SBS

Business Context and Reporting Period

Company: Companhia de Saneamento Básico do Estado de São Paulo (SABESP)
Filing Type: Form 6-K (Reporting Brazilian Quarterly Information Form - ITR)
Reporting Period: Second Quarter ended June 30, 2023 (Q2 2023) and Year-to-Date (YTD) June 30, 2023.
Business Overview: SABESP is a mixed-capital company controlled by the State of São Paulo, providing water and sewage services to 375 municipalities. The company operates under long-term concession and service contracts.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net operating revenue increased 16.9% QoQ and 16.9% YoY. Sanitation service revenue rose 16.6% driven by tariff adjustments (11.9% impact) and a 2.6% increase in billed volume.
• Profitability: Net income surged 76.1% in Q2 2023 compared to Q2 2022. Excluding the Separation Incentive Program (PDI), net income increased 201%.
• Cost Structure: Costs and expenses increased 21.0% in Q2 2023. This was primarily due to a R$ 529.6 million provision for the PDI. Excluding PDI, costs rose only 4.6%.
• Financial Result: The financial result improved significantly from a loss of R$ 324.4 million in Q2 2022 to a loss of R$ 14.0 million in Q2 2023. This was driven by a R$ 328.5 million gain from exchange variations due to the depreciation of the USD and Yen against the Real.
• Debt Profile: Total debt decreased slightly to R$ 18.7 billion. Foreign currency debt represents 13.2% of total debt.

Guidance, Outlook, Risks, and Unusual Items

• Separation Incentive Program (PDI): In June 2023, SABESP implemented a workforce reduction program. 1,862 employees registered, resulting in a R$ 529.6 million provision. Terminations are expected between July 2023 and June 2024.
• Privatization Model: On July 31, 2023, the State Privatization Program discussed guidelines for SABESP's privatization. The model includes a public offering of shares, with proceeds intended to accelerate investments and reduce tariffs. Further studies are ongoing.
• New Concession: SABESP won a 30-year concession for water and sewage services in Olímpia, SP, marking the first time a state-owned company won such a bid in Brazil. The contract value is estimated at R$ 1.18 billion over the term.
• Investments: Investments totaled R$ 1,294.3 million in Q2 2023. The company executed a R$ 1 billion sustainability-linked loan with the IFC and a R$ 470 million tranche with IDB Invest for infrastructure projects.
• Risks:
  • Exchange Rate Risk: Significant exposure to USD and Yen denominated debt. A 10% depreciation of the Real would impact pre-tax profit by approximately R$ 251 million.
  • Interest Rate Risk: Exposure to variable rates (CDI, SOFR). A 1% increase in rates would impact pre-tax profit by R$ 169.7 million.
  • Legal Provisions: Significant contingent liabilities exist regarding environmental, labor, and tax claims, totaling R$ 11.3 billion net of deposits.

Investor Verification Checklist

• PDI Impact: Verify the actual cash outflow and timeline for the Separation Incentive Program (PDI) provisions over the next 12 months.
• Privatization Timeline: Monitor the progress of the privatization studies and the specific structure of the public offering announced in July 2023.
• Debt Covenants: Confirm continued compliance with restrictive covenants, specifically Net Debt/Adjusted EBITDA (max 3.50) and Adjusted EBITDA/Financial Expenses (min 2.35).
• Exchange Rate Sensitivity: Assess the impact of potential Real depreciation on the R$ 2.5 billion foreign currency debt portfolio.
• Olímpia Concession: Track the signing of the Olímpia concession agreement and the creation of the required Special Purpose Entity (SPE).