Companhia de Saneamento Basico do Estado de Sao Paulo - SABESP (SBS) 2013 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to SABESP's conference call to discuss 2Q 2013 highlights, and the tariff revision process.

The audio for this conference is being broadcast simultaneously through the Internet in the website www.sabesp.com.br. At that same address, you can also find the slideshow presentation available for download.

We would like to inform participants that you will be in a listen-only mode during the Company's presentation. After the Company's remarks are over, there will be a Q&A period. At that time, further instructions will be given. (Operator instructions)

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of SABESP's management and on information currently available to the Company. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties, and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of SABESP, and could cause results to differ materially from those expressed in such forward-looking statements.

Now, I will turn the conference over to Mr. Mario Arruda Sampaio, Head of Capital Market and Investor Relations. Sir, you may begin your conference.

Well, good afternoon, everybody. And first, let me also present other participants. We have with here our CFO, Mr. Rui Affonso; the Head of Tariff and Costs, Mr. [Silvio Chavier], and the Head of Accounting, Mr. Marcelo Miyagui. So there will be, together with the rest of the CFO's team, available for question and answers.

Today, we have basically three points to go through, three slides regarding the second quarter, some second quarter highlights, the news on the GFM and municipality, and the last would be new on the tariff process.

But before, we do have a slide with some dates outlined, where we would like to make some preliminary considerations for the reasons that we have been somewhat in a silent and not so much available, or at all available for discussions with the market.

As everyone knows, since the release of our SABESP Resolution 427, which suspended the tariff revision process, and requested SABESP to reform the time necessary to revise the asset base due to inconsistency found, we have decided to remain silent. First, obviously, we ask you for your understanding, and at the same time, we would like to reinforce how great and important it is for SABESP, and importance we give towards contacting, communicating and interacting with shareholders, investors, analysts and the media, make sure that this is not only valuable and important for you all, but also for SABESP management, and the process of which we manage this Company. This is very important, this interaction.

Therefore, we would like to expose the reasons for our decision to remain silent up to now, reminding that this situation has great similarity to that one that occurred during the fourth quarter 2012 release, that is, of a convergence of dates between the fourth quarter release -- in this case, the second quarter release, and the resolution, or a resolution issued by SABESP.

More precisely, as you can see on August 2nd, our SABESP release Resolution 427 which suspended the tariff revision process as whole, for an indeterminate time, and gave SABESP 30 days to inform the time it would take to revise its regulatory asset base.

At that time, as you all probably know, SABESP had scheduled its second quarter 2013 results release for August 8th, and the conference call for August 13th. When SABESP became aware of our SABESP Resolution, it started working intensively to assess the inconsistencies raised by the agencies in relation to the asset based estimates.

Taking into account the short time period between the publication of this Resolution, and SABESP's results release, we postponed at first the result release for August 13, and the conference call for August 15. The objective was to give an answer to assess before releasing the results, such that during the call, we could freely discuss both the Company's results and the tariff revision process.

However, in view of the complexity of the matter, it was not possible to complete our answer to SABESP in time for the conference call on August 15.

In the meantime, two other facts occurred during this period. On August 9th, the last tariff adjustment completed 12 months, and on August 16, ARSESP's President resigned, leaving the agency's Executive Board with two officers, with a minimum quorum for resolution is three officers.

Considering that we have not yet defined the deadline for work related to the asset base, and the Company's results came in line with the market expectation, we decided to cancel the conference call and remain silent until any relevant information about this process issue became available. In other words, it would not fit to come to the market, and do not address the issue of greater relevance -- that is, the tariff revision.

With this decision, we understand we are observing the alignment with all shareholders, investors, analysts and other SABESP stakeholders until we have a concrete fact to discuss, which are doing right now.

On our next slide -- I believe it's slide 4 -- we highlight some points of the quarter and some recent events. As you already know, second quarter 2013 came in line with the market expectation. Net income totaled BRL361 million in second quarter 2013, compared to BRL292 million in second quarter 2012. And at the six month period, net income was up 9.3%, from BRL787 million in last quarter, to BRL857 million this quarter, this last quarter, this last second -- sorry, half.

EBITDA grew 14.2%, from BRL798 million in second quarter 2012 to BRL911 million in second quarter 2013. In the six month period, EBITDA was up 8.7%, from BRL1.686 [million] (sic) -- in other words, almost BRL1.7 billion in second quarter 2013, to almost BRL1.8 billion in second quarter 2013.

EBITDA margin in second quarter 2013 came slightly higher, 32.6%, compared to 32.3% in second quarter 2012. In the six month period, EBITDA margin also slightly increased, from 33.4% in second quarter last year, to 33.7% in second quarter 2013. If we exclude revenue and construction effects, construction cost effects, EBITDA margin was 42% in the first half of 2013, compared to 41.4% in first half 2012.

We also point out the net debt to EBITDA ratio, which, in the six month period, remained relatively in line, at 1.6 times, and in the first half of 2013, against 1.91 times in first half 2012. Now, when we see the total debt over EBITDA, the difference was even smaller, from 2.42 times in first half 2012 to 2.41 in first half 2013.

So the numbers reinforce that the Company has strong fundamentals to face adverse macroeconomic conditions, as those seen currently with the devaluation of the real against foreign currencies, and the increase in interest rates in Brazil and throughout the world.

With respect to foreign exchange exposure, we'd like to highlight, first, from the point of view of the results, the Company was less impacted this quarter compared to the same period last year, due to the lower appreciation of the yen against the real. The depreciation was 4.2% this second quarter against 14.6% in second quarter 2012. And lower appreciation of the dollar against the real, in this case, 10% in second quarter 2013, from 10.9%, slightly higher, in second quarter 2012. All this causing a decrease in the exchange rate variation expense of BRL80 million.

In relation to total debt, as you can see on the chart, second quarter presented a foreign exchange exposure of 38.5% -- that is 38% against second quarter 2012, so very, very stable.

From the debt profile point of view, in our opinion, the situation is very tranquil, as you can see. The Company continues to manage its foreign exchange exposure by diluting maturities in time -- throughout the time, and maintaining sufficient cash availability to cover any relevant exchange rate variations that we might see as we move on.

Other recent highlights are the signature of the PPP Sao Lourenco, so PPP, this is a contract which main objective is to expand the water supply in the metro region of Sao Paulo by another 4.7 cubic meters per second. This will be benefiting directly 1.3 million consumers, and will, together with other initiatives, ensure a water supply in the metro region of Sao Paulo, our biggest market, for the next 15 years.

This contract foresees investments in the order of BRL2.2 billion, to be performed between this year and 2018. By this time, the water treatment station starts to operate the expectation.

Besides the water treatment station investment, we will also invest in 80 kilometers of water mains. All this will be implemented. These mains will have diameters varying from 0.8 meter to 2.1 meters, and will be carrying water that should be able to -- that will overcome a 330 meter difference in ground level. The contractual mode of this investment, through a PPP, it's important to note that this reinforces SABESP's commitment to invest and expand its services, so that should ensure 100% water supply, and reach also the sewerage services 100% coverage commitment until 2020.

Another point we would like to highlight is that on July 18th this year, SABESP's credit risk started to be covered by the credit rating agency Moody's, which assigned a Baa3 global risk rating, corresponding to an investment grade, and a Brazilian National Risk of Aa1.br, both of them with a stable outlook.

With its credit rating, the agency ratifies the capital market's pricing. In other words, SABESP's securities have been trading at spreads comparable with other large companies, Brazilian companies, rated as investment grade.

Credit highlights pointed out by Moody's are supported by the Company's solid cash generation, appropriate liquidity position, and the access to national and international capital markets and public financing, which support our CapEx program through low long-term and very low-cost debt instruments.

Let's go to our next slide, and then let's comment on the municipality of Diadema, the news on our participation on that issue. As mentioned in our balance sheet, in 1995, the municipality of Diadema terminated the concession agreement with SABESP before its expiration, generating disputes of two types. First, the municipality did not pay the indemnity for the non-amortized assets, and second, the municipality company that renders the service, that took over the service and began rendering the service, has been buying water on the wholesale from SABESP, and partly paying the invoices.

This has led to disputes and lawsuits, whose total judicial value comes to near BRL1 billion. This value, obviously, grows continuously, either by interest and penalties incurred on the debt, or because the water bills are still not paid, in part, on one side, and on the other, without the possibility of SABESP to enforce payment by cutting off the water supply.

In 2008, SABESP signed the letter, so in other words, we have been working this debt already and the situation for some time. So in 2008, we signed a letter of intention for settling the debt of the municipality. The initial idea then was to create a company with shared control between SABESP and the municipality. In fact, in 2011, it was issued a -- it was published, issued, or enacted, a municipal law, which provided for the creation of a new water company -- sorry, a new water and sewerage company in Diadema.

However, there were several circumstances in the period that led to a change in the course of negotiations, and that allowed SABESP to negotiate what is now a full operation of services. SABESP's proposal, in fact, for this, was accepted by the municipal executive branch at the end of last week, and in fact, yesterday night, was approved by the legislative branch of the municipality, which, with this approval, now allows us and the executive brand to sign a contract. In fact, the expectation is that, all going well, we would start operating directly this business -- so, moving from wholesale to retail in Diadema as of January of next year.

The municipality is inserted in a region that SABESP already operates with large economies of scales. To be more precise, it fits exactly between the city of Sao Paulo and Sao Bernardo do Campo, which is another city we operate. And the main data that we highlight here on the municipality, and you have -- we'll leave a little bit more there with you, but the ones I'll highlight is, a population of close to 400,000, a water distribution is already at SABESP level 100%. Sewage collection is very high, 96.2%. This operation will provide for 94,000 water connections, 87,000 sewer connections, which means we have to serve 120,000 residential units of water, and 110,000 units of sewage.

The agreement's main characteristics are, we will have full operation of water supply and sewage services. There should be the signing of a contract for provision of services for 30 years. It's a service contract. We've -- there will be a litigation settlement in lawsuits that were filed by SABESP. We will take over the employees currently working in the municipality, so they all move to SABESP.

We have to be, in our investment plan, to be in compliance with the municipal sanitation plan. That would represent about BRL160 million of investments we're going to have to be executing in the years to come.

Tariff regulation and control will be delegated to ARSESP. There will be a leveling of municipal -- Diadema's municipal current tariffs, with the metropolitan region of Sao Paulo tariffs, and when we practice in the metro region of those cities we operate. This should be done in five years, as of 2015.

Well, I believe that gives you an idea of what we are dealing with, with Diadema, so let's move to our last slide, then that comment on the recent developments on the tariff front.

As everyone knows, the tariff revision is suspended. The final decision on the average tariff is subject to ARSESP approval of SABESP's asset base. But first, let's go through a brief history of this process. In order to estimate the regulatory asset base, ARSESP -- this was in 2010, I believe, defined that work should be performed by appraisers accredited by the agency prior to the bidding and hiring process by SABESP. In such, SABESP hired two specialized companies, one for the metro region of Sao Paulo, and the other for the inland and coastal regions.

The prerequisite for revision completion was that SABESP would inspect the report. In December, 2012, ARSESP hired an audit company to support the inspection process. The audit results rate, as we all know now, inconsistencies in SABESP's reports.

In such, in August 2nd this year, the agency issued what we already mentioned, Resolution deliberation 427, in which the suspension of the remaining steps of the SABESP tariff review was maintained until issues with the asset base were solved. Through such resolution, ARSESP requested SABESP form with 30 days the period necessary to reassess certain items of its regulatory asset base, and by means of an official letter later, afterwards, the agency sent the list of items to be revised.

The reply, SABESP requested three months to assess, clarify and make the adjustments necessary to the regulatory asset base.

So, one central point in the discussion related to the Company's asset base is the inclusion of work in progress and working capital. In the preliminary tariff issued at the beginning of the year, the one that granted us 2.35% increase by SABESP, both of these issues were excluded from the regulatory asset base. SABESP has once again requested the agency to analyze the technical appeal that we filed in the occasion that was late April, 2013, immediately after the publication of the preliminary tariff.

With regards to the tariff adjustment to inflation, in view of the referred resolution and subsequent evaluation, on the issues to be revised in the regulatory asset base, SABESP filed a petition for the agency to authorize a tariff adjustment by inflation -- that is, by the IPCA, as usually occurs every year, and you probably know, in August and September.

What we can say is that the official letter has not yet been answered by the agency. Remember that what we are requesting, that is, SABESP is requesting that the 2.35% granted in April as a preliminary tariff is now considered as recomposition of inflationary effects in this period -- that is, from August last year to September this year, such that the adjustment would correspond to the IPCA accumulated until August, which discounted at 2.35%, means there is a residual increase of 3.83% that we are proposing if all the entire request is accepted.

With regards to the nomination now of ARSESP officers -- it became a very important issue -- in order to ARSESP proceed with its works, whether referring to tariff revision or to evaluate the petition for adjustment by inflation, it is necessary to re-establish the quorum of the agency's Executive Board, which currently has only two of five officers.

On September 3, the name of Mr. [Jose Bonifacio deSouza Amaral] was submitted by the Governor of Sao Paulo to the legislative assembly of Sao Paulo, to compose ARSESP's Executive Board, as Economic Financial and Market Regulation Officer, reminding that according to the law that created SABESP, if examination by the legislative body of Sao Paulo does not occur within 30 days, the nomination is automatically approved.

Those were our considerations. I would now -- please feel free to place your questions.

We will now begin the question and answer session. (Operator instructions) Our first question comes from Bruno Pascon with Goldman Sachs. Please go ahead.

Thanks, good afternoon, everyone. I have two questions. First, regarding the tariff revision process. I would like to understand the inconsistencies appointed by the regulator on the calculation of the regulatory asset base, and whether those inconsistencies were related to pumping systems, treatment stations, and pipelines in terms of the amount considering the calculation. Are those inconsistencies are more connected to pricing? So that would be my first question.

And then the second one of these, specifically in the case of the royalties discussion on the 7.5% arrived with the municipality of Sao Paulo, and whether this will be discussed and approved at the conclusion of the tariff revision process as well, and on whether the Company still had the (inaudible) debt in order to preserve the economic equilibrium of the contract, that it's illegal not to pass through those royalties to win tariffs of SABESP? Thanks.

Bruno, a question you made on the inconsistencies. In summary, you want to know if they're more related to physical aspects, if the assets are there or not there? Or price assets, price issues, if the asset is there? Or -- and the value for the asset is something that is not matching? Is that the question you made?

Yes, exactly. Yes, exactly.

Okay, just give me a second here.

Okay, Bruno, I mean, we're -- obviously, we went off for a second to see what we could detail. But the fact is that they come on both sides. There's a physical questioning, there's price questioning. There are 19 items. Obviously, within each of the 19 items, there are many -- so I don't think there's anything we can say that would be helpful for you, regarding these inconsistencies.

What we can say is there are sufficiently enough that we believe we can appraise this in three months, fine, which is obviously much less than we spent all in this process before. And we're very optimistic that this will not be an issue for delaying the process.

Now on the 7.5% royalty, as we mentioned on the last call, the Portuguese call, understanding here is that everything continues equal. In other words, the only information we have on that is what you know. And that is this pass-through. And first of all, it's a personal -- correction, it's not a royalty, it's a transfer, okay? It is suspended until the application of the final tariff. So we are in this, absolutely, same page as you.

We will obviously have tracked this. If we have any relevant information, we will come back to you on this, okay?

Okay, thank you.

Our next question comes from Hasan Doza with Water Asset Management.

Hi, Mario, Rui -- how are you?

Hey, Hasan, how are you?

Good, good. I just wanted to clarify, I need to be sure I understand your comment about the inflation increase you'll be requesting. So right now, inflation is, what, around 6%?

Yes, the inflation in the period is about 6.3%. Something like that.

Okay. And the way that you plan to get to that inflation increase, what you're proposing, just so I understand correctly, is that you're saying, let us keep the preliminary 2.35% which was given, but subject to, obviously, the final process being complete. So we are saying, let us keep the 2.35%, and then add 3.8% on top of it to get to an inflation-type increase basically. Is that generally what you're planning to request?

Yes.

Okay --

So what we're -- more specifically, and Rui, correct me if I'm wrong here, what we're saying is the following. Since it has been 12 months since our last tariff revision, and the 2.35% is a provisional -- it's a preliminary, it's not the final tariff. And given that there will be, by the time of all the asset base is evaluated and so forth, it will be more than a year since the preliminary asset base value was granted to us based on December numbers -- okay?

We understand that all this should be postponed, that it has been postponed, the revision has been postponed for more than one year, in such that we should be granted the tariff readjustment of one year due in September.

So the 2.35% will no more be a preliminary, but will be part of the inflation to be given for the period. So, 2.35% plus 3.83%, I believe, yes, is the total 6.37% inflation for the period. And then at the end of the process, hopefully, as soon as possible, we will be granted the final tariff, once in a time, not a preliminary, okay?

Okay, I understood. Did you look -- the only comment I would have is, did -- the model, as it was set up, was supposed to be an inflation, plus real tariff increase model. I mean, my only concern would be if you are kind of willing to compromise, like, splitting the difference on the inflation increase --

No.

I mean, one -- it wouldn't -- one, wouldn't you be compromising the integrity of the original model, which was real tariff increase? So my question would be, why not just ask for a 6% inflation increase, like you are entitled to as per the model every year? So I mean, what is the argument, again, just asking for a inflation type increase as you have done every year, and leave that 2.35% outside of this kind of a compromise?

So we're not compromising anything here. We're saying that the tariff revision process is postponed indefinitely, and all the indications is that it will be something to happen by the end of this year, beginning of next year.

Said that, the 2.35% can be part, together with 3.83%, of the total inflation that should be accrued for the period up to August this year. So we're not compromising. We're just saying that we still want, and we will still go after the new tariff. We are still requesting. We have not changed our position that we are requesting a 13% above inflation tariff review.

But we're only saying, since the review is not happening this year, and it has been more than 12 months of the last tariff adjustment, in order not to hurt SABESP's cash flow and financials and our overall plan, and stress the company unnecessary, we are requesting for the agency to consider, since the tariff revision has been pushed to next year, to consider giving us the inflation for this period. That's it.

So it's -- now, considering that it has already -- we have already increased our price in 2.35%, for us to complete a 6.37% increase, which is inflation up to August this year, we would only need an additional 3.83% increase. So we're not compromising, okay? We're just being very realistic, and asking what we think we have the right to receive, until the process is defined.

Okay, got you. And for this inflation request, you would -- ARSESP, you would still need to have a third member, which currently it doesn't have?

Yes.

Okay.

The third member, as I mentioned on the speech, has been named -- has been appointed by the Governor to the state legislative body, and the legislative body has a process of approving that can take up to 60 days or so. Or, if it doesn't comment on anything, the nomination is automatically approved in 30 days.

So, expectation is, in a couple of months, to have the full Executive -- not the full, but the necessary Executive Board members, a number of members.

Great. Thanks, Mario.

Okay.

(Operator instructions) Our next question comes from Diogo Moreno with Merrill Lynch. Please go ahead.

Hi, Mario and Rui again. So, we already did a lot of questions about, today, the process of the tariff revision and the Diadema thing, but one that is remaining from my side is really, regarding the revenue share with Sao Paulo city.

I know that the process, they are like going in parallel or through the tariff revision, but when do you think that the situation will be solved, that you're going to allowed to incorporate into your tariffs the pass-through of this revenue sharing? Do you think that they needed to, first, to finalize the whole process of tariff revision for them discuss about it, or is that kind of discussion that is going completely outside of the discussion of the tariff review?

And also what you are planning to request as the retroactive effect? You know, because I think that since 2010, you already paid BRL800 million, and with the amounts of this year, that's going to be close to BRL1.2 billion. Also, this is a considerable amount, and how are you planning to recover this point? Thank you.

Okay, Diogo, just a second. Diogo, on the revenue sharing and, unfortunately, I'm going to be as blunt as we were in the last question in the last call on this matter. But we definitely are in the same schedule as everybody, in terms of the -- ARSESP's determination is that it will be implemented at the same time the new tariff is implemented.

So, our expectation today is that it will -- it should be implemented by this timeframe. Obviously, we all would like to have more visibility exactly when that is. In the meantime, we believe that the government must be in some discussions around this matter. But I can tell you that we are not aware of it, to the extent that we can comment on it. And with all the difficulties that the process brings, especially next year when we have a very sensible political year.

On the retroactive effect, let me see if Rui can comment on this.

(spoken in Portuguese). Well, the same thing. We -- this -- at the time we have signed this contract with Sao Paulo city, we have two potential entities that could be considering the future power. We have the power of concession in water and sanitation, the state and the municipal level.

Since this year, with the decision finally made on the Supreme Court, we have the two entities in place. We are still waiting for the final specifics of this decision from the Supreme Court.

But we have -- we can say that, yes, in the metropolitan region, we have two, the state and the municipal entities, ruling the same concession.

So ,from our perspective, at the end of this tariff revision process, we have to get deeper on this issue, either with the state, and also with the municipal level. We have said already to you that in our evaluation of the Sao Paulo city, we don't -- we haven't considered the pass-through costs, only to the citizens of the Sao Paulo city. The assumption behind our evaluation was that we have to pass these costs through to the whole metro region.

So this will be -- has to be addressed at the end of this tariff review process, and the retroactive cost that we have incurred during this period is part of this discussion.

From our point of view, of course, we have -- we will go for it. We will ask this to be recovered. But we have to discuss this with these two levels of government now, because these two have been empowered by the Supreme Court in this year. That's our understanding.

So it there will be a very complex discussion at the end of this process of tariff revision.

Okay, thank you.

This will be the final announcement. (Operator instructions) We have a question from Antonio Junqueira with BTG.

Hey, guys. Thanks for the call. I have some questions on Diadema. I have some questions on Diadema. I would like you to provide us a bit more details, if you could provide us the revenue, annual revenue of this operation, annual EBITDA, if they have financial liabilities --- not with you, like with the other parties. And with the liability they have with you, [the speed], I would like to know, how is this booked in your balance sheet today? Because it seems the number that is there, it's -- the gross number is way smaller than BRL1 billion, and part of it is provision. So I would like to know, how we will the treatment with this -- the accounting treatment? And also what did you negotiate with them in regards to this BRL1 billion liability they have with you? Thanks.

Okay, just a second, Antonio.

Antonio, I think the first comment on the balance sheet, I will pass the word to Marcelo Miyagui, then we can cover off the other points, essentially.

Thanks.

Hi, Antonio. This is Marcelo. Firstly, we have recorded accounts receivable from Diadema, amounts to BRL193 million, and its total provision for allowance for that account. And we also have the [indemnity] regarding the assets in the amount of BRL60 million, and it's also provision for losses.

So this provision is going to be reversed, and the costs that they're going to pay for the concession is going to -- it will be regarded as an intangible asset according to the (inaudible) 12, (inaudible) 12. So, (multiple speakers) --

(multiple speakers) --

Okay?

No, no, that's great. But what's the difference between this BRL1 billion? Because you gave BRL193 million plus BRL60 million, that's BRL250 million, so there's BRL750 million off balance sheet?

Antonio, the BRL1 billion is the judicial, the judicial value. That is the nominal value, plus inflation, plus penalties and interests. That is the (inaudible) value of our legal -- what the value is from a legal dispute standpoint, okay? Which we have, to some extent, a great -- we will have great difficulties in receiving. That's on one side.

That's around the BRL250 million that's, let's put it, it's on the balance sheet, that is all -- that is provisioned and so forth.

The final details, and this is what I think we have to say here, the final details of the financial liabilities -- what is the EBITDA, what is the revenue, we're not going to disclose this right now, in fact, because we're still -- we're still -- still sign the contract. We still have to sign the contract. So there's some details we don't want to share until we have the contract signed.

What we can say is that this equates, and actually, it provides also an example of how to equate this awkward situation where we provide water, we don't get -- we're not received. We're going to the courts. We're winning. On the flip side, we have to continue to proceed with the supply of water. We have no ways to cut out the -- and enforce collection.

And what we can say now, that although we will be paying about BRL95 million in two installments, at this point, we can say that the financial liabilities and all the liabilities obviously were a due diligence by us. But all this in bulk were not sufficient for us not to move on with this process, in such to equate this problem with Diadema, bring this operation from wholesale to retail with all the benefits, add more connections in services into a very highly scaled area, and obviously, set precedents for the future.

So we are going to retrieve from right now jumping into revenue, EBITDA because, again, we're not buying the company there. We're taking over the services. So we did not diligence the company.

What we did is, we appraised the values of the asset. We appraised the value of what is the future cash flows. And we did our evaluation, and we put that against what was the proposal from the Diadema side. And I think we came into a very good agreement in benefit of Diadema, which had in its bag a potential BRL1 billion legal claim, a claim that is growing as we speak from all aspects, as we mentioned on the call.

So overall, this is what we want to -- I believe this is today as far as we would like to comment, Antonio.

That's fine, guys. Thank you.

Our next question comes from Felipe Mattar with Goldman Sachs.

Hi, good afternoon, everyone. So I have three quick questions. The first one is, how confident are you about the 3.8% additional inflation increase, and if there are any pushbacks by the regulator by the time the new director takes over, with respect to that number, where do you believe that could come from? This is my first question.

The second question, I want to understand better if there are any further risks of potential pushbacks in the calculation of the asset base? Meaning, within three months by the time you publish the asset base, if there is a new round of this agreement between the regulator and the Company, could be talking about a potential new round.

And so my question is, what is the risk that after three months, there is not an agreement between the company and the regulator? We entered into another three months round and so on, that we lose a little bit of sight on when the effective timeline for the conclusion of the process is going to be.

And the final question I have is just to become clear about what is the referential date for the three months? I apologize if you already answered this question, but I want to understand if we're talking three months from August 2nd, when ARSESP published the deliberation 427, or if we are talking now three months from the date, meaning last Monday, that you -- or last Friday, sorry, that you actually gave the timeline to the regulator? Thank you.

Okay. So, Felipe, on the referential date for the months, we believe is starting the date ARSESP provides an okay for our proposal, which we expect anytime soon, because we understand that this decision is not a decision that has to go through the Executive, ARSESP's Executive Board voting.

So it's -- I can say, our expectations is anytime soon to get the okay, and that counts three months. Nonetheless, we are already working on it, so we are counting three months from the date we -- in our side, we said we can do it in three months. So if they -- it's on their hands. It's on ARSESP's side to, in fact, not only approve the three months, but also provide for a new schedule. So that's how we look at it.

Rui, do you want to comment on the 3.83%, and then the risk pushback on the calculation, on asset calculation?

On the two other questions, first, one is how confident we are about the 3.83% of inflation increase. We are quite confident. We are very confident whether to resume -- its our opinion.

Second, further reach, looking ahead, well, from our perspective, what we are seeing, it's this gap of this agreement, it's narrowed down. It's my understanding. We are now in this gap of this agreement, of this understanding, as time goes by.

But again, of course, it could be a new round of this agreement. But we cannot see it -- large ones in the near future. So our -- we're sensitive about this two points you have raised.

Okay. Okay thank you.

Okay.

There appears to be no further questions at this time, so I'd like to turn the conference back over to Mr. Sampaio for any final remarks.

Well, thank you, everybody, for this -- for the call, to be with us with the call. We are obviously now open for conversations. So as you need further clarifications, please call me, Angela, who will be available. Thanks a lot. See you soon. Bye-bye.

Thank you for attending today's presentation. You may now disconnect your line. Thank you.