SBS

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: Quarter ended June 30, 2010 (2Q10) and Six Months ended June 30, 2010 (1S10)
Business Overview: SABESP is a state-owned mixed-capital company providing water supply and sewage collection/treatment services in 365 municipalities in the State of São Paulo, Brazil. The company operates under concession and program contracts, with the State of São Paulo Government as the controlling shareholder (50.3%).

Key Financial Metrics

Note: Figures are in thousands of Brazilian Reais (R$). EBITDA figures are derived from management commentary tables.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 9.0% in 2Q10 compared to 2Q09, driven by a 4.43% tariff adjustment (Sept 2009) and a 4.0% increase in billed volume.
• Profitability Decline: Despite revenue growth, Net Income decreased 28.2% in 2Q10 (R$333.6M) compared to 2Q09 (R$464.7M). This was primarily due to a significant increase in financial expenses and credit write-offs.
• Financial Expenses: Net financial expenses increased 33.4% in 2Q10. This was driven by new debenture issuances (11th and 12th) and higher interest rates, partially offset by a reduction in exchange losses compared to the prior year.
• Credit Write-offs: Allowance for doubtful accounts increased 55.5% to R$117.7M in 2Q10, largely due to past-due debts from the Municipality of São Paulo (PMSP).
• Cost Management: Total costs and expenses decreased 5.7% in the first half of 2010 compared to the same period in 2009, aided by a reduction in payroll charges due to layoffs and lower provisions for judicial contingencies.

Guidance, Outlook, Risks, and Unusual Items

• Accounting Standards Transition: Management noted that new Brazilian accounting standards (CPCs) effective in 2010 (e.g., CPC 37, 38, 39) were not yet applied to this quarterly report. An estimated impact of R$696M write-off of receivables related to Law 4819/58 and R$851M actuarial obligation adjustment could reduce shareholders' equity to approximately R$9.1B if applied immediately.
• State Government Receivables: A significant risk involves the "Controversial Amount" of R$496M related to pension benefits paid by SABESP on behalf of the State. Management has recognized a provision for loss on this amount, though legal actions to recover the debt continue.
• Concession Expirations: 78 concessions have expired and are under negotiation. Management expects renewal or extension to avoid service discontinuity. Assets related to these municipalities total R$2.1B.
• Debt Issuances: In June 2010, SABESP issued the 12th series of debentures (R$500M) to the FGTS Sanitation Portfolio to fund infrastructure projects. The 11th series (R$1.2B) was issued in March 2010.
• Operational Indicators: Water loss index improved to 25.8% in 2Q10 from 26.7% in 2Q09. Employee headcount decreased 4.7% to 15,095 due to a workforce reduction program.

Investor Verification Checklist

• State Receivables Recovery: Verify the status of negotiations regarding the R$496M "Controversial Amount" and the R$696M reservoir transfer agreement with the State of São Paulo.
• Accounting Restatement Impact: Monitor the final impact of the new CPC accounting standards on the 2010 year-end financial statements, specifically regarding the actuarial liabilities and receivable write-offs.
• Concession Renewals: Track the progress of negotiations for the 78 expired concessions to ensure no disruption in service or revenue streams.
• Debt Servicing: Review the repayment schedule for the new debenture issuances (11th and 12th series) and the impact of variable interest rates on future financial expenses.
• Credit Quality: Assess the collectability of receivables from the Municipality of São Paulo, which contributed significantly to the increase in credit write-offs.