Aguas Andinas S A : Reasoned Analysis

Aguas Andinas Reasoned Analysis

Period ended as of June 30, 2022

1. Summary of the exercise

Aguas Andinas has continued to be impacted by the global macroeconomic effects that have mainly translated into significant inflationary pressures and cost increases.

Inflation in Chile in the first half of 2022 amounted to 7.1% and 12.5% accumulated for 12 months. Inflation has various impacts on the Company's income statement as detailed below:

1. Upward pressure on operating costs linked to inflation: an important part of Aguas Andinas' cost structure is linked to the evolution of inflation (labor costs, construction materials, service contracts in UF and salary adjustments), with an impact at the end of June 2022 compared to the same period of previous year of approximately ThCh$(10,983) million.

1. Increase in financial costs related to the price-level restatement of debt in UF: the significant increase in the CPI of 7.1% negatively impacted our financial costs by ThCh$40,654 million associated with the readjustment of the financial debt in UF. It should be noted that the price- level restatement of the UF is an accounting impact with no significant effect on the Company's cash flow.

1. Rate indexations based on the polynomial: on the other hand, during the period Aguas Andinas has registered indexations in February and May 2022, which allows mitigating the increase in costs due to CPI.

Aguas Andinas is focused on the management and mitigation of climate change impacts.

The Company continues to face the challenge of climate change. The profound situation of drought and water scarcity in the country, which has been going on for more than 13 years and has deepened in the last 3 years, continues to strongly affect the availability of river flows that supply the city, the Maipo and Mapocho Rivers, which in the current summer 2022 have seen their flows reduced by 70% to 80% regarding averages of the last 10 years. Both rivers maintain the condition of Shortage Decree granted by the regulatory authority.

In this context, water scarcity has continued to be managed by prioritizing water transfer agreements with other users, which has allowed securing supply during 2022 and maintaining the security level of the El Yeso reservoir at 149.5 hm3 (June 2022), in line with the Company's objective.

Additionally, we have continued to deploy our action plan to address water scarcity and the effects of climate change, which has materialized in an investment effort during the first half of 2022 in the amount of ThCh$51,613 million. In this regard, it should be noted the completion of the works of the new Lo Mena - Cerro Negro well system, which will provide a flow of 1,500 l/s to supply 400,000 customers.

Finally, it should be noted, the actions carried out by both Aguas Andinas and the public sector focused on raising awareness and sensitizing the citizenship on the importance of caring for water and with the aim of reducing consumption in the current context described above. An example of such actions is the communication campaign "Every drop counts", with a call to modify behaviors for the benefit of the environment and responsible consumption. During the first half of 2022, consumption was 2.3% lower than in the same period of previous year, mainly due to lower residential demand.

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Evolution of delinquency and new Basic Services Law

During the second quarter of 2022, the bad debt provision expense has presented a positive evolution, going from a bad debt to income rate of 3.4% at the end of March to 2.6% in June. The Company maintains an active commercial management for the recovery and containment of overdue debt, including payment agreements that allow customers to regularize their accumulated debts. On the other hand, on February 11, 2022, Law 21,423 was published in the Official Gazette, which partially solves the debt incurred during the Covid-19 pandemic by sanitation service customers in a more vulnerable situation and who have an average consumption of no more than 15 cubic meters of potable water per month. The debt and subsidy will be prorated in 48 monthly and successive installments. Each installment may not exceed 15% of the average monthly consumption. The portion of the debt not covered by the subsidy will be extinguished, which will be recognized as a tax accepted expense. The impact to date has not been significant for the Company; only approximately 23% of the customers covered by these agreements remain in force.

The Company is accelerating its efficiency program based on our Transformation plan

The Company is implementing a Transformation plan, with a vision of a new sustainable business model focused on mitigating risks, capturing efficiencies, prioritizing investments and incorporating technology, supported by a new organizational culture. In line with the above, initiatives have been developed to improve processes and digital transformation that have generated Efficiencies of $1,529 million by the end of the first half of 2022.

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EBITDA as of June 30, 2022 amounted to $149,058 million, an increase of 7.0% regarding the same half of previous year (without considering the positive non-recurring effects of the year 2021, the increase would be 11.5%). The main variations are shown in the following chart:

1. Higher sanitation revenues of $28,431 million, mainly associated with higher average tariffs of $32,760 million due to the latest tariff indexations by polynomial and the entry into operation of new investment projects (La Farfana/Trebal-Mapocho Nitrates and Aguas Cordillera safety ponds). However, lower sales volumes were recorded for $5,298 million, mainly explained by a decrease in sales to Residential customers by -3.6%, which is partially offset by higher sales to non-Residential customers by +3.5%.

1. Non-sanitationrevenues increased by $1,542 million, mainly associated with higher activity in home services, sale of materials and non-sanitation subsidiaries. On the other hand, a non- recurring income of $(5,698) million was obtained in 2021.

1. The Company's costs have been increased by the CPI, mainly due to higher labor costs, construction materials, service contracts in UF and compensation adjustments. As of June 2022, the index accumulated an increase of 7.1% in the first half and 12.5% in 12 months. Additionally, operating costs for the entry into operation of new facilities and assets are considered.

1. Higher raw water of $2,528 million necessary to continue facing the extreme drought situation that the region has been experiencing for the last 13 years.
   Since lower hydrological conditions were recorded this summer, the lower flow available in the Maipo river basin resulted in a higher price per cubic meter of water purchased. Likewise, the volume stored in the El Yeso reservoir as of June 2022 was 149.5 Hm3 vs. 174.9 Hm3 as of June 2021, also due to a greater need to supply the demand for the period.

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it is important to note that in August 2021 a historic collaboration agreement was signed with the Irrigation Associations of the First Section of the Maipo River, which includes commitments to develop a Master Plan for the Management of the Maipo River Basin, and will allow promoting new investments to provide additional resources to the system, such as the reuse of treated water from the Biofactories for exchange with raw water.

The collaboration agreement with the Irrigation Associations is in operation, and thus, the Board of Directors of the Junta de Vigilancia de la Primera Sección del Río Maipo (Maipo River First Section Oversight Board) has coordinated water transfers, ensuring sufficient reserves in the El Yeso Reservoir to ensure the supply to the customers.

The agreement has also established an update in the price of transfers, making it consistent with the value of raw water from the Maipo River used in the tariff processes. In addition, it includes thresholds that define high and low demand prices based on the river's water scarcity.

1. Higher network maintenance and repair costs of $2,590 million were generated due to a significant increase in customer requirements and workload.

1. At the end of the first half of 2022, an allowance for doubtful accounts of $7,356 million was recorded, generating a lower bad debt expense of $137 million regarding 2021, resulting a % of bad debt on revenues of 2.6% vs. 2.9% of the previous year.

1. The Company is implementing a Transformation plan, with a vision of a new sustainable business model focused on mitigating risks, capturing efficiencies, prioritizing investments and incorporating technology, supported by a new organizational culture. In line with the above, initiatives have been developed to improve processes and digital transformation that have allowed us to generate Efficiencies for $1,529 million at the end of the first half of 2022.

Net income as of June 30, 2022 amounted to $43,700 million, representing a decrease of 25.0% regarding the same half of previous year. The main variations are presented in the following chart:

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