agreements at year-end accounted for 81.1% of our total revenues for the year ended December 31, 2018, and 80.2% of our intangible assets and
contract asset as of December 31, 2018. Of the 35 served municipalities for which we lacked formal agreements at year-end, we were in the
process of actively renegotiating with all municipalities. Together, these 35 municipalities accounted for 6.1% of our total revenues for the year
ended December 31, 2018 and 12.3% of our intangible assets and contract asset as of that same date. Between 2019 and 2030, 31 of our existing
concession agreements will expire. These 31 concession agreements accounted for 6.3% of our total revenues for the year ended December 31,
2018 and 5.3% of our intangible assets and contract asset as of that same date.
We may not be able to continue providing service on current terms, or at all, in the municipalities for which we do not have formal
agreements, including the 35 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.
Changes in the Basic Sanitation Law and in other laws related to it could have adverse effects on our negotiation with the municipalities and
we cannot evaluate these impacts since Provisionary Measure No. 868 is still under discussion. For further information, see Item “3.D. Risk
Facors—Current regulatory uncertainty, especially with regard to implementation and interpretation of the Brazilian Basic Sanitation Law, may
have an adverse effect on our business”.
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 Regulations Applicable to our Contracts—Contracts
for the Provision of Essential Basic Sanitation Services in Brazil.”
In the municipalities with which we did not have formal agreements by December 31, 2018, 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. 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 regard to our operations that lack contracts or have indefinite or overdue timeframes, the Basic Sanitation Law No. 11,445/2007
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.
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We have been, and are currently, party to concession-related proceedings related to indemnification issues regarding the resumption of water
supply and sewage collection services by some municipalities. For more information, see Note 20 to our 2018 financial statements included in
this annual report. Other municipalities may seek to terminate their concession agreements before the contractual expiration date. If this occurs
and we do not receive adequate indemnification for our investments, or the indemnification is paid over an extended period, 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, 2018, our total accounts receivable was R$5,157.0 million. Of this amount, certain municipalities to which we provide
water on a wholesale basis owed us R$1,994.9 million, and certain municipal government entities owed us R$850.6 million. Of the total amount
owed by municipalities, R$171.1 million was overdue by between 30 and 360 days and R$1,802.3 million was overdue by over 360 days.
The Brazilian courts could oblige 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.
Since 2012, we have intensified negotiations with municipalities in order to find alternative ways of receiving these sums and restoring
normal commercial relations with them. In 2014 we entered into an agreement with the municipality of Diadema. More recently, in December
2018, we entered into an agreement with the municipality of Guarulhos for the direct supply of water and sewage services for 40 years, subject
to regulation and oversight of ARSESP.
With respect to the municipality of Mauá, on April 19, 2018 we published a press release stating that we have been in contact with the
municipality of Mauá regarding directly supplying water to four neighborhoods that have been affected by a water shortage, and, to date, no
agreement to supply water to these neighborhoods was concluded.
With respect to the municipality of Santo André, we signed a protocol of intention on May 11, 2017 but efforts did not culminate in any
agreement. In March 2019, we signed a new Protocol of Intentions with this municipality.
For more information on wholesale operations, see “Item 4.B. Business Overview—Description of Our Activities—Wholesale
Operations”. In addition, 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 they owe us. If these
municipalities and related entities do not pay the amounts they owe us, we may suffer further material harm to our financial position.
Any failure to obtain new financing may adversely affect our ability to continue our capital expenditure program.
Our capital expenditure program will require resources of approximately R$18.7 billion in the period from 2019 through 2023. In 2018 we
recorded R$4.2 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—Indebtedness Financing—Financial Covenants”.
Compliance with environmental laws and environmental liability could have a material adverse effect on us.
We are subject to extensive Brazilian federal, state and municipal laws and regulations relating to the protection of human health and the
environment. These laws and regulations set, among others, 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, among others, to the release of untreated sewage into waterways or the disposal of sludge generated by treatment plants. We are also
involved in proceedings challenging the water withdrawing in the face of the 2014-2015 water crisis. Any unfavorable judgment in relation to
these proceedings, or any material environmental liabilities, may have a material adverse effect on us. For further information on these
proceedings, see “Item 8.A. Financial Statements and Other Financial Information—Legal Proceedings”. For further information on
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investments in environmental programs, see “Item 4.A. History and Development of the Company—Main Projects of our Capital Expenditure
Program”, “Item 4.B. Business Overview—Description of our Activities—Sewage Operations—Sewage Treatment and Disposal”, “Item 4.B
Business Overview—Environmental Matters” and “Item 4.B. Business Overview— Environmental Matters—Environmental Regulation”. For
further information on the Water Crisis, see “Item 4.B. Business Overview—The 2014-2015 Water Crisis.
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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, such goals have not
yet been established for the sanitation sector, 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 increased frequency of 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.
Extreme weather events such as torrential rain may also cause impacts to our installations that can lead to negative impacts to the
environment and society.
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. Extreme weather events may also 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 any 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.
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”.
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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, 2018, the estimated total claims asserted amounted to R$57,498.4 million
(net of R$258.6 million in escrow deposits), including contingent liabilities. 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 recognized provisions totaling R$892.9 million (net of
escrow deposits) as of December 31, 2018. For more information, see Note 20 to our 2018 financial statements included in this annual report.
These provisions do not cover all legal proceedings involving monetary claims filed against us and it may be insufficient to cover the ultimate
resolution of these claims. Any unfavorable judgment in relation to these proceedings may have a material adverse effect on us. For more
information, see “Item 8.A. Financial Statements and Other Financial Information—Legal Proceedings”.
We are subject to anti-corruption, anti-bribery, anti-money laundering, sanctions and antitrust laws and regulations. Our violation of any
such laws or regulations could have a material adverse effect on our reputation, our results of operations and our financial condition.
We are subject to anti-corruption, anti-bribery, anti-money laundering, sanctions, antitrust and other similar laws and regulations. We are
required to comply with the applicable laws and regulations of Brazil, and we may become subject to such laws and regulations in other
jurisdictions. There can be no assurance that our internal policies and procedures will be sufficient to prevent or detect any inappropriate
practices, fraud or violations of these laws or regulations by our employees, officers, executives, partners, agents and service providers, nor that
any such persons will not take actions in violation of our policies and procedures. Any violations, whether actual or perceived, by us or any of
our employees, directors, officers, partners, agents and service providers of these laws or regulations or our internal policies or procedures could
have a material adverse effect on our business, reputation, our ability to obtain financing, results of operations and financial condition.
Our business is subject to cyberattacks and security and privacy breaches.
Our business involves the collection, storage, processing and transmission of customers’, suppliers and employees’ personal or sensitive
data. We also use key information technology systems for controlling water, sewage and commercial, administrative and financial operations.
An increasing number of organizations, including large businesses, financial institutions and government institutions, have disclosed breaches of
their information technology and information security systems, some of which have involved sophisticated and highly targeted attacks, including
on portions of their websites or infrastructure.
The techniques used to obtain unauthorized, improper or illegal access to our systems, our data or our customers’ data, to disable or degrade
service, or to sabotage systems are constantly evolving, may be difficult to detect quickly, and often are not recognized until launched against a
target. Unauthorized parties may attempt to gain access to our systems or facilities through various means, including, among others, hacking
into our systems or those of our customers, partners or vendors, or attempting to fraudulently induce our employees, customers, partners,
vendors or other users of our systems into disclosing user names, passwords or other sensitive information, which may in turn be used to access
our information technology systems. Certain efforts may be supported by significant financial and technological resources, making them even
more sophisticated and difficult to detect.
We have established an Information Security Committee with members appointed by our executive officers. The mission of this committee
is to undertake projects and actions related to the protection or mitigation of the vulnerabilities and risks of our information technology assets.
Although we have developed systems and processes, such as this committee, that are designed to protect our data, the data of our customers,
employees and suppliers, and to prevent data loss and other security breaches, these security measures cannot provide absolute security. Our
information technology and infrastructure may be vulnerable to cyberattacks or security breaches, and third parties may be able to access our
customers’, suppliers’ and employees’ personal or proprietary information that are stored on or accessible through those systems. Our security
measures may also be breached due to human error, malfeasance, system errors or vulnerabilities, or other irregularities. Any actual or
perceived breach of our security could interrupt our operations, result in our systems or services being unavailable, result in improper disclosure
of data, materially harm our reputation and brand, result in significant legal and financial exposure, lead to loss of customer confidence in, or
decreased use of, our products and services, and adversely affect our business and results of operations. In addition, any breaches of network or
data security at our suppliers (including data center and cloud computing providers) could have similar negative effects. Actual or perceived
vulnerabilities or data breaches may lead to claims against us. We cannot guarantee that the protections we have in place to protect our operating
technology and information technology systems are sufficient to protect against cyberattacks and security and privacy breaches.
In this regard, the Internet Act (Law No. 12,965 of 2014) applies only to personal data collected through the Internet, and establishes other
principles and rules with respect to the privacy and protection of the personal and behavioral data of internet users. The Internet Act guarantees,
among others, the privacy of internet and privately stored communications. Any data processing activity is subject to the data subject’s
informed, free and express consent. If we fail to comply with the provisions of the Internet Act, we may be subject to sanctions and penalties,
including damages, which will be assessed based on the nature and degree of our non-compliance, among other factors.
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On August 15, 2018, the Brazilian General Law for Data Protection ("LGPD") was published with a term of 18 months to take effect.
Subsequently, on December 28, 2018, Provisional Measure No. 869/2018 was published, which, in summary, created the National Data
Protection Authority (ANPD), linked to the Brazilian Presidency, effective since the date of publication of this Provisional Measure, and
extending the initial term of validity regarding the obligations set out in the other articles to 24 months. The LGPD regulates the use of personal
data in Brazil. The LGPD significantly transformed the data protection system in Brazil and is in line with recent European legislation (the
General Data Protection Regulation – “GDPR”). The LGPD establishes detailed rules for the collection, use, processing and storage of personal
data. It will affect all economic sectors, including the relationship between customers and suppliers of goods and services, employees and
employers and other relationships in which personal data is collected, both in the digital and physical environment.
Failure by us to adhere to the LGPD and any additional privacy laws or regulations enacted or approved in Brazil or in other jurisdictions in
which we operate could adversely affect our reputation, business, financial condition or results of operations.
Industrial accidents, equipment failure, environmental hazards or other natural phenomena may adversely affect our operations, assets and
reputation and might not be covered by our insurance policies.
As of December 31, 2018, we provided water and sewage services to 369 municipalities in the state of São Paulo. We currently substantially
withdraw all of our water supply from surface sources from rivers and reservoirs, with a small portion being withdrawn from groundwater. Our
reservoirs are filled by impounding water from rivers and streams, by diverting the flow from nearby rivers, or by a combination of both
methods. We have 229 dams for water supply purpose. Although we comply with all legal requirements and best practices for the management
of dams, invest in security inspections, monitoring and maintenance of all structures under our responsibility, our operations may be hampered
by numerous factors, including unexpected or unusual geological and/or geotechnical operating conditions, industrial accidents, floods or
droughts or other environmental occurrences that could result in structural damages and eventually rupture our reservoirs, dams and other
facilities or equipment. The occurrence of any of these events could lead to personal injury or death, adverse social impacts on the communities
located near our facilities, monetary losses and possible legal liability, other environmental damages, the loss of prime materials and damage to
our reputation. See "Item 4.B. Business Overview—Water Operations—Water Resources".
It is not always possible to obtain insurance against all such risks due to the high premiums associated with insuring against them or for
other reasons. Moreover, insurance against risks such as water contamination or other problems involving our water supply to customers and for
environmental related liabilities and damages as a result of our activities is not generally available to us or to other companies in our industry on
acceptable terms. Our insurance will not cover all potential risks associated with our operations and insurance coverage may not continue to be
available or may not be adequate to cover any resulting liability. Losses from these events may cause us to incur significant costs that could have
a material adverse effect on our financial performance and results of operations. To the extent that we incur losses not covered by our insurance
policies, the funds available for sustaining our current operations and for our expansion activities will be reduced. See also “—Risks Relating to
Our Business—Compliance with environmental laws and environmental liability payments could have a material adverse effect on us” and
“Item 4.B. Business Overview—Insurance”.
Risks Relating to Our Common Shares and ADSs
We may not always be in a position to pay dividends or interest on shareholders’ equity and ADSs.
Depending on our future results, our shareholders may not receive dividends or interest on own capital if we do not generate a profit.
Despite the requirement to distribute a minimum of 25% of the unadjusted 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 52.9% of the aggregate
market capitalization of the B3 as of December 31, 2018.
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, the Brazilian
Corporate Law and Brazilian capital markets regulations will be resolved by arbitration conducted pursuant to the B3 Arbitration Rules in the
Market Arbitration Chamber. Any disputes among shareholders and ADR holders, and any disputes between us and our shareholders and ADR
holders, will also be submitted to arbitration. As a result, a court in the United States might require that a claim brought by an ADR holder
predicated upon the U.S. securities laws be submitted to arbitration in accordance with our bylaws. In that event, a purchaser of ADSs would be
effectively precluded from pursuing remedies under the U.S. securities laws in the U.S. courts. However, a court in the United States could
allow claims predicated upon the U.S. securities laws brought by holders who purchased ADSs on the NYSE to be submitted to U.S. courts.
A holder of our common shares and ADSs might be unable to exercise preemptive rights and tag‑along rights with respect to the common
shares.
U.S. holders of common shares and ADSs may not be able to exercise the preemptive rights and tag‑along rights relating to common shares
unless a registration statement under the U.S. Securities Act of 1933, as amended, or the Securities Act, 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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If we issue new shares or our shareholders sell shares in the future, the market price of your ADS may be reduced.
Sales of a substantial number of shares, or the belief that this may occur, could decrease the prevailing market price of our common and
preferred shares and ADS by diluting the shares’ value. If we issue new shares or our existing shareholders sell shares they hold, the market
price of our common and preferred shares, and of the ADS, may decrease significantly. Such issuances and sales also might make it more
difficult for us to issue shares or ADS in the future at a time and a price that we deem appropriate and for you to sell your securities at or above
the price you paid for them. Our controlling shareholder, the Brazilian Government, may decide to capitalize us for a variety of reasons therefore
diluting existing shareholders and ADS holders.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Overview
Companhia de Saneamento Básico do Estado de São Paulo – SABESP is a mixed capital company (sociedade de economia mista) with
limited liability. We were incorporated on September 6, 1973 under the laws of the Federative Republic of Brazil. We are registered with the
Commercial Registry of the State of São Paulo (Junta Comercial do Estado de São Paulo) under registration number NIRE 35300016831. Our
principal executive offices are located at Rua Costa Carvalho, 300, 05429‑900 São Paulo, SP, Brazil. Our telephone number is
+55 11 3388‑8000. Our agent for service of process in the United States is CT Corporation System, with offices at 818 West Seventh Street –
Team 1, Los Angeles, CA 90017. We are allowed to operate, in a subsidiary form, in other Brazilian locations and abroad. See “Item 4.B.
Business Overview— Government Regulations Applicable to Our Contracts—Contracts for the Provision of Essential Basic Sanitation Services
in Brazil”.
We believe we are one of the largest water and sewage service providers in the world (based on the number of customers in 2014, according
to the inDepth Water Yearbook 2014-2015). 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, 2018, we generated net revenue of R$16,085.1 million and net income of
R$2,835.1 million. Our total assets amounted to R$43,565.1 million and our total shareholders’ equity amounted to R$19,551.7 million as of
December 31, 2018.
As of December 31, 2018, we provided water and sewage services to a broad range of residential, commercial, industrial and governmental
customers in 369 of the 645 municipalities in the state of São Paulo, including the city of São Paulo. Substantially all of our concessions or
program agreements have 30‑year terms. As of December 31, 2018, we lacked formal agreements for 35 of the municipalities we serve, each of
which we are currently in the process of renegotiating. From January 1, 2019 through 2030, 31 further concessions will expire, and we will seek
to replace them with program agreements. In addition to the 369 municipalities we served, we also provided water services to the municipality
of Mogi das Cruzes, pursuant to two partial water contracts under which we service only certain neighborhoods in that municipality. See
“Presentation of Financial and Other Information—Other Information—Our Contracts and the Municipalities We Serve”.
We also supplied water on a wholesale basis to five municipalities in the São Paulo metropolitan region, including Guarulhos, in which we
did not operate water distribution systems (together covering a total estimated urban population of approximately 3.1 million residents). Four of
these municipalities also utilized our sewage treatment services. For the year ended December 31, 2018, the São Paulo metropolitan region
(including the municipalities to which we provide water on a wholesale basis) accounted for 72.2% of our gross operating revenue (excluding
revenues relating to the construction of concession infrastructure), while the Regional Systems accounted for 27.8%. In December 2018, we
entered into an agreement with the municipality of Guarulhos for the direct supply of water and sewage services to the municipality. Operations
commenced in January 2019.
As of December 31, 2018, we provided water services through 9.1 million water connections to approximately 25.1 million people,
representing approximately 57% of the total population of the state of São Paulo, and had a water coverage ratio of 98% with respect to all
regions. As of that date, we provided sewage services through 7.5 million sewage connections to approximately 21.7 million people and had an
effective sewage service ratio of 83%. As of December 31, 2018, we operated using 75,519 kilometers of water pipes and water transmission
lines and 51,788 kilometers of sewer lines.
We also provide water and/or sewage services to four other municipalities through special purpose companies. In addition, we have three
partnerships with private companies: Aquapolo Ambiental S.A., Attend Ambiental S.A. and Paulista Geradora de Energia S.A. Aquapolo
Ambiental S.A. commenced operations in the second half of 2012 and operates the largest water recycling facility in the southern
hemisphere. Aquapolo Ambiental S.A. has the capacity to supply up to 1,000 liters per second to industries in the Capuava petrochemical cluster
of the São Paulo metropolitan region, but is currently only providing approximately 650 liters per second as a result of demand. Attend
Ambiental S.A. commenced operations in the second half of 2014 to operate a pre-treatment plant for non-domestic effluent in the São Paulo
metropolitan region. Paulista Geradora de Energia S.A., which was formed in 2015, focuses on the implementation and commercial exploration
of water potential in small hydroelectric power plants, located at Vertedouro Cascata and the Guaraú Water Treatment Plant, with a total capacity
of 7 MW. Until the date of this annual report, we had not yet started construction. See “Note 12 to the Financial Statements - Investments”. In
addition, we provide consulting services regarding the rational use of water, the updating of institutional models, and commercial and
operational management in Panama, through a consortium.
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The State of São Paulo, our controlling shareholder, is required by State Law No. 11,454/2003 to own at least 50% plus one of our common
shares. As of December 31, 2018, 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
Infrastructure and Environment 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 Infrastructure and Environment 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 nine systems, most of which were affected by the most severe drought in our service region in over 80
years, which occurred during 2014 and 2015. Of those, the Cantareira System, our largest water system, was the most affected. In order to
balance supply and demand despite the restricted water availability, we adopted a series of initiatives throughout 2014 and 2015, including the
Water Consumption Reduction Incentive Program. In March 2016, as a result of the increased level of rainfall and increased predictability of the
level of water in our reservoirs, we cancelled the Water Consumption Reduction Incentive Program and disapplied the Contingency Tariff to
water meter readings recorded as of May 1, 2016. For further information on the water crisis, see “Item 3.D. Risk Factors—The 2014-2015
water crisis impacted the water supply in the metropolitan region of São Paulo and affected the water consumption practices that have been
influencing the volume of water billed” and “Item 4.B Business Overview—The 2014-2015 Water Crisis”.
Our Strengths
We believe that our strong business position and future prospects derive from the following strengths:
Well‑established business with significant size, scale and know‑how to operate in complex urban settings. We believe we are one of the
largest water and sewage service providers in the world. We provide water services directly to approximately 25.1 million people and supply
water on a wholesale basis to an additional urban population of approximately 3.1 million people, including the population of Guarulhos. As of
December 31, 2018, we had an effective water coverage ratio of 98% in respect of all regions in which we operate. We also provide sewage
services directly to approximately 21.7 million people, achieving an effective sewage service ratio of 83% in respect of all regions in which we
operate as of December 31, 2018. Our significant size and scale have required us to operate in complex urban settings such as shantytowns
(favelas) and environments without urban planning, thereby enabling us to develop well‑trained personnel, skills for operating in adverse
conditions that we believe our competitors lack.
Operations in Brazil’s most populous and wealthy state. The state of São Paulo, which is located in the most developed and economically
active region of Brazil, is the most populous state in Brazil, with an estimated total population of 44.2 million as of December 31, 2018. The
city of São Paulo had an estimated total population of 11.8 million as of the same date, while the São Paulo metropolitan region had a total
population of 20.9 million. Based on its GDP, the state of São Paulo is the wealthiest state and has the largest economy of any state in Brazil.
The GDP of the state of São Paulo was approximately R$2.0 trillion representing approximately 32.5% of Brazil’s total GDP, according to the
most recent data collected by the IBGE in 2016. 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, 2008 and December 31, 2018, we executed 30-year agreements with 307 of the
369 municipalities we serve, including an agreement with the city of São Paulo, in June 2010, and Santos in September 2015. In December
2018, we entered into an agreement with the municipality of Guarulhos, the second largest municipality in the State of São Paulo where we
started the operation in January 2019, with a population of 1.3 million. For the year ended December 31, 2018, income from these 30-year
agreements accounted for 81.1% 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 B3, 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.
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High quality operations. We believe that we adhere to high standards of service and employ the best available technology in the sanitation
business to control the quality of the water we abstract, process and distribute. Of our 16 laboratories in total, our central laboratory and 13 of
our regional laboratories are accredited by the National Institute of Metrology, Quality and Technology, Standardization and Industrial Quality,
or INMETRO, and comply with the ABNT NBR ISO IEC 17025 standard, thereby assuring the quality and accuracy of our test results.
Moreover, our laboratories and field teams use the latest equipment to detect substances controlled by regulations and have highly trained teams
to handle contingencies and customer complaints. We believe our technology enhances the efficiency and quality of our operations.
Our Strategy
Our mission is to provide water and sewage services, contributing to improvements in quality of life and the environment. Our goal is to
become a global reference in the provision of basic sanitation services in a sustainable, competitive and innovative manner, focused on the
needs of our clients. To this end, our strategic objectives are based upon the guiding principles of water availability, excellence in the provision
of services, sustainable growth, fostering and expanding our operating base, innovation and technology, motivation of personnel and expansion
of our sewage treatment coverage.
Secure water availability in the areas where we operate. Our goal is to secure the availability of water in the areas where we operate, as
well as to promote a rational and integrated use of water resources, respecting demand and critical levels of water for each region, and
allocating resources in the short, medium and long run in order to guarantee access to water. Our goal is to consistently meet the needs of our
consumers with our services. Furthermore, specifically during 2015 to 2018, we implemented a series of short-term and medium-term
initiatives that improved the water security for the Metropolitan region of São Paulo. For more information, see “Item 4.B. Business Overview
—The 2014-2015 Water Crisis” and “—Capital Expenditure Program”.
Ensure the quality and availability of our services in our existing service area through excellence in service provision and improving
our operating efficiency. Our goal is to maintain the water coverage ratio, coupled with a high standard of quality and availability of our
services, and meet the expected growth in our operations. We also intend to increase our sewage coverage by adding 1.2 million sewage
connections by 2023. In addition, we seek to reduce both physical and non‑physical water loss. See “—Capital Expenditure Program”.
We also seek to improve our processes by implementing: (i) a new management model based on the Management Excellence Model of the
National Quality Foundation (Modelo de Excelência na Gestão da Fundação Nacional da Qualidade) that seeks to improve the alignment of
management processes and the dissemination of best practices within the company; (ii) an enterprise resourcing planning system, or “ERP
system” (SAP), and a customer relationship management system, or “CRM system” (Net@suite), to replace our commercial and management
information systems. The ERP system was implemented in April 2017. The first stage of Net@suite was implemented in August 2018 and we
expect to complete the implementation of the Net@ suite by 2020.
Through these projects we intend to increase our speed and productivity in responding to regulatory changes; to strengthen and streamline
our financial, commercial and administrative structure; to provide a solid and integral base of information to support the decision-making
process; and to increase the efficiency of our operations while also reducing costs.
Continue to seek sustainable growth. Our goal is to grow while balancing our economic and financial results with environmental and
social considerations, to secure positive financial results so as to guarantee investments for the provision of services, as well as to provide
adequate and just remuneration for our shareholders. We seek to act as citizens and to promote the well-being of the communities we operate in
and the protection of the environment. We aim to apply our principles of financial growth and sustainability to each business unit, assigning
goals and setting clear responsibilities for each unit so as to strengthen our financial results. To achieve this goal, we intend to use our best
efforts to reduce operating costs and increase productivity and profitability. We plan to improve the management of our assets, as well as to
continue to reduce our total operating expenses by automating some of our facilities, streamlining operational processes, implementing
integrated planning and further investing in internal technological research and development.
We also plan to continue our efforts to improve our collection of overdue 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.
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.
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Currently, we provide water and/or sewage services to four other municipalities through special purpose companies and have three
partnerships with private companies. See “Item 4. Information on the Company—History and Development of the Company—Overview”.
Maintain and expand our operating base. We intend to maintain and expand our operating base by 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, allowing us to renew all or substantially all of our concession agreements as they expire. 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 on
aggregate represent a total population of approximately 16.7 million, including the population of Guarulhos and Aguaí. We evaluate possible
expansion opportunities in terms of proximity to our existing service areas to maximize return on investment and improve our financial
performance. In June 2010, we entered into a 30‑year agreement with the State and city of São Paulo for the provision of water and sewage
services in the city of São Paulo, which in the year ended December 31, 2018 accounted for 47.0% of our gross operating revenues (excluding
revenues relating to the construction of concession infrastructure). Between January 1, 2007 and December 31, 2018, we entered into
agreements with 307 municipalities (including our services agreement with the city of São Paulo), of which twenty were entered into in 2018.
These 307 municipalities accounted for 81.1% of our total revenues for the year ended December 31, 2018 and 80.2% of our intangible assets as
of the same date. As of December 31, 2018, 35 of our concessions had expired and are currently being renegotiated. These 35 municipalities
accounted for 6.1% of our total revenues for the year ended December 31, 2018 and 12.3% of our intangible assets as of the same date. From
January 1, 2019 through 2030, 31 concession agreements, accounting for 6.3% of our revenues for the year ended December 31, 2018 and 5.3%
of our intangible assets as of the same date, will expire.
Seek opportunities to adopt and develop innovative technology. We plan to stimulate the creation, adoption and diffusion of innovative
solutions aiming to generate value and to improve our provision of basic sanitation services while promoting environmental protection and
maintaining our competitiveness and profitability. In accordance with our bylaws, our activities comprise water supply, sanitary sewage
services, urban rainwater management and drainage services, urban cleaning services, solid waste management services, and also related
activities, including the planning, operation, maintenance and commercialization of energy, and the commercialization of services, products,
benefits and rights that directly or indirectly arise from our assets, operations and activities. We are also authorized to carry out activities through
subsidiaries in other Brazilian locations and in other countries. See Item “5.C. Research and Development, Patents and Licenses, Etc.”
Establish efficient and competitive ways of motivating, retaining and attracting personnel. We intend to provide our personnel with
programs for professional and personal development, growth opportunities and recognition. These programs include competitive benefit
packages and a healthy and collaborative work environment. We seek to raise workplace satisfaction, well-being, engagement and productivity.
Expand our sewage treatment coverage. Our goal is to progress in the implementation of sewage collection and treatment structures in an
economically and technologically viable way. We had an effective sewage coverage ratio of 90% as of December 31, 2018 and plan to increase
this ratio to 93% by 2023 by adding over 1.2 million sewage connections and the indicator of consumer units connected to the sewage treatment
system from 76% to 84% by 2023. 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 16.7 million
(including the municipality of Guarulhos and Aguaí) to which we currently do not provide water or sewage services, or to which we currently
supply water solely on a wholesale basis. Our strong presence in the State and experience in providing water and sewage services places us in a
privileged position to expand our sewage services to these additional municipalities in the state of São Paulo as well as to other Brazilian states
and abroad. For more information, see “Item 4.B. Business Overview—Description of our Activities—Sewage Operations” and “Item 4.B.
Business Overview—Competition” and “Item 4.B. Business Overview—Tariffs”.
Our strategic objectives also focus on our political and institutional relationships as well as on our commitment to the market to increase
shareholder value.
In 2018 we invested R$4.2 billion and between 2019 and 2023 we plan to invest an additional R$18.7 billion to improve and expand our
water and sewage systems, increase water security, and meet the growing demand for water and sewage services in the state of São Paulo,
thereby encouraging these customers to continue using our services.
We believe that our overall strategy will enable us to meet the demand for high quality water and sewage services in the state of São Paulo
as well as in other Brazilian states and abroad, while creating shareholder value and strengthening our results of operations and our financial
condition.
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.
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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 44.2 million as of December 31,
2018. The city of São Paulo, capital of the state of São Paulo, had an estimated total population of 11.8 million, with a total population of 20.9
million inhabitants in the São Paulo metropolitan region, as of December 31, 2018. The São Paulo metropolitan region encompasses 39
municipalities and is the largest metropolitan region in the Americas and the fourth largest metropolitan region in the world, according to the
United Nations’ Data Booklet “The World’s Cities in 2018”, with approximately 47% of the total population of the state of São Paulo as of
December 31, 2018. According to the 2016, the most recent data collected by the IBGE, the GDP of the state of São Paulo was approximately
R$2.0 trillion, representing approximately 32.5% of Brazil’s total GDP, and making it the largest economy of any state in Brazil based on GDP.
According to the IBGE, the state of São Paulo is also the leading Brazilian state in terms of manufacturing and industrial activity, with a strong
position in car manufacturing, pharmaceuticals, computer manufacturing, steel making and plastics, among other activities, as well as a leading
position in the banking and financial services industries. The state of São Paulo is the leading export state in Brazil, according to the Brazilian
Ministry of Development, Industry and Foreign Trade (Ministério do Desenvolvimento, Indústria e Comércio Exterior), currently Ministry of
Economy (Ministério da Economia).
History
Until the end of the nineteenth century, water and sewage services in the state of São Paulo were generally provided by private companies.
In 1875, the Province of São Paulo granted a concession for the provision of water and sewage services to Cantareira Water and Sewage
Company (Companhia Cantareira de Água e Esgotos). In 1893, the government of the Province of São Paulo assumed responsibility for the
provision of water and sewage services from Cantareira Water and Sewage Company and formed the Office of Water and Sewers (Repartição de
Água e Esgotos), a government agency. Since that time, water and sewage services in the São Paulo metropolitan region have been administered
by the 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 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 São Paulo Secretariat for Infrastructure and Environment
(Secretaria de Infraestrutura e Meio Ambiente do Estado de São Paulo). Additionally, a majority of the members of our board of directors and
our management are appointed by the State Government.
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 Infrastructure and Environment. We are also subject to supervision from the Court of
Audit of the State of São Paulo (Tribunal de Contas do Estado de São Paulo), with regard to our accounting, financial and budgetary activities
and our operating assets.
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As of December 31, 2018, we provided water and sewage services directly to a large number of residential, commercial and industrial
private consumers, as well as to a variety of public entities, in 369 of the 645 municipalities in the State, including in the city of São Paulo. We
also supplied water on a wholesale basis to five municipalities in the São Paulo metropolitan region, including Guarulhos, in which we did not
operate water distribution systems, and four of these municipalities also utilize our sewage treatment services. In December 2018, we entered
into an agreement with the municipality of Guarulhos for the direct supply of water and sewage services. This operation began in January 2019.
According to the inDepth Water Yearbook 2014-2015, we are the fourth largest water and sewage service company in the world in terms of
number of clients.
In 1994, we were registered with the CVM as a publicly-held company and are therefore subject to the CVM’s rules, including those
relating to the periodic disclosure of extraordinary facts or relevant events. Our common shares have been listed on the B3 under the ticker
“SBSP3” since June 4, 1997.
In 2002, we joined the Novo Mercado segment of the B3, which is the listing segment in Brazil with the highest corporate governance
requirements. In the same year, we registered our common shares with the Securities and Exchange Commission, or SEC, and started trading
our shares in the form of ADR – level III on the New York Stock Exchange, or NYSE, under the ticker “SBS”.
In 2004, the State of São Paulo carried out a secondary offer of common shares of our company in the Brazilian and international markets.
State Law No. 12,292/2006 amended State Law No. 119/1973, which created our company, and now authorizes us to provide water and
sewage services outside of the state of São Paulo, both to other states of Brazil and to other countries. This law also authorizes us to own
interests in other public or private‑public companies and Brazilian or international consortia. In addition, this law permits us to incorporate
subsidiaries and enter into a partnership with or acquire interests in a private company with a corporate purpose related to the sanitation
business.
In December 2007, State Supplementary Law No. 1,025/2007, 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.
In September 2017, the State of São Paulo obtained approval for State Law No. 16,525/2017, which authorizes the State of São Paulo to set
up a controlling company to hold all of the shares that the State of São Paulo holds in our company. Once formed, this controlling company will
control our company, pursuant to the provisions of Art. 116 of Law No. 6,404 of December 15, 1976, as amended, or the Brazilian Corporate
Law. State Law No. 16,525/2017 allows other minority shareholders, including private companies and state companies, to hold shares of the
controlling company, provided that the State of São Paulo holds the majority of the common shares of the controlling company. If and once
formed, this controlling company may affect future shareholding in and the control of our company. Due to elections for state government in the
second half of 2018, this operation was suspended, and we are currently awaiting guidance from the State Privatization Program’s Board
(Conselho Diretor do Programa Estadual de Desestatização - CDPED), which has authority over our corporate reorganization plan, including
the formation of the controlling company, or any other type of corporate reorganization, including a change of control. We cannot assure that any
potential corporate reorganization, including a change of control, will not have a material adverse effect on our business.
Corporate Organization
We currently have six management divisions, each of which is supervised by one of our executive officers.
Our board of directors allocates responsibilities to our executive officers following an initial proposal made by our Chief Executive Officer,
in accordance with our bylaws. The Chief Executive Officer is responsible for coordinating all management divisions in accordance with the
policies and directives established by our shareholders’ meeting, our board of directors and board of executive officers, including the
coordination, evaluation and control of all functions related to the Chief Executive Officer’s office and staff, integrated planning, business
management and corporate organization, communication, ombudsman, regulatory affairs, audit, compliance, risk management and quality. The
Chief Executive Officer represents our company before third parties and certain powers can be granted to attorneys‑in‑fact. The executive
officers described below report to the Chief Executive Officer:
· the Corporate Management Officer, who is responsible for marketing (commercial processes), human resources and social responsibility, legal
affairs, information technology, asset management, supplies and contracts;
· the Chief Financial Officer and Investor Relations Officer, who is responsible for financial planning, collection of revenues, allocating financial
resources to divisions of our company, conducting capital markets and other debt incurrence transactions and managing debt levels, controller,
accounting, costs and tariffs, corporate governance and investor relations;
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· 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 innovation and new business ventures; and
· the Chief Operating Officer for the São Paulo metropolitan region Division and the Chief Operating Officer for the Regional Systems Division,
who are responsible for managing the operation, maintenance, execution of works for water and sewage supply systems (including for the
services that we provide on a wholesale basis), sales and call center services, and have overall responsibility for the financial and operational
performance of their divisions. The Chief Operating Officers are also responsible for sanitation advisory services to independent municipalities
and for mediation and negotiation with communities and local governments, aimed at aligning our interests with the interests of our clients.
Capital Expenditure Program
Our capital expenditure program is designed to improve and expand our water and sewage system and to increase and protect our water
sources in order to sustain water security, meet the growing demand for water and sewage services in the state of São Paulo and improve the
overall environmental impact of our activities. Our capital expenditure program has four specific goals with respect to the municipalities we
serve:
(I). to continue to increase water security and meet increased demand for treated water;
(II). to expand the percentage of households connected to our sewage system;
(III). to increase the treatment of sewage collected; and
(IV). to increase operating efficiency and reduce water loss.
We have budgeted investments in the total amount of R$18.7 billion from 2019 through 2023. We invested R$4.2 billion, R$3.4 billion and
R$3.9 billion in 2018, 2017 and 2016, 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
2019
2020
Planned Capital Expenditures
2021
(in millions of reais)
2022
1,669
1,366
470
3,505
1,492
1,524
607
3,623
1,636
1,777
471
3,884
1,507
1,766
576
3,849
2023
Total
1,453
1,878
539
3,870
7,757
8,311
2,663
18,731
Our capital expenditure program from 2019 through 2023 will continue to focus on achieving our targets by making regular investments to
maintain and expand our infrastructure and to reduce water losses in the 369 municipalities we served as of December 31, 2018. The recent
drought has prompted a reduction in the volume of water billed, particularly in 2014 and 2015, and thus a reduction in revenue. Due to the
drought and the need to prioritize construction to mitigate the effects of the water crisis and increase water security in the Metropolitan Region
of São Paulo, we were required to adjust our investment programs commencing in 2014. These adjustments are expected to continue in 2019 due
to the priority given since 2014 to emergency investments in water.
Main Projects of Our Capital Expenditure Program
The following is a description of the main projects in our capital expenditure program.
Investments in Water – We have a series of ongoing and scheduled projects involving water production and distribution. For the period
from 2019 through 2023, we plan to spend R$7.7 billion in water-related investments. The main programs are:
Metropolitan Water Program
Demand for our water services has grown steadily over the years in the São Paulo metropolitan region and has at times exceeded the
capacity of our water systems. On account of the high demand, prior to September 1998, a portion of our customers in this region received water
only on alternate days of the week. We refer to this as “water rotation”. In order to address this situation, we implemented the Metropolitan
Water Program (Programa Metropolitano de Água) to improve regular water supply to the entire São Paulo metropolitan region. This program
terminated in 2000 and the water rotation measure was eliminated, but we have nevertheless maintained our investment plans for the region. In
2018, we invested approximately R$165 million in the Metropolitan Water Program.
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Since 2000, the Metropolitan Water Program has increased the production capacity by 13.1 m³/s, 5 m³/s of which can be attributed to the
Public Private Partnership, or “PPP”, conducted in the Alto do Tietê concluded in 2011, 2.1 m³/s of which can be attributed to increased
production in the Guarapiranga System, concluded in 2015, and 6 m³/s due to the implementation of the new São Lourenço water supply system.
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 developed, under a PPP contract, a new supply system called São Lourenço, which expands 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 was undertaken by Sistema Produtor São Lourenço S.A., which is a special purpose company controlled by the
construction companies Camargo Corrêa Construtora S.A. and Andrade Gutierrez S.A. The construction was completed in April 2018 and
operations began in July 2018. In May 2018, Camargo Corrêa Construtora S.A. and Andrade Gutierrez S.A. sold their shares of Sistema
Produtor São Lourenço S.A. to CGGC Construtora do Brasil Ltda., a Chinese-owned company.
As of December 31, 2018, the estimated amount of the PPP contract was R$6.0 billion (including R$2.2 billion in construction and
maintenance and operation of the system). After monetary adjustment, the contract amounts to approximately R$7.9 billion and has a 25-year
term, four years of which was dedicated to the construction, while the other 21 years will be dedicated to service delivery. These services include
the operation and maintenance of the sludge treatment system of the water treatment plant and disposal of the waste thus generated;
electromechanic and civil maintenance of the untreated water pumping stations, of the water treatment plant and the untreated water pipeline;
preservation and cleaning, surveillance and property security.
Interconnection of Jaguari and Atibainha Reservoirs
In February 2016, we began the construction work on the interconnection of Jaguari (part of the Paraíba do Sul Basin) and Atibainha
reservoirs (part of the PCJ River Basin, Cantareira System), which is a strategic and priority project to guarantee secure access to water for the
metropolitan region of São Paulo. This project was completed during March 2018, when we also began transferring 5.13 m³/s of water from the
first to the other.
Since May 2018, the transfer of water also works in the opposite direction, from the Atibainha reservoir to the Jaguari reservoir, enabling to
reverse up to 12.2 m3/s and optimize the reservation capacity of both reservoirs, while benefiting the population of the Paraíba Valley.
Reversal of the Itapanhaú River
The Itapanhaú River system is expected to have the capacity to pump an average of 2 m3/s (maximum of 2.5 m3/s) of water to Biritiba-
Mirim reservoir, part of the Alto Tietê system. The project aims to improve water security in the São Paulo metropolitan region and is expected
to directly benefit approximately 4.5 million residents that receive water from the Alto Tietê system as well as indirectly benefit 20.9 million
people in the greater São Paulo region. In 2017, we finalized the bidding process that selected the consortium which will execute the project.
The investment will be of R$91.7 million and the start of works is conditional on obtaining the installation license expected for the second half
of 2019.
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 anticipate total investments of approximately R$6.2 billion (current value) throughout the term of the program. Funding for the
program will come from our own resources as well as from credit facilities provided by the Japan International Cooperation Agency, or JICA
and BNDES.
The program aims to reduce the rate of water loss from 436 liters per connection per day in December 2008 to 267 liters per connection per
day by 2021, which is equivalent to reducing the Water Metered Loss Index (based on measured consumption) from 34.1% in December 2008 to
28.5% in 2021. In 2018, we invested approximately R$645.6 million in this program and our water loss measured 293 liters per connection per
day and our Water Metered Loss Index averaged 30.1%.
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.
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In order to reach this goal, we built two water treatment plants, 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. We have also begun constructing two additional water treatment
plants in the municipality of Peruíbe, and in 2018, we started to enlarge the treatment capacity of the water treatment station Mambu Branco,
from 1.6m3/s to 3.2m3/s, which we estimate to conclude by 2021.
In 2016, the integrated system of the Baixada Santista metropolitan region was reinforced with the commencement of operations at the
Melvi Treated Water Reserve Center, located in Praia Grande. The Center’s reserves went from 20 million to 45 million liters. The infrastructure
is part of the Mambu-Branco production center (inaugurated in 2013 in Itanhaém) and will serve residents and tourists in two municipalities of
the Baixada Santista region (Praia Grande and São Vicente). The program is supported by funds from the Caixa Econômica Federal as well as
our own funds. In 2018, we invested R$33.6 million in the Coastal Water Program.
Investments in Sewage—We have a series of ongoing and scheduled projects involving the collection, removal and treatment of sewage. For
the period from 2019 through 2023, we plan to invest R$11.0 billion in sewage collection and treatment. The main programs are:
Tietê Project
We have been working in the metropolitan region of São Paulo in sanitation programs that aim to contribute to the revitalization of rivers
and streams, and its main program is the Tietê Project.
Established in 1992, the project aims to contribute to the progressive revitalization of the Tietê river and its tributaries, in the Alto Tietê
basin, where the metropolitan region of São Paulo is located, through the expansion and optimization of the sewage collection, transportation
and treatment system.
Considering the complexity and challenges faced to implement infrastructure projects in crowded and disorderly urbanized areas such as
São Paulo, it was necessary to structure the project in stages.
From 1992 to the end of 2018, the investments totaled US$2.9 billion, of which R$441.9 million were disbursed in 2018. Part of the
resources allocated to the program are our own capital and the remainder comes from financins granted by the Inter-American Development
Bank - IDB, BNDES and Caixa Econômica Federal - CEF.
During this period, 1.77 million domestic sewage connections were built and 4.45 thousand km of interceptors, trunk collectors and
collection networks were built to collect and transport the sewage to treatment in our plants, whose installed capacity for treatment almost
tripled.
As a result, the treated sewage outflow at the metropolitan region of São Paulo increased from four thousand liters per second in 1992 to the
current 18.7 thousand liters per second. This increase, of 14.7 thousand liters per second, is equivalent to the sewage generated by approximately
ten million people. As a result, sewage collection that served 70% of the urbanized area of the metropolitan region of São Paulo in 1992
increased to 87% by the end of 2018. Sewage treatment increased from 24% to 70% of the volume collected.
The program aims to increase by 2024 the coverage rate with the sewage network in the metropolitan region of São Paulo to 92% and the
treatment index to 90% of the total collected, with the conclusion of the third stage, now under way with a 70% progress, and the works already
planned for the fourth stage, with priority interventions currently in concurrent execution.
In 2018, the completion of the second phase of the expansion of Sewage Tratment Plant Barueri, the largest treatment plant in South
America, allowed us to increase from 12 thousand liters per second (reached in 2017) to 16 thousand liters per second currently.
It is also worth mentioning the implementation of the ITi-7 sewage interceptor under the Marginal Tietê, a highway that runs through the
city of São Paulo along with the Tietê River, expected to be completed by the beginning of 2020, benefiting approximately 2 million people
living in the central and southern regions of the city of São Paulo, highly verticalized, with collector piping operating close to its limit.
Clean Stream Program
The Clean Stream Program (Programa Córrego Limpo), an agreement between the State, acting through our company, and the city of São
Paulo, aims to decontaminate urban streams in the city of São Paulo by eliminating the discharge of sewage into streams and rainwater runoff
routes, cleaning streams and banks, and removing and relocating low‑income households located on the banks of streams.
Since 2007, 151 urban streams have been decontaminated, benefiting approximately 2.5 million people. In 2018, we invested R$9 million
in the Clean Stream Program. The program is supported by funds from the Caixa Econômica Federal as well as our own funds. Part of the
investment related to the Tietê Project benefits the Clean Stream Program.
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In 2018, through certain actions for the regularization of the sewage systems through the Clean Stream Program, complementary to the
Tietê Project, we were able to clean up an extensive stream in the city of São Paulo, named Traição, benefiting more than 210 thousand people,
in addition to the advances in sanitation works in sub-basins of the streams in conclusive phases. Throughout the year, we also continue to
inspect and monitor the water quality of previously decontaminated streams.
However, despite our constant monitoring of pollution levels, the municipality of São Paulo’s difficulties in moving low-income families
who live in risky areas has led to a slowdown in progress under the program. We have renewed the partnership with the municipality and the
objectives for 2019 are under discussion.
Clean Wave Program
The Clean Wave Program (Programa Onda Limpa) is the largest environmental sanitation program on the Brazilian coast. Its main goal is
to improve and expand the sewage systems in the municipalities that cover the metropolitan region of Baixada Santista, seeking the
universalization of sewage services in the region. The program will improve the condition of 82 beaches and will benefit approximately 4
million people, including locals and tourists who visit the coast, especially in the summer months.
Due to the complexity and challenges involved in the implementation of infrastructure projects in coastal regions, the Program was
structured in stages. In the first phase, started in 2007, 1,263 km of sewage collection networks, 4.5 km of submarine emissaries, two sewage
pre-conditioning stations, seven sewage treatment stations and approximately 110 thousand sewage connections were implemented, resulting in
the increase of the collected sewage index from 53% to 81% in 2018, reaching 100% treatment of the sewage collected. We invested R$1.9
billion in this phase, with our own resources and financing from JICA and BNDES.
The second phase of the Program began in 2018 and aims to implement two sewage preconditioning stations, each with a treatment capacity
of 1.4 m3/s of sewage and replacing the diffuser sections of two submarine emissaries in the city of Praia Grande. This stage also includes the
implementation of approximately 450 km of collecting networks, 48 thousand new connections, three new sewage treatment plants and eleven
additions and improvements to existing sewage treatment plants. We expect to complete this step in 2025, with 92% sewage collection and
maintenance of sewage treatment index collected.
The third stage of the Program is under planning, with execution estimated between 2025 and 2030, and a forecast of 95% sewage
collection and treatment of all sewage collected.
Other Policies and Programs
Nossa Guarapiranga
The Nossa Guarapiranga Project launched in December 2011 is still running. Its main objective is to improve the water quality in the
Guarapiranga basin, an urban water source for the São Paulo metropolitan region. The basin serves one million people directly in the areas near
Guarapiranga reservoir and indirectly serves a further three million people who consume the water from this water basin. We carried out actions
on three fronts as part of this project: (i) we installed ecobarriers at the bottom of the reservoir’s main affluents in order to retain solid residue
and installed drains to collect residue from rivers in the Guarapiranga basin; (ii) we developed diagnosis and control services for the removal of
plants that obstruct water extraction; and (iii) we removed and disposed of solid residue that had accumulated at the bottom of the dam in the
river basin. Two vessels were built specifically for this purpose. We work as a collaborative team with the municipal government of São Paulo in
the Nossa Guarapiranga Project, with the municipal government of São Paulo transporting all of the residue collected through these fronts to a
sanitary landfill. In 2018, we removed an average of 200 m³/month of solid residue and approximately 1,370 m3/month of water plants from this
basin.
Pró‑Conexão
In 2012, the State of São Paulo approved a project to subsidize connections to the sewage system for low‑income families. Initially
intended to last eight 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 2018, we completed approximately 25.5 thousand sewage connections under the Pró-
Conexão program.
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. For more information see “Item 7.B. Major Shareholders
and Related Party transactions—Related Party transactions—Agreements with the State.”
A large part of this work was executed by our own personnel, which considerably reduced the need for investment.
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B. Business Overview
Our Operations
As of December 31, 2018, we provided water and sewage services to 369 municipalities in the state of São Paulo under concession
agreements, program agreements, other forms of legal arrangements or without formal agreements. We also supplied treated water on a
wholesale basis to five municipalities located in the São Paulo metropolitan region and urban conurbations, including Guarulhos. The majority
of these concessions have 30‑year terms. Due to court orders, we temporarily suspended our services in two other municipalities (Cajobi and
Macatuba). For more information, see “Item 8.A. Financial Statements and Other Financial Information—Legal Proceedings”. Between
January 1, 2007 and December 31, 2018, we entered into agreements with 307 municipalities (including our services agreement with the city of
São Paulo) in accordance with the Basic Sanitation Law, of which twenty were entered into in 2018. As of December 31, 2018, these 307
municipalities accounted for 81.1% 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, 2018, 35 of our agreements or
concessions had expired but we continued to provide water and sewage services to these municipalities and were in negotiations with these
municipalities to execute program agreements to substitute the expired concessions. From January 1, 2019 through 2030, 31 concessions will
expire.
For more information on laws and regulations related to our concession operations, see “—Government Regulations Applicable to our
Contracts”.
Description of Our Activities
As set forth in 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 Regulations Applicable to Our Contracts—
Establishment of ARSESP”. For a description of our operating segments please see Note 26 to our financial statements as of and for the year
ended December 31, 2018.
Operating segments are presented in our annual report in a manner consistent with the internal reporting provided to our chief operating
decision maker, which is the board of directors and the board of executive officers, as determined under IFRS 8. Under Brazilian GAAP, prior
to our conversion to IFRS, the financial information for construction services was not separately presented and construction costs related to
concessions were capitalized within property, plant and equipment. As a result, our chief operating decision maker did not review the results of
this business. Following our conversion to IFRS, our chief operating decision maker decided to continue to exclude the construction results
from the internal reporting of our revenues and expenses, thus not basing their decisions on discrete financial information for that
business. Consequently, the business did not qualify as an operating segment under IFRS 8. Nonetheless, after our conversion to IFRS and for
IFRS financial statement purposes only, we started to record such results separately as construction revenue and costs under IFRIC 12.
Although such information is available discretely, it is not analyzed by our chief operating decision maker as such and is not the basis for
operational decisions.
We set forth below a description of our activities.
Wholesale Operations
Wholesale Water Services
Until the end of 2018, we provided water services on a wholesale basis to five municipalities located in the São Paulo metropolitan region
(Guarulhos, Mauá, Mogi das Cruzes, Santo André and São Caetano do Sul). However, in December 2018 we entered into an agreement with the
municipality of Guarulhos to provide water and sewage services on a retail basis as from January 2019, replacing water services on a wholesale
basis. 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 No. 11.445/2007. In 2018, the revenues from wholesales water services were R$1,117.4 million (including the amount of
R$928.0 million related to agreement with the municipality of Guarulhos. For more information on this agreement, see Note 9 to our 2018
financial statements).
The Brazilian courts could oblige us to continue to supply water to these municipalities, even when we have not received payments due to
us. If they do not pay, we have no way of ensuring that negotiations with these municipalities or legal action taken against them will result in
payments being made. For example, the municipalities of Santo André and Mauá still owe us significant sums in respect of water that we have
been providing to them on a wholesale basis. For more information, see “Item 3.D. Risk Factors—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”. We have intensified the process of collecting these sums and other amounts using the Single Registry of Debtors of São
Paulo (Cadastro Único de Devedores de São Paulo), or State CADIN, and we executed Protocols of Intentions with Santo André and Mauá, in
2015 and 2016, respectively, seeking to resolve the outstanding amounts and restore normal commercial relations with them but the negotiations
were not successful. Accordingly, we signed a new Protocol of Intentions with the municipality of Santo André in March 2019.
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Wholesale Sewage Services
Currently, we provide sewage services on a wholesale basis to the municipalities of Mauá, Mogi das Cruzes, Santo André and São Caetano
do Sul. 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 2018 we invoiced approximately 31.1 million cubic meters of sewage collected from these
municipalities. We believe this illustrates our commitment to social and environmental responsibility. In 2018, our revenues from wholesale
sewage services were R$46.9 million.
In December 2018, we entered into an agreement with the municipality of Guarulhos to direct supply water and sewage services to the
municipality for 40 years. The municipality of Guarulhos holds a PPP contract entitled part of the sewage services and we hold an
interdependent contract with the SPE that holds the PPP contract. We are responsible for all commercial and billing services.
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 2018, we produced approximately 2,799.7 million 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 69.1% of water invoiced by volume in 2018.
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
2018
Year ended December 31,
2017
(in millions of cubic meters)
2016
1,959.6
840.1
2,799.7
1,194.5
262.7
650.7
2.107,9
1,952.3
830.9
2,783.2
1,175.8
256.7
643.4
2,075.9
1,888.8
807.4
2,696.2
1,136.7
227.4
626.2
1,990.3
The difference between the volume of water produced and the volume of water invoiced generally represents both physical and
non‑physical water loss. See “—Water Loss”. In addition, we do not invoice:
· water discharged for periodic maintenance of water transmission lines and water storage tanks;
· water supplied for municipal uses such as firefighting;
· water consumed in our own facilities; and
· estimated water loss associated with water we supply to shantytowns (favelas).
Seasonality
Although seasonality does not affect our results in a significant way, in general, higher water demand is observed during the summer and
lower water demand during the winter. The summer coincides with the rainy season, while the winter corresponds to the dry season. The
demand in the coastal region is increased by tourism, with the greatest demand occurring during the Brazilian summer holiday months.
Water Resources
We can withdraw water only to the extent permitted by DAEE pursuant to water rights granted by it. Depending on the geographic location
of the river basin or if the river crosses more than one state (federal domain), the approval of ANA a federal agency under the Ministry of the
Environment is required. We currently withdraw substantially all of our water supply from surface sources from rivers and reservoirs, with a
small portion being withdrawn from groundwater. Our reservoirs are filled by impounding water from rivers and streams, by diverting the flow
from nearby rivers, or by a combination of both methods. For more information on water usage regulation, see “—Environmental Matters—
Water Usage”.
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In order to supply water to the São Paulo metropolitan region, we rely on 20 reservoirs of non‑treated water and 231 reservoirs of treated
water, which are located in the areas under the influence of the nine water producing systems (including the São Lourenço water supply system)
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 82.1 m³/s, not including an additional 5.5 m³/s resulting from the emergency construction work conducted by us in 2014
and 2015. Total current installed capacity is 80.9 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 60.9 m³/s during 2018. The Cantareira, Guarapiranga and Alto
Tietê systems produce 82% of the water we distributed in the São Paulo metropolitan region in 2018.
In March 2018, we began operations of one of the important projects for the interconnected water system of the São Paulo metropolitan
region with the beginning of the transfer of water from the Jaguari reservoir to the Atibainha reservoir. The interconnection between the Jaguari
and Atibainha reservoirs has an average flow of 5.13m3/s and represents an important increase in water security for the Cantareira System and
for the water supply in the São Paulo metropolitan area. For more information see “—Capital Expenditure Program—Main Projects of Our
Capital Expenditure Program—Interconnection of Jaguarí and Atibainha Reservoirs”.
The construction of the São Lourenço Production System, another important project for the interconnected water system of the São Paulo
metropolitan region, began in April 2014 and was completed in April 2018 and operations began in July 2018. The São Lourenço Production
System represents an increase of 6.4m3/s in water availability and production capacity of the region’s integrated system and is the
ninth interconnected production system for the Metropolitan Region. For more information see “—Capital Expenditure Program—Main Projects
of Our Capital Expenditure Program—São Lourenço Project”.
In 2018, the Cantareira system accounted for 39% 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 72.2% 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”.
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 159 employees on the State River Basin Committees and the Federal Committees that act in the state of São Paulo and in the National and
State Councils on Water Resources.
The following table sets forth the water production systems from which we produce water for the São Paulo metropolitan region:
Water production system:
Cantareira
Guarapiranga
Alto Tietê
Rio Claro
Rio Grande (Billings reservoir)
Alto Cotia
Baixo Cotia (2)
Ribeirão da Estiva
São Lourenço
Total
Production Rate(1)
2018
2017
2016
(in cubic meters per second)
23.9
13.4
12.9
3.4
4.3
1.1
0.2
0.1
1.6
60.9
25.0
13.3
11.8
3.9
4.5
1.2
0.8
0.1
-
60.6
22.0
13.9
11.7
3.8
4.9
1.2
0.9
0.1
-
58.5
(1) Average of the twelve months ended December 31, 2018, 2017 and 2016.
(2) At the beginning of 2018, the region served by the Baixo Cotia system began to be supplied by the São Lourenço system.
The Guarapiranga and Billings reservoirs and a portion of some of the reservoirs of the Alto Tietê system are owned by other companies
controlled by the State. In the cities of the interior region of São Paulo, our principal source of water consists of surface water from nearby
rivers and from wells. 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”.
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 199.1, 207.3 and 200.2 thousand new water connections in 2018, 2017 and 2016,
respectively. 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, including Guarulhos, whereas
distribution is the responsibility of other companies or departments related to each municipality.
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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$18.7 billion from
2019 to 2023 to increase our water production and distribution capacities as well as to improve the water supply systems. In 2018, our total
investment in water supply systems amounted to R$2.3 billion, of which R$2.0 billion were invested in the São Paulo metropolitan region.
Water Treatment
We treat all water at our water treatment facilities prior to dispatching it to our water distribution network. We operate 247 treatment
facilities, of which nine are a part of the Metropolitan Production System—located in the São Paulo metropolitan region and account for
approximately 70.0% of all water we produced in 2018. The type of treatment used depends on the nature of the source and quality of the
untreated water. For example, water abstracted from rivers requires more treatment than water withdrawn from groundwater sources. All of the
water we treat receives fluoridation treatment.
Water Distribution
We distribute water through our 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)
2018
75,519
9,053
As of December 31,
2017
74,396
8,863
2016
73,015
8,654
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, 2018, our water distribution pipes and water transmission lines included: (i) 38,858 kilometers in the São Paulo
metropolitan region; and (ii) 36,661 kilometers in the Regional Systems.
As of that date, we had 375 storage tanks in the São Paulo metropolitan region with a total capacity of 2.3 million cubic meters, and 2,056
storage tanks in the Regional Systems. Furthermore, we had 462 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
in thousands
2019
124
62
186
2020
127
65
192
2021
127
65
192
2022
127
65
192
2023
127
65
192
2019 – 2023
632
322
954
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Water Loss
The difference between the volume of water produced and the volume of water invoiced generally represents both physical and
non‑physical water loss.
The Water Billed Loss Index represents the quotient of (i) the difference between (a) the total volume of water produced minus (b) the total
volume of water invoiced plus (c) the volume of water excluded from our calculation of water loss, divided by (ii) the total volume of water
produced.
The Water Metered Loss Index represents the quotient of (i) the difference between (a) the total volume of water produced minus (b) the
total volume of water measured minus (c) the volume of water that we exclude from our calculation of water loss, divided by (ii) the total
volume 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).
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:
WBLI =
WMLI =
TLDC =
Vproduced (Vinvoiced + Vused)
Vproduced
Vproduced – (Vmeasured + Vused)
Vproduced
Vproduced – (Vmeasured + Vused)
Nconnection x No. of days of a given
period
Where:
Vproduced: corresponds to the volume of water produced at a given period;
Vbilled: corresponds to the volume of water billed at a given period;
Vmeasured: 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, 2018, we experienced 337 liter/connection per day of water loss in the São Paulo
metropolitan region and 226 liter/connection per day of water loss in the Regional Systems, averaging 293 liter/connection of water loss per
day. We have a Corporate Program for Reduction of Water Loss in place that aims to reduce total water loss to around 267 liters/connection per
day, and the Water Metered Loss Index to 28.5% by 2021.
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) fell from
22.2% in December 2008 to 19.9% in December 2018.
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For more information on the measure we have adopted to confront the water crisis, see “—The 2014-2015 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
· reduction of non‑physical loss, which results primarily from the inaccuracy of our water meters installed at our customers’ premises and from
clandestine and illegal use. To this end we are upgrading and replacing inaccurate water meters, increase anti-fraud actions and expanding our
anti‑fraud personnel.
We are taking measures to decrease physical loss by reducing response time to fix leakages and by better monitoring of non‑visible water
main fractures. Among other initiatives, we have adopted the following measures to reduce physical water loss:
· the introduction of technically advanced valves to regulate water pressure throughout our water transmission lines in order to maintain
appropriate water pressure downstream. These valves are programmed to respond automatically to variations in demand. During peak usage,
the flow of water in the pipes is at its highest point; however, when demand decreases, pressure builds up in the water transmission lines and
the resulting stress on the network can cause significant water loss through cracks and an increase in ruptures of the pipes. The technically
advanced valves are equipped with probes programmed to feed data to the valve in order to reduce or increase pressure to the water
transmission lines as water usage fluctuates; the reconfiguration of interconnected water distribution to permit the distribution of water at lower
pressure;
·
the implementation of routine operational leak detection surveys to reduce overall water loss;
· the monitoring 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 90 thousand 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 Inductively Coupled Plasma
(ICP). 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, Quality and
Technology, or INMETRO.
All chemical products used for water treatment are analyzed and follow strict specifications set out in recommendations made by the
National Health Foundation (Fundação Nacional de Saúde), or NHF, ABNT, and the National Standard Foundation, or NSF, and the American
Water Works Association, or AWWA, to eliminate toxic substances that are harmful to human health. From time to time, we face problems with
the proliferation of algae, which may cause an unpleasant taste and odor in the water. In order to mitigate this problem, we work on: (i) fighting
algae growth at the water source and (ii) using advanced treatment processes at the water treatment facilities that involve the use of powdered
activated carbon and oxidation by potassium permanganate. The algae growth creates significant additional costs for water treatment because of
the higher volumes of chemicals used to treat the water. We also participate in the Clean Stream Program to clean important streams in the city
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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—Clean Stream Program”, and “—
Other Policies and Programs—Nossa Guarapiranga”.
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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, 2018, we collected
approximately 82% and 85% 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 2018, we collected approximately 83% of all the sewage produced in the municipalities in which we
operated in the state of São Paulo. We installed 215.3 thousand, 221.8 thousand and 236.6 thousand new sewage connections in 2018, 2017 and
2016, 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, 2018,
we were responsible for the operation and maintenance of 51,788 kilometers of sewage lines, of which approximately 27,036 kilometers are
located in the São Paulo metropolitan region and 24,752 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)
2018
51,788
7,495
As of December 31,
2017
50,991
7,302
2016
50,097
7,091
Our sewage system comprises a number of systems built at different times and constructed primarily from clay pipes and, more recently,
PVC tubing. Sewage lines larger than 0.5 meters in diameter are primarily made of concrete. Our sewage system is generally designed to
operate by gravitational flow, although pumping stations are required in certain parts of the system to ensure the continuous flow of sewage.
Where pumping stations are required, we use sewage lines made of cast iron.
The public sewage system operated by us was structured in order to receive, in addition to household effluents, a portion of non-domestic
effluents (such as industrial sewage and sewage from other non‑domestic sources) for treatment together with household effluents. Non-
domestic effluents have characteristics that are qualitatively and quantitatively different from household effluents. As a result, the discharge of
non-domestic effluents into the public sewage system is subject to compliance with specific legal demands with the purpose of protecting the
sewage collection and treatment systems, the health and safety of operators and the environment. The current environmental legislation
establishes standards for the discharge of these effluents into the public sewage system and stipulates that such effluents be subject to
pretreatment. These standards are defined in State Decree No. 8,468/1976.
Before the discharge is permitted, we carry out acceptance studies that assess the capacity of the public sewage system to receive it as well
as the compliance with regulations. Upon the conclusion of these studies, the technical and commercial conditions for receiving the discharge
are established, which are then formalized in a document signed by us and the effluent producer. Failure to comply with these conditions can
lead to the application of penalties by us. In extreme cases, the State of São Paulo Environmental Company (Companhia Ambiental do Estado
de São Paulo), or CETESB, is notified in order for the applicable measures to be taken. Effluents from our treatment facilities must comply
with limitation guidelines for release of effluents into receiving water bodies. Additionally, the quality of the water in the receiving water body
must not be impaired by the release of such effluents, as established by State Law No. 997/1976 regulated by State Decree No. 8,468/1976 and
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.
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Unlike the São Paulo metropolitan region, the interior region of São Paulo State does not generally suffer obstructions caused by sewage
system overload. The coastal region, however, experiences obstructions in its sewage lines primarily due to infiltration of sand, especially
during the rainy season in the summer months. In addition, the sewage coverage ratio in the coastal region is lower than in the other regions
served by us, at approximately 80% as of December 31, 2018.
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
2019
2020
2021
2022
in thousands
2023
2019‑2023
147
80
227
154
86
240
154
92
246
155
92
247
155
85
240
765
435
1,200
In 2018, approximately 64% and 99% of the consumer units of the sewage services used our sewage treatment system in the São Paulo
metropolitan region and the Regional Systems, respectively, or 76% of the consumer units of our sewage services in the state of São Paulo, was
connected at our treatment facilities and afterwards discharged into receiving water bodies such as rivers and the Atlantic Ocean, in accordance
with applicable legislation. Though we have not yet reached full coverage of sewage collection and treatment services in the regions where we
operate, we are making efforts to reach this goal.
We currently operate nine ocean outfalls and 556 sewage treatment facilities, of which the five largest, located in the São Paulo metropolitan
region, have a treatment capacity of approximately 24.5 cubic meters of sewage per second.
In the São Paulo metropolitan region, the treatment process used by most treatment facilities is the activated sludge process.
Sewage 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 489 secondary treatment facilities in the interior region of São Paulo State that have
treatment capacity of approximately 16.9 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 43 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—
Environmental Matters—Environmental Regulation—Sewage Requirements”.
Sludge Disposal
The generation 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.
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, regulated by Federal Decree No. 7,404/2010, State Law No. 12,300/2006 and State Decree No. 54,645/2009.
Currently, the sludge generated through our activity goes mainly to landfills authorized to receive it. In turn, we treat the leachate generated
in these landfills.
Current legislation and the population at large demand advances in the search for alternative technologies that minimize the generation of
and find beneficial uses for sludge. In light of these demands, we work on several fronts, seeking innovative approaches to the destination and
final disposal of sludge.
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Additionally, using financing from Funding Authority for Studies and Projects (Financiadora de Estudos e Projetos, or FINEP), we are also
developing two other innovating projects aiming to reduce the disposal of sludge in landfills. The first project uses a gasification system that
uses specialist technology to transform sludge from sewage treatment plants into a solid product, weighing 5% of its initial weight, which can be
re-used in construction work. The second project consists of a sludge dryer that uses highly mechanized and automated processes, drawing on
solar energy, to reduce up to 70% of initial volume.
Principal Markets in Which We Operate
As of December 31, 2018, we operated water and sewage systems in 369 of the 645 municipalities in the state of São Paulo. In addition, we
supplied water on a wholesale basis to five municipalities located in the São Paulo metropolitan region, including Guarulhos, with a total
population of approximately 3.1 million people.
The following table provides a breakdown of gross revenues from water supply and sewage services by geographic market for the years
indicated:
São Paulo metropolitan region
Regional Systems
Total
Competition
2018
Year ended December 31,
2017
(in millions of R$)
2016
10,295.5
3,958.1
14,253.6
8,636.9
3,586.8
12,223.7
7,749.7
3,372.5
11,122.2
In 2018, there were 276 municipalities operating their own water and sewage systems with a total population of approximately 16.7 million,
or approximately 38% of the population of the state of São Paulo.
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 “—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”. 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. Since these fixed demand agreements (take-or-pay
contracts) with certain of our industrial customers were not covered by our bonus program, until April 2016, we suspended the fixed demand
requirement in order to encourage lower water consumption. In May 2016, we reinitiated the fixed demand requirement, and the volumes of
those contracts were revised according to clients’ new consumption profiles. We started 2018 with 482 formal contracts and ended the year with
531 contracts. For more information about the water crisis, see “—The 2014-2015 Water Crisis”. For more information on Take-or-pay
Contracts see “—Tariff Structure—Fixed Demand Agreements (Take-or Pay)”.
Billing Procedures
The procedure for billing and payment of our water and sewage services is largely the same for all customer categories. Water and sewage
bills are based upon water usage determined by monthly water meter readings. Larger customers, however, have their meters read every 15 days
to monitor consumption and thus avoid water loss resulting from leakages. 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 independent contractors
who are also responsible for reading water meters, although a proportion of clients elected, for convenience purposes, to receive their bill
through regular mail. Water and sewage bills can be paid at some banks and other locations in the state of São Paulo. These funds are paid over
to us after deducting average banking fees ranging from R$0.29 to R$1.34 per transaction for collection and remittance of these payments.
Customers must pay their water and sewage bills by the due date if they wish to avoid paying a fine. We generally charge a penalty fee and
interest on late bill payments. In 2018, 2017 and 2016, we received payment of 93.8%, 94.1% and 93.0%, respectively, of the amount billed to
our retail customers, and 93.8%, 94.1% and 93.0%, respectively, of the amount billed to those customers other than State entities, within 30 days
after the due date. In 2018, 2017 and 2016, we received 99.4%, 99.2% and 97.2%, respectively, of the amount billed to the State entities. With
respect to wholesale supply, in 2018, 2017 and 2016, we received payment of 38.5%, 60.1% and 74.1%, respectively, of the amount billed
within 30 days.
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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.
Tariffs
Tariff adjustments follow the guidelines established by the Basic Sanitation Law and ARSESP. The guidelines also establish procedural
steps and the terms for the annual adjustments. The adjustments have to be announced 30 days prior to the effective date of the new tariffs,
which previously would take effect in September. Pursuant to the most recent tariff revision, both the base date and future adjustments take
place in April.
Tariffs have historically been adjusted once a year and for periods of at least 12 months. See “—Government Regulations Applicable to our
Contracts—Tariff Regulation in the State of São Paulo” for additional information regarding our tariffs.
With the publication of the Basic Sanitation Law, Federal Law No. 11,445/2007, states have been required to establish independent
regulators responsible for the regulation of basic sanitation services, including tariff regulation. To exercise this assignment, the State of São
Paulo enacted State Supplementary Law No. 1,025/2007, that established ARSESP, which regulates and supervises the services we provide to
the State and also to the municipalities that have agreed to its jurisdiction. The guidelines by which we readjust our tariffs are defined pursuant
to State Decree No. 41,446/1996, which were ratified by Federal Law No. 11,445/2007 and regulated by resolutions issued by ARSESP.
In regard to municipalities that have not explicitly selected ARSESP as their regulator, the Basic Sanitation Law allows the municipality to
create other regulatory agencies of their own. 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, however, reserved 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 four
municipalities (Piracaia, Mombuca, Santa Maria da Serra and Aguas de São Pedro). In 2016 we obtained a definitive favorable decision in the
Piracaia proceeding and in 2018, we obtained a definitive favorable decision in the Mombuca and Santa Maria da Serra proceedings. However,
as the debate continues in the Aguas de São Pedro proceeding, we cannot predict the outcome of this case or how it may affect our business.
Furthermore, regional and municipal agencies may continue to be created and may dispute with ARSESP regarding the regulation and oversight
of our services. 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”.
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 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.
First Ordinary Tariff Revision (2013-2016)
On November 1, 2013, ARSESP issued Resolution No. 435/2013 which authorized us to implement a linear tariff adjustment increase of
3.1451% for tariffs beginning December 11, 2013.
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In April 2014, ARSESP issued Resolution No. 484/2014 (further ratified by ARSESP Resolution No. 520/2014). Considering the provisions
of 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.
ARSESP Resolution No. 520/2014, published on November 27, 2014, authorized 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.
Taking into account the unusual situation in our industry as a result of the lack of rainfall and our measures to encourage water savings in
order to ensure supply, we had to implement a series of measures, including the following:
Water Consumption Reduction Incentive Program and Contingency Tariff as a Result of the Water Crisis
ARSESP Resolution No. 469, published in February 2014, authorized us to adopt a Water Consumption Reduction Incentive Program for
consumers whose consumption of water was reduced by 20% in comparison with their consumption in the period from February 2013 through
January 2014.
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 the municipalities we served in Piracicaba, Capivari and the
Jaguari River Basin in the Cantareira System catchment area, and remained in effect for invoices issued between June 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 reduced their water
consumption by 10-15% became entitled to a 10% discount on their service bill; (ii) customers who reduced their water consumption by 15-20%
became entitled to a 20% discount; and (iii) customers who reduced their water consumption by 20% or more became entitled to a 30%
discount.
ARSESP Resolution No. 536, published in December 2014, authorized us to extend the Water Consumption Reduction Incentive Program
until the earlier of either the end of 2015 or the date on which levels in the reservoirs normalizes.
In December 2015, we requested ARSESP to ratify the continuity and update of the Water Consumption Reduction Incentive Program
through the Bonus grant to the Water and Sewage Bill, as well as the continuity of the Contingency Tariff. In response, ARSESP published the
following 2 resolutions:
(1) Resolution No. 614/2015, published in December 2015, authorized the extension until December 31, 2016, or until hydrological
conditions become more predictable, of the effects of ARSESP Resolution No. 545/2015, maintaining the current rules and conditions
for the application of the contingency tariff by us envisaged in Resolution No. 545/2015; and
(2) Resolution No. 615/2015, also published in December 2015, authorized the extension of the Water Consumption Reduction Incentive
Program until December 31, 2016, or until hydrological conditions become more predictable, and updated of the reference consumption
value used to determine when discounts should be offered to our customers. Prior to this resolution, the reference consumption value by
which we calculated the discounts was the average consumption of our customers in the period between February 2013 and January
2014. As of December 2015, we modified the reference consumption value, which was set at 78% of the prior reference consumption
value. The updated reference consumption value began to be applied to our customers’ bills as of February 1, 2016. The bonus ranges
of 10%, 20% and 30%, were maintained, following the rules of our discount (bonus) program which established that if a client consumes
10% less water during a certain period compared to his reference consumption value, he will obtain a discount of 20% in his water bill,
and if the client consumes 20% less water, he obtains a discount of 30%.
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.
Extraordinary Tariff Revision as a Result of the Water Crisis
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In March 2015, we filed a request with ARSESP for an extraordinary tariff revision due to the decline in the volume of water billed because
of the water crisis and the unforeseen increase in electricity tariffs. After analyzing our request and receiving opinions through public
consultations, ARSESP published Resolutions No. 560/2015 and No. 561/2015:
I. Resolution No. 560/2015, published May 4, 2015, authorized a readjustment of 7.7875% on existing tariffs, which constituted of:
(i) an annual tariff readjustment for the year of 2015 of 7.1899%, calculated based on the 8.1285% variation in the IPCA in the
period between March 2014 and March 2015, minus the efficiency factor of 0.9386%; and (ii) the additional adjustment of
0.5575% due to the postponement of the application of the Ordinary Tariff Review (the tariff review that adjusts tariffs according
to inflation), authorized in May 2014 but only applied in December 2014, when it was partially compensated; and
II. Resolution No. 561/2015, also published May 4, 2015, established the 6.9154% index of the Extraordinary Tariff Revision (the
tariff revision we requested due to the decline in the volume of water billed due to the water crisis and the unpredicted increase in
electricity tariffs) for us, applicable to the tariffs authorized on this date by Resolution No. 550. Both tariff adjustments, combined,
resulted in the 15.24% index. The new tariff values began to apply on June 5, 2015.
Cancelation of Water Consumption Reduction Incentive Program and Contingengy Tariff
In March 2016, we filed with ARSESP a request to cancel the Water Consumption Reduction Incentive Program and the Contingency
Tariff. In response, ARSESP published on March 31, 2016, the following Resolutions:
I. Resolution No. 640/2016, authorizing the cancellation of the Contingency Tariff, which was applied to water meter readings as of
May 1, 2016; and
II. Resolution No. 641/2016 authorizing the cancellation of the Water Consumption Reduction Incentive Program, which granted
discounts to water and sewage bills. This cancellation was applied to water meter readings as of May 1, 2016.
Second Ordinary Tariff Revision (2017-2020)
The Second Ordinary Tariff Revision was originally expected to occur in April 2017. To this effect, on October 15, 2016, ARSESP released
Resolution No. 672/2016, after public consultation, establishing the methodology and criteria for the update of our regulatory asset base in the
Second Ordinary Tariff Revision.
Due to delays in retaining a consulting company to advise ARSESP on the tariff revision and to the fact that it was impossible to predict
when this consulting company would be retained, ARSESP released Resolution No. 706/2017 on January 19, 2017. This resolution divided the
Second Ordinary Tariff Revision process into two parts. Due to extensions resulting from the need for supplemental information from us, the
first part, which was initially expected to be concluded by June 30, 2017, was completed on October 10, 2017. The second part was concluded in
May 2018.
On October 6, 2017, ARSESP published the Final Technical Note NT/F/004/2017 and the Detailed Report on the first part of the Second
Ordinary Tariff Revision.These publications set the initial regulatory remuneration asset base at R$40.3 billion (although this value was not
final), increased the annual rate (WACC) from 8.06% to 8.11% and set the preliminary tariff revision (Preliminary P0) at R$3.6386/m3 using the
April 2017 price. On October 10, 2017, ARESP approved Resolution No. 753/2017, authorizing us to apply the tariff repositioning index of
7.8888%, effective on November 10,2017.
On November 10, 2017, ARSESP authorized us to charge our customers for the Regulatory, Control and Inspection Fee (Taxa de
Regulação, Controle e Fiscalização, or TRCF) by 0.5% including it in customer bills in the municipalities regulated by ARSESP, pursuant to
Paragraph 2 of Article 2 of ARSESP Resolution No. 406/2013. This fee was initially established by the State Supplementary Law No.
1.025/2007.
With respect to the second stage of the Second Ordinary Tariff Revision, on March 26, 2018, ARSESP released Preliminary Technical Note
NT/F/0004-2018 with the proposed calculation of the maximum average tariff (P0) and the X Factor. This technical note established a final
regulatory asset base of R$38.4 billion, a WACC of 8.11%, an X Factor of 0.9287%, a P0 of R$3.8207/m³ and a tariff repositioning index of
4.7744%. After Public Consultation and Public Hearings on the Final P0 proposal, ARSESP released, on May 9, 2018, Final Technical Note
NT/F/0006/2018 and Resolution No. 794/2018, establishing a final regulatory asset base of R$39 billion, a WACC of 8.11%, an X Factor of
0.8885%, a P0 of R$3.7702/m³ and a tariff repositioning index of 3.5070% effective on June 9, 2018.
On May 24, 2018, as a result of the final result of the Second Ordinary Tariff Revision, we filed: (i) an administrative appeal questioning the
methodology utilized for applying the compensatory adjustment to revenue, electricity costs and investments made during the first tariff cycle;
(ii) a request for clarification of the reasons leading to a significant reduction in OPEX projections for the period 2017-2020; (iii) a request to
review estimates for the X Factor calculations of the compensatory adjustment for the delay in the application of the Second Ordinary Tariff
Review; and (iv) a request to review the calculation of the financial component related to municipal funds, this one related to the contract with
the municipality of São Paulo.
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On February 28, 2019, ARSESP published the result of the applications filed on May 24, 2018 (described above). With regard to the
administrative appeal, ARSESP decided not to accept its merits. Regarding the request for clarification and estimate review; ARSESP partially
accepted our arguments and determined: (i) the correction of the X factor, reducing it from 0.8885% to 0.6920%; and (ii) to apply a
compensatory adjustment of 0.8408% to the upcoming tariff adjustment to cover: a) the delay in the application of the Tariff Revision in the
second cycle, specifically related to the capitalization of revenue differences after June 2018; and b) an adjustment in the reference price dates
adopted in the OPEX calculation, from December 2017 to April 2017. The final results of an index of 0,8408%, to be applied at the same time as
the annual tariff adjustment in May 2019.
On April 10, 2019, ARSESP issued Resolution No. 859/2019 which authorizes us to implement a tariff readjustment of 4.7242% to the
current tariffs, comprised of: (i) IPCA variation in the period of 4.5754% effective (ii) efficiency factor (X Factor) of 0.6920%; and (iii)
Compensatory adjustment of 0.8408%. This tariff readjustment will be effective on May 11, 2019.
Regulatory Agenda
On November 1, 2018, ARSESP opened public consultation No. 09/2018 with the objective of collecting contributions and opinions related
to the proposal of the Regulatory Agenda ARSESP 2019-2020. The purpose of this Regulatory Agenda is to ensure transparency and
participation by the society in the regulatory process and to give users of regulated public services, economic agents and other interested parties
the opportunity to express their opinion, as well as to obtain subsidies that may provide a greater degree of reliability, clarity and security to the
agency’s decision-making process. On January 31, 2019, ARSESP announced the result of this public consultation (No. 09/2018) and among the
subjects that were discussed are the regulatory criteria for the recognition as part of the tariffs of the transfers made to all municipal funds for
environmental sanitation and infrastructure, expected to be concluded in the first half of 2019.
On February 8, 2019, ARSESP published the Public Consultation No. 02/2019, which aims to obtain contributions on the Regulatory
Criteria for the recognition of the tariffs for the transfers to municipal funds for environmental sanitation and infrastructure. Our contributions to
this Public Consultation were forwarded on March 11, 2019.
Contract with the State and the City of São Paulo, dated June 23, 2010
With regard to the contract dated June 23, 2010, executed with the State and the city of São Paulo to regulate the provision of water and
sewage services for the next 30 years, among other principal terms of this agreement, we must transfer 7.5% of our gross revenues, subtracting
the COFINS and PASEP taxes and 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), ARSESP issued the following resolutions:
· In March 2013, ARSESP issued Resolution No. 407/2013, authorizing us to pass on to our consumers the 7.5% transfer to the
Municipal Fund for Environmental Sanitation and Infrastructure, as defined by municipal legislation. Pursuant to 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 first tariff
revision process is concluded, thereby postponing our authorization to pass on to our consumers’ service bill the charge for the
Municipal Fund for Environmental Sanitation and Infrastructure. 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.
· 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 on to our consumers’ service bill the charge for the Municipal Fund for Environmental Sanitation and
Infrastructure. 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 December 2016, we concluded the first four-year revision of our contract with the city of São Paulo, which altered our service
quality, investment and investment tracking targets. However, the issue of the 7.5% charge was not discussed.
· In January 2018, the second step of our Second Ordinary Tariff Revision was initiated. In this review, the possibility of including the
average tariff in the portion related to transfers to municipal funds, as is the case with the 7.5% that we transfer to the São Paulo
Municipal Fund for Environmental Sanitation and Infrastructure, was discussed.
· On May 9, 2018 ARSESP announced the final results of the Second Ordinary Tariff Revision. Following this revision cycle, ARSESP
will pass-through to the tariffs up to 4% of the municipal revenue that is transferred by us to a legally established municipal
infrastructure fund. Our only contract that provides for this and complies with ARSESP´s requirements is with the municipality of São
Paulo and, accordingly, today 4% of the funds transferred to the São Paulo Municipal Fund for Environmental Sanitation and
Infrastructure are being passed through to our tariffs.
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· On May 24, 2018, as a result of the final result of the Second Ordinary Tariff Revision, we filed a reconsideration request as well as a
clarification and revision request with ARSESP. As part of the clarification and revision request, we requested that ARSESP provide a
revision of the calculation of the financial component related to municipal funds. On February 28, 2019, ARSESP rejected our
reconsideration request and maintained their original calculation of the financial component related to municipal funds. For more
information, see “Item 4.B. Business Overview—Tariffs—Second Ordinary Tariff Revision (2017-2020).”
· Considering the final results of the Second Ordinary Tariff Revision released on May 9, 2018, in the current tariff cycle (2017-2020)
this 7.5% charge will not be passed in full through to customers.
For more information 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.”
Tariff Structure
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 the 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.
However, in the Public Consultation No. 09/2018, one of the topics included in the Regulatory Agenda 2019-2020 proposed by ARSESP is
the preparation of studies and proposals for a review of our tariff structure and respective implementation plan. This subject is expected to be
concluded in the first half of 2020.
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 30.0
thousand and with half or more classified according to their degree of social vulnerability by the Social Vulnerability Index of São Paulo (Índice
Paulista de Vulnerabilidade Social) 5 and 6, of the SEADE, obtained through the analysis of the 2000 Census figures, and start to receive tariff
benefits, in accordance with our normative ruling, for the category of public use, at the municipality level. The tariffs are equal to those offered
to the commercial/entity of social assistance and that corresponds to 50.0% of the public tariffs without contractual provisions referred to in item
(iv) above.
Fixed Demand Agreements (Take‑or‑Pay)
We established a new tariff schedule, effective May 2002, for commercial and industrial customers that consume at least 5 thousand cubic
meters of water per month and that enter into fixed demand agreements (take‑or‑pay) with us for at least one‑year terms, with the aim of
retaining these industrial and commercial customers. In October 2007, the minimum volume for entering into these agreements was reduced
from 5 thousand cubic meters per month to 3 thousand 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 thousand 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.
In May 2016, we reinitiated the fixed demand requirement, and the volumes of those contracts were revised according to clients’ new
consumption profiles. We started 2018 with 482 formal contracts and ended the year with 531 contracts. For more information about the water
crisis, see “—The 2014-2015 Water Crisis”.
On November 2, 2018, ARSESP published Resolution No. 818/2018 which provides the criteria for the execution and inspection of
contracts for the supply of water and sewage services for large users of non-residential use categories, governing the conclusion of new contracts
and adjusting existing contracts to the new rules.
The ARSESP Resolution No. 818/2018 consolidates all the regulatory guidelines for the execution of contracts with large users, as well as
establishing a system for the homologation of standard contracts setting out the transition rules for contracts already in force and determines the
minimum and maximum limits for the fees that may be charged. Additionally, this resolution allows ARSESP to amend such contracts, in case
of a restriction of the water supply, and require mandatory disclosure of the contracts, as well as the results of their inspections, on the website of
the provider.
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Water and sewage services tariffs
We establish separate tariff schedules for our services in each of the São Paulo metropolitan regions and each of the interior region of São
Paulo State and coastal regions which comprise our Regional Systems, depending upon whether a customer is located in the São Paulo
metropolitan region or the Regional Systems. Each tariff schedule incorporates regional cross‑subsidies, taking into account the customers’ type
and volume of consumption. Tariffs paid by customers with high monthly water consumption rates exceed our costs of providing water service.
We use the excess tariff billed to high‑volume customers to compensate for the lower tariffs paid by low‑volume customers. Similarly, tariffs for
non‑residential customers are established at levels that subsidize residential customers. In addition, the tariffs for the São Paulo metropolitan
region generally are higher than tariffs in the interior region of São Paulo State and coastal regions. In 2018, 2017 and 2016, the average tariff
calculated for the Regional Systems was approximately 25% below the average tariff of the São Paulo metropolitan region. Considering the
current tariff structure this is also expected for 2019.
Sewage charges in each region are fixed and are based on the same volume of water charged. In the São Paulo metropolitan region and the
coastal region, the sewage tariffs are equal to the water tariffs. In the majority of the municipalities of the interior region of the State of São
Paulo, sewage tariffs are approximately 20.0% lower than water tariffs. Wholesale water rates are the same for all municipalities served. We
also make available sewage treatment services to those municipalities in line with the applicable contracts and tariffs. In addition, various
industrial customers pay an additional sewage charge, depending on the characteristics of the sewage they produce. Each category and class of
customer pays tariffs according to the volume of water consumed. The tariff paid by a certain category and class of customer increases
progressively according to the increase in the volume of water consumed. The first category (0-10) corresponds to the minimum fee that is
charged to our customers for the consumption of water. The following table sets forth the water and sewage services tariffs by (i) customer
category and class; and (ii) volume of water consumed, charged in cubic meters during the years and period stated in the São Paulo metropolitan
region:
Customer Category Consumption
As of May 11,
As of June 9,
As of Nov 10,
As of May 12,
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
2019
2018
2017
(reais per m3)
2.62
4.10
10.23
11.27
0.89
1.53
5.43
7.74
8.55
0.68
0.77
2.56
7.74
8.55
5.26
10.23
19.60
20.42
2.63
5.11
9.84
10.22
3.94
7.66
14.74
15.32
2.50
3.91
9.77
10.76
0.85
1.46
5.19
7.39
8.17
0.65
0.73
2.44
7.39
8.17
50.20
9.77
18.71
19.50
2.51
4.88
9.40
9.76
3.76
7.32
14.08
14.63
2.42
3.78
9.44
10.40
0.82
1.41
5.01
7.14
7.89
0.63
0.71
2.36
7.14
7.89
4.85
9.44
18.08
18.84
2.42
4.71
9.08
9.43
3.63
7.07
13.60
14.13
2016
2.24
3.50
8.75
9.64
0.76
1.31
4.64
6,.62
7.31
0.58
0.66
2.19
6.62
7.31
4.50
8.75
16.76
17.46
2.25
4.37
8.42
8.74
3.37
6.55
12.61
13.10
(1)
The minimum volume charged is for ten cubic meters per month.
On April 11, 2016, ARSESP issued Resolution No. 643/2016, which authorizes us to implement an 8.4478% tariff adjustment to our current
tariffs, effective on May 12, 2016.
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On October 10, 2017, ARSESP issued Resolution No. 753/2017, which authorizes us to implement a 7.8888% repositioning index to our
current tariffs, effective on November 10, 2017.
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On November 10, 2017, ARSESP authorized us to charge our customers for the Regulatory, Control and Inspection Fee (Taxa de
Regulação, Controle e Fiscalização, or TRCF) by 0.5% including it in customer bills in the municipalities regulated by ARSESP, pursuant to
Paragraph 2 of Article 2 of ARSESP Resolution No. 406/2013. This fee was initially established by the State Supplementary Law No.
1.025/2007.
On May 9, 2018, ARSESP issued Resolution No. 794/2018, which authorizes us to implement a 3.5070% repositioning index to our current
tariffs, effective on June 9, 2018.
On April 10, 2019, ARSESP issued Resolution No. 859/2019 which authorizes us to implement a tariff readjustment of 4.7242% to the
current tariffs, comprised of: (i) IPCA variation in the period of 4.5754% effective (ii) efficiency factor (X Factor) of 0.6920%; and (iii)
Compensatory adjustment of 0.8408%. This tariff readjustment will be effective on May 11, 2019.
Government Regulations Applicable to our Contracts
Basic sanitation services in Brazil are subject to extensive federal, state and local legislation and regulation that, among other matters,
regulates:
· the development of public‑private partnerships, or PPPs;
· the need of a public bidding process for the appointment of water and sewage services providers via concession agreements;
· the need of setting up an agreement for the appointment of public water and sewage services providers;
· the joint management of public services through cooperation agreements, allowing for a program agreement without the need for a
public bidding process for the service provider;
· the planning, regulation and inspection of basic sanitation services prohibited by service providers;
· minimum requirements for water and sewage services;
· water usage;
· water quality and environmental protection; and
· governmental restrictions on the incurrence of debt applicable to state‑controlled companies.
PLANASA
The National Plan of Basic Sanitation (Plano Nacional de Saneamento Básico), or “PLANASA” was created in 1971, aiming to provide
universal access to sanitation services in urban areas and to establish an adequate tariff policy, among other things. Afterwards, SABESP was
created under State Law No. 119/1973 as a mixed capital company to provide basic sanitation services in the state of São Paulo while also
acknowledging the autonomy of the municipalities within the State.
Pursuant to the Brazilian Constitution, the authority to develop and provide public water and sewage services are the joint responsibility of
the federal government, the states and the municipalities. Article 216 of the Constitution of the State of São Paulo establishes that the State must
provide the conditions for the efficient management and adequate expansion of water and sewage services rendered by its agencies and
State‑controlled companies or any other concessionaire under its control.
Pursuant to Article 175 of the Brazilian Constitution, the rendering of public services, such as water and sewage services, is the
responsibility of the applicable public authority. However, any such public authority has the right to render these services directly or through a
concession granted to a third party after a bidding process.
Additionally, Article 241 of the Brazilian Constitution establishes the legal regime for managing the rendering of public services among
different federal, state and municipal government entities, including the total or partial transfer among these entities of fees, services, personnel
and essential goods needed to render such public services. For example, such service can be rendered through a public consortium or a
cooperation agreement under Federal Law No. 11,107 of April 6, 2005, also known as the Law on Public Consortia and Cooperation
Agreements (Lei de Consórcios Públicos e Convênio de Cooperação), which, in turn, created a program contract which allowed for the waiver
of the bidding process for companies like ours.
The Basic Sanitation Law
The Basic Sanitation Law No. 11,445/2007 went into effect on January 5, 2007, effectively revoking and substituting the PLANASA model,
establishing nationwide guidelines for basic sanitation and seeking to create the appropriate solutions for the provision of basic sanitation
considering the particular conditions in each state and municipality. The Basic Sanitation Law also sought to facilitate the cooperation between
the state and municipalities in the rendering of public services.
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The Basic Sanitation Law establishes the following guiding principles for the public service of basic sanitation: 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 certain minimum liability thresholds, such as the
development of local and regional sanitation plans, the need to create norms for the regulation and supervision of services, the creation of the
entities responsible for such regulation and establishment of the rights and obligations of the users and of social control mechanisms, in addition
to the principles listed below:
· for public-private partnership contracts (or program contracts), public hearings must be held with respect to bid announcements;
· the carrying out of technical and financial feasibility studies;
· the holding of public hearings regarding concession bidding notices and contract drafts;
· 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;
· the interruption of the provision of sanitation services by the service provider in the event of a default of payment of the tariffs by the
customer, among other reasons, provided that mimimum conditions for maintaining health are assured;
· when parts of a regulated service are to be provided by different service providers, those providers must execute an agreement
regulating their respective activities;
· the definition of principles and guidelines which must be respected when securing public funds generated or operated by agencies or
entities of the federal government;
· the possibility of using subsidies as an instrument of social policy in order to ensure access to basic sanitation services to everyone,
particularly for low‑income families; and
· the obligation to adopt environmental criteria that include, among other measures, individual management of water consumption per
habitation unit.
By establishing the principles listed above, the Basic Sanitation Law defines the laws and regulations under which a water and basic
sanitation provider may provide its services to several regions controlled by different owners (i.e., one single provider serves two or more
owners, for which there may be one plan for the combination of services).
The rules for implementation of the new principles and directives set forth in Federal Law No. 11,445/2007 are established by Federal
Decree No. 7,217 / 2010, dated June 21, 2010; as amended by Federal Decree No. 8,211, dated March 21, 2014; Federal Decree No. 8,629,
dated December 30, 2015; and Federal Decree No. 9.254, dated December 29, 2017.
In addition, the Basic Sanitation Law defines the rules for the delegation of the regulation, control and monitoring of sanitation services by
the states and municipalities to contracted parties and the conditions for any such provision of public services. The Basic Sanitation Law also
significantly amends Article 42 of the Federal Concessions Law No. 8,987/1995, which establishes the administrative proceedings necessary for
the termination of concessions prior to the expiration date and the reversibility conditions for unamortized investments that create assets upon
the termination of a concession. The amendment to Article 42 establishes that when a concession is terminated prior to its expiration date, the
service provider must be indemnified for unamortized investments that create assets, preferably through an amicable settlement between the
parties defining the criteria for the calculation and payments of indemnity.
Furthermore, the Basic Sanitation Law also provides that the provision of sanitation services may be interrupted by the service provider, in
the event of a default of payment of the tariffs by the customer, among other reasons. The provision of sanitation services may only be
interrupted after a written notice, and as long as minimum health requirements are met.
The Basic Sanitation Law defines the criteria for the reversal of assets at the time of termination of the water and sewage public service
contract, which term also encompasses concession agreements 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 criteria for calculating the amount of an indemnity
due, which may be calculated by a specialized institution chosen by mutual agreement between the parties in a formal payment agreement.
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Pursuant to the Basic Sanitation Law, the parties involved in a 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. The provision of public services will remain valid until the conclusion of any
administrative measures undertaken by the entity responsible for such services.
According to the Basic Sanitation Law, the existing concession or water and sewage public service contract will remain in effect until the
responsible public entity concludes the administrative proceedings necessary for termination.
The Basic Sanitation Law provides that our new water and sewage public service contracts must 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.
On December 28, 2018, Provisional Measure No. 868/2018 was issued with the same purpose of Provisional Measure No. 844/2018, which
aims to amend the Basic Sanitation Law No. 11,445/2017; Law No. 9,984/2000, to attribute to the National Water Agency the power to enact
national reference rules about the sanitation service; Law No. 10,768/2003 to change the role of the Water Resources Specialist; and Law No.
13,529/2017 to authorize the Federal Government to participate in the fund with the exclusive purpose to provide financial support for
specialized technical services. This Provisional Measure is valid until June 3, 2019 and its conversion into law is pending approval by the
National Congress. Although this Provisional Measure has been in force since the date of its publication, it is not yet possible to predict how it
will impact contracts that we may enter into while the measure is in force.
Contracts for the Provision of Essential Basic Sanitation Services in Brazil
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 No. 11,107/2005; and (iii) PPPs 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.
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.
The Constitution of the State of São Paulo provides that the State shall ensure the adequate provision and efficient administration of water
and sewage services in the state territory by a company under its control, such as our company.
Our Concession Agreements
From 1998 to 2005, our contracts with municipalities have been regulated by the Federal Concessions Law No. 8,987/1995. Generally,
these contracts have a 30‑year term, and the total value of the concession is set by the discounted cash flow method. Under this method, when
the expected contractual cash flow is reached, the total value of the concession and assets is amortized to zero on our books and we receive no
payment for the assets. If the concession is terminated prior to the end of the 30‑year term, thereby interrupting the normal contractual cash
flow, we are paid an amount equal to the present value of the expected cash flow over the years remaining in the concession, adjusted for
inflation.
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 unilaterally at any time if certain standards of
quality and safety are not met, in the event of default of the terms of the concession agreement, or due to changes in public interest since the
concession was granted.
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”.
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Program Agreements
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
consortium enters into contracts with the Brazilian federal government, state governments, the Federal District and municipalities, regulating the
joint management of public services.
Federal Law No. 11,107/2005 introduces significant changes in the relationship among municipalities, states and companies providing
public sanitation services, prohibiting the latter from exercising the activities of planning, oversight and regulation, including tariff regulation, of
the services. The law also created the program agreement, a contract to be followed when Brazilian states and municipalities enter into
agreements for the provision of public services with mixed capital companies. The program agreement provides the guidelines for the joint
management of public services by Brazilian states and municipalities with mixed capital companies. Furthermore, this agreement allows states
and municipalities to waiver the public bidding process and still be in compliance with concession legislation when entering into contracts with
entities that are owned by the Brazilian states or municipalities.
Federal Decree No. 6,017/2007 details the conditions for the establishment of joint management entities and the execution of the program
agreement regulating the Public Consortia and Cooperation Agreement Law.
Pursuant to the Brazilian Constitution, in metropolitan regions, urban conurbations and microregions, the authority to develop public water
and sewage systems is shared by the states and municipalities. However, for municipalities which are not a part of the types of regions cited
above (metropolitan regions, urban conurbations and microregions), the primary responsibility for providing water and sewage services to
residents rests with the municipality.
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. On January 13, 2006, the Governor of the
State of São Paulo enacted State Decree No. 50,470/2006, amended by State Decrees No. 52,020/2007, dated July 30, 2007, and
No. 53,192/2008, dated July 1, 2008, which regulate the provision of water and sewage services in the State of São Paulo. Pursuant to these
decrees, we may enter into agreements with municipalities in connection with the provision of water and sewage services by means of a
“program agreement without a public bidding process”. In addition, these decrees established that we will continue to render services in the
areas covered by the concession granted by the State. Following the entry into force of the Public Consortia and Cooperation Agreements Law,
we adopted the administration of public services through cooperation agreements and program agreement which can be used simultaneously.
Public‑Private Partnerships
Public-Private Partnerships, or “PPPs”, are long-term contracts between private parties and government entities, for providing a public asset
or service, in which the private parties bears significant risk and management responsibility, and remuneration is linked to performance. PPPs
are regulated by the State of São Paulo through Law No. 11,688/2004, which was enacted on May 19, 2004. PPPs may be used for:
(i) implantation, expansion, improvement, reform, maintenance or management of public infrastructure; (ii) provision of public services; and
(iii) exploitation of public assets and non‑material rights belonging to the State.
Payment is conditioned upon performance. The payment may be collected through: (i) tariffs paid by users; (ii) use of resources from the
budget; (iii) assignment of credits belonging to the State; (iv) transfer of rights related to the commercial exploitation of public assets;
(v) transfer of real property and other property of assets; (vi) public debts securities; and (vii) other revenues.
We do not currently provide any basic sanitation services to municipalities through PPPs.
Agreements with Municipalities and Metropolitan Regions
The state of São Paulo, pursuant to Article No. 25, Paragraph 3 of the Brazilian Constitution, enacted the State Supplementary Law, or
“LCE”, to create the metropolitan regions of São Paulo (LCE No. 94/1974), Baixada Santista (LCE No. 815/1996), Campinas (LCE
No. 870/2000), Vale do Paraíba and Litoral Norte (LCE No. 1,166/2012), Sorocaba No. (LCE No. 1,241/2014) and Ribeirão Preto (LCE
1,290/2016), and the urban clusters of Jundiaí (LCE No. 1,146/2011), Piracicaba (LCE No. 1,178/2012) and and Franca (LCE No. 1,323/2018).
Pursuant to the Brazilian Constitution, in metropolitan regions, urban conurbations and microregions, the authority to develop public water
and sewage systems is shared by the states and municipalities. However, for municipalities which are not a part of the types of regions cited
above (metropolitan regions, urban conurbations and microregions), the primary responsibility for providing water and sewage services to
residents rests with the municipality.
We provide basic sanitation services for municipalities, urban conurbations and metropolitan regions. In these municipalities, operations are
regionalized and contracts are structured considering the financial and economic conditions of the entire region. The regulation including taxes,
control and oversight are the responsibilities of ARSESP (State Supplementary Law 1,025/2007 – Articles No. 6 and No. 10). With regard 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 sharing the
management of basic sanitation services. With regard to metropolitan regions, we conduct our operations based on state legislation and
contracts and make a note of any pending litigation addressing the delineation of responsibilities regarding basic sanitation services in
municipalities, metropolitan regions, urban conurbations and microregions.
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On March 6, 2013, the Brazilian Supreme Court decided a matter related to the shared management of basic sanitation services in the state
of Rio de Janeiro, whose effects may impact other ongoing legal proceedings. In its decision, the court ruled that the state of Rio de Janeiro must
establish a new entity, owned by both the state of Rio de Janeiro and the relevant municipalities, to oversee the planning, regulation and auditing
of basic sanitation services in its metropolitan region with the non-partisan participation of all the municipalities located in the metropolitan
region; creating a requirement that the state and the municipalities must participate jointly in the shared management of public services.
However, this decision is not yet fully effective, and, therefore, does not yet alter the legislative framework regarding basic sanitation that is
currently in effect for the State of São Paulo.
In January 2015, the Federal Government issued the Metropolitan Bylaws (Law No. 13,089/2015), amended by Provisional Measure No.
818 of January 11, 2018, which was subsequently converted into Federal Law No. 13,683/2018 and by Provisional Measure No. 862 of
December 4, 2018, establishing within the term of five years, counted from the date of the institution of the metropolitan region or urban cluster:
(i) the general guidelines for the planning, management and performance of public initiatives in metropolitan regions and in urban clusters
instituted by the states; (ii) the general planning standards for integrated urban development and other interfederal governance instruments; and
(iii) the criteria to receive federal loans related to urban development. In addition, the Metropolitan Bylaws foresees mechanisms for integrated
management and interfederal governance as well as the sharing of decisions by regional entities.
Despite the Brazilian Supreme Court’s March 6, 2013 decision and the Metropolitan Bylaws, some municipalities in metropolitan regions
and urban clusters, including in metropolitan regions where we operate, have been conducting bidding processes for the concession of sanitation
services without including shared management.
Establishment of ARSESP
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), or “CORSANPA”, to regulate basic
sanitation services. CORSANPA was directly subordinated to the State Secretariat for Infrastructure and Environment. The main duty of
CORSANPA was conducting studies for the creation of a regulatory agency for the basic sanitation industry and the presentation of legal and
regulatory measures.
The completion of such duties resulted in the publication of State Supplementary Law No. 1,025/2007 of December 7, 2007, which created
the São Paulo State Sanitation and Energy Regulatory Agency (Agência Reguladora de Saneamento e Energia do Estado de São Paulo), or
“ARSESP”, and partially revoked Supplementary Law No. 7,750/1992. Furthermore, Supplementary Law No. 1,025/2007 maintained
CONESAN, as an advisory council to define and implement the state basic sanitation policy, and the State Sanitation Fund (Fundo Estadual de
Saneamento) or “FESAN”. FESAN is connected to the State Secretariat for Infrastructure and Environment and collects and manages resources
that support State‑approved programs, as well as the development of technology, management and human resources and a sanitation information
system, in addition to other support programs.
On August 5, 2009, the State of São Paulo enacted Decree No. 54,644/2009, which revoked Decree No. 50,868/2006 and regulated the
composition, organization and operation of the State Sanitation Council (Conselho Estadual de Saneamento), or “CONESAN” created by
Supplementary Law No. 7,750/1992.
In connection with the scope of our services, Supplementary Law No. 1,025/2007 expanded the range of services that we can render, with
the inclusion of urban rainwater 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.
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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;
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 net 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.
Rules Enacted by ARSESP
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.
The implementation of these and other more recent rules will particularly impact our commercial and operational processes and may
adversely affect us in ways we cannot currently predict. Implementation of these rules started in 2011 and is expected to continue for the next
few years.
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. This alteration requires
that invoices be sent to the user of the service rather than the owner of the property connected to the public water supply and sewage systems.
Since 2011, we have implemented several measures and instituted new rules to update our client registry. Currently, more than 90% of our water
and sewage connections are billed to the user of our services, as foreseen under current regulations. Related to the collection of debt, we are also
faced with the challenge of collecting customers’ taxpayer identification numbers, which are required to register for our services and are needed
for the judicial collection of outstanding fees in the event of nonpayment. We continuously update our customers’ registration information, but
we face difficulties in updating this information in areas with high concentrations of social vulnerability and noncompliance.
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, we receive a portion of the reported incidents 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, in compliance with rules enacted by ARSESP, we established procedures for communicating scheduled interruptions in the
provision of water services by developing the Communication of Scheduled Interruptions of Basic Sanitation, or “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
operational processes, and may adversely affect us in ways we cannot currently predict.
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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”.
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.
Our Current Concession Agreements
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. In the municipalities included in metropolitan regions, urban agglomerations and
microregions, the State of São Paulo is also included as a party. The assets comprising the existing municipal water and sewage systems are
transferred from the municipality to us in order for us to provide the contracted services. Until 1998, we acquired municipal concessions and the
existing water and sewage assets in exchange for our common shares issued at book value. Since 1998, we have acquired concessions and water
and sewage assets by paying the municipality an amount equal to the present value of 30 years of estimated cash flows from the date of
acquisition of the concession, assuming a discount of at least 12%. For reference purposes, in 2011 ARSESP set the discount rate for our
contracts at 8.06% and in October 2017 the discount rate was updated to 8.11% due to the Second Ordinary Tariff Revision. See “—Tariffs”.
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.
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 agreements in cases involving the early
resumption of services by the concession authority.
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As of December 31, 2018, we provided water and sewage services to 369 municipalities. The majority of these concessions have 30-year
terms. Due to court orders, we temporarily suspended our services in two other municipalities (Macatuba and Cajobi). For more information,
see “Item 8.A. Financial Statements and Other Financial Information—Legal Proceedings”. Between January 1, 2007 and December 31, 2018,
we entered into agreements with 307 municipalities (including our services agreement with the city of São Paulo) in accordance with the Basic
Sanitation Law, of which twenty were entered into in 2018. As of December 31, 2018, these 307 municipalities accounted for 81.1% 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, 2018, 35 of our agreements or concessions had expired but we continued to provide
water and sewage services to these municipalities and were in negotiations to execute program agreements to substitute the expired
concessions. From December 30, 2019 through 2030, 31 concessions will expire.
Municipalities have the inherent power under Brazilian law to terminate concessions prior to their contractual expiration dates for reasons of
public interest. The municipality of Mauá, which we previously served, terminated our concession in December 1995. 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, 2018. Despite these developments, we currently
supply water on a wholesale basis to Mauá. In January 2016, the municipality of Mauá executed a Protocol of Intentions with us for the
preparation of studies and evaluations aiming to resolve commercial relations and existing debts between the municipality and us. However, the
negotiations with Mauá ended June 2016. On April 19, 2018, we published a press release stating that we have been in contact with the
municipality of Mauá regarding directly supplying water to four neighborhoods that have been affected by a water shortage and to date no
agreement was entered into to supply water to those neighborhoods.
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”.
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 State Supplementary Law, or
“LCE”, to create the metropolitan regions of São Paulo (LCE No. 94/1974), Baixada Santista (LCE No. 815/1996), Campinas (LCE
No. 870/2000), Vale do Paraíba and Litoral Norte (LCE No. 1,166/2012), Sorocaba No. (LCE No. 1,241/2014) and Ribeirão Preto (LCE
1,290/2016), and the urban clusters of Jundiaí (LCE No. 1,146/2011), Piracicaba (LCE No. 1,178/2012) and Franca (LCE No. 1,323/2018).
On June 18, 2009, Municipal Law No. 14,934/2009 repealed Municipal Law 13,670/2003, which had assigned the responsibility for the city
of São Paulo’s planning, regulating and supervising the provision of water supply and sewage collection services exclusively to the city of São
Paulo. On June 23, 2010, the State and the city of São Paulo entered into a formal agreement with the purpose of sharing the planning of the
provision of water supply and sewage collection services; delegating oversight and regulation, including tariff regulation, to ARSESP; and
authorizing the maintenance of water supply and sewage collection services in the city of São Paulo for a 30-year term (renewable for the same
period).
In January 2015, the Federal Government issued the Metropolitan Bylaws (Law No. 13,089/2015), amended by Provisional Measure No.
818 of January 11, 2018, which was subsequently converted into Federal Law No. 13,683/2018 and by Provisional Measure No. 862 of
December 4, 2018, establishing within the term of five years, counted from the date of the institution of the metropolitan region or urban
cluster: (i) the general guidelines for the planning, management and performance of public interest initiatives in metropolitan regions and in
urban clusters instituted by the states; (ii) the general planning standards for integrated urban development and other interfederal governance
instruments; and (iii) the criteria to receive federal loans related to urban development. However, this provision was repealed by Federal Law
No. 1,368/2000.
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On March 6, 2013, the Brazilian Supreme Court decided a matter related to the shared management of basic sanitation services in the state
of Rio de Janeiro. In its decision, the court ruled that the state of Rio de Janeiro must establish a new entity, owned by both the state of Rio de
Janeiro and the relevant municipalities, to oversee the planning, regulation and auditing of basic sanitation services in its metropolitan region
with the non-partisan participation of all the municipalities located in the metropolitan region; creating a requirement that the state and the
municipalities must participate jointly in the shared management of public services.
However, this decision is not yet fully effective, as a ruling on a motion for clarification is currently pending, and therefore does not yet
alter the legislative framework regarding basic sanitation that is currently in effect for the State of São Paulo. The São Paulo metropolitan region
(including the municipalities to which we provide water on a wholesale basis, but excluding the concession infrastructure construction revenue)
accounted for 72.2% of our gross operating revenue from services in 2018.
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”.
Tariff Regulation in the State of São Paulo
The tariffs for our services are subject to Federal and State regulation.
On December 16, 1996, the Governor of the State of São Paulo issued the decree No. 41,446/1996, which updated the existing tariff system
and allowed us to continue to set our own tariffs. Our tariffs are based on the general objectives of maintaining our financial condition and
preserving “social equality” in terms of the provision of water and sewage services to the population while providing a return on investment.
The governor’s decree also directs us to apply the following criteria in determining our tariffs:
· 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. Except
for the responsibility for planning, the remaining activities may be delegated.
The current tariff structure maintains different tariff schedules, depending upon whether a customer is located in the São Paulo metropolitan
region or the Regional Systems. There are four levels of volume consumed for each category of customer, except for the residential-social and
shantytown (favelas) categories. The residential-social tariffs apply to residences of low-income families, residences of persons unemployed for
up to 12 months and collective living residences. The favela tariffs apply to residences in shantytowns characterized by a lack of urban
infrastructure. The latter two 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.
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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 four municipalities (Piracaia, Mombuca, Santa Maria da Serra and Aguas de São Pedro). In 2016 we
obtained a definitive favorable decision in the Piracaia proceeding and in 2018, we obtained a definitive favorable decision in the Mombuca and
Santa Maria da Serra proceedings. However, as the debate continues in the Aguas de São Pedro proceeding, we cannot predict the outcome of
this case or how it may affect 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”.
The 2014-2015 Water Crisis
Prior to 2014, we planned our supply of water to the São Paulo metropolitan region based on the water supply during the driest period on
record, which was from 1953 to 1954. However, water inflow to the Cantareira reservoirs throughout 2014 and most of 2015 was less than half
the inflow recorded in 1953, the previous most critical year. Consequently, the volume of water stored in the reservoirs in 2014 and 2015
declined significantly until September 2015, when the reservoirs once again held more water than 12 months previously for the first time since
the beginning of the water crisis. In the rainy season from October 2015 to March 2016 rainfall returned to historical levels and water levels in
the reservoirs that provide water to the São Paulo metropolitan region, our largest market, increased. With the return of rainfall to the level of
water in the reservoirs that provide water to the population of the São Paulo metropolitan region at normal levels, the measures taken during the
water crisis to continue services to consumers were gradually discontinued. As of December 31, 2018, the reservoirs in the São Paulo
metropolitan region contained 943.3 million m3 of water storage for treatment (including the São Lourenço System – a new supply system
which expands our production capacity by 6 m3/s, and which commenced operations in July 2018), compared to 916.8 million m3 available for
treatment as of December 31, 2017 not including the technical reserve of 287.5 million m³. The average monthly water production in 2018 for
the São Paulo metropolitan region was 60.9 cubic meters per second, or m³/s, compared to 60.6 m³/s in 2017 and 58.5 m³/s in 2016.
For more information on the water production systems which we use to produce water for the São Paulo metropolitan region, see “Item 4.B.
Business Overview—Description of Our Activities—Water Operations—Water Resources”.
Cantareira System
The Cantareira System is located in the northern area of the São Paulo metropolitan region. It uses water extracted from the PCJ River
Basin and the Juqueri River Basin and consists of six reservoirs interconnected by a complex water network of tunnels and pipes, located along
the municipalities of São Paulo, Mairiporã, Nazaré Paulista, Piracaia, Vargem, and Joanópolis. The latter two are located on the border of the
state of Minas Gerais, approximately 100 kilometers from the city of São Paulo. Gravity forces the flow of water from one reservoir to another,
and once the water reaches the Paiva Castro reservoir, located in the Juqueri River Basin, it is pumped to the Guaraú water treatment plant.
Prior to February 2014 and the water crisis, this system supplied water to approximately 8.9 million people, with an average extraction of up
to 33 m³/s to serve the São Paulo metropolitan region. After the water crisis, when conditions returned to normal levels, this system supplies
water to approximately 6.8 million people, with an annual average water production of up to 23.9 m³/s in 2018 in order to serve the São Paulo
metropolitan region. The volume of water that may be extracted from the Cantareira System is now based on the volume of water available in
the reservoirs. A minimum of 10 m³/s of water may be released to serve the metropolitan region of Campinas and Jundiaí, which is located
downstream from the reservoirs. This flow is defined in Joint Resolution Nos. 926/2017 and 925/2017, both dated May 29, 2017. See “Item 3.D.
Risk Factors—Risks Relating to Our Business”.
Water Inflow to the Cantareira System
During the October 2013 – March 2014 rainy season, rainfall and water inflow levels into the reservoirs reached the lowest stream flow
measurements in over 80 years. This drought persisted in the rainy season between October 2014 and March 2015. During the October 2015 –
March 2016 and during the October 2016 – March 2017 rainy season, the level of rainfall in the region returned to the normal levels expected
for the period and water inflow levels consequently improved. With the return of rainfall to its historical average, the measures taken during the
water crisis to continue services to consumers were gradually discontinued.
The table below sets forth water inflow (volume of water that flows into the reservoirs or natural inflow from the river basin), showing:
(i) historical average and minimum flows; (ii) 1953, previously the driest year on record; (iii) inflow during the 2013-2014, 2014-2015, 2015-
2016, 2016-2017 and 2017-2018 hydrological year; and (iv) inflow during the 2018-2019 hydrological year (through March 2019):
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Oct.
Nov.
Dec.
Jan.
Feb.
March
April
May
June
July
Aug.
Sep.
For the month of
Water Inflow
Historical Average
Historical Minimum
Drought of 1953
2013/14
2014/15
2015/16
2016/17
2017/18
2018/19
30.0
14.0
17.5
25.1
5.2
14.8
24.2
13.7
30.9
34.4
14.0
26.0
22.1
8.8
27.1
29.5
23.0
33.0
52.1
21.8
31.5
22.5
16.0
52.3
30.2
18.8
40.8
69.4
26.9
26.9
15.4
11.5
73.8
76.0
57.4
41.5
72.3
27.6
34.5
10.5
40.7
49.6
36.4
35.8
43.5
(in m³/s)
65.9
28.1
29.8
18.9
42.6
69.8
36.9
33.2
56.2
47.3
24.7
34.6
17.2
18.1
24.1
24.3
17.5
37.7
19.9
23.8
10.1
14.0
25.0
33.8
13.7
35.0
16.5
20.7
10.0
16.2
62.9
22.6
20.1
28.2
13.9
17.6
6.4
11.3
19.4
13.9
15.6
24.0
12.0
16.3
8.2
5.8
19.3
14.9
20.1
25.0
11.8
16.2
9.0
18.3
14.9
9.0
17.9
As a result of the drought and low water volume in the Cantareira System, DAEE and ANA regulated the volume of water we were
permitted to extract from this system from March 2014 to May 2017. However, in May 2017, the water right that regulates 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, based on the
volume of water available in the reservoirs was renewed. Under the new terms, the water we are permitted to withdraw from the system is
divided into five tranches: (i) if the volume of water available is higher than 60% of the reservoirs’ capacity, we can withdraw up to 33 m3/s; (ii)
if the volume of water is between 40% and 60% of the reservoirs’ capacity, we can withdraw up to 31 m3/s; (iii) if the volume of water is
between 30% and 40% of the reservoirs’ capacity, we can withdraw up to 27 m3/s; (iv) if the volume of water is between 20% and 30% of the
reservoirs’ capacity, we can withdraw up to 23 m3/s; and (v) if the volume of water available is lower than 20% of the reservoirs’ capacity, we
can withdraw up to 15.5 m3/s.
As of December 31, 2018, the reservoirs in the São Paulo metropolitan region, where our largest market is located, contained 943.3 million
m3 of water storage for treatment, compared to 916.8 million m3 (including the São Lourenço System – a new supply system with 59.0 million
m3) available for treatment as of December 31, 2017. These figures do not include the Cantareira System’s technical reserve of 287.5 million m³.
The following table shows the volume of water stored in the systems that serve the São Paulo metropolitan region as of March 2016,
December 2016, March 2017, December 2017, March 2018, December 2018 and March 2019 at the end of the rainy season:
March 2019
December
2018
March 2018
December
2017
March 2017
December
2016
March 2016 Total Storage Capacity
For the month
Cantareira
Guarapiranga
Rio Grande
Rio Claro
Alto Tietê
Cotia
São Lourenço
542.4
155.8
113.1
13.9
511.9
16.8
87.3
387.8
103.3
92.4
10.9
282.6
7.1
59.1
532.3
141.4
97.2
13.9
362.8
15.2
-
405.2
101.6
92.2
10.1
294.8
12.9
-
931.9
135.4
98.9
13.9
314.6
16.4
-
740.1
123.6
99.3
11.3
248.1
16.2
-
641.9
150.0
108.4
14.0
247.9
16.5
-
1,269.5(1)(2)
171.2
112.2
13.7
573.8
16.5
-
(1)
The Cantareira system’s total storage capacity is 982.0 million m³ available above the water intake level, plus 287.5 million m³ below the water intake level (known as
the “technical reserve”).
(2)
Amounts included since the May 2017 water right renewal do not include the water from the Cantareira System’s technical reserve, which is water stored below the
water intake level. For more information, see “—Extracting Water from the Technical Reserve”.
In order to continue to meet consumer demand in the São Paulo metropolitan region and reduce water production in the Cantareira system to
the limits set by ANA and DAEE, we adopted the following measures from February 2014 to early 2016 to maintain continuous water supply:
· use of treated water from other production systems to serve consumers originally supplied by the Cantareira system;
· implementation of a bonus program and contingency tariff;
· reduction of pressure in pipes in order to decrease leakage;
· adjustment to the volume of treated water sold to municipalities that operate their own distribution network, due to the reduced
availability of water; and
· extraction of water from the technical reserve.
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The first four measures resulted in significant water savings and helped to offset the reduced volume of water extracted from the Cantareira
System. The extraction of water from the technical reserve was critical to maintaining a continuous supply of water to the population.
With the return of historical average rainfall in the rainy season from October 2015 to March 2016, water levels for the São Paulo
metropolitan region returned to normal and we gradually discontinued the measures that we had taken during the water crisis.
The rain levels and water inflows into the reservoirs that supply the metropolitan region of São Paulo during the October 2018-March 2019
rainy season were at the historical average, when taking into account the accumulated volume, the completion of the São Lourenço Project and
the Jaguarí-Atibainha interconnection, a greater capacity of water transfer between the water producing systems, and the lower level of water
production due a lower average water consumption by the population, we believe that in terms of water security, the Metropolitan Region is
prepared to face situations of similar magnitude as those observed in 2014 and 2015 in the future.
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. The 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 major SAM water mains, which further
integrated the systems and, among other things, allowed water to be transferred from different production systems to areas that, under normal
conditions, would have been supplied by the Cantareira System. The Alto Tietê and Guarapiranga systems contributed most to this process.
The Guarapiranga System, with a storage capacity of 171 billion liters, maintained favorable levels of water availability for the duration of
the drought and was the system that supplied most water during the water crisis, serving an additional 1.4 million people in the south and
southeast regions of the city of São Paulo who had previously been served by the Cantareira System. As a result, the number of people served
by the Guarapiranga System increased from 3.8 million before the water crisis to 5.2 million during the crisis. As of December 31, 2018, the
Guarapiranga System served a population of 4.6 million people.
Throughout 2014 and 2015, with the adoption of these measures, almost three million people who used to be served by the Cantareira
System began to be served by other systems. As of December 31, 2018, the Cantareira System served 6.8 million people, compared to 8.9
million people before the drought in February 2014.
Bonus Program
In February 2014, we implemented 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 the municipalities we served in Piracicaba, Capivari and the
Jaguari River Basin in the Cantareira System catchment area, and remained in effect for invoices issued between June 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 reduced their water
consumption by 10-15% became entitled to a 10% discount on their service bill; (ii) customers who reduced their water consumption by 15-20%
became entitled to a 20% discount; and (iii) customers who reduced their water consumption by 20% or more became entitled to a 30%
discount.
In December 2014, we extended the Water Consumption Reduction Incentive Program until the end of 2015 or until reservoir levels
normalized, whichever was to occur first.
In December 2015, we modified our bonus program by updating the reference value used to determine the discounts. Prior to this change,
the reference value for the discounts was average consumption between February 2013 and January 2014. In December 2015, we reduced the
reference value to 78% of the prior reference value, applicable as of February 1, 2016. The bonus ranges previously established were
maintained.
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On March 24, 2016, with the return of rainfall to historical levels and increased predictability of reservoir levels, we applied to ARSESP for
cancellation our Water Consumption Reduction Incentive Program. ARSESP approved this request on March 31, 2016, with effect on water
meter readings recorded as of May 1, 2016.
Contingency Tariff
In January 2015, ARSESP authorized us to implement a contingency tariff mechanism consisting of additions to water bills for customers
who did not reduce consumption. Under this contingency tariff mechanism, increases of up to 20% above average consumption result in a tariff
increase of 40% and increases in consumption of more than 20% above average result in a tariff increase of 100%.
In December 2015, ARSESP authorized us to extend the contingency tariff, maintaining the current rules and conditions for its application,
until December 31, 2016 or until inflows of water into our systems returned to predictable levels.
On March 24, 2016, with the return of historical average rainfall and increased predictability of reservoir levels, we applied to ARSESP for
cancellation of the Contingency Tariff. ARSESP approved this request on March 31, 2016, with effect on water meter readings recorded as of
May 1, 2016.
Reducing Pressure in the Water Distribution Lines in order to Decrease Leakage
Reducing water pressure in water distribution lines through operational maneuvers is a routine measure taken by sanitation companies to
reduce water losses. We have been carrying out this measure in the São Paulo metropolitan region water supply network since 1997.
Due to the severity of the 2014-2015 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 temporarily had less water availability during parts 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, mitigating any effects
on water supply.
With the return of historical average rainfall beginning in October 2015, starting in December 2015 we returned to the normal pre-crisis
policy of reducing pressure only at night.
Adjusting the Volume of Treated Water Sold to Municipalities that Operate their own 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 during the water crisis. As the situation improved, the volume of water provided to these
municipalities was restored.
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 Cantareira System’s technical reserve, which is water stored
below the water intake level.
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. With the return of normal rainfall in the October 2015 – March
2016 rainy season, the technical reserve was fully restored in December 2015. We have reserved the right to access the technical reserve in our
operational contingency plan in case this action becomes necessary again in the future.
Emergency Projects and Projects Implemented to Meet the Water Demand of the São Paulo Metropolitan Region
In addition to the measures discussed above, we made and continue to make short and medium-term investments in projects to increase
water availability, transfer water between different reservoir systems and expand water treatment production capacity.
Our production of treated water was expanded by 8.6 m³/s with the completion of the São Lourenço Project. In addition, an additional 13
m³/s was made available to our reservoirs through interconnections to other reservoirs in the state of São Paulo, which will be available to us if
reservoirs levels once again become low. Completion of these projects results in improved water security for the SIM.
The main projects include:
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·
·
·
·
·
·
Alto Tietê System – transfer of an additional 1 m³/s from the Guaió River to the Taiaçupeba reservoir, in order to recover the reserve
volume of the Alto Tiête System. This project was concluded in June 2015.
Alto Tietê System – transfer of additional up to 4.0 m³/s from Rio Grande - Billings reservoirs to the Alto Tietê System. This project was
concluded in September 2015.
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. This project was concluded in December 2015.
Interconnection of the Jaguari and Atibainha reservoirs – the purpose of this project is to recover water levels and increase the water
security of the Cantareira System. The interconnection increases water availability 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. Construction of the interconnection
began in February 2016 and was completed in March 2018. Upon completion of construction, we began transferring water from the
Jaguari reservoir (part of the Paraíba do Sul Basin) to the Atibainha reservoir (part of the PCJ River Basin). For more information, see
“Item 4.A. History and Development of the Company—Capital Expenditures Program”.
Alto Tietê System – transfer of an additional average 1.9 m³/s and up to 2.5 m³/s from the Itapanhaú river to the Biritiba reservoir,
providing more volume to the Alto Tietê System. In 2017, we finalized the bidding process that selected the consortium that will execute
the project. The investment will be of R$91.7 million and the start of works is conditional on obtaining the installation license expected for
the second half of 2019.
Implementation of the São Lourenço Production System – this project was commenced in April 2014 and was completed in April 2018
and operations began in July 2018. This system has an average water treatment capacity of 6.0 m3/s. For more information, see “Item
4.A. 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 were exchanging information and planning joint actions between its members in relation to
anydrought affecting regions in the state. However, due to the end of the water crisis, this committee is not operating anymore.
Marketing Channels
As of December 31, 2018, we were the concessionaire for the provision of water supply and collection, treatment and disposal of sewage
services directly to end consumers for 369 municipalities in the state of São Paulo. We also supplied water on a wholesale basis to five
municipalities located in the São Paulo metropolitan region, including Guarulhos. 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”.
Energy Consumption
Energy is essential to our operations, and as a result we are one of the largest users of energy in the state of São Paulo. In the year ended
December 31, 2018, we used approximately 1.9% of the total energy consumption in the state of São Paulo. To date, we have not experienced
any major disruptions in energy supply. Any significant disruption of energy to us could have a material adverse effect on our business,
financial condition, results of operations or prospects. Energy prices have a significant impact on our results of operations. In 2018, we
purchased approximately 55% of our total energy consumption in the “free market”, where we can more efficiently negotiate the supply of
energy; and the remainder of our energy consumption comes from the Regulated Market. This allowed us to save approximately R$183 million
in 2018, compared to what we expect we would have spent if we purchased all of our total energy consumption in the Regulated Market.
Most of the energy produced in Brazil comes from hydroelectric power plants. For more information on energy, see “Item 3.D. Risk Factors
—Risks Relating to Our Business—We are exposed to risks associated with the provision of water and sewage services”.
Insurance
We maintain insurance covering, among other things, fire or other damage to our property and office buildings and third‑party liability. We
also maintain insurance coverage for directors’ and officers’ liability (D&O insurance). We currently obtain our insurance policies by means of
public bids involving major Brazilian and international insurance companies that operate in Brazil. As of December 31, 2018, we had paid a
total aggregate amount of R$5.0 million in premiums. In addition, we paid R$1.6 million for a D&O insurance policy, covering R$3.1 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.
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Intellectual Property
Trademarks
We have secured registration of our logo and composite trademark (“Sabesp”) at the Brazilian Institute of Industrial Property (Instituto
Nacional da Propriedade Industrial), or INPI. In addition, we have registered with the INPI several other trademarks, such as: “Sabesp Soluções
Ambientais”, “Projeto Tietê”, “Programa Córrego Limpo”, “Programa Onda Limpa”, “Prol – Programa de Reciclagem do Óleo de Fritura”,
“Revista DAE”, “Ligação Sabesp”, “Agente da Gente – Sabesp na Comunidade”, “PURA – Programa de Uso Racional da Água”, “Sabesp
Inteligência Ambiental”, “Uso Racional da Água”, “Parque da Integração”, “Sabesp Semana do Meio Ambiente”, “Água Sabesp Aquífero
Guarani”, “Água Sabesp Estação Cantareira”, “Contrato de Fidelização Sabesp”, “Esgoto não Domésticos Sabesp”, “PEA – Programa de
Educação Ambiental – Sabesp”, “Sabesp Abraço Verde”, “Água de Reúso Sabesp”, “Eu Sou Guardião das Águas Sabesp Eu Não Desperdiço”,
“Calculadora de Sonhos”, “Parque Sabesp Mooca”, “Parque Sabesp Butantã”, “Parque Sabesp Cangaíba”, “Programa Água Legal Sabesp”,
“Signos Sistema de Informação Geográfica no Saneamento Sabesp”, “Sistema de Suporte a Decisões Sabesp” and “Clubinho Sabesp”, which is
a tool for environmental education directed to children through our website, and of its characters: “SuperH2O”, “Gota Borralheira”, “Gotucho”,
“Ratantan”, “Dr. Gastão”, “Cauã”, “Denis”, “Gabi”, “Iara”, “Sayuri”, and “Cadu”.
We have also filed applications with the INPI for registration of the following trademarks: “Acertando suas contas com a Sabesp”,
“Fertilizante Sabesfértil Sabesp”, “Pitch Sabesp”, “Novos Negócios Sabesp”, “Centrais de Geração, Hidrelétrica Sabesp”, “Biogás Sabesp”,
“Energia Fotovoltaica Sabesp”, “Energia Eólica Sabesp”, “Resíduos Sólidos Urbanos Sabesp”, “Fertilizantes Sabesp”, “Tocha de Plasma
Sabesp”, “Serviços Técnicos Sabesp”, “Afinidades Sabesp”, “Fibra Ótica nas Redes Sabesp”, “Geosabesp Sabesp”, “Serviços Imobiliários
Sabesp”, “Waste To Energy Sabesp”, “Esgoto não Doméstico Sabesp” and “Redução de Perdas Sabesp”.
Patents
We have a patent granted by the INPI for a device for the removal of supernatants during the sewage treatment process. Our patent for a
constructive device in a building hydraulic simulator used for didactic purposes has expired and therefore, the rights associated with such patent
have fallen into the public domain. We have also filed patent requests for the following additional devices:
· a biofilter odor control unit;
· rotary devices used to clean water reservoirs transported by trucks with high-pressure hydrojetting systems;
· a digital leakage detection system;
· a chemical composition sensor, its fabrication process and use to measure pH in microfluid systems;
· a bubble removal system, autonomous microlaboratory and use of autonomous microlaboratory to monitor water quality; and
· a box for installation of water meters.
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”, “PREGÃO SABESP ONLINE”, “SISDOC” (Document Control System),
“system for analyzing the metrological behavior of water meters”, “MPLT” (Standardized Model of Technical Report), “SGH” (Hydrometry
Management System), “SAI” (Audit Information System), “CSI” (Business System: Information Services), “NETCONTROL” (Automation
System of Sanitary Control Laboratories), “SACE” (External Commercial Service System), “SAN” (Navigation Support System), “online
software for managing specific articles published in the DAE engineering journal”, “Dashboard panel”, “COP” (Online Control of Water
Losses), “GEL” (Power Management System), “CADGEO”, “LIGGEO”, “Intellectual Property Management System”, “SOE” (Business
Organization System), “Application for Predicting the Concentration of Cyanobacteria through Artificial Intelligence” and “Sabesp Decision
Support System - SSD.”
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Among them, we highlight:
· AQUALOG is a software designed to monitor water treatment through the employment of artificial intelligence. In 2001, we
completed the first rendering of services based on the AQUALOG software to a third party with the automation of a water treatment
plant in the city of Jaguará do Sul, State of Santa Catarina. We have entered into an agreement to license the software to Sanesul, in the
state of Mato Grosso do Sul and to Teuto’s drugs factory, in the city of Anapólis, state of Goiás.
· SGL is an electronic price quotation system that allows us to view and control all bid and acquisition proceedings in real time.
· CADGEO and LIGGEO are computer programs used to locate the water and sewage infrastructure in times of installation,
maintenance or expansion in real time via satellite.
· “Application for Predicting the Concentration of Cyanobacteria through Artificial Intelligence”, is an application that was developed as
a result of a joint research project by us, the São Paulo Research Foundation (Fundação de Amparo à Pesquisa do Estado de São Paulo
– FAPESP) and the Federal University of São Paulo – UNIFESP.
· “Sabesp Decision Support System - SSD” is a software that contains graphic interfaces for updating data, queries of information in the
form of graphs and tables, regarding the operation of water-producing systems and dissemination of data to society through newsletters
generated by the system.
We have also registered all of these programs at the INPI.
Domain Names
We own the domain names described below which have been registered with the relevant entity in Brazil, Registro.br:
· www.sabesp.com.br;
· www.corregolimpo.com.br;
· www.projetotiete.com.br;
· www.revistadae.com.br;
· 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.
Environmental Matters
Our environmental management, which is guided by the directives established in our environmental policy, is inherent to the provision of
our services and the essence of our business. In order to consolidate our environmental culture, we have an Environmental Corporate
Management Department and Environmental Management Teams allocated in our business units. Our environment management is based in two
pillars of action: (i) environmental compliance and (ii) change of environmental culture. We prioritize the internal and external dissemination of
knowledge and experience on the best environmental practices. There are actions of our environmental management corporate program that rely
on the involvement of collaborators, the communities we service and partnerships with non-governmental organizations.
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We have the following ongoing environmental management programs:
· development of the Corporate Greenhouse Gas Management Program (Programa Corporativo de Gestão de Emissões de Gases de Efeito
Estufa), in line with the guidelines from the São Paulo State Climate Change Policy (PEMC), including the preparation of inventories of
greenhouse gases, totaling 11 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 Environmental Education Program (PEA-SABESP), an important tool for strengthening the effectiveness of our sanitation activities,
which propitiates connections with the communities we service through over several environmental education projects. The activities
developed by the PEA are organized with the following objectives: increment the intrinsic value of water; protect the environment;
preserve the streams; improve the quality of the environment; valorize sanitation activities; valorize the conscious use of water; direct
capacitation and production of guiding material;
· Management of our institutional representation in the State and National Systems of Water Resources, including training of company
representatives to participate in: (i) the creation of criteria for water usage charges, (ii) preparation and review of river basin plans (Planos de
Bacias), (iii) review of water bodies’ classifications, and (iv) analysis of legislations regarding the protection of water sources;
·
·
·
the SABESP 3‑Rs Program (Programa SABESP 3Rs) for the reduction, re‑use and recycling of waste from administrative activities, in
partnership with waste and recycling collecting cooperatives and which includes employee training enabling them to act as multipliers in
the roll-out of the program;
the progressive implementation and maintenance of the Environmental Management System (EMS) in our water and sewage treatment plants.
Since 2015, we have been working on the EMS with a mixed model, whereby the ISO 14001 standard is applied to a limited number of
certified plants, while the other stations adopt their own environmental management model (named SGA-SABESP), without aiming
certification. The EMS is currently in place in 271 treatment plants, 35 of which are ISO 14001 certified. We expect to implement the EMS in
all stations by 2024, which may expand the scope of ISO 14001 certifications according to the strategy of the Business Units; and
implementation of the Regularization of the Terms of Commitment for Environmental Recovery Corporate Program, based on obligations of
forest restoration with environmental compensation purposes, when necessary, for the environmental licensing of new enterprises. This
program includes the planting and maintenance of 1 million seedlings of native species in the period of ten years, in order to deal with current
obligations, as well as to new environmental compensations for the implementation of new projects. The action is part of the Springs Program
(Programa Nascentes) created by the Government of the State of São Paulo. Currently 416 thousand seedlings have been planted and are
being maintained in the Cantareira System, in the surroundings of the Cachoeira Reservoir, additionaly to other 58 thousand in the
municipality of Igaratá, located in Paraíba Valley. The planting and maintenance of other 150 thousand more seedlings around Cachoeira
Reservoir and 110 thousand more in the municipality of Mirante do Paranapanema have all been contracted.
In addition to corporate environmental management initiatives, we have several projects and initiatives underway to benefit the environment
by engaging the population at large.
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, and regulated by Decree No. 55,947 of
June 24, 2010, 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 and regulated by Decree No. 7.390/2010 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 have a Corporate Greenhouse Gas Management Program, aimed at reducing the
amount of greenhouse gases released into the atmosphere, including the awareness of climate change and the preparation of annual inventories.
In 2018, we concluded the corporate inventory of greenhouse gases for 2017, thus totaling 11 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 89.3% of total greenhouse gas release. Electric energy represents approximately
9.1% and other activities represent approximately 1.6%.
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We have projects in the research and development stages that entail using biogas generated in the treatment of sewage and recycling sewage
sludge as a possible way to reduce the gases released in the treatment processes, among other technological resources to reduce the amount of
sludge disposed in landfills. We also have initiatives to reduce our emission of greenhouse gases, such as the coverage of stabilization ponds
and drying of sludge by solar irradiation and the processing of biogas for vehicular use.
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”.
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,
extreme weather conditions may cause adverse effects on our business and operations. Long-term effects of extreme weather conditions cause
significant alterations in the physical environment that may create unfavorable circumstances, which could affect the costs of services and
tariffs.
An increase in heavy rainfall can impact the regular operation of water sources, including abstraction of water from our dams, through
potential increased soil erosion, silting and runoff of pollutants that can affect aquatic ecosystems. In addition, increased flows of rainwater into
sewage systems may overwhelm the capacity of sewage treatment plants.
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 and enlarging their coverage in the areas we operate in, as well as
identifying opportunities to increase our effectiveness and to implement new technologies. With regard to the risk of reduced water availability,
we are working to adapt to a new scenario of water scarcity due to the risks associates with the effects of climate change through initiatives such
as the Corporate Programs for Reduction of Water Loss, 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 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”.
Public Bidding Procedures
Pursuant to the Federal Public Bidding Law, the public bid process commences with publication by the granting authority in a federal, state
or municipal official newspaper, as the case may be, and another leading Brazilian newspaper. The publication announces that the granting
authority will carry out a public bidding contest pursuant to provisions set forth in an edital (invitation to bid). The invitation to bid must
specify, among other terms: (i) the purpose, duration and goals of the bid; (ii) the participation of bidders, either individually or forming a
consortium; (iii) a description of the qualifications required for adequate performance of the services covered by the bid; (iv) the deadlines for
the submission of the bids; (v) the criteria used for the selection of the winning bidder; and (vi) a list of the documents required to establish the
bidder’s technical, financial and legal capabilities.
The invitation to bid is binding on the granting authority. Bidders may submit their proposals either individually or in consortia, as provided
for in the invitation to bid. After receiving proposals, the granting authority will evaluate each proposal according to the following criteria,
which must have been set forth in the invitation to bid:
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· the technical quality of the proposal;
· lowest cost or lowest public service tariff offered;
· a combination of the criteria above; or
· the largest amount offered in consideration for the concession.
The provisions of State Law No. 6,544/1989 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.
On June 30, 2016, Federal Law No. 13,303/16 came into force in Brazil. This law sets new corporate governance standards for Brazilian
government-owned and mixed capital companies like our company, as well as their subsidiaries. Federal Law No. 13,303/16 also sets new rules
that these companies must follow in public bidding procedures and when contracting third parties. These requirements were implemented by
June 30, 2018.
Water Usage
State law establishes the basic principles governing the use of water resources in the state of São Paulo in accordance with the State
constitution. These principles include:
· rational utilization of water resources, ensuring that their primary use is to supply water to the population;
· optimizing the economic and social benefits resulting from the use of water resources;
· protection of water resources against actions which could compromise current and future use;
· defense against critical hydrological events which could cause risk to the health and safety of the population or economic and social
losses;
· development of hydro‑transportation for economic benefit;
· development of permanent programs of conservation and protection of underground water against pollution and excessive exploitation;
and
· prevention of soil erosion in urban and rural areas, with a view to protecting against physical pollution and silting of water resources.
Among other instruments established by the State Water Policy, Law No. 7,663 of December 30, 1991, the competent public authority
grants for the right to use water for the implementation of any enterprise that demands the use of surface or underground water resources (for
water collection and release of effluents), as well as for the execution of services that alter the regime or quality of such water resources. In the
case of rivers under the federal government’s domain (rivers crossing more than one state), ANA is the public authority which grants the
authorization. With respect to the rivers under a state’s domain, the applicable state authority has jurisdiction to grant the right of use. In the
state of São Paulo, DAEE is the public authority responsible for granting such authorizations.
In conducting our principal activities, we have the majority of grants for the rights to use water, and there is a multi-annual corporate
program in place to obtain and maintain the rights to use water to comply with current regulations. There are requests to obtain grants 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 2018, we paid approximately R$78.7 million for the use of water resources.
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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 and Médio Tietê, Baixo Tietê and Baixada Santista river basins. In 2014, charges were
implemented for the use of water from the Alto Tietê river basin, and in 2016, from the Tietê / Batalha, Tietê / Jacaré and Ribeira de Iguape river
basins. In 2017, charges were implemented for the use of water from the Sapucaí Mirim/Grande, Baixo Pardo/Grade, Mogi Guaçu and Pardo
river basins. In 2018, the charge of the Turvo Grande/Médio Paranapanema/Pontal do Paranapanema committees was implemented, and the
implementation of the charge in the Litoral Norte, São José dos Dourados e Alto Paranapanema river basins is expected for 2019.
Water Quality
Attachment XX of the Consolidation Administrative Rule No. 5 from September 28, 2017, issued by the Ministry of Health of the federal
government, provides the standards for potable water for human consumption in Brazil. This rule is similar to the U.S. Safe Drinking Water Act
and the regulations enacted by the U.S. Environmental Protection Agency, which establishes rules for sampling and limits related to substances
that are potentially hazardous to human health.
In compliance with Brazilian law, the physical‑chemical, organic and bacteriological analyses carried out for water quality control must
follow several national and international standards, such as: Standard Methods for the Examination of Water and Wastewater from the
institutions such as the American Public Health Association (APHA), American Water Works Association (AWWA) and Water Environment
Federation (WEF); United States Environmental Protection Agency (EPA); standards published by the International Standardization
Organization (ISO); and methodologies proposed by the World Health Organization (WHO).
Decree No. 5,440/2005 provides that the quality of water must be disclosed to consumers. We have been complying with this regulation by
publishing the required information in monthly bills and annual reports delivered to all consumers that we serve.
Environmental Regulation
The 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, as amended
by State Decree No. 62,973/2017 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; Supplementary Law No. 140/2011 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. 8,468/1976, 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, 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 DAAE Ordinance No. 1,630/2017 and ANA Resolution No. 1,941/2017, which regulate the concession of grants for
the right to use water and interfere in water resources on the State and federal level, respectively.
The licensing process, usually, 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.
There are cases, according to the type of business to be licensed, in which the preliminary license may be issued with the installation
license. The environmental licenses are renewable.
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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.
We have a multi-annual corporate program to obtain and maintain the environmental licenses for our water treatment plants, sewage
treatment plants and sewage pumping stations in order to comply with environmental regulations.
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 plants. For more information, see “—Environmental
Matters”.
State and federal water resource legislation establishes the charging of fees for the discharge of treated effluents into water bodies. This
charge is already in force for some river basins, and it is in different implementation stages for the remaining basins. See “—Environmental
Matters—Water Usage”.
Lending Limits of Brazilian Financial Institutions
CMN Resolution No. 4,589/17 dated as of June 29, 2017, which replaced CMN Resolution No. 2,827/2001 dated as of March 30, 2001, as
amended, limits the amount that Brazilian financial institutions may lend to public sector companies, such as us. Financing of projects which
are put up for international bid and any financing in reais provided to the Brazilian counterpart of such international bids are excluded from
these limits.
Scope of Business
State Law No. 12,292/2006, dated as of March 2, 2006, and amended State Law No. 119/1973, dated as of June 29, 1973, which created our
Company, authorizes us to provide water and sewage services outside the state of São Paulo (in other states of Brazil and other countries). This
law also authorizes us to own interests in other public or private‑public companies and Brazilian or international consortia. In addition, this law
permits us to incorporate subsidiaries and enter into a partnership with or acquire interests in a private company with a corporate purpose related
to the sanitation business.
C. Organizational Structure
Not applicable.
D. Property, Plant, Equipment and Intangible Assets
Our principal property, plant and equipment comprise administrative facilities which are stated at historical costs less depreciation. The
reservoirs, water treatment facilities, water distribution networks consisting of water pipes, water 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, 2018, we operated through 75,519 kilometers of water pipes and water transmission
lines and 51,788 kilometers of sewer lines. As of the same date, we operated 247 water treatment facilities and 565 sewage treatment facilities
(including nine ocean outfalls), as well as 16 water quality control laboratories.
As of December 31, 2018, the total net book value of our property, plant and equipment, intangible assets (including concession assets) and
contract assets was R$36,688.0 million.
All of our material properties are located in the state of São Paulo.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our
audited financial statements included elsewhere in this annual report. The financial statements included elsewhere in this annual report have
been prepared in accordance with IFRS as issued by the IASB. This annual report contains forward‑looking statements that involve risks and
uncertainties. Our actual results may differ materially from those discussed in the forward‑looking statements as a result of various factors,
including, without limitation, those set forth in “Risk Factors”.
In the following discussion, references to increases or decreases in any period are made by comparison with the corresponding prior period,
except as the context otherwise indicates.
A. Operating and Financial Review and Prospects
Overview
As of December 31, 2018, 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 369 municipalities, or 57% 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. In December 2018, we entered into an agreement with the municipality of Guarulhos, previously served on a wholesale basis, for the
direct supply of water and sewage services to the municipality of Guarulhos. The operation began in January 2019.
The São Paulo metropolitan region, which includes the city of São Paulo, is our most important service region. With a total population of
approximately 20.9 million, the São Paulo metropolitan region accounted for 72.2%, 70.7% and 69.7% of our gross operating revenue in 2018,
2017 and 2016 (excluding revenues relating to the construction of concession infrastructure), respectively. As of December 31, 2018, 64.2% of
the concession intangible assets reflected on our balance sheet were located in this region. In an effort to respond to demand in the São Paulo
metropolitan region, we have concentrated a major portion of our capital expenditure program to expand the water and sewage systems and to
increase and protect water sources in this region. Our capital expenditure program is our most significant liquidity and capital resource
requirement.
Factors Affecting Our Results of Operations
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.
In 2015, our business was significantly affected by the most severe drought recorded in our service area in over 80 years. During the rainy
season that began in October 2015 and ended in March 2016, rainfall returned to its historical average, resulting in the level of water in the
reservoirs that provide water to the population of the São Paulo metropolitan region returned to normal and the measures taken during the water
crisis to continue to services consumers were gradually discontinued. However, heightened public awareness of the need to conserve water
during the crisis resulted in our customers adopting lower water consumption practices during the water crisis and these practices have been
partially integrated into our consumers’ daily habits. In 2017 and 2018, consumption levels largely recovered in the residential category, while
consumption in the industrial category continued to decline mainly due to the low level of growth in the Brazilian economy. As a result of this
new behavior, despite our reservoirs having a higher volume of water available for treatment, the volume of water billed to our clients has not
returned to the 2013 pre-water crisis levels.
Effects of Tariff Increases
Our results of operations and financial condition are highly dependent on tariff increases for our water and sewage services. Since the
enactment of the Basic Sanitation Law in 2007, as a general rule, regulatory agencies are responsible for setting, adjusting and reviewing tariffs,
taking into consideration, among other factors, the following:
· political considerations arising from our status as a State‑controlled company;
· anti‑inflation measures enacted by the federal government from time to time; 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 years indicated, the percentage increase of our tariffs, as compared to three inflation indexes:
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Increase in average tariff(1)
Inflation – IPC – FIPE
Inflation – IPCA
Inflation – IGP‑M
Year ended December 31,
2018
3.51%
3.02%
3.75%
7.54%
2017
7.89%
2.27%
2.95%
(0.52)%
2016
8.45%
6.54%
6.29%
7.17%
(1) See “Item 4.B. Business Overview—Tariffs” for addition information on tariff increases.
Sources: Central Bank, Fundação Getulio Vargas, or FGV, Instituto Brasileiro de Geografia e Estatística, or IBGE, and Fundação Instituto de Pesquisas 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 stability.
General Economic Conditions
In 2016, Brazilian GDP decreased 3.6% in comparison with 2015. Brazil’s trade surplus in 2016 was US$47.7 billion, the highest surplus
recorded since the start of the historical series in 1989 and at year-end the country had US$372.2 billion in currency reserves. The average
unemployment rate in Brazil in 2016 was 11.5%.
In 2017, Brazilian GDP increased 1% in comparison with 2016. Brazil’s trade surplus in 2017 was US$67 billion and at year-end the
country had US$381.9 billion in currency reserves. The average unemployment rate in Brazil in 2017 was 12.7%, the highest rate ever recorded
by IBGE.
In 2018, Brazilian GDP increased 1.1% in comparison with 2017. Brazil’s trade surplus in 2018 was US$58 billion and at year-end the
country had US$374.7 billion in currency reserves. The average unemployment rate in Brazil in 2018 was 12.3%.
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 11.65% at December 31, 2014 and
increased to 14.15% at December 31, 2015. The SELIC rate increased to 13.65% at December 31, 2016. A series of rate reductions in 2017,
brought the SELIC rate down to 6.90% as of December 7, 2017, where it remained at year-end 2017. In 2018 the SELIC rate decreased to
6.40%.
We have not contracted any derivative financial instruments or any hedging instruments to mitigate interest rate fluctuations.
Inflation
Inflation affects our financial performance by increasing our costs of services rendered and operating expenses. Part of our
real‑denominated debt is directly indexed to take into account the effects of inflation. Additionally, we are exposed to the mismatch between the
inflation adjustment indices of our loans and financing and those of our receivables. Water supply and sewage service tariffs do not necessarily
follow the increases in inflation adjustment and interest rates affecting our debt. We cannot assure you that our tariffs will be increased, in future
periods, to offset, in full or in part, the effects of inflation.
Inflation adjustments derive from collections from or payment to third parties, as contractually required by law or court decision, and are
recognized on an accrual basis. Inflation adjustments included in these agreements and decisions are not considered embedded derivatives, since
they are deemed as inflation adjustments for us. See Notes 3.20, 5.1 and 30 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$6,669.4 million as of December 31, 2018, of which R$738.5 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 2016, the 16.54% appreciation of the real against the U.S. dollar and the
13.89% appreciation of the real against the yen led to a foreign exchange gain of R$1,090.5 million. In 2017, the 1.50% depreciation of the real
against the dollar and the 5.38% depreciation of the real against the yen led to a foreign exchange loss of R$96.3 million. In 2018, the 17.1%
depreciation of the real against the dollar and the 20.0% depreciation of the real against the yen led to a foreign exchange loss of R$915.9
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.
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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 years indicated:
Depreciation (appreciation) of the real versus U.S. dollar(1)
Period‑end exchange rate – US$1.00
Average exchange rate – US$1.00(2)
(1) Represents the comparison with period-end exchange rate. Source: Central Bank.
(2) Represents the average for period indicated.
Year ended December 31,
2017
2018
(in reais, except percentages)
17.13%
3,8748
3.6558
1.50%
3.3080
3.1925
2016
(16.54)%
3.2591
3.3523
The following table shows the fluctuation of the real against the yen, the period‑end exchange rates and the average exchange rates as of or
for the years indicated:
Depreciation (appreciation) of the real versus yen(1)
Period‑end exchange rate – ¥1.00
Average exchange rate – ¥1.0(2)
(1) Represents the comparison with period-end exchange rate. Source: Central Bank.
(2) Represents the average for period indicated.
2018
19.97%
0.0353
0.0331
Year ended December 31,
2017
(in reais, except percentages)
5.38%
0.0294
0.0291
2016
(13.89)%
0.0279
0.0289
During the years ended December 31, 2018, 2017 and 2016 we had no forward exchange transactions.
For further information on exchange rates, see “Item 3.D. Risk Factors—Risks Relating to Brazil—The devaluation of the real to foreign
currencies may adversely affect us and the market price of our common shares or ADSs” and “Item 5.B. Liquidity and Capital Resources—
Indebtedness Financing—Financial Covenants”.
Effects of Extreme Weather Events
The southeastern region of Brazil, particularly the southern region of the state of Minas Gerais, the PCJ River Basin (from which we extract
the water used in the Cantareira System), and the northern area of the São Paulo metropolitan region, experienced below average rainfall since
2012. In the October 2013 – March 2014 rainy season, rainfall and water inflow into the reservoirs reached the lowest levels in more than 80
years of recorded rainfall in the region, a scenario that continued in the October 2014 – March 2015 rainy season. During the October 2015 –
March 2016 rainy season, the level of rainfall in the region returned to the normal levels expected for the period. Improved rainfall in the rainy
season that began in October 2015, the collaborative efforts between us and the population we serve and emergency construction works
conducted by us throughout 2014 and 2015 to combat the water crisis, resulted in a partial restoration of the water levels of the Cantareira
system.
As of December 31, 2018, the reservoirs in the São Paulo metropolitan region, where our largest market is located, contained 943.3 million
m3 of water storage for treatment, compared to 916.8 million m3 available for treatment as of December 31, 2017. The measurements for these
years do not include the technical reserve of 287.5 million m³. In December 2018, this system served 6.8 million residents, compared to 8.9
million in February 2014, the last month before the water crisis started.
In order to balance supply and demand despite restricted water availability, we adopted a series of measures from February 2014 until April
2016. With the return of the rainfall to its historical average for the rainy season that began in October 2015 and ended in March 2016, the level
of water in the reservoirs that provide water to the population of the São Paulo metropolitan region returned to normal and the measures taken
during the water crisis to continue to services consumers were gradually discontinued. See “Item 4.B. Business Overview—The 2014-2015
Water Crisis”.
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Critical Accounting Estimates and Judgments
We make estimates and judgments concerning the future. The resulting accounting estimates will, by definition, seldom equal the related
actual results. The estimates and judgments that have a significant risk of causing material adjustment to the carrying amount of our assets and
liabilities within the next financial year are mentioned below.
Allowance for Doubtful Accounts
We establish an allowance for doubtful accounts in an amount that our management considers sufficient to cover expected losses, based on
an analysis of customer accounts receivable, in accordance with the accounting policy stated in Note 3.4 to our financial statements as of
December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016. Bad debt expense, net of recoveries, is included in
selling expenses, and was R$166.7 million, R$82.7 million and R$90.5 million for the years ended December 31, 2018, 2017 and 2016,
respectively. In 2018, the transactions with wholesale customers generated a reversal of wholesale sales losses, amounting to a revenue of
R$529.1 million, mainly due to the agreement with the municipality of Guarulhos (for more information on this agreement, see Note 9 to our
2018 financial statements included in this annual report). In 2017 and 2016, we recorded wholesale losses amounting to R$203.5 million and
R$328.7 million respectively, were recorded as a reduction of revenue.
The methodology for determining the allowance for doubtful accounts requires significant estimates, considering a number of factors,
including historical collection experience, current economic trends, expected future losses, the aging of the accounts receivable portfolio,
recoveries of previously written off receivables and other factors. Actual results could differ from those estimates.
Intangible Assets Arising from Concession and Program Contracts
As of December 31, 2018, we had intangible assets of R$29,012.5 million and contract asset of R$7,407.9 million.
We recognize intangible assets arising from concession contracts under IFRIC 12. We estimate the fair value of construction and other work
on the infrastructure to recognize the cost of the intangible asset, which is recognized when the infrastructure is built and provided that it will
generate future economic benefits. The great majority of our contracts for service concession arrangements entered into with each grantor is
under service concession agreements in which we have the right to receive, at the end of the contract, a payment equivalent to the asset balance
of the concession intangible asset, which in this case, is amortized over the useful life of the underlying physical assets; thus at the end of the
contract, the remaining value of the intangible would be equal to the residual value of the related physical asset.
The fair value of construction and other work on the infrastructure is recognized as revenue, at its fair value, when the infrastructure is built,
provided that this work is expected to generate future economic benefits. The accounting policy for the recognition of construction revenue is
described in Note 3.3 “Operating Revenue” to our financial statements.
Intangible assets related to concession agreements and program contracts, when there is no right to receive the residual value of the assets at
the end of the contract, are amortized on a straight-line basis over the period of the contract or the useful life of the underlying asset, whichever
is shorter.
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 carrying amounts of these assets. The amortization of intangible assets and estimated useful lives of the
underlying assets also requires significant assumptions and estimates, which different assumptions and estimates, and changes in future
circumstances, could affect amortization of intangible assets and remaining useful lives of the underlying assets and can have a significant
impact on the results of operations.
Provisions and Contingent Liabilities
We are a party to a number of legal proceedings involving significant monetary claims. These legal proceedings include, among other
types, disputes with customers and suppliers and tax, labor, civil, environmental and other proceedings. For a more detailed discussion of these
legal proceedings, see Note 20 to our financial statements included in this annual report. We recognize provisions for legal proceedings in which
our company has a present obligation as a result of past events (either due to an explicit agreement or duty, known as a legal obligation; or due to
our past actions, known as a constructive obligation), it is probable that an outflow of resources embodying economic benefits will be necessary
to settle the obligation and the amount of obligation can be estimated reliably. Therefore, we are required to make judgments regarding future
events for which we often seek the advice of legal counsel. As a result of the significant judgment required in assessing and estimating these
provisions, actual losses realized in future periods could differ significantly from our estimates and could exceed the amounts which we have
provisioned.
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As of December 31, 2018, we were party to judicial and administrative proceedings, relating to civil, environmental and tax matters,
amounting to R$892.9 million (after deducting court escrow deposits in the amount of R$100.8 million) with respect to which we recognized
provisions based on the criteria described above, as shown in Note 3.15 to our financial statements included in this annual report. As of the
same date, the proceedings with respect to which we have contingent liabilities (i.e., no provisions have been recognized) totaled R$56,605.5
million, of which we believe R$47,812.4 million of those have a remote probability of an outflow of resources embodying economic benefits
exists.
Pension Benefits
The present value of the pension obligations depends on a number of factors that are determined on an actuarial basis using a number of
assumptions. The assumptions used in determining the net cost (income) for pensions include a discount rate and a mortality table. Any
changes in these assumptions will impact the carrying amount of pension obligations.
We determine the appropriate discount rates at the end of each year, which is the interest rate that should be used to determine the present
value of estimated future cash outflows expected to be required to settle the pension obligations. The discount rate was decreased from 5.30% in
2017 to 4.84% in 2018 under Plan G0 and from 5.35% in 2017 to 4.91% in 2018 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 21 (b) to our financial statements included in this annual report.
Other key assumptions for pension obligations are based in part on current market conditions. Additional information on the pension plans
under Plan G0 and G1 is disclosed in Note 21 to our financial statements included in this annual report.
Deferred income tax and social contribution
We recognize and settle taxes on income based on the results of operations verified according to the Brazilian Corporate Law, taking into
consideration the provisions of the tax laws. We recognize deferred tax assets and liabilities based on the differences between the accounting
balances and the tax bases of assets and liabilities.
We regularly review the recoverability of deferred tax assets and do not recognize deferred tax assets if it is probable that these assets will
not be realized, based on historic taxable income, the projection of future taxable income and the estimated period to reverse temporary
differences. This process requires the use of estimates and assumptions. The use of different estimates and assumptions could result in the non-
recognition of a significant amount of deferred tax assets.
As of December 31, 2018 and 2017, we have recognized R$261.2 million and R$36.8 million as deferred income tax liabilities and deferred
income tax assets, respectively, in each case, net of the deferred tax assets and liabilities, as disclosed in Note 19] to our financial statements
included in this annual report.
Certain Transactions with Controlling Shareholder
Reimbursement Due from the State
Reimbursement due from the State for pensions paid represent supplementary pensions (Plan G0) that we pay, on behalf of the State, to
former employees of State‑owned companies which merged to form our company. These amounts must be reimbursed to us by the State, as
primary obligor.
In November 2008, we entered into the third amendment to the agreement with the State relating to payments of pension benefits made by
us on its behalf. The State acknowledged that it owed us an outstanding balance of R$915.3 million as of September 30, 2008, relating to
payments of pension benefits made by us on its behalf. We provisionally accepted, but it is not recognized in our books, the reservoirs in the
Alto Tietê System as partial payment in the amount of R$696.3 million, subject to the transfer of the property rights of these reservoirs to us.
Since November 2008, the State has been paying the remaining balance in the amount of R$219.0 million in 114 successive monthly
installments. See Note 10 to our financial statements included in this annual report and “Item 7. Major Shareholders and Related Party
Transactions”.
On March 18, 2015, we, the State and DAEE, with the intervention of the Department of Sanitation and Water Resources, executed an
agreement in the amount of R$1,012.3 million, consisting of R$696.3 million in principal amount and R$316.0 million in monetary adjustment
of the principal through February 2015. For detailed information on this agreement, see “Item 7.B. Related Party Transactions—Agreements
with the State” and Note 10(a)(iv) to our financial statements included in this annual report.
As of December 31, 2018 and 2017, the amounts not recognized related to pension benefits paid by us on behalf of the State totaled
R$1,107.1 million and R$1,021.7 million respectively. As a result, we also recognized the obligation related to pension benefits, maintained
with the beneficiaries and pensioners of Plan G0. As of December 31, 2018 and 2017, the pension benefit obligations of Plan G0 totaled
R$2,606.1 million and R$2,543.9 million, respectively. For detailed information on the pension benefit obligations refer to Note 21 to our
financial statements included in this annual report.
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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 included in this annual report
and “Item 7. Major Shareholders and Related Party Transactions”.
Use of Guarapiranga and Billings reservoirs
We withdraw water for use in the São Paulo metropolitan area from the Guarapiranga and Billings reservoirs. EMAE, a company that is
also controlled by the State of São Paulo, has a concession to produce hydroelectric energy using water from the same reservoirs. EMAE
commenced various lawsuits against us in the past seeking compensation for the water we withdraw from these reservoirs. Those lawsuits have
now been settled, by way of an agreement between EMAE and our company.
The settlement agreement requires us to make certain installment payments to EMAE in settlement of the claim for compensation for our
capture and use of the water, as well as apportionment of the maintenance, operation and monitoring costs for the reservoirs. See “Item 7.
Major Shareholders and Related Party Transactions” and See Note 10(b) to our financial statements included in this annual report.
Results of Operations
The following table sets forth, for the years indicated, certain items from our income statements of operations, each expressed as a
percentage of net operating revenue:
Year ended December 31,
2018
2017
2016
(in millions of reais, except percentages)
Net operating revenue
Cost of services
Gross profit
Selling expenses
Allowance for doubtful accounts (*)
Administrative income (expenses)
Other operating income (expenses), net and equity results of
investments in affiliates
Profit from operations before finance income (expenses) and income
tax and social contribution
Financial income (expenses), net
Profit before income tax and social contribution
Income tax and social contribution
Profit for the year
16,085.1
(9,086.5)
6,998.6
(693.5)
(166.7)
(996.9)
35.1
5,176.6
(1,264.3)
3,912.3
(1,077.2)
2,835.1
100.0%
(56.5)%
43.5%
(4.3)%
(1.0)%
(6.2)%
0.2%
32.2%
(7.9)%
24.3%
(6.7)%
17.6%
14,608.2
(8,778.9)
5,829.3
(768.7)
(82.7)
(1,099.0)
100.0%
(60.1)%
39.9%
(5.3)%
(0.6)%
(7.5)%
14,098.2
(9,013.1)
5,085.1
(730.0)
-
(934.9)
100.0%
(63.9)%
36.1%
(5.2)%
-
(6.6)%
0.1
0.0%
9.5
0.1%
3,961.7
(458.1)
3,503.6
(984.3)
2,519.3
27.1%
(3.1)%
24.0%
(6.7)%
17.2%
3,429.7
699.4
4,129.1
(1,182.0)
2,947.1
24.3%
5.0%
29.3%
(8.4)%
20.9%
(*) Starting January 1, 2018, we adopted IFRS 9. As a result, in 2018 and 2017 we recorded our allowance for doubtful accounts in the income statements as a separate item. In
2016, the amount of allowance for doubtful accounts in the income statements was R$90.5 million and was presented as part of our selling expenses.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Net operating revenue
Net operating revenue increased by R$1,476.9 million, or 10.1%, to R$16,085.1 million in 2018 from R$14,608.2 million in 2017. These
main factors that led to the increase were:
· tariff repositioning index of 7.9% since November 2017;
· tariff repositioning index of 3.5% since June 2018;
· increase of 1.5% in our total billed volume (1.5% in water and 1.5% in sewage); and
· formalization of the agreement with the municipality of Guarulhos in 2018, in the amount of R$928.0 million, representing an
increase of R$800.0 million in operating revenue.
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Construction revenue decreased by R$348.2 million, or 11.1%, to R$2,802.7 million in 2018 from R$3,150.9 million in 2017. This variation
was mainly due to the increase in asset investments carried out in 2017 in the municipalities served by the Company, particularly in the São
Lourenço Production System (Sistema Produtor São Lourenço). See Note 3.3(b) to our financial statements included in this annual report for a
description of the accounting policies applicable to our construction services business.
Cost of services
Our cost of services increased by R$307.6 million, or 3.5%, to R$9,086.5 million in 2018 from R$8,778.9 million in 2017. As a percentage
of net operating revenue, cost of services decreased to 56.5% in 2018 from 60.1% in 2017.
The increase in cost of services was principally due to the following factors:
· an increase of R$162.5 million in the cost of electricity, mainly due to: (i) an average increase of 7.3% in free market tariffs, with
a 3.6% increase in consumption; (ii) an average increase of 4.9% in the Tariff for the Use of Distribution System (TUSD), with a
13.5% increase in consumption; and (iii) an average increase of 10.4% in regulated market tariffs, without any relevant
consumption variations;
· an increase of R$139.4 million in the cost of services, due to several factors, mainly: (i) an increase of R$34.9 million in
maintenance of water and sewage systems costs; and (ii) a higher cost associated with the hiring of technical services, in the
amount of R$25.3 million;
· an increase of R$94.7 million in salaries and payroll charges and Pension plan obligations mainly due to: (i) an increase of
R$156.2 million due to the provision for those who joined the Knowledge Retention Program (Programa de Retenção do
Conhecimento – PRC), launched in 2018, aiming to mitigate the impact of the exit of employees who possess strategic knowledge
acquired throughout their career; and (ii) an increase of R$71.9 million in expenses related to health insurance. These increases
were partially offset by the reversal of R$136.5 million in the Provision for the Consent Decree (Termo de Ajustamento de
Conduta – TAC), related to the employees who joined the PRC;
· an increase of R$102.7 million in depreciation and amortization, arising from the conclusion of construction of concession
intangible assets; and
· an increase of R$97.3 million in general expenses, mainly due to the following factors: (i) higher provision for the Municipal
Fund for Environmental Sanitation and Infrastructure, in the amount of R$53.0 million, as a result of the increase in revenues
generated from the municipality of São Paulo; and (ii) higher charges for the use of water, in the amount of R$39.0 million,
related to complementary payments made between 2014 and 2016, due to the signing of an agreement between us and the Alto
Tietê Hydrographic Basin Agency Foundation (Fundação Agência Bacia Hidrográfica Alto Tietê – FABHAT) in 2018.
The increase was partially offset by the decrease of R$340.9 million in construction costs, due to higher construction costs in 2017, mainly
with regards to the São Lourenço Production System.
Gross Profit
As a result of the factors discussed above, gross profit for the year ended December 31, 2018 increased by R$1,169.3 million, or 20.1 %, to
R$6,998.6 million in 2018 from R$5,829.3 million in 2017. As a percentage of net operating revenue, our gross profit margin increased to
43.5% in 2018 from 39.9% in 2017.
Selling Expenses
Selling expenses increased by R$7.5 million, or 1.1%, to R$693.5 million in 2018 from R$686.0 million in 2017. As a percentage of net
operating revenue, selling expenses decreased to 4.3% in 2018 from 4.7% in 2017. The increase in selling expenses was primarily due to:
· an increase of R$15.2 million in expenses with services, mainly due to an increase in expenses related to the hiring of credit
recovery services and technical services, in the amounts of R$6.5 million and R$5.8 million, respectively;
· an increase of R$8.1 million in general expenses, due to the increase in the collection of bills from certain banks; and
· an increase of R$1.9 million in material expenses, mainly due to the consumption of fuels and lubricants.
The increase in selling expenses was partially offset by the decrease of R$19.8 million in salaries and expenses, mainly due to the migration
of employees whose termination amounts were provisioned in the Provision for Consent Decree (Termo de Ajustamento de Conduta - TAC),
who joined the Knowledge Retention Program - PRC, generating a reduction of R$17.0 million in total expenses with these provisions.
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Allowance for Doubtful Accounts
Our allowance for doubtful accounts increased by R$84.0 million, or 101.6%, to R$166.7 million from R$82.7 million, mainly due to the
higher recovery of amounts in 2017, in the amount of R$77.8 million.
Administrative Income (Expenses)
Administrative expenses decreased by R$102.1 million, to R$996.9 million in 2018 from R$1,099.0 million in 2017, mainly due to the
EMAE agreement occurred in 2017 .
Other Operating Income (Expenses), Net and Equity in Results of Investments in Affiliates
Other operating income, net was R$35.1 million in 2018 compared with R$0.1 million operating income, net in 2017.
Other operating income, net consists of gains and losses from sales of property, plant and equipment, sale of contracts awarded in public
bids, right to sell electricity, indemnities and reimbursement of expenses, fines and collaterals, property leases, reuse of water, PURA projects
and services.
Other operating expenses consist mainly of write-offs of concessions assets due to obsolescence, discontinued construction works,
unproductive wells, projects considered economically unfeasible, losses on property, plant and equipment and exceeding cost of electricity sold.
Other operating income (expenses) increased by R$35.0 million, mainly influenced by the provision of obsolete goods in 2017, in the
amount of R$15.1 million, and an increase in amounts received from the Hydrographic Basin Depollution Program, in the amount of R$11.2
million, due to the accomplishment of the goals of the program.
Financial 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$806.2 million to a financial expense, net of R$1,264.3 million in 2018 from a financial
expense, net of R$458.1 million in 2017. As a percentage of net operating revenues, financial expense amounted to 7.9% in 2018 compared with
a financial expense of 3.1% in 2017. The variation was due to an increase of R$819.5 million in exchange rate variation on loans and financing,
due to the appreciation of the U.S. dollar and the Japanese Yen against the Real in 2018 (17.1% and 20.0%, respectively), compared to a more
moderate appreciation in 2017 (1.5% and 5.3%, respectively).
Profit before income tax and social contribution
As a result of the factors discussed above, profit before income tax and social contribution increased by R$408.7 million, to R$3,912.3
million in 2018 from R$3,503.6 million in 2017. As a percentage of net operating revenue, our profit before income tax and social contribution
increased to 24.3% in 2018 compared to 24.0% in 2017.
Income Tax and Social Contribution
Income tax and social contribution expense increased by R$92.9 million to R$1,077.2 million in 2018 from R$984.3 million in 2017. This
increase was mainly due to the increase in operating revenues, mitigated by the higher electricity and services costs, as well as the increase in
exchange rate variation expenses, due to the higher appreciation of the U.S. dollar and the Japanese Yen against the Real in 2018.
Profit for the year
As a result of the factors discussed above, our profit for the year increased to R$2,835.1 million in 2018 from R$2,519.3 million in 2017. As
a percentage of net operating revenue, our profit for the year increased to 17.6% in 2018 from 17.2% in 2017.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Net operating revenue
Net operating revenue increased by R$510.0 million, or 3.6%, to R$14,608.2 million in 2017 from R$14,098.2 million in 2016.
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Net operating revenue, disregarding the effect of construction revenue, as of December 31, 2017, increased R$1,092.0 million, or 10.5%,
from R$10,365.3 million in 2016 to R$11,457.3 million in 2017. In 2017, the construction revenue was R$3,150.9 million compared to
R$3,732.9 million in 2016. The variations in net operating revenue were principally due to:
· an increase of 8.4% in tariffs since May 2016 (ordinary tariff adjustment);
· an increase of 7.9% in tariffs since November 2017 (extraordinary tariff revision);
· an increase of 4.3% in our total billed volume (4.3% in water and 4.2% in sewage);
· the cancelation of the Water Consumption Reduction Incentive Program, concluded in April 2016, resulting in no bonus granted
in 2017, compared to a bonus granted in the amount of R$187.4 million in 2016 which resulted in a decrease in revenue in 2016;
and
· a lower estimated loss of wholesale revenue in 2017, in the amount of R$125.1 million, due to the payment received in the
period, mainly from the municipality of Guarulhos.
These increases were partially offset by the suspension of the Contingency Tariff in April 2016, in the amount of R$224.7 million in 2016.
Cost of services
Our cost of services decreased by R$234.2 million, or 2.6%, to R$8,778.9 million in 2017 from R$9,013.1 million in 2016.
The decrease in cost of services was principally due to the following factors:
· a decrease of R$570.9 million in construction costs due to lower investments in the municipalities we serve; and
· a decrease of R$138.1 million in the cost of electricity, mainly due to an average decrease of 12.7% in free market tariffs, with a
16.9% increase in consumption; an average decrease of 27.5% in the Tariff for the Use of Distribution System (TUSD), with a
19.6% decrease in consumption; and an average decrease of 5.3% in regulated market tariffs, with a 5.7% decrease in
consumption.
The decrease in cost of services was partially offset by:
· an increase of R$303.2 million in salaries and payroll charges and pension plan obligations due to the reduction in non-recurring
expenses in 2016 in connection with the migration of participants from the Defined Benefit Plan (G1) to the Defined Contribution
Plan (Sabesprev Mais), which generated an early reduction of R$223.5 million in the actuarial deficit. The increase in salaries and
payroll charges is also due to an increase of R$72.5 million, principally driven by the 1% increase related to the Career and Salary
Plan since December 2016 and the 3.71% pay rise in May 2017;
· an increase of R$100.8 million in depreciation and amortization, mainly due to the increase in operating intangible assets in
2017, principally due to new assets entering into operation; and
· an increase of R$34.5 million in the provision for the Municipal Fund for Environmental Sanitation and Infrastructure, as a result
of the increase in revenues generated from the municipality of São Paulo.
Gross Profit
As a result of the factors discussed above, gross profit for the year ended December 31, 2017 increased by R$744.2 million, or 14.6 %, to
R$5,829.3 million in 2017 from R$5,085.1 million in 2016.
Selling Expenses
Selling expenses increased by R$38.7 million, or 5.3%, to R$768.7 in 2017 from R$730.0 million in 2016. The increase in selling expenses
was primarily due to:
· an increase of R$59.0 million in salaries and payroll charges and pension plan obligations due to the reduction in non-recurring
expenses in 2016 in connection with to the migration of participants from the Defined Benefit Plan (G1) to the Defined
Contribution Plan (Sabesprev Mais), which generated an early reduction of R$30.4 million in the actuarial deficit in 2016. The
increase in salaries and payroll charges is also due to an increase of R$13.2 million, principally driven by the 1% increase related
to the Career and Salary Plan since December 2016 and the 3.71% pay rise in May 2017;
The increase in selling expenses was partially offset by the decrease of R$20.3 million related to outsourced services.
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Administrative Income (Expenses)
Administrative expenses increased by R$164.1 million, or 17.6%, to an expense of R$1,099.0 million in 2017 from income of R$934.9
million in 2016.
The increase in administrative expenses was principally due to:
·
an increase of R$70.9 million in salaries and payroll charges and pension plan obligations resulting from the reduction in non-recurring
expenses in 2016 in connection with the migration of participants from the Defined Benefit Plan (G1) to the Defined Contribution Plan
(Sabesprev Mais), which generated an early reduction of R$80.3 million in the actuarial deficit in 2016. The increase in salaries and payroll
charges is also driven by the 1% increase related to the Career and Salary Plan since December 2016 and the 3.71% pay rise in May 2017;
· an increase of R$48.5 million in depreciation and amortization, mainly due to the implementation of the Integrated Business Management
System (Enterprise Resource Planning – SAP ERP) in 2017; and
· an increase of R$28.8 million related to outsourced services.
Other Operating Income (Expenses), Net and Equity in Results of Investments in Affiliates
Other operating income, net was R$0.1 million in 2017 compared with R$9.5 million operating income, net in 2016.
Other operating income, net consists of gains and losses from sales of property, plant and equipment, sale of contracts awarded in public
bids, right to sell electricity, indemnities and reimbursement of expenses, fines and collaterals, property leases, reuse of water, PURA projects
and services.
Other operating income decreased by R$9.4 million, mainly due to the estimate for losses in 2017 on discontinued concessions, in the
amount of R$24.1 million, partially offset by higher revenues from the sale of surplus energy, in the amount of R$8.5 million.
Our other operating expenses consist mainly of write-offs of concessions assets due to obsolescence, discontinued construction works,
unproductive wells, projects considered economically unfeasible, losses on property, plant and equipment and exceeding cost of electricity sold.
Financial 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$1,157.5 million to financial expense, net of R$458.1 million in 2017 from financial
income, net of R$699.4 million in 2016.
The variation was due to a positive variation of R$1,186.6 million in the cost of currency variations on borrowings and financing, due to the
strengthening of the real against the U.S. dollar and the Japanese Yen in 2017 (1.5% and 5.3%, respectively), compared to a devaluation of the
real in 2016 (16.5% and 13.9%, respectively).
Profit before income tax and social contribution
As a result of the factors discussed above, profit before income tax and social contribution decreased by R$625.5 million, to R$3,503.6
million in 2017 from R$4,129.1 million in 2016. As a percentage of net operating revenue, our profit before income tax and social contribution
increased to 24.0% in 2017 compared to 29.3% in 2016.
Income Tax and Social Contribution
Income tax and social contribution expense decreased by R$197.7 million, or 16.7%, to R$984.3 million in 2017 from R$1,182.0 million in
2016. This decrease was mainly due to our lower taxable result in 2017, which was impacted by the exchange rate variation.
Profit for the year
As a result of the factors discussed above, our profit for the year decreased to R$2,519.3 million in 2017 from R$2,947.1 million in 2016.
As a percentage of net operating revenue, our profit for the year decreased to 17.2% in 2017 from 20.9% in 2016.
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B. Liquidity and Capital Resources
Capital Sources
In order to satisfy our liquidity and capital requirements, we have primarily relied on cash provided by operating activities, long-term
borrowings from Brazilian federal governmental financial institutions, and long-term financing from multilateral organizations and from
domestic and international development banks, and also from capital markets. As of December 31, 2018, we had R$3,029.2 million in cash and
cash equivalents. The outstanding current portion of our long-term indebtedness was R$2,103.6 million as of December 31, 2018, of which
R$738.5 million was denominated in foreign currency. Long‑term indebtedness was R$11,049.2 million as of December 31, 2018, of which
R$5,930.9 million consisted of foreign currency-denominated obligations.
Our management expects that the cash and cash equivalents available on December 31, 2018, the operating cash generation estimated for
2019 and the lines of credit available for investments are sufficient to meet our short-term liabilities, in light of our current financial position and
our expected cash generated by operating activities. In our opinion, the working capital is sufficient for the company's present requirements.
Cash Flows
Net Cash Generated from Operating Activities
Cash generated from operating activities is the single largest source of our liquidity and capital resources, and we expect that it will continue
to be so in the future. Our net cash generated from operating activities was R$3,842.9 million, R$3,301.9 million and R$3,003.6 million in 2018,
2017 and 2016, respectively. The main driver of our cash flow from operating activities relates to our cash collections from customers, which is
due to the nature of our business and to the fact that we are expanding our infrastructure. The increase in net cash generated in 2018 is
principally due to the increase of 1.5% in our total billed volume (1.5% in water and 1.5% in sewage). This increase was partially offset by the
income tax and social contribution paid in 2018.
Net Cash Used in Investing Activities
Net cash used in investing activities was R$ 2,189.3 million, R$1,971.4 million and R$2,130.7 million in 2018, 2017 and 2016,
respectively. The main driver of our net cash outflow for investing activities relates to purchases of intangible assets, as required under our
concession and program contracts, which is due to the fact that we are expanding our infrastructure and service coverage. Although we invested
approximately R$389.7 million (including capitalized interest) in the São Lourenço PPP, a construction project planned and initiated before the
water crisis, and the amount of R$928.0 million related to agreement with the municipality of Guarulhos, that did not impact our cash flow in
2018.
Net Cash Used in Financing Activities
Our net cash used in financing activities was R$907.5 million, R$933.6 million and R$625.9 million in 2018, 2017 and 2016, respectively.
The main driver of our cash flows from financing activities relates to the proceeds and repayments of loans used to finance purchases of
intangible assets related to our concession and program contracts, in order to support the expansion of our services and our payment of interest
on shareholders’ equity.
Indebtedness Financing
Our total financial indebtedness increased by 8.7%, from R$12,101.0 million as of December 31, 2017 to R$13,152.8 million as of
December 31, 2018. In addition, during the same period, our total indebtedness denominated in foreign currency increased by 17.6%, from
R$5,672.8 million as of December 31, 2017 to R$6,669.4 million as of December 31, 2018.
As of December 31, 2018, we had R$11,049.2 million in long-term indebtedness outstanding (excluding the current portion of long-term
indebtedness), of which R$5,930.9 million consisted of foreign currency-denominated long-term debt. We had an outstanding current portion of
long-term indebtedness of R$2,103.6 million as of December 31, 2018. As of December 31, 2018, R$738.5 million of this current portion of
long-term indebtedness was denominated in foreign currency. As of December 31, 2018, our S&P domestic rating was brAAA and our S&P
global rating was BB. Our Moody’s national rating was Aa2.br and our Moody’s global rating was Ba2 as of December 31, 2018, while our
Fitch national rating was AA(bra) and our Fitch global rating was BB, as of the same date.
Various contractual agreements we have entered into, including certain financing agreements with Caixa Econômica Federal and BNDES,
provide for liens over a portion of our cash flows from the payment of water and sewage provision tariffs. In addition, we provide as guarantees
a portion of our cash flow generation to transactions related to PPPs.
Pursuant to these agreements, cash received from operations is required to pass through designated accounts. In the event of a default under
the relevant agreement, such cash and future cash flows that are required to be deposited in such accounts become restricted and are subject to
security interests in favor of the relevant creditor. As of December 31, 2018, 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$4,792.5 million (R$4,749.5 million of principal and R$43.0 million related to interest and charges). See “—Indebtedness Financing—
Financial Covenants—Local currency denominated indebtedness” and Note 17 to our financial statements included in this annual report. The
following table sets forth information on our indebtedness outstanding as of December 31, 2018:
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Denominated in local currency:
10th issue of debentures
12th issue of debentures
14th issue of debentures
15th issue of debentures
17th issue of debentures
18th issue of debentures
20th issue of debentures
21st issue of debentures
22nd issue of debentures
Caixa Econômica Federal
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
National Bank for Economic and Social
Development (BNDES) 2015
Financial leasing
Other
Interest and others charges
Current
Noncurrent
Total
Final Maturity
Interest Rates*
December 31, 2018
42,493
45,450
41,270
359,394
279,100
33,469
248,334
-
-
75,223
16,899
11,227
4,364
3,186
23,632
30,589
31,615
19,077
1,380
98,410
40,194
249,249
103,005
82,687
294,699
2020
2025
144,275
2022
-
359,394
2019
532,691
165,267
811,791
2023
198,736
2024
TJLP + 1.92% (1st & 3rd series) & IPCA +
9.53% (2nd series)
TR + 9.5%
TJLP + 1.92% (1st & 3rd series) & IPCA +
9.19% (2nd series)
CDI + 0.99% (1st series) & IPCA + 6.2%
(2nd series)
CDI + 0.75% (1st series) & IPCA + 4.5%
(2nd series) & IPCA + 4.75% (3rd series)
TJLP + 1.92% (1st and 3rd series) & IPCA
+ 8.25% (2nd series)
-
248,334
2019
CDI + 3.80%
499,604
756,040
499,604
2022
756,040
2025
CDI + 0.60% & CDI + 0.90%
CDI + 0.58% (1st series) & CDI + 0.90%
(2nd series) & IPCA + 6.00% (3rd series)
1,266,592
1,341,815
2019/2039
TR + 5% to 9.5%
-
39,169
18,811
23,100
123,875
252,197
490,729
549,589
8,163
-
16,899
2019
2.5% + TJLP
50,396
2023
2.15% + TJLP
23,175
2027
1.72% + TJLP
26,286
2027
1.72% + TJLP
147,507
2025
1.92% + TJLP
282,786
2028
1.66% + TJLP
522,344
568,666
2035
2035
9,543
2025
98,410
2.5% + TJLP
7.73% to 10.12% + IPC
TJLP + 1.5% (FINEP) & TR + 12.00%
(Presidente Prudente)
Total denominated in local currency
1,365,112
5,118,275
6,483,387
Denominated in foreign currency:
Inter-American Development Bank (IADB)
US$616,404,000
(2017 - US$527,096,000)
International Bank for Reconstruction and
Development (IBRD) US$91,286,000
(2017 – US$79,946,000)
Deutsche Bank – US$75,000,000 (2017 -
US$150,000,000)
Eurobonds - US$350,000,000 (2017 – US$
350,000,000)
JICA 15 - ¥ 12,676,730,000
(2017 - ¥ 13,829,160,000)
JICA 18 - ¥ 11,397,760,000
(2017- ¥ 12,433,920,000)
JICA 17 - ¥ 1,826,957,000
(2017- ¥ 1,534,959,000)
JICA 19 - ¥ 31,561,726,000
(2017 - ¥ 29,777,232,000)
IADB 1983AB – US$ 58,462,000 (2017 –
US$ 82,404,000)
Interest and others charges
163,924
2,208,519
2,372,443
2025 to 2035
3.31% to 3.42%
11,779
288,479
341,646
353,425
2034
2.85%
-
288,479
2019
LIBOR + 4.50%
-
1,354,532
1,354,532
2020
6.25%
40,646
36,545
11,835
64,028
68,554
52,710
406,462
365,230
51,786
1,047,081
155,653
-
447,108
2029
1.8% & 2.5%
401,775
2029
1.8% & 2.5%
63,621
2035
1.2% & 0.01%
1,111,109
2037
1.7% & 0.01%
224,207
2023
LIBOR + 2.08% to 2.38%
52,710
Total denominated in foreign currency
738,500
5,930,909
6,669,409
Total loans and financing
2,103,612
11,049,184
13,152,796
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*
TR was 0.00% per month as of December 31, 2018; CDI stands for Interbank Deposit Rate (Certificado de Depósitos Interbancários), which was 6.40% per annum as of December 31, 2018; IGP‑M
was 7.54% per annum as of December 31, 2018; TJLP stands for Long‑term Interest Rate (Taxa de Juros a Longo Prazo), published quarterly by the Central Bank, which was 6.98% per annum as of
December 31, 2018; and USD LIBOR was 1.69 as of December 31, 2018.
The following table shows the maturity profile of our debt, as of December 31, 2018, for the period indicated:
Loans and financing
2,103.6
2,559.0
1,062.8
1,148.3
939.6
5,339.5
13,152.8
2019
2020
2021
2022
2023
(in millions of reais)
After
2024
Total
Referring to all of our foreign currency-denominated indebtedness, the amount of R$4,593.1 million, net of transaction costs, as of
December 31, 2018 was denominated in U.S. dollars and R$2,023.6 million was denominated in Japanese Yen. This indebtedness consisted
principally of:
·
R$2,372.5 million (US$616.4 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, one of which was terminated in December 2016 and
the other terminated in December 2017;
(ii) one loan to finance the second phase of the Tietê Project in 2000, under which payments of principal are made in
semiannual installments with final maturity in July 2025. The principal amount accrues interest at USD LIBOR plus
a variable spread paid semiannually; and
(iii) one loan to finance the third phase of the Tietê Project in 2010, under which payments of principal are made in
semiannual installments with final maturity in September 2035. The principal amount accrues interest at USD
LIBOR plus a variable spread paid semiannually;
R$353.4 million (US$91.3 million) in U.S. dollar denominated loans contracted with the IBRD which was entered into on
October 28, 2009, amounting to US$100.0 million, for the financing of the Water Source Program (Programa Mananciais), a
program ended in 2017, which consisted of various projects that focused on the preservation and improvement of water sources in
the metropolitan region of São Paulo. The loan matures in March 2034. Repayments of principal will be made in semiannual
installments starting in September 2019 after a grace period of ten years. The principal amount accrues interest at USD LIBOR plus
a variable spread, paid semiannually;
R$224.2 million (US$58.5 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 accrues interest at USD LIBOR plus a rate varying from 2.08% to 2.38%, paid semiannually. The proceeds were used to
repay an outstanding series of debt securities in connection with the implementation of our investment plan;
R$1,354.5 million (US$350.0 million) in U.S. dollar denominated Eurobonds issued in December 2010 with an interest rate of
6.25%. The bonds pay interest semi‑annually and mature in 2020. The proceeds from the offering were used to repay financial
commitments throughout 2007 and 2011;
R$2,023.5 million (¥57,463.2 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 a rate
that varies from 1.8% to 2.5% per year, paid semiannually; (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, with
repayments of principal made in semiannual installments. The principal amount accrues interest at a rate that varies from 0.01% to
1.2% per year, paid semiannually; (iii) ¥19,169 million denominated loans contracted in February 2011 to complement the financing
for the first stage of the Clean Wave Program (Programa Onda Limpa), with commercial conditions similar to the loan entered into
in August 2004. These funds were used for the provision of works and services in the Baixada Santista metropolitan region. The
credit agreement expires in 18 years with final maturity in August 2029. The principal amount accrues interest at a rate that varies
from 1.8% to 2.5% per year, paid semiannually; 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. Repayments of principal will be made in semiannual installments starting in February 2019 after a grace period of
seven years. The principal amount accrues interest at a rate that varies from 0.01% to 1.7% per year, paid semiannually; and
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· R$288.5 (US$75.0 million), in U.S. dollar denominated loan contracted in October 2016, with Deutsche Bank AG. London Branch and
Banco Bradesco S.A., New York Branch, with an interest rate of 3-month LIBOR plus 4.50% interest per year and with final maturity
in October 2019. Interest under this loan is paid quarterly and the principal amount is amortized in semiannual installments after an 18-
month grace period. The proceeds from the loan were used to repay the US$140.0 million Eurobond issued in November 2006, which
matured in November 2016, and other financial commitments throughout 2016. The loan agreement includes financial covenants
requiring our debt service coverage ratio to be higher than 2.35:1.00; and our ratio of total adjusted debt to EBITDA, determined on a
consolidated basis, to be lower or equal than 3.65:1.00.
Our borrowings from multilateral institutions and with Government Agency, such as the IADB, IBRD and JICA are guaranteed by the
federal government, and have a counter-guarantee from the state of São Paulo. 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$6,483,4 million as of December 31, 2018 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, June 2014, December 2015, June 2017 and February 2018 and
financial leasing.
The following summarizes our principal borrowings from federal and State‑owned banks:
· from 2003 to 2018, we entered into several financing agreements with Caixa Econômica Federal, pursuant to which repayments of
principal are paid in up to in 60, 180 or 240 months in monthly installments commencing 30 days following the applicable grace
period, which varies from 10 to 48 months from the date of signature of the line of credit agreement. The final maturity is 2042. The
principal amount accrues interest from 5.0% to 8.0%. The financing agreements are collateralized (i) by the pledge of collections of
monthly billings of water supply and sewage services up to three monthly installments until reaching the total amount of the debt, or
(ii) by a monthly plan of billings corresponding to the minimum of three times the monthly charge, depending on the terms of the
relevant financing agreement. As of December 31, 2018, the outstanding debt was R$1,341.8 million;
· in November 2007, we entered into a R$129.9 million financing agreement with BNDES. Repayments of the principal amount are
being 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. As of December 31,
2018, the outstanding debt was R$16.9 million;
· in May 2008, we entered into a R$174.0 million financing agreement with BNDES. Repayments of the principal amount are being
made in 150 successive monthly installments, with final maturity in 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. As of December 31,
2018, the outstanding debt was R$50.4 million;
· in March 2010, we entered into a R$294.3 million financing agreement with BNDES. Repayments of the principal amount are being
made in 156 successive monthly installments, with final maturity in 2025. The principal amount accrues interest at the TJLP, but
limited to 6.0% per year, plus 1.92% per year. If the TJLP exceeds 6.0% per year, such excess will be added to the principal
amount. The financing agreement is collateralized by part of the billings from the provision of water and sewage services. As of
December 31, 2018, the outstanding debt was R$147.5 million;
· in 2011, we entered into financial leases in the total amount of R$49.6 million with certain contractors for the construction of
infrastructure on land we own. During the construction phase, we recognized a contract asset (as of December 31, 2018, with the
adoption of IFRS 15 - Revenue from contract with customer, since 1 January 2018, assets related to concessions under construction,
registered under the scope of IFRIC 12 - Concession Contracts, are classified as Contract Assets during the construction period and are
transferred to Intangible Assets only after completion of the works. For more information of this adoption, see Note 4.1 to our 2018
financial statements included in this annual report) and the related liability of the lease at fair value. Upon the conclusion of the
construction, we began paying the rental of the infrastructure (in 240 installments) and the lease was updated accordingly to the
contract. On August 31, 2013, SES Campo Limpo Paulista and Várzea Paulista started operations, and the corresponding amount as of
December 31, 2014 was of R$138,602 million. As of December 31, 2018, the outstanding debt was R$568.7 million;
· in March 2012, we entered into a R$180.8 million financing agreement with BNDES. Amortization of the principal amount is being
made in up to 156 successive monthly installments, with the final maturity in 2027. The principal amount accrues interest at the TJLP
but it is limited to 6.0% per year plus a yearly 1.72%. If the TJLP exceeds 6.0% per year, such excess will be added to the principal
amount. This financing agreement is collateralized with a portion of the revenues from the provision of water and sewage services. As
of December 31, 2018, the outstanding debt was R$49.5 million;
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· in February 2013, we entered into a R$1.3 billion financing agreement with BNDES. Amortization of the principal amount is being
made in up to 144 successive monthly installments with the final maturity in 2028. The principal amount accrues interest at the TJLP
but is limited to 6.0% per year plus a yearly 1.66%. If the TJLP exceeds 6.0% per year, such excess will be added to the principal
amount. This financing agreement is collateralized with a portion of the revenues from the provision of water and sewage services. As
of December 31, 2018, the outstanding debt was R$282.8 million;
· in June 2014, we entered into a R$61.1 million financing agreement with BNDES. Amortization of the principal amount is being
made in up to 108 successive monthly installments after the grace period of 36 months, with the final maturity in 2026. The principal
amount accrues interest at the TJLP but is limited to 6.0% per year plus a yearly 1.76%. If the TJLP exceeds 6.0% per year, such excess
will be added to the principal amount. This financing agreement is collateralized with a portion of the revenues from the provision of
water and sewage services;
· in June 2015, we entered into a R$747.4 million financing agreement with BNDES. Amortization of the principal amount is being
made in up to 204 successive monthly installments after the grace period of 36 months, with the final maturity in 2035. The principal
amount accrues interest at the TJLP but is limited to 6.0% per year plus a yearly 2.18%. If the TJLP exceeds 6.0% per year, such
excess will be added to the principal amount. This financing agreement is collateralized with a portion of the revenues from the
provision of water and sewage services. As of December 31, 2018, the outstanding debt was R$522.3 million; and
· in October 2015, we entered into a R$48.3 million financing agreement with Funding Authority for Studies and Projects (Financiadora
de Estudos e Projetos, or FINEP). Repayments of the principal amount shall be paid in up in 91 successive monthly installments after
the grace period of 30 months, with the final maturity in 2025. The principal amount accrues interest at the TJLP, but it limited to 6.0%
per year plus a yearly 1.5%. If TJLP exceeds 6% per year, such excess will be added to the principal amount. This financing agreement
is collateralized with a portion of the revenues from the provision of water and sewage services. As of December 31, 2018, the
outstanding debt was R$9.6 million.
Under the BNDES program, we issued three tranches of debentures in the aggregate amount of R$826.1 million. 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. As of
December 31, 2018, the outstanding debt of the tenth issuance of debentures is R$82.7 million. 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. As of December 31, 2018, the outstanding debt of the
fourteenth issuance of debentures is R$$144.3 million. 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 and July 2015, BNDES subscribed in part to the debentures of the third series and will subscribe to the other
debentures of the third series in 2018. 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. As of December 31,
2018, the outstanding debt of the eighteenth issuance of debentures is R$198.8 million.
In June 2010, we carried out our twelfth issuance of debentures, totaling R$500 million, to the FGTS, based on the FGTS’s program to
finance companies in the sanitation, transport and real estate businesses. The debentures will mature in June 2025 and bear monthly interest
based on the TR plus 9.5% per year. The proceeds of this issuance were used to fund a portion of our capital expenditure program in the water
supply and sewage system. As of December 31, 2018, the outstanding debt of the twelfth issuance of debentures is R$294.7 million.
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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 million. 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. As of December 31, 2018, the outstanding debt of the fifteenth issuance of debentures is
R$359.4 million.
In January 2013, we carried out our seventeenth issuance of debentures of R$1.0 billion in three series, the first for R$424.7 million with
maturity date of January 2018 and with an interest rate of 0.75% per year plus the CDI rate, the second for R$395.2 million with a maturity of
January 2020 and with the interest rate of 4.50% per year plus IPCA variation and the third for R$180.1 million with a maturity date of
January 2023 and with an interest rate of 4.75% per year plus IPCA variation. The proceeds of this issuance were used to pay our financial
commitments for 2013. As of December 31, 2018, the outstanding debt of the seventeenth issuance of debentures is R$811.8 million.
In December 2015, we carried out our twentieth issuance of debentures of R$500 million, with a maturity date of December 2019 and
bearing interest, each semester with an interest rate of 3.80% per year plus the CDI rate. The proceeds of this issuance were used to strengthen
our cash position and refinance financial commitments which were set to mature in the first trimester of 2016. As of December 31, 2018, the
outstanding debt of twentieth issuance of debentures is R$248.3 million.
In June 2017, we carried out our twenty-first issuance of debentures in two series in the aggregate principal amount of R$500 million. The
first and second series will mature in June 2020 and 2022, respectively. The debentures of the first series (in the aggregate principal amount of
R$150 million) bear interest at a rate of CDI plus 0.60% per year. The debentures of the second series (in the aggregate principal amount of
R$350 million) bear interest at a rate of CDI plus 0.90% per year. The proceeds of this issuance shall be used to strengthen our cash position and
refinance financial commitments which mature in 2017. As of December 31, 2018, the outstanding debt of the twenty-first issuance of
debentures is R$499.6 million.
In February 2018, we carried our twenty-second issuance of debentures in three series in the aggregate principal amount of R$750 million.
The first, second and third series will mature in February 2021, 2023 and 2025 respectively. The debentures of the first series (in the aggregate
principal amount of R$100 million) bear interest at a rate of CDI plus 0.58% per year, with semi-annual interest payments. The second series (in
the aggregate principal amount R$400 million) bears interest at a rate of CDI plus 0.90% per year, with semi-annual interest payments. The third
series (in the aggregate principal amount R$250 million) bears interest at a rate of IPCA plus 6.00% per year, with annual interest payments. The
proceeds from this funding are intended to strengthen our cash position and refinance outstanding financial commitments in 2018. As of
December 31, 2018, the outstanding debt of the twenty-second issuance of debentures is R$756.0 million.
Part of our real‑denominated indebtedness is indexed to take into account the effects of inflation. This debt provides for inflation‑based
increases to the principal amount, determined by reference to the IPCA.
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, including our borrowings from the IADB, we are subject to financial
covenants, including limitations on our ability to incur debt. For example:
The financial covenants in our Loan No. 1212 from the IADB require as follows:
· our tariff revenues must be sufficient to cover the operational expenses of our system, including administrative, operating and
maintenance expenses, and depreciation;
· our tariff revenues must provide a return on the balance sheet value of our property, plant, and equipment of not less than 7%; and
· during project execution, the balance of our short-term borrowings must not exceed 8.5% of our total equity.
This contract contains an early maturity clause in the event of non-compliance on our part, of any obligation stipulated therein or in other
contracts with the bank relating to the financing of the above-mentioned projects.
The financial covenants in our AB Loan Agreements with the IADB (No. 1983AB) require as follows:
·
·
our debt service coverage ratio must be greater than or equal to 2.35:1.00; and
our ratio of Net Debt (defined as all borrowed money, including debentures and Eurobonds, less interest and financial charges that
have been provisioned for the current period) to Adjusted EBITDA (defined as our net income before net financial expenses, income
tax and social contribution tax, depreciation and amortization, non-operating income or expenses, and extraordinary items net of
income tax and social contribution, as set forth in our consolidated financial statements), each determined on a consolidated basis,
must be less than 3.65:1.00.
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This contract contains an early maturity clause. In the event of non-compliance with the terms of the contract, the BID can request the
anticipated payment of part or all of the loan. The contract also contains cross-default provisions whereby an event of non-compliance on our
part relating to any other of our debts with BID or third-parties (in this case, if over US$25 million) allows BID to request the early payment of
the loan.
The indenture relating to our 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 17 to our financial statements
included in this annual report.
Any significant devaluation of the real will affect the total portion of our debt denominated in foreign currencies when measured in reais.
As a result, the Adjusted Total or Net Debt in reais will be affected, with consequent impact on the ratio between Adjusted Total or Net Debt to
adjusted EBITDA.
As of December 31, 2018 and 2017, we had met all the requirements of these loans and financing agreements.
Local currency denominated indebtedness
With respect to our outstanding indebtedness denominated in reais, we are subject to financial covenants.
The covenant clauses apply to all of our indebtedness with BNDES, including the 10th, 14th, and 18th issuances of debentures held by
BNDES, which totaled R$1,444.8 million as of December 31, 2018. The only financing agreement which is exempt from the renegotiated
financing is contract No. 08.2.0169.1. See Note 17 (a) (ii) to our financial statements included in this annual report.
In summary, the BNDES financings specify two bands for the ratios of Adjusted Net Debt / Adjusted EBITDA, Adjusted EBITDA /
Adjusted Financial Expenses, and Other Onerous Debt / Adjusted EBITDA. The financings also specify a collateral mechanism by which we
assign a portion of our tariff payment receivables to BNDES in order to provide a partial guarantee of the amounts due under the financings.
Under this mechanism, each month we must ensure that a portion of the tariff payments which we receive are deposited on a daily basis into a
blocked collateral account, before being released to a regular movements account later in the day provided that BNDES has not notified the bank
that we are in default. If the ratio of Adjusted EBITDA / Adjusted Financial Expenses is equal to or higher than 3.50, the ratio of Adjusted Net
Debt / Adjusted EBITDA equal to or lower than 3.00, and the Other Onerous Debt / Adjusted EBITDA equal to or lower than 1.00, the amount
that must pass through this blocked collateral account is R$225.9 million per month. If one of the three ratios mentioned above are not met in
any two or more quarters, consecutive or not, within a twelve-month period, yet remain within the following band of ratios: Adjusted EBITDA /
Adjusted Financial Expenses lower than 3.50 but equal to or higher than 2.80, Adjusted Net Debt / Adjusted EBITDA equal to or lower than
3.80 but higher than 3.00, and Other Onerous Debt / Adjusted EBITDA equal to or lower than 1.30 but higher than 1.00, the amount that must
pass through the blocked collateral account is automatically increased by 20%.
The current covenant clauses are:
A. Maintenance of the following ratios, calculated quarterly and relative to amounts accumulated over the last 12 months at the time of
disclosure of reviewed quarterly financial statements or audited annual financial statements:
· Adjusted EBITDA / Adjusted Financial Expenses equal to or higher than 3.50;
· Adjusted Net Debt / Adjusted EBITDA equal to or lower than 3.00; and
· Other Onerous Debt / Adjusted EBITDA equal to or lower than 1.00 (where “Other Onerous Debt” is equal to the sum of (i) social
security liabilities and health care plans, (ii) installment payments of tax debt and (iii) installment payments of debt with electricity
providers).
B. If any one of the ratios specified in A. above are not met in any two or more quarters, consecutive or not, within a twelve-month period,
we shall be deemed to be in non-compliance with the first band ratios and must, as a result, automatically increase the amount passing
through the blocked collateral account by 20%, provided that the following second band ratios are met:
· Adjusted EBITDA / Adjusted Financial Expenses lower than 3.50 but equal to or higher than 2.80;
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· Adjusted Net Debt / Adjusted EBITDA equal to or lower than 3.80 but higher than 3.00; and
· Other Onerous Debt / Adjusted EBITDA equal to or lower than 1.30 but higher than 1.00.
C. If any one of the second band ratios specified in B. above are not met for any one quarter, or if we are required to but fails to ensure
that the increased monthly amount specified in B. above passes through the blocked collateral account, then we shall be deemed to be
in non-compliance with its ratio covenants, in which case BNDES may at its discretion:
· require us to provide additional financial guarantees within a deadline specified by BNDES, which may not be less than 30 days;
· suspend the release of funds; and/or
· declare the financings to be immediately due and payable.]
As of December 31, 2018, the amount that must pass through the blocked collateral account is R$242.9 million per month, not including the
financial guarantees for financing contract No. 08.2.0169.1.
The financial covenants applicable to financing contract No. 08.2.0169.1 are the following:
· Adjusted EBITDA / Adjusted Net Operational Revenue equal to or higher than 38%;
· Adjusted EBITDA / Adjusted Financial Expenses equal to or higher than 2.35; and
· Adjusted Net Debt / Adjusted EBITDA equal to or lower than 3.20.
BNDES will annually verify the maintenance of the ratios mentioned above for contract 08.2.0169.1 by reviewing our audited annual
financial statements, which must be presented to BNDES or published by April 30 of the following year to which the financial statements refer.
If we maintain all of the financial covenants for contract 08.2.0169.1, BNDES will reduce the interest charged on this loan from 2.15% to 1.82%
per annum. If the financial covenants are maintained, the interest rate is reduced as of June 16 of the same year in which the financial covenants
were verified until June 15 of the subsequent year.
The financing agreement established with BNDES in March 2010 is subject to a cross-default clause. For example, the early maturity of
any of our debts, the financial contracts and/or amounts of which may compromise the obligations stipulated in the indenture shall cause the
early maturity of such agreement.
Additionally, since 2018, we are subject to financial covenants under the new financing agreements executed with Caixa Econômica
Federal. These financial covenants require us to maintain the following financial indexes, calculated for the past twelve months on a quarterly
basis:
- Adjusted EBITDA / Adjusted Financial Expenses, equal to or greater than 2.80;
- Adjusted Net Debt / Adjusted EBITDA, equal to or lower than 3.80;
- Other Onerous Debt / Adjusted EBITDA equal to or lower than 1.30.
These agreements provide that disbursements may be suspended if any of these covenants are not being complied with. In the event of non-
compliance with the terms of these agreements, Caixa Econômica Federal may request the anticipated payment of the entire loan.
The agreements with Caixa Econômica Federal also contain a cross-default clause and an early maturity clause, in the event of non-
compliance with the terms of the contract, the Caixa Econômica Federal can request the anticipated payment of part or all of the loan. See Note
17 to our financial statements included in this annual report.
With respect to our outstanding debentures, the twelfth issuance requires us to maintain an Adjusted Current Ratio (current assets divided by
current liabilities, excluding from current liabilities the current portion of noncurrent debts incurred by us that is recorded in current liabilities)
higher than 1.0:1.0 and an EBITDA/Financial Expenses Ratio equal to or higher than 1.5:1.0. The twelfth debenture issuance has an early
maturity clause, which is triggered if our credit ratings are downgraded two levels below the “brAA-” Brazil National Scale rating assigned to
our debentures by the credit rating agency S&P at the time of their issuance. On July 11, 2018, our credit rating and the one assigned to the
twelfth debenture issuance by S&P were both “brAAA”. This issuance has a cross-default clause. See Note 17 to our financial statements
included in this annual report.
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The tenth, fourteenth and eighteenth issuances follow the covenants included in the BNDES loans, as described above, and contain a cross-
default clauses. See Note 17 to our financial statements included in this annual report.
The fifteenth, seventeenth, nineteenth and twentieth 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 17 to our financial statements.
The table below shows the more restrictive covenants ratios and our financial covenants ratios as of December 31, 2018.
The twenty-first and twenty-second issuances require us to maintain an EBITDA/paid financial expenses ratio equal to or higher than
1.5:1.0 and an adjusted net debt/EBITDA ratio equal to or lower than 3.50:1.0. These issuances have a cross-default clause. See Note 17 to our
financial statements.
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
Net debt/Adjusted EBITDA
Restrictive Ratios
Equal to or higher than 2.80:1.00
Equal to or lower than 3.80:1.00
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
Equal to or lower than 3.50:1.0
Ratio as of December 31, 2018
8.05
1.56
1.99
0.46
1.63
8.93
1.52
(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, 2018 and 2017, we complied with all the covenants of our loans and financing agreements.
Capital Requirements
We have, and expect to continue having, substantial liquidity and capital resource requirements. These requirements include debt‑service
obligations, capital expenditures to maintain, improve and expand our water and sewage systems, and dividend payments and other distributions
to our shareholders, including the State.
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 2018, we recorded R$4.2 billion to improve and
expand our water and sewage system and to protect our water sources in order to meet the growing demand for water and sewage services in the
state of São Paulo. We have budgeted investments in the amount of approximately R$18.7 billion from 2019 through 2023. See “Item 4.A.
History and Development of the Company—Capital Expenditure Program”.
Dividend Distributions
We are required by our bylaws to make dividend distributions, which can be made as payments of interest on shareholders’ equity to our
shareholders in an amount equal to or higher than 25% of the amounts available for distribution. In addition, our dividend policy, which was
approved at the annual shareholders’ meeting held on April 27, 2018, establishes that this percentage shall be maintained until the
universalization of basic sanitation services in the areas where we operate. We declared dividends of R$792.2 million, R$703.9 million and
R$823.5 million in 2018, 2017 and 2016 and, respectively. See “Item 7.B. Related Party Transactions—Dividends”.
C. Research and Development, Patents and Licenses, Etc.
Research and innovation
Our strategic innovation process goes beyond the development of new technologies, products and services. It involves the creation of new
business models, new ways of meeting the needs of consumers, new organizational processes, new ways of competing and cooperating in the
business environment and improvements to service delivery, while at the same time promoting protection of the environment and public health.
In 2018, we allocated R$10.6 million to Research, Development and Innovation, or RD&I, projects. These resources are a differential in our
results and indicate our capacity for innovation and pioneering, which can bring fiscal, tariff and financial advantages. We also set up a
Corporate “Research, Technological Development and Innovation” Program, which allows us to differentiate the financial resources spent
specifically for this purpose within our budget structure.
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In line with business planning, the structuring of RD&I actions is based on the concept of a circular economy, that is, based on the
intelligence of nature, the circular process opposes the traditional linear production process. As part of this concept, residues are inputs for the
production of new products and new cycles. We have highlighted below certain RD&I projects that use the concept of a circular economy as
part of the processes for the treatment of sewage.
The technical cooperation agreement with the German Fraunhofer Institute resulted in the inauguration of the Biogas Benefit System for
Vehicular Use at the sewage treatment plant in Franca in April 2018. This project is the only one in Latin America that produces biomethane
from sewage treatment. The plant treats an average of 500 liters per second of sewage and produces around 2,500 m³ of biogas per day, enough
to replace 1,500 liters of common gas daily. It currently supplies part of the unit’s fleet of vehicles. Biomethane was also tested in passenger
buses at the “Sweden-Brazil Innovation Week” promoted by the Swedish Embassy and Business Sweden, as well as the promotion of autonomy
and performance evaluation in a luxury vehicle, originally manufactured to use natural gas and gasoline.
At the same plant, we developed and are operating a sludge dryer based on solar radiation, financed by the Funding Authority for Studies
and Projects (Financiadora de Estudos e Projetos, or FINEP).
At the Barueri sewage treatment plant, we implemented a plasma gasification system for the processing of sludge generated. It is current in
the adjustment phase to ensure it fully operates in a continuous and safe way. At the end of the process, the system generates inert residue with
drastic reduction in its volume. The project was funded by FINEP.
To improve the quality of the water produced for industrial reuse, we installed an innovative ultraviolet disinfection system at the Jesus
Netto wastewater reuse station, in the city of São Paulo.
Shortage of water is an increasingly imminent problem in large urban centers. Accordingly, an increasingly conscious use of water and the
search for alternative ways of reusing water are essential. With regard to projects that use the concept of the circular economy in the processes of
water treatment, we have undertaken tests under a technical cooperation agreement with Magni, the representative of the Danish company
Liqtech, for the use of ceramic membranes for the ultrafiltration of silicon carbide for the recovery of waste water from water treatment plants.
In partnership with the São Paulo State University Júlio de Mesquita Filho - UNESP, we are evaluating the technical and environmental
feasibility of the use of sludge from water treatment plants as raw material for the base and sub-base of pavements, adding value to a by-product.
The investment in optimization solutions and the implementation of innovative processes in water treatment and distribution and sewage
collection and treatment seek to stimulate the development of fast and efficient solutions, consolidating competitive advantages in the market
and improving its economic-financial sustainability.
We also developed biofiltration units for odor control to be installed in the sewage and pumping stations in Pinheiros and Pomar, in the city
of São Paulo. This is an example of a project fostered by studies developed internally by us. This project is also funded by FINEP.
We are also developing an engineering project for a vacuum collection and evacuation system for the depletion of a small area located in the
municipality of Itanhaém. With the future implementation of this pilot system, it is expected that we will obtain parameters for the design,
operation and maintenance of this type of technology and that it will be a technical alternative for exhaustion in areas lacking the necessary
infrastructure.
From our partnership with the São Paulo Research Foundation (Fundação de Amparo à Pesquisa do Estado de São Paulo –FAPESP)
financial resources are invested equally to subsidize and support the development of basic and applied research projects under the Program for
Support of Research in Partnership for Technological Innovation for research projects in academic or research institutions, whose themes
originated from the demands pointed out by the operational areas. As an example, we highlight: the use of autonomous microlaboratories for
real-time phosphorus monitoring, development of an expert system for detection and diagnosis of leaks in urban water distribution networks, the
development of an electronic tongue for taste and odor of water, alternatives for application of water treatment plant sludge in soils and landfills,
granular aerobic sludge, among others. These projects are in progress, with preliminary results published.
In partnership with FINEP, the “Technological Innovations Plan of Sabesp for Sanitation” was financed under the FINEP Inova Brasil
program. The plan consists of four projects, totaling approximately R$60 million. These projects include: a system for the production of reuse
water for urban and industrial uses; biofiltration units for odor control to be installed in sewage elevated stations; sludge dryer based on solar
radiation for the Franca sewage treatment plant; and a plasma gasification system to process the sludge generated at the Barueri sewage
treatment system.
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Open Innovation
We are investing in the development and implementation of actions as part of Open Innovation, integrating ideas, thoughts, processes and
research from players from various internal and external segments of our company, aiming to improve its processes, products and services. This
project includes: Pitch Sabesp; partnerships among sanitation companies, participation in collaborative networks, design of the Innovation Lab
and Coworking, among others.
Pitch Sabesp was a public competition in which 27 challenges were proposed in five different areas. The process was open to the
participation of individuals and companies, including startups resident in Brazil and abroad. The selected projects will soon be in the testing
phase for technical, economic-financial and business evaluation.
Collaborative Networks for Innovation, in which we participate, provide integration with the different spheres of government, startups,
companies, universities, development institutions, etc. All players seek to add knowledge and experience, to build joint solutions for the
challenge of implementing open innovation in the public sector. The participation of the Urban Living Labs working group (urban sustainability
laboratory - ULL) associated with an international consortium, the Belmont Forum, supported by the nexus among water use, food and power
generation, or FEW, and the partnership with Ino3W Ltd. (Ino3W community water system) with the purpose of sharing the information on
innovative technologies among large sanitation companies around the world.
In 2018, we entered into the second agreement with the São Paulo Research Foundation (Fundação de Amparo à Pesquisa do Estado de São
Paulo – FAPESP) to focus on supporting the execution of scientific and/or technological research in micro, small and medium enterprises in the
State of São Paulo.
We publish the DAE Magazine, a quarterly engineering journal that in 2018 totaled more than 200 issues since its first edition. This journal
includes a specialized team of opinion makers and is currently classified in the Qualis/CAPES system under the category “B2”. Through the
publication of technical and scientific articles on basic and environmental sanitation, we aim to encourage and disseminate improvements in
processes, innovations and technological advances.
D. Trend Information
Several factors may affect our future results of operations, liquidity and capital resources, including:
·
the interests of our controlling shareholder;
· our potential corporate reorganization, as approved by State Law No. 16,525 on September 15, 2017 or any other type of reorganization that
might be approved by the government that may include change in control;
·
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 renewal of our concession agreements;
the impact on our business of lower water consumption practices adopted by our customers during the water crisis, which we do not know if
they will return to their prior standards despite the discontinuation of the measure we adopted to serve the São Paulo metropolitan region
during the water crisis;
investments made, by some sectors, during the water crisis in search of alternative sources of supply, such as the drilling of artesian wells, the
reuse of water and the use of rainwater;
the May 2017 renewal of the concession that regulates 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, based on the volume of water available in the reservoirs divided into five tranches:
(i) if the volume of water available is higher than 60% of the reservoirs’ capacity, we can withdraw up to 33m3/s; (ii) if the volume of water
is between 40% and 60% of the reservoirs’ capacity, we can withdraw up to 31m3/s; (iii) if the volume of water is between 30% and 40%
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of the reservoirs’ capacity, we can withdraw up to 27m3/s; (iv) if the volume of water is between 20% and 30% of the reservoirs’ capacity,
we can withdraw up to 23m3/s; and (v) if the volume of water available is lower than 20% of the reservoirs’ capacity, we can withdraw up
to 15.5m3/s;
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·
any measures that we may be required to take to ensure the provision of water to our customers;
· our ability to access financing with favorable terms in the future;
·
·
·
the potential impacts of the Provisional Measure No. 868/2018 on our business if it is converted into law;
the outcome of any pending or future legal proceedings; 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 Arrangements
We had no off‑balance sheet arrangements as of December 31, 2018.
F. Tabular Disclosure of Contractual Obligations
Our debt obligations and other contractual obligations as of December 31, 2018 were as follows:
Loans and financing
Estimated interest payments(1)
Accounts payable to suppliers and
contractors
Services payable
Program contract commitments
Purchase obligations(2)
Total
Less than 1 year
1‑3 years
3‑5 years
(in millions of reais)
More than 5 years
Total
2,103.6
477.7
466.0
454.0
244.5
4,197.3
7,943.1
3,621.8
878.8
-
-
91.3
3,014.8
7,606.7
2,088.0
570.2
-
-
62.0
1,291.3
4,011.5
5,339.4
1,024.8
-
-
14.4
6,844.6
13,223.2
13,152.8
2,951.5
466.0
454.0
412.2
15,348.0
32,784.5
(1) Estimated interest payments on loans and financing were determined considering the interest rates as of December 31, 2018. 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.
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,
2018, see Note 17 to our financial statements as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016,
included elsewhere in this annual report.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Under our bylaws and Brazilian Corporate Law, we are managed by our board of directors (Conselho de Administração), which currently
consists of nine directors, and a board of executive officers (Diretoria), which currently consists of six executive officers.
As our controlling shareholder, the State has the ability to 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”.
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Board of Directors
Our bylaws provide for a minimum of seven and a maximum of eleven directors. The members of our board of directors are elected at a general
shareholders’ meeting to serve a two-year term. Such terms may be renewed three consecutive times. Pursuant to our bylaws, 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, or the “Brazilian Corporate Law”, at least one member of the board of directors of mixed
capital companies, such as us, must be appointed by the minority shareholders. Finally, according to the Novo Mercado rules and Federal Law
No. 13,303/16, at least two, or 25.0% (whichever is greater), of the board of directors must be comprised of independent members.
All the current members of our board of directors were elected at the annual shareholders’ meeting held on April 27, 2018, except for
Benedito Pinto Ferreira Braga Junior who joined our board of directors on January 10, 2019 when he was appointed our Chief Executive Officer,
and Monica Ferreira do Amaral Porto who joined our board of directors on March 12, 2019. The tenure of all the directors will end upon the
election of members for the new term at the annual shareholders’ meeting in 2020. Currently, we have six members considered independent
under the Novo Mercado rules and Federal Law No. 13,303/16.
Our board of directors ordinarily meets once a month or, when necessary for the interests of our company, when called by a majority of the
directors or the chairman. Its responsibilities include the establishment of policy and general orientation of our business, and the appointment
and supervision of our executive officers.
The following are the names, ages, positions, dates of election and brief biographical descriptions of the current members of our board of
directors:
Director
Mario Engler Pinto Junior
Benedito Pinto Ferreira Braga Junior
Monica Ferreira do Amaral Porto
Reinaldo Guerreiro
Francisco Vidal Luna
Luís Eduardo Alves de Assis(2)
Francisco Luiz Sibut Gomide
Lucas Navarro Prado
Ernesto Rubens Gelbcke
Age
62
71
62
66
72
62
73
38
75
Position
Chairman
Member
Member
Independent Member(1)
Independent Member(1)
Independent Member(1)
Independent Member(1)
Independent Member(1)
Independent Member(1)
Date Elected
April 27, 2018
January 10, 2019
March 12, 2019
April 27, 2018
April 27, 2018
April 27, 2018
April 27, 2018
April 27, 2018
April 27, 2018
(1) These members comply with the independence requirements established by Federal Law No. 13,303/16 and the Novo Mercado rules.
(2) Member indicated by the minority shareholders.
Mario Engler Pinto Junior. Mr. Pinto has been the Chairman of our board of directors since April 2018. Mr. Pinto holds a law degree and
PhD in Commercial Law from the University of São Paulo (Universidade de São Paulo – USP). He is the CEO and a member of the board of
directors of the São Paulo Partnership Company (Companhia Paulista de Parcerias - CPP), a member of the State Capital Protection Board
(Conselho de Defesa dos Capitais do Estado - CODEC), chief advisor on public and corporate finance to the Treasury Department, an arbitrator
for the B3 Arbitration Chamber, a member of the Advisory Chamber for the Governance Market for State-Owned Companies (Mercado de
Governança de Estatais) and a member of the Fiscal Council for the Luso-Brazilian Bank (Banco Luso-Brasileiro). He is also a professor at the
bachelor’s and master’s levels and for a specialization course at the Getúlio Vargas Foundation (Fundação Getúlio Vargas – FGV), where he
also conducts legal research regarding contractual and corporate arrangements in the public and private sector and serves as coordinator of the
professional master’s degree program. He has been an active lawyer since 1979 and served as a São Paulo State Attorney from 1984 to 2014. He
was also a member of the Energy Council for the Regulatory Agency of Sanitation and Energy for the State of São Paulo (Conselho de
Orientação de Energia da Agência Reguladora de Saneamento e Energia do Estado de São Paulo) from 2008 to 2010, a member of our board of
directors from 2006 to 2011, a member of our audit committee from 2006 to 2009, a member of the board of directors for the Brazilian Institutue
of Corporate Governance (Instituto Brasileiro de Governança Corporativa – IBGC) from 2004 to 2006, Deputy Attorney General for the State
of São Paulo from 2000 to 2003 and a member of the board of directors for the airline Viação Aérea São Paulo from 2000 to 2001.
Benedito Pinto Ferreira Braga Junior. Mr. Braga has been our Chief Executive Officer and a member of our board of directors since May
2018. He has a degree in civil engineering from the School of Engineering of São Carlos University of São Paulo (Escola de Engenharia de São
Carlos da Universidade de São Paulo – USP), a master's degree in Hydrology from Stanford University and a master's degree in Hydraulics
from USP, and a PhD in Water Resources from Stanford University. He was Secretary of Sanitation and Water Resources of the State of São
Paulo (Secretário de Saneamento e Recursos Hídricos do Estado de São Paulo) from January 2015 to May 2018 and was the Chairman of
Sabesp's Board of Directors from January 2015 to April 2018. He was a professor at the Polytechnic School of USP (Escola Politécnica da
USP), from 1980 until December 2018, and has been in a position of Sitting Professor since 1998. He was Co-Chairman of the International
Organizing Committee of the World Water Forum in Brasilia (2018), in Korea (2015) and Chairman of the Committee in France (2012). He is an
Honorary Chairman of the World Water Council – WWC, of which he was the Chairman from 2012 to 2018. Mr. Braga was also the Chairman
of the Intergovernmental Council of UNESCO’s International Hydrological Program from 2008 to 2009, Chairman of the International Water
Resources Association – IWRA, from 1998 to 2000, as well as, Executive Officer of National Water Agency (Agência Nacional de Águas, or
ANA) from 2001 to 2009.
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Monica Ferreira do Amaral Porto. Mrs. Porto has been a member of our board of directors since March 2019. She has a degree in Civil
Engineering from the Polytechnic School of the University of São Paulo (Escola Politécnica da Universidade de São Paulo – USP) and master’s
and PhD degrees in Hydraulic Engineering from the same institution. She has had a faculty position at the Department of Environmental and
Hydraulic Engineering of the Polytechnic School of USP (Departamento de Engenharia Hidráulica e Ambiental) since 1984 and has been a Full
Professor since 2005. She has also been a Head of Department at this institution since June 2018. She was Deputy Secretary of the Department
of Sanitation and Water Resources of the State of São Paulo (Secretaria de Saneamento e Recursos Hídricos do Estado de São Paulo – SSRH)
between January 2015 and May 2018. She is the Chairperson of the Committee for the Integration of the Paraíba do Sul River Basin (Comitê de
Integração da Bacia do Rio Paraíba do Sul), representing the SSRH. She was the Chief Executive Officer of the Hydraulic Technology Center
Foundation (Fundação Centro Tecnológico da Hidráulica) between 2008 and 2014. She has been a member of the Management Board of the
Department of Infrastructure and Construction Works of the São Paulo Municipal Government (Conselho de Gestão da Secretaria de
Infraestrutura e Obras da Prefeitura de Municipal de São Paulo) since January 2017. She was an alternate member of the Board of Governors
of the World Water Council, representing USP. From 1998 to 2012, she participated in several international water resource entities: she is a
member of the Advisory Committee for the World Water Quality Assessment, the United Nations Environment Program and the Stockholm
Water Prize Committee, among others. She was the Chairperson of the Brazilian Association of Water Resources (Associação Brasileira de
Recursos Hídricos) from 1996 to 1997.
Reinaldo Guerreiro. Mr. Guerreiro has been an independent member of our board of directors since January 2007 and a member of our
Audit Committee from January 2007 to May 2017. 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 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.
Francisco Vidal Luna. Mr. Luna has been an independent member of our board of directors since April 2013 and a member of our Audit
Committee from April 2013 to September 2016. 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. In the private sector, he was the Executive Chairman of Banco Inter American Express S.A. He
is currently a member of the Board of Directors and Chairman of the Audit Committee of Desenvolve SP, member of the Board of Directors and
Audit Committee of Gafisa S.A and member of the Board of Curators of FIPE – Fundação Instituto de Pesquisas Econômicas, a member of the
Board of Trustees of the Fundação Faculdade de Medicina - FFM and a member of the Board of Trustees of FIPE - Fundação Instituto de
Pesquisas Econômicas.
Luís Eduardo Alves de Assis. Mr. Assis has been an independent member of our Board of Directors since April 2014 and a member of our
Audit Committee since September 30, 2016. 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 Executive Officer at HSBC
Asset Management, 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 as vice-president of the Fernand
Braudel Institute of World Economics council. He also writes an opinion column for the newspaper O Estado de São Paulo.
Francisco Luiz Sibut Gomide Mr. Gomide has been an independent member of our board of directors since April 2017. He was a member
of our Audit Committee from May 2017 to August 2017. He holds Bachelor’s degrees in Civil Engineering and in Economic Sciences from the
Federal University of Paraná (Universidade Federal do Paraná) and a PhD in Hydrology and Water Resources from the Colorado State
University. He was the Minister of Mines and Energy in 2002, CEO of ESCELSA – Espírito Santo Centrais Elétricas S.A. between 1995 and
2001, the CEO of the Energy Company of Mato Grosso do Sul between 1997 and 2001, the General Brazilian Diretor of Itaipu Binacional
between 1993 and 1995, the CEO of the Energy Company of Paraná (Companhia Paranaense de Energia – Copel) between 1986 and 1993 and
the Chief Financial Officer of the same company from 1983 to 1985. Mr. Gomide was also a professor at the Federal University of Paraná
(Universidade Federal do Paraná) from 1970 to 1995. Between 1969 and 1982, he was a hydraulic engineer and hydrologist at the Energy
Company of Paraná.
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Lucas Navarro Prado. Mr. Prado has been an independent member of our board of directors and a member of our Audit Committee since
August 2017. He holds a law degree from the University of São Paulo (Universidade de São Paulo - USP) and a master’s degree in Corporate
Finance and Investment Banking from the University of São Paulo’s Business Institute Foundation (FIA-USP). From 2005 to 2007, he served as
the advisor to the public-private partnership division of the Planning, Budget and Management Ministry of Brazil. Mr. Prado served as an
advisor to SABESP’s CEO between 2007 and 2009 and as the head of SABESP’s legal department between 2009 and 2011.
Ernesto Rubens Gelbcke. Mr. Gelbcke has been an independent member of our board of directors since April 2018. Mr. Gelbcke has a
Bachelor’s degree and a Master’s degree in accounting sciences, both from the School of Economics, Administration and Accounting of the
University of São Paulo (Faculdade de Economia, Administração e Contabilidade da Universidade de São Paulo – FEA USP). He worked at
Arthur Andersen (various positions, including São Paulo audit coordinator and member of the Brazil technical policies committee) from 1965 to
1976, Directa Auditores (founder and CEO) from 1977 to 2014, Grant Thornton Brasil (chairman of the board of directors) from 2014 to 2015,
Gelbcke Consultores (founder and consultant) since 2001, and GHG Contadores (founder) since 2017. He was one of the twelve elected
members of the Accounting Pronouncements Committee, representing the Foundation Institute of Accounting, Actuary and Financial Research
(Fundação Instituto de Pesquisas Contábeis, Atuariais e Financeiras – FIPECAFI) from its creation in 2006 until 2016. He was also a professor
at FEA USP from 1971 to 2003, professor and coordinator of the audit specialization course at the Central Bank with the Foundation Institute
for Accounting, Actuarial and Financial Research (Fundação Instituto de Pesquisas Contábeis, Atuariais e Financeiras – FIPECAFI) from 1978
to 1980, among others. He has authored and co-authored various articles, technical opinions and books, such as “Accounting Manual for Stock
Companies” (Manual de Contabilidade das Sociedades por Ações), “Manual for Corporate Accounting” (Manual de Contabilidade Societária),
and “Intermediate Accounting” (Contabilidade Intermediária). He was a member of the fiscal committee and of the audit committee of AMBEV
S.A. from 2007 to 2009, a member of the Board of Directors of the Brazilian Institute of Independent Accountants (Instituto dos Auditores
Independentes do Brasil – IBRACON) from 2015 to 2017, and a member of the audit committee of AES Eletropaulo in 2017, among others.
Since 2017, he has been a member of the fiscal council of FIPECAFI. This term expires in 2019.
Board of Executive Officers
Our board of executive officers is composed of six executive officers appointed by our board of directors for a two-year term. Such terms
may be renewed three consecutive times. Our executive officers are responsible for all matters concerning our day‑to‑day management and
operations. Members of our board of executive officers have individual responsibilities established by our board of directors and our bylaws.
The following are the names, ages, positions, dates of election and brief biographical descriptions of our board of executive officers:
Executive Officer
Benedito Pinto Ferreira Braga Junior
Adriano Candido Stringhini
Rui de Britto Álvares Affonso
Paulo Massato Yoshimoto
Ricardo Daruiz Borsari
Edison Airoldi
Age
71
43
61
66
63
62
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 10, 2019
January 10, 2019
June 22, 2017
June 22, 2017
January 10, 2019
June 22, 2017
Benedito Pinto Ferreira Braga Junior. See above, “—Board of Directors”.
Adriano Candido Stringhin. Mr. Stringhini was Sabesp's Head of Communication from April 2009 to January 2019 and Head of Legal
Affairs from 2007 to 2009. He has a master's degree in Law from the Law School of University of São Paulo (Faculdade de Direito da
Universidade de São Paulo – USP). He has a degree in Law from USP and he is specialist in Organizational Strategic Communication and
Public Relations from School of Communications and Arts of USP (Escola de Comunicações e Artes – ECA/USP). He was the Head Lawyer of
Funding Authority for Studies and Projects (Financiadora de Estudos e Projetos -Finep-SP) of the Ministry of Science and Technology
(Ministério da Ciência e Tecnologia) from 2002 to 2007. He was advisor of the Chief Executive Officer of the Administrative Council for
Economic Defense (Conselho Administrativo de Defesa Econômica – CADE), between 1999 and 2001. He was a professor in undergraduate and
graduate courses of several institutions, among them: Fundação Getúlio Vargas - FGV, Mackenzie University and School of Law of the Lawyers
of São Paulo Institute (Escola Paulista de Advocacia do Instituto dos Advogados de São Paulo – IASP).
Rui de Britto Álvares Affonso. Mr. Affonso has been our Chief Financial Officer and Investor Relations Officer since July 2003.
Mr. Affonso holds a PhD 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 directors 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. In 2017 Mr. Affonso won the Professional Award of the Year of 2016 in Finance
by ANEFAC/SERASA EXPERIAN
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- National Association of Executives of Finance, Administration and Accounting.
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.
Ricardo Daruiz Borsari. Mr. Borsari has a degree in Civil Engineering and a master's degree in Civil Engineering from the Polytechnic
School of University of São Paulo (Escola Politécnica da Universidade de São Paulo – USP). He was Secretary of Sanitation and Water
Resources of the State of São Paulo from May to December 2018. He worked in several positions at the Department of Water and Electric
Energy (Departamento de Águas e Energia Elétrica – DAEE), among them: Engineer since 1978, Executive Officer from January 2015 to May
2018 and from June 2001 to February 2007, Executive Officer of Engineering and Construction Works from August 2010 to October 2011,
Executive Officer of the Technology Center of Hydraulic and Water Resources from July 2008 to October 2011. He was Executive Secretary of
the Alto Tietê River Basin Committee from 2001 to 2005 and from 2017 to 2018 and Chief Executive Officer and member of the Board of
Directors of Metropolitan Water and Energy Company (Empresa Metropolitana de Águas e Energia – EMAE), from 2011 to 2015. He was a
member of the Board of Directors of Companhia Energética de São Paulo - CESP between April 2015 and May 2018. Mr. Borsari was a
professor at several institutions, including: School of Engineering of Mackenzie University from 1979 to 1980, School of Engineering of
Fundação Armando Álvares Penteado – FAAP, from 1982 to 1986, Polytechnic School of USP, from 1989 to 2004, and Pontificial University
Catholic of São Paulo – PUCSP, from 1997 to 2001.
Edison Airoldi. Mr. Airoldi has been our Technology, Enterprises and Environment Officer since June 2015. He holds a degree in
Mechanical Engineering from the Polytechnic School at the University of São Paulo (Universidade de São Paulo - USP) and a Master’s degree
in Business Administration from the Foundation Institute of Administration (Fundação Instituto de Administração - FIA). Mr. Airoldi joined us
in 1981 and has worked with us as the Head of the Northern Region business unit, the Water Production business unit and the Technical and
Integrated Planning Unit.
B. Compensation
Pursuant to Brazilian Corporate Law, our shareholders are responsible for establishing the aggregate amount of compensation we pay to the
members of our board of directors, members of our fiscal committee and our executive officers. According to Instruction No. 480 issued by
CVM, we have to periodically disclose certain information on the aggregate compensation such as averages and fringe benefits.
In 2018, 2017 and 2016, the aggregate compensation, including benefits in kind granted that we paid to members of our board of directors,
board of executive officers and fiscal committee for services in all capacities was R$4.6 million, R$4.4 million and R$4.4 million, respectively.
At our annual shareholders’ meeting held on April 27, 2018, our shareholders approved R$4.7 million in aggregate compensation payable to
members of our board of directors, members of our fiscal committee and our executive officers in 2018.
The table below sets forth the breakdown of the total compensation received by our directors and members of our board of executive
officers and fiscal committee and other data related to their compensation for the periods indicated:
2018
Year ended December 31,
2017
(in thousands of R$, except where indicated otherwise)
2016
Total compensation per administrative body
Board of directors
Board of executive officers
Fiscal committee
Total amount of compensation
Number of members (in individuals)
Board of directors
Board of executive officers
Fiscal committee
Fixed annual compensation
Salary
Board of directors
Board of executive officers
Fiscal committee
Direct and indirect benefits
Board of directors
Board of executive officers
Fiscal committee
Variable compensation
Bonus
Board of directors
Board of executive officers
Fiscal committee
Maximum amount of compensation
Board of directors
Board of executive officers
Fiscal committee
Minimum amount of compensation
Board of directors
Board of executive officers
Fiscal committee
Average amount of compensation
Board of directors
1,106
3,228
280
4,614
10
6
5
851
1,849
215
255
841
65
-
538
-
162
677
66
99
498
60
115
848
3,208
313
4,369
7
6
5
659
1,856
247
189
796
66
-
556
-
156
691
62
96
439
62
121
923
3,184
299
4,406
8
6
5
710
1,877
243
213
812
56
-
494
-
157
618
61
96
420
51
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516
61
535
62
531
61
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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$36.2 million, R$48.7 million and R$24.3 million in 2018, 2017and 2016, 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, 2018, our obligation under
these both plans (G0 and G1) totaled R$2,970.0 million. For further information on our pension plans see Note 21 to our financial
statements included in this annual report.
Beginning in 2008, payments under the profit‑sharing plan were based both on general goals that evaluate us as a whole and on other goals
that evaluate the performance our different business units. Payments are proportionally reduced annually if the goals are not completely
achieved.
We recorded profit‑sharing expenses of R$110.5 million, R$94.4 million and R$83.7 million in 2018, 2017 and 2016, respectively. We do
not have a stock‑option plan for our employees.
C. Board Practices
The members of our board of directors are elected at an annual shareholders’ meeting to serve a two‑year term. Such term may be renewed
three consecutive times. Our next annual shareholders’ meeting will be held on April 29, 2019. 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 two‑year term. Such term
may be renewed three consecutive times. Although our bylaws provide that the meetings of our board of executive officers shall be held at least
twice a month, meetings are held on a weekly basis. See “Item 6.A. Directors and Senior Management—Board of Executive Officers”.
None of our directors and/or executive officers is a party to an employment contract providing for benefits upon termination of
employment. Those directors and officers who are also our employees will remain as our employees after their tenure as directors and/or
officers, in this case, maintaining all benefits granted to our employees.
Fiscal Committee (Conselho Fiscal)
Our fiscal committee, which is established on a permanent basis, consists of a minimum of three and a maximum of five members and
generally meets once a month. Our fiscal committee currently consists of four members and four alternates. All of the current members of our
fiscal committee were elected in the shareholders’ meeting held on April 27, 2018, except Marcio Cury Abumussi, who joined our fiscal
committee on October 30, 2018. Their tenure will end on April 29, 2019. 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 Members
Humberto Macedo Puccinelli
Pablo Andres Fernandez Uhart
Rui Brasil Assis
Alexandre Pedercini Issa(1)
Marcio Cury Abumussi
Gustavo Carvalho Tapia Lira
César Aparecido Martins Louvison
Leticia Pedercini Issa Maia(1)
(1)
Members indicated by the minority shareholders
Age
61
45
65
37
50
40
58
38
Position
Member
Member
Member
Member
Alternate
Alternate
Alternate
Alternate
-94-
Date Elected
April 27, 2018
April 27, 2018
April 27, 2018
April 27, 2018
October 30, 2018
April 27, 2018
April 27, 2018
April 27, 2018
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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
Economy and Planning Secretariat State of São Paulo (Secretaria de Planejamento e Gestão do Estado de São Paulo) 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 Economy and Planning
Secretariat State of São Paulo as Assistant Secretary in 2003. He has been the Technical Assistant of the State Treasury since January 2004.
Pablo Andres Fernandez Uhart. Mr. Uhart has been a member of our fiscal committee since April 2017. He holds a Bachelor’s degree in
Public Administration from the Getulio Vargas Foundation (Fundação Getúlio Vargas – FGV - SP) and an MBA from the Pontifical Catholic
University of Rio de Janeiro (Pontifícia Universidade Católica do Rio de Janeiro – PUC - RJ). He also was an advisor to the São Paulo State
Secretary (Secretaria da Fazenda do Estado de São Paulo – FESP) and has more than twenty years of experience in finance, having held the
positions of Corporate Controller, Regional Head (Latin America) of Treasury Center and Corporate Finance, and Advisor & Risk Manager at
Nestlé from 1995 to 2013.
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 and Sanitation Secretariat from 2007 to 2010 and the Secretariat for Infrastructure and Environment
since 2011 (former Secretariat for Sanitation and Water Resources). Mr. Assis has been a member of the fiscal committee of the Foundation
Hydraulic Technology Center (Fundação Centro Tecnológico de Hidráulica) since 2014. He has also served as a member of the deliberative
council of the Foundation Agency of Alto Tietê Water Basin (Fundação Agência de Bacia Hidrográfica do Alto Tietê) from 2006 to 2014 and
since 2017. Mr. Assis was a member of the fiscal committee of EMAE from 2007 to 2011, the 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 Environmental Company of São
Paulo State (Companhia Ambiental do Estado de São Paulo -CETESB) from 1999 to 2007.
Alexandre Pedercini Issa. Mr. Padercini has been a member of our fiscal committee since April 2017. He holds a Bachelor’s degree in
Administration from Milton Campos College (Faculdade Milton Campos) and an MBA in Strategic Business Management from the Foundation
for Education and Culture of Minas Gerais (Fundação Mineira de Educação e Cultura – FUMEC). He was a member of the Board of Directors
of the Sanitation Company of Minas Gerais State (Companhia de Saneamento de Minas Gerais – COPASA) from 2011 to 2016, a member of the
fiscal committee of the Telecommunications provider that is part of the Minas Gerais Energy Company Group (Companhia Energética de Minas
Gerais – CEMIG) between 2013 and 2015. Additionally, he is also the founder and administrator of the investment club Letalex.
Marcio Cury Abumussi. Mr. Abumussi holds a degree in Mechanical Engineering from Universidade Paulista and a post-graduate degree in
Public Management – Management, Accounting and Finance from Fundação Instituto de Pesquisas Contábeis Atuariais – FIPECAFI. Since
2017, Mr. Abumussi is the Head of the Technical Department of the Secretariat of Finance of the State of São Paulo, in which he has held
several roles, among which: technical assistant from 1997 to 2001, Head of the technical division from 2001 to 2008, Head of the technical
department from 2009 to 2016 and general administrative coordinator in 2017. He was a sitting member of the Fiscal Council of Companhia
Paulista de Securitização – CPSEC from 2010 to 2017 and alternate member of the Fiscal Council of Empresa Paulista de Planejamento
Metropolitano S/A – Emplasa from 2010 to 2011.
Gustavo Carvalho Tapia Lira. Mr. Tapia has been a member of our fiscal committee since April 2018. He holds a Bachelor’s degree in
Administration and a Master’s degree in Political Economics, both from the Pontificial University of São Paulo (Pontifícia Universidade
Católica de São Paulo – PUC-SP). Since 2013, he has been the expert advisor of the Management and Planning Secretariat’s Office (Gabinete
da Secretaria de Planejamento e Gestão), where he also served as an economic advisor public executive from 2009 to 2013. He also worked as
an examiner for the Fundação Procon-SP, from 2005 to 2008. He was a member of the fiscal committee of the Paulista Company of Events and
Tourism (Companhia Paulista de Eventos e Turismo – CPETUR) and is currently a member of the fiscal committee of the São Paulo Retirement
Plan (São Paulo Previdência – SPPREV).
César Aparecido Martins Louvison. Mr. Louvison has been a member of our fiscal committee since April 2017. He holds a Bachelor’s
degree in Law from the University of Marilia (Universidade de Marília) and was a professor in several universities and secondary schools
(1981-2006). He is currently the Technical Director III of Hydrological Resources Department and was previously a Public Executive at the
Secretariat for Sanitation and Water Resources (Secretaria de Saneamento e Recursos Hídricos do Estado de São Paulo) between 2013 and
2017. He has also been an administrative director of the Barueri Campus of the Pontificial Catholic University of São Paulo (Pontifícia
Universidade Católica de São Paulo – PUC - SP) between 2010 and 2011, an Administrative Officer of the Office for the Development of
Sanitary Education and Mass Immunization (Fomento de Educação Sanitária e Imunização em Massa – FESIMA) between 2000 and 2007,
Planning and Control Technical Assistant II of the Justice and Citizenship Defense Secretariat’s Office of the State of São Paulo (Secretaria de
Estado da Justiça e Defesa da Cidadania de São Paulo) between 1998 and 1999, and director of the Brazilian detention center for the youth
(Fundação do Bem-Estar do Menor – FEBEM-SP) from 1996 to 1998.
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Leticia Pedercini Issa Maia. Mrs. Pedercini has been a member of our fiscal committee since April 2017. She holds a Bachelor’s degree in
Administration from the Administrative School of Minas Gerais (FEAD Minas - Centro de Gestão Empreendedora). She is the founder and
manager of Hydrocenter Válvulas Tubos e Conexões Ltda since 2004 and the Chief Financial Officer of GPI Distribuidora since 2012. She has
also been the Vice-President of the Fiscal Council of the Sanitation Company of Minas Gerais State (Companhia de Saneamento de Minas
Gerais – COPASA) from 2015 to 2016, the President of the Fiscal Council of the Sanitation Company of Minas Gerais State (Companhia de
Saneamento de Minas Gerais – COPASA) from 2014 to 2015 and a member of the Fiscal Committee of the Sanitation Company of Minas Gerais
State (Companhia de Saneamento de Minas Gerais – COPASA) from 2011 to 2014. Prior to that, she was a portfolio manager at Clube de
Investimentos Letalex from 2007 to 2008 and the CFO of Grupo Dismetal from 1999 to 2004.
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
Ernesto Rubens Gelbcke qualifies as a financial expert under the SEC rules. The members are appointed by the board of directors and pursuant
to our bylaws, the members of our audit committee may be appointed simultaneously to their election to the board of directors or by a
subsequent resolution.
The audit committee is mainly responsible for assisting and advising the board of directors in its responsibilities to ensure the quality,
transparency and integrity of our published financial information and financial statements. The audit committee is also responsible for
supervising all matters relating to the Code of Conduct and Integrity, accounting, internal controls, the internal and independent audit functions,
compliance, risk management and internal policies, such as the related parties transaction policy. The audit committee and its members have no
decision-making powers or executive functions.
The minimum availability required from each member of the audit committee is thirty hours per month. Under our bylaws, the members
shall exercise their roles for the same period as their corresponding term of office, or until otherwise resolved by the general shareholders’
meeting or by resolution of the board of directors. In the event that an audit committee member resigns or is removed from office after
exercising any portion of his or her term, such member may only rejoin the audit committee at least three years from the end of such member’s
term. All of our audit committee members are independent.
The following are the names, positions and dates of election of the members of our audit committee:
Director
Ernesto Rubens Gelbcke
Lucas Navarro Prado
Luís Eduardo Alves de Assis
Position
Coordinator and Financial Expert
Member
Member
Date Elected
June 21, 2018
August 24, 2017
September 30, 2016
Eligibility and Advisory Committee
In accordance with Federal Law No. 13,303/16, and pursuant to our bylaws, as approved at the extraordinary shareholders’ meeting held on
April 27, 2018, we created an Eligibility and Advisory Committee, responsible for supervising the process for the appointment and evaluation of
members of our board of directors, executive board and fiscal council.
This committee is composed of up to three members, elected by a general shareholders’ meeting, without a fixed term of office. Members
must have at least three years' professional experience in public administration, or three years’ experience in the private sector in an area in
which, or related to which, we operate. Currently, our Eligibility and Advisory Committee is composed of three members, which is
representatives from our legal, human resources and compliance departments.
Members of the Eligibility and Advisory Committee may attend board of directors’ meetings where matters related to this committee are
discussed and have the right to speak, but not to vote, in accordance with our bylaws.
This committee is also responsible for providing methodological and procedural support to the board of directors to evaluate the
performance of officers and other members of statutory committees.
We expect that a written charter addressing the committee’s purpose and detailing its required responsibilities will be approved by the board
of directors.
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D. Employees
As of December 31, 2018, we had 14,449 full‑time employees. On December 31, 2018, we had 956 interns and 485 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:
Number of employees by category of activity:
Projects and operations
Administration
Finance
Marketing
Number of employees by corporate division:
Head office
São Paulo metropolitan region
Regional Systems
Total number of employees
2018
As of December 31,
2017
2016
10,683
2,074
433
1,259
1,485
6,661
6,303
14,449
9,176
2,147
387
1,962
1,342
6,353
5,977
13,672
9,456
2,220
424
2,037
1,389
6,634
6,114
14,137
The average tenure of our employees is approximately 19.2 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 the State 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 bargaining agreement signed in 2016 resulted in: (i) a salary increase of 10.03% (which corresponds to the inflation
adjustment for the period); (ii) a 10.03% increase in meal vouchers, food stipends and nursery stipends; (iii) maintenance of the clause from the
2014/2015 collective bargaining agreement which guarantees the employment of 98% of our employees; (iv) and maintenance of the Christmas
food stipend.
The collective bargaining agreement signed in 2017 resulted in: (i) a salary increase of 3.7% (which corresponds to the inflation adjustment
for the period); (ii) a 7.1% increase in meal vouchers; (iii) a 36.1% increase in food assistance; (iv) a 8.39% increase in nursery stipends; (v)
maintenance of the clause from the 2016/2017 collective bargaining agreement which guarantees the employment of 98% of our employees; and
(vi) maintenance of the Christmas food stipend on an exceptional basis.
The collective bargaining agreement signed in 2018 resulted in: (i) a salary increase of 1.29% (which corresponds to the inflation
adjustment for the period); (ii) a 2% increase in meal vouchers; (iii) a 2% increase in food assistance; (iv) a 2% increase in nursery stipends; (v)
maintenance of the clause from the 2017/2018 collective bargaining agreement which guarantees the employment of 98% of our employees; and
(vi) maintenance of the Christmas food stipend on an exceptional basis.
We experienced a two-day strike in 2013, which did not interrupt the essential services that we provide. In 2018, 2017, 2016, 2015 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.
E. Share Ownership
As of December 31, 2018, less than 1% of our common shares were owned by our directors and executive officers. See “Item 7.A. Major
Shareholder” for more information.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholder
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 17, 2019:
State of São Paulo(1)
Directors and executive officers of Sabesp
Others
(2)
Total
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Common shares
Shares
343,524,291
3,000
339,982,578
683,509,869
%
50.3%
0.0%
49.7%
100.0%
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(1)
It includes shares held by the Secretariat of Finance and Planning of the State of São Paulo (Secretaria da Fazenda e Planejamento do Estado de São Paulo) and other
companies controlled by the Government of the State of São Paulo.
(2) As of April 17, 2019, 83% of our outstanding common shares were held by 9,410 registered shareholders in Brazil.
As of April 17, 2019, 17% 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, as of March 31, 2019, 30 record holders of
ADSs in the United States.
On May 12, 2017, we announced that the State of São Paulo’s Privatization Program Board, established by State Law No. 9,361/1996, dated
as of July 5, 1996, resolved to take the following measures:
(i). to proceed with studies aiming to provide alternatives to our current capitalization model;
(ii). the hiring of the International Finance Corporation, a member institution of the World Bank Group; and
(iii). the conclusion of an agreement between us and the São Paulo State Government, through the Secretariat of Sanitation and Water Resources
(currently Secretariat of Infrastructure and Environment) and the Secretariat of Finance (currently Secretariat of Finance and Planning), to
delineate the scope of the International Finance Corporation’s hiring and to govern the relationship between the contracting parties, including
the proportional reimbursement of expenses.
The proposed capitalization plan provides for the creation of a new parent company to which the State of São Paulo would transfer all of its
ownership interest in us, thus maintaining direct control over our operations through this new parent company. In the process, institutional
investors may be invited to participate in the new company’s capital, but the State of São Paulo will in any case retain sufficient shareholding
interest to exercise corporate control, as required by law.
In September 2017, the State of São Paulo obtained approval for State Law No. 16,525/2017, which authorizes the State of São Paulo to set
up a controlling company to hold all of the shares that the State of São Paulo holds in our company. Once formed, this controlling company will
control our company, pursuant to the provisions of Art. 116 of Law No. 6,404 of December 15, 1976, as amended, or the Brazilian Corporate
Law. State Law No. 16,525/2017 allows other minority shareholders, including private companies and state companies, to hold shares of the
controlling company, provided that the State of São Paulo holds the majority of the common shares of the controlling company. If and once
formed, this controlling company may affect future shareholding in and the control of our company. Due to elections for state government in the
second half of 2018, this operation was suspended, and we are currently awaiting guidance from the State Privatization Program’s Board
(Conselho Diretor do Programa Estadual de Desestatização - CDPED), which has authority over our corporate reorganization plan, including
the formation of the controlling company, or any other type of corporate reorganization, including a change of control. We cannot assure that any
potential corporate reorganization, including a change of control, will not have a material adverse effect on our business.
B. Related Party Transactions
Transactions with the State of São Paulo
We have entered into extensive transactions with the State, which is our controlling shareholder, and we expect to continue to do so. The
State is our largest customer. It owns some of the facilities that we use in our business, it is one of the governmental entities that regulate our
business, and it has assisted us in obtaining financing on favorable terms.
Many of our transactions with the State reflect policies of the State that depend on decisions of elected officials or public servants, and are
accordingly subject to change. Among the practices that could change are those described below concerning the provision of State guarantees,
and the terms on which we use State‑owned reservoirs.
Rendering Services
We provide water and sewage services to the federal government, state and municipal governments and government entities in the ordinary
course of our business. Gross revenue from sales to the State, including State entities, totaled R$501.1 million in 2018, R$463.0 million in 2017
and R$445.7 million in 2016. Our accounts receivable from the State for sanitation services totaled R$105.7 million, R$106.0 million and
R$77.4 million, as of December 31, 2018, 2017 and 2016, 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 2018, 2017 and 2016, we made payments to former employees of R$180.8 million, R$179.5 million and R$178.7 million, respectively in
respect of Plan G0. The State made reimbursements in 2018, 2017 and 2016 in the amounts of R$173.5 million, R$192.9 million and R$139.5
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 that it is not probable that we will ultimately prevail in our appeal, which would
prohibit the transfer of the reservoirs in payment of the accounts receivable due from the State.
The December 2001 agreement also provided that the legal advisors of the State would carry out specific analyses, which have commenced,
to ensure agreement among the parties as to the methodology employed in determining the amount of reimbursement for pension benefits owed
to us by the State. The commencement of payments with respect to pension amounts owed to us by the State has been postponed until these
analyses are completed, the appraisal report is approved and the credit assignments relating to the transfer of the reservoirs are formalized. As
discussed above, the transfer of these reservoirs is currently being disputed and we are not certain whether the transfer will be legally permitted.
Under the December 2001 agreement, the first payment was to be made in July 2002.
On March 22, 2004, we and the State entered into a first amendment to the December 2001 agreement. Under this amendment, the State
acknowledged that it owed R$581.8 million to us relating to unpaid accounts receivable from the State until February 29, 2004, and we
acknowledged that we owed an aggregate amount of R$518.7 million to the State as dividends, in the form of interest on shareholders’ equity.
Accordingly, we and the State agreed to offset each other’s credit up to the limit of R$404.9 million, which was an amount adjusted up to
February 2004. The outstanding balance of R$176.9 million (as of February 29, 2004) of the State’s consolidated debt would be paid in
consecutive monthly installments from May 2005 until April 2009. These installments would be indexed according to the IPCA index, plus an
interest rate of 0.5% per month. Upon the execution of the first amendment, part of the debt that the State owed to us for the use of water and
sewage services through February 2004 was offset by the debt that we owed to the State as dividends, in the form of interest on shareholders’
equity. The outstanding balance of R$113.8 million as dividends in the form of interest on shareholders’ equity that we owed to the State was
netted against accounts overdue after February 2004. The first amendment did not amend the provisions of the December 2001 agreement
regarding the supplemental retirement and pension benefits we paid from March 1986 to November 2001 on behalf of the State to former
employees of the State‑owned companies.
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On December 28, 2007, we and the State entered into a second amendment to the December 2001 agreement, pursuant to which the State
agreed to pay (i) the outstanding balance under the first amendment, in the amount of R$133.7 million (as of November 30, 2007), in 60
consecutive monthly installments, beginning on January 2, 2008, and (ii) the amount of R$236.1 million relating to part of the accounts overdue
and unpaid from March 2004 through October 2007 regarding the provision of water supply and sewage collection services. As part of this
amendment, we agreed to pay during the period from January through March 2008 the outstanding balance of dividends in the amount of
R$400.8 million, in the form of interest on shareholders’ equity, due from March 2004 through December 2006. We paid these amounts as
agreed. Under the second amendment, dividends payable by us are no longer required to be applied to offset accounts receivable from the State,
and as a result, we are currently unable to determine the amount, if any, of the declared dividends that the State will apply to current and future
accounts receivable owed to us by the State or its entities. In addition, pursuant to the second amendment, we and the State agreed on
complying with certain mutual obligations relating (i) to the improvement of payment processes and budget management procedures; (ii) the
rationalization of the use of water and the volume of water and sewage bills under the responsibility of the State; (iii) the recording of
government entities with accounts overdue in a delinquency system or reference file; and (iv) the possibility of interrupting water supply to these
entities in case of non‑payment of water and sewage bills. Finally, this second amendment did not amend the provisions of the December 2001
agreement regarding the supplemental retirement and pension benefits we paid from March 1986 through November 2001 on behalf of the State
to former employees of the State‑owned companies that merged to form our Company.
In 2007, we received payment installments from the State in the amount of R$326.0 million. As of December 31, 2007, our dividends
payable to the State, due from 2004 through 2007, were in the amount of R$552.0 million. We are currently unable to determine the amount, if
any, of the declared dividends that the State will apply to current and future accounts receivable owed to us by the State or its entities. The
second amendment no longer requires that dividends be applied to offset accounts receivable from the State.
On March 26, 2008, we entered into a commitment agreement (termo de compromisso) with the State with the purpose of finding an
alternate solution to the deadlock related to the amount owed by the State to us in connection with the supplemental retirement and pension
benefits we paid from March 1986 to November 2001 on behalf of the State to former employees of the State‑owned companies which merged
to form our Company. In this agreement, we and State committed to hiring specialized companies to carry out new valuations of the amounts
owed to us by the State and of the reservoirs. An independent consulting firm, FIPECAFI, has been retained to resolve the disagreement and
validate the amount we paid from March 1986 through November 2001 on behalf of the State to former employees of the State‑owned
companies that merged to form our Company, which the State has not yet agreed to reimburse us hereinafter referred to as the “Disputed
Reimbursement Amount”. In addition, FIPECAFI performed, together with another independent consulting firm, a new evaluation of the
reservoirs that might be transferred to us as amortization of the reimbursement payable by the State to us.
On November 17, 2008, we, the State and DAEE entered into a third amendment to the December 2001 agreement, pursuant to which the
State recognized a debt balance payable to us totaling R$915.3 million, hereinafter referred to as the “Undisputed Reimbursement Amount”, as
adjusted 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, was being paid by the State in 114 consecutive monthly installments and was totally paid in 2018.
On March 18, 2015, we, the State and DAEE, with the intervention of the Department of Sanitation and Water Resources, executed a term
of agreement, in the amount of R$1,012.3 million, of which R$696.3 million refers to the principal amount and R$316.0 million refers to the
monetary adjustment of the principal through February 2015.
The principal amount is payable in 180 installments, as follows:
· The first 24 installments were settled by an immediate transfer of 2,221,000 preferred shares issued by the São Paulo Company of
Electric Power Transmission (Companhia de Transmissão de Energia Elétrica Paulista - CTEEP), totaling R$87.2 million, based on the
share closing price as of March 17, 2015. As of April 20, 2016, the Company sold these shares for R$111.1 million; and
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· The amount of R$609.1 million, payable in 156 monthly installments, was adjusted by IPCA until the initial payment date on April 5,
2017, after which installments are 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 the amount of R$316.0 million 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, 2018, the Disputed Reimbursement Amount amounted to R$1,107.1 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 included in this
annual report regarding the Disputed Reimbursement Amount. We and the State have agreed that the dispute relating to the Disputed
Reimbursement Amount will not prevent us from carrying out the commitments made in the December 2001 agreement.
In addition, the third amendment to the December 2001 agreement provides for the regularization of the monthly flow of benefits. While
we are liable for the monthly flow of benefits to the former employees of the state‑owned companies that merged to form our Company, the
State shall reimburse us based on criteria identical to those applied when determining the Undisputed Reimbursement Amount. Should there be
no preventive court decision, the State will assume the flow of monthly payment of benefits portion deemed as undisputed.
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, 2018, we had made a provision of R$2,606.1 million in our pension obligations accounts in respect of the pension benefit
obligation of Plan G0.
Even though the negotiations with the State are still progressing, we cannot assure you that we will recover the receivables related to the
Disputed Reimbursement Amount.
We will not waive the receivables from the State to which we consider ourselves to be legally entitled. Accordingly, we will take all
possible actions to resolve the issue at all administrative and court levels. Should this conflict persist, we will take all the necessary actions to
protect our interests. On March 24, 2010, we sent to the controlling shareholder the official letter approved by our executive committee,
proposing that the matter be discussed at the B3 Arbitration Chamber. In June 2010, we sent a settlement proposal to the Secretary of Treasury,
which was denied, and on November 9, 2010, we filed a civil lawsuit against the State of São Paulo seeking full reimbursement of the amounts
paid as benefits granted by Law No. 4,819/1958. 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
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· we may participate in management committee meetings but may not vote.
In application of the convênio, we executed a separate contract with the State and the city of São Paulo, also dated June 23, 2010, to regulate
the provision of these services for the following 30 years. The principal terms of this contract are as follows:
· The total investment stated in the contract must be equal to 13% of gross revenues from the provision of services to the city of São
Paulo, net of the taxes on revenues.
· We must transfer 7.5% of the gross revenues obtained from providing sanitation services in the municipality of São Paulo and subtract
(i) COFINS and PASEP taxes, and (ii) unpaid bills of publicly owned properties in the city of São Paulo, to the Municipal Fund for
Environmental Sanitation and Infrastructure (Fundo Municipal de Saneamento Ambiental e Infraestrutura), established by Municipal
Law No. 14,934/2009. 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.
· 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. In December 2016, we concluded the first four-year revision of our contract with the city
of São Paulo, which altered our service quality, investment and investment tracking targets. However, the issue of the 7.5% charge was not
discussed.
On May 9, 2018 ARSESP announced the final results of the Second Ordinary Tariff Revision. Following this revision cycle, ARSESP will
pass-through to the tariffs up to 4% of the municipal revenue that is transferred by us to a legally established municipal infrastructure fund. Our
only contract that provides for this and complies with ARSESP´s requirements is with the municipality of São Paulo and, accordingly, today 4%
of the funds transferred to the São Paulo Municipal Fund for Environmental Sanitation and Infrastructure are being passed through to our tariffs.
On May 24, 2018, as a result of the final result of the Second Ordinary Tariff Revision, we filed a reconsideration request as well as a
clarification and revision request with ARSESP. As part of the clarification and revision request, we requested that ARSESP provide a revision
of the calculation of the financial component related to municipal funds. This administrative appeal was denied by ARSESP on February 28,
2019. For more information, see “Item 4.B. Business Overview—Tariffs—Second Ordinary Tariff Revision (2017-2020)”.
Dividends
We regularly pay dividends to our shareholders, including the State of São Paulo. In the past, we have withheld part of the dividends to
which the State was entitled in order to offset it against our pending receivables from the State as described above.
In accordance with our agreements with the State, we do not anticipate that we will withhold dividends to which the State was entitled in
order to offset it against our pending receivables from the State in the near future.
Government Guarantees of Financing
In some situations, the federal government, the State or government agencies guarantee our performance under debt‑ and project‑related
agreements.
Furthermore, the federal government has guaranteed, and the State has provided a counter‑guarantee, in respect of the financial agreements
we entered into with the IADB (i) in 1992 and 2000 for the total original aggregate amount of US$600.0 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.
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For more information on the aforementioned loans, see “Item 5.B. Liquidity and Capital Resources—Indebtedness Financing”.
Use of Reservoirs
We withdraw water for use in the São Paulo metropolitan area from the Guarapiranga and Billings reservoirs. We do not pay any fees for
the use of these reservoirs, although we are responsible for maintaining them and funding their operating costs. The State incurs no operating
costs on our behalf.
EMAE, a company that is also controlled by the State of São Paulo, has a concession to produce hydroelectric energy using water from the
same reservoirs. EMAE commenced various lawsuits against us in the past seeking compensation for the water we withdraw from these
reservoirs. Those lawsuits have now been settled by way of an agreement between EMAE and us.
The settlement agreement settled the compensation arrangements between EMAE and our company. It requires us to pay the following
amounts to EMAE:
· R$46.3 million, plus inflation adjustments indexed to the IPCA index, payable in five annual installments from April 2017 through
April 2022, plus
· R$6.6 million, plus inflation adjustments indexed to the IPCA index, payable in 25 annual installments from October 2017 through
October 2042.
If we fail to pay any installment to EMAE when due, all remaining amounts to be paid under the agreement will become immediately due
and payable.
On April 11, 2016, we were also named in a separate lawsuit commenced by minority shareholders of EMAE against the State of São Paulo,
as controlling shareholder of EMAE. The minority shareholders are seeking an order to require the State to stop us from withdrawing water
from the reservoirs without paying compensation to EMAE, and to allow EMAE to pump water from the reservoirs for its hydroelectric facility.
The plaintiffs allege that the State, in its capacity as controlling shareholder of EMAE, has acted unduly to EMAE’s detriment and in favor of
us. The lawsuit is in its initial phase. The settlement agreement between EMAE and us will not necessarily put an end to this separate lawsuit.
In addition, on August 7, 2017 we were named in a new lawsuit against us, EMAE and ANEEL, brought by Alvaro Luiz de Lima de
Alvares Otero, another minority shareholder of EMAE, requesting the annulment of ANEEL’s order approving the settlement agreement
mentioned above, as well as our condemnation for indemnifying EMAE for damages suffered by EMAE. The plaintiff alleges that the order is
illegal and harmful, jeopardizing the operational viability of the Henry Borden hydroelectric power plant, as well as the energy security of the
State of São Paulo, the Southeast region of Brazil and Brazil as a whole. The judge dismissed this lawsuit without judgment on the merits, but
this decision is currently being appealed. The settlement agreement between EMAE and us will not necessarily put an end to this separate
lawsuit.
If one of the ongoing lawsuits by minority shareholders of EMAE requires the State to make a different decision regarding water use, from
what was agreed between EMAE and the State of São Paulo, our ability to withdraw water from the Guarapiranga and Billings reservoirs may
be compromised. If we were no longer able to withdraw water from these reservoirs, we would have to transport water from locations farther
away, which would increase our water transportation costs and may affect our ability to provide adequate service in the region.
Agreements with Lower Tariffs
We have entered into agreements with public entities, including State entities and municipalities, which manage approximately 9,082
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 2018, 2017 and 2016 amounted to
R$8.9 million, R$9.9 million and R$10.4 million, respectively.
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The expenses related to personnel assigned by other entities to us totaled R$0.1 million in 2018. There were no expenses related to
personnel assigned by other entities to us in 2017. The expenses related to personnel assigned by other entities to us totaled R$0.01 million in
2016.
Services Obtained from State Government Entities
As of December 31, 2018 and 2017, we had an outstanding amount payable of R$8.7 million and R$1.4 million, respectively, 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, 2018 and 2017.
Transactions with SABESPREV Pension Fund
SABESPREV is a pension fund we established to provide our employees with retirement and pension benefits. The assets of SABESPREV
are independently held, but we nominate 50.0% of SABESPREV’s board of directors, including the chairman of the board, who has the deciding
vote pursuant to the applicable legislation. Both we and our employees make contributions to SABESPREV pension plans. We contributed
R$20.8 million, R$19.2 million and R$10.8 million in 2018, 2017 and 2016, 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 and in early 2013 a financial expert was appointed to the case. The results of this inspection were unfavorable to the representative
entities for our employees and ex‑employees and in 2016 the proceeding was dismissed, revoking the interim decision made in October 2010.
In 2016, participants were again offered the ability to migrate according to the rules established by the regulatory authority. The Retiree
and Pensioneer Association filed a judicial proceeding questioning the amounts that were transferred from the benefits plan to the individual
accounts of the participants who migrated to the Defined Contribution Plan. On March 14, 2018, the judge presiding over the case held that the
adjustment of the Defined Benefit Plan’s actuarial defecit was permitted and terminated the lawsuit related to the migration process of members
from the Defined Benefit Plan to the Defined Contribution Plan.
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$4.1
million, R$3.8 million and R$3.9 million in 2018, 2017 and 2016, respectively, and it refers to salaries and other short‑term benefits
management. An additional R$0.5 million, R$0.6 million and R$0.5 million related to the bonus program was accrued to executive officers in
2018, 2017 and 2016.
For further information on management compensation, see “Item 6.B. Directors and Senior Management—Compensation”.
Loan agreement through credit facility
We hold interests in some companies. Although we do not hold the majority of shares in any of the companies in which we hold interests,
we are party to shareholders’ agreements which provide for the power of veto with regard to certain management proposals and decisions. Due
to our significant influence on these companies by way of shareholders’ agreements, for accounting purposes, these companies are accounted for
by applying the equity method of accounting.
We entered into loan agreements with the special purpose enterprises Aquapolo Ambiental S.A. on March 30, 2012 and Attend Ambiental
S.A. on May 9, 2014 under which we made loans to finance their respective operations, until their loans due to banks are cleared.
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The table below summarizes the terms of those agreements at December 31, 2018:
Companies
Aquapolo Ambiental S.A.
Total
___________________
Principal
disbursed
Interest
balance
Total
Interest rate
Maturity
19,000
19,000
13,857
13,857
32,857
32,857
CDI + 1.2% p.a.
-
(1)
-
(1) The loan agreement originally expired on April 30, 2015, was extended to October 30, 2015 and on November 25, 2015 a new amendment changed the payment schedule for three annual installments,
the first of which maturing on December 30, 2021 and the last on December 30, 2023.
As of December 31, 2018, the principal and interest balance of this agreement was R$32.9 million, recorded as a non current assets under
“Other Accounts Receivable”. In 2018, we recognized financial income of R$2.8 million.
Pró-Conexão
In 2012, the State of São Paulo approved a project to subsidize connections to the sewage system for low‑income families. Initially
intended to last eight 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 192,000 new sewage connections benefiting approximately
800,000 people.
As of December 2018, we had completed approximately 25.5 thousand sewage connections under the Pró-Conexão program.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Financial Statements and Other Financial Information
See “Item 18. Financial Statements”.
Legal Proceedings
We are currently subject to numerous legal proceedings relating to civil, tax, labor, corporate and environmental issues arising in the normal
course of our business. Several individual disputes account for a significant part of the total amount of claims against us. Our material legal
proceedings are described in Note 20 to our financial statements included in this annual report, and that description is incorporated by reference
under this Item.
Civil Public Actions Related to Environmental Matters
We are subject to administrative and judicial proceedings, including proceedings initiated by the Companhia Ambiental do Estado de Sao
Paulo (CETESB), the State of São Paulo Public Prosecutor Office and non‑governmental organizations. These proceedings result from alleged
environmental damage and relief sought against us includes: (i) cessation of the release of raw sewage into certain local bodies of water; (ii)
remedies, in some cases, for environmental damages that have not yet been specified and evaluated by the court’s technical experts;
(iii) requirements to install and operate sewage treatment facilities in locations referred to in the civil public actions; and (iv) imposition of a
limit on water extracted from the water springs most affected by the water crisis. In certain cases, we are subject to daily fines for
non‑compliance. In our response to these lawsuits, we note that the installation and operation of sewage treatment facilities in locations referred
to in the civil public actions is included in our investment plan. There have already been unfavorable judicial decisions against us and their
effects may include: (i) 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 recognize provisions for classify certain of these proceedings as defined in Note 3.15 to our financial
statements included in this annual report. As of December 31, 2018, we have provisions totaling R$170.4 million for the matters stated in Note
20 to our financial statements included in this annual report.
Other Legal Proceedings
On December 30, 2003, the Civil Entity Coordination Committee of Piracicaba filed a civil class action against us, the National Water
Agency and the State of São Paulo Treasury Department seeking, among other claims relief for: (i) the termination of use of 31 m3/s of water
from one of the municipality’s reservoirs; (ii) the creation of a schedule to regulate water use and withdrawal from the Piracicaba river basin
by the Cantareira system to eliminate possible damage to populations downstream; and (iii) the development of an environmental impact study
on the Cantareira system evaluating the impact of water use and withdrawal on the various basins that constitute the system. In August 2012,
this civil public action was decided favorably for us in two lower courts, and the plaintiff’s appeal to a higher court seeking special and
extraordinary recourse was denied based on inadmissibility. 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, 2018 is R$25.8 billion. We have
assessed that we do not have a current obligation as a result of a past event, and accordingly have not made any provisions.
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On November 30, 2012, the Public Prosecutor’s Office of the State of São Paulo on November 30, 2012 filed a civil class action against us
seeking: (i) the nullification of the contract we entered into with the municipality of São Paulo on June 23, 2010 regarding the supply of water
and sewage services; (ii) our exclusion from the B3’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 plaintiff presented an appeal. This first
decision was upheld by the Court of Justice and was finally settled. The amount involved in these proceedings is R$16.5 billion as of
December 31, 2018. We have assessed that we do not have a current obligation as a result of a past event, and accordingly have not made any
provisions.
Dividends and Dividend Policy
Amounts Available for Distribution
At each annual shareholders’ meeting, the board of directors is required to recommend the allocation of net profits for the preceding fiscal
year. For 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, 2018, 2017 and 2016 the balance of our legal reserve was R$1,200.0 million,
R$1,058.3 million and R$923.3 million, respectively, which was equal to 8.0%, 10.6% and 9.3%, respectively, of our capital.
Brazilian Corporate Law also provides for two discretionary allocations of net profits that are subject to approval by the shareholders at
each annual shareholders’ meeting. First, a percentage of net profits may be allocated to a contingency reserve for anticipated losses that are
deemed probable in future years. Any amount so allocated in a prior year must be either reversed in the fiscal year in which the loss was
anticipated if such loss does not in fact occur, or written off in the event that the anticipated loss occurs. Second, if the mandatory distributable
amount exceeds the sum of realized net profits in any given year, such excess may be allocated to an unrealized revenue reserve. Under
Brazilian Corporate Law, realized net profits is defined as the amount of net profits that exceeds the net positive result of equity adjustments and
profits or revenues from operations with financial results after the end of the next succeeding fiscal year.
Under Brazilian Corporate Law, any company may authorize the creation of a discretionary reserve in its bylaws. Bylaws which authorize
the allocation of a percentage of a company’s net income to the discretionary reserve must also indicate the purpose, criteria for allocation and
maximum amount of the reserve. We may also allocate a portion of our net profits for discretionary allocations for plan expansion and other
capital investment projects, the amount of which would be based on a capital budget previously presented by management and approved by our
shareholders. Under Law No. 10,303/2001 of October 31, 2001, as amended, capital budgets for more than one year must be revised at each
annual shareholders’ meeting. After completion of the relevant capital projects, we may retain the allocation until the shareholders vote to
transfer all or a portion of the reserve to capital or retained earnings. As of December 31, 2018, 2017 and 2016 we had an investment reserve of
R$3,840.4 million, R$6,939.3 million and R$5,249.8 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 Bradesco S.A., as the custodian and agent for the depositary, which is the registered owner of the common shares underlying the ADSs.
Our current registrar is Banco Bradesco S.A. The depositary electronically registers the common shares underlying the ADSs with the Central
Bank and, therefore, is able to have dividends, sales proceeds or other amounts with respect to these shares eligible to be remitted outside
Brazil. 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:
· 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.
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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, 2018 correspond to the minimum established by
law of 25.0% of the net income and the difference of R$792.2 million will be recorded in 2019 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 2018, 2017 and 2016
earnings. All these amounts distributed or to be distributed were or will be in the form of interest on shareholders’ equity.
Year ended December 31,
Aggregate amount
proposed
(in millions of reais)
Payment Dates
Payment per share
Payment per ADS
(in reais)
2018
1.16
2017
1.03
2016
1.20
* We recorded dividends in the amount of R$673.3 million, which pursuant to our bylaws is our minimum dividend amount. We expect to pay the dividends on June 28, 2019.
June 28, 2019
June 26, 2018
June 27, 2017
792.2
703.9
823.5
1.16
1.03
1.20
Dividend Policy
We intend to declare and pay dividends and/or interest on shareholders’ equity, as required by Brazilian Corporate Law, our bylaws and our
dividend policy. Our board of directors may propose the distribution of interest on shareholders’ equity, calculated based on our 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 proposed distribution of dividends should consider (i) the need
for investments to universalize basic sanitation services; (ii) the achievement of our corporate purpose, as set forth in our bylaws; (iii) the cash
generation and cash requirements; and (iv) our economic and financial sustainability. The amount of any distributions will depend on many
factors, such as our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our board of
directors and shareholders. Within the context of our tax planning, we may in the future continue to determine that it is in our best interest to
distribute interest on shareholders’ equity.
B. Significant Changes
Other than as disclosed in this annual report, no significant change has occurred since the date of the audited financial statements included
in this annual report.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Market for our Common Shares
Our common shares have been listed on the São Paulo Stock Exchange (B3) under the trading symbol “SBSP3” since June 4, 1997 and,
starting on April 24, 2002, have been included in the Novo Mercado segment of that exchange.
Market of our ADSs
Our ADSs, each of which represents one of our common shares are listed on the NYSE under the trading symbol “SBS”.
B. Plan of Distribution
Not applicable.
C. Markets
Trading on the Brazilian Stock Exchange
Our common shares are traded on the B3, the only Brazilian stock exchange that trades shares. Trading on the B3 is limited to brokerage
firms and a limited number of authorized entities. The CVM and the B3 have discretionary authority to suspend trading in shares of a particular
issuer under certain circumstances.
Trading on the B3 is conducted between 10:00 a.m. and 4:55 p.m. or from 10:00 a.m. to 5:55 p.m. (during daylight savings time in Brazil).
The B3 also permits trading from 5:30 p.m. to 6:00 p.m. during a different trading period called the “after market”. The after-market session is
restricted to certain stocks that were traded in the portfolios IBOV and/or IBrX and that were traded on the same day during the regular
negotiation. Trading during aftermarket is subject to regulatory limits on price volatility and on the volume of shares transacted through internet
brokers.
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In order to maintain better quality control over the fluctuation of its index, the B3 has adopted a “circuit breaker” system pursuant to which
trading sessions are suspended (i) for a period of 30 minutes whenever the index of this stock exchange falls more than 10% from the index
registered for the previous day; (ii) for one hour if the index of this stock exchange falls 15% or more from the index registered for the previous
day, after the reopening of trading; and (iii) for a certain period of time to be defined by the B3, if the index of this stock exchange falls 20% or
more from the index registered for the previous day, after the reopening of trading. The minimum and maximum price is based on a reference
price for each asset, which will be the previous session’s closing quote, when considering the asset at the beginning of the day before the first
trade, or the price of the day’s first trade. The asset’s reference price will be altered during the session if there is an auction sparked by the
intraday limit being breached. In this case the reference price will become whatever results from the auction.
The B3 settles the sale of shares 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 B3. The B3 performs multilateral compensation for both the
financial obligations and the delivery of shares. According to the B3’s regulations, financial settlement is carried out by the Central Bank’s
reserve transfer system. The securities are transferred by the B3’s custody system. Both delivery and payment are final and irrevocable.
Trading on the B3 is significantly less liquid than trading on the NYSE or other major exchanges in the world. Although any of the
outstanding shares of a listed company may trade on the B3, in most cases fewer than half of the listed shares are actually available for trading
by the public, the remainder being held by a controlling group or by government entities.
Trading on the B3 by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or a “non‑Brazilian holder”,
is subject to certain limitations under Brazilian foreign investment regulations. With limited exceptions, non‑Brazilian holders may trade on
Brazilian stock exchanges in accordance with the requirements of CMN Resolution No. 4,373/2014, which requires that securities held by
non‑Brazilian holders be maintained in the custody of financial institutions authorized by the Central Bank and by the CVM or in deposit
accounts with financial institutions. In addition, Resolution No. 4,373/2014 requires non‑Brazilian holders to restrict their securities trading to
transactions on the B3 or qualified over‑the‑counter markets. With limited exceptions, non‑Brazilian holders may not transfer the ownership of
investments made under Resolution No. 4,373/2014 to other non‑Brazilian holders through a private transaction. See “Item 10.E. Taxation—
Brazilian Tax Considerations—Taxation of Gains” for a description of certain tax benefits extended to non‑Brazilian holders who qualify under
Resolution No. 4,373/2014.
The Novo Mercado Segment
Since April 24, 2002, our common shares have been listed on the Novo Mercado segment of the B3. The Novo Mercado is a listing
segment designed for the trading of shares issued by companies that voluntarily undertake to abide by certain additional corporate governance
practices and disclosure requirements in addition to those already required under Brazilian law. A company with shares listed on the Novo
Mercado must follow good practices of corporate governance. These rules generally increase shareholders’ rights and enhance the quality of
information provided to shareholders. On April 18, 2002, June 19, 2006, April 23, 2012 and April 27, 2018 our shareholders approved changes
to our bylaws to comply with the Novo Mercado requirements.
In addition to the obligations imposed by current Brazilian law, a company listed on the Novo Mercado is obligated to, among others:
· maintain only common shares;
· hold public offerings of shares in a manner favoring diversification of the company’s shareholder base and broader access to retail investors;
· grant tag along rights for all shareholders in connection with a transfer of control of the company;
·
limit the term of all members of the board of directors to two years;
· hold a tender offer by the company’s controlling shareholder (the minimum price of the shares to be offered will be determined by an appraisal
process) if it elects to delist from the Novo Mercado, unless a waiver is granted by the company’s shareholders;
· maintain a related party transactions policy, including (i) the criteria to be followed in the performance and approval of related party
transactions, (ii) the procedures for identifying conflicts of interest and establishing voting restrictions for conflicted shareholders, directors
and executive officers, and (iii) the procedures for identifying related parties and related party transactions;
·
the chairman of the board of directors is prohibited from simultaneously holding the position of chief executive officer;
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·
·
the board of directors must disclose its opinion on takeover proposals within 15 days from the presentation of the proposal;
relevant facts, notices to market or to shareholders and press releases must be made in English simultaneously with the disclosure made in
Portuguese;
· ensure that at least two or 20.0% (whichever is greater) of the members of the board of directors are independent, as defined under the Novo
Mercado regulation;
· maintain a minimum free float of at least (i) 25.0% of the capital stock of the company, or (ii) 15.0% of the capital stock of the company,
in the event that the average daily trading volume is equal to or greater than R$25.0 million;
·
the company must have an internal audit committee;
· disclose information on the share ownership of controlling shareholders and certain related parties on a monthly basis;
·
resolve and require the shareholders, directors, and members of the fiscal committee of the company to resolve any and all disputes among
them by arbitration before the Chamber of Market Arbitration (Câmara de Arbitragem do Mercado); and
·
the company must adopt and publish a code of conduct approved by the board of directors, as well as, policies for (i) compensation; (ii)
election of board and committee members; (iii) risk management; (iv) related party transactions; and (v) the purchasing and trading of
securities.
Companies already listed in the Novo Mercado segment have until April 2021 to make the necessary changes in order to comply with these
new rules. We are working to implement such changes and believe that such implementation will be completed by the April 2021 deadline.
Regulation of Brazilian Securities Markets
The Brazilian securities markets are principally governed by Law No. 6,385/1976 of December 7, 1976, and the Brazilian Corporate Law,
each as amended and supplemented, and by regulations issued by the CVM, which has regulatory authority over the stock exchanges and
securities markets generally, by the CMN, and by the Central Bank, which has licensing authority over brokerage firms and regulates foreign
investment and foreign exchange transactions. These laws and regulations, among others, provide for disclosure requirements applicable to
issuers of traded securities, protection of minority shareholders and criminal penalties for insider trading and price manipulation. They also
provide for licensing and oversight of brokerage firms and governance of the Brazilian stock exchanges. Nevertheless, the Brazilian securities
markets are not as highly regulated and supervised as the U.S. securities markets.
Under Brazilian Corporate Law, a company is either public (companhia aberta), such as we are, or closely held (companhia fechada). All
public companies, including us, are registered with the CVM and are subject to reporting requirements. A company registered with the CVM
may have its securities traded on the Brazilian stock exchanges or in the Brazilian over‑the‑counter market. Our common shares are listed and
traded on the B3 and may be traded privately subject to certain limitations.
To be listed on a Brazilian stock exchange a company must apply for registration with the CVM and the stock exchange where the head
office of the company is located.
We have the option to ask that trading in our securities on the B3 be suspended in anticipation of a material announcement. Trading may
also be suspended on the initiative of the B3 or the CVM, among other reasons, based on or due to a belief that a company has provided
inadequate information regarding a material event or has provided inadequate responses to the inquiries by the CVM or the São Paulo Stock
Exchange.
The Brazilian over‑the‑counter market consists of direct trades between individuals in which a financial institution registered with the CVM
serves as intermediary. No special application, other than registration with the CVM, is necessary for securities of a public company to be
traded in this market. The CVM requires that it be given notice of all trades carried out in the Brazilian over‑the‑counter market by the
respective intermediaries.
Trading on the B3 by non‑residents of Brazil is subject to limitations under Brazilian foreign investment and tax legislation. The Brazilian
custodian for our common shares underlying the ADSs must, on behalf of the depositary for our 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”.
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D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The following is a summary of the material terms of our common shares, including related provisions of our bylaws and Brazilian Corporate
Law. This description is qualified by reference to our bylaws and to Brazilian law.
Corporate Purposes
We are a mixed capital company (sociedade de economia mista) of unlimited duration, incorporated on September 6, 1973, with limited
liability, duly organized and operating under Brazilian Corporate Law. As set forth in Article 2 of our bylaws, our corporate purpose is to render
basic sanitation services, aimed at the universalization of basic sanitation in the state of São Paulo without harming our long‑term financial
sustainability. Our activities comprise water supply, sanitary sewage services, urban rainwater management and drainage services, urban
cleaning services, solid waste management services and related activities, including the planning, operation, maintenance and commercialization
of energy, and the commercialization of services, products, benefits and rights that directly or indirectly arise from our assets, operations and
activities. We are allowed to act, in a subsidiary form, in other Brazilian locations and abroad.
Directors’ Powers
In addition to the general provisions of Brazilian law, our Board of Director’s Internal Charter contains the specific provisions set out below
regarding a director’s power to vote on a proposal, arrangement or contract in which that director has a material interest. Under Brazilian
Corporate Law, a director or an executive officer is prohibited from voting in any meeting or with respect to any transaction in which that
director or executive officer has a conflict of interest with the company and must disclose the nature and extent of the conflicting interest to be
recorded in the minutes of the meeting. In any case, a director or an executive officer may not transact any business with the company, including
any borrowing, except on reasonable or fair terms and conditions that are identical to the terms and conditions prevailing in the market or
offered by third parties.
According to our Board of Director’s Internal Charter, when a matter involves a conflict of interest with ours or a particular interest in the
matter, each member of the Board of Directors shall (i) declare his impediment in a timely manner, as soon as he becomes aware of the fact, (ii)
refrain from intervening in the matter in discussion or deliberation, (iii) include the fact in the minutes of the meeting, and (iv) abstain from
discussions and deliberations.
Under our bylaws, our shareholders are responsible for establishing the compensation we pay to the members of our board of directors,
members of the fiscal committee and the executive officers.
Pursuant to Brazilian Corporate Law, each member of our board of executive officers must be a resident in Brazil. Our bylaws do not
establish any mandatory retirement age limit.
See also “Item 6.A. Directors and Senior Management”.
Description of Common Shares
General
Each common share entitles the holder thereof to one vote at our annual or special shareholders’ meetings. According to the Brazilian
Corporate Law and CVM regulation, our shareholders’ meetings must be called by publication of a notice in 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
(in our case, the publication “Valor Econômico”), currently the city of São Paulo, at least fifteen days prior to the meeting. In addition, the CVM
requires issuers of American Depositary Shares, like us, to issue the first call for a shareholders’ meeting 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.
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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 bylaws expressly prevent
us from issuing preferred shares. Brazilian Corporate Law specifies other circumstances where a dissenting shareholder may also have appraisal
rights.
According to Brazilian Corporate Law, neither a company’s bylaws nor actions taken at a general meeting of shareholders may deprive a
shareholder of certain rights, such as:
· the right to participate in the distribution of profits;
· the right to participate equally and ratably in any remaining residual assets in the event of liquidation of the company;
· the right to supervise the management of the corporate business as specified in Brazilian Corporate Law;
· the right to preemptive rights in the event of a subscription of shares, debentures convertible into shares or subscription bonuses (except
in some 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 address:
· staggered terms for directors;
· cumulative voting, except as described below; or
· measures that could prevent a takeover attempt.
However, under the laws of the State of São Paulo, the State is required to own at least a majority of our outstanding common shares.
According to Brazilian Corporate Law and its regulations, shareholders representing at least 10 percent of our capital, may request that a
multiple voting procedure be adopted to entitle each share to as many votes as there are board members and to give each shareholder the right to
vote cumulatively for only one candidate or to distribute their votes among several candidates. Pursuant to Brazilian Corporate Law,
shareholder action must be taken at a shareholders meeting, duly called for and not by written consent.
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”.
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Redemption and Rights of Withdrawal
Brazilian Corporate Law provides that, under limited circumstances, a shareholder has the right to withdraw his or her equity interest from
the company and to receive payment for the portion of shareholder’s equity attributable to his or her equity interest. This right of withdrawal
may be exercised by dissenting our shareholders in the event that at least half of all voting shares outstanding authorize us:
· to reduce the mandatory distribution of dividends;
· to merge into another company or to consolidate with another company, subject to the conditions set forth in Brazilian Corporate Law;
· to participate in a centralized group of companies, as defined under 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;
· 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 Bovespa index (Índice Bovespa) or other stock exchange index (as defined by the CVM), and
(ii) are widely held, such that the controlling shareholder or companies it controls have less than 50.0% of our shares. Our common shares are
included on the Bovespa index.
This right of withdrawal may also be exercised in the event that the entity resulting from a stock merger as described above, consolidation
or spin‑off of a listed company fails to become a listed company within 120 days of the shareholders’ meeting at which such transaction was
approved.
We may cancel the right of withdrawal if the payment amount has a material adverse effect on our finances.
Conversion Right
Not applicable because our capital stock is only comprised of common shares.
Special and General Meetings
Unlike the laws governing corporations incorporated under the laws of the United States’ state of Delaware, the Brazilian corporate law
does not allow shareholders to approve matters by written consent obtained as a response to a consent solicitation procedure. All matters subject
to approval by the shareholders must be approved in a general meeting, duly 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.
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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.
A special shareholders’ meeting may be held concurrently with the annual shareholders’ meeting and at other times during the year. Our
shareholders may take the following actions, among others, exclusively at shareholders’ meetings:
· election and dismissal of the members of our board of directors and our fiscal committee, if the shareholders have requested the setup
of the latter;
· approval of the aggregate compensation of the members of our board of directors and board of executive officers, as well as the
compensation of the members of the fiscal committee;
· amendment of our bylaws;
· approval of our merger, consolidation or spin‑off;
· approval of our dissolution or liquidation, as well as the election and dismissal of liquidators and the approval of their accounts;
· granting stock awards and approval of stock splits or reverse stock splits;
· approval of stock option plans for our management and employees, as well as for the management and employees of other companies
directly or indirectly controlled by us;
· approval, in accordance with the proposal submitted by our board of directors, of the distribution of our net income and payment of
dividends;
· authorization to delist from the Novo Mercado and to become a private company, except if the cancellation is due to a breach of the
Novo Mercado regulations by management, and to retain a specialized firm to prepare a valuation report with respect to the value of our
shares, in any such events;
· approval of our management accounts and our financial statements;
· approval of any primary public offering of our shares or securities convertible into our shares; and
· deliberate upon any matter submitted by the board of directors.
Limitations on Rights to Own Securities
There are no limitations under Brazilian law and our bylaws on the rights of non‑residents or foreign shareholders to own securities,
including the rights of such non‑resident or foreign shareholders to hold or exercise voting rights.
Equal Treatment Provisions
Pursuant to our bylaws and the Novo Mercado regulations, any party that acquires our control must extend a tender offer for the shares held
by non‑controlling shareholders at the same conditions and purchase price paid to the controlling shareholder. In addition, State Law
No. 119/1973, which created our Company, requires the State to hold the majority of our shares at all times.
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Reserves
General
The Brazilian Corporate Law provides that all discretionary allocations of “adjusted income” are subject to shareholder approval and may
be added to capital or distributed as dividends in subsequent years. In the case of our capital reserve and the legal reserve, they are also subject
to shareholder approval; however, the use of their respective balances is restricted to being added to capital or absorbed by losses. They cannot
be used as a source for income distribution to shareholders.
Investment Reserve
Our investment reserve is composed specifically of internal funds for expansion of water and sewage service systems. As of December 31,
2018, we had an investment reserve of R$3,840.4 million.
Legal Reserve
Under Brazilian Corporate Law, we are required to record a legal reserve to which we must allocate 5% of the adjusted net income each
year until the amount of the reserve equals 20.0% of paid‑in capital. Any accumulated deficit may be charged against the legal reserve. As of
December 31, 2018, the balance of our legal reserve was R$1,200.0 million.
Arbitration
In connection with our listing with the Novo Mercado segment of the B3, we, our shareholders, directors and officers have undertaken to
refer to arbitration any and all disputes or controversies arising out of the Novo Mercado rules or any other corporate matters. See “Item 9.C.
Markets”. Under our bylaws, any dispute among us, our shareholders and our management with respect to the application of Novo Mercado
rules, the Brazilian Corporate Law, the application of the rules and regulations regarding Brazilian capital markets, will be resolved by
arbitration conducted pursuant to the B3 Arbitration Rules in the Market Arbitration Chamber. Any dispute among shareholders, including
holders of ADSs, and any dispute between us and shareholders, including holders of ADSs, will also be submitted to arbitration.
Options
There are currently no outstanding options to purchase any of our common shares.
C. Material Contracts
For a description of the material contracts entered into by the State and us, see “Item 7.B. Related Party Transactions—Transactions with
the State of São Paulo” and “Item 7.B. Related Party Transactions—Agreements with the State”.
D. Exchange Controls
The right to convert dividend or interest payments and proceeds from the sale of shares into foreign currency and to remit such amounts
outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, that the relevant
investments have been registered with the Central Bank and the CVM. Such restrictions on the remittance of foreign capital abroad may hinder
or prevent the custodian for our common shares represented by our ADSs or the holders of our common shares from converting dividends,
distributions or the proceeds from any sale of these shares into U.S. dollars and remitting the U.S. dollars abroad. Holders of our ADSs could be
adversely affected by delays in, or refusal to grant any, required government approval to convert Brazilian currency payments on the common
shares underlying our ADS and to remit the proceeds abroad.
Accordingly, the proceeds from the sale of ADSs by ADR holders outside Brazil are not subject to Brazilian foreign investment controls,
and holders of the ADSs are entitled to favorable tax treatment under certain circumstances. See “Item 3.D. Risk Factors—Risks Relating to
Our Common Shares and ADSs—Investors who exchange ADSs for common shares may lose their ability to remit foreign currency abroad and
to obtain Brazilian tax advantages” and “Item 10.E. Taxation—Brazilian Tax Considerations”.
Since March 30, 2015, CMN Resolution No. 4,373/2014, of September 29, 2014, has been in full effect, providing for the issuance of
depositary receipts in foreign markets in respect to shares of Brazilian issuers. The CMN Resolution No. 4,373/2014, among other acts, revoked
CMN Resolution No. 1,927/1992, of May 18, 1992, CMN Resolution No. 1,289/1987, of March 20, 1987, and CMN Resolution No.
2,689/2000, of January 26, 2000. Under Brazilian law relating to foreign investment in the Brazilian capital markets, foreign investors
registered with the 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.
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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. 1,548/2015, of February 13, 2015, and RFB Normative Instruction No. 1,863/2018, of December 27, 2018.
E. Taxation
This summary contains a description of certain Brazilian and U.S. federal income tax consequences of the purchase, ownership and
disposition of common shares or ADSs by a holder.
The summary is based upon the tax laws of Brazil and the federal income tax laws of the United States as in effect on the date of this annual
report, which laws are subject to change, possibly with retroactive effect, regarding the U.S. federal income tax, and to differing interpretations.
Holders of common shares or ADSs should consult their own tax advisors as to the Brazilian, U.S. or other tax consequences of the purchase,
ownership and disposition of common shares or ADSs, including, in particular, the effect of any non-Brazilian, non-U.S., state or local tax laws.
Although there presently is no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had
discussions in the past regarding such a treaty. No assurance can be given, however, as to if or when a treaty will enter into force or how it will
affect the U.S. holders of common shares or ADSs.
Brazilian Tax Considerations
The following discussion summarizes the principal Brazilian tax consequences of the acquisition, ownership and disposition of common
shares or ADSs by a holder that is not domiciled in Brazil for purposes of Brazilian taxation (a “non‑Brazilian holder”). It is based on Brazilian
laws and regulations as currently in effect, and, therefore, any change in such law may change the consequences described below. Each
non‑Brazilian holder should consult his or her own tax adviser concerning the Brazilian tax consequences of an investment in common shares or
ADSs.
A non‑Brazilian holder of ADSs may withdraw them in exchange for common shares in Brazil. Pursuant to Brazilian law, the non‑Brazilian
holder may invest in the common shares under CMN Resolution 4,373/2014 or as a foreign direct investment under Law No. 4,131/1962.
Taxation of Dividends
As a result of the tax legislation adopted on December 26, 1995, dividends based on profits generated after January 1, 1996, including
dividends paid in kind, payable by us in respect of common shares or ADSs, are exempt from withholding income tax. Dividends relating to
profits generated prior to January 1, 1996 may be subject to Brazilian withholding income tax at varying rates, depending on the year the profits
were generated.
Beginning in 2008, the Brazilian accounting rules were significantly modified in order to align them with IFRS. After the issuance of such
new rules, a transitory tax regime (regime tributário de transição), 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.
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As a result of the application of the RTT, the accounting profit of a Brazilian company might be significantly higher (or lower) than its
taxable profit. Although this specific matter has not been expressly regulated by law, the Brazilian tax authorities issued a normative instruction
stating that the amount of dividends paid in excess of the profit of a company determined as per the accounting rules and criteria that existed
until December 2007 should be subject to taxation.
On April 14, 2014, Law No. 12,973 was issued to, among other, terminate the Transitory Regime (RTT) and regulate how corporate taxable
income should be assessed taking as a starting point the accounting profit calculated according to the new accounting rules introduced as from
2008. Such Law states that dividends related to all accounting profits generated between January 2008 and 31 December 2013 in excess of the
established methods and criteria in force in December 31, 2007, are not subject to withholding tax, and does not integrate the calculation of
income tax and social contribution. With reference to 2014, the law is not clear, but tax authorities state that dividends paid in excess of the
profit of a company determined as per the accounting rules and criteria that existed until December 2007 should be subject to withholding
income tax at the rate of 15%, or 25% if the non-Brazilian holder is domiciled in a country or location that does not impose income tax or where
the maximum income tax rate is lower than 20% (“Nil or Low Taxation Jurisdiction”). As of 2015, in view of the termination of the RTT, there
would be no differences between the accounting and the taxable profit, so that dividends generated since 2015 should be fully paid with no
Brazilian withholding tax implications.
Taxation of Gains
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
in all other cases, including gains realized by a non-Brazilian 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 (i) a flat rate of 15% for a 4,373/2014 holder that is not a resident of or domiciled in a Nil or Low Taxation Jurisdiction; (ii) a flat
rate of 25.0% for a non‑Brazilian holder that is a resident of or domiciled in a Nil or Low Taxation Jurisdiction; (iii) progressive rates that may
vary from 15.0% to 22.5% (15.0% for the part of the gain that does not exceed R$5.0 million, 17.5% for the part of the gain that exceeds R$5.0
million but does not exceed R$10.0 million, 20.0% for the part of the gain that exceeds R$10.0 million but does not exceed R$30.0 million and
22.5% for the part of the gain that exceeds R$30.0 million), for all other non‑Brazilian holders. If these gains are related to transactions
conducted on the Brazilian non-organized-over-the-counter market with intermediation, withholding income tax of 0.005% shall also be
applicable and can be offset with the eventual income tax due on the capital gain.
In the case of redemption of securities or capital reduction by a Brazilian corporation, such as ourselves, the positive difference between the
amount effectively received by the non‑Brazilian holder and the corresponding acquisition cost is treated, for tax purposes, as capital gain
derived from disposition of common shares not carried out on a Brazilian stock exchange.
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 should not be subject to Brazilian tax. As mentioned
above, according to 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.
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In case the ADSs are considered assets located in Brazil, gains on disposition of ADSs by a non‑Brazilian holder to 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.
10,833/2003.
Upon receipt of the underlying common shares in exchange for ADSs, non-Brazilian holders may also elect to register with the Central
Bank the U.S. dollar amount of such preferred shares or common shares as a foreign portfolio investment under Resolution No. 4,373/2014 or as
a foreign direct investment under Law No. 4,131/1962.
Exchange of common shares for ADSs
With reference to the deposit of common shares in exchange for ADSs, the difference between the acquisition cost of the common shares
and the market price of the common shares may be subject to Brazilian income tax at progressive rates that may vary from 15.0% to 22.5%
(15.0% for the part of the gain that does not exceed R$5.0 million, 17.5% for the part of the gain that exceeds R$5.0 million but does not exceed
R$10.0 million, 20.0% for the part of the gain that exceeds R$10.0 million but does not exceed R$30.0 million and 22.5% for the part of the gain
that exceeds R$30.0 million), except for non-Brazilian holders located in a Nil or Low Taxation Jurisdiction, which, in this case, would be
subject to income tax at a flat rate of 25.0%. In some circumstances, there may be arguments to claim that this taxation is not applicable in the
case of a non-Brazilian holder that is a 4,373 Holder and is not a resident of or domiciled in a Nil or Low Taxation Jurisdiction.
Discussion on Low or Nil Taxation Jurisdictions
On June 24, 2008, Law No. 11,727/2008 was enacted defining the concept of a “privileged tax regime” in connection with transactions
subject to transfer pricing and thin capitalization rules. In this conception, privileged tax regimes are more comprehensive than tax havens. A
“privileged tax regime” is considered to be a jurisdiction which: (i) does not tax income or taxes income at a maximum rate lower than 20.0%;
(ii) grants tax advantages to a non‑resident entity or individual (a) without requiring substantial economic activity in the jurisdiction of such
non‑resident entity or individual or (b) to the extent such non‑resident entity or individual does not conduct substantial economic activity in the
jurisdiction of such non‑resident entity or individual; (iii) does not tax income generated abroad, or imposes tax on income generated abroad at a
maximum rate lower than 20.0%; or (iv) restricts the ownership disclosure of assets and ownership rights or restricts disclosure about economic
transactions. On 2014 the Brazilian Revenue Service Ordinance 488 was published, reducing from 20% to 17% the minimum threshold for
certain specific cases. The reduced 17% threshold applies only to countries and regimes aligned with international standards of fiscal
transparency in accordance with rules to be established by the Brazilian tax authorities.
Notwithstanding the fact that the “privileged tax regime” concept was enacted in connection with Brazilian transfer pricing and thin
capitalization rules, there is no assurance that Brazilian tax authorities will not attempt to apply the concept of privileged tax regimes to other
types of transactions, such as investments in the Brazilian financial and capital markets. We recommend that prospective investors consult their
own tax advisors from time to time to verify any possible tax consequences of Law No. 11,727/2008 and Ordinance 488/2014.
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.
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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.
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. Federal Income Tax Considerations
The following discussion is a summary of certain U.S. federal income tax consequences of the acquisition, ownership and disposition of
common shares or ADSs as of the date hereof. This discussion applies only to a beneficial owner of common shares or ADSs that is a
“U.S. holder”. As used herein, the term “U.S. holder” means a beneficial owner of a common share or ADS that, for U.S. federal income tax
purposes, is:
·
·
·
·
an individual who is a citizen or resident of the United States;
a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the
United States, any state thereof or the District of Columbia;
an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
a trust if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to
control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury Department regulations to be
treated as a U.S. person.
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds common shares or ADSs, the tax
treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. A U.S. holder that is a partner of
a partnership holding common shares or ADSs should consult its tax advisors.
Except where noted, this discussion deals only with common shares or ADSs held as capital assets within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended, or the Code, 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 ADSs, causing a reduction in such adjusted tax basis (and thereby increasing the
amount of gain, or decreasing the amount of loss, to be recognized on a subsequent disposition of our common shares or ADSs), and thereafter
as capital gain recognized on a sale or exchange. Because we do not expect to maintain calculations of earnings and profits in accordance with
U.S. federal income tax principles, U.S. holders should expect that a distribution will generally be treated as a dividend for U.S. federal income
tax purposes. Distributions of additional common shares or ADSs to U.S. holders that are part of a pro rata distribution to all of our shareholders
generally will not be subject to U.S. federal income tax.
The amount of any dividend paid in reais will equal the U.S. dollar value of the reais received calculated by reference to the exchange rate
in effect on the date the dividend is received by the U.S. holder, in the case of common shares, or by the Depositary, in the case of ADSs,
regardless of whether the reais are converted into U.S. dollars. If the reais received as a dividend are not converted into U.S. dollars on the date
of receipt, the U.S. holder will have a tax basis in the reais equal to their U.S. dollar value on the date of receipt. Any gain or loss realized on a
subsequent conversion or other disposition of the reais will be foreign currency gain or loss that is treated as U.S. source ordinary income or
loss. If dividends paid in reais are converted into U.S. dollars 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.
Subject to certain complex limitations and conditions (including a minimum holding period requirement), Brazilian income taxes withheld
on dividends, if any, may be treated as foreign income taxes eligible for credit against a U.S. holder’s U.S. federal income tax liability.
Alternatively, if a U.S. holder does not elect to claim a foreign income tax credit for any foreign taxes paid during the taxable year, all foreign
income taxes paid may instead be deducted in computing such U.S. holder’s taxable income. For purposes of calculating the foreign tax credit,
dividends paid on our common shares or ADSs will be treated as income from sources outside the United States. For the purposes of the
U.S. foreign tax credit limitations, the dividends paid by us should generally constitute “passive category income” for most U.S. holders. The
rules governing the foreign tax credit are complex. U.S. holders should consult their tax advisors regarding the availability of the foreign tax
credit under their particular circumstances.
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Taxation of Capital Gains
For U.S. federal income tax purposes, a U.S. holder generally will recognize taxable gain or loss on any sale, exchange or other taxable
disposition of a common share or ADS in an amount equal to the difference between the U.S. dollar value of the amount realized for the
common share or ADS and the U.S. holder’s adjusted tax basis in the common share or ADS, determined in U.S. dollars. Such gain or loss will
generally be capital gain or loss. The capital gain or loss will be long‑term capital gain or loss if at the time of sale, exchange or other taxable
disposition the U.S. holder has held our common shares or ADSs for more than one year. Capital gains of individuals derived with respect to
capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.
Any gain or loss recognized by a U.S. holder will generally be treated as U.S. source gain or loss. 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 Foreign Investment Company Rules
Based upon our current and projected income, assets, activities and business plans, we do not expect the common shares or ADSs to be
considered shares of a PFIC for our current fiscal year (although the determination cannot be made until the end of such fiscal year), and we
intend to continue our operations in such a manner that we do not expect to be classified as a PFIC in the foreseeable future. However, because
the determination of whether the common shares or ADSs constitute shares of a PFIC will be based upon the composition of our income, assets
and the nature of our business, as well as the income, assets and business of entities in which we hold at least a 25% interest, from time to time,
and because there are uncertainties in the application of the relevant rules, there can be no assurance that the common shares or ADSs will not be
considered shares of a PFIC for any fiscal year. If the common shares or ADSs were shares of a PFIC for any fiscal year, U.S. holders
(including certain indirect U.S. holders) may be subject to adverse tax consequences, including the possible imposition of an interest charge on
gains or “excess distributions” allocable to prior years in the U.S. holder’s holding period during which we were determined to be a PFIC. If we
are deemed to be a PFIC for a taxable year, dividends on our common shares or ADSs would not be qualified dividend income eligible for
preferential rates of U.S. federal income taxation. In addition, a U.S. holder that owns common shares or ADSs during any taxable year that we
are treated as a PFIC would generally be required to file IRS form 8621. U.S. holders should consult their own tax advisors regarding the
application of the PFIC rules (including any information reporting requirements in connection therewith) to the common shares or ADSs.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to dividends in respect of our common shares or ADSs or the proceeds received
on the sale, exchange, or redemption of our common shares or ADSs, in each case to the extent treated as being paid within the United States
(and in certain cases, outside of the United States) to a U.S. holder unless a U.S. holder establishes its status as an exempt recipient, and backup
withholding (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.
In addition, U.S. holders should be aware that additional reporting requirements apply with respect to the holding of certain foreign
financial assets, including stock of foreign issuers which is not held in an account maintained by a financial institution, if the aggregate value of
all of such assets exceeds US$50,000. U.S. holders should consult their own tax advisors regarding the application of the information reporting
rules to our common shares and ADSs and the application of these additional reporting requirements for foreign financial assets to their
particular situation.
F. Dividends and Payments Agents
Not applicable.
G. Statements by Experts
Not applicable.
H. Documents on Display
We are subject to the periodic reporting and other informational requirements of the U.S. Securities Exchange Act of 1934, as amended and
supplemented, or the Exchange Act. Accordingly, we are required to file reports and other information with the SEC. You may inspect and
copy reports and other information filed by us at the public reference facilities maintained by the SEC at 100 F Street, N.W., Washington D.C.
20549. Our filings will also be available at the SEC’s website at http://www.sec.gov. Reports and other information may also be inspected and
copied at the offices of the NYSE at 20 Broad Street, New York, New York 10005.
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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. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to various market risks, in particular, foreign currency risk and interest rate risk. We are exposed to foreign currency risk
because a substantial portion of our financial indebtedness is denominated in foreign currencies, primarily the U.S. dollar, while we generate all
of our net operating revenues in reais. Similarly, we are subject to interest rate risk based upon changes in interest rates, which affect our net
financial expenses. For further information on our market risks, see Note 5 to our financial statements included in this annual report.
Exchange Rate Risk
As of December 31, 2018 and 2017, R$6,669.4 million and R$5,672.8 million, or 50.7% and 46.9%, 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, 2018, 2017 and 2016 from each hypothetical instantaneous and unfavorable 1% change in the U.S. dollar and yen against the real
would have been approximately R$66.7 million, R$56.7 million and R$56.6 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$666.9 million,
R$567.3 million and R$566.0 million as of December 31, 2018, 2017 and 2016, respectively.
The fluctuation of the real in relation to the U.S. dollar and yen for the years ended December 31, 2018, 2017 and 2016 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
2018
17.1
20.0
Year ended December 31,
2017
(in percentages)
1.5
5.4
2016
(16.5)
(13.8)
We have not contracted derivative financial instruments in the years ended December 31, 2018, 2017 and 2016.
For further information regarding foreign currency risk, see Note 5.1(a) to our 2018 financial statements included in this annual report.
As of December 31, 2018, 2017 and 2016, we had no short‑term indebtedness outstanding, other than the current portion of long‑term debt.
Interest Rate Risk
As of December 31, 2018 and 2017, R$1,642.4 million, or 12.5%, and R$1,579.7 million, or 13.1%, 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, 2018 and 2017, R$1,261.7 million, or 9.6%, and R$1,149.2 million, or 9.5%, respectively, of our total debt denominated in
reais was subject to interest rates based on the CDI. As of December 31, 2018 and 2017, R$2,982.0 million and R$2,317.0 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.
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As of December 31, 2018 and 2017, 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$3,029.2 million and R$2,283.0 million as of December 31, 2018
and 2017, 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$131.5 million, R$121.0 million and
R$119.6 million if a hypothetical instantaneous and unfavorable change of 100 basis points in the interest rates applicable to financial liabilities
as of December 31, 2018, 2017 and 2016, 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$1,315.3 million, R$1,210.1
million and R$1,196.4 million million as of December 31, 2018, 2017 and 2016, respectively. This sensitivity analysis is based on the
assumption of an unfavorable 100 basis point movement of the interest rates applicable to each homogeneous category of financial liabilities and
sustained over a period of one year, as applicable, and that such movement may or may not affect interest rates applicable to any other
homogenous category of financial liabilities.
A homogeneous category is defined according to the currency in which financial liabilities are denominated and assumes the same interest
rate movement within each homogeneous category (i.e., U.S. dollars). As a result, our interest rate risk sensitivity model may overstate the
effect of interest rate fluctuation on these financial instruments, as consistently unfavorable movements of all interest rates are unlikely.
The tables below provide information about our interest rate-sensitive instruments. For variable interest rate debt, the rate presented is the
weighted average rate calculated as of December 31, 2018. For the foreign currency denominated obligations, these amounts have been
converted at the selling rates as of December 31, 2018 and do not represent amounts which may actually be payable with respect to such
obligations on the dates indicated.
As of December 31, 2018
Expected maturity date
2019
2020
2021
2022 and
after
Total
(in millions, except percentages)
Average
annual
interest
rate
3,029.2
-
-
-
3,029.2
Assets
Cash equivalents denominated in reais
Liabilities
Long‑term debt (current and noncurrent
portion)
CDI
TJLP
IPCA
TR or UPR
Fixed rate, denominated in reais
Floating rate, denominated in reais indexed by
Floating rate, denominated in reais indexed by
Floating rate, denominated in reais indexed by
Floating rate, denominated in reais indexed by
123.5
171.9
326.6
149.8
36.9
255.3
140.4
1,354.6
2,559.0
UPR stands for Standard Reference Unit (Unidade Padrão Referência) and is equal to TR, which was 0.00% per month as of December 31, 2018; CDI stands for Interbank
Deposit Rate (Certificado de Depósitos Interbancários), which was 6.40% per annum as of December 31, 2018; IGP‑M was 7.54% per annum as of December 31, 2018; TJLP
stands for Long‑term Interest Rate (Taxa de Juros a Longo Prazo), published quarterly by the Central Bank, which was 6.98% per annum as of December 31, 2018.
1,642.4
1,324.1
1,686.5
1,261.7
568.7
3,274.9
2,036.1
1,358.4
13,152.8
126.6
196.4
759.7
263.3
19.1
569.1
165.6
3.8
2,103.6
1,264.7
807.0
485.0
573.8
474.0
2,233.2
1,589.7
-
7,427.4
127.6
148.8
115.2
274.8
38.7
217.3
140.4
-
1,062.8
6.1%
7.8%
7.9%
1.5%
3.3%
9.9%
4.3%
8.9%
Fixed rate, denominated in U.S. dollars
Total long‑term debt
Floating rate, denominated in U.S. dollars
Fixed rate, denominated in Yen
The percentage of our indebtedness subject to fixed and floating interest rate is as follows:
Floating rate debt:
Denominated in U.S. dollars
Denominated in reais
Fixed rate debt:
Denominated in reais
Denominated in Yen
Denominated in U.S. dollars
Total
As of December 31,
2018
2017
2016
22.2%
45.0%
4.3%
15.5%
13.0%
100.0%
23.3%
48.5%
4.6%
14.1%
9.5%
100.0%
24.3%
48.1%
4.6%
13.5%
9.5%
100.0%
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
In the United States, our common shares trade in the form of 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 25, 2013, we issued two new ADSs for each
ADS currently trading and distributed them to our holders on April 29, 2013. The ADSs are issued by The Bank of New York Mellon, as
Depositary pursuant to a Deposit Agreement. The ADSs commenced trading on the NYSE on May 10, 2002.
Fees and Expenses
The following table summarizes the fees and expenses payable by holders of ADRs:
Persons depositing common shares or ADR holders must pay:
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
For:
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
Payment of Taxes
Any cash distribution to you
Distribution of securities distributed to holders of deposited securities which
are distributed by the depositary to ADR holders
Depositary services
Transfer and registration of common shares on our common share register to
or from the name of the depositary or its agent when you deposit or withdraw
common shares
As necessary
No charges of this type are currently made in the Brazilian market
The depositary may deduct the amount of any taxes owed from any payments to you. It may also sell deposited securities, by public or
private sale, to pay any taxes owed. You will remain liable if the proceeds of the sale are not sufficient to pay the taxes. If the depositary sells
deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any proceeds, or send to you any
property, remaining after it has paid the taxes.
Reimbursement of Fees
The Bank of New York Mellon, as depositary, has agreed to reimburse us for expenses we incur that are related to establishment and
maintenance expenses of the ADS program. The depositary has agreed to reimburse us for our continuing annual stock exchange listing fees.
The depositary has also agreed to pay the standard out‑of‑pocket maintenance costs for the ADRs, which consist of the expenses of postage and
envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of United States federal
tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse us annually for
certain investor relationship programs or special investor relations promotional activities. In certain instances, the depositary has agreed to
provide additional payments to us based on any applicable performance indicators relating to the ADR facility. There are limits on the amount
of expenses for which the depositary will reimburse us, but the amount of reimbursement available to us is not necessarily tied to the amount of
fees the depositary collects from investors.
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The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the
purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting
those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual
fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book‑entry system accounts of
participants acting for them. The depositary may generally refuse to provide fee‑attracting services until its fees for those services are paid.
Reimbursement of Fees Incurred in 2018
From January 1, 2018 to December 31, 2018, we received reimbursements in the amount of US$2.5 million for standard out‑of‑pocket
maintenance costs for the ADRs, any applicable performance indicators relating to the ADR facility, marketing fees and legal fees.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
A. Disclosure Controls and Procedures
We carried out an evaluation under the supervision of and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer and Investor Relations Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures, including those defined in the United States Exchange Act Rule 13(a)‑15(e), as of the year ended December 31, 2018.
As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer and Investor Relations Officer concluded, that our
disclosure controls and procedures, as of December 31, 2018, were not effective due to a deficiency in the maintenance of our controls regarding
privileged access to our Information Technology (“IT”) environment, as described in item B below.
B. Management Report on Internal Control over the Preparation of Financial Reports
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.
Our internal controls over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with IFRS, as issued by the IASB.
Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with IFRS, as issued by the IASB, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and directors, and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer and Investor Relations Officer,
our management conducted an assessment of our internal control over financial reporting as of December 31, 2018 based on the criteria
established in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in 2013.
Based on such assessment and criteria, our management has identified control deficiency, as of December 31, 2018, that represent a material
weakness in our internal control over financial reporting. The ineffectiveness of this internal control has not resulted in a misstatement or
omission in our consolidated financial statements as of December 31, 2018 and for the year then ended
Material Weakness in Internal Control over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in the internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement in the company’s annual or interim financial statements will not be prevented or detected on a
timely basis.
Our management has identified a service account (ERP system support) with privileged access. This account, if used improperly, could have
had access to system transactions and made undue changes.
Additionally, this access control deficiency could have affected the effectiveness of business process automated controls and manual
controls with an automated component.
Although there was a possibility of improper access, we carried out an analysis of the System Access Logs, which demonstrated that the
actions carried out were limited to those necessary to maintain the system, without any impact on our financial reporting for 2018.
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Actions for Remediation of Material Weakness
Our management immediately established actions and efforts to remediate the material weakness identified in relation to the service
account. These actions included:
Removing the privileged access;
·
· Analyzing the access logs of the relevant account;
· Actions to ensure that privileged access occurs only on an exceptional basis and for the necessary time, subject to due justification and
based on the authorization of two managers; and
Periodic monitoring of privileged user actions.
·
Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial
reporting, as described below.
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C. Certification Report of the Independent Audit Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders, Board of Directors and Management of Companhia de Saneamento Básico do Estado de São Paulo
- SABESP São Paulo - SP
Opinion on Internal Control Over Financial Reporting
We have audited Companhia de Saneamento Básico do Estado de São Paulo - SABESP (the Company) internal control
over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion,
because of the effect of the material weakness, described below, on the achievement of the objectives of the control
criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission”.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the statements of financial position of the Company as of December 31, 2018 and 2017, the related
statements of profit or loss, other comprehensive income, changes in equity, and cash flows for each of the years in the
three-year period ended December 31, 2018, and the related notes (collectively, the financial statements) and our report
dated April 26, 2019 expressed an unqualified opinion on those financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements
will not be prevented or detected on a timely basis. The following material weakness has been identified and included in
management’s assessment.
· There were ineffective general information technology controls (GITC) due to the existence of a user with
privileged access to the information technology (IT) that support the Company’s financial reporting process. As a
result, business process automated controls and manual controls with an automated component were also
considered ineffective because they could have been adversely impacted.
The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of
the 2018 financial statements and this report does not affect our report on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Annual Report on Internal Controls over Financial Reporting appearing under Item 15 of the Company’s Annual Report
on Form 20-F. Our responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
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transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ KPMG Auditores Independentes
São Paulo – Brazil
April 26, 2019
D. Changes in internal control over disclosure of financial information
There have been no changes in our internal control over financial reporting that occurred during the fiscal year ended December 31, 2018
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
At our board meeting held on June 26, 2006, we established an audit committee, as defined under section 3(a)(58) of the Exchange Act. Our
board of directors has determined that Ernesto Rubens Gelbcke qualifies as an “audit committee financial expert” as defined for the purposes of
this Item 16A in Item 16 of Form 20‑F. Ernesto Rubens Gelbcke is an “independent director” within the meaning of the SEC rules.
ITEM 16B. CODE OF ETHICS
We have adopted a code of business conduct and ethics called the Code of Conduct and Integrity, which applies to all of our employees,
including our directors, chief executive officer, chief financial officer and investor relations and head of accounting, as well as our suppliers and
third‑party contractors. To ensure compliance with the Code of Conduct and Integrity, we have an Ethics Commission and an internal Whistle-
Blower 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. Recurring cases are reported to the Ethics Commission, which urges the related departments to develop preventive actions. In
2018, 164 events were reported to the Whistle-Blower Channel. During 2018, 48 of our employees or outsourced employees received penalties
(11 warnings, one suspension and 36 dismissals). Our Ethics Commission is also responsible for addressing relevant inquiries and interpreting
the norms of the Code of Conduct and Integrity for all of our employees. Our Code of Conduct and Integrity is available on our web site at
http://www.sabesp.com.br at the following location: Investor Relations – Corporate Governance. If we amend the provisions of our Code of
Conduct and Integrity, or if we grant any waiver of such provisions, we will disclose the amendment or waiver on our web site at the same
address. You can obtain copies of our Code of Conduct and Integrity, without charge, upon request to sabesp.ri@sabesp.com.br.
Federal Law No. 13,303/16, State Decree 62,349/16 and the new Novo Mercado rules require the adoption of a Code of Conduct that should
include, among other provisions, guidelines to avoid conflicts of interests, forbiddance of fraudulent acts and corruption, whistleblowing
channels, protective measures to avoid retaliation regarding whistleblowers, periodic training on the content of such code and sanctions in case
of code violations. See “Item 16G—Corporate Governance—Required Changes to Corporate Governance Practices of Brazilian Government-
Controlled Companies”. We will disclose the amendment on our web site at the address listed above.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
KPMG Auditores Independentes served as our independent registered public accounting firm for the year ended December 31,
2018. KPMG Auditores Independentes’ activity began with the review of our interim financial information reporting for the second quarter of
2016.
Deloitte Touche Tohmatsu Auditores Independentes served as our independent registered public accounting firm for the years ended
December 31, 2015 and 2014.
The following table presents the aggregate fees for professional services and other services rendered to us by KPMG Auditores
Independentes and Deloitte Touche Tohmatsu Auditores Independentes in 2018 and 2017:
Audit Fees(1)
Audit‑Related Fees
Tax Fees
All Other Fees(2)
Year ended December 31,
(in millions of reais)
2018
2.8
-
-
-
2017
3,0
-
-
0.0
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2.8
3.0
(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.
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(2) Includes the amount of R$0.04 million referring to non-material, non-audit services in 2017.
Pre‑approval policies and procedures
Pursuant to Brazilian law, our board of directors is responsible, among other matters, for the selection, dismissal and oversight of our
independent registered public accounting firm. Our management is required to obtain the board of directors’ approval before engaging an
independent registered public accounting firm to provide any audit or permitted non‑audit services to us. The Brazilian Federal and State Public
Bidding Laws also apply to us with respect to obtaining services from third parties for our business, including the services provided by our
independent registered public accounting firm. As part of the bidding process, the independent registered public accounting firm is required to
submit proposals, and is then selected by us based on certain criteria including technical expertise and cost.
Except as disclosed above, KPMG Auditores Independentes did not provide any non-audit services to us in 2016, 2017 or 2018. Deloitte
Touche Tohmatsu Auditores Independentes did not provide any non-audit services to us in 2016.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM 16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
As previously disclosed in our annual report on Form 20-F for the fiscal year ended December 31, 2016, we engaged KPMG Auditores
Independentes as our independent registered public accounting firm on June 22, 2016. Our financial statements as of and for the years ended
December 31, 2015 and 2014, which are not included in this annual report, were audited by Deloitte Touche Tohmatsu Auditores Independentes.
ITEM 16G. CORPORATE GOVERNANCE
Required Changes to Corporate Governance Practices of Brazilian Government-Controlled Companies
On June 30, 2016, Federal Law No. 13,303/16 came into force in Brazil. This law sets new corporate governance standards for Brazilian
government-owned and mixed capital companies like our company, as well as their subsidiaries. Federal Law No. 13,303/16 also sets new rules
that these companies must follow in public bidding procedures and when contracting third parties.
Although the federal law gave the companies concerned two years in which to comply with the new standards, the State of São Paulo
decided that companies controlled by the State, like our company, had to revise their bylaws to bring them into compliance by the end of 2017.
However, taking into account State Law No. 16,525, of September 15, 2017, which regulates our corporate reorganization and the new Novo
Mercado requirements, the State of São Paulo enacted Decree No. 63,089/2017, which allowed us to implement the necessary changes to our
bylaws by June 30, 2018, as required by Federal Law No. 13,303/16. The revisions to our bylaws were approved at our General Shareholders’
Meeting held on April 27, 2018.
In terms of corporate governance, Federal Law No. 13,303/16 requires significant changes to internal controls and strengthens the rights not
only of our shareholders, but also of any interested party, to inspect the finances and running of the company. It requires us to publish
periodically a series of documents and reports to demonstrate our level of commitment to our business objectives, the financial impact of those
commitments, and our policies and practices in terms of corporate governance and sustainability, among other things. Those documents and
reports must be accompanied by further explanations, in plain language, that can be understood by the general public.
Among other requirements, this law sets out the following rules:
· At least 25% of the members of the Board of Directors must be independent, in accordance with the definition of director independence set by
Brazilian law (or, for companies whose minority shareholders exercise multiple votes, at least one of the directors must be independent).
· All directors and officers must have the same term of office, which may not be longer than two years. They may be re-elected up to a
maximum of three times consecutively.
· The performance of the executive officers, directors and members of board committees must be subjected to yearly evaluation with respect to,
at a minimum, the following matters:
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a. the lawfulness and effectiveness of their management performance;
b. their contribution to the company’s income for the year; and
c. their contribution to furthering the objectives in the company’s business plan and compliance with its long-term strategy.
The federal law requires that all officers and directors of the company must satisfy certain technical standards, in addition to the general
requirement that they be of good reputation and have knowledge of the business sector concerned. These technical standards include satisfying
both Point 1 and Point 2 below:
1. The individual must satisfy at least one of the requirements under (a), (b) or (c) of this Point 1:
a. a minimum of 10 years’ experience in an appointed position, in either the public or private sector, in a business area that is similar
or related to the company’s business purpose; or
b. a minimum of four years’ exercise of any one of (i), (ii) or (iii) below:
i.
a senior management position in a company with a similar business purpose or similar size; or
ii.
a position in the public sector that involves a high degree of trust (i.e., at level DAS-4 or higher); or
iii.
a position as professor or researcher in the company’s business sectors; or
c. a minimum of four years’ practice as an independent professional in one or more areas that are directly or indirectly related to the
company’s business sectors;
and:
2. The individual must satisfy the requirements of both (a) and (b) of this Point 2:
a. the individual must have received sufficient training for the position for which she or he has been nominated; and
b. the individual must not have been declared ineligible for such position in accordance with applicable law.
In order to comply with this law, we have implemented certain changes in our corporate governance structure and governing documents,
such as our bylaws, Board of Director’s Internal Charter, Executive Board’s Internal Charter and Fiscal Council’s Internal Charter.
Additionally, we have certain corporate policies, such as the Nominating Policy for the appointment and assessment of directors, officers
and Fiscal Council members, as well as the Policy for Compensation of directors, officers, as well as members of the Fiscal Council and
statutory committees.
These policies also aim to comply with the Novo Mercado Regulation and the State Decree No. 62,349/2016.
For a description of new corporate governance obligations imposed by Brazilian law on companies listed on the Novo Mercado segment,
see “Item 9.C. Markets—Trading on the Brazilian Stock Exchange—The Novo Mercado Segment”.
Significant Differences between our Current Corporate Governance Practices and NYSE Corporate Governance Standards
We are subject to the NYSE corporate governance listing standards. As a foreign private issuer, the standards applicable to us are
considerably different than the standards applied to U.S. listed companies. Under the NYSE rules, we are required only to: (a) have an audit
committee or audit board, pursuant to an applicable exemption available to foreign private issuers, that meets certain requirements, as discussed
below, (b) provide prompt certification by our chief executive officer of any material non‑compliance with any corporate governance rules, and
(c) provide a brief description of the significant differences between our corporate governance practices and the NYSE corporate governance
practice required to be followed by U.S. listed companies.
In view of Brazilian Law 13.303/16 and new requirements of Novo Mercado Listing Regulations, the following discussion summarizes the
significant differences between our current corporate governance practices and those required of U.S. listed companies:
Majority of Independent Directors
The NYSE rules require that a majority of the board must consist of independent directors. Independence is defined by various criteria,
including the absence of a material relationship between the director and the listed company. While the Brazilian Corporate Law did not
previously have a similar requirement, Federal Law No. 13,303/16 established that at least 25% of the members of the board of directors must be
independent. Under the Novo Mercado Regulations, our board of directors must evaluate the independence of directors before their election to
the board. Such evaluation shall be based on a declaration prepared by the nominee. Additionally, Brazilian Corporate Law, Federal Law No.
13,303/16 and the CVM have established rules that require directors to meet certain qualification requirements applicable to a company’s
directors. However, they do not require that we have a majority of independent directors, as required under the NYSE rules. Under our current
bylaws, approved on April 27, 2018, our board of directors must have a minimum of seven members, and 25% of the board must be
independent, as established by Federal Law No. 13,303/16 and as defined under Novo Mercado Regulations. Currently, six of our nine directors
are independent, pursuant to the Novo Mercado Listing Regulations and Federal Law No. 13,303/16. We believe these rules provide adequate
assurances that our directors are independent.
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Executive Sessions
NYSE rules require that the non‑management directors must meet at regularly scheduled executive sessions without management present.
The Brazilian Corporate Law does not have a similar provision. According to this Law, up to one‑third of the members of the board of directors
can be elected from management. Our bylaws provide that the CEO shall integrate the Board of Directors, while holding such position. All
other members of our board of directors meet the NYSE’s definition of “non‑management” directors. There is no requirement in the Brazilian
Corporate Law that non-management directors meet regularly without management. However, the Internal Charter of the Board of Directors
establishes that, by resolution of the Chairman of the Board, meetings may be held exclusively for external directors, without the presence of
executives. Our board of directors consists of seven non-management directors.
Fiscal Council
Under the Brazilian Corporate Law, the Conselho Fiscal, or fiscal council, is a corporate body independent of management and a company’s
external auditors. The fiscal council may be either permanent or non‑permanent, in which case it is appointed by the shareholders to act during a
specific fiscal year. A fiscal council is not equivalent to, or comparable with, a U.S. audit committee. The primary responsibility of the fiscal
council is to review management’s activities and a company’s financial statements, and to report its findings to the company’s shareholders. The
Brazilian Corporate Law requires fiscal council members to receive as compensation at least 10% of the average annual amount paid to a
company’s executive officers. The Brazilian Corporate Law requires a fiscal council to be composed of a minimum of three and a maximum of
five sitting members and respective alternates.
Under the Brazilian Corporate Law, the fiscal council may not contain members that (i) are on our board of directors, (ii) are on the board of
executive officers, (iii) are employed by us or a controlled company, or (iv) are spouses or relatives of any member of our management, up to the
third degree.
Currently, our fiscal council consists of four sitting members and his/her alternates. The fiscal council members generally meet once a
month.
Audit Committee
NYSE rules require that listed companies have an audit committee that (i) is composed of a minimum of three independent directors who
are all financially literate, (ii) meets the SEC rules regarding audit committees for listed companies, (iii) has at least one member who has
accounting or financial management expertise and (iv) is governed by a written charter addressing the committee’s required purpose and
detailing its required responsibilities. However, as a foreign private issuer, we need only to comply with the requirement that the audit
committee meet the SEC rules regarding audit committees for listed companies to the extent compatible with Brazilian Corporate Law and
Federal Law No. 13,303/16 (the Brazilian State-owned Companies Law). Our audit committee, which is not equivalent to, or comparable with,
a U.S. audit committee, provides assistance to our board of directors on matters involving accounting, internal controls, financial reporting and
compliance. The audit committee is mainly responsible for assisting and advising the board of directors in its responsibilities to ensure the
quality, transparency and integrity of our published financial information and financial statements. The audit committee is also responsible for
supervising all matters relating to the Code of Conduct and Integrity, accounting, internal controls, the internal and independent audit functions,
compliance, risk management and internal policies, such as the related parties transaction policy. The audit committee comprises three members
appointed by the board of directors, and, pursuant to our bylaws, the members of our audit committee may be appointed simultaneously to their
election to the board of directors or by a subsequent resolution. The members of the audit committee shall perform their duties for the duration
of their respective terms as board members or until otherwise decided by the shareholders’ meeting or by the board of directors. In the event that
an audit committee member resigns or is removed from office after exercising any portion of his or her term, such member may only rejoin the
audit committee at least three years from the end of his or her term. The current members of our audit committee are Ernesto Rubens Gelbcke,
Lucas Navarro Prado and Luís Eduardo Alves de Assis. All members meet the independent membership requirements of the SEC and NYSE as
well as other NYSE requirements. Ernesto Rubens Gelbcke 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.
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Nomination/Corporate Governance and Compensation Committees
NYSE rules require that listed companies have a nomination/corporate governance committee and a compensation committee composed
entirely of independent directors and governed by a written charter addressing the committee’s required purpose and detailing its required
responsibilities. Required responsibilities for the nomination/corporate governance committee include, among other things, identifying and
selecting qualified board member nominees and developing a set of corporate governance principles applicable to the company. Required
responsibilities for the compensation committee include, among other things, reviewing corporate goals relevant to the chief executive officer’s
compensation, evaluating the chief executive officer’s performance, approving the chief executive officer’s compensation levels and
recommending to the board non‑chief executive officer compensation, incentive‑compensation and equity‑based plans.
Under the Brazilian Corporate Law, we are not required to have a nomination/corporate governance committee or compensation committee.
However, Federal Law No. 13,303/16 and State Decree No. 62,349/16 established the requirement of a committee with the responsibilities of
verifying the nomination process of the members of the management and of the fiscal council. In our annual shareholders’ meeting, held on
April 27, 2018, our bylaws were amended in order to, among other things, create the Eligibility and Advisory Committee in compliance with
Federal Law No. 13,303/16 and State Decree No. 62,349/16.
This committee must be composed of up to three members, elected by a general shareholders’ meeting, without a fixed term of office.
Members must have at least three years’ professional experience in public administration, or three years’ experience in the private sector in an
area in which, or related to which, we operate. Currently, our Eligibility and Advisory Committee is composed of three members, which are
representatives from our legal, human resources and compliance departments.
Candidates are assessed based on the CODEC Resolution No. 03/2018 and on our nomination policy, approved by the Board of Directors,
which follows the guidelines defined by Federal Law No. 13,303/16, State Decree No. 62,349/16 and Novo Mercado Listing Regulations.
Members of the Eligibility and Advisory Committee may attend board of directors’ meetings where matters related to this committee are
discussed and will have the right to speak, but not to vote, in accordance with our bylaws.
This committee is also responsible for verifying the compliance of the evaluation process of the members of the management and of the
fiscal council, as well as providing methodological and procedural support to the board of directors to evaluate the performance of officers and
other members of statutory committees.
The performance evaluation, individual and collective, held annually, of the members of the management and the members of committees,
observing the following minimum requirements, according to the terms of Federal Law No. 13,303/16:
(a) presentation of the acts of management, regarding the lawfulness and effectiveness of the management;
(b) contribution to the earnings for the year; and
(c) achievement of the purposes established in the business plan and fulfillment of the long-term strategy.
We expect that a written charter addressing the committee’s purpose and detailing its required responsibilities will be approved by the board
of directors.
Under the Brazilian Corporate Law, the total amount available for compensation of our directors and executive officers and for
profit‑sharing payments to our executive officers is established by our shareholders at the annual general meeting. The individual compensation
and profit‑sharing of each executive officer, as well as the compensation of our board and committee members is set out according to our
remuneration policy, approved by the Board of Directors, which follows the guidelines from the São Paulo State Government and the CODEC
(State Capital Protection Board).
Shareholder Approval of Equity Compensation Plans
NYSE rules require that shareholders be given the opportunity to vote on all equity compensation plans and material revisions thereto, with
limited exceptions. We do not currently have any equity compensation plan. If such a plan were to be implemented, there is no requirement
under Brazilian Corporate Law for the plan to be approved by our shareholders. However, if the issuance of new shares in connection with any
equity compensation plan exceeded the authorized capital under our bylaws, the increase in capital would require shareholder approval.
Corporate Governance Guidelines
NYSE rules require that listed companies adopt and disclose corporate governance guidelines. We are in compliance with the adoption of
corporate governance provisions and guidelines required under the Novo Mercado Regulations, Federal Law No. 13,303/16 and State Decree
62,349/16. See “Item 9.C Markets—Trading on the Brazilian Stock Exchange—The Novo Mercado Segment” and “Item 16.G—Corporate
Governance—Required Changes to Corporate Governance Practices of Brazilian Government-Controlled Companies”, our Report on Brazilian
Code of Corporate Governance and our policies available on “Corporate Governance” section of our Investor Relations website. We believe that
such corporate governance guidelines applicable to us do not conflict with the guidelines established by the NYSE. Our corporate governance
guidelines and practices are available on our website at www.sabesp.com.br at the following location: Investor Relations – Corporate
Governance.
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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. The adoption and disclosure of a formal code is not required
under the Brazilian Corporate Law.
However, Federal Law No. 13,303/16, State Decree 62,349/16 and the Novo Mercado Regulations require the adoption of a Code of
Conduct and Integrity that should include, among other provisions, guidelines to avoid conflicts of interests, forbiddance of fraudulent acts and
corruption, whistleblowing channels, protective measures to avoid retaliation regarding whistleblowers, periodic training on the content of such
code and sanctions in case of code violations. We adopt and disclose a Code of Conduct and Integrity and believe that this code complies with
the requirements made by the Brazilian laws and regulations, as well as addresses the matters required to be addressed by the applicable NYSE
and SEC rules.
Internal Audit Function
NYSE rules require that listed companies maintain an internal audit function to provide management and the audit committee with ongoing
assessments of the company’s risk management processes and system of internal control. Our internal audit department is connected to the
Board of Directors through the audit committee and reports to our Chief Executive Officer. Our internal audit is responsible for evaluating (i) the
adequacy of internal controls, (ii) the effectiveness of the risk management and of the governance processes, (iii) the reliability of the process of
collecting, measuring, classifying, accumulating, recording and disclosing events and transactions, to prepare financial statements, and (iv) the
proper application of the principle of segregation of duties, to avoid the occurrence of conflicts of interest and fraud.
Anticorruption Compliance
Law No. 12,846, of August 1, 2013 (the “Anticorruption Law” or the “Clean Company Act”), as further regulated by Decree No.
8,420/2015, introduced to the Brazilian legal system the concept of strict liability for legal entities involved in harmful acts against the national
and foreign public administration, as defined in the Anticorruption Law, subjecting the violation company to penalties both in administrative and
civil law. Similar to the Foreign Corrupt Practices Act of the United States, to which we are also subject, the Anticorruption Law considers that
an effective implementation of Compliance Programs may be used to mitigate the administrative penalties to be applied as a consequence of a
harmful act against the public administration, which can be up to 20% of the company’s annual gross revenue. The program currently consists of
a set of internal mechanisms and procedures related to integrity, monitoring and incentives to report irregularities. The program also focuses on
the effective implementation of the Code of Conduct and Integrity as well as other policies and guidelines aimed at preventing fraud, corruption
and other harmful acts against public administration. In 2018, we circulated communications directed to the entire company, reinforcing the
importance of acting in accordance with laws, regulations and internal policies.
As a mixed capital company, our Compliance Program encompasses two distinct situations – active corruption and passive corruption, as
predicted in the Brazilian legislation – and follows the recommendations of the Organization for Economic Cooperation and Development, the
United Nations Office on Drugs and Crimes, and the World Bank to establish an ethical culture. Our program incorporates and focuses on high
management, structural functioning, the provision of complaint hotlines, monitoring of third-party relationships, governance and internal
controls, risk management, training and communication.
Citizens’ Access to Information at Sabesp
Federal Law No. 12,527/2011 (LAI), regulated by State Decree No. 58.052/2012 and State Decree No. 61.559/2015 determines that
government entities must create Citizen Information Services – SIC units which receive and manage information requests from the public, and
make available to citizens information requested or otherwise provided the reasons for denial of such information requests.
In order to comply with LAI, we implemented the Citizen Information Service – SIC, structuring the internal flow of information to serve
citizens within the terms provided by this law. We also made a Transparency Portal (Portal da Transparência) available on our website, which
includes basic information required by law, software for citizens to request information and a list of frequently requested information, according
to the standards of the São Paulo State Government.
These duties are linked to the Risk Management area whose main assumption is the transparency, quality of information and compliance
with strategic rules of a listed company.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
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ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
PART III
The following financial statements, together with the reports of the 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*
4.18*
4.19*
11.1*
12.1
12.2
13.1
13.2
Description
Bylaws of the Registrant (English translation) (incorporated by reference to the Form 6-K filed on May 25, 2018).
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 September 20, 2018 (English translation) (incorporated by reference to the Form 6‑K filed on November 30, 2018).
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).
Notice of Transactions with Related Parties, dated November 9, 2016, (English translation) (incorporated by reference to the Form 6-K filed on November 16,
2016).
First Amendment to the Private Instrument of Settlement and Other Covenants bewteen the Registrant and EMAE, dated October 19, 2017 (English translation)
(incorporated by reference to the Form 6-K filed on November 9, 2017).
Code of Conduct and Integrity dated July 27, 2018 (English translation) (incorporated by reference to the Form 6-K filed on August 10, 2018).
Certification of Benedito Pinto Ferreira Braga Junior, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Rui de Britto Álvares Affonso, Chief Financial Officer and Investor Relations Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Benedito Pinto Ferreira Braga Junior, 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.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
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101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
(*) Previously filed.
-133-
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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/ Benedito Pinto Ferreira Braga Junior
Name: Benedito Pinto Ferreira Braga Junior
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 26, 2019
-134-
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Companhia de Saneamento Básico do Estado de São Paulo -
SABESP
Financial Statements as at December 31, 2018 and 2017
And for the years ended
December 31, 2018, 2017 and 2016
F-1
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders, Board of Directors and Management of
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
São Paulo - SP
Opinion on the Financial Statements
We have audited the accompanying Statements of financial position of Companhia de Saneamento Básico do Estado de
São Paulo – SABESP (the Company) as of December 31, 2018 and 2017, the related statements of profit or loss, other
comprehensive income, changes in equity, and cash flows for each of the years in the three year period ended December
31, 2018, and the related notes (collectively, the financial statements). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results
of its operations and its cash flows for each of the years in the three year period ended December 31, 2018, in
conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards
Board (IASB).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission, and our report dated April 26, 2019 expressed an adverse opinion on the effectiveness of the
Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2016.
/s/ KPMG Auditores Independentes
São Paulo – SP
April 26, 2019
F-2
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statement of Financial Position as of December 31, 2018 and 2017
Amounts in thousands of reais
Assets
Current assets
Cash and cash equivalents
Trade receivables
Accounts receivable from related parties
Inventories
Restricted cash
Recoverable taxes
Other receivables
Total current assets
Noncurrent assets
Trade receivables
Accounts receivable from related parties
Escrow deposits
Water National Agency – ANA
Other receivables
Investments
Investment properties
Contract asset
Intangible assets
Property, plant and equipment
Note
7
9 (a)
10 (a)
8
18 (a)
9 (a)
10 (a)
11
12
13
14
15
16
Total noncurrent assets
Total assets
The accompanying notes are an integral part of these financial statements.
F-3
December 31, 2018
December 31, 2017
3,029,191
1,843,333
174,148
65,596
31,900
380,703
77,371
5,602,242
209,083
669,102
152,018
49,136
103,310
44,587
47,620
7,407,948
29,012,460
267,612
37,962,876
43,565,118
2,283,047
1,672,595
180,773
85,671
18,822
276,585
56,592
4,574,085
215,910
634,387
122,686
70,487
113,123
36,932
57,652
-
33,466,132
255,050
34,972,359
39,546,444
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statement of Financial Position as of December 31, 2018 and 2017
Amounts in thousands of reais
Liabilities and equity
Current assets
Trade payables and contractors
Current portion of long-term borrowings and financing
Accrued payroll and related taxes
Taxes and contributions
Interest on capital
Provisions
Services payable
Public-Private Partnership - PPP
Program Contract Commitments
Other liabilities
Total current liabilities
Noncurrent liabilities
Borrowings and financing
Deferred income tax and social contribution
Deferred Cofins and PASEP
Provisions
Pension obligations
Public-Private Partnership - PPP
Program Contract Commitments
Other liabilities
Total noncurrent liabilities
Total liabilities
Equity
Capital stock
Earnings reserves
Other comprehensive loss
Total equity
Total equity and liabilities
The accompanying notes are an integral part of these financial statements.
Note
December 31, 2018
December 31, 2017
17
18 (b)
24 (c)
20 (a)
22
15 (g)
15 (c) (iv)
17
19
20 (a)
21 (b)
15 (g)
15 (c) (iv)
24
F-4
465,993
2,103,612
564,830
200,563
673,765
458,387
454,022
137,827
230,695
108,938
5,398,632
11,049,184
261,242
140,830
434,475
2,970,009
3,275,297
142,314
341,447
18,614,798
344,947
1,746,755
588,073
183,965
598,612
607,959
408,275
60,007
128,802
104,485
4,771,880
10,354,211
36,754
130,182
470,245
2,932,338
3,011,409
110,698
215,718
17,261,555
24,013,430
22,033,435
15,000,000
5,100,783
(549,095)
19,551,688
43,565,118
10,000,000
8,051,110
(538,101)
17,513,009
39,546,444
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Income Statements for the
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
Net operating income
Cost of services
Gross profit
Selling expenses
Allowance for doubtful accounts
Administrative expenses
Other operating income (expenses), net
Equity results of investments in affiliaties
Profit from operations before finance income (expenses)
and income tax and social contribution
Financial expenses
Financial revenues
Exchange result, net
Financial result, net
Note
2018
2017
2016
28 (b)
29
16,085,094
(9,086,456)
14,608,233
(8,778,963)
14,098,208
(9,013,120)
29
29
29
31
12
30
30
30
6,998,638
5,829,270
5,085,088
(693,480)
(166,727)
(996,877)
28,591
6,510
(686,012)
(82,681)
(1,098,990)
(5,679)
5,760
(639,559)
(90,488)
(934,896)
4,722
4,740
5,176,655
3,961,668
3,429,607
(807,967)
446,302
(902,671)
(688,280)
326,244
(96,018)
(839,891)
448,710
1,090,628
(1,264,336)
(458,054)
699,447
Profit before income tax and social contribution
3,912,319
3,503,614
4,129,054
Income tax and social contribution
Current
Deferred
19 (d)
19 (d)
(852,655)
(224,596)
(882,787)
(101,517)
(1,121,289)
(60,667)
(1,077,251)
(984,304)
(1,181,956)
Profit for the year
Earnings per share – basic and diluted (in reais)
25
2,835,068
2,519,310
2,947,098
4.15
3.69
4.31
The accompanying notes are an integral part of these financial statements.
F-5
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Comprehensive Income for the
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais
Profit for the year
2,835,068
2,519,310
2,947,098
Other comprehensive income (loss)
(10,994)
287,547
(472,266)
Note
2018
2017
2016
Items which will not be subsequently reclassified to the income
statement:
Actuarial gains and (losses) on defined benefit plans
21 (b)
(10,994)
287,547
(472,266)
Total comprehensive income for the year
2,824,074
2,806,857
2,474,832
The accompanying notes are an integral part of these financial statements.
F-6
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Changes in Equity for the
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
Earnings reserves
Note
Capital
stock
10,000,000
Legal
Reserve
Investment
reserve
Additional
dividend
proposed
Retained
earnings
Other
comprehensive
loss
Total
784,955
3,273,580
11,453
-
(353,382)
13,716,606
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Balances as of December 31, 2015
Net income for the year
Actuarial gains (losses)
Total comprehensive income for the year
Legal reserve
Interest on capital (R$1.0240 per share)
2015 additional proposed dividends, approved
(R$0.0330 per share)
Additional proposed dividends
Withholding income tax on interest on capital
attributable as minimum mandatory dividends
21 (b)
24 (d)
24 (c)
24 (c)
-
-
-
-
-
-
-
-
Transfer to investments reserve
Balances as of December 31, 2016
-
10,000,000
-
-
-
147,355
-
-
-
-
-
Net income for the year
Actuarial gains (losses)
Total comprehensive income for the year
Legal reserve
Interest on capital (R$0.87539 per share)
2016 additional proposed dividends, approved
(R$0.09176 per share)
Additional proposed dividends
Withholding income tax on interest on capital
attributable as minimum mandatory dividends
Transfer to investments reserve
Balances as of December 31, 2017
Net income for the year
Actuarial gains (losses)
Total comprehensive income for the year
Legal Reserve
21 (b)
24 (d)
24 (c)
24 (c)
24 (c)
-
-
-
-
-
-
-
-
-
-
-
125,965
-
-
-
-
-
-
10,000,000 1,058,275
21 (b)
24 (d)
-
-
-
-
-
-
-
141,755
Investments reserve capitalized
24 (a)
5,000,000
Interest on capital (R$0.9851 per share)
2016 additional proposed dividends, approved
(R$0.07833 per share)
Additional proposed dividends
Withholding income tax on interest on capital
attributable as minimum mandatory dividends
Transfer to investments reserve
24 (c)
24 (c)
24 (c)
24 (f)
-
-
-
-
-
-
-
-
-
-
-
2,947,098
-
2,947,098
-
(472,266)
(472,266)
2,947,098
(472,266)
2,474,832
-
-
-
-
-
(11,453)
123,557
(147,355)
(699,936)
-
(123,557)
-
-
-
-
-
-
-
(699,936)
(11,453)
-
(60,838)
-
(60,838)
-
1,976,250
-
(1,976,250)
932,310
5,249,830
62,719
-
(825,648)
15,419,211
2,519,310
-
2,519,310
-
287,547
287,547
-
-
-
-
-
2,519,310
(125,965)
(598,336)
(62,719)
-
105,543
(105,543)
(52,004)
-
287,547
2,806,857
-
-
-
-
-
-
-
(598,336)
(62,719)
-
(52,004)
-
(10,994)
2,824,074
-
-
-
-
-
-
-
-
-
(673,328)
(53,539)
-
(58,528)
-
1,689,466
-
(1,689,466)
6,939,296
53,539
-
(538,101)
17,513,009
2,835,068
-
2,835,068
-
(10,994)
(10,994)
-
-
-
-
(5,000,000)
-
-
-
-
-
-
-
-
-
-
(53,539)
118,859
(58,528)
2,835,068
(141,755)
-
(673,328)
-
(118,859)
-
1,901,126
-
(1,901,126)
3,840,422
Balances as of December 31, 2018
The accompanying notes are an integral part of these financial statements.
15,000,000 1,200,030
60,331
-
(549,095)
19,551,688
F-7
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Cash Flows for the
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais
Cash flow from operating activities
Profit before income tax and social contribution
December 31,
2018
December 31,
2017
December
31,
2016
3,912,319
3,503,614
4,129,054
Adjustments for:
Depreciation and amortization
Residual value of property, plant and equipment, intangible assets and investment properties written-off
Bad debt expense
Agreement signed with the municipality of Guarulhos
Provisions and inflation adjustment
Pension plan liabilities – early reduction (curtailment)
Interest calculated on borrowings and financing payable
Inflation adjustment and exchange gains (losses) on borrowings and financing
Interest and inflation adjustment on liabilities
Interest and inflation adjustment on assets
Finance charges from customers
Margin of fair value on intangible assets arising from concession
Provision for Consent Decree (TAC)
Share of profit of investees
Provision from São Paulo agreement
Provision for pension plan - Sabesprev Mais
Pension obligations
Other adjustments
1,392,541
24,974
165,433
(928,014)
111,940
-
563,902
982,072
30,103
(64,046)
(289,321)
(63,013)
80,245
(6,510)
135,735
-
243,569
33,349
1,301,897
24,935
82,681
-
185,080
-
426,781
159,087
25,751
(31,619)
(193,683)
(70,335)
72,933
(5,760)
-
-
304,500
92,461
1,146,626
15,168
90,488
-
276,654
(334,152)
449,470
(969,430)
24,297
(80,675)
(207,789)
(81,513)
89,083
(4,740)
-
235
377,886
24,412
Changes in assets
Trade receivables
Accounts receivable from related parties
Inventories
Recoverable taxes
Escrow deposits
Other receivables
Changes in liabilities
Trade payables and contractors
Services payable
Accrued payroll and related taxes
Taxes and contributions payable
Deferred Cofins/PASEP
Provisions
Pension obligations
Other liabilities
Cash generated from operations
Interest paid
Income tax and social contribution paid
Net cash generated from operating activities
Cash flows from investing activities
Acquisition of contract asset and intangible assets
Restricted cash
Investment increase
Purchase of property, plant and equipment
Dividends received
Net cash used in investing activities
The accompanying notes are an integral part of these financial statements.
F-9
6,325,278
5,878,323
4,945,074
(71,679)
39,919
20,075
(104,118)
(1,639)
11,760
(176,826)
(89,988)
(103,488)
(4,829)
10,648
(297,282)
(217,000)
122,214
5,463,045
(732,048)
(888,077)
3,842,920
(42,194)
51,594
(27,633)
(233,952)
(32,200)
8,312
(180,353)
(51,779)
56,841
15,983
(7,889)
(279,951)
(228,282)
(16,741)
4,910,079
(34,665)
(3,163)
7,156
35,195
33,232
144,920
6,371
72,775
21,240
(90,325)
5,150
(185,793)
(201,736)
17,842
4,773,273
(676,087)
(932,110)
3,301,882
(739,944)
(1,029,737)
3,003,592
(2,132,559)
(13,078)
(1,136)
(50,645)
8,131
(2,189,287)
(1,957,780)
5.256
-
(18,920)
-
(1,971,444)
(2,108,167)
5,078
-
(27,631)
-
(2,130,720)
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Cash Flows for the
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais
(continued)
Cash flows from financing activities
Borrowings and financing
Proceeds from loans
Payment of loans
Payment of interest on capital
Public-Private Partnership - PPP
Program Contract Commitments
Net cash used in financing activities
December 31,
2018
December 31,
2017
December 31,
2016
1,634,553
(1,678,748)
(653,393)
(178,333)
(31,568)
(907,489)
1,007,572
(1,098,558)
(765,933)
(31,758)
(44,935)
(933,612)
1,250,524
(1,535,312)
(139,399)
(30,498)
(171,180)
(625,865)
Increase in cash and cash equivalents
746,144
396,826
247,007
Represented by :
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Increase in cash and cash equivalents
2,283,047
3,029,191
746,144
1,886,221
2,283,047
396,826
1,639,214
1,886,221
247,007
The accompanying notes are an integral part of these financial statements.
F-10
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
1 Operations
Companhia de Saneamento Básico do Estado de São Paulo ("SABESP" or the "Company") is a mixed-capital company
headquartered in 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 performs these activities in other
states and countries, and can operate in drainage, urban cleaning, solid waste handling and energy markets. SABESP aims to
be a world reference in the provision of sanitation services, in a sustainable, competitive and innovative manner, with a focus
on customers.
As of December 31, 2018, the Company operated water and sewage services in 369 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 369 municipalities. The municipalities of Guarulhos and Aguaí signed contracts on December of 2018,
however their operations will begin only in 2019 (in January and June, respectively). As of December 31, 2018, the Company
had 373 contracts.
SABESP is not temporarily operating in the municipalities of Macatuba and Cajobi due to judicial orders. The lawsuits are in
progress and the carrying amount of these municipalities’ intangible assets was R$4,345 as of December 31, 2018 (R$4,345 as
of December 31, 2017).
As of December 31, 2018, 35 concession agreements (51 as of December 31, 2017) had expired and are being negotiated. From
2019 to 2030, 31 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, 2018, 307 program and services contracts were signed (287 contracts as of December 31,
2017).
As of December 31, 2018, the carrying amount of the underlying assets used in the 35 concessions of the municipalities under
negotiation totaled R$4,485,203, accounting for 12.32% of the total of intangible assets, and the related gross revenue for the
year ended December 31, 2018 totaled R$1,035,906, accounting for 6.07% of the total of gross revenue.
The Company’s operations are concentrated in the municipality of São Paulo, which represents 51.52% of the gross revenues as
of December 31, 2018 (55.38% as of December 31, 2017 and 55.46% as of December 31, 2016) and 46.97% of intangible assets
(46.92% on December 31, 2017).
F-11
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
On June 23, 2010, the State of São Paulo, the Municipality of São Paulo, the Company and the regulatory agency “Sanitation
and Energy Regulatory Agency – ARSESP” signed an agreement to share the responsibility for water supply and sewage
services to the Municipality of São Paulo based on a 30-year concession agreement. This agreement is extendable for another
30 years, pursuant to the law. This agreement sets forth SABESP as the exclusive service provider and designates ARSESP as
regulator, establishing prices, controlling and monitoring services. On the same date, the State of São Paulo, the Municipality
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:
protection of the sources of water in collaboration with other agencies of the State and the City;
capture, transport and treatment of water;
collect, transport, treatment and final dispose of sanitary sewage; and
i.
ii.
iii.
iv. adoption of other actions of basic and environmental sanitation.
The Company operates under an authorization by public deed in some municipalities in the Santos coast region and in the
Ribeira Valley, where the Company started to operate after the merger of the companies that formed it. In September 2015, the
Company entered into a water supply and sewage public utility services agreement with the municipality of Santos; the gross
revenue calculated in the year ended December 31, 2018 totaled R$ 326.276 (R$294,658 as of December 31, 2017 and
R$280,689 as of December 31, 2016) and the intangible asset was R$307,566 in the year ended December 31, 2018
(R$310,577 as of December 31, 2017).
Public deeds are valid and governed by the Brazilian Civil Code.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
The Company's shares have been listed in the Novo Mercado (New Market) segment of B3 under the ticker symbol SBSP3
since April 2002 and on the New York Stock Exchange (NYSE) as American Depositary Receipts (“ADRs”) Level III, under the
SBS code, since May 2002.
Since 2008, the Company has been setting up partnerships with other companies, which resulted in the following companies:
Sesamm, Águas de Andradina, Saneaqua Mairinque, Aquapolo Ambiental, Águas de Castilho, Attend Ambiental and Paulista
Geradora de Energia. 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.
As of March 3, 2018, the Jaguari-Atibainha interconnection was inaugurated; this interconnection allow the transfer of an
average annual outflow of 5.13 cubic meters per second (m³/s) and a maximum outflow of 8.5 m³/s from the Paraíba do Sul
Basin to the Cantareira System. Inaugurated in April 2018, the São Lourenço Production System expand water production and
capacity by 6.4 m³/s. With the conclusion of this system the Company has nine large production systems available to supply
the São Paulo Metropolitan Region. These two important works aim at expand water security in the São Paulo Metropolitan
Region.
Management expects that with improved water security, due to the works carried out, the generation of operating cash and the
credit lines available for investment, the Company will have sufficient funds to meet its commitments and not compromise its
necessary investments.
The financial statements were approved by Management on April 25, 2019.
2 Basis of preparation and presentation of the financial statements
The financial statements of the Company have been prepared in accordance with the International Financial Reporting Standards –
IFRS as issued by the International Accounting Standards Board – IASB. All material information related to the financial
statements, and this information alone, is being disclosed and corresponds to the information used by the Company’s Management
in its administration.
The financial statements have been prepared under the historical cost except for certain financial instruments measured at fair
value when required by the standards.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also
requires Management to exercise its judgment in the process of applying the Company's accounting policies. The areas involving a
higher degree to judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are
described in Note 6.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
3 Summary of Significant Accounting Policies
The main accounting policies applied in the preparation of these financial statements are defined below. These policies have been
applied consistently in all years presented, except for the adoption of new accounting standards as described below.
3.1 Cash and cash equivalents
Cash and cash equivalents include cash in hand, bank deposits, overdraft accounts and other short-term highly liquid investments
with original maturities less than three months as of the investment date, with an insignificant risk of changing value.
3.2 Financial assets and liabilities
Financial Asset - Classification
As of December 31, 2017, the Company classified its financial assets according to the following categories: measured at fair value
through profit or loss, borrowings and receivables, held-to-maturity and available for sale. The classification depends on the
purpose for which the financial assets were acquired. Management determines the classification of the financial assets at inception.
As of December 31, 2017, 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.
· Borrowings and receivables
These comprise receivables, which are non-derivative financial assets with fixed or determinable payments, not quoted in an
active market. Borrowings and receivables are presented in current assets, except for those with maturity of more than 12
months after the reporting date (these are classified as noncurrent assets). The Company's borrowings and receivables include
cash and cash equivalents, restrict cash, balances of trade receivables, accounts receivable from related parties, other
receivables, receivables from the Water National Agency – ANA. Borrowings and receivables are recorded at fair value and
subsequently at amortized cost, under the effective interest rate method.
Starting January 1, 2018, the Company adopted IFRS 9, which establishes principles for the financial reporting of financial assets
and financial liabilities involving all three accounting aspects: classification and measurement, impairment and hedge accounting.
As of December 31, 2018, the Company classifies its financial assets according to the following categories: measured at amortized
cost, measured at fair value through other comprehensive income and measured at fair value through profit or loss. The
classification depends on the purpose for which the financial assets were acquired. Management determines the classification of the
financial assets at inception. As of December 31, 2018, the Company did not have financial assets classified as fair value through
other comprehensive income and fair value through profit or loss.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
· Amortized cost
This comprises financial assets that meet the following conditions: (i) it is held within the business model whose objective is to hold
financial assets to collect contractual cash flows; and (ii) the contractual terms of the financial asset give rise, on specified dates, to
cash flows that are solely payments of principal and interest on the principal amount outstanding.
Presented as current assets, except for those with maturity of more than 12 months after the reporting date (these are classified as
noncurrent assets). The Company's financial assets measured at amortized cost include cash and cash equivalents, restricted cash,
balances of trade receivables, accounts receivable from related parties, other receivables, receivables from the Water National
Agency – ANA. Financial assets measured at amortized cost are recorded at fair value and subsequently at amortized cost, under
the effective interest rate method.
Financial Liabilities - Classification
As of December 31, 12 2017, the Company classified its financial liabilities into the following categories: measured at fair value
through profit or loss and amortized cost. Classification depends on the purpose to which the financial liabilities were assumed. As
of December 31, 2017, the Company did not have liabilities classified into the “fair value through profit or loss” category.
· Amortized cost
This category comprises balances payable to contractors and suppliers, borrowings and financing, services payable, balances
payable from public-private partnership (PPP), and program contract commitments.
The effective interest rate method is adopted to calculate the amortized cost of a financial liability and allocate its interest expense
under the respective period. The effective interest rate exactly deducts the estimated future cash flows (including fees, transaction
costs and other issue costs) throughout the financial liability’s estimated life or, when appropriate, during a shorter period, for
initial recognition of the net carrying amount.
As of December 31, 2018, with the adoption of IFRS 9, the Company classifies its financial liabilities measured at amortized cost.
Classification depends on the purpose to which the financial liabilities were assumed. This category comprises balances payable to
contractors and suppliers, borrowings and financing, services payable, balances payable from public-private partnership (PPP), and
program contract commitments.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
The effective interest rate method is adopted to calculate the amortized cost of a financial liability and allocate its interest expense
under the respective period. The effective interest rate exactly deducts the estimated future cash flows (including fees, transaction
costs and other issue costs) throughout the financial liability’s estimated life or, when appropriate, during a shorter period, for
initial recognition of the net carrying amount.
Impairment
IFRS 9 – Financial Instruments introduces a new impairment model, replacing the incurred loss model for the expected credit loss
model, which requires the recording of provision upon initial recognition of asset exposed to credit risk.
Trade receivables
Due to the caractheristics of the Company’s accounts receivable such as (i) insignificant financial component, (ii) non-complex
receivables portfolio, and (iii) low credit risk, the Company adopted the simplified approach of expected credit loss, which consists
in recognizing expected credit loss based on the total asset’s useful life.
As of December 31, 2017, the methodology to calculate the allowance for doubtful accounts was carried out based on historical
loss. The methodology used consisted of using an estimate per maturiry range through the average weighted loss of the last 12
months. The calculation also considered a segregation of clients by nature and maturity date. The Company also concluded that
the macroeconomic indicators did not have significant impact on its estimates. In order to support this understanding, the
Company carried out several analyses of the correlation between indicators that could potentially have some influence the
sanitation sector and its history of losses on doubtful accounts, such as Gross Domestic Product (GDP), Unemployment Rate and
the Extended Consumer Price Index (IPCA).
After analysis, the Management concluded that the methodology already adopted by the Company complies with the expected
credit loss model and, for this reason, the first-time adoption of IFRS 9 as from January 1, 2018 did not have significant impacts
on the measurement of allowance for doubtful accounts.
Deposit transactions and financial investments measured at amortized cost
The Company analyzes changes in the rates of investments in bank deposits certificates and information obtained from regulatory
agencies about the financial institutions. The likelihood of delinquency over 12 months and during the terms of these investments
was based on historical data provided by credit rating agencies for each credit level and analyzed in terms of sensitivity based on
current returns.
These deposits and financial investments are subject to an insignificant risk of change in value.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
3.3 Operating income
(a) Revenue from sanitation services
Revenue from water supply and sanitation services are recognized as the water is consumed and services are provided. Revenues,
including 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. Unbilled revenues represent incurred revenues in which the
services were provided, but not yet billed until the end of the each period and are recorded as trade receivables based on monthly
estimates of the completed services. The average term between the issue and the maturity of the bill is ten business days.
Concerning revenues of wholesale municipal governments (wholesale sale), which do not pay the full invoice, the Company records
allowance for doubtful accounts upon invoicing in revenue reduction account.
As of December 31, 2017, the Company recognized revenue when: i) products were delivered or services were rendered; ii) the
amount of revenue could be reliably measured, iii) it was probable that future economic benefits would flow to the Company, and
iv) it was probable that the amounts will be collected. The amount of revenue was not considered to be reliably measurable until all
conditions relating to the sale had been satisfied. Amounts in dispute were recognized as revenue when collected.
As of December 31, 2018, with the adoption of IFRS 15, since 1 January, 2018, which establishes a five-step model applicable over
revenue from a contract with a customer, as a result, the Company started to recognize revenue when: i) it identifies the contracts
with customers; ii) it identifies the different obligations in the contract; iii) it determines the transaction price; iv) it allocates the
transaction price to the performance obligations in the contracts; and (v) it satisfies all performance obligations. Amounts in
dispute are recognized as revenue when collected.
The Company analyzed sales transactions to private sector, government entities and wholesale customers and concluded IFRS 15
did not have significant impacts.
The Company adopted IFRS 15 using the cumulative effect method, with application and recognition as from first-time adoption,
i.e. January 1, 2018. Consequently, the Company did not apply the requirements of IFRS 15 for comparison purposes. Accordingly,
data relating to 2017 is presented based on information previously reported and prepared in accordance with IAS 18 Revenue and
related interpretations.
(b) Construction revenue
As of December 31, 2017, revenue from concession construction contracts was recognized in accordance with IFRIC 12 (Concession
Arrangements) and IAS 11 (Construction Contracts), using the percentage-of-completion method, provided that the applicable
conditions for application were fulfilled, with non-cash effect. The percentage of completion was 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
was 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 construction costs,
resulting in the construction revenue.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
As of December 31, 2018, revenue from concession construction contracts is recognized in accordance with IFRS 15 (Revenue from
Contracts with Customers) and IFRIC 12 (Concession Contracts), as all performance obligations are satisfied over time. During the
construction of the contract, an asset is classified as contract asset, as the Company estimates that the fair value of its consideration
is equivalent to expected construction costs plus margin (the effects from the first-time adoption of IFRS 15 are presented according
to Note 4.1). The fee represents the additional margin related to the work performed by the Company in relation to such
construction contracts and it is added to construction costs, resulting in the construction revenue.
3.4 Trade receivables and allowance for doubtful accounts
Trade receivables are amounts due from customers for services performed in the ordinary course of business. These are classified
as current assets, except when maturity exceeds 12 months after the end of the reporting period. In these cases, they are presented
as noncurrent assets.
The Company establishes an allowance for doubtful accounts for receivable balances at an amount that Management considers to
be sufficient to cover eventual losses. The analysis is carried out based on objective accounts receivable data, past receipts, existing
guarantees, and as from January 1, 2018, with the adoption of IFRS 9, it considers expected future losses.
3.5 Inventories
Inventories of supplies for consumption and maintenance of the water and sewage systems are stated at the lower of average cost of
acquisition or net realizable value, and are classified in current assets.
3.6 Investment properties
The investment properties are recorded at the acquisition or construction cost, less accumulated depreciation, except for the land
group, calculated by the straight-line method at rates that consider the estimated useful life of assets. Expenditures related to
repairs and maintenance are recorded in the income statement when incurred.
The Company also maintains few assets for undetermined use in the future, i.e., it is not defined if the Company will use these
assets in the operation or sell them in the short term during the ordinary course of business.
3.7 Property, plant and equipment
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
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 finance charges and inflationary effects deriving from financing effectively applied to construction in
progress are recorded as cost of respective property, plant and equipment, in this case, for the qualifying assets, as applicable.
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.
Subsequent costs included in the existing asset's carrying amount or recognized as a separate asset, as appropriate, only when it is
probable that the future economic benefit associated with the item will flow to the Company and the cost of the item can be
measured reliably. Repairs and maintenance are charged to the income statement during the financial period in which they were
incurred.
Depreciation is calculated using the straight-line method to allocate their cost and is described in Note 16(c). .
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 income statement.
3.8 Intangible assets
Intangibles are stated at acquisition cost and/or construction of the underlying assets, including construction margin, interest and
other finance charges capitalized during the construction period, in this case, for the qualifying assets. Qualifying assets are assets
that, necessarily, take a substantial period to get ready for its intended use or sale. The Company considers that substantial period
means a period greater than 12 months. This period was established by considering the completion period of the majority of its
constructions, which is greater than 12 months, which corresponds to one fiscal year of SABESP.
The intangible has its amortization initiated when the intangible assets are available for use in location and the necessary condition
when this asset becomes operational.
The amortization of intangible assets reflects the period over the expected future economic benefits generated by the intangible
asset are consumed by the Company and can be the period of the contract or the useful life of the asset.
The amortization of the intangible assets is discontinued when the asset is totally consumed or it is disposed of, whatever occurs
first.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
Donations in assets, received from third parties and governmental entities, to allow the Company to render water and sewage
services are not recorded in the Company’s financial statements, since these assets are controlled by the concession grantor.
Financial resources received as donations for the construction of infrastructure are recorded under “Other operating income”.
(a) Concession arrangements/program
The Company operates concession agreements including the rendering of basic sanitation, environmental, water supply and sewage
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 (b).
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, in cases where there is the right to receive the residual value of
the assets at the end of the contract , 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.
The details referring to amortization of intangible arising from concession arrangements/program are described in Note 16 (c).
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
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.
(b) Software licenses
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 Impairment of non-financial assets
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 Trade accounts payable and contractors
Accounts payable to contractors and suppliers are obligations to pay for goods or services purchased from suppliers in the ordinary
course of business and are classified as current liabilities if the payment is due in the period up to one year. Otherwise, the accounts
payable are presented as noncurrent liabilities and are initially measured at fair value, which generally correspond to the bill and
subsequently at amortized cost.
3.11 Borrowings and financing
Borrowings and financing are initially recognized at fair value, upon receipt of funds, net of transaction costs. Subsequently,
borrowings and financing are stated at amortized cost, as presented in Note 17. Borrowings and financing are classified as current
liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the end of
the reporting period.
Nonconvertible bonds issued by the Company are recognized in a similar manner to borrowings.
3.12 Borrowing costs
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
Borrowings and financing are initially recognized at fair value, upon receipt of funds, net of transaction costs. Subsequently,
borrowings and financing are stated at amortized cost, as presented in Note 17. Borrowings and financing are classified as current
liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the end of
the reporting period.
Nonconvertible bonds issued by the Company are recognized in a similar manner to borrowings.
3.12 Borrowing 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
borrowings, 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 borrowings
effective on the capitalization date.
For foreign currency-denominated borrowings or financing, the Company analyzes them as if they were contracted in local
currency, restricting the capitalization of interest and/or exchange variation by the amount that would be capitalized if these were
contracted in the domestic market in similar lines of credit and loans.
3.13 Payroll, related charges and contributions
Salaries, vacations and the 13th salary and additional payments negotiated in collective labor agreements plus related charges and
contributions are recorded on the accrual basis.
3.14 Profit sharing
The 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 cost, selling and administrative expenses.
3.15 Provisions, legal liabilities, escrow deposits and contingent assets
Provisions related to claims are recognized when: i) the Company has a present (legal or constructive) obligation as a result of past
event; ii) it is probable that an outflow of resources that comprise economic benefits will be required to settle the obligation; and iii)
the amount can be reliably estimated. Where there are a number of similar obligations, the likelihood that an outflow 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 20.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
Escrow deposits not linked to related liabilities are recorded in noncurrent assets. Escrow deposits are adjusted for inflation.
Contingent assets are not recognized in the statements of financial position.
3.16 Environmental costs
Costs related to ongoing environmental programs are expensed in the income statement, when there is 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.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
3.17 Income taxes – current and deferred
Income taxes expenses comprise current and deferred income tax and social contributions.
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 income statement), 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. 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.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
3.18 Taxes on revenues
Revenues from sanitation services are recognized on accrual basis for PASEP and Cofins, calculated at the rates of 1.65% and
7.60%, respectively.
In addition, revenues from sanitation services are also subject to the Regulatory, Control and Inspection Fee (TRCF - Taxa de
Regulação, Controle e Fiscalização), whose taxable event is the performance of regulation, control and monitoring activities by
ARSESP, calculated at 0.50% of the annual revenue directly generated by the service provided less taxes levied on the service.
The taxes related to PASEP and Cofins incident on amounts invoiced to public entities are due when invoices are received.
These taxes are calculated by the non-cumulativeness regime and presented net, as deductions from gross revenues. Tax debts
calculated over “other operating income” are presented as deductions from the respective operating income.
3.19 Pension obligations
(a) Defined benefit
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 income statement for the period.
Liabilities from defined benefit pension plan obligations correspond to the present value of the defined benefit obligation at the end
of the reporting period, less the fair value of the plan’s assets. The defined benefit obligation (G1) and (G0) are calculated on an
annual basis by independent actuaries, using the projected unit credit method. The estimated future cash 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.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
In an event where a curtailment relates to only some of the employees covered by a plan, or where only part of an obligation is
settled, the gain or loss includes a proportionate share of the past service cost and actuarial gains and losses. The proportionate
share is determined on the basis of the present value of the obligations before and after the curtailment or settlement.
(b) Defined contribution
The Company makes contributions to defined contribution plans (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 revenues and expenses
Financial revenue is primarily comprised of interest, inflation adjustments and exchange rate changes 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 rate changes on borrowings and
financing, provisions, public-private partnership and program contract commitments. These financial income and expenses are
calculated using the effective interest rate method.
Inflation adjustments and exchange gains and losses derive from the collection or payment to third parties, as contractually
required by law or court decision, and recognized on an accrual basis pro rata temporis. Inflation adjustments included in the
agreements are not considered embedded derivatives, since they are deemed as inflation adjustment rates for the Company’s
economic scenario.
3.21 Leases
Lease agreements are classified as finance 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 income statement on a straight-line
basis during the lease term.
Finance lease agreements are measured based on the lower amount between the present value of minimum mandatory payments of
the agreement or the fair value of asset on the start date the lease agreement. The amounts payable deriving from considerations of
finance lease agreements are impacted by financial expenses and amortization of finance lease payables so that to obtain a constant
interest rate. The corresponding lessor’s liability is recorded as current and noncurrent debt.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
3.22 Other current and noncurrent assets and liabilities
Other assets are stated at cost of acquisition, net of any impairment loss, where applicable. The amounts recognized as other
liabilities are stated at known or estimated amounts, including, where applicable, related charges and inflation adjustments.
3.23 Dividends and interest on capital
The Company uses the tax benefits of distributing dividends as interest on capital, as permitted by Brazilian Law. This distribution
of dividend is accounted for in accordance with Brazilian Law 9,249/95 for tax deductibility purposes, limited to the daily pro rata
fluctuation of the Long-term Interest Rate (TJLP). The benefit attributed to the shareholders is recognized in the current liability
against Equity, based on its by-laws. Dividends and interest on capital over the minimum established in the by-laws are recognized
when approved by the shareholders in the shareholders’ meeting, except for taxes incurring in the distribution of interest on capital.
The tax benefit of the interest on capital are accrued in the income statement of the year, under the same recognition basis of
expenses with interest on capital.
3.24 Present value adjustment
Current and noncurrent financial assets and liabilities 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 Segment information
Operating segments are determined in a manner consistent with the internal reporting to the Company’s chief operating decision
maker (“CODM”), which, in the case of SABESP, is the Board of Executive Officers, to make strategic decisions, allocate resources
and evaluate performance.
Consequently, the Company determined that it has one operating segment (sanitation services).
The accounting policies used to determine segment information are the same as those used to prepare the Company’s financial
statements.
The measure of the segment’s profit or loss is operating income before other operating expenses, net and equity accounting, which
excludes construction revenue and related costs.
The CODM analyzes asset and liabilitity information on a consolidated basis. Consequently, the Company does not disclose
segment information on assets and liabilities.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
Substantially all of the Company’s noncurrent assets and revenue generated from customers are located in São Paulo State.
Consequently, financial information is not disclosed by geographic area.
3.26 Translation into foreign currency
(a) Functional and reporting currency
Items included in the financial statements are measured using the currency of the primary economic environment in which the
company operates ("the functional currency"). The financial statements are presented in Brazilian reais (R$), which is also the
Company's functional currency. All financial information has been stated in reais and rounded to the next thousand, except where
otherwise indicated.
(b) Foreign currency translation
Foreign currency-denominated transactions are translated into Brazilian reais using the exchange rates prevailing at the
transaction dates. Statement of financial position accounts are translated by the exchange rate prevailing at reporting date.
Exchange gains and losses resulting from the settlement of these transactions and the translation of foreign currency-denominated
cash assets and liabilities are recognized in the income statement, except for borrowings and financing referring to property, plant
and equipment or intangible assets in progress, where exchange losses are recognized as corresponding entry to the asset while
construction is in progress, as described in Note 3.12.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
4 Changes in accounting practices and disclosures
4.1 New standards, amendments and interpretations effective for periods beginning on or after January 1, 2018
New standards and revisions
Standard
Description
Impact
IFRS 9 - Financial Instruments
Changes in the classification and
measurement requirements, mainly for
impairment and hedge accounting.
IFRS 15 - Revenue from Contracts with
Customers
Amendments to IFRS 2 – Classification
and measurement of share-based payment
transactions
Amendments to IAS 40 – Transfers of
investment properties
Establishes a single comprehensive
framework to determine if and when a
revenue is recognized and how revenue is
measured.
IFRS 15 supersedes the current revenue
recognition guidance including IAS 18
Revenue, IAS 11 Construction Contracts
and IFRIC 13 Interpretation A – Customer
Loyalty Programmes.
Describe about modifications of settled
options of shares.
The amendments clarify that a transfer to
or from investment properties require an
assessment of whether a property match,
or no longer match, the definition of
supported by
investment properties,
observable evidence of a change in use,
and that a change in use is possible for
properties under construction.
Annual improvements to IFRSs: 2014-
2016 cycle
Amendments to IAS 28 Investments in
Associates and Joint Ventures
IFRIC 22 – Foreign Currency
Transactions and Advance Consideration
The amendments clarify that the option
made by a venture capital organization
and other similar entities to measure
investments
joint
ventures at fair value through profit or
loss
for each
associate or joint venture, and this choice
should be made in the inception.
is separately available
in associates and
Describes how the transaction date should
be defined in order to determine the
exchange rate applicable to the initial
recognition of an asset, expense or income
when the consideration of that item has
been paid or received in advance in
foreign
the
recording of non-monetary assets and
liabilities.
currency,
resulting
in
Except for the impact of the disclosure of
allowance for doubtful accounts in the
income statements, which is
demonstrated as a separate item, the
application of this standard did not
impact materially the disclosures or
amounts recognized in the annual
financial statements.
(*) See impact analysis below.
The application of this amendment did
not impact the disclosures or amounts
recognized in the annual financial
statements.
The application of this amendment did
not impact the disclosures or amounts
recognized in the annual financial
statements.
The application of this amendment did
not impact the disclosures or amounts
recognized in the annual financial
statements.
The application of this interpretation did
not impact the disclosures or amounts
recognized in the annual financial
statements.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
(*) IFRS 15 – Revenue from Contracts with Customers
As established by IFRS 15 - Revenue from Contracts with Customers, assets related to the concession under construction, recorded
under the scope of IFRIC 12 - Service Concession Arrengements, should be classified as Contract Asset during the construction
period and transferred to Intangible Assets only after completion of the works.
With the adoption of this new accounting standard, SABESP started to record the Contract Asset in the balance sheet. This amount
was previously recognized as part of Intangible Assets and was, therefore, reclassified, with no impact in the income statement. Due
to the transition methods adopted by the Company in the application of this standard, the comparative information of the financial
statements was not restated and the impact of the adoption on January 1, 2018 is as follows:
Assets
Current assets
Cash and cash equivalents
Trade receivables
Accounts receivable from related parties
Inventories
Restricted cash
Recoverable taxes
Other receivables
Total current assets
Noncurrent assets
Trade receivables
Accounts receivable from related parties
Escrow deposits
Water National Agency – ANA
Other receivables
Investments
Investment properties
Contract asset
Intangible assets
Property, plant and equipment
Total noncurrent assets
Total assets
Note
January 1, 2018
Impact of IFRS 15
January 1, 2018
2,283,047
1,672,595
180,773
85,671
18,822
276,585
56,592
4,574,085
215,910
634,387
122,686
70,487
113,123
36,932
57,652
-
33,466,132
255,050
34,972,359
39,546,444
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10,387,715
(10,387,715)
-
-
-
2,283,047
1,672,595
180,773
85,671
18,822
276,585
56,592
4,574,085
215,910
634,387
122,686
70,487
113,123
36,932
57,652
10,387,715
23,078,417
255,050
34,972,359
39,546,444
7
9 (a)
10 (a)
8
18 (a)
9 (a)
10 (a)
11
12
13
14
15
16
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
4.2 New standards, amendments and interpretations to existing standards that are not yet effective
The Company did not early adopt these standards and is assessing the impacts of the new and revised IFRS below on the
disclosures or amounts recognized in the financial statements:
Standard
Description
Impact
IFRS 16 – Leases1
IFRIC 23 – Uncertainty
over Income Tax
Treatments1
Establishes a single model for the accounting of leases in
the balance sheet for lessees. A lessee recognizes a right of
use asset that represents his right to use the leased asset
and a lease liability that represents his obligation to make
lease payments. The lessor's accounting remains similar to
the current standard, that is, the lessors continue to
classify the leases as financial or operating.
IFRS 16 will supersede the current leases guidance
including IAS 17 Leases and IFRIC 4, SIC 15 and SIC 27
Determining Whether an Arrangement Contains a Lease.
Clarify accounting when there are uncertainties about the
treatment of taxes on profit.
(**) See impact analysis below.
The Company is assessing the
impacts and effects of the
amendments, however it does not
expect material effects from
adopting this standard.
1 Effective for annual periods beginning on or after January 1, 2019.
(*) IFRS 16 – Leases
The new standard supersede IAS 17 - "Leases" and corresponding interpretations, introducing significant changes to lessees, as it
requires lessess to recognize the liability of future payments and the right of use of leased assets to virtually all leases agreements,
including operating leases, specific short-term contracts or contracts with small amounts may be excluded from the scope of this
new standard.
The Company’s financial statements will be impacted as follows:
a) recognition of right-of-use assets and lease liabilities in the statement of financial position, initially measured at the present
value of future lease payments;
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
b) recognition of amortization expenses of right-of-use assets and interest expenses on lease liabilities in the income statement;
and
c) segregation of the total cash paid in these transactions between principal (recorded in financing activities) and interest
(recorded in operating activities) in the statement of cash flows.
SABESP will apply the requirements of IFRS 16 as of the fiscal year beginning on January 1, 2019. To this end, the transition
method selected by the Company was the modified retrospective approach, whereby the amount referring to the Right-of-Use Asset
(“Lease Asset”) equals to the Lease Liability, without the cumulative effect of the initial application of this new standard recorded as
an adjustment to the opening balance of the equity and without the restatement of comparative periods.
The new lease definitions were applied to all contracts in effect on the transition date. The change in the definition of a lease refers
mainly to the concept of control. IFRS 16 establishes whether a contract contains a lease based on the fact that customer has the
right to control the use of an identified asset for a defined period of time in exchange of consideration.
The Company's Management analyzed the contracts (out of a total of approximately 20,000 contracts), evaluating whether they
contained leases in accordance with IFRS 16. This analysis identified impacts mainly related to vehicles and properties leased from
third parties, corresponding to approximately 95% of the total amount, and less representative amounts arising from other
transactions in which we identified assets leased individually or in combination in service contracts.
The recognition of lease expenses of short-term leases (12 months or less) and leases of low-value assets (below US $ 5,000.00) will
remain on a linear basis as permitted by IFRS 16.
On January 1, 2019, the measurement of lease liabilities corresponds to the total of fixed lease payments, adjusted to present value,
considering an incremental rate on borrowings, which corresponds to the average rate applicable to borrowings or debt issues in
the local capital market, which represent the financing of these assets classified as right of use, allocating the assets based on useful
life at the average rate per maturity term of each borrowing contract.
The Company decided to use the practical expedient of using a single real discount rate based on the respective terms for contracts
with similar characteristics.
Regarding renewals, the Company considered the assumptions, policies and internal regulations, whose term cannot be
automatically renewed, and for which extensions will only occur based on an agreement between the parties in cases proven to be
advantageous and necessary to attain SABESP’s interests, i.e., when it is reasonable sure that the option will be exercised.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
After carrying out analysis, the Company concluded that only 70 agreements will fall under the scope of IFRS 16, and, on January 1,
2019, the Company's Management will recognize a right-of-use asset and a lease liability at the present value of R$ 64,955.
As of December 31, 2018, the analyses and internal controls associated with the measurement and accounting of the lease
agreements were substantially concluded and under customization, with conclusion pending the definition of certain assumptions.
Therefore, considering the existence of significant judgment components in the new accounting pronouncement, the Company
believe that there may be changes in the reported amounts, but in amounts deemed not significant with the context of the financial
statements.
The Company intends to apply the practical expedient related to the definition of leases during transition. This means that it will
apply IFRS 16 to all agreements signed before January 1, 2019 identified as lease, in accordance with IAS 17 and IFRIC 4.
There are no other standards and interpretations not yet adopted that may, in the opinion of Management, have a significant
impact on the result for the year of equity disclosed by the Company in its financial statements.
5 Risk Management
5.1 Financial Risk Management
Financial risk factors
The Company's activities are affected by Brazilian economic scenario, making it exposed to market risk (exchange rate and interest
rate), credit risk and liquidity risk. 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 reported periods.
(a) Market risk
Foreign currency risk
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 borrowings.
The management of SABESP’s foreign currency exposure considers several current and projected economic factors, besides market
conditions.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
This risk arises from the possibility that the Company may incur in losses due to exchange rate fluctuations that would impact
liability balances of foreign currency-denominated borrowings and financing raised in the market and related financial expenses.
The Company does not maintain hedge or swap contracts or any derivative financial instrument to hedge against this risk.
A significant amount of the Company’s financial debt is indexed to the US dollar and Yen, in the total amount of R$ 6,694,912 as of
December 31, 2018 (R$5,702,375 as of December 31, 2017). Below, the Company’s exposure to exchange risk:
December 31, 2018
Foreign
currency
R$
December 31, 2017
Foreign
currency
R$
Borrowings and financing – US$
Borrowings and financing – Yen
1,191,152
57,463,173
Interest and charges from borrowings and financing – US$
Interest and charges from borrowings and financing – Yen
Total exposure
Borrowing cost – US$
Borrowing cost – Yen
Total foreign-currency denominated borrowings (Note 17)
4,615,476
2,026,726
40,193
12,517
6,694,912
(22,390)
(3,113)
6,669,409
1,200,786
3,972,200
57,575,271
1,692,713
26,628
10,834
5,702,375
(26,454)
(3,100)
5,672,821
The 17.6% increase in foreign currency-denominated debt from December 31, 2017 to December 31, 2018 was mainly due to:
Exchange rates, as a result of:
1) 17.6% increase of the US dollar against the real, from R$3.3080 as of December 31, 2017 to R$3.8748 as of December 31,
2018; and
2) 20.0% increase of the Yen-denominated, from R$0.02940 as of December 31, 2017 to R$0.03527 as of December 31,
2018.
As of December 31, 2018, if the Brazilian real had depreciated or appreciated by 10 percentage points, in addition to the impacts
mentioned above, against the US dollar and Yen with all other variables held constant, effects on results before taxes on the year
would have been R$669,491 (R$570,238 as of December 31, 2017), lower or higher, mainly as a result of exchange losses or gains
on the translation of foreign currency-denominated loans.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
Interest rate risk
This risk arises from the possibility that the Company could incur losses due to fluctuations in interest rates, increasing the
financial expenses related to borrowings and financing.
The Company has not entered into any derivative contract to hedge against this risk; however continually monitors market interest
rates, in order to evaluate the possible need to replace its debt.
The table below provides the Company's borrowings and financing subject to variable interest rate:
December 31, 2018
December 31, 2017
CDI(i)
TR(ii)
IPCA(iii)
TJLP(iv)
LIBOR(v)
Interest and charges
Total
1,250,000
1,637,290
1,614,595
1,322,854
3,259,295
134,725
9,218,759
1,144,391
1,574,564
1,699,747
1,354,987
2,814,399
125,172
8,713,260
(i) CDI – (Certificado de Depósito Interbancário), an interbank deposit certificate
(ii) TR – Interest Benchmark Rate
(iii) IPCA – (Índice Nacional de Preços ao Consumidor Amplo), a consumer price index
(iv) TJLP – (Taxa de Juros a Longo Prazo), a long-term interest rate index
(v) LIBOR – London Interbank Offered Rate
Another risk to which the Company is exposed, is the mismatch of monetary restatement indices of its debts with those of its service
revenues. Tariff adjustments of services provided by the Company do not necessarily follow the increases in the inflation indexes to
adjust loans, financing and interest rates affecting indebtedness
As of December 31, 2018, if interest rates on borrowings and financing had been 1 percentage point higher or lower with all other
variables held constant, the effects on profit before taxes would have been R$ 92,188
(R$ 87,133 as of December 31, 2017) lower or higher, mainly as a result of lower or higher interest expense on floating rate
borrowings and financing.
(b) Credit risk
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
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 base.
The maximum exposures to credit risk as of December 31, 2018 are the carrying amounts of instruments classified as cash
equivalents, deposits in banks and financial institutions, restricted cash, trade receivables and accounts receivable from related
parties in the balance sheet date. See additional information in 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 impairment can be
assessed by reference to external credit ratings (if available) or to historical information about the bank’s default rates. The credit
quality of the banks, such as deposits and financial investments, the Company considers the lower rating published by three main
international rating agencies (Fitch, Moody's and S&P), according to internal policy of market risk management:
Cash at banks and short-term bank deposits
AA+(bra)
AAA(bra)
Other (*)
December 31, 2018
December 31, 2017
2,966,080
45,430
17,681
3,029,191
2,222,001
43,978
17,068
2,283,047
(*) This category includes current accounts and investment funds in banks whose balances were not significant, and after assessing
the impact of IFRS 9, concluded that expected losses are not material.
The available credit rating information of the banks, as at December 31, 2018, in which the Company made deposit transactions
and financial investments in local currency (R$ - domestic rating) during the year is as follows:
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) Liquidity risk
Fitch
AA(bra)
-
AA(bra)
AAA(bra)
AAA(bra)
Moody's
Standard Poor's
Aa1.br
Aaa.br
Aa1.br
Aa1.br
Aa1.br
-
brAAA
brAAA
brAAA
brAAA
The Company's liquidity is primarily reliant upon cash provided by operating activities, loans from Brazilian
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
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 operating and
capital expenditures 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 relevant maturities, including the installments of principal and
future interest to be paid according to the agreement. Future interest was calculated based on the contractual clauses for all
agreements. For agreements with floating interest rate, the interest rates used correspond to the base dates above.
As of December 31, 2018
2019
2020
2021
2022
2023
2024
onwards
Total
Liabilities
Borrowings and financing
2,581,359
3,073,006
1,427,558
1,468,221
1,189,927
6,364,235
16,104,306
Accounts payables to suppliers and contractors
Services payable
Public-Private Partnership – PPP
Program contract commitments
Cross default
465,993
454,022
405,263
244,446
-
-
-
-
-
-
-
-
-
-
465,993
454,022
377,196
45,608
377,196
45,741
377,196
30,991
377,196
4,889,573
6,803,620
30,991
14,417
412,194
The Company has borrowings and financing agreements including cross default clauses, e.g., the early maturity of any debt, may
imply the early maturity of these agreements. The indicators are continuously monitored in order to avoid the execution of these
clauses.
5.2 Capital management
The Company’s objectives when managing capital are ensure its ability to continue as a going concern in order to provide returns
for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital.
The Company monitors capital based on the leverage ratio. This ratio corresponds to net debt divided by total capital. Net debt
corresponds to total borrowings and financing less cash and cash equivalents. Total capital is calculated as total equity as shown in
the statement of the financial position plus net debt.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
Total borrowings and financing (Note 17)
(-) Cash and cash equivalents (Note 7)
Net debt
Total equity
Total capital
Leverage ratio
December 31, 2018
December 31, 2017
13,152,796
(3,029,191)
10,123,605
19,551,688
12,100,966
(2,283,047)
9,817,919
17,513,009
29,675,293
27,330,928
34%
36%
As of December 31, 2018, the leverage ratio decreased to 34% from the 36% as of December 31, 2017, mainly due to the increase in
equity generated by the 2018 earnings retention, mitigated by the increase of the net debt mainly as a result of the appreciation of
the dollar (17.1%) and the yen (20.0%) against the real.
5.3 Fair value estimates
The Company considers that balances from trade receivables (current) and accounts payable to suppliers by carrying amount, less
impairment approximate their fair values, considering the short maturity. Long-term trade receivables also approximate their fair
values, as they will be adjusted by inflation and/or will bear contractual interest rates over time.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
4 Financial instruments
With the changes introduced by IFRS 9 (Financial Instruments), as of December 31, 2018, the Company did not have financial
assets classified as fair value through other comprehensive income and fair value through profit or loss. The Company’s financial
instruments included in the amortized cost category comprise cash and cash equivalents, restricted cash, trade receivables,
balances with related parties, other receivables, and balances receivable from the Water National Agency – ANA, accounts payable
to contractors and suppliers, borrowings and financing, services payable, balances payable deriving from the Public Private
Partnership-PPP and program contract commitments, which are non-derivative financial assets and liabilities with fixed or
determinable payments, not quoted in an active market.
The estimated fair values of financial instruments are as follows:
Financial assets
Cash and cash equivalents
Restricted cash
Trade receivables
Water National Agency – ANA
Other receivables
December 31, 2018
December 31, 2017
Carrying amount
Fair value
Carrying amount
Fair value
3,029,191
31,900
2,052,416
49,136
180,681
3,029,191
31,900
2,052,416
49,136
180,681
2,283,047
2,283,047
18,822
18,822
1,888,505
1,888,505
70,487
169,715
70,487
169,715
Additionally, SABESP has financial instrument assets receivables from related parties, in the amount of R$843,250 as of December
31, 2018 (R$815,160 as of December 31, 2017), which were calculated in accordance with the conditions negotiated between related
parties. The conditions and additional information referring to these financial instruments are disclosed in Note 10 to the financial
statements. Part of this balance, in the amount of R$737,503 (R$709,208 as of December 31, 2017), refers to reimbursement of
additional retirement and pension plan - G0 and is indexed by IPCA plus simple interest of 0.5% p.m. This interest rate
approximates that one practiced by federal government bonds (NTN-b) with terms similar to those of related-party transactions.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
Financial liabilities
December 31, 2018
December 31, 2017
Carrying amount
Fair value
Carrying amount
Fair value
Borrowings and financing
13,152,796
13,116,684
12,100,966
11,967,909
Accounts payables to suppliers and contractors
Services payable
Program contract commitments
465,993
454,022
373,009
465,993
454,022
373,009
344,947
408,275
239,500
344,947
408,275
239,500
Public-Private Partnership - PPP
3,413,124
3,413,124
3,071,416
3,071,416
To obtain fair value of borrowings and financing, the following criteria have been adopted:
(i) Agreements with Banco do Brasil and CEF (Brazilian Federal Savings Bank) were projected until their final maturities, at
contractual rates (projected TR + spread) and discounted at present value by TR x DI, both rates were obtained from B3.
(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 loans are financial instruments valued at carrying amount plus contractual interest rate until the maturity date, and are
indexed by long term interest rate – TJLP.
These financing have specific characteristics and the conditions defined in the financing 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 until maturity date, discounted
to present value considering a future interest rate published by B3.
(v) Agreements with BID 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 was priced at market value through
quotes published by Bloomberg. All the amounts obtained were translated into Brazilian reais at the exchange rate of December 31,
2018.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
(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 of December 31, 2018.
(vii)Leases are financial instruments considered by face value restated until maturity date, whose characteristic is the indexation by
fixed contractual rate. Thus, the Company discloses as market value, the amount recorded as of December 31, 2018.
Financial instruments referring to investments and borrowings and financing are classified as Level 2 in the fair value hierarchy.
Considering the nature of other financial instruments, assets and liabilities 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.
6 Key accounting estimates and judgments
Estimates and judgments are continually evaluated and are based on historical experience and on other factors, including
expectations of future events that are believed to be reasonable under the circumstances.
The Company makes estimates and assumptions concerning the future. The resulting accounting estimates, 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) Allowance for doubtful accounts
The Company establishes an allowance for doubtful accounts in an amount that Management considers sufficient to cover expected
losses (see Note 9 (c) ), based on an analysis of trade receivables, 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 expectation of future losses. While the Company believes that the assumptions used are
reasonable, actual results could be different.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
(b) Intangible assets arising from concession and program contracts
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, upon completion of the construction
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 are described in Notes 3.8 and 15.
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 relevant impacts on the results of operations.
(c) Pension benefits
The Company sponsors the defined benefit plan and the defined contribution plan, as described in Note 21.
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 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.
(d) Deferred income tax and social contribution
The Company recognizes and settles taxes on income based on the results of operations verified according to the Brazilian
Corporation Law, taking into consideration the provisions of the tax laws. The Company recognizes deferred tax assets and
liabilities based on the differences between the accounting balances and the tax bases of assets and liabilities.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
The Company regularly reviews the recoverability of deferred tax assets and recognizes a provision for impairment if it is probable
that these assets will not be realized, based on the historic taxable income, 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.
Additional information related to taxes are described in Note 19.
(e) Provisions
The Company is party to a number of legal proceedings involving significant claims. These legal proceedings include, but are not
limited to, tax, labor, civil, environmental, disputes with customers and suppliers. The Company recognizes a provision for lawsuits
when it has a present obligation (legal or constructive) arising from a past event, it is probable that an outflow of resources
embodying economic benefits will be necessary to settle the liability and the amount of such obligation can be reliable
estimated. Judgments regarding future events 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 are disclosed in Note 20.
7 Cash and cash equivalents
Cash and banks
Cash equivalents
December 31, 2018
December 31, 2017
151,558
2,877,633
3,029,191
171,951
2,111,096
2,283,047
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 98.28% of CDI in December 2018 (98.88% in December 2017).
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
8 Restricted cash
Current
Agreement with the São Paulo municipal government (i)
Brazilian Federal Savings Bank – escrow deposits (ii)
Other
December 31, 2018
December 31, 2017
19,977
5,880
6,043
31,900
12,055
1,209
5,558
18,822
(i) Refers to the amount deducted from the 7.5% of municipal revenue transferred to the Municipal Fund, corresponding to
eventual amounts unpaid by direct management bodies, foundations and government agencies, as established in the
agreement entered into with the municipal government of São Paulo; and
(ii) Refers to savings account for receiving escrow deposits regarding lawsuits with final and unappealable decisions in favor of
the Company, which are blocked as per contractual clause.
9 Trade receivables
(a) Financial position balances
Private sector:
General and special customers (i) (ii)
Agreements (iii)
Government entities:
Municipal
Federal
Agreements (iii)
Wholesale customers – Municipal governments: (iv)
Mogi das Cruzes
São Caetano do Sul
Total wholesale customers – Municipal governments
Unbilled supply
Subtotal
Allowance for doubtful accounts
Total
Current
Noncurrent
December 31, 2018
December 31, 2017
1,372,667
347,679
1,720,346
575,733
3,876
274,906
854,515
3,056
2,869
5,925
571,072
3,151,858
(1,099,442)
2,052,416
1,843,333
209,083
2,052,416
1,248,979
320,032
1,569,011
532,320
3,547
285,614
821,481
2,670
2,604
5,274
560,712
2,956,478
(1,067,973)
1,888,505
1,672,595
215,910
1,888,505
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
(i) General customers - residential and small and mid-sized companies
(ii) Special customers - large consumers, commercial, industries, condominiums and special billing consumers (fixed
demand agreements, industrial waste, wells, etc.).
(iii) Agreements - installment payments of past-due receivables, plus monetary adjustment and interest, according to the
agreements.
Wholesale customers – Municipal governments: (iv)
Guarulhos (*)
Mauá
Mogi das Cruzes
Santo André
São Caetano do Sul
Diadema
Total wholesale customers – Municipal governments
-
601,910
3,056
1,164,399
2,869
222,671
1,994,905
760,598
530,830
2,670
1,048,832
2,604
222,671
2,568,205
(iv) Wholesale basis customers - municipal governments - This balance refers to invoices issued as a result of services
provided 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. The Company has not recognized revenue nor
receivables from these municipalities according to the IFRS 15/IFRS 9, since it does not consider that it will be probable
that it will collect the consideration to which it is entitled in exchange for the services transferred to the municipalities.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
(*) Agreement with the municipality of Guarulhos
On December 12, 2018, an Agreement for debt payment and receipt was entered into by the municipality of Guarulhos
(“Guarulhos”), the Guarulhos Autonomous Water and Sewage Service (SAAE) and SABESP, in order to settle SAAE’s
existing debt through the transfer of sanitation services to SABESP for a period of 40 years.
On December 12, 2018, the São Paulo State, the city of Guarulhos and SABESP, with intervention of SAAE, signed a
Public Utility Service Agreement to Provide Water Supply and Sewage Services in the municipality of Guarulhos, through
which the São Paulo State and the municipality of Guarulhos granted SABESP the right to provide services for a period of
40 years.
Due to the signature of the service agreement, the amount due by SAAE, recorded as revenue loss, totaling R$ 928,014,
was recognized as revenue, reducing losses in receivables. As a result, the balance of receivables was used to pay for the
transfer of sanitation services for a 40-year period, incorporated into intangible assets.
Due to the service transfer, the Company paid R$ 50,000 to settle administrative costs and terminate the services
provided by SAAE. It also allocated R$ 150,000 to be transferred in five annual statements, adjusted by the IPCA index
published by the Brazilian Institute of Geography and Statistics (IBGE); the first installment was paid in 2018 and the
others will be paid from January 2020 to January 2023. The amounts must be allocated to sanitation initiatives. The total
amount of R$ 200,000 was adjusted to present value and registered in intangible assets by crediting current and
noncurrent liabilities, in the amounts of R$ 80,000 and R$ 98,301, respectively.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
From the sixth year after the signature of the agreement, four percent (4%) of gross revenue received by SABESP from the
municipality of Guarulhos, less Cofins/Pasep, ARSESP’s Regulation, Control and Oversight Fee (TRCF) and other
taxes/fees levied on revenue will be invested in environmental sanitation, housing, drainage and other urban
infrastructure projects of the municipality of Guarulhos.
Credits in court, in the form of Court-Order Debt Security, will be held as collateral of compliance with the Settlement
Agreement. The payment of said Court-Order Debt Security held in court will be suspended for the period in which the
Agreement remains in effect.
The collateral amount will be progressively reduced according to the following rules:
· The collateral amount will not be reduced until the fifth (5th) anniversary of the Agreement signature date;
· From the fifth (5th) to the fifteenth (15th) anniversary of the Agreement signature date, Credits 1 and 2 will be reduced by an
amount equivalent to 1/120 per complete month;
· From the fifteenth (15th) to the twenty-third (23rd) anniversary of the Agreement signature date, Credits 3 and 4will be reduced
by an amount equivalent to 1/96 per complete month;
· From the twenty-third (23rd) to the fortieth (40th) anniversary of the Agreement signature date, Credit 5 will be reduced by an
amount equivalent to 1/204 per complete month.
(b) The aging of trade receivables is as follows
December 31, 2018
December 31, 2017
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
1,449,927
330,310
145,153
83,679
54,486
89,740
44,856
953,707
1,701,931
3,151,858
F-48
1,434,097
287,173
100,383
56,386
34,685
70,609
47,241
925,904
1,522,381
2,956,478
mzdirect.mz-ir.com/Sabesp/2019/20F2018/v23/sbsform20f_2018.htm
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
The decrease in the overdue balance was mainly due to wholesale receivables from the municipality of Guarulhos, as a result of the
agreement signed in December 2018.
(c) Allowance for doubtful accounts
Balance at beginning of the year
Private sector /government entities
Recoveries
Net additions for the year
Write-offs of accounts receivable during the year
Balance at the end of the year
Reconciliation of estimated/historical losses
of income
Write-offs
(Losses)/reversal with state entities - related parties
(Losses) with private sector / government entities
(Losses)/reversal with wholesale customers
Recoveries
December 31, 2018
December 31, 2017
December 31, 2016
1,067,973
61,315
(29,846)
31,469
-
1,099,442
1,068,747
75,973
(76,747)
(774)
-
1,067,973
977,758
144,217
(25,272)
118,945
(27,956)
1,068,747
December 31, 2018
December 31, 2017
December 31, 2016
(184,555)
1,294
(61,315)
(29,458)
107,307
(171,729)
21,510
(75,973)
9,781
133,730
(177,492)
(7,292)
(144,217)
(2,596)
241,109
Amount recorded as bad debt expense, net of recoveries
(166,727)
(82,681)
(90,488)
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
Losses from wholesale customers related to the municipalities of Santo André and Mauá, totalling R$116,250 and R$71,606,
respectively, were recorded as revenue reduction in 2018 (R$104,082 and R$64,070, respectively, in 2017). Additionally, a revenue
was recorded in the amount of R$716,981 in the same account, related to the municipality of Guarulhos. Accordingly, as a result of
these transactions, a revenue with wholesale services was recorded amounting to R$529,125, in 2018 (R$203,496 was recorded in
2017 as revenue reduction).
The Company does not have customers representing 10% or more of its total revenues.
10 Related-Party Balances and Transactions
The Company is a party to transactions with its controlling shareholder, the State Government, and companies related to it.
(a) Accounts receivable, interest on capital payable, revenue and expenses with the São Paulo State
Government
Accounts receivable
Current:
Sanitation services (i)
Allowance for losses (i)
Reimbursement for retirement and pension benefits paid (G0):
- monthly flow (payments) (ii)
- GESP Agreement – 2008 (ii)
- GESP Agreement – 2015 (iv)
Total current
Noncurrent:
Agreement for the installment payment of sanitation services
Reimbursement for retirement and pension benefits paid (G0):
- GESP Agreement – 2015 (iv)
Total noncurrent
Total receivables from shareholders
Assets:
Sanitation services
Reimbursement of additional retirement and pension benefits (G0)
Total
Liabilities:
Interest on capital payable to related parties
Other (g)
F-50
December 31, 2018
December 31, 2017
122,522
(33,820)
22,926
-
118,441
(35,114)
22,968
20,099
62,520
54,379
174,148
180,773
17,045
652,057
669,102
843,250
105,747
737,503
843,250
338,407
8,694
22,625
611,762
634,387
815.160
105,952
709,208
815,160
300,717
1,367
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
Revenue from sanitation services
Payments received from related parties
2018
2017
2016
501,146
462,989
445,726
(509,672)
(471,081)
(424,549)
Receipt of GESP reimbursement referring to Law 4,819/58
(173,516)
(192,889)
(139,472)
(i) Sanitation services
The Company provides water supply and sewage services to the São Paulo State Government and other companies related to it in
accordance with usual market terms and conditions, as considered by management, except for the settlement of credits which can
be made according to items (iii), (iv) and (v), below.
The Company recognized R$33,820 as of December 31, 2018 (R$35,114 as of December 31, 2017) as allowance for losses in
accordance of IFRS 9, applicable since January, 1 2018.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
(ii) Reimbursement of additional retirement and pension benefits paid
Refers to amounts of supplementary retirement and pension benefits provided for in State Law 4,819/58 ("Benefits") paid by the
Company to former employees and pensioners, referred to as Go.
Under the Agreement referred on item (iii) 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 21 (b) (iii).
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 sanitation 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. . See additional information in item (iv) below.
On March 22, 2004, the Company signed the first amendment to the GESP Agreement, settling the amounts due by the São Paulo
State Government for water supply and sewage services provided, monetarily adjusted through February 2004; and formally
authorizing the offset of amounts due by the São Paulo State Government with interest on capital 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
defining the payment conditions of the remaining liabilities of the São Paulo State Government for the receipt of the water supply
and sewage services.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
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. In December 2012 the last installment was paid.
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 of R$915,251, monetarily adjusted until September 2008 in accordance with the
fluctuation of the IPCA-IBGE, corresponding to the Undisputed Reimbursement, determined by FIPECAFI. SABESP accepted on a
provisional basis the reservoirs as part of the payment of the Undisputed Reimbursement and offered to GESP a provisional
settlement, recognizing a credit totaling R$696,283, corresponding to the value of the reservoirs in the Alto Tietê system. The
remaining debtor balance of R$ 218,967 was totally paid in 2018.
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. In March 2015, Sabesp and GESP entered into an agreement to pay the amounts receivable,
totaling R$696,283 (more information in item (iv) of this note).
In addition, the third amendment provides for the regularization of the monthly flow of benefits. While SABESP is liable for the
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.
(iv) Agreement with the São Paulo State Government entered into in 2015
On March 18, 2015, the Company, the State of São Paulo and the Department of Water and Electricity (DAEE), and the Sanitation
and Water Resources Department as the intervening party, entered into a Term of Agreement in the amount of R$1,012,310, of
which R$696,283 refer to the principal of the Undisputed Amount mentioned in item (vi) and R$316,027 corresponding to the
inflation adjustment of the principal until February 2015.
The Principal Amount will be paid in 180 installments, as follows:
· The first 24 installments were settled by immediately transferring 2,221,000 preferred shares issued by Companhia de
Transmissão de Energia Elétrica Paulista - CTEEP, totaling R$87,174, based on the share closing on March 17, 2015; and
· The amount of R$609,109, payable in 156 monthly installments, was adjusted by IPCA (Extended Consumer Price Index) until the
initial payment date, on April 5, 2017. As of this date, installments are being adjusted by IPCA plus simple interest of 0.5% per
month.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
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:
· 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 date of payment of each installment; and
· If the transfer of Reservoirs is not possible, the State will pay to SABESP, in addition to the Principal Amount, the inflation
adjustment credit of R$316,027 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.
The accounting impacts of the agreement generated a debit of R$696,283 in accounts receivable from related parties and a credit in
the same amount in administrative expenses on the transaction date. As of December 31, 2018, the balance receivable totaled
R$62,520 in current assets (R$ R$54,379 as of December 31, 2017) and R$652,057 in noncurrent assets (R$611,762 as of
December 31, 2017) and CTEEP shares were disposed of on April 20, 2016 for R$111.1 million.
(v) Disputed 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 Amount of benefits set out in Law 4,819/58. At the time, the expectation was based on the willingness of the PGE to
reanalyze the issue and the implied right of the Company to the reimbursement, including based on opinions from outside legal
advisors.
However, the recent opinions issued by the PGE and received on September 4 and 22, 2009 and January 4, 2010, refute the
reimbursement of previously defined as Disputed Amount.
Even though the negotiations with the State are still in progress, it is not possible to assure that the Company will recover the
disputed receivables without dispute.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
As part of the actions intended to recover the receivables that management considers due by the State, related to discrepancies in
the reimbursement of the pension benefits paid by the Company, SABESP: (i) on March 24, 2010, reported to the controlling
shareholder the official letter approved by the executive committee, proposing that the matter be discussed at the São Paulo Stock
Exchange (B3) Arbitration Chamber; (ii) in June 2010, presented to Department of Finance a proposal to solve the outstanding
items, such proposal was not accepted; (iii) on November 9, 2010, filed a judicial action against the State of São Paulo pleading the
entire reimbursement related to employee benefits set out in Law 4,819/58 to finalize the discussion between the Company and
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 best course of action to the Company and to its shareholders than waiting until
the end of the lawsuit.
The Company's Management decided to record allowance for losses of amounts receivables from the State; as of December 31, 2018
and 2017, the amounts related to the pension plan benefits paid and recorded for allowance for doubtful accounts totaled
R$ 1,107,104 and R$ 1,021,657, respectively.
As a result, the Company also recognized the obligation related to the pension benefit obligations maintained with the beneficiaries,
retirees and pensioners of Plan G0. As of December 31, 2018 and 2017, the pension benefit obligations of Plan G0 totaled
R$2,606,107 and R$2,543,877, respectively. For detailed information on the pension benefit obligations refer to Note 21 (b) (iii).
(b) Use of reservoirs – EMAE
Empresa Metropolitana de Águas e Energia S.A. - EMAE planned to receive for the credit and obtain financial compensation for
alleged past and future losses in electricity generation, due to water collection, and compensation for costs already incurred and to
be incurred with the operation, maintenance and inspection of the Guarapiranga and Billings reservoirs used by SABESP in its
operations.
Several lawsuits were filed by EMAE. An arbitration proceeding was in progress related to the Guarapiranga reservoir and a lawsuit
related to the Billings reservoir, both pleading for financial compensation due to SABESP’s water collection for public supply,
alleging that this conduct has been causing permanent and growing loss in the capacity of generating electricity of Henry Borden
hydroelectric power plant with financial losses.
As of October 28, 2016, the Company entered into an agreement based on a Private Transaction Agreement and Other Adjustments
aimed to fully and completely settle the disputes involving the two companies. As of October 19, 2017, the conditions precedent
were complied with and the agreement came into effect.
Based on a Private Transaction Agreement and Other Adjustments, the payments were established as follows:
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
- R$ 6,610 annually, adjusted for inflation, as of the execution date of this instrument, by the IPCA or any other index that may
replace it, by the last business day of October of each fiscal year, with (i) the first of such annual payments due up to the last
business day of October 2017 and (ii) the last payment due up to the last business day of October 2042; and
- R$46,270, in five annual and successive installments, adjusted for inflation by the IPCA or any other index that may replace it,
with the first installment of R$9,254 due on April 30, 2017 and the subsequent ones in 4 (four) installments of same amount,
adjusted for inflation, due on every April 30 of the subsequent years, or on the first subsequent business day.
By entering into the Agreement, all litigation between the parties will cease permanently and the Company will continue using the
reservoirs.
In addition to the lawsuits that were part of the Agreement, on April 11, 2016, SABESP was named in the Indemnification
proceeding commenced by EMAE’s minority shareholders, who claimed compensation for damages suffered by EMAE, based on
the amounts that the latter did not earn due to the decrease in the outflow of these reservoirs and in the generation of electricity as
a result of the use of water of the Billings and Guarapiranga reservoirs by SABESP, and also requested that SABESP be sentenced to
reimburse the loss of profits related to EMAE’s unearned amounts resulting from the fact that water was not pumped from the
Pinheiros and Tietê Rivers to the Henry Borden hydroelectric power plant. In summary, the company claims that the São Paulo
State, in its capacity as controlling shareholder of EMAE, has acted unduly to EMAE’s detriment and in favor of SABESP’s interests
by allowing and consenting water intake from the Billings and Guarapiranga reservoirs, in detriment to the output of these
reservoirs and generation of electricity by EMAE, without the necessary financial compensation, making impracticable the
satisfactory use of the Henry Borden hydroelectric power plant. Although this lawsuit was not the object of the agreement, the
Company understands that the approval of the agreement by the Extraordinary Shareholders’ Meeting would eliminate the risk that
this proceeding would continue in the judicial level.
As of August 7, 2017, the Company was once again served with process in a citizen suit filed by Alvaro Luiz de Lima de Alvares
Otero against ANEEL, EMAE and SABESP requesting the annulment of ANEEL order, which consents to the above transaction.
The plaintiff claims that the act is illegal and harmful, compromises the operational feasibility of the Henry Borden hydroelectric
power plant and jeopardizes the energy security of the São Paulo State, the Southeast region and Brazil. Finally, the plaintiff
requests SABESP to indemnify EMAE, at an amount to be calculated. The suit was extinguished without judgment of merit. An
appeal was lodged by the author awaiting judgment by the Court of Justice.
The agreement entered into with EMAE will not necessarily resolve these actions.
As of December 31, 2018, the Company recorded R$16,055 and R$90,518 in Other Liabilities, under current and noncurrent
liabilities, respectively. In 2018, the Company paid the amount of R$ 16,622.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
(c) Agreements with reduced tariffs with State and Municipal Government Entities that joined the Rational
Water Use Program (PURA)
The Company has signed agreements with government entities related to the State Government and municipalities where it
operates that benefit from a reduction of 25% in the tariff of water supply and sewage services when they are not in default. These
agreements provide for the implementation of the rational water use program, which takes into consideration the reduction in
water consumption.
(d) Guarantees
The State Government provides guarantees for some borrowings and financing of the Company and does not charge any fee with
respect to such guarantees.
(e) Personnel assignment agreement among entities related to the State Government
The Company has personnel assignment agreements with entities related to the State Government, whose expenses are fully passed
on and monetarily reimbursed. In 2018, the expenses related to personnel assigned by SABESP to other state government entities
amounted to R$8,903 (R$9,853 in 2017 and R$10,393 in 2016).
In 2018, the expenses related to personnel assigned by other entities to SABESP were R$ 116 (In 2017 there were no expenses
related to personnel assigned by other entities to SABESP and R$10 in 2016).
(f) Services obtained from state government entities
As of December 31, 2018 and 2017, SABESP had an outstanding amounts payable of R$8,694 and R$1,367, respectively, for
services rendered by São Paulo State Government entities.
(g) Non-operating assets
As of December 31, 2018 and December 31, 2017, the Company had an amount of R$969 related to a free land lent to DAEE
(Department of Water and Electricity).
(h) Sabesprev
The Company sponsors health plans managed by Sabesprev, according to Note 21 (a).
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, 2018 amounted to R$363,902 (R$388,461 as of December 31, 2017), according to Note 21
(b) (i).
(i) Compensation of Management Key Personnel
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
- Compensation:
SABESP's compensation policy for the Management and officers is set out according to guidelines of the São Paulo State
Government, issued by 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.
The Executive Officers’ fees are also defined by government authorities. Management and Fiscal Council’s compensation is
equivalent to 30% and 20%, respectively, of the Executive Officers’ fee, 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 the monthly fee, the members of the Board of Directors, Fiscal Council and the Board of Executive Officers 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.
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 and bonuses.
SABESP pays bonuses for the purposes of compensating Executive Officers, in accordance with the guidelines of the São Paulo State
government, 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 capital. Annual bonuses cannot exceed six times the
monthly compensation of the officers/directors or 10% of the interest on capital paid by the Company, prevailing the shortest
amount.
Expenses related to the compensation to the members of its Board of Directors, Fiscal Council and Board of Executive Officers
amounted to R$4,077, R$3,813 and R$3,912 for 2018, 2017 and 2016, respectively. An additional amount of R$538, related to the
bonus program, was recorded in 2018 (R$556 in 2017 and R$494 in 2016).
(j) Loan agreement through credit facility
The Company holds interest in certain Special Purpose Entities (SPEs), not holding the majority interest but with cast vote and
power of veto in some issues, with no ability to use such power of veto in a way to affect returns over
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
investments. Therefore, these SPEs are considered for accounting purposes as jointly arrangements.
The Company entered into a loan agreement through credit facility with the SPEs Aquapolo Ambiental S.A. and with Attend
Ambiental S.A., to finance the operations of these companies, until the borrowings and financing requested with financial
institutions is granted.
These agreements remain with the same characteristics, according to the table below:
SPE
Principal disbursed
amount
Interest balance
Total
Interest rate
Maturity
Aquapolo Ambiental
Total
19,000
19,000
13,857
13,857
32,857
32,857
CDI + 1.2% a.a.
(i)
(i) The loan agreement originally matured on April 30, 2015, but was extended to October 30, 2015 and on November 25,
2015 a new amendment changed the payment schedule for three annual installments, the first of which maturing on
December 30, 2021 and the last on December 30, 2023.
As of December 31, 2018, the principal and interest balance of this agreement was R$ 32,857, recorded in the non current assets
under "Other Accounts Receivables" (December 31, 2017 - R$ 50,617). In 2018 the financial income recognized was R$ 2,772 (in
2017 - R$ 5,017).
The contract amounting to R$ 10,838 existed as of December 31, 2017, was fully paid on December 21, 2018.
Regarding the agreement entered into with Attend, in the amount of R$ 5,400 (principal), which had been overdue since June
2015, an allowance for doubtful accounts of R$ 9,596 (principal plus interest) was recorded, as a renegotiation agreement was not
reached.
(k) “Se Liga na Rede” (Connect to the Network Program)
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. As of December 31, 2018, the program total amount was R$100,928 (R$82,697 as of December 31,
2017), there was no balance receivable as of December 31, 2018 and 2017 from related parties (R$6,148 as of December 31, 2016).
The amount of R$49,919 (R$35,068 as of December 31, 2017) was recorded in the group of intangible assets and R$51,009 was
reimbursed by GESP (R$47,629 as of December 31, 2017) from the beginning of the program until December 31, 2018.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
11 Water National Agency - ANA
The Company has 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 – Brazilian Federal Savings Banks (CEF), until the fulfillment of treated sewage
volume is evidenced, as well as, the reduction of polluting cargoes of each agreement.
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. As of December 31, 2018, the balances of assets and liabilities were
R$49,136 (R$70,487 as of December 31, 2017), and the liability is recorded in "other liabilities" under noncurrent liabilities.
12 Investments
The Company holds interest in certain Special Purpose Entities (SPE). Although SABESP has no majority shares of its investees, the
shareholders’ agreement provides for the power of veto in certain management issues, however, with no ability to use such power of
veto in a way to affect returns over investments, indicating participating shared control (joint venture – IFRS 11).
The Company holds interest recognized by the equity accounting in the following investees:
Sesamm
As of August 15, 2008, the Company, together with GS Inima Brasil Ltda (“GS Inima”), successor of Técnicas y Gestion
Medioambiental S.A.U. (“TGM”) and GS Inima Environment S/A (currently OHL Medio Ambiente); and Estudos Técnicos e
Projetos ETEP Ltda. (“ETEP”), succeeded by ECS Operações e Participações Ltda (“ECS”), incorporated Sesamm – Serviços de
Saneamento de Mogi Mirim S/A for a period of 30 years from the date the concession agreement with the municipality for the
purpose of providing complementary services to the sewage diversion system and implementing and operating sewage treatment
system in the municipality of Mogi Mirim, including the disposal of solid waste.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
Sesamm's capital as of December 31, 2018, totaled R$ 19,532, and was represented by 19,532,409 registered common shares
without a par value. SABESP holds a 36% interest, GS Inima 57% and ECS 7%.
The operations initiated in June 2012.
Águas de Andradina
As of September 15, 2010, the Company, together with Companhia de Águas do Brasil – Cab Ambiental, currently Iguá Saneamento
S/A (“Iguá”), incorporated Águas de Andradina S.A., with indefinite term, for the purpose of providing water supply and sewage
services to the municipality of Andradina.
As of December 31, 2018, the capital of Águas de Andradina totaled R$ 17,948, divided into 17,936,174 registered common shares
without a par value. SABESP holds 30% of its equity interest and Iguá 70%. The amount of R$ 12 is recorded under investee’s
equity, as advance for future capital increase.
As of April 26, 2016, the Annual and Extraordinary Shareholders’ Meeting approved a capital increase in the amount of R$ 2,290
upon the issue of 2,289,796 new registered common shares with no par value, fully subscribed and paid-in, R$ 573 of which using
the minimum mandatory dividends and R$ 1,717 corresponding to additional dividends, both arising from the profit recorded in
2015.
In 2018, the Company contributed R$ 910 in the investee, through the issuance of 910,006 registered common shares with no par
value, subscribed and paid-in. The amount was recorded in current assets, under “Other receivables” and was reclassified into
investments.
On May 4, 2018, the shareholders at an Annual and Extraordinary Shareholders’ Meeting approved the capital increase in the
amount of R$ 1,062, through the issuance of 1,061,935 new registered common shares with no par value, fully subscribed and paid-
in, through the capitalization of the credits held by the shareholders as a result of the distribution of dividends. The Company holds
30% of this capital increase.
The Company pledges as guarantee 100% of its shares in Águas de Andradina.
The operations initiated in October 2010.
Águas de Castilho
As of October 29, 2010, the Company, together with Águas do Brasil – Cab Ambiental, currently Iguá Saneamento S/A (“Iguá”),
incorporated Águas de Castilho, for the purpose of providing water supply and sewage services to the municipality of Castilho.
As of December 31, 2018, the company’s capital was R$ 2,785, and was represented by 2,785,225 registered shares without a par
value. SABESP holds a 30% interest and Iguá 70%.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
As of April 26, 2016, the Annual and Extraordinary Shareholders’ Meeting approved a capital increase in the amount of R$ 740
upon the issue of 740 new registered common shares with no par value, fully subscribed and paid-in, R$ 184 of which using the
minimum mandatory dividends and R$ 556 corresponding to additional dividends, both arising from the profit recorded in 2015.
In 2018, the Company contributed R$ 61 in the investee, through the issuance of 61,000 registered common shares with no par
value, subscribed and paid-in. The amount was recorded in current assets, under “Other receivables” and was reclassified into
investments.
On May 4, 2018, the shareholders at an Annual and Extraordinary Shareholders’ Meeting approved the capital increase in the
amount of R$ 222, through the issuance of 221,613 new registered common shares with no par value, fully subscribed and paid-in,
through the capitalization of the credits held by the shareholders as a result of the distribution of dividends. The Company holds
30% of this capital increase.
The Company pledges as guarantee 100% of its shares in Águas de Castilho.
The operations initiated in January 2011.
Saneaqua Mairinque
As of June 14, 2010, the Company, together with BRK Ambiental Participações S/A (“BRK”) currently Odebrecht Utilities S/A,
former Foz do Brasil S.A., incorporated Saneaqua Mairinque S/A, with indefinite term, for the purpose of exploring water supply
and sewage services of the municipality of Mairinque.
As of December 31, 2018, the capital of Saneaqua Mairinque totaled R$ 4,183, and was represented by 3,141,239 registered
common shares without a par value. SABESP holds a 30% interest and BRK 70%. In 2018, the investee received capital
contribution of R$ 2,183, by issuing 1,141,239 new registered common shares with no par value, which was recorded as advance for
future capital increase in its noncurrent liabilities in 2017.
The Company pledges as guarantee 100% of its shares in Saneaqua Mairinque.
The operations initiated in October 2010.
Attend Ambiental
As of August 23, 2010, SABESP, jointly with Companhia Estre Ambiental S.A. (“Estre”), incorporated 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.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
As of December 31, 2018, the capital totaled R$ 13,400, and was represented by 13,400,000 registered common shares without a
par value. SABESP holds a 45% interest and Estre 55%.
The operations initiated in December 2014.
Aquapolo Ambiental S/A.
As of October 8, 2009, the Company, together with Odebrecht Utilities S/A, formerly Foz do Brasil S.A., incorporated 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.
As of December 31, 2018, 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. As of December 29, 2016, Odebrecht Utilities S/A transferred to
Odebrecht Ambiental Participações em Negócios Industriais S/A (“OAPNI”) all its shares and control and the latter now holds 51%
of the shares.
The Company pledges as guarantee 100% of its shares in Aquapolo Ambiental S/A.
The operations initiated in October 2012.
Paulista Geradora de Energia
As of April 13, 2015, the Company acquired shares from Empresa Paulista Geradora de Energia S/A - PGE, jointly with Servtec
Investimentos e Participações Ltda ("Servtec) and Tecniplan Engenharia e Comércio Ltda ("Tecniplan"), which operational purpose
is the implementation and commercial exploration of water potential in small hydroelectric power plants (PCHs), located at the
Guaraú and Vertedouro Cascata Water Treatment Stations.
As of December 31, 2018, the capital of Paulista Geradora de Energia was R$ 8,679, represented by 8,679,040 registered common
shares without a par value, in which SABESP holds a 25% interest, Servtec holds 37.5% and Tecniplan 37.5%.
As of December 31, 2017, operations had not initiated yet.
Below is a summary of the investees’ financial information and SABESP’s equity interest:
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
Company
Equity
Capital
increase
Dividends
distributed
Profit (loss) for the year
2018
2017
2016
2018
2018
2018
(*)
2017
2016
Sesamm
43,547
39,262
37,198
Águas de Andradina (i)
24,832
19,392
16,161
Águas de Castilho
6,084
4,880
Saneaqua Mairinque
Attend Ambiental
Aquapolo Ambiental
Paulista Geradora de
Energia
5,720
1,426
4,327
5,169
3,706
4,090
3,925
30,170
18,757
12,340
7,625
8,447
8,469
-
3,033
203
2,183
-
-
-
(1,336)
-
-
-
-
-
-
5,621
2,425
1,060
(478)
(4,731)
11,410
(448)
-
(18)
(59)
(312)
988
3
(374)
2,707
4,471
933
390
1,324
6,470
(22)
8,601
1,772
631
723
841
689
(40)
Company
Investments
Capital
increase
Dividends
distributed
Equity in the earnings of subsidiaries
Interest percentage
2018
2017
2018
(*)
2018
(*)
2017
2016
2018
2017
2016
Sesamm
15,677
14,135
Águas de Andradina
Águas de Castilho
Saneaqua Mairinque
Attend Ambiental
Aquapolo Ambiental
Paulista Geradora de
Energia
7,450
1,826
1,716
642
14,783
1,905
5,818
1,465
1,298
2,326
9,191
2,111
-
910
61
655
-
-
-
(481)
2,023
-
-
-
-
-
-
727
318
(143)
(2,129)
5,591
(112)
Total
43,999
36,344
1.626
(481)
6,275
Other investments
588
588
Overall total
44,587
36,932
-
(5)
(18)
(94)
445
975
729
287
71
560
1
3,144
(6)
(94)
235
5,760
4,740
3,096
532
189
217
378
338
(10)
36%
30%
30%
30%
45%
49%
25%
36%
30%
30%
30%
45%
49%
25%
36%
30%
30%
30%
45%
49%
25%
(*) Refer to changes in the equity of investees, as their financial statements for the year ended December 31, 2017 were issued,
including some adjustments, after the Company’s financial statements.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
13 Investment properties
December 31, 2017
disposals
Transfers
Depreciation
December 31, 2018
Write-offs and
Investment properties
Total
57,652
57,652
(9,995)
(9,995)
13
13
(50)
(50)
47,620
47,620
December 31, 2016
disposals
Depreciation
December 31, 2017
Write-offs and
Investment properties
Total
57,968
57,968
(244)
(244)
(72)
(72)
57,652
57,652
December
Write-offs
Reversal of
31, 2015
Transfers
and disposals
estimated losses
Depreciation
Investment properties
Total
56,957
56,957
1,231
1,231
(124)
(124)
10
10
(106)
(106)
December
31, 2016
57,968
57,968
As of December 31, 2018 and 2017, the market value of these properties is approximately R$386,000 and R$402,000, respectively.
14 Contract asset
Contract asset (works in progress) is the right to consideration in exchange for goods or services transferred to
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
customers. As established by IFRS 15 - Revenue from contract with customer, assets related to the concession under construction,
recorded under the scope of IFRIC 12 – Service Concession Arrengements, should be classified as contract asset during the
construction period and transferred to intangible assets only after completion of the works.
A contract asset is initially recognized at fair value and includes borrowing costs capitalized during the period when the asset is
under construction, based on the weighted average rate of borrowings in effect on the capitalization date, as described in Note 3.12.
January 1, 2018
Additions
Contract
renewal
Transfers of Works
(*)
December 31,
2018
Contract asset arising from:
Agreements – equity value
Agreements – economic value
Program contracts
1,303,552
233,361
367,199
111,703
(284,856)
-
1,809,257
806,554
284,856
Services contracts – São Paulo
6,733,732
1,788,210
Software license
Inventories
Advance to suppliers
Total
533
298,340
8,940
52,183
63,075
19
10,387,715
3,188,943
(*) Work in progress transferred from contract asset to intangible asset.
-
-
-
-
-
(475,481)
(96,676)
(676,695)
(4,867,158)
(52,700)
-
-
910,414
248,388
2,223,972
3,654,784
16
361,415
8,959
(6,168,710)
7,407,948
15 Intangible assets
(a) Statement of financial position details
December 31, 2018
Accumulated
amortization
Cost
Net
Cost
December 31, 2017
Accumulated
amortization
Net
Intangible right arising from:
Agreements – equity value
5,465,206
(1,391,862)
4,073,344
8,893,296
(1,751,682)
7,141,614
Agreements – economic value
1,948,255
(716,246)
1,232,009
2,068,402
(634,465)
1,433,937
Program contracts
12,710,937
(3,933,008)
8,777,929
10,653,292
(3,058,226)
7,595,066
Program contracts – commitments
1,320,106
(240,555)
1,079,551
1,113,160
(202,785)
910,375
Services contracts – São Paulo
17,474,797
(4,083,345)
13,391,452
19,388,751
(3,471,736)
15,917,015
Software license
Total
748,962
(290,787)
458,175
688,712
(220,587)
468,125
39,668,263
(10,655,803)
29,012,460
42,805,613
(9,339,481)
33,466,132
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
(b) Changes
December
31, 2017
Transfers to
contract
assets (*)
Additions
Contract
renewal
Transfers of
works (**)
Transfers
Write-offs
and disposals
Amortization
December
31, 2018
Intangible right arising
from:
Agreements –
value
equity
Agreements – economic
value
7,141,614
(1,427,046)
93
(1,935,780)
499,002
(5,268)
(1,406)
(197,865)
4,073,344
1,433,937
(233,361)
373
-
114,442
Program contracts
7,595,066
(2,019,461)
928,818
1,935,780
681,742
Program
commitments
contracts –
Services contracts – São
Paulo
Software license
Total
910,375
-
206,946
15,917,015
(6,707,847)
468,125
-
3,724
4,774
33,466,132
(10,387,715)
1,144,728
-
-
-
-
-
4,818,734
54,790
88
3,011
-
12
686
(1,031)
(7,616)
(82,439)
1,232,009
(339,411)
8,777,929
-
(37,770)
1,079,551
(14,813)
(625,373)
13,391,452
-
(70,200)
458,175
6,168,710
(1,471)
(24,866)
(1,353,058)
29,012,460
(*) Work in progress transferred to contract asset due to adoption of IFRS 15, as of January 1, 2018, as described in Note 4.1.
(**) Work in progress transferred from contract asset to intangible asset.
December 31,
2016
Additions
Contract
renewal
Reversal of
estimated
losses
Transfers
Write-offs
and disposals
Amortization
December 31,
2017
Intangible right arising from:
Agreements – equity value
7,482,955
374,775
(531,818)
Agreements –
value
economic
1,381,652
142,429
-
Program contracts
6,576,021
772,278
531,818
Program
commitments
contracts
–
Services contracts – São
Paulo
Software license
Total
823,216
121,313
14,552,707
1,976,079
430,237
103,424
31,246,788
3,490,298
-
-
-
-
F-67
2,078
8
4,834
-
1,663
2,604
(2,795)
(185,244)
7,141,614
(1,163)
(91,593)
1,433,937
(1,784)
(6,606)
(281,495)
7,595,066
-
-
(34,154)
910,375
6,460
(18,346)
(13,848)
(586,037)
15,917,015
-
6,489
-
(72,025)
468,125
13,380
(9,374)
(24,412)
(1,250,548)
33,466,132
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
December 31,
2015
Additions
Contract
renewal
Estimated
losses
Transfers
Write-offs
and disposals
Amortization
December 31,
2016
Intangible right arising from:
Agreements – equity value
7,287,630
391,545
(9,587)
(1,335)
1,014
(6,233)
(180,079)
7,482,955
Agreements –
value
economic
1,353,020
106,307
Program contracts
6,288,575
553,126
Program
commitments
contracts
–
Services contracts – São
Paulo
Software license
Total
850,530
5,762
12,367,017
2,697,724
366,854
101,367
28,513,626
3,855,831
-
9,587
-
-
-
-
(8)
(4,360)
-
(4,495)
-
6
(110)
(77,563)
1,381,652
2,023
(5,571)
(267,359)
6,576,021
-
9,696
(167)
-
(33,076)
823,216
(2,894)
(514,341)
14,552,707
-
(37,817)
430,237
(10,198)
12,572
(14,808)
(1,110,235)
31,246,788
In 2018, the Company renewed a program contract with the municipalities of Angatuba, Arandu, Assis, Cachoeira Paulista,
Carapicuíba, Gália, Guararema, Itirapuã, Monções, Monte Mor, Piraju, Poá, Praia Grande, Queluz, Salesópolis, São Vicente and
Terra Roxa. The Company also started operations in the municipality of Saltinho.
In December 2018, the Company signed a contract with the municipalities of Guarulhos and Aguaí, to begin operating in January
and June of 2019, respectively.
All of these contracts are valid for 30 years, except for the contract signed with Guarulhos, which is valid for 40 years.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
(c) Intangible arising from concession agreements
The Company operates public service concession agreements for water supply and sewage services mostly based on agreements that
set out rights and obligations relative to the exploration of assets related to the public 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, 2018, the Company operated in 369 municipalities in the State of São Paulo (368 as of December 31, 2017).
Most of these contracts have a 30-year concession period.
The services provided by the Company are billed at a price regulated and controlled by São Paulo State Sanitation and Energy
Regulatory Agency (ARSESP).
Intangible rights arising from concession agreements include:
(i) Concession agreements – equity value
These refer to municipalities assumed until 2006, except for the municipalities assumed by economic value through assets
valuation report prepared by independent experts. The amortization of assets is calculated according to the straight-line method,
which considers the assets useful life.
(ii) Concession agreements – economic value
From 1999 through 2006, the negotiations for new concessions were conducted on the basis of the economic and financial result of
the transaction, determined in a valuation report issued by independent appraisers.
The amount determined in the related contract, after the transaction is closed with the municipal authorities, realized through the
subscription of the Company's shares or in cash, is recorded as "concession agreements" and amortized over the period of the
related concession (usually 30 years). As of December 31, 2018 and 2017 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.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
(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).
As of December 31, 2018 and 2017, the amounts not yet disbursed were recorded under “program contract commitments”, in
current liabilities, totaling R$ 225,291 and R$ 128,802, respectively, and in noncurrent liabilities, totaling R$ 142,314 and
R$ 110,698, respectively. In 2018, the annual rate of 8.06% (WACC) was applied 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 municipalitu of São Paulo for a 30-year period, which is extendable for an
another 30-year period.
Also on June 23, 2010, an agreement was signed between the state and municipal government, and SABESP and the Sanitation and
Energy Regulatory Agency of the State of São Paulo (“ARSESP”) are the consenting and intervening parties, whose main aspects are
the following:
1. The State and the Municipality of São Paulo grant to SABESP the right to explore the sanitation services in the capital of the State
of São Paulo, which consists of the obligation to provide such service and charge the respective tariff for this service;
2. The State and the Municipality sets forth ARSESP as the agency responsible for regulating the tariff, controlling and monitoring
the services.
3. The evaluation model of the contract was the discounted cash flow, which considered the financial and economic sustainability of
SABESP’s operations in the metropolitan region of São Paulo;
4. All operating costs, taxes, investments and the opportunity cost of investors and the creditors of SABESP’s were considered in the
cash flow analysis;
5. The agreement provides for investments established in the agreement comply with the minimum of 13% of the gross revenue
from the municipality of São Paulo, net of the taxes on revenues. Investment plans referring to SABESP’s execution shall be
compatible with the activities and programs foreseen in the state, municipal sanitation plans, and where applicable, the
metropolitan plan. The investment plan is not definite and will be revised by Managing Committee every four years, especially as to
investments to be made in the following period;
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
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 restated, as defined by ARSESP. In addition, the agreement provides for the remuneration of investments to be
made by SABESP, so that there is no residual value at the end of the agreement.
Referring to the recovery through tariff, mentioned in item 6 above, of transfer to the Municipal Fund of Environmental Sanitation
and Infrastructure, ARSESP issued in April 2013, the Resolution no. 413, postponing the application of Resolution no. 407 until the
conclusion of the tariff revision process, the transfer to the bill of services of amounts referring to the municipal charges which were
stipulated in Resolution no. 407. The postponement to apply Resolution no. 407 was due to a request by the São Paulo State
Government to analyze, among other things, methods to reduce the impact on consumers.
As of April 18, 2014, ARSESP Resolution no. 484 was published with the final results of SABESP’s Tariff Revision, however, both
the São Paulo Municipal Government, through Official Letter no. 1,309/14-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
State Government and SABESP.
By means of Resolution no. 488 of May 7, 2014, ARSESP maintained the suspension of the effectiveness of ARSESP Resolution no.
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.
The agreement represents 51.52% of the total revenue of the Company as of December 31, 2018, and ensures the judicial and assets
security.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
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 services to the real properties of the
municipality, and for that reason, the Company filed a suit to collect these accounts, which are accrued for losses.
(d) Capitalization of interest and other finance charges
In 2018, the Company capitalized interest and inflation adjustment, including related foreign currency exchange effects in
concession intangible assets, totaling R$488,502, including the São Lourenço Production System and Leases (R$649,048 in 2017
and R$700,743 in 2016) during the construction period.
(e) Construction margin
The Company acts as a principal responsible to construct and install the infrastructure related to the concession, using own efforts
or hiring outsourcing services, receiving the risks and benefits.
Accordingly, the Company recognizes revenue from construction service corresponding to the cost of construction increased by
gross margin. Generally, the constructions related to the concessions are performed by third parties, in such case, the margin of the
Company is lower, normally, to cover eventual administration costs, and the responsibility of the primary risk. In 2018 and 2017
the margin was 2.3%.
Construction margin for 2018, 2017 and 2016 were R$63,013, R$70,335 and R$81,513, respectively.
(f) Expropriations
As a result of the construction of priority projects related to water and sewage systems, the Company was required to expropriate
third-parties' properties, and the owners of these properties will be compensated either amicably or through courts.
The costs of these expropriations are recorded as concession intangible assets after the transaction is concluded. In 2018, the total
amount related to expropriations was R$106,429 (R$19,576 in 2017 and R$40,452 in 2016).
(g) Public-Private Partnership - PPP
SABESP carries out operations related to the PPPs mentioned below. These operations and their respective obligations and
guarantees are supported by agreements executed according to Law 11,079/04.
Alto Tietê Production System
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
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, 2018 and 2017, the amounts recognized as intangible asset related to PPP were R$359,759 and R$371,862,
respectively. In 2018, a discount rate of 8.20% p.a. was used to calculate the adjustment to present value of the agreement.
On a monthly basis, SABESP assigns funds from tariffs to the SPE CAB Sistema Produtor Alto Tietê S/A, in the amount of
R$10,361, corresponding to the monthly remuneration. This amount is annually adjusted by the IPC – FIPE and is recorded in a
restricted account, pursuant to the contractual operating proceeding.
The guarantee is effective since the beginning of the operation and will be valid until the conclusion, termination, intervention,
annulment or caducity of the Administrative Concession, or other extinction events provided for in the Concession Agreement or in
the law applicable to administrative concessions, including in the event of bankruptcy or extinction of the SPE.
São Lourenço Production System
SABESP and the special purpose entity 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 the São Lourenço
Production System.
In May 2018, the control of SPE Sistema Produtor São Lourenço S/A was transferred to CGGC Construtora do Brasil Ltda,
previously composed of Construções e Comércio Camargo Corrêa S/A and Construtora Andrade Gutierrez S/A.
The objective of the contract is: a) the construction of a water producing system, mainly consisting of a water pipeline connecting
Ibiúna to Barueri, a water collection station in Ibiúna, a water treatment station in Vargem Grande Paulista and water reservoirs;
and b) the provision of services for a 25-year term, aiming at rendering services to operate the dehydration system, drying and final
disposal of sludge, maintenance and works of the São Lourenço Production System. Works started in April 2014.
The São Lourenço Production System (SPSL) PPP began the service provision phase on July 10, 2018, as per the contractual clause
that allows the beginning of operations provided that system has full operating capacity, without, however implying in the
Acceptance of the Works. In this way, the Service Phase was initiated, with the consequent payment of the payments due, in parallel
with the completion of the Phase of Works.
The estimated amount by inflation adjustment through December 31, 2018 is approximately R$7.92 billion.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
After the beginning of the operations, every month SABESP will transfer to the SPE Sistema Produtor São Lourenço S/A funds from
tariffs arising from the services provided, in the amount of R$32.0 million, equivalent to the estimated monthly remuneration plus
interest and charges. The amount above will be annually reevaluated by the IPC - FIPE and should be monthly recorded in a
restricted account, in accordance with the operating procedures of the agreements.
This obligation with the SPE will become effective as of the beginning of the system’s appropriate operation, duly accepted by
SABESP, valid until the occurrence of any of the following events, whichever occurs first: (i) the original payment date of the last
installment of interest / amortization of the principal taken out by the SPE to execute the works; (ii) the end, termination,
intervention, annulment, caducity of the Administrative Concession, or other extinction events provided for in the Concession
Agreement or in the law applicable to administrative concessions, including bankruptcy or extinction of the SPE.
As of December 31, 2018 and 2017, the carrying amount recorded in the Company’s intangible assets, related to this PPP, amounted
to R$3,208,464 and R$2,818,805, respectively. Intangible assets are accounted for based on the physical evolution of the
construction which, as of December 31, 2018, was approximately 96.8% complete, with a counter-entry in the Private Public
Partnership (PPP) liabilities account. In 2018, a discount rate of 7.80% p.a. was used to calculate the adjustment to present value of
the agreement.
The obligations assumed by the Company as of December 31, 2018 and 2017 are shown in the table below, and the increase in
intangible assets and liabilities was mainly due to the progress of PPP São Lourenço works in 2018.
December 31, 2018
December 31, 2017
Current
liabilities
Noncurrent
liabilities
Total liabilities
Current
liabilities
Noncurrent
liabilities
Total liabilities
Alto Tietê
São Lourenço
Total
39,283
98,544
137,827
252,093
3,023,204
3,275,297
291,376
3,121,748
3,413,124
35,083
24,924
60,007
282,501
2,728,908
3,011,409
317,584
2,753,832
3,071,416
(h) Works in progress
With the adoption of IFRS 15 - Revenue from contract with customer, as of January 1, 2018, assets related to the concession under
construction, recorded under the scope of IFRIC 12 – Service Concession Arrengements, previously recognized as part of of
intangible assets as works in progress were reclassified to contract asset, according to note 14, in the amount of R$ 10,387 million.
The amount of R$10,387 million is recorded under intangible assets as works in progress as of December 31, 2017 (R$10,387
million as of December 31, 2017), and, in 2017, the major projects are located in the municipalities of São Paulo, Franca and
Itanhaém, totaling R$6,497 million (including R$2,819 million from São Lourenço PPP), R$253 million and R$208 million,
respectively.
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
(i) Amortization of intangible assets
The amortization average rate totaled 4.2% as of December 31, 2018 and 3.9% as of December 31, 2017 and 2016.
(j) Software license of use
The software license of use is capitalized based on the costs incurred to acquire software and make them ready for use. As of April
10, 2017, the Company implemented the Integrated Business Management System (Enterprise Resource Planning – SAP ERP),
which includes the administrative/financial module. The implementation of the commercial module is in progress.
16 Property, plant and equipment
(a) Statement of financial position details
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Total
December 31, 2018
Accumulated
depreciation
-
(38,961)
Cost
92,979
79,086
372,872
(256,786)
11,333
27,250
1,659
(7,860)
(13,672)
(288)
Net
92,979
40,125
116,086
3,473
13,578
1,371
December 31, 2017
Accumulated
depreciation
-
(36,653)
Cost
92,507
79,013
Net
92,507
42,360
330,753
(226,950)
103,803
10,862
24,430
1,122
(7,182)
(12,614)
(238)
3,680
11,816
884
585,179
(317,567)
267,612
538,687
(283,637)
255,050
F-75
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
(b) Changes
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Total
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Total
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Total
December 31, 2017
Additions
Transfers
Write-offs and
disposals
Depreciation
December
31, 2018
92,507
42,360
103,803
3,680
11,816
884
255,050
-
73
46,473
589
2,972
538
50,645
472
-
986
-
-
-
-
-
(81)
-
(27)
-
-
(2,308)
(35,095)
(796)
(1,183)
(51)
92,979
40,125
116,086
3,473
13,578
1,371
1,458
(108)
(39,433)
267,612
December 31, 2016
Additions
Transfers
Write-offs and
disposals
Depreciation
December 31, 2017
92,494
43,262
149,140
4,531
11,986
-
86
17,627
-
1,207
13
1,358
(15,945)
(33)
(75)
-
-
(178)
(27)
(54)
-
(2,346)
(46,841)
(791)
(1,248)
92,507
42,360
103,803
3,680
11,816
970
-
(15)
(20)
(51)
884
302,383
18,920
(14,697)
(279)
(51,277)
255,050
December 31, 2015
Additions
Transfers
Write-offs and
disposals
Depreciation
December
31, 2016
102,708
45,891
162,218
5,692
8,418
149
-
-
26,061
214
511
845
(10,214)
(911)
(6,380)
(556)
4,258
-
325,076
27,631
(13,803)
-
(45)
(181)
-
(10)
-
(236)
-
(1,673)
(32,578)
(819)
(1,191)
(24)
92,494
43,262
149,140
4,531
11,986
970
(36,285)
302,383
F-76
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
(c) Depreciation
The Company annually review the depreciation rates of: buildings – 3.0%; equipment- 16.5%; transportation equipment - 10% and
furniture and fixture – 6.8%. Land is not depreciated.
The depreciation average rate was 12.3%, 13.6% and 10.9%, as of December 31, 2018, 2017 and 2016, respectively.
F-77
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
17 Borrowings and financing
Borrowings and financing outstanding balance
December 31, 2018
December 31, 2017
Financial institution
Local currency
10th issue debentures
12th issue debentures
14th issue debentures
15th issue debentures
17th issue debentures
18th issue debentures
20th issue debentures
21th issue debentures
22th 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 TIETÊ III
Brazilian Development Bank - BNDES 2015
Leases
Other
Interest and charges
Total in local currency
Current Noncurrent
Total
Current Noncurrent
Total
42,493
45,450
41,270
359,394
279,100
33,469
248,334
-
-
75,223
16,899
11,227
4,364
3,186
23,632
30,589
31,615
19,077
1,380
98,410
40,194
249,249
103,005
-
532,691
165,267
-
499,604
756,040
82,687
294,699
144,275
359,394
811,791
198,736
248,334
499,604
756,040
1,266,592
1,341,815
-
39,169
18,811
23,100
123,875
252,197
490,729
549,589
8,163
-
16,899
50,396
23,175
26,286
147,507
282,786
522,344
568,666
9,543
98,410
41,702
45,450
40,503
346,414
144,391
33,020
250,000
-
-
78,487
16,782
11,143
4,334
2,367
23,469
30,378
10,050
17,573
1,466
101,855
80,953
294,702
141,351
122,655
340,152
181,854
345,788
692,202
781,922
194,872
246,890
499,628
-
926,313
227,892
496,890
499,628
-
1,154,599
1,233,086
16,782
50,028
22,991
19,526
146,461
280,825
397,922
544,044
9,477
-
33,564
61,171
27,325
21,893
169,930
311,203
407,972
561,617
10,943
101,855
1,365,112
5,118,275
6,483,387
1,199,384
5,228,761
6,428,145
Borrowings and financing outstanding balance
December 31, 2018
December 31, 2017
Financial institution
Foreign currency
Inter-American Development Bank - BID 1212 – US$71,947
thousand (US$92,503 thousand in December 2017)
Inter-American Development Bank - BID 2202 – US$544,457
thousand (US$438,071 thousand in December 2017)
International Bank of Reconstruction and Development -BIRD –
US$91,286 thousand (US$79,946 thousand in December 2017)
Deutsche Bank – US$75,000 (US$150,000 thousand in
December 2017)
Eurobonds – US$350,000 thousand (US$350,000 thousand in
December 2017)
JICA 15 – ¥12,676,730 thousand (¥13,829,160 thousand in
December 2017)
JICA 18 – ¥11,397,760 thousand (¥12,433,920 thousand in
December 2017)
JICA 17 – ¥1,826,957 thousand (¥1,534,959 thousand in
December 2017)
JICA 19 – ¥31.561.726 thousand (¥29,777,232 thousand in
December 2017)
BID 1983AB – US$58,462 thousand (US$82,404 thousand in
December 2017)
Interest and charges
Total in foreign currency
Current Noncurrent
Total
Current Noncurrent
Total
39,826
238,954
278,780
34,000
238,000
272,000
124,098
1,969,565
2,093,663
81,757
1,375,358
1,457,115
11,779
341,646
353,425
-
301,665
301,665
288,479
-
288,479
248,100
242,343
490,443
-
1,354,532
1,354,532
-
1,155,331
1,155,331
40,646
406,462
447,108
33,881
372,696
406,577
36,545
365,230
401,775
30,463
334,849
365,312
11,835
51,786
63,621
2,507
41,835
44,342
64,028
1,047,081
1,111,109
-
873,383
873,383
68,554
52,710
155,653
224,207
-
52,710
79,201
37,462
189,990
-
269,191
37,462
738,500
5,930,909
6,669,409
547,371
5,125,450
5,672,821
Total borrowings and financing
2,103,612
11,049,184
13,152,796
1,746,755
10,354,211
12,100,966
Exchange rate as of December 31, 2018: US$3.8748; ¥0.03527 (as of December 31, 2017: US$3.3080; ¥0.02940).
As of December 31, 2018, the Company did not have balances of borrowings and financing, raised during the year, to mature within 12 months.
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
Local currency
Guarantees
Maturity
Annual interest rates
Inflation adjustment
10th issue debentures
12th issue debentures
14th issue debentures
15th issue debentures
Own funds
2020
TJLP +1.92% (Series 1 and 3) and 9.53% (Series 2)
IPCA (Series 2)
Own funds
2025
TR + 9.5%
Own funds
Own funds
2022
2019
TJLP +1.92% (Series 1 and 3) and 9.19% (Series 2)
IPCA (Series 2)
CDI + 0.99% (Series 1) and 6.2% (Series 2)
IPCA (Series 2)
17th issue debentures
Own funds
2023
CDI +0.75 (Series 1) and 4.5% (Series 2) and4.75%
(Series 3)
IPCA (Series 2 and 3)
18th issue debentures
20th issue debentures
Own funds
2024
TJLP 1.92 % (Series 1 and 3) and 8.25% (Series 2)
IPCA (Series 2)
Own funds
2019
CDI + 3.80%
21th issue debentures
Own funds
2022
CDI + 0.60% e CDI+ 0.90%
22th issue debentures
Own funds
2025
CDI +0.58 (Series 1) and CDI + 0.90% (Series 2) and
6.0% (Series 3)
Brazilian Federal Savings Bank
Own funds
2019/2039
Brazilian Development Bank - BNDES BAIXADA
SANTISTA
Own funds
2019
Brazilian Development Bank - BNDES PAC
Own funds
2023
Brazilian Development Bank - BNDES PAC II 9751
Own funds
2027
Brazilian Development Bank - BNDES PAC II 9752
Own funds
2027
Brazilian Development Bank - BNDES ONDA LIMPA
Own funds
2025
Brazilian Development Bank - BNDES TIETÊ III
Own funds
2028
Brazilian Development Bank - BNDES 2015
Own funds
2035
5% to 9.5%
TJLP+2.5%
TJLP+2.15%
TJLP+1.72%
TJLP+1.72%
TJLP+1.92%
TJLP+1.66%
TJLP+2.5%
IPCA (Series 3)
TR
Leases
Other
2035
7.73% to 10.12%
Own funds
2025
12% (Presidente Prudente) and TJLP + 1.5% (FINEP)
IPC
TR
F-80
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
Foreign currency
Guarantees
Maturity
Annual interest rates
Exchange rate changes
Inter-American Development Bank - BID 1212 - US$71,947
thousand
Inter-American Development Bank - BID 2202 - US$544,457
thousand
Government
2025
3.31% (*)
Government
2035
3.42% (*)
International Bank for Reconstruction and Development - BIRD
US$91,286 thousand
Government
Deutsche Bank US$75,000 thousand
Eurobonds – US$350,000 thousand
JICA 15 – ¥12,676,730 thousand
JICA 18 – ¥11,397,760 thousand
JICA 17– ¥1,826,957 thousand
JICA 19– ¥31,561,726 thousand
BID 1983AB – US$58,462 thousand
-
-
Government
Government
Government
Government
-
2034
2019
2020
2029
2029
2035
2037
2023
2.85% (*)
4.50%(*)
6.25%
1.8% and 2.5%
1.8% and 2.5%
1.2% and 0.01%
1.7% and 0.01%
2.08% to 2.38% (*)
(*)Rates comprising LIBOR + contractually defined spread.
US$
US$
US$
US$
US$
Yen
Yen
Yen
Yen
US$
F-81
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
(i) Payment schedule – accounting balances as of December 31, 2018
LOCAL CURRENCY
Federal
Savings
Debentures
Brazilian
Bank
BNDES
Leasing
Other
Interest and charges
TOTAL
CURRENCY
IN
LOCAL
FOREIGN CURRENCY
BID
BIRD
2019
2020
2021
2022
2023
2024
2025 to 2039
TOTAL
1,049,510
589,190
479,995
559,184
362,555
204,832
150,294
3,395,560
75,223
78,072
82,169
86,589
121,512
103,260
102,809
102,809
19,077
1,380
98,410
36,903
38,700
40,654
1,380
-
1,380
-
1,380
-
79,037
97,069
43,416
1,380
-
77,369
863,356
1,341,815
91,581
45,153
1,380
-
450,353
1,069,393
344,763
568,666
1,263
-
9,543
98,410
1,365,112
808,805
705,053
790,616
583,457
420,315
1,810,029
6,483,387
163,923
163,923
163,923
163,923
163,923
163,923
1,388,905
2,372,443
11,779
23,557
23,557
23,557
23,557
23,557
223,861
353,425
Deutsche Bank
288,479
-
-
1,354,532
-
-
-
-
-
-
-
-
-
-
288,479
1,354,532
Eurobonds
JICA
BID 1983AB
Interest and charges
TOTAL
CURRENCY
IN
Overall Total
FOREIGN
153,055
140,431
140,431
140,431
140,431
140,431
1,168,403
2,023,613
68,554
52,710
67,786
29,806
29,806
28,255
-
-
-
-
-
-
-
-
224,207
52,710
738,500
1,750,229
357,717
357,717
356,166
327,911
2,781,169
6,669,409
2,103,612
2,559,034
1,062,770
1,148,333
939,623
748,226
4,591,198
13,152,796
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
(ii) Changes
LOCAL
CURRENCY
Debentures
Brazilian
Federal
Savings Bank
BNDES
Leasing
Other
TOTAL IN
LOCAL
CURRENCY
FOREIGN
CURRENCY
BID
BIRD
Deutsche
Bank
Eurobonds
JICA
BID 1983AB
TOTAL IN
FOREIGN
CURRENCY
Overall Total
December
31, 2017
Funding
Borrowings
costs
Monetary
variation
and
exchange
rate
changes
Inflation
adjustment /
update
incorporated
interest -
Capitalized
Interest
and fees
paid
Amortization
Accrued
interest
Interest
and fees –
Capitalized
(*)
Borrowings
costs -
expenses
December
31, 2018
3,576,842
750,000
(3,021)
62,676
1,236,674
194,244
1,042,036
131,000
561,616
10,977
-
-
-
-
-
-
-
3,438
-
69
-
-
(259,175)
(905,080)
226,810
34,409
3,400 3,486,861
(102,772)
(85,515)
4,001
(90,397)
(102,314)
6,366
-
(38,196)
(772)
(17,427)
(1,470)
75,668
28,909
40,290
763
27,385
55,725
16,017
4
-
1,345,684
207
1,072,605
-
-
568,666
9,571
6,428,145
1,075,244
(3,021)
66,183
10,367
(491,312)
(1,111,806)
372,440
133,540
3,607
6,483,387
1,743,257
484,690
(2,365)
237,433
53,208
(55,391)
(130,520)
26,910
303,278
496,726
1,158,642
1,700,448
270,470
-
-
-
-
-
-
80,196
-
(191)
-
48,279
3,462
(7,607)
-
6,945
62,918
198,380
329,638
39,241
-
-
6,787
-
(35,207)
(97,952)
(33,519)
(11,060)
(268,508)
28,862
-
(82,608)
(85,306)
85,072
33,992
9,681
41,878
2,044
4,454
13,448
1,209
1,488
885
2,399,985
19
356,420
3,627
292,872
822
1,358,412
176
1,078
2,036,128
225,592
5,672,821
564,886
(2,556)
915,889
63,457 (240,736)
(566,942)
191,462
64,521
6,607 6,669,409
12,100,966
1,640,130
(5,577)
982,072
73,824 (732,048)
(1,678,748)
563,902
198,061
10,214 13,152,796
(*) amount related to accrued interest which as part of the contract asset.
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-
-
-
-
-
-
-
-
-
-
LOCAL
CURRENCY
Debentures
Brazilian
Federal
Savings Bank
BNDES
Leasing
Other
TOTAL IN
LOCAL
CURRENCY
FOREIGN
CURRENCY
BID
BIRD
Deutsche
Bank
JICA
BID 1983AB
TOTAL IN
FOREIGN
CURRENCY
Overall Total
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
December
31, 2016 Funding
Borrowings
costs
Lease
Monetary
variation
and
exchange
rate
changes
Inflation
adjustment /
update
incorporated
interest -
Capitalized
Interest
and fees
paid
Amortization
Accrued
interest
Interest
and fees –
Capitalized
(*)
Borrowings
costs -
expenses
December
31, 2017
3,641,912
500,000
(1,157)
1,150,691
144,654
946,984
171,153
552,516
11,677
-
-
-
-
- 24,693
-
-
51,768
-
(301,493)
(597,794)
176,780
103,215
3,611
3,576,842
5,495
5,405
-
116
1,415
(95,854)
(65,836)
78,283
2,512
(78,466)
(87,993)
33,938
-
-
-
(876)
(15,593)
(750)
-
779
17,826
48,294
-
31
-
1,236,674
209
1,042,036
-
-
561,616
10,977
6,303,780
815,807
(1,157) 24,693
62,784
3,927
(476,689)
(767,966)
289,780
169,366
3,820
6,428,145
1,811,664
261,337
485,090
96,889
35,710
-
-
1,617,215
343,588
63,909
-
(2,497)
-
(720)
-
(287)
(82)
(15,193)
2,874
7,335
17,115
82,563
1,609
40,228
(38,654)
(189,280)
22,547
2,837
(4,049)
-
-
2,525
-
(31,774)
(85,338)
(28,652)
(10,931)
-
-
-
(65,702)
(75,610)
3,662
21,286
55,046
27,602
6,858
16,803
888
11,925
29,529
1,115
3,715
750
19
1,743,257
303,278
3,584
496,726
821
1,158,642
160
1,323
1,700,448
270,470
Eurobonds
1,141,469
5,660,363
196,508
(3,586)
96,303
45,590 (199,398)
(330,592)
137,001
11,964,143
1,012,315
(4,743) 24,693
159,087
49,517
(676,087)
(1,098,558)
426,781
63,975
233,341
6,657
5,672,821
10,477
12,100,966
(*) amount related to accrued interest which as part of the contract asset.
F-84
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Notes to the Financial Statements
Years ended December 31, 2018, 2017 and 2016
Amounts in thousands of reais, unless otherwise indicated
LOCAL
CURRENCY
Debentures
Brazilian
Federal
Savings Bank
BNDES
Leasing
Other
TOTAL IN
LOCAL
CURRENCY
FOREIGN
CURRENCY
BID
BIRD
Deutsche
Bank
JICA
BID 1983AB
TOTAL IN
FOREIGN
CURRENCY
Overall Total
December
31, 2015 Funding
Borrowings
costs
Lease
Monetary
variation
and
exchange
rate
changes
Inflation
adjustment /
update
incorporated
interest -
Capitalized
Interest
and fees
paid
Amortization
Accrued
interest
Interest
and fees –
Capitalized
(*)
Borrowings
costs -
expenses
December
31, 2016
4,203,127
-
(1,241)
1,067,464
113,310
-
696,329
313,072
(2,242)
-
-
-
534,894
-
1,962
10,014
32,111
-
-
105,385
-
(375,027)
(663,468)
214,245
154,814
4,077
3,641,912
15,619
6,405
(89,896)
(52,315)
63,813
-
-
31
-
-
-
(55,806)
(76,469)
38,172
-
(905)
(14,489)
-
(655)
1,149
26,291
33,768
-
81
-
1,150,691
160
946,984
-
-
552,516
11,677
6,503,776
436,396
(3,483)
32,111
121,035
6,405
(521,634)
(807,396)
317,379
214,954
4,237
6,303,780
2,194,353
113,543
(3,819)
238,940
59,983
-
-
469,020
(9,167)
Eurobonds
1,922,256
-
1,756,969
188,755
505,306
-
-
(468)
(236)
(396,817)
(40,213)
19,845
(334,915)
(259,455)
(78,910)
-
-
-
-
-
-
-
37,412
(42,429)
(133,063)
21,792
20,100
-
-
1,916
2,042
1,971
(1,876)
-
-
-
(128,283)
(437,752)
69,002
5,771
(33,799)
-
(11,923)
(73,854)
(83,247)
30,791
6,548
597
2,804
50,239
2,362
4,772
592
19
546
922
143
1,278
1,811,664
261,337
485,090
1,141,469
1,617,215
343,588
6,617,824
831,301
(13,690)
(1,090,465)
45,154
(218,310)
(727,916)
132,091
80,874
3,500
5,660,363
13,121,600
1,267,697
(17,173)
32,111
(969,430)
51,559 (739,944)
(1,535,312)
449,470
295,828
7,737
11,964,143
(*) amount related to accrued interest which as part of the contract asset.
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(a) Debentures
Balance as of December 31, 2018 is stated net of borrowings costs in the amount of R$5,590 (R$6,223 as of December 31, 2017),
which will be amortized during the same maturity period of each contract.
(i) Main events
Amortizations
17th issue - series 1
17th issue - series 2
20th issue
10th issue
12th issue
14th issue
18th issue
(*) Amounts paid during the year.
Funding
Amount
Maturity
Interest rates
R$ 144,391
R$ 348,434
R$ 250,000
R$ 42,438
R$ 45,450
R$ 40,726
R$ 33,641
January 15, 2018
February 15, 2018
December 20, 2018
2018 (*)
2018 (*)
2018 (*)
2018 (*)
CDI
IPCA
CDI
TJLP/IPCA
TR
TJLP/IPCA
TJLP/IPCA
As of February 19, 2018, the Company held the 22nd issue of unsecured debentures, not convertible into shares, totaling R$
750 million, in up to three series, for public distribution, with restricted placement efforts, pursuant to CVM Instruction
476/09, distributed as follows:
Amount
Maturity
Series 1
Series 2
Series 3
R$ 100,000
R$ 400,000
R$ 250,000
3 years
5 years
7 years
Remuneration
CDI + 0.58% p.a.
CDI + 0.90% p.a.
IPCA + 6.00% p.a.
The proceeds from the debenture issue a allocated to refinance financial commitments and recompose the Company’s cash.
(ii) Covenants
For the outstanding contracts, the Company has the following restrictive clauses “covenants”:
Applicable to the 10th issue, 14th issue and 18th issue:
Financial covenants applicable to the 10th, 14th and 18th issues and the financing agreements entered into with the BNDES, except
for agreement no. 08.2.0169.1 (PAC):
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The financing agreements entered into with the BNDES specify two ranges in which the Company needs to maintain its Adjusted
EBITDA / Adjusted Financial Expenses, Adjusted Net Debt / Adjusted EBITDA, and Other Onerous Debt / Adjusted EBITDA
ratios.
These agreements also specify a guarantee mechanism in which the Company needs to ensure that a portion of the monthly
receivables amount is daily recorded in a fiduciary account linked to the BNDES. In this process, every day, after the BNDES
notifies the depositary bank that the Company is not in default, this portion of the monthly receivables amount is transferred to a
Company current account.
The renegotiated/amended covenants are:
A. Maintenance of the following ratios, quarterly calculated and related to accrued amounts over the last 12 months, upon the
disclosure of reviewed interim financial statements or audited annual financial statements entails the need to record R$225.9
million per month in a fiduciary account linked to the BNDES:
· Adjusted EBITDA / Adjusted financial expenses equal to or higher than 3.50;
· Adjusted net debt / Adjusted EBITDA equal to or lower than 3.00;
· Other onerous debt (*) / Adjusted EBITDA equal to or lower than 1.00.
(*)“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.
B. In case of failure to comply with one or more ratios specified in item A, in two or more quarters, consecutive or not, within
twelve months, the Company will be failing to comply with the first range of ratios and the portion of the monthly receivables
to be recorded in a fiduciary account linked to the BNDES will be automatically increased by 20%, if the ratios are
maintained in the following range:
· 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 3.00;
· Other onerous debt / Adjusted EBITDA equal to or lower than 1.30 and higher than 1.00.
C. The failure to achieve one or more than one ratio stipulated in item B, and/or the Company does not comply with the
automatic reinforcement of guarantee under the terms of item B, the Company will be failing to comply with the covenant
terms and the BNDES may, at its sole discretion:
· require the creation of additional guarantees, not below 30 days, within term to be defined by it through notice;
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· suspend the release of funds; and/or
· declare the early maturity of the financing agreements.
As of December 31, 2018, the amount of R$242.9 million was guaranteed for the agreements above (excluding the guarantee of
agreement no 08.2.0169.1).
Financial covenants applicable to financing agreement no. 08.2.0169.1 entered into with the BNDES:
· Adjusted EBITDA / adjusted net operating revenue: equal to or higher than 38%;
· Adjusted EBITDA /adjusted financial expenses: equal to or higher than 2.35;
· Adjusted net debt / adjusted EBITDA: equal to or lower than 3.20.
The BNDES will annually verify if the ratios have been complied with by analyzing the annual audited financial statements, which
must be presented to the BNDES or published by April 30 of the subsequent year referring to the financial statements. If the
Company complies, cumulatively, with the ratios above, the BNDES will reduce the interest stipulated in the agreement from 2.15%
p.a. to 1.82% p.a., from June 16 of the year when the analysis is carried out to June 15 of the subsequent year.
The agreements also have a cross default clause, e.g., 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.
Applicable 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
contract’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
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.
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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.
This issue has an early maturity clause, in case there is a downgrade, by more than two levels, of the “brAA-” risk rating in national
scale originally attributed to this issue’s Debentures by the Rating Agency, always taking into consideration the Standard & Poor’s
rating table. As of December 31, 2018, SABESP’s rate was “brAAA”.
The agreement also has a cross default clause, i.e. the early maturity of any of the Company’s debts, equal to or exceeding R$50
million, adjusted by IPCA variation as of the issue date, due to contractual default, the amount of which may anyhow compromise
the settlement of the Company’s monetary obligations arising from the Issue, shall imply the early maturity of this agreement.
Applicable to the 15th issue, 17th issue and 20th issues:
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
contract’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 acceleration clause, i.e., the early maturity of any of the Company’s debts, equal to or exceeding R$90
million (for the 20th 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.
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Applicable to 21st and 22st issues:
Calculated every quarter upon the disclosure of interim or annual financial statements:
- Net 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.
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 agreement have a cross acceleration clause, i.e., the early maturity of any of the Company’s debts, equal to or exceeding R$145
million, adjusted by IPCA variation as of the issue date, result in an event of default that result in the early maturity of these
agreements.
(b) Brazilian Federal Savings Bank - CEF
(i) Main events
Funding totaled R$194,244 in 2018, mainly related to the agreements in progress of the Growth Acceleration Program (PAC).
In 2018, amortizations totaled R$85,515.
The guarantee for financing agreements entered into with the Brazilian Federal Savings Bank is the recognition of a portion of
tariffs in an account for this purpose with the Brazilian Federal Savings Bank, which should maintain a flow equal to or at least
three times the amount of the monthly charges, during the grace period, based on interest, the management fee and the credit risk
rate and, during the amortization phase, based on the principal, interest, the management fee and the credit risk rate. Additionally,
the Company maintains a reserve account, linked to financing agreements, in the Brazilian Federal Savings Bank, which is
maintained during the entire term the agreements, where an amount is accrued equivalent to a monthly charge, composed of,
during the grace period, interest, the management fee and the credit risk rate and, during the amortization phase, of the principal,
interest, the management fee and the credit risk rate.
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(ii) Sanitation to All Program of the Brazilian Federal Savings Bank (CEF)
On December 28, 2018, SABESP entered into seven financing agreements (twenty-one sub-credits) with the Brazilian Federal
Savings Bank, totaling R$ 652.2 million. The agreements were selected by the Ministry of Cities – City Progress / Sanitation to All
Programs. The funds came from the Guarantee Fund for Length of Service - FGTS and will allocated to sanitation services.
Covenants
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.
The agreement has the following covenants:
Calculated every quarter upon the disclosure of interim financial information based on information included in the financial
statements for the last twelve (12) months:
Restrict the funding of new debt so that:
· Adjusted EBITDA/ adjusted financial expenses equal to or higher than 2.80;
· Adjusted net debt/adjusted EBITDA: equal to or higher than 3.80;
· Other onerous debt(*) / adjusted EBITDA lower than or equal to 1.30
(*) “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.
(c) BNDES
Balance as of December 31, 2018 is stated net of borrowings costs in the amount of R$2,584 (R$2,793 on December 31, 2017),
which will be amortized during the same maturity period of each contract.
(i) Main events
In 2018, funding from current contracts totaled R$131,000, mainly referring to the BNDES 2015 agreement, in the amount of
R$124,000 and BNDES PAC II 9752, in the amount of R$ 7,000.
In 2018, amortizations totaled R$102,314.
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) Covenants
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
The agreements entered into with the BNDES have standardized financial covenants, as described in item (a), (ii), covenants
applicable to the 10th issue, 14th issue and 18th issue, of this Note.
(d) Leasing
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 2019.
After startup, the lease payment period starts (240 monthly installments), whose amount is periodically restated by contracted
price index.
(e) Eurobonds
Balance as of December 31, 2018 is net of borrowing costs in the amount of R$1,648 (R$2,470 as of December 31, 2017), which will
be amortized during the same maturity period of the contract.
(i) Covenants
The contract has the following restrictive clauses “covenants”:
Calculated every quarter upon the disclosure of interim or annual financial statements:
Restrict the funding of new debts so that:
- Adjusted total debt to EBITDA does not exceed 3.65;
- The Company's debt service coverage ratio, determined at the end of each quarter, shall not be lower than 2.35.
Non-compliance with covenants will accelerate the maturity of the agreement.
The agreement has a cross default clause, i.e., the early maturity of any indebtedness in view of the Company’s loans or any of its
Subsidiaries (*) with a total principal amount of US$ 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”.
(f) Deutsche Bank US$150 million
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Balance as of December 31, 2018 is net of borrowing costs in the amount of R$2,131 (R$5,757 as of December 31, 2017), which will
be amortized during the maturity period of the contract.
In 2018, amortizations totaled R$ 268,508.
(i) Covenants
The agreement has the following restrictive clauses “covenants”:
Calculated every quarter upon the disclosure of interim or annual financial statements:
- Total debt/adjusted EBITDA: lower than 3.65;
- Company's debt service coverage ratio, determined at the end of each quarter, shall not be lower than 2.35.
Non-compliance with covenants for two quarters, consecutive or not, will accelerate the maturity of the agreement.
The agreement has a “cross acceleration” clause, i.e., in the early maturity of any debt of the Company or any of its subsidiaries,
with a total principal or aggregate amount equal to or higher than R$120 million (or its equivalent in another currency), contracted
pursuant to the Brazilian law, or with a total principal or aggregate amount equal to or higher than US$50 million (or its equivalent
in another currency), in the case of debts governed by the laws of any other jurisdiction other than Brazil, will result in the early
maturity of the agreement.
(*) Pursuant to the agreement, a subsidiary means any partnership, corporation, company, association or commercial entity in
which SABESP or one or more of its subsidiaries directly or indirectly hold more than 50% of the outstanding common shares with
voting rights of its respective capital stock.
(g) Inter-American Development Bank (BID)
Balance as of December 31, 2018 is net of borrowing costs amounting to R$15,999 (R$14,517 as of December 31, 2017), which will
be amortized during the same maturity period of the agreement.
(i) Main events
In 2018, funding referring to BID 2202 agreement totaled R$ 484,690 and amortizations totaled R$ 130,520.
(ii) Guarantees
Loans obtained from multilateral agencies and from Government Agencies, such as the BID, BIRD and JICA, are guaranteed by the
Federal Government, with a counter-guarantee of the São Paulo State government.
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(iii) Covenants
For the outstanding contracts, the Company has the following restrictive clauses “covenants”:
Calculated every quarter upon the disclosure of interim or annual financial statements:
- Loan agreement 1,212 - 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.
These agreements have an early maturity clause, i.e., in the early maturity will occur in the event the Company’s fail failure to
comply with any obligation therewith or any agreements signed with the Bank related to Project finance.
(h) Japan International Cooperation Agency - JICA
(i) Relevant funding
Balance as of December 31, 2018 is stated net of borrowing costs amounting to R$3,113 (R$3,100 as of December 31, 2017), which
will be amortized during the same maturity period of the contract.
(ii) Main events
In 2018, the Company raised R$80,196, referring to BZ-P19 (JICA 19) e BZ-P17 (JICA 17) agreements.
In 2018, amortizations totaled R$82,608 referring to JICA BZ-15, JICA BZ-17 and JICA BZ-18 agreements.
For the guarantees assigned, see item g (ii) of this note.
(i) AB Loan (IADB 1983AB)
The balance stated as of December 31, 2018 is net of borrowing costs amounting to R$2,322 (R$3,400 as of December 31, 2017),
which will be amortized during the same maturity period of the contract.
(i) Main events
In 2018, amortization totaled R$85,306.
(ii) Covenants
The Company has the following restrictive clauses “covenants”:
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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 adjusted EBITDA, determined on a consolidated basis, must be lower than 3.65.
The agreement has an early maturity clause, i.e., in the event of default, the BID may order the early maturity of the loan or part of
it.
The agreement also has a “cross default” clause, i.e., in the event of default of any other Company debt with the BID or with third
parties (in this case, higher than US$25 million), the BID may order the early maturity of the loan.
(j) International Bank for Reconstruction and Development - IBRD
Balance as of December 31, 2018 is stated net of borrowing costs amounting to R$290 (R$310 as of December 31, 2017), which will
be amortized during the same maturity period of the contract.
For the guarantees assigned, see item g (ii) of this Note.
(k) Covenants
As of December 31, 2018 and 2017, the Company had met the requirements set forth by its borrowings and financing agreements.
(l) Exchange rate changes
In 2018, the US dollar appreciated 17.1%, from R$ 3.3080 on December 31, 2017 to R$ 3.8748 on December 31, 2018, increasing
debt in US dollars by R$ 675,145, and the yen appreciated 20.0%, from R$ 0.02940 on December 31, 2017 to R$ 0.035270 on
December 31, 2018, increasing debt in yen by R$ 337,309.
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(m) Borrowings and financing – Credit Limits
Agent
Brazilian Federal Savings Bank
Brazilian Development Bank – BNDES
Japan International Cooperation Agency – JICA
Other
TOTAL
December 31, 2018
(in millions of reais (*))
1,908
1,455
208
38
3,609
(*) Brazilian Central Bank’s exchange rate as of December 30, 2018 ( ¥1.00 = R$0.03527).
SABESP in order to comply with its Capex 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.
Taxes recoverable/payable
(a) Current assets
Recoverable taxes
Income tax and social contribution
Withholding income tax (IRRF) on financial investments
Other federal taxes
Total
December 31, 2018
December 31, 2017
361,758
6,423
12,522
380,703
270,614
2,606
3,365
276,585
The increase in recoverable taxes is mainly due to the increase in the “income tax and social contribution” item, referring to the
estimates paid are higher that the amounts due in the year.
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(b) Current liabilities
Taxes and contributions payable
Cofins and Pasep
INSS (Social Security contribution)
IRRF (withholding income tax)
Other
Total
Deferred taxes and contributions
(a) Statement of financial position details
Deferred income tax assets
Provisions
Pension obligations - G1
Donations of underlying asset on concession agreements
Credit losses
Other
Total deferred tax assets
Deferred income tax liabilities
Temporary difference on concession of intangible asset
Capitalization of borrowing costs
Profit on supply to governmental entities
Actuarial gain/loss – G1 Plan
Construction margin
Borrowing costs
Total deferred tax liabilities
December 31, 2018
December 31, 2017
82,381
38,871
66,825
12,486
200,563
74,034
35,365
58,204
16,362
183,965
December 31, 2018
December 31, 2017
337,833
157,044
54,131
197,920
186,887
933,815
(433,842)
(420,978)
(206,978)
(36,430)
(86,164)
(10,665)
(1,195,057)
482,863
165,503
55,112
199,063
151,562
1,054,103
(460,177)
(415,379)
(76,705)
(36,538)
(88,947)
(13,111)
(1,090,857)
Deferred tax assets (liabilities), net
(261,242)
(36,754)
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(b) Realization
Deferred income tax assets
to be realized within 12 months
to be realized after one year
Total deferred tax assets
Deferred income tax liabilities
to be realized within 12 months
to be realized after one year
Total deferred tax liabilities
Deferred tax asset (liabilities)
(c) Changes
December 31, 2018
December 31, 2017
158,294
775,521
933,815
(32,546)
(1,162,511)
(1,195,057)
(261,242)
221,999
832,104
1,054,103
(51,520)
(1,039,337)
(1,090,857)
(36,754)
Deferred income tax assets
Provisions
Pension obligations - G1
Donations of underlying asset on concession
agreements
Credit losses
Other
Total
Deferred income tax liabilities
Temporary difference on concession of intangible asset
Capitalization of borrowing costs
Profit on supply to governmental entities
Actuarial (gain)/loss – G1
Construction margin
Borrowing costs
Total
December 31, 2017
Net change
December 31, 2018
482,863
165,503
55,112
199,063
151,562
1,054,103
(460,177)
(415,379)
(76,705)
(36,538)
(88,947)
(13,111)
(145,030)
(8,459)
(981)
(1,143)
35,325
(120,288)
26,335
(5,599)
(130,273)
108
2,783
2,446
(1,090,857)
(104,200)
337,833
157,044
54,131
197,920
186,887
933,815
(433,842)
(420,978)
(206,978)
(36,430)
(86,164)
(10,665)
(1,195,057)
Deferred tax assets (liabilities), net
(36,754)
(224,488)
(261,242)
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Deferred income tax assets
Provisions
Actuarial gain/loss – G1
Pension obligations - G1
Donations of underlying asset on concession
agreements
Credit losses
Other
Total
Deferred income tax liabilities
Temporary difference on concession of intangible asset
Capitalization of borrowing costs
Profit on supply to governmental entities
Actuarial gain/loss – G1
Construction margin
Borrowing costs
Total
December 31, 2016
Net change
December 31, 2017
524,129
85,044
167,922
57,317
266,757
151,247
1,252,416
(492,341)
(374,512)
(92,365)
-
(91,790)
(15,063)
(1,066,071)
(41,266)
(85,044)
(2,419)
(2,205)
(67,694)
315
(198,313)
32,164
(40,867)
15,660
(36,538)
2,843
1,952
(24,786)
482,863
-
165,503
55,112
199,063
151,562
1,054,103
(460,177)
(415,379)
(76,705)
(36,538)
(88,947)
(13,111)
(1,090,857)
Deferred tax assets (liabilities), net
186,345
(223,099)
(36,754)
Opening balance
Net change in the year:
- corresponding entry to the income statement
- corresponding entry to valuation adjustments to
equity (Note 21 (b))
Total net change
Closing balance
(d) Reconciliation of the effective tax rate
December 31, 2018
December 31, 2017
December 31, 2016
(36,754)
186,345
128,242
(224,596)
108
(224,488)
(261,242)
(101,517)
(121,582)
(223,099)
(36,754)
(60,667)
118,770
58,103
186,345
The amounts recorded as income tax and social contribution expenses in the financial statements are reconciled to the statutory
rates, as shown below:
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Profit before income taxes
Statutory rate
Estimated expense at statutory rate
Tax benefit of interest on equity
Permanent differences
Provision – Law 4,819/58 - Go (i)
Donations
Other differences
December 31, 2018
December 31, 2017
December 31, 2016
3,912,319
34%
(1,330,186)
264,816
(46,544)
(13,068)
47,731
3,503,614
34%
(1,191,229)
245,444
(57,104)
(12,413)
30,998
4,129,054
34%
(1,403,878)
245,637
(63,039)
(10,987)
50,311
Income tax and social contribution
(1,077,251)
(984,304)
(1,181,956)
Current income tax and social contribution
Deferred income tax and social contribution
Effective rate
(852,655)
(224,596)
28%
(882,787)
(101,517)
28%
(1,121,289)
(60,667)
29%
(i) Permanent difference related to the provision for actuarial liability (Note 21 (b) (iii)).
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Provisions
(a) Lawsuits and proceedings that resulted in provisions
(I) Statement of financial position details
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 recognizes provisions in the financial statements consistently with the recognition
and measurement criteria established in Note 3.15. The ultimate timing and amounts of the payments depends on the outcome of
the court cases. The 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
Provisions
Escrow
deposits
December 31,
2018
Provisions
Escrow
deposits
December 31,
2017
290,649
67,985
98,302
63,335
302,935
170,419
993,625
(43,841)
(24,380)
(13,519)
(8,091)
(10,932)
-
(100,763)
458,387
535,238
-
(100,763)
246,808
43,605
84,783
55,244
292,003
170,419
892,862
458,387
434,475
438,619
(56,301)
382,318
332,037
(259,608)
114,544
77,100
299,842
160,446
(16,227)
(5,507)
(6,741)
-
72,429
98,317
71,593
293,101
160,446
1,422,588
(344,384)
1,078,204
607,959
-
814,629
(344,384)
607,959
470,245
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(II) Changes
Customer claims (i)
Supplier claims (ii)
Other civil claims (iii)
Tax claims (iv)
Labor claims (v)
Environmental claims (vi)
Subtotal
Escrow deposits
Total
Customer claims (i)
Supplier claims (ii)
Other civil claims (iii)
Tax claims (iv)
Labor claims (v)
Environmental claims (vi)
Subtotal
Escrow deposits
Total
Customer claims (i)
Supplier claims (ii)
Other civil claims (iii)
Tax claims (iv)
Labor claims (v)
Environmental claims (vi)
Subtotal
Escrow deposits
Total
December 31,
2017
Additional
provisions
Interest and
inflation
adjustment
Use of the
accrual
Amounts not
used
(reversal)
December 31,
2018
438,619
332,037
114,544
77,100
299,842
160,446
1,422,588
(344,384)
1,078,204
29,732
36,100
22,578
10,763
83,499
33,392
216,064
(53,205)
162,859
40,749
21,161
12,939
4,157
32,290
18,294
129,590
(5,533)
124,057
(141,421)
(308,253)
(16,146)
(2,490)
(44,900)
(115)
(513,325)
269,248
(77,030)
(13,060)
(35,613)
(26,195)
(67,796)
(41,598)
(261,292)
33,111
(244,077)
(228,181)
290,649
67,985
98,302
63,335
302,935
170,419
993,625
(100,763)
892,862
December 31,
2016
Additional
provisions
Interest and
inflation
adjustment
572,210
332,667
131,286
69,898
285,413
150,084
1,541,558
(368,483)
1,173,075
26,642
23,017
13,517
6,877
55,106
32,377
157,536
(29,089)
128,447
Use of the
accrual
(138,466)
(39,433)
(19,975)
(259)
(43,498)
(24,585)
Amounts not
used
(reversal)
December 31,
2017
(66,572)
(21,102)
(22,341)
(6,808)
(36,040)
(13,586)
438,619
332,037
114,544
77,100
299,842
160,446
(266,216)
(166,449)
15,354
45,657
1,422,588
(344,384)
44,805
36,888
12,057
7,392
38,861
16,156
156,159
(7,823)
148,336
(250,862)
(120,792)
1,078,204
December 31,
2015
Additional
provisions
Interest and
inflation
adjustment
Use of the
accrual
Amounts not
used
(reversal)
December 31,
2016
561,061
296,660
124,833
62,812
283,991
83,520
1,412,877
(330,663)
1,082,214
109,540
12,885
20,638
20,716
51,408
68,485
283,672
(38,269)
245,403
F-102
95,459
43,679
19,940
14,265
29,419
23,508
226,270
(27,153)
(87,334)
(20,018)
(8,080)
(4,621)
(37,072)
-
(106,516)
(539)
(26,045)
(23,274)
(42,333)
(25,429)
572,210
332,667
131,286
69,898
285,413
150,084
(157,125)
(224,136)
9,601
18,001
1,541,558
(368,483)
199,117
(147,524)
(206,135)
1,173,075
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(b) Lawsuits deemed as contingent liabilities
The Company is party to lawsuits and administrative proceedings relating to environmental, tax, civil and labor claims, which are
assessed as contingent liabilities in the financial statements, since it either does not expect outflows to be required or the amount of
the obligation cannot be reliably measured. Contingent liabilities are represented as follows:
Customer claims (i)
Supplier claims (ii)
Other civil claims (iii)
Tax claims (iv)
Labor claims (v)
Environmental claims (vi)
Total
December 31, 2018
December 31, 2017
207,600
1,459,100
719,300
1,439,100
624,200
4,343,800
8,793,100
219,900
1,430,600
733,100
1,291,000
677,400
3,879,000
8,231,000
(c) Explanation on the nature of main classes of lawsuits
(i) Customer claims
Approximately 890 lawsuits (1,070 as of December 31, 2017) were filed by commercial customers, who claim that their tariffs
should correspond to other consumer categories, and 490 lawsuits (680 as of December 31, 2017) in which customers claim a
reduction in the sewage tariff due to losses in the system, consequently requesting the refund of amounts charged by the Company
and 40 lawsuits (50 as of December 31, 2017) in which 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. The R$ 135,510 decrease
in accrued lawsuits was mainly due to payments in the period, and revisions of expectations arising from court decisions in the
period.
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(ii) Supplier claims
These lawsuits include lawsuits filed by some suppliers alleging underpayment of monetary restatements, withholding of amounts
related to the understated inflation rates deriving from Real economic plan, and the economic and financial imbalance of the
agreements, and are in progress at different courts. The R$ 28,824 decrease in accrued lawsuits was mainly due to payments in the
period.
(iii) Other civil claims
These mainly refer to indemnities for property damage, pain and suffering, and loss of profits allegedly caused to third parties, such
as vehicle accidents, claims, challenges on the methodology to collect tariffs, among others, filed at different court levels.
(iv) Tax claims
Tax claims refer mainly to issues related to tax collections and fines in general challenged due to disagreements regarding
notification or differences in the interpretation of legislation by the Company's Management. The R$ 16,349 decrease in accrued
lawsuits was mainly due to revisions of expectations arising from court decisions in the period. The R$ 148,100 increase in lawsuits
deemed as contingent liabilities is mainly related to the update of lawsuits in progress.
(a) In 2006, the Brazilian Federal Revenue Service, by means of a tax execution, verified 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, 2018 in the amount of R$ 53,430 (R$ 52,192 as of December 31, 2017). The Company appealed this recognition and
was granted a partial relief in the first administrative instance. In December 2015, it filed a Voluntary Appeal against the part of the
decision that was unfavorable to it. In March 2018, a decision for production of more evidence was published. Management
considers that this administrative proceeding is deemed as a possible disbursement.
(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$ 605,008
(R$ 547,510 as of December 31, 2017), which currently are subject-matter of Tax Foreclosures, deemed by the Management as
contingent liabilities. SABESP filed a writ of mandamus against this revocation, which was rejected. 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. The appellate decision was favorable to the Company. The Municipality’s special
and extraordinary appeal is still pending. The Company’s Management deemed the proceeding as contingent liability.
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(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, 2018 and is R$ 36,070 (R$ 42,173 as of December 31, 2017). Management considers
that this administrative proceeding is deemed as a possible disbursement.
(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, 2018 and is estimated at R$ 52,427 (R$ 51,374 as of December 31, 2017). Management considers
that this administrative proceeding is deemed as a possible disbursement.
(e) Some municipalities have filed several lawsuits against SABESP related to taxes and fines in general, which were accrued and
deemed as contingent liabilities. As of December 31, 2018, the restated amounts of such lawsuits were R$ 17,682 (R$ 40,123 as of
December 31, 2017) and R$ 677,786 (R$ 582,168 as of December 31, 2017), respectively.
(v) Labor claims
The Company is a party to labor lawsuits, involving issues such as overtime, shift schedule, health hazard premium and hazardous
duty premium, prior notice, change of function, salary equalization, service outsourcing and other. Part of the amount involved is in
provisional or final execution at various court levels. The R$ 53,200 decrease in lawsuits deemed as contingent liabilities is mainly
due to the revision of expectations arising from court decisions in the year.
(vi) Environmental claims
These refer to several administrative proceedings and lawsuits filed by government entities, including Companhia de Tecnologia de
Saneamento Ambiental – Cetesb and the Public Prosecution Office of the State of São Paulo, 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$ 464,800 increase in lawsuits deemed as contingent liabilities is mainly due to the new lawsuits filed and
updates on lawsuits in progress.
Among the main lawsuits the Company is involved, there are 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.
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(d) Other concession-related legal proceedings
The Company is a party to concessions-related proceedings, where it challenges compensatory issues for the resumption of water
supply and sewage collection services by some municipalities or the right to continue operating said services.
The amount of intangible assets related to the municipalities mentioned in the lawsuits mentioned below totaled R$ 114,335 as of
December 31, 2018 (R$ 114,335 as of December 31, 2017), of which R$ 109,990 (items “c” to “h”) reclassified to indemnities
receivable in current and noncurrent assets, and estimated losses in the full amount of the claim were recorded, in previous periods.
All municipalities mentioned below are not operated by the Company. When a municipality is awarded a final an unappealable
favorable sentence, allowing it to repossess sanitation service assets and operations, the Brazilian legislation provides for the
indemnity of the Company’s investments.
(a) Cajobi filed an action to recover possession against SABESP, which was granted relief to maintain the municipality in the
possession of water and sewage assets; the likelihood of the Company resuming operations is remote. As of February 18, 2018,
the appeal filed in the Appellate Court was denied. SABESP filed a special appeal. Meanwhile, SABESP has filed a motion
against the municipality of Cajobi aiming at the enumeration and appraisal of the concession assets, which is in the forensic
accounting stage and will support the subsequent filing of an action for damages;
(b) Macatuba filed an action to recover possession against SABESP, which was granted relief; the likelihood of the Company
resuming operations is remote. The lawsuit is currently awaiting judgment of the special appeal filed by SABESP. Meanwhile,
SABESP has filed an appeal requesting the payment by the municipality of indemnity related to non-amortized reversible
assets. The action is in the forensic accounting stage. In this same action, the municipality of Macatuba counterclaimed
because it believes that SABESP earned, through the collection of tariffs, more than the amount invested in the water and
sewage system, requesting that the Company be sentenced to pay an indemnity to be calculated by forensic experts, which is
deemed as a contingent liability;
(c) The Company filed a repossession action against the municipality of Álvares Florence, which was deemed groundless in an
unappealable judgment. SABESP also filed an action for damages, requiring the payment related to non-amortized reversible
assets. The Court sentenced the municipality to comply with the terms of the agreement. The municipality then filed motion
and the appeal is pending judgment;
(d) Embaúba filed a repossession action against SABESP, which was granted relief to maintain the municipality in the
possession of water and sewage assets and was issued a final and unappealable decision. The indemnity action was judged
groundless in first instance and upheld by the Court of Justice. The appeal filed by SABESP in the Superior Court of Justice
was not known;
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(e) Araçoiaba da Serra filed a repossession action against SABESP, which was granted relief to maintain the municipality in the
possession of water and sewage assets and was issued a final and unappealable decision. SABESP filed an indemnity action,
which is in progress, in the forensic expert stage;
(f) Itapira filed a repossession action against SABESP, which was granted relief to maintain the municipality in the possession
of water and sewage assets, which was issued final and unappealable decision. SABESP filed an indemnity action, which was
held valid to determine the reimbursement of R$ 16,554, which must be adjusted for inflation as from the filing of the lawsuit
(February 2008). This decision may be challenged.
(g) Tuiuti, through an action, obtained the right to continue operating water and sewage services. However, in a counter-claim,
the municipality was sentenced to pay an indemnity, as a final decision that became an execution object by SABESP. As of
December 7, 2016, an official communication was issued requesting the payment of the award;
(h) Mauá is a defendant in a lawsuit filed by SABESP in 1996, in order to receive indemnification for its investments during the
period of the concession agreement. The court found for the plaintiff and the decision was executed. The lawsuit is currently
pending payment through registered warranties.
(e) Environmental lawsuits with settlements entered into in 2018
In 2018, the Company entered into several legal and administrative agreements totaling R$ 48,353. Of this amount, R$ 46,538 is
related to the construction and R$ 1,835 to environmental indemnifications, recorded under “other liabilities”. The accumulated
balance as of December 31, 2018, corresponding to environmental indemnifications, totaled R$ 44,828 (R$ 43,014 as of December
31, 2017).
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(f) Guarantee insurance for escrow deposit
The Company contracts guarantee insurance for escrow deposit, which was renewed as of May 25, 2017, in the amount of R$ 500
million. Such insurance will be used to settle legal claims instead of have immediate cash disbursement by the Company, such
insurance is used until the conclusion of these proceedings limited to up to five years.
In 2018, the Company used R$ 160,377 of the total contracted amount (R$ 101,192 in 2017). The amount of R$ 471,556 is currently
outstanding from the current contract.
21 Employees benefits
(a) Health benefit plan
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, 2017 – 7.7%) on average, of gross payroll;
. Participating employees: 3.21% of base salary and premiums, equivalent to 2.5% of payroll, on average.
(b) Pension plan benefits
Funded plan – G1 (i)
Present value of defined benefit obligations
Fair value of the plan's assets
December 31, 2018
December 31, 2017
2,532,338
(2,168,436)
2,319,841
(1,931,380)
Net liabilities recognized for defined benefit obligations
363,902
388,461
Unfunded plan – G0 (iii)
Present value of defined benefit obligations
2,606,107
2,543,877
Net liabilities recognized for defined benefit obligations
2,606,107
2,543,877
Liability as per statement of financial position – pension obligations (*)
2,970,009
2,932,338
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Despite the decrease in interest rate in the year, the decrease of actuarial deficit was mainly due to the higher profitability of the
plan’s assets.
Pursuant to IAS19, the Company recognizes gains/(losses), due to changes in assumptions under equity, as valuation adjustments
to equity, as shown below:
As of December 31, 2018
Actuarial gains/(losses) on obligations
Gains/(losses) on financial assets
Total gains/(losses)
Deferred income tax and social contribution - G1 Plan
Valuation adjustments to equity
As of December 31, 2017
Actuarial gains/(losses) on obligations
Gains/(losses) on financial assets
Total gains/(losses)
Deferred income tax and social contribution - G1 Plan
Valuation adjustments to equity
As of December 31, 2016
Actuarial gains/(losses) on obligations
Gains/(losses) on financial assets
Total gains/(losses)
Deferred income tax and social contribution - G1 Plan
Valuation adjustments to equity
G1 Plan
G0 Plan
Total
(114,188)
113,869
(319)
108
(211)
(10,783)
-
(10,783)
-
(10,783)
(124,971)
113,869
(11,102)
108
(10,994)
G1 Plan
G0 Plan
Total
305,511
52,083
357,594
(121,582)
236,012
51,535
-
51,535
-
51,535
357,046
52,083
409,129
(121,582)
287,547
G1 Plan
G0 Plan
Total
(541,783)
192,458
(349,325)
118,770
(230,555)
(241,711)
-
(241,711)
-
(241,711)
(783,494)
192,458
(591,036)
118,770
(472,266)
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(i) G1 Plan
The Company sponsors a defined benefit pension plan for its employees ("G1 Plan"), which is managed by Sabesprev, receives
similar contributions established in a plan of subsidy of actuarial study of Sabesprev, as follows:
· 0.99% of the portion of the salary of participation up to 20 salaries; and
· 8.39% of the surplus, if any, of the portion of the salary of participation over 20 salaries.
As of December 31, 2018, SABESP had a net actuarial liability of R$363,902 (R$388,461 as of December 31, 2017) 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
2018
2017
2,319,841
13,905
213,201
114,188
(128,797)
2,465,721
17,582
260,409
(305,511)
(118,360)
Defined benefit obligation, end of the year
2,532,338
2,319,841
Below, the change of fair value of the plan during the year:
Fair value of the plan’s assets, beginning of the year
Expected return on the plan assets
Expected Company’s contributions
Expected participants’ contributions
Benefits paid
Actuarial gains/(losses) recorded as other comprehensive income
Fair value of the plan’s assets, end of the year
2018
2017
1,931,380
179,449
36,199
36,336
(128,797)
113,869
2,168,436
1,712,551
183,689
48,742
52,675
(118,360)
52,083
1,931,380
(Deficit)/Surplus
(363,902)
(388,461)
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The amounts recognized in the year are as follows:
Current service expenses
Interest cost rate
Expected return on the plan's assets
Total expenses
2018
2017
2016
(22,431)
213,201
(35,093)
260,409
13,562
285,227
(179,449)
(183,689)
(201,778)
11,321
41,627
97,011
In 2018, the expenses related to defined pension plan amounting to R$7,530, R$1,133 and R$704 (R$35,156, R$1,864 and R$619
in 2017 and R$60,263, R$7,982 and R$24,557 in 2016), were recorded in operating costs, selling and administrative expenses,
respectively. The amount of R$1,955 was capitalized in assets (R$3,988 in 2017 and R$4,209 in 2016).
Estimated expenses
Service cost
Interest cost rates
Participants' contribution
Net profitability on financial assets
Expense to be recognized by the employer
Actuarial assumptions:
Discount rate – actual rate (NTN-B)
Inflation rate
Expected rate of return on assets
Future salary increase
Mortality table
2019
8,610
224,429
(31,712)
(192,965)
8,362
2018
2017
2016
4.91% p.a.
4.01% p.a.
9.12% p.a.
5.35% p.a.
3.96% p.a.
5.74% p.a.
4.87% p.a.
9.52% p.a.
10.89% p.a.
6.09% p.a.
6.04% p.a.
6.97% p.a.
AT-2000
AT-2000
AT-2000
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The number of active participants as of December 31, 2018 was 4,056 (4,317 as of December 31, 2017), and of inactive participants
was 7,149 (6,978 as of December 31, 2017).
The benefit to be paid of G1 pension plan, expected for 2019 is R$177,516.
The contributions of the Company and participants of Plan G1 in 2018 were R$ 36,199 (R$ 48,742 in 2017) and R$ 36,336
(R$ 52,047 in 2017), respectively. Of this amount, the Company and the participants’ payments corresponding to the actuarial
deficit of the G1 funded plan in 2018, totaled R$ 26,672 and R$ 16,832, respectively.
Sensitivity analysis of the defined benefit pension plan as of December 31, 2017 regarding the changes in the
main assumptions are:
Plan – G1
Discount rate
Life expectation
Wage increase rate
Plan’s assets
Change in assumption
Impact on present value of the defined
benefit obligations
Increase of 1.0%
Decrease of 1.0%
Increase of 1 year
Decrease of 1 year
Increase of 1.0%
Decrease of 1.0%
Decrease of R$263,661
Increase of R$319,455
Increase of R$48,558
Decrease of R$49,705
Increase of R$31,418
Decrease of R$27,019
The plan’s investment policies and strategies are aim at getting consistent returns and reduce the risks associated to the utilization
of financial assets available on the Capital Markets through diversification, considering factors, such as the liquidity needs and the
long-term nature of the plan liability, types and availability of financial instruments in the local and international markets, general
economic conditions and forecasts as well as requirements under the law. The plan's asset allocation management strategies are
determined with the support of reports and analysis prepared by Sabesprev and independent financial advisors:
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Fixed income
- NTNBs
- NTNCs
Government bonds in own portfolio
Fixed income fund quotas
Private credit investment fund quotas
Debentures
Total fixed income
Equities
Stocks investment fund quotas
Shares
Total equities
Structured investments
Equity investment fund quotas
Real estate investment fund quotas
Multimarket investment fund quotas
Total structured investments
Other
December 31, 2018
December 31, 2017
1,225,738
163,966
1,389,704
87,939
-
-
1,477,643
249,740
-
249,740
121,043
-
310,785
431,828
9,225
1,064,935
146,495
1,211,430
260,352
135,454
3,902
1,611,138
195,459
3,903
199,362
86,193
27,170
-
113,363
7,517
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Fair value of the plan's assets
2,168,436
1,931,380
(a) Fixed income: it is composed of government bonds issued by the National Treasury, between 2024 and 2055. These
instruments are indexed by NTN-b indexed by IPCA (Extended Consumer Price Index) and NTN-c indexed by IGPM
(General Market Price 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.
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(d) Equities: equity fund composed of Brazilian companies’ stocks listed at B3.
(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 companies trading in stock exchanges or not.
(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: Investment funds that use several investment strategies available in the capital
markets in order to obtain return higher than the CDI.
(h) Other: Investment fund quotas in global companies’ stocks, mostly US companies, borrowings, real estate, etc., reducing
operational and contingent liabilities.
Restrictions with respect to asset portfolio investments, in the case of federal government securities:
i) instruments securitized by the National Treasury will not be permitted;
ii) derivative instruments must be used for hedge.
Restrictions with respect to asset portfolio investments, in the case of variable-income securities for internal management, are as
follows:
i) day-trade operations will not be permitted;
ii) sale of uncovered share is prohibited;
iii) swap operations without guarantee are prohibited
iv) leverage will not be permitted, i.e., operations with derivatives representing leverage of asset or selling short, such operations
cannot result in losses higher than invested amounts.
As of December 31, 2018, Sabesprev did not have financial assets issued by the Company in its own portfolio; however, said assets
could have been part of the investment fund portfolio invested by the Foundation. The real estate held in the portfolio is not used by
the Company.
The assets’ consolidated profitability came to 11.75% in 2018, exceeding its actuarial target of 9.12% in the same period (INPC +
5.5% p.a.). In 2017, profitability reached 12.02%, also exceeding the variation of the actuarial target for that year, of 7.68%.
Concerning Fixed Income, the strategies focused on federal government bonds prevailed. Said bonds appreciated due to the result
of presidential election, which market agents believe may give rise to liberal reforms.
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Concerning Equities, investments appreciated for the same reason, which led to the appreciation of fixed income investments. The
return of Ibovespa reached 15.03% in 2018 and 26.86% in 2017.
Structured Investments also appreciated due to the valuation of investees, which are currently more developed than in previous
years, in addition to dividend payments in 2018.
(ii) Private pension plan benefits – Defined contribution
As of December 31, 2018, Sabesprev Mais plan, based on defined contribution, had 9,586 active and assisted participants (9,328 as
of December 31, 2017).
With respect to the Sabesprev Mais plan, the contributions from the sponsor represent 100% over the total basic contribution from
the participants. In 2018, expenses related to the obligation of defined contribution, totaling R$13,227, R$1,820 and R$3,599, were
allocated to operating costs, selling expenses and administrative expenses. The amount of R$2,115 was capitalized in assets. In
August 2016, the Company concluded the migration process initiated in 2010 and paid R$30,891, corresponding to a non-recurring
contribution and incentive to participants who migrated, and R$7,214, corresponding to the previous balance, related to the
migration that began in 2010.
The Company has made contributions in the amount of R$20,762 in 2018 (R$19,220 as of December 31, 2017).
(iii) G0 Plan
Pursuant to State Law 4,819/58, employees who started providing services prior to May 1974 and retired as an employee of the
Company acquired a legal right to receive supplemental pension payments, which rights are referred as "G0 Plan ". The Company
pays these supplemental benefits on behalf of the State Government and makes claims for reimbursements from the State
Government, which are recorded as accounts receivable from related parties, limited to the amounts considered virtually certain
that will be reimbursed by the State Government. As of December 31, 2018, the Company recorded a defined benefit obligation for
the G0 Plan of R$ 2,606,107 (R$ 2,543,877 as of December 31, 2017).
Defined benefit obligation, beginning of the year
Current interest expense and service costs
Actuarial (gains)/losses recorded as other comprehensive income
Benefits paid
2018
2,543,877
232,248
10,783
(180,801)
2017
2,512,080
262,873
(51,535)
(179,541)
Defined benefit obligation, end of the year
2,606,107
2,543,877
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The amounts recognized in the income statement are as follows:
Current interest expense and service costs
Amount received from GESP (undisputed amount)
Total expenses
2018
2017
2016
232,248
(96,282)
262,873
(95,191)
282,117
(96,709)
135,966
167,682
185,408
In 2018 and 2017, the expenses related to the defined benefit obligation under Plan G0 were recorded in administrative expenses.
Estimated expenses
Interest cost rate
Expense to be recognized
The main actuarial assumptions used:
Discount rate – actual rate (NTN-B)
Inflation rate
Future salary increase
Mortality table
2019
227,367
227,367
2018
2017
2016
4.84% p.a.
5.30% p.a.
5.71% p.a.
4.01% p.a.
3.96% p.a.
4.87% p.a.
6.09% p.a.
6.04% p.a.
6.97% p.a.
AT-2000
AT-2000
AT-2000
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The number of active participants of Plan - Go as of December 31, 2018 and 2017 was 10. The number of beneficiaries, retirees and
survivors as of December 31, 2018 was 2,038 (2,294 as of December 31, 2017).
The benefit payable from the Go pension plan expected for 2019 is R$188,328.
The sensitivity analysis of defined benefit pension plan as of December 31, 2017 to the changes in the main
assumptions is:
Plan – G0
Discount rate
Life expectation
Wage growth rate
(c) Profit sharing
Changes in assumption
Impact on present value of the defined
benefit obligations
Increase of 1.0%
Decrease of 1.0%
Increase of 1 year
Decrease of 1 year
Increase of 1.0%
Decrease of 1.0%
Decrease of R$233,665
Increase of R$275,063
Increase of R$81,430
Decrease of R$81,436
Increase of R$280,410
Decrease of R$241,841
The Company has a profit-sharing program in accordance with an agreement with labor union and SABESP. The period covered
represents the Company fiscal year, from January to December 2018. The limit of the profit sharing is up to one-month salary for
each employee, depending on performance goals reached. As of December 31, 2018, the Program’s balance payable was recorded
under “salaries, payroll charges and social contributions” in the amount of R$ 110,464 (R$ 94,352 as of December 31, 2017).
22 Services payable
The services account records the balances payable, mainly from services received from third parties, such as supply of electric
power, reading of hydrometers and delivery of water and sewage bills, cleaning, surveillance and security services, collection, legal
counsel services, audit, marketing and advertising and consulting services, among others. This account also includes the amounts
payable to the Municipal Fund of Environmental Sanitation and Infrastructure based on a percentage of the revenues from São
Paulo local government (Note 15 (c) (v) (6)). The balances as of December 31, 2018 and 2017 were R$ 454,022 and R$ 408,275,
respectively.
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23 Knowledge Retention Program
In June 2018, SABESP implemented the Knowledge Retention Program (PRC), aiming to provide personnel planning conditions
and mitigate the impact of the exit of employees who possess strategic knowledge acquired throughout their career.
The period to enroll in the Program was from July 2, 2018 to October 31, 2018; however, the final term was postponed to November
30, 2018. Employment terminations will be carried out based on a previously set schedule, during the validity of the Program, i.e.
from January 2, 2019 to December 30, 2020.
For those enrolled in the Program, the compliance with the agreements of the Collective Work Agreement effective on the date of
termination is thereby guaranteed. They will also receive a severance incentive proportional to the length of service at SABESP,
corresponding to a percentage of the balance of the Guarantee Fund for Length of Service (FGTS), for termination purposes, on the
date of termination, as per the table below:
Length of service at SABESP (years)
% of the Guarantee Fund for Length of Service (FGTS)
More than 15
11 - 15
6 - 10
0 - 5
40%
30%
15%
5%
In 2018, the Company recorded R$ 196,472, corresponding to the provision of compensatory payments of employees enrolled in
the Program, R$ 74,324 of which recorded under current liabilities and R$ 122,148 under noncurrent liabilities.
For employees eligible to the Consent Decree (TAC) entered into with the São Paulo State Prosecution Office in 2009 who joined
the Program, the Company reversed R$ 170,303 in 2018.
As of December 31, 2018 the total provisioned corresponding to TAC was R$ 140,818, R$ 136,293 of which was recorded under
current liabilities and R$ 4,525 under noncurrent liabilities.
24 Equity
(a) Authorized capital
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On December 13, 2018, the Board of Directors approved a capital increase of R$ 10,000,000 to R$ 15,000,000 (authorized limit)
with capitalization of part of the investment reserve in the amount of R$ 5,000,000.
(b) Subscribed and paid-in capital
As of December 31, 2018 and 2017, subscribed and paid-in capital was represented by 683,509,869 registered, book-entry common
shares with no par value, as follows:
December 31, 2018
December 31, 2017
Number of
shares
343,524,285
212,612,143
125,278,967
2,094,474
%
Number of shares
%
50,26%
31,10%
18,33%
0,31%
343,524,285
201,026,895
50,26%
29,41%
136,790,413
20,01%
2,168,276
0,32%
683,509,869
100,00%
683,509,869
100,00%
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.
(**) custodians
(c) Distribution of earnings
Shareholders are entitled to a minimum mandatory dividend of 25% of the adjusted net income under Brazilian GAAP, calculated
according to the Brazilian corporate law. The dividends do not bear interest and the amounts not claimed within three years from
the date of the Shareholders' Meeting that approved them mature in favor of the Company.
Profit for the year
(-) Legal reserve - 5%
2018
2017
2016
2,835,068
2,519,310
2,947,098
141,755
125,965
147,355
2,693,313
2,393,345
2,799,743
Minimum mandatory dividend – 25% (R$0.9851, R$0.87539 and R$1.0240 as of December 31,
2018, 2017 and 2016 per share and per ADS)
673,328
598,336
699,936
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On April 27, 2018, the Shareholders’ General Meeting approved the distribution of dividends as interest on capital amounting to R$
105,543, for the 2017 fiscal year. Therefore, the amount of R$ 53,539 related to the surplus minimum mandatory dividends of 25%,
set forth in the Bylaws, recorded in the 2017 equity under “Additional proposed dividends” was transferred to current liabilities.
These amounts started being paid in June 2018.
The Company proposed dividends as interest on capital ad referendum of the Annual Shareholders’ Meeting of 2019, in the amount
of R$ 673,328 (R$ 598,336 in 2017) and additional proposed dividends in the amount of R$ 118,859 (R$ 105,543 in 2017), totaling
R$ 792,187 (R$ 703,879 in 2017), corresponding to R$ 1.1590 per common share (R$ 1.0298 in 2017), to be resolved on the
Shareholders’ Meeting to be held on April 29, 2019. The amount exceeding the minimum mandatory dividend due in the year of R$
118,859 (R$ 105,543 in 2017) was reclassified into equity to the “Additional proposed dividends” account, this amount includes the
withholding income tax of R$58,258 (R$52,004 in 2017).
Pursuant to CVM Resolution 207/1996, the Company imputed interest on capital to the minimum dividend by its net value of
withholding income tax. The amount of R$ 58,258 (R$ 52,004 in 2017) 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 capital.
The interest on capital balance payable as of December 31, 2018, totaling R$ 673,765 (R$ 598,612 in 2017), refers to the amount of
R$ 673,328 (R$ 598,336 in 2017) declared in 2018, net of withholding income tax and R$ 437 declared in previous years (R$ 276 in
2017).
(d) Legal reserve
Earnings reserve - legal reserve is a requirement for all Brazilian corporations and represents an allocation of retained earnings 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 and are not available for the payment of dividends.
(e) Investments reserve
Earnings reserve - investments reserve is specifically formed by the portion corresponding to own funds assigned to the expansion
of the water supply and sewage treatment systems, based on capital budget approved by the Management.
As of December 31, 2018 and 2017, the balance of investment reserve totaled R$3,840,422 and R$6,939,296, 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:
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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.
(f) Allocation of profit for the year
Profit
(+)
(-)
(-)
(-)
Profit for the year
Legal reserve – 5%
Minimum mandatory dividends
Additional proposed dividends
Investment reserve recorded
2018
2017
2016
2,835,068
141,755
673,328
118,859
1,901,126
2,519,310
125,965
598,336
105,543
1,689,466
2,947,098
147,355
699,936
123,557
1.976.250
Management will send for approval at the Shareholders’ Meeting, a proposal to reallocate retained earnings the amount of
R$1,901,126 to the Investment Reserve account, in order to meet the investment needs foreseen in the Capital Budget.
(g) Retained earnings
Retained earnings (accumulated losses): the statutory balance of this account is zero as all retained earnings must be distributed or
allocated to an earnings reserve.
(h) Other comprehensive loss
Gains and losses arising from changes in the actuarial assumptions are accounted for as equity valuation adjustments, net of
income tax and social contribution effects. See Note 21 (b), the breakdown of amounts recorded in 2018 and 2017.
Balance as of December 31, 2017
Actuarial gains/(losses) for the year (Note 21 (b))
Balance as of December 31, 2018
F-121
G1
G0
Total
70,927
(211)
70,716
(609,028)
(10,783)
(619,811)
(538,101)
(10,994)
(549,095)
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25 Earnings per share
Basic and diluted
Basic earnings per share is calculated by dividing the equity attributable to the Company’s owners by the weighted average number
of outstanding common shares during the year. The Company does not have potentially dilutive common shares outstanding or
debts convertible into common shares. Accordingly, basic and diluted earnings per share are equal.
2018
2017
2016
Earnings attributable to Company’s owners
Weighted average number of common shares issued
2,835,068
2,519,310
2,947,098
683,509,869
683,509,869
683,509,869
Basic and diluted earnings per share (reais per share)
4.15
3.69
4.31
26 Operating segment information
Management, comprised of the Board of Directors and Board of Executive Officers, has determined the operating segment used to
make strategic decisions, as sanitation services.
Result
Gross operating revenue
Gross sales deductions
Net operating revenue
Costs, selling and administrative expenses
Income from operations before other operating expenses, net and equity accounting
2018
Reconciliation to
the financial
statements (ii)
2,802,670
-
2,802,670
(2,739,657)
63,013
Sanitation (i)
14,253,609
(971,185)
13,282,424
(8,203,883)
5,078,541
Other operating income / (expenses), net
Equity accounting
Financial result, net
Income from operations before taxes
Depreciation and amortization
(1,392,541)
F-122
Balance as per
financial
statements
17,056,279
(971,185)
16,085,094
(10,943,540)
5,141,554
28,591
6,510
(1,264,336)
3,912,319
(1,392,541)
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(i) See note 33 for further information about non-cash items, other than depreciation and amortization that impact segment results,
and for additionals to long-lived asset information;
(ii) Construction revenue and related costs not reported to the CODM.
Gross operating revenue
Gross sales deductions
Net operating revenue
Costs, selling and administrative expenses
Income from operations before other operating expenses, net and equity accounting
Other operating income / (expenses), net
Equity accounting
Financial result, net
Income from operations before taxes
Depreciation and amortization
F-123
2017
Reconciliation to
the financial
statements (ii)
3,150,877
-
3,150,877
(3,080,542)
70,335
Sanitation (i)
12,223,746
(766,390)
11,457,356
(7,566,104)
3,891,252
(1,301,897)
-
Balance as per
financial
statements
15,374,623
(766,390)
14,608,233
(10,646,646)
3,961,587
(5,679)
5,760
(458,054)
3,503,614
(1,301,897)
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(i) See note 33 for further information about non-cash items, other than depreciation and amortization that impact segment results,
and for additionals to long-lived asset information;
(ii) Construction revenue and related costs not reported to the CODM.
Gross operating revenue
Gross sales deductions
Net operating revenue
Costs, selling and administrative expenses
Income from operations before other operating expenses, net and equity accounting
Other operating income / (expenses), net
Equity accounting
Financial result, net
Income from operations before taxes
Depreciation and amortization
F-124
2016
Reconciliation to
the financial
statements (ii)
3,732,877
-
3,732,877
(3,651,364)
81,513
Sanitation (i)
11,122,232
(756,901)
10,365,331
(7,026,699)
3,338,632
1,146,626
-
Balance as per
financial
statements
14,855,109
(756,901)
14,098,208
(10,678,063)
3,420,145
4,722
4,740
699,447
4,129,054
1,146,626
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(i) See note 33 for further information about non-cash items, other than depreciation and amortization that impact segment results,
and for additionals to long-lived asset information;
(ii) Construction revenue and related costs not reported to the CODM.
Explanation on the reconciliation items for the financial statements.
The impacts on gross operating income and costs are as follows:
2018
2017
2016
Gross revenue from construction recognized under IFRIC 12 (a)
2,802,670
3,150,877
3,732,877
Construction costs recognized under IFRIC 12 (a)
(2,739,657)
(3,080,542)
(3,651,364)
Construction margin
63,013
70,335
81,513
(a) Revenue from concession construction contracts is recognized in accordance with Note 3.3 (b).
27 Insurance
The Company has insurance that covers fire and other damage to its assets and office buildings, and liabilities to third parties, among
others. It also has civil liability insurance for the members of the Board of Directors and Board of Executive Officers (“D&O
insurance”) and guarantee insurance for escrow deposit (as described in Note 20 (f)) and traditional guarantee insurance. The
Company contracts insurance through bidding processes with the participation of the main Brazilian and international insurance
companies that operate in Brazil.
As of December 31, 2018, the Company’s insurance coverage is as follows:
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Specified risks – fire
Engineering risk
Guarantee insurance for escrow deposit
Traditional guarantee insurance
Civil liability– D&O (Directors and Officers)
Civil liability – works
Domestic and international transportation
Civil liability – operations
Other
Total
28 Operating revenue
(a) Revenue from sanitation services:
Metropolitan region of São Paulo
Regional Systems
Total
Coverage
2,007,219
911,961
500,000
100,000
100,000
72,435
11,470
5,000
14
3,708,099
2018
2017
2016
10,295,509
3,958,100
8,636,926
3,586,820
7,749,694
3,372,538
14,253,609
12,223,746
11,122,232
(b) Reconciliation between gross operating income and net operating income:
2018
2017
2016
Revenue from sanitation services (i)
14,253,609
12,223,746
11,122,232
Construction revenue
Sales tax
Regulation, Control and Oversight Fee (TRCF) (ii)
Net revenue
2,802,670
(916,808)
(54,377)
3,150,877
(757,619)
(8,771)
3,732,877
(756,901)
-
16,085,094
14,608,233
14,098,208
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(i) Includes the amount of R$63,901 corresponding to the TRCF charged from customers from the municipalities regulated by
ARSESP.
(ii) Amount payable to ARSESP referring to regulation, control and oversight activities, pursuant to State Complementary Law
1,025/07.
29 Operating costs and expenses
Operating costs
Salaries, payroll charges and benefits
Pension obligations
Construction costs (Note 26)
General supplies
Treatment supplies
Outsourced services
Electricity
General expenses
Depreciation and amortization
Selling expenses
2018
2017
2016
(1,959,539)
(25,066)
(1,841,571)
(48,381)
(1,718,199)
131,469
(2,739,657)
(3,080,542)
(3,651,364)
(238,034)
(265,146)
(996,477)
(956,840)
(629,253)
(163,712)
(287,592)
(857,063)
(794,352)
(531,985)
(1,276,444)
(1,173,765)
(9,086,456)
(8,778,963)
(173,224)
(279,150)
(845,334)
(932,435)
(471,965)
(1,072,918)
(9,013,120)
Salaries, payroll charges and benefits
(289,378)
(305,440)
(271,690)
Pension obligations
General supplies
Outsourced services
Electricity
General expenses
Depreciation and amortization
(3,602)
(6,391)
(273,470)
(1,154)
(102,213)
(17,272)
(693,480)
(7,296)
(4,451)
17,941
(3,585)
(258,287)
(278,565)
(762)
(94,112)
(15,664)
(751)
(93,180)
(9,729)
(686,012)
(639,559)
Bad debt expense, net of recoveries (Note 9 (c))
(166,727)
(82,681)
(90,488)
Administrative expenses
Salaries, payroll charges and benefits
Pension obligations
General supplies
Outsourced services
Electricity
General expenses
Depreciation and amortization
Tax expenses
Operating costs and expenses
Salaries, payroll charges and benefits
Pension obligations
Construction costs (Note 26)
General supplies
Treatment supplies
Outsourced services
Electricity
mzdirect.mz-ir.com/Sabesp/2019/20F2018/v23/sbsform20f_2018.htm
(254,284)
(141,758)
(4,881)
(204,728)
(1,363)
(232,288)
(98,825)
(58,750)
(229,752)
(171,830)
(5,675)
(183,746)
(965)
(302,113)
(112,468)
(92,441)
(996,877)
(1,098,990)
(194,357)
(136,358)
(2,585)
(154,926)
(1,848)
(289,862)
(63,979)
(90,981)
(934,896)
(2,503,201)
(2,376,763)
(2,184,246)
(170,426)
(227,507)
13,052
(2,739,657)
(3,080,542)
(3,651,364)
(249,306)
(265,146)
(1,474,675)
(959,357)
(173,838)
(287,592)
(1,299,096)
(796,079)
(179,394)
(279,150)
(1,278,825)
(935,034)
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General expenses
Depreciation and amortization
Tax expenses
Bad debt expense, net of recoveries (Note 9 (c))
(963,754)
(1,392,541)
(58,750)
(166,727)
(928,210)
(1,301,897)
(92,441)
(82,681)
(855,007)
(1,146,626)
(90,981)
(90,488)
(10,943,540)
(10,646,646)
(10,678,063)
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30 Financial Income (Expenses)
Financial expenses
Interest and charges on borrowings and financing – local currency (i)
Interest and charges on borrowings and financing – foreign currency (ii)
Other financial expenses (iii)
Income tax over international remittance
Inflation adjustment on borrowings and financing (iv)
Inflation adjustment on Sabesprev Mais deficit
Other inflation adjustments (v)
Interest and inflation adjustments on provisions (vi)
Total financial expenses
Financial income
Inflation adjustment gains (vii)
Income on short-term investments (viii)
Interest income (ix)
Cofins and Pasep
Other
Total financial income
2018
2017
2016
(332,149)
(171,686)
(187,563)
(19,779)
(66,183)
-
(45,193)
14,586
(289,780)
(119,100)
(97,533)
(17,901)
(62,787)
-
(50,941)
(50,238)
(807,967)
(688,280)
105,952
187,094
175,939
(22,693)
10
446,302
89,010
195,992
57,166
(16,366)
442
326,244
(317,379)
(113,268)
(86,372)
(18,823)
(121,036)
(891)
(48,634)
(133,488)
(839,891)
152,154
209,376
99,068
(23,535)
11,647
448,710
Financial income (expenses), net before exchange rate changes
(361,665)
(362,036)
(391,181)
Net exchange gains (losses)
Exchange rate changes on borrowings and financing (x)
(915,897)
(96,300)
Exchange rate changes on assets
Other exchange rate changes
Exchange rate changes, net
Financial income (expenses), net
13,235
(9)
336
(54)
1,090,466
371
(209)
(902,671)
(96,018)
1,090,628
(1,264,336)
(458,054)
699,447
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(i) Increase of R$ 42.4 million mainly due to the lower capitalization in the investment in 2018 compared to 2017.
(ii) Increase of R$ 52.6 million due to the appreciation of the dollar and the yen against the real in 2018 (17.1% and 20.0%,
respectively), when compared to the real appreciation occurred in 2017 (1.5% and 5.3%, respectively).
(iii) The variation is due to the increase in recognition of interest on Public-Private Partnership (PPP) contracts, due to the beginning
of the the service provision of São Lourenço Production System (SPSL), on July 10, 2018.
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(iv) The monetary variation derives mainly due to the higher variation of the IPCA in 2018, compared to the variation in 2017
(3.75% and 2.95%, respectively). The exposures to this rate are shown in Note 5.1 (d).
(v) Expenses mainly related to inflation adjustments related to the commieents required by Public-Private Partnership, program
contracts commitments and agreements.
(vi) The decrease is mainly due to the reversion of provisions in 2018.
(vii) The monetary variations gains increased mainly due to the higher restatement escrow deposits.
(viii)The decrease is a result of the decrease in the CDI rate, of 6.89% p.a. in 2017 and 6.42% p.a. in 2018.
(ix) The R$ 118,773 increase in interest income is mainly due to the recognition of interest on installment agreements with customers,
in 2018.
(x) The change in expenses mainly reflects the appreciation of the U.S. dólar and the Yen against the Real in 2018 (17.1% and 20.0%,
respectively), compared to appreciation presented in 2017 (1.5% and 5.3, respectively).
31 Other operating income (expenses), net
2018
2017
2016
Other operating income, net
Other operating expenses
93,089
(64,498)
75,410
(81,089)
62,570
(57,848)
Other operating income (expenses), net
28,591
(5,679)
4,722
Other operating income is comprised by sale of property, plant and equipment, sale of contracts awarded in public bids, right to sell
electricity, indemnities and reimbursement of expenses, fines and collaterals, property leases, reuse water, PURA projects and
services, net of Cofins and Pasep.
Other operating expenses consist mainly of derecognition of concessions assets due to obsolescence, discontinued construction
works, unproductive wells, projects considered economically unfeasible, losses on property, plant and equipment and exceeding
cost of electricity sold.
32 Commitments
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The Company has agreements to manage and maintain its activities, as well as agreements to build new projects aiming at
achieving the objectives proposed in its target plan. Below, the main committed amounts as of December 31, 2018:
Contractual obligations –
Expenses
Contractual obligations –
Investments
Total
1 year
1-3 years
3-5 years
More than 5
years
Total
1,521,921
2,675,326
4,197,247
801,136
282,192
1,107,121
3,712,370
2,213,620
3,014,756
1,009,148
1,291,340
5,737,495
6,844,616
11,635,589
15,347,959
The main commitment refers to the São Lourenço PPP. See Note 15 (g).
33 Supplemental cash flow information
Total additions of contract assets (Note 14)
Total additions to intangible assets (Note 15 (b))
2018
2017
2016
3,188,943
-
-
1,144,728
3,490,298
3,855,831
Items not affecting cash (see breakdown below)
(2,201,112)
(1,532,518)
(1,747,664)
Total additions to intangible assets as per statement of cash flows
2,132,559
1,957,780
2,108,167
Investment and financing operations affecting intangible assets but not cash:
Interest capitalized in the year (Note 15 (d))
Contractors payable
Program contract commitments
Public Private Partnership - São Lourenço PPP (Note 15 (g))
Leases
Construction margin (Note 26)
Agreement signed with the municipality of Guarulhos (Note 9 (a))
Total
F-131
488,502
297,872
149,974
273,737
-
63,013
928,014
649,048
213,340
95,126
501,591
3,078
70,335
-
700,743
57,431
4,262
893,181
10,534
81,513
-
2,201,112
1,532,518
1,747,664
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Companhia de Saneamento Básico do Estado de São Paulo - SABESP
34 Events after the reporting period
· São Bernardo do Campo
On March 12, 2019, the Executive Body (Poder Executivo Municipal) of São Bernardo do Campo submitted the Proposed Bill to the
Municipal Chamber (Câmara Municipal) with the purpose of signing the Contract for the Provision of Public Services between the
Municipality, the State of São Paulo, and Sabesp, in order to adjust the current contract to the current legislation.
The contract that enables the Company to provide services to the municipality of São Bernardo was celebrated in December 2003,
i.e., prior to the Federal Law No. 11,445 of 2007. Considering that this Law establishes specific rules and conditions to contract
basic sanitation services, there is a need to adjust the contract to comply with this legislation.
· Santo André
On March 20, 2019, was executed a Protocol of Intentions with the municipality of Santo André for the preparation of studies and
evaluations aiming to resolve commercial relations and existing debts between the municipality and the Company.
2ND Ordinary Tariff Revision
On May 24, 2018, in view of the result of the Second Ordinary Tariff Revision, the Company filed with ARSESP: (i) a request for
reconsideration; and (ii) a request for clarification and revision. In the request for clarification and review, the Company requests
revision of the value of the revenue of the city of São Paulo used to calculate the financial component referring to municipal funds.
In reply, on February 28, 2019 ARSESP decided not to accept the request for reconsideration (administrative appeal). Regarding
the request for clarification and revision, the ARSESP decided for its partial approval, which will imply an index of 0.8408%, to be
applied at the same time of the annual tariff adjustment (May 2019).
Payment of debentures
The Company paid the installment corresponding to the 17th debenture issue, in the amount of R$ 279,797, in January 2019, settled
the 15th debenture issue, in the amount of R$ 361,593, in February 2019, and prepaid the 20th debenture issue, in the amount of
R$ 250,000, in March 2019
23th Issuance of Debentures
On April 8, 2019, was approved the 23th issuance of simple, unsecured and non-convertible debentures, in up to two series, for
public distribution, with restricted placement efforts, pursuant to CVM Rule No. 476, dated as of January 16, 2009, as amended, in
the total amount of up to R$ 1,500,000,000.00 (one billion and five hundred million reais), being the Offer conditioned to the
issuance of, at least, 750,000 (seven hundred and fifty thousand) Debentures, in the total amount of R$750,000,000.00 (seven
hundred and fifty million reais). The issuance and the number of Debentures to be placed in each serie, the remuneration of the
Debentures and the total amount of the Offer will be defined according to the bookbuilding process, in the communicating vessels
system.
Tariff readjustment
On April 10, 2019, São Paulo State Energy and Sanitation Regulatory Agency (ARSESP - Agência Reguladora de Saneamento e
Energia do Estado de São Paulo) published Resolution No. 859 authorizing the Company to apply a tariff readjustment of 4.7242%
to its current tariffs, comprised of:
IPCA variation in the period of 4.5754%;
Efficiency factor (X Factor) of 0.6920%; and
Compensatory adjustment of 0.8408%, as described in Technical Note NT.F-0010-2018.
F-132
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CERTIFICATION
EXHIBIT 12.1
I, Benedito Pinto Ferreira Braga Junior, certify that:
1.
I have reviewed this annual report on Form 20-F of Companhia de Saneamento Básico do Estado de São Paulo -
Sabesp;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report fairly present
in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the
periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
a. designed such disclosure controls and procedures or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the company, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c. evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered
by this report based on evaluation; and
d. disclosed in this report any change in the company’s internal control over financial reporting that occurred during
the period covered by the annual report that has materially affected, or is reasonably likely to materially affect,
the company’s internal control over financial reporting.
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the company’s auditors and to the audit committee of the company’s board of directors (or
persons performing the equivalent function):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and
report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in
the company’s internal control over financial reporting.
Date: April 26, 2019
By: /s/ Benedito Pinto Ferreira Braga Junior
Name: Benedito Pinto Ferreira Braga Junior
Title: Chief Executive Officer
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EXHIBIT 12.2
I, Rui de Britto Álvares Affonso, certify that:
CERTIFICATION
1.
I have reviewed this annual report on Form 20-F of Companhia de Saneamento Básico do Estado de São Paulo -
Sabesp;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in
all material respects the financial condition, results of operations and cash flows of the company as of, and for, the
periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by
this report based on evaluation; and
d) disclosed in this report any change in the company’s internal control over financial reporting that occurred during
the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the
company’s internal control over financial reporting.
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the company’s auditors and to the audit committee of the company’s board of directors (or
persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
company’s internal control over financial reporting.
Date: April 26, 2019
By: /s/ Rui de Britto Álvares Affonso
Name: Rui de Britto Álvares Affonso
Title: Chief Financial Officer and Investor Relations Officer
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CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002
EXHIBIT 13.1
In connection with the Annual Report of Companhia de Saneamento Básico do Estado de São Paulo - Sabesp (the
"Company") on Form 20-F for the fiscal year ended December 31, 2018, as filed with the U.S. Securities and Exchange
Commission on the date hereof (the "Report"), I, Benedito Pinto Ferreira Braga Junior, Chief Executive Officer, certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the U.S. Sarbanes Oxley Act of 2002, that to
the best of my knowledge:
(i)
(ii)
the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange Act
of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: April 26, 2019
By: /s/Benedito Pinto Ferreira Braga Junior
Name: Benedito Pinto Ferreira Braga Junior
Title: Chief Executive Officer
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CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002
EXHIBIT 13.2
In connection with the Annual Report of Companhia de Saneamento Básico do Estado de São Paulo – Sabesp (the
“Company”) on Form 20-F for the fiscal year ended December 31, 2018, as filed with the U.S. Securities and Exchange
Commission on the date hereof (the “Report”), I, Rui de Britto Álvares Affonso, Chief Financial Officer and Investor
Relations Officer, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the U.S. Sarbanes
Oxley Act of 2002, that to the best of my knowledge:
(i)
(ii)
the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange
Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: April 26, 2019
By: /s/ Rui de Britto Álvares Affonso
Name: Rui de Britto Álvares Affonso
Title: Chief Financial Officer and Investor Relations Officer
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