UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the transition period from ________________ to _______________________
OR
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
Shares are not listed for trading, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the New York Stock Exchange.
Name of each exchange on which
registered
New York Stock Exchange*
New York Stock Exchange
Trading Symbols(s)
Not traded
SBS
1
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by
the annual report.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
683,509,869 Shares of Common Stock
Yes No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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
Non-accelerated Filer
Accelerated Filer
Emerging Growth Company
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided
pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP International Financial Reporting Standards as issued by the International Accounting Standards Board Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has
elected to follow
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Item 17 Item 18
Yes No
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board
to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report.
Yes No
2
TABLE OF CONTENTS
PART I .................................................................................................................................................................................................................. 9
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS ..................................................................... 9
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE ....................................................................................................... 9
ITEM 3. KEY INFORMATION ............................................................................................................................................................ 9
ITEM 4. INFORMATION ON THE COMPANY ............................................................................................................................... 26
ITEM 4A. UNRESOLVED STAFF COMMENTS .................................................................................................................................... 72
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS ........................................................................................ 72
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES ......................................................................................... 95
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS ..................................................................... 104
ITEM 8. FINANCIAL INFORMATION ........................................................................................................................................... 112
ITEM 9. THE OFFER AND LISTING .............................................................................................................................................. 115
ITEM 10. ADDITIONAL INFORMATION ......................................................................................................................................... 118
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..................................................... 130
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES ..................................................................... 131
Par II .................................................................................................................................................................................................................. 134
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES ............................................................................... 134
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS ................ 134
ITEM 15. CONTROLS AND PROCEDURES ..................................................................................................................................... 134
ITEM 16. [Reserved] ................................................................................................................................................................................... 136
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT ................................................................................................................... 136
ITEM 16B. CODE OF ETHICS ............................................................................................................................................................... 136
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES ...................................................................................................... 137
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES ...................................................... 137
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS ......................................... 137
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT ...................................................................................... 137
ITEM 16G. CORPORATE GOVERNANCE .......................................................................................................................................... 138
ITEM 16H. MINE SAFETY DISCLOSURE........................................................................................................................................... 144
3
Part III ................................................................................................................................................................................................................ 144
ITEM 17. FINANCIAL STATEMENTS .............................................................................................................................................. 144
ITEM 18. FINANCIAL STATEMENTS .............................................................................................................................................. 144
ITEM 19. EXHIBITS ............................................................................................................................................................................ 145
4
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, 2019 and 2018 and
for each of the years in the three-year period ended December 31, 2019 are included in this annual report on Form 20-F.
Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not
be an arithmetic aggregation of the figures which precede them.
Other Information
In this annual report, unless the context otherwise requires, references to “we,” “us,” “our,” “Company,” or “SABESP” refer to Companhia de Saneamento
Básico do Estado de São Paulo – SABESP.
In addition, references to:
• “ANA” are to 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;
• “BNDES” are to Brazilian National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social).
• “Brazil” are to the Federative Republic of Brazil;
• “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”);
• “COVID-19” or “Coronavirus” are to the novel coronavirus pandemic;
• “CVM” are to the Comissão de Valores Mobiliários, the Brazilian securities and exchange commission;
• “FAPESP” are to the Fundação de Amparo à Pesquisa do Estado de São Paulo, the São Paulo State Research Foundation;
• “federal government” and “Brazilian government” are to the federal government of the Federative Republic of Brazil and “state government” are to
the state government of the State of São Paulo;
• “IDB” are to the Interamerican Development Bank;
• “¥” or “Japanese Yen” are to the official currency of Japan;
• “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil;
• “Regional Systems” are to the area where the regional systems’ executive office operates, comprising 332 municipalities in the interior and coastline
regions of the state of São Paulo;
• “São Paulo metropolitan region,” with respect to our operations, are to the area where the metropolitan executive office operates, comprising
40 municipalities, including the city of São Paulo;
5
• “Service” indicators are to (a) the number of homes that are actually connected to the water network or sewage collection network, as a portion of (b)
the total number of homes within a given serviceable area;
• “Sewage Treatment Coverage” indicators are to the amount of consumer units connected to the sewage treatment system;
• “State” are to the State of São Paulo, which is also our controlling shareholder;
• “U.S. dollars” or “US$” are to the United States dollar, the official currency of the United States;
• “water crisis” are to the drought we experienced from late 2013 and throughout most of 2015. This drought, the most serious that our service region
has experienced in the previous 80 years, primarily affected the Cantareira System, our largest water production system; and
• “WHO” are to the World Health Organization.
Information in this annual report related to liters, water and sewage volumes, number of employees, kilometers, water and sewage connections, population
served, operating productivity, water production, water and sewage lines (in kilometers), water loss index and investment in programs has not been audited.
Market Information
We make statements in this annual report about our market share and other information relating to Brazil and the industry in which we operate. We have
made these statements on the basis of information from third-party sources and publicly available information that we believe is reliable, such as information
and reports from the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), 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 372 municipalities we serve and the three municipalities in our wholesale segment (Mauá, Mogi das Cruzes
and São Caetano do Sul), since our revenue for the fiscal year 2019 is derived from these municipalities. Most of our contracts with the municipalities we
serve are program contracts which have a term of 30 years. Additionally, in October 2019 we signed a contract with the municipality of Tapiratiba and
operations commenced in April 2020.
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 as part of our retail operations. However, the municipality of Guarulhos held a PPP contract which entitled part of the sewage services to another
company. In September 2019, the company which provided partial sewage services terminated the contract, after which we began providing the entirety of
sewage services to Guarulhos as part of our retail operations, under an emergency agreement. The Contract for the Provision of Public Services of Water and
Sewage we signed on December 12, 2018 was amended on December 4, 2019, and entitled us to the full provision of public sewage services in the municipality
of Guarulhos.
Additionally, in August 2019 we also started retail operations (to supply water and sewage services) in the municipality of Santo André, which was served
before on a wholesale basis.
6
CAUTIONARY STATEMENTS ABOUT FORWARD-LOOKING STATEMENTS
This annual report includes forward-looking statements, mainly in Items 3 through 5. We have based these forward-looking statements largely on our
current expectations and projections about future events and financial trends affecting our business. These forward-looking statements are subject to risks,
uncertainties and assumptions, including, among other factors:
• general economic, political, demographical, health and other conditions in Brazil and in other countries;
• 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,
or if the impact will be compensated by tariffs established by ARSESP;
• 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;
• the potential impacts on our business caused by the approval and conversion of Bill No. 4,162/2019 into law, which is currently under discussion;
• 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, states, the federal government and 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 considering that ARSESP has limited the pass-through to tariff of values transferred to municipal infrastructure funds to 4%;
• 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;
7
• our ability to access financing with favorable terms in the future;
• the costs we incur in complying with environmental laws and any penalties for failure to comply with these laws;
• the outcome of our pending or future legal proceedings;
• the delay or postponement in investment in our sewage system;
• our management’s expectations and estimates relating to our future financial performance;
• the regulations issued by ARSESP regarding several aspects of our business, including resetting and adjusting our tariffs;
• the impact of widespread health developments, such as COVID-19, and the governmental, regulatory, consumer and other responses thereto and its
effects on our operating revenues and financial condition as a result of, inter alia, a decrease in water consumption and an increase in defaults in certain
sectors and an increase in non-payment of water bills;
• 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.
8
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. 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, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017 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, 2017, 2016
and 2015 and for the years ended December 31, 2016 and 2015 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, 2015 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.”
2019
R$
17,983.7
(10,137.7)
7,846.0
(803.4)
(128.1)
(1,187.9)
5,711.6
(1,033.7)
3,367.5
4.93
4.93
1.17
1.17
2018
R$
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
2017
R$
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
For the year ended December 31,
2016
R$
2015
R$
(in millions, except per share and per ADS (1) data
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
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
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
diluted
Earnings per ADS – basic and
Dividends and interest on
shareholders’ equity per share
Dividends and interest on
shareholders’ equity per ADS
Weighted average number of
common shares outstanding
683,509,869
683,509,869
683,509,869
683,509,869
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 and
(1) ADS-American Depositary Share.
2015, the amounts of allowance for doubtful accounts in the income statements were R$90.5 million and R$2.4 million and were presented as part of our selling expenses.
9
Selected Statement of Financial Position Data
Property, plant and equipment
Contract asset (*)
Intangible assets
Total assets
Loans and financing - current
Long-term loans and financing
Interest on capital
Total liabilities
Equity
Capital stock
Selected Statements of Cash Flows Data:
Net cash generated from operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Purchases of intangible assets and property, plant and
equipment as presented in our statement of cash flow
2019
R$
314.4
7,617.7
32,325.4
46,457.8
2,859.8
10,384,9
800.4
24,822.0
21,635.8
15,000.0
4,197.2
(3,267.3)
(1,705.9)
(3,273.4)
2018
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)
2017
R$
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)
2016
R$
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)
2015
R$
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)
(*) 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”
Percentage of population covered by water network (“coverage”
Percentage of population covered by sewage network (“coverage”
indicator) (in percent) (1)
indicator) (in percent) (2)
indicator) (in percent) (2)
2019
9,933
8,326
94
84
98
2018
9,053
7,495
95
83
98
2017
8,863
7,302
95
83
98
91
90
90
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
(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”).
76
2,107.9
19.5
30.1
293
14,449
78
2,112.7
18.7
29.0
285
13,945
75
2,075.9
20.1
30.7
302
13,672
(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
10
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;
• the Brazilian government’s response to the COVID-19 pandemic and, inter alia, its impacts on water consumption, labor laws and other regulations
affecting our industry. For further information regarding risks relating to communicable diseases including the novel coronavirus, see “—Risks Relating
to Our Business— Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as
the recent outbreak of COVID-19;” and
• other political, foreign policy, social and economic developments in or affecting Brazil.
Uncertainties in relation to the implementation by the government of changes relating to the monetary and tax policies, the approved pension reform and
possible development arising from this reform, and other relevant legislation may contribute to economic uncertainty. We cannot predict the measures that the
Brazilian federal government will take due to mounting macroeconomic pressures or otherwise. Economic and political instability and uncertainty has led to
a negative perception of the Brazilian economy and higher volatility in the Brazilian capital markets and the securities of Brazilian issuers, which may adversely
affect us. In October 2018, Jair Bolsonaro won the Brazilian presidential election and he took office in January 2019. We cannot predict the policies or
regulations that the president of Brazil may adopt or change during his term or market reactions to these policies or regulations.
Ongoing political instability has adversely affected the Brazilian economy and may have an adverse effect on our financial condition and results of
operations.
Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have
affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened
volatility in the securities issued by Brazilian companies.
Brazil has experienced amplified economic and political instability, as well as heightened volatility, as a result of various ongoing investigations by the
Brazilian Federal Prosecutors’ Office (Ministério Público Federal), the Brazilian Federal Police (Polícia Federal), the CVM, and other Brazilian public entities
who are responsible for corruption and cartel investigations, including, among others, the Cui Bono, A Origem, Sepsis, Patmos, Zelotes and Greenfield
investigations, as well as the largest such investigation, known as Lava Jato. In addition, certain foreign entities, such as the U.S. Department of Justice, the
SEC and the Office of the Attorney General of Switzerland (Bundesanwaltschaft), have also conducted and still conduct their own investigations. These
investigations have negatively impacted the Brazilian economy and political environment and have contributed to a decline in market confidence in Brazil. In
addition, they may lead to further allegations and charges against Brazilian federal and state government officials and senior management of Brazilian industry.
11
Numerous elected officials, public servants and executives and other personnel of major companies have been subject to investigation, arrest, criminal
charges and other proceedings. Depending on the outcome of such investigations and the time it takes to conclude them, they may face (as some of them already
faced) downgrades from credit rating agencies, experience (as some of them already experienced) funding restrictions and have (as some of them already had)
a reduction in revenues, among other negative effects. Such negative effects may hinder the ability of those companies to timely honor their financial
obligations bringing loses to us as a number of them are our suppliers. The companies involved in the Lava Jato investigations, a number of which are our
suppliers, may also be (as some of them already have been) prosecuted by investors on the grounds that they were misled by the information released to them,
including their financial statements.
There can be no assurance that other federal or state officials or senior management of Brazilian industry will not be charged with corruption-related
crimes in the Lava Jato or other investigations into corruption. Additional allegations, trials and convictions may lead to political instability and a decline in
confidence by consumers and foreign direct investors in the stability and transparency of the Brazilian government and Brazilian companies, and may have a
material adverse effect on Brazil’s economic growth, on the demand for securities issued by Brazilian companies, and on access to the international financial
markets by Brazilian companies.
Mr. Bolsonaro took office as president on January 1, 2019, following a period of political instability marked by the impeachment of President Dilma
Rousseff and conviction, and subsequent arrest, of President Luis Inácio Lula da Silva. We cannot predict how Mr. Bolsonaro’s administration may impact
the overall stability, growth prospects and economic and political health of Brazil. During his presidential campaign, Mr. Bolsonaro established an agenda of
privatizations, economic liberalization, and pension and tax reforms. However, there is uncertainty as to whether the Bolsonaro administration will be
successful in implementing these reforms. Mr. Bolsonaro was also generally a polarizing figure during his campaign for presidency, and we cannot predict the
ways in which a divided electorate may continue to impact his presidency and his ability to implement policies, reforms and manage the COVID-19 crisis, all
of which could have a negative impact on our business and the market price of our common shares and ADSs. As of the date of this annual report, only the
pension reform was approved by the Brazilian National Congress. There were expectations that the administrative and tax reform would be passed in 2020,
however, that is more uncertain now due to the effects of the COVID-19 outbreak. For more information, see “—Risks Relating to Our Business — Our
financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the recent outbreak of COVID-
19.”
Further, during the campaign, the current Minister of Economy proposed taxing dividends paid by Brazilian companies and changes in taxation method
of interest on equity. If this campaign promise were to be enacted, this would increase the tax expenses associated with any dividend, interest on equity or
distributions made by Brazilian companies, which could impact us or our shareholders and the value of our common shares and ADSs. Uncertainty regarding
the implementation by the new government of related changes in monetary, fiscal and pension policies, as well as pertinent legislation, could contribute to
economic instability. These uncertainties and new measures could increase the volatility of Brazilian securities markets. Any of the above factors may create
additional political uncertainty, which could harm the Brazilian economy and, consequently, our business, results of operations and financial condition.
Inflation and the Brazilian government’s measures to combat inflation may contribute to economic uncertainty in Brazil, adversely affecting us and the
market price of our common shares or ADSs.
Brazil has historically experienced high rates of inflation. Inflation and the Brazilian government’s measures to combat it have had and may in the future
have significant effects on the Brazilian economy and our business, financial condition and results of our operations. Tight monetary policies with high interest
rates may restrict Brazil’s growth, the availability of credit and our cost of funding. Conversely, other Brazilian governmental actions, including lowering
interest rates, intervention in the foreign exchange market and actions to adjust or fix the value of the real, may trigger increases in inflation. The Special
Clearing and Settlement System (Sistema Especial de Liquidação e Custódia), or SELIC, the official overnight interest rate in Brazil, was 4.40%, 6.40% and
6.90% at the end of 2019, 2018 and 2017, respectively, in line with the target rate set by the Brazilian Committee on Monetary Policy (Comitê de Política
Monetária, or “COPOM”). However, the COPOM has frequently adjusted the interest rate in situations of economic uncertainty and to achieve objectives
under the economic policy of the Brazilian government. For example, in response to the COVID-19 outbreak, the COPOM further reduced the SELIC target
rate to 3.75%, where it remains as of the date of this annual report. Inflation, along with government measures to combat inflation and public speculation about
possible future government measures, has had significant negative effects on the Brazilian economy, and contributed to economic uncertainty in Brazil and
heightened volatility in the Brazilian securities market, which may have an adverse effect on us if such policies are reinstated.
12
The Brazilian annual inflation rates, as measured by the Amplified Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo), or IPCA,
were 4.31%, 3.75% and 2.95% during 2019, 2018 and 2017, respectively. If Brazil experiences substantial inflation or deflation in the future, our business,
financial condition or results of operations may be adversely affected, including our ability to comply with our obligations. In addition, a substantial increase
in inflation may weaken investors’ confidence in Brazil, causing a decrease in the market price of our common shares or ADSs.
Exchange rate instability and developments and the perception of risk in other countries, especially in the United States and in emerging market countries,
may adversely affect us, our foreign currency denominated debt and the market price of our common shares or ADSs and our ability to service our foreign
currency denominated obligations.
Brazil’s currency has been characterized historically by high degrees of volatility and has depreciated periodically in relation to the U.S. dollar and other
foreign currencies during recent decades. At different points over this period, the Brazilian government has implemented various economic plans and exchange
rate policies, including sudden devaluations, periodic mini-devaluations during which the frequency of adjustments has ranged from daily to monthly, floating
exchange rate systems, exchange controls and dual exchange rate markets.
The current floating exchange rate system has also contributed to significant fluctuations in the exchange rate between the Brazilian currency and the U.S.
dollar and other currencies. As of December 31, 2016, the exchange rate was R$3.26 to U.S.$1.00, representing an appreciation of 16.5% as compared to the
rate prevailing as of December 31, 2015. As of December 31, 2017, the exchange rate was R$3.31 to U.S.$1.00, representing a depreciation of 1.5% as
compared to the rate prevailing as of December 31, 2016. As of December 31, 2018, the exchange rate was R$3.87 to U.S.$1.00, representing a depreciation
of 17.1% as compared to the rate prevailing as of December 31, 2017. Further, during 2019, the real was very volatile and depreciated by 4.0% against the
U.S. dollar by year-end. This volatility continued in the early months of 2020 and as of April 20, 2020, the commercial selling rate as reported by the Central
Bank was R$5.2837 per US$1.00. There can be no assurance that the real will not depreciate further against the U.S. dollar.
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), 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, inflationary 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$6,358.8 million as of December 31, 2019 and we anticipate that we may incur additional
amounts of foreign currency denominated debt in the future. In 2019, our results of operations were negatively affected by the 4.0% depreciation of the real
against the U.S. dollar, and the depreciation of the real against the Yen by 5.3%, which together led to a R$234.0 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 5.1(a) to
our 2019 financial statements.
Further, the market price of securities of Brazilian companies is affected to varying degrees by economic and market conditions in other countries,
including the United States, China and other Latin American and emerging market countries. Although economic conditions in these countries may differ
significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market price
of securities of Brazilian issuers. Crises in other emerging market countries or economic policies of other countries may diminish investor interest in securities
of Brazilian issuers, including ours. This could adversely affect the market price of our common shares or ADSs, and could also make it more difficult for us
to access the capital markets and finance our operations in the future, on acceptable terms or at all.
In the past, the adverse development of economic conditions in emerging markets resulted in a significant flow of funds out of Brazil and a decrease in
the quantity of foreign capital invested in Brazil. Changes in the prices of securities of public companies, lack of available credit, reductions in spending,
general slowdown of the global economy, exchange rate instability and inflationary pressure may adversely affect, directly or indirectly, the Brazilian economy
and securities market. Global economic downturns and related instability in the international financial system have had, and may continue to have, a negative
effect on economic growth in Brazil. Global economic downturns reduce the availability of liquidity and credit to fund the continuation and expansion of
business operations worldwide.
13
In addition, 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.
As it owns the majority of our common shares, the State is able to control the election of a majority of the members of our board of directors and appoint
our senior management and with that determine our operating policies and strategy. As of December 31, 2019, the State owned 50.3% of our outstanding
common shares. In addition, pursuant to the State Constitution of São Paulo, the Governor of São Paulo, the legal representative of our controlling shareholder,
is the competent authority to make these decisions. Both through its control of our board of directors as well as by enacting State decrees, the State has in the
past directed our company to engage in business activities and make expenditures that promoted political, economic or social goals, but that did not necessarily
enhance business, financial condition or results of operations. For example, recently the State issued Decree No. 64,879/2020 in March, 2020 setting out
emergency measures as a result of the coronavirus outbreak, including exempting customers under the “Residential Social” and “Residential Favela” categories
from paying water and sewage bills for all municipalities we serve. This exemption is valid for 90 days as of April 1, 2020. 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” and “Item 4.B. Business
Overview—Tariffs.”
The State of São Paulo has the power to appoint up to 9 out of the 11 members of our Board of Directors and, through them, influence the choice of a
majority of the executive officers responsible for our day-to-day management. Consequently, the State is empowered to approve most matters prescribed by
law. 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, financial condition or results of operations.
Further, 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, financial condition or results of operations, especially during new elections periods.
Our controlling shareholder is currently discussing proposals for our corporate reorganization. We cannot guarantee that any potential reorganization
will not have a material adverse effect on our business, financial condition or results of operations.
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. On April
24, 2019, the CDPED established a working group aimed at discussing alternative corporate structures for us. We cannot assure that any potential corporate
reorganization, including a change of control, will not have a material adverse effect on our business, financial condition or results of operations.
The São Paulo State Government, our major shareholder, is awaiting the approval of changes to the basic sanitation legislation to decide if it will implement
our potential corporate reorganization which may involve a privatization or a capitalization plan. See “—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,
financial condition or results of operations.”
14
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, 2019, the State owed us R$103.3 million for water and sewage services. Additionally, the State also owes us substantial amounts related to
reimbursements of State-mandated special retirement and pension payments that we make to some of our former employees for which the State is required to
reimburse us.
With respect to payment of pensions on behalf of the State, we had a contested credit amount of R$1,195.3 million as of December 31, 2019. We do not
record this contested amount as a reimbursement credit for actuarial liability due to the uncertainty of payment by the State. We also had an uncontested credit
amounting of R$747.6 million which is recorded as related-party receivables. See note 10(a) to our 2019 financial statements.
In addition, as of December 31, 2019, we had a provision for an actuarial liability in the amount of R$3,046.3 million with respect to future supplemental
pension payments for which the State does not accept responsibility.
In addition, certain municipalities and other government entities also owe us payments. See “—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 cannot
assure you when or if the State and such municipalities will pay the contested credit amounts, which are still under discussion, and the remaining overdue
amounts they owe us. The amounts owed to us by the State, municipalities and other government entities for water and sewage services and reimbursements
for pensions paid may increase in the future.
Our right to withdraw water from the Guarapiranga and Billings reservoirs is being challenged judicially by minority shareholders of EMAE.
We withdraw water for use in the São Paulo metropolitan region from the Guarapiranga and Billings reservoirs. Empresa Metropolitana de Águas e
Energia S.A., 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.
However, on April 11, 2016, we were also named in a separate lawsuit filed by minority shareholders of EMAE against the State of São Paulo, as
controlling shareholder of EMAE. The minority shareholders are seeking an order to require the State to stop us from withdrawing water from the reservoirs
without paying compensation to EMAE, and to allow EMAE to pump water from the reservoirs for its hydroelectric 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. This lawsuit was dismissed
and is currently under appeal by the plaintiffs.
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 further away, which would increase our water
transportation costs and may affect our ability to provide adequate service in the region, which may have an adverse effect on our financial condition and results
of operations. In addition, we may be ordered to pay any indemnity to EMAE if the agreement is judicially invalidated, which could have material adverse
effects on our financial condition and operating results. See “Item 7. Major Shareholders and Related Party Transactions.”
15
Risks Relating to Our Business
Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the recent outbreak of
COVID-19.
Our financial and operating performance may be adversely affected by pandemics such as COVID-19, as well as other catastrophes and health epidemics.
In late December 2019 the outbreak of a new contagious disease originated in Wuhan, Hubei province of China, was reported to the WHO. A novel
coronavirus virus was identified, with cases and fatalities soon confirmed in multiple provinces in China, as well as in several other countries. On March 11,
2020, the WHO confirmed that its spread and severity had escalated to the point of pandemic. Coronavirus cases have been diagnosed in virtually every country,
and travel to and from China, most of Europe, the United States and other countries, including Brazil, have been suspended or restricted by certain airlines and
governments. Further, extended shutdowns of certain businesses and disruptions in financial markets have been reported globally. The final impact on the
global economy and financial markets is still uncertain, but is expected to be significant.
On March 22, 2020, the São Paulo State Government decreed a two-week quarantine throughout the State, restricting business activities in order to avoid
the accelerated spread of COVID-19. On April 6, 2020, this quarantine was extended until April 22, 2020 and on April 17, 2020, this quarantine was extended
until May 10, 2020. We cannot assure that this quarantine will not be extended again. As a result, our revenues in the commercial and public sectors may suffer
losses due to reduced demand from those sectors. The impacts on the industrial sector are not yet clear, since certain companies will increase production as a
response to the pandemic, leading to an increase in water consumption, while other companies will reduce their water consumption as a result of a reduction
or stoppage in production. Our revenues from the residential sector will also be affected as consumers in the “Residential Social” and “Residential Favela”
categories will be exempt from the payment of water and sewage bills for all municipalities we serve. This exemption is valid for 90 days as of April 1, 2020.
However, some of the losses in revenue from the “Residential Social” and “Residential Favela” categories will be off-set by an increase in other residential
consumption categories as a result of the quarantine measures. For the year ended December 31, 2019, the residential sector represented 82.8% of the volume
of water billed to our customers, while the commercial sector, the industrial sector, the public sector and the wholesale sector represented 9%, 1.9%, 2.2% and
4.1%, respectively.
On April 9, 2020, ARSESP published a tariff readjustment of 2.4924%. Due to the approval of a state of public calamity mentioned above, ARSESP
postponed this readjustment by 90 days. We cannot assure that ARSESP will adequately indemnify us for the tariff reduction, delay in their readjustment or
reduction in the volume billed. See “Item 4.B. Business Overview—Tariffs.”
To counter this pandemic, we have implemented measures to limit our employees’ exposure to possible infection, such as a home office policy for
administrative staff and employees aged 60 years or above, domestic and international travel restrictions, moving the vaccination calendar ahead of schedule,
among others. These measures, though implemented to ensure the continuity of our services, may result in a disruption or delay in their provision.
Further, in order to finance our investments in infrastructure, we rely on third party capital as a complement to our own resources. However, the impact
of COVID-19 on our ability to raise additional capital is still uncertain. The deterioration of Brazilian and global economic conditions could, among other
things, make it more difficult or costly for us to obtain financing for our operations or investments or to refinance our debt in the future and decrease the value
of certain of our investments. Any other political or governmental developments or health concerns in Brazil as a result of this outbreak could result in social,
economic and labor instability.
Global supply chains and the timely availability of products have been and will continue to be materially disrupted by quarantines, factory slowdowns or
shutdowns, border closings and travel restrictions resulting from the COVID-19 pandemic. We provide a critical service to our customers which means that
we must keep our employees who operate our businesses safe and minimize unnecessary risk of exposure to the virus. This is a rapidly evolving situation that
could lead to extended disruption of economic activity in our markets. The ultimate impact also depends on factors beyond our knowledge or control, including
the duration and severity of this outbreak as well as third-party actions taken to contain its spread and mitigate its public health effects. Accordingly, we
currently cannot estimate the potential impact on our financial position, results of operations and cash flows. However, all these uncertainties could have a
material adverse effect on our results of operations and financial condition.
16
Current regulatory uncertainty, especially with regard to implementation and interpretation of the Brazilian Basic Sanitation Law, may have an adverse
effect on our business, financial condition or results of operations.
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, among others, by Federal Decree No. 10,203/2020)
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.
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, financial condition or results of operations.
The Basic Sanitation Law still requires that the federal government, states and municipalities establish independent regulators who monitor basic sanitation
services and regulate tariffs. Municipalities may create their own regulatory agencies or partner with regional regulatory agencies, which requires us to comply
with such agencies. However, we cannot predict whether this will occur and, if so, what impacts these regulations by other agencies will have on our business,
financial condition or results of operations. 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, the Federal Decree No. 7,217/2010 (as
amended, among others, by Federal Decree No. 10,203/2020) and regulations issued by ARSESP will have on our business, financial condition or results of
operations, if any. For further information, see “Item 4.B. Business Overview—Government Regulations Applicable to Our Contracts—The Basic Sanitation
Law” and “Item 4.B. Business Overview—Government Regulations Applicable to Our Contracts—Rules Enacted by ARSESP.”
The State of São Paulo enacted the State Supplementary Law creating certain metropolitan regions and urban clusters (for further information on the
specific regions created and ruled enacted, see “Item 4.B. Business Overview—Government Regulations Applicable to Our Contracts—Agreements with
Municipalities and Metropolitan Regions”). 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.
The debate on changes to current sanitation regulatory framework, under Sanitation Law No. 11,445/2007, began in 2018 with Provisional Measure No.
844/2018, which expired in November of that year. That same year, Provisional Measure No. 868/2018 was enacted with similar provisions to Provisional
Measure No. 844/2018, and expired in June 2019.
In December 2019 the Chamber of Deputies approved Bill No. 4,162/2019, after amendments that brought it in line with Bill No. 3,261/2019. Bill No.
4,162/2019 was then sent to the Senate for approval, after which it will return to the Chamber of Deputies for further amendments or final approval. Currently,
it is not possible to predict what the final outcome of the legislation and the impact on our operations will be. 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.”
Certain terms of our agreement to provide water and sewage services in the city of São Paulo could have a material adverse effect on us.
The provision of water and sewage services in the city of São Paulo accounted for 44.5% of our gross operating revenues from sanitation services
(excluding revenues relating to the construction of concession infrastructure) in the year ended December 31, 2019.
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.
17
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, this resolution was suspended, pursuant to requests from
the governments of both the city and state of São Paulo made in 2013 and 2014. As a result the collection was suspended, postponing the authorization for us
to transfer the charge to consumers in water and sewage bills. For further information regarding the specific regulations which discussed this matter, please
refer to “Item 4.B. Business Overview—Tariffs,” especially “Item 4.B. Business Overview—Tariffs—Tariff Readjustment and Revisions.”
On May 9, 2018, ARSESP announced the final result of the Second Ordinary Tariff Revision. Following this revision cycle, ARSESP is passing-through
to the tariffs up to 4% of the municipal revenue that is transferred by us to a legally established municipal infrastructure fund. In the current tariff cycle, 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.
Prior to May 9, 2018, our tariff had never included any pass-through to tariffs related to the transfer of 7.5% of the gross revenues obtained from providing
sanitation services in the municipality of São Paulo to the São Paulo Municipal Fund for Environmental Sanitation and Infrastructure.
The transfer of 4% was subsequently regulated by ARSESP Resolution No. 870/2019 of May 2019, which established the criteria and conditions to permit
the transfer of 4% of the revenue from service providers through the tariff, excluding COFINS and PASEP taxes, and unpaid bills in respect of publicly owned
properties. Within the scope of the Second Ordinary Tariff Review, a regulatory limit of 4% of the municipality’s operating revenue was established to pass
on to the tariffs and, if the concessionaire and the municipality decide to transfer amounts greater than 4% of the revenue, the excess will not be recognized as
a financial component of tariffs and will be restricted to the municipality. In addition, for recognition as part of the tariff, municipal funds for environmental
sanitation and infrastructure must be established by the service provider through a legal act, which specifies the allocation of resources.
From 2010 to December 31, 2019, we have transferred approximately R$3.6 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.”
Considering that ARSESP has limited the pass-through to tariff of values transferred to municipal infrastructure funds to 4%, the mandatory transfer of
the remaining 3.5% of the gross revenues, subtracting (i) COFINS and PASEP taxes and (ii) unpaid bills of publicly owned properties in the city of São Paulo,
to the Municipal Fund for Environmental Sanitation and Infrastructure will not be passed through to customers in full and we cannot assure you when and if
this will happen and may have an adverse effect on our business, financial condition or results of operations.
Municipalities may terminate our concessions before they expire in certain circumstances. The indemnification payments we receive in such cases may be
less than the value of the investments we made, or may be paid over an extended period, adversely affecting our business, financial condition or results of
operations.
Municipalities have a right of early termination of our concessions if we fail to comply with our contractual or legal obligations or if the municipality
determines to do so in an expropriation proceeding (retomada de serviços). The resumption of services must be justified by public interest. In this case, the
municipalities evaluate that it is no longer in public interest to continue to provide water and sewage services under the terms and conditions of the current
concession.
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 for purposes of assessing any related
indemnification amounts that would be due to the relevant company. 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 be paid voluntarily by the municipality, potentially
leading to judicial disputes. In the case of a judicial dispute, 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.
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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 indemnifications 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.
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 certain municipalities. For more information, see Note 19 to our 2019 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, this may adversely affect our business, financial condition or
results of operations.
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, 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.
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, 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.
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.”
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$20.2 billion in the period from 2020 through 2024. In 2019, we recorded
R$5.1 billion in capital expenditures, of which R$ 2.1 billion are non-cash investments.
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 public financing or amounts available for water and sewage services, or if we
fail to obtain long-term financing at attractive interest rates from domestic and international multilateral agencies and development banks in the future, we may
not be able to meet our obligations or finance our capital expenditure program, which could have a material adverse effect on our business, financial condition
or results of operations.
Furthermore, Brazilian public and private financial institutions are legally limited up to a certain percentage of their shareholder’s equity to provide loans
to public sector entities, including, for example, us. These limitations could adversely affect our ability to continue our capital expenditure program and,
consequently, may adversely affect our business, financial condition or results of operations.
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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.”
Droughts, such as the 2014 – 2015 water crisis, can have a material impact on our business and on consumption habits and, accordingly, may have a
material adverse impact on our business, financial condition or results of operations.
We experience decreases in our water supply from time to time due to droughts. For example, we experienced a severe drought in the metropolitan region
of São Paulo in 2014 and 2015, which was more intense in the northwest region of the State of São Paulo, resulting in the lowest level of rainfall and water
inflow ever recorded in the Cantareira System, the largest production system in the metropolitan region of São Paulo, over the previous 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 from 2014
to April 2016 to mitigate its impact and maintain the water supply for the then 20.9 million inhabitants served in the metropolitan region of São Paulo. See
“Item 4.B. Business Overview—The 2014-2015 Water Crisis.”
With the return of the rainfall to its historical average, the volume of water available to the population of the São Paulo metropolitan region returned to a
normal level and the measures taken during the water crisis to continue to service consumers were gradually discontinued from April 2016. 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, since the
water crisis had a strong impact on the consumer profile, which will probably not return to its former state before the crisis. This change in consumption practice
as a result of the 2014-2015 water crisis has had a continued effect on our results of operations since the 2014-2015 crisis.
There is 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 or more severe
measures as those adopted in 2014-2015, which can have a material impact on our business and on consumption habits and, accordingly, may have a material
adverse impact on our business, financial condition or results of operations.
Extreme Weather Conditions and Climate Change may have a material adverse impact on our business, financial condition or results of operations.
Our business is not only affected by droughts but also by other extreme weather conditions, such as torrential rain and other changes in climate patterns. A
possible increase in the frequency of extreme weather conditions in the future may adversely affect the water available for abstraction, treatment, and
supply. Droughts could adversely affect the water supply systems, resulting in a decrease in the volume of water distributed and billed as well as in the revenue
derived from water supply services. For further information, see “3.D. Risk Factors —Droughts, such as the 2014 – 2015 water crisis, can have a material
impact on our business and on consumption habits and, accordingly, may have a material adverse impact on our business, financial condition or results of
operations.” An increase in heavy rainfall could damage our installations or 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. 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.
Since we are dependent upon energy supplies to conduct our business, extreme weather events may also reduce water levels in the reservoirs that power
hydroelectric power plants in Brazil, which may cause energy shortages, 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. Increased electricity prices may also adversely affect our costs and operations. For
further information, see “Item 4.B. Business Overview—Energy Consumption.”
Climate change may lead to increased frequency of extreme weather events conditions, such as droughts or torrential rains, which may affect our ability
to deliver our services and require us to strengthen our actions such as:
• 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 reservoirs.
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We cannot predict all of the effects of extreme weather events, therefore making it difficult to predict any necessary investments, as current technology
and scientific understandings of climate change make it difficult to predict potential expenses and liabilities. If any of these events occur, we may be required
to make substantial investments or incur substantial costs in their remediation, which may have a material adverse impact on our business, financial condition
or results of operations. We also cannot guarantee that we will be able to pass on any of these additional costs and expenditures to our customers.
New laws and regulations relating to climate change and changes in existing regulation may result in increased liabilities and increased capital
expenditures, which could have a material adverse effect on us.
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, these goals have not yet been established for
the sanitation sector. However, once they are established and if we increase our capital expenditures for this purpose, we may be required to reduce expenditures
on other strategic 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.”
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, environmental licensing requirements and potable water standards and limit or prohibit the
discharge or spillage of untreated 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. We could be subject to various types of criminal, administrative and civil proceedings for non-compliance with
environmental laws and regulations, including licensing requirements, that could expose us to administrative penalties and criminal sanctions, such as fines,
closure orders and significant indemnification obligations. These expenses may lead us to reduce expenditure on strategic investments, which may adversely
affect our business, financial condition or results of operations.
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 our business, financial condition or results of operations. For further information on these
proceedings, see “Item 8.A. Financial Statements and Other Financial Information—Legal Proceedings.” For further information on investments in
environmental programs, see “Item 4.A. History and Development of the Company—Main Projects of our Capital Expenditure Program,” “Item 4.B. Business
Overview—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.”
Any substantial monetary judgment against us in legal proceedings may have a material adverse effect on us.
We are currently a party to numerous legal proceedings relating to civil, corporate, environmental, labor and tax claims filed against us. These claims
involve substantial amounts of money and other remedies. We have established provisions for all amounts in dispute that represent a present obligation as a
result of a past event and is probable there will be outflow to settle the referred obligation in the view of our legal advisors and due to disputes that are covered
by laws, administrative decrees, decrees or court rulings that have proven to be unfavorable. As of December 31, 2019, the estimated total claims asserted
amounted to R$45,070.8 million (net of R$219.7 million in escrow deposits), including contingent liabilities. We have recognized provisions totaling R$1,035.8
million (net of escrow deposits) as of December 31, 2019. These provisions do not cover all legal proceedings involving monetary claims filed against us and
it may be insufficient to cover the ultimate resolution of these claims. Any unfavorable judgment in relation to these proceedings may have a material adverse
effect on our financial condition. For more information, see “Item 8.A. Financial Statements and Other Financial Information—Legal Proceedings” and Note
19 to our 2019 Financial Statements included in this annual report.
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We are subject to anti-corruption, anti-bribery, anti-money laundering, sanctions and antitrust laws and regulations. Our violation of any such laws or
regulations could have a material adverse effect on our reputation, our results of operations and our financial condition.
We are subject to anti-corruption, anti-bribery, anti-money laundering, sanctions, antitrust and other similar laws and regulations. We are required to
comply with the applicable laws and regulations of Brazil, and we may become subject to such laws and regulations in other jurisdictions. There can be no
assurance that our internal policies and procedures will be sufficient to prevent or detect any inappropriate practices, fraud or violations of these laws or
regulations by our employees, officers, executives, partners, agents and service providers, nor that any such persons will not take actions in violation of our
policies and procedures. Any violations, whether actual or perceived, by us or any of our employees, directors, officers, partners, agents and service providers
of these laws or regulations or our internal policies or procedures could have a material adverse effect on our reputation, our ability to obtain financing our
business, financial condition or results of operations.
Our business is subject to cyberattacks and security and privacy breaches.
Our business involves the collection, storage, processing and transmission of customers’, suppliers and employees’ personal or sensitive data. We also
use key information technology systems for controlling water, sewage and commercial, administrative and financial operations. We may be subject to breaches
of the information technology systems we use for these purposes. Experienced computer programmers and hackers may be able to penetrate our network
security and misappropriate or compromise our confidential information or that of third parties, create system disruptions, or cause shutdowns. Computer
programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our products or otherwise
exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and applications that we produce or
procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the
operation of the system. Following the COVID-19 outbreak, we started to use new communication softwares and systems. However, we currently cannot
assure that these systems adequately protect data and information to avoid confidentiality breaches or will not affect our capacity to operate.
The techniques used to obtain unauthorized, improper or illegal access to our systems, our data or our customers’ data, to disable or degrade service, or to
sabotage systems are constantly evolving, may be difficult to detect quickly, and often are not recognized until launched against a target. Unauthorized parties
may attempt to gain access to our systems or facilities through various means, including, among others, hacking into our systems or those of our customers,
partners or vendors, or attempting to fraudulently induce our employees, customers, partners, vendors or other users of our systems into disclosing 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.
Our information technology and infrastructure may be vulnerable to cyberattacks or security breaches, and third parties may be able to access our
customers’, suppliers’ and employees’ personal or proprietary information that are stored on or accessible through those systems. Our security measures may
also be breached due to human error, malfeasance, system errors or vulnerabilities, or other irregularities. Any actual or perceived breach of our security could
interrupt our operations, result in our systems or services being unavailable, result in improper disclosure of data, materially harm our reputation and brand,
result in significant legal and financial exposure, lead to loss of customer confidence in our products and services, and adversely our business, financial
condition or results of operations. In addition, any breaches of network or data security at our suppliers (including data center and cloud computing providers)
could have similar negative effects. Actual or perceived vulnerabilities or data breaches may lead to claims against us. We cannot guarantee that the protections
we have in place to protect our operating technology and information technology systems are sufficient to protect against cyberattacks and security and privacy
breaches.
Failure by us to comply with the LGPD or any further privacy laws enacted in Brazil could adversely affect our reputation, business, financial condition
or results of operations.
We are subject to data privacy laws, such as Law No. 12,965/2014 (the “Brazilian Internet Act”) and the Brazilian General Law for Data Protection (Law
No. 13,709/2018 or “LGPD”) and their related regulations, including regulations to be enacted by the Brazilian National Data Protection Authority (ANPD).
The Brazilian Internet Act applies 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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LPGD is scheduled to become fully effective in August 2020 and will provide a comprehensive regulation for the use of personal data in Brazil. However,
Bill No. 1,179/2020 sets out, among other legislative measures to address the ongoing coronavirus pandemic, that LGPD will become effective on January 1,
2021 and that its administrative sanctions will only be applicable as of August 2021. As of the date of this annual report, Bill No. 1,179/2020 was passed in the
Senate and currently awaits approval by the Chamber of Deputies.
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 financial institutions, employees and employers and other relationships in which personal data is collected,
both in the digital and physical environment. Further, the ANPD is charged with overall responsibility to: (i) ensure the protection of personal data, in accordance
with the law; (ii) deliberate, at an administrative level, on a terminative character, upon the interpretation of the LGPD; (iii) supervise the compliance with, and
assess penalties in the event of data processing performed in violation of, LGPD; (iv) implement simplified mechanisms for recording complaints about the
processing of personal data in violation of the LGPD; and (v) inform the competent authorities the criminal offenses of which it becomes aware. Law No.
13,853 also assigned to the ANPD the exclusive competence to assess penalties provided for by the LGPD. However, other authorities, such as the Federal
District Prosecutor’s Office and the Secretaria Nacional do Consumidor (National Consumer Secretariat), have competence to examine evidence of violation
of data protection legislation by companies, as well as to file and to asses applicable penalties.
Failure by us to adhere to the LGPD or any further privacy laws or regulations enacted or approved in Brazil 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.
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. Our operations may be hampered by numerous factors, including unexpected or unusual geological
and/or geotechnical operating conditions, industrial accidents, floods or droughts or other environmental occurrences that could result in structural damages
and eventually rupture our reservoirs, dams and other facilities or equipment.
Our water and sewage pipes are susceptible to degradation caused by factors such as 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 our customers and the environment. In
particular, 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.B. Business Overview—Description of Our Activities—Water Operations—Water Distribution” and “Item 4.B. Business Overview—
Description of Our Activities—Sewage Operations—Sewage System.”
The occurrence of any of these events could lead to personal injury or death, adverse social impacts on the communities located near our facilities,
monetary losses and possible legal liability, 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 could
have a material adverse effect on us” and “Item 4.B. Business Overview—Insurance.”
We may face difficulties in continuing to provide water and sewage services in return for payment in certain 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, 2019, we held formal agreements with 325 municipalities (including the city of São Paulo) of the 372 municipalities we serve. We
entered into 18 of these agreements during 2019. These 325 municipalities accounted for 85.0% of our total revenues (excluding revenues relating to the
construction of concession infrastructure) for the year ended December 31, 2019 and 90.1% of our intangible assets and contract assets as of the same date. As
of December 31, 2019, 21 of our concessions had expired and are currently being renegotiated. These 21 municipalities accounted for 2.8% of our total
revenues (excluding revenues relating to the construction of concession infrastructure) for the year ended December 31, 2019 and 4.1% of our intangible assets
and contract assets as of the same date. From January 1, 2020 through 2030, 27 concession agreements, accounting for 3.7% of our revenues (excluding
revenues relating to the construction of concession infrastructure) the year ended December 31, 2019 and 3.0% of our intangible assets and contract assets as
of the same date, will expire.
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We may not be able to continue providing service on current terms, or at all, in the municipalities for which we do not have formal
agreements, including the 21 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. The municipalities for which we do not have formal agreements may choose to start
providing water and sewage services directly themselves, or may run public tenders to select another provider. They may set eligibility
requirements for which we do not qualify and, if we do qualify and participate in these tenders, we may not win.
In December 2019 the Chamber of Deputies approved Bill No. 4,162/2019, after amendments that brought it in line with Bill No.
3,261/2019. Bill No. 4,162/2019 was then sent to the Senate for approval, after which it will return to the Chamber of Deputies for further
amendments or final approval. Currently, it is not possible to predict what the final outcome of the legislation and the impact on our operations
will be. Any of these events could have a material adverse effect on our business, financial condition or results of operations. 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.”
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, 2019, our total trade receivables was R$3,395.0 million. Of this amount, the municipalities of Mogi das Cruzes and
São Caetano do Sul, to which we provide water on a wholesale basis, owed us R$13.1 million, and certain municipal government entities owed
us R$749.7 million. Of the total amount owed by municipalities, R$75.3 million was overdue by between 30 and 360 days and R$601.9 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 actions taken against the municipalities will result in
payments being made.
In August 2019, we signed a new Protocol of Intentions with the municipality of Mauá aiming to resolve commercial issues and the
municipality’s outstanding debt with us. On January 16, 2020 a municipal law was sanctioned, allowing the government of Mauá to sign
agreements, amendments and any other necessary adjustments with the State of São Paulo, ARSESP and us. As of the date of this annual report
there has been no progress in negotiations and we cannot guarantee if or when any agreement will be signed.
For more information on wholesale operations, see “Item 4.B. Business Overview—Description of Our Activities—Wholesale
Operations.” In addition, certain entities associated with municipal governments for which we provide services also do not make regular
payments. We cannot guarantee if or when these entities will make payments on a regular basis or pay the amounts they owe us. If these
municipalities and related entities do not pay the amounts they owe us, our business, financial condition or results of operations may be
adversely affected.
Risks Relating to Our Common Shares and ADSs
We may not always be in a position to pay dividends or interest on shareholders’ equity and ADSs.
Depending on our future results, our shareholders may not receive dividends or interest on own capital if we do not generate a
profit. Despite the requirement to distribute a minimum of 25% of the adjusted annual net income to shareholders in accordance with Brazilian
Corporate Law, our future financial position may not permit us to distribute dividends or pay interest on own capital.
The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell our common shares
underlying the ADSs at the price and time you desire.
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Investing in securities from emerging markets such as Brazil involves greater risk than investing in securities of issuers in major securities markets, and
these investments are often considered to be more speculative in nature. The Brazilian securities market is substantially smaller, less liquid, more concentrated
and can be more volatile than major securities markets. Accordingly, although you are entitled to withdraw the common shares underlying the ADSs from the
depositary at any time, your ability to sell the common shares underlying the ADSs at a price and time at which you wish to do so may be substantially
limited. There is also significantly greater concentration in the Brazilian securities market than in major securities markets. The ten largest companies in terms
of market capitalization represented approximately 50.1% of the aggregate market capitalization of the B3 as of December 31, 2019.
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.
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.
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Holders of our ADSs do not have the same voting rights as our shareholders.
Holders of our ADSs do not have the same voting rights as holders of our shares. Holders of our ADSs are entitled to the contractual rights set forth for
their benefit under the deposit agreements. ADS holders exercise voting rights by providing instructions to the depositary, as opposed to attending shareholders
meetings or voting by other means available to shareholders. In practice, the ability of a holder of ADSs to instruct the depositary as to voting will depend on
the timing and procedures for providing instructions to the depositary, either directly or through the holder’s custodian and clearing system. The deposit
agreement also provides that if the depositary does not receive any instructions from a holder of ADRs, the ADR holder may be deemed to have given a
discretionary proxy to a person designated by our company and the underlying shares may be voted by such person. However, we have chosen not to designate
any person to exercise these deemed proxy rights with respect to any annual or special general meetings, and ADSs for which no specific voting instructions
were received by the Depositary were therefore not voted at that meeting.
If we issue new shares or our shareholders sell shares in the future, the market price of your ADS may be reduced.
Sales of a substantial number of shares, or the belief that this may occur, could decrease the prevailing market price of our common and preferred shares
and ADS by diluting the shares’ value. If we issue new shares or our existing shareholders sell shares they hold, the market price of our common and preferred
shares, and of the ADS, may decrease significantly. Such issuances and sales also might make it more difficult for us to issue shares or ADS in the future at a
time and a price that we deem appropriate and for you to sell your securities at or above the price you paid for them. Our controlling shareholder, the 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, according to the in Depth 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, 2019, we generated net revenue of R$17,983.7 million and net income of R$3,367.5 million. Our total assets amounted to R$46,457.8 million
and our total shareholders’ equity amounted to R$21,635.8 million as of December 31, 2019.
As of December 31, 2019, we provided water and sewage services to a broad range of residential, commercial, industrial and governmental customers in
372 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, 2019, we lacked formal agreements for 21 of the municipalities we serve, each of which we are currently in the process of
renegotiating. From January 1, 2020 through 2030, 27 further concessions will expire, and we will seek to replace them with program agreements. In addition
to the 372 municipalities we served, we also provided water and sewage 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 three municipalities in the São Paulo metropolitan region, two of which also received our sewage treatment
services. For the year ended December 31, 2019, the São Paulo metropolitan region (including the municipalities to which we provide water on a wholesale
basis) accounted for 73.4% of our operating revenue (excluding revenues relating to the construction of concession infrastructure), while the Regional Systems
accounted for 26.6%. The municipalities of Guarulhos and Santo André were both served on a wholesale basis until December 2018 and August 2019,
respectively, after which we started retail operations in these municipalities, which means we now account for them as part of our retail segment.
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As of December 31, 2019, we provided water services through 9.9 million water connections to approximately 27.1 million people, representing
approximately 61% of the total population of the state of São Paulo, and had a water coverage ratio of 98% with respect to all regions. As of that date, we
provided sewage services through 8.3 million sewage connections to approximately 23.8 million people and had an effective sewage service ratio of 84%. As
of December 31, 2019, we operated using 81,324 kilometers of water pipes and water transmission lines and 55,983 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 11 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.
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, 2019, 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 by (i) our ability to raise tariffs, control costs and improve productivity; (ii) the
general economic conditions in Brazil and abroad; (iii) climate conditions; and (iv) the impact of pandemics such as COVID-19. After the water crises, the
volume of water billed to the São Paulo metropolitan region continued below 2013 levels as many of our customers continue to apply some of the lower water
consumption practices adopted during water crisis. For further information on the water crisis, see “Item 3.D. Risk Factors—Droughts, such as the 2014 – 2015
water crisis, can have a material impact on our business and on consumption habits and, accordingly, may have a material adverse impact on our business,
financial condition or results of operations” 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 27.1 million people and supply water on a wholesale basis to
an additional urban population of approximately 1.0 million people. As of December 31, 2019, 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 23.8 million people, achieving an effective sewage service ratio
of 84% in respect of all regions in which we operate as of December 31, 2019. 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 44.5 million as of December 31, 2019. 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 21.1 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$2.1 trillion representing approximately 32.2% of Brazil’s total GDP, according to the most recent data collected by the IBGE in 2017. The state of São Paulo
generates more revenue from water and sewage services than any other Brazilian state.
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Strong Base of Contracted Business. Between January 1, 2007 and December 31, 2019, we executed agreements with 325 municipalities, including
agreements with the cities of São Paulo and Guarulhos, respectively the first and second largest municipalities in the State of São Paulo. For the year ended
December 31, 2019, income from these agreements accounted for 85% of our gross operating revenues from sanitation services (excluding revenues relating
to the construction of concession infrastructure).
Access to low-cost and diverse sources of financing. Our strong cash flow generation from operations and our role as an essential public service provider
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. Additionally, in 2016 Federal Law No. 13,303/16 came into force in Brazil and set new corporate governance standards
for Brazilian government-owned and mixed capital companies like our company, as well as their subsidiaries. This law also set new rules that these companies
must follow in public bidding procedures when contracting with third parties. As a result, we are committed to certain corporate governance standards that are
not otherwise required by Brazilian Corporate Law, which provides heightened protection to our shareholders and enhances the quality of information we
disclose to the market.
High quality operations. We believe that we adhere to high standards of service and employ the best available technology in the sanitation business to
control the quality of the water we abstract, process and distribute. Of our 16 laboratories in total, our central laboratory and 13 of our regional laboratories
are accredited by the National Institute of Metrology, Quality and Technology, Standardization and Industrial Quality, 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 “—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 2024. 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 mid-2021.
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Through these projects we intend to increase our speed and productivity in responding to regulatory changes; to strengthen and streamline our financial,
commercial and administrative structure; to provide a solid and integral base of information to support the decision-making process; and to increase the
efficiency of our operations while also reducing costs.
Continue to seek sustainable growth. Our goal is to grow while balancing our economic and financial results with environmental and social
considerations, to secure positive financial results so as to guarantee investments for the provision of services, as well as to provide adequate and just
remuneration for our shareholders. We seek to act as citizens and to promote the well-being of the communities we operate in and the protection of the
environment. We aim to apply our principles of financial growth and sustainability to each business unit, assigning goals and setting clear responsibilities for
each unit so as to strengthen our financial results. To achieve this goal, we intend to use our best efforts to reduce operating costs and increase productivity
and profitability. We plan to improve the management of our assets, as well as to continue to reduce our total operating expenses by automating some of our
facilities, streamlining operational processes, implementing integrated planning and further investing in internal technological research and development.
We also plan to continue our efforts to improve our collection of overdue trade receivables from municipalities to which we provide services, from the
State and from other governmental entities, including by exploring opportunities to offset these outstanding debts against certain possessory or property rights
over utilities relating to water and sewage systems. We intend to continue to fund our working capital needs and estimated capital expenditure programs with
diversified sources of financing, such as domestic and international development banks and multilateral agencies. We will continue to seek market opportunities
for low-cost financing and restructuring of our indebtedness if and when advantageous and appropriate.
Since 2008, we have expanded into activities that complement water and sewage services in which we may leverage our know-how, size, scale and
profitability. These activities include consulting and management of sanitation systems.
Currently, we provide water and/or sewage services to 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 14.7 million. We evaluate possible
expansion opportunities in terms of proximity to our existing service areas to maximize return on investment and improve our financial performance. In
June 2010, we entered into a 30-year agreement with the State and city of São Paulo for the provision of water and sewage services in the city of São Paulo,
which in the year ended December 31, 2019 accounted for 44.5% of our gross operating revenues from sanitation services (excluding revenues relating to the
construction of concession infrastructure). Between January 1, 2007 and December 31, 2019, we entered into agreements with 325 municipalities (including
our services agreement with the city of São Paulo), of which 18 were entered into in 2019. These 325 municipalities accounted for 85.0% of our total revenues
(excluding revenues relating to the construction of concession infrastructure) for the year ended December 31, 2019 and 90.1% of our intangible assets and
contract assets as of the same date. As of December 31, 2019, 21 of our concessions had expired and are currently being renegotiated. These 21 municipalities
accounted for 2.8% of our total revenues (excluding revenues relating to the construction of concession infrastructure) for the year ended December 31, 2019
and 4.1% of our intangible assets and contract assets as of the same date. From January 1, 2020 through 2030, 27 concession agreements, accounting for 3.7%
of our revenues (excluding revenues relating to the construction of concession infrastructure) the year ended December 31, 2019 and 3.0% of our intangible
assets and contract 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.
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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 91% as of December 31, 2019 and plan to increase this ratio to 95% by 2024 by
adding over 1.2 million sewage connections and the indicator of consumer units connected to the sewage treatment system from 78% to 85% by 2024. These
investments are necessary to restore the quality of the rivers and lakes, providing new sources for water supply. In addition, there are municipalities in the state
of São Paulo representing a total population of approximately 14.7 million to which we currently do not provide water or sewage services, or to which we
currently supply water solely on a wholesale basis. Our strong presence in the State and experience in providing water and sewage services places us in a
privileged position to expand our sewage services to these additional municipalities in the state of São Paulo as well as to other Brazilian states and abroad. For
more information, see “Item 4.B. Business Overview—Description of our Activities—Sewage Operations” and “Item 4.B. Business Overview—Competition”
and “Item 4.B. Business Overview—Tariffs.”
Our strategic objectives also focus on our political and institutional relationships as well as on our commitment to the market to increase shareholder
value.
In 2019 we invested R$5.1 billion and between 2020 and 2024 we plan to invest an additional R$20.2 billion to improve and expand our water and sewage
systems, increase water security, and meet the growing demand for water and sewage services in the state of São Paulo, thereby encouraging these customers
to continue using our services.
We believe that our overall strategy will enable us to meet the demand for high quality water and sewage services in the state of São Paulo as well as in
other Brazilian states and abroad, while creating shareholder value and strengthening our results of operations and our financial condition.
State of São Paulo
The state of São Paulo is one of 26 states that, together with the Federal District of Brasília, constitute the Federative Republic of Brazil. The state of São
Paulo is located in the southeastern region of the country, which also includes the States of Minas Gerais, Espírito Santo and Rio de Janeiro, and which is,
according to IBGE, the most developed and economically active region of Brazil. The state of São Paulo is located on the Atlantic coast of Brazil and is
bordered by the states of Rio de Janeiro and Minas Gerais to the north, the state of Paraná to the south and the state of Mato Grosso do Sul to the west.
The state of São Paulo occupies approximately 3.0% of Brazil’s land mass and encompasses an area amounting to approximately 96,000 square
miles. According to the SEADE, the state of São Paulo had an estimated total population of 44.5 million as of December 31, 2019. 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 21.1 million inhabitants in the São Paulo
metropolitan region, as of December 31, 2019. 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 47.4% of the total population of the state of São Paulo as of December 31, 2019. In, the most recent data collected by the IBGE, the GDP of the
state of São Paulo was approximately R$2.1 trillion, representing approximately 32.2% of Brazil’s total GDP, and making it the largest economy of any state
in Brazil based on GDP. According to the IBGE, the state of São Paulo is also the leading Brazilian state in terms of manufacturing and industrial activity, with
a strong position in car manufacturing, pharmaceuticals, computer manufacturing, steel making and plastics, among other activities, as well as a leading position
in the banking and financial services industries. The state of São Paulo is the leading export state in Brazil, according to the Brazilian Ministry of Development,
Industry and Foreign Trade (Ministério do Desenvolvimento, Indústria e Comércio Exterior), 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.
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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.
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. However,
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). On April 24, 2019, CDPED established a working
group to evaluate alternatives for our corporate restructuring. For further information, see “Risk Factors—Our controlling shareholder is currently discussing
proposals for our corporate reorganization. We cannot guarantee that any potential reorganization will not have a material adverse effect on our business,
financial condition or results of operations.”
31
As of December 31, 2019, 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 372 of the 645 municipalities in the State, including in the city of São Paulo. We also supplied water on a wholesale
basis to three municipalities in the São Paulo metropolitan region. According to the in Depth Water Yearbook 2014-2015, we are one of the largest water and
sewage service providers in the world (based on the number of customers).
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, compliance, risk management, audit and quality.
The Chief Executive Officer represents our company before third parties and certain powers can be granted to attorneys-in-fact. The executive officers
described below report to the Chief Executive Officer:
• the Corporate Management Officer, who is responsible for marketing (commercial processes), human resources and social responsibility, legal affairs,
information technology, asset management, supplies and contracts;
• the Chief Financial Officer and Investor Relations Officer, who is responsible for financial planning, collection of revenues, allocating financial
resources to 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;
• 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 and services for water and sewage supply systems (including for the
services that we provide on a wholesale basis), sales and call center services, and have overall responsibility for the financial and operational
performance of their divisions. The Chief Operating Officers are also responsible for sanitation advisory services to independent municipalities,
negotiating contracts for water supply and sewage treatment services and for mediation and negotiation with communities and local governments,
aimed at aligning our interests with the interests of our clients.
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$20.2 billion from 2020 through 2024. We invested R$5.1 billion, R$4.2 billion and R$3.4 billion
in 2019, 2018 and 2017, respectively.
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The following table sets forth our planned capital expenditures for water and sewage infrastructure for the years indicated:
Water
Sewage Collection
Sewage Treatment
Total
2020
1,677
1,526
578
3,781
2021
1,640
1,873
508
4,021
2022
(in millions of reais)
1,505
2,022
593
4,120
Planned Capital Expenditures
Total
2024
2023
1,586
1,999
530
4,115
1,693
1,870
615
4,178
8,101
9,290
2,824
20,215
Our capital expenditure program from 2020 through 2024 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 372 municipalities we served as of December 31, 2019.
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 2020
through 2024, we plan to spend R$8.1 billion in water-related investments. The main programs are:
Metropolitan Water Program
Demand for our water services has grown steadily over the years in the São Paulo metropolitan region and has at times exceeded the capacity of our water
systems. On account of the high demand, prior to September 1998, a portion of our customers in this region received water only on alternate days of the
week. We refer to this as “water rotation.” Further, the metropolitan region lacks water resources, which requires us to obtain water from increasingly distant
sources. In order to address this situation, we implemented the Metropolitan Water Program (Programa Metropolitano de Água) to improve regular water
supply to the entire São Paulo metropolitan region. This program terminated in 2000 and the water rotation measure was eliminated, but we have nevertheless
maintained our investment plans for the region. In 2019, we invested approximately R$185.1 million in the Metropolitan Water Program.
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 São Lourenço water supply system, or PPP São Lourenço, which was concluded in
2018 and directly benefits 1.5 million residents of the western and southwestern regions of the São Paulo metropolitan region.
With regard to PPP São Lourenço, as of December 31, 2019, the estimated amount of the PPP contract was R$6.0 billion (including R$2.2 billion in
construction and maintenance and operation of the system). After monetary adjustment, the contract amounts to approximately R$7.8 billion and has a 25-year
term, four years of which was dedicated to the construction, while the other 21 years will be dedicated to service delivery. These services include the operation
and maintenance of the sludge treatment system of the water treatment plant and disposal of the waste thus generated; 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. The system indirectly benefits the entire São Paulo metropolitan region as it is connected to the metropolitan system, which increases the volume of
available water.
Additionally, in March 2018 we concluded the interconnection of Jaguari (part of the Paraíba do Sul Basin) and Atibainha reservoirs (part of the PCJ
River Basin, Cantareira System), which is also strategic to guarantee secure access to water for the metropolitan region of São Paulo. Through this project, we
are able to transfer 5.13 m³/s (annual average) to 8.5 m³/s (maximum) of water from Jaguari to Atibainha, one of the reservoirs of Cantareira System. Since
May 2018, the transfer of water also works in the opposite direction, from the Atibainha reservoir to the Jaguari reservoir, allowing us to reverse up to 12.2
m3/s and optimize the reservation capacity of both reservoirs, while benefiting the population of the Paraíba Valley.
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Reversal of the Itapanhaú River
The reversal of the Itapanhaú River to the Birita-Mirim River, part of the Alto Tietê 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 21.1 million people in the greater São Paulo region. The project is pending environmental licenses and is expected to begin construction in 2020, with
financial support from the Federal Savings Bank (Caixa Econômica Federal).
Program for Reduction of Water Loss
The Program for Reduction of Water Loss (Programa de Redução de Perdas de Água) aims to reduce water loss by integrating 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 (JICA), BNDES, World Bank (IBRD) and incentivized debentures pursuant to Law No. 12.431/2011.
The program aims to reduce the rate of water loss from 430 liters per connection per day in December 2008 to 273 liters per connection per day by 2020,
which is equivalent to reducing the Water Metered Loss Index (based on measured consumption) from 34.1% in December 2008 to 28.4% in December
2020. In 2019, we invested approximately R$929.7 million in this program and our water loss measured 285 liters per connection per day and our Water
Metered Loss Index averaged 29.0%.
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.
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. In 2019, two additional water treatment plants became operational in the municipality of Peruíbe
as part of an ongoing plan to enlarge the treatment capacity of the water treatment plant Mambu Branco, from 1.6m3/s to 3.2m3/s, which we expect 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 2019, we invested R$36.5 million in
the Coastal Water Program.
Sustainable and Inclusive Sanitation Program
The Sustainable and Inclusive Sanitation Program integrates water security and social inclusion and is focused on the Guarapiranga reservoir area in the
São Paulo Metropolitan Region, benefiting more than 1 million people. The Program aims to reduce water losses by replacing our water networks and
implementing water supply infrastructure in houses with underdeveloped facilities, as well as to improve maintenance and safety control of Guarapiranga
reservoir and to expand and optimize sewage collection, transportation and treatment systems in the area. The Program is supported by funds from the World
Bank as well as our own funds.
Investments in Sewage—We have a series of ongoing and scheduled projects involving the collection, removal and treatment of sewage. For the period from
2020 through 2024, we plan to invest R$12.1 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.
34
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 2019, the investments totaled US$3.0 billion, of which R$454 million were disbursed in 2019. Part of the resources allocated to
the program are our own capital and the remainder comes from financings granted by the Inter-American Development Bank - IDB, BNDES and Caixa
Econômica Federal.
During this period, 1.8 million domestic sewage connections were built and 4.5 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 20.6
thousand liters per second. This increase, of 16.6 thousand liters per second, is equivalent to the sewage generated by approximately 11 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 2019. Sewage
treatment increased from 24% to 81% of the volume collected.
By 2025, the program aims to increase the sewage collection rate in the metropolitan region of São Paulo to 92% and the treatment rate to 90% of the total
collected, with the conclusion of the third stage, now under way with a 72% 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 Treatment 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, which became operational in 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. The project, which has approximately 15km in length,
will allow the broadening of sewage disposal and treatment in the region, which will in turn guarantee greater operational security to the sewage system.
In November 2019, we signed a new loan agreement with IDB in the amount of US$300 million for the partial financing of Project Tietê’s fourth phase.
Novo Rio Pinheiros Project
The Novo Rio Pinheiros Project is an initiative of the São Paulo State Government that aims to clean up the Pinheiros river by 2022, in order to reintegrate
it into the city and make it a leisure and tourism area. The project includes sewage services, riverbed dredging, programs for the collection and reduction of
inadequate urban waste disposal, as well as environmental education actions.
We took part in the project by offering the expansion of the sewage collection network and the installation of new sewage connections in areas not yet
served. In places where the connection to the existing infrastructure is not possible due to settlements along the river bank, as part of the project we will install
small sewage treatment plants on the river’s tributaries.
These initiatives are being contracted based on performance (Performance Contract), a form of service contracting that set goals to be achieved by the
contractors, with the compensation varying according to the achievement of the proposed targets. That is, compensation will take place upon completion of the
construction and will also have a variable part, depending on the final result achieved. Performance evaluation considers targets such as the number of new
properties connected to the sewage network and stream water quality.
Clean Stream Program
The Clean Stream Program (Programa Córrego Limpo), a partnership between the State of São Paulo, our company, and the city of São Paulo, aims to
decontaminate urban streams in the city of São Paulo by eliminating the discharge of sewage into streams and rainwater runoff routes, cleaning streams and
banks, and removing and relocating low-income households located on the banks of streams.
Since 2007, 152 urban streams have been decontaminated and preserved, benefiting approximately 2.7 million people. In 2019, we invested R$9.6 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.
35
In 2019, we concluded the decontamination of an extensive stream in the city of São Paulo, the Traição stream, benefiting 215 thousand people and
resulting in the piping of 275 liters per second of sewage. In addition, the decontamination of several other streams is in its final stages. Throughout the year,
we also continue to inspect the water quality and carry out maintenance services of previously decontaminated streams as necessary.
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 2020 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, and among other actions 110 thousand sewage connections were implemented, resulting in the increase of the sewage
coverage ratio from 53% to 83% in 2019, reaching 100% treatment of the sewage collected. We invested R$2 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 approximately 450 km of sewage collection network, 48 thousand new connections,
three new sewage treatment plants and improvements to existing sewage treatment plants. In 2019, we began works on sewage collection networks and new
connections in the municipalities of Praia Grande, Mongaguá, São Vicente and Intanhaém. We expect to complete this stage in 2025, with 92% sewage
collection and maintenance of sewage treatment index collected.
The execution of the third stage of the Program is 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 mouth of the reservoir’s main affluents in order to retain solid residue in the Guarapiranga basin; (ii) we developed diagnosis
and control services for the removal of water plants that obstruct water extraction; and (iii) we removed and disposed of solid residue that had accumulated at
the water surface of the dam in the reservoir. Two vessels were built specifically for this purpose. We work as a collaborative team with the municipal
government of São Paulo in the Nossa Guarapiranga Project, with the municipal government of São Paulo transporting all of the residue collected through
these fronts to a sanitary landfill. In 2019, we removed an average of 1.152 m³/month of solid residue and approximately 217 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 2019, we
completed approximately 28.2 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, 2019, we provided water and sewage services to 372 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 three municipalities
located in the São Paulo metropolitan region and urban conurbations. The majority of these concessions have 30-year terms. Due to court orders, we 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, 2019, we entered into agreements with 325 municipalities (including our services agreement
with the city of São Paulo) in accordance with the Basic Sanitation Law, of which eighteen were entered into in 2019. As of December 31, 2019, these 325
municipalities accounted for 85.0% of our gross operating revenues from sanitation services (excluding revenues relating to the construction of concession
infrastructure). In addition to the contracts, the municipalities entered into cooperation contracts with the State of São Paulo, delegating the regulation and
monitoring of the provision of services to ARSESP. As of December 31, 2019, 21 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, 2020 through 2030, 27 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 25 to our
financial statements as of and for the year ended December 31, 2019.
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 2019, we provided water services on a wholesale basis to three municipalities located in the São Paulo metropolitan region (Mauá, Mogi
das Cruzes and São Caetano do Sul). The municipalities of Guarulhos and Santo André were both served on a wholesale basis until December 2018 and July
2019, respectively, after which we started supplying water directly to the population of these municipalities which means we now account for them as part of
our retail segment. Agreements to provide water services on a wholesale basis must comply with the Basic Sanitation Law which requires that the service be
supervised by an independent agency, stipulates registration of the cost of the service with the rules published by ARSESP. Our agreements currently comply
with the provisions of the Basic Sanitation Law No. 11.445/2007. In 2019, the revenues from wholesales water services were R$1,385.4 million, the main
impact of which was related to the agreement with the municipality of Santo André. For more information on this agreement, see Note 9 to our 2019 financial
statements.
37
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 municipality of Mauá still owes us significant sums in respect of water that we have been providing to it 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. In
August 2019, we executed a new Protocol of Intentions with the municipality of Mauá aiming to resolve commercial relations and the municipality’s outstanding
debt with us. On January 16, 2020, a municipal law was sanctioned, allowing the municipal government of Mauá to sign agreements and amendments and any
other type of necessary adjustments with the State of São Paulo, ARSESP and us. As of the date of this annual report there has been no progress in negotiations
and we cannot guarantee if or when any agreement will be signed.
Wholesale Sewage Services
Currently, we provide sewage services on a wholesale basis to the municipalities of Mogi das Cruzes and São Caetano do Sul.
In July 2019, we entered into an agreement with the municipality of Santo André to direct supply water and sewage services to the municipality for 40
years. The municipality of Santo André was served on a wholesale basis until July 2019. Through these agreements, in 2019 we invoiced approximately 16
million cubic meters of sewage collected from these municipalities served on a wholesale basis. In 2019, our revenues from wholesale sewage services were
R$33.1 million.
Water Operations
Our supply of water to our customers generally involves water extraction from various sources, subsequent treatment and distribution to our customers’
premises. In 2019, we produced approximately 2,873.2 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 70% of water invoiced by
volume in 2019.
The following table sets forth the volume of water that we produced and invoiced for the periods indicated:
2019
2018
Year ended December 31,
2017
(in millions of cubic meters)
Produced:
São Paulo metropolitan region
Regional Systems
Total
Invoiced:
1,175.8
São Paulo metropolitan region
256.7
Wholesale
643.4
Regional Systems
2,075.9
Total
* Includes the volume billed for the municipality of Guarulhos in the retail segment in 2019 and in the wholesale segment in 2018. Also includes the volume billed for the
municipality of Santo André in the retail segment as from October 2019 and in the wholesale segment until September 2019.
1,363.5*
82.9
666.3
2,112.7
1,194.5
262.7
650.7
2,107.9
2,012.5
860.7
2,873.2
1,959.6
840.1
2,799.7
1,952.3
830.9
2,783.2
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.
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Water Resources
We can withdraw water only to the extent permitted by the Department of Water and Electric Energy (Departamento de Águas e Energia Elétrica –
DAEE) pursuant to water rights granted by it. Depending on the geographic location of the river basin or if the river crosses more than one state (federal
domain), the approval of ANA, a federal agency under the Ministry of Regional Development is required. We currently withdraw substantially all of our water
supply from surface sources from rivers and reservoirs, with a small portion being withdrawn from groundwater. Our reservoirs are filled by impounding water
from rivers and streams, by diverting the flow from nearby rivers, or by a combination of both methods. For more information on water usage regulation, see
“—Environmental Matters—Water Usage.”
In order to supply water to the São Paulo metropolitan region, as of December 31, 2019 we relied on 20 reservoirs of non-treated water and 243 reservoirs
of treated water, which are located in the areas under the influence of the ten water producing systems (including the Guarulhos 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 82.3 m³/s.
Total current installed capacity is 81.7 m³/s and can be distributed to the São Paulo metropolitan region. Average verified production for the interconnected
water system of the São Paulo metropolitan region was 62.9 m³/s during 2019. The Cantareira, Guarapiranga and Alto Tietê systems produce 81% of the water
we distributed in the São Paulo metropolitan region in 2019.
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 region. For more information see “—Capital Expenditure Program—Main Projects of Our Capital Expenditure Program—Investments in Water.”
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 6.0m³ 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— Investments in
Water.”
In 2019, the Cantareira system accounted for 38% 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 73.4% of our operating revenues from sanitation services (excluding revenues relating to
the construction of concession infrastructure) for the year. For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Business—Droughts,
such as the 2014 – 2015 water crisis, can have a material impact on our business and on consumption habits and, accordingly, may have a material adverse
impact on our business, financial condition or results of operations.”
Current river basin committees are authorized to charge both for water usage and the dumping of sewage into water bodies. We participate in the
decentralized and integrated management of water resources established by the National Policy on Water Resources. We are represented by our employees on
the State River Basin Committees and the Federal Committees that act in the state of São Paulo and in the National and State Councils on Water Resources.
The following table sets forth the water production systems from which we produce water for the São Paulo metropolitan region:
Water production system:
Cantareira
Guarapiranga
Alto Tietê
Rio Claro
Rio Grande (Billings reservoir)
Alto Cotia
Baixo Cotia (2)
Ribeirão da Estiva
São Lourenço
Guarulhos
Total
2019
23.8
12.7
14.3
3.1
4.3
1.2
-
0.1
3.1
0.3
62.9
(1) Average of the twelve months ended December 31, 2019, 2018 and 2017.
(2) At the beginning of 2018, the region served by the Baixo Cotia system began to be supplied by the São Lourenço system.
Production Rate(1)
2018
2017
(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
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The Guarapiranga and Billings reservoirs and a portion of some of the reservoirs of the Alto Tietê system are owned by other companies controlled by the
State. In the cities of the interior region of São Paulo, our principal source of water consists of surface water from nearby rivers and from wells, whereas in
coastal areas, our principal source of water consists of surface water from rivers and mountain springs. For additional information on the Alto Tietê system,
see “Item 7.B. Related Party Transactions—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 204.8, 199.1 and 207.3 thousand new water connections in 2019, 2018 and 2017, respectively. The interconnected
water system of the São Paulo metropolitan region serves 30 municipalities, of which 27 are operated directly by us under this system. Through this system,
we serve the other three municipalities on a wholesale basis whereas distribution is the responsibility of other companies or departments related to each
municipality.
In order to reach the final customer, the water is stored and transported through a complex and interconnected system. This water system requires
permanent operational supervision, engineering inspection, maintenance, and quality monitoring and measurement control.
To ensure the continuous provision of regular water supply in the São Paulo metropolitan region, we intend to invest R$8.1 billion from 2020 to 2024 to
increase our water production and distribution capacities as well as to improve the water supply systems. In 2019, our total investment in water supply systems
amounted to R$2.5 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 253 treatment facilities, of which
ten 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 2019. The type of treatment used depends on the nature of the source and quality of the untreated water. For example, water abstracted from
rivers requires more treatment than water withdrawn from groundwater sources. All of the water we treat receives fluoridation treatment.
Water Distribution
We distribute water through our networks of water pipes and water transmission lines, 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)
2019
81,324
9,933
As of December 31,
2017
74,396
8,863
2018
75,519
9,053
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, 2019, our water distribution pipes and water transmission lines included: (i) 42,158 kilometers in the São Paulo metropolitan region;
and (ii) 39,167 kilometers in the Regional Systems.
As of that date, we had 397 storage tanks in the São Paulo metropolitan region with a total capacity of 2.4 million cubic meters, and 2,101 storage tanks
in the Regional Systems. Furthermore, we had 465 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.
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The new customers whose water pipes are more than 20 meters away from the water transmission lines are responsible for covering part of the costs of
connecting to our water distribution network. They must cover the costs of connecting to the network from the customer’s premises, including costs of
purchasing and installing the water meter and related labor costs. We perform the installation of the water meter and conduct periodical inspections and
measurements. After completion of installation, the customer is responsible for the water meter.
The following table sets forth projected new water connections for the periods indicated in thousands:
São Paulo metropolitan region
Regional Systems
Total
Water Loss
2020
129
65
194
2021
122
65
187
2022
122
65
187
2023
122
65
187
in thousands
2020 – 2024
608
324
932
2024
113
64
177
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;
41
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, 2019, we experienced 331 liter/connection per day of water loss in the São Paulo metropolitan region
and 216 liter/connection per day of water loss in the Regional Systems, averaging 285 liter/connection of water loss per day. We have a Program for Reduction
of Water Loss in place that aims to reduce total water loss to around 273 liters/connection per day, and the Water Metered Loss Index to 28.4% by 2020.
Real water loss (water physically lost) fell from 22.2% in December 2008 to 19.0% in December 2019.
Our strategy to reduce water loss has two approaches:
• reduction in the level of physical loss, which results mainly from leakage. To this end we are replacing and repairing water transmission lines and
pipes and installing probing and other equipment, including strategically located pressure regulating valves; and
• reduction of non physical loss, which results primarily from the inaccuracy of our water meters installed at our customers’ premises and from clandestine
and illegal use. To this end we are upgrading and replacing inaccurate water meters, increase anti-fraud actions and expanding our anti fraud
personnel.
We are taking measures to decrease physical loss by reducing response time to fix leakages and by better monitoring of non-visible water main
fractures. Among other initiatives, we have adopted the following measures to reduce physical water loss:
• the introduction of technically advanced valves to regulate water pressure throughout our water transmission lines in order to maintain appropriate
water pressure downstream. These valves are programmed to respond automatically to variations in demand. During peak usage, the flow of water in
the pipes is at its highest point; however, when demand decreases, pressure builds up in the water transmission lines and the resulting stress on the
network can cause significant water loss through cracks and an increase in ruptures of the pipes. The technically advanced valves are equipped with
probes programmed to feed data to the valve in order to reduce or increase pressure to the water transmission lines as water usage fluctuates; the
reconfiguration of interconnected water distribution to permit the distribution of water at lower pressure;
• the implementation of routine operational leak detection surveys to reduce overall water loss;
• the monitoring 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.
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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 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.”
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, 2019, we collected approximately 83% and
86% 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 2019, we collected approximately 84% of all the sewage produced in the municipalities in which we operated in the state of São Paulo. We
installed 237.0 thousand, 215.3 thousand and 221.8 thousand new sewage connections in 2019, 2018 and 2017, 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, 2019, we were
responsible for the operation and maintenance of 55,983 kilometers of sewage lines, of which approximately 29,607 kilometers are located in the São Paulo
metropolitan region and 26,376 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)
2019
55,983
8,326
As of December 31,
2017
50,991
7,302
2018
51,788
7,495
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.
43
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 and Conama
Resolution No. 397/2008.
We considered the condition of the sewage lines in the São Paulo metropolitan region to be adequate as of the date of this annual report. Due to a greater
volume of sewage collected, a higher population and more extensive commercial and industrial development, the sewage lines in the São Paulo metropolitan
region are more deteriorated than those of the Regional Systems. To counter the effects of deterioration, we maintain an ongoing program for the maintenance
of sewage lines intended to address anticipated fractures arising from obstructions caused by system overloads.
Unlike the São Paulo metropolitan region, the interior region of São Paulo State does not generally suffer obstructions caused by sewage system
overload. The coastal region, however, experiences obstructions in its sewage lines primarily due to infiltration of sand, especially during the rainy season in
the summer months. In addition, the sewage coverage ratio in the coastal region is lower than in the other regions served by us, at approximately 81% as of
December 31, 2019.
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
2020
162
78
240
2021
152
88
240
2022
148
92
240
2023
148
85
233
2024
148
85
233
in thousands
2020-2024
758
428
1,186
In 2019, approximately 66% 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 78% 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 eight ocean outfalls and 561 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 16.7 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.
44
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 appropriately
to prevent harm to the environment. Sludge removed from the treatment process typically contains water and a very small proportion of solids. We use filter
presses, belt filter presses, drying beds and centrifugation machines, among other processes, to dewater the sludge, reducing the solid content to a range of 20%
to 25% by the end of the treatment process.
Currently, the sludge generated through our activity goes mainly to landfills authorized to receive it. In some cases, in return, we treat the leachate
generated in these landfills.
Current legislation and the population at large demand advances in the search for alternative technologies that minimize the generation of and find
beneficial uses for sludge. In light of these demands, we work on several fronts, seeking innovative approaches to the destination and final disposal of
sludge. For instance, since 2018 we produce an agricultural organic fertilizer in the municipality of Botucatu, Sabesfértil, which is produced by biodrying
sewage sludge. This project was approved by the Ministry of Agriculture and allows for the sale of such fertilizer.
Additionally, using financing from Funding Authority for Studies and Projects (Financiadora de Estudos e Projetos, or FINEP), we are also developing
two other projects. The first project uses a plasma gasification system that uses specialist technology to transform sludge from sewage treatment plants into a
solid vitreous product, weighing 5% of its initial weight, which can be re-used in construction work. The second project consists of a sludge dryer that uses
sunlight and highly automated processes, resulting in a final product that weighs 25% of its initial weight.
Sludge disposal must comply with State and Federal law requirements, such as Federal Law No. 12,305/2010, regulated by Federal Decree No. 7,404/2010,
State Law No. 12,300/2006, regulated by and State Decree No. 54,645/2009, and Resolution No. 375/2006 of the CONAMA. Our technical staff participate
into different thematic groups of the sanitation sector, which contributes to the technical improvement of the regulations which apply to the use and appropriate
disposal of the waste.
Principal Markets in Which We Operate
As of December 31, 2019, we operated water and sewage systems in 372 of the 645 municipalities in the state of São Paulo. In addition, we supplied
water on a wholesale basis to three municipalities located in the São Paulo metropolitan region with a total population of approximately 1.0 million people.
The following table provides a breakdown of gross revenues from sanitation services by geographic market for the years indicated:
São Paulo metropolitan region
Regional Systems
Total
Competition
2019
11,849.8
4,284.3
16,134.1
Year ended December 31,
2017
2018
(in millions of R$)
10,295.5
3,958.1
14,253.6
8,636.9
3,586.8
12,223.7
In 2019, there were 273 municipalities operating their own water and sewage systems in the state of São Paulo, with a total population of approximately
14.7 million, or approximately 33.1% of the population of the state.
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, or may be
paid over an extended period, adversely affecting our business, financial condition or results of operations.” In the past, municipal governments have terminated
our concessions agreements before the expiration date. Furthermore, municipal governments have tried to expropriate our assets in an attempt to resume the
provision of water and sewage services to local populations. 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.
45
In recent years, we have also experienced an increasing level of competition in the market of water supply, including to residential condominiums and
non-residential 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 under demand or take-or-pay contracts. On December 31, 2019 we had 558 take-or-
pay contracts. 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
on water usage determined by monthly water meter readings. Larger customers, however, have their meters read every 15 days to monitor consumption and
thus avoid water losses resulting from leakages. Sewage billing is included as part of the water bill and is based on the water meter reading.
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, which are 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.
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 certain banks and other locations in the state of São Paulo. These funds are paid over to us after deducting average banking fees
ranging from R$0.29 to R$1.41 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 2019, 2018 and 2017, we received payment
of 93.7%, 93.8% and 94.1%, respectively, of the amount billed to our retail customers, and 93.7%, 93.8% and 94.1%, respectively, of the amount billed to
those customers other than State entities, within 30 days after the due date. In 2019, 2018 and 2017, we received 99.6%, 99.4% and 99.2%, respectively, of
the amount billed to the State entities.
With respect to wholesale supply, in 2019, 2018 and 2017, we received payment of 34.7%, 38.5% and 66.6%, respectively, of the amount billed within
30 days. The reason for the reduction in the payments received within 30 days over the last three years is due to the fact that our bills for the municipalities of
Guarulhos and Santo André are no longer included as part of this calculation as we have now signed contracts with those municipalities. Prior to the signing
of those contracts, they were included in this calculation as it includes court ordered payments.
Tariffs
Tariff adjustments follow the guidelines established by the Basic Sanitation Law and ARSESP regulations. The guidelines also establish procedural steps
and the terms for the annual adjustments. The adjustments have to be announced 30 days prior to the effective date of the new tariffs. Pursuant to the most
recent tariff revision, both the base date and future adjustments take place in April. Tariffs have historically been adjusted once a year and for periods of at
least 12 months. 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.
46
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. As a result of the creation of the ARES/PCJ, we were 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 Águas
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. In 2019, the case involving Águas de São Pedro was dismissed, given that the municipality requested its
removal from ARES/PCJ, after which the lawsuit lost its object-matter.
In November 2013 the Regulatory Agency of São Bernardo do Campo was created. However, when the contract was signed with the municipality of São
Bernardo do Campo in 2019 the regulation and supervision of services were delegated to ARSESP. 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, financial condition or results of operations.”
Tariff Readjustment and Revisions
Tariff readjustment and revision are mechanisms through which tariffs may be monetarily altered. Such mechanisms are provided for in laws, contracts
and regulatory standards and allow the maintenance of the economic and financial balance of the concessionaire and of the concession agreement itself.
Pursuant to Law No. 11,445/2007, revisions may be ordinary or extraordinary. The ordinary tariff review takes place every four years and aims at
maintaining the economic and financial balance of service provision. This review takes into account the expectations of costs, expenses, investments and market
prices in order to preserve the financial and economic balance of the concession agreement, as was the case with our tariff revision. This revision calculates
the required revenue (or balance revenue), the X Factor that allows us to share productivity gains with consumers and the Q Factor, which encourages quality
improvement. In addition, it is important to recognize all investments made during the “inter-cycle” period by the concessionaire, such as us, and to redefine
their efficient operating costs according to the evolution of other distributors and the rate of return (WACC) according to the country’s socioeconomic scenario.
Extraordinary tariff revisions, on the other hand, may occur at any time regardless of the aforementioned readjustments and revisions if there are material
changes in conditions that affect the financial and economic balance of the concession agreement.
Further to revisions, the tariffs are annually adjusted in the years between periodic tariff reviews. In our agreements, we use the IPCA price index
(accumulated in 12 months), minus a productivity factor calculated in the periodic tariff review (X Factor) and, as of 2020, the adjustment of IGQ - General
Quality Index that can be naught, positive or negative, according to the deviation between the established goal and the actual values.
The first ordinary tariff revision took place from April 2013 to April 2016. In 2015, due to the decline in the volume of water billed due to the water crisis
and the unpredicted increase in electricity tariffs, we requested an extraordinary tariff review from ARSESP. The request was partially accepted which resulted
in a tariff repositioning index of 6.92%.
The second ordinary tariff revision cycle began in April 2017 and is expected to end in April 2021. However, due to delays in the process, the revision
was divided into two parts. The first part was completed on October 10, 2017 and the second part was completed in May 2018.
As part of the first part of this cycle, ARSESP authorized us to apply the tariff repositioning index of 7.8888%, effective on November 10, 2017.
On May 24, 2018, as a 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, in respect of our contract with the municipality of São Paulo.
On February 28, 2019, ARSESP published the result of the applications filed on May 24, 2018. 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%,
applied at the same time as the annual tariff adjustment in May 2019.
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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,
consisting of: (i) IPCA variation in the period of 4.5754%; (ii) efficiency factor (X Factor) of 0.6920%; and (iii) Compensatory adjustment of 0.8408%. This
tariff readjustment was applied as from May 11, 2019.
On April 1, 2020, ARSESP issued Resolution No. 974/2020 setting out the schedule of stages for our Third Ordinary Tariff Revision, as set out in the
table below:
Stage
1
2
3
4
5
6
7
8
9
10
11
Description
Presentation of historical data by us
Publication of the 3rd Ordinary Tariff Revision methodology proposal
Publication of Weighted Average Cost of Capital (WACC)
Public Consultation and Public Hearing - Methodology of the 3rd Ordinary Tariff Revision
Public Consultation and Public Hearing – WACC
Release of Detailed Report and Final Technical Note of the methodology
Release of WACC Detailed Report and Final Technical Note
Receivement of our Business Plan
Release of Preliminary Technical Note - Calculation of P0
Public Consultation and Public Hearing - Calculation of P0
Release of the Detailed Report, Final Technical Note and P0 Resolution
Period
05/14/2020
05/14/2020
05/14/2020
05/15/2020
to
07/03/2020
05/15/2020
to
07/03/2020
07/30/2020
07/30/2020
10/05/2020
01/14/2021
01/15/2021
to
02/19/2021
04/09/2021
However, due to the COVID-19 pandemic, the deadlines for some of the stages set out above might suffer delays.
On April 9, 2020, ARSESP issued Resolution No. 980/2020 publishing a tariff readjustment of 2.4924%, consisting of: (i) IPCA variation during the
period of 3.3032%; (ii) efficiency factor (X Factor) of 0.6920%; and (iii) Quality Fator (Q Factor) of -0.1188%. Due to the state of public calamity resulting
from the COVID-19 pandemic, ARSESP postponed this readjustment for 90 days. The main provisions of the Resolution No. 980/2020 are set out below:
• To postpone the publication of the new tariff tables, resulting from the annual tariff adjustment to June 10, 2020;
• That the adjusted tariff tables will be published by June 10, 2020 and will be applied as of thirty days from their publication, pursuant to Law No.
11,445/2007;
• That the compensatory adjustments for the postponement of the application of the annual tariff adjustment will be calculated until June 10, 2020; and
• That the amount to be compensated will be distributed in the tariffs in the period between July 10, 2020 and May 10, 2021, when the results of the
Third Ordinary Tariff Revision will be applied.
Further on April 9, 2020, ARSESP issued Resolution No. 979/2020, informing that it will evaluate the economic-financial balance of the provision of
services in order to restore it in due course, if necessary, as a result of the impact of the exemption of payment of water and sewage bills for consumers in the
“Residential Social” and “Residential Favela” categories for bills issued from April 1, 2020 for 90 days and will cover all municipalities operated by us.
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On April 17, 2020 ARSESP published Resolutions No. 985/2020 and No. 991/2020 on the topic reduced revenues in the short term resulting from the
COVID-19 pandemic. Resolution No. 985/2020 suspends, on an exceptional and transitory basis, from May to December 2020, the payment of the TRCF -
Regulation, Control and Inspection Fee, paid by us. During this period, the payment we transfer to ARSESP will decrease from 0.50% to 0.25% of annual
revenues. The postponed transfers will be monetarily adjusted and paid in 24 equal monthly installments starting in January 2021.
Resolution No. 991/2020 provides for the postponement of the implementation of the Four-year Research and Technological Development Program for
Innovation in Sanitation Services scheduled for May 2020 to May 2021. The value of the Authorized Amount of financial resources for the year 2020 (2017-
2020 Cycle), inflation-adjusted by the accumulated IPCA of 2020, will integrate the calculation of the Authorized Amount to be invested in 2021 and 2022.
Regulatory Agenda
On January 31, 2019, ARSESP published a 2019-2020 Regulatory Agenda in order to ensure transparency and participation by the society in the regulatory
process of the Third Ordinary Tariff Revision.
As of the date of this annual report, the following matters of this regulatory agenda have been evaluated or are under discussion through consultation and
public hearing:
(a) On February 8, 2019, ARSESP published Public Consultation No. 02/2019, which aimed to obtain contributions regarding the Regulatory Criteria for
the recognition of the tariffs for the transfers to municipal funds for environmental sanitation and infrastructure. On May 13 2019, ARSESP published: (i)
Resolution No. 870/2019, which establishes criteria and conditions to recognize in the tariff the transfer of part of the direct revenue of the service providers,
regulated by ARSESP to the municipal funds for basic sanitation; and (ii) a detailed report with an analysis and clarification on the contributions received
through public consultation related to the regulation of these transfers. Within the scope of the Second Ordinary Tariff Review, the regulatory limit of 4% of
the municipality’s operating revenue was set to pass on tariffs and if the concessionaire and the municipality decide to transfer amounts greater than 4% of the
revenue, the surplus will not be recognized as a financial component in the tariffs and will be restricted to the municipality. In addition, for tariff recognition,
the municipal funds for environmental sanitation and infrastructure shall be established by the service holder by an act of law, which shall specify the destination
of the funds.
(b) On June 6, 2019, ARSESP published Public Consultation No. 06/2019, which aimed at discussing the methodology for calculating and application of
the General Quality Index (Q Factor) in our tariff readjustment and revision processes, with positive or negative tariff effect in our annual adjustments. The
table below indicates the primary targets proposed by the ARSESP for the 2020 tariff adjustment, and accepted by us, for the four indicators that make up the
Q Factor, as approved in Resolution No. 898/2019:
Indicator
ILFE(1) (%)
IDRP(2) (%)
IRFA(3) (complaints/1,000 connections)
IVV(4) (visible leakage/network extension)
_____________________
(1) ILFE – Index of feasible sewage connections;
(2) IDRP – Pavement replacement non-compliance index;
(3) IRFA – Customers complaints index related to lack of water and low pressure;
(4) IVV – Visible leakage index per network extension.
2019 Targets
1.12
13.68
28.19
7.02
On April 9, 2020, ARSESP issued Resolution No. 980/2020, publishing a tariff readjustment of 2.4924%. Due to the state of public calamity as a result
of the COVID-19 pandemic, ARSESP postponed this readjustment for 90 days. The effect of the Quality Factor (Q Factor) was -0.1188%.
(c) On July 17, 2019 ARSESP published Public Consultation No. 09/2019, which aimed at obtaining contributions regarding the methodology and general
criteria for updating our Regulatory Asset Base as part of the Third Ordinary Tariff Review (OTR). As approved in Resolution No. 941/2019, the incremental
assets added by us in the period from July 2016 to June 2019 will be evaluated using the Original Book Value method and for the new municipalities added by
us during the cycle the assets will evaluated by the New Replacement Value method.
(d) On September 2, 2019 ARSESP published the Public Consultation Notice No. 10/2019, which aimed to: (i) establish the Quadrennial Research and
Technological Development Program for Innovation in Basic Sanitation Services regulated by ARSESP, to regulate the application of the 0.05% revenue
required in Research and Technological Development projects, as defined in 2018 (the “PD&I Program”); and (ii) approve the Elaboration and Evaluation
Manual of the Quadrennial Research and Technological Development Program for Innovation in Basic Sanitation Services regulated by ARSESP. These
documents were approved in Resolution No. 920/2019 and we are required to file a portfolio of PD&I Program projects for analysis and prioritization by
ARSESP. The Quadrennial Program was scheduled to produce tariff effect in 2020 annual adjustment. However, taking the scenario of reduced revenues in
the short term resulting from the COVID-19 pandemic into account, ARSESP published Resolution No. 991/2020 which suspended the implementation of the
Four-year Research and Technological Development Program for Innovation in Sanitation Services scheduled for May 2020. See “—Tariff Readjustment and
Revisions.”
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(e) On February 10, 2020, ARSESP published the Public Consultation Notice No. 02/2020, which aimed at obtaining contributions regarding the proposed
2020-2021 ARSESP Regulatory Agenda. On April 14, 2020, ARSESP disclosed the Detailed Report and Resolution No. 981/2020, related to the Public
Consultation No. 02/2020, which establishes the 2020-2021 Regulatory Agenda.
Due to the economic impact caused by COVID-19, in March 2020 our Board of Directors approved an exemption for customers registered as of March
19, 2020 under the “Residential Social” and “Residential Favela” categories from paying water and sewage bills for all municipalities we serve. This exemption
is valid for 90 days as of April 1, 2020. For more information See “—Risks Relating to Our Business — Our financial and operating performance may be
adversely affected by epidemics, natural disasters and other catastrophes, such as the recent outbreak of COVID-19.”
Tariff Structure
Our current tariff structure is based on the tariff regulation approved by State Decree No. 41,446/1996, and is divided into two categories: residential and
non-residential. The residential category is subdivided into standard residential, residential-social and shantytown (favela). The residential-social tariffs apply
to residences of low-income families, residences of persons unemployed for up to 12 months and collective living residences. The favela tariffs apply to
residences in shantytowns characterized by a lack of urban infrastructure. The latter two sub-categories were instituted to assist lower-income customers by
providing lower tariffs for consumption. The non-residential category consists of: (i) commercial, industrial and public customers; (ii) non-profit entities that
pay 50.0% of the prevailing non-residential tariff; (iii) government entities that adhere to the Rational Use of Water Program (Programa de Uso Racional da
Água – PURA) pay 75.0% of the prevailing non-residential tariff; and (iv) public entities that have entered into program agreements, for municipalities with
a population of up to 30.0 thousand and with half or more classified according to their degree of social vulnerability by the Social Vulnerability Index of São
Paulo (Índice Paulista de Vulnerabilidade Social) 5 and 6, of the SEADE, obtained through the analysis of the 2000 Census figures, and start to receive tariff
benefits, in accordance with our normative ruling, for the category of public use, at the municipality level. The tariffs are equal to those offered to the
commercial/entity of social assistance and that corresponds to 50.0% of the public tariffs without contractual provisions referred to in item (iv) above.
There are tables with the values due for each consumption band for the abovementioned categories: up to 10 m³, from 11 to 20 m³, from 21 to 50 m³ and
above 50 m³. The “Residential Social” and “Residential Favela” categories have five consumption bands: up to 10 m³, from 11 to 20 m³, from 21 to 30 m³, 31
to 50 m³ and above 50 m³. The amount charged is always progressive.
Large consumers and municipalities served by wholesale have separate tariff tables.
In January 2020, ARSESP enacted Resolution No. 951/2020, ratified by the Regulatory Agenda 2020-2021, which established regulatory guidelines and
the schedule for the new tariff structure, which will be completed in December 2020.
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.
On December 31, 2019 we had 558 contracts. For more information about the water crisis, see “—The 2014-2015 Water Crisis.”
50
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.
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 2019, 2018 and 2017, the average tariff calculated for the Regional Systems was approximately 22% below the average tariff of the São
Paulo metropolitan region. Considering the current tariff structure we expect approximately 22% for 2020.
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
Residential
Standard Residential:
0-10(1)
11-20
21-50
Above 50
Social:
0-10(1)
11-20
21-30
31-50
Above 50
Shantytown (favela):
0-10(1)
11-20
21-30
31-50
Above 50
Non-Residential
Commercial/Industrial/Governmental:
0-10(1)
11-20
21-50
Above 50
Social Welfare Entities:
0-10(1)
11-20
21-50
Above 50
Government entities that employ the Rational Use of Water Program (Programa de Uso Racional
da Água – PURA), with reduction agreement:
0-10(1)
11-20
21-50
Above 50
(1) The minimum volume charged is for ten cubic meters per month.
As of May 11,
2019
As of June 9,
2018
As of Nov 10,
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
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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.
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.
On November 10, 2017, we started to charge our customers the Regulatory, Control and Inspection Fee (Taxa de Regulação, Controle e Fiscalização, or
TRCF) by including a 0.5% fee 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,
which consists of: (i) IPCA variation in the effective period of 4.5754%; and (ii) efficiency factor (X Factor) of 0.6920%; and (iii) Compensatory adjustment
of 0.8408%. This tariff readjustment was effective as from May 11, 2019.
On April 9, 2020, ARSESP issued Resolution No. 980/2020 publishing a tariff readjustment of 2.4924%, consisting of: (i) IPCA variation in the period
of 3.3032%; (ii) efficiency factor (X Factor) of 0.6920%; and (iii) Quality fator (Q Factor) of -0.1188%. Due to the state of public calamity resulting from the
COVID-19 pandemic, ARSESP decided to postpone it for 90 days. See “—Tariff Readjustment and Revisions.”
Other ARSESP Regulations
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.
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. 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. However, this regulation has been suspended until the date of this annual report.
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;
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• 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
Until 1970, Brazil’s sanitation sector mainly consisted of small-scale projects, the absence of a standardized tariff system and shortage of financial, human
and technical resources.
The National Plan of Basic Sanitation (Plano Nacional de Saneamento Básico), 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.
PLANASA was the first attempt to outline long-term universalization targets for water and sewage services, but it was discontinued in 1986.
The Basic Sanitation Law
Until 2007, the sanitation sector was predominantly self-regulated by the service providers and tariffs were determined by direct negotiation between state
and municipal governments and companies.
The Basic Sanitation Law 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.
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:
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• 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 modified, among others, by Federal Decree No. 10,203/2020), which 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.
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.
National Plan for Basic Sanitation (PLANSAB)
The National Plan for Basic Sanitation (PLANSAB) is an instrument of the public sanitation project established by the Basic Sanitation Law, with an
expected duration of 20 years. The plan contains a diagnosis of Brazil’s basic sanitation infrastructure divided into four segments: (i) coverage deficits, (ii) a
government program, (iii) investments made and (iv) political and institutional aspects. The program also provides estimates for investments to achieve
coverage targets.
Short, medium and long-term objectives were prepared for 2018, 2023 and 2033, respectively, based on the historical evolution and current water and
sewage infrastructure.
Ever since (i) the issuance of Provisional Measure No. 844/2018 in July 2018 (which expired in November 2018 without being converted into law) and
(ii) the issuance of Provisional Measure No. 868/2018, on December 28, 2018 (which expired in June 2019 without being converted into law), there have been
efforts by both the Executive and Legislative powers to amend the Basic Sanitation Law No. 11,445/2007 and Law No. 9,984/2000, which will attribute the
National Water Agency the capacity to establish national reference rules on sanitation services and exclude the possibility of contracting new program
agreements, among other relevant changes to the sector. In December 2019, Bill No. 3,261/2019 was submitted before the Chamber of Deputies. In the same
month of 2019, the Chamber of Deputies approved Bill No. 4,162/2019, which replaced Bill No. 3,261/2019, and submitted it for approval by the Senate. The
amendment of the Basic Sanitation Law could have a material adverse effect on our business, results of operations and financial condition. 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, financial condition or results of operations.”
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 agreement 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.
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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.”
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.
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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 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.
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, 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.
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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.
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. Currently, all of our service agreements signed pursuant to Law No. 11,445/2007 had their regulation and supervision services
delegated to ARSESP.
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 an executed 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.
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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.
Pursuant to rules provided in ARSESP Resolution No. 846/2018, enacted on December 20, 2018, certain procedures were established to report incidents
and interruptions in the provision of water and sewage services through the Supervision Support System (SAFI).
The implementation of these rules, which began in 2011 and was completed in 2018, required certain adjustments to our business and operations, but so
far have not adversely affected us. We created a handbook on how to report incidents and interruptions in order to standardize the understanding and usage of
the Incident Reporting System (including roles, responsibilities and a step-by-step guide), as well as a training series, directed to each business unit, in order to
address the subject and its importance. The goal was to promote a broad communication to all stakeholders mentioned by the ARSESP rules in each available
information channel.
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, financial condition or results of operations.”
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 the contracts’ estimated cash flows from the date of acquisition of the concession. In 2011, ARSESP set the Weighted Average Cost of Capital
(WACC) at 8.06%, due to the First Ordinary Tariff Revision, and in October 2017 the discount rate was updated to 8.11% due to the Second Ordinary Tariff
Revision. See “—Tariffs.” Since 2011, we have used ARSESP’s WACC as a discount rate used to analyze the financial and economic feasibility of the
service agreements with municipalities.
The main provisions of our existing concession agreements are as follows:
• we assume all responsibility for providing water and sewage services in the municipality;
• according to the municipal laws authorizing the concession, we are permitted to collect tariffs for our services and tariff readjustments follow the
guidelines established by the Basic Sanitation Law and ARSESP;
• as a general rule, to date, we are exempt from municipal taxes, and no royalties are payable to the municipality with respect to the concession;
• we are granted rights of way on municipal property for the installation of water pipes and water transmission lines, and sewage lines; and
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• 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, 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 the 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.
As of December 31, 2019, we provided water and sewage services to 372 municipalities. The majority of these concessions have 30-year terms. Due to
court orders, we 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, 2019, we entered into agreements with 325 municipalities
(including our services agreement with the city of São Paulo) in accordance with the Basic Sanitation Law, of which 18 were entered into in 2019. As of
December 31, 2019, these 325 municipalities accounted for 85.0% of our gross operating revenues from sanitation services (excluding 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, 2019, 21 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 January 1, 2020 through 2030, 27 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. Despite these developments, we currently supply water on a wholesale basis to Mauá. After
many years of discussions, on August 16, 2019, we executed a Protocol of Intentions with the municipality of Mauá for the preparation of studies and evaluations
aiming to resolve our commercial relations and the municipality’s outstanding debt with us. On January 16, 2020 a municipal law was sanctioned, allowing
the government of Mauá to sign agreements, amendments and any other necessary adjustments with the State of São Paulo, ARSESP and us. As of the date of
this annual report there has been no progress in negotiations and we cannot guarantee if or when any agreement will be signed.
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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, or may be paid over an extended period, adversely affecting our business, financial condition or results
of operations.”
Operations in the City of São Paulo and Certain Metropolitan Regions
We are a concessionary of the state of São Paulo tasked with providing operate basic sanitary services in metropolitan regions, microregions and urban
conglomerates instituted by state law.
The state of São Paulo, pursuant to Article No. 25, Paragraph 3 of the Brazilian Constitution, enacted the 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, 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.
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 73.4% of our operating revenue
from services in 2019.
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, financial condition or results of operations.”
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. 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.
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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 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. As a result of the creation of ARES/PCJ,
we were 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 Águas 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. In 2019, the case involving Águas
de São Pedro was dismissed, given that the Municipality requested its removal from the ARES/PCJ, after which the lawsuit lost its object-matter.
In November 2013 the Regulatory Agency of São Bernardo do Campo was created. However, when the contract was signed with the municipality of São
Bernardo do Campo in 2019, the regulation and supervision of services were delegated to ARSESP. 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, financial condition or results of operations.”
The 2014-2015 Water Crisis
Prior to 2014, we planned our supply of water to the São Paulo metropolitan region based on the water supply during the driest period on record, which
was from 1953 to 1954. However, water inflow to the Cantareira reservoirs throughout 2014 and most of 2015 was less than half the inflow recorded in 1953,
the previous most critical year. Consequently, the volume of water stored in the reservoirs in 2014 and 2015 declined significantly until September 2015, when
the reservoirs once again held more water than 12 months previously for the first time since the beginning of the water crisis. Once rainfall returned the level
of water in the reservoirs that provide water to the population of the São Paulo metropolitan region to normal levels, the measures taken during the water crisis
to continue services to consumers were gradually discontinued starting in early 2016. As of December 31, 2019, the reservoirs in the São Paulo metropolitan
region contained 1.1 billion m3 of water storage for treatment, compared to 943.3 million m3 available for treatment as of December 31, 2018 not including the
technical reserve of 287.5 million m³. The average monthly water production in 2019 for the São Paulo metropolitan region was 62.9 cubic meters per second,
or m³/s, compared to 60.9 m³/s in 2018 and 60.6 m³/s in 2017.
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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
7.0 million people, with an annual average water production of up to 23.8 m³/s in 2019 in order to serve the São Paulo metropolitan region. Since May 2017,
the volume of water that may be extracted from the Cantareira System is now based on the volume of water available in the reservoirs. A minimum of 10 m³/s
of water may be released to serve the metropolitan region of Campinas and Jundiaí, which is located downstream from the reservoirs. This flow is defined in
Joint Resolution Nos. 926/2017 and 925/2017, both dated May 29, 2017.
In May 2017, the concession that regulates the volume of water that may be extracted from the Cantareira System, issued by ANA and DAEE was renewed
for a period of 10 years and will allow us to withdraw from the system is divided into five tranches: (i) if the volume of water available is higher than 60% of
the reservoirs’ capacity, we can withdraw up to 33 m3/s; (ii) if the volume of water is between 40% and 60% of the reservoirs’ capacity, we can withdraw up
to 31 m3/s; (iii) if the volume of water is between 30% and 40% of the reservoirs’ capacity, we can withdraw up to 27 m3/s; (iv) if the volume of water is
between 20% and 30% of the reservoirs’ capacity, we can withdraw up to 23 m3/s; and (v) if the volume of water available is lower than 20% of the reservoirs’
capacity, we can withdraw up to 15.5 m3/s.
As of December 31, 2019, the reservoirs in the São Paulo metropolitan region, where our largest market is located, contained 1.1 billion m3 of water
storage for treatment, compared to 943.3 million m3 available for treatment as of December 31, 2018. 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 December 2016, March 2017,
December 2017, March 2018, December 2018, March 2019, December 2019 and March 2020, the end of the rainy season:
March
2020
December
2019
March
2019
December
2018
632.2
141.4
98.8
13.4
497.9
16.9
87.8
396.4
110.5
93.0
13.4
430.3
12.2
52.3
542.4
155.8
113.1
14.0
511.9
16.8
87.2
387.8
103.3
92.4
10.9
282.6
7.1
59.1
For the month
March
2018
December
2017
532.3
141.4
97.2
13.9
362.8
15.2
-
405.2
101.6
92.2
10.1
294.8
12.9
-
March
2017
931.9
135.4
98.9
13.9
314.6
16.4
-
December
2016 Total Storage Capacity
740.1
123.6
99.3
11.3
248.1
16.2
-
1,269.5(1)(2)
171.2
112.2
13.7
573.8
16.5
88.8
Cantareira
Guarapiranga
Rio Grande
Rio Claro
Alto Tietê
Cotia
São Lourenço
(1) The Cantareira system’s total storage capacity is 982.0 million m³ available above the water intake level, plus 287.5 million m³ below the water
intake level (known as the “technical reserve”).
(2) Amounts included since the May 2017 water right renewal do not include the water from the Cantareira System’s technical reserve, which is water
stored below the water intake level.
In order to continue to meet consumer demand in the São Paulo metropolitan region and reduce water production in the Cantareira system to the current
limits set by ANA and DAEE, we adopted 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;
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• 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.
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.
Emergency Projects and Projects Implemented to Meet the Water Demand of the São Paulo Metropolitan Region
In addition to the measures taken to meet consumer demand in the São Paulo metropolitan region, we made and continue to make short and medium-term
investments in projects to increase water availability, transfer water between different reservoir systems and expand water treatment production capacity.
Our production of treated water was expanded by 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 Integrated Water Supply System (Sistema Integrado de Abastecimento de
Água), or SIM.
The main projects include:
• 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—Main Projects of
Our Capital Expenditures Program.”
• 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—Main Projects of Our Capital Expenditures Program.”
• Alto Tietê System – transfer of an additional average 2.0 m³/s and up to 2.5 m³/s from the Itapanhaú river to the Biritiba reservoir, which will provide
more volume to the Alto Tietê System. The project is expected to begin construction in 2020. For more information, see “Item 4.A. History and
Development of the Company— Main Projects of Our Capital Expenditures Program.”
Marketing Channels
As of December 31, 2019, we were the concessionaire for the provision of water supply and collection, treatment and disposal of sewage services directly
to end consumers for 372 municipalities in the state of São Paulo. We also supplied water on a wholesale basis to three municipalities located in the São Paulo
metropolitan region. It is the responsibility of these municipalities to then distribute the water to end consumers. We provide sewage services to two 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.”
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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,
2019, 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 2019, we purchased approximately 55.1% 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$ 207 million in 2019, compared to what we expect we would have spent if we purchased all of our total
energy consumption in the Regulated Market.
Additionally, we are developing projects that aim to generate clean, renewable and sustainable energy. In 2019, we began to structure a Distributed Power
Generation Program focused on solar energy. The program estimates that until 2022 we will have a generation capacity of 61 megawatt, with a daily average
output of 21 megawatts, corresponding to about 4.5% of our total energy consumption. The credits obtained in this distributed generation will be used to offset
energy consumption of low voltage installations, which have a higher tariff. As such, about 60% of energy consumption carried out in low voltage will be
supplied by renewable energy. The investment of approximately R$310 million foreseen in this program has an estimated payback of 7 to 8 years.
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— Extreme Weather Conditions and Climate Change may have a material adverse impact on our business, financial condition or
results of operations.”
Insurance
We maintain insurance covering, among other things, fire or other damage to our property and office buildings and third-party liability. We also maintain
insurance coverage for directors’ and officers’ liability (D&O insurance). We currently obtain our insurance policies by means of public bids involving major
Brazilian and international insurance companies that operate in Brazil. As of December 31, 2019, we had paid a total aggregate amount of R$5.9 million in
premiums. In addition, we paid R$1.5 million for a D&O insurance policy, covering R$5.2 billion in assets, third-party liabilities and D&O insurance. We do
not have insurance coverage for business interruption risk because we do not believe that the high premiums for such insurance are justified by the low risk of
major interruption of our activities. In addition, we do not have insurance coverage for liabilities arising from water contamination or other problems involving
our water supply to customers and for environmental related liabilities and damages. We believe that we maintain insurance at levels customary in Brazil for
our type of business.
Intellectual Property
Trademarks
We have secured registration of our logo and composite trademark (“Sabesp”) at the Brazilian Institute of Industrial Property (Instituto Nacional da
Propriedade Industrial), 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 Doméstico Sabesp”, “PEA – Programa de Educação Ambiental – Sabesp”, “Sabesp Abraço Verde”, “Água de Reúso Sabesp”, “Eu Sou
Guardião das Águas Sabesp Eu Não Desperdiço”, “Calculadora de Sonhos”, “Parque Sabesp Mooca”, “Parque Sabesp Butantã”, “Parque Sabesp Cangaíba”,
“Programa Água Legal Sabesp”, “Signos – Sistema de Informação Geográfica no Saneamento Sabesp”, “Sistema de Suporte a Decisões Sabesp”, “Fertilizante
Sabesfértil Sabesp”, “Pitch Sabesp”, “Novos Negócios Sabesp”, “Centrais de Geração, Hidrelétrica Sabesp”, “Biogás Sabesp”, “Energia Fotovoltaica Sabesp”,
“Energia Eólica Sabesp”, “Resíduos Sólidos Urbanos Sabesp”, “Fertilizantes Sabesp”, “Tocha de Plasma Sabesp”, “Serviços Técnicos Sabesp”, “Afinidades
Sabesp”, “Fibra Ótica nas Redes Sabesp”, “Geosabesp Sabesp”, “Waste To Energy Sabesp”, “Redução de Perdas Sabesp”, “Serviços Imobiliários Sabesp” and
“Clubinho Sabesp”, which is a tool for environmental education directed to children through our website, and of its characters: “Super H2O”, “Gota
Borralheira”, “Gotucho”, “Ratantan”, “Dr. Gastão”, “Cauã”, “Denis”, “Gabi”, “Iara”, “Sayuri” and “Cadu”.
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Patents
We have a patent granted by the INPI for a device for the removal of supernatants during the sewage treatment process.
We have also filed ten patent applications for the following additional devices or inventions, currently awaiting the INPI’s decisions, some of which have
been jointly filed with certain Brazilian universities as a result of our cooperation agreements with these institutions:
• a biofilter odor control unit;
• rotary devices used to clean water reservoirs transported by trucks with high-pressure hydrojetting systems;
• a digital leakage detection system, jointly filed with the University of São Paulo - USP;
• a chemical composition sensor, its fabrication process and use to measure pH in microfluid systems, jointly filed with the University of São Paulo -
USP;
• a bubble removal system, autonomous microlaboratory and use of autonomous microlaboratory to monitor water quality, jointly filed with the
University of São Paulo - USP;
• a box for installation of water meters; and
• water leakage detection equipment (consisting of four requests), jointly filed with FAPESP and Universidade Estadual Paulista Júlio De Mesquita Filho
– UNESP.
For more information on our cooperation agreements with Brazilian universities and FAPESP, see “Item 5. Operating and Financial Review Prospects—
C. Research and Development, Patents and Licenses, etc.—Research and innovation.”
Software
We have adopted an internal policy that provides for an active and effective audit and prevention of unauthorized software. We have acquired the software
licenses for all our workstations.
We have also developed certain computer programs for management and control of water and sewage treatment facilities, as well as for third-party services
management, called “AQUALOG” (Control Water Treatment Plants), “SGL” (Bid Management System), “SCORPION” (Software to Operational Control),
“Electronic Price Quotation,” “PREGÃO SABESP ONLINE,” “SISDOC” (Document Control System), “system for analyzing the metrological behavior of
water meters,” “MPLT” (Standardized Model of Technical Report), “SGH” (Hydrometry Management System), “SIA” (Audit Information System), “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.”
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, FAPESP and the Federal University of São Paulo – UNIFESP;
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• “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.projetotiete.com.br;
• www.revistadae.com.br; and
• www.sustentabilidadesabesp.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.
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 annual inventories on emissions, raising
environmental awareness and encouraging the reduction of greenhouse gas emissionsin our operations;
• continuation of the actions set out in our corporate programs for 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: raise awareness on the intrinsic value of water; protect the environment; preserve streams; improve the
quality of the environment; raise awareness on sanitation activities; raise awareness on the conscious use of water; and direct capacitation and production
of guiding material, which involve activities with civil society groups, education centers, municipal governments and non-governmental organizations;
• Management of our institutional representation in the State and National Systems of Water Resources, including training of company representatives
to participate in: (i) the creation of criteria for water usage charges, (ii) preparation and review of river basin plans (Planos de Bacias), (iii) review of
water bodies’ classifications, and (iv) analysis of legislations regarding the protection of water sources;
• the SABESP 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 390 treatment plants, 35 of which are ISO 14001 certified. We expect to implement the EMS in all stations by 2024;
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• Development of the Corporate Program for Sustainable WWTPs, which aims to disseminate the culture of sustainability in the Company and the
application of technologies and practices to transform the by-products generated in sewage treatment plants, specifically, biogas, sludge and effluent,
in sustainable resources for beneficial use, with added value for the market, considering their energy use; and
• Implementation of the regularization and acceleration of the terms of commitment for environmental recovery corporate program for the environmental
licensing of new companies, which includes obligations of forest restoration with environmental compensation purposes, when necessary. This program
includes the planting and maintenance of 1 million seedlings of local and native species in the period of ten years, in order to deal with current
obligations, as well as to new terms of commitment for environmental recovery related to the implementation of new projects. The action is part of the
Springs Program (Programa Nascentes) created by the Government of the State of São Paulo and prioritizes the restoration of water spring protection
areas. Currently 625 thousand seedlings have been planted and are being maintained.
In addition to corporate environmental management initiatives, we have several projects and initiatives underway to benefit the environment by engaging
the population at large.
We are also signatory of United Nations Global Compact and supports the 17 United Nations Sustainable Development Goals, which aims to stimulate
actions in areas of crucial importance to humanity, the planet, countries and the companies.
Climate Change Regulations: Reduction of Greenhouse Gases (GHG) Emissions
We are required to comply with laws and regulations related to climate change, including international agreements and treaties to which Brazil is 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 raising awareness on the topic, preparing annual inventories of greenhouse gas emissions
and establishing and carrying out actions to reduce greenhouse gas emissions.
In 2019, we concluded the corporate inventory of greenhouse gases for 2018, thus totaling 12 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 90,4% of total greenhouse gas release. Electric energy represents approximately 8.1% and other activities represent approximately
1.5%.
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 our operations.
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.
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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 Program 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:
• 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 rules Brazilian government-owned and mixed capital
companies like our company 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:
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• rational utilization of water resources, ensuring that their primary use is to supply water to the population;
• optimizing the economic and social benefits resulting from the use of water resources;
• protection of water resources against actions which could compromise current and future use;
• defense against critical hydrological events which could cause risk to the health and safety of the population or economic and social losses;
• development of hydro-transportation for economic benefit;
• development of permanent programs of conservation and protection of underground water against pollution and excessive exploitation; and
• prevention of soil erosion in urban and rural areas, with a view to protecting against physical pollution and silting of water resources.
Among other instruments established by the State Water Policy, Law No. 7,663 of December 30, 1991, the competent public authority grants for the right
to use water for the implementation of any enterprise that demands the use of surface or underground water resources (for water collection and release of
effluents), as well as for the execution of services that alter the regime or quality of such water resources. In the case of rivers under the federal government’s
domain (rivers crossing more than one state), ANA is the public authority which grants the authorization. With respect to the rivers under a state’s domain,
the applicable state authority has jurisdiction to grant the right of use. In the state of São Paulo, DAEE is the public authority responsible for granting such
authorizations.
State Law No. 12,183/2005, which was enacted on December 29, 2005, established the basis for charging for the use of the water resources under the
domain of the State of São Paulo. To apply such charging, the law provides for, among other provisions, the participation of the River Basins Committees, the
formulation of criteria by such committees, the creation of basin agencies and the organization of a registered list of water resource users. The basin committee’s
proposals regarding the criteria to calculate the amounts to be charged at each basin must be approved by the State Water Resource Council and formalized by
a decree issued by the State Governor.
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
2019, we paid approximately R$89.2 million for the use of water resources.
Charging for the use of water from rivers of federal domain began in 2003 in the Paraíba do Sul basin, and charging for the use of water from rivers of
state domain began in 2007 in the Paraíba do Sul, Piracicaba, Capivari and Jundiaí basins. Subsequently, charges were implemented for the use of water from
the Sorocaba 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 2020, since the decrees were approved in 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).
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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. 8.468/1976 and its
amendments.
The control and environmental planning instruments are defined by several legal instruments, such as State Law No. 997/1976, regulated by Decree No.
8,468/1976 and its amendments, which regulates environmental pollution control and establishes the standards for discharge of effluents at state level;
CONAMA Resolution No. 05/1988, which requires licensing of sanitation projects that cause significant alterations to the environment; Supplementary Law
No. 140/2011 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 Law No. 9,509/1977, regulated by State Decree
No. 47,400/2002, which outlines the state environmental policy; CONAMA Resolution No. 357/2005, amended by CONAMA Resolution No. 430/2011, which
establishes the standards for discharge of effluents; and DAAE Ordinance No. 1,630/2017 and ANA Resolution No. 1,941/2017, which regulate the concession
of grants for the right to use water and interfere in water resources on the State and federal level, respectively.
The licensing process, usually, is composed of three stages, including the following licenses which can be renewed:
• preliminary license – granted in the planning stage, approving the location and concept and attesting to the project’s environmental feasibility;
• installation license – authorizing the beginning of works for the installation of the project, subject to compliance with approved plans, programs and
projects, including environmental control measures and other necessary technical requirements; and
• operation license – authorizing the operation of a unit or activity, subject to compliance with the technical requirements contained in the installation
license.
Projects with significant environmental impact are subject to specific studies prepared by multidisciplinary teams that present a series of recommendations
focused on minimizing the environmental impact. These studies are then submitted for analysis and approval by the government authorities.
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 effect in the majority of river basins. See “—Environmental Matters—Water Usage.”
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Lending Limits of Brazilian Financial Institutions
CMN Resolution No. 4,589/17 dated as of June 29, 2017, which replaced CMN Resolution No. 2,827/2001 dated as of March 30, 2001, as amended,
limits the amount that Brazilian financial institutions may lend to public sector companies, such as us. Financing of projects which are put up for international
bid and any financing in reais provided to the Brazilian counterpart of such international bids are excluded from these limits.
Scope of Business
State Law No. 12,292/2006, dated as of March 2, 2006, and amended State Law No. 119/1973, dated as of June 29, 1973, which created our Company,
authorizes us to provide water and sewage services outside the state of São Paulo (in other states of Brazil and other countries). This law also authorizes us to
own interests in other public or private-public companies and Brazilian or international consortia. In addition, this law permits us to incorporate subsidiaries
and enter into a partnership with or acquire interests in a private company with a corporate purpose related to the sanitation business.
In connection with the scope of our services, State Suplementary Law No 1.025/2007 amended State Law No. 119/1973 and expanded the range of services
that we can render, with the inclusion of urban rainwater drainage and management, urban cleaning and solid waste management, as well as power generation,
storage, conservation and sales activities, for our own or third-party use.
C. Organizational Structure
Not applicable.
D. Property, Plant, Equipment, Intangible Assets and Contract Assets
Our principal property, plant and equipment comprise administrative facilities which are stated at historical costs less depreciation. The reservoirs, water
treatment facilities, water distribution networks consisting of water pipes, water transmission lines, water connections and water meters, sewage treatment
facilities, and sewage collection networks consisting of sewer lines and sewage connections are recorded as contract assets and intangible assets (concession
assets). As of December 31, 2019, we operated through 81,324 kilometers of water pipes and water transmission lines and 55,983 kilometers of sewer lines. As
of the same date, we operated 253 water treatment facilities and 569 sewage treatment facilities (including eight ocean outfalls), as well as 16 water quality
control laboratories.
As of December 31, 2019, the total net book value of our property, plant and equipment, intangible assets and contract assets (including concession assets)
and contract assets was R$40,257.6 million.
All of our material properties are located in the state of São Paulo.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our audited
financial statements included elsewhere in this annual report. The financial statements included elsewhere in this annual report have been prepared in
accordance with IFRS as issued by the IASB. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results
may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in
“Risk Factors.”
In the following discussion, references to increases or decreases in any period are made by comparison with the corresponding prior period, except as the
context otherwise indicates.
A. Operating and Financial Review and Prospects
Overview
As of December 31, 2019, 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 372 municipalities, or 58% of all municipalities in the state. We also provided water services on a wholesale basis to three
municipalities located in the São Paulo metropolitan region in which we did not operate water distribution systems. In December 2018 and July 2019, we
entered into agreements with the municipalities of Guarulhos and Santo André, respectively, and began operations in these municipalities for the direct supply
of water and sewage services in January 2019 and August 2019, respectively.
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The São Paulo metropolitan region, which includes the city of São Paulo, is our most important service region. With a total population of approximately
21.1 million, the São Paulo metropolitan region accounted for 73.4%, 72.2% and 70.7% of our operating revenue in 2019, 2018 and 2017 (excluding revenues
relating to the construction of concession infrastructure), respectively. As of December 31, 2019, 65.4% 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 the previous 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. 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, since the water crisis had a strong impact on the consumer profile, which will probably not return to its former state
before the crisis. This change in consumption practice as a result of the 2014-2015 water crisis has had a continued effect on our results of operations since the
2014-2015 crisis.
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:
Increase in average tariff(1)
Inflation – IPC – FIPE
Inflation – IPCA
Inflation – IGP-M
2019
4.72%
4.40%
4.31%
7.30%
Year ended December 31,
2018
3.51%
3.02%
3.75%
7.54%
2017
7.89%
2.27%
2.95%
(0.52)%
(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.
On April 9, 2020, ARSESP published a tariff readjustment of 2.4924%. Due to the approval of the state of public calamity resulting from the COVID-19
pandemic, ARSESP postponed this readjustment by 90 days. See “Item 4.B. Business Overview—Tariffs.”
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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 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$374.7 billion in currency reserves. The average unemployment rate in Brazil in 2018 was 12.3%.
In 2019, Brazilian GDP increased 1.1% in comparison with 2018. Brazil’s trade surplus in 2019 was US$ 46.6 billion and at year-end the country had
US$ 356.9 billion in currency reserves. The average unemployment rate in Brazil in 2019 was 11.9%.
The Brazilian Government had estimated a GDP growth of 2.1% for 2020. However, due to the COVID-19 pandemic, the Brazilian Government has
already revised its estimate of GDP growth to 0.02%. For more information, see “Item 3.D Key Information—Risk Factors—Risks Relating to Our Business—
Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the recent outbreak of
COVID-19.”
Interest Rates
As a political monetary instrument of the federal government, the SELIC rate influences the behavior of other interest rates in the country, including the
rates related indebtedness denominated in local currency. The SELIC rate has historically been high. However, a series of rate reductions in 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% and in 2019 the SELIC
rate decreased to 4.40%. In response to the COVID-19 outbreak, the COPOM further reduced the SELIC target rate to 3.75%, where it remains as of the date
of this annual report.
We have not contracted any derivative financial instruments or any hedging instruments to mitigate interest rate fluctuations.
Inflation
Inflation affects our financial performance by increasing our costs of services rendered and operating expenses. Part of our real-denominated debt is
directly indexed to take into account the effects of inflation. Additionally, we are exposed to the mismatch between the inflation adjustment indices of our
loans and financing and those of our receivables. Water supply and sewage service tariffs do not necessarily follow the increases in inflation adjustment and
interest rates affecting our debt. We cannot assure you that our tariffs will be increased, in future periods, to offset, in full or in part, the effects of inflation.
Inflation adjustments derive from collections from or payment to third parties, as contractually required by law or court decision, and are recognized on
an accrual basis. Inflation adjustments included in these agreements and decisions are not considered embedded derivatives, since they are deemed as inflation
adjustments for us. See Notes 3.19, 5.1 and 29 of the financial statements for the impacts of inflation adjustments on our financial performance and debt.
Currency Exchange Rates
We had total foreign currency-denominated indebtedness of R$6,358.8 million as of December 31, 2019, of which R$1,881.9 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 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. In 2019, the 4.0% depreciation of the real against the dollar and the 5.3% depreciation of the real against the Yen led to a
foreign exchange loss of R$234.0 million. However, since most of our debt denominated in foreign currencies is long-term debt with a long amortization
schedule, a devaluation of the real would principally impact cash flows regarding the current portion of our long-term debt.
We manage our indebtedness portfolio closely to decrease the cost of servicing our indebtedness as a whole and our exposure to exchange rate
fluctuations. We do not have any exposure to derivatives tied to foreign currencies.
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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.
2019
4.02%
4.0307
4.1096
Year ended December 31,
2018
2017
(in reais, except percentages)
17.13%
3,8748
3.6558
1.50%
3.3080
3.1925
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.
During the years ended December 31, 2019, 2018 and 2017 we had no forward exchange transactions.
Year ended December 31,
2019
2018
2017
5.33%
0.0371
0.0377
(in reais, except percentages)
5.38%
19.97%
0.0294
0.0353
0.0291
0.0331
For further information on exchange rates, see “Item 3.D. Risk Factors—Risks Relating to Brazil—Exchange rate instability may adversely affect us, our
foreign currency denominated debt and the market price of our common shares or ADSs and our ability to service our foreign currency denominated obligations”
and “Item 5.B. Liquidity and Capital Resources—Indebtedness Financing—Financial Covenants.”
Effects of Extreme Weather Events
The southeastern region of Brazil, particularly the southern region of the state of Minas Gerais, the PCJ River Basin (from which we extract the water
used in the Cantareira System), and the northern area of the São Paulo metropolitan region, experienced below average rainfall from late 2012 throughout 2014
and most of 2015. 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, 2019, the reservoirs in the São Paulo metropolitan region, where our largest market is located, contained 1.1 billion m3 of water
storage for treatment, compared to 943.3 million m3 available for treatment as of December 31, 2018. The measurements for these years do not include the
technical reserve of 287.5 million m³. In December 2019, this system served 7 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. 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, since the water crisis had a strong impact on the consumer profile, which will probably not return to its former state
before the crisis. This change in consumption practice as a result of the 2014-2015 water crisis has had a continued effect on our results of operations since the
2014-2015 crisis. For more information, see “Item 3.D. Risk Factors—Risks Relating to Our Business— Droughts, such as the 2014 – 2015 water crisis, can
have a material impact on our business and on consumption habits and, accordingly, may have a material adverse impact on our business, financial condition
or results of operations” and “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
trade receivables, in accordance with the accounting policy stated in Note 3.4 to our financial statements as of December 31, 2019 and 2018 and for the years
ended December 31, 2019, 2018 and 2017. Bad debt expense, net of recoveries, is included in selling expenses, and was R$128.1 million, R$166.7 million
and R$82.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The methodology for determining the allowance for doubtful accounts requires significant estimates, considering a number of factors, including historical
collection experience, current economic trends, expected future losses, the aging of the trade receivables portfolio, recoveries of previously written off
receivables and other factors. Actual results could differ from those estimates.
Intangible Assets Arising from Concession and Program Contracts
As of December 31, 2019, we had intangible assets of R$32,325.4 million and contract assets of R$7,617.7 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 19
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, 2019, we were party to judicial and administrative proceedings, relating to civil, environmental and tax matters, amounting to
R$1,035.8 million (after deducting court escrow deposits in the amount of R$42.6 million) with respect to which we recognized provisions based on the criteria
described above, as shown in Note 3.14 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$44,035.0 million, of which we believe R$34,601.5 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 4.84% in 2018 to 3.36% in 2019
under Plan G0 and from 4.91% in 2018 to 3.37% in 2019 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 3.18 (a) and 20 (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 20 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, 2019 and 2018, we have recognized R$434.0 million and R$261.2 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 18 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. 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.
77
As of December 31, 2019 and 2018, the amounts not recognized related to pension benefits paid by us on behalf of the State totaled R$1,195.3 million
and R$1,107.1 million respectively. As a result, we also recognized the obligation related to pension benefits, maintained with the beneficiaries and pensioners
of Plan G0. As of December 31, 2019 and 2018, the pension benefit obligations of Plan G0 totaled R$3,046.3 million and R$2,606.1 million, respectively. For
detailed information on the pension benefit obligations refer to Note 20 to our financial statements included in this annual report.
Accounts Receivable from the State for Water and Sewage Services Rendered
Certain of these accounts receivable have been overdue for a long period. We have entered into agreements with the State with respect to these accounts
receivable. For 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 region from the Guarapiranga and Billings reservoirs. EMAE, a company that is also controlled
by the State of São Paulo, has a concession to produce hydroelectric energy using water from the same reservoirs. EMAE commenced various lawsuits against
us in the past seeking compensation for the water we withdraw from these reservoirs. Those lawsuits have now been settled, by way of an agreement between
EMAE and our company.
The settlement agreement requires us to make certain installment payments to EMAE in settlement of the claim for compensation for our capture and use
of the water, as well as apportionment of the maintenance, operation and monitoring costs for the reservoirs. 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:
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
17,983.7
(10,137.7)
7,846.0
(803.4)
(128.1)
(1,187.9)
(15.0)
5,711.6
(1,033.7)
4,677.9
(1,310.4)
3,367.5
2019
100.0%
(56.4)%
43.6%
(4.5)%
(0.7)%
(6.6)%
(0.1)%
31.8%
(5.7)%
26.0%
(7.3)%
18.7%
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
Year ended December 31,
2018
2017
(in millions of reais, except percentages)
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)
0.1
3,961.7
(458.1)
3,503.6
(984.3)
2,519.3
100.0%
(60.1)%
39.9%
(5.3)%
(0.6)%
(7.5)%
0.0%
27.1%
(3.1)%
24.0%
(6.7)%
17.2%
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Net operating revenue
Net operating revenue increased by R$1,898.6 million, or 11.8%, to R$17,983.7 million in 2019 from R$16,085.1 million in 2018. As of December 31,
2019, net operating revenue, excluding construction revenue, increased by R$1,754.7 million or 13.2%, to R$15,037.1 million in 2019 from R$13,282.4 million
in 2018. Our construction revenue was R$2,946.6 million in 2019 and R$2,802.7 million in 2018. The main factors that led to the increase were:
• tariff repositioning index of 3.5% since June 2018;
• tariff adjustment index of 4.7 % since May 2019;
• increase of 2.7% in our total billed volume (2.4% in water and 3.1% in sewage); and
78
• formalization of the agreement with the municipality of Santo André in 2019, representing an increase of R$1,357.3 million in operating revenue.
These increases were partially off-set by a R$533.7 million decrease in revenues as result of the agreement signed with the municipality of Guarulhos in
2018 which had the effect of increasing revenues in 2018 by approximately R$900 million without having the corresponding effect in 2019.
Cost of services
Our cost of services increased by R$1,051.2 million, or 11.6%, to R$10,137.7 million in 2019 from R$9,086.5 million in 2018. As a percentage of net
operating revenue, cost of services decreased to 56.4% in 2019 from 56.5% in 2018.
The increase in cost of services was principally due to the following factors:
• an increase of R$383.3 million in depreciation and amortization, due to the conclusion of the construction of intangible concession assets;
• an increase of R$254.4 million in the cost of services, due to several factors, mainly: (i) an increase of R$62.1 million in costs for the maintenance of
water and sewage networks and connections; (ii) R$57.3 million in expenses with employees assigned to the municipality of Guarulhos; (iii) R$23.9
million in labor expenses, related to the start of operations in the municipality of Santo André; (iv) R$17.9 million costs in relation to the paving and
replacement of sidewalks; and (v) R$17.9 million in costs related to maintenance of water and sewage systems;
• an increase of R$183.3 million in the cost of electricity, mainly due to: (i) an average decrease of 3.2% in free market tariffs, with a 5.9% decrease in
consumption; (ii) an average increase of 11.1% in regulated market tariffs, with a 10.3% increase in consumption. The increase in consumption in 2019
was largely driven by the start of operations at the Jaguari-Atibainha Interconnection and the São Lourenço Production System, as well as the start of
operations in the municipality of Guarulhos;
• an increase in construction revenue by R$141.7 million mainly due to an increase in investments in assets in 2019; and
• an increase in treatment materials of R$45.2 million, mainly due to higher use of alkaliners and coagulants in water treatment;
Gross Profit
As a result of the factors discussed above, gross profit for the year ended December 31, 2019 increased by R$847.4 million, or 12.1 %, to R$7,846.0
million in 2019 from R$6,998.6 million in 2018. As a percentage of net operating revenue, our gross profit margin increased to 43.6% in 2019 from 43.5% in
2018.
Selling Expenses
Selling expenses increased by R$109.9 million, or 15.8%, to R$803.4 million in 2019 from R$693.5 million in 2018. As a percentage of net operating
revenue, selling expenses increased to 4.5% in 2019 from 4.3% in 2018. The increase in selling expenses was primarily due to:
• an increase of R$86.7 million in expenses with services, mainly due to an increase: (i) in expenses related to the reading of hydrometers and the delivery
of bills, in the amount of R$32.5 million; (ii) of R$25.7 million in customer service expenses; and (iii) in expenses for the hiring of credit recovery
services in the amount of R$24.3 million; and
• an increase of R$20.3 million in general expenses, due to an increase in expenses related to the collection of bills from certain banks.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts decreased by R$38.6 million, or 23.2%, to R$128.1 million from R$166.7 million, mainly due to the higher recovery
of doubtful accounts as a result of the agreements signed in 2019, net of the defaults recorded in the period.
Administrative Income (Expenses)
Administrative expenses increased by R$191.0 million, or 19.2% to R$1,187,9 million in 2019 from R$996.9 million in 2018, mainly due to (i) higher
provisions for lawsuits in 2019, in the amount of R$88.8 million; and (ii) expenses related to the conclusion of lawsuits, in the amount of R$85.4 million,
resulting from the signing of agreements with the municipalities of São Bernardo do Campo and Guarujá, in the amounts of R$39.0 million and R$46.4 million,
respectively.
79
Other Operating Income (Expenses), Net and Equity in Results of Investments in Affiliates
Other operating expense, net were R$15.0 million in 2019 compared with R$35.1 million operating income, net in 2018.
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 expenses increased by R$50.1 million, mainly due to:
• a decrease of R$20.1 million in other operating revenues, mainly due to: (i) the non-recurring revenue from property expropriation in 2018, in the
amount of R$8.1 million; and (ii) higher receipt of funds from the River Basin Depollution Program in 2018, in the amount of R$6.2 million; and
• an increase in the write-off of obsolete items in 2019, totaling R$15.6 million.
Financial Income (Expenses), Net
Financial income (expenses), net consists primarily of interest on our indebtedness and foreign exchange losses (or gains) in respect of our indebtedness,
offset partially by interest income on cash and cash equivalents and inflation based indexation accruals, mainly relating to agreements entered into with certain
customers to settle overdue trade receivables.
Financial income (expenses), net decreased by R$230.6 million to a financial expense, net of R$1,033.7 million in 2019 from a financial expense, net of
R$1,264.3 million in 2018. As a percentage of net operating revenues, financial expense amounted to 5.7% in 2019 compared with a financial expense of 7.9%
in 2018. This variation was due to:
• a decrease of R$681.9 million in exchange rate variations on loans and financings, as a result of the lower appreciation of the U.S. dollar and Japanese
Yen against the Realin 2019 (4.0% and 5.3%, respectively), when compared to the amounts recorded in 2018 (17.1% and 20.0%, respectively);
• an increase of R$282.7 million in other financial expenses, mainly due to: (i) a R$128.3 million increase in interest recognition in 2019, as a result of
the definitive start of the São Lourenço Production System, in July 2018; and (ii) higher recognition of interest on lawsuits, in the amount of R$127.9
million; and
• an increase of R$111.2 million in other monetary variations, as a result of: (i) monetary variation on the liabilities of the São Lourenço Production
System, in the amount of R$53.1 million; and (ii) higher monetary variation on lawsuits, in the amount of R$48.8 million.
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$765.6 million, to R$4,677.9 million in 2019
from R$3,912.3 million in 2018. As a percentage of net operating revenue, our profit before income tax and social contribution increased to 26.0% in 2019
compared to 24.3% in 2018.
Income Tax and Social Contribution
Income tax and social contribution expense increased by R$233.2 million to R$1,310.4 million in 2019 from R$1,077.2 million in 2018. This increase
was mainly due to the agreement with the municipality of Santo André and the reduction in expenses from exchange variations.
Profit for the year
As a result of the factors discussed above, our profit for the year increased to R$3,367.5 million in 2019 from R$2,835.1 million in 2018. As a percentage
of net operating revenue, our profit for the year increased to 18.7% in 2019 from 17.6% in 2018.
80
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 variations were
principally due to:
• an increase of 7.9% in tariffs since November 2017 (tariff repositioning);
• an increase of 3.5% in tariffs since June 2018 (tariff repositioning);
• an 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, representing an increase of R$800.0 million in operating revenue.
Construction revenue decreased by R$348.20 million, or 11.1%, to R$2,802.7 million in 2018 from R$3,150.9 million in 2017. 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 the 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 the 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 the costs related to maintenance
of water and sewage systems; 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 entry into operation of 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 the 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 the higher amount used in the construction of assets
within the municipalities operated in 2017, mainly in 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, gross profit margin increased to 43.5% in 2018 from 39.9% in
2017.
81
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;
• 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.
Allowance for Doubtful Accounts
Increase of R$84.0 million, mainly due to the higher recovery of amounts in 2017, totaling R$77.8 million.
Administrative Expenses
Administrative expenses increased by R$102.1 million, to R$996.9 million in 2018 from R$1,099.0 million in 2017, mainly due to lower provisioning of
legal expenses.
Other Operating Income (Expenses), Net and Equity 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 increased by R$35.0 million, mainly influenced by the write-offs of obsolete goods in 2017, in the amount of R$15.1 million, and
increase in amounts received from the Hydrographic Basin Depollution Program, in the amount of R$11.2 million, due to the accomplishment of goals related
to 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 trade receivables.
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 to financial expenses of 3.1% in
2017. The variation was due to:
• an increase of R$819.5 million in exchange rate variations on loans and financings, due to a higher appreciation of the U.S. dollar and the Yen against
the real in 2018 (17.1% and 20.0%, respectively), compared to an appreciation in 2017 of 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.
82
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, partially off-set by higher electricity and service costs, as well as the increase in expenses for exchange rate
variations, due to the higher appreciation of the U.S. dollar and the Yen against the real in 2018 mentioned above.
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.
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, 2019, we had R$2,253.2 million in cash and cash equivalents. The outstanding current indebtedness
was R$2,859.8 million as of December 31, 2019, of which R$1,881.9 million was denominated in foreign currency. Long-term indebtedness was R$10,384.9
million as of December 31, 2019, of which R$4,476.9 million consisted of foreign currency-denominated obligations.
Our management expects that with the decrease in defaults as a result of us having entered into contract with the municipalities of Guarulhos and Santo
André, improved water security due to the works carried out, and the generation of operating cash and availability of credit lines for investments, we will have
sufficient funds to meet our commitments and not compromise our planned investments.
On March 22, 2020, the São Paulo State Government decreed a quarantine throughout the State, restricting activities in order to avoid the accelerated
spread of COVID-19. Accordingly, our revenues in the commercial and public segments may be negatively impacted as result of the reduction in activity. On
the other hand, consumption in the residential segment may increase as a result of these measures. The trend in the industrial segment is unclear, since there
are segments that will increase production and, therefore, increase their demand for water, while others will have to reduce it.
In order to finance the constant investment needs in our infrastructure, we use third party funds to complement our own resources. The impacts of COVID-
19 in attracting borrowings and financings is still uncertain, however, we believe that we currently have sufficient sources of funds to implement our short and
medium term strategy.
Cash Flows
Net Cash Generated from Operating Activities
Cash generated from operating activities is the single largest source of our liquidity and capital resources, and we expect that it will continue to be so in
the future. Our net cash generated from operating activities was R$4,197.2 million, RS3,842.9 million and R$3,301.9 million in 2019, 2018 and 2017,
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 2019 is principally due to the increase of 2.7% in our
total billed volume (2.4% in water and 3.1% in sewage). This increase was partially offset by the income tax and social contribution paid in 2019.
Net Cash Used in Investing Activities
Net cash used in investing activities was R$3,267.3 million, R$2,189.3 million and R$1,971.4 million in 2019, 2018 and 2017, 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 the amount of R$1,336.9 million related to agreement
with the municipality of Santo André, that did not impact our cash flow in 2019.
Net Cash Used in Financing Activities
Our net cash used in financing activities was R$1,705.9 million, R$907.5 million and R$933.6 million in 2019, 2018 and 2017, 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 and the definitive start
of the São Lourenço Production System, in July 2018, increasing the interest recognition in 2019.
83
Indebtedness Financing
Our total financial indebtedness increased by 0.7%, from R$13,152.8 million as of December 31, 2018 to R$13,244.7 million as of December 31, 2019.
In addition, during the same period, our total indebtedness denominated in foreign currency decreased by 4.7%, from R$6,669.4 million as of December 31,
2018 to R$6,358.8 million as of December 31, 2019.
As of December 31, 2019, we had R$10,384.9 million in long-term indebtedness outstanding (excluding the current indebtedness), of which
R$4,476.9 million consisted of foreign currency-denominated long-term debt. We had an outstanding current indebtedness of R$2,859.8 million as of
December 31, 2019. As of December 31, 2019, R$1,881.9 million of this current portion of long-term indebtedness was denominated in foreign currency. As
of December 31, 2019, 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, 2019, 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, 2019, 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$4,781.0 million (R$4,741.1 million of principal and R$39.9 million
related to interest and charges). See “—Indebtedness Financing—Financial Covenants—Local currency denominated indebtedness” and Note 16 to our
financial statements included in this annual report. The following table sets forth information on our indebtedness outstanding as of December 31, 2019:
Denominated in local currency:
10th issue of debentures
12th issue of debentures
14th issue of debentures
17th issue of debentures
18th issue of debentures
21st issue of debentures
22nd issue of debentures
23rd issue of debentures
24th issue of debentures
Caixa Econômica Federal
National Bank for Economic and Social
Development (BNDES) PAC
National Bank for Economic and Social
Development (BNDES) PAC II 9751
National Bank for Economic and Social
Development (BNDES) PAC II 9752
National Bank for Economic and Social
Development (BNDES) Onda Limpa
Current
Noncurrent
Total
Final Maturity
December 31, 2019
Interest Rates*
(in thousands of R$)
41,021
45,450
41,940
289,211
34,239
150,000
-
-
-
83,519
11,184
6,990
3,913
23,704
-
203,829
63,012
263,226
133,679
349,660
765,689
864,603
395,855
41,021
249,279
104,952
552,437
167,918
499,660
765,689
864,603
395,855
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 + 0.75% (1st series) & IPCA +
4.5% (2nd series) & IPCA + 4.75% (3rd
series)
TJLP + 1.92% (1st and 3rd series) &
IPCA + 8.25% (2nd series)
CDI + 0.60% (1st series) & CDI +
0.90% (2nd series)
CDI + 0.58% (1st series) & CDI + 0.90%
(2nd series) & IPCA + 6.00% (3rd series)
CDI + 0.63% (1st series) & CDI + 0.49%
(2nd series)
IPCA + 3.20% (1st series) & IPCA +
3.37% (2nd series)
2020
2025
2022
2023
2024
2022
2025
2027
2029
1,341,660
1,425,179
2020/2039
TR + 5% to 9.5%
27,854
40,685
24,457
39,038
47,675
28,370
100,582
124,286
2023
2027
2027
2025
2.5% + TJLP
2.15% + TJLP
1.72% + TJLP
1.72% + TJLP
84
Denominated in local currency:
National Bank for Economic and Social
Development (BNDES) Tietê III
National Bank for Economic and Social
Development (BNDES) 2015
National Bank for Economic and Social
Development (BNDES) 2014
Leases
Leases (IFRS 16)
Other
Interest and others charges
Current
Noncurrent
Total
Final Maturity
52,874
31,712
4,659
27,314
51,088
1,665
77,460
383,191
460,646
25,411
432,357
23,365
8,207
-
436,065
492,358
30,070
459,671
74,453
9,872
77,460
2028
2035
2026
2035
2023
Total denominated in local currency
977,943
5,907,968
6,885,911
December 31, 2019
Interest Rates*
(in thousands of R$)
1.92% + TJLP
2.5% + TJLP
1.76% + TJLP
7.73% to 10.12% + IPC
6.01% to 9.84%
TJLP + 1.5% (FINEP) & 3.0%
(FEHIDRO)
Denominated in foreign currency:
Inter-American Development Bank
(IADB) US$572,241,000
(2018 - US$616,404,000)
International Bank for Reconstruction
and Development (IBRD)
US$88,871,000 (2018 –
US$91,286,000)
Eurobonds - US$350,000,000
(2017 – US$ 350,000,000)
JICA 15 - ¥ 11,524,300,000
(2018 - ¥ 13,829,160,000)
JICA 18 - ¥ 10,361,600,000
(2018- ¥ 11,397,760,000)
JICA 17 - ¥ 2,830,420,000
(2018- ¥ 1,826,957,000)
JICA 19 - ¥ 31,736,565,000
(2018 - ¥ 31,561,726,000)
IADB 1983AB – US$ 40,769,000 (2018
– US$ 58,462,000)
Interest and others charges
Total denominated in foreign
currency
Total loans and financing
170,051
2,121,438
2,291,489
2025 to 2035
3.31% to 3.42%
24,505
330,898
355,403
1,409,921
-
1,409,921
42,813
38,493
12,466
67,372
71,312
44,967
385,315
346,237
91,845
428,128
384,730
104,311
1,109,644
1,177,016
91,521
-
162,833
44,967
2034
2020
2029
2029
2035
2037
2023
2.85%
6.25%
1.8% & 2.5%
1.8% & 2.5%
1.2% & 0.01%
1.7% & 0.01%
LIBOR + 2.08% to 2.38%
1,881,900
2,859,843
4,476,898
10,384,866
6,358,798
13,244,709
* TR was 0.00% per month as of December 31, 2019; CDI stands for Interbank Deposit Rate (Certificado de Depósitos Interbancários), which was 4.40%
per annum as of December 31, 2019; IGP-M was 7. 30% per annum as of December 31, 2019; TJLP stands for Long-term Interest Rate (Taxa de Juros a
Longo Prazo), published quarterly by the Central Bank, which was 5.57% per annum as of December 31, 2019; and USD LIBOR was 1.91 as of December
31, 2019.
The following table shows the maturity profile of our debt, as of December 31, 2019, for the period indicated:
Loans and financing
2,859.8
1,140.9
1,204.6
995.3
1,295.8
5,748.3
13,244.7
2020
2021
2022
2023
2024
After 2025
Total
(in millions of reais)
Referring to all of our foreign currency-denominated indebtedness, the amount of R$4.219.6 million, net of transaction costs, as of December 31, 2019
was denominated in U.S. dollars and R$2.094.2 million was denominated in Japanese Yen. This indebtedness consisted principally of:
85
• R$2,291.5 million (US$572.2 million) in U.S. dollar denominated loans contracted with the Inter-American Development Bank, or the IADB,
composed of the following:
(i)
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
(ii) 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$355.4 million (US$88.9 million) in U.S. dollar denominated loans contracted with the IBRD which was entered into on October 28, 2009, amounting
to US$100.0 million, for the financing of the Water Source Program (Programa Mananciais), 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$162.8 million (US$40.8 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$1,409.9 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; and
• R$2,094.2 million (¥56,452.9 million) in Japanese Yen denominated loans contracted with the JICA, composed of the following: (i) ¥11.524.3 million
denominated loans contracted in August 2004 for the financing of the environmental recovery program for the Baixada Santista metropolitan region,
called the Clean Wave Program (Programa Onda Limpa). Under these loans, the payments of principal are made in semi-annual installments with
final maturity in August 2029. The principal amount accrues interest at a rate that varies from 1.8% to 2.5% per year, paid semiannually; (ii) ¥2.830.4
million in denominated loans contracted in October 2010 for the financing of the environmental improvement program in the basin of the Billings
dam. The loan matures in October 2035, with repayments of principal made in semiannual installments. The principal amount accrues interest at a
rate that varies from 0.01% to 1.2% per year, paid semiannually; (iii) ¥10.361.6 million denominated loans contracted in February 2011 to complement
the financing for the first stage of the Clean Wave Program (Programa Onda Limpa), with commercial conditions similar to the loan entered into in
August 2004. These funds were used for the provision of works and services in the Baixada Santista metropolitan region. The credit agreement expires
in 18 years with final maturity in August 2029. The principal amount accrues interest at a rate that varies from 1.8% to 2.5% per year, paid semiannually;
and (iv) ¥31.736.6 million denominated loan in February 2012 for the financing of the Program for Water Loss Reduction (Programa de Redução de
Perdas de Água). The loan matures in February 2037. Repayments of principal will be made in 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.
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$6,885.9 million as of December 31, 2019 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,
January 2013, October 2013, June 2014, June 2017, February 2018, May 2019 and July 2019, and financial leasing.
The following summarizes our principal borrowings from federal and State-owned banks:
• from 2003 to 2019, we entered into several financing agreements with Caixa Econômica Federal, pursuant to which repayments of principal are paid
in up to in 60, 180 or 240 months in monthly installments commencing 30 days following the applicable grace period, which varies from 10 to
48 months from the date of signature of the line of credit agreement. The final maturity is 2042. The principal amount accrues interest from 5.0% to
8.0%. The financing agreements are collateralized (i) by the pledge of collections of monthly billings of water supply and sewage services up to three
monthly installments until reaching the total amount of the debt, or (ii) by a monthly plan of billings corresponding to the minimum of three times the
monthly charge, depending on the terms of the relevant financing agreement. As of December 31, 2019, the outstanding debt was R$1,425.2 million;
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• 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, 2019, the outstanding debt was R$39.0 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, 2019, the outstanding debt was R$124.3 million;
• in 2011, we entered into financial leases in the total amount of R$49.6 million with certain contractors for the construction of infrastructure on land we
own. During the construction phase, we recognized a contract asset (as of December 31, 2018, with the adoption of IFRS 15 - Revenue from contract
with customer, since 1 January 2018, assets related to concessions under construction, registered under the scope of IFRIC 12 - Concession Contracts,
are classified as Contract Assets during the construction period and are transferred to Intangible Assets only after completion of the works. For more
information, see Notes 3.3 (b) and 13 to our 2019 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, 2019, the outstanding debt was R$459.6 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, 2019, the outstanding debt was R$76.1 million;
• in February 2013, we entered into a R$1.3 billion financing agreement with BNDES. Amortization of the principal amount is being made in up to 144
successive monthly installments with the final maturity in 2028. The principal amount accrues interest at the TJLP but is limited to 6.0% per year plus
a yearly 1.66%. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. This financing agreement is collateralized with
a portion of the revenues from the provision of water and sewage services. As of December 31, 2019, the outstanding debt was R$436.1 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. As of December 31, 2019, the outstanding
debt was R$30.1 million;
• in June 2015, we entered into a R$747.4 million financing agreement with BNDES. Amortization of the principal amount is being made in up to 204
successive monthly installments after the grace period of 36 months, with the final maturity in 2035. The principal amount accrues interest at the TJLP
but is limited to 6.0% per year plus a yearly 2.18%. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. This
financing agreement is collateralized with a portion of the revenues from the provision of water and sewage services. As of December 31, 2019, the
outstanding debt was R$492.3 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, 2019, the outstanding debt was R$9.9 million.
87
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, 2019, the outstanding debt of the tenth issuance of debentures is R$41.0 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, 2019, the outstanding debt of the fourteenth issuance of debentures is
R$104.9 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 2020. We have used the funds raised from the three issuances for investments primarily in the Program for Water Loss Reduction and on
improvements and reforms of the Rio Grande’s water treatment plant, including other projects for water supply and sewage collection systems in the São Paulo
Northern Coast, Paraíba Valley and Mantiqueira Regions. As of December 31, 2019, the outstanding debt of the eighteenth issuance of debentures is R$167.9
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, 2019, the outstanding debt of the twelfth issuance of debentures is R$249.3 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, 2019, the outstanding debt of
the seventeenth issuance of debentures is R$552.4 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 were used to strengthen our cash position and refinance financial commitments which mature in 2017. As of
December 31, 2019, the outstanding debt of the twenty-first issuance of debentures is R$499.7 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 were used to strengthen
our cash position and refinance outstanding financial commitments in 2018. As of December 31, 2019, the outstanding debt of the twenty-second issuance of
debentures is R$765.7 million.
In May 2019, we issued our twenty-third issuances of debentures divided into two series in the aggregate principal amount of R$866,755,000.00. The first
and second series will mature in May 2024 and 2027 respectively. The debentures of the first series (in the aggregate principal amount of R$491,755,000.00)
bear interest at a rate of CDI plus 0.49% per year, with semi-annual interest payments. The second series (in the aggregate principal amount R$375 million)
bears interest at a rate of CDI plus 0.63% per year, with semi-annual interest payments. The proceeds from this funding were used to strengthen our cash
position and refinance outstanding financial commitments in 2019. As of December 31, 2019, the outstanding debt of the twenty-third issuance of debentures
was R$864.6 million.
88
In July 2019, we issued our twenty-fourth issuances of debentures divided into two series in the aggregate principal amount of R$400 million. The first
and second series will mature in July 2026 and 2029 respectively. The debentures of the first series (in the aggregate principal amount of R$100 million) bear
interest at a rate of IPCA plus 3.20% per year, with annual interest payments. The second series (in the aggregate principal amount R$300 million) bears interest
at a rate of IPCA plus 3.37% per year, with annual interest payments. The proceeds from this funding are intended to support investment in infrastructure
projects in some municipalities in which our company render services. As of December 31, 2019, the outstanding debt of the twenty- fourth issuance of
debentures was R$395.9 million.
In April 2020, we carried out our twenty-fifth issuance of debentures of R$1.45 billion, with a maturity date of October 2021 and bearing interest at a rate
of CDI plus 3.30% per year. The proceeds of this issuance are intended to strengthen our cash position and refinance outstanding financial commitments in
2020.
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.
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$50.0 million or more (or the corresponding amount in other currencies)
shall imply this agreement’s early maturity. See Note 16 to our financial statements included in this annual report.
89
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, 2019 and 2018, 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$313.8 million as of December 31, 2019. The only financing agreement which is exempt from the renegotiated financing is contract No.
08.2.0169.1. See Note 16 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;
• 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.
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As of December 31, 2019, the amount that must pass through the blocked collateral account is R$255.3 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 16 to our financial statements
included in this annual report.
With respect to our outstanding debentures, the twelfth issuance requires us to maintain an Adjusted Current Ratio (current assets divided by current
liabilities, excluding from current liabilities the current portion of noncurrent debts incurred by us that is recorded in current liabilities) higher than 1.0:1.0 and
an EBITDA/Financial Expenses Ratio equal to or higher than 1.5:1.0. The twelfth debenture issuance has an early maturity clause, which is triggered if our
credit ratings are downgraded two levels below the “brAA-” Brazil National Scale rating assigned to our debentures by the credit rating agency S&P at the
time of their issuance. On July 11, 2018, our credit rating and the one assigned to the twelfth debenture issuance by S&P were both “brAAA.” This issuance
has a cross-default clause.
The tenth, fourteenth and eighteenth issuances follow the covenants included in the BNDES loans, as described above, and contain a cross-default clauses.
The seventeenth issuance requires us to maintain an adjusted EBITDA/paid financial expenses ratio equal to or higher than 1.5:1.0 and an adjusted total
debt/adjusted EBITDA ratio equal to or lower than 3.65:1.0. This issuance has a cross-default clause.
The table below shows the more restrictive covenants ratios and our financial covenants ratios as of December 31, 2019.
The twenty-first, twenty-second, twenty-third, twenty-fourth and twenty-fifth debenture issuances require us to maintain an adjusted EBITDA/paid
financial expenses ratio equal to or higher than 1.5:1.0 and an adjusted net debt/adjusted EBITDA ratio equal to or lower than 3.50:1.0. These issuances have
a cross-default clause.
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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, 2019
6.33
1.48
1.75
0.45
1.32
10.19
1.45
(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, 2019 and 2018, 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 2019, we recorded R$5.1 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$20.2 billion from 2020 through 2024. 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 29, 2019, 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$941.0 million, R$792.2 million and R$703.9 million in 2019, 2018 and 2017 and, respectively. As of the
date of this annual report, we do not intend to suspend the distribution of dividends during the ongoing COVID-19 pandemic. 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.
We set up a Corporate “Research, Technological Development and Innovation” Program, which allows us to differentiate the financial resources spent
specifically for this purpose within our budget structure. In 2019, we allocated R$17.4 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. In addition, in September 2019, based on programs already in place in the power and gas sectors, ARSESP created the Quadrennial Research and
Technological Development Program for Innovation in Basic Sanitation Services (the “PD&I Program”), establishing the application of the 0.05% revenue
required in Research and Technological Development projects. ARSESP also approved the Elaboration and Evaluation Manual of the PD&I Program. We are
required to file a portfolio of PD&I Program projects for analysis and prioritization by ARSESP. The Quadrennial Program will produce tariff effect in the
2020 annual adjustment. However, taking the scenario of reduced revenues in the short term resulting from the COVID-19 pandemic into account, ARSESP
published Resolution No. 991/2020 which suspended the implementation of the Four-year Research and Technological Development Program for Innovation
in Sanitation Services scheduled for May 2020. See “—Tariff Readjustment and Revisions.”
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In line with business planning, the structuring of RD&I actions is based on the concept of a circular economy and resource recovery, 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
water and sewage treatment.
The sequential implementation of integrated actions for liquid, solid and gaseous sewage treatment phases at the sewage treatment plant in Franca aims
to optimize processes and transform the site into a resource recovery plant. An additional project has also been implemented to transform biogas from the
sewage treatment process into biomethane, which has been used to supply our vehicle fleet in the same municipality. The biomethane project is the result of a
technical cooperation agreement with the Fraunhofer Institute in Germany. 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.
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) in the “Technological Innovations Plan of Sabesp for Sanitation” financed by the FINEP Inova Brasil program.
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.
In order to generate clean energy to improve the efficiency of sewage treatments we installed solar-powered aerators, increasing the removal of sewage
sludge. Test results indicate that this technology can be replicated and adapted elsewhere. 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 for the use of ceramic membranes for the ultrafiltration
of silicon carbide for the recovery of waste water from water treatment plants. Test results point to the feasibility in the use of this technology.
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.
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.
From our partnership with FAPESP financial resources are invested equally to subsidize and support the development of basic and applied research
projects under the Program for Support of Research in Partnership for Technological Innovation for research projects in academic or research institutions,
whose themes originated from the demands pointed out by the operational areas. This partnership has already resulted in 17 projects with different universities,
such as: University of São Paulo - USP, Technological Institute of Aeronautics - ITA, Federal University of São Paulo - UNIFESP, National Institute for Space
Research - INPE and São Paulo State University - UNESP. The partnership provides for a non-refundable financing of R$ 50 million, divided equally between
us and FAPESP. The first and second summons to select projects to finance led to the filing of seven patent and one software registration requests. In March
2020, we launched the third summon, to which we will finance projects up to a total of R$8 million and which we expect to conclude by November 2020.
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 and Coworking, among others.
Pitch Sabesp was a public competition launched in 2018, in which 27 challenges were proposed in five different areas of the sanitation sector, with a focus
on innovative solutions that could add competitive advantages to our products and services. Throughout 2019, technological application project sites were
mapped for the technical conditions necessary for a controlled environment. The conclusion of the technical and financial feasibility assessment for the solutions
is scheduled for 2020.
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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.
We also have a second agreement with FAPESP to focus on supporting the execution of scientific and/or technological research in micro, small and
medium enterprises in the State of São Paulo, through the Small Enterprises Innovation Program aimed at accelerating start-ups focused on the development
of innovative projects that solve challenges faced by us.
We publish the DAE Magazine, a quarterly engineering journal published by a specialized team of opinion makers that in 2019 totaled more than 220
issues since its first edition. This journal was indicated in the Qualis/CAPES system from the “B2” to “B1” category in July , 2019. 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;
• general economic, political, demographical, health and other conditions in Brazil and in other countries;
• 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,
or if the impact will be compensated by tariffs established by ARSESP;
• 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;
• 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 on our business caused by the approval and conversion of the Bill No. 4,162/2019 into law, which is currently under discussion;
• the impact of widespread health developments, such as COVID-19, and the governmental, regulatory, consumer and other responses thereto and its
effects on our operating revenues and financial condition as a result of, inter alia, a decrease in water consumption and an increase in defaults in certain
sectors and an increase in non-payment of water bills;
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• 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, financial
condition or results of operations.
E. Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31, 2019.
F. Tabular Disclosure of Contractual Obligations
Our debt obligations and other contractual obligations as of December 31, 2019 were as follows:
Less than 1 year
1-3 years
3-5 years
More than 5 years
Total
Loans and financing
Estimated interest payments(1)
Accounts payable to suppliers and contractors
Services payable
Program contract commitments
Purchase obligations(2)
Total
2,859.8
443.9
369.6
474.1
276.6
3,191.8
7,615.8
2,345.5
824.6
-
-
78.7
4,803.3
8,052.1
2,291.1
601.7
-
-
33.0
1,933.8
4,859.6
5,748.3
967.6
-
-
13.8
3,043.4
9,773.1
(in millions of reais)
13,244.7
2,837.8
369.6
474.1
402.1
12,972.3
30,300.6
(1) Estimated interest payments on loans and financing were determined considering the interest rates as of December 31, 2019. 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, 2019, see Note 16 to our financial statements
as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017, 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.”
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.
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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 Wilson Newton de Mello
Neto who joined our board of directors on October 24, 2019. The tenure of all the directors will end on May 14, 2020, when the members elected at our annual
shareholders’ meeting held on April 28, 2020 are expected to take office. 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
Wilson Newton de Mello Neto
Reinaldo Guerreiro
Francisco Vidal Luna
Luís Eduardo Alves de Assis(2)
Francisco Luiz Sibut Gomide
Lucas Navarro Prado
Ernesto Rubens Gelbcke
Age
63
72
48
67
73
63
74
39
76
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
October 24, 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 appointed by the minority shareholders.
Mario Engler Pinto Junior. Mr. Engler has been the Chairman of our board of directors since April 2018. Before that, he served as member of our board
of directors from 2006 to 2011 and as member of our audit committee from 2006 to 2009. He holds a PhD degree in Commercial Law from Getúlio Vargas
Foundation Law School (Fundação Getúlio Vargas – FGV) and is now a professor at the same institution. At FGV Law School, Mr. Engler is the coordinator
for the professional master’s program and conducts legal research regarding contractual and corporate arrangements in the public and private sector. He has
been a lawyer since 1979 and served for 30 years as public attorney for the State of São Paulo from 1984 to 2014. In the last years, he has been an arbitrator
and executive officer and director for private companies and State-owned enterprises.
Benedito Pinto Ferreira Braga Junior. Mr. Braga has been our Chief Executive Officer and a member of our board of directors since January 2019. He
has a degree in civil engineering from the School of Engineering of São Carlos of the 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, 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 from January 2015 to May 2018 and was
the Chairman of our Board of Directors from January 2015 to April 2018. He was a professor at the Polytechnic School of University of São Paulo from 1980
to 2019. 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 Honorary President of the World Water Council – WWC, of which he was the President from 2012 to 2018. Mr. Braga was
also the President of the Intergovernmental Council of UNESCO’s International Hydrological Program from 2008 to 2009, President of the International Water
Resources Association – IWRA, from 1998 to 2000, as well as, Director of the National Water Agency from 2001 to 2009.
Wilson Newton de Mello Neto. de Mello Neto has been a member of our board of directors since October 2019. He holds a bachelor’s degree in Law
from the Pontifical Catholic University of Sao Paulo (Pontifícia Universidade Católica de São Paulo - PUC/SP). He has been the CEO of Investe São Paulo
since April 2019 and a member of the Industrial Policy Council of the Brazilian National Confederation of Industry (Confederação Nacional da Indústria -
CNI) since March 2019. He was Vice-President of Corporate Affairs and General Secretary at Danone from May 2015 to March 2019; Director of Corporate
Affairs at JBS S.A. from September 2014 to May 2015; Vice-President of Corporate Affairs at BRF S.A. from June 2010 to August 2013; Legal and New
Business Director at Tishman Speyer Ltda. from March 2009 to May 2010; Vice-President of Corporate Affairs at Walmart Brasil Ltda. from March 2004 to
April 2007; and partner at Machado, Meyer, Sendacz e Opice Advogados from June 1992 to February 2004 and from May 2007 to February 2009. Mr. de
Mello Neto was also Vice-President of the Brazilian Supermarket Association (Associação Brasileira de Supermercados -ABRAS) from May 2004 to April
2007; member of the Executive Board of the Brazilian Association of Advertisers (Associação Brasileira de Anunciantes - ABA) from May 2015 to March
2019; and Chairman of the Board of Directors of the Brazilian Food Industry Association (Associação Brasileira da Indústria de Alimentos - ABIA) from
March 2018 to March 2019.
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Reinaldo Guerreiro. Mr. Guerreiro has been an independent member of our board of directors since January 2007. He holds a doctorate in Accounting
and Controllership, a Master’s degree in Accounting and Controllership and a Bachelor’s degree in Accounting Sciences, all of them from the Business,
Economics and Accounting School at the University of São Paulo (FEA - USP). As a professor of FEA-USP, he was Director and currently is the Deputy
Head of the Accounting Department. As a Brazilian National Council for Scientific and Technological Development (CNPq) researcher, he has authored books
in management accounting and has published various scientific articles in domestic and international magazines. Mr. Guerreiro was a member of our Audit
Committee from January 2007 to May 2017. He is currently President of Audit Committee of Petrobras Gás S.A. (Gaspetro). He is also a specialized consultant
in financial management and 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, Correios and for the São Paulo State 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. He was member of the Board of Directors of BNDES. In the public sector,
he has served as the Secretary of Planning for the state and city of São Paulo. He has also worked at the Treasury Department for the State of São Paulo and
the Federal Planning Bureau, among other roles. In the private sector, he was the Executive Chairman of Banco Inter American Express S.A. He is currently
a member of the Board of Directors and Chairman of the Audit Committee of Desenvolve SP, member of the Audit Committee of the Petrobrás Conglomerate,
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 Pontifical 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.
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.
We held our Annual General Meeting on April 28, 2020. During the meeting our shareholders elected (i) Mario Engler Pinto Junior, Benedito Pinto
Ferreira Braga Junior, Wilson Newton de Mello Neto and Claudia Polto da Cunha to be members of our Board of Directors; and (ii) Francisco Vidal
Luna, Reinaldo Guerreiro, Francisco Luiz Sibut Gomide, Lucas Navarro Prado and Eduardo de Freitas Teixeira and Walter Luis Bernardes Albertoni to be
independent members of our Board of Directors. Walter Luis Bernardes Albertoni is the member appointed by our minority shareholders. Their term of office
is expected to commence on May 14, 2020.
97
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
Alceu Segamarchi Junior
Age
72
44
62
67
64
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
June 13, 2019
June 13, 2019
June 13, 2019
June 13, 2019
June 13, 2019
February 20, 2020
Benedito Pinto Ferreira Braga Junior. See above, “—Board of Directors.”
Adriano Candido Stringhini. Mr. Stringhini has been our Corporate Management Officer since January 2019. He is also the current Governor (Board of
Governors) of the World Water Council for the 2019-2021 triennium, he is a member of the Board of Directors of IMESP - Imprensa Oficial do Estado de São
Paulo and was elected as Vice-Chairman of the Board of Aberje – Associação Brasileira de Comunicação Empresarial in 2020. 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 our Head of Communication from April 2009 to January 2019 and Head of Legal Affairs from 2007 to 2009. 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 to 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 - 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 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 Pontifical University Catholic of São Paulo – PUCSP, from 1997 to 2001.
98
Alceu Segamarchi Junior. Mr. Segamarchi has been our Technology, Enterprises and Environment Officer since February 2020. He holds a degree in
Civil Engineering from the Pontifical Catholic University of Campinas (Pontifícia Universidade Católica de Campinas – PUC Campinas) a postgraduate
degree in Public Administration from the Getúlio Vargas Foundation (Fundação Getúlio Vargas – FGV), and a diploma from the Privatization and Infrastructure
Program from Harvard University. He worked at the Department of Water and Electricity of the State of São Paulo (Departamento de Águas e Energia Elétrica
do Estado de São Paulo - DAEE) Superintendent, from February 2019 to February 2020 and from March 2011 to January 2015. Mr. Segamarchi was also
Nacional Secretary of Environmental Sanitation of the Ministry of Cities (Saneamento Ambiental do Ministério das Cidades) from May 2016 to April 2017,
and worked in the municipality of Sorocaba from April 2017 to December 2018 as Secretary of Sanitation. He also held several leadership positions at
Companhia Paulista de Trens Metropolitanos - CPTM from 1996 to 2009 and worked at Ferrovia Paulista S.A. - Fepasa until 1996, where he began his career
in 1980.
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 2019, 2018 and 2017, 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$6.7 million, R$ 4.6 million and R$4.4 million, respectively. At our annual
shareholders’ meeting held on April 29, 2019, our shareholders approved R$4.8 million in aggregate compensation payable to members of our board of
directors, members of our fiscal committee and our executive officers in 2019. On June 3, 2019, the annual total compensation of the management and members
of the audit committee and fiscal council was adjusted to R$6,920 thousand in accordance with our Compensation Policy, amended by our Board of Directors
on May 3, 2019. The aggregate compensation was adjusted again on November 26, 2019 to R$6,926 million, due to the election of a new member of the fiscal
council.
The table below sets forth the breakdown of the total compensation received by our directors and members of our board of executive officers and fiscal
committee and other data related to their compensation for the periods indicated:
Year ended December 31,
2019
2018
2017
(in thousands of R$, except where indicated otherwise)
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
1,417
5,000
275
6,692
9
6
4
1,084
2,487
212
334
1,165
62
-
1,348
-
205
867
67
1,106
3,228
280
4,614
10
6
5
851
1,849
215
255
841
65
-
538
-
162
677
66
848
3,208
313
4,369
7
6
5
659
1,856
247
189
796
66
-
556
-
156
691
62
99
Minimum amount of compensation
Board of directors
Board of executive officers
Fiscal committee
Average amount of compensation
Board of directors
Board of executive officers
Fiscal committee
Year ended December 31,
2018
2017
(in thousands of R$, except where indicated otherwise)
99
498
60
115
516
61
96
439
62
121
535
62
2019
121
802
67
153
810
69
At our annual shareholders’ meeting held on April 28, 2020, our shareholders approved of R$8.1 million in aggregate compensation payable to the
members of our board of directors, members of our fiscal committee and our executive officers in 2020.
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$37.0 million, R$36.2 million and
R$48.7 million in 2019, 2018 and 2017, 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, 2019, our obligation under these both plans (G0 and G1) totaled R$3,360.9 million. For further information on our
pension plans see Note 20 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$93.5 million, R$110.5 million and R$94.4 million in 2019, 2018 and 2017, 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. We held our 2020 Annual General Meeting on April 28, 2020, when our shareholders elected new members to our board of directors. Their
term of office is expected to commence on May 14, 2020. Our next annual shareholders’ meeting will be held in April 2021. 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 five sitting members and four alternates, since a fifth alternate elected by the minority shareholders
resigned in July 2019. All of the current members of our fiscal committee were elected in the shareholders’ meeting held on April 29, 2019, except Ângelo
Luiz Moreira Grossi and Andréa Martins Botaro, who joined our fiscal committee on November 26, 2019. Their tenure will end on May 12, 2020, when the
members elected at our annual shareholders’ meeting held on April 28, 2020 are expected to take office. 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
Manoel Victor de Azevedo Neto
Ângelo Luiz Moreira Grossi
Alexandre Pedercini Issa(1)
Marcio Cury Abumussi
Cassiano Quevedo Rosas de Ávila
Nanci Cortazzo Mendes Galuzio
Andréa Martins Botaro
(1) Member indicated by the minority shareholders
Age
62
46
68
39
38
51
42
57
36
Position
Member
Member
Member
Member
Member
Alternate
Alternate
Alternate
Alternate
Date Elected
April 29, 2019
April 29, 2019
April 29 2019
November 26, 2019
April 29, 2019
April 29, 2019
April 29, 2019
April 29, 2019
November 26, 2019
100
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 Pontifical 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 Andrés Fernández Uhart. Mr. Uhart has been a member of our fiscal committee since April 2017. He holds a Bachelor’s degree in Public
Administration from Getulio Vargas Foundation (Fundação Getúlio Vargas – FGV - SP) and an MBA from Pontifical Catholic University of Rio de Janeiro
(Pontifícia Universidade Católica do Rio de Janeiro – PUC - RJ). He was also deputy Secretary for Planning and Management of the State of São Paulo and
has more than twenty years of experience in finance, having held the positions of Corporate Controller, Head of the Latin America Treasury, Corporate Finance
Advisor and Global Risk Manager at Nestlé from 1995 to 2013.
Manoel Victor de Azevedo Neto. Mr. de Azevedo Neto has been a member of our fiscal committee since April 2019. He holds a degree in Civil Engineering
from the Engineering School of the Armando Álvares Penteado Foundation (Fundação Armando Álvares Penteado – FAAP) and is specialist in traffic
engineering. He has been advisor to EMAE’s CEO since February 2019. He worked at the São Paulo Engineering and Traffic Company (Companhia de
Engenharia de Tráfego de São Paulo – CET) from 1976 to January 2019, holding the positions of Engineering and Signaling Supervisor from 1990 to 2000,
Technical Assistant to the Board of Executive Officers from 2001 to 2002, Chief Operations Officer from 2017 to January 2019. He is a member of the Traffic
Division of the São Paulo Engineering Institute and the Traffic Commission of the National Public Transportation Association. He was Deputy Officer and
General Coordinator of Normative and Strategic Planning of the National Traffic Department (Departamento Nacional de Trânsito – DENATRAN) and
Coordinator of the Thematic Engineering and Signaling Chamber from 1990 to 2000. He was Deputy Secretary of Green and the Environment of the São Paulo
city government in 2013 and held other positions in the city government from 2006 to 2016.
Ângelo Luiz Moreira Grossi. Mr. Grossi has been a member of our fiscal committee since November 2019. He holds a bachelor’s degree in Automation
and Control Engineering from Federal University of Minas Gerais (Universidade Federal de Minas Gerais - UFMG), an MBA degree in Finance from the
Brazilian Institute of Capital Markets (Instituto Brasileiro de Mercado de Capitais - IBMEC), an MBA degree in Project Management from the Institute of
Technological Education (Instituto de Educação Tecnológica - IETEC), and a specialization degree in Business Management from the Getúlio Vargas
Foundation (Fundação Getúlio Vargas - FGV). He was Corporate Production Manager at RHI-Magnesita from November 2004 to March 2012; Project
Manager at Grupo J. Mendes (Ferro + Mineração, an iron ore company) from March 2012 to May 2015; Operations Manager at Rede Mater Dei de Saúde
from 2015 to 2016; Planning, Finance and Investor Relations Officer (CFO) at Brazilian Airport Infrastructure Company (Empresa Brasileira de Infraestrutura
Aeroportuária - INFRAERO) from June 2016 to January 2019; member of the Fiscal Council of Aeroportos Brasil Viracopos, from 2017 to 2018; and member
of the Board of Directors of Agricultural Development Company of São Paulo (Companhia de Desenvolvimento Agrícola de São Paulo - CODASP) from
February to August 2019. Currently, he works as Director of Planning, Management and Finance at Air Transport Department of the São Paulo State
government (Departamento Aeroviário do Estado de São Paulo - DAESP), and is a member of the Board of Directors of Desenvolvimento Rodoviário S.A. -
DERSA, a São Paulo State road development company. In 2018, Mr. Grossi was honored with a Certificate of Recognition by GCSM (Global Council of
Sales and Marketing) in recognition of the work he carried out at INFRAERO.
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 is a member of the Board of Directors of Banco da Amazônia and since 2017 has
been a member of the Board of Directors of the sanitation company of the State of Minas Gerais (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, and member of the board of directors of the Minas Gerais Gas Company (Companhia de Gás
de Minas Gerais), from 2015 to 2016.
Marcio Cury Abumussi. Mr. Abumussi has been a member of our fiscal committee since April 2019. He 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. Mr. Abumussi was 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 2019 and general administrative coordinator in 2017. He is a sitting member of the Fiscal Council of São Paulo Previdência -
PREVCOM, He was a sitting member of the Fiscal Council of Companhia Paulista de Securitização – CPSEC from 2010 to 2017, Fiscal Council of Companhia
Paulista de Processamento de Dados - PRODESP from 2018 to 2019 and alternate member of the Fiscal Council of Empresa Paulista de Planejamento
Metropolitano S.A. – Emplasa from 2010 to 2011.
101
Cassiano Quevedo Rosas de Ávila. Mr. Ávila has been a member of our fiscal committee since April 2019. He holds a degree in Law from Sorocaba Law
School (FADI), and a graduate degree in Public and State Law from Itu Law School (Faculdade de Direito de Itu - FADITU), a graduate degree in
Administrative Law from the Pontifical University of São Paulo (Pontifícia Universidade Católica de São Paulo – PUC/SP), a graduate degree in
Environmental Law from Mackenzie Presbyterian University (Universidade Presbiteriana Mackenzie). He also holds a Master’s degree in Public Policies and
Management from the Getúlio Vargas Foundation (Fundação Getúlio Vargas - FGV). Mr. Ávila is currently the Chief of Staff at the Housing Office of the
São Paulo State government, where he accounts for Public-Private Partnerships Group of the Agência Paulista de Habitação Social - Casa Paulista. He was
advisor at the Sorocaba Association of Engineers and Architects and at Companhia de Desenvolvimento Habitacional e Urbano de São Paulo – CDHU. He
was also an Administration and Infrastructure Officer in SPTrans.
Nanci Cortazzo Mendes Galuzio. Ms Galuzio has been a member of our fiscal committee since April 2019. Ms. Galuzio holds a bachelor’s degree in Law
from Pontifical University of São Paulo (Pontifícia Universidade Católica de São Paulo – PUC/SP), and a postgraduate degree in Business Law and Business
Management Information Systems from the same institution. She also graduated from George Washington University. Currently, she is the Administrative
and Financial Director at the Fundação Florestal of the Infrastructure and Environment Secretariat of the São Paulo State government. Previously, she worked
as Corporate Management Director of Companhia Paulistana de Securitização from 2011 to 2013, Legal Manager at Emplasa S.A. from 2003 to 2011. She
was a member of the Board of Directors of EMAE from 2014 to 2017 and a member of the Board of Directors of CPOS and of Develops SP, both from 2018
to 2019.
Andréa Martins Botaro. Ms Botaro has been a member of our fiscal committee since November 2019. She holds a bachelor’s degree in Business
Administration from São Camilo University Center (Centro Universitário São Camilo). She has been a technical advisor at the Government Secretariat
(Secretaria de Governo)_of the São Paulo State government since June 2016. Ms. Botaro has more than 15 years of experience in the public sector and held
positions at the Secretariat of Civil House (Secretaria da Casa Civil) of the São Paulo State government from 2014 to 2015; Secretariat of Logistics and
Transport (Secretaria de Logística e Transportes) from 2007 to 2014; Secretariat of Energy, Water Resources and Sanitation (Secretaria de Energia, Recursos
Hídricos e Saneamento) from 2005 to 2007; Secretariat of Energy (Secretaria de Energia) and São Paulo Energy Company (Companhia Energética de São
Paulo - CESP) from 2001 to 2002.
We held our Annual General Meeting on April 28, 2020. During the meeting our shareholders also elected (i) Fabio Bernacchi Maia, Pablo Andrés
Fernández Uhart, Edson Tomas de Lima Filho, Ângelo Luiz Moreira Grossi and Reginaldo Ferreira Alexandre to be sitting members of our Fiscal Committee;
and (ii) Marcio Cury Abumussi, Cassiano Quevedo Rosas de Ávila, Nanci Cortazzo mendes Galuzio, Andréa Martins Botaro and Gisélia da Silva to be alternate
members of our Fiscal Committee. Mr. Reginaldo Ferreira Alexandre and Ms. Gisélia da Silva are the members appointed by our minority shareholders, and
their appointmemt is subject to review by our Eligibility and Advisory Committee to ensure that they comply with the relevant requirements of their
functions. Their term of office is expected to commence on May 12, 2020.
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 Business Conduct and Ethics, 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:
Audit Committee Members
Ernesto Rubens Gelbcke
Lucas Navarro Prado
Luís Eduardo Alves de Assis
Position
Coordinator and Financial Expert
Member
Member
Date Elected
June 21, 2018
June 21, 2018
June 21, 2018
102
We held our Annual General Meeting on April 28, 2020. During the meeting Ernesto Rubens Gelbcke and Luís Eduardo Alves de Assis were not reelected
by our shareholders. The new members of our Audit Committee are expected to be elected by our Board of Directors on May 14, 2020.
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.
The following are the names, positions and dates of election of the members of our Eligibility and Advisory Committee:
Eligibility and Advisory Committee
Fábio Aurélio Aguilera Mendes
Laura Diaz Montiel
Paula Cristina Nassif Elias de Lima
Position
Member
Member
Member
Date Elected
June 3, 2019
June 3, 2019
June 3, 2019
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.
D. Employees
As of December 31, 2019, we had 13,945 full-time employees. On December 31, 2019, we had 1,049 interns and 624 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
As of December 31,
2019
2018
2017
10,212
2,163
419
1,151
1,451
6,425
6,069
13,945
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
The average tenure of our employees is approximately 19.7 years. We also outsource certain services such as maintenance, delivery of water and sewage
bills, meter reading, catering and security. We believe that our relations with our employees are generally satisfactory.
Approximately 62% of all our employees are members of unions. The five main unions that represent our employees are (i) the Union of Workers in
Water, Sewage and Environment of the State of São Paulo – 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 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.
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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.
The collective bargaining agreement signed in 2019 resulted in: (i) a salary increase of 4.99% (which corresponds to the inflation adjustment for the
period); (ii) a 4.99% increase in meal vouchers; (iii) a 4.99% increase in food assistance; (iv) a 38.59% increase in nursery stipends; (v) maintenance of the
clause from the 2018/2019 collective bargaining agreement which guarantees the employment of 98% of our employees; and (vi) maintenance of the Christmas
food stipend on an exceptional basis. In 2019, 2018 and 2017 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, 2019, 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
Our outstanding capital stock consists of 683,509,869 common shares, without par value. Under state laws, the State is required to own at least one-half
plus one of our outstanding common shares. All of our shareholders, including the State, have the same voting rights. The following table sets forth ownership
information for each of our shareholders that beneficially owned 5.0% or more of our common shares and for our officers and directors, individually and as a
group, as of December 31, 2019:
State of São Paulo(1)
Directors and executive officers of Sabesp
Others
Total(2)
Shares
343,524,291
3,000
339,982,578
683,509,869
%
50.3%
0.0%
49.7%
100.0%
(1) It includes 343,524,285 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 6 shares held by Companhia Paulista de Parcerias, or CPP, which is controlled by the Government of the State of São
Paulo.
(2) As of December 31, 2019, 62% of our outstanding common shares were held by 12,561 registered shareholders in Brazil.
As of December 31, 2019, 15% 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 December 31, 2019, 27 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. On April
24, 2019 the CDPED established a working group aimed at discussing alternative corporate structures for us. We cannot assure that any potential corporate
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reorganization, including a change of control, will not have a material adverse effect on our business, financial condition or results of operations. The São Paulo
State Government, our major shareholder, is awaiting the approval of changes to the basic sanitation legislation to decide if it will implement our potential
corporate reorganization, which may involve a privatization or a capitalization plan.
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$556.6 million in 2019, R$501.1 million in 2018 and R$463.0 million in
2017. Our accounts receivable from the State for sanitation services totaled R$103.3 million, R$105.7 million and R$106.0 million, as of December 31, 2019,
2018 and 2017, 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 2019, 2018 and 2017, we made payments to
former employees of R$184.8 million, R$180.8 million and R$179.5 million, respectively in respect of Plan G0. The State made reimbursements in 2019,
2018 and 2017 in the amounts of R$152.1 million, R$173.5 million and R$192.9 million, respectively.
Agreements with the State
In September 1997, we and the State entered into a memorandum of understanding providing that we would, in effect, apply dividends we declared that
were otherwise payable to the State to offset accounts receivable in connection with the provision of water and sewage services to the State and its controlled
entities.
On December 11, 2001, we entered into an agreement with the State and the DAEE. Pursuant to this agreement, the State acknowledged and agreed,
subject to an audit by a State-appointed auditor, to pay us amounts it owed to us in respect of:
• water and sewage services we provided to governmental agencies, State owned autonomous entities and foundations through December 1, 2001, and
that was not offset in accordance with the September 1997 memorandum of understanding, in the total amount of R$358.2 million. This amount was
renegotiated and included in the second amendment to this agreement discussed below; and
• supplemental retirement and pension benefits we paid from March 1986 to November 2001 on behalf of the State to former employees of the State
owned companies which merged to form our company; as we did not reach an agreement regarding these amounts, a joint inquiry has commenced in
order to ensure agreement between us and the State, in the total amount of R$320.6 million. This amount was renegotiated and included in the third
amendment to this agreement discussed below.
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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.
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.
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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, we sold these shares for R$111.1 million; and
• The amount of R$609.1 million, payable in 156 monthly installments, was adjusted by 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, 2019, the Disputed Reimbursement Amount amounted to R$1.195.2 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.
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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, 2019, we had made a provision of
R$3.046.3 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
• 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.
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• Our investment plan must be compatible with the sanitation plans of the State, the city of São Paulo and, if necessary, the Metropolitan region.
• ARSESP will ensure that the tariffs will adequately compensate us for the services we provide and that tariffs may be adjusted in order to restore the
original balance between each party’s obligations and economic gain (equilíbrio econômico financeiro).
We currently have an investment plan in place that reflects our obligations under the convênio and addresses their compatibility with the sanitation plans
of the State, the city of São Paulo and, if necessary, the São Paulo metropolitan region. The investment plan is not irrevocable and is reviewed every four years
by our management committee. We draft a detailed work plan every two years, particularly with respect to the investments to be executed in the subsequent
period. 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 is passing-through
to the tariffs up to 4% of the municipal revenue that is transferred by us to a legally established municipal infrastructure fund. In the current tariff cycle, 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. Prior to May 9, 2018, our
tariff had never included any pass-through to tariffs related to the transfer of 7.5% of the gross revenues obtained from providing sanitation services in the
municipality of São Paulo to the São Paulo Municipal Fund for Environmental Sanitation and Infrastructure.
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—Tariff Readjustment and Revisions.”
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
Program for Water Loss Reduction, in February 2012, for an aggregate principal amount of ¥33,584 million.
For more information on the aforementioned loans, see “Item 5.B. Liquidity and Capital Resources—Indebtedness Financing.”
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Use of Reservoirs
We withdraw water for use in the São Paulo metropolitan region from the Guarapiranga and Billings reservoirs. We do not pay any fees for the use of
these reservoirs, although we are responsible for maintaining them and funding their operating costs. The State incurs no operating costs on our behalf.
EMAE, a company that is also controlled by the State of São Paulo, has a concession to produce hydroelectric energy using water from the same
reservoirs. EMAE commenced various lawsuits against us in the past seeking compensation for the water we withdraw from these reservoirs. Those lawsuits
have now been settled by way of an agreement between EMAE and us.
The settlement agreement settled the compensation arrangements between EMAE and our company. It requires us to pay the following amounts to EMAE:
• R$46.3 million, plus inflation adjustments indexed to the IPCA index, payable in five annual installments from April 2017 through April 2022, plus
• R$6.6 million, plus inflation adjustments indexed to the IPCA index, payable in 25 annual installments from October 2017 through October 2042.
If we fail to pay any installment to EMAE when due, all remaining amounts to be paid under the agreement will become immediately due and payable.
On April 11, 2016, we were also named in a separate lawsuit filed by minority shareholders of EMAE against the State of São Paulo, as controlling
shareholder of EMAE. On August 7, 2017 we were named in a new lawsuit against us, EMAE and the National Electric Energy Agency (Agência Nacional de
Energia Elétrica, 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
settlement agreement between EMAE and us does not necessarily put an end to the separate lawsuits. For more Information, see “Item 3.D. Risk Factors —
Risks Relating to Our Control by the State of São Paulo — Our right to withdraw water from the Guarapiranga and Billings reservoirs is being challenged
judicially by minority shareholders of EMAE.”
If one of the ongoing lawsuits by minority shareholders of EMAE requires the State to make a different decision regarding water use from what was
agreed between EMAE and the State of São Paulo, our ability to withdraw water from the Guarapiranga and Billings reservoirs may be compromised. If we
were no longer able to withdraw water from these reservoirs, we would have to transport water from locations farther away, which would increase our water
transportation costs and may affect our ability to provide adequate service in the region, which may have an adverse effect on our financial condition and results
of operations. . In addition, we may be ordered to pay any indemnity to EMAE if the agreement is judicially invalidated, which could have material adverse
effects on our financial condition and operating results.
Agreements with Lower Tariffs
We have entered into agreements with public entities, including State entities and municipalities, which manage approximately 11,326 properties. Under
these agreements, these public entities pay a different tariff which is approximately 25.0% lower than the tariff that applies for the public entities that have not
entered into these agreements, provided such entities implement 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 2019, 2018 and 2017 amounted to R$4.9 million, R$8.9
million and R$9.9 million, respectively.
The expenses related to personnel assigned by other entities to us totaled R$0.1 million in 2019 and 2018. There were no expenses related to personnel
assigned by other entities to us in 2017.
Non-operating Assets
As of December 31, 2019, we had an amount of R$3.6 million related to a land and lending structures compared to R$0.1 million as of December 31,
2018.
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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$22.5 million, R$20.8 million
and R$19.2 million in 2019, 2018 and 2017, respectively. On May 29, 2001, a federal law was enacted which, among other provisions, limits the amount
mixed capital companies, like us, may contribute to their pension plans. Specifically, the ordinary contributions made by us to our pension plans may not
exceed the contributions made by the beneficiaries of these plans.
Our original pension plan (the Defined Benefit Plan) has an actuarial deficit. We have commenced studies to manage this deficit and have also created a
new, Defined Contribution Plan (SABESPREV Mais). Our new plan was approved by Previc in June 2010, after which our old plan stopped accepting new
members. Contributions to the new plan are also shared between plan members and us, and benefits are established based on the balance of the individual
member’s account when payment on his or her benefit begins. This balance consists of contributions and profitability obtained when applying resources. We
intended to have members of the old plan migrate their reserves to the new plan. This migration was interrupted by a judicial order as a result of proceedings
brought by representative entities for our employees and ex-employees. In October 2010, the judge presiding over the case pronounced in an interim decision
that people and reserves were not allowed to migrate between the plans until a further decision was made. This decision also prevents the plan from charging
contributions to account for the deficit for those who remained covered by the original plan. In September 2012, the judge presiding over the case ordered a
financial expert inspection and in early 2013 a financial expert was appointed to the case. The results of this inspection were unfavorable to the representative
entities for our employees and ex-employees and in 2016 the proceeding was dismissed, revoking the interim decision made in October 2010.
In 2016, participants were again offered the ability to migrate according to the rules established by the regulatory authority. The Retiree and 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 deficit 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$5.3 million, R$4.1
million and R$3.8 million in 2019, 2018 and 2017, respectively, and it refers to salaries and other short-term benefits management. An additional R$1.3
million, R$0.5 million and R$0.6 million related to the bonus program was accrued to executive officers in 2019, 2018 and 2017.
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 a loan agreement with the special purpose enterprise Aquapolo Ambiental S.A. on March 30, 2012 under which we made loan to finance
the operation, until the borrowings and financing requested with financial institutions is granted.
As of December 31, 2019, the principal and interest balance of this agreement was R$35.0 million, recorded as non-current assets under “Other Accounts
Receivable.”
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.
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.
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As of December 2019, we had completed approximately 28.2 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 19 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 3.14 to our financial statements included in this annual report.
As of December 31, 2019, we have provisions totaling R$192.9 million for the matters stated in Note 19 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, 2019
is R$26.6 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.
On May 18, 2016, the Public Prosecutor’s Office of the State of São Paulo filed a Public Civil Action combined with a preliminary injunction, requesting,
in summary that: (i) we cease to dispose of untreated domestic and industrial sewage through a marine outfall in Santos Bay, under penalty of paying a daily
fine; and (ii) we pay environmental and public health damages as a result of the disposal of untreated sewage in Santos Bay, calculated as of the date of
installation of the marine outfall until the date we implement more advanced sewage treatment mechanisms. In October 2017, the lawsuit was dismissed by the
lower court. The Prosecutor’s Office appealed the decision, which was rejected in November 2019. Subsequently, the Prosecutor’s Office appealed to the High
Court of Justice and the Supreme Court, which are currently reviewing the admissibility of the case. The amount involved in this proceeding as of December
31, 2019 is R$2.9 billion. We have assessed that we do not have a current obligation as a result of this past event, and accordingly have not made any provisions.
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Dividends and Dividend Policy
Amounts Available for Distribution
At each annual shareholders’ meeting, the board of directors is required to recommend the allocation of net profits for the preceding fiscal year. For
purposes of Brazilian Corporate Law, net profits are defined as net income after income tax and social contribution tax for such fiscal year, net of any
accumulated losses from prior fiscal years and any amounts allocated to employees’ and management’s participation in our profits. In accordance with Brazilian
Corporate Law, the amounts available for dividend distribution are the amounts equal to half of the net profit as increased or reduced by:
• the amount intended to form the legal reserve; and
• the amount intended to form the reserves for contingencies and any written-off amounts of the same reserves formed in previous fiscal years.
We are required to maintain a legal reserve, to which we must allocate 5.0% of net profits for each fiscal year until the amount for such reserve equals
20.0% of our paid-in capital. However, we are not required to make any allocations to our legal reserve in respect of any fiscal year in which the aggregate
amount of the legal reserve plus our other established capital reserves exceeds 30.0% of our capital. Net losses, if any, may be offset against the legal
reserve. As of December 31, 2019, 2018 and 2017 the balance of our legal reserve was R$1,368.4 million, R$1,200.0 million and R$1,058.3 million,
respectively, which was equal to 9.1%, 8.0% and 10.6%, 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,
2019, 2018 and 2017 we had an investment reserve of R$6,098.6 million, R$3,840.4 million and R$6,939.3 million, respectively.
The amounts available for distribution may be further increased by a reversion of the contingency reserve for anticipated losses constituted in prior years
but not realized. The amounts available for distribution are determined on the basis of our financial statements prepared in accordance with Brazilian GAAP.
The legal reserve is subject to approval by the shareholder vote at our annual shareholders’ meeting and may be transferred to capital but is not available
for the payment of dividends in subsequent years.
Mandatory Distribution
Brazilian Corporate Law generally requires that the bylaws of each Brazilian corporation specify a minimum percentage of the amounts available for
distribution by such corporation for each fiscal year that must be distributed to shareholders as dividends, also known as the mandatory distributable
amount. Under our bylaws, the mandatory distributable amount has been fixed at an amount equal to not less than 25.0% of the amounts available for
distribution, to the extent amounts are available for distribution at the end of each given fiscal year.
The mandatory distribution is based on a percentage of adjusted net income, not lower than 25.0%, rather than a fixed monetary amount per
share. Brazilian Corporate Law, however, permits a publicly held company, such as us, to suspend the mandatory distribution if the board of directors and the
fiscal committee report to the shareholders’ meeting that the distribution would be inadvisable in view of 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. As of the date of this annual report, we do not intend to suspend the
distribution of dividends during the ongoing COVID-19 pandemic.
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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.
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 amount of R$799.8 million recognized as of December 31, 2019 correspond to the minimum established by law of
25.0% of the net income and the difference of R$141.2 million will be recorded in 2020 after the annual shareholders’ meeting.
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Distributions of dividends
The following table sets forth the distributions of dividends that we made to our shareholders in respect of our 2019, 2018 and 2017 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,
2019*
2018
2017
Aggregate amount proposed
(in millions of reais)
941.0
792.2
703.9
Payment Dates
Payment per share
June 27, 2020
June 28, 2019
June 26, 2018
1.38
1.16
1.03
Payment per ADS
(in reais)
1.38
1.16
1.03
∗ We recorded dividends in the amount of R$799.8 million, which pursuant to our bylaws is our minimum dividend amount. We expect to pay the
dividends on May 29, 2020.
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.”
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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. The quorum to hold shareholders’ meetings on first call requires the
attendance of shareholders, either in person or by proxy, representing at least 25.0% of the shares entitled to vote and, on second call, the meetings can be held
with the attendance of shareholders, also either in person or by proxy, representing any number of shares entitled to vote.
Under Brazilian Corporate Law, our common shares are entitled to dividends or other distributions made in respect of our common shares in proportion
to their share of the amount available for the dividend or distribution. See “Item 8A. Financial Statements and Other Financial Information—Dividends and
Dividend Policy” for a more complete description of payment of dividends and other distributions on our common shares. In addition, upon any liquidation of
our Company, our common shares are entitled to our remaining capital after paying our creditors in proportion to their ownership interest in us.
In principle, a change in shareholder rights, such as the reduction of the compulsory minimum dividend, is subject to a favorable vote of the shareholders
representing at least one half of our voting shares. Under some circumstances that may result in a change in the shareholder rights, such as the creation of
preferred shares, Brazilian Corporate Law requires the approval of a majority of the shareholders who would be adversely affected by the change attending a
special meeting called for such reason. It should be emphasized, however, that our 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.
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Preemptive Rights
Each of our shareholders has a general preemptive right to subscribe for shares or securities convertible into shares in any capital increase, in proportion
to his or her ownership interest in us, except in the event of the grant and exercise of any option to acquire shares of our capital stock. The preemptive rights
are valid for a 30-day period from the publication of the announcement of the capital increase. Shareholders are also entitled to sell this preemptive right to
third parties. Under Brazilian Corporate Law, we may amend our bylaws to eliminate preemptive rights or to reduce the exercise period in connection with a
public offering of shares or an exchange offer made to acquire another company.
In the event of a capital increase by means of the issuance of new shares, holders of ADSs, or of common shares, would, except under circumstances
described above, have preemptive rights to subscribe for any class of our newly issued shares. However, an ADS holder may not be able to exercise the
preemptive rights relating to the common shares underlying his or her ADSs unless a registration statement under the Securities Act is effective with respect
to those rights or an exemption from the registration requirements of the Securities Act is available. See “Item 3.D. Risk Factors—Risks Relating to Our
Common Shares and ADSs—A holder of our common shares and ADSs might be unable to exercise preemptive rights and tag-along rights with respect to the
common shares.”
Redemption and Rights of Withdrawal
Brazilian Corporate Law provides that, under limited circumstances, a shareholder has the right to withdraw his or her equity interest from the company
and to receive payment for the portion of shareholder’s equity attributable to his or her equity interest. This right of withdrawal may be exercised by dissenting
our shareholders in the event that at least half of all voting shares outstanding authorize us:
• to reduce the mandatory distribution of dividends;
• to merge into another company or to consolidate with another company, subject to the conditions set forth in Brazilian Corporate Law;
• to participate in a centralized group of companies, as defined under Brazilian Corporate Law and subject to the conditions set forth therein;
• to change our corporate purpose;
• to split up, subject to the conditions set forth in Brazilian Corporate Law;
• creating preferred shares or increasing an existing class of preferred shares without maintaining the existing ratio with the remaining class of preferred
shares, unless when already set forth in or authorized by the bylaws;
• 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.
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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.
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;
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• 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.
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, 2019, we had
an investment reserve of R$6,098.6 million.
Legal Reserve
Under Brazilian Corporate Law, we are required to record a legal reserve to which we must allocate 5% of the adjusted net income each year until the
amount of the reserve equals 20.0% of paid-in capital. Any accumulated deficit may be charged against the legal reserve. As of December 31, 2019, the
balance of our legal reserve was R$1,368.4 million.
Arbitration
In connection with our listing with the Novo Mercado segment of the B3, we, our shareholders, directors and officers have undertaken to refer to arbitration
any and all disputes or controversies arising out of the Novo Mercado rules or any other corporate matters. 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.
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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.
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.
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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.
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.
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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 will be subject to Brazilian taxation at the same rate applicable
to the sale or disposition of common shares.
There is no assurance that the current preferential treatment for non-Brazilian holders of common shares under CMN Resolution No. 4,373/2014 will
continue in the future or that it will not be changed in the future. 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.
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.
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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
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.
(b)
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.
126
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 stock, or persons whose “functional currency” is not the
U.S. dollar.
This discussion is based upon the provisions of the Code, and existing and proposed U.S. Treasury Department regulations, administrative pronouncements
of the Internal Revenue Service, or the IRS, and judicial decisions as of the date hereof. Such authorities may be repealed, revoked or modified so as to result
in U.S. federal income tax consequences different from those discussed below, possibly with retroactive effect. In addition, this discussion is based, in part,
upon representations made by the Depositary to us and assumes that the deposit agreement, and all other related agreements, will be performed in accordance
with their terms.
Except as specifically described below, this discussion assumes that we are not a passive foreign investment company, or PFIC, for U.S. federal income
tax purposes. Please see the discussion under “—Passive Foreign Investment Company Rules” below. Further, this discussion does not address the U.S. federal
estate and gift, alternative minimum tax, Medicare tax 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.
127
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.
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.
128
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to dividends in respect of our common shares or ADSs or the proceeds received on the sale,
exchange, or redemption of our common shares or ADSs, in each case to the extent treated as being paid within the United States (and in certain cases, outside
of the United States) to a U.S. holder unless a U.S. holder establishes its status as an exempt recipient, and backup withholding may apply to such amounts if
the U.S. holder does not establish its status as an exempt recipient or fails to provide a correct taxpayer identification number and certify that such U.S. holder
is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. holder will be allowed as a refund or credit against
such U.S. holder’s U.S. federal income tax liability provided the U.S. holder timely furnishes the required information to the IRS.
In addition, U.S. holders should be aware that additional reporting requirements apply with respect to the holding of certain foreign financial assets,
including stock of foreign issuers which is not held in an account maintained by a financial institution, if the aggregate value of all of such assets exceeds
US$50,000. U.S. holders should consult their own tax advisors regarding the application of the information reporting rules to our common shares and ADSs
and the application of these additional reporting requirements for foreign financial assets to their particular situation.
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.
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.
129
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, 2019 and 2018, R$6,358.8 million and R$6,669.4 million, or 48.0% and 50.7%, 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, 2019,
2018 and 2017 from each hypothetical instantaneous and unfavorable 1% change in the U.S. dollar and Yen against the real would have been approximately
R$63.6 million, R$66.7 million and R$56.7 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$635.9 million, R$666.9 million and R$567.3 million as of December 31, 2019, 2018
and 2017, respectively.
The fluctuation of the real in relation to the U.S. dollar and Yen for the years ended December 31, 2019, 2018 and 2017 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
2019
4.0
5.3
2018
17.1
20.0
Year ended December 31,
2017
(in percentages)
1.5
5.4
We have not contracted derivative financial instruments in the years ended December 31, 2019, 2018 and 2017.
For further information regarding foreign currency risk, see Note 5.1(a) to our 2019 financial statements included in this annual report.
As of December 31, 2019, 2018 and 2017, we had no short-term indebtedness outstanding, other than the current portion of long-term debt.
Interest Rate Risk
As of December 31, 2019 and 2018, R$1,680.3 million, or 12.7%, and R$1,642.4 million, or 12.5%, respectively, of our total debt outstanding balance
denominated in reais was based on variable rates of interest based on the UPR, which is equivalent to the TR. In addition, as of December 31, 2019 and 2018,
R$1,881.9 million, or 14.2%, and R$1,261.7 million, or 9.6%, and respectively, of our total debt denominated in reais was subject to interest rates based on
the CDI. As of December 31, 2019 and 2018, R$2,837.9 million and R$2,982.0 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.
As of December 31, 2019 and 2018, 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$2,253.2 million and R$3,029.2 million as of December 31, 2019 and 2018, 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$132.4 million, R$131.5 million and R$121.0 million if
a hypothetical instantaneous and unfavorable change of 100 basis points in the interest rates applicable to financial liabilities as of December 31, 2019, 2018
and 2017, 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$1,324.5 million, R$1,315.3 million and R$1,210.1 million as of December 31, 2019, 2018 and 2017,
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.
130
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, 2019. For the foreign currency denominated obligations, these amounts have been converted at the selling rates as
of December 31, 2019 and do not represent amounts which may actually be payable with respect to such obligations on the dates indicated.
Assets
Cash equivalents denominated in reais
Liabilities
Long-term debt (current and noncurrent
portion)
Floating rate, denominated in reais indexed by
TR or UPR
Floating rate, denominated in reais indexed by
TJLP
Floating rate, denominated in reais indexed by
IPCA
Floating rate, denominated in reais indexed by
CDI
Fixed rate, denominated in reais
Floating rate, denominated in U.S. dollars
Fixed rate, denominated in Yen
Fixed rate, denominated in U.S. dollars
Total long-term debt
2020
2021
2022
2023 and after
As of December 31, 2019
Expected maturity date
Average annual
interest rate
(in millions, except percentages)
Total
2,253.2
-
-
-
2,253.2
134.8
208.1
387.8
168.5
78.7
294.1
173.8
1,414.0
2,859.8
133.4
180.7
119.3
274.9
52.2
225.6
154.8
-
1,140.9
138.2
159.8
119.3
374.7
32.2
225.6
154.8
-
1,204.6
1,273.9
833.8
779.1
1,063.8
372.7
2,092.7
1,623.4
-
8,039.4
1,680.3
1,382.4
1,405.5
1,881.9
535.8
2,838.0
2,106.8
1,414.0
13,244.7
7.8%
9.4%
8.4%
5.1%
3.4%
1.5%
3.3%
5.5%
UPR stands for Standard Reference Unit (Unidade Padrão Referência) and is equal to TR, which was 0.00% per month as of December 31, 2019; CDI
stands for Interbank Deposit Rate (Certificado de Depósitos Interbancários), which was 4.40% per annum as of December 31, 2019; IGP-M was 7.30%
per annum as of December 31, 2019; TJLP stands for Long-term Interest Rate (Taxa de Juros a Longo Prazo), published quarterly by the Central Bank,
which was 5.57% per annum as of December 31, 2019.
The percentage of our indebtedness subject to fixed and floating interest rate is as follows:
Floating rate debt:
Denominated in U.S. dollars
Denominated in reais
Fixed rate debt:
Denominated in reais
Denominated in Yen
Denominated in U.S. dollars
Total
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
2019
19.0%
48.0%
4.0%
16.0%
13.0%
100.0%
As of December 31,
2017
2019
22.2%
45.0%
4.3%
15.5%
13.0%
100.0%
23.3%
48.5%
4.6%
14.1%
9.5%
100.0%
131
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. The amount of reimbursement available to us is tied to
the amount of fees the depositary collects from investors.
132
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 2019
From January 1, 2019 to December 31, 2019, we received reimbursements in the amount of US$655,400 for standard out-of-pocket maintenance costs for
the ADRs, any applicable performance indicators relating to the ADR facility, marketing fees and legal fees.
133
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, 2019.
As a result of this analysis, our principal executive officer and principal financial officer concluded that (i) our disclosure controls and procedures were
both designed and effective at the reasonable assurance level as of December 31, 2019; (ii) that the information required to be disclosed in our filings and
submissions under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms; and
(iii) that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer and Investor
Relations Officer, as appropriate to allow timely decisions regarding required disclosure.
B. Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal controls over financial reporting.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with IFRS, as issued by the IASB.
Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our assets, (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with IFRS, as issued by the IASB, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer and Investor Relations Officer, our
management conducted an assessment of our internal control over financial reporting as of December 31, 2019 based on the criteria established in “Internal
Control - Integrated Framework” issued by COSO in 2013.
As a result of the assessment described above, our management concluded that as of December 31, 2019, we maintained effective internal control over
financial reporting based on the criteria established in “Internal Control — Integrated Framework” issued by COSO in 2013.
Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting. That
report is included below.
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C. Attestation Report of the Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders, 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, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2019, 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 financial position
of the Company as of December 31, 2019 and 2018, the related the related statements of income, comprehensive income, changes in equity and cash flows for
each of the years in the three-year period ended December 31, 2019, and the related notes(collectively, the financial statements), and our report dated April 30,
2020 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Financial Statments. 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 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 30, 2020
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D. Changes in internal control over financial reporting
There have been improvements in our internal control over financial reporting as of December 31, 2019. Our management, under the supervision and with
the participation of our Chief Executive Officer and Chief Financial Officer and Investor Relations Officer, has been actively engaged in the implementation
of remediation efforts to address our material weakness as of December 31, 2018 and previously disclosed in our 2018 Annual Report on Form 20-F.
Our management established major actions that have been implemented to remediate the material weakness related the service account (ERP system
support) with privileged access. These actions included:
• Implementing more stringent formalized procedures and controls 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;
• Introducing review of the access logs of the relevant account by an independent professional;
• Promoting the periodic review of users with privileged access; and
• Establishing automated monitoring by the internal audit department to timely identify the accesses granted in exceptional situations.
As a result of this work, we have concluded that the previous material weakness as disclosed in our 2018 Annual Report on Form 20-F has been remediated
as of December 31, 2019.
In addition, as from January 1, 2019, we adopted IFRS 16 (Leases) that required the implementation of new controls and the modification of certain
accounting processes related to the recognition, measurement, presentation and disclosure of leases. The impact of these changes was not material in respect
of our internal control over financial reporting. Our management identified no other changes in our internal control over financial reporting that occurred during
our the fiscal year ended December 31, 2019 that 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 ethics and conduct called the Code of Conduct and Integrity, which applies to all of our employees, including our directors,
chief executive officer, chief financial officer and investor relations and head of accounting, as well as our suppliers and third-party contractors. To ensure
compliance with 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 2019, 174 events were reported to the Whistle-Blower Channel. During 2019, 45 of our
employees or outsourced employees received penalties (20 warnings, two suspension and 23 dismissals). Our Ethics Commission is also responsible for
addressing relevant inquiries and interpreting the norms of the Code of Business Conduct and Ethics 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 Business Conduct and Ethics, 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.
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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
KPMG Auditores Independentes served as our independent registered public accounting firm for the year ended December 31, 2019.
The following table presents the aggregate fees for professional services and other services rendered to us by KPMG Auditores Independentes in 2019
and 2018:
Audit Fees(1)
Audit-Related Fees
Tax Fees
All Other Fees
Total
2019
2.9
-
-
-
2.9
Year ended December 31,
2018
(in millions of reais)
2.8
-
-
-
2.8
(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.
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.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
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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.
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:
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
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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.
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.
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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 Business Conduct and Ethics, 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.
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.
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.
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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.
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 Business Conduct and Ethics which complies with the requirements made by the Brazilian laws and regulations, as well as
addresses the matters required to be addressed by the applicable NYSE and SEC rules.
We have had a Code of Business Conduct and Ethics since 2006, and the latest version was approved by the Board of Directors in June 2018. It is available
on www.sabesp.com.br/investidores, section “Governança Corporativa” Corporate Governance), and on the Brazilian Securities Commission
(www.cvm.com.br).
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The Code of Conduct and Integrity is introduced to Company’s Officers, Board of Directors, Board of Auditors, Audit Committee, Eligibility and
Counselling Committee and to all the other employees during the integration program which is tailored to their positions.
Moreover, we require our suppliers and other related third-party to comply with our Code of Business Conduct and Ethics as well and the non-compliance
acts are subjected to sanctions under the contract and other measures according to applicable laws and regulations.
Any breach of the Code of Conduct and Integrity is subject to internal investigations and disciplinaries measures applicable on a case-by-case basis.
The Code of Conduct and Integrity is frequently updated in order to comply with new laws and regulations.
Internal Audit Function
NYSE rules require that listed companies maintain an internal audit function to provide management and the audit committee with ongoing assessments
of the company’s risk management processes and system of internal control. Our internal audit department is connected to the Board of Directors through the
audit committee and reports to our Chief Executive Officer. Our internal audit is responsible for evaluating (i) the adequacy of internal controls, (ii) the
effectiveness of the risk management and of the governance processes, (iii) the reliability of the process of collecting, measuring, classifying, accumulating,
recording and disclosing events and transactions, to prepare financial statements, and (iv) the proper application of the principle of segregation of duties, to
avoid the occurrence of conflicts of interest and fraud.
Anticorruption Compliance
Law No. 12,846, of August 1, 2013 (the “Anticorruption Law” or the “Clean Company Act”), 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.
We have a Compliance Program which was approved by the Board of Directors and is updated periodically. The last update was in December 2018. The
program was established in accordance with the Brazilian Anticorruption Law, Foreign Corrupt Practices Act, Federal Law No. 13,303/16, the Novo Mercado
Regulations, and Brazilian Office of the Comptroller General’s (CGU) guidelines.
As a semi-public company, our Compliance Program encompasses two distinct situations – active corruption and passive corruption, as established in
Brazilian anti-corruption legislation – and follows the recommendations of the Organization for Economic Cooperation and Development, the United Nations
Office on Drugs and Crimes, and the World Bank to establish an ethical culture. Our program incorporates and focuses on high management, structural
functioning, the provision of complaint hotlines, monitoring of third-party relations, governance and internal controls, risk management, training and
communication.
The program currently consists of a set of internal mechanisms and procedures related to integrity, monitoring and incentives to report irregularities. The
program also focuses on the effective implementation of the Code of Business Conduct and Ethics as well as other policies and guidelines aimed at preventing
fraud, corruption and other harmful acts against public administration.
As part of the program, we created the Conduct and Integrity Learning Track (Trilha de Aprendizagem de Conduta e Integridade) which consists of a
continuous training program directed to the entire company staff, reinforcing the importance of acting in accordance with laws, regulations and internal policies.
The main topics covered are: integrity, ethics, sexual and moral harassment, diversity, corruption, fraud and conflicts of interest.
In 2019 we also conducted on-site training on Prevention and Fight Against Fraud and Corruption based on national and international laws to disseminate
best practices and adopt a culture of integrity for our employees and officers and those responsible for the compliance areas of our special purpose companies.
We also train our directors, officers and members of the Fiscal Council on issues related to corporate governance and integrity and carry out specific training
for employees who work in the process of investigating complaints.
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Additionally, this year we carried out the “Ethics Visits” Project throughout our business units, which held more than one hundred workshops with our
employees, throughout 30 municipalities where we provide water and sewage services.
In 2019, we also started a new cycle of mapping and analyzing risks, mainly on fraud and corruption, as well as the necessary measures to mitigate them.
We are evaluating 14 critical macroprocesses, through interviews with managers and executives, to identify their perception of the risks of fraud and corruption
related to strategic guidelines.
Further, we provide the Trust Channel, which is a tool made available to employees make inquiries on any questions related to the ethical behavior within
our business. We ensure confidentiality and anonymity to whoever uses this tool.
We also provide complaint hotlines to report cases of fraud, corruption, unlawful acts, breaches of the Code of Business Conduct and Integrity and other
activities that could harm our interests and principles. This information is available and is easily accessible and identifiable on our website. Anonymity is
guaranteed in all cases, except when there is a court decision to the contrary.
For related-party transactions, establishment of special purpose vehicles or when required, background checks are adopted in order to detect information
relating to history and reputation, relationships with public agencies or agents, company corporate structure and restrictive lists, including corruption
proceedings and investigations, to ensure that the terms and conditions of the transaction do not result in a material risk of violation of applicable anti-corruption
laws.
Among the compliance practices, we encourage the adoption of integrity measures among our suppliers by providing contractual clauses to ensure
compliance with ethical standards and the prohibition of fraud and corruption practices, in addition to monitoring related party transactions.
Our department responsible for the application and improvement of the Compliance Program acts with autonomy, independence and impartiality and
reports to the CEO. Depending on the individuals involved in the allegations, the department may file a report to Board of Directors, Fiscal Committee and
Audit Committee, to which it also makes periodical reports on its activities.
As a result of our efforts, we did not register any corruption cases in 2019.
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.
143
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
Part III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements, together with the reports of the independent registered public accounting firms, are filed as part of this annual
report. See “Index to Financial Statements.”
144
ITEM 19. EXHIBITS
Item
1.1*
2.1
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
101.INS
Description
Bylaws of the Registrant (English translation) (incorporated by reference to the Form 6-K filed on December 9, 2019).
Description of Securities registered under Section 12 of the Exchange Act.
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 between 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.
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
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
(*) Previously filed.
145
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP
By: /s/ 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 30, 2020
146
Companhia de Saneamento Básico do Estado de São Paulo
- SABESP
Financial Statements as at December 31, 2019 and 2018
And for the years ended
December 31, 2019, 2018 and 2017
F-1
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, 2019 and 2018, the related statements of income,
comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended
December 31, 2019, 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, 2019 and 2018, and
the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019,
in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accouting
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, 2019, 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 30, 2020 expressed an unqualified 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F-2
Assessment of the fair value of the concession agreement with the municipality of Santo André
As discussed in notes 5.4, 9 (a) and 14 to the financial statements, on July 31, 2019, the Company, São Paulo State and
the city of Santo André entered into a concession agreement which granted the Company the right to provide sanitation
services in the Municipality of Santo André for a period of 40 years. In exchange, the Company gave up its rights to
certain receivables from Santo André Municipal Water and Sanitation Service (SEMASA). As a result of this
transaction, SABESP recognized R$ 1,337 million of revenue in the year ended December 31, 2019 based on the
Company’s estimate of the fair value of the concession agreement. The fair value was estimated by the Company using
a discounted cash flow methodology which required a number of unobservable inputs.
We identified the assessment of the fair value of the concession agreement with the municipality of Santo André as a
critical audit matter. This was due to the high degree of auditor judgment, subjectivity, and effort required to perform
the procedures to evaluate management’s fair value calculation and its significant unobservable inputs. These included
the future revenues, as well as the underlying assumptions related to tariffs and volumes of water and sewage based on
SEMASA’s average consumption history, and estimates of future operational costs based on historical trends and
experience and the determination of the discount rate to be used.
The primary procedures we performed to address this critical audit matter included the following. We tested certain
internal controls related to the process for developing the fair value estimates of the concession agreement, including
controls related to the determination and approval of the future revenues, estimates of future operational costs and the
discount rate. We involved valuation professionals with specialized skills and knowledge who assisted in:
(i) testing the Company’s process to develop the fair value estimate, including evaluating whether the data, inputs,
discount rate and assumptions are relevant and reliable and whether the models and methodologies used are appropriate;
(ii) evaluating management’s discount rate used by comparing it to an independently developed discount rate;
(iii) evaluating the Company’s assumptions related to the: (a) future revenue growth rates, including the underlying
assumptions related to tariffs and volumes of water and sewage based on SEMASA’s average consumption history; and
(b) estimates of future operational costs based on historical trends and experience, by comparing them to information
from internal and external sources, as available; and
(iv) developing an estimate of the fair value using the Company´s future revenues and operational costs and the
independently developed discount rate, and comparing this to the Company’s fair value estimate.
Evaluation of provisions and disclosures for environmental lawsuits
As discussed in notes 3.15, 6 (e) and 19 to the financial statements, the Company is involved in environmental lawsuits
related to fines imposed by public bodies and other such authorities for alleged environmental damages caused by the
Company. The Company, with the support and evaluation of its internal and external legal advisors, determines the
likelihood of loss and, where possible, estimates the amount of any eventual outflow of resources, for each lawsuit. The
Company records a provision when it is probable that an outflow of resources will be required and when the outflow
can be reasonably estimated. The Company discloses a contingency whenever the likelihood of loss is considered
possible, or when the likelihood of loss is considered probable but it is not possible to reasonably estimate the amount
of the outflow.
We identified the evaluation of provisions and disclosures for environmental lawsuits as a critical audit matter because
it required challenging auditor judgment and effort due to the subjective nature of the judgments about the likelihood
of loss of the environmental lawsuits and the estimates of the amounts that would be paid in the event of loss.
F-3
The primary procedures we performed to address this critical audit matter included the following. We tested certain
internal controls over the Company’s environmental lawsuit process, including controls related to the review and
approval of the determination of the likelihood of loss and the estimate of the loss amount, as well as controls over the
financial statement disclosures. We obtained and evaluated letters from the Company’s legal advisors in relation to the
lawsuits including their assessment of the likelihood of loss and estimates of eventual payments in the event of loss.
We compared these assessments and estimates to those used by the Company and evaluated the sufficiency of the
Company’s provisions and disclosures as they related to environmental lawsuits. We involved professionals with
specialized skills and knowledge to assist in evaluating the assumptions used by the Company in determining the
likelihood of loss for a sample of environmental lawsuits, by considering the merits of the lawsuits, judgments in similar
cases, the current status of the lawsuits and other available public information.
We have served as the Company’s auditor since 2016.
/S/ KPMG Auditores Independentes
São
April 30, 2020
Paulo
–
Brazil
F-4
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statement of Financial Position as of December 31, 2019 and 2018
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 assets
Intangible assets
Property, plant and equipment
Total noncurrent assets
Total assets
The accompanying notes are an integral part of these financial statements.
December 31, 2019
December 31, 2018
2,253,210
2,137,752
192,906
70,454
26,018
141,266
74,532
4,896,138
215,275
657,990
177,982
32,466
119,646
53,187
47,562
7,617,714
32,325,447
314,393
41,561,662
46,457,800
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
Note
7
9 (a)
10 (a)
8
17 (a)
9 (a)
10 (a)
11
12
13
14
15
F-5
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statement of Financial Position as of December 31, 2019 and 2018
Amounts in thousands of reais
Liabilities and equity
Current liabilities
Trade payables and contractors
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, 2019
December 31, 2018
369,631
2,859,843
594,279
250,318
800,352
550,247
474,078
110,291
273,932
170,453
6,453,424
10,384,866
433,996
143,693
485,561
3,360,932
3,183,689
103,321
272,535
18,368,593
24,822,017
15,000,000
7,547,954
(912,171)
21,635,783
46,457,800
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
24,013,430
15,000,000
5,100,783
(549,095)
19,551,688
43,565,118
16
17 (b)
23 (c)
19 (a)
21
14 (g)
14 (c) (iv)
16
18
19 (a)
20 (b)
14 (g)
14 (c) (iv)
23
F-6
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Income Statements for the
Years ended December 31, 2019, 2018 and 2017
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
2019
2018
2017
27 (b)
28
17,983,654
(10,137,637)
16,085,094
(9,086,456)
14,608,233
(8,778,963)
28
28
28
30
11
29
29
29
7,846,017
6,998,638
5,829,270
(803,404)
(128,099)
(1,187,844)
(18,748)
3,701
(693,480)
(166,727)
(996,877)
28,591
6,510
(686,012)
(82,681)
(1,098,990)
(5,679)
5,760
5,711,623
5,176,655
3,961,668
(1,173,425)
372,842
(233,098)
(807,967)
446,302
(902,671)
(688,280)
326,244
(96,018)
(1,033,681)
(1,264,336)
(458,054)
Profit before income tax and social contribution
4,677,942
3,912,319
3,503,614
Income tax and social contribution
Current
Deferred
18 (d)
18 (d)
(1,155,463)
(154,962)
(1,310,425)
(852,655)
(224,596)
(1,077,251)
(882,787)
(101,517)
(984,304)
Profit for the year
Earnings per share – basic and diluted (in reais)
3,367,517
4.93
2,835,068
4.15
2,519,310
3.69
24
The accompanying notes are an integral part of these financial statements.
F-7
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Comprehensive Income for the
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais
Profit for the year
Note
2019
2018
2017
3,367,517
2,835,068
2,519,310
Other comprehensive income (loss)
(363,076)
(10,994)
287,547
Items which will not be subsequently reclassified
to the income statement:
Actuarial gains and (losses) on defined benefit
Plans, net of income tax
Other
20 (b)
(363,059)
(17)
(10,994)
-
287,547
-
Total comprehensive income for the year
3,004,441
2,824,074
2,806,857
The accompanying notes are an integral part of these financial statements.
F-8
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Changes in Equity for the
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Balances as of December 31, 2016
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
Earnings reserves
Note
20 (b)
23 (d)
23 (c)
23 (c)
Capital
stock
10,000,000
-
-
-
-
-
-
-
Legal
Reserve
932,310
-
-
-
125,965
-
-
-
Investment
reserve
5,249,830
-
-
-
-
-
-
-
Additional
dividend
proposed
62,719
-
-
-
-
-
(62,719)
105,543
Retained
earnings
-
2,519,310
-
2,519,310
(125,965)
(598,336)
-
(105,543)
Other
comprehensive
loss
(825,648)
-
287,547
287,547
-
-
-
-
Total
15,419,211
2,519,310
287,547
2,806,857
-
(598,336)
(62,719)
-
-
-
-
-
10,000,000 1,058,275
-
1,689,466
6,939,296
(52,004)
-
53,539
-
(1,689,466)
-
-
-
(538,101)
(52,004)
-
17,513,009
Net income for the year
Actuarial gains (losses)
Total comprehensive income for the year
Legal reserve
Investments reserve capitalized
Interest on capital (R$0.9851 per share)
2017 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
Balances as of December 31, 2018
20(b)
23 (d)
23 (a)
23 (c)
23 (c)
23 (c)
-
-
-
-
-
-
141,755
-
-
5,000,000
-
-
-
-
-
-
-
-
-
-
15,000,000 1,200,030
-
-
-
-
(5,000,000)
-
-
-
-
1,901,126
3,840,422
20 (b)
Net income for the year
Actuarial gains (losses)
Total comprehensive income for the year
Legal Reserve
Interest on shareholder's equity (R$1.17012 per
share)
2018 additional proposed dividends, approved
(R$0.08827 per share)
Additional proposed dividends
Withholding income tax on interest on capital
-
attributable as minimum mandatory dividends
2,258,153
Transfer to investments reserve
6,098,575
Balances as of December 31, 2019
The accompanying notes are an integral part of these financial statements.
-
-
-
-
15,000,000 1,368,406
-
-
-
168,376
-
-
-
23 (d)
23 (c)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
23 (c)
23 (f)
23 (c)
-
-
-
-
-
-
(53,539)
118,859
(58,528)
-
60,331
-
-
-
-
-
(60,331)
141,203
2,835,068
-
2,835,068
(141,755)
-
(673,328)
-
(118,859)
-
(1,901,126)
-
3,367,517
-
3,367,517
(168,376)
(799,785)
-
(141,203)
-
(10,994)
(10,994)
-
-
-
-
-
-
-
(549,095)
-
(363,076)
(363,076)
-
-
-
-
2,835,068
(10,994)
2,824,074
-
-
(673,328)
(53,539)
-
(58,528)
-
19,551,688
3,367,517
(363,076)
3,004,441
-
(799,785)
(60,331)
-
(60,230)
-
80,973
-
(2,258,153)
-
-
-
(912,171)
(60,230)
-
21,635,783
F-9
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Cash Flows for the
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of
reais
Cash flow from operating activities
Profit before income tax and social contribution
Adjustments for:
Depreciation and amortization
Residual value of property, plant and equipment, intangible assets and investment properties written-off
Bad debt expense
Agreement signed with the municipality of Guarulhos
Agreement signed with the municipality of Santo André
Provisions and inflation adjustment
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
Interest and monetary restatement (PPP)
Provision from São Paulo agreement
Pension obligations
Other adjustments
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
December 31,
2019
December 31,
2018
December 31,
2017
4,677,942
3,912,319
3,503,614
1,780,094
45,434
128,099
-
(1,336,908)
384,620
568,679
280,526
46,038
(39,547)
(364,291)
(65,172)
(130,345)
(3,701)
397,576
135,013
267,423
5,863
6,777,343
(72,538)
26,358
(4,858)
239,437
(12,302)
(1,966)
(349,037)
(114,957)
159,794
63,276
2,863
(241,674)
(221,784)
(92,637)
6,157,318
(737,326)
(1,222,747)
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
6,325,278
(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)
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
5,878,323
(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
(676,087)
(932,110)
Net cash generated from operating activities
4,197,245
3,842,920
3,301,882
Cash flows from investing activities
Acquisition of contract assets and intangible assets
Restricted cash
Investment increase/(decrease)
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.
(3,195,247)
5,882
240
(78,159)
-
(3,267,284)
(2,132,559)
(13,078)
(1,136)
(50,645)
8,131
(2,189,287)
(1,957,780)
5.256
-
(18,920)
-
(1,971,444)
F-10
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Statements of Cash Flows for the
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of
reais (continued)
December 31,
2019
December 31,
2018
December 31,
2017
1,793,388
(2,148,198)
(739,996)
(548,079)
(63,057)
(1,705,942)
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)
(775,981)
746,144
396,826
3,029,191
2,253,210
(775,981)
2,283,047
3,029,191
746,144
1,886,221
2,283,047
396,826
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
Increase / (decrease) in cash and cash equivalents
Represented by :
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
Increase / (decrease) in cash and cash equivalents
The accompanying notes are an integral part of these financial statements.
F-11
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
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, 2019, the Company operated water and sewage services in 372 municipalities of the State of São Paulo. Most
of these municipalities’ operations are based on 30-year concession, program and services contracts; of the 372 municipalities
served, 324 have already signed contracts, accordingly by Law 11,445/07, until December 31, 2019.
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. The table below shows a summary of the
contractual situation:
December 31,
2019
December 31,
2018
Total municipalities that have already signed contracts (*)
Balance – intangible and contract assets
Percentage of intangible and contract assets
Gross revenue (except Construction Revenue)
Percentage of gross revenue (except Construction Revenue)
Municipalities with contracts under negotiation (expired):
Balance – intangible and contract assets
Percentage of intangible and contract assets
Gross revenue (except Construction Revenue)
Percentage of gross revenue (except Construction Revenue)
Municipalities with concession agreements due by 2030:
Balance – intangible and contract assets
Percentage of intangible and contract assets
Gross revenue (except Construction Revenue)
Percentage of gross revenue (except Construction Revenue)
Municipality of São Paulo:
Percentage of intangible and contract assets
Percentage of gross operating revenue
F-12
325
35,990,087
90.10%
13,700,777
84.92%
21
1,637,878
4.10%
451,603
2.80%
27
1,181,172
2.96%
588,628
3.65%
43.37%
44.48%
307
29,187,524
80.14%
11,297,242
79.26%
35
4,485,203
12.32%
858,277
6.02%
31
1,917,142
5.26%
980,679
6.88%
46.97%
47.05%
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(*) Includes the municipality of Tapiratiba, which signed a contract in October 2019, to begin operating in April 2020.
The Company operates under an authorization by public deed in the municipalities of Ilhabela, Juquitiba e Ubatuba. As of
December 31, 2019, the gross revenue calculated in these municipalities totaled R$89,165 (R$81,385 as of December 31, 2018 and
R$81,911 as of December 31, 2017) and the intangible asset was R$351,441 in the year ended December 31, 2019 (R$289,922 as of
December 31, 2018).
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.
Management expects that with the decrease in default resulting from the signature with the municipalities of Guarulhos and Santo
André, improved water security, due to the works carried out, and 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 the scheduled investments.
The financial statements were approved by Management on April 30, 2020.
F-13
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
2 Basis of preparation and presentation of the financial statements
The financial statements of the Company have been prepared in accordance with the International Financial Reporting Standards
– IFRS as issued by the International Accounting Standards Board – IASB. All material information related to the financial
statements, and this information alone, is being disclosed and corresponds to the information used by the Company’s Management
in its administration.
The financial statements have been prepared under the historical cost except for certain financial instruments measured at fair
value when required by the standards.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also
requires Management to exercise its judgment in the process of applying the Company's accounting policies. The areas involving
a higher degree to judgment or complexity, or areas where assumptions and estimates are significant to the financial statements
are described in Note 6.
3 Summary of Significant Accounting Policies
The main accounting policies applied in the preparation of these financial statements are defined below. These policies have been
applied consistently in all years presented, except for the note 3.20.
3.1 Cash and cash equivalents
Cash and cash equivalents include cash in hand, bank deposits, overdraft accounts and other short-term highly liquid investments
with maturities and intention of use by the Company’s Management in a period lower than three months.
3.2 Financial assets and liabilities
Financial Asset - Classification
As of December 31, 2019 and 2018, the Company classified its financial assets according to the following categories: measured at
amortized cost, measured at fair value through other comprehensive income and measured at fair value through profit or loss. The
classification depends on the purpose for which the financial assets were acquired. Management determines the classification of
the financial assets at inception. As of December 31, 2019 and 2018, the Company did not have financial assets classified as fair
value through other comprehensive income and fair value through profit or loss.
F-14
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
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, 2019 and 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.
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.
F-15
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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, 2019 and 2018, the methodology to calculate allowance for doubtful accounts consisted of using an estimate
calculated based on the average default observed in the last 12 months, per maturity range, in addition to estimating the recovery
of credits overdue for more than 360 days, based on the track record of the last two years. For estimate purposes, it also
considered the category of private and public customers, and segregated accounts receivable among the regular consumption
accounts and agreements.. The Company also concluded that the 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).
Deposit transactions and financial investments measured at amortized cost
The Company analyzes changes in the rates of investments in bank deposits certificates and information obtained from regulatory
agencies about the financial institutions. The likelihood of delinquency over 12 months and during the terms of these investments
was based on historical data provided by credit rating agencies for each credit level and analyzed in terms of sensitivity based on
current returns.
These deposits and financial investments are subject to an insignificant risk of change in value.
3.3 Operating income
(a) Revenue from sanitation services
Revenue from water supply and sanitation services are recognized as the water is consumed and services are provided. Revenues,
including 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.
F-16
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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, 2019 and 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.
As of December 31, 2019 and 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 assets, as the Company estimates that the fair value
of its consideration is equivalent to expected construction costs plus margin. The fee represents the additional margin related to
the work performed by the Company in relation to such construction contracts and it is added to construction costs, resulting in
the construction revenue.
F-17
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
3.4 Trade receivables and allowance for doubtful accounts
Trade receivables are amounts due from customers for services performed in the ordinary course of business. These are classified
as current assets, except when maturity exceeds 12 months after the end of the reporting period. In these cases, they are presented
as noncurrent assets.
The Company establishes an allowance for doubtful accounts for receivable balances at an amount that Management considers to
be sufficient to cover eventual losses, as described in note 3.2.
3.5 Inventories
Inventories comprise supplies for consumption and maintenance of the water and sewage systems are stated at the lower 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
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.
F-18
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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 15 (a).
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.
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.
F-19
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Financial resources received as donations for the construction of infrastructure are recorded under “Other operating income”.
(a) Concession agreements/program contracts/service contracts
The Company operates concession agreements including the rendering of basic sanitation, environmental, water supply and
sewage services signed with the 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 agreements 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 the concessions, 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, with cash or cash equivalents or also, in
general with the contract extension. These investments are amortized by the useful life of asset.
The details referring to amortization of intangible assets are described in Note 14 (c).
F-20
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Law 11,445/2007 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 license of use
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 assets 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 11,445/2007, 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 initially measured at fair value, which generally correspond to the bill and subsequently at amortized
cost, being classified as current liabilities, except when the maturity exceeds 12 months after the reporting date and are, otherwise,
presented as noncurrent liabilities.
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 16. 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.
F-21
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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 Salaries, payroll charges and contributions
Salaries, vacations, 13th salary, profit sharing and additional payments negotiated in collective labor agreements plus related
charges and contributions are recorded on the accrual basis.
The profit sharing plan for its employees is based on operational and financial targets of the Company, which creates provision
when it is contractually required or when there is a practice in the past that created a constructive obligation, and is recorded on
the accrual basis period as operating cost, selling, administrative expenses or capitalized in assets.
3.14 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.
F-22
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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.
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.
3.15 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.
3.16 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.
F-23
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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.
3.17 Taxes on revenues
Revenues from sanitation services are recognized on accrual basis for PASEP (Programa de Formação do Patrimônio do Servidor
Público) and Cofins (Contribuição para o Financiamento da Seguridade Social), calculated at the rates of 1.65% and 7.60%,
respectively.
In addition, revenues from sanitation services are also subject to the Regulatory, Control and Oversight Fee (TRCF - Taxa de
Regulação, Controle e Fiscalização), whose taxable event is the performance of regulatory, control and monitoring activities by
ARSESP, calculated at 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.
F-24
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
3.18 Pension obligations
(a) Defined benefit
The Company makes contributions to defined benefit plans on a contractual basis and sponsored thereby. The regular
contributions comprise the net administrative expenses and are recognized in the income statement for the period.
Liabilities from defined benefit pension plan obligations correspond to the present value of the defined benefit obligation at the
end of the reporting period, less the fair value of the plan’s assets. The defined benefit obligation (G1) and (G0) are calculated on
an annual basis by independent actuaries, using the projected unit credit method. The estimated future cash 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.
In an event where a curtailment relates to only some of the employees covered by a plan, or where only part of an obligation is
settled, the gain or loss includes a proportionate share of the past service cost and actuarial gains and losses. The proportionate
share is determined on the basis of the present value of the obligations before and after the curtailment or settlement.
(b) Defined contribution
The Company makes contributions to defined contribution plans on a contractual basis and sponsored thereby, a supplementary
private pension entity that provides post-employment benefits to its employees, in which the Company makes fixed and equal
contributions to employees, within the limits set by regulation. In this model, the benefits paid are directly related to the amount
contributed, with no deficits to be covered by the Company.
3.19 Financial revenues and expenses
Financial revenue is primarily comprised of interest and inflation adjustments resulting from financial investments, escrow
deposits and negotiations with customer to pay by installments, calculated using the effective interest rate method.
Financial expenses are primarily comprised of interest, inflation adjustments and exchange rate changes on borrowings and
financing, provisions, public-private partnership and program contract commitments. These financial income and expenses are
calculated using the effective interest rate method.
F-25
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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.
3.20 Leases
As of December 31, 2018 lease agreements were classified as finance lease when property, risks and rewards inherent to the
ownership of asset to the lessee are transferred. Other leases were classified as operational lease, recognized as expenses in the
income statement on a straight-line basis during the lease term.
Finance lease agreements were 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.
On January 1, 2019, the Company applied IFRS16, which introduced one sole lease model, replacing the concept of classifying
between operating and finance lease, which was applied by the Company up to December 31, 2018. The impact of this new
standard is detailed in Note 4.1.
3.21 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.
3.22 Dividends and interest on capital
The Company uses the tax benefits of distributing dividends as interest on capital, as permitted by Brazilian Law and based on the
Bylaws. This distribution of dividend is accounted for in accordance with Brazilian Law 9,249/95 for tax deductibility purposes,
limited to the daily pro rata fluctuation of the Long-term Interest Rate (TJLP). The benefit attributed to the shareholders is
recognized in the current liability against Equity, based on its by-laws. Dividends and interest on capital over the minimum
established in the by-laws are recognized when approved by the shareholders in the shareholders’ meeting, except for taxes
incurring in the distribution of interest on capital. The tax benefit of the interest on capital is accrued in the income statement of
the year, under the same recognition basis of expenses with interest on capital.
F-26
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
3.23 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.
3.24 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.
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.
F-27
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
3.25 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.
F-28
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
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,
2019
New standards and revisions
Standard
Description
Impact
IFRS 16 – Leases
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 superseded the leases guidance including IAS 17 Leases and IFRIC 4, SIC
15 and SIC 27 Determining Whether an Arrangement Contains a Lease.
(*) See impact analysis below.
IFRIC 23 – Uncertainty over Income Tax
Treatments1
Clarify accounting when there are uncertainties about the treatment of taxes on
profit.
Amendments to IFRS 9 – Prepayment
Features with Negative Compensation
Amendments to IAS 28 – Long-term
interests in Associates and Joint Ventures
Annual Improvements to IFRSs: 2015-
2017 Cycle (Amendments to IFRS 3, IFRS
11, IAS 12 and IAS 23)
Amendments to IAS 19 – Plan
Amendment, Curtailment or Settlement
Clarify that, to determine whether a prepayment feature meets the condition of
“solely payments of principal and interest”, the party exercising the option may
pay or receive compensation for the prepayment regardless of the reason for the
prepayment, that is, the prepayment features with negative compensation do not
automatically break the condition of “solely payments of principal and interest”.
Clarify that IFRS 9, including its requirements for impairment, is applicable to
other financial instruments in an associate or joint venture to which the equity
method is not applicable. Include long-term investments that, in substance, are
part of the entity's net investment in an associate or joint venture.
• IFRS 3 – Business Combinations - clarify that when the control of a business that
is a joint operation is obtained, the requirements for business combination are
applied in stages, including the remeasurement of the interest previously held in
the joint operation at fair value.
• IFRS 11 – Joint Arrangements - clarify that when a party that participates in a
joint operation that corresponds to a business, but does not have joint control of
that operation, obtains joint control of that joint operation, its interest previously
held in the joint operation is not remeasured.
• IAS 32 – Income Taxes - clarify that the Company must recognize the
consequences of income tax on dividends in profit or loss, in other
comprehensive income or in equity, depending on where the transactions that
generated the profit to be distributed were originally recognized.
• IAS 23 – Borrowing Costs – clarify that if there is any specific borrowing
outstanding after the corresponding asset is ready for its intended use or sale,
that borrowing becomes part of the funds that the Company usually borrows to
calculate the capitalization rate on borrowings in general.
The amendments clarify that the cost of past services (or settlement gain or loss) is
calculated by measuring the defined benefit liability (asset) based on updated
assumptions and comparing the benefits offered and the plan’s assets before and
after the change of the plan (or its curtailment or settlement) but ignoring the effect
of the asset ceiling (which may arise when the defined benefit plan is in surplus).
IAS 19 clarifies that the change in the effect of the asset ceiling resulting from the
change in the plan (or its curtailment or settlement) is determined in a second step
and is normally recognized in other comprehensive income.
The application of this interpretation 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 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.
F-29
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(*) Transition to IFRS 16 - Leases
The new standard replaces IAS 17 – “Leases” and corresponding interpretations, introducing significant changes to lessees, as it
requires lessees to recognize the liability of future payments and the right of use of leased assets to virtually all lease 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 were impacted as follows:
a) recognition of right-of-use assets and lease liabilities in the statement of financial position, initially measured at present value
of future lease payments;
b) recognition of amortization expenses of right-of-use assets and interest expenses on lease liabilities in the income statement;
and
F-30
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
c) separation 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 applied 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 equals
the Lease Liability, without the cumulative effect of the initial application of this new standard recorded as adjustment to the
opening balance of 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 an identified asset for a defined period of time in exchange of consideration.
The Company’s Management analyzed contracts (out of a total of approximately 20,000 contracts), evaluating whether they
contained leases in accordance with IFRS 16. This analysis identified mainly impacts related to vehicles and properties leased from
third parties, corresponding to nearly 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 RS$ 19) will remain
on a linear basis, as permitted by IFRS 16.
On January 1, 2019, the measurement of lease liabilities corresponds to the total future fixed lease payments, adjusted to present
value, considering an incremental rate on borrowings, which corresponds to the incremental borrowing 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 incremental borrowing rate per maturity term of each borrowing contract.
The Company decided to use the practical expedient of using an incremental borrowing rate of 8.97% p.y., 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 the Company’s interests, i.e. when it is reasonable certain that the option will be exercised.
F-31
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
The Company applied the practical expedient relating to the definition of leases during the transition period. This means that it
applied IFRS 16 to all agreements signed before January 1, 2019, identified as leases in accordance with IAS 17 and IFRIC 4.
After carrying out analysis, the Company concluded that on January 1, 2019, 70 contracts fell under the scope of IFRS 16. The
adoption of this standard increased assets, due to the recognition of the right of use of leased assets, and liabilities, as shown below:
Impact from first-time adoption of the standard
Future payments of fixed
leases
Impact of the discount
rate
Right of use of leased
assets
Lease liabilities
Group
Vehicles
Properties
Equipment
Other
Leases (IAS 17)*
63,795
7,525
741
4,243
-
(9,313)
(1,333)
(100)
(603)
-
54,482
6,192
641
3,640
581,388
646,343
54,482
6,192
641
3,640
568,666
633,621
Total
* Leases recognized in accordance with IAS 17 through December 31, 2018.
76,304
(11,349)
See additional information in Notes 14 (k), 16 and 32.
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 17 – Insurance Contracts2
Establishes the principles for the recognition, measurement, presentation and
disclosure of insurance contracts.
IFRS 17 will supersede IFRS 4 Insurance Contracts.
The Company does not expect effects from
adopting this standard.
Amendments to IFRS 10 and IAS 28
– Sale or Contribution of Assets
between an Investor and its
Associate or Joint Venture3
Amendments to IFRS 3 – Definition
of a Business1
Clarify situations involving the sale or contribution of assets between an investor
and its associates or joint venture.
Clarify that even though businesses normally present outputs (“products”),
products are not necessary for an integrated set of activities and assets to qualify as
businesses. To be considered as a business, an acquired set of activities and assets
must include at least one input and a substantive process that together contribute
significantly to the ability to create products.
The Company is assessing the impacts and
effects of the amendments, however, it does not
expect material effects from adopting this
standard.
The Company does not expect effects from
adopting this amendment.
Amendments to IAS 1 and IAS 8 –
Definition of Material1
The purpose of the amendments is to facilitate the understanding of the definition
of material in IAS 1 and not to change the underlying concept of materiality in the
IFRS Standards. The concept of “hidden” material information by immaterial
information was included as part of the new definition.
The Company is assessing the impacts and
effects of the amendments, however it does not
expect material effects from adopting this
standard.
F-32
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
1 Effective for annual periods beginning on or after January 1, 2020.
2 Effective for annual periods beginning on or after January 1, 2021.
3 The effective date for these amendments was deferred indefinitely.
There are no other standards and interpretations not yet adopted that may, in the opinion of Management, have a significant
impact on the result for the year of equity disclosed by the Company in its financial statements.
F-33
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
5 Risk Management
5.1 Financial Risk Management
Financial risk factors
The Company's activities are affected by Brazilian economic scenario, making it exposed to market risk (exchange rate and interest
rate), credit risk and liquidity risk. 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.
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$6,382,009 as
of December 31, 2019 (R$6,694,912 as of December 31, 2018). Below, the Company’s exposure to exchange risk:
F-34
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
December 31, 2019
December 31, 2018
Foreign currency
R$ Foreign currency
R$
Borrowings and financing – US$
Borrowings and financing – Yen
Interest and charges from borrowings and financing – US$
Interest and charges from borrowings and financing – Yen
Total exposure
Borrowing cost – US$
Borrowing cost – Yen
Total foreign-currency denominated borrowings (Note 16)
1,051,881
56,452,885
4,239,817
2,097,225
32,242
12,725
6,382,009
(20,173)
(3,038)
6,358,798
1,191,152
57,463,173
4,615,476
2,026,726
40,193
12,517
6,694,912
(22,390)
(3,113)
6,669,409
The 4.7% decrease in foreign currency-denominated debt from December 31, 2018 to December 31, 2019 was mainly due to
decrease of debt in US dollar and Yen, resulting from the amortizations occurred in 2019, mitigated by the increase in exchange
rates, as shown in the table below:
December 31, 2019
December 31, 2018
Variation
US$
Iene
R$ 4.0307
R$ 0.03715
R$ 3.8748
R$ 0.03527
4.0%
5.3%
As of December 31, 2019, 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$638,201 (R$669,491 as of December 31, 2018), lower or higher, mainly as a result of exchange losses or gains
on the translation of foreign currency-denominated loans.
Interest rate risk
This risk arises from the possibility that the Company could incur losses due to fluctuations in interest rates, increasing the
financial expenses related to borrowings and financing.
The Company has not entered into any derivative contract to hedge against this risk; however continually monitors market interest
rates, in order to evaluate the possible need to replace its debt.
F-35
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
The table below provides the Company's borrowings and financing subject to variable interest rate:
CDI(i)
TR(ii)
IPCA(iii)
TJLP(iv)
LIBOR(v)
Interest and charges
Total
December 31, 2019
December 31, 2018
1,866,755
1,675,203
1,366,134
1,381,342
2,829,073
105,667
9,224,174
1,250,000
1,637,290
1,614,595
1,322,854
3,259,295
134,725
9,218,759
(i) CDI – (Certificado de Depósito Interbancário), an interbank deposit certificate
(ii) TR – Interest Benchmark Rate
(iii) IPCA – (Índice Nacional de Preços ao Consumidor Amplo), a consumer price index
(iv) TJLP – (Taxa de Juros a Longo Prazo), a long-term interest rate index
(v) LIBOR – London Interbank Offered Rate
Another risk to which the Company is exposed, is the mismatch of monetary restatement indices of its debts with those of its
service revenues. Tariff adjustments of services provided by the Company do not necessarily follow the increases in the inflation
indexes to adjust loans, financing and interest rates affecting indebtedness
As of December 31, 2019, if interest rates on borrowings and financing had been 1 percentage point higher or lower with all other
92,242
variables
(R$ 92,188 as of December 31, 2018) lower or higher, mainly as a result of lower or higher interest expense on floating rate
borrowings and financing.
constant,
effects
before
would
profit
taxes
been
have
held
the
R$
on
(b) Credit risk
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, 2019 are the carrying amounts of instruments classified as cash and
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.
F-36
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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. For the
credit quality of the banks, such as deposits and financial investments, the Company considers the lower rating published by
three main international rating agencies (Fitch, Moody's and S&P), according to internal policy of market risk management:
Cash and cash equivalents
AA+(bra)
AAA(bra)
Other (*)
December 31, 2019
December 31, 2018
2,193,725
41,992
17,493
2,253,210
2,966,080
45,430
17,681
3,029,191
(*) 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, 2019, 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
Fitch
AA(bra)
-
AA(bra)
AAA(bra)
AAA(bra)
Moody's
Aa1.br
Aaa.br
Aa1.br
Aa1.br
Aa1.br
Standard Poor's
-
brAAA
brAAA
brAAA
brAAA
F-37
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(c) Liquidity risk
The Company's liquidity is primarily reliant upon cash provided by operating activities and borrowings and financing obtained 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.
2020
2021
2022
2023
2024
2025
onwards
Total
As of December 31, 2019
Liabilities
Borrowings and financing
Accounts payables to suppliers and contractors
Services payable
Public-Private Partnership – PPP
Program contract commitments
Cross default
3,303,736
369,631
474,078
383,421
276,580
1,574,711
-
-
383,421
46,733
1,595,436
-
-
383,421
31,983
1,317,996
-
-
383,421
31,983
1,574,770
-
-
338,765
1,014
6,715,873
-
-
4,615,324
13,771
16,082,522
369,631
474,078
6,487,773
402,064
The Company has borrowings and financing agreements including cross default clauses, e.g., the early maturity of any debt, may
imply the early maturity of these agreements. The indicators are continuously monitored in order to avoid the execution of these
clauses and the more restrictive are showed in Note 16 (d).
F-38
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
5.2 Capital management
The Company’s objectives when managing capital are ensure its ability to continue as a going concern in order to provide returns
for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital.
The Company monitors capital based on the leverage ratio. This ratio corresponds to net debt divided by total capital (shareholders
and providers of capital). Net debt corresponds to total borrowings and financing less cash and cash equivalents. Total capital is
calculated as total equity as shown in the statement of the financial position plus net debt.
December 31, 2019
December 31, 2018
Total borrowings and financing (Note 16)
(-) Cash and cash equivalents (Note 7)
Net debt
Total equity
Total capital (shareholders + providers of capital)
Leverage ratio
13,244,709
(2,253,210)
10,991,499
21,635,783
32,627,282
34%
13,152,796
(3,029,191)
10,123,605
19,551,688
29,675,293
34%
As of December 31, 2019, the leverage ratio remained at 34% compared to December 31, 2018, mainly due to the increase in equity,
generated by the 2019 earnings retention, which was mitigated by the decrease of cash and cash equivalents.
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.
F-39
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
5.4 Financial instruments
The Company did not have financial assets classified as fair value through other comprehensive income and fair value through
profit or loss. The Company’s financial instruments included in the amortized cost category comprise cash and cash equivalents,
restricted cash, trade receivables, balances with related parties, other receivables, and balances receivable from the Water 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, 2019
December 31, 2018
Carrying amount
Fair value
Carrying amount
Fair value
2,253,210
26,018
2,353,027
32,466
194,178
2,253,210
26,018
2,353,027
32,466
194,178
3,029,191
31,900
2,052,416
49,136
180,681
3,029,191
31,900
2,052,416
49,136
180,681
Additionally, SABESP has financial instrument assets receivables from related parties, in the amount of R$850,896 as of December
31, 2019 (R$843,250 as of December 31, 2018), 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$747,579 (R$737,503 as of December 31, 2018), 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.
The agreement with the municipality of Santo André was recorded considering the Level 3 fair value hierarchy, due to the fact that
this transaction is unobservable under market conditions, i.e., the inputs were not based on market data. All recurring and non-
recurring transactions carried out by the Company, when classified at Level 3, are assessed by SABESP’s Controllership, in order
to assess unobservable data and any valuation adjustments.
F-40
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Financial liabilities
December 31, 2019
December 31, 2018
Carrying amount
Fair value
Carrying amount
Fair value
Borrowings and financing
Accounts payables to suppliers and contractors
Services payable
Program contract commitments
Public-Private Partnership - PPP
13,244,709
369,631
474,078
377,253
3,293,980
13,937,611
369,631
474,078
377,253
3,293,980
13,152,796
465,993
454,022
373,009
3,413,124
13,116,684
465,993
454,022
373,009
3,413,124
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.
F-41
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(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, 2019.
(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, 2019.
(vii) Leases and leases based on IFRS 16 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, 2019.
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
date, 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
The preparation of the financial statements requires management to make certain judgments and use assumptions and estimates
based on experience and other factors considered relevant, which affect the values of assets and liabilities and which may present
results that differ from actual results.
The significant judgment made by the Company is related to the recognition of revenue.
The areas that require a higher level of judgment and have greater complexity, as well as the areas in which assumptions and
estimates are significant for the financial statements, are disclosed 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.
F-42
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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.
(b) Intangible assets arising from concession and program contracts
The Company recognizes as intangible assets those 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
agreements 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, Service contracts 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 14.
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 20.
The liability recognized in the balance sheet in relation to defined benefit pension plans is the present value of defined benefit
obligation on the balance sheet date, less the fair value of plan’s 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.
F-43
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(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.
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 deferred taxes is described in Note 18.
(e) Provisions
The provisions for civil, labor, environmental and tax risks are recorded based on Note 3.14. 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
19.
7 Cash and cash equivalents
Cash and banks
Cash equivalents
Total
December 31, 2019
December 31, 2018
176,497
2,076,713
2,253,210
151,558
2,877,633
3,029,191
F-44
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Cash and cash equivalents include cash, bank deposits and high-liquidity short-term financial investments, mainly represented by
repurchase agreements (accruing CDI interest rates), 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, deposited in a fund, in which SABESP is exclusive
quotaholder, at Banco do Brasil.
The fund is intended, exclusively, to receive funds from SABESP, and as of December 31, 2019, it was essentially composed of
investments in governments bonds, repurchase agreements and fixed income financial assets.
Due to SABESP is the exclusive quotaholder and has control over the fund, it should be consolidated in the Company's financial
statements, however, due to the fact that 99% of the balance has already been presented in SABESP's financial statements under
the items of cash and cash equivalents and the magnitude of the remaining balance, referring to the administration and
maintenance expenses of the fund, is irrelevant (R$ 205), the Company chose not to present the balances between Parent Company
and Consolidated due to the fact that there is no significant difference between such balances and for not generating relevant
disclosure to users of the financial statements.
The average yield of cash equivalents corresponds to 98.02% of CDI in December 2019 (98.28% in December 2018).
8 Restricted cash
Agreement with the São Paulo municipal government (i)
Brazilian Federal Savings Bank – escrow deposits (ii)
Other
December 31, 2019
December 31, 2018
17,068
2,245
6,705
26,018
19,977
5,880
6,043
31,900
(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.
F-45
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
9 Trade receivables
(a) Financial position balances
Private sector:
General (i) and special (ii) customers
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, 2019
December 31, 2018
1,505,150
378,341
1,883,491
472,666
2,805
277,047
752,518
3,278
9,871
13,149
745,884
3,395,042
(1,042,015)
2,353,027
2,137,752
215,275
2,353,027
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
F-46
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
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.
(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. The balance
presented does not include the municipality of Mauá, as it is questioning in court the tariffs charged. Therefore, SABESP
did not record revenues and receivables of this municipality, due to low expectation of realization, in accordance with
IFRS 15 and IFRS 9, as the Company does not believe that it is likely that it will receive the consideration it is entitled to
in exchange for the services transferred to the municipalities.
F-47
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
The historical value of unrecognized receivables from these municipalities is as follows:
December 31,
2019
Wholesale customers – Municipal governments:
Mauá
Santo André (*)
Total
677,298
-
677,298
December 31,
2018
601,910
1,164,399
1,766,309
(*) Agreement with the municipality of Santo André
On July 31, 2019, the Company entered into a debt payment and receipt Consent Decree with the Municipality of Santo
André (“Santo André”) and the Santo André Municipal Water and Sanitation Service (SEMASA), aiming to settle
SEMASA’s existing debt upon the transfer of sanitation services to SABESP for 40 years.
On the same date, the São Paulo State, the Municipality of Santo André and SABESP signed the Public Service Provision
Agreement of Water Supply and Sewage Services in the Municipality of Santo André, through which the São Paulo State
and the Municipality of Santo André granted SABESP the right to provide services for a period of 40 years.
Due to the signature of the service agreement the Company recognized as revenue, under the fair value method, the
amount of R$ 1,336,908, and the respective trade receivable was given as payment for the transfer of sanitation
services for a 40-year period and incorporated into the intangible assets.
Due to the service transfer, the Company paid R$ 70,000 to settle administrative costs and terminate the services provided
by SEMASA. Additionally, R$ 90,000 was transferred in two annual installments, the first of which due 30 days after the
signature of the agreement, and the second by February 28, 2020; these amounts shall be allocated to sanitation initiatives.
The total amount of R$ 160,000 was recorded in intangible assets against current liabilities.
From the first quarter of 2021, 4% of gross revenue earned in the municipality by SABESP, net of Cofins/Pasep, ARSESP’s
Regulation, Control and Oversight Fee (TRCF) and any business charges levied on revenue, will be allocated to
environmental sanitation, housing, drainage and other urban infrastructure services in the Municipality.
F-48
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Receivables mentioned above, that were discussed in court, in the form of registered warrants, will be held as collateral of
compliance with the Adjustment Instrument. The payment of the registered warrants will be suspended during the term
of the Decree.
The amount collateralized will be progressively reduced according to the following rules:
• Until the seventh (7th) anniversary of the signature date of the Agreement, Credits 1 and 2 will be reduced
by an amount equivalent to one eighty-fourth (1/84) per full month, releasing the collateralized amount
related to Credit 1 followed by the amount related to Credit 2;
• After the seventh (7th) anniversary and up to the twelfth (12th) anniversary of the Agreement’s signature
date, Credits 3 and 4 will be reduced by an amount equivalent to one-sixtieth (1/60) per full month,
releasing the collateralized amount related to Credit 3 followed by the amount related to Credit 4;
• After the twelfth (12th) anniversary and up to the twenty-seventh (27th) anniversary of the Agreement’s
signature date, Credit 5 will be reduced by an amount equivalent to one-one hundred and eightieth (1/180)
per full month;
• After the twenty-seventh (27th) anniversary and up to the thirty-fifth (35th) anniversary of the Agreement’s
signature date, Credits 6 and 7 will be reduced by an amount equivalent to one ninety-sixth (1/96) per full
month, releasing the collateralized amount related to Credit 6 followed by the amount related to Credit 7;
• After the thirty-fifth (35th) anniversary and up to the fortieth (40th) anniversary of the Agreement’s
signature date, Credits 8 and 9 will be reduced by an amount equivalent to one-sixtieth (1/60) per full
month, releasing the collateralized amount related to Credit 8 followed by the amount related to Credit 9.
The measurement of the non-recurring fair value for the transaction with Santo André was categorized within level 3 of
the fair value hierarchy, in its initial recognition, in the amount of R$ 1,336,908.
F-49
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
The Company considered the discounted cash flow technique to carry out the evaluation, based on the judgment that the
market participants could and / or should apply. The discounted cash flow considered the present value of the net cash
flows expected to be generate with the Company’s assumption water supply and sewage services for a period of 40 years,
taking into consideration the following unobservable inputs:
• Average tariff and average volume of water and sewage by economy based on SEMASA’s average consumption
histogram, referring to the period between January and December 2018;
• Indirect revenues based on historical data of the municipalities operated by SABESP in the Metropolitan Region of
São Paulo;
• Average unit cost of the Metropolitan Region of São Paulo with synergy, due to economies of scale and the use of
existing structures at SABESP (administrative and operational);
• Personnel costs - in the first two years, considering the payment of employees assigned by SEMASA;
• Costs and investments in the integrated metropolitan supply system prorated based on the volume of water supplied
to the municipality;
• Exclusive investments by the municipality following the Municipal Sanitation Plan;
• Complementary investments to be made by the municipality and paid by SABESP, corresponding to na installment
of R$ 90 million in the first year, plus 4% of net revenue as of the second year;
• Projected cash flow discount rate - 8.11% per year (WACC).
(b) The aging of trade receivables is as follows
December 31, 2019
December 31, 2018
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
1,762,606
330,488
164,913
86,765
58,971
81,003
33,206
877,090
1,632,436
3,395,042
F-50
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
The increase in the current balance was mainly due to the assumption of the provision of sanitation services to the municipalities
of Guarulhos and Santo André, as well as by the 4.39% tariff increase.
(c) Allowance for doubtful accounts
December 31, 2019
December 31, 2018
December 31, 2017
Balance at beginning of the year
Private sector /government entities
Recoveries
1,099,442
54,064
(111,491)
1,067,973
61,315
(29,846)
1,068,747
75,973
(76,747)
Net additions for the year
(57,427)
31,469
(774)
Balance at the end of the year
1,042,015
1,099,442
1,067,973
F-51
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Reconciliation of estimated/historical losses of income
December 31, 2019
December 31, 2018
December 31, 2017
Write-offs
(Losses)/reversal with state entities - related parties
(Losses) with private sector / government entities
(Losses)/reversal with wholesale customers
Recoveries
(179,929)
(5,597)
(54,064)
-
111,491
(184,555)
1,294
(61,315)
(29,458)
107,307
(171,729)
21,510
(75,973)
9,781
133,730
Amount recorded expense
(128,099)
(166,727)
(82,681)
The Company does not have customers representing 10% or more of its total revenues.
10 Related-Party Balances and Transactions
(a) Accounts receivable, interest on capital payable, revenue and expenses with GESP
Accounts receivable
Current:
Sanitation services (i)
Allowance for losses (i)
Reimbursement for retirement and pension benefits paid (G0):
- monthly flow (payments) (ii) and (vi)
- 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
December 31, 2019
December 31, 2018
131,851
(39,417)
122,522
(33,820)
31,584
68,888
22,926
62,520
192,906
10,883
647,107
657,990
850,896
103,317
747,579
850,896
401,963
174,148
17,045
652,057
669,102
843,250
105,747
737,503
843,250
338,407
F-52
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Revenue from sanitation services
Payments received from related parties
2019
2018
2017
556,574
(546,365)
501,146
(509,672)
462,989
(471,081)
Receipt of GESP reimbursement referring to Law 4,819/58
(152,112)
(173,516)
(192,889)
(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) of this Note.
F-53
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
The Company recognized R$39,417 as of December 31, 2019 (R$33,820 as of December 31, 2018 and R$35,114 as of December 31,
2017) as allowance for losses in accordance of IFRS 9.
(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 20 (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 Mirim, 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.
F-54
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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.
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 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 (iii) and R$316,027 corresponding to the
inflation adjustment of the principal until February 2015.
F-55
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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, which
were sold on April 20, 2016; 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.
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$316,027 in 60 installments, starting these payments at the end of Principal Amount installment
payment. The amount will be adjusted by IPCA to the start date of payments and, as of this date, IPCA will be incurred plus
0.5% simple interest rates/month over the amount of each installment.
As of December 31, 2019, the balance receivable totaled R$ 68,888 in current assets (R$ 62,520 as of December 31, 2018) and
R$ 647,107 in noncurrent assets (R$ 652,057 December 31, 2018).
(v) Disputed Amounts
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.
F-56
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
By entering into the third amendment, the State's Legal Representative (PGE) agreed to reassess the differences that gave rise to
the Disputed Amount of benefits set out in Law 4,819/58. At the time, the expectation was based on the willingness of the PGE to
reanalyze the issue and the implied right of the Company to the reimbursement, including based on opinions from outside legal
advisors.
However, the latest opinions issued by the PGE and received on September 4 and 22, 2009 and January 4, 2010, refute the
reimbursement of previously defined as Disputed Amount.
Even though the negotiations with the State are still in progress, it is not possible to assure that the Company will recover the
disputed receivables without dispute.
As part of the actions intended to recover the receivables that management considers due by the State, related to discrepancies in
the reimbursement of the pension benefits paid by the Company, SABESP: (i) on March 24, 2010, reported to the controlling
shareholder the official letter approved by the executive committee, proposing that the matter be discussed at the São Paulo Stock
Exchange (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.
As of December 31, 2019 and 2018, the disputed amounts between SABESP and GESP, corresponding to additional retirement
and pension benefits paid (Law 4,819/1958), totaled R$ 1,195,217 and R$ 1,107,104, respectively. The Company recorded
allowances for doubtful accounts for such amounts.
(vi) Actuarial liability
The Company also recognized an actuarial liability corresponding to additional retirement and pension benefits paid to employees,
retired employees and pensioners of Plan G0. As of December 31, 2019 and 2018, the amounts corresponding to the actuarial
liability totaled R$ 3,046,255 and R$ 2,606,107, respectively. For more information on additional retirement and pension benefits,
see Note 20 (b).
F-57
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(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.
On 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 and the SABESP will continue using the reservoirs.
As of December 31, 2019, the Company recorded R$16,653 and R$87,231 in Other Liabilities, under current and noncurrent
liabilities, respectively (in December 31, 2018, R$16,055 and R$90,518). In 2019, the Company paid the amount of R$17,246.
(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 GESP
The Company has personnel assignment agreements with entities related to the State Government, whose expenses are fully passed
on and monetarily reimbursed. In 2019, the expenses related to personnel assigned by SABESP to other state government entities
amounted to R$4,881 (R$8,903 in 2018 and R$9,853 in 2017).
In 2019, the expenses related to personnel assigned by other entities to SABESP were R$ 139 (In 2018, the expenses related to
personnel assigned by other entities to SABESP were R$ 116 and in 2017 there were no expenses related to personnel assigned by
other entities to SABESP).
F-58
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(f) Non-operating assets
As of December 31, 2019, the Company had an amount of R$3,613 related to a land and lent structures (as of December 31, 2018
– R$ 969).
(g) SABESPREV
The Company sponsors a private defined benefit pension plan (G1 Plan), which is operated and administered by SABESPREV. The
net actuarial liability recognized as of December 31, 2019 amounted to R$314,677 (R$363,902 as of December 31, 2018), according
to Note 20 (b).
(h) Compensation of Management Key Personnel
- 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.
F-59
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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$5,344, R$4,077 and R$3,813 for 2019, 2018 and 2017, respectively. An additional amount of R$1,348, related to
the bonus program, was recorded in 2019 (R$538 in 2018 and R$556 in 2017).
(i) Loan agreement through credit facility
The Company holds interest in certain Special Purpose Entities (SPEs), not holding the majority interest but with cast vote and
power of veto in some issues, with no ability to use such power of veto in a way to affect returns over
investments. Therefore, these SPEs are considered for accounting purposes as joint arrangements.
The Company entered into a loan agreement through credit facility with the SPE Aquapolo Ambiental S/A to finance the operation
of this company, until the borrowings and financing requested with financial institutions is granted.
As of December 31, 2019, the balance of principal and interest related to this agreement was R$ 34,992, recorded in Noncurrent
Assets under "Other Accounts Receivables" (December 31, 2018 - R$ 32,857) with interest at the CDI rate + 1.2% per year.
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.
(j) “Se Liga na Rede” (Connect to the Network Program)
The State Government enacted the State Law no. 14,687/1912, 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, 2019, the program total amount was R$117,272 (R$100,928 as of
December 31, 2018), there was no balance receivable as of December 31, 2019 and 2018 from related parties. The amount of
R$65,099 (R$49,919 as of December 31, 2018) was recorded in the group of intangible assets and R$52,174 was reimbursed by
GESP (R$51,009 as of December 31, 2018) from the beginning of the program until December 31, 2019.
F-60
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
11 Investments
The Company holds interest in certain Special Purpose Entities (SPE). Although SABESP has no majority shares of its investees,
the shareholders’ agreement provides for the power of veto in certain management issues, however, with no ability to use such
power of veto in a way to affect returns over investments, indicating participating shared control (joint venture – IFRS 11).
The Company holds interest recognized by the equity accounting in the following investees:
Sesamm
As of August 15, 2008, the Company, together with GS Inima Brasil Ltda (“GS Inima”), successor of Técnicas y Gestion
Medioambiental S.A.U. (“TGM”) and GS Inima Environment S/A (currently OHL Medio Ambiente); and Estudos Técnicos e
Projetos ETEP Ltda. (“ETEP”), succeeded by ECS Operações e Participações Ltda (“ECS”), incorporated Sesamm – Serviços de
Saneamento de Mogi Mirim S/A for a period of 30 years from the date the concession agreement with the municipality for the
purpose of providing complementary services to the sewage diversion system and implementing and operating sewage treatment
system in the municipality of Mogi Mirim, including the disposal of solid waste.
On October 30, 2019, ECS shares were transferred to GS Inima Brasil, after the transfer SABESP continues to hold a 36% interest
and GS Inima has increased to 64%.
Sesamm's capital as of December 31, 2019, totaled R$ 19,532, and was represented by 19,532,409 registered common shares
without a par value.
The operations initiated in June 2012.
F-61
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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, 2019, the capital of Águas de Andradina totaled R$ 17,936, 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.
The Company pledges as guarantee 100% of its shares in Águas de Andradina as a counter guarantee for the issuance of Letters of
Guarantee with BNDES.
The operations initiated in October 2010.
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, 2019, 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%.
The Company pledges as guarantee 100% of its shares in Águas de Castilho as a counter guarantee for the issuance of Letters of
Guarantee with BNDES.
The operations initiated in January 2011.
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, 2019, 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%.
F-62
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
As guarantee for the financing for Saneaqua Mairinque, the Company pledges 100% of its shares in said company..
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.
In 2019, the investee received a capital contribution in the amount of R$ 24,277, through the issuance of 24,277,245 new registered
common shares with no par value, through the conversion of the total credits held by the shareholders against the Company,
resulting from Loan Agreements.
As of December 31, 2019, the capital totaled R$ 37,677, and was represented by 37,677,245 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 of Capuava and the metropolitan
region of São Paulo.
F-63
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
As of December 31, 2019, the capital of Aquapolo totaled R$ 36,412, and was represented by 42,419,045 registered common shares
without a par value. SABESP holds 49% of its equity interest.
The Company pledges as guarantee to the loan acquired through the issuance of debentures, 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, 2019, 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, 2019, operations had not initiated yet.
Below is a summary of the investees’ financial information and SABESP’s equity interest:
Company
Equity
Capital
increase
Dividends
distributed
Other
Comprehensive
Income
Profit (loss) for the year
2019
2018
2017
2019
2019
2019
2019
(*)
2018
2017
Sesamm
Águas de Andradina (i)
Águas de Castilho
Saneaqua Mairinque
Attend Ambiental
Aquapolo Ambiental
Paulista Geradora de Energia
45,923
30,065
7,242
4,783
7,486
37,772
7,144
43,547
24,832
6,084
5,720
1,426
30,170
7,625
39,262
19,392
4,880
4,327
5,169
18,757
8,447
-
-
-
-
24,277
-
-
(2,042)
(2,038)
(609)
(11)
-
(8,681)
-
-
-
-
(55)
-
-
-
6,485
7,070
1,648
(867)
(17,781)
16,283
(481)
(2,067)
201
119
(4)
(436)
-
-
5,621
2,407
1,001
(790)
(3,743)
11,413
(822)
2,707
4,471
933
390
1,324
6,470
(22)
F-64
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Company
Investments
2018
2019
Capital
increase
2019
Dividends
distributed
2019
Other
Comprehensive
Income
2019
Equity in the earnings of subsidiaries
2017
2018
2019
(*)
Interest percentage
2018
2019
2017
Sesamm
Águas de Andradina
Águas de Castilho
Saneaqua Mairinque
Attend Ambiental
Aquapolo Ambiental
Paulista Geradora de Energia
Total
Other investments
Overall total
16,533
9,020
2,172
1,434
3,369
18,508
1,786
52,822
365
53,187
15,677
7,450
1,826
1,716
642
14,783
1,905
43,999
588
44,587
-
-
-
-
10,925
-
-
10,925
(735)
(611)
(183)
(3)
-
(4,254)
-
(5,786)
-
-
-
(17)
-
-
-
(17)
2,335
2,121
493
(260)
(8,002)
7,979
(119)
4,547
(744)
60
36
(2)
(196)
-
-
(846)
2,023
722
300
(237)
(1,684)
5,592
(206)
6,510
975
729
287
71
560
3,144
(6)
5,760
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, 2018 were issued,
including some adjustments, after the Company’s financial statements.
12 Investment properties
December 31,
2018
Transfers
Depreciation
December 31,
2019
Investment properties
47,620
(9)
(49)
47,562
December 31,
2017
Write-offs and
disposals
Transfers
Depreciation
December 31,
2018
Investment properties
57,652
(9,995)
13
(50)
47,620
December 31,
2016
Write-offs and
disposals
Depreciation
December 31,
2017
Investment properties
57,968
(244)
(72)
57,652
F-65
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
As of December 31, 2019 and 2018, the market value of these properties is approximately R$386,000.
13 Contract assets
Contract assets (works in progress) is the right to consideration in exchange for goods or services transferred to customers. As
established by IFRS 15 - Revenue from contract with customers, assets related to the concession under construction, recorded
under the scope of IFRIC 12 – Service Concession Arrengements, should be classified as Contract Assets during the construction
period and transferred to Intangible Assets only after the completion of the works.
A contract assets is initially recognized at fair value and includes borrowing costs capitalized during the period when the asset is
under construction, based on the weighted average rate of borrowings in effect on the capitalization date, as described in Note 14.
As of December 31, 2019, the amount recorded as contract assets was R$ 7,618 million, and the largest works are located in the
municipalities of São Paulo, Praia Grande and São Bernardo do Campo, in the amounts of R$ 3,593 million, R$ 338 million and
R$ 330 million, respectively. Additionally, R$ 3,328 million was transferred to intangible assets (under book value); the most
significant work is the expansion of the Barueri Sewage Treatment Station, while the largest additions of the period are located in
the municipalities of São Paulo, Praia Grande and São Bernardo do Campo, in the amounts of R$ 1,790 million, R$ 212 million
and R$ 151 million, respectively.
December 31, 2018 Additions
Write-offs
Transfers Transfers of works to intangible assets December 31, 2019
Tota contract assets (*)
7,407,948 3,532,283
(4,910)
10,710
(3,328,317)
7,617,714
(*) As of December 31, 2019, contract assets includes leases recognized before December 31, 2018 in accordance with IAS 17
amounting to R$ 276,893 (R$ 265,671 as of December 31, 2018).
January 1, 2018 Additions Transfers of works to intangible assets December 31, 2018
Total contract assets
10,387,715 3,188,943
(6,168,710)
7,407,948
F-66
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
14 Intangible assets
(a) Statement of financial position details
Intangible right arising from:
Concession agreements – equity value
Concession agreements – economic value
Program contracts
Program contracts – commitments
Services contracts – São Paulo
Software license of use
Right of use
Total
(b) Changes
December 31, 2019
December 31, 2018
Cost Accumulated amortization
Net
Cost Accumulated amortization
Net
2,066,459
1,334,531
19,413,768
1,651,434
19,217,091
829,739
113,233
44,626,255
(571,606)
(621,679)
(5,594,068)
(286,559)
(4,826,328)
(358,033)
(42,535)
(12,300,808)
1,494,853
712,852
13,819,700
1,364,875
14,390,763
471,706
70,698
32,325,447
5,465,206
1,948,255
12,710,937
1,320,106
17,474,797
748,962
-
39,668,263
(1,391,862)
(716,246)
(3,933,008)
(240,555)
(4,083,345)
(290,787)
-
(10,655,803)
4,073,344
1,232,009
8,777,929
1,079,551
13,391,452
458,175
-
29,012,460
Intangible right arising from:
Concession agreements – equity value (*)
Concession agreements – economic value
Program contracts (*)
Program contracts – commitments
Services contracts – São Paulo
Software license of use
Right of use - Other assets
Intangible right arising from:
December
31, 2018
First-time
adoption
of IFRS 16
Addition
Contract
renewal
Transfer to
indemnities
receivable
4,073,344
1,232,009
8,777,929
1,079,551
13,391,452
458,175
-
29,012,460
-
-
-
-
-
-
64,955
64,955
2
2,034
1,338,443
331,328
3,867
-
48,278
1,723,952
(2,690,660)
(532,173)
3,223,773
-
(940)
-
-
-
(4,345)
-
-
-
-
-
-
(4,345)
Transfer of contract assets
Transfers
Write-offs and disposals
Amortization
131,809
89,041
970,534
-
2,054,940
81,993
-
3,328,317
76,804
1,956
137,283
-
(228,583)
(991)
-
(13,531)
(8,311)
(569)
(10,312)
-
(20,739)
-
-
(39,931)
December
31, 2019*
1,494,853
712,852
13,819,700
1,364,875
14,390,763
471,706
70,698
(83,790)
(79,446)
(617,950)
(46,004)
(809,234)
(67,471)
(42,535)
(1,746,430)
32,325,447
(*)As of December 31, 2019, intangible assets includes leases recognized before December 31, 2018 in accordance with IAS 17 amounting to R$ 292,824 - (R$ 315,717 as of
December 31, 2018 – R$ R$ 98,077 recognized as concession agreements – equity value and R$ 217,640 recognized as program contracts).
F-67
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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:
Concession agreements – equity value
Concession agreements – economic value
Program contracts
Program contracts – commitments
Services contracts – São Paulo
Software license of use
Total
7,141,614
1,433,937
7,595,066
910,375
15,917,015
468,125
33,466,132
(1,427,046)
(233,361)
(2,019,461)
-
(6,707,847)
-
(10,387,715)
93
373
928,818
206,946
3,724
4,774
1,144,728
(1,935,780)
-
1,935,780
-
-
-
-
499,002
114,442
681,742
-
4,818,734
54,790
6,168,710
(5,268)
88
3,011
-
12
686
(1,471)
(1,406)
(1,031)
(7,616)
-
(14,813)
-
(24,866)
(197,865)
(82,439)
(339,411)
(37,770)
(625,373)
(70,200)
(1,353,058)
4,073,344
1,232,009
8,777,929
1,079,551
13,391,452
458,175
29,012,460
(*) Work in progress transferred to contract assets due to adoption of IFRS 15, as of January 1, 2018, as described in Note 4.1.
(**) Work in progress transferred from contract assets to intangible assets.
F-68
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Intangible right arising from:
Concession agreements – equity value
Concession agreements – economic value
Program contracts
Program contracts – commitments
Services contracts – São Paulo
Software license of use
Total
December 31,
2016
Additions Contract renewal
Reversal of
estimated losses
Transfers Write-offs and disposals
Amortization
December 31,
2017
7,482,955
1,381,652
6,576,021
823,216
14,552,707
430,237
31,246,788
374,775
142,429
772,278
121,313
1,976,079
103,424
3,490,298
(531,818)
-
531,818
-
-
-
-
2,078
8
4,834
-
6,460
-
13,380
1,663
2,604
(1,784)
-
(18,346)
6,489
(9,374)
(2,795)
(1,163)
(6,606)
-
(13,848)
-
(24,412)
(185,244)
(91,593)
(281,495)
(34,154)
(586,037)
(72,025)
(1,250,548)
7,141,614
1,433,937
7,595,066
910,375
15,917,015
468,125
33,466,132
In 2019, the Company renewed the program contract with the municipalities of Águas de São Pedro, Alambari, Bertioga, Caraguatatuba, Espírito Santo do Turvo, Guarujá,
Itanhaém, Lavrinhas, Mongaguá, Nazaré Paulista, Oriente, Paraguaçu Paulista, Pedra Bela, Peruíbe, São Bernardo do Campo, São Sebastião e Vargem. The Company also
started operations in the municipality of Santo André.
All of these contracts are valid for 30 years, except for the contracts signed with São Bernardo do Campo and Santo André, which are valid for 40 years.
In October 2019, the Company signed a contract with the municipality of Tapiratiba, to begin operating in April 2020.
(c) Intangible arising from concession agreements
The Company operates public utility service concession agreements for water supply and sewage services mostly based on agreements that set out rights and obligations
relative to the exploration of assets related to the public utility service (See Note 3.8 (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, 2019, the Company operated in 372 municipalities in the State of São Paulo (369 as of December 31, 2018). Most of these contracts have a 30-year
concession period.
F-69
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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, 2019 and 2018 there were no amounts pending related to these payments
to the municipalities.
Intangible assets are amortized on a straight-line basis over the period of the concession agreements or for the useful lives of the
underlying assets, whichever is shorter.
(iii) Program contracts
These refer to the renewal of contracts previously referred to as concession agreements whose purpose is to provide sanitation
services. The amortization of the assets acquired until the dates of signatures of the program contracts is calculated according to
the straight-line method, which considers the assets’ useful lives. Assets acquired or built after the signature dates of program
contracts are amortized during the contracted period (mostly, 30 years) or during the useful lives of underlying assets, whichever
is shorter.
(iv) Program contracts - Commitments
After the enactment of the regulatory framework in 2007, renewals of concessions started to be made through of program
contracts. In some of these program contracts, the Company undertook the commitment to financially participate in social and
environmental actions. The assets built within the program contracts are recorded as intangible assets and are amortized by the
straight-line method in accordance with the duration of the program contract (mostly, 30 years).
F-70
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
As of December 31, 2019 and 2018, the amounts not yet disbursed were recorded under “program contract commitments”, in
current liabilities, totaling R$ 273,932 and R$ 230,695, respectively, and in noncurrent liabilities, totaling R$ 103,321 and
R$ 142,314, respectively. In 2019, the annual rate of 8.11% (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 municipality of São Paulo for a 30-year period, which is extendable for
an another 30-year period.
Also on June 23, 2010, an agreement was signed between the state and municipal government, and SABESP and the Sanitation
and Energy Regulatory Agency of the State of São Paulo (“ARSESP”) are the consenting and intervening parties, whose main
aspects are the following:
1. The State and the Municipality of São Paulo grant to SABESP the right to explore the sanitation services in the capital of the
State of São Paulo, which consists of the obligation to provide such service and charge the respective tariff for this service;
2. The State and the Municipality sets forth ARSESP as the agency responsible for regulating the tariff, controlling and monitoring
the services.
3. The evaluation model of the contract was the discounted cash flow, which considered the financial and economic sustainability
of SABESP’s operations in the metropolitan region of São Paulo;
4. All operating costs, taxes, investments and the opportunity cost of investors and the creditors of SABESP’s were considered in
the cash flow analysis;
5. The agreement provides for investments established in the agreement comply with the minimum of 13% of the gross revenue
from the municipality of São Paulo, net of the taxes on revenues. Investment plans referring to SABESP’s execution shall be
compatible with the activities and programs foreseen in the state, municipal sanitation plans, and where applicable, the
metropolitan plan. The investment plan is not definite and will be revised by Managing Committee every four years, especially as
to investments to be made in the following period;
F-71
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
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. 1,309/2014-SGM/GAB and the São Paulo State Government
through a petition filed by the São Paulo State Office, through the Official Letter ATG/Official Letter no. 092/2014-CC, requested
a postponement of the effects of ARSESP Resolution no. 413, published in the São Paulo State Official Gazette on March 20, 2013,
until the conclusion of the revision of the Agreement entered into between the São Paulo Municipal Government, the São Paulo
State 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.
F-72
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
The agreement represents 44.48% of the total revenue of the Company as of December 31, 2019, and ensures the judicial and assets
security.
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 2019, the Company capitalized interest and inflation adjustment, including related foreign currency exchange effects in
concession intangible assets, totaling R$233,251, including the São Lourenço Production System and Leases (R$488,502 in 2018
and R$649,048 in 2017) 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 2019 and
2018 the margin was 2.3%.
Construction margin for 2019, 2018 and 2017 were R$65,172, R$63,013 and R$70,335, 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 2019, the total
amount related to expropriations was R$34,681 (R$106,429 in 2018 and R$19,576 in 2017).
(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 11,079/2004.
F-73
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Alto Tietê Production System
The Company and the special purpose entity CAB-Sistema Produtor Alto Tietê S/A, formed by Galvão Engenharia S.A. and
Companhia Águas do Brasil – Cab Ambiental, signed in June 2008 the contract of public-private- partnership of Alto Tietê
production system.
The contract last 15 years which purpose is to expand the capacity of treated water of Taiaçupeba from 10 thousand to 15 thousand
of liters per second, whose operation began in October 2011.
As of December 31, 2019 and 2018, the amounts recognized as intangible asset related to PPP were R$348,586 and R$359,759,
respectively. In 2019 and 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
In August 2013, 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, 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.
F-74
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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 started operating on July 10, 2018.
The estimated amount by inflation adjustment through December 31, 2019 is approximately R$7.73 billion.
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$33.0 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, 2019 and 2018, the carrying amounts recorded in the Company’s intangible assets, related to this PPP,
amounted to R$3,235,008 and R$3,208,464, respectively. Intangible assets are accrued for based on the physical evolution of the
construction, with a counter-entry in the Private Public Partnership (PPP) liabilities account. In 2019, a discount rate of 7.80%
p.a. was used to calculate the adjustment to present value of the agreement.
The São Lourenço Production System had its main works completed in the first quarter of 2019 with the end of the works phase
(phase 1) occurred on November 1, 2019, after checking compliance with the contractual clauses and the absence of documentary
pending issues.
The obligations assumed by the Company as of December 31, 2019 and 2018 are shown in the table below:
F-75
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
December 31, 2019
Noncurrent
liabilities
Current
liabilities
Total liabilities
Current
liabilities
Noncurrent
liabilities
Total
liabilities
December 31, 2018
Alto Tietê
São Lourenço
Total
44,003
66,288
110,291
208,217
2,975,472
3,183,689
252,220
3,041,760
3,293,980
39,283
98,544
137,827
252,093
3,023,204
3,275,297
291,376
3,121,748
3,413,124
(h) Works in progress
With the adoption of IFRS 15 - Revenue from contract with customers, as of January 1, 2018, assets related to the concession under
construction, recorded under the scope of IFRIC 12 – Service Concession Arrengements, previously recognized as part of of
intangible assets as works in progress were reclassified to contract assets, according to note 13, in the amount of R$ 10,387 million.
(i) Amortization of intangible assets
The amortization average rate totaled 4.2% as of December 31, 2019 (4.2% and 3.9% as of December 31, 2018 and 2017,
respectively).
(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.
(k) Right of use
The statement of financial position account Right of Use, created by the Company on January 1, 2019, reflects the amendment
introduced by IFRS 16, which requires lessees to record the right-of-use asset and the lease liability. The Company has utilized the
exemption in adoption of IFRS 16 related to leases with a lease term of 12 months or less and containing no purchase options and
leases where the underlying asset has a low value when new. For those leases accounted for under the exemption option, the
Company recognized R$40,577, R$9,132 and R$2,146 in its results, allocated to operating costs, selling expenses and administrative
expenses, respectively in 2019.
F-76
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Details of right of use asset are as follows:
Nature
Leases related to Contract Assets
Leases related to Concession Agreements and Program Contracts
- Cost
- Accumulated amortization
Other assets
- Vehicles
- Properties
- Equipment
- Other
- Accumulated amortization
Right of use
December 31, 2019
276,893
292,824
405,426
(112,602)
70,698
91,709
13,309
3,801
4,414
(42,535)
640,415
Lease liability corresponds to total future fixed lease payments, adjusted to present value, considering an incremental rate on
borrowings. For further information, see Note 16.
The table below shows the impact in the income statements as of December 31, 2019:
Impact in the income statement
Right-of-use amortization
Financial result – interest expenses
Short-term and low-value lease expenses
Decrease of the income of the year
December 31, 2019
(65,413)
(54,791)
(51,855)
(172,059)
F-77
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
15 Property, plant and equipment
(a) Statement of financial position details
December 31, 2019
December 31, 2018
Depreciation
average rate
Cost Accumulated depreciation
Cost Accumulated depreciation Net
92,962
82,143
402,850
8,946
31,365
7,559
625,825
- 92,962
41,705
(40,438)
(250,577) 152,273
1,984
18,219
7,250
(311,432) 314,393
(6,962)
(13,146)
(309)
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Total
(b) Changes
2.1%
- 92,979
79,086
16.3% 372,872
9.9%
11,333
6.7% 27,250
5.0%
1,659
12.5% 585,179
- 92,979
(38,961) 40,125
(256,786) 116,086
3,473
13,578
1,371
(317,567) 267,612
(7,860)
(13,672)
(288)
Net Depreciation average rate
-
3.0%
16.5%
10.0%
6.8%
6.2%
12.3%
December 31, 2018
Additions
Transfers Write-offs and disposals
Depreciation
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Total
92,979
40,125
116,086
3,473
13,578
1,371
267,612
-
3,497
63,216
308
5,266
5,872
78,159
(17)
15
3,149
(1,117)
734
66
2,830
-
-
(429)
(2)
(162)
-
(593)
-
(1,932)
(29,749)
(678)
(1,197)
(59)
(33,615)
December 31,
2019
92,962
41,705
152,273
1,984
18,219
7,250
314,393
F-78
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Total
Land
Buildings
Equipment
Transportation equipment
Furniture and fixtures
Other
Total
December 31, 2017
92,507
42,360
103,803
3,680
11,816
884
255,050
December 31, 2016
92,494
43,262
149,140
4,531
11,986
970
302,383
Additions
-
73
46,473
589
2,972
538
50,645
Additions
-
86
17,627
-
1,207
-
18,920
Transfers Write-offs and disposals
-
-
(81)
-
(27)
-
(108)
472
-
986
-
-
-
1,458
Depreciation
-
(2,308)
(35,095)
(796)
(1,183)
(51)
(39,433)
Transfers Write-offs and disposals
-
-
(178)
(27)
(54)
(20)
(279)
13
1,358
(15,945)
(33)
(75)
(15)
(14,697)
Depreciation
-
(2,346)
(46,841)
(791)
(1,248)
(51)
(51,277)
December 31,
2018
92,979
40,125
116,086
3,473
13,578
1,371
267,612
December 31,
2017
92,507
42,360
103,803
3,680
11,816
884
255,050
F-79
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
16 Borrowings and financing
Borrowings and financing outstanding balance
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
23th issue debentures
24th 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
Brazilian Development Bank - BNDES 2014
Leases (Concession Agreements, Program Contracts and Contract Assets)
Leases (Others)
Other
Interest and charges
Total in local currency
Borrowings and financing outstanding balance
Financial institution
Foreign currency
December 31, 2019
December 31, 2018
Current
Noncurrent
Total
Current
Noncurrent
Total
41,021
45,450
41,940
-
289,211
34,239
-
-
203,829
63,012
-
263,226
133,679
41,021
249,279
104,952
42,493
45,450
41,270
40,194
249,249
103,005
82,687
294,699
144,275
-
359,394
-
359,394
552,437
279,100
167,918
33,469
532,691
165,267
811,791
198,736
-
-
248,334
-
248,334
150,000
349,660
499,660
-
-
-
765,689
765,689
864,603
864,603
395,855
395,855
83,519
1,341,660
1,425,179
-
27,854
40,685
24,457
100,582
383,191
460,646
25,411
-
39,038
47,675
28,370
124,286
436,065
492,358
30,070
-
-
-
-
75,223
16,899
11,227
4,364
3,186
23,632
30,589
31,615
-
499,604
499,604
756,040
756,040
-
-
-
-
1,266,592
1,341,815
-
39,169
18,811
23,100
123,875
252,197
490,729
-
16,899
50,396
23,175
26,286
147,507
282,786
522,344
-
432,357
459,671
19,077
549,589
568,666
23,365
8,207
74,453
9,872
-
1,380
-
77,460
98,410
-
8,163
-
-
9,543
98,410
977,943
5,907,968
6,885,911
1,365,112
5,118,275
6,483,387
December 31, 2019
December 31, 2018
Current
Noncurrent
Total
Current
Noncurrent
Total
-
11,184
6,990
3,913
23,704
52,874
31,712
4,659
27,314
51,088
1,665
77,460
Inter-American Development Bank - BID 1212 – US$61,668 thousand (US$71,947 thousand in December
2018)
41,428
207,140
248,568
39,826
238,954
278,780
Inter-American Development Bank - BID 2202 – US$510,573 thousand (US$544,457 thousand in
December 2018)
International Bank of Reconstruction and Development -BIRD – US$88,871 thousand (US$91,286
thousand in December 2018)
Deutsche Bank – (US$75,000 thousand in December 2018)
Eurobonds – US$350,000 thousand (US$350,000 thousand in December 2018)
JICA 15 – ¥11,524,300 thousand (¥12,676,730 thousand in December 2018)
JICA 18 – ¥10,361,600 thousand (¥11,397,760 thousand in December 2018)
JICA 17 – ¥2,830,420 thousand (¥1,826,957 thousand in December 2018)
JICA 19 – ¥31,736,565 thousand (¥31.561.726 thousand in December 2018)
BID 1983AB – US$40,769 thousand (US$58,462 thousand in December 2018)
Interest and charges
Total in foreign currency
Total borrowings and financing
128,623
1,914,298
2,042,921
124,098
1,969,565
2,093,663
24,505
330,898
355,403
11,779
341,646
353,425
-
1,409,921
42,813
38,493
12,466
67,372
71,312
44,967
-
-
385,315
346,237
91,845
-
288,479
-
288,479
1,409,921
-
1,354,532
1,354,532
428,128
40,646
384,730
104,311
36,545
11,835
406,462
365,230
51,786
447,108
401,775
63,621
1,109,644
1,177,016
64,028
1,047,081
1,111,109
91,521
162,833
-
44,967
68,554
52,710
155,653
224,207
-
52,710
1,881,900
4,476,898
6,358,798
738,500
5,930,909
6,669,409
2,859,843
10,384,866
13,244,709
2,103,612
11,049,184
13,152,796
Exchange rate as of December 31, 2019: US$4.0307; ¥0.03715 (as of December 31, 2018: US$3.8748; ¥0.03527).
As of December 31, 2019, the Company did not have balances of borrowings and financing, raised during the year, to mature within 12 months.
F-80
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
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
17th issue debentures
18th issue debentures
21th issue debentures
22th issue debentures
23th issue debentures
Own funds
Own funds
Own funds
Own funds
Own funds
Own funds
Own funds
Own funds
2020
2025
2022
2023
2024
2022
2025
2027
TJLP +1.92% (Series 1 and 3) and 9.53% (Series 2)
IPCA (Series 2)
TR + 9.5%
TJLP +1.92% (Series 1 and 3) and 9.19% (Series 2)
IPCA (Series 2)
CDI +0.75 (Series 1) and 4.5% (Series 2) and4.75%
(Series 3)
TJLP 1.92 % (Series 1 and 3) and 8.25% (Series 2)
IPCA (Series 2 and 3)
IPCA (Series 2)
CDI + 0.60% e CDI+ 0.90%
CDI +0.58 (Series 1) and CDI + 0.90% (Series 2) and
6.0% (Series 3)
IPCA (Series 3)
CDI +0.63 (Series 1) and CDI + 0.49% (Series 2)
24th issue debentures
Brazilian Federal Savings Bank
Own funds
2029
Own funds 2020/2039
3.20 (Series 1) and 3.37% (Series 2)
5% to 9.5%
IPCA (Series 1 and 2)
TR
Brazilian Development Bank - BNDES PAC
Brazilian Development Bank - BNDES PAC II 9751
Brazilian Development Bank - BNDES PAC II 9752
Own funds
Own funds
Own funds
Brazilian Development Bank - BNDES ONDA LIMPA
Own funds
Brazilian Development Bank - BNDES TIETÊ III
Brazilian Development Bank - BNDES 2015
Brazilian Development Bank - BNDES 2014
Leases (Concession Agreements, Program Contracts and
Contract Assets)
Leases (Others)
Other
Own funds
Own funds
Own funds
Own funds
2023
2027
2027
2025
2028
2035
2026
2035
2023
2025
TJLP+2.15%
TJLP+1.72%
TJLP+1.72%
TJLP+1.92%
TJLP+1.66%
TJLP+2.5%
TJLP+1.76%
7.73% to 10.12%
IPC
6.01% to 9.84%
3% (FEHIDRO) and TJLP + 1.5% (FINEP)
F-81
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
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$61,668 thousand
Inter-American Development Bank - BID 2202 - US$510,573 thousand
International Bank for Reconstruction and Development - BIRD US$88,871 thousand
Eurobonds – US$350,000 thousand
JICA 15 – ¥11,524,300 thousand
JICA 18 – ¥10,361,600 thousand
JICA 17– ¥2,830,420 thousand
JICA 19– ¥31,736,565 thousand
BID 1983AB – US$40,769 thousand
Government
Government
Government
-
Government
Government
Government
Government
-
2025
2035
2034
2020
2029
2029
2035
2037
2023
(*)Rates comprising LIBOR + contractually defined spread.
3.31% (*)
3.42% (*)
2.85% (*)
6.25%
1.8% and 2.5%
1.8% and 2.5%
1.2% and 0.01%
1.7% and 0.01%
2.08% to 2.38% (*)
US$
US$
US$
US$
Yen
Yen
Yen
Yen
US$
F-82
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(i) Payment schedule as of December 31, 2019
LOCAL CURRENCY
Debentures
2020
2021
2022
2023
2024
2025
2026 to
2040
TOTAL
601,861
484,363
563,291
366,330
700,583
280,062
644,924
3,641,414
Brazilian Federal Savings Bank
83,519
87,951
92,727
85,554
84,289
89,569
901,570
1,425,179
BNDES
135,036
134,584
134,584
128,886
123,400
105,460
435,912
1,197,862
Leases (Concession Agreements, Program Contracts and Contract Assets)
27,314
29,093
31,063
33,711
36,697
39,951
261,842
459,671
Leases (Others)
Other
Interest and charges
TOTAL IN LOCAL CURRENCY
FOREIGN CURRENCY
BID
BIRD
Eurobonds
JICA
BID 1983AB
Interest and charges
TOTAL IN FOREIGN CURRENCY
Overall Total
51,088
22,630
1,665
77,460
1,865
-
678
1,865
-
57
-
-
1,825
1,384
1,268
-
-
-
-
-
-
74,453
9,872
77,460
977,943
760,486
824,208
616,363
946,353
516,310
2,244,248
6,885,911
170,051
170,051
170,051
170,051
170,051
170,051
1,271,183
2,291,489
24,505
24,505
24,505
24,505
24,505
24,505
208,373
355,403
1,409,921
-
-
-
-
-
-
1,409,921
161,144
154,857
154,857
154,857
154,857
154,857
1,158,756
2,094,185
71,312
31,005
31,005
29,511
44,967
-
-
-
-
-
-
-
-
-
162,833
44,967
1,881,900
380,418
380,418
378,924
349,413
349,413
2,638,312
6,358,798
2,859,843
1,140,904
1,204,626
995,287
1,295,766
865,723
4,882,560 13,244,709
F-83
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(ii) Changes
December 31, 2018
Addition
as per
IFRS 16
Funding
Borrowing
costs
Monetary
variation
and
exchange
rate
changes
Inflation
adjustment
/ exchange
rate
changes -
Capitalized
Interest
paid
Amortization
Accrued
interest
Provision
for interest
and fees -
Capitalized
Amortization
of borrowing
costs
December 31, 2019
LOCAL CURRENCY
Debentures
Brazilian Federal Savings Bank
BNDES
Leases (Concession Agreements, Program Contracts and Contract Assets)
Leases (Others)
Other
TOTAL IN LOCAL CURRENCY
FOREIGN CURRENCY
BID
BIRD
Deutsche Bank
Eurobonds
JICA
BID 1983AB
TOTAL IN FOREIGN CURRENCY
Overall Total
3,486,861
1,345,684
1,072,605
568,666
-
9,571
-
-
-
-
113,233
-
1,266,755
162,767
256,981
-
-
1,683
(11,814)
-
(628)
-
-
-
6,483,387
113,233
1,688,186
(12,442)
2,399,985
356,420
292,872
1,358,412
2,036,128
225,592
6,669,409
-
-
-
-
-
-
-
-
2,540
-
-
117,861
-
120,401
-
(2,540)
-
-
(112)
(105)
(2,757)
42,692
-
2,082
1,765
-
28
46,567
40,594
12,575
13,255
54,565
104,027
8,943
233,959
-
-
826
3,761
-
-
(234,307)
(109,128)
(83,419)
(47,663)
(1,141)
(655)
(1,055,623)
(79,404)
(131,026)
(123,880)
(42,646)
(1,383)
195,586
74,421
60,644
49,160
5,007
652
4,587
(476,313)
(1,433,962)
385,470
49,387
1,657
-
-
3,675
-
(83,602)
(10,627)
(18,562)
(102,883)
(35,001)
(10,338)
(171,892)
(12,273)
(303,866)
-
(155,064)
(71,141)
26,332
8,548
12,929
94,095
32,194
9,111
54,719
(261,013)
(714,236)
183,209
13,152,796
113,233
1,808,587
(15,199)
280,526
59,306
(737,326)
(2,148,198)
568,679
17,233
34,910
23,112
7,862
-
2
83,119
54,431
1,561
1,240
8,943
3,013
870
70,058
153,177
3,845
-
234
-
-
-
4,079
955
19
2,132
824
187
932
5,049
9,128
3,711,228
1,429,250
1,201,411
459,671
74,453
9,898
6,885,911
2,316,190
357,880
-
1,413,956
2,106,908
163,864
6,358,798
13,244,709
F-84
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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
LOCAL CURRENCY
Debentures
Brazilian Federal Savings Bank
BNDES
Leases
Other
TOTAL IN LOCAL CURRENCY
FOREIGN CURRENCY
BID
BIRD
Deutsche Bank
Eurobonds
JICA
BID 1983AB
TOTAL IN FOREIGN CURRENCY
Overall Total
3,576,842
1,236,674
1,042,036
561,616
10,977
750,000
194,244
131,000
-
-
6,428,145
1,075,244
1,743,257
303,278
496,726
1,158,642
1,700,448
270,470
5,672,821
484,690
-
-
-
80,196
-
564,886
12,100,966
1,640,130
(3,021)
-
-
-
-
(3,021)
(2,365)
-
-
-
(191)
-
(2,556)
(5,577)
62,676
-
3,438
-
69
66,183
237,433
48,279
62,918
198,380
329,638
39,241
915,889
982,072
-
-
4,001
6,366
-
10,367
53,208
3,462
-
-
6,787
-
63,457
73,824
(259,175)
(102,772)
(90,397)
(38,196)
(772)
(491,312)
(55,391)
(7,607)
(35,207)
(97,952)
(33,519)
(11,060)
(240,736)
(732,048)
(905,080)
(85,515)
(102,314)
(17,427)
(1,470)
(1,111,806)
(130,520)
-
(268,508)
-
(82,608)
(85,306)
(566,942)
(1,678,748)
226,810
75,668
28,909
40,290
763
372,440
26,910
6,945
28,862
85,072
33,992
9,681
191,462
563,902
34,409
27,385
55,725
16,017
4
133,540
41,878
2,044
4,454
13,448
1,209
1,488
64,521
3,400
-
207
-
-
3,607
885
19
3,627
822
176
1,078
6,607
198,061
10,214
3,486,861
1,345,684
1,072,605
568,666
9,571
6,483,387
2,399,985
356,420
292,872
1,358,412
2,036,128
225,592
6,669,409
13,152,796
(*) amount related to accrued interest which as part of the contract assets.
F-85
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
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
LOCAL CURRENCY
Debentures
Brazilian Federal Savings Bank
BNDES
Leases
Other
TOTAL IN LOCAL CURRENCY
3,641,912
1,150,691
946,984
552,516
11,677
6,303,780
500,000
144,654
171,153
-
-
815,807
-
(1,157)
-
-
-
-
- 24,693
-
-
(1,157) 24,693
FOREIGN CURRENCY
1,811,664
BID
261,337
BIRD
485,090
Deutsche Bank
1,141,469
Eurobonds
1,617,215
JICA
343,588
BID 1983AB
5,660,363
TOTAL IN FOREIGN CURRENCY
11,964,143
Overall Total
(*) amount related to accrued interest which as part of the contract assets.
-
(2,497)
-
-
-
(720)
-
-
-
(287)
-
(82)
(3,586)
-
(4,743) 24,693
96,889
35,710
-
-
63,909
-
196,508
1,012,315
51,768
5,495
5,405
-
116
62,784
(15,193)
2,874
7,335
17,115
82,563
1,609
96,303
159,087
-
1,415
2,512
-
-
3,927
(301,493)
(95,854)
(78,466)
-
(876)
(476,689)
(597,794)
(65,836)
(87,993)
(15,593)
(750)
(767,966)
176,780
78,283
33,938
-
779
289,780
40,228
2,837
-
-
2,525
-
45,590
49,517
(38,654)
(4,049)
(31,774)
(85,338)
(28,652)
(10,931)
(199,398)
(676,087)
(189,280)
-
-
-
(65,702)
(75,610)
(330,592)
(1,098,558)
22,547
3,662
21,286
55,046
27,602
6,858
137,001
426,781
103,215
17,826
48,294
-
31
169,366
16,803
888
11,925
29,529
1,115
3,715
63,975
233,341
3,611
-
209
-
-
3,820
750
19
3,584
821
160
1,323
6,657
10,477
3,576,842
1,236,674
1,042,036
561,616
10,977
6,428,145
1,743,257
303,278
496,726
1,158,642
1,700,448
270,470
5,672,821
12,100,966
F-86
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(a) Debentures
(i) Funding
On May 27, 2019, the Company raised funds through the 23rd debenture issue, oin the amount of R$ 866,755, as follows:
Series 1
Series 2
Value
491,755
375,000
Maturity
May/2024
May/2027
Remuneration
CDI + 0.63 p.a.
CDI + 0.49 p.a.
On July 24, 2019, the Company raised funds through the 24th debenture issue, in the amount of R$ 400,000, as follows:
Series 1
Series 2
Value
100,000
300,000
Maturity
July/2026
July /2029
Remuneration
IPCA+ 3.20 p.a.
IPCA + 3.37 p.a.
(ii) Covenants
Applicable to the 23rd issue and 24th issue:
Calculated every quarter upon the disclosure of interim or annual financial statements:
- Net debt/ EBITDA: lower than or equal to 3.50;
- Adjusted 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 has a clause that, in case of early maturity of any Company debt, in an individual or aggregate amount equal to
or higher than R$ 145 million, adjusted by the variation of the IPCA as from the issue date, is a default event that may cause
the early maturity of the obligations arising from the Debentures.
F-87
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(b) BNDES
(i) Funding
The initial funding of agreement 14.2.0535.1 (BNDES 2014), totaling R$ 33,000, was carried out on June 18, 2019. The
agreement, totaling R$ 61,143, signed on June 30, 2014, is for the implementation of Setor Gênesis (sub-conductor) and
Fazendinha, in the Municipality of Santana de Parnaíba, in São Paulo. The contract will be amortized in 85 installments, began
in July 2019 and is expected to end in July 2026.
(ii) Covenants
Applicable to financing agreement no. 14.2.0535.1 (BNDES 2014)
The financing agreements entered into with the BNDES specifies 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.
This agreements also specifies 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.
F-88
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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;
• suspend the release of funds; and/or
• declare the early maturity of the financing agreements.
As of December 31, 2019, the amount of R$255.3 million was guaranteed for the BNDES agreements.
(c) Leases
The Company has work service agreements which includes specific assets under lease terms. During the construction period,
works are capitalized to intangible assets in progress and the lease amount is recorded at the same proportion.
After startup, the lease payment period starts (240 monthly installments), whose amount is periodically restated by contracted
price index.
F-89
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(d) Financial commitments - Covenants
The table below shows the more restrictive covenants ratios as of December 31, 2019.
Adjusted EBITDA / Adjusted financial expenses
Adjusted net debt / Adjusted EBITDA
Adjusted total debt / Adjusted EBITDA
Other onerous debt(1) / Adjusted EBITDA
Adjusted current ratio
EBITDA / Paid financial expenses
Net debt / Adjusted EBITDA
Restrictive Ratios
Equal to or higher than 2.80
Equal to or lower than 3.80
Lower than 3.65
Equal to or lower than 1.30
Higher than 1.00
Equal to or higher than 2.35
Equal to or lower than 3.50
(1) “Other Onerous Debts” correspond to the sum of social security liabilities, health care plan, installment payment of tax debts and installment payment of
debts with electricity supplier.
As of December 31, 2019 and 2018, the Company met the financial debt covenants as set forth by its borrowing and financing
agreements.
(e) Borrowings and financing – Credit Limits
Agent
Brazilian Federal Savings Bank
Brazilian Development Bank – BNDES
Japan International Cooperation Agency – JICA
Inter-American Development Bank – BID
International Bank for Reconstruction and Development - IBRD
Other
TOTAL
December 31, 2019
(in millions of reais (*))
1,729
1,203
94
1,209
1,005
41
5,281
(*) Brazilian Central Bank’s exchange sell rate as of December 30, 2019 (US$ 1.00 = R$ 4.0307; ¥ 1.00 = R$ 0.03715) .
Financing resources contracted have specific purposes, which have been released for the execution of their respective investments,
according to the progress of the works.
F-90
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
17 Taxes recoverable/payable
(a) Current assets
Recoverable taxes
Income tax and social contribution
Withholding income tax (IRRF) on financial investments
Other federal taxes
Total
(b) Current liabilities
Taxes and contributions payable
Cofins and Pasep
INSS (Social Security contribution)
IRRF (withholding income tax)
Other
Total
18 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
Deferred tax assets (liabilities), net
December 31, 2019
December 31, 2018
136,436
1,359
3,471
141,266
361,758
6,423
12,522
380,703
December 31, 2019
December 31, 2018
94,027
39,404
69,932
46,955
250,318
82,381
38,871
66,825
12,486
200,563
December 31, 2019
December 31, 2018
366,673
157,998
51,818
145,622
183,147
905,258
(408,732)
(409,236)
(372,289)
(54,222)
(83,399)
(11,376)
(1,339,254)
(433,996)
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)
(261,242)
F-91
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(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
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
Deferred tax assets (liabilities), net
December 31, 2019
December 31, 2018
189,740
715,518
905,258
(35,954)
(1,303,300)
(1,339,254)
(433,996)
Net
change
28,840
954
(2,313)
(52,298)
(3,740)
(28,557)
25,110
11,742
(165,311)
(17,792)
2,765
(711)
(144,197)
(172,754)
158,294
775,521
933,815
(32,546)
(1,162,511)
(1,195,057)
(261,242)
December 31,
2019
366,673
157,998
51,818
145,622
183,147
905,258
(408,732)
(409,236)
(372,289)
(54,222)
(83,399)
(11,376)
(1,339,254)
(433,996)
December 31,
2018
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)
(261,242)
F-92
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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
Deferred tax assets (liabilities), net
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
Deferred tax assets (liabilities), net
Net
change
(145,030)
(8,459)
(981)
(1,143)
35,325
(120,288)
26,335
(5,599)
(130,273)
108
2,783
2,446
(104,200)
(224,488)
Net
change
(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)
(223,099)
December 31,
2018
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)
(261,242)
December 31,
2017
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)
(36,754)
December 31,
2017
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)
(36,754)
December 31,
2016
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)
186,345
F-93
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Opening balance
Net change in the year:
- corresponding entry to the income statement
- corresponding entry to valuation adjustments to equity (Note
20 (b))
Total net change
Closing balance
December 31,
2019
December 31,
2018
December 31,
2017
(261,242)
(36,754)
186,345
(154,962)
(17,792)
(172,754)
(433,996)
(224,596)
108
(224,488)
(261,242)
(101,517)
(121,582)
(223,099)
(36,754)
F-94
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(d) Reconciliation of the effective tax rate
The amounts recorded as income tax and social contribution expenses in the financial statements are reconciled to the statutory
rates, as shown below:
Profit before income taxes
Statutory rate
Estimated expense at statutory rate
Tax benefit of interest on equity
Permanent differences
Provision – Law 4,819/1958 – G0 (i)
Donations
Other differences
December 31, 2019
December 31, 2018
December 31, 2017
4,677,942
34%
(1,590,500)
312,339
(44,426)
(19,888)
32,050
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
Income tax and social contribution
(1,310,425)
(1,077,251)
(984,304)
Current income tax and social contribution
Deferred income tax and social contribution
Effective rate
(1,155,463)
(154,962)
28%
(852,655)
(224,596)
28%
(882,787)
(101,517)
28%
(i) Permanent difference related to the provision for actuarial liability (Note 20 (b) (iii)).
F-95
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
19 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 from the normal course of business, including civil, tax,
labor and environmental matters. Management recognizes provisions in the financial statements consistently with the recognition
and measurement criteria established in Note 3.14. The ultimate timing and amounts of the payments depends on the outcome of
the court cases.
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
253,665
153,654
93,910
59,143
325,129
192,950
1,078,451
550,247
528,204
(9,973)
(298)
(16,496)
(3,518)
(12,329)
(29)
(42,643)
-
(42,643)
December 31,
2019 Provisions Escrow deposits
(43,841)
(24,380)
(13,519)
(8,091)
(10,932)
-
(100,763)
290,649
67,985
98,302
63,335
302,935
170,419
993,625
243,692
153,356
77,414
55,625
312,800
192,921
1,035,808
December
31,
2018
246,808
43,605
84,783
55,244
292,003
170,419
892,862
550,247
485,561
458,387
535,238
-
(100,763)
458,387
434,475
F-96
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(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,
2018
290,649
67,985
98,302
63,335
302,935
170,419
993,625
(100,763)
892,862
December 31,
2017
438,619
332,037
114,544
77,100
299,842
160,446
1,422,588
(344,384)
1,078,204
December 31,
2016
572,210
332,667
131,286
69,898
285,413
150,084
1,541,558
(368,483)
1,173,075
Additional
provisions
57,314
54,223
28,888
11,821
167,995
42,198
362,439
(14,051)
348,388
Additional
provisions
29,732
36,100
22,578
10,763
83,499
33,392
216,064
(53,205)
162,859
Additional
provisions
26,642
23,017
13,517
6,877
55,106
32,377
157,536
(29,089)
128,447
Interest and
inflation
adjustment
53,929
102,686
18,713
2,918
61,483
24,358
264,087
(11,844)
252,243
Interest and
inflation
adjustment
40,749
21,161
12,939
4,157
32,290
18,294
129,590
(5,533)
124,057
Interest and
inflation
adjustment
44,805
36,888
12,057
7,392
38,861
16,156
156,159
(7,823)
148,336
Use of the
accrual
(99,379)
(42,948)
(9,766)
(4,982)
(112,084)
(312)
(269,471)
19,191
(250,280)
Use of the
accrual
(141,421)
(308,253)
(16,146)
(2,490)
(44,900)
(115)
(513,325)
269,248
(244,077)
Amounts not
used
(reversal)
(48,848)
(28,292)
(42,227)
(13,949)
(95,200)
(43,713)
(272,229)
64,824
(207,405)
Amounts not
used
(reversal)
(77,030)
(13,060)
(35,613)
(26,195)
(67,796)
(41,598)
(261,292)
33,111
(228,181)
December 31,
2019
253,665
153,654
93,910
59,143
325,129
192,950
1,078,451
(42,643)
1,035,808
December 31,
2018
290,649
67,985
98,302
63,335
302,935
170,419
993,625
(100,763)
892,862
Use of the
accrual
(138,466)
(39,433)
(19,975)
(259)
(43,498)
(24,585)
(266,216)
15,354
(250,862)
Amounts not
used
(reversal)
(66,572)
(21,102)
(22,341)
(6,808)
(36,040)
(13,586)
(166,449)
45,657
(120,792)
December 31,
2017
438,619
332,037
114,544
77,100
299,842
160,446
1,422,588
(344,384)
1,078,204
F-97
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(b) Lawsuits deemed as contingent liabilities
The Company is party to lawsuits and administrative proceedings relating to environmental, tax, civil and labor claims, which are
assessed as contingent liabilities in the financial statements, since it either does not expect outflows to be required or the amount
of the obligation cannot be reliably measured. Contingent liabilities, net of escrow deposits, are represented as follows:
Customer claims (i)
Supplier claims (ii)
Other civil claims (iii)
Tax claims (iv)
Labor claims (v)
Environmental claims (vi)
Total
December 31, 2019
86,061
1,986,736
679,623
1,184,811
631,364
4,864,894
9,433,489
December 31, 2018
207,600
1,459,100
719,300
1,439,100
624,200
4,343,800
8,793,100
(c) Explanation on the nature of main classes of lawsuits
(i) Customer claims
Approximately 680 lawsuits (890 as of December 31, 2018) were filed by commercial customers, who claim that their tariffs should
correspond to other consumer categories, and 320 lawsuits (490 as of December 31, 2018) 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 30
lawsuits (40 as of December 31, 2018) in which customers plead the reduction in tariff under the category as “Social Welfare
Entity”. The R$ 121,539 decrease in the lawsuits deemed as contingent liabilities was mainly due to the revisions of expectations
arising from court decisions in the period.
F-98
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(ii) Supplier claims
These lawsuits include lawsuits filed by some suppliers alleging underpayment of monetary restatements and the economic and
financial imbalance of the agreements, and are in progress at different courts. The R$ 109,751 increase in accrued lawsuits was
mainly due to revisions of expectations arising from court decisions in the period. The R$ 527,636 increase in lawsuits deemed as
contingent liabilities is mainly due to updates and revisions of expectations arising on lawsuits in progress.
(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, that were accrued and others that
were deemed as contingent liabilities. The R$ 254,289 decrease in lawsuits deemed as contingent liabilities was mainly due to
changes in expectations arising from agreements with the municipalities of Guarujá and São Bernardo do Campo in the period.
The municipality of São Paulo, through law, revoked the services tax exemption which until then the company withheld and
thereafter issued tax deficiency notices related to the sewage service and ancillary activities, in the updated amount of R$ 664,669
(R$ 605,008 as of December 31, 2018), which currently are subject-matter of three Tax Foreclosures. 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 deemed the proceeding as contingent liability.
F-99
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(v) Labor claims
The Company is a party to a number of labor lawsuits, involving issues such as overtime, shift schedule, health hazard premium
and hazardous duty premium, prior notice, change of function, salary equalization, service outsourcing and other, which are at
various court levels.
(vi) Environmental claims
These refer to several administrative proceedings and lawsuits filed by government entities, including Companhia Ambiental do
Estado de São Paulo – CESTESB and the Public Prosecution Office of the State of São Paulo, 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 R$ 22,502 and 521,004 increases in accrued lawsuits and deemed as contingent
liabilities, respectively, are mainly due to updates and revision of estimates on lawsuits in progress in the period.
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.
(d) Other concession-related legal proceedings
The Company is a party to concessions-related proceedings, where it challenges compensatory issues for the resumption of
sanitation services by some municipalities or by the right to continue operating said services.
The amount recorded as indemnities receivable in noncurrent assets, referring to municipalities of Cajobi, Macatuba, Álvares
Florence, Embaúba, Araçoiaba da Serra, Itapira, Tuiuti e Mauá was R$ 114,335 as December 31, 2019 (R$ 109,990 as of December
31, 2018), with allowance for doubtful accounts in the full amount recorded. All municipalities mentioned 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.
(e) Environmental lawsuits with settlements
In 2019, the Company has not entered into any Environmental agreement. The accumulated balance as of December 31, 2019,
corresponding to environmental indemnifications, totaled R$ 43,923 (R$ 44,828 as of December 31, 2018), recorded under “other
liabilities”.
F-100
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(f) Guarantee insurance for escrow deposit
On May 25, 2019, the Company contracted guarantee insurance for escrow deposit, effective for one year, in the amount of R$ 500
million. Such insurance will be used to settle legal claims instead of having cash disbursement by the Company, such insurance is
used until the conclusion of these proceedings limited to up to five years.
In 2019, the Company used R$ 126,4 million of the guarantee insurance (R$ 160,4 in 2018), of which R$ 75,5 million from the
current contract with an outstanding amount of R$ 424,5 million from the current contract.
20 Employees benefits
(a) Health plan – Medical Assistance
Since August 1, 2019, the new health plans managed by Fundação CESP - FUNCESP, which replaced the previous health plans
managed by SABESPREV, have been in effect. The health plan operator was changed by means of the signature of an Adhesion
Agreement between the parties. The entire process was in accordance with the current industry law, which is applicable to SABESP,
and was approved by the controlling authorities of the State Government.
Benefits are now paid after the event, free of choice, sponsored by contributions of SABESP and the employees is as follows:
Company: 9.3% (December 31, 2018 – 7.2%) on average, of gross payroll, totaling R$ 237,898 in 2019 (R$ 196,281 in 2018).
(b) Pension plan benefits
The Company has Post-Employment Benefit Plans in the following modalities: Defined Benefit (BD) – G1 (i) and G0 (ii); Defined
Contribution (CD) – Sabesprev Mais (iii) and FUNCESP (iv).
Statements of defined benefit plans
Summary of pension obligations – Liabilities
Present value of defined benefit obligations
Fair value of the plan’s assets
December 31, 2019
G0 Plan
G1 Plan
Total
(3,067,094) (3,046,255) (6,113,349) (2,532,338) (2,606,107)
-
2,752,417
G1 Plan G0 Plan
2,168,436
2,752,417
-
Total
(5,138,445)
2,168,436
December 31, 2018
Liability as per statement of financial position – pension obligations
(314,677) (3,046,255) (3,360,932)
(363,902) (2,606,107)
(2,970,009)
F-101
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Pension obligations
Plan’s liabilities
Defined benefit obligation, beginning of the year
Current service cost
Interest cost
Actuarial (gains)/losses recorded as other
comprehensive income
Benefits paid
Defined benefit obligation, end of the year
December 31, 2019
G0 Plan
G1 Plan
Total
G1 Plan
December 31, 2018
G0 Plan
Total
(2,532,338)
(47,001)
(224,429)
(392,876)
129,550
(2,606,107)
(227,367)
-
(397,597)
184,816
(5,138,445)
(274,368)
(224,429)
(790,473)
314,366
(2,319,841)
(13,905)
(213,201)
(2,543,877)
(232,248)
-
(114,188)
128,797
(10,783)
180,801
(4,863,718)
(246,153)
(213,201)
(124,971)
309,598
(3,067,094)
(3,046,255)
(6,113,349)
(2,532,338)
(2,606,107)
(5,138,445)
Plan’s assets
Fair value of the plan’s assets, beginning of the year
Expected return on the plan assets
Expected Company’s contributions
Expected participant’s contributions
Benefits paid
Actuarial gains/(losses) recorded as other
comprehensive income
Fair value of the plan’s assets, end of the year
2,168,436
192,965
36,968
38,391
(129,549)
445,206
2,752,417
-
-
-
-
-
-
-
2,168,436
192,965
36,968
38,391
(129,549)
445,206
2,752,417
1,931,380
179,449
36,199
36,336
(128,797)
113,869
2,168,436
-
-
-
-
-
-
-
1,931,380
179,449
36,199
36,336
(128,797)
113,869
2,168,436
(Deficit)/Surplus
(314,677)
(3,046,255)
(3,360,932)
(363,902)
(2,606,107)
(2,970,009)
F-102
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Despite the decrease in interest rate in the year, the decrease of actuarial deficit in G1 Plan was mainly due to the higher profitability
of the plan’s assets.
Other comprehensive income
Pursuant to IAS19, the Company recognizes gains/(losses), due to changes in assumptions under equity, as valuation adjustments
to equity, as shown below:
December 31, 2019
G0 Plan
G1 Plan
Total
G1 Plan
December 31, 2018
G0 Plan
Total
December 31, 2017
G0 Plan
G1 Plan
Total
Actuarial gains/(losses) on obligations
Actuarial gains/(losses) recorded as other
comprehensive income
Total gains/(losses)
Deferred income tax and social contribution
Valuation adjustments to equity
(392,876)
445,206
52,330
(17,792)
34,538
(397,597)
-
(397,597)
-
(397,597)
(790,473)
445,206
(345,267)
(17,792)
(363,059)
(114,188)
113,869
(319)
108
(211)
(10,783)
-
(10,783)
-
(10,783)
(124,971)
113,869
(11,102)
108
(10,994)
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
The amounts recognized in the year are as follows:
Cost of service, net
Interest cost rates
Expected return on the plan’s assets
Amount received from GESP (undisputed)
Total expenses
Actuarial assumptions:
Discount rate – actual rate (NTN-B)
Inflation rate
Expected nominal rate of return on assets
Nominal rate of salary growth
Mortality table
December 31, 2019
G0 Plan
227,367
-
-
(97,300)
130,067
G1 Plan
8,609
224,429
(192,965)
-
40,073
Total
235,976
224,429
(192,965)
(97,300)
170,140
December 31, 2018
G0 Plan
232,248
-
-
(96,282)
135,966
G1 Plan
(22,431)
213,201
(179,449)
-
11,321
Total
209,817
213,201
(179,449)
(96,282)
147,287
G1 Plan
December 31, 2017
G0 Plan
262,873
-
-
(95,191)
167,682
(35,093)
260,409
(183,689)
-
41,627
Total
227,780
260,409
(183,689)
(95,191)
209,309
December 31, 2019
December 31, 2018
December 31, 2017
G1 Plan
3.37% a.a.
3.5% a.a.
6.99%a.a.
5.57% a.a.
AT-2000
G0 Plan
3.36% a.a.
3.5% a.a.
-
5.57% a.a
AT-2000
G1 Plan
4.91% a.a.
4.01% a.a.
9.12%a.a.
6.09% a.a.
AT-2000
G0 Plan
4.84%
4.01%
-
6.09% a.a
AT-2000
G1 Plan
5.35% a.a.
3.96% a.a.
9.52%a.a.
6.04% a.a.
AT-2000
G0 Plan
5.30%
3.96%
-
6.04% a.a
AT-2000
F-103
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Sensitivity analysis
Sensitivity analysis of the defined benefit pension plan as of December 31, 2019 regarding the changes in the main assumptions
are:
Change in
assumption
Increase of 1.0%
Decrease of 1.0%
Increase of 1 year
Decrease of 1 year
Increase of 1.0%
Decrease of 1.0%
Assumptions
Discount rate
Life expectation
Wage increase rate
(i) G1 Plan
Impact on presente value of the defined benefit obligations
G1
Decrease of R$ 326,714
Increase of R$ 396,026
Increase of R$ 80,048
Decrease of R$ 72,676
Increase of R$ 36,140
Decrease of R$ 31,070
G0
Decrease of R$ 301,727
Increase of R$ 314,156
Increase of R$ 117,324
Decrease of R$ 140,051
Increase of R$ 388,886
Decrease of R$ 372,127
Managed by Sabesprev, the defined benefit plan (“G1 Plan”) 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.
In 2019, the expenses related to defined benefit obligation amounting to R$ 29,637, R$ 4,187 and R$ 2,685 were recorded in
operating costs, and selling and administrative expenses, respectively (R$ 7,530, R$ 1,133 and R$ 704 in 2018 and R$ 35,156,
R$ 1,864 and R$ 619 in 2017). The amount of R$ 3,564 (R$ 1,955 in 2018) was capitalized in assets.
The active participants as of December 31, 2019 totaled 3,758 (4,056 as of December 31, 2018), while inactive participants were
7,399 (7,149 as of December 31, 2018).
F-104
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
The expected benefit to be paid in 2020 referring to the G1 pension plan is R$ 167,202.
The contributions of the Company and participants of the G1 Plan in 2019 were R$ 36,968 (R$ 36,199 in 2018) and R$ 38,391
(R$ 36,336 in 2018), respectively. Of this amount, the Company and the participants’ payments corresponding to the actuarial
deficit of the G1 pension plan totaled R$ 25,531 and R$ 13,497, respectively, in 2019.
Estimated expenses
Service cost
Interest cost rates
Net profitability on financial assets
Expense to be recognized by the employeer
Plan’s assets
2020
3,796
208,485
(187,317)
24,964
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:
December 31, 2019
December 31, 2018
%
Total fixed income
Total equities
Total structures investments
Other
Fair value of the plan’s assets
Restrictions with respect to asset portfolio investments, in the case of federal government securities:
1,795,554
301,707
630,933
24,223
2,752,417
1,477,643
249,740
431,828
9,225
2,168,436
68.1
11.6
19.9
0.4
100
%
65.2
11.0
22.9
0.9
100
i) instruments securitized by the National Treasury will not be permitted;
ii) derivative instruments must be used for hedge.
F-105
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
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, 2019, 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.
(ii) G0 Plan
Pursuant to State Law 4,819/1958, employees who started providing services prior to May 1974 and retired as an employee of the
Company acquired a legal right to receive supplemental pension payments, which rights are referred as "G0 Plan ". The Company
pays these supplemental benefits on behalf of the State 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.
The number of active participants of Plan - Go as of December 31, 2019 and 2018 was 10. The number of beneficiaries, retirees and
survivors as of December 31, 2019 was 1,960 (2,038 as of December 31, 2018).
The benefit payable from the Go pension plan expected for 2020 is R$180,382.
In 2019 and 2018, the expenses related to the defined benefit obligation under Plan G0 were recorded in administrative expenses.
Estimated expenses for 2020
Interest cost rate
Expense to be recognized
2020
206,262
206,262
F-106
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(iii) Sabesprev Mais Plan
As of December 31, 2019, this Defined Contribution Plan administered by Sabesprev had had 9,774 active and assisted participants
(9,586 as of December 31, 2018).
With respect to the Sabesprev Mais plan, the contributions from the sponsor represent 100% over the total basic contribution from
the participants.
In 2019, the expenses related to defined pension plan amounting to R$ 14,293, R$ 1,865 and R$ 3,845 were recorded in operating
costs, and selling and administrative expenses, respectively (R$ 13,227, R$ 1,820 and R$ 3,599 in 2018 and R$ 12,034, R$ 1,744
and R$ 3,245 in 2017). The amount of R$ 2,458 (R$ 2,115 in 2018) was capitalized in assets.
(iv) FUNCESP plan
Sabesprev Mais Plan was closed to new adhesions on December 31, 2019, and as of January 1, 2020, hired employees will have the
option to join the Fundação Cesp Defined Contribution Plan (FUNCESP), as well as those employees not opting for the Sabesprev
Mais Plan.
(c) Profit sharing
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 2019. The limit of the profit sharing is up to one-month salary for
each employee, depending on performance goals reached. As of December 31, 2019, the Program’s balance payable was recorded
under “salaries, payroll charges and social contributions” in the amount of R$ 93,486 (R$ 110,464 as of December 31, 2018).
21 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 municipal government (Note 14 (c) (v) (6)). The balances as of December 31, 2019 and 2018 were R$ 474,078 and R$
454,022, respectively.
F-107
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
22 Knowledge Retention Program
a) Knowledge Retention Program (PRC)
In June 2018, SABESP implemented the Knowledge Retention Program (PRC), which is expected to end in December 2020, aiming
to provide personnel planning conditions and mitigate the impact of the exit of employees who possess strategic knowledge
acquired throughout their career.
For those enrolled in the Program, the compliance with the agreements of the Collective Bargaining 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.
In 2019, the Company paid the amount of R$ 43,905, corresponding to the exit of employees enrolled in the Program. As of
December 31, 2019, the total balance was R$ 153,377 in current liabilities (as of December 31, 2018 - R$ 74,324 in current liabilities
and R$ 122,148 in non-current liabilities).
b) Consent Decree (“TAC”)
On February 20, 2009, SABESP signed a Consent Decree, proposed by the State Prosecution Office, in which the Company
undertook to: a) continue hiring employees by means of public competition, except for filling positions in commission or trust
functions; b) gradually dismissing retired employees, replacing them with permanent staff, except in segments where increased
efficiency requires the reduction in the effective number of employees.
The Consent Decree clarifies “the need of training and carrying out phased dismissal of approximately two thousand an two
hundred (2,200) retired employees within a reasonable period of time, as well as those who will retire in the future”, which
allowed interpreting that the Consent Decree did not cover the approximately 2,200 retirees at that time, but all other employees
who retire at SABESP. Accordingly, the Company created a provision for indemnity of all retired employees who worked at
SABESP.
On October 11, 2019, the Prosecutor filed the Consent Decree stating that for the time elapsed and the successive information
provided by SABESP, the objective of the Consent Decree was fully complied with. Accordingly, the amount of R$ 173,284,
corresponding to the provisioned amount related to number of employees who retired after February 20, 2009 was reversed, taking
into consideration that the Consent Decree was filed following the dismissal of the 2,200 retired employees on the date the Decree
was signed.
F-108
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
As of December 31, 2019, the amount provisioned under “Labor obligations”, related to the Consent Decree totaled R$ 10,472 (R$
140,818 as of December 31, 2018), of which R$ 8,242 (R$ 136,293 as of December 31, 2018) under current liabilities, and R$ 2,230
(R$ 4,525 as of December 31, 2018) under noncurrent liabilities.
23 Equity
(a) Authorized capital
As of December 31, 2019 and 2018 the Company’s capital is R$ 15,000,000.
(b) Subscribed and paid-in capital
As of December 31, 2019 and 2018, subscribed and paid-in capital was represented by 683,509,869 registered, book-entry common
shares with no par value, as follows:
December 31, 2019
December 31, 2018
Number of shares
% Number of shares
%
343,524,285
235,643,765
103,823,655
518,164
50.26
34.47
15.19
0.08
343,524,285
212,612,143
125,278,967
2,094,474
50.26
31.10
18.33
0.31
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.
F-109
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Profit for the year
(-) Legal reserve - 5%
Minimum mandatory dividend – 25%
Dividend per share and per ADS
2019
3,367,517
168,376
2018
2,835,068
141,755
2017
2,519,310
125,965
3,199,141
2,693,313
2,393,345
799,785
1.17012
673,328
0.9851
598,336
0.87539
On April 29, 2019, the Shareholders’ General Meeting approved the distribution of dividends as interest on capital amounting to
R$ 118,859, for the 2018 fiscal year. Therefore, the amount of R$ 60,331 related to the surplus minimum mandatory dividends of
25%, set forth in the Bylaws, recorded in the 2018 equity under “Additional proposed dividends” was transferred to current
liabilities. These amounts started being paid in June 2019.
The Company proposed dividends as interest on capital ad referendum of the Annual Shareholders’ Meeting of 2020, in the
amount of R$ 799,785 (R$ 673,328 in 2018) and additional proposed dividends in the amount of R$ 141,203 (R$ 118,859 in 2018),
totaling R$ 940,988 (R$ 792,187 in 2018), corresponding to R$ 1.3767 per common share (R$ 1.1590 in 2018), to be resolved on
the Shareholders’ Meeting to be held on April 28, 2020. The amount exceeding the minimum mandatory dividend due in the year
of R$ 141,203 (R$ 118,859 in 2018) was reclassified into equity to the “Additional proposed dividends” account, this amount
includes the withholding income tax of R$60,230 (R$58,258 in 2018).
Pursuant to CVM Resolution 207/1996, the Company imputed interest on capital to the minimum dividend by its net value of
withholding income tax. The amount of R$ 60,230 (R$ 58,258 in 2018) 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, 2019, totaling R$ 800,352 (R$ 673,765 in 2018), refers to the amount
of R$ 799,785 (R$ 673,328 in 2018) declared in 2019, net of withholding income tax and R$ 567 declared in previous years (R$ 437
in 2018).
(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.
F-110
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(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, 2019 and 2018, the balance of investment reserve totaled R$6,098,575 and R$3,840,422, respectively.
Pursuant to paragraph four of article 28 of the by-laws, the Board of Directors may propose to the Shareholders’ Meeting that the
remaining balance of profit for the year, after deducting the legal reserve and minimum mandatory dividends, be allocated to an
investment reserve that will comply with the following criteria:
I- its balance, jointly with the balance of the other earnings reserves, except for reserves for contingencies and realizable
profits, may not exceed the capital stock;
II- the reserve is intended to guarantee the investment plan and its balance may be used:
a) to absorb losses, whenever necessary;
b) to distribute dividends, at any moment;
c) in share redemption, reimbursement or purchase transactions authorized by law;
d) in incorporation to the capital stock.
(f) Allocation of profit for the year
Profit
(+)
(-)
(-)
(-)
Profit for the year
Legal reserve – 5%
Minimum mandatory dividends
Additional proposed dividends
Investment reserve recorded
2019
2018
2017
3,367,517
168,376
799,785
141,203
2,258,153
2,835,068
141,755
673,328
118,859
1,901,126
2,519,310
125,965
598,336
105,543
1,689,466
Management will send for approval at the Shareholders’ Meeting, a proposal to reallocate retained earnings the amount of
R$2,258,153 to the Investment Reserve account, in order to meet the investment needs foreseen in the Capital Budget.
F-111
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
(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 20 (b), the breakdown of amounts recorded in 2019 and 2018.
Balance as of December 31, 2018
Actuarial gains/(losses) for the year (Note 20 (b))
Balance as of December 31, 2019
24 Earnings per share
Basic and diluted
G1 plan
70,716
34,538
105,254
G0 plan
(619,811)
(397,597)
(1,017,408)
Total
(549,095)
(363,059)
(912,154)
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.
Earnings attributable to Company’s owners
Weighted average number of common shares issued
2019
2018
2017
3,367,517
683,509,869
2,835,068
683,509,869
2,519,310
683,509,869
Basic and diluted earnings per share (reais per share)
4.93
4.15
3.69
25 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.
F-112
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Result
Gross operating revenue
Gross sales deductions
Net operating revenue
Costs, selling and administrative expenses
Income from operations before other net operating expenses,
net and equity accounting
Other operating income / (expenses), net
Equity accounting
Financial result, net
Income from operations before taxes
Depreciation and amortization
Sanitation (i)
16,134,032
(1,096,944)
15,037,088
(9,375,590)
5,661,498
2019
Reconciliation to the
financial statements (ii)
2,946,566
-
2,946,566
(2,881,394)
65,172
(1,780,094)
Balance as per financial
statements
19,080,598
(1,096,944)
17,983,654
(12,256,984)
5,726,670
(18,748)
3,701
(1,033,681)
4,677,942
(1,780,094)
(i) See note 32 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. Revenue from construction is recognized in accordance
with IFRIC 12 (Concession Agreements) and IFRS 15 (Revenue from Contracts with Customers), as all performance obligations
are satisfied over time. See Note 14 (e).
F-113
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Gross operating revenue
Gross sales deductions
Net operating revenue
Costs, selling and administrative expenses
Income from operations before other net operating expenses,
net and equity accounting
Other operating income / (expenses), net
Equity accounting
Financial result, net
Income from operations before taxes
Depreciation and amortization
Sanitation (i)
14,253,609
(971,185)
13,282,424
(8,203,883)
5,078,541
2018
Reconciliation to the
financial statements (ii)
2,802,670
-
2,802,670
(2,739,657)
63,013
(1,392,541)
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)
(i) See note 32 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. Revenue from construction is recognized in accordance
with IFRIC 12 (Concession Agreements) and IFRS 15 (Revenue from Contracts with Customers), as all performance obligations
are satisfied over time. See Note 14 (e).
F-114
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
Gross operating revenue
Gross sales deductions
Net operating revenue
Costs, selling and administrative expenses
Income from operations before other net operating expenses,
net and equity accounting
Other operating income / (expenses), net
Equity accounting
Financial result, net
Income from operations before taxes
Depreciation and amortization
Sanitation (i)
12,223,746
(766,390)
11,457,356
(7,566,104)
3,891,252
2017
Reconciliation to the
financial statements (ii)
3,150,877
-
3,150,877
(3,080,542)
70,335
(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)
(i) See note 32 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:
Gross revenue from construction recognized under IFRIC 12 (a)
Construction costs recognized under IFRIC 12 (a)
2,946,566
(2,881,394)
2,802,670
(2,739,657)
3,150,877
(3,080,542)
Construction margin
65,172
63,013
70,335
(a) Revenue from concession construction contracts is recognized in accordance with Note 3.3 (b).
2019
2018
2017
F-115
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
26 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 19 (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, 2019, the Company’s insurance coverage is as follows:
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
Coverage
2,185,827
1,960,248
500,000
100,000
100,000
105,695
6,058
5,000
14
4,962,842
F-116
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
27 Operating revenue
(a) Revenue from sanitation services:
Metropolitan region of São Paulo
Regional Systems
Total
2019
2018
2017
11,849,776
4,284,256
16,134,032
10,295,509
3,958,100
14,253,609
8,636,926
3,586,820
12,223,746
(b) Reconciliation between gross operating income and net operating income:
Revenue from sanitation services (i)
Construction revenue
Sales tax
Regulatory, Control and Oversight Fee (TRCF) (ii)
Net revenue
2019
2018
2017
16,134,032
2,946,566
(1,035,051)
(61,893)
17,983,654
14,253,609
2,802,670
(916,808)
(54,377)
16,085,094
12,223,746
3,150,877
(757,619)
(8,771)
14,608,233
(i) Includes the amount of R$70,122 corresponding to the TRCF charged from customers from the municipalities regulated by
ARSESP (R$ 63,901 in 2018).
(ii)Amount payable to ARSESP referring to regulatory, control and oversight activities, pursuant to State Complementary Law
1,025/07.
F-117
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
28 Operating costs and expenses
Operating costs
Salaries, payroll charges and benefits
Pension obligations
Construction costs (Note 25)
General supplies
Treatment supplies
Outsourced services
Electricity
General expenses
Depreciation and amortization
Selling expenses
Salaries, payroll charges and benefits
Pension obligations
General supplies
Outsourced services
Electricity
General expenses
Depreciation and amortization
Bad debt expense, net of recoveries (Note 9 (c))
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 25)
General supplies
Treatment supplies
Outsourced services
Electricity
General expenses
Depreciation and amortization
Tax expenses
Bad debt expense, net of recoveries (Note 9 (c))
2019
2018
2017
(1,938,265)
(49,564)
(2,881,394)
(259,401)
(310,380)
(1,250,890)
(1,140,160)
(647,804)
(1,659,779)
(10,137,637)
(270,549)
(6,848)
(10,332)
(360,190)
(1,333)
(122,503)
(31,649)
(803,404)
(128,099)
(278,507)
(138,207)
(3,216)
(197,357)
(1,436)
(407,250)
(88,666)
(73,205)
(1,187,844)
(2,487,321)
(194,619)
(2,881,394)
(272,949)
(310,380)
(1,808,437)
(1,142,929)
(1,177,557)
(1,780,094)
(73,205)
(128,099)
(12,256,984)
(1,959,539)
(25,066)
(2,739,657)
(238,034)
(265,146)
(996,477)
(956,840)
(629,253)
(1,276,444)
(9,086,456)
(289,378)
(3,602)
(6,391)
(273,470)
(1,154)
(102,213)
(17,272)
(693,480)
(166,727)
(254,284)
(141,758)
(4,881)
(204,728)
(1,363)
(232,288)
(98,825)
(58,750)
(996,877)
(2,503,201)
(170,426)
(2,739,657)
(249,306)
(265,146)
(1,474,675)
(959,357)
(963,754)
(1,392,541)
(58,750)
(166,727)
(10,943,540)
(1,841,571)
(48,381)
(3,080,542)
(163,712)
(287,592)
(857,063)
(794,352)
(531,985)
(1,173,765)
(8,778,963)
(305,440)
(7,296)
(4,451)
(258,287)
(762)
(94,112)
(15,664)
(686,012)
(82,681)
(229,752)
(171,830)
(5,675)
(183,746)
(965)
(302,113)
(112,468)
(92,441)
(1,098,990)
(2,376,763)
(227,507)
(3,080,542)
(173,838)
(287,592)
(1,299,096)
(796,079)
(928,210)
(1,301,897)
(92,441)
(82,681)
(10,646,646)
F-118
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
29 Financial Income (Expenses)
Financial expenses
Interest and charges on borrowings and financing – local currency
Interest and charges on borrowings and financing – foreign currency
Other financial expenses (i)
Income tax over international remittance
Inflation adjustment on borrowings and financing (ii)
Other inflation adjustments (i)
Interest and inflation adjustments on provisions (iii)
Total financial expenses
Financial income
Inflation adjustment gains (iv)
Income on short-term investments (v)
Interest income (vi)
Cofins and Pasep
Other
Total financial income
2019
2018
2017
(331,367)
(165,421)
(344,508)
(17,650)
(44,802)
(107,584)
(162,093)
(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)
(1,173,425)
(807,967)
(688,280)
91,180
151,622
150,054
(20,028)
14
372,842
105,952
187,094
175,939
(22,693)
10
446,302
89,010
195,992
57,166
(16,366)
442
326,244
Financial income (expenses), net before exchange rate changes
(800,583)
(361,665)
(362,036)
Exchange gains (losses)
Exchange rate changes on borrowings and financing (vii)
(233,960)
(915,897)
(96,300)
Exchange rate changes on assets
Other exchange rate changes
Exchange rate changes, net
Financial income (expenses), net
863
(1)
13,235
(9)
336
(54)
(233,098)
(902,671)
(96,018)
(1,033,681)
(1,264,336)
(458,054)
(i) 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.
(ii) Decrease of R$ 21.4 milion in monetary variation derives mainly on local borrowings and financing, mainly in debentures, due to the amortization of the 15th and 17th debentures
issue and the decrease of the TJLP from 6.98% in 2018 to 5.57% in 2019.
(iii) Lawsuits accrued interest and monetary restatement due to inflation in Brazil. The increase in interest and monetary restatement on lawsuits is due to a change in the expectations
regarding unfavorable outcome of the court cases against the Company.
(iv) The monetary variations gains decreased mainly due to the higher restatement on escrow deposits.
(v) The decrease is a result of the reduction in the CDI rate, of 6.42% p.a. in 2019 and 5.96% p.a. in 2018. The average balance applied in 2019 was R$ 2.199 billion, compared to R$
2.972 billion in 2018.
(vi) The increase in interest income is mainly due to the recognition of interest on installment agreements with customers, in 2018
(vii) Decrease of R$ 681.9 million in exchange rate changes on borrowings and financing mainly due to the lower appreciation of the U.S. dolar and the Yen against the Real in 2019
(4.0% and 5.3%, respectively), compared to appreciation presented in 2018 (17.1% and 20.0, respectively).
F-119
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
30 Other operating income (expenses), net
Other operating income, net
Other operating expenses
Other operating income (expenses), net
2019
75,667
(94,415)
(18,748)
2018
93,089
(64,498)
28,591
2017
75,410
(81,089)
(5,679)
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.
31 Commitments
The Company has agreements to manage and maintain its activities, as well as agreements to build new projects aiming at
achieving the objectives proposed in its target plan. Below, the main unrecorded committed amounts as of December 31, 2019:
Contractual obligations – Expenses
Contractual obligations – Investments
Total
1 year
1-3 years
3-5 years
944,045
2,247,765
3,191,810
2,787,402
2,015,873
4,803,275
1,188,276
745,603
1,933,879
More than
5 years
3,006,756
36,611
3,043,367
Total
7,926,479
5,045,852
12,972,331
The main commitment refers to the São Lourenço PPP. See Note 14 (g).
32 Supplemental cash flow information
Total additions of contract assets (Note 13)
Total additions to intangible assets (Note 14 (b))
Items not affecting cash (see breakdown below)
2019
2018
2017
3,532,283
1,788,907
3,188,943
1,144,728
-
3,490,298
(2,125,943)
(2,201,112)
(1,532,518)
Total additions to intangible assets as per statement of cash flows
3,195,247
2,132,559
1,957,780
Investment and financing operations affecting intangible assets but not cash:
Interest capitalized in the year (Note 14 (d))
Contractors payable
Program contract commitments
Public Private Partnership - São Lourenço PPP (Note 14 (g))
Leases
Performance agreements
Right of use
Construction margin (Note 25)
Agreement with the Municipality of Santo André (Note 9 (a))
Agreement with the municipality of Guarulhos (Note 9 (a))
Total
F-120
233,251
252,675
35,817
10,591
-
78,296
113,233
65,172
1,336,908
-
2,125,943
488,502
297,872
149,974
273,737
-
-
-
63,013
-
928,014
2,201,112
649,048
213,340
95,126
501,591
3,078
-
-
70,335
-
-
1,532,518
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
33 Events after the reporting period
• 25th Issuance of Debentures
On February 20, 2020, the Board of Directors approved the 25th issuance simple, unsecured, non-convertible debentures, in up
to three series, for public distribution, with restricted placement efforts, pursuant to CVM Instruction nº 476, in the total amount
of R $ 1,000,000,000.00. The amount of Debentures to be allocated in each series of the Offer will occur through the
communicating vessels system.
In April 27, 2020, Sabesp carried out the twenty-fifth issuance of debentures of R$1.45 billion, with a maturity date of October
2021 and bearing interest at a rate of CDI plus 3.30% per year. Considering the uncertainties arising from the coronavirus crisis
and its effect on the economy and financial markets, the Company decided to increase the amount issued in R$ 450 million.
The proceeds from the issuance and offering of the Debentures will be used to the refinance of its financial commitments maturing
in 2020 and to replenish the Company's cash position.
• COVID-19 (Coronavírus)
The services provided by the Company become even more essential to society in the context of the COVID 19 pandemic. The
interruption of water supply by a basic sanitation company may compromise the guidance given by the World Health Organization
(WHO) so that everyone maintains good hygiene habits, such as washing your hands correctly and more often.
The Company has implemented several preventive measures so that its employees are not exposed to risky situations, such as: (i)
use of home-office practice particularly in the administrative sectors and for all employees over 60; (ii) restriction of national and
international travel; (iii) use of remote communication; (iv) anticipation of the vaccination campaign; among others. The Company
additionally took all necessary preventive measures so that employees with strategic functions can comply with them without
increasing the risk of contamination, ensuring continuity in the provision of essential services.
Some materials used in the treatment of water and sewage are imported and may suffer some type of restriction, however these
can be replaced by alternative products in Brazil. Accordingly, there is no expectation of any negative effect on the Company's
operations.
On March 20, 2020, SABESP released a Material Fact stating that the Executive Board approved the proposal to exempt customer
categories consumption of "Residencial Social" and "Residencial Favela (Shantytown)" from paying water/sewage bills. This
measure covers all municipalities operated for a period of 90 days and refer to accounts issued as of April 1, 2020, which must be
ratified by the Board of Directors. To preserve the economic and financial sustainability of Company, the impact on revenue may
be offset by reduced expenses and budgetary adjustments.
On March 22, 2020, the São Paulo State Government decreed quarantine throughout the State, restricting activities in order to
avoid the accelerated spread of COVID 19. In this sense, the Company's revenues in the commercial and public categories may
have a negative impact in future reporting periods due to the reduction in the level of activity. On the other hand, this same measure
may increase consumption in the residential category. The trend in the industrial category is not clear, since there are sectors that
will increase production and, therefore, increase the demand for water, while others will have to reduce it.
F-121
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
In order to cope with the constant investments in infrastructure, the Company annually uses third party capital, as a complement
to its own resources. The impacts of COVID-19 in attracting borrowings and financing is still uncertain, however the Company has
sufficient resources of funds to fulfill its short and medium term strategy for the next 12 months.
At this time, it is not possible to assess all the impacts that COVID-19 may have in the future, for this reason this topic is being
assessed daily by the Company's management.
F-122
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Notes to the Financial Statements
Years ended December 31, 2019, 2018 and 2017
Amounts in thousands of reais, unless otherwise indicated
On March 30, 2020, the Board of Directors ratified the exemption approved by the Executive Board On March 19, 2020 that deals
with the proposal to exempt customer categories consumption of "Residencial Social" and "Residencial Favela (Shantytown)",
registered on March 19, 2020, from paying water/sewage bills for 90 days for bills issued as of April 1, 2020, covering all
municipalities operated by the Company.
• Tariff Adjustment Index
On April 9, 2020, the São Paulo State Sanitation and Energy Regulatory Agency ("ARSESP") published Resolutions nº 980 and
nº 979.
Resolution nº 980 disclosing a tariff adjustment index of 2.4924% for the Company, broken down as follows:
IPCA variation of 3.3032% in the period;
•
• Efficiency Factor (X Factor) of 0.6920%; and
• Quality factor (Q Factor) of -0.1188%.
However, considering Official Letter SIMA/GAB/370/2020, of the State Secretariat for Infrastructure and Environment, which
requests ARSESP to evaluate the possibility of postponing the tariff adjustment for 90 days, further to Decree 64,879/2020,
recognizing the state of public calamity resulting from the COVID-19 pandemic, ARSESP decided:
• To postpone the publication of the new tariff tables, resulting from the annual tariff adjustment to June 10, 2020;
• The adjusted tariff tables, including the tables of the municipalities of Iperó, Pereiras, Santa Branca and Santa Isabel, will
be published by June 10, 2020 and will be applied as of thirty days from their publication, pursuant to Law 11,445/2007;
• The compensatory adjustments for the postponement of the application of the annual tariff adjustment will be calculated
until June 10, 2020; and
• The amount to be compensated will be distributed in the tariffs in the period between July 10, 2020 and May 10, 2021,
when the results of the Third Ordinary Tariff Revision will be applied.
Resolution No. 979 informs that ARSESP will evaluate the economic-financial balance of the provision of services in order to
restore it in due course, if necessary, as a result of the impact of the exemption from tariffs on water / sewage bills of consumers
in the "Residential Social" and "Residential Favela (Shantytown)" categories consumption, registered on 03/19/2020 for 90 days
for accounts issued as of 04/01/2020 and which will cover all municipalities operated by the Company.
• Conversion from Dollars to Reais of the debt contracted with the Inter American Development Bank
(IDB)
On April 28, 2020, the Company carried out the conversion from Dollars to Reais of the debt contracted with the Inter American
Development Bank (IDB) in the amount of US$ 494,616,801.20, corresponding to the debt balance of the 2202 / OC-BR loan
related to the Rio Tietê Stage III Depollution Program. The details are:
o Date: Executed, April 27, 2020 / effective, May 5, 2020
o Expiration: 3 September 2035
o Amortization: Semiannual installments
o Total amount:
o From: US$ 494,616,801.20
o To: R$ 2,810,907,281.22
•
Interest rate:
o From: Dollar - Libor 3 months + 0.39% per year (*)
o For: Reais – DI + 0.06% per year (*)
(*) On this rate, the variable margin for loans from IDB Ordinary Capital is added. This rate is periodically determined by the bank and today is at 80 bps
F-123
DESCRIPTION OF SECURITIES
REGISTERED UNDER SECTION 12 OF THE EXCHANGE ACT
EXHIBIT 2.1
As of December 31, 2019, Companhia de Saneamento Básico do Estado de São Paulo – SABESP (“we,” “us,” and “our”) had the following series of
securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares, without par value
Not traded
New York Stock Exchange *
American Depositary Shares, evidenced by
American Depositary Receipts, each
representing one Common Share
SBS
New York Stock Exchange
* Shares are not listed for trading, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the New
York Stock Exchange.
Capitalized terms used but not defined herein have the meanings given to them in our annual report on Form 20-F for the fiscal year ended December 31,
2019.
1
General
COMMON SHARES, WITHOUT PAR VALUE
Set out below is certain information concerning our authorized and issued share capital and a brief summary of certain significant provisions of our bylaws
and Brazilian corporate law. This description does not purport to be complete and is qualified by reference to our bylaws (an English translation of which we
have filed with the SEC) and to Brazilian corporate law.
A copy of our bylaws is attached to our annual report on Form 20-F as “Exhibit 1.1— Bylaws of the Registrant (English translation) (incorporated by
reference to the Form 6-K filed on December 09, 2019)”. We encourage you to read our bylaws and the applicable sections of our annual report for additional
information.
Share Capital
Our capital stock is only composed of common shares, all without par value. As of December 31, 2019, our share capital was represented by 683,609,869
common shares. Our common shares are publicly traded in Brazil on the B3, under the ticker symbol SBSP3.
The State of São Paulo holds the majority of our common shares. See “Item 7.A. Major Shareholders and Related Party Transactions—Major Shareholder”
of our annual report on Form 20-F.
Rights, preferences and restrictions attaching to each class of shares
Each common share entitles the holder thereof to one vote at our annual or special shareholders’ meetings. According to Brazilian Corporate Law and
CVM regulations, 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. The quorum to hold shareholders’ meetings on first call requires the
attendance of shareholders, either in person or by proxy, representing at least 25.0% of the shares entitled to vote and, on second call, the meetings can be held
with the attendance of shareholders, also either in person or by proxy, representing any number of shares entitled to vote.
Under Brazilian Corporate Law, our common shares are entitled to dividends or other distributions made in respect of our common shares in proportion
to their share of the amount available for the dividend or distribution. See “Item 8A. Financial Statements and Other Financial Information—Dividends and
Dividend Policy” of our annual report on Form 20-F 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 certain circumstances that may result in a change in 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.
2
Pursuant to Brazilian Corporate Law and our bylaws, each of our common shares carries the right to one vote at our shareholders’ meetings. We may not
restrain or deny that right without the consent of the holders of a majority of the shares affected.
Neither Brazilian Corporate Law nor our bylaws expressly address:
• staggered terms for directors;
• cumulative voting, except as described below; or
• measures that could prevent a takeover attempt.
However, under the laws of the State of São Paulo, the State is required to own at least a majority of our outstanding common shares.
According to Brazilian Corporate Law and its regulations, shareholders representing at least 10 percent of our capital, may request that a multiple voting
procedure be adopted to entitle each share to as many votes as there are board members and to give each shareholder the right to vote cumulatively for only
one candidate or to distribute their votes among several candidates. Pursuant to Brazilian Corporate Law, shareholder action must be taken at a shareholders
meeting, duly called for and not by written consent. Pursuant to regulations promulgated by the CVM, the 10% threshold requirement for the exercise of
multiple voting procedures may be reduced depending on the amount of capital stock of the company. Considering our current capital stock, shareholders
representing 5% of our voting capital may demand the adoption of a multiple voting procedure.
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. Nonetheless,
as per decisions by CVM, in a company that has issued only common shares, such amount may be reduced to 10.0%. Furthermore, pursuant to Brazilian
corporate law, non-controlling holders of common shares issued by a mixed capital company (sociedade de economia mista), irrespective of its interest
percentage in the company’s voting capital, may also have exercise the right of elect separately a member of the Board of Directors and an alternate, if they
are not entitled to elect more members by means of the multiple voting procedure.
Dividends
The Brazilian corporate law and our bylaws prescribe that we must distribute to our shareholders in the form of dividends or interest on shareholders’
equity an annual amount equal to not less than 25% of the of the fiscal year’s net income, after the deductions established or authorized by law, unless the
Board of Directors advises our shareholders at our general shareholders’ meeting that payment of the mandatory dividend for the preceding year is inadvisable
in light of our financial condition. The Fiscal Council must review any such determination and report it to the shareholders. The shareholders must also approve
the recommendation of the Board of Directors with respect to any required distribution.
By law, we are required to hold an annual shareholders’ meeting by April 30 of each year at which an annual dividend may be declared (exceptionally in
2020, due to the COVID-19 pandemic, this deadline was postponed by seven months counted from the closing date of the prior fiscal year (2019), as provided
in Provisional Measure No. 931 of March 30, 2020). Under Brazilian Corporate Law, dividends are generally required to be paid to the holder of record on a
dividend declaration date within 60 days following the date the dividend was declared, unless a shareholders’ resolution sets forth another date of payment,
which, in either case, the payment of the dividends 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 payments of interest on shareholders’ equity) in respect of its shares, after which we will
have no liability for such payments.
Pre-emptive 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
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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.”
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 of Brazil.
See also “Item 6.A. Directors and Senior Management” of our annual report on Form 20-F.
Liquidation Rights
Under Brazilian corporate law, the approval of shareholders representing at least one-half of the issued and outstanding voting shares is required for
dissolving or liquidating us.
Redemption Rights
Our common shares are not redeemable, except that a dissenting shareholder is entitled under Brazilian Corporate Law to obtain redemption upon a
decision made at a shareholders’ meeting approving any of the items described above in “Exhibit 2.1. Common Shares, Without Par Value—Rights, preferences
and restrictions attaching to each class of shares” to our annual report on Form 20-F, as well as:
• any decision to transfer all of our shares to another company in order to make us a wholly owned subsidiary of such company, a stock merger;
• any decision to approve the acquisition of control of another company at a price which exceeds certain limits set forth in Brazilian corporate law;
or
• in the event that the entity resulting from (i) a merger, (ii) a stock merger as described above or (iii) a spin-off that we conduct fails to become a
listed company within 120 days of the general shareholders’ meeting at which such decision was taken.
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The right of redemption triggered by shareholder decisions to merge, consolidate or to participate in a centralized group of companies may only be
exercised if our shares do not satisfy certain tests of liquidity, among others, at the time of the shareholder resolution. The right of redemption lapses 30 days
after publication of the minutes of the relevant general shareholders’ meeting.
We would be entitled to reconsider any action giving rise to redemption rights within 10 days following the expiration of such rights if the redemption of
shares of dissenting shareholders would jeopardize our financial stability. Any redemption pursuant to Brazilian corporate law would be made at no less than
the book value per share, determined on the basis of the last balance sheet approved by the shareholders; provided that if the general 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 general shareholders’ meeting.
Changes to Our Share Capital
Under Brazilian Corporate Law, the approval of shareholders representing at least one-half of the issued and outstanding voting shares is required for
creating a new class of preferred shares with privileges than the common shares. Pursuant to Brazilian Corporate Law, shareholder action must be taken at a
shareholders meeting, duly called for and not by written consent.
Restrictions on Non-Brazilian Holders
Under Brazilian corporate law, there are no restrictions on ownership of our capital stock by individuals or legal entities domiciled outside Brazil, including
the rights of such non-resident or foreign shareholders to hold or exercise voting rights.
However, the right to convert dividend payments and proceeds from the sale of common 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 investment be registered
with the Central Bank of Brazil. These restrictions on the remittance of foreign capital abroad could hinder or prevent the depositary bank and its agents for
the common shares represented by ADSs from converting dividends, distributions or the proceeds from any sale of common shares or rights, as the case may
be, into U.S. dollars and remitting such amounts abroad. Delays in, or refusal to grant, any required government approval for conversions of Brazilian currency
payments and remittances abroad of amounts owed to holders of ADSs could adversely affect holders of ADRs.
Under CMN Resolution No. 4,373 of 2014 (“Resolution 4,373”), foreign investors, defined to include individuals, legal entities, mutual funds and other
collective investment entities, domiciled or headquartered outside Brazil, may invest in almost all financial assets and engage in almost all transactions available
in the Brazilian financial and capital markets, provided that they:
• appoint at least one representative in Brazil, with powers to perform actions relating to its investment,
• complete the appropriate foreign investor registration form,
• register as a foreign investor with the CVM, and register its foreign investment with the Central Bank of Brazil, and
• appoint a custodian, duly licensed by the Central Bank of Brazil, if the Brazilian representative in the first bullet is not a financial institution.
Resolution 4,373 specifies the manner of custody and the permitted means for trading securities held by foreign investors under the resolution. The offshore
transfer or assignment of securities or other financial assets held by foreign investors pursuant to Resolution 4,373 is prohibited, except for transfers resulting
from a corporate reorganization, or occurring upon the death of an investor by operation of law or will.
Form and Transfer of Shares
Our common shares are in book-entry form registered in the name of each shareholder. The transfer of such shares is made under Brazilian corporate law,
which provides that a transfer of shares is effected by our transfer agent, Banco Bradesco S.A., upon presentation of valid share transfer instructions to us by a
transferor or its representative. When common shares are acquired or sold on a Brazilian stock exchange, the transfer is effected on the records of our transfer
agent by a representative of a brokerage firm or the stock exchange’s clearing system. Transfers of shares by a foreign investor are made in the same way and
are executed by the investor’s local agent, who is also responsible for updating the information relating to the foreign investment furnished to the Central Bank
of Brazil.
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Shareholder Ownership Disclosure
Pursuant to CVM regulations, a Brazilian public company’s (i) direct or indirect controlling shareholders, (ii) shareholders who have elected members of
such company’s board of directors or fiscal council, as well as (iii) any person or group of persons representing the same interest, in each case that has directly
or indirectly acquired or sold an interest that exceeds (either upward or downward) the threshold of 5%, or any multiple thereof, of the total number of shares
of any type or class, must disclose such shareholder’s or person’s share ownership or divestment, immediately after the acquisition or sale, to the CVM and the
B3.
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AMERICAN DEPOSITARY SHARES (EVIDENCED
BY AMERICAN DEPOSITARY RECEIPTS), EACH
REPRESENTING ONE COMMON SHARE
Depositary
The Bank of New York Mellon acts as the depositary (“Depositary”), for our American Depository Shares (“ADSs”), which are evidenced by American
depositary receipts (“ADRs”). Each ADS represents one common share deposited with the Custodian (as defined below), as agent of the Depositary, under the
amended and restated deposit agreement (“Deposit Agreement”) dated as of May 9, 2002, as amended and restated as of January 22, 2013, between us, the
Depositary and any person in whose name ADRs are registered on the books of the Depositary maintained for such purpose, or an owner, and any person
holding from time to time those ADSs (“holders”).
The Bank of New York Mellon’s office where the ADRs are administered is located at 101 Barclay Street, New York, N.Y. 10286, United States, or the
Corporate Trust Office, and its principal executive office is located at 225 Liberty Street, New York, N.Y. 10286, United States.
Provisions
In the United States, our common shares trade in the form of ADSs. Following a ratio change effected on January 24, 2013, each ADS represents one
common share of our company. Following a stock split which took place on April 25, 2013, we issued two new ADSs for each ADS currently trading and
distributed them to our holders on April 29, 2013. The ADSs are issued by The Bank of New York Mellon, as Depositary, pursuant to the Deposit
Agreement. The ADSs commenced trading on the NYSE on May 10, 2002.
Banco Bradesco S.A. located in Brazil acts as custodian (“Custodian”), as the agent of the Depositary for the purposes of the Deposit Agreement.
Holders of our ADSs are not treated as our shareholders and do not have the same rights that our shareholders have. The Depositary will hold the shares
that underlie the common share ADSs through the Custodian in accordance with the provisions of the Deposit Agreement. The rights of our ADSs holders are
governed by the Deposit Agreement and the ADRs, which are governed by New York law. In contrast, the rights of our shareholders are governed by Brazilian
law.
If you become an owner of ADSs, you will become a party to the Deposit Agreement and therefore will be bound to its terms and to the terms of any ADR
that evidences your ADSs. The Deposit Agreement and the ADRs specify our rights and obligations as well as your rights and obligations as owner of ADSs
and those of the Depositary. As an ADS holder you appoint the Depositary to act on your behalf in certain circumstances.
We are providing you with a summary of the material terms of the ADSs, the Depositary Agreement and of your material rights as an owner of an
ADS. We urge you to review the Deposit Agreement in its entirety, which sets forth the full rights of owners and holders and the rights and duties of the
Depositary in respect of the common shares deposited thereunder. Copies of the Deposit Agreement are on file at the Depositary’s Corporate Trust Office.
Dividends and Distributions
Whenever the Depositary receives any cash dividend or other cash distribution on any deposited securities, the Depositary will, after conversion to U.S.
dollars, if applicable under the Depositary Agreement, distribute the amount received (net of the fees and expenses of the Depositary as provided in the Deposit
Agreement, if applicable) to the owners of ADRs entitled thereto as of the recorded date. Provided, however, that in the event that we or the Depositary are
required to withhold and do withhold from such cash dividend or such other cash distribution in respect of any deposited securities an amount on account of
applicable taxes, the amount distributed to the owners of the ADRs evidencing ADS representing such deposited securities will be reduced accordingly.
Subject to the provisions of the Deposit Agreement, whenever the Depositary receives any distribution other than certain distributions further described
in Sections 4.1, 4.3 or 4.4 of the Deposit Agreement, the Depositary will, as promptly as practicable after consultation with us, cause the securities or property
received by it to be distributed to the Owners of ADRs entitled thereto, after deduction or upon payment of any fees and expenses of the Depositary or any
applicable taxes or other governmental charges, in any manner that the Depositary may reasonably deem equitable and practicable for accomplishing such
distribution. Provided, however, that if in the opinion of the Depositary such distribution cannot be made proportionately among the owners of ADRs entitled
thereto, or if for any other reason the Depositary deems such distribution not to be feasible, the Depositary may adopt such method as it may reasonably deem
equitable and practicable for the purpose of effecting such distribution, including, but not limited to, the public or private sale of the securities or property thus
received, or any part thereof, and the net proceeds of any such sale will be distributed by the Depositary to the Owners entitled thereto as in the case of a
distribution received in cash; provided that any unsold balance of such securities or property is distributed by the Depositary to the Holders entitled thereto, if
such distribution is feasible without withholding for or on account of any taxes or other governmental charges and without registration under the Securities
Act, in accordance with such equitable and practicable methods as the Depositary may have adopted; provided, further, that no distribution to Holders pursuant
to Section 4.2 of the Deposit Agreement is unreasonably delayed by any action of the Depositary.
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If any distribution upon any deposited securities consists of a dividend in, or free distribution of, common shares, the Depositary may, and will if we
request, distribute to the owners of outstanding ADRs entitled thereto, additional ADRs evidencing an aggregate number of ADSs representing the amount of
common shares received as such dividend or free distribution, subject to the terms and conditions of the Deposit Agreement with respect to the deposit of
common shares and the issuance of ADSs evidenced by ADRs, including the withholding of any tax or other governmental charge as provided in Section 4.11
of the Deposit Agreement and the payment of the fees of the Depositary as provided in Section 5.9 of the Deposit Agreement. In lieu of delivering ADRs for
fractional ADSs in any such case, the Depositary will sell the amount of common shares represented by the aggregate of such fractions and distribute the net
proceeds, all in the manner and subject to the conditions set forth in the Deposit Agreement. If additional ADRs are not so distributed, each ADS will thenceforth
also represent the additional common shares distributed upon the deposited securities represented thereby.
In the event that the Depositary determines that any distribution in property (including common shares and rights to subscribe therefor) is subject to any
tax or other governmental charge which the Depositary is obligated to withhold, the Depositary may by public or private sale dispose of all or a portion of such
property (including common shares and rights to subscribe therefor) in such amounts and in such manner as the Depositary deems necessary and practicable
to pay any such taxes or charges and the Depositary will distribute the net proceeds of any such sale after deduction of such taxes or charges to the owners of
ADRs entitled thereto.
The owners shall indemnify the Depositary, us, the Custodian and any respective directors, employees, agents and affiliates against, and hold each of them
harmless from, any claims by any governmental authority with respect to taxes, additions to tax, penalties or interest arising out of any refund of taxes, reduced
rate of withholding at source or other tax benefit obtained.
Withdrawal and Surrender of Deposited Securities
Upon surrender at the deposited securities of the Depositary of an ADR for the purpose of withdrawal of the deposited securities represented by the ADS
evidenced by such ADR, and upon payment of the fee of the Depositary for the surrender of ADR as provided in the Deposit Agreement and payment of all
taxes and governmental charges payable in connection with such surrender and withdrawal of the deposited securities, and subject to the terms and conditions
of the Deposit Agreement, the owner of such ADR will be entitled to delivery, to him or her or upon his or her order, of the amount of deposited securities at
the time represented by the ADS evidenced by such ADRs. Delivery of such deposited securities may be made by the delivery of (a) deposited securities in the
name of such owner or as ordered by him or her or by certificates properly endorsed or accompanied by proper instruments of transfer to such owner or as
ordered by him or her and (b) any other securities, property and cash to which such owner is then entitled in respect of such ADRs to such owner or as ordered
by him. Such delivery will be made, as hereinafter provided, without unreasonable delay.
An ADR surrendered for such purposes may be required by the Depositary to be properly endorsed in blank or accompanied by proper instruments of
transfer in blank, and if the Depositary so requires, the owner thereof will execute and deliver to the Depositary a written order directing the Depositary to
cause the deposited securities being withdrawn to be delivered to or upon the written order of a person or persons designated in such order. Thereupon the
Depositary will direct the Custodian to deliver at the principal office of such Custodian, subject to limitations contained in the ADR and to the other terms and
conditions of the Deposit Agreement, to or upon the written order of the person or persons designated in the order delivered to the Depositary as above provided,
the amount of deposited securities represented by the ADRs evidenced by such ADR, except that the Depositary may make delivery to such person or persons
at the principal trust office of the Depositary of any dividends or distributions with respect to the deposited securities represented by the ADSs evidenced by
such ADRs, or of any proceeds of sale of any dividends, distributions or rights, which may at the time be held by the Depositary.
At the request, risk and expense of any Owner so surrendering an ADR, and for the account of such Owner, the Depositary will direct the Custodian to
forward any cash or other property (other than rights) comprising, and forward a certificate or certificates, if applicable, and other proper documents of title
for, the deposited securities represented by the ADS evidenced by such ADR to the Depositary for delivery at the Corporate Trust Office of the Depositary.
Such direction is to be given by letter or, at the request, risk and expense of such owner, by cable, telex or facsimile transmission.
All ADRs surrendered to the Depositary will be cancelled by the Depositary. The Depositary is authorized to destroy ADRs so cancelled.
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Record Date
Whenever any cash dividend or other cash distribution becomes payable or any distribution other than cash is to be made, or whenever rights are to be
issued with respect to the deposited securities, or whenever for any reason the Depositary causes a change in the number of common shares that are represented
by each ADS, the Depositary will fix a record date (which record date, if not the same as the record date determined by us, shall be as close to practicable to
the date corresponding to the record date fixed by us in respect of the common shares or other deposited securities) (a) for the determination of the owners of
Receipts who shall be entitled to receive such dividend, distribution or rights or the net proceeds of the sale thereof or (b) on or after which each ADS will
represent the changed number of common shares, subject to the provisions of the Deposit Agreement. Whenever the Depositary receives notice of any meeting
of or solicitation of consents or proxies from holders of common shares or other deposited securities, the Depositary has to fix, after consultation with us, a
record date for the determination of owners who are entitled to give instructions for the exercise of voting rights at any such meeting.
Voting Rights
Upon receipt of notice of any meeting of holders of common shares or other deposited securities, if requested in writing by us, the Depositary will, as
soon as practicable thereafter, mail to the owners of ADRs a notice, the form of which notice will be in the sole discretion of the Depositary, which will contain
(a) such information as is contained in such notice of meeting, (b) a statement that the owners of ADRs as of the close of business on a specified record date
will be entitled, subject to any applicable provision of Brazilian law and of our estatuto social (By-laws), to instruct the Depositary as to the exercise of the
voting rights, if any, pertaining to the amount of common shares or other deposited securities represented by their respective ADS and (c) a statement as to the
manner in which such instructions may be given, including an express indication that such instructions may be given or deemed given in accordance with the
last sentence of this paragraph if no instruction is received, to the Depositary to give a discretionary proxy to a person designated by us.
Upon the written request of an owner of an ADR on such record date, received on or before the date established by the Depositary for such purpose, or
the Instruction Date, the Depositary will endeavour, in so far as practicable and permitted under Brazilian law and our estatuto social (By-laws) to vote or
cause to be voted the amount of common shares and/or other deposited securities represented by the ADSs evidenced by such ADR in accordance with the
instructions set forth in such request. The Depositary will not vote or attempt to exercise the right to vote that attaches to the common shares or other deposited
securities, other than in accordance with such instructions or deemed instructions. If no instructions are received by the Depositary from any owner with respect
to any of the deposited securities represented by the ADS evidenced by such Owner’s ADRs on or before the date established by the Depositary for such
purpose, the Depositary will deem such Owner to have instructed the Depositary to give a discretionary proxy to a person designated by us with respect to such
deposited securities and the Depositary will give a discretionary proxy to a person designated by us to vote such deposited securities, provided, that no such
instruction will be deemed given and no such discretionary proxy will be given with respect to any matter as to which we inform the Depositary (and we agree
to provide such information as promptly as practicable in writing) that (x) we do not wish such proxy given, (y) substantial opposition exists or (z) such matter
materially and adversely affects the rights of holders of common shares.
There can be no assurance that Owners generally or any Owner in particular will receive the notice described in the preceding paragraph sufficiently prior
to the Instruction Date to ensure that the Depositary will vote the common shares or deposited securities in accordance with the provisions set forth in the
preceding paragraph.
In order to give Owners a reasonable opportunity to instruct the Depositary as to the exercise of voting rights relating to deposited securities, if we will
request the Depositary to act under Section 4.7 of the Deposit Agreement, we will give the Depositary notice of any such meeting and details concerning the
matters to be voted upon not less than 30 days prior to the meeting date.
Owners of ADS will not be entitled to attend shareholders’ meetings, but will be entitled to instruct the Depositary in the manner set out above as to the
manner of voting the common shares represented by ADS at any shareholders’ meeting.
Reports: Inspection of Transfer Books
We are subject to the periodic reporting requirements of the United States Securities Exchange Act of 1934 and, accordingly, file certain reports with the
United States Securities and Exchange Commission (the “SEC”). Such reports and communications will be available for inspection and copying through the
SEC’s EDGAR system or at the public reference facilities maintained by the SEC in Washington, D.C.
The Depositary will make available for inspection by owners of ADRs at its Corporate Trust Office any reports and communications, including any proxy
soliciting material, received from us which are both (a) received by the Depositary as the holder of the deposited securities and (b) made generally available to
the holders of such deposited securities by us. The Depositary will also, upon written request, as promptly as practicable, send to the owners of ADRs copies
of such reports furnished by us pursuant to the Deposit Agreement. Any such reports and communications, including any such proxy soliciting material,
furnished to the Depositary by us will be furnished in English, to the extent such materials are required to be translated into English pursuant to any regulation
of the SEC applicable to us.
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The Depositary keeps books at its Corporate Trust Office for the registration of ADRs and transfers of ADRs which at all reasonable times will be open
for inspection by us and the owners of ADRs, provided that such inspection will not be for the purpose of communicating with owners of ADRs in the interest
of a business or object other than the business of us or a matter related to the Deposit Agreement or the ADRs.
Liabilities of Owners for Taxes
If any tax or other governmental charge becomes payable by the Custodian or the Depositary with respect to any ADR or any deposited securities
represented hereby, such tax or other governmental charge will be payable by the Owner hereof to the Depositary. The Depositary may refuse to effect any
transfer of an ADR or any withdrawal of deposited securities represented by ADSs evidenced by such ADR until such payment is made, and may withhold any
dividends or other distributions, or may sell for the account of the owner hereof any part or all of the deposited securities represented by the ADS evidenced
by an ADR, and may apply such dividends or other distributions or the proceeds of any such sale in payment of such tax or other governmental charge and the
owner hereof will remain liable for any deficiency.
Changes Affecting Deposited Securities
In circumstances where the provisions of Section 4.3 of the Deposit Agreement do not apply, upon any change in nominal value, change in par value,
split-up, consolidation or any other reclassification of deposited securities, or upon any recapitalization, reorganization, merger or consolidation, or sale of
assets affecting us or to which we are a party, any securities received by the Depositary or the Custodian in exchange for or in conversion of or in respect of
deposited securities will be treated as new deposited securities under the Deposit Agreement, and ADS will from then on represent, in addition to the existing
deposited securities, if any, the new deposited securities so received in exchange or conversion, unless additional ADRs are delivered pursuant to the following
sentence. In any such case the Depositary may, and will if we request, execute and deliver additional ADRs as in the case of a dividend in common shares, or
call for the surrender of outstanding ADRs to be exchanged for new ADRs specifically describing such new deposited securities.
Amendment and Termination
The form of the ADRs and any provisions of the Deposit Agreement may at any time and from time to time be amended by agreement between us and
the Depositary without the consent of owners and holders in any respect which they may deem necessary or desirable. Any amendment which imposes or
increases any fees or charges (other than taxes and other governmental charges, registration fees, cable, telex or facsimile transmission costs, delivery costs or
other such expenses), or which otherwise prejudices any substantial existing right of owners of ADRs, will, however, not become effective as to outstanding
ADRs until the expiration of thirty days after notice of such amendment has been given to the Owners of outstanding ADRs. Every Owner of an ADR at the
time any amendment so becomes effective will be deemed, by continuing to hold such ADR, to consent and agree to such amendment and to be bound by the
Deposit Agreement as amended thereby. In no event shall any amendment impair the right of the Owner of any ADR to surrender such ADR and receive
therefor the deposited securities represented thereby, except in order to comply with mandatory provisions of applicable law.
Notwithstanding the foregoing, if any governmental body should adopt new laws, rules or regulations which would require an amendment or supplement
of the Deposit Agreement to ensure compliance therewith, we and the Depositary may amend or supplement the Deposit Agreement at any time in accordance
with such changed laws, rules and regulations. Such amendment or supplement to the Deposit Agreement in such circumstances may become effective before
a notice of such amendment or supplement is given to owners or within any other period of time as required for compliance with such laws, rules or regulations.
The Depositary will at any time at our direction terminate the Deposit Agreement by mailing notice of such termination to the Owners of all ADRs then
outstanding at least 90 days prior to the date fixed in such notice for such termination. The Depositary may likewise terminate the Deposit Agreement by
mailing notice of such termination (30 days prior to the date such termination is to take effect) to us and the Owners of all ADRs then outstanding if at any
time 90 days has expired after the Depositary has delivered to us a written notice of its election to resign and a successor depositary has not been appointed and
accepted its appointment as provided in the Deposit Agreement. On and after the date of termination, the owner of an ADR will, upon (a) surrender of such
ADR at the Corporate Trust Office of the Depositary, (b) payment of the fee of the Depositary for the surrender of ADR referred to in Section 2.5 of the Deposit
Agreement and (c) payment of any applicable taxes or governmental charges, be entitled to delivery, to him or her or upon his or her order, of the amount of
deposited securities represented by the ADSs evidenced by such surrendered ADRs.
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If any ADRs remain outstanding after the date of termination, the Depositary thereafter will discontinue the registration of transfers of ADRs, suspend the
distribution of dividends to the owners thereof, will not accept deposit of ADSs (and will instruct the Custodian to act accordingly) and will not give any further
notices or perform any further acts under the Deposit Agreement, except that the Depositary will continue to collect dividends and other distributions pertaining
to deposited securities, will sell rights and other property as provided in the Deposit Agreement, and will continue to deliver deposited securities, together with
any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, in exchange for ADRs
surrendered to the Depositary (after deducting, in each case, the fee of the Depositary for the surrender of a ADR, any expenses for the account of the owner
of such ADR in accordance with the terms and conditions of the Deposit Agreement and any applicable taxes or governmental charges).
At any time after the expiration of 4 months from the date of termination, the Depositary may sell at public or private sale the deposited securities then
held under the Deposit Agreement and may thereafter hold unsegregated the net proceeds of any such sale, together with any other cash then held by it
thereunder, uninvested and without liability for interest, for the pro rata benefit of the Owners of ADRs which have not theretofore been surrendered, such
Owners thereupon becoming general creditors of the Depositary with respect to such net proceeds. After making such sale, the Depositary is discharged from
all obligations under the Deposit Agreement, except to account for such net proceeds and other cash (after deducting, in each case, the fee of the Depositary
for the surrender of an ADR, any expenses for the account of the Owner of such ADR in accordance with the terms and conditions of the Deposit Agreement,
and any applicable taxes or governmental charges) and for its obligations under Section 5.8 of the Deposit Agreement. Upon the termination of the Deposit
Agreement, we will be discharged from all obligations under the Deposit Agreement except for its obligations to the Depositary under Sections 5.8 and 5.9 of
the Deposit Agreement. The obligations of the Depositary under Section 5.8 of the Deposit Agreement will survive the termination of the Deposit Agreement.
Limitations on Obligations and Liabilities to ADR Holders
We assume no obligation nor are we subject to any liability under the Deposit Agreement to any Owner or Holder of ADRs, except that we agree to
perform our obligations specifically set forth in the Deposit Agreement without negligence or bad faith.
The Depositary assumes no obligation nor will it be subject to any liability under the Deposit Agreement to any Owner or Holder of any ADR (including,
without limitation, liability with respect to the validity or worth of the deposited securities), except that it agrees to perform its obligations specifically set forth
in the Deposit Agreement without negligence or bad faith.
Neither we nor the Depositary will be under any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any deposited
securities or in respect of the ADRs, which in our reasonable opinion may involve it in expense or liability, unless indemnity satisfactory to it against all
expense and liability is furnished as often as may be required, and the Custodian will not be under any obligation whatsoever with respect to such proceedings,
the responsibility of the Custodian being solely to the Depositary.
Neither we nor the Depositary nor the will be liable for any action or nonaction by it in reliance upon the advice of or information from legal counsel,
accountants, any person presenting common shares for deposit, any Owner or any other person believed by it in good faith to be competent to give such advice
or information.
The Depositary shall not be liable for any acts or omissions made by a successor depositary whether in connection with a previous act or omission of the
Depositary or in connection with any matter arising wholly after the removal or resignation of the Depositary, provided that in connection with the issue out of
which such potential liability arises the Depositary performed its obligations without negligence or bad faith while it acted as Depositary.
Neither we nor the Depositary will be liable for the acts or omissions of any securities depository, clearing agency or settlement system in connection with
or arising out of book-entry settlement of deposited securities or otherwise.
The Depositary will not be responsible for any failure to carry out any instructions to vote any of the deposited securities, or for the manner in which any
such vote is cast or the effect of any such vote, provided that any such action or nonaction is in good faith.
No disclaimer of liability under the Securities Act is intended by any provision of the Deposit Agreement.
11
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 30, 2020
By: /s/ Benedito Pinto Ferreira Braga Junior
Name: Benedito Pinto Ferreira Braga Junior
Title: Chief Executive Officer
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 30, 2020
By: /s/ Rui de Britto Álvares Affonso
Name: Rui de Britto Álvares Affonso
Title: Chief Financial Officer and Investor Relations Officer
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, 2019, 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) the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: April 30, 2020
By: /s/Benedito Pinto Ferreira Braga Junior
Name: Benedito Pinto Ferreira Braga Junior
Title: Chief Executive Officer
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, 2019, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), I,
Rui de Britto Álvares Affonso, Chief Financial Officer and Investor Relations Officer, certify, pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the U.S. Sarbanes Oxley Act of 2002, that to the best of my knowledge:
(i) the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: April 30, 2020
By: /s/ Rui de Britto Álvares Affonso
Name: Rui de Britto Álvares Affonso
Title: Chief Financial Officer and Investor Relations Officer