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 financial results for SABESP, a state-owned utility providing water and sewage services in the State of São Paulo, Brazil. The reporting period covers the first quarter ended March 31, 2007. The company operates under concessions in 367 municipalities, with 55.8% of sales derived from the City of São Paulo, where it operates under a public deed of authorization rather than a formal concession. The financial statements are prepared in accordance with Brazilian accounting practices and were reviewed by Deloitte Touche Tohmatsu.

Key Financial Metrics (Q1 2007)

Note: All figures in Brazilian Reais (R$) unless otherwise noted. Total Debt (Current + Non-current) was approximately R$ 6,194.5 million as of March 31, 2007.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 8.9% driven by a 6.71% tariff adjustment effective August 2006 and a 3.2% increase in invoiced water and sewage volumes.
• Cost Increases: Total costs and expenses rose 12.8% to R$ 897.3 million. Key drivers included an 8.6% increase in payroll (due to salary adjustments and pension provisions), a 12.3% rise in electric power costs, and an 11.9% increase in bad debt expenses.
• Profitability Decline: Despite revenue growth, Net Income fell 10.7% to R$ 292.9 million. This was primarily due to higher operating costs and a significant increase in the effective tax rate (from 27% in Q1 2006 to 36% in Q1 2007) caused by the realization of revaluation reserves.
• Financial Expenses: Net financial expenses decreased 13.0% to R$ 145.1 million, aided by favorable foreign exchange variations (R$ 46.9 million gain) and lower interest rates on refinanced debt.

Outlook, Risks, and Contingencies

• Concession Renewals: 59 concession contracts are set to expire in 2007. Management expects renewals but notes that 114 contracts expired previously are still under negotiation. The net book value of assets in municipalities with expiring/negotiating concessions is R$ 1.90 billion.
• State Government Receivables: Significant receivables exist from the State of São Paulo (R$ 1.22 billion total), including R$ 798 million for pension benefit reimbursements. Negotiations regarding the GESP agreement and asset transfers (reservoirs) are ongoing, creating uncertainty over the timing and method of collection.
• Legal Contingencies: The company has recorded provisions of R$ 695.6 million for probable losses from civil, tax, labor, and environmental claims. Additionally, there are unprovisioned lawsuits with a potential aggregate loss of approximately R$ 1.64 billion.
• Wholesale Debt: Receivables from wholesale municipal customers (e.g., Guarulhos, Santo André) total R$ 869 million. Some municipalities are judicially contesting tariffs, leading to classification of these amounts as non-current assets.
• Audit Qualification: The independent auditor issued an unqualified review report but included an emphasis of matter regarding an unreconciled "Unidentified collections" account with a debt balance of R$ 37.4 million, preventing a conclusion on its potential impact.

Investor Verification Checklist

• Concession Renewal Status: Verify the progress of negotiations for the 59 contracts expiring in 2007 and the 114 previously expired contracts.
• State Receivables Collection: Monitor the outcome of negotiations with the State of São Paulo regarding the R$ 1.22 billion receivable, specifically the pension reimbursement and reservoir transfer issues.
• Wholesale Customer Solvency: Assess the risk of non-payment from wholesale municipal customers currently disputing tariffs.
• Unreconciled Account: Review the resolution of the "Unidentified collections" account (R$ 37.4 million) highlighted by the auditor.
• Debt Refinancing: Track the company's strategy to reduce foreign currency exposure and the impact of interest rate fluctuations on financial results.