A. [Reserved]
B. Capitalization
and Indebtedness
Not applicable.
C. Reasons
for the Offer and Use of Proceeds
Not applicable.
D. Risk
Factors
You should carefully
consider the risks described below, together with all of the other information included in this annual report, before making an investment
decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks
or uncertainties. In that case, the trading prices of our securities could decline, and you may lose all or part of your investment. The
risks described below are those that we currently believe may materially affect us. Additional risks not presently known to us, or that
we currently consider immaterial, may also materially adversely affect us.
For purposes of
this section, when we state that a risk, uncertainty or problem may, could or will have an “adverse effect” on us or “adversely
affect” us, we mean that the risk, uncertainty or problem could have an adverse effect on our business, financial condition, results
of operations, cash flow and/or prospects, except as otherwise indicated. You should view similar expressions in this section as having
similar meaning.
Summary of Risk Factors
This section is intended
to be a summary of more detailed discussions contained elsewhere in this annual report. The risks described below are not the only ones
we face. Our business, results of operations or financial condition could be harmed if any of these risks materialize.
Risks Relating to Brazil
• Ongoing political instability has adversely affected the Brazilian economy and may lead to an economic slowdown, which may have an adverse effect on our financial condition and results of operations.
• The Brazilian government has exerted and continues to exert significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions, may adversely affect the Company and the market price of our common shares and ADSs.
• Changes in Brazilian tax laws or conflicts in their interpretation may adversely affect us and may have an adverse impact on the taxes applicable to a disposition of our shares or ADSs.
• Inflation and the Brazilian government’s measures to combat it may contribute to economic uncertainty in Brazil, adversely affecting us and the market price of our common shares or ADSs.
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• Exchange rate instability may adversely affect us, our foreign currency denominated debt and the market price of our common shares or ADSs and our ability to service our foreign currency denominated obligations.
• Downgrades in Brazil's credit rating could adversely affect our credit rating, the cost of our indebtedness and the trading price of our common shares and ADSs.
• Events, geopolitical tension and the perception of risks in other countries, especially the United States and emerging economies, may adversely affect the market price of Brazilian securities.
Risks Relating to Our Business
• Risks associated with the transfer of revenue and tariff adjustments related to the provision of water and sewage services to the city of São Paulo.
• Any failure to obtain new funding or to comply with covenants in our existing financing agreements may adversely affect our ability to continue our capital expenditure program.
• Any substantial monetary judgment against us or any of our directors and officers in legal proceedings may have a material adverse effect on our reputation, business or operating or financial condition and/or results.
• We are subject to anti-corruption, anti-bribery, anti-money laundering, sanctions and antitrust laws and regulations. Our violation of any such laws or regulations could have a material adverse effect on our reputation, our results of operations and our financial condition.
• Our business is subject to cyberattacks and security and privacy breaches.
• Failure to comply with the LGPD or any further privacy and data protection laws enacted in Brazil could adversely affect our reputation, business, financial condition or results of operations.
• Our failure to protect our intellectual property rights may negatively impact us.
• Industrial accidents, equipment failure, environmental hazards or other natural phenomena may adversely affect our operations, assets and reputation and might not be covered by our insurance policies.
• Our insurance policies may not cover or may be insufficient to cover claims which may arise.
• We cannot guarantee that our suppliers and/or outsourced service providers will not engage in any irregular practices.
• Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes.
• If we are not successful in addressing issues related to occupational health and safety for our employees and the facilities where we conduct our activities, our results and operations may be negatively affected.
• If any of our assets are deemed assets dedicated to providing an essential public service, they will not be available for liquidation and will not be subject to attachment to secure a judgment.
• Strikes, work stoppages or labor unrest by our employees or by the employees of our suppliers or contractors could adversely affect our business.
• We are subject to obligations regarding respect for the human rights of all of our stakeholders, which may result in additional costs and significant contingencies.
• If we do not remedy the material weakness in our internal controls, the reliability of our financial statements could be materially affected.
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• Transactions with related parties, including as part of our privatization, may not have comparable market terms available and may not be entered into on an arm's length basis, which could expose us to lawsuits and affect our financial results.
Risks Relating to Suppliers
• Any interruptions in the supply of electricity and water may adversely affect our operations.
• Our business is subject to risks arising from reliance on services and products from third-party suppliers.
Risks Relating to Our Clients
• We are owed some substantial unpaid debts. We cannot assure you as to when or whether we will be paid.
Risks Relating to Our Management
• We depend on the technical qualifications of the members of our management and certain key employees, and we cannot guarantee that we will be able to retain them or replace them with equally qualified individuals.
Risks Relating to the Regulatory Environment
• Regulatory conditions for access to federal funding and financing pose risks to our ability to obtain resources necessary for our operations and investments.
• Pursuant to the New Legal Framework for Basic Sanitation, ANA will be responsible for issuing reference standards. Any non-compliance will prevent municipalities or operators from accessing financings and public resources managed or operated by the Brazilian government.
• We are exposed to risks associated with the Concession Agreement for URAE-1, which may materially impact our financial condition and operating results.
• If we do not meet the targets established by the Concession Agreement for URAE-1, our tariff adjustments might be reduced, which could materially adversely affect our business, financial condition, or results of operations.
• The granting/contracting authorities may terminate contracts before they expire in certain circumstances. The indemnification payments we receive in such cases may be less than the value of the investments we made, or may be paid over an extended period, adversely affecting our business, financial condition, or results of operations.
• If the water from our water sources (mananciais) does not meet our water treatment conditions, we may have to interrupt the water treatment process until we are able to treat the water or to substitute the supply of water from another water source.
• Risks associated with the collection, treatment and disposal of wastewater and the operation of water utilities may impose significant costs that may not be covered by insurance, which could result in increased insurance premiums.
• We are exposed to risks of delays or failures in payments associated with the provision of water and sewage services.
• Securing new concessions, new public-private partnerships and new acquisitions involve risks related to the integrations of the adjudicated or acquired businesses, the situation of the assets and the regularity of the operations related to the concessions.
• Our expansion strategy includes acquisitions that involve significant risks and uncertainties, which could adversely affect our business, results of operations, and financial condition.
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• Risks related to encumbrances, which may negatively affect us in the event of default on the obligations guaranteed by our properties.
• If we are unable to obtain or renew environmental permits and/or licenses, we may be subject to fines and the closure of any irregular facilities, with the interruption of activities carried out by us at such facilities.
• According to the Brazilian law regulating concessions and public-private partnership matters, our corporate structure is composed of some special purpose entities, which may result in our responsibility for tax, labor, environmental protection, consumer and bankruptcy matters originated from our subsidiaries.
• We are subject to penalties related to our registrations, authorizations, licenses and permits for the development of our activities.
Risks Relating to Environmental Matters and Physical and
Climate Transition Risks
• Noncompliance with environmental laws and environmental liability could have a material adverse effect on us and our reputation.
• Environmental, social and governance considerations could expose us to potential liabilities, increased costs (regulatory or otherwise), compliance failures and reputational harm, including with respect to the B3 Green Shares classification we have been granted.
• Droughts, such as the 2014 – 2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results of operations.
• Extreme weather conditions and climate change may have a material adverse impact on our business, financial condition or results of operations.
• New laws and regulations relating to climate change and changes in existing regulation may result in increased liabilities and increased capital expenditures, which could have a material adverse effect on us.
Risks Relating to Our Privatization
• Our Privatization may still be subject to legal challenge, and the dispersed ownership structure resulting from our Privatization may impact our ability to efficiently approve certain transactions and could potentially delay critical decision-making processes, which may adversely affect our business and results of operations
Risks Relating to Our Common Shares and ADSs
• We may issue additional common shares or enter into a merger, consolidation or other similar corporate transaction, which could dilute your interest in our common shares underlying the ADS.
• International judgments may not be enforceable when considering our directors or officers’ status of residency.
• We may not always be in a position to pay dividends or interest on shareholders’ equity and ADSs.
• Mandatory arbitration provisions in our bylaws may limit the ability of a holder of our ADRs to enforce liability under U.S. securities laws.
• A holder of our common shares and ADSs might be unable to exercise preemptive rights and tag-along rights with respect to the common shares.
• Holders of our ADSs do not have the same voting rights as our shareholders.
• Judgments of Brazilian courts with respect to our common shares are required to be payable only in reais.
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Risks Relating to Brazil
Ongoing political instability has
adversely affected the Brazilian economy and may lead to an economic slowdown, which may have an adverse effect on our financial condition
and results of operations.
Brazil has experienced
amplified economic and political instability, as well as heightened volatility, as a result of several investigations by national and
foreign agencies responsible for corruption and cartel investigations. Investigations into allegations, trials and convictions of Brazilian
government and State of São Paulo government officials and senior management of Brazilian companies may lead to further allegations
and charges, which in turn may lead to political instability and a decline in confidence by consumers and foreign direct investors in
the stability and transparency of the Brazilian government and Brazilian companies. This may have a material adverse effect on Brazil’s
economic growth, the demand for securities issued by Brazilian companies, and access to the international financial markets by Brazilian
companies.
Furthermore, the President
has the power to impose policies and issue governmental acts (Medidas Provisórias) regarding the Brazilian economy that
may affect our operations and financial performance. We cannot predict what policies the President will impose, much less whether such
new policies or changes in current policies will have an adverse effect on our business or the Brazilian economy. Additionally, the Brazilian
government’s potential difficulty in securing a majority in the National Congress could obstruct policy implementation, further
contributing to economic instability. These uncertainties, along with any new measures that may be implemented, may increase the volatility
of the Brazilian securities market.
Historically, political crises have affected
investor confidence as well as public opinion, and any of the above factors may create additional political uncertainty, which could harm
the Brazilian economy and, consequently, our business, results of operations, financial condition and the trading price of our common
shares and ADSs.
The Brazilian government has exerted
and continues to exert significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions,
may adversely affect the Company and the market price of our common shares and ADSs.
The Brazilian government
frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s
actions to control inflation and other policies and regulations have often involved, among other measures, changes in interest rates,
tax policies, price and tariff controls, foreign exchange rate controls, currency devaluation or appreciation, capital controls and limits
on imports and exports. Our business, financial condition and results of operations, as well as the market price of our common shares
or ADSs, may be adversely affected by changes in public policy at federal, state and municipal levels with respect to public tariffs and
exchange controls, as well as other factors, such as:
•
expansion or retraction of the Brazilian economy;
•
the regulatory environment and changes in laws and regulations;
•
interest rates fluctuations, inflation and foreign exchange rate movements;
•
availability of credit and liquidity of the Brazilian capital and lending markets;
•
commodity prices;
•
import and export controls;
•
public debt;
•
economic, political and social instability;
•
water and electricity shortages and rationing;
•
other factors identified or discussed under “Risk Factors”.
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We cannot predict
the measures that the Brazilian government will take due to mounting macroeconomic pressures or otherwise. Economic and political instability
and uncertainty has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian capital markets and the
securities of Brazilian issuers, which may adversely affect our activities, results of operations, and the trading price of our common
shares and ADSs. For more information, see “Item 3.D. Risk Factors—Risks Relating to Brazil—Ongoing political instability
has adversely affected the Brazilian economy and may lead to an economic slowdown, which may have an adverse effect on our financial condition
and results of operations.”
Changes in Brazilian tax laws or conflicts in their interpretation
may adversely affect us and may have an adverse impact on the taxes applicable to a disposition of our shares or ADSs.
The Brazilian government
frequently modifies tax laws, including tax treaties, rates, and benefits, which may increase our tax liabilities and adversely affect
our profitability and results of operations. In addition, tax authorities may interpret laws in a way that differs from the interpretation
we currently rely upon to carry out our transactions, potentially leading to adverse financial effects. We cannot assure that we will
be able to maintain our projected cash flows and profitability following any increases in Brazilian taxes applicable to our operations,
which may adversely affect our results of operations and financial condition.
Brazil is undergoing
significant tax reform, particularly on the taxation of goods and services. On December 20, 2023, Constitutional Amendment No. 132/2023
(“EC 132”) was enacted, replacing several of the current “indirect taxes” (ICMS, IPI, ISS and PIS/COFINS) by three
new ones: a Goods and Services Tax (IBS), a Contribution on Goods and Services (CBS) and an Excise Tax (IS). The transition period runs
from 2026 to 2032, with full implementation by 2033.
The regulatory process
for EC 132 through legislation (complementary and ordinary laws) is underway. On January 16, 2025, Complementary Law No. 214/2025 was
enacted, establishing the general legal framework applicable to IBS, CBS and IS. It is expected that the standard rate for the sum of
IBS and CBS to be generally levied on any type of services and goods (with some limited exceptions) will be 28.0%.
Further reforms on
income and payroll taxation are also under discussion by the Brazilian government. EC 132 provides that the executive branch must submit
to the National Congress, within 90 days of its enactment, bills of law for reforming income and payroll taxation. As of the date of this
annual report, no such bills have been submitted.
Several bills aimed
at reforming the Brazilian Income Tax system have been submitted to Congress. In November 2025, the enactment of Law No. 15,270/2025 introduced
changes such as a minimum annual taxation for high-income individuals, an increase in the personal income tax exemption threshold, and
a 10% withholding income tax on certain dividend distributions to individuals and remittances abroad. Subsequently, Complementary Law
No. 224/2025 established a 10% linear reduction of federal tax incentives and benefits granted to companies established in Brazil in relation
to certain federal taxes, and increased the withholding tax on Interest on Net Equity (Juros sobre Capital Próprio) from
15% to 17.5% starting in 2026.
In addition, Law No.
10,833/2003 provides that the disposition of assets located in Brazil by a non-resident to either a Brazilian resident or a non-resident
is subject to taxation in Brazil, regardless of whether the disposition occurs outside or within Brazil. This provision results in the
imposition of withholding income tax on gains arising from a disposition of our common shares by a non-resident of Brazil to another non-resident
of Brazil. There is no judicial guidance as to the application of Law No. 10,833/2003 to dispositions of ADSs, and accordingly, we are
unable to predict whether Brazilian courts may decide that it applies to dispositions of our ADSs between non-residents of Brazil. However,
in the event that the disposition of assets is interpreted to include a disposition of our ADSs, this tax law would result in the imposition
of withholding taxes on the disposition of our ADSs by a non-resident of Brazil to another non-resident of Brazil. For purposes of Brazilian
taxation, the income tax rules on gains related to the disposition of common shares or ADSs can vary depending on the domicile of the
non-Brazilian holder and the form by which the non-Brazilian holder has registered its investment.
We cannot predict
the effects of changes in Brazilian tax laws, and if they may have an adverse effect on our business, financial condition or results of
operations.
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Inflation and the Brazilian government’s
measures to combat it may contribute to economic uncertainty in Brazil, adversely affecting us and the market price of our common shares
or ADSs.
Brazil has historically
experienced high rates of inflation, and the Brazilian government’s measures to control inflation have had, and may continue to
have, significant effects on the Brazilian economy and on our business, financial condition and results of operations. Monetary tightening
cycles, characterized by high interest rates, may constrain economic growth, reduce credit availability and increase our cost of funding.
Conversely, other Brazilian governmental actions, including reductions in interest rates, intervention in the foreign exchange market,
or measures intended to influence the value of the real, may trigger increases in inflation expectations.
Brazil’s General
Price Index (Índice Geral de Preços – Mercado), or IGP-M index, recorded deflation of 1.05% in 2025, inflation
of 6.54% in 2024 and deflation of 3.18% in 2023. Brazil’s National Broad Consumer Price Index (Índice Nacional de Preços
ao Consumidor Amplo), or IPCA index, recorded inflation of 4.26% in 2025, 4.83% in 2024 and 4.62% in 2023.
In Brazil, the Central
Bank’s Monetary Policy Committee, or COPOM, is responsible for setting the Brazilian official interest rate, or the Selic rate.
COPOM frequently adjusts the official base interest rates to meet the economic goals established by the Brazilian government´s National
Monetary Council, particularly the inflation-targeting regime. In the event of an increase in inflation, the COPOM may choose to significantly
increase interest rates. For example, as of December 31, 2023 and 2024, the Selic rate was 11.75% and 12.15% per annum, respectively.
In 2025, the Selic rate further increased, reaching 15.00% in June 2025, its highest level since 2006. In 2026, the Selic rate eased slightly,
declining to 14.75% per annum as of the date of this annual report.
If Brazil once again
experiences substantial high inflation or deflation in the future, our business, financial condition or results of operations may be adversely
affected, including our ability to comply with our obligations. In addition, a significant increase in inflation may weaken investor confidence
in Brazil, adversely affecting the market price of our common shares or ADSs.
Exchange rate instability may adversely
affect us, our foreign currency denominated debt and the market price of our common shares or ADSs and our ability to service our foreign
currency denominated obligations.
As a result of inflationary
pressures, the Brazilian currency has, at times, depreciated against the US dollar and other foreign currencies. The devaluation of the
Brazilian real against major foreign currencies, including the US dollar, may create additional inflationary pressure in Brazil,
potentially leading the Brazilian Central Bank (Banco Central do Brasil), or Bacen, to raise interest rates in an effort to stabilize
the economy. Depending on the circumstances, these measures may affect the overall growth of the Brazilian economy and, in some cases,
may adversely impact our financial condition and results of operations. Foreign exchange rate fluctuations will impact the U.S. dollar
value of our common shares on the B3, as well as the U.S. dollar equivalent of any distributions we make in reais with respect
to our common shares.
In addition, because
we have debt denominated in foreign currencies, any significant devaluation of the real will increase our financial expenses as
a result of foreign exchange losses that we must record. This would also increase our total debt, which could lead us to breach any debt/EBITDA
covenants we are subject to in certain financings. We had total foreign currency denominated debt of R$10.6 billion as of December 31,
2025, and we anticipate that we may incur additional amounts of foreign currency denominated debt in the future. In December 2023, our
Board of Directors approved our hedging policy, and in 2024 and 2025, we entered into derivative instruments to hedge against a depreciation
of the real against the U.S. dollar. We cannot guarantee we will always be able to enter into derivative instruments to hedge in
favorable terms.
A devaluation of the
real may adversely affect us and the market price of our common shares or ADSs. For more information, see Note 5.1(a) to our 2025
Consolidated Financial Statements.
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Downgrades in Brazil’s credit rating could adversely
affect our credit rating, the cost of our indebtedness and the trading price of our common shares and ADSs.
Brazil has experienced
the loss of investment grade status from credit rating agencies such as Standard & Poor’s, Moody’s, and Fitch Ratings,
as well as a downgrade by Standard & Poor’s. As a result, any changes in Brazilian government policies or fluctuations in Brazil’s
sovereign credit rating—factors beyond our control—may contribute to increased volatility in the Brazilian capital markets
and have a material adverse effect on us and the market price of our common shares and ADSs.
Recently, the Brazilian
political and economic environment has experienced high levels of volatility and instability, including contraction of GDP, sharp fluctuations
in the real against the US dollar, rising unemployment, and lower consumer spending and confidence. We cannot predict the potential
impacts of policies to be adopted by the Federal Government. The most recent change by Fitch, on June 25, 2025, upgraded Brazil’s
sovereign credit rating to BB with a stable outlook, citing better-than-expected macroeconomic and fiscal performance despite successive
shocks in recent years. As of the date of this annual report, Brazil’s credit rating was BB (Standard & Poor’s), Ba1 (Moody’s),
and BB with a stable outlook (Fitch).
If there are further
downgrades in Brazil’s credit rating by rating agencies, investor risk perception may increase and, as a result, the trading value
of our securities may decrease, which could negatively impact our shareholders and holders of our securities.
Events, geopolitical tension and
the perception of risks in other countries, especially the United States and emerging economies, may adversely affect the market price
of Brazilian securities.
International investors
generally consider Brazil an emerging market. Historically, adverse events in emerging economies have resulted in a perception of greater
risk by global investors, including those from the United States and Europe. Such perceptions regarding emerging market countries significantly
affect Brazil, the Brazilian capital market, and the availability of credit in Brazil, both from domestic and international sources.
Additionally, the
Brazilian economy and the market price of securities of Brazilian companies are influenced, to varying degrees, by economic and market
conditions in Brazil and other countries, including the United States, Europe, and other emerging economies. Even if economic conditions
in these countries differ significantly from those in Brazil, investor reactions to events in other countries may have a material adverse
effect on the Brazilian economy and the market value of securities issued by Brazilian issuers. In the past, the development of adverse
economic conditions in other countries has generally resulted in capital outflows and, consequently, a reduction in external resources
invested in Brazil. Any of the above events may adversely affect the market value of our securities and make it more difficult for us
to access the capital markets and finance our operations in the future, on acceptable terms or at all.
Brazil is subject
to events such as: (i) political instability in the United States; (ii) the conflict between Ukraine and Russia, which triggered a military
and geopolitical crisis with worldwide repercussions; (iii) the trade war between the United States and China; (iv) the conflict in the
Gaza Strip and tensions in the Middle East, including the escalation of hostilities involving the United States and Israel; (v) crises
and tensions between Venezuela and the United States; and (vi) crises in Europe and other countries that affect the global economy, producing
or potentially producing a series of effects that directly or indirectly affect the capital markets and the Brazilian economy, including
fluctuations in the prices of listed companies' securities, reduced credit availability, deterioration of the global economy, exchange
rate and inflation fluctuations, negative impacts on the supply chain for raw materials, and increased inflation and interest rates on
goods, among others, which may have a material adverse effect on our financial condition and results of operations.
The U.S. government
has been implementing protectionist policies, including imposing tariffs on a range of products from various countries, such as China,
the European Union, and Brazil. Among other measures, the U.S. government recently announced a 50% tariff on Brazilian imports, including
manufactured goods, commodities, and agricultural products, which entered into force, subject to exceptions, on August 1, 2025. In addition,
the United States maintains extraterritorial international sanctions programs, such as the Global Magnitsky Human Rights Accountability
Act, which have been applied to certain Brazilian individuals. These measures have contributed to increased geopolitical tensions, greater
market volatility, and increased uncertainty regarding international trade and capital flows, potentially resulting in a slowdown in
global trade and economic activity. Changes in U.S. government policies may significantly and adversely affect the Brazilian economy
and, consequently, the market value of our securities.
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In February 2026,
the United States and Israel launched coordinated military strikes against key Iranian military and infrastructure targets. This marked
a significant escalation of hostilities, resulting in heightened instability across the Middle East, further disruptions to global energy
markets, and increased volatility in international trade and supply chains. Escalation or expansion of hostilities, interventions by other
groups or nations, the imposition of economic sanctions, disruption of shipping transit in the Straits of Hormuz or other significant
trade routes, or similar outcomes could adversely affect global international trade and financial markets, which could in turn have a
material adverse effect on the Brazilian economy and the market value of our securities.
For example, the conflict
involving the Russian Federation and Ukraine poses a risk of further increases in fuel and gas prices; occurring simultaneously with a
possible appreciation of the U.S. dollar, these increases would exert even more inflationary pressure and could hinder Brazil's economic
recovery. Additionally, the conflict impacts the global supply of agricultural commodities, so that, if grain prices rise due to increased
demand, demand for Brazilian production would increase, given Brazil’s high production capacity and ability to negotiate more competitive
prices; thus, export rates and domestic prices would rise, generating further inflationary pressure. Furthermore, a significant portion
of Brazilian agribusiness is highly dependent on fertilizers imported from the Russian Federation and its allies (the Republic of Belarus
and the People's Republic of China). Changes in the export policy of these products could adversely affect the economy and, consequently,
the capital market. It is important to note that, following the Russian invasion on February 24, 2022, animosities have arisen not only
among the directly involved countries but also in many other nations indirectly interested in the issue, creating a scenario of high uncertainty
for the global economy.
Additionally, the
Brazilian economy is affected by market conditions, including commodity market conditions (particularly iron ore, oil, coffee, corn, soybeans,
and live cattle), as well as by international economic conditions, especially those of the United States. The prices of shares and other
securities traded on B3, for example, are highly affected by fluctuations in U.S. interest rates and the performance of major U.S. stock
exchanges. Any increase in interest rates in other countries, especially the United States, may reduce global liquidity and investor interest
in investing in the Brazilian capital market, which could have a material adverse effect on the market price of our securities.
Risks Relating to Our Business
Risks associated with the transfer
of revenue and tariff adjustments related to the provision of water and sewage services to the city of São Paulo.
The provision of water
and sewage services in the city of São Paulo accounted for 45.7% of our gross operating revenue from sanitation services (excluding
revenues relating to the construction of concession infrastructure) in the year ended December 31, 2025.
On June 23, 2010,
the State and the city of São Paulo executed a convention agreement (convênio) with our intermediation and ARSESP’s
consent, under which they agreed to manage the planning and investment for the basic sanitation system of the city of São Paulo
on a joint basis. We executed a service contract with the State and the city of São Paulo on the same date to provide these services
for the next 30 years, pursuant to which, among other things, we must transfer 7.5% of the gross revenues we obtain from this contract,
less COFINS and PASEP taxes, and unpaid bills for services provided to properties owned by the city of São Paulo, to the FMSAI,
as per Municipal Law No. 14,934/2009. For more information, see “Item 7.B. Related Party Transactions” for a further discussion
of the principal terms of this convention and the service contract we executed in accordance with this convention.
As a result of the
second ordinary tariff revision, published in ARSESP Resolution No. 794/2018 (“Second Ordinary Tariff Revision”), ARSESP
allows the pass-through of up to 4% of the municipal revenue we transfer to a legally established municipal infrastructure fund. ARSESP
Resolution No. 1545/2024 subsequently established the criteria and conditions to permit the transfer of 4% of such revenue from service
providers. In addition, for recognition as part of the tariff, municipal funds for environmental sanitation and infrastructure must be
established by the municipality through a legal act, which specifies the allocation of resources. For the fourth tariff cycle (2021-2024)
ARSESP has set a 4% cap on transfers to municipal funds, with these transfers requiring prior approval by ARSESP and formal recognition
as part of the tariff structure.
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Considering that ARSESP
limited the transfer of tariffs for amounts transferred to municipal infrastructure funds to 4%, the mandatory contractual transfer of
the remaining 3.5% of gross revenue (excluding COFINS and PASEP taxes and unpaid bills of public properties in the city of São
Paulo) to FMSAI was not fully transferred to customers until the effective date of the current concession agreement signed with URAE 1.
From 2010 to December
31, 2023, we transferred approximately R$5.9 billion to FMSAI. For additional information on ARSESP regulations, see “Item 4.B.
Business Overview—Government Regulations Applicable to Our Contracts—ARSESP.”
On July 13, 2021,
the city of São Paulo filed a public civil action against us, the State of São Paulo and ARSESP, aiming, in general terms,
to discuss the possibility of including the charge to FMSAI in the tariff adjustment provided for in Resolution No. 870/2019, which in
practice was already being transferred pursuant to Resolution No. 794/2018. In summary, this public civil action seeks: (i) the recognition
of illegality of the transfer of 7.5% of our gross revenue, related to FMSAI, to the water and sewage tariff applicable in the city of
São Paulo; (ii) to establish our liability for any damages caused to users affected by ARSESP Resolutions 794/2018 and 870/2019;
and (iii) the recognition of the inexistence of liabilities to be paid to us for the transfers to FMSAI made by it since 2010, since they
would already be included in the tariff value from the beginning.
On August 19, 2021,
the city of São Paulo requested the suspension of the process in view of the ongoing negotiations in search of an amicable solution
to the dispute. On September 13, 2021, the suspension of the case for a period of 90 days was granted. On August 15, 2022, the city of
São Paulo reported that the settlement negotiations were still ongoing. On February 12, 2025, the city of São Paulo requested
an additional suspension of the process for 30 days, and, as of the date of this annual report, there have been no further developments.
We have not yet been appointed and we cannot
predict the outcome of this process, which, if unfavorable, could have a negative economic impact on us.
The Concession Agreement
for URAE-1 provides for the full recognition of tariff payments to FMSAI for the municipality of São Paulo (as of the effective
date of the new concession contract), which means that the rate of 7.5% is now recognized in the tariffs. Please see “Presentation
of Financial and Other Information—Privatization” for more information on contributions to this public consultation, and “Item
4.B. Business Overview” for more information on our tariff structure.
Any failure to obtain new funding
or to comply with covenants in our existing financing agreements may adversely affect our ability to continue our capital expenditure
program.
At the time of our
privatization, the capital expenditure program to meet our coverage and service targets was estimated to be R$70 billion between 2024
and 2029. For the year ended December 31, 2025, we recorded R$15.2 billion in capital expenditures. We intend to continue funding these
capital expenditures with cash generated by our operations, issuances of debt securities in the domestic and international capital markets
as well as borrowings in Brazilian reais and foreign currencies. A significant portion of our financing needs is obtained through
long-term financing at attractive interest rates from Brazilian federal public banks, multilateral agencies and international governmental
development banks. If the Brazilian government changes its policies regarding public financing or amounts available for water and sewage
services, or if we fail to obtain long-term financing at attractive interest rates in the future, we may not be able to meet our obligations
or finance our capital expenditure program, which could have a material adverse effect on our business, financial condition or results
of operations.
Our debt includes
financial covenants that impose indebtedness limits, as well as several non-financial covenants, including the pledging of assets, provision
of financial statements and audit reports, change of control provisions and compliance with environmental laws and licenses, among others.
Our failure to comply with any of these covenants could seriously impair our ability to finance our capital expenditure program, which
could have a material adverse effect on us. For more information on these covenants, see “Item 5.B. Liquidity and Capital Resources—Indebtedness
Financing-Financial Covenants.”
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Any substantial monetary judgment
against us or any of our directors and officers in legal proceedings may have a material adverse effect on our reputation, business or
operating or financial condition and/or results.
We are and may in
the future be party to legal proceedings related to civil, corporate, environmental, labor, tax, and/or criminal actions filed against
us, which may require us to expend substantial funds and other resources.
These claims involve
substantial amounts of money and other remedies. As of December 31, 2025, the total estimated amount of claims related to our legal proceedings
was R$18.2 billion (net of court deposits). Of this amount, R$1.9 billion was provisioned, representing only claims assessed as involving
probable losses. This provision does not include exposures classified as possible or remote losses.
Our provisions do
not cover all legal proceedings involving monetary claims filed against us and may be insufficient to cover any amounts arising from unfavorable
final decisions, which may have a material adverse effect on our financial condition and reputation. Further, one or more of our directors
and officers may become parties to civil, administrative, environmental, criminal or tax judicial, administrative or arbitration proceedings,
of which the initiation and/or outcome may adversely affect them and impair their ability to perform their duties with us, which could
lead to a material adverse effect on our reputation, business or operating or financial condition and/or results.
Unfavorable judicial,
administrative, and arbitral decisions against us, our subsidiaries, executives, and directors, particularly those involving substantial
amounts or preventing us from conducting business as initially planned, may adversely affect our results, business, reputation, financial
situation, and market value of our shares and ADSs. Negative decisions involving criminal proceedings, especially those related to corruption
or administrative misconduct, could also impact our executives’ ability to perform their duties or restrict our ability to contract
with the government and access tax benefits and significantly harm our reputation and business.
Furthermore, the Public
Prosecutor’s Office and environmental agencies may initiate administrative procedures to investigate possible environmental damages
caused by our activities, which may lead to recommendations, “conduct adjustment agreements” and/or general “terms of
commitments” with the relevant authorities, assuming specific obligations for a determined period. Non-compliance with these terms
could result in fines, enforcement, and filing of lawsuits.
Finally, parliamentary
inquiry commissions and regulatory and oversight bodies, such as the State Audit Court (Tribunal de Contas do Estado de São
Paulo - TCE), the National Water and Sanitation Agency (Agência Nacional de Águas e Saneamento Básico -
ANA) and ARSESP, may scrutinize our operations, processes, contracts, procedures, and partnerships. Investigations or unfavorable decisions
may (i) restrict our ability to conduct our business; (ii) require us to make payments that have not been provisioned for; (iii)
affect the continuity or profitability of our service lines; (iv) prevent or delay the execution of our projects as initially planned;;
and (v) prohibit us from entering into contracts with the public administration to receive fiscal incentives and benefits and access financing
and resources. Furthermore, such bodies may initiate processes including judicial, administrative and arbitral proceedings, which may
lead to unfavorable decisions and adversely affect our business, financial situation, and reputation. For more information, see “Item
8.A. Consolidated Financial Statements and Other Financial Information—Legal Proceedings” and Note 23 to our 2025 Consolidated
Financial Statements included in this annual report.
We are subject to anti-corruption,
anti-bribery, anti-money laundering, sanctions and antitrust laws and regulations. Our violation of any such laws or regulations could
have a material adverse effect on our reputation, our results of operations and our financial condition.
We are subject to anti-corruption,
anti-bribery, anti-money laundering, sanctions, antitrust and other similar laws and regulations. We are required to comply with the
applicable laws and regulations of Brazil and the U.S. Foreign Corrupt Practices Act (“FCPA”), and we may become subject
to similar laws and regulations in other jurisdictions. The existence of any investigation, inquiry or proceeding of an administrative
or judicial nature related to the violation of any of these laws or regulations, in Brazil or abroad, for acts against the public administration
by our affiliates or subsidiaries, managers, employees or any third parties acting on our behalf, may result in the application of sanctions,
which may include (i) administrative, civil or criminal fines and indemnities (the latter applicable to the members of management who
participated in the infraction); (ii) an obligation to repair the damage caused; (iii) extraordinary publication of the conviction;
(iv) inclusion in the National Register of Punished Companies (CNEP); (v) a criminal conviction; (vi) forfeiture of the benefits
or assets illicitly obtained; (vii) partial or full suspension of activities; (viii) a prohibition on entering into contracts
with the government or receiving tax or credit benefits or incentives; and (ix) compulsory dissolution or disregard of the company’s
personality There can be no assurance that our internal policies and procedures will be sufficient to prevent, detect and timely implement
corrective measures in relation to any unlawful and inappropriate practices, fraud or violations by our employees, officers, executives,
partners, agents and service providers and other third parties, nor that any such persons will not take actions in violation of our policies
and procedures.
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From time to time,
we receive or become aware of complaints or allegations of potential breaches of applicable anti-corruption, anti-bribery or other laws
and regulations or our internal policies and procedures (including our procurement processes) through our whistleblower channel or other
internal or external sources. Our internal audit team processes these complaints or allegations, and our audit committee may engage outside
counsel to investigate given the nature of the complaints or allegations. The findings of our internal audit team and any outside counsel
are reported to our audit committee. These complaints or allegations under the supervision of our audit committee may lead to formal government
inquiries or investigations and harm to our reputation.
If we or any of our
subsidiaries, directors, officers, employees, partners, agents, service providers or other persons are deemed or perceived to have engaged
in activities violative of applicable laws, regulations or internal controls or procedures, we could become subject to government enforcement
actions, penalties, damages, fines and sanctions, as well as events of default or prepayment events under our outstanding indebtedness,
that could result in a material adverse effect on our reputation, business, our ability to obtain financing for our business, our financial
condition, our results of operations and the market price of our common shares and ADSs.
Our business is subject to cyberattacks and security and
privacy breaches.
Our business depends
on the availability, integrity and security of information technology ("IT") and operational technology ("OT") systems
to support water supply, sewage collection and treatment, and commercial, administrative and financial operations. We also collect, store,
process and transmit personal or sensitive and operational data relating to customers, suppliers and employees. As a result, we are subject
to risks associated with cybersecurity incidents, including unauthorized access, data breaches, malware, ransomware, system intrusions,
human error, system failures and third-party security incidents.
Cybersecurity threats
continue to evolve and may increase in frequency, scale and sophistication, including threats from well-resourced and highly capable actors.
Attack methods may involve exploitation of system vulnerabilities, social engineering techniques or compromises affecting vendors, service
providers or other third parties. Any actual or perceived cybersecurity incident could result in operational disruptions, data loss or
unauthorized disclosure of information, impairment of critical systems, reputational harm, regulatory investigations, litigation or financial
losses, and could adversely affect our business, financial condition or results of operations.
On October 16, 2024,
we experienced a cyberattack that caused disruptions to our digital network, resulting in the unavailability of certain systems and the
exfiltration and publication of certain data. We notified the Brazilian National Data Protection Agency (Agência Nacional de
Proteção de Dados – “ANPD”) in accordance with applicable law and in 2025, the matter was formally
closed by such authority in light of the remedial measures adopted and our cooperative conduct, with no material harm identified to data
subjects. We cannot assure you that the measures we have implemented in response to this incident will be sufficient to prevent future
incidents of a similar or greater magnitude, or that we will not face regulatory scrutiny, litigation, reputational harm or other adverse
consequences arising from this or any future cybersecurity incident.
We may be subject
to additional information security incidents or data breaches in the future. There can be no assurance that our cybersecurity and other
technical and organizational measures will be effective against all threats, particularly as attack techniques continue to evolve. A
significant cybersecurity incident could adversely affect our operations, financial condition, results of operations and reputation.
For more information, see “Item 16.K. Cybersecurity.”
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Failure to comply with the LGPD or any further privacy
and data protection laws enacted in Brazil could adversely affect our reputation, business, financial condition or results of operations.
We are subject to privacy
and personal and data protection laws, including the Brazilian Federal Constitution, the Brazilian Consumer Protection Code (Law No. 8,078/1990)
(the “Consumer Protection Code”), Law No. 12,965/2014 (the “Brazilian Internet Civil Rights Framework” –
Marco Civil da Internet) and Law No. 13,709/2018 (the “Brazilian General Data Protection Law” or “LGPD”), as well
as related regulations, including those issued by the ANPD.
The LGPD establishes
rules governing the collection, use, processing, sharing, storage, retention, disposal, and all other forms of processing of personal
data, applicable to all economic sectors, both in digital and physical environments. The ANPD is responsible for overseeing compliance
with the LGPD, including issuing regulations, conducting investigations, and imposing administrative sanctions.
Failure to comply
with the LGPD — particularly with respect to ensuring data subjects’ rights, implementing adequate documentation and data
governance programs, providing clear and transparent information regarding our personal data processing activities, ensuring that data
processing is limited to its stated purposes, complying with legally mandated data retention periods, and implementing the required security
standards—may subject us to administrative sanctions. Such sanctions may include warnings, public disclosure of violations, temporary
blocking or deletion of personal data, suspension or prohibition of data processing activities, daily fines, and fines of up to 2% of
the Company’s, group’s, or conglomerate’s gross revenue in Brazil in the prior fiscal year, net of taxes, capped at
R$50 million per violation.
In addition to the administrative
sanctions that could be imposed by the ANPD , violations of the LGPD laws and regulations relating to privacy and protection of personal
data may result in judicial proceedings, enforcement actions by other authorities, such as the Public Prosecutor’s Office and consumer
protection agencies, which may lead to penalties provided , adverse court decisions requiring the payment of compensation for under other
applicable laws, including the Brazilian Consumer Protection Code (Law No. 8,078/1990) and the Brazilian Internet Civil Rights Framework
damages , as well as reputational harm and damage to our brand and public image. We are also subject to legal actions brought directly
by affected data subjects, which may result in the payment of damages.
We cannot guarantee
that our personal data processing activities will always be secure, compliant, and adequate, nor that we will not be subject to fines
or other sanctions. The imposition of penalties or obligations to remedy failures in personal data protection or LGPD compliance may negatively
affect our reputation, business operations, and, consequently, the value of our common shares and ADSs.
In 2024, we experienced
a cybersecurity incident, which we reported and notified to the ANPD in accordance with applicable law. In 2025, the matter was formally
closed by the authority in light of the remedial measures adopted and our cooperative conduct, with no material harm identified to data
subjects. Additionally, in 2025, we were sued by Instituto Sigilo for alleged violations of personal data protection laws,in Brazil, in
which we obtained a favorable decision in the first instance. This legal proceeding is currently pending at the Brazilian appellate level
court. We cannot assure you that the ANPD or other regulatory authorities will not initiate additional investigations or proceedings in
connection with this procedure or any other incident, or as a consequence of it, nor can we exclude the possibility that any pending or
future judicial or administrative proceedings will not may result in sanctions, penalties or other adverse consequences that could affect
our business, financial condition, results of operations or reputation.
Our failure to protect our intellectual property rights
may negatively impact us.
We own and license
from third parties several intellectual property assets, including trademarks, patents, software, copyrights, and domain names. Therefore,
we rely on intellectual property laws and registration authorities in Brazil and abroad, as well as on license agreements, to protect
our intellectual property.
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Events such as the rejection
of patent applications or trademark registrations by the National Institute of Industrial Property (“INPI”), or the unauthorized
use or other improper appropriation of our intellectual property assets, especially the “Sabesp” trademark and other trademarks
used in our business, can diminish the value of our brands or affect our reputation. Furthermore, we cannot guarantee that the measures
taken to protect our intellectual property rights are and will continue to be sufficient to protect us against potential illicit actions
by third parties. Similarly, third parties may claim that our services, or even our intellectual property assets, violate their intellectual
property rights.
Any dispute or litigation,whether
judicial or administrative, related to intellectual property assets, including, without limitation, any allegation of infringement arising
from the products and/or services provided by us, even if it concerns assets of low relevance to our operations, can be costly and time-consuming
and, as a result, may adversely affect our operations, our business and our operating results. Therefore, any situation that affects our
protection with respect to our intellectual property assets may have adverse impacts on our business.
Additionally, we have entered into temporary
licensing agreements for the use of certain technologies essential to the development of our operations, such as software licensing agreements.
If we are unable to renew or maintain the licenses for the necessary intellectual property rights, we may face difficulties in replacing
these technologies. Furthermore, if this scenario occurs and we continue to use these technologies without the necessary licenses, the
holders of these intellectual property rights may demand that we cease using such rights and seek compensatory damages.
Furthermore, third
parties may claim that the services we provide infringe their intellectual property rights. Any alleged violation or infringement of intellectual
property rights against us may result in costly and time-consuming litigation and, consequently, adversely affect our operational results.
If we are not successful in defending against potential claims or reaching settlements, we may be required to pay damages, cease the use
of third-party intellectual property, or enter into licensing agreements on unfavorable terms.
Industrial accidents, equipment failure,
environmental hazards or other natural phenomena may adversely affect our operations, assets and reputation and might not be covered by
our insurance policies.
Currently, we substantially
source our water supply from rivers and reservoirs, although we source a small portion from groundwater wells. Our reservoirs are filled
with impounding water from rivers and streams, by diverting the flow from nearby rivers, or by a combination of both methods. As of December
31, 2025, we had 28 large-scale reservoirs which are classified under Brazilian dam safety legislation, which, due to their characteristics,
may be associated with potential damages. Our operations may be hampered by numerous factors, including unexpected or unusual geological
and/or geotechnical operating conditions, industrial accidents, floods and/or droughts or other environmental occurrences that could result
in structural damages and eventually rupture of our dams and other facilities or equipment.
Our water and sewage
pipes are susceptible to degradation caused by factors such as aging, intense traffic, interventions resulting from disorderly urban planning
and action by other companies, which may provoke accidents in the networks, increasing the risk of physical loss of water and leakage
of sewage, which could affect the regular provision of our services, impacting our customers, the society and the environment. Regarding
sanitary sewage, our sewage pipes may also be obstructed due to misuse resulting from the improper release of solid waste and rainwater
in the sewage systems, which could also lead to the risks mentioned above.
In particular, the
increasing degradation of our water sources (mananciais) may affect the quantity and quality of water available to meet demand
from our customers. For more information, see “Item 4.B. Business Overview—Description of Our Activities—Water Operations,”
“Item 4.B. Business Overview—Description of Our Activities— Water Distribution” and “Item 4.B. Business
Overview—Description of Our Activities—Sewage Operations—Sewage System.”
The occurrence of
any of these events could lead to personal injury or death, adverse social impacts on the communities located near our facilities, monetary
losses and possible legal liability arising from environmental and social damages, other environmental and social damages, the loss of
prime materials, substantial financial costs potentially not covered by insurance and damage to our reputation. For more information,
see “Item 4.B. Business Overview—Description of Our Activities Water Operations—Water Resources.”
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Our insurance policies may not cover or may be insufficient
to cover claims which may arise.
Due to the high premiums
associated with insurance policies and other factors relating to our risk management, it is not always possible to obtain insurance against
all types of risks and liabilities associated with our activities and related assets. We cannot guarantee that our existing insurance
policies are adequate and sufficient for all circumstances that may arise or against all inherent risks and for amounts that cover all
the losses we may occur.
If a claim is not covered
by our insurance policies, or if damages exceed the policy limits, we may incur additional costs for the repair or replacement of damaged
assets or for compensation to third parties, which could adversely affect our results of operations and reputation. Furthermore, for insured
events, coverage is contingent upon the payment of a premium and the fulfillment of specific obligations stipulated in the policy;
failure to pay such premium or breach of any of these obligations, coupled with the occurrence of an event giving rise to a claim, could
put us at further risk, as damages - even if insured - would not be covered by the insurer.
We cannot guarantee
that we will be able to renew our existing insurance policies at reasonable rates, and if renewed, we cannot guarantee that they will
be renewed under the same conditions and coverage originally acquired, or at reasonable commercial rates, or on acceptable terms, whether
in terms of costs or coverage.
Losses caused by events
not covered by insurance, or partially covered, may cause us to incur significant costs and the resources available to maintain our current
activities and allocated towards our expansion activities will be reduced, which could ultimately have a material adverse effect on our
financial performance and operating results.
If we are not successful in addressing
issues related to occupational health and safety for our employees and the facilities where we conduct our activities, our results and
operations may be negatively affected.
Our operational activities
are exposed to risk factors that may impact the safety of employees and service providers. Among the main critical risks associated with
our sector are: working at heights, excavation work, confined spaces, electrical work, lifting and handling loads, and exposure to chemical
products used in operational processes.
Failures in managing
these risks, whether due to inadequate operational controls, ineffective procedures, or insufficient training, may result in serious accidents,
material damage, reputational impacts, and partial or total interruption of activities until corrective measures are implemented.
Our operations are
subject to extensive federal, state, and municipal legislation related to occupational health and safety. In particular, the Regulatory
Standards (NRs) establish mandatory guidelines for accident prevention, worker training, implementation of engineering controls, and adoption
of management systems. Failure to comply with these standards may lead to fines, citations, civil, labor and criminal liabilities, as
well as the shutdown or interdiction of operational units by the relevant authorities.
We cannot guarantee
that our current health and safety measures will be sufficient to prevent accidents or ensure full compliance with applicable regulations
at all times. The occurrence of a significant occupational accident or a finding of non-compliance could adversely affect our operations,
financial condition, results of operations and reputation.
If any of our assets are deemed assets
dedicated to providing an essential public service, they will not be available for liquidation and will not be subject to attachment to
secure a judgment.
A substantial portion of
our assets, including our water and wastewater treatment plants and sewage collection and treatment facilities, are considered by Brazilian
law and the URAE-1 Concession Agreement to be essential for the provision of public services. Accordingly, such assets would not be available
for liquidation or attachment to ensure the continuity of the public service provision. Upon expiration or termination of the applicable
concession agreements, these assets will revert to the relevant granting authority in accordance with Brazilian law and the terms of such
agreements. We cannot assure you that any indemnity we receive for such assets would be equal to their market value or sufficient to reimburse
the investments made by us in such assets, which could adversely affect our financial condition.
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Strikes, work stoppages or labor
unrest by our employees or by the employees of our suppliers or contractors could adversely affect our business.
Labor-related disruptions,
including strikes, protests or other collective actions involving our employees, the employees of our subsidiaries, or workers of suppliers
and contractors performing essential functions, could adversely affect our critical operational activities. Such events may result in
significant delays, impair the completion of strategic projects, and lead to additional costs associated with contingency measures. We
cannot ensure that future strikes, work stoppages or other forms of labor unrest will not affect our operations or administrative routines.
Disagreements on issues
involving changes in our business strategy, reductions in our personnel, or changes to employee contributions and benefits could lead
to labor unrest. Disputes arising from these or other matters may give rise to conflicts of interest that could disrupt our operations,
administrative processes or project execution timelines.
Strikes, work stoppages
or other forms of labor unrest at our company or our subsidiaries, or at any of our major suppliers or contractors, could impair our ability
to complete major projects and adversely affect our results of operations, financial condition and ability to achieve our long-term objectives.
For further information
regarding strikes, labor unions and work stoppages, see "Item 6.D. Directors, Senior Management and Employees — Employees."
We are subject to obligations regarding
respect for the human rights of all of our stakeholders, which may result in additional costs and significant contingencies.
We are required to
comply with to legal, regulatory and normative obligations related to the respect, promotion and protection of human rights for all stakeholders
with whom we interact. Compliance with such obligations may result in additional costs, the need for structural investments and the identification
of material contingencies. Failure to comply with these requirements may adversely affect our reputation, operations and financial condition.
We are exposed to
social risks arising from adverse, potential or actual impacts that our operations may have on the human rights of employees, customers,
suppliers, investors and local communities, whether through direct or indirect relationships with our activities. These risks include,
among others, inadequate working conditions, violations of occupational health and safety standards, discrimination, harassment and other
practices inconsistent with labor laws, industry norms and international expectations.
It is essential to
ensure a safe, healthy and non-discriminatory work environment, as well as to safeguard the right to freedom of association and participation
in labor unions, in accordance with applicable legislation. The identification of an unsafe, hostile or discriminatory workplace may expose
us to civil, administrative and labor liabilities, result in operational disruptions, increase employee turnover and impair our ability
to attract, retain and develop talent.
In addition, the absence
of structured and continuous initiatives aimed at promoting diversity, equity and inclusion across our workforce—including in leadership
and management positions—may heighten reputational risks, increase stakeholder scrutiny, weaken our competitive positioning and
lead to legal or regulatory challenges.
We cannot assure that
we will be able to fully mitigate these social risks or maintain continuous and comprehensive compliance with all national and international
standards, guidelines and expectations related to human rights. Any failure to do so may result in material adverse effects on our operating
results, corporate reputation and financial condition.
If we do not remedy the material
weakness in our internal controls, the reliability of our financial statements could be materially affected.
Our management is
responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on the
effectiveness of our system of internal control. Our internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes
in accordance with IFRS Accounting Standards. As a public company, we are required to comply with the Sarbanes-Oxley Act and other rules
that govern public companies. In particular, we are required to certify our compliance with Section 404 of the Sarbanes-Oxley Act, which
requires us to furnish annually a report by management on the effectiveness of our internal control over financial reporting. In addition,
our independent registered public accounting firm is required to report on the effectiveness of our internal control over financial reporting.
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A
“material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements would not be
prevented or detected on a timely basis. In the course of completing our assessment of internal control over financial reporting as
of December 31, 2025, we did not design or maintain effective internal control due to material weaknesses identified as of that
date. These material weaknesses were related to the identification, design and execution of relevant controls in information
technology general controls (ITGC) and related information produced by the entity that support underlying data used in all routine
and non-routine business and financial reporting processes and controls, to fully address the requirements of the COSO criteria.
These material weaknesses did not result in any identified misstatements to the consolidated financial statements and there were no
changes to previously released financial results. Although these material weaknesses did not result in any material misstatement of
our consolidated financial statements for the periods presented, they could lead to a material misstatement of account balances or
disclosures. Accordingly, management has concluded that these control deficiencies constitute material weaknesses.
Our internal controls
department is responsible for overseeing the implementation of action plans and reports periodically to the Board of Directors and the
Audit Committee. If our future efforts are not sufficient to remedy all the inconsistencies identified, we could continue to experience
material weaknesses in our internal controls in the future. Any such material weaknesses could adversely affect our ability to accurately
prepare our financial statements, which may result in a restatement of our historical financial statements or in misstatements in our
future financial statements and, consequently, adversely affect our business and financial condition. See “Item 15-Controls and
Procedures” for further details.
Transactions with related parties,
including as part of our privatization, may not have comparable market terms available and may not be entered into on an arm’s length
basis, which could expose us to lawsuits and affect our financial results.
We were a company
controlled by the State of São Paulo and certain transactions that we entered into with companies controlled by the State of São
Paulo or governmental entities have no comparable market terms available. Additionally, we cannot guarantee that these transactions have
been entered into on an arm’s length basis. This risk remains even following our privatization as the State of São Paulo
remains our significant shareholder.
Furthermore, we must
comply with Brazilian antitrust and competition regulations, as well as with the disclosure requirements of the CVM, the SEC, and the
stock exchanges on which our securities are listed. Any noncompliance with applicable requirements relating to related party transactions
could adversely affect our financial condition, may result in regulatory penalties and may expose us to lawsuits from third parties.
Risks Relating to Suppliers
We cannot guarantee that our suppliers and/or outsourced
service providers will not engage in any irregular practices.
We rely on suppliers
and outsourced service providers for the performance of a significant portion of our operational and expansion activities. We cannot guarantee
that such third parties will not engage in improper, unlawful or non-compliant practices under applicable legislation, including anti-corruption,
environmental, labor, and regulatory standards.
Any involvement of
suppliers or service providers in acts of corruption, fraud, collusion, labor or environmental irregularities may result in investigations,
administrative or judicial sanctions, fines, restrictions on contracting with the public sector, contract termination, suspension of works
or services, as well as significant reputational damage.
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Even if such acts
are committed by third parties, we may be held jointly or secondarily liable, or may suffer indirect impacts arising from the interruption
of activities and the need to replace suppliers. The materialization of these risks may adversely affect our financial condition, operating
results, and reputation.
Any interruptions in the supply of electricity and water
may adversely affect our operations.
Electricity and the
price we pay for it have a significant impact on our operating results. Any material interruptions in the supply of energy could have
a considerable negative effect on our activities, financial condition, results of operations and prospects.
The Brazilian power
generation system is based on hydro, thermal, wind and solar energy, with the majority of energy being produced by hydroelectric powerplants.
It is not possible to predict rain patterns in the future. Increases in the price of energy could have a material impact on our business,
financial condition, or results of operations. Moreover, electricity shortages could lead to instability in water supply and sewage collection
and treatment services, which could adversely affect our reputation and operations. Additionally, as one of the largest electricity consumers
in the State of São Paulo, a potential increase in electricity tariffs due to a shortage of hydroelectric power could have a significant
financial impact on us.
Finally, adverse weather
conditions and continuous droughts can interrupt the electricity supply and may impact our distribution of water and prevent us from providing
water to our customers and perform our obligations in accordance with the terms of our concession agreements. For more information, see
“Item 4.B. Business Overview—Power Consumption.”
Our business is subject to risks arising from reliance
on services and products from third-party suppliers.
Our ability to operate
our systems and execute construction projects within planned deadlines and budgets may be negatively impacted by dependence on third-party
suppliers and service providers for the supply of materials, equipment, services, and products. We rely on these third parties to carry
out the works required to meet regulatory targets for universalization of sanitation, and the technical capability, operational performance,
and financial stability of these suppliers are critical factors for delivering projects within the expected timelines and budgets.
This dependence involves
risks of shortages of critical inputs, such as high-density polyethylene (HDPE), polyvinyl chloride (PVC) and concrete pipes, for which
demand may, at certain times, exceed the available production capacity. There are also risks related to the limited availability of equipment,
such as micro-tunneling machines, high-speed drilling rigs (HDD) and compact lift stations, which have few qualified manufacturers and,
in some cases, are not produced domestically, potentially causing significant delays or requiring urgent importation.
We depend on a limited
number of suppliers for chemicals used in water and sewage treatment processes, inputs that are essential for maintaining the quality,
safety, and continuity of public service provision.
Additionally, financial
difficulties, bankruptcy, work stoppages, contractual breaches, or serious health and safety failures by third parties may result in delays,
increased costs, administrative sanctions, liability for us, and reputational impacts. Competition with other sectors of the economy for
similar professionals, equipment, and materials may further intensify price pressures and temporary unavailability.
In this context, failures
in the supply capacity or execution by third parties may result in interruptions, delays, or significant additional costs, affect compliance
with regulatory targets and contractual commitments related to the expansion, operation, and modernization of infrastructure, and generate
adverse impacts on our financial condition, operating results, and reputation.
Risks Relating to Our Clients
We are owed some substantial unpaid debts. We cannot assure
you as to when or whether we will be paid.
Historically, the
State of São Paulo and some State entities have delayed payment of substantial amounts related to water and sewage services owed
to us. As of December 31, 2025, the State of São Paulo owed us R$122.5 million for water and sewage services. Additionally, the
State of São Paulo also owes us substantial amounts related to reimbursements of state-mandated special
retirement and pension payments that we make to some of our former employees for which the State of São Paulo is required to reimburse
us.
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With respect to payment
of pensions on behalf of the State of São Paulo, we had a disputed credit of R$1.8 billion as of December 31, 2025, recorded in
the line item “disputed amount”. We have not recorded this disputed amount as a reimbursement credit for actuarial liability
due to the uncertainty of payment by the State of São Paulo, considering that the amount is under judicial discussion in a civil
lawsuit filed on November 9, 2010, against the State of São Paulo. We also had an uncontested credit of R$1.0 billion which is
recorded as related-party receivables, recorded in the line item “undisputed amount”. For further information, see Note 11
to our 2025 Consolidated Financial Statements.
In addition, as of
December 31, 2025, we recorded a provision for an actuarial liability of R$ 2.0 billion with respect to future supplemental pension payments
for which the State of São Paulo does not accept responsibility. For further information, see Note 25 to our 2025 Consolidated
Financial Statements.
In addition, certain
municipalities and other government entities also owe us payments. We cannot assure you when or if the State of São Paulo and such
municipalities will pay the contested credits, which are still under discussion, and the remaining overdue amounts they owe us. The amounts
owed to us by the State of São Paulo, municipalities and other government entities for water and sewage services and reimbursements
for pensions paid may increase in the future, given that we are currently making some payments on behalf of the State of São Paulo.
Risks Relating to Our Management
We depend on the technical qualifications
of the members of our management and certain key employees, and we cannot guarantee that we will be able to retain them or replace them
with equally qualified individuals.
Part of the success
of our operations and the implementation of our strategy depends on the knowledge, skills, and efforts of our management and certain key
employees. If members of our management or such employees choose to no longer participate in the management of our business and/or resign,
we may not be able to find qualified professionals to replace them.
The New Legal Framework
for Basic Sanitation set a target of December 31, 2033 for the universalization of water and sewage services in Brazil. However, in relation
to the Concession Agreement for URAE-1, this date was brought forward to December 31, 2029.
The increase in the
number of companies operating in our industry, as a result of the New Legal Framework for Basic Sanitation, may lead members of our management
or other professionals to leave us. The loss of members of management and key employees, as well as the difficulty in recruiting professionals
with equivalent expertise and experience, could have a negative effect on our results of operations, financial condition, and reputation.
Risks Relating to the Regulatory Environment
Regulatory conditions for access
to federal funding and financing pose risks to our ability to obtain resources necessary for our operations and investments.
Access to federal
public funds and financing supported by Brazilian government resources, or by resources managed or operated by Brazilian federal agencies
or entities, is subject to several specific regulatory conditions. Failure to meet any of these requirements may limit our ability to
obtain such funding, increase our financing costs, or delay planned investments.
As provided for in Federal
Law No. 11,445/2007 and Federal Decree No. 11,599/2023, these conditions include: (i) achievement of minimum performance indicators, related
to technical, economic, and financial management, as well as efficiency and effectiveness in service provision; (ii) proper operation
and maintenance of previously financed projects; (iii) compliance with the ANA reference standards for the regulation of basic sanitation
services, including compliance by ARSESP; (iv) compliance with losses targets in the water distribution system; (v) timely submission
of updated information to the National Information System for Basic Sanitation (SINISA); and (vi) regulatory compliance of the operation
to be financed.
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If we do not meet
these conditions, we may become ineligible to access certain federal funds or financing programs, which could reduce our access to specific
funding sources or require us to seek alternative financing on less advantageous terms. Any such limitations could adversely affect our
investment program, operational performance, and financial condition.
Pursuant to the New Legal Framework
for Basic Sanitation, ANA will be responsible for issuing reference standards. Any non-compliance will prevent municipalities or operators
from accessing financings and public resources managed or operated by the Brazilian government.
According to Federal
Law No. 11,445/2007 and Federal Law No. 9,984/2000, both modified by the New Legal Framework for Basic Sanitation on Federal Law No. 14,026/2020,
ANA can issue reference standards (guidelines) for how subnational regulatory agencies should regulate certain topics in the sector. Consequently,
ANA’s reference standards can apply to the basic sanitation sector nationwide, setting the guidelines for regulation and supervision
by the regulatory entities at the state, municipal, and district levels, and ensuring regulatory uniformity in the sector and legal certainty
for the provision and regulation of the service.
Nevertheless, the
application of the reference standards is not mandatory a priori. The New Legal Framework for Basic Sanitation provided that the
access to financing and public resources managed or operated by the Brazilian government depends on compliance with the reference standards,
by the sanitation service titleholders, service providers, and the subnational regulatory agencies, such as ARSESP. Accordingly, there
is an incentive for adherence to these reference standards. If ARSESP and/or any other regulatory agency responsible for overseeing and
supervising the services provided by us do not adopt ANA’s reference standards, we will be ineligible for federal funding. In this
case, we would be unable to execute financing agreements with federal public banks. Access to federal funding is also contingent upon
compliance with the additional requirements established in Article 50 of the New Sanitation Legal Framework.
Moreover, Federal
Decree No. 11,468/2023 created the National Secretariat for Environmental Sanitation, linked to the Ministry of Cities, with several competences,
including: (i) coordination of the implementation of the Federal Basic Sanitation Policy in Brazil; (ii) proposition of national
guidelines for financing the sanitation sector; and (iii) definition of guidelines for the preparation of reference standards.
Non-compliance by
any municipalities with the reference standards could adversely affect our activities, especially as we and any non-complying municipalities
would be prevented from accessing public resources from the Brazilian government.
We are exposed to risks associated
with the Concession Agreement for URAE-1, which may materially impact our financial condition and operating results.
Pursuant to the Concession
Agreement for URAE-1, there is an allocation of risks between the granting authority and us. We are responsible for risks inherent to
our business operations, including but not limited to:
(i) Failures, errors, or omissions in the engineering projects necessary for investment execution, including execution methodology and/or technology used by us, or in the surveys that supported them;
(ii) Costs arising from obsolescence, instability, and malfunctioning of the technology employed by us in our services;
(ii) Shortfalls or fluctuations in tariff revenue established by the São Paulo State Public Services Regulatory Agency (ARSESP);
(iv) Costs
and delays resulting from the late obtainment of licenses, authorizations and/or permits, arising from our failure to comply with the
terms and conditions set forth in the Authorizations Plan approved by ARSESP; and
(v) Negligence,
lack of skill, or recklessness by individuals working for us.
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If any of these risks
materialize, we may not be entitled to an economic-financial rebalancing of the contract and may consequently face increased costs and/or
reduced revenues, which could impact our results of operations and financial condition.
In addition, pursuant
to the Concession Agreement for URAE-1 and the internal regulations of the URAE-1 deliberative council, any municipality could withdraw
from the Concession Agreement for URAE-1. The withdrawal of a municipality, particularly one that generates a significant portion of our
revenue — such as the city of São Paulo — could have a material adverse effect on our business and results of operations.
However, a municipality’s decision to withdraw from URAE-1 is subject to the prior payment of the indemnification amounts owed to
us, without prejudice to our continuing to operate the services until full payment of the amount due is made. In the case of municipalities
that are part of a metropolitan region, urban agglomeration, or microregion and that share operational facilities, any withdrawal must
be submitted for approval by the other municipalities that are part of URAE-1.
Moreover, in the event
of contractual noncompliance, such as failure to meet key performance indicators, we may be subject to penalties, which can be imposed
only after an administrative proceeding conducted in accordance with the due process requirements set forth under Brazilian law. In addition
to the application of such penalties, tariff discounts may also be applied through universalization factor (“Factor U”) and/or
Factor Q, which relate, respectively, to the achievement of universalization targets and the quality of the services provided.
As ARSESP is responsible
for implementing tariff adjustments and conducting periodic and extraordinary reviews of the Concession Agreement for URAE-1, we cannot
guarantee that ARSESP will approve tariff adjustments in a timely manner or accept the imbalance events presented by us during periodic
and extraordinary reviews. Any refusal and/or delay in applying tariff adjustments or any failure to restore the contractual economic-financial
balance may impact our results of operations and financial condition.
Finally, the granting
authorities have the right to terminate these agreements early under the circumstances set forth in Section 35 of Federal Law No. 8,987/1995
(the “Brazilian Concessions Law”), such as:
• Forfeiture (Caducidade): early termination due to (i) inadequate or deficient service provision; (ii) material breach of contractual obligations; (iii) unjustified interruption of services; or (iv) loss of the economic, technical, or operational capacity necessary to provide the service adequately. We are entitled to a cure period before administrative proceedings for forfeiture are initiated.
• Takeover (Encampação): early termination based on a public-interest decision, duly justified and approved by law, upon demonstration that continuation of the concession is no longer in the public interest.
Any early termination
must be preceded by an administrative proceeding in which we will have the opportunity to present our defense and contest the indemnification
amount. It is not possible to predict how long such proceedings will take or whether we will receive the compensation we consider appropriate.
Under each concession agreement, we are entitled to compensation for investments that have not yet been amortized or depreciated. In the
event of takeover, compensation must be paid prior to termination, while forfeiture does not require prior payment. Any such early termination
could have a material adverse effect on our results of operations, financial condition, and reputation, as well as the trading price of
our common shares and ADSs.
For more information,
please see “Item 4.B. Business Overview— Contract URAE-1— Tariffs.”
If we do not meet the targets established
by the Concession Agreement for URAE-1, our tariff adjustments might be reduced, which could materially adversely affect our business,
financial condition, or results of operations.
The New Legal Framework
for Basic Sanitation established December 31, 2033 as the deadline for achieving universal access to water supply (99% of the population)
and sewage services (90% of the population) in Brazil.
However, in relation
to the Concession Agreement for URAE-1, this deadline was brought forward to December 31, 2029. The universalization deadline also applies
to rural areas and consolidated informal urban areas, which were included in our service area by the Concession Agreement for URAE-1.
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Monitoring compliance
with the universalization targets shall be evaluated based on the indicators and timelines set out in the Technical Annex for each municipality
(Annex II of the Concession Agreement for URAE-1). If the universalization targets are not achieved, the tariff adjustment index (Índice
de Reajuste Tarifário – “IRT) may be reduced through the application of Factor U, which could materially and adversely
affect our business, financial condition, or results of operations. ARSESP is responsible for calculating the Factor U at each tariff
adjustment and periodic tariff review, using information provided by the independent verifier.
The distribution of
dividends by us is prohibited in the event of non-compliance with the universalization targets and schedules provided for in the Concession
Agreement for URAE-1, as determined in a regular administrative proceeding and decided with final effect by ARSESP.
In addition to the
application of Factor U and its potential effects on dividend distribution, ARSESP may impose fines and other sanctions if we are found,
during regulatory inspections, to be in non-compliance with the URAE-1 Concession Agreement. In an extreme scenario, repeated failure
to meet universalization targets may trigger the early termination of the Concession Agreement for URAE-1 (declaration of forfeiture),
if any of the following occur:
• failure to achieve at least one of the URAE-1 Coverage Targets for water or sewage services in two consecutive years or in three non-consecutive years within a five-year period starting in 2025;
• failure to achieve at least one of the Municipality Coverage Targets for water supply or sewage services — representing at least one-third (1/3) of the municipalities within URAE-1 — in two consecutive years or in three non-consecutive years from 2027 onward, provided that none of the three URAE-1 coverage targets demonstrates any improvement; and/or
• the service availability indicator IRFA — Index of User Complaints Related to Water Shortage and Low Pressure — reaching a level equal to or above 95, regardless of the applicable target framework for the calculation of Factor Q, for four consecutive semesters or seven non-consecutive semesters within a five-year period.
Any fine, sanction,
or early termination of the Concession Agreement can be imposed only following an administrative proceeding conducted in accordance with
the due process guarantees set forth under Brazilian law.
Although much of the
effort to achieve these targets falls on us, there are imponderable elements that are beyond our control, and which could affect our ability
to achieve these targets — such as delays in issuing environmental licenses and municipal authorizations to carry out construction
works, processes for vacating areas of interest, the possible finding of archaeological sites, among others. We will not be held liable
for any failure to achieve the universalization targets if such failure results from omissions or delays by URAE-1, the municipalities,
or the State in fulfilling their respective obligations.
The granting/contracting authorities
may terminate contracts before they expire in certain circumstances. The indemnification payments we receive in such cases may be less
than the value of the investments we made, or may be paid over an extended period, adversely affecting our business, financial condition,
or results of operations.
The granting authorities
— the contracting entities that delegate the provision of public services to us through concession agreements, such as URAE-1 and
the municipality of Olímpia — have the right to terminate these agreements early under the circumstances set forth in Section
35 of Brazilian Concessions Law. Early termination may occur in the following cases:
• Forfeiture (Caducidade): early termination due to (i) inadequate or deficient service provision; (ii) material breach of contractual obligations; (iii) unjustified interruption of services; or (iv) loss of the economic, technical, or operational capacity necessary to provide the service adequately. We are entitled to a cure period before administrative proceedings for forfeiture are initiated.
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• Takeover (Encampação"): early termination based on a public interest decision, duly justified and approved by law, upon demonstration that continuation of the concession is no longer in the public interest.
• Annulment: early termination due to a subsequently identified illegality that cannot be remedied, such as legal defects in the bidding process.
• Bankruptcy or dissolution of the concessionaire.
In addition to the
grounds set forth in the Brazilian Concessions Law, the initiation of judicial or extrajudicial reorganization proceedings may also lead
to early termination, depending on the terms of each contract. Any early termination must be preceded by an administrative proceeding
in accordance with the due process requirements set forth under Brazilian law. We will have the opportunity to present our defense and
contest the indemnification amount. It is not possible to predict how long such proceedings will take or whether we will receive the compensation
we consider appropriate.
In cases of forfeiture,
annulment (when we or our controlling shareholders contributed to the illegality), or bankruptcy, additional penalties may be imposed,
including suspension of the right to participate in future public tenders. Under each concession agreement, we are entitled to compensation
for investments that have not yet been amortized or depreciated. In the event of takeover, compensation must be paid prior to termination,
while forfeiture does not require prior payment.
At the federal level,
ANA issued Reference Standard No. 03/2023, approved by Resolution No. 161/2023, which establishes the methodology for compensating unamortized
or undepreciated investments in water supply and sewage services. This standard applies to contracts entered into before and after its
issuance and must be followed by subnational regulatory authorities when issuing their own rules.
In municipalities
within the State of São Paulo regulated by ARSESP, Deliberation No. 1,515/2024 must be observed regarding asset reversion and compensation
at the end of concessions. This Deliberation was issued by ARSESP based upon the aforementioned ANA Reference Standard No. 03/2023. However,
with respect to the URAE-1 Concession Agreement, the contractual methodology prevails, and ARSESP’s regulation applies only on a
subsidiary basis. For other municipalities regulated by ARES-PCJ, such as Olímpia, Resolution No. 648/2025 applies on a subsidiary
basis to the methodology established in the applicable concession agreement.
Even with the guarantee
of due process, adversarial rights, and the correction of irregularities (particularly regarding forfeiture), we cannot rule out the possibility
that granting authorities may terminate concession agreements early under the circumstances described above. If early termination occurs
and we do not receive adequate compensation, or if compensation is significantly delayed, our business, financial condition, and operating
results could be adversely affected.
We also cannot predict
the impact that methodologies adopted by the relevant regulatory authorities — when applied on a subsidiary basis — may have
on our business, including the risk that compensation payments may be lower than the remaining value of our investments.
Additionally, municipalities
may refuse to pay indemnification voluntarily, potentially leading to judicial disputes. In such cases, there is a risk that judicial
decisions could result in indemnification being set at a lower value or deemed undue. We are also a party to proceedings related to indemnification
issues regarding the resumption of water supply and sewage collection services by certain municipalities. For more information, see “Item
3.D. Risk Factors — Risks Relating to Environmental Matters and Physical and Climate Transition Risks.”
If the water from our water sources
(mananciais) does not meet our water treatment conditions, we may have to interrupt the water treatment process until we are able to treat
the water or to substitute the supply of water from another water source.
Our water supplies are potentially subject
to contamination by sewage infiltration into our water distribution networks, which can alter their quality. If this occurs, we do not
distribute the contaminated water and maintenance and disinfection is carried out in the distribution network, which generates additional
costs for our business.
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In addition, water
sources may possibly be contaminated by third parties through irregular or accidental dumping of large quantities of pollutants affecting
the final quality of the water and impact the result for the quality of services factor (Factor Q - ICAD) on tariff adjustment.
Risks of contamination
in our distribution system include potential failures in network maintenance procedures, which may carry unwanted material to the supply
network. If we are found liable for water contamination resulting in human exposure to hazardous substances, we could face administrative,
civil and/or criminal enforcement actions, litigation, and other proceedings or obligations to remediate environmental damages and compensate
affected individuals. Such incidents could also significantly harm our reputation. Environmental remediation and compensation typically
involve significant costs and may last several years. Additionally, claims or complaints from residents or communities near our sites
may have adverse effects on our business, reputation, or ability to obtain funding, especially from multilateral institutions. Failure
to effectively manage these claims could adversely affect our results of operations, financial condition, and reputation.
Furthermore, cleaning
up water sources can be costly and if we are required to do so, it could have a material and adverse effect on our business, results of
operations, and financial condition. If our water supply fails to meet treatment standards, we may have to interrupt or stop the use of
that water supply until we can treat the water or replace it with water from another source. Adapting the treatment process, either by
expanding current facilities or developing new methods, could incur significant costs. Using a more distant water source may also result
in increased expenses. Additionally, if we need to interrupt the water supply, we will have to notify our consumers, further impacting
our operations.
Additionally, the
increase in the population density of the contributing basins is another factor that may reduce the availability of raw water. Any decrease
in the amount of raw water available to us could have a negative effect on our financial results and activities.
Water and sewage treatment
involve environmental risks in the event there is a system failure. For example, if there is an overflow in a sewage treatment plant,
the sewage could impact neighboring areas or even natural water resources, which could have a material adverse effect on our reputation,
financial condition, and results of operations. In addition, sludge, a byproduct of the sanitation process, needs to be disposed of appropriately
in order to prevent harm to the environment. In some cases, the landfills in which the sludge is deposited are not located in the same
municipalities as the water and sewage treatment facilities and, therefore, we are required to transport the sludge to the closest landfill,
which increases the risk of contamination. Furthermore, some landfills may stop operating, which may increase our operating costs. These
events could also lead to environmental liabilities in the administrative, criminal, and civil spheres, as mentioned above.
Any of the above events
could have a material adverse effect on our results of operations, financial condition, cash flow, liquidity, and reputation.
Risks associated with the collection,
treatment and disposal of wastewater and the operation of water utilities may impose significant costs that may not be covered by insurance,
which could result in increased insurance premiums.
The wastewater collection,
treatment, and disposal operations of our utilities are subject to substantial regulation and involve significant environmental risks.
If collection or sewage systems fail or do not otherwise operate properly — including as a result of pipe leaks, bursts, or overflow
— untreated wastewater or other contaminants could spill onto nearby properties or into nearby streams and rivers, potentially causing
damage to persons or property, harm to the environment (including aquatic life), and economic losses that may not be recoverable through
tariff rates. This risk is most acute during periods of substantial rainfall or flooding, which are among the principal causes of sewer
overflow and system failure.
Liabilities resulting
from such damage could materially and adversely affect our business, results of operations, and financial condition. If we are deemed
liable for any damage caused by such failures, losses might not be covered by our insurance policies, and such losses may make it difficult
for us to secure insurance in the future with the same coverage and coverage limits at acceptable premium rates. Similarly, any related
business interruption or other losses might not be covered by insurance
policies, which would also make it difficult for us to secure insurance in the future at acceptable premium rates.
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We may also incur
liabilities under environmental laws and regulations requiring the investigation and remediation of environmental contamination at our
properties or at off-site locations where there have been adverse environmental impacts. The discovery of previously unknown conditions,
or the imposition of cleanup obligations in the future, could result in significant costs and could materially and adversely affect our
reputation, financial condition, results of operations, cash flows, and liquidity. Such remediation losses may not be covered by our current
insurance policies, or the insured amount may not be sufficient, and may make it difficult for us to obtain comparable insurance coverage
in the future at acceptable premium rates.
We cannot guarantee
that our existing insurance policies provide comprehensive coverage for all circumstances that may arise or all inherent risks, that they
would cover all potential damages claimed, or that we will be able to renew our existing insurance policies, or on what terms any such
renewal could be obtained. The occurrence of a significant uninsured or uninsurable loss, in part or in full, or the failure of our subcontractors
to comply with their indemnity obligations, may materially and adversely affect our results of operations, financial condition, and reputation.
We are exposed to risks of delays or failures in payments
associated with the provision of water and sewage services.
According to our contracts,
we are required to achieve specific service targets and continue supplying water and sewage services to clients with overdue or irregular
payments. In these situations, we cannot guarantee when payments for the services will be received, despite the existence of administrative
and judicial procedures for the collection of outstanding debts. As a result, we may experience delays or shortfalls in cash collections,
which could adversely affect our liquidity and working capital.
Meanwhile, we incur
significant costs for providing these public services, like water abstraction and sewage discharge fees, and there is a risk we may not
be able to fully pass these costs on to our customers. In addition, increases in such costs or limitations imposed by regulatory authorities
on our ability to recover them through tariffs could negatively impact our margins. However, under the URAE-1 Concession Agreement, the
tariff adjustment mechanism takes into account, among other factors, the level of uncollectible revenue, i.e., revenue that remains
uncollected after all commercial and legal collection efforts have been exhausted and that reflects structural default.
If the volume of uncollectible
revenues increases beyond the level recognized in the tariff adjustment process, or if the regulatory methodology for recognizing such
amounts changes, our financial condition and results of operations could be adversely affected.
Reducing physical
water losses caused by leaks and overflows primarily depends on investments made in leak detection and repairs, pressure management in
distribution networks, operational improvements, and the renewal of the distribution network. Reducing levels of non-physical water losses
(which result from unauthorized consumption (theft) or inaccurate measurement) depends mainly on investments made in the acquisition and
installation of water meters, the re-registration of customers, and combat of irregularities, such as illegal water connections. The URAE-1
Concession Agreement establishes performance indicators with targets for coverage and water loss reduction throughout its term for each
municipality.
If we do not make
sufficient investment in activities and projects to reduce our levels of water losses, we could be materially and adversely affected,
including the imposition of fines and the reduction of the tariff adjustment amount related to URAE-1 Concession Agreement. These investments
must mainly be aligned with the goals established in concession contracts and the ideal levels of losses in supply systems.
Furthermore, the New
Legal Framework for Basic Sanitation establishes that providers of public water supply and sewage services must meet qualitative and quantitative
targets. Among these targets is the reduction of losses in the distribution of treated water.
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If we do not implement
the necessary actions to reduce the water loss rates, or if the projects aimed at reducing water loss levels do not produce satisfactory
results, our cash flow, results of operations, and financial condition may be adversely affected, and we may be penalized by the granting
authority if we fail to meet the targets established in the relevant concession agreements related to losses. Such penalties could include
financial sanctions or other contractual consequences, further affecting our operational performance.
Securing new concessions, new public-private
partnerships and new acquisitions involve risks related to the integrations of the adjudicated or acquired businesses, the situation of
the assets and the regularity of the operations related to the concessions.
Securing new concessions,
entering into public-private partnerships or completing acquisitions may expose us to risks related to the integration of the adjudicated
or acquired businesses, the condition and adequacy of existing assets, and the regularity of concession-related operations, such as: (i)
the assets related to the contract may be different from the description provided in the public bidding documents; (ii) the absence of
and/or the irregularity of required environmental licenses; (iii) the absence of grants for the operation of wells; or (iv) land irregularities.
We may also encounter
difficulties in transferring the assets associated with these contracts, or such assets may be in non-operational condition, requiring
additional investments to bring them into compliance with operational or regulatory standards. These irregularities may also complicate,
or in some cases prevent, the execution of financing agreements, which could affect our ability to meet the performance targets originally
established in our contracts.
In the case of companies
acquired by us, there may be delays in obtaining the consent of the granting authority or their creditors to confirm the change of control
or we may not obtain such consents at all. Furthermore, other factors such as contingencies not identified during due diligence, lack
of synergies, failure to integrate activities, among others, may arise. This could result in increased expenses for us and, as a result,
impact our financial condition and operating performance.
Our expansion strategy includes acquisitions that involve
significant risks and uncertainties, which could adversely affect our business, results of operations, and financial condition.
As part of our strategy
to expand our activities, we may undertake acquisitions from time to time, which will depend on several factors, including our ability
to identify suitable companies or assets for acquisition, negotiate acceptable prices and terms, successfully integrate and maintain the
quality of operations of the acquired businesses or assets, and realize the expected synergies and cost savings from such integrations.
If we are unable to
achieve the expected gains from acquisitions, or if acquired assets do not perform or integrate as expected, our business, results of
operations, and financial condition could be adversely affected.
Potential acquisitions
may also require us to incur additional indebtedness or to access the financial and capital markets, including through the issuance of
new shares and ADSs. This could result in increased indebtedness and financial exposure, as well as dilution of our existing shareholders’
and ADS holders’ ownership interests in our share capital. Acquisitions also expose us to the obligations and contingencies of the
acquired companies or assets arising from acts or omissions of prior management and previously incurred liabilities. Our legal due diligence
process to evaluate the legal and financial condition of potential acquisition targets — and any contractual guarantees or indemnities
we may receive from our counterparties — may be insufficient to protect us against such contingencies. If significant or unidentified
contingencies arise in connection with such acquisitions, they could adversely affect our business, results of operations, and financial
condition.
We may also encounter
difficulties or delays during any acquisition process, and such processes could divert significant time and attention of our management
team toward transitional or integration-related matters and away from our core business operations.
In addition, corporate
reorganizations undertaken in connection with our acquisitions may be subject to review or investigation by competition, antitrust, or
other regulatory authorities, which could delay or prevent the completion of such transactions.
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Any failure or delay
in completing future acquisitions or other strategic investment transactions could have a material adverse effect on our business and
results of operations.
Risks related to encumbrances, which may negatively affect
us in the event of default on the obligations guaranteed by our properties.
There may be risks
in relation to some of our properties that are subject to legal encumbrances and restrictions, such as unavailability and easements (right
of way).
According to certificates
of real estate records, some of our properties are burdened with unavailability, which is a temporary judicial measure that imposes significant
restrictions on certain assets and the taxpayer’s rights over those assets, to ensure compliance with and payment of back taxes
by the taxpayer before they can dispose of, transfer or use specific assets previously identified by the public treasury as debt security.
As a rule, non-payment
of debts that lead to the declaration of unavailability can result in the forced sale of the properties, the value of which will be used
to pay the outstanding debts. In these cases, the new owners of the properties can request possession of the assets, which may require
the relocation of the activities carried out in these locations.
In addition, even
if the debts that resulted in the declaration of unavailability have already been paid, failure to cancel the encumbrance on property
registrations may hinder possible transactions or operations involving such properties in the future.
In addition, some
of our properties are trapped by easements. In the event that the existing easements are not being respected, the respective beneficiaries
may demand that their area be vacated and enforce the real right of these easements, as well as the losses and damages incurred, such
as the payment of fines and compensation for any damages caused by the non-compliance with the real right. In addition, beneficiaries
can file a lawsuit to ensure that their right of way is respected.
Failure to pay the
amounts that generated the unavailability can lead to the forced sale of the properties, and the value of any sale will be used to pay
off outstanding debts. In these cases, the new owners of the properties may seek possession of the assets, which may lead to the need
to relocate the activities carried out in these locations.
If we are unable to obtain or renew
environmental permits and/or licenses, we may be subject to fines and the closure of any irregular facilities, with the interruption of
activities carried out by us at such facilities.
We may not be able
to keep in force or renew with the appropriate public authorities all permits and/or licenses necessary for our operational assets and
for the development of our activities.
If we are unable to obtain
or renew such permits and/or licenses, we may be subject to fines and the closing of any non-compliant facilities, with the interruption
of the activities carried out by us at such facilities. Any factors that impact the failure to obtain or renew such licenses and permits
may cause us to incur additional costs, which may force us to reallocate resources to meet any additional charges. Failure to obtain,
maintain or renew environmental licenses and authorizations as well as to comply with applicable conditions may result in environmental,
administrative, civil or criminal liability, including strict liability for environmental damages under Brazilian law.
Additionally, we cannot
guarantee that permits, licenses and authorizations, such as use and operating permits and/or documents relating to the regularity of
built-up areas, have not been breached in the past when in the process of obtaining or renewing them. For example, the existence of a
built-up area without prior authorization from the relevant city hall, or in disagreement with the project approved, could lead to risks
and liabilities for the property if the area is not regularized and it is inspected by the competent authorities. These risks include:
(i) the impossibility of registering the construction; (ii) the refusal for us to issue an operating license; (iii) the refusal
to obtain or renew property insurance; (iv) the imposition of fines; and/or (v) the forced closure of the establishment.
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According to the Brazilian law regulating
concessions and public-private partnership matters, our corporate structure is composed of some special purpose entities, which may result
in our responsibility for tax, labor, environmental protection, consumer and bankruptcy matters originated from our subsidiaries.
Pursuant to Brazilian
Law No. 11,079/2004, the execution of public-private partnerships must be preceded by the incorporation of a special purpose entity (SPE).
However, in the event that one of our SPEs does not comply with the contractual obligations or is financially unable to honor the due
capital contribution installments, as provided in the public-private partnership agreement, as their controlling shareholder and/or guarantor,
we may be liable to perform supplementary investments and to provide additional services in order to maintain the minimum financial rates
provided for under the relevant agreements.
Brazilian Concessions
Law, which establishes provisions for concessions and permission of public services, sets forth that the concessionaire, incorporated
as an SPE or not, is responsible for the provision of the service granted in the concession, and is liable for any and all damages to
the granting authorities, users or third parties. Oversight by the competent authority does not exclude or mitigate such liability, which
could adversely and materially affect our business, financial condition, and results of operations.
In the case of the
concessionaire being incorporated as a consortium, the consortium leading company is liable before the public grantor for the compliance
with the concession agreement, without prejudice to the joint and several liability of the additional members of the consortium.
Risks related to our
subsidiaries also include bankruptcy and potential enforcement of piercing the corporate veil by the Brazilian Courts. As a rule, the
controlling shareholder is liable for damages resulting from acts performed with abuse of power. Any event impacting the image of our
partners, business partners and service providers of our subsidiaries may adversely affect our brand. Additionally, we may be liable for
certain obligations of our subsidiaries, including tax, labor, environmental protection, regulatory and consumer matters, which, in the
event they materialize, may adversely affect our business and results.
We are subject to penalties related to our registrations,
authorizations, licenses and permits for the development of our activities.
We depend on licensing
and registration before federal, state and municipal authorities and agencies, as well as operating permits. We cannot guarantee that
we will be able to obtain all the necessary licenses, permits and authorizations, or obtain their renewals in a timely manner. Obtaining
the necessary licenses, permits and authorizations depends on clearance from environmental agencies and other authorities, whose deadlines
we do not control.
The failure to obtain
or renew such licenses may prevent us from operating our units and lead to suspension and closing of irregular units, as well as the application
of fines. Our strategy may be adversely affected if it is impossible to open and operate new units or if the operations of our current
units are suspended or terminated due to the failure to obtain or renew the required registrations, permits and licenses, which may adversely
affect our results of operations.
In addition, we are
required to comply with the administrative limitations provided by environmental laws, such as the preservation of environmentally protected
areas, and of nature conservation areas (e.g., parks, reserves, protected areas, etc.). Failure to comply with these restrictions
may result in penalties and other liabilities, including substantial fines, criminal/administrative sanctions and the obligation to repair
and/or indemnify any damages.
Risks Relating to Environmental Matters and Physical and
Climate Transition Risks
Our financial and operating performance may be adversely
affected by epidemics, natural disasters and other catastrophes
Our financial and operating
performance may be adversely affected by the outbreak of pandemics, as well as other catastrophes and health epidemics on a regional or
global scale. Such outbreaks may result, at different levels, in the adoption of governmental and private measures, including restrictions,
as a whole or in part, on the circulation and transportation of persons, goods and services
and consequently, in the closure of private establishments and public offices, interruptions to the supply chain, reduction of consumption
in general by the population and increased intervention in their economies.
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In addition, the occurrence
of any of these adverse events may increase delinquencies which can negatively impact our results of operations. Our allowance for doubtful
accounts decreased by 88.9% for the year ended December 31, 2025 compared to the year ended December 31, 2024 and decreased by 14.6% for
the year ended December 31, 2024 compared to the year ended December 31, 2023.
Epidemics, natural disasters
and other catastrophes may have a negative and significant effect on the world economy and on Brazil’s economy, and include or may
include reduction in the level of economic activity; currency devaluation and volatility; increase in the fiscal deficit and
constraints to the capacity of the Brazilian government or state governments to make investments and payments and to contract services
or acquire goods; delays in judicial, arbitral and/or administrative proceedings; imposition, even if only temporarily, of a
more onerous tax treatment of our business activities; decrease the liquidity available in the international and/or Brazilian market;
and volatility in the price of raw materials and other inputs, among other effects.
We cannot assure that the occurrence of any of
these events and their duration may have material adverse effects on our operating results and financial condition, as well as the trading
price of our common shares and ADSs.
Noncompliance with environmental laws and environmental
liability could have a material adverse effect on us and our reputation.
We are subject to
extensive Brazilian federal, state and municipal laws and regulations related to human health and environmental protection. These regulations
establish requirements for environmental licensing, water use grants, and drinking water quality standards, as well as limits on discharge
of non-domestic sources entering effluents into our treatment systems. Additionally, they define the quality standards that treated sewage
must meet before being discharged into waterways. We may also face incidents such as leaks or pipe ruptures that can lead to liability
for environmental damages, including groundwater and soil contamination, as well as regulatory and environmental infractions.
We are a party to
several environmental proceedings and could be subject to other types of criminal, administrative and civil proceedings for non-compliance
with environmental laws and regulations, including licensing requirements and water grants, that could expose us to administrative penalties
and criminal sanctions, such as fines, closure orders and significant indemnification obligations. Furthermore, we are party to commitment
terms regarding the regularization of licenses and water grants requirements for our operations. Failure to comply with these terms could
result in administrative, civil and criminal liabilities. Such expenses may lead us to reduce expenditure on strategic investments, which
may adversely affect our business, financial condition, results of operations or reputation.
We are also involved
in environmental proceedings related to the discharge of untreated sewage into waterways or the disposal of sludge from treatment plants.
These proceedings subject us to civil proceedings and investigations concerning environmental remediation and compensation for damages
caused. In addition, we are involved in civil/administrative proceedings challenging the water withdrawn during the 2014-2015 water crisis.
Any unfavorable judgment in relation to these proceedings, or any material environmental liabilities, may have a material adverse effect
on our reputation, business, financial conditions or results of operations.
For more information
on these proceedings, see “Item 8.A. Consolidated Financial Statements and Other Financial Information—Legal Proceedings.”
For more information on investments in environmental programs, see “Item 4.A. History and Development of the Company—Main
Focus of our Capital Expenditure Program,” “Item 4.B. Business Overview—Description of our Activities—Sewage Operations—Sewage
Treatment and Disposal,” “Item 4.B. Business Overview—Environmental Matters” and “Item 4.B. Business Overview—Environmental
Matters—Environmental Regulation.”
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Environmental, social and governance
considerations could expose us to potential liabilities, increased costs (regulatory or otherwise), compliance failures and reputational
harm, including with respect to the B3 Green Shares classification we have been granted.
We are subject to a broad
range of laws, regulations and other measures that govern a wide range of topics requirements, including those related to matters that
extend beyond our core business activities. New or amended laws, regulations, policies, and international accords relating to ESG matters,
including sustainability, climate change, human capital and diversity, are being developed and formalized implemented in Brazil, the U.S.
and elsewhere other jurisdiction, which may require us to comply with specific, target-driven frameworks and/or disclosure requirements.
In the U.S., the SEC adopted broad climate change disclosure requirements in March 2024, which were subsequently stayed and vacated. The
regulatory landscape in this area remains uncertain and subject to further developments, which may require significant compliance efforts
if new rules are adopted in the future. The scope, timing and final form of any of these regulations or other measures is still uncertain.
The implementation of these goals and initiatives, as well as compliance with emerging regulatory obligations, and forward-looking milestones
may require considerable management time and may result in significant expense to us, and we cannot guarantee that we will achieve our
objectives.
Moreover, increasingly different
stakeholder groups have divergent views on ESG matters, which increases the risk that any action or lack thereof with respect to ESG will
be perceived negatively by at least some stakeholders and adversely impact our reputation. Emerging regulatory frameworks may also impose
additional compliance burdens and costs on us, and as with any new or developing regulation, may be subject to differing interpretation,
which could increase the risk of unintentional noncompliance. Our business could be negatively affected by increased regulation of ESG
research, ratings and data.
Moreover, increasingly different
stakeholder groups have divergent views on ESG matters, which increases the risk that any action or lack thereof with respect to ESG will
be perceived negatively by at least some stakeholders and adversely impact our reputation. Such regulatory regimes could impose significant
compliance burdens and costs on us, and as with all new regulation, we could be subject to ambiguous interpretation that could result
in inadvertent noncompliance. Our business could be negatively affected by increased regulation of ESG research, ratings and data.
Additionally, on June 7,
2024, the B3 granted us the B3 Green Shares (B3 Ações Verdes) classification. In compliance with Circular Letter No. 002/2024-VPE,
dated May 7, 2024, issued by the B3, S&P Global Ratings Shades of Green (the “Specialized Consultant”), certified that
we met the criteria established by B3 and that we derive: (i) more than 50.0% of our annual gross revenue from activities contributing
to the green economy; (ii) more than 50.0% of our annual investments and operational expenses allocated to activities contributing to
the green economy; and (iii) less than 5.0% of our annual gross revenue derived from fossil fuel activities. However, as the B3 Green
Shares classification is provided by a Specialized Consultant, which is a third-party provider, there is no assurance that the scrutiny
process meets investor criteria and expectations. We are the first company in Brazil to obtain the B3 Green Shares seal, and there are
no standardized processes and regulatory frameworks for this classification. Accordingly, we cannot assure that we will continue to meet
the criteria and expectations regarding environmental impact and sustainability performance in upcoming years, and we can give no assurance
that we will continue to meet the requirements, voluntary taxonomies or standards, whether currently in place or implemented in the future,
to maintain this classification.
Any failure, or perceived failure, by us to comply fully with ESG
laws and regulations or meet evolving and varied stakeholder expectations and standards could harm our business, operating results, and
financial condition.
Droughts, such as the 2014 –
2015 water crisis, can cause a material impact on consumption habits and, consequently, on our business, financial condition or results
of operations.
Severe drought events,
such as the drought resulting from the low rainfall levels recorded in the summer of 2014, which resulted in the 2014–2015 water
crisis, can have a material impact on consumption habits and, consequently, on our business, financial condition, and operating results.
Periodically, we face restrictions in water availability due to prolonged droughts.
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In recent years, the
production systems that supply the Metropolitan Region of São Paulo (RMSP) have recorded rainfall below expectations for two consecutive
hydrological years, especially the 2024–2025 cycle, which presented the lowest rainfall volumes of the last seven years. Prior hydrological
years also recorded below-average rainfall, including the 2019–2020, 2020–2021, and 2023–2024 cycles, demonstrating
a pattern of recurring drought events in our areas of operation. This scenario culminated in SP-Águas Deliberations No. 11 and
No. 12, of September 2025, which declared a situation of water scarcity in the Alto Tietê and Piracicaba basins, respectively. The
reduction in rainfall levels compromises the recovery of reservoir levels, which are essential to guarantee supply during the dry season,
which extends from April to September.
It is not possible
to accurately predict the future behavior of rainfall, especially given the effects of ongoing climate change. The occurrence of consecutive
periods of severe drought may require us to adopt additional measures to mitigate impacts and ensure the continuity of water supply in
our areas of operation.
During the 2014–2015
water crisis, the levels of the main water sources that supply the São Paulo Metropolitan Region were significantly affected, which
led us to implement, between 2014 and 2016, a set of operational and demand management measures to maintain the water supply to the population.
These measures were gradually discontinued from 2016 onwards, with the recovery of reservoir levels. However, greater public awareness
of the need for rational water use, resulting from that crisis and more recent drought events, has contributed to maintaining lower consumption
patterns. Sustainable water resource management and the recurrence of scarcity events may continue to influence consumption habits, with
potential adverse impacts on our revenues and operating results. Considering the observed history, there is a risk of new droughts occurring
in the future, which may require us to adopt measures similar to or more restrictive than those implemented in 2014–2015, resulting
in additional and potentially significant changes in consumption patterns. These uncertainties could adversely and materially affect our
financial condition and operating results.
Extreme weather conditions and climate
change may have a material adverse impact on our business, financial condition or results of operations.
Our business may be
affected by droughts, and by other extreme weather conditions, such as torrential rain and other changes in climate patterns. A possible
increase in the severity of extreme weather conditions in the future may adversely affect the water available for abstraction, treatment,
and supply, whether from the standpoint of quality or quantity. Droughts could adversely affect the water supply systems, resulting in
a decrease in the volume of water distributed, and consequently, the volume of water billed (i.e., the revenue derived from water
supply services). Extreme climate conditions may compromise our facilities’ conditions to operate and supply of inputs. Additionally,
increases in air temperature could affect demand for water.
Since we are dependent
upon energy supplies to conduct our business, extreme weather events may also reduce water levels in the reservoirs that power hydroelectric
power plants in Brazil, which may cause energy shortages, which could affect water and sewage services. Increased electricity prices may
also adversely affect our costs and results of operations. For more information, see “Item 3.D. Risk Factors—Risks relating
to Our Suppliers—Any interruptions in the supply of electricity and water may adversely affect our operations” and “Item
4.B. Business Overview—Power Consumption.”
In February 2023,
there were torrential rains on the northern coast of the State of São Paulo, especially in the city of São Sebastião,
where we operate. Within 24 hours, 683mm of rain fell in São Sebastião. As a result, our water treatment plants in the region
were damaged, and the water supply was interrupted for a few days due to siltation, the inability to store water, and lack of electricity.
If similar incidents occur in the future or become more frequent, these events may have other additional material adverse effects on our
results of operations and financial condition.
We cannot predict
all of the effects of extreme weather events, making it difficult to estimate the resources needed to mitigate these effects. It is possible
that as a result of the difficulty to predict these events, we may be required to make other significant investments or incur substantial
costs in their remediation or prevention measures, which may have a material adverse impact on our business, financial condition or results
of operations. We also cannot guarantee that we will be able to pass on any of these additional costs and expenses to our customers.
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New laws and regulations relating
to climate change and changes in existing regulation may result in increased liabilities and increased capital expenditures, which could
have a material adverse effect on us.
We are subject to
federal, state and international climate change regulations aimed at reducing greenhouse gas (“GHG”) emissions. Among these,
Decree No. 65,881/2021 formalizes the State of São Paulo’s commitment to global initiatives such as the “Race to Zero”
and “Race to Resilience” campaigns, which focus on lowering emissions and enhancing climate resilience. The decree also mandates
the development of the 2050 Climate Action Plan (PAC 2050) by the State of São Paulo government, which is expected to set sector-specific
emissions targets, including for the sanitation industry.
Additionally, further regulations
may impose additional obligations. For example, Law No. 15,402/2024 establishes the Brazilian Greenhouse Gas Emissions Trading System
(or the Brazilian Carbon Market Regulation), which introduces a framework for capping GHG emissions and trading carbon-related assets.
Given Brazil’s commitments
under international climate agreements, the state government’s firm stance on reducing emissions, and the establishment of new legislation,
we may be required to increase investment in emission mitigation measures by (i) enhancing operational efficiency and adopting more sustainable
processes to reduce GHG emissions; (ii) implementing infrastructure and equipment to capture and utilize biogas and process-generated
sludge; (iii) expanding the use of clean and renewable energy sources and alternative fuels; and (iv) offsetting GHG emissions through
intensified conservation and reforestation initiatives. Compliance with evolving climate change regulations present significant challenges
due to may be particularly challenging given the complexity and scale of our operational facilities operations, where changes in process
design can impact both our existing and future operations activities.
In March 2024, the
SEC approved new climate-related disclosure rules that would have required public companies to report material climate risks, GHG emissions
inventories, climate targets and goals, and the financial implications of physical and transition risks. However, following multiple legal
challenges, the SEC voluntarily vacated these rules in February 2025. The regulatory landscape in this area remains uncertain, and new
or revised climate disclosure requirements may be introduced in the future. If such rules are adopted and applied to us, our compliance
costs — such as legal, accounting, and reporting expenses — could increase significantly, and the associated compliance efforts
may divert management’s time and attention.
In addition, the CVM
approved Resolution No. 193/2023, which allows publicly held companies to voluntarily prepare and disclose sustainability-related financial
reports in accordance with the International Sustainability Standards Board (“ISSB”) guidelines. According to CVM Resolution
No. 193/2023, disclosure is mandatory for financial years beginning on or after January 1, 2026.
We may be exposed
to legal or regulatory action or claims as a result of future SEC climate disclosure requirements and existing CVM rules. Although we
are in the process of assessing and adapting our internal procedures to comply with requirements , these risks could have a material adverse
effect on our business, financial condition, results of operations and the prices of our securities.
New expenditures resulting
from new compliance with climate change regulations and from the prevention or correction of effects of extreme weather could have a material
adverse effect on our results of operations. For more information, see “Item 4.B. Business Overview — Environmental Matters
— Climate Change Regulations: Reduction of Greenhouse Gases (GHG) Emissions” and “Item 4.B. Business Overview—Power
Consumption.”
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Risks Relating to Our Privatization
Our Privatization may still be subject
to legal challenge, and the dispersed ownership structure resulting from our Privatization may impact our ability to efficiently approve
certain transactions and could potentially delay critical decision-making processes, which may adversely affect our business and results
of operations.
Legal proceedings
challenging our Privatization remain ongoing, as further described in “Item 8.A. Consolidated Financial Statements and Other Financial
Information-Legal Proceedings.” Additional legal challenges or proceedings may also be filed in the future. Potential adverse rulings
from judicial or administrative proceedings, if any, may have negative effects on our financial results and reputation.
In addition, as a
result of our Privatization, we no longer have a single controlling shareholder or group of controlling shareholders. This dispersed ownership
structure, which has been in place since the consummation of our Privatization, presents ongoing governance challenges. The absence of
a controlling shareholder may impact our ability to efficiently approve certain transactions and could potentially delay critical decision-making
processes, which may adversely affect our business and results of operations.
Risks Relating to Our Common Shares and ADSs
We may issue additional common shares
or enter into a merger, consolidation or other similar corporate transaction, which could dilute your interest in our common shares underlying
the ADS.
We may need to raise
additional funds in the future, such as to finance capital expenditures or payments related to new concessions. These funds may be raised
through private or public offerings of shares or securities convertible into shares issued by us. Under Brazilian Corporate Law and CVM
regulations, public offerings of shares or convertible securities may be conducted without granting preemptive rights to our existing
shareholders, including investors in the common shares underlying the ADSs. As a result, such issuances may dilute the interests of our
then-existing investors.
Dilution of your interest
in the common shares underlying the ADSs may also occur if we enter into a merger, consolidation or any other corporate transaction with
similar effects involving companies that we may acquire in the future.
International judgments may not be enforceable when considering
our directors or officers’ status of residency.
All of the directors
and officers identified in this annual report reside in Brazil. Neither we, nor our directors, officers, or the members of our audit committee
have agreed to accept service of process in the United States. Additionally, substantially all of our directors’ and officers’
assets are located in Brazil. As a result, it may be difficult or impossible to effect service of process within the United States or
in other jurisdictions outside Brazil upon such persons, to attach their assets, or to enforce civil liabilities or securities law judgments
from U.S. courts or from courts of other jurisdictions against them or against us.
We may not always be in a position
to pay dividends or interest on shareholders’ equity and ADSs.
Under Brazilian Corporate
Law and our bylaws, we are required to distribute to our shareholders a mandatory minimum dividend equal to 25% of our net income after
the allocation of legal reserves for the previous fiscal year.
Other than the mandatory
minimum dividend, we may retain profits in statutory reserves for investment purposes or in capital reserves. If we record a net loss
or if our net income is insufficient to support dividend payments, including the mandatory minimum dividend, management may recommend
using profit reserves to make such payments, after offsetting any net losses for the current or prior fiscal years. Losses for the current
fiscal year must be absorbed in the following order: accrued profits, profit reserves and legal reserves. Even when we are able to declare
dividends, management may still decide to postpone their payment or, in limited circumstances, not declare dividends at all. Certain reserves
established under Brazilian Corporate Law cannot be used for dividend distributions.
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In addition, the New
Legal Framework for Basic Sanitation prohibits the distribution of profits and dividends by service providers that are in breach of the
objectives and deadlines set out in their sanitation service agreements. The Concession Agreement for URAE-1 provides that, if it is determined
that we are failing to meet the targets and schedules set forth in that agreement or in any other concession agreement, and provided that
the applicable contractual procedures are followed, we may be prevented from paying dividends or interest on equity to our shareholders
and ADS holders for as long as such breach continues.
For more information,
see “Item 8.A. Consolidated Financial Statements and Other Financial Information—Dividends and Dividend Policy.”
Mandatory arbitration provisions
in our bylaws may limit the ability of a holder of our ADRs to enforce liability under U.S. securities laws.
Under our bylaws,
any disputes among us, our shareholders, our directors, executive officers, members of the fiscal council, effective and alternates, and
members of statutory and non-statutory committees, with respect to the Novo Mercado Listing Regulation, the Brazilian Corporate
Law and Brazilian capital markets regulations will be resolved by arbitration conducted pursuant to the B3 Arbitration Rules in the Market
Arbitration Chamber. Any disputes among shareholders and ADR holders, and any disputes between us and our shareholders and ADR holders,
will also be submitted to arbitration. As a result, a court in the United States might require that a claim brought by an ADR holder predicated
upon the U.S. securities laws be submitted to arbitration in accordance with our bylaws. In that event, a purchaser of ADSs would be effectively
precluded from pursuing remedies under the U.S. securities laws in the U.S. courts. However, a court in the United States could allow
claims predicated upon the U.S. securities laws brought by holders who purchased ADSs on the NYSE to be submitted to U.S. courts.
For more information,
see “Item 10.B. Additional Information—Memorandum and Articles of Association—Description of Common Shares—Redemption
and Rights of Withdrawal.”
A holder of our common shares and ADSs might be unable
to exercise preemptive rights and tag-along rights with respect to the common shares.
U.S. holders of common
shares and ADSs may not be able to exercise the preemptive rights and tag-along rights relating to common shares unless a registration
statement under the U.S. Securities Act of 1933, as amended (“Securities Act”), is effective with respect to those rights
or an exemption from the registration requirements of the Securities Act is available. We are not obliged to file a registration statement
with respect to our common shares relating to these rights, and we cannot assure you that we will file any such registration statement.
Unless we file a registration statement or an exemption from registration is available — such as those provided under Rule 144A
or Regulation S under the Securities Act, which may not be available to all holders — an ADS holder may receive only the net proceeds
from the sale of their preemptive rights and tag-along rights or, if these rights cannot be sold, they will lapse, and the ADS holder
will receive no value for them.
Holders of our ADSs do not have the same voting rights
as our shareholders.
Holders of our ADSs
do not have the same voting rights as holders of our shares. Holders of our ADSs are entitled to the contractual rights set forth for
their benefit under the deposit agreements. ADS holders exercise voting rights by providing instructions to the depositary, as opposed
to attending shareholders meetings or voting by other means available to shareholders. In practice, the ability of a holder of ADSs to
instruct the depositary as to vote will depend on the timing and procedures for providing instructions to the depositary, either directly
or through the holder's custodian and clearing system. ADS holders may not receive notice of shareholders' meetings sufficiently in advance
to enable them to provide timely voting instructions to the depositary, which could result in their being unable to exercise their voting
rights with respect to a given meeting.
The deposit agreement
also provides that if the depositary does not receive any instructions from a holder of ADSs, the ADS holder may be deemed to have given
a discretionary proxy to a person designated by our company and the underlying shares may be voted by such person. However, we have chosen
not to designate any person to exercise these deemed proxy rights with respect to any annual or special general meetings, and ADSs for
which no specific voting instructions were received by the depositary were therefore not voted at that meeting. As a result, ADS holders who do not provide voting instructions
and for whom no proxy is designated may have no influence over the outcome of votes on matters considered at shareholders’ meetings,
including votes on material corporate transactions or governance matters.
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Judgments of Brazilian courts with
respect to our common shares are required to be payable only in reais.
If proceedings are
brought in the courts of Brazil seeking to enforce our obligations in respect of our common shares, we may not be required to discharge
our obligations in a currency other than reais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated
in a currency other than reais must only be satisfied in Brazilian currency at the exchange rate, as determined by the Central Bank of
Brazil, in effect (1) on the date of actual payment, (2) on the date on which such judgment is rendered or (3) on the date on which collection
or enforcement proceedings are commenced. The then prevailing exchange rate may not provide non-Brazilian investors with full compensation
for any claim arising out of or related to our obligations under the common shares or the common shares represented by ADSs.