OREANDA-NEWS. July 01, 2015. This release is a translation of the original press release published on June 22, 2015.

Fitch Ratings has assigned a National Scale Long-Term rating of 'A(bra)' to Saneamento de Goias S.A. (Saneago). The Rating Outlook is Stable.

KEY RATING DRIVERS

Saneago's rating reflects the expectation that the company will be able to maintain a satisfactory financial profile, supported by moderate leverage, adequate operational cash generation and manageable debt maturity profile as it executes its capex plans. Fitch believes the 32% tariff review, already approved by the regulator and to be gradually implemented between July 2015 and January 2016, will enable the company to resume its higher profitability ratios after the strong cost pressures faced since 2014.

The assessment reflected Saneago's almost monopolistic position in the provision of water/wastewater services in its operating region (the state of Goias), which benefits its business profile. Fitch also factored in the political risk inherent to its control by the government of the state of Goias, with possible changes to the administration and strategy after each election and potential interventions in the implementation of tariff increases. The regulatory risk to the water/wastewater industry is moderate, given the recent regulatory model, while the hydrologic risk is inherent to this activity. The agency believes the spread of water reduction campaigns in states outside Goias due to low hydrology should impact Saneago's water volumes billed, at least in 2015.

Moderate Leverage

Fitch expects Saneago's net leverage to be around 4.0x in 2015, gradually declining to approximately 2.5x over the next four years. The company has the challenge to manage its financial profile conservatively as it uses capex for its expansion plans. By December 2014, Saneago's net leverage was satisfactory, at 3.4x, a moderate increase from the 2.9x reported in 2013, pressured by higher costs and expenses incurred in the period.

EBITDA Margin to Regain

Fitch estimates Saneago's EBITDA margin of approximately 20% in 2015, excluding construction revenues, with steady growth to around 30% until 2019. During 2014, Saneago's EBITDA, of BRL264 million, was moderate and lower than the BRL323 million reported in 2013. The company's EBITDA margin (net of construction revenue) also declined in 2014, to 21% against the 27% reported in 2013. The expected tariff increase for 2015 and 2016 should offset the higher expenses for energy and personnel, after the implementation of a new staff career plan and payroll scheme in 2014. Over the medium- to long-term, the company should benefit from lower growth rates of its payroll.

Pressured Free Cash Flow (FCF)

The benefit from the tariff increase to Saneago's revenue and cash flow should be partially offset by the likely up to 5% reduction of total water and sewage volumes billed in 2015, as a result of the rational water consumption campaigns by other water/wastewater players affected by the hydrologic crisis in their operating regions. In 2014, the volume billed by Saneago grew 4.6% and its net revenue by 5.8% to BRL1.3 billion, excluding construction revenues.

Fitch estimates that the reduction of annual capex to around BRL350 million - BRL400 million in the next four years will not be insufficient to turn Saneago's FCF positive. Company's cash flow from operations (CFFO) reached BRL319 million in 2014, moderately lower compared with the BRL325 million reported in 2013. In 2014, strong investments of BRL533 million resulted in negative FCF of BRL214 million.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Saneago include:
--Lower water/wastewater volume billed of 5% in 2015 and 3% annual growth from 2016 onwards;
--Staggered implementation of the 32% tariff review, of 17% and 8%, respectively, in July and September 2015, and 5% in January 2016. Future tariff increases based on inflation rate;
--Dividend payout ratio of 25% of net profit;
--Annual average investments of BRL350 - BRL400 million;
--Capital injection of BRL69 million in 2015 and no further capital increases in the following years.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action:

--Expectation of net leverage increase to above 4.5x on a sustainable basis;
--Operating efficiency deterioration noted in EBITDA margins below 25%, excluding construction revenue and costs from the calculation;
--Financial flexibility deterioration with CFFO reduction on a sustainable basis.

Future developments which can, individually or collectively, lead to a positive rating action:

--Net leverage below 2.5x, on a sustainable basis;
--Improved operating efficiency, with EBITDA margins above 30%, excluding construction revenue and costs;
--Strengthening of liquidity, with a cash/short-term debt ratio above 0.7 time.

LIQUIDITY

Historically, Saneago's liquidity has been weak. By the end of 2014, the company's cash and marketable securities amounted to BRL58 million and represented only 16% of its significant short-term debt of BRL362 million. Total debt was BRL963 million, with low foreign exchange risk. Fitch estimates that the company can sustain a reduced cash balance with liquidity risk partially mitigated by its robust CFFO. As of the same date, Saneago's available receivables to support a structured transaction were also limited to near 10% of company's monthly billing, as most of its receivables have been offered to guarantee structured financing issuances of Future Flow of Receivables (FIDCs).

In 2014, Saneago benefited from capital injections of BRL234 million from the government of Goias. Fitch has considered BRL69 million injections for 2015 in its projections and believes the company should be successful in obtaining the necessary funds to finance its planned capex.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following rating to Saneago:

--National Scale Long-Term rating 'A(bra)'; Outlook Stable.