SBS

Business Context and Reporting Period

Company: Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE: SBS; BM&FBovespa: SBSP3)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Fourth Quarter 2011 (4Q11) and Full Year 2011 (ended December 31, 2011)
Business Overview: One of the world's largest water and sewage service providers by customer count, operating primarily in the State of São Paulo, Brazil. Financials are presented in Brazilian Reais (R$).

Key Financial Metrics (Full Year 2011)

Material Changes vs. Prior Period

• Revenue Growth: Net operating revenue grew 7.6% to R$ 9.9 billion, driven by an 8.5% increase in gross operating revenue from water and sewage services. This was supported by a 2.6% increase in billed water volume, a 3.6% increase in billed sewage volume, and tariff adjustments of 4.05% (Sept 2010) and 6.83% (Sept 2011).
• Profitability Decline: Net income dropped 25.0% to R$ 1.2 billion. The primary driver was a R$ 448.5 million negative currency exchange variation on international loans due to a 12.6% appreciation of the U.S. dollar in 2011 (compared to a 4.3% depreciation in 2010).
• Cost Increases: Total costs and expenses rose 14.0% to R$ 7.5 billion. Notable increases included:
  • Payroll and Benefits: Up 28.8% (R$ 403.1 million), largely due to non-recurring actuarial liabilities (R$ 157.5 million) related to the G0 Plan and wage increases.
  • Depreciation and Amortization: Up 39.2% (R$ 216.5 million) due to asset life adjustments and transfers of works in progress to operation.
  • General Expenses: Up 47.7% due to provisions for legal contingencies and agreements with the municipal government of São Paulo.
• EBITDA Stability: Despite higher costs, EBITDA remained stable at R$ 3.2 billion. Excluding construction activities and non-recurring actuarial liabilities, the adjusted EBITDA margin was 43.1% in 2011.

Guidance, Outlook, and Risks

• Water Loss Reduction: The water loss indicator improved to 25.6% in December 2011. Management aims to reduce the loss ratio to 13% by 2019, contingent on the implementation of the Corporate Program for Water Loss Reduction (2012-2019).
• Capital Expenditures & Financing:
  • In February 2012, SABESP issued R$ 771.1 million in debentures to settle 2012 financial commitments.
  • Secured a loan of approximately R$ 710 million from the Japan International Cooperation Agency (JICA) to support the second stage of the water loss reduction program.
• Risks and Contingencies:
  • Currency Risk: Significant exposure to exchange rate fluctuations on international debt, which materially impacted 2011 net income.
  • Legal and Regulatory: Increased provisions for legal contingencies and ongoing agreements with municipal governments affecting general expenses.
  • Forward-Looking Statements: Management notes that future results depend on economic conditions, industry trends, and the successful execution of capital plans, with no guarantee that expectations will be met.

Investor Verification Checklist

• Currency Impact: Verify the sensitivity of future earnings to USD/BRL exchange rate fluctuations given the R$ 448.5 million loss in 2011.
• Actuarial Liabilities: Confirm the recurring nature of the R$ 157.5 million G0 Plan liability; management states it is non-recurring for future quarters.
• Debt Maturity Profile: Review the debt schedule, noting R$ 1.6 billion in current portion of long-term loans due in 2012.
• Water Loss Targets: Monitor progress toward the 13% water loss target by 2019, as this is critical for operational efficiency and margin expansion.
• Construction Margins: Assess the impact of the construction margin index change (from 2.6% in 2010 to 2.3% in 2011) on future construction revenue profitability.