SBS

SEC Filing Summary: Companhia de Saneamento Básico do Estado de São Paulo (SABESP)

Business Context and Reporting Period

This Form 6-K filing reports the Quarterly Information (ITR) for SABESP, a state-owned mixed-capital company providing water and sewage services in 365 municipalities in the State of São Paulo, Brazil. The reporting period covers the quarter ended September 30, 2009, and the nine months ended September 30, 2009. The company operates under concessions, with 79 currently expired and under negotiation, though services continue uninterrupted.

Key Financial Metrics (Consolidated)

Amounts in thousands of Brazilian Reais (R$), unless otherwise noted.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 2.3% in Q3 2009 compared to Q3 2008, driven by a 0.2% tariff adjustment and a 0.7% increase in billed volume. YTD revenue grew 5.6%.
• Profitability Decline: Net income for Q3 2009 decreased 15.3% year-over-year. EBITDA declined 11.5% in the quarter, primarily due to increased operating costs and financial expenses.
• Cost Increases: Total costs and expenses rose 11.1% in Q3 2009. Key drivers included a 36.7% increase in "Outside services" (maintenance and network repairs) and a 17.6% increase in credit write-offs (allowance for doubtful accounts).
• Financial Expenses: Net financial expenses increased significantly due to a R$102.2 million rise in interest on civil judicial deposits, partially offset by gains from foreign exchange variations (USD devaluation).
• Liquidity: Cash and cash equivalents decreased by approximately R$302 million during the quarter, resulting in a net cash outflow.

Guidance, Outlook, Risks, and Contingencies

• Concession Renewals: Management expects all 79 expired concessions to be renewed or extended, ensuring service continuity. Negotiations are ongoing with municipalities.
• Major Contingency (Gesp Agreement): A significant portion of non-current assets relates to receivables from the State of São Paulo (Gesp) for supplementary retirement and pension benefits. While the "uncontroversial" amount is being settled via reservoir transfers and installments, a "controversial" amount of approximately R$332 million is recorded without a provision for loss. The independent auditors issued a qualified opinion, stating that assets and equity are overstated by this amount because Brazilian accounting standards typically require a provision for such long-term disputed receivables.
• Legal and Environmental Risks: The company faces provisions for contingencies totaling R$1.35 billion (current and non-current), covering customer disputes, supplier claims, tax issues, and environmental lawsuits. Potential losses not recorded in the books are estimated at approximately R$1.9 billion.
• Debt Structure: The company has significant exposure to foreign currency (USD and Yen) and variable interest rates. It actively manages debt to minimize costs but faces risks from exchange rate fluctuations.
• Subsequent Events: In October 2009, the company signed a US$100 million loan agreement with the World Bank (BIRD) for the "Vida Nova" reservoir recovery program and received IDB approval for a US$600 million loan for the Tiete Project.

Investor Verification Checklist

• Auditor Qualification: Verify the impact of the qualified audit opinion regarding the R$332 million disputed receivable from the State Government and the potential need for a future provision.
• Concession Renewals: Monitor the status of negotiations for the 79 expired concessions to ensure no disruption in revenue streams.
• Cost Control: Assess the sustainability of the 36.7% increase in outside services and the rising trend in credit write-offs (allowance for doubtful accounts).
• Debt Maturity: Review the repayment schedule for the R$6.07 billion total debt, noting significant maturities in 2010 and 2011.
• Regulatory Fees: Confirm the impact of the new 0.5% regulation fee (TRCF) on gross operating revenue.