SBS

Business Context and Reporting Period

Company: Companhia de Saneamento Básico do Estado de São Paulo (SABESP)
Filing Type: Form 6-K (ITR - Quarterly Information Form)
Reporting Period: Third Quarter ended September 30, 2021 (3Q21) and Year-to-Date (9M21)
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 concession, program, and service contracts, with a significant portion of assets tied to intangible rights from these agreements.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net operating revenue increased 16.1% in 3Q21 compared to 3Q20. This was driven by a 7.0% tariff adjustment (May 2021), higher billed volumes (excluding exempt categories), and the commencement of retail operations in the municipality of Mauá.
• Profitability Surge: Net income rose 11.1% quarter-over-quarter and 1,126% year-over-year (9M). The significant 9M increase is largely due to a massive exchange loss in 3Q20 (R$ 2.4 billion) which did not recur in 2021.
• Financial Result: Net financial expenses decreased significantly in 9M21 (R$ 626.2 million) compared to 9M20 (R$ 2,986.4 million), primarily due to the absence of the large exchange losses recorded in the prior year.
• Cost Increases: Operating costs (excluding construction) rose 14.3% in 3Q21. Key drivers included higher electricity expenses (+20.6%), general expenses (+45.9% due to lawsuits and municipal fund transfers), and a 57.9% increase in the allowance for doubtful accounts due to higher delinquency.
• Liquidity: Cash and cash equivalents increased significantly to R$ 2.4 billion from R$ 396 million at year-end 2020, supported by strong operating cash flows and new debt issuances.

Guidance, Outlook, Risks, and Unusual Items

• Debt Management: The Board approved a new debenture issue (29th Issue) of up to R$ 1.25 billion to refinance maturing debt and fund infrastructure investments. The company met all financial covenants as of September 30, 2021.
• Exchange Rate Risk: The company has significant exposure to foreign currency debt (USD and JPY). In 3Q21, exchange losses on borrowings increased by R$ 141.5 million due to the appreciation of the USD and Yen against the Real. Sensitivity analysis indicates a 10% depreciation of the Real could impact pre-tax profit by approximately R$ 326 million.
• Regulatory Environment: The "New Legal Sanitation Framework" (Law 14,026/2020) imposes universalization goals (99% water, 90% sewage by 2033). Management believes current contracts and access to capital markets position the company to meet these targets.
• Legal Contingencies: The company faces significant contingent liabilities, totaling R$ 8.16 billion, primarily related to environmental claims (R$ 3.06 billion), tax claims (R$ 1.49 billion), and supplier claims (R$ 1.54 billion).
• COVID-19 Impact: While the pandemic impact on revenue has diminished, the allowance for doubtful accounts remains elevated due to lingering delinquency. The company also benefited from the end of tariff exemptions for "Residential Social" and "Residential Favela" categories that were in place in 3Q20.

Investor Verification Checklist

• Debt Maturity Profile: Verify the repayment schedule for the R$ 17.9 billion total debt, noting that R$ 1.9 billion is due in the remainder of 2021 and 2022.
• Exchange Rate Sensitivity: Monitor the USD/BRL and JPY/BRL rates, as a significant portion of debt is foreign-denominated and unhedged.
• Delinquency Trends: Track the "Allowance for Doubtful Accounts" and collection rates, as this metric has risen sharply (+57.9% in 3Q21) and impacts net income.
• Regulatory Compliance: Confirm progress on the "New Legal Sanitation Framework" universalization targets and any potential regulatory adjustments to tariffs.
• CAPEX Execution: Review the execution of the R$ 3.6 billion invested in 9M21 against the R$ 5.5 billion in committed investment obligations.