Business Context and Reporting Period
Company: Companhia de Saneamento Básico do Estado de São Paulo (SABESP)
Filing Type: Form 6-K (Quarterly Information Form - ITR)
Reporting Period: Nine months ended September 30, 2017 (9M17) and Third Quarter 2017 (3Q17)
Business Overview: SABESP is a mixed-capital company controlled by the São Paulo State Government, providing water and sewage services in 367 municipalities within the state. Operations are primarily based on 30-year concession, program, and service contracts. The company is currently undergoing a corporate restructuring process authorized by Law 16,525 to create a parent holding company to facilitate capitalization and investment.
Key Financial Metrics
| Metric (R$ Million) | 3Q17 | 9M17 | 3Q16 | 9M16 |
|---|---|---|---|---|
| Net Operating Revenue | 3,536.5 | 10,589.9 | 3,745.8 | 10,212.2 |
| Net Income | 900.5 | 1,906.7 | 573.9 | 2,000.2 |
| Adjusted EBITDA | 1,456.3 | 3,875.2 | 1,337.5 | 3,362.5 |
| Adjusted EBITDA Margin | 41.2% | 36.6% | 35.7% | 32.9% |
| Earnings Per Share (Basic) | R$ 1.32 | R$ 2.79 | R$ 0.84 | R$ 2.93 |
| Operating Cash Flow (9M) | 2,339.2 | 2,028.8 | ||
| Total Assets | 38,373.4 | 36,745.0 | ||
| Total Liabilities | 21,110.2 | 21,325.8 | ||
| Shareholders' Equity | 17,263.2 | 15,419.2 | ||
| Net Debt | 9,786.8 | 10,077.9 | ||
| Leverage Ratio (Net Debt/Total Capital) | 36% | 40% |
Material Changes vs. Prior Period
- Revenue: Net operating revenue increased 3.7% year-to-date (9M17 vs 9M16) driven by a 4.8% increase in billed water and sewage volumes. However, construction revenue decreased 15.5% due to lower investments in served municipalities.
- Profitability: Net income for 3Q17 rose 56.9% compared to 3Q16, primarily due to a significant improvement in the financial result (R$ 222.9M gain vs R$ 176.8M loss in prior year) driven by exchange rate gains on foreign currency debt. Year-to-date net income decreased 4.7%.
- Costs: Total costs and expenses (including construction) decreased 10.5% in 3Q17. Excluding construction costs, operating expenses increased 5.9%, largely due to salary increases and pension plan adjustments. Electricity costs fell 9.4% due to lower tariffs in the free and grid markets.
- Financial Result: The financial result swung from a loss of R$ 176.8M in 3Q16 to a gain of R$ 222.9M in 3Q17. This was driven by a R$ 253.2M exchange gain on foreign currency loans (USD and JPY depreciation against the Real) and lower interest rates (CDI).
- Balance Sheet: Total assets grew to R$ 38.4 billion, with intangible assets (concession contracts) increasing to R$ 32.7 billion. Shareholders' equity increased to R$ 17.3 billion, reducing the leverage ratio to 36%.
Guidance, Outlook, Risks, and Unusual Items
- Corporate Restructuring: Law 16,525 was enacted to reorganize SABESP under a new parent company. The goal is to attract institutional investors, strengthen governance, and accelerate universalization of sanitation services. The State Government will retain control.
- Tariff Adjustment: Following the reporting period, the regulatory agency (ARSESP) approved a tariff adjustment index of 7.8888%, effective November 10, 2017. A new 0.5% Regulation, Control, and Monitoring Rate (TRCF) was also approved.
- Water Security Projects: Two major projects are nearing completion to increase water security in the São Paulo Metropolitan Region: the Jaguari-Atibainha interconnection (90.3% complete) and the São Lourenço Production System (81.1% complete).
- Legal and Contingencies:
- EMAE Dispute: An agreement was finalized with EMAE to settle disputes regarding water reservoir usage, involving annual payments and a one-time settlement. Litigation has ceased, though citizen suits challenging the agreement remain.
- Wholesale Receivables: Significant receivables from wholesale municipal customers (e.g., Guarulhos, Santo André) are subject to litigation regarding tariffs. A debt negotiation proposal with Guarulhos involves a 30% discount on a R$ 2.9 billion debt in exchange for a payment plan.
- Concession Expirations: 53 concession agreements had expired as of September 30, 2017, and are under negotiation. Management expects renewal but notes the risk of discontinuity.
- Financial Risks: The company has significant exposure to foreign currency (USD and JPY) and interest rate fluctuations. A 10% depreciation of the Real against the USD and JPY would negatively impact pre-tax results by approximately R$ 543.5 million.
Investor Verification Checklist
- Wholesale Receivables Quality: Verify the collectability of the R$ 2.55 billion in receivables from wholesale municipal customers, particularly those under litigation (Guarulhos, Santo André).
- Concession Renewals: Monitor the status of the 53 expired concession agreements and the 32 set to expire between 2017 and 2030 to assess revenue continuity risks.
- Foreign Exchange Sensitivity: Assess the impact of potential Real depreciation on the R$ 5.4 billion foreign currency-denominated debt, given the lack of hedging instruments.
- Corporate Restructuring Progress: Track the implementation of the new parent company structure and the admission of new institutional investors as outlined in Law 16,525.
- Capital Expenditure Funding: Confirm the company's ability to fund the R$ 2.3 billion capex plan (including São Lourenço PPP) through operating cash flow and new financing, especially given the high leverage ratio.