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SBS Companhia de Saneamento Basico do Estado de Sao Paulo.

Filed: 27 Apr 21, 8:00pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

20549 FORM 20-F

 

o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020

 

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________to ________________

 

OR

 

o       SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report ________________

 

Commission file number 001-31317

 

Companhia de Saneamento Básico do Estado de São Paulo–SABESP

(Exact name of Registrant as specified in its charter)

 

Basic Sanitation Company of the State of São Paulo-SABESP

(Translation of the Registrant’s name into English)

 

Federative Republic of Brazil

(Jurisdiction of incorporation or organization)

 

Rua Costa Carvalho, 300

05429-900 São Paulo, SP, Brazil

(Address of principal executive offices)

 

Rui de Britto Álvares

Affonso raffonso@sabesp.com.br (+55 11 3388 8247)

Rua Costa Carvalho, 300 05429-900 São Paulo, SP, Brazil

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each classTrading Symbols(s)

Name of each exchange on which

registered

Common Shares, without par valueNot tradedNew York Stock Exchange*

American Depositary Shares, evidenced by American Depositary Receipts,

each representing one Common Share

SBSNew York Stock Exchange

 

Shares are not listed for trading, but only in connection with the registration of American Depositary Receipts pursuant to the requirements of the New York Stock Exchange.

 
 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.

 

683,509,869 Shares of Common Stock

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes þ No o

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

Yes o No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

Yes þ No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes þ No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer þAccelerated Filer o
Non-accelerated Filer oEmerging Growth Company o

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP o

International Financial Reporting Standards as issued by the International Accounting Standards Board þ

Other o

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow

 

Item 17 o Item 18 o

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o No þ

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

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 þ No o

 

 
 2

 

TABLE OF CONTENTS 

PART I 9
ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS9
ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE9
ITEM 3.KEY INFORMATION9
ITEM 4.INFORMATION ON THE COMPANY26
ITEM 4A.UNRESOLVED STAFF COMMENTS72
ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS72
ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES95
ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS104
ITEM 8.FINANCIAL INFORMATION112
ITEM 9.THE OFFER AND LISTING115
ITEM 10.ADDITIONAL INFORMATION118
ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK130
ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES131
PART II 134
ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES134
ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS134
ITEM 15.CONTROLS AND PROCEDURES134
ITEM 16.  [RESERVED]136
ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT136
ITEM 16B.CODE OF ETHICS136
ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES137
ITEM 16D.EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES137
ITEM 16E.PURCHASES OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS137
ITEM 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT137

 

 
 3
ITEM 16G.CORPORATE GOVERNANCE138
ITEM 16H.MINE SAFETY DISCLOSURE144
PART III 144
ITEM 17.FINANCIAL STATEMENTS144
ITEM 18.FINANCIAL STATEMENTS144
ITEM 19.EXHIBITS145

 

 
 4

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

General

 

We maintain our books and records in reais. We prepare our financial statements in accordance with International Financial Reporting Standards, or “IFRS,” as issued by the International Accounting Standards Board, or the “IASB.” Our audited financial statements as of December 31, 2020 and 2019 and for each of the years in the three-year period ended December 31, 2020 are included in this annual report on Form 20-F.

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them.

Other Information

In this annual report, unless the context otherwise requires, references to “we,” “us,” “our,” “Company,” or “SABESP” refer to Companhia de Saneamento Básico do Estado de São Paulo – SABESP.

In addition, references to:

·“ANA” are to the National Water and Sanitation Agency (Agência Nacional de Águas e Saneamento Básico);
·“ARSESP” are to the São Paulo State Public Services Regulatory Agency (ARSESP - Agência Reguladora de Serviços Públicos do Estado de São Paulo);
·“ADR” or “ADRs” are to American Depositary Receipt or American Depositary Receipts, respectively;
·“ADS” or “ADSs” are to American Depositary Share or American Depositary Shares, respectively;
·“Basic Sanitation Law” are to Law No. 11,445/2007 of the Federative Republic of Brazil, as amended;
·“BNDES” are to Brazilian National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social).
·“Brazil” are to the Federative Republic of Brazil;
·“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 SARS-CoV-2 2019 coronavirus pandemic;
·“CVM” are to the Comissão de Valores Mobiliários, the Brazilian securities and exchange commission;
·“FAPESP” are to the Fundação de Amparo à Pesquisa do Estado de São Paulo, the São Paulo State Research Foundation;
·“federal government” and “Brazilian government” are to the federal government of the Federative Republic of Brazil and “São Paulo state government” are to the state government of the State of São Paulo;
·“IBRD” are to the International Bank for Reconstruction and Development;
·“IDB” are to the Interamerican Development Bank;
·“New Legal Framework for Basic Sanitation” are to Law No. 14,026/2020 of the Federative Republic of Brazil;
·“¥” or “Japanese Yen” are to the official currency of Japan;
·“program contract” are to certain inter-federative cooperation agreements entered into within the scope of associated management (pursuant to Art. 241 of the Brazilian Federal Constitution), whereby the provision of public services are delegated to third parties or liablities, services, personnel or goods necessary for the continuity of public services are totally or partially transferred to third parties;
·real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil;
·“Regional Systems” are to the area where the regional systems’ executive office operates, comprising 334 municipalities in the interior and coastline regions of the state of São Paulo;
·“São Paulo metropolitan region,” with respect to our operations, are to the area where the metropolitan executive office operates, comprising 41 municipalities, including the city of São Paulo;
·“Service” indicators are to (a) the number of homes that are actually connected to the water network or sewage collection network, as a portion of (b) the total number of homes within a given serviceable area;
·“Sewage Treatment Coverage” indicators are to the amount of consumer units connected to the sewage treatment system;
·“State” are to the State of São Paulo, which is also our controlling shareholder;
 
 5
·“URAE” are to Regional Unit for Drinking Water Supply and Sewage Services (Unidade Regional de Serviços de Abastecimento de Água Potável e Esgotamento Sanitário);
·“U.S. dollars” or “US$” are to the United States dollar, the official currency of the United States;
·“water crisis” are to the drought we experienced from late 2013 and throughout most of 2015. This drought, the most serious that our service region has experienced in the previous 80 years, primarily affected the Cantareira System, our largest water production system; and
·“WHO” are to the World Health Organization.

Information in this annual report related to liters, water and sewage volumes, number of employees, kilometers, water and sewage connections, population served, operating productivity, water production, water and sewage lines (in kilometers), water loss index and investment in programs has not been audited.

Market Information

We make statements in this annual report about our market share and other information relating to Brazil and the industry in which we operate. We have made these statements on the basis of information from third-party sources and publicly available information that we believe is reliable, such as information and reports from the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), 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 375 municipalities we serve and the two municipalities in our wholesale segment (Mogi das Cruzes and São Caetano do Sul), since our revenue for the fiscal year 2020 is derived from these municipalities. Most of our contracts with the municipalities we serve are program contracts which have a term of 30 years.

In November 2020 we started retail operations to supply water services in the municipality of Mauá, which was previously served 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;
·fluctuations in inflation, interest rates and exchange rates in Brazil;
·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, (i) an increase in volumes in the residential categories and a reduction in the public, commercial and industrial categories which have higher average tariffs, leading to a reduction in the total average tariff, in addition to increases in delinquencies in certain categories, which are reflected in our results, with a direct impact on revenues; (ii)  an increase in delinquencies in certain sectors; and (iii) the exemption from the payment of water and sewage bills for the “Residential Social” and “Residential Favela” categories, the impact of which was compensated by tariffs established by ARSESP;
·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 a change in our control;
·the regulations issued by ARSESP regarding several aspects of our business, including resetting and adjusting our tariffs;
·changes in applicable laws and regulations, as well as the enactment of new laws and regulations, including those relating to environmental, tax and employment matters in Brazil;
·our ability to continue to use certain reservoirs under current terms and conditions;
·availability of our water supply, springs and storage systems;
·the impact on our business of lower water consumption practices adopted by our customers during the water crisis which resulted in water savings, and have not returned to their prior standards despite us maintaining a continuous supply of water to the São Paulo metropolitan region.
·the size and growth of our customer base and its consumption habits;
·any measures that we may be required to take to ensure the provision of water to our customers;
·our exposure to probable increases in the frequency of extreme weather conditions, including droughts and intensive rain and other climatic events;
·the potential impacts on our business caused by the enactment of the New Legal Framework for Basic Sanitation, which introduced several changes that directly affect our operations, including the requirement to participate in new public bids in case the entity is not part of the administration of the holder, and the prohibition on entering into program contracts, agreements, partnership agreements and other unstable instruments for the provision of public sanitation services;
·our ability to comply with the requirements regarding water and sewage service levels included in our agreements with municipalities especially as a result of the changes brought by the New Legal Framework for Basic Sanitation, which establish that, by 2033, 90% and 99% of the population served must have access to sewage collection and treatment and access to drinking water, respectively, further requiring that contracts that do not have such targets will have until March 31, 2022 to make this inclusion;
·the municipalities’ ability to terminate our existing concession agreements prior to their expiration date and our ability to renew such agreements;
·the creation of a national regulator (ANA) by the enactment of the New Legal Framework for Basic Sanitation;
·our ability to collect amounts owed to us by our controlling shareholder, states, the federal government and municipalities;
·our capital expenditure program and other liquidity and capital resources requirements;
·the effects of the agreement for provision of water and sewage services in the city of São Paulo, which we executed with the State and the city of São Paulo considering that ARSESP has limited the pass-through to tariff of values transferred to municipal infrastructure funds to 4%;
·our management’s expectations and estimates relating to our future financial performance;
·our level of debt and limitations on our ability to incur additional debt;
·our ability to access financing with favorable terms in the future;
·the costs we incur in complying with environmental laws and any penalties for failure to comply with these laws;
·the outcome of our pending or future legal proceedings;
·the delay or postponement in investment in our sewage system;
·the possibility to be subject to other regulatory agencies other than ARSESP;
 
 7
·power shortages, rationing of energy supply or significant changes in energy tariffs;
·other risk factors as set forth under “Item 3.D. Risk Factors;” and
·as well as the potential impacts of the new tariff structure to be implemented in 2022.

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, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018 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 and 2016 and for the years ended December 31, 2017 and 2016 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.”

For the year ended December 31,
 2020 2019 2018 2017 2016
 R$ R$ R$ R$ R$
(in millions, except per share and per ADS (1) data

Selected Income Statement

Data:

         
Net operating revenue17,797.5 17,983.7 16,085.1 14,608.2 14,098.2
Operating costs(11,179.6) (10,137.7) (9,086.5) (8,779.0) (9,013.1)
Gross profit6,617.9 7,846.0 6,998.6 5,829.2 5,085.1
Selling expenses(751.3) (803.4) (693.5) (686.0) (730.0)
Allowance for doubtful accounts(*)(444.8) 

 

(128.1)

 

 

(166.7)

 

 

(82.7)

 

 

Administrative expenses(1,051.2) (1,187.9) (996.9) (1,099.0) (934.9)
Operating profit4,492.4 5,711.6 5,176.6 3,961.7 3,429.6
Financial result, net(3,166.4) (1,033.7) (1,264.3) (458.1) 699.4
Profit for the year973.3 3,367.5 2,835.1 2,519.3 2,947.1
Earnings per share – basic and diluted1.42 

 

4.93

 

 

4.15

 

 

3.69

 

 

4.31

Earnings per ADS – basic and diluted1.42 

 

4.93

 

 

4.15

 

 

3.69

 

 

4.31

Dividends and interest on

shareholders’ equity per share

0.34 

 

1.17

 

 

0.99

 

 

0.19

 

 

1.02

Dividends and interest on shareholders’ equity per ADS0.34 

 

1.17

 

 

0.99

 

 

0.19

 

 

1.02

Weighted average number of common shares outstanding683,509,869 

 

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 recorded our allowance for doubtful accounts in the income statements as a separate line item. In 2016, the amount of allowance for doubtful accounts was R$90.5 million, and we recorded this amount as part of our selling expenses in our income statement.

(1)       ADS-American Depositary Share.

 

 

 
 9

Selected Statement of Financial Position Data

 

 

 

 

2020 2019 2018 2017 2016
 R$ R$ R$ R$ R$
          
Property, plant and equipment268.3 314.4 267.6 255.1 302.4
Contract asset (*)7,969.2 7,617.7 7,407.9  
Intangible assets34,405.6 32,325.4 29,012.5 33,466.1 31,246.8
Total assets50,418.6 46,457.8 43,565.1 39,546.4 36,745.0
Loans and financing – current3,034.4 2,859.8 2,103.6 1,746.8 1,246.6
Long-term loans and financing14,224.2 10,384,9 11,049.2 10,354.2 10,717.6
Interest on capital231.6 800.4 673.8 598.6 700.0
Total liabilities27,624.9 24,822.0 24,013.4 22,033.4 21,325.8
Equity22,793.7 21,635.8 19,551.7 17,513.0 15,419.2
Capital stock15,000.0 15,000.0 15,000.0 10,000.0 10,000.0
Selected Statements of Cash Flows Data:         
Net cash generated from operating activities4,978.2 4,197.2 3,842.9 3,301.9 3,003.6
Net cash used in investing activities(6,768.7) (3,267.3) (2,189.3) (1,971.4) (2,130.7)
Net cash provided by (used in) financing activities(66.3) (1,705.9) (907.5) (933.6) (625.9)
Purchases of intangible assets and property, plant and equipment as presented in our statement of cash flow(3,342.1) 

 

(3,273.4)

 

 

(2,183.2)

 

 

(1,976.7)

 

 

(2,135.8)

(*)As of December 31, 2018, with the adoption of IFRS 15 - Revenue from contract with customer starting on January 1, 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.

 

Operating Data

 

Indicator     
 2020 2019 2018
Number of water connections (in thousands) (1)10,088 9,933 9,053
Number of sewage connections (in thousands) (1)8,518 8,326 7,495
Percentage of population with water connections (“service” indicator) (in percent) (2)95 

 

94

 

 

95

Percentage of population with sewer connections (“service” indicator) (in percent) (2)85 

 

84

 

 

83

Percentage of population covered by water network (“coverage”

indicator) (in percent) (3)

98 

 

98

 

 

98

Percentage of population covered by sewage network (“coverage” indicator) (in percent) (3)92 

 

91

 

 

90

Percentage of consumer units connected to the sewage treatment

system (“sewage treatment coverage” indicator) (in percent)

76 

 

78

 

 

76

Volume of water billed during period (in millions of cubic meters)2,159.2 2,112.7 2,107.9
Water Billed Loss Index during period (average) (in percent) (4)16.9 18.6 19.5
Water Metered Loss Index during period (average) (in percent) (5)27.0 29.0 30.1
Water loss per connection per day (average) (6)263 285 293
Number of employees12,806 13,945 14,449
(1)Includes active and inactive connections, but excluding the municipality of Mauá.
(2)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.
(3)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”).
(4)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). In January 2021, the municipality of Guarulhos was added to the index calculation. The municipality of Santo André will be included in the calculation of the index as from January 2022.
(5)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). In January 2021, the municipality of Guarulhos was added to the index calculation. The municipality of Santo André will be included in the calculation of the index as from January 2022.
(6)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). In January 2021, the municipality of Guarulhos was added to the index calculation. The municipality of Santo André will be included in the calculation of the index as from January 2022.
 
 10
B.Capitalization and Indebtedness

Not applicable.

C.Reasons for the Offer and Use of Proceeds

Not applicable.

D.Risk Factors

Risks Relating to Brazil

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions, could adversely affect us and the market price of our common shares and ADSs.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, changes in interest rates, tax policies, price and tariff controls, currency devaluation or appreciation, capital controls and limits on imports. Our business, financial condition and results of operations, as well as the market price of our common shares or ADSs, may be adversely affected by changes in public policy at federal, state and municipal levels with respect to public tariffs and exchange controls, as well as other factors, such as:

·expansion or retraction of the Brazilian economy;
·the regulatory environment related to our business operations and concession agreements;
·interest rates and monetary policies;
·exchange rates and exchange controls and restrictions on remittances abroad;
·currency fluctuations;
·increased unemployment;
·availability of credit;
·changes in labor regulations;
·political elections and social and political instability;
·inflation;
·liquidity of the Brazilian capital and lending markets;
·tax and regulatory policies and laws;
·economic and social instability;
·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 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 Brazilian government of changes relating to the monetary and tax policies, the approved pension reform and possible developments arising from this reform, and other relevant legislation, aggravated by the impacts of the COVID-19 pandemic, may contribute to economic uncertainty. In addition, the Brazilian economy was affected by recent political events that also affected the confidence of investors and the public in general, thus harming Brazilian economic performance. We cannot predict the measures that the federal government will take due to mounting macroeconomic pressures or otherwise. Economic and political instability and uncertainty has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian capital markets and the securities of Brazilian issuers, which may adversely affect us. We cannot predict what future policies will be adopted by current or future Brazilian governments, or whether these policies will result in adverse consequences to the Brazilian economy or cause an adverse effect on us.

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.

 
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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 São Paulo state government officials and senior management of Brazilian industry.

Numerous elected officials, public servants and executives and other personnel of major companies have been subject to investigation, arrest, criminal charges and other proceedings. 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 the conviction, and subsequent arrest, of former President Luis Inácio Lula da Silva. Mr. Bolsonaro established an agenda of privatizations, economic liberalization, and pension and tax reforms. His presidency has since been marked by divisive rhetoric, fractious relations with congress and infighting within his own administration. He has had to reshuffle his cabinet repeatedly following the exits of many of his high-profile ministers, including numerous Ministers of Health and his Minister of Justice, who resigned following allegations that President Bolsonaro was interfering in anticorruption investigations. We cannot predict the policies that the President Bolsonaro administration may adopt or change in relation to corruption investigations, the COVID-19 pandemic, the economy or otherwise, or the effect that any such policies may have on our business and the Brazilian economy as a whole.

As of the date of this annual report, President Bolsonaro is being investigated by the Brazilian Supreme Court for the alleged improper acts claimed by the former Minister of Justice, Sergio Moro. Any resulting consequences of this investigation, including a potential opening of the impeachment process or trial by the Brazilian Supreme Court, could have significant adverse effects on the political and economic environment in Brazil, as well as on businesses operating in Brazil, including our business.

Further, during the campaign, the then main contender and 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 realized, this would increase the tax expenses associated with any dividend, interest on equity or distributions made by Brazilian companies, which could impact us or our shareholders and the value of our common shares and ADSs. Uncertainty regarding the implementation by the current government of related changes in monetary, fiscal and pension policies, as well as pertinent legislation, could contribute to economic instability. These uncertainties and new measures could increase the volatility of Brazilian securities markets.

Ultimately, there is no guarantee that President Bolsonaro will be successful in executing his privatization, liberalization and tax reform agenda fully or at all, or manage the COVID-19 pandemic effectively, nor can we predict with certainty how President Bolsonaro’s administration may impact the overall stability, growth prospects and economic and political health of the country.

Any of the above factors may create additional political uncertainty, which could harm the Brazilian economy and, consequently, our business, results of operations and financial condition and the trading price of our common shares and ADSs.

Inflation and the Brazilian government’s measures to combat inflation may contribute to economic uncertainty in Brazil, adversely affecting us and the market price of our common shares or ADSs.

Brazil has historically experienced high rates of inflation. 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 1.90%, 4.40% and 6.40% at the end of 2020, 2019 and 2018, 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 2% between August 2020 and March, 2021, after which it was raised to 2.75%, 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.

 
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The Brazilian annual inflation rates, as measured by the Amplified Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo), or IPCA, were 4.52%, 4.31% and 3.75% during 2020, 2019 and 2018, 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, 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. As of December 31, 2019, the exchange rate was R$4.03 to U.S.$1.00, representing a depreciation of 4.0% as compared to the rate prevailing as of December 31, 2018. Further, during 2020, the real was very volatile and depreciated by 28.9% against the U.S. dollar by year-end. This volatility continued in the early months of 2021 and as of April 19, 2021, the commercial selling rate as reported by the Central Bank was R$5.5750 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$3,547.8 million as of December 31, 2020 and we anticipate that we may incur additional amounts of foreign currency denominated debt in the future. In 2020, our results of operations were negatively affected by the 28.9% depreciation of the real against the U.S. dollar, and the depreciation of the real against the Yen by 35.7%, which together led to a R$2,180.2 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 2020 financial statements.

Further, the market price of securities of Brazilian companies is affected to varying degrees by economic and market conditions in other countries, including the United States, China and other Latin American and emerging market countries. Although economic conditions in these countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in these other countries may have an adverse effect on the market price of securities of Brazilian issuers. Crises in other emerging market countries or economic policies of other countries may diminish investor interest in securities of Brazilian issuers, including ours. This could adversely affect the market price of our common shares or ADSs, and could also make it more difficult for us to access the capital markets and finance our operations in the future, on acceptable terms or at all.

In the past, the adverse development of economic conditions in emerging markets resulted in a significant flow of funds out of Brazil and a decrease in the quantity of foreign capital invested in Brazil. Changes in the prices of securities of public companies, lack of available credit, reductions in spending, general slowdown of the global economy, exchange rate instability and inflationary pressure may adversely affect, directly or indirectly, the Brazilian economy and securities market. Global economic downturns and related instability in the international financial system have had, and may continue to have, a negative effect on economic growth in Brazil. Global economic downturns reduce the availability of liquidity and credit to fund the continuation and expansion of business operations worldwide.

In addition, global financial crises have caused, and in the future may again cause, significant consequences, 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.

 
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Risks Relating to Our Control by the State of São Paulo

We are controlled by the State of São Paulo, whose interests may differ from the interests of non-controlling shareholders, including holders of ADSs.

As the São Paulo state government owns the majority of our common shares, it is able to control the election of a majority of the members of our board of directors and appoint our senior management and with that determine our operating policies and strategy. As of December 31, 2020, 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, 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 was extended until September 15, 2020. Among the measures to mitigate the economic effects of the COVID-19 pandemic, on February 3, 2021, our Board of Executive Officers approved a series of measures aiming to minimize our customers’ defaults, facilitating them to maintain their businesses during the COVID-19 pandemic and to be able to pay-off their debts in the future. See “Item 4.B. Business Overview—Tariffs.” The São Paulo state government may direct our company to act in this manner again in the future, depending on the evolution of the pandemic in the State of São Paulo. These decisions by the State may not be in the interests of our non-controlling shareholders, including holders of ADs.

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 owns in our company. Once established, the controlling company could sell shares to other minority shareholders, including private companies and state-owned companies, provided, however, that the state of São Paulo will continue to hold a majority of the common shares of the controlling company. 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, pursuant to the recent changes to the basic sanitation law. As of the date of this annual report, a decision has not been made on the model for our potential corporate reorganization. See “—Risks Relating to Our Business—Current regulatory uncertainty, especially with regard to the New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.”

The 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, 2020, the State owed us R$74.3 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$1,281.4 million as of December 31, 2020. We do not record this contested amount as a reimbursement credit for actuarial liability due to the uncertainty of payment by the State. We also had an uncontested credit amounting to R$732.4 million which is recorded as related-party receivables. See note 10(a) to our 2020 financial statements.

In addition, as of December 31, 2020, we had a provision for an actuarial liability in the amount of R$2,549.5 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 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.

 
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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 terminate the separate lawsuits.

If one of the ongoing lawsuits by minority shareholders of EMAE requires the State to make a different decision regarding water use from what was agreed between EMAE and the State of São Paulo, our ability to withdraw water from the Guarapiranga and Billings reservoirs may be compromised. If we were no longer able to withdraw water from these reservoirs, we would have to transport water from locations further away, which would increase our water transportation costs and may affect our ability to provide adequate service in the region, which may have an adverse effect on our financial condition and results of operations. In addition, we may be ordered to pay any indemnity to EMAE if the agreement is judicially invalidated, which could have material adverse effects on our financial condition and operating results. See “Item 7. Major Shareholders and Related Party Transactions.”

Risks Relating to Our Business

Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the outbreak of COVID-19.

Our financial and operating performance may be adversely affected by pandemics such as COVID-19, as well as other catastrophes and health epidemics. The impact of the COVID-19 pandemic on the global economy and financial markets has been significant in 2020 and is expected to continue during 2021.

In late December 2019 the outbreak of a new contagious disease originated in Wuhan, Hubei province of China, was reported to the WHO. The SARS-CoV-2 strain of the 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 a 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, has been suspended or restricted by certain airlines and governments. Further, extended shutdowns of certain businesses and disruptions in financial markets have been reported globally.

In the second quarter of 2020, the São Paulo state government decreed a quarantine throughout the State, restricting business activities in order to avoid the accelerated spread of COVID-19. We experienced a direct impact on revenues as a consequence of the change in the consumption mix, due to the increase in volumes in the residential category and a reduction in the public, commercial and industrial categories which have higher average tariffs, leading to a reduction in the total average tariff, in addition to increases in delinquencies in certain categories.

The new consumption patterns as a result of the COVID-19 pandemic impacted the total volume of water billed. The total volume in the retail category increased by 0.9%. If the categories are considered separately, the total volume of water billed in the residential category increased by 2.6%, whereas the commercial, industrial and public categories were strongly impacted by new consumption patterns, leading to a decrease in consumption of 9.5%, 6.1% and 18.8%, respectively. The uncertainties arising from these new patterns of consumption could have unpredictable material adverse effects on our results of operations and financial condition, particularly as the prices charged to customers in the residential category are lower than in the commercial, industrial and public categories.

Our revenues from the residential sector were also affected as consumers in the “Residential Social” and “Residential Favela” categories were exempt from the payment of water and sewage bills for all municipalities we serve. This exemption was initially valid for 90 days as of April 1, 2020 and was later extended until September 15, 2020. The impact of these exemptions on our revenues in 2020 was approximately R$125 million. Despite ARSESP already having indemnified us for these exemptions, we cannot assure your that in the event of future exemptions the outcome will be the same. See “Item 4.B. Business Overview—Tariffs.”

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 initially postponed this readjustment by 90 days. Considering the on-going effects of the COVID-19 pandemic, the adjustment was further postponed and the tariff readjustment of 3.4026% was only applied on August 15, 2020. This tariff readjustment included a compensatory adjustment of 0.8881% in compensation for the postponement of the annual tariff readjustment. As of December 31, 2020, R$37,6 million was outstanding to be recovered. See “Item 4.B. Business Overview—Tariffs.”

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.

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, including the implementation and completion of the vaccination program in Brazil. 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.

 
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The New Legal Framework for Basic Sanitation prohibits program contracts for basic sanitation services, resulting in uncertainties for our current and future concessions.

Law No. 11,445/2007, which establishes national guidelines for basic sanitation, was amended by Law No. 14,026/2020, which became known as the New Legal Framework for Basic Sanitation and brought about several changes that directly affect our operations.

As provided, the provision of public basic sanitation services by any party other than municipal and state’s public administration can no longer be formalized through program contracts, agreements, partnership agreements and other unstable instruments for the provision of public basic sanitation services were prohibited. As such, any current expired contract we hold with municipalities can only be renewed through a bidding process under Law No. 8,666/1993, as amended, which regulates concession contracts.

Previously, we provided services in several municipalities through contracts which did not require bidding procedures. The current program contracts and contracts that comply with Law No. 11,445/2007 will remain in effect until the end of their contractual term, provided that the contracts set targets for the universalization of services until December 31, 2033, and those who have not set such targets will have to establish them until March 31, 2022. Pursuant to current legislation, the renewal of these contracts, once they expire, will require a bidding process, and therefore we cannot guarantee that we will be able to maintain our current customer base and size of operations.

For our contracts that have expired and that we did not adjust adequately prior to the enactment of the New Legal Framework on Basic Sanitation, we will have to win new bidding processes in order to continue providing our services.

Prior to the New Legal Framework on Basic Sanitation, our market expansion could be undertaken through program contracts that did not require a bidding process. Under the New Legal Framework on Basic Sanitation, this important mechanism for expanding operations in the state of São Paulo or other areas of Brazil is no longer available to us and any new concession must be won through bids, which may increase uncertainty with respect to our plans for expansion of our market share.

Any sale of our shares to the private sector which removes the State as our majority shareholder brings uncertainties regarding the maintenance of current program contracts.

The New Legal Framework for Basic Sanitation establishes that, in the event of the sale of the State’s share control to the private sector, the current program contracts will be automatically replaced by new concession contracts, subject to the State Privatization Program, where applicable. The framework also establishes that if there is a change in the clauses of these program contracts, such proposals must be presented to the public entities holding the service, who must, in 180 days, manifest their opinion if in disagreement, after which the proposal will be considered as approved. We cannot assure you that all the public entities holding the service will agree to any proposed change in the contract clauses and that the result of those negotiations would not have a material impact on our revenues or operations.

Municipalities may terminate our concessions before they expire in certain circumstances. The indemnification payments we receive in such cases may be less than the value of the investments we made, or may be paid over an extended period, adversely affecting our business, financial condition or results of operations.

Municipalities have a right to terminate our concessions early if we fail to comply with our contractual or legal obligations or if the municipalities determine to do so in an expropriation proceeding (retomada de serviços). The resumption of services must be justified by public interest. In these circumstances, the municipalities have to determine that it is no longer in the public interest to continue to provide water and sewage services under the terms and conditions of the current concession.

The Basic Sanitation Law provides that on the early termination of a concession a valuation of the assets that relate to the services provided must be carried out in order to calculate the unamortized portion of investments for purposes of assessing any related indemnification payments due to the relevant company. The resulting indemnification payment may be less than the remaining value of the investments the sanitation service provider made. Alternatively, there may be an extension of the maturity dates for the payments. The municipalities may also refuse to make indemnification payments voluntarily, potentially leading to judicial disputes. In the case of a judicial dispute, there is a risk that the judicial decision will consider the indemnification as undue or set it at a lower value than the investments already made.

The New Legal Framework for Basic Sanitation assigns to ANA the authority to introduce reference standards on the methodology for calculating indemnities due to investments made and not yet amortized or depreciated.

The new law provides that the transfer of services from one provider to another will be conditioned, in each case, on the indemnity of investments linked to reversible assets not yet amortized or depreciated, under the terms of Law No. 8,987/1995. In these cases, the holder of the services may assign payment to the provider who will assume the service. It is not possible to guarantee that future bids will take into account previous resolution of this issue before the bidding processes.

Additionally, we have been, and are currently, party to proceedings related to indemnification issues regarding the resumption of water supply and sewage collection services by certain municipalities. For more information, see Note 20 to our 2020 financial statements included in this annual report. Other municipalities may seek to terminate their concession agreements before the contractual expiration date. If this occurs and we do not receive adequate indemnification for our investments, or the indemnification is paid over an extended period, our business, financial condition or results of operations may be adversely affected.

 
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Current regulatory uncertainty, especially with regard to the New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.

The New Legal Framework for Basic Sanitation deferred certain regulations and definitions to be passed at a later date, which could have a significant impact on our operations.

Among them, we highlight the definition and operations of regional sanitation units, which must be established by state governments within one year after the enactment of the law. If this does not take place, the federal government may establish the reference blocks for the regionalized provision of public basic sanitation services pursuant to Article 15 of Law No. 14,026/2020. The regionalized provision of sanitation services is one of the requirements of the new legislation to allow providers to access the federal government’s technical and financial resources. On April 21, 2021, State Bill No. 251/2021 was published, whereby four URAEs are proposed to provide drinking water supply and sewage services. Pursuant to the bill, the municipalities have 180 days to adhere to the respective URAE by means of a formal declaration to signed by the mayor. As of the date of this annual report, it is not yet possible to confirm whether this bill will be approved or whether it will be approved as originally drafted. In addition, we cannot predict if the municipalities where we currently operate will adhere to the units that may be created.

The New Legal Framework for Basic Sanitation assigned the authority to edit reference norms to regulate sanitation services pursuant to Article 23, of the Law No. 11.445/2007 to ANA, thereby potentially reducing the autonomy of regional regulatory agencies, which under certain circumstances will have to follow ANA’s national guidelines. If these guidelines are not followed, certain consequences may apply to the operators, such as blocking access to funding or financings provided or managed by the federal government or federal entities.

Pursuant to Article 10-B of Law No. 11,445/2007, as amended by Law No.14,026/2020 service operators must comply with financial and economic parameters that will measure their capacity to provide sanitation services and timely reach service standards established by the law. The definition of these parameters is still uncertain and we cannot guarantee that we are currently operating in accordance with the standards that may be issued.

The outcome of the above is still uncertain and we cannot guarantee that it will not materially affect our operations. For more information on ARSESP regulations and these pending measures, see “Item 4.B. Business Overview—Government Regulations Applicable to Our Contracts—The Basic Sanitation Law and the New Legal Framework for Basic Sanitation.”

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, the lowest 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 awareness and did not return to its former state before the crisis. This change in consumption practice as a result of the 2014-2015 water crisis has had a continued effect on our results of operations since the 2014-2015 crisis.

The 2019-2020 water season which ended in September 2020 had a lower-than-average rainfall compared to the expected long-term average. The Cantareira System received 74% of the expected volume, while the Alto Tietê System received 72% and the Guarapiranga System received 68%. The water inflows were also below average in the three main systems that supply the São Paulo metropolitan region, with the Alto Tietê System recording inflows close to its minimum historic levels between April 2020 and to September 2020.

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. This 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.

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 44.6% of our gross operating revenues from sanitation services (excluding revenues relating to the construction of concession infrastructure) in the year ended December 31, 2020.

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.

 
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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. Within the scope of the Second Ordinary Tariff Review, the current tariff cycle scheduled to end in April 2021, 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, scheduled to end in April 2021, 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, 2020, we have transferred approximately R$4.0 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.

The technical note approved by ARSESP on July 30, 2020 which established the methodology to be used for the calculation of the maximum tariff, also establishes that for the third tariff cycle (2021-2024) a 4% limit will be applied to transfers to municipal funds, with transfers made to funds previously approved by ARSESP or those provided for in Article 15 of ARSESP Resolution No. 870/2019 being recognized as part of the tariffs.

Our current tariff structure is outdated and does not reflect the current socioeconomic changes the State of São Paulo has undergone over the past decades. The approved update to the structure and its implementation may lead to uncertainties in the market as well as unpredictability about our future revenues.

Our current tariff structure is based on the pricing regulation approved by State Decree No. 41,446/1996 and has been in force since the 1970s. Accordingly, it no longer reflects the socioeconomic changes the State of São Paulo has undergone over the past decades. Considering the need to adapt to new circumstances, ARSESP accepted our request to update our tariff structure to reflect the new consumption profile of our customers. This process was developed in parallel with the Third Ordinary Tariff Revision, both of which were completed on April 8, 2021.

Our current Tariff Structure applies different pricing ranges for the following categories of users: (i) residential customers (Residential Normal, Residential Social and Residential Favela) and non-residential customers (including commercial, industrial and public customers, as described in “Item 4.B. Business Overview—Tariff Structure”); (ii) the metropolitan regions of São Paulo and the regional system; (iii) water and sewage, with no difference in prices for sewage collection and treatment; and (iv) the charge of a minimum consumption of 10 m³/month and differences in prices per range, with progressive increases in the price as consumption increases. In 2020, 2019 and 2018, the average price calculated for the regional systems was approximately 21% below the average price of the São Paulo metropolitan region. See “Item 4.B. Business Overview—Tariff Structure.”

The new Tariff Structure, which we will adopt from 2022, introduces: (i) new classifications for residential customers (Residential, Residential Social, Residential Vulnerable and Residential Collective) and non-residential customers (Commercial, Commercial Assistance, Commercial Collective, Industrial and Public Wholesale, Water Truck, Sewage Cleaning Truck); (ii) different prices for water, sewage collection and treatment sewage services; (iii) the unification of our pricing schedules, which partially reduces subsidies between the regions; and (iv) the charging of a fixed component that reflects fixed costs per connection and another variable part that reflects consumption (a binomial price).

The transition period from 2021 to 2024 during which it will be implement this new tariff structure may lead to uncertainties as well as unpredictability about the revenues we expect to earn from May 2022, given that it is difficult to determine the customer reclassification as a result of price changes, which can lead to differences in our revenues compared to those projected based on the current tariff structure. We cannot assure what the result of the implementation of this new tariff structure will be and if it will have an adverse effect on our business, financial condition or results of operations. see “Item 4.B. Business Overview—Tariffs—New Tariff Structure.”

 
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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$21 billion in the period from 2021 through 2025. In 2020, we recorded R$4.4 billion in capital expenditures. Cash used in 2020 referring to our historical investment totaled R$3.3 billion. 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.

Historically, we have had solid relationships with local and international public and private banks, which have in the past allowed us to raise funds to refinance debts and also to execute our investment plan. However, we cannot guarantee that we will have access to financing in the future at rates that are compatible with our business plan, which could have a material adverse effect on our business, financial condition or results of operations and our future investment plan.

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.”

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, as well as the resilience and flexibility of our water treatment systems.

 

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 and state 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 specific 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 standards to improve our energy use efficiency and minimize the release of greenhouse gases when we renew the environmental licenses for the systems already in operation or when we obtain environmental licenses for new enterprises. We may need to make substantial new expenditures, either to comply with new environmental regulations linked to climate change or to prevent or correct the physical effects of extreme weather events, any of which could have a material adverse effect on our results of operations. For more information, see “Item 4.B. Business Overview—Environmental Matters—Climate Change Regulations: Reduction of Greenhouse Gases (GHG) Emissions” and “Item 4.B. Business Overview—Energy Consumption.”

 
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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, as well as standards for effluents which limit or prohibit the discharge or spillage of untreated effluent produced in our operations, particularly raw sewage. 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 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, 2020, the estimated total claims asserted amounted to R$48,228.5 million (net of R$196.3 million in escrow deposits), including contingent liabilities. We have recognized provisions totaling R$1,252.3 million (net of escrow deposits) as of December 31, 2020. 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 2020 Financial Statements included in this annual report.

We are subject to anti-corruption, anti-bribery, anti-money laundering, sanctions and antitrust laws and regulations. Our violation of any such laws or regulations could have a material adverse effect on our reputation, our results of operations and our financial condition.

We are subject to anti-corruption, anti-bribery, anti-money laundering, sanctions, antitrust and other similar laws and regulations. We are required to comply with the applicable laws and regulations of Brazil, and we may become subject to such laws and regulations in other jurisdictions. There can be no assurance that our internal policies and procedures will be sufficient to prevent or detect any inappropriate practices, fraud or violations of these laws or regulations by our employees, officers, executives, partners, agents and service providers, nor that any such persons will not take actions in violation of our policies and procedures. Any violations, whether actual or perceived, by us or any of our employees, directors, officers, partners, agents and service providers of these laws or regulations or our internal policies or procedures could have a material adverse effect on our reputation, our ability to obtain financing our business, financial condition or results of operations.

Our business is subject to cyberattacks and security and privacy breaches.

Our business involves the collection, storage, processing and transmission of customers’, suppliers and employees’ personal or sensitive data. We also use key information technology systems for controlling water, sewage and commercial, administrative and financial operations. We may be subject to breaches of the information technology systems we use for these purposes. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions, or cause shutdowns. Computer programmers and hackers also may be able to develop and deploy viruses, worms and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. Following the COVID-19 outbreak, we started to use new communication software 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.

 
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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.

The LGPD came into effect on September 18, 2020 and provides a comprehensive regulation for the use of personal data in Brazil. Companies and organizations that do not comply with the new requirements may suffer administrative sanctions and fines in the amount of up to R$50 million. However, Law No. 14.010/20, published on June 10, 2020, extended the exemption from of these penalties to August 1, 2021. Notwithstanding the exemption of administrative penalties, failure to comply with any provisions of such legislation entails the following risks: (i) the filing of lawsuits claiming damages resulting from violations, based not only on LGPD, but also on sectorial legislation that are still in force; and (ii) the application of penalties provided for in the Consumer Defense Code and the Brazilian Internet Act by relevant consumer protection agencies, such as the Federal District Prosecutor’s Office and the National Consumer Secretariat (Secretaria Nacional do Consumidor), since these authorities have competence to examine allegations of violation of data protection legislation by companies, as well as to enforce and to asses applicable penalties. These authorities have already acted towards this, even before the effectiveness of the LGPD and the structuring of ANPD, especially in cases of security incidents resulting in improper access to personal data. As of the date of this annual report, the ANPD has not yet been completely structured by the Brazilian government and has not yet issued regulatory guidelines for the LGPD. On October 20, 2020, the Federal Senate approved the names of those nominated to compose ANDP’s board.

The LGPD significantly transformed the data protection system in Brazil and is was inspired on 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, whose establishment is still pending, 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.

Any 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 purposes, which is the total amount of dams used by us. 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.”

 
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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 collecting overdue amounts owed to us by municipal government entities.

As of December 31, 2020, our total trade receivables were R$3,608.6 million. Of this amount, the municipalities of Mogi das Cruzes and São Caetano do Sul, for which we provide water on a wholesale basis, owed us R$22.4 million, and certain municipal government entities owed us R$806.9 million. Of the total amount owed by municipalities, R$15.2 million was overdue by between 30 and 360 days and none was overdue by over 360 days.

Certain entities associated with municipal governments for which we provide services also do not make regular payments. We cannot guarantee if or when these entities will make payments on a regular basis or pay the amounts they owe us. If these municipalities and related entities do not pay the amounts they owe us, our business, financial condition or results of operations may be adversely affected.

Risks Relating to Our Common Shares and ADSs

We may not always be in a position to pay dividends or interest on shareholders’ equity and ADSs.

Depending on our future results, our shareholders may not receive dividends or interest on own capital if we do not generate a profit. Despite the requirement to distribute a minimum of 25% of the adjusted annual net income to shareholders in accordance with Brazilian Corporate Law, our future financial position may not permit us to distribute dividends or pay interest on own capital.

The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell our common shares underlying the ADSs at the price and time you desire.

Investing in securities from emerging markets such as Brazil involves greater risk than investing in securities of issuers in major securities markets, and these investments are often considered to be more speculative in nature. The Brazilian securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets. Accordingly, although you are entitled to withdraw the common shares underlying the ADSs from the depositary at any time, your ability to sell the common shares underlying the ADSs at a price and time at which you wish to do so may be substantially limited. There is also significantly greater concentration in the Brazilian securities market than in major securities markets. The ten largest companies in terms of market capitalization represented approximately 51.6% of the aggregate market capitalization of the B3 as of December 31, 2020.

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.

Further, during the campaign, the then main contender and 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 realized, this would increase the tax expenses associated with any dividend, interest on equity or distributions made by Brazilian companies, which could impact us or our shareholders and the value of our common shares and ADSs. Uncertainty regarding the implementation by the current government of related changes in monetary, fiscal and pension policies, as well as pertinent legislation, could contribute to economic instability. These uncertainties and new measures could increase the volatility of Brazilian securities markets.

 
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A holder of common shares or ADSs may face difficulties in protecting his or her interests as a shareholder because we are a Brazilian mixed capital company.

We are a mixed capital company (sociedade de economia mista) organized under the laws of Brazil, and all of our directors and officers and our controlling shareholder reside in Brazil. All of our assets are located in Brazil. As a result, it may not be possible for a holder to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain requirements are met, a holder may face more difficulty in protecting his or her interests in the case of actions by our directors, officers or our controlling shareholder than would shareholders of a corporation incorporated in a state or other jurisdiction of the United States. In addition, under Brazilian law, none of our assets which are essential to our ability to render public services are subject to seizure or attachment. Furthermore, the execution of a judgment against our controlling shareholder may be delayed, since the State may only be able to pay a judgment if it is provided for in its budget in a subsequent fiscal year. None of the public property of our controlling shareholder is available for seizure or attachment, either prior to or after judgment.

Mandatory arbitration provisions in our bylaws may limit the ability of a holder of our ADSs to enforce liability under U.S. securities laws.

Under our bylaws, any disputes among us, our shareholders and our management with respect to the Novo Mercado rules, the Brazilian Corporate Law and Brazilian capital markets regulations will be resolved by arbitration conducted pursuant to the B3 Arbitration Rules in the Market Arbitration Chamber. Any disputes among shareholders and ADR holders, and any disputes between us and our shareholders and ADR holders, will also be submitted to arbitration. As a result, a court in the United States might require that a claim brought by an ADR holder predicated upon the U.S. securities laws be submitted to arbitration in accordance with our bylaws. In that event, a purchaser of ADSs would be effectively precluded from pursuing remedies under the

U.S. securities laws in the U.S. courts. However, a court in the United States could allow claims predicated upon the U.S. securities laws brought by holders who purchased ADSs on the NYSE to be submitted to U.S. courts.

A holder of our common shares and ADSs might be unable to exercise preemptive rights and tag-along rights with respect to the common shares.

U.S. holders of common shares and ADSs may not be able to exercise the preemptive rights and tag-along rights relating to common shares unless a registration statement under the U.S. Securities Act of 1933, as amended, or the Securities Act, is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to our common shares relating to these rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration is available, an ADR holder may receive only the net proceeds from the sale of his or her preemptive rights and tag-along rights or, if these rights cannot be sold, they will lapse and the ADR holder will receive no value for them.

Holders of our ADSs do not have the same voting rights as our shareholders.

Holders of our ADSs do not have the same voting rights as holders of our shares. Holders of our ADSs are entitled to the contractual rights set forth for their benefit under the deposit agreements. ADS holders exercise voting rights by providing instructions to the depositary, as opposed to attending shareholders meetings or voting by other means available to shareholders. In practice, the ability of a holder of ADSs to instruct the depositary as to voting will depend on the timing and procedures for providing instructions to the depositary, either directly or through the holder’s custodian and clearing system. The deposit agreement also provides that if the depositary does not receive any instructions from a holder of ADRs, the ADR holder may be deemed to have given a discretionary proxy to a person designated by our company and the underlying shares may be voted by such person. However, we have chosen not to designate any person to exercise these deemed proxy rights with respect to any annual or special general meetings, and ADSs for which no specific voting instructions were received by the Depositary were therefore not voted at that meeting.

If we issue new shares or our shareholders sell shares in the future, the market price of your ADS may be reduced.

Sales of a substantial number of shares, or the belief that this may occur, could decrease the prevailing market price of our common and preferred shares and ADS by diluting the shares’ value. If we issue new shares or our existing shareholders sell shares they hold, the market price of our common and preferred shares, and of the ADS, may decrease significantly. Such issuances and sales also might make it more difficult for us to issue shares or ADS in the future at a time and a price that we deem appropriate and for you to sell your securities at or above the price you paid for them. Our controlling shareholder, the state of São Paulo, may decide to undertake a corporate reorganization, for a variety of reasons which could have the effect of diluting existing shareholders and ADS holders or lead to a change of control. See “—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.”

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.”

 
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We believe we are one of the largest water and sewage service providers in the world (based on revenues, according to studies of the Global Water Intelligence in 2019). 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, 2020, we generated net operating revenue of R$17,797.5 million and profit of R$973.3 million. Our total assets amounted to R$50,418.6 million and our total shareholders’ equity amounted to R$22,793.7 million as of December 31, 2020.

As of December 31, 2020, we provided water and sewage services to a broad range of residential, commercial, industrial and governmental customers in 375 of the 645 municipalities in the state of São Paulo, including the city of São Paulo. Substantially all of our concessions or program agreements have 30-year terms. As of December 31, 2020, we lacked formal agreements for 8 of the municipalities we serve. In addition to the eight contracts expired in December 2020, from January 1, 2021 through 2030, 25 concession agreements will expire, accounting for 3.9% of our revenues (excluding revenues relating to the construction of concession infrastructure) the year ended December 31, 2020 and 3.4% of our intangible assets and contract assets as of the same date, will expire.

We also supplied water and sewage treatment services on a wholesale basis to two municipalities, Mogi das Cruzes and São Caetano do Sul, located in the São Paulo metropolitan region. For the year ended December 31, 2020, the São Paulo metropolitan region (including the municipalities to which we provide water on a wholesale basis) accounted for 70.7% of our operating revenue (excluding revenues relating to the construction of concession infrastructure), while the Regional Systems accounted for 29.3%. The municipalities of Guarulhos, Santo André and Mauá were served on a wholesale basis until December 2018, August 2019 and November 2020, respectively, after which we started retail operations in these municipalities, which means we now account for them as part of our retail segment.

As of December 31, 2020, we provided water services through 10.1 million water connections to approximately 27.5 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 8.5 million sewage connections to approximately 24.3 million people and had an effective sewage service ratio of 85%. As of December 31, 2020, we operated using 87,568 kilometers of water pipes and water transmission lines and 59,660 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, 2020, the State owned 50.3% of our outstanding common shares. As a mixed capital company, we are an integral part of the São Paulo 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 São Paulo 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. Following the water crises, the volume of water billed in the São Paulo metropolitan region continued below 2013 levels as many of our customers continue to apply some of the lower water consumption practices adopted during water crisis. The COVID-19 pandemic resulted in increased in volumes of water billed in the residential categories and a reduction in the public, commercial and industrial categories which have higher average tariffs, leading to a reduction in the total average tariff, in addition to increases in delinquencies in certain categories, which are reflected in our results, with a direct impact on revenues. 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,” and for information on the COVID-19 pandemic, 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 outbreak of COVID-19.”

 
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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 27.5 million people (without considering the population serviced in Mauá) and supply water on a wholesale basis to an additional urban population of approximately 1.0 million people (including the population serviced in Mauá). As of December 31, 2020, we had an effective water coverage ratio of 98% in respect of all regions in which we operate. We also provide sewage services directly to approximately 24.3 million people, achieving an effective sewage service ratio of 85% in respect of all regions in which we operate as of December 31, 2020. 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 44.8 million as of December 31, 2020. The city of São Paulo had an estimated total population of 11.9 million as of the same date, while the São Paulo metropolitan region had a total population of 21.2 million. Based on its GDP, the state of São Paulo is the wealthiest state and has the largest economy of any state in Brazil. The GDP of the state of São Paulo was approximately R$2.2 trillion representing approximately 31.6% of Brazil’s total GDP, according to the most recent data collected by the IBGE in 2018. The state of São Paulo generates more revenue from water and sewage services than any other Brazilian state.

Strong Base of Contracted Business. Between January 1, 2007 and December 31, 2020, we executed agreements with 342 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, 2020, income from these agreements accounted for 95.1% 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 sanitation services, contributing to improvements in quality of life and the environment. Our goal is to become a global reference in the provision of basic sanitation services in a sustainable, competitive and innovative manner, focused on the needs of our clients. To this end, our strategic objectives are based upon the guiding principles of water availability, excellence in the provision of services, sustainable growth, fostering and expanding our operating base, innovation and technology, motivation of personnel and expansion of our sewage treatment coverage.

Secure water availability in the areas where we operate. Our goal is to secure the availability of water in the areas where we operate, as well as to promote a rational and integrated use of water resources, respecting demand and critical levels of water for each region, and allocating resources in the short, medium and long run in order to guarantee access to water. Our goal is to consistently meet the needs of our consumers with our services. 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 2025. In addition, we seek to reduce both physical and non-physical water loss. See “—Capital Expenditure Program.”

 

We also seek to improve our processes and controls by implementing: (i) a new management model based on the Management Excellence Model 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 searching for new business opportunities. We also regularly explore the possibility of providing water and sewage services in municipalities in the state of São Paulo in which we currently have no operations or to which we currently supply water and provide sewage treatment solely on a wholesale basis, which on aggregate represent a total population of approximately 14.3 million (without considering the population serviced in Mauá). 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, 2020 accounted for 44.6% of our gross operating revenues from sanitation services (excluding revenues relating to the construction of concession infrastructure). Between January 1, 2007 and December 31, 2020, we entered into agreements with 342 municipalities (including our services agreement with the city of São Paulo), of which 17 were entered into in 2020. These 342 municipalities accounted for 95.1% of our total revenues (excluding revenues relating to the construction of concession infrastructure) for the year ended December 31, 2020 and 93.1% of our intangible assets and contract assets as of the same date. As of December 31, 2020, 8 of our concessions had expired. These 8 municipalities accounted for 0.3% of our total revenues (excluding revenues relating to the construction of concession infrastructure) for the year ended December 31, 2020 and 0.6% of our intangible assets and contract assets as of the same date. From January 1, 2021 through 2030, 25 concession agreements will expire, accounting for 3.9% of our revenues (excluding revenues relating to the construction of concession infrastructure) the year ended December 31, 2020 and 3.4% of our intangible assets and contract assets as of the same date, will expire.

Seek opportunities to adopt and develop innovative technology. We stimulate the creation, adoption and diffusion of innovative solutions aiming to generate value and to improve our provision of basic sanitation services while promoting environmental protection and maintaining our competitiveness and profitability. In accordance with our bylaws, our activities comprise water supply, sanitary sewage services, urban rainwater management and drainage services, urban cleaning services, solid waste management services, and also related activities, including the planning, operation, maintenance and commercialization of energy, and the commercialization of services, products, benefits and rights that directly or indirectly arise from our assets, operations and activities. We are also authorized to carry out activities through subsidiaries in other Brazilian locations and in other countries. See Item “5.C. Research and Development, Patents and Licenses, Etc.”

Establish efficient and competitive ways of motivating, retaining and attracting personnel. We intend to provide our personnel with programs for professional and personal development, growth opportunities and recognition. These programs include competitive benefit packages and a healthy and collaborative work environment. We seek to raise workplace satisfaction, well-being, engagement and productivity.

Expand our sewage treatment coverage. Our goal is to progress in the implementation of sewage collection and treatment structures in an economically and technologically viable way. We had an effective sewage coverage ratio of 92% as of December 31, 2020 and plan to increase this ratio to 95% by 2025, which will be maintained in 2025 by adding over 1.2 million sewage connections by 2025 and the indicator of consumer units connected to the sewage treatment system from 76% to 88% by 2025. 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 14.3 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.

 
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In 2020 we invested R$4.4 billion and between 2021 and 2025 we plan to invest an additional R$21 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 44.8 million as of December 31, 2020. The city of São Paulo, capital of the state of São Paulo, had an estimated total population of 11.9 million, with a total population of 21.2 million inhabitants in the São Paulo metropolitan region, as of December 31, 2020. 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 47.3% of the total population of the state of São Paulo as of December 31, 2020. In, the most recent data collected by the IBGE, the GDP of the state of São Paulo was approximately R$2.2 trillion, representing approximately 31.6% 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 São Paulo state government. Historically, water and sewage services in substantially all other municipalities of the State were administered directly by the municipalities, either by municipal water and sewage departments or through autarquias of the municipal government. Autarquias are relatively autonomous public bodies with separate legal standing, assets and revenues, created by law to carry out the administration of public services where the government deems that a decentralized administrative and financial structure would be advantageous.

In 1954, in response to dramatic population growth in the São Paulo metropolitan region, the São Paulo 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 São Paulo 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 São Paulo state governmental and state-controlled companies involved in water supply and sewage collection and treatment in the state of São Paulo have been merged into our company. The State has always been our controlling shareholder, as required by State Law No. 11,454/2003. We have therefore been integrated into the São Paulo state governmental structure and our strategies have been formulated in conjunction with the strategies of the São Paulo Secretariat for Infrastructure and Environment (Secretaria de Infraestrutura e Meio Ambiente do Estado de São Paulo). Additionally, a majority of the members of our board of directors and our management are appointed by the State Government.

Our capital expenditure budget is subject to approval by the State legislative chamber. This approval is obtained simultaneously with the approval of the budget of the São Paulo Secretariat for Infrastructure and Environment. We are also subject to supervision from the Court of Audit of the State of São Paulo (Tribunal de Contas do Estado de São Paulo), with regard to our accounting, financial and budgetary activities and our operating assets.

 
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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 established, the controlling company could sell shares to other minority shareholders, including private companies and state-owned companies, provided, however, that the state of São Paulo will continue to hold a majority of the common shares of the controlling company. 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, pursuant to the recent changes to the basic sanitation law. 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.”

As of December 31, 2020, 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 375 of the 645 municipalities in the State, including in the city of São Paulo. We also supplied water on a wholesale basis to two municipalities in the São Paulo metropolitan region. According to a report from Global Water Intelligence in 2019, we are the third largest sanitation company in the world by revenue.

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:

 
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(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$21.0 billion from 2021 through 2025. We invested R$4.4 billion, R$5.1 billion and R$3.4 billion in 2020, 2019 and 2018, respectively.

The following table sets forth our planned capital expenditures for water and sewage infrastructure for the years indicated:

 

2021

2022

2023

2024

2025

Total

Water1,7531,5551,5161,6941,6488,166
Sewage Collection1,8312,0842,1972,0791,87410,065
Sewage Treatment5875614724057122,737
Total4,1714,2004,1854,1784,23420,968

 

Our capital expenditure program from 2021 through 2025 will continue to focus on achieving our targets by making regular investments to maintain and expand our infrastructure and to reduce water losses in the 375 municipalities we served as of December 31, 2020.

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 2021 through 2025, we plan to spend R$8.2 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.

Since 2000, the Metropolitan Water Program has increased the production capacity by 13.1 m³/s, with the aim of improving the structure of the supply system in the São Paulo metropolitan region, by expanding the water production, transportation and distribution systems. In March 2018 we concluded the interconnection of the Jaguari (part of the Paraíba do Sul Basin) and Atibainha reservoirs (part of the PCJ River Basin, Cantareira System), which is also strategic to guarantee secure access to water for the metropolitan region of São Paulo. Through 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. Since May 2018, the transfer of water also works in the opposite direction, from the Atibainha reservoir to the Jaguari reservoir, allowing us to optimize the reservation capacity of both reservoirs, while benefiting the population of the Paraíba Valley.

With regard to PPP São Lourenço, as of December 31, 2020, 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.

Reversal of the Itapanhaú River

This is the third major project of the many structural interventions to ensure water security in the São Paulo metropolitan region. Through the reversal of the Itapanhaú River to the Biritiba-Mirim reservoir, 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 the Biritiba-Mirim reservoir. The project aims to improve water security in the São Paulo metropolitan region and is expected to directly benefit approximately 4.5 million residents that receive water from the Alto Tietê system as well as indirectly benefit 21.1 million people in the greater São Paulo region. After obtaining the necessary environmental licenses, construction works began in June 2020 and are estimated to finish in 2022 with financial support from the Federal Savings Bank (Caixa Econômica Federal).

 
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Program for Reduction of Water Loss

The Program for the Reduction of Water Loss aims to achieve a steady reduction in water loss in the long term, through the implementation of various operational and maintenance improvement measures, in addition to important actions to renew and improve the infrastructure.

As a result, the rate of total losses index has decreased gradually, from 41.0% in 2004 to 27.0% in 2020. The loss in liters per connection per day, considered the most suitable index, has also shown a decrease. In 2020, the index reached 263 liters per connection per day, 52% less than 2004, when the indicator registered 547 liters per connection per day.

From 2021 onwards, the losses in the municipality of Guarulhos will be accounted for in this index, leading to an increase of about 10 liters per connection per day in the loss index. Accordingly, the goal for 2021 is to reach an index of 268 liters per connection per day, including the municipality of Guarulhos.

Part of the resources allocated, to the program came from our own resources and the remainder from financing granted by the Japan International Cooperation Agency (JICA), BNDES and by incentive debentures provided for in Law No. 12,431/2011.

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 in the southern and northern coasts 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 have been investing in upgrading water treatment plants in several municipalities since 2013, such as Mambu/Branco and Itanhaém. In 2020, one of the highlights was the doubling of the Mambu-Branco production system located in Itanhaém, which had a production capacity of 1.6 m³/s. In 2020, we were able to advance the project and reached 60% of completion by the end of 2020, with delivery scheduled for 2021. Once completed, the system will have capacity to produce about 3.2 m³/s of water.

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 which 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).

In the northern coast, we have made numerous investments aimed at expanding water security, improving and increasing the capacity of water production units, and have implemented certain actions to optimize water distribution units to meet demand in the high season.

The program is supported by funds from the Caixa Econômica Federal as well as our own funds.

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 2021 through 2025, we plan to invest R$12.8 billion in sewage collection and treatment. The main programs are:

Tietê Project

We have been working in the metropolitan region of São Paulo in sanitation programs that aim to contribute to the revitalization of rivers and streams, and its main program is the Tietê Project.

Established in 1992, the project aims to contribute to the progressive revitalization of the Tietê river and its tributaries, in the Alto Tietê basin, where the metropolitan region of São Paulo is located, through the expansion and optimization of the sewage collection, transportation and treatment system.

Considering the complexity and challenges faced to implement infrastructure projects in crowded and disorderly urbanized areas such as São Paulo, it was necessary to structure the project in stages.

From 1992 to the end of 2020, the investments totaled US$3.1 billion, of which R$435 million were disbursed in 2020. 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.

 
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During this period, 1.8 million domestic sewage connections were built and 4.6 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 22.7 thousand liters per second. This increase, of 18.7 thousand liters per second, is equivalent to the sewage generated by approximately 12.4 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 92% by the end of 2020. Sewage treatment increased from 24% to 83% 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 77% progress, and the works already planned for the fourth stage, with priority interventions currently in concurrent execution.

It is also worth mentioning the completion in 2020 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 2020, the Laranjeiras sewage treatment system was inaugurated in the municipality of Caieiras, consisting of a sewage treatment plant, with a capacity of 80 liters per second, and 8km of interceptors and trunk collectors, benefiting 30 thousand people in the region.

Finally, the major highlight is the Novo Rio Pinheiros Project, which is part of the Tietê Project, since the Pinheiros River is one of the main tributaries of the Tietê River in the São Paulo metropolitan region, and the improvement of Pinheiros River will have a direct impact on improving the quality of Tietê’s waters. It is important to point out that the large sewage collection and interception infrastructure built over time as part of the Tietê Project allows the complementary improvements carried out in the Novo Pinheiros River to be immediately connected to the Barueri treatment station.

The Novo Rio Pinheiros Project is an initiative promoted by the state of São Paulo to coordinate several state and municipal entities in an effort to clean up the Pinheiros river 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 were encouraged to participate in this initiative as it is relevant to the Tietê Project and we took part in the project by offering an accelerated expansion of the sewage collection network and the installation of new sewage connections in areas not yet served, which is expected to connect approximately 533 thousand homes to the sewage treatment system. 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. In 2020, approximately 150 thousand residences were connected to the sewage treatment system.

These initiatives are being contracted based on performance (Performance Contract), a form of service contracting that set goals to be achieved by the contractors, with the compensation varying according to the achievement of the proposed targets. That is, compensation will take place upon completion of the construction and will also have a variable part, depending on the final result achieved. Performance evaluation considers targets such as the number of new properties connected to the sewage network and stream water quality.

As of December 2020, 16 contracts were concluded through bidding processes for the collection and transportation of sewage for treatment at the Barueri station, in addition to our contracting for the implementation of 5 local stations to treat sewage in areas of irregular occupation, in which previously the sewage ended up being released into local streams as the occupation left no space for the installation of sewage collection facilities.

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, 161 urban streams have been decontaminated and preserved, benefiting approximately 2.9 million people. In the 14 years of the program, we have invested R$318 million. 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.

In 2020, the program benefited more than 202.5 thousand people, contributing to the collection and treatment of an additional 182 liters per second of sewage.

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 and the north coast, 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.

 
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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 2020, 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, which aims to achieve universal sewage collection and treatment, is estimated between 2025 and 2030, and a forecast of 95% sewage collection and treatment of all sewage collected is set to benefit areas with expanding populations.

Other Policies and Programs

Nossa Guarapiranga

The Nossa Guarapiranga Project launched in December 2011 is still running. Its main objective is to improve the water quality in the Guarapiranga basin, an urban water source for the São Paulo metropolitan region, which supplies more than 4 million people.

We carried out actions on three fronts as part of this project: (i) we installed ecobarriers at the mouth of the reservoir’s main effluents in order to retain solid residue in the Guarapiranga basin; (ii) we developed diagnosis and control services for the removal of water plants that obstruct water extraction; and (iii) we removed and disposed of solid residue that had accumulated at the water surface of the dam in the reservoir. Two vessels were built specifically for this purpose. We work as a collaborative team with the municipal government of São Paulo in the Nossa Guarapiranga Project, with the municipal government of São Paulo transporting all of the residue collected through these fronts to a sanitary landfill. In 2020, we removed an average of 1.152 m³/month of solid residue and approximately 217 m3/month of water plants from this basin.

Água Legal Program

Created in 2017, the Água Legal Program aims to promote the proper installation of water distribution systems in communities of high social vulnerability, where residents are poorly supplied with improvised pipes subject to contamination. In 2020, the Program brought more comfort and health to 33 thousand families (115 thousand people) with the replacement of precarious and irregular facilities with networks and water meters that bring quality water to the taps. In four years, around 145 thousand families (approximately 507 thousand people) in the São Paulo metropolitan region had their private connections standardized.

Pró-Conexão

In 2012, the State of São Paulo approved a project to subsidize connections to the sewage system for low-income families, of which 80% of the capital expenditures should be provided by the São Paulo state government and 20% by us.

The 2020 program brought more comfort and health to 29.7 thousand families (104 thousand people) with sewage connections, new internal installations and replacement of precarious and irregular sewage pipes, providing safe and legally compliant infrastructure to these households.

In 2019, the original term of the program provided for in State Decree No. 58,208/2012 expired. At the beginning of 2021, negotiations for renewing the program with the Secretariat for Infrastructure and the Environment were resumed.

We believe that this program can increase the efficiency of our other sewage collection programs and help improve water quality in the region’s rivers and basins as well as improve quality of life for low-income families. For more information see “Item 7.B. 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.

B.        Business Overview

Our Operations

As of December 31, 2020, we provided water and sewage services to 375 municipalities in the state of São Paulo under concession agreements, program agreements, other forms of legal arrangements or without formal agreements. We also supplied treated water on a wholesale basis to two municipalities located in the São Paulo metropolitan region and conurbations. The majority of these concessions have 30-year terms. Between January 1, 2007 and December 31, 2020, we entered into agreements with 342 municipalities (including our services agreement with the municipalities of São Paulo and Guarulhos) in accordance with the Basic Sanitation Law, of which 17 were entered into in 2020. As of December 31, 2020, these 342 municipalities accounted for 95.1% 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, 2020, 8 of our agreements or concessions had expired but we continued to provide water and sewage services to these municipalities. From January 1, 2021 through 2030, 25 concession agreements will expire, accounting for 3.9% of our revenues (excluding revenues relating to the construction of concession infrastructure) the year ended December 31, 2020 and 3.4% of our intangible assets and contract assets as of the same date, will expire.

 
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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, 2020.

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 2020, we provided water services on a wholesale basis to two municipalities located in the São Paulo metropolitan region (Mogi das Cruzes and São Caetano do Sul). The municipalities of Guarulhos, Santo André and Mauá were served on a wholesale basis until December 2018, July 2019 and November 2020, 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 2020, we invoiced approximately 50.1 million cubic meters of water to these municipalities and the revenues from wholesales water services were R$282.6 million, the main impact of which was related to the agreement with the municipality of Mauá. For more information on this agreement, see Note 10 to our 2020 financial statements.

The Brazilian courts could oblige us to continue to supply water to the municipalities serviced through our wholesale segment, even when we have not received payments due to us. If they do not pay, we have no way of ensuring that negotiations with these municipalities or legal action taken against them will result in payments being made. The municipalities Mogi das Cruzes and São Caetano do Sul have historically paid for our services on time.

Wholesale Sewage Services

Currently, we provide sewage services on a wholesale basis to the municipalities of Mogi das Cruzes and São Caetano do Sul.

Through these agreements, in 2020 we invoiced approximately 16.0 million cubic meters of sewage collected from these municipalities served on a wholesale basis. In 2020, our revenues from wholesale sewage services were R$19.8 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 2020, we produced approximately 2,907 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 2020.

The following table sets forth the volume of water that we produced and invoiced for the periods indicated:

 
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 Year ended December 31,
 

2020

 

2019

 

2018

 (in millions of cubic meters)
Produced:     
São Paulo metropolitan region2,032.0 2,012.5 1,959.6
Regional Systems874.7 860.7 840.1
Total2,906.7 2,873.2 2,799.7
Invoiced:     
São Paulo metropolitan region1,297.4 1,296.4 1,194.5
Wholesale (1)50.1 48.1 262.7
Regional Systems682.5 666.3 650.7
Subtotal2,030,0 2,010.8 2,107.9
Santo André (2)53.9 67.1 -
Mauá (3)29.5 34.8 -
Residencial Social/Favela (4)45.8 - -
Total2,159.2 2,112.7 2,107.9

 

(1)       Wholesale includes volumes of reuse water and non-domestic sewage;

(2)        Billed volume in the retail segment in 2020 and in the wholesale/retail segment in 2019;

(3)        Billed volume in the wholesale/retail segments in 2020 and in the wholesale segment in 2019; and

(4)        Volume exempt from paying water and sewage bills.

The difference between the volume of water produced and the volume of water invoiced generally represents both physical and non-physical water loss. See “—Water Loss.” In addition, we do not invoice:

·water discharged for periodic maintenance of water transmission lines and water storage tanks;
·water supplied for municipal uses such as firefighting;
·water consumed in our own facilities; and
·estimated water loss associated with water we supply to shantytowns (favelas).

 

Seasonality

Although seasonality does not affect our results in a significant way, in general, higher water demand is observed during the summer and lower water demand during the winter. The summer coincides with the rainy season, while the winter corresponds to the dry season. The demand in the coastal region is increased by tourism, with the greatest demand occurring during the Brazilian summer holiday months.

Water Resources

We can withdraw water only to the extent permitted by 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, 2020 we relied on 20 reservoirs of non-treated water and 264 reservoirs of treated water, which are located in the areas under the influence of the nine water producing systems comprising the interconnected water system of the São Paulo metropolitan region, and the Guarulhos water supply system. The total capacity of the water sources available for treatment in this area is 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 water systems of the São Paulo metropolitan region was 63.4 m³/s during 2020. The Cantareira, Guarapiranga and Alto Tietê systems produce 80.3% of the water we distributed in the São Paulo metropolitan region in 2020.

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 5.13 m3/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 2020, the Cantareira system accounted for 39.0% of the water that we supplied to the São Paulo metropolitan region (including the municipalities to which we supplied water on a wholesale basis), which represented 70.7% 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.”

 
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Current river basin committees are authorized to charge both for water usage and the dumping of sewage into water bodies. We participate in the decentralized and integrated management of water resources established by the National Policy on Water Resources. We are represented by our employees on the State River Basin Committees and the Federal Committees that act in the state of São Paulo and in the National and State Councils on Water Resources.

The following table sets forth the water production systems from which we produce water for the São Paulo metropolitan region:

Production Rate(1)
   2020 2019 2018
(in cubic meters per second)
Water production system:     
Cantareira24.6 23.8 23.9
Guarapiranga12.7 12.7 13.4
Alto Tietê13.6 14.3 12.9
Rio Claro3.6 3.1 3.4
Rio Grande (Billings reservoir)4.3 4.3 4.3
Alto Cotia1.1 1.2 1.1
Baixo Cotia (2)- - 0.2
Ribeirão da Estiva0.1 0.1 0.1
São Lourenço3.1 3.1 1.6
Guarulhos0.3 0.3 -
Total63.4 62.9 60.9

 

(1)Average of the year ended December 31, 2020, 2019 and 2018.
(2)At the start of 2018, the region served by the Baixo Cotia system began to be supplied by the São Lourenço system.

 

The Guarapiranga and Billings reservoirs and a portion of some of the reservoirs of the Alto Tietê system are owned by other companies controlled by the State. In the cities of the interior region of São Paulo, our principal source of water consists of surface water from nearby rivers and from wells, 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 220.4, 204.8 and 199.1 thousand new water connections in 2020, 2019 and 2018, respectively. The interconnected water system of the São Paulo metropolitan region serves 30 municipalities, of which 29 are operated directly by us under this system. Through this system, we serve the other two municipalities on a wholesale basis whereas distribution is the responsibility of the companies or departments related to each municipality.

In order to reach the final customer, the water is stored and transported through a complex and interconnected system. This water system requires permanent operational supervision, engineering inspection, maintenance, and quality monitoring and measurement control.

To ensure the continuous provision of regular water supply, we intend to invest R$21.0 billion from 2021 to 2025 to increase our water production and distribution capacities as well as to improve the water supply systems. In 2020, our total investment in water supply systems amounted to R$2.1 billion, of which R$1.6 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 251 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 2020. The type of treatment used depends on the nature of the source and quality of the untreated water. For example, water abstracted from rivers requires more treatment than water withdrawn from groundwater sources. All of the water we treat receives fluoridation treatment.

Water Distribution

We distribute water through our networks of water pipes and water transmission lines. Storage tanks and pumping stations regulate the volume of water flowing through the networks in order to maintain adequate pressure and continuous water supply.

The following table sets forth the total number of kilometers of water pipes and water transmission lines and the number of connections in our network as of the dates indicated:

As of December 31,
 2020 2019 2018
Water distribution pipes and water transmission lines (in kilometers)87,568 81,324 75,519
Number of connections (in thousands)10,088 9,933 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.

 
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As of December 31, 2020, our water distribution pipes and water transmission lines included: (i) 46,202 kilometers in the São Paulo metropolitan region; and (ii) 41,366 kilometers in the Regional Systems.

As of that date, we had 423 storage tanks in the São Paulo metropolitan region with a total capacity of 2.3 million cubic meters, and 2,124 storage tanks in the Regional Systems. Furthermore, we had 513 treated water pumping stations in the São Paulo metropolitan region aqueduct system, including stations at treatment facilities, intermediate trunk transfer pumping stations and small booster stations serving local areas.

Water transmission lines that require maintenance are cleaned and their lining is replaced. We are typically notified of water main fractures or breaks by the public through a toll-free number maintained by us. We consider the condition of the water pipes and water transmission lines in the São Paulo metropolitan region to be adequate as of the date of this annual report. Due to age, external factors such as traffic, the dense population, and commercial and industrial development, water pipes and water transmission lines in the São Paulo metropolitan region are somewhat more susceptible to degradation than those in the Regional Systems. To counter these effects, we have a maintenance program in place for water pipes and water transmission lines that is intended to address anticipated fractures and clogs due to brittleness and encrustation, and to help ensure water quality in the region.

The new customers whose water pipes are more than 20 meters away from the water transmission lines are responsible for covering part of the costs of connecting to our water distribution network. They must cover the costs of connecting to the network from the customer’s premises, including costs of purchasing and installing the water meter and related labor costs. We perform the installation of the water meter and conduct periodical inspections and measurements. After completion of installation, the customer is responsible for the water meter.

The following table sets forth projected new water connections for the periods indicated in thousands:

 2021 2022 2023 2024 2025 2021 – 2025
São Paulo metropolitan region135 135 140 140 140 690
Regional Systems57 57 60 60 60 294
Total192 192 200 200 200 984

 

Water Loss

The difference between the volume of water produced and the volume of water invoiced generally represents both physical and non-physical water loss.

The Water Billed Loss Index represents the quotient of (i) the difference between (a) the total volume of water produced minus (b) the total volume of water invoiced plus (c) the volume of water excluded from our calculation of water loss, divided by (ii) the total volume of water produced.

The Water Metered Loss Index represents the quotient of (i) the difference between (a) the total volume of water produced minus (b) the total volume of water measured minus (c) the volume of water that we exclude from our calculation of water loss, divided by (ii) the total volume of water produced.

The Water Loss per Connection per day measured in liters per connection per day represents the quotient of (i) the average annual water loss, divided by 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 =  Vproduced (Vinvoiced + Vused)
 Vproduced
WMLI =  Vproduced – (Vmeasured + Vused)
 Vproduced
TLDC =  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;

 
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Vbilled: corresponds to the volume of water billed at a given period;

Vmeasured: corresponds to the volume of water measured at a given period;

Vused: corresponds to the volume of water used for operational, public, private and social needs (supply shantytown areas) at a given period; and

Nconnections: corresponds to the average number of active water connections.

Using this calculation method, as of December 31, 2020, we experienced 299 liter/connection per day of water loss in the São Paulo metropolitan region and 207 liter/connection per day of water loss in the Regional Systems, averaging 263 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 268 liters/connection per day, and the Water Metered Loss Index to 29.7% by 2021.

Real water loss (water physically lost) decreased from 22.2% in December 2008 to 17.4% in December 2020.

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.

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.

 
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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 Pró-Conexão and Água Legal Program. See “—Main Projects of Our Capital Expenditure Program— Clean Stream Program,” and “—Other Policies and Programs—Nossa Guarapiranga, Pró-Conexão and Água Legal Program.”

We believe that there are no material instances where our standards are not being met. However, we cannot be certain that future breaches of these standards will not occur.

Fluoridation

As required by Brazilian law, we 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, 2020, we collected approximately 84% and 87% 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 2020, we collected approximately 85% of all the sewage produced in the municipalities in which we operated in the state of São Paulo. We installed 259 thousand, 237 thousand and 215.3 thousand new sewage connections in 2020, 2019 and 2018, 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, 2020, we were responsible for the operation and maintenance of 59,660 kilometers of sewage lines, of which approximately 31,596 kilometers are located in the São Paulo metropolitan region and 28,064 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:

As of December 31,
 2020 2019 2018
Sewage lines (in kilometers)59,660 55,983 51,788
Sewage connections (in thousands)8,518 8,326 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.

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.

 
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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 82% as of December 31, 2020.

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:

           

in thousands

 

2021

 

2022

 

2023

 

2024

 

2025

 

2021-2025

São Paulo metropolitan region176 177 170 170 170 863
Regional Systems70 70 70 70 70 350
Total246 247 240 240 240 1,213

 

Sewage Treatment and Disposal

In 2020, approximately 64% and 99% of the consumer units of the sewage services used our sewage treatment system in the São Paulo metropolitan region and the Regional Systems, respectively, or 76% of the consumer units of our sewage services in the state of São Paulo, was connected at our treatment facilities and afterwards discharged into receiving water bodies such as rivers and the Atlantic Ocean, in accordance with applicable legislation. Though we have not yet reached full coverage of sewage collection and treatment services in the regions where we operate, we are making efforts to reach this goal.

We currently operate eight ocean outfalls and 564 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.

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, which facilitates and reduces the cost of transportation and final disposal. In addition, after dehydration, the calorie value of the sludge increases, and the conditions for its mixing with other components improve, which can be an opportunity for the advancement of new uses and products. Our technological innovation actions aim to test technologies seeking full scale use of sludge in our operations.

Currently, the sludge generated through our activities goes mainly to landfills authorized to receive it. In some cases, in return, we treat the leachate generated in these landfills.

Current legislation and the population at large demand advances in the search for alternative technologies that minimize the generation of and find beneficial uses for sludge. In light of these demands, we work on several fronts, seeking innovative approaches to the destination and final disposal of sludge. For instance, since 2018 we produce an agricultural organic fertilizer in the municipality of Botucatu, Sabesfértil, which is produced by biodrying sewage sludge. This project was approved by the Ministry of Agriculture and allows for the sale of such fertilizer.

Additionally, using financing from Funding Authority for Studies and Projects (Financiadora de Estudos e Projetos, or FINEP), we are also developing two other projects. The first project is a plasma gasification system which uses specialist technology to transform sludge from sewage treatment plants into a solid vitreous product, weighing 5% of its initial weight, which can be re-used in construction work. The second project consists of a sludge dryer that uses sunlight and automated processes, resulting in a final product that weighs 25% of its initial weight.

 
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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 State Decree No. 54,645/2009, and CONAMA Resolution No. 498/2020, which revoked CONAMA Resolution No. 375/2006, introducing new guidelines for the use of sewage sludge in the soil. Therefore, in addition to agricultural use, it is possible to use sludge for the recovery of degraded soils, creating opportunities for using sludge from sewage treatment plants in the interior of the State of São Paulo as a soil conditioner, due to its proximity to farms and favorable sludge conditions. This change opens a new opportunity for the use of sludge which corresponds to the sewage treatment of approximately 8 million inhabitants.

Our technical staff participate into different thematic groups of the sanitation sector, which contributes to the technical improvement of the regulations which apply to the use and appropriate disposal of the waste.

Principal Markets in Which We Operate

As of December 31, 2020, we operated water and sewage systems in 375 of the 645 municipalities in the state of São Paulo. In addition, we supplied water on a wholesale basis to two municipalities located in the São Paulo metropolitan region with a total population of approximately 0.6 million people.

The following table provides a breakdown of gross revenues from sanitation services by geographic market for the years indicated:

Year ended December 31,
 2020 2019 2018
(in millions of R$)
São Paulo metropolitan region10,722.4 11,849.8 10,295.5
Regional Systems4,435.4 4,284.3 3,958.1
Total15,157.8 16,134.1 14,253.6

 

Competition

For contracts, where the municipality delegates the provision of sanitation services to us, we have a natural monopoly. However, we also compete in the market (see Market competition below), in which we service consumers in specific segments using alternative sources of water.

Natural monopoly

As of December 31, 2020, we provided water and/or sewage services to 375 municipalities in the state of São Paulo under concession agreements and program agreements. As of December 31, 2020, 8 of our concessions had expired. These 8 municipalities accounted for 0.3% of our total revenues (excluding revenues relating to the construction of the concession infrastructure).

On December 31, 2020, there were 270 municipalities operating their own water and/or sewage systems in the state of São Paulo, with a total population of approximately 14.3 million, or approximately 32% of the population of the state.

The competition for municipal concessions arises mainly from the municipalities, as they may commence bidding procedures which we may not win or resume the water and sewage services that were granted to us and start providing these services directly to the local population. In this latter case, the municipal governments would be required to indemnify us for the unamortized portion of our investment. 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.”

The New Legal Framework for Basic Sanitation brought a profound change to the relationship between the municipality as granting authority and us as service provider since it introduced the mandatory use of public bids for the execution of future contracts for the provision of sanitation services, which has the potential to intensify competition between public companies and the private sector. See “—Risk Factors—Risks Relating to Our Business— The New Legal Framework for Basic Sanitation prohibits program contracts for basic sanitation services, resulting in uncertainties for our current and future concessions.”

Market competition

In the state of São Paulo, we face competition from private and municipal water and sewage service providers.

In recent years, we have also experienced an increasing level of competition in the market for the supply of water, including to residential condominiums and non-residential customers who collect their own water from undergrounds wells or use water trucks. Several large industrial customers located in municipalities we serve also use their own wells to meet their water needs. This competition is taxed distinctly, and more than two thirds of the deep wells are illegal and extract water without regular concessions. One of the reasons for the competition in respect of alternative sources of water is generally the need for water with fewer technical specifications than the water made available to the public.

 
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This trend has increased in recent years, especially since the 2014-2015 water crisis, when non-residential customers and residential condominiums sought independent solutions to supply water and to dispose of non-residential, commercial and industrial sludge in the São Paulo metropolitan region. Private companies offer stand-alone water treatment solutions inside the facilities of their customers.

In order to retain these clients, 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. As of December 31, 2020, we had 570 take-or-pay contracts. For more information on Take-or-pay Contracts see “—Tariff Structure—Fixed Demand Agreements (Take-or Pay).”

Competition for new municipalities

By prohibiting the renewal of a program contract, the New Legal Framework for Basic Sanitation imposes mandatory bidding processes for municipalities to hire companies providing basic sanitation services. This opened up a new business environment in which state-owned and private companies can compete. Participating in a bidding process is now the only method of maintaining and/or expanding our market, whether in the State of São Paulo or in other states.

In September 2020, we participated, for the first time, in a bidding process with a private partner, Iguá Saneamento S.A., the majority leader of the consortium, carried out by the state of Alagoas in northeast Brazil, for the concession of water and sewage services in the Maceió metropolitan area. The consortium we participated in was not successful, but it is possible that we will participate in other bids that take place in the future, whether with or without partners.

As of the date of this annual report, we are participating in a public bid for the provision of water and sanitation services in the municipality of Orlândia in the state of São Paulo. In addition to us, there are 18 other competitors. The criterion for this bid is the highest grant (with a minimum grant of R$5 million). The winner of this bid has not been announced as of the date of this annual report.

Billing Procedures

The procedure for billing and payment of our water and sewage services is largely the same for all customer categories. In the current tariff structure, water and sewage bills are based on water usage determined by monthly water meter readings. Larger customers, however, have their meters read every 15 days to monitor consumption and thus avoid water losses resulting from leakages. Sewage billing is included as part of the water bill and is based on the water meter reading.

The readings of the water meters for billing purposes are carried out by our own team and by third parties through portable data collectors, using a mobile application developed by us, with simultaneous printing and delivery of the bill to the customer or, when the customer so chooses, the bill can be forwarded by mail to an address of the customer’s choice.

Water and sewage bills can be paid at certain banks and other locations in the state of São Paulo. These funds are paid over to us after deducting average banking fees ranging from R$0.29 to R$1.45 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 2020, 2019 and 2018, we received payment of 93.0%, 93.7% and 93.8%, respectively, of the amount billed to our retail customers, and 93.0%, 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 2020, 2019 and 2018, we received 100.4%, 99.6% and 99.4%, respectively, of the amount billed to the State entities.

In 2019, the consumption monitoring contract for Internet of Things (“IoT”) networks was implemented in the metropolitan region of São Paulo, in which we monitor the daily consumption of 100 thousand customers representing approximately 2% of the connections and 45% of the Metropolitan region of São Paulo revenue. This format has helped us improve our customer care management. We believe this contract model has become a benchmark in the utilities sector, as the entire management is carried out by monitoring the quantity and quality indicators of the data delivered, an innovative approach in relation to telemetry in the sanitation sector.

With respect to wholesale supply, in 2020, 2019 and 2018, we received payment of 43.2%, 34.7% and 38.5%, 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.

Customer relationship

We constantly seek to improve our services and modernize our relationships with our customers. In 2020, the digital transformation was accelerated by the need for quick responses motivated by the COVID 19 pandemic, which lead us to diversify the pillars of our customer relationships.

We closed our on-site agencies in March 2020, seeking to readjust services by expanding digital and telephone channels by investing in simplifying processes and adjusting customer relationship procedures, giving our customers more autonomy and enabling them to provide self-service. We have three main digital channels: the virtual agency on our website, our Sabesp Mobile application, and Sabesp Fácil, a hotsite developed at the outset of the COVID-19 pandemic, which enables the exchange of documents in digital form, eliminating the need to travel from the client to a face-to-face service agency. These three channels together serve more than 70% of our monthly demands.

 
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During 2020, we implemented partnerships with the Iti and PicPay digital wallets, offering additional options for our customers to pay their water bills.

In respect of telephone services, we implemented several improvements in our processes and procedures, in addition to unifying our telephone service platform, which brought greater flexibility and a larger portfolio of services to customers seeking assistance through this channel.

The implementation of a unified channel (Omnichannel) integrating all services and optimizing processes is still at the design stage, scheduled for completion in 2021, and is aimed at further cost reduction and higher customer satisfaction.

With these main pillars we seek to improve customer satisfaction, which in 2020 was 86%, according to the annual satisfaction survey conducted by the GMR Market Intelligence Institute, and modernize our customer relationships and bring about significant cost savings.

We also continue to provide an ombudsman service to customers. This channel exclusively handles complaints, suggestions, reports, critiques and information requests.

In addition, to facilitate access for customers with disabilities, we offer support in Brazilian Sign Language and our telephone channels have an option for people with hearing and speech disabilities. For people with visual impairments, we issue bills in braille.

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.

The Basic Sanitation Law, Federal Law No. 11,445/2007, as amended by Law No. 14,026/2020, states have been required to establish independent regulators responsible for the regulation of basic sanitation services, including tariff regulation. To exercise this assignment, the State of São Paulo enacted State Supplementary Law No. 1,025/2007, that established ARSESP, which regulates and supervises the services we provide to the State and also to the municipalities that have agreed to its jurisdiction. The guidelines by which we readjust our tariffs are defined pursuant to State Decree No. 41,446/1996, which were ratified by Federal Law No. 11,445/2007 and regulated by resolutions issued by ARSESP.

In regard to municipalities that have not explicitly selected ARSESP as their regulator, the Basic Sanitation Law allows the municipality to create other regulatory agencies of their own.

In 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 the New Legal Framework for Basic Sanitation, 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 demand in order to preserve the financial and economic balance of the concession agreement, as was the case with our tariff revision. This revision calculates the required revenue (or balance revenue), the annual X Factor that allows us to share productivity gains with consumers and the annual IGQ - General Quality Index, which encourages quality improvement. In addition, it is important to recognize all investments made during the “inter-cycle” period by the concessionaire, such as us, and to redefine their efficient operating costs according to the evolution of other service providers and the rate of return (WACC) according to the country’s socioeconomic scenario.

Extraordinary tariff revisions, on the other hand, may occur at any time regardless of the readjustments mentioned above and revisions in case there are material changes in conditions that affect the financial and economic balance of the concession agreement.

Further to revisions, the tariffs are annually adjusted in the years between periodic tariff reviews. Following ARSESP regulations, 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 was effective 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% plus inflation for the period.

The second ordinary tariff revision cycle began in May 2017 and is due to end in April 2021. However, due to delays in the process, the revision was divided into two phases. The first phase was completed on October 10, 2017 and the second phase was completed in May 2018.

 
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As part of the first phase of this second ordinary tariff revision, ARSESP authorized us to apply the tariff repositioning index of 7.8888%, effective as of November 10, 2017. For the second phase, ARSESP issued Resolution No. 794/2018 on May 9, 2018, which authorizes us to implement a 3.5070% repositioning index, effective as of June 9, 2018.

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. The decision with regard to these filings was published on February 28, 2019 and resulted in an index of 0.8408%, which was applied simultaneously with the annual tariff adjustment in May 2019.

2019 – 2020 Regulatory Agenda

On January 31, 2019, ARSESP published the 2019-2020 Regulatory Agenda. The following matters were discussed with respect to this agenda:

(a)      On May 13, 2019, ARSESP published the final results of Public Consultation No. 02/2019, which aimed to obtain public consultations regarding the Regulatory Criteria for the recognition of the tariffs for transfers to municipal funds for environmental sanitation and infrastructure. 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 exceeding 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 will be established by the service holder by an act of law, which will specify the destination of the funds.

(b)      On August 20, 2019 ARSESP published the final results of Public Consultation No. 06/2019, which aimed at discussing the methodology for calculating and application of the General Quality Index (IGQ) in our tariff readjustment and revision processes, with positive or negative tariff effect in our annual adjustments. The four indicators that make up the IGQ proposed by the ARSESP for the 2020 tariff adjustment, and which were accepted by us were: (i) index of feasible sewage connections; (ii) pavement replacement non-compliance index; (iii) customers complaints index related to lack of water and low pressure; and (iv) visible leakage per network extension. The effect of the IGQ on the 2020 tariff readjustment was -0.1188%.

(c)      On December 13, 2019 ARSESP published the final results of 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. 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 November 23, 2019 ARSESP published the final result of Public Consultation 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 suspended the implementation of the Four-year Research and Technological Development Program for Innovation in Sanitation Services scheduled for May 2020. See “—COVID-19-related measures.”

2020-2021 Regulatory Agenda

On April 13, 2020, ARSESP published the 2020-2021 Regulatory Agenda. The following matters were discussed with respect to this agenda:

(a)On July 30, 2020 ARSESP published the final results of Public Consultation No. 05/2020, which aimed to obtain input on the definition of the methodology to be used for the calculation of the maximum tariff and the tariff structure for our Third Ordinary Tariff Revision. On the same date, ARSESP also published the final results of Public Consultation No. 06/2020, which covers the definition of the Weighted Average Cost of Capital (WACC) for our Third Ordinary Tariff Revision.

The approved regulatory model adopted by ARSESP for the industry defines a maximum price (P0), based on the guarantee of the economic and financial balance of the provider, such as us, in its business segment and on efficient costs projected for the tariff cycle, in order to encourage the provider to permanently seek to reduce its costs. Accordingly, an average tariff is established, expressed in reais per cubic meter, which reflects the economic cost of providing water and sewage services in a certain tariff cycle. The methodology is based on a discounted cash flow model, which aims to calculate the average tariff (P0), ensuring that the Net Present Value (NPV) of the tariff cycle is equal to zero and taking into account a rate of return equal to the Weighted Average Cost of Capital (WACC). The also establishes that for the Third Ordinary Tariff Revision the limit of 4% will be applied to transfers to municipal funds, with transfers made to funds previously approved by ARSESP or those provided for in Article 15 of ARESP Resolution No. 870/2019 recognized in tariffs.

The Weighted Average Cost of Capital (WACC) was set at 8.10% for the Third Ordinary Tariff Revision, after ARSESP took into account the contributions provided during Public Consultation No.06/2020.

 
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 (b)In a technical note, ARSESP published the final results of Public Consultation No. 11/2020, which aimed to obtain input on the methodology and calculation of the economic level of water losses to establish the regulatory loss target for our Third Ordinary Tariff Revision. The target for water losses defined by ARSESP was 215.07 liters/connection per day, in two tariff cycles (from 2021 to 2028), starting from 258.2 liters/connection per day in 2020 and 252.8 liters/connection per day in 2021.
 (c)On December 30, 2020, ARSESP published the final results of Public Consultation No. 16/2020, which established the classification and sharing criteria of the Alternative Revenues. Until the Second Ordinary Tariff Revision, all revenues earned by us were passed on to the consumer through social equality adjustments, considering the composition of the revenue required for the calculation of the tariff. The result of the criteria that will be used in the third tariff cycle (2021-2024) was released together with the final technical note of the Third Ordinary Tariff Revision on April 8, 2021. In total, considering the historical share of reused water in the total indirect revenues and the adoption of a percentage of 100% for other activities, the share value of indirect revenues in the Third Ordinary Tariff Revision is 35% (accordingly, this percentage will be returned to users in the form of social equality adjustments, while we will remain with 65% of the revenue).
 (d)On February 4, 2021 ARSESP, published the final results of Public Consultation Notice No. 24/2020, which aimed at obtaining contributions on the General Quality Index to be applied to our tariff readjustment and revision as of the Third Ordinary Tariff Revision.

2021-2022 Regulatory Agenda

On February 19, 2021, ARSESP published the final results of the Public Consultation Notice No. 02/2021, which aimed at obtaining contributions to the proposed Regulatory Agenda for the 2021-2022 period. This agenda considers the matters that will be discussed in the period and aims to promote greater predictability of the actions that will be taken by the agency within the scope of regulated public services.

Third Ordinary Tariff Revision - OTR (May 2021 – April 2025 Cycle)

The final results of the Third Ordinary Tariff Revision were released on April 8, 2021, marking the beginning of a new four-year cycle from 2021 to 2024. For this event, Public Consultation No. 03/2021 – Calculation of the Maximum Average Tariff (P0) and X Factor of the Third Ordinary Tariff Revision was opened.

Simultaneously, a revision of our tariff structure, which has been in force since the 1970s and underwent minor changes in 1997, also took place. In light of the complexity and challenges related to the revision of our tariff structure, ARSESP carried out specific regulatory actions, including further research on the topic and allowing the participation of several actors in the sector as part of study. Based on these studies and discussions with the public, ARSESP defined the regulatory guidelines to be followed by us when presenting our proposal for a new tariff structure that, after review, resulted in the tariff structure proposal, the subject of Public Consultation No. 04/2021.

On April 8, 2021, ARSESP published the results of Public Consultation No. 03/2021 – Calculation of the Maximum Average Tariff (P0) and X Factor of the Third Ordinary Tariff Revision through Resolution Nº 1.150, Final Techical Note No. 0016-21 and Detailed Report No. 0002-2021); and the results of Public Consultation No. 04/2021 – Proposed Revision of Sabesp’s Tariff Structure through Final Techical Note No. 0017-21 and Detailed Report 0003-2021.

The main details of the Third Ordinary Tariff Revision include:

(a)The final regulatory asset base (“RAB”) was set at R$55.9 billion: (i) including the municipality of Santo André in the amount of R$1 billion, which was not included in the preliminary technical note; and (ii) a reversal of R$3.2 billion in net assets that were written off in the first tariff revision in addition to the R$1 billion that had already been recognized in the Second Ordinary Tariff Revision;
(b)ARSESP made three compensatory adjustments for the 2021-2024 tariff cycle: (i) compensatory adjustments related to the previous cycle, which totaled R$1.7 billion to be returned to customers; (ii) compensatory adjustment resulting from the suspension of payment of the accounts of customers classified as Residential Social and Residential Favela, due to the effects of the COVID-19 pandemic, according to ARSESP Resolution No. 979/2020, in addition to the resolutions that extended this term, which totaled R$127.2 million in our favor; and (iii) compensatory adjustment resulting from the postponement of the application of the tariff adequacy plans of certain municipalities (including Guarulhos, Santo André and Mauá), in order to align their tariff readjustment base date to the date of our general adjustment. The alignment of the base date for these municipalities and the postponement of readjustments created a difference in revenue that totaled R$43.2 million in our favor; and
(c)The Final P0 was set at R$4.9534/m³ with the implementation of the compensatory adjustments, which as of October 2020 translated into a P0 of R$5.1213/m3 as of February 2021.

Although a new tariff structure was approved, the tariff for 2021 will still be based on the current tariff structure, while the new structure will be applied from 2022 onwards. The impact of the tariff adjustment for residential and non-residential, residential social and wholesale (water and sewage treatment) customers in 2021 is 7.6%, negative 1.0% and 5.45%, respectively, corrected by the compensatory adjustment due to the difference in the calculation of the IGQ in 2019 for the application of the IGQ of 2020 and the difference between the COFINS/PASEP taxes calculated between the Second and Third Ordinary Tariff Revision. Further, the real tariff readjustments for the residential category for 2022, 2023 and 2024 were set at 1.5%, 3% and 4.6%, respectively, together with the expansion of beneficiaries in the vulnerable residential category and the resources intended for the commercial programs of the 2019-2020.

 
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Tariff Readjustment

In addition to revisions, the tariffs are adjusted annually in the years between periodic tariff reviews. In our agreements, we use the IPCA price index (accumulated for twelve months), minus a productivity factor calculated in the periodic tariff review (X Factor). As of 2020, the adjustment for the General Quality Index (IGQ) can be zero, positive or negative, according to the deviation between the established goal and the actual values.

On May 9, 2018, ARSESP issued Resolution No. 794/2018, which authorizes us to apply a 3.5070% repositioning index to our current tariffs, effective as of June 9, 2018.

On April 10, 2019, ARSESP issued Resolution No. 859/2019 which authorizes us to apply a tariff readjustment of 4.7242% to the current tariffs, which consists of: (i) the IPCA variation during the effective period of 4.5754%; (ii) the efficiency factor (X Factor) of 0.6920%; and (iii) the compensatory adjustment of 0.8408%. This tariff readjustment was effective as of May 11, 2019.

On April 9, 2020, ARSESP issued Resolution No. 980/2020 which authorized us to apply a tariff readjustment of 2.4924%, consisting of: (i) the IPCA variation during the period of 3.3032%; (ii) the efficiency factor (X Factor) of 0.6920%; and (iii) the Quality Factor (Q Factor) of -0.1188%. Due to the state of public calamity resulting from the COVID-19 pandemic, ARSESP postponed this readjustment initially for 90 days. However, due to the on-going effects of the COVID-19 pandemic, ARSESP further postponed. On July 15, 2020, ARSESP issued Resolution No. 1,021 authorizing us to apply a tariff readjustment of 3.4026% to our current tariffs, which consist of: (i) an annual readjustment of 2.4924%, and (ii) a compensatory adjustment of 0.8881%. The compensatory adjustment of 0.8881% refers to the compensation for the postponement of the annual tariff readjustment. This tariff readjustment was effective as of August 15, 2020.

On April 8, 2021, ARSESP released a tariff adjustment for residential and non-residential, residential social and wholesale (water and sewage treatment) customers in 2021of 7.6%, negative 1.0% and 5.45%, respectively, starting on May 10, 2021. See “—Third Ordinary Tariff Revision - OTR (May 2021 – April 2025 Cycle).”

COVID-19-related measures

Among the measures to mitigate the economic effects of the COVID-19 pandemic supported by ARSESP Resolutions No. 979, No. 1,005, No. 1,017 and No. 1,038/2020, we announced an exemption from the payment of water and sewage bills for customers in the “Residential Social” and “Residential Favela” categories, which covered more than 2.5 million people across the State of São Paulo. The measure was initially valid for three months (April, May and June 2020) for bills issued from April 1, but was subsequently extended to September 15, 2020.

The effects of the payment exemption for the “Residential Social” and “Residential Favela” categories were considered in the calculation of the P0 for the Third Ordinary Tariff Revision, totaling R$127.2 million in our favor.

On April 17, 2020, ARSESP published Resolutions No. 985/2020 and No. 991/2020 on the topic of reduced revenues in the short term resulting from the economic effects of 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 to ARSESP. During this period, the payment we transfer to ARSESP will decrease from 0.50% to 0.25% of our annual revenues. The postponed transfers will be monetarily adjusted and paid in 24 equal monthly installments. The first installment was paid in January 2021.

Resolution No. 991/2020 postpones 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 form a part of the calculation of the Authorized Amount to be invested in 2021 and 2022.

On February 3, 2021, in accordance with our credit policy and procedures, our Board of Executive Officers approved a series of measures aiming to minimize our customers’ defaults, facilitating them to maintain their businesses during the COVID-19 pandemic and to be able to pay-off their debts in the future, including: (i) the suspension of supply cuts, renegotiation of debts for commercial and service customers residing in municipalities that are in the orange and red phases of the São Paulo state government’s COVID-19 Plan; (ii) the measures will be valid from February 3, 2021 to March 31, 2021; (iii) the renegotiation of the existing debts, including the agreements signed during the pandemic period, without the application of fines and interest, limited only to monetary adjustments; (iv) payment in 12 monthly installments, from the date of the renegotiation of outstanding debt; (v) not including debtors in the credit protection list until March 31, 2021; (vi) debtors which may have been included in the credit protection list during the COVID-19 pandemic will be withdrawn immediately after the debt is renegotiated with us. At a meeting held on March 16, 2021, our Board of Executive Officers extended these measures until April 30, 2021.

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.

 
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There are tariff tables with the values due for each consumption pricing ranges for the abovementioned categories: up to 10 m³, from 11 to 20 m³, from 21 to 50 m³ and above 50 m³. The “Residential Social” and “Residential Favela” categories have five consumption pricing ranges: up to 10 m³, from 11 to 20 m³, from 21 to 30 m³, 31 to 50 m³ and above 50 m³. The amount charged is always progressive.

Large consumers and municipalities served by wholesale have separate tariff tables.

On February 9, 2021, ARSESP opened Public Consultation Notice No. 4/2021 and Public Hearing Notice No. 2/2021, regarding the proposed new tariff structure. On April 8, 2021, ARSESP published the final results of Public Consultation No. 04/2021 – Proposed Revision of Sabesp’s Tariff Structure through Final Techical Note 0017-21 and Detailed Report 0003-2021.

New Tariff Structure

Our current Tariff Structure applies different pricing ranges for the following categories of users: (i) residential customers (Residential Normal, Residential Social and Residential Favela) and non-residential customers (including commercial, industrial and public customers, as described in “— Tariff Structure”); (ii) the metropolitan regions of São Paulo and the regional system; (iii) water and sewage, with no difference in prices for sewage collection and treatment; and (iv) the charge of a minimum consumption of 10 m³/month and differences in prices per range, with progressive increases in the price as consumption increases.

The new tariff structure was defined by ARSESP considering four groups: (i) minimum consumption versus fixed tariff with a portion being deterimned by reference to volume of water used; (ii) tariffs segregated by type of service (such as water, sewage collection and sewage treatment); (iii) social tariff; and (iv) non-residential tariffs.

ARSESP adopted the application of single tariffs for all regions where we operate; i.e., the tariff tables will be merged. According to ARSESP, this measure partially reduces subsidies between regions, but does not completely eliminate them, since there are cost differences between regions.

It should be noted that there are various tariff tables in the current Tariff Structure. The tables applied in the interior region present a sewage tariff equivalent of 80% of the water tariff. As a result, in the metropolitan area the tariffs for water and sewage are divided 50% each, whereas in the interior the division is 56% water and 44% sewage (as a result of the 80% ratio).

ARSESP established the following customer groups:

 (i) Residential: referring to family homes, where the use of water is mainly intended for personal hygiene, food and cleaning. The residential category is further broken down into Residential Individual, Residential Collective, Social Residential and Vulnerable Residential; and
 (ii)Non-Residential: referring to other customer units, where the use of water is related to the type of activity, service or production process. The non-residential category is further broken down into: (a) Commercial: customer units whose main activity is the sale of products and/or services, which includes Commercial Individual, Commercial Collective, and Commercial Assistance; (b) Industrials: establishments that carry out transformation/industrialization activities; and (c) Public: buildings intended for government activities or government facilities. In addition, the tariff structure will contain the segments of wholesale sector and tanker trucks, including water trucks and tank cleaners.

ARSESP established the following attributes to the new tariff structure: (i) unified for our entire area of operation, without segregation by region; (ii) differentiated tariffs for the following services: water, sewage collection and sewage treatment; (iii) binomial tariff, with a fixed component which must partially or fully reflect the fixed costs of providing the service, and a variable component related to the volume of water used which must reflect variable costs; (iv) there will be no fixed component for the sewage treatment service tariff, and the fixed costs of the service will be distributed across the fixed component of the other services (i.e., water and sewage collection); (v) tariffs will be divided in blocks, including progressive tariffs between consumption ranges; (vi) the fixed component will be billed per connection (charged at R$/month), while the variable component will be billed, progressively, by volume (charged at R$/m³); (vii) the volume of sewage collected to be billed will be equal to the measured volume of water, if the connection includes sewage collection service; and (viii) the treated sewage volume to be billed will be equal to the volume of sewage collected, if the connection includes sewage treatment.

Furthermore, this tariff structure update introduces a high level of uncertainty about the market and revenues that we will obtain in the new tariff cycle, due to the unpredictability of changes in customers’ tariff classification, which may lead us to realize significantly more or less revenue than projected for the cycle. Considering the high level of uncertainty, ARSESP established a variation limit for the annual revenue, so that:

·if our effective revenue exceeds 102.5% of the required recalculated revenue, the entire additional amount will be reverted to social equality adjustments in the annual tariff adjustment process; and
·if our effective revenue is less than 97.5% of the required recalculated revenue, the entire outstanding amount will be offset in the annual tariff adjustment process.

For 2021, we will maintain the current tariff structure. See “Item 3.D. Risk Factor—Risks Relating to Our Business—Our current tariff structure is outdated and does not reflect the current socioeconomic changes the State of São Paulo has undergone over the past decades. The approved update to the structure and its implementation may lead to uncertainties in the market as well as unpredictability about our future revenues.”

 
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Fixed Demand Agreements (Take-or-Pay)

On November 2, 2018, ARSESP published Resolution No. 818/2018 which provides the criteria for the execution and inspection of water and sewage service contracts for large non-residential users, as well as the execution of new contracts and the revision of the existing contracts to the new rules. This Resolution consolidates all the regulatory guidelines for the execution of contracts with large users, and establishes the minimum and maximum limits of the tariffs to be applied and a system for the prior approval by the regulator of the standard contract template to be used and also requires the disclosure of the contracts in force on our website and the results of the inspections of these contracts on the ARSESP website.

As of December 31, 2020, we had 570 contracts in force.

On May 2020, we established a loyalty policy for large clients in the non-residential segment, which were encouraged to enter into a contract with us in order to apply a differentiated rate according to the contracted fixed monthly demand. The purpose of this policy is to retain the base of this customer segment.

In October 2007, the minimum volume for entering into these agreements was reduced from 5,000 m3 per month to 3,000 thousand m3per month. We believe this tariff schedule will help prevent certain 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 use more than 3,000 thousand m3per month, with a maximum tariff equal to the tariffs applicable to non-residential customers that use more than 50 m3per 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.

Water and sewage services tariffs

In the current tariff structure, we establish separate tariff schedules for our services in each of the São Paulo metropolitan regions and each of the interior region of São Paulo State and coastal regions which comprise our Regional Systems, depending upon whether a customer is located in the São Paulo metropolitan region or the Regional Systems. Each tariff schedule incorporates regional cross-subsidies, taking into account the customers’ type and volume of consumption. Tariffs paid by customers with high monthly water consumption rates exceed our costs of providing water service. We use the excess tariff billed to high-volume customers to compensate for the lower tariffs paid by low-volume customers. Similarly, tariffs for non-residential customers are established at levels that subsidize residential customers. In addition, the tariffs for the São Paulo metropolitan region generally are higher than tariffs in the interior region of São Paulo State and coastal regions. In 2020, 2019 and 2018, the average tariff calculated for the Regional Systems was approximately 21% below the average tariff of the São Paulo metropolitan region. Considering the current tariff structure we expect approximately 21% for 2021.

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.

For more information on the differences between our current Tariff Structure and the New Tariff Structure, see “—New Tariff Structure.”

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

Starting May 10,

 

As from August 15,

 

As of May 11,

 

As of June 9,

 
 

2021

 

2020

 

2019

 

2018

 
Residential        
Standard Residential:        
0-10(1)2.90 2.71 2.62 2.50 
11-204.54 4.24 4.10 3.91 
21-5011.33 10.58 10.23 9.77 
Above 5012.48 11.65 11.27 10.76 
Social:        
0-10(1)0.91 0.92 0.89 0.85 
11-201.55 1.58 1.53 1.46 
21-305.53 5.61 5.43 5.19 
31-507.88 8.00 7.74 7.39 
Above 508.71 8.84 8.55 8.17 
Shantytown (favela): vulnerable social starting in 2021        
0-10(1)0.69 0.70 0.68 0.65 
11-200.78 0.80 0.77 0.73 
21-302.61 2.65 2.56 2.44 
31-507.88 8.00 7.74 7.39 
Above 508.71 8.84 8.55 8.17 
Non-Residential        
Commercial/Industrial/Governmental:        
0-10(1)5.82 5.44 5.26 50.20 
11-2011.33 10.58 10.23 9.77 
 
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21-5021.72 20.27 19.60 18.71 
Above 5022.62 21.11 20.42 19.50 
Social Welfare Entities:        
0-10(1)2.91 2.72 2.63 2.51 
11-205.65 5.28 5.11 4.88 
21-5010.89 10.17 9.84 9.40 
Above 5011.32 10.57 10.22 9.76 
0-10(1)4.36 4.07 3.94 3.76 
11-208.48 7.92 7.66 7.32 
21-5016.33 15.24 14.74 14.08 
Above 5016.97 15.84 15.32 14.63 

 

(1) The minimum volume charged is for ten cubic meters per month.

 

See “—Tariff Readjustment and Revisions—Tariff Readjustment.”

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;
·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.

 
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Pursuant to Article 175 of the Brazilian Constitution, the rendering of public services, such as water and sewage services, is the responsibility of the applicable public authority. However, any such public authority has the right to render these services directly or through a concession granted to a third party after a bidding process.

Additionally, Article 241 of the Brazilian Constitution establishes the legal regime for managing the rendering of public services among different federal, state and municipal government entities, including the total or partial transfer among these entities of fees, services, personnel and essential goods needed to render such public services. For example, these 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 dispensation of the bidding process for companies like ours. This dispensation was irrefutable until the enactment of the New Legal Framework for Basic Sanitation.

However, the New Legal Framework for Basic Sanitation, amending Law No. 11,445/2007, established that the provision of sanitation services may be carried out by joint management, under a public consortium or cooperation agreement entered exclusively by municipalities. The New Legal Framework for Basic Sanitation also established restrictions for the adjustment of program agreements with public companies and mixed-capital companies. See “Item 3.D. Risk Factors–Risks Relating to Our Business–The New Legal Framework for Basic Sanitation prohibits program contracts for basic sanitation services, resulting in uncertainties for our current and future concessions.”

PLANASA was the first attempt to outline long-term universalization targets for water and sewage services, but it was discontinued in 1986.

The Basic Sanitation Law and the New Legal Framework for Basic Sanitation

Until 2007, the sanitation sector was predominantly self-regulated by the service providers and tariffs were determined by direct negotiation between state and municipal governments and companies.

The Basic Sanitation Law 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.

Since (i) the issuance of Provisional Measure No. 844/2018 in July 2018 (which expired in November 2018 without being converted into law) and the issuance of Provisional Measure No. 868/2018, on December 28, 2018 (which expired in June 2019 without being converted into law), the Executive and Legislative powers made efforts to amend the Basic Sanitation Law No. 11,445/2007 and Law No. 9,984/2000. 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.

On July 16, 2020 the New Legal Framework for Basic Sanitation was enacted, resulting from the provisional measures mentioned above and from Bill No. 4,162/2019, which aimed to make water and sewage services universal by 2033. The new law delegated to ANA the authority to establish national reference rules on sanitation services and excludes the possibility of executing new program contracts, among other relevant changes to the sector. As a result of the new legislation, Laws No. 11,445/2007, No. 9,984/2000, No. 12,305/2010, No. 10,768/2003, No. 13,089/2015, No. 11,107/2005 and No. 13,529/2017 were amended. As the President vetoed 18 articles of the New Legal Framework for Basic Sanitation, all of which were maintained by the Chamber of Deputies in a session held on March 17, 2021.

In summary, we highlight the following points from the new framework: (a) the authority to edit reference standards for the regulation of public basic sanitation services was attributed to ANA, reducing the scope of autonomy of the regional regulatory agencies; (b) the creation of the Interministerial Committee on Basic Sanitation (regulated by Decree No. 10,430/2020), with the authority to determine the allocation of federal resources for sanitation; and (c) the definition of the power of concession to carry out public basic sanitation services: (i) the municipalities and the Federal District, in the case of local services; (ii) the State, together with the municipalities that effectively share operational facilities that are part of metropolitan regions, conurbations and micro-regions, instituted by complementary state law, in the case of shared services between the State and municipalities. Despite formally granting authority to municipalities, it is possible that these Municipalities will not have easy access to financing when providing these services without combined efforts with other municipalities, thus leaving little or no margin to exercise their authority.

Additionally, the New Legal Framework for Basic Sanitation provides for the creation of an intermunicipal public entity aimed at the joint management of sanitation services, pursuant to article 241 of the Federal Constitution.

The New Legal Framework for Basic Sanitation establishes regionalized provision through the provision of one or more components of integrated basic public sanitation services in a given region whose territory covers more than one municipality, structured as follows: (i) the regional basic sanitation units, which consist of entities established by State Law, consist of a group of municipalities, which are not necessarily adjacent to each other, aimed at adequately meeting the hygiene and public health requirements, or to provide economic and technical feasibility for the least economically favored municipalities; and (ii) reference blocks, which are groups of municipalities, which are not necessarily adjacent to each other, established by the federal government and formally created through the municipalities’ voluntary joint management. The reference blocks will be created by the federal governments if the States have not created the regional basic sanitation infrastructure within one year of the enactment of the new law. Regionalized provision aims at gaining scale in the provision of services and conditions the access to federal resources to the groups of municipalities. On April 21, 2021, State Bill No. 251/2021 was published, whereby four URAEs are proposed to provide drinking water supply and sewage services. Pursuant to the bill, the municipalities have 180 days to adhere to the respective URAE by means of a formal declaration to signed by the mayor. As of the date of this annual report, it is not yet possible to confirm whether this bill will be approved or whether it will be approved as originally drafted. In addition, we cannot predict if the municipalities where we currently operate will adhere to the units that may be created.

 
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On December 24, 2020, Federal Decree No. 10,588/2020 was published, enabling technical and financial support towards the adaptation of public basic sanitation services to the provisions of Law No. 14,026/2020, as well as for the allocation of federal public resources and financing with federal resources or resources managed or operated by federal entities.

According to this decree, the distribution of resources and the financing of projects with federal resources will be conditioned to, among others:

(i)       performance of the provider in terms of technical, economic and financial management, which will have to be proven by a declaration from the regulatory agency;

(ii)        efficiency and effectiveness in the provision of public basic sanitation services, proven through a declaration by the regulatory agency; and

(iii)        proper operation and maintenance of projects previously financed with federal resources.

Also according to the decree, the activities that will be supported by the federal government are, among others:

(a)        the process of transition of the holder of the public basic sanitation services to a regionalized mechanism;

(b)        structuring the form service provision and governance in each regionalized mechanism, in order to establish the responsibilities of each federative entity and the best form of management;

(c)        the preparation or updating of municipal or regional basic sanitation plans; and

(d)        the definition of the regulatory and inspection entity for public basic sanitation services, including delegation as necessary.

The Decree does not apply to concessions and public-private partnerships that (i) have been procured or submitted to public consultation prior to the date of its publication; and (ii) are subject to studies already contracted by federal bodies prior to the date of publication of this decree.

The New Legal Framework for Basic Sanitation assigns to ANA the responsibility for the publication of technical norms for the regulation of public basic sanitation services. The agency carried out an analysis of Law 14,026/2020 to identify the rules that would come under its responsibility. Following this analysis, ANA published on September 8, 2020 a public consultation notice, which aimed at debating the proposed regulatory agenda for technical norms for basic sanitation. In addition, on March 8, 2021 ANA published an update of the Appendix of Resolution No. 64/2021, which approves Thematic Axis 5 - Reference Standards for Sanitation, which is part of ANA’s Regulatory Agenda for the 2020-2021 period.

ANA is also the authority responsible for introducing reference standards on the methodology for calculating indemnities due to investments made and not yet amortized or depreciated. Currently, there is considerable legal uncertainty regarding the indemnity for non-amortized assets, and we expect that the reference standards will mitigate this situation.

National Plan for Basic Sanitation (PLANSAB)

The National Plan for Basic Sanitation (PLANSAB) is an instrument of the public sanitation project established by the Basic Sanitation Law, with an expected duration of 20 years. The plan contains a diagnosis of Brazil’s basic sanitation infrastructure divided into four segments: (i) coverage deficits, (ii) a government program, (iii) investments made and (iv) political and institutional aspects. The program also provides estimates for investments to achieve coverage targets.

Short, medium and long-term objectives were prepared for 2018, 2023 and 2033, respectively, based on the historical evolution and current water and sewage infrastructure.

The New Legal Framework for Basic Sanitation provides that PLANSAB will contain proposals for programs, projects and actions necessary to achieve the objectives and goals of the federal basic sanitation policy, with identification of the sources of financing and expansion of public and private investments in the sector. Additionally, it establishes that PLANSAB should include (i) a specific program for basic sanitation actions in rural areas; (ii) specific water security actions; and (iii) basic sanitation actions in underdeveloped urban areas occupied by low-income populations in irregular areas but which are already long-established considering the nature and length of the occupation are not at risk. Furthermore, it created the Interministerial Committee on Basic Sanitation with the authority to coordinate, integrate, articulate and evaluate the management of the National Basic Sanitation Plan at the federal level. See “Item 3.D. Risk Factor—Risks Relating to Our Business— Current regulatory uncertainty, especially with regard to the New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.”

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.

 
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The Federal Concessions Law No. 8,987/1995 and the State Concessions Law No. 7,835/1992 require that the granting of a concession by the government be preceded by a public bidding process. However, the Federal Public Bidding Law No. 8,666/1993, which establishes the rules for the public bidding process, provides that a public bidding process can be waived under certain circumstances, including in the case of services to be provided by a public entity created for such specific purpose on a date prior to the effectiveness of this law, provided that the contracted price is compatible with what is practiced in the market. This provision was maintaned by Law No. 14,133/2021. 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.

However, the New Legal Framework for Basic Sanitation prohibited the execution of program contracts, agreements, partnership and other unstable instruments for the provision of public basic sanitation services by entities that are not part of the granting authority’s structure. See “Item 3.D. Risk Factors—Risks Relating to Our Business—The New Legal Framework for Basic Sanitation prohibits program contracts for basic sanitation services, resulting in uncertainties for our current and future concessions.”

Our Concession Agreements

From 1998 to 2005, our contracts with municipalities have been regulated by the Federal Concessions Law No. 8,987/1995. Generally, these contracts have a 30-year term, and the total value of the concession is set by the discounted cash flow method. Under this method, when the expected contractual cash flow is reached, the total value of the concession and assets is amortized to zero on our books and we receive no payment for the assets. If the concession is terminated prior to the end of the 30-year term, thereby interrupting the normal contractual cash flow, we are paid an amount equal to the present value of the expected cash flow over the years remaining in the concession, adjusted for inflation.

However, our concessions can be revoked unilaterally at any time if certain standards of quality and safety are not met, in the event of default of the terms of the concession agreement, or due to changes in public interest since the concession was granted, or due to non-conformity with the New Legal Framework for Basic Sanitation.

A municipality that chooses to assume the direct control of its water and sewage services must terminate the current relationship by duly compensating the service provider and the investments unamortized. Subsequently, the municipality will be in charge of rendering services or of conducting a public bidding process to grant the concession to potential concessionaires. 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

Federal Law No. 11,107/2005, or the Federal Public Consortia and Cooperation Agreement Law, which regulates Article 241 of the Brazilian Constitution introduced significant changes in the relationship among municipalities, states and companies providing public sanitation services, prohibiting the latter from exercising the activities of planning, oversight and regulation, including tariff regulation, of the services. The law also created the program agreement, a contract to be followed when Brazilian states and municipalities enter into agreements for the provision of public services with mixed capital companies. The program agreement provides the guidelines for the joint management of public services by Brazilian states and municipalities with mixed capital companies, removing the need for bidding processes.

However, as previously mentioned, the New Legal Framework for Basic Sanitation prohibits the formalization of program contracts, agreements, partnership agreements and other unstable instruments for the provision of public basic sanitation services by companies which are not subsidiaries of the entity which administers the concessions.

The Constitution of the State of São Paulo provides that the State shall assure the correct operation, necessary expansion and efficient administration of water and sewage services in the state by a company under its control. On January 13, 2006, the Governor of the State of São Paulo enacted State Decree No. 50,470/2006, amended by State Decrees No. 52,020/2007, dated July 30, 2007, and No. 53,192/2008, dated July 1, 2008, which regulate the provision of water and sewage services in the State. Pursuant to these decrees, it was previously possible to enter into agreements with municipalities in connection with the provision of water and sewage services by means of a “program agreement without a public bidding process.” Following the entry into force of the Public Consortia and Cooperation Agreements Law, we adopted the administration of public services through cooperation agreements and program agreement which can be used simultaneously.

As of the date of this annual report, the decrees mentioned above have not been amended, and certain provisions, such as those related to the formalization of program contracts, do not conform with the New Legal Framework for Basic Sanitation.

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 No. 1,290/2016), and the urban clusters of Jundiaí (LCE No. 1,146/2011), Piracicaba (LCE No. 1,178/2012) and Franca (LCE No. 1,323/2018).

Pursuant to the Brazilian Constitution, in metropolitan regions, conurbations and microregions, the authority to develop public water and sewage systems is shared by the states and municipalities. However, for municipalities which are not a part of the types of regions cited above (metropolitan regions, conurbations and microregions), the primary responsibility for providing water and sewage services to residents rests with the municipality.

We provide basic sanitation services for municipalities, conurbations and metropolitan regions. In these municipalities, operations are regionalized and contracts are structured considering the financial and economic conditions of the entire region. The regulation including taxes, control and oversight are the responsibilities of ARSESP (State Supplementary Law 1,025/2007 – Articles No. 6 and No. 10).

In January 2015, the federal government issued the Metropolitan Bylaws (Law No. 13,089/2015), which established general guidelines for the planning, management and execution of public services of common interest in metropolitan regions and in conurbations as defined by the states, as well as general rules on integrated urban development plans and other instruments for interfederal governance instruments.

With the enactment of the New Legal Framework for Basic Sanitation, regionalized service provision is clearly encouraged, especially by requiring the creation of regional basic sanitation units or reference blocks that aim to group municipalities and encourage the provision of basic sanitation services in more isolated and low-profit municipalities. Additionally, despite formally granting authority to municipalities, these municipalities will not have access to financing with federal resources if they are not part of a regionalized group, thus leaving little or no margin to exercise their authority.

Due to this recent legislative change and the uncertainties that surround the prohibition of program contracts, along with other possible forms of joint interests, as is the case of associated management through a cooperation agreement, or even possible corporate arrangements, it is not yet possible to confirm the impact of the New Legal Framework for Basic Sanitation.

On April 21, 2021, State Bill No. 251/2021 was published, whereby four URAEs are proposed to provide drinking water supply and sewage services. As of the date of this annual report, it is not yet possible to confirm whether this bill will be approved or whether it will be approved as originally drafted. In addition, we cannot predict if the municipalities where we currently operate will adhere to the units that may be created.

Establishment of ARSESP

On June 8, 2006, the State of São Paulo enacted Decree No. 50,868/2006, creating the Commission for the Regulation of Sanitation Service of the State of São Paulo (Comissão de Regulação do Serviço de Saneamento do Estado de São Paulo), or “CORSANPA,” to regulate basic sanitation services. CORSANPA was directly subordinated to the State Secretariat for Infrastructure and Environment. The main duty of CORSANPA was conducting studies for the creation of a regulatory agency for the basic sanitation industry and the presentation of legal and regulatory measures.

The completion of such duties resulted in the publication of State Supplementary Law No. 1,025/2007 of December 7, 2007, which created the São Paulo State Sanitation and Energy Regulatory Agency (Agência Reguladora de Saneamento e Energia do Estado de São Paulo), or “ARSESP,” and partially revoked Supplementary Law No. 7,750/1992. Furthermore, Supplementary Law No. 1,025/2007 maintained CONESAN, as an advisory council to define and implement the state basic sanitation policy, and the State Sanitation Fund (Fundo Estadual de Saneamento) or “FESAN.” FESAN is connected to the State Secretariat for Infrastructure and Environment and collects and manages resources that support state-approved programs, as well as the development of technology, management and human resources and a sanitation information system, in addition to other support programs.

On August 5, 2009, the State of São Paulo enacted Decree No. 54,644/2009, which revoked Decree No. 50,868/2006 and regulated the composition, organization and operation of the State Sanitation Council (Conselho Estadual de Saneamento), or “CONESAN” created by Supplementary Law No. 7,750/1992.

In connection with the scope of our services, Supplementary Law No. 1,025/2007 expanded the range of services that we can render, with the inclusion of urban rainwater drainage and management, urban cleaning and solid waste management, as well as the operation of power generation, storage, conservation and sales activities, for our own or third-party use.

In addition, the rules simplified the process for the expansion of our business in Brazil and abroad, authorizing us to:

·participate in the controlling block or the capital of other companies;
·create subsidiaries, which may become majority or minority shareholders in other companies; and
·establish partnerships with national or foreign companies, including other state or municipal basic sanitation companies, in order to expand our activities, share technology and expand investments related to basic sanitation services.

ARSESP regulates the basic sanitation services that belong to the State, relating to the federal and municipal jurisdictions and prerogatives, and is responsible for:

 
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·the compliance with and enforcement of state and federal basic sanitation legislation;
·the publication of the organizational platform for the services, indicating the types of services provided by the State, as well as the equipment and facilities that compose the system;
·the acceptance, where applicable, of the legal attributions of the jurisdictional authority;
·the establishment, in accordance with the tariff guidelines defined by Decree No. 41,446/96, of tariffs and other methods that provide compensation for our services, adjustment and review of such tariffs and methods to ensure the financial economic balance of services and low cost tariffs through mechanisms that increase service efficiency and lead to the distribution of productivity gains to society; and
·the approval, oversight and regulation (including tariff issues) of the sewage treatment and wholesale water supply agreements entered into between the state supplier and other suppliers, pursuant to Article 12 of the Basic Sanitation Law.

With respect to municipal basic sanitation, ARSESP oversees and regulates services (including tariff issues) that have been delegated by municipalities to the State as a result of cooperation agreements that authorize program agreements between the municipalities and us for as long as it is convenient to the municipality’s public interest. 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.

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 “Item 3.D Risk Factors— Current regulatory uncertainty, especially with regard to the New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.”

 
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Our Current Concession Agreements

The current concessions are based on a standard form of agreement between us and the municipality. Each agreement received the prior approval of the legislative council of each municipality. In the municipalities included in metropolitan regions, conurbations and microregions, the State of São Paulo is also included as a party. The assets comprising the existing municipal water and sewage systems are transferred from the municipality to us in order for us to provide the contracted services. Until 1998, we acquired municipal concessions and the existing water and sewage assets in exchange for our common shares issued at book value. Since 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. In July 2020, the discount rate was updated to 8.10% as a result of the Third 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
·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 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 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, 2020, we provided water and sewage services to 375 municipalities. The majority of these concessions have 30-year terms. Between January 1, 2007 and December 31, 2020, we entered into agreements with 342 municipalities (including our services agreement with the city of São Paulo and Guarulhos) in accordance with the Basic Sanitation Law, of which 17 were entered into in 2020. As of December 31, 2020, these 342 municipalities accounted for 95.1% 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, 2020, 8 of our agreements or concessions had expired but we continued to provide water and sewage services to these municipalities. From January 1, 2021 through 2030, 25 concession agreements will expire, accounting for 3.9% of our revenues (excluding revenues relating to the construction of concession infrastructure) the year ended December 31, 2020 and 3.4% of our intangible assets and contract assets as of the same date, will expire.

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 No. 1,290/2016), and the urban clusters of Jundiaí (LCE No. 1,146/2011), Piracicaba (LCE No. 1,178/2012) and Franca (LCE No. 1,323/2018).

 
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On June 18, 2009, Municipal Law No. 14,934/2009 repealed Municipal Law 13,670/2003, which had assigned the responsibility for the city of São Paulo’s planning, regulating and supervising the provision of water supply and sewage collection services exclusively to the city of São Paulo. On June 23, 2010, the State and the city of São Paulo entered into a formal agreement with the purpose of sharing the planning of the provision of water supply and sewage collection services; delegating oversight and regulation, including tariff regulation, to ARSESP; and authorizing the maintenance of water supply and sewage collection services in the city of São Paulo for a 30-year term (renewable for the same period).

In January 2015, the federal government issued the Metropolitan Bylaws (Law No. 13,089/2015), which established general guidelines for the planning, management and execution of public services of common interest in metropolitan areas and in conurbations as defined by the States, as well as general rules on integrated urban development plans and other interfederal governance instruments.

The New Legal Framework for Basic Sanitation outlined the entities responsible for the provision of basic sanitation services. However, there are still several uncertainties regarding regionalized provisions, including the creation of new forms, such as regional basic sanitation units and reference blocks. Accordingly, as of the date of this annual report it is not possible to describe how these new forms will be implemented.

On April 21, 2021, State Bill No. 251/2021 was published, whereby four URAEs are proposed to provide drinking water supply and sewage services. As of the date of this annual report, it is not yet possible to confirm whether this bill will be approved or whether it will be approved as originally drafted. In addition, we cannot predict if the municipalities where we currently operate will adhere to the units that may be created.

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 70.7% of our operating revenue from services in 2020.

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 the New Legal Framework for Basic Sanitation, 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.

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 subcategories 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.

 
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On February 9, 2021, ARSESP opened Public Consultation Notice No. 4/2021 and Public Hearing Notice No. 2/2021, regarding the proposed new tariff structure. On April 8, 2021, ARSESP published the final results of Public Consultation No. 04/2021 – Proposed Revision of Sabesp’s Tariff Structure through Final Techical Note 0017-21 and Detailed Report 0003-2021. For more information on the differences as a result of the new tariff structure, see “Item 4.B. Business Overview—Description of Our Activities—New Tariff Structure.”

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.

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 New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.”

The 2014-2015 Water Crisis

Prior to 2014, we planned our supply of water to the São Paulo metropolitan region based on the water supply during the driest period on record, which was from 1953 to 1954. However, water inflow to the Cantareira reservoirs throughout 2014 and most of 2015 was less than half the inflow recorded in 1953, the previous most critical year. Consequently, the volume of water stored in the reservoirs in 2014 and 2015 declined significantly until September 2015, when the reservoirs once again held more water than 12 months previously for the first time since the beginning of the water crisis. Once rainfall returned the level of water in the reservoirs that provide water to the population of the São Paulo metropolitan region to normal levels, the measures taken during the water crisis to continue services to consumers were gradually discontinued starting in early 2016. As of December 31, 2020, the reservoirs in the São Paulo metropolitan region contained 913.1 million m3 of water storage for treatment, compared to 1.1 billion m3 available for treatment as of December 31, 2019 not including the technical reserve of 287.5 million m³. The average monthly water production in 2020 for the São Paulo metropolitan region was 63.4 cubic meters per second, or m³/s, compared to 62.9 m³/s in 2019 and 60.9 m³/s in 2018.

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 24.6 m³/s in 2020 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.

The following table shows the volume of water stored in the systems that serve the São Paulo metropolitan region as of December 2017, March 2018, December 2018, March 2019, December 2019, March 2020, December 2020 and March 2021, the end of the rainy season:

 

March

2021

 

December

2020

 

March

2020

 

December

2019

 

March

2019

 

December

2018

 

March

2018

 

December

2017

 

Total Storage

Capacity

Cantareira518.8 355.1 632.2 396.4 542.4 387.8 532.3 405.2 982.0 (1)(2)
Guarulhos0.6 - - - - - - - 1.0
Guarapiranga122.6 97.1 141.4 110.5 155.8 103.3 141.4 101.6 171.2
Rio Grande98.1 89.4 98.8 93.0 113.1 92.4 97.2 92.2 112.2
Rio Claro7.0 6.0 13.4 13.4 14.0 10.9 13.9 10.1 13.7
Alto Tietê341.2 301.8 497.9 430.3 511.9 282.6 362.8 294.8 560.3
Cotia13.2 10.5 16.9 12.2 16.8 7.1 15.2 12.9 16.5
São Lourenço57.4 54.1 87.8 52.3 87.2 59.1 - - 88.8
(1)The Cantareira system’s total storage capacity is 982.0 million m³ available above the water intake level, plus 287.5 million m³ below the water intake level (known as the “technical reserve”).
(2)Amounts included since the May 2017 water right renewal do not include the water from the Cantareira System’s technical reserve, which is water stored below the water intake level.
 
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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;
·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 6.0 m³/s with the completion of the São Lourenço Project. In addition, an additional 13 m³/s was made available to our reservoirs through interconnections to other reservoirs in the state of São Paulo, which will be available to us if reservoirs levels once again become low. Completion of these projects results in improved water security for the Integrated Water Supply System (Sistema Integrado de Abastecimento de Água), 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-Mirim reservoir, which will provide more volume to the Alto Tietê System. The project began construction in 2020. For more information, see “Item 4.A. History and Development of the Company— Main Projects of Our Capital Expenditures Program.”

Additionally, we continue to take measures to maintain the water supply to the metropolitan region of São Paulo in the adequate quantity and quality for the population. These measures are implemented to keep the system in operation, with renovation of its structures and constructions, in addition to adjustments for operational flexibility by increasing the transfer of treated water between the producing systems of the Integrated Metropolitan System. We have carried out specific studies on the likelihood of new water scarcity events similar to the 2014-2015 water crisis. These studies aim to promote better management of water resources in order to offer greater guarantee of supply, reconciling acceptable risks with the capacity to invest in any necessary expansions.

 
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Measures to Combat the COVID-19 Pandemic

To counter the COVID-19 pandemic, we implemented measures to maintain our commitment to provide more hygienic and healthy conditions for the population served, prioritizing socially vulnerable individuals.

In partnership with other companies, entities, and public agencies, we implemented measures to limit our employees’ exposure to possible infection, anticipate essential purchases of protective equipment and seeking alternatives to avoid possible service interruptions.

We also distributed food baskets, hygiene kits and water tanks for the most vulnerable population, and installed public washbasins, sanitized the surroundings of certain public hospitals and health centers, suspended supply cuts and exempted tariffs for the “Residential Social” and “Residential Favela” customer categories.

We closed all of our on-site agencies and concentrated service to our clients through our digital channels, such as the virtual agency and the Sabesp Mobile app, as well as telephone and chat channels. In March 2020, once the COVID-19 pandemic was declared, approximately 5,900 employees from administrative staff and employees aged 60 years or above or employees with preexisting health conditions were working remotely.

For employees in the essential services category, who work in our facilities or on the streets, we organize shifts, distribute specific protective equipment and have adopted measures to expand the cleaning and hygiene protocols of workplaces. We have established the Sabesp Sanitary Protocol for the entire Company, with rules for reducing circulation for safe work, social distancing, personal hygiene and sanitation of the facilities, in addition to communication and monitoring actions.

In addition, we anticipated the vaccination campaign against the flu and pneumonia, with 81% of our employees being immunized, and reinforced our internal communication with daily updates in our channels of information about health care and practical tips for adapting to remote work.. See item 6.D. - Employees for more information about other measures we adopted to protect our employees.

Facing an economic crisis and the COVID-19 pandemic simultaneously demanded an effort from us in the reallocation of available resources, adapting to the new scenario marked by a decrease in revenues, an increase in defaults, as well as increased uncertainty and exchange rate volatility.  

Conscious that in the midst of the pandemic, water is an even more essential resource for preserving the population’s health, our first objective was to make our economic and financial conditions feasible for us to ensure the maintenance of operations and access to services, in particular for the more socially vulnerable population.

The quarantine decree in the State of São Paulo directly impacted our revenues as a consequence of the change in the consumption mix, caused by the increase in volumes in the residential categories and reduction in the commercial, industrial and public categories whose average tariffs are higher, leading to a reduction in the total average tariff.  Our revenues from the residential sector were also affected, since consumers in the “Social Residential” and “Residential Favela” categories were exempted from paying water and sewage bills between the months of April and August of 2020.

To face this challenge, we have taken several measures to strengthen our liquidity and to somewhat off-set the decrease in revenues, uncertainty and exchange rate volatility and thus maintain the investments necessary to meet the obligations assumed in the contracts signed with municipalities where we operate.

Marketing Channels

As of December 31, 2020, we were the concessionaire for the provision of water supply and collection, treatment and disposal of sewage services directly to end consumers for 375 municipalities in the state of São Paulo. We also supplied water and sewage services on a wholesale basis to two municipalities located in the São Paulo metropolitan region. It is the responsibility of these municipalities to then distribute the water to end consumers. Because of our distribution infrastructure, end consumers to whom we offer water services on a wholesale basis cannot alternatively acquire such services directly from us. For more information on service concessions, see “—Wholesale Operations.”

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, 2020, we used approximately 2.09% 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 2020, we purchased approximately 59% 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$107 million in 2020, 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$250 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.”

 
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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, 2020, we had paid a total aggregate amount of R$14.0 million in premiums. In addition, we paid R$1.5 million for a D&O insurance policy, covering R$5.4 billion in assets, third-party liabilities and D&O insurance. We do not have insurance coverage for business interruption risk because we do not believe that the high premiums for such insurance are justified by the low risk of major interruption of our activities. In addition, we do not have insurance coverage for liabilities arising from water contamination or other problems involving our water supply to customers and for environmental related liabilities and damages. We believe that we maintain insurance at levels customary in Brazil for our type of business.

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”.

We have also filed applications with the INPI for registration of the following trademarks: “Acertando suas Contas com a Sabesp”; “Somos Água Sabesp”; “ Somos Água Somos Amazônia Sabesp”; and “Hydria Sabesp”.

Patents

We have two patents granted by the INPI: (i) a device for the removal of supernatants during the sewage treatment process and (ii) a rotary device used to clean water reservoirs transported by trucks with high-pressure hydrojetting systems.

We have also filed patent applications for the following additional devices or inventions, currently awaiting the INPI’s decisions, some of which have been jointly filed with certain Brazilian universities as a result of our cooperation agreements with these institutions:

·a biofilter odor control unit;
·a digital leakage detection system, jointly filed with the University of São Paulo - 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 modular system for the treatment of sanitary sludge and process using this system;
·a box for installation of water meters; and
·water leakage detection equipment, jointly filed with FAPESP and Universidade Estadual Paulista Júlio de Mesquita Filho – UNESP.

In addition to these Brazilian patent applications, we also filed three international patent application under the Patent Cooperation Treaty (“PCT”).

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.

 
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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”, “Sabesp PM Mobile” 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;
·“Sabesp PM Mobile” is a mobile application to register and assist our technicians in monitoring and managing asset maintenance activities;
·“Sabesp Decision Support System - SSD” is a software that contains graphic interfaces for updating data, queries of information in the form of graphs and tables, regarding the operation of water-producing systems and dissemination of data to society through newsletters generated by the system.

We have also registered all of these programs at the INPI.

Domain Names

We own the domain names described below which have been registered with the relevant entity in Brazil, Registro.br:

·www.sabesp.com.br; and
·www.revistadae.com.br.

Environmental Matters

Our environmental management is inherent to the provision of our services and the essence of our business. Our performance is guided by the standards established in our environmental policy, which is monitored by the Environmental Committee, which allows us to plan in an integrated manner and ensure the sustainability of our operations. Our environment management is based on two pillars of action: (i) environmental compliance and improvement of operational facilities; and (ii) spreading a culture of cherishing the environment among our stakeholders. 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.

In order to consolidate our environmental culture, we have an Environmental Corporate Management Department and Environmental Management Teams allocated in our business units.

We have the following ongoing environmental management programs:

·development of the Corporate Greenhouse Gas Management Program (Programa Corporativo de Gestão de Emissões de Gases de Efeito Estufa), 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 emissions in our operations;
·Corporate Program for Obtaining and Maintaining Licenses for Water Treatment Stations, Sewage Treatment Stations and Sewage Pumping Stations (Programa Corporativo de Obtenção e Manutenção de Licenças de Estações de Tratamento de Água, Estações de Tratamento de Esgotos e Estações Elevatórias de Esgotos), in order to meet the requirements of the licensing authority, in addition to structuring operations for the renewal and maintenance of these licenses.
·Corporate Program for Obtaining and Maintaining Concessions for the Use of Water Resources (Programa Corporativo de Obtenção e Manutenção das Outorgas de Uso de Recursos Hídricos), including water catchment, releases and dams. The grant provides the necessary resources to subsidize the process of use and payment for water resources. We are the biggest payer for water use in the State of São Paulo.
·the Environmental Education Program (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;
 
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·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 530 treatment plants, 36 of which are ISO 14001 certified. We expect to implement the EMS in all stations by 2024;
·Development of the Corporate Program for Sustainable WWTPs, which aims to disseminate our culture of sustainability and the application of technologies and practices to transform the by-products generated in sewage treatment plants, specifically, biogas, sludge and effluent, in sustainable resources for beneficial use, with added value for the market, considering their energy use. Currently, the program includes 18 stations, five of which have a sustainability seal. Stations that have not yet been certified are undergoing studies and infrastructure improvements, with plans to expand the scope of the program in the coming years; 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 São Paulo state government and prioritizes the restoration of water spring protection areas.

In addition to corporate environmental management initiatives, we have several projects and initiatives underway to benefit the environment, such as projects for the use of photovoltaic energy and biogas as a vehicle fuel, as well as other environmental projects focused on the engagement of the population at large.

We are also signatory of United Nations Global Compact and 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 2020, we concluded the corporate inventory of greenhouse gases for 2019, thus totaling 13 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 90.46% of total greenhouse gas release. Electric energy represents approximately 8.27% and other activities represent approximately 1.27%. In 2020, we also entered into the São Paulo Environmental Agreement, which recognizes the signatories as part of a community of leaders in climate change, with particular focus on sustainable development.

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.”

 
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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.

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 the resilience and flexibility of our water supply systems, as well as and to implement new operation and management technologies. With regard to the risk of reduced water availability, we are also 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, Corporate Environmental Education Program 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 body, entity or administrative unit through which the government acts (the “Public Administration”) in a federal, state or municipal official newspaper, as the case may be, and another leading Brazilian newspaper. The publication announces that the Public Administration will carry out a public bidding contest pursuant to provisions set forth in an edital (invitation to bid). The invitation to bid must specify, among other terms: (i) the purpose, duration and goals of the bid; (ii) the participation of bidders, either individually or forming a consortium; (iii) a description of the qualifications required for adequate performance of the services covered by the bid; (iv) the deadlines for the submission of the bids; (v) the criteria used for the selection of the winning bidder; and (vi) a list of the documents required to establish the bidder’s technical, financial and legal capabilities.

The invitation to bid is binding on the Public Administration. Bidders may submit their proposals either individually or in consortia, as provided for in the invitation to bid. After receiving proposals, the Public Administration will evaluate each proposal according to the following criteria, which must have been set forth in the invitation to bid:

·the technical quality of the proposal;
·lowest cost or lowest public service tariff offered;
·a combination of the criteria above; or
·the largest amount offered in consideration for a concession.

Currently, Brazilian government-owned and mixed capital companies such as us must comply with Law No. 13,303/2016 when conducting public bidding procedures and contracting third parties. Law No. 13,303/2016 established new corporate governance rules to be followed. Our Internal Bidding and Contracting Regulations were published in June 2018, contemplating the new legal guidelines.

The provisions of State Law No. 6,544/1989 of November 2, 1989, as amended, 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.

Additionally, the New Legal Framework for Basic Sanitation, enacted on July 16, 2020 and, which amended Law No. 11,445/2007, introduced the need for bidding for the provision of basic sanitation services by a company which is not a subsidiary of the holder of public services. This will lead to our increased participation in bidding procedures in order to expand our market share.

 
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Water Usage

State law establishes the basic principles governing the use of water resources in the state of São Paulo in accordance with the State constitution. These principles include:

·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 2020, we paid approximately R$82.4 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 was implemented. In 2019, charges were implemented for the use of water in the Alto Paranapanema river basins. The charge for the use of water from São José dos Dourados and in the north coast river basins that was expected for 2020 was postponed to 2021.

Water Quality

Attachment XX of the Consolidation Administrative Rule No. 5 from September 28, 2017, issued by the Ministry of Health of the federal government, provides the standards for potable water for human consumption in Brazil. This rule is similar to the U.S. Safe Drinking Water Act and the regulations enacted by the U.S. Environmental Protection Agency, which establishes rules for sampling and limits related to substances that are potentially hazardous to human health.

In compliance with Brazilian law, the physical-chemical, organic and bacteriological analyses carried out for water quality control must follow several national and international standards, such as: Standard Methods for the Examination of Water and Wastewater from the institutions such as the American Public Health Association (APHA), American Water Works Association (AWWA) and Water Environment Federation (WEF); United States Environmental Protection Agency (EPA); standards published by the International Standardization Organization (ISO); and methodologies proposed by the World Health Organization (WHO).

Decree No. 5,440/2005 provides that the quality of water must be disclosed to consumers. We have been complying with this regulation by publishing the required information in monthly bills and annual reports delivered to all consumers that we serve.

 
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Environmental Regulation

The implementation and operation of water and sewage systems are subject to federal, state and municipal laws and regulations on environmental and water-resource protection. The National Environmental Council (Conselho Nacional de Meio Ambiente), 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, which regulates (i) environmental licenses; (ii) federal, state and local jurisdiction over environmental issues; (iii) the list of activities subject to licensing; and (iv) environmental impact studies and reports; State Law No. 9,509/1977, regulated by State Decree No. 47,400/2002, which outlines the state environmental policy; CONAMA Resolution No. 357/2005, amended by CONAMA Resolution No. 430/2011, which establishes the standards for discharge of effluents; and DAAE Ordinance No. 1,630/2017 and ANA Resolution No. 1,941/2017, which regulate the concession of grants for the right to use water and interfere in water resources on the State and federal level, respectively; and CONAMA Resolution 302/2002, which establishes the mapping of an Environmental Plan for the Conservation and Use of the Surroundings of Artificial Reservoirs (Plano Ambiental de Conservação e Uso do Entorno de Reservatórios Artificiais, or PACUERA) for public supply projects focused on environmental licensing as a way of making use and preservation compatible. In addition, the Brazilian Forestry Code (Law No. 12,651/2012) establishes the requirement to maintain permanent preservation areas, in certain cases covered with natural vegetation, surrounding water springs and reservoirs, due to their environmental importance as sources of water security, geologic stability, biodiversity and soil nutrition. Our reservoirs were in operation prior to this legal requirement, and accordingly only new reservoirs are be subject to PACUERA.

As for environmental licensing and concessions of water and sewage treatment plants and pumping stations, certain corporate programs are in progress to obtain and maintain the legal requirements to comply with these regulations. See “—Environmental Matters.” We also have a Corporate Program for Regularizing and Anticipating Environmental Recovery Commitment Terms (Programa Corporativo de Regularização e Antecipação de Termos de Compromisso de Recuperação Ambiental).

We use and protect an area of approximately 44 thousand hectares in total within conservation units, as defined in Law No. 9,985/2000, with 9 thousand hectares of water mirrors and 35 thousand hectares of protected areas surrounding water sources, thus protecting the main water-producing systems of the São Paulo metropolitan region. It should be noted that in the case of the Cantareira System, the Environmental Protection Area (Área de Proteção Ambiental, or APA) management plan for the Cantareira System was recently approved through Decree No. 65,244 of October 14, 2020.

The licensing process, usually, is composed of three stages, including the following licenses which can be renewed:

·preliminary license – granted in the planning stage, approving the location and concept and attesting to the project’s environmental feasibility;
·installation license – authorizing the beginning of works for the installation of the project, subject to compliance with approved plans, programs and projects, including environmental control measures and other necessary technical requirements; and
·operation license – authorizing the operation of a unit or activity, subject to compliance with the technical requirements contained in the installation license.

Projects with significant environmental impact are subject to specific studies prepared by multidisciplinary teams that present a series of recommendations focused on minimizing the environmental impact. These studies are then submitted for analysis and approval by the government authorities.

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.”

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.

 
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Scope of Business

State Law No. 12,292/2006, dated as of March 2, 2006, and amended State Law No. 119/1973, dated as of June 29, 1973, which created our Company, authorizes us to provide water and sewage services outside the state of São Paulo (in other states of Brazil and other countries). This law also authorizes us to own interests in other public or private-public companies and Brazilian or international consortia. In addition, this law permits us to incorporate subsidiaries and enter into a partnership with or acquire interests in a private company with a corporate purpose related to the sanitation business.

In connection with the scope of our services, State Supplementary Law No 1.025/2007 amended State Law No. 119/1973 and expanded the range of services that we can render, with the inclusion of urban rainwater drainage and management, urban cleaning and solid waste management, as well as power generation, storage, conservation and sales activities, for our own or third-party use.

C.Organizational Structure

Not applicable.

D.Property, Plant, Equipment, Intangible Assets and Contract Assets

Our principal property, plant and equipment comprise administrative facilities which are stated at historical costs less depreciation. The reservoirs, water treatment facilities, water distribution networks consisting of water pipes, water transmission lines, water connections and water meters, sewage treatment facilities, and sewage collection networks consisting of sewer lines and sewage connections are recorded as contract assets and intangible assets (concession assets). As of December 31, 2020, we operated through 87,568 kilometers of water pipes and water transmission lines and 59,660 kilometers of sewer lines. As of the same date, we operated 251 water treatment facilities and 572 sewage treatment facilities (including eight ocean outfalls), as well as 16 water quality control laboratories.

As of December 31, 2020, the total net book value of our property, plant and equipment, intangible assets and contract assets (including concession assets) and contract assets was R$42,643.1 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, 2020, we operated water and sewage systems in the state of São Paulo, including in the city of São Paulo, Brazil’s largest city. Our operations extended into a total of 375 municipalities, or 58% of all municipalities in the state. We also provided water services on a wholesale basis to two municipalities located in the São Paulo metropolitan region in which we did not operate water distribution systems. In December 2018 and July 2019, we entered into agreements with the municipalities of Guarulhos, Santo André and Mauá, respectively, and began operations in these municipalities for the direct supply of water and sewage services in January 2019, August 2019 and November 2020, respectively.

The São Paulo metropolitan region, which includes the city of São Paulo, is our most important service region. With a total population of approximately 21.2 million, the São Paulo metropolitan region accounted for 70.7%, 73.4% and 72.2% of our operating revenue in 2020, 2019 and 2018 (excluding revenues relating to the construction of concession infrastructure), respectively. As of December 31, 2020, 57.7% of the concession intangible assets reflected on our balance sheet were located in this region. In an effort to respond to demand in the São Paulo metropolitan region, we have concentrated a major portion of our capital expenditure program to expand the water and sewage systems and to increase and protect water sources in this region. Our capital expenditure program is our most significant liquidity and capital resource requirement.

Factors Affecting Our Results of Operations

Business Drivers and Measures

 

General Factors Affecting our Business

 
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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, global and local catastrophes and health epidemics such as COVID-19 and extreme weather events.

In 2015, our business was significantly affected by the most severe drought recorded in our service area in the previous 80 years. 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 did not return to its former state before the crisis. This change in consumption practice as a result of the 2014-2015 water crisis has had a continued effect on our results of operations since the 2014-2015 crisis.

In 2020, the COVID-19 pandemic significantly impacted economic activity and markets around the world, and its severity, magnitude and duration continues to be highly uncertain, rapidly changing and difficult to predict. Actual and potential impacts of the COVID-19 pandemic on the global economy, the economies of certain countries and certain companies has led ratings agencies to review and downgrade the credit ratings of sovereigns and issuers of securities around the world. In November 2020, Fitch confirmed Brazil's sovereign credit rating of BB- with a negative outlook, citing the deterioration of the Brazilian economic environment as a result of political instability and the ongoing COVID-19 pandemic. 

In the event of a significant devaluation of the real in relation to the U.S. dollar or other currencies, our ability to meet our foreign currency denominated obligations could be adversely affected because our tariff revenue and other sources of income are denominated solely in reais. In addition, we have debt denominated in foreign currencies, any significant devaluation of the real will increase our financial expenses as a result of foreign exchange losses that we must record. A devaluation of the real may adversely affect us and the market price of our common shares or ADSs. For more information, see Note 5.1(a) to our 2020 financial statements.

In the second quarter of 2020, the São Paulo state government decreed a quarantine throughout the State, restricting business activities in order to avoid the accelerated spread of COVID-19.

As a result, we experienced a direct impact on our revenues as a consequence of the change in the consumption mix, due to the increase in volumes in the residential categories and a reduction in the public, commercial and industrial categories which have higher average tariffs, leading to a reduction in the total average tariff, in addition to increases in delinquencies in certain categories. Our revenues from the residential sector were also affected as consumers in the “Residential Social” and “Residential Favela” categories were exempt from the payment of water and sewage bills for all municipalities we serve. This exemption was initially valid for 90 days as of April 1, 2020. However, as a result of the on-going COVID-19 pandemic this exemption was extended until September 15, 2020.

 

Effects of Tariff Increases

Our results of operations and financial condition are highly dependent on tariff increases for our water and sewage services. Since the enactment of the Basic Sanitation Law in 2007, as a general rule, regulatory agencies are responsible for setting, adjusting and reviewing tariffs, taking into consideration, among other factors, the following:

·political considerations arising from our status as a state-controlled company;
·anti-inflation measures enacted by the federal government from time to time;
·impacts of the new tariff structure scheduled to come into force in 2022;
·impacts of health epidemics such as COVID-19; and
·when necessary, the readjustment to maintain the original balance between each party’s obligation and economic gain (equilíbrio econômico-financeiro) under the agreement.

Readjustment of our tariffs continues to be set annually and depend on the parameters established by the Basic Sanitation Law and ARSESP. The guidelines also establish procedural steps and the terms for annual adjustments. The annual adjustments must be announced 30 days prior to the effective date of the new tariffs. See “4.B. Business Overview—Tariffs.”

The following table sets forth, for the years indicated, the percentage increase of our tariffs, as compared to three inflation indexes:

Year ended December 31,
 2020 2019 2018
Increase in average tariff(1)3.4026% 4.72% 3.51%
Inflation – IPC – FIPE5.62% 4.40% 3.02%
Inflation – IPCA4.52% 4.31% 3.75%
Inflation – IGP-M23.14% 7.30% 7.54%
(1)See “Item 4.B. Business Overview—Tariffs” for addition information on tariff increases.
 
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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 a state of public calamity mentioned above, ARSESP initially postponed this readjustment by 90 days. Due to the on-going effects of the COVID-19 pandemic, the adjustment was further postponed and the tariff readjustment of 3.4026% was only applied on August 15, 2020. This tariff readjustment included a compensatory adjustment of 0.8881% in compensation for the postponement of the annual tariff readjustment. See “Item 4.B. Business Overview—Tariffs.”

Effects of Brazilian Economic Conditions

As a company with all of its operations in Brazil, our results of operations and financial condition are affected by general economic conditions in Brazil, particularly by the economic activity and the inflation rate. For example, the general performance of the Brazilian economy may affect our cost of capital and inflation may affect our costs and margins. The Brazilian economic environment has been characterized by significant variations in economic growth rates. However, as our product is viewed as essential, in normal conditions our sales revenue demonstrates stability.

General Economic Conditions

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%.

In 2020, Brazilian GDP decreased 4.1% in comparison with 2019. Brazil’s trade surplus in 2020 was US$50.9 billion and at year-end the country had US$355.62 billion in currency reserves. The average unemployment rate in Brazil in 2020 was 13.9%.

According to the Focus Market Readout of April 5, 2021, Brazilian GDP is expected to increase 3.17% for 2021 and according to the IMF projection, dated April 6, 2021, the expected growth is 3.7%. Considering that in 2020, Brazilian GDP decreased 4.1% in comparison with 2019, this growth can be considered quite low. In general, the reasons for this poor performance is a result of, among other factors, measures adopted to mitigate the COVID-19 pandemic, the uncertainty regarding promotion of adjustments in public accounts and the slow progress of vaccinations.

Interest Rates

As a political monetary instrument of the federal government, the SELIC rate influences the behavior of other interest rates in the country, including the rates related indebtedness denominated in local currency. The SELIC rate has historically been high. However, a series of rate reductions in 2018, brought the SELIC rate down to 6.40% as of December 31, 2018. In 2019 the SELIC rate decreased to 4.40% and in 2020, in response to the COVID-19 outbreak, COPOM further reduced the SELIC target rate to 2.00% 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$3,547.8 million as of December 31, 2020, of which R$359.6 million relates to the current portion of our long-term foreign currency-denominated obligations. In the event of significant devaluations of the real in relation to the U.S. dollar or other currencies, the cost of servicing our foreign currency-denominated obligations would increase as measured in reais, particularly as our tariff and other revenue is based solely in reais. In addition, any significant devaluation of the real will increase our financial expenses as a result of foreign exchange losses that we must record. In 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. In 2020, the 28.9% depreciation of the real against the dollar and the 35.7% depreciation of the real against the Yen led to a foreign exchange loss of R$2,180.2 million. 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. However, we have certain external financing contracts that contain clauses that allow the replacement of the foreign currency with our domestic currency. In 2020, we exchanged part of the debt we owe to IDB from U.S. dollars to reais.

 
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In addition, in 2020 we also repaid our U.S.$357.8 million Eurobonds, reducing our foreign currency exposure.

The following table shows the fluctuation of the real against the U.S. dollar, the period-end exchange rates and the average exchange rates as of or for the years indicated:

Year ended December 31,
 2020 2019 2018
(in reais, except percentages)
Depreciation (appreciation) of the real versus U.S. dollar(1)28.93% 4.02% 17.13%
Period-end exchange rate – US$1.005.1967 4.0307 3,8748
Average exchange rate – US$1.00(2)5.1578 4.1096 3.6558

 

(1)Represents the comparison with period-end exchange rate. Source: Central Bank.
(2)Represents the average for period indicated.

 

The following table shows the fluctuation of the real against the Yen, the period-end exchange rates and the average exchange rates as of or for the years indicated:

Year ended December 31,
 2020 2019 2018
(in reais, except percentages)
Depreciation (appreciation) of the real versus Yen(1)35.75% 5.33% 19.97%
Period-end exchange rate – ¥1.000.0504 0.0371 0.0353
Average exchange rate – ¥1.0(2)0.0484 0.0377 0.0331

 

(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, 2020, 2019 and 2018 we did not enter into any forward exchange transactions.

For further information on exchange rates, see “Item 3.D. Risk Factors—Risks Relating to Brazil—Exchange rate instability may adversely affect us, 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, 2020, the reservoirs in the São Paulo metropolitan region, where our largest market is located, contained 913.1 million m3 of water storage for treatment, compared to 1.1 billion m3 available for treatment as of December 31, 2019. The measurements for these years do not include the technical reserve of 287.5 million m³.

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 did not return to its former state before the crisis. This change in consumption practice as a result of the 2014-2015 water crisis has had a continued effect on our results of operations since the 2014-2015 crisis.

 
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The 2019-2020 water season which ended in September 2020 had a lower-than-average rainfall compared to the expected long-term average. The Cantareira System received 74% of the expected volume, while the Alto Tietê System received 72% and the Guarapiranga System received 68%. The water inflows were also below average in the three main systems that supply the São Paulo metropolitan region, with the Alto Tietê system recording inflows close to its minimum historic levels between April and to September.

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.”

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, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018. Bad debt expense, net of recoveries, is included in selling expenses, and was R$444.8 million, R$128.1 million and R$166.7 million for the years ended December 31, 2020, 2019 and 2018, 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, 2020, we had intangible assets of R$34,405.6 million and contract assets of R$7,969.2 million.

We recognize intangible assets arising from concession contracts under IFRIC 12. We estimate the fair value of construction and other work on the infrastructure to recognize the cost of the intangible asset, which is recognized when the infrastructure is built and provided that it will generate future economic benefits. The great majority of our contracts for service concession arrangements entered into with each grantor is under service concession agreements in which we have the right to receive, at the end of the contract, a payment equivalent to the asset balance of the concession intangible asset, which in this case, is amortized over the useful life of the underlying physical assets; thus, at the end of the contract, the remaining value of the intangible would be equal to the residual value of the related physical asset.

The fair value of construction and other work on the infrastructure is recognized as revenue, at its fair value, when the infrastructure is built, provided that this work is expected to generate future economic benefits. The accounting policy for the recognition of construction revenue is described in Note 3.3 “Operating Revenue” to our financial statements.

Intangible assets related to concession agreements and program contracts, when there is no right to receive the residual value of the assets at the end of the contract, are amortized on a straight-line basis over the period of the contract or the useful life of the underlying asset, whichever is shorter.

The recognition of fair value for the intangible assets arising on concession contracts is subject to assumptions and estimates, and the use of different assumptions could affect the carrying amounts of these assets. The amortization of intangible assets and estimated useful lives of the underlying assets also requires significant assumptions and estimates, which different assumptions and estimates, and changes in future circumstances, could affect amortization of intangible assets and remaining useful lives of the underlying assets and can have a significant impact on the results of operations.

Provisions and Contingent Liabilities

We are a party to a number of legal proceedings involving significant monetary claims. These legal proceedings include, among other types, disputes with customers and suppliers and tax, labor, civil, environmental and other proceedings. For a more detailed discussion of these legal proceedings, see Note 20 to our financial statements included in this annual report. We recognize provisions for legal proceedings in which our company has a present obligation as a result of past events (either due to an explicit agreement or duty, known as a legal obligation; or due to our past actions, known as a constructive obligation), it is probable that an outflow of resources embodying economic benefits will be necessary to settle the obligation and the amount of obligation can be estimated reliably. Therefore, we are required to make judgments regarding future events for which we often seek the advice of legal counsel. As a result of the significant judgment required in assessing and estimating these provisions, actual losses realized in future periods could differ significantly from our estimates and could exceed the amounts which we have provisioned.

As of December 31, 2020, we were party to judicial and administrative proceedings, relating to civil, environmental and tax matters, amounting to R$1,252.3 million (after deducting court escrow deposits in the amount of R$31.4 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$46,976.2 million, of which we believe R$36,515.5 million of those have a remote probability of an outflow of resources embodying economic benefits exists.

 
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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 3.36% in 2019 to 3.07% in 2020 under Plan G0 and was increased from 3.37% in 2019 to 3.44% in 2020 under Plan G1 in order to follow the volatility in the rates applicable to the Brazilian Government NTN – B, long term notes, which term is similar to the duration of the pension benefits, as described in Notes 3.18 (a) and 21 (b) to our financial statements included in this annual report.

Other key assumptions for pension obligations are based in part on current market conditions. Additional information on the pension plans under Plan G0 and G1 is disclosed in Note 21 to our financial statements included in this annual report.

Deferred income tax and social contribution

We recognize and settle taxes on income based on the results of operations verified according to the Brazilian Corporate Law, taking into consideration the provisions of the tax laws. We recognize deferred tax assets and liabilities based on the differences between the accounting balances and the tax bases of assets and liabilities.

We regularly review the recoverability of deferred tax assets and do not recognize deferred tax assets if it is probable that these assets will not be realized, based on historic taxable income, the projection of future taxable income and the estimated period to reverse temporary differences. This process requires the use of estimates and assumptions. The use of different estimates and assumptions could result in the non-recognition of a significant amount of deferred tax assets.

As of December 31, 2020 and 2019, we have recognized R$320.7 million and R$434.0 million as deferred income tax liabilities and deferred income tax assets, respectively, in each case, net of the deferred tax assets and liabilities, as disclosed in Note 19 to our financial statements included in this annual report.

Unbilled revenue

We recognize unbilled revenue which corresponds to services rendered for which readings have not been made yet. They are recognized based on monthly estimates calculated according to average billings. Additional information on revenue and accounts receivable are described in Notes 3.3 and 10 to our financial statements included in this annual report.

Certain Transactions with our Controlling Shareholder

Reimbursement Due from the State

Reimbursement due from the State for pensions paid represent supplementary pensions (Plan G0) that we pay, on behalf of the State, to former employees of state-owned companies which merged to form our company. These amounts must be reimbursed to us by the State, as primary obligor.

In November 2008, we entered into the third amendment to the agreement with the State relating to payments of pension benefits made by us on its behalf. The State acknowledged that it owed us an outstanding balance of R$915.3 million as of September 30, 2008, relating to payments of pension benefits made by us on its behalf. We provisionally accepted, but it is not recognized in our books, the reservoirs in the Alto Tietê System as partial payment in the amount of R$696.3 million, subject to the transfer of the property rights of these reservoirs to us. See Note 11 to our financial statements included in this annual report and “Item 7. Major Shareholders and Related Party Transactions.”

On March 18, 2015, we, the State and DAEE, with the intervention of the Department of Sanitation and Water Resources, executed an agreement in the amount of R$1,012.3 million, consisting of R$696.3 million in principal amount and R$316.0 million in monetary adjustment of the principal through February 2015. For detailed information on this agreement, see “Item 7.B. Related Party Transactions—Agreements with the State” and Note 11(a)(iv) to our financial statements included in this annual report.

As of December 31, 2020 and 2019, the amounts not recognized related to pension benefits paid by us on behalf of the State totaled R$1,281.4 million and R$1,195.3 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, 2020 and 2019, the pension benefit obligations of Plan G0 totaled R$2,549.5 million and R$3,046.3 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.”

 
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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 11(b) to our financial statements included in this annual report.

Results of Operations

The following table sets forth, for the years indicated, certain items from our income statements of operations, each expressed as a percentage of net operating revenue:

Year ended December 31,
  2020  2019  2018
(in millions of reais, except percentages)
Net operating revenue17,797.5100.0% 17,983.7100.0% 16,085.1100.0%
Operating costs(11,179.6)(62.8%) (10,137.7)(56.4)% (9,086.5)(56.5)%
Gross profit6,617.937.2% 7,846.043.6% 6,998.643.5%
Selling expenses(751.3)(4.2)% (803.4)(4.5)% (693.5)(4.3)%
Allowance for doubtful accounts (*)(448.8)(2.5)% (128.1)(0.7)% (166.7)(1.0)%
Administrative expenses(1,051.2)(5.9)% (1,187.9)(6.6)% (996.9)(6.2)%
Other operating income (expenses), net and equity results of investments in affiliates121.80.7% 

(15.0)

(0.1)%

 

35.1

0.2%

Profit from operations before finance income (expenses) and income tax and social contribution4,492.425.2% 

 

5,711.6

 

31.8%

 

 

5,176.6

 

32.2%

Financial result, net(3,166.4)(17.8)% (1,033.7)(5.7)% (1,264.3)(7.9)%
Profit before income tax and social contribution1,326.07.5% 4,677.926.0% 3,912.324.3%
Income tax and social contribution(352.7)(2.0)% (1,310.4)(7.3)% (1,077.2)(6.7)%
Profit for the year973.35.5% 3,367.518.7% 2,835.117.6%

 

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Net operating revenue

Net operating revenue decreased by R$186.2 million, or 1.0%, to R$17,797.5 million in 2020 from R$17,983.7 million in 2019.

As of December 31, 2020, net operating revenue, excluding construction revenue, decreased by R$956.2 million, or 6.4%, to R$14,080.9 million in 2020 from R$15,037.1 million in 2019. The construction revenue was R$3,716.6 million in 2020 and R$2,946.6 million in 2019. The main factors that led to the decrease were:

signing of the agreement with the municipality of Santo André in 2019, generating non-recurring revenue of R$1,261.7 million in operating revenue;
lower billed volume in the commercial, industrial and public categories, resulting in a decrease of approximately R$ 805.0 million, compared to last year; and;
exemption granted to customers in the “Residential Social” and “Residential Favela” categories from paying water and sewage bills to mitigate some of the adverse economic effects of the COVID-19 pandemic, leading to a decrease of R$40.2 million between April and August 2020.

The decrease in operating revenue was offset by:

consent of agreement with the municipality of Mauá in June 2020, resulting in an increase of R$204.1 million;
higher billed volume in the residential category, resulting in an increase of approximately R$840.0 million; and
higher revenue from retail sales in the municipality of Santo André, in the amount of R$ 214.2 million; and a tariff adjustment of 3.4% since August 2020.
 
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Operating costs

Our operating costs increased by R$1,041.9 million, or 10.3%, to R$11,179.6 million in 2020 from R$10,137.7 million in 2019. As a percentage of net operating revenue, cost of services increased to 62.8% in 2020 from 56.4% in 2019.

The increase in operating cost was principally due to the following factors:

·an increase of R$748.7 million in construction costs, due to the higher investment in the construction of assets in the municipalities we operate;
·an increase of R$222.5 million in depreciation and amortization, arising from the conclusion of construction of concession intangible assets; and
·an increase of R$28.4 million, due to the higher use of algaecides and coagulants in order to maintain the quality of raw water.

Gross Profit

As a result of the factors discussed above, gross profit for the year ended December 31, 2020 decreased by R$1,228.1 million, or 15.7%, to R$6,617.9 million in 2020 from R$7,846.0 million in 2019.  As a percentage of net operating revenue, our gross profit margin decreased to 37.2% in 2020 from 43.6% in 2019.

Selling Expenses

Selling expenses decreased by R$52.1 million, or 6.5%, to R$751.3 million in 2020 from R$803.4 million in 2019. As a percentage of net operating revenue, selling expenses decreased to 4.2% in 2020 from 4.5% in 2019. The main factor of the decrease in selling expenses was the decrease of R$69.7 million in expenses with services due to: (i) a reduction in expenses related to hydrometers readings and bill deliveries, in the amount of R$41.8 million; and (ii) lower expenses with credit recovery services, in the amount of R$17.5 million.

Allowance for Doubtful Accounts

Our allowance for doubtful accounts increased by R$316.7 million, or 247.2%, to R$444.8 million from R$128.1 million, mainly due to:

● an increase in delinquency rates due to the economic instability worsened by the COVID-19 pandemic; and

● non-recurring reversal of R$51.5 million in 2019, due to the agreement entered into with the municipality of Santo André in August 2019.

Administrative Expenses

Administrative expenses decreased by R$136.7 million, to R$1,051.2 million in 2020 from R$1,187.9 million in 2019, mainly due to: (i) non-recurring expenses in 2019 related to the conclusion of legal proceedings, 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; (ii) lower expenses with lawsuits in 2020, of R$27.1 million, excluding financial expenses; and (iii) the reversal of allowance for doubtful accounts in 2020, in the amount of R$12.5 million, resulting from the signature of the agreement with Companhia de Saneamento de Alagoas (CASAL).

Other Operating Income (Expenses), Net and Equity in Results of Investments in Affiliates

Other operating expense, net was R$121.8 million in 2020 compared with R$15.0 million in operating income, net in 2019, resulting in a positive variation of R$136.8 million, mainly due to the following factors:

reversal of allowance for doubtful accounts with assets indemnity of the municipality of Mauá, in the amount of R$85.9 million, as a result of the signature of the agreement; and
a decrease in the write-off of obsolete items, in the amount of R$23.9 million.

Other operating income consists of gains and losses from sales of property, plant and equipment, sale of contracts awarded in public bids, right to sell electricity, indemnities and reimbursement of expenses, fines and collaterals, property leases, reuse of water, PURA projects and services, net of COFINS and PASEP.

Other operating expenses consist mainly of derecognition of concessions assets due to obsolescence, discontinued construction works, unproductive wells, projects considered economically unfeasible, losses on property, plant and equipment and recognition and reversal of estimated losses with asset indemnification.

Financial Result, Net

Financial result, 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 financial investments and inflation based indexation accruals, mainly relating to agreements entered into with certain customers to settle overdue accounts receivable.

 
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Financial result, net increased by R$2,132.7 million to a financial expense, net of R$3,166.4 million in 2020 from a financial expense, net of R$1,033.7 million in 2019. As a percentage of net operating revenues, financial result, net amounted to 17.8% in 2020 compared with a financial expense of 5.7% in 2019. The variation was due to an increase of R$1,946.3 million in exchange variations on loans and financing, as a result of the higher appreciation of the U.S. dollar and Japanese Yen against the Brazilian real in 2020 (28.9% and 35.8%, respectively), when compared to the appreciation recorded in 2019 (4.0% 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 decreased by R$3,351.9 million, to R$1,326.0 million in 2020 from R$4,677.9 million in 2019. As a percentage of net operating revenue, our profit before income tax and social contribution decreased to 7.5% in 2020 compared to 26.0% in 2019.

Income Tax and Social Contribution

Income tax and social contribution expense decreased by R$957.7 million to R$352.7 million in 2020 from R$1,310.4 million in 2019. This decrease was mainly due to the non-recurring agreement with the municipality of Santo André in 2019 and the increase in expenses in 2020 related to allowance for doubtful accounts and exchange variations.

Profit for the year

As a result of the factors discussed above, our profit for the year decreased to R$973.3 million in 2020 from R$3,367.5 million in 2019. As a percentage of net operating revenue, our profit for the year decreased to 5.5% in 2019 from 18.7% in 2019.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

For a discussion of our consolidated results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018, see “Item 5. Operating and Financial Review and Prospects — A. Results of Operations — Year Ended December 31, 2019 Compared to Year Ended December 31, 2018” of our annual report on Form 20-F for the year ended December 31, 2019, filed with the SEC on April 30, 2020.

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, 2020, we had R$396.4 million in cash and cash equivalents. The outstanding current indebtedness was R$3,034.4 million as of December 31, 2020, of which R$359.6 million was denominated in foreign currency. Long-term indebtedness was R$14,224.2 million as of December 31, 2020, of which R$3,188.2 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, Santo André and Mauá, improved water security due to the works carried out, and the generation of operating cash and availability of credit lines for investments, we will have sufficient funds to meet our commitments and not compromise our planned investments.

In the second quarter of 2020, the São Paulo state government decreed a quarantine throughout the State, restricting business activities in order to avoid the accelerated spread of COVID-19. We experienced a direct impact on revenues as a consequence of the change in the consumption mix, due to the increase in volumes in the residential category and a reduction in the public, commercial and industrial categories which have higher average tariffs, leading to a reduction in the total average tariff, in addition to increases in delinquencies in certain categories.

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 initially postponed this readjustment by 90 days. Considering the on-going effects of the COVID-19 pandemic, the adjustment was further postponed and the tariff readjustment of 3.4026% was only applied on August 15, 2020. This tariff readjustment included a compensatory adjustment of 0.8881% in compensation for the postponement of the annual tariff readjustment. As of December 31, 2020, R$37,6 million was outstanding to be recovered. See “Item 4.B. Business Overview—Tariffs.”

As a further result of the COVID-19 pandemic, on February 2021, our Board of Executive Officers approved a series of measures aiming to mitigate the adverse effects on our commercial service customers, facilitating them to maintain their businesses during the COVID-19 pandemic and to be able to pay-off their debts in the future. These measures include: suspension of supply cuts, renegotiation of debt without the use of fines and interest, among others. We cannot assure that ARSESP will adequately indemnify us for these measures. Initially, these measures were valid from February 3, 2021 to March 31, 2021, however at a meeting held on March 16, 2021, our Board of Executive Officers extended these measures until April 30, 2021. See “Item 4.B. Business Overview—Tariffs”.

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.

 
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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$4,978.2 million, R$4,197.2 million and R$3,842.9 million in 2020, 2019 and 2018, 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 2020 is principally due to the decrease in income tax and social contribution paid in 2020.

Net Cash Used in Investing Activities

Net cash used in investing activities was R$6,768.7 million, R$3,267.3 million and R$2,189.3 million in 2020, 2019 and 2018, 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$280.8 million related to agreement with the municipality of Mauà, that did not impact our cash flow in 2020. Additionally, we recognized the amount of R$3,411.1 as financial investments in Certificates of Bank Deposits (Certificados de Depósito Bancário, or CDBs), with daily liquidity, which it does not intend to use in the next three months.

Net Cash Used in Financing Activities

Our net cash used in financing activities was R$66.4 million, R$1,705.9 million and R$907.5 million in 2020, 2019 and 2018, 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. In order to fund these investments, we carried out our 25th, 26th and 27th debentures issuances at R$1.45 billion, R$1.05 billion and R$1.0 billion, respectively; and, in November 2020, we entered into an agreement of R$950.0 million with IDB Invest. In addition, on September 30, 2020, we amortized our Eurobonds early in the amount of R$1,910.1 million (US$357.8 million) to further reduce our currency exposure.

Indebtedness Financing

Anticipated impacts of the discontinuation of LIBOR

The London Interbank Offered Rate (“LIBOR”), the financial reference rate for loan agreements with Multilateral Development Banks (such as IDB and IBRD) will cease to exist as of December 2021 and is expected to be replaced by another rate, which is yet to be announced. According to the development banks, the changes will allow the risk of inconsistencies in financings to be minimized. Banks will continue to work with borrowers to ensure that loan agreements have appropriate provisions that allow borrowers and lenders to discontinue the use of LIBOR by the end of 2021. We expect to amend our loan agreements through contractual amendments.

Indebtedness financing

Our total financial indebtedness increased by 30.3%, from R$13,244.7 million as of December 31, 2019 to R$17,258.6 million as of December 31, 2020. In addition, during the same period, our total indebtedness denominated in foreign currency decreased by 44.2%, from R$6,358.8 million as of December 31, 2019 to R$3,547.8 million as of December 31, 2020.

As of December 31, 2020, we had R$14,224.2 million in long-term indebtedness outstanding (excluding the current indebtedness), of which R$3,188.2 million consisted of foreign currency-denominated long-term debt. We had an outstanding current indebtedness of R$3,034.4 million as of December 31, 2020. As of December 31, 2020, R$359.6 million of this current portion of long-term indebtedness was denominated in foreign currency. As of December 31, 2020, 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, 2020, while our Fitch national rating was AA(bra) and our Fitch global rating was BB, as of the same date. On April 26, 2021, Fitch upgraded our national rating to AAA(bra) and our global rating to BB+.

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, 2020, 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$3,428.5 million (R$3,407.4 million of principal and R$21.1 million related to interest and charges). See “—Indebtedness Financing—Financial Covenants—Local currency denominated indebtedness” and Note 17 to our financial statements included in this annual report. The following table sets forth information on our indebtedness outstanding as of December 31, 2020:

 
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         December 31, 2020
 Current Noncurrent Total Final Maturity Interest Rates(1)
         (in thousands of R$)
Denominated in local currency:         
          
          
12th issue of debentures45,450 158,425 203,875 2025 TR + 9.5%

 

14th issue of debentures

51,873 24,205 76,078 2022 

TJLP + 1.92% (1st & 3rd series) & IPCA

+ 9.19% (2nd series)

 

17th issue of debentures

91,850 183,335 275,185 2023 

CDI + 0.75% (1st series) & IPCA + 4.5% (2nd series) & IPCA + 4.75% (3rd

series)

 

18th issue of debentures

45,918 135,105 181,023 2024 TJLP + 1.92% (1st and 3rd series) & IPCA + 8.25% (2nd series)

 

21st issue of debentures

175,000 174,769 349,769 2022 

CDI + 0.60% (1st series) & CDI +

0.90% (2nd series)

 

22nd issue of debentures

99,969 678,149 778,118 2025 CDI + 0.58% (1st series) & CDI + 0.90% (2nd series) & IPCA + 6.00% (3rd series)

 

23rd issue of debentures

- 864,678 864,678 2027 

CDI + 0.49% (1st series) & CDI + 0.63%

(2nd series)

 

24th issue of debentures

- 414,994 414,994 2029 

IPCA + 3.20% (1st series) & IPCA +

3.37% (2nd series)

 

25th issue of debentures

1,442,610 - 1,442,610 

 

2021

 CDI + 3.30%

 

26th issue of debentures

- 1,047,767 1,047,767 2030 

IPCA + 4.65% (1st series) & IPCA +

4.95% (2nd series)

 

27th issue of debentures

- 997,000 997,000 

 

2027

 

CDI + 1.60% (1st series) & CDI + 1.80% (2nd series) & CDI + 2.25% (3rd

series)

          

 

Caixa Econômica Federal

90,382 1,324,459 1,414,841 2021/2042 TR + 5% to 9.5%
National Bank for Economic and Social Development (BNDES) PAC13,185 20,247 33,432 2023 1.82% + TJLP
National Bank for Economic and Social Development (BNDES) PAC II 97517,159 37,447 44,606 2027 1.72% + TJLP
National Bank for Economic and Social Development (BNDES) PAC II 97524,851 25,470 30,321 2027 1.72% + TJLP
National Bank for Economic and Social Development (BNDES) Onda Limpa26,751 86,809 113,560 2025 1.92% + TJLP
National Bank for Economic and Social Development (BNDES) Tietê III86,823 542,519 629,342 2028 1.66% + TJLP
National Bank for Economic and Social Development (BNDES) 201533,558 454,126 487,684 2035 2.18% + TJLP
National Bank for Economic and Social Development (BNDES) 20145,143 23,017 28,160 2026 1.76% + TJLP
Inter-American Development Bank (IADB) 2202181,349 2,524,798 2,706,147 2035 CDI + 0.86%
IDB INVEST44,815 898,060 942,875 2034 CDI + 1.90% & CDI + 2,70%
Leases (Concession Agreements, Program Contracts and Contract Assets)28,847 399,896 428,743 2035 7.73% to 10.12% + IPC
Leases (Others)36,576 9,300 45,876 2023 4.24% to 9.29%

 

Other

3,778 11,382 15,160 2025 

TJLP + 1.5% (FINEP) & 3.0%

(FEHIDRO)

Interest and others charges158,918 - 158,918    
          
Total denominated in local currency2,674,805 11,035,957 13,710,762    
          
Denominated in foreign currency:         
          

Inter-American Development Bank (IADB) US$61,610,000

(2019 - US$572,241,000)

53,412 260,123 313,535 

 

2025 to 2044

 

 

1.12% to 3.31%

 
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International Bank for Reconstruction and Development (IBRD) US$82,792,000 (2019 –

US$88,871,000)

31,594 393,949 425,543 2034 2.85%

JICA 15 - ¥ 10,371,870,000

(2019 - ¥ 11,524,300,000)

58,117 464,936 523,053 2029 1.8% & 2.5%

JICA 18 - ¥ 9,325,440,000

(2019- ¥ 10,361,600,000)

52,253 417,846 470,099 2029 1.8% & 2.5%

JICA 17 - ¥ 3,349,203,000

(2019- ¥ 2,830,420,000)

11,260 156,738 167,998 2035 1.2% & 0.01%

JICA 19 - ¥ 29,923,047,000

(2019 - ¥ 31,736,565,000)

91,456 1,415,683 1,507,139 2037 1.7% & 0.01%

IADB 1983AB – US$ 23,077,000 (2019

– US$ 40,769,000)

39,975 78,943 118,918 2023 LIBOR + 2.08% to 2.38%
Interest and others charges21,577 - 21,577    
          
Total denominated in foreign currency359,644 3,188,218 3,547,862    
Total loans and financing3,034,449 14,224,175 17,258,624    

 

 (1)TR was 0.00% per month as of December 31, 2020; CDI stands for Interbank Deposit Rate (Certificado de Depósitos Interbancários), which was 1.90% per annum as of December 31, 2020; IGP-M was 23.14% per annum as of December 31, 2020; TJLP stands for Long-term Interest Rate (Taxa de Juros a Longo Prazo), published quarterly by the Central Bank, which was 4.55% per annum as of December 31, 2020; and USD LIBOR was 0.766% as of December 31, 2020.

The following table shows the maturity profile of our debt, as of December 31, 2020, for the period indicated:

 2021 2022 2023 2024 2025 After 2026 Total
             (in millions of reais)
Loans and financing3,034.4 1,509.7 1,588.8 1,779.9 1,335.8 8,010.0 17,258.6

 

Referring to all of our foreign currency-denominated indebtedness, the amount of R$857.9 million, net of transaction costs, as of December 31, 2020 was denominated in U.S. dollars and R$2,668.4 million was denominated in Japanese Yen. This indebtedness consisted principally of:

·R$313.5 million (US$61.6 million) in U.S. dollar-denominated loans contracted with the Inter-American Development Bank, or the IADB, which were entered into in 2000, amounting to US$200 million.
(i)to finance the second phase of the Tietê Project, under which payments of principal are made in semiannual installments with final maturity in July 2025. The principal amount accrues interest at USD LIBOR plus a variable spread paid semiannually;
(ii)a loan to finance the fourth phase of the Tietê Project, entered into in November 2019, amounting to US$300.0 million, under which payments of principal are made in semi-annual installments with final maturity in May 2044. The principal amount accrues interest at USD LIBOR plus a variable spread paid semi-annually. This contract allows for the replacement of the currency, index and interests;
·R$425.5 million (US$82.8 million) in U.S. dollar denominated loans contracted with the IBRD which was entered into on October 28, 2009, amounting to US$100.0 million, for the financing of the Water Source Program (Programa Mananciais), a program ended in 2017, which consisted of various projects that focused on the preservation and improvement of water sources in the metropolitan region of São Paulo. The loan matures in March 2034. Repayments of principal will be made in semi-annual installments starting in September 2019 after a grace period of ten years. The principal amount accrues interest at USD LIBOR plus a variable spread, paid semi-annually. This contract allows for the replacement of the currency, index and interests;
·R$118.9 million (US$23.1 million) in U.S. dollar denominated loans from the AB Loan financing contracted with the IADB in May 2008. Under this loan, payments of principal are made in annual installments with final maturity in May 2023. The principal amount accrues interest at USD LIBOR plus a rate varying from 2.08% to 2.38%, paid semi-annually. The proceeds were used to repay an outstanding series of debt securities in connection with the implementation of our investment plan; and
·R$2,668.3 million (¥52,969.6 million) in Japanese Yen denominated loans contracted with the JICA, composed of the following: (i) ¥11.524.3 million denominated loans contracted in August 2004 for the financing of the environmental recovery program for the Baixada Santista metropolitan region, called the Clean Wave Program (Programa Onda Limpa). Under these loans, the payments of principal are made in semi-annual installments with final maturity in August 2029. The principal amount accrues interest at a rate that varies from 1.8% to 2.5% per year, paid semi-annually; (ii) ¥2.830.4 million in denominated loans contracted in October 2010 for the financing of the environmental improvement program in the basin of the Billings dam. The loan matures in October 2035, with repayments of principal made in semi-annual installments. The principal amount accrues interest at a rate that varies from 0.01% to 1.2% per year, paid semi-annually; (iii) ¥10.361.6 million denominated loans contracted in February 2011 to complement the financing for the first stage of the Clean Wave Program (Programa Onda Limpa), with commercial conditions similar to the loan entered into in August 2004. These funds were used for the provision of works and services in the Baixada Santista metropolitan region. The credit agreement expires in 18 years with final maturity in August 2029. The principal amount accrues interest at a rate that varies from 1.8% to 2.5% per year, paid semi-annually; and (iv) ¥31.736.6 million denominated loan in February 2012 for the financing of the Program for Water Loss Reduction (Programa de Redução de Perdas de Água). The loan matures in February 2037. Repayments of principal will be made in semi-annual installments starting in February 2019 after a grace period of seven years. The principal amount accrues interest at a rate that varies from 0.01% to 1.7% per year, paid semi-annually.
 
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In May 2020, the debit balance of the IADB loan to finance the third phase of the 2010 Tietê Project, originally contracted in US$, was converted into reais, with semi-annual payments and maturity in September 2035. The main amount accrues interest using the real CDI plus a fixed rate of 0.06% and a variable margin in effect for loans from the bank’s ordinary capital, paid semi-annually. As of December 31, 2020, the outstanding debt was R$2,706.1 million.

Additionally, in September 2020, our issuance of US$350.0 million 6.25% Notes issued in December 2010 was fully amortized.

Our borrowings from multilateral institutions and with government agencies, 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$13,710.8 million as of December 31, 2020 and consisted primarily of real-denominated loans from federal and state-owned banks, in particular, Caixa Econômica Federal and BNDES, as well as debentures issued in June 2010, February 2011, January 2013, October 2013, June 2017, February 2018, May 2019, July 2019, April 2020, July 2020 and December 2020, 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, 2020, the outstanding debt was R$1,414.8 million;
·in May 2008, we entered into a R$174.0 million financing agreement with BNDES. Repayments of the principal amount are being made in 150 successive monthly installments, with final maturity in 2023. The principal amount accrues interest at the TJLP, but limited to 6.0% per year, plus 2.15% per year. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. The financing agreement is collateralized by part of the billings from the provision of water and sewage services. As of December 31, 2020, the outstanding debt was R$33.5 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, 2020, the outstanding debt was R$113.6 million;
·in 2011, we entered into financial leases in the total amount of R$49.6 million with certain contractors for the construction of infrastructure on land we own. During the construction phase, we recognized a contract asset (as of December 31, 2018, with the adoption of IFRS 15 - Revenue from contract with customer, since 1 January 2018, assets related to concessions under construction, registered under the scope of IFRIC 12 - Concession Contracts, are classified as Contract Assets during the construction period and are transferred to Intangible Assets only after completion of the works. For more information, see Notes 3.3 (b) and 14 to our 2020 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, 2020, the outstanding debt was R$428.7 million;
·in March 2012, we entered into a R$180.8 million financing agreement with BNDES. Amortization of the principal amount is being made in up to 156 successive monthly installments, with the final maturity in 2027. The principal amount accrues interest at the TJLP but it is limited to 6.0% per year plus a yearly 1.72%. If the TJLP exceeds 6.0% per year, such excess will be added to the principal amount. This financing agreement is collateralized with a portion of the revenues from the provision of water and sewage services. As of December 31, 2020, the outstanding debt was R$75.0 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, 2020, the outstanding debt was R$629.3 million;
 
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·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, 2020, the outstanding debt was R$28.1 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, 2020, the outstanding debt was R$487.7 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, 2020, the outstanding debt was R$15.1 million.

Under the BNDES program, we issued three tranches of debentures in the aggregate amount of R$826.1 million. In November 2009, we issued our tenth tranche of debentures in the aggregate principal amount of R$275.4 million. The debentures were divided in three series: the first and third series matured in November 2020 and the second in December 2020, and were all repaid. 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, 2020, the outstanding debt of the tenth issuance of debentures was totally paid. 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, 2020, the outstanding debt of the fourteenth issuance of debentures is R$76.1 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, 2020, the outstanding debt of the eighteenth issuance of debentures is R$181.0 million. In October 2020, contractual amendments were formalized regarding the postponement of debt services from August to December 2020, according to BNDES requirements. The amended contracts were: No. 09.2.1535.1; No. 08.2.0169.1; No. 14.2.0535.1; No. 15.2.0313.1; No. 09.2.1175.1; No. 09.6.0110.1; No. 11.2.0975.1; No. 11.2.0975.2; No. 12.2.1381.1; and the fourteenth and eighteenth issuances of debentures.

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, 2020, the outstanding debt of the twelfth issuance of debentures is R$203.9 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, 2020, the outstanding debt of the seventeenth issuance of debentures is R$275.2 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, 2020, the outstanding debt of the twenty-first issuance of debentures is R$349.8 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 these issuances were used to strengthen our cash position and refinance outstanding financial commitments in 2018. As of December 31, 2020, the outstanding debt of the twenty-second issuance of debentures is R$778.1 million.

 
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In May 2019, we issued our twenty-third issuance of debentures divided into two series in the aggregate principal amount of R$866.8 million. The first and second series will mature in May 2024 and 2027 respectively. The debentures of the first series (in the aggregate principal amount of R$491.8 million) bear interest at a rate of CDI plus 0.49% per year, with semi-annual interest payments. The second series (in the aggregate principal amount R$375 million) bears interest at a rate of CDI plus 0.63% per year, with semi-annual interest payments. The proceeds from these issuances were used to strengthen our cash position and refinance outstanding financial commitments in 2019. As of December 31, 2020, the outstanding debt of the twenty-third issuance of debentures was R$864.7 million.

In July 2019, we issued our twenty-fourth issuance of debentures divided into two series in the aggregate principal amount of R$400 million. The first and second series will mature in July 2026 and 2029 respectively. The debentures of the first series (in the aggregate principal amount of R$100 million) bear interest at a rate of IPCA plus 3.20% per year, with annual interest payments. The second series (in the aggregate principal amount R$300 million) bears interest at a rate of IPCA plus 3.37% per year, with annual interest payments. The proceeds from these issuances are intended to support investment in infrastructure projects in some municipalities in which our company render services. As of December 31, 2020, the outstanding debt of the twenty-fourth issuance of debentures was R$415.0 million.

In April 2020, we carried out our twenty-fifth issuance of debentures, in a single series, in the aggregate principal amount 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, which will be paid in the maturity date. The proceeds of this issuance were used to strengthen our cash position and refinance outstanding financial commitments in 2020. As of December 31, 2020, the outstanding debt of the twenty- fifth issuance of debentures was R$1,442.6 million.

In July 2020, we issued our twenty-sixth issuance of debentures divided into two series in the aggregate principal amount of R$ 1.045 billion. The first and second series will mature in July 2027 and 2030 respectively. The debentures of the first series (in the aggregate principal amount of R$600 million) bear interest at a rate of IPCA plus 4.65% per year, with annual interest payments. The second series (in the aggregate principal amount R$445 million) bears interest at a rate of IPCA plus 4.95% per year, with annual interest payments. The proceeds from these issuances are intended to support investment in infrastructure projects in certain municipalities in which we provide services. As of December 31, 2020, the outstanding debt of the twenty-sixth issuance of debentures was R$1,047.8 million.

In December 2020, we issued our twenty-seventh issuance of debentures divided into three series in the aggregate principal amount of R$1 billion. The first, second and third series will mature in December 2023, 2025 and 2027 respectively. The debentures of the first series (in the aggregate principal amount of R$300 million) bear interest at a rate of CDI plus 1.60% per year, with semi-annual interest payments. The second series (in the aggregate principal amount R$400 million) bears interest at a rate of CDI plus 1.80% per year, with semi-annual interest payments. The third series (in the aggregate principal amount R$300 million) bears interest at a rate of CDI plus 2.25% per year, with semi-annual interest payments. The proceeds from these issuances are intended to refinance commitments due to mature in 2021 and to replenish our cashflows. As of December 31, 2020, the outstanding debt of the twenty-seventh issuance of debentures is R$997.0 million.

Additionally, in November 2020, we entered into a loan with Inter-American Investment Corporation (“IDB Invest”), an agent of the IADB, as creditor, the principal amount of which is R$950 million, divided into two tranches which will expire in August 2034 and 2029, respectively. The first tranche named. “Long Term” (in the total principal amount R$508 million) bears interest at the CDI rate plus 2.70% per year, with principal payments and semi-annual interest payments. The second tranche named “Medium Term” (in the total principal amount of R$442 million) bears interest at CDI plus 1.90% per year, with principal and semi-annual interest payments. The resources of the Long Term tranche are used to finance our investment plan between 2020 and 2026, whereas the Medium Term tranche is used to refinance debts. As of December 31, 2020, the outstanding debt of the loan was R$942.9 million.

Part of our real-denominated indebtedness is indexed to take into account the effects of inflation. This debt provides for inflation-based increases to the principal amount, determined by reference to the IPCA.

Financial Covenants

We are subject to financial covenants under the agreements evidencing or governing our outstanding indebtedness.

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 loan agreement contains an early maturity clause in the event of non-compliance on our part of any obligation stipulated therein or in other contracts with the bank relating to the financing of the above-mentioned projects.

 
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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, less interest and financial charges that have been provisioned for the current period) to Adjusted EBITDA (defined as our net income before net financial expenses, income tax and social contribution tax, depreciation and amortization, non-operating income or expenses, and extraordinary items net of income tax and social contribution, as set forth in our consolidated financial statements), each determined on a consolidated basis, must be less than 3.65:1.00.

This contract contains an early maturity clause. In the event of non-compliance with the terms of the contract, the BID can request the anticipated payment of part or all of the loan. The contract also contains cross-default provisions whereby an event of non-compliance on our part relating to any other of our debts with BID or third-parties (in this case, if over US$25 million) allows IDB to request the early payment of the loan.

The financial covenants in our Loan with IDB Invest (No. 13069-01) require as follows:

·our debt service coverage ratio must be greater than or equal to 2.35:1.00; and
·our ratio of Net Debt (defined as all borrowed money, including debentures and Eurobonds, less interest and financial charges that have been provisioned for the current period) to Adjusted EBITDA (defined as our net income before net financial expenses, income tax and social contribution tax, depreciation and amortization, non-operating income or expenses, and extraordinary items net of income tax and social contribution, as set forth in our consolidated financial statements), each determined on a consolidated basis, must be less than 3.50:1.00.

This loan agreement contains an early maturity clause in the event of non-compliance on our part of any obligation stipulated therein or in other contracts with the bank relating to the financing of the above-mentioned projects.

Any significant devaluation of the real will affect the total portion of our debt denominated in foreign currencies when measured in reais. As a result, the Adjusted Total or Net Debt in reais will be affected, with consequent impact on the ratio between Adjusted Total or Net Debt to adjusted EBITDA.

As of December 31, 2020 and 2019, 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 14th and 18th issuances of debentures held by BNDES, which totaled R$257.1 million as of December 31, 2020. The only financing agreement which is exempt from the renegotiated financing is contract No. 08.2.0169.1.

In summary, the BNDES financings specify two bands for the ratios of Adjusted Net Debt / Adjusted EBITDA, Adjusted EBITDA / Adjusted Financial Expenses, and Other Onerous Debt / Adjusted EBITDA. The financings also specify a collateral mechanism by which we assign a portion of our tariff payment receivables to BNDES in order to provide a partial guarantee of the amounts due under the financings. Under this mechanism, each month we must ensure that a portion of the tariff payments which we receive are deposited on a daily basis into a blocked collateral account, before being released to a regular movements account later in the day provided that BNDES has not notified the bank that we are in default. If the ratio of Adjusted EBITDA / Adjusted Financial Expenses is equal to or higher than 3.50, the ratio of Adjusted Net Debt / Adjusted EBITDA equal to or lower than 3.00, and the Other Onerous Debt / Adjusted EBITDA equal to or lower than 1.00, the amount that must pass through this blocked collateral account is R$13.4 million per month. If one of the three ratios mentioned above are not met in any two or more quarters, consecutive or not, within a twelve-month period, yet remain within the following band of ratios: Adjusted EBITDA / Adjusted Financial Expenses lower than 3.50 but equal to or higher than 2.80, Adjusted Net Debt / Adjusted EBITDA equal to or lower than 3.80 but higher than 3.00, and Other Onerous Debt / Adjusted EBITDA equal to or lower than 1.30 but higher than 1.00, the amount that must pass through the blocked collateral account is automatically increased by 20%.

The current covenant clauses are:

A.Maintenance of the following ratios, calculated quarterly and relative to amounts accumulated over the last 12 months at the time of disclosure of reviewed quarterly financial statements or audited annual financial statements:
·Adjusted EBITDA / Adjusted Financial Expenses equal to or higher than 3.50;
·Adjusted Net Debt / Adjusted EBITDA equal to or lower than 3.00; and
·Other Onerous Debt / Adjusted EBITDA equal to or lower than 1.00 (where “Other Onerous Debt” is equal to the sum of (i) social security liabilities and health care plans, (ii) installment payments of tax debt and (iii) installment payments of debt with electricity providers).
B.If any one of the ratios specified in A. above are not met in any two or more quarters, consecutive or not, within a twelve-month period, we shall be deemed to be in non-compliance with the first band ratios and must, as a result, automatically increase the amount passing through the blocked collateral account by 20%, provided that the following second band ratios are met:
·Adjusted EBITDA / Adjusted Financial Expenses lower than 3.50 but equal to or higher than 2.80;
 
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·Adjusted Net Debt / Adjusted EBITDA equal to or lower than 3.80 but higher than 3.00; and
·Other Onerous Debt / Adjusted EBITDA equal to or lower than 1.30 but higher than 1.00.
C.If any one of the second band ratios specified in B. above are not met for any one quarter, or if we are required to but fails to ensure that the increased monthly amount specified in B. above passes through the blocked collateral account, then we shall be deemed to be in non-compliance with its ratio covenants, in which case BNDES may at its discretion:
·require us to provide additional financial guarantees within a deadline specified by BNDES, which may not be less than 30 days;
·suspend the release of funds; and/or
·declare the financings to be immediately due and payable.

As of December 31, 2020, the amount that must pass through the blocked collateral account is R$233.7 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 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, 2020.

The twenty-first, twenty-second, twenty-third, twenty-fourth, twenty-fifth, twenty-sixth and twenty-seventh debenture issuances require us to maintain an adjusted EBITDA/paid financial expenses ratio equal to or higher than 1.5:1.0 and an adjusted net debt/adjusted EBITDA ratio equal to or lower than 3.50:1.0. These issuances have a cross acceleration clause.

 
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 Restrictive Ratios Ratio as of December 31, 2020
Adjusted EBITDA / Adjusted financial expensesEqual to or higher than 2.80:1.00 4.86
Adjusted net debt / Adjusted EBITDAEqual to or lower than 3.80:1.00 2.62
Adjusted total debt / Adjusted EBITDALower than 3.65:1.00 2.66
Other onerous debt1/ Adjusted EBITDAEqual to or lower than 1.30:1.00 0.45
Adjusted current ratioHigher than 1.0 2.11
EBITDA/Paid financial expensesEqual to or higher than 2.35:1.00 10.25
Net debt/Adjusted EBITDAEqual to or lower than 3.50:1.0 2.60

 

(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, 2020 and 2019, 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 2020, we recorded R$4.4 billion to improve and expand our water and sewage system and to protect our water sources in order to meet the growing demand for water and sewage services in the state of São Paulo. We have budgeted investments in the amount of approximately R$21.0 billion from 2021 through 2025. See “Item 4.A. History and Development of the Company—Capital Expenditure Program.”

Dividend Distributions

We are required by our bylaws to make dividend distributions, which can be made as payments of interest on shareholders’ equity to our shareholders in an amount equal to or higher than 25% of the amounts available for distribution. In addition, our dividend policy, which was approved at the annual shareholders’ meeting held on April 27, 2018, establishes that this percentage shall be maintained until the universalization of basic sanitation services in the areas where we operate. We declared dividends of R$272.0 million, R$941.0 million and R$792.2 million in 2020, 2019 and 2018 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

The advancement of research and technological development is part of our strategic guidelines, and aims to implement innovation in operations, processes and services. Such efforts seek to increase organizational efficiency, reflecting in greater customer satisfaction, improved quality of life, environmental sustainability and competitiveness, with improved productivity and quality of our processes and services.

Our strategic innovation process goes beyond the development of new technologies, products and services. It involves the creation of new business models, new ways of meeting the needs of consumers, new organizational processes, new ways of competing and cooperating in the business environment and improvements to service delivery, while at the same time promoting protection of the environment and public health.

We set up a Corporate “Research, Technological Development and Innovation” Program, which allows us to differentiate the financial resources spent specifically for this purpose within our budget structure. In 2020, we allocated R$20.5 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% of revenue required in Research and Technological Development projects. ARSESP also approved the Elaboration and Evaluation Manual of the PD&I Program. In 2020, we filed a portfolio of PD&I Program projects for analysis and prioritization by ARSESP. 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, postponing it to the 2021-2024 tariff cycle . See “—Tariff Readjustment and Revisions.”

In February 2020, we signed a Technical Cooperation agreement with IDB to finance actions for the improvement and technological innovation of water supply management facilities during water crises, using modern analytical tools, available experiences and practices and theoretical analysis. This cooperation agreement provides for resources of approximately US$328 thousand, non-refundable, to be debited from the bank’s ordinary capital resources destined to the Strategic Program for Infrastructure Development, with our counterpart in the amount of US$30 thousand.

In line with business planning, the structuring of RD&I actions is based on the concept of a circular economy, that is, focused on the intelligence of  nature, the circular process opposes the traditional linear production process. As part of this concept, residues are inputs for the production of new products and new cycles. We have highlighted below certain RD&I projects that use the concept of a circular economy, which strongly supports resource recovery, as part of the processes for the water and sewage treatment.

 
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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. Since 2018, a biogas upgrade project in one of our sewage treatment plants, located in Franca, has been producing biomethane for vehicle use. The project was developed in partnership with the Fraunhofer Institute in Stuttgart, Germany. This sewage treatment plant treats an average of 500 liters per second of sewage and produces around 2,500 m³ of biogas per day. The upgrade system can produce biomethane to replace 1,500 liters of common gas daily. The biomethane currently supplies part of the Sabesp Franca fleet. As a result of the tests carried out, we can replicate this initiative in sewage treatment plants in the São Paulo metropolitan region.

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) as part of the “Technological Innovations Plan of Sabesp for Sanitation” financed by the FINEP Inova Brasil program.

The project also provides for other actions in the planning and contracting phase, such as the use of energy from hydraulic and solar sources, in addition to other beneficial applications of biogas. This circular economy project in the Franca sewage treatment plant received first place in the 2019 edition of the Ideas en Acción award of IDB.

At the Barueri sewage treatment plant, we implemented a plasma gasification system for the processing of sludge generated. In 2020, a new gas treatment system was installed to improve the quality of the gases generated. This system continues in the adjustment phase to ensure it is fully operational in a continuous and safe way. At the end of the process, the system generates inert residue with a drastic reduction in its volume, with a potential for reuse as in construction, meaning it does not need to be disposed of in landfills. This project was also funded by FINEP.

In order to generate clean energy to improve the efficiency of sewage treatment, we installed solar-powered aerators, increasing the energy efficiency of sewage treatment. Test results indicate that this technology can be replicated and adapted elsewhere. 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. This study reveals an alternative for reusing sludge from water treatment Plants that serve our entire concession area in other sectors, such as construction.

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. Projects such as this are extremely important to reduce the emission of odorous substances in the atmosphere from the transport and treatment of sewage, which can help mitigate socio-economic and environmental impacts.

From our partnership with FAPESP financial resources are invested equally to subsidize and support the development of basic and applied research projects under the Program for Support of Research in Partnership for Technological Innovation for research projects in academic or research institutions, whose themes originated from the demands pointed out by the operational areas. This partnership has already resulted in 17 projects with different universities, such as: 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$18 million. The submitted projects are currently under analysis for scientific merit by FAPESP’s ad hoc reviewers.

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. Several selected solutions were tested in a controlled environment and on a pilot scale. Some of them proved to be apt for future implementation on an operational scale. Due to the COVID-19 pandemic, some tests were delayed and are pending to be completed in 2021.

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 conduct tests with innovative solutions that emerge from market demands, at different evolutionary stages of development, to assess their potential for application in our activities. These technological cooperation initiatives, in addition to allowing us to propose technological solutions that improve our processes and services, also provide market companies with the opportunity to effectively test their solutions in the sanitation environment, in operational practices, verify the effectiveness of their solutions and, as needed, identify needs for improvement.

 
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With this open innovation process, we provide the market with the foundations for an innovative ecosystem aimed at the sanitation sector.

Additionally, we have a second agreement with FAPESP to focus on supporting the execution of scientific and/or technological research in micro, small and medium enterprises in the State of São Paulo, through the Small Enterprises Innovation Program aimed at accelerating start-ups focused on the development of innovative projects that solve challenges faced by us.

We publish the DAE Magazine, a quarterly engineering journal published by a specialized team of opinion makers that in 2020 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 for the 2021-2024 period. Through the publication of technical and scientific articles on basic and environmental sanitation, we aim to encourage and disseminate improvements in processes, innovations and technological advances.

In 2019, our circular economy project at Franca sewage treatment plant was recognized, with first place in the “Ideas en Acción 2019” award for innovative companies in water and sanitation organized by the Inter-American Development Bank (IDB) and the International Water Association (IWA ) in Guayaquil, Ecuador.

In 2020, we won the “Ideas en acción” award in the “Business Management for Innovation” category promoted by IDB for our innovative ideas and entrepreneurship.

D.Trend Information

We expect to continue to operate in a competitive and regulated environment which will pose continued risks to our existing businesses, placing the profitability of our assets under pressure. The following list sets out, what we believe to be, the most important trends, uncertainties and events that are reasonably likely to continue to have a material effect on our revenues, income from continuing operations, profitability, liquidity and capital resources, or that may cause reported financial information to be not necessarily indicative of future operating results or financial condition:

·We expect that our business will continue to be affected by the COVID-19 pandemic and governmental responses to it, which in turn will likely continue to affect our customers. For example, during 2020 new consumption patterns emerged as a result of the COVID-19 pandemic, which impacted the total volume of water billed. Although the total volume of water billed in the residential category increased by 2.6% as a result of the isolation measures adopted during a large part of 2020, our revenues decreased. This was due to the fact that the total volume of water billed in the commercial, industrial and public categories, which all attract higher tariffs, decreased by 9.5%, 6.1% and 18.8%, respectively. In addition, the “Residential Social” and “Residential Favela” categories were exempt from payment of water and sewage bills from April to September 15, 2020 by force of the State Decree No. 64,879/2020, which further reduced our revenues. For a more detailed description of the effects of the COVID-19 pandemic on our results of operations, see “—A. Operating and Financial Review and Prospects Overview—Factors Affecting Our Results of Operations—General Factors Affecting our Business and “Risk Factors—Risk Relating to our Business—Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, such as the outbreak of COVID-19.”
·In September 2017, the state of São Paulo obtained approval for State Law No. 16,525/2017, which authorizes the State to set up a controlling company to hold all of the shares that the State owns in our company. Once established, the controlling company could sell shares to other minority shareholders, including private companies and state-owned companies, provided, however, that the state of São Paulo will continue to hold a majority of the common shares of the controlling company. 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, pursuant to the recent changes to the basic sanitation law. As of the date of this annual report, a decision has not been made on the model for our potential corporate reorganization. See “Item 3—Key Information—Risk Factors— Risks Relating to Our Control by the State of São Paulo—Our controlling shareholder is currently discussing proposals for our corporate reorganization. We cannot guarantee that any potential reorganization will not have a material adverse effect on our business, financial condition or results of operations.”
·There are various uncertainties surrounding the New Legal Framework for Basic Sanitation, including the new requirement to participate in public bids in case the entity is not part of the administration of the holder, the prohibition on entering into program contracts, agreements, partnership agreements and other unstable instruments for the provision of public sanitation services. Further, we expect to be impacted by the requirements regarding water and sewage service levels included in our agreements with municipalities especially as a result of the changes brought by the New Legal Framework for Basic Sanitation, which establish that, by 2033, 90% and 99% of the population served must have access to sewage collection and treatment and access to drinking water, respectively, further requiring that contracts that do not have such targets will have until March 31, 2022 to make this inclusion. See “Item 3—Key Information—Risk Factors—Risks Relating to Our Business—The New Legal Framework for Basic Sanitation prohibits program contracts for basic sanitation services, resulting in uncertainties for our current and future concessions” and “Item 3—Key Information—Risk Factors—Risks Relating to Our Business—Current regulatory uncertainty, especially with regard to the New Legal Framework for Basic Sanitation, may have an adverse effect on our business, financial condition or results of operations.”
·Our business will continue to be susceptible to unpredictable weather conditions. Our business is not only adversely affected by droughts but also by other extreme weather conditions, such as torrential rain and other changes in climate patterns. A possible increase in the frequency of extreme weather conditions in the future may adversely affect the water available for abstraction, treatment, and supply. See “Item 3—Key Information—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” and “Item 3—Key Information—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.”
 
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·We expect to continue to be affected by the Brazilian governments frequent interventions in the Brazilian economy and occasional significant changes in policy and regulations. Uncertainties in relation to the implementation by the Brazilian government of changes relating to monetary and tax policies, the approved pension reform and possible developments arising from this reform, and other relevant legislation, aggravated by the impacts of the COVID-19 pandemic, may contribute to political instability, economic uncertainty and may impact our results of operations. See “Item 3—Key Information—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.”
·There are uncertainties arising from the implementation of our new tariff structure, which we expect to implement from 2022. The transition period from 2021 to 2024 during which we will implement this new tariff structure may lead to uncertainties in the market as well as unpredictability about the revenues we expect to earn from May 2022. See “Item 3—Key Information—Risk Factors—Risks Relating to Our Business—Our current tariff structure is outdated and does not reflect the current socioeconomic changes the State of São Paulo has undergone over the past decades. The approved update to the structure and its implementation may lead to uncertainties in the market as well as unpredictability about our future revenues.”

In addition to the information set out above, see “Cautionary Statements About Forward-Looking Statements” for further information related to our forward-looking statements, and “Item 3—Key Information—Risk Factors” for a description of certain factors that could affect our industry and our own performance in the future.

E.Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of December 31, 2020.

F.Tabular Disclosure of Contractual Obligations

Our debt obligations and other contractual obligations as of December 31, 2020 were as follows:

      Less than 1 year   1-3 years   3-5 years   More than 5 years   Total
         (in millions of reais)
Loans and financing3,034.4 3,098.5 3,115.7 8,010.0 17,258.6
Estimated interest payments(1)404.8 915.5 734.4 1,818.5 3,873.2
Accounts payable to suppliers and contractors263.7 - - - 263.7
Services payable453.8 - - - 453.8
Program contract commitments163.8 66.6 2.1 13.1 245.6
Purchase obligations(2)3,512.9 2,276.1 2,246.4 858.9 8,894.3
Total7,833.4 6,356.7 6,098.6 10,700.5 30,989.2

 

(1)Estimated interest payments on loans and financing were determined considering the interest rates as of December 31, 2020. 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, 2020, see Note 17 to our financial statements as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018, included elsewhere in this annual report.

ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.Directors and Senior Management

Under our bylaws and Brazilian Corporate Law, we are managed by our board of directors (Conselho de Administração), which currently consists of ten directors, and a board of executive officers (Diretoria), which currently consists of six executive officers.

As our controlling shareholder, the State has the ability to elect the majority of our board of directors and, therefore, our direction and future operations. Upon the election of a new State governor and any resulting change in the administration of the State, all or some of the members of our board of directors, including our chairman, have historically been replaced by designees of the new administration. Our board of directors may in turn replace some or all of the executive officers. 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 ADRs.”

 
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Board of Directors

Our bylaws provide for a minimum of seven and a maximum of eleven directors. The members of our board of directors are elected at a general shareholders’ meeting to serve a two-year term. Such terms may be renewed three consecutive times. Pursuant to our bylaws, our employees have the option to elect one member of our board of directors. Currently, our employees have not elected a director. In addition, pursuant to Law No. 6,404/1976 of December 15, 1976, as amended, or the “Brazilian Corporate Law,” at least one member of the board of directors of mixed capital companies, such as us, must be appointed by the minority shareholders. Finally, according to the Novo Mercado rules and Federal Law No. 13,303/16, at least two, or 25.0% (whichever is greater), of the board of directors must be comprised of independent members.

All the current members of our board of directors were elected at the annual shareholders’ meeting held on April 28, 2020, except for Luis Eduardo Alves de Assis who joined our board of directors on January 21, 2021. The tenure of all the directors will end after our annual shareholders’ meeting to be held in April 2022 when the new members 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 Age Position Date Elected
Mario Engler Pinto Junior 64 Chairman April 28, 2020
Benedito Pinto Ferreira Braga Junior 73 Member April 28, 2020
Wilson Newton de Mello Neto 49 Member April 28, 2020
Claudia Polto da Cunha 53 Member April 28, 2020
Eduardo de Freitas Teixeira 66 Independent Member(1) April 28, 2020
Reinaldo Guerreiro 68 Independent Member(1) April 28, 2020
Francisco Vidal Luna 74 Independent Member(1) April 28, 2020
Francisco Luiz Sibut Gomide 75 Independent Member(1) April 28, 2020
Luís Eduardo Alves de Assis 64 Independent Member(1) January 21, 2021
Walter Luis Bernardes Albertoni 52 Independent Member(1)(2) April 28, 2020
(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 sectors. 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. Mr. Braga 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. Mr. 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 São Paulo (Pontifícia Universidade Católica de São Paulo - PUC/SP). He has been the CEO of Investe São Paulo since April 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. Mr. Guerreiro was also a member of our Audit Committee from January 2007 to May 2017 and was reappointed in May 2020. 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. 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.

Francisco Vidal Luna. Mr. Luna has been an independent member of our board of directors since April 2013. Mr. Luna was also a member of our Audit Committee from April 2013 to September 2016 and was reappointed in May 2020. He has a doctorate in Economics from the Business, Economics and Accounting School at 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 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.

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 a 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, the 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.

Eduardo de Freitas Teixeira. Mr. Teixeira has been an independent member of our Board of Directors since April 2020 and a member of our Audit Committee since May 2020. He holds a Master’s degree in Economics from the Federal University of Rio de Janeiro and an undergraduate degree in Economics from the same institution. He is currently also a member of the Board of Directors of Empresa Metropolitana de Águas e Energia (EMAE). Mr. Teixeira began his career at the Central of Bank in 1977, remaining in that institution until 1998. In 1991 he founded the consulting firm Creta Planejamento, in which he continues to work. Also in the private sector, he was Chief Financial Officer and member of the Board of Directors of HRT Participações (currently PetroRio) from 2009 to 2012 and member of the Board of Directors of Viracopos Airport from 2015 to 2018. In the public sector, Mr. Teixeira served as Deputy Secretary for Economic Affairs of the Ministry of Finance from 1985 to 1988, member of the Fiscal Council of Banco do Brasil from 1987 to 1989 and the Brazilian Federal Savings Bank (Caixa Econômica Federal) from 1986 to 1988, Executive Secretary of the Ministry of Economy in 1990, Chairman of the Board of Directors and CEO of Petrobrás from 1990 to 1991, Chairman of the Board of Directors of Banco do Brasil in 1990 and Minister of State for Infrastructure and member of the National Monetary Council in 1991. In addition, member of the Board of Directors of Itaipú Binacional from 1990 to 1991.

Claudia Polto da Cunha. Mrs. Cunha has been a member of our Board of Directors in April 2020, having previously served in the same position from 2014 to 2016. She holds a Master’s degree in Administrative Law from the University of São Paulo– USP, and an undergraduate law degree from the same institution. She has been a state attorney since 1991, and currently serves as Deputy State Attorney General. She is also Chairwoman of the Board of Directors of Companhia Paulista de Securitização and member of the Board of Directors of Empresa Metropolitana de Transportes Urbanos - EMTU, where she served in the same position between 2012 and 2014. She was special advisor to the Secretary of Finance and Planning in 2019, Executive Secretary of the State Capital Defense Council — CODEC, from 2006 to 2016, and Advisor to the Attorney-General of São Paulo from 1995 to 2006. Ms. Cunha was also a member of the Board of Directors of Companhia do Metropolitano de São Paulo – METRO from 2007 to 2012, and Executive Officer at Companhia Paulista de Parcerias—CPP, from 2006 to 2016.

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 2016. He holds a degree in Economics from the University of São Paulo, a master’s degree from the State University of Campinas - UNICAMP and an MBA from Scuola Superiore Enrico Mattei, Milan, Italy. He was the director of Monetary Policy at the Central Bank of Brazil, professor at the Department of Economics at PUC-SP and FGV-SP. He has developed an extensive career in the financial market, serving as Chief Economist and Investment Director at Citibank, President of HSBC Investment Bank Brasil, Chief Operating Officer of HSBC Bank Brasil, Senior Executive of Strategic Planning at the HSBC Group in London and Regional Director of Latin America at HSBC. He is currently president of Fator Seguradora and a contributor to the newspaper O Estado de São Paulo.

Walter Luis Bernardes Albertoni. Mr. Albertoni has been an independent member of our board of directors since April 2020. He holds an undergraduate law degree from the Pontifical Catholic University of São Paulo (Pontifícia Universidade Católica de São Paulo – PUC-SP), with a graduate diploma in corporate and tax law from INSPER and civil procedural law from PUC-SP. Mr. Albertoni has more than 28 years of experience as a legal practitioner, with an emphasis on corporate, civil, civil procedural, tax and commercial law, as well as contracts analysis and drafting. He also has 14 years of experience as an outsourced legal officer at Association of Capital Market Investors - AMEC, acting in the institutional defense of the rights and interests of shareholders not participating in control blocks from 2006 to present date, and acts as a board member of Banco Bradesco S.A. since March 2020, member of the Board of Directors of Companhia Energética de Brasília - CEB S.A since April 2019, Fiscal Council member of Banco Bradesco S.A. from 2017 to 2020, Fiscal Council member of Indústrias Romi S.A. from 2017 to 2020, member of the Audit Committee of Dataprev S.A. from 2018 to 2020, alternate member of the Board of Directors of Mahle Metal Leve S.A. since April 2017, Fiscal Council member of Petrobrás elected by the preferred shareholders from 2013 to 2018, member of the Board of Directors of Paranapanema S.A. from 2016 to August 2017, alternate Fiscal Council member of Ser Educacional S.A. since April 2015, alternate Fiscal Council Member of SANEPAR S.A. since April 2017, Fiscal Council member of BRADESPAR S.A. in 2016, alternate Fiscal Council Member of MILLS S.A. in 2016, member of the Advisory Committee of the State-Owned Companies of B3 S.A. – Brasil, Bolsa, Balcão (as part of the Destaque de Estatais Program), alternate member of National Financial System Resource Council - CRSFN from 2011 to 2015, consultant to the Merger and Acquisitions Committee from 2013 to 2017 and a member of Committee for Disclosure of Information to the Market - CODIM from 2007 to 2009.

 
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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 Age Position Date Elected
Benedito Pinto Ferreira Braga Junior 73 Chief Executive Officer June 13, 2019
Adriano Candido Stringhini 45 Corporate Management Officer June 13, 2019
Rui de Britto Álvares Affonso 63 Chief Financial Officer and Investor Relations Officer June 13, 2019
Ricardo Daruiz Borsari 65 Metropolitan Region Officer September 17, 2020
Monica Ferreira do Amaral Porto 64 Regional Systems Officer September 17, 2020
Alceu Segamarchi Junior 63 Technology, Enterprises and Environment Officer 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, was elected as Vice-Chairman of the Board of Aberje – Associação Brasileira de Comunicação Empresarial in 2020 and he is a member of LIDE - Grupo de Líderes Empresariais. 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 holds Executive Certificate from Harvard Kennedy School (PPP, Regulation and Adaptative Leadership) and an certificate of Digital Transformation and Digital Disruption by Cambridge University and by IMD Business School. 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 São Paulo 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.

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.

Monica Ferreira do Amaral Porto. Mrs. Porto holds a bachelor’s degree in civil engineering from the University of São Paulo - USP, a master’s degree and a doctorate in hydraulic engineering, and Habilitation in Environmental Engineering from the same institution. She has worked as a professor at the Hydraulic and Environmental Engineering Department of USP since 1984, and has worked as a Principal Professor of this department since 2005, and as Senior Professor since August 2019. She was also advisor to our Presidency from September 2019 to September 2020 and a member of our Board of Directors from March to September 2019. Ms. Porto was assistant secretary of the Secretariat of Sanitation and Water Resources - SSRH from January 2015 to March 2018. She is currently a member of the Management Council of the Secretariat of Infrastructure and Environment of the State of São Paulo since January 2019 and member of the Management Council of the Secretariat of Infrastructure and Urbanism of the municipality of São Paulo since January 2017. Mrs. Porto was also president of the Integration Committee of the Paraíba do Sul River basin between 2016 and 2018, representing SSRH. She served as chairwoman of the Board of Trustees of the Hydraulic Technology Center Foundation between 2018 and 2019, and between 2008 and 2014 she acted as Chief Executive Officer of the abovementioned Foundation. She was also an alternate member of the Board of Governors at the World Water Council Board, as a delegate of USP from 2013 to 2018. Between 1998 and 2014, she was a member of several international entities in the area of water resources such as: Advisory Committee for the World Water Quality Assessment, United Nations Environment Program, Stockholm Water Prize Committee, among others. She was also chairwoman of the Brazilian Water Resources Association from 1996 to 1997.

 
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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) an university extension 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 was Superintendent 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), 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 2020, 2019 and 2018, 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$7.9 million, R$6.7 million and R$4.6 million, respectively. At our annual shareholders’ meeting held on April 28, 2020, our shareholders approved R$8.1 million in aggregate compensation payable to members of our board of directors, members of our fiscal committee and our executive officers in 2020.

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,
 2020 2019 2018
(in thousands of R$, except where indicated otherwise)
Total compensation per administrative body     
Board of directors1,726 1,417 1,106
Board of executive officers5,797 5,000 3,228
Fiscal committee342 275 280
Total amount of compensation7,865 6,692 4,614
Number of members (in individuals)     
Board of directors10 9 10
Board of executive officers6 6 6
Fiscal committee5 4 5
Fixed annual compensation     
Salary     
Board of directors1,328 1,084 851
Board of executive officers2,959 2,487 1,849
Fiscal committee263 212 215
Direct and indirect benefits     
Board of directors398 334 255
Board of executive officers1,399 1,165 841
Fiscal committee79 62 65
Variable compensation     
Bonus     
Board of directors- - -
Board of executive officers1,439 1,348 538
Fiscal committee- - -
Maximum amount of compensation     
Board of directors234 205 162
Board of executive officers989 867 677
Fiscal committee68 67 66
Minimum amount of compensation     
Board of directors140 121 99
Board of executive officers971 802 498
Fiscal committee68 67 60
Average amount of compensation     
Board of directors171 153 115
Board of executive officers953 810 516
Fiscal committee68 69 61

 

 
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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. The remuneration for 2021 will be decided by the General Shareholders’ Meeting to be held on April 29, 2021.

Profit Sharing and Pension Plans

We have established a pension and benefit fund (Fundação SABESP de Seguridade Social), or SABESPREV, to provide our employees with retirement and pension benefits. This pension plan provides benefit payments to former employees and their families. Both we and our employees make contributions to the pension plan under SABESPREV, which we called as plan G1. Our total contributions to the pension plan totaled R$36.0 million, R$37.0 million and R$36.2 million in 2020, 2019 and 2018, 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, 2020, our obligation under these both plans (G0 and G1) totaled R$2,868.6 million. For further information on our pension plans see Note 21 to our financial statements included in this annual report.

Beginning in 2008, payments under the profit-sharing plan were based both on general goals that evaluate us as a whole and on other goals that evaluate the performance our different business units. Payments are proportionally reduced annually if the goals are not completely achieved.

We recorded profit-sharing expenses of R$91.0 million, R$93.5 million and R$110.5 million in 2020, 2019 and 2018, respectively. We do not have a stock-option plan for our employees.

C.Board Practices

The members of our board of directors are elected at an annual shareholders’ meeting to serve a two-year term. Such term may be renewed three consecutive times. Our next annual shareholders’ meeting will be held on April 29, 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 five alternates, All of the current members of our fiscal committee were elected in the shareholders’ meeting held on April 28, 2020, except Ernesto Mascellani Neto, who joined our fiscal committee on September 2020. 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 Age Position Date Elected
Fabio Bernacchi Maia 50 Member April 28, 2020
Ernesto Mascellani Neto 41 Member  September 25, 2020
Edson Tomas De Lima Filho 68 Member April 28, 2020
Ângelo Luiz Moreira Grossi 40 Member April 28, 2020
Reginaldo Ferreira Alexandre(1) 62 Member  April 28, 2020
Marcio Cury Abumussi 52 Alternate  April 28, 2020
Cassiano Quevedo Rosas de Ávila 43 Alternate  April 28, 2020
Nanci Cortazzo Mendes Galuzio 58 Alternate  April 28, 2020
Andréa Martins Botaro 37 Alternate April 28, 2020
Gisélia Da Silva(1) 59 Alternate April 28, 2020

 

(1)       Member indicated by the minority shareholders.

 

Fabio Bernacchi Maia. Mr. Maia has been a member of our fiscal committee since April 2020. He holds an MBA in Business Management from the Administration Institute Foundation of the University of São Paulo, an MBA in Public Management from Fundação Getúlio Vargas, and an undergraduate degree in Business Administration from São Judas Tadeu University. He began his career at Empresa Metropolitana de Transportes Urbanos de São Paulo - EMTU in 1994, where he held several positions until early 2016, such as Financial Controllership Manager and Administrative and Finance Director. Since 2016, he has served in the State Capital Defense Council (CODEC), where he was Executive Secretary from July 2017 to January 2019 and in the first three months of 2020. Currently, he is Deputy Executive Secretary of the State Capital Defense Council (CODEC). Mr. Maia has been a sitting member of the Fiscal Council of Empresa Metropolitana de Águas e Energia since 2017, and alternate member of the Fiscal Council of Companhia do Metropolitano de São Paulo - METRÔ since 2019. He was also a sitting member of the Fiscal Council of Companhia de Seguros do Estado de São Paulo from 2017 to 2018.

 
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Ernesto Mascellani Neto. Mr. Mascellani Neto holds a bachelor’s degree in International Relations from Fundação Armando Alvares Penteado - FAAP and a graduate degree in Public Managerial Skills from the São Paulo State University - UNESP. He is currently the Chief Executive Officer of the State Traffic Department of the São Paulo State - DETRAN-SP. Mr. Mascellani Neto was Special Project Supervisor at the São Paulo State Data Processing Company - Prodesp from 2019 to 2020, Housing Service Officer at the Urban Development and Housing Company - CDHU of São Paulo from 2015 to 2019, Coordinator of Technical, Technological and Vocational Education Department of Economic Development, Science, Technology and Innovation of the São Paulo State from 2013 to 2015, among other positions.

Edson Tomas de Lima Filho. Mr. Lima Filho has been a member of our fiscal committee since April 2020. He holds a bachelor’s degree in Economics from Mogi das Cruzes University (Universidade de Mogi das Cruzes) and a master’s degree in Public Administration from Getúlio Vargas Foundation (Fundação Getúlio Vargas - FGV). Currently, he is the President of the Municipal Authority for Urban Cleaning of the municipality of São Paulo (AMLURB) and an alternate Fiscal Councilor for CETESB. He was Chief Executive Officer of the Insurance Company of the State of São Paulo (COSESP) from 1999 to 2004 and Chairman of the Board of Directors from 1999 to 2004 and in 2018 for the same company. He held several positions in public sector entities: Chairman of the Board of Directors of São Paulo’s Road Development Company (Desenvolvimento Rodiviário S.A. - DERSA) from March 2015 to April 2018; member of the Board of Directors of Empresa Metropolitana de Transportes Urbanos (EMTU) from June 2007 to June 2010; member of the Board of Directors of Banco Nossa Caixa S.A. from 2001 to 2002; member of the Board of Directors of CETESB from1999 to 2001, where he was also Director of Corporate Management from January 2007 to January 2011 and from January 2015 to December 2016. Mr. Lima Filho was also a member of the Advisory Board of Fundação Mario Covas between July 2001 and April 2002 and a member of the Board of Directors of the Brazilian Society of Sciences and Insurance from 1999 to 2001.

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 Br