SABESP 3Q18 Financial Summary
Business Context and Reporting Period
Company: Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE: SBS; B3: SBSP3)
Reporting Period: Third Quarter ended September 30, 2018 (3Q18) and Year-to-Date (9M18).
Business: One of the world's largest water and sewage service providers, operating primarily in the State of São Paulo, Brazil.
Currency: Brazilian Reais (R$).
Key Financial Metrics
| Metric (R$ Million) | 3Q18 | 3Q17 | 9M18 | 9M17 |
|---|---|---|---|---|
| Net Operating Revenue | 3,810.8 | 3,536.5 | 11,182.7 | 10,589.9 |
| Net Income | 565.2 | 900.5 | 1,327.5 | 1,906.7 |
| Adjusted EBITDA | 1,434.6 | 1,456.3 | 4,216.2 | 3,875.2 |
| Adjusted EBITDA Margin | 37.6% | 41.2% | 37.7% | 36.6% |
| Earnings Per Share (R$) | 0.83 | 1.32 | 1.94 | 2.79 |
| Cash and Equivalents (Balance Sheet) | 3,619.3 | 2,283.0 (Dec 2017) | - | - |
| Total Debt (Current + Noncurrent) | 13,727.0 | - | - | - |
Note: Total debt figure represents the sum of all scheduled debt maturities listed in the debt profile table (R$ 13,726,968 thousand).
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased 7.8% in 3Q18, driven by tariff repositioning (7.9% in Nov 2017 and 3.5% in June 2018). Gross operating revenue from sanitation services rose 11.1%.
- Profitability Decline: Net income fell 37.2% to R$565.2 million. Adjusted EBITDA decreased 1.5% to R$1,434.6 million.
- Cost Increases: Total costs and expenses rose 13.0%. Key drivers included:
- Salaries: +11.0% due to the Knowledge Retention Program (PRC) and salary adjustments.
- Electricity: +18.6% due to tariff increases in free and regulated markets.
- Services: +27.1% due to increased technical and maintenance services.
- Financial Result Deterioration: The financial result swung from a gain of R$222.9 million in 3Q17 to a loss of R$262.8 million in 3Q18. This was primarily caused by a R$444.0 million negative exchange variation due to the appreciation of the USD and JPY against the BRL.
- Operational Volume: Total billed water and sewage volume remained relatively flat (+0.1% in 3Q18), with slight growth in residential categories offset by declines in commercial and industrial sectors.
Outlook, Risks, and Management Commentary
- Capital Expenditure: 3Q18 investments totaled R$795.6 million, including R$61.6 million for the São Lourenço PPP project.
- Debt Profile: The company maintains a significant debt portfolio with maturities extending to 2034. A substantial portion is denominated in foreign currency (USD, JPY), exposing the company to exchange rate volatility.
- Forward-Looking Statements: Management notes that future results depend on economic conditions, industry trends, and operating factors. There is no guarantee that expected results will occur.
- Key Risks:
- Currency Fluctuation: Significant exposure to USD and JPY appreciation impacting financial results and debt servicing.
- Regulatory/Tariff: Reliance on tariff adjustments to offset cost inflation.
- Wholesale Revenue: Higher allowance for doubtful accounts regarding wholesale sales (specifically Guarulhos municipality) impacted revenue recognition.
Investor Verification Checklist
- Exchange Rate Sensitivity: Verify the impact of BRL depreciation on future financial results and debt service costs, given the R$444M negative variance in 3Q18.
- Cost Structure: Monitor the sustainability of the 13% cost increase, particularly regarding the Knowledge Retention Program and electricity tariffs.
- Wholesale Collections: Assess the recovery status of wholesale receivables, specifically from the municipality of Guarulhos, which drove higher doubtful account provisions.
- Debt Maturity Wall: Review the debt profile table for upcoming maturities in 2019-2020 (R$ 2.03B and R$ 2.61B respectively) and refinancing plans.
- PPP Integration: Track the performance and financial impact of the newly operational São Lourenço Production System.