Companhia de Saneamento de Minas Gerais : 3Q23 Release

Earnings

Release

3Q23

Rio Manso Reservoir

Belo Horizonte, October 26th, 2023 - COPASA MG - Companhia de Saneamento de Minas Gerais - (B3: CSMG3) hereby announces today its results for the third quarter of 2023 (3Q23). The financial information, except where otherwise indicated, is presented in Brazilian Reais thousands (R$ thousand) and refers to the Parent Company. All tables in this report are available for download on the Company's Investor Relations website (ir.copasa.com.br).

OPERATIONAL AND FINANCIAL HIGHLIGHTS

• Net revenue of water, sewage, and solid waste totaled R$1.62 billion in 3Q23, up by 17.7% over 3Q22 (R$1.38 billion).
• The result was positively impacted as a consequence of the agreement signed in the Labor Class Action (Labor Lawsuit number 102100-74.2008.5.03.0024), with reversal of R$49.9 million under Other Operating Expenses and R$105.2 million under Financial Expenses, as detailed in item 2.1.
• Costs and expenses totaled R$1.14 billion in 3Q23 (against R$1.01 billion in 3Q22), up by 12.6%.
• The adjusted EBITDA totaled R$638.9 million in 3Q23, up by 24.1% over 3Q22 (R$515.0 million). The margin was 38.5% (36.3% in 3Q22).
• Net income was R$437.1 million in 3Q23, up by 92.4% over 3Q22, that was R$227.2 million.
• Interest on Equity (IoE) declared in 3Q23 totaled R$127.4 million.
• Net debt reached R$3.44 billion in September 2023 and the Net Debt/EBITDA ratio was 1.4x.
• Investments made by the Parent Company from January to September 2023, including capitalizations, totaled R$1.19 billion, increasing by 26.6% from the same period in 2022.
• In September 2023, the number of consumer units for water reached 5.64 million (5.57 million in September 2022) and consumer units for sewage reached 4.03 million (3.95 million in September 2022) (consolidated data).
• In 3Q23, water volume measured reached 169.6 million m³, while sewage volume came to 116.4 million m³ (up by 3.4% and 3.8%, respectively, over 3Q22) (consolidated data).
• The delinquency rate, measured by the ratio between the balance of accounts receivable overdue between 90 and 359 days and the total amount billed in the last 12 months, reached 3.07% in September 2023 (3.46% in September 2022).
• The loss rate in COPASA MG's distribution reached 38.9% in September 2023 (39.8% in September 2022).
• The Parent Company's index of "employees per thousand water and sewage connections" fell by 4.8%, from 1.33 in September 2022 to 1.27 in September 2023.
• The capacity level of the reservoirs of the Paraopeba system is 73.1%.

	Conference Call	Investor Relations
	October 27th, 2023 (Tuesday)	Telephone [phone]
	15 p.m. (Brasilia) 2 p.m. (New York) 7 p.m. (London)	[e-mail]
	Webcast:Click here	ir.copasa.com.br

Index
1.	Operating Performance	3
1.1.	Operational data	3
1.2.	Customer Base	4
1.3.	Staff Management	5
2.	Financial Performance	6

2.1. Impacts on the Results for 3Q23 as a Consequence of the Agreement Signed in the Labor Class Action . 6

2.2.	Revenues	6
2.3.	Costs and Expenses	8
2.4.	Other Operating Revenues (Expenses)	11
2.5.	Equity Pick-up (Subsidiary COPANOR)	11
2.6.	Financial Result	12
2.7.	Taxes on Income	12
2.8.	Net Income	12
2.9.	EBITDA and EBITDA Margin	13
3.	Shareholder Compensation	14
3.1.	Dividend Policy Revision	14
3.2.	Shareholder Compensation - 2023	14
4.	Indebtedness and Rating	15
4.1.	Gross Debt and Net Debt	2	15
4.2.	Indexes and Average Coupon	2	16
4.3.	Corporate Ratings	16
5.	Investment Program and Fundraising	17
5.1.	Investment Program - 2023	17
5.2.	Investment Program - 2024 to 2027	18
5.3.	Fundraising	18
6.	Sanitation Framework	20
6.1.	Decrees Issued by the Federal Executive Branch	20
7.	Service Concessions	21
8.	Water Situation	22
8.1.	Belo Horizonte Metropolitan Area (BHMA)	22
8.2.	Other municipalities in the Minas Gerais State	23
9.	Material Fact Disclosed on 08.21.2023	24
10.	Annexes	25
10.1. Quarterly Income Statement	25
10.2. Balance Sheet - Assets	26
10.3. Balance Sheet - Liabilities	27
10.4. Quarterly Cash Flow	28
10.5. Debt	29

Earnings Release 3Q23

1. Operating Performance

1.1. Operational data

The main operational data of the parent company (COPASA MG) for 3Q23, 3Q22 and 3Q21 is as follows:

			3Q23		3Q22
COPASA data (Parent Company)	3Q23	3Q22	vs.	3Q21	vs.
			3Q22		3Q21
Water
Connections (1,000 units)	4,564	4,508	1.2%	4,464	1.0%
Units (1,000 units)	5,522	5,455	1.2%	5,399	1.0%
Population Served (1,000 inhabitants)	11,608	11,600	0.1%	11,599	0.0%
Distributed Volume (1,000 m³)	275,688	267,476	3.1%	265,770	0.6%
Measured Volume (1,000 m³)	166,970	161,411	3.4%	152,943	5.5%
Network Extension (km)	62,848	61,989	1.4%	60,012	3.3%
Water Metering Index (%)	100.0	99.9	0.1 p.p.	99.9	-
Loss Index¹ (%)	38.9	39.8	-0.9 p.p.	40.3	-0.5 p.p.
Loss Index² (L/connectionsxday)	252.2	252.4	-0.1%	259.5	-2.7%
Sewage
Connections (1,000 units)	3,121	3,056	2.1%	2,996	2.0%
Units (1,000 units)	3,972	3,891	2.1%	3,817	1.9%
Population Served (1,000 inhabitants)	8,481	8,406	0.9%	8,306	1.2%
Measured Volume (1,000 m³)	115,157	110,866	3.9%	104,885	5.7%
Treated Volume (1,000 m³)	89,606	73,551	21.8%	82,625	-11.0%
Network Extension (km)	31,985	31,194	2.5%	30,624	1.9%
Water and Sewage
Consumption Days (quarter)	93.9	92.7	1.3%	90.6	2.3%
Consumption Days (monthly average)	31.3	30.9	1.3%	30.2	2.3%
Delinquency³ (%)	3.07%	3.46%	-0.39 p.p.	3.54%	-0.08 p.p.

1. Difference between the distributed volume and the measured volume, divided by the distributed volume in the last twelve months.
2. Difference between the volume distributed and the volume measured, divided by the number of served connections and the number of days in the period in the last twelve months.
3. Corresponds to the ratio between the balance of accounts receivable overdue between 90 and 359 days and the total amount invoiced in the last 12 months

The delinquency rate, which corresponds to the ratio between the balance of accounts receivable overdue between 90 and 359 days and the total billed amount in the last 12 months, which was 3.46% in September 2022, reached 3.07% in September 2023, the lowest rate recorded in the last 6 (six) years. This result is due to the resumption and intensification of collection actions and campaigns to renegotiate debts.

3

Earnings Release 3Q23

The main operational data of the subsidiary COPANOR for 3Q23, 3Q22 and 3Q21 is as follows:

			3Q23		3Q22
COPANOR Data	3Q23	3Q22	vs.	3Q21	vs.
			3Q22		3Q21
Water
Connections (1,000 units)	113	111	2.2%	109	1.7%
Units (1,000 units)	117	114	2.0%	113	1.6%
Population Served (1,000 inhabitants)	225	225	0.1%	221	1.4%
Distributed Volume (1,000 m³)	3,919	4,235	-7.5%	3,506	20.8%
Measured Volume (1,000 m³)	2,622	2,538	3.3%	2,473	2.6%
Network Extension (km)	2,846	2,701	5.3%	2,673	1.1%
Sewage
Connections (1,000 units)	54	54	0.5%	52	2.8%
Units (1,000 units)	56	55	0.3%	54	2.7%
Population Served (1,000 inhabitants)	107	108	-0.3%	105	2.3%
Measured Volume (1,000 m³)	1,205	1,193	1.1%	1,158	3.0%
Network Extension (km)	1,547	1,542	0.4%	1,519	1.5%

The main operational data of the parent company (COPASA MG) and the subsidiary (COPANOR) for 3Q23,

3Q22 and 3Q21 is as follows:

			3Q23		3Q22
Consolidated Data (COPASA MG + COPANOR)	3Q23	3Q22	vs.	3Q21	vs.
			3Q22		3Q21
Water
Connections (1,000 units)	4,677	4,619	1.3%	4,573	1.0%
Units (1,000 units)	5,638	5,569	1.2%	5,511	1.1%
Population Served (1,000 inhabitants)	11,833	11,825	0.1%	11,820	0.0%
Distributed Volume (1,000 m³)	279,606	271,711	2.9%	269,275	0.9%
Measured Volume (1,000 m³)	169,592	163,949	3.4%	155,415	5.5%
Network Extension (km)	65,694	64,690	1.6%	62,685	3.2%
Sewage
Connections (1,000 units)	3,175	3,110	2.1%	3,048	2.0%
Units (1,000 units)	4,028	3,947	2.1%	3,871	2.0%
Population Served (1,000 inhabitants)	8,588	8,513	0.9%	8,412	1.2%
Measured Volume (1,000 m³)	116,363	112,059	3.8%	106,043	5.7%
Network Extension (km)	33,532	32,735	2.4%	32,143	1.8%

1.2. Customer Base

The quarterly information about the customer base, measured volume and billing by consumer category (Residential, Social Residential, Commercial, Industrial and Public) are highlighted in the following table:

Consolidated Data

(COPASA MG + COPANOR)

Water and Sewage (Quarterly Average)

Residential

Residential Social

Commercial

Industrial

Public

Total

Units per Category

(%)

3Q23 3Q22 3Q21

77.9% 77.7% 76.9%

11.6% 11.8% 12.6%

9.2% 8.6% 8.6%

0.6% 0.6% 0.6%

0.7% 1.3% 1.3%

100.0% 100.0% 100.0%

Measures Volume per Category	Billings per Category
	(%)			(%)
3Q23	3Q22	3Q21	3Q23	3Q22	3Q21
73.5%	73.1%	73.4%	67.8%	67.8%	69.6%
11.4%	11.8%	12.8%	5.5%	5.7%	6.0%
9.0%	8.2%	7.8%	15.4%	13.9%	13.5%
2.1%	2.1%	2.1%	4.0%	4.0%	4.0%
4.0%	4.8%	3.9%	7.3%	8.6%	6.9%
100.0%	100.0%	100.0%	100.0%	100.0%	100.0%

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Earnings Release 3Q23

1.3. Staff Management

1.3.1. Employees and Employees per Connection

The number of employees in the Parent Company decreased by 3.5% from September 2022, to 9,796 employees in September 2023.

This reduction was due to the Voluntary Separation Program (VSP) implemented by the company in May 2023, to which 736 employees applied, with 384 being dismissed under the program in 3Q23. It is also worth noting that the estimated indemnification - fully accounted for in 2Q23 - totaled R$115.1 million, R$44.0 million of which written off in 3Q23.

			3Q23		3Q22
Employees and Employees per Connection	3Q23	3Q22	vs.	3Q21	vs.
			3Q22		3Q21
COPASA
Employees	9,796	10,149	-3.5%	11,212	-9.5%
Employees/Connection¹	1.27	1.33	-4.8%	1.49	-10.8%
COPANOR
Employees	468	471	-0.6%	475	-0.8%
Employees/Connection¹	2.75	2.81	-2.1%	2.92	-3.7%
COPASA + COPANOR
Employees	10,264	10,620	-3.4%	11,687	-9.1%
Employees/Connection¹	1.30	1.37	-4.8%	1.52	-10.4%

(1) Number of employees / 1,000 connections of water and sewage.

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Earnings Release 3Q23

2. Financial Performance

2.1. Impacts on the Results for 3Q23 as a Consequence of the Agreement Signed in the Labor Class Action

Labor Lawsuit Number 102100-74.2008.5.03.0024 was filed in 2008 by the main union of the Company's employees, challenging the lawfulness of the extinct dismissal policy, which used employees' age as a criterion for terminating their employment contracts.

As detailed in item 8.1 of the 4Q21 Earnings Release, considering the court ruling unfavorable to the Company in December 2021, COPASA MG decided to review the provision amount at the time, even if the sentence amount referring to said lawsuit had not been settled. To that end, the Company made preliminary calculations at the time and, with due regard to the best accounting practices and considering the legal guidelines and basis presented by the legal counsel hired to conduct the lawsuit, increased the provision for such suit by around R$217.5 million, which was recognized on December 31st, 2021. Later, the Company filed a motion for relief from the judgment.

In 2023, some individual execution agreements were entered into, and a final agreement was formalized, in July 2023, with Sindágua-MG and the Labor Prosecution Office in the records of the Class Action.

As result of the final agreement, the following impacts were recorded in 3Q23:

• payments totaling R$93.3 million were made between July and September 2023; and
• reversal of the provision for labor lawsuit totaling (i) R$49.9 million, recorded under Other Operating Expenses; and (ii) R$105.2 million, referring to interest and monetary restatement, recorded under Financial Expenses. Thus, such reversals had a positive impact on the results for 3Q23.

The final agreement - duly ratified by the Labor Court - rules out the possibility of including any interested parties in the referred Class Action. New executions are suspended due to the filing of a motion for relief from judgment, and the Company obtained approval for the provisional relief. However, based on its legal counsel's opinion, the Company conservatively maintained a R$15.4 million provision on September 30, 2023 related to potential beneficiaries that did not adhere to the Class Action, considering individual lawsuits that might be brought against it in the future.

2.2. Revenues

The table below shows gross revenue, deductions (PIS/COFINS), and net revenue from water, sewage, and solid waste in the comparative periods:

			3Q23		3Q22
Gross Revenue, Deductions and Net Revenue	3Q23	3Q22	vs.	3Q21	vs.
			3Q22		3Q21
Gross Revenue - Water	1,172,825	1,010,569	16.1%	947,808	6.6%
Gross Revenue - Sewage	611,125	505,406	20.9%	492,083	2.7%
Gross Revenue - Solid Waste	1,325	577	129.6%	613	-5.9%
Gross Revenue - Water, Sewage and Solid Waste	1,785,275	1,516,552	17.7%	1,440,504	5.3%
PIS/COFINS	(165,239)	(140,350)	17.7%	(133,303)	5.3%
Net Revenue - Water, Sewage and Solid Waste	1,620,037	1,376,202	17.7%	1,307,201	5.3%

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Earnings Release 3Q23

Net revenue from water, sewage and solid waste totaled R$1.62 billion in 3Q23, as shown below:

			3Q23		3Q22
Net Revenue	3Q23	3Q22	vs.	3Q21	vs.
			3Q22		3Q21
Net Direct Revenue - Water	1,050,449	895,083	17.4%	840,086	6.5%
Net Direct Revenue - Sewage	551,273	456,890	20.7%	444,411	2.8%
Net Direct Revenue - Water and Sewage	1,601,722	1,351,973	18.5%	1,284,497	5.3%
Net Indirect Revenue - Water	13,834	21,990	-37.1%	20,017	9.9%
Net Indirect Revenue - Sewage	3,317	1,734	91.3%	2,150	-19.3%
Net Indirect Revenue - Water and Sewage	17,151	23,724	-27.7%	22,167	7.0%
Net Revenue - Solid Waste	1,163	506	129.8%	537	-5.8%
Net Revenue - Water, Sewage and Solid Waste	1,620,036	1,376,203	17.7%	1,307,201	5.3%

The Company's comments on the main factors that influenced net revenue from water supply and sewage services in the comparative periods as follows:

• impacts of the tariff readjustment applied on 01.01.2023, with an average tariff effect of 15.7%, as authorized by Arsae-MG;
• an increase of 3.4% in water volumes and 3.9% in sewage volume.

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Earnings Release 3Q23

2.3. Costs and Expenses

The costs of sales and services rendered, sales expenses, and administrative expenses totaled R$1.14 billion in 3Q23, compared to the R$1.0 billion reported in 3Q22, or an increase of 12.6%, as shown in the table below:

								3Q23					3Q22
	Costs and Expenses		3Q23			3Q22		vs.			3Q21		vs.
								3Q22					3Q21
	Manageable Costs		749,128			679,095		10.3%			794,798		-14.6%
	Personnel(1,2)	408,895	357,590		14.3%	529,057	-32.3%
	Outsourced Services	182,244	163,877		11.2%	119,875	36.7%
	Rio Manso PPP	23,415	23,967		-2.3%	22,241	7.8%
	Materials	19,532	23,910		-18.3%	19,231	24.3%
	Provision for Doubtful Accounts (PDA)	33,660	51,113		-34.1%	51,866	-1.5%
	Tariff Transfers to Municipalities	68,689	51,241		34.1%	43,371	18.1%
	Sundry Operational Costs	12,693	7,397	71.6%	9,157	-19.2%
	Non-Manageable Costs		181,288			148,908		21.7%			170,014		-12.4%
	Electricity	156,625	122,488		27.9%	152,551	-19.7%
	Telecommunication	5,029	4,215	19.3%	3,656	15.3%
	Treatment and Laboratory Materials	28,817	28,713		0.4%	19,286	48.9%
	Fuels and Lubricants	7,395	10,920		-32.3%	8,354	30.7%
	Tax Credits	(16,578)	(17,428)	-4.9%	(13,833)	26.0%
	Capital Costs		193,007			178,805		7.9%			170,822		4.7%
	Depreciation and Amortization	193,007	178,805		7.9%	170,822	4.7%
	Charge for Usage of Water Resources		18,112			7,421		144.1%			1,088		582.1%
	Total Costs and Expenses		1,141,535			1,014,229		12.6%			1,136,722		-10.8%
	Total Costs and Expenses (without Depreciation and		948,528			835,424		13.5%			965,900		-13.5%
	Amortization)

1. Includes pension plan obligations.
2. The amount for 3Q21 was impacted by expenses of R$152.2 million referring to the Voluntary Separation Program (VSP) implemented in 2021 (as detailed in item 2.3.2 of the3Q21 Release). See the breakdown of the 2023 VSP in item 1.3.1 of this Release.

Below, the Company presents the comments on the items that make up the costs and expenses that presented the most significant variations:

2.3.1. Manageable Costs

2.3.1.1. Personnel

This line increased by 14.3%. The items with the most significant variations in the period were:

• impacts in salaries, vacation, and 13th salaries, among other benefits arising from the 2022 Collective Bargaining Agreement, whose base date is November and considered the INPC (6.46%) as a base;
• higher provision for profit sharing - because of an increase in net income - totaling R$27.3 million in 3Q23 (R$14.0 million in 3Q22); and
• an increase of R$3.6 million in expenses with the health program, due to increased utilization of medical services and the readjustment of health plans.
• effects of an increase in the base of variable compensation and position-based commission, due to the improvement in the EBITDA Margin, which is the reference indicator for the calculation of said compensation; and
• a reduction of R$2.2 million in capitalizable expenses referring to employees assigned to the Company's expansion areas and who are classified as intangible assets.

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Earnings Release 3Q23

2.3.1.2. Outsourced Services

This line increased by 11.2%. The items with the most significant variations in the period were:

• expenses of R$3.8 million in outsourced bill reading and delivery services; occurred in 3Q23;
• an increase of R$3.2 million in expenses with professional technical services in 3Q23, mainly due to occupational safety consulting services and correlated environmental control studies, among others, in a dispersed manner;
• an increase of R$2.6 million in maintenance, cut and reconnection services; and
• an increase of R$2.8 million in expenses with IT services in 3Q23, due to the contracting of new software licenses and technical support services.

2.3.1.3. Rio Manso PPP

Reduced by 2.3% in the comparative periods, mainly due to the recovery of PIS/COFINS credits referring to this service, which was recorded directly as a credit to this line as of 1Q23.

2.3.1.4. Materials

This item dropped by 18.3%, mainly due to lower expenses with materials for the conservation/maintenance of assets related to operating systems and vehicle parts, accessories and components.

2.3.1.5. Impairment of Receivables

This line was 34.1% lower than in 3Q23, mainly due to the following:

• the change in the method for accounting recovered amounts from written-off accounts, which, as of 1Q23, started to be recorded as credit under this line. As a result, this line started to be seen as net value; and
• a rise of 97.7% in recovered amounts from written-off accounts year on year in 3Q23, mainly due to the adoption of more restrictive debt collection policies, including by reporting clients in default to credit reporting companies and by protesting bills, among other measures.

2.3.1.6. Tariff Transfers to Municipalities

The 34.1% increase in this item was due to the growth in the tariff transfer values, given the 15.70% readjustment defined by Arsae-MG and to the increase in the number of municipal sanitation funds qualified to receive this transfer.

According to Technical note GRT 01/2022, in the scope of the tariff adjustment applied on January 2023, 75 new municipal sanitation funds were included with the right to the transfers, totaling 294 qualified municipalities. It is worth noting that the amounts intended for the municipal sanitation funds are recognized in the tariff.

2.3.1.7. Sundry Operating Costs

The 71.6% increase seen in sundry operating costs year on year in 3Q23 was mainly due to higher expenses with water self-consumption and exhibitions and congresses, as well as other lines in a dispersed manner.

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Earnings Release 3Q23

2.3.2. Non-Manageable Costs

2.3.2.1. Electricity

The 27.9% increase in electric energy expenses year on year in 3Q23 was mainly due to the net effect of the following factors:

• an increase of 3.8% in the Company's electricity consumption;
• an increase of 13.27% applied by CEMIG to the electric energy tariffs, levied on the captive market, effective from June 2023;
• a reduction of 3% in the subsidy applied to the electric energy tariffs of the concessionaires providing public water supply and sewage services, levied on the captive market, effective from June 2023;
• exclusion of the ICMS tax from the PIS/COFINS credit tax base, as of May 2023;
• resumption of collection of the ICMS tax on the Tariff for the Use of the Electricity Transmission System (TUST) and the Tariff for the Use of the Electricity Distribution System (TUSD), as of February 2023; and
• a reduction of 19.9% in electric energy expenses from the units that migrated to the Free Market. We underscore that such units account for about 43% of the Company's total energy consumption, and that the migration occurred in 1Q23.

It is worth noting that the Company continually seeks to optimize its electric energy expenses through some initiatives, especially the following:

• energy contracted in the Free Market increasing from the current 43% to around 53%, by mid-2024; and
• structuring of a project for 2024, aiming at using photovoltaic solar energy and promoting energy compensation - through distributed generation - of around 90% of the total consumption of the units served with low voltage, equivalent to approximately 17% of the total consumption.

2.3.2.2. Tax Credits

The balances verified in the tax credits line dropped by 4.9% year on year in 3Q23, mainly due to the exclusion of the ICMS tax from the PIS/COFINS credit tax base, calculated on electricity and inputs, as of May 2023.

2.3.3. Depreciation and Amortization

The 7.9% increase in the depreciation and amortization line in 3Q23 versus 3Q22 was mainly due to incorporations in intangible assets and PP&E.

2.3.4. Charge for the use of water resources

The charge for the use of water resources is an economic water management instrument provided for in the Brazilian Water Resource Policy and the Minas Gerais State Water Resource Policy. This collection covers the following basins at the state level: Rivers Rios Piracicaba and Jaguari; Araguari; Velhas; Pará; Caratinga; Piranga; Suaçuí Grande; Santo Antônio; Manhuaçu, Pomba and Muriaé; Preto and Paraibuna; Grande; Alto and Baixo Paranaíba; Paraopeba; and the Furnas Reservoir. At the federal level, collection covers the following basins: Rivers Doce; Paraíba do Sul; São Francisco; Piracicaba, Capivari and Jundiaí; and Verde Grande.

The amount accounted for expense in 9M23 was R$19.2 million (R$8.5 million in 9M22). It is worth mentioning that said collection is passed on in full to the customer through a specific line in the water and sewage bill.

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