SBS

Business Context and Reporting Period

Company: Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE: SBS; BM&FBovespa: SBSP3)
Reporting Period: Full Year 2015 (ended December 31, 2015)
Filing Date: March 25, 2016
Context: SABESP is one of the world's largest water and sewage service providers. The 2015 results were significantly impacted by a severe water crisis in São Paulo, which necessitated demand management measures and reduced billed volumes, alongside substantial currency devaluation affecting financial results.

Key Financial Metrics

Note: All figures are in Brazilian Reais (R$) unless otherwise noted. Debt figure represents total principal obligations as of the filing date.

Material Changes vs. Prior Period

• Revenue Growth: Net operating revenue increased 4.4% to R$ 11.7 billion, driven by tariff adjustments (6.5% repositioning in Dec 2014 and 15.2% increase in June 2015) and a contingency tariff. This growth offset a 6.8% decline in total billed volume caused by the water crisis.
• Profitability Decline: Net income fell 40.6% to R$ 536.3 million. The primary driver was a massive increase in financial losses due to currency devaluation. Net monetary and exchange variation losses surged to R$ 2.0 billion in 2015 from R$ 423.9 million in 2014.
• Cost Efficiency: Total costs and expenses (including construction) decreased 5.2% to R$ 8.8 billion. Excluding construction costs, operating expenses dropped 13.8%, improving the cost-to-revenue ratio from 82.9% in 2014 to 75.3% in 2015.
• EBITDA Expansion: Adjusted EBITDA grew 36.2% to R$ 4.0 billion, reflecting operational efficiency and tariff increases, despite the volume decline.
• Government Reimbursement: A one-time credit of R$ 696.3 million was recorded from the São Paulo state government regarding employee benefits (G0), partially offsetting other expenses.

Outlook, Risks, and Management Commentary

• Capital Expenditure Plan: SABESP announced a 5-year Capex plan (2016–2020) totaling R$ 12.5 billion, with R$ 5.3 billion allocated to water and R$ 7.2 billion to sewage.
• Water Crisis Impact: Management highlighted a 13.1% reduction in water production volume in 2015. However, water loss per connection (IPDt) improved significantly, dropping 19.1% to 258 liters/connection/day due to network pressure reduction and loss control initiatives.
• Financial Risks: The company faces significant exposure to currency fluctuations. The appreciation of the US Dollar (47.0%) and Yen (45.9%) against the Real in 2015 caused substantial exchange losses on international loans. Additionally, rising interest rates (CDI) increased domestic financing costs.
• Forward-Looking Statements: Management cautioned that future results depend on economic conditions, tariff adjustments, and the resolution of the water crisis. There is no guarantee that projected Capex or operational improvements will materialize as planned.

Investor Verification Checklist

• Currency Exposure: Verify the extent of unhedged foreign currency debt and the sensitivity of future earnings to Real devaluation.
• Tariff Sustainability: Assess the longevity of the 2015 tariff increases and the potential for future regulatory adjustments given the water crisis context.
• Volume Recovery: Monitor billed volume trends to determine if the 6.8% decline in 2015 was a temporary crisis effect or a structural shift in consumption.
• Debt Servicing: Review the debt maturity schedule (R$ 1.5 billion due in 2016) against current liquidity and cash flow generation capabilities.
• Government Relations: Track the status of the R$ 696.3 million state government reimbursement and any potential future claims or disputes with the São Paulo state government.