COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO SABESP

Transcription

1 COMPANHIA DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO SABESP Explanatory notes to the financial statements on December 31, 1998 and 1997 (In thousand reais) 1. OPERATING CONTEXT The company has for its main corporate objects the collection, treatment and supply of water and the collection and treatment of sewage, upon concession from the State of São Paulo and the municipalities where it operates. Its object also comprises the conducting of studies, projects and execution of works for enlargement and construction of new networks. 2. PRESENTATION OF THE FINANCIAL STATEMENTS These financial statements have been prepared in two versions: in constant purchasing power currency and pursuant to Corporation Law and are presented in conformance with the accounting principles set forth in the instructions enacted by the Brazilian Securities and Exchange Commission CVM and in Brazilian Corporation Law 3. MAIN ACCOUNTING PRACTICES 3.1 FINANCIAL STATEMENTS PURSUANT TO CORPORATION LAW Liquid Investments Recorded at the investment values, added by income earned ( pro rata temporis ) until the closing date of the fiscal period. Revenues Water supply and sanitary sewer collection services not invoiced until the closing date of the balance sheet are measured and recorded in such a manner as to allow the contraposition of costs and revenues in the respective fiscal year/period. Financial and revenues Substantially represented by interests, monetary and exchange variations arising out of financial investments, as well as loan and financing. (Note 27) Allowance for doubtful debtors This allowance is accrued in an amount deemed sufficient to cover probable losses arising from possible losses, being recorded as a contra account of the income under the item selling. During the 1998 fiscal year, the company recorded R$ thousand directly in Income (R$ thousand in 1997), obeying Law 9430/96, which limits the effects of deductibility for income tax and social contribution calculation purposes. Inventories Inventories of materials intended for consumption and maintenance of water and sewer systems are evaluated at their average purchase cost and recorded in Current Assets. Inventories intended for investment are shown in Fixed Assets at historic cost corrected to December 31, Investments Recorded at cost corrected for monetary variation to December 31, Fixed Assets

2 Recorded at cost, corrected for monetary variation to December 31, 1995, added by spot reevaluations and deducted accumulated depreciation. Depreciation calculated by straight-line depreciation method and recorded in the income for the period. Deferred Expenses with economic studies and system development, recorded as Deferred Assets, were corrected monetarily to December 31, 1995, deducting accumulated amortization. Amortization is calculated by the straight-line method and recorded in the income for the period. Loans and financing Restated with basis on monetary and exchange variations, added by the respective charges incurred until the closing date of the fiscal period. (Note 9) Provision for long service leave Constituted proportionally by complete period of service, added social charges. Donations Aid for Works Recorded directly in capital reserve. Income tax and social contribution Income tax and social contribution are provisioned on the basis of real profit, determined in accordance with current tax legislation. Expenses with income tax and social contribution are recorded as gross amount, including tax incentives. The portion recorded as Tax Incentives is credited directly to Tax Incentive Reserve. Interest on own capital Calculated according to Article 9 of Law 9249/95, observing the deductibility of the long term interest rate for calculation of income tax and social contribution. Classified as financial, and reclassified for Shareholders Equity for demonstration purposes, following CVM instruction 207/96. Deferred income tax Monthly realization (1/120) referring to the difference between the Consumer Prices Index IPC and the National Treasury Tax Bond BTNF Law no. 8200/91 and inflation income. 3.2 FINANCIAL STATEMENTS IN A CONSTANT PURCHASING POWER CURRENCY Updating rate The monetary updating of operations relating to permanent assets, shareholders equity, income accounts and calculation of profits and losses in monetary items was measured with basis on the variation of the Accounting Monetary Unit UMC, taking for basis the variation of the General Prices Index Market IGP-M. Shareholders Equity Assets and Liabilities registered under the title in a constant purchasing power currency are equal to those shown pursuant to Corporation Law, except for accounts receivable customers, accounts payable suppliers and contractors, which are restated so as to reflect the purchasing power or realization in a currency as of December 31, 1998, taking for basis the rate disclosed by the National Association of Investment Banks and Securities Dealers ANBID, and Permanent Assets and Shareholders Equity, which are corrected by monthly variation to the IGP-M.

3 Income accounts All accounts have been monetarily adjusted as from their initial recording month, adjusted according to the following procedures. Inflation profits and losses ascertained in relation to balances of assets and liabilities which generated nominal financial or inflationary and revenues. These were deemed to reduce the respective income accounts to which they are attached. Real interests were recorded in financial revenue and expense accounts, and other inflationary gains and losses were allocated to other income accounts according to their nature. Statements of changes in shareholders equity and in origin and application of resources Amounts in the referred statements are shown in a constant purchasing power currency as of December 31, ACCOUNTS RECEIVABLE AND SUPPLIES TO BE BILLED In a constant purchasing power currency Pursuant to the Corporation Law From private customers 458, , , ,943 From public entities Municipal 213, , , ,558 State 18, ,205 18, ,068 Federal 8,275 5,435 8,275 5, , , , ,965 Concession Holders Guarulhos 62,292 31,431 62,292 30,877 Mauá Mogi das Cruzes Santo André Osasco São Bernardo do Campo 70,809 55,680 70,809 54,698 São Caetano do Sul 2, , Diadema 11,844 6,463 11,844 6,349 Unbilled supply 162, , , ,312 (-) Credit write off (Law 9430/96) (285,631) (234,389) (285,631) (230,256) Adjustment at present value (2,978) (5,382) - - TOTAL 874, , , ,764 The values shown here, according to accounting principles, do not include fines and monetary indexation for late payments. 5. COMPLEMENTING RETIREMENT AND LONG SERVICE LEAVE STATE LAW 4819/59 In the months of September and November, the company received sums of R$ 34,500 thousand and R$ 15,000 thousand respectively from the State Treasury as reimbursement for payments made for the complementation of retirement and long service leave for the period of January to February, FIXED ASSETS WRITE-OFF

4 The company wrote off properties from its fixed assets to the sum of R$ 6,830 thousand, of which R$ 4,898 thousand was related to works in progress: projects not used and works not concluded and not used. The remaining R$ 1,932 thousand was related to assets in operation, as a result of obsolescence, thefts and disposal. 8. CAPITALIZATION OF INTEREST AND FINANCIAL CHARGES In compliance with Deliberation CVM no. 193, of June 11, 1996, the company capitalized the amount of R$ 54,189 thousand (1997 R$ 33,209 thousand) in fiscal year 1998, as a result of financial charges relating to financing of fixed assets under construction. 10. COMMERCIAL PAPERS On December , 200 Commercial Papers were issued in a single series with unit value of R$ 500 thousand. The face value of the issue was R$ 100,000 thousand, and the net value received was R$ 96,000 thousand, according to authorization granted by the Brazilian Central Bank (BACEN) and according to CMN Resolution no, 2,259 of November 5, The maturity period is 360 days from date of issue, with provision for anticipated recovery after 180 days. Swap operations were performed on the Brazilian Mercantile and Futures Exchange (BMF) to match the issue to current interest rates. The swap was for 102.5% of Interfinancial Depository Certificate. 11. DEBENTURES In the first quarter of 1998, the Company quit the balance of the 2nd debenture issue, with anticipated payments to the sum of R$ 199,024 thousand, corresponding to the amortization installments of numbers 8, 9 and TAXES AND CONTRIBUTIONS In a constant purchasing power currency Short Term Long Term Income tax and social contribution - 37, Income tax and social contribution installments Cofins and Pasep , Cofins and Pasep installments 37,854 33,164 27,961 57,350 INSS (Social Security) 10,957 20, Others 6, Total 139, , , ,525 Pursuant to Corporation Law Short Term Long Term Income tax and social contribution - 36, Income tax and social contribution installments 69,651 56, , ,187 Cofins and Pasep 15,376 14, Cofins and Pasep installments 37,854 32,579 27,961 56,339 INSS (Social Security) 10,957 20, Others 6, Total 139, , , , AGREEMENT FOR INSTALLMENTS FOR DEBT WITH FEDERAL TREASURY The Company anticipated the payment of the installments due in April and December of 1998, related to the installment agreement for payment of Corporate Income Tax, Social Contribution on Corporate Profits, COFINS and PASEP, to the sum of R$ 55,539 thousand.

5 14. PROFIT SHARING The Company provisioned the sum of R$ 60,120 thousand under Profit Sharing in 1998, in accordance with the profit sharing agreement signed with union representatives on June 3, 1998, on the basis of instructions contained in the Brazilian Constitution, under regulation MP An advance of R$ 20,977 thousand was paid in September. 15. CONTRIBUTIONS TO SABESPREV The company sponsors Fundação Sabesp de Seguridade Social SABESPREV, an entity founded in August, 1990 with the main purpose of administering SABESP s complementary pension plans and assistance program for its employees. The company s monthly contributions related to the pension plan are determined under an annual costing plan. In 1998 they were as follows:. Company s contributions: 2.10% on the payroll;. Participants contributions: 2.10% total, corresponding to the application to their monthly salaries of percentiles ranging from 1% to 8.5%;. Inter-program transfers: 1.13% on the payroll. The actuarial regime is by capitalization, aggregate method, for retirement pensions, and by covering capital allocation for death benefits. The plan is defined benefit, reevaluated at November 30, 1998 and the contribution proportion is 40.2% company and 59.8% participant. The actuarial calculations for December 31, 1998, related to the responsibility assumed by SABESP, with reference to periods preceding the organization of the SABESPREV, to the sum of R$ 10,362 thousand (1997 R$ 11,119 thousand) is demandable until 2011 and is recorded in long term liabilities: Other Obligations. A supplementary plan was established in 1998 for the same population, with minimum optional contributions of 2% of salary. 16. LABOR OBLIGATIONS Obligations resulting from legal and judicial labor indemnities are provisioned to a sum of R$ thousand (1997 R$ 14,932 thousand). 17. CAPITAL On December 31, 1998, authorized capital stock was R$ 4,100 million according to corporation law and R$ 5,290 million in a constant purchasing power currency (1997 R$ 4,100 million according to corporation law and R$ 5,290 million in a constant purchasing power currency). The subscribed and paid-up capital stock, R$ 3,315 million according to corporation law and R$ 3,962 million in a constant purchasing power currency, comprises 27,857,339,553 registered common shares, without face value, distributed as follows: Shareholders Number % State of São Paulo Treasury Department 18,146,480,818 65,14 Cia. Paulista de Administração de Ativos CPA 6,147,453,360 22,06 State of São Paulo Department of Water and Electric Power 862,999,886 3,09 Shares in Custody with Stock Exchanges 2,425,585,359 8,70 Others 274,820,130 1,01 Total 27,857,339, ,0 18. APPLICATION OF INCOME FOR PERIOD REMUNERATION OF SHAREHOLDERS Of net profit for the period of R$ 542,156 thousand, 5% (R$ 27,108 thousand) was credited to Legal Reserve. The company s by-laws guarantee distribution of compulsory dividends of the order of 25% of adjusted net profit, in addition to the remuneration recorded under Interest on Own Capital, which can be

6 imputed to the value of the statutory dividend, calculated according to the variation of the long term interest rate (TJLP) according to Law 9249/95. The administration proposes a distribution of interest on own capital to the sum of R$ 514,541 thousand in place of compulsory dividends for the 1998 fiscal year. Interest on Own Capital Quarter Gross value Total Withholding tax (IRRF) 15% 120, , , , ,541 Net value 115, , , , ,784 Value per share 0, , , , Dividends Net profit 542,156 (-) Legal reserve (27,108) Calculation base 515,048 Compulsory dividend 128,762 Interests for 1st quarter were paid on November 20, The balance will be paid by June AGREEMENT PROTOCOL BETWEEN THE STATE OF SÃO PAULO AND SABESP The government of the state of São Paulo and Sabesp, mediated by the Treasury Minister, sealed an agreement protocol on September 30, 1997, seeking to equate the stock of credits relative to services rendered by Sabesp with the use of dividends or interest on own capital. By December 31, 1998, the installment of interest on own capital owed to the State of São Paulo Treasury Department, to the sum of R$ 287,789 thousand was compensated with part of the credits due. 20. CONCILIATION OF INCOME FOR THE FISCAL YEAR AND SHAREHOLDERS EQUITY Income Shareholders Equity Pursuant to corporation law 542, ,778 8,424,523 8,349,308 Net Adjustment to Present Value Accounts receivable and supplies to be billed 2,404 (1,939) (2,978) (5,382) Suppliers and Contractors (607) ,133 Indexation of Non-monetary Items 76, ,367 2,333,652 2,257,457 In a constant purchasing power currency 620, ,240 10,755,722 10,602, TAX EFFECTS ON ASSETS REVALUATION The effect not shown in the Balance Sheet arising out of incidence of income tax and social contribution on future realization of revaluation of fixed assets (occurred in 1990 and 1991) was R$ thousand at December 31, FINANCIAL INSTRUMENTS The Company records financial assets and liabilities in its Balance Sheet, characterized as financial instruments as described in CVM instruction 235/95. Under the accounting practices used in valuing financial assets and liabilities are recognized, the book values of these instruments do not differ from market values.

7 23. APPROPRIATION OF PROPERTY Appropriation or institution of right-of-way in third parties properties became necessary as a result of the performance of priority works. The respective land owners shall be indemnified through judicial actions or out of court settlements. The estimated amount to be disbursed as from fiscal year 1999 is approximately R$ 116,101 thousand (1998 R$ 58,229), which shall be provided out of own resources or financed. 24. GAINS AND LOSSES IN MONETARY ITEMS Assets Allocation account Cash and banks (385) (1,716) General Financial applications (2,629) (7,090) Financial income Accounts receivable and supplies 42,025 (56,561) Financial income to be invoiced Short term rights realizable (884) (16,561) Personnel Anticipated payments (441) (816) General Inventories 4,301 (4,122) Materials Installments of tariff debts 9,212 (784) Financial income Other assets 398 (1,699) Financial income 51,597 (89,693) Liabilities Suppliers and contractors Salaries payable Loans and financing Taxes and contributions Allocation account 17,592 8,574 Financial 639 1,179 Personnel (298,368) (9,982) Financial 12,549 37,028 Financial Provisions for leave, long service 2,509 10,528 Personnel leave and social charges Interests on own capital payable 549 2,562 General Deferred income tax 6,634 32,245 Financial Other liabilities 1,334 6,464 General Total gains ( ) Monetary gains (losses), net value 25. Y2K ELECTRONIC SYSTEM ADJUSTMENTS In attending to article 2, paragraph 1 of CVM instructions 276/98 and 293/98, which set out procedures for the adjustment of electronic systems to ensure the correct processing of data after the year 1999, the Company prioritized economic and financial transactions which could cause an impact to its business. The adjustments are being carried out with in house and outsourced personnel, with costs estimated at R$ 2,422 thousand, of which R$ 547 thousand was spent in 1998, with completion planned by June GROSS OPERATING REVENUE

8 In a constant purchasing power currency Pursuant to Corporation Law Water supply 1,820,767 1,795,700 1,814,589 1,712,266 Collection and treatment of sewage 1,225,114 1,177,005 1,221,007 1,112,620 Other services 148, , , ,832 Adjustment to present value, accounts receivable and unbilled supply (30,070) (44,683) - - Total 3,164,630 3,076,709 3,183,961 2,976, OPERATING COSTS AND EXPENSES In a constant purchasing power currency Pursuant to Corporation Law EXPENSES WITH SERVICES RENDERED Salaries and payroll charges 667, , , ,911 General materials 36,713 47,443 42,421 43,440 Treatment materials 35,695 31,077 35,567 29,501 Third parties services 152, , , ,631 Electric power 119, , , ,205 General 23,968 22,789 23,953 21,938 Depreciation 378, , , ,024 1,413,405 1,368,871 1,421,375 1,314,650 SELLING EXPENSES Salaries and payroll charges 65,853 61,730 65,669 59,223 General materials 1, , Third parties services 18,502 22,201 19,215 22,131 Electric power General 15,525 21,539 15,519 20,731 Depreciation Written-off credits 145, , , , , , , ,172 ADMINISTRATIVE EXPENSES Salaries and payroll charges 94,309 86,343 93,991 82,770 General materials 1,909 2,365 2,206 2,166 Third parties services 52,206 44,887 54,197 44,733 Electric power General 7,338 6,040 7,334 5,858 Depreciation and amortization 22,365 24,171 22,291 23,025 Tax 14,093 13,479 14,047 12, , , , ,431 FINANCIAL EXPENSES Interests on domestic loans and financing 230, , , ,681 Interests on foreign loans and financing 122,168 47, ,803 45,368 Monetary variation on loans and financing , ,840 Exchange variation on loans and financing ,901 47,132 Reversal of adjustment to present value of 11,652 10, suppliers and contractors Gains and losses 257,833 (65,880) - - Others 76,146 53,809 55,947 52, , , , ,495 FINANCIAL INCOME Monetary variations on debt installments ,883 10,788 Income from financial investments 24,210 23,655 24,113 22,639 Reversal of the adjustment to present value of accounts receivable and unbilled supply 32,474 42,

9 of accounts receivable and unbilled supply Gains and losses 47,763 (69,447) - - Others 765 1, , ,212 (1,298) 101,758 35, ADDITIONAL INFORMATION Terminated Concessions - Municipalities of DIADEMA and MAUÁ The Municipalities of Diadema and Mauá terminated the concessions of water supply and sewer collection services in the beginning of In December, 1996 the company filed an action for indemnity seeking repayment of the investments carried out during the effective term of the concession agreements. The company continues supplying treated water, in bulk, to the mentioned municipalities, which currently operate the water and sewer systems. The residual book value of fixed assets related to the Municipality of Diadema, written-off in December, 1996, was R$ 75,231 thousand, and the balance of indemnity receivable from the municipality was R$ 55,977 thousand. The residual book value of fixed assets related to the Municipality of Mauá was R$ 100,412 thousand, and the outstanding indemnity is currently under court discussion, process No. 1311/ FISCAL ADJUSTMENT PROGRAM Changes to Federal Government legislation regarding fiscal adjustment may affect the company s results, as follows: 1) Increase in COFINS rate from 2% to 3%, with provision for compensation of one third of this amount with Social Contribution on Corporate Profits. 2) Broadening of base for Social Integration Program, PASEP and COFINS from invoicing to gross revenue. 3) Increase in Social Contribution on Corporate Profits rate from 8% to 12% for the period May 1 to December 31, ) Increase in rate of Financial Operations Tax, on loans to corporations, from 1.5% p.a. to 1.9% p.a., in addition to new incidences. 30. SUBSEQUENT EVENTS 30.1 Change to Brazilian Central Bank exchange policy As is public knowledge, the Brazilian Central Bank changed its exchange policy at the end of the first fortnight of January 1999, abolishing the so called exchange band within which it administered the variation between the real and the US dollar and allowing the real to be traded freely on the market. As a consequence, the real accumulated significant falls against the US dollar in the first two months of 1999, compared to its rate on December 31, It is impossible to predict at this stage whether the real will remain at this level. On December 31, 1998, the Company had net US dollar liabilities of US$ 1,459,894 thousand (R$ 1,764,574 thousand) Debenture issue A public placement of simple debentures, not convertible into stock, was carried out by the company in March, 1999, as per an Initial Offer announcement published in Gazeta Mercantil on March 19 and 22, 1999, and respective Public Offer Prospectus prepared in accordance with the National Association of Investment Banks ANBID s Self-Regulation Code. A total of 413,094 debentures were placed, to a value of R$ million, distributed as follows: 1st, 2nd and 3rd series: R$ million each series 4th series: R$ 51.7 million

10 5th series: R$ 16.4 million The issue was made on the basis of National Monetary Council (CMN) Resolution no , dated November 05, Repricing: 1st and 4th series 12th month after payment 2nd and 5th series 18th month after payment 3rd and 6th series 24th month after payment Optional anticipated recovery: As of the first year, the issuer retains the right to fully or partially recover debentures in circulation through payment of 1% on debenture unit price at recovery date. Interest payments: Quarterly. Remunerative Interests: Pre-fixed and with SWAP for IDC on the BMF or the Custody and Financial Settlement of Securities Center (CETIP).

11 REPORT OF THE AUDIT COMMITTEE The members of the Sabesp Audit Committee whose signatures appear below, in accordance with their legal and statutory obligations, examined the Management Report, Balance Sheet at December 31, 1998, Income Statement, Statement of Origin and Application of Resources, Statement of Changes to Shareholders Equity and Explanatory Notes. On the basis of this examination, of the monthly verifications of interim balances and of the Independent Auditors Report, relative to the mentioned information and the explanations offered by them, we are of the opinion that the documents examined, representing the economic and financial situation of the company on the stated date, are fit to be presented to the shareholders. São Paulo, March 24, 1999 WALDOMIRO JOSÉ DE SOUZA EDUARDO SOARES MARIA DE FÁTIMA REITEMBACH DE CASTRO SANDRA LÚCIA FERNANDES MARINHO MARIA DE FATIMA ALVES FERREIRA

12 Independent Auditors Opinion To the Board of Directors and Shareholders Companhia de Saneamento Básico do Estado de São Paulo - Sabesp 1. We have examined the financial statements of Companhia de Saneamento Básico do Estado de São Paulo Sabesp on December 31, 1998 and 1997, according to the corporate legislation and according to a constant purchasing power currency, and their respective income statements, statements of changes to shareholders equity and statements of origin and application of resources for the periods ended on those dates. Said statements were prepared under the company s management s responsibility. Our responsibility is that of providing an opinion concerning these financial statements. 2. Our examination was carried out in accordance with standard auditing procedures and included: (a) planning of works, considering materiality of balances, volume of transactions and the company s accounting systems and internal controls, (b) determination, on a test basis, of evidences and records supporting the amounts and accounting information therein disclosed and (c) evaluation of the most representative accounting practices and estimates adopted by the company s management, as well as of the presentation of the financial statements as a whole. 3. It is our opinion that the financial statements, according to the constant purchasing power currency fairly present, in all their material aspects, the equity and financial condition of Companhia de Saneamento Básico do Estdo de São Paulo SABESP as of December 31, 1998 and 1997 and the income from its operations, changes in shareholders equity and sources and investments of funds for the fiscal year ended as of the referred date, in accordance with basic accounting principles. 4. It is our opinion, further, that the financial statements according to a corporate legislation fairly present, in all their material aspects, the equity and financial condition of Companhia de Saneamento Básico do Estado de São Paulo SABESP as of December 31, 1998 and 1997 and the income from its operations, changes in shareholders equity and sources and investments of funds for the fiscal year ended as of the referred date, in accordance with basic accounting principles. 5. The statements of cash flow and added value, which are presented in order to provide supplementary information on the company, are not required as an integral part of the financial statements. These statements were submitted to those auditing procedures as described in the second paragraph hereof and, in our opinion, are fairly presented in all their material aspects in relation to the financial statements, taken as a whole. São Paulo, February 19, 1999, with exception of Note 30, March 23, Orlando Octávio de Freitas Junior Accountant CRC/SP no. 1SP /0-4 Trevisan Auditores Indpendentes CRC/SP no. 2SP /0-5