Business Context and Reporting Period
Company: Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE: SBS; BM&FBovespa: SBSP3)
Reporting Period: Third Quarter (3Q) and Nine Months (9M) ended September 30, 2016.
Business Overview: SABESP is a major provider of water and sewage services in Brazil. Financial results are presented in Brazilian Reais (R$) in accordance with Brazilian Corporate Law. Comparisons refer to the same periods in 2015.
Key Financial Metrics
| Metric (R$ Million) | 3Q 2016 | 3Q 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net Operating Revenue | 3,745.8 | 3,197.0 | 10,212.2 | 8,488.5 |
| Net Income | 573.9 | (580.1) | 2,000.2 | 75.3 |
| Adjusted EBITDA | 1,337.5 | 903.2 | 3,362.5 | 3,017.1 |
| Adjusted EBITDA Margin | 35.7% | 28.3% | 32.9% | 35.5% |
| Earnings Per Share (R$) | 0.84 | (0.85) | 2.93 | 0.11 |
| Cash and Equivalents (End of Period) | 1,415.5 | 1,639.2 | 1,415.5 | 889.9 |
| Capital Expenditures (9M) | 2,655.6 | 1,878.8 | 2,655.6 | 1,878.8 |
Note: Capital Expenditures calculated as sum of Acquisition of intangibles and Purchases of tangible assets from Cash Flow statement.
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased 17.2% in 3Q16 and 20.3% in 9M16. This was driven by an 8.4% tariff increase effective May 2016 and a 4.7% increase in billed volume.
- Profitability Turnaround: The company reported a net income of R$ 573.9 million in 3Q16, a significant improvement from a net loss of R$ 580.1 million in 3Q15.
- Financial Result Improvement: The financial result improved by R$ 1,362.6 million (88.5% reduction in loss) in 3Q16. This was primarily due to a R$ 1,348.7 million decrease in negative monetary and exchange variations, as the appreciation of the dollar and yen against the Real was significantly lower in 3Q16 compared to 3Q15.
- Cost Management: Costs and expenses (excluding construction) rose only 2.8% in 3Q16. Salaries and payroll charges decreased by R$ 259.7 million due to the migration of 3,572 participants from a Defined Benefit Plan to a Defined Contribution Plan.
- Operating Indicators: Water production increased 9.1% in the quarter. However, measured water loss (IPM) increased to 31.4% from 28.3% in 3Q15, attributed to the end of demand management measures related to the previous water crisis.
Guidance, Outlook, and Risks
- Debt Management: In October 2016, SABESP raised a US$ 150 million foreign loan to settle a Eurobond issue and other maturing debts. Total debt maturities are significant, with R$ 730.6 million due in 2016 and R$ 1,135.4 million in 2017.
- 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 and Contingencies:
- Exchange Rate Risk: Significant exposure to foreign currency fluctuations, though 3Q16 saw favorable stabilization compared to the prior year.
- Legal and Provisions: General expenses increased due to provisions for court proceedings and agreements with municipalities (e.g., EMAE, Santos).
- Water Losses: The increase in IPM (measured water loss) to 31.4% poses an operational efficiency risk.
Investor Verification Checklist
- Tariff Sustainability: Verify the long-term impact of the 8.4% tariff increase implemented in May 2016 on future revenue stability.
- Debt Maturity Profile: Review the detailed debt schedule, particularly the R$ 1.1 billion due in 2017, to assess refinancing risks.
- Water Loss Trends: Monitor the trajectory of the IPM (measured water loss) metric, which rose to 31.4%, to evaluate operational efficiency.
- Provision Reversals: Analyze the sustainability of cost reductions driven by one-time pension plan migrations and the reversal of specific provisions (e.g., GESP agreement in 3Q15).
- Currency Exposure: Assess the company's hedging strategies given the historical volatility of the Real against the Dollar and Yen impacting financial results.