Business Context and Reporting Period
Company: Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE: SBS; BM&FBovespa: SBSP3)
Reporting Period: Third Quarter 2011 (ended September 30, 2011) and Year-to-Date (9 months ended September 30, 2011).
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. Financials are presented in Brazilian Reais (R$).
Key Financial Metrics
| Metric (R$ Million) | 3Q11 | 3Q10 | 9M11 | 9M10 |
|---|---|---|---|---|
| Net Operating Revenue | 2,591.3 | 2,353.3 | 7,225.7 | 6,788.9 |
| EBITDA | 814.2 | 776.8 | 2,244.0 | 2,367.0 |
| EBITDA Margin | 31.4% | 33.0% | 31.1% | 34.9% |
| Net Income | 68.0 | 437.0 | 730.4 | 1,055.5 |
| Earnings Per Share (R$) | 0.30 | 1.92 | 3.21 | 4.63 |
| Cash and Equivalents (End of Period) | 2,265.9 | 1,367.2 | 2,265.9 | 1,367.2 |
Note: 9M10 Cash and Equivalents figures are derived from the Cash Flow statement ending balances.
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased 10.1% in 3Q11 (vs. 3Q10) and 6.4% for the 9-month period. Growth was driven by a 3.0% increase in billed water volume, a 4.2% increase in billed sewage volume, and a 4.05% tariff adjustment effective September 2010.
- Profitability Decline: Despite revenue growth, Net Income plummeted 84.4% in 3Q11 and 30.8% for the 9-month period. This was primarily due to a massive non-cash exchange loss on foreign liabilities.
- Cost Increases: Total costs and expenses rose 10.4% in 3Q11. Key drivers included an 11.2% increase in payroll (due to wage hikes and severance provisions) and an 8.8% rise in electric power costs.
- Exchange Rate Impact: A significant negative monetary variation of R$ 466.3 million occurred in 3Q11 due to an 18.8% appreciation of the U.S. Dollar against the Real, compared to a depreciation in the prior year. This resulted in a net exchange loss of R$ 465.9 million in the consolidated income statement.
- Financial Expenses: Net financial expenses increased 116.0% in 3Q11, largely due to interest on Eurobonds and lawsuit-related interest charges.
Outlook, Risks, and Management Commentary
- Operational Efficiency: The water loss ratio improved to 25.7% in 3Q11 from 26.0% in 3Q10, attributed to the resumption of service agreements and fraud prevention efforts.
- Debt Management: In October 2011, the company used cash to fully redeem the 9th issue debentures (R$ 220 million). New loan operations with BNDES (R$ 183.3 million) and CAIXA (R$ 215 million) were approved and expected to be signed by year-end to finance infrastructure projects.
- Forward-Looking Risks: Management highlights risks related to general economic conditions, industry factors, and the volatility of exchange rates affecting foreign-denominated debt. There is no guarantee that forward-looking statements regarding dividends or capital expenditure plans will materialize.
- Legal Contingencies: General expenses increased 16.9% due to provisions for legal contingencies. Interest rate charges on lawsuits also significantly impacted financial expenses.
Investor Verification Checklist
- Exchange Rate Sensitivity: Verify the impact of BRL/USD fluctuations on future earnings, given the R$ 466 million exchange loss in 3Q11.
- Debt Maturity Profile: Review the detailed debt schedule (totaling R$ 8.5 billion) to assess refinancing risks and liquidity requirements over the next 5-7 years.
- Regulatory Tariff Adjustments: Monitor upcoming tariff reviews by ARSESP, as revenue growth is heavily dependent on volume and regulated price adjustments.
- Legal Provisions: Assess the magnitude of provisions for legal contingencies and lawsuits, which drove increases in both general expenses and financial charges.
- Capital Expenditure Execution: Confirm the signing and disbursement of the new BNDES and CAIXA loans to ensure funding for planned water and sewage projects.