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: First Quarter 2011 (ended March 31, 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) | 1Q11 | 1Q10 | Change |
|---|---|---|---|
| Gross Operating Revenue | 1,989.8 | 1,844.5 | +7.9% |
| Net Operating Revenue | 2,294.6 | 2,163.1 | +6.1% |
| EBITDA | 654.3 | 837.8 | -21.9% |
| EBITDA Margin | 28.5% | 38.7% | -10.2 pts |
| EBIT | 426.2 | 694.8 | -38.7% |
| Net Income | 182.8 | 299.0 | -38.9% |
| Earnings Per Share (R$) | 0.80 | 1.31 | -38.9% |
| Cash and Equivalents (End of Period) | 2,399.8 | 852.5 | +181.5% |
| Operating Cash Flow | 513.3 | 574.7 | -10.7% |
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased 6.1% driven by a 4.05% tariff adjustment (effective Sept 2010), a 2.6% increase in billed water volume, and a 3.1% increase in billed sewage volume.
- Cost Inflation: Total costs and expenses rose 39.1% (excluding construction costs, operating costs rose 27.2%). This was primarily due to non-recurring accounting adjustments and increased operational inputs.
- Profitability Decline: EBITDA dropped 21.9% and EBIT fell 38.7%. The decline is largely attributed to two specific non-recurring items totaling R$ 230.9 million:
- R$ 157.5 million complementation of actuarial liability for the G0 Plan (retirement/pension benefits).
- R$ 73.4 million adjustment to the amortization term of intangible assets.
- Payroll Surge: Payroll and benefits expenses jumped 55.8% (R$ 199.2 million increase), driven by the R$ 157.5 million actuarial liability adjustment and a 5.05% wage increase.
- Financial Expenses: Net financial expenses decreased 46.0% to R$ 97.7 million, aided by a significant reduction in provisions for lawsuits (R$ 77.6 million decrease) despite higher interest costs on new domestic debt.
Outlook, Risks, and Management Commentary
- Adjusted Performance: Management notes that excluding the R$ 230.9 million in non-recurring items, EBITDA would have been R$ 811.8 million (35.4% margin) and Net Income would have been R$ 388.8 million.
- Operational Indicators: Water loss ratio remained stable at 26% over the last 12 months. Management expects this ratio to return to planned levels as network maintenance services resume normal operations following a transition period.
- Liquidity and Debt:
- Cash position strengthened significantly to R$ 2.4 billion.
- Completed the 14th issue of debentures (R$ 275.3 million) with BNDES/BNDESPAR.
- Final maturity of the FIDC (Receivables Securitization Fund) occurred in March 2011.
- Risks and Contingencies:
- Legal/Regulatory: Significant provisions were made regarding an agreement with the Municipal Government of São Paulo (R$ 76.1 million provision in general expenses).
- Operational: Increased treatment supply costs (26.3%) due to worsened water quality requiring chemical replacements (ferric sulphate, aluminum polyvinyl) and seasonal algae proliferation.
- Forward-Looking Statements: Future results depend on economic conditions, tariff adjustments, and the successful implementation of capital expenditure plans.
Investor Verification Checklist
- Non-Recurring Items: Verify the sustainability of earnings by excluding the R$ 157.5 million actuarial liability and R$ 73.4 million amortization adjustment.
- Cost Structure: Monitor the trajectory of payroll and treatment supply costs to determine if the 55.8% and 26.3% increases are one-time events or structural shifts.
- Water Loss Ratio: Track the water loss ratio in upcoming quarters to confirm management's assertion that it will return to planned levels after the maintenance transition.
- Debt Maturities: Review the debt schedule, specifically the June 2011 maturity of the 8th issue of debentures (R$ 465 million) and the funding secured via Eurobonds.
- Regulatory Agreements: Assess the long-term financial impact of the agreement with the Municipal Government of São Paulo regarding revenue sharing and provisions.