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

R$ million

1. Financial highlights

Adjusted EBITDA Reconciliation (Non-accounting measures)

(*) Earnings before interest, income tax and social contribution.

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

In 1Q14, net operating revenue reached R$ 2.8 billion; a 5.6% increase compared to 1Q13.

Costs and expenses, including construction costs, increased 6.1%, from R$ 1.9 billion in 1Q13 to R$ 2.0 billion this quarter.

EBIT grew 4.0%, from R$ 726.3 million in 1Q13 to R$ 755.6 million in 1Q14.

Adjusted EBITDA increased 10.2%, from R$ 921.5 million in 1Q13 to R$ 1,015.8 million in 1Q14.

The adjusted EBITDA margin moved from 34.8% in 1Q13 to 36.4% in 1Q14. Excluding construction revenues and construction costs, the adjusted EBITDA margin was 44.5% in 1Q14 (42.4% in 1Q13).

Net income dropped 3.7%, from R$ 496.2 million in 1Q13 to R$ 477.6 million in 1Q14.

2. Gross operating revenue

Gross operating revenue from water and sewage grew from R$ 2.3 billion in 1Q13 to R$ 2.4 billion in 1Q14, an increase of R$ 125.7 million or 5.4%.

The main factors that led to this variation were:

·         Increase of 5.2% in the Company’s total billed volume (4.9% in water and 5.5% in sewage); and

·         Average effect of the 5.3% tariff adjustment.

The tariff adjustments in 2013 were:

·         The tariff repositioning index of 2.35% applied since April 2013; and

·         Tariff adjustment of 3.1% since December 2013.

The increases mentioned above were partially offset by the higher reversion of estimated revenue in 1Q14, in the amount of R$ 75.6 million, compared to 1Q13 and by higher provision for revenue losses on the wholesale basis, in the amount of R$ 39.6 million.   

3. Construction revenue

Construction revenue increased R$ 35.6 million or 7.2%, when compared to 1Q13. The variation was mainly due to higher investments in 1Q14.

4. Billed volume

The following tables show the water and sewage billed volume, quarter-on-quarter, per customer category and region.

            (1) Unaudited

            (2) Including coastal and interior region

5. Costs, administrative and selling expenses

In 1Q14, costs, administrative and selling expenses, grew 6.1% (R$ 117.4 million). Excluding construction costs, total costs and expenses grew 5.8%. As a percentage of net revenue, cost and expenses moved from 72.5% in 1Q13 to 72.9% in 1Q14.

5.1. Payroll and benefits

In 1Q14 payroll and benefits grew R$ 34.9 million or 7.6%, from R$ 461.8 million to R$ 496.7 million, due to the following:

·         8.0% increase in wages since May 2013 and the  implementation of the Company’s new career and wage plan carried out by the Company, with an impact of approximately R$ 24.0 million;

·         R$ 5.7 million upturn in the provision for the Pension Plan, arising from changes in actuarial assumptions;

·         R$ 4.0 million increase from the higher number of employees who are entitled to request retirement (TAC); and

·         R$ 2.3 million increase in meal expenses, mainly due to the 13.6% adjustment on meal voucher in May 2013, settled in the collective bargaining agreement.

5.2. Supplies

In 1Q14, expenses with supplies increased by R$ 2.8 million or 6.3%, when compared to the previous year, from R$ 44.3 million to R$ 47.1 million, mostly due to:

·         Preventive and corrective maintenance in several water and sewage systems, in the amount of R$ 1.6 million; and

·         Expenses with fuel and lubricants, in the amount of R$ 1.1 million, from the increase in prices of diesel and ethanol in March and November, 2013, in addition to increased mileage traveled.   

5.3. Treatment supplies

Treatment supplies expenses in 1Q14 were R$ 4.8 million or 7.4% higher than in 1Q13, from R$ 64.9 million to R$ 69.7 million. The main factors for this variation were:

·           Increase in the consumption of aluminum polychloride, in the amount R$ 1.9 million, essentially in the Rodolfo Costa e Silva, Guaraú, Campo Limpo Paulista, Presidente Prudente and Hortolândia Water Treatment Stations (WTS) with an upturn of 40.0% in the average cost;

·           Increase of R$ 1.8 million in the consumption of aluminum sulfate, due to the decline in the quality of untreated water in the Casa Grande and Rio Claro WTS, with a 15.5% increase in consumption and of 38.6% in the average cost.; and

·           Increase of R$ 1.2 million in the consumption of Sodium hypochlorite, with a 20.6% increase in consumption and of 11.4% in the average cost.

5.4. Services

Services grew R$ 86.0 million or 37.6%, from R$ 228.7 million in 1Q13 to R$ 314.7 million in 1Q14. The main factors were:

·           Reversal of provision in the amount of R$ 41.4 million, due to the end of the agreement settled with the São Paulo Municipal Government in 1Q13, non-recurring;

·           Expenses with legal services in the amount of R$ 13.0 million, regarding the agreement for the resumption of the operation in the municipality of Diadema;

·           Expenses with risk contracts for credit recovery, in the amount of R$ 8.4 million. As a result of these contracts, collection initiatives generated an increase of R$ 51.8 million in revenue in 1Q14;

·           Maintenance in the water and sewage network connections, in the amount of R$ 6.5 million, mainly due to the intensification of water loss prevention and the execution of services in several areas of the São Paulo Metropolitan Region;

·           Maintenance of software and equipment, in the amount of R$ 5.5 million;

·           Hydrometer reading and bill delivery expenses in the amount of R$ 2.7 million, as a result of the new contracts with services expansion, such as: property inspections, service requests, analysis of outstanding debt and revision of bills;

·           Hiring of consultancy, advisory and specialized services, with a R$ 2.7 million increase, mainly comprising: (i) SiiS project – Sabesp integrated information system, support, updates, maintenance services and information safety management training; and (ii) value generation project through GVA system; and

·           Preventive and corrective maintenance in the water and sewage systems in the amount of R$ 2.4 million.

5.5. Electric power

This item decreased R$ 4.8 million, or 3.3%, from R$ 144.8 million in 1Q13 to R$ 140.0 million this quarter, mainly due to the average reduction of 14.0% in regulated market and distribution grid tariffs, and partially offset by the average increase of 7.1% in free market tariffs associated with the upturn in consumption volume in 1Q14.

5.6. General expenses

General expenses dropped by R$ 62.7 million or 29.1%, from R$ 215.4 million in 1Q13 to R$ 152.7 million in 1Q14, due to the following:

·         Decrease in the provision for lawsuits in the amount of R$ 59.6 million, mainly related to civil (R$ 32.1 million), environmental (R$ 19.9 million) and labor (R$ 6.2 million) contingencies; and

·         Agreements for environmental compensation, in the amount of R$ 17.3 million in 1Q13.

These decreases were offset, in part, by:

·         Provision for unrecoverable losses in the amount of R$ 4.1 million; and

·         R$ 3.3 million in provision related to the transfer to the Municipal Fund for Environmental Sanitation and Infrastructure, pursuant to the Service Agreement with the São Paulo Municipal Government, as a result of the increase in revenues; and

·         R$ 3.3 million due to institutional support aiming the rational use of water.

5.7. Depreciation and amortization

Depreciation and amortization increased R$ 65.0 million or 33.3%, from R$ 195.2 million in 1Q13 to R$ 260.2 million in 1Q14, due to the beginning of operations of intangible assets, in the amount of R$ 1.8 billion.

5.8. Credit write-offs

Credit write-offs decreased R$ 22.7 million or 60.7%, from R$ 37.4 million in 1Q13 to R$ 14.7 million in 1Q14, chiefly due to the lower provision for possible loan losses and higher recoveries through agreements.

5.9. Tax expenses

In 1Q14, there was a decrease of R$ 20.4 million or 50.9%, chiefly due to increase tax expenses in 1Q13.

6. Other operating revenues and expenses

6.1. Other operating revenues

Recorded a R$ 5.9 million increase, mainly due to revenue from the Rational Water Use Program (PURA) in 1Q14.

6.2. Other operating expenses

R$ 57.8 million increase in other operating expenses due to:

·         Provision for the write-off of works and projects in the amount of R$ 31.4 million;

·         Provision for losses regarding  contractual payments related to the agreement with the municipality of Diadema, in the amount of R$ 13.0 million; and

·         Provision for the write-off of hydrometers in the amount of R$ 11.6 million.

7. Net financial

7.1. Financial revenues and expenses

7.1.1. Financial expenses

Financial expenses dropped R$ 5.1 million or 3.6%. The main reasons were:

·         R$ 10.8 million decrease in other financial expenses, chiefly due to: (i) lower interest due to lower need of provision for lawsuits, in the amount of R$ 20.3 million; and (ii) costs with funding in the amount of R$ 3.9 million, due to the early settlement of the balance of the 11^th debenture issue in March 2013; and

·         Increase in interest and charges on international loans and financing, due to the increase in total debt, from higher funding, specially the BID loan.

7.1.2. Financial revenues

Financial revenues increased by R$ 7.1 million or 11.0%, due to the higher interest rate from financial investments.

7.2. Net monetary variation

7.2.1. Monetary/currency exchange variation on liabilities

The effect on the monetary/currency exchange variation on liabilities in 1Q14 was R$ 8.0 million or 10.5% lower than in 1Q13, specially:

·         Decrease of R$ 12.6 million in revenues of exchange rate variation over loans and financing, mainly deriving from  the lower depreciation of the Japanese Yen versus Brazilian Real in 1Q14 of 1.6%, when compared to the 9.7% depreciation in 1Q13; partially offset by the depreciation of the US Dollar versus Brazilian Real of 3.4% in 1Q14, compared to a 1.5% depreciation in 1Q13; and

·         R$ 8.9 million increase in monetary variation expenses over domestic loans and financing, especially the series restated by the IPCA rate of the 17^th and 18^th debenture issues in February and December 2013, respectively; and

·         R$ 13.5 million decrease in other monetary variation from the lower need for provision for lawsuits.

7.2.2. Monetary variation on assets

Monetary variation on assets decreased by R$ 4.0 million in 1Q14, chiefly due to monetary adjustment in 1Q13, for the period between the date the 17^th issue debenture was issued (January 2013) and the date it was settled (February 2013).

8. Income tax and social contribution

Income tax and social contribution expenses decreased by R$ 3.8 million, due to the drop in taxable income in the period.

9. Indicators

9.1. Operating

The Company continues to expand its water and sewage connection to serve the population of its operating area, as shown in the chart below.

Regarding the non-revenue water, with the progress of the Corporate Program for Water Loss Reduction the results are already noticeable, with a decrease of the loss ratio to 24.1% this quarter. The Company expects even better results along 2014 and 2015, due to the Program’s progress.

(1)        Total connections, active and inactive, in thousand units at the end of the period

(2)        In million inhabitants, at the end of the period. Not including wholesale

(3)        In millions of cubic meters at the end of the period

(*)      Unaudited 

9.2. Financial

(*)     Unaudited 

10. Loans and financing

11. Capex

Our capex plan is designed to improve and expand our water and sewage system and to increase and protect our water sources in order to meet the growing demand for water and sewage services in the 364 municipalities we serve.

In 1Q14 the Company invested R$ 553.9 million versus R$ 535.1 million invested in 1Q13.

12. Conference calls

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.