CIA. DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP

Rui de Britto Álvares Affonso

Chief Financial Officer and Investor Relations Officer

Mario Azevedo de Arruda Sampaio

Head of Capital Markets and Investor Relations

1. Financial Highlights

 (*) Earnings before interest and taxes

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

In 2Q11, net operating revenue reached R$ 2.3 billion, a 3.0% growth compared to 2Q10. Costs and expenses, including construction costs, in the amount of R$ 1.7 billion grew 4.2% versus 2Q10. EBIT dropped by 0.8%, from R$ 603.8 million in 2Q10 to R$ 599.2 million in 2Q11. EBITDA was R$ 752.5 million in 2Q10 and R$ 775.4 million in 2Q11, an increase of 3.0%, with EBITDA margin stable at 33.1%.

2. Gross operating revenue

Gross operating revenue, including construction revenue, reached R$ 2.5 billion, a 3.2% increase in comparison to the 2Q10.

Gross operating revenue from water supply and sewage collection recorded grew from R$ 1.9 billion in 2Q10 to R$ 2.0 billion in 2Q11, an increase of R$ 120.8 million or 6.5%. The main factors that led to this variation were: the increase of 2.7% in water billed volume and of 3.7% in sewage billed volume and the tariff adjustment of 4.05% as of September 2010.

The main factors that contributed to higher billed volume were: the increase in the number of connections, the growth in the consumption in the industry category due to a better economic scenario, and the new firm demand contracts.

3. Construction revenue

Construction revenue dropped R$ 44.1 million, or 8.1% when comparing to 2Q10, moving from R$ 542.6 million to R$ 498.5 million, due to lower investments in the period.

4. Billed volume

The following tables show the billed water and sewage volume per customer category and region in 2Q10 and 2Q11.

   (1) Unaudited

   (2) Including coastal and countryside

5. Costs, administrative and selling expenses

In 2Q11, costs of products and services, administrative and selling expenses grew 4.2% (R$ 70.7 million). As a percentage of net revenue, costs and expenses moved from 73.4% in 2Q10 to 74.3% in 2Q11.

5.1. Payroll and benefits

In 2Q11 payroll and benefits increased by R$ 16.1 million or 4.1%, from R$ 396.0 million to R$ 412.1 million, due to the following: 

·         5.05% increase in wages since May 2010 and of 8% since May 2011; and

·         Adjustment in the provision, in the amount of R$ 7.7 million, for the payment of severance to employees who requested retirement in 2Q11.

These increases were partly offset by the of R$ 4.9 million decrease in the payment of FGTS penalty and termination notice on account of the fewer terminations in 2Q11, mainly those related to the Conduct Adjustment Agreement (TAC).

5.2. Supplies

In 2Q11, expenses with Supplies increased by R$ 2.3 million or 7.1%, when compared to the same quarter of 2010, from R$ 32.3 million to R$ 34.6 million. The main factors for this variation were higher expenses with maintenance of the equipment, furniture and services in the sewage pumping and treatment stations located at the Regional Systemns.

5.3. Treatment supplies

Between 2Q11 and 2Q10, expenses with treatment supplies increased by R$ 4.9 million or 15.8%, from R$ 31.1 million to R$ 36.0 million, due to the following:

·         Increase of R$ 4.6 million in the consumption of aluminum polychloride in replacement of the aluminum sulphate at the Water Treatment Station of Guaraú;

·         Addition of R$ 1.4 million on account of the price adjustment of sodium carbonate since September 2010, which now includes product transport costs, and the increase in chlorine and oxygen consumption due to the climate and water reserves conditions; and

·         Decrease of R$ 1.7 million, due to the lower consumption of activated carbon, which is a seasonal product, caused by the lower proliferation of algae in dams that serve the Alto Tietê production system.

5.4. Services

In 2Q11 this item decreased R$ 42.0 million or 15.3%, from R$ 274.6 million to R$ 232.6 million. The main factors were: 

·         Agreement with the municipality of São Paulo:  

ü  Decrease of R$ 44.7 million in the provision made in 2Q11 relating to the actions established in the agreement; and

ü  Addition of R$ 2.0 million, due to transportation of sediments of lake Parque do Ibirapuera.

·         Advertising campaigns with a R$ 10.4 million decrease due to the completion of certain advertising campaign contracts, such as: SPTV 2ª Edição, midia project TV RECORD, globo soccer, planeta sustentaval 2010, among others.

There was an increase in the following services:

·         Preventive and corrective maintenance in the water supply and sewage service systems, amounting to R$ 5.0 million, due to the following factors: (i) maintenance and recuperation of equipment, properties, as well as reservoirs, aqueduct systems and substations in the São Paulo Metropolitan Region and the regional systems; and

·         Postage and telegraphs in the amount of R$ 3.5 million related to the delivery of water bills at some Business Units by post, due to judicial request.

5.5. Electric power

In 2Q11 this item increased R$ 21.5 million or 16.6%, from R$ 129.8 million to R$ 151.3 million.

This result is associated to the increase of 12.3% in the free market and of 15.8% in the captive market, corresponding to an average consumption of 15.2% between the markets. The average tariff increase in the free and captive market was approximately 5.4% in the period.

5.6. General expenses

In 2Q11 general expenses increased R$ 121.0 million or 336.1%, from R$ 36.0 million to R$ 157.0 million, mainly due to the following:

·         Provision in the amount of R$ 77.6 million as envisaged in the agreement with the Municipal Government of São Paulo, which is equivalent to 7.5% of the municipality’s gross revenue after deducting the Cofins and Pasep contributions, calculated from the date of signing of the agreement, that is June 23, 2010; and

·         Additions in the provision for legal contingencies in relation to 2Q10, amounting to R$ 46.9 million.

5.7. Depreciation and amortization

This item increased R$ 27.5 million or 18.5%, from R$ 148.7 million to R$ 176.3 million, due to the amortization term adjustment between the asset’s useful life and the contract effectiveness, whichever is the shortest one, recurring for the next quarter. 

5.8. Credit write-offs

Credit write-offs dropped R$ 34.8 million or 44.7%, from R$ 77.8 million to R$ 43.0 million, mainly due to the complementing of provision that occurred in 2Q10 for the debts with the Municipal Government of São Paulo. 

6. Other operating expenses and revenues

Other operating revenues (net of expenses) increased R$ 46.8 million, mainly due to the signing of the Disposal of Exclusive Rights agreement, for the payment of Sabesp’s employees, with Nossa Caixa and Banco do Brasil for the period from March 2007 to March 2014.

7. Financial expenses and revenues

7.1. Financial expenses

In 2Q11 financial expenses dropped R$ 46.7 million, or 27.1%. The main factors that influenced this result were:

·         Decrease in the amount relating to lawsuit in the amount of R$ 27.3 million; and

·         Decrease in interest by R$ 25.5 million, on domestic loans and financing, mainly due to the amortization of the 8^th debenture in June 2011. 

These decreases were partially offset by the interest related to the Eurobonds, in the amount of US$ 350 million, in December 2010, which increased R$ 6.1 million.

7.2. Financial revenues

Financial revenues increased by R$ 51.0 million, as a result of higher volume for financial investments due to the increase in cash position.

8. Monetary variation on assets and liabilities

8.1. Monetary variations on liabilities

The effect on the monetary variations on liabilities in 2Q11 was R$ 95.2 million lower, compared to 2Q10, due to:

·         Exchange variation on foreign loans and financing generating a negative impact of R$ 92.7 million, due to the 4.2% depreciation of the U.S. Dollar in 2Q11 compared to the 1.2% appreciation in 2Q10; and

·         Monetary variations on domestic loans and financing decreased by R$ 7.7 million, mainly due to the R$ 9.9 million decrease due to the positive variation of the IGPM in 2Q11 of 0.70%, compared to a 2.84% variation in 2Q10; and the R$ 2.2 million increase due to the higher variation of the TR interest rate in 2Q11 of 0.31% compared to 0.11% in 2Q10.

8.2. Monetary variations on assets

Monetary variations on assets decreased R$ 27.3 million, mainly due to the exchange variation caused by the depreciation of the Real against the Yen during the payment of Japan International Coopreation Agency - JICA, and the monetary restatement of the deposits relating to legal proceedings in 2Q10.

9. Operating indicators

The water loss ratio remained stable at 26% as it is calculated considering the moving average of the last 12 months, therefore, still affected by water network outsourced maintenance services interrupted in 2010 in the São Paulo Metropolitan Region.

  (1) In thousand units

  (2) In million inhabitants. Not including wholesale

  (3) In millions of cubic meters

  * Unaudited

10. Loans and financing

The following table shows the loans and financing breakdown in 2Q11.

11. Conference Calls

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.

Income Statement

Balance Sheet

Cash Flow

This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates of future economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or 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.