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Risk Management
 12 Months Ended
Dec. 31, 2022
Risk Management  
Risk Management

 

5Risk Management

 

5.1Financial Risk Management

 

Financial risk factors

 

The Company's activities are affected by Brazilian economic scenario, making it exposed to market risk (exchange rate and interest rate), credit risk and liquidity risk. Financial risk management is focused on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance.

 

The Company has not utilized derivative instruments in any of the reported periods.

 

(a)Market risk

 

Foreign currency risk

 

Foreign exchange exposure implies market risks associated with currency fluctuations, since the Company has foreign currency-denominated liabilities, arising from long-term funding, in development institutions, at more attractive interest rates, in U.S. dollars and Yen.

 

The management of currency exposure considers several current and projected economic factors, besides market conditions.

 

This risk arises from the possibility that the Company may incur in losses due to exchange rate fluctuations that would impact liability balances of foreign currency-denominated borrowings and financing raised in the market and related financial expenses. The Company does not maintain hedge or swap contracts or any derivative financial instrument to hedge against this risk.

 

Part of the financial debt, totaling R$ 2,809,441 as of December 31, 2022 (R$ 3,321,489 as of December 31, 2021), is indexed to the U.S. dollar and Yen. The exposure to exchange risk is as follows:

 

 

                    
   December 31, 2022  December 31, 2021
   Foreign currency (in thousands)  R$  Foreign currency (in thousands)  R$
             
Borrowings and financing – US$   191,022    996,695    163,538    912,624 
Borrowings and financing – Yen   45,369,189    1,795,259    49,324,813    2,390,774 
Interest and charges from borrowings and financing – US$        6,985         4,121 
Interest and charges from borrowings and financing – Yen        10,502         13,970 
Total exposure        2,809,441         3,321,489 
Borrowing cost – US$        (31,037)        (22,486)
Borrowing cost – Yen        (2,646)        (2,850)
Total foreign-currency denominated borrowings (Note 17)        2,775,758         3,296,153 

 

 

The 15.8% decrease in the balance of the foreign currency-denominated debt from December 31, 2022, compared to December 31, 2021, was mainly impacted by the depreciation of the U.S. dollar and Yen against the Brazilian real. The table below shows the prices and exchange variations in the period:

 

                 
      

December 31, 2022

    

December 31, 2021

    

Variation

 
 US$    R$ 5.2177    R$ 5.5805    -6.5%
 Iene    R$ 0.03957    R$ 0.04847    -18.4%

 

In 2022 there was a decrease related to the Exchange variation in borrowings and financing, in the amount of R$ 488,614 (a decrease of R$ 38,324 in 2021), see Note 17 (ii). As of December 31, 2022, if the Brazilian real had depreciated or appreciated by 10 percentage points, in addition to the impacts already mentioned above, against the U.S. dollar and Yen with all other variables held constant, the effects on the result before taxes in the year would have been R$ 280,944 (R$ 332,149 in 2021), lower or higher.

 

The probable scenario below presents the effect on the income statements for the next 12 months considering the projection of the U.S. dollar and the Yen.

 

The Company understands that the scenario presented is reasonable, given the instability of the Brazilian real against the U.S. dollar and the Yen.

 

      
   Scenario I (Probable)
   (*)
Net currency exposure as of December 31, 2022 in US$ - Liabilities   191,022 
      
US$ rate as of December 31, 2022   5.2177 
Exchange rate estimated according to the scenario   5.2700 
Difference between the rates   (0.0523)
      
Effect on the net financial result R$ - gain/(loss)   (9,990)
      
Net currency exposure as of December 31, 2022 in Yen - Liabilities   45,369,189 
      
Yen rate as of December 31, 2022   0.03957 
Exchange rate estimated according to the scenario   0.04203 
Difference between the rates   (0.00246)
      
Effect on the net financial result R$ - gain/(loss)   (111,608)
      
Total effect on the net financial result in R$ - gain/(loss)   (121,598)
      
(*) For the probable scenario in U.S. dollars and Yen, the exchange rates estimated for December 31, 2023, were used, according to the Focus-BACEN and B3's Benchmark Rate report, of December 31, 2022, respectively.

 

Interest rate risk

 

This risk arises from the possibility that the Company could incur losses due to fluctuations in interest rates, increasing the financial expenses related to borrowings and financing.

 

The Company has not entered into any derivative contract to hedge against this risk; however continually monitors market interest rates, in order to evaluate the possible need to replace its debt.

The table below provides the borrowings and financing subject to variable interest rates:

 

          
    

December 31, 2022

    

December 31, 2021

 
CDI(i)   9,251,150    7,612,299 
TR(ii)   1,635,587    1,638,079 
IPCA(iii)   3,073,435    3,019,459 
TJLP(iv)   1,433,029    1,478,740 
SOFR(v)   996,697    912,626 
Interest and charges   424,856    243,696 
Total   16,814,754    14,904,899 

 

(i) CDI – (Certificado de Depósito Interbancário), an interbank deposit certificate
(ii) TR – Interest Benchmark Rate
(iii) IPCA – (Índice Nacional de Preços ao Consumidor Amplo), a consumer price index
(iv) TJLP – (Taxa de Juros a Longo Prazo), a long-term interest rate index
(v) SOFR – Secured Overnight Financing Rate

 

Another risk to which the Company is exposed, is the mismatch of inflation adjustment indices of its debts with those of its service revenues. Tariff adjustments of services provided by the Company do not necessarily follow the increases in the inflation indexes to adjust borrowings, financing and interest rates affecting indebtedness

 

As of December 31, 2022, if interest rates on borrowings and financing had been 1 percentage point higher or lower with all other variables held constant, the effects on profit before taxes would have been R$ 168,148 (R$ 149,049 as of December 31, 2021) lower or higher, mainly as a result of lower or higher interest expense on floating rate borrowings and financing.

 

(b)       Credit risk

 

Credit risk arises from cash and cash equivalents, financial investments, as well as credit exposures to wholesale basis and retail customers, including outstanding accounts receivable, restricted cash and accounts receivable from related parties. Credit risk exposure to customers is mitigated by sales to a dispersed base.

 

The maximum exposures to credit risk as of December 31, 2022 is the carrying amount of instruments classified as cash and cash equivalents, financial investments, restricted cash, trade receivables and accounts receivable from related parties in the balance sheet date. See additional information in Notes 7, 8, 9, 10 and 11.

 

Regarding the financial assets held with financial institutions, the credit quality was assessed by reference to external credit ratings (if available) or to historical information about the bank’s default rates. For the credit quality of the banks, such as deposits and financial investments, the Company considers the lower rating published by three main international rating agencies (Fitch, Moody's and S&P), according to internal policy of market risk management:

     

Banks

Fitch

Moody's

Standard Poor's

Banco do Brasil S/A AA(bra) AAA.br -
Banco Santander Brasil S/A - AAA.br brAAA
Brazilian Federal Savings Bank AA(bra) AAA.br brAAA
Banco Bradesco S/A AAA(bra) AAA.br brAAA
Itaú Unibanco Holding S/A AAA(bra) AAA.br -
Banco BV - AA.br brAAA
Banco BTG Pactual S/A AA(bra) AAA.br brAAA

 

The table below shows the rating assessment released by the Fitch agency, for deposit transactions and financial investments in local currency:

 

          
   December 31, 2022  December 31, 2021
Cash and cash equivalents and financial investments          
AA(bra)   2,237,629    1,905,810 
AAA(bra)   1,011,685    970,474 
Other (*)   296,044    275,030 
    3,545,358    3,151,314 

 

(*) As of December 31, 2022, this category includes R$ 289,908 (R$ 262,465 as of December 31, 2021) referring to Banco BV, current accounts, and financial investments, which are not rated by Fitch.

 

(c)       Liquidity risk

 

Liquidity is primarily reliant upon cash provided by operating activities and borrowings and financing obtained in the local and international capital markets, as well as the payment of debts. The liquidity risk management considers the assessment of its liquidity requirements to ensure it has sufficient cash to meet its operating and capital expenditures needs, as well as the payment of debts.

 

The funds held by the Company are invested in interest-bearing current accounts, time deposits and securities, selecting instruments with appropriate maturity or liquidity sufficient to provide margin as determined by projections mentioned above.

 

The table below shows the financial liabilities of the Company, by relevant maturities, including the installments of principal and future interest to be paid according to the agreement. Future interest was calculated based on the contractual clauses for all agreements. For agreements with floating interest rate, the interest rates used correspond to the base dates above.

 

                                   
   2022  2023  2024  2025  2026  2027 onwards  Total
As of December 31, 2022                     
                      
Liabilities                                   
Borrowings and financing   3,640,245    3,740,510    3,790,915    3,503,169    3,821,448    13,422,829    31,919,116 
Trade payables and contractors   430,946    —      —      —      —      —      430,946 
Services payable   723,242    —      —      —      —      —      723,242 
Public-Private Partnership – PPP   517,681    423,568    386,767    386,767    386,767    3,733,287    5,834,837 
Program Contract Commitments   100,022    1,174    1,174    1,174    1,174    12,352    117,070 
Total   5,412,136    4,165,252    4,178,856    3,891,110    4,209,389    17,168,468    39,025,211 

 

Cross default

 

The Company has borrowings and financing agreements including cross default clauses, e.g., the early maturity of any debt, may imply the early maturity of these agreements. The indicators are continuously monitored in order to avoid the execution of these clauses and the more restrictive ones are showed in Note 17 (c).

 

(d)       Sensitivity analysis on interest rate risk

 

The table below shows the sensitivity analysis of the financial instruments, prepared in accordance with IFRS 7, in order to evidence the balances of main financial assets and liabilities, calculated at a rate projected for the twelve-month period after December 31, 2022, or until the final settlement of each contract, whichever occurs first, considering a likely scenario.

 

The purpose of the sensitivity analysis is to measure the impact of changes in the market over the financial instruments, considering constant all other variables. In the time of settlement the amounts can be different from those presented, due to the estimates used in the measurement.

 

   

December 31, 2022

Indicators

Exposure

Scenario I

(Probable)

     
Assets    
CDI 1,689,876 13.4200%(**)
Financial income   226,781
     
Liabilities    
CDI (9,251,150) 13.4200%(**)
Interest to be incurred   (1,241,504)
 
 
 
CDI net exposure (7,561,274) (1,014,723)
     
Liabilities    
TR (1,635,587) 0.0205%(**)
Expenses to be incurred   (335)
     
IPCA (3,073,435) 5.3128%(*)
Expenses to be incurred   (163,285)
     
TJLP (1,433,029) 7.2000%(*)
Interest to be incurred   (103,178)
     
SOFR (***) (996,697) 0.0491%(**)
Interest to be incurred   (489)
   
 
Total expenses to be incurred, net  

(1,282,010)

     
(*)  Source: Focus-BACEN Report of December 31, 2022
(**) Source: B3 of December 31, 2022
(***) Source: Bloomberg

 

 

5.2Capital management

 

The Company’s objectives when managing capital are ensure its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital.

 

Capital is monitored based on the leverage ratio, which corresponds to net debt divided by total capital (shareholders and providers of capital). Net debt corresponds to total borrowings and financing less cash and cash equivalents and financial investments. Total capital is calculated as total equity as shown in the statement of the financial position plus net debt.

 

          
   December 31, 2022  December 31, 2021
       
Total borrowings and financing (Note 17)   18,958,671    17,723,836 
(-) Cash and cash equivalents (Note 7)   (1,867,485)   (717,929)
(-) Financial investments (Note 8)   (1,677,873)   (2,433,385)
           
Net debt   15,413,313    14,572,522 
Total equity   27,333,533    24,931,859 
           
Total capital (shareholders + providers of capital)   42,746,846    39,504,381 
           
Leverage ratio   36%   37%

 

As of December 31, 2022, the leverage ratio decreased to 36% compared to 37% as of December 31, 2021, mainly due to the increase in total equity, resulting from the profit of December 31, 2022.

 

5.3Fair value estimates

 

The Company considers that balances from trade receivables (current) and trade payables and contractors by carrying amount, less impairment approximate their fair values, considering the short maturity. Long-term trade receivables also approximate their fair values, as they will be adjusted by inflation and/or will bear contractual interest rates over time.

 

5.4Financial instruments

 

The Company did not have financial assets classified as fair value through other comprehensive income and fair value through profit or loss. The Company’s financial instruments included in the amortized cost category comprise cash and cash equivalents, restricted cash, trade receivables, balances with related parties, other receivables, and balances receivable from the Water and Basic Sanitation National Agency – ANA, trade payables and contractors, borrowings and financing, services payable, balances payable deriving from the Public Private Partnership-PPP and program contract commitments, which are non-derivative financial assets and liabilities with fixed or determinable payments, not quoted in an active market, except for cash equivalents and financial investments.

 

The estimated fair values of the financial instruments are as follows:

 

Financial assets

 

                    
   December 31, 2022  December 31, 2021
   Carrying amount  Fair value  Carrying amount  Fair value
Cash and cash equivalents   1,867,485    1,867,485    717,929    717,929 
Financial investments   1,677,873    1,677,873    2,433,385    2,433,385 
Restricted cash   37,474    37,474    28,467    28,467 
Trade receivables   3,277,808    3,277,808    2,918,311    2,918,311 
Water and Basic Sanitation National Agency – ANA   9,193    9,193    20,666    20,666 
Other assets   212,674    212,674    226,242    226,242 

 

Additionally, SABESP has financial instrument assets receivables from related parties, in the amount of R$1,156,743 as of December 31, 2022 (R$818,552 as of December 31, 2021), which were calculated in accordance with the conditions negotiated between related parties. The conditions and additional information referring to these financial instruments are disclosed in Note 11 to the financial statements. Part of this balance, in the amount of R$1,060,040 (R$741,910 as of December 31, 2021), refers to reimbursement of additional retirement and pension plan - G0 and is indexed by IPCA plus simple interest of 0.5% p.m. This interest rate approximates that one practiced by federal government bonds (NTN-b) with terms similar to those of related-party transactions.

 

Financial liabilities

 

                    
   December 31, 2022  December 31, 2021
   Carrying amount  Fair value  Carrying amount  Fair value
 Borrowings and financing   18,958,671    19,260,133    17,723,836    17,947,954 
Trade payables and contractors   430,946    430,946    236,763    236,763 
Services payable   723,242    723,242    469,027    469,027 
Program contract commitments   112,385    112,385    122,647    122,647 
Public-Private Partnership - PPP   2,959,181    2,959,181    3,060,185    3,060,185 

 

To obtain fair value of borrowings and financing, the following criteria have been adopted:

 

(i)Agreements with CEF (Brazilian Federal Savings Bank) were projected until their final maturities, at the average interest rate plus TR x DI and the average contractual term, were adjusted to present value by a funding rate specific for the Company in similar contracts, plus TR x DI, on the end of the reporting period. TR x DI rates were obtained with B3.

 

(ii)The debentures were projected up to the final maturity date according to contractual rates (IPCA, DI, TJLP or TR), and adjusted to present value considering the future interest rate published by ANBIMA in the secondary market, or by equivalent market rates, or the Company’s shares traded in the Brazilian market.

 

(iii)Financing – BNDES corresponds to instruments valued at their carrying amount restated until the maturity date, and are indexed by the long-term interest rate (TJLP).

 

These financings have specific characteristics and conditions defined in the financing agreements with BNDES, between independent parties, and reflect the conditions for these types of financing. Brazil does not have a consolidated market of long-term debts with the same characteristics of BNDES financing; thus, the offering of credit to the entities in general, with such long-term characteristics, is usually restricted to BNDES.

 

(iv)Other financings in local currency are considered by carrying the amount restated until the maturity date, adjusted to present value at future market interest rates. The future rates used were obtained on the website of B3.

 

(v)Agreements with IDB and IBRD were projected until final maturity in origin currency, using the contracted interest rates plus SOFR’s future rate, obtained with Bloomberg, adjusted to present value using the exchange coupon curve obtained with B3, plus future LFT, disclosed by ANBIMA in the secondary market. All the amounts obtained were translated into Brazilian reais at the exchange rate of December 31, 2022.

 

(vi)Agreements with JICA were projected until final maturity in origin currency, using the contracted interest rates, translated to the U.S. dollar and adjusted to present value using the exchange coupon curve obtained with B3, plus future LFT, disclosed by ANBIMA in the secondary market. The amounts obtained were translated into Brazilian reais at the exchange rate of December 31, 2022.

 

(vii)Lease and finance leases based on IFRS 16 correspond to instruments valued at their carrying amount restated until the maturity date, and are indexed by a fixed contractual rate. Thus, the Company discloses the amount recorded as of December 31, 2022 as market value.

 

Financial instruments referring to financial investments and borrowings and financing are classified as Level 2 in the fair value hierarchy.

 

Considering the nature of other financial instruments, assets and liabilities, the balances recognized in the statement of financial position approximate the fair values, except for borrowings and financing, considering the maturities close to the end of the reporting date, comparison of contractual interest rates with market rates in similar operations at the end of the reporting period, their nature and maturity terms.