Companhia de Saneamento
Básico do Estado de São Paulo -
SABESP

Financial Statements as of
December 31, 2011 and 2010

Table of Contents of the 2011 Financial Statements

F-2

Independent auditor's report

To the Management and Shareholders
Companhia de Saneamento Básico do
Estado de São Paulo - SABESP

We have audited the accompanying financial statements of Companhia de Saneamento Básico do Estado de São Paulo - SABESP ("Company" or "Parent company"), which comprise the balance sheet as at December 31, 2011 and the statements of income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

We have also audited the accompanying consolidated financial statements of Companhia de Saneamento Básico do Estado de São Paulo - SABESP and its subsidiaries ("Consolidated"), which comprise the consolidated balance sheet as at December 31, 2011 and the consolidated statements of income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management's responsibility
for the financial statements

Management is responsible for the preparation and fair presentation of the parent company financial statements in accordance with accounting practices adopted in Brazil, and for the consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and accounting practices adopted in Brazil, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Brazilian and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

F-3

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.

In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion on the parent company
financial statements

In our opinion, the parent company financial statements referred to above present fairly, in all material respects, the financial position of Companhia de Saneamento Básico do Estado de São Paulo - SABESP as at December 31, 2011, and its financial performance and cash flows for the year then ended, in accordance with accounting practices adopted in Brazil.

Opinion on the consolidated
financial statements

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Companhia de Saneamento Básico do Estado de São Paulo - SABESP and its subsidiaries as at December 31, 2011, and their financial performance and cash flows for the year then ended in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and accounting practices adopted in Brazil.

Emphasis of matter

As discussed in Note 2 to these financial statements, the parent company financial statements have been prepared in accordance with accounting practices adopted in Brazil. In the case of Companhia de Saneamento Básico do Estado de São Paulo - SABESP, these practices differ from IFRS applicable to separate financial statements only in relation to the measurement of investments in jointly-controlled subsidiaries based on equity accounting, while IFRS requires measurement based on cost or fair value. Our opinion is not qualified in respect of this matter.

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Other matters

Supplementary information -
statements of value added

We also have audited the parent company and consolidated statements of value added for the year ended December 31, 2011 prepared by management, the presentation of which is required by the Brazilian corporate legislation for listed companies, but is considered supplementary information for IFRS. These statements were subject to the same audit procedures described above and, in our opinion, are fairly presented, in all material respects, in relation to the financial statements taken as a whole.

São Paulo, March 23, 2012

PricewaterhouseCoopers
Auditores Independentes
CRC 2SP000160/O-5

Valdir Renato Coscodai
Contador CRC 1SP149262/O-6

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MESSAGE FROM CEO

It is not possible talking about civilization without mentioning basic sanitation, which is human being s basic right and condition necessary so that the environment and natural resources are not fated to exhaustion. In this regard, supply water, collect and treat sewage is an activity intrinsically connected with sustainability. One cannot live without the other.

A company like Sabesp everyday deals with sustainability in all its dimensions. We are socially responsible for providing a service whose effects over recipient s life quality and health conditions are direct and immediate. We are environmentally involved in the conservation of springs, recovery of water resources and rivers, stream and ocean depollution. We are committed to the financial strength of a business whose maturation is naturally lengthy and costs should necessarily low.

Sabesp s commitment to sustainability precepts is already recognized by society. This is the result of a culture that has been built up in our employees daily activities, our service providers, in the quality which is increasingly required from our suppliers, but sustainability does not mean the final destination, it is a direction to be sought towards a future much better than present time.

Therefore, when preparing this report, we were concerned with broadening the limits of boundaries. We enhanced the dimension of the information disclosed, we sought to improve the quality of the information that has already been published, we acknowledge our weaknesses when and where they can be noticed. We are committed to transparency, common good and respect for our stakeholders.

I understand that our mission of supplying sanitation to over 27.6 million people only is successful if grounded in fundamental principles: transparency, good management and technology. Sabesp has been able to fulfill this mission, efficiently on a solid, dynamic, innovative and sustainable basis in financial, environmental and social terms.

Sustainable development cannot be better translated than a sewage treatment station capable of effectively operating over its 50 years of useful life, at lower cost, with greater service scope, taking most advantage of natural resources and with a minimum impact on the environment. This means sustainability.

Sabesp is also committed to the universalization of sanitation services in formal areas where we operate by the end of this decade. Therefore, the company foresees to maintain the average of investments recorded in the past years, i.e., approximately R$ 2 billion.

Based on these principles, Sabesp obtained relevant results in the expansion of water and sewage services in 2011. In both cases, the number of new connections was the highest over the last 12 years. By the end of this decade, we plan to make another 1.6 million new water connections and nearly 2.3 million sewage connections in order to materialize our target of universalizing sanitation services in our marketplace.

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All six performance targets outlined for our organization in 2011 have been achieved. We consider the performance satisfactory, without mentioning that, although our business strategy kept its direction, 2011 was a year of changes in our Management, we exchanged four of six members of our Board of Executive Officers. In our opinion, our performance in new businesses is still far from our plans but it is possible to move forward.

The commitment of universalizing water supply, sewage collection and treatment services by the end of this decade is one of the most privileged and challenging commitments that a company could have. Sabesp has the privilege of, in each of its small to relevant actions, collaborating to a better people s life, a healthier environment, so that society is economically more developed and socially fairer.

Dilma Pena

Chief Executive Officer of Sabesp

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Profile

Sabesp is a mixed-capital company with limited liability that operates in the sanitation sector, whose majority shareholder is the São Paulo State Government. Its common shares are traded on the Novo Mercado (New Market) segment of the Securities, Commodities and Futures Exchange of São Paulo (BM&FBovespa), under the ticker SBSP3, and as American Depositary Receipts (ADR level III) at New York Stock Exchange (NYSE), under the ticker SBS.

Founded in 1973, Sabesp is the largest sanitation company of the Americas and the world s fourth largest company in terms of population served, according to the 13^rd edition (2011-2012) of the Pinsent Masons Water Yearbook. The Company s head offices are located in the City and State of São Paulo.

In addition to providing water and sewage services in the State of São Paulo, Sabesp is also accredited to operate in other states and countries, and may also operate in the drainage and city cleaning segments, handling of solid waste and energy.

We directly operate sanitation services in 363 municipalities of the State of São Paulo in 2011, the municipality of Macatuba is no longer our operated base and we supply water on the wholesale basis to other seven municipalities, among which five also utilize our sewage treatment services. Total population supplied with water by Sabesp reaches 27.6 million people (3.5 million referring to wholesale, 200,000 in partnership and 23.9 million directly by the company), which accounts for approximately 70% of the urban population of the State of São Paulo.

In addition, we also provide water and sewage services in other three municipalities of the State of São Paulo, through special purpose entities (SPE) organized with private companies, namely: Águas de Castilho S.A. and Águas de Andradina S.A., in partnership with CAB Ambiental; Saneaqua Mairinque S.A., jointly with Foz do Brasil. In the city of Mogi Mirim, in partnership with OHL Meio Ambiente and Etep, we are in charge of the modernization, implementation and management of sewage treatment system also through a SPE.

We also provide consulting services in the water rational use, business and operating management in Panamá and Honduras through a consortium signed with Latin Consult. In addition, we maintain partnerships with sanitation concessionaires of the states of Alagoas (Casal) and Espírito Santo (Cesan).

Sabesp s mission is to provide sanitation services, contributing to improve life quality and environment . Our vision of the future foresees to be recognized in 2018 as the company that ensured universal access to water and sewage services in its marketplace, in a sustainable and competitive manner, with excellence in costumer service .

Despite the dimension of the challenge, the company is well positioned to achieve its objective, with sustainability and profitability. We understand that most of level of investments required is already equalized to fulfill our investment plan. Nevertheless, we continue working hard in raising funds, mainly at lower costs, compatible with sanitation activity, in order to deal with investments necessary to expand our services.

In order to achieve the objective of universalizing services in 2011, the Company reformulated its strategic guidelines: growth with economic and financial sustainability; social and environmental sustainability; universalization and quality; proactive behavior in relationships; integration and innovation; and human capital as competitive force. The new cycle of strategic planning covers the period between 2011 and 2020.

F-8

The Company s commitment to a sustainable and responsible universalization of water and sewage services in its marketplace by the end of this decade is reflected in the financial strategy and social and environmental actions outlined herein.

Summary of Targets

The Company fully achieved six performance targets defined in 2011 that guided the concession of salary benefits established in the Profit Sharing Plan (PPR).

Water supply was maintained in a level we may consider as being universalized in our marketplace. New connections of this service followed the vegetative growth of the areas covered by the company and business. Even so, they reached the second largest record over the last 12 years in 2011.

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The sewage collection and treatment continue growing as projected. It is worth mentioning that in 2011, we achieved the best results over the last 12 years in relation to the number of new sewage connections.

(1) calculated by method prior to the effictiveness of CPCs/IFRS
(2) The target is composed of two actions, so that to reflect with greater accuracy the company's efforts to expand sewage treatment systems

Referring to loss ratio, the result achieved in the year follows the trend outlined by the Company for the next eight years. The target is to reduce the percentage to 13% by 2019, although this ratio may change in 2012. The volume saved in 2011, with the reduction of total losses from 26% to 25.6%, is sufficient to supply 23,000 people without using new springs, neither additional investments in water reservation and production. It is worth mentioning that the indicator has been systematically going down since 2004, when it stood at 34%.

The Company also maintained a high level of customer s satisfaction, reinforced both by the percentage of 92% measured by opinion polls conducted with 5,860 users, and the fact that Sabesp has been not included in the ranking of companies with the highest number of complaints at Procon (Oversight Board of Consumer Protection and Defense) since March 2010.

BUSINESS MANAGEMENT

Sabesp keeps its pace of investments in order to achieve its target by the end of this decade, providing services to all city domiciles served by the Company.

In 2011, we invested R$2.4 billion, including investments in public-private partnerships (PPP) amounting to R$121.4 million. The utilization of this financing model allows the company to accelerate and optimize the bidding process of works and services and have access to public resources outside the government contingency, speeding up the execution of investment plan.

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Investments Track Record ⁽¹⁾ (current R$ million)

Investments Made in 2011 by region (current R$ million)

Water supply kept the trend to universalization in urban areas. In 2011, we achieved the second largest expansion over the last 12 years: 208,000 new connections. The result is important to ensure safe supply, supported by spring recovery and conservation actions, incentive to reduce consumption and decrease water losses. At the end of 2011 the company supplied approximately 23.9 million people directly, which added to the population of municipalities served on wholesale basis and those operated in private partnerships, amounted to 27.6 million.

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As far as sewage collection services are concerned, 246,000 new connections were made in 2011, the second best result since 1997. The collection ratio was up 82% and treatment reached 76% of collected volume. Approximately 20.5 million people are currently serviced by collection networks, while the company treats the sewage volume generated by 14.9 million people.

In 2011, six new municipalities also had universalized sewage services, summing up 147 municipalities.

New water and sewage connections executed and population benefited in 2011

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Structuring Programs

Sabesp s investment plan is based on twofold structuring program: ensure a safe water supply and contribute to depollution and recovery of our rivers, streams and other water bodies.

Our Water Metropolitan Program aims at increasing by 20% corresponding to 13.2 m³/s current production capacity until 2017. In 2011, production and intake works were concluded, improving the water supply level of the metropolitan region of São Paulo (RMSP). We point out the conclusion of interventions that resulted in expanding the treatment capacity of the Production System of Alto Tietê by 50%, from 10m³/s to 15 m³/s, through PPP jointly with CAB Ambiental. In addition, more than 14 important projects were delivered, which together, directly and indirectly benefit 6.6 million people, mainly in the east and west regions of the City of São Paulo with more treated water. The investment accumulated in the program since 2006 is R$1.7 billion, with own funds and financing authorized by the Federal Savings Bank (Caixa Econômica Federal) and the Brazilian Development Bank (BNDES).

The program Água no Litoral (Water on the coast) is another initiative. These are works to expand production, improve quality, increase intake and treated water reservation capacity in the metropolitan area on the coast of the State of São Paulo (Baixada Santista) and south coast, which have approximately 1.7 million people in nine municipalities, a population that reaches almost 3 million people during holiday season.

In 2011, R$158 million were invested in works, such as the implementation of Mambu-Branco Production System estimated to be concluded by the end of second half of 2012, in the city of Itanhaém, and the construction of the Jurubatuba Water Treatment Station to be concluded in 2012 in the city of Guarujá. The partial startup of this station is estimated for the first half of 2012. By the end of 2011, the amount invested in the program which started in 2008 summed up R$472.7 million.

Concurrently with projects destined to production expansion and water treatment, Sabesp develops among its structuring actions, the Loss Reduction Corporate Program. Until 2019, we estimate to invest R$4.3 billion in actions, such as, replacement of network, exchange of pipes, division into sectors (reducing water pressure) and replacement of hydrometers. Currently, our goal is to reduce loss ratio to 13% by 2019, but this target has been reviewed due to results achieved up to date.

We already invested R$1.03 billion in the program, and approximately R$326.7 million in 2011. Resources are partially own funds and the remainder derives from financing authorized by Japan International Cooperation Agency (Jica), Federal Savings Bank (Caixa Econômica Federal) and BNDES. It is worth mentioning that in February 2012, a loan agreement related to the second phase of the program with Jica was signed in the amount of R$710 million to which another R$390 million of Sabesp s consideration will be added.

In 2011, we achieved to decrease billing loss ratio from 26% to 25.6%. It is worth mentioning that the average losses in Brazil stood at 37%.

But only this is not sufficient. Considering low water availability, mainly in the metropolitan region of São Paulo (RMSP), the company s planning includes the roll-out of a new production system in order to meet growing demands of RMSP: the São Lourenço system (Alto Juquiá), will have production capacity of 4.7 m³/s and will supply the west region of Great São Paulo, benefiting almost 1.5 million inhabitants.

F-13

The recovery and depollution of water bodies represent more serious challenge that assuring supply. In this regard, we understand that the recovery of most important river in the State of São Paulo and its affluent is one of the basic tasks with which Sabesp may contribute. This explains our efforts to expand sewage services in the metropolitan region of São Paulo, where the structure installed by the company over the last 20 years as part of Tietê Project represented the inclusion of 8.5 million people in the collection and treatment system.

Tietê Project is our main sewage investment program and currently is at its third phase, which began in 2009. Its goal is to increase the sewage collection ratio to 87% by 2016 and treatment ratio to 84% of total collected volume, with investments estimated at approximately US$1.1 billion, with own funds and financing authorized by Inter-American Development Bank (IDB), Federal Savings Bank (Caixa Econômica Federal) and BNDES. Out of R$423.3 million already invested in this phase of the program, R$228.4 million were invested in 2011.

Approximately 43% of works related to this phase have already been executed and other 25% of works are under bidding process. At the end of interventions, more than 1.5 million people will be benefited with collection and 3 million with sewage treatment.

The fourth and last phases of Tietê Project, with execution estimated between 2013 and 2018, are currently under planning phase. With the latter, we expect to eliminate the release of untreated sewage in Tietê river in the metropolitan region of São Paulo in areas regularly operated by Sabesp.

Therefore, we also consider essential the civil society s involvement in facing this problem. Thus, in 2011 we supported the roll-out of the campaign Tietê Vivo Compromisso de Todos Nós (Live Tietê, Everyone s Commitment), an initiative of Fundação SOS Mata Atlântica. Support has been raised on the Facebook web page, concerned with Tietê river depollution through the ratification of 10 commandments to the benefit of river s recovery.

Specifically in the city of São Paulo, Tietê river depollution actions are supplemented by the program called Córrego Limpo (Clean Stream), developed in partnership with the local government. As its name suggests, it aims at recovering water bodies, with the improvement of sewage system and the elimination of untreated sewage in these streams, cleaning of margins and riverbed, the removal and resettlement of real properties located in riparian areas.

In 2011 we formatted the third phase of the program (52 streams) and we concluded the cleaning of another seven streams, benefiting approximately 48,000 people.

There have been 103 streams depolluted since 2007 in the City of São Paulo, benefiting more than 1.7 million people, with total investments of R$129.5 million. Therefore, approximately 1,100 L/s of sewage were no longer discharged in these streams. In 2012, the estimate is to clean another 45 streams, benefiting more than 700,000 people, with Sabesp s investments of R$36 million.

Finally, we also developed the program called Vida Nova (New Life) in the metropolitan region of São Paulo, concerned with the recovery and protection of reservoirs, used to supply water in this region. There are interventions in 43 shantytowns in sub-basins Guarapiranga and Billings, benefiting 50,000 households.

Sabesp is in charge of implementing and improving water and sewage systems, with investments of R$355 million. In 2011, we invested R$29.4 million of total amount and R$45.5 million were already invested. The program is estimated to be concluded in 2015, with total investments of R$1.3 billion, with funds also from the federal, state, municipal governments, Housing and Urban Development Company and World Bank.

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On the coast, our sewage structuring actions are organized around the program called Onda Limpa (Clean Wave). At the metropolitan area on the coast of State of São Paulo (Baixada Santista), works started in 2007 and should be concluded in 2013. In addition to own funds, the program relies on the financing from Jica and resources from the Severance Indemnity Fund for Employees (FGTS).

Up to date R$1.6 billion have been invested, of which R$159.8 million were invested in 2011. With the end of construction of sewage treatment stations and the installation of networks, we have prioritized the connection of real properties to the sewage collection system, which by the end of 2011, summed up 63,000 connections out of 123,000 estimated connections.

Currently, the Baixada Santista has one of the lowest child mortality rates in the State of São Paulo. Over the last decade, this rate dropped over 30%: from 22.2 deaths for each 1,000 children born alive to 15.2 in the region. It is correct to affirm that an improved water supply and sewage service was one of the factors that contributed to this result.

Sabesp has already been preparing a second phase of Onda Limpa, which aims the collection and treatment of sewage of cities in Baixada Santista until 2018.

The Onda Limpa program is also developed in the north coast of the State of São Paulo. The target is to increase the sewage collection and treatment ratio in the municipalities of Caraguatatuba, Ilhabela, São Sebastião and Ubatuba from current 49% to 85% by 2015, and investments estimated at R$500 million, involving own funds, from BNDES and FGTS. It is worth mentioning that in 2007, prior to the program, the percentage stood at 30%. 600,000 people will be benefited, among area residents and tourists visiting the region. In 2011, Sabesp invested R$24.6 million in this program, out of total of R$114.6 million were already invested up to date, involving own funds, from BNDES, FGTS and Caixa. A public-private partnership is also estimated for this program.

An example of successful initiative in our strategy of recovering important springs was the recovery of Paraíba do Sul river, in Paraíba Valley in the eastern region of the State of São Paulo. With works to expand sewage collection and treatment in densely populated municipalities, such as, São José dos Campos and Taubaté, Cetesb s analyses recorded a significant increase in water oxidation ratio of Paraíba do Sul river in 2011, then, fishes natives of Brazil that were infrequently seen, such as lambari, piaba, catfish, traíra and tilapia returned to the waters of this region.

New policies and programs

Currently, one of the greatest challenges posed in the universalization process of sanitation services is the fact that unit investments are growing to the extent that they advance towards lower purchasing power classes, those with less capacity to generate revenues for the company. In this regard, it is important to design new public policies and actions that contribute to execute the company s expansion targets, concur with the success of structuring programs already in effect and meet the precept of social inclusion.

Within this strategy, in 2011, Sabesp s efforts to universalize sanitation services in the State of São Paulo were reinforced by two governmental programs: Pró-Conexão (Pro-Connection), an initiative destined to subsidize intra-domicile works so that low- income households are able to connect their houses to the sewage public network; and Água é Vida (Water is Life), concerned with the implementation of sanitation services in low-income communities located in areas distant from main cities of São Paulo State inland.

The company will be liable for the technical assistance to the municipalities and for the implementation of water systems at the same communities benefited with sewage treatment. After the conclusion of works, Sabesp will be liable for the maintenance and operation of systems.

F-15

In another initiative jointly with the public authority, the program called Nossa Guarapiranga (Our Guarapiranga) started in December, whose objective is to contribute to improve water quality of one of the main springs that supplies the metropolitan region of São Paulo. Eleven barriers were installed for waste control at the main streams flowing into water table, in order to collect 20 m3 of waste/day on average. Actions that have already been developed in partnership with the state and local governments, have helped to avoid a load of 106 l/s of sewage to reach Guarapiranga and Billings reservoirs.

Caring for the environment

The implementation of water supply and sewage systems enables several benefits to the environment and the life quality of population serviced. Among them, the most relevant benefits are the preservation and improved condition of water resources and on the coast, the recovery of bathing water quality at beaches, without mentioning the immediate positive effect on population s health conditions.

Nevertheless, our activity may cause adverse environmental effects deriving from implementation and operation phases. As trunk lines and sewage interceptors follow valley bottom and treatment stations are installed, in general, at lower quotas, situations arise demanding the occupation of permanent preservation areas, in few cases, requiring the recovery of riparian forest.

Adverse social and environmental effects are also associated with the expropriation of areas, removal of vegetation, generation of water and sewage treatment mud, emission of methane in anaerobic treatment and indirect generation of carbon dioxide (CO2) due to energy consumption. Note that Sabesp is one of the largest individual consumers of energy in the State of São Paulo, accounting for 1.8% of total: in 2011, 2,276 gigawatts-hours were consumed.

Sabesp has been seeking to incorporate the environmental variable, from inception until the operation of its systems, including the implementation of practices concerned with sustainability and projects in partnership with society. Customer satisfaction survey conducted in 2011 points out the recognition of this effort: 79% of customers consider us a socially and environmentally responsible company. When we surveyed those interviewed if the company is concerned with preservation of the environment, rivers, water springs and vegetation, 78% of customers agreed.

Social commitment

Sabesp is proud of ties it establishes with the population of the State of São Paulo. We believe that when providing better services, ensuring the water supply with quality and regularity and treating well our water resources, we are contributing to create value in our society.

The recognition of these efforts can be seen in the high level of yes answers obtained in customer satisfaction surveys, when interviewee was inquired if the company is concerned with improved people s life quality and well-being. 80% of interviewees answered yes: In your opinion, is Sabesp a socially responsible company?

Our commitment to customer s satisfaction was even more evidenced in the new Strategic Plan we defined to be effective between 2011 and 2020. We revised our vision of the future, highlighting our concern and our focus on excellence in customer service . The Strategic Map was revised, comprising 14 objectives considered strategic for the period. The Company s mission did not change.

We also included among our strategic guidelines valuing human capital as competitive force. Within this context, we are committed to make the company the best place to work for. In 2011, we analyzed two issues we consider crucial to increase our employees satisfaction: the adoption of a new Job Position and Salaries Plan and the equalization of our private pension plan, Sabesprev. Actions endeavored allow us to foresee the presentation of results to the company during 2012.

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Market consolidation

Sabesp is concerned with maintaining and expanding the base of municipalities operated through program contracts fully in line with the requirements of the sector s new regulatory framework. This strategy is particularly relevant today, which coincides with the end of first effectiveness cycle of dozen contracts whose initial framework goes back to the time when the company was organized during the first half of 70s.

In 2011, 25 program contracts were signed, amounting to 225 renewed contracts complying with Sanitation Law and other 39 contracts covered by legal system prior to that to expire between 2012 and 2033. Together, these municipalities account for 74 of revenues earned by the company.

In order to face competition in large customers segment, where several industrial and commercial consumers prefer to use artesian wells or water trucks to supply water, Sabesp adopted a flexible tariff policy to compete in the market, with the formalization of firm demand contracts.

New businesses and partnerships in environmental solutions

Sabesp also seeks to operate in new markets, consolidating itself in the sector on a sustainable basis. In this regard, the company has been investing in partnerships to operate in other states and countries, and in the development of Sabesp Environmental Solutions Platform, concerned with the expansion of operations in markets and with large customers. In 2011, our main highlights were the expansion of Rational Water Use Program (PURA) and initiatives favoring the production of reuse water.

Today, Pura program is implemented in more than 2.2 thousand real properties of the State Government of São Paulo and city government of São Paulo. Sabesp is liable for contracting engineering works and services necessary to reduce water consumption. With these measures, we managed to maintain monthly water volume sufficient to supply approximately 23,000 people without the need of using new springs. The program also contributes to postpone investments in water and sewage systems.

The company has been also strongly investing in the expansion of production of water generated by treatment of sewage for industrial use, refrigeration of equipment and other non-drinkable purposes. Today we have capacity to produce 319,000 m³/month of reuse water, however, currently we supply only 160,000 m³/month mainly due to difficult distribution logistics, incipient prospect of new customers and the need of improving production process.

Our most important project in this area, Aquapolo Ambiental (Environmental Aquapolo) must start operations in April 2012. This is the largest plant to produce reuse water in the South Hemisphere, whose final output foreseen is 1 m³/s, volume sufficient to supply 300,000 people. In 2011, this project was ranked second in the Global Water Awards, granted by Global Water Intelligence that awards innovative initiatives in supply and sanitation throughout the world.

Other initiatives concerned with offering environmental solutions are the loyalty contracts with large consumers that ensure annual revenue of approximately R$233 million to the company; the treatment of non-domestic sewage deriving from production processes of Sabesp s customers, through which more than 26 million m³ sewage was collected and treated in 2011, resulting in R$181.8 million revenue.

Projects already implemented related to the individualized measurement of water consumption in residential condominiums and tele-measurement (which enables the monitoring of consumption in real time via internet) have been analyzed and re-planned so that to make feasible its evolvement.

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Sabesp also operates in new markets in partnership with private partners and through special purpose entities in: (i) the rendering of water and/or sewage services in four municipalities of the State of São Paulo: Andradina, Castilho, Mairinque and Mogi Mirim; (ii) the implementation and operation of industrial sewage treatment station and mud conditioning in the city of Barueri; (iii) rendering of consulting services in water rational use, business and operational management in Panamá and Honduras; and (iv) partnerships with sanitation concessionaires in the states of Alagoas (Casal) and Espírito Santo (Cesan).

Research and Innovation

The specific supervision created in 2010 has been already obtaining positive results, such as the nationwide innovative experience of using the gas generated by sewage treatment as fuel for cars, which currently has been implemented.

A partnership with Fraunhofer Institute in Germany proposes to capture methane from mud bio-digesters of Franca ETE (sewage treatment station) and help to reduce the emission of pollutants in the atmosphere. In the second quarter of 2012, the system will start supplying 49 cars of the company in that region. There will be three years of tests, including the fuel distribution logistics and analysis of results. The company is investing R$900,000 in this system and the German partner, another R$5.1 million.

In addition, according to the cooperation agreement signed with Fapesp (Foundation of Research Support of the State of São Paulo), in 2011, 11 projects were approved, involving universities, whose themes include alternatives of treatment, disposal and utilization of mud from water and sewage treatment stations; monitoring of water quality; and energy efficiency, among others.

Concerning the protection of intellectual property rights at the Company, in 2011, the letter patent called disposition in building hydraulic simulator for informative purposes was obtained. In addition, three patent applications were filed, which are confidential and the software SGH Hydrometry Management System was registered.

The Regional Systems Executive Board launched in 2011 the Excellence and Innovation Program, concerned with the identification, recognition, promotion and dissemination of innovative practices and projects that add value to the business. Certain objectives are to reduce energy costs, the number of occupational accidents and customers complaint.

Our investments in research, development and innovation in 2011 reached R$3.2 million.

ECONOMIC AND FINANCIAL SUSTAINABILITY

The company committed to add value to the business and reach the universalization of sanitation in the regions where it operates, it carried on the proper management of its finances in 2011. The Added Value Management model, implemented in 2009, was incorporated into the corporate system, allowing management to get a detailed view of its marketplace and contributing to optimizing its asset base and also a continued improvement of its results.

In 2011, the gross operating revenue from water and sewage supply services was up 8.5%, from R$7.7 billion to R$8.3 billion in 2011. If we also include the construction revenue, total revenues were up from R$9.8 billion in 2010 to R$10.5 billion in 2011, a 7.6% increase.

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Gross Operating Revenue Track Record (current R$ billion)

Driving factors of increased gross revenue from water and sewage were billed volume growth of 2.6% in water and 3.6% in sewage, besides a tariff adjustment of 4.05%, applied in September 2010 and 6.83% applied in September 2011.

Water and sewage billed volume⁽¹⁾ by use category (millions of m³)

Water and sewage billed volume ⁽¹⁾ by region (millions of m³)

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Net operating revenue was also up 7.6% over previous year, amounting to R$9.9 billion.

Net Operating Revenue Track Record ⁽¹⁾ (current R$ billion)

In 2011, construction revenue was up 4.4%, mainly due to higher construction cost in 2011. The 4.4% variation in revenue against 4.6% in construction cost is due to the change in the index to calculate construction margin which decreased 2.6% in 2010 to 2.3% in 2011.

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Costs and expenses added to construction costs, in the amount of R$7.5 billion were up 14.0% compared to 2010. EBITDA remained in line at R$3.2 billion between two periods. EBTIDA margin reached 32.4%, compared to 34.9% in 2010. Excluding revenue and construction cost effects, EBTIDA margin stood at 41.1% in 2011 (44.7% in 2010).

Also excluding the complementing effect of actuarial liability in the amount of R$ 157.5 million referring to G0 Plan, non-recurring for the next years and the revenue and construction cost effects, EBTIDA margin reached 43.1% in 2011.

EBITDA and EBTIDA Margin Track Record ⁽¹⁾ (current R$ billion)

In 2011, the company posted a net income of R$1.2 billion, down 25.0% over 2010, mainly due to exchange variation on foreign loans and financing, amounting to R$ 448.5 million deriving from 12.6% appreciation of US dollar in 2011 against 4.3% depreciation in 2010. Despite the dimensions related to the challenge of universalizing services, the company is considered well positioned to achieve its goal, with financial, environmental and social sustainability and profitability to shareholder.

Approximately 75% corresponding to R$6.5 billion of investment planned for 2009-2013 was already achieved. The company has been prioritizing funding at lower costs and compatible with sanitation activity, including through the lengthening of debt terms on the capital markets, fact of which distributes maturities and accordingly, minimizes cash pressures.

In 2011, the Tariffs and Costs Department was created, within the scope of the Chief Financial and Investor Relations Officer, aiming at developing proposals and analyses to subsidize Sabesp s discussions with its stakeholders, as well as in the processes to define costs deriving from services rendered, restructuring and tariff review. The new tariff methodology proposed by the Sanitation Regulatory Agency of the State of São Paulo (Arsesp) will enable revenue foreseeability, which is fundamental so that the company may achieve service coverage targets foreseen in the investment plan, besides ensuring quality services.

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Also in relation to the tariff review, the services agreement executed with the municipality of São Paulo in June 2010 provides that Sabesp shall contribute with 7.5% of gross revenue earned with the rendering of services in the city of São Paulo, net of COFINS and PASEP (taxes on revenues) for the Municipal Fund of Environmental Sanitation and Infrastructure. Since the agreement was signed, we have been tranfering to the Fund, even without compensation in tariffs, since the 7.5% were not taken into consideration when the calculation of the formula for the tariff adjustment was established. Arsesp is structuring the tariff methodology of the second cycle, which is estimated to be implemented in August 2012, which we expect will include this costs transfer and accordingly, provide more appropriate remuneration to the Company.

We also advanced towards a solution for our private pension plan, Sabesprev. By the end of December, Sabesp entered into an agreement with entities representing employees so that to made few changes in their private pension plans, which include the possibility of employees migrating from Defined Benefit to Defined Contribution and changes in risk benefits.

The proposal, which was negotiated during six months, will also allow to facing the technical deficit problem of the basic plan, estimated at R$538.6 million. In addition, it will ensure that deficit will not be recurrent, thus, improving the organizational climate and greater confidence of our employees as to the planning of their future. The proposals submitted also need the approval of control authorities of the State Government and are also submitted to the analysis of the Judiciary Branch, in view of lawsuit that in November 2010, suspended migrations to Sabesprev Mais.

It is also worth mentioning that the effectiveness of strategy the company has been adopting over the past years was recognized by the market in several occasions during 2011, such as:

• The company s rating was upgraded by the credit risk rating agency Standard & Poors, on Global Scale from BB to BB+ and on Brazil National Scale from brAA- to brAA+ ;
• a tribute conferred by Anefac (National Association of Finance, Management and Accounting Executives) at the ceremony of the 2011 Transparency Award, as the company was one of the finalists in 11 of 15 editions of this award that recognizes the outstanding performance of companies for their transparency and qualify of information reported in their balance sheets. Sabesp won this award in 2000, 2006 and 2010;
• the Valor 1000 Award, promoted by Valor Econômico newspaper, under the Water and Sanitation category: for the fifth time, Sabesp was recognized for its good management and strict administration of operating expenses , according to the yearbook;
• the outstanding performance of Sanitation and Water and Gas Services sector conferred by Prêmio Abrasca de Criação de Valor 2011 (2011 Abrasca Value Creation Award), as the company that achieved the highest percentages of value creation, in relation to its market capitalization over the past three years; and
• for the fifth consecutive year, Sabesp is included in the Corporate Sustainability Index (ISE) of BM&FBovespa.

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Indebtedness Analysis

At the end of 2011, the company s total indebtedness was R$8.4 billion and net debt/EBTIDA ratio was 2.0 x.

In line with the maturation of investments, which is a characteristic of the sector, most of this debt (68%) was contracted with multilateral agencies and Brazilian development institutions at low costs and long terms. The foreign currency-denominated debt accounts for 36% of total debt.

In 2011, R$1.7 billion were raised and the company amortized R$1.9 billion.

In order to ensure investments required to universalize sanitation in the State of São Paulo, the company continued looking for funding sources more compatible with the profile of its businesses, the results of which are outlined as follows:

Loans and financing

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Debt instruments

In January 2011, Sabesp conducted the 13^rd issue of debentures in a single series, at the total amount of R$600 million, paying half-yearly interest rates indexed to CDI (interbank deposit rate) plus average annual spread of 0.95%, destined to redemption of the 5^th issue of company s promissory notes at the same amount.

In February 2011, Sabesp launched the 14^th issue of non-convertible debentures, at the amount of R$275.3 million. This is the second issue of a total of three issues provided for in the subscription agreement signed with BNDES. Resources are applied in several investment projects of the company, i.e., water supply, sewage collection and treatment systems.

In March 2011, FIDC SABESP I (receivables securitization fund) was settled, with the amortization of the last installment of senior quotas, amounting to R$8.3 million.

In addition, in June 2011, the 8^th issue of debentures were finally amortized at the amount of R$481.4 million related to the remaining balance of the second series.

In addition, in October 2011, Sabesp with cash resources redeemed in advance the total balance of outstanding debentures of the 9^th issue, amounting to R$240.7 million, thus, amortizing its higher cost debentures.

In addition, in February 2012, Sabesp concluded its 15^th issue of debentures, at the total amount of R$771.1 million, in two series, and 1^st series at the amount of R$ 287.3 million indexed to CDI + 0.99% p.a. and the 2^nd series at the amount of R$ 483.8 million, with IPCA (Extended Consumer Price Index) and annual interest rates of 6.20%, and these resources were raised to settle financial commitments falling due in 2012, mainly, the settlement of the 13^rd issue of debentures. Thus, in February 2012, we settled in advance the entire amount of the 13^rd Issue of Debentures of R$ 600 million to mature in August 2012. Resources raised also supported the amortization occurred in March 2012 of 50% of the 2^nd series of the 11^th issue of debentures, summing up R$202.5 million.

Stock market

2011 was a very positive year for Sabesp shares. Despite the 18.11% drop seen at Ibovespa, the company s shares at BM&FBovespa ended 2011 priced at R$52.03, with 22.16% appreciation compared to 2010. Among the shares composing Ibovespa, Sabesp s shares were one of the best performers.

The company s shares participated 100% at the trading sessions of BM&FBovespa and had a financial volume of R$2.9 billion in 2011.

The company ADRs appreciated 5.24%, closing the year at US$55.65, with 30 million ADRs outstanding on the market. The financial volume traded at NYSE in 2011 was US$3.7 billion, almost 31% higher compared to 2010.

In 2011, the number of financial institutions covering Sabesp s shares remained in line at 19 institutions.

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Ownership structure on 12/31/2011

Sabesp s shares are traded at BM&FBovespa under the ticker SBSP3 and at the New York Stock Exchange under the ticker SBS and compose main indexes of Brazil s stock exchange. For the fifth consecutive year, its shares are included in Corporate Sustainability Index - ISE.

Dividends

Pursuant to the Company s Bylaws, common shares are entitled to minimum mandatory dividend corresponding to 25% of net income for the year, after deductions determined or accepted by laws which can be paid as interest on shareholders equity.

Referring to 2010, Sabesp credited the amount of R$456 million in dividends, as interest on shareholders equity, corresponding to approximately R$2.00 per common share and dividend yield of 4.7%.

Referring to 2011, the Board of Directors approved the payment of interest on shareholders equity at the amount of R$578.7 million, corresponding to R$2.54 per common shares and dividend yield of 4.88% to be paid within 60 days after the 2012 Annual Shareholders Meeting to approve the 2011 accounts.

Debits of municipalities serviced on a wholesale basis

In 2011, the most important advance in this area was the approval of the creation of a mixed-capital company to explore water and sewage services in the city of Diadema, eighth largest municipality of the metropolitan region of São Paulo, with 390,000 inhabitants.

On July 29, 2011 the municipal law nº 3.123/2011 was published providing for the creation of a new water and sewage company in the city of Diadema (CAED), and authorized the executive branch to execute agreements or other types of necessary adjustments with Sabesp. However, few articles of this law had to be amended, which are still pending approval from the local government. The new company will be created by the municipality and the proposal, according to the model developed, is that subsequently Sabesp buys 49.9% of its shares.

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Sabesp engaged a company specialized in the economic advisory services in order to conduct an economic and financial valuation of Saned and PricewaterhouseCoopers to carry out the due diligence. These works must be concluded by the end of March 2012. It is not possible to anticipate when this new company will start its operations.

In addition to the end of discussions with Diadema, in 2011, Sabesp carried on negotiations with the municipalities serviced on wholesale to recover amounts due in view of the supply of treated water and sewage treatment. Developments in 2011 were the following:

• Guarulhos: payments related to 2011 monthly consumption remained partial and the collection referring to certificate of judgment debt of the government has not been made in view of the Constitutional Amendment nº 62/2009. Nevertheless, writs of mandamus have been filed against decisions that extinguished levies of execution and recently only one of these writs of mandamus has been granted relief. For this reason, few pleadings for levy of execution upon revenues referring to overdue and unpaid amounts now will resume. Concurrently, all reasonable measures have been taken to recover all levies of execution;
• Santo André: In 2011, payment remained partial, even with the court decision rendered in 2009, which required the municipality to include in the budget total expenses related to Sabesp s water supply;
• Mauá: payments related to 2011 monthly consumption remained partial. Nevertheless, the municipality made deposits referring to invoices overdue in 2008, contributing to reduce debt. In addition, similar to Guarulhos, writs of mandamus were also filed against decisions that extinguished Sabesp s pleadings for levy of execution upon revenue related to certificate of judgment debt of the government. One of them was recently judged by the Court of Justice of São Paulo, which was granted relief. For this reason, pleadings for levy of execution upon revenue referring to overdue and unpaid amounts now will resume;
• Mogi das Cruzes: the renegotiation of previous debt of approximately R$8.5 million was fully paid to Sabesp and a new agreement was signed to pay overdue and unpaid invoices in the period between January and June 2011, at the approximate amount of R$13.0 million. Payments started in December.

Sabesp at the new regulated environment

With the new basic sanitation guidelines in Brazil Federal Law nº 11.445/2007 and State Supplementary Law n° 1,025/2007, the rendering of water supply and sewage services by Sabesp is submitted to the inspection and regulation, including tariffs, of the Sanitation and Energy Regulatory Agency of the State of São Paulo (Arsesp).

The new scenario resulted in the first quarter of 2011 in the creation of a Committee of Regulatory Affairs at the company, as a permanent, advisory and decision-making body, composed of the Chief Executive Officer, Chief Financial and Investor Relations Officer, Metropolitan and Regional Systems Officer, in order to guide, define guidelines, strategies and coordinate the works of the Regulatory Affairs Department.

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This specific department is Sabesp s exclusive channel of communication with the agency and shall ensure the strict compliance with regulatory requirements, discussing and integrating internal areas in the identification, adjustment, creation and implementation of processes necessary, always in observance to the best practices.

In 2011, Arsesp published relevant rules aiming the return on capital invested, the tariff review, the confidentiality and secrecy in the discussion of regulatory information.

An extremely relevant issue for the company s economic and financial breakeven, the economic regulation started to be materialized in 2011 from two basic parameters: the remuneration basis of assets and the cost of capital of the company (WACC or weighted average cost of capital).

The definition of WACC at 8.06% to be applied in the second cycle of tariff review was one of the most important economic and financial facts occurred in 2011 for the future tariff rule of services rendered by Sabesp, therefore, the company s future revenues and cash.

According to the regulatory agency, the tariff review will be guided to:

• Define an initial framework for periodic tariff reviews provided for by laws and in Sabesp s agreements with municipalities;
• Re-discuss all the criteria adopted in relation to the cost of services, tariff structure, subsidies policy and others;
• Establish methodology, rules and procedures for future reviews and adjustments.

Also in 2011, Arsesp defined the phases of the process and the schedule of events to implement the first tariff review, starting works to evaluate the company s assets and to calculate the regulatory basis of remuneration. This schedule shall be extended until the publication of results, estimated for August 30, 2012, with the ratification of structure and prices to be practiced.

In October, the company submitted a business plan to Arsesp, containing information about revenue, expenses and investments and awaits the publication of the Proposal for Initial Average Tariff and Efficiency Gains Factor, estimated by regulator for May 2012.

In addition, the company pleads with Arsesp the anticipation of tariff adjustment, aiming at speeding up the recovery of expenditures already incurred, and thus, relieve pressure on cash. This pleading has been analyzed by regulatory agency.

Also in 2011, Arsesp ruled the classification and procedures related to the internal progress of documents, data and material, providing greater legal security when dealing with confidential information. Currently, two public consultations have been conducted at ARSESP (ARSESP n° 03/2011 and ARSESP n° 01/2012), aiming, respectively, establish the concept of shortages in supply and corresponding administrative sanctions and a detailed methodology for Sabesp s tariff review process Second Cycle. These processes are in progress and the company participates by preparing requests and making contributions.

The processes to implement the rules issued by Arsesp began in 2009 gradually and progressively and were intensified in 2011. Results and impacts are relevant, especially in commercial and operational areas and must be equalized in the restructuring and tariff review.

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It is worth mentioning the sending of the adhesion agreement according to Arsesp standard to all company s customers. Thus, the rule on tariff collection changed: previously, it was sent to the owner of the real property connected to sewage public networks, now it is sent to the user-consumer. Despite the fact this change is suitable, it may affect litigations in progress and commercial processes.

Sabesp is frequently inspected by Arsesp and seeks to comply with decisions and recommendations deriving from Notification Instrument, besides presenting its technical, legal and factual justification. This conduct has resulted in the drawing up of few deficiency notices and in the application of non-relevant fines.

The inspection rules and the notification of accidents when rendering services were incorporated into our processes. Part of the inspection occurs online through the Accident Communication System created by Arsesp, giving more transparency and control to procedures.

Corporate Governance

2011 was a year of changes in our controlling shareholder, the State Government of São Paulo, significantly altering the structure of our Management, but without impacting the Company s performance.

At the Board of Directors, among other changes, Dilma Pena who previously was the chairwoman was nominated to the position of the Company s Chief Executive Officer, now composing our main governance body only as a member, in line with the best corporate governance practices. Manuelito Pereira Magalhães Junior, who was a board member, now is in charge of the corporate management office. Except for the chief executive officer, no other officer is a member of the Board of Directors.

Currently, the Board of Directors is composed of 10 members. Among them, five of them were our board members and were re-elected at the Shareholders General Meeting held in April 2011. Three are independent members, according to the Novo Mercado criteria. At the board of executive officers, four of six members, including the chief executive officer were exchanged in 2011.

The following chart shows how our governance structure is organized. Further information about the operation of different levels composing it is available in the Corporate Governance section, Investor Relations area at the company s website.

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• 46% refer to irregularities in the processes involving connections and operational water and sewage services;
• 19% refer to supposed improper behavior, such as moral distress, discrimination, harassment and injustice;

• 24% refer to situations involving several administrative processes, such as the improper use of transport, product inventory, information technology; and
• 11% refer to supposed irregularities in biddings and purchases, management of contractors services agreements.

The number of complaints registered in 2011 remained in line. In this period, penalties were applied to 31 employees or service providers (14 warnings, 3 suspensions and 14 layoffs).

In 2011, aiming at mitigating the risks involving supposed irregularities in water and sewage operational services, a program was initiated to combat frauds at business units of the metropolitan region of São Paulo, accounting for approximately 70% of the company s gross sales revenue. In order to comply with the program, 33 employees were trained.

Also in 2011, eight business units liable for approximately 80% of the company s gross sales revenue were submitted to corruption-related risk evaluations. These risks are listed in a computerized system and are the basis of audit works.

Internal Controls

The evaluation of internal controls systematically conducted on a structured basis since 2005 uses as reference the frameworks of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and Control Objectives for Information and Related Technology (COBIT).

Yearly, the internal controls evaluation process is re-examined considering both any existence of new risks associated with the preparation and disclosure of financial statements and possible significant changes in the processes and computerized systems.

Controls, which are tested by a company s independent unit, comprise procedures ensuring the accuracy of accounting records; the preparation of financial statements according to official rules; and proper authorization of transactions related to acquisition, use and disposal of the company s assets.

The revision conducted on the efficacy of internal controls in 2010, in compliance with section 404 of Sarbanes-Oxley Act, was concluded in June 2011 and did not identify any relevant deficiency, as already occurred in previous years. Tests related to 2011 will be concluded in April 2012.

Risk Management

Generally speaking, every day the organizations are exposed to uncertainties and the maximization of companies value is achieved to the extent strategies and objectives are established guiding the balance between growth targets, return on investments and related risks.

In this direction, in 2008 Sabesp systematized the corporate risk management, with procedures to identify, measure and treat risks of sources internal and external to the organization.

In the second half of 2011, the company advanced in the improvement of its governance process and proposed to the controlling shareholder the creation of a specific unit to manage risks, previously conducted by audit area observing strict criteria of Independence and in line with contemporary market requirements, such as the Sarbanes-Oxley Act, the Code of Best Corporate Governance Practices of the Brazilian Institute of Corporate Governance, technical standards, such as ABN NBR ISO 31000 Risk Management Principles and Guidelines and other procedures defined by the Brazilian Securities and Exchange Commission (CVM), SEC and BM&FBovespa.

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Among the objectives of this new area: (i) the preservation and the increased value of the organization through the reduction of the probability and/or impact of loss events, combined with the decrease of capital costs resulting from lower perception of risk by lenders, insurance companies and the market in general; (ii) the promotion of greater transparency to investors and public in general from the implementation of risk techniques and mitigation actions; (iii) the improvement of governance standards through the explanation of risk profile adopted.

ENVIRONMENTAL MANAGEMENT

Sabesp has been prioritizing the implementation of policies concerned with environmental sustainability and improved life quality of the population.

Our Environment Policy effective as of January 2008 sets forth the guidelines for the company s environmental management.

In 2011, the company took several actions to improve environmental management. The integrated performance of the company, based on the guidelines proposed in its policy, is one of the driving factors for the universalization of sanitation services in our marketplace, on an environmentally sustainable basis, until the end of this decade.

Environmental Management System and ISO 14001 Certification

The strategy adopted by Sabesp in its environmental management was the implementation of the Environmental Management System (EMS) at the sewage treatment stations (ETE) and water treatment stations (ETA), associated with ISO 14001 certification of part of operating units. We established targets to implement EMS, progressively, considering the geographic distribution of the operated base, and also seeking to cover several types of treatment and sizes.

In December 2010, 50 of our ETEs have been certified by ISO 14001. EMS was implemented in 65 ETEs and ETAs.

In 2011, our challenge was to consolidate the methodology of EMS implementation and maintenance. In addition, Sabesp was submitted to re-certification audit. Over the next years, the company plans to continue implementing EMS at its sites. The target is to reach 302 ETEs and ETAs with EMS implemented by 2018, as well as certify those considered as strategic, totaling 155 by 2018.

Environmental Permit Regularization Corporate Program and Rights for the Use of Water Resources

Considering the need of maintaining and regularizing the environmental permit of the company s facilities, as well as rights to use water resources, Sabesp has been improving its management tools. Part of the operational complex is the purpose of the Environmental Permit Maintenance and Regularization Corporate Program and Regularization of Rights for the Exploitation of Water Resources.

Concerning new projects, the obtainment of these permits and grants is already part of its life cycle.

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Participation in the Water Resources Joint Committees

Currently, approximately 150 employees directly participate in 21 committees of hydrographic basin within São Paulo state scope and 2 committees within the federal scope.

Sabesp also participates in technical panels of the National Council of Water Resources occupying seats reserved for the Association of State Sanitation Companies (AESBE), and State Council of Water Resources, as representative of the Sanitation and Water Resources Department of the State of São Paulo.

Collection for the use of water resources

Sabesp started paying for the use of water in rivers under federal domain at the hydrographic basin of Paraíba do Sul in 2003 and basins of Piracicaba, Capivari and Jundiaí rivers in 2006. In 2007, the State of São Paulo implemented the collection for the use of water in rivers of its domain at the basins of Paraíba do Sul rivers and Piracicaba, Capivari and Jundiaí rivers, and in 2010, at the basin of Sorocaba and Médio Tietê rivers.

In 2011, Sabesp paid R$19.3 million for the use of water resources at these 3 basins. For the next year, payments related to another 5 basins are expected: Baixada Santista and Alto Tietê, have already announced the call notice and Baixo Tietê, Tietê / Batalha and Tietê / Jacaré, whose decrees were already signed in December 2010. Other 6 basins already had their criteria approved by the State Council of Water Resources and await decree to be signed and may start charging next year.

Environmental Educational Program PEA Sabesp

Sabesp develops environmental and sanitary educational actions as an integral part of its values and corporate communication, in pursuit of consciousness-raising and change of its employees culture and society. The Environmental Educational Corporate Program - PEA provides guidelines for more than 100 actions and projects, and it is worth mentioning the following actions in 2011:

• 1,843 school visits at ETA and ETE attended by a total amount of 72,671 people;
• workshops at schools, communities and companies attended by 165,607 people, summing up 2,169 events;
• the adoption of the Rational Water Use Program (Pura) at schools, which allowed to reduce by 72 million liters/month the water consumption at schools of the municipality of São Paulo;
• the Community Participation Program, which makes use of environmental education to make population sensitive to the regularization of water and sewage connections and the intelligent use of sanitation equipment.

In addition, we also offer environmental education for children, pointing out Clubinho Sabesp (www.clubinhosabesp.com.br), which currently has 30,000 members between 6 and 13 years old. In 2011, we launched the campaign Privada não é Lixeira (Toilet is not a Waste bin), orienting children to not throw rubbish into the toilet.

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Climate Change and Greenhouse Gas Emission Management

Over the past years, the climate change has been included in the world s political and economic agendas, significantly affecting companies lives, demanding innovation and new scientific and technological knowledge in order to overcome this huge challenge for the mankind. It is worth mentioning that changes may affect business in several ways, for instance, the alteration of rainfall climatology, greater evaporation at reservoirs, greater consumption caused by higher average temperature and increasing level and alteration in tidal regime, potentially affecting the operation of ocean outfalls.

Greenhouse Gas Emission Management Program

Sabesp has been playing its role concerning its global efforts to improve knowledge about climate change, as well as is seeking new ways of production.

In 2008, we prepared our first corporate inventory of greenhouse gas emissions related to 2007. Then, we started to improve the methodologies and tools applied and currently we are concluding the early stages of conception of our Greenhouse Gas (GHG) Emissions Management Program .

One of the advances of this work in 2011 was the completion of GHG emissions company inventory for 2008, whose results confirm the conclusions obtained in the previous survey: approximately 92% of GHG emissions of the company come from the sewage process (collection and treatment) and 6.45% from electricity consumption. Company inventories related to 2009 and 2012 must be concluded by the end of 2012.

It is worth mentioning that the company has been endeavoring its efforts to develop initiatives that reduce these emissions. Among them we point out the initiatives to utilize biogas generated from sewage sludge digestion as fuel for our vehicle fleet; the substitution of older vehicle fleet by light vehicles using flex fuel technology, with mandatory supply of ethanol and actions to recover riparian forest at springs to capture dioxide carbon.

Carbon Disclosure Project - CDP

Sabesp has been participating in the Carbon Disclosure Project CDP Investors for the past five years. It refers to the disclosure of greenhouse gas emission data, as well as information about its business as of the impacts, potential risks and opportunities related to climate change, based on a questionnaire prepared by CDP, an entity supported by approximately 550 institutional investors that manage over US$70 trillion throughout the world.

Carbon Disclosure Project Supply Chain

In December 2010, Sabesp adhered to the CDP Supply Chain, an arm of CDP. The project is based on the collaboration with our main suppliers as to climate change risks and greenhouse gas emissions.

This project enabled in 2011 the interaction between Sabesp and approximately 100 of our main suppliers, with the possibility of applying management cooperating strategies. The level of suppliers adhesion was nearly 20%.

Cycle of Environmental Management Conferences

Yearly Sabesp conducts Environmental Management Conferences, such as corporate environmental management strategy with a view to promoting the discussion, knowledge exchange and the dissemination of information about environmental issues under development at the company.

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With the participation of approximately 3,000 people, 14 conferences have been held since early 2008 to date. Two events were organized in 2011: one of them is concerned with the institutional representation and water resources management and the other to discuss the role of environmental education and challenges of technological innovation in the sanitation sector.

Sabesp 3Rs Program and Ecoposto Sabesp

Aiming at organizing and standardizing company s several selective garbage collection initiatives and defining recycling material disposal criteria for recyclables collection cooperatives, Sabesp 3Rs Program was implemented in 2008. Based on the concept reducing, reusing and recycling , in 2011 the company sent 286 tonnes of material for recycling.

Another initiative of the company was to launch in 2011 ecopostos (eco stations) to collect recycling material at the company s main facilities located in residential areas.

Environmental Good Practices

Sabesp is engaged in several partnerships in order to increasingly improve its environmental good practices, among them, we point out the following:

Nossa Guarapiranga Program

In December, we started the Nossa Guarapiranga Program, which is concerned with the protection and cleaning of Guarapiranga reservoir. Among its goals, we mention the improvement of environmental quality of one of the most important springs that supplies the metropolitan region of São Paulo and the minimization of water quality risks.

11 eco-barriers were installed to control waste at the outlets of main springs that flow into the reservoir. In addition, 10 rowboats and one boat were contracted. The target is to collect 20 m³ waste/day on average, corresponding to four carts.

Benefits will be directly seen by approximately 1 million people and indirectly by 2 million people supplied with spring water in the metropolitan region of São Paulo.

1 Million Trees at Cantareira

This is a successful experience launched in 2008 in partnership with the NGO The Nature Conservancy (TNC) and Ecological Research Institute (IPÊ). In less than two years, we exceeded the original target, with 1.25 million seedlings planted in the Cantareira System, which accounts for 50% of water supply in the metropolitan region of São Paulo. Now we are preparing the second phase to reach another one million.

In 2011, this project won the 5 de Junho Award, promoted by Brazilian Institute of Public Business, in the degraded area recovery category.

Community Gardens

In 2011, we expanded the area and the number of households benefited with this program, with over 2,000 m² cultivated area at the intake range with ETA Guaraú and nine households. Currently, we have 32 households benefited with income generation through the cultivation of pesticide-free vegetables and greens. This initiative also reduces problems in the conservation of intake servitude area, such as rubbish discard.

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Abraço Verde Project

The Abraço Verde Project launched in 2008, aims at complementing the afforestation of pavements at approximately 4,000 company s facilities.

In August 2011, this initiative was considered one of the 30 social and environmental best practices for the Brazilian Environmental Benchmarking , conducted by Instituto Mais, which then integrated successful case studies (www.maisprojetos.com.br).

Verde Vida Program

This program which has been developed at the business unit Pardo e Grande since 2007 includes environmental education, riparian forest recovery, reforestation, cultural preservation with cavalcade in the region, and mainly, actions to preserve and recover Canoas river, accounting for 80% of the water supply in Franca. One of its main partnerships is the Associação Amigos do Rio Canoas (Friends Association of Canoas River). 80,000 seedlings have already been planted, 4,020 in 2011, many of them deriving from a nursery supported by ETE of Franca.

ETE of Jales provides social and environmental wealth

With an area of 72,000 hectares, Sabesp maintains at ETE of Jales, in partnership with universities, schools and NGOs of the region, an opened huge natural space for community, which includes the planting of approximately 130,000 trees over the past 10 years. This project includes thematic gardens, seedling nursery, trails, orchards and an organic garden, besides a tank for fishery, supplying the needs of elderly people for leisure in the region.

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In 2011, ETE received 2,232 visitors and students from 45 schools in the region. ETE of Jales also in partnership with the local public maternity hospital executed the project called Nasce uma criança, plante uma árvore (A child is born, plant a tree), when 10,664 seedlings of fruit and native trees were planted in 2011. This initiative won the Mario Covas Award, promoted by the Public Management State Department, under the Public Management Innovation category.

Ecomobilizações

This is a community effort to collect garbage and plant seedlings at the margins of water bodies in partnership with Fundação SOS Mata Atlântica, with the support of local governments, district associations and community surrounding the streams, reservoirs and beaches. Overall, 17 editions of this project already occurred, five of them in 2011.

Sustainable purchases

This set of actions advances in several fronts, in the acquisition of items that generate less social and environmental impacts, especially through the purchase of bulk chemical products, energy efficiency and restrictions to hazardous substances in electronic equipment and the prohibition to use asbestos.

It is worth mentioning that in 2011, the Sustainable Public Contract State Program granted the social and environmental seal for 171 purchase specifications of Sabesp. The target is to extend this program to approximately 700 items in 2012.

Use of aggregate recycled debris at works

In 2011 we increased the utilization of aggregates from construction and demolition debris (C&D) in our works. We adopted the environmentally correct alternative and approximately 50% cheaper to seal 2,500 m of ditch (base and sub-base) of Vila Marchi-Alvarenga water mains, part of Tietê Project. 3,750 m³ aggregates were used deriving from Urbem plants.

In October, the company s Committee of Public Biddings approved amendments to contractual clauses so that to authorize the use of aggregate from C&D for non-structural applications, with brickwork settlement, pavement, sub-base of internal pavements and covering for water and sewage pipeline ditches.

Supports and sponsorship to environmentally relevant initiatives

Sabesp supports NGO projects, universities and companies focused on sustainability and preservation of water resources, so that this support meets the company s business and allows leveraging proposals that improve life quality, may be expanded or reproduced in other locations.

Sabesp also supports with resources or non-onerous approval, the edition of books, the performance of seminars and sports competitions and other events to reinforce the institutional image.

Cooking Oil Recycling Program Prol

Prol is a program that foments cooking oil recycling initiatives at the entire base operated by Sabesp. It aims at preventing the pollution of water bodies, generating income for cooperatives, firms and non-profit organizations and making available cheaper raw material. In addition, by avoiding the improper discard of oil, recycling prevents the obstruction of sewage network.

In 2011, we broke the record of 50 commercial agencies and other facilities of the company with oil collection available to population. There are already stations installed in approximately 35 municipalities.

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Banco Cyan

In 2011, we executed a partnership with Ambev at Banco Cyan, a rebate system that awards who saves water. This action consists of establishing consumption reduction targets, suggested according to the real property s usage profile. Any decreased use results in scores that customer may exchange for rebates in online shopping with the institutions participating in the project.

This initiative was launched in March, which has been contributing to save 60 million liters of water.

Sustainability hearings

These hearings are events to stimulate discussions and disclose ecological, social, cultural and sports initiatives related to sustainability. Sabesp invites NGO, associations, companies, universities to present proposals on a certain theme.

As of December 2007, 28 editions already took place. In 2011 three hearings were organized: two of them to launch our 2010 sustainability report and previously discuss its content, working as panels of commitment to society and another one about education and culture on the preservation of springs.

Radio Program: Meu Ambiente

In August 2010, we launched the Meu Ambiente program which, at least, once every week, radio broadcasts an innovative content of sustainability. These programs are available free of charge for radios throughout the country on the web page. In 2011, 110 editions were produced.

Since broadcasts started, 308 people were interviewed, among experts, public authorities, company s technicians and citizens. Until December 2011, this radio program had 8,478 accesses by radio stations and internet surfers.

SOCIAL RESPONSIBILITY

Sabesp s commitment with society derives from the assumption that positive impacts a company is able to generate in the value chain in which operates go beyond the offering of products and services with quality and regularity, or the maintenance of jobs and generation of economic and financial results.

To develop relationship practices, communication and commitment with our stakeholders (customers, shareholders, employees, governments and community), guided by principles of ethics and transparency, is essential factor for the company s sustainability. We established corporate guidelines related to social and environmental sustainability and appreciation of the human capital, in line with our Code of Ethics and Conduct, in pursuit of sustainable development, integrated management, respect for human rights, diversity and improved life quality.

In our bidding process, we adopted criteria that aim at reducing the impacts in the supply chain. Sabesp tried to use its level of influence, based on contract portfolio of R$3.05 billion in 2011, to stimulate the production of goods and services socially fairer and environmentally more responsible.

In the social area, we point out the maintenance of voluntary adhesions to domestic and international actions. We point out the UN Global Pact, which gathers companies to the benefit of labor human rights, environmental protection and anti-corruption actions. Sabesp is also partner of Ethos Institute, besides supporting and promoting the UM Millennium Eight Objectives, integrated with our Corporate Volunteer Program. We also supported the Sustainable Planet project, led by Editora Abril.

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It is also worth mentioning that the company is proud of its commitment to Brazilian childhood, it is concerned with prevention and eradication of child labor and it is recognized as Empresa Amiga da Criança (child-friendly company) by Fundação Abrinq. We are also co-supporters of Instituto Criança Cidadã, concerned with the personal development of young people facing economic and social difficulties, by providing education, culture and assistance in the metropolitan region of São Paulo. In 2011, we contributed with R$2.4 million, providing free-of-charge assistance to 7,000 children and adolescents.

These initiatives are incorporated into our Code of Ethics and Conduct, whose values are: respect for society, customer, environment and people; integrity; competency and citizenship. In order to ensure that these principles are observed, we have an in-house channel of complaints and a corporate procedure to verify responsibilities. We also maintain an open channel to receive external complaints, through the Ombudsman and Customer Call Center. In 2011, for the second consecutive year, we were excluded from the most complained-about firms on Procon s list, wherein we were included until March 2010.

Relationship with customers

A change occurred in 2011 in the vision of the company s future reflects our maximum commitment to the satisfaction of our 27.5 million customers. As part of the company s new strategic planning for 2011-2020, our vision became: to be recognized in 2018 as the company that ensured universal access to water and sewage services in its marketplace, in a sustainable and competitive manner, with excellence in customer service .

In the pursuit of our targets, we are improving the customer service channels; the disclosure and distribution of adhesion contracts; and the initiatives aiming at solving outstanding debts with the company, especially, low-income households and regularize water and sewage connections in areas occupied irregularly or illegally.

In observance to Arsesp s resolutions, as of September 2011, Sabesp started to deliver the adhesion contracts to its users, explaining their rights and duties and ratifying our position to the benefit of a transparent relationship with customers. Until the end of 2011, more than 5.7 million contracts have been delivered.

The improved relationship with our customers also can be seen in our call centers by dialing the number 195 where in 100% of our calls, customer await 60 seconds and we have approximately 350 public service bureaus and customer service offices 60 in the metropolitan region of São Paulo and around 290 in inland and on the coast of the State of São Paulo.

In 2011, we expanded the implementation of Tace (Service Technician for External Customer) in more than 70 municipalities served. Currently, 308 cities already have this system. Sabesp s professionals visit user s domicile and right away carries out the reading, emission and check the consumption of water/sewage. At these occasions, our employees also provide clarifications and give advices aiming at serving and reducing the need of customer going to a service office.

Also in 2011, we have made available on our website the Virtual Bureau , launched in November. The objective is that by the second half of 2012, 80% of most requested services in other service channels of the company, such as water and sewage connection, re-connection, regularization of overdue bills, change of user s address and bill maturity date are answered through the internet.

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Our concern with social inclusion can be seen in the adoption of the social tariff , through which low-income population may pay lower amounts for the services rendered by the company. This benefit is regulated by Arsesp and assists households earning up to three minimum wages, besides observing dwelling size criteria and energy consumption. Currently, approximately 8.6 thousand domiciles gain this benefit. Sabesp s social tariff is one of the lowest tariffs practiced by state sanitation companies, and it is even 64% lower than the regular residential tariff considering domiciles with average consumption of 15 m3 month/water.

The company is also working in the regularization of irregular connections, an important challenge for sanitation companies, which produces significant results in terms of improvement of public health conditions and social inclusion. The project called Paritá (Project to Regularize, Integrate and Transform Informal Areas) was implemented in the east zone of the metropolitan region of São Paulo.

In 2011, approximately 1,300 water connections were regularized in 14 areas irregularly occupied; between 2008 and 2010, other 37 areas have been regularized. Considering the results achieved over the past four years, we decreased by 22.5% the universe of domiciles with irregular connections located in the east zone of RMSP and approximately 20,000 inhabitants have been assisted. It is worth mentioning that these actions also enable to decrease annual losses of 2.3 million m³ water.

Also in areas of lower income, the company developed the pilot project to prevent fire at the Sônia Ribeiro community, in Jardim Aeroporto, in the city of São Paulo, by installing fire hydrants in water distribution networks. This experience will result in the agreement to be signed with the local government of São Paulo to install prevention equipment in risky 21communities of the city of São Paulo in 2012.

Sabesp has been conducting satisfaction survey with its customers since 2004/2005. In 2006, this survey became annual, always applying same methodology, in order to enable the comparison between different business units and periods. The objective is to improve services rendered to our users from answers obtained.

In 2011, the overall satisfaction level in relation to the company reached 92%. Compared to results of previous survey in 2010, we saw an increase of three percentage points. We believe that good results are mainly based on the quality and regularity of water supplied by the company: 92% of interviewees said they were satisfied or very satisfied with services. The survey results consider a margin of error of 1.3 percentage point, within a confidence level of 95%. 5,860 customers were interviewed of all categories and consumption sizes in the region operated by Sabesp in the State of São Paulo.

Ombudsman

The Ombudsman is a service qualified channel. It measures conflicts between the company and its customers and monitors the complaints filed with Arsesp. In 2011, the Ombudsman received 44,169 customers complaints, of which 99% were answered and/or solved. In order to ensure the agility to solve complaints received, the Company adopts procedures and maintains agreements with Procon and the Judiciary Branch aiming at looking for conciliation alternatives.

One of these experiences is the Digital Small-Claims Court (JEC), a partnership between the company and the Small-Claims Court System. In 2011, we answered 354 requests, reducing by 15% the number of customers who appealed to the small-claims court compared to same previous year period. The ratio of advanced settlements at hearing remained at satisfactory levels of approximately 72% of requests, reiterating the company s commitment to seeking a balanced relationship with customers and faster and more appropriate solutions for both parties.

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The Ombudsman also follows-up the complaints registered by Fundação Procon. In 2011, 1,488 customers complaints were received at Fundação Procon statewide, a down 5.5% compared to the previous year. The follow-up in this preliminary phase, which precedes the recording of formal administrative process by Procon, allowed to reducing by 88% the number of complaints to be submitted for hearing. Therefore, in 2011 only 179 complaints continued being monitored by Fundação Procon after the first answer sent by Sabesp.

We consider the number of initial records currently enrolled at all Procon s units and sent for Sabesp s evaluation represents a small volume against total number of consumers directly served by the company, i.e. 23.9 million people. All complaints are recorded and sent through the CRM (Customer Relationship Management), for evaluation and treatment by Sabesp s business units and are fully answered.

Investor relations

In 2011, the company participated in major conferences held with investors, in Brazil and abroad, and received hundreds of analysts, investors and shareholders at its facilities.

Our concern to promote easy and quality communication with the market, which contributes to the perception of our shares value, accordingly, the company s value, was recognized by the 2011 IR Global Rankings, which awarded Sabesp for having achieved a great advance of quality in its IR website in Latin America. Through the IR website, shareholders and investors may contact the Investor Relations team, liable for communicating market demands to the company s top management.

The company also stood out at the Sanitation, Water and Gas Services sector of Abrasca s 2011 Value Creation Award. The entity considered that Sabesp achieved the highest percentages of value creation, in relation to our market capitalization over the past three years.

Supplier relations

In our relations with supply chain, we seek to stimulate competition and allow the achievement of best results for the company and higher value generation for society. We foment local companies participation, although by force of law, we cannot adopt any discrimination or privilege in this regard. We also seek to encourage our suppliers to adhere to management practices and reduce greenhouse gas emissions.

As a mixed-capital company, Sabesp depends on previous selection procedure when it contracts, this is a constitutional requirement regulated by Law nº 8,666/93 (Bidding Law). This implies to offer same bidding and participation conditions to suppliers, irrespective of location where they are installed. This equal protection of the laws can be seen in the broad disclosure of bidding procedures through our electronic bidding portal, available in our website.

Sabesp was the first government company to roll out an electronic procurement process in Brazil. Besides reducing costs, this system offers to its suppliers and population a greater transparency, efficiency and agility. In 2011, nearly 2,000 electronic trading sessions were held, amounting to R$1.5 billion, with R$211 million savings for the company s treasury.

Sabesp promotes the participation and contracting of local suppliers in the regions where it operates. As our organizational structure is divided into business units, each one has its own budget and independence to contract on a decentralized basis.

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As part of the compliance with a broad peripheral legislation on contracting, a special treatment is also assured to small-sized companies and cooperatives, also encouraging the participation and contracting of local suppliers. In 2011, this participation, only considering contracting due to exemption of bidding by value and invitation, reached 40%.

Sabesp also discloses to the market as much as possible its procurement planning, in order to stimulate competition. In this regard, we prepared the manual Bidding Guidelines in Public Procurements , available on our website, where we establish the general guidelines to increase the number of suppliers and promote greater competition. Pursuant to State Decree n° 53,336/08, Sabesp also discloses its Sustainable Public Contract Report, which lists our main social and environmental actions and good practices applied to our supply chain.

Social and environmental aspects are also included in the public bidding rules and drafts of agreement, pointing out participation conditions: interdicted companies due to environmental crimes are prohibited from participating in Sabesp s bidding processes pursuant to Article 10 of Law nº 9,605/98; restraints to minor children labor; declaration of non-utilization of workforce similar to forced or compulsory labor, in any of its forms, in its production chain; only wood products and byproducts of exotic or native origin deriving from legal sources will be utilized in the execution of engineering works and services, pursuant to State Decree n° 53.047/08; Normative Guideline for Qualification of Suppliers who are committed to environment and its surrounding. It also requires the compliance with local environmental laws through installation and operation licenses issued by environmental authorities. In addition, it assesses the products toxicological risks, so that to ensure safety of use both at treatment stations and for end consumer.

Relationship with employees

In order to maintain leadership, grow in the required pace and overcome ongoing challenges of the market, it is essential to Sabesp rely on professionals who are capable and committed to the organizational results. This competitive advantage composed of our staff is the strategic asset we seek to preserve. Sabesp plans to become a benchmark in people management, making feasible the professional growth through opportunities and recognition, increasing satisfaction and well-being at the workplace.

Our company currently has 14,896 employees ruled by CLT (Consolidation of Labor Laws). Male employees are the majority (80%), who completed secondary school (49%), white ethnic group (84%), over 40 years of age(70%). Average period of services rendered to the company is 17 years.

Sabesp relies on service providers when necessary. Currently, the company has approximately 7.4 thousand professionals. In addition, we have 918 trainees and 506 young apprentices, who combine the opportunity of working and taking administrative qualification courses in partnership with Senai.

The building of a fairer and more sustainable society necessarily means valuing diversity and social inclusion. Sabesp complies with Federal Decree nº 3,298 of 1999, which determines to set aside 5% of vacant positions offered in the public selection processes for disabled people. In 2011, we had 63 job positions under these conditions, 71% physically-impaired, 21% hearing-impaired and 8% visually-impaired employees. We also have been maintaining since 2005, an agreement with the Avape Association Valuing People with a Disability, through which, currently, 100 disabled people work in our public service bureaus and they receive over 108 hours of previous training.

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The work developed by the company evidences actions against prejudice and discrimination, valuing differences as strategy for the corporate and social development. Sabesp was granted with the Selo Paulista de Diversidade Categoria Plena (São Paulo Diversity Seal Top Category) by Employment and Labor Relations Department of the State Government of São Paulo. In order to obtain its renewal, in 2011, the company was audited by the certifying entity Fundação Vanzolini. This seal reveals our concern with inclusion, the adequacy of bureaus and in-house facilities, aiming the accessibility and the creation of a service channel for hearing-impaired people.

The company also maintains a package of benefits that goes beyond legal provisions, seeking to ensure the maintenance of health conditions, well-being, development, improved life quality, satisfaction and safety of employees and dependents. These benefits cover all employees, regardless of working hours system or position, gender or ethnic group only the apprentices comply with specific laws.

Employees with child custody receive day-care assistance reimbursement or utilization of the company s day care center for children between 6 months and 6 years of age (incomplete). The company provides reimbursement of expenses to those employees having children with special needs for treatment at specialized institutions and twice the amount of day-care assistance, without limit of age.

Employees under leave due to sickness allowance or accident whose salary is above the maximum amount paid by INSS (National Institute of Social Security), are automatically granted an addition to salary for a period of up to six months.

In addition to these benefits, through Fundação Sabesp Sabesprev, the company subsidizes the health and private pension plans of all its employees. In 2011, the company contributed with 1.41% of the monthly payroll to its private pension plan under the Defined Benefit mode.

By the end of December 2011, Sabesp signed an agreement with employees unions in order to change their pension plans. The proposal foresees other incentives for those willing to migrate from Defined Benefit Mode (Basic Plan) to Defined Contribution (Sabesprev Mais Plan). I also includes changes in risk benefits.

With this agreement, we expect to deal with the technical deficit of the Basic Plan, estimated at R$506.4 million, however, the solution is still subject to the approval of control authorities of the State government, as well as the evaluation of the Judiciary Branch, in view of lawsuit which in November 2010, suspended migrations to Sabesprev Mais Plan.

Referring to Sabesprev health plan, in 2011 a similar committee was created to establish proposals to improve insurance coverage, with costs compatible with the market, including a performance analysis of plans currently administered by Sabesprev concerning the following items: financial results, services and services network for inactive and active members.

People Management

The adoption of a people management model in line with market s reality, agile and flexible is indispensable in business performance. We understand it is necessary to discuss again the bases and outline new scenarios in relation to the human resources policy and company s outsourcing. This approach must reflect and include the market s trend, the expectation of the management and employees.

We are also seeking employees involvement through integration and motivation strategies and we expect to resume the Organizational Climate Management in 2012. We plan to be viewed in the near future as one of Brazil s best companies to work for. In order to achieve this goal, we started actions concerned with the improvement of current staff of the organization and company s relation with its employees. Among them, we mention the improvement of the Career and Salary Plan (PCS). We seek to align Sabesp with the practices and procedures effective on the Market and roll out an effective career plan based on the merit, in the performance evaluation, capacities and competencies.

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Labor and union relations

Sabesp incentives and supports its employees to participate in professional entities and associations, as a way of fully exercising their rights, besides promoting the personal development and improving the organizational climate. All our employees are free to be members of an association, to be represented by Unions which is covered by collective bargaining agreements.

The company conducts negotiation processes with responsibility and transparency and value a health dialogue with Union entities. They also hold meetings at any time to discuss reasonable proposals which aim at meeting employees expectations and maintaining good organizational climate, observing the limit of its financial capacity and governmental guidelines. In 2011, no situation has been seen that this free right of association and negotiation has been under risk.

Yearly Sabesp holds negotiations with five main Unions that represent the majority (90%) of its employees: Sintaema, Sintius, Seesp, Sasp and Sintec. It is worth mentioning that 80% of our employees are voluntary members of each of these Unions.

The collective bargaining process of 2011/2012 took place in May and involved main Unions representing employees, which resulted in 8% adjustment to payroll and benefits and in the establishment of the Profit Sharing Program PPR. It is worth mentioning that as agreed with Union in the 2010 collective bargaining agreement, on January 31, 2011 a 30% advance of amounts related to PPR of that year was paid and the final payment related to the fulfillment of targets was made on April 29, 2011. The amount distributed was R$51 million, including 15,424 employees.

In 2011, 2.7 thousand changes in personnel occurred, which included promotions, reallocations, designation and exclusion of job positions. These were preceded by employees competency or performance evaluations by corresponding managers.

Sabesp complies with the Brazilian laws, concerned with employees so that changes that affect their work conditions do not occur. In the event of changes in the processes that would impact labor relations, the company previously discuss this issue with employees representatives.

Qualification and training of the workforce

We know that the sustainability of our business relies on people who will hold leadership positions at the company in the medium and long terms. This is even more fundamental when we know that 35% of our managers will be entitled to retirement in the next five years. In this regard, in 2011 we set our first group of the Succession and Career Program, composed of 39 people with essential and potential competencies to become leaders at Sabesp in the future. The development process includes MBA, coaching, evaluation, language courses and individualized improvement, nationwide and internationally, in business s priority issues. In 2012, we started a Managerial Excellence Program and we opened the second succession and career group.

The qualification and training of our employees always deserved special attention. Sabesp is one of the pioneers in corporate education in Brazil with its Corporate University, implemented in 2001 to qualify leaderships and employees at all levels.

In 2011, the qualification process recorded 112,000 participants, 4% of them were managers, 17% were undergraduates, 28% were operational workers, 42% were technicians, 5% were trainees and 4% were apprentices, reaching the average of 46 hours/person. It is worth mentioning the distance education, with a list of approximately 350 courses, summing up annual average of 12,000 participants.

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The University s investments in training are approximately R$9 million and they privilege courses mainly concerned with sustainability, corporate governance, environment, social responsibility, quality, health and safety, besides competencies essential to the business.

In 2011, the company strongly invested in training activities related to the hygiene, occupational safety and medicine, including human rights aspects. The company also endeavored efforts to improve the qualification of its professionals, subsidizing graduate course, MBA, technical and specialized courses and language courses, through partnerships with renowned institutions on the market. In addition, agreements with over 150 educational institutions providing discounts of up to 40% for employees and legal dependents in undergraduate, graduate courses, primary and secondary schools, technical school, elementary school, language school, high school equivalency education and literacy program.

Occupational health and safety

Basic sanitation activities due to own nature are susceptible to occupational accidents. Therefore, the objective of the company s occupational health and safety management is to ensure actions that promote the development of the prevention culture at the company, as well as the improvement of work conditions, adding life quality to employees and service providers.

Sabesp s Occupational Health and Safety Management System is certified by OHSAS 18001, comprising 100 establishments within the scope of services and works including digging and restricted areas executed at public ducts. In 2011, Bureau Veritas Certification audited Sabesp regarding the maintenance of certification and the company was certified again.

One fourth of our employees, including managers and employees, work in formal health and safety committees and include activities such as: systematization, monitoring and specific programs. In particular, we point out the efforts and commitment of our 3,650 CIPA (Internal Commission of Accident Prevention) members, members of the fire brigade and area s professionals.

The mains drivers of the company s health and safety policy are: (i) everyone is responsible for occupational health and safety; and (ii) the performance related to occupational health and safety must be continuously monitored and improved.

Occupational health and safety programs developed have been obtained gradual reduction in frequency and severity of accidents. Most frequent accidents are related to traffic (26%) and falls (24%). Main causes are related to behavior attitudes (66%).

In 2011, an average investment of R$10 million was made in accident prevention. In addition, a communication channel was created for the external public specifically concerned with occupational health and safety issues.

Quality Management

With growing prospects for operating in new markets, products and services, and the sector s regulation, the Quality Integrated System is a great ally to a continued improvement of Sabesp s management.

The Quality Management Excellence program has been prioritizing the improvement of ISO 14001 standard (environmental management) and the maintenance of integrated certification for ISO 9001 (quality) and OHSAS 18001 standards (occupational health and safety).

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In 2011, maintenance and re-certification audits were carried out at the Quality Integrated System referring to ISO 9001, ISO 14001 and OHSAS 18001 standards. Currently, Sabesp has 13 laboratories accredited by ISO/IEC 17025 standard and certified by Inmetro (National Institute of Metrology, Quality and Technology) ensuring that water does not pose direct effects on its users health.

In this regard, it is worth mentioning that although procedures related to the minimization of products and service labeling are not conducted, as these are destined to bottled products the company disclosed in its water and/or sewage monthly bill, the water quality parameters (turbidity, chloride, fluorine, total coliform bacteria, fecal coliforms), according to the President s Decree nº 5,440/05 and Ordinance nº 518/04 of the Ministry of Health.

Community relations

Sabesp pursues the support of educational activities concerned with customers, suppliers and communities, in reply to the needs expressed in our opinion polls. In this regard, we point out trainings related to the rational use of water and environmental education. The company opens the doors of its facilities for schools wanting to know the water and/or sewage treatment process: in 2011, nearly 2,000 visits took place, summing up over 72,000 people.

Sabesp works with communities in partnership with local governments. Programs concerned with low-income population include technical and social works and aim the social, economic and environmental sustainability of projects, which include the community s participation and the environmental education, observing the characteristics of works and the profile of benefited population.

It is worth mentioning the methodology called Cooperative Governance, developed by the Brazilian Center of Analysis and Planning (Cebrap) utilized, for instance, in programs such as Córrego Limpo (Clean Stream) by Metropolitan Executive Board In this approach, social and environmental projects are maintained with the participation of all related parties and beneficiaries are monitored and supported by visits of teams related to the company s social responsibility.

In the metropolitan region of São Paulo, Sabesp also develops the program called Agente da Gente (People s Agent) a Community Participation Program, through which we establish an effective communication channel among our 40 technicians and local community leaders. Together, they work to involve area residents, transforming them into environmental consciousness-raising multipliers. In 2011, over 600,000 people participated in workshops and events related to sanitation.

The company continuously seeks means of approaching professionals of its operational area in the communities operated. In this regard, one of the issues has been to provide services through its own labor, a model adopted by the Regional Systems Executive Board. Referred to as Gente que Faz (People Who Works) also deals with the strategy aiming at valuing the staff and add value to the company s results.

It is also worth mentioning the performance of meetings with public authority s representatives and civil associations during the weeks preceding the 2011 rainfall period, with a view to presenting the management of the Cantareira System dam operations, as well as establishing coordinated actions to deal with and prevent emergency situation during summer. Five meetings were held in the cities of Atibaia, Campinas, Nazaré Paulista, Piracicaba and Vargem involving authorities, such as Department of Water and Energy of the State of São Paulo (DAEE), Civil Defense of the State, municipal authorities (executive and legislative branches), civil association s representatives, municipal consortia, other sanitation companies and press agencies.

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Government relations

Sabesp is a concessionaire of public utilities. Under these conditions, its main related parties are the federal, state or municipal governments. We comply with the laws, rules and regulations issued by the Executive Branch, at concurrently, we seek to collaborate in the process to formulate public sanitation policies.

Our relations with the federal government are guided by defense of public interests. As a government-controlled Corporation, we depend, for instance, of approval from federal authorities to raise foreign loans. We also endeavored efforts to have access to budgetary resources eventually made available by federal government. Through sector s representative entities we try to have influence on discussions about federal taxes levied on the rendering of water and sewage services, which we consider to be very high in Brazil it is worth mentioning that in 2011, Sabesp paid R$1.21 billion as income tax, Pasep, Cofins (taxes on revenue) and CSLL (social contribution on net income).

Statewide, the State Government of São Paulo is our controlling shareholder. We cooperate in the preparation of public programs and in the definition of guidelines for the sanitation sector, with a view to speeding up the execution of services universalization target in our state. We also set aside resources for actions supported by the state government, such as support to culture and sports, based on tax incentives.

The municipalities are the granting authorities of services rendered, therefore, we deem them as our major customers. Our program contracts are defined in strict partnership with local governments, so that to improve the adhesion of our works and actions to the needs and demands of the population. We also develop social and environmental projects with the municipalities, in order to generate greater benefits to the population.

Incentive to culture and sports

Sabesp provides institutional and financial support to environmental, social, cultural and sports projects developed by organizations concerned with environmental preservation and in line with social responsibility principles, incentive to culture and well-being of the community.

Over the past years, the company has been narrowing its relations with culture by means of event sponsorships and the creation of new spaces and cultural programs, such as Sabesp para quem tem sede de cultura (Sabesp for those yearning for culture), through which the Company supports projects related to movies, literature, fine arts, music, dance, theater, circus and preservation of cultural heritage.

In 2011, R$13.4 million were invested and 19 movies were selected to receive a total amount of R$8 million through the São Paulo Movies Incentive Program. Movies were selected by the State Department of Culture and receive funds that Sabesp makes available through Rouanet and Audiovisual laws. Two of them discuss sustainability: Metrópolis Desafios para o Desenvolvimento Sustentável (metropolis sustainable development challenges) by Chico Guariba, and Coração do Brasil , by Daniel Santiago.

Since 2004, when the company adhered to the program, 127 movies had already been sponsored, with total investments of R$48 million in the sector one of them is Xingu , directed by Cao Hamburger, to debut in 2012. The selection is made by specialists, directors, producers and curators, according to criteria, such as cultural and artistic interest, project quality and professionals involved.

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Currently, Sabesp is the company that most invests in movies in the State of São Paulo and one of the three largest sponsors of the sector throughout the country. In respect for diversity, the company was pioneer in Brazil when required as of 2011 that productions sponsored thereby make available copies with resources enabling hearing and visually-impaired people to watch the movies. Onde Está a Felicidade? (Where is Happiness?), directed by Carlos Alberto Riccelli, was the first movie to show subtitles and audio-description. All movies that received the company s investments in 2011 assumed equal commitment.

We also implemented the project called Escola no Cinema (School goes to the Cinema), destined to improve the relationship between students and teachers: 10,000 students already watched commented sessions at Cine Sabesp , one of the recent movie streets in the city of São Paulo and currently supported by the company. More than a half of viewers had never seen a movie. This room is also used in the Ecocine Festival, which will have a new edition in 2012.

Sabesp also sponsored sports activities, setting aside R$3 million as tax incentives in 2011. Among the beneficiaries are the aquatic team of Esporte Clube Pinheiros and water polo of the Association Comunidade Mãos Dadas. Another R$3 million were remitted by the company to the State Fund of Child and Adolescent Rights, through Condeca.

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ANNUAL SOCIAL BALANCE SHEET/ 2011

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Companhia de Saneamento Básico do Estado de São Paulo - SABESP

The Company has no other comprehensive income for the year, then the statement of comprehensive income is not presented.

The accompanying notes are an integral part of these financial statement.

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