SABESP 2Q10 Financial Summary
Business Context and Reporting Period
Company: Companhia de Saneamento Básico do Estado de São Paulo - SABESP
Reporting Period: Second Quarter 2010 (ended June 30, 2010)
Filing Date: August 6, 2010
Business: One of the world's largest water and sewage service providers, operating primarily in the State of São Paulo, Brazil. Financials are presented in Brazilian Reais (R$).
Key Financial Metrics
| Metric (R$ Million) | 2Q10 | 2Q09 | 1H10 | 1H09 |
|---|---|---|---|---|
| Gross Operating Revenue | 1,904.5 | 1,743.7 | 3,790.1 | 3,523.0 |
| Net Operating Revenue | 1,769.8 | 1,623.7 | 3,521.8 | 3,277.0 |
| EBITDA | 777.2 | 666.8 | 1,639.5 | 1,290.4 |
| EBITDA Margin | 43.9% | 41.1% | 46.6% | 39.4% |
| EBIT | 626.2 | 505.3 | 1,344.7 | 967.2 |
| Net Income | 333.6 | 464.7 | 624.2 | 720.9 |
| Earnings Per Share (R$) | 1.46 | 2.04 | 2.74 | 3.16 |
| Operating Cash Flow | 155.3 | 436.0 | N/A | N/A |
| Cash & Equivalents (End of Period) | 1,047.4 | 688.9 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased 9.0% in 2Q10, driven by a 4.43% tariff adjustment (Sept 2009) and a 4.0% increase in billed volume.
- Profitability: EBITDA rose 16.6% and EBIT rose 23.9% due to revenue growth and cost efficiencies. However, Net Income fell 28.2% primarily due to a significant reduction in foreign exchange gains compared to 2Q09.
- Cost Management: Total costs and expenses grew only 2.3%, while costs as a percentage of net revenue dropped from 68.9% to 64.6%. Payroll expenses decreased 0.4% due to workforce reductions (2,387 employees laid off) despite wage adjustments.
- Financial Expenses: Net financial expenses increased 33.4% to R$ 146.7 million, driven by new debenture issuances and higher interest rates.
- Exchange Rate Impact: Unlike 2Q09, which benefited from a R$ 237.8 million foreign exchange gain, 2Q10 saw a R$ 14.2 million loss due to the appreciation of the U.S. Dollar.
- Credit Write-offs: Increased 55.5% to R$ 117.7 million, largely due to overdue debts from the São Paulo Municipal Government.
Outlook, Risks, and Unusual Items
- Debt Issuances: In June 2010, SABESP issued R$ 500 million in debentures (12th issue). In July, the Board approved a R$ 600 million promissory note issue to settle 2010-2011 obligations.
- Government Support: The Brazilian Senate authorized a federal guarantee for a US$ 65 million loan from JICA for environmental improvements in the Billings reservoir area.
- Operational Efficiency: Water loss ratio improved to 25.8% from 26.7% in 2Q09. Billed volume increased across all customer categories, with Industrial volume up 8.2%.
- Unusual Items: The decline in Net Income is heavily influenced by the absence of the large foreign exchange gain recorded in the prior year. Additionally, credit write-offs were elevated due to specific municipal government arrears.
- Forward-Looking Statements: Management notes that future results depend on economic conditions, tariff adjustments, and the successful execution of investment plans.
Investor Verification Checklist
- Exchange Rate Sensitivity: Verify the impact of USD/BRL fluctuations on future net income, given the volatility seen between 2Q09 and 2Q10.
- Municipal Debt Collection: Monitor the recovery of overdue debts from the São Paulo Municipal Government, which drove a 55% increase in credit write-offs.
- Debt Servicing: Review the repayment schedule for the new R$ 500 million debentures and R$ 600 million promissory notes against projected cash flows.
- Regulatory Tariffs: Assess the sustainability of the 4.43% tariff adjustment implemented in late 2009 and potential future regulatory changes.
- Workforce Reduction: Confirm the long-term impact of the 2,387 employee layoffs on operational capacity and service quality.