Sabesp Gains as Brazil Utility Wins Rate Raise Amid Drought

Sabesp, Latin America’s biggest water utility, climbed for a third straight day as regulators approved a bigger-than-estimated rate increase after delaying a decision for a year and a half.

Cia. de Saneamento Basico do Estado de Sao Paulo, as the company is formally known, rose 3.1 percent to 21.55 reais at the close of trading in Sao Paulo. The shares have climbed 9.9 percent over the past three days, the biggest such rally since September. Brazil’s benchmark Ibovespa gauge fell 0.3 percent today.

Sabesp tumbled 36 percent in the 12 months through April 15 as regulators postponed the rate decision, originally slated for August 2012, and costs rose amid Brazil’s worst drought in at least four decades. Sao Paulo state’s water and energy regulator said April 17 that Sabesp may raise rates by as much as 5.4408 percent starting May 11, above the regulator’s 4.6607 percent estimate given in February.

“The decision was very favorable for the company,” Henrique Kleine, the head equity analyst at brokerage Magliano SA in Sao Paulo, said in a telephone interview. “The market had been waiting for this for a long time.”

The higher-than-expected increase incorporates compensation for delays in the process, according to a statement from the regulator, known as Arsesp. The regulator also gave the utility a numerical figure that will be used to calculate rate adjustments in 2015 and 2016.

The utility said in a filing April 17 that it will cut costs this year by 900 million reais ($402 million) to preserve its “economic and financial sustainability.” Details of the measures weren’t provided.

Record Lows

Water levels at the Cantareira basin, which supplies almost half of the 20 million residents of metropolitan Sao Paulo, fell to 11.9 percent today, the lowest level since the National Water Agency began collecting data in 1982.

“The rate review was concluded at a moment of prospects for unusual and unforeseen water supply,” Arsesp said in its statement.

Citigroup Inc. analysts Marcelo Britto and Kaique Vasconcellos said in a research note that “major rationing” this year may create downside risk to their 22.50-real target price for the shares.

Sabesp is offering 30 percent discounts to some customers who reduce consumption by at least 20 percent of their 12-month average. In a filing after the rate decision was disclosed, the utility said it agreed to postpone the rate increase until December at the latest.

‘Good Strategy’

The utility’s decision to delay the increase is a “good strategy,” Kleine said. “They looked at their current scenario and decided to delay it to not create issues with the customers. But they have the right to raise rates when they see fit.”

Sabesp said in an e-mailed statement it’s also considering fines for consumers who don’t save water.

The rate increase is “good news, but they have bigger problems,” Kunal Ghosh, a Singapore-based emerging-market portfolio manager at Allianz Global Investors, which has $475 billion in assets under management, said by phone. “Your core problem is low reservoir levels. You have to address your core problem. Otherwise you’ll get a good one quarter and bigger problems down the road.”

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