SBS

SABESP Form 6-K Summary: Second Quarter 2004

Business Context and Reporting Period

This Form 6-K filing covers the second quarter of 2004 (ended June 30, 2004) for Companhia de Saneamento Básico do Estado de São Paulo (SABESP). SABESP is the largest water and sewage utility in the Americas and the third largest globally by customer count. Financial data is presented in Brazilian Reais (R$) in accordance with Brazilian corporate law. All comparisons refer to the second quarter of 2003.

Key Financial Metrics

Debt and Liquidity: Total indebtedness payable by the end of 2004 was R$ 713 million as of June 30. Total liabilities and shareholder equity stood at R$ 16.44 billion. Cash flow from operating activities was positive at R$ 587.6 million for the quarter, offset by significant cash outflows from financing activities (R$ 472.8 million) and investing activities (R$ 243.4 million).

Material Changes vs. Prior Period

• Net Loss: The company reported a net loss of R$ 73.3 million compared to a net income of R$ 332.6 million in 2Q03. This reversal was primarily driven by a R$ 613.3 million negative monetary exchange variation due to a 6.8% devaluation of the Real against the US dollar, contrasting with a 14.4% appreciation in the prior year.
• Revenue Growth: Gross revenue grew 6.4% and net operating revenue grew 6.8%. This growth occurred despite a consumer education campaign that reduced water consumption in the São Paulo metro area (responsible for ~70% of revenue). The inclusion of São Bernardo do Campo in the retail market helped offset volume declines.
• Expense Increases: Costs, Administrative, and Selling expenses rose 11.1% (R$ 74.5 million). Notable increases included Credit Write-offs (+61.7% due to provisions for old debts), Third Party Services (+25.6% due to marketing campaigns), and Electric Power (+16.6% due to tariff hikes).
• Financial Expenses: Financial expenses decreased 31.1% (R$ 90.2 million) due to lower interest rates on domestic loans and reduced provisions for lawsuits compared to 2Q03.

Outlook, Risks, and Management Commentary

• Operational Outlook: Management highlighted the success of the consumer education campaign in avoiding water rationing in the São Paulo metro area. The Cantareira System authorization was renewed for 10 years, guaranteeing water withdrawal rates for 83% of the time.
• Funding and Capital Markets: SABESP secured a financing contract with the Japan Bank for International Cooperation (JBIC) for approximately R$ 588.0 million for the Santos metro area environmental recovery. The company also approved a Securities Distribution Program for up to R$ 1.5 billion and issued R$ 200 million in promissory notes.
• Risks and Contingencies: The filing notes significant exposure to foreign exchange fluctuations, which materially impacted the bottom line. Additionally, credit write-offs increased significantly due to provisions for credits over R$ 30,000 past due for more than one year. Forward-looking statements regarding dividends and capital expenditure plans are subject to economic and market uncertainties.

Key Facts for Investor Verification

• Exchange Rate Sensitivity: Verify the impact of Real devaluation on future earnings, as a 6.8% devaluation caused a R$ 613.3 million loss in 2Q04.
• Credit Quality: Monitor the trend in credit write-offs, which surged 61.7% in 2Q04 due to provisions for long-overdue debts.
• Debt Maturity: Review the debt schedule, noting R$ 713 million in total indebtedness due by the end of 2004, with significant international obligations (e.g., Eurobonds, IDB loans).
• Volume vs. Revenue: Assess the long-term revenue impact of water conservation campaigns, which reduced billed volumes in the core metro area despite overall revenue growth.
• Regulatory Renewals: Confirm the stability of water withdrawal rights under the renewed 10-year Cantareira System authorization.