SBS Companhia Sanea

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 2Q16, net operating revenue, including construction revenue, reached R$ 3.4 billion; a 21.8% increase compared to the same period of 2015.

Costs and expenses, including construction costs, totaled R$ 2.6 billion, 11.3% higher than the R$ 2.4 billion recorded in 2Q15.

Adjusted EBIT, in the amount of R$ 822.9 million, grew 74.2% from R$ 472.5 million recorded in 2Q15.

Adjusted EBITDA, in the amount of R$ 1,117.1 million, increased 47.6% from R$ 756.6 million recorded in 2Q15 (R$ 3,885.1 million in the last 12 months) .

The adjusted EBITDA margin was 32.5% in 2Q16, versus 26.8% in 2Q15 (30.1% in the last 12 months). Excluding construction revenues and construction costs, the adjusted EBITDA margin was 43.2% in 2Q16 (38.4% in 2Q15 and 40.0% in the last 12 months).

In 2Q16 the Company recorded a net income of R$ 797.5 million, in comparison to a net income of R$ 337.3 million in 2Q15.

2. Gross operating revenue

Gross operating revenue from water and sewage, not including construction revenue, totaled R$ 2.7 billion, an increase of R$ 676.2 million or 33.0%, when compared to the R$ 2.0 billion recorded in 2Q15.

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;

·          Tariff increase of 8.4% since May 2016;

·          Lower bonus granted within the Water Consumption Reduction Incentive Program, concluded in April 2016, in the amount of R$ 33.6 million in 2Q16, versus R$ 231.0 million granted in 2Q15; and

·          Increase of 5.4% in the Company’s total billed volume (4.7% in water and 6.3% in sewage).

The increase driven by the above factors was offset by the lower application of the Contingency Tariff in 2Q16, which also ended in April, 2016, totaling R$ 64.2 million in 2Q16 (R$ 123 million in 2Q15).

3. Construction revenue

Construction revenue dropped R$ 7.6 million or 0.8%, when compared to the previous year. The variation was mainly due to lower investments in the municipalities served by the Company.

4. Billed volume

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

5. Costs, administrative, selling and construction expenses

In 2Q16, costs, administrative, selling and construction expenses, grew 11.3% (R$ 265.1 million). Excluding construction costs, total costs and expenses increased by 18.6%.

As a percentage of net revenue, costs and expenses were 83.3% in 2Q15 and 76.1% in 2Q16.

5.1. Salaries and payroll charges and Pension plan obligations

In 2Q16 increased R$ 92.5 million or 17.5%, due to the following:

·          R$ 47.7 million, mainly due to the average wage increase of 9.7% since May 2015 and by the application of 1.0% related to the career and wage plan, since July 2015, and the wage increase of 10.03% since May 2016;

·          R$ 19.0 million in the provision for the pension plan, arising from changes in actuarial assumptions; and

·          R$ 11.7 million in expenses related to the Profit Sharing Program, due to a lower reversion of provision in 2Q16, as a result of achievements higher than the targets estimated for the period.

  5.2. Services

Services expenses, in the amount of R$ 316.3 million, grew R$ 46.3 million or 17.1%, in comparison to R$ 270.0 million in 2Q15. The main factors that led to this increase were:

·          Estimate of service expenses, totaling R$ 17.0 million, especially due to the higher expenses related to maintenance in water and sewage systems and connections and advertising campaigns in 2Q16;

·          Water and sewage systems and connections maintenance, in the amount of R$ 10.4 million; and

·          Advertising campaigns, in the amount of R$ 10.2 million .

5.3. Electricity

Electricity expenses totaled R$ 242.8 million in 2Q16, an increase of R$ 34.5 million or 16.6% in comparison to the R$ 208.3 million in 2Q15. The main factors that contributed to this increase were:

·          Average increase of 12.0% in the grid market tariffs (TUSD), with a 13.5% increase in consumption;

·          Average increase of 20.8% in the free market tariff, with a 6.7% decrease in consumption; and

·          Average increase of 6.1% in the regulated market tariffs, with a 8.4% increase in consumption.

In 2Q16 the grid market accounted for 28.4% of the total electricity consumed by the Company, the free market accounted for 31.2% and the regulated market accounted for 40.4% of total consumption.

5.4. General expenses

General expenses increased R$ 118.0 million, totaling R$ 166.7 million in 2Q16, versus the R$ 48.7 million recorded in 2Q15, mainly due to:

·          R$ 81.0 million increase in the provision for lawsuits, mainly due to the reversion of R$ 70.4 million in 2Q15; and

·          Higher provision for the Municipal Fund for Environmental Sanitation and Infrastructure , in the amount of R$ 31.5 million, as a result of the increase in revenues with the municipality of São Paulo.

5.5. Tax expenses

Increase of R$ 5.0 million, largely due to the increase in the Municipal Property Tax (IPTU) in 2016, related to the properties in São Paulo.

5.6. Depreciation and amortization

R$ 10.1 million increase or 3.6%, reaching R$ 294,2 million in comparison to the R$ 284.1 million recorded in 2Q15, largely due to the beginning of operations of intangible assets, in the amount of R$ 2.4 billion.

5.7. Allowance for doubtful accounts

Decreased R$ 35.8 million, mainly due to the reversal of the provision for losses with the municipalities of Guarulhos and Mauá in 2Q16, in the amount of R$ 34.8 million and R$ 3.4 million, respectively, as a result of the receipt of court-ordered debt payments in cash.

6. Other operating revenues (expenses), net

Other net operational revenues and expenses reported a positive variation of R$ 4.5 million, mainly due to the following:

·          Reduction of R$ 17.5 million in other operating expenses, mainly due to the lower provision for the write-off of properties and projects and the lower surplus electricity cost in 2Q16, in the amounts of R$ 6.0 million and R$ 5.9 million, respectively; and

·          R$ 13.1 million decrease in other operating revenue, mainly due to the sale of surplus energy in 2Q15, non-recurring, in the amount of R$ 15.8 million.

7. Financial result

7.1. Financial income and expenses

7.1.1. Financial expenses

Financial expenses dropped R$ 6.3 million, mainly due to lower interest and charges on domestic loans and financing, in the amount of R$ 7.9 million, from the decrease in the debt balance as a result of the previous amortization of the 19 ^th debenture issue, in 1Q16.

7.1.2. Financial income

Decline of R$ 23.6 million, arising from the reduction in the number of settlements   in 2Q16, leading to a decline in the recognition of interest.

7.2. Monetary and exchange rate variation on assets and liabilities

The effect in 2Q16 was R$ 231.5, higher than in 2Q15, especially due to:

·          The positive variation of R$ 251.9 million in expenses with exchange rate variation on loans and financing, due to the higher depreciation of the US dollar versus the Brazilian Real in 2Q16, when compared to the depreciation recorded in 2Q15 (-9.8% and -3.3%, respectively);

·          Decrease in expenses with monetary variation on loans and financing, in the amount of R$ 8.8 million, mainly due to the lower variation of the Amplified Consumer Price Index (IPCA) in 2Q16, when compared to the variation recorded in 2Q15 (1.75% and 2.26%, respectively); and

·          Increase in other monetary variation, in the amount of R$ 29.2 million, from the reversal of R$ 25.6 million in provision for lawsuits in 2Q15. 

8. Income tax and social contribution

Grew R$ 112.0 million, due to the increase in taxable income in 2Q16, when compared to 2Q15.

9. Indicators

9.1. Operating

The water produced volume recorded an upturn of 10.4% in the quarter and 9.6% in the semester.

Regarding water losses, the loss related to micrometering increased from 28.5% in 2Q15 to 30.7% in 2Q16. The 2Q15 figure was influenced not only by loss control initiatives, but also by the management of demand due to the water crisis and the consequent need to reduce network pressures.

9.2. Financial

10. Loans and financing

In the second quarter of 2016, the “Adjusted Total Debt / Adjusted EBITDA” ratio came to 3.0 times, versus 3.27 times in the same quarter of 2015. Foreign exchange exposure stood at 48.3% in 2Q16, versus 46.2% in 2Q15. It is worth noting that the exchange rate closed 2Q16 at R$ 3.2098, slightly higher than the R$ 3.1026 observed in 2Q15.

11. Capex

In the second quarter of 2016, the Company invested R$ 901.6 million, totaling R$ 1.6 billion in the first six months of 2016.

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.

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