Good morning, and welcome to SABESP's third quarter of 2026 earnings presentation. With us here today are Carlos Piani, CEO, Daniel Szlak, CFO, and Thiago Levy, investor relations. Before we begin, we clarify that the statements made during this presentation will not include projections or estimates of future events. However, they may contain forward-looking statements indicating potential trends related to SABESP based on the reasonable expectations, beliefs, and assumptions of SABESP's management as of today.
These statements involve risks and uncertainties and are based on assumptions and factors, such as market, regulatory, and economic conditions, which may not materialize, in addition to the risks factor disclosed in SABESP's filings with the Brazilian Securities and Exchange Commission, B3, and on its investor relations website. Investors should understand that changes in such factors may lead to outcomes that differ from current trends and that undue reliance should not be placed on these statements.
The full disclaimer will be presented next and must be read carefully by all participants. This presentation is being recorded, and all participants will be in listen-only mode during the presentation. After that, we will begin the question-and-answer session for analysts and investors only. If you wish to ask a question, please raise your hand and submit it via the Zoom Q&A, informing your name and company. I will now turn the floor over to Daniel Szlak, who will discuss the results. Daniel, you may proceed.
Thank you, operator. Good morning, everyone, and thank you for joining SABESP's third quarter 2026 earnings call. I'm Daniel Szlak, CFO, and I'll present our operational and financial highlights for the quarter. After which, I'll hand the call over to our CEO, Carlos Piani, to update you on our priorities. We will then open the floor for the Q&A. Starting with our operational performance on slide four. In the third quarter, total water production reached 796 million cubic meters, down 1.6% year-over-year and up 2.2% versus the prior quarter. The year-over-year decline reflects higher rain levels impacted by the Super El Niño, with rainfall of 204 mm, 175% higher than last year.
Our active customer base continues to grow, with about 9.5 million water and 8.3 million sewage connections. Both are now up 0.1% year-over-year, reversing the slight year-on-year reduction presented last quarter. Q uarter-over-quarter, we saw a 0.3% increase in both water and sewage connections as a result of the universal access program. Before I begin explaining slide number five, I would like to remind our attendees that since last quarter, we started to consolidate EMAE's results into our reported figures.
Therefore, the figures presented on this slide include EMAE's contribution. Adjusted net revenue reached BRL 6 billion, representing organic growth of 9% versus last year. Adjusted EBITDA increased 14% year-over-year to BRL 3.6 billion, with an EBITDA margin solidly above 60%. EBITDA margin grew due to strong revenue performance and the efficiency agenda, partially offset by investments in our customer service initiatives explained in our second quarter earnings call, and which will be updated in the next slides. Adjusted net income totaled about BRL 1.1 billion, reflecting higher funding costs and interest rates associated with our investment program.
Cash generation remained solid, with operating cash flow reaching BRL 2 billion, a 14% increase year-over-year. Moving to slide six. Before diving deeper into the quarter, I will briefly go through the reconciliation between reported and adjusted figures, after which I will focus on the adjusted figures, excluding the effects that do not reflect SABESP's core performance. As in previous quarters, we exclude construction and financial asset bifurcation effects. Keep in mind that while SABESP does not record margins for construction, EMAE still does. At the EBITDA level, we also exclude the BRL 300 million one-off tax gain and BRL 38 million related to the Jaguaré incident.
As we did last quarter, we exclude EMAE's figures from the next pages so that we can properly discuss the core business performance. Investors can find more information on EMAE's performance in the appendix, in our filings at CVM, and in EMAE's own filings, given it was also a publicly traded company during Q3. Turning to slide seven and exploring our revenue drivers, adjusted net revenue reached BRL 6 billion, an increase of 9% year-over-year.
First, price contributed 7.7%, driven by the 10.6% rate phasing, partially offset by higher refunds, which we expect to recover in the 2028 rate cycle. Second, volume contributed 2.1%, explained by a 2.2% gain from new units and 0.4% gain from metering upgrades. These were partially offset by a 0.4% negative effect from consumption per capita. Finally, mix was - 0.8%, reflecting customer category and a 0.6% consumption band mix effect linked to consumption per capita. This is a significantly smaller drag than the 3.1% we saw last quarter.
On slide eight, we provide additional color on revenue performance. More than 2 million units now have access to discounted rates, an increase of about 15% year-over-year, and more than double what we had before the privatization. The BRL 44 million mix impact in the quarter was mainly driven by the expansion of Cadastro Único social tariff, which added 268,000 units year-over-year, together with category mix. This reflects our commitment to expanding access to sanitation services while supporting vulnerable subpopulations. The chart on the right puts this in perspective.
Over the last 24 months, SABESP price effectively paid by our customers increased about 5% and remains 5 percentage points below CPI. For SABESP, these impacts are provided for within the regulatory framework and are expected to be adjusted annually on the tariff reviews. Finally, meter upgrades were 58% lower year-over-year, although volumes increased versus the second quarter. More importantly, there has been a month-over-month increase in meter replacements from July to October, indicating a positive trend towards easing supply chain constraints, with the inauguration of the local meter factories already happening next week.
Moving to EBITDA on slide nine. Adjusted EBITDA grew 14% year-over-year to BRL 3.6 billion, with margin expanding from 58.6%- 61.2%. Starting from the top, net revenue contributed BRL 0.5 billion and personnel expenses a further BRL 150 million. These were partially offset by general expenses with an BRL 80 million impact, mainly from portfolio aging, driving a higher allowance for doubtful accounts. Power also contributed BRL -112 million, reflecting inflation and ANGRA charges that got introduced this year.
Finally, people had a positive contribution of BRL 150 million, driven by a 3.4% headcount reduction, health plan migration, collective bargain, and workforce mix. On slide 10, we break down the execution of our commercial plan this quarter. Total P&L impact was about BRL 180 million, of which BRL 70 million hit in revenue and BRL 110 million hit in cost. BRL 70 million came mainly from rebilling, as we proactively adjusted customer bills that fit inside the regulatory framework for that. BRL 80 million on the cost front came from media and communication efforts to increase customer awareness and engagement, and BRL 30 million from customer experience initiatives as we strengthen our service channels and simplify the customer journey.
Importantly, BRL 80 million of the total is non-recurring, with BRL 100 million recurring. In addition, of the recurring portion, BRL 70 million already has tariff coverage, which will be recovered in the 2028 tariff adjustment. Deep diving into costs on slide 11, personnel expenses decreased 22% year-over-year, despite a 4.4% inflation-linked wage adjustment. This was more than offset by a 3.4% headcount reduction and other actions such as health plan migration, collective agreement, and workforce mix.
Power costs increased 37%. Most of that came from inflation and the new ANGRA sector charges, as well as higher costs with power generators. Migration to the free market continued to mitigate part of these pressures, with 89% of our total consumption now sourced through the free market, an increase of 13 percentage points versus the same period of last year. Moving to the next slide, reported net income reached BRL 1.4 billion in the quarter, compared with BRL 2.2 billion in the third quarter of last year. EBITDA was a positive contribution with more than BRL 1 billion.
The main driver behind the year-on-year decline was the net financial result. Keep in mind that the third quarter of the last year included a non-recurring gain of BRL 1.5 billion from court order payments, the precatórios. In addition, interest expenses increased by BRL 380 million on larger debt balance, consistent with the financing needs of our accelerated investment program. Depreciation and amortization also increased, reflecting the expansion of our asset base. These effects were partially offset by lower income tax, reflecting lower pre-tax income. Moving to slides 13 and 14, we will update you on our CapEx.
Investment execution remains one of the highlights of our transformation. As we anticipated last quarter, CapEx accelerated in the second half. We invested BRL 4.5 billion in the third quarter, 14% more than a year ago, and 21% above the second quarter. Y ear-to-date, CapEx reached a total of BRL 12 billion, an increase of 15% versus the same period of last year. Our contracted backlog reached BRL 44 billion through 2029, up 9% quarter-over-quarter, driven by the contracting of our universalization waves two and three.
One important comment on CapEx unitization, which is basically putting the assets to service. As in previous years, unitization is concentrated in the fourth quarter. In 2025, around 65% of the year's unitization happened in Q4, and we expect that to be consistent or slightly higher in 2026, mainly for two reasons. The first is the construction schedule. A large part of our projects are planned for final delivery in December, and unitization depends on that. The second is a one-off effect of the ERP migration to S/4HANA.
As we expected in the migration plan, it temporarily slowed the pace of unitization, and that pace will catch up in the fourth quarter. With the migration completed as planned and the year-end project deliveries on schedule, we are on track. U-factor targets continue to evolve at a fast pace. As of September, we have achieved 118% of the cumulative target for water and 103% of our cumulative target for sewage. On sewage treatment, we reached 89% of the complete target, with the third quarter being our strongest quarter of the year in new units for treatment. On slide 14, we provide an overview of the universalization program.
Projects are being contracted into four waves, structured across 45 lots and covering 375 cities. Together with the BRL 34 billion executed since 2024, the BRL 44 billion backlog brings the program to BRL 78 billion, 40% more than a year ago. Integra Tietê runs alongside the waves. It has a total investment of BRL 23 billion from 2023- 2029 and will benefit around 5 million people. Program is 69% contracted and 39% executed. Waves one and two in the countryside are fully contracted, totaling BRL 13 billion across 23 lots and 321 cities, and is already in execution.
Wave three in the Santos metropolitan area and the northern coastline is 88% contracted, with BRL 4.8 billion in investments and started execution in September. Wave four in the São Paulo metropolitan area is the largest, with BRL 20 billion across 14 lots and is expected to begin in January 2027. Together, these four waves will benefit approximately 1 million people. Turning to slide 15, our balance sheet remains strong and well-positioned to support the investment cycle. Gross debt totaled BRL 46.4 billion, while net debt stood at BRL 38.6 billion at the end of the quarter.
As of October, 66% of our debt is free of financial covenants. Our average cost of debt remained close to CDI, with a 6.2-year weighted average maturity. In addition, 71% of our debt matures from 2031 onwards, increasing to 74% after the new A/B loan signed in October, reflecting the long-term profile of our financing structure. We ended the quarter with BRL 7.9 billion of cash, or BRL 12.8 billion, including the proceeds from the A/B loan, which covers all of our amortization through 2029 and provides liquidity and flexibility to continue executing our investment plan. We monitor the interest rates environment really close, given its impact on our results.
Since most of our debt is linked to CDI, every 100 basis points increase in the Selic rate reduces our pre-tax income by about BRL 300 million and our net income by about BRL 200 million. However, our regulatory frameworks provide the mechanism to capture the environment over time. Higher interest rates and inflation in both Brazil and the U.S. are inputs to the regulatory WACC, which will be reset in 2029. A higher cost of capital in the market would therefore be reflected in our allowed return at the next reset, offsetting the near-term impact in our financial results.
Moreover, inflation and interest rates are intimately linked, and therefore, through time, must converge, matching assets and liabilities on our balance sheet. Finally, on slide 16, our net debt closed at 2.7x EBITDA, a level we deem appropriate for a company executing one of the largest infrastructure investment programs in the world. Return metrics remained resilient in a higher-for-longer interest rate scenario, sitting stable versus the prior quarters, reflecting the strength of the business as we continue investing for future growth. With that, I will now hand the call over to our CEO, Carlos Piani, to discuss our priorities in greater detail.
Thanks, Daniel. Good morning, everyone. Last quarter, as we marked two years since privatization, I highlighted three values from our culture on a page: deliver results with purpose, be guided by ethics and safety, and put customers first. I also pointed to two areas that needed particular attention. Our customer experience had to catch up with the transformation across SABESP, and our safety standards had to keep pace with the expansion of our construction program. Today, I want to return to those commitments and show you the progress we have made. Values become credible when people can see them in action.
Let me start where I said we had to work the most, customer service. Three months ago, I presented our commercial plan built around three priorities: strengthening our service infrastructure, redesigning the customer journey, and communicating more with our customers. This year, we have opened 36 branches and deployed 78 self-service kiosks. Our branches offer more service positions, accessible layouts, and a more comfortable environment, supported by real-time management of queues and service times.
The kiosks help customers complete routine tasks such as getting a copy of a bill, make a payment, or changing the account holder without waiting in line. Through our Vambora Digitalizar initiative, branch teams also help customers use our digital channels. We have strengthened how we manage service. Whenever the average wait at a branch exceeds 20 minutes, an alert allows us to respond by adjusting staffing and opening hours. We also analyze recording of calls and branch interactions to identify recurring complaints, improve follow-up and training, and access service quality and compliance. We are closing the feedback loop.
Through our voice of the customer process, customers receive a WhatsApp survey three days after each contact. This helps us understand whether the issue was resolved and how they rated the experience by channel, journey, and municipality. Let me show you what these changes are delivering. As you can see on the chart, average waiting time in our branches peaked at almost 14 minutes in April when our service channels were under the greatest pressure. By September, it had fallen to just over three minutes, a 70% reduction from March. Complaints are also coming down. Between March and September, complaints for our ombudsman and critical channels fell 51%.
Complaints registered with Procon, the consumer protection agency, fell 46%. Last quarter, I reported a 31% quarter-over-quarter reduction in complaints. The progress this quarter shows that we are sustaining that improvement. Customers are also reporting a better experience. Our net promoter score improved 23.5% in the third quarter compared with the second. The scale matters. In 2026, we are servicing an average of 318,000 consumers a month in our branches and 400,000 through our call center. Improvements across these channels affect hundreds of thousands of interactions every month.
We still have work to do, but the customer experience is beginning to catch up with the transformation across SABESP. That progress also matters for how society sees our company. Last quarter, I said that customers need to understand and experience the benefits of our transformation. The same applies to society more broadly. Earning stakeholder understanding and support is one of our strategic paths. That is why we increased investment in brand and communication to BRL 94.4 million year-to-date, compared with BRL 26.3 million in the same period of 2025. Our reach has expanded significantly.
From January to September, SABESP generated more than 6 billion media impressions, compared with about 3.4 billion in all of 2025. We also recorded almost 65,000 press publications, 35% more than in the same period last year. Our cost per thousand impressions was BRL 12.44, down 53% from 2024 and 20% from 2025. More importantly, we are seeing an improvement in reputation. Our reputation index reached eight out of 10, classified as good, up 5.3% quarter-over-quarter. And the share of consumers with a positive assessment of SABESP rose from 21% in June to 39% in September, an increase of 18 percentage points.
Let me now turn to safety, a commitment that must guide every stage of our work in the field. Last quarter, I said that recent incidents had made it clear we needed to go further on safety. We raised our standards beyond Brazilian technical requirements, tripled our field inspectors, and created an operational safety group reporting directly to me. The first results are encouraging. Our lost-time injury frequency rate, including employees and contractors, fell 67% in the third quarter compared with the same period of last year.
Field safety inspections were 2.6x higher. These results reinforce the importance of the measures we have taken. Sustaining them requires permanent capabilities, which we are building in three areas. First, technology and prevention. We will invest approximately BRL 41 million in AI-based monitoring through 2029. Our target is to equip all our backhoes with onboard AI cameras, complemented by mobile monitoring units deployed by our field inspection teams. Second, governance and assurance. We now have a dedicated safety department with around 65 employees and 70 third-party staff covering people, safety management processes, and field safety.
For our safety excellence program, we track more than 50,000 third-party workers individually and have already validated more than 2.5 million documents with the support of artificial intelligence. Third, field standards and training. We have strengthened drilling and excavation protocols, introduced a dedicated safety liberal role in the field, and expanded zones and subsurface investigations. We are also building CROSS, a training center for underground works in Vila Leopoldina, and have training partnership with industry associations such as ABES, Abratt, Abendi, and SENAI. Our commitment remains clear. The acceleration of our investment program cannot come at the expense of safety.
I would like to finish with a tangible example of what delivering results with purpose means, the Tietê River. For decades, the Tietê has symbolized São Paulo's sanitation challenge. The progress we are seeing now shows what sustained investment and execution can achieve. According to a CETESB technical note published on September 15th, the organic load discharge into the Tietê in the São Paulo metropolitan region fell by approximately 30% compared with 2024. Behind that number are projects delivered.
Through Integra Tietê, we have added seven new wastewater treatment plants, including Fortaleza in Cabuçu in Guarulhos and Água Vermelha in Francisco Morato, and more than 1,000 km of sewage network. We are now treating an additional volume of sewage equivalent to 5,500 Olympic-sized swimming pools every month, benefiting around 3 million people. There is much more ahead. Our total investment in Integra Tietê will reach BRL 23 billion through 2029. Before we move to Q&A, let me return to the commitments I discussed last quarter. We said the customer experience needed to catch up with SABESP's transformation.
Waiting times are now down 70%, complaints have fallen by around half, and customer perceptions are improving. We said safety standards had to keep pace with our construction program. We have strengthened our controls and capabilities, and the first results are encouraging. We said we would deliver results with purpose. The progress on the Tietê shows what that means for communities we serve. There is still a lot to do. Our responsibility now is to sustain this progress as we continue to invest and execute. Our ambition remains unchanged, to build the global leader in water and sanitation while creating sustainable long-term value for our shareholders and for society. With that, we can move to the Q&A session.
Thank you. We will now begin our Q&A session for investors and analysts. To ask a question, please submit it via the Zoom Q&A, informing your name and company. Our first question comes from Mr. Fillipe Andrade from Itaú BBA.
Hello, everyone. Good morning. Thanks for accepting the question. Just on the commercial plan, you classify roughly BRL 99 million of the commercial plan impact as recurring. Just two points here. First, should we interpret that as quarterly run impact or as an impact that should persist, but not necessarily at the same magnitude every quarter? Second, given that 2/3 is a pass-through, the expected impact now should be expected to remain at roughly BRL 120 million per year versus the BRL 200 million before? Thanks.
Thank you. Thank you, Fillipe. Daniel, good morning here. Looking about the commercial plan, we had BRL 99 million recurring impact in Q2, of which BRL 70 million are the refunds. These are what we expect will keep the way it is. Naturally, as we become more efficient, it could go slightly down, but I would expect that this is the right level that we will see that. Remembering what this creates, this reduces the market in here. This reduces the market for the next tariff review, which is going to go live in January 2028. That is how you should think about that mechanically. On the discounts, I think that was your second question where you mentioned the BRL 120 million. The large client discounts, correct, Fillipe?
Yes, the 1/3 that is not recurring.
The 1/3 is not recurring, sorry. We have about BRL 80 million that is not recurring. Most of that is linked to communications and so on and so forth. We saw that most of our customers did not understand what we were doing, how we were doing, and why we were doing what we were doing. So we decided that we needed to improve that communication with them.
Specifically this year, we also have the tax reform that we are going to start communicating a lot over the next few days to the customers. That is why we decided that we needed to invest a little bit more in communication this year, which we do not expect to continue at the same level that we did in 2026, and we expect it to return to levels consistent with the ones of 2025.
Great. Thanks, Daniel.
Yeah.
Our next question comes from Francisco Navarrete from Bradesco BBI.
Hello. Good morning. Can you hear me now?
Yes, Francisco, you can go ahead.
Okay, thank you. Thank you for the opportunity. Our question was about the CapEx deployment pace in the third quarter was BRL 4.4 billion. Analyzed nine months would be closer to BRL 17.7 billion, and this is one of the questions we get from investors. If this pace is the right one, if it will accelerate, if we can expect anything between BRL 18 billion or closer to BRL 18 billion for the fiscal year 2026, and if you see any issues in the pace of the CapEx deployment.
Still on the CapEx, you already also spoke about this, but if you could again just go over it. The unitized CapEx in the quarter was BRL 1.8 billion, which optically seems low, but we know there is seasonality. What do you think we could expect for the fourth quarter 2026, and are there any issues that may be preventing you from unitizing CapEx at a faster pace? Thank you very much.
Thank you, Nava. I will take this one as well. Good morning to you. Look, with regards to CapEx, our view continues to be the range that we provided in Q2, between BRL 18 billion- BRL 20 billion, BRL 18 billion being the floor. We are very confident about that. Q3 already showed some acceleration. In Q4, I think the page that we went through explains the waves and the contracting phase of those waves is exactly aimed at trying to bridge that gap between us that are in the day-to-day and you that are outside of the day-to-day, to try to show you how these things are actually stacking up together to increase the pace of execution in terms of CapEx.
Our view continues to be that at the floor, we will do BRL 18 billion, and potentially reach close to BRL 20 billion, but more likely close to BRL 18 billion. That means that implicitly we exit this year at a very high pace of execution, leading us into 2027, okay? That is how we see the plan. With regards to unitization, first of all, I think one thing that is always good to remind everyone on the call, we have different levels of knowledge and understanding. The way that our CapEx gets recognized into the RAB, through the construction period, we get interest on construction.
So provided that we do and execute the construction in the same timeframe that the regulation allows us for each type of asset, we continue earning money on the asset, and we preserve the economic value of the asset, irrespective of it being unitized faster or not. So that is the first point to have in mind. The second point to have in mind is, from the month that the asset gets commissioned, AKA unitized, so it is put into use, it starts accruing WACC plus inflation as the first amendment of the contract provided for, okay?
Just to make sure that we level set everyone in the same pace. I know that you know that very well, Nava, but we have a lot of people on the call. That said, unitization is usually a back-ended curve. Last year, we saw the same effect, and this year particularly, we also had the SAP go live that created a little bit of noise for us in Q2 and Q3, but at the end of Q3, already saw the pace of the unitization picking up.
What I can tell you already, since it is an open call, in October, we had almost the same amount of unitization that we had in the whole quarter of the third quarter. Unitization is ramping up significantly, and we expect to continue to unitize 2/3 of the CapEx that we execute in 2026 at the end of the year. Piani, you are on mute. I can see that you are speaking, but I think you are on mute.
Yeah.
Piani, you want to add something?
Thank you. Thank you very much.
Yeah, and just to add a little bit on Daniel, there is no restriction on CapEx execution. There is nothing holding us back now. What happened, we had some extraordinary events during the year. Daniel already said, SAP changed, whatever. We changed some protocols in terms of safety procedures, as we discussed previously on the presentation.
I think looking ahead, I think there is momentum to increase the pace, and even if we deviate a little bit from our guidance of the CapEx, as Daniel highlighted for everyone to have the same understanding, from an economic standpoint, we are neutral, okay? But of course, liquidity is important, so we are trying as best as we can to execute and unitize, as we call it, all the investments as soon as we can. I think it is upwards and consistently improving what we posted previous quarters.
Thank you very much. Congrats for the presentation and results.
Our next question comes from Bruno Amorim from Goldman Sachs.
Hi, good morning. Thanks for taking my question. I have a broader question related to capital allocation. Can you comment first on what changes, if something, in terms of the appetite for M&As and new concessions in light of the recent iteration in the rates environment, which probably argued for higher returns and a more prudent balance sheet approach? On the opportunity side, can you please update us on the Universaliza São Paulo project?
I guess higher rates mean probably even less competition for SABESP, and also we know that some of your competitors across the country are highly leveraged, and in the current environment, the source of financing is probably more scarce, which means some of those assets can become targets for SABESP. That is kind of the question, broader view on how you are seeing capital allocation in the current environments. Thank you very much.
Thanks for the question, Bruno. I think in general, we do not have any news on Universaliza. I think we are following as the process moves through. Of course, we are interested. We are going to look very carefully, given it is in our backyard. Let us put it this way, right? It makes total sense for us. In broader sense, it is a trade-off, right? The environment is a little bit tougher on the economic cycle. Cost of capital is higher, as you mentioned. But as a little bit different from public markets, when you are dealing with illiquid markets, vintage is very important, usually is the major variable correlation with returns.
Given that we are long-term investors, maybe this will provide more opportunities, but at the right price, given the cost of capital is higher. That is how we think. We always look at our stock as well, right? We can always buy our stock, and this is a reference for us in comparing that opportunity to the others on the marketplace. Our commitment is to look at these opportunities without compromising the plan and the commitments that we have at SABESP and URAE that we committed at the privatization. All said that, we are going to look at everything as we always do, and knowing that based on past experience, that may be a good vintage if we have the right price.
Thank you very much.
Our next question comes from Sofia Grand from Moneda Investments, and she says, "What is the average lag between CapEx outlay and tariff recognition, considering both the tariff increase process and that works are only recognized when operational?" She says, "Can you give some color how uncollectibles are trending? Do you see higher uncollectibles in newly accessed economies versus legacy ones?
Thank you. I will take this one. Sofia, for your questions. The average lag between CapEx and the tariff recognition, you should think about it in 18 months between the moment that it actually was put into service and the moment that we actually start earning money against that. The reason being that we execute the CapEx or that we unitize the CapEx throughout the year, so an average of six months. After that, we have to deliver that to the regulator, which assesses, audits, and so on and so forth, and then puts that into the RAB and then into the tariff of the January of the year after.
So, a 12-month process between delivering that to the regulator and getting that into tariff, and a six-month average period between unitization and actually delivering that to the regulator. This is the end state of the process. The CapEx execution begins before that. The CapEx starts before that and gets put into service once it is finalized. That process, on average today, our construction is taking about 20 months. We have construction works that go all the way to 36 months. We have construction that happens on the very same day, and it gets into the RAB theory on the same day.
But the average today is about 20 months, and the main driver for that average to be longer is because mainly we are expanding sewage treatment plants, which are usually very high in expenditure, and they are very long in terms of tenure. But keep in mind that, again, during that construction phase, we earn interest on the construction, and then once the asset is unitized, we also start earning WACC plus inflation over that before it actually goes into the tariff. Economically, we are well covered throughout that period.
The next question that you had with regards to allowance for delinquency. When we started, we had about 4% of delinquency. We took it all the way down to 1%. We expect this as a benchmark to be around 2%. We will have up and downs, but we expect that on average to be, on the long run, about 2%, which is the average and the benchmark that we have for utilities.
I do not see a very different behavior from new economies that we are adding, and the main driver for that is the social tariffs. When we look at the cohorts, 70% of what we add are usually eligible to social tariffs. When I look at the cohorts of social tariffs versus regular tariffs on residential consumers, their behavior is roughly the same. It shows that social tariffs actually work. That tried to give you the full briefing on that. That is it.
Our next question comes from Arthur Pereira from JP Morgan.
Hey, good morning, guys. My question is about the effective tariffs when you compare to the regulatory tariffs. Could you please share your estimated impact year-to-date when you take into consideration the rebilling process, discount to large industrials, subsidized tariffs, and also client mix? Maybe if you also may share the breakdown of this. Also, you have mentioned already about the rebilling process, that it is only an adjustment of future volumes in tariffs, but if you can recall us, which items you are entitled to financial compensation for past impacts and which ones are just adjustments for future tariffs. If I may, two brief follow-ups on previous questions.
On the client satisfaction expenses, you already mentioned the recurring level, but in the second quarter result, you mentioned that BRL 800 million potential impact related to 2026, and so far, I understand that it was below BRL 400 million. So, will also be a higher impact in the fourth quarter, or should we take the third quarter as the best proxy for the fourth quarter? On the unitization, you mentioned that 2/3 of the CapEx deployed within the year, but what about the CapEx that was deployed in 2025 and not yet unitized? Should we expect some unitization of that as well? Thank you.
Right. Thank you, Arthur. So, maybe I will probably start from the end, simpler. When we say that about 2/3 of the CapEx of the year is the unitization, we try to use that as a proxy for everything to be easier for the investors in the end. So, 2/3 is the cumulative between what we had in the work in progress and what we executed this year. So, unitization, you should not think about the inventory. Think about the number as the CapEx times 2/3. That is what we will unitize this year, between what was in the inventory and what was added to the base. In terms of the commercial plan costs, right, I think when we discussed, we showed.
Let me put it in a different way. Let me start from a different way. We said that we had a commercial discount program that we expected to be approved by the regulator. It was approved, but it is only going to start its effectiveness in January. 120 million of that BRL 800 million goes away. In terms of refunds, we have mentioned that we were expecting to have about BRL 290 million of refunds. We had BRL 50 million in Q2, BRL 70 million in Q3. I would expect Q4 to be closer to Q3, but with some potential of acceleration or deceleration.
This is on the go. That part, in the end, gets reimbursed for us, Arthur, in the way that we are lowering the volume of the market, and the tariff is the required revenue divided by the volume of the market. That is why and how this actually comes back to us. This is where we are in terms of communications and customer service. I think the BRL 200 million that we mentioned on both, I would expect that we will fully incur that in the full-year basis. That is how I think about that. In terms of revenue gap, as it stands, the way that we think, there are basically two types of gaps, real gaps and timing gaps.
Because the refunds are timing gaps, the mix is a timing gap. All of this is a timing gap, and we disclose that every quarter, what is the impact of refunds, what is the impact of mix, and so on and so forth. The impact that actually has a real loss for us, let us say, is the discounts to large clients. On our view, we have an annualized discount of BRL 150 million as it stands today, year-to-date about BRL 130 million. The reason for that is we have about one client that still has discounts, which is roughly 1/3 of the total amount, and we have some clients with injunctions that are still planning.
We have been winning injunctions throughout the year, but the remaining of the amount comes from those injunctions. That is where we are. That said, with the new commercial discount program, we are also offering the large customers an opportunity to enroll and so on and so forth, which should also help us solve for these issues as well.
Okay, very clear. Thank you.
Our next question comes from Ricardo Bello from Safra.
Hi, guys. Thank you for taking my questions. The first one is regarding volumes growth. I would like to know how much came from new connections versus metering upgrades, and what growth should we expect for the next quarter, for this quarter, in fact, and expectations for the next year, considering the possible effects from El Niño? My second question is about the X factor. What is the expected timeline for ARSESP's final decision on the public consultation, and what were the main points in the company's contribution to the consultation, and how has the dialogue with the regulator been?
Right. Thank you. Look, thinking about the growth on the quarter for the new economies and the meter upgrades, we have about 2.2% of growth in revenue coming from new customers that were added to the base. We expect that to continue because as we cycle through that, we expect that pace to be more or less constant, and we've been seeing around the same level of growth. When we think about meter upgrades, we saw 0.4% contribution to revenue from metering upgrades. When we think about that, we expect that to accelerate, because if you remember, we mentioned that in Q2, we had some supply chain issues with the smart meters coming through.
We already reached 100,000 smart meters in place, already installed. Next week, we actually have the inauguration of all the four factories, the local factories that are producing the smart meters. Next year, we expect to ramp up and start picking up against our regulatory obligation, which is replace the meters in São Paulo and São José dos Campos for that. With regards to the X factor, we have an open public consultation, which should close on November 23rd, and we'll see what progress is. Our contract actually already defines until 2029 the application of an efficiency factor of 0.89% to be applied over the OpEx. We already have a pre-definition until 2029. Sorry, I don't think there was a third question. Pardon.
Volume for next year, El Niño, given El Niño.
Yeah. You want to take this one? Take this one then.
Yeah. This is a very hard one. There is a correlation with climate. We developed internal models to deal with this, but we don't have any guidance to give the market. Very uncertain. I think consumption is with the rainfall. Let me give one step back. In our region, in the state of São Paulo, the impacts of El Niño, they're not marked, they're not as strong as in the south of Brazil and the northeast. It varies per season by phenomenon. It's very hard to predict what's going to happen. Usually, when we have hard, very strong El Niños, usually on the beginning of the rainy season, on the dry season, it rains a little bit more, and on the rainy season during the summer, it rains a little bit less.
That's a pattern that we have seen with some square, R square that's a little bit stronger, but it's no guarantee. All that to say, we need to have a little bit more visibility, to be a little bit closer to give educated comments and guidance to the market, okay? We don't have anything that we can speak to the public markets regarding volume right now, just to say there's correlation with climate that impacts our volume. Today, the volume is a little bit less than what we envisioned at the beginning of the year, given what's happening. As soon as we have a better guess on this, Daniel and the team can discuss with you guys.
Perfect. Thank you.
Our next question comes from Lilyanna Yang from HSBC.
Hey. Hello. Good morning. Thank you for the call. Could you please clarify, remind to us the impact of the tax reform on your financial statements, on your operations? Thank you.
Hi, Lily. Good to hear from you. Thank you for your question. Look, with regards to tax reform, what I can say is, first, our contract is neutral to that, okay? It says very explicitly in the contract. So that's the first point. Initially, very few changes, right? Because basically we're replacing PIS/COFINS for CBS. Of course, whatever is the final rate of that will be reflected in our statements, and we're discussing with the regulator, so it's a very close conversation. It will allow us to amplify our credit base, which will probably be picked up ex-post and not ex-ante.
So, that's the first thing. Then once IBS comes into play, then naturally this will add another tax on top of what we already have, because we don't have currently ICMS. The sector is exempt from ICMS, which should be passed on to the tariff. But that is how it actually gets reflected. From a P&L perspective and reading the P&L, naturally gross revenue will become net revenue and will be closer to how foreigners report their statements than how Brazilian companies do that.
On the day-to-day, there is also impacts for us because we will have to issue invoices and notas fiscais, which today we do not. So we have a specific model of billing document, the invoice, that will come live now in December 1st. We are actually going live next week already to preempt the process and make sure that we do not have any issues.
Okay, thank you.
Our next question comes from Arthur Pereira from JP Morgan.
Hi. A brief one on the leverage. Could you please share the outlook for funding and leverage given the recent increase in Brazil's rates, and also SABESP, a robust CapEx plan for 2027 and 2029?
Thank you, Arthur. Look, in terms of leverage and funding, we have raised BRL 40 billion to date since the privatization. We are finalizing our budget for next year, but we expect a lower number to be raised for next year, mainly because amortizations are smaller next year. We have extended a lot of the duration of the debt, so we have less amortizations next year, and we will have a higher tariff next year as well. These two things combined should reduce the capital requirements for next year. That said, thinking about, let us assume that we have to raise the same BRL 20 billion that we raised this year next year.
We have BRL 1 trillion into the local market in the corporate market, another BRL 500 million in incentivized debentures. There is ample room for us to raise capital and make sure that we do that, especially now that the cost of capital abroad is a little bit more expensive. Maybe let us see what happen now after the midterms and how this sustains in the market. As it stands, our plan A is local. With regards to how this gets reflected, naturally, as we reset the WACC in 2029, we have a formula that is already predefined in the contract that should reset the indexes that feed into the formula, and they should capture that period of higher interest rates. At some point, this gets rebalanced in the contract.
Thank you.
The Q&A session is now over. We wish to give the floor to Mr. Carlos Piani for the company's closing remarks.
Thank you, all of you, for joining us. Thank you, all of you, for joining the call today, for your questions, and for your continued interest in the company. Our investor relation teams will remain available for any other further questions that you may have. Thank you, and have all a great day. Bye-bye.
SABESP earnings presentation is now closed. Thank you very much for your participation, and we wish you all a very good day.