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 1Q17, net operating revenue, including construction revenue, reached R$ 3,558.8 million; a 17.5% increase compared to the same period in 2016.

Costs and expenses, including construction costs, totaled R$ 2,539.2 million, 5.5% higher than in 1Q16.

Adjusted EBIT, in the amount of R$ 1,021.4 million, grew 63.9% from R$ 623.1 million recorded in 1Q16.

Adjusted EBITDA, in the amount of R$ 1,353.4 million, increased 49.1% from R$ 907.8 million recorded in 1Q16 .

The adjusted EBITDA margin was 38.0% in 1Q17 against 30.0% in 1Q16. Excluding construction revenues and construction costs, the adjusted EBITDA margin was 47.2% in 1Q17 (37.2% in 1Q16).

In 1Q17 the Company recorded a net income of R$ 674.4 million, in comparison to a net income of R$ 628.8 million in 1T16.

2. Gross operating revenue

Gross operating revenue from sanitation services, not including construction revenue, totaled R$ 3,029.3 million, an increase of R$ 458.7 million or 17.8%, when compared to the R$ 2,570.6 million recorded in 1Q16.

The main factors that led to this variation were:

·          Tariff increase of 8.4% since May 2016;

·          Increase of 6.0% in the Company’s total billed volume (6.1% in water and 5.9% in sewage); and

·          Bonus granted in 1Q16 amounting to R$ 153.8 million, within the Water Consumption Reduction Incentive Program ended in April 2016.

The increase resulting from the above mentioned factors was partially offset by the suspension of the Contingency Tariff in April 2016, in the amount of R$ 160.6 million in 1Q16.

3. Construction revenue

Construction revenue increased R$ 97.6 million or 15.6%, when compared to 1Q16. 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, on quarter-on-quarter basis, per customer category and region.

5. Costs, administrative, selling and construction expenses

In 1Q17, costs, administrative, selling and construction expenses, grew 5.5% (R$ 132.4 million). Excluding construction costs, total costs and expenses increased by 2.1% (R$ 37.6 million).

As a percentage of net revenue, costs and expenses were 71.3% in 1Q17 compared to 79.5% in 1Q16.

5.1. Salaries and payroll charges and Pension plan obligations

There was an increase of R$ 14.1 million in 1Q17, mainly due to:

·          Increase of R$ 36.1 million, mostly due to the 10.3% pay rise in May 2016 and the 1% impact related to the Career and Salary Plan since December 2016; and

·          Increase of R$ 2.2 million in expenses related to the Defined Contribution Plan (Sabesprev Mais), as a result of the migration of 3,572 participants of the Defined Benefit Plan (G1) in August 2016.

The above-mentioned increases were partially offset by the R$ 27.2 million decline in G0 Pension Plan and Defined Benefit Plan (G1) expenses, due to: (i) changes in the actuarial assumptions (interest rate); (ii) the migration of employees from the Defined Benefit Plan to the Defined Contribution Plan (in August 2016); and (iii) the beginning of payment of the actuarial deficit by employees as of December 2016, reducing the Company’s expenses.

5.2. Electricity

Electricity expenses totaled R$ 199.7 million in 1Q17, a decrease of R$ 40.7 million or 16.9% in comparison to the R$ 240.4 million in 1Q16. The main factors that contributed to this increase were:

·          Average reduction of 17.4% in the free market tariffs, with an 21.2% increase in consumption;

·          Average reduction of 27.3% in the grid market tariff (TUSD), with a 21.7% rise in consumption; and

·          Average reduction of 14.0% in the regulated market tariffs, with a 10.2%.decrease in consumption.

In 1Q17, the regulated market accounted for 32.3% of the total electricity consumed by the Company, the free market accounted for 34.4% and the grid market accounted for 33.3% of total consumption.

5.3. General expenses

General expenses decreased R$ 14.7 million, or 6.5%, totaling R$ 209.9 million in 1Q17, versus the R$ 224.6 million recorded in 1Q16, mainly due to the r eduction of R$ 23.4 million in provisions for court proceedings in 1Q17, partially offset by a higher provision for the Municipal Fund for Environmental Sanitation and Infrastructure , in the amount of R$ 10.9 million, as a result of the increase in revenues with the municipality of São Paulo.

5.4. Depreciation and amortization

Depreciation and amortization increased R$ 47.3 million or 16.6%, reaching R$ 332.0 million in 1Q17 in comparison to the R$ 284.7 million recorded in 1Q16, largely due to the beginning of operations of intangible assets, in the amount of R$ 2.1 billion.

5.5. Allowance for doubtful accounts

Increase of R$ 30.0 million, mainly resulting from:

·          Increase in default, causing a R$ 26.5 million impact; and

·          Receipt of non-recurring court-ordered debt payments amounting to R$ 14.4 million in 1Q16, especially from the city of Guarulhos.

This increase was partially offset by an upturn of R$ 10.8 million in the recovery of funds through agreements in 1Q17.

6. Financial result

6.1. Financial income and expenses

6.1.1. Financial expenses

Decrease of R$ 56.2 million, mainly due to the following events:

·          Interest and charges on domestic loans and financing: reduction of R$ 30.4 million, mainly due to a decline in the debt balance following the early amortization of the 19th debenture issue in March 2016, the 10th issue in January  2017 and the 15th issue in February 2017;

·          Interest and charges on international loans and financing: decrease of R$ 15.4 million, mainly due to the 11% depreciation of the dollar against the real at the close of 1Q17 compared with the close of 1Q16; and

·          Other financial expenses: reduction of R$ 10.4 million, due to lower provisioning for interest on court proceedings in 1Q17.

6.1.2. Financial income

Decrease of R$ 25.3 million, mainly due to the lower recognition of interest on installment agreements in 1Q17 compared with 1Q16.

6.2. Monetary and exchange rate variation on assets and liabilities

6.2.1 Monetary and exchange rate variation on liabilities

The effect of monetary and currency variations in 1Q17 was R$ 333.3 million less than in 1Q16, mainly due to:

·          Reduction of R$ 31.1 million in expenses with monetary variation on loans and financing, due to the lower variation in the IPCA in 1Q17 compared with 1Q16 (0.96% and 7.62%, respectively).

·          Decrease of R$ 394.0 million in exchange variation on loans and financing, as a result of the lower depreciation of the dollar and the appreciation of the yen against the real in  1Q17 (-2.8% and +1.9%, respectively), versus devaluation of both currencies in 1Q16 (-8.9% and -2.4%, respectively); and

·          Decline of R$ 29.6 million in other monetary variation expenses, chiefly due to the reduction in the provision for court proceedings in 1Q17.

6.2.2 Monetary and exchange rate variation on assets

Decrease of R$ 34.0 million, mainly due to the lower monetary restatement of judicial deposits in 1Q17.

7. Income tax and social contribution

Increase of R$ 21.4 million, mainly due to the upturn in operating revenue. This increase was partially offset by the worse financial result reported in the period, which was impacted by exchange rate oscillations.

8. Indicators

8.1. Operating

(1)   Total connections, active and inactive, in thousand units at the end of the period

(2)   In million inhabitants, at the end of the period. Not including wholesale

(3)   In millions of cubic meters

(*)  Unaudited

8.2. Financial

9. Loans and financing

10. Capex

In 2017, investments are expected to reach R$ 2.3 billion, R$ 745.4 million of which were invested in the first quarter of the year, including R$ 189.8 million related to the São Lourenço PPP.

11. 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.

Income Statement

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