1.    Financial highlights

Adjusted EBITDA Reconciliation (Non-accounting measures)

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

In 2016, net operating revenue, including construction revenue, reached R$ 14,098.2 million; a 20.4% increase compared to 2015.

Costs and expenses, including construction costs, totaled R$ 10,678.0 million, 21.1% higher than in 2015.

Adjusted EBIT, in the amount of R$ 3,424.9 million, grew 18.1% from R$ 2,900.2 million recorded in 2015.

Adjusted EBITDA, in the amount of R$ 4,571.5 million, increased 15.0% from R$ 3,974.3 million recorded in 2015.

The adjusted EBITDA margin was 32.4% in 2016 against 33.9% in 2015. Excluding construction revenues and construction costs, the adjusted EBITDA margin was 43.3% in 2016 (46.6% in 2015).

In 2016 the Company recorded a net income of R$ 2,947.1 million, in comparison to a net income of R$ 536.3 million in 2015.

2. Gross operating revenue

Gross operating revenue from water and sewage, not including construction revenue, totaled R$ 11,122.2 million, an increase of R$ 2,175.4 million or 24.3%, when compared to the R$ 8.946.8 million recorded in 2015.

The main factors that led to this variation were:

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

·         Tariff increase of 8.4% since May 2016;

·         Increase of 4.4% in the Company’s total billed volume (4.0% in water and 4.8% in sewage); and

·         Bonus granted within the Water Consumption Reduction Incentive Program, concluded in April 2016, was lower in 2016, amounting to R$ 187.4 million (R$ 926.1 million in 2015).

The increase resulting from the above mentioned factors was partially offset by the suspension of the Contingency Tariff in April 2016, in the amount of R$ 224.7 million in 2016 (R$ 499.7 million in 2015).

3. Construction revenue

Construction revenue increased R$ 396.2 million or 11.9%, when compared to 2015. The variation was mainly due to higher investments in the municipalities served by the Company.

4. Billed volume

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

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5. Costs, administrative, selling and construction expenses

In 2016, costs, administrative, selling and construction expenses, grew 21.1% (R$ 1,864.1 million). Excluding construction costs, total costs and expenses increased by 26.6% (R$ 1,476.5 million).

As a percentage of net revenue, costs and expenses were 75.7% in 2016 compared to 75.3% in 2015.

5.1. Salaries and payroll charges and Pension plan obligations

There was a decrease of R$ 22.5 million in 2016, mainly due to:

·         Decrease of R$ 307.4 million due to the migration of 3,572 participants from the Defined Benefit Plan (G1) to the Defined Contribution Plan (Sabesprev Mais), generating in advance a decrease of R$ 334.2 million in the actuarial deficit, offset by the extraordinary contribution and incentive of R$ 26.8 million;

The above mentioned decrease was partly compensated by the following factors:

·         Increase of R$ 126.8 million due to the 10.03% salary adjustment in May 2016;

·         Increase of R$ 129.9 million in provisions for severance pay (TAC), mainly due to the higher number of retired employees in 2016; and

·         R$ 27.6 million increase in provisions for supplementary payments for retirement plans and pensions under the G0 Plan, due to changes in actuarial assumptions.

 5.2. Services

Services expenses, in the amount of R$ 1,278.8 million, grew R$ 116.2 million or 10.0%, in comparison to R$ 1,162.6 million in 2015. The main items that led to this increase were:

·         Maintenance of networks and sewage and equipment connections, amounting to R$ 28.8 million;

·         Advertising campaigns totaling R$ 19.5 million;

·         Asphalt and pavement replacement amounting to R$ 15.6 million;

·         Reading water meters and delivering bills, R$ 14.1 million;

·         Surveillance contract, R$ 7.9 million; and

·         Credit recovery contracts totaling R$ 7.7 million.

5.3. Electricity

Electricity expenses totaled R$ 935.0 million in 2016, an increase of R$ 117.5 million or 14.4% in comparison to the R$ 817.5 million in 2015. The main factors that contributed to this increase were:

·         Average increase of 15.4% in the free market tariffs, with an 2.3% increase in consumption;

·         Average increase of 21.5% in the grid market tariff (TUSD), with a 5.0% rise in consumption; and

·         Average increase of 1.5% in the regulated market tariffs, with consumption remaining stable.

In 2016, the regulated market accounted for 37.3% of the total electricity consumed by the Company, the free market accounted for 32.6% and the grid market accounted for 30.1% of total consumption.

5.4. General expenses

General expenses increased R$ 388.3 million, or 83.2%, totaling R$ 855.0 million in 2016, versus the R$ 466.7 million recorded in 2015, mainly due to:

·         Increase of R$ 212.3 million, mainly due to increased provisions for court proceedings in 2016 and reversals in 2015, resulting from judicial decisions;

·         Higher provision for the Municipal Fund for Environmental Sanitation and Infrastructure, in the amount of R$ 101.1 million, as a result of the increase in revenues with the municipality of São Paulo;

·         Provision of R$ 38.1 million concerning the agreement entered into with EMAE – Empresa Metropolitana de Águas e Energia; and

·         Reversal of provision in 2015, amounting to R$ 17.9 million, due to the recovery of funds from the São Paulo State Government (GESP), due to employees assignment.

5.5. GESP Reimbursement

In 2015, the Company entered into an Agreement with the São Paulo State Government (GESP) in order to receive the undisputed amount related to the state government's debt with the Company for the payment of the benefits related to State Law 4,819, of August 26, 1958, to former employees (G0), which generated a R$ 696.3 million credit in the result.

5.6. Depreciation and amortization

Depreciation and amortization increased R$ 72.5 million or 6.7%, reaching R$ 1,146.6 million in 2016 in comparison to the R$ 1,074.1 million recorded in 2015, largely due to the beginning of operations of intangible assets, in the amount of R$ 2.1 billion.

5.7. Allowance for doubtful accounts

Increase of R$ 88.0 million, mainly resulting from:

·         Increase in default, causing a R$165.4 million impact; and

·         Lower recovery of funds, amounting to R$ 34.5 million.

This increase was partially offset by the higher receipt of court-ordered debt payments, especially from the city of Guarulhos, amounting to R$ 110.9 million.

6. Other operating revenues (expenses), net

Other net operational revenues and expenses reported a negative variation of R$ 139.1 million, mainly due to the following events:

·         Reduction of R$ 47.4 million in revenue from the sale of properties;

·         Decline of R$ 42.8 million in revenue from the sale of surplus electricity; and

·         Decrease of R$ 23.2 million in the amount received from REAGUA - Programa Estadual de Apoio à Recuperação de Águas (State Program to Support Water Recovery).

7. Financial result

7.1. Financial income and expenses

7.1.1. Financial expenses

Decrease of R$ 34.4 million, mainly due to the following events:

·         Interest and charges on domestic loans and financing: reduction of R$ 8.9 million, due to increased capitalization of interests in 2016, as a result of an upturn in work in progress; and

·         Interest and charges on international loans and financing: decrease of R$ 14.0 million, due to the reduction in the total debt amount, as a result of the depreciation of the dollar and the yen in 2016 (16.5% and 13.9%, respectively), versus an appreciation in 2015 (47.0% and 45.9%, respectively).

7.1.2. Financial income

Increase of R$ 68.2 million, chiefly due to higher interest on financial investments in 2016, as a result of the upturn in the invested amount.

7.2. Monetary and exchange rate variation on assets and liabilities

7.2.1 Monetary and exchange rate variation on liabilities

The effect of monetary and currency variations in 2016 was R$ 3,068.4 million less than in 2015, mainly due to:

·         Reduction of R$ 50.7 million in expenses with monetary variation on loans and financing, due to the lower increase in the IPCA in 2016 compared with 2015 (6.29% and 10.67%, respectively).

·         A positive variation of R$ 3,082.9 million in the cost of currency variations on loans and financing, due to the dollar and the yen devaluation against the Real in 2016 (16.5% and 13.9%, respectively), compared with their appreciation in 2015 (47.0% and 45.9%, respectively); and

·         Increase in the cost of other monetary variations by R$ 65.2 million, principally due to higher provisioning for court proceedings in 2016.

7.2.2 Monetary and exchange rate variation on assets

Decrease of R$ 15.1 million, mainly due to the lower monetary restatement of judicial deposits in 2016.

8. Income tax and social contribution

Increase of R$ 1,130.7 million, mainly due to the upturn in operating revenue and the financial result, which was impacted by exchange rate oscillations. These increases were partially offset by the upturn in operating costs and expenses.

9. Indicators

9.1. Operating

Water production volume increased 9.3% in 2016.

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

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

(3)    In 2015, the number included 370 employees retired for disability, excluded from the total figure in 2016.

(4)    In millions of cubic meters

        ( * )  Unaudited

9.2. Financial

                            (*) Unaudited

10. Loans and financing

In November 2016, the Company paid the last installment of the principal and interest of the Eurobond 2016 issue, in the amount of R$ 454 million.

11. Capex

2016 investments, totaling R$ 3.9 billion, including R$ 1.3 billion related to the São Lourenço PPP, still reflected the priority given to the water supply infrastructure.

 Note: Does not include obligations related to program contracts (R$ 5.8 million)

Capex Plan 2017-2021: R$ 13.9 billion

Between 2017 and 2021, the Company plans to invest directly approximately R$ 13.9 billion, R$ 7.1 billion of which in water and R$ 6.8 billion in sewage collection and treatment.

12. Conference calls

For more information, please contact:

Mario Arruda Sampaio

Head of Capital Markets and Investor Relations

Phone.(55 11) 3388-8664

E-mail: maasampaio@sabesp.com.br

Angela Beatriz Airoldi                                                                         

Investor Relations Manager

Phone.(55 11) 3388-8793

E-mail: abairoldi@sabesp.com.br

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

Income Statement

Balance Sheet

Cash Flow

This press release may contain forward-looking statements. These statements are statements that are not historical facts, and are based on management's current view and estimates of future economic circumstances, industry conditions, company performance and financial results. The words "anticipates", "believes", "estimates", "expects", "plans" and similar expressions, as they relate to the company, are intended to identify forward-looking statements. Statements regarding the declaration or payment of dividends, the implementation of principal operating and financing strategies and capital expenditure plans, the direction of future operations and the factors or trends affecting financial condition, liquidity or results of operations are examples of forward-looking statements. Such statements reflect the current views of management and are subject to a number of risks and uncertainties. There is no guarantee that the expected events, trends or results will actually occur. The statements are based on many assumptions and factors, including general economic and market conditions, industry conditions, and operating factors. Any changes in such assumptions or factors could cause actual results to differ materially from current expectations.