Operators Series: Healthy Sanepar ready to expand

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Monday, January 29, 2018

The water utility of Brazil's southern Paraná state, Sanepar, is preparing to launch projects in new areas to take advantage of a robust cash flow and absence of drought risks.

These two factors leave the state-owned company in a good position to look for new opportunities.  

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Sanepar net profit totaled 532mn reais (US$164mn) in the first nine months of 2017, representing a rise of 13.7% from the year ago period, thanks to ongoing tariff increases and a growing number of metered connections.

In 3Q17, 61% of the company's operating revenue was attributable to water, 35% to sewage and 4% to "services and other." The last category includes solid waste management and it is the area where Sanepar has most room to expand.

SOLID WASTE

The company has a small solid waste management area that operates three landfills, which is considered pilot scale.

"We are seeing opportunity to act in the area of solid waste," Sanepar president Mounir Chaowiche told BNamericas.

The entry into solid waste will help the company diversify revenue, said Chaowiche, adding that Sanepar will seek partners for solid waste operations. "I expect that the waste area will be responsible for 20% to 25% of our revenue in 10 years."

With the company on track to reach full coverage of water and sanitation services throughout Paraná state, regional expansion is also part of the plans.

"Another point that I believe can be explored by Sanepar in the next few years is the possibility of acting in other states. We have made initial contacts about this possibility but this must be better evaluated," Chaowiche said.

REASONS BEHIND SUCCESS

While several state-run water utility companies face challenges in Brazil, Sanepar is enjoying good results thanks to the combination of strong corporate governance, lack of political influence and the geographical position of its water reservoirs, which are less prone to drought than other parts of the country.

"Sanepar has a lower hydrological risk compared with its peers Sabesp [São Paulo state utility] and Copasa [Minas Gerais state utility] and this is an important aspect," said Gustavo Mueller, a director at Fitch Ratings, in an interview with BNamericas.

"When we look at historical figures for Sanepar reservoir levels, we always see these at high levels, at around 85% and 100%, since its reservoirs are well distributed," Mueller added.

The company adheres to a strict governance policy, which has helped it attract investors through the capital markets.

In December 2016, Sanepar raised 1.97bn reais through an IPO and secondary offering of shares, which attracted investors such as Morgan Stanley. In December last year, the company raised an additional 1.04bn from a new share offering to reinforce its cash position.

"In various states, sanitation companies are a problem for governments as they need cash injections. In the case of Sanepar, it is the opposite since the company represents a solution. The company is self-sufficient and has no need to raise cash from government," said Mueller.

ON TRACK TO PROVIDE WATER AND SANITATION SERVICES FOR ALL

Sanepar is pushing ahead with its goal of providing water and sanitation for 100% of the population in the state of Paraná.

"Currently we have a universal water condition where 100% of the population in Paraná state is being served with potable water, though we continue to advance with certain details to improve water supply in rural communities. This is the result of heavy investments made by us," said Chaowiche.

"Now we are aiming for universal collection and treatment of sewage."

In Brazil, only 42% of the population is connected to sewage collection systems and treatment networks, while 70.2% of the Paraná population is connected to the Sanepar system.

The goal is to achieve 100% within 15 years, serving all municipalities in the state, according to Chaowiche.

INVESTMENTS AND COST REDUCTION

The Sanepar board recently approved an investment plan worth 5.68bn reais through 2022.

The company will invest 1.18bn reais in 2018; 976mn in 2019; 918mn in 2020; 1.26bn in 2021; and 1.34bn in 2022. Specific details about the investments have not been provided.

Sanepar will use its own funds and also credit lines to finance the investment plan.

"Sanepar already has financing contracts that ensure the investment plan, we do not need to seek new resources," said Chaowiche.

The company also plans to reduce its labor force to reduce fixed costs in the future.

Sanepar has 7,200 employees after 280 workers left last year as part of voluntary redudancy and retirement programs.

"I believe we can reduce this more, reaching 6,800 workers, which is an adequate level of employees since we have implemented several technological improvements that guarantee our service quality," said Chaowiche.