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 2010 (ended September 30, 2010)
Business Overview: SABESP is 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$).
Key Financial Metrics
| Metric (R$ Million) | 3Q 2010 | 3Q 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Gross Operating Revenue | 1,976.5 | 1,749.1 | 5,766.6 | 5,272.1 |
| Net Operating Revenue | 1,835.6 | 1,629.0 | 5,357.4 | 4,906.0 |
| EBITDA | 799.6 | 617.1 | 2,439.0 | 1,907.4 |
| EBITDA Margin | 43.6% | 37.9% | 45.5% | 38.9% |
| Net Income | 449.8 | 195.7 | 1,074.1 | 916.6 |
| Earnings Per Share (R$) | 1.97 | 0.86 | 4.71 | 4.02 |
| Cash and Equivalents (End of Period) | 1,367.2 | 386.3 | 1,367.2 | 386.3 |
| Net Cash from Operating Activities | 495.8 | 555.7 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased 12.7% in 3Q10, driven by a 4.44% tariff adjustment and a 5.6% increase in billed volume.
- Profitability Surge: Net income more than doubled (up 129.8%) to R$ 449.8 million. EBIT grew 43.8% to R$ 655.1 million.
- Cost Efficiency: Total costs and expenses grew only 0.6% despite revenue growth, reducing the cost-to-revenue ratio from 72.0% to 64.3%. Payroll expenses decreased 1.8% due to actuarial adjustments and staff reductions under the Conduct Adjustment Term (TAC).
- Financial Expenses: Net financial expenses dropped 94.1% to R$ 15.6 million. This was primarily due to a R$ 240.8 million reversal of interest charges related to a lawsuit indemnity.
- Operational Metrics: Water losses decreased from 26.5% to 26.0%. Total billed volume increased 5.6% year-over-year.
Guidance, Outlook, and Risks
- Capital Projects & Financing: SABESP signed a US$ 600 million loan with the Inter-American Development Bank (IDB) for the Tietê Project Phase 3 and secured financing from the Japan International Cooperation Agency (JICA) for the ProBillings and Onda Limpa programs.
- Legal Contingencies: A significant R$ 80 million provision was recorded in 3Q10 related to an agreement with the Municipality of São Paulo, payable in November 2010. Credit write-offs increased 23.9% due to provisions for private clients and municipal entities.
- Forward-Looking Statements: Management notes that future results depend on economic conditions, tariff adjustments, and the successful implementation of capital expenditure plans. There is no guarantee that forward-looking estimates will be realized.
Investor Verification Checklist
- Sustainability of Net Income: Verify the extent to which the 129.8% net income increase is driven by the non-recurring R$ 240.8 million reversal of lawsuit interest charges versus organic operational growth.
- Legal Provisions: Confirm the status and payment schedule of the R$ 80 million provision for the São Paulo Municipality agreement and the R$ 759 million total provision for contingencies on the balance sheet.
- Debt Servicing: Review the impact of new international loans (IDB, JICA) on future interest coverage ratios and currency exposure given the depreciation of the USD in 3Q10.
- Operational Efficiency: Monitor the trend of water loss reduction (currently 26.0%) and its impact on future revenue per cubic meter produced.