SABESP announces 3Q10 results

1. Financial Highlights

(*) Earnings before interest and taxes
(**) Earnings before interest, taxes, depreciation and amortization

In 3Q10, net operating revenue reached R$ 1.8 billion, a 12.7% growth compared to 3Q09. Costs and expenses in the amount of R$ 1.2 billion grew 0.6% versus 3Q09. EBITDA was R$ 617.1 million in 3Q09 and R$ 799.6 million in 3Q10, an increase of 29.6%.

EBIT grew 43.8%, from R$ 455.6 million in 3Q09 to R$ 655.1 million in 3Q10.

2. Gross operating revenue

In 3Q10, gross operating revenue grew from R$ 1.7 billion in 3Q09 to R$ 2.0 billion in 3Q10, an increase of R$ 227.4 million or 13.0%. The main factors that led to this variation were the 2009 and 2010 tariff adjustment of 4.44% and the increase of 5.6% in billed volume in relation to the same quarter of 2009.

3. Billed volume

The following tables show the billed water and sewage volume per customer category and region in 3Q09, 3Q10, 9M09 and 9M10.

4. Costs, administrative and selling expenses

In 3Q10, costs of products and services, administrative and selling expenses grew 0.6% (R$ 7.0 million). As a percentage of net revenue, costs and expenses declined from 72.0% in 3Q09 to 64.3% in 3Q10.

4.1. Payroll and benefits

In 3Q10 payroll and benefits decreased by R$ 6.5 million or 1.8%, from R$ 354.6 million to R$ 348.1 million, due to the following:

·         Adjustment of actuarial calculation relating to the migration of approximately three thousand employees from the Defined Benefits Plan to Sabesprev-Mais in September 2010, amounting to R$ 12.4 million;

·         Adjustment in the provision for Profit Sharing (PLR) in the amount of R$ 15.8 million due to the reversal of the amounts provisioned in 2009; and

·         Reduction of R$ 4.3 million in payroll and benefits as a result of the layoffs under the Conduct Adjustment Term (“TAC”) + 2% of the staff, despite the 5.05% salary raise in May 2010.

This decrease was partly offset by the following factors:

·         Company’s contribution of R$ 17.1 million relating to the deficit caused by employees that migrated to Sabesprev-Mais; and

·         Adjustment of R$ 10.0 million in the provision for the payment of termination benefits to employees that requested retirement in 3Q10. 

4.2. Supplies

In 3Q10, expenses with Supplies decreased by R$ 3.2 million or 8.1%, when compared to the same period 2009, from R$ 39.5 million to R$ 36.3 million. The main factors for this variation were lower expenses with materials for the maintenance of the equipment, maintenance of the aqueduct systems, water and sewage treatment station, and the pumping stations in the Metropolitan Region of São Paulo (RMSP) in the amount of R$ 2.4 million.

4.3. Treatment supplies

Treatment supplies expenses in 3Q10 were R$ 1.8 million, or 5.4% lower than in 3Q09, from R$ 33.4 million to R$ 31.6 million. The main factors were:

·         R$ 3.2 million reduction, due to the lower consumption of aluminum polychloride of approximately 41% and aluminum sulphate replacement. The aluminum sulphate consumption grew around 30%, however the product average cost decreased 25%, which contributed significantly in the expenses reduction of the period; and

·         Increase of R$ 1.5 million in the consumption of a few products, such as: i) lime, due to the price adjustment, as well as the water reserves and climatic conditions; and ii) polyelectrolytes, due to the beginning of operation of the centrifuges in the Barueri sewage system.

4.4. Services

In 3Q10 this item decreased R$ 15.1 million or 6.4%, from R$ 236.3 million to R$ 221.2 million. The main factors were:

·         Agreement signed between Sabesp and the São Paulo Municipal Government:

ü  R$ 9.4 million decrease in the provision made in 3Q09, related to the actions established in the agreement; and

ü  R$ 7.6 million decrease on account of the (non-recurring) lower spending in the implementation of the Program for the Rational Use of Water (PURA) in municipal schools.

·         Decrease of R$ 6.7 million in the expenses from January through September 2010, as expected for the second year of the Public Private Partnership (PPP) contract of the Alto Tietê production system;

·         Decrease of R$ 5.0 million in the purchase of treated water due to the termination of the contract with Águas de Cajamar S/A in March 2010; and

·         Decrease in preventive and corrective maintenance in the water and sewage treatment systems in the amount of R$ 2.3 million, due to the implementation of the structural works at the Parque da Integração in 3Q09.

There was an increase in the following services:

·           Paving services and replacement of sidewalks in the amount of R$ 10.3 million, on account of the offsetting of accounts with municipal governments of the cities served by the Regional Systems;

·           Residential connection and sewage network maintenance in the amount of R$ 3.7 million, due to the:

ü  Increase in demand and the contractual amounts based on Global Sourcing in the municipalities of the Regional Systems and actions to optimize the sewage systems in the Baixada Santista region; and

ü  Increases in the execution of the maintenance services in the RMSP, and the intensification of actions to meet the demands of the Córrego Limpo Program with the Municipal Government of São Paulo (PMSP).

·           Expenses with sludge transportation in the amount of R$ 1.2 million.

4.5. Electric power

In 3Q10 this item increased R$ 10.9 million or 9.0%, from R$ 121.4 million to R$ 132.3 million.

This increase is due to the following factors:

·         Tariff adjustment, which had a 2.5% impact in the average tariff in the captive market, which represents 82% of the installed capacity, impacting the weighted average increase between the captive market and free market by around 3.3%; and

·         Weighted average cost increase of 8.0% between the markets.

4.6. General expenses

In 3Q10 general expenses increased R$ 20.3 million or 13.9%, from R$ 145.8 million to R$ 166.1 million, mainly due to the R$ 80 million provision envisaged in the agreement with the Municipality of São Paulo, which will be paid in November 2010. This amount is equivalent to 7.5% of the municipality’s gross revenue after deducting the Cofins and Pasep contributions. The first payment was calculated from the date of signing of the agreement, that is June 23, 2010, and hence, besides the quarterly revenue, the calculation basis proportionally includes several days in June. This increase was partially offset by the lower need for provision for legal contingencies in relation to 2009, amounting to R$ 66.2 million. 

4.7. Depreciation and amortization

This item decreased R$ 17.0 million or 10.5%, from R$ 161.5 million to R$ 144.5 million. This variation is mainly due to the estimates review, with increase in the useful life of the assets, as of December 2009.

4.8. Credit write-offs

Credit write-offs increased by R$ 17.1 million, or 23.9%, from R$ 71.5 million to R$ 88.6 million, mainly due to the need for complementing the provision on the billing of private clients and municipal public entities.

The increase was compensated by the higher recovery of credits through installment agreements, notably those signed with the municipalities of Taubaté and Ferraz de Vasconcelos.

5. Other operating revenues and expenses

5.1 Other operating revenues

This item decreased by R$ 3.4 million or 39.7% in 3Q10, mainly due to the write-off of projects and ongoing construction works made unfeasible, in the amount of R$ 2.6 million.

6. Financial expenses and revenues

6.1. Financial expenses

In 3Q10 financial expenses dropped R$ 218.9 million, or 74.2%, as described below:

·         Interest over lawsuit in the amount of R$ 240.8 million; and

·         Increase in interest by R$ 25.4 million, on domestic loans and financing due to some new funding in the period, such as: (i) the 10^th issue of debentures in November 2009, (ii) the 11^th issue of debentures in March 2010, (iii) the 12^th issue of debentures in June 2010, (iv) the 5^th issue of promissory notes in August 2010, and (v) the payments for financing agreements already signed.

6.2. Financial revenues

Financial revenues increased by R$ 31.7 million, due to the higher volume of financial investments.

7. Monetary variation on assets and liabilities

7.1. Variation on liabilities

The effect on the monetary variations on liabilities in 3Q10 was R$ 80.2 million higher, compared to 3Q09, due to:

·         Exchange variation on foreign loans and financing generated a negative impact of R$ 44.2 million, due to the 6.0% depreciation of the U.S. Dollar in 3Q10 compared to the 8.9% depreciation in 3Q09;

·         Other monetary variations decreased R$ 18.7 million related to lawsuit; and

·         Monetary variations on domestic loans and financing increased by R$ 17.3 million, mainly due to the R$ 15.4 million increase due to the positive variation of the IGPM in 3Q10 of 2.08%, compared to a negative impact of 0.37% in 3Q09; and the R$ 1.9 million increase due to the higher variation of the TR interest rate in 3Q10 of 0.28% compared to 0.12% in 3Q09.

7.2. Monetary variations on assets

Monetary variations on assets increased R$ 8.3 million, mainly due to installment agreements with the municipalities of Taubaté and Ferraz de Vasconcelos.

8. Operating indicators

Sabesp continues to work strenuously to reduce water losses, which has enabled a continued reduction in the loss ratio, from 26.5% in 3Q09 to 26.0% in 3Q10. Thanks to this reduction, water produced was lower than the water billed volume.

(1) In thousand units at the end of the period
(2) In million inhabitants at the end of the period, not including wholesale
(3) In million of cubic meters at the end of the period
* Unaudited

9. Loans and financing

In September, Sabesp signed a Loan Agreement with the Inter-American Development Bank (IBD) to partially finance the 3^rd Phase of the Tietê Project. The total investment will be US$ 800 million, of which US$ 600 million will be financed and US$ 200 million will be Sabesp’s counterpart. The agreement is for a 25-year term, with a grace period of 6 years and interest rate pegged to the LIBOR rate.

In October, Sabesp signed a loan agreement with the Japan International Cooperation Agency (JICA) to finance the Environmental Improvement Integrated Program at Billings reservoir water source area (ProBillings). The total investment is ¥ 12,357 billion, with ¥ 6,208 billion coming through the financing and ¥ 6,149 billion being Sabesp’s counterpart.  The agreement term is 25 years, with a grace period of 7 years and interest rate of 1.2% p.a.. 

Also in October, Sabesp negotiated with JICA the terms and conditions of an additional loan agreement for the Onda Limpa (Clean Wave) program 2^nd Phase. The amount of the new financing agreement is ¥ 19,162 billion, equivalent to around US$ 234.3 million, with disbursement in up to 2 years, with amortization of 18 years and interest rate between 1.8 and 2.5% p.a. The next step to formalize the agreement is to obtain the approval from the Brazilian Senate’s Commission on Economic Affairs.

10. Conference call

Click here for live webcast or access through the internet at: www.sabesp.com.br

For more information, please contact:

Mario Arruda Sampaio

Phone: (55 11) 3388-8664

E-mail: maasampaio@sabesp.com.br

Angela Beatriz Airoldi

Phone: (55 11) 3388-8793

E-mail: abairoldi@sabesp.com.br

Statements contained in this press release may contain information that is forward-looking and reflects management's current view and estimates of future economic circumstances, industry conditions, SABESP performance, and financial results. Any statements, expectations, capabilities, plans and assumptions contained in this press release that do not describe historical facts, such as statements regarding the declaration or payment of dividends, the direction of future operations, the implementation of principal operating and financing strategies and capital expenditure plans, the factors or trends affecting financial condition, liquidity or results of operations are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties. There is no guarantee that these results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.

Balance Sheet

Cash Flow