SBS

Business Context and Reporting Period

Company: Companhia de Saneamento Básico do Estado de São Paulo (SABESP)
Reporting Period: Year ended December 31, 2012
Business Overview: SABESP is Brazil's largest sanitation company, providing water supply and sewage services to approximately 27.7 million people across 363 municipalities in the State of São Paulo. The company operates under a mixed-capital structure with the São Paulo State Government as the majority shareholder. Key operational focus areas in 2012 included expanding water supply connections, reducing water losses, and advancing sewage treatment infrastructure.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Surge: Net income increased by 56.3% (R$1.9 billion) compared to 2011, driven by a 12.2% increase in Adjusted EBITDA and improved operational efficiency.
• Revenue Growth: Net revenue rose 8.2% year-over-year, attributed to a 2.7% increase in billed volumes and tariff adjustments of 6.83% (Sept 2011) and 5.15% (Sept 2012).
• Operational Expansion: The company recorded 212,800 new water connections (highest since 2000) and 240,700 new sewage connections (second best since 1998). Sewage treatment coverage reached 77%.
• Cost Management: While operating costs increased by 5.2%, the ratio of costs to net revenue improved from 75.4% in 2011 to 73.4% in 2012.
• Stock Performance: Market capitalization increased 67% to R$19.8 billion; ADRs gained 50.2% in the U.S. market.

Guidance, Outlook, and Risks

Outlook and Strategy

• Investment Plan: SABESP projects investments of R$9.9 billion for the 2013–2016 period to achieve universal access to sanitation services by 2018.
• Key Projects: The company published the invitation to bid for the São Lourenço Production System (PPP) to secure water supply for the metropolitan region. The Aquapolo Ambiental water reuse project is operational, increasing reuse production by 13 times.
• Loss Reduction: A R$710 million loan from JICA (Japan International Cooperation Agency) will fund the Corporate Program for Water Loss Reduction, aiming to lower the loss ratio from 25.7% to 19% by the end of the decade.

Risks and Contingencies

• Tariff Revision: A critical regulatory process with ARSESP (Regulatory Agency) is underway to revise tariffs. The outcome is essential for maintaining financial sustainability and funding future investments.
• Wholesale Debts: Significant outstanding receivables exist from municipalities serviced on a wholesale basis (e.g., Guarulhos, Mauá, Santo André, Diadema). Legal actions are ongoing to recover these amounts.
• Legal Provisions: The company holds provisions of R$1.19 billion (net of escrow) for probable losses related to customer, supplier, tax, labor, and environmental claims. Additional contingent liabilities with "possible" loss likelihood total R$2.8 billion.
• Foreign Exchange: Approximately 35% of total debt is denominated in foreign currency (USD and Yen), exposing the company to exchange rate fluctuations.

Investor Verification Checklist

• Tariff Approval: Monitor the final outcome of the ARSESP tariff revision process, as it directly impacts future revenue and investment capacity.
• Wholesale Collections: Track the resolution of outstanding debts from wholesale municipal customers, particularly Diadema and Mauá, which represent significant receivables.
• Water Loss Targets: Verify progress on the water loss reduction program funded by the JICA loan, as the 2012 target of 25.2% was missed (actual 25.7%).
• Debt Maturity: Review the debt maturity schedule, noting significant repayments due in 2013 and 2014, and the company's ability to refinance or service this debt.
• Legal Exposure: Assess the status of major environmental and concession-related lawsuits, including the R$11.7 billion public civil action filed by the Public Prosecution Office regarding the São Paulo service agreement.