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Sabesp ADRs Rally as Brazil Regulator Allows Rate Increase

Cia. de Saneamento Basico do Estado de Sao Paulo, Latin America’s biggest water utility, climbed to a two-week high in New York trading after regulators allowed it to increase rates.

Sabesp, as the company is known, gained 1.8 percent to $9.51 at the close of trading, the highest since April 7. The iShares MSCI Brazil Capped exchange-traded fund fell 0.4 percent. Brazil’s stock market was closed for a holiday.

Sao Paulo state’s water and energy regulator Arsesp authorized Sabesp to raise rates by as much as 5.4408 percent, according to an April 17 statement. That’s more than the 4.6607 percent the agency initially proposed in February. The regulator also disclosed the efficiency factor, which is part of the formula used to calculate future increases, that will be used for adjustments in 2015 and 2016.

“This news is a relief,” UBS AG analyst Lilyanna Yang wrote in a note to clients. “The rhetoric over future tariff hikes is positive, but we remain pessimistic in the near term on lower dividends, squeezed profitability from rising rationing risks.”

Arsesp said the higher rates could take effect as soon as May 11 and Sabesp may postpone or suspend the increase as it gives 30 percent discounts to some customers who reduce consumption amid the worst drought in at least 40 years. The higher rate might be “impractical or undesirable” now, Arsesp said in a statement on its website.

Sabesp decided to postpone the rate increase until as late as December and said it will cut costs by 900 million reais ($402 million) to “preserve the company’s economic and financial sustainability,” according to an April 17 regulatory filing.

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