SABESP(US:SBS)2025-04-30 21:20PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS This section is not applicable as per the report37 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE This section is not applicable as per the report38 ITEM 3. KEY INFORMATION This section details significant risks associated with the company's operations, recent privatization, the Brazilian economic and political environment, and its securities Risk Factors This subsection provides a comprehensive overview of risks faced by the company, categorized into privatization, Brazil-related, business, regulatory, environmental, and share-related challenges - Privatization Risks: The company's July 2024 privatization faces ongoing legal challenges, and its new dispersed ownership structure may delay critical decision-making545556 - Brazil-Related Risks: The company is exposed to significant influence from Brazilian government economic policies, political instability, potential tax law changes (e.g., EC 132), high inflation, exchange rate volatility, and sovereign credit downgrades576267 - Business and Operational Risks: Key business risks include financial impacts from revenue transfer agreements, reliance on funding for a R$72.0 billion capital expenditure program (2025-2029), and substantial legal contingencies totaling R$24.7 billion, alongside cybersecurity threats highlighted by an October 2024 attack9197100 - Regulatory and Environmental Risks: The company must comply with the new Concession Agreement for URAE-1, which brought forward universalization targets to 2029, with failure potentially leading to tariff reductions; environmental risks include droughts, extreme weather, and non-compliance with environmental laws169174229 - Share and ADS Risks: An anti-takeover provision requires any shareholder acquiring 30% or more of shares to launch a tender offer for all remaining shares at a 200% premium, and ADS holders have different voting rights and may be unable to exercise preemptive rights24250 ITEM 4. INFORMATION ON THE COMPANY This section provides a detailed overview of SABESP, covering its history, recent privatization, corporate strategy, capital expenditure program, business operations, regulatory environment, and environmental initiatives History and Development of the Company SABESP was privatized in July 2024, with the State of São Paulo reducing its stake to 18% and Equatorial Energia S.A. becoming a reference shareholder with 15%, focusing on universalization targets by 2029 and planning a R$70.0 billion capital expenditure program for 2025-2029 - The company was privatized in July 2024, with the State of São Paulo ceasing to be the controlling shareholder, and Equatorial Energia S.A. is now a reference shareholder with a 15% stake255 - The new post-privatization strategy is built on five pillars: Universalization of the new Concession Agreement for URAE-1, Optimization of business performance, Growth in the water and sanitation business, Adjacent and new core businesses, and Regulatory optimization266 - A capital expenditure program of approximately R$70.0 billion is planned for the period 2025-2029 to enhance and expand water and sewage systems, aiming for universal sanitation269 Incremental Connection Goals (2025-2026) | Incremental Connections | 2024-2025 | 2025-2026 | | :--- | :--- | :--- | | | (in thousands of units) | (in thousands of units) | | Water coverage | 436 | 861 | | Sewage coverage | 588 | 1,122 | | Sewage treatment | 1,028 | 2,121 | Business Overview As of year-end 2024, SABESP provided water and sewage services to 375 municipalities in São Paulo, serving approximately 28.1 million people with water and 25.1 million with sewage services, governed by the Concession Agreement for URAE-1 until 2060 Key Financials and Operations (FY 2024) | Metric | Value | | :--- | :--- | | Net Operating Revenue | R$36,145.5 million | | Profit for the year | R$13,642.8 million | | Total Assets | R$80,965.4 million | | People served with water | ~28.1 million | | People served with sewage | ~25.1 million | Volume of Water Produced and Invoiced (in millions of cubic meters) | | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Produced (Total) | 3,086.3 | 2,985.2 | 2,857.9 | | Invoiced (Total) | 2,299.3 | 2,236.2 | 2,177.6 | - The Concession Agreement for URAE-1, effective July 2024, governs services for 371 municipalities and introduces significant changes to the economic-regulatory model, including a new tariff structure and an accelerated universalization target313 - The company is subject to regulation by ARSESP at the state level and must adhere to reference standards set by ANA at the national level to be eligible for federal funding166358 - In June 2024, SABESP was the first company in Brazil to receive the B3 Green Shares (B3 Ações Verdes) classification, certifying that over 50% of its revenue and investments contribute to the green economy227 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section analyzes SABESP's financial performance and condition, highlighting a surge in 2024 net operating revenue to R$36.1 billion and profit to R$9.6 billion due to a new concession agreement financial asset, with liquidity primarily from operations and a R$70.0 billion capital expenditure plan for 2025-2029 Operating Results For the year ended December 31, 2024, net operating revenue increased by 41.3% to R$36.1 billion, primarily due to the recognition of a financial asset under the new URAE-1 concession agreement, leading to a significant rise in profit for the year to R$9.6 billion Results of Operations (FY 2024 vs. FY 2023) | Item (in millions of R$) | 2024 | 2023 | % Change | | :--- | :--- | :--- | :--- | | Net operating revenue | 36,145.5 | 25,572.1 | 41.3% | | Gross profit | 19,542.4 | 9,520.2 | 105.3% | | Profit from operations | 15,510.5 | 6,346.0 | 144.4% | | Profit for the year | 9,579.6 | 3,523.5 | 171.9% | - The substantial increase in net operating revenue and profit in 2024 was mainly driven by the recognition of a financial asset (indemnity) and related financial income of R$9.15 billion following the new Concession Agreement for URAE-14811280 - Administrative expenses increased by 44.7% in 2024, primarily due to a R$388.6 million reassessment of new legal claims and a R$134.4 million increase in costs related to the 2024 Voluntary Dismissal Program (PDV)483 - Allowance for doubtful accounts decreased by 14.6% to R$557.8 million in 2024, reflecting lower default rates and improved collection efforts482 Liquidity and Capital Resources SABESP's liquidity is mainly funded by cash from operations, which was R$7.4 billion in 2024, while total financial indebtedness increased to R$25.3 billion as of December 31, 2024, with all financial covenants met and a R$70.0 billion capital expenditure budget set for 2025-2029 Cash Flow Summary (in millions of R$) | Cash Flow from | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Operating Activities | 7,404.6 | 4,854.4 | 3,967.6 | | Investing Activities | (9,975.6) | (4,905.5) | (2,878.3) | | Financing Activities | 3,415.2 | (977.8) | 60.3 | Indebtedness Summary (as of Dec 31) | Item (in millions of R$) | 2024 | 2023 | | :--- | :--- | :--- | | Total Financial Indebtedness | 25,258.3 | 19,536.4 | | Foreign Currency Debt | 3,356.4 | 2,745.9 | | Cash and Cash Equivalents | 1,682.6 | 838.5 | - The company is subject to restrictive financial covenants on its debt, such as maintaining a Net Debt/Adjusted EBITDA ratio equal to or lower than 3.50:1.0, all of which were met as of December 31, 2024522525529 - In 2024, the company entered into derivative instruments (plain vanilla swaps) to fully hedge its foreign currency exposure on debt denominated in U.S. dollars and Japanese Yen444510 Research and Development, Patents and Licenses, etc. SABESP allocated R$52.1 million to Research, Development & Innovation (RD&I) projects in 2024, earning first place in the "Infrastructure" segment of the Valor Inovação Brasil 2024 award for its innovation efforts focused on circular economy concepts and open innovation collaborations - In 2024, R$52.1 million was allocated to RD&I projects, with an ongoing program with ARSESP requiring the application of 0.05% of revenue to RD&I, and over R$56.0 million approved for the 2021-2025 cycle537538 - The company won first place in the "Infrastructure" segment of the Valor Inovação Brasil 2024 award, ranking 11th overall among the 150 most innovative companies in Brazil536 - Key innovation projects focus on circular economy principles, such as producing biomethane from biogas at the Franca sewage treatment plant and developing a plasma gasification system for sludge at the Barueri plant540542 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section details the company's management and employee structure post-privatization, including the Board of Directors, Board of Executive Officers, and Fiscal Council, with total compensation of R$11.3 million in 2024, new long-term incentive plans approved in 2025, and 10,512 employees at year-end 2024 following voluntary dismissal programs - Following privatization, the Board of Directors consists of nine members, including three independent directors, and the Board of Executive Officers has up to seven statutory officers564566 Aggregate Compensation (in millions of R$) | Year | Board of Directors | Board of Executive Officers | Fiscal Council | Total | | :--- | :--- | :--- | :--- | :--- | | 2024 | 2.3 | 8.6 | 0.5 | 11.3 | | 2023 | 2.2 | 7.9 | 0.4 | 10.5 | | 2022 | 1.9 | 5.3 | 0.3 | 7.5 | - In April 2025, shareholders approved new long-term incentive plans, including a Restricted Shares Plan and a Performance Shares Plan, to align executive compensation with long-term objectives like the Universalization Target597 - As of December 31, 2024, the company had 10,512 full-time employees; a Voluntary Dismissal Program (IDP) launched in 2023 saw 1,854 employees join, and a new program launched in December 2024 enrolled 2,039 employees for dismissal in 2025641647 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section outlines SABESP's ownership structure post-privatization, with the State of São Paulo holding an 18.0% stake and a 'Golden Share', Equatorial S.A. holding 15.0%, and the remaining 67.0% as free float, detailing key related party transactions including sanitation services to government entities and pension reimbursements Major Shareholders as of December 31, 2024 | Shareholder | Common Shares (%) | Preferred Shares (%) | Total Capital (%) | | :--- | :--- | :--- | :--- | | São Paulo State | 18.0 | 100.0 (1 Golden Share) | 18.0 | | Equatorial S.A. | 15.0 | - | 15.0 | | Free Float | 67.0 | - | 67.0 | - The State of São Paulo's 'Golden Share' grants it veto power over changes to the company's name, corporate purpose (providing water and sewage services), and bylaw provisions limiting voting rights654 - Significant related party transactions include providing sanitation services to the State of São Paulo (R$891.3 million in revenue for 2024) and managing pension benefit payments (Plan G0) on behalf of the State, for which it seeks reimbursement665 ITEM 8. FINANCIAL INFORMATION This section covers legal proceedings and the company's dividend policy, noting R$167.7 billion in legal claims with R$2.4 billion provisioned for probable losses, and a dividend policy mandating a minimum 25% distribution of adjusted net income, potentially increasing to 100% by 2030 contingent on meeting universalization targets and maintaining financial leverage below 3.25x Provisions for Legal Claims as of December 31, 2024 (in millions of R$) | Types of Claims | Provisions for probable claims | Escrow deposits | Provisions net of deposits | | :--- | :--- | :--- | :--- | | Customer claims | 149.8 | (11.3) | 138.5 | | Supplier claims | 235.7 | (0.1) | 235.6 | | Other civil claims | 174.2 | (1.4) | 172.8 | | Tax claims | 176.4 | (2.4) | 174.0 | | Labor claims | 1,077.1 | (13.2) | 1,063.9 | | Environmental claims | 657.0 | (0.1) | 656.9 | | Total | 2,470.2 | (28.5) | 2,441.7 | - The company faces contingent liabilities (possible loss) of R$9.6 billion and remote loss contingencies of R$12.6 billion, which are not provisioned677 - The dividend policy mandates a minimum payout of 25% of adjusted net income, which can increase to 50% in 2026-2027, 75% in 2028-2029, and 100% from 2030, provided universalization targets are met and financial leverage is ≤ 3.25x702707 - Dividend distribution is prohibited if the company fails to comply with the targets and schedules set out in the Concession Agreement for URAE-1, as determined by ARSESP247712 ITEM 9. THE OFFER AND LISTING This section details the trading markets for SABESP's securities, with common shares listed on the B3 stock exchange in Brazil under the ticker 'SBSP3' as part of the Novo Mercado segment, and American Depositary Shares (ADSs) listed on the New York Stock Exchange (NYSE) under the ticker 'SBS' - Common shares trade on the B3 (Brazil) under the symbol 'SBSP3'723 - American Depositary Shares (ADSs) trade on the NYSE under the symbol 'SBS', with each ADS representing one common share724 - The company is listed on the Novo Mercado segment of the B3, requiring compliance with enhanced corporate governance practices, such as maintaining only common shares, granting tag-along rights to all shareholders, and having at least 20% or two independent board members730732 ITEM 10. ADDITIONAL INFORMATION This section details the company's share capital, articles of association, and the regulatory framework for exchange controls and taxation, including its capital structure of common shares and one 'Golden Share', a significant anti-takeover provision in its bylaws, and key Brazilian and U.S. federal income tax considerations for non-resident holders - The company's capital consists of 683,509,868 common shares and one special class preferred 'Golden Share' owned by the State of São Paulo736 - An anti-takeover provision requires any shareholder or group acquiring 30% or more of common shares to make a tender offer for all remaining shares at a price including a 200% premium over the highest price paid in the prior 12 months764 - Bylaws prohibit any single shareholder or group from exercising votes exceeding 30% of the total voting capital762 - For non-Brazilian holders, dividends from profits generated after Jan 1, 1996, are exempt from Brazilian withholding tax, while interest on shareholders' equity is subject to a 15% withholding tax (or 25% for tax haven residents)787808 - For U.S. holders, distributions are generally treated as dividend income, and subject to complex limitations, Brazilian taxes withheld may be eligible for a foreign tax credit against U.S. federal income tax liability820824 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK SABESP is primarily exposed to foreign currency and interest rate risks, with 13.3% of its debt foreign currency-denominated as of December 31, 2024, and a significant portion subject to floating interest rates, where sensitivity analyses indicate a 10% unfavorable exchange rate change could result in a R$335.6 million loss, and a 100 basis point interest rate rise could lead to a R$252.6 million loss over one year - As of Dec 31, 2024, 13.3% (R$3.36 billion) of the company's debt was denominated in foreign currencies (USD and JPY), and the company entered into hedge transactions in 2024 to protect against this exposure838 - A hypothetical 10% unfavorable change in foreign exchange rates would have resulted in a loss of approximately R$335.6 million as of Dec 31, 2024839 - A hypothetical 100 basis point unfavorable change in interest rates would have resulted in a loss of approximately R$252.6 million over one year as of Dec 31, 2024844 Debt Composition by Interest Rate Type (as of Dec 31, 2024) | Rate Type | % of Total Debt | | :--- | :--- | | Floating Rate | | | Denominated in U.S. dollars | 4.0% | | Denominated in reais | 84.8% | | Fixed Rate | | | Denominated in reais | 1.9% | | Denominated in Yen | 6.0% | | Denominated in U.S. dollars | 3.3% | | Total | 100.0% | ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES This section describes the company's American Depositary Shares (ADSs), where each ADS represents one common share and trades on the NYSE, detailing the fees payable by ADS holders for services such as issuance, cancellation, and cash distributions, managed by The Bank of New York Mellon as the depositary - Each American Depositary Share (ADS) represents one common share of the company and is issued by The Bank of New York Mellon853 Fees Payable by ADS Holders | Fee | For: | | :--- | :--- | | US$5.00 (or less) per 100 ADSs | Issuance or cancellation of ADSs | | US$0.05 (or less) per ADS | Any cash distribution | | US$0.05 (or less) per ADS per year | Depositary services | PART II ITEM 15. CONTROLS AND PROCEDURES Management concluded that as of December 31, 2024, the company's disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting, leading to an adverse opinion from the independent auditor, BDO, on internal control over financial reporting, despite management's established remediation plans - Management concluded that disclosure controls and procedures were not effective as of December 31, 2024863 - Material weaknesses were identified in internal controls over financial reporting related to: * IT General Controls (ITGCs): Inadequate design, implementation, and monitoring of controls for program change management and user access * Information Produced by Entity (IPE): Deficient design of controls over the completeness and accuracy of certain reports and spreadsheets * Risk Assessment: Failure to design controls for new risks arising from business process changes, including segregation of duties and personnel changes867879 - The independent registered public accounting firm (BDO) issued an adverse opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2024871 - Management has implemented remediation plans, including reviewing the risk and controls matrix, implementing IT governance functions, improving IPE processes, and training personnel869 - A previously reported material weakness from 2023 related to the revenue billing system (Conecta) was remediated as of December 31, 2024870 Other Information This section covers various governance and compliance topics, including the designation of an audit committee financial expert, adoption of a Code of Conduct and Integrity, fees paid to its principal accountant BDO totaling R$4.0 million in 2024, significant differences between its corporate governance practices and NYSE standards, and the company's cybersecurity risk management strategy and governance, including its response to an October 2024 cyberattack Audit Committee Financial Expert The Board of Directors has determined that Mateus Affonso Bandeira qualifies as the Audit Committee Coordinator and Financial Expert, as defined by SEC rules, and is also considered an 'independent director' - Mateus Affonso Bandeira is designated as the Audit Committee Coordinator and Financial Expert881 Code of Ethics SABESP has adopted a comprehensive compliance program, including a Code of Conduct and Integrity applicable to all employees and third parties, aligned with Brazilian and international anti-corruption laws, featuring an external whistleblowing hotline, and reported no corruption cases in 2024 - The company has a Code of Conduct and Integrity and a compliance program aligned with the Brazilian Anticorruption Law and the U.S. FCPA884 - An external, anonymous whistleblowing hotline is available to report fraud, bribery, and other misconduct885 - The company reported no cases of corruption in 2024888 Principal Accountant Fees and Services The company's independent registered public accounting firm is BDO RCS Auditores Independentes SS Ltda, with aggregate fees for professional services totaling R$4.0 million in fiscal year 2024, an increase from R$1.2 million in 2023 due to audit-related fees connected to the company's privatization Accountant Fees (in millions of R$) | Fee Type | 2024 | 2023 | | :--- | :--- | :--- | | Audit Fees | 1.2 | 1.2 | | Audit-Related Fees | 2.8 | - | | Tax Fees | - | - | | All Other Fees | - | - | | Total | 4.0 | 1.2 | - Audit-Related Fees in 2024 were for services related to the issuance of comfort letters as part of the company's privatization process890 Corporate Governance As a foreign private issuer listed on the NYSE, SABESP follows corporate governance practices that differ from those required for U.S. domestic issuers, notably not having a majority of independent directors (3 of 9 are independent), and utilizing exemptions for its Audit Committee structure - The company relies on exemptions available to foreign private issuers, resulting in corporate governance practices that differ from NYSE standards for U.S. companies902 - Key differences include: * Board Independence: 3 of 9 directors are independent, not a majority * Committees: The company has a statutory Eligibility and Compensation Committee, but is not required to have separate nominating and compensation committees composed entirely of independent directors * Audit Committee: The company's Audit Committee is established under Brazilian law and relies on an exemption from certain NYSE requirements904 Cybersecurity SABESP has a comprehensive cybersecurity risk management strategy and governance structure, treating cyber risk as a main corporate risk, and responded to a cyberattack on October 16, 2024, which caused temporary instability in non-critical systems and exfiltration of some non-sensitive data, without affecting water supply and sewage operations - The company has a dedicated security team, a Security Operations Center (SOC) for continuous monitoring, and a governance structure where cyber risks are reported to management and the Board of Directors919920921 - On October 16, 2024, the company experienced a cyberattack causing temporary instability in some non-critical systems; non-sensitive and low-sensitive information was exfiltrated and later disclosed by the attackers915916 - In response to the attack, the company engaged external advisors, implemented a restoration plan, and notified the Brazilian Data Protection Authority (ANPD); core operations of water supply and sewage treatment were not impacted915916 PART III Financial Statements This section contains the company's audited consolidated financial statements for the years ended December 31, 2024, 2023, and 2022, with the independent auditor BDO issuing an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting, highlighting critical audit matters related to concession infrastructure assets and the new concession financial asset (indemnity) - The independent auditor (BDO) issued an unqualified opinion on the consolidated financial statements for FY2024 and FY2023929 - The auditor issued an adverse opinion on the company's internal control over financial reporting as of December 31, 2024930 - Critical Audit Matters identified by the auditor include: 1. Concession infrastructure for sanitation services (Contract assets and Intangible assets): Due to significant management judgment in assessing project status, completion dates, impairment indicators, and useful lives 2. Concession financial asset (Indemnity): Due to complex judgments in accounting for the contract modification with URAE-1, the 'bifurcation' of the asset, and the calculation of related financial income935937939 Consolidated Statement of Financial Position (in thousands of R$) | | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total current assets | 10,608,860 | 7,783,450 | | Total noncurrent assets | 70,356,570 | 53,687,507 | | Total assets | 80,965,430 | 61,470,957 | | Total current liabilities | 11,972,245 | 8,407,842 | | Total non-current liabilities | 32,065,131 | 23,205,739 | | Total liabilities | 44,037,376 | 31,613,581 | | Total equity | 36,928,054 | 29,857,376 | Consolidated Statement of Income (in thousands of R$) | | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net operating revenue | 36,145,477 | 25,572,056 | 22,055,720 | | Gross profit | 19,542,404 | 9,520,190 | 7,704,817 | | Profit for the year | 9,579,563 | 3,523,531 | 3,121,267 | | Earnings per share (R$) | 14.02 | 5.16 | 4.57 | ITEM 19. EXHIBITS This section lists the exhibits filed as part of the annual report, including the company's bylaws, description of securities, various material agreements, codes of conduct, and certifications by the CEO and CFO - The report includes numerous exhibits, such as the company's bylaws, the Concession Contract for URAE-1, the Code of Conduct and Integrity, and Sarbanes-Oxley Act certifications924