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

Adjusted EBITDA Reconciliation (Non-accounting measures)

(**) Adjusted EBITDA is net income before: (i) depreciation and amortization; (ii) income tax and social contribution (income federal taxes); (iii) financial result and (iv) other operating expenses, net.

In 2012, net operating revenue reached R$ 10.7 billion, an 8.2% growth compared to 2011. Costs and expenses, including construction costs, in the amount of R$ 7.9 billion grew 5.2% over 2011. EBIT grew 17.3%, from R$ 2.4 billion in 2011 to R$ 2.9 billion in 2012. Adjusted EBITDA increased 12.2%, from R$ 3.2 billion in 2011 to R$ 3.6 billion in 2012. The adjusted EBITDA margin was 33.6% in 2012 in comparison to 32.4% in 2011. Excluding construction revenues and construction costs, the adjusted EBITDA margin was 43.0% in 2012 (41.1% in 2011).

Net income reached R$ 1.9 billion in 2012, 56.3% higher than in 2011.

2. Gross operating revenue

Gross operating revenue from water supply and sewage collection grew from R$ 8.3 billion in 2011 to R$ 8.9 billion in 2012, an increase of R$ 621.7 million or 7.5%. The main factors that led to this variation were: the increase of 2.4% in water billed volume and of 3.2% in sewage billed volume, the Company’s total increase in billed volume was of 2.7%, and the tariff adjustment of 6.83% since September 2011 and of 5.15% since September 2012.

3. Construction revenue

In 2012, construction revenue increased R$ 239.9 million or 10.8%, comparing to 2011. This variation was mainly due to higher investments in 2012.

4. Billed volume

The following tables show the billed water and sewage volume per customer category and region in 4Q11 and 4Q12, and 2011 and 2012.

   (1) Unaudited

   (2) Including coastal and countryside

5. Costs, administrative, selling and construction expenses

In 2012, costs of products and services, administrative, selling and construction expenses grew 5.2% (R$ 385.5 million). As a percentage of net revenue, cost and expenses moved from 75.3% in 2011 to 73.2% in 2012.

5.1. Payroll and benefits

In 2012 payroll and benefits dropped R$ 65.2 million or 3.6%, from R$ 1.8 billion to R$ 1.7 billion, due to the following:

·         Complementation of the actuarial liability related to the G0 Plan, in the amount of R$ 157.5 million in 2011, non-recurring for 2012; and

·         Decline of R$ 14.0 million in the actuarial calculation related to the Defined Benefit Plan in 2012.

These decreases were partially offset by the 8.00% increase in wages since May 2011 and of 6.17% since May 2012, with an impact of approximately R$ 102.9 million in payroll.

In 4Q12 payroll and benefits grew R$ 53.7 million or 13.1%, due to the following:

·         6.17% increase in wages since May 2012, with an impact of approximately R$ 34.4 million; and

·         Increase in the provision for severance pay in the amount of R$ 19.9 million, due to: (i) increased adhesion of employees who applied for retirement; and (ii) approval of Law 12.506/11, changing the notice period from 30 to 90 days in case of dismissal without cause.

5.2. Supplies

In 2012, expenses with supplies increased by R$ 22.7 million or 14.3%, when compared to the previous year, from R$ 159.1 million to R$ 181.8 million, mostly due to: (i) preventive and corrective maintenance in water and sewage systems, in the amount of R$ 8.7 million; (ii) maintenance of water and sewage networks totaling R$ 7.2 million, due to regularity in the execution of Global Sourcing services and the increase in the price of certain materials.

In 4Q12, these expenses increased by R$ 7.1 million or 15.8%, due to the same factors mentioned for the year.

5.3. Treatment supplies

Treatment supplies expenses in 2012 were R$ 22.8 million or 14.7% higher than in 2011, from R$ 154.7 million to R$ 177.5 million. The main factors for this variation were:

·         Higher consumption of lime, replacing sodium hydroxide, and a price increase of approximately 14%, with a net addition of R$ 7.6 million, as well as a higher volume of treated sludge;  

·         Higher consumption of iron chloride, replacing iron sulfate, and a price increase of approximately 7%, with a net addition of R$ 4.0 million, as well as a higher volume of treated sludge;

·         Higher consumption of activated carbon, with a price increase of approximately 17%, leading to an upturn of R$ 6.1 million due to weather and watershed conditions; and

·         Increase of R$ 5.4 million from the greater consumption of hydrogen peroxide at the sewage pumping stations of the Baixada Santista Region due to the proliferation of algae and odor, and the startup of 2 sewage pumping stations in Guarujá.

In 4Q12 treatment supplies increased R$ 6.4 million or 17.8%, due to the higher consumption of aluminum polychloride, in approximately 6.2%. This product was mainly used at the Water Treatment Station of Guaraú, ensuring an increase in maximum flow, without jeopardizing the quality of treated water.

5.4. Services

In 2012 this item increased R$ 81.9 million or 8.2%, from R$ 993.6 million in 2011 to R$ 1,075.5 million in 2012. The main factors were:

·         Increase of R$ 24.4 million related to the fleet renewal and expansion program, through leasing;

·         Public and Private Partnership Agreement of the Alto Tietê Production System, with an increase of R$ 17.0 million due to the start-up in September 2011, increasing the water production capacity from 10m³/s to 15m³/s;

·         Paving services and replacement of sidewalks in the amount of R$ 13.7 million, due to the intensification of the actions against water losses;

·         Property security in the amount of R$ 12.4 million, due to increase of equipment and coverage areas;

·         Hydrometer reading and bill delivery expenses in the amount of R$ 11.3 million, as a result of the usage of new technologies that allow greater security and agility in the bill issue, reading and delivery system at municipalities belonging to the Regional Systems, in addition to the higher number of connections and contract adjustments at the São Paulo Metropolitan Region; and

·         Preventive and corrective maintenance in the water and sewage systems in the amount of R$ 5.9 million.

The increases mentioned above were offset by a decrease of R$ 22.7 million resulting from social and environmental activities settled with the Municipal Government of São Paulo.

In 4Q12 treatment supplies expenses grew R$ 12.1 million or 4.3%, due to:

·         Public and Private Partnership Agreement of the Alto Tietê Production System, with an increase of R$ 6.2 million due to its start-up in September 2011, increasing the water production capacity from 10m³/s to 15m³/s; and

·         Property security in the amount of R$ 5.0 million, due to increase of equipment and coverage areas.

5.5. Electric power

In 2012, this item increased R$ 5.9 million, or 1.0%, from R$ 584.1 million in 2011 to R$ 590.0 million in 2012, due to the average increase of approximately 1.6% in the tariff for free and captive markets in the period. This increase was partially offset by a 15% discount granted, since September 2011, at the Use of Distribution System Tariff (TUSD), in the facilities directly related to sanitation.

5.6. General expenses

In 2012 general expenses increased R$ 31.5 million or 4.8%, from R$ 656.0 million to R$ 687.5 million, due to:

·         Transfer of R$ 21.0 million to the municipal fund pursuant to the Service Agreement with the Municipal Government of São Paulo;

·         Increase of R$ 6.9 million, due to the beginning of billing for the use of water from the Baixada Santista water basin since February 2012; and

·         Increase of R$ 2.7 million, related to the institutional support due to the contribution to the Instituto Criança Cidadã. 

In 4Q12 general expenses increased R$ 9.0 million, mainly due to:

·         Transfer of R$ 4.6 million to the municipal fund pursuant to the Service Agreement with the Municipal Government of São Paulo;

·         Increase of R$ 1.7 million, due to the beginning of billing for the use of water from the Baixada Santista water basin since February 2012; and

·         Increase of R$ 0.6 million, related to the institutional support due to the contribution to the Instituto Criança Cidadã.

5.7. Depreciation and Amortization

Depreciation and amortization dropped R$ 30.2 million or 3.9%, from R$ 768.7 million in 2011 to R$ 738.5 million in 2012, due to the amortization term adjustment between the asset’s useful life and the contract effectiveness, whichever is the shortest one, in 2011. The main adjustment refers to the amortization of intangible assets related to the Service Agreement with the Municipal Government of São Paulo, non-recurring for the coming year.

5.8. Credit write-offs

In 2012 credit write-offs increased R$ 71.9 million or 59.8%, from R$ 120.3 million to R$ 192.2 million, chiefly due to the additional provision for overdue agreements with private clients in the amount of R$ 14.4 million, municipal public entities in the amount of R$ 8.8 million and the additional provision for overdue debits with public state entities in the amount of R$ 35.1 million.

5.9. Tax expenses

In 2012 tax expenses grew R$ 6.8 million or 11.1%, due to:

·         Payment of the Municipal Real Estate Tax – IPTU, especially in the municipality of São Paulo in the amount of R$ 3.7 million; and

·         Payment of the R$ 3.2 million TRCF (Regulation, Control and Oversight) fee to ARSESP (São Paulo State Sanitation and Energy Regulatory Agency).

6. Other operating revenues and expenses

6.1. Other operating revenues

Other operating revenues fell by R$ 5.1 million, chiefly due to the R$ 37.1 million received, in 2011, related to the agreement of Disposal of Exclusivity Rights for deposits of Sabesp employees' payments with Nossa Caixa and Banco do Brasil, regarding the period between March 2007 and December 2011.

This decline was partially offset by: (i) the sale of scrap material totaling R$ 5.3 million; (ii) contractual fines of R$ 13.4 million; (iii) the sale of fixed assets totaling R$ 4.8 million; and (iv) the agreement for the provision of specialized technical services and technology transfer, with the purpose of implementing a program for the reduction of losses and revenue evasion with the Alagoas state sanitation concessionaire (CASAL) amounting to R$ 4.4 million.

6.2. Other operating expenses

Other operating expenses declined by R$ 71.1 million, mainly due to: (i) provision for losses related to the indemnification of assets related to the concession in the municipality of Mauá, in the amount of R$ 85.9 million, in 2011; (ii) the write-off of assets out of use totaling R$ 40.3 million in 2011; and (iii) studies and projects not economically feasible written off in 2011 in the amount of R$ 6.1 million.

These increases were partially offset by the provision for losses from the indemnification of assets related to the concession of the municipality of Diadema in the amount of R$ 60.3 million.

7. Financial revenues and expenses

7.1. Financial expenses

In 2012 financial expenses dropped R$ 57.7 million, or 10.1%. The main factors that influenced this result were:

·         Decrease in interest on domestic loans and financing in the amount of R$ 50.1 million, mainly due to the amortization of the 8^th, 9^th  and 13^th debenture in June and October 2011, and February 2012, respectively;

·         Lower interest related to lawsuits, mainly regarding clients, in the amount of R$ 29.8 million;

·         Other financial expenses increased by R$ 14.2 million mainly due to commitments with the municipalities for the formalization of program contracts; and

·         Increase of R$ 8.0 million in interest from international loans and financing, due to the exchange rate variation.

7.2. Financial revenues

Financial revenues decreased by R$ 109.8 million, due to the gradual reduction of the market interest rates obtained in financial investments and lower cash position.

8. Monetary variation on assets and liabilities

8.1. Monetary variation on liabilities

The effect on the monetary variation on liabilities in 2012 was R$ 397.8 million lower than in 2011, specially:

·         Decrease in the exchange rate variation on international loans and financing, in the amount of R$ 331.8 million, due to the 8.9% depreciation of the Brazilian Real versus the US Dollar in 2012, compared with 12.6% in 2011 and the 2.4% appreciation of the Brazilian Real versus the Yen in 2012 (18.6% depreciation in 2011);

·         Monetary variation on domestic loans and financing decreased by R$ 14.3 million, mainly due to the lower variation of the TR interest rate in 2012 of 0.29%, compared with 1.21% in 2011;

·         Monetary restatements of the commitments arising from program agreements in 2011, totaling a R$ 36.3 million decrease; and

·         Expenses relating to lawsuits in the amount of R$ 16.6 million.

8.2. Monetary variation on assets

Monetary variation on assets dropped R$ 8.4 million, from the Sale of Exclusivity Rights for deposits of Sabesp’s employees' payments in 2011.

9. Operating indicators

The table below shows operating indicators performance in 2012. Sabesp invested approximately R$ 362 million in the Corporate Program for Water Loss Reduction, in 2012, close to the amount invested in 2011, and enough to maintain the loss ratio stable, closing the year at 25.7%.

Currently, there is a biding to hire the activities scheduled for the 1^st Phase of the Program, financed by JICA – Japan International Cooperation Agency, scheduled to start on the second half of 2013. At this phase an increase of the amounts directed to water loss is foreseen and, as a consequence, the drop in the water loss ratio.

(1) In thousand units
(2) In million inhabitants. Not including wholesale
(3) In millions of cubic meters.
* Unaudited

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11. Capex for 2013 - 2016

R$ 2.5 billion were invested in 2012, mainly in sewage.

The 2013/2016 capital expenditure plan totals R$ 9.9 billion and aims at achieving the target of keeping the universal access to sanitation services in all municipalities in the system, until the end of the decade.

To finance the plan, Sabesp will count with its own resources and loans with BNDES, Caixa Econômica Federal and international fomenting banks, which present better financing conditions to the Company’s investments.

Capital Expenditure

12. Events

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