1. Financial highlights

 (*) Earnings before interest and taxes

 (**) Earnings before interest, taxes, depreciation and amortization

In 2011, net operating revenue reached R$ 9.9 billion, a 7.6% growth compared to the previous year. Costs and expenses, including construction costs, in the amount of R$ 7.5 billion grew 14.0% over 2010. EBIT dropped 8.4%, from R$ 2.7 billion in 2010 to R$ 2.4 billion in 2011. EBITDA remained stable at R$ 3.2 billion between 2010 and 2011. The EBITDA margin was 32.4% in 2011 in comparison to 34.9% in the previous year. Excluding construction revenues and construction costs, the EBITDA margin was 41.1% in 2011 (44.7% in 2010).

Also excluding non-recurring additional actuarial liabilities of R$ 157.5 million related to the G0 Plan, and construction revenue and construction costs, the EBITDA margin came to 43.1% in 2011.

The Company’s net income was R$ 1.2 billion, a 25.0% drop compared to 2010, mainly due to the currency exchange variation over international loans and financing, in the amount of R$ 448.5 million due to the 12.6% appreciation of the U.S. dollar in 2011, compared to the 4.3% depreciation in 2010.

2. Gross operating revenue

Gross operating revenue from water supply and sewage collection grew from R$ 7.7 billion in 2010 to R$ 8.3 billion in 2011, an increase of R$ 649.7 million or 8.5%. The main factors that led to this variation were: the increase of 2.6% in water billed volume and of 3.6% in sewage billed volume and the tariff adjustment of 4.05% as of September 2010 and of 6.83% as of September 2011. 

3. Construction revenue

In 2011, construction revenue grew from R$ 2.1 billion to R$ 2.2 billion, an increase of R$ 94.0 million or 4.4%, comparing to the previous year. This variation was mainly due to higher construction costs in 2011.The increase of 4.4% in construction revenue and 4.6% in construction costs was due to the change in the index for the calculation of the construction margin, from 2.6% in 2010 to 2.3% in 2011.   

4. Billed volume

The following tables show the billed water and sewage volume per customer category and region in 4Q10 and 4Q11, and 2010 and 2011.

   (1) Unaudited

   (2) Including coastal and countryside

5. Costs, administrative, selling and construction expenses

In 2011, costs of products and services, administrative, selling and construction expenses grew 14.0% (R$ 920.7 million). As a percentage of net revenue, cost and expenses moved from 71.1% in 2010 to 75.3% in 2011.

5.1. Payroll and benefits

In 2011 payroll and benefits increased R$ 403.1 million or 28.8%, from R$ 1,401.0 million to R$ 1,804.1 million, due to the following:

·         Complementation of the actuarial liability totaling R$ 157.5 million, referring to the actuarial calculation made on December 31, 2010 related to G0 Plan; non-recurring for the next quarters;

·         Complementation of the actuarial liability related to the G0 Plan, in the amount of R$ 22.2 million;

·         Adjustments, in 2010, of the actuarial calculation relating to the migration of employees from the Defined Benefits Plan to Sabesprev Mais, in the amount of R$ 60.8 million;

·         Increase of R$ 22.4 million due to compensation related to Government Severance Indemnity Fund (FGTS), as a result of a higher number of lay-offs in the year;

·         5.05% increase in wages since May 2010 and 8% since May 2011, with an impact of approximately R$ 94.0 million; and

·         Reversion of R$ 13.4 million, in 2010, referent to part of the provision for Profit Sharing, in 2009, with an impact of R$ 29.2 million between the periods.

In 4Q11 payroll and benefits increased R$ 144.9 million or 55.0%, due to:

·         R$ 77.9 million actuarial liability of the G0 Plan. Since 2011, these expenses have been recognized net of the payment of the undisputed party (benefits of Law 4819/58);

·         Adjustments, in 2010, of the actuarial calculation relating to the migration of employees from the Defined Benefits Plan to Sabesprev Mais, in the amount of R$ 39.4 million; and

·         8% increase in wages since May 2011, with an impact of approximately R$ 23.6 million.

5.2. Supplies

In 2011, expenses with supplies increased by R$ 12.4 million or 8.5%, when compared to the previous year, from R$ 146.7 million to R$ 159.1 million. The main factors for these variation were expenses with water and sewage systems maintenance, in the amount of R$ 7.4 million, and fuel and lubricants, in the amount of R$ 2.2 million, due to the 22% average increase in ethanol prices and fleet growth.

In 4Q11, these expenses increased by R$ 1.2 million or 2.7%, due to supplies for water and sewage systems maintenance.

5.3. Treatment supplies

Treatment supplies expenses in 2011 were R$ 18.2 million or 13.3% higher than in 2010, from R$ 136.5 million to R$ 154.7 million. The main factors were:

·         Increase of R$ 21.1 million, 65% of which were related to the approximately 43% increase in the consumption of aluminum polychloride, with an 11% adjustment. This product was mainly used at the Water Treatment Station of Guaraú, as a replacement for aluminum sulphate, ensuring an increase in maximum flow, without jeopardizing treated water quality; and

·         Decrease of R$ 2.0 million in activated carbon due to weather and water conditions and the non-proliferation of algae in the dams that serve Guarapiranga/Billings and the Alto Tietê Production System.

In 4Q11 treatment supplies expenses dropped R$ 1.9 million or 5.0%, due to: i) aluminum sulphate that was replaced by other products such as aluminum polychloride; and ii) activated carbon due to climate conditions.

5.4. Services

In 2011 this item increased R$ 24.1 million or 2.5%, from R$ 969.5 million to R$ 993.6 million. The main factors were:

·         Public and Private Partnership Agreement of the Alto Tietê Production System, with an increase of R$ 14.7 million as expected for the second year of the contract and start-up in September 2011;

·         Preventive and corrective maintenance in the water and sewage systems, amounting to R$ 14.3 million;

·         Hydrometer reading and bill delivery expenses in the amount of R$ 11.1 million, as a result of the usage of new technologies that allow greater security and agility in the bill issue and reading system at municipalities belonging to the Regional Systems, in addition to the higher number of connections and contract adjustments at the São Paulo Metropolitan Region;

·         Water and sewage connection and network maintenance in the amount of R$ 9.2 million, due to the intensification of the fight against water losses and to comply with work execution terms required by the ARSESP;

·         Postage and telegraphs in the amount of R$ 6.0 million related to the delivery of water bills at some Business Units by post, due to judicial request; and

·         Expenses with risk contracts for the recovery of credits, in the amount of R$ 4.2 million, due to the intensification of collection operations, which led to a R$ 325.4 million increase in revenues in 2011.

The following items recorded a decrease in the period:

·         The municipal government of São Paulo, down by R$ 15.5 million, related to joint social and environmental initiatives;

·         Advertising campaigns with a R$ 18.4 million decrease due to the completion of certain advertising campaign contracts; and

·         Telephone and data transmission, down by R$ 6.6 million, due to the agreement involving wireline telephony and data long distance call (DDD/DDI) projects and corporate mobiles.

In 4Q11 this item increased R$ 26.1 million, or 10.1%, due to:

·         Paving services and replacement of sidewalks in the amount of R$ 8.2 million, on account of the offsetting of accounts with Municipal Governments;

·         Public and Private Partnership Agreement of the Alto Tietê Production System, with an increase of R$ 7.5 million as expected for the second year of the contract and start-up in September 2011;

·         Advertising campaigns focused on social and environmental initiatives broadcast on the radio and TV totaling R$ 4.2 million, which will also be incurred in the next quarter; and

·         Hydrometer reading and bill delivery expenses in the amount of R$ 4.7 million, as a result of the implementation of new technologies (TACE) in several municipalities belonging to the Regional Systems, that allow greater security and agility in the bill issue and reading system, in addition to the higher number of connections and contract adjustments at the São Paulo Metropolitan Region.

5.5. Electric power

In 2011, this item increased R$ 52.8 million, or 9.9%, from R$ 531.3 million to R$ 584.1 million, associated to the increase in consumption and to the average tariff increase in the free and captive market. 

5.6. General expenses

In 2011 general expenses increased R$ 211.8 million or 47.7%, from R$ 444.2 million to R$ 656.0 million, due to:

·         R$ 162.1 million provisions envisaged in the agreement with the municipal government of São Paulo, which is equivalent to 7.5% of the municipality’s gross revenue net of Cofins and Pasep. These provisions were constituted as of the third quarter of 2010 and full year of 2011; and

·         Increase in provision for legal contingencies in relation to 2010, amounting to R$ 51.0 million.

In 4Q11 this item increased R$ 8.0 million due to provisions for legal contingencies.

5.7. Depreciation and amortization

This item increased R$ 216.5 million or 39.2%, from R$ 552.2 million to R$ 768.7 million, due to the amortization term adjustment between the asset’s useful life and the contract effectiveness, whichever is the shortest one, and the increased transfer of works in progress to operation in 2011. The main adjustment refers to the amortization of intangible assets related to the Service Agreement with the municipal government of São Paulo

5.8. Credit write-offs

In 2011 credit write-offs dropped R$ 112.2 million or 48.3%, from R$ 232.5 million to R$ 120.3 million, mainly due to additional provisions of R$ 34.2 million related to private clients and R$ 139.1 million related to public municipal entities in 2010, R$ 54.8 million of which refers to the municipal government of São Paulo.

6. Other operating revenues and expenses

6.1. Other operating revenues

Other operating revenues increased R$ 33 million or 83.5% in 2011, mainly due to the signing of the Disposal of Exclusive Rights agreement, for the payment of Sabesp’s employees, with Nossa Caixa and Banco do Brasil for the period from March 2007 to March 2014.

6.2. Other operating expenses

Other operating revenues increased R$ 125.0 million  or 332.4% in 2011, mainly due to provision of R$ 85.9 million for assets related to the concession agreement with the municipality of Mauá and asset write-offs, in the amount of R$ 35.3 million.

7. Financial revenues and expenses

7.1. Financial expenses

In 2011 financial expenses dropped R$ 128.2 million, or 18.3%. The main factors that influenced this result were:

·         Decrease in the amount relating to lawsuits in  the amount of R$ 95.6 million, due to higher interest from supplier and client lawsuits in 2010;  

·         Decrease in interest by R$ 33.6 million on domestic loans and financing, mainly due to the amortization of the 8^th and 9^th debenture in June and October 2011, respectively; and

·         Interest related to the Eurobonds 2020, in the amount of US$ 350 million, in December 2010, which increased R$ 29.0 million.

7.2. Financial revenues

Financial revenues increased by R$ 153.4 million, as a result of financial investments due to the increase in cash position.

8. Monetary variation on assets and liabilities

8.1. Monetary variation on liabilities

The effect on the monetary variation on liabilities in 2011 was R$ 489.7 million higher than in 2010, due to:

·         Exchange variation on foreign loans and financing in the amount of R$ 448.5 million, due to the 12.6% appreciation of the U.S. dollar in 2011, compared to the 4.3% depreciation in 2010; and

·         Monetary restatements of the commitments arising from program agreements, totaling R$ 41.2 million.

8.2. Monetary variation on assets

Monetary variation on assets decreased R$ 46.0 million, due to:

·         Monetary restatement related to the proceeds of the 11^th debenture issue, as a result of the change in the Unit Price between the issue date and the actual disbursement date in 2010, totaling R$ 20.0 million;

·         Depreciation of the Yen against the Real at the release of the amount disbursed by the Japan International Cooperation Agency – JICA, totaling R$ 14.0 million in 2011; and

·         Lower tariff debit installment agreements in 2011, in the amount of R$ 12.0 million.

9. Operating indicators

In 2011, the water loss indicator resumed its downward trend, coming to 25.6% in December, after a stable period in 2010 due to problems related to the termination of network maintenance agreements, which are part of the loss reduction efforts.

Currently the goal is to reduce loss ratio to 13% until 2019, however, this goal will be revised based on the results reached so far and the expected reduction with the implementation of the Corporate Program for Water Loss Reduction in the 2012-2019 period.

  (1) In thousand units

  (2) In million inhabitants. Not including wholesale

  (3) In million of cubic meters.

  * Unaudited

10. Loans and financing

In February, 2012, the Company held its 15^th issue of simple, non-convertible, unsecured debentures in the amount of R$ 771.1 million, in two series, for public distribution, with restricted placement efforts, pursuant to CVM Instruction 476. The first series totals R$ 287.3 million, due in 5 years and the second series totals R$ 483.8 million, due in 7 years. The proceeds were used to settle financial commitments due in 2012, especially the prepayment of the 13^rd debenture issue, totaling R$ 600 million, due in August 2012. The proceeds were also used to amortize an installment of the 2^nd series of the 11^th debenture issue, totaling R$ 202.5 million.

In the same month, the Company entered into a loan agreement with the Japan International Cooperation Agency (JICA) in the amount of ¥ 33.584 billion (equivalent to around R$710 million on the execution date) to support the second stage of the Corporate Program for Water Loss Reduction in water supply systems. Investments in this stage of the program are estimated at R$ 1.1 billion (¥ 52.207 billion), R$ 390 million (¥18.623 billion) of which represent Sabesp’s counterpart. The loan term is 25 years, with a 7-year grace period and an interest rate of 1.7% p.a.  

11. Events

Click here for live webcast and Access through the Internet at: www.sabesp.com.br

For more information, please contact:

Mario Arruda Sampaio

Phone.(55 11) 3388-8664

E-mail: maasampaio@sabesp.com.br 

Angela Beatriz Airoldi                                                                         

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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