Companhia de saneamento Basico Do Estado De Sao Paulo - Sabesp 6-K 2006
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For October 04, 2006(Commission File No. 1-31317)
Companhia de Saneamento Básico do Estado de São Paulo - SABESP
(Exact name of registrant as specified in its charter)
Basic Sanitation Company of the State of Sao Paulo - SABESP
(Translation of Registrant's name into English)
Rua Costa Carvalho, 300
São Paulo, S.P., 05429-900
Federative Republic of Brazil
(Address of Regristrant's principal executive offices)
Indicate by check mark whether the registrant files or will file
annual reports under cover Form 20-F or Form 40-F.
Form 20-F ___X___ Form 40-F ______
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(1)__.
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(7)__.
Indicate by check mark whether the registrant by furnishing the
If "Yes" is marked, indicated below the file number assigned to the
registrant in connection with Rule 12g3-2(b):
01.01 - IDENTIFICATION
01.02 - HEAD-OFFICE
01.03 - INVESTOR RELATIONS OFFICER (Company's Mail Address)
01.04 - REFERENCE / INDEPENDENT AUDITOR
01.05 - CAPITAL COMPOSITION
01.06 - CHARACTERISTICS OF THE COMPANY
01.07 - COMPANIES EXCLUDED FROM THE CONSOLIDATED FINANCIAL STATEMENTS
01.08 - DIVIDENDS APPROVED AND/OR PAID DURING AND AFTER THE QUARTER
01.09 - SUBSCRIBED CAPITAL AND CHANGES IN THE CURRENT YEAR
01.10 - INVESTOR RELATIONS OFFICER
02.01 - BALANCE SHEET - ASSETS (In thousands of reais)
02.02 - BALANCE SHEET - LIABILITIES (In thousands of reais)
02.02 - BALANCE SHEET - LIABILITIES (Thousand Reais)
03.01 - INCOME STATEMENT (Thousand Reais)
04.01 - EXPLANATORY NOTES
(Amounts in thousands of Brazilian reais-R$ , unless otherwise stated)
Companhia de Saneamento Básico do Estado de São Paulo (SABESP or the Company) is engaged in the operation of public water and sewage systems in the State of São Paulo, providing water and sewage services to a broad range of residential, commercial, industrial and government customers. The Company also provides water on a wholesale basis to certain municipalities in the São Paulo Metropolitan Region that do not have water production systems.
As of the Law 12,292, enacted on March 2, 2006, the Company may provide water and sewage services outside the State of São Paulo, including in other countries, either directly or through national or international consortia, may have equity participation in other state or mixed-capital companies, as well as to establish subsidiaries, to relate itself or participate in a private company connected to the sanitation industry.
The Company provides water and sewage services in 367 municipalities in the State of São Paulo, nearly all of which are through concessions granted by the municipalities and most of them with 30-year term. The 17 (seventeen) concession contracts that expired in 2005 have been extended or are under negotiation. Up to December 31, 2006, 135 contracts are going to expire and the rest between 2007 and 2034. Management expects that the referred concessions will be renewed or extended, thus there will not be a discontinuity of the water supply and sewage collection. Up to June 30, 2006, the net book value of property, plant and equipment items relating to the municipalities where the concessions are under negotiation or will expire in 2006 totals R$ 1,62 billion, and net revenue totals R$ 358 million related to these concessions.
The Company does not hold a formal concession to provide water and sewage services in the City of São Paulo, which accounts for a substantial portion of the sales and services rendered. In Santos, a municipality located in the Santos Coastal Area, which also has a large population, the Company operates under a public deed of authorization, like in some other municipalities in the Santos Coastal Area and in the Ribeira Valley, where the Company started operating after the merger of the companies that formed SABESP. Management believes that the Company has a vested right to provide water and sewage services to these municipalities based upon, among other things, its ownership of the related water and sewage systems serving the City of São Paulo and these other municipalities and certain succession rights resulting from the merger which formed the Company.
In general, the Company does not face any competition in the municipalities in which it provides water and sewage services, and management understands that in those municipalities the Company has an exclusive right to provide such services.
All information regarding concession areas, number of municipalities, volumes of water and sewage and other related data disclosed in this report that do not arise from the accounting and/or financial statements are unaudited.
2. PRESENTATION OF FINANCIAL STATEMENTS
The Companys financial statements, which are used as the basis for determining income taxes and mandatory minimum dividends calculations, have been prepared in accordance with accounting practices adopted in Brazil, which are based on the Brazilian Corporate Law (Law No. 6,404/76 and amendments), the rules and regulations of the Brazilian Securities Commission - CVM and the accounting standards issued by the Brazilian Institute of Independent Auditors IBRACON.
3. SIGNIFICANT ACCOUNTING PRACTICES
(a) Determination of results of operations
(i) Revenues from sales and services
Revenues for water supply and sewage collection services are recognized as water is consumed or as services are provided. Revenues from water supply and sewage collection services rendered but not billed are recognized as unbilled customer accounts receivable based on monthly estimates, in order to match such revenues with costs incurred.
(ii) Financial income and expenses
Primarily comprised of interest and monetary and exchange variations on loans and financing and financial investments, calculated and reported on the accrual basis of accounting.
(iii) Income and social contribution taxes
Income tax is calculated at the rate of 15%, plus a 10% surtax, and social contribution is calculated at the rate of 9%. These taxes are reported on an accrual basis.
Deferred taxes related to tax loss carryforwards and temporary differences are calculated and recorded based on future taxable or deductible amounts and are recognized to the extent that their realization is believed to be probable.
As permitted by the CVM, the Company opted not to recognize the deferred tax liability (non-cash) on the revaluation reserve of property, plant and equipment recorded up to 1991.
(iv) Other income and expenses
Other income and expenses are recorded on an accrual basis.
(b) Cash and Cash Equivalents
Cash and cash equivalents are comprised mainly of bank deposits and financial investments and are carried at cost, plus accrued interest, if applicable. Financial investments denominated in reais have a ready market and an original maturity after 30 days from the date of investment, and are comprised mainly of Bank Deposit Certificates CDBs. Foreign currency deposits, if any, are translated at balance sheets date exchange rates. The Company is required by law to invest excess cash with financial institutions controlled by the State Government (Note 5).
(c) Customer accounts receivable and allowance for doubtful accounts
Customer accounts receivable generally do not accrue interest or indexation charges or penalties, except for refinanced agreements.
The Company records an allowance for doubtful accounts for receivable balances in an amount that is deemed by the Management to be sufficient to cover probable losses in accounts receivable, based on an aging analysis of receipts, taking into consideration the expected recovery in the different categories of customers accounts. Amounts in excess of R$ 5 and overdue for more than 360 days and in excess of R$ 30 and overdue for more than 360 days, which are under judicial collection proceedings, are provisioned. Accounts receivable balances under R$ 5 and overdue for more than 180 days are written off through a direct charge to income.
Inventories of materials used in operations and in the maintenance of the Companys water and sewage systems are stated at the lower of average acquisition cost or realizable value and are classified in current assets.
Inventories for capital projects are classified under property, plant and equipment and are stated at the average acquisition cost.
(e) Other current assets and long-term receivables
Other current assets and long-term receivables are stated at the lower of acquisition cost or realization value, plus accrued interest, when applicable.
(f) Property, plant and equipment
Demonstrated at cost restated up to December 31, 1995, combined with the following aspects:
Depreciation of property, plant and equipment calculated at the straight-line method, at the annual rates mentioned in note 6.a.
Revaluation of fixed asset items, carried out in two separate stages in 1990 and 1991, was based on an appraisal report issued by independent experts, recorded with a corresponding credit to the Revaluation Reserve account in the Shareholders Equity, and is realized through depreciation, sale and disposal of the respective items, with a corresponding entry to Retained Earnings account.
Contributions of property, plant and equipment by third parties and from government entities to allow the Company to supply water and sewage services are recorded as a capital reserve.
Construction-in-progress is recorded at cost and is primarily related to construction projects under contract with third parties.
Capitalization of interest
Interest charges on loans and financing for construction-in-progress are capitalized as part of the cost of assets.
Repairs and Maintenance
Improvements to existing property are capitalized, while costs of general maintenance and repairs are expensed as incurred. Materials allocated to specific projects are added to construction-in-progress.
The Company reviews long-lived assets, primarily buildings and water and sewage systems, including property, plant and equipment and concession assets, to be held and used in the business, for the purpose of determining and measuring impairment on a recurring basis or when events or changes in circumstances indicate that the carrying value of an asset or group of assets may not be recoverable. The Company assesses impairment on the basis of the projected recovery of depreciation charges through results of operations. The carrying value of assets or group of assets is written down to realizable amount if and when appropriate.
(g) Deferred Assets
The deferred assets are comprised of deferred project costs and technical studies, which are being amortized using the straight-line method over 5 years from the date when benefits start to be generated.
(h) Loans and Financing
Loans and financing are adjusted by indexation charges and foreign exchange variations, and include accruals for related interest expense. Loans and financing denominated in foreign currencies are translated to reais at the balance sheet date. The resulting foreign currency exchange adjustments are recognized as incurred, in the financial income (expense), net account.
(i) Salaries and payroll charges
Salaries and other payroll charges, including provision for vacation pay, 13th salary and complementary payments agreed upon through collective bargaining agreements, added by the corresponding payroll charges, are recorded on an accrual basis.
Provision for contingencies is recorded at the estimated amounts to cover potential losses related to labor, tax, civil, commercial, environmental and other claims and lawsuits, at administrative and court levels, when such losses are considered probable. Provision for contingencies balances are being disclosed net of the related escrow deposits.
(k) Environmental costs
Expenditures relating to ongoing environmental programs are expensed as incurred. Ongoing programs are designed and performed with a view to minimize the environmental impact of the operations and to manage the environmental risks inherent to the Companys activities. Provisions for contingent losses related to environmental claims are recorded when they are considered to be probable and reasonably estimable by Management.
(l) Pension and Postretirement Benefits
The Company sponsors a private defined benefit pension plan, which is operated and administered by Fundação Sabesp de Seguridade Social (SABESPREV). CVM resolution 371 of December 13, 2000 determines the recognition of the actuarial liabilities in excess to the plan assets. The Company has elected to recognize the transition obligation as of the date of adoption in earnings on a straight-line basis over five years beginning January 1, 2002.
(m) Other current and long-term liabilities
Other current and long-term liabilities are stated at their known or estimated amounts, including related charges and monetary and foreign exchange adjustments, when applicable.
(n) Interest on shareholders equity
Recorded in accordance with Law 9,249/95, for tax deductibility purposes, limited to the daily pro-rata variation of the Long-Term Interest Rate (TJLP) and disclosed in accordance with CVM Deliberation 207/96.
(o) Earnings per share
Earning per share is calculated based on the number of shares outstanding at the balance sheet date.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the reported amounts of revenues and expenses for the reporting periods. Actual results could differ from those estimates.
4. CUSTOMERS ACCOUNTS RECEIVABLE
(a) Summary of customer accounts receivable
(i) General customers residential and small and medium-sized businesses.(ii) Special customers large consumers, commercial industries, plants, condominiums and special billing consumers (industrial waste, wells, etc.).
(iii) Agreements renegotiation of past-due balances (from non-government controlled companies). The amounts under agreements are generally due in approximately 6 12 months, except for certain amounts due from municipalities that are receivable through 2011.
(iv) Wholesale customers municipal authorities Accounts receivable from wholesale customers relate to the wholesale of treated water to certain municipalities, which are responsible for distribution, billing and collection with the final customers, as follows:
(v) Long-term receivables The long-term portion of customer accounts receivable consists of the long-term portion of renegotiated past-due private sector customer accounts receivable and past-due balances of wholesale customers-municipal authorities. It is recorded net of an allowance for doubtful accounts of R$ 561,582 at June 30, 2006 (March/2006 - R$ 545,675).
(b) Customer accounts receivable aging summary
(i) The amount of the supplement to the provision may be presented as follows:
(ii) Income statement
The Company recorded bad-debt expenses for probable losses in the accounts receivable in the second quarter of 2006 in the amount of R$ 55,896 (net of recoveries of R$ 26,575 for amounts under R$ 5 and R$ 29,321 for amounts in excess of R$ 5), directly to the periods income, as determined by Law nº 9,430/96, in the selling expenses account. In the second quarter of 2005 these losses amounted to R$ 60,395.
Management believes that the allowance for doubtful accounts is sufficient to absorb probable losses in customer accounts receivable.
(d) Unbilled amounts
Unbilled amounts represent water and sewage services provided but not yet billed, which are estimated from the last measurement date to month end based on prior months billings.5. RELATED-PARTY TRANSACTIONS
The Company is a party to a number of transactions with its majority shareholder, the State Government, and its related agencies.
(a) Accounts receivable from the State Government
The Company does not record an allowance for doubtful accounts for any amounts due from the State Government or entities controlled by the State Government, since it does not expect losses on such receivables.
(i) Water and sewage services
The Company provides water and sewage services to the State Government and its related agencies under terms and conditions that management believes are equal to those with third parties, except for the settlement of amounts outstanding, as described further below in items (iii) and (iv).
(ii) Reimbursement for pension and benefits paid.
Reimbursement for pension and benefits paid represents supplementary pension and leave benefit paid by the Company on behalf of the State Government to former employees of State Government-owned companies which merged to form SABESP. The amounts should be reimbursed to the Company by the Government, as the primary obligor, in conformity with Law No. 200/74. On June 30, 2006 and March 31, 2006, 2,699 and 2,761 retirees, respectively, received supplementary pension payments, for which the Company paid R$ 23,327 and R$ 22,915 in the periods ended June 30, 2006 and March 31, 2006, respectively. There were 182 active employees at June 30, 2006, who will be entitled to these benefits once they retire, as compared to 188 at March 31, 2006.
(iii) GESP Agreement
On December 11, 2001, the Company entered into an agreement with the State of São Paulo Government, through the State Department of Finance and the State Department of Water and Energy - DAEE, having the State Department of Water Resources, Sanitation and Works as intervening party, under which the State Government, by force of Law No. 200/74, acknowledged to be responsible for the supplemental retirement and pension benefits and acknowledged the existence of debts in respect of water and sewage services. The total Agreement value was R$ 678,830, of which R$ 320,623 refered to supplemental retirement and pension benefits in the period from March 1986 until November 2001, and R$ 358,207 refered to water supply and sewage collection services invoiced and due from 1985 until December 1, 2001.
Considering the strategic importance of Taiacupeba, Jundiaí, Biritiba, Paraitinga and Ponte Nova reservoirs, for ensuring the volume of water of the Alto Tietê System to be maintained, the Department of Water and Energy - DAEE will transfer these properties to the Company as partial amortization, by means of credit assignment, of the amount owed by the State. The reservoirs evaluation works has been completed and approved by the Companys Board of Directors, indicating an amount of R$ 300,880 (base date June, 2002), as shown in the related report.Based on Official Notice No. 53/2005 of the State Capital Defense Council CODEC, dated March 21, 2005, negotiations were restarted between the Company and the State Government with a view to restatement of the debt under the terms defined in the GESP agreement, including amounts due after November, 2001. These negotiations shall be consolidated in a second amendment to the Agreement between the State Government and SABESP. The Company has retained Fundação Instituto de Pesquisas Contábeis, Atuariais e Financeiras, USP FIPECAFI to validate the actual values to be reimbursed by the State Government, taking into account the legal advice provided by the General Office of the State Attorney.
Once the amounts and the monetary adjustment criterion are defined, SABESP will be able to take applicable actions with DAEE in order to transfer the ownership rights to the Alto Tietê System reservoirs, since no legal restraint exists, once the State Government has timely filed an appeal against the decision that had granted the public civil action and managed to obtain the suspension of the effects thereof.
This second amendment shall also include the criteria for monthly recovery of the future amounts to be disbursed by SABESP.
It is not possible to determine the net effects on the balance sheet resulting from such negotiation. Management does not expect to incur significant losses relating to any differences between the amounts recorded as due from the State Government and the amounts actually paid by SABESP.
The balances for water and sewage services were included in the 1st amendment, as described below (iv).
(iv) First Amendment to GESP Agreement
On March 22, 2004, the Company and the State Government amended the terms of the original GESP Agreement, thereby (1) consolidating and acknowledging amounts due from the State Government for water and sewage services through February 2004, monetarily adjusted through February 2004; (2) formally providing for the offset of amounts due from the State Government against interest on shareholders equity declared by the Company and any other debt owed to the State Government at December 31, 2003, which were monetarily adjusted through February 2004; and (3) defining the payment terms of the remaining obligations of the State Government for water and sewage services.
Under the terms of the Amendment, the State Government acknowledged amounts due to the Company for water and sewage services provided through February 2004, in the amount of R$ 581,779, including monetary adjustments based on the Referential Rate (TR) at the end of each fiscal year through February 2004. The Company acknowledged amounts due to the State Government with respect to interest on shareholders equity of R$ 518,732, including (1) amounts declared and payable relating to years prior to 2003 (R$ 126,967), (2) monetary adjustments on these amounts based on the annual change in the Consumer Prices Index (IPC/FIPE) through February 2004 (R$ 31,098); and (3) amounts declared and payable relating to 2003 (R$ 360,667).
The Company and the State Government agreed to the reciprocal offset of R$ 404,889 (monetarily adjusted through February 2004). The remaining obligation of R$ 176,890 at February 29, 2004 is being paid in monthly installments from May 2005 through April 2009, which is subject to monthly monetary adjustment at the Expanded Consumer Price Index (IPCA/IBGE), plus 0.5% .
The Amendment to the GESP Agreement does not provide for amounts owed by the State Government for supplementary retirement and pension plan benefits, paid by the Company on behalf of the State Government. Such amounts continue to be subject to the terms of the original GESP Agreement. Part of such amounts may be netted upon the transfer of the reservoirs that make up the Alto Tietê System. The Company and the State Government are negotiating the transfer and netting of the additional amounts owed.
Management believes that the amounts owed by the State Government shall be received and it is not estimated that losses will be incurred with such accounts receivable.
(d) Cash and cash equivalents
The Companys balance of cash and financial investments accounts with financial institutions controlled by the State Government was R$ 303,758 at June 30, 2006 (R$ 44,145 at March 31, 2006). The financial income from such investments was R$ 27,645 and R$ 15,466 in the semesters ended June 30, 2006 and 2005, respectively.
(c) Arrangements to use certain reservoirs
The Company uses the Guarapiranga and Billings reservoirs and a portion of some of the reservoirs of the Alto Tietê System, which are owned by other State of São Paulo-owned companies and it does not pay any fees for their usage.
The Company has the right to use water and to explore the reservoirs of the Alto Tietê System during a 30-year period, beginning in 1997.
Depreciation is calculated at the following annual rates: buildings 4%; networks 2%; equipment 10%; water meters 10%; transportation equipment 20%; IT equipment 20%; building connections 5% furniture, fixtures and equipment 10%. When applicable, depreciation rates are adjusted to take into account the changes in the estimated remaining economic lives as assets are replaced.
Amortization of intangible assets is performed during the term of the concession agreements entered into with the municipalities
(b) Construction in progress
Disbursements from the third quarter of 2006 to 2011, related to construction works already contracted are estimated to be approximately R$ 976,000 (unaudited).
(c) Disposals of property, plant and equipment
In the second quarter of 2006 and 2005 the Company wrote-off property, plant and equipment in the amounts of R$ 956 and R$ 1,448, respectively, related to assets in use, due to obsolescence, thefts and disposal.
Studies supporting the write-offs for obsolescence were concluded by the Company in the accounting period of the write-off, based on undiscounted cash flow projections, and have been approved by Management. The carrying value of property, plant and equipment is monitored on an on-going basis and is adjusted, when appropriate, to assure future projected operating revenue is sufficient to recover the carrying value of the assets.
As a result of the implementation of priority projects related to the water and sewage systems it was necessary to expropriate or establish rights of way through third-party properties, all in conformity with the relevant legislation. The owners of these properties will be compensated either through negotiated settlements or judicial arbitration. Disbursements to be effected as from the third quarter of 2006 are estimated to be approximately R$ 280,245 (unaudited), which will be paid out of Company funds. The related assets acquired as a result of these negotiations are recorded as property, plant and equipment when the expropriation is complete. The total amount paid relating to expropriations of property, plant and equipment in the second quarter of 2006 was R$ 1,829 (in the second quarter of 2005 - R$ 4,028).
(e) Tax effects on revaluation of assets
Property, plant and equipment items were revaluated in 1990 and 1991 and have been depreciated at annual rates which take into consideration the estimated remaining economic useful lives of the assets as determined in the respective valuation reports that, as a rule, fall within the ranges of the above presented rates.
As permitted by CVM Instruction 197/93, the Company did not record the deferred tax effects on the surplus of the revaluation of property, plant and equipment carried out in 1990 and 1991. Had the income tax and social contribution on revaluation reserve been accounted for, the unrealized amount at June 30, 2006 would be R$ 445,755 (R$ 476,314 up to June 30, 2005). The amount of R$ 46,205 was realized in the period from January to June, 2006 (January to June, 2005 R$ 44,626).
(i) Intangible Assets
Beginning in 1999, negotiations and acquisitions of new concessions considers the financial economic value of the business, defined in an appraisal report, issued by independent experts.
The terms of these concessions are generally for a period of 30 years and generally include the corresponding right to operate the related concession assets for which the Company does not have title. The purchase price for these concessions is generally the fair value of the concession, based on appraisal reports which take into consideration the projected cash flows and the remaining concession period at the date of acquisition. The cost of the concession assets acquired is amortized over the concession period using the straight-line method.
In the second quarter of 2006 and 2005 the amortization expenses related to intangible concession rights were R$ 4,989 and R$ 4,900, respectively. The amortization expense for the next five years is estimated to be approximately R$ 20,000 per year.
(ii) Fixed Assets in operationThe fixed assets in operation represent the assets involved in the services providing of supply of water and collection of sewage in 352 municipalities. At the end of the concession, assets shall be transferred to the conceding power, by means of indemnification. The other municipalities have been negotiated by financial economic appraisal, as described in the above item.
(g) Capitalization of interest and financial charges
In the second quarter of 2006 and 2005, the Company capitalized to property, plant and equipment interests and monetary variation, including exchange variation, in the amount of R$ 6,284 and R$ (23.210) respectively, during the period in which the related assets were under construction.
(h) Assets in guarantee
At June 30 and March 31, 2006, the Company had assets in the amount of R$ 249,034 provided as guarantee under the Special Tax Debt Refinancing Program PAES (Note 9).
Three of the Companys properties in the amount of R$ 60,539 were pledged as collateral for financing with the International Bank for Reconstruction and Development BIRD.
(i) Non-operating assets
The Company had R$ 26,482 at June 30 and March 31, 2006 referring to other non-operating assets, comprised primarily of land surrounding reservoirs.
(j) Totally depreciated assets
On June 30 and March 31, 2006 the gross accounting value of the totally depreciated assets which are still in use is R$ 347,234 and R$ 342,243, respectively.
(i) Loans and financing balances
As of June 30, 2006 the Company did not have balances of short-term loans and financing.
Exchange rate as June 30, 2006: USD 2.1643; EUR 2.76814; Yen 0.018920
UPR: Standard Reference Unit - TJLP : Long Term Interest Rate
On April 19, 2006 the Company anticipated the settlement of the 1st series of the 5th issue of debentures, which final maturity was March, 2007, by using part of the funds obtained from the Credit Rights Investment Fund SABESP I FIDC, in the amount of R$ 106,373.
(iii) Settlement schedule of loans and financing
Total debt to be paid until the end of 2006 is R$ 351,515, being the amount denominated in United States dollars and in Euro of R$ 66,351, and the amount of R$ 285,164 refers to interest and principal of loans denominated in Brazilian reais.
One of the Companys main goals is to reduce its foreign currency debt exposure, therefore minimizing costs and volatility over income.
At June 30, 2006 the Company was in compliance with all financial covenants.
8. TAXES AND CONTRIBUTIONS
Income tax and social contribution are accrued on taxable results at the applicable tax rates, generally 25% for income tax and 9% for social contribution tax (34% composite rate).
(a) Balance sheet accounts
(b) Deferred taxes and social contributions
(i) In Current Assets
Mainly calculated on temporary differences in the amount of R$ 65,180 (March/2006 R$ 30,371). The tax loss carryforwards basis of social contribution in June 30, 2006 has been totally realized and in March 31, 2006 amounted to R$ 29,597.
(ii) In Long-Term Assets
Mainly calculated on temporary differences in the amount of R$ 908,193 (March/2006 - R$ 897,899) related to income tax and R$ 930,874 (March/2006 - R$ 923,043) related to social contribution.
(iii) In current liabilities
Substantially calculated on amounts invoiced to government agencies, with taxes being deducted upon receipt of the invoices.
(iv) In long-term liabilities
- Income tax and social contribution
Substantially calculated based on temporary differences in the amount of R$ 249,189 (March/2006 - R$ 246,233) relating to income tax and R$ 199,083 (March/2006 - R$ 196,127) relating to social contribution.
- PASEP and COFINS
(c) Reconciliation of the effective tax rate
The amount recorded as income tax and social contribution expenses in the quarterly information is reconciled from the nominal rates provided by law, as shown below:
9. PAES Special Tax Debt Refinancing Program
The Company applied for enrollment in the Special Tax Debt Refinancing Program PAES, on July 15, 2003, in accordance with Law No. 10,684, of May 30, 2003, including certain tax liabilities related to COFINS and PASEP subject of a legal action challenging the application of Law No. 9,718/98, and consolidated the previously outstanding balance of the Tax Recovery Program REFIS, in the amount of R$ 316,953. The debt is being paid in 120 months, added by interests at the TJLP rate, the amount thereof being subject to homologation by the Federal Revenue Service.
The amount paid in the 2nd quarter of 2006 was R$ 10,136 (R$ 9,400 in the 2nd quarter of 2005), and R$ 4,628 was accrued in the 2nd quarter of 2006 (R$ 6,309 in the 2nd quarter 2005) relating to financial charges.
Assets pledged as guarantee under the REFIS program, in the amount of R$ 249,034, continue to secure amounts under the PAES program.10. PROVISIONS FOR CONTINGENCIES
The Company has recorded in current liabilities, under the caption Provisions, amounts related to judicial lawsuits in process, in phase of sentence. The presented balance of R$ 10,921 (Mach/2006 - R$ 27,288) is net of escrow deposits totaling R$ 13,428 (March/2006 R$ 3,083).
The Company, based on a joint analysis together with its legal counselors, recorded provisions in an amount considered sufficient to cover probable losses arising from judicial lawsuits, recorded in long term liabilities, under the caption Provisions, in the amount of R$ 602,964 (March/2006 R$ 593,771), presented net of escrow deposits totaling R$ 1,032 (March/2006 R$ 12,141).
(i) Customer claims approximately 960 claims from customers have been filed by commercial customers claiming that their tariffs should be equal to those of other categories of consumers and, consequently, claim the refund of amounts imposed and charged by the Company. The Company has obtained final decisions, both favorable and adverse, in several different court levels, and has recorded provisions for cases whose risk of loss has been assessed as probable.
(ii) Contractor claims Filed by certain construction service contractors alleging underpayment of monetary adjustments, withholding of amounts relating to the effects of the Real Plan and monetary losses from economic-financial unbalance in the applicable contract. These lawsuits are in progress in several different court levels, and provisions are recorded for cases with probable chance of loss.
(iii) Civil and tax claims Refer to claims for indemnifications for material damages, pain and suffering and loss of profits caused to third parties, in several different court levels, provisioned when classified as of probable loss.
(iv) Labor claims the Company is party to several labor claims, related to overtime pay, health hazard and risk, prior notice period, job deviation, salary parity and others, most of the amounts involved being under provisional or definite execution, in several court levels, thus being classified as of probable loss and, consequently, duly provisioned.
(v) Environmental claims refer to several administrative proceedings brought by public agencies, including Companhia de Tecnologia de Saneamento Ambiental CETESB (Environment Sanitation Technology Company), seeking to impose fine for environmental damages allegedly caused by the Company.
Lawsuits with possible risk of loss
The Company is a party to lawsuits and administrative proceedings relating to environmental, tax, civil and labor matters, which are assessed by its legal advisors to be of possible likelihood of loss and which are not provisioned. The aggregate amount referring to such proceedings is approximately R$ 1,876,000 as of June 30, 2006 (March/06 R$ 1,935,000).
11. PENSION AND HEALTH BENEFIT PLANS
The Company sponsors the Fundação SABESP de Seguridade Social - SABESPREV, an entity organized in August 1990 with the main purpose of managing SABESPs complementary pension and health benefit plans.
The monthly contribution to the retirement plan defined benefit corresponds to 2.10% from the Company and 2.27% from the participating employees.
The contributions made by participating employees presented above is an average, as discount amount depends on salary level, between 1% and 8.5% .
The health benefit program, which is comprised of optional health benefit plans, free-election, is also funded by contributions from the sponsor and the participating employers, which were the following in the period:
Participating employees: 3.21% of base salary and bonus, corresponding to 2.31% of the gross payroll, on average.
12. BENEFITS TO EMPLOYEES
In order to meet the provisions of CVM Resolution No. 371, of December 13, 2000, below is a description of the amounts of pension and retirement benefits granted and payable to which the employees will be entitled after service time.
At December 31, 2005, based on independent actuarial reports, SABESP had a net actuarial liability of R$ 329,772, representing the difference between the present value of the Companys benefit obligations to the participating employees, retired employees and pensioners, and the assets in guarantee.
The Company has elected to recognize the liability over five years beginning in 2002. The actuarial liability as of June 30, 2006, in the amount of R$ 299,118 (March/2006 R$ 287,824), has been recorded in long-term liabilities.
For the fiscal year 2006 the expense estimate is R$ 56,045, and it has been charged to income in the period from January to June, 2006, as follows:
The amount related to past service cost is recorded as an extraordinary item, net of tax effects, in the statement of income.
13. PROFIT SHARING
Based on negotiations held by the Company with the entities representing the employees, a Profit Sharing Program was implemented with the payment of an amount corresponding to up to one months payroll.
On December 2005 an advance payment of R$ 22,906 was made, equivalent to 50% of one months payroll, and the remainder payment is estimated to be paid at the end of August 2006.
14. FINANCIAL INSTRUMENTS
(a) Market value of financial instruments
The determination of the market value of financial instruments is performed on an annual by basis Company Management.
(b) Credit risk concentration
A significant portion of sales is made to a geographically dispersed customer base. In relation to those clients, credit risk is mitigated due to the large portfolio and to the control procedures which monitor this risk.
The allowance for doubtful accounts is sufficient to cover eventual losses.
(c) Foreign Currency
Transactions in foreign currency consist of borrowings to specific improvement works and expansion of the Companys water supply and sewage collection and treatment services.
15. OPERATING COSTS AND EXPENSES
16. INDEMNITIES RECEIVABLE
Indemnifications receivable is a long term asset representing amounts receivable from the municipalities of Diadema and Mauá as indemnification for the unilateral withdraw of the Companys water and sewage services concessions in 1995. At June 30, 2006 this asset amounted to R$ 148,794.
Under these concession agreements, the Company invested in the construction of water and sewage systems in these municipalities to meet its concession service commitments. Upon the unilateral termination of the Diadema and Mauá concessions, the municipalities took on the responsibility of providing water and sewage services in these areas. At that time, the Company reclassified from property, plant and equipment balances relating to the impounded assets to long-term assets (indemnities receivable) and recorded impairment charges to reduce the carrying value of the assets to the estimated recoverable amounts for which the Company had contractually agreed as fair compensation with the relevant authorities. The net book value of property, plant and equipment items relating to the municipality of Diadema, written-off in December 1996, was R$ 75,231, and the balance of indemnity and other receivables from this municipality was R$ 62,876 at June 30, 2006. The net book value of the property, plant and equipment items relating to the municipality of Mauá, written-off in fiscal year 1999, was R$ 103,763, and the balance of indemnity receivable from the municipality was R$ 85,918 at June 30, 2006
The Companys rights to the recovery of these amounts are being disputed by the municipalities and no amount has been received to date.
In December 1996, SABESP filed a claim seeking compensation for the amounts due by the municipality of Diadema. In the first instance the judge pronounced a sentence against SABESP. The Company filed an appeal in November 2000 and on December 1, 2005, it was given partial acceptance to the appeal in order to void the sentence and determine the performance of a new first instance judgment.
With respect to Mauá, a decision has been issued by the lower court requiring Mauá to pay an amount of R$ 153,2 million as compensation for the loss of profits. This decision was appealed by Mauá and is pending appeal court decision.
proceedings. However, the ultimate amounts to be received, if any, will most likely be subject to a final court decision. As such, actual amounts received could differ from those recorded.
17. SHAREHOLDERS EQUITY
(a) Authorized Capital
The Company is authorized to increase its capital stock up to a maximum of R$ 4,100,000, corresponding to 40,000,000,000 book-entry common shares without par value.
(b) Subscribed and paid-up capital
Subscribed and paid-up capital is represented by 28,479,577,827 registered common shares, without par value, as follows:
(*) Each ADR equals 250 shares
(c) Distribution of earnings
Shareholders are entitled to a mandatory minimum dividend distribution of 25% of adjusted net income, calculated in conformity with Brazilian Corporate Law.
Interest on shareholders equity declared in 2005, in the amount of R$ 348,216, was partially paid (R$ 148,769) on June 27, 2006.
(d) Capital reserve
Capital reserve comprises fiscal incentives and donations from governmental entities and private entities.
(e) Revaluation reserve
As provided by CVM Instruction No. 197/93, the Company elected not to recognize income tax and social contribution on the revaluation reserve of property, plant and equipment carried out until 1991.
The reserve has been realized with a corresponding entry to retained earnings, to the same proportion of the depreciation and write-off of the assets to which it is related.
(f) Changes in Retained Earnings Account
18. CASH FLOW
In order to improved information to the market and in conformity with the New Market regulation, the Company is presenting statements of cash flow prepared in accordance with the NPC-20 of the IBRACON.
19. SUBSEQUENT EVENT
In the first semester of 2006 Sabesp achieved a gross operating revenue of R$ 2,878.8 million, a 11.5% growth in relation to the same period of 2005. EBITDA reached R$ 1,286.5 million and margin achieved 48.4% . Net income, on its turn, reached R$ 503,5 million.
1. Operating revenue
SABESP obtained gross operating revenues of R$ 1,422.0 million and EBITDA of R$ 591,2 million in 2Q06. The 6.9% growth in gross operating revenues derives, mainly:
From the 2.4% increase in the volume of water and sewage billed.
In the first semester of 2006, Sabesp achieved gross operating revenue of R$ 2,878.8 million, an 11.5% growth in relation to the same period of the previous year. The EBITDA reached R$ 1,286.5 million and margin reached 48.4% . Net profit, in turn, reached R$ 503.5 million.
2. Invoiced volume
The invoiced volumes of water and sewage by category of use and region in 2Q05 and 2Q06 are demonstrated in the tables below.
3. Costs, selling and administrative expenses
In the period from January to June, 2006, cost of goods and services sold, administrative and selling expenses presented an R$ 103.7 million increase, or 6.6%, when compared to the same period in 2005.
In 2Q06, cost of goods and services sold, selling and administrative expenses had an increase of R$ 52,7 million, or 6.4% .
The main changes identified in the period were:
3.1. Payroll and related charges
In the 2Q06 the Company increased productivity per employee in 3.8% . The number of connections per employee increased from 640 in 2Q05 to 664 in 2Q06, and the number of employees increased from 17,577 to 17,289, respectively.
4.63% compensation increase, from May 2006 on, affecting salaries, social charges, benefits and provisions, with a reflex of approximately R$ 25,4 million;
In 2Q06, presented a growth of R$ 2.1 million, or 7.4%, with highlights to the following changes:
Fuels and vehicle lubricants in the amount of R$ 0.9 million, or 16.1% mostly due to price adjustment;
Increase of R$ 0.7 million in network maintenance, and
3.3. Treatment supplies
Presented a R$ 0.6 million increase, or 2.3%, due mainly to increase in average price of supplies, compensated by a reduction in consumption, with highlights to chlorine.
In 2Q06, services presented a decrease of R$ 11.0 million, or 9.4%, in relation to 2Q05, from R$ 116.9 million to R$ 105.9 million, due mostly to:
Reduction in technical professional services in the amount of R$ 9.4 million, with emphasis to costs related to the restructuring of an operation in the capital market, occurred in June 2005, in the amount of R$ 7.7 million, non recurring;
Reduction in residential connections maintenance expenses in the amount of R$ 1.9 million, in sidewalks paving and restoring in the amount of R$ 1.8 million occurred in the Metropolitan Region of São Paulo, originating mostly from the termination of some contracts related to Global Sourcing.
These decreases have partially been compensated by the following increases:
R$ 1.7 million increase in vigilance, due to new contracts and pricing adjustment of the existing contracts;
R$ 1.2 million increase in telephone services;
Increase in maintenance of operating systems of the Metropolitan Region of São Paulo, in the amount of R$ 0.9 million, and
R$ 0.6 million increase, mainly by the contracting of leakage detection engineering services.
3.5. Electric power
In the 2Q06 presented a R$ 0.4 million increase, or 0.4%, in relation to 2Q05, from R$ 109.1 million to R$ 109.5 million, despite average adjustment and the increase in produced volume.
3.6. General expenses
In the 2Q06, general expenses presented a R$ 3.9 million decrease, or 8.6%, in relation to 2Q05, from R$ 45.4 million to R$ 41.5 million, due mostly to the lower provision for contingencies.
3.7. Bad debt expenses
Presented a R$ 4.5 million decrease, or 7.5%, caused mainly by the better performance in the recovery losses through the collection of debts accrued as uncollectible.
3.8. Tax expenses
In the 2Q06, tax expenses presented a R$ 2.1 million increase, or 30.0%, in relation to the 2Q05, from R$ 7.0 million to R$ 9.0 million, due mostly to the CPMF, in the amount of R$ 1.2 million, as a result of the repayment of debts in the capital market.
4. Financial and monetary variation expenses
4.1 Financial expenses
In the 2Q06, presented a decrease of R$ 50.3 million, or 28.2%, arising from:
Increase in interests on local currency loans and financing of R$ 4.2 million related to the 8th issue of debentures on June 2005 and to the FDIC on March 2006;
Interests on foreign currency loans and financing, with a R$ 13.1 million decrease due mostly to the amortization of Eurobonds matured in July 2005;
R$ 31.9 million decrease in provision of interests on judicial contingencies due to the lower provision in this quarter.
Financial income presented a R$ 12.5 million growth, or 68.7%, resulting mainly from interests on renegotiated installments and interests of financial investments.
4.2. Monetary variation expenses
Monetary variation expenses presented a R$ 284,9 million increase, arising mostly from the lower appreciation of the real in relation to the US dollar, of 0.4% in the 2Q06, as compared to the appreciation occurred in the 2Q05, of 11.8%
5. Operating Indicators (*)
As shown in the following table, the Company keeps increasing its services:
(1) In thousands of units at the end of the period
(2) In millions of inhabitants at the end of the period. It does not include wholesale supply.
(3) Number of water and sewage connections per employee
10.01 - CHARACTERISTICS OF THE PUBLIC OR PRIVATE ISSUE OF DEBENTURES
In order to improve the information provided to the market, the Company presents, as supplementary information, the financial statements in the constant currency method.
1. SUPPLEMENTARY INFORMATION IN CONSTANT CURRENCY METHOD
(a) Restatement index
The monetary adjustment of the operations relating to permanent assets, shareholders equity, income statement accounts and the calculation of gains and losses in monetary items have been measured based on the variation of the Accounting Monetary Unit - UMC, taking as basis the variation of the General Prices Index - Market - IGP-M in the second quarter of 2006, of 0.71%, and of 1,41% accumulated in the year.
(b) Balance sheet accounts
Amounts related to monetary assets and liabilities presented in constant currency method are similar to those presented by corporate legislation, except for accounts receivable from customers, accounts payable to suppliers and contractors, deferred income tax and social contribution in long-term liabilities, which are adjusted to reflect purchasing power or currency realization as of June 30, 2006, taking as basis the rate published by the National Association of Investment Banks - ANBID.
Permanent assets and shareholders equity were adjusted based on the monthly variation of the UMC, updated by the IGP-M until June 30, 2006.
(c) Income statement accounts
All accounts have been monetarily restated based on the variation of the UMC, beginning on the month of recording, adjusted for inflationary gains and losses calculated on each months beginning and ending balances of monetary assets and liabilities, and that generated financial or inflationary nominal income and expenses, which have been considered as reductions to the income statement accounts to which they are related.
(d) Deferred taxes and contributionsDeferred income tax and social contribution have been calculated based on the rates of 15%, plus an additional 10%, and 9%, respectively, on the surplus of property, plant and equipment generated by its monetary variation, in accordance with the instructions of CVM, consolidated in IBRACON Brazilian Institute of the Independent Auditors of Statement No. 006/99.
The amounts presented are in constant currency method as of June 30, 2006.
2. EVOLUTION OF SHAREHOLDING BY THE CONTROLLING SHAREHOLDER, DIRECTORS AND EXECUTIVE OFFICER FROM 06/30/2005 TO 06/30/2006
*Difference arising from the entrance and exit of Board Members
4. SABESP AND THE NEW MARKET
SABESP, at the time of its adhesion to the New Market segment of BOVESPA, which congregates the Brazilian companies whose corporate governance practices are considered the best in Brazil, has incorporated to its By-Laws an Arbitrage Clause. This clause provides that The Company, its shareholders, Managers and members of the Fiscal Council undertake to resolve, by means of arbitrage, any and all dispute or controversy that may arise among them, related to or resulting from, in special, the application, validity, effectiveness, interpretation, violation and its effects, of the provisions contained in Law No. 6,404/76, in these By-Laws, in the norms enacted by the National Monetary Council, by the Central Bank of Brazil and by CVM, as well as to those rules applicable to the operation of the capital markets in general, in addition to those contained in the New Market Listing Regulation, of the Contract of Participation in the New Market, to be conducted together with the Arbitrage Chamber of the Market set up by BOVESPA, in compliance with the Regulation of the referred Chamber, observed the exception applicable to the unavailable rights.
(Convenience Translation into English from the Original Previously Issued in Portuguese)
INDEPENDENT ACCOUNTANTS REVIEW REPORT
1. We have performed a special review of the accompanying interim financial statements of Companhia de Saneamento Básico do Estado de São Paulo - SABESP (the Company), consisting of the balance sheet as of June 30, 2006, and the related statement of operations for the quarter then ended and the performance report, all expressed in Brazilian reais and prepared in conformity with Brazilian accounting practices under the responsibility of the Companys management.
2. We conducted our review in accordance with specific standards established by the Brazilian Institute of Independent Auditors (IBRACON), together with the Federal Accounting Council, which consisted principally of: (a) inquiries of and discussions with persons responsible for the accounting, financial and operating areas as to the criteria adopted in preparing the interim financial statements, and (b) review of the information and subsequent events that had or might have had material effects on the financial position and results of operations of the Company.
3. Based on our special review, we are not aware of any material modifications that should be made to the interim financial statements referred to in paragraph 1 for them to be in conformity with Brazilian accounting practices and standards established by the Brazilian Securities Commission (CVM), specifically applicable to the preparation of mandatory interim financial statements.
4. The supplementary information for the quarter ended June 30, 2006, referring to the financial statements in constant purchasing power, and the statement of cash flows are presented for purposes of additional analysis and are not a required part of the basic financial statements. This supplementary information was reviewed by us in accordance with the procedures mentioned in paragraph 2 and, based on our review, we are not aware of any material modifications that should be made for it to be fairly presented, in all material respects, in relation to the interim financial statements referred to in paragraph 1 taken as a whole.
5. As mentioned in Note 5 to the interim financial statements, the Company is negotiating with the State of São Paulo Government the reimbursement of the amounts for supplementary retirement and pensions paid by the Company and the future flow of these payments to be reimbursed by the State of São Paulo Government.
6. We had previously reviewed the balance sheet as of March 31, 2006, and the statements of operations for the quarter and semester ended June 30, 2005, the supplementary information in constant purchasing power, and the statement of cash flows for the quarter ended March 31, 2005, presented for comparative purposes, and issued an unqualified review report, dated May 15, 2006 and August 11, 2005, respectively. In addition, our review report, dated May 15, 2006, contains a comment similar to the one described in paragraph 5.
7. The accompanying interim financial statements have been translated into English for the convenience of readers outside Brazil.
São Paulo, August 14, 2006 (except for note 19, dated October 2, 2006)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city São Paulo, Brazil.
Date: October 04, 2006
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.