Companhia de Saneamento Básico do Estado de São Paulo - SABESP

Good morning, everyone, and welcome to SABESP's video conference to discuss the results for the third quarter of 2020. My name is Mario Sampaio. I am head of capital market and investor relations. Let's start by informing all participants that this video conference is recorded. The presentation, accompanied by slides, is being transmitted over the internet. through the website www.sabesp.com.br and through the MGIQ platform. Presentation will be available for download on the same portal as well as the results release. We remind you that the questions will be accepted to the speakers only through the videocast platform. Our conference will take approximately 1 hour and 30 minutes and we will reserve 45 minutes potential questions and answers from analysts and from journalists. Before proceeding, we would like to clarify that any statement that may be made during this conference relating to the company's business prospects, projections and operational and financial goals constitute the beliefs and assumptions of SABESP. Thank you very much. Thank you very much. We have Mr. Rui Afonso, the Chief Financial and Investor Relations Officer, Mr. Marcelo Niaghi, Head of Accounting, Mr. Agnaldo Pacheco, Company Controller, and Mr. Luiz Tudério, Head of Costs and Tariffs. Well, we have a presentation to go through, but before we start, I'd like to make some general considerations on the company performance in the period. In this quarter, with the pandemic crisis still in course, a crisis that imposes caution and challenges in the economic field, we observe the initial resumption of economic activity with some sectors in the reopening phase. However, the recovery has still been very timid and at a slower pace than desirable. This is reflected in the company results with a direct impact on revenues as a consequence of the change in the consumption mix due to the increasing volumes in the residential category and reduction in volumes from the industrial and commercial pools that have average tariffs higher, but all in leading to a reduction in the total average tariff. In addition to this, we also had higher delinquency levels. We recently started our water year that went from October to March, so let's remember how that went, the last year's hydrological year went. In terms of water resources, we have been experiencing a period of severe drought and higher temperatures, And notice that the works carried out in the last few years, especially those that added more water capacity during the water crisis, have proven to be efficient, eliminating the risk of water shortages in the metro region of São Paulo. Considering that the rainfall season then starts now, started in October, rainfall is expected to increase and water resources are expected to return to more comfortable levels in the next few months. It is important to highlight that, as in the water crisis today, in the context of the economic and health crisis, we maintain the strong level of investment despite all these events. From the financial point of view, we have taken a series of measures aimed at strengthening the company's liquidity and mitigating the effects of the exchange rate uncertainty and volatility, exchange exposure. In this line, we issued the 26th, the venture in the amounts of 1 billion and 45 million reais during the third quarter. which adds to a total of 2.5 billion so far of debenture issuances this year. We also prepaid the $350 million foreign currency debt of the Erebon that would mature on late mid-December. In May this year, just let's remember, we had already exchanged debt from an IDB loan of 494 million dollars when we changed it to reais representing 2.8 billion reais. If we combine these two movements, we reduce exposure to foreign currency from approximately 49% in the last quarter, last year, to 25% this year, reversing, thus, the adverse situation of a high financial expense due to the increasing valuation of the heiau against the dollar and increased, at the meantime, the company's resilience to this factor. We also obtained from the NDS the postponement of interest payments in operation notes that stand still in the amount of 131 million heiais. that were maturing during this year and we preserved our cash by using a guaranteed insurance. to avoid cash outflows so far of 220 million reais. Also, this month, we signed a financing impacted loan agreement with IDB Invest. IDB Invest is a private area bank of the IDB Group that is in the total amount of 950 million reais. These actions resulted in the maintenance of liquidity and payment capacity, ensuring the execution of the expected investment of 3.5 billion this year. In fact, in the third quarter we invested 1 billion, and in the nine months we already add 3.1 billion. This quarter was also marked by the bidding process for rendering the service in the metropolitan region of Maceió, taking advantage of the window of opportunities that arose after the approval of the new framework from the sanitation sector. We participated in the competition with a minority stake in a consortium with a private partner. This move is to show that SABESP is prepared to expand markets and participate in other competitions in the future. With regards to regulation, we have the tariff adjustment of 2.4924% and plus the compensatory adjustment of 0.888% this last due to the postponement of the application of the adjustment in April, resulting then in a total adjustment of 3.4026 in effect since August 15, which being in effect since August, also partially Thank you very much. and the retail segment of the residential, social and pavilion categories, the total increase was 0.6. Similar to the previous quarter, volume growth was anchored in household consumption, with the residential category increasing by 3%, while non-residential categories fell by 14.7%. That now moves to slide four. Here we go through our financial highlights. Income total $421.6 million in the third quarter of 2020 compared to $1.2 billion in the third quarter of 2019. The decrease was due to the non-recurring revenue recognized by the signing of the agreement of the Municipality of Santo André in the third quarter, which resulted in a negative deviation of $1.3 billion compared to the same period last year. This impact on the result was offset by efforts to reduce foreign exchange exposure, as already mentioned, with the currency exchange of the debt especially the IDB debt with close to 500 million and then with a positive effect on the results for the period of 395 million reais. Net operating revenue fell by 18 percent from 5.4 billion in third quarter 19 to 4.4 quarter billion in this third quarter 20 due to the effects arising from the agreement exact agreement signed with the municipality of Santander in the third quarter of 19. this then resulting in a negative variation of 972 million in the period Added to this was the effect caused by the change in our tariff mix with the residential category with lower tariffs accounting for a greater percentage contributing to the reduction of revenue in the period. Costs, administrative selling expenses and construction costs increased by 20 The adjusted EBITDA was significantly affected, falling by $1.5 billion from $3 billion in Q3 2019 to $1.5 billion in 2020. The adjusted EBITDA margin fell from $55.6 On a 12-month basis, the margin was 35.8%. Excluding the effects from revenue and construction costs, the adjusted EBITDA margin was 44% in the third quarter of 2020, compared to the margin of 63% in third quarter 19. and 44.3% is the last 12-month margin for this quarter. In summary, the drop in EBITDA was due to the non-returning events of the third quarter of 2019 added to the deterioration of the economic condition of the period. Let's go now to slide five to analyze costs. Compared to the same quarter in 19, costs, administrative, selling, expenses, and construction costs increased $588 million, or 20.5%. Construction costs increased by $346 million compared to third quarter, from $683 million to $1 billion due to investment in the construction of assets, I mean board investments. However, excluding construction costs, Cost and expenses increased by 11% from 2.2 billion to 2.4 billion, a variation of 242 billion. Among the most significant variations are salaries, payroll, targets, and benefits and pension plan liabilities of 162 million or 29.5 percent mainly due to the negative variation of the reversal of expenses in the third quarter of 19 related to the positive retiring program in the amount of 173 million reais. Including this non-return effect, personnel exchange expenses would have decreased in the quarter claimed mostly to the average reduction of 2.8% in the number of employees, mainly due to the gradual employee termination under the knowledge retention program, called PCR. The variation is in estimated loss and allowance for doubtful accounts in the amount of 112.7 million, also contributed significantly when compared to the same period of last year. This was partly explained by the reversal of 51.5 million reais in third quarter from the agreement with the municipality of Santo André, and also by the increase in the level of default caused by the economic instability worsened by the Covid-19 crisis. Let's now move to slide 6. Here we will analyze briefly the main changes that affected the net result. Net income fell by $787 million, as previously explained. Net operating revenue decreased to $970 million. Costs and expenses, including construction costs, grew by $588 million. Other operating revenues and expenses, including equity results, came in negative by 11.2%. It's worth noting that our financial results, which had a positive variation of $389 million, was mainly due once more to the company's management to reduce the FX exposure. Finally, income tax and social contribution fell by $295 million in view of the lower taxable income recorded in the quarter when compared to the same period last year. Let's now go to the next slide, slide 7. Here we'll briefly comment on management performance indicators. Although the gross revenue per bill cubic meter indicator was 8.6% lower in the third quarter this year over third quarter last year, this indicator has been reporting a growing average monthly increase, as you can see on the top left. Operating expenses per built cubic meter increased in controlled matter and compatible with the growth of our operations. In third quarter 20, these expenses increased by 11.5% over decrease, sorry, by 11.5% over third quarter 19. In line with the budget adjustments we've made in the second quarter of this year of 300 million reais, which we did comment on our first quarter call, and another executed in the third quarter of an additional 150 million chiates. As a consequence, the third quarter of 2020 had a positive evolution compared to the beginning of the year, despite being 10.4% lower than the results in third quarter 19, as you can see on the top right. On the bottom, you can see the average evolution of the indicator Eddie Doppler billed cubic meter that has also a growth trend in the period. This illustrates that despite the adverse scenario, we managed to reduce expenses, offset over average tariffs, and maintain cash generation levels without neglecting our investment plan. Let's now quickly talk about regulation on the next slide. uh okay first uh this is basically let's talk uh about uh the third ordinary tariff review scheduled for completion in april 2021 the report on the regulatory asset base and the business plan have already been delivered to our staff and in january the preliminary p0 will be released It is worth remembering that, until the conclusion of the review, there will still be some important steps and public hearings for the calculation process of the average tariff, so let's keep an eye. Still within the scope of our SASC 20-21 regulatory agenda, we contributed with a public consultation regarding its losses, and we are currently working on another that addresses the criteria for sharing alternative revenues. We still have other topics on the agenda, such as conservation program for water resources, assessments of exclusions made by the asset base for the first tariff review, and detailing of the risk matrix. Regarding the exclusions made at the asset base in the first tariff review, we're working on this analysis and we'll present our study shortly. The revision of the tariff structure is expected to be concluded by March 21, but it's important to note that the future structure may differ from the current one. Thus, the required revenue that will be allowed will be distributed within the new tariff structure, which means that there may be different tariffs per category that we have today. So, there's going to be a new distribution. Let's now move to slide four. Let's comment then in a little bit more detail on the water situation of the reservoirs in the metro region of São Paulo. The 1920 water season that ended in September had a lower than average rainfall. The Cantaredes system received 74% of the expected volume, while the Alto Tietê received 72% and Guarapiranga system 68%. Next slide. With inflows below average on the three main supply systems, the Alto Tietê has been recording inflows close to its minimum storage levels. As you can see, they went very low. Let's go to the next slide. Considering the integrated system for the entire metro region of São Paulo, the system's total available water volume for October 31 was 45.7%, although this volume was lower than the same period in 2019, it is 1% higher as you can see from 2018. It's worth noting that the drop in water reservoir levels between April and September is normal, as the rain season concentrates between the month of October and March. So, the purpose, obviously, of the reservoir is to guarantee water supply during April and September when rain falls less. Despite rainfall falling less than expected, as we saw, we can observe that the water sources that supply the natural region of São Paulo is under control. The construction works that we carried out, such as the São Lourenço production system and the Jaguari-Achibainha interconnection, increased the system's water security for the networks of São Paulo during the periods of this period of lower water availability and stress. Next slide. Finally, it's worth noting that the impacts of the economic crisis, and consequently of the average incomes of families combined with the pandemic brought a change in the consumption pattern of the population with an increase in residential consumption. He has already mentioned a drop significant in commercial and industrial production, although maintaining practically the same volume produced. As you can see in the graph, average production in the São Paulo metro region in October was 63.3 cubic meters per second and volume 500 liters per second lower than in October 19. Well, before we finalize, I would like to briefly detail on the company's debt and liquidity management. As already mentioned, the company has been working to guarantee the execution of investments and to meet debt maturities. maintaining its assumption for strong cash position, cash position and lower exposure to foreign currencies. With the approval of the Sans-Fu agreement on the NDS financing contracts, which in fact provided the suspension of debt services for six months, SABESP has a cash relief, as mentioned also, of 131 million until December this year. Detailing more, this month we formalized the financing, the loan agreement with the IDD Invest. The amount, just to remember, is $950 million in two trenches. There's a long trench with long-terms of $508 million, which proceeds will be invested in two projects, the Nova Pinheiro project and a renewable energy plant. And the second tranche, in the amount of 442 million, the proceeds will be used to refinance debt, including the euro bond. The transaction is unsecured, and the total borrowing amount will be disbursed one time by the beginning of this year. So this is a very emblematic move. It is a multilateral lending in reais. Lending with No Guarantees and Associating to Investment and to Cash Support and Refinancing. So this is very important. At the end, such funds will be relevant to further and simultaneously preserve our capex execution, capacity and support our liquidity. So that's basically what we have for the slides. We're now open for questions. So let's see if we have yet a question. But we have, I'm opening for questions, okay? We have one question that I can see here. Let me check, just give me one second. As I was speaking, I did not chat. Okay. We have one question from Liliana Young from HSBC. The question is, there are one, two, three questions. First, can you please update us on the presidential vetoes on the June approved federal sanitation bill, which are pending analysis of the Congress and are relevant for SABESP? That's one question. Second question, can you discuss The appetite for new concessions out of São Paulo, faith and rationale of partnering with Igua as opposed with other private-run players or as opposed to bidding alone. And the third, can you please quantify cost impacts and savings with your ongoing voluntary plan and other saving initiatives? Rui, I'm addressing this to you. Do you want me to repeat the first question?

Mario, I believe that I've got it, the first one. My understanding is from the many of the vetoes that are in discussion in the Congress to reject it or to approve it at all, as is it right now, because the law is effective, Right now, if the Congress stands still and don't make any change in order to the presidential veto, the main important impact for SABESP could be the one that if There are gopits down by the Congress allowing the extension of the modality of program contracts for us and for everybody. In our case, it's not some deal issue, deal-broken issue, because it's As you were following, especially you, Liliana, we have assured both parts of our contracts before the law was in action. So we don't have a major problem on that. If there is any change in this veto, the extension The second question is, can you discuss the appetite for new concessions out of São Paulo State and the rationale

or partnering with IGUA as opposed to with other private players or as opposed to building one alone?