SBS Companhia Sanea

1.     Financial highlights

(*) Adjusted EBIT is net income before: (i) other operating revenues/expenses, net; (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 3Q17, net operating revenue, including construction revenue, reached R$ 3,536.5 million; a 5.6% decrease compared to the same period in 2016.

Costs and expenses, including construction costs, totaled R$ 2,405.9 million, 10.5% lower than in 3Q16.

Adjusted EBIT, in the amount of R$ 1,131.8 million, increased 7.0% from R$ 1,057.3 million recorded in 3Q16.

Adjusted EBITDA, in the amount of R$ 1,456.3 million, increased 8.9% from R$ 1,337.5 million recorded in 3Q16 . (R$ 5,084.3 million in the last twelve months).

The adjusted EBITDA margin was 41.2% in 3Q17 against 35.7% in 3Q16 (35.1% in the last twelve months).

Excluding construction revenues and construction costs, the adjusted EBITDA margin was 50.9% in 3Q17 (49.6% in 3Q16 and 44.9% in the last twelve months).

In 3Q17 the Company recorded a net income of R$ 900.5 million, in comparison to a net income of R$ 573.9 million in 3Q16.

2. Gross operating revenue

Gross operating revenue from sanitation services, not including construction revenue, totaled R$ 2,999.7 million, an increase of R$145.6 million or 5.1%, when compared to the R$ 2,854.1 million recorded in 3Q16.

The main factors that led to this variation were:

·          Increase of 4.8% in the Company’s total billed volume (5.0% in water and 4.6% in sewage);

·          Lower estimated loss of wholesale revenue in 3Q17, in the amount of R$ 16.7 million, due to the payment received in the period, especially from the Guarulhos municipal government.

3. Construction revenue

Construction revenue decreased R$ 384.9 million or 35.1%, when compared to 3Q16. The variation was mainly due to lower investments in the municipalities served by the Company.

4. Billed volume

5. Costs, administrative & selling expenses and construction costs

Costs, administrative & selling expenses as well as construction costs decreased 10.5% in 3Q17 (R$ 283.1 million). Excluding construction costs, costs and expenses increased by 5.9% (R$ 95.9 million).

As a percentage of net revenue, costs and expenses were 68.0% in 3Q17 compared to 71.8% in 3Q16.

5.1. Salaries and payroll charges and Pension plan obligations

There was an increase of R$ 331.1 million in 3Q17, mainly due to:

·          Increase of R$ 34.5 million, mostly due to the 1% increase related to the Career and Salary Plan since December 2016 and the 3.71% pay rise in May 2017; and

·          Migration of 3,572 participants from the Defined Benefit Plan (G1) to the Defined Contribution Plan (Sabesprev Mais) in 3Q16, generating an early reduction of R$ 334.2 million in the actuarial deficit, offset by an incentive and extraordinary contribution of R$ 26.8 million, resulting in a net reduction of R$ 307.4 million in expenses in that period.

5.2. Services

Services expenses totaled R$ 288.4 million, R$ 58.7 million less than the R$ 347.1 million recorded in 3Q16. This decline was distributed in several items, including:

·          Marketing campaigns, in the amount of R$ 10.9 million;

·          Nautical services related to the application of chemicals in the water reservoirs, in the amount of R$ 10.1 million;

·          Leasing of machinery and equipment, in the amount of R$ 4.3 million; and

·          Telephony, in the amount of R$ 3.2 million.

5.3. Electricity

Electricity expenses totaled R$ 203.6 million in 3Q17, a decrease of R$ 21.1 million or 9.4% in comparison to the R$ 224.7 million in 3Q16. The main factors that contributed to this decrease were:

·          Average reduction of 12.1% in the free market tariffs, with an 14.6% increase in consumption;

·          Average reduction of 29.4% in the grid market tariff (TUSD), with a 19.6% rise in consumption; and

·          Average reduction of 3.0% in the regulated market tariffs, with a 3.0%.decrease in consumption.

In 3Q17, the free market accounted for 35.2% of the total electricity consumed by the Company, the grid market accounted for 31.9% and the regulated market accounted for 32.9% of total consumption.

5.4. General expenses

General expenses decreased R$ 64.9 million, or 26.0%, totaling R$ 184.4 million in 3Q17, versus the R$ 249.3 million recorded in 3Q16, mainly due to the following reasons:

·          Higher provisioning for lawsuits in 3Q16, totaling R$ 31.6 million; and

·          Non-recurring provisioning of R$ 38.1 million in 3Q16, related to the agreement with Empresa Metropolitana de Águas e Energia – EMAE.

5.5. Depreciation and amortization

Depreciation and amortization increased R$ 44.3 million or 15.8%, reaching R$ 324.5 million in 3Q17 in comparison to the R$ 280.2 million recorded in 3Q16, largely due to the beginning of operations of intangible assets, in the amount of R$ 1.6 billion.

5.6. Allowance for doubtful accounts

The allowance for doubtful accounts fell R$ 124.1 million, mainly due to lower delinquency rates in the period.

6. Other operational revenues (expenses), net

There was an R$ 8.3 million increase in this line, mostly due to the payment of R$ 9.2 million received under the Water Basin Clean-up Program in 3Q17.

7. Financial result

7.1. Financial income and expenses

7.1.1. Financial expenses

Decrease of R$ 26.5 million, mainly due to the following events:

·          Interest and charges on domestic loans and financing: decline of R$ 8.1 million, mainly due to the lower CDI rate in 3Q17, compared with 3Q16 (8.14% and 14.13%, respectively); and

·          Other financial expenses: reduction of R$ 18.6 million, mostly due to lower provisioning for interest on court proceedings in 3Q17.

7.1.2. Financial income

Financial income moved up R$ 20.7 million, mostly due to the higher recognition of interest on installment agreements in 3Q17.

7.2. Monetary and exchange rate variation on assets and liabilities

7.2.1 Monetary and exchange rate variation on liabilities

The effect of monetary and currency variations in 3Q17 was R$ 361.4 million lower than in 3Q16, mainly due to:

·          Reduction of R$ 20.8 million in expenses with monetary variation on loans and financing, due to the lower variation in the IPCA in 3Q17 compared with 3Q16 (0.6% and 1.0%, respectively); and

·          Decrease of R$ 332.4 million in exchange variation on loans and financing, as a result of the devaluation of dollar and yen against the real in 3Q17 (-4.2% and -4.5%, respectively), versus an appreciation of 1.1% and 2.7%, respectively, in 3Q16.

8. Income tax and social contribution

Increase of R$ 155.9 million, mainly due to the higher taxable result reported in the period, which was mostly impacted by the devaluation of dollar and yen against the real in 3Q17, versus an appreciation in 3Q16.

9. Indicators

9.1. Operating

9.2. Financial

10. Loans and financing

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