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: Second Quarter 2011 (ended June 30, 2011) and Six Months ended June 30, 2011.
Business Overview: SABESP is one of the world's largest water and sewage service providers by customer count, operating primarily in the State of São Paulo, Brazil. Financial results are presented in Brazilian Reais (R$).
Key Financial Metrics
| Metric (R$ Million) | 2Q11 | 2Q10 | 6M11 | 6M10 |
|---|---|---|---|---|
| Net Operating Revenue | 2,339.8 | 2,272.5 | 4,634.4 | 4,435.6 |
| EBITDA | 775.4 | 752.5 | 1,429.7 | 1,590.4 |
| EBITDA Margin | 33.1% | 33.1% | 30.8% | 35.9% |
| Net Income | 479.6 | 319.5 | 662.4 | 618.5 |
| Earnings Per Share (R$) | 2.11 | 1.40 | 2.91 | 2.71 |
| Cash and Equivalents (End of Period) | 2,172.9 | 1,988.0 | 2,172.9 | 1,046.8 |
| Total Debt (Loans & Financing) | 8,025.6 | N/A | 8,025.6 | N/A |
Note: Total Debt figure represents the sum of local and international market loans and financing as of 2Q11.
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased 3.0% in 2Q11 compared to 2Q10, driven by a 4.05% tariff adjustment (effective Sept 2010) and a 2.7% increase in billed water volume.
- Profitability: Net income surged 50.1% to R$ 479.6 million in 2Q11. This was primarily due to a 78.9% reduction in net financial expenses and a significant exchange gain.
- EBITDA Decline (6M): While 2Q11 EBITDA grew 3.0%, the six-month EBITDA decreased 10.1% to R$ 1.43 billion, largely due to higher costs and expenses (up 23.9% for 6M) and a drop in construction revenue.
- Cost Pressures: Costs and expenses rose 4.2% in 2Q11. Key drivers included a 16.6% increase in electric power costs, a 15.8% rise in treatment supplies, and a 336.1% spike in general expenses due to specific provisions.
- Financial Expenses: Net financial expenses dropped significantly from R$ 123.9 million in 2Q10 to R$ 26.2 million in 2Q11, aided by lower interest on domestic loans and reduced lawsuit-related interest charges.
Outlook, Risks, and Unusual Items
- Unusual Items:
- General Expenses: A R$ 77.6 million provision was recorded related to an agreement with the Municipal Government of São Paulo (7.5% of gross revenue). Additionally, R$ 46.9 million was added for legal contingencies.
- Exchange Variations: A net monetary variation loss of R$ 71.8 million occurred in 2Q11, primarily due to a R$ 92.7 million negative impact from the depreciation of the U.S. Dollar against the Real on foreign loans.
- Operational Risks: Water loss ratio remained stable at 26%, still affected by the interruption of outsourced maintenance services in the São Paulo Metropolitan Region in 2010.
- Forward-Looking Statements: Management notes that future results depend on economic conditions, tariff adjustments, and the implementation of capital expenditure plans. There is no guarantee that expected results will occur.
Investor Verification Checklist
- Provision Impact: Verify the long-term financial impact of the R$ 77.6 million provision related to the Municipal Government agreement and the R$ 46.9 million legal contingency addition.
- Debt Structure: Review the maturity profile of the R$ 8.0 billion total debt, noting significant repayments due in 2012 (R$ 1.5 billion) and 2013 (R$ 1.25 billion).
- Cost Trajectory: Monitor the sustainability of the 16.6% increase in electric power costs and the 15.8% rise in treatment supplies, which may pressure future margins.
- Water Losses: Assess the timeline for resolving the water network maintenance issues that are keeping the water loss ratio at 26%.
- Currency Exposure: Evaluate the sensitivity of financial results to USD/BRL exchange rate fluctuations, given the significant foreign debt exposure.