Good morning, ladies and gentlemen, and welcome, everyone, to Copasa MG's audio conference to discuss results relative to Q2 2025. This teleconference is being recorded, and the replay facility will be made available at the company's website at ri.copasa.com.br. The respective slide deck can also be downloaded from the platform. All participants will be connected in listen-only mode during the company's remarks. After that, we'll start the Q&A session when further instructions will be provided. The presentation is also being recorded and simultaneously translated into English. Translation is available by clicking on the interpretation button. For those listening to the conference in English, there's an option to mute original audio by clicking on the button. Before moving on, I'd like to state that forward-looking statements are based on beliefs and assumptions on the part of the company's management and also on information currently available for the company.
These forward-looking statements might involve risks and uncertainties as they involve future events and therefore depend on circumstances that may or may not materialize. Investors, analysts, and journalists should take into account that events relative to the macroeconomic environment, to the industry, and to other operating factors might lead such forward-looking numbers to differ materially from those expressed in these forward-looking statements. I'd like now to turn the conference over to Mr. Adriano Hideki de Moura, CFO and IRO. You have the floor, sir. Good morning, everyone, and welcome to our teleconference. Thank you all for joining us this morning. I am joined by the main members of our Executive Board. Thank you, Clayton Giacomini, our Client Communication and Sustainability Officer; Guilherme Frasson, Operations Officer; Pablo Ferrazzo, Engineering and Environment Director; and Michele Hesenti, Strategic Management and Regulation Director.
It's a pleasure to be here this morning to present results relative to second quarter 2024, a quite challenging quarter, especially taking into account the impact on the drop in volume because of lower temperatures across the main regions of the state of Minas Gerais. It's also important to highlight some advances across different strategic fronts, which we'll be detailing further down the presentation. Starting with the main highlights for Q2, on the next slide, slide number two, we continue to execute our bold investment plan. In the year-to-date numbers, close to BRL 1.2 billion, which accounts for 32% above the same period of 2024 and over 75% when compared to 2023. We are making important investments across the state of Minas Gerais. We will reach something close to BRL 2.5 billion. That's one of the main pillars of our sustainable growth plan.
Every investment made not only improves the quality of the services provided, in other words, better service for the clients and population, it also improves our efficiency level and, of course, increases our asset base. As for dividends, in addition to the BRL 153 million paid out on June 2024, we have already paid over BRL 700 million in April, anticipating Q1. We're now defining the payment of another BRL 164 million on the coming 11th relative to Q3 2025. Another highlight is the completion of the hedge contracted IPCA+ swap at EUR 90.5 million, half of our foreign exchange exposure, and the cost of the transaction came out way below our raising capital or raising costs, rather. We also are considering trying to extend that for the remainder of the amount, about BRL 100 million, and we're now analyzing potential alternatives in the coming months.
Also, as a highlight, a robust operating cash generation to the tune of BRL 554 million in the quarter, quite in line with what the Q2 in 2024 presented. Another highlight is the loss level, which has been going down. We have already reached 37.6% in June, which is about 110 basis points when compared to last year, quite a significant drop. Delinquency, we have reached the lowest number on record, 2.83% in default rate. Congrats to the commercial front. The results speak for themselves. Congratulations to the whole team, the commercial team. Another highlight for the quarter was the company rating, which remained AAA by Moody’s. We have just renewed that in April. We also have AAA by Fitch, which was also published this year. Those ratings reflect the solid fundamentals in terms of demand, leverage levels, cash generation, and also environmental impacts, which were highlighted by the various rating agencies.
Last but not least, a small increase in leverage from 1.8x to 2 x now at the end of the second quarter. Still room for investments and to dividend payout. Moving on to the next slide, before we go into detail about the numbers, I'd like to share with you some of the advances of the main initiatives in terms of value creation, which is being carried out with all of our associates. Our main objective now is to prepare the company to reach a new investment level in efficiency, considering all the demands and challenges, irrespective of the fact that we are still a mixed-capital company. Those initiatives have been presented during our Q1 conference, and they are split across three strategic pillars, as you can see on the slide. Number one, a process-driven organizational restructuring.
The focus here is to improve the decision-making process and productivity for each activity, especially in the areas pertaining to operations. We have already redesigned several operational processes. We are now transferring to a Shared Services Center, which is at the final phase of completion. We're transferring several activities. We plan to consolidate and standardize all the activities. The SSC will consolidate over 140 processes, which involve over 600 people. We have already identified several efficiency levers, which will be used in the first wave of implementation towards the end of the year and in the coming years. CapEx management. In terms of process, this second pillar is the one where we have moved further. The focus is to empower the company to improve to face a new demand for higher investments.
With very strict discipline in contracting and in capital allocation, we have developed a new model to manage investments. The focus is to increase the execution capacity and make CapEx planning more well-defined, especially as we go through a very special moment in terms of defining new investments. Operating efficiency, number three, a very relevant pillar. We have already started our zero-based budgeting to reduce costs further, as I mentioned in our first quarter conferencing. Starting in 2026, to start working on a budget with a multi-year horizon in mind, using the best practices available in the market, with the idea of improving efficiency at the end of the day. This methodology leads to a broader discussion about opportunities to reduce costs.
Another front under the same pillar is the use of advanced analytics models to identify complex frauds and to direct our actions out in the field with more precision. This approach will raise our efficiency in terms of supervision and will result in positive financial impacts. We're also redesigning our strategy to source services, prioritizing critical categories, and applying techniques for strategic sourcing. As I said, that implies a review of specs and also expect to gain and scale. In other words, several initiatives which are now part of our business plan starting in 2026. Moving on to the next slide, slide number four. We have our EBITDA bridge starting in Q2 2024 all the way over to Q2 2025. The main variations are there, both in revenue and costs.
As I mentioned before, we had a drop in the volume in consumption, which is atypical for the quarter, affected by lower temperatures in May and June. This drop also affected the tariff mix. The tariff for water is growing. It's an uptrending curve. The more you consume, the more expensive it becomes. When you reduce, that makes the mix worse, worsens the mix. We also had an accounting impact. It adjusts consumption on a monthly basis because the billing generated by the readings, the daily readings out in the field, do not take into account all the complete working days for that month. This is provisioned to maintain the accounting regime, and that's returned in the following month for accounting purposes. We included in our release to better explain that system. We have explained how that reconciliation happens.
You can find more details about this process, this accounting process, in our release, which was published yesterday. We're going to be doing that for the next quarters as well. As a result of that combination of mix and price, the growth in net revenue was only 2.1% quarter on quarter, despite the average increase in tariffs as of January of 6.4%. In terms of costs, the second quarter, excluding depreciation, personnel, which is our highest cost, it's quite in line with what we had last year. We had a drop of 200 employees in the past 12 months. That sort of offsets salary increases coming from collective bargaining agreements. We continue to have a strict policy in terms of extra hours. This is quite under control as is. Third parties or outsourced services, we had to replace some activities as those 200 headcount left. We're at very lower costs.
In terms of outsourced services, we had one-off demands for maintenance of some systems, about BRL 10 million more than last year. We had also non-recurring expenses with consultancy firms, which are still helping us across several projects which are part of our value creation agenda, something to the tune of BRL 9 million. Non-manageable costs in line with what we had last year, not major variations. Once again, here we have our highest or largest account, which is electric energy, about BRL 150 million in the quarter, despite recent adjustments in energy. We already see the positive results in terms of consumption reduction and migration to the free market, in addition to the use of solar energy. All of that combined has reduced energy costs. Today, 80% of our consumption is already under solar or free market.
The difference appears in the captive market, and we are trying to find alternatives to further improve that reduction. As for others, we had basically an increase in tariff transfers for cities, about BRL 10 million, coming from the inclusion of new cities, and this transfer is made by the regulator, in addition to a growth in revenue. Most of that amount is compensated at the tariff level. We also saw an increase in provisions for court cases, about BRL 14 million non-recurring, out of which BRL 11 million are labor suits relative to retired employees, and they are challenging our layoff policies from back in 2008. We used age as a criteria for laying off those people, though. That sort of encompasses most of the complaints and suits we have under that.
We also have an increase in PCLD of 16% or BRL 10 million, just about, basically coming from an increase in revenue and the review of the risk matrix. That matrix considers a historical risk trajectory throughout time, 2022, 2023, 2024. It is important to highlight that the delinquency level that I just mentioned, the default level, shows a shorter-term perspective. This index is decreasing regularly. This will eventually reflect in the PCLD in the future. Next slide, number five, we have devolution of our net income. Starting in the second quarter of 2022 to Q2 2025, a drop of 11%, as you can see on the slide, in addition to the negative impact coming from the EBITDA. As I mentioned, we had an increase in depreciation because of increasing investments. The final financial results are in line with what we had the previous quarter.
An offset between expenses and revenues, an increase on financial expenses over debt, especially debentures, which grew over BRL 40 million because of an increase in debt and also because of interest rates. That was offset by an increase on improvement in the foreign exchange exposure line, which decreased by BRL 150 million. The effective rate of taxes improved from 21% to 15% because we are making better use of some tax incentives. Moving on, slide number six, cash flow. Here, our cash movements are final and ending. Solid cash generation for the quarter in line with our robust CapEx level. Those BRL 391 million refer to financial activities that reflect a net result from debt raising. We have reduced amortizations, and we also take into account in this line dividends paid out in the period. Next, please, number seven.
As for our investment program, as I mentioned, that's a very important strategic pillar. We are keeping our prediction for the next years, contemplating the third tariff cycle, as shown. An average of about BRL 3.5 billion starting next year. This year, we should reach BRL 2.5 billion, which was approved by our board. A significant improvement when compared to amounts which were taken into account in the second tariff cycle, whose cutoff date was last March. Most of that growth anticipates investments to meet universalization programs and objectives, but it also focuses on other goals as quality improvement for services, water security, loss reduction. There is a lot of room for improvements, especially in the metropolitan area of Belo Horizonte. Also, retrofit investments for sanitation and water and sewage. Most of those improvements also affect our OpEx. There is a reduction in our OpEx because of that.
In summary, we are now fully meeting our schedule, which was planned. As I mentioned, BRL 1.2 billion year to date, quite relevant numbers, 32% above what we had Q2 last year. As for the universalization goals in terms of water coverage, the company is already above 99%, and our main challenge is certainly to universalize sewage services, which today covers about 78%, give or take. On the next slide, slide number eight, we have a couple of data points about indebtedness. Our leverage level, 2x , as I mentioned early on, still with a lot of room to raise capital and good dividend payouts. That also means that our investment schedule, with that leverage level, will increase in the coming years, both to meet our investment plans, but also to keep a dividend payout, which is competitive.
This balance will be gauged, will be calibrated year- on- year as investments are incorporated in our asset base. This will happen on a yearly basis. Also a plan to reduce costs as it starts to provide consequences and repercussions. We have a better capital structure. Without giving out any guidance, we understand this should be getting close to 3x , just as a reference, not as a guidance. In terms of amortization for our debt, we have a very compatible level with our cash generation. Our average term, weighted average term, is about eight years today. We have been trying to raise in the longer term also, and we are working right now to use incentivized credit lines. As of next year, 2026, we plan to start raising capital with more incentivized credit lines.
In terms of exposure, half of our debt is pegged to IPCA and CDI, over 80%. In June, we had some euros exposure accounting for 18% of our total debt. As I mentioned before, we had that by half of that exposure, the amount of about BRL 90 million, and we are now considering the extension of that to protect the remainder of that number, another BRL 90 million or BRL 100 million. Moving on to our last but one slide, some of our main operating indicators all are on a better trend, coming from several initiatives we have been implementing. Some have already been mentioned, as the improvements in the loss level and water distribution. Continued improvement, as you can see, 37.6%. Some initiatives are still ongoing, projecting other improvements, such as yearly replacement of water meters. 20% is our target for the year.
We already have the renewed base much better, with much better age than we had last year, 3.2 years on average, compared to 5.3 years that we had up until December 2019. We are now also using new technology to identify leakages. We are speeding up the replacement of about 350 km of water networks in the city of Belo Horizonte, where we have the highest loss ratio. Default, as I mentioned, the lowest default level in history. New initiatives include mobile stations, agencies in popular areas to negotiate debts. We also expand our formal collecting processes using court, our legal department as well. Also, negotiation with major clients, an increase in collection using PIX. 30% today already use PIX. That is quite a significant advancement, and of course, that helps reduce default.
The associates' per-connection rate is still at 1.2, considering a base of 9,500 employees or associates without considering co-planner. To wrap up our last slide, a couple of comments about the third tariff review, which will start on January 1st 2026. Overall, we understand that the process is well advanced. Discussions moving along well with contributions from both sides. Until now, we've had important improvements such as the increment in WOC. In the next cycle, it'll move from 7.9% to 9.15%. As the regulator has already mentioned, there will be an annual recognition of investments starting now in the third cycle. That recognition on a yearly basis was an important advancement during the discussions, and it'll be key to improve our investment capacity to meet that robust investment plan we have in our hands. As for sharing of gains, we have already established a number defined, 75%.
That impact on 2026 is still small, but that might be important in the coming cycle. That methodology has been adopted for partial sharing of efficiency gains, as we start a new tariff cycle in line with what was done in São Paulo, for example. Returning now to the review now ongoing, the process is expected to be continued in the coming months, and the final deadline is November, where we'll have an official definition, which will be enforced as of January 1st 2026. With that, I think we can wrap our part, our end of the presentation with operational and financial numbers. I turn the word back over to the operator so that he can start the Q&A session. Over to you, please. Thank you. We'll now start the Q&A session. To ask a question, please click on the raise your hand.
If your question has been answered, please, you may remove yourself from the line by clicking on lower the hand. To send a question by text, click on the Q&A button and state your name and company, please. Wait as we poll for questions. Thank you. Our first question comes from Mrs. Luisa Canjota from Itaú BBA. You have the floor, ma'am.
Good morning. Thank you for taking my questions. I have two questions. My first one is about OpEx, especially in terms of the outsourced services line. We saw a relevant increase when we compare numbers quarterly and yearly, as you mentioned during the presentation, even if we adjust for the non-recurring events in the quarter. I'd like to understand, given the initiatives in place on the operating efficiency front, how do you see these trends in this line, outsourced services, and also of PMSO as a whole, looking at the coming quarters? That's my first question. My second question is about the tariff review process. We are still at the phase of public consultations, as you have just mentioned. If you could give us some more color in terms of the methodology to calculate the asset base.
Understand if there has been any indication that the methodology will change from the older one to a new one where they would, in the past, bring the base down at the start of the cycle. Is it a different methodology now? Has there been a change and advancement in terms of methodology? Thank you. Thank you, Luisa, for your questions. To your point about the OpEx, that outsourced services line, as I mentioned, is a line that has a very seasonal effect. We have some non-recurring expenses, which we understand that as of next year, they won't be necessary, if you will, anymore. We are investing in consultancy services to help us improve in our efficiency levels. In this quarter, specifically, we have something about BRL 10 million under that line. We also have one-off demands for maintenance and preservation services.
That's yet another item where we are keeping a close eye on reviewing that for us to keep that under our original budget, which, of course, contemplates an increase, but very much in line with inflation indexes. Overall, we are optimistic in terms of PMSO. All those fronts we're working on will eventually reflect a drop in PMSO. There are plenty of opportunities for 2025. The increase for this year will be very close to the inflation index, and all the efforts are being made for that to happen. There are things we cannot control, but overall, I think all the initiatives are already bringing positive results. We also have other non-recurring items we had, which we'll be working on in the coming quarters to avoid them in the future. PMSO is under control. As for the tariff part of your question, I'll ask Michele to address that question.
The PMT issue, I cannot say we have already eliminated that. We'll start from a much better basis. Michele, over to you, please, if you could help us. Good morning. Yes. Good morning, Luisa and everyone. Thank you for your question. Just as Rúdig, this has already been included in the technical note and also in the public consultation documents that already include that. To your point, that has been addressed. We'll start from the real asset base this time. That's the difference in methodology now for the coming tariff cycle. In terms of details or potential applications, in terms of different timelines, we still need to wait for the publication of the final documents after this last public consultation. To your point, to your question, the answer is yes. That adjustment has already been made. That's a good example of a good evolution as we improve our investments.
This recognition of a different or higher asset base is important. It'll increase our investment capacity. Thank you. Thank you very much for your answers. Once again, to ask a question, please click on the raise your hand button. Our next question comes from Leonardo Nau from UNESP, the State University of São Paulo. You may carry on, sir. Thank you. I have a question about the goals for the new legal framework. Even without privatizing it, do you think it's possible to reach all those goals? What about the more vulnerable areas? Where do those goals, objectives stand for those areas? Thank you, Leonardo, for your question. Our investment plan is focused on meeting the universalization goals and targets contemplated in the legal framework. The answer is yes. We will meet the targets within the legal terms. That's our focus, irrespective of privatization processes.
Privatization is something we cannot control, so our plan follows independently from that. We'll apply and make those investments to reach those universalization goals and targets. Thank you. Once again, to ask a question, click on the raise hand button. Please wait as we poll for questions. Next question comes from Mario Obeto from Banco Safra. You may carry on, sir. Hello, everyone. Good morning. Thank you for taking my question. I'd like to better understand how you see the evolution of consumption levels vis-à-vis investments that were made, and how do you expect that ratio between volume and mix to move forward in the coming quarter? Thank you. Hi, Mario. Thank you for your question. We are monitoring that very closely.
There is an impact which we cannot control regarding the weather, but those investments being made and as we reduce losses, that combination has helped us improve consumption levels. We understand that the evolution in terms of volume is quite seasonal. To your point, we are monitoring that very closely. Clayton, would you like to jump in and complement? Yes. An important aspect is as we have a regulatory definition for collection, many of the investments aim at expanding treatment, which is already covered by the tariff, so we won't have meaningful impacts. Okay. Very good. Thank you. Once again, for questions, please click on raise hand. If you want to send a written question in writing, please click on the Q&A button. Please stand by as we poll for questions. Once again, for questions, please click on the raise hand button. Please stand by as we poll for questions.
Next question comes from Andrea Sampaio from Santander. You may proceed, sir. Good morning, everyone. A quick question about the BNDS process. I'd like to hear from you. How do you see the timing for that contracting? How long do you expect for all those studies to take? Thank you. Hello, Andrei. I think you referred to the material fact we announced last Friday. The material fact replicates in full a notice received by the shareholder not authorizing the BNDS to open a process to identify consultancy firms. Our understanding is that this phase is part of the process to adhere to PROPAG and contracting the BNDS to write a report. It's important. It's vital. As the process evolves, we will provide more information.
At this moment, as is, we do not have any other piece of information, and it's not in our hands to define what happens with this process moving forward. Okay. Thank you. Once again, for questions, click on the raise hand button. If your question is in writing, please click on the Q&A button. Please wait as we poll for questions. Thank you. We'll now move on with the questions which were sent in writing. Everyone, I think as we wrap up this call, there are a couple of questions about the privatization process, where do we stand? We are also monitoring the evolution of that process at the states or at the federal assembly, a federal Congress. We know that this process still needs to be analyzed by a special committee, and then it will be submitted to Congress in two different rounds.
As a material fact which was published in March, the controlling shareholder asked Copasa to make studies to subsidize and help discussions at the Congress level, at the state level. Those studies are moving forward well and will provide all the necessary support for the process. As we have new information, we will certainly inform the market. We also have a couple of questions about the Vale do Jequitinhonha PPP. We are now still at a phase of updating contracts, a phase which is necessary for the process to move forward. We do not have a defined date to publish the bidding documents. That's something we are also monitoring. As soon as we have more information, we will make the market aware. I think one final question about Belo Horizonte. Once again, the Belo Horizonte contract only matures in 2032.
It is a relevant contract for Copasa , of course, responsible for 27% of our revenues. We have already started studies, as I mentioned in our previous call, Q1, to assess renewal opportunities or alternatives. We are confident that we'll be able to offer good renewal conditions and terms that might meet Copasa 's interests and also to meet the city's needs and demands. The Q&A session is now over. I turn now the floor over to our CFO and IRO, Mr. Adriano Hideki de Moura, for his final comments. Over to you, sir. Once again, thank you very much for your participation. I'd like to emphasize that we are quite optimistic with all the advancements we've seen and the ones also to come.
I'd like to reinforce also our commitment to raise the company to new competitive and efficiency levels, with results always sustainable and resilient, with quality services to consumers, stakeholders, associates, and shareholders. Thank you and see you next quarter in August. Copasa 's teleconference is over. Thank you all for joining, and have a nice day, everyone.