Sabesp Falls as Rate Increase Delayed Amid Rationing Concern

Apr 11, 2014 5:00 pm ET

(Updates with closing prices in sixth paragraph.)

April 11 (Bloomberg) -- Sao Paulo water utility Sabesp extended its biggest weekly drop in 10 months after failing to secure a rate increase amid concern that shrinking drinking supplies will lead to rationing.

The water regulator Arsesp canceled an expected announcement of a rate review for Cia. de Saneamento Basico do Estado de Sao Paulo without setting a new date. An agency official declined to give a reason for the postponement. The process started in March 2011 and has been repeatedly delayed since an initial date was set for a year and a half ago.

While Sabesp is trying to increase investment and boost Sao Paulo’s water supply, the delayed rate review makes investors doubt that the company will be fairly compensated for improvements, said Felipe Rocha, an analyst at brokerage firm Omar Camargo Investimentos.

“We see an increased regulatory risk for Sabesp,” Rocha said by telephone from Curitiba, Brazil. “Until there’s more information on the rate review process, the stock will remain under pressure.”

The rate decision is critical to Sabesp as the worst drought in at least four decades sends reservoir levels to a record low, a situation that may prompt rationing during the World Cup soccer tournament that starts June 12. The water utility, the largest in Latin America by market value, has already cut supplies to some neighboring cities as the Cantareira basin, which serves almost half of the 20 million residents of metropolitan Sao Paulo, fell to 12.2 percent of capacity yesterday.

Rate Outlook

Shares of Sabesp dropped 5.6 percent to 19.74 reais at the close of trading in Sao Paulo, extending this week’s slump to 10 percent, the biggest since June. The Ibovespa stock benchmark climbed 1.4 percent today.

While UBS AG and Brean Capital LLC say Arsesp will probably uphold a 4.7 percent rate increase proposed in February, they’re looking for details on how annual rate adjustments will be calculated in 2015 and 2016. Doubt over future rate increases and compensation for the cost of potential rationing is weighing on the stock, UBS analysts Lilyanna Yang and Carlos Herrera wrote in a research note to clients March 20.

The utility plans to invest 5.28 billion reais ($2.40 billion) to expand water supply in Sao Paulo from 2014 to 2018, according to a March 28 statement.

--With assistance from Jessica Brice in Sao Paulo.