Business Context and Reporting Period
Company: Companhia de Saneamento Básico do Estado de São Paulo (SABESP)
Filing Type: Form 6-K (Quarterly Information - ITR)
Reporting Period: Six months ended June 30, 2011 (Second Quarter 2011)
Business Overview: SABESP is a mixed-capital company controlled by the São Paulo State Government, providing water supply and sewage collection services in 364 municipalities within the state. The company operates under concession contracts, with 104 concessions expired as of June 30, 2011, currently under negotiation.
Key Financial Metrics (Consolidated)
All figures in Brazilian Reais (R$) unless otherwise noted. Amounts in thousands.
| Metric | 6 Months Ended Jun 30, 2011 | 6 Months Ended Jun 30, 2010 |
|---|---|---|
| Net Operating Revenue | 4,637,256 | 4,435,632 |
| Net Profit (Continuing Operations) | 662,441 | 618,494 |
| Earnings Per Share (Basic & Diluted) | R$ 2.91 | R$ 2.71 |
| EBITDA | 1,429,700 | 1,590,400 |
| EBITDA Margin | 30.8% | 35.9% |
| Net Cash from Operating Activities | 1,314,880 | 1,104,139 |
| Total Assets | 23,793,066 | 23,350,584 |
| Total Liabilities | 13,517,586 | 13,672,084 |
| Shareholders' Equity | 10,275,480 | 9,681,800 |
| Net Debt | 5,852,703 | 6,221,288 |
| Leverage Ratio (Net Debt/Total Capital) | 36.3% | 39.1% |
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased by 4.5% (R$198.8 million) compared to the first half of 2010. This was driven by a 4.05% tariff adjustment applied in September 2010 and a 3.0% increase in invoiced volume (water and sewage).
- Profitability: Net profit increased by 7.1% (R$43.9 million). However, EBITDA decreased by 10.1% (R$160.7 million) and EBITDA margin contracted from 35.9% to 30.8%.
- Cost Structure: Total costs and expenses increased by 15.0%. Notable increases included:
- Payroll: Increased 28.6% due to salary adjustments (5.05% in May 2010 and 8% in May 2011) and provisions for severance.
- Electricity: Increased 12.5% due to higher tariffs in free and captive markets.
- General Expenses: Increased 161.4% primarily due to a R$77.6 million provision required by the contract with the Municipality of São Paulo (7.5% of gross revenue) and increased judicial contingency provisions.
- Financial Results: Net financial expenses decreased significantly by 78.9% (from R$123.9 million to R$26.2 million) due to reduced interest on domestic loans and judicial proceedings, partially offset by foreign exchange losses on external debt.
- Balance Sheet: Total assets grew by 1.9%. Shareholders' equity increased by 6.1% to R$10.3 billion, driven by retained earnings. Net debt decreased by 6.0%.
Outlook, Risks, and Contingencies
- Concession Renewals: Management expects all 104 expired concessions to be renewed or extended, ensuring no discontinuity in service. Negotiations are ongoing with municipalities.
- Related Party Receivables: Significant receivables exist from the State of São Paulo (controlling shareholder) regarding water/sewage services and reimbursement of retirement/pension benefits (Plan G0). A "Controversial Amount" of approximately R$1.26 billion (unrecorded) relates to pension supplements paid by SABESP but disputed by the State. SABESP has filed judicial action for reimbursement.
- Legal and Environmental Provisions: Total provisions for contingencies (current and non-current) totaled R$1.52 billion. This includes lawsuits from customers, suppliers, labor disputes, and environmental fines. Management estimates potential losses from unrecorded lawsuits at approximately R$2.48 billion.
- Financial Covenants: The company met all financial covenants as of June 30, 2011, including liquidity ratios and EBITDA/Financial Expenses ratios required by debenture holders and lenders (BNDES, BID, Eurobonds).
- Foreign Exchange Risk: The company has significant debt denominated in USD and Yen (approx. R$2.43 billion). A 10% appreciation of the Real would impact net income by approximately R$160.6 million.
Investor Verification Checklist
- Concession Status: Verify the progress of negotiations for the 104 expired concessions and the 42 set to expire between 2011 and 2033.
- State Receivables: Monitor the resolution of the "Controversial Amount" regarding pension benefits (Plan G0) and the transfer of reservoirs (Alto Tiete system) from the State to SABESP.
- Cost Inflation: Assess the sustainability of rising operational costs, particularly electricity and payroll, against regulated tariff adjustments.
- Legal Exposure: Review updates on environmental lawsuits and customer tariff disputes, which represent significant contingent liabilities.
- Debt Maturity: Confirm adherence to debt covenants given the high leverage ratio and significant foreign currency exposure.