SBS

SEC Filing Summary: Companhia de Saneamento Básico do Estado de São Paulo (SABESP)

Business Context and Reporting Period

This Form 6-K filing reports the Quarterly Information Form (ITR) for the period ended March 31, 2015. SABESP is a mixed-capital company controlled by the São Paulo State Government, providing water and sewage services to 364 municipalities in the state. The reporting period was significantly impacted by a severe water crisis in the Cantareira System, the lowest rainfall in 84 years, necessitating demand management measures and contingency tariffs.

Key Financial Metrics (YTD Q1 2015 vs. Q1 2014)

Note: All figures in Brazilian Reais (R$). Net Income decreased primarily due to significant foreign exchange losses, despite a strong increase in Adjusted EBITDA.

Material Changes and Drivers

• Revenue Decline: Gross operating revenue from water and sewage dropped 18.0% (R$ 440 million) due to an 11.7% decrease in billed volumes caused by the water crisis. This was partially offset by a 6.5% tariff increase and a contingency tariff.
• Cost Reduction: Total costs and expenses decreased 47.9% year-over-year. This was largely driven by a one-time R$ 696.3 million reimbursement from the São Paulo State Government (GESP agreement) regarding pension benefits, which was recorded as a credit to administrative expenses.
• Financial Result Deterioration: The financial result swung from a gain of R$ 27.5 million in Q1 2014 to a loss of R$ 985.8 million in Q1 2015. This was caused by a R$ 884.5 million foreign exchange loss due to the appreciation of the US Dollar (+20.8%) and Yen (+20.3%) against the Brazilian Real.
• Construction Revenue: Increased 10.8% to R$ 588.4 million due to higher investment activity.

Outlook, Risks, and Contingencies

• Water Crisis Management: SABESP is utilizing technical reserves, reducing network pressure, and offering consumption bonuses to manage the water shortage. Management expects current cash and credit lines to be sufficient to meet short-term liabilities and maintain supply.
• Tariff Adjustments: Following the reporting period (May 2015), the regulator (ARSESP) authorized a cumulative tariff adjustment of 15.24% (7.79% annual adjustment + 6.92% extraordinary revision).
• Foreign Exchange Risk: The company has significant exposure to USD and JPY denominated debt (approx. R$ 5.4 billion). A 10% depreciation of the Real would negatively impact pre-tax results by approximately R$ 544 million.
• Covenant Compliance: The company is in technical default on a BNDES covenant regarding the adjusted net debt/adjusted EBITDA ratio (3.09 vs. 3.00 limit). This requires the maintenance of restricted funds of approx. R$ 250 million.
• Legal Contingencies: Significant provisions exist for customer, supplier, labor, and environmental claims. Total provisions for probable losses were R$ 1.1 billion (net of escrow).

Investor Verification Checklist

• FX Sensitivity: Verify the impact of continued Real depreciation on future financial results given the high level of foreign currency debt.
• Water Volume Recovery: Monitor rainfall data and reservoir levels in the Cantareira System to assess the sustainability of the revenue decline.
• Government Reimbursement: Confirm the timing and certainty of the remaining installments of the GESP agreement (R$ 609 million payable starting 2017).
• Covenant Status: Track the company's ability to maintain the restricted cash account required by the BNDES covenant default.
• Tariff Implementation: Verify the effective date and collection impact of the 15.24% tariff increase approved in May 2015.