We believe that our strong business position and future prospects derive from the following strengths.
Well‑established business with significant size, scale and know‑how. We are one of the largest privately-owned water and sewage service providers in Brazil. We provide services to 48 municipalities of various sizes, from 3,500 residents to over 850,000 residents, in ten states across all the regions of Brazil, which demonstrates our capability of adapting to a range of municipality sizes and socioeconomics realities and enables us to develop well‑trained personnel and skills for operating in diverse environments.
The know-how developed throughout the years helped us to perform successful turnaround stories such as our investment in Águas Guariroba, the water and sewage concessionaire responsible for the Municipality of Campo Grande, State of Mato Grosso do Sul. Since the acquisition, Águas Guariroba reduced its water distribution loss ratio from 55.9% in 2006 to 19.4%, one of the lowest amongst Brazilian municipalities. In addition, we increased the sewage coverage of Águas Guariroba from 27.1% in 2006 to 84.0% in 2016.
We replicate our business model by focusing on operational efficiency and quality of services. For example, we have:
reduced our water loss distribution rate at Prolagos from 56.8% in 2007 to 24.6% during the six-month period ended June 30, 2017, which is key given the importance of Prolagos to Rio de Janeiro’s tourism industry considering that it receives a large amount of tourists during peak season, increasing significantly the population to be served with water and sewage services;
reversed the environmental damage that was threatening the Lagoa de Araruama (Araruama Lagoon), which is the world’s largest hypersaline lagoon, whose ecosystem is vital to the region covered by the Prolagos concession;
universalized sewage service in two years in the Municipality of Piracicaba, in the State of São Paulo, through the Águas do Mirante public-private partnership;
universalized sewage service in the Municipality of Matão, in the State of São Paulo, through the Águas de Matão concession agreement; and
treated 100% of the water in the Municipality of Timon, the first city in the State of Maranhão to reach such treatment levels for its population.
Quality diversified assets and long-term concession agreements. We have a diversified and high-quality asset base, with long-term concession agreements (with an average remaining concession period of 34.3years). Our asset base, combined with the facts that (i) demand is relatively inelastic, (ii) tariffs are usually inflation-linked and paid directly by users, and (iii) concession contracts typically have strong economic rebalancing clauses for events not provided in the bidding documents, resulting in predictable cash flows. We mitigate risk through geographic and regulatory diversification, with operations in ten States and 48 municipalities across the country.
We believe that hydraulic resources available in the regions we operate, such as rivers, dams, lakes and underground water, guarantee us a constant water supply to the populations we serve. In addition, we believe the demand in the regions in which we operate still lag behind water availability, which enables us to serve current and future demand in a predictable manner.
High quality of service standard, technical-operational excellence and shared value creation. We believe that we adhere to high standards of service and employ the best available technology in the sanitation business to control the quality of the water we abstract, process and distribute. We have 13 regional laboratories and we also use outsourced laboratories in order to monitor water quality, as required by our standards and those set by law. We also treat 100% of the sewage that we collect.
In terms of water losses, we have a dedicated area to reduce water distribution losses and we also have invested in the reduction of our water distribution losses and as a consequence, reducing energy consumption. In order to replicate Aegea’s business model, we created the AEGEA Academy (Academia AEGEA), our own educational facility, in order to train people to replicate the best practices of the more mature concessionaires.
We aim to generate shared value and all concessionaires undertake efforts to promote health, environmental education and universalization of water and sewage treatment. These efforts require constant dialog with local governments, communities and trade associations in the regions in which we operate. We also implement social responsibility programs and initiatives with a focus on environmental education and health.
Strong profitability and predictable cash flow generation. Our results of operations demonstrate superior profitability. Our EBITDA margin (excluding construction revenue and cost) was 52.6% in the six-month period ended in June 30, 2017 and 46.6%, 50.6% and 49.2% in the years ended December 31, 2016, 2015 and 2014 respectively, which compares to an average of 33.0% among publicly traded Brazilian water and sewage companies.
Unlike government-owned water utilities companies, our tariffs are contractually predetermined (i.e., not subject to any government entity’s unilateral decision) and indexed to inflation indexes, therefore ensuring us and our shareholders stable and predictable returns.
In addition, our capital expenditures relate in the vast majority to infrastructure for new households connected (as opposed to maintenance of the infrastructure of already connected households), generating new cash flow and revenues and reducing our leverage in the short- to medium-term after the capital expenditure is made.
Access to long-term sources of financing. Our strong cash flow generation from operations and our role as an essential public service provider places us in a privileged position in our industry to obtain long-term, low-cost financing from Brazilian public banks, and domestic and international multilateral agencies and development banks. We do not depend on a limited number of sources of financing, but instead have access to various funding alternatives in the Brazilian and international markets to fund our working capital needs and our capital expenditure programs.
World class shareholders and strong corporate governance practices. Our shareholders are Grupo Equipav (a Brazilian infrastructure conglomerate with long time history and expertise in the sector), GIC (Sovereign Wealth Fund of the Government of Singapore), IFC, and GIF (managed by IFC). This group provides a unique combination of technical knowledge, financial diligence and disciplined approach to new projects and a stamp of quality by international investors and multilateral organizations which makes us uniquely positioned to drive value and pursue sustained growth for our stakeholders.
We maintain a solid corporate governance and compliance structure, based on the principles of transparency, equality, accountability and corporate responsibility. We currently have seven members on our Board of Directors, of which six are considered independent according to the IBGC criteria, and we support our Board of Directors with four executive committees and a compliance department.
Our mission is to provide water and sewage services, contributing to improvements in quality of life and the environment. Our goal is to become a global reference in the provision of basic sanitation services in a sustainable, competitive and innovative manner, focused on the needs of our clients. To this end, our strategic objectives are based upon the guiding principles of water availability, excellence in the provision of services, sustainable growth, fostering and expanding our operating base, innovation and technology, motivation of personnel and expansion of our sewage treatment coverage.
Secure water availability in the areas where we operate. Our goal is to secure the availability of water in the areas where we operate, as well as to promote a rational and integrated use of water resources, respecting demand and critical levels of water for each region, and allocating resources in the short-, medium- and long-term in order to guarantee access to water. Furthermore, we have planned a series of short- and medium-term measures that we believe will increase the ability of our immediate water supply to cope with shortages and significantly improve future water security by the end of the decade.
Ensure the quality and availability of our services in our existing service area by providing excellent service and improving our operating efficiency. Our goal is to maintain our water coverage ratio, coupled with a high standard of quality and availability of our services, and meet the expected growth in our customer basis. We also intend to increase our sewage coverage in compliance with the targets established in the concession agreements and to reduce both physical and non‑physical water loss.
We intend to invest in information technology in order to increase our speed and productivity in responding to regulatory changes; to strengthen and streamline our financial, commercial and administrative structure; to provide a solid and integral base of information to support the decision-making process; and to increase the efficiency of our operations while also reducing costs.
We plan to improve the management of our assets, as well as to continue to reduce our total operating expenses by automating some of our facilities, streamlining operational processes, implementing integrated planning and further investing in internal technological research and development.
Continue to seek sustainable growth. Our goal is to grow while balancing our economic and financial results with environmental and social considerations, to secure positive financial results so as to guarantee investments for the provision of services as well as to provide adequate returns for our shareholders.
We have an undisputed track record of concessions won in public bids and in acquisitions, recently increasing our footprint throughout Brazil to 48 municipalities in ten states. We intend to analyze and pursue eventual acquisition opportunities and benefit from the integration expertise that we have.
We intend to continue to fund our estimated capital expenditure programs and working capital needs with diversified sources of financing, such as domestic and international development banks and multilateral agencies.
Expand our water and sewage treatment coverage. We intend to implement sewage collection and treatment structures in an economically and technologically viable way. We had an effective sewage coverage ratio of 54.1% as of June 30, 2017 and plan to increase this ratio in compliance with the targets established under our concession agreements. These investments are necessary to restore the quality of rivers and lakes, providing new sources for water supply. Our strong presence across Brazil and experience in providing water and sewage services places us in a privileged position to expand our sewage services.
Establish efficient and competitive ways of motivating, retaining and attracting personnel. We intend to provide our personnel with programs for professional and personal development, growth opportunities and recognition. These programs include competitive benefit packages and a healthy and collaborative work environment. We seek to maintain workplace satisfaction, well-being, engagement and productivity. In addition, through AEGEA Academy (Academia AEGEA), we have trained more than 2,700 of our employees through over 17,000 hours of directed trainings in over 120 specialized courses. We expect the courses of Academia AEGEA to be certified by institutions recognized by the Brazilian Department of Education (Ministério da Educação), or MEC.