SABESP 3Q15 Financial Summary
Business Context and Reporting Period
Company: Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Reporting Period: Third Quarter ended September 30, 2015 (3Q15) and nine months ended September 30, 2015 (9M15).
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) | 3Q15 | 3Q14 | 9M15 | 9M14 |
|---|---|---|---|---|
| Net Operating Revenue | 3,197.0 | 2,823.5 | 8,488.5 | 8,369.6 |
| Net Income (Loss) | (580.1) | 91.5 | 75.3 | 871.5 |
| Adjusted EBITDA | 903.2 | 742.4 | 3,017.1 | 2,419.9 |
| Adjusted EBITDA Margin | 28.3% | 26.3% | 35.5% | 28.9% |
| Operating Cash Flow (9M) | 1,853.0 | 2,006.9 | - | - |
| Cash & Equivalents (End of Period) | 889.9 | 1,723.0 | - | - |
| Debt Service Coverage (Adjusted Net Debt/EBITDA) | 3.54x | - | - | - |
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased 13.2% in 3Q15, driven by a 21.7% tariff increase (ordinary and extraordinary) and a contingency tariff. This offset a 5.8% decline in billed volumes due to the severe water crisis.
- Profitability Impact: Despite revenue growth, the company reported a net loss of R$ 580.1 million in 3Q15 compared to a profit of R$ 91.5 million in 3Q14. The primary driver was a massive increase in financial expenses.
- Financial Result: Net financial expenses surged to R$ 1,539.4 million (from R$ 337.8 million in 3Q14). This was caused by a R$ 1,433.8 million loss on monetary and exchange rate variations due to the depreciation of the Brazilian Real against the US Dollar and Yen.
- Cost Structure: Total costs and expenses rose 10.4% year-over-year. Notable increases included electric power costs (+40.8%) due to higher regulated market tariffs and construction costs (+27.0%).
- Operational Volume: Water production volume dropped 11.1% in the quarter and 15.9% year-to-date due to the water crisis. However, water loss per connection (IPDt) improved significantly, dropping 23.2% to 261 liters/connection/day.
Guidance, Outlook, and Risks
- Debt Covenant Compliance: The company met its "Adjusted net debt / EBITDA" covenant requirement of 3.65x, reporting a ratio of 3.54x for the quarter. The Inter-American Development Bank (IDB) agreed not to accelerate debt repayment for non-compliance in a single quarter.
- Capital Expenditure: SABESP invested R$ 1.0 billion in 3Q15, totaling R$ 2.6 billion for the first nine months of 2015.
- Key Risks:
- Water Crisis: Continued reduction in water production and billed volumes.
- Currency Volatility: Significant exposure to exchange rate fluctuations on international debt (USD and JPY), which heavily impacted the bottom line.
- Interest Rates: Rising domestic interest rates (CDI) increased financial expenses on local debt.
- Management Commentary: Management highlighted that excluding construction revenues and costs, the Adjusted EBITDA margin was 40.4% in 3Q15, indicating strong core operational performance despite the macroeconomic headwinds.
Investor Verification Checklist
- Currency Exposure: Verify the extent of unhedged foreign currency debt and the sensitivity of future earnings to Real depreciation.
- Water Crisis Duration: Assess the projected timeline for water volume recovery and the long-term impact on billed volumes and revenue.
- Debt Maturity Profile: Review the detailed debt schedule (R$ 12.6 billion total) to understand near-term refinancing needs, particularly given the high interest rate environment.
- Regulatory Tariff Adjustments: Confirm the sustainability of the current tariff levels and the potential for future adjustments to offset cost increases (e.g., electricity).
- Construction Revenue Quality: Analyze the composition of construction revenue (26.9% growth) to ensure it reflects billable, high-margin projects rather than low-margin government contracts.