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, 2011
Accounting Standards: International Financial Reporting Standards (IFRS)
Business Overview: SABESP is a mixed-capital company controlled by the State of São Paulo, providing water and sewage services to 363 municipalities in the state, including the city of São Paulo. It operates as a public utility with a mandate to universalize sanitation services.
Key Financial Metrics (Year Ended Dec 31, 2011)
| Metric | Value (R$ Millions) | Notes |
|---|---|---|
| Net Revenue | 9,941.6 | Up 7.7% from 2010 |
| Cost of Sales and Services | (6,031.1) | Up 16.1% from 2010 |
| Gross Profit | 3,910.5 | Down 3.1% from 2010 |
| Operating Profit | 2,354.3 | Down 11.9% from 2010 |
| Net Income | 1,223.4 | Down 25.0% from 2010 |
| Earnings Per Share (Basic/Diluted) | R$ 5.37 | Down from R$ 7.16 in 2010 |
| Cash from Operating Activities | 2,717.1 | Up 30.4% from 2010 |
| Capital Expenditures | 2,211.1 | Recorded in 2011 |
| Total Assets | 25,215.0 | As of Dec 31, 2011 |
| Total Liabilities | 14,669.1 | As of Dec 31, 2011 |
| Shareholders' Equity | 10,545.9 | As of Dec 31, 2011 |
| Total Debt (Short + Long Term) | 8,596.3 | Includes R$ 3,053.4M foreign currency debt |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased by R$710.6 million (7.7%) driven by a 6.83% tariff increase in September 2011 and a 3.1% increase in sales volume.
- Profit Decline: Net income fell significantly by R$407.1 million (25.0%) despite revenue growth. This was primarily due to a 67.0% increase in net finance costs and higher operating expenses.
- Foreign Exchange Impact: The 12.6% depreciation of the Brazilian real against the U.S. dollar resulted in a foreign exchange loss of R$382.3 million, significantly impacting financial results.
- Cost Increases: Cost of sales rose 16.1% due to increased amortization of intangible assets (related to new agreements with São Paulo municipality and 99 expired concessions), higher wages, and a mandatory 7.5% contribution to the São Paulo Municipal Sanitation Fund.
- Water Losses: Water loss percentage improved slightly to 25.6% in 2011 from 26.0% in 2010.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Expenditure Program: SABESP has budgeted approximately R$7.9 billion in investments from 2012 through 2015 to expand infrastructure, reduce water losses, and increase sewage coverage.
- Tariff Regulation: The regulatory agency (ARSESP) is developing a new tariff methodology expected to be implemented in 2012. Management anticipates a final public hearing by November 2012.
- Strategic Goals: The company aims to increase sewage coverage to 95% by 2019 and reduce water losses to 13.0% by 2019.
Key Risks and Contingencies
- State Receivables: Significant uncertainty exists regarding the recovery of R$1,290.7 million in disputed pension reimbursements owed by the State of São Paulo. Additionally, R$145.4 million is owed for water/sewage services.
- Concession Renewals: As of Dec 31, 2011, 99 concessions had expired (representing 23.8% of revenue) and were being renegotiated. Failure to formalize these agreements poses a risk to future operations.
- Legal Proceedings: Total estimated contingencies from legal proceedings were R$24,152.0 million. The company has provisioned R$1,571.8 million for probable losses, primarily related to environmental matters, tariff disputes, and labor claims.
- Climate and Environmental: The company faces risks from droughts, intense rainfall, and environmental lawsuits regarding sewage discharge and sludge disposal.
- Exchange Rate Volatility: With R$3.05 billion in foreign currency debt, further depreciation of the real could materially increase financial expenses.
Investor Verification Checklist
- State Debt Recovery: Verify the status of negotiations regarding the R$1.29 billion disputed pension reimbursement and the R$145 million service receivable from the State of São Paulo.
- Concession Formalization: Monitor the progress of formalizing agreements with the 99 municipalities where concessions expired in 2011.
- Tariff Methodology: Track the ARSESP's finalization of the new tariff structure and its potential impact on future revenue and margins.
- Foreign Exchange Exposure: Assess the company's hedging strategies (or lack thereof) given the high exposure to U.S. dollar-denominated debt.
- Environmental Litigation: Review updates on major environmental lawsuits, particularly those involving daily fines for untreated sewage discharge.
- Capital Expenditure Execution: Confirm the ability to fund the R$7.9 billion investment plan (2012-2015) given current debt levels and cash flow.