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April 7 (The following statement was released by the rating agency)
According to Fitch Ratings, the financial profile of Companhia de Saneamento Basico do Estado de Sao Paulo (Sabesp) should be moderately pressured in 2014 by the impact of the expected reduction in its net revenue and operating cash generation on the company's credit metrics. This pressure may grow higher if current operating conditions worsen and the company does not manage to carry adequate tariff adjustments to mitigate the effects of the reduction in water consumption. Sabesp faces a challenging operating environment given the prolonged low levels of rainfall in the Sistema Cantareira reservoir region, which is responsible for producing nearly one-third of the total volume of water produced by the company and for the supply of its main region of service.
The continued reduction in the storage levels recorded by the Sistema Cantareira in recent months should impact Sabesp more severely than originally estimated by Fitch (see the comment published on Feb. 6, 2014, available at www.fitchratings.com). The company has taken successive measures to mitigate these effects such as extending the incentive program to reduce water consumption in the affected region which was to end in August 2014 until end-2014. This program has also been extended to the entire metropolitan region of Sao Paulo.
Fitch's current projections regarding the impact on the company's cash flow from the reduction in the volume of water and sewage billed demonstrate moderate-to-high pressure on Sabesp's credit profile. The agency's forecasts for 2014 are that Sabesp's net leverage measured by total adjusted net debt/EBITDA should increase to around 3.5x, which compares with 2.5x reported at the end of 2013. The company's net leverage is expected to recover to a level aligned with the current ratings as soon as hydrologic conditions return to a normal pattern. The strength of the company's cash flow from operations (CFFO) during regular hydrologic conditions, combined with its healthy liquidity position, low leverage and lengthened debt maturity profile, should contribute to partially mitigate the more challenging scenario. Relevant frustrations regarding tariff adjustments incorporated by Fitch which provide important support in the company's cash generation or a reduction in water consumption levels beyond Fitch's expectations may increase the company's net leverage to above 4.0x in 2014 and place higher pressure on the Sabesp's ratings.
Fitch's new assumptions consider net revenue decrease of around 14% (net of construction revenues) due to the water consumption reduction incentive programs which should be partially mitigated by the tariff adjustments (estimated at 4.7%) and base of operations growth of 2.5%. Fitch also considered Sabesp's EBITDA margin deterioration to 33% versus the 44% EBITDA margin average during the last four years.
By the end of 2013, the company's cash balance was healthy at BRL1.8 billion and its total debt was BRL11.8 billion. Cash reserves enabled strong coverage of short-term debt of 2.8x and 7.1x, respectively, as measured by cash/short-term debt and cash + CFFO/short-term debt. In 2013, Sabesp reported robust EBITDA and CFFO of BRL4.0 billion and BRL2.8 billion, respectively, with an EBITDA margin of 45%.
Fitch currently rates Sabesp as follows:
--Long-Term Foreign Currency IDR (Issuer Default Rating) 'BB+';
--Long-Term Local Currency IDR 'BB+');
--Long-Term National Rating 'AA(bra)';
--Senior unsecured notes due in 2016 and 2020 'BB+'.