Business Context and Reporting Period
Company: Companhia de Saneamento Básico do Estado de São Paulo - SABESP (NYSE: SBS; Bovespa: SBSP3)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Third Quarter 2006 (ended September 30, 2006) and Year-to-Date (9 months ended September 30, 2006)
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$).
Key Financial Metrics
| Metric (R$ Million) | 3Q06 | 3Q05 | 9M06 | 9M05 |
|---|---|---|---|---|
| Gross Operating Revenue | 1,505.9 | 1,323.0 | 4,384.6 | 3,905.3 |
| Net Operating Revenue | 1,390.9 | 1,222.6 | 4,048.8 | 3,612.6 |
| EBITDA | 626.4 | 548.0 | 1,912.9 | 1,667.4 |
| EBITDA Margin | 45.0% | 44.8% | 47.2% | 46.2% |
| Net Income | 195.5 | 191.2 | 699.0 | 678.3 |
| Earnings Per 1,000 Shares | 6.86 | 6.71 | 24.54 | 23.82 |
| Cash and Equivalents (End of Period) | 399.4 | 228.6 | 399.4 | 228.6 |
Debt Profile: Total debt to be paid by end of 2006 is R$ 206 million (R$ 59 million denominated in USD). Total debt maturity profile extends through 2012 and beyond, totaling R$ 6,377 million.
Material Changes vs. Prior Period
- Revenue Growth: Net operating revenue increased 13.8% in 3Q06 and 12.1% in 9M06. Growth was driven by a 3.6% increase in billed water/sewage volume and tariff adjustments (9.0% in Aug 2005 and 6.71% in Aug 2006).
- Profitability: EBITDA grew 14.3% in 3Q06 and 14.7% in 9M06. Net income rose 2.2% in 3Q06 and 3.1% in 9M06.
- Cost Structure: Costs and expenses increased 11.4% in 3Q06. Notable increases included credit write-offs (up 77.1% due to lawsuits and lack of non-recurring recoveries) and salaries (up 5.1% due to wage adjustments). However, costs as a percentage of net revenue improved to 63.9% in 9M06 from 66.1% in 9M05.
- Financial Expenses: Net financial expenses dropped 30.1% in 3Q06, primarily due to the prepayment of domestic debentures and amortization of Eurobonds.
- Monetary Variation: Passive monetary variation increased by R$ 90.1 million compared to 3Q05, shifting from a gain to a loss due to the real devaluation versus the US dollar (0.46% devaluation in 3Q06 vs. 5.45% appreciation in 3Q05).
Guidance, Outlook, and Risks
- Subsequent Event: On November 3, 2006, SABESP issued US$ 140.0 million in 10-year Eurobonds (2016 maturity) at 7.5% interest. Proceeds were used to repurchase US$ 126.9 million of higher-interest (12%) 2008 Eurobonds.
- Operational Outlook: The company continues to expand services, with water connections growing 1.9% and sewage connections 2.6% in 3Q06. Operational productivity (connections per employee) increased 3.3%.
- Risks and Contingencies:
- Legal/Environmental: Provisions for civil, labor, and environmental contingencies increased by R$ 1.4 million in 3Q06.
- Credit Risk: Significant increase in credit write-offs due to lawsuits regarding customer billing.
- Forward-Looking Statements: Management notes that future results depend on economic conditions, industry trends, and regulatory factors. There is no guarantee that expected results will occur.
Investor Verification Checklist
- Tariff Adjustments: Verify the sustainability of revenue growth driven by the August 2005 and August 2006 tariff readjustments.
- Credit Quality: Investigate the 77.1% surge in credit write-offs and the volume of lawsuits regarding customer billing.
- Debt Refinancing: Confirm the impact of the new 2016 Eurobond issuance on the company's interest expense profile and liquidity.
- Currency Exposure: Assess the impact of the Brazilian Real's volatility on passive monetary variation and USD-denominated debt obligations.
- Cost Efficiency: Monitor the trend of costs as a percentage of revenue, specifically regarding rising energy costs and labor indemnities.