SBS

Business Context and Reporting Period

Company: Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE: SBS; BM&FBovespa: SBSP3)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Fourth Quarter 2012 (4Q12) and Full Year 2012 (ended December 31, 2012)
Business Overview: One of the world's largest water and sewage service providers by customer count, operating primarily in the State of São Paulo, Brazil. Financial results are presented in Brazilian Reais (R$).

Key Financial Metrics (Full Year 2012)

Note: Operating cash flow decreased primarily due to higher provisions for contingencies and pension plan obligations, despite strong net income growth.

Material Changes vs. Prior Period

• Revenue Growth: Driven by a 2.7% increase in total billed volume (water + sewage) and tariff adjustments of 6.83% (Sept 2011) and 5.15% (Sept 2012). Construction revenue rose 10.8% due to higher investment execution.
• Profitability Expansion: Net income surged 56.3% to R$ 1.9 billion. This was significantly aided by a sharp reduction in monetary variation losses on liabilities (down 89.0% year-over-year) due to the depreciation of the Brazilian Real against the USD and Yen being less severe than in 2011.
• Cost Dynamics: Total costs and expenses grew 5.2%. Notable increases included credit write-offs (+59.8% to R$ 192.2 million) due to provisions for overdue debts with public and private entities. Conversely, payroll and benefits decreased 3.6% year-over-year due to the absence of a non-recurring actuarial liability complementation in 2012.
• Financial Expenses: Net financial expenses increased 26.7% to R$ 247.5 million, primarily due to lower financial revenues from reduced market interest rates and cash positions, partially offset by lower interest on domestic loans.

Outlook, Guidance, and Risks

Capital Expenditure Plan (2013-2016)

SABESP has outlined a 4-year Capex plan totaling R$ 9.9 billion to maintain universal access to sanitation. The plan allocates R$ 3.7 billion to water supply and R$ 4.2 billion to sewage collection.

Financing Activities

• Debentures: Issued R$ 500 million in Dec 2012 and R$ 1.0 billion in Jan 2013 to refinance commitments and early redeem the 11th issue.
• BNDES Loan: Secured a R$ 1.3 billion loan in Feb 2013 for the Third Phase of the Tietê Project (sewage treatment and collection).

Risks and Contingencies

• Credit Risk: Significant increase in provisions for overdue debts, particularly with municipal and state public entities.
• Operational: Water loss ratio remained stable at 25.7%; future reduction depends on the execution of the JICA-financed program starting in late 2013.
• Forward-Looking Statements: Management notes that future results depend on economic conditions, tariff adjustments, and the successful implementation of investment plans.

Investor Verification Checklist

• Credit Quality: Verify the recoverability of the R$ 192.2 million in credit write-offs, specifically the R$ 35.1 million provision for overdue debits with public state entities.
• Currency Exposure: Assess the impact of future exchange rate fluctuations on the R$ 3.2 billion in international market debt (BID, BIRD, Eurobonds, JICA).
• Regulatory Tariffs: Monitor upcoming tariff adjustment cycles to ensure they cover inflation and cost increases, given the reliance on tariff hikes for revenue growth.
• Capex Execution: Track the deployment of the R$ 9.9 billion investment plan against the schedule to ensure service expansion targets are met.
• Water Loss Reduction: Confirm the start and efficacy of the JICA-financed water loss reduction program scheduled for the second half of 2013.