Late last week Companhia de Saneamento Basico do Estado de Sao Paulo (Sabesp) (SBS 2.81%) released its quarterly earnings. From an operational standpoint, Sabesp looked pretty strong. Revenue was up on increased tariff rates and increased customer connections, and several of its more controlable costs were down. However, it was the factors that are mostly outside of its control that hit the company hard this quarter and resulted in a net loss. Here's a quick look at the company's results and what to make of it.
Sabesp's results: The raw numbers
| Results (in millions, except per-share data)* | Q3 2015 | Q3 2014 | Change |
|---|---|---|---|
| Revenue | $831.2 | $733.9 | 13.2% |
| Adjusted EBITDA | $234.8 | $192.9 | 21.7% |
| Net income | ($150.8) | $23.7 | -- |
| Earnings per share | ($0.22) | $0.03 | -- |
*All financial results converted to USD at exchange rate $1 BRL = $0.26 USD
Source: Sabesp quarterly earnings release.
Those numbers by themselves look a little confusing, so let's break them out a little. The largest factor between this quarter and the same time last year is increased finanical costs due to foreign exchange rates. Over the past year, the Brazilian real depreciated in value compared to the U.S. dollar and the Japanese yen by 28% and 30%, respectively. This makes things costly because all revenue is generated in Brazilian real and 51% of its debt is denominated in either dollars or yen. Compared to this time last year, foreign exchange related debt costs increased 352%.
What happened with Sabesp this quarter
Despite that huge currency related cost, operational results across the company looked rather strong. Here's some of the highlights:
- Total water and sewage volumes decreased 6.8% and 4.4%, respectively, but Sabesp was able to make up for this with a 15.2% tariff inrease in June of 2015. Total connections for water and sewer also increased 2.6% and 3%, respectively.
- Supplies, services, and general expenses declined 10.3% to $141 million for the quarter, but they weren't enough to offset electric power costs that resulted from a tariff increase as well. Sabesp did reduce its total power consumption overall, but the 76% increase in tariffs for electricity were simply too much of a cost to overcome.
- Perhaps one of the greater reliefs for the company is the easing drought situation in the region. Water levels across its system are still not at ideal levels and its still under incenting customers to keep water use to a minimum. However, the water deficit -- amount of rainwater flowing into reservoirs minus withdrawals -- declined 94%.
Looking ahead
There is absolutely nothing that Sabesp can do when it comes to currency fluctuation. The declining value of the real is likely going to lead to additional large financial costs like these when other notes it took out years ago in other currencies come due. Long-term, though, foreign currency exchanges typically come out the wash. This year, though, it will likely make for a much smaller dividend payment since Sabesp's divided is based on a percentage of net income and the dividend is in reais. So the payment to American depositary shares will take a big hit.
Eventually when all of these currency headwinds clear, investors could be looking at a strong income-generating company. By 2020 it plans to have 100% water distribution and 95% sewage collection coverage across all potential customers in its municipal operating region, and Sabesp is doing a decent job of cutting the costs it can control. It may take a while for Sabesp to look attractive as an income investment for American investors, but once it does, investors probably won't be disappointed with the results.
