SEC Filing Summary: Companhia de Saneamento Básico do Estado de São Paulo (SABESP)
Business Context and Reporting Period
Company: Companhia de Saneamento Básico do Estado de São Paulo (SABESP)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Quarter ended June 30, 2009 (2Q09) and Six Months ended June 30, 2009 (1H09)
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 agreements, many of which are nearing expiration and are currently under negotiation.
Key Financial Metrics
All figures in Brazilian Reais (R$) unless otherwise noted. Consolidated figures used where available.
| Metric | 2Q09 (Quarter) | 1H09 (YTD) | 2Q08 (Quarter) | 1H08 (YTD) |
|---|---|---|---|---|
| Net Revenue | R$ 1,623,623 | R$ 3,276,989 | R$ 1,513,352 | R$ 3,053,421 |
| Net Income | R$ 464,665 | R$ 720,879 | R$ 360,019 | R$ 663,744 |
| Earnings Per Share (R$) | R$ 2.04 | R$ 3.16 | R$ 1.58 | R$ 2.91 |
| EBITDA | R$ 666,800 | R$ 1,290,500 | R$ 636,000 | R$ 1,410,400 |
| EBITDA Margin | 41.1% | 39.4% | 42.0% | 46.2% |
| Cash & Equivalents | R$ 688,904 | R$ 688,904 | R$ 352,781 | R$ 352,781 |
| Total Debt (Loans & Debentures) | R$ 6,465,227 | R$ 6,465,227 | R$ 6,674,505 | R$ 6,674,505 |
| Shareholders' Equity | R$ 11,074,328 | R$ 11,074,328 | R$ 10,748,643 | R$ 10,748,643 |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 7.3% in 2Q09 compared to 2Q08, driven by a 5.10% tariff adjustment in September 2008 and a 3% increase in billed volume (2.7% water, 3.4% sewage).
- Profitability: Net income rose 29.1% quarter-over-quarter to R$ 464.7 million. However, EBITDA decreased 8.5% year-to-date compared to 1H08, primarily due to higher operating costs.
- Cost Increases: Total costs and expenses increased 8.3% in 2Q09. Notable drivers included an 81.2% increase in "Outside services" (R$ 123.8 million) due to commitments under the São Paulo City Hall agreement and maintenance contracts, and a 5.0% increase in payroll.
- Financial Results: Net financial expenses increased 27.0% to R$ 110.0 million. This was largely offset by a significant exchange gain of R$ 237.8 million due to the devaluation of the US dollar (15.7% in 2Q09).
- Credit Quality: Credit write-offs (allowance for doubtful accounts) decreased 43.6% to R$ 75.7 million, attributed to improved collection actions and reduced need for provisioning on past-due municipal debts compared to 2Q08.
Guidance, Outlook, Risks, and Contingencies
- Concession Renewals: As of June 30, 2009, 74 concession contracts had expired and were under negotiation. Management expects all to be renewed or extended to ensure service continuity. 99 additional concessions are scheduled to expire between 2009 and 2030.
- Related Party Disputes (Gesp Agreement): A significant portion of receivables relates to the State Government (Gesp). A Third Amendment to the Gesp Agreement (Nov 2008) settled an "uncontroversial" amount of R$ 915.3 million (partially via reservoir transfer). A "controversial" amount of approximately R$ 323.9 million remains disputed. Management has not recorded a provision for this amount, citing a high expectation of recovery.
- Auditor Exception: PricewaterhouseCoopers issued a report with an exception regarding the controversial receivable from the State Government. The auditors noted that non-current assets and shareholders' equity are overstated by R$ 323.9 million and net income is overstated by R$ 21.1 million because a provision for losses was not recorded for the disputed amount.
- Legal Contingencies: The company maintains provisions of R$ 1.13 billion for various contingencies (customers, suppliers, tax, labor, environmental). Additionally, lawsuits with a "possible" likelihood of loss total approximately R$ 1.86 billion.
- Debt Structure: The company has significant exposure to foreign currency (USD and Yen) totaling R$ 1.97 billion. It actively manages debt to minimize costs and volatility but does not use derivative hedging instruments.
Key Facts for Investor Verification
- Auditor Qualification: Verify the status of the R$ 323.9 million disputed receivable from the State of São Paulo, which the auditors flagged as a potential overstatement of assets and income.
- Concession Expirations: Monitor the progress of negotiations for the 74 expired concessions and the 99 expiring between 2009-2030, as failure to renew could impact future revenue streams.
- Cost Volatility: Review the sustainability of the 81.2% increase in "Outside services" costs, which included one-time provisions for the São Paulo City Hall agreement and specific maintenance projects.
- Foreign Exchange Exposure: Assess the impact of currency fluctuations on the R$ 1.97 billion foreign-denominated debt, given the company's reliance on exchange gains to offset financial expenses.
- Dividend Policy: Note that shareholders are entitled to a minimum mandatory dividend of 25% of adjusted net income. Interest on shareholders' equity of R$ 138.98 million was approved for payment in 2010.