SBS Companhia Sanea

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)

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

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

In 2014, net operating revenue, including construction revenue, reached R$ 11.2 billion; a 0.9% decrease compared to 2013.

Costs and expenses, including construction costs, totaled R$ 9.3 billion, up 13.6% compared to R$ 8.2 billion in 2013.

Adjusted EBIT, in the amount of R$ 1.9 billion, dropped 39.0% from R$ 3.1 billion recorded in 2013.

Adjusted EBITDA, in the amount of R$ 2.9 billion, dropped 27.2% from R$ 4.0 billion recorded in 2013.

The adjusted EBITDA margin was 26.0% in 2014, versus 35.4% in 2013. Excluding construction revenues and construction costs, the adjusted EBITDA margin was 34.4% in 2014 (44.6% in 2013).

Net income totaled R$ 903.0 million, 53.1% lower than R$ 1.9 billion recorded in 2013.

2. Gross operating revenue

Gross operating revenue from water and sewage, not including construction revenue, totaled R$ 8.9 billion, a drop of R$ 634.6 million or 6.7%, when compared to the R$ 9.5 billion recorded in 2013.

The main factors that led to this variation were:

·    Water Consumption Reduction Incentive Program, with a R$ 376.4 million impact; and

·    Decrease of 2.2% in the Company’s total billed volume (3.1% in water and 1.1% in sewage).

The tariff adjustments applied in the period were:

·    3.1% tariff adjustment since December 2013; and

·    6.5% repositioning index since December 2014, with an impact as of January 2015.

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3. Construction revenue

Construction revenue increased R$ 473.2 million or 19.4%, when compared to 2013. The variation was mainly due to higher investments in 2014.

4. Billed volume

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5. Costs, administrative and selling expenses

In 2014, costs, administrative and selling expenses, grew 13.6% (R$ 1,114.1 million). Excluding construction costs, total costs and expenses grew 11.3%. As a percentage of net revenue, cost and expenses was 82.9% in 2014 from 72.3% in 2013.

5.1. Payroll and benefits

In 2014 payroll and benefits grew R$ 196.1 million or 10.2%, from R$ 1,927.2 million to R$ 2,123.3 million, due to the following:

·    R$ 89.1 million increase due to the 6.8% increase in average wages since May 2014 and the changes from the career and wage plan;

·    R$ 43.5 million increase in provisions, from the higher number of employees who are entitled to request retirement (TAC), in addition to the wage increase in the period;

·    R$ 25.9 million upturn in the provision for the Pension Plan, arising from changes in actuarial assumptions;

·    R$ 14.6 million increase in overtime pay, mainly due to wage adjustment in the period, and the higher number of hours worked, as a result of the management and intensification of water systems maintenance; and

·    R$ 7.0 million, due to the 7.1% adjustment in healthcare expenses since July 2014.

In 4Q14 payroll and benefits grew R$ 55.0 million, due to:

·    R$ 22.7 million increase due to the 6.8% average increase in wages since May 2014 and the changes from the career and wage plan;

·    R$ 11.7 million increase in provisions, from the higher number of employees who are entitled to request retirement (TAC), in addition to the pay rise in the period;

·    R$ 8.3 million upturn in the provision for the Pension Plan, arising from changes in actuarial assumptions; and

·    R$ 7.5 million increase in overtime pay, mainly due to wage adjustment in the period, and the higher number of hours worked, as a result of the management and intensification of water systems maintenance.

5.2. Supplies

In 2014, expenses with supplies increased R$ 8.7 million or 4.5%, from R$ 193.4 million to R$ 202.1 million, mostly due to the increase in the consumption of diesel used in generators installed to extract water from thetechnical reserve at the Cantareira System, in the amount of R$ 6.5 million.

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5.3. Treatment supplies

Treatment supplies expenses in 2014 were R$ 20.5 million or 8.5% higher than in 2013, from R$ 240.7 million to R$ 261.2 million, due to the following:

·    Consumption increase in aluminum sulfate, with an impact of R$ 7.0 million, chiefly due to a 14.0% increase in production volume at the Taiaçupeba Water Treatment Station;

·    Consumptiom increase of several treatment supplies, with an impact of R$ 5.9 million, chiefly due to the beginning of the use of products that reduce the algae bloom in the São Paulo metropolitan region’s water sources since April 2014; and

·    Consumption increase of sodium hypochlorite, used to replace chlorine gas in several water treatment stations in the Regional Systems, due to higher efficiency and safety with an impact of R$5.5 million.

5.4. Services

Services, in the amount of R$ 1,314.9 million, grew R$ 202.7 million or 18.2%, in comparison to the R$ 1,112.2 million in 2013. The main factors were:

·    Advertising campaigns, in the amount of R$ 58.7 million, mainly due to the intensification of the ‘Rational Use of Water’ campaign;

·    Reversal of the provision for expenses, totaling R$41.4 million, due to the end of the agreement with the São Paulo Municipal Government; non-recurring;

·    Hired Services in the amount of R$ 34.7 million, mainly due to the beginning of operations in the municipality of Diadema, in March of 2014, in the amount of R$ 28.2 million;

·    Higher expenses with the Corporate Program for Reduction of Water Loss, in the amount of R$ 19.7 million; and

·    Water metering and billing, totaling R$11.4 million, due to the expansion of services and increased information availability, pursuant to ARSESP Resolution Nº 106/09.

In 4Q14 services expenses grew R$ 44.3 million, due to:

·    Advertising campaigns, in the amount of R$ 27.1 million, mainly due to the intensification of the ‘Rational Use of Water’ campaign;

·    Higher expenses with the Corporate Program for Reduction of Water Loss, in the amount of R$ 9.0 million; and

·    Hired services, in the amount of R$ 8.0 million, due to the beginning of operations in the municipality of Diadema, in March of 2014, in the amount of R$ 5.8 million.

5.5. Electric power

This item totaled R$ 599.1 million, an increase of R$ 46.2 million or 8.4% in comparison to the R$ 552.9 million in 2013, due to the average increase of 19.8% in free market tariffs and of 7.8% in regulated market tariffs.

These increases were partially offset by the average decrease of 14.5% in the Tariff for the Use of Distribution System (TUSD).

5.6. General expenses

General expenses grew R$ 8.7 million or 1.2%, totaling R$ 719.7 million, versus the R$ 711.0 million recorded in 2013 mainly due to:

·    R$ 37.1 million increase in the provision for lawsuits; and

·    Higher provision for sundry losses, in the amount of R$ 16.3 million.

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The increases above were partially offset by the R$ 43.3 million drop in the provision for the Municipal Fund for Environmental Sanitation and Infrastructure, as a result of the decrease in revenues with the municipality of São Paulo.

5.7. Depreciation and amortization

R$ 133.4 million increase or 15.3%, reaching R$ 1,004.5 million in comparison to the R$ 871.1 million recorded in 2013, largely due to the beginning of operations of intangible assets, in the amount of R$ 4,1 billion.

5.8. Credit write-offs

Credit write-offs increased R$ 35.7 million, chiefly due to the higher provision for losses with municipalities served by the Company on the wholesale basis during 2014.

6. Other operating revenues and expenses, net

Other operating revenues/expenses, net, recorded a R$ 6.8 million decrease, mainly due to:

R$ 51.9 million increase in other operating revenue, as follows:

·    Increase in fines to suppliers and service providers, totaling R$ 25.8 million; and

·    Upturn in revenue from the Program for the Rational Use of Water – PURA, totaling R$ 20.9 million. R$ 58.7 million increase in other operating expenses, as follows:

·    Provision for the write-off of construction works and projects, totaling R$ 21.3 million;

·    Provision for losses with contractual payments, as a result of the agreement with the municipality of Diadema, totaling R$15.0 million;

·    Write-off of obsolete goods, in the amount of R$ 11.4 million; and

·    Provision for the write-off of hydrometers, in the amount of R$ 11.4 million.

7. Financial result

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7.1.1. Financial expenses

Financial expenses grew R$ 41.0 million. The main reasons were:

·    R$ 21.8 million decrease in interest and charges on domestic loans and financing, mainly due to the higher interest capitalization occurred in 2014, versus 2013;

·    R$ 7.6 million increase in interest and charges on international loans and financing, due to the increase in total debt, as a result of new fundings, in the amount of R$ 458.7 million; and

·    Other financial expenses increased R$ 55.2 million, largely due to the greater recognition of interest arising from the beginning of operation of two sewage treatment plants financed through leases, in the amount of  R$ 47.9 million.

7.1.2. Financial revenues

Financial revenues increased R$ 29.9 million or 9.9%, due to financial investments indexed to CDI, held in the period, as a result of the increase in the Interbank Deposit Certificate (CDI) in 2014 (10.8%), versus 2013 (8.2%).

7.2. Monetary and exchange rate variation on assets and liabilities

7.2.1. Monetary/exchange rate variation on liabilities

The effect on the monetary/currency exchange variation on liabilities in 2014 was R$ 146.3 million, higher than in 2013, especially due to:

·    An increase of R$ 25.6 million in expenses with monetary variation on domestic loans and financing, chiefly due to the increase in the IPCA and TR (6.4% and 0.9%, respectively) compared to 2013 (5.9% and 0.2%, respectively);

·    An upturn of R$ 77.9 million in expenses, considering exchange variation on loans and financing, due to the increase in the debt balance, as a result of new fundings, totaling R$458.7 million; and

·   Other monetary variations, with an increase of R$42.8 million, chiefly due to the monetary restatement of lawsuits, totaling R$38.0 million.

The US dollar appreciation recorded in 2014 and 2013 was 13.4% and 14.6%, respectively.

7.2.2. Monetary/Exchange rate variation on assets

R$ 4.7 million increase, mainly due to the monetary updates on judicial deposits.

8. Income tax and social contribution

Income tax and social contribution expenses decreased by R$ 360.2 million, due to the drop in taxable income in the period.

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9. Indicators

9.1. Operating

The water loss ratio has continued decreasing, closing 2014 at 21.3%. The same occurred with the measured water loss ratio which dropped from 31.2% in 2013 to 29.8% in 2014.

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

(3) In millions of cubic meters (*) Unaudited

9.2. Financial

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10. Loans and financing

11. Capex

In 2014 the Company invested R$ 3.2 billion, R$ 2.0 billion in the São Paulo Metropolitan Region and R$ 1.2 billion in the Regional Systems.

2014 Capex

Capex Plan 2015 – 2019: R$ 13.5 billion

The Capex Plan for 2015 to 2019 is R$ 13.5 billion of which R$ 5.6 billion in water and R$ 7.9 billion in sewage.

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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.

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Income Statement

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Balance Sheet

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