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: Second Quarter ended June 30, 2013 (Q2 2013) and Year-to-Date (YTD) ended June 30, 2013.
Business Overview: SABESP is a mixed-capital company controlled by the São Paulo State Government, providing water supply and sewage collection services in 363 municipalities within the state. Operations are primarily based on 30-year concession agreements.
Key Financial Metrics (YTD June 30, 2013)
| Metric (R$ Thousand) | YTD 2013 | YTD 2012 | Change |
|---|---|---|---|
| Net Revenue | 5,441,322 | 5,052,731 | +7.7% |
| Net Income | 857,871 | 784,724 | +9.3% |
| Earnings Per Share (Basic) | R$ 1.26 | R$ 1.15 | +9.3% |
| Adjusted EBITDA | 1,832,900 | 1,686,600 | +8.7% |
| Adjusted EBITDA Margin | 33.7% | 33.4% | +0.3 pp |
| Operating Cash Flow | 1,404,860 | 1,289,330 | +9.0% |
| Total Assets | 26,983,475 | 26,476,097 | +1.9% |
| Total Liabilities | 14,949,043 | 15,219,335 | -1.8% |
| Shareholders' Equity | 12,034,432 | 11,256,762 | +6.9% |
| Net Debt | 7,357,391 | 6,959,281 | +5.7% |
| Leverage Ratio (Net Debt/Total Capital) | 38% | 38% | 0% |
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased 13.0% in Q2 2013 compared to Q2 2012, driven by a 5.15% tariff adjustment (Sept 2012), a 2.35% tariff repositioning index (April 2013), and a 3.5% increase in billed volume.
- Profitability: Net income rose 23.5% in Q2 2013 (R$361.7 million) compared to Q2 2012 (R$292.8 million). EBIT grew 15.0% to R$714.7 million.
- Cost Structure: Total costs and expenses grew 12.4% in Q2 2013. Payroll and benefits increased 10.9% due to wage adjustments and a new career plan. Conversely, electric power costs decreased 9.9% due to lower distribution system tariffs.
- Financial Result: Net financial expenses improved significantly, decreasing 37.4% in Q2 2013. This was primarily due to lower interest rates on domestic loans, reduced foreign exchange losses (Yen appreciation was lower than in 2012), and the issuance of the 17th debenture issue.
- Accounting Changes: The company adopted CPC 19(R2) and CPC 33(R1) effective Jan 1, 2013. This resulted in the restatement of prior period figures, specifically changing the consolidation method for joint ventures to the equity method and recognizing actuarial gains/losses in other comprehensive income rather than profit/loss.
Guidance, Outlook, Risks, and Contingencies
- Tariff Revision Status: The regulatory agency (ARSESP) suspended stages C2-C5 of the tariff revision process in August 2013 due to "methodological and quantitative inconsistencies" in SABESP's asset base report. SABESP is awaiting details to assess potential impacts.
- Concession Renewals: As of June 30, 2013, 63 concessions had expired and were under negotiation. Management believes all will be renewed, though 38 concessions are scheduled to expire between 2013 and 2034.
- Legal and Environmental Contingencies:
- Provisions: Total provisions for probable losses were R$1.52 billion (net of escrow deposits: R$1.21 billion). Environmental claims provisions increased by R$48.3 million.
- EMAE Dispute: A dispute regarding the use of Guarapiranga and Billings reservoirs is pending arbitration. The potential loss amount is currently indeterminate.
- Customer Claims: Approximately 1,520 lawsuits filed by commercial customers regarding tariff categories and sewage losses.
- Financial Risks:
- Foreign Exchange: Significant exposure to USD and JPY denominated debt (Total exposure R$3.49 billion). A 10% depreciation of the Real would reduce pre-tax results by approximately R$349 million.
- Interest Rate: Exposure to variable interest rates (TR, CDI, TJLP, IPCA, LIBOR). A 100 basis point increase in domestic rates would reduce pre-tax profit by R$65.8 million.
- Dividends: Interest on equity totaling R$498.7 million was approved and paid in June 2013.
Key Facts for Investor Verification
- Asset Base Discrepancy: Verify the resolution of the ARSESP suspension regarding the asset base report, as this directly impacts future tariff revisions and revenue projections.
- Concession Renewal Timeline: Monitor the status of the 63 expired concessions and the 38 expiring between 2013-2034 to assess revenue continuity risks.
- Foreign Exchange Sensitivity: Given the high level of foreign currency debt (USD and JPY), monitor the BRL/USD and BRL/JPY exchange rates for potential volatility in financial results.
- Environmental Provisions: Track the evolution of environmental claims provisions, which saw a significant increase (R$48.3 million) in the period, indicating potential future cash outflows.
- Debt Covenants: Confirm continued compliance with financial covenants, specifically the Adjusted Total Debt/EBITDA ratio (must be ≤ 3.65) and EBITDA/Finance Expenses Paid ratio (must be ≥ 1.5) for the 17th Debenture issue.