SABESP 2Q17 Financial Summary
Business Context and Reporting Period
Company: Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Second Quarter ended June 30, 2017 (2Q17)
Announcement Date: August 14, 2017
Currency: Brazilian Reais (R$)
SABESP is one of the world's largest water and sewage service providers. The filing presents unaudited financial results for 2Q17 and the first half of 2017 (1H17), with comparisons to the same periods in 2016.
Key Financial Metrics
| Metric (R$ million) | 2Q17 | 2Q16 | 1H17 | 1H16 |
|---|---|---|---|---|
| Net Operating Revenue | 3,494.6 | 3,438.6 | 7,053.5 | 6,466.4 |
| Adjusted EBITDA | 1,065.4 | 1,117.1 | 2,419.0 | 2,024.9 |
| Adjusted EBITDA Margin | 30.5% | 32.5% | 34.3% | 31.3% |
| Net Income | 331.8 | 797.5 | 1,006.2 | 1,426.3 |
| Earnings Per Share (R$) | 0.49 | 1.17 | 1.47 | 2.09 |
| Operating Cash Flow (1H) | 1,649.6 | 1,375.0 | - | - |
| Cash & Equivalents (End of Period) | 1,367.6 | 1,886.2 | - | - |
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased 1.6% in 2Q17 and 9.1% in 1H17. This was driven by an 8.4% tariff increase (effective May 2016) and a 2.7% increase in billed volume. Construction revenue declined 13.1% due to lower municipal investments.
- Profitability Decline: Net income dropped 58.4% in 2Q17 and 29.5% in 1H17. The primary driver was a significant deterioration in the financial result.
- Financial Result Impact: The financial result swung from a gain of R$ 372.7 million in 2Q16 to a loss of R$ 281.2 million in 2Q17. This R$ 653.9 million negative variance was caused by the appreciation of the US Dollar and Japanese Yen against the Brazilian Real, resulting in substantial exchange losses on foreign currency debt.
- Cost Increases: Total costs and expenses rose 14.2% in 2Q17. Key drivers included a R$ 94.7 million increase in payroll (due to severance provisions and salary adjustments) and a R$ 72.9 million increase in general expenses (legal provisions). Electricity costs decreased 22.6% due to lower market tariffs.
- Operational Metrics: Total billed volume increased 2.7% in 2Q17. Water loss (IPM) increased slightly to 31.5% from 30.7%.
Guidance, Outlook, and Risks
- Debt Management: On July 13, 2017, SABESP issued R$ 500 million in debentures (21st Issue) to refinance maturing commitments and replenish cash. The proceeds were split into a 3-year series (CDI + 0.60%) and a 5-year series (CDI + 0.90%).
- 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.
- Risks: The filing highlights significant exposure to currency fluctuations (USD and JPY appreciation) and inflation adjustments. Legal provisions and court proceedings also represent a variable cost component.
- Unusual Items: The 2Q16 period included a one-time bonus of R$ 33.6 million from the Water Consumption Reduction Incentive Program and a suspension of the Contingency Tariff, which impacted year-over-year comparisons.
Investor Verification Checklist
- Currency Sensitivity: Verify the impact of continued Real depreciation on future financial results, given the heavy reliance on foreign currency debt.
- Debt Maturity Profile: Review the detailed loan schedule (R$ 11.6 billion total) to assess refinancing risks in 2017-2020.
- Regulatory Tariffs: Monitor upcoming tariff adjustments and the sustainability of the 8.4% increase implemented in 2016.
- Legal Provisions: Assess the volatility of "General expenses" and "Allowance for doubtful accounts" related to court proceedings and municipal debts (e.g., Guarulhos).
- Construction Revenue: Evaluate the trend of declining construction revenue and its impact on total revenue growth.