SABESP 3Q12 Financial Summary
Business Context and Reporting Period
This Form 6-K reports the third-quarter 2012 (3Q12) results for Companhia de Saneamento Básico do Estado de São Paulo (SABESP), a major water and sewage provider in Brazil. The reporting period covers the three months ended September 30, 2012, and the nine months ended September 30, 2012 (9M12). All financial figures are presented in Brazilian Reais (R$) unless otherwise noted.
Key Financial Metrics
| Metric (R$ Million) | 3Q12 | 3Q11 | 9M12 | 9M11 |
|---|---|---|---|---|
| Net Operating Revenue | 2,711.0 | 2,591.3 | 7,763.7 | 7,225.7 |
| EBIT | 721.8 | 646.0 | 2,044.9 | 1,671.5 |
| EBITDA | 902.0 | 814.2 | 2,588.6 | 2,244.0 |
| EBITDA Margin | 33.3% | 31.4% | 33.3% | 31.1% |
| Net Income | 361.8 | 68.0 | 1,146.5 | 730.4 |
| Earnings Per Share (R$) | 1.59 | 0.30 | 5.03 | 3.21 |
| Cash and Equivalents (Sep 30) | 1,777.7 | 2,265.9 | - | - |
| Total Debt (Sep 30) | 8,586.1 | 8,675.7 | - | - |
Note: Total Debt calculated as sum of Current portion of long term loans (1,316.5) and Non-Current Loans and Financing (7,269.6) from Consolidated Balance Sheet.
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased 4.6% in 3Q12, driven by a 9.4% rise in gross operating revenue from water and sewage services. This was primarily due to a 6.83% tariff adjustment in 2011 and a 3.2% increase in billed volume.
- Profitability Surge: Net income jumped 432.1% to R$ 361.8 million in 3Q12. This significant increase was largely attributable to a reduction in exchange rate losses on liabilities. In 3Q11, exchange losses were R$ 466.0 million; in 3Q12, they dropped to R$ 23.1 million due to the stabilization of the Brazilian Real against the US Dollar and Yen.
- Cost Management: Total costs and expenses grew only 2.3% in 3Q12, improving the cost-to-revenue ratio from 75.0% to 73.4%. Payroll expenses remained flat, while credit write-offs increased significantly by 310.5% to R$ 70.6 million due to additional provisions for overdue debts with public and private entities.
- Construction Activity: Construction revenue decreased 8.9% in 3Q12, reflecting lower expenses with construction works during the quarter.
Outlook, Risks, and Management Commentary
- Debt Refinancing: The Board approved two new debenture issuances totaling up to R$ 1.5 billion (R$ 500 million in October and up to R$ 1 billion in November) to settle maturing obligations in 2013 and refinance existing debt.
- Tariff Cycle: On November 13, the regulator (ARSESP) published a technical note regarding the preliminary Maximum Initial Average Tariff (P0) and Asset Base for the Second Tariff Cycle (stage B3). Details were expected to be discussed in the conference call.
- Operational Efficiency: The water loss ratio remained steady at 26% in 3Q12. Management expects a more substantial decline in this indicator starting mid-2013 with the commencement of hiring financed by JICA.
- Risks: Forward-looking statements are subject to risks including general economic conditions, industry conditions, and operating factors. Significant exchange rate fluctuations previously impacted results, though volatility decreased in 3Q12.
Investor Verification Checklist
- Exchange Rate Impact: Verify the sustainability of the reduced exchange rate losses, as 3Q11 results were heavily penalized by currency depreciation which did not recur in 3Q12.
- Credit Quality: Investigate the 310.5% increase in credit write-offs and the adequacy of provisions for overdue debts with public entities.
- Debt Maturity: Review the debt maturity schedule, noting significant repayments due in 2013 (R$ 1.28 billion) and the success of the new debenture issuances.
- Tariff Approval: Monitor the final approval of the Second Tariff Cycle (stage B3) by ARSESP to confirm future revenue assumptions.
- Construction Revenue: Assess the trend in construction revenue, which declined in 3Q12, to understand its impact on future top-line growth.