SBS

Business Context and Reporting Period

Company: Companhia de Saneamento Básico do Estado de São Paulo (SABESP)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2009
Accounting Basis: International Financial Reporting Standards (IFRS) – First-time adoption.
Business Overview: SABESP is a mixed-capital company controlled by the State of São Paulo, providing water supply and sewage services to 366 municipalities in the state, including the city of São Paulo. The company operates under concession agreements, program contracts, and authorization deeds.

Key Financial Metrics (2009 vs. 2008)

Material Changes and Drivers

• Revenue Growth: Net revenue increased 9.9% to R$8,579.5 million, driven by a 2.1% increase in invoiced volume and tariff adjustments (5.1% in 2008, 4.4% in 2009).
• Profit Surge: Net income increased 74.7% to R$1,507.7 million. This was primarily due to a massive reduction in net financial expenses (from R$973.0 million expense in 2008 to R$10.0 million expense in 2009).
• Foreign Exchange Impact: The 25.5% appreciation of the Brazilian Real against the U.S. Dollar in 2009 generated a foreign exchange gain of R$528.4 million, contrasting with a R$438.9 million loss in 2008 due to devaluation.
• Cost Increases: Cost of sales and services rose 13.5% to R$5,087.3 million, largely due to increased payroll (salary adjustments and severance for workforce reduction), outsourced services, and construction costs.
• Operational Efficiency: Water loss percentage decreased from 27.9% in 2008 to 26.0% in 2009. The employee count was reduced by 9.3% to 15,103.

Guidance, Outlook, and Risks

• Capital Expenditure Program: The company has budgeted approximately R$8.6 billion in investments from 2009 through 2013 to expand infrastructure and reduce water losses. Planned expenditures for 2010-2013 total R$6.977 billion.
• Regulatory Environment: The company is subject to the Basic Sanitation Law (Law No. 11,445/2007). The regulatory agency (ARSESP) is developing a new tariff methodology expected in 2011. A new 30-year agreement for the city of São Paulo was signed in June 2010, requiring the company to invest 13.0% of gross revenues from that agreement into infrastructure.
• Key Risks:
  • State Receivables: Significant amounts are owed by the State of São Paulo for services and pension reimbursements. As of Dec 31, 2009, R$169.5 million was owed for services, and R$1,394.7 million for pensions (of which R$1,167.9 million was not recorded due to uncertainty of recovery).
  • Concession Expirations: 82 concession agreements had expired by end of 2009 and were under renegotiation. 80 more are scheduled to expire between 2010 and 2030.
  • Legal Proceedings: The company faces significant legal contingencies totaling approximately R$3,418.6 million, with provisions of R$1,468.8 million recorded. Major areas include tariff disputes, environmental claims, and labor proceedings.
  • Currency Risk: The company has R$1,745.6 million in foreign currency-denominated debt. While the Real appreciated in 2009, future devaluation could significantly increase financial expenses.

Investor Verification Checklist

• Recovery of State Receivables: Verify the status of negotiations regarding the R$1.17 billion in unrecorded pension reimbursements and the transfer of Alto Tietê reservoirs as partial payment.
• Concession Renewals: Monitor the progress of renegotiations for the 82 expired concessions and the 80 expiring between 2010-2030 to ensure continuity of operations and revenue streams.
• Tariff Adjustments: Track the implementation of the new ARSESP tariff methodology expected in 2011 and its impact on the company's ability to pass on costs.
• Legal Provisions Adequacy: Assess whether the R$1.47 billion provision for legal contingencies is sufficient given the volume of environmental and tariff-related lawsuits.
• Debt Profile: Review the maturity schedule of the R$6.56 billion total debt, particularly the foreign currency portion, in the context of exchange rate volatility.