SBS Companhia Sanea

CIA. DE SANEAMENTO BÁSICO DO ESTADO DE SÃO PAULO - SABESP

Rui de Britto Álvares Affonso

Chief Financial Officer and Investor Relations Officer

Mario Azevedo de Arruda Sampaio

Head of Capital Markets and Investor Relations

1.     Financial highlights

(*) Adjusted EBIT is net income before: (i) other operating revenues/expenses, net; (ii) financial result; and (iii) income tax and social contribution.

(**) Adjusted EBITDA is net income before: (i) depreciation and amortization expenses; (ii) income tax and social contribution; (iii) financial result; and (iv) other operating revenues/expenses, net.

In 1Q16, net operating revenue, including construction revenue, reached R$ 3.0 billion; a 22.7% increase compared to the same period of 2015.

Costs and expenses, including construction costs, totaled R$ 2.4 billion, 76.3% higher than the R$ 1.4 billion recorded in 1Q15.

Adjusted EBIT, in the amount of R$ 623.1 million, dropped 43.6% from R$ 1,104.2 million recorded in 1Q15.

Adjusted EBITDA, in the amount of R$ 907.8 million, reduced 33.1% from R$ 1,357.5 million recorded in 1Q15 (R$ 3,524.6 million in the last 12 months) .

The adjusted EBITDA margin was 30.0% in 1Q16, versus 55.0% in 1Q15 (28.7% in the last 12 months). Excluding construction revenues and construction costs, the adjusted EBITDA margin was 37.2% in 1Q16 (71.6% in 1Q15 and 38.8% in the last 12 months).

In 1Q16 the Company recorded a net income of R$ 628.8 million, in comparison to a net income of R$ 318.2 million in 1Q15.

2. Gross operating revenue

Gross operating revenue from water and sewage, not including construction revenue, totaled R$ 2.6 billion, an increase of R$ 566.1 million or 28.2%, when compared to the R$ 2.0 billion recorded in 1Q15.

The main factors that led to this variation were:

·          15.2% tariff increase (7.8% ordinary tariff adjustment and 6.9% extraordinary tariff revision) since June 2015;

·          Lower bonus granted within the Water Consumption Reduction Incentive Program, with a R$ 153.8 million impact in 1Q16, versus the R$ 211.2 million recorded in 1Q15;

·          Application of contingency tariff, in the amount of R$ 160.6 million in 1Q16 (R$ 79.3 million in 1Q15); and

·          Increase of 1.9% in the Company’s total billed volume (1.0% in water and 3.0% in sewage).

3. Construction revenue

Construction revenue increased R$ 36.9 million or 6.3%, when compared to the previous year. The variation was mainly due to higher investments in the municipalities served by the Company.

4. Billed volume

The following tables show the water and sewage billed volume, quarter-on-quarter, per customer category and region.

5. Costs, administrative, selling and construction expenses

In 1Q16, costs, administrative, selling and construction expenses, grew 76.3% (R$ 1,041.3 million). Excluding construction costs, total costs and expenses increased by 127.4%.

Excluding the effects of the non-recurring GESP Reimbursement transaction, costs and expenses increased by 16.7%.

As a percentage of net revenue, costs and expenses were 55.3% in 1Q15 and 79.5% in 1Q16.Excluding the effects of the GESP Reimbursement effects, costs and expenses as a percentage of net revenue came to 83.5% in 1Q15.

5.1. Payroll and benefits and pension plan obligations

In 1Q16 payroll and benefits increased R$ 39.8 million or 7.4%, due to the following:

·          R$ 18.8 million in the provision for the pension plan, arising from changes in actuarial assumptions;

·          R$ 14.5 million, mainly due to the average wage increase of 9.7% in May 2015 and by the application of 1% related to the career and wage plan, since July 2015; and

·          R$ 5.9 million, due to the adjustment in healthcare expenses since July 2015.

  5.2. Supplies

In 1Q16, expenses with supplies decreased R$ 12.5 million or 25.7%, from R$ 48.7 million to R$ 36.2 million, mostly due to the following:

·          Fuel, in the amount of R$ 6.7 million, mostly due to the fact that the generators used to pump water from the Cantareira System technical reserve were turned off in December 2015; and

·          Lower use of materials in preventive and corrective maintenance in water and sewage systems, in computerized systems and conservation of properties and installations, in the amount of R$ 5.9 million.

5.3. Services

Services expenses, in the amount of R$ 282.4 million, dropped R$ 13.5 million or 4.6%, in comparison to R$ 295.9 million in1Q15. The main factors that led to this decrease were:

·          Water and sewage systems and connections maintenance, in the amount of R$ 10.3 million; and

·          Advertising campaigns, in the amount of R$ 4.0 million, mainly due to the intensification in 1Q15, for the rational use of water.

5.4. Electric power

Electric power expenses totaled R$ 240.4 million, an increase of R$ 81.3 million or 51.1% in comparison to the R$ 159.1 million in 1Q15. The main factors that contributed to this increase were:

·          Average increase of 38.3% in the regulated market tariffs, with no significant variation in consumption;

·          Average increase of 165.2% in the grid market tariffs (TUSD), with a 5.3% decrease in consumption; and

·          Average increase of 10.5% in the free market tariff, with a 7.5% decrease in consumption.

In 1Q16 the regulated market accounted for 39.3% of the total electric power consumed by the Company, the free market accounted for 31.0% and the grid market accounted for 29.7% of total consumption.

5.5. General expenses

General expenses increased R$ 170.2 million, totaling R$ 224.6 million, versus the R$ 54.4 million recorded in 1Q15, mainly due to:

·          R$ 138.7 million increase in the provision for lawsuits; and

·          Higher provision for the Municipal Fund for Environmental Sanitation and Infrastructure , in the amount of R$ 27.7 million, as a result of the increase in revenues with the municipality of São Paulo.

5.6. São Paulo state government reimbursement

In 1Q15, the Company entered into an agreement with the São Paulo state government to receive the undisputed amount, related to the state’s debt with the Company, for the payment of the benefits to former employees (G0) dealt with by state Law #4,819, of August 26, 1958, that generated a credit in the result in the amount of R$ 696.3 million.

5.7. Depreciation and amortization

R$ 31.4 million increase or 12.4%, reaching R$ 284.7 million in comparison to the R$ 253.3 million recorded in 1Q15, largely due to the beginning of operations of intangible assets, in the amount of R$ 2.4 billion.

5.8. Provision for doubtful credits

Increased R$ 8.8 million, mainly due to the lower recovery of amounts through settlements in 1Q16, in the amount of R$ 12.8 million, partially offset by the reduction in provisions for revenue losses, in the amount of R$ 4.0 million.

6. Other operating revenues (expenses), net

Other net operational revenues and expenses reported a negative variation of R$ 26.6 million, mainly due to the R$ 21.5 million drop from the sale of surplus electricity between the analyzed periods.

7.1. Financial revenues and expenses                                                                                            

7.1.1. Financial expenses

Financial expenses grew R$ 48.0 million. The main reasons were:

·          R$ 7.2 million in interest and charges on international loans and financing, due to the increase in the debt balance, despite the depreciation of the US dollar and the Yen versus the Brazilian Real in 1Q16 (-8.9% and -2.4%, respectively);

·          R$ 8.5 million in interest and charges on domestic loans and financing, especially due to the funding of the 20 ^th debenture issue, in December 2015; and

·          R$ 32.3 million in other financial expenses, largely due to the higher provision of interest on lawsuits in 1Q16.

7.1.2. Financial revenues

Financial revenues increased R$ 12.0 million, largely due to the increased recognition of interest on installment agreements and financial investments in 1Q16.

7.2. Monetary and exchange rate variation on assets and liabilities

The effect in 1Q16 was R$ 1,362.0 million, lower than in 1Q15, especially due to the positive variation of R$ 1,367.8 million in expenses with exchange rate variation on loans and financing, due to the depreciation of the US dollar and the Yen versus the Brazilian Real in 1Q16 (-8.9% and -2.4%, respectively), when compared to the appreciation recorded in 1Q15 (20.8% and 20.3%, respectively). This amount was partially offset by the increase of R$ 32.9 million from higher provisions for the monetary restatement of lawsuits in 1Q16.

8. Income tax and social contribution

Grew R$ 507.7 million, due to the increase in taxable income in 1Q16, when compared to the net loss recorded in 1Q15.

9. Indicators

9.1. Operating

In the first quarter of 2016, due to the greater availability of water, production volume increased by 8.8%.

Water losses moved up this quarter, although this was already expected given that the reduction observed until now was not only due to the loss control initiatives, but was also to the water crisis and the consequent need to lower network pressures as a means of managing demand.

9.2. Financial

  (*) Unaudited

10. Loans and financing

11. Capex

In the first quarter of 2016, the Company invested R$ 665.4 million.

12. Conference calls

For more information, please contact:

Mario Arruda Sampaio

Head of Capital Markets and Investor Relations

Phone.(55 11) 3388-8664

E-mail: maasampaio@sabesp.com.br

Angela Beatriz Airoldi                                                                         

Investor Relations Manager

Phone.(55 11) 3388-8793

E-mail: abairoldi@sabesp.com.br

Statements contained in this press release may contain information that is forward-looking and reflects management's current view and estimates of future economic circumstances, industry conditions, SABESP performance, and financial results. Any statements, expectations, capabilities, plans and assumptions contained in this press release that do not describe historical facts, such as statements regarding the declaration or payment of dividends, the direction of future operations, the implementation of principal operating and financing strategies and capital expenditure plans, the factors or trends affecting financial condition, liquidity or results of operations are forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties. There is no guarantee that these results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.