SBS

SABESP 3Q24 Financial Summary

Business Context and Reporting Period

This Form 6-K reports the unaudited financial results for Companhia de Saneamento Básico do Estado de São Paulo (SABESP) for the third quarter ended September 30, 2024. The period marks the first full quarter following the company's privatization and the signing of the URAE-1 concession agreement on July 23, 2024. The results reflect significant accounting changes related to the bifurcation of concession assets into intangible assets and a new financial asset (indemnity) for reversible investments.

Key Financial Metrics

Debt Profile: Total borrowings and financing obligations stood at R$ 23.86 billion as of September 30, 2024. The company met all debt covenants, including an Adjusted EBITDA/Adjusted Financial Expenses ratio of at least 2.80 and a Net Debt/Adjusted EBITDA ratio of no more than 3.50.

Material Changes vs. Prior Period

• Financial Asset Recognition: A one-time revenue impact of R$ 8,820 million was recorded due to the recognition of a financial asset (indemnity) related to reversible investments under the new concession agreement. This significantly inflated reported revenue and net income.
• Adjusted Performance: Excluding the financial asset and construction margin, Adjusted EBITDA grew 16.7% to R$ 2,785 million, driven by a 6.7% increase in net revenue from sanitation services and a 6.5% reduction in operating costs.
• Revenue Drivers: Net revenue from sanitation services increased 6.7% due to a 4.6% increase in average tariff (net of FAUSP) and a 2.0% increase in billed volume. However, a database update in September qualified 500,000 users for a differentiated tariff, reducing revenue by R$ 28 million.
• Cost Reductions: Operating costs decreased 6.5% year-over-year. Key drivers included a 13.1% reduction in the average number of employees (saving R$ 53 million) and a 13.2% drop in service expenses. These were partially offset by a 9.3% increase in electricity costs due to drought conditions.
• Transition Costs: New management recorded R$ 194 million in losses on assets under construction, R$ 309 million in lawsuit provisions, and R$ 47 million in transition consulting and privatization costs.

Outlook, Risks, and Management Commentary

• Operational Efficiency: Management highlighted improved efficiency with a 9.0% reduction in employee headcount and lower depreciation rates following the new concession agreement.
• Liquidity: Cash and cash equivalents increased to R$ 2.39 billion at period end, up from R$ 838 million at the start of the year, supported by strong operating cash flow and new financing proceeds of R$ 5.63 billion.
• Risks: The filing notes risks related to general economic conditions, industry trends, and the assumptions underlying forward-looking statements. Specific operational risks include drought conditions affecting electricity consumption and the impact of tariff adjustments on low-income users.
• Investments: Capital expenditures for 3Q24 totaled R$ 1.44 billion, split between water (R$ 708 million) and sewage (R$ 736 million) infrastructure.

Investor Verification Checklist

• Quality of Earnings: Verify the sustainability of net income by excluding the R$ 8.82 billion one-time financial asset recognition and R$ 1.53 billion construction revenue.
• Debt Covenants: Confirm continued compliance with the Adjusted EBITDA/Financial Expenses (min 2.80) and Net Debt/Adjusted EBITDA (max 3.50) covenants in future quarters.
• Cost Structure: Monitor the trajectory of electricity costs given the drought conditions and the impact of the reduced workforce on operational capacity.
• Tariff Impact: Assess the long-term revenue impact of the 500,000 users qualifying for differentiated tariffs following the Unified Registry update.
• Transition Provisions: Review the adequacy of the R$ 309 million lawsuit provision and the R$ 194 million asset impairment as the new management finalizes its review of legacy items.