Basic Sanitation Company of the State of Sao Paulo SABESP

SWB:SAJA

Earnings Call Transcript 2024-Q1

[Luiz Tiberio, executive]

Hello. Good morning, everyone, and welcome to our earnings call for Q1 2024. I'm Luiz Roberto Tiberio. I'm Investor Relations Superintendent. Andre Salcedo is here with us, he is the CEO; Catia Pereira, the company's CFO and IR Director; and Marcelo Miyagui, who's the Accounting Superintendent.

I'll turn it over to Andre. But before that, I'd like to share some announcements and guidelines. There is simultaneous translation into English, and this call is being broadcast. This presentation and video will be available for download on the Investor Relations website. You can send your questions in writing using the platform's chat. The call will last 1.5 hours and we'll have time for questions and answers from investors, analysts and journalists.

Also, we'd like to mention that there might be forward-looking statements in this reference -- in this call, referring to our business outlook, operating and financial results estimates, and they're based on the management's expectations and beliefs and on available information today and do not constitute any investment recommendation. Forward-looking statements do not guarantee performance. They involve uncertainties, assumptions and risks presented in disclosed documents filed by SABESP. Therefore, they depend on future events and they might or not come true. So investors need to take into account industry and other operating conditions that might affect future results and might lead to results that are substantially different than the ones presented here.

Now I'd like to turn it over to Andre Salcedo. Over to you, Andre.

[Andre Gustavo Salcedo Mendes, executive]

Thank you, Tiberio, and good morning, everyone. So let's have a look at our performance of Q1 2024. We try to follow the adjustment journey of the company and to conclude some steps of the restructuring that we started last year, there are some levels of accommodation for the new shared service center and the new IT strategy.

Important to point out, the performance of our engineering operations teams and regulatory team with the support of [indiscernible] on the company in defining the contribution for the regulatory model for the privatization process. So we had many debates and discussions, really management invested a lot of time to design a balanced model. For privatization, also a subsequent event after Q1, is that there was another tariff adjustment with actual gains for the company, which is a result of a good communication with the regulatory agency.

And there is technical support to our claims and we've been having very good communication with ARSESP and they understand our needs, and that's why that was reflected in the tariff adjustment that goes into effect today -- actually enters into effect this adjustment. And even more important than that, the definition of a new regulatory model of a single contract.

In this quarter, we end journey started in December 2022 of designing what the new model should be, the new regulatory model, the model that would be the foundation for other future processes. It's a challenging process because there is a regional perspective and natural resources sharing considerations. But we work with the state government, with the environmental department of the state and other departments, the UFC team, our consultants to the state government ARSESP also engaged in this process, everybody trying to build together and work together so as to provide good services and also has to be able to attract private capital because investments are considerable and that would ensure predictability levels among [indiscernible] journey, which is a long journey.

It would be a 36-year contract, taking into account 2024 as Year 1. We are very excited actually. So it was really important what we've been doing last year -- this year on putting together this contract, and now with the new regulatory framework, we think we are going to be able to capture more value in the company going forward. And also in the company should be pointed out our good market timing because of a very well thought out plan in the past.

We concluded a very important funding process that will enable us to speed up this year, nearly BRL 3 billion in debentures, combining green financing and social agenda and the preservation of reservoirs, oceans and rivers with our Blue Certification. We are very happy. We think we can replicate the certification structure for the coming debenture issuings. With the certified bonds and very well-defined commitments in resource allocation and investments that do have an impact and change lives of people and communities and reduce human impact on the environment. So we're really happy with this event in Q1.

Also as a subsequent event, which is very important as well, something that Catia worked on with our team and Bruno, which was to reduce the company's risk. One of the important deliveries was that we approved our debt -- our hedging policy that was introduced in April with contracts that are a pilot project. So we understand how it works and its behavior over time. So we are testing this model and this is going to be an ongoing policy of hedging against FX exposure because we are exposed in our [indiscernible] and revenue dynamics.

In the 2022 earnings call, I mentioned that we are still speeding up the process of investments, bringing forward the new investment plan for after the privatization until April, we launched 43 packages of linear networks to clean up the Tiete River and we renovated the most important sewage plants in Barueri, Sao Miguel and also smaller sewage plants in Guarulhos and other sites. So that we can speed up the process of Tiete sewage. So these packages add up to more than BRL 16 billion. Constructions are going to be carried out in '24, '25, '26.

And we are very excited within engagement of suppliers, we are adjusting the packages and contracting conditions [ such that ] to be more competitive and to be working with the investment funds as well. So that we can speed up mobilization of resources for construction companies.

And finally, maybe an important point today is the privatization price versus status up until March this year. We had concluded the public consultation process. We disclosed all the final materials in April. And the URAE assembly is scheduled for the 20th of the month. So this assembly will review the new concession contract and it annexes and other items, your URAE governance and how it's going to work. Also, the Board is going to be elected, and the Executive Board, just like an entity, approve the municipal sanitation plan.

Also on the 20th, we will hold the general assembly to change the bylaws that will enter into effect later. And today, the expectation that we have is that the offering will be made in June. It might even be concluded in June itself. We should conclude the waivers in the coming days. Catia will give you more details about that, if you want. And after the contract is approved at URAE's, the company would be able to sign the contract. So that's what I had for you.

So we've been working hard to improve the different elements of the company. It's important to point out, as I mentioned before, that there's going to be some volatility, especially in material and service cost and the resignation plan, this quarter was slightly below our expectations. But we are working hard to improve figures, just like we did in the past, January and February. There were some agreements that have been signed before and that had an impact on our performance. We are coming up with new ways of negotiating with consumers that we reduce the risk of contract breach through collection services and other means of payment that we reduce our risk.

So that's what I had for you. And later on, I'll be available for your questions. Thank you.

[Luiz Tiberio, executive]

Thank you, Andre. Now I'll turn it over to Catia. Catia, over to you for the financial highlights.

[Catia Cristina Pereira, executive]

[Technical Difficulty]

[Luiz Tiberio, executive]

You were on mute Catia. Can you hear me now?

[Catia Cristina Pereira, executive]

Yes. Good morning, everyone. So welcome to this earnings call. We see that there's an increase in revenue, 15.6% increase in revenue. This is a growth because of the increase in tariff of [ 956 ] and the increase in 5.5 of volume, and there's also the effect of the tariff mix. Looking at the margin highlight there is that the adjusted margin without the effect -- the nonrecurring effect, which was the APS agreement, which was what Andre was mentioned, and there's also was part of the explanatory note of the 2023 results and the agreement we had with the [indiscernible] it's a nonrecurring event that -- without that we would have [ 2,591 ]. EBITDA margin was 45%, and then it grows to 49.6%. Net income, also there was a 31.9% growth. Also not taking into account the nonrecurring events so that we can really assess the company's performance.

And we see the KPIs as well in the slide. Looking at this quarter, but also at the journey the company is on. So we see the past 12-month average, it's a rolling average that shows us the performance not only of the last quarter, but what's been happening. In terms of revenue, comparing 2022, the previous year and Q1 2024, there was an increase and there is the volume effect and the tariff effect and the mix effect.

Again, when we -- looking at the 12 months average allows us to account for seasonability. When we compare quarter-over-quarter, there's different behaviors because of seasonality. But without seasonality, we can see the clear trends in a graph like this. The same applies to the EBITDA for cubic meter. Again, we see the trends over the past 12 months, and we see 2023, 2.32 and Q1 '24 2.40, so this is the upward trend we see today.

And we in the company also, we also look at figures quarter-over-quarter to try to find improvement opportunities for the company. Having a look at our volumes, that was a 5% increase in water, 5.7% in sewage. Our greatest volume is in residential consumers, this is where we see most growth. But there's also marginal growth in volume in the other consumer categories, but average is a 5.5% increase.

In December 2023, there was similar growth rates, and there's a mix growth that has an impact on revenues, which is slightly larger than we see today. So basically, that's because of the mix and because of the vacation period where there's consumer migration, the people travel from Sao Paulo City to other places. And because of that, there's a lower average tariff. That's why it's important to look at the quarter is taking into account this volume growth. But when we look at mix and average tariff, we see these differences because of seasonality. So this is an important point.

This is the financial performance of the company. Net income of 1Q 2022 was BRL 747 million. There's a significant increase of BRL 705 million in revenue, which is a 15% growth in revenue. Construction results, again, this is a proxy. There's nearly no impact on results.

Costs and expenses, we see the breakdown there because it's important to understand what is recurring or nonrecurring, so we see the APS effect, which is BRL 162 million. That was an important agreement for the company because last year, we had expenses of BRL 45 million because of a deficit of health care insurance. And with this agreement, we will no longer have any future responsibilities. We will no longer have costs or expenses in the future related to retired employees and their dependents. So that's the driver for this agreement. So there is going to be a clear benefit for the company.

And there was another [indiscernible] that -- but also generate post employment benefit for employees. So this was a very important agreement for the company that will ensure better future results, visibility and no future impact. So that's why we entered into this agreement. Of the BRL 272 million there of costs and expenses, important impact of depreciation. I'll give you more details later on. And events such as the allowance and service variation. So this is the expenses there.

Other than APS other expenses, there is impactful financial expenses, BRL 79 million quarter-over-quarter, there was a benefit last year of FX variation with the appreciation of the real in this year, we are moving sideways. There was an impact of the U.S. dollar on Q1, which was offset by the yen. When we used Q1, the FX variation was closely no. But when compared to 2023, there was a loss, so to speak, because back there, we recognize the financial revenue from FX variation.

In addition to that, there is also an increase and some debt last year. One we had almost 1.5 of new debts, and that's the breakdown of natural results of expensive income tax and consequence of -- that's the consequence of our results and net income, BRL 823 million without adjustments, EPS is just highlighted there, but there is no adjustments in this net income figure.

Some details here, as was expected. We've been delivering the PDI that was designed back there and approved and introduced starting in July 2023. 1,360 people resigned by Q1. And in June, the plan will be concluded with looking at the net of [ BRL 4.8 million ], actually, that figure when we look at that financially and using the resignation plan alone, the effect would be much larger. In May, there was also an increase of [ BRL 4.9 million ] of union agreement and salary adjustment. So year-over-year, quarter-over-quarter without the resignation plan that figure would be 5% greater. So [ BRL 4.8 million ] shows the impact of the resignation plan PDI.

I know you're going to see in the second half of the year after the PDI has been concluded, we will have a greater capture. And in a 1-year horizon that what we see is the 15% reduction. Of course, always comparing to the baseline which was when the program was introduced because over time, there is salary adjustments every year. So that is also something that needs to be taken into account.

General supply is also moving sideways. We are working hard on general supplies and treatment supplies, general consumption and demand planning. Looking at the [indiscernible] after privatization. So that's going to be more predictability, long-term contracts so that there's going to be no seasonal impact. There was a positive impact of consumption and prices of some supplies. Reservoirs were full in Q1, so we could manage water treatment. So that's a benefit that was captured by the company.

And in services, there was BRL 60 million increase. Part of that impact is from maintenance of systems and pipelines, so we see that effect on Q1. Electricity is aligned with what we presented last year for the same Q. Again, with the same strategies that were designed looking at the free market and distributed generation, making progress with the solar panels. So we've been working to have a supply of renewable energy and with managed costs.

General expenses was a big impact. We have the breakdown there so that you have visibility of general expenses, you see what the municipal fund is. So there's -- that's a pass-through to the tariff, and this is not managed buy the company. Significant increase because of the increase in revenue, but also because of new municipalities that are now receiving after Q1 last year. So the impact is larger than the revenue because of that. And in general expenses, what we see is the APS, which was the agreement we mentioned before and BRL 68 million, which is general expenses, which is updates of ongoing processes. And even excluding APS, there's been this increase of ongoing processes. There's nothing new, nothing significant, but just an update.

In depreciation and amortization, there is nearly BRL 120 million increase because of the increase of immobilization last year. We ended the year with BRL 6.3 billion of fixed assets. And that generates depreciation and amortization expenses. We see a small graph below showing the performance of fixed assets because this is what has an impact on depreciation. The PCLD, which is the [ bad ] payer allowance, there's a nearly BRL 30 million impact.

In Q4 last year, we mentioned that there were 2 very good quarters. And there was an important nonrecurring event then that had an impact on our Q3 and Q4 results and also structuring actions are underway with the customer team, working with new types of collection and also speeding up service termination or suspension.

So this here to give you an idea, basically, we doubled the number of service disconnections giving our contracts negotiated with our global maintenance suppliers. So that's with what we've been working on.

In Q1, there was no [indiscernible]. We started late in March actually. But there was the effect of not having had that and events such as new agreements. So we are working on that. So as to introduce new payment methods that can help consumers and will also ensure our revenues. We are adjusting that and the customer team is working hard on that.

And last year, we ended with 3% and now it's 3.4% of the bad payer allowance. And this year, in the short and mid run, we wanted to remain on a 3% level. Before we start using digital payments and different types of payments so that then we will be able to reduce the default level. So there's this accommodation period. But again 2023 is the starting point for this journey in 2024. And so this is the baseline we are adopting.

Looking at our indebtedness. Again, the indebtedness level of the net debt adjusted EBITDA, [ 15.8% ] net debt with the effect of the funding this first Q, we are a low leveraging rate. This is going to be good for us. So that we can comply with our investment levels. So this leveraging rate will enable us in the coming few years to increase the indebtedness ratio, of course, respecting our covenants. So that can improve our capital structure and so that we can be able to make the investments that are required and that will be greater in 2029.

So we ended with 167, the good margin and an EBITDA -- net debt adjusted EBITDA or just EBITDA, financial expense is also very good. We still see the 12% of debt in foreign currency and next quarter, we're going to be 100% real linked debt back to our indicators in Brazilian real.

So that's it for me, and I will be available for your questions later on.

[Luiz Tiberio, executive]

Thank you, Catia. Also so well, that's it in terms of our presentation.

[Luiz Tiberio, executive]

Now we begin the Q&A session. [Operator Instructions]

That said, we already have some questions. Let's begin.

[indiscernible] have 2 questions. One, in addition to the APS agreement, what other initiatives are underway in terms of personnel that will have an impact on the company's turnaround and should be highlighted? Two, on the new contracts URAE. Are there any variables such as asset base to be used in initial calculations and the OpEx because they have not been disclosed. Do you know when these pieces of information will be disclosed?

[Andre Gustavo Salcedo Mendes, executive]

Good morning, [indiscernible]. In terms of personal, we have different initiatives. They are initiatives of when we're still state-owned. And then there's the resignation program, and centralization of management and CapEx and overall management of service agreement that many of them have been migrated to the CSP. So these policies are under away. So that's why we see a journey of reduction in the long run. There might be some noise quarter-over-quarter structurally, the unit cost in the several lines tended [indiscernible] the APS agreement is a different reasoning, which is risk mitigation. It's something that was a good opportunity for the company when it was presented.

As Catia mentioned, we had an agreement with the health care insurance company and [ SABESP ] was the guarantor of payment flows. And we had to make some payments to them because of actuarial imbalances that happened in 2022. And we wanted to solve that problem. And we started to charge from beneficiaries. And that's what led to this agreement. So together, we combined 2 issues.

One lawsuit that we didn't know what the outcome would be, but it could have been a significant impact on our balance sheet. And even if we are entitled to charge the beneficiaries, that was not beneficial for us. So we did the agreement to mitigate risk, first and foremost. And this was very beneficial for the company. As a state-owned companies, we don't have such [indiscernible]. But as we become a privatized company. There's going to be other opportunities for agreements that will mitigate risks and that will help us reduce current liabilities.

As for the URAE contract, the asset base is being validated according to ARSESP orientation. We hired independent consultants. It's probably going to be ready by the end of May. And that and the [ OpEx ] SABESP and the government know how important it is for you to set this figure as early as possible. And we are working on that. OpEx itself has a calculation formula starting in 2022 with a number of factors. That's an NX 8, I think. So there you find the formula. And later on, we can put you in touch with our regulatory team that can give you more details on this formula. Thank you.

[Luiz Tiberio, executive]

Thank you, Andre. Next question asked by Gabriel Francisco. Thank you for answering my question. Can you explain if part of the increase in the service line is due to more outsourcing because you have fewer headcount. Is there an effect of consultants and legal and financial advisers because of privatization process? Is the service expense level the same you can expect for the future, if nothing else changes?

[Andre Gustavo Salcedo Mendes, executive]

Thank you, Gabriel, for your question. Actually, what you see there is a demand effect. It's not associated to outsourced services and operations. Depending on our needs in the future, we do need to hire contractors, but in operations and maintenance, we already have contractors. So the increase is not directly related to that. It's not related to the fact that there are lower head count. We are still consolidating the service levels, we are centralizing some activities that were being carried out by the business units. And in April, we concluded the centralization process.

Now we are in this transition of this migration to shared services model and also strategic procurement is something that is also being incorporated by procurement. So this is a number of initiatives underway. And we are migrating contracts, but they have different expiration dates. And as contracts expire, strategy that we adopted last year is that any new contract or contract renewal is for 12 months, the termination clause so that we could go through the privatization process, have any ability to talk and bilaterally negotiate our agreements. So we still see this level of expenses in the company. We are working to reduce it.

And in 2025, the expectation is that we're going to have the full benefit. So the company will have been privatized for a while. The contracts will have expired and we will scale up what we are negotiating. So in the coming quarters, we expect to see similar levels, but as of the second half of the year, there will be some reductions, but the benefit -- the full benefit and the big incentive and opportunity of doing things differently is something that we will see after the company has been fully privatized. There's some important levers. The way we are structured today as a company gives us a much better view of what can be achieved. It's a long question. Did I answer it?

[Luiz Tiberio, executive]

I think you covered everything. He also asked if there's an effect of hiring consultants or legal advisers?

[Andre Gustavo Salcedo Mendes, executive]

There is a value that is supported by the government, consultants that we hired have a contract that's mostly based on success fee. And nearly all of them follow the privatization law. So there is the expense, but the government can reimburse later on. It's a state law, Gabriel, that defines how that should be carried out.

[Luiz Tiberio, executive]

There are 2 questions asked by Marcelo Sa. First, election of Board members per ticket. This ensures that strategic will appoint 3 board members, 3 board members from the states and 3 independent Board members. In the bylaws, there is the possibility of production of multiple voice. If a relevant shareholder tries to enforce that, can it make this board composition feasible?

And the second question is about the poison fuel. And the bylaws that would be the largest value between 200% of the capital increase price that happened in the past 36 months and 200% of the average price of the past 90 days after the tender offer announcement date. It's not clear to me what happened. If this poison fuel limit is achieved in 4 years of the due. So only the 200% of the average price of the past 90 days would be taken into account.

[Andre Gustavo Salcedo Mendes, executive]

Marcelo, in the bylaws, there would be 9 Board members and the government would appoint no more than 3 Board members, that's in the bylaws, that's the makeup today. And also, there's a minimum number of independent Board members. So that's the structure today. And if there's a strategic shareholder, it is likely that they will also appoint a Board member, even an independent board member, that would be possible as well. The multiple vote is write of shareholders. And that does not make the bylaws invalid.

Of course, the changes in the dynamics because it wouldn't have a ticket, but it would have individual vote per Board member. So indeed, these are 2 different mechanism, the multiple vote or the ticket vote. These are 2 possible mechanisms according to our bylaws.

Poison Pill, I don't understand your question. I'm reading it again. Basically, the largest of the 2 figures is the largest of the 90 -- previous 90 days or the stock issuing price. So if there's no increase in capital, this metric is not taken into account. So only one of the items is valid. Thank you.

[Luiz Tiberio, executive]

Next question, Vladimir -- actually 2 questions by Vladimir. First one, the new municipalities who have had approved funds. Why is there the new collection? Is this the privatization? And the second, the PCOD value, which is the bad payer allowance is substantially higher than that indicated in the nonrecoverable revenues of the new regulatory framework. Can we expect value convergence over 2024? What has been...

[Catia Cristina Pereira, executive]

I'll answer the first one. Thank you, Vladimir, for your question. So the new contracts, new municipal funds, have been waiting for approval of our SABESP for many years. It had filed for that many years ago the largest municipalities already have their established funds. And the smaller municipalities had not realized that there was this opportunity. They need a municipal law to be passed and then after that, we have to file with ARSESP and ARSESP approves that, and then we make payments after the approval by ARSESP. And if there's any retroactive payments to be made, we make them according to what ARSESP decides.

So for us, from an economic point of view, this is neutral because there's a full pass-through to the tariff. And the impact of the new municipalities is not relevant, and that's nothing to do with privatization. In the post privatization model, it is much more clear type of discipline that will guide the payments made into the municipal funds. The totality will be included in the tariff, in Sao Paulo it will be 7.5% of the Sao Paulo municipal fund and only 4% is recognized in the tariff. But after privatization, the totality of that is going to be included in the tariff. The same will happen to the other municipalities.

You still need a municipal law to be passed and then you need to file that with ARSESP which needs to approve that. And in the next tariff cycle, there is a payment of reimbursement of the payments made and the inclusion of future payments.

And now the question about bad payer allowance. When you look at, the regulatory model says that you should take into account the past 16 months in terms of nonrecoverable revenues. And we're taking into account the average of bad payments before the pandemic. So the percentage is much lower than we see in 2024. So eventually, there's going to be a convergence. I don't think it's going to be 2024. When you look at 60 months, basically, we're talking about 5 years and irrecoverable is that what you cannot collect in the 5-year horizon. So this is a PCLD of 260 [indiscernible] irrecoverable according to the regulatory agency, they look at the tail. So having a 3.4%, bad payer allowance does not mean that we won't try to still collect. So we still pursue collection of above 360.

In accounting terms, we do the allowance. But commercially, we're still working to collect those amounts. So there are different concepts. In the time line, it's a 5-year horizon, 60 months, and the bad payer allowance is 360-day or 1-year horizon. Eventually, they will converge when we look at the 5-year average.

So in answer to your question, according to the new regulations, if I'm not mistaken, it's 1.9% as a target. So we will try to achieve that, but we are still working on that with our customer team. 165 not 1.9%. So there's still some ways ahead before we know when we are going to be able to get there.

[Luiz Tiberio, executive]

Thank you, Catia. Next question asked by Lilyanna Yang. Congratulations on your deliveries so far. Two questions. One, what did ARSESP not recognized in terms of SABESP tariffs referring the IRT of May 2024 of 6.4%. For example, the repass of the municipal fund of the Sao Paulo city, is it 4% or 7.5%?

Two, what should be the offering format? And when we will have more details about that? For instance, the price to be paid at the offering by minority investors is going to be the same paid by a strategic investor.

[Andre Gustavo Salcedo Mendes, executive]

Thank you, Lilyanna, for your questions. The 2 important points that were not addressed by the tariff adjustments. And that are recognized in the new contract that have an impact on the revenue. First, fixed demand contracts, so key accounts, 2023 there were BRL 720 million discounts that were not recognized in the tariff. The new contract, there is BRL 300 million forecast to be recognized in the tariff. So we will be adjusting this volume of BRL 720 million in our budget. This is a very important point. This was not recognized in the tariff adjustment even if -- there was a item therefore, which was not included in the new regulation.

The second point that had an important impact, is reforms and cancellations. We talked to the regulatory agency about that issue that we have the obligation of letting them know the build amounts. But in that period, in that time frame, we are not able to review all of the requests for review. And then a new contract, it's going to be 90 days. And this addresses 90% of the problems we have with strong measurements of revenue because the figure may be polluted by reforms and cancellation, which should account for 2% of the revenue in the 2022 values.

And in answer to your first question, the value of the tariff which includes 4%, the 7.5% is the new regulatory framework.

The second question is the privatization offering. This is being led by the government. They've been having meetings with the privatization agency. So the government is analyzing that. We give them support whenever they request us to. Our advisers and consultants are also at their government service, but the figures have not been set yet. And I think that this is going to be published as soon as possible as soon as the model is established.

[Luiz Tiberio, executive]

Thank you, Andre. Next question asked by Louisa [indiscernible]. Could you share more details about your vision regarding the final documents of public consultation regarding the new regulatory framework. What were the most important contributions made by the company and addressed funds? We see that commercial programs will be included in the tariff with an annual limit. That said, what should be the strategy to apply tariff discounts going forward?

[Andre Gustavo Salcedo Mendes, executive]

[indiscernible] in revenue, so there's commercial agreements. It is going to be a budget for existing contracts. The contract inventories at BRL 720 million of discount. It's going to be adjusted to BRL 300 million. This is going to take some time. There's a forecast and then we're going to be working with the regulatory agents that the figure grows in the future, but then in it's to be something we built together with the agency. So to look at the new commercial agreements and not be limited to BRL 300 million. But the context that with the new consumers, the unit cost will decrease for everyone. So this is an important point to be addressed.

And in terms of cost, we had the recognition of the employees. This is an important point that is going to be recognized in expenses and sharing efficiencies in the first cycle up until 2030. We capture 100% -- the company captures 100% of efficiencies generated and then 50% in the second cycle is 75% and then 90%. And an interesting point of the municipal funds that can help us reduce -- the municipal fund allow us to keep some pass-throughs if there's any municipality that doesn't pay. So because -- it's an important mechanism for us. We'll be able to retain resources from municipal funds in case the municipalities don't pay their bills with us. This is a very important mechanism.

[Luiz Tiberio, executive]

Next question asked by Gabriel Francisco. Can you give us more details on the cost basis for 2022? That is the basis for the OpEx calculation and a tariff review. According to the new regulation, it seems to me that some costs such as the management bonus and losses are removed from the calculation base. Do you have any idea of the magnitude of the costs no longer taken into account?

[Catia Cristina Pereira, executive]

Actually, the basis was 2022 because that was closed the year -- that was audited already, and then was used for the analysis for the new contract. 2022 has not been closed yet. So the baseline is 2022 because the figures have been audited already.

And as to, well, Andre answered that, that one of the achievements was the recognition of the bonus is something not to be discounted. But as we say here, and I can give you figures later on, it's BRL 100 million -- roughly BRL 100 million. It's not that significant. An important point here, what is part of the new contract is, that is going to be an obligation, which is the insurance -- mandatory insurance. And this is an account that was the company, the insurance premium that because of the requirement that it will be in terms of coverage, we will have that as a pass-through into the tariffs.

We are going to present the company's insurance program for ARSESP when that is approved, that's going to be passed on through to the tariffs. So this is going to be an expense that is going to increase for the company because there's more coverage requirement insurance, but that is going to be introduced in the tariff as the nonmanageable expense. So that's helpful when we look at -- what is discounted today in the regulations is going to be in the contingencies lines and insurance is going to be helpful. And we'll be able to treat that in a structured way, in a more comprehensive way. And there are some other initiatives that we adopted to reduce risk that are also going to be helpful for our contingency management. Thank you.

[Luiz Tiberio, executive]

Thank you, Catia. Thank you, Andre. So that was the last question from investors and analysts.

[Operator Instructions]

And so this was the last question from analysts and investors. And now we can answer questions from journalists.

Actually, there's an additional question here.

Adela Sosa asks, the initial tariff is going to be in the contract signed by URAE before privatization?

[Andre Gustavo Salcedo Mendes, executive]

The formula is there that this tariff will depend on the conclusion of the 2023 asset base. So we wanted to announce that as soon as possible. But by the 20th, I'm not sure that's going to be -- have been approved by ARSESP. So probably this contract is going to be signed as is today.

[Luiz Tiberio, executive]

Okay. Thank you. Okay. We can now answer the questions from journalists.

[indiscernible], what's not ready yet in terms of the offering model. During the offering early in June, is it viable? Is it not just -- is it not too short a time?

[Andre Gustavo Salcedo Mendes, executive]

Thank you, [indiscernible], for your question. The regulatory model, I don't think it's going to be adjusted by the URAE meeting because we think it has been concluded already. So at URAE, we already have the new concept for the regulatory framework. So that is set as to the offering model, there are some points they are still open. The price, for instance, it's going to be different price and some other details. So the government needs to set that. And then the process is that there's a meeting with the state privatization team, and then they announced to the market what they decided. So that doesn't need to be ready by the URAE meeting. It's a different logic. It's a construction of a new contract model that has an impact on the offering, but it's not part of what URAE needs to approve.

In the June time line, it is feasible today, yes. What I mentioned before that -- we can -- the window is from end of May and to beginning of August. So with the current figures, we can have an offering up until the beginning of August. In case we needed to change that schedule, we have this flexibility to adjust the schedule up until August.

[Luiz Tiberio, executive]

Thank you, Andre. [indiscernible] has another question on your -- it's a follow-up on the P0. So if I understood you correctly, privatization would begin without the initial tariffs. Is that correct?

[Andre Gustavo Salcedo Mendes, executive]

No, that's not correct. The methodology of P0 is not being established. So the variables are there except the 2023 base. And if the offering is done without that defined, that suggest in the next tariff cycle. It's not a problem. So whatever is not available today can be recognized later in the next tariff cycle.

[Luiz Tiberio, executive]

Thank you, Andre. Next question by Alberto Alerigi Jr. This apparent hurry for privatization with many nondefined points. Don't you think that create legal risks that could compromise the process and its legitimacy. Why is there such a hurry for such a complex process?

[Andre Gustavo Salcedo Mendes, executive]

That's an excellent question. I think it's the opposite. We've been making very well-founded decisions since the beginning of last year, we hired a UFC and defined Phase 0 and the foundations of why going forward with the process, the benefits that would be accrued all of the details in Phase 1, a notification to municipalities definition of the new regulatory framework.

But everything has been done with great technical rigor -- and the final model, as I mentioned earlier today, is very innovative and has been adopted elsewhere. And I think this is what should be done not only here with this regional view and interdependencies and coexistence of assets and natural resources that serve to more than one municipality, there's the URAE meeting and then the 30-day time and the offering follows the rules of the equity markets. And as new information is made available. We can change the offering schedule because we want people -- investors wanted to take part in the process to be comfortable.

As I mentioned before, to [indiscernible] question. We can have the offering up until early August. And this is a decision that we make together with other parties. So we decide when the best time for the offering would be. It's a robust regulatory model, which is very suitable to the sanitation challenges today and all of the important variables are defined in the contract model.

So it's the opposite of what you say. Everything is being done very carefully, with all of the technical consideration and the state government is also doing its part and there's also the legislative processes in parallel. So we're doing things according to schedule. And this is something that is going to be a breakthrough in Sao Paulo and in Brazil as a whole. And we are confident that the process is being led the best way possible.

[Luiz Tiberio, executive]

Thank you, Andre. [indiscernible] has another question. If you don't have the offering by August, do you think it would be done still in 2024?

[Andre Gustavo Salcedo Mendes, executive]

Well, we today are working with the first Q window. We don't have a plan B in case there's anything that will make us rethink, well, then we will see what would be the best way to go about it?

[Luiz Tiberio, executive]

So yes, so these were the questions from the journalists. I turn it over and to Catia for your final remarks.

[Catia Cristina Pereira, executive]

So I'd like to thank everyone in the company, the superintendents, the operating teams and everyone in the company. This has been a very fruitful journey. We've been learning a lot and it's a transformation journey for the company, for the consumers. And the company is being able to respond to changes in a very positive way. What we've been doing in 2023, '24 is the result of hard work, dedication. I'm not going to name names because I don't want it to be unfair, but I'd like to thank everyone support teams, financial team engineering, operations, customer regulatory, new business. So everyone has been working really hard in this process.

Also the company has had this unparalleled ability to mobilize whenever there's any event that put lives at risk. Last week, there was this a typical weather event in Rio Grande do Sul very quickly, 4 people in the company and the company were engaged engineers, technicians, people in maintenance and operations, and they traveled to Rio Grande do Sul. There are 14 crews working in Port Volgren and municipalities working with the state government. And we are going to Rio Grande do Sul to help with the disasters. They are sending also water, we sent many trucks of water to Rio Grande do Sul to help them establish the services there. Helping them reestablish the services, but also helping supply hospitals and shelters with water with our trucks.

So thank you to our heroes that traveled to Rio Grande do Sul, from people from SABESP and everyone who donated to help. I'd like to thank you all and to thank everyone in the company once again. Also, I wanted to thank everyone in my team. Everyone has been working very hard because of this privatization process. the turnaround process. So thank you, everyone, in finances. I'd like to thank my colleagues, the managers and directors and their teams. We have been rethinking this company, rethinking processes, and this is a journey. And every day, there's more information, and we are always aiming for continuous improvement.

There's a long way ahead, but I'm happy to see that we've been making progress working together so that we can deliver the best to society, which is to deliver sanitation more affordability and better results for the company. Thank you, everyone.

[Luiz Tiberio, executive]

Thank you. So with that, we end this earnings call. Thank you, everyone, and have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]