Companhia de Saneamento Básico do Estado
de São Paulo - SABESP

Financial Statements as of

December 31, 2017 and 2016

Independent Auditor’s Report in the Financial Statements

To the Shareholders, Board of Directors and Management of

Companhia de Saneamento Básico do Estado de São Paulo - SABESP

São Paulo – SP

Opinion

We have audited the financial statements of Companhia de Saneamento Básico do Estado de São Paulo - SABESP (“the Company”), which comprise the statement of financial position as at December 31, 2017  the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Companhia de Saneamento Básico do Estado de São Paulo - SABESP as at December 31, 2017, and of its financial performance and its cash flows for the year then ended in accordance with Accounting Practices Adopted in Brazil and with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB).

Basis for Opinion

We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the relevant ethical requirements included in the Accountant Professional Code of Ethics (“Código de Ética Profissional do Contador”) and in the professional standards issued by the Brazilian Federal Accounting Council (“Conselho Federal de Contabilidade”) and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Valuation of provisions for environmental contingencies

See Note 19 to the financial statements.

The Company is party in judicial and administrative proceedings of  tax, environmental, labor and civil nature, arising from the normal course of its operations. The environmental lawsuits are related to fines imposed by the competent public authoryties on potential environmental damages caused by the Company in the Municipalities where Sabesp operates. Management, based on the support and judgment of its internal and external legal advisors, determines the probability of loss and the amounts involved for each proceeding and records in the accounting a provision for items with probability of loss more likely than not and discloses those  classified with possible risk of loss (contingent liabilities).

The determination of the likelihood of loss and the estimation of amounts involved in the lawsuits demand Management's judgment considering experts assessments, jurisprudential evolutions and other subjective aspects. At the conclusion of legal disputes,  likelihood of loss and the final amounts involved may differ from those estimated by Management, and due to this reason we understand that this area is relevant and has had special attention during our audit.

How our audit addressed this matter

We evaluate the design, implementation and effectiveness of existing key internal controls related to the determination of estimates to record or disclose amounts in accordance with expected loss of litigation and how to ensure the integrity and updating of the risk classification by the Company.

We requested Company's legal advisors to confirm all proceedings, their respective risk and values assessment for all proceedings in the administrative or judicial spheres.

We obtained a sample of environmental proceedings and involved our legal experts to evaluate the assumptions used by the Company in determining the likelihood of loss, where we observed the merits of the cases, similar proceedings already juedged, and recently published information and updates regarding the progress of the proceedings.

We evaluate the adequacy of the provision and the adequacy of the disclosures made in the notes to the financial statements relevant to this topic.

During the course of our audit, Management identified adjustments that would affect the measurement and disclosure of the provision for environmental contingencies, which, despite being non-material, were recorded.

Based on the result of the procedures above mentioned, we consider that the balances of the provision for environmental contingencies are acceptable in the context of the financial statements taken as a whole for the year ended December 31, 2017.

Intangible Assets

See Note 14 to the financial statements.

During 2017, the Company made investments of approximately R $ 3,420,959 in infrastructures related to the base of concession contracts and intangible assets. There are several types of transactions that affect the intangible assets, such as the signing of new concession agreements, municipalities where the Company has ceased to operate or is not operating temporarily, evaluation of existing contracts in the context of accounting standard of concessions, additions of new infrastructures, amortization of assets and evaluation of the construction margin related to the balance of infrastructure built.

Due to the importance of the balances recorded under this caption, the potential financial impact resulting from the signing or breaking of existing concession contracts, construction of new infrastructures and amortization of current balances, we believe that this area is relevant and has had special attention during our audit.

How our audit addressed this matter

We evaluated the design, implementation and effectiveness of existing key internal controls related to the addition of new infrastructures, amortization of intangible assets, administration and management of new and current concession contracts, and validation of the construction margin used by the Company to guarantee the integrity, existence, precision and valuation of the balances classified as intangible assets.

We perform sample procedures to verify documents that support the new additions and their eligibility to capitalization as intangible assets. Verified documentation includes invoices, contracts, measurements reports and payments of additions occurred during the year 2017.

We recalculated the amortization recorded during the year 2017 and compared with the balances recorded in Company’s books, we evaluated the transfer of assets in construction to operation, we performed procedures to recalculate the construction margin and we made a technical evaluation to conclude on the adherence of concession contracts to the respective accounting standard.

We evaluate the sufficiency and adequacy of the disclosures made in notes to the financial statements regarding the requirements described in the accounting standards relevant to this topic. Based on the results of the procedures above mentioned, we consider that the balances recorded as intangible assets and their respective disclosures are acceptable, in the context of the financial statements taken as a whole for the year ended December 31, 2017.

Other matters

Statements of value added

The statements of value added (DVA) for the year ended December 31, 2017, prepared under the responsibility of the Company’s management, and presented herein as supplementary information for IFRS purposes, have been subject to audit procedures jointly performed with the audit of the Company's financial statements.  In order to form our opinion, we assessed whether those statements are reconciled with the financial statements and accounting records, as applicable, and whether their format and contents are in accordance with criteria determined in the Technical Pronouncement 09 (CPC 09) - Statement of Value Added issued by the Committee for Accounting Pronouncements (CPC). In our opinion, the statements of value added have been fairly prepared, in all material respects, in accordance with the criteria determined by the aforementioned Technical Pronouncement, and are consistent with the overall financial statements.

Other information accompanying the financial statements and the auditor's report

Management is responsible for the other information comprising the management report.

Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with Accounting Practices Adopted in Brazil and with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB) 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.

In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian and international standards on auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with Brazilian and international standards on auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

São Paulo, March 27, 2018.

KPMG Auditores Independentes

CRC 2SP014428/O-6

(original in Portuguese signed by)

Marcio Serpejante Peppe

Contador CRC 1SP233011/O-8

Companhia de Saneamento Básico do Estado de São Paulo - SABESP

2017 Management Report

MESSAGE FROM THE CEO

DOING MORE AND DOING IT BETTER FOR SANITATION IN THE STATE OF SÃO PAULO

Sabesp is the concessionaire that invests the most in sanitation in Brazil. The average amounts invested over the last few years represent about 30%¹ of the total amount allocated to sanitation in the country, and it was no different in 2017. We maintained a high level of investments that added up to a tot sum of R$ 3.4 billion for the expansion of the infrastructure for sewage collection and treatment services, water supply, process improvement and technological improvements applied to operations and management.

Even in a normal year, with satisfactory volumes stored in the reservoirs that serve the metropolitan region of São Paulo (RMSP), we are still heavily focused on the expansion of water security in Greater São Paulo. As a result, we have made significant progress in the construction of two major works: the São Lourenço Production System and the Jaguari-Atibainha interconnection.

At the same time, we are continuing with the steps for the construction of the system that will transfer water from the Itapanhaú River, on the Atlantic side, to the Alto Tietê System, with the expectation being that the construction work will get underway in the first half of 2018.

This set of interventions coupled with the actions that were carried out during the years of water crisis mean that we are not concerned about having to face similar situations in the future. In this scenario, it is important to stress the new consolidated pattern of water consumption, which is another key factor for the maintenance of water security. Now that it is more aware of the situation, in 2017 the population maintained the same level of water consumption per capita/day as in 2016, which is 23% lower than that observed before the outbreak of the crisis.

Still on the question of supply, the Água Legal (Legal Water) Program made remarkable progress, with 2017 seeing the installation of networks and more than 74 thousand families from irregular areas being connected to the Sabesp network. This initiative, whose goal is to serve 160 thousand properties in the RMSP, has two lofty objectives: to provide greater health and quality of life to residents in situations of social vulnerability and to reduce losses of liters and liters of water that permanently flow from the jumble of pipes that are precariously installed and which are exposed to contamination.

On another front, we stepped up the pace of the work of expanding the sewage collection and treatment infrastructure in the area of operations. We carried out 221,800 sewage connections, with this number reflecting the commendable performance on the part of Sabesp and its partners in relation to convincing those who have the collection structure available, but irresponsibly insist on not being connected to the networks.

The expansion of the treatment capacity of the Barueri Sewage Treatment Station (STS), one of the largest stations in Latin America, opened a new phase of sanitation in the RMSP, with the capacity to serve another 1.6 million people, benefiting the entire metropolis. In this context, we highlight the achievements of the Se Liga na Rede (Connect To The Network) Program and the “Córrego Limpo” (Clean Stream) Program. In the state's interior, we inaugurated 11 STSs (sewage treatment stations), positioning the municipalities very close to the universal access target, with repercussions on improving the quality of important rivers in the State of São Paulo.

On the internal front, an important chapter in the ongoing process of management's modernization was achieved with the coming into operation of Sabesp's Integrated Information System (SiiS). In addition to improving the performance and agility of our processes, the company also benefits from the standardization of data and the increased security and reliability of business information for the purpose of decision making. As was the case during the period of overcoming the crisis, we have witnessed a very pronounced degree of engagement and commitment from the entire team in light of the complexity of the change.

We have kept up the pace in relation to the work of adapting things in order to meet the requirements of the State-Owned Companies Law and in terms of making improvements to the compliance and risk management processes. In the same way, we have taken major steps toward implementing the Management Excellence Model (MEG), which will enable the dissemination of best practices and technologies throughout the Company. One example of this is the use of a program to rank investments according to the priorities in terms of the service, starting with water quality and water safety followed by combating losses and expanding the collection and treatment of sewage.

Among a series of other procedural and technological improvements, this package includes the dissemination of advances aimed at the efficiency of operations with the automation and the energy self-sufficiency of the stations, such as the projects that are already undergoing tests at some of our units. This activity is guided by the excellence in the provision of services which in 2017 earnt Sabesp, Level IV Plus, which is the highest level of the National Quality Award in Sanitation from the Brazilian Association of Sanitary and Environmental Engineering (Abes).

Also in 2017, we took an important step with the legislative approval of a possible corporate restructuring of Sabesp, paving the way for us to do more, to do it better and to do it faster for sanitation in the State of São Paulo. To do more by increasing investments aimed at universal access in the area in which the company operates and the possible incorporation of additional municipalities. To do better with greater increases in efficiency and innovation, enabling to move forwards with greater speed and quality in the provision of the services. In summary, we are constantly on the lookout for initiatives that contribute to reducing costs and improving the services, with the client and the environment being the main beneficiaries. Without losing sight of the Company's economic-financial sustainability.

Jerson Kelman – Sabesp's CEO

THE WORLD'S FOURTH LARGEST SANITATION COMPANY REGARDING POPULATION SERVED

Companhia de Saneamento Básico do Estado de São Paulo – Sabesp is currently responsible for water supply, sewage collection and treatment services to 368 municipalities in the State of São Paulo including the municipalities of Santa Branca and Pereiras, in which operations got underway in 2017.

Sabesp provides water supply and sewage collection and treatment services to residential, commercial, public and industrial customers, in addition to supplying water on a wholesale basis to five municipalities in the metropolitan region of São Paulo (RMSP), four of which also benefit from sewage treatment services. It is regarded as the world's fourth largest sanitation company in terms of population served, according to the Arup inDepth Water Yearbook 2014-2015: with approximately 27.9 million people being supplied with water (24.7 million directly plus 3.0 million residents in the municipalities served on the wholesale market) and 21.6 million people being served with sewage collection services.

In a further four municipalities in the State, Sabesp is present in providing sanitation services as a minority shareholder in the companies Águas de Castilho S.A., Águas de Andradina S.A., Saneaqua Mairinque S.A. and SESAMM - Serviços de Saneamento de Mogi Mirim S.A.

In addition, the Company has equity interests in the companies Aquapolo Ambiental, the largest enterprise for the production of industrial reuse water in South America (the fifth largest in the world), Attend Ambiental, which operates in the non-domestic sewage segment, and in Paulista Geradora de Energia S.A. (which is still in the pre-operational phase), in the electricity segment. More information about the Company's stake in these companies can be found in Note 12 to the Financial Statements.

Sabesp also provides consulting services in relation to rational water use, planning, and commercial, financial and operational management in Panama. Sabesp ended 2017 with a headcount of 13,672 employees, split between its head office, its administrative units and 17 business units, which operate 74.4 thousand km of water distribution networks and 51.0 thousand km of sewage collection networks, outfalls and interceptors; 240 water treatment stations and 557 sewage treatment stations.

In 2017, it invested R$ 3.4 billion to enhance its actions aimed at achieving its future vision of being a worldwide benchmark in providing services in a sustainable, competitive and innovative way, with a focus on the customer.

Net revenue generated in 2017 was R$ 14.6 billion with a profit of R$ 2.5 billion. Assets came to a total of R$ 39.5 billion and the company's market value was R$ 23.5 billion as of December 31.

Sabesp has been a signatory to the United Nations Global Compact since 2007, reaffirming its mission to "provide sanitation services, contribute to improving the quality of life and of the environment", and its operations are aligned with the Sustainable Development Goals (SDGs), which is a global agenda of the United Nations (UN) made up of 17 global goals to be achieved by 2030.

Panel of Indicators

(1)                    Coverage equal to 98% or more. Service equal to 95% or more.

(15)                  Does not include financial commitments assumed in program agreements (R$ 65 million, R$ 116 million, R$ 177 million, R$ 6 million and R$ 121 million in 2013, 2014, 2015, 2016 and 2017, respectively)

Modern Management, Innovation and Ethics

As a listed company on the Novo Mercado of B3 (the São Paulo Stock Exchange) and on the New York Stock Exchange (American Depositary Shares - ADR Level III) since 2002, Sabesp has a Corporate Governance structure that is guided by high standards in relation to ethics and conduct, which emphasizes transparency in decision-making and fairness and respect for the stakeholders.

The clarity and reliability of the figures reported in the financial statements, for example, resulted in Sabesp being awarded the outstanding Transparency Trophy among the 10 award-winning companies in the category of companies with net revenues in excess of R$ 5 billion in 2017. This award has been given for the 21 years at the initiative of the National Association of Finance, Management and Accounting Executives (Associação Nacional dos Executivos de Finanças, Administração e Contabilidade - ANEFAC) in partnership with the Foundation for Accounting, Actuarial and Financial Research (FIPECAFI) and Serasa Experian. Sabesp has been among the best companies of the year in 17 editions of this award.

Also held by ANEFAC, the Professional Award of the Year was awarded to Sabesp's Chief Financial and Investor Relations Officer, Rui de Britto Álvares Affonso. The awards are held as a way of showing recognition for executives who have excelled in their areas of activity. The selected professionals are chosen based on the indication of the 1,600 members and is confirmed by the agency's evaluation committee.

Despite already having a consolidated Governance structure, new standards of transparency and good governance, such as Federal Law 13,303/16 and State Decree 62,349/16, have been released, which has resulted in the need for adaptations, the deadline for the implementation of which is June 2018.

In addition, a new version of the B3 Novo Mercado's Listing Regulation came into force at the start of 2018, requiring the revision of institutional documents and of information disclosure practices. The deadline for adaptation to this new rule is April 2021.

Throughout 2017, the Company focused on the development of the aforementioned adaptive measures, which mainly consist of the amendment to the Bylaws and the Code of Ethics, adaption of the governance structure, the implementation of a system for evaluating managers, creating policies, including among them the policy regarding transactions between related parties, and the drafting of a BiddingRules of Procedure.

Sabesp's current corporate governance structure, with its functions and responsibilities can be checked out at www.sabesp.com.br/investidores, Corporate Governance section.

Management Compensation

In 2017, the compensation of the directors, members of the fiscal council and executive officers, in gross amounts, including benefits and legal charges, was approximately R$ 4.4 million. Around R$ 556 thousand of this amount relates to the variable compensation of the executive officers, with it being worth remembering that neither board members nor fiscal council members are allowed to receive variable compensation, as provided for in State Decree 58,265/12 and ratified by the Shareholders' Meeting of April 2013.

Under the terms of Brazilian Corporate Law, the overall compensation of the directors, members of the fiscal council and executive officers is set by the Shareholders' Meeting. At Sabesp, the compensation policy for board members, fiscal council members and executive officers is set in accordance with the guidelines of the government of São Paulo, always subject to approval by the Shareholders' Meeting.

Integrity and transparency

Sabesp's Integrity Program was established in 2015 and follows the recommendations of the Organization for Economic Co-operation and Development (OECD), of the United Nations Office on Drugs and Crime (UNODC) and of the World Bank.

The program covers two distinct scenarios, active corruption and passive corruption, and in 2017, it underwent a new restructuring in order to bring it into line with the recommendations of the Office of the Comptroller General (CGU), divided into five pillars: Commitment and Support from Senior Management, Responsible Body, Profile and Risk Analysis, Rules and Instruments and Continuous Monitoring.

The Program currently consists of a set of internal integrity mechanisms and procedures for monitoring and encouraging the reporting of irregularities, and for the effective application of the Code of Ethics and Conduct and of the policies and guidelines aimed at preventing fraud and corruption.

As part of the Program, Sabesp has an Institutional Compliance Policy approved by the Board of Directors, which establishes guidelines, principles and skills that direct its managers and employees to work for the company so as to ensure compliance with laws, regulations and organizational instruments, preserving the company's assets, image, integrity and other ethical values. The Compliance Policy is disclosed internally by means of the Company's corporate portal.

In 2017, taking into consideration the Company's risk and corporate governance profile, 59 actions were consolidated as compliance practices. By comparison with the previous year, there was a 13% growth in the adherence to these practices.

Among these actions, highlight goes to the adoption of integrity measures among the company's suppliers and service providers, establishing compulsory compliance with ethical standards and a ban on fraudulent and corrupt practices in their contracts.

Sabesp has been taking a series of measures that, in compliance with corporate governance actions, increase its processes so as to always act with transparency and become a reference in models of efficiency in public sector management, such as the Transparency Portal, which was implemented in 2017, and which delivers clear and up-to-date information such as Institutional Policies, agreements with the granting authority and agreements with suppliers, main programs and projects developed. The stance adopted by the company of widespread publication of information is also reflected in the results of requests made by the Citizens Information Service (SIC). The 267 requests registered were all answered in an average period of 13 working days, seven days less than the deadline permitted under the law, which is one of 20 days.

For next year the company has scheduled training on anti-corruption measures and improvements in due diligence of suppliers and service providers.

Sabesp is committed to improving its processes for combatting corruption in its business environment and has expressed its public commitment to ethics, also by means of its adherence to the Instituto Ethos' Corporate Pact for Integrity and Against Corruption, a member of the UN Global Compact's Anticorruption Working Group and of the Anti-Corruption and Compliance Committee of the Brazilian Bar Association (OAB), Pinheiros/SP chapter.

Code of Ethics and Conduct and Whistle-Blowing Channel

Sabesp's Code of Ethics and Conduct, which was developed in a collaborative way, was launched in 2006, updated in 2014 and is applied throughout the organization. It establishes the ground rules for its managers and employees to act in an integrated and coherent way in the conduct of their relations and businesses with different publics: customers, shareholders, investors, suppliers, partners, third parties, government, community and society in general. The document can be found at www.sabesp.com.br and guides Sabesp's actions in combating all forms of fraud, corruption and acts harmful to the public administration, especially those provided for by domestic and foreign anti-corruption legislation.

The Ethics and Conduct Committee is responsible for encouraging employees' commitment to the Code and for ensuring that it remains relevant, up-to-date and adequate, as well as for guiding and suggesting actions required for the disclosure and dissemination of its precepts at all levels of the Company.

Complaints about incidents of fraud, corruption, unlawful acts, breaches of the Code, or in relation to other matters that may have a negative impact on the principles and interests of Sabesp, its subsidiaries and shareholders, may be made by any interested party by means of the channels provided by the Company:

• e-mail: canaldedenuncia@sabesp.com.br
• Direct phone line: (011) 3388-8100
• Ombudsman: 0800-0550565 or e-mail: ouvidoria@sabesp.com.br
• Telephone Call Center: Emergency: 195 or Metropolitan Region SP: 0800-0119911 or the state's interior and coastal region: 0800-0550195
• PO Box: 61.540 - Zip Code: 05424-970
• In person or by letter addressed to Superintendência de Auditoria: Rua Costa Carvalho, 300 - CEP: 05429-900

It is up to the Audit Committee to monitor the procedures for verifying breaches of the Code of Conduct and Integrity, as well as of events registered on the Whistle-Blowing Channel.

The Audit Superintendence is responsible for processing complaints, and should take efforts to ensure the anonymity of the complainant and protect the confidentiality of the information and of those involved, in order to preserve rights and the neutrality of decisions.

In 2017, 144 incidents were recorded, of which 71% were investigated and 29% are under investigation, which represents a 6.5% decrease against 2016. Out of the total, 5% were related to inappropriate behavior, harassment, discrimination, persecution and unfair treatment. In the case of all those complaints considered to be relevant, penalties were imposed on 43 employees (including the company's own employees as well as outsourced employees): 18 warnings, 7 suspensions and 18 dismissals. The results of the inquiries of the complaints are forwarded to the Audit Committee.

Internal controls

Internal controls have been assessed in a structured and systematic way since 2005, benchmarking with the internal control parameters of the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

The internal controls assessment process is carried out once a year taking into account both the existence of new risks associated with the drawing up and disclosure of financial statements and possible significant changes in information technology processes and systems.

Internal controls include the procedures regarding adjustment of the accounting records, preparation of the financial statements in accordance with official rules and proper authorization of transactions involving the acquisition, use and disposal of the Company's assets.

The internal control tests are carried out by the Internal Audit, a department that is subordinated to the Chief Executive Officer and reports functionally to the Audit Committee, and which since 2016 has held the QA Quality Assessment certificate granted by the Brazilian Institute of Internal Auditors (IIA Brazil), which is an affiliate of The Institute of Internal Auditors (IIA).

In addition to complying with section 404 of the Sarbanes-Oxley Act (SOX), the internal controls assessment process is in compliance with Law 13,303, dated June 30, 2016.

As was the case in previous years, the review of the effectiveness of the internal control environment in 2016 did not identify any material deficiencies. The tests for the year 2017 will be completed in April 2018.

Risk management

Sabesp has a Risk Management and Compliance Department, which is subordinated to the Chief Executive Officer and reports functionally to the Audit Committee.

The risk management process complies with international and Brazilian technical standards, specifically the COSO - ERM - The Committee of Sponsoring Organizations of the Treadway Commission "Enterprise Risk Management - Integrated Framework" and ABNT NBR ISO 31.000 - Risk Management - Principles and Guidelines, covering the entire organization.

The Company maintains a risk map and monitors global and national trends in order to foresee scenarios that may have an adverse effect on its operations and in this way ensure that its objectives are achieved. The identified risks are measured at regular intervals with regard to their impact and the likelihood of their occurrence, are given a detailed assessment by the appropriate hierarchical levels in order to define mitigating actions required for each situation. The description of the risk factors can be found in item 4 of the Reference Form, which is available on the Company's Investor Relations website, in the Financial and Operating Information section.

External Auditors

Sabesp respects the principles that protect the external auditor's independence with regard to not auditing its own work, not performing managerial functions and not acting on behalf of its client. KPMG Auditores Independentes has been the Company's independent auditor since the review of the quarterly information (ITR) of June 30, 2016. In 2017, the Company paid R$ 2.9 million for the audit of the financial statements, the review of the quarterly information and of financing projects, among others. In 2017 Deloitte Touche Tohmatsu Auditores Independentes provided one-off external audit services in the sum of R$ 136 thousand, in relation to the reissue of opinions regarding previous years that were audited by it. Out of SABESP's affiliated companies, KPMG Auditores Independentes audits the companies Águas de Castilho S.A. and Águas de Andradina S.A. During the period in which they have acted in the Company the auditors have not provided any other services that exceeded 5% of the fees paid for the external audit services.

Business model

Sabesp is a publicly-held mixed capital company founded in Brazil in 1973, under the terms of State Law 119/73, and its main corporate purpose at the present time is to provide basic sanitation services, as established in its Bylaws, with a view to universal access to the aforesaid services in the State of São Paulo, without prejudice to the company's long-term financial sustainability.

The Company is also authorized to plan, operate and maintain systems for the production, storage, conservation and commercialization of energy, both for itself as well as for third parties, and also to market services, products, benefits and rights that directly or indirectly result from its assets, business ventures and activities. It may also provide services subsidiarily in any part of Brazil's territory or abroad.

Sabesp's share capital consists exclusively of common shares (with voting rights) and in compliance with State Law 11,454/2003, the Government of the State São Paulo is required to be the controlling shareholder. The Government of the State currently holds 50.3% of the shares.

The rest of the shares are traded on stock exchanges in Brazil and abroad. At the end of 2017, 29.7% of the shares were traded in Brazil, and the remaining 20.0% were traded in the United States in the form of American Depositary Receipts (ADRs) - Level III.

On September 15, 2017, State Law 16,.525 was enacted, which allowed the Government of the State of São Paulo to set up a joint stock company that could exercise share control of Sabesp, but with the State Government retaining the majority of the voting capital of this parent company.

The purpose of this measure is to try to obtain more resources in order to expand investments in sanitation and to speed up the process of achieving universal access to the water supply, sewage collection and treatment services, in an attempt to add value to Sabesp's business and strengthen its corporate governance.

For more information, see the chapter "Results Reversed into Gains for Society" of this report.

STRATEGY AND VISION OF THE FUTURE

Sabesp's mission is to provide water and sewage services, contributing to improve the quality of life and of the environment; with the Company's goal being to become a worldwide reference in relation to the provision of sanitation services, in a sustainable, competitive and innovative way, with a focus on the customer.

The definition of Sabesp's strategies and guidelines considers inputs to be the process of surveying scenarios and risks and opportunities. Based on international standards and Brazilian technical norms, specifically the COSO - ERM model - The Committee of Sponsoring Organizations of the Treadway Commission "Enterprise Risk Management - Integrated Framework" and ABNT NBR ISO 31.000 - Risk Management - Principles and Guidelines, the Sabesp's risk management process is divided into four categories, with these being strategic, financial, operational and compliance. The Company's main risks are described in item 4 of the Reference Form.

Sabesp's main lines of action in pursuit of its vision for the future are:

To ensure the availability of water in the company's area of ​​operations and to make progress in relation to implementing structures for the collection and treatment of sewage, with technical and economic feasibility, contributing to the goal of universalization and to ensure quality in the management of the services and products provided. The objective is to maintain universal coverage and service in water supply, together with high levels of quality and availability, undertaking 783 thousand new water connections between 2018 and 2022. The Company also intends to increase coverage and service in relation to sewage collection and the coverage ratio, carrying out roughly 1.1 million new connections during the same period.

To improve the Company's management through the SiiS (Sabesp Integrated Information System) operation, the ERP (Enterprise Resource Planning) system, which was implemented in April 2017, and the CRM (Customer Relationship Management) system, with a view to replacing the current commercial information systems. At the same time, the Sabesp Management Model Project was developed during 2017, which consists of carrying out the Assisted Self-Assessment based on the National Quality Foundation's Management Excellence Model (MEG). The project's completion is scheduled for the first half of 2018 and it will provide the basis for improving the Company's management model. These projects will help strengthen management, provide greater support in decision making, increased efficiency of internal processes and operations along with greater productivity.

To encourage the creation, adoption and dissemination of solutions focused on value generation, seeking to enhance asset management and energy efficiency, as well as to continuously reduce water losses and operating costs. This is achieved by means of investing in research and technological development projects, in addition to automation, integration of planning and optimization of processes. In 2017, Sabesp invested roughly R$ 10.7 million in research, development and innovation projects, both with its own resources as well as those raised with development entities or even financed by partners. As an additional way of encouraging the search for sustainable and innovative solutions to optimize investments and improve the operational efficiency of sanitation in the Baixada Santista region or in informal areas, at the start of 2018, Sabesp launched the Saturnino Brito Engineer Award. An initiative open to all employees will recognize the best and most innovative sanitary engineering projects proposed for these regions.

 Balance of Targets

The targets proposed by the Company for 2017 were achieved, with highlight going to the implementation of 207.3 thousand new water connections, which was 12% greater than the target that had been set and the 221.8 thousand new sewage connections, which translates into 11% more connections than had been expected for the period.

The 31.7% target for losses related to measurement of water was exceeded, with the achievement of a 30.7% result. In 2017, in an attempt to align itself with the technical means, such as the International Water Association (IWA), Sabesp began to use the Water Loss per Connection per Day Index (IPDt) as an indicator for target setting, with this also being adopted by Arsesp to establish the regulatory loss targets.

Achievements in 2017 and forcasts for the coming years can be found in the table below.

Achievements in 2017 and Targets for 2018-2022

(1)    Coverage equal to 98% or more. Service equal to 95% or more. For methodological reasons, it includes a variation margin of plus or minus 2 percentage points.

(2)    Household is the term used for the building or subdivision of a building, with occupations that are demonstrably independent of each other, collectively using a single water supply and/or sewage connection.

The company defined some indicators that are in line with its organizational strategy, reflecting economic, social and environmental performance, and which are included in the Company's Profit Sharing Program.

SUPPLY

WATER SAFETY FOR THE PRESENT AND FOR THE FUTURE

The supply of water, although available to everyone, is a service that requires the permanent monitoring of the demographic and geographical growth of the cities, which in 2017, required the investment of R$ 2.2 billion. In order to fulfill its task, Sabesp has an infrastructure of 240 water treatment stations that, combined, enable the production of 119 m³/s of treated water that reaches the company's customers' taps via 74.4 thousand km of networks and water mains and 8.9 million connections.

The metropolis and the challenge to supply

The Metropolitan Region of São Paulo (RMSP) is the largest urban agglomeration in Latin America and is one of the world's six largest metropolises. In this region, there are 20.8 million people, or 47% of the inhabitants of the State of São Paulo. The combination of this high population density coupled with factors such as economic activity, disorderly and irregular occupation of the soil and the geographical location (at the spring of the Alto Tietê basin) result in extremely low water availability.

 In this environment of permanent scarcity, extreme climatic phenomena such as the one that occurred during the years 2014-2015, with the most severe drought ever recorded in the RMSP, made the task of maintaining water safety and ensuring that the population continued to receive the service an even more challenging one.

Once the driest period (2014-2015) was over, the year 2017 saw a continuation of the trend that began in 2016 of recovery of the main systems that supply the metropolitan region. The natural contribution (inflow) to the water supply sources was 71% of the historical average, due to a rainfall equal to 90% of the historical average, with the amount of rainfall equal to 75% of what was expected. Nevertheless, on December 31, 2017, the overall volume of the water supply sources showed a cumulative figure of 916.8 million cubic meters, a level just slightly below (1.5% down) in relation to the same date in 2016. But an 8.1% increase against the volume registered in December 2013, the period immediately prior to the water crisis.

The volume stored in 2017 represents 49.4% of the total capacity of the set of water supply sources which is 1.8 billion m³. Transfers between the systems boosted by the construction works undertaken as a result of the water crisis made it possible to accumulate 119.8 million m³ in the metropolitan region's water supply sources in 2017. Without these transfers, total reserve would have been 6.5 percentage points lower, at 42.9%.

The maintenance of the volume stocked in the face of the below-average inflow and rainfall can be put down to the fact that the population, particularly the residential consumers, have become aware of the problem, and incorporated the rational consumption habits that were acquired over the course of the water crisis.

As a result, per capita consumption in 2017 was 130 liters a day, maintaining the same level as in 2016, and one which was 23% lower than the figure of 169 liters per inhabitant/day that was registered in 2013, before the start of the prolonged drought. This behavior can be partially observed in the average daily production of treated water in 2017 to supply the Metropolitan Region of São Paulo, which was 60.6 m³/s, which represents a 12% drop by comparison with the 69.1m³/s average produced in 2013, which was year immediately prior to the outbreak of the water crisis. Investments in water supply made in the RMSP in 2017 came to a total sum of R$ 1.8 billion.

Granting of water intake from the Cantareira System

With rainfall back to normal, a Joint Resolution between the Department of Water and Electricity of the State of São Paulo (DAEE) and the National Water Agency (ANA) in May 2017 established the new rules for granting of water intake from the Cantareira System. The rules are valid for a period of ten years and define the operation by different flow bands withdrawn from the System according to the cumulative useful volume, with the maximum amount being 33 m³/s, when the Cantareira has a stock equal to or greater than 60% of its capacity. The document also makes the granting conditional upon operational improvements to be shown by the Company.

Metropolitan Water Program

In the RMSP, in addition to the Cantareira System, Sabesp has seven other Water Producing Systems, which together have a nominal production capacity of 75.8 m³/s of water and make up the Metropolitan Integrated System (SIM). With the coming into operation of the São Lourenço Producing System, the Integrated System will be made up of 9 production systems interconnected by large-scale water pipelines that are part of the Metropolitan Water Mains System, responsible for transporting the treated water to the sectoral reservoirs and, from these points, distributed to the consumption points in the Greater São Paulo region.

The Metropolitan Water Program (PMA), which got underway more than two decades ago, has been focused on increasing the supply of raw water, increasing the reservoir structures, renovating and expanding the transport (pumping) capacity and the production of treated water, in order to fix the problem of the lack of infrastructure that imposed a situation of water rationing on more than five million people in the RMSP. As a result of this work, service coverage for consumers rose from 70% to 100% in 2000, and the water production capacity in the Metropolitan Region of São Paulo RMSP was increased from 57.2 m³/s to 75.8 m³/s. In 2017, roughly R$ 460 million was invested in the Program.

Although fundamental to overcoming the water crisis, the set of emergency construction projects that was carried out in the two-year period 2014-2015 and the resulting recovery of water supply sources with the return of the rainfall is no guarantee that the future will be fully predictable.

Given this and in light of the greater probability of the occurrence of new extreme climatic events, Sabesp proceeded with the implementation of two major structuring works, foreseen in the Master Plans for Use of Water Resources for the São Paulo Macro-Metropolis (Secretariat of Water Resources and DAEE) and in the Water Supply of the RMSP - PDAA (Sabesp). The implementation of the São Lourenço Producing System was speeded up, while that of the Jaguari - Atibainha Interconnection was brought forward. And this continues with the negotiations to start the work on the transposition of water from the Itapanhaú river, on the Atlantic side, to the Alto Tietê System. 

With the new risk curve generated by the crisis, Sabesp's long-term planning also needed to be repositioned strategically. Therefore, the Company brought forward the updating of the Metropolitan Region of São Paulo's (RMSP's) Water Supply Master Plan, with a timeframe up until 2045, which is almost at the point of being concluded at the end of 2017. The studies and projections of the water availability of the producing systems were based on historical monthly series of water inflow and rainfall level (including the two-year period of the crisis: 2014-2015).

The natural availability of the Alto Tietê river basin is unable to meet the water needs of this population, which forces the Company to seek water from water supply sources located at ever greater distances and imposes a need to combat water losses in the pipes and to encourage rational consumption. Built more than four decades ago in order to enable the reversal of water from the Piracicaba, Capivari and Jundiaí Rivers (PCJ) to the RMSP (included in the Alto Tietê Basin), the Cantareira System already predicted that the need to "import" water from ever further away was a reality that had to be faced.

The search for sources outside the Alto Tietê Basin is the common point between Sabesp's three recent major structuring works: the São Lourenço Production System and the interconnection of the Jaguari-Atibainha reservoirs, and the reversal of the Itapanhaú river, which increase the supply of raw water and treated water in the RMSP.

São Lourenço Producing System

With construction initiated in April 2014, the São Lourenço Producing System is due to be inaugurated in April 2018 and is designed to supply up to 6.4 m³/s of ready-to-drink water in the Integrated Metropolitan System (SIM). It has a capacity to serve up to two million people. It includes 82 km of networks and pipelines, a water treatment plant and reservoirs capable of storing 125 million liters. The work was carried out by means of a Public-Private Partnership (PPP) between Sabesp and a private consortium.

Jaguari – Atibainha Interconnection

This represents another of Sabesp's main interventions aimed at increasing water security both for those served in the RMSP and PCJ Basin as well as users of the Paraíba do Sul Basin, the Vale do Paraíba region and Rio de Janeiro. Inaugurated in March 2018, the 19.6 km long interconnection makes it possible to transfer an average flow of 5.13 m³/s and a maximum Paraíba of 8.5 m³/s of raw water from the Jaguari reservoir, in the Paraíba do Sul Basin, to the Atibainha reservoir, which is one of those that make up the Cantareira System (PCJ Basin).

In the opposite direction (Atibainha - Jaguari), it will allow the reversal of up to 12.2 m³/s, thus ensuring that the Cantareira System serves as a water tank to supply the population of the Paraíba do Sul basin in periods of greatest need.

Reversal of the Itapanhaú River

The third major construction project in the set of structuring interventions aimed at increasing water security in the RMSP, the pumping of the waters from the Itapanhaú River will directly benefit about 4.5 million residents who are supplied by the Alto Tietê System and indirectly, via the integrated system, 21 million people of Greater São Paulo.

The bidding process that defined the consortium which will implement the project was concluded in 2017. This undertaking will have the capacity to pump an average of 2 m³/s (with a maximum of 2.5 m³/s) from the Sertãozinho stream, which is one of those that feeds the Itapanhaú river, to the Biritiba-Mirim reservoir, which is part of the Alto Tietê System. 

Protection of biodiversity: the water supply sources and their green belts  

In addition to the expansion of the water infrastructure, Sabesp monitors and preserves an area of more than 44 thousand hectares, consisting of a 9 thousand ha body of water and a 35- thousand hectare area around these Water Supply Sources. 94% of this is protected areas covered by vegetation, which are located in the reserves: Morro Grande, Alto Cotia System, Serra do Mar State Park in the Rio Claro System, Capivari-Monos Environmental Protection Area, which is part of the Guarapiranga System and in the Cantareira System. A total of 213 thousand seedlings of native species were planted over the course of 2017 in the Cantareira's Environmental Protection Area. These reserves represent 1.4% of the State of São Paulo's remaining Atlantic Forest.

The preservation of the green belts received a boost in 2016 with the launch of the 'Nascentes' (Springs) Program, a partnership between Sabesp and the Government of the State of São Paulo, which already has five plantations under development in the towns of Joanópolis, Piracaia, Jacareí/Igaratá, Salesópolis and Cajati, which add up to a total of 246.31 hectares with more than 410 thousand seedlings already planted by 2017 (263 thousand planted by Sabesp). The project's final objective is the restoration of around 20 thousand ha of riparian forests and the protection of 6 thousand km of water courses.

To fulfill part of the reforestation projects, Sabesp also maintains three forest nurseries, which are located in the municipalities of Vargem Grande, Cotia and Jales.

Together with riparian protection and vegetation of the basin initiatives, since 2011, Sabesp has developed the Program Nossa Guarapiranga (Our Guarapiranga), which is a system that supplies around 4 million people. As a result of this program, the reservoir is cleaned with the aid of collecting boats and a number of eco-barriers - metallic screen blocks which are installed at the mouth of the reservoir's tributaries, which block the waste that arrive via these channels.

For the task, Sabesp, in partnership with Unesp's Foundation for Agricultural and Forestry Research, developed two boats with robotic arms to collect large objects under water in the water supply sources, as well as to remove aquatic plants which, when they are in excessive numbers, hamper the collection of water and its use for leisure.

In 2017, a new cooperation agreement was signed for the program.

On top of this initiative there was also the development and installation of another floating barrier to protect Guarapiranga's water intake, resulting in a decrease in the number of stoppages in water production due to obstruction caused by aquatic plants and other waste, from 19 stoppages in 2016 to just 3 in 2017. During the year, an average of 1.4 thousand m³ of waste and macrophytes was collected each month, which is the equivalent of roughly 45 garbage trucks.

In addition to benefiting society with the protection of green areas, these actions are fundamental to ensuring the availability and quality of the water that supplies the population.

Water Supply for the coastal region and the interior of the State

The investment made in 2017 in order to supply water to the interior of the state and to the coastal region was R$ 408.5 million. On the coast, the high temperatures during the summer months together with the high number of tourists who visit the beaches during this period make the coastal region the second most complex area to supply after the RMSP.

In the Baixada Santista, in addition to the 1.8 million residents, Sabesp also needs to fully supply the tourists who virtually cause the population to double during this period. The water collected in 31 rivers is transported to the 13 water treatment stations which, together, have the capacity to treat 11 m³/s of water, which is distributed to the region's nine municipalities.

With an integrated system that resembles the concept of the RMSP's integrated system, but on a smaller scale and with a smaller reservoir capacity, it is possible to redistribute water from one region to another one where there is greater demand, balancing the supply in accordance with the population's consumption needs. The main focus in 2017 was on the implementation of two water treatment stations in the municipality of Peruíbe, which will boost the availability for the municipality by 295 liters/s.

On the north coast, operational improvements were made to the systems, with highlight going to the partial start-up of the Maranduba Water Treatment Station, in the municipality of Ubatuba, and the drilling of three wells (two in the municipality of São Sebastião and one in Ubatuba). Also in Ubatuba, the reserve capacity of the Praia Vermelha do Sul system was increased by means of the installation of six reservoirs.

In addition to this, new pressure reducing valves (VRPs) were installed in the set of municipalities, and more than 11 thousand water meters and 11 thousand branches were replaced.

In the state's interior, 2017 saw the start of drilling of 26 deep wells, with highlight going to the more than 1.6 thousand meter deep well drilled in Fernandópolis to make use of the Guarani Aquifer. The construction work is continuing in 2018 with the installation of a pipeline, a reservoir, a chemical dose unit, an electromechanical assembly and a cooling system, given that the water comes out at a temperature of 58 °C.

2017 also saw the start of relocating 48 municipalities to UNs with headquarters closer to each municipality, for the purpose of optimizing financial resources, and above all, providing technical and administrative efficiency gains, as well as leveraging the conditions for improvement in the provision of services.

Investments made in 2017 to supply water to the state's interior and its coastal region added up to the sum of R$ 408.5 million.

Combating water losses

Efforts to reduce water losses in the distribution network are supplementary to the actions aimed at increasing the water safety infrastructure and help optimize the use of the current water supply sources and postpone the need to search for new ones at ever greater distances.

Technically, the losses can be divided into actual (or physical) losses and apparent (or non-physical) losses. The actual losses correspond to the volume of water that is not consumed by the customers, due to the fact it is lost via leaks along the route taken by the water on the way to the delivery points. While the apparent losses correspond to the volume that is consumed, but which is not registered by the Company, mainly due to frauds, irregularities and inaccurate measurement by the water meters.

With the implementation of the Corporate Loss Reduction Program in 2009, which began to be performed under the JICA (Japan International Cooperation Agency) financial and technological partnership in 2012, the total loss rate has gradually fallen, with a 30.7% result being recorded in 2017. The daily loss in terms of liters per connection, which is regarded as the most appropriate index for the measurement of losses was 302 liters/connection/day.

The Program foresees the investment of R$ 6.3 billion in current amounts ​​(during the period 2009-2020) in order to achieve the 29% target for the loss index related to micro-metering, which corresponds to an index of 273 liters/connection/day and a level of real (or physical) losses of around 18.9% - which is comparable to the best supply systems in the world.

The funds are channeled into repairs and scans of the networks, the replacement of equipment and pipelines, the management of customer records and the prevention of fraud.

Água Legal (Legal Water): expansion to Irregular Areas

In 2017 Sabesp officially launched the Água Legal (Legal Water) Program, whose goal is to bring the supply structure to inhabitants of irregular areas. The program has already benefited 274,000 people in roughly 74,000 families who had their illegal connections exchanged for water meters and who began to receive quality water from their taps. The target is to install official connections in 160 thousand properties in the RMSP, serving 600 thousand residents.

In addition to benefiting families with better health conditions, the program offers citizenship conditions with the formalization of a proof of address, enabling the children to be enrolled in day care centers and permitting families to obtain services that require this type of document.

The initiative also helps to reduce water loss. Just with the connections made in 2017, three billion liters of water are no being longer wasted, which is equivalent to supplying 63 thousand people for a year.

Another highlight of this project is the fact that the companies that perform the services of network implementation, water connection and registration of new clients, hire residents of the communities themselves. In order to enter these communities, Sabesp negotiates individual authorizations with the city halls, due to the fact that there is a federal law which prevents the installation of sanitation systems in areas without any urban infrastructure, with environmental protection areas and private lands being prohibited.

Rational use, awareness and reuse

Like the fight against losses, the development of actions aimed at the conscientious use of water have been part of Sabesp's sustainable management guidelines for the last decade. Since 1996, Sabesp has been organizing structural improvements in public buildings, such as schools, hospitals, nurseries and prisons, in order to reduce water losses by means of the Rational Water Use Program (PURA). On adhesion, educational materials are distributed to raise awareness regarding the rational use of water and lectures and courses related to investigating leaks are held for the employees of these places.

Public sector customers who manage to reduce their water consumption by at least 10% get a 25% discount on their bill. At the end of 2017, 8,914 properties were already part of the Program.

At the same time, Sabesp has sought to develop actions and technologies to increase the reuse of effluents generated from sewage treatment for industrial use and other non-drinking applications, as a way of saving water earmarked for human use. Inaugurated in 2012, Aquapolo Ambiental, a partnership between Sabesp and BRK Ambiental, is regarded as the largest project for the production of industrial reuse water in South America, and the fifth largest one in the world.

With a current supply capacity of 650 l/s, which is expected to rise to 1m³/s, the plant supplies the Capuava Petrochemical Complex in the Greater São Paulo’s ABC region, along with three other major industries in the region. The 418 l/s volume supplied in 2017 is equivalent to the drinking water consumption of approximately 210 thousand residents. In addition to Aquapolo, Sabesp produces 131 million liters of reuse water per month at the Barueri, Parque Novo Mundo, São Miguel Paulista and Jesus Neto sewage treatment stations (ETEs), which are mainly used for urban cleaning purposes such as cleaning of the streets and the irrigation of parks and gardens.

Quality water as a priority

The quality of the water distributed complies with the parameters required by Health Ministry Ordinance 2.914/11, which governs the procedures for controlling and monitoring the quality of water for human consumption. The control of the conditions of drinking water standards is undertaken right from the moment of collection, with a total of 90 types of tests. On a monthly basis, more than 60 thousand analyzes are carried out, with the control parameters including of turbidity, color, chlorine content, coliforms and thermotolerant bacteria.

Sabesp has 16 sanitary control laboratories installed for this purpose. Most of the laboratories are accredited by the National Institute of Metrology, Quality and Technology (Inmetro). Reports on the Water Quality are sent on a monthly basis to the Ministry of Health, which makes them available to all Health Surveillance departments in the respective Municipalities in which Sabesp operates.

The customers receive the results on their bills, which provides a summary of the parameters evaluated. Sabesp has also had a team of tasters since 1996, which became a Ministry of Health requirement in 2011. The results are sent to the Water Treatment Stations in order to guide the treatment of water and possible preventive or corrective adjustments.

Note: The sums in terms of investment per project or program are shown under the cash basis.

SANITARY SEWAGE

HEALTH, QUALITY OF LIFE AND RECOVERY OF WATER RESOURCES

In 2017, actions to expand sewage collection and treatment required investments of R$ 1.2 billion and registered significant results. Over the course of the year, new ETEs came into operation and 221.8 thousand connections were made. On average, the municipalities operated by Sabesp registered rates of 90% for sewage collection coverage, 83% for collection service and 75% for the households connected to sewage treatment.

The challenges of the metropolis 

Rapid and disorderly growth, irregular occupations, illegal discharge of residential and industrial sewage, environmental degradation of preservation areas, scarce oversight on the part of the executive authorities and a high population concentration make the Metropolitan Region of Sao Paulo (RMSP) an extremely complex area for the expansion of the sanitary service. The scale of the problems and the challenges of operating in one of the world's largest urban centers is proportional to the initiatives on a grand scale large developed by Sabesp, such as the Tietê Project, which is the country's largest environmental sanitation program.

First begun in 1992, the Tietê Project seeks to contribute to the progressive revitalization of the Tietê river and its tributaries, and consequently, to improve the population's quality of life, by means of the expansion and optimization of the system for the collection, transport and treatment of sewage in the RMSP.

From its beginning up until the present time, important advances have been made in expanding the sanitary infrastructure with interventions in 29 metropolitan municipalities. Over the course of the last 25 years, approximately 4,400 km of trunk collectors, interceptors and sewage collection networks were installed, pipelines buried for the purpose of collecting the sewage generated and transporting it to the treatment plants. The volume of treated sewage leapt from 4m³/s to the current 18.3m³/s, which is equivalent to the sewage generated by roughly 10 million people. During these two and a half decades, Sabesp has invested US$2.8 billion, with R$ 411 million of this just in 2017, expanding the percentage of sewage collected from 70% to 87% and the percentage of collected sewage treated from 24% to 70%.

In 2017, the highlight of the Tietê Project, currently in its third stage, was the completion of the first phase of the construction work for the expansion of the Barueri ETE, the largest sewage treatment plant in South America. The sewage treatment plant's capacity increased from 9.5 m³/s to 12 m³/s, henceforth being able to handle the sewage of an additional 1.6 million people. As a result of this, the installed capacity of the RMSP's treatment system increased to 20.5 m³/s.

With investments of approximately US$2 billion, the third stage, which is currently underway with 64% of the work completed, supplements the actions undertaken in the first and second stages, which were carried out between 1992 and 2010. When the third stage is completed, it is expected that there will be a further leap in the levels of sewage collection and treatment, with the collection of sewage generated by more than 5 million people.

In 2017, apart from the Barueri ETE, there was also progress in the construction work on trunk sewer in the northern, western and eastern regions of the RMSP, as well as the launching of bidding processes for the installation of major pipelines and pumping stations that will benefit the capital's eastern, northern and western districts, in addition to the cities of Barueri, Cotia, Itaquaquecetuba, Osasco and Suzano.

The fourth stage of the Project was structured so as to continue with the expansion and optimization actions of the sewage systems in the RMSP. Some actions were brought forward and are in the implementation phase of the construction work, such as a 7.5 km long sewage interceptor underneath the Marginal Tietê, the trunk collectors in the area of the Vale do Anhangabaú and the Tamanduateí interceptor. When it is ready, the system will transport the sewage to the Barueri sewage treatment station. The project will benefit districts in the capital's central and southern areas, which are places with a significant degree of verticalization with collecting pipelines operating close to the limit.

All the interventions envisaged and carried out under this program have a positive impact on the rivers that run through the metropolitan region, such as the Tietê River, where there has been significant, progressive decrease in the pollution spot during the 25 years of the program. At first, the pollution extended down the river over a distance of roughly 530 km, between Mogi das Cruzes (RMSP) and Barra Bonita, in the interior. In 2017, the pollution extended a total of 130 km between Itaquaquecetuba (RMSP) and Cabreúva, in the interior.

Treatment of non-domestic sewage

The result of a partnership between Sabesp and Estre Ambiental, Attend Ambiental has been operating since 2014 in the treatment of the Metropolitan Region of Sao Paulo's non-domestic sewage and is situated alongside the Barueri ETE. The company offers pre-treatment of sewage, as required by the environmental legislation, making it advantageous to outsource this process. In 2017, the company treated 1.94 million m³ of non-domestic sewage, which was later forwarded to the Barueri ETE for conventional treatment. This volume is 3% higher than that received in 2016, on account of the growth in the customer portfolio, as well as due to the increase in rainfall, which affects the volume of slurry from landfills.

Recovery of urban rivers and water supply sources

In addition to the expansion of the sanitation infrastructure in the Greater São Paulo area and in the state's interior, the decontamination of the Tietê river and the improvement of the Metropolitan Region of Sao Paulo's (RMSP's) water supply sources are also a reflection of the actions that have been taken in its urban tributaries under the “Córrego Limpo” (Clean Stream) Program.

Over the course of a ten-year period, the Program has helped depollute 151 streams, benefiting some 2.5 million people. A total of R$ 8 million was invested in the program in 2017. Under the Clean Stream program, Sabesp is responsible for diagnosing illegal sewage discharge, implementing extensions of sewage networks, collectors and connections, monitoring the water quality of the depolluted streams, and undertaking maintenance work and adjustments to the existing networks when anomalies are detected. While the city's administration takes action in relation to the evacuation of irregular areas, carries out the registration of families in housing programs and imposes fines on properties that are not connected to the networks.

The maintenance of the quality of the water body depends on the awareness of the local community, which is developed on the basis of meetings between Sabesp's representatives and the residents and social organizations of the basins of the streams benefited. The work uses social approach techniques based on a Collaborative Governance methodology assembled by Sabesp together with Cebrap (the Brazilian Analysis and Planning Center). 65 meetings were held with communities in the RMSP during 2017.

These actions are in line with the Community Participation Program, that was carried out almost two decades ago, in order to give priority in terms of the service to low-income groups or clients, with the dissemination of social and environmental practices, such as combating losses, collective clean-up efforts in connection with rivers and streams, planting trees and other activities. Meetings are held at regular intervals with community leaders to present the actions, undertake surveys of the population's expectations, aligning the Company's investments and actions to the needs of the different regions.

In addition to the expansion of the water infrastructure, the preservation and environmental recovery of the areas surrounding the water supply sources are fundamental initiatives to ensuring the continued availability and quality of the water that supplies the population. This is a complex undertaking that requires public sector participation by means of efficient housing policies, avoiding the growth of the so-called "informal city", particularly in areas of environmental protection, hillsides, valley bottoms, streams and floodplains.

In this context, Sabesp and the city of São Paulo's administration joined forces for the Mananciais (Water Supply Sources) Program, with a view to recovering the basins of two of the RMSP's main "water tanks", namely the Billings and Guarapiranga reservoirs. In 2017, the sum of R$ 20 million was invested in the Program.

Since 2011, actions in the Billings reservoir basin have been reinforced by Pró-Billings, which is aimed at increasing the collection of sewage and forwarding it to the ABC ETE for treatment. After a stoppage on account of the water crisis, the Program was resumed in 2017 and the prediction is that the sum of US$123 million will be invested in the program by 2020, with its own resources and financing from the Japan International Cooperation Agency (JICA) and the BNDES (Brazil's National Bank for Economic and Social Development).

In 2017, investments in sanitary sewage in the RMSP came to a total of R$ 769.5 million.

On the path to universalization

In the coastal region and in the state's interior, Sabesp is the concessionaire responsible for 330 municipalities, which represent a total of 9.4 million people. In 2017, the Company invested R$ 393.0 million in sewage collection and treatment services in the region.

As part of the Company's ongoing efforts to universalize the collection and treatment of sewage in the state's interior, 11 ETEs were delivered in 2017. As a result of this, 98% of the savings were connected to sewage treatment at the end of the year.

The benefit of this work can clearly be seen, for example, in the Paraíba do Sul river, which in 2018 began to contribute to the water security of the RMSP, with the conclusion of the interconnection of the Jaguari-Atibainha reservoirs.

The experience of the Vale do Paraíba region symbolizes the recent changes that have taken place in all of the State's regions, the rivers in which have benefited from the expansion of the sanitary infrastructure, largely reflecting the improvement in the waters of the Tietê River throughout its entire length.

Another example, the Jundiaí River, which in the early 1980s was one of the most polluted rivers in the State of São Paulo, began to contribute to the supply, after conventional treatment, with the delivery of new sanitation facilities in the region, namely the Campo Limpo/Várzea ETE in 2013 and the Itupeva ETE in 2014.

In March 2017, Sabesp inaugurated a new catchment station in the municipality of Jundiaí to serve 117 thousand inhabitants of Várzea Paulista. All of these cities are located in the region that has the lowest water availability in the State, with a mere 104 m³ per inhabitant per year.

Progressive improvement can also be seen in the Vale do Ribeira region, where Sabesp's construction projects have allowed the average sewage collection rate to jump from 88% in 2011 to the current figure of 95%, a result which puts the Paranapanema river, a river that separates the States of São Paulo and Paraná, in one of the best water quality classifications in the country.

In the Baixada Santista region, the Onda Limpa (Clean Wave) Program commemorated its 10th anniversary with important advances in public health and the quality of life of the residents. Since the program first got underway, in 2007, the coverage with sewage collection has jumped from 53% to 77%, and sewage treatment has already reached the 100% level.

During this first phase of the program, which is scheduled to be completed in 2018, the Company invested in the construction of infrastructure for sewage treatment in this region, and is focusing on expanding coverage of the services and supply of collection networks. In 2017, a total of R$ 71 million was invested.

In the second phase of the Program, which is scheduled to start in 2019, the plan is to increase the collecting networks, domestic connections, pre-conditioning stations, and to expand and improve the ETEs.

In the state's northern coastal, 71% of the formal area has a sewage network and 100% of the sewage collected is treated. Operational improvements were made in 2017 to the ETEs with the installation of aerators and a telemetry system, resulting in a better quality of treated sewage. 

Engagement that generates result

When bringing the sewage collection system into a new area, especially in low-income areas, Sabesp carries out a social diagnosis in order to assess the conditions of the families, along with individual visits and socio-educational talks. The information contributes to the planning and structuring of the project and allows the selection of families that are beneficiaries of programs, such as Se Liga na Rede (Connect To The Network) and the social tariff, in addition to subsidizing the planning of social policies in other areas of public service.

Despite the investments in the expansion of the collection networks, the lack of economic conditions for customers to connect sanitary facilities to Sabesp's pipelines means that sewage continues to be disposed of in an irregular way. To deal with these situations, at the end of 2011, Sabesp and the State Government launched the Pro-Connection Program, the trade name of which is Se Liga na Rede (Connect To The Network). Under this Program, the installation costs of the interconnection are fully paid by the government (80%) and by Sabesp (20%). By 2017, internal adjustments and connections were carried out in 23.5 thousand residences which had a family income of up to three minimum wages.

The granting of the social tariff is one of the actions directed at low-income families. In 2017, 390 thousand households paid the symbolic sum of about R$ 16 for the use of water and sewage services (up to 10 m³).

Proximity with the community opens up a relevant channel for dialogue with residents and encourages the involvement of local leaders, who help spread information regarding the importance of implementing the residential connection, the correct use of the collecting networks and the subsequent benefits both for people as well as for the environment.

For those who live in urban areas and have a property on a street that has collectors, sewage connection is compulsory, with it being the responsibility of city hall to undertake the relevant inspections. In 2017, Sabesp registered about 170 thousand properties with irregular connections and regularized more than 22 thousand cases. The partnership with the judiciary has yielded good results in the formalization of agreements for the regularization of properties.

Awareness begins in the home

In order to reduce the impact of water and soil pollution caused by the improper disposal of frying oil and to warn about the damage caused to sewage pipes, ten years ago Sabesp created the Frying Oil Recycling Program (PROL). The oil is collected at regional offices, commercial agencies or partner establishments and forwarded to recycling companies and transformed into biodiesel, paint, lubricant, glycerin, detergent, soap, and other by-products. About 500 thousand liters of oil was collected in 2017. It should be remembered that the disposal of plastic containers, cigarettes, Q-tips and other objects in toilet also cause blockages in the pipes and can result in sewage flowing back into homes.

Note: The investment sums per project or program are shown on a cash basis.

ECONOMIC AND FINANCIAL MANAGEMENT

RESULTS REVERSED INTO GAINS FOR SOCIETY

In the wake of the severe water crisis during the two years 2014-2015, when Sabesp had to cope with reduced revenues, and consequently the deadlines for a series of investments in sewage treatment were extended in order to make room to bring forward water security projects, in 2017 the Company continued to make progress in terms of recovering the financial metrics of the pre-crisis period.

Over the last decade Sabesp has been meeting society's demands for better sanitation conditions with a marked increase in investments. Between 2011 and 2016, it invested approximately R$ 3.0 billion a year, which represents roughly 30% of all the investment made in sanitation in Brazil. However, there is still a very high level of demand, particularly for sewage collection and treatment.

In order to meet the challenge of mobilizing resources for investment, the Company has combined its own resources, resulting from the tariffs charged for the services rendered, together with third-party resources obtained by means of debt. However, the possibilities of obtaining resources to efficiently finance the investments necessary for the universalization of services are limited at the present time.

One of the constraints is internal - the current level of the Company's indebtedness, which although conservative, does not permit any significant increase - and the other one is external, the country's fiscal situation, which has reduced the availability of funds in terms of long-term domestic financing from public sector agencies, such as the BNDES and the Caixa Econômica Federal.

In light of these circumstances and given society's continuous demands, on September 15, 2017, State Law 16.525 was enacted, which authorized the Government of the State of São Paulo to establish a joint stock company that will exercise share control of Sabesp, while ensuring that the State's Government retains a majority of the voting capital of the parent company.

The company, which is yet to be set up by the Government, is an alternative way of leveraging the Company's investments in the short term, without undermining its economic-financial sustainability, and will help the Government to implement public policies aimed at basic sanitation.

This new company will be able to accept private shareholders with a long-term investment profile and interest in the infrastructure sector and, provided that state control is maintained, may issue new shares to be acquired by private investors, with the corresponding proceeds being earmarked for investment in basic sanitation.

The proposed model will enable the maintenance of Sabesp's program agreements, without altering the relationship and negotiation conditions between Sabesp and the municipalities, will maintain the access to financing by multilateral organizations, and will also respect the rights of Sabesp's minority shareholders.

Sabesp is of the opinion that with the corporate restructuring and sound economic and financial management, it will be able to fulfill, more quickly and in a better way, its mission of "providing sanitation services, helping to improve the quality of life and of the environment" as well achieving its vision of "being a world reference in the provision of sanitation services, in a sustainable, competitive and innovative way, with a focus on the customer."

Economic-Financial Performance

In 2017, the Company posted net income of R$ 2.5 billion, against R$ 2.9 billion registered in 2016.

History of Income

Net operational revenue (including construction revenue) came to a total amount of R$ 14.6 billion, a 3.6% increase over the previous year.

History of Net Operational Revenue

Gross operating revenue related to the provision of sanitation services (excluding construction revenue) totaled R$ 12.2 billion in 2017, which is an increase of R$ 1.1 billion, or 9.9%, by comparison with the R$ 11.1 billion figure registered in 2016.

The positive variation in 2017 can mainly be attributed to (i) the 8.4% tariff adjustment since May 2016, (ii) the 7.9% tariff repositioning since November 2017, (iii) the 4.3% increase in the total volume billed, (iv) the granting of bonuses in 2016 in the sum of R$ 187.4 million in the context of the Water Reduction Incentive Program, which ended in April 2016; and (v) due to the lower recognition of estimated losses with revenue from sales on the wholesale market in 2017, in the sum of R$ 125.1 million, due to the receipt that occurred during the period, mainly from the municipality of Guarulhos.

In the comparison with 2016, it should also be borne in mind that the increase was reduced by the R$ 224.7 million registered in 2016, in relation to the application of the Contingency Tariff, which ended in April of that year.

Construction revenue decreased by R$ 582.0 million, or 15.6%, when compared to 2016. This variation is mainly due to the lower investment that was made in the period.

History of Gross Operational Revenue

Total volume of water and sewage billed ⁽¹⁾ by category of use - million m³

(1)     Not audited

(2)     Wholesale includes the volumes of re-use water and non-domestic sewage

Volume of water and sewage billed ⁽¹⁾ by region - millions of m³

(1) Not audited

(2) Consisting of the coastal and inland regions

(3) Wholesale includes the volumes of reuse water and non-domestic sewage

In 2017, costs, administrative and commercial expenses and construction costs showed a 0.3% decrease (R$ 31.4 million). Disregarding the effects of construction costs, the increase was 7.7% (R$ 539.5 million). The share of costs and expenses in net revenue was 72.9% in 2017, by comparison with the 75.7% figure observed in 2016. For further information regarding the composition and changes in costs and expenses, see the Earnings Release, which is available on the Company's website at www.sabesp.com.br/investidores, item Financial and Operational Information in the top menu.

Adjusted EBITDA exhibited a 15.3% increase, rising from R$ 4,571.5 million in 2016 to R$ 5,269.3 million in 2017, and the adjusted EBITDA margin came out to 36.1%,against the 32.4% result the previous year. Excluding the effects of construction revenues and costs, the adjusted EBITDA margin shows 45.4% in 2017 (43.3% in 2016).

   History of Adjusted EBITDA and Adjusted EBITDA Margin

Reconciliation of Adjusted EBITDA² (Non-accounting measures)

R$ million

Investments

In 2017, the total amount invested by the Company was R$ 3.4 billion, including R$ 866 million in relation to the São Lourenço PPP, also reflecting the prioritization of investment in water supply infrastructure and water security.

The table below gives details of the investments made, broken down between water, sewage and the region:

Note: Does not include the commitments assumed under the program agreements (R$ 121 million).

For the period from 2018 to 2022, the Company plans to directly invest roughly R$ 17.3 billion, with R$ 7.1 billion of this being in water and the remaining R$ 10.2 billion in sewage collection and treatment:

In this period, as can be seen, the priority in terms of allocation of resources will be on the sewage segment.

Indebtedness

In 2017, total debt remained stable at approximately R$ 12.1 billion. The Company repaid R$ 1.2 billion of debt during the year, while fund raised totaled R$ 1.0 billion.

The company's active management of its debt enabled Sabesp to reduce its relative indebtedness level, as demonstrated by the "Total Adjusted Debt/Adjusted EBITDA" ratio. This ratio which is mentioned in the Company's debenture issues (the 15th, 17th and 20th Issues), remained virtually stable at 2.27 times, as shown in the graph below. This means that Sabesp has returned to the debt levels it exhibited in 2013, the year before the water crisis began, as well as maintaining this index below the 2.5-times reference level, a historical level that the Company uses as a guideline for the aforementioned financial ratio.

In June 2017, the Company repaid the full amount of the balance of its 19th Issue of Debentures. In July, there was a new issue of Debentures (the 21st Issue).

The Company's foreign currency debt remained at a similar level to that seen in the previous year, of close to R$ 5.7 billion, equivalent to 46.7% of the total debt. Similarly, the Real/US dollar exchange rate showed a lower level of volatility, ending 2017 at R$ 3.3080, by comparison with the R$ 3.2591 FX rate observed at the end of 2016, which translates into a 1.50% devaluation in the Real. It should be stressed that Sabesp does not use hedging instruments, and the diluted payment flow and long-term maturities of the foreign currency denominated debt enables the reduction of exchange rate risk, whilst at the same time obtaining the benefits from the low cost of the aforementioned debt.

It should be borne in mind that, in its 21st Issue of Debentures, the Company began its migration from its above mentioned financial leverage indicator (covenant) to the "Adjusted Net Debt/EBITDA" ratio, with a 3.5 times limit. The difference in relation to the previous covenant arises from the deduction, from the total debt, of the amount in relation to the Company's cash at the time of measurement. This change seeks to align the indicator with market practice, which for the most part uses the net debt ratio. Up until such time as the oldest debt issues, which make use of the total debt indicator, reach maturity, the Company will coexist with the two indicators. This new indicator has exhibited the following behavior in recent years:

With regard to the company's credit risk classification, notwithstanding the favorable development in the indebtedness ratios, not all the rating agencies have taken this into account in the Company's credit rating, since the aforesaid rating continues to be negatively affected by Brazil's risk classification, as well as the credit rating of the State Government, which is Sabesp's majority shareholder. While Fitch Ratings upgraded the Company's credit rating in local currency in May 2017, S & P downgraded the company on the global scale in January 2018 due to the fact that the country's rating had been downgraded.

The Company currently has the following risk classifications (credit rating):

Sabesp benefits from an extended debt repayment profile at financing costs that are compatible with its investment cycle, particularly those granted by official domestic banks and multilateral lending agencies.

The Company has adequate access to domestic and international credit markets, maintaining solid relationships with public sector banks, particularly the National Bank for Economic and Social Development (BNDES) and the Caixa Econômica Federal (Federal Savings and Loans Bank), as well as multilateral agencies such as the IADB (Inter-American Development Bank)), IBRD (International Bank for Reconstruction and Development) and JICA (Japan International Cooperation Agency).

With regard to third-party loans, as a State-controlled company, the Company is subject to the rules and limits imposed on the national financial system related to the tightening of credit to the public sector.

Fundraising

In 2017, the Company contracted a sum of R$ 648 million, used to restore cash, refinance financial commitments and finance its investment plan.

Part of the resources, in relation to the 21st issue of debentures, in the sum of R$ 500.0 million were disbursed in 2017, distributed in two series. The first of these with maturity in June 2020, remunerated at the Interbank Deposit Rate plus an interest rate of 0.6% per year, while the second of these is to mature in June 2022, remunerated at Interbank Deposit Rate plus an interest rate of 0.9%, both with six-monthly payments of interest.

The Company also signed a financing agreement for the sum of approximately R$ 148 million, earmarked for the undertaking of construction to make use of the waters of the Itapanhaú River for supplying the Metropolitan Region of São Paulo, to be disbursed over the course of the project's construction. This financing agreement was selected on an extraordinary basis under the scope of the Ministry of Cities' Selection Process, with the Caixa Econômica Federal (Federal Savings and Loans Bank) as the financial agent and the funds coming from the FGTS (Government Severance Indemnity Fund for Employees). The conditions of the agreement are as follows: an interest rate of 6.00% p.a., a Risk Rate of 0.50% p.a. and a Management Fee of 1.40% p.a., indexed by the TR - Referential Rate. The grace period is 22 months and repayment is over 240 months.

In addition, at the start of 2018, the Company made its 22nd Issue of Debentures in the amount of R$ 750 million, in three series. The first of these, in the sum of R$ 100 million, with maturity in 3 years and remunerated at the Interbank Deposit Rate + 0.58% p.a., the second of these, in the sum of R$ 400 million, with maturity in 5 years and remunerated at the Interbank Deposit Rate + 0.90% p.a., and the third of these, in the sum of R$ 250 million, with maturity in 7 years and remunerated by the IPCA + 6.00% p.a.

Further information about the Company's sources of financing is available in Note 16 to the Financial Statements.

Stock market

The company's shares ended the year 2017 at a price of R$ 34.33, which was a 19.24% increase against the end of the previous year. During the same period, the IBOVESPA registered a 26.86% appreciation. The main events that influenced the performance of Sabesp's shares were the return to normal of the water conditions, the Real's stability against the US dollar, the tariff revision processes and the Company's possible capitalization, as well as the approval of the collection of the Regulation, Control and Inspection Fee established by Arsesp (Sanitation and Energy Regulatory Agency of the State of Sao Paulo.

Sabesp's ADRs ended the year with a 20.39% appreciation, being quoted at US$10.45, while the Dow Jones index rose 25.1% and the S&P 500 index rose 19.4%.

The Company's shares participated in 100% of the B3's trading sessions and the annual financial volume traded was R$ 12.6 billion, a 3% drop by comparison with 2016. In the US market, the Company ended the year with 136.8 million ADRs outstanding, and an annual financial volume of US$4.4 billion, which was 2% lower than the previous year. The equity value of the shares at the end of the year was R$ 25.62, which represents a 13.6% increase against 2016.

In 2017, Sabesp continued to be included in the B3's main indices and continued to be monitored by the market's principal financial institutions.

Tariffs and Regulation

Sabesp's second ordinary tariff review was scheduled for April 2017, however, due to delays in hiring a consulting firm to assist ARSESP with this process and the need for further information in relation to Sabesp, the Agency decided to alter the schedule and divide the process into two separate stages.

The first (preliminary) stage was completed in October 2017, with the publication of Final Technical Note 004/2017, which set the basis for calculating the regulatory remuneration for the first stage at R$ 40.3 billion, increased the weighted average cost of regulatory capital (WACC) from 8.06% to 8.11% and set the preliminary P0 at R$ 3.6386/m³ (in April 2017 prices), which resulted in a tariff repositioning of 7.8888% for bills issued from November 10, 2017 onward.

The second (final) stage of the tariff review got underway in January 2018 with the publication of Arsesp Resolution 780/2018, which established the schedule for the final stage. During this stage, we highlight that the Agency is now considering the possibility of including the portion related to the transfers to municipal funds, such as the transfer to São Paulo's Municipal Environmental Sanitation and Infrastructure Fund, in the average tariff. In March 2018, the Agency released Preliminary Technical Note 0004/2018. The proposal is in the Public Consultation and Public Hearing stage during the period between 03/27/2018 and 04/17/2018. The final result of the Tariff Review is scheduled for May 10, 2018, under Resolution 788/18. The details regarding the tariff review process and the Resolution published by Arsesp can be found on the Company's Investor Relations website.

In addition, on November 10, 2017, Sabesp also started to charge clients who reside in the municipalities regulated by Arsesp, the 0.5% Regulation, Control and Inspection Fee established by Resolution 406/2013 issued by the agency. This rate was initially established by State Supplementary Law 1.025/2007 and has already been paid by Sabesp to ARSESP, but has not yet been passed on to the consumer.

Related Party Transactions

In October 2017, SABESP and the Metropolitan Water and Energy Company (EMAE) signed the 1st Amendment to the Private Transaction Instrument and Other Covenants, which excluded the suspensive condition related to the need for approval of the Instrument by the general meeting of EMAE's shareholders, ending the litigation involving the use of the Guarapiranga and Billings reservoirs. For more information about the transaction, see Note 10 (b).

Advances in the negotiations of the debit balances of the permissionaire municipalities

Sabesp supplies water on a wholesale basis to five municipalities in the RMSP: São Caetano, Mogi das Cruzes, Guarulhos, Mauá and Santo André, and the municipalities of Mauá and Santo André continue to record a significant history of default.

Since 2015 Sabesp has stepped up its efforts to reestablish commercial relations with the municipalities that are in default, in order to recover the amount owed and to ensure the regularity of the future flow of payments.

No progress has been made in the negotiations with Mauá and the Memorandum of Intent, which was signed in 2015, was terminated in 2016.

Negotiations with Guarulhos and Santo André, which had also been interrupted in 2016, were resumed in April 2017 and May 2017, respectively, with the formalization of new Memorandums of Intent.

In relation to the municipality of Guarulhos, Sabesp and the municipality's Autonomous Water and Sewage Service (SAAE) have indicated their intention to sign (i) a judicial agreement for payment by instalments of the municipality's debt with Sabesp, and (ii) an interdependence agreement, to regulate the supply of water by Sabesp on the wholesale market.

The legal agreement will provide for payment of the debt in 480 monthly installments, with interest of 0.5% per month and monetary correction by IPCA (Amplified Consumer Price Index), plus a 30% discount on R$ 2.9 billion of the municipality of Guarulhos' debt, linked to payment over the course of the installment period.

The agreement for the wholesale supply of water will provide for a guarantee of payment to Sabesp by means of a statutory lien over the SAAE's receivables, with automatic segregation of the amounts owed to Sabesp by the SAAE's centralizing payment bank, and a 20% reduction over the monthly amount billed for the wholesale water supply services, as a result of the establishment of the guarantee and the automatic payment.

The implementation of the above described agreements depends on the prior approval of Sabesp's Board of Directors, as well as other approvals to be determined by each party and obtained before any binding documents are signed. Since 2017, the municipality has begun to make payments of between 80% and 100% of the invoices.

The Company signed a memorandum of intent with the municipality of Santo André in May and studies and evaluations have been underway since that time, with a view to rebalancing the commercial relations and the settlement of the municipality's debt with Sabesp.

In addition, in October, the administrative investigation filed by the Administrative Council for Economic Defense (CADE) at the request of the Municipal Environmental Sanitation Service of Santo André (SEMASA), and to which a similar request made by the municipality of Guarulhos had been attached, was shelved due to lack of evidence of antitrust violation allegedly practiced by Sabesp in the supply of water on the wholesale market.

Dividends

According to the Company's Bylaws, the common shares are entitled to the mandatory minimum dividend, which corresponds to 25% of the year's net income, obtained after deductions determined or permitted by law and which may be paid in the form of interest on equity. In 2017, Sabesp provided a credit for the dividends, in the form of interest on equity in the sum of R$ 823.5 million, in relation to the year 2016, which translates into roughly R$ 1.2048 per common share and results in a dividend yield of 4.2%.

With regard to the year 2017, the Board of Directors considered the proposal to pay interest on equity in the amount of R$ 703.9 million, which corresponds to R$ 1.0298 per common share and a dividend yield of 3.0% with payment scheduled to get underway on June 26, 2018.

ENVIRONMENT 

ENVIRONMENTAL MANAGEMENT, INNOVATION AND TECHNOLOGY FOR THE BENEFIT OF SUSTAINABILITY

Basic sanitation has sustainability at its heart, since the recovery and efficient management of its main resource has a positive impact on public health, on the quality of people's lives and on the socioeconomic development of the area served. At Sabesp, this activity is backed up by a set of procedures that combine the environmental management with the business guidelines.

Supported by an Environmental Policy, the Company aims to achieve the integrated development of its activities by means of corporate programs focused on operations. For this task, in 2007 an environmental corporate area was set up, along with Environmental Management Centers (NGAs) at the Business Units (UNs), where the environmental management operational agents operate.

These programs are disseminated throughout the entire area operated by means of the NGAs, ensuring the uniformity of procedures and information, and based on two pillars: namely environmental compliance and changing environmental culture.

In 2017, investments allocated to corporate environmental management programs, as well as to the Rational Water Use Program (PURA), among other one-off initiatives related in this document, add up to a total sum of approximately R$ 19.9 million. In order to ensure the continuity of the environmental management programs and the achievement of the strategic objectives, environmental corporate accounts were established, exclusively for this purpose.

Other investments and expenses associated with environmental protection are included in the total amount of operating expenses and investments informed in this report, due to the direct relationship between the Company's the environmental activities and its core activity. As an example, highlight goes to the investments in sewage, effluent monitoring, payment for the use of water from federal and state bodies of water, maintenance of reserves in protected areas, maintenance of forest nurseries, effluent reuse initiatives, combatting water losses, environmental education actions and training in the environment among other initiatives.

Environmental Management System and ISO 14001 Certification

In 2017, on the operational front, Sabesp continued with the progressive implementation of the Environmental Management System (SGA) at the ETEs and ETAs. Structured in 2009, the SGA is based on the main guidelines of ISO 14001, with a focus on minimizing accident risks and on generating environmental liabilities, in addition to encouraging the development of preventive and sustainable actions, with an improvement in the efficiency of the operation and of the processes at the treatment stations.

Since 2015, Sabesp has been working on the SGA with a mixed model, with ISO 14001 being applied to a limited scope of certified stations, and for the other stations, the company uses its own environmental management model (called SGA-Sabesp), without certification objectives.

SGA-SABESP was developed with a view to streamlining the process of implementing this system at the various business units, with its main emphasis being on facilitating the incorporation of environmental management tools into the operational routine, reinforcing the process of cultural change that is already underway at the Company.

Over the course of 2017, the SGA was implemented at 48 stations, with ISO 14001 certification being maintained at another 35 stations. There are currently 177 stations operating according to principles of best environmental practices, with the prospect of the SGA being implemented at all the stations by 2024.

Training multipliers for the protection of the environment

Based on the Environmental Policy, Sabesp's environmental actions are also directed towards the dissemination of the message of sustainability and of knowledge about the correct use of the installed sanitation structure. And it counts on the involvement of clients, communities and the consolidation of partnerships with municipal governments, schools and non-governmental organizations associated with the environment, in order to promote initiatives that encourage mobilization for preservation and respect for the environment.

The Corporate Environmental Education Program (PEA Sabesp) includes activities of various types such as talks at schools, theater plays, tree plantations, competitions, activities on commemorative dates such as World Water Day, Environment Day and Tree Day, collective efforts for the cleaning-up of beaches and rivers, the release of fingerlings and monitored visits to ETEs and ETAs. In 2017, PEA Sabesp gave more than 1,000 environmental education talks and received almost 1,500 monitored visits to the Company's facilities, catering to roughly 65.3 thousand visitors.

Aimed primarily at environmental education, Sabesp also maintains a virtual space (www.clubinhosabesp.com.br) with games, characters and savings tips to encourage children and youngsters aged from six to thirteen to take care of water.

For the internal public, there is a corporate environmental training program with specific courses aimed at the operational areas, managers and leaders, addressing issues related to the management of water resources, environmental legislation and environmental management practices in the operation, among others, with more than 1,700 people receiving training in 2017.

In defense of the efficient management of water resources

Sabesp participates in and acts in the various levels of the National Water Resources System. On the National Council of Water Resources (CNRH), which is the highest body in the System, it occupies a seat on the Council and in three of its technical chambers. In the State Water Resources Council - CRH, Sabesp has representation in all seven technical chambers. The Company also takes part in all of the State of São Paulo's 21 Water Basin Committees and in the 4 Interstate Committees with coverage in the State of São Paulo, giving priority to the activities in the chambers that deal with Planning, Sanitation, Environmental Education and Charging for Water Use. In total, there are 159 employees operating in a coordinated way, as institutional representatives.

In 2017, the Company disbursed R$ 60.8 million by way of payment for the use of the water resources of rivers under federal and state domain, in the water basins of the Paraíba do Sul, Piracicaba, Capivari and Jundiaí, Sorocaba and Médio Tietê rivers, of the rivers in the Baixada Santista region, and those of the Alto and Baixo Tietê, Tietê Batalha, Tietê Jacaré, Ribeira de Iguape and of the rivers in the Litoral Sul, Pardo, Baixo Pardo and Grande, Sapucaí Mirim and Grande, and Mogi-Guaçu regions. This is an important source of financing for the actions planned by the Committees for the recovery and preservation of water resources. The start of charging in the State's other river basins is expected to get underway in 2018.

With regard to the environmental permits and licenses, the existing operating complex is the subject of the Corporate Programs for Obtaining and Maintaining the Grants of Right of Use of Water Resources and Environmental Permits for ETEs, ETAs and Sewage Pumping Stations.

In this context, it should be noted that the development of activities related to the implementation of construction projects and interventions goes through a process of obtaining permits and environmental licenses, in accordance with the legislation that is in force. In order to meet the current and future environmental compensation requirements, Sabesp has developed and is implementing a corporate program that includes the planting and maintenance of 1 million seedlings of native species over a ten-year period. The work has already been initiated and is part of the Nascentes Program which is described in the chapter "Water Security for the Present and Future" of this report.

Climate change and management of greenhouse gas emissions

Climatic conditions and extreme events have a direct impact on sanitation activities. Therefore, Sabesp's environmental management is focused on technical training, quantification of greenhouse gas emissions and initiatives to reduce these emissions, as well as making adaptations to the current climatic conditions.

The Company has developed the Corporate Program for the Management of Greenhouse Gas (GHG) Emissions, which results in the preparation of annual inventories for the measurement of the aforesaid emission and the promotion of awareness activities in relation to climate issues. These initiatives are in alignment with the responsibilities established in the guidelines and requirements of the State Policy on Climate Change (PEMC).

In 2017, Sabesp completed its 10th corporate GHG inventory, which showed total emissions of 1,979,399 tCO2 and of greenhouse gases in 2016, where it can be observed that sewage collection and treatment activities remain the main sources of emissions (89% of the total), followed by electricity consumption as the second largest source, contributing 9% of the total amount.

New technologies: efficiency, cost and sustainability

From the innovation standpoint, Sabesp relies on initiatives that focus on the development of technology, with a view to increasing operational efficiency, reducing costs and reducing minimizing environmental impact, such as the purchase of more energy-efficient equipment, the installation of "mini-hydroelectric power plants" installed in the water pipes, the installation in the pipes of small turbines that recharge using the flow of water to feed the telemetry system that monitors the performance of the pressure reducing valves.

Since the first quarter of 2018 there has been another project under way at Franca's ETE, which has had a positive impact on reducing costs and cutting greenhouse gas emissions: part of the fleet is being supplied by the biomethane generated from the purification of the biogas resulting from sewage treatment. This technology is the result of a technical cooperation agreement with the German Fraunhofer Institute and has a total cost of R$ 7.3 million.

In addition to these initiatives, Sabesp maintains the Sabesp Fleet Renewal Program, an action which has been in place since 2011 that is focused on the replacement of light vehicles that have been in use for more than 7 years and heavy vehicles that have been in use for more than 20 years, which also helps reduce greenhouse gas (GHG) emissions. In addition to this program, Sabesp complies with governmental guidelines regarding the use of ethanol, a renewable fuels, for flex vehicles and Diesel S10 for heavy vehicles.

As well as the environmental importance, the economic benefits and modernization of management generated by the Fleet Renewal Program, such as reducing fossil fuel consumption, savings in terms of maintenance costs and documentation, and revenue obtained from the auctions for the sale of the replaced vehicles. As a result of the program the fleet's daily availability achieved a 99.5% level, increasing the productivity of operational activities. 

Research and innovation

The actions developed by the Company are based on the strategic guideline "Innovation and Technology" and are designed to encourage the creation, adoption and dissemination of new solutions that add technology and efficiency to the water and sewage services and, often working in conjunction with educational institutions, research entities and companies with state-of-the-art technology.

Structured with a Superintendency focused on technological development, in 2017 the Company invested about R$ 10.7 million in projects with its own funds, raised with development entities or financed by partners. R$ 37 million was invested in the last three years.

One of the important partnerships resulted in the Cooperation agreement between Sabesp and FAPESP, aimed at financing projects in Higher Education and Research Institutions in the State of São Paulo. Among the research partner institutions are the following: the University of São Paulo - USP, the Aeronautics Technological Institute - ITA, the Federal University of São Paulo - UNIFESP, the National Institute of Space Research - INPE and the State University of São Paulo - UNESP.

The Agreement provides for non-refundable financing of R$ 50 million, split equally between Sabesp and FAPESP. Initiated in 2009, the partnership has already yielded 17 projects, nine of which have been concluded, with an investment of R$ 5.2 million, with eight other projects being approved and having had their terms of agreement signed in 2015. Investments of R$ 7 million and an execution time of 42 months are predicted for these projects.

Among the projects under study, the highlight is the development of a national signal correlator optimized for the location and detection of leaks in the Company's underground water ducts, together with effective devices for training leak detection teams which are being developed together with researchers from UNESP.

By means of a Financing Agreement that was signed in 2015 with the Brazilian Innovation Agency - FINEP, Sabesp is enabling the implementation of its "Technological Innovations Plan for Sanitation". With a forecast 30-month execution period and a cost of R$ 60 million, the Plan is made up of four projects: a system for the production of reuse water for urban and industrial use, which is being implemented in the RMSP; biofiltration units for controlling odor from sewage pumping stations, which is also to be implemented in RMSP, ETE sludge drier by means of Solar Irradiation, which is being implemented in the municipality of Franca.

Technical cooperation agreements are another way to promote the development of technologies on themes that are a priority for Sabesp, such as reduction of losses, energy efficiency and alternatives for the treatment and disposal of sludge.

In 2016 an agreement was signed with a representative of the Danish company Liqtech to evaluate the technology of ceramic membranes for ultrafiltration of silicon carbide for the recovery of waste water from water treatment plants. Tests were carried out at a number of ETAs in 2017, to verify the technical and economic viability of the material. In 2017, the Deed of Undertaking was signed with the Federal University of Minas Gerais, by means of its through its Sanitary and Environmental Engineering Department DESA/UFMG, with a view to continuing the project "Evaluation of the potential for use of biogas generated in anaerobic reactors in the treatment of domestic sewage in Brazil" at Várzea Paulista's Sewage Treatment Plant. Measurements and assessments of the biogas production are underway.

In 2017 we also signed a Memorandum of Understanding with ino3W Ltd. (ino3W community water system) for the specific purpose of swapping knowledge and experience between the parties, with a view to an possible partnership for technological development. This partnership aims to share information in relation to innovative technologies, with the participation of the world's major sanitation companies, enabling the exchange of knowledge, validation of technologies, development and implementation of innovations and subsequent placing in the market.

At the Parque Novo Mundo sewage treatment station, in the city of São Paulo, a study is underway to replace the current complex of blowers with machines that consume 23% less energy and increase air production, in order to meet the expected increase in demand for treatment and the final quality of treated sewage. Contracting is also expected to take place in 2018.

 Photovoltaic generation is another alternative that is being studied. In this context, a study is underway for the implementation of photovoltaic power plants in a number of sewage treatment ponds, making it possible to achieve savings of between 10% to 20% in the amount of electricity consumption. This project, which is in the phase of structuring the technical package, will be contracted in 2018.

Disposal of waste

The final destination of the solid waste from water and sewage treatment systems has been one of the areas of greatest concentration of Sabesp's studies and research in the search for economically viable and environmentally sustainable solutions.

At ETE Barueri, which is one of the largest sewage treatment plants in Latin America and which accounts for more than half of all the sewage volume treated by the Company in the RMSP, a pilot system for the thermal treatment of sludge using plasma technology is in the process of being implemented. Under this process the sludge is subjected to high temperatures (of around 1500°C) and at the end of the system an inert vitreous residue is generated with a drastic reduction of the initial volume and with the possibility being reutilized for civil construction.

Also in Barueri, the project entitled Waste to Energy Barueri provides for the thermal treatment of sludge and energy utilization of biogas and, if possible, sludge. The energy potential will be used for the sludge treatment process itself as well as to operate the ETE itself.

At plants in the interior and in the coastal region, sludge drying initiatives by means of solar irradiation are under development. All these projects also contribute to avoiding operational costs and greenhouse gas emissions, to the extent that they reduce the need to transport waste to landfills. In some cases, the process is associated with the implementation of composting systems, using, for example, pruning debris from trees and eucalyptus bark, with the compost produced being used in agriculture.

In the administrative areas, Sabesp implemented the Sabesp 3Rs Program with the aim of structuring the management of solid waste generated, as well as organizing and standardizing a series of selective waste collection initiatives.

As a result of this, actions and practices were defined in order to minimize generation, reutilize and allocate the waste for recycling. The program also provides for the training of employees to act as multipliers in their areas of work along with external activities, together with the training of outsourced workers to ensure they are better qualified to provide the services. Since the program first got underway in 2008, more than 2,200 people have been trained, including employees and outsourced workers, in addition to the collection of more than 2,100 tons of waste.

SOCIAL RESPONSABILITY

A RELATIONSHIP GUIDED BY TRUST, RESPECT AND APPRECIATION OF CITIZENSHIP

It is Sabesp's belief that social responsibility should be a stance that is both inside as well as outside the Company. Based on ethics, this such conduct is present on a daily basis in the relationship of transparency and respect for the client, efficiency in the services rendered and appreciation of the skills of its employees. The substantial investments in the expansion of the sanitation infrastructure and the strengthening of partnerships with society result in the promotion of citizenship, the provision of health and quality of life for the population served.

Voluntary adhesion and representativeness

Sabesp is a signatory to the Global Compact, a United Nations (UN) initiative, which aligns its activities with the principles of human rights, labor, environmental protection and anti-corruption, as well as supporting and encourages the 17 Sustainable Development Goals (SDGs), by means of its Corporate Volunteer Program.

The Program is based on the 17 SDGs and its objective, by means of the sanitation services, is to carry out actions and encourage changes in behavior that contribute in a broader way to the social development of the population that is under the influence of the Company. In 2017, Sabesp promoted dialogues with Rede Brasil do Pacto Global (the Brazilian Global Compact Network) with the aim of sharing experiences and implemented the Social Mobilization Platform in order to increase awareness and engagement among employees, together dissemination and management of the projects.

In addition, the certificate granted by the Abrinq Foundation was renewed for the 14th year in a row, and the Company continued as a co-supporter of the Instituto Criança Cidadã (Citizen Child Institute) and maintained its partnership with Instituto Ethos, the agreement with the Associação Amigos Metroviários dos Excepcionais as well as maintaining the granting of the State of São Paulo Seal of Diversity.

With the aim of broadening the relationship with sanitation representatives and reinforcing the dialogue regarding issues that encourage the creation of public policies aimed at expanding the basic sanitation service, as well as the efficient and sustainable management of water resources at regional and national levels, Sabesp also participates in sectoral entities.

Institutional programs

Through its Corporate Volunteer Program, Sabesp carries out campaigns that on an annual basis result in the collection of food, clothing, hygiene products, books and magazines, among others, in addition to a number of actions of social inclusion, learning and care for children, the elderly and those with special needs.

One of the most integrated and most successful corporate actions, participation in FUSSESP's - the State of São Paulo's Solidarity and Social and Cultural Development Fund's Winter Clothing Campaign -, resulted in the collection of 1.4 million items of clothing in 2017, which benefited more than 18 thousand families and 195 charitable entities.  

For young people aged between 14 and 22, since 2006 Sabesp has maintained the Apprentice Program, which contributes to citizenship and professional training. With an 18-month contract that includes theory and on-the-job training, the program is developed in conjunction with the Sao Paulo branch of the National Service of Industrial Learning - Senai. This initiative has already provided opportunities to 3,307 young people.

Support and Sponsorship

By means of financial and/or institutional support with funds from budget funds and tax incentives, Sabesp takes part in cultural, social, educational, sports and environmental actions encouraging social development in partnership with a number of civil society organizations. In 2017, more than R$ 34 million was allocated to actions and projects that contribute to respect for human rights, promotion of social inclusion, mitigation of social impacts and encouragement of volunteer work.

Supply chain management

The contracting of suppliers complies with Labor, Occupational Safety and Environment requirements, extending the commitment to the contracted company, which is responsible for any potential irregular acts or facts practiced by the subcontractor and/or outsourced party on its behalf, or on behalf of its employees and agents.

The Company has its own process for the qualification of suppliers and their respective products, for the purchase of strategic materials. Supplier qualification covers a number of requirements, including the production process, from the raw material to the finished product, and includes checks in relation to environmental liability, such as toxicological risks of the product, and social responsibility, such as combating forced labor and the use of child labor.

The Company seeks to provide the market with the maximum possible transparency regarding its procurement and contracting process, using electronic bidding procedures, based on preconditions for taking part, establishing requirements for contracting and guidelines to prevent collusion between competitors.

The participation and contracting of local suppliers in their areas of activity is encouraged by the Company, as well as the fact that under the current legislation, micro and small companies and cooperatives are guaranteed differentiated treatment.

In accordance with State Decree n° 53.336/08, which established the State Program for Sustainable Public Procurement, Sabesp presents its Report on Sustainable Public Procurement, which is produced according to the guidelines established by the Government of the State of São Paulo's Program for Sustainable Public Procurement, with the main socio-environmental actions and best practices applied to its supply chain.

Relationship with Customers

Respect for society and for the customer, with the offer of quality products and services, adequate tariffs and effective customer service make up one of the strategic guiding principles for Sabesp's operations, which focus on boosting technology as a pillar for improving excellence in the provision of the services.

In this way, Sabesp relies on the traditional service channels (telephone and on-site by means of the branches established in the municipalities in which the company operates) and by means of the Ombudsman's Office, which is a qualified channel for customer service, in the 2nd instance, to handle complaints, denunciations, criticism and information. In 2017, the Ombudsman's Office received about 110 thousand protests, which was a 20.9% reduction against 2016.

In addition to these service channels, the Company has increased the use of technology in order to make the customer's life more comfortable and easier, as well as broadening the alternatives in terms of interaction and relationship with the population served. Available since January 2017, Sabesp Mobile makes it possible to pay overdue bills by installments, receive a second copy of a bill, obtain a copy of the bar code in order to settle the debt via bank app, and report a lack of water, along with other services, in a quick and straightforward way.

Another means available is the virtual branch, by means of which the client can, via the Company's website, make new requests for water and sewage connections, a second copy of a bill, repairs, communicate the lack of water and a sewage leak, in addition to receiving tips and information in relation to the conscious consumption of water.

In order to facilitate access and inclusion of hearing impaired clients, in September 2017 a pilot system was established at the Penha branch, which allows attendants to initiate a video call with qualified interpreters who fluent in Libras (Brazilian Sign Language) from a Simultaneous Translation Center and in this way be assisted to give all the support that the customer needs.

In order to improve its service, Sabesp conducts a Satisfaction Survey on an annual basis, taking into account the best market practices. In 2017, 6,240 interviews were carried out throughout the entire State of São Paulo, which makes it possible to obtain results with a 1.24% margin of error and a 95% confidence level. The overall satisfaction indicator was 85%, which means that out of every 10 customers, 8 stated that they were satisfied or very satisfied with Sabesp.

Relationship with the granting authority 

The Regulatory Sanitation Framework (Federal Law 11.445/07), in conjunction with the other laws that regulate the sector, introduced a new type of relationship between municipalities and the service provider: the program agreement. In accordance with the provisions of the legislation, Sabesp has already signed 287 agreements under this modality, with 266 Program Agreements in the Regional Systems Department and 21 in the Metropolitan Department. In 2017 alone, 6 new agreements were signed, with 5 being renewals with municipalities that were already being operated by Sabesp and the sixth being the inclusion of the Municipality of Pereiras.

Sabesp works to maintain and increase its market, seeking the economic, financial and socio-environmental sustainability of the Company and ensuring the continuity of the business. On the one hand, the company's high capillarity, with operations in every part of the state, represents a competitive advantage for the business due to the large volume of agreements but on the other hand it also represents a challenge regarding the forms of management and the relationship with the representatives of the granting power, due to the specific characteristics of each locality and of the municipal managers.

People management

2017 was a challenging year for people management at Sabesp. In addition to making adjustments in order to comply with the E-social, the new Labor Law and the training of employees to use Sabesp's Integrated Information System (SiiS) which was implemented in April, this year the Company switched to a more innovative and flexible people management model. A number of projects were developed in the sense of integrating and leveraging the efforts into one main goal of optimizing the organizational values ​​to future challenges.

Historically the Company has a good relationship with its employees and the representative entities (union and associations), seeking to meet the employees' main demands, whilst always respecting the limit of its financial capacity and the legal and governmental guidelines. It prioritizes negotiations in its labor relations, as a way of resolving conflicts, substantially reducing the occurrence of strikes. The Collective Bargaining Agreements in 2017 resulted in the maintenance of benefits and a 3.71% salary adjustment. Roughly 70% of the employees are unionized.

At the end of 2017, Sabesp had 13,672 employees, 910 trainees and 540 apprentices. More information regarding the staff profile can be found in the Company's Sustainability Report.

Of the total, 81 job positions were held by people with disabilities, with 72% being physically disabled, 12% being hearing impaired and 16% being visually impaired.

The average length of time that the employees have been with the Company is 19.5 years. In 2017, the company had a 1.7% churn rate (versus 3.8% in 2016), overtime in relation to normal hours worked was equal to 10.6% and the absenteeism rate was 1.6%. With regard to maternity leave, of the 55 women who took advantage of this benefit, 61.8% returned to work.

Sabesp selects and recruits its employees, trainees and apprentices by means of competitive public examination. In 2017, the competitive held a competitive public examination to fill 485 vacancies for young apprentices and at the beginning of 2018 announced a selection process for 661 vacancies for various different job positions. The company also carries out an internal selection process to identify those professionals with the right profile for the management positions available. In 2017, 5 management positions were filled by means of internal selection.

Competency Based Management and Organizational Climate

Sabesp adopts the Competency Based People Management model that has been improved with the purpose of offering a value proposition to the employees, capable of increasing their commitment and engagement. Its principles are: valuing people, managing career and improving competences.

The evaluation process is undertaken on an annual basis between the employees and the managers and, after determining the stage of the competences, an Individual Development Plan is drawn up, which allows the progression of the essential skills so that Sabesp achieves the challenges it has assumed. In 2017, the 5th evaluation cycle was carried out, which resulted in more than 6,000 moves. The process also included the Organizational Climate Survey, which makes it easier to analyze the internal environment and to monitor employee satisfaction, enabling the identification of employees' motivation in aspects such as leadership, relationship, pride, and appreciation among others.

In 2017 the survey was applied throughout the entire organization, with a response rate of 79.8% of the employees, the highest participation rate in Sabesp's Organizational Climate Survey. The results obtained by means of the survey will be used to draft an improvement plan in order to mitigate the critical aspects identified by the employees.

Compensation and Benefits

In line with the Evaluation, the Job Position and Salary Plan is regarded as a key part of the people management, as it ensures flexibility, attractiveness and the retention of talent.

Sabesp adopts a single Salary Policy for the entire State of São Paulo, with the employees' compensation being made up of base salary, profit sharing, function bonus and benefits and with there being no difference for occupants of the same position and reference on the basis of gender. The ratio between the lowest salary paid in the Company and the minimum wage is 1.98. The plan is currently under review.

In addition, the Company has adopted a Profit Sharing Program, which is used on an annual basis to encourage employees' adherence to the organizational objectives. The Program follows the general guidelines set forth by Federal Law n° 10.101/2000 and by State Decree n° 59.598/2013, and is the subject of annual negotiations with the Unions.

In addition to the benefits required by law, Sabesp adopts a benefits policy that aims to meet the employees' demands, and which includes: meal tickets and food vouchers, snacks during overtime work, Christmas baskets, employment guarantees, Child Care Center, child care assistance, supplementary sickness benefit, holiday bonus, medical care and private pension. With regard to the medical care, in 2017, Sabesp contracted the Economic Research Institute Foundation (FIPE) to remodel Sabesprev's medical services, resulting in a proposal being submitted and discussed in different forums, consisting of interested stakeholders, including the health plan regulatory agency. This proposal should ensure the maintenance and sustainability of the health plans over the coming years.

Sabesp's Corporate University

In line with its strategic guidelines, Sabesp has continuously encouraged the training of its human capital in order to increase employees' effectiveness and productivity, so as to have an ever-more competitive team.

To meet the need to take knowledge to all of Sabesp's units, spread throughout the State of São Paulo, Sabesp's Corporate University (UES) has an online platform with courses in a number of different areas of knowledge, audiovisual tools such as whiteboard animation and gamification, case studies, films and exercises.

In addition to the direct benefits, by means of Sabesp's Corporate University, the Company offers educational subsidies and arrangements for courses at various levels of training and formal education in undergraduate degree programs, postgraduate degree programs, secondary technical education course, language courses, professional development and distance learning. Subsidies are offered exclusively to employees while the educational arrangements are extended to family members of all ages.

With the purpose of boosting employees' professional and personal development, in 2017 Sabesp launched the Mais Conhecimento (More Knowledge) Program, which increased the opportunities for granting educational subsidies, with a view to raising the employees' educational level, as well as promoting technical training and professional recognition.

The technical-vocational courses were extended to the employees in the operational category, the postgraduate courses to the employees in the technical/administrative category and undergraduate courses to those in all job categories, including those employees who have already got a degree, enabling them to expand their knowledge, provided that it is in alignment with the Company's objectives. The program also aims to encourage employees to take master's degree and PhD courses (stricto sensu graduate degree programs).

In 2017, the subsidy percentage was also increased to 80% and approximately R$ 600 thousand was invested in 267 subsidies.

Continually seeking to incorporate into its business, cutting-edge practices and technologies that can be found on the global scenario, Sabesp developed the International Training Program in partnership with the National Industrial Learning Service (SENAI). The objective is to increase employees' knowledge, identify opportunities in terms of project and innovations, by means of participation in congresses, conferences, forums, seminars, overseas trade fairs and technical visits, both in connection with essential business activities, as well as those related to activities such as support, leadership and business management.

In 2017, development opportunities were offered in the United States, Germany, the Netherlands and France, with 23 employees participating.

Leadership Development

In December/17 Sabesp Corporate University concluded the third Business Management MBA group with the participation of 40 employees, 14 being managers and 26 being potential successors. The course is an integral part of Sabesp's Management Excellence and Management Succession programs, which has already enabled the development of roughly 570 professionals.

The MBA course was conducted in partnership with the Foundation Institute of Administration - FIA to meet the executives' need to develop a strategic vision in the face of adverse situations using modern methods and tools for decision making.

The Management Succession Program, which was created in 2010, is based on a model of assessment and training of potential successors, in a cycle of diversified and integrated activities. In 2017, a subsidy was offered for language courses, thus increasing the curriculum in English and Spanish.

At present, 157 professionals from the university category, with different backgrounds and professional experience, are enrolled in the program. Out of these, 51 were selected to assume managerial positions, representing 32% of the program's total professionals.

Occupational Health and Safety

The Health and Safety actions are designed to promote the development of the culture of prevention with employees and service providers, in order to ensure improved working conditions and quality of life.

To this end, Sabesp has specific policies, guidelines and rules for risk activities, both of the Company itself and of the service providers, 142 Internal Accident Prevention Committees (CIPAs) and 290 emergency brigades.

In addition, the Company maintains Environmental Risk Prevention Programs for each of the Company's more than 500 establishments and a Medical Control Program for Occupational Health for all employees, apprentices and trainees, making it possible to outline the health profile of the employees who subsidize health and quality of life programs, as well as complying with the legal aspects.

For the effective prevention of infectious diseases, in 2017, Sabesp applied more than 11,000 doses of flu vaccine for employees, apprentices and trainees (75% of the employee headcount) and about 1,500 doses of typhoid fever vaccine for all employees with potential exposure to sewage. With the resurgence of wild-type yellow fever in the state of São Paulo, Sabesp has also carried out a campaign to encourage vaccination, and ensured the immunization of employees working in the risk regions.

Health and Safety Campaigns also occur by means of newsletters, lectures and preventive actions, and Sabesp's Corporate University is continuously organizing face-to-face and virtual training courses in occupational health and safety, contributing to improving the employees' professional training. In 2017, the distance learning courses were stepped up, and SIPAT Interativa counted almost 27 thousand participations at the virtual and face-to-face events.

Encouraging dissemination of a culture of and commitment to quality of life throughout the entire organization is a challenge for Sabesp. To this end, a number of actions are carried out with the aim of promoting changes in behavior, lifestyle and arousing concern in relation to health, such as the Blood Donation Campaign, October Pink and Blue November, for breast cancer and prostate cancer awareness and prevention.

The Quality of Life Program is being restructured in order to promote the adoption of a healthier lifestyle among the employees, by means of actions that seek quality of life, providing well-being and personal satisfaction.

2017 AWARDS

ANNUAL SOCIAL BALANCE 2017