Sabesp to Cut Costs, Delay Rate Increase to as Late as December

Sabesp, Brazil’s largest water utility, will reduce spending and postpone a rate increase to as late as December as it gives discounts to clients who cut consumption amid the worst drought in at least four decades.

The utility’s board decided on April 16 to cut costs by 900 million reais ($402 million) to “preserve the company’s economic and financial sustainability,” according to a filing. The decision came after regulator Arsesp gave it aproval to raise rates by as much as 5.4 percent effective May 11, then asked Sabesp to hold off until conditions improve.

The water and energy regulator announced the decision yesterday in a statement on its website, adding that the higher rate might be “impractical or undesirable” now considering that Sabesp (SBSP3) already offered discounts of 30 percent for customers who reduce consumption by at least 20 percent of their 12-month average.

The four-year rate review released yesterday also set 0.9386 percent as the efficiency factor that will be used to calculate adjustments in 2015 and 2016. The efficiency factor is part of the formula used to calculate future increases and measures improvements to service the regulator requires before rates can be raised.

“The rate review was concluded at a moment of prospects for unusual and unforeseen water supply,” Arsesp said in the statement. “Considering the atypical situation on the utility’s market, the drought and the measures it has adopted to encourage reduction in water consumption in order to ensure supply, the agency decided to allow the company to apply the raise at a more suitable date in the future.”

Rate Expectations

The rate increase for 2014 is higher than the 4.7 percent preliminary proposal announced in February and incorporates compensation for delays in the process, according to Arsesp’s statement. The review was scheduled to be finished by August 2012.

Sabesp is battling record-low reservoir levels that could prompt rationing during the World Cup. The shares of Cia de Saneamento Basico do Estado de Sao Paulo, as Sabesp is formally known, have declined 32 percent in the past year on lower-than-expected increases in regulated prices as it struggles to curb expenditures amid rising costs to pump water from lakes that are drying up.

Sabesp on March 31 doubled to 17 million the number of clients who get a discount on their bills for cutting water consumption. Water levels at the Cantareira basin, which supplies almost half of the 20 million residents of metropolitan Sao Paulo, are at the lowest levels since the National Water Agency began collecting data in 1982.

Sabesp’s adjusted net income will fall 11 percent to 1.63 billion reais this year from 2013, according to the average estimate among seven analysts surveyed by Bloomberg.

To contact the reporter on this story: Denyse Godoy in Sao Paulo at dgodoy2@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Iain Wilson, Jim McDonald

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