Good morning, ladies and gentlemen. Welcome to COPASA MG's conference call to discuss the results for the third quarter of 2025. This conference is being recorded, and the replay can be accessed on the company's IR website, ri.copasa.com.br. The presentation is also available for download on the platform. We would like to inform that the participants attending the conference call will be in listen-only mode during the presentation. We will then open the Q&A session when further instructions will be provided. We would like to inform you that the presentation is being recorded and translated simultaneously. The translation is available by clicking on the Interpretation button. For those listening to the conference call in English, there is an option to mute the original audio in Portuguese by clicking on Mute Original Audio.
Before proceeding, we would like to clarify that any forward-looking statements are based on the beliefs and assumptions of COPASA's management and current information available to the company. These statements may involve risks and uncertainties as they relate to future events and therefore depend on circumstances that may or may not occur. Investors, analysts, and journalists must understand that events related to the macroeconomic environment, industry, and other factors could cause results to differ materially from those expressed in their respective forward-looking statements. I would now like to turn the floor over to Mr. Fernando Passalio , COPASA's CEO.
Good morning, ladies and gentlemen, investors, analysts, and members of our team. I'm here with the CFO and IRO and main executives of our management team. I would like to thank Cleyson Giacomini, Chief Client Communication and Sustainability Officer; Pablo Ferraz, Chief Engineering and Environmental Officer; Michel Desbrissants , Chief Strategy and Regulatory Officer, as well as Guilherme Frasson. It's an honor to be here together, not only to discuss the solid results for the third quarter, but also to discuss the transforming moment we are going through. The market has recognized our potential, and today I would like to share our vision on how we are navigating in this scenario and building the future of our company. Recently, we watched the analysis of the main institutions that follow the sector, especially the reports of renowned institutions that watch what we do closely.
We were very happy to see that there's a consensus in an optimistic view, and there's a clear recognition of our intrinsic value and our growth potential. This positive perception is a reflection of the pillars that we have made solid with a lot of work and strategic planning across the years. The first and most visible pillar is the advance of the controlling in the process of de-statization. The approval of PEC 24/2023 in the first round in the Legislative Assembly of Minas Gerais on October the 24th was an important mark, with four more votes than what was required for the approval. We see that there is a doubtless alignment in politics and approval of society to reform the company and decrease, eliminate any bottleneck for the future, and accelerate the universalization of the sanitation in our state. This is not COPASA's project alone.
It's a project for the future of the state of Minas Gerais, which will favor millions of people. We know that the schedule for 2026 is a challenge, but we remain optimistic. On our side, we are prepared to cooperate with the controlling shareholders as we are assigned to the project. Still then, we are planning the next steps to ensure that the process happens in a fast manner and especially in a very transparent manner. The second pillar, as mentioned by the journalists, is the improvement in our regulatory environment. To that purpose, the constructive, technical, and constructive dialogue has been fundamental with the institutes.
The new regulatory framework and the recognition of the CapEx in our asset base and the indication that there is a sharing of gains and efficiency is in line with the main practice of the market, and that is translated into more legal safety and, as a consequence, more attractiveness to investors. In relation to the investments we need to make, we understand that there was a clear sign that the tariff review. It was a result of a lot of debate, and we came to an understanding that we have to have robustness in our balance sheet so that we can make advances in the universalization of the services provided to our millions of clients. We understand that we still can improve some points, and to that purpose, we have made contributions in the last public consultation. However, this is a maturation process and a mutual construction.
Our dialogue with the regulatory agency is technical and open, and we are sure that we are going to get to a balanced model that will remunerate in a fair way the investor and would encourage the continued search for further efficiency with direct benefits to consumers. Lastly, we understand that the agenda on which we are working is allowing for opportunities for expansion and value creation in the sanitation area in Brazil. We have a lot to invest to retrofit, modernize, and grow. Generating solid returns and contribute in a decisive way to universalize the service of water and sewage in the state of Minas Gerais. What we have been building since 2019 is a new COPASA, more agile, more efficient, with more capacity of investment and ready to meet its mission with excellence. Our commitment is to generate value to our shareholders.
With the continuous improvement in our services to the people in Minas Gerais and sustainable growth to our employees and to the state at large. I would like to thank you for the confidence you have placed on us and the analysts who have worked hard and are following what we do. We are confident in what we have done, and we are confident in the future that we have our COPASA. And this is my initial comment, and I turn the floor to Mr. Adriano Moura to comment on the results of the third quarter, and we will be together with the other executives to answer any questions you might have. Thank you.
Thank you, Fernando. Good morning, everyone. I would like to thank you to attend our conference for the third quarter of 2025. It's a great honor to be here sharing the good results for the quarter.
It was a very challenging quarter, but with important advancements in strategic fronts about which we are going to discuss later. We're going to start with the first slide about the highlights for the quarter. We continue implementing our CapEx investment plan. Getting to nearly BRL 2 billion, advance of 26% in relation to the same period of last year. And more than 65% when compared to the same period of 2023. We are making important investments in all the state of Minas, and we are very close to our target of 2025, about BRL 2.5 billion. We'd like to remind you that this is one of the main pillars of our sustainable growth plan.
Considering that each investment made in addition to improving the services provided and also meeting the demands of the population, it also improves the efficiency in different aspects, and it also increases the remuneration basis of assets. In relation to dividends, in addition to the BRL 345 million that were paid in the first half of 2025, we have planned the payment of BRL 170 million that will be paid on November 11th as an advance of the interest on equity. We are following our dividend policy for 2025 with a payout of 50%. In addition to an interim dividend that will depend on the circumstances of the moment. Another highlight I'd like to share with you for the quarter is the contraction of a hedge, a FX hedge by means of a swap of IPCA+ .
We ended the quarter with EUR 90 million and EUR 32 million in addition. Adding to BRL 150 million, that's equivalent to EUR 120 million. We have a remaining balance of about EUR 135 million. When new fundings come in will be considered. But the idea is to make headway in the evaluation of what's the best. Relation of cost-benefit so that we can reduce this FX exposure, taking advantage of the good moment of the FX variation. I would also like to draw your attention to the operating cash flow reaching BRL 701 million, 26% higher than the third quarter of 2024. Another highlight is the losses reduction. We reached 37.3% in September. 110 basis points less when compared to the previous year. Passalio has already mentioned about the third tariff review that's making good headway and positive advances and the preliminary increase of 5.5% as of next year.
Another highlight we'd like to share with you is the EBITDA that, in spite of the revenue due to the low temperatures for the period. It was still in line with what we had in 2024. In the nine months, we accumulated BRL 2.1 billion, 40.2% margin for the period. And lastly, our leverage level, which is still very comfortable, standing at 2.1x . And this was the close, what we had in the closing date of September 30th. And we still have good room for good investments and good. Dividend payment. Before I provide more details about the details of the quarter, I would like to provide an update on our advances of our main initiatives of value generation that we are running with. Participation of all COPASIAN members. We would like to mention that this agenda does not depend on any.
De-statization agenda, but what we're doing is preparing the company for a new investment level considering the new challenges of the sanitation. Framework. Those initiatives have been presented along the year and divided into three strategic pillars, basically. In the pillar of process-driven organizational restructuring, we implemented the CSCC, which is a shared service center, consolidating more than 140 processes. This area involves more than 600 people. We are very optimistic with the potential of opportunities that we have down the road with this way of standardizing and centralizing the services. We know that the impact will be gradual, but we are already identifying the improvements in the budget for next year.
As for CapEx planning, this is one of the pillars where we see a lot of progress, and the focus is to train COPASA for the new demand of new and high investments with the discipline of capital allocation and efficiency in the contracts. We want to ensure that all investments are addressed to strategic projects that can be in the remuneration basis and ensure somehow the reduction of OpEx. As for operational efficiency, in the third quarter, we have started the project of zero-based budget with additional reduction of costs. So, as of 2026, we will have a pluriannual view considering efficiency improvement projects using this methodology. We are very optimistic with the results that we have reached so far. Only five weeks we've been in this process, and we already see the potential that we can reach.
Still talking about operational efficiency, another example I would like to give, we are redesigning our service sourcing, and we are prioritizing some critical categories and using techniques of strategic sourcing, and that would include a review of specifications, the study of demands, and optimizing service levels with the purpose of providing more transparency in the contracting activities based on performance and in such a way that, again, scale will provide better personalization and better services provided. We are in the final phase of the strategic planning review that for 2026 to 2030, and we'd like to highlight all the challenges we have with the prioritization of the efforts with the purpose of universalizing and improving the services considering the regulations. So, this is an agenda that is going to advance a lot in the third quarter, in the next quarter.
Moving on to the next slide, we have the main EBITDA variation comparing the third quarter of 2025, and we talk about revenue and costs. As for revenue, the increase in the tariff was offset by the negative impact of mix and volumes as a result of low temperatures, especially in June, July, where there was an 8% drop in relation to last year in the same period. There was a recovery in August. It was about the same level when compared year- on- year. And in September, we saw a better recovery with the volume increasing by more than 3%. But on average, the reduction was 1.7% in terms of volume of water and 0.9% in sewage. As for costs and expenses without depreciation, personnel costs, which is the highest cost we have, had an increase below inflation levels.
We had a reduction of nearly 200 employees in the last 12 months, and that practically offset the increase in salary from the collective bargaining that was assigned in November last year. We continue with a rigid policy of extra hours, showing a relevant drop in extra hours when we compare quarter- on- quarter. As for outsourced services, we continue reviewing contracts and optimizing services. We had some one-off contracting to meet the needs for system services and non-recurring expenses for consulting services. Electric energy, we had a growth of 9.5%, impacted especially by the red flag tariffs level. And we are continuing our strategy to migrate to the free market and using solar energy more. In September, we'll end the quarter at 25% in the captive market, 17% in the solar energy, and 58% in free market.
In the line of others, we had some optimization in the tariff pass-through in the amount of BRL 7 million by including new cities. However, this increase will have a positive impact in the tariff review. In addition, we had an increase of BRL 6 million in the lawsuits and compensations that were offset by non-recurring revenues from auctions in the amount of BRL 8 million. In the next slide, main variations of net income among the quarters, a little drop in relation to the third quarter of 2024. We had an increase in depreciations as expected as a result of the increases of CapEx. The financial result net, we had a relevant improvement of BRL 70 million, nearly 34% in relation to the same period of 2024. Especially as a result of the positive result in FX variation, BRL 57 million on average.
That was reduced by the impact on the higher fees on financing that grew BRL 43 million. And the effective rate improved from 22% to 19.6%, basically by the use of the fiscal benefit of the equity cash flow. We see the cash flow movement starting from the initial base up to the end of the quarter. I would like to highlight the solid operating cash generation in line with the robust level of CapEx in the period. We have a net impact of BRL 270 million related to financing activities that reflect the funding of debts produced by the amortizations in the period, in addition to the dividends and the payment on the equity, as we mentioned in the presentation. Moving on, our projections for investments as of the third tariff cycle, as we can see in this graph. It's a strategic pillar for the company.
We estimate that on average there will be BRL 3.5 billion per year as of the third cycle. Practically the double of the second tariff cycle that ended in March of this year. And a good part of this growth is for the to meet the needs of the universalization of services, but also improvements in the services provided to consumer water security and loss reduction. There's a lot of room for improvement yet, especially in the metropolitan region of Belo Horizonte. And retrofitting investments is also planned in the sewage treatment plants that would also reduce our OpEx. As we previously mentioned in the highlights, we are meeting the physical schedule and the financial schedule as well that was planned for the year. In relation to the goals for the universalization, we have 99% of water coverage, much above our target.
As for the universalization according to the new legal framework. And we are also going to look at the universalization of sewage. That has a lower coverage level. Net debt, we show our comfortable leverage rate of 2.1x . And that includes good allocation of capital and good payment of dividends. And the trend is that this leverage level should grow across the years. To meet the investment plan and also to maintain competitive dividend policy. As we mentioned in the last call, this balance will be adjusted every year as new investments will be included in the regulatory base. And after when we see the results of the reduction of expenses, so that we are going to have a leverage of near to 3x in the next year, not as a guide, it's just to provide you a reference.
In terms of amortization, we have a very good level compatible with our cash generation level. We are going to continue focusing our long-term resources, looking at the lines of incentivized funding. And in terms of exposure, nearly 70% of our debt today is linked to IPCA and DI. In FX, 18% is linked to euros. And as I mentioned before, we have a hedge for the exposure so that we are going to be less and less exposed across the year. Moving on to the slide before the last, we show the evolution of the main indicators for our operations. Some of them have already been previously mentioned, such as the improvement in the loss rate. Some initiatives are underway that will lead to continuous improvement in this dimension of loss, which is the replacement of the water meters.
Today, we have a renewed target of 3.2 years when compared to 5.3 years that we had in December 2019. So we are also using new technologies to eradicate leaks, and we accelerated 350 km of network in the metropolitan region of Belo Horizonte, where we have the highest level of losses. In terms of delinquency, there was a bit increased to 3.01%. It's still a very low rate when compared to the main players, especially in residential and social categories. Even considering the effort of our collection teams, we are going to reinforce those efforts so that we can reduce this rate even further for the next months. In September, the ratio of employees per connection remains at a stable level. Considering a basis of 9,500 employees, not considering COPANOR. On slide 10. To end our presentation, we have some comments on the process of the third tariff review.
And the cycle will start in January 2026. In general, this process continues making progress. We said 5.5% as a preliminary indication. In the last public consultation, good contributions have been made both by COPASA and also by the market, and the original schedule is to complete the process in the beginning of December, and the application is going to start in January 2026. With this, we end our presentations of our operational and financial results for the third quarter, and I turn the floor to the operator so that we can start the Q&A session.
Thank you. We are now going to open the Q&A session to investors and analysts. To ask a question, click on raise hand. If your question is answered, you can leave the queue by clicking on lower hand.
To ask a question via text, simply send it using the Q&A icon stating your name and company. Please stand by while we collect the questions.
[Foreign language].
We have a question by Carol with Safra. She has two questions. One in relation to the cost journey. The company mentioned that there is a possibility of implementing new efficiency measures to get the company prepared for the new level. As I said, this is a priority of our agenda. This is our top priority for efficiency, and it's one of the pillars that we are making good headway. In this quarter, we started our zero-based budgeting that brings excellent references to the market so that we can have a pluriannual view with the best benchmarks, with the best initiatives in terms of cost reduction.
This project is still in the beginning, five weeks so far, and we have already seen excellent results that are going to be incorporated in our budget for 2026. As I mentioned, this is our top priority, and the second question is related to the negotiation of new BH contract. So I'll turn the floor to Passalio.
[Foreign language].
I would like to start by saying that in relation to the City Hall of Belo Horizonte, we are having high-level talks with them, and the negotiations are very good in technical terms, and this is what I can say. We can say that we have been working hard and we keep an eye not only on the Belo Horizonte contract, but we also have some other concessions on our radar that may offer opportunities for us to evaluate both by COPASA and by the government.
Considering the sanitation legal framework, we have the possibility, according to Article 14, we have new possibilities, and we have our eye also on this. So we are moving ahead in terms of opportunities that we have or we are going to have in the future with the PL and the PEC in the assembly.
[Foreign language]
We have several questions in relation to efficiency and reduction of PMSO. We are working on those agendas, as I've already mentioned. I would just like to reaffirm that this is one of our priorities, especially considering the budget as of 2026. [Foreign language] . In relation to Belo Horizonte, I think Passalio has already made some comments on that. [Foreign language] . So we are still collecting questions. So if you have any questions, please. We're available.
Once again, to ask a question, you can click on raise hand. Or you can use the Q&A icon. Our next question comes from João Pimentel with Citi. Your line is open, sir.
[Foreign language]. Good morning, everyone. Thank you very much for taking my question. I would like to ask a question about. Asset base. If we look at the history of COPASA, historically, it has underinvested. Versus the peers. If we look at the investment level and regulatory depreciation, it underinvested in the last seven or eight years. I would like to know, first, I would like the next explanation for that. And looking to the future, naturally, the company will have an increase of CapEx, very relevant considering the universalization process underway. But after the cycle. Of investment.
What would you consider to be a normalized CapEx after this cycle of higher investment? Because it seems that. COPASA has a catch-up to be made in terms of regulatory assets. When you compare to Sabesp, for example, you see that the asset base is much below, considering the size and the company when compared to Sabesp. So. What do you imagine that will happen after this universalization cycle? What would be a CapEx for maintenance or a CapEx for. Expansion after 2030, 2033. Depending on the moment where the universalization will be reached? What do you think is the base to be recovered after the period of higher investment?
Thank you, João, for the question. It's a very relevant topic for us. But when we look into the future, this is what we have to say. In the past, we had some investment restrictions.
But when we think about investment in the third cycle onwards, we have a very aggressive goal. We have already provided guidance of investment in the amount of BRL 17 billion up to 2029. This is practically the double of what we have been investing in relation to the past cycle. The last cycle. Stood below. The regulatory depreciation. So if we consider this level of BRL 3 billion+ for the third cycle, that would be an increase of BRL 2 billion per year, considering a depreciation of about BRL 1 billion regulatory depreciation. So this is a very aggressive growth for the next cycle, I would say. This is more than BRL 10 billion if we consider the average of BRL 2 billion per year. So what we have done recently. Is that we underwent one adjustment for the company. We qualified our company. We trained our company.
We updated the processes, improved all the systems so that we could face this level of investment. This is a very large growth of CapEx. We have shown that we stand BRL 2 billion more in our budget so far, or targeted to reach BRL 2.5 billion. And that's already 20% higher than what we had last year, and nearly 70% more than if we compare to two years ago. So it's another level of investment, and we are going to continue implementing it. Pablo, I don't know if you have anything to add. Pablo is our Chief Engineering and Environmental Officer. I'm going to pass the floor to him.
In relation to the investments after the universalization, we have the growth, the vegetative growth of the populations. But there is also a focus of improving the operational efficiency. So this higher efficiency is aligned with continuous improvement.
And we follow the same pace. Of course, that will happen at a lower pace. But along the process, the company may be searching for new investment opportunities, be them new agreements or agreements where the company will operate as a result of the process that are underway. So there's a well-structured plan up to 2033 for the universalization purpose. And after that, we are going to continue higher efficiency in providing services. To put you in perspective, this year alone, we're investing in loss reduction, the highest ever considering our historical track record. So we have been making investments in replacement assets and also performance contracts. So all those investments are that we have been making. And we understand there's a gap to be fulfilled, especially in the metropolitan region in terms of loss reduction. But along the long-term agreements and their execution, we will maintain this level.
And we understand that as new technologies come up, we are going to expand our efficiency in the operations.
Okay. João, just to complement part of your question in relation to post-2033, it's difficult to imagine a plan below the regulatory depreciation. We still do not have it. If we do not have any clearer visibility, this would be the minimum target for our investments.
Once again, to ask a question, please click on raise hand. If you want to send a question in text, use the Q&A icon, inform your name, and your company. Please wait while we collect your questions.
[Foreign language] . I'm going to start the questions in writing. So you can proceed, members of the company. [Foreign language] .
I think I saw a question about what you expect the company after the privatization. The privatization will allow COPASA to have more flexibility to invest. We will be able to innovate without the typical limitations of a government-owned company. So the operations will be retrofitted quicker. There will be an improvement in services. The management of resources will be better. COPASA will be more effective, will be more prepared to ensure quality water and sewage services to all the states and all the municipalities we operate now and for the future.
[Foreign language] . Once again, if you want to ask a question via text, send it using the Q&A icon, stating your name and company. Please wait while we collect your questions.
[Foreign language] . The questions we are receiving are very similar in content. There are questions about CapEx, about the privatization, about costs. I do not believe there is any different question. So I'll give you some more questions. I'll give you some more minutes for you to ask your questions. Should you have anything more specific to ask?
[Foreign language]. Our next question comes from Marcelo Oliveira with Oceana. Your line is open, sir. [Foreign language] . Mr. Marcelo Oliveira with Oceana, you may ask your question.
[Foreign language] . Probably you're having some technical problems, but we are available. We can answer your questions afterwards.
And if there are no further questions, I would like to thank everyone for attending this conference call to discuss the results. I would like to say that we are very optimistic considering the results we have reached so far. I would like to reaffirm our commitment to take COPASA to a new efficiency and competitive level with consistent and sustainable results. [Foreign language] . To all consumers, shareholders, and analysts.
[Foreign language] . COPASA's conference call is now closed. We would like to thank you for your participation and have a nice.