Sao Paulo, Brazil-based Companhia de Saneamento Basico do Estado de Sao Paulo, or SABESP’s (SBS) financial results in the second quarter 2010 were disappointing as earnings per ADR of R$1.46 (US$1.62 per ADR) reported a year-over-year decline of 28.4% compared with R$2.04 (US$1.95) in the second quarter of 2009. Earnings per ADR also fell short of the Zacks Consensus Estimate of $1.65.
 
Net income plummeted 28.2% year over year to R$333.6 million (US$185.3 million) compared with R$464.7 million (US$222.3 million) in the second quarter of 2009. The fall was chiefly due to higher costs and expenses, and interest expense in the quarter.
 
Revenues
 
Considering the top line, net operating revenue (net of COFINS and PASEP taxes) of R$1,769.8 million (US$983.2 million above the Zacks Consensus Estimate of US$937.0 million) increased 9.0% year over year from R$1,623.7 million (US$776.9 million) in the year-ago quarter. The growth was primarily due to a 4.0% rise in billed water and sewage volume. Of the 847.9 million cubic meter volume reported, roughly 58.1% represented water variation and 41.8% of sewage.
 
The company’s stringent efforts to restrict water loss were evident from its continued reduction in water loss rates, which decreased from 26.7% to 25.8% year over year. Water volume produced in the quarter went up 2.8% year over year; water connections increased 2.4% and sewage connections rose by 3.4%.
 
Margins
 
During the quarter, SABESP’s costs and expenses grew modestly by 2.3% year over year to R$1,143.5 million (US$635.3 million). Cost for electric power, for example, escalated by 6.7%, while tax expenses registered a 17.0% hike. Moreover, credit write-offs increased by 55.5% year over year.
 
As a percentage of revenue, costs and expenses declined 430 basis points to 64.6%.  Major improvements were seen in supply costs (down 12.2% year over year), general expenses (a14.9% decline), depreciation and amortization (a 6.5% decline), and treatment supplies (a 6.0% decline).
 
In the reported quarter, EBITDA improved to R$777.2 million (US$431.8 million), up 16.6% year over year and represented 43.9% of net operating revenue.  EBIT was R$626.2 million (US$347.9 million), up 23.9% year over year with a margin of 35.4%.
 
Financial expenses, net of revenues soared 33.4% year over year to R$146.7 million (US$81.5 million), due primarily to higher domestic loans and finances.
 
Balance Sheet
 
Exiting the second quarter, SABESP had cash and cash equivalents of roughly R$1,047.4 million (US$581.9 million), up 22.9% from R$852.5 million (US$477.4 million) in the previous quarter.  Loans and financing, net of current portion were R$6,019.5 million (US$3,344.2 million), up 7.3% from R$5,610.1 million in the previous quarter.
 
Cash Flow
 
Net cash flow from operating activities was down 64.4% year over year to R$155.3 million (US$86.3 million). The company reduced its spending on acquisition of property, plant and equipment by 6.6% year over year to R$404.6 million (US$224.8 million).
 
Following its second-quarter 2010 earnings announcement, SABESP continues to be the largest water and sewage services provider in the world serving roughly 23.4 million water customers and 19.7 million sewage customers.
 
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